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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
September 27, 2003.
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period From
to .
-------------- -----------------
Commission File Number 333-49429-01
PRESTOLITE ELECTRIC HOLDING, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3142033
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2311 Green Road, Ste. B., Ann Arbor, Michigan 48105
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(Address of principal executive offices) (Zip Code)
(734) 913-6600
-----------------
(Registrant's telephone number, including area code)
Not Applicable
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(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 November 10, 2003
Common Stock 1,969,000
This form 10Q may be found on Prestolite's website at
http://www.prestolite.com/literature/corp/2003_3q10q.pdf.
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
at September 27, 2003 (unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations Three and nine months
ended September 27, 2003 and September 28, 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
Nine months ended September 27, 2003 and September 28, 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 4: Controls and Procedures 18
Part II: Other Information 19
Signatures 20
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 21
Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 22
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)
September 27, December 31,
2003 2002
--------- ---------
Assets (Unaudited)
Current Assets:
Cash $ 996 $ 4,386
Accounts receivable, net of allowances 34,858 28,264
Inventories, net 44,243 38,699
Prepaid and other current assets 3,203 2,675
--------- ---------
Total current assets 83,300 74,024
Property, plant and equipment, net 30,914 33,032
Investments 577 577
Goodwill 4,158 4,048
Other intangibles, net 3,171 3,393
Long-term receivables and pension assets 4,162 3,435
Net assets of discontinued operations 2,208 1,976
--------- ---------
Total assets $ 128,490 $ 120,485
========= =========
Liabilities
Current Liabilities:
Revolving credit $ 4,372 $ 3,575
Current portion of long-term debt 771 740
Accounts payable 18,315 16,118
Accrued liabilities 14,420 15,006
--------- ---------
Total current liabilities 37,878 35,439
Long-term debt 103,734 105,125
Other non-current liabilities 9,664 9,955
--------- ---------
Total liabilities 151,276 150,519
Minority interest 5,434 5,908
Stockholders' equity (deficit)
Common stock, par value $.01, 5,000,000 shares authorized,
1,969,000 shares issued and outstanding
at September 27, 2003 and December 31, 2002 2 2
Paid-in capital 19,644 16,957
Accumulated deficit (2,179) (5,151)
Notes receivable, employees' stock purchase, 7.74% (105) (105)
Treasury stock, 1,334,000 shares on September 27, 2003
and December 31, 2002 (24,900) (24,900)
--------- ---------
Total stockholders' deficit before accumulated other
comprehensive income (loss) (7,538) (13,197)
Minimum pension liability (9,156) (9,156)
Foreign currency translation adjustment (11,526) (13,589)
--------- ---------
Accumulated other comprehensive income (loss) (20,682) (22,745)
Total stockholders' equity (deficit) (28,220) (35,942)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 128,490 $ 120,485
========= =========
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 nine months ended
------------------------------ ------------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 50,865 $ 43,152 $ 139,279 $ 120,535
Cost of goods sold 39,367 32,789 105,079 91,506
----------- ----------- ----------- -----------
Gross profit 11,498 10,363 34,200 29,029
Selling, general and administrative 5,573 5,047 17,067 16,143
Sale transaction costs 189 -- 189 --
Stock option charges 2,106 (647) 2,687 (647)
Severance charges 35 1,700 118 1,880
----------- ----------- ----------- -----------
Operating income 3,595 4,263 14,139 11,653
Interest expense 2,673 2,816 8,217 8,432
Foreign exchange losses 286 62 364 1,025
Lease guarantee charge -- -- -- 400
Minority interest expense 718 741 1,548 1,641
Other income (90) (94) (261) (132)
----------- ----------- ----------- -----------
Income (loss) before income taxes 8 738 4,271 287
Provision for (benefit from) income taxes 407 (238) 1,299 228
----------- ----------- ----------- -----------
Net income (loss) (399) 976 2,972 59
Other comprehensive income (loss):
Foreign currency translation adjustment 49 540 2,063 (3,688)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (350) $ 1,516 $ 5,035 $ (3,629)
=========== =========== =========== ===========
Basic earnings (loss) per common share $ (0.20) $ 0.49 $ 1.51 $ 0.03
Diluted earnings (loss) per common share $ (0.20) $ 0.49 $ 1.38 $ 0.03
Basic weighted average shares outstanding 1,969,000 1,977,000 1,969,000 1,977,000
Diluted weighted average shares outstanding 2,201,514 1,977,000 2,159,011 1,977,000
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 4
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months ended
---------------------------------
September 27, September 28,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,972 $ 59
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 5,132 4,424
Amortization 567 537
Option repurchase / extension 2,687 (647)
Minority interest income 1,548 1,641
Loss (gain) on sale of property, plant, and equipment (179) 4
Deferred gain on sale and leaseback (144) (144)
Deferred taxes -- 19
Changes in working capital items (12,141) (9,043)
------------- -------------
Net cash provided by (used in) continuing operating activities 442 (3,150)
Net cash provided by (used in) discontinued operations (232) 2,865
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 210 (285)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,487) (3,133)
Proceeds from disposal of fixed assets 386 6
Acquisition of Mosal -- (179)
Investment in affiliates (167) --
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (3,268) (3,306)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving line of credit 756 2,892
Payments on long-term debt (700) (863)
Proceeds from borrowings -- 362
Borrowings (payments) on capital leases (246) (300)
Other financing costs, net (509) (8)
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (699) 2,083
Effect of exchange rate changes on cash 367 339
------------- -------------
Net increase (decrease) in cash (3,390) (1,169)
Cash - beginning of period 4,386 2,907
------------- -------------
CASH - END OF PERIOD $ 996 $ 1,738
============= =============
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 condensed 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, 2002. These statements reflect all adjustments, including items of
a normal recurring nature, which are, in the opinion of management, necessary
for the fair presentation of the consolidated financial position, results of
operations, and cash flows for the interim periods 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, 2002. The results of
operations for the nine-month period ended September 27, 2003 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 1,920,000 shares of Prestolite Electric Holding, Inc.
formerly held by Genstar Capital Corporation 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: JOINT VENTURE
Prestolite Electric Beijing, Ltd. (PEBL) began operations in The People's
Republic of China on April 1, 2001. Prestolite initially contributed certain
technology to PEBL and agreed to contribute an additional $1.9 million in cash
to PEBL by the first quarter of 2004. In order to receive a dividend from PEBL,
the contributed capital was required to be made. Therefore in the second quarter
of 2003 the contribution of $1.9 million was made. Subsequently, we received a
dividend of $2.2 million from PEBL. The joint venture partners have not received
their corresponding dividend as of September 27, 2003 and as a result, $2.1
million is included in accrued liabilities at September 27, 2003.
Page 6
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the nine months ended September 27, 2003 follow (in
thousands):
Goodwill, December 31, 2002 $ 4,048
Impact of changes in foreign currency 110
---------
Goodwill, September 27, 2003 $ 4,158
=========
Amortizable intangible assets consist of the following (in thousands):
as of September 27, 2003 as of December 31, 2002
------------------------ -----------------------
Accumulated Accumulated Weighted
Gross Amortization Gross Amortization Average Life
-------- ------------- -------- ------------- -------------
Licenses $ 226 $ (175) $ 226 $ (151) 7 years
MOSAL 899 (316) 699 (135) 10 years
Financing Costs 4,613 (2,839) 4,613 (2,533) 10 years
Technology 968 (205) 801 (127) 10 years
------- -------
Total Net
Amortizable Assets $ 3,171 $ 3,393
======= =======
The MOSAL change was caused by the impact of exchange rate changes for foreign
currency. Technology increased as a result of incurring the remaining costs due
to the Chinese joint venture
Page 7
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4: EARNINGS PER SHARE ("EPS")
In computing income available to common stockholders, no adjustments were
required to the amounts reported in the statement of income. Earnings per share
is, therefore, calculated as follows:
Three months ended Nine months ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2003
Income available to common
stockholder (numerator) $ (399,000) $ 976,000 $ 2,972,000 $ 59,000
Weighted average number of shares
used to compute basic EPS (denominator) 1,969,000 1,977,000 1,969,000 1,977,000
----------- ----------- ----------- -----------
Basic EPS $ (0.20) $ 0.49 $ 1.51 $ 0.03
Effect of dilutive shares: stock options -- -- 190,011 --
----------- ----------- ----------- -----------
Weighted average number of shares
used to compute dilutive EPS (denominator) 1,969,000 1,977,000 2,159,011 1,977,000
----------- ----------- ----------- -----------
Diluted EPS $ (0.20) $ 0.49 $ 1.38 $ 0.03
NOTE 5: INVENTORIES
Inventories are summarized as follows (in thousands):
As of As of
September 27, December 31,
2003 2002
------------- ------------
FIFO cost:
Raw material $ 23,102 $ 19,519
Work in progress 4,986 3,919
Finished goods 19,274 18,315
------------- ------------
Total FIFO cost $ 47,362 $ 41,753
Adjustment to LIFO cost 707 778
Reserves (3,826) (3,832)
------------- ------------
$ 44,243 $ 38,699
============= ============
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
As of As of
September 27, December 31,
2003 2002
------------- ------------
Land & buildings $ 16,429 $ 16,649
Machinery & equipment 57,428 53,471
Construction in progress 1,440 1,617
------------- ------------
Total, at cost $ 75,297 $ 71,737
Accumulated depreciation (44,383) (38,705)
------------- ------------
Net $ 30,914 $ 33,032
============= ============
Page 8
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
September 27, December 31,
2003 2002
------------- ------------
North America
Float $ 339 $ 130
Senior unsecured notes, 9.625% 98,533 98,533
Revolving credit 451 --
------------- ------------
Total 99,323 98,663
United Kingdom
Overdraft facility 2,201 1,425
Term loan 4,405 5,752
South Africa 1,142 990
MOSAL obligation 774 1,040
------------- ------------
Total 8,522 9,207
Total term, revolving credit and senior debt 107,845 107,870
Capital lease obligations 996 1,456
Other 36 114
------------- ------------
Consolidated total 108,877 109,440
Less current maturities 5,143 4,315
------------- ------------
Consolidated long term debt $ 103,734 $ 105,125
============= ============
Our U.S. bank borrowing arrangements consist of a $10 million revolving credit
facility and a $3.5 million revolving credit and letter of credit facility.
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 our Funded Debt Ratio. We were paying interest at prime, 4% at September 27,
2003. The letter of credit fee is 2% of amounts drawn. Both U.S. facilities are
collateralized by eligible accounts receivable and inventory. On September 27,
2003, letters of credit totaling $0.9 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 interest. The senior notes are
more fully described in our Prospectus dated June 26, 1998.
Page 9
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 7: DEBT (CONTINUED)
Our U.K. agreement consists of a (pound)3.6 million variable rate term loan and
a (pound)2.3 million overdraft facility. Interest on the variable rate loan is
1.375% above the bank's base rate (3.75% at September 27, 2003) and interest on
the overdraft is at 1.25% above the base rate. The term loan is repayable in
sixty monthly payments through December 2007. The U.K. loans are collateralized
by eligible receivables and fixed assets in the United Kingdom.
At September 27, 2003 and December 31, 2002 we had no Argentine bank debt
outstanding. 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 in the table above as $1.0 million of "MOSAL
obligation" at December 31, 2002, and 2.3 million pesos are recorded as $0.8
million at September 27, 2003.
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 and fixed assets.
In China, our joint venture has a bank line of credit for Rmb 10.0 million ($1.2
million translated at 8.28 Rmb to one U.S. dollar on September 27, 2003). There
were no borrowings against this line at September 27, 2003 or December 31, 2002.
We classified $5.1 million of debt as current at September 27, 2003. This
consisted of principal payments of $1.0 million due in the United Kingdom,
principal payments of $0.3 million due on lease rental obligations, $0.5 million
due for the MOSAL obligation, and $3.3 million of revolving debt which we expect
(but are not obligated) to pay down over the following twelve months.
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 6.5:1
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 10
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8: SEVERANCE
We record severance expense when plans are announced and employees notified. The
severance charged to operations in the table below is related to personnel
reductions in the United Kingdom and in Argentina for the first nine months of
2003. The following is a summary of our severance liability, charges and outlays
(in thousands):
Beginning balance, December 31, 2002 $ 1,915
Severance charged to operations 118
Payments (1,515)
Currency change (185)
-------
Ending balance, September 27, 2003 $ 333
=======
NOTE 9: DISCONTINUED OPERATIONS
Net assets related to discontinued operations at September 27, 2003 and December
31, 2002 are presented below (in thousands):
As of As of
September 27, December 31,
2003 2002
------------- ------------
(Unaudited)
In escrow $ 538 $ 536
Facility held for sale 3,246 3,246
Accrued transaction costs, estimated sale price reductions,
and provision for lease guarantee (1,576) (1,806)
------------- ------------
Total $ 2,208 $ 1,976
============= ============
NOTE 10: 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 Argentine peso ended 2002 with a value of $0.297 and we used
that rate to translate the December 31, 2002 Argentina balance sheet. The peso
traded at $0.344 (2.91 pesos per dollar) on September 27, 2003. As a result, we
recorded a nine month 2003 foreign exchange loss of $0.1 million and other
comprehensive income of $1.0 million representing the cumulative translation
adjustment.
Page 11
NOTE 11: 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 adjusted earnings before interest expense, taxes,
depreciation, and amortization (Adjusted EBITDA) in each geographic region. The
Company defines Adjusted EBITDA as operating income plus depreciation,
amortization and other special charges. 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 automotive and light truck
applications while sales of products from North America and Europe consist
largely of products for heavy-duty applications. China sales are primarily
products for medium and heavy-duty applications.
Sales, assets and Adjusted EBITDA are summarized by geographic region 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:
September 27, 2003 $ 26,725 $ 9,934 $ 5,447 $ 1,827 $ 6,932 $ -- $ 50,865
September 28, 2002 $ 23,340 $ 8,734 $ 3,349 $ 1,450 $ 6,279 $ -- $ 43,152
For nine months ended:
September 27, 2003 $ 75,186 $ 28,434 $ 14,427 $ 4,945 $ 16,287 $ -- $139,279
September 28, 2002 $ 67,992 $ 25,850 $ 8,051 $ 4,069 $ 14,573 $ -- $120,535
Long-lived assets (net) as of:
September 27, 2003 $ 11,527 $ 13,617 $ 2,168 $ 1,415 $ 2,187 $ -- $ 30,914
December 31, 2002 $ 11,726 $ 15,094 $ 2,301 $ 1,233 $ 2,678 $ -- $ 33,032
Sales to external customers, based on location of customers
For quarter ended:
September 27, 2003 $ 25,856 $ 9,089 $ 5,129 $ 1,825 $ 8,428 $ 538 $ 50,865
September 28, 2002 $ 22,398 $ 7,390 $ 3,281 $ 1,382 $ 7,115 $ 1,586 $ 43,152
For nine months ended:
September 27, 2003 $ 72,127 $ 26,683 $ 14,042 $ 4,898 $ 19,508 $ 2,021 $139,279
September 28, 2002 $ 65,247 $ 23,061 $ 7,722 $ 3,986 $ 17,937 $ 2,582 $120,535
Adjusted EBITDA
For quarter ended:
September 27, 2003 $ 4,939 $ 1,438 $ 1,393 $ (473) $ 1,910 $ 9,207
September 28, 2002 $ 4,473 $ 1,268 $ 1,014 $ 240 $ 1,527 $ 8,522
For nine months ended:
September 27, 2003 $ 15,597 $ 4,432 $ 3,769 $ (494) $ 3,596 $ 26,900
September 28, 2002 $ 12,015 $ 3,915 $ 2,413 $ 487 $ 3,630 $ 22,460
Page 12
NOTE 11: GEOGRAPHIC REGIONS (CONTINUED)
A reconciliation of adjusted EBITDA to net income (loss) follows (in thousands
of U.S. dollars):
For the quarter ended For the nine months ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Adjusted EBITDA of geographic regions $ 9,207 $ 8,522 $ 26,900 $ 22,460
Less:
Corporate costs 1,238 1,455 3,807 4,481
Depreciation and amortization 1,954 1,657 5,699 4,961
Lease guarantee charge -- -- -- 400
Severance 35 1,700 118 1,880
Stock option charges 2,106 (647) 2,687 (647)
Interest expense 2,673 2,816 8,217 8,432
Foreign exchange loss 286 62 364 1,025
Sale transactions costs 189 -- 189 --
Minority interest expense 718 741 1,548 1,641
Provision for income taxes 407 (238) 1,299 228
------------- ------------- ------------- -------------
Net income (loss) $ (399) $ 976 $ 2,972 $ 59
============= ============= ============= =============
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.
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.
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 and San Luis, Argentina. 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 automotive products in
China, selling primarily into the heavy-duty (non-automotive) market.
RESULTS OF OPERATIONS
Quarter Ended September 27, 2003 Compared to Quarter Ended September 28, 2002
Sales to external customers for the quarter ended September 27, 2003 were
$50.9 million, an increase of $7.7 million, or 17.9%, from $43.2 million in the
third quarter of 2002. Contributing to the sales increase were South American
sales of $5.4 million in the third quarter of 2003, an increase of $2.1 million,
or 62.3%, from sales in the third quarter of 2002 of $3.3 million; China sales
of $6.9 million in the third quarter of 2003, an increase of $0.6 million, or
10.4%, from sales in the third quarter of 2002 of $6.3 million; European sales
of $9.9 million, an increase of $1.2 million or 13.7%; North American sales of
$26.7 million in the third quarter of 2003, an increase of $3.4 million, or
14.5%, from sales in the third quarter of 2002 of $23.3 million; and African
third quarter 2003 sales of $1.8 million compared to third quarter 2002 sales of
$1.5 million, an increase of approximately $0.4 million, or 26.0%. The increases
in Argentinean and European sales were partially due to exchange rate changes.
In local currencies, South American sales rose approximately 42.9%, with
aftermarket sales from South America increasing 78.4% and export sales from
South America decreasing 13.6%; European sales rose 9.5%; China sales rose
10.7%; and African sales fell slightly.
Page 14
Gross profit was $11.5 million in the third quarter of 2003, or 22.6% of
sales. This compares to gross profit of $10.4 million, or 24.0% of sales, in the
third quarter of 2002. Increased sales volumes and control of product costs,
offset by the strengthening of the Argentine peso and South African Rand and
adverse operating performance in South Africa produced the improvement in gross
profit.
Selling, general, and administrative expense was $5.6 million, or 11.0% of
sales for the third quarter of 2003, an increase of $0.5 million, or 10.4%, from
$5.0 million, or 11.7% of sales, in the third quarter of 2002. The dollar
increase in selling, general, and administrative expense is due to inflation
plus additional spending.
In the third quarter of 2003 we recorded a $2.1 million option expense,
reflecting an increase in the estimated fair market value of the Company's
equity.
Operating income in the third quarter of 2003 was $3.6 million, or 7.1% of
sales, a decrease of $0.7 million, or 15.7%, from the $4.3 million, or 9.9% of
sales, in the third quarter of 2002. This was due to the factors discussed
above.
Interest expense was $2.7 million in the third quarter of 2003, a decrease
of $0.1 million compared to $2.8 million in the third quarter of 2002. This
decrease is due to decreases in U.K. term loan debt and the MOSAL obligation,
offset by smaller increases in North American and South African debt.
The provision for income taxes for the third quarter of 2003 was $0.4
million compared to income before taxes of $8,000. Certain losses were recorded
without tax benefit, reducing income before tax but not reducing tax expense.
This compares to the $0.2 million benefit for income taxes, 32.3% of income
before tax, for the third quarter of 2002. In 2002 we did not book a benefit in
the Unites States for the third quarter loss.
Nine Months Ended September 27, 2003 Compared to Nine Months Ended September 28,
2002
Sales for the nine months ended September 27, 2003 were $139.3 million, an
increase of $18.7 million, or 15.6%, from $120.5 million in the first nine
months of 2002. The sales increase is attributable to the North American sales
of $80.1 million in the first nine months of 2003, an increase of $11.1 million,
or 16.0%, from sales in the first nine months of 2002; South American sales of
$14.5 million, an increase of $6.5 million or 80.4%; European sales of $29.1
million, an increase of $2.9 million or 11.1%; and African sales of $4.9
million, an increase of $0.8 million or 21.6%. These increases were partly
offset by Asian sales of $10.6 million, a decrease of $2.6 million, or 19.6%.
The increases in South American, European and African sales were partially due
to exchange rate changes. In local currencies, South American sales grew 54.9%,
with aftermarket sales from South America increasing 111.6% and export sales
from South America increasing 45.6%; and European sales rose slightly. African
sales fell 9.7%, and Asian sales fell 27.2%. The Asian decrease was mostly in
response to the SARS epidemic.
Gross profit was $34.2 million in the first nine months of 2003, or 24.6%
of sales. This compares to gross profit of $29.0 million, or 24.1% of sales, in
the first nine months of 2002.
Page 15
Increased sales volumes and control of product costs, offset by the
strengthening of the Argentine peso and South African Rand produced the increase
in gross profit.
Selling, general, and administrative expense was $17.1 million, or 12.3% of
sales for the first nine months of 2003, an increase of $0.9 million, or 5.7%,
from $16.1 million, or 13.4% of sales, in the first nine months of 2002. The
dollar increase in selling, general, and administrative expense is due to
inflation plus additional spending.
In the first nine months of 2003 we recorded a $2.7 million option expense,
reflecting an increase in the estimated fair market value of the Company's
equity.
Operating income in the first nine months of 2003 was $14.1 million, or
10.2% of sales, an increase of $2.6 million, or 21.3%, from the $11.7 million,
or 9.7% of sales, in the first nine months of 2002. This was due to the factors
discussed above.
Interest expense was $8.2 million in the first nine months of 2003, a
decrease of $0.2 million compared to $8.4 million in the first nine months of
2002. This decrease is due to decreases in U.K. term loan debt and the MOSAL
obligation, offset by smaller increases in North American and South African
debt.
The provision for income taxes was $1.3 million, 30.4% of the income before
taxes, for the first nine months of 2003 compared to the $0.2 million provision
for income taxes for the first nine months of 2002 on income of $0.3 million. In
2002 we did not record a tax benefit in the United States for the third quarter
loss.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operating activities in the first nine months of 2003 was
$0.2 million. Capital spending for the first nine months of 2003 was $3.5
million, an increase of $0.4 million from the first nine months of 2002, not
including the MOSAL transaction in 2002. Of the $3.5 million, $2.1 million was
spent in the United States and $1.4 million outside the United States. Planned
capital expenditures consist primarily of expenditures to reduce costs through
automation, replace existing equipment and enable us to manufacture new
products.
Debt, net of cash, increased from $105.1 million at December 31, 2002 to
$107.9 million at September 27, 2003, an increase of $2.8 million. Factors
contributing to this increase were the $3.5 million of capital spending, a $6.6
million increase in accounts receivable, and a $5.5 million increase in
inventory, offset by a $2.2 million increase in accounts payable.
We had a cash balance of $1.0 million and revolving credit facilities with
banks in the United States and United Kingdom under which additional borrowings
of $11.0 million and $2.4 million were available based on the September 27, 2003
levels of eligible receivables (United States and United Kingdom) and inventory
(United States only) which are pledged to support that debt. As of September 27,
2003, we had no bank debt outstanding in China or Argentina.
Page 16
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 ongoing operations, 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 January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB 51." FIN
No. 46 requires that the primary beneficiary in a variable interest entity
consolidate the entity even if the primary beneficiary does not have a majority
voting interest. The consolidation requirements of this Interpretation are
required to be implemented for any variable interest entity created on or after
January 31, 2003. In addition, FIN No. 46 requires disclosure of information
regarding guarantees or exposures to loss relating to any variable interest
entity existing prior to January 31, 2003 in financial statements issued after
January 31, 2003. We do not believe this Interpretation will significantly
impact our financial position or results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133 and is to be applied prospectively to contracts entered into or
modified after June 30, 2003. The adoption of this statement will not have an
impact on the Company's consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). The adoption of this statement will not
have an impact on the Company's consolidated financial position or results of
operations.
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
Page 17
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.
ITEM 4: CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer and
the Chief Financial Officer of the Company, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13-a14. Based upon that evaluation, the principal executive
officers and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.
Subsequent to the evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Page 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K filed in the three month period ended
September 27, 2003, and incorporated by reference include:
1. 8K filed on August 13, 2003 accompanied by the press release
of August 8, 2003 reporting results for the quarter ended June
28, 2003.
(b) Exhibits
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 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer 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: November 10, 2003 By: /s/ Kenneth C. Cornelius
------------------------
Kenneth C. Cornelius
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
Page 20
Exhibit Index
Exhibit Number Description
-------------- -----------
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 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Page 21