Quarter ended June 30, 2009 compared to Quarter ended June 30, 2008 The following table presents a summary of the Company's financial performance for the three months ended June 30, 2009 and 2008:

                                                  2009                            2008
                                                         % of                            % of
($ in thousands)                        Amount         Net Sales        Amount         Net Sales

Net sales
MRO                                    $  80,570             84.8 %    $ 105,619             83.1 %
OEM                                       14,463             15.2         21,529             16.9

Consolidated total                     $  95,033            100.0 %    $ 127,148            100.0 %


Gross profit
MRO                                    $  53,211             66.0 %    $  68,988             65.3 %
OEM                                        2,658             18.4          4,456             20.7

Consolidated total                        55,869             58.8         73,444             57.8

Operating expenses:
Selling, general and administrative
expenses                                  52,890             55.7         66,249             52.1
Severance and other                         (489 )           (0.5 )        5,913              4.7
Settlement and related costs                  42                -         30,417             23.9


Operating income (loss)                    3,426              3.6        (29,135 )          (22.9 )
Other, net                                  (217 )            0.2            (49 )              -

Income (loss) from continuing
operations before income tax
expense                                    3,209              3.4        (29,184 )          (22.9 )
Income tax expense                         1,313              1.4             51              0.1


Income (loss) from continuing
operations                             $   1,896              2.0 %    $ (29,235 )          (23.0 )%

Net Sales
Net sales for the second quarter of 2009 decreased 25.3% to $95.0 million, from $127.1 million in the same period of 2008 as the global economic recession and contraction in the credit markets continued to decrease customer demand throughout our industry. The duration of the recession is uncertain and industry demand may continue to decline and create downward pressure on sales volume throughout 2009.
The sales decline was reflected in both the MRO and the OEM segments. MRO net sales decreased $25.0 million or 23.7% in the second quarter of 2009, to $80.6 million from $105.6 million in the prior year period. OEM net sales decreased $7.0 million or 32.8% in the second quarter of 2009, to $14.5 million from $21.5 million in the prior year period. Gross Profit
Gross profit decreased $17.5 million in the second quarter of 2009, to $55.9 million from $73.4 million in the prior year period. The gross profit margin for the first quarter of 2009 increased by one percentage point to 58.8% compared to 57.8% achieved in the second quarter of 2008. The increase in the overall margin percentage was due to an improvement in the MRO gross margin along with an increase in the proportion of total sales generated by the higher margin MRO segment.

MRO gross profit of $53.2 million in the second quarter of 2009 was $15.8 million lower than the $69.0 million recorded in the prior year period. However, the MRO gross profit as a percent of net sales increased to 66.0% for the second quarter of 2009 from 65.3% in the second quarter of 2008. OEM gross profit decreased $1.8 million in the second quarter of 2009, to $2.7 million from $4.5 million in the prior year period. Gross profit as a percent of net sales decreased to 18.4% for the second quarter of 2009 from 20.7% in the second quarter of 2008 as a result of the increasingly competitive pricing environment. Selling, General and Administrative Expenses ("SG&A") SG&A expenses were $52.9 million or 55.7% of net sales and $66.2 million or 52.1% of net sales for the quarters ended June 30, 2009 and 2008, respectively. The $13.3 million reduction in the second quarter of 2009 primarily reflects lower compensation expenses including sales commissions. SG&A as a percent of net sales increased 3.6 percentage points in the second quarter of 2009 compared to the second quarter of 2008 as fixed costs were not reduced in proportion to the overall decrease in net sales.
Severance and Other
The Company recorded a $0.5 million net gain in Severance and other in the second quarter of 2009, primarily due to a $0.4 million gain realized on the sale of the Charlotte, North Carolina distribution center. In the second quarter of 2008, the Company recorded $5.9 million of severance and other charges. Of this amount, $2.3 million related to severance costs and $3.6 million related to unclaimed property liabilities primarily for years prior to 2003. Settlement and Related Costs
During the second quarter of 2008, the Company recorded a $30.0 million provision for penalties in connection with the settlement of the investigation by the U.S. Attorney's Office for the Northern District of Illinois. In addition, the Company recorded expenses of $0.4 million in costs related to the investigation in 2008.
Income Tax Expense
For the three months ended June 30, 2009, the Company recorded $1.3 million of income tax expense on pre-tax income from continuing operations of $3.2 million, resulting in an effective tax rate of 40.9%. For the three months ended June 30, 2008, the pretax loss of $29.1 million was mostly due to the non-deductible portion of the penalty incurred from the settlement of the U.S Attorney's investigation. Adjustments made for the non-deductible expense resulted in taxable income for the second quarter of 2008.

Six Months ended June 30, 2009 compared to Six Months ended June 30, 2008 The following table presents a summary of the Company's financial performance for the six months ended June 30, 2009 and 2008:

                                                  2009                             2008
                                                         % of                             % of
($ in thousands)                        Amount         Net Sales         Amount         Net Sales

Net sales
MRO                                    $ 163,389             84.0 %     $ 211,023             83.4 %
OEM                                       31,025             16.0          41,995             16.6

Consolidated total                     $ 194,414            100.0 %     $ 253,018            100.0 %


Gross profit
MRO                                    $ 104,776             64.1 %     $ 138,707             65.7 %
OEM                                        5,260             17.0           8,865             21.1

Consolidated total                       110,036             56.6         147,572             58.3

Operating expenses:
Selling, general and administrative
expenses                                 109,522             56.3         131,119             51.8
Severance and other                        5,963              3.1           6,473              2.6
Settlement and related costs                  91                -          31,168             12.3


Operating loss                            (5,540 )           (2.8 )       (21,188 )           (8.4 )
Other, net                                   434              0.2            (170 )           (0.1 )

Loss from continuing operations
before income tax expense                 (5,106 )           (2.6 )       (21,358 )           (8.5 )
Income tax (benefit) expense              (1,083 )           (0.5 )         3,353              1.3


Loss from continuing operations        $  (4,023 )           (2.1 )%    $ (24,711 )           (9.8 )%

Net Sales
Net sales for the first half of 2009 decreased 23.2% to $194.4 million, from $253.0 million in the same period of 2008 as the global economic recession and contraction in the credit markets continued to decrease customer demand throughout our industry. The duration of the recession is uncertain and industry demand may continue to decline and create downward pressure on sales volume throughout 2009.
The sales decline was reflected in both the MRO and the OEM segments. MRO net sales decreased $47.6 million or 22.6% in the first six months of 2009, to $163.4 million from $211.0 million in the prior year period. OEM net sales decreased $11.0 million or 26.1% in the first six months of 2009, to $31.0 million from $42.0 million in the prior year period. Gross Profit
Gross profit decreased $37.6 million in the first half of 2009, to $110.0 million from $147.6 million in the prior year period. The gross profit margin for the first half of 2009 was 56.6%, 1.7 percentage points lower than the 58.3% achieved in the first half of 2008. MRO gross profit decreased $33.9 million in the first six months of 2009, to $104.8 million from $138.7 million in the prior year period. MRO gross profit as a percent of net sales decreased to 64.1% for the first half of 2009 from 65.7% in the first half of 2008. OEM gross profit decreased $3.6 million in the first half of 2009, to $5.3 million from $8.9 million in the prior year period. Gross profit as a percent of net sales decreased to 17.0% for the first half of 2009 from 21.1% in the first half of 2008. The decreases recorded in both segments were primarily due to an increasingly competitive pricing environment and an increase in inventory reserves.

Selling, General and Administrative Expenses ("SG&A") SG&A expenses were $109.5 million or 56.3% of net sales and $131.1 million or 51.8% of net sales for the six months ended June 30, 2009 and 2008, respectively. The $21.6 million reduction in the first half of 2009 primarily reflects lower compensation expenses including sales commission. SG&A as a percent of net sales increased 4.5 percentage points in the first half of 2009 compared to the first half of 2008 as fixed costs were not reduced in proportion to the overall decrease in net sales
Severance and Other
During the first half of 2009 the Company implemented certain cost reduction measures in response to current economic conditions. These cost reduction measures included a reduction in force of approximately 11%, or approximately 150 employees, across the organization and the closure of its Charlotte, North Carolina and Dallas, Texas distribution centers. The reduction in force and closure of the distribution centers were substantially complete as of June 30, 2009. As a result of these measures, the Company incurred a charge of $6.0 million in the first half of 2009 primarily related to the termination of employees. These cost reduction measures are expected to result in future annualized cost savings of between $10.0 million and $12.0 million. In the first half of 2008, the Company recorded $6.5 million of severance and other charges. Of this amount, $2.9 million related to severance costs and $3.6 million related to unclaimed property liabilities primarily for years prior to 2003.
Settlement and Related Costs
During the first six months of 2008, the Company recorded a $30.0 million provision for penalties in connection with the settlement of the investigation by the U.S. Attorney's Office for the Northern District of Illinois. In addition, the Company incurred expenses of $0.1 million and $1.2 million in costs related to the investigation in the first half of 2009 and 2008, respectively.
Income Tax (Benefit) Expense
Income tax as a percentage of the pre-tax loss for the first half of 2009 was 21.2% compared to a negative tax rate of 15.7% for the first half of 2008. The 2009 tax rate was affected by non-deductible expenses and by income earned in jurisdictions with higher tax rates which decreased the net income tax benefit in relation to the overall pre-tax loss. The income tax provision recorded for 2008 was affected by approximately $29.2 million of the $30.0 million provision incurred from the settlement of the investigation by the U.S. Attorney's Office for the Northern District of Illinois, which was non-deductible.

Liquidity and Capital Resources
Net cash provided by operations was $16.4 million for the first six months of 2009 compared to $5.4 million in the first six months of 2008, primarily due to improved working capital utilization.
Working capital, including cash and cash equivalents, at June 30, 2009, was $87.2 million as compared to $90.0 million at December 31, 2008. Decreases in receivables and inventories were somewhat offset by an increase in cash and a decrease in current liabilities.
Capital expenditures were $2.0 million and $1.7 million for the first six months of 2009 and 2008, respectively. During the second quarter of 2009, the Company sold its previously discontinued Charlotte, North Carolina distribution center. The Company received proceeds of $2.2 million in cash and recorded a gain of $0.4 million on the transaction. Net cash used for financing activities in the first six months of 2009 was $9.9 million compared to $0.9 million in the first six months of 2008, primarily reflecting the $7.7 million pay down all of the outstanding balance of the Company's revolving line of credit.
The Company announced cash dividends of $.06 per common share during the first half of 2009, compared to the cash dividends of $.40 per share announced in 2008. The Amended Credit Facility entered into in March 2009 restricts the quarterly dividend to $260,000.
The Company's goodwill balance is normally tested for impairment annually in the fourth quarter. Due to the recent decline in our stock price, the goodwill was reviewed for impairment as of June 30, 2009. According to SFAS 142, Accounting for Goodwill and Other Intangible Assets, goodwill impairment is deemed to exist if the carrying amount of a reporting unit exceeds its estimated fair value and the carrying amount of the goodwill exceeds its estimated fair value. The results of our test indicated that the fair value of the applicable reporting unit exceeded its carrying amount. We concluded that as of June 30, 2009 the goodwill balance was not impaired. Further declines in our stock price may reduce the Company's market value compared to the book value of our net assets and accordingly, we will continue to review goodwill for impairment in future periods.
The generation of cash during the first half of 2009 allowed the Company to pay down all of its revolving line of credit as of June 30, 2009. Cash from operations and the cash available from the revolving line of credit are expected to be adequate to finance the Company's future operations, including the $10.0 million Deferred Prosecution Agreement settlement payments due in August 2009 and 2010. However, if market and other conditions change from those we anticipate due to a prolonged economic slowdown, our liquidity may be adversely affected.