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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the Quarter Ended March 30, 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 1-9298
RAYTECH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1182033
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 295, Four Corporate Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
203-925-8023
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports 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|
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |X| No |_|
As of April 28, 2003, 41,737,306 shares of common stock were outstanding and the
aggregate market value of these shares (based upon the closing price of Raytech
common stock on the New York Stock Exchange) on such date held by non-affiliates
was approximately $53.4 million.
Page 1 of 22
RAYTECH CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets at March 30, 2003 (Unaudited)
and December 29, 2002 3
Condensed Unaudited Consolidated Statements of
Operations for the thirteen weeks ended
March 30, 2003 and March 31, 2002 4
Condensed Unaudited Consolidated Statements
of Cash Flows for the thirteen weeks
ended March 30, 2003 and March 31, 2002 5
Condensed Unaudited Consolidated Statements of
Changes in Shareholders' Equity for the thirteen
weeks ended March 30, 2003 and March 31, 2002 6
Notes to Condensed Unaudited Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 21
-2-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 30, 2003 December 29,
At (unaudited) 2002
----------- ----
ASSETS
Current assets
Cash and cash equivalents $ 13,813 $ 19,983
Restricted cash 2,028 2,027
Trade accounts receivable, less allowance
of $853 and $824 30,774 26,640
Inventories, net 33,535 34,057
Income taxes receivable 4,793 4,793
Other current assets 5,987 5,078
-------- --------
Total current assets 90,930 92,578
-------- --------
Property, plant and equipment 133,523 131,378
Less accumulated depreciation (29,221) (25,257)
-------- --------
Net property, plant and equipment 104,302 106,121
-------- --------
Intangible assets, net 70,006 70,562
Deferred income taxes 21,906 21,906
Other assets 2,969 3,054
-------- --------
Total assets $290,113 $294,221
======== ========
LIABILITIES
Current liabilities
Notes payable and current portion of long-term debt $ 11,774 $ 15,091
Current portion of pension obligation 8,030 8,030
Accounts payable 16,454 15,089
Accrued liabilities 23,917 26,258
Payable to the PI Trust 4,793 4,793
-------- --------
Total current liabilities 64,968 69,261
-------- --------
Long-term debt 4,564 4,293
Pension obligation 12,140 12,815
Postretirement benefits other than pension 14,004 13,800
Deferred payable to the PI Trust 42,356 42,356
Other long-term liabilities 831 827
-------- --------
Total liabilities 138,863 143,352
-------- --------
Minority interest 9,032 8,759
Commitments and contingencies
SHAREHOLDERS' EQUITY
Capital stock
Cumulative preferred stock, no par value,
5,000,000 shares authorized, none issued and
outstanding -- --
Common stock, par value $1.00, 50,000,000 shares
authorized, 41,701,554 and 41,701,554 issued and
outstanding 41,701 41,701
Additional paid in capital 117,458 117,458
Accumulated deficit (8,475) (8,402)
Accumulated other comprehensive loss (8,466) (8,647)
-------- --------
Total shareholders' equity 142,218 142,110
-------- --------
Total liabilities and shareholders' equity $290,113 $294,221
======== ========
The accompanying notes are an integral part of these statements.
-3-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
For the 13 Weeks Ended March 30, 2003 March 31, 2002
-------------- --------------
Net sales $ 55,735 $ 52,709
Cost of sales (46,850) (42,184)
-------- --------
Gross profit 8,885 10,525
Selling, general and
administrative expenses (8,279) (7,594)
-------- --------
Operating profit 606 2,931
Interest expense (237) (277)
Other income, net 15 179
-------- --------
Income before provision for income
taxes and minority interest 384 2,833
Provision for income taxes (184) (1,091)
-------- --------
Income before minority interest 200 1,742
Minority interest (273) (412)
-------- --------
Net (loss) income $ (73) $ 1,330
======= =======
Basic (loss) earnings per share $ (.00) $ .03
======= =======
Diluted (loss) earnings per share $ (.00) $ .03
======= =======
The accompanying notes are an integral part of these statements.
-4-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the 13 Weeks Ended March 30, 2003 March 31, 2002
-------------- --------------
Cash flows from operating activities:
Net (loss) income $ (73) $ 1,330
Depreciation and amortization 4,607 3,672
Other operating activities (5,669) (1,521)
--------- -------
Net cash (used in) provided by
operating activities (1,135) 3,481
--------- -------
Cash flow from investing activities:
Capital expenditures (1,800) (2,755)
Proceeds on sales of property,
plant and equipment -- 62
--------- -------
Net cash used in investing activities (1,800) (2,693)
Cash flow from financing activities:
Net (payments) borrowings on short-term notes (3,393) 529
Principal payments on long-term debt (17) (262)
Proceeds from long-term borrowings 131 54
--------- -------
Net cash (used in) provided by
financing activities (3,279) 321
Effect of exchange rate changes on cash 44 (34)
Net change in cash and cash equivalents (6,170) 1,075
Cash and cash equivalents at
beginning of period 19,983 14,463
--------- -------
Cash and cash equivalents at end of period $ 13,813 $15,538
========= =======
The accompanying notes are an integral part of these statements.
-5-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Accumulated
Additional Other
Common Paid in Accumulated Comprehensive
Stock Capital Deficit Loss Total
----- ------- ------- ---- -----
Balance,
December 30, 2001 $41,528 $116,843 $ (5,577) $(8,711) $ 144,083
Comprehensive income:
Net income -- -- 1,330 -- 1,330
Changes during
the period -- -- -- (66) (66)
------- -------- -------- ------- ---------
Total comprehensive
income -- -- 1,330 (66) 1,264
------- -------- -------- ------- ---------
Balance,
March 31, 2002 $41,528 $116,843 $ (4,247) $(8,777) $ 145,347
======= ======== ======== ======= =========
Balance,
December 29, 2002 $41,701 $117,458 $ (8,402) $(8,647) $ 142,110
Comprehensive income:
Net loss -- -- (73) -- (73)
Changes during
the period -- -- -- 181 181
------- -------- -------- ------- ---------
Total comprehensive
income -- -- (73) 181 108
------- -------- -------- ------- ---------
Balance,
March 30, 2003 $41,701 $117,458 $ (8,475) $(8,466) $ 142,218
======= ======== ======== ======= =========
The accompanying notes are an integral part of these statements.
-6-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted,
except per share data)
(Unaudited)
Note A - Summary of Significant Accounting Policies
For a summary of all other significant accounting policies, refer to Note
A to the consolidated financial statements included with the 2002 Form 10-K.
1. Presentation of Condensed Unaudited Consolidated Financial Statements
These condensed unaudited consolidated financial statements have been
prepared pursuant to the requirements of Article 10 of Regulation S-X, and
in the opinion of management, contain all adjustments necessary to fairly
present the consolidated financial position of Raytech as of March 30,
2003 and the consolidated results of operations and cash flows for all
interim periods presented. All adjustments are of a normal recurring
nature. The year-end condensed consolidated balance sheet data was derived
from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States
of America. The financial statements contained herein should be read in
conjunction with the Company's financial statements and related notes
filed on Form 10-K for the year ended December 29, 2002. Interim results
are not necessarily indicative of the results for the full year.
2. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages a fair value based method of
accounting for employee stock options and similar equity instruments,
which generally would result in the recording of additional compensation
expense in the Company's financial statements. The Statement also allows
the Company to continue to account for stock-based employee compensation
using the intrinsic value for equity instruments using APB Opinion No. 25.
The Company has adopted the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." Accordingly, no compensation cost has been
recognized for the stock option plans in the accompanying financial
statements.
SFAS No. 123, as amended by SFAS No. 148, requires the Company to disclose
pro forma net income and pro forma earnings per share amounts as if
compensation expense was recognized for options granted after 1994. Pro
forma net income and the related basic and diluted earnings per share
amounts would be as follows:
-7-
Note A, continued
For the 13 Weeks Ended
March 30, 2003 March 31, 2002
-------------- --------------
(unaudited)
Net (loss) income:
As reported $ (73) $ 1,330
Less: Total stock-based employee
compensation expense determined
under fair value based method (413) --
------ -------
Pro forma net (loss) income $ (486) $ 1,330
====== =======
Basic (loss) earnings per share:
As reported $ (.00) $ .03
Pro forma $ (.01) $ .03
Diluted (loss) earnings per share:
As reported $ (.00) $ .03
Pro forma $ (.01) $ .03
During the thirteen weeks ended March 30, 2003, the Company granted options for
1,601,000 shares of common stock with an exercise price of $5.70 per share. The
fair value of these options was estimated at $3.22 per common share on the date
of grant, using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 56.7%, dividend yield of 0.00%, risk free
interest rate of 3.60% and an expected life of the options of six years.
There was no pro forma impact on net income for the thirteen weeks ended March
31, 2002, as all options outstanding during the period were fully vested in
1999. The fair value of these options, which were granted during 1998, was
estimated at $2.01 per common share on the date of grant, using the Black
Scholes option pricing model with the following assumptions: expected volatility
of 54%, dividend yield of 0.00%, risk free interest rate of 5.42% and an
expected life of the options of four years.
Note B - Inventories
Inventories, net, consist of the following:
March 30, 2003 December 29, 2002
(Unaudited)
-----------
Raw material $ 10,868 $ 11,049
Work in process 8,494 8,349
Finished goods 14,173 14,659
-------- --------
$ 33,535 $ 34,057
======== ========
-8-
Note C - Earnings Per Share
For the 13 Weeks Ended
March 30, 2003 March 31, 2002
-------------- --------------
(Unaudited)
Basic EPS Computation
Numerator:
Net (loss) income $ (73) $ 1,330
Denominator:
Weighted average shares 41,701,554 41,528,520
Basic (loss) earnings per share $ (.00) $ .03
=========== ===========
Diluted EPS Computation
Numerator:
Net (loss) income $ (73) $ 1,330
Denominator:
Weighted average shares 41,701,554 41,528,520
Dilutive potential
common shares -- 37,304
----------- -----------
Adjusted weighted average
shares and equivalents 41,701,554 41,565,824
Diluted (loss) earnings per share $ (.00) $ .03
=========== ===========
Options to purchase 326,411 shares of common stock at $4.25 per share and
options to purchase 1,601,000 shares of common stock at $5.70 per share were not
included in the computation of diluted earnings per share for the thirteen weeks
ended March 30, 2003 because of their anti-dilutive effect due to the Company
incurring a net loss for the period.
Options to purchase 380,453 shares of common stock at $4.25 per share were
outstanding during the thirteen weeks ended March 31, 2002 but were not included
in the computation of diluted earnings per share because the option's exercise
price was greater than average market price of the common shares during the
period.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action.
-9-
Note D - Segment Reporting
The Company's operations are categorized into three business segments
based on management structure, product type and distribution channel, as
described below.
The Wet Friction segment produces specialty engineered products for heat
resistant, inertia control, energy absorption and transmission
applications used in an oil immersed environment. The Company markets its
products to automobile and heavy duty original equipment manufacturers
("OEM"), as well as to farm machinery, mining, truck and bus
manufacturers.
The Dry Friction segment produces engineered friction products, which are
not used in an oil immersed environment, and are primarily used in
original equipment automobile and truck manual transmissions. The clutch
facings produced by this segment are marketed to companies who assemble
the manual transmission systems used in automobiles and trucks.
The Aftermarket segment produces specialty engineered products used for
wet friction applications, primarily for automobile and light truck
transmissions. In addition to these products, this segment markets
transmission filters and other transmission related components. The focus
of this segment is marketing to warehouse distributors and certain retail
operations in the automotive aftermarket.
Information relating to operations by industry segment follows:
OPERATING SEGMENTS
March 30, 2003 March 31, 2002
-------------- --------------
(Unaudited)
NET SALES
Wet Friction $ 34,672 $ 34,348
Aftermarket 11,489 12,484
Dry Friction 11,709 8,153
Intersegment elimination (1) (2,135) (2,276)
-------- --------
Net sales to external customers $ 55,735 $ 52,709
======== ========
OPERATING PROFIT (LOSS)(2)
Wet Friction $ (1,194) $ 1,513
Aftermarket 2,230 2,558
Dry Friction 1,365 755
Corporate (2,017) (1,993)
-------- --------
Consolidated $ 384 $ 2,833
======== ========
(1) The Company records intersegment sales at an amount negotiated between the
segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable
segments on an operating profit basis, consisting of income before income
taxes and minority interest.
-10-
Note E - Income Taxes
The effective tax rate for the thirteen-week period ended March 30, 2003
is 47.9% compared to an effective rate of 38.5% for the same period in the prior
year. The rate for the current period reflects a statutory federal rate adjusted
for state and foreign taxes and contributions made to the Raymark pension plan.
Payments to the Raymark pension plans create a permanent difference due to this
tax benefit inuring to the Raytech Personal Injury Trust in accordance with the
Tax Benefits Assignment and Assumption Agreement. In addition, the Company did
not recognize any tax benefits associated with the operating losses incurred by
the Company's U.K. operations due to doubts about their future recoverability.
The rate differs from the 2002 rate by 9.4 percentage points caused primarily by
contributions made to the Raymark pension plan.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At March 30, 2003, the Company
has tax loss carryforwards of $74.8 million and tax credit carryforwards of $1.2
million. The net operating loss carryforwards are allocated between Raytech
Corporation and the PI Trust in the amounts of $2.8 million and $72.0 million,
respectively. Additionally, future payments to the PI Trust and others will
create additional tax deductions, which will inure to the benefit of the PI
Trust in accordance with the Agreement. These include deductions for payments to
the PI Trust of tax benefits associated with the utilization of the operating
losses allocated to the PI Trust, and contributions made to the Raymark pension
plans. If Raytech Corporation generates additional losses in future periods,
exclusive of losses attributable to the payments discussed above, those losses
will be retained by the Company. The method of allocation in utilizing current
and future operating losses, if any, between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries
expected to be received in future periods are shown as deferred tax assets and a
deferred payable to the PI Trust which amounted to $42.4 million at March 30,
2003.
At March 30, 2003, the Company has recorded a tax receivable in the amount
of $4.8 million, net of Federal income tax, due from state governments for
returns filed in 2002. The Company received $2.5 million, net of Federal tax, in
April 2003 as a partial recovery of these state taxes. In accordance with the
Agreement, this amount inures to the benefit of the PI Trust.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company owns 57% of the stock of Allomatic Products Company ("APC").
The Company has not recorded a deferred tax liability for the undistributed
earnings of APC since management expects that those earnings will be distributed
to the Company in a tax-free transaction. However, the deferred tax liability on
the undistributed earnings of APC would be approximately $1.3 million at March
30, 2003, if all of APC's earnings were to be distributed through dividends.
-11-
Note F - Goodwill and Other Intangible Assets
March 30, 2003 December 29, 2002
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(Unaudited)
Finite life intangible
assets:
Unpatented technology $ 16,262 $3,881 $ 16,262 $ 3,396
Distribution base 5,716 571 5,716 500
-------- ------ -------- --------
Sub-total $ 21,978 $4,452 $ 21,978 $ 3,896
-------- ------ -------- --------
Indefinite life intangible
assets:
Trademarks 17,713 17,713
-------- --------
Goodwill 34,767 34,767
-------- --------
Intangible assets, net $ 70,006 $ 70,562
======== ========
The weighted-average amortization periods for the unpatented technology and the
distribution base are 8.6 and 20.0 years, respectively. Amortization expense for
the thirteen weeks ended March 30, 2003 amounted to $556.
Estimated annual amortization expense is as follows:
For the year ending:
2003 $ 2,226
2004 2,226
2005 2,226
2006 2,226
2007 1,926
Trademarks and goodwill will not be amortized but will be reviewed for
impairment annually. The Company's three operating segments have been defined as
reporting units for purposes of testing goodwill for impairment. The amount of
goodwill has been assigned to each of the Company's segments. There were no
changes in the carrying amount of trademarks or goodwill during the thirteen
weeks ended March 30, 2003.
Note G - Litigation
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, and management does not expect these matters will
have a material adverse effect on the Company. In addition, the Company is
involved in the following litigation.
In April 1996, the Indiana Department of Environmental Management ("IDEM")
advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary of the
Company, that it may have contributed to the release of lead and PCB's
-12-
Note G, continued
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. However, in June 2001, Reliance Insurance Company was placed in
rehabilitation in Pennsylvania. The effect upon RPC's claim is not known at this
time. Three additional insurers have been added to the Reliance case as ordered
by the District Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation and is in compliance with the cleanup Order. The Company has
estimated that the cost to comply with the Order will be approximately $14.3
million of which $10.5 million has been spent through March 30, 2003. The
remaining balance of $3.8 million is included in accrued liabilities. It is at
least reasonably possible that the assessment of estimated costs to comply with
the Order may be modified as the project progresses and that there may be
additional assessments from the EPA. On May 6, 2003, EPA indicated that RPC is
potentially liable for PCB contamination downstream of the ditch area that is
the subject of the Order. EPA has not issued an order to RPC regarding this
downstream area.
Prior to IDEM's relinquishment of control of the cleanup to the EPA, IDEM
and RPC had reached an Agreed Order providing for a risk-based remediation of
the contamination different from the EPA's Order. IDEM withdrew from the Agreed
Order, which was ruled to be a breach of contract by an Indiana State Superior
Court. In July 2002, RPC filed an action against IDEM for damages based on the
difference between the costs of cleanup under the EPA Order and the IDEM Agreed
Order. The outcome of this litigation is not known.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action.
On January 8, 2002, the Michigan Department of Environmental Quality
("MDEQ") sent the Company a letter alleging responsibility for trichloroethylene
("TCE") contamination at a Ferndale, Michigan, industrial site formerly occupied
by Advanced Friction Materials Company ("AFM") from 1974 to 1985. AFM was
acquired by the Company in 1998. The Company is cooperating with the MDEQ in
evaluating the subsurface of the site to obtain data concerning the alleged
contamination. The Company's liability at this site is indeterminable at this
time.
-13-
Note H - Restricted Cash
Restricted cash relates to the following:
December 29,
March 30, 2003 2002
-------------- ------------
(Unaudited)
Letters of credit $1,618 $1,617
Other 410 410
------ ------
$2,028 $2,027
====== ======
The letters of credit collateralize certain obligations relating primarily
to workers' compensation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In preparing the discussion and analysis required by the Federal
Securities Laws, it is presumed that users of the interim financial information
have read or have access to the discussion and analysis for the preceding fiscal
year.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: Statements under the "Liquidity, Capital Resources and Future
Liquidity" heading and other statements herein that relate to future operating
periods are subject to important risks and uncertainties that could cause actual
results to differ materially. Forward-looking statements relating to the
Company's businesses involve certain factors that are subject to change,
including the many interrelated factors that affect consumer confidence,
including worldwide demand for automotive and heavy duty products, general
economic conditions, the environment, actions of competitors in the various
industries in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor relations; interest and
currency exchange rates; technological difficulties; accounting standards, and
other risks and uncertainties. Further information, including factors that
potentially could materially affect the Company's financial results, is included
in the Company's filings with the Securities and Exchange Commission.
Significant Accounting Policies
Preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Management believes the most complex and
sensitive judgments, because of their significance to the consolidated financial
statements, result primarily from the need to make estimates about the effects
of matters that are inherently uncertain. Management's Discussion and Analysis
and Note 1 to the Consolidated Financial Statements in the Company's Form 10-K
for fiscal 2002 describe the significant accounting estimates and policies used
by management in the preparation of the consolidated financial statements.
Actual results in these areas could differ from management's estimates. There
have been no changes in the Company's critical accounting estimates during the
first quarter 2003.
-14-
Results of Operations and Liquidity and Capital Resources
Raytech Corporation recorded a net loss of $0.1 million, or nil per basic
share, for the thirteen-week period ended March 30, 2003 compared to net income
of $1.3 million, or $.03 per basic share for the same period in the prior year.
The reduction in earnings of $1.4 million is due to an operating loss recorded
in the Wet Friction segment and lower operating profit generated by the
Aftermarket segment. The Dry Friction segment reported improved net sales and
operating profit compared to the same period in the prior year. The details of
which are presented below.
Net Sales
Raytech recorded net sales of $55.7 million for the thirteen-week period
ended March 30, 2003 compared to $52.7 million in the same period in the prior
year. The analysis of the change in sales period-over-period is presented below
by business segment.
The Wet Friction segment recorded sales of $34.7 million for the
thirteen-week period ended March 30, 2003 compared to $34.3 million for the same
period in the prior year, an increase of $.4 million, or 1.0 percent. The sales
for the segment reflect increased sales to the automotive OEM component of $1.8
million due primarily to increased sales on certain new business, which began in
the second quarter of 2002, offset by lower sales to the heavy duty component of
the Wet Friction segment of $1.6 million. Sales to various other customers
increased $.2 million period-over-period.
The Aftermarket segment recorded sales of $11.5 million for the quarter
ended March 30, 2003 compared to $12.5 million for the quarter ended March 31,
2002, a reduction of $1.0 million or 8.0 percent. The lower sales reflect a
slower aftermarket in general as Raytech's customer base for aftermarket
products, predominantly warehouse distributors, feel the impact of the slower
economy.
The Dry Friction segment recorded sales of $11.7 million for the
thirteen-week period ended March 30, 2003 compared to $8.2 million for the same
period in the prior year, an increase of $3.5 million, or 42.7 percent. The
increase represents improved sales through Raytech's operations in China of $.7
million, as the Company's business in China continues to expand, and improved
sales through the German operation of $2.9 million. The increase in Germany is
due to a volume increase of $1.2 million and a translation gain of $1.7 million
for the period. The translation gain reflects the increase period-over-period in
the exchange rate of the Euro to the U.S. dollar.
Gross Profit
Raytech recorded gross profit for the thirteen-week period ended March 30,
2003 of $8.9 million compared to $10.5 million for the thirteen- week period
ended March 31, 2002, a reduction in gross profit of $1.6 million. Gross profit
as a percentage of sales for the first quarter of 2003 was 15.9 percent compared
to 20.0 percent for the same period in the prior year, a decrease of 4.1
percentage points. The reduced gross profit is due to higher labor and material
costs in the Wet Friction segment due to the production of certain new business
in the automotive component of the segment. In addition, the reduced sales to
the heavy duty component of the Wet Friction segment has negatively impacted
overhead absorption. Management has taken action on both of these issues. The
gross profit in the Dry Friction segment increased period-over-period due to the
increased sales volume and related efficiencies.
-15-
Selling, General and Administrative
The selling, general and administrative ("SG&A") expenses for the
thirteen-week period ended March 30, 2003 were $8.3 million compared to $7.6
million for the same period in the prior year, an increase of $.7 million
period-over-period. The increased SG&A reflects increased research and
development costs, new hire and severance costs associated with certain
management changes and increased personnel costs period-over-period.
Interest Expense
Interest expense for the thirteen-week period ended March 30, 2003 of $.2
million is substantially the same as the prior period amount of $.3 million.
Operating Profits
The following discussion of operating results by industry segment relates
to information contained in Note D - Segment Reporting to the Unaudited
Condensed Consolidated Financial Statements. Operating profit is income before
income taxes and minority interest.
Raytech Corporation recorded operating profit of $.4 million for the
thirteen-week period ended March 30, 2003 compared to $2.8 million for the same
period in the prior year, a reduction of $2.4 million. The operating profit was
negatively affected by the reduced gross profit for the first quarter of 2003
compared to the first quarter of 2002. The details of the changes in operating
profit are detailed below.
The Wet Friction segment recorded an operating loss for the period of $1.2
million compared to an operating profit of $1.5 million for the same period in
the prior year. The reduced operating income is due substantially to the reduced
gross profit in this segment of $2.3 million, the details of which are outlined
in the gross profit discussion above. The remaining $.4 million of reduced
operating profit reflects higher SG&A expenses for the period.
The Aftermarket segment recorded operating profit of $2.2 million for the
thirteen-week period ended March 30, 2003 compared to $2.6 million for the same
period in the prior year. The reduced operating profit reflects lower gross
profit period-over-period of $.4 million due substantially to a change in
product mix for the segment.
The Dry Friction segment recorded operating profit of $1.4 million for the
thirteen-week period ended March 30, 2003 compared to $.8 million for the same
period in the prior year, an increase of $.6 million. The increased operating
profit is a result of the increased sales period-over-period of $3.6 million.
Income Taxes
See Note E - Income Taxes to the condensed unaudited consolidated
financial statements included in Item I of this Part I.
Liquidity, Capital Resources and Future Liquidity
The Company's cash and cash equivalents at March 30, 2003 totaled $13.8
million compared to $20.0 million at December 29, 2002, a decrease of $6.2
million. Capital expenditures for the three-month period totaled $ 1.8 million
which is consistent with planned expenditures and a reduction of $1.0
-16-
million, compared with the capital spending for the same period in the prior
year. Net cash used in operating activities was $1.1 million for the three-
month period ended March 30, 2003, compared to cash provided by operating
activities of $3.5 million in the prior year period. Cash outflows for working
capital were $5.7 million during the current year period, which was primarily
comprised of the following: a $4.0 million increase in trade accounts
receivable and a $3.2 million cash payment for environmental remediation,
partially offset by a $1.3 million increase in accounts payable. These were the
most significant aspects of the change in other operating activities recorded on
the statement of cash flows.
The debt and available lines of credit at March 30, 2003 and December 29,
2002 consist of the following:
(in thousands)
March 30, 2003 (unaudited) December 29, 2002
------------------------------ -----------------------------
Current Non-Current Total Current Non-Current Total
------- ----------- ----- ------- ----------- -----
Domestic bank debt $ 8,244 $ -- $ 8,244 $ 11,306 $ -- $ 11,306
Foreign bank debt 3,363 4,377 7,740 3,609 4,095 7,704
-------- -------- -------- -------- -------- --------
Total bank debt 11,607 4,377 15,984 14,915 4,095 19,010
Leases 167 187 354 176 198 374
-------- -------- -------- -------- -------- --------
Total borrowings $ 11,774 $ 4,564 $ 16,338 $ 15,091 $ 4,293 $ 19,384
======== ======== ======== ======== ======== ========
Available lines of credit:
2003 2002
---- ----
Domestic $ 8,219 $ 5,006
Foreign 4,151 3,829
------- -------
Total $12,370 $ 8,835
======= =======
Refer to the Management's Discussion and Analysis section and to Note M to
the consolidated financial statements, both included within the Company's 2002
Form 10-K, for information regarding the Company's obligations and commitments
by year. These obligations and commitments consist of long-term debt, capital
leases and rental agreements.
The current domestic loan agreement has a covenant requiring the borrowing
companies to maintain a rolling twelve-month earnings before interest, taxes,
depreciation and amortization (EBITDA) of $10.5 million for the quarter ended
March 30, 2003. The Company was in compliance with this covenant at March 30,
2003.
The domestic borrowing facility matures in September 2003. The Company is
reviewing borrowing alternatives and intends to enter into a new lending
arrangement by September 2003.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency ("EPA") at its manufacturing facility in
Crawfordsville, Indiana.
See Note G - Litigation. The Company spent $3.2 million during the
thirteen-week period ended March 30, 2003 and has a remaining accrual of $3.8
million for completion of the project, which is included in other accrued
liabilities. The remaining accrual is expected to be sufficient for compliance
with the order.
The Company assumed the liability for the Raymark pension plans as part of
the reorganization. Funding for the plans in 2003 is expected to be
approximately $7.6 million of which $1.2 million was funded in the first quarter
of 2003.
-17-
Certain tax issues are discussed in Note E - Income Taxes, which provide
details concerning the status of the current Internal Revenue Service audit and
the use of certain future tax benefits.
Management believes that existing cash balances, the Company's ability to
replace the current lending facility and cash flow from operations during 2003
will be sufficient to meet all of the Company's obligations arising in the
normal course of business, including anticipated capital investments.
Financial Risks
The Company maintains lines of credit with United States and foreign
banks, as well as other creditors. The Company is naturally exposed to various
interest rate risk and foreign currency risk in its normal course of business.
The Company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 50.2 days. This allows for
minimum borrowings in supporting inventory and trade receivables. Management
does not anticipate a significant change in fiscal policy in any of its
borrowing markets in 2003 given current economic conditions. Further, the
Company can reduce the short-term impact of interest rate fluctuation through
deferral of capital investment should the need arise.
The local currencies of the Company's foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at the balance sheet
date for assets and liabilities, historical exchange rates for elements of
stockholder's equity and an average exchange rate in effect during the period
for revenues and expenses. Where possible, the Company attempts to mitigate
foreign currency translation effects by borrowing in local currencies to fund
operations. The Company does not believe that the fluctuation in foreign
currency will have a material adverse effect on the Company's overall financial
condition. Additionally, the Company does not enter into agreements to manage
any currency transaction risks due to the immaterial amount of transactions of
this type.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
-18-
Item 4. Controls and Procedures
(a) Based on evaluation of the effectiveness of the design and operation
of the Company disclosure controls and procedures, which evaluation
was made under the supervision and with the participation of
management, including the Company's principal executive officer and
principal financial officer within the 90-day period prior to the
filing of this Quarterly Report on Form 10-Q, the principal
executive officer and principal financial officer have each
concluded that such disclosure controls and procedures are effective
in ensuring that information required to be disclosed by the Company
in reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) No significant changes were made to the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note G - Litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on 8-K
None
-19-
SIGNATURE
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.
RAYTECH CORPORATION
By: /s/JOHN B. DEVLIN
------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: May 14, 2003
-20-
CERTIFICATION
I, John B. Devlin, Chief Financial Officer of Raytech Corporation (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Raytech Corporation;
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 the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(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 14, 2003
/s/ JOHN B. DEVLIN
------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
-21-
CERTIFICATION
I, Albert A. Canosa, President and Chief Executive Officer, of Raytech
Corporation (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Raytech Corporation;
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 the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(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 14, 2003
/s/ ALBERT A. CANOSA
--------------------
Albert A. Canosa
President and
Chief Executive Officer
-22-
CERTIFICATION
I, John B. Devlin, Chief Financial Officer of Raytech Corporation (the
"Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby
certify as follows:
1. The quarterly report on Form 10-Q of the Company for the period
ended March 30, 2003 fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents, in
accordance with United States generally accepted accounting
principles, in all material respects, the financial condition and
results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 14th day of
May, 2003.
/s/ JOHN B. DEVLIN
------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
CERTIFICATION
I, Albert A. Canosa, Chief Executive Officer of Raytech Corporation (the
"Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby
certify as follows:
1. The quarterly report on Form 10-Q of the Company for the period
ended March 30, 2003 fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents, in
accordance with United States generally accepted accounting
principles, in all material respects, the financial condition and
results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 14th day of
May, 2003.
/s/ ALBERT A. CANOSA
--------------------
Albert A. Canosa
President and
Chief Executive Officer