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| AOS > SEC Filings for AOS > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
RESULTS OF OPERATIONS
FIRST THREE MONTHS OF 2009 COMPARED TO 2008
Net sales for the first quarter of 2009 were $481.6 million or 15.7 percent lower than sales of $571.4 million in the first quarter of 2008. The decline in sales resulted from lower volume which more than offset price increases related to higher raw material costs at Water Products and declining market demand and customer inventory reductions at Electrical Products.
Our first quarter gross profit margin declined from 23.2 percent in 2008 to 21.1 percent in 2009. The lower margins in 2009 at both operating units were due mostly to the decline in volume which more than offset other cost reduction measures.
Selling, general and administrative (SG&A) expense for the first quarter of 2009 was $84.5 million or $9.3 million lower than the first quarter of 2008. Corporate SG&A declined $1.8 million from the first quarter of 2008 due to lower consulting expenses and other cost reduction activities. During the first quarter of 2008, $1.3 million of expense associated with a corporate-wide voluntary reduction plan for office personnel was recognized. The remainder of the reduction in 2009 first quarter SG&A was due primarily to lower selling related expenses.
Restructuring and other charges were $1.4 million and $3.8 million in the first quarter of 2009 and 2008, respectively. The 2009 amount is comprised of a $0.9 million loss on sale of a vacated facility from a previously owned business recognized in corporate expense, and $0.5 million of equipment move costs associated with certain Electrical Products' plant closures. The $3.8 million recognized in 2008 was related entirely to plant closure activities at Electrical Products.
Interest expense decreased from $5.4 million in the first quarter of 2008 to $3.2 million in this year's first quarter due to lower interest rates and debt levels.
Our effective tax rate for the first quarter of 2009 was 23.9 percent and compared to 26.1 percent in the same period last year. The lower rate in 2009 resulted from proportionally higher income from foreign operations where tax rates are significantly lower than our domestic operations. In addition, the first quarter of 2008 included a $1.0 million nondeductible loss associated with the closing of our Hungary plant.
We have significant pension costs and credits that are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on assets, retirement ages, and years of service. Consideration is given to current market conditions, including changes in interest rates in making these assumptions. Our assumption for the expected rate of return on plan assets is 8.75 percent in 2009, unchanged from 2008. The discount rate used to determine net periodic pension costs increased from 6.5 percent in 2008 to 6.6 percent in 2009. Pension expense in the first quarter of 2009 was $2.6 million or $1.3 million higher than the first quarter of 2008. Our pension costs are reflected in cost of products sold and SG&A expense.
Net earnings in the first quarter of 2009 were $8.7 million or $0.29 per diluted share and compared to net earnings of $21.9 million or $0.72 per diluted share in the first quarter of 2008.
Water Products
First quarter net sales for our Water Products segment were $339.0 million or $13.1 million lower than sales of $352.1 million in the same period last year. The sales decline was due to lower residential and commercial water heater volume in North America and lower sales in China which more than offset price increases related to higher steel costs.
Operating earnings for our Water Products segment in the first quarter of 2009 decreased to $29.1 million from $35.9 million in the first quarter of 2008 due primarily to lower volume.
Electrical Products
First quarter net sales for our Electrical Products segment were $143.6 million or $76.9 million lower than sales of $220.5 million in the same period last year. The decline in sales resulted from weak residential and commercial construction markets and customer inventory reduction actions.
Our Electrical Products segment recognized an operating loss of $3.1 million in the first quarter of 2009 compared to operating earnings of $11.1 million in the first quarter of 2008. As previously mentioned, the first quarters of 2009 and 2008 reflected restructuring charges of $0.5 million and $3.8 million, respectively. The lower earnings in 2009 resulted from significantly lower volumes which more than offset $5.0 million in cost savings achieved from 2008 restructuring activities.
Outlook
Our OEM motor customers are forecasting anywhere from 20 to 30 percent year over year volume declines in 2009, and we are aligning our cost structure with this lower level of market demand. We have significantly reduced our hourly and salaried workforce around the world with most of the impact being recognized subsequent to the first quarter of 2009 and will continue to implement significant cost reduction programs.
As a result of weak demand and the prolonged and severe housing slump, we are reducing our annual earnings guidance to between $1.80 and $2.10 per share. We are forecasting that we will still generate $140 to $150 million in operating cash flow this year, despite our lower earnings outlook and higher pension plan payments.
We see some optimistic signs in our major markets. Replacement demand for residential and commercial water heaters is holding up at expected levels, and we still expect to see the $15.0 million in incremental cost savings from Electrical Products' restructuring initiatives. Our priorities in 2009 will be to conserve cash while making the necessary investments to maintain our competitive position and high level of service to our customers. This will include moving forward with our water heater venture and facility in India, developing the high efficiency products the market will need, and focusing on renewable technologies.
Liquidity & Capital Resources
Our working capital was $330.5 million at March 31, 2009, $54.2 million greater than at December 31, 2008, due to lower accounts payable balances at both businesses which were partially offset by lower inventory levels and a $18.2 million decline in cash deposits associated with derivative contracts. In addition, a $30.7 million (non-cash) decline in our derivative contracts liability added to the increase in working capital. Cash provided by operating activities during the first quarter of 2009 was $6.0 million compared with $14.9 million cash used by operating activities during the first quarter of 2008. A smaller investment in working capital during the first quarter of 2009 compared with the same period in 2008 was partially offset by lower earnings in the first quarter of this year compared with the first quarter 2008. For the total year 2009, we expect cash provided by operating activities to be approximately $140 to $150 million.
Our capital expenditures totaled $12.5 million during the first quarter of 2009, compared with $9.8 million one year ago. We are projecting 2009 capital expenditures to be between $60 and $70 million, similar to the levels of last year and approximately the same as projected depreciation and amortization expense. Capital spending in 2009 includes the construction of the water heater manufacturing plant near Bangalore, India and the completion of the expansion of our Nanjing, China water heater operations.
In February 2006, we completed a $425 million multi-currency credit facility with eight banks. The facility has an accordion provision which allows it to be increased up to $500 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants at the end of March 2009.
The facility backs up commercial paper and credit line borrowings, and it expires on February 17, 2011. As a result of the long-term nature of this facility, our commercial paper and credit line borrowings, as well as drawings under the facility, are classified as long-term debt. At March 31, 2009, we had available borrowing capacity of $222.9 million under this facility. We believe the combination of available borrowing capacity and operating cash flow will provide sufficient funds to finance our existing operations for the foreseeable future.
At this point in time, our liquidity has not been materially impacted by the current credit environment, and we do not expect that it will be materially impacted in the near future. There can be no assurance, however, that the cost of future borrowings on our credit facility will not be impacted by the ongoing capital market disruptions.
Our total debt increased $16.8 million from $334.8 million at December 31, 2008 to $351.6 million at March 31, 2009. Our leverage, as measured by the ratio of total debt to total capitalization, was 34.7 percent at the end of the quarter up slightly from the 34.3 percent at the end of last year.
GSW operated a captive insurance company to provide product liability and general liability insurance to its subsidiary, American Water Heater Company. We decided to cover American's liability exposures with our existing insurance programs and operate the captive in runoff effective July 1, 2006. The reinsurance company restricts the amount of capital which must be maintained by the captive. At March 31, 2009, the restricted amount was $18.8 million and is included in other non-current assets. The restricted assets are invested in money market securities. During the quarter, the captive liquidated approximately $7.5 million in marketable securities and on March 27, 2009, paid us a $7.5 million dividend. The proceeds of this dividend were used to pay down debt.
On April 14, 2009, our board of directors declared a regular quarterly dividend of $.19 per share on our common stock and Class A common stock, which is payable on May 15, 2009 to shareholders of record on April 30, 2009.
Critical Accounting Policies
The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the United States which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes.
Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2008. We believe that at March 31, 2009 there has been no material change to this information.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133," ("SFAS 161"). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"). SFAS 161 also applies to non-derivative hedging instruments and all hedged items designated and qualifying under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for periods prior to its initial adoption. We adopted SFAS 161 on January 1, 2009. Adoption of this statement did not have a material impact on our consolidated financial condition, results of operations or cash flows. See Note 13 for further discussion.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51", ("SFAS 160"). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method changes the accounting for transactions with minority interest holders. SFAS 160 is effective beginning in 2009. We adopted SFAS 160 on January 1, 2009. Adoption of this statement will impact our accounting for any future transactions which include a noncontrolling interest.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," ("SFAS 141(R)"). SFAS 141(R) requires us to continue to follow the guidance in SFAS 141 for certain aspects of business combinations, with additional guidance provided defining the acquirer, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and measuring goodwill or a gain from a bargain purchase. In addition, certain transaction costs previously capitalized as part of the purchase price will be expensed as incurred. Also, under SFAS 141(R) adjustments associated with changes in tax contingencies that occur after the one year measurement period are recorded as adjustments to income. This statement is effective for all business combinations for which the acquisition date is on or after the beginning of an entity's first fiscal year that begins after December 15, 2008; however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. We have adopted SFAS 141(R) for any business combinations occurring at or subsequent to January 1, 2009.
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