Lydall Q4 2008 Earnings Call Transcript

| About: Lydall, Inc. (LDL)

Lydall, Inc. (NYSE:LDL)

Q4 2008 Earnings Call

February 27, 2009 10:00 AM ET


Thomas P. Smith - Vice President, Chief Financial Officer and Treasurer

Dale G. Barnhart - President and Chief Executive Officer


John E. Franzreb, IV - Sidoti & Company, LLC


Good day, everyone and welcome to the Lydall Fourth Quarter 2008 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to your moderator, Vice President and Chief Financial Officer, Mr. Tom Smith. Please go ahead, sir.

Thomas P. Smith

Thank you. Good morning everyone and thank you for joining us today. Dale Barnhart, Lydall's President and Chief Executive Officer will briefly review Lydall's performance for the fourth quarter ended December 31, 2008. We will then open the lines for questions.

Participants should note that additional information, including a presentation outlining key financial data for the fourth quarter ended December 31, 2008 supporting today's discussion can be found at in the Investor Relations section.

Before we begin, I'd like to inform our listeners that any information discussed in this call which maybe forward-looking in nature is made available pursuant to the Safe Harbor provision for forward-looking statements as defined in the Securities laws. Lydall's businesses are subject to a number of risk factors which may cause actual results to differ materially from those anticipated in the forward-looking statements.

For information identifying some of these important risk factors, I refer you to Lydall's Annual Report on Form 10-K and forms 10-Q in the MD&A section under Cautionary Notes concerning factors that may affect future results and also risk factors. I also refer you to additional risks factors described in our press release announcing the financial results for the fourth quarter and year-ended December 31, 2008.

Finally, this call is fully accessible to interested investors and the media and is intended to comply with all the requirements of our public disclosure under Regulation FD.

I will now turn the call over to Dale Barnhart. Dale?

Dale G. Barnhart

Thank you, Tom and good morning everyone. As you read in our release today, our fourth quarter results were significantly impacted by global, regional and industrial... industry economic downturns, which have impacted our core markets. Results were also significantly impacted by non-cash charges of 17.4 million and 1.6 million of restructuring charges that occurred in... we have booked in the fourth quarter.

Net sales were down 18.8 million, excluding the impact of foreign exchange. Our gross margins declined to 13.1 from 24% in Q4 '07, driven principally by the impact of our Thermal/Acoustic, our automotive business. In the fourth quarter, we took charges of 1.5 million as it relates to restructuring in our North American business, which contributed to 250 basis points decline in gross margin.

Our operating loss from continuing operations was 22.1 million in the fourth quarter of 2008, again with the impact of the impairment charges of 17.4 million or $0.66 per diluted share. The goodwill impairment charges were 16.4 million, 12.2 million related to our Thermal/Acoustics, our automotive segment, 4.2 million for the Affinity temperature control business.

Our long-lived assets impairment of 1 million was related to our Affinity business. We did incur restructuring expenses of 1.6 million, or $0.06 per diluted share for the consolidation of our North American automotive operations.

Our loss per share from continuing operations in Q4 '08 was $0.84, versus a gain of $0.14 in Q4 '07. Again, the Q4 '08 includes the 17.4 million or $0.66 impairment charges, and the 1.6 million or $0.06 of restructuring expense. Excluding these expenses, the fourth quarter earnings were a loss of 2.1 million or $0.12 per diluted share.

Comparing 2008 to 2007, overall our sales were down 24.5 million. Gross margins declined 200 basis points. Again, a significant portion of that or 50 basis points related to the automotive business and the decline, the impact and the decline of revenue and also the restructuring charges.

Operating loss from continuing operations was 9.5 million in 2008 versus operating income of 15.2 million in 2007. Again, we took the fourth quarter charges of 17.4 million or $0.66 per diluted share for impairment charges and restructuring of 1.6 million or $0.06.

Excluding the impact of the fourth quarter charges, net income for 2008 would be 6.7 million or $0.41 per diluted share. While we had very difficult economic climate in 2008, the company accomplished... a significant accomplishment it should be noted. Prior in 2008 in the third quarter, we announced the consolidation of our North American Thermal/Acoustic, our automotive operations into one from two, which resulted in the closing our St. Johnsbury facility.

We were slightly ahead of the rapid decline at the automotive industry in making that decision. Also, it's important to note that our overall financial position enabled us to make that decision. With the further decline in the automotive sector, we've been able to accelerate the completion of that consolidation. We'll pull it ahead about one quarter, to be substantially completed by the end of the second quarter of '09, and we will start realizing the benefit of that restructuring in the second half. We expect the annualized savings from that restructuring to be 3.5 to $4 million.

We also realigned our management structure in the Thermal/Acoustics or the automotive business to really structure the business on a global basis. We eliminated two regional Sales Presidents and consolidated one Global President.

The benefit there is obviously some cost reduction but more importantly as we go forward really driving the synergies in that business because the automotive business truly is global. And we're already realizing the benefit of those synergies in leveraging sales positions, particularly with the European automotive manufacturers, as they are coming to North America.

From the standpoint of cost and discretionary spending, the organization has used its Lean Six Sigma tools and prudent cost reduction strategy to really bring our costs in line as fast as we could with the revenues we were seeing.

Over the year we've reduced our work force by 15% and we will continue to see consolidation of that reduction of our work force as we go in to '09, as we complete our consolidation efforts of our North American Thermal/Acoustics business.

While we are spending a lot of time on cost reductions and streamlining the business for efficiency, we are not ignoring growth opportunities and significant to our North American automotive business in this past year is that we have obtained Tier 1 status at three major Asian transplant manufacturers of automobiles and we are in the process of either shipping or beginning to ship orders to those respective OEMs.

We did again because of our financial strength in '08 acquire DSM Solutech BV which is a advanced filtration media that we add to our performance material group which will really enable future growth for that business.

In addition, to that we are able to support and we will fund through '09 investments in our bio-disposable business to support a market that's growing quite substantially and will lead to future growth for the company.

We also successfully divested a non-core transport business resulting in 4.2 million in cash and after-tax gain on the sale of about $1 million.

Also important to know is Lean Six Sigma continues to strength the operating performance of all of our businesses. I can say that irrespective of the revenue being generated in each of the businesses as we exit '08, each one of our business unit is operating at better efficiencies due to the efforts of Lean Six Sigma. And we will continue to utilize that tool as we go through '09. And not insignificant is that we ended 2008 with 13.7 million in cash and no significant debt.

Also we are in the process of negotiating a new asset based credit facility with certain financing facilities which we expect to be in place in Feb... March, excuse me.

Going on to the individual business segments, performance materials in the fourth quarter again, performance material is our business unit that provides both air and liquid filtration, media and participates in industrial and thermal insulation business.

In the fourth quarter of '08 compared to the fourth quarter of '07, we saw our revenues decline 4.4 million. Our operating income declined 1.9 million compared to the prior quarter.

If you look at the individual business segments or product lines in the industrial and thermal, our fourth quarter sales were down 1.2 million. That's comprised of the segment of energy industrial which is acquired thermal insulation material for LNG storage and transportation and also a material that we make that's used in insulating material for the production of transformers was pretty much flat quarter-to-quarter.

And as you could expect the insulating products that we sell into building and in the white good appliance markets was down 1.3 due to the over all economic climate.

And our air-liquid filtration actually saw a significant decline in the fourth quarter of 3.2 million. Most of that occurred in December as we saw some significant inventory adjustments from our OEM filter manufacturers. For the year net sales for performance materials was virtually flat, slightly down or increased about half a million and our operating income year-to-year was 15.5 million, again essentially flat with '07.

Looking at the different segments, our industrial and thermal insulation, our overall sales for the year are actually up 1 million. And if you look at again, looking at the energy and industrial, as you would expect, was up significantly, 3.1 million driven by our acquired thermal again, material we sell for liquid LNG storage and shipment and the material that we sell into electrical insulation for the production of transformers.

Our building and appliance on the other hand because of the economic condition was down 2.1 million. Air-liquid filtration was down only half a million for the full year which as you saw, as I mention earlier, all of the decline came in the fourth quarter as people were making adjustments.

This business segment continues to be core for us and a key area for growth, participating in markets that we think are attractive going forward and that's why as I mentioned earlier in '08 we completed the acquisition of Cytec product line to compliment their business going forward.

Thermal/Acoustic, our automotive segment obviously has been impacted not only the fourth quarter but the full year from -- we all know is going on in automotive production around the world.

Our net sales in the fourth quarter were down $11.6 million excluding the impact of foreign exchange. Our operating loss of $14.4 million, did include the impairment charges $12.2 million and restructuring of $1.6. Excluding those we had an operating loss of $700,000 for the quarter.

Our product sales were down $12 million or 30%. If you look at by region we were down 31% in the United States and 28% in Europe.

North American automotive industry continues to be impacted by the general economic compounded by the credit availability and production in North America was down 26% in Q4 '08 compared to Q4 '07 and down 16% year-over-year.

I've already mentioned that we took the goodwill charges of $12.2 million in the quarter along with the restructuring charge of the $1.6, which impacted obviously the full year. If we excluded the -- in the quarter. In Europe, we did see significant reduction in demand in the fourth quarter by 27% or $1.5 million in Q4 '08 versus Q4 '07.

For the year, Thermal/Acoustics segments saw net sales decline of $20.6 million excluding the impact of FX, operating income loss of 6.1 million, again with the impairment charge of $12.2 and restructuring of $1.6. Excluding these charges, we had an operating income of $7.7 million for the Thermal/Acoustics business.

Product sales overall were down 14% fort the year, down $22.9 million. Again driven principally by the reduction in production of automotive vehicles both in Europe and North America.

It is significant to note that while we were excluding the charges, we were positive on operating income for the Thermal/Acoustic or automotive business, we were also cash positive for the year.

Other products and services again comprised of thermal of vital fluids and affinity.

Vital fluids for the fourth quarter of '07, our net sales were up $300,000 and our operating income was up $200,000, driven by the continued improvement in our operating performance in that business. And we couldn't be more pleased with the trend we're seeing in the vital fluids business.

Affinity impacted by the rapid decline or the continuing decline of the semiconductor industry, saw a sales decline of $3.1 million. We had an operating loss of $6 million again significantly impacted by goodwill impairment charge of $4.2 and long-lived asset impairment of #1 million. Without those, we had an operating loss of $800,000 for the quarter.

For the full year, our vital fluids business continued to show improvement, year-over-year where sales up 1.9 million and our operating income up $600,000. This is again one of the key markets that we are investing in '09 for growth to take advantage of our position, the growing market in the bio-disposable space.

Affinity net sales declined 6.8 million or 30% year-on-year. Again, for the year, we took-- we had operating loss of 7.5 million in '08 versus an operating loss of 1.2 million in '07. Excluding the impairment charges, the loss for the year was 2.3 million.

In summary, obviously '08 was a very difficult economic climate for our market segments that we were in. I am confident that we have positioned the company, and addressed the revenue decline in the utilization of our Lean Six Sigma. As I mentioned earlier, all of our businesses exited '08 with better operating metrics than they had going into the year, because of our Lean Six Sigma. We have acted on key growth initiatives. And as a result, Lydall has positioned ourselves very well, to be in a position to benefit from the economic recovery when it does occur.

With that, I'll turn it over to any questions.

Question-and-Answer Session


(Operator Instructions). We will go to our first question from John Franzreb at Sidoti & Company.

John Franzreb, IV - Sidoti & Company, LLC

Good morning, Dale and Tom.

Dale Barnhart

Good morning John.

Thomas Smith

And, how are you?

John Franzreb, IV - Sidoti & Company, LLC

Could you just discuss what the order trends were like in January and February in each segment?

Dale Barnhart

Order trends? Well again, we really don't -- for the order trends in automotive, I would say, are continuing on what we saw in the fourth quarter. So, there is no real improvement there. And if you look at our other -- our filtration performance material, maybe a slight pickup. But, it's nothing that I would say that it's a positive trend that we could pick up and guarantee right now.

So, there is still a lot of volatility in our markets. And it's really difficult for us to really project what's going to happen in '09 in those overall markets. And that's why we're focusing on the continuing Lean Six Sigma, things we can do to really improve our cost position as we go forward.

John Franzreb, IV - Sidoti & Company, LLC

Some of the other filtration companies are a signaling difficult continuing environment, so that would kind of drive -- what I'm hearing. Can you talk a little bit about the pricing environment as the competitive landscape, I guess, gets tougher?

Dale Barnhart

Well, we are seeing some. Last year we were able, if you look at different businesses and performance materials, we're able to benefit some pricing in '08 as we saw raw materials increasing in the first set part of '08. We went out and took that to the marketplace.

Now, raw material prices are declining. We hope to benefit from some of that as we go forward in '09 but we're also getting some pressure from our customers who also realizes. So we're balancing the act of working with them on their request for price reductions versus what we're doing and seeing in costs.

So there is some discussion and pressure, particularly in the performance material the non-automotive. In the automotive sector, we're not seeing anything other than what we've contractually committed to in any long-term agreements we have on these platforms from where they expect year-over-year price reduction.

John Franzreb, IV - Sidoti & Company, LLC

Right. Could you just touched on the other side, there is certainly lot of concern about the ongoing liability of Chrysler. How big of a net is Chrysler to the -- by those sales price?

Dale Barnhart

Its about 10% of our revenue right now, in 2008.

John Franzreb, IV - Sidoti & Company, LLC

One last question, you mentioned you're getting a new credit facility. Why is that necessary?

Dale Barnhart

Well, its just security to make sure that should the situation occur where we need it, we have it. Again we finished with cash in bank at the end of the year. We will continue to really work and improving working capital as we go forward from a cash management but it would not be prudent from my standpoint, as CEO of this company not to have a credit facility in place in these economic conditions.

John Franzreb, IV - Sidoti & Company, LLC

How large a facility are we talking here?

Dale Barnhart

We really can't disclose it, what I can disclose is that we have been working with two financial institutions. As we started the process, we obviously have cash in the bank and cash in the bank, so we could make sure that we were working with good financial institutions and working towards your program that would benefit the company

We -- our credit lines that expired was a non-secured credit line, because of credit availability, we are going to asset-based credit facility. We've had proposals from the two financial institutions. They've gone through their due diligence and looking at our performance, and the good news is that both of those proposals have been reviewed by the credit committee.

So both of those financial institutions and have been approved. And we are in the process now of working the final details to move to closing sometime in March with one of those financial institutions.

John Franzreb, IV - Sidoti & Company, LLC

Okay, Thanks a lot, Dale.


(Operators Instruction). And with no further questions in the queue, I'd like to turn the conference back to your presenters for any additional comments or closing remarks.

Dale Barnhart

Again thanks for participating, and we'll talk to you at the end of the first quarter. Thank you.


This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at anytime and have a good day.

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