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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] 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 333-45823
STANADYNE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2940378
- ---------------------------------------------------- ----------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer I.D.)
organization)
92 Deerfield Road, Windsor, Connecticut 06095-4209
- ---------------------------------------------------- ----------------------
(Address of principal executive offices) (zip code)
(860) 525-0821
- ----------------------------------------------------
(Registrant's telephone number, including area code)
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 Exchange Act).
Yes [ ] No [X]
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of October 31, 2003 was 1,000.
STANADYNE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002............................. 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2003 and 2002 (unaudited).......... 4
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2003 and 2002 (unaudited).......... 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002 (unaudited).......... 6
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................... 7-21
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 22-29
Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 30
Item 4 Controls and Procedures....................................... 31
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K.............................. 32
Signature.............................................................. 33
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STANADYNE CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
September 30, DECEMBER 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 8,924 $ 4,683
Accounts receivable, net of allowance for uncollectible accounts of
$665 at September 30, 2003 and $522 at December 31, 2002 45,724 33,045
Inventories, net 31,493 33,395
Prepaid expenses and other current assets 2,424 1,299
Deferred income taxes 5,588 5,919
--------- ---------
Total current assets 94,153 78,341
Property, plant and equipment, net 103,546 108,326
Goodwill 69,456 68,090
Intangible and other assets, net 7,556 9,485
Due from Stanadyne Automotive Holding Corp. 4,269 4,216
--------- ---------
Total assets $ 278,980 $ 268,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,594 $ 19,864
Accrued liabilities 34,961 26,532
Current maturities of long-term debt 4,481 9,456
Current installments of capital lease obligations 134 117
--------- ---------
Total current liabilities 60,170 55,969
Long-term debt, excluding current maturities 89,368 92,999
Deferred income taxes 835 666
Capital lease obligations, excluding current installments 255 324
Other noncurrent liabilities 51,707 50,949
--------- ---------
Total liabilities 202,335 200,907
--------- ---------
Minority interest in consolidated subsidiary 246 232
Commitments and contingencies -- --
Stockholders' equity:
Common stock -- --
Additional paid-in capital 59,858 59,858
Other accumulated comprehensive loss (1,954) (4,174)
Retained earnings 18,495 11,635
--------- ---------
Total stockholders' equity 76,399 67,319
--------- ---------
Total liabilities and stockholders' equity $ 278,980 $ 268,458
========= =========
See notes to condensed consolidated financial statements.
- 3 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Months Three Months
Ended Ended
September 30, September 30,
2003 2002
---- ----
Net sales $70,007 $62,877
Cost of goods sold 58,734 53,775
------- -------
Gross profit 11,273 9,102
Selling, general and administrative expenses 7,208 7,819
Amortization of intangibles 618 867
Management fees 275 275
------- -------
Operating income 3,172 141
Other income (expenses):
Interest, net (2,044) (2,261)
------- -------
Income (loss) before income taxes (benefit) and minority
interest 1,128 (2,120)
Income taxes (benefit) 630 (1,397)
------- -------
Income (loss) before minority interest 498 (723)
Minority interest in loss of consolidated subsidiary 78 49
------- -------
Net income (loss) $ 576 $ (674)
======= =======
See notes to condensed consolidated financial statements.
- 4 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
---- ----
Net sales $ 214,341 $ 200,650
Cost of goods sold 173,680 163,568
--------- ---------
Gross profit 40,661 37,082
Selling, general and administrative expenses 21,513 23,521
Amortization of intangibles 1,859 2,603
Management fees 825 825
--------- ---------
Operating income 16,464 10,133
Other income (expenses):
Gain from extinguishment of debt 813 -
Interest, net (6,224) (7,065)
--------- ---------
Income before income taxes and minority interest 11,053 3,068
Income taxes 4,430 196
--------- ---------
Income before minority interest 6,623 2,872
Minority interest in loss of consolidated subsidiary 237 169
--------- ---------
Net income $ 6,860 $ 3,041
========= =========
See notes to condensed consolidated financial statements.
- 5 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 6,860 $ 3,041
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,820 15,532
Deferred income taxes (benefit) 667 (2,353)
Loss applicable to minority interest (237) (169)
Loss (gain) on disposal of property, plant and equipment 28 (1)
Changes in operating assets and liabilities (1,853) (102)
--------- --------
Net cash provided by operating activities 21,285 15,948
--------- --------
Cash flows from investing activities:
Capital expenditures (7,585) (8,305)
Proceeds from disposal of property, plant and equipment 2 1
--------- --------
Net cash used in investing activities (7,583) (8,304)
--------- --------
Cash flows from financing activities:
Proceeds on foreign term loan 1,451 -
Net payments on revolving credit facilities - (4,950)
Net proceeds on foreign overdraft facilities 527 1,171
Principal payments on long-term debt (10,833) (4,205)
Payments of capital lease obligations (96) (68)
Proceeds from investment by minority interest 251 431
--------- --------
Net cash used in financing activities (8,700) (7,621)
--------- --------
Cash and cash equivalents:
Net increase in cash and cash equivalents 5,002 23
Effect of exchange rate changes on cash (761) 803
Cash and cash equivalents at beginning of period 4,683 120
--------- --------
Cash and cash equivalents at end of period $ 8,924 $ 946
========= ========
See notes to condensed consolidated financial statements.
- 6 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(1) SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Stanadyne Corporation (the "Company"), formerly known
as Stanadyne Automotive Corp., is a wholly-owned subsidiary of Stanadyne
Automotive Holding Corp. ("Holdings"). A majority of the outstanding equity of
Holdings is owned by American Industrial Partners Capital Fund II, L.P. ("AIP").
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and all of the Company's wholly-owned subsidiaries:
Precision Engine Products Corp. ("PEPC"), Stanadyne, SpA ("SpA"), Precision
Engine Products LTDA ("PEPL") and Stanadyne Automotive Foreign Sales Corp.
("FSC") which was dissolved December 30, 2002. A joint venture, Stanadyne
Amalgamations Private Limited ("SAPL"), is fully consolidated based on the
Company's 51% controlling share, while the remaining 49% is recorded as a
minority interest. Intercompany balances have been eliminated in consolidation.
Basis of Presentation. The balance sheet as of December 31, 2002 is condensed
financial information derived from the audited balance sheet. The interim
financial statements are unaudited. These financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation for the periods presented. Certain amounts have been reclassified
in the 2002 financial statements to conform to the 2003 presentation. The
Company's quarterly results are subject to fluctuation; consequently the results
of operations and cash flows for any quarter are not necessarily indicative of
the results and cash flows for any future period.
Stock Options. The Company follows the intrinsic method of accounting for its
stock-based compensation under the guidelines set forth in Accounting Principles
Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees."
Intrinsic value is the excess of the market value of the common stock over the
exercise price at the date of grant. Because stock options are granted with
fixed terms and with an exercise price equal to the market price of the common
stock at the date of grant, there is no measured compensation cost of stock
options.
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STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
Had compensation costs for options been determined based on the fair value of
options outstanding for the three-month periods ended September 30, 2003 and
2002 and for the nine-month periods ended September 30, 2003 and 2002, pro forma
net income (loss) would be as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported $ 576 $ (674) $ 6,860 $ 3,041
Stock based compensation using
Black-Scholes option valuation
model, net of related tax
effects 43 41 126 124
--------- --------- --------- ---------
Pro forma net income (loss) $ 533 $ (715) 6,734 2,917
========= ========= ========= =========
The Company has adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB
Statement No. 123. The Statement requires prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
Adoption of FASB Statement No. 145. In April 2002, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 primarily affects the reporting requirements and
classification of gains and losses from the extinguishment of debt, rescinds the
transitional accounting requirements for intangible assets of motor carriers,
and requires that certain lease modifications with economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 is effective for financial statements
issued after April 2002, with the exception of the provisions affecting the
accounting for lease transactions, which are applicable for transactions entered
into after May 15, 2002, and the provisions affecting classification of gains
and losses from the extinguishment of debt, which are applicable for fiscal
years beginning after May 15, 2002. Application of SFAS 145 in the first quarter
of 2003 resulted in the classification of an $0.8 million gain from the
extinguishment of $5.0 million in Senior Subordinated Notes ("Notes") as other
income.
Accounting for Certain Financial Instruments With Characteristics of Both
Liabilities and Equity. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments With Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with
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STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
characteristics of both liabilities and equity. It requires that an issuer
classify certain financial instruments as a liability (or an asset in some
circumstances). The scope of SFAS No. 150 includes financial instruments issued
in the form of shares that are mandatorily redeemable and that employ
unconditional obligations requiring the issuer to redeem it by transferring its
assets at a specific or determinable date or upon an event that is certain to
occur.
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. Mandatorily redeemable financial
instruments of nonpublic entities are subject to the provisions of SFAS No. 150
for the first fiscal period beginning after December 15, 2003. The Company
believes that adoption of this statement will not have any material impact on
the consolidated financial condition or results of operations.
(2) INVENTORIES
Components of inventories are as follows:
As of As of
September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials and purchased parts $ 9,276 $ 9,028
Work-in-process 15,781 16,453
Finished goods 6,436 7,914
----------- ----------
$ 31,493 $ 33,395
=========== ==========
(3) INCOME TAXES
The Company had an effective income tax rate of 40.1% for the first nine months
of 2003, compared to 6.4% for the first nine months of 2002. In the first nine
months of 2003, the Company recorded $4.4 million of tax expense on a pre-tax
income of $11.1 million. Taxes for 2003 include $0.7 million for a valuation
allowance associated with foreign net operating loss carry-forwards in SpA that
are anticipated to expire at year end without utilization. In 2002, the Company
recorded $0.2 million of tax expense on a pre-tax income of $3.1 million. The
Company received U.S. income tax benefits for export sales in both periods. The
Company applies the estimated annual tax rate to the quarterly earnings to
provide consistent quarterly tax rates based on the estimated effective tax rate
for the year. To the extent there are differences between components of planned
and actual net income, the estimated annual tax rate for the year could change
and, in turn, have an impact on future quarterly tax rates.
- 9 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(4) LONG-TERM DEBT
The Company had $71.0 million and $76.0 million of Notes at an interest rate of
10.25% outstanding at September 30, 2003 and December 31, 2002, respectively.
The Notes are due on December 15, 2007. On January 15, 2003 the Company retired
$5.0 million in Notes at the market price of $4.1 million. As a result of the
early retirement of the Notes, the Company realized a $0.8 million gain after
the write off of unamortized debt issuance costs of $0.1 million. The
transaction was recorded as other income in the Company's consolidated financial
statements.
The Company had $19.0 million and $24.8 million in U.S.-based term loans (the
"Term Loans") outstanding at September 30, 2003 and December 31, 2002,
respectively, at various interest rates on September 30, 2003 ranging from 2.88%
to 5.0%. The Company had $23.2 million in revolving credit lines (the "Revolving
Credit Lines") available for borrowings at September 30, 2003 and December 31,
2002. The Company had no borrowings against the Revolving Credit Lines at
September 30, 2003 and December 31, 2002. The Term Loans and the Revolving
Credit Lines are governed by a Credit Agreement dated December 11, 1997, as
amended (the "Credit Agreement"). The Company was in compliance with the
quarterly financial performance covenants as established by the Credit Agreement
as of the September 30, 2003 measurement date.
Overseas operations included $2.4 million and $1.7 million in overdraft
borrowings at SpA outstanding at September 30, 2003 and December 31, 2002,
respectively. Also, the Company had $1.5 million in foreign term loan borrowings
at SAPL outstanding at September 30, 2003.
(5) GOODWILL AND INTANGIBLE AND OTHER ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization but is annually assessed for impairment by applying a
fair-value based test. Within six months of adoption of SFAS No. 142, the
Company was required to complete a transitional impairment review using a fair
value methodology to identify if there was impairment to the goodwill or
intangible assets of indefinite life. Any impairment loss resulting from the
transitional impairment test would have been recorded as a cumulative effect of
a change in accounting principle for the quarter ended June 30, 2002. The
Company completed its evaluation of the carrying value of goodwill during the
second quarter of 2002 and determined that there was no impairment of goodwill.
SFAS No. 142 requires that goodwill be tested annually and between annual tests
if events or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value. The Company's annual
evaluation of the carrying value of goodwill completed during the second quarter
of 2003 also determined that
- 10 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
there was no impairment of goodwill. Subsequent impairment losses, if any, will
be reflected in operating income in the consolidated Statement of Operations.
Goodwill for the Precision Products & Technologies Group (the "PPT Group")
formerly known as Diesel Systems Group was $58.1 million and $56.7 million at
September 30, 2003 and December 31, 2002, respectively. The change in goodwill
balances between periods is due to foreign currency translation of
Euro-denominated goodwill at SpA. Goodwill for Precision Engine Products
("Precision Engine") was $11.4 million at September 30, 2003 and December 31,
2002. Major components of intangible and other assets at September 30, 2003 and
December 31, 2002 are listed below:
September 30, 2003 December 31, 2002
------------------ -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
--------- -------------- -------- ------------
Patents $ 9,809 $ 7,420 $ 9,809 $ 6,487
Debt issuance costs 8,024 6,220 8,149 5,466
Pension intangible asset 1,796 - 1,796 -
Software 3,544 3,544 3,544 3,544
Customer contracts 1,310 1,087 1,310 947
Other 1,787 443 1,732 411
--------- -------------- -------- ------------
$ 26,270 $ 18,714 $ 26,340 $ 16,855
========= ============== ======== ============
Amortization expense of intangible assets was $1,859 and $2,603 for the nine
months ended September 30, 2003 and 2002, respectively. Estimated annual
amortization expense of intangible assets is expected to be $2,378 in 2003,
$1,369 in 2004, $1,193 in 2005, $1,180 in 2006 and $936 in 2007.
(6) CONTINGENCIES
The Company is involved in various legal and regulatory proceedings generally
incidental to its business. While the results of any litigation or regulatory
issue contain an element of uncertainty, management believes that the outcome of
any known, pending or threatened legal proceeding, or all of them combined, will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is subject to potential environmental liabilities as a result of
various claims and legal actions, which are pending or may be asserted against
the Company. Reserves for such liabilities have been established, and no
insurance recoveries have been anticipated in the determination of the reserves.
In management's opinion, the aforementioned claims will be resolved without
material adverse effect on the consolidated results of operations, financial
position or cash flows of the Company. Also, in conjunction with the acquisition
of the Company from Metromedia Company ("Metromedia") on December 11, 1997,
Metromedia
- 11 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
agreed to partially indemnify the Company and AIP for certain environmental
matters. The effect of this indemnification is to limit the Company's financial
exposure for known environmental issues.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The disclosure for the Company's warranty accrual as
required by FIN No.45 is provided below:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Warranty liability, beginning of period $ 1,613 $ 2,131 $ 1,875 $ 3,000
Warranty expense based on products sold 210 131 630 393
Adjustments to warranty estimates (150) (104) (450) (912)
Warranty claims paid (152) (173) (534) (496)
--------- --------- --------- ---------
Warranty liability, end of period $ 1,521 $ 1,985 $ 1,521 $ 1,985
========= ========= ========= =========
The Company's warranty accrual is included as components of accrued liabilities
and other noncurrent liabilities on the consolidated balance sheets.
(7) COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 576 $ (674) $ 6,860 $ 3,041
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (2,012) 1,216 2,220 2,257
--------- --------- --------- ---------
Comprehensive (loss) income $ (1,436) $ 542 $ 9,080 $ 5,298
========= ========= ========= =========
(8) SEGMENTS
The Company has two reportable segments, the Precision Products and Technologies
Group ("PPT Group") and Precision Engine. The PPT Group name replaces the former
segment named Diesel Systems Group. This name change was made to indicate a
broader scope of products and markets served by this segment. The PPT Group
manufactures its own proprietary products including pumps for gasoline and
diesel engines, injectors and filtration systems for diesel
- 12 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
engines, and various non-proprietary products manufactured under contract for
other companies. The Company's proprietary products currently account for the
majority of PPT Group's sales. This segment accounted for approximately 77% of
the Company's revenues for each of the three months ended September 30, 2003 and
2002, and approximately 76% and 79% of total revenues for the nine months ended
September 30, 2003 and 2002, respectively.
Precision Engine manufactures roller-rocker arms, hydraulic valve lifters and
lash adjusters for gasoline and diesel engines. Revenues for Precision Engine
accounted for approximately 23% of total revenues for each of the three months
ended September 30, 2003 and 2002, and approximately 24% and 21% of total
revenues for the nine months ended September 30, 2003 and 2002, respectively.
The Company considers the PPT Group and Precision Engine to be two distinct
segments because the operating results of each are compiled, reviewed and
managed separately. There were no significant inter-segment sales between the
PPT Group and Precision Engine for any of the periods presented.
The following summarizes key information used by the Company in evaluating the
performance of each segment for the three months ended September 30, 2003 and
2002 and as of and for the nine months ended September 30, 2003 and 2002:
For the Three Months Ended September 30, 2003
---------------------------------------------
PPT Precision
Group Engine Eliminations Totals
----- ------ ------------ ------
Net sales $ 54,166 $ 15,848 $ (7) $ 70,007
Gross profit 10,929 344 - 11,273
Depreciation and amortization
Expense 4,512 850 - 5,362
Operating income (loss) 3,817 (645) - 3,172
Net income (loss) 723 (147) - 576
Total capital expenditures 1,705 518 - 2,223
For the Three Months Ended September 30, 2002
---------------------------------------------
PPT Precision
Group Engine Eliminations Totals
----- ------ ------------ ------
Net sales $ 48,442 $ 14,435 $ - $ 62,877
Gross profit 8,103 999 - 9,102
Depreciation and amortization
expense 4,341 854 - 5,195
Operating income (loss) 1,072 (931) - 141
Net income (loss) 103 (777) - (674)
Total capital expenditures 2,936 611 - 3,547
- 13 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
As of and For the Nine Months Ended September 30, 2003
------------------------------------------------------
PPT Precision
Group Engine Eliminations Totals
----- ------ ------------ ------
Net sales $ 162,102 $ 52,246 $ (7) $ 214,341
Gross profit 35,759 4,902 - 40,661
Depreciation and amortization
expense 13,339 2,481 - 15,820
Operating income 13,972 2,492 - 16,464
Net income 5,473 1,387 - 6,860
Total assets 250,382 47,422 (18,824) 278,980
Total capital expenditures 6,589 996 - 7,585
As of and For the Nine Months Ended September 30, 2002
------------------------------------------------------
PPT Precision
Group Engine Eliminations Totals
----- ------ ------------ ------
Net sales $ 157,930 $ 42,720 $ - $ 200,650
Gross profit 33,682 3,400 - 37,082
Depreciation and amortization
expense 12,967 2,565 - 15,532
Operating income (loss) 11,257 (1,124) - 10,133
Net income (loss) 4,879 (1,838) - 3,041
Total assets 238,701 52,711 (15,867) 275,545
Total capital expenditures 6,717 1,588 - 8,305
(9) SUBSEQUENT EVENT
On October 24, 2003 the Company refinanced its Term Loans, which resulted in one
new term loan (the "Refinanced Term Loan"). The Refinanced Term Loan bears
interest at prime plus 2.25% or libor plus 3.25% and principal is paid in
quarterly installments of $893 on the first business day of each quarter
starting from January 2, 2004 through July 2, 2007 with a final balloon payment
of $11,607 on October 1, 2007. The Refinanced Term Loan requires the Company to
comply with certain financial covenants including maintaining a minimum EBITDA,
fixed charge coverage ratio and senior leverage ratio as defined in the loan and
security agreement. The Refinanced Term Loan is secured by substantially all of
the Company's domestic accounts receivables, inventory and assets.
On October 24, 2003 the Company also refinanced its Revolving Credit Lines (the
"Refinanced Revolving Credit Lines"). The Refinanced Revolving Credit Lines bear
interest at prime plus 1.75% or libor plus 2.75%. Any amounts borrowed on the
Refinanced Revolving Credit Lines are payable on October 1, 2007.
- 14 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(10) SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Notes issued December 11, 1997 by the Company are guaranteed jointly, fully,
severally and unconditionally by PEPC (the "Subsidiary Guarantor") on a
subordinated basis and are not guaranteed by FSC, SpA, PEPL and SAPL (the
"Non-Guarantor Subsidiaries").
Supplemental combining condensed financial statements for Stanadyne Corporation
("Parent"), the Subsidiary Guarantor and the Non-Guarantor Subsidiaries are
presented below. Separate complete financial statements of the Subsidiary
Guarantor are not presented because management has determined that they are not
material to investors.
- 15 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Balance Sheets
September 30, 2003
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,272 $ 46 $ 434 $ 172 $ 8,924
Accounts receivable, net 33,856 8,656 3,212 - 45,724
Inventories, net 19,325 7,259 5,354 (445) (a) 31,493
Other current assets 6,008 417 1,587 - 8,012
--------------------------------------------------------------------------
Total current assets 67,461 16,378 10,587 (273) 94,153
Property, plant and equipment, net 70,632 15,767 17,147 - 103,546
Goodwill 43,465 11,360 14,631 - 69,456
Intangible and other assets, net 6,633 742 1,865 (1,684) (b) 7,556
Investment in subsidiaries 28,475 (3,294) - (25,181) (c) -
Due from Stanadyne Automotive Holding Corp. 4,269 - - - 4,269
--------------------------------------------------------------------------
Total assets $ 220,935 $ 40,953 $ 44,230 $ (27,138) $ 278,980
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 41,983 $ 9,235 $ 4 ,328 $ 9 $ 55,555
Current maturities of long-term debt
and capital lease obligations 2,079 - 2,536 - 4,615
--------------------------------------------------------------------------
Total current liabilities 44,062 9,235 6,864 9 60,170
Long-term debt and capital lease obligations 87,865 - 1,758 - 89,623
Other noncurrent liabilities 36,262 10,335 7,508 (1,563) (b) 52,542
Minority interest in consolidated Subsidiary - - - 246 246
Intercompany accounts (23,661) 4,621 19,191 (151) -
Stockholders' equity 76,407 16,762 8,909 (25,679) (c) 76,399
--------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 220,935 $ 40,953 $ 44,230 $ (27,138) $ 278,980
==========================================================================
(a) Amount represents the elimination of inventory for out of period transfers.
(b) Reclassification of deferred tax liability to consolidated net deferred tax
asset.
(c) Elimination of investments in subsidiaries of the Parent and Subsidiary
Guarantor.
- 16 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Balance Sheets
December 31, 2002
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,223 $ 8 $ 452 $ - $ 4,683
Accounts receivable, net 22,869 6,506 3,670 - 33,045
Inventories, net 20,348 8,480 4,902 (335) (a) 33,395
Other current assets 5,369 378 1,471 - 7,218
--------------------------------------------------------------------------
Total current assets 52,809 15,372 10,495 (335) 78,341
Property, plant and equipment, net 75,564 17,114 15,336 312 108,326
Goodwill 43,465 11,360 13,265 - 68,090
Intangible and other assets, net 8,474 930 2,037 (1,956) (b) 9,485
Investment in subsidiaries 27,218 (4,328) - (22,890) (c) -
Due from Stanadyne Automotive Holding Corp. 4,216 - - - 4,216
--------------------------------------------------------------------------
Total assets $ 211,746 $ 40,448 $ 41,133 $ (24,869) $ 268,458
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 33,507 $ 8,083 $ 4,764 $ 42 $ 46,396
Current maturities of long-term debt
and capital lease obligations 7,777 - 1,796 - 9,573
--------------------------------------------------------------------------
Total current liabilities 41,284 8,083 6,560 42 55,969
Long-term debt and capital lease obligations 92,999 - 324 - 93,323
Other noncurrent liabilities 35,763 10,686 6,856 (1,690) (b) 51,615
Minority interest in consolidated subsidiary - - - 232 232
Intercompany accounts (27,950) 7,949 20,034 (33) -
Stockholders' equity 69,650 13,730 7,359 (23,420) (c) 67,319
--------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 211,746 $ 40,448 $ 41,133 $ (24,869) $ 268,458
==========================================================================
(a) Amount represents the elimination of inventory for out of period transfers.
(b) Reclassification of deferred tax asset to deferred tax liability.
(c) Elimination of investments in subsidiaries of the Parent and Subsidiary
Guarantor.
- 17 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Operations
Three Months Ended September 30, 2003
------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Net sales $ 51,598 $ 14,877 $ 4,595 $ (1,063) (a) $ 70,007
Cost of goods sold 40,214 14,988 4,574 (1,042) (a) 58,734
------------------------------------------------------------------------------
Gross profit (loss) 11,384 (111) 21 (21) 11,273
Selling, general, administrative and other
operating expenses 6,592 851 672 (14) 8,101
------------------------------------------------------------------------------
Operating income (loss) 4,792 (962) (651) (7) 3,172
Interest, net (1,728) (5) (290) (21) (2,044)
------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) and minority interest 3,064 (967) (941) (28) 1,128
Income taxes (benefit) 1,277 (656) 4 5 630
------------------------------------------------------------------------------
Income (loss) before minority interest 1,787 (311) (945) (33) 498
Minority interest in loss of consolidated
subsidiary - - - 78 78
------------------------------------------------------------------------------
Net income (loss) $ 1,787 $ (311) $ (945) $ 45 $ 576
==============================================================================
Consolidating Condensed Statements of Operations
Three Months Ended September 30, 2002
------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Net sales $ 45,135 $ 13,500 $ 6,644 $ (2,402) (a) $ 62,877
Cost of goods sold 37,369 12,549 6,275 (2,418) (a) 53,775
------------------------------------------------------------------------------
Gross profit 7,766 951 369 16 9,102
Selling, general, administrative and other
operating expenses 6,647 1,038 1,670 (394) 8,961
------------------------------------------------------------------------------
Operating income (loss) 1,119 (87) (1,301) 410 141
Interest, net (1,806) (140) (317) 2 (2,261)
------------------------------------------------------------------------------
Loss before income taxes (benefit) and
minority interest (687) (227) (1,618) 412 (2,120)
Income taxes (benefit) (1,939) 87 455 - (1,397)
------------------------------------------------------------------------------
Income (loss) before
minority interest 1,252 (314) (2,073) 412 (723)
Minority interest in loss of consolidated
subsidiary - - - 49 49
------------------------------------------------------------------------------
Net income (loss) $ 1,252 $ (314) $ (2,073) $ 461 $ (674)
==============================================================================
(a) Elimination of intercompany sales and cost of goods sold.
- 18 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Operations
Nine Months Ended September 30, 2003
------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Net sales $ 151,858 $ 49,914 $ 15,143 $ (2,574) (a) $ 214,341
Cost of goods sold 115,732 45,899 14,556 (2,507) (a) 173,680
------------------------------------------------------------------------------
Gross profit 36,126 4,015 587 (67) 40,661
Selling, general, administrative and other
operating expenses 20,244 2,855 659 439 24,197
------------------------------------------------------------------------------
Operating income (loss) 15,882 1,160 (72) (506) 16,464
Other income (expenses):
Gain from extinguishment of debt 813 - - - 813
Interest, net (4,965) (308) (887) (64) (6,224)
------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) and minority interest 11,730 852 (959) (570) 11,053
Income taxes 3,206 209 1,160 (145) 4,430
------------------------------------------------------------------------------
Income (loss) before minority interest 8,524 643 (2,119) (425) 6,623
Minority interest in loss of consolidated
subsidiary - - - 237 237
------------------------------------------------------------------------------
Net income (loss) $ 8,524 $ 643 $ (2,119) $ (188) $ 6,860
==============================================================================
Consolidating Condensed Statements of Operations
Nine Months Ended September 30, 2002
------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Net sales $ 147,191 $ 40,298 $ 20,075 $ (6,914) (a) $ 200,650
Cost of goods sold 114,954 37,742 17,784 (6,912) (a) 163,568
------------------------------------------------------------------------------
Gross profit 32,237 2,556 2,291 (2) 37,082
Selling, general, administrative and other
operating expenses 21,253 3,372 2,718 (394) 26,949
------------------------------------------------------------------------------
Operating income (loss) 10,984 (816) (427) 392 10,133
Interest, net (5,515) (474) (973) (103) (7,065)
------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) and minority interest 5,469 (1,290) (1,400) 289 3,068
Income taxes (benefit) (155) 248 103 - 196
------------------------------------------------------------------------------
Income (loss) before minority interest 5,624 (1,538) (1,503) 289 2,872
Minority interest in loss of consolidated
subsidiary - - - 169 169
------------------------------------------------------------------------------
Net income (loss) $ 5,624 $ (1,538) $ (1,503) $ 458 $ 3,041
==============================================================================
(a) Elimination of intercompany sales and cost of goods sold.
- 19 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Cash Flows
Nine Months Ended September 30, 2003
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 8,524 $ 643 $ (2,119) $ (188) $ 6,860
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,194 2,456 1,170 - 15,820
Other adjustments (30) 73 797 (145) 695
Loss applicable to minority interest - - - (237) (237)
Changes in operating assets and
liabilities 2,742 (3,495) (2,270) 1,170 (1,853)
--------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 23,430 (323) (2,422) 600 21,285
--------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,531) (994) (1,370) 312 (7,583)
Investment in subsidiaries (214) - - 214 -
--------------------------------------------------------------------------
Net cash used in investing activities (5,745) (994) (1,370) 526 (7,583)
--------------------------------------------------------------------------
Cash flows from financing activities:
Net change in debt (10,833) - 1,882 - (8,951)
Net change in equity (2,809) 1,355 1,839 (134) 251
--------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (13,642) 1,355 3,721 (134) (8,700)
--------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,043 38 (71) 992 5,002
Effect of exchange rate changes on cash 6 - 53 (820) (761)
Cash and cash equivalents at beginning of
period 4,223 8 452 - 4,683
--------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,272 $ 46 $ 434 $ 172 $ 8,924
==========================================================================
- 20 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONCLUDED)
Consolidating Condensed Statements of Cash Flows
Nine Months Ended September 30, 2002
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 5,624 $ (1,538) $ (1,503) $ 458 $ 3,041
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,116 2,537 879 - 15,532
Other adjustments (1,655) (299) (400) - (2,354)
Loss applicable to minority interest - - - (169) (169)
Changes in operating assets and
liabilities 552 136 (705) (85) (102)
--------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 16,637 836 (1,729) 204 15,948
--------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,577) (1,534) (1,194) - (8,305)
Proceeds from disposal of property, plant
and equipment - - 1 - 1
Investment in subsidiaries (448) - - 448 -
--------------------------------------------------------------------------
Net cash used in investing activities (6,025) (1,534) (1,193) 448 (8,304)
--------------------------------------------------------------------------
Cash flows from financing activities:
Net change in debt (9,155) - 1,103 - (8,052)
Net change in equity (1,276) 754 1,361 (408) 431
--------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (10,431) 754 2,464 (408) (7,621)
--------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 181 56 (458) 244 23
Effect of exchange rate changes on cash 14 - (107) 896 803
Cash and cash equivalents at beginning of
period 483 5 772 (1,140) 120
--------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 678 $ 61 $ 207 $ - $ 946
==========================================================================
- 21 -
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
(1) Overview
The Company is a leading designer and manufacturer of highly-engineered,
precision manufactured engine components. The Company's two reporting segments
are the PPT Group and Precision Engine. The PPT Group name replaces the former
segment named Diesel Systems Group. This name change was made to indicate a
broader scope of products and markets served by this segment. The PPT Group
manufactures its own proprietary products including pumps for gasoline and
diesel engines, injectors and filtration systems for diesel engines, and various
non-proprietary products manufactured under contract for other companies.
Precision Engine manufactures roller-rocker arm assemblies, hydraulic valve
lifters and lash adjusters for gasoline and diesel engines. Detailed segment
information can be found in Note 8 of Notes to Condensed Consolidated Financial
Statements.
Continued strength in demand for the Company's products resulted in a 6.8%
increase in overall revenues through the first nine months of 2003 as compared
to the same period last year. Results for both operating segments reflect
increased sales and net income. Net income in the first nine months of 2003 grew
to $6.9 million or 3.2% of net sales - more than twice the net income of $3.0
million or 1.5% for the same period last year.
BASIS OF PRESENTATION
The following table displays unaudited performance details for the periods
shown. Net sales, cost of goods sold, gross profit, selling, general and
administrative expense ("SG&A"), amortization of intangibles, management fees,
operating income and net income of the Company are presented in thousands of
dollars and as a percentage of net sales. Historical results and percentage
relationships are not necessarily indicative of the results that may be expected
for any future period.
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
$ % $ % $ % $ %
------ ----- ------ ----- ------- ----- ------- -----
Net sales .................... 70,007 100.0 62,877 100.0 214,341 100.0 200,650 100.0
Cost of goods sold ........... 58,734 83.9 53,775 85.5 173,680 81.0 163,568 81.5
Gross profit ................. 11,273 16.1 9,102 14.5 40,661 19.0 37,082 18.5
SG&A ......................... 7,208 10.3 7,819 12.4 21,513 10.0 23,521 11.7
Amortization of intangibles .. 618 0.9 867 1.4 1,859 0.9 2,603 1.3
Management fees .............. 275 0.4 275 0.4 825 0.4 825 0.4
Operating income ............. 3,172 4.5 141 0.2 16,464 7.7 10,133 5.1
Net income (loss) ............ 576 0.8 (674) (1.1) 6,860 3.2 3,041 1.5
- 22 -
STANADYNE CORPORATION AND SUBSIDIARIES
COMPARISON OF RESULTS OF OPERATIONS:
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Net Sales. Net sales for the third quarter of 2003 totaled $70.0 million
compared to $62.9 million in the third quarter of 2002, representing an increase
of $7.1 million or 11.3%. Increases were reported in both segments: PPT Group
increased by $5.7 million or 11.8% and Precision Engine increased by $1.4
million or 9.8%.
Higher PPT Group sales in the third quarter of 2003 were primarily the result of
increased demand for diesel fuel injection equipment from most of the major OEM
customers. Sales to John Deere increased by $2.0 million in the third quarter of
2003 as compared to the same period of 2002, driven by increased shipments of
Tier II off-highway emissions compliant products. Sales of the DS electronic
fuel pump to General Engine Products for the Hummer vehicle increased by $1.0
million in the third quarter of 2003 versus 2002. Year-over-year third quarter
PPT Group sales to the aftermarket were also stronger in 2003 by $3.0 million,
with much of the increase due to $1.3 million of proprietary service tool kits
shipped in September.
Sales in the Precision Engine segment were higher in the third quarter of 2003
compared to the same period in 2002 due primarily to $1.6 million of additional
shipments to DaimlerChrysler (DCX). While sales of individual rocker arm
assemblies to DCX for the 3.5 litre LH platform ended in August as planned,
Precision Engine continues as the sole source supplier of fully assembled
valve-train actuator assembly (VTAA), comprised of nine rocker arm assemblies,
to the 3.5 litre CS platform for the Pacifica vehicle.
Gross Profit. Gross profit for the Company improved in the third quarter of 2003
to $11.3 million and 16.1% of net sales, from $9.1 million and 14.5% of net
sales for the same period in 2002. Gross profit results by segment were mixed.
PPT Group recorded gross profit of $10.9 million or 20.2% of net sales in the
third quarter of 2003, considerably higher than the $8.1 million or 16.7% of net
sales recorded for the same period in 2002. While quarter-to-quarter
manufacturing costs trended favorably, most of this improvement was due to
higher overall sales volumes in the third quarter of 2003 and particularly to
the strength in higher margin aftermarket sales.
Gross profit in the Precision Engine segment totaled $0.3 million or 2.2% of net
sales in the third quarter of 2003, down from the $1.0 million or 6.9% of net
sales reported for the same period of 2002. Gross profit generated by the
additional year-over-year third quarter sales volume was more than offset by
price reductions on slipper tappets sold to the aftermarket and higher
manufacturing and overhead costs in this segment. Changes to the management
structure intended to improve operational performance were completed in the
third quarter of 2003.
SG&A. SG&A of $7.2 million in the third quarter of 2003 was lower than the $7.8
million reported for the third quarter of 2002. There were two major components
to this reduction.
- 23 -
STANADYNE CORPORATION AND SUBSIDIARIES
First, on June 1, 2003 the Company implemented changes to the retiree health
benefit plans by standardizing cost sharing guidelines for all U.S. retirees
receiving such healthcare coverage. The impact of this change reduced the
Company's third quarter 2003 versus 2002 cost for retiree health benefits by
$1.0 million. The full-year 2003 versus 2002 impact of the change in cost
sharing is projected to be approximately $3.0 million. The second major
component to the reduction in third quarter 2003 SG&A costs was a net change of
$0.7 million representing lower foreign exchange losses in the third quarter of
2003 compared to foreign exchange losses in the third quarter of 2002 on
Precision Engine operations in Brazil. Significant cost increases in the third
quarter included $0.5 million in profit sharing accruals based on higher
earnings and $0.2 million in freight on sales associated with increased business
levels.
Amortization of Intangibles. Amortization of intangible assets decreased to $0.6
million in the third quarter of 2003 from $0.9 million in the third of 2002.
This reduction reflected the conclusion of the amortization of the Company's old
business systems software that was replaced by the new ERP system in 2002.
Operating Income. Operating income for the third quarter of 2003 totaled $3.2
million or 4.5% of net sales versus $0.1 million or 0.2% for the same period a
year ago. All of this improvement occurred in the PPT Group, where higher gross
profits produced operating income of $3.8 million or 7.0% of net sales versus
the $1.1 million or 2.2% of net sales in the third quarter of 2002. Lower gross
profits recorded by the Precision Engine segment in the third quarter of 2003
were more than offset by the significant reductions in SG&A costs, reducing the
operating loss to $0.6 million or (4.1)% of net sales compared to an operating
loss of $0.9 million or (6.4)% of net sales in the third quarter of 2002.
Net Income. Net income in the third quarter of 2003 totaled $0.6 million versus
a net loss of $0.7 million for the same period in 2002. This improvement
reflected the combined results of $3.0 million of higher operating income in
2003, $0.2 million in lower interest expense due to less debt and lower interest
rates, and a $2.0 million increase in income taxes.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Net Sales. Net sales for the first nine months of 2003 totaled $214.3 million
and were 6.8% higher than the $200.7 million reported in the same period last
year. Increases were reported in both segments: PPT Group increased by $4.2
million or 2.6% and Precision Engine increased by $9.5 million or 22.3%.
Net sales in the PPT Group, for the first nine months of 2003 versus 2002,
increased by $10.5 million due to increases in demand from John Deere for diesel
fuel injection equipment and Cummins Engine and Caterpillar Inc. for Precision
Components and Assembly ("PCA") products. Increases in sales through PPT Group's
aftermarket network provided an additional $5.1 million in sales during the
first nine months of 2003. These increases were offset primarily by a decline of
$4.4 million in the service demand for DS fuel pumps supplied to
- 24 -
STANADYNE CORPORATION AND SUBSIDIARIES
General Motors and $1.9 million and $2.4 million lower sales of diesel fuel
injection equipment to Perkins Engine and SISU Diesel, respectively.
The Precision Engine segment reported sales of $52.2 million for the first nine
months of 2003, totaling $9.5 million or 22.3% more than the same period in
2002. A significant portion of this increase, $7.2 million, was due to higher
demand from DCX. While sales of individual rocker arm assemblies to DCX for the
3.5 litre LH platform ended as planned in August, Precision Engine continues to
supply a fully assembled valve-train actuator assembly (VTAA), comprised of nine
rocker arm assemblies, to the 3.5 litre CS platform for the Pacifica vehicle.
Higher OEM sales to Tritec (a Brazilian joint venture company formed by DCX and
BMW AG) in Brazil totaled $2.4 million more through the first nine months of
2003 as success of the Mini Cooper continues to drive demand for the 1.6 liter
gasoline engine which exclusively utilizes Precision Engine roller rocker arm
assemblies.
Gross Profit. Gross profit for the Company in the first nine months of 2003
totaled $40.7 million or 19.0% of net sales and were 9.7% higher than the $37.1
million or 18.5% of net sales reported for the same period in 2002. Gross profit
results in both segments showed year-over-year improvement.
As a result of the strong sales and earnings recorded in the third quarter,
gross profit for the PPT Group for the first nine months of 2003 showed a $2.1
million increase from the same period in 2002. An increase in the gross profit
as a percentage of net sales to 22.1% in the first nine months of 2003 reflected
a combination of stronger sales to the higher margin aftermarket and lower
manufacturing costs in the U.S.-based facilities.
Gross profit in the Precision Engine segment in the first nine months of 2003
totaled $4.9 million and was $1.5 million higher than the same period in 2002.
Additional gross profits on the year-over-year increase in sales volumes were
depressed by higher manufacturing and factory overhead costs. Operating
inefficiencies in both the Tallahassee, Florida and Windsor, Connecticut
facilities have been addressed through a reorganization of segment management.
SG&A. SG&A of $21.5 million in the first nine months of 2003 was $2.0 million
lower than the $23.5 million reported in the first nine months of 2002. There
were two major components to this reduction. First, on June 1, 2003 the Company
implemented changes to the retiree health benefit plans by standardizing cost
sharing guidelines for all U.S. retirees participating in the Company's retiree
health plan. The impact of this change reduced the Company's year-to-date 2003
versus 2002 cost for retiree health benefits by $2.0 million. The full-year 2003
versus 2002 impact of the change in cost sharing is projected to be
approximately $3.0 million. The second major component to the year-to-year
reduction in SG&A costs was foreign exchange differences on Precision Engine
operations in Brazil; $0.7 million in gains during 2003 versus $0.9 million in
losses during 2002. SG&A cost increases during the first nine months of 2003
included an additional $0.7 million in profit sharing accruals based on higher
earnings and $0.2 million in freight on sales associated with increased business
levels.
- 25 -
STANADYNE CORPORATION AND SUBSIDIARIES
Amortization of Intangibles. Amortization of intangible assets decreased to $1.9
million for the first nine months of 2003 from $2.6 million for the same period
in 2002. This reduction reflected the conclusion of the amortization of the
Company's old business systems software that was replaced by the new ERP system
in 2002.
Operating Income. Operating income for the first nine months of 2003 totaled
$16.5 million versus $10.1 million for the same period in 2002. As a percentage
of net sales, operating income increased to 7.7% in 2003 from 5.1% in 2002.
Higher sales in both segments generated $3.6 million in additional gross profits
which, when combined with $2.0 million in lower SG&A costs and $0.7 million in
lower amortization expense, resulted in the significant improvement from the
prior year.
Net Income. Net income in the first nine months of 2003 grew to $6.9 million or
3.2% of net sales - more than twice the net income of $3.0 million or 1.5% for
the same period last year. This improvement reflected the combined results of
6.3 million in added operating income in 2003, a $0.8 million gain on the
repurchase of a portion of the Company's Notes, and $0.8 million in lower
interest expense due to less debt and lower interest rates, all partially
offset by a $4.2 million increase in income taxes. The increase to income taxes
included $0.7 million for a valuation allowance associated with net operating
loss carry forwards in SpA, the Company's Italian subsidiary, that are
anticipated to partially expire at year end.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operations
supplemented by a revolving credit facility under which $23.2 million was
available for borrowings as of September 30, 2003. The Company occasionally
utilizes capital leasing and, for its foreign operations in Italy and India,
maintains a combination of overdraft and term loan facilities with local
financial institutions on an as needed basis. As of September 30, 2003, there
were borrowings of $19.0 million under the Term Loans, no borrowings under the
Revolving Credit Lines, $2.4 million in foreign overdraft facilities and $1.5
million in foreign term loans. The Company met all financial covenants set forth
in the Credit Agreement for the September 30, 2003 measurement date. On October
24, 2003, the Company refinanced its Term Loans and Revolving Credit Lines. See
Footnote 9 (Subsequent Event) of the Notes To Condensed Consolidated Financial
Statements for additional detail.
Cash Flows From Operating Activities. Cash flows from operations for the nine
months ended September 30, 2003 totaled $21.3 million and were $5.4 million
higher than the $15.9 million generated in the same period of 2002. This
increase was primarily accounted for by additional net income adjusted for
non-cash deferred income taxes totaling $6.8 million. The cash flows from
additional earnings were partially offset by $1.8 million of increases in
working capital accounts related to the higher overall levels of business in
both segments. Sales increases in the first nine months of 2003 drove accounts
receivable balances $12.2 million higher, consuming $10.5 million in additional
cash as compared to the same period last year. Since its initial installation in
early 2002, the Company's use and understanding of the ERP system has steadily
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STANADYNE CORPORATION AND SUBSIDIARIES
improved, resulting in better inventory management. Inventory overall declined
by $2.4 million in the first nine months of 2003, as compared to a $3.3 million
inventory increase during the same period in 2002. Monthly inventory turnover
averaged 7.8 turns at the end of the first nine months, reflecting a significant
improvement from the 7.0 turns recorded for the same period in 2002. Growth in
2003 accrued liability accounts totaled $2.8 million and was primarily in
support of higher business levels.
Cash Flows From Investing Activities. The Company's capital expenditures for the
first nine months of 2003 totaled $7.6 million, compared to $8.3 million for the
same period of 2002. Capital expenditures in 2003 included $4.4 million in
support of new product launches with the remainder applied to cost reduction,
quality enhancements, safety and ergonomics improvements, capacity enhancement
and general maintenance projects.
Cash Flows From Financing Activities. Cash flows from financing activities for
the nine months ended September 30, 2003 resulted in a net decrease in cash of
$8.7 million. Principal payments of long-term debt totaled $10.8 million,
including the early retirement of $5.0 million in outstanding Notes. There were
no borrowings under the Revolving Credit Facility. Additional overdraft
borrowings at SpA this year totaled $0.5 million. Foreign term loan borrowings
at SAPL totaling $1.5 million were required to purchase machinery and equipment
for the Company's joint venture activities in India. Payments against capital
lease obligations totaled $0.1 million. Investments in the share capital of SAPL
by the minority partner increased cash flows by $0.2 million in the first nine
months of 2003.
The Company has, from time to time, purchased its own Notes on the open market
and may continue to do so in the future when it deems doing so is an effective
use of its liquidity. From November 10 through November 12, 2003 the Company
retired $4,950 in Notes at an aggregate price of $4,948. As a result of the
early retirement of the Notes, the Company realized a $98 loss after the write
off of unamortized debt issuance costs of $100. This amount will be recorded in
the fourth quarter of 2003.
Pension Plans. The Company maintains a qualified defined benefit pension plan
(the "Qualified Plan"), which covers substantially all domestic hourly and
salary employees except for Tallahassee hourly employees and an unfunded
nonqualified plan to provide benefits in excess of amounts permitted to be paid
under the provisions of the tax law to participants in the Qualified Plan.
The value of the Qualified Plan assets decreased from $43.8 million at December
31, 2001 to $37.8 million at December 31, 2002. The combination of weak
investment performance and declining discount rates during 2002 resulted in an
increase in the Qualified Plan unfunded benefit obligation. Cash contributions
to the Qualified Plan for the 2002 plan year of $2.5 million were paid in the
third quarter of 2003 to achieve a current liability funding level of 80%.
Contributions to the Qualified Plan for the 2003 plan year are expected to be
approximately $6.0 million in 2004 to achieve a current liability funding level
of 80%. The Company continues to examine the longer term projections for pension
expense and cash contributions.
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STANADYNE CORPORATION AND SUBSIDIARIES
(2) NEW ACCOUNTING STANDARDS
The Company has adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB
Statement No. 123. The Statement requires prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock compensation awards under the intrinsic
method of APB Opinion No. 25 requiring compensation cost to be recognized based
on the excess, if any, between the quoted market price of the stock at the date
of grant and the amount an employee must pay to acquire the stock. All options
awarded under the Company's stock option plans are granted with an exercise
price equal to the fair market value on the date of the grant.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or an asset in some circumstances). The scope of SFAS No. 150 includes
financial instruments issued in the form of shares that are mandatorily
redeemable and that employ unconditional obligations requiring the issuer to
redeem it by transferring its assets at a specific or determinable date or upon
an event that is certain to occur.
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. Mandatorily redeemable financial
instruments of nonpublic entities are subject to the provisions of SFAS No. 150
for the first fiscal period beginning after December 15, 2003. The Company
believes that adoption of this statement will not have any material impact on
the consolidated financial condition or results of operations.
(3) CRITICAL ACCOUNTING POLICIES
The Company prepares the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, the Company is required to make certain estimates, judgments and
assumptions that it believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The significant
accounting policies involving estimates which the Company believes are the most
critical to aid in fully understanding and evaluating the reported financial
results include: product warranty reserves, inventory reserves for excess or
obsolescence, income taxes, self insurance healthcare costs, and pension and
postretirement benefit liabilities and are more fully described in the notes to
the consolidated financial statements contained in the annual report on Form
10-K.
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STANADYNE CORPORATION AND SUBSIDIARIES
(4) CAUTIONARY STATEMENT
This quarterly report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
statements with respect to the financial condition, results of operations and
business of the Company and management's discussion and analysis of financial
condition and results of operations. All of these forward-looking statements are
based on estimates and assumptions made by the management of the Company which,
although believed to be reasonable, are inherently uncertain. Therefore, undue
reliance should not be placed upon such estimates and statements. No assurance
can be given that any such estimates will be realized, and it is likely that
actual results will differ materially from those contemplated by such
forward-looking statements. Factors that may cause such differences include: (1)
increased competition; (2) increased costs; (3) loss or retirement of key
members of management; (4) increases in the Company's cost of borrowing or
inability or unavailability of additional debt or equity capital; (5) loss of
material customers; (6) adverse state or federal legislation or regulation or
adverse determinations in pending litigation; (7) changes in the value of the
U.S. dollar relative to foreign currencies of countries where the Company
conducts its business; and (8) changes in general economic conditions and/or in
the automobile, light duty trucks, agricultural and construction vehicles and
equipment, industrial products and marine equipment markets in which the Company
competes. Many of such factors are beyond the control of the Company and its
management. The forward-looking statements contained in this report speak only
as of the date on which such statements were made. The Company undertakes no
duty or obligation to publicly update or revise any forward-looking statements
or to reflect new, changing or unanticipated events or circumstances.
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STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks which include changes in interest rates
and changes in foreign currency exchange rates as measured against the U.S.
dollar.
Interest Rate Risk. The carrying values of the Company's revolving credit lines
and term loans approximate fair value. The term loans are primarily LIBOR-based
borrowings and are repriced every one to three months. A 10% change in the
interest rate on the term loans would have had a negligible effect on the
interest expense recorded in the nine months of 2003. The 10 1/4% Notes bear
interest at a fixed rate and, therefore, are not sensitive to interest rate
fluctuation. The fair value of the Company's $71.0 million in Notes based on
quoted market prices on September 30, 2003 was approximately $61.0 million. More
recent buy transactions completed by the Company in November, indicate the price
of the Notes is closer to par value.
Foreign Currency Risk. The Company has subsidiaries in Brazil and Italy, a joint
venture in India and a branch office in France, and therefore is exposed to
changes in foreign currency exchange rates. Changes in exchange rates may
positively or negatively affect the Company's sales, gross margins, and retained
earnings. However, historically, these locations have contributed less than 15%
of the Company's net sales and retained earnings, with most of these sales
attributable to the Italian and Brazilian subsidiaries. The Company also sells
its products from the United States to foreign customers for payment in foreign
currencies as well as U.S. dollars. Foreign currency exchange differences were
net gain (loss) of $0.7 million and $(0.9) million for the nine months ended
September 30, 2003 and 2002, respectively. A majority of the exchange
differences are related to the Company's operations in Brazil. The Company does
not hedge against foreign currency risk.
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STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were adequate
and designed to ensure that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
manner, including that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) CHANGES IN INTERNAL CONTROLS
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses in internal
controls, subsequent to the evaluation described above.
Reference is made to the Certifications of the Chief Executive Officer and Chief
Financial Officer about these and other matters filed as exhibits to this
report.
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STANADYNE CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.16(a) Loan and Security Agreement dated as of October 24,
2003 among GMAC Commercial Finance LLC (as Collateral
Agent and Administrative Agent) and The Bank of New York
(as Documentation Agent) and Wachovia Bank, National
Association (as Syndication Agent) and The Lenders
Signatory Hereto From Time To Time (as Lenders), With
Stanadyne Corporation (as Borrowing Agent) and The Other
Loan Parties Signatory Hereto (as Loan Parties)
10.16(b) Revolving Credit Note to GMAC Commercial Finance LLC
(as agent) dated October 24, 2003
10.16(c) Swingline Note to GMAC Commercial Finance LLC
(as agent) dated October 24, 2003
10.16(d) Term Note to GMAC Commercial Finance LLC
(as agent) dated October 24, 2003
31.1 Certification of Chief Executive Officer Pursuant to
Rule 15d-14(a) of the Securities Exchange Act as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer Rule 15d-14(a)
of the Securities Exchange Act as Adopted Pursuant to
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification Pursuant to Rule 15d-14(b) of the
Securities Exchange Act and 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b. No report on Form 8-K was filed during the quarter ended September
30, 2003.
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STANADYNE CORPORATION AND SUBSIDIARIES
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.
Stanadyne Corporation
---------------------
(Registrant)
Date: November 14, 2003 /s/ Stephen S. Langin
---------------------
Stephen S. Langin
Vice President and
Chief Financial Officer
- 33 -
EXHIBIT INDEX:
10.16(a) Loan and Security Agreement dated as of October 24, 2003
among GMAC Commercial Finance LLC (as Collateral Agent and
Administrative Agent) and The Bank of New York (as
Documentation Agent) and Wachovia Bank, National Association
(as Syndication Agent) and The Lenders Signatory Hereto From
Time To Time (as Lenders), With Stanadyne Corporation (as
Borrowing Agent) and The Other Loan Parties Signatory Hereto
(as Loan Parties)
10.16(b) Revolving Credit Note to GMAC Commercial Finance LLC
(as agent) dated October 24, 2003
10.16(c) Swingline Note to GMAC Commercial Finance LLC
(as agent) dated October 24, 2003
10.16(d) Term Note to GMAC Commercial Finance LLC
(as agent) dated October 24, 2003
31.1 Certification of Chief Executive Officer Pursuant to Rule
15d-14(a) of the Securities Exchange Act as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule
15d-14(a) of the Securities Exchange Act as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to Rule 15d-14(b) of the Securities
Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002