Insilco
Q2
| Insilco
Q2
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| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) Insilco Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INSL)") else Response.Write("(NASDAQ: INSL)") end if %> UNION CITY, Ca., July 31, 1996/FOOLWIRE/ --- Insilco Corporation reported Q2 1996 earnings this morning. The company earned $1.20 per share, which is record performance for Insilco post-reorganization. This compares to $1.11 per share for Q2 1995 after excluding reorganization, goodwill, amortization and other one time costs related to Rolodex last year.
For the quarter, sales were up to $178 million, which is also a record performance for ongoing businesses. The automotive group was up 14% in revenues in a relatively flat market. This growth was driven by fine performance in thermal components and very strong sales in after-market heat exchangers (primarily automotive related.
On the surface the operating income appears to have increased substantially from last year's Q2. However, Q2 1995 included a $6.2 million non-recurring charge to operating earnings at Rolodex Curtis. After adjusting the prior year operating income for these non-recurring charges and for the goodwill amortization, operating income is down $0.4 million or $0.03 per share after tax.
The operating margins also declined from 11.9% to 11%, primarily resulting from lower contribution margins in the Technologies Group and in the Office Products Group. Other income also affects their comparison with Q2 last year with a reported $4.1 million decline year-over-year. Last year's other income included gains on the sale of excess corporate assets, payroll litigation resolution, and adjustments to their environmental protection agency liabilities. The current quarter other income does include one-time gains from a favorable resolution of pre-emergence liabilities, but not to the magnitude that they recorded last year. There is about $2 million worth of pre-bankruptcy related accrued liabilities that they took to income in the current quarter -- one relating to sales tax liabilities that existed and that they had accruals for that they favorable settled their failure to file earnings properly many years ago. They have submitted those settlements now with the states involved and that was about $1 million. They also had accruals for bankruptcy claims that, given they have now elapsed three years out of bankruptcy and those claims have not been asserted, they determined that it was time to take those reserves back and that was about $800,000 of the total. There is also additional income that came in from Sinclair, from an escrow that they had set aside on sale of Sinclair stores.
Also recorded in other income is the equity income from their joint venture with Thermolex, which was $800,000 in Q2 versus $500,000 last year. Their operating cash flow during the quarter was $8.4 million versus $12.9 million in Q2 1995. They saw higher working capital usage driven by higher quarter over quarter sales growth rate versus last year and that is the principal reason for the lower cash flow. For the first half of 1996, their operating cash flow is up $500,000 with cash flow from operating activities up $1.3 million, partly offset by higher capital spending. Their debt declined by $3 million from a year ago after $9 million of stock repurchases and a $5 million acquisition in the intervening 12 months.
Cash return on investment will be one of Insilco's highest priorities and they will take decisive action to achieve their objectives.
They have made investments in support systems, MIS implementations across the board, and two key marketing and strategy studies which were major one-time expenditures in the quarter hitting the SG&A line -- well in excess of $1 million in the quarter. They fully expect the sustaining level of these kind of activities to be significantly lower going forward.
AUTOMOTIVE COMPONENTS
In the Automotive Components Group, operating income rose $900,000 to $7.5 million on a strong sales performance. The operating margin there was roughly comparable to a year ago at 14.3%. The sales gain in that group was led by a strong automotive aftermarket heat exchanger demand. Their acquisition of the Great Lake Radiator business is meeting performance expectations and they are very optimistic about the long term growth prospects following the acquisition of H. Lingamen's heat exchanger tubing business in Europe which gives them an excellent position there to capitalize on their strength.
Their Thermolex joint venture is having another outstanding year with continued gains in high-efficiency tubing for automotive air conditioners. They are also excited about potential applications outside their traditional markets for this tubing. They will be adding a fourth press line beginning this year which will be financed totally internally by the joint venture, which is also having an excellent cash performance year.
TECHNOLOGIES GROUP
In the Technologies Group, they are very pleased with the turnaround in their cable and wire harness assembly business. They continue to win new business in this area and sales and orders are up over 30% compared to the same period last year. Margins are also up very sharply. In the Technologies Group, operating income was down $0.4 million and the margins declined from 19.3% of sales to 16.9%. The principal reason for the decline was lower margins at Stewart Connector as a result of pricing pressures.
In their connector business, they had expected to see considerably higher growth given the backlog they had at the beginning of the quarter but they were ahead with what appears to be a rather broad-based inventory correction among network equipment manufacturers. Margins declined due to continued pricing pressure as expected but they remain very high compared to connector industry averages. Also, they are comparing to a strong Q2 1995 which itself was up over 20%. Recent orders activity has picked up and they were recently awarded a major piece of business from one of the leading network providers which is expected to result in incremental revenues of about $8 million over the next two years. The products involved with this order are so-called Category 5 High-Speed Data Interconnects. These interconnects are capable of transmitting data at speeds in excess of 100 megabits per second and are also used in ATM (asynchronous transfer mode) networking, a rapidly growing area in computer networking. Sales of these products started in Q2, but will begin ramping up in Q3.
OFFICE PRODUCTS AND PUBLISHING GROUP
In their Office Products and Publishing Group, Taylor Publishing achieved substantial gains in productivity of school yearbook production with its digital pre-press process, but these gains were offset to a certain extent by lower margins in non-yearbook business and also some additional re-engineering costs. Taylor Publishing posted improvements in operating results during its highest seasonal shipping period with $5.3 million in operating income compared to the year-ago $5 million. The improvement they saw in yearbook productivity was partially offset by a number of factors, but raw material costs were higher and they had lower earnings from specialty publishing sales outside the yearbook area -- primarily sports franchise related books, that they enjoyed high margins on a year ago, didn't recur in Q2 this year.
Rolodex continues to experience good growth in its core cardfile business. Electronics, however, has become much more competitive and margins remain under pressure as compared to prior years. Rolodex Curtis operating income excluding last year's non-recurring charges was down $600,000 to $1.3 million in Q2. The operating margin was 6%, down from an adjusted 9.1% a year ago. That is roughly in line with their expectations as the lower operating margins reflect recognition of customer returns, chargebacks, and higher business administrative support costs and business systems re-engineering. For the remainder of the year they do expect to continue to see lower electronic organizer sales as they work to improve return on investment in this category. Going forward, their focus in this segment will be cash return on cash invested. Revenues may suffer, but they will drive for significant improvement in working capital turnover. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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