Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the Quarter Ended March 28, 2004,
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 Identification No.)
Incorporation or Organization)
SUITE 295, FOUR CORPORATE DRIVE
SHELTON, CONNECTICUT 06484
(Address of Principal Executive Offices) (Zip Code)
203-925-8021
------------
(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 30, 2004, 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 $21.0 million.
RAYTECH CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements
Condensed Consolidated Balance
Sheets at March 28, 2004
and December 28, 2003 3
Condensed Consolidated Statements of
Operations for the thirteen weeks ended
March 28, 2004 and March 30, 2003 4
Condensed Consolidated Statements
of Cash Flows for the thirteen weeks
ended March 28, 2004 and March 30, 2003 5
Condensed Consolidated Statements of
Changes in Shareholders' Equity for the thirteen
weeks ended March 28, 2004 and March 30, 2003 6
Notes to Condensed Consolidated
Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 29
ITEM 4. Controls and Procedures 29
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 30
ITEM 6. Exhibits and Reports on Form 8-K 30
Signature 31
-2-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 28, December 28,
2004 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 18,897 $ 16,413
Restricted cash 4,900 4,872
Trade accounts receivable, less allowance
of $1,261 and $1,250 30,596 24,739
Inventories, net 30,135 30,877
Income taxes receivable 1,040 1,085
Other current assets 6,456 5,770
------------ ------------
Total current assets 92,024 83,756
------------ ------------
Property, plant and equipment 126,618 126,059
Less accumulated depreciation (40,472) (36,824)
------------ ------------
Net property, plant and equipment 86,146 89,235
------------ ------------
Goodwill, net 5,912 5,912
Other intangible assets, net 24,172 24,652
Other assets 2,696 2,469
------------ ------------
Total assets $ 210,950 $ 206,024
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt $ 13,597 $ 8,092
Current portion of pension obligation 5,190 5,190
Accounts payable 14,402 14,609
Accrued liabilities 26,209 26,636
Payable to the PI Trust 3,815 3,815
------------ ------------
Total current liabilities 63,213 58,342
------------ ------------
Long-term debt 13,497 14,354
Pension obligation 12,512 13,453
Postretirement benefits other than pension 15,408 15,103
Deferred payable to the PI Trust 11,887 11,887
Deferred income taxes 6,854 6,881
Other long-term liabilities 722 706
------------ ------------
Total liabilities 124,093 120,726
------------ ------------
Minority interest 9,644 9,388
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, 41,737,306 issued and
outstanding 41,737 41,737
Additional paid in capital 117,574 117,574
Accumulated deficit (73,494) (74,845)
Accumulated other comprehensive loss (8,604) (8,556)
------------ ------------
Total shareholders' equity 77,213 75,910
------------ ------------
Total liabilities and shareholders' equity $ 210,950 $ 206,024
============ ============
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 thirteen weeks ended
------------------------------
March 28, March 30,
2004 2003
------------ ------------
Net sales $ 56,598 $ 55,735
Cost of sales (45,539) (46,850)
------------ ------------
Gross profit 11,059 8,885
Selling, general and
administrative expenses (8,602) (8,279)
------------ ------------
Operating profit 2,457 606
Interest expense (315) (237)
Other income, net 293 15
------------ ------------
Income before provision for income
taxes and minority interest 2,435 384
Provision for income taxes (828) (184)
------------ ------------
Income before minority interest 1,607 200
Minority interest (256) (273)
------------ ------------
Net income (loss) $ 1,351 $ (73)
============ ============
Basic earnings (loss) per share $ .03 $ (.00)
============ ============
Diluted earnings (loss) per share $ .03 $ (.00)
============ ============
The accompanying notes are an integral part of these statements.
-4-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the thirteen weeks ended
------------------------------
March 28, March 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,351 $ (73)
Depreciation and amortization 4,157 4,607
Other operating activities (6,908) (5,669)
------------ ------------
Net cash used in operating activities (1,400) (1,135)
Cash flow from investing activities:
Capital expenditures (842) (1,800)
------------ ------------
Net cash used in investing activities (842) (1,800)
Cash flow from financing activities:
Net borrowings (payments) on short-term notes 5,513 (3,393)
Principal payments on long-term debt (747) (17)
Proceeds from long-term borrowings - 131
------------ ------------
Net cash (used in) provided by
financing activities 4,766 (3,279)
Effect of exchange rate changes on cash (40) 44
Net change in cash and cash equivalents 2,484 (6,170)
Cash and cash equivalents at
beginning of period 16,413 19,983
------------ ------------
Cash and cash equivalents at end of period $ 18,897 $ 13,813
============ ============
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 29, 2002 $ 41,701 $ 117,458 $ (8,402) $ (8,647) $ 142,110
Comprehensive income:
Net loss - - (73) - (73)
Currency translation
adjustment - - - 181 181
-------------- -------------- -------------- -------------- --------------
Total comprehensive
income - - (73) 181 108
-------------- -------------- -------------- -------------- --------------
Balance,
March 30, 2003 $ 41,701 $ 117,458 $ (8,475) $ (8,466) $ 142,218
============== ============== ============== ============== ==============
Balance,
December 28, 2003 $ 41,737 $ 117,574 $ (74,845) $ (8,556) $ 75,910
Comprehensive income:
Net income - - 1,351 - 1,351
Currency translation
adjustment - - - (48) (48)
-------------- -------------- -------------- -------------- --------------
Total comprehensive
income - - 1,351 (48) 1,303
-------------- -------------- -------------- -------------- --------------
Balance,
March 28, 2004 $ 41,737 $ 117,574 $ (73,494) $ (8,604) $ 77,213
============== ============== ============== ============== ==============
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
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 Corporation (the "Company") as of
March 28, 2004 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 28, 2003. Interim results are not necessarily indicative of the results
for the full year.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value-based method of accounting in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost is recognized for stock
options granted at fair market value. Had compensation costs of stock options
been determined under a fair value alternative method as stated in Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement
No. 123," the Company would have been required to record the fair value for such
options and employees' purchase rights, and record such amount in the
consolidated financial statements as compensation expense. Pro forma stock-based
employee compensation costs, net income (loss) and earnings (loss) per share, as
they would have been recognized if the fair value method had been applied to all
awards, are presented in the table below.
FOR THE THIRTEEN WEEKS ENDED
------------------------------
MARCH 28, MARCH 30,
2004 2003
------------ ------------
Net income (loss):
As reported ............................................ $ 1,351 $ (73)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects ... (671) (413)
------------ ------------
Pro forma .............................................. $ 680 $ (486)
============ ============
Basic earnings (loss) per share:
As reported ............................................ $ .03 $ (.00)
============ ============
Pro forma .............................................. $ .02 $ (.01)
============ ============
Diluted earnings (loss) per share:
As reported ............................................ $ .03 $ (.00)
============ ============
Pro forma .............................................. $ .02 $ (.01)
============ ============
During the first quarter of fiscal 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:
-7-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE A, CONTINUED
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. During the second
quarter of fiscal 2003, the Company granted options for 1,172,000 shares of
common stock with an exercise price of $5.70 per share. The fair value of these
options was estimated at $2.05 per common share on the date of grant, using the
Black-Scholes option pricing model with the following assumptions: expected
volatility of 62.30%, dividend yield of 0.00%, risk free interest rate of 2.84%
and an expected life of the options of six years.
There were no options granted during the first quarter of 2004.
For a summary of all other significant accounting policies, refer to Note
A to the consolidated financial statements included with the 2003 Form 10-K.
NOTE B - RESTRICTED CASH
Restricted cash relates to the following:
March 28, December 28,
2004 2003
------------ ------------
Payable to the PI Trust $ 3,209 $ 3,182
Letters of credit 1,631 1,630
Other 60 60
------------ ------------
$ 4,900 $ 4,872
============ ============
The payable to the Personal Injury Trust ("PI Trust") consists of tax
refunds and other funds received by the Company that will be paid to the PI
Trust at a future date.
The letters of credit collateralize certain obligations relating primarily
to workers' compensation.
NOTE C - INVENTORIES
Inventories, net, consist of the following:
March 28, 2004 December 28, 2003
-------------- -----------------
Raw material $ 10,934 $ 11,056
Work in process 9,172 8,871
Finished goods 10,029 10,950
------------ ------------
$ 30,135 $ 30,877
============ ============
Inventory reserves were $3,808 and $4,588 at March 28, 2004 and December
28, 2003, respectively.
-8-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS
March 28, 2004 December 28, 2003
------------------------------ -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Finite life intangible
assets:
Unpatented technology $ 14,360 $ 5,646 $ 14,360 $ 5,337
Distribution base 5,716 958 5,716 787
------------ ------------ ------------ ------------
Total $ 20,076 $ 6,604 $ 20,076 $ 6,124
============ ============ ============ ============
Indefinite life intangible
assets:
Trademarks $ 10,700 $ 10,700
============ ============
Goodwill $ 5,912 $ 5,912
============ ============
Intangible assets, net $ 30,084 $ 30,564
============ ============
The weighted-average amortization periods for the unpatented technology
and the distribution base are between 6 and 20 years. Amortization expense for
the 13 weeks ended March 28, 2004 and March 30, 2003 amounted to $480 and $556,
respectively.
Estimated annual amortization expense is as follows:
For the year ending:
2004 $ 1,922
2005 1,922
2006 1,922
2007 1,622
2008 1,522
Trademarks and goodwill are not being amortized but are reviewed for
impairment annually or more frequently when events or circumstances indicate
that the carrying amount may be impaired. The Company's three operating segments
have been defined as reporting units for purposes of testing goodwill for
impairment. 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 28, 2004.
-9-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE E - DEBT
Debt at March 28, 2004 and December 28, 2003 consists of the following:
March 28, 2004 December 28, 2003
------------------------------------------ ------------------------------------------
Current Non-Current Total Current Non-Current Total
------- ----------- ----- ------- ----------- -----
Domestic bank debt
Line of credit $ 9,123 $ - $ 9,123 $ 3,604 $ - $ 3,604
Term loans
Domestic Wet Friction 1,055 3,869 4,924 1,055 4,133 5,188
Aftermarket 996 5,671 6,667 996 5,921 6,917
------------ ------------ ------------ ------------ ------------ ------------
Total domestic bank debt 11,174 9,540 20,714 5,655 10,054 15,709
------------ ------------ ------------ ------------ ------------ ------------
Foreign bank debt
Line of credit - - - - - -
Term loans
Europe 957 3,817 4,774 979 4,137 5,116
Asia 1,300 - 1,300 1,300 - 1,300
------------ ------------ ------------ ------------ ------------ ------------
Total foreign bank debt 2,257 3,817 6,074 2,279 4,137 6,416
------------ ------------ ------------ ------------ ------------ ------------
Total bank debt 13,431 13,357 26,788 7,934 14,191 22,125
Leases 166 140 306 158 163 321
------------ ------------ ------------ ------------ ------------ ------------
Total borrowings $ 13,597 $ 13,497 $ 27,094 $ 8,092 $ 14,354 $ 22,446
============ ============ ============ ============ ============ ============
The carrying value of the Company's debt approximates fair value.
The Company, through its Domestic Wet Friction segment subsidiaries,
Raybestos Products Company ("RPC"), and Raybestos Automotive Components Company
("RACC"), maintains a Loan and Security Agreement, which provides for RPC and
RACC to borrow up to $25.3 million in the aggregate. The agreement, as amended
in November 2003, consists of a $20 million revolving line of credit and a term
loan of $5.3 million. The revolving line of credit is limited through a formula
which provides availability based on qualified accounts receivable and
inventory. The revolving line of credit matures September 28, 2006. The term
loan is payable in 34 monthly payments of $88 thousand, commencing December 1,
2003 and maturing on September 28, 2006, with the final payment being the
remainder of the balance. The revolving line of credit and the term loan are
collateralized by accounts receivable, inventory and property, plant and
equipment. Amounts outstanding under the revolving line of credit bear interest
at a rate equal to, at the Company's option, the prime rate or the adjusted
Eurodollar rate, plus a margin of 0.5% and 2.75%, respectively. Amounts
outstanding under the term loan bear interest at a rate equal to, at the
Company's option, the prime rate or the adjusted Eurodollar rate, plus a margin
of 0.75% and 3.0%, respectively. The agreement contains financial and other
covenants, including a fixed charge coverage ratio and a material adverse change
clause. At March 28, 2004 and December 28, 2003, the aggregate pledged assets of
RPC and RACC amounted to $62.1 million and $59.6 million, respectively,
consisting of cash, accounts receivable, inventory, machinery and equipment and
all other tangible and intangible assets, except real property. The agreement
permits RPC and RACC to pay dividends to the Company for costs and expenses
incurred by the Company in the ordinary course of business so long as no event
of default has occurred and is continuing. Subsequent to the end of the first
quarter, but prior to the filing of this report, the Company entered into a
fifth amendment to this agreement. The fifth amendment alters the determination
of availability under the revolving
-10-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE E, CONTINUED
line of credit to exclude certain receivables due to a potential right of setoff
and grants the lender a mortgage on the real property owned by the Company in
Sterling Heights, Michigan. The carrying value of the real property in Sterling
Heights, Michigan was $5.1 million at March 28, 2004. Further, in accordance
with the fifth amendment, the lender may make loans, subject to certain limits,
under the revolving line of credit up to the lesser of the amount of the
excluded receivables or $1.9 million.
The Company, through its subsidiaries Raytech Powertrain, Inc. ("RPI"),
Allomatic Products Company ("APC"), Raytech Systems, Inc. ("RSI") and
Raybestos Powertrain, LLC is party to a loan agreement for $7.0 million with an
interest rate at 1.65 basis points over the adjusted Eurodollar rate with a
five-year term. The loan is payable in 59 monthly payments of $83, commencing on
December 1, 2003, with a balloon payment of $2.1 million payable on November 3,
2008. The proceeds from this facility will be used to pay environmental costs
and pension costs. The loan is collateralized by the assets of the borrowing
entities. The agreement contains financial and other covenants, including the
maintenance of certain financial ratios and a material adverse change clause. At
March 28, 2004 and December 28, 2003, the aggregate pledged assets of APC, RSI
RPI and Raybestos Powertrain LLC were $54.9 million and $54.0 million
respectively.
The Company's wholly-owned German subsidiary, Raybestos Industrie-Produkte
GmbH ("RIP"), has available lines of credit with several German banks. Interest
is charged at rates between 5.07% and 8.0%. The lines are repayable on demand.
At March 28, 2004 and December 28, 2003, there were no borrowings outstanding
under these lines of credit.
The Company's wholly-owned German subsidiaries, Raytech Composites Europe
GmbH ("RCE") and RIP have various loan agreements where the maturities range
from September 2006 through December 2012. The loans are payable in equal
periodic installments (usually quarterly or semi-annually) over the term of the
loan. The loans bear interest at rates ranging from 2.5% through 6.2%. At March
28, 2004 and December 28, 2003, respectively, the aggregate pledged assets,
consisting of machinery and equipment, amounted to EUR13.0 million ($16.0
million) and EUR12.7 million ($16.0 million).
During the periods presented, the Company's wholly-owned Chinese
subsidiary Raybestos Friction Products (Suzhou) Co. Ltd. ("RFP") has had various
loan agreements. The loans are short-term with maturities between six and twelve
months.
The weighted average rates on all domestic and foreign bank notes payable
at March 28, 2004 and December 28, 2003 were 3.88% and 3.71%, respectively.
-11-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE F - LITIGATION
ENVIRONMENTAL REMEDIATION
Crawfordsville, Indiana - Shelly's Ditch Contamination Removal
In October 1987, RPC, a wholly-owned subsidiary of the Company, purchased
a major manufacturing facility (the "RPC Facility") in Crawfordsville, Indiana.
Sometime thereafter, the Company learned that the previous owner of the RPC
Facility had disposed of polychlorinated biphenyls ("PCBs") in the ground at the
RPC Facility in the mid-1960s and that such PCBs were leaching from the RPC
Facility into an adjacent ditch ("Shelly's Ditch").
In 1996, the Indiana Department of Environmental Management (the "IDEM")
advised RPC that the RPC Facility may have contributed to, and was potentially
responsible for, the release of lead and PCBs found in Shelly's Ditch. In the
late 1990s, RPC and the IDEM entered into an agreed order (the "Agreed Order")
for a risk-based remediation of PCBs and lead in Shelly's Ditch. When the IDEM
later sought to unilaterally withdraw from the Agreed Order, RPC appealed and
the court ordered the IDEM to reinstate the Agreed Order. Meanwhile, at the
IDEM's request, the United States Environmental Protection Agency (the "EPA")
became involved in Shelly's Ditch.
In December 2000, before the Agreed Order was reinstated, the EPA issued a
Unilateral Administrative Order to RPC under CERCLA (the "EPA Removal Order")
demanding removal of contaminated soils from those Shelly's Ditch areas
identified as Reaches 1 through 3 (the "Site"). The EPA Removal Order required
more work at greater expense than the IDEM Agreed Order. Thereafter, RPC
proceeded with the work required under the EPA Removal Order. By March 28, 2004,
RPC had spent approximately $18.7 million on removal of lead and PCB
contaminated soils from the Site and had accrued $400 for potential EPA
oversight costs relating to that work.
On January 9, 2004, the EPA confirmed that RPC had completed the action
required under the EPA Removal Order, including the removal and proper disposal
of Site soils and sediments contaminated with PCBs and lead. In its
confirmation, the EPA noted that RPC would continue to be subject to certain
obligations under that order, including record retention and the payment of
oversight costs. Whether RPC will be required to pay oversight costs relating to
the work under the EPA Removal Order will depend on the outcome of future
negotiations with the EPA and the IDEM regarding potential environmental
remediation downstream of the Site.
Crawfordsville, IN - Environmental Remediation Downstream of
Reaches 1 through 3 of Shelly's Ditch
On May 6, 2003, the EPA indicated that RPC is potentially liable for PCB
and lead contamination downstream of the Site. The EPA has not issued an order
to RPC regarding this downstream area. However, during the third quarter of
2003, the Company began negotiations with the EPA concerning such possible
additional remediation. As a result, during the third quarter of 2003, the
Company recorded a $2.4 million provision relating to this potential liability
for future cleanup costs.
-12-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE F, CONTINUED
Crawfordsville, IN - Environmental Remediation and Expenses
relating to the RPC Facility
On May 15, 2001, the EPA issued a Pre-filing Notice and Opportunity to
Confer to RPC (the "Pre-filing Notice"). This notice stated that the EPA might
file a civil action lawsuit against RPC for violations of various environmental
statutes and would offer RPC the opportunity to participate in pre-filing
negotiations to resolve this matter. The EPA stated that it has reason to
believe that RPC committed violations of the Clean Air Act, Clean Water Act,
Resource Conservation and Recovery Act, and Toxic Substances Control Act and
that RPC could be subject to substantial penalties. At that time, the Company
recorded a provision of $.3 million on the advice of legal counsel. On September
3, 2003, the EPA proposed that the parties settle the Pre-filing Notice. The EPA
stated that penalties for violations alleged in the Pre-filing Notice could
total approximately $180 million and suggested the following resolution: RPC
should pay approximately $2.4 million in fines and undertake compliance
activities, on-site investigative work that the EPA estimated would cost about
$1.0 million, and corrective action to resolve the Pre-filing Notice. The
parties have begun preliminary negotiations regarding the potential on-site
investigative work but have not obtained an overall EPA settlement proposal. The
Company recorded a provision of $3.1 million in the year-ended December 28, 2003
based on the EPA position.
Ferndale, MI - Potential Responsibility for Environmental Remediation
In a January 8, 2002 letter, the Michigan Department of Environmental
Quality asserted Company responsibility for trichloroethylene contamination at a
Ferndale, Michigan industrial site that Advanced Friction Materials Company
("AFM") leased from approximately 1974 to 1985. The Company acquired 47% of the
stock of AFM in 1996 and the balance of the shares in 1998. The Company's
liability at this site is indeterminable at this time.
ENVIRONMENTAL LITIGATION
Cost Recovery Actions against Insurers regarding Shelly's Ditch
In 1996, RPC notified its insurers and demanded defense and indemnity
regarding any environmental issues relating to alleged lead and PCB
contamination of Shelly's Ditch. In January 1997, one insurer filed a complaint
in the U.S. District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. Raybestos Products Company (the "Insurance Case"). The
complaint sought a declaratory judgment that the Reliance Insurance policies do
not provide coverage to RPC for defense and indemnity relating to investigation
and remediation of contamination in Shelly's Ditch. In January 2000, the
District Court rejected Reliance`s claims and granted summary judgment to RPC.
In June 2001, Reliance Insurance Company was placed in liquidation in
Pennsylvania. The Company has filed claims in the Reliance liquidation for
recovery of its Shelly's Ditch expenses but has not received a decision.
In February 2002, RPC filed a third-party complaint in the Insurance Case
against National Union and two other insurance carriers. The third-party
complaint seeks defense and indemnity from the insurers relating to
investigation and remediation of contamination in Shelly's Ditch.
-13-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE F, CONTINUED
In February 2004, National Union and its affiliates commenced an adversary
proceeding against the Company, RPC and others by filing a complaint in U.S.
Bankruptcy Court (the "Adversary Proceeding"). In the Adversary Proceeding,
National Union claims that RPC's third-party complaint against National Union is
barred by a January 2002 order of the U.S. Bankruptcy Court in the Raymark
Industries, Inc. and Raymark Corporation Chapter 11 cases (the "Raymark Order").
National Union claims that the Raymark Order prohibited RPC from pursuing its
third-party complaint against National Union and declared that the National
Union insurance policies issued to the Company and RPC have been exhausted. Also
in February 2004, National Union filed a motion in the U.S. District Court,
Southern District of Indiana, asking that court to stay the Insurance Case
against National Union. The outcome of this Adversary Proceeding and related
motion for stay and their effects, if any, on the Insurance Case against
National Union cannot be predicted.
RPC Claims against IDEM
In July 2002, RPC filed an action against the IDEM for breach of contract
claiming damages based on the difference between the costs of cleanup under the
EPA Removal Order and the IDEM Agreed Order. The outcome of this litigation
cannot be predicted.
COMMERCIAL LITIGATION
On April 22, 2003, Automation by Design, Inc. filed a civil action against
RPC in U.S. District Court for the Southern District of Indiana. The complaint
alleges copyright infringement and breach of contract in connection with RPC's
purchase of certain equipment. In answer to plaintiff's complaint, RPC denied
liability and filed counterclaims for breach of contract and declaratory
judgment. The court has granted Automation by Design's motion to amend its
complaint to include Raytech Corporation and Production Design Services, Inc. as
defendants. RPC has agreed to defend and provide certain indemnity protection to
Production Design Services, Inc., which manufactured certain equipment that is
allegedly involved in this court action. The outcome of this litigation cannot
be predicted, and the Company's liability or recoveries are indeterminable at
this time.
EQUITY HOLDERS LITIGATION
In February 2002, lawyers claiming to represent the Committee of Equity
Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court to compel
the Company to either issue up to approximately 700,000 additional shares to the
pre-reorganization holders of shares in the Company 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 cannot be predicted; 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 Bankruptcy Court denied a Company motion to dismiss this action. The Company
is currently in negotiations with the equity holders' representative to settle
this case.
The Company is subject to certain other legal matters that have arisen in
the ordinary course of business, and management does not expect them to have a
significant adverse effect on the results of consolidated operations, financial
condition or cash flow.
-14-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE G - SEGMENT REPORTING
The Company's operations are categorized into three operating segments and
a corporate group based on management structure, product type and distribution
channel, as described below. The Company, during the first quarter of 2004,
restructured its operating segments to facilitate a stronger focus on the
European wet friction operations. Oversight of the European wet friction
operations, Raybestos Reibtechnik GmbH ("RRT") and Raybestos U.K. Ltd. ("RUK"),
was transferred to the European management team. The newly defined operating
segments are Domestic Wet Friction, International (including the European wet
friction operations and European and Asian dry friction operations), and
Aftermarket. All prior period segment information presented has been restated to
reflect the newly defined segments.
Domestic Wet Friction
The Domestic Wet Friction segment manufactures and distributes automatic
transmission and wet wheel brake system components. The Company markets its
products to automobile, heavy duty truck, farm machinery, mining, and bus
original equipment manufacturers ("OEMs") in North America.
International
The International segment manufactures and distributes automatic
transmission, manual transmission and wet wheel brake system components. The
Company markets its products to automobile, heavy duty truck, farm machinery,
mining, and bus OEMs. The International segment markets its dry friction
products worldwide and its wet friction products throughout Europe and Asia.
Aftermarket
The Aftermarket segment produces specialty engineered products primarily
for automobile and lift truck automatic 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.
Corporate
The Corporate group consists principally of corporate expenses, including
costs to maintain the corporate headquarters, certain environmental costs, and
certain assets, liabilities and related income and expense stemming from the
reorganization plan implemented when the Company emerged from bankruptcy in
2001. The Company has chosen not to distribute these costs to the operating
segments to preserve the historical comparability at the operating segment
level.
-15-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE G, CONTINUED
Information relating to operations by industry segment follows:
FOR THE THIRTEEN WEEKS ENDED
--------------------------------
MARCH 28, 2004 MARCH 30, 2003
-------------- --------------
Net Sales
Domestic Wet Friction $ 31,402 $ 33,053
International 16,653 15,063
Aftermarket 12,386 11,489
Intersegment elimination(1) (3,843) (3,870)
------------ ------------
Net sales to external customers $ 56,598 $ 55,735
============ ============
Gross Profit
Domestic Wet Friction $ 3,896 $ 2,701
International 4,789 3,905
Aftermarket 3,685 3,379
Intersegment elimination(1) (1,311) (1,100)
------------ ------------
Consolidated $ 11,059 $ 8,885
============ ============
Operating Profit (Loss)(2)
Domestic Wet Friction $ 670 $ (1,208)
International 2,186 1,379
Aftermarket 2,234 2,410
Corporate (2,655) (2,197)
------------ ------------
Consolidated $ 2,435 $ 384
============ ============
(1) The Company records intersegment sales at an amount negotiated between the
segments. All intersegment sales are eliminated in consolidation.
Substantially all intersegment sales are sales of wet friction products to
the Aftermarket segment.
(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.
-16-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE H - INCOME TAXES
The tax provision for the thirteen-week period ended March 28, 2004 is $.8
million compared to a provision of $.2 million for the same period in the prior
year. The provision for the current period includes federal taxes resulting from
profit generated by APC, foreign taxes associated with operations in Germany and
China and state taxes generated by domestic operations. The Company did not
recognize any tax benefits associated with the losses generated by the U.S.
domestic operations, due to doubts concerning their future recoverability, in
the thirteen week period ended March 28, 2004. The Company's effective tax rate
for the thirteen week period ended March 28, 2004 was 34.0% compared to a rate
of 47.9% for the same period in the prior year. The effective tax rate
coincidentally approximates the U.S. statutory rate in the first quarter of
2004 due to the mix of income and the related income tax rates in each of the
tax jurisdictions in which the Company's operations generated income. The
effective tax rate for the thirteen week period ended March 30, 2003 reflects
the statutory federal tax rate adjusted for state and foreign taxes and
contributions made to the Raymark pension plan. 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.
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 28, 2004, the Company
has tax loss carryforwards of $101.2 million and tax credit carryforwards of
$3.5 million. The net operating loss carryforwards are allocated between the
Company and the PI Trust in the amounts of $21.2 million and $80.0 million,
respectively. The tax credit carryforwards all inure to the benefit of the PI
Trust. 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.
Losses generated by the Company subsequent to the emergence from bankruptcy,
exclusive of losses attributed to the payments discussed above, will be retained
by the Company. The method of allocation in utilizing current and future
operating losses between the PI Trust and the Company has not been determined at
this time. Additional tax recoveries, expected to be received in future periods,
are recorded as deferred tax assets, net of valuation allowances, and a deferred
payable to the PI Trust, which amounted to $11.9 million at March 28, 2004 and
December 28, 2003.
At March 28, 2004, the Company has recorded a tax receivable in the amount
of $.9 million due from state governments for returns filed in 2003. The Company
received $45 in January 2004 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 impact the deferred tax asset
attributable to the PI Trust. Any change in the deferred tax asset attributable
to the PI Trust will also impact the valuation allowance and the related
deferred payable to the PI Trust. Pursuant to a settlement meeting held in April
2004, the Company and the IRS have reached a tentative settlement of the IRS
audit. The settlement, if approved by the IRS District Director and the Joint
Committee on Internal Revenue Taxation, would result in no payment of Federal
tax given the Company's net operating losses. However, interest on the tax
assessment would be payable. The Agreement does not address, and the parties
have not agreed, as to whether the Company or the PI Trust would be responsible
for the interest on any tax assessment. The Company expects the approval process
to be completed prior to the end of the current fiscal year.
-17-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE H - CONTINUED
The Company owns 57% of the stock of 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 $1.5 million at March 28, 2004, if all of APC's
earnings were to be distributed through dividends.
NOTE I - EARNINGS PER SHARE
FOR THE THIRTEEN WEEKS ENDED
-------------------------------------------------------------------------------------
MARCH 28, 2004 MARCH 30, 2003
---------------------------------------- ----------------------------------------
SHARE PER SHARE PER
SHARES AMOUNT INCOME SHARES AMOUNT INCOME
---------- ---------- ---------- ---------- ---------- ----------
Basic Earnings per Share
Income available
to common stockholders $ 1,351 41,737 $ .03 $ (73) 41,702 $ (.00)
Effect of Dilutive Securities --- --- --- ---
---------- ---------- ---------- ----------
Diluted Earnings per Share
Income available
to common stockholders $ 1,351 41,737 $ .03 $ (73) 41,702 $ (.00)
========== ========== ========== ========== ========== ==========
Options to purchase 3,035,659 and 1,927,411 shares of common stock were
not included in the computation of diluted earnings per share for the thirteen
weeks ended March 28, 2004 and the thirteen weeks ended March 30, 2003,
respectively, due to their anti-dilutive effect due either to their exercise
price compared to the market price or the Company incurring a loss for the
period.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court to compel
the Company to either issue up to approximately 700,000 additional shares to the
pre-reorganization holders of shares in the Company 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 cannot be predicted; 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 Bankruptcy Court denied a Company motion to dismiss this action. The Company
is currently in negotiations with the equity holders' representative to settle
this case.
-18-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE J - PENSION AND POST RETIREMENT BENEFIT PLANS
Components of Net Periodic Benefit Cost
Pension Benefits Post Retirement Benefits
----------------------- ------------------------
For the thirteen weeks ended
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
---------- ---------- ---------- -----------
Service Cost $ 146 $ 108 $ 197 $ 157
Interest Cost 698 719 290 270
Expected return on plan assets (636) (414) - -
Amortization of prior service cost 15 - - -
Amortization of net (gain) loss 128 25 41 -
---------- ---------- ---------- -----------
Net periodic benefit cost $ 351 $ 438 $ 528 $ 427
========== ========== ========== ===========
The Company previously disclosed in its financial statements for the year
ended December 28, 2003, that it expected to contribute $5.3 million to its
pension plans and $.6 million to fund its post retirement plan in 2004. As of
March 28, 2004, $1.2 million of contributions have been made. The Company
presently anticipates contributing an additional $4.6 million to fund its
pension and post retirement plans in 2004. The 2004 planned contributions of
$5.8 million reflect a $.5 million reduction provided by the Pension Funding
Equity Act of 2004.
In connection with the Company's Chapter 11 proceedings, the Pension
Benefit Guaranty Corporation ("PBGC") filed certain motions claiming that the
Company was responsible for the funding and sponsorship of two Raymark
Corporation pension plans. The court ordered that the Company was liable for the
maintenance and funding of the underfunded pension plan obligations of Raymark
Corporation. The Company, based on the court's order, assumed the role of plan
sponsor of the Raymark Plans upon emergence from bankruptcy. Subsequent to the
end of the first quarter of 2004, but prior to the filing of this report, the
Company executed a mortgage of its real property located in Crawfordsville,
Indiana to the PBGC, guaranteeing its funding obligations of the Raymark Plans.
At March 28, 2004 the carrying value of the real property mortgaged was $4.8
million.
NOTE K - LIQUIDITY
Cash used by operating activities for quarter ended March 28, 2004 was
$1.4 million compared to $1.1 million during the same period last year. The
principal operating use of cash in both periods presented was an increase in
trade accounts receivable. The increase in trade accounts receivable during the
first quarter is a seasonal fluctuation. The Company effectively manages its
accounts receivable as evidenced by the average days sales in trade receivables
of 49 and 50 days at March 28, 2004 and March 30, 2003, respectively.
Capital expenditures during the first quarter of 2004 were $.8 million
compared to $1.8 million during the first quarter of 2003.
The Company's cash and cash equivalents at March 28, 2004 totaled $18.9
million compared to $16.4 million at December 28, 2003, an increase of $2.5
million.
-19-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE K, CONTINUED
The total borrowings at March 28, 2004 of $27.1 million compares to total
borrowings of $22.4 million at year-end 2003, an increase of $4.7 million
period-over-period. The available lines of credit at March 28, 2004 of $9.4
million compares to $10.6 million at year-end 2003, a decrease in availability
of $1.2 million. Full details of the Company's debt are contained in Note E to
the Condensed Consolidated Financial Statements.
In summary of the above, the cash and available lines of credit at March
28, 2004 were $28.3 million compared to $27.0 million at year-end 2003, an
increase in cash and available lines of credit of $1.3 million.
Refer to Notes F - Debt and N - Commitments to the consolidated financial
statements, included within the Company's 2003 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 Company's potential obligations regarding environmental remediation
are explained fully in Note F - Litigation of the Condensed Consolidated
Financial Statements.
The Company assumed the liability for the Raymark pension plans as part of
the reorganization. Funding for the plans in 2004 is expected to be
approximately $4.4 million of which $1.2 million was funded in the first quarter
of 2004.
Certain tax issues are discussed in Note H - Income Taxes, which provide
details concerning the status of the current Internal Revenue Service audit and
the use of certain future tax benefits.
The most significant factor affecting the Company's future cash flows is
its ability to earn and collect cash from customers. The automotive parts
industry is extremely competitive. Many of the Company's customers and
competitors are significantly larger than the Company. The Company's customers
are often able to demand price reductions from the suppliers including all
segments of Raytech. Some of the Company's sales are made under standard sales
contracts that include price commitments for multiple years. Specifically in the
Domestic Wet Friction segment, the Company is selling certain products to
certain customers at a loss under the terms of its current sales contracts. The
Company is currently working with its customers to re-negotiate the terms of
these loss contracts. In addition, the Company is reviewing alternatives to
improve its cost structure.
Items that will potentially require the use of cash during the remainder
of fiscal 2004 other than normal operating expenses include the following.
- The Company has recorded an accrued liability of $6.2 million for certain
environmental matters more fully discussed in Note F - Litigation. It is
not certain at this time when these funds will be expended. There exists
the potential that all or a portion of the funds will be spent in 2004.
- The Company assumed the liability for the Raymark pension plans as part of
the Chapter 11 reorganization. The plans, which are discussed as part of
Note M - Employee Benefits to the consolidated financial statements,
included within the Company's 2003 Form 10-K, are under funded and the
Company, through an agreement with the Internal Revenue Service, is
providing both current contributions and catch-up contributions. The
expected funding for the plans in 2004 will be approximately $4.4 million,
$1.2 million of which was funded during the first quarter.
-20-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited)
NOTE K, CONTINUED
- Certain tax issues are discussed in Note H - Income Taxes, which provides
detail 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 lending
facilities and cash flow from operations during 2004 will be sufficient to meet
all of the Company's obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the Company
to utilize its lending facilities is dependent on the Company's ability to meet
its financial forecasts for 2004, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts include
certain revenue assumptions generally consistent with the prior year for the
Domestic Wet Friction (on a comparable basis) and Aftermarket segments and
modest growth in the International segment, as well as certain cost-saving
initiatives. If the Company does not comply with the financial covenants, an
event of default would occur and could result in the acceleration of the
Company's indebtedness under its domestic credit facilities. If that were to
occur, the ability of the Company to continue would be dependent upon, among
other things, its ability to amend the credit facilities, enact certain actions
to generate cash and/or to seek additional alternative financing from other
lenders.
-21-
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 assumed that users of the interim financial information
have read or have access to the discussion and analysis for the preceding fiscal
year.
Caution Regarding Forward Looking Statements
Statements in this "Management's Discussion and Analysis" relating to
management's views of trends, the effects of changing prices, plans, objectives
and other matters for future operating periods are "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to significant risks and uncertainties
that could cause actual results to differ materially from the results in the
statements. Forward-looking statements relating to Raytech Corporation (the
"Company") businesses are based on assumptions concerning certain factors that
are not predictable and are subject to change. These factors include general
economic conditions, worldwide demand for automotive and heavy duty vehicles,
consumer confidence, actions of our competitors, vendors and customers, factors
affecting our costs such as raw material prices, labor relations and
environmental compliance and remediation, interest and foreign currency exchange
rates, technological issues, accounting standards, and the risks set forth in
the section entitled "Risk Factors." The forward-looking statements herein are
made as of the date of this report. We have no obligation to update our
forward-looking statements.
Risk Factors
The Company's businesses are subject to certain risks, including but not
limited to those described below, that could cause material changes in its
results of operations or financial condition in the future.
- - The Company's businesses are greatly affected by general economic conditions.
The Company sells components to the automotive and heavy duty equipment
industries and in large part is dependent upon consumer demand for
automobiles, consumer confidence and business investment in heavy equipment.
The Company's businesses sell components for transmissions and brakes to
automotive and heavy duty original equipment manufacturers ("OEMs") as well
as the automotive aftermarket. The economic slowdown and recession of the
last three years have resulted in reduced heavy equipment and passenger
vehicle production in the United States and in foreign markets and reduced
demand in the aftermarket. It is possible that OEM vehicle and equipment
production will not increase significantly in 2004 and future years.
Continuation of the economic slowdown may adversely affect the Company's
revenues in all of its business segments.
- - The Company's customers are large companies under pressure to cut component
costs. The Domestic Wet Friction segment's largest customers are experiencing
margin erosion due to reduced volume, high labor costs and intense foreign
competition. The Company is a relatively small supplier of a limited number
of components. Due to their size, the Company's customers are often able to
demand component price reductions from their suppliers, including all
segments of the Company. These customers may also demand technological
changes and quality improvements at the Company's expense. In addition, the
trend in the automotive aftermarket is toward longer transmission service and
replacement cycles due to improved quality. If foreign automotive
manufacturers continue to take U.S. market share from the Company's domestic
OEM customers and economic conditions do not improve significantly, the
Company's revenues will be adversely affected by these factors.
- - The Company is subject to substantial environmental remediation obligations
for past contamination that are not yet fixed in scope or amount. The nature
of environmental contamination and its remediation are such that the amount
and nature of work necessary is often unknown until late in the process. The
level of responsibility of the parties involved and the level of remediation
to be required by governmental
-22-
authorities is also uncertain. The Company also incurs substantial ongoing
environmental compliance costs in operating its production facilities.
Substantial unanticipated environmental costs could adversely affect
profitability.
- - Raytech's Common Stock is currently included in the Russell 3000 equity
index. The Russell 3000 is a market capitalization-weighted index of the
3,000 largest U.S. companies. Russell reconstitutes the index annually in
order to accurately rank the 3,000 largest companies in the U.S. stock market
by market capitalization to provide a truer reflection of stock market
activity and performance. There is a risk that Raytech may no longer be part
of that index after the next recalculation of the index in June 2004. If
Raytech ceases to be a member of the Russell 3000, its common stock price may
be adversely affected because mutual funds and other investors who must own
or wish to own the Russell 3000 index will sell or no longer purchase Raytech
common stock. The Personal Injury ("PI Trust") holds 82.9% and the
Environmental Protection Agency ("EPA') holds 5.5% of the outstanding common
stock of the Company at March 28, 2004.
- - Worldwide increases in steel demand have led to increased prices and concerns
of a steel shortage. Potential impacts on the Company from the current steel
market conditions could include reduced delivery levels of finished products
to Raybestos customers and lower profitability due to higher raw material
costs.
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 A to the Consolidated Financial Statements in the Company's Form 10-K
for fiscal 2003 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 estimate processes and
policies during the first quarter 2004.
Results of Operations and Liquidity and Capital Resources
The following table sets forth selected income statement data for the
thirteen weeks ended March 28, 2004 and March 30, 2003.
For the thirteen weeks ended
(amounts in millions)
March 28, 2004 March 30, 2003
----------------------- -----------------------
Net sales $ 56.6 100.0% $ 55.7 100.0%
Gross profit 11.1 19.5 8.9 15.9
Selling, general and
administrative expense 8.6 15.2 8.3 14.9
Interest expense .3 .6 .2 .4
Other income, net (.3) -.5 - -
Income before taxes and
minority interest 2.4 4.3 .4 .7
Income taxes (.8) 1.5 (.2) .3
Minority interest (.3) .5 (.3) .5
---------- ---------- ---------- ----------
Net income (loss) $ 1.4 2.4% $ (.1) -.2%
========== ========== ========== ==========
The Company reported increased sales in the first quarter of 2004 compared
to the first quarter of 2003. The increase in sales was due principally to
favorable currency translation adjustments in the Company's European operations
and modest growth in the Aftermarket segment. The Company continues to
-23-
experience pressure to reduce prices from certain of its major customers, most
notably in the Domestic Wet Friction segment.
Gross profit increased to 19.5% of sales in the first quarter of 2004
compared to 15.9% during the same period last year. The Company realized
improved gross profit across all three of its operating segments, principally
due to improved productivity and cost reduction programs, partially offset by
the impact of price reductions. The Company's cost reduction programs generated
$2.3 million in savings during the first quarter of 2004. During the first
quarter of 2004 the Company experienced increases in the price of steel, a key
raw material. Continued increases in the price of steel could negatively impact
the Company's future profitability.
SG&A expenses increased $.3 million or 3.6% during the first quarter of
2004 compared to the first quarter of 2003. The increase is principally due to
currency translation, increased incentive compensation expense and medical
expense, partially offset by cost reductions.
Interest expense is incurred on the Company's debt facilities. See Note E
of the Condensed Consolidated Financial Statements.
The Company's income taxes are discussed in detail in Note H of the
Condensed Consolidated Financial Statements. As a condition of the
reorganization plan, all tax benefits received by the Company as a result of the
reorganization inure to the benefit of the PI Trust.
Minority interest relates to the Company's majority-owned subsidiary,
Allomatic Products Company ("APC"). APC, a member of the Company's Aftermarket
segment, is 57% owned by the Company, 40% owned by a related party and 3% owned
by certain employees of the Company. APC is consolidated in the financial
statements and a minority interest is recorded to reflect the minority
shareholders' interest in APC.
The Company recorded net income of $1.4 million, or $.03 per basic share,
for the thirteen week period ended March 28, 2004 compared to a net loss of $0.1
million, or nil per basic share for the same period in the prior year. The
increase in earnings of $1.5 million is due to improved operating results in the
Domestic Wet Friction and International segments.
The Company, during the first quarter of 2004, restructured its operating
segments to facilitate a stronger focus on the European wet friction operations.
Management of the European wet friction operations, Raybestos Reibtechnik GmbH
("RRT") and Raybestos U.K. Ltd. ("RUK") was transferred to the European
management team. The newly defined operating segments are Domestic Wet Friction,
International (including the European wet friction operations and European and
Asian dry friction operations), and Aftermarket. Details of performance by
operating segment are presented below. All prior period segment information
presented has been restated to reflect the newly defined segments.
-24-
DOMESTIC WET FRICTION
The following table sets forth selected income statement data for the
Domestic Wet Friction segment for the thirteen weeks ended March 28, 2004 and
March 30, 2003.
For the thirteen weeks ended
(amounts in millions)
March 28, 2004 March 30, 2003
------------------------ -------------------------
Net sales $ 31.4 100.0% $ 33.1 100.0%
Gross profit 3.9 12.4 2.7 8.2
Selling, general and
administrative expense 2.7 8.7 3.4 10.3
Income (loss) before taxes .7 2.1 (1.2) -3.7
The Domestic Wet Friction segment's sales decreased $1.7 million or 5.1%
in the first quarter of 2004 from the same period in 2003. The decrease in sales
is due to price reductions in both the automotive and heavy duty components of
the segment of $1.1 million, decreased automotive volume of $1.7 million,
partially offset by increased heavy duty volume of $.7 million. The remaining
change is due to intercompany sales.
Gross profit as a percentage of sales increased to 12.4% in the first
quarter of 2004 compared to 8.2% in the same quarter last year. Overall, the
increase in gross profit is the combined result of cost reductions, improved
productivity and improved overhead absorption, partially offset by the impact of
sales price reductions. Additionally, as a result of the impairment charge
recorded during the fourth quarter of 2003, depreciation expense was reduced by
$.3 million in the first quarter of 2004. The increase in the price of steel
resulted in an increase of raw material costs of $.2 million during the first
quarter of 2004. Correspondingly, the segment also realized an increase in the
proceeds from the sale of scrap of $.5 million in the first quarter of 2004
compared to the same period in the prior year. The Company believes that the net
favorable result of steel price increases realized in the first quarter of 2004
is a timing issue and that, in future periods, it is likely that the increase in
the cost of raw material will be equal to or exceed the increase in the proceeds
received from the sale of scrap.
The Domestic Wet Friction segment produces goods for its customers based
on a purchase order system, and in certain instances using longer-term contracts
that stipulate a fixed selling price with no commitment as to quantity. In
instances where the product's cost exceeds the selling price, a reserve is
established for the expected loss on products in inventory and customer purchase
orders received by the balance sheet date. The Company has not recorded an
estimate of the loss over the term of these contracts since the quantity and mix
of parts is not known and the future production costs will be impacted by, among
other things, changes in economic conditions and management's actions, including
expected cost reductions. Cost reductions realized during the first quarter 2004
allowed the Company to reduce its reserve for expected loss on goods in
inventory and customer purchase orders in the amount of $.4 million at March 28,
2004 compared to December 28, 2003.
SG&A expense for the first quarter of 2004 decreased $.7 million or 20.6%
compared to the first quarter of 2003. The decrease in SG&A is principally the
result of an increased emphasis on managing expenses. Additionally, the first
quarter of 2003 included $.2 million of non-recurring severance and relocation
expenses.
As a result of the above, income before taxes improved to $.7 million in
the first quarter of 2004 compared to a loss before taxes and minority interest
of $1.2 million in the same period in 2003.
The Company continues to review alternatives to improve the operating
results for this segment. Actions taken or being contemplated are as follows:
-25-
- During the first quarter of 2004, the Company reorganized its operating
segments to facilitate a stronger focus on the European wet friction
operations. Oversight of the European wet friction operations, RRT and
RUK, was transferred to the European management team.
- During March of 2004 the Sterling Heights technical center was closed. The
automotive sales and applications engineering groups previously located in
this building have been relocated to a nearby office building in the
Detroit area.
- Cost reduction programs generated $2.3 million in cost savings during the
first quarter of 2004. The Company has identified additional cost savings
projects that it expects to implement during 2004.
- The Company is conducting a facilities utilization review to determine if
improved performance can be obtained through consolidating certain
facilities with a focus on improved overhead absorption.
INTERNATIONAL
The following table sets forth selected income statement data for the
International segment for the thirteen weeks ended March 28, 2004 and March 30,
2003.
For the thirteen weeks ended
(amounts in millions)
March 28, 2004 March 30, 2003
------------------------ -------------------------
Net sales $ 16.7 100.0% $ 15.1 100.0%
Gross profit 4.8 28.8 3.9 25.9
Selling, general and
administrative expense 2.7 16.2 2.4 16.1
Income before taxes 2.2 13.1 1.4 9.2
The International segment's sales increased $1.6 million or 10.6% in the
first quarter of 2004 compared to the same period in 2003. The increase is due
to favorable currency translation gains of $2.3 million partially offset by
volume, mix and price decreases of $.7 million. The currency translation gains
reflect the increase period-over-period in the exchange rate of the Euro and the
British pound to the U.S. dollar. During the first quarter of 2004 the Company
consolidated its dry friction distribution facility into its wet friction
production facility in the U.K.. The relocation of the dry friction facility
resulted in lower production and lower sales to certain customers. The German
wet friction operation is experiencing increased competition resulting in the
loss of some sales and in price reductions. The German and Chinese dry friction
operations have increased sales modestly despite some pressure from customers
for price reductions.
Gross profit as a percentage of sales increased to 28.8% in the first
quarter of 2004 from 25.9% during the first quarter of 2003. The improved gross
profit as a percentage of sales is principally the result of cost reductions at
the Company's U.K. facility. The segments gross profit was favorably impacted by
currency translation gains in the amount of $.4 million.
SG&A expense for the first quarter of 2004 was $2.7 million or 16.2% of
sales compared to $2.4 million or 16.1% of sales in the first quarter of 2003.
The increase in SG&A of $.3 million is the result of currency translation gains
and increased incentive compensation expense.
As a result of the foregoing, income before taxes increased $.8 million or
57% in the first quarter of 2004 compared to the same period in 2003.
-26-
AFTERMARKET
The following table sets forth selected income statement data for the
Aftermarket segment for the thirteen weeks ended March 28, 2004 and March 30,
2003.
For the thirteen weeks ended
(amounts in millions)
March 28, 2004 March 30, 2003
------------------------ -------------------------
Net sales $ 12.4 100.0% $ 11.5 100.0%
Gross profit 3.7 29.8 3.4 29.4
Selling, general &
administrative expense 1.5 12.4 1.1 9.1
Income before taxes &
minority interest 2.2 18.0 2.4 21.0
The Aftermarket segment's sales increased $.9 million or 7.8% in the first
quarter of 2004 from the same period in 2003. The increase in sales is due
primarily to growth in sales to foreign customers and new product offerings.
Gross profit increased $.3 million as a result of the increase in sales.
As a percentage of sales, gross profit increased to 29.8% in the first quarter
of 2004 compared to 29.4% in the same quarter last year.
SG&A expense for the first quarter of 2004 was $1.5 million or 12.4% of
sales compared to $1.1 million or 9.1% of sales in the first quarter of 2003.
The increase in SG&A of $.4 million is principally the result of increased
incentive compensation and medical costs.
As a result of the above, income before taxes and minority interest
decreased slightly to $2.2 million in the first quarter of 2004 compared to $2.4
million in the same period in 2003.
Liquidity, Capital Resources and Future Liquidity
The Company's cash and cash equivalents at March 28, 2004 totaled $18.9
million compared to $16.4 million at December 28, 2003, an increase of $2.5
million. Capital expenditures for the three-month period totaled $.8 million,
which is lower than planned expenditures, and a reduction of $1.0 million
compared with the capital spending for the same period in the prior year. Net
cash used in operating activities was $1.4 million for the three-month period
ended March 28, 2004, compared to cash used in operating activities of $1.1
million in the prior year period. Cash outflows for working capital were $6.9
million during the current year period, which was primarily comprised of the
following: a $6.0 million increase in trade accounts receivable, a $1.2 million
cash payment for pension funding, and a $.9 million increase in other assets,
partially offset by a $.7 million decrease in inventories and a $.5 million
increase in other liabilities. These were the most significant aspects of the
change in other operating activities recorded on the statement of cash flows.
The total borrowings at March 28, 2004 of $27.1 million compares to total
borrowings of $22.4 million at year-end 2003, an increase of $4.7 million
period-over-period. The available lines of credit at March 28, 2004 of $9.4
million compares to $10.6 million at year-end 2003, a decrease in availability
of $1.2 million. Full details of the Company's debt are contained in Note E to
the Condensed Consolidated Financial Statements.
In summary of the above, the cash and available lines of credit at March
28, 2004 were $28.3 million compared to $27.0 million at year-end 2003, an
increase in cash and available lines of credit of $1.3 million.
Refer to the Management's Discussion and Analysis section and to Notes F -
Debt and N - Commitments to the consolidated financial statements, included
within the Company's 2003 Form 10-K, for information
-27-
regarding the Company's obligations and commitments by year. These obligations
and commitments consist of long-term debt, capital leases and rental agreements.
The Company's potential obligations regarding environmental remediation
are explained fully in Note F - Litigation of the Condensed Consolidated
Financial Statements.
The Company assumed the liability for the Raymark pension plans as part of
the reorganization. Funding for the plans in 2004 is expected to be
approximately $4.4 million of which $1.2 million was funded in the first quarter
of 2004.
Certain tax issues are discussed in Note H - 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 lending
facilities and cash flow from operations will be sufficient to meet all of the
Company's obligations arising in the normal course of business, including
anticipated capital investments. However, the ability of the Company to utilize
its lending facilities is dependent on the Company's ability to meet its
financial forecasts, which is not assured, and to meet the financial covenants
contained in its credit facilities. These forecasts include certain revenue
assumptions generally consistent with the prior year for the Domestic Wet
Friction (on a comparable basis) and Aftermarket segments and modest growth in
the International segment, as well as certain cost-saving initiatives. If the
Company does not comply with the financial covenants, an event of default would
occur and could result in the acceleration of the Company's indebtedness under
its domestic credit facilities. If that were to occur, the ability of the
Company to continue would be dependent upon, among other things, its ability to
amend the credit facilities, take certain actions to generate cash and/or to
seek additional alternative financing from other lenders.
Financial Risks
The Company maintains lines of credit with United States and foreign
banks, as well as other creditors detailed in Note E to the Condensed Unaudited
Consolidated Financial Statements. 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 49 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 2004 given current economic conditions. Further, the Company can reduce the
short-term impact of interest rate fluctuations through deferral of capital
investment should the need arise.
The Company maintains borrowings in both fixed rate and variable rate debt
instruments. The fixed rate debt at March 28, 2004 of $6.1 million had rates of
interest that ranged from 2.5% to 6.2%. The variable rate debt at March 28, 2004
of $20.7 million had rates of interest that ranged from 2.7% to 4.8%. The
variable debt reprices either at prime rate or the Eurodollar rate. The Company
has not entered into any interest rate management programs such as interest rate
swaps or other derivative type transactions. The amount of exposure in the
short-term that could be created by increases in rates is not considered
significant by management.
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
stockholders' equity and an average exchange rate in effect during the year 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 fluctuations in foreign
currency will have a material adverse effect on the Company's overall
consolidated financial condition. Additionally, the Company does not enter into
agreements to manage any currency transaction risks.
-28-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2.
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures under the supervision and with the participation of
management, including the Company's principal executive officer and
principal financial officer as of March 28, 2004. Based on this
evaluation, the principal executive officer and principal financial
officer have each concluded that such disclosure controls and
procedures were effective in all material respects 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.
-29-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See discussion of the Company's debt agreements in Note E of the Condensed
Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) Waiver and Fifth Amendment to Loan and Security Agreement, dated May
10, 2004, to the Loan Security Agreement dated September 28, 2000 by
and between Raybestos Products Company, Raytech Automotive
Components Company, and Automotive Composites Company, as amended.
10(b) Joinder and Assumption Agreement dated May 11, 2004, among Raytech
Powertrain, Inc., Allomatic Products Company, Raytech Systems Inc.,
Raytech Corporation, and Raybestos Powertrain, LLC.
31-1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31-2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32-1 Certifications of the Chief Executive Officer and the Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on 8-K
None
-30-
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 12, 2004
-31-