Lydall Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Lydall, Inc. (LDL)

Lydall (NYSE:LDL)

Q2 2013 Earnings Call

August 01, 2013 11:00 am ET

Executives

Robert K. Julian - Chief Financial Officer and Executive Vice President

Dale G. Barnhart - Chief Executive Officer, President, Director and President of Global Automotive Business

Analysts

Adam Brooks - Sidoti & Company, LLC

Operator

Good day, and welcome to Lydall's Second Quarter 2013 Results Conference Call. [Operator Instructions] Please also note, this event is being recorded. I would now like to turn the conference over to Mr. Robert Julian, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Robert K. Julian

Thank you, operator, and welcome, everybody to our second quarter 2013 earnings conference call. I will start off by taking you through the financial highlights for the quarter, and then turn it over to Dale Barnhart, Lydall's President and Chief Executive Officer, to talk about our operational results by business. So that you can follow along, I will be referring to the PowerPoint presentation titled Q2 2013 Earnings Conference Call, which you can find at lydall.com in the Investor Relations section.

On Page 1 of the presentation is a reminder about forward-looking statements. Please note that any information discussed in this presentation which may be 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, please refer to Lydall's annual report on Form 10-K and Form 10-Q under cautionary note concerning forward-looking statements, as well as risk factors.

With that, I'll turn to Page 2 of the presentation to cover the Q2 2013 financial highlights. Q2 2013 net sales were $101.1 million, an increase of 3.6% versus Q2 2012, when net sales were $97.5 million.

Operating income for the quarter was $9.5 million or 9.4% of net sales compared to operating income of $8.7 million or 9.0% of net sales in Q2 2012. We are very pleased with the consolidated performance of the business as operating margin is at the highest level in recent history. Net income for the quarter was $6.0 million or $0.35 per share compared to $6.6 million or $0.39 per share in Q2 2012. The current quarter includes a discrete tax benefit of $0.02 per share, while Q2 2012 included the tax benefit of $0.08 per share that was attributed to the reversal of valuation allowance on foreign tax credit carryovers.

Finally, we ended the quarter with $58.5 million of cash. We used approximately $6 million to repurchase more than 423,000 shares of common stock this quarter under our share repurchase program.

Turning to Page 3 of the presentation. I'll cover our summary statement of operations for Q2 2013 versus Q2 2012. Again, consolidated total net sales increased 3.6%, primarily driven by increased sales in the Thermal/Acoustical Fibers segment and the Thermal/Acoustical Metals segment, which were driven by tire consumer demand on Lydall's existing platforms and tooling sales for new platform awards. These increases were partially offset by lower sales for the Performance Materials segment, which was primarily driven by lower net sales of industrial thermal insulation products and to a lesser extent, lower sales of Life Sciences filtration products.

Gross margin of 22.8% improved 25 basis points when compared to Q2 2012. This improvement was primarily driven by strong contribution from the Thermal/Acoustical Fibers segment as a result of operational improvements in manufacturing efficiencies. As you can see, we had a very strong operating margin performance of 9.4% in Q2 2013, and it is important to note that Q2 2012 operating margin included 40 basis points of benefit from the completion of services provided under a license agreement.

As noted earlier, reported diluted earnings were $0.35 per share versus $0.39 per share in Q2 2012. Q2 2013 was positively impacted by a discrete tax benefit of $0.02 per share, while Q2 2012 was positively impacted by the reversal of tax valuation allowances that created a benefit of $0.08 per share.

Turning to Page 4 of the presentation. You will see our summary balance sheets as of June 30, 2013, and December 31, 2012. Consistent with the approach I've taken in previous quarters, I will not go through all the information in detail, but would like to highlight our continued strong cash position of $58.5 million, as of June 30, 2013. The decline in cash versus 2012 year end is primarily due to changes in working capital, capital expenditures and share repurchase activity. The changes in working capital relate to increased inventory levels and is primarily driven by an increase in tooling of $4.7 million, as our automotive businesses prepare to support future production. Approximately $6 million was used to repurchase more than 423,000 shares of Lydall common stock under our share repurchase program this quarter. To date, we have acquired 733,000 shares and have approximately 276,000 shares remaining to be purchased under the authorized share repurchase program.

Finally, as you can see based on the chart on the right-hand side of the page, Q2 2013 inventory days increased slightly to tooling, as you might anticipate, and receivables days performance has improved over the second quarter and full year 2012 results.

Page 5 details our statement of cash flows. Again, just hitting the highlights, the use of cash in 2013 was driven by the inventory build and share repurchase activity I just discussed. Capital expenditures for 2013 were $5.5 million, and I will reconfirm that we had -- what we advised last quarter in that we anticipate full year capital expenditures to be approximately $14 million to $15 million.

With that, I would like to turn it over to Dale Barnhart, Lydall's President and CEO, to discuss our operational results by segment in more detail. Dale?

Dale G. Barnhart

Thank you, Robert, and good morning, everyone. First of all, I will start by taking you through the results of our Performance Materials segment on Page 6. Sales declined nearly 11% in Q2 2013 compared to Q2 2012. The quarter-over-quarter decline was primarily driven by lower Industrial Thermal Insulation net sales of $2.5 million, and to a lesser extent, lower net sales of Life Science filtration products of $800,000. As you may recall, in the Industrial Thermal Insulation business, we completed a contract manufacturing agreement with a customer of electrical paper products in the second quarter of 2012. This was part of the divestiture of that product line in 2010, which resulted in net sales being lower by $1.5 million. In this business, we also experienced lower sales of cryogenic and commercial building application products of approximately $1 million due to timing of orders.

Sales declined in the Life Science filtration business due to the obsolescence of a product line, as well as lower demand for respirator applications. The decline in operating income in Q2 2013 compared to Q2 2012 was primarily due to reduced revenues, unfavorable absorption of fixed costs, as well as product mix.

Additionally, Q2 2012 results included $400,000 gain from services provided to the buyer of electrical papers products line in accordance with our completed license agreement.

Turning to Page 7 to look at our Thermal/Acoustic Metals segment. Part sales were essentially flat in Q2 2013 compared to Q2 2012, as modest improvements for products in North America were partially offset by lower demand from our European operations given the generally weak European automotive market. As we experienced quarter-over-quarter decline in Europe, we are seeing continued signs of stabilization as the European parts sales have trended up slightly over the past 3 quarters.

As Robert mentioned earlier, tooling sales are up again significantly this quarter, and this is the primary driver of the quarter-over-quarter total revenue growth in this segment. The slight increase in operating margin for the segment in Q2 2013 compared to the same period in 2012 is attributable primarily to reduced raw material costs, scrap and material usage cost being offset partially by an unfavorable mix in sales between parts and tooling, as part sales typically result in higher gross margins than lower margin tooling. That being said, tooling sales are a leading indicator for the business and evidence that we continue to win and prepare for new platform launches.

As I mentioned last quarter, we announced the establishment of a wholly owned foreign enterprise outside Shanghai, China in order for this business to serve the local auto market. This project is on track and we anticipate the manufacturing facility will be fully operational in the first half of 2014.

On Page 8 is a summary of our Thermal/Acoustic Fiber business. Fiber parts sales grew 9.4% in Q2 2013 compared to Q2 2012, driven by higher consumer demand for vehicles on Lydall's existing platforms and from sales of parts on new platform awards. Again, similar to what you saw in the Thermal/Acoustic Metals business, this segment also experienced higher tooling sales this quarter, which contributed to the quarter-over-quarter total sales growth in this segment. The significant increase in operating income is attributed to higher net sales and improved gross margin realized from the mix of sales, reduction in scrap material usage and labor costs and other manufacturing efficiencies.

Turning to Page 9 to look at our other products and services, which comprises the Life Sciences Vital Fluid business, sales were up 13.7% in Q2 2013 compared to Q2 2012, driven primarily by increase of blood filtration sales. Decline in operating margin is primarily due to increasing selling costs associated with the distribution of CELLution Biotech equipment in advance of orders as this initiative ramps up. As I have mentioned previously, we continue to be optimistic about the CELLution opportunity as it allows us to provide a more complete offering to our existing bio-processing customers and provides us with an excellent venue to help drive sales over single-use bags. Concluding with our summary on Page 10, overall, we had very good results for the second quarter of 2013 as this is the highest consolidated operating margin the company has experienced in recent history. The softness that we were previously seeing in Europe appears to be stabilizing and the business continues to benefit from strong demand for vehicles in North America and excellent execution by the Thermal/Acoustic Fibers business.

Based on what we are currently seeing in the market, I anticipate that the total automotive demand will be consistent with the first half of 2013.

In addition, I also anticipate the positive trends in volume in both North America and Europe for Performance Materials segment to continue into the third quarter.

We remain focused on increasing margins in all of our businesses through our Lean Six Sigma continuous improvement program and remain committed to funding organic growth programs, capital investments and pursuing strategic growth opportunities.

With that, we'll be glad to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Adam Brooks of Sidoti & Company.

Adam Brooks - Sidoti & Company, LLC

Just starting on the Fibers segment. Can you give us a sense, maybe break down the main buckets you had mentioned, the sales/fixed overhead, raw mats and the cost savings, the year-over-year improvement and the op margin for Fibers? Just kind of how that broke out?

Dale G. Barnhart

We'll have to get back to you on that.

Adam Brooks - Sidoti & Company, LLC

Okay. And then maybe could you just give us a sense. I think last time we have talked about it, it seemed like this was a mid-teens type op margin business. Now that you've continued to see more and more improvements there, have you adjusted your expectations? Can this break 20% on a consistent basis or are we kind of touching up against what you think the peak is?

Dale G. Barnhart

I think, as you know, the automotive space is very competitive and getting to that point is one that we would like to maintain going forward.

Adam Brooks - Sidoti & Company, LLC

Okay. And then maybe on Performance Materials. If we look into 3Q in the back half of the year, can we start to see a sequential improvement? And I know some of the decline this quarter was due electric paper line, I guess, about $1.5 million. But could we start to see positive year-over-year comps as we get into the back half of the year?

Dale G. Barnhart

Well, we should continue to see sequential improvement as we're looking right now -- particularly going into the third quarter. We -- as we're looking at our backlog, it appears that the trend that started in the first to second quarter revenue growth is continuing into the third quarter.

Adam Brooks - Sidoti & Company, LLC

Okay. And then just talking about acquisitions. Have you ramped up activity on looking for acquisitions? Has it remains status quo? And is there anything out there that you think is interesting at this point?

Dale G. Barnhart

Well, as we have in the past, we have a very active program in trying to identify good accretive acquisitions for the company. And that's about all we can say at this time.

Robert K. Julian

And, Adam, just a clarification, a little bit of flavor on your question on the improvement at Fibers. It's primarily coming from 3 areas. We're getting good material productivity. That comes from some outsourcing and some reduced scrap and so -- actually, it's in sourcing, effectively where we don't have to outsource as much product outside. It's coming from fixed cost absorption because as you can see in our results, volume is up. And it's coming from labor and overhead productivity. Fairly, evenly weighted between those 3, maybe a little bit more on the benefit on the material. As you can imagine, it's a larger proportion of our total cost space. But that's a little bit of a flavor on where the profitability improvement is coming from Fibers. And if you want some more, we can talk more about it, I guess, if you want to clarify.

Adam Brooks - Sidoti & Company, LLC

Okay. And then maybe one more I'll squeeze in here before I hop back into the queue. Have you won anymore business in China? And just maybe an update, I know you said the expansion is on track. Just maybe an update on how things are going over there.

Dale G. Barnhart

Well, we have the 2 applications that we were counting on when we went. And just this morning, the team said we're pursuing another one. So we're getting -- the reception is very good from the local manufacturers that we are there now. So we will have, I think, plenty of opportunities, and the focus of the business is to be selective and go after the ones that will produce the best margins for the operation.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Dale Barnhart for any closing remarks.

Dale G. Barnhart

Again, we are very pleased with the third quarter -- second quarter results, excuse me. And a lot of it was driven by our Lean Six Sigma program and there's continuous focus on that process to drive improvement in our businesses, and also now focusing on top line growth. So again, thanks for participating on the call, and we will talk to you at the end of the third quarter.

Operator

And thank you, sir, for your time. The conference is now concluded, and we thank all of you for attending today's presentation. You may now disconnect, and have a wonderful day.

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