Kaydon Earnings Call Insights: Actuarial Non-Cash Amortization Charge, Wind Orders

On Wednesday, Kaydon Corporation (NYSE:KDN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Actuarial Non-Cash Amortization Charge

Eli Lustgarten – Longbow Securities: Want to get just a couple of clarifications. One, the recurring charge for the actuarial non-cash amortization, is that gone every quarter or is just a onetime charge this quarter?

James O’Leary – Chairman, President CEO: That will be every quarter and it is fluctuated wildly over the past five years. If you look back a couple years ago is probably a swing of about $6 million of non-cash pension expense, partially attributable to this, which is a decline in interest rates, the impact on liabilities. You cover a couple of these companies, so it’s probably worth calling out where we got guidance from this and the inspiration for it, both General Electric and IBM is something almost identical but we are not carving out anything other than the amortization of losses which was largely funded already on the liability piece and there are some companies and I don’t well, actually you may, I know you are familiar with Honeywell, but there are host of others that have gone to a full mark-to-market, which we are considering. We evaluate it. We went through a lot of the work, whether or not, go to a full mark-to-market and more of a comprehensive income approach to pension obligation. Recently we chose not to, it’s a healthy amount that has to per GAAP be capitalized in the inventory and the volatility that introduced it actually would do you less of a service in just calling it out and the two best examples I can think at top of mind are GE and IBM.

Eli Lustgarten – Longbow Securities: But at this point, we should assume a similar level for the next couple quarters?

James O’Leary – Chairman, President CEO: I think you got similar level assumed, couple of analysts we have talked to, a couple investors already assumed higher pension income, so we’re just calling out this component of it.

Timothy J. Heasley – SVP and CFO: For the balance of the year, the remaining three quarters it will be the same amount as the first quarter.

Eli Lustgarten – Longbow Securities: Just one other clarification, the 29% tax rate, interest charge is going to be about $400,000 a quarter from this point? If that wasn’t for the quarter, was that –?

James O’Leary – Chairman, President CEO: It will be between $750,000 and $1 million.

Eli Lustgarten – Longbow Securities: $750,000 per quarter? That’s correct.

Timothy J. Heasley – SVP and CFO: There was roughly $250,000 in Q1 that related to the write-off of some of the deferred credit facility costs in the previous credit facility.

Eli Lustgarten – Longbow Securities: So the number will come out, $750,000 to $1 million for the year? Per quarter?

James O’Leary – Chairman, President CEO: Each quarter.

Eli Lustgarten – Longbow Securities: As we talk about wind, I mean, $60 million to $70 million for the year, I guess we are hoping prior – it was going to be closer to $70 million, so obviously more volatility. That suggested the first quarter maybe it would be best quarter that you can see at this point, depending on what happens. Is that a fair statement?

James O’Leary – Chairman, President CEO: No, the second and third quarter maybe a little better. The fourth quarter is the one that is the biggest uncertainty because of what will happen with the PTC. There will unquestionably be a drop-off in wind shipments, and production, and that I think you should factor in a drop in marginal income, largely because of the non-cash amortization or depreciation as such. What we do in terms of reduction, operating cost reductions and anything else that comes with it is – we will be lot more lucid about that, but not next quarter, certainly in the third. It all comes down to what happens with the PTC and what orders come in over the next few quarters.

Eli Lustgarten – Longbow Securities: What were wind orders in the quarter? You gave a shipment, I think the 17.8 or something like that?

James O’Leary – Chairman, President CEO: This quarter, nothing material.

Eli Lustgarten – Longbow Securities: Military shipments in this quarter were also very similar level to winds at this point?

James O’Leary – Chairman, President CEO: They are a bit lower, but they are a bit better than last year. I don’t think we have ever disclosed that exactly within the segment but they were a bit higher in this quarter compared to last quarter this year.

Eli Lustgarten – Longbow Securities: Sort of expecting your commentary that we were sort of expecting it to stabilize in this 15 to 17 or north of $60 million range I think is what I’d generally assume?

James O’Leary – Chairman, President CEO: That’s correct.

Eli Lustgarten – Longbow Securities: You indicated a pickup in heavy industrial. Are we looking at better shipments and (besides) win in the industrial in the next couple of quarters and better profitability for the heavy equipment should be more profitable?

James O’Leary – Chairman, President CEO: Well, historically it has been more profitable, they are comparable now and what I say I would not assume necessarily this is our best quarter, but the other one if they are a bit better, it will be because of heavy equipment.

Wind Orders

Walter Liptak – Barrington Research: You gave us the wind orders I wonder if you could get the – we could calculate it too but I just want to make sure we have the math right if your backlog was about $60 million, I think at the end of the year, it would drop by the shipments this quarter, is that right?

Timothy J. Heasley – SVP and CFO: Actually wind orders for the quarter were $8.5 million and the backlog for wind ended up around $51 million at the end of the quarter.

Walter Liptak – Barrington Research: Is there a chance that we see better revenue? I know you’re keeping the $60 million to $70 million, but if there are projects that need to get completed by the end of this year to get the PTC, could there be incremental revenue that comes in beyond the level that you’re looking at, I guess what you’re hearing from the customers?

James O’Leary – Chairman, President CEO: Some of the revision or forecasts are and quite frankly we won’t meet all pricing and there were some customers that we really can’t ship to that comes down to credit issues and the likes, when you go across the list of guys, we’re not going to sell at any price given that this is a product that this have liability associated with it and we can’t ship to anybody if they don’t have sufficient credit support, that was one of the things that caused a dip in sales; the only real hiccup in sales during the worst of the recession in the wind sector. So if those things got remediated, absolutely, or it could be better. But right now our best guess is 60 to 70, if you picked 65, you may be right. But there is still a possibility for it to be an upward bias, but the one sector is extraordinarily volatile and it could be lower too.

Walter Liptak – Barrington Research: Just switching gears to industrial orders, I know you’ve talked a lot about this in your opening statements, but sequentially the orders picked up, is that primarily from aerial work platforms and the heavy machineries you talked about?

James O’Leary – Chairman, President CEO: That was one of the more improved areas. Part of the sequential pick-up in orders as well was, went a little better, so I misspoke on Eli’s question, but we also had cancellations last year. Sequentially might be a little bit better. On orders specifically you didn’t ask this, but sequentially, for the last two or three quarters, this has been about the run rate. The challenge, again not just us and many of the end markets we’re in, but the first two quarters of last year were fantastic. So the comparisons against the first two quarters of 2011 were really-really good and when Europe started to get a little wobbly, exports to Europe got a little wobbly, probably in July of last year, you drop down to a rate that’s still healthy not fantastic but suffers in comparison to Q1 and 2 of 2011.

Walter Liptak – Barrington Research: Since I am still going, the…?

James O’Leary – Chairman, President CEO: This would be the (indiscernible) and then you can get back.

Walter Liptak – Barrington Research: Selling prices, in the 10-Q there was some commentary that selling prices were up in most of the segments, except for Industrial Products, one of you talked a little bit about pricing, maybe what’s going on with this Industrial Products operations?

James O’Leary – Chairman, President CEO: It’s tough to get, pricing is challenging to get. We are holding our own as we do with a lot of the OEM sales. We’re really adding a lot of value. I’ll be remiss in saying that there isn’t a lot of price pressure, that’s why there are some situations we’re not meeting in the wind business, but in an environment like this it is challenging to get price. We are holding our own, probably the most difficult area is continues to be wind.