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| KDN > SEC Filings for KDN > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
quarter of 2009 as compared with $86.8 million during the second fiscal quarter
of 2008, a decrease of $22.6 million or 26.0 percent. Excluding an increase in
sales to wind energy customers of $0.6 million, sales in the second fiscal
quarter of 2009 decreased by $23.2 million compared to the second fiscal quarter
of 2008. This decrease was attributable to sales volume declines of
$22.4 million and the adverse effect of exchange rate changes of $1.8 million,
which were only partially offset by a $1.0 million positive effect from
increased pricing. The sales volume declines primarily reflect weak business
conditions in industrial markets due to the global economic recession and a
decrease in sales to the defense market, largely attributable to timing, as the
prior year's sales supporting certain military programs have not thus far been
replaced by sales supporting this year's programs.
The wind energy market in the near term continues to be impacted by issues in
the general economy as well as credit availability. Recent steps taken by the
government to improve these issues through the stimulus package should
eventually increase demand for our products in the United States. We do not
believe that industrial markets show clear signs of impending improvement;
however, it appears these markets began to stabilize in the second quarter of
2009, albeit at cyclically low levels. Additionally, recent awards for certain
defense programs have resulted in customer orders for delivery in the second
half of 2009 with the potential for additional orders as these programs continue
to ramp up.
In the second fiscal quarter of 2009, sales in our Velocity Control Products
reporting segment were $10.2 million compared to $20.0 million in the second
fiscal quarter of 2008. The decrease of $9.8 million was attributable to volume
declines of $7.9 million caused by reduced domestic and international economic
demand, especially in industrial markets, and the adverse effects of exchange
rate changes of $1.9 million. This reportable segment is highly correlated with
the level of industrial activity in its served markets and is tied to
distributor stocking levels. Thus, sales volumes dropped quickly and
significantly when the economic crisis occurred and spread globally. After prior
downturns, when distributors began restocking to meaningful levels, this
business was one of the first to benefit.
Sales in our Sealing Products reporting segment in the second fiscal quarter of
2009 were $9.6 million compared to $11.7 million in the second fiscal quarter of
2008. The $2.1 million sales decline was attributable to decreased volume of
$2.3 million that was only partially offset by a $0.2 million effect of price
increases. The volume decline was attributable to weak industrial markets and
delayed capital projects that caused our customers to defer the receipt of our
product. While we do not believe the markets served by this segment show clear
signs of impending improvement, it appears as though these markets began to
stabilize in the second quarter of 2009.
Sales in our remaining businesses equaled $14.3 million during the second fiscal
quarter of 2009 compared to $21.4 million in the second fiscal quarter of 2008.
The $7.1 million sales decline was principally due to the global economic
recession which resulted in decreased demand for liquid filtration, air
filtration, and metal alloy products totaling $2.2 million, $1.8 million, and
$2.6 million, respectively. We expect these markets to continue at these
decreased demand levels for the remainder of 2009.
Gross margin in the second fiscal quarter of 2009 was 32.9 percent compared with
38.7 percent in the second fiscal quarter of 2008. The year-over-year decrease
of 5.8 points is attributable to decreased sales volume and lost absorption in
our plants as we produced below optimal capacity levels of 4.5 points, and
adverse changes in product mix, largely caused by sales declines in higher
margin industrial segments of 0.9 points, with the remaining net 0.4 points due
to increased depreciation primarily associated with our wind energy capacity
expansion and increased pension costs, that were partially offset by other net
cost reductions. We anticipate that we will continue to experience sales
weakness in our higher margin markets until industrial markets recover. Gross
profit declined by $21.8 million on a year-over-year basis from 2008 to 2009. In
addition to the decrease in gross margins, on a year-over-year basis second
fiscal quarter gross profit was also impacted by decreased sales volumes and the
unfavorable effects of exchange rate changes resulting from a stronger dollar.
Selling, general and administrative expenses were $19.1 million, or 19.5 percent
of sales, in the second fiscal quarter of 2009, compared to $22.0 million, or
15.7 percent of sales, in the second fiscal quarter of 2008. Selling, general
and administrative expenses declined in the second fiscal quarter of 2009
compared to the prior second fiscal quarter primarily because of the preemptive
and continuing steps we have taken to reduce compensation and discretionary
costs in light of weak global markets. Selling, general and administrative
expenses included approximately $1 million of one-time expenses associated with
layoffs and severance in the second fiscal quarter of 2009. Also, we realized
the benefit of changes to our postretirement benefit plans totaling
approximately $1 million in the second
fiscal quarter of 2009. Additional changes to our postretirement benefit plans
in the third quarter of 2009, are estimated to result in curtailment gains of
not less than $4.5 million in that period.
Our operating income was $13.2 million in the second fiscal quarter of 2009
compared to $32.1 million in the second fiscal quarter of 2008, as the decrease
in gross profit more than offset declines in selling, general and administrative
expenses.
On a reporting segment basis, operating income from our Friction Control
Products reporting segment during the second fiscal quarter of 2009 was
$9.8 million compared to $22.1 million in the second fiscal quarter of 2008. The
$12.3 million decrease was principally attributable to the effect of the lower
sales volume mentioned above. In addition, a $0.4 million adverse effect of
changes in product mix resulting from lower year-over-year sales to higher
margin industrial markets and net higher costs of $2.6 million, were fully
offset by a $2.7 million benefit from increased pricing and a $0.3 million
favorable effect of exchange rate changes. The higher costs include increased
depreciation associated with our investment in capacity to support the wind
energy growth initiative, increased pension expense, and $0.7 million of
severance and redundancy costs incurred in the second fiscal quarter of 2009. We
expect the unfavorable impact of product mix resulting from weak industrial
markets and the increased depreciation and pension expense to continue for the
remainder of 2009.
The Velocity Control Products reporting segment contributed $0.9 million to our
operating income during the second fiscal quarter of 2009 as compared to
$6.1 million during the comparable period last year. This decrease in operating
income was principally due to the effects of the decline in sales volume
mentioned above.
The Sealing Products reporting segment contributed $0.8 million to our operating
income during the second fiscal quarter of 2009 as compared to $1.5 million
during the comparable period last year. The $0.7 million decrease is
attributable to the effect of lower sales volume of $1.0 million and the impact
of adverse changes in product mix associated with proportionately lower sales of
higher margin industrial seals of $0.4 million that were partially offset by a
$0.2 million benefit from increased pricing and net cost reductions of
$0.5 million.
Our other businesses contributed $1.1 million to our operating income during the
second fiscal quarter of 2009 as compared to $3.3 million during the comparable
period last year. This decrease in operating income was due to the adverse
impact of the sales volume decreases mentioned above.
During the second fiscal quarter of 2009, interest income totaled $0.1 million
on average investment balances of $213.4 million at an average rate of
approximately 0.2 percent. This compares to $1.7 million of interest income in
last year's second fiscal quarter when we earned approximately 2.4 percent on
average investment balances of $282.0 million. The lower average investment
balances resulted from investments in our capital expenditure program, increased
working capital, contributions to our qualified pension plans, the use of cash
for our stock repurchase program, and an increase in our dividend rate. The
significantly lower interest earned in the second fiscal quarter of 2009
reflects prevailing historically low interest rates on short term treasury
securities. While we are earning modest interest income, our investments provide
increased security and significant liquidity when liquidity is at a premium. We
expect that interest income in the third fiscal quarter of 2009 will be
consistent with the second fiscal quarter of 2009.
The effective tax rate for the second fiscal quarter of 2009 was 37.0 percent.
The full year 2009 effective tax rate is expected to be approximately
36 percent. The second fiscal quarter of 2009 tax rate was higher than the prior
second quarter because certain tax deductions were unavailable due to the effect
of our additional $14.1 million pension contribution in the second quarter of
2009 on taxable income. The effective tax rate for the second quarter of 2008
was 35.4 percent.
Net income for the second fiscal quarter of 2009 was $8.4 million or $0.25 per
share on a diluted basis as compared to the adjusted net income for the second
fiscal quarter of 2008 of $19.6 million, or $0.63 per share on a diluted basis.
Second fiscal quarter 2008 results have been adjusted to reflect the required
retrospective application of two Financial Accounting Standards Board Staff
Positions which were effective January 1, 2009, resulting in the recording of
additional non-cash interest expense of $1.1 million, $0.7 million net of tax,
in the second quarter of 2008. These required adjustments reduced previously
reported second fiscal quarter 2008 basic earnings per share by $0.04 and
diluted earnings per share by $0.01.
First Fiscal Half Results
Sales during the first fiscal half of 2009 equaled $208.7 million, a decrease of
$54.5 million or 20.7 percent as compared to $263.2 million in the first fiscal
half of 2008. While sales to customers in the strategically important wind
energy market increased 16.3 percent to $40.6 million in the first fiscal half
of 2009, this growth was offset by declines in sales to other end markets,
especially industrial markets, of $60.2 million, as a result of the global
economic recession. From a regional perspective, our businesses serving
international markets, principally Europe, experienced declines during the first
fiscal half of 2009 that were similar to the declines experienced in our
domestic end markets in the later half of 2008 and first half of 2009.
Specifically, sales in our Friction Control Products reporting segment were
$136.4 million during the first fiscal half of 2009 as compared with
$160.9 million during the first fiscal half of 2008, a decrease of $24.5 million
or 15.2 percent. Excluding volume and pricing gains to wind energy customers of
$5.7 million, sales to all other markets in the first fiscal half of 2009
decreased by $30.2 million from the comparable period last year. This decline
was due to volume declines of $27.6 million and the adverse effects of exchange
rate changes of $4.5 million, which were only partially offset by a $1.9 million
effect of increased pricing. The volume declines were attributable to weak
industrial markets and a decrease in sales to the defense market, largely due to
timing as the prior year's sales supporting certain military programs have not
thus far been replaced by sales supporting this year's programs.
During the first fiscal half of 2009, sales in our Velocity Control Products
reporting segment were $22.4 million compared to $38.7 million in the first
fiscal half of 2008. The decrease of $16.3 million was due to reduced volumes of
$12.7 million caused by decreased demand in domestic and international markets,
especially industrial markets, and the adverse effects of exchange rate changes
of $3.6 million.
Sales in our Sealing Products reporting segment in the first fiscal half of 2009
were $20.2 million compared to $23.2 million in the first fiscal half of 2008,
as decreased volume associated with the global economic recession of
$3.7 million was only partially offset by a $0.7 million increase resulting from
higher pricing.
Sales in our remaining businesses equaled $29.7 million during the first fiscal
half of 2009 compared to $40.3 million in the first fiscal half of 2008. The
$10.6 million sales decline was principally due to the global economic recession
which resulted in decreased demand for liquid filtration, air filtration, and
metal alloy products, totaling $4.0 million, $2.3 million, and $4.1 million,
respectively.
Gross margin in the first fiscal half of 2009 was 32.7 percent compared with
38.6 percent in the first fiscal half of 2008. The year-over-year decrease of
5.9 points is attributable to decreased sales volume and lost absorption in our
plants as we produced below optimal capacity levels of 2.8 points, and adverse
changes in product mix, largely due to sales declines in higher margin
industrial segments of 1.1 points, with the remaining 2.0 points due principally
to increased depreciation primarily associated with our wind energy capacity
expansion and increased pension costs. Gross profit declined by $33.4 million on
a period-over-period basis from 2008 to 2009. In addition to the decrease in
gross margins, on a year-over-year basis first fiscal half gross profit was also
impacted by decreased sales volumes and the unfavorable effects of exchange rate
changes resulting from a stronger dollar.
Selling, general and administrative expenses were $39.4 million, or 18.9 percent
of sales, in the first fiscal half of 2009, compared to $43.2 million, or
16.4 percent of sales in the first fiscal half of 2008. Selling, general and
administrative expenses declined in the first fiscal half of 2009 compared to
the prior first fiscal half primarily because of the preemptive and continuing
steps we have taken to reduce compensation and discretionary costs in light of
weak global markets. Selling, general and administrative expenses included
approximately $1 million of one-time expenses associated with layoffs and
severance in the first fiscal half of 2009. Also, we realized the benefit of
changes to our postretirement benefit plans totaling approximately $1 million in
the first fiscal half of 2009.
Our operating income was $28.7 million in the first fiscal half of 2009 compared
to $58.3 million in the first fiscal half of 2008, as the decrease in gross
profit of $33.4 million more than offset the reduction in selling, general and
administrative expenses of $3.8 million.
On a reporting segment basis, operating income from the Friction Control
Products reporting segment during the first fiscal half of 2009 totaled
$22.2 million compared to $39.7 million in the first fiscal half of 2008. The
$17.5 million decrease in operating income was due to a $13.3 million adverse
effect of the decreased sales volumes mentioned above, a $0.8 million effect of
adverse product mix from lower sales to higher margin industrial markets, net
higher
costs of $8.6 million, and a $0.3 million effect of adverse exchange rate
changes, that were partially offset by a $5.5 million benefit of increased
pricing. The higher costs include increased depreciation associated with our
investment in capacity to support the wind energy growth initiative, increased
pension expense, and $0.8 million of severance and redundancy costs incurred
during the first fiscal half of 2009.
The Velocity Control Products reporting segment contributed $3.1 million to our
operating income during the first fiscal half of 2009 as compared to
$11.7 million during the comparable period last year. This decrease in operating
income is principally due to the effect of the decline in sales volume mentioned
above.
The Sealing Products reporting segment contributed $1.4 million to our operating
income during the first fiscal half of 2009 as compared to $3.0 million during
the comparable period last year. The combined effect of the decreased sales
volume mentioned above and adverse changes in product mix associated with
proportionately lower sales of higher margin industrial seals totaled
$2.7 million, were partially offset by the impact of higher pricing of
$0.7 million, and net cost reductions of $0.4 million.
Our other businesses contributed $1.9 million to our operating income during the
first fiscal half of 2009 as compared to $5.5 million during the comparable
period last year. This decrease in operating income is due principally to the
effect of the decline in sales volume mentioned above.
During the first fiscal half of 2009, interest income totaled $0.2 million on
average investment balances of $216.4 million at an average rate of 0.2 percent.
This compares to $3.7 million of interest income in last year's first fiscal
half when we earned approximately 2.5 percent on average investment balances of
$285.4 million. The lower average investment balances resulted from our capital
expenditure program, increased working capital, our stock repurchase program,
contributions to our qualified pension plans and an increase in our dividend
rate. In addition to lower average balances, the significantly lower interest
earned in the first fiscal half of 2009 reflects prevailing historically low
interest rates on short term treasury securities.
The effective tax rate for the first fiscal half of 2009 was 36.0 percent. The
effective tax rate for the first fiscal half of 2008 was 35.4 percent.
Net income for the first fiscal half of 2009 was $18.5 million, or $0.55 per
share on a diluted basis as compared to the adjusted net income for the first
fiscal half of 2008 of $35.0 million, or $1.15 per share on a diluted basis.
First fiscal half 2008 results have been adjusted to reflect the required
retrospective application of two Financial Accounting Standards Board Staff
Positions which were effective January 1, 2009, resulting in the recording of
additional non-cash interest expense of $3.1 million, $2.0 million net of tax.
These required adjustments reduced previously reported first fiscal half 2008
basic earnings per share by $0.09 and diluted earnings per share by $0.01.
Liquidity and Capital Resources
At July 4, 2009, our current ratio was 8.9 to 1 and working capital totaled
$361.4 million, including $210.7 million of cash and cash equivalents. At
December 31, 2008, our current ratio was 6.8 to 1 and working capital totaled
$365.3 million, including cash and cash equivalents of $233.0 million.
Net cash from operating activities during the first fiscal half of 2009 equaled
$2.8 million, compared to the first fiscal half of 2008 net cash from operating
activities of $25.9 million. The decline in net cash from operating activities
was principally due to the decline of $16.5 million in net income and the
$14.8 million in contributions to our qualified pension plans compared to no
contribution in the prior first half.
During the first fiscal half of 2009, we paid common stock dividends of
$11.5 million, repurchased a total of 314,047 shares of Company common stock for
$8.9 million and invested $7.6 million in net capital expenditures.
Net inventories at July 4, 2009 were $114.7 million, an increase of
$17.0 million compared to December 31, 2008. The increase is principally
attributable to our investment in inventory supporting the wind energy growth
initiative, where lead-times of customized materials are long. While long-term
policy discussions and legislative proposals centering on reduced carbon
emissions and promoting growth in renewable energy alternatives remain positive
for the long term, the absence of a well-defined renewable electricity standard
on a national basis and ongoing issues associated with accessing the financing
markets have impacted both current customer orders and the acceptance of
previously scheduled shipments. This lack of visibility and readily accessible
financing has resulted in certain of our customers deferring their receipt of
ordered goods, which resulted in an increase of our finished goods inventory. In
response to customers continuing to defer receipt of shipments, and refraining
from placing new orders until conditions improve, we have reduced our orders of
raw materials supporting this initiative and expect to reduce our inventory
levels for the remainder of the year.
In considering both our long-term confidence in the wind energy market and our
ongoing strategic relationships with wind energy customers, we believe that our
inventory as of July 4, 2009 is fully realizable. Additionally, while certain of
our customers have deferred their receipt of ordered goods and have delayed
certain payments, we closely monitor our accounts receivable from wind energy
customers and are reasonably assured that our accounts receivable are fully
collectible. As such we have not established any reserve for inventory or an
allowance for doubtful accounts related to wind energy customers as of July 4,
2009.
We have recorded in other assets a $3.2 million net investment representing our
position in an investment fund. This fund has been closed by the fund issuer.
The fund issuer, owned by a major bank, has restricted the redemption of the
fund to permit its orderly liquidation as the underlying fund assets mature or
are sold. During the first half of 2009 we received distributions of $1.9
million from the fund at approximately book value.
Management expects that our planned capital requirements, which consist of
capital expenditures, dividend payments and our stock repurchase program, will
be financed by operations and existing cash balances. In addition, our revolving
credit facility provides additional financial strength to support our
objectives, including future acquisitions.
Outlook
The near term outlook for the domestic and international economies is uncertain.
The deterioration in general business conditions has softened demand for our
higher margin immediately shippable orders, or "book and ship" orders, to our
general industrial distribution channels in domestic and international markets.
In addition, certain customers which previously placed large orders to be
delivered over many quarters have reduced the size of those orders and increased
the frequency of smaller orders as they react to economic conditions. Backlog
equaled $242.8 million at the end of the second fiscal quarter of 2009 compared
to backlog of $324.0 million at the end of the second fiscal quarter of 2008.
The decrease is principally attributable to shipments in excess of gross orders,
and, to a lesser extent, pricing adjustments reflecting contractual pass-through
of decreased material costs. We believe challenging economic conditions are
likely to continue through the remainder of 2009.
. . .
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