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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 29, 2002.
/ / 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 333-49429-01
PRESTOLITE ELECTRIC HOLDING, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3142033
-------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2311 Green Road, Ste. B., Ann Arbor, Michigan 48105
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(734) 913 - 6600
-----------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, address, and former fiscal year, if changed since last report)
Indicate 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 the filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of common shares outstanding
Class: as of August 9, 2002
Common Stock 1,985,000
Page 1
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Item 1: Condensed Consolidated Balance Sheets 3
at June 29, 2002 (unaudited) and December 31, 2001
Condensed Consolidated Statements of Operations 4
three and six months ended June 29, 2002 (unaudited)
and June 30, 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows 5
six months ended June 29, 2002 (unaudited)
and June 30, 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Part II: Other Information 19
Signatures 20
Page 2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 29, December 31,
2002 2001
--------- ------------
Assets (Unaudited)
Current Assets:
Cash $ 2,093 $ 2,907
Accounts receivable, net of allowances 28,100 24,900
Inventories, net 38,914 40,889
Prepaid and other current assets 3,187 4,280
--------- ---------
Total current assets 72,294 72,976
Property, plant and equipment, net 32,229 33,831
Investments 577 577
Goodwill 3,863 3,677
Other intangibles 3,681 3,414
Long-term receivables and pension assets 2,961 4,184
Net assets of discontinued operations 2,389 5,714
--------- ---------
Total assets $ 117,994 $ 124,373
========= =========
Liabilities
Current Liabilities:
Revolving credit $ 7,903 $ 6,834
Current portion of long-term debt 383 402
Accounts payable 17,001 18,351
Accrued liabilities 13,137 14,007
--------- ---------
Total current liabilities 38,424 39,594
Long-term debt 105,008 105,008
Other non-current liabilities 782 1,754
Deferred tax liabilities 20
--------- ---------
Total liabilities 144,234 146,356
Minority interest 4,255 3,367
Stockholders' equity (deficit)
Common stock, par value $.01, 5,000,000 shares
authorized, 1,985,000 shares issued and outstanding
at June 29, 2002 and December 31, 2001 2 2
Paid-in capital 17,269 17,269
Retained earnings (7,048) (6,131)
Notes receivable, employees' stock purchase, 7.74% due 2002 (395) (395)
Foreign currency translation adjustment (15,698) (11,470)
Treasury stock, 1,318,000 shares on June 29, 2002 and
December 31, 2001 (24,625) (24,625)
--------- ---------
Total stockholders' equity (deficit) (30,495) (25,350)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 117,994 $ 124,373
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 3
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
For the three months ended For the six months ended
------------------------------ ------------------------------
June 29, June 30 June 29, June 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Sales $ 40,742 $ 42,218 $ 77,383 $ 84,182
Cost of goods sold 30,608 33,882 58,717 67,641
----------- ----------- ----------- -----------
Gross profit 10,134 8,336 18,666 16,541
Selling, general and administrative 5,541 5,089 11,096 10,577
Severance charges 89 769 180 1,110
----------- ----------- ----------- -----------
Operating income 4,504 2,478 7,390 4,854
Interest expense 2,745 3,247 5,616 6,343
Foreign exchange losses 387 7 963 32
Lease guarantee charge 400 -- 400 --
Minority interest expense 582 -- 900 --
Other expense (income) (105) (98) (38) 35
----------- ----------- ----------- -----------
Income (loss) before income taxes 495 (678) (451) (1,556)
Provision (benefit) from income taxes 307 (72) 466 (93)
----------- ----------- ----------- -----------
Income (loss) from operations 188 (606) (917) (1,463)
Extraordinary item -
Gain on senior note repurchase, net of taxes -- 391 -- 391
----------- ----------- ----------- -----------
Net income (loss) $ 188 $ (215) $ (917) $ (1,072)
Other comprehensive income (expense):
Foreign currency translation adjustment $ 504 $ 7 $ (4,228) $ (1,496)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 692 $ (208) $ (5,145) $ (2,568)
=========== =========== =========== ===========
Basic and diluted earnings per common share
Income (loss) from operations $ 0.09 $ (0.31) $ (0.46) $ (0.74)
Extraordinary item - Gain on
senior note repurchase $ -- $ 0.20 $ -- $ 0.20
----------- ----------- ----------- -----------
Net income (loss) $ 0.09 $ (0.11) $ (0.46) $ (0.54)
=========== =========== =========== ===========
Basic and diluted weighted
average shares outstanding 1,985,000 1,985,000 1,985,000 1,985,000
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 4
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended
---------------------------
June 29, June 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (917) $ (1,072)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 2,965 3,527
Amortization 339 625
Minority interest income 900 --
Gain on senior note purchase -- (660)
Loss (gain) on sale of property, plant, and equipment 3 (24)
Deferred gain on sale and leaseback (96) (210)
Deferred taxes 20 (484)
Changes in working capital items (4,575) (5,164)
-------- --------
Net cash provided by (used in) continuing operating activities (1,361) (3,462)
Net cash provided by (used in) discontinued operations 2,925 (2,243)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,564 (5,705)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,971) (2,415)
Proceeds from disposal of fixed assets -- 35
Acquisition of Mosal (179) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,150) (2,380)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving line of credit 158 2,726
Payments on long-term debt (738) (602)
Proceeds from borrowings 362 683
Senior note repurchase -- (1,065)
Purchase of treasury stock, options and warrants, employee stock receivable -- 51
Borrowings (payments) on capital leases (190) (236)
Other financing costs, net (6) (18)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES (414) 1,539
Effect of exchange rate changes on cash 186 106
-------- --------
Net increase (decrease) in cash (814) (6,440)
Cash - beginning of period 2,907 10,181
-------- --------
CASH - END OF PERIOD $ 2,093 $ 3,741
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 5
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL INFORMATION
Prestolite Electric Holding, Inc. conducts all of its operations through its
wholly-owned principal subsidiary, Prestolite Electric Incorporated. There are
no material differences between the financial statements of Prestolite Electric
Holding, Inc. and Prestolite Electric Incorporated (collectively, "Prestolite,"
"us," "we" or the "Company").
These unaudited consolidated financial statements have been prepared by us in
accordance with Rule 10-01 of Regulation S-X and have been prepared on a basis
consistent with our audited financial statements for the year ended December 31,
2001. These statements reflect all adjustments, including items of a normal
recurring nature, which are, in the opinion of management, necessary for the
fair statement of the consolidated financial condition and consolidated results
of operations for the interim period presented.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
and the related notes should be read in conjunction with our audited financial
statements, the notes to those statements and the other material included in our
Annual Report on Form 10-K for the year ended December 31, 2001. The results of
operations for the three- and six-month periods ended June 29, 2002 are not
necessarily indicative of the operating results that may be expected for the
full year or any other interim period.
On January 22, 2002, the shares of Prestolite Electric Holding, Inc. formerly
held by Genstar Capital Corporation, the parent company, were distributed to the
39 shareholders of Genstar Capital Corporation. The voting power associated with
the shares is exercised by Genstar Capital Corporation.
NOTE 2: ARGENTINA
Beginning in 1991 the Argentine government maintained the value of its currency
such that one Argentine peso equaled one U.S. dollar. During the second half of
2001, Argentina suffered a severe economic and monetary crisis. During most of
December 2001 and early January 2002 the banks in Argentina were closed. On
January 14, 2002, the banks reopened and the Argentina peso traded at $0.606 per
peso (1.65 pesos per dollar). The peso traded at $0.3396 (2.94 pesos per dollar)
on March 30, 2002 and as a result of using this rate, we recorded a first
quarter 2002 foreign exchange loss of $585,000 and a charge to other
comprehensive income of $4.4 million representing the cumulative translation
adjustment. The peso traded at $0.2597 ($3.85 pesos per dollar) on June 30,
2002. As a result, we recorded a second quarter 2002 foreign exchange loss of
$198,000 and an additional charge of $1.5 million to other comprehensive income.
Page 6
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As discussed in Note 6, our practice in Argentina has been to borrow
funds by discounting post-dated checks received from our customers. Because
Argentine banks stopped lending during the second half of 2001, we provided
financial support to our Argentine subsidiary from North America, increasing the
amount lent to that subsidiary by $5.3 million during the year. During 2001 our
Argentine subsidiary reduced the non-debt discounted checks outstanding by $3.5
million and bank debt outstanding by $1.2 million. During the first quarter of
2002, we provided an additional $1.8 million of support to the Argentine
subsidiary, including $0.2 million associated with the MOSAL transaction
discussed in Note 7; our Argentine subsidiary reduced their discounted checks
outstanding and bank debt to zero. During the second quarter we provided $0.3
million of additional support.
NOTE 3: DISCONTINUED OPERATIONS
On August 4, 2000, we sold our direct current electric motor business, our
battery charger business, and our switch business to Ametek, Inc. The $62.0
million contractual price of this asset sale was adjusted for changes in net
operating assets from a target amount and for the sales to a key customer during
the second quarter of 2001. The adjusted sale price was approximately $57.4
million, including $3.8 million and $0.5 million in escrow at December 31, 2001
and June 29, 2002, respectively.
Net assets related to discontinued operations at June 29, 2002 and December 31,
2001 are presented below (in thousands):
As of As of
June 29, December 31,
2002 2001
------------ ------------
(Unaudited)
Decatur facility held for sale $ 3,254 $ 3,254
Escrow and receivable 524 3,802
Accrued transaction costs and estimated sale price reductions (989) (1,342)
Lease guarantee provision - Thermadyne (400) -
------------ ------------
Total $ 2,389 $ 5,714
============ ============
In conjunction with the 1997 sale of our welding equipment business to
Thermadyne, Prestolite guaranteed annual lease payments of $447,000 for a
facility through October 31, 2006. In April 2002, Thermadyne Holdings
Corporation, which is operating under Chapter 11, notified Prestolite that
Thermadyne was unwilling to honor their Prestolite-guaranteed lease commitment,
but were willing to occupy a portion of the space at a reduced rate. In July
2002 we reached a tentative agreement with Thermadyne whereby they will continue
to lease a portion of the space in question at a reduced rate. We expect to find
another tenant for the balance of the space. We recorded a charge of $0.4
million in the second quarter reflecting the estimated cost of this agreement
Page 7
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001 the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 142 supercedes APB No. 17 and eliminated the then current requirement to
amortize goodwill and indefinite-lived intangible assets, addressed the
amortization of intangible assets with a defined life and impairment testing and
recognition for goodwill and intangible assets. SFAS No. 142 is effective for
2002. Accordingly, we have adopted SFAS No. 142 and will no longer amortize
goodwill. Goodwill will instead be assessed for impairment at least annually.
Under FAS 142, we were required to test all existing goodwill for impairment as
of January 1, 2002. We have completed this test and no impairment was required.
Changes in goodwill for the quarter ended June 29, 2002 follow (in thousands):
Goodwill, December 31, 2001 $ 3,677
Impact of changes in foreign currency 186
---------
Goodwill, June 29, 2002 $ 3,863
=========
SFAS 142 does not provide for restatement of our results of operations for
periods ending prior to January 2002. Our results of operations for the quarter
and six months ended June 30, 2001 included goodwill amortization expense of
$176,000 and $357,000, respectively, which affected the net loss by $117,000 and
$238,000, respectively. Excluding the effect of goodwill amortization, our
reported net loss for the second quarter of 2001 would have been reduced from
$215,000 to $98,000 and our net loss for the first six months would have been
reduced from $1,072,000 to $834,000. Our net loss per common share would have
been reduced from $0.11 to $0.05 per common share for the second quarter and
from $0.54 to $0.42 per common share for the first six months.
The following table summarizes the amortizable intangibles and changes for the
six months ended June 29, 2002 (in thousands):
North South
America America Asia Total
------- ------- ------- -------
Balance at
December 31, 2001 $ 2,678 $ 84 $ 652 $ 3,414
Year to date
amortization expense (230) (57) (52) $ (339)
Additions 406 67 473
Change in foreign exchange 133 133
------- ------- ------- -------
Balance at
June 29, 2002 $ 2,448 $ 566 $ 667 $ 3,681
======= ======= ======= =======
Page 8
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 5: INVENTORIES
Inventories are summarized as follows (in thousands):
As of As of
June 29, December 31,
2002 2001
-------- --------
(Unaudited)
FIFO Cost:
Raw Material $ 17,924 $ 17,509
Work in Progress 3,361 3,695
Finished Goods 20,688 22,372
-------- --------
Total FIFO cost $ 41,973 $ 43,576
Adjustment to LIFO cost 684 801
Reserves (3,743) (3,488)
-------- --------
$ 38,914 $ 40,889
======== ========
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
As of As of
June 29, December 31,
2002 2001
-------- --------
(Unaudited)
Land & Buildings $ 15,901 $ 17,463
Machinery & Equipment 48,283 47,482
Construction in Progress 2,717 1,957
-------- --------
Total, at Cost 66,901 66,902
Accumulated Depreciation (34,672) (33,071)
-------- --------
Net $ 32,229 $ 33,831
======== ========
Page 9
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 7: DEBT
Debt consists of the following (in thousands):
As of As of
June 29, December 31,
2002 2001
----------- -----------
(Unaudited)
North America
Senior unsecured notes, 9.625% $100,108 $100,108
Revolving credit and float 947 789
----------- -----------
Total 101,055 100,897
United Kingdom
Overdraft facility 4,126 3,739
Term loans 4,892 5,401
South Africa 851 747
Argentina -- 125
China 362 --
----------- -----------
Total 10,231 10,012
Total term, revolving credit and
senior debt 111,286 110,909
Capital lease obligations 982 1,212
Other 1,026 123
----------- -----------
Consolidated total 113,294 112,244
Less current maturities 8,286 7,236
----------- -----------
Consolidated long term debt $105,008 $105,008
=========== ===========
Cash 2,093 2,907
----------- -----------
Total debt net of cash $111,201 $109,337
=========== ===========
Our U.S. bank borrowing arrangements consist of a total of $13.5 million in
revolving credit and letter of credit facilities. Interest is payable on amounts
borrowed under the revolving credit facility at the bank's prime rate plus up to
another 0.75% depending upon amounts borrowed and upon our Funded Debt Ratio. We
were paying interest at 5.5% at June 29, 2002. The letter of credit fee is 2% of
amounts drawn. Both U.S. facilities are collateralized by eligible accounts
receivable and inventory. On June 29, 2002 letters of credit totaling $1.1
million were outstanding.
The 9.625% (interest payable semiannually) senior notes are senior unsecured
obligations of Prestolite Electric Incorporated and are fully and
unconditionally guaranteed on a senior unsecured basis by Prestolite Electric
Holding, Inc. The notes mature on February 1, 2008, and are redeemable at our
option, in whole or in part, beginning on February 1, 2003 at amounts from
104.8125% to 100% of the principal plus accrued and unpaid interest. The senior
notes are more fully described in our Prospectus dated June 26, 1998.
Page 10
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Our U.K. agreement consists of a Pound Sterling 2.0 million fixed rate term
loan, a Pound Sterling 2.0 million floating rate term loan, a Pound Sterling 1.4
million floating rate term loan and a Pound Sterling 2.8 million overdraft
facility. Interest on the fixed rate loan is 8.144% while interest on the
floating-rate term loans and the overdraft facilities are at 1.375% above the
bank's base rate (4.0% at June 29, 2002). The term loans are repayable in sixty
monthly payments through January 2004 (fixed rate), November 2003 and January
2005. The U.K. loans are collateralized by eligible receivables and fixed assets
in the United Kingdom.
In Argentina we had arrangements with several banks that allowed us to borrow by
discounting post-dated checks given to us by our customers. Depending on the
details of the arrangement with each bank, the resulting borrowing was recorded
as debt or as the sale of the underlying receivable. At June 29, 2002 and
December 31, 2001 we had, in addition to the debt shown in the table above, zero
and $263,000 of discounted checks which we recorded as the sale of a receivable.
There was no Argentine bank debt outstanding at June 29, 2002. In March 2002 our
Argentine subsidiary acquired an Argentine corporation ("MOSAL") with certain
tax benefits for 4.0 million Argentine pesos, 500,000 pesos in cash and 3.5
million pesos due over the next three years. The 3.5 million pesos are shown as
$0.9 million of other debt.
In South Africa we borrow from a bank at the bank's prime lending rate. This
loan is supported by a pledge of South African receivables.
In China, the joint venture obtained a bank loan in the second quarter for Rmb
3.0 million ($362,000 translated at 8.28 Rmb to U.S. dollar on June 29, 2002).
The term of this agreement is for six months at an interest rate of 4.62%.
We classified $8.3 million of debt as current at June 29, 2002. This consisted
of principal payments of $1.6 million due in the United Kingdom, principal
payments of $0.2 million due on lease rental obligations, $0.2 million due for
the MOSAL obligations, and $6.3 million of revolving debt which we expect (but
are not obligated) to pay down over the following twelve months.
At June 29, 2002, we had a cash balance of $2.1 million and could have borrowed
an additional $11.9 million in the U.S. and $0.2 million in the U.K.
The senior notes and bank arrangements mentioned above contain various covenants
including maintenance of certain financial ratios and limits on (a) issuance of
additional debt or preferred stock; (b) the payment of dividends and purchases,
redemptions or retirements of common stock; (c) investments; (d) sale of assets
and capital stock of subsidiaries; and (e) certain consolidations, mergers,
transfers of assets and certain other transactions with affiliates. Our U.S.
bank covenants require us to maintain a Funded Debt Ratio of not more than 7:1
and a Fixed Charge Coverage Ratio of not less that 1:1, as those terms are
defined in our bank agreements. The foreign facilities contain covenants that
pertain to the foreign operations.
Page 11
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8: GEOGRAPHIC REGIONS
Prestolite operates in five principal geographic regions; each region's revenue
and operating performance is managed and reported separately. We evaluate
operating performance based on earnings before interest expense, taxes,
depreciation, amortization and certain other charges (EBITDA). Corporate
overhead and certain other charges are not allocated to the business/geographic
units. Sales from Africa and South America consist largely of products for the
automotive market while sales of products from North America and Europe consist
largely of products for non-automotive applications. In order to increase our
sales into China, in 2001 we began operation of a joint venture in China,
Prestolite Electric Beijing, Ltd., selling products for both automotive and
heavy duty vehicle applications. Sales between regions are priced at cost plus a
standard markup.
Sales, assets and operating results are summarized by location as follows (in
thousands):
North South
America Europe America Africa Asia Other Total
------- ------- ------- ------- ------- ------- -------
Sales to external customers, based on point of shipment
For quarter ended:
June 29, 2002 * $22,832 $ 8,723 $ 2,657 $ 1,548 $ 4,982 $ -- $40,742
June 30, 2001 * $19,840 $ 8,929 $11,482 $ 1,967 $ -- $ -- $42,218
For six months ended:
June 29, 2002 * $44,702 $17,066 $ 4,702 $ 2,619 $ 8,294 $ -- $77,383
June 30, 2001 * $39,685 $20,054 $20,190 $ 4,253 $ -- $ -- $84,182
Long-lived assets as of:
June 29, 2002 * $12,115 $14,797 $ 1,770 $ 1,153 $ 2,394 $ -- $32,229
December 31, 2001 $12,413 $14,673 $ 3,354 $ 1,084 $ 2,307 $ -- $33,831
Goodwill as of:
June 29, 2002 * $ 1,061 $ 2,802 $ -- $ -- $ -- $ -- $ 3,863
December 31, 2001 $ 1,061 $ 2,616 $ -- $ -- $ -- $ -- $ 3,677
Sales to external customers, based on location of customers
For quarter ended:
June 29, 2002 * $22,156 $ 7,822 $ 2,419 $ 1,530 $ 6,343 $ 472 $40,742
June 30, 2001 * $17,881 $ 7,332 $11,343 $ 2,032 $ 3,172 $ 458 $42,218
For six months ended:
June 29, 2002 * $42,849 $15,671 $ 4,441 $ 2,604 $10,822 $ 996 $77,383
June 30, 2001 * $36,182 $17,682 $20,074 $ 4,328 $ 5,110 $ 806 $84,182
Unallocated
EBITDA Costs
For quarter ended:
June 29, 2002 * $ 3,930 $ 1,481 $ 856 $ 173 $ 1,461 $(1,647) $ 6,254
June 30, 2001 * $ 3,319 $ 1,469 $ 1,298 $ 230 $ -- $(1,011) $ 5,305
For six months ended:
June 29, 2002 * $ 7,542 $ 2,647 $ 1,399 $ 247 $ 2,103 $(3,026) $10,912
June 30, 2001 * $ 6,481 $ 3,141 $ 1,967 $ 336 $ -- $(1,844) $10,081
* Unaudited
Page 12
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
A reconciliation of unaudited EBITDA to income (loss) from continuing operations
before income taxes follows (in thousands):
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- ---------
EBITDA $ 6,254 $ 5,305 $ 10,912 $ 10,081
Depreciation and amortization 1,556 1,960 3,304 4,152
Lease guarantee charge (400) -- (400) --
Severance 89 769 180 1,110
Exchange loss 387 7 963 32
Interest expense 2,745 3,247 5,616 6,343
Minority interest 582 -- 900 --
Income (loss) from operations
-------- -------- -------- --------
before income taxes $ 495 $ (678) $ (451) $ (1,556)
======== ======== ======== ========
Page 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
OVERVIEW
We manufacture alternators, starter motors and other items for heavy duty,
automotive, defense and industrial markets. These are supplied under the
"Prestolite," "Leece-Neville," and "Indiel" brand names for original equipment
and aftermarket application on a variety of vehicles and industrial equipment.
Most of our products are component parts used on diesel engines and automobiles,
sold to both aftermarket customers and original equipment manufacturers. We sell
our products to a variety of markets, in terms of both end-use and geography.
We operate in five principal geographic regions. While each region
primarily sells in its own area, no location sells exclusively into its
geographic region. In 2001 we began operation of a joint venture in China,
Prestolite Electric Beijing, Ltd., selling products for both automotive and
heavy duty vehicle applications.
Our North American and European facilities produce alternators, starter
motors, inline pumps, and other products, primarily for installation on diesel
engines used in the heavy duty, defense, marine and industrial markets. These
facilities are located in Arcade, NY; Florence, KY; Garfield, NJ; Acton,
England; and Leyland, England.
The African and South American facilities manufacture lighter duty
alternators and starter motors. These facilities are located in Johannesburg,
South Africa; and in Buenos Aires, San Lorenzo, and San Luis, Argentina. The
Argentina operation also manufactures distributors. In both South Africa and
Argentina a significant portion of our sales are to the automotive aftermarket,
and a portion of those aftermarket sales are products purchased for resale.
Prestolite Electric Beijing, Ltd. manufactures alternators and starter
motors.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 29, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001
Sales for the quarter ended June 29, 2002 were $40.7 million, a decrease of $1.5
million, or 3.5%, from $42.2 million in the second quarter of 2001. The sales
decline is mostly attributable to the South American sales of $2.7 million in
the second quarter of 2002, a decrease of $8.8 million, or 76.9%, from sales in
the second quarter of 2001, mostly as a result of the peso devaluation. Also
contributing to the decline in sales were African sales of $1.5 million, a
decrease of $0.5 million or 21.3% from second quarter 2001 sales. These sales
decreases were partially offset by North American sales of $23.5 million, an
increase of $3.7 million, or 18.5% from the second quarter 2001. The declines
were also partially offset by the sales from China of $4.1 million. No China
sales were reported for the second quarter of 2001.
Page 14
Sales from our European region held steady at $8.9 million in the second
quarters of both 2002 and 2001.
Gross profit was $10.1 million in the second quarter of 2002, or 24.9% of sales.
This compares to gross profit of $8.3 million, or 19.8% of sales, in the second
quarter of 2001. Continued control of product costs and improvement in our
Argentine cost structure (partly because of the peso devaluation) contributed to
the improvement. In addition, our gross margins have benefited from the China
joint venture.
Selling, general, and administrative expense was $5.5 million, or 13.6% of sales
for the second quarter of 2002, an increase of $0.4 million, or 8.9%, from $5.1
million, or 12.1% of sales, in the second quarter of 2001. The dollar increase
in selling, general, and administrative expense is largely attributable to the
new China joint venture operations, partially offset by cost savings and no
goodwill amortization.
Operating income in the second quarter of 2002 was $4.5 million, or 11.1% of
sales, an increase of $2.0 million, or 81.8%, from the $2.5 million, or 5.9% of
sales, in the second quarter of 2001. This was due to the factors discussed
above.
Other income was $105,000 in the second quarter of 2002 compared to other income
of $98,000 in the second quarter of 2001. This consists primarily of interest
income, miscellaneous income, royalty expense, and trademark expense. In 2002 we
also recorded the $125,000 benefit resulting from the demutualization of an
insurance provider.
Interest expense was $2.7 million in the second quarter of 2002, a decrease of
$0.5 million compared to $3.2 million in the second quarter of 2001. This
decrease is primarily due to the reductions in Argentina debt, offset by
increased debt in the United States.
The provision for income taxes was $307,000, 62.0% of income before taxes, for
the second quarter of 2002 as compared to the $72,000 benefit from income taxes
for the second quarter of 2001, 10.6% of loss before taxes. The change in the
tax rate is due to losses for which no tax benefit was recorded.
In April 2002, Thermadyne Holdings Corporation, which is operating under Chapter
11, notified Prestolite that Thermadyne is unwilling to honor their
Prestolite-guaranteed lease commitment, although they may be willing to occupy a
portion of the space at a reduced rate. In conjunction with the 1997 sale of its
welding equipment business to Thermadyne, Prestolite guaranteed annual lease
payments of $447,000 at the facility in question through October 31, 2006. In
July 2002 a tentative agreement was reached with Thermadyne whereby they will
continue to lease a portion of the space in question at a reduced rate. We
expect to find another tenant for the balance of the space. To reflect the
expected cost of this arrangement, we recorded a charge of $0.4 million in the
second quarter of 2002.
Page 15
SIX MONTHS ENDED JUNE 29, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Sales for the first half ended June 29, 2002 were $77.4 million, a decrease of
$6.8 million, or 8.1%. The sales decline is mostly attributable to the South
American sales of $4.7 million in the first half of 2002, a decrease of $15.5
million, or 76.7%, from sales in the first half of 2001, mostly as a result of
the peso devaluation. Also contributing to the decline in sales were European
sales of $17.5 million, a decrease of $2.6 million or 12.9% from the first half
2001 and African sales of $2.6 million, a decrease of $1.7 million or 38.4% from
the first half 2001. These sales decreases were partially offset by North
American sales of $45.7 million, an increase of $6.0 million, or 15.2%, from
sales of $39.7 million in the first half of 2001. The declines were also
partially offset by the sales from China of $6.9 million. No China sales were
reported for the first half of 2001.
Gross profit was $18.7 million in the first half of 2002, or 24.1 % of sales.
This compares to gross profit of $16.5 million, or 19.7% of sales, in the first
half of 2001. Continued control of product costs and improvement in our
Argentine cost structure (partly because of the peso devaluation) contributed to
the improvement. In addition, our gross margins have benefited from the China
joint venture.
Selling, general, and administrative expense was $11.1 million, or 14.3% of
sales for the first half of 2002, an increase of $0.5 million, or 4.9%, from
$10.6 million, or 12.6% of sales, in the first half of 2001. The dollar increase
in selling, general, and administrative expense is largely attributable to the
new China joint venture operations, partially offset by cost savings and no
goodwill amortization.
Operating income in the first half of 2002 was $7.4 million, or 9.6% of sales,
an increase of $2.5 million, from the $4.9 million in the first half of 2001.
This was due to the factors discussed above.
Other income was $38,000 in the first half of 2002 compared to other expense of
$35,000 in the first half of 2001. This consists primarily of interest income,
miscellaneous income, royalty expense, and trademark expense. In 2002 we also
recorded a $125,000 benefit resulting from the demutualization of an insurance
provider.
Interest expense was $5.6 million in the first half of 2002, a decrease of $0.7
million compared to $6.3 million in the first half of 2001. This decrease is
primarily due to the reductions in Argentina debt and offset by increased debt
in the United States.
The provision for income taxes was $466,000 for the first half of 2002 as
compared to the $93,000 benefit from income taxes for the first half of 2001.
The change in tax is due to losses for which no tax benefit was recorded.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $4.6 million in the first half of
2002. Capital spending (not including the MOSAL transaction) for the first half
of 2002 was $2.0 million, a decrease of $0.4 million from the first half of
2001. Of the $2.0 million, $1.0 million was spent in the United States and $1.0
million outside the United States. Planned capital expenditures consist
primarily
Page 16
of expenditures to reduce costs through automation, replace existing equipment
and enable us to manufacture new products.
Debt, net of cash, increased from $109.3 million at December 31, 2001 to $111.2
million at June 29, 2002, an increase of $1.9 million. Factors contributing to
this change include the $2.0 million of capital spending, $0.6 million related
to exchange rate changes in the U.K., the increase in accounts receivable
related to the increased sales volume, the increase in inventory to support
increased OE product and new product investments. We received funds from an
escrow deposit of $3.3 million in February 2002 and have spent $0.4 million as
it related to the transaction costs and facility arrangements of the
discontinued operations.
We had a cash balance of $2.1 million and revolving credit facilities with banks
in the United States and United Kingdom under which additional borrowings of
$11.9 million and $0.2 million were available based on the June 29, 2002 levels
of eligible receivables (United States and United Kingdom) and inventory (United
States only) which are pledged to support that debt. During the five quarters
ended March 30, 2002, our Argentine subsidiary reduced their bank debt by $1.3
million and their non-debt discounted checks by $4.0 million. They no longer
have any outstanding bank debt. We do not anticipate borrowing in Argentina in
the near term as we expect operating cash flow to provide short term liquidity
needs. In South Africa we borrow from a bank, pledged by accounts receivable, at
the bank's prime lending rate. No additional borrowings were available under the
South African credit agreement on June 29, 2002.
We expect our liquidity needs to consist primarily of working capital needs,
scheduled payments under certain contractual obligations, and scheduled payments
of principal and interest on our indebtedness. We expect our short-term
liquidity needs to be provided by operating cash flows and borrowings under our
revolving credit facilities. We expect to fund our long-term liquidity needs
from our operating cash flows, the issuance of debt and/or equity securities,
and bank borrowings.
We believe that cash flows from operations, our existing cash balances and
amounts available under these revolving credit facilities will provide adequate
funds for on going operation, planned capital expenditures, investments, and
debt service for at least the next twelve months. Estimates as to working
capital needs and other expenditures may be materially affected if the foregoing
sources are not available or do not otherwise provide sufficient funds to meet
our obligations.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001 the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 replaces APB No. 16
and eliminates the pooling-of-interests method for any business combinations
after June 30, 2001. SFAS 142 superceded APB No. 17 and eliminated the
requirement to amortize goodwill and indefinite-lived intangible assets,
addressed the amortization of intangible assets with a defined life and
impairment testing and recognition for goodwill and intangible assets. SFAS No.
142 is effective for 2002.
Page 17
Accordingly, we have adopted SFAS 142 and goodwill will be assessed for
impairment at least annually.
In June and August of 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the Impairment
or Disposal of Long Lived Assets" ("SFAS 144") which are effective January 1,
2003 and January 1,2002, respectively, for the Company. SFAS 143 requires that
an existing legal obligation associated with the retirement of a tangible
long-lived asset be recognized as a liability when incurred and the amount of
the liability be initially measured at fair value. Under SFAS 144, a single
accounting method was established for long-lived assets to be disposed of. SFAS
144 requires the Company to recognize an impairment loss only if the carrying
amount is less than the fair value of the asset less costs to sell. The Company
has adopted the provisions of SFAS 144 effective January 1, 2002. SFAS 144 did
not have a material impact on the financial results of the company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
With the rescission of SFAS No. 4 and 64, only gains and losses from
extinguishments of debt that meet the criteria of APB No. 30 would be classified
as extraordinary items. The Company is currently reviewing the impact of this
provision as well as the other provisions of this statement and will adopt it
effective with our 2003 fiscal year-end.
FORWARD-LOOKING STATEMENTS
This form 10-Q contains, in addition to historical information, forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact included herein
may contain forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "estimate", "anticipate", "believe", or "continue" or the
negative thereof or variations thereon or similar terminology. Such
forward-looking statements are based upon information currently available in
which our management shares its knowledge and judgment about factors that they
believe may materially affect our performance. We make the forward-looking
statements in good faith and believe them to have a reasonable basis. However,
such statements are speculative, speak only as of the date made and are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results could vary materially from those anticipated,
estimated or expected. Factors that might cause actual results to differ
materially from those in such forward-looking statements include, but are not
limited to, those discussed in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All subsequent written and oral
statements that we make are qualified in their entirety by these factors.
Page 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K
We have not filed any reports on Form 8-K during the quarterly
period ended June 29, 2002.
(b) Exhibits
10.1 - Amendment No. 2 to Credit Agreement by and between Prestolite
Electric Incorporated and Comerica Bank, dated June 28, 2002.
99.1 - Certification of Chief Executive Officer adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 - Certification of Chief Financial Officer adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 2002 By: /s/ Kenneth C. Cornelius
-------------------------
Kenneth C. Cornelius
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
Page 20
Exhibit Index
Exhibit No. Description
10.1 - Amendment No. 2 to Credit Agreement by and between Prestolite
Electric Incorporated and Comerica Bank, dated June 28, 2002.
99.1 - Certification of Chief Executive Officer adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 - Certification of Chief Financial Officer adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002