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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 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ------------
Commission file number 0-23378
Thermadyne Holdings Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2482571
- ----------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
- --------------------------------------------------------------------------------
16052 Swingley Ridge Road, Suite 300, Chesterfield, MO 63017
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (636) 728-3000
Indicate by [X] whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by [X] whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] NO [X]
Indicate by [X] whether the registrant has filed all documents and reports
required to be filed by Section 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 [ ]
The number of shares outstanding of the issuer's common stock, par value $0.01
per share, as of October 31, 2003 was 13,300,000.
THERMADYNE HOLDINGS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of
Thermadyne Holdings Corporation (Unaudited)
Condensed Consolidated Balance Sheets.................. 3
Condensed Consolidated Statements of Operations........ 4-5
Condensed Consolidated Statements of Cash Flows........ 6
Notes to Condensed Consolidated Financial Statements... 7-19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....... 20-25
Item 3. Market Risk............................................ 25
Item 4. Controls and Procedures................................ 25
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............. 26
Item 6. Exhibits and Reports on Form 8-K....................... 27
SIGNATURES........................................................... 28
ITEM 1
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
Reorganized Predecessor
Company Company
------------- -------------
September 30, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 11,078 $ 17,413
Accounts receivable, less allowance for doubtful
accounts of $4,847 and $4,275, respectively 81,290 80,423
Inventories 103,934 95,702
Prepaid expenses and other 11,495 12,057
------------- -------------
Total current assets 207,797 205,595
Property, plant and equipment, net 84,178 72,291
Goodwill 137,876 10,625
Intangibles, net 79,443 3,696
Other assets 1,083 5,354
------------- -------------
Total assets $ 510,377 $ 297,561
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 25,934 $ 23,855
Accrued and other liabilities 30,940 27,458
Accrued interest 196 -
Income taxes payable 3,706 1,658
Revolving credit facility 17,185 -
Current maturities of long-term obligations 8,889 13,328
------------- -------------
Total current liabilities 86,850 66,299
Liabilities subject to compromise - 832,919
Long-term obligations, less current maturities 201,205 17,285
Other long-term liabilities 41,609 46,201
Redeemable preferred stock - 78,509
Shareholders' equity (deficit):
Common stock, $0.01 par value, 25,000,000 shares authorized,
and 13,300,000 shares issued and outstanding 133 36
Additional paid-in capital 183,267 (128,523)
Accumulated deficit (2,550) (568,963)
Management loans - (1,596)
Accumulated other comprehensive loss (137) (44,606)
------------- -------------
Total shareholders' equity (deficit) 180,713 (743,652)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 510,377 $ 297,561
============= =============
See accompanying notes to condensed consolidated financial statements.
3
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
Reorganized Predecessor
Company Company
------------- ------------
Three Months Three Months
Ended Ended
September 30, September 30
2003 2002
------------- ------------
Net sales $ 106,688 $ 98,433
Operating expenses:
Cost of goods sold 73,230 61,921
Selling, general and administrative expenses 28,260 25,678
Amortization of intangibles 1,150 193
Net periodic postretirement benefits 687 288
------------- ------------
Operating income 3,361 10,353
Other income (expense):
Interest expense (contractual interest of $17,490 for the (4,324) (5,217)
three months ended September 30, 2002)
Amortization of deferred financing costs (114) (829)
Other, net (671) (1,339)
------------- ------------
Income (loss) before reorganization items and (1,748) 2,968
income tax provision
Reorganization items -- 3,530
------------- ------------
Loss before income tax provision (1,748) (562)
Income tax provision 1,608 44
------------- ------------
Net loss $ (3,356) $ (606)
============= ============
Basic and diluted net loss per share amounts: $ (0.25) $ (0.17)
============= ============
See accompanying notes to condensed consolidated financial statements
4
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
Reorganized
Company Predecessor Company
------------ ----------------------------
Four Months Five Months Nine Months
Ended Ended Ended
September 30, May 31, September 30,
2003 2003 2002
------------ ------------ ------------
Net sales $ 142,926 $ 172,010 $ 309,196
Operating expenses:
Cost of goods sold 97,589 111,333 197,314
Selling, general and administrative expenses 37,059 44,341 80,813
Amortization of intangibles 1,492 363 767
Net periodic postretirement benefits 801 516 864
------------ ------------ ------------
Operating income 5,985 15,457 29,438
Other income (expense):
Interest expense (contractual interest of $29,962 and $53,052 for the
five months ended May 31, 2003 and the nine months ended
September 30, 2002, respectively) (5,779) (8,798) (16,853)
Amortization of deferred financing costs (152) - (2,487)
Other, net (678) (1,174) (2,850)
------------ ------------ ------------
Income (loss) before reorganization items and
income tax provision (624) 5,485 7,248
Reorganization items - (14,672) (9,577)
Gain from reorganization and adoption of fresh-start accounting - 581,089 -
------------ ------------ ------------
Income (loss) before income tax provision (624) 571,902 (2,329)
Income tax provision 1,926 2,939 1,534
------------ ------------ ------------
Net income (loss) $ (2,550) $ 568,963 $ (3,863)
============ ============ ============
Basic and diluted net income (loss) per share amounts: $ (0.19) $ 158.47 $ (1.08)
============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Reorganized
Company Predecessor Company
------------------ ---------------------------------
Four Months Five Months Nine Months
Ended Ended Ended
September 30, 2003 May 31, 2003 September 30, 2002
------------------ ------------ ------------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (2,550) $ 568,963 $ (3,863)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Net periodic postretirement benefits 801 516 864
Depreciation 6,676 6,071 11,646
Amortization of intangibles 1,492 363 767
Amortization of deferred financing costs 152 - 2,487
Gain on reorganization and adoption of fresh-start accounting - (581,089) 35
Non-cash cost of sales 2,195 - -
Deferred income taxes 167 (33) -
Changes in operating assets and liabilities:
Accounts receivable 5,058 (1,521) 150
Inventories 506 (5,703) (8,155)
Prepaid expenses and other (590) (347) 753
Accounts payable (3,658) 3,326 307
Accrued and other liabilities (9,740) 5,059 1,043
Accrued interest 196 11 (476)
Income taxes payable (702) 2,028 757
Other long-term liabilities (820) (1,035) (2,272)
------------------ ------------ ------------------
Total adjustments 1,733 (572,354) 7,906
------------------ ------------ ------------------
Net cash provided by (used in) operating activities (817) (3,391) 4,043
------------------ ------------ ------------------
Cash flows used in investing activities:
Capital expenditures, net (3,209) (4,114) (6,522)
------------------ ------------ ------------------
Net cash used in investing activities (3,209) (4,114) (6,522)
------------------ ------------ ------------------
Cash flows provided by (used in) financing activities:
Borrowing under debtor-in-possession credit facility - - 1,500
Net borrowings under revolving credit facility 4,222 12,963 -
Repayment of long-term obligations (719) (12,780) (4,247)
Borrowing of long-term obligations - 3,075 3,389
Financing fees - (1,352) -
Other (1,192) 979 58
------------------ ------------ ------------------
Net cash provided by financing activities 2,311 2,885 700
------------------ ------------ ------------------
Net decrease in cash and cash equivalents (1,715) (4,620) (1,779)
Cash and cash equivalents at beginning of period 12,793 17,413 14,800
------------------ ------------ ------------------
Cash and cash equivalents at end of period $ 11,078 $ 12,793 $ 13,021
================== ============ ==================
See accompanying notes to condensed consolidated financial statements
6
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. REORGANIZATION AND BASIS OF PRESENTATION
Thermadyne Holdings Corporation ("Thermadyne" or the "Company"), a
Delaware corporation, is a global manufacturer of cutting and welding
products and accessories. On May 23, 2003 (the "Effective Date"),
Thermadyne consummated its plan of reorganization under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") and completed
a comprehensive financial restructuring (the "Restructuring").
The principal elements of the Restructuring and the principal effects
of its consummation pursuant to the plan of reorganization are
summarized below. The Company has accounted for the Restructuring using
the principles of "fresh-start" accounting as required by the American
Institute of Certified Public Accountants Statement of Position No.
90-7, entitled "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code" ("SOP 90-7"). As a result of the application of
SOP 90-7, the Company's financial results for the periods ending prior
to June 1, 2003 and ending after May 31, 2003 include two different
bases of accounting and, accordingly the operating results and cash
flows of the Reorganized Company (as defined below) and the Predecessor
Company (as defined below) have been separately disclosed. For the
purposes of these financial statements, references to the "Predecessor
Company" are references to the Company for periods prior to June 1,
2003 (the first day of the calendar month following the month in which
the Company emerged from bankruptcy) and references to the "Reorganized
Company" are references to the Company for the periods subsequent to
May 31, 2003. The Reorganized Company's financial statements are not
comparable to the Predecessor Company's financial statements. The
combined results of operations of the Company for the nine-month period
ended September 30, 2003 are not necessarily indicative of the
operating results that may be expected for future periods.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Thermadyne have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the five months
ended May 31, 2003 and the four months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
2002.
PLAN OF REORGANIZATION
On November 19, 2001, the Company and substantially all of its domestic
subsidiaries (collectively, the "Debtors"), filed voluntary petitions
for relief under Chapter 11 of the
7
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Missouri (the "Court".)
On January 17, 2003, the Debtors filed with the Court the First Amended
and Restated Joint Plan of Reorganization (the "Plan") and the First
Amended and Restated Disclosure Statement describing the Plan (the
"Disclosure Statement"). The Plan and the Disclosure Statement were
filed with the SEC on Form 8-K on February 6, 2003. On April 3, 2003,
the Court confirmed the Plan. The Plan was consummated on the Effective
Date, and the Company emerged from Chapter 11 bankruptcy protection.
The Plan provided for a substantial reduction of the Company's
long-term debt. Under the Plan, the Company's total debt was reduced to
approximately $225,000, as compared to the nearly $800,000 in debt and
$79,000 in preferred stock outstanding at the time the Company filed
for Chapter 11 protection in November 2001. The Plan provided for
treatment to the various classes of claims and equity interest as
follows (as is more fully described in the Plan):
Administrative Expense Claims, Priority Tax Claims and the Class 1
Other Priority Claims (as each such class, and all classes described
herein, are more fully described in the Plan) remain unaffected by the
Chapter 11 cases and are to be paid in full. The Class 3 Other Secured
Claims are also unimpaired by the Chapter 11 cases and the holders of
such claims continue to retain their liens.
The pre-petition senior secured lenders (Class 2) exchanged their
approximately $365,000 in debt and outstanding letters of credit for
cash, approximately 94.5% of the new common stock of the Company,
$180,000 in new senior debt notes and Series C Warrants exercisable for
additional shares of new common stock of the Company. The pre-petition
senior lenders transferred the Series C Warrants to certain
pre-petition Company equity holders.
General Unsecured Creditors (Class 4) will receive distributions of
cash equal to the lesser of (1) a holder's pro rata share of $7,500 and
(2) fifty percent (50%) of such holder's claim (estimated by the
Company to provide a recovery on such claims of 30% to 37% of the
amount of such claims). The Company has made initial distributions of
such amounts.
The 9 7/8% Senior Subordinated Note Holders (Class 5) exchanged their
approximately $230 million in debt and accrued interest for
approximately 5.5% of the new common stock of the Company, and Series A
Warrants and Series B Warrants exercisable for additional shares of new
common stock of the Company. The 9 7/8% Senior Subordinated Note
Holders had the opportunity to subscribe for more shares through a
subscription offering held pursuant to the Plan, but no holders
subscribed to the offering.
The Junior Subordinated Note Claims, the 10.75% Senior Subordinated
Note Claims and the 12 1/2% Senior Discount Debenture Claims (Class 6,
Class 7 and Class 8, respectively) did not receive any distribution
under the Plan, but had the opportunity to participate in the
subscription offering for shares of new common stock of the reorganized
Company. None of the holders elected to subscribe to the offering.
8
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED
The Thermadyne Holdings Equity Interests (Class 9), which includes the
existing common and preferred stock of the Company, were cancelled upon
the Effective Date of the Plan and the holders of such interests did
not receive any distributions pursuant to the Plan.
On the Effective Date of the Plan, the Company issued 13,300,000 shares
of new common stock, $180,000 in new senior debt notes, 1,157,000
Series A Warrants, 700,000 Series B Warrants and 271,429 Series C
Warrants. The Company concurrently entered into a new senior secured
credit facility providing for revolving loans of up to $50,000. The
Company borrowed $15,300 under the facility on the Effective Date to
repay in full amounts outstanding under the $60,000
debtor-in-possession credit facility among Thermadyne Mfg. LLC, as
borrower, the Company and certain U.S. subsidiaries as guarantors, and
a syndicate of lenders with ABN AMRO Bank N.V. as agent (the "DIP
Facility"), for the payment of various pre-petition obligations and for
general working capital purposes. The Company may make additional draws
under the facility.
LIABILITIES SUBJECT TO COMPROMISE
Under Chapter 11, certain claims against the debtor in existence prior
to the filing of the petition for relief under federal bankruptcy laws
are stayed while the debtor continues business operations as
debtor-in-possession. These claims are shown in the accompanying
December 31, 2002, balance sheet as "liabilities subject to
compromise." The principal categories of liabilities subject to
compromise at December 31, 2002, consisted of the following:
December 31,
2002
------------
Trade accounts payable $ 15,949
Accrued and other liabilities 3,023
Accrued interest 24,809
Accrued income taxes 9,086
Old Credit Facility 356,172
Senior Subordinated Notes 207,000
Debentures 145,066
Subordinated Notes 37,060
Junior Notes 33,427
Other long-term obligations 1,327
------------
Total $ 832,919
============
REORGANIZATION ITEMS
For the five months ended May 31, 2003, reorganization items totaled
approximately $14,700 and included $13,900 of professional fees and
expenses, $200 paid under the key employee retention program, and $600
of
9
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
other reorganization costs. Reorganization items for the three-month
period ended September 30, 2002, include $3,000 of professional fees
and expenses, $400 of expenses related to financing fees associated
with the DIP Facility, and $100 of other reorganization costs. For the
nine months ended September 30, 2002, reorganization items include
$6,900 of professional fees and expenses, $1,400 of expenses related to
financing fees associated with the DIP Facility, $400 associated with a
lease obligation that was rejected, $300 related to payments under the
key employee retention plan approved by the Court, and $600 of other
reorganization costs.
SELLING, GENERAL AND ADMINISTRATIVE CHARGES
Selling, general and administrative expenses for the three-month period
ended September 30, 2003 included charges of approximately $500 related
primarily to the reorganization of domestic manufacturing facilities.
For the four months ended September 30, 2003, together with the five
months ended May 31, 2003, selling, general and administrative expenses
included $1,100 related to plant reorganizations and $900 related to
the logistics and technology projects. Included in selling, general and
administrative expenses for the three months ended September 30, 2002,
are costs of approximately $500 related to an information technology
transformation project and $100 related to logistics initiatives. For
the nine months ended September 30, 2002, selling, general and
administrative expenses included $1,900 related to the information
technology transformation initiative and $500 related to the logistics
projects.
COST OF GOODS SOLD
Included in cost of goods sold for the three months ended September 30,
2003, is a $2,195 charge related to the required write-up of foreign
inventory in connection with fresh-start accounting. In connection with
the opening balance sheet, the Company wrote up its foreign inventory
by approximately $3,000. The Company's foreign subsidiaries account for
their inventory on a first-in, first-out basis, and as a result, the
majority of the revalued inventory was sold in the third quarter of
2003. The remaining $800 of the write-up will be recorded to cost of
goods sold in the fourth quarter of 2003.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
current period presentation. These reclassifications did not affect net
income (loss). Additionally, certain intercompany sales transactions,
which were inadvertently misclassified as trade sales, have been
reclassified. This reclassification of sales was offset by a
corresponding change in the cost of goods sold and had no effect on the
Company's financial condition, changes in financial condition, and
results of operations including no effect on reported gross profit,
operating income, net income (loss) or net income (loss) per common
share. A summary of these reclassifications for the current fiscal year
and the fiscal year ended December 31, 2002 is as follows:
10
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Reorganized
Predecessor Company Company
------------------------- -----------
Three Months Two Months One Month
Ended Ended Ended
March 31, May 31, June 30,
2003 2003 2003 Total
------------ ---------- ----------- ---------
Net sales as reported $ 100,991 $ 71,917 $ 36,299 $ 209,207
Reclassification (537) (362) (61) (960)
------------ ---------- ----------- ---------
Net sales as adjusted $ 100,454 $ 71,555 $ 36,238 $ 208,247
============ ========== =========== =========
Cost of goods sold as reported $ 65,090 $ 47,144 $ 24,419 $ 136,653
Reclassification (537) (362) (61) (960)
------------ ---------- ----------- ---------
Cost of goods sold as adjusted $ 64,553 $ 46,782 $ 24,358 $ 135,693
============ ========== =========== =========
Operating income as reported $ 9,486 $ 5,968 $ 2,624 $ 18,078
============ ========== =========== =========
Predecessor Company
------------------------------
Three Months Three Months
Ended Ended
September 30, December 31,
2002 2002 Total
------------- ------------- ---------
Net sales as reported $ 98,610 $ 104,882 $ 203,492
Reclassification (177) (456) (633)
------------- ------------- ---------
Net sales as adjusted $ 98,433 $ 104,426 $ 202,859
============= ============= =========
Cost of goods sold as reported $ 62,098 $ 70,073 $ 132,171
Reclassification (177) (456) (633)
------------- ------------- ---------
Cost of goods sold as adjusted $ 61,921 $ 69,617 $ 131,538
============= ============= =========
Operating income as reported $ 10,353 $ 8,373 $ 18,726
============= ============= =========
11
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
INCOME (LOSS) PER SHARE
The following table sets forth the information used in the computation
of basic and diluted loss per share for the periods indicated.
Reorganized Predecessor
Company Company
------------- -------------
Three Months Three Months
Ended Ended
September 30, September 30,
2003 2002
------------- -------------
Numerator:
Net loss applicable to common shares $ (3,356) $ (606)
============= =============
Denominator:
Weighted average shares-basic and diluted 13,300,000 3,590,326
============= =============
Basic and diluted loss per share amounts:
Net loss applicable to common shares $ (0.25) $ (0.17)
============= =============
Reorganized
Company Predecessor Company
------------- -----------------------------
Four Months Five Months Nine Months
Ended Ended Ended
September 30, May 31 September 30,
2003 2003 2002
------------- ------------- -------------
Numerator:
Net income (loss) applicable to common shares $ (2,550) $ 568,963 $ (3,863)
============= ============= =============
Denominator:
Weighted average shares-basic and diluted 13,300,000 3,590,326 3,590,326
============= ============= =============
Basic and diluted loss per share amounts:
Net income (loss) applicable to common shares $ (0.19) $ 158.47 $ (1.08)
============= ============= =============
12
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2. FRESH-START ACCOUNTING
The company has accounted for the Restructuring using the principles of
"fresh-start" accounting as required by SOP 90-7. Pursuant to such
principles, the Company's assets and liabilities were revalued as of
the month-end closest to the Effective Date. The assets were stated at
their reorganization value (the "Reorganization Value"), which is
defined as the fair value of the Company's assets before considering
liabilities.
The Reorganization Value was determined by the Company through
consultation with its financial advisors, by developing a range of
values using both comparable companies and net present value
approaches. The Reorganization Value was based in part on financial
projections prepared by the Company for the period 2002 through 2006.
These projections assume a compound annual growth rate for sales of
approximately 3.3% with domestic sales growing at a slightly faster
pace than international. This growth rate compares to a negative
compounded rate of 4.5% the Company experienced for the years 1997 to
2002. The projections also assume improved profitability from continued
efforts to reduce cost. The determination of the Reorganization Value
is more fully described in the Plan of Reorganization. Based on the
analyses prepared by the Company and its financial advisor, the Company
estimated the Reorganization Value at approximately $523,000. The
Company has made an allocation of the Reorganization Value, which
includes certain estimates and judgments.
The following unaudited consolidated balance sheet as of June 1, 2003,
illustrates the effect of the Company's Restructuring and the effect of
fresh-start accounting adjustments to record the Company's preliminary
allocation of the Reorganization Value to its assets. The total amount
of debt forgiveness was $782,100 and was included as a reorganization
item gain in the accompanying statements for the two and five month
periods ended May 31, 2003. The consolidated balance sheet at June 1,
2003, has been prepared on a different basis of accounting and is not
comparable in material respects to any such balance sheet as of any
prior date or for any prior period.
13
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 1, 2003
Historical Debt Discharge June 1, 2003
Basis of and Fresh-Start New Basis of
Accounting Restructuring Adjustments Accounting
------------ -------------- ----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 12,793 $ - $ - $ 12,793
Accounts receivable, net 86,089 - - 86,089
Inventories 105,804 - - (j) 105,804
Prepaid expenses and other 12,123 - (933)(k) 11,190
--------- --------- --------- ---------
Total current assets 216,809 - (933) 215,876
Property, plant and equipment 73,934 - 13,793 (l) 87,727
Deferred financing costs 675 677(a) - 1,352
Goodwill 13,089 - 124,787 (m) 137,876
Intangibles 4,046 - 75,382 (n) 79,428
Other assets 1,113 - - 1,113
--------- --------- --------- ---------
Total assets $ 309,666 $ 677 $ 213,029 $ 523,372
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 29,649 $ - $ - $ 29,649
Accrued and other liabilities 31,963 8,639 (b) - 40,602
Accrued interest 1,348 (1,348)(c) - -
Income taxes payable 3,841 488 (d) - 4,329
Current maturities of long-term obligations 15,511 (11,650)(e) - 3,861
--------- --------- --------- ---------
Total current liabilities 82,312 (3,871) - 78,441
Liabilities subject to compromise 835,969 (835,969)(f) - -
Long-term obligations, less current maturities 15,742 195,349 (g) 8,744 (o) 219,835
Other long-term liabilities 47,203 9,648 (d) (15,155)(o) 41,696
--------- --------- --------- ---------
Total liabilities 981,226 (634,843) (6,411) 339,972
--------- --------- --------- ---------
Redeemable preferred stock 78,509 (78,509)(h) - -
Stockholders' equity (deficit):
Common stock 36 97 (i) - 133
Additional paid-in capital (130,204) 313,471 (i) - 183,267
Accumulated other comprehensive loss (38,812) (2,488)(i) 41,300 (p) -
Accumulated deficit (581,089) 402,949 (i) 178,140 (p) -
--------- --------- --------- ---------
Total stockholders' equity (deficit) (750,069) 714,029 219,440 183,400
--------- --------- --------- ---------
Total liabilities and shareholders' equity (deficit) $ 309,666 $ 677 $ 213,029 $ 523,372
========= ========= ========= =========
14
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
DEBT DISCHARGE AND RESTRUCTURING ADJUSTMENTS:
(a) To record financing costs related to the Company's new credit agreement
and the new term notes issued as part of the Plan.
(b) To record amounts expected to be paid in accordance with the Plan.
Amount includes $7,500 to be paid to unsecured creditors with the
remainder related to other secured and priority claims.
(c) To record payment of accrued interest on the DIP Facility and the
pre-petition credit agreement.
(d) To reestablish obligations expected to be paid in the normal course of
business. Amounts were previously included in liabilities subject to
compromise.
(e) To record repayment principal outstanding under the DIP Facility.
(f) To eliminate liabilities subject to compromise.
(g) To record initial borrowings of $15,349 under the Company's new credit
agreement and to record $180,000 of new term notes in accordance with
the Plan. Initial borrowings under the new credit agreement were used
to repay the DIP Facility and to pay certain amounts due at closing
including interest on the DIP Facility and the Company's pre-petition
credit facility.
(h) To eliminate preferred stock in accordance with the Plan.
(i) To adjust equity for adjustments contemplated in the Plan and to record
new common stock.
FRESH-START ADJUSTMENTS:
(j) The Company revalued its inventory to record work-in-process and
finished goods at their respective selling prices less (i) costs to
complete, (ii) costs of disposal, and (iii) a reasonable profit on the
selling effort, as applicable. The write-up in inventory resulting from
this revaluation was essentially offset by an adjustment to eliminate
the existing LIFO reserve and previously capitalized inventory costs.
(k) To eliminate prepaid pension asset. In accordance with SOP 90-7, the
Company recorded the liability related to its defined benefit pension
plans at the projected benefit obligation in excess of plan assets and
eliminated other amounts recorded on the balance sheet. In addition to
the prepaid pension asset, the Company eliminated $4,459 recorded in
accumulated other comprehensive loss.
(l) To write-up fixed assets to their estimated fair value. The write-up
was based on management estimates and an appraisal prepared for the
Company by an outside third party.
(m) Represents the excess of Reorganization Value over identifiable assets
("goodwill".)
15
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED
(n) Represents the incremental allocation of the Reorganization Value to
identifiable intangible assets. Intangibles consist of the following as
of June 1, 2003:
Patents $ 7,436
Trademarks 33,600
Customer relationships 38,392
----------
$ 79,428
==========
The value assigned to patents, trademarks and customer relationships
was based on management's estimates and an appraisal prepared for the
Company by an outside third party.
(o) Adjustments consist of the following:
Other
Long-term Long-term
Obligations Liabilities
-------------------------
Properly classify capital lease obligations $ 8,744 $ (8,769)
Adjust pension obligation in accordance with SOP 90-7 - 1,787
Adjust post-retirement benefit obligation in accordance
with SOP 90-7 - (8,173)
-------------------------
$ 8,744 $ (15,155)
=========================
Similar to the adjustment made related to the defined benefit pension
plans, in accordance with SOP 90-7, the Company adjusted the liability
related to its post-retirement benefit plan to the accumulated
post-retirement benefit obligation.
(p) To eliminate remaining balances of accumulated other comprehensive loss
and retained deficit.
3. INVENTORIES
The composition of inventories was as follows:
September 30, 2003 December 31, 2002
----------------- -----------------
Raw materials $ 20,349 $ 15,881
Work-in-process 12,651 26,413
Finished Goods 70,934 52,488
LIFO reserve - 920
------------- -----------------
Total $ 103,934 $ 95,702
============= =================
16
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. SEGMENT INFORMATION
The Company reports its segment information by geographic region.
Although the Company's domestic operation is comprised of several
individual business units, similarity of products, paths to market, end
users, and production processes results in performance evaluation and
decisions regarding allocation of resources being made on a combined
basis. The Company's reportable geographic regions are the United
States, Europe and Australia/Asia.
The Company evaluates performance and allocates resources based
principally on operating income net of any special charges or
significant one-time charges. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Intersegment sales are based on market prices.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. Export sales from the United
States are included in the United States segment. The "Other" column
includes the elimination of intersegment sales and profits, corporate
related items and other costs not allocated to the reportable segments.
Other
United Australia Geographic
States Europe Asia Regions Other Consolidated
------------ ------------ ------------ ------------ ------------ ------------
REORGANIZED COMPANY
Four Months Ended September 30, 2003
Revenue from external customers $ 82,656 $ 19,066 $ 20,837 $ 20,367 $ - $ 142,926
Intersegment revenues 7,768 2,244 414 900 (11,326) -
Operating income (loss) 12,869 (136) 693 1,236 (8,677) 5,985
PREDECESSOR COMPANY
Five Months Ended May 31, 2003
Revenue from external customers $ 101,025 $ 26,235 $ 21,243 $ 23,507 $ - $ 172,010
Intersegment revenues 10,478 2,562 257 1,109 (14,406) -
Operating income (loss) 20,223 2,508 205 1,261 (8,740) 15,457
Nine Months Ended September 30, 2002
Revenue from external customers $ 199,143 $ 35,936 $ 34,521 $ 39,596 $ - $ 309,196
Intersegment revenues 17,866 4,012 446 3,301 (25,625) -
Operating income (loss) 38,625 1,860 (459) 4,818 (15,406) 29,438
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive loss totaled $(3,650), and $(4,531) for the three months
ended September 30, 2003, and the three months ended September 30,
2002, respectively. For the four-month period ended September 30, 2003,
the five-month period ended May 31, 2003, and the nine-month period
ended September 30, 2002, comprehensive income (loss) was $(2,687),
$613,566 and $(5,668), respectively.
17
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
6. INTANGIBLE ASSETS
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", the Company ceased amortization
of its goodwill on January 1, 2002. Effective June 1, 2003, the Company
made an adjustment of $122,287 to write-up goodwill pursuant to the
principles of "fresh-start" accounting as required by SOP 90-7.
Goodwill had a net balance of $137,876 and $10,625 at September 30,
2003 and December 31, 2002, respectively.
The Company has other identifiable intangible assets such as patents,
trademarks and customer relationships. In accordance with SOP 90-7, the
Company revalued its identifiable intangible assets and recorded a
fresh-start adjustment of $75,382 to write-up these assets. Patents and
customer relationships are amortized on a straight-line basis over
their estimated useful lives, which generally range from 10 to 20
years. Trademarks are not amortized, but are periodically evaluated for
impairment. The total cost of these intangible assets was $79,734 and
$13,511 at September 30, 2003 and December 31, 2002, respectively.
Accumulated amortization totaled $1,492 and $9,815 at September 30,
2003 and December 31, 2002, respectively. Amortization expense amounted
to $1,150 and $193 for the three month period ended September 30, 2003
and the three month period ended September 30, 2002, respectively.
Amortization expense was $1,492, $363, and $767 for the four months
ended September 30, 2003, the five months ended May 31, 2003, and the
nine months ended September 30, 2002, respectively. Amortization
expense is expected to be approximately $3,100 for each of the next
five fiscal years.
7. LONG-TERM OBLIGATIONS
On the Effective Date, the Company entered into a credit agreement
dated as of May 23, 2003 (the "Working Capital Facility") among the
Company, as a guarantor thereunder, Thermadyne Industries, Inc. and
certain other domestic subsidiaries of the Company, as borrowers, the
other credit parties signatory thereto, the lenders signatory thereto
from time to time, General Electric Capital Corporation, as Agent and
Lender, and GECC Capital Markets Group, Inc., as Lead Arranger,
providing for up to $50,000 in a revolving loan for working capital
purposes (the "Working Capital Facility.")
Additionally, in connection with the Plan and as a distribution to the
Company's pre-petition senior secured lenders for their claims in the
bankruptcy, the Company entered into the Credit and Guaranty Agreement
dated as of May 23, 2003 (the "Senior Notes Facility") among the
Company, as Borrower, the guarantors referred to therein, the New Term
Lenders referred to therein and Deutsche Bank Trust Company Americas,
as Administrative Agent and Collateral Agent, providing a total of
$180,000 in term loans (the "Senior Term Notes.")
The Working Capital Facility provides for total borrowings of $50,000,
of which up to $20,000 may be used for letters of credit. Actual
borrowing availability is subject to a borrowing base calculation,
which is equal to 1.5 times Adjusted EBITDA. The Working Capital
Facility defines Adjusted EBITDA as 100% of the EBITDA for the Company
and its domestic subsidiaries plus 65% of the EBITDA of the Company's
Canadian subsidiaries. EBITDA is defined in the Working Capital
Facility as net income less interest income, gains from extraordinary
items, any
18
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
aggregate net gain on the sale of tangible assets, and any other
non-cash gains added in determining net income; plus, provision for
income taxes, interest expense, depreciation, amortization of
intangibles, amortization of deferred financing costs, any amount
deducted from net income as a result of stock or stock option grants,
net periodic post-retirement benefit costs, losses from extraordinary
items, reorganization costs related to the Chapter 11 cases, and any
non-recurring employee severance expenses and non-recurring cash
expenses related to plant reorganizations, not to exceed $5,000 in the
aggregate. Availability under the Working Capital Facility may also be
limited if the Company fails to meet certain levels of Adjusted EBITDA.
Borrowings under the Working Capital Facility accrue interest, at the
Company's option, at the prime lending rate plus 2.25% in the case of
index rate loans, or at the London Interbank Offered Rate ("LIBOR")
plus 3.25% in the case of LIBOR loans. The Working Capital Facility is
secured by substantially all the assets of the Company, including a
pledge of the capital stock of substantially all its subsidiaries,
subject to certain limitations with respect to foreign subsidiaries.
The Working Capital Facility contains financial covenants, including
minimum levels of EBITDA (determined on a consolidated basis for the
Company) and other customary provisions. As of September 30, 2003, the
Company had borrowed $17,185 and issued letters of credit totaling
$9,165 under the Working Capital Facility. The Working Capital Facility
terminates on May 16, 2006.
The Senior Term Notes accrue interest, in the case of eurodollar loans
at LIBOR plus a margin ranging from 3.0% to 7.5%, and in the case of
base rate loans at the prime rate plus a margin ranging from 2.0% to
6.5%. The interest margin applicable to the Eurodollar and base rate
loans varies depending on the level of indebtedness and the time
elapsed from the Effective Date. The Senior Notes Facility contains
financial covenants and other provisions similar to those in the
Working Capital Facility. No payments of principal are due under the
Senior Note Facility until June 2004.
8. Income Taxes
The Company's tax provision relates primarily to its foreign
subsidiaries. Domestic losses are fully reserved with a valuation
allowance based on the current tax position and estimates of taxable
income for the forseeable future.
19
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thermadyne, through its subsidiaries, is engaged in the design, manufacture and
distribution of cutting and welding products and accessories. Since 1994, the
Company has embarked on a strategy designed to focus its business exclusively on
the cutting and welding industry and enhance the Company's market position
within that industry.
On January 17, 2003, the Debtors filed with the Court the First Amended and
Restated Joint Plan of Reorganization (the "Plan") and the First Amended and
Restated Disclosure Statement describing the Plan (the "Disclosure Statement").
The Plan and the Disclosure Statement were filed with the SEC on Form 8-K on
February 6, 2003. On April 3, 2003, the Court confirmed the Plan. The Plan was
consummated on May 23, 2003 (the "Effective Date") as all conditions necessary
for the Plan to become effective were satisfied or waived, and the Company
emerged from Chapter 11 bankruptcy protection.
Effective June 1, 2003, the Company adopted "fresh-start" financial reporting
pursuant to which the assets of the Company were recorded at their
reorganization value, which is defined as the fair value of the reorganized
company. As part of its fresh-start revaluation, the Company also recorded
significant goodwill (reorganization value in excess of identifiable assets). In
addition, as part of the Restructuring, the Company significantly reduced its
long-term debt and eliminated its preferred stock. As a result of the foregoing,
the Company's financial data from June 1, 2003, as presented in the consolidated
financial statements is not comparable to prior periods.
To facilitate meaningful comparisons of the Company's third quarter 2003 and
2002 operating results, and the year to date operating results for the nine
months ended September 30, 2003 and 2002, the following discussions of results
of operations on a consolidated basis are presented on a traditional three and
nine month basis for both years. Consequently, the information presented below
does not reflect the periods in the nine months ended September 30, 2003, as
they were presented in the Consolidated Statements of Operations. A summary of
financial data which combines the four-month period ended September 30, 2003 and
the five-month period ended May 31, 2003 is presented to provide a basis for
discussions and is referred to as "Combined Nine Months Ended September 30,
2003." The results of operations for the three and nine month periods ended
September 30, 2003, are not necessarily indicative of the operating results that
might be achieved for the full fiscal year.
20
Combined Nine
Four Months Five Months Months Nine Months
Ended Ended Ended Ended
September 30, May 31, September 30, September 30,
2003 2003 2003 2002
------------- ------------- ------------- -------------
Net sales $ 142,926 $ 172,010 $ 314,936 $ 309,196
Operating expenses:
Cost of goods sold 97,589 111,333 208,922 197,314
Selling, general and administrative expenses 37,059 44,341 81,400 80,813
Amortization of intangibles 1,492 363 1,855 767
Net periodic postretirement benefits 801 516 1,317 864
------------- ------------- ------------- -------------
Operating income 5,985 15,457 21,442 29,438
Other income (expense):
Interest expense (5,779) (8,798) (14,577) (16,853)
Amortization of deferred financing costs (152) - (152) (2,487)
Other, net (678) (1,174) (1,852) (2,850)
------------- ------------- ------------- -------------
Income (loss) before reorganization items and
income tax provision (624) 5,485 4,861 7,248
Reorganization items - (14,672) (14,672) (9,577)
Gain on reorganization and fresh-start accounting - 581,089 581,089 -
------------- ------------- ------------- -------------
Income (loss) before income tax provision (624) 571,902 571,278 (2,329)
Income tax provision 1,926 2,939 4,865 1,534
------------- ------------- ------------- -------------
Net income (loss) $ (2,550) $ 568,963 $ 566,413 $ (3,863)
============= ============= ============= =============
OVERVIEW
The statements in this Quarterly Report on Form 10-Q that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors and the other risks
described in this Quarterly Report and the other documents the Company files
from time to time with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or
that reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net sales for the three-month period ended September 30, 2003 were $106.7
million, which was an 8.4% increase over net sales of $98.4 million for the same
three-month period in 2002. Domestic sales were $56.8 million for the third
quarter of 2003, compared to $56.2 million for the same period last year, which
is an increase of 1.1%. International sales were $49.9 million for the three
months ended September 30, 2003 compared to $42.2 million for the third quarter
of 2002, or an increase of 18.2%. Australia, Europe and Latin America had the
strongest sales growth in the third quarter, and were all up over 20% compared
to the third quarter in 2002. Although international volumes were up over the
third quarter in 2003, a weaker U.S. dollar also contributed to the sales
increase for the quarter. Sales increased approximately 16.2% during the third
quarter compared to the same quarter in 2002 as a result of the effects of
currency.
21
Cost of goods sold was 68.6% of sales for the three-month period ended
September 30, 2003, which compares to 62.9% for the same quarterly period in
2002. This unfavorable change relates partly to a less favorable mix between
domestic and international sales, and a decline in volume through the domestic
manufacturing facilities which has lowered the absorption of fixed factory
costs. Cost of goods sold was negatively impacted by currency and increased
approximately $4.3 million over the comparable period in 2002 as a result of
translating local currency results into U.S. dollars. Also included in cost of
goods sold for the three-month period ended September 30, 2003 was a $2.2
million charge related to the required write-up of foreign inventory in
connection with fresh-start accounting. In connection with the opening balance
sheet, the Company wrote up its foreign inventory by approximately $3.0 million.
The Company's foreign subsidiaries account for their inventory on a first-in,
first-out basis, and as a result, the majority of the revalued inventory was
sold in the third quarter of 2003. The remaining $0.8 million of the write-up
will be recorded to cost of goods sold in the fourth quarter of 2003. Absent
this $2.2 million charge, cost of goods sold for the three months ended
September 30, 2003, would have been 66.6% of sales.
Selling, general and administrative expenses were $28.3 million for the
three-month period ended September 30, 2003, or 10.1% more than the same
three-month period in 2002. As a percentage of sales, selling, general and
administrative expenses were 26.5% for the quarter ended September 30, 2003,
versus 26.1% for the three months ended September 30, 2002. The increase in
selling, general and administrative expenses results partly from expenditures
related to new products and certain sales and marketing programs. In addition,
selling, general and administrative expenses increased approximately $1.0
million over the third quarter of 2002 as a result of translating local currency
results into U.S. dollars. Also increasing selling, general and administrative
expenses in the third quarter of 2003 was approximately $0.9 million accrued
related to the Company's management incentive plan and $0.5 million related to
the reorganization of certain domestic manufacturing facilities. Selling,
general and administrative expenses incurred during the quarter ended September
30, 2002, included approximately $0.5 million related to an information
technology transformation project and $0.1 million related to logistics
initiatives.
Reorganization items for the three-month period ended September 30, 2002
consisted of $3.0 million of professional fees and expenses, $0.4 million of
expenses related to financing fees associated with the DIP Facility, and $0.1
million of other reorganization costs.
Interest expense for the third quarter of 2003 was $4.3 million, which compares
to $5.2 million for the third quarter of 2002. The difference results primarily
from the reduction in long-term debt resulting from the consummation of the plan
of reorganization.
An income tax provision of $1.6 million was recorded on pretax loss of $1.7
million for the three months ended September 30, 2003. An income tax provision
of $0.1 million was recorded on a pretax loss of $0.6 million for the quarter
ended September 30, 2002. The income tax provision for both periods primarily
relates to income generated in foreign jurisdictions, and differs from that
determined by applying the U.S. federal statutory rate primarily due to
nondeductible expenses and the valuation allowance established for current year
operating losses.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net sales for the first nine months of 2003 were $314.9 million compared to
$309.2 million for the same nine-month period in 2002, or an increase of 1.9 %.
Domestic sales for the nine months ended September 30, 2003, were $169.0
million, which is a decline of 9.2% compared to net sales of $186.2 million for
the nine months ended September 30, 2002. Generally weak economic conditions in
the U.S. together with a highly competitive market are the main reasons for the
decrease in domestic sales. International sales were $145.9 million for the nine
months ended September 30, 2003, or 18.6% higher than sales of $123.0 million
for the same period in 2002. Sales growth was in excess of 26% in Australia,
Europe, South
22
Africa, and the Middle East. A weaker U.S. dollar contributed to the increase in
international sales with approximately 14.7% of the growth over 2002
attributable to the effects of currency.
Cost of goods sold was 66.3% of sales for the nine months ended September 30,
2003, which compares to 63.8% for the same nine-month period in 2002. This
increase results partly from the mix between domestic and international sales,
and also from a decline in production volume in the domestic manufacturing
facilities which has resulted in less absorption of fixed factory costs. Cost of
goods sold increased approximately $11.5 million in the nine months ended
September 30, 2003 compared to the same period in 2002 as a result of
translating local currency results into U.S. dollars. Also included in cost of
goods sold for the nine-month period ended September 30, 2003 was a $2.2 million
charge related to the required write-up of foreign inventory in connection with
fresh-start accounting. In connection with the opening balance sheet, the
Company wrote up its foreign inventory by approximately $3.0 million. The
Company's foreign subsidiaries account for their inventory on a first-in,
first-out basis, and as a result, the majority of the revalued inventory was
sold in the third quarter of 2003. The remaining $0.8 million of the write-up
will be recorded to cost of goods sold in the fourth quarter of 2003. Absent
this $2.2 million charge, cost of goods sold for the nine months ended September
30, 2003, would have been 65.6% of sales.
Selling, general and administrative expenses were $81.4 million for the nine
months ended September 30, 2003, which is comparable to $80.8 million for the
nine months ended September 30, 2002. As a percentage of sales, selling, general
and administrative expenses were 25.8% for the first nine months of 2003 versus
26.1% for the first three quarters of 2002. Selling, general and administrative
expenses for the nine months ended September 30, 2003 increased approximately
$2.5 million over the first nine months of 2002 as a result of translating local
currency results into U.S. dollars. Selling, general and administrative expenses
for the nine months ended September 30, 2003 include $1.1 million related to the
reorganization of certain domestic manufacturing facilities and $0.9 million
related to logistics and technology initiatives. Selling, general and
administrative expenses for the nine months ended September 30, 2002, include
$1.9 million related to the information technology transformation initiative and
$0.5 related to the logistics projects. Also included in selling, general and
administrative expenses for the nine months ended September 30, 2003, is $0.9
million accrued related to the 2003 management incentive plan, which compares to
$2.0 million accrued during the first nine months of 2002 for last year's plan.
Reorganization costs for the nine months ended September 30, 2003 were $14.7
million and included $13.9 million of professional fees, $0.2 million paid under
the key employee retention program, and $0.6 million of other reorganization
costs. Reorganization costs for the nine months ended September 30, 2002,
include $6.9 million of professional fees and expenses, $1.4 million of expenses
related to financing fees associated with the DIP Facility, $0.4 million
associated with a lease obligation that was rejected, $0.3 million related to
payments under the key employee retention plan approved by the Court, and $0.6
million of other reorganization costs.
Interest expense for the first nine months of 2003 was $14.6 million, which
compares to $16.9 million for the first nine months of 2002. The difference
results partly from a reduction in variable interest rates, and also to the
benefit realized from the overall reduction in long-term debt that resulted from
the consummation of the plan of reorganization.
An income tax provision of $4.9 million was recorded on pretax income of $571.3
million for the nine months ended September 30, 2003. An income tax provision of
$1.5 million was recorded on a pretax loss of $2.3 million for the nine months
ended September 30, 2002. The income tax provision for both periods primarily
relates to income generated in foreign jurisdictions and differs from that
determined by applying the U.S. federal statutory rate primarily due to
nondeductible expenses and the valuation allowance established for current year
operating losses.
23
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
Operating activities used $4.2 million of cash during the first nine months of
2003, compared to $4.0 million of cash provided during the same time period in
2002. Earnings, after adjusting for non-cash expenses, were $3.7 million for the
nine months ended September 30, 2003, compared to earnings of $11.9 million for
the comparable time frame in 2002. This difference results primarily from higher
reorganization costs and an increase in tax expense. Operating assets and
liabilities used $7.9 million of cash during each of the nine-month periods
ended September 30, 2003 and 2002, respectively. Accounts receivable provided
$3.5 million during the nine months ended September 30, 2003, compared to $0.2
million during the same period in 2002. The improvement in accounts receivable
relates primarily to an overall improvement in collections. Inventory used $5.2
million of cash through the first nine months of 2003, as compared to an $8.2
million use of cash in the same nine-month period last year. The increase in
inventory in 2003 results primarily from increasing stock levels in regional
warehouses in the U.S., stock added related to new product introductions, and
increasing inventory levels as the Company relocates the production of two
domestic facilities. Accounts payable used $0.3 million of cash in the first
three quarters of 2003, which compares to cash provided of $0.3 million in the
same period in 2002. Accrued and other liabilities used $4.7 million of cash in
the nine-month period ended September 30, 2003, which compares to cash provided
of $1.0 million during the same period last year. The majority of this
difference results from payments made related to the reorganization.
Capital expenditures were $7.3 million during the nine months ended September
30, 2003, which is $0.8 million more than was spent during the same period last
year.
Financing activities provided $5.2 million during the first three quarters of
2003 compared to cash provided of $0.7 million during the same period last year.
This difference results primarily from additional net borrowings.
LIQUIDITY
The Company's principal uses of cash will be capital expenditures, working
capital and debt service requirements under the Working Capital Facility and the
Senior Term Notes. The Company expects that ongoing requirements for debt
service, capital expenditures and working capital will be funded from operating
cash flow and borrowings under the Working Capital Facility.
The Working Capital Facility provides for total borrowings of $50 million under
a revolver, of which up to $20 million may be used for letters of credit. Actual
borrowing availability is subject to a borrowing base calculation, which is
equal to 1.5 times Adjusted EBITDA. The Working Capital Facility defines
Adjusted EBITDA as 100% of the EBITDA for the Company and its domestic
subsidiaries plus 65% of the EBITDA of the Company's Canadian subsidiaries.
EBITDA is defined in the Working Capital Facility as net income less interest
income, gains from extraordinary items, any aggregate net gain on the sale of
tangible assets, and any other non-cash gains added in determining net income;
plus, provision for income taxes, interest expense, depreciation, amortization
of intangibles, amortization of deferred financing costs, any amount deducted
from net income as a result of stock or stock option grants, net periodic
post-retirement benefit costs, losses from extraordinary items, reorganization
costs related to the Chapter 11 cases, and any non-recurring employee severance
expenses and non-recurring cash expenses related to plant reorganizations, not
to exceed $5 million in the aggregate. Availability under the Working Capital
Facility may also be limited if the Company fails to meet certain levels of
Adjusted EBITDA.
24
Borrowings under the Working Capital Facility accrue interest, at the Company's
option, at the prime lending rate plus 2.25% in the case of index rate loans, or
at the London Interbank Offered Rate ("LIBOR") plus 3.25% in the case of LIBOR
loans. The Working Capital Facility is secured by substantially all the assets
of the Company, including a pledge of the capital stock of substantially all its
subsidiaries, subject to certain limitations with respect to foreign
subsidiaries. The Working Capital Facility contains financial covenants,
including minimum levels of EBITDA (determined on a consolidated basis for the
Company) and other customary provisions. As of September 30, 2003, the Company
had borrowed $17.2 million and issued letters of credit totaling $9.4 million
under the Working Capital Facility, resulting in availability of approximately
$23 million. The Working Capital Facility terminates on May 16, 2006.
The Senior Term Notes accrue interest, in the case of eurodollar loans at LIBOR
plus a margin ranging from 3.0% to 7.5%, and in the case of base rate loans at
the administrative agent's alternative base rate plus a margin ranging from 2.0%
to 6.5%. The interest margin applicable to the Eurodollar and base rate loans
varies depending on the level of indebtedness and the time elapsed from the
Effective Date. At September 30, 2003, the Company had $180 million outstanding
under the Senior Term Notes. No payments of principal are due under the Senior
Notes Facility until June 2004. The Senior Notes Facility contains financial
covenants and other provisions similar to those in the Working Capital Facility.
The Senior Notes Facility is secured by substantially all the assets of
Thermadyne and its domestic subsidiaries, including a pledge of the capital
stock of substantially all subsidiaries, subject to certain limitations with
respect to foreign subsidiaries, subordinated to the liens under the Working
Capital Facility. The respective rights of the lenders under each of the Working
Capital Facility and the Senior Notes Facility are governed by an intercreditor
agreement.
The Company expects its operating cash flow, together with borrowings under the
Working Capital Facility, will be sufficient to meet its anticipated future
operating expenses, capital expenditures and the debt service requirements of
the Working Capital Facility and the Senior Term Notes. However, the Company's
ability to generate sufficient cash flow to meet its operating needs will be
affected by general economic, financial, competitive, legislative, regulatory,
business and other factors beyond its control.
ITEM 3. MARKET RISK
There have been no changes in the Company's exposure to foreign currency risk.
The Company is exposed to changes in interest rates related to its variable
rate debt. The Company does not believe that changes in interest rates will
have a material effect on its financial condition or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO") have
reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 240.13a-14(c)
and 15d-14(c)) as of the end of the current reporting period. Based on
that evaluation, the CEO and CFO have concluded that the Company's
current disclosure controls and procedures are effective in timely
providing them with material information relating to the Company
required to be disclosed in the reports the Company files or submits
under the Exchange Act.
(b) Changes in internal controls. There have not been any significant
changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of
their evaluation. With respect to the reclassifications described in
Note 1 to the accompanying consolidated financial statements, these
were the isolated result of the miscoding of certain sales transactions
by an operating subsidiary following its conversion and implementation
of a new financial reporting system. The Company has made the necessary
corrections to the financial reporting system during the quarter ended
September 30, 2003.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Amended and Restated Certificate of Incorporation
Pursuant to the Plan, on the Effective Date, the Company filed with the Delaware
Secretary of State an Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), under which its authorized capital stock as of
the Effective Date consists of (i) 25,000,000 shares of common stock, with a par
value of $0.01 per share (the "New Common Stock") and (ii) 5,000,000 shares of
preferred stock with a par value of $0.01 per share (the "Preferred Stock"). No
Preferred Stock has been issued. Pursuant to the Certificate of Incorporation,
Preferred Stock may be issued in one or more series as determined from time to
time by the board of directors of the Company, without further approval by the
stockholders. Upon issuance of Preferred Stock, the board of directors will
determine the voting powers, preferences, rights, qualifications, limitations
and restrictions as the board may set forth in the certificate of designation
for such Preferred Stock. The Plan provides that the Company shall not issue
nonvoting equity securities for so long as Section 1123 of the Bankruptcy Code
is applicable to the Company. Pursuant to the Plan, on the Effective Date, all
then-outstanding pre-Effective Date debt and equity securities were cancelled as
well as all options and agreements to issue or purchase any equity interests.
Warrant Agreements
Pursuant to the Plan, on the Effective Date, the Company issued three series of
warrants exercisable for shares of the New Common Stock. The Company issued: (i)
1,157,000 Series A Warrants exercisable before the first anniversary of the
Effective Date with an exercise price of $13.85 in cash per share of New Common
Stock, payable to the Company; (ii) 700,000 Series B Warrants exercisable before
the third anniversary of the Effective Date with an exercise price of $20.78 in
cash per share of New Common Stock, payable to the Company; and (iii) 271,429
Series C Warrants exercisable before the third anniversary of the Effective Date
with an exercise price of $27.70 in cash per share of New Common Stock, payable
to the Company. Each of the series of warrants is exercisable in accordance with
the respective warrant agreements.
Registration Rights Agreement
The issuance of shares by the Company pursuant to the Plan on the Effective Date
are exempt from the registration requirements of the Securities Act of 1933, as
amended, to the extent provided by section 1145 of the Bankruptcy Code. Certain
holders of the New Common Stock that are deemed "underwriters" under section
1145 of the Bankruptcy Code received securities with legends restricting the
transfer of such shares. On the Effective Date, the Company entered into a
registration rights agreement with certain holders of restricted shares of New
Common Stock (the "Registration Rights Agreement").
Subscription Offering
Pursuant to the Plan, the Company offered certain holders of pre-petition claims
the opportunity to subscribe for shares of New Common Stock for a specified time
period. No holders subscribed to the offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Thermadyne Holdings Corporation Non-Employee
Director's Stock Option Agreement*
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
32.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
* Filed herewith.
b) Reports on Form 8-K
None.
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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.
THERMADYNE HOLDINGS CORPORATION
By: /s/ Karl R. Wyss
--------------------------------------------
Karl R. Wyss
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James H. Tate
--------------------------------------------
James H. Tate
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 14, 2003
28