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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes No X
--- ---
AS OF MAY 10, 2004, THERE WERE 4,931,767 SHARES OF COMMON STOCK OF THE
REGISTRANT OUTSTANDING.
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........19
Item 4. Controls and Procedures............................................19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................20
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------
2004 2003
---- ----
Net sales $ 33,006 $ 32,383
Cost of sales 28,931 28,653
--------- --------
Gross profit 4,075 3,730
Selling and administrative expenses 2,069 2,092
--------- --------
Income from operations 2,006 1,638
Interest expense 2,147 1,780
--------- --------
Loss before income taxes (141) (142)
Income tax provision 15 27
--------- --------
Net loss $ (156) $ (169)
========= ========
Per share data:
Basic and diluted net loss applicable to common stockholders $ (0.03) $ (0.04)
========= ========
See notes to consolidated financial statements.
-1-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
---------------- -----------------
ASSETS:
Current assets:
Cash $ 302 $ 189
Accounts receivable, net 20,530 17,277
Inventories, net 10,083 8,527
Prepaid expenses and other current assets 2,141 2,481
Deferred income taxes 1,360 1,360
---------- ----------
Total current assets 34,416 29,834
Property, plant, and equipment, net 41,835 42,632
Goodwill 7,623 7,623
Other assets, net 3,710 3,598
---------- ----------
Total assets $ 87,584 $ 83,687
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 11,476 $ 10,038
Accrued expenses, excluding accrued interest 5,881 6,159
Accrued interest expense 1,033 314
Deferred gain on repurchase of debt 3,252 3,252
Short-term debt 15,499 12,246
Current portion of long-term debt 5,743 5,585
---------- ----------
Total current liabilities 42,884 37,594
---------- ----------
Long-term debt, excluding current portion 62,407 63,681
---------- ----------
Deferred income taxes and other long-term liabilities 1,934 1,904
---------- ----------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,931,767 shares issued 1,233 1,233
Additional paid-in-capital 13,169 13,169
Accumulated deficit (34,043) (33,894)
---------- ----------
Total stockholders' deficit (19,641) (19,492)
---------- ----------
Total liabilities and stockholders' deficit $ 87,584 $ 83,687
========== ==========
See notes to consolidated financial statements.
-2-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------------
2004 2003
---- ----
OPERATING ACTIVITIES:
Net loss $ (156) $ (169)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,188 2,606
Amortization included in operating expense 113 165
Amortization included in interest expense 252 143
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net (3,253) (4,356)
Inventories, net (1,556) (509)
Prepaid expenses and other current assets 566 695
Accounts payable 1,438 (124)
Accrued expenses, excluding interest expense (278) 775
Accrued interest expense 719 1,113
Other long-term liabilities 30 64
Other 12 (13)
---------- ----------
Net cash provided by operating activities 75 390
---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (1,393) (899)
Net increase in equipment deposits (141) (47)
Expenditures for tooling owned by customers (143) (77)
Other (226) 151
---------- ----------
Net cash used by investing activities (1,903) (872)
---------- ----------
FINANCING ACTIVITIES:
Net increase in loans under revolving line of credit 3,253 3,142
Repayment of term notes and other debt (1,124) (2,591)
Payment of financing expenses that were deferred (188) (205)
---------- ----------
Net cash provided by financing activities 1,941 346
---------- ----------
Net increase (decrease) in cash 113 (136)
Cash at beginning of period 189 1,753
---------- ----------
Cash at end of period $ 302 $ 1,617
========== ==========
See notes to consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiaries (collectively,
the "Company"). The consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, the consolidated financial statements do not include all the
information and footnotes included in the Company's annual consolidated
financial statements. Significant accounting policies followed by the Company
are set forth in Note 1 to the consolidated financial statements in the
Company's annual report on Form 10-K for the year ended December 31, 2003. In
the opinion of management, the unaudited interim consolidated financial
statements contain all adjustments, consisting only of adjustments of a normal,
recurring nature, necessary to present fairly the financial position of the
Company at March 31, 2004, and the Company's results of operations and cash
flows for the three-month periods ended March 31, 2004 and 2003. To prepare the
accompanying interim consolidated financial statements, the Company is required
to make estimates and assumptions that affect the reported amounts and
disclosures. Actual results could differ from those estimates.
The results of operations for the three-month period ended March 31,
2004, are not necessarily indicative of the results to be expected for the full
year or for any succeeding quarter.
NOTE 2 -- INVENTORIES
Inventories at March 31, 2004, and December 31, 2003, are set forth
below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2004 2003
----------------- ----------------
Finished goods $ 3,685 $ 3,793
Work in process 3,280 2,018
Raw materials 3,118 2,716
---------- ----------
$ 10,083 $ 8,527
========== ==========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 2004, and December 31,
2003, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2004 2003
----------------- ----------------
Land $ 2,350 $ 2,350
Buildings 23,006 22,863
Equipment 117,778 116,557
---------- ----------
143,134 141,770
Accumulated depreciation 101,299 99,138
---------- ----------
Property, plant, and equipment, net $ 41,835 $ 42,632
========== ==========
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
Debt at March 31, 2004, and December 31, 2003, is set forth below
(dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2004 2003
----------------- ----------------
Short-term debt:
Revolving line of credit $ 15,341 $ 12,088
12 3/4% Senior Subordinated Notes 158 158
-------- ---------
Subtotal 15,499 12,246
Current portion of long-term debt 5,743 5,585
-------- ---------
Total short-term debt 21,242 17,831
-------- ---------
Long-term debt:
Equipment Term Loan 12,900 13,500
Real Estate Term Loan 11,213 11,500
12% Senior Subordinated Notes 42,441 42,441
13% Junior Subordinated Notes 347 347
Unsecured, amortizing term notes 60 104
Capital lease obligations 416 573
Series B Preferred Stock 602 594
Other 171 207
-------- ---------
Subtotal 68,150 69,266
Less current portion (5,743) (5,585)
-------- ---------
Total long-term debt 62,407 63,681
-------- ---------
Total debt $ 83,649 $ 81,512
======== =========
REVOLVING LINE OF CREDIT
At March 31, 2004, the aggregate principal amount of loans outstanding
under the revolving line of credit was $15,341,000 and unused availability
totaled $2,819,000. The revolving line of credit expires on June 30, 2006. Loans
under the revolving line of credit bear interest at either the prime rate plus
1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%, at the Company's
option. The loans outstanding under the revolving line of credit are classified
as short-term debt because the revolving line of credit provides that the
Company's cash receipts are automatically used to reduce such loans on a daily
basis, by means of a lock-box sweep arrangement, and the lender has the ability
to modify certain terms of the revolving line of credit without the Company's
approval. Loans under the revolving line of credit are limited to 88% of
eligible accounts receivable plus 65% of eligible inventories. All loans under
the revolving line of credit are secured by first priority liens on
substantially all of the Company's assets other than real property.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At March 31, 2004, availability under the revolving line of credit was
reduced by three separate reserves established by the lender, which totaled
$3,000,000. The elimination of $1,000,000 of these reserves is subject to the
attainment of certain specified financial performance goals and the elimination
of $650,000 of the reserves is subject to the Company obtaining an appraisal of
its equipment that indicates that the outstanding principal amount of the
Equipment Term Loan does not exceed 85% of the net orderly liquidation value of
the equipment that secures it. Based on the results of an appraisal of the
Company's equipment completed during April 2004, the lender released the
$650,000 appraisal reserve on May 3, 2004. Based upon the Company's operating
results for the three-month period ended March 31, 2004, the Company anticipates
that $500,000 of the reserve related to financial performance goals will be
released during the second quarter of 2004. The Company cannot predict at this
time whether any of the remaining reserves will be released.
12% SENIOR SUBORDINATED NOTES
The 12% Senior Subordinated Notes mature on August 1, 2009, and are
unsecured obligations of the Company that are subordinated in right of payment
to all of the Company's existing and future secured debt. Interest on the 12%
Senior Subordinated Notes is payable quarterly on February 1, May 1, August 1,
and November 1.
SERIES B PREFERRED STOCK
At March 31, 2004, there were outstanding 3,300 shares of the Company's
$8 Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), par value $100 per share, with a carrying value of $602,000.
Redemptions of $90,000 are scheduled on November 30 of each year in order to
retire 450 shares of Series B Preferred Stock annually. The Company failed to
make scheduled redemptions in the aggregate amount of $360,000 on November 30,
2000, 2001, 2002, and 2003.
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("FAS 150"), which established
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer that have characteristics of
both liabilities and equity. As a result of the adoption of FAS 150, the Company
classifies the Series B Preferred Stock as debt in the consolidated financial
statements. Subsequent to adoption, increases in the fair value of the Series B
Preferred Stock and payments of quarterly dividends have been recorded by
monthly charges to interest expense.
RESTRICTIVE COVENANTS
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require the Company to maintain specified financial ratios as of the end of
specified periods, including the maintenance of a minimum fixed charge coverage
ratio, minimum levels of net worth and earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), and a maximum leverage ratio. The
Company also has other covenants that place restrictions on its business and
operations, including covenants relating to the sale of all or substantially all
of its assets, the purchase of common stock, the redemption of preferred stock,
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
compliance with specified laws and regulations, the purchase of plant and
equipment, and the payment of cash dividends.
From time to time, the Company's secured lenders have agreed to waive,
amend, or eliminate certain of the financial covenants contained in the
Company's various financing agreements in order to maintain or otherwise ensure
the Company's current or future compliance. On March 31, 2004, the Company's two
senior, secured lenders amended their fixed charge coverage ratio and their
annual limitation on unfinanced capital expenditures in order for the Company to
avoid projected defaults under these two covenants during 2004. In the event
that the Company is not in compliance with any of its covenants in the future
and its lenders do not agree to amend, waive, or eliminate those covenants, the
lenders would have the right to declare the borrowings under their financing
agreements to be due and payable immediately.
NOTE 5 -- INCOME TAXES
At March 31, 2004, and December 31, 2003, the Company's net deferred
income tax assets were fully offset by a valuation allowance. The income tax
provisions recorded during the three-month periods ended March 31, 2004 and
2003, consisted of estimated state income taxes payable.
NOTE 6 -- NET LOSS PER COMMON SHARE
The calculations of basic and diluted net loss per common share for the
three-month periods ended March 31, 2004 and 2003, are set forth below (in
thousands, except per share amounts). The pro forma conversion of the Series B
Preferred Stock and the pro forma exercise of outstanding warrants to purchase
the Company's common stock, which were issued on December 18, 2003 (the
"Warrants"), were not dilutive. As a result, the calculation of diluted net loss
per common share set forth below does not reflect the pro forma conversion of
the Series B Preferred Stock or the pro forma exercise of the Warrants.
THREE MONTHS ENDED
MARCH 31
------------------------
2004 2003
---- ----
Numerator -- net loss applicable to common stockholders $ (156) $ (169)
========= =========
Denominator -- weighted average common shares 4,932 4,828
========= =========
Basic and diluted net loss applicable to common
stockholders $ (0.03) $ (0.04)
========= =========
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 -- SEGMENTS
Information relating to the Company's operating segments and its
corporate office for the three-month periods ended March 31, 2004 and 2003, is
summarized below (dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
--------------------------
2004 2003
---- ----
NET SALES:
Rubber Group $ 27,803 $ 26,722
Metals Group 5,203 5,661
---------- ----------
Total net sales $ 33,006 $ 32,383
========== ==========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 3,542 $ 2,812
Metals Group (960) (583)
---------- ----------
Subtotal 2,582 2,229
Corporate Office (576) (591)
---------- ----------
Total income from operations $ 2,006 $ 1,638
========== ==========
ASSETS:
Rubber Group $ 64,810 $ 65,645
Metals Group 18,515 23,239
---------- ----------
Subtotal 83,325 88,884
Corporate Office 4,259 5,584
---------- ----------
Total assets $ 87,584 $ 94,468
========== ==========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 1,740 $ 1,875
Metals Group 551 887
---------- ----------
Subtotal 2,291 2,762
Corporate Office 10 9
---------- ----------
Total depreciation and amortization $ 2,301 $ 2,771
========== ==========
CAPITAL EXPENDITURES (2):
Rubber Group $ 910 $ 827
Metals Group 483 176
---------- ----------
Subtotal 1,393 1,003
Corporate Office - 2
---------- ----------
Total capital expenditures $ 1,393 $ 1,005
========== ==========
(1) Does not include amortization of deferred financing expenses, which
totaled $252,000 and $143,000 during the three-month periods ended March
31, 2004 and 2003, respectively, and which is included in interest
expense in the consolidated financial statements.
(2) Capital expenditures for the three-month period ended March 31, 2003,
included $106,000 of equipment purchased under a capital lease
obligation.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- DEFERRED GAIN ON REPURCHASE OF DEBT
On December 18, 2003, the Company repurchased its $7,500,000 senior,
unsecured note, and all accrued and unpaid interest thereon, for a purchase
price of $5,810,000. The pre-tax gain of $3,252,000 on the repurchase of the
senior, unsecured note was deferred and recorded in the current liabilities
section of the Company's consolidated balance sheet as "Deferred gain on
repurchase of debt" because the agreement governing the repurchase of the note
provided that the claim could be reinstated if certain events occurred prior to
April 20, 2004. Because none of these events occurred prior to April 20, 2004,
the Company will recognize the pre-tax gain of $3,252,000 during the three-month
period ending June 30, 2004.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Some of our statements in this Form 10-Q, including this item, are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements usually can be
identified by our use of words like "believes," "expects," "may," "will,"
"should," "anticipates," "estimates," "projects," or the negative thereof. They
may be used when we discuss strategy, which typically involves risk and
uncertainty, and they generally are based upon projections and estimates rather
than historical facts and events.
Forward-looking statements are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from the future results or performance expressed in or
implied by those statements. Some of those risks and uncertainties are:
- increases and decreases in business awarded to us by our
customers,
- unanticipated price reductions for our products as a result of
competition,
- unanticipated operating results,
- changes in the cost of raw materials,
- increases or decreases in capital expenditures,
- changes in economic conditions,
- strength or weakness in the North American automotive market,
- changes in the competitive environment,
- changes in interest rates and the credit and securities markets,
and
- labor interruptions at our facilities or at our customers'
facilities.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size that has less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a representation
that any of the projections or estimates expressed in or implied by those
forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements
contained herein will prove to be accurate. All forward-looking statements are
expressly qualified by the discussion above.
RESULTS OF OPERATIONS -- FIRST QUARTER OF 2004 VERSUS FIRST QUARTER OF 2003
The following table sets forth our consolidated operating results for
the three-month periods ended March 31, 2004 and 2003, and the reconciliation of
income from operations to earnings before
-10-
interest, taxes, depreciation, and amortization, which is commonly referred to
as EBITDA (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2004 2003
------------------ ------------------
Net sales $ 33,006 100.0% $ 32,383 100.0%
Cost of sales 28,931 87.7 28,653 88.5
--------- ------- --------- -------
Gross profit 4,075 12.3 3,730 11.5
Selling and administrative expenses 2,069 6.3 2,092 6.5
--------- ------- --------- -------
Income from operations 2,006 6.0 1,638 5.0
Add back: depreciation and amortization (1) 2,301 7.0 2,771 8.6
--------- ------- --------- -------
EBITDA (2) $ 4,307 13.0% $ 4,409 13.6%
========= ======= ========= =======
Net cash provided by operating activities (3) $ 75 0.2% $ 390 1.2%
========= ======= ========= =======
(1) Does not include amortization of deferred financing expenses,
which totaled $252,000 and $143,000 during the three-month
periods ended March 31, 2004 and 2003, respectively, and which
is included in interest expense in the consolidated financial
statements.
(2) EBITDA is not a measure of performance under accounting
principles generally accepted in the United States and should
not be considered in isolation or used as a substitute for
income from operations, net income, net cash provided by
operating activities, or other operating or cash flow statement
data prepared in accordance with generally accepted accounting
principles. We have presented EBITDA here and elsewhere in this
Form 10-Q because this measure is used by investors, as well as
our own management, to evaluate the operating performance of our
business, including its ability to incur and to service debt.
Our definition of EBITDA may not be the same as the definition
of EBITDA used by other companies.
(3) The calculation of net cash provided by operating activities is
detailed in the consolidated statement of cash flows that is
part of our consolidated financial statements in Part I, Item 1.
Our net sales for the first quarter of 2004 were $33,006,000, compared
to net sales of $32,383,000 for the first quarter of 2003, an increase of
$623,000, or 1.9%. The increase in net sales was principally a result of
increased net sales of rubber components, offset, in part, by reduced sales of
machined metal components. EBITDA for the first quarter of 2004 was $4,307,000,
or 13.0% of net sales, compared to EBITDA of $4,409,000, or 13.6% of net sales,
for the first quarter of 2003. The change in EBITDA was primarily a result of a
$632,000 reduction in EBITDA at our Metals Group, partially offset by a $595,000
increase in EBITDA at our Rubber Group.
-11-
Net cash provided by operating activities during the first quarter of
2004 totaled $75,000, compared to $390,000 for the first quarter of 2003. Please
refer to the consolidated statement of cash flows in Part I, Item 1, for details
regarding net cash provided by our operating activities.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for the
three-month periods ended March 31, 2004 and 2003.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any significant reduction in the
level of activity in the automotive industry may have a material adverse effect
on the results of operations of the Rubber Group and on our company taken as a
whole.
Delphi Corporation is the Rubber Group's largest customer. During 2003,
2002, and 2001, the Rubber Group's net sales to Delphi totaled $24,150,000,
$24,837,000, and $23,660,000, respectively, which represented 23.4%, 25.1%, and
25.8%, respectively, of the Rubber Group's net sales. Net sales to Delphi of
connector seals for automotive wire harnesses totaled $20,227,000, $21,147,000,
and $22,295,000, during 2003, 2002, and 2001, respectively. Substantially all of
the connector seals we sell to Delphi are sold pursuant to a supply agreement
that expires on December 31, 2004. We cannot predict whether we and Delphi will
enter into a new agreement for us to supply connector seals to Delphi when the
current agreement expires on December 31, 2004, or, if we do enter into an
agreement, what the volume, pricing, duration, and other terms of that agreement
will be. Delphi has indicated to us that they currently plan to in-source,
during 2005, approximately 30 connector seals currently manufactured by us under
the supply agreement. Our aggregate net sales of these parts during 2003 were
$9,319,000. Assuming those connector seals were in-sourced on the earliest
possible date, January 1, 2005, and we were unable to replace the lost business
with new business from Delphi or other customers, we estimate that the operating
profit and EBITDA of the Rubber Group would be reduced by approximately
$2,500,000 per annum. We are currently in discussions with Delphi regarding our
ongoing supply relationship, and we are developing plans to restructure the
operations of our connector seals division to reduce expenses and mitigate the
impact of any lost business. Any such restructuring of our connector seals
business could include, among other things, the closing of one of our existing
manufacturing facilities, which could result in significant cash and non-cash
expenses. Although we can give you no assurance, it is also possible that, if we
do continue to sell components to Delphi, the average price for those components
may increase, thereby partially offsetting the negative impact of lower volume.
-12-
The following table sets forth the operating results of the Rubber
Group for the three-month periods ended March 31, 2004 and 2003, and the
reconciliation of the Rubber Group's income from operations to its EBITDA
(dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2004 2003
------------------ ------------------
Net sales $ 27,803 100.0% $ 26,722 100.0%
Cost of sales 23,117 83.1 22,769 85.2
-------- -------- -------- --------
Gross profit 4,686 16.9 3,953 14.8
Selling and administrative expenses 1,144 4.1 1,141 4.3
-------- -------- -------- --------
Income from operations 3,542 12.7 2,812 10.5
Add back: depreciation and amortization 1,740 6.2 1,875 7.0
-------- -------- -------- --------
EBITDA $ 5,282 19.0% $ 4,687 17.5%
======== ======== ======== ========
During the first quarter of 2004, net sales of the Rubber Group
increased by $1,081,000, or 4.0%, compared to the first quarter of 2003. The
increase in net sales was primarily due to increased unit sales of insulators
for automotive ignition wire sets, which resulted primarily from an increase in
the level of activity in the automotive industry and an increase in our share of
business at certain existing customers, and, to a lesser extent, increased sales
of connector seals for automotive wire systems and components for medical
devices. These increases were offset, in part, by price reductions on certain
automotive components.
Cost of sales as a percentage of net sales decreased during the first
quarter of 2004 to 83.1% of net sales from 85.2% of net sales during the first
quarter of 2003, primarily because of improved operating performance at our
insulator division, reduced employee benefit costs, lower maintenance expenses,
and reduced depreciation and amortization expenses, offset, in part, by reduced
operating performance at our connector seals division. During the first quarter
of 2004, the operating results of the connector seals division included:
- increased costs for scrap, sorting, and repair, relating to a
particular type of connector seal;
- increased freight costs, which resulted from delivery issues
related to those quality problems;
- costs related to the rollout of new business at our operations
that mold seals from liquid silicone rubber;
- losses resulting from the production problems encountered in the
manufacture of automotive door grommets utilizing non-silicone
materials; and
- costs incurred due to the general disruption to our operations
as we attempted to cope with the problems listed above.
-13-
During the second half of 2003, we initiated a plan to reduce or eliminate these
operating problems. The plan includes:
- upgrading management and supervisory personnel;
- installing and utilizing improved process controllers and
centralized data collection capabilities on all molding presses;
- implementing improved manufacturing procedures throughout the
operation;
- installing automated visual inspection and repair equipment; and
- improving utilization of the division's enterprise resource
planning software system.
During the first quarter of 2004, the operating performance of the
connector seals division improved compared to the second half of 2003. We
believe that the operations improvement plan has begun to benefit our operations
and will continue to yield improving results during 2004 as key components of
the plan take effect.
Selling and administrative expenses as a percentage of net sales
decreased during the first quarter of 2004, compared to the first quarter of
2003, primarily because certain of our selling and administrative expenses are
fixed, or partially fixed, in nature.
During the first quarter of 2004, income from operations totaled
$3,542,000, an increase of $730,000, or 26.0%, compared to the first quarter of
2003. EBITDA for the first quarter of 2004 was $5,282,000, or 19.0% of net
sales, compared to $4,687,000, or 17.5% of net sales, during the first quarter
of 2003.
METALS GROUP
The Metals Group manufactures aluminum die castings and machine
components from aluminum, brass, and steel bars, primarily for automotive
industry customers. Any significant reduction in the level of activity in the
automotive industry may have a material adverse effect on the results of
operations of the Metals Group and on our company taken as a whole.
-14-
The following table sets forth the operating results of the Metals
Group for the three-month periods ended March 31, 2004 and 2003, and the
reconciliation of the Metals Group's income from operations to its EBITDA
(dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2004 2003
------------------ ------------------
Net sales $ 5,203 100.0% $ 5,661 100.0%
Cost of sales 5,814 111.7 5,884 103.9
-------- ------- -------- -------
Gross profit (611) (11.7) (223) (3.9)
Selling and administrative expenses 349 6.7 360 6.4
-------- ------- -------- -------
Income from operations (960) (18.4) (583) (10.3)
Add back: depreciation and amortization 551 10.6 887 15.7
-------- ------- -------- -------
EBITDA $ (409) (7.8) $ 304 5.4%
======== ======= ======== =======
During the first quarter of 2004, net sales of the Metals Group
decreased by $458,000, or 8.1%, compared to the first quarter of 2003. The
decrease resulted from reduced sales of machined metal components, primarily due
to the loss of sales of a high-volume, machined metal component because the
customer converted the part to a stamped metal component, offset, in part, by
increased sales of machined metal components resulting primarily from the
rollout of certain new business obtained from existing customers.
Cost of sales, as a percentage of net sales increased to 111.7% of net
sales during the first quarter of 2004 from 103.9% of net sales during the first
quarter of 2003, primarily because of higher than anticipated start up costs on
recently awarded machined metal components and the adverse effect of relatively
high fixed, or partially fixed, operating expenses in a period of low sales
volume. During the first quarter of 2004, the Metals Group's operating expenses
were reduced, in part, by reduced employee benefit expenses and lower
depreciation and amortization expenses.
Selling and administrative expenses decreased during the first quarter
of 2004 compared to the first quarter of 2003, primarily because of a reduction
in salaried payroll expense and related employee benefit costs, offset, in part,
by increased legal fees.
During the first quarter of 2004, the loss from operations was $960,000
compared to a loss from operations of $583,000 during the first quarter of 2003.
EBITDA for the first quarter of 2004 was a negative $409,000, or a negative 7.8%
of net sales, a decrease of $713,000, compared to the first quarter of 2003.
-15-
CORPORATE OFFICE
Corporate Office expenses, which are not included in the operating
results of the Rubber Group or the Metals Group, represent administrative
expenses incurred primarily at our New York and Cleveland offices. Corporate
Office expenses are consolidated with the selling and administrative expenses of
the Rubber Group and the Metals Group in our consolidated financial statements.
The following table sets forth the operating results of the Corporate
Office for the three-month periods ended March 31, 2004 and 2003, and the
reconciliation of the loss from operations to EBITDA (dollar amounts in
thousands):
THREE MONTHS ENDED
MARCH 31
-----------------------
2004 2003
---- ----
Loss from operations $ (576) $ (591)
Add back: depreciation and amortization 10 9
------- --------
EBITDA $ (566) $ (582)
======= ========
INTEREST EXPENSE
During the first quarters of 2004 and 2003, interest expense totaled
$2,147,000 and $1,780,000, respectively, which included amortization of deferred
financing expenses of $252,000 and $143,000, respectively. Interest expense
increased primarily because the amount of outstanding debt on which we accrued
and paid interest increased from $72,906,000 at March 31, 2003, to $83,649,000
at March 31, 2004, because we converted $15,029,000 of accrued and unpaid
interest on our 12 3/4% Senior Subordinated Notes, on which we did not accrue
interest, into new 12% Senior Subordinated Notes due August 1, 2009, during the
fourth quarter of 2003.
INCOME TAX PROVISION
At March 31, 2004, and December 31, 2003, our net deferred income tax
assets were fully offset by a valuation allowance. The income tax provisions
recorded during the three-month periods ended March 31, 2004 and 2003, consisted
of estimated state income taxes payable.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 2004, our operating activities provided
$75,000 of cash. Our accounts receivable increased by $3,253,000, our inventory
increased by $1,556,000, and our accounts payable increased by $1,438,000,
primarily due to increased levels of business activity in the first quarter of
2004 compared to the fourth quarter of 2003. At March 31, 2004, and December 31,
2003, accounts payable included outstanding checks of $1,089,000 and $1,488,000,
respectively. Prepaid expenses and other current assets decreased by $566,000,
primarily because of a reduction in the amount of unbilled tooling being
manufactured or purchased by us for sale to our customers.
-16-
INVESTING ACTIVITIES
During the first quarter of 2004, our investing activities used
$1,903,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group and the Metals Group totaled $910,000 and
$483,000, respectively, primarily for the purchase of equipment. Capital
expenditures for the Rubber Group, the Metals Group, and the Corporate Office
are currently projected to total $5,339,000, $1,553,000, and $5,000,
respectively, during 2004. At March 31, 2004, we had outstanding commitments to
purchase plant and equipment of approximately $1,409,000.
FINANCING ACTIVITIES
During the first quarter of 2004, our financing activities used
$1,941,000 of cash. During the first quarter of 2004, we made scheduled monthly
payments on our Equipment Term Loan and Real Estate Term Loan of $887,000. Net
borrowings under our revolving line of credit increased by $3,253,000 during the
first quarter of 2004, primarily to fund capital expenditures and increases in
accounts receivable and inventories.
LIQUIDITY
We operate with substantial financial leverage and limited liquidity.
Our aggregate indebtedness as of March 31, 2004, totaled $83,649,000. During the
remaining nine months of 2004, interest and scheduled principal payments are
projected to be approximately $5,616,000 and $4,522,000, respectively.
We finance our operations with cash from operating activities and a
variety of financing arrangements, including the Equipment Term Loan, the Real
Estate Term Loan, and loans under our revolving line of credit. The Equipment
Term Loan bears interest at the prime rate plus 1 1/2% or LIBOR plus 3 3/4%, at
our option. The Real Estate Term Loan bears interest at the prime rate plus 4%,
subject to a minimum rate of 8 1/4% and requires us to pay a fee of 1.875% of
the outstanding principal amount of the loans on each anniversary of the closing
date. Loans under the revolving line of credit bear interest at the prime rate
plus 1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%, at our
option. The revolving loans are limited to 88% of eligible accounts receivable
plus 65% of eligible inventories. Our revolving line of credit is currently
scheduled to expire on June 30, 2006.
The revolving line of credit and the Equipment Term Loan are secured by
first priority liens on substantially all of our assets other than real
property. The Real Estate Term Loan is secured by first priority liens on all of
our real property and second priority liens on substantially all of our other
assets. At March 31, 2004, availability under the revolving line of credit was
being reduced by three separate reserves established by the lender, which
totaled $3,000,000. The elimination of $1,000,000 of these reserves is subject
to the attainment of certain specified financial performance goals and the
elimination of $650,000 of the reserves is subject to our obtaining an appraisal
of our equipment that indicates that the outstanding principal amount of the
Equipment Term Loan does not exceed 85% of the net orderly liquidation value of
the equipment that secures it. Based on the results of an appraisal of our
equipment completed during April 2004, the lender released the $650,000
appraisal reserve on May 3, 2004. Based upon our operating results for the
three-month period ended March 31, 2004, we anticipate that $500,000 of the
reserve related to financial performance goals will be released sometime during
the second quarter of 2004. We cannot predict at this time whether any of the
remaining reserves will be released.
-17-
At March 31, 2004, availability under our revolving line of credit
totaled $2,819,000. At May 12, 2004, availability under our revolving line of
credit totaled $1,956,000.
At March 31, 2004, and December 31, 2003, the aggregate principal
amount of loans outstanding under the revolving line of credit was $15,341,000
and $12,088,000, respectively. These loans are classified as short-term debt
because the revolving line of credit requires that our cash receipts are
automatically used to reduce such loans on a daily basis, by means of a lock-box
sweep arrangement, and the lender has the ability to modify certain terms of the
revolving line of credit without our approval.
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require us to maintain specified financial ratios as of the end of
specified periods, including the maintenance of a minimum fixed charge coverage
ratio, minimum levels of net worth and earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), and a maximum leverage ratio. We also
have covenants that limit our unfinanced capital expenditures to $6,250,000 per
annum and limit the amount of additional secured financing we can incur for the
purchase of plant and equipment to $2,500,000 per annum. Although we do not
believe this provision will limit our planned capital expenditures during 2004,
we may be required to obtain new borrowings in order to complete our planned
capital expenditures. We currently believe, although we can give you no
assurance, that the necessary new borrowings would be available to us under
financing arrangements that we may negotiate. We also have other covenants that
place restrictions on our business and operations, including covenants relating
to the sale of all or substantially all of our assets, the purchase of common
stock, the redemption of preferred stock, compliance with specified laws and
regulations, and the payment of cash dividends.
On December 18, 2003, we repurchased our $7,500,000 senior, unsecured
note, and all accrued and unpaid interest thereon, for a purchase price of
$5,810,000. The pre-tax gain of $3,252,000 on the repurchase was deferred and
recorded in the current liabilities section of our consolidated balance sheets
as "Deferred gain on repurchase of debt" because the agreement governing the
repurchase of the note provided that the claim could be reinstated if certain
events occurred prior to April 20, 2004. Because none of these events occurred
prior to April 20, 2004, we will recognize the pre-tax gain of $3,252,000 during
the second quarter of 2004.
From time to time, our secured lenders have agreed to waive, amend, or
eliminate certain of the financial covenants contained in our various financing
agreements in order to maintain or otherwise ensure our current or future
compliance. On March 31, 2004, our two senior, secured lenders amended the fixed
charge coverage ratio and the annual limitation on unfinanced capital
expenditures in order for us to avoid projected defaults under these two
covenants during 2004. In the event that we are not in compliance with any of
our covenants in the future and our lenders do not agree to amend, waive, or
eliminate those covenants, the lenders would have the right to declare the
borrowings under their financing agreements to be due and payable immediately.
We had a net working capital deficit of $8,387,000 at March 31, 2004,
compared to a net working capital deficit of $7,760,000 at December 31, 2003.
The net working capital deficit exists primarily because we are required, under
accounting principles generally accepted in the United States, to classify the
loans outstanding under the revolving line of credit, which totaled at March 31,
2004, and December 31, 2003, $15,341,000 and $12,088,000, respectively, as
current liabilities and because current liabilities on those dates included the
$3,252,000 deferred gain on the repurchase of debt that we will recognize as
income during the second quarter of 2004.
-18-
Based on our most recent financial projections, we estimate that, in
addition to cash flow from operations and borrowings under our revolving line of
credit, we will require approximately $1,200,000 of new borrowings during 2004
to meet our working capital and debt service requirements and to fund projected
capital expenditures. We currently believe, although there can be no assurance,
that the required new borrowings will be available to us under financing
arrangements that we plan to negotiate. If cash flow from operations or
availability under existing and new financing arrangements fall below
expectations, we may be forced to delay certain capital expenditures, reduce
certain operating expenses, extend certain trade accounts payable beyond terms
that we believe are customary in the industries in which we operate, or consider
other alternatives designed to improve our liquidity. Some of these actions
could have a material adverse effect upon our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is insignificant.
At December 31, 2003, we had $37,192,000 of outstanding floating rate
debt at interest rates equal to either LIBOR plus 3 1/4%, LIBOR plus 3 3/4%, the
prime rate plus 1%, the prime rate plus 1 1/2%, the prime rate plus 4%, or the
prime rate. Currently, we do not purchase derivative financial instruments to
hedge or reduce our interest rate risk. As a result, changes in either LIBOR or
the prime rate affect the rates at which we borrow funds under these agreements.
At March 31, 2004, we had outstanding $44,320,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 11.9%, of which $158,000
had matured.
We currently estimate that our monthly cash interest expense during the
remaining nine months of 2004 will be approximately $625,000 and that a one
percentage point increase or decrease in short-term interest rates would
increase or decrease our monthly interest expense by approximately $31,000.
For further information about our indebtedness, we recommend that you
also read Note 4 to our consolidated financial statements in Part II, Item 8.
ITEM 4. CONTROLS AND PROCEDURES
Our Chairman of the Board, President, and Chief Financial Officer, with
the participation of the management of our operating divisions, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2004. Based on that evaluation, our Principal
Executive Officers and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. We also
reviewed our internal controls, and determined that there have been no changes
in our internal controls or in other factors identified in connection with this
evaluation that have materially affected, or are reasonably likely to materially
affect our internal controls over financial reporting.
-19-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
31-1 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of
Michael A. Lubin, Chairman of the Board and co-Principal
Officer of the registrant.
31-2 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of
Warren Delano, President and co-Principal Officer of the
registrant.
31-3 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of
Dennis J. Welhouse, Chief Financial Officer and
Principal Financial Officer of the registrant.
32-1 Certification of Michael A. Lubin, Chairman of the Board
and Co-Principal Executive Officer of the registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32-2 Certification of Warren Delano, President and
Co-Principal Executive Officer of the registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32-3 Certification of Dennis J. Welhouse, Chief Financial
Officer and Principal Financial Officer of the
registrant, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) REPORTS ON FORM 8-K
On April 14, 2004, we filed a report on Form 8-K that included a
press release dated April 14, 2004, announcing financial results for the quarter
and year ended December 31, 2003.
-20-
LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 2004
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.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 14, 2004 By: /s/ Michael A. Lubin
- ------------ ------------------------------
Date Michael A. Lubin
Chairman of the Board
May 14, 2004 By: /s/ Warren Delano
- ------------ ------------------------------
Date Warren Delano
President
May 14, 2004 By: /s/ Dennis J. Welhouse
- ------------ ------------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-21-