Lydall Management Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 5.14 | About: Lydall, Inc. (LDL)

Lydall (NYSE:LDL)

Q4 2013 Earnings Call

March 05, 2014 8:30 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

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

Operator

Good morning, and welcome to the Lydall Fourth Quarter and Year Ended December 31, 2013, Earnings Release and Conference Call. [Operator Instructions] Please note, this event is being recorded. And I would now like to turn the conference over to Robert Julian, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Robert K. Julian

Thank you, Emily, and welcome, everyone, to our Fourth Quarter 2013 Earnings Conference Call. I'll start off this morning by taking you through the financial highlights, and then we'll 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'll be referring to the PowerPoint presentation entitled, Q4 2013 Earnings Conference Call, which you can find at lydall.com in the Investor Relations section.

On Slide 2 of the presentation is a reminder about forward-looking statements. Please note that any information discussed in this presentation that 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 that 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 reports on Form 10-K and Form 10-Q under cautionary note concerning forward-looking statements.

With that, I'll turn to Slide 3 of the presentation to cover the Q4 2013 financial highlights. Q4 2013 net sales were $99.9 million, an increase of 10.4% versus Q4 2012 when net sales were $90.5 million. Operating income for the quarter was $5.3 million or 5.3% of net sales compared to operating income of $2 million or 2.2% of net sales in Q4 2012. Net income for the quarter was $4.1 million or $0.25 per diluted share compared to $2.4 million or $0.14 per diluted share in Q4 2012.

There are a few notable items of significance impacting both the current and prior periods that are worth mentioning, and I'll take you through those items in detail on the following slide. Cash provided by operations of $19.4 million in Q4 2013 and ending cash balance of $75.4 million for 2013 compared to cash provided by operations of $15.2 million in Q4 2012 and ending cash balance of $63.6 million for 2012. This includes the impact of $6.1 million in cash used in 2013 to repurchase more than 423,000 shares of Lydall common stock under our share repurchase program.

Turning to Slide 4 of the presentation. I'll review our summary statement of operations for Q4 2013 versus Q4 2012. Again, consolidated total net sales increased 10.4% driven by increased sales in all of our reportable business segments. The Thermal/Acoustical Metals and Thermal/Acoustical Fibers segments were the most significant contributors to this increase and were the result of higher consumer demand for Lydall's existing platforms, as well as incremental tooling sales for new platform awards.

Q4 gross margin of 20.4% improved 130 basis points when compared to Q4 2012. This improvement was primarily driven by the Performance Materials segment as a result of higher sales volume, favorable product mix and improved absorption of fixed cost. In addition, the Thermal/Acoustical Fibers segment also contributed to the improvement in gross margin through higher sales, reductions in raw material cost and favorable absorption of fixed costs.

Operating margin increased 310 basis points to 5.3% in Q4 2013 when compared to Q4 2012. This increase is primarily due to an improvement in the Performance Materials segment gross margin and lower selling and product development and administrative expenses of $0.7 million, including the absence of a $0.3 million expense for an asset impairment charge in the fourth quarter of 2012.

As noted earlier, reported earnings were $0.25 per diluted share compared to $0.14 per diluted share in Q4 2012 despite a significantly higher effective tax rate year-over-year.

I'd like to come back now to the significant items affecting net income that I mentioned earlier. First, fourth quarter 2013 results include $1.1 million of expenses or $0.04 per diluted share related to transaction costs for the acquisition that we announced in February. Dale will discuss this acquisition in more detail toward the end of this presentation, so I won't go into too much detail here. But I did want to highlight that the fourth quarter does include some acquisition expenses. Second, both Q4 2013 and Q4 2012 include reversals of tax valuation allowances. This amounted to $0.9 million or $0.05 per diluted share in 2013 and $1.3 million or $0.08 per diluted share in 2012.

Finally, I'll remind you that Q4 2012 included an asset impairment charge of $1.8 million or $0.07 per diluted share related to an abandoned ERP reimplementation.

Slide 5 of the presentation details our summary statement of operations for full year 2013 versus full year 2012. Net sales increased by $19 million or 5% compared to 2012 with foreign currency translation providing a favorable impact of 1% or $3.8 million for the year. Sales increases in the Thermal/Acoustical Fibers segment provided the greatest contribution, as this segment continued to benefit from increased production of vehicles on Lydall's platforms in North America, resulting in greater parts net sales of $12.4 million, as well as increased tooling revenues of $7.5 million to support the launch of new vehicle platforms.

The 90-basis-point improvement in gross margin versus 2012 was primarily a result of continued improvements within the Thermal/Acoustical Fibers segment due to higher sales volume and operational efficiencies within the business. These increases were offset, to some extent, by a decrease in operating income in the Thermal/Acoustical Metals segment, which included start-up cost of $0.6 million for its China operation. The improvement of $7.3 million in operating income in 2013 compared to 2012 is due to the reasons I just mentioned offset by other income of $0.8 million in 2012 from a license agreement from the previously divested electrical papers product line in the Performance Materials segment.

The company's effective tax rate for 2013 was 32.4% compared to 19.9% in 2012. The lower rates in 2013 and 2012 compared to statutory rates were primary a result of the reversal of valuation allowances of $3.9 million or $0.23 per diluted share in 2012 and $1.6 million or $0.10 per diluted share in 2013.

Turning to Slide 6 of the presentation, you'll see our summary balance sheet as of December 31, 2013, and December 31, 2012. Consistent with the approach I've taken in previous quarters, I won't go through all of this information in detail, but we'll highlight the company's strong cash position of $75.4 million as of December 31, 2013. As I mentioned earlier, we completed the acquisition of the industrial air filtration businesses from Andrew Industries Limited in February, for which we paid $83 million. To finance the deal, we utilized $60 million of our newly expanded $100 million dollar credit facility and funded the remaining consideration with cash on hand. Therefore, when we report first quarter 2014 results, you can anticipate seeing cash come down and debt increase.

The changes in working capital relate to increases in both accounts receivables and inventory. The increase in accounts receivable is primarily due to the timing of sales and the longer collection cycle for tooling receivables. The higher inventory levels were primarily driven by $5.3 million of tooling as our automotive business is prepared to support future production. As you can see, based on the chart on the right-hand side of the page, Q4 2013 and full year 2013 inventory and receivables days' performance are slightly unfavorable when compared to the fourth quarter and full year 2012 results, primarily driven by the increased amount of tooling in our automotive segments.

Slide 7 details our statement of cash flows. Again, I won't take you through all of the figures here, but we'll selectively point out a couple of key items. First, the business generated $30.3 million of cash flow from operations for the full year compared to $34.4 million for the same period in 2012. The slight reduction is primarily due to the increased amount of tooling inventory I just mentioned. Finally, capital expenditures for the full year 2013 were $13.8 million, and from a financing standpoint, we used $6.6 million for the repurchase of stock.

With that, I'd like to turn the call 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, I will start by taking you through the results of our Performance Materials segment on Slide 8. Sales increased 8.1% in Q4 2013 compared to Q4 2012. This quarter-over-quarter increase was primarily driven by higher thermal insulation net sales due to improved demand as a result of increases in commercial building construction. Segment net sales decreased $6 million or 5.1% in 2013 compared to 2012 due to decreased sales volumes offset, to some extent, by the positive impact of foreign currency translation of $1.1 million or 0.9%. Decline in the filtration business was the most significant, as the air filtration market experienced lower demand for products in Europe, primarily due to macroeconomic conditions.

As we have discussed in prior quarters, the decrease in thermal insulation sales is caused by the divestiture of the electrical papers product line in a prior year. Sales for this divested product line decreased $4.5 million in comparison to 2012. Excluding the impact of the divested product line, net sales for thermal insulation products would have increased 8.9% year-over-year, primarily due to the higher sales of cryogenic products. The net sales of life science filtration products were lower for the year due to decreased demand for water and respiration products.

The increase in operating income in Q4 2013 compared to Q4 2012 was primarily due to increased revenues, favorable absorption of fixed cost, as well as product mix. Operating income also benefited from lower SG&A spending of $700,000 included -- including the absence of $300,000 of expense from an asset impairment charge in Q4 2012. For the full year 2013, the segment reported operating income of $9.5 million or 8.4% of net sales compared to operating income of $10.4 million or 8.8% of net sales in 2012. Excluding the gain of $800,000 in 2012 from the sale of a product line, operating income was essentially flat for the year.

Turning to Slide 9 to look at our Thermal/Acoustical Metals segment. Parts sales increased 7.9% in Q4 2013 compared to Q4 2012 driven by the increased demand for products in North America and a modest increase in demand for products in Europe, as well as favorable foreign currency translation in the current quarter. For the year, parts sales were essentially flat compared to 2012 due to lower demand in Europe due to the macroeconomic conditions, partially offset by higher parts sales in North America due to strong market demand. Foreign currency translation increased parts sales by $2.4 million in 2013 compared to 2012.

Tooling revenues were higher both for the quarter and the year due to timing of new product launches, particularly in Europe. The Thermal/Acoustical Metals segment reported operating income of $14.1 million or 8.9% of sales in 2013 compared to $14.7 million or 9.6% of net sales in 2012. The decrease in operating income was primarily due to higher selling, product development and administrative costs offset to some extent by higher gross profit related to increased net sales in 2013 compared to 2012. The decrease in operating income for Q4 2013 and full year 2013 was unfavorably impacted by the start-up cost of $300,000 associated with the new China operation, which is expected to be operational by the second quarter of 2014.

On Slide 10 is the summary of our Thermal/Acoustical Fibers business. Fibers parts sales grew 5.5% in Q4 2013 compared to Q4 2012 and 13.2% year-over-year. This growth was primarily driven by higher consumer demand for vehicles in North America on Lydall's existing platforms and new platform launches. As you can see, tooling sales in this segment increased significantly driven by the timing of new product launches.

Operating income margin for 2013 increased 520 basis points to 18.8% compared to 2012. This increase is primarily driven by higher net sales and improved gross margin realized from manufacturing efficiency improvements realized from favorable absorption of fixed overhead cost, lower raw material and reductions in labor cost and to a lesser extent, $1.18 million related to completed pricing negotiating -- negotiation in a nonrecurring customer project.

Turn to Slide 11 to look at our Other Products and Services, which comprises the Life Sciences Vital Fluids business. Sales were down slightly in the current quarter but were higher by 1.9% in 2013 when compared to 2012 due to higher volume of blood filtration and cell therapy net sales. Decline in operating margin for both Q4 2013 as well as full year 2013 is primarily due to increased selling costs associated with the distribution of solution, biotech and Equitech equipment in advance of orders as these initiatives continue to ramp up.

Turning to Slide 12. As some of you may be aware, a couple of weeks ago, we announced we completed the acquisition of the industrial filtration business of Andrew Industries Limited for $83 million in cash. The acquisition is expected to be accretive to Lydall's 2014 full year earnings and free cash flow, and this is after taking into account transaction expenses, the effect of inventory step-up and incremental amortization of intangible assets. For the 12 months ending December 31, 2013, Andrew's filtration's unaudited revenue was approximately $127 million, and unaudited EBITDA was approximately $14 million, excluding nonrecurring items.

Once the business is fully integrated, we expect to leverage our operating discipline and support functions to generate anticipated annual cost savings of approximately $4 million by 2016. As Robert mentioned earlier, the acquisition was financed through a combination of cash on hand and $60 million of borrowings from the company's recently expanded $100 million revolving credit facility that was established to support our long-term growth strategy. The amended 5-year syndicated facility provides Lydall with greater flexibility through lower borrowing rates, more favorable financial covenants, as well as a $50 million accordion feature to the extent we ever need it.

Moving forward to Slide 13, Beginning in the fourth quarter of 2014, the Andrew filtration business will be reported as a stand-alone reporting segment that we named Industrial Filtration. This segment, in conjunction with the Performance Materials segment, will serve the filtration and engineering materials market and is expected to comprise half of Lydall's revenues, which will bring a more balance to our overall portfolio.

Concluding with the summary on Slide 14. Overall, I'm very pleased with our consolidated results for the fourth quarter and full year 2013 as the business continues to improve operating performance. The softness that we experienced earlier in the year in Europe and Asia has subsided, and we are seeing positive signs carry into 2014. As I just mentioned, we are very excited about the completion of the acquisition of Andrew filtration as it strengthens Lydall's position as an industry-leading global provider of filtration and engineering material products and diversifies the company's end markets and geographic revenue base.

As always, we remain focused on increasing margins in all the business through our Lean Six Sigma continuous improvement program, remain committed to funding organic growth programs, capital investments and continue to pursue strategic growth opportunities.

With that, I would be glad to open to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Bruce Geller of DGHM.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

Congratulations on a nice finish to the year and also on the -- what seems to be a really nice acquisition. I had some questions related to the Andrew deal just with respect to accretion. I'm just trying to do some of my own calculations here. Of the $14 million in EBITDA, do you have an estimate roughly of how much of that is EBIT and how much is D&A?

Dale G. Barnhart

About 3% is D&A.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

3% of sales or 3% of the $14 million?

Dale G. Barnhart

Of sales.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

Okay. All right. So that means -- okay, so a little over $10 million in EBIT. And it seems like the financing rate on the $60 million, the interest expense related to that should be what? About $1 million?

Robert K. Julian

Yes, that's in the ballpark, Bruce. Sure, we -- I think we announced with the new credit facility, depending on the leverage ratio where we're going to be at starting out is LIBOR plus 125 basis points on the floating portion of the debt.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

Okay. So that would bring roughly $5.5 million to $6 million down to the net income line it seems like, to me, which would be over $0.30 per year in EPS accretion once we get through the transaction expenses in the inventory step-up. Does that sound reasonably accurate?

Robert K. Julian

It's probably in the ballpark, Bruce. As you know, we don't really provide guidance in that level of detail on the EPS. But your math, generally, is pretty sound.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

Okay. And that's prior to the $4 million of additional synergies that you think you can realize over the next couple of years?

Dale G. Barnhart

That's correct. That's correct.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

It seems like it would add another $0.15 or so. So potentially, based on my math, not your guidance, it seems like this can add north of $0.40, possibly $0.45 a share in annual earnings once all those synergies are realized.

Dale G. Barnhart

As you said, Bruce, in opening up, we believe it's a very good acquisition.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

That's amazing. Can you just note what the -- you gave the $3 million in transaction expenses in Q1...

Dale G. Barnhart

In Q1 and we had about $1.1 million in Q4.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

And does that include the inventory step-up? Or is that...

Dale G. Barnhart

No.

Robert K. Julian

Does not.

Dale G. Barnhart

Does not

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

So can you give an estimate of what the incremental expense related to that might be in Q1?

Dale G. Barnhart

We're still going through the process of evaluating that for the final adjustment.

Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC

Okay. Well, that seems like a terrific deal. It seems like post synergy, you paid less than 5x EBITDA for it, so congratulations on a very attractive transaction.

Robert K. Julian

Thank you, Bruce.

Dale G. Barnhart

Thank you, Bruce.

Operator

[Operator Instructions] And sir, no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Barnhart for any closing remarks.

Dale G. Barnhart

I want to thank everybody for participating on the call this morning and look forward to our first quarter call in about 60 days. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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