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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-9576
K-TRON INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-1759452
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification #)
or Organization)
Routes 55 & 553, P.O. Box 888, Pitman, New Jersey 08071-0888
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (856) 589-0500
Not Applicable
- --------------------------------------------------------------------------------
(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The Registrant had 2,433,104 shares of Common Stock outstanding as of March 29,
2003.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets 1
March 29, 2003 and December 28, 2002
Consolidated Statements of Income 2
& Retained Earnings for the Three Months
Ended March 29, 2003 and March 30, 2002
Consolidated Statements of Cash Flows 3
for the Three Months Ended March 29, 2003
and March 30, 2002
Notes to Consolidated Financial Statements 4 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. 10 - 17
Item 4. Controls and Procedures. 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
CERTIFICATIONS 20-21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share Data)
(Unaudited)
March 29, December 28,
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,325 $ 2,694
Accounts receivable, net of allowance for
doubtful accounts of $723 and $716 17,433 15,275
Inventories 14,092 9,318
Deferred income taxes 169 169
Prepaid expenses and other current assets 2,073 1,775
--------- ------------
Total current assets 38,092 29,231
PROPERTY, PLANT AND EQUIPMENT, net 24,739 16,170
PATENTS, net 1,997 767
GOODWILL, net 2,053 2,053
OTHER INTANGIBLES 9,010 --
NOTES RECEIVABLE AND OTHER ASSETS 2,167 2,238
--------- ------------
Total assets $ 78,058 $ 50,459
========= ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,610 $ 2,005
Accounts payable 6,115 4,934
Accrued expenses and other current liabilities 6,527 5,845
Accrued commissions 1,815 1,532
Customer advances 1,101 809
--------- ------------
Total current liabilities 19,168 15,125
LONG-TERM DEBT, net of current portion 28,809 6,499
OTHER NON-CURRENT LIABILITIES 158 --
DEFERRED INCOME TAXES 416 416
COMMITMENTS AND CONTINGENCIES
SERIES B JUNIOR PARTICIPATING PREFERRED SHARES,
$.01 par value - authorized 50,000 shares; none issued -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value - authorized 950,000 shares; none issued -- --
Common stock, $.01 par value - authorized 50,000,000 shares;
issued 4,435,678 shares and 4,433,342 shares 44 44
Paid-in capital 16,719 16,701
Retained earnings 39,603 38,768
Accumulated other comprehensive income 655 420
--------- ------------
57,021 55,933
Treasury stock, 2,002,574 and 2,002,574 shares - at cost (27,514) (27,514)
--------- ------------
Total shareholders' equity 29,507 28,419
--------- ------------
Total liabilities and shareholders' equity $ 78,058 $ 50,459
========= ============
See Notes to Consolidated Financial Statements
-1-
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME & RETAINED EARNINGS
(Dollars in Thousands except Share Data)
(Unaudited)
Three Months Ended
------------------
March 29, March 30,
2003 2002
---- ----
REVENUES $ 23,398 $ 16,778
COST OF REVENUES 13,957 9,642
--------- ---------
Gross Profit 9,441 7,136
OPERATING EXPENSES:
Selling, general & administrative 7,265 5,252
Research and development 671 706
--------- ---------
7,936 5,958
--------- ---------
Operating Income 1,505 1,178
INTEREST EXPENSE 380 173
--------- ---------
Income before income taxes 1,125 1,005
INCOME TAX PROVISION 290 254
--------- ---------
NET INCOME 835 751
RETAINED EARNINGS
Beginning of period 38,768 35,484
--------- ---------
End of period $ 39,603 $ 36,235
========= =========
EARNINGS PER SHARE
Basic $ 0.34 $ 0.31
========= =========
Diluted $ 0.34 $ 0.31
========= =========
See Notes to Consolidated Financial Statements
-2-
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
------------------
March 29, March 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 835 $ 751
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 862 683
Changes in assets and liabilities:
Accounts receivable, net 1,144 (151)
Inventories (128) 899
Prepaid expenses and other current assets (13) (314)
Other assets 164 33
Accounts payable (583) 354
Accrued expenses and other current liabilities (1,035) 509
--------- ---------
Net cash provided by operating activities 1,246 2,764
--------- ---------
INVESTING ACTIVITIES:
Business acquired, net of cash acquired (18,988) --
Capital expenditures (562) (218)
Other (2) (15)
--------- ---------
Net cash used in investing activities (19,552) (233)
--------- ---------
FINANCING ACTIVITIES:
Net (repayments) borrowing under notes payable to banks 5 (1,116)
Proceeds from issuance of long-term debt 20,000 --
Principal payments on long-term debt (132) (509)
Proceeds from issuance of common stock 18 4
--------- ---------
Net cash provided by (used in) financing activities 19,891 (1,621)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 46 (18)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,631 892
--------- ---------
CASH AND CASH EQUIVALENTS
Beginning of period 2,694 2,214
--------- ---------
End of period $ 4,325 $ 3,106
========= =========
See Notes to Consolidated Financial Statements
-3-
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 29, 2003
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete
financial statements. The consolidated financial statements include the
accounts of K-Tron International, Inc. and its subsidiaries ("K-Tron"
or the "Company") (including the January 2, 2003 Pennsylvania Crusher
Corporation acquisition noted below). All intercompany transactions
have been eliminated in consolidation. In the opinion of management,
all adjustments (consisting of a normal recurring nature) considered
necessary for a fair presentation of results for interim periods have
been made.
Certain reclassifications were made to the first quarter 2002
consolidated financial statements to conform to the current period
presentation.
The unaudited financial statements herein should be read in conjunction
with the Company's annual report on Form 10-K for the year ended
December 28, 2002 which was previously filed with the Securities and
Exchange Commission.
2. Acquisition
On January 2, 2003, the Company acquired all of the stock of
privately-held Pennsylvania Crusher Corporation. The purchase price
paid for the Pennsylvania Crusher Corporation stock was $23.5 million,
plus a post-closing adjustment of $205,000 based on Pennsylvania
Crusher Corporation's consolidated shareholders' equity at December 31,
2002. Of this amount, $19.7 million was paid in cash and $4.0 million
was in unsecured, promissory notes which are payable in equal, annual
installments on January 2 in each of 2005, 2006 and 2007. The excess of
the purchase price over the carrying value of the net assets acquired
was allocated as follows (in millions): inventory -- $0.3, property,
plant & equipment -- $4.7, patents -- $1.3, trademarks and tradenames
-- $1.9, and other identified intangibles -- $7.1. Trademarks and
tradenames and other identified intangibles are included in other
intangibles in the consolidated balance sheet.
If the acquisition of Pennsylvania Crusher Corporation had occurred at
the beginning of fiscal 2002, pro forma revenues, net income and
diluted earnings per share for the three months ended March 30, 2002
would have been approximately $24.9 million, $1.0 million and $0.41 per
share, respectively. These pro forma disclosures are unaudited and are
based on historical results, adjusted for the impact of certain
acquisition-related items such as depreciation and amortization of
property, plant and equipment and identified
-4-
intangibles, increased interest expense on acquisition debt and the
related income tax effects. This unaudited pro forma disclosure is
presented for informational purposes only and should not be construed
to be indicative of the actual results of operations of the combined
companies on the date indicated or of the results that may be obtained
in the future.
3. Intangible Assets
Three Months Ended March 29, 2003
---------------------------------
(in thousands)
Gross Carrying Accumulated
Amount Amortization
------ ------------
Amortized intangible assets
Patents $2,758 $ 761
Drawings 3,550 29
------ ------
$6,308 $ 790
====== ======
Unamortized intangible assets
Trademarks $1,890
Other identifiable intangibles 3,599
------
$5,489
======
The amortized intangible assets are being amortized on the
straight-line basis over the expected period of benefits, 17 to 25
years. Intangible assets of $10.3 million were acquired during the
first quarter of 2003 as part of the acquisition of Pennsylvania
Crusher Corporation (see Note 2). Amortization expense for the first
three months of 2003 and 2002 was $71 thousand and $18 thousand,
respectively.
4. Supplemental Disclosures of Cash Flow Information
The Company considers all highly liquid short-term investments
purchased with an original maturity of three months or less to be cash
equivalents.
Cash paid in the first three months of 2003 and 2002 for interest was
$0.1 million and $0.2 million, respectively, and for income taxes was
$0.1 million and zero, respectively.
-5-
5. Inventories
Inventories consist of the following:
March 29, December 28,
2003 2002
---- ----
(in thousands)
Components $ 12,072 $ 8,064
Work-in-process 1,921 1,151
Finished goods 99 103
--------- ------------
$ 14,092 $ 9,318
========= ============
6. Accrued Warranty
The Company offers a product warranty on a majority of its products.
Warranty is accrued as a percentage of sales on a monthly basis and is
included in accrued expenses and other current liabilities. The
following is a rollforward of accrued warranty for the three-month
periods ended March 29, 2003 and March 30, 2002.
March 29, March 30,
2003 2002
---- ----
(in thousands)
Beginning balance $ 687 $ 662
Accrued warranty of acquired business 553 --
Accrual 351 182
Expense (474) (254)
Foreign exchange adjustment 6 (2)
--------- ---------
Ending balance $ 1,123 $ 588
========= =========
7. Earnings Per Share
The Company's basic and diluted earnings per share are calculated as
follows:
For the Three Months Ended March 29, 2003
-----------------------------------------
Net Income Available
(Dollars and Shares in Thousands To Common Earnings
except Per Share Data) Shareholders Shares Per Share
------------ ------ ---------
Basic $ 835 2,432 $ 0.34
Common Share Equivalent
of Outstanding Options -- 52 (0.00)
------------ ------ ---------
Diluted $ 835 2,484 $ 0.34
============ ====== =========
-6-
For the Three Months Ended March 30, 2002
-----------------------------------------
Net Income Available
(Dollars and Shares in Thousands To Common Earnings
except Per Share Data) Shareholders Shares Per Share
------------ ------ ---------
Basic $ 751 2,432 $ 0.31
Common Share Equivalent
of Outstanding Options -- 17 (0.00)
------------ ------ ---------
Diluted $ 751 2,449 $ 0.31
============ ====== =========
Diluted earnings per common share are based on the weighted average
number of common and common equivalent shares outstanding during a
given time period. Such average shares include the weighted average
number of common shares outstanding plus the shares issuable upon
exercise of stock options after the assumed repurchase of common shares
with the related proceeds.
8. Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require more prominent and frequent disclosures in
financial statements. Also, SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company has
included the interim disclosures prescribed under SFAS No. 148.
At March 29, 2003, the Company had various stock-based compensation
plans as described in Note 11 to the consolidated financial statements
in the Company's annual report on Form 10-K for the year ended December
28, 2002. As permitted under SFAS No. 123, as amended by SFAS No. 148,
the Company has elected to continue to account for compensation costs
using the intrinsic value-based method of accounting as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." No compensation expense has been recognized in
net income for stock options, as options granted had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to its stock option plans.
-7-
March 29, March 30,
2003 2002
---- ----
(in thousands, except per share)
Net income - as reported $ 835 $ 751
Net income - pro forma 767 667
Basic earnings per share - as reported 0.34 0.31
Basic earnings per share - pro forma 0.32 0.27
Diluted earnings per share - as reported 0.34 0.31
Diluted earnings per share - pro forma 0.31 0.27
9. Comprehensive Income
Comprehensive income is the total of net income, the change in the
unrealized gain or loss on derivatives, net of tax and the change in
translation adjustments, all for a given period, which are the
Company's only non-owner changes in equity. For the three-month periods
ending March 29, 2003 and March 30, 2002, the following table sets
forth the Company's comprehensive income:
Three Months Ended
------------------
March 29, March 30,
2003 2002
---- ----
(in thousands)
Net Income $ 835 $ 751
Unrealized loss on derivatives, net of tax (98) --
Translation Adjustments 333 (89)
--------- ---------
Comprehensive Income $ 1,070 $ 662
========= =========
-8-
10. Management Segment Information
The Company is engaged in one principal business segment -- material
handling equipment and systems. The Company operates in two primary
geographic locations, North and South America (the "Americas") and
Europe, the Middle East, Africa and Asia ("EMEA/Asia"). For the three
months ended March 29, 2003 and March 30, 2002, the following tables
set forth the Company's segment information:
EMEA/ Elimi- Consoli-
Americas Asia nations dated
-------- ---- ------- -----
(in thousands)
THREE MONTHS ENDED
March 29, 2003
Revenues
Sales to unaffiliated customers $ 13,217 $ 10,181 $ -- $ 23,398
Sales to affiliates 749 568 (1,317) --
-------- -------- -------- --------
Total sales $ 13,966 $ 10,749 $ (1,317) $ 23,398
======== ======== ======== ========
Operating income $ 673 $ 851 $ (19) $ 1,505
======== ======== ========
Interest expense (380)
--------
Income before income taxes $ 1,125
========
EMEA/ Elimi- Consoli-
Americas Asia nations dated
-------- ---- -------- --------
(in thousands)
THREE MONTHS ENDED
March 30, 2002
Revenues
Sales to unaffiliated customers $ 7,584 $ 9,194 $ -- $ 16,778
Sales to affiliates 948 305 (1,253) --
-------- -------- -------- --------
Total sales $ 8,532 $ 9,499 $ (1,253) $ 16,778
======== ======== ======== ========
Operating income $ 644 $ 534 $ -- $ 1,178
======== ======== ========
Interest expense (173)
--------
Income before income taxes $ 1,005
========
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following provides information that management believes is relevant
to an assessment and understanding of our consolidated results of operations and
financial condition. The discussion should be read in conjunction with our
consolidated financial statements and accompanying notes. All references to the
first three months or first quarters of 2003 and 2002 mean the fiscal quarters
ended March 29, 2003 and March 30, 2002, respectively.
On January 2, 2003, we acquired all of the outstanding capital stock of
privately-held Pennsylvania Crusher Corporation ("Penn Crusher"). As a result of
this purchase, we also acquired Jeffrey Specialty Equipment Corporation
("Jeffrey"), a wholly-owned subsidiary of Penn Crusher. The purchase price
consisted of a combination of $19,500,000 in cash, $4,000,000 in unsecured
promissory notes and a post-closing cash payment of $205,000 based on Penn
Crusher's consolidated shareholders' equity at December 31, 2002. With respect
to the payment of the cash portion of the purchase price and related acquisition
costs, we financed $15,000,000 through a $17,000,000 secured credit facility
with Penn Crusher as the borrower (the additional $2,000,000 is available for
working capital and general corporate purposes, subject to certain limitations).
This facility is directly with Penn Crusher, and the lender has no recourse
against any K-Tron company other than Penn Crusher and Jeffrey with respect to
any amounts borrowed thereunder. Additionally, we borrowed $5,000,000 from a
U.S. bank through a K-Tron wholly-owned subsidiary, the repayment of which loan
was guaranteed by K-Tron International, and we used these funds to pay part of
the purchase price. K-Tron International also issued the $4,000,000 of unsecured
promissory notes referred to above.
As noted above, we incurred substantial debt as a result of the Penn
Crusher acquisition, which debt is described in more detail in the Liquidity and
Capital Resources section below; however, we expect to have sufficient cash flow
to cover all required principal and interest payments and, in particular, Penn
Crusher's cash flow should be adequate to cover required principal and interest
payments on its secured credit facility.
RESULTS OF OPERATIONS
For the first three months of 2003 and 2002, K-Tron reported net income
of $835,000 and $751,000, respectively.
We are engaged in one principal business segment - material handling
equipment and systems. We operate in two primary geographic locations - North
and South America (the "Americas") and Europe, the Middle East, Africa and Asia
("EMEA/Asia"). We derived approximately 44% and 55% of our first quarter of 2003
and 2002 revenues, respectively, from products manufactured in, and services
performed from, our facilities located outside the United States, primarily in
Europe. Since we operate globally, we are sensitive to changes in foreign
currency exchange rates ("foreign exchange rates"), which can affect both the
translation of financial statement items into U.S. dollars as well as
transactions where the revenues and related expenses may initially be accounted
for in different currencies, such as sales made from our
-10-
Swiss manufacturing facility in currencies other than the Swiss franc. The
reduction in the percentage of revenues derived outside of the United States in
the first quarter of 2003 as compared to the same period in 2002 was primarily
due to the acquisition of Penn Crusher and Jeffrey noted above, since their
revenues were mostly derived from within the United States.
The following table sets forth our results of operations expressed as a
percentage of total revenues for the periods indicated.
Three Months Ended
------------------
March 29, March 30,
2003 2002
---- ----
Total revenues 100.0% 100.0%
Cost of revenues 59.7 57.5
---- ----
Gross profit 40.3 42.5
Selling, general and administrative 31.0 31.3
Research and development 2.9 4.2
--- ---
Operating income 6.4 7.0
Interest 1.6 1.0
--- ---
Income before income taxes 4.8% 6.0%
=== ===
The following table summarizes our order backlog as of the dates
indicated, all adjusted to March 29, 2003 foreign exchange rates:
(Dollars in Thousands) March 29, 2003 December 28, 2002 March 30, 2002
-------------- ----------------- --------------
Order backlog $ 15,530 $ 8,637 $ 12,810
The March 29, 2003 order backlog includes $7,464,000 of order backlog
of Penn Crusher and Jeffrey.
As previously noted, we derive a substantial amount of our revenues
from activities in foreign jurisdictions. Consequently, our results can be
significantly affected by changes in foreign exchange rates, particularly in
U.S. dollar exchange rates with respect to the Swiss franc, euro and British
pound sterling and, to a lesser degree, the Singapore dollar and other
currencies. When the U.S. dollar weakens against these currencies, the U.S.
dollar value of non-U.S. dollar-based sales increases. When the U.S. dollar
strengthens against these currencies, the U.S. dollar
-11-
value of non-U.S. dollar-based sales decreases. Correspondingly, the U.S. dollar
value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and
decreases when the U.S. dollar strengthens. Overall, since we typically receive
a significant amount of our revenues in currencies other than the U.S. dollar,
we generally benefit from a weaker dollar and are adversely affected by a
stronger dollar relative to major currencies worldwide, especially those
identified above. In particular, a general weakening of the U.S. dollar against
other currencies would positively affect our revenues, gross profit and
operating income as expressed in U.S. dollars (provided that the gross profit
and operating income numbers from foreign operations are not losses, since in
the case of a loss, the effect would be to increase the loss), whereas a general
strengthening of the U.S. dollar against such currencies would have the opposite
effect.
In addition, our revenues and income with respect to particular
transactions may be affected by changes in foreign exchange rates where sales
are made in currencies other than the functional currency of the facility
manufacturing the product subject to the sale, including in particular the U.S.
dollar/Swiss franc (for inter-company transactions) and the Swiss franc/euro and
Swiss franc/British pound sterling (for sales from the Company's Swiss
manufacturing facility) exchange rates. For the first three months of 2003 and
2002, the changes in certain key exchange rates were as follows:
Three Months Ended
------------------
March 29, March 30,
2003 2002
---- ----
Average U.S. dollar equivalent of
one Swiss franc 0.732 0.595
% change vs. prior year 23.0%
Average U.S. dollar equivalent of
one euro 1.073 0.876
% change vs. prior year 22.5%
Average U.S. dollar equivalent of
one British pound sterling 1.602 1.427
% change vs. prior year 12.3%
Average Swiss franc equivalent of
one euro 1.466 1.472
% change vs. prior year -0.4%
Average Swiss franc equivalent of
one British pound sterling 2.189 2.398
% change vs. prior year -8.7%
-12-
With the acquisition of Penn Crusher and Jeffrey, we are less affected
by foreign exchange rates since most of their sales are in U.S. dollars.
Nevertheless, more than 40% of our first quarter 2003 revenues were from
products manufactured in, and services performed from, our facilities outside
the United States, so that we will continue to have significant sensitivity to
foreign exchange rate changes.
Total revenues increased by $6,620,000 or 39.5% in the first quarter of
2003 compared to the same period in 2002. This increase in revenues was
primarily attributed to a full quarter of revenues in 2003 from the January 2,
2003 acquisition of Penn Crusher and Jeffrey ($7,261,000) and the positive
effect of a weaker U.S. dollar when translating the revenues of foreign
operations into U.S. dollars, partially offset by lower revenues in our
pre-acquisition businesses due to a weaker global economy with reduced capital
equipment spending in many of the industries that we serve. If the average
foreign exchange rates for the first quarter of 2002 were applied to the first
quarter of 2003, total revenues for 2003 would have increased by $4,822,000 or
28.7% as compared to the first quarter of 2002.
Gross profit as a percent of total revenues decreased to 40.3% in the
first quarter of 2003 from 42.5% for the same period in 2002. The decrease in
gross profit was primarily due to geographic and product sales mix and the
deterioration in economic conditions discussed above, which led to fixed costs
being absorbed over a smaller revenue base.
Selling, general and administrative (SG&A) expenses increased by
$2,013,000 or 38.3% in the first quarter of 2003 compared to the same period in
2002. The increase in SG&A was primarily due to Penn Crusher and Jeffrey,
partially offset by lower spending levels. As a percent of total revenues, SG&A
was 31.0% in the first quarter of 2003 and 31.3% in the same period in 2002.
Research and development (R&D) expenditures decreased by $35,000 or
5.0% in the first quarter of 2003 compared to the first quarter of 2002. This
decline was due to lower tooling costs partially offset by the translation
effects of a weaker U.S. dollar. R&D expense as a percent of total revenues was
2.9% in the first quarter of 2003 and 4.2% for the same period in 2002.
Interest expense increased by $207,000 or 120% in the first quarter of
2003 compared to the same period in 2002. The increase was due to the debt
associated with the Penn Crusher acquisition, partially offset by lower interest
costs on other debt as a result of substantial reductions in that debt which
were made in the last nine months of 2002.
Income before income taxes was $1,125,000 in the first quarter of 2003
and $1,005,000 in the same period in 2002. First quarter 2003 income before
income taxes improved versus the same period in 2002, primarily as a result of
the Penn Crusher acquisition.
The effective tax rate for the first quarter of 2003 was 25.8% compared
to 25.3% for the same period in 2002.
Our backlog at constant foreign exchange rates increased by 79.8% and
21.2% at the end of the first quarter of 2003 compared to year end 2002 and
March 30, 2002, respectively, due to the Penn Crusher acquisition, partially
offset by reduced backlog in our other businesses resulting from the very weak
capital equipment spending environment that existed during all of 2002.
-13-
LIQUIDITY AND CAPITAL RESOURCES
To finance the Penn Crusher acquisition described earlier, in January
2003 we borrowed $20,000,000 from two U.S. banks, and we also issued $4,000,000
in unsecured promissory notes to the former Penn Crusher stockholders.
We borrowed $5,000,000 from a U.S. bank through K-Tron's U.S.
manufacturing subsidiary, which loan was combined with an outstanding term loan
from that bank to that subsidiary and resulted in a $7,333,000 term loan.
Monthly principal payments of $83,000 plus interest at a fixed rate of 5.625% on
approximately half the loan and at a variable rate of one-month LIBOR plus 1.85%
on the other half (3.19% at March 29, 2003) began in February 2003, with the
final principal payment of approximately $2,416,000 plus interest being due in
January 2008. This loan is secured by substantially all of the assets of the
U.S. manufacturing subsidiary and is guaranteed by K-Tron International, Inc.
Penn Crusher borrowed $15,000,000 from another U.S. bank consisting of
an aggregate of $13,500,000 term debt ($10,000,000 with a five-year term and
$3,500,000 with a six-year term) and $1,500,000 under a five-year revolving
credit facility. Subject to certain conditions, the revolving credit facility
provides for up to an additional $2,000,000 of availability. Quarterly term debt
principal payments of $400,000 began March 31, 2003 and increase each year by
$62,500 per quarter (or $250,000 per year in the aggregate) through December 31,
2007, with final quarterly payments of $750,000 in 2008. Interest is based on
one- to six-month LIBOR plus 3% to 3.5%, and the 3% to 3.5% can be reduced to 2%
to 2.5% upon meeting certain financial ratios. In January 2003, Penn Crusher
entered into an interest rate swap related to the entire $10,000,000 five-year
term loan where interest will not exceed 6.11% for the full term of the loan and
can be reduced to 5.11% upon meeting certain financial ratios. The interest
rates on the $10,000,000 term loan, $3,500,000 term loan and $1,500,000
revolving credit facility were 6.11%, 4.91% and 4.34%, respectively, as of March
29, 2003. The Penn Crusher debt is guaranteed by Jeffrey and secured by
substantially all of the assets of Penn Crusher and Jeffrey, but it is not
guaranteed by any other K-Tron company.
In addition, K-Tron International, Inc. issued $4,000,000 of unsecured
promissory notes to the former Penn Crusher stockholders as part of the Penn
Crusher purchase price, which notes are payable in three equal, annual
installments on the second, third and fourth anniversaries of the closing date.
Interest at 6% per annum is payable quarterly.
As stated previously, we expect to have sufficient cash flow to cover
all required principal and interest payments on the foregoing debt.
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Our capitalization at the end of the first quarter of 2003 and at the
end of fiscal years 2002 and 2001 is set forth below:
March 29, December 28, December 29,
(Dollars in Thousands) 2003 2002 2001
---- ---- ----
Short-term debt, including current
portion of long-term debt $ 3,610 $ 2,005 $ 2,186
Long-term debt 28,809 6,499 12,499
--------- ------------ ------------
Total debt 32,419 8,504 14,685
Shareholders' equity 29,507 28,419 21,561
--------- ------------ ------------
Total debt and shareholders' equity $ 61,926 $ 36,923 $ 36,246
========= ============ ============
(total capitalization)
Percent total debt to total capitalization 52% 23% 41%
Percent long-term debt to equity 98% 23% 58%
Percent total debt to equity 110% 30% 68%
Total debt increased by $23,917,000 in the first three months of 2003
($24,000,000 related to the Penn Crusher acquisition net of a debt reduction in
the U.S. of $83,000). At March 29, 2003 and subject to certain conditions, we
had $6,000,000 of unused borrowing availability under our U.S. revolving credit
agreements and $6,915,000 of unused borrowing availability under our foreign
loan agreements.
At March 29, 2003, working capital was $18,924,000 compared to
$14,106,000 at December 28, 2002, and the ratio of current assets to current
liabilities at those dates was 1.99 and 1.93, respectively.
In the first three months of 2003 and 2002, we utilized internally
generated funds to meet our working capital needs.
Net cash provided by operating activities was $1,246,000 in the first
three months of 2003 compared to $2,764,000 in the same period of 2002. The
decrease in operating cash flow during the first three months of 2003 compared
to the same period in 2002 was primarily due to a decrease in accounts payable
and accrued expenses and an increase in inventory, partially offset by a
decrease in accounts receivable and higher depreciation and amortization.
Net cash used in investing activities in the first three months of 2003
was primarily for the acquisition of Penn Crusher and capital additions, while
in the first quarter of 2002 net cash used in investing activities was primarily
for capital additions.
-15-
Cash provided by financing activities in the first three months of 2003
was primarily due to the borrowings related to the Penn Crusher acquisition,
while cash used in financing activities in the same period of 2002 was primarily
for debt reduction.
Of the total increase in shareholders' equity of $1,088,000 in the
first three months of 2003, $835,000 was from net income, $333,000 was
attributable to changes in foreign exchange rates, particularly the
strengthening of the Swiss franc and euro versus the U.S. dollar, and $18,000
was from the issuance of common stock, reduced by $98,000 which was an
unrealized loss on a derivative, net of taxes.
CONTRACTUAL OBLIGATIONS
We are obligated to make future payments under various contracts such
as debt agreements and lease agreements, and we are subject to certain other
commitments and contingencies. There have been no material changes to
Contractual Obligations as reflected in the Liquidity and Capital Resources
section of the Management's Discussion and Analysis in the Company's annual
report on Form 10-K for the year ended December 28, 2002 (the "2002 Form 10-K").
Refer to Notes 9 and 16 to the consolidated financial statements in the 2002
Form 10-K for additional information on long-term debt and commitments and
contingencies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of our financial condition and
results of operations is based on the accounting policies used and disclosed in
our 2002 consolidated financial statements and accompanying notes that were
prepared in accordance with accounting principles generally accepted in the
United States and included in the 2002 Form 10-K. The preparation of those
financial statements required management to make estimates and assumptions that
affected the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The significant accounting policies of the Company are described in
Note 2 to the 2002 consolidated financial statements, and the critical
accounting policies and estimates are described in Management's Discussion and
Analysis included in the 2002 Form 10-K. Information concerning our
implementation and impact of new accounting standards issued by the Financial
Accounting Standards Board (FASB) is included in the notes to the 2002
consolidated financial statements. Otherwise, we did not adopt an accounting
policy in the current period that had a material impact on our financial
condition, liquidity or results of operations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a safe harbor for forward-looking statements made by us or on our
behalf. We and our representatives may from time to time make written or oral
statements that are "forward-looking," including statements contained in this
report and other filings with the Securities and Exchange Commission, reports to
our shareholders and news releases. All statements that express
-16-
expectations, estimates, forecasts or projections are forward-looking statements
within the meaning of the Act. In addition, other written or oral statements
which constitute forward-looking statements may be made by us or on our behalf.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," " should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in or suggested by such forward-looking statements.
The forward-looking statements contained in this report include statements
regarding the effect of changes in foreign exchange rates on our business and
our ability to repay debt, including in particular the principal and interest
payments related to the Penn Crusher acquisition. We undertake no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
A wide range of factors could materially affect our future performance
and financial and competitive position, including the following: (i) increasing
price and product/service competition by domestic and foreign competitors,
including new entrants; (ii) the mix of products/services sold by us; (iii)
rapid technological changes and developments and our ability to continue to
introduce competitive new products on a timely and cost-effective basis; (iv)
changes in U.S. and global financial and currency markets, including significant
interest rate and foreign currency exchange rate fluctuations; (v) protection
and validity of patent and other intellectual property rights held by us and our
competitors; (vi) the cyclical nature of our business as a capital goods
supplier; (vii) possible future litigation and governmental proceedings; (viii)
the availability of financing and financial resources in the amounts, at the
times and on the terms required to support our future business, including
capacity expansions and possible acquisitions; (ix) the loss of key customers,
employees or suppliers; (x) the failure to carry out marketing and sales plans;
(xi) the failure to integrate acquired businesses without substantial costs,
delays or other operational or financial problems; (xii) economic, business and
regulatory conditions and changes which may affect the level of new investments
and purchases made by customers, including general economic and business
conditions that are less favorable than expected; (xiii) domestic and
international political and economic conditions; and (xiv) the outcome of any
legal proceeding in which we are involved.
This list of factors that may affect our future performance and
financial and competitive position and also the accuracy of forward-looking
statements is illustrative, but it is by no means exhaustive. Accordingly, all
forward-looking statements should be evaluated with the understanding of their
inherent uncertainty.
-17-
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of March 25, 2003 was carried out by us under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures have been designed and are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. A controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
Subsequent to the date of the most recent evaluation of our internal controls,
there were no significant changes in our internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
1. Current Report on Form 8-K dated January 2, 2003 ("January
2003 Form 8-K") and filed with the Securities and Exchange Commission on January
15, 2003 reporting our acquisition of all of the outstanding capital stock of
Penn Crusher.
2. Current Report on Form 8-K/A dated January 2, 2003 and filed
with the Securities and Exchange Commission on March 17, 2003, amending the
January 2003 Form 8-K to include the audited financial statements of Penn
Crusher and certain unaudited K-Tron pro forma condensed consolidated financial
statements.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
K-TRON INTERNATIONAL, INC.
Date: May 13, 2003 By: /s/ Ronald R. Remick
--------------------
Ronald R. Remick
Senior Vice President & Chief
Financial Officer
(Duly authorized officer and principal
financial officer of the registrant)
By: /s/ Alan R. Sukoneck
--------------------
Alan R. Sukoneck
Vice President, Chief Accounting
& Tax Officer
(Duly authorized officer and principal
accounting officer of the registrant)
-19-
CERTIFICATIONS
I, Edward B. Cloues, II, Chairman and Chief Executive Officer of K-Tron
International, Inc. (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and audit
committee of Registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Edward B. Cloues, II
------------------------
Edward B. Cloues, II
Chairman and Chief Executive Officer
-20-
CERTIFICATIONS, continued
I, Ronald R. Remick, Senior Vice President and Chief Financial Officer of K-Tron
International, Inc. (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and audit
committee of Registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Ronald R. Remick
--------------------
Ronald R. Remick
Senior Vice President and Chief
Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002