ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Gross profit margin for the three months ended March 31, 2009 was 23.5 percent as compared to 34.5 percent in the prior year quarter. The change from the prior year quarter was primarily due to reduced absorption of manufacturing costs due to lower production levels, a less favorable business unit mix, temporary disruption effects from restructuring programs and restructuring and related charges, partially offset by the net favorable impact of higher price realization.
Gross profit for the nine months ended March 31, 2009 decreased $185.0 million, or 27.6 percent, to $485.9 million from $670.9 million in the prior year period. The decrease was primarily due to lower organic sales volume, reduced absorption of manufacturing costs due to lower production levels, temporary disruption effects from restructuring programs, unfavorable foreign currency effects of $4.7 million and less favorable business unit mix as well as restructuring and related charges of $6.9 million. Improved price realization more than offset the impact of higher raw material costs, and the net favorable impact of acquisitions and divestitures was $11.7 million for the current period. Gross profit margin for the nine months ended March 31, 2009 was 28.9 percent, down from 34.4 percent in the prior year period. The change from the prior year period was primarily due to reduced absorption of manufacturing costs due to lower production levels, temporary disruption costs from restructuring programs and the unfavorable impact of restructuring and related charges as well as less favorable business unit mix, partially offset by the net favorable impact of higher price realization.
OPERATING EXPENSE
Operating expense for the three months ended March 31, 2009 was $108.1 million, a decrease of $42.4 million, or 28.2 percent, compared to $150.5 million in the prior year quarter. The decrease is attributable to a $28.6 million decrease in employment expenses driven by restructuring and cost management activities as well as lower provisions for incentive compensation programs, favorable foreign currency effects of $7.8 million, a net benefit of $1.1 million driven by a postretirement benefit plan curtailment gain recognized during the current quarter and the impact of other cost reductions of $8.2 million, offset somewhat by the net unfavorable impact of acquisitions and divestitures of $3.3 million. Operating expense for the nine months ended March 31, 2009 was $392.1 million, a decrease of $51.3 million, or 11.6 percent, compared to $443.4 million in the prior year period. The decrease is attributable to a $39.2 million decrease in employment expenses driven by restructuring and cost management activities as well as lower provisions for incentive compensation programs, favorable foreign currency effects of $6.6 million, a net benefit of $1.2 million driven by a postretirement benefit plan curtailment gain recognized during the current period and the impact of other cost reductions of $10.7 million, offset somewhat by the net unfavorable impact of acquisitions and divestitures of $6.4 million.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Restructuring
As previously announced, the Company continued to implement restructuring plans to reduce cost and improve operating efficiencies. These actions relate to facility rationalizations and employment reductions.
Restructuring and related charges recorded in the three months ended March 31, 2009 amounted to $33.5 million, including $33.1 million of restructuring charges, of which $0.7 million were related to inventory disposals and recorded in cost of goods sold. Restructuring-related charges of $1.5 million were recorded in cost of goods sold and a restructuring-related benefit of $1.1 million was recorded in operating expenses for the three months ended March 31, 2009.
Restructuring and related charges recorded in the nine months ended March 31, 2009 amounted to $52.8 million, including $48.1 million of restructuring charges, of which $1.0 million was related to inventory disposals and recorded as cost of goods sold. Restructuring-related charges of $5.9 million were recorded in cost of goods sold and a restructuring-related benefit of $1.2 million was recorded in operating expense for the nine months ended March 31, 2009.
For the three months ended March 31, 2009, restructuring charges for MSSG, AMSG and Corporate were $23.4 million, $7.9 million and $1.8 million, respectively. For the nine months ended March 31, 2009, restructuring charges for MSSG, AMSG and Corporate were $32.6 million, $10.5 million and $5.0 million, respectively. See Note 7 to our condensed consolidated financial statements set forth in

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Asset Impairment
In view of the severe downturn in global markets during the current quarter, we made an assessment of the possible impairment of the goodwill and other long-lived assets of our various reporting units. As a result of this assessment, we determined that the magnitude and duration of the economic downturn, as well as other factors, served as a triggering event for an impairment test of our surface finishing machines and services business as well as our engineered products business. These businesses are both part of our AMSG segment. As a result of our test, we recorded a non-cash pre-tax impairment charge of $111.0 million during the three months ended March 31, 2009. See Note 16 to our condensed consolidated financial statements set forth in Part I Item 1 of this Form 10-Q.
A goodwill impairment charge of $35.0 million was also recorded for the surface finishing machines and services business during the three months ended March 31, 2008. This was the result of an impairment test performed as part of the financial closing procedures for the quarter due to lower than expected operating performance and a revised earnings forecast for that business as a result of weakened market conditions and outlook.
AMORTIZATION OF INTANGIBLES
Amortization expense was $3.2 million for the three months ended March 31, 2009, a decrease of $0.3 million from $3.5 million in the prior year quarter. Amortization expense was $9.9 million for the nine months ended March 31, 2009, a decrease of $0.2 million from $10.1 million in the prior year period.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2009 of $6.7 million decreased $1.3 million, or 16.7 percent, from $8.0 million in the prior year quarter. The impact of an increase in average domestic borrowings of $153.7 million was more than offset by the impact of a 271 basis point decrease in average interest rates on domestic borrowings. The increase in these borrowings was driven by first quarter share repurchases for $127.6 million and a cash outlay of $64.5 million in the second quarter for a business acquisition. Interest expense for the nine months ended March 31, 2009 of $21.8 million decreased $2.5 million, or 10.4 percent, from $24.3 million in the prior year period. The impact of an increase in average domestic borrowings of $153.1 million due to the factors discussed above was more than offset by the impact of a 236 basis point decrease in average interest rates on domestic borrowings.
OTHER (INCOME) EXPENSE, NET
Other income, net for the three months ended March 31, 2009 was $5.2 million. Other expense, net for the three months ended March 31, 2008 was $0.4 million. The change was primarily driven by a favorable change in foreign currency transaction results of $6.5 million.
Other income, net for the nine months ended March 31, 2009 and 2008 was $8.6 million and $1.7 million, respectively. The change was primarily driven by favorable change in foreign currency transaction results of $6.5 million.
INCOME TAXES
The effective income tax rate for the three months ended March 31, 2009 and 2008 was 9.6 percent and 41.0 percent, respectively. The decrease in the rate from the prior year was primarily the result of the impact of a goodwill impairment charge recorded in the current year as well as a goodwill impairment charge recorded in the prior year. The impact of these items was partially offset by differing rates and effects related to international operations.
The effective income tax rate for the nine months ended March 31, 2009 and 2008 was 1.7 percent and 30.6 percent, respectively. The decrease in the rate from the prior year was primarily the result of the goodwill impairment charge recorded in the current year, as well as a goodwill impairment charge and a non-cash income tax charge related to a German tax reform bill that was recorded in the prior year. The impact of these items was partially offset by the release of a valuation allowance in Europe in the first quarter of the current year, a benefit from the completion of a routine income tax examination for certain prior fiscal years that was recorded in the second quarter of the current year, and differing rates and effects related to international operations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

BUSINESS SEGMENT REVIEW
Our operations are organized into two reportable operating segments consisting of Metalworking Solutions & Services Group (MSSG) and Advanced Materials Solutions Group (AMSG), and Corporate. The presentation of segment information reflects the manner in which we organize segments for making operating decisions and assessing performance. Corporate represents certain corporate shared service costs, employee benefit costs, employment costs, including performance-based bonuses and stock-based compensation expense, and eliminations of operating results between segments.

METALWORKING SOLUTIONS & SERVICES GROUP

                                   Three Months Ended             Nine Months Ended
                                        March 31,                     March 31,
      (in thousands)               2009          2008           2009            2008

      External sales            $ 262,454     $ 459,407     $ 1,038,370     $ 1,301,837
      Intersegment sales           25,263        44,273         112,306         126,590
      Operating (loss) income     (39,943 )      75,679          11,196         193,017

For the three months ended March 31, 2009, MSSG external sales decreased $197.0 million, or 42.9 percent, from the prior year quarter. This decrease was the result of an organic sales decline of 35 percent, unfavorable foreign currency effects of 6 percent and 2 percent from the impact of divestitures. On a global basis, industrial production declined sequentially and in comparison to the prior year quarter. Demand in most industry and market sectors weakened substantially. On a regional basis, Europe, India and North America reported organic sales declines of 40 percent, 38 percent and 34 percent, respectively, for the current year quarter. Asia Pacific and Latin America also experienced organic sales declines of 31 percent and 21 percent, respectively.
For the three months ended March 31, 2009, MSSG operating loss was $39.9 million compared to operating income of $75.7 million for the prior year quarter. The primary drivers which led to the lower operating performance compared to the prior year were reduced sales volume, reduced absorption of manufacturing costs due to lower production levels as well as restructuring and related charges of $25.4 million and temporary disruption effects related to restructuring programs.
For the nine months ended March 31, 2009, MSSG external sales decreased $263.5 million, or 20.2 percent, from the prior year period. This decrease was the result of an organic sales decline of 18 percent, unfavorable foreign currency effects of 2 percent and the impact of divestitures of 1 percent partially offset by the impact of more workdays of 1 percent. On a regional basis, Europe, North America and India reported organic sales declines of 19 percent, 18 percent and 17 percent, respectively for the current period. Asia Pacific and Latin America experienced organic sales declines of 8 percent and 6 percent, respectively.
For the nine months ended March 31, 2009, MSSG operating income decreased by $181.8 million from the prior year period. Operating margin on total sales was 1.0 percent for the current period as compared to 13.5 percent for the prior year period. The primary drivers for the decline in operating margin were reduced absorption of manufacturing costs due to lower production levels as well as restructuring and related charges of $39.9 million and temporary disruption effects related to restructuring programs.

ADVANCED MATERIALS SOLUTIONS GROUP

                                      Three Months Ended           Nine Months Ended
                                          March 31,                    March 31,
        (in thousands)                2009          2008          2009          2008

        External sales            $  178,857     $ 230,262     $ 640,890     $ 650,331
        Intersegment sales             3,025         9,396        14,640        29,944
        Operating (loss) income     (102,502 )      (6,110 )     (53,072 )      51,067

For the three months ended March 31, 2009, AMSG external sales decreased $51.4 million, or 22.3 percent, from the prior year quarter. This decrease was the result 24 percent organic decline and a 3 percent decrease from unfavorable foreign currency effects, partially offset by the favorable impact of acquisitions of 5 percent. The organic decline was primarily driven by lower sales in the surface finishing machines and services business as well as the engineered products business.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three months ended March 31, 2009, AMSG operating loss was $102.5 million compared to operating loss of $6.1 million for the prior year quarter. Operating results for the current quarter included an impairment charge of $111.0 million as well as restructuring and related charges of $9.5 million. Operating results for the prior year quarter included an impairment charge of $35.0 million. In addition, operating results for the current quarter were impacted by lower sales and production volumes in the engineered products business as compared to the prior year quarter.
For the nine months ended March 31, 2009, AMSG external sales decreased $9.4 million, or 1.5 percent, from the prior year period. This was the result of a 5 percent organic decline and a 1 percent decrease from unfavorable foreign currency effects, partially offset by the favorable impact of acquisitions of 5 percent. Organic sales decreased primarily due to lower sales in the surface finishing machines and services business as well as the engineered products business.
For the nine months ended March 31, 2009, AMSG operating loss was $53.1 million compared to operating income of $51.1 million for the prior year period. The decline in operating performance was primarily due to charges related to restructuring and asset impairment of $124.7 million and lower sales and production volumes in the engineered products business.
CORPORATE

Three Months Ended Nine Months Ended March 31, March 31, (in thousands) 2009 2008 2009 2008

Operating loss $ (8,499 ) $ (20,651 ) $ (32,299 ) $ (61,661 )

For the three months ended March 31, 2009, operating loss decreased $12.2 million, or 58.8 percent, compared to the prior year quarter, primarily due to lower provisions for performance-based employee compensation programs as well as the impact of cost reduction actions.
For the nine months ended March 31, 2009, operating loss decreased $29.4 million, or 47.6 percent, compared to the prior year period, primarily due to lower provisions for employee incentive compensation programs and the impact of cost reduction actions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of funds for financing our capital expenditures and internal growth. During the nine months ended March 31, 2009, cash flow provided by operating activities was $163.7 million, which exceeded our investment in capital expenditures and a business acquisition for that period. As an additional source of funds to meet our cash requirements, we have a five-year, multi currency, revolving credit facility entered into in March 2006 (2006 Credit Agreement) that extends to March 2011 and permits revolving credit loans of up to $500.0 million. Borrowings under the 2006 Credit Agreement as of March 31, 2009 were $159.9 million that were used in part to finance the repurchase of $127.6 million in capital stock during the nine months ended March 31, 2009.
At March 31, 2009, we had cash and cash equivalents of $98.2 million of which $30.6 million was used for payment on April 1, 2009 of a liability related to a foreign exchange contract. Total shareowners' equity was $1,249.3 million and total debt was $502.1 million, including borrowings under the 2006 Credit Agreement, as of March 31, 2009. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets as well as the counterparty risk of our credit providers.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

The 2006 Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of March 31, 2009. Based on our current projections, we expect to be in compliance with these covenants at June 30, 2009. However, given the severe downturn in global markets and the uncertainty related thereto, we cannot assure that we will be able to maintain compliance with these financial covenants through fiscal year 2010. We will continue to closely monitor our results of operations and financial performance as well as other pertinent factors for any potential impact on our ability to comply with the covenants. Management believes that it can avoid noncompliance with these financial covenants through fiscal year 2010 by taking a combination of actions including improving cash flows, reducing outstanding indebtedness, amending or replacing the 2006 Credit Agreement or obtaining waivers or forbearances from our lenders, but there can be no assurances in this regard. Any failure to comply would be an event of default under the 2006 Credit Agreement. If such an event of default were to occur, and we are unable to cure the default, amend the 2006 Credit Agreement, or obtain a waiver, the lenders could require immediate payment of all amounts outstanding under the agreement and terminate their commitments to lend under the agreement. This could, in turn, trigger an event of default under any cross-default provisions of the company's other outstanding indebtedness, and potentially accelerate our obligation to repay that indebtedness. There have been no material changes in our contractual obligations and commitments since June 30, 2008.
Cash Flow Provided by Operating Activities During the nine months ended March 31, 2009, cash flow provided by operating activities was $163.7 million, compared to $158.6 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net loss and non-cash items amounting to $97.2 million of cash generation plus cash provided by changes in certain assets and liabilities netting to $66.6 million. Contributing to these changes was a decrease in accounts receivable of $173.9 million and a decrease in inventories of $4.3 million, partially offset by a decrease in accounts payable and accrued liabilities of $88.0 million due in part to a $14.3 million payment of 2008 performance-based bonuses, an increase in accrued income taxes of $12.8 million and an increase in other liabilities of $11.0 million.
During the nine months ended March 31, 2008, cash flow provided by operating activities was $158.6 million and consisted of net income and non-cash items totaling $238.2 million, offset somewhat by cash used by changes in certain assets and liabilities netting to $79.7 million. Contributing to these changes was an increase in inventories of $56.8 million, a decrease in accrued income taxes of $18.4 million, partially due to the impact of adoption of FIN 48, and a decrease in accounts payable and accrued liabilities of $17.9 million due in part to a $15.1 million payment of 2007 performance-based bonuses, offset somewhat by a decrease in accounts receivable of $11.3 million. Cash Flow Used for Investing Activities
Cash flow used for investing activities was $154.9 million for the nine months ended March 31, 2009, an increase of $39.2 million, compared to $115.7 million in the prior year period. During the nine months ended March 31, 2009, cash used for investing activities included $92.7 million used for purchases of property, plant and equipment, which consisted primarily of equipment upgrades, and $64.5 million used for the acquisition of business assets.
Cash flow used for investing activities was $115.7 million for the nine months ended March 31, 2008, and included $130.6 million used for purchases of property, plant and equipment, which consisted primarily of equipment upgrades and geographical expansion, partially offset by proceeds from the sale of investments in affiliated companies of $5.9 million and proceeds from divestitures of $3.0 million.
Cash Flow Provided by (Used for) Financing Activities Cash flow provided by financing activities was $37.4 million for the nine months ended March 31, 2009 compared to cash flow used for financing activities of $39.4 million in the prior year period. During the nine months ended March 31, . . .