Ladish EPS Drops Like a Hammer

Ladish’s earnings exceeded our wildest expectations...on the downside!

Ladish Co., Inc. (LDSH - Snapshot Report), the forging, casting and machining company, posted Q1-09 Sales that were de-pressed 9.8% to $105.7 million (we had been looking $98.1 million), while EPS dropped mightily (just like the hammer on one of its forges) by 80.5% to 8¢ (our model was at 23¢).

The Gross Profit Margin was squeezed from 12.6% to 6.9%, while S,G&A Expense remained at 3.8% of Sales. Interest Expense & Other increased by 50.8%, driven, in part, by the cost of funds used to make recent acquisitions. Not helping matters was the Tax Rate, which increased from 37.3% to 40.1%, and the share count, which was higher by 9.3%.

Besides the reduction in Revenues, LDSH encountered a decline in the sale of by-product (aka scrap) of $2.9 million, an increase in pension expenses of $1.1 million, a charge of $0.8 million associated with employment reductions and separations (aka termination expense), a rise in Depreciation of $0.6 million and $0.4 million of additional Interest Expense (not to mention the one-time jump in the Tax Rate).

Taken altogether, these items squashed Pre-Tax Income by $5.8 million. If we add the $5.8 million back to the reported Pre-Tax Income of $2.0 million and then tax that amount at a more normalized rate of 37%, we arrive at a theoretical after-tax number of $4.914 million, which equates (again, theoretically) to something north of 32¢. OMG! Murphy's Law at work again!

Now for the not-so-bad news. If it weren’t for the acquisitions that LDSH made last year, Revenues would have been down by 17% to 18%. The Tax Rate going forward will be 37% or less. The Sales mix has improved - from 51% = Engines, 26% = Other Aerospace and 23% = Industrial - to 52%, 32% and 16% respectively, of which Engines are the most profitable and Industrial, the least.

All units were profitable during the quarter. Scrap is being accumulated until the price improves (something akin to "The flogging will continue until morale improves!"). The rotary-aircraft sector (which includes helicopters as well as the V-22) is strong. Defense is OK. The first flight 787 is soon?!

Customer destocking may have run its course. Inquiries are picking up. Future quarters could be better. Mexico is on hold (and not just because of the swine flu). Raw material prices are declining.

Here - or is it "hear" - are some other items from the conference call: Pension expense will climb. Depreciation is rising from $3.2 million to $3.8 million as the new 118 press comes on line. Interest expense will continue at higher levels. Backlog was at ~ $523 million, which is down from the $628 million reported previously. Cap X of $4.5 million vs. $7.8 million. Employment is off by 6%.

The Days in Inventory as well as Accounts receivable have declined a bit.

Looking forward, it appears that subsequent quarters will indeed improve over Q1-09 (I know -- that wouldn’t take much). Further, some crafty investors are now buying aerospace supplier stocks in anticipation of the ramp-up in 787 production (yay team!), followed by the A350. Gives you something to think about!