The Daily Magic Formula Stock for 02/07/2009 is Robbins & Myers Inc. According to the Magic Formula Investing Web Site, the ebit yield is 25% and the EBIT ROIC is 50-75%.
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Important Information Regarding Forward-Looking Statements
Portions of this Form 10-K include â€śforward-looking statementsâ€ť within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. This includes, in particular, â€śItem 7-Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť of this Form 10-K as well as other portions of this Form 10-K. The words â€śbelieve,â€ť â€śexpect,â€ť â€śanticipate,â€ť â€śproject,â€ť and similar expressions, among others, generally identify â€śforward-looking statements,â€ť which speak only as of the date the statements were made. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in this Form 10-K (included in â€śItem 1A-Risk Factorsâ€ť). Except to the limited extent required by applicable law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Robbins & Myers, Inc. is an Ohio corporation. As used in this report, the terms â€śCompany,â€ť â€śwe,â€ť â€śour,â€ť or â€śusâ€ť mean Robbins & Myers, Inc. and its subsidiaries unless the context indicates another meaning. We are a leading supplier of engineered equipment and systems for critical applications in global energy, industrial, chemical and pharmaceutical markets. Our success is based on close and continuing interaction with our customers, application engineering expertise, innovation, customer support and a competitive cost structure. Our fiscal 2008 sales were approximately $787 million, and no one customer accounted for more than 5% of these sales.
Information concerning our sales, income before interest and income taxes (â€śEBITâ€ť), identifiable assets by segment and sales and tangible assets by geographic area for the years ended August 31, 2008, 2007 and 2006 is set forth in Note 12 to the Consolidated Financial Statements included at Item 8 and is incorporated herein by reference.
Fluid Management Segment
Our Fluid Management business segment designs, manufactures and markets equipment and systems used in oil and gas exploration and recovery, specialty chemical, wastewater treatment and a variety of other industrial applications. Primary brands include MoynoÂ®, YaleÂ®, New EraÂ®, TARBYÂ® and HerculesÂ®. Our products and systems include hydraulic drilling power sections; down-hole and industrial progressing cavity pumps and related products such as grinders for applications involving the flow of viscous, abrasive and solid-laden slurries and sludge; and a broad line of ancillary equipment, such as rod guides, rod and tubing rotators, wellhead systems, pipeline closure products and valves. These products and systems are used at the wellhead and in subsurface drilling and production.
Sales, Marketing and Distribution. We sell our rotors and stators for hydraulic drilling power sections through a direct sales force. We sell our tubing wear prevention products, down-hole pump systems, and certain wellhead equipment through major distributors as well as our direct sales force and service centers in key oilfield locations worldwide. We sell our wellhead, closure products and industrial pumps through distributors and manufacturer representatives. Backlog at August 31, 2008 was $63.2 million, compared with $43.0 million at August 31, 2007.
Aftermarket Sales . Aftermarket sales consist principally of selling replacement components for our pumps, as well as the relining of stators and the refurbishment of rotors for the energy market. Aftermarket sales represented approximately 22% of the sales in this segment in fiscal 2008. However, replacement items, such as power section rotors and stators, down-hole pump rotors and rod guides are components of larger systems that wear out after regular usage. These are often sold as complete products and are not identifiable by us as aftermarket sales.
Markets and Competition. We believe we are the leading independent manufacturer of rotors and stators for hydraulic drilling power sections worldwide. We are also a leading manufacturer of rod guides, wellhead components, pipeline closure products and down-hole progressing cavity pumps worldwide. While the oil and gas exploration and recovery equipment marketplace is highly fragmented, we believe that with our leading brands and products we are effectively positioned as a full-line supplier with the capability to provide customers with complete system sourcing. We also have a large installed base and a significant market share in progressing cavity pumps for general industrial applications in the U.S. and Canada, but a smaller presence in Europe and Asia. While we believe MoynoÂ® is the North American leader in the manufacture and sale of progressing cavity.
pumps for the general industrial market, the worldwide market is highly competitive and includes several competitors, none of which is dominant. In addition, there are several other types of positive displacement pumps, including gear, lobe and air-operated diaphragm pumps that compete with progressing cavity pumps in certain applications.
Process Solutions Business Segment
Our Process Solutions business segment designs, manufactures and services glass-lined reactors and storage vessels, standard and customized fluid-agitation equipment and systems, thermal fluid systems and customized fluoropolymer-lined fittings, vessels and accessories, primarily for the pharmaceutical and fine chemical markets. Primary brands are PfaudlerÂ®, Tycon-TechnoglassÂ®, ChemineerÂ® and EdlonÂ®.
Sales, Marketing and Distribution. We primarily market and sell glass-lined reactors and storage vessels through our direct sales force, as well as manufacturersâ€™ representatives in certain world markets. Industrial mixers, agitation equipment and corrosion resistant products are primarily sold through manufacturersâ€™ representatives. Backlog at August 31, 2008 was $123.5 million compared with $98.9 million at August 31, 2007.
Aftermarket Sales. Aftermarket products and services, which include field service, replacement parts, accessories and reconditioning of glass-lined vessels, are an important part of our glass-lined reactor product line. Our aftermarket capabilities and presence allow us to service our large installed base of Pfaudler glass-lined vessels and to meet the needs of our customers, who are increasingly inclined to outsource various maintenance and service functions. We also service competitorsâ€™ equipment in the U.S. and in Europe. We also refurbish and sell used, glass-lined vessels. Our aftermarket business for the ChemineerÂ® and EdlonÂ® lines primarily consists of selling replacement parts. Aftermarket sales represented approximately 32% of this segmentâ€™s sales in fiscal 2008.
Markets and Competition. We believe we have the number one worldwide market position in sales value for quality glass-lined reactors and storage vessels, competing principally with DeDeitrich, a French company. The mixing equipment industry in which our ChemineerÂ® brand participates is highly competitive and fragmented. We believe we are one of the market leaders worldwide. Our primary competitors are American and German businesses. Our EdlonÂ® brand primarily competes by offering highly engineered products and products made for special needs, which are not readily supplied by competitors.
Romaco Business Segment
Our Romaco business segment designs, manufactures and markets packaging and secondary processing equipment for the pharmaceutical, healthcare, nutriceutical, food and cosmetic industries. Packaging applications include dosing, filling and sealing of vials, capsules, tubes, bottles and blisters, as well as customized packaging. Primary brands are NoackÂ®, SieblerÂ®, FrymaKorumaÂ®, MacofarÂ® and PromaticÂ®.
Sales, Marketing and Distribution. We sell Romaco products through our direct sales and service centers in certain world markets. We supplement our direct sales force with an extensive network of manufacturersâ€™ representatives and third party distributors. Backlog at August 31, 2008 was $51.3 million compared with $52.0 million at August 31, 2007.
Aftermarket Sales . Aftermarket sales of our Romaco business were approximately 29% of this segmentâ€™s fiscal 2008 sales, consisting largely of replacement parts for the installed base of equipment.
Markets and Competition. We believe Romaco is one of the top five worldwide manufacturers of the type of pharmaceutical equipment it provides; however, the market is fragmented with many competitors, none of which is dominant.
Other Consolidated Information
Our total order backlog was $238.0 million at August 31, 2008 compared with $193.8 million at August 31, 2007. We expect to ship substantially all of our backlog during the next 12 months.
Sales are not concentrated with any customer, as no customer represented more than 5% of sales in fiscal 2008, 2007 or 2006.
Raw materials are purchased from various vendors that generally are located in the same country as our facility using the raw materials. Because of high global demand for steel, costs increased significantly in the first half of fiscal 2008. However, our supply of steel and other raw materials and components has been adequate and available without significant delivery delays. No events are known or anticipated that would change the availability of raw materials. No one supplier provides more than 10% of our raw materials.
We own a number of patents relating to the design and manufacture of our products. While we consider these patents important to our operations, we believe that the successful manufacture and sale of our products depend more upon operating and application expertise and manufacturing skills. We are committed to maintaining high quality manufacturing standards and have completed ISO certification at many of our facilities.
During fiscal 2008, we spent approximately $6.5 million on research and development activities compared with $6.4 million in fiscal 2007 and $7.8 million in fiscal 2006. We also incurred significant engineering costs in conjunction with fulfilling custom customer orders and executing customer projects that is of a research and development nature that is not captured in these amounts.
Compliance with federal, state and local laws regulating the discharge of materials into the environment is not anticipated to have any material effect upon the Companyâ€™s capital expenditures, earnings or competitive position.
At August 31, 2008, we had 3,357 employees, which included approximately 710 at majority-owned joint ventures. Approximately 590 of our total employees were covered by collective bargaining agreements at various locations. The Company considers labor relations at each of its locations to be good.
Peter C. Wallace, our President and Chief Executive Officer, certified to the New York Stock Exchange on February 5, 2008 that, as of that date, he was not aware of any violation by the Company of the NYSEâ€™s Corporate Governance Listing Standards. We have filed with the SEC the certifications of Mr. Wallace and Christopher M. Hix, our Chief Financial Officer, that are required by Section 302 of the Sarbanes-Oxley Act of 2002 relating to the financial statements and disclosures contained in our Annual Report on Form 10-K for the year ended August 31, 2008.
We make available free of charge on or through our web site, at www.robn.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with the Securities and Exchange Commission (â€śSECâ€ť). Additionally, the public may read and copy any materials we file with the SEC at the SECâ€™s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Information regarding operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0300. Information that we file with the SEC is also available at the SECâ€™s web site at www.sec.gov.
We also post on our web site the following corporate governance documents: Corporate Governance Guidelines, Code of Business Conduct and the Charters of our Audit, Compensation, and Nominating and Governance
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a leading designer, manufacturer and marketer of highly-engineered, application-critical equipment and systems for the energy, industrial, chemical and pharmaceutical markets worldwide. For fiscal 2008, the energy, chemical and pharmaceutical markets were favorable and contributed to the improved operating results in each of our segments. With 61% of our sales outside the United States, we were favorably impacted by foreign currency translation. We attribute our success to our close and continuing interaction with customers, our manufacturing, sourcing and application engineering expertise and our ability to serve customers globally. We have initiatives to improve our performance in these key areas. Our business consists of three market-focused segments: Fluid Management, Process Solutions and Romaco.
Fluid Management . Energy markets served by our Fluid Management segment have been strong. Our primary objective for this segment is to ensure that we continue to capture and increase the opportunities in this growing market. We are increasing our manufacturing capacity through improved asset utilization and measured levels of capital expenditures, and we are delivering valued new product offerings in our niche market sectors. Our Fluid Management business segment designs, manufactures and markets equipment and systems, including hydraulic drilling power sections, down-hole and industrial progressing cavity pumps, wellhead systems, grinders, rod guides, tubing rotators and pipeline closures, used in oil and gas exploration and recovery, specialty chemical, wastewater treatment and a variety of other industrial applications.
Process Solutions . Key end markets served by our Process Solutions segment, chemical and pharmaceutical, are experiencing global growth, particularly in Asia. Our primary objectives are to improve productivity through integration of operations and process improvements and to increase our presence in Asia. Our Process Solutions business segment designs, manufactures and services glass-lined reactors and storage vessels, standard and customized fluid-agitation equipment and systems and customized fluoropolymer-lined fittings, vessels and accessories, primarily for the pharmaceutical and specialty chemical markets.
Romaco . Our customer base within the key markets served by the Romaco segment, pharmaceutical, cosmetics and healthcare, are expanding in developing areas of the world. Profitability in our Romaco segment has been improving as a result of the restructuring program completed in fiscal 2007. We remain focused on simplifying this business, managing its cost structure in order to further improve profit levels and cost-effectively serving customers in developing global areas. Our Romaco business segment designs, manufactures and markets packaging and secondary processing equipment for the pharmaceutical, healthcare, nutriceutical and cosmetic industries. Packaging applications include dosing, filling and sealing of vials, capsules, tubes, bottles and blisters, as well as customized packaging.
Fiscal Year Ended August 31, 2008 Compared with Fiscal Year Ended August 31, 2007
Sales for fiscal 2008 were $787.2 million compared to $695.4 million in fiscal 2007, an increase of $91.8 million or 13.2%. Excluding the impact of currency translation and acquisitions and dispositions, sales increased by $43.9 million, or 6.4%.
The Fluid Management segment had sales of $322.9 million in fiscal 2008 compared to $292.3 million in fiscal 2007, an increase of $30.6 million, or 10.5%. Currency translation accounted for $9.0 million of the increase, and the remaining $21.6 million increase, or 7.4%, was from increased demand for oilfield equipment products due to higher levels of oil and gas exploration and recovery activity, as well as improved demand in chemical processing and general industrial markets. Orders for this segment were $343.1 million in fiscal 2008 compared to $301.9 million in fiscal 2007. Ending backlog of $63.2 million is 47.0% higher than at the end of the prior year.
The Process Solutions segment had sales of $313.6 million in fiscal 2008 compared to $273.9 million in fiscal 2007, an increase $39.7 million, or 14.5%. Excluding the impact of currency translation and an acquisition, sales increased by $15.1 million, or 5.5% over the prior year. This increase is largely attributable to a stronger global chemical market and increased Asia region sales. Excluding currency and acquisition impacts, orders increased by $18.1 million, or 6.4% over prior year, primarily driven by projects in the chemical market and activity in the Asian region. Ending backlog of $123.5 million is 24.9% higher than prior year levels. The organic increase in sales, orders and backlog reflects the strong demand in the chemical market and an increased expansion in the developing areas of the world. Our primary end markets, chemical processing and pharmaceutical, continued to improve.
The Romaco segment had sales of $150.7 million in fiscal 2008 compared to $129.2 million in fiscal 2007, an increase of $21.5 million, or 16.6%. Excluding the impact of currency translation and a product line sold in fiscal 2007, sales increased $7.3 million, or 5.8% over the prior year. The increase was primarily in the pharmaceutical market. Orders increased $1.1 million, or 0.9%, over prior year after adjusting for currency and the disposed product line. Ending backlog of $51.3 million is comparable to prior year level of $52.0 million.
Earnings Before Interest and Income Taxes (EBIT)
The Companyâ€™s operating performance is evaluated using several measures including EBIT. EBIT is income before interest and income taxes and is reconciled to net income on our Consolidated Statement of Operations. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not, however, a measure of performance calculated in accordance with accounting principles generally accepted in the United States and should not be considered as an alternative to net income when evaluating our operating results. EBIT is not a measure of cash available for use by management.
Consolidated EBIT for fiscal 2008 was $130.7 million compared to $94.3 million in fiscal 2007, an increase of $36.4 million. Results for fiscal 2008 included other income of $7.6 million from gains on product line/facility sales while fiscal 2007 results included other income of $3.5 million, which consisted of gains on product line and facility sales of $5.3 million, reduced by restructuring costs in the Romaco segment of $1.8 million. The remaining increase in consolidated EBIT of $32.3 million resulted from increased sales volume, benefits realized from completed restructuring activities in the Romaco segment and improved pricing.
The Fluid Management segment EBIT for fiscal 2008 was $91.3 million, compared to $77.0 million in fiscal 2007. The increase of $14.3 million resulted primarily from the sales increase described above, coupled with a favorable product mix.
The Process Solutions segment EBIT was $37.6 million for fiscal 2008, compared to $31.9 million for fiscal 2007, an increase of $5.7 million. Process Solutions had a gain on the sale of a facility in fiscal 2008 of $0.8 million while fiscal 2007 had a facility sale gain of $5.0 million. Excluding the impact of facility sale gains, fiscal 2008 EBIT increased by $9.9 million principally due to the sales volume increase described above, coupled with better pricing.
The Romaco segment EBIT was $20.6 million for fiscal 2008, an increase of $18.0 million compared to fiscal 2007. The change in other (income) expense accounted for $8.4 million of the increase in EBIT. In fiscal 2008, other income included a gain of $5.7 million related to Romaco product lines sold in fiscal 2006 and a $1.1 million gain on a facility sale related to a previously disposed product line, while fiscal 2007 other expense of $1.6 million consisted of restructuring costs of $1.8 million, reduced by net gains on product line and facility sales of $0.2 million. The remaining $9.6 million increase in EBIT was attributable to higher sales described above and benefits from restructuring activities completed in the prior year.
Net interest expense was $2.0 million in fiscal 2008 and $5.2 million in fiscal 2007. The reduction in net interest expense resulted from higher levels of interest income due to increased cash equivalent balances in fiscal 2008, as well as lower average debt levels in fiscal 2008 due to the repayment of $70 million of our Senior Notes on May 1, 2008. The higher levels of cash equivalent balances were attributable to cash generated from operations and asset/product line sales.
Our effective tax rate for fiscal 2008 was 30.4%. The effective tax rate was lower than the statutory rate primarily due to continued profitable operations in Italy and Germany, which resulted in the release of deferred tax asset valuation allowances of $4.9 million (3.8% point reduction in the effective tax rate), as well as increased taxable income in countries outside the United States, where statutory rates are lower. The significant benefit from the release of the deferred tax asset valuation allowances is not expected to continue in fiscal 2009. Our effective tax rate for fiscal 2007 was 41.4%. The effective tax rate in fiscal 2007 was higher than the statutory rate due to certain foreign losses for which no benefit was recognized.
Our net income in fiscal 2008 was $87.4 million compared with $50.7 million in fiscal 2007. The increase in net income is a result of higher sales, improved cost structure due to completed restructuring activities in the Romaco segment, greater benefit from product line/ asset sales, improved pricing, lower interest expense and a lower normalized effective tax rate, as discussed above.
Fiscal Year Ended August 31, 2007 Compared with Fiscal Year Ended August 31, 2006
Sales for fiscal 2007 were $695.4 million compared to $625.4 million in fiscal 2006, an increase of $70.0 million or 11.2%. Excluding sales from product lines sold in fiscal 2007 and 2006, sales increased by approximately $103.2 million. Exchange rates accounted for $22.9 million of the increase in sales.
The Fluid Management segment had sales of $292.3 million in fiscal 2007 compared to $245.2 million in fiscal 2006, an increase of $47.1 million, or 19.2%. The sales increase is from strong demand for oilfield equipment products due to high levels of oil and gas exploration and recovery activity, as well as improved demand in chemical processing and general industrial markets.
The Process Solutions segment had sales of $273.9 million in fiscal 2007 compared to $231.0 million in fiscal 2006, an increase $42.9 million, or 18.6%. The increase in sales is largely attributable to improved orders for original equipment over the last twelve to eighteen months. Exchange rate changes contributed $11.1 million to the increase in sales. Primary end markets, chemical processing and pharmaceutical, continued to improve. The segment is also benefiting from emerging applications, such as flue gas desulfurization and bio-diesel.
The Romaco segment had sales of $129.2 million in fiscal 2007 compared to $149.2 million in fiscal 2006. Excluding product lines sold in fiscal 2007 and 2006, sales increased $13.2 million, or 11.4%. Current year sales include $8.3 million of exchange rate change benefit. Our orders and backlog improved all year as the pharmaceutical market strengthened over the last twelve to eighteen months, which has translated into higher sales in this segment.
Earnings Before Interest and Income Taxes (EBIT)
Consolidated EBIT for fiscal 2007 was $94.3 million compared to $7.5 million in fiscal 2006, an increase of $86.8 million. The $39.2 million fiscal 2006 goodwill impairment change and the change in other (income) expense accounted for $40.8 million of the increase in EBIT. Fiscal 2007 results included other income of $3.5 million, which consisted of net gains on product line and facility sales of $5.3 million, reduced by restructuring costs in the Romaco segment of $1.8 million. Fiscal 2006 results included other income of $1.8 million, which consisted of net gains on product line and facility sales of $10.3 million, reduced by restructuring costs in the Process Solutions and Romaco segments of $8.5 million. The remaining increase in consolidated EBIT of $46.0 million resulted from the improved profitability (after the aforementioned other income and goodwill impairment) within each of our operating segments, and lower corporate costs.
The Fluid Management segment EBIT for fiscal 2007 was $77.0 million, compared to $56.5 million in fiscal 2006. The increase of $20.5 million resulted from the sales increase of $47.1 million.
The Process Solutions segment EBIT was $31.9 million for fiscal 2007, compared to $8.9 million for fiscal 2006, an increase of $23.0 million. Process Solutions had a gain on the sale of a facility of $5.0 million in fiscal 2007. In fiscal 2006 Process Solutions had net other expense of $2.4 million, consisting of restructuring costs of $4.2 million, offset by a gain on the sale of a facility of $1.8 million. After the previously mentioned change in other expense, EBIT increased by $25.4 million. Approximately $10.5 million of the increase is attributable to higher sales and the remainder due to cost savings from recent restructuring activities.
The Romaco segment EBIT was $2.6 million for fiscal 2007, an increase of $40.8 million compared to fiscal 2006. The change in goodwill impairment charge and other (income) expense accounted for $33.5 million of the increase in EBIT. In fiscal 2007, other expense was $1.6 million and consisted of restructuring costs of $1.8 million reduced by net gains on product line and facility sales of $0.2 million, compared with a combined goodwill impairment charge and net other expense (including a gain on the sale of product lines and restructuring costs) of $35.0 million in the prior year period. The remaining $7.3 million increase in EBIT was attributable to higher sales, which contributed $1.7 million in EBIT improvement, and cost savings from restructuring activities.
Interest expense was $5.2 million in fiscal 2007 and $12.9 million in fiscal 2006. The reduction in interest expense resulted from lower average debt levels in fiscal 2007 compared to fiscal 2006. The lower debt levels were attributable to cash generated from operations, asset/product line sales and the conversion of $38.9 million of our convertible notes into common stock late in the fiscal year 2006.
Our effective tax rate for fiscal 2007 was 41.4%. The effective tax rate is higher than the statutory rate primarily due to certain foreign losses for which no benefit is recognized, revaluation of deferred tax assets and liabilities to current rates and increased provisions for tax contingencies. In 2006 we had $12.6 million of income tax expense in spite of a $5.4 million pretax loss because of two significant transactions with minimal tax impact; the goodwill impairment charge of $39.2 million and the gain on the sale of Hapa and Laetus of $8.1 million. After considering the impact of these transactions, our effective tax rate in fiscal 2006 was 46.0%. The fiscal 2007 effective rate was lower than the fiscal 2006 adjusted effective rate of 46.0% because of profitability in jurisdictions, such as Germany and Italy, where we previously had losses.
Our net income in fiscal 2007 was $50.7 million compared with a net loss in fiscal 2006 of $19.6 million. The increase in net income is a result of improved operating performance, lower goodwill impairment and other expenses, lower interest expense and a lower normalized tax rate, as discussed above.
Liquidity and Capital Resources
In fiscal 2008, our cash flow from operating activities was $89.6 million compared with $65.1 million in fiscal 2007, an increase of $24.5 million. This increase resulted primarily from higher net income, reduced by cash used for working capital to support our growth.
We expect our available cash and fiscal 2009 operating cash flow to be adequate to fund fiscal year 2009 operating needs, shareholder dividends, planned capital expenditures and share repurchases. Our planned capital expenditures are related to additional production capacity in Fluid Management, new products and services, productivity programs, and replacement items.
On October 27, 2008 we announced that our Board of Directors has authorized the repurchase of up to three million of our currently outstanding common shares.
Our capital expenditures were $22.1 million in fiscal 2008, an increase from $16.5 million in fiscal 2007. Our 2008 capital expenditures were primarily for information technology systems and for capacity expansion in the Fluid Management and Process Solutions segments.
In fiscal 2008 we received proceeds related to the sale of two of our Romaco product lines sold in fiscal 2006 and sold two facilities generating cash of $8.5 million. We made an acquisition in our Process Solutions segment in 2008 for a total consideration of $5.1 million. During 2007, we sold two product lines and two facilities to generate $13.7 million of cash.
The proceeds from the sale of common stock were $8.6 million in fiscal 2008 and $11.3 million in fiscal 2007 were mostly related to the exercise of stock options by current and former employees. Dividends paid during fiscal 2008 were $5.0 million compared to $4.3 million in fiscal 2007. The quarterly dividend rate per common share was increased in January 2008 from $0.0325 to $0.0375.
Our Bank Credit Agreement (â€śAgreementâ€ť) provides that we may borrow on a revolving credit basis up to a maximum of $150 million and includes a $100 million expansion feature. All outstanding amounts under the Agreement are due and payable on December 19, 2011. Interest is variable based upon formulas tied to LIBOR or an alternative base rate defined in the Agreement, at our option, and is payable quarterly. Indebtedness under the Agreement is unsecured except for the pledge of the stock of our U.S. subsidiaries and two-thirds of the stock of certain non-U.S. subsidiaries. At August 31, 2008 we had no borrowings under the Agreement. We had $37.2 million of standby letters of credit outstanding at August 31, 2008. These standby letters of credit are primarily used as security for advance payments received from customers and for our performance under customer contracts. Under the Agreement we have $112.8 million of unused borrowing capacity.
Six banks participate in our revolving credit agreement. We are not dependent on any single bank for our financing needs.
From available cash balances, we repaid $70 million of our Senior Notes on the May 1, 2008 due date.
Critical Accounting Policies and Estimates
This â€śManagementâ€™s Discussion and Analysisâ€ť is based on our Consolidated Financial Statements and the related notes. The more critical accounting policies used in the preparation of our Consolidated Financial Statements are discussed below.
We recognize revenue at the time of title passage to our customer. In instances where we have equipment installation obligations, the revenue related to the installation service is deferred until installation is complete. We recognize revenue for certain longer-term contracts based on the percentage of completion method. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method since we can make reasonably dependable estimates of the revenue and cost applicable to various stages of the contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Significant estimates made by us include the allowance for doubtful accounts, inventory valuation, deferred tax asset valuation allowance, warranty, litigation, product liability and environmental accruals, tax contingencies, stock option valuation, goodwill valuation and retirement benefit obligations.
Our estimate for uncollectible accounts receivable is based upon an analysis of our prior collection experience, specific customer creditworthiness and current economic trends within the industries we serve. In circumstances where we are aware of a specific customerâ€™s inability to meet its financial obligation to us (e.g., bankruptcy filings or substantial downgrading of credit ratings), we record a specific reserve to reduce the receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time that the receivables are past due.
Inventory valuation reserves are determined based on our assessment of the market conditions for our products and the on hand quantities of inventory in relation to historical usage. The inventory to which this reserve relates is still on hand and will be sold or disposed of in the future. The expected selling price of this inventory approximates its net book value, therefore there is no significant impact on gross margin when it is sold.
We have recorded valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of estimated future taxable income and establishment of tax strategies. Future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.
Warranty obligations are contingent upon product failure rates, material required for the repairs and service and delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales. We record litigation and product liability reserves based upon a case-by-case analysis of the facts, circumstances and estimated costs.
These estimates form the basis for making judgments about the carrying value of our assets and liabilities and are based on the best available information at the time we prepare our consolidated financial statements. These estimates are subject to change as conditions within and beyond our control change, including but not limited to economic conditions, the availability of additional information and actual experience rates different from those used in our estimates. Accordingly, actual results may differ from these estimates.
Goodwill and Other Intangible Assets
Goodwill is tested on an annual basis, or more frequently as impairment indicators arise. Impairment tests, which involve the use of estimates related to the fair market values of the business operations with which goodwill is associated, were performed at year-end for fiscal 2008 (our annual impairment test date) using a discounted cash flow methodology (â€śincome approachâ€ť). The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the businesses for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these businesses. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment in determining the cash flows attributable to these businesses over their estimated remaining useful lives. Losses, if any, resulting from impairment tests are reflected in operating income in our Consolidated Statement of Operations. Other intangibles are evaluated periodically if events or circumstances indicate a possible inability to recover their carrying amount.
Foreign Currency Accounting
Gains and losses resulting from the settlement of a transaction in a currency different from that used to record the transaction are charged or credited to net income or loss when incurred. Adjustments resulting from the translation of non-U.S. financial statements into U.S. dollars are recognized in accumulated other comprehensive income or loss for all non-U.S. units.
We use permanently invested intercompany loans as a source of capital to reduce the exposure to foreign currency fluctuations in our foreign subsidiaries. These loans are treated as analogous to equity for accounting purposes. Therefore, we record foreign exchange gains or losses on these intercompany loans in accumulated other comprehensive income or loss.
We maintain defined benefit and defined contribution pension plans that provide retirement benefits to substantially all U.S. employees and certain non-U.S. employees. Pension expense for fiscal 2008 and beyond is dependent on a number of factors including returns on plan assets and changes in the planâ€™s discount rate and therefore cannot be predicted with certainty at this time. The following paragraphs discuss the significant factors that affect the amount of recorded pension expense.
A significant factor in determining the amount of expense recorded for a funded pension plan is the expected long-term rate of return on plan assets. We develop the long-term rate of return assumption based on the current mix of equity and debt securities included in the planâ€™s assets and on the historical returns on those types of investments, judgmentally adjusted to reflect current expectations of future returns. At August 31, 2008 the weighted average expected rate of return on plan assets was 7.70%.
In addition to the expected rate of return on plan assets, recorded pension expense includes the effects of service cost â€” the actuarial cost of benefits earned during a period â€” and interest on the planâ€™s liabilities to participants. These amounts are determined actuarially based on current discount rates and assumptions regarding matters such as future salary increases and mortality. Differences in actual experience in relation to these assumptions are generally not recognized immediately but rather are deferred together with asset-related gains or losses. When cumulative asset-related and liability-related gains or losses exceed the greater of 10% of total liabilities or the calculated value of plan assets, the excess is amortized and included in pension income or expense. At August 31, 2008, the weighted average discount rate used to value the plan liabilities was 6.6%. We determine our discount rate based on an actuarial yield curve applied to the payments we expect to make out of our retirement plans.
Additional changes in the key assumptions discussed above would affect the amount of pension expense currently expected to be recorded for years subsequent to 2008. Specifically, a one-half percent decrease in the rate of return on assets assumption would have the effect of increasing pension expense by approximately $0.5 million. A comparable increase in this assumption would have the opposite effect. In addition, a one-half percent increase in the discount rate would decrease pension expense by $0.1 million, and a comparable decrease in the discount rate would increase expense by approximately $0.3 million.
New Accounting Pronouncements
In September 2006 the Financial Accounting Standards Board (FASB) issued FASB Statement No. 158, â€śEmployersâ€™ Accounting for Defined Benefit Pension and Other Postretirement Plans â€” an amendment of FASB Statements No. 87, 88, 106 and 132(R)â€ť (SFAS No. 158). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in its Balance Sheet, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. We adopted SFAS No. 158 on August 31, 2007.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
A summary of the Companyâ€™s repurchases of its common shares during the quarter ended November 30, 2008 is as follows:
(a) During the first quarter of fiscal 2009, the Company purchased 3,663 of its common shares in connection with its employee benefit plans, including purchases associated with the vesting of restricted stock awards. These purchases were not made pursuant to a publicly announced repurchase plan or program.
(b) On October 27, 2008, our Board of Directors approved the repurchase of up to 3.0 million of our outstanding common shares (the â€śProgramâ€ť). In the first quarter of fiscal 2009, we repurchased an aggregate of 2,007,537 of our outstanding common shares pursuant to the Program. In connection with the Program, the Company entered into a Rule 10b5-1 securities repurchase plan which was effective November 17, 2008 through January 7, 2009. The Program will expire when we have repurchased all the authorized shares under the Program, unless terminated earlier by a Board resolution.
Thank you and good morning. Again, I'm Peter Wallace, President and CEO of Robbins & Myers. Chris Hix, our Chief Financial Officer for the company, is joining me on the call this morning. We are pleased to provide an update on our fiscal 2009 first quarter performance.
During this webcast we will report on the financial results for the September through November time period, discuss the business environment and future prospects, provide segment-level information and comments relative to primary markets, and communicate our primary objectives for the coming year.
Following my initial comments, Chris will take you through a detailed review of our financial performance, working capital changes, and changes in our balance sheet. We will open the phone lines to address your specific questions following our prepared comments.
Slides are also available online at the R&M website if you're not following on this online presentation.
Take your attention to Slide 1, which is our cautionary statement, which should be noted in these more challenging economic times. You should understand this presentation will contain forward-looking statements. Actual events and results may differ from those described in this presentation due to significant changes in capital expenditures in our primary markets, including chemical processing and pharmaceutical, major changes in the price of oil and gas, changes in foreign currency exchange rates and more.
We also refer to various non-GAAP measures, such as earnings per share excluding special items, as we feel they are helpful to investors in assessing our ongoing performance.
Please refer to our slide entitled Cautionary Statement Concerning Forward-Looking Information for additional comments.
Now advance to Slide 2, where we'll have a few comments on the first quarter. We had a very healthy Q1, with sales and orders up on an organic basis. Profitability was very strong, with an EBIT margin of 14.8% or 140 basis points ahead of the same period a year ago, and cash flow showed a marked improvement over the prior year period.
During the quarter, we purchased slightly more than 2 million shares for $39 million and we feel these were made at attractive prices. On Tuesday of this week we announced that we have increased our dividend to $0.04 per share for the quarter, up about 7% from earlier period. In spite of the share repurchase program and dividend payments, we continue to be underleveraged with a net cash position.
The only negative in the quarter was that we began to experience some slowdown in order rates at the end of the quarter, and we have seen a slowdown in quotation and inquiry activity at some of our units as well. However, we have continued to see strength in demand for our energy related products. Like the other companies you most likely follow, we are watching the markets closely to determine the best way to respond to changing market demand. We will discuss this a bit more in a few minutes.
At the end, you should have confidence that we are a much-improved business that can weather some headwinds and make the most of the challenging market environment.
Turning to Slide 3, you will note reported orders were down in the quarter due to the strengthening U.S. dollar, but were up 4% on a constant currency basis. Sales were up 3% in the quarter or 6% organically, and in spite of fairly strong headwinds from currency, our backlog grew $10 million on a year-over-year basis. A healthy backlog should support shipments in the near term.
Please turn to Slide 4. Profit margins in the quarter were strong. We improved 140 basis points to 14.8%, driven by strength in our Fluid Management Group. Process Solutions saw a slight drop in profitability, but was close to double-digit for the quarter. And Romaco went to a loss position in the period driven by lower sales volume. We will discuss the segment details in a few minutes.
Diluted earnings per share for the quarter improved to $0.50, up from $0.40 in the prior year period. Cash flow in the first quarter has historically been negative in the first quarter as the units release payments to vendors and make the year end bonus payments. This year was a much better situation as we were able to hold cash flow neutral from year end levels, which is about a $6 million improvement from the prior year. It is clear that improved functional disciplines and tighter controls are paying dividends.
As you can see now on Slide 5, we have continued to make progress. The trailing four quarters of adjusted EBITDA, which we define as EBIT less restructuring costs and the gains and losses on asset sales, has continued to move upwards. We are proud to report $141 million in adjusted EBITDA delivered in the trailing four quarters. The first quarter of 2009 fiscal year had EBITDA of $30 million, which represents a 14% year-on-year improvement.
Moving on the Slide 6, we should note that the worldwide financial crisis is beginning to impact our industrial businesses. Order rates, inquiry levels, and quotation activity have slowed in the last two months. During the quarter, the Fluid Management Group was up due to strength in energy markets, but experienced weakness in the municipal and industrial markets. Orders for Process Solutions were positive in the quarter, but were driven by some larger projects in Europe. Beyond these larger projects, the underlying activity has declined in both chemical and pharma markets. And Romaco has had lower demand, seen in both the incoming order rates and the shipments.
Many of the large chemical companies have announced plans to reduce their work force, close or idle facilities, and these changes will ultimately have an impact on projects that may have been planned, but can still be cancelled. We do feel there is no exposure with our current backlog of business, but the project activity will be lower in the back half of the year.
Our business managers in the pharma and packaging side of the business remain somewhat optimistic that many projects will still be funded; however, the weakness in booked orders in the first quarter is of concern. We are tracking these projects and will be prepared to adjust plans if the weakness continues.
Municipal spending has also been off, although we have seen a stronger level of customer quotations during the last month. All in all, we are now facing what other companies have faced. With so many industries struggling or having credit issues for such a long period of time, it has finally caught up to us.
A very bright spot is the continuing performance of our Fluid Management Group and, in particular, the energy part of the business. We will have more on this in just a minute.
As a leader in many of our primary markets, we are well positioned to go after new business. We are in great financial position and will be able to pursue incremental business as opportunities arise. The markets seem to change week to week, and we will be even more diligent in adapting to the challenging environment.
Turing to Slide 7, you will see that we are implementing some contingency plans to shore up profit levels in lieu of the softer demand. Our managers are experienced and have been through market cycles before. We will do the obvious, such as curtail hiring, review capital spend plans, and work to minimize overtime costs. There are normally some expenditures that can be deemed discretionary, and we will take a very hard view on these investments. We will also work with our supplier partners to find ways to reduce costs, and we will take advantage of the lower commodity prices in steel and energy to control our overall cost situation.
Beyond the first level cost reductions, we are also evaluating our structure to make sure we have the optimum footprint to serve our customers. There may be opportunities for future facility consolidations.
However, I also want to mention that we have an extremely strong balance sheet that will allow us to continue funding smart projects that will drive future growth. We will work to protect profitability, but we'll also continue to fund strategic investments that will allow us to come out of the cycle stronger than others.
Now on Slide 8 you will see that the Fluid Management Group had another great quarter. Orders were up 2%, but were up 8% excluding the currency impact. This strong year-over-year performance was driven by demand for energy products, while the industrial and municipal markets were somewhat lower.
Sales were up 14% or 18% organically. It should be noted that while drill rig activity has come down a bit due to the lower oil and gas prices, one of our key product lines is used primarily in horizontal and directional drilling, and this particularly rig activity has fared much better than vertical drilling. We've also had further success with some of our key accounts and have been able to take some market share with key players in the industry.
Profit levels were fantastic with an EBIT margin of 30% in the quarter, a full 450 basis points ahead of the prior year period. This performance was driven by a favorable mix, higher volume, and price management programs.
We are a leader in the industry, and we'll try to use our position to capture new market share.
Moving on the Slide 9, you will see that orders for Process Solutions were down 4.7%, driven by the effect of the stronger dollar, principally against the euro. Excluding the currency impact, orders were actually up 6% in the period. The order strength was driven by major European orders in the chemical sector.
As mentioned earlier, we are watching the order and project activity closely. We have seen a reduction in inquiries, but there remain some large projects that appear to be still active.
Sales in the quarter were up 2% or 4% organically. We continue to have good backlog levels that have supported the sales increase.
EBIT margins declined in the quarter due in large part to a change in mix. Our Asian businesses have seen an increase in alloy vessels versus glass-lined vessels, and this contributes to the profit change. In addition, some of the units had excess inventory, resulting in higher steel cost relative to current pricing.
We have taken action on several fronts to address the more difficult period expected in the second half of the year. The business remains focused on delivering profit levels in spite of slower demand.
Moving on to Slide 10, Romaco was the disappointment for the quarter. During the fiscal 2008, we demonstrated that this group can deliver reasonable profit levels, but we were caught with lower than anticipated shipments in the first quarter. Orders were off 21%, driven by the strengthening U.S. dollar. The business is mostly conducted in euros and on this basis the order rate was off 8% - better, but nothing to be feeling great about.
On a similar note, sales were off 23% or 17% organically. The lower sales were the primary driver for the business showing a loss in the most recent period.
During the quarter we incurred a $500,000 expense to restructure our sales organization in the U.K., and this should be recovered with savings throughout the balance of the fiscal year.
We are actively pursuing major project work that has been identified as the variable contribution margin for this business is now very attractive. While we do this, we are also moving forward with actions to reduce our costs should the weaker demand experienced in the first quarter continue throughout the year.
On Slide 11 I have identified the primary areas of management focus for fiscal 2009. You will note they have not changed much from the prior year and we feel the consistency of our message is a real strength.
We continue to make strides with the implement of lean, but those that follow the lean journey understand that this process never ends. There are many opportunities for us to remove waste, improve cycle time, and react faster to changing customer requirements.
Key account management will become a cornerstone of our business. We will differentiate ourselves with more than products. We will strategically align ourselves with the major players in the market that can make a difference.
Each of our businesses have introduced new products. We are becoming much better at identifying those projects that should receive funding. Our customers expect us to continue delivering a solution that will allow them to improve productivity with their operations and acquisitions will hopefully be a part of our growth. We have a balance sheet that supports acquisitions and even though this may be a difficult time to close deals, we are pursuing some possibilities at this time.
With the changing market, we are looking at all aspects of our cost structure, organization structure and more. Overall, we are running with our strategy in place by responding to the market challenges in a prudent manner.
Slide 12 summarizes some of the comments that I have already made throughout the presentation. We have a healthy backlog that will serve us well in the short term, but feel the second half will come under more pressure until liquidity and confidence is restored across the world markets.
We have planned on currency to be at the rates as of the end of our first quarter - at the end of November to be specific. Our earlier guidance for the year indicated that our capital spend would be approximately $25 to $30 million, and with a lower expected demand, we will most likely scale this back to something closer to $20 million.
As you will see on Slide 13, we are providing new guidance for the fiscal year, now guiding to $1.80 to $2.00 per share for the year. This contrasts to $2.52 in the prior year or $2.17 after adjusting for one-off and special items.
For the second quarter we are forecasting diluted earnings per share of $0.40 to $0.50. It should be noted that the forecast accounts for the approximate 2 million shares purchased to date, but does not factor additional purchases during the remainder of the year.
Moving to Slide 14, I would like to make some summary comments. We are continuing with our successful programs around lean implementation and key account management programs. We have made progress, but there remains much more to be accomplished. Our balance sheet is in terrific shape and will support both organic and strategic growth initiatives. We have remained attractively positioned, with leadership positions serving primary markets in energy, chemical and pharma, and we have assembled a capable and experienced management team that will work to create long-term shareholder value.
With these opening comments, I will now turn the presentation over to Chris so that he can walk you through some of the financial highlights. Chris?
Well, thanks, Pete. If everyone will turn to Slide 16, I can begin my prepared remarks.
Orders decreased and sales increased on a nominal year-over-year basis in the first quarter, and once you strip away the significant impact from currency translation changes - something we will discuss in more detail in a moment - you can see that orders and sales both increased modestly in the first quarter.
Enterprise organic growth was led by improvements in our FMG and PSG businesses, offset a bit by a decrease in our Romaco business.
Backlog grew during the first quarter as orders exceeded sales in each segment. Compared with the prior year, backlog is $9 million higher. Excluding the impact of currency, backlog would be $34 million higher than the prior year and would also have been sequentially higher than last year's fourth quarter.
During the first quarter we also made strides in gross margins with positive momentum from 2008 extending into the new fiscal year. You will recall our discussions over the past few quarters regarding pricing, improved operational execution, and sharpened analysis and control. The company again demonstrated the benefits from these actions in its first quarter, along with favorable mix, expanding gross margins year-over-year by 200 basis points to 38.2%.
We were able to leverage these improvements in sales and gross margins into greater profitability, increasing EBIT margins 140 basis points to 14.8%. If you strip away the currency effects, the flow through on our organic growth was about 30%, consistent with general expectations of 30% to 40% across our businesses.
EPS grew $0.10 year-over-year to $0.50 in the first quarter, benefiting from higher operating performance and about $0.01 from a lower tax rate and another $0.01 from reduced interest expense as a result of the repayment of $70 million of senior notes in May of 2008. We did not receive any share repurchase benefits to EPS in Q1 due to the late timing of the purchases in the quarter.
Let's turn to Slide 17 to further discuss recent currency changes. The three charts across the top of the slide represent the amount of U.S. dollars that could be purchased with a euro, a British pound and a Canadian dollar from September 2007 through the end of our first quarter, November 30, 2008. These three currencies are our principal non-U.S. operating currencies. For our 2009 plan and guidance, we used the exchange rates as of the end of fiscal 2008, that is, at the end of August. These rates are reflected on the charts as a red dotted line.
After setting these rates, the currencies experienced significant devaluations with respect to the U.S. dollar, 14% to 16%. The result was lower translated sales and profits in Q1 from our nonU.S. entities. It's important to note that every 10% change in exchange rates relative to the U.S. dollar with our current mix and level of business is expected to create an annual $0.12 EPS impact. For the remainder of the year we have assumed the end of November exchange rates. With the euro recently strengthening against the U.S. dollar, perhaps the currency impacts will moderate.
If you turn to Slide 18, you will see that current assets decreased year-over-year from $285 million to $264 million and current liabilities decreased from $174 million to $154 million, both significantly impacted by currency exchange rates. We can remove the bias from currency and look more closely at core performance by examining the ratio of net working capital to annualized quarterly sales. Under this measure, we improved from 16% in the prior year to 15.4% this year, driven largely by improved customer collections activity, offset a bit by increased inventories and lower payables.
Given the changing economic picture, the improvements we've made in cash flow management over the past two years should serve us well in a more uncertain environment.
Please turn to Slide 19. Earlier Pete mentioned that we managed to keep cash flow from operations neutral in the first quarter of this year versus consuming $6 million of cash in the first quarter of last year. That enabled us to end the quarter with $74 million of cash, which also reflects the $39 million that we invested during the quarter in share repurchases. We also ended the quarter with very little debt, principally $30 million of senior notes due in May of 2010. Our senior credit facility remains undrawn and is available until December 2011.
In short, our balance sheet is strong and Robbins & Myers is positioned to weather choppy economic conditions.
That concludes my remarks. Pete, back to you.