SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- -------------------------------------------------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 2004 Commission File Number 333-19257
KINETEK, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
(847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable
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 twelve (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 ninety (90) days.
Yes x No
--- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No x
--- ---
The number of shares outstanding of Registrant's Common Stock as of May 17,
2004: 10,000.
1
KINETEK, INC.
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- -------
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Item 4. Controls and Procedures 11
Part II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security 13
Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-k 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
--------------------------------
PAGE NO.
Condensed Consolidated Balance Sheets at March 31, 2004 4
and December 31, 2003
Condensed Consolidated Statements of Operations for the 5
three months ended March 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the three 6
months ended March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 7-8
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 14,827 $ 7,615
Accounts receivable, net 63,017 59,286
Inventories 55,100 51,141
Prepaid expenses and other current assets 3,941 4,604
Taxes receivable 5,198 5,637
-------- --------
Total Current Assets 142,083 128,283
Property, plant, and equipment, net 30,472 30,811
Goodwill, net 180,894 180,361
Deferred financing costs, net 6,631 7,293
Due from affiliated company 7,588 7,716
Investment in affiliate 12,344 12,344
Other non-current assets, net 909 839
-------- --------
Total Assets $380,921 $367,647
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 29,824 $ 26,705
Accrued interest payable 11,554 4,104
Accrued expenses and other current liabilities 11,258 13,289
Current portion of long term debt 11,169 10,783
-------- --------
Total Current Liabilities 63,805 54,881
Long-term debt 301,162 296,843
Deferred income taxes 21,796 20,550
Other non-current liabilities 5,925 5,744
Shareholders' Deficit:
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit (65,547) (61,343)
Accumulated other comprehensive loss 3,774 966
-------- --------
Total Shareholders' Deficit $(11,767) $(10,371)
-------- --------
Total Liabilities and Shareholders' Deficit $380,921 $367,647
======== ========
See accompanying notes to condensed consolidated financial statements.
4
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
-------------------------------
2004 2003
---- ----
Net Sales $75,717 $71,252
Cost of sales, excluding
depreciation 51,362 46,378
Selling, general and
administrative expenses 15,244 13,474
Depreciation 1,610 1,802
Amortization 36 55
Management fees and other 758 735
------- -------
Operating Income 6,707 8,808
Other (income)/ expense:
Interest expense 8,819 8,803
Interest income (30) (48)
Miscellaneous, net 341 316
------- -------
Loss before income taxes (2,423) (263)
Income tax provision 1,781 1,893
------- -------
Net Loss $(4,204) $(2,156)
======= =======
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $(4,204) $(2,156)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,880 2,542
Deferred income taxes 1,245 151
Changes in operating assets and liabilities net of
effects of acquisitions:
Current assets
(6,588) (9,614)
Current liabilities 8,538 9,872
Non-current assets & liabilities 98 264
Due from (payable to) affiliated company 128 (1,093)
------- -------
Net cash provided by (used in) operating activities 1,097 (34)
Cash flows from investing activities:
Capital expenditures, net (819) (961)
------- -------
Net cash used in investing activities (819) (961)
Cash flows from financing activities:
Net borrowings (repayment) under revolving
credit facility and other long-term debt 4,531 (1,385)
------- -------
Net cash provided by (used) in financing activities 4,531 (1,385)
Effect of exchange rate changes on cash 2,403 4,147
------- -------
Net increase in cash and cash equivalents 7,212 1,767
Cash and cash equivalents at beginning of period 7,615 14,654
------- -------
Cash and cash equivalents at end of period $14,827 $16,421
======= =======
See accompanying notes to condensed consolidated financial statements.
6
KINETEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. Organization
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results of
interim operations and which are of a normal recurring nature, should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 2003, included in the Company's annual report on Form 10-K.
The Company conducts its operations exclusively through its subsidiaries.
Results of operations for the interim periods are not necessarily indicative of
annual results of operations.
2. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of Kinetek,
Inc. and its subsidiaries. Material intercompany transactions and balances are
eliminated in consolidation. Operations of certain subsidiaries outside the
United States are included for periods ending two months prior to the Company's
year-end and interim periods to ensure timely preparation of the condensed
consolidated financial statements.
The Company has recorded an income tax provision on its loss before taxes due
to its foreign and state tax expense, but its domestic losses have not been
benefited for federal tax purposes.
3. Inventories
Inventories are summarized as follows:
March 31, December 31,
2004 2003
------------- -------------
Raw materials $31,003 $27,847
Work in process 16,292 15,542
Finished goods 7,805 7,752
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$55,100 $51,141
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three months ended March 31, 2004 and
2003 is as follows:
Three Months Ended
March 31,
---------------------
2004 2003
---- ----
Net loss $(4,204) $(2,156)
Foreign currency
translation adjustment 2,808 5,316
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Comprehensive income (loss) $(1,396) $ 3,160
======= =======
7
5. Business Segment Information
See Part 1 "Financial Information" - Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the Company's
business segment disclosures. There have been no changes from the Company's
December 31, 2003 consolidated financial statements with respect to segmentation
or the measurement of segment profit.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
Overview
The following discussion and analysis of the Company's results of operations and
of its liquidity and capital resources should be read in conjunction with the
financial statements and the related notes thereto appearing elsewhere in this
Form 10-Q.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The statement regarding the Company in this document that
are not historical in nature, particularly those that utilize terminology such
as "may," "will," "should," "likely," expects," "anticipates," "estimates,"
"believes" or "plans," or comparable terminology, are forward-looking statements
based on current expectations about future events, which the Company has derived
from information currently available. These forward-looking statements involve
known and unknown risks and uncertainties that may cause our results to be
materially different from results implied in such forward-looking statements.
Those risks include, among others, risks associated with the industry in which
the Company operates, the dependence on senior management, maintaining
sufficient working capital financing, competitive pressures, general economic
conditions and a softening of consumer acceptance of the Company's products
leading to a decrease in anticipated revenue and gross profit margins.
Summary financial information included in the financial statements of the
Company is as follows:
Three Months Ended
March 31,
--------------------------------
2004 2003
---- ----
Net sales
Motors $54,048 $51,330
Controls 21,669 19,922
------- -------
75,717 71,252
Operating income
Motors 8,557 9,319
Controls 1,988 2,722
------- -------
10,545 12,041
Management fees and unallocated
corporate overhead 3,838 3,233
------- -------
Total operating income 6,707 8,808
Interest expense 8,819 8,803
Interest income (30) (48)
Miscellaneous, net 341 316
------- -------
Loss before income taxes $(2,423) $ (263)
======= =======
9
Consolidated Results of Operations
Consolidated net sales for the three months ended March 31, 2004 were $75.7
million, an increase of $4.5 million, or 6.3%, from the same period in 2003.
Sales of the Company's Motors segment were $54.0 million, a $2.7 million (5.3%)
increase from the previous year. Sales of the Company's subfractional motor
products were $19.0 million, a decrease of $1.4 million, or 6.7% compared to the
first quarter of 2003. The decline primarily resulted from the loss of
value-added business with a major appliance customer, softness in the market for
motors sold to general vending customers, and the inclusion of significant
one-time sales to certain restaurant product customers during the prior year
period. Sales of fractional and integral motor products were $35.0 million, an
increase of $4.1 million, or 12.8% from the first quarter of 2003. This increase
resulted from general strength and share gains in the Company's material
handling and commercial floor care motor products, an increase in elevator
motors sold in China, and the favorable translation impact of European sales
denominated in Euros. These increases were partially offset by general weakness
in the Company's European markets served by the FIR Group of companies, where
sales declined 9.7% on a local currency basis. First quarter 2004 sales for the
Company's Controls segment were $21.7 million, an increase of $1.7 million, or
8.8%, from the prior year. The Company's elevator controls and automotive
assembly line controls product lines both contributed to the increase in sales
during the first quarter of 2004.
Total operating income for the first quarter of 2004 was $6.7 million, a decline
of $2.1 million, or 23.9 %, from the same quarter of the previous year.
Operating income for the first three months of 2004 in the Motors segment was
$8.6 million, which was $0.8 million, or 8.2% lower than 2003's first quarter
results. Operating income for the Controls segment was $2.0 million, a decrease
of $0.7 million, or 27.0% from the corresponding quarter in the previous year.
Total Company gross margin was $24.4 million in the first three months of 2004,
a decrease of $0.5 million, or 2.1%, from the corresponding quarter in the
previous year. Gross margin as a percentage of sales fell from 34.9 % in the
first quarter of 2003 to 32.2% in 2004. The decline in gross margin was caused
by a number of factors, the most significant of which are: 1) During the first
quarter of 2004, the Company experienced significant inflation on metal (copper,
steel, aluminum, etc.) components used in the assembly of motor products.
Pricing pressures on motors have prevented these cost increases from being
passed along to customers in the form of higher prices, which has compressed
profitability of sales. 2) Several sizable pieces of market share gained in the
material handling and floor care segments, and a new elevator control product
shipped in limited quantities during the quarter, carry lower margins than the
Company's historical product mix. It is expected that margins on these products
will expand over time as the Company moves up the learning curve, gains volume
leverage, and implements planned cost reductions. 3) Two facility moves
completed in the first quarter of 2004 within the subfractional and
fractional/integral products groups led to increased costs related directly to
the moves and to temporarily lower efficiencies for the period.
Selling, general, and administrative expenses increased $1.8 million, or 13.1%,
to $15.2 million for the first quarter of 2004. Most of the increase is due to
increases in commission expenses related to higher sales, the cumulative impact
of employment increases since 2003 at Motion Control Engineering in preparation
for production release of its "I" family of elevator control products during
2004, expenses related to the aforementioned facility moves, and increases in
professional service fees.
10
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy. Of
primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating activities
and the funds available under its revolving credit facility.
Operating activities. Net cash provided by operating activities for the
three-month period ended March 31, 2004 was $1.1 million, compared to zero
provided by operating activities for the three months ended March 31, 2003. The
favorable performance in cash is attributable to improved working capital
management in 2004 compared to the previous year, offset partly by the lower
operating income discussed under "Consolidated Results of Operations".
Investing activities. In the first three months of 2004, the Company used $0.8
million for capital expenditures, compared to $1.0 million used in the same
period of 2003.
Financing activities. The Company is party to a Credit Agreement under which the
Company is able to borrow up to approximately $35.0 million to fund acquisitions
and provide working capital, and for other general corporate purposes.
Borrowings are secured by the stock and substantially all of the assets of the
Company. As of March 31, 2004, the Company has approximately $15.3 million of
available funds under this Credit Agreement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's debt obligations are primarily fixed-rate in nature and, as
such, are not sensitive to changes in interest rates. At March 31, 2004 the
Company had variable rate debt outstanding of $4.3 million. A one-percentage
point increase in interest rates would not have a material effect on the
amount of annual interest paid. The Company does not believe that its market
risk from financial instruments on March 31, 2004 would have a material effect
on future operations or cash flow.
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currency of foreign operations.
The functional currency of operations outside the United States is the
respective local currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
Item 4. CONTROLS AND PROCEDURES
-----------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the
Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, our
chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
11
period covered by this report (the "Evaluation Date") with the Securities and
Exchange Commission. Based on such evaluation, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures were effective as of the Evaluation Date to ensure that information
required to be disclosed in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms. There have been no changes in our internal
controls over financial reporting during the period covered by this report that
were identified in connection with the evaluation referred to above that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) A list of exhibits filed with this report is contained on the
Exhibit Index immediately preceding such exhibits and is
incorporated herein by reference.
(b) None.
13
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.
KINETEK, INC.
By: /s/ Daniel Drury
----------------
Daniel Drury
Chief Financial Officer
May 17, 2004
14
EXHIBIT INDEX
Exhibit
Number Description
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a)
31.2 Certificate of Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a)
..