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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period ended June 30, 2002
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-58675
KEY COMPONENTS, LLC
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(Exact name of Registrant as Specified in its charter)
Delaware 04-3425424
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown NY 10591
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(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
(Registrant's Telephone Number, Including Area Code)
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KEY COMPONENTS FINANCE CORP.
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(Exact name of Registrant as specified in its charter)
Delaware 14-1805946
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown NY 10591
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
As of August 14, 2002, all of the membership interests in Key
Components, LLC were owned by Key Components, Inc., a privately held New York
corporation. All of the shares of common stock of Key Components Finance Corp.
were owned by Key Components, LLC.
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KEY COMPONENTS, LLC
Form 10-Q Index
June 30, 2002
Page
Number
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PART I
Item 1.-- Consolidated Financial Statements:
Balance Sheets.................................................... 2
Statements of Income.............................................. 3
Statements of Cash Flows.......................................... 4
Notes to Consolidated Financial Statements........................ 5
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
Item 3.-- Quantitative and Qualitative Disclosures about Market Risk........ 22
PART II
Item 6.-- Exhibits and Reports on Form 8-K.................................. 22
Signatures .................................................................. 23
1
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------------------------------------------
Assets: (unaudited)
Current
Cash $ 3,814 $ 5,080
Accounts receivable, net of allowance for doubtful accounts
of $1,293 and $1,004 at June 30, 2002 and December 31,
2001, respectively 26,080 25,461
Inventories 29,730 30,412
Prepaid expenses and other current assets 1,246 1,986
Prepaid income taxes 368 1,316
Deferred income taxes 3,835 4,025
Assets held for sale - 2,250
- --------------------------------------------------------------------------------------------------------------------
Total current assets 65,073 70,530
Property and equipment, net 24,836 25,891
Goodwill, net 107,903 119,067
Deferred financing costs, net 4,644 5,259
Intangibles, net 160 314
Prepaid pension cost 3,299 3,588
Other assets 543 1,070
- --------------------------------------------------------------------------------------------------------------------
$206,458 $225,719
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Member's Equity:
Current
Current portion of long-term debt $ 9,992 $ 6,305
Accounts payable 8,625 8,876
Accrued compensation 3,524 2,814
Accrued expenses 6,784 7,572
Accrued acquisition costs 1,090 1,414
Accrued interest 706 888
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 30,721 27,869
Long term debt 143,817 159,532
Deferred income taxes 1,570 5,056
Other long-term liabilities 1,387 1,587
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 177,495 194,044
Commitments and contingencies
Member's equity 28,963 31,675
- --------------------------------------------------------------------------------------------------------------------
$206,458 $225,719
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
2
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands)
Six months ended June 30, Three months ended June 30,
--------------------------- -------------------------------
2002 2001 2002 2001
--------------------------- -------------------------------
Net sales $ 96,397 $ 100,868 $ 49,778 $ 50,071
Cost of goods sold 60,529 63,925 30,814 31,658
- ---------------------------------------------------------------------------------------------------------------
Gross profit 35,868 36,943 18,964 18,413
Selling, general and administrative expenses 19,233 21,327 9,677 10,297
Cumulative adjustment for Aerospace -- (721) -- (721)
Amortization of goodwill -- 1,680 -- 817
Other 588 -- 398 --
- ---------------------------------------------------------------------------------------------------------------
Income from operations 16,047 14,657 8,889 8,020
Other income (expense):
Other income 98 141 44 55
Interest expense (6,772) (9,122) (3,362) (4,239)
- ---------------------------------------------------------------------------------------------------------------
Income before provision for income taxes
and cumulative effect in change in
accounting principle 9,373 5,676 5,571 3,836
Provision for income taxes 4,281 2,600 2,541 1,846
- ---------------------------------------------------------------------------------------------------------------
Income before cumulative effect in change
in accounting principle 5,092 3,076 3,030 1,990
Cumulative effect in change of accounting
principle, net of taxes of $3,360 (7,804) -- -- --
- ---------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,712) $ 3,076 $ 3,030 $ 1,990
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Six Months Ended June 30, 2002 2001
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (2,712) $ 3,076
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle 7,804 --
Depreciation and amortization 2,518 4,175
Amortization of deferred finance costs 468 513
Writedown of deferred finance costs 145 --
Deferred taxes 64 --
Changes in operating assets and liabilities:
Accounts receivable (619) 1,091
Inventories 682 2,321
Prepaid expenses and other assets 4,471 1,461
Accounts payable (332) (3,496)
Accrued expenses (784) (3,161)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,705 5,980
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from assets held for sale 364 1,737
Capital expenditures (1,307) (2,256)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (943) (519)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of long-term debt and capital lease obligations (12,028) (10,286)
Proceeds from debt issued -- 2,800
Member withdrawals -- (865)
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (12,028) (8,351)
- ---------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,266) (2,890)
Cash and cash equivalents, beginning of period 5,080 3,775
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,814 $ 885
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
KEY COMPONENTS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the financial statements of Key
Components, LLC ("KCLLC"), and its subsidiaries, all of which are wholly owned
(collectively, the "Company"). All significant intercompany transactions have
been eliminated.
The Company manufactures and sells custom engineered essential componentry in a
diverse array of end use markets. Through its two business segments, electrical
components and mechanical engineered components, the Company targets its
products to original equipment manufacturers. The Company's electrical
components business products include power conversion products, specialty
electrical components and high-voltage utility switches. The Company's
mechanical engineered components business products primarily consist of medium
security lock products and accessories, flexible shaft and remote valve control
components and turbo-charger actuators.
KCLLC's assets are limited to the Company's corporate office and its investments
in its subsidiaries. KCLLC's financial statements include the related expenses
of operating the Company's corporate office. KCLLC is wholly-owned by Key
Components, Inc. ("KCI"), a New York corporation. KCI holds no other assets
other than its investments in KCLLC and has no operations.
The accompanying unaudited financial statements of the Company contain all
adjustments that are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, the Company
believes that the disclosures herein are adequate to make the information not
misleading. The results of operations for the interim periods are not
necessarily indicative of the results for full years. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2001 included in the Company's
Annual Report on Form 10-K.
Certain reclassifications were made to conform the prior periods to the current
year presentation.
2. Acquisitions and Dispositions
On November 21, 2000, the Company acquired all of the outstanding shares of Acme
Electric Corporation ("Acme") for a purchase price of approximately $47.3
million and assumed liabilities of approximately $28.8 million. In conjunction
with the acquisition, the Company repaid approximately $10.4 million of Acme's
outstanding long-term debt out of the approximately $28.8 million of liabilities
assumed as part of the acquisition. The Company recorded the excess purchase
price over net assets acquired of approximately $33.1 million as goodwill.
At the time of the acquisition, the Company decided to divest the Acme Aerospace
("Aerospace") division and sell the Acme Electronics ("Electronics") division.
Aerospace manufactures lightweight high power battery chargers and related power
systems for aerospace applications. Electronics is a contract electronics
manufacturer for data storage, telecommunications and medical electronic
applications.
Based on the strength of the operating performance of Aerospace, on June 1,
2001, the Company decided to retain rather than divest Aerospace. On that date
and in accordance with EITF 90-6, "Accounting for Certain Events Not Addressed
in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold," the
Company reallocated the purchase price of Acme as if Aerospace had never been
held for sale and recorded a cumulative adjustment for the results of operations
of Aerospace from the date of acquisition through May 31, 2001 of $721,000.
5
In December 2001, the Company entered into an agreement to sell the Electronics
division of Acme. Pursuant to this transaction, which closed on February 15,
2002, the Company received $100,000 in cash and a $300,000 note due on February
15, 2006, which bears interest at a rate of 7% per annum. In addition,
contingent consideration of up to $2.1 million will be earned if Electronics
meets certain annual revenue targets during the 48 months following such
closing. Contingent consideration earned, if any, including interest at 7% per
annum accruing on such amount, will be paid on the fourth anniversary from the
date such contingent consideration is earned and will be recorded against
goodwill.
As part of the Company's plan of integrating the Acme acquisition, the Company
accrued approximately $2.3 million of severance and related costs and $260,000
of lease exit costs related to the closure of Acme's corporate office. At June
30, 2002, $1.5 million of payments had been made related to these accruals. The
Acme corporate office was closed in October 2001. The accrued acquisition costs
represents a significant estimate and is subject to change based on actual
results.
3. Inventories
Inventories consist of the following:
(In thousands) June 30, December 31,
2002 2001
- ------------------------------------------------------------------------------
Raw materials $15,239 $15,566
Work-in-process 7,372 6,808
Finished goods 7,119 8,038
- ------------------------------------------------------------------------------
Total inventory $29,730 $30,412
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
6
4. Operating Segments
The Company conducts its operations through its two businesses, the manufacture
and sale of electrical components ("EC") and mechanical engineered components
("MEC"). The EC business produces an array of electrical componentry items for
recreational and industrial applications and switches for utility companies,
which are utilized in industrial markets. The MEC business manufactures flexible
shaft products, specialty locks and related accessories and turbo charger
actuators and related componentry.
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest, taxes and depreciation and amortization
("EBITDA"). In its calculation of EBITDA, certain charges that management
determines are non-recurring are excluded. Segment information for the six and
three months ended June 30, 2002 and 2001 is as follows:
(In thousands) Mechanical
Electrical Engineered
Components Components Total
- --------------------------------------------------------------------------------
Six months ended June 30, 2002:
Net sales to external customers $ 62,965 $ 33,432 $ 96,397
Intersegment net sales -- 75 75
Segment profit - EBITDA 11,469 9,552 21,021
Segment assets 113,300 88,777 202,077
Depreciation and amortization 1,287 1,213 2,500
- --------------------------------------------------------------------------------
Six months ended June 30, 2001:
Net sales to external customers $ 60,895 $ 39,973 $100,868
Intersegment net sales -- 65 65
Segment profit - EBITDA 10,625 11,490 22,115
Segment assets 121,628 103,552 225,180
Depreciation and amortization 1,600 2,069 3,669
- --------------------------------------------------------------------------------
Three months ended June 30, 2002:
Net sales to external customers $ 32,732 $ 17,046 $ 49,778
Intersegment net sales -- 43 43
Segment profit - EBITDA 6,423 5,040 11,463
Segment assets 113,300 88,777 202,077
Depreciation and amortization 637 601 1,238
- --------------------------------------------------------------------------------
Three months ended June 30, 2001:
Net sales to external customers $ 31,181 $ 18,890 $ 50,071
Intersegment net sales -- 39 39
Segment profit - EBITDA 5,946 5,643 11,589
Segment assets 121,628 103,552 225,180
Depreciation and amortization 720 1,034 1,754
- --------------------------------------------------------------------------------
December 31, 2001:
Segment assets $116,576 $100,265 $216,841
- --------------------------------------------------------------------------------
7
Reconciliation of Selected Segment Information to the Company's Consolidated
Totals:
(In thousands) Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
Profit or loss:
Total profit from reportable segments-
EBITDA $ 21,021 $ 22,115 $ 11,463 $ 11,589
Reconciling items:
Corporate expenses (1,519) (2,309) (677) (1,059)
Depreciation and amortization (2,518) (4,175) (1,247) (2,108)
Interest expense (6,772) (9,122) (3,362) (4,239)
Management fee (251) (632) (128) (306)
Non-recurring expenses (588) (201) (478) (41)
- ----------------------------------------------------------------------------------------------------
Total consolidated income before taxes
and cumulative effect on change in
accounting principle $ 9,373 $ 5,676 $ 5,571 $ 3,836
====================================================================================================
December
June 30, 2002 31, 2001
- --------------------------------------------------------------------------------
Assets:
Total assets for reportable segments $202,077 $216,841
Corporate assets 4,381 6,628
Assets held for sale - 2,250
- --------------------------------------------------------------------------------
Total consolidated assets $206,458 $225,719
================================================================================
(In thousands) Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
Geographical Sales Information:
United States $ 84,821 $ 89,202 $ 43,660 $ 44,644
China 2,368 2,071 1,221 1,150
England 2,127 1,806 1,561 893
Canada 1,712 2,106 795 761
Mexico 1,035 1,764 637 856
Netherlands 1,298 924 688 490
Other 3,036 2,995 1,216 1,277
- ----------------------------------------------------------------------------------------------------
Total $ 96,397 $100,868 $ 49,778 $ 50,071
====================================================================================================
5. Provision for Income Taxes
For the three and six months ended June 30, 2002 and 2001, the Company's
provision for income taxes primarily relates to the federal and state income
taxes of its sole member, KCI. Deferred income taxes have been recorded to
reflect the tax consequences on future years of temporary differences between
the tax bases of assets and liabilities and their financial reporting amounts at
year-end. Valuation allowances are recorded when necessary to reduce deferred
tax assets to expected realizable amounts.
8
6. Financing amendment
In June 2002, the Company amended its credit agreement (the "Amendment") to
provide for revised financial covenant ratios from June 30, 2002 through
December 2003 from the original covenant ratios stipulated in the agreement. In
addition, the Amendment revises the Company's pricing, the allowed maximum
capital expenditures through 2003 and reduces the amount to be paid for
permitted acquisitions (as defined) from $15 million to $7.5 million through the
end of 2003. In connection with the Amendment, the Company voluntarily reduced
its revolving credit facility by $15 million from $40 million to $25 million
through the end of 2003. At June 30, 2002, the Company was in compliance with
the covenants of the credit agreement, as amended. In connection with the new
amendment, as a result of the Company voluntarily reducing its loan commitment
through the end of 2003, the Company wrote down $145,000 of the deferred finance
costs related to closing the Company's credit facility.
7. Goodwill
In July 2001, Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the Company reclassify the carrying amount of
certain intangible assets.
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill. Goodwill amortization for the years ended December 31,
2001, 2000 and 1999 was approximately $3.6 million, $2.6 million and $2.5
million, respectively.
Upon the adoption of SFAS 142, the Company stopped recording goodwill
amortization, which totaled $1. 6 million and $817,000 in the six months and
three months ended June 30, 2001, respectively. In June 2002, the Company
completed the assessment of its reporting units and completed its initial step
one impairment test on January 1, 2002 financial information. As a result, the
Company identified one reporting unit in the MEC business with a book value of
goodwill that exceeded its fair market value, which was estimated using
valuation methodology involving discounted cash flows, market and transactional
multiples of the reporting units. Further procedures, as prescribed by SFAS 142
will be performed in the third quarter to determine the amount of final
impairment. In accordance with SFAS 142, the Company estimated the amount of the
impairment and recorded a cumulative effect in change of accounting principle,
as of January 1, 2002, of approximately $7.8 million, net of taxes of
approximately $3.4 million, to write down the goodwill associated with the
Company's lock product line resulting from the current market conditions of that
product line.
9
8. New Accounting Pronouncements
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 provides guidance on the accounting for
long-lived assets to be held and used and for assets to be disposed of through
sale or other means. SFAS 144 also broadens the definition of what constitutes a
discontinued operation and how such results are to be measured and presented.
FAS 144 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 did not have a material impact on the earnings or financial
position of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from
the extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. . SFAS 145 requires
that most gains and losses from the extinguishment of debt no longer be
classified as extraordinary items and that they be recorded as part of the
results of operations. In additions, SFAS 145 amends FASB Statement No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Lastly, SFAS 145 makes technical corrections to
existing pronouncements. While those corrections are not substantive in nature,
in some instances, they may change accounting practice. The Company adopted the
statement as of January 1, 2002. The adoption of SFAS 145 did not have a
material effect to the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued and
recorded as liabilities in financial statements. This statement is effective for
exit or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of this statement to determine the effect, if
any, it may have on its consolidated results of operations and financial
position.
10
Item 2-- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
GENERAL
Key Components, LLC ("KCLLC") is the parent holding company of the wholly owned
subsidiaries of the Company. Key Components, Inc. ("KCI"), the sole member of
KCLLC, holds no other assets other than its investment in KCLLC and has no
operations. The Company has two operating business segments, its electrical
components ("EC") business and mechanical engineered components ("MEC")
business. Through its two businesses, the Company is a leading manufacturer of
custom-engineered essential componentry for application in a diverse array of
end-use products. The Company targets original equipment manufacturer ("OEM")
markets where the Company believes its value-added engineering and manufacturing
capabilities, along with its timely delivery, reliability and customer service,
enable it to differentiate the Company from its competitors and enhance
profitability. The EC business' product offerings include power conversion
products, specialty electrical components and high-voltage utility switches. The
product offerings of the MEC business consist of flexible shaft and remote valve
control components, turbo-charger actuators and medium security lock products
and accessories.
The Company has historically acquired complementary or related manufacturing
businesses and sought to integrate them into existing operations. Following an
acquisition, management seeks to rationalize operations, reduce overhead costs,
develop additional cross-selling opportunities and establish new customer
relationships. As a result of its integration efforts and internal growth, the
Company's consolidated net sales have increased from approximately $9.1 million
in fiscal year 1992 to approximately $193.8 million for fiscal year 2001.
The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies, but there are no agreements regarding any such
acquisitions existing as of the date hereof.
11
Results of Operations
The following table sets forth, for the periods indicated, consolidated
statement of operations data for the Company expressed in dollar amounts (in
thousands) and as a percentage of net sales. The financial data set forth
includes the result of operations of its wholly owned subsidiaries from their
respective dates of acquisition. The data set forth below should be read in
conjunction with the Company's consolidated financial statements and notes
thereto contained elsewhere in this Form 10-Q.
Six months ended June 30, Three months ended June 30,
----------------------------------------- ---------------------------------------
2002 2001 2002 2001
------------------- -------------------- ------------------- -----------------
(In thousands) % of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
---------- ------- --------- -------- --------- -------- -------- ------
Net Sales $96,397 100.0% $100,868 100.0% $49,778 100.0% $50,071 100.0%
Cost of Goods Sold 60,529 62.8 63,925 63.4 30,814 61.9 31,658 63.2
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit 35,868 37.2 36,943 36.6 18,964 38.1 18,413 36.8
Selling, general and
administrative expenses 19,233 20.0 21,327 21.1 9,677 19.4 10,297 20.6
Cumulative adjustment for
Aerospace -- -- (721) (0.7) -- -- (721) (1.4)
Amortization of goodwill -- -- 1,680 1.7 -- -- 817 1.6
Other 588 0.6 -- -- 398 0.8 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations 16,047 16.6 14,657 14.5 8,889 17.9 8,020 16.0
Other income 98 0.1 141 0.1 44 0.1 55 0.1
Interest expense (6,772) (7.0) (9,122) (9.0) (3,362) (6.8) (4,239) (8.5)
- ------------------------------------------------------------------------------------------------------------------------------
Income before provision for
income taxes and cumulative
effect in change of accounting
principle 9,373 9.7 5,676 5.6 5,571 11.2 3,836 7.7
Provision for income taxes 4,281 4.4 2,600 2.6 2,541 5.1 1,846 3.7
- ------------------------------------------------------------------------------------------------------------------------------
Income before change in
accounting principle 5,092 5.3 3,076 3.0 3,030 6.1 1,990 4.0
Change in accounting principle,
net of taxes of $3,360 (7,804) (8.1) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,712) (2.8%) $3,076 3.0% $ 3,030 6.1% $ 1,990 4.0%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
12
A summary of the Company's segments is as follows:
Electrical Components
Business
Six Months Ended June 30, Three Months Ended June 30,
--------------------------------------- -----------------------------------------
2002 2001 2002 2001
----------------- ------------------ ------------------- ------------------
% of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales $62,965 100.0% $60,895 100.0% $32,732 100.0% $31,181 100.0%
Cost of Sales 39,529 62.8 39,156 64.3 20,256 61.9 20,184 64.7
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit 23,436 37.2 21,739 35.7 12,476 38.1 10,997 35.3
Selling, general and
administrative expenses 13,299 21.1 12,892 21.2 6,805 20.8 6,170 19.8
Cumulative adjustment for -- -- (721) (1.2) -- -- (721) (2.3)
Aerospace
Amortization of goodwill -- -- 816 1.3 -- -- 384 1.2
Other 241 0.4 -- -- 161 0.5 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations $ 9,896 15.7% $ 8,752 14.4% $ 5,510 16.8% $ 5,164 16.6%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Mechanical Engineered
Components Business
Six Months Ended June 30, Three Months Ended June 30,
--------------------------------------- -----------------------------------------
2002 2001 2002 2001
----------------- ------------------ ------------------- ------------------
% of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales $33,432 100.0% $39,973 100.0% $17,046 100.0% $18,890 100.0%
Cost of Sales 21,000 62.8 24,768 62.0 10,558 61.9 11,474 60.7
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit 12,432 37.2 15,205 38.0 6,488 38.1 7,416 39.3
Selling, general and
administrative expenses 4,141 12.4 4,936 12.3 2,080 12.2 2,379 12.6
Amortization of goodwill -- -- 864 2.2 -- -- 433 2.3
Other 350 1.0 11 -- 240 1.4 11 0.1
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations $ 7,941 23.8% $ 9,394 23.5% $ 4,168 24.5% $ 4,593 24.3%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002 compared to the six months ended June 30, 2001
Net Sales: Net sales for the six months ended June 30, 2002 ("Six Months 2002")
decreased by approximately $4.5 million, or 4.4%, from $100.9 million for the
six months ended June 30, 2001 ("Six Months 2001") to $96.4 million for the Six
Months 2002. This decrease was the result of the sum of the $2.1 million, or
3.4%, increase in the net sales of the EC business less the approximately $6.5
million, or 16.4%, decrease in net sales of the MEC business.
13
For the first five months of 2001, the results of operations of the aerospace
division of Acme ("Aerospace") were excluded from the consolidated results of
the Company due to its classification as being held for sale during that period.
Net sales of the EC business, pro forma to include the net sales of Aerospace
for the entire period in the results of operations for the Six Months 2001,
declined by approximately $2.9 million, or 4.4% for the Six Months 2002. The
primary driver was the decline in sales for the power conversion product line of
the EC business. Net sales of the power conversion business for the Six Months
2002, pro forma to include the net sales of Aerospace for the entire period in
the results of operations for the Six Months 2001, declined by approximately
$5.1 million or 15.3%. This decline was the result of lower demand in the
industrial and telecom markets for power distribution products.
Net sales in the MEC business decreased by approximately $6.5 million for the
Six Months 2002 as compared to the Six Months 2001. This decrease is primarily
related to the decline in sales of the Company's lock product line, which has
continued to experience softness in demand across its major markets.
Gross Profit: Gross profit decreased by approximately $1.1 million, or 2.9%,
from approximately $36.9 million for the Six Months 2001 to approximately $35.9
million the Six Months 2002, resulting from the $1.7 million, or 8.0%, increase
in the gross profit of the EC business less the decline in gross profit of the
MEC business for Six Months 2002 of approximately $2.8 million, or 18.2%.
Gross profit of the EC business, pro forma to include the results of operations
of Aerospace for the entire period in the results of operations for the Six
Months 2001, remained at approximately $23.4 million for the Six Months 2002 as
compared to the Six Months 2001. The gross margin lost in the decline in sales
for the EC business was offset by productivity improvements experienced during
2002 as well as product mix.
The approximately $2.8 million decline in gross profit for the MEC business for
the Six Months 2002 as compared to the Six Months 2001 is primarily due to the
decline in sales of the lock product line of the MEC business for the Six Months
2002.
The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business increased by approximately 1.6% from 35.6% for the Six Months 2001 to
37.2% to the Six Months 2002. For the MEC business, the GP percentage declined
approximately 0.8% from 38.0% for the Six Months 2001 to 37.2% to the Six Months
2002. The GP percentage for the EC business, pro forma to include the results of
operations of Aerospace for the entire period in the results of operations for
the Six Months 2001, increased approximately 1.7% from 35.5% for the Six Months
2001 to 37.2% for the Six Months 2001. The increase in GP percentage for the EC
business is the result of product mix and productivity gains. The decline in GP
percentage of the MEC business is primarily related to a change in product mix
and margin compression resulting from fixed overheads being absorbed by lower
sales levels primarily related to the lock product line.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses declined by approximately $2.1 million, or
9.8%, from approximately $21.3 million for the Six Months 2001 to approximately
$19.2 million for the Six Months 2002. As a percentage of net sales, SG&A
decreased by 1.1% from 21.1% for the Six Months 2001 to 20.0% for the Six Months
2002. SG&A of the EC business increased by approximately $437,000, or 3.4%, for
the Six Months 2002 as compared to the Six Months 2001 and, as a percentage of
net sales, remained at 21.1% for the Six Months 2002 and 2001. SG&A of the EC
business, pro forma to include the results of operations of Aerospace for the
entire period in Six Months 2001, declined by approximately $569,000, or 4.1%,
for the Six Months 2002 as compared to the Six Months 2001, and, as a percentage
of net sales, SG&A, pro forma to include the results of operations of Aerospace
for the entire period in the results of operations for the Six Months 2001,
increased 0.1% for the Six Months 2002. SG&A of the MEC business, which declined
by approximately $795,000, or 16.1%, for the Six Months 2002 as compared to the
Six Months 2001, increased as a percentage of net sales by approximately 0.1%.
The decrease in SG&A expenses for the Six Months 2002 as compared to the Six
Months 2001 is primarily related to the closure of the corporate office of Acme.
For the Six Months 2001, the corporate office, which was closed in October 2001,
added approximately $1.5 million to the consolidated SG&A expenses of the
Company during the Six Months 2001, including approximately $312,000 of
depreciation. Upon the close of the Acme corporate office, all remaining related
expenses of that office terminated.
14
The decrease in the SG&A of the EC business, pro forma to include the results of
Aerospace in the Six Months 2001, and decrease in SG&A of the MEC business were
primarily related to the Company's cost reduction initiatives in response to the
downturn in the economy, put in place during 2001 and lower commissions due to
lower sales volumes. The increase in SG&A as a percentage of net sales of the
MEC business primarily resulted from the impact of the sharper decline in the
net sales of the MEC business as compared to the cost reductions made by the
Company. The Company's MEC business has a lower overhead structure than its EC
business due to the lower selling and marketing expenses, which limits the
ability of the MEC business to reduce its expenses beyond a certain level.
Acme Aerospace Division Cumulative Adjustment: On June 1, 2001, the Company,
based on management's conclusion that the aerospace division of Acme
("Aerospace"), which was previously held for sale, was more valuable than what
current market conditions dictated and decided to retain rather than divest
Aerospace. On that date and in accordance with EITF 90-6, "Accounting for
Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired
Operating Unit to be Sold", the Company reallocated the purchase price as if
Aerospace had never been held for sale and recorded a cumulative adjustment for
the results of operations of Aerospace from the date of acquisition through May
31, 2001 of $721,000, which had been excluded from the results of operations of
the Company and had been included in goodwill.
Amortization of Goodwill: Goodwill amortization decreased by approximately $1.7
million during Six Months 2002 as compared to Six Months 2001, due to the
Company ceasing the amortization of goodwill as of January 1, 2002 as required
by Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets."
Other Operating expenses: Other operating expenses primarily relate to the start
up expenses related to the Company's new lock production facility in Mexico. In
addition the Company wrote down approximately $145,000 of deferred finance costs
related to its credit facility (see Liquidity and Capital Resources).
Income from Operations: Income from operations increased by approximately $1.4
million, or 9.5%, from approximately $14.7 million for the Six Months 2001 to
$16.0 million for the Six Months 2002. This increase resulted from the decrease
in gross profit of approximately $1.1 million offset by the decreases in SG&A
expenses of approximately $2.1 million and goodwill amortization of
approximately $1.7 million. The decrease in operating expenses was reduced by
$721,000 of cumulative income recorded during the Six Months 2001 and an
increase of other operating expenses of approximately $588,000.
Interest Expense: Interest expense declined by approximately $2.4 million, or
25.8%, during the Six Months 2002. This decrease is primarily due to lower
levels of outstanding borrowings during the Six Months 2002 as compared to the
Six Months 2001, as well as reduced rates of interest charged on the outstanding
principal on the variable rate term loan during the Six Months 2002 as compared
to the Six Months 2001.
Provision for Income Taxes: The provision for income taxes increased by
approximately $1.7 million, or 64.7%, for the Six Months 2002 as compared to the
Six Months 2001. The increase is directly related to the increase in income
before taxes. The Company's effective tax rate for Six Months 2002 was
approximately 45.0% on income before taxes. The effective rate for the Six
Months 2001 was 45.7%.
Cumulative effect in Change of Accounting Principle: In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, which are effective for fiscal years beginning after December
15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the company reclassify the carrying amount of
certain intangible assets.
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill.
15
In June 2002, the Company completed the assessment of its reporting units and
completed its initial step one impairment test on January 1, 2002 financial
information. As a result, the Company identified one reporting unit, the
Company's Lock product line, in the MEC business that's had a book value of
goodwill that exceeded its fair market value, which was estimated using
valuation methodology involving discounted cash flows and market and
transactional multiples of the reporting units. This was primarily driven by the
downturn in the economy, which has caused significant reductions in spending on
new office furniture. Further procedures, as prescribed by SFAS 142 will be
performed in the third quarter to determine the amount of final impairment. In
accordance with SFAS 142, the Company estimated the amount of the impairment and
recorded a cumulative effect in change of accounting principle, as of January 1,
2002, of approximately $7.8 million, net of taxes of approximately $3.4 million,
to write down the goodwill associated with the Company's lock product line,
resulting from the current market conditions of that product unit.
Net (loss) Income: Net income decreased by approximately $5.8 million from net
income of approximately $3.1 million for the Six Months 2001 to a net loss of
approximately $2.7 million for the Six Months 2002. The increase resulted from
an increase in income from operations of approximately $1.5 million, a decrease
in other income of approximately $43,000, a decrease in interest expense of
approximately $2.4 million, an increase in provision for taxes of approximately
$1.7 million, and the increase in cumulative effect in accounting principle of
approximately $7.8 million, due to the factors discussed above.
Three months ended June 30, 2002 compared to the three months ended June 30,
2001
Net Sales: Net sales for the three months ended June 30, 2002 ("Quarter 2002")
decreased by approximately $293,000, or 0.6%, from approximately $50.1 million
for the three months ended June 30, 2001 ("Quarter 2001") to approximately $49.8
million for the Quarter 2002. This decrease was the result of the approximately
$1.6 million, or 5.0%, increase in the net sales of the EC business less the
approximately $1.8 million, or 9.8%, decline in net sales of the MEC business.
For April and May 2001, the results of operations of the aerospace division of
Acme ("Aerospace") were excluded from the consolidated results of the Company
due to its classification of being held for sale during that period. Net sales
of the EC business, pro forma to include the net sales of Aerospace for the
entire quarter in the results of operations of the Quarter 2001, declined
approximately $550,000, or 1.7% for the Quarter 2002. The primary driver was the
decline in sales for the power conversion product line of the EC business. Net
sales of the power conversion business, including the net sales of Aerospace in
the Quarter 2001, declined approximately $1.8 million. This decline was the
result of lower demand in the industrial and telecom markets for power
distribution products.
Net sales in the MEC business decreased by approximately $1.8 million for the
Quarter 2002 as compared to the Quarter 2001. This decrease is primarily related
to the decline in sales of the Company's lock product line, which has continued
to experience softness in demand across its major markets.
Gross Profit: Gross profit increased by $551,000, or 3.0%, from approximately
$18.4 million for the Quarter 2001 to approximately $19.0 million for the
Quarter 2002, resulting from the $1.5 million or 13.4%, increase in the gross
profit of the EC business less the decline in gross profit of the MEC business
for the Quarter 2002 of approximately $928,000, or 12.5%.
Gross profit of the EC business, pro forma to include the results of operations
of Aerospace in the Quarter 2001, increased approximately $811,000, or 7.0%. The
primary drivers were the result of continued productivity gains related to cost
cutting efforts put in place during 2001 and product mix.
The approximately $928,000 decline in gross profit of the MEC business for the
Quarter 2002 as compared to the Quarter 2001 is primarily due to the decline in
sales of the lock product line of the MEC business for the Quarter 2002.
The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business increased by approximately 2.8% from 35.3% for the Quarter 2001 to
38.1% for the Quarter 2002. For the MEC business, the GP percentage declined
approximately 1.2% for the Quarter 2002. The GP percentage for the EC business,
pro forma to include the results of operations of Aerospace for the entire
quarter in the results of operations for the Quarter 2001, increased by
approximately 3.1%. The change in GP percentage for the EC business is the
result of product mix and productivity gains. The change in GP percentage for
the MEC business is primarily related to a change in product mix and margin
compression resulting from fixed overheads being absorbed by lower sales levels
related to the lock product line.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses declined by approximately $620,000, or 6.0%,
from approximately $10.3 million for the Quarter 2001 to approximately $9.7
million for the Quarter 2002. As a percentage of net sales, SG&A decreased by
approximately 1.2% for the Quarter 2002 as compared to the Quarter 2001. SG&A of
the EC business increased by approximately $665,000, or 10.8%, for the Quarter
2002 as compared to the Quarter 2001 and, as a percentage of net sales,
increased by 1.1% to 20.8% for the Quarter 2002. SG&A of the EC business, pro
forma to include the results of operations of Aerospace for the entire quarter
in the results of operations for the Quarter 2001, increased by approximately
$218,000, or 3.3%. As a percentage of net sales, SG&A for the EC business, pro
forma to include the results of operations of Aerospace for the entire quarter
in the results of operations for the Quarter 2001, increased by 1.0% for the
Quarter 2002. SG&A of the MEC business, which declined by approximately
$299,000, or 12.6%, for the Quarter 2002 as compared to the Quarter 2001,
decreased as a percentage of net sales by approximately 0.4% to 12.2% for the
Quarter 2002.
16
The decrease in SG&A expenses for the Quarter 2002 as compared to the Quarter
2001 is primarily related to the closing of the corporate office of Acme. For
the Quarter 2001, the corporate office, which was closed in October 2001, added
approximately $750,000 to the consolidated SG&A expenses of the Company during
the Quarter 2001, including approximately $168,000 of depreciation. Upon the
close of the Acme corporate office, all remaining related expenses of that
office terminated.
The increase in SG&A of the EC business is primarily related to commissions
resulting from increased volume as well as change in product sales mix. The
decline in the SG&A and in SG&A as a percentage of sales of the MEC business
were primarily related to the Company's cost reduction initiatives in response
to the downturn in the MEC business.
Acme Aerospace Division Cumulative Adjustment: On June 1, 2001, the Company,
based on management's conclusion that the aerospace division of Acme
("Aerospace"), which was previously held for sale, was more valuable than market
conditions dictated and decided to retain rather than divest Aerospace. On that
date and in accordance with EITF 90-6, "Accounting for Certain Events Not
Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold",
the Company reallocated the purchase price as if Aerospace had never been held
for sale and recorded a cumulative adjustment for the results of operations of
Aerospace from the date of acquisition through May 31, 2001 of $721,000, which
had been excluded from the results of operations of the Company and had been
included in goodwill.
Amortization of Goodwill: Goodwill amortization decreased by approximately
$817,000 during the Quarter 2002 as compared to the Quarter 2001, due to the
Company ceasing the amortization of goodwill as of January 1, 2002 as required
by Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets."
Other Operating expenses: Other operating expenses increased approximately
$398,000 or 0.8% and relate primarily to the start up expenses of the Company's
new lock production facility in Mexico. In addition, the Company wrote down
approximately $145,000 of deferred finance costs related to its credit facility
(see Liquidity and Capital Resources).
Income from Operations: Income from operations increased by approximately
$869,000, or 10.8%, from approximately $8.0 million for the Quarter 2001 to
approximately $8.9 million for the Quarter 2002. This increase resulted from the
increase in gross profit of approximately $551,000, decreases in SG&A expenses
of approximately $700,000 and goodwill amortization of approximately $817,000.
The decrease in operating expenses was reduced by the $721,000 cumulative income
adjustment for Aerospace recorded in the Quarter 2001 and an increase in other
operating expenses of approximately $478,000.
Interest Expense: Interest expense decreased by approximately $877,000, or
20.7%, during the Quarter 2002. This decrease is primarily due to lower levels
of outstanding borrowings during the Quarter 2002 as compared to the Quarter
2001, as well as reduced rates of interest charged on the outstanding principal
on the variable rate term loan during Quarter 2002 as compared to Quarter 2001.
Provision for Income Taxes: The provision for income taxes increased by
approximately $695,000, or 37.6%, for the Quarter 2002 as compared to the
Quarter 2001. The increase in provision for taxes is primarily related to the
increase in income before taxes. The Company's effective tax rate for the
Quarter 2002 was approximately 45.6% on income before taxes. The Company's
effective rate declined approximately 3.0% due to the elimination of goodwill
amortization beginning in Quarter 2002. Principally all of the company's
goodwill is non-deductible for tax purposes. The effective rate for Quarter 2001
was 48.1%.
Net Income: Net Income increased by approximately $1.0 million from
approximately $2.0 million for the Quarter 2001 to approximately $3.0 million
for the Quarter 2002. The increase resulted from the increase in income from
operations of approximately $869,000, a decrease in interest expense of
approximately $877,000 and an increase in provision for taxes of approximately
$695,000, due to the factors discussed above.
17
Liquidity and Capital Resources
The Company has historically generated funds from its operations and its working
capital requirements generally have not materially fluctuated from quarter to
quarter. The Company's other main sources of liquidity have historically been
the Company's $80.0 million of uncollateralized 10.5% senior notes due 2008 and
its outstanding credit facilities. The credit facility provides for a six-year
$40.0 million revolving credit facility and a six-year $100.0 million term loan
facility. The credit agreement, guaranteed by the Company's subsidiaries and
KCI, is collateralized by all of the capital stock of the subsidiaries,
receivables, inventories, equipment and certain intangible property. There were
no amounts outstanding under the revolving credit facility at June 30, 2002 or
December 31, 2001. The term loan is payable in quarterly installments through
September 2006. Both the term loan and revolving credit facility bear interest
at fluctuating interest rates determined by reference to a base rate or the
London interbank offered rate ("LIBOR") plus an applicable margin which will
vary from 1.0% to 3.5% and require the payment of a commitment fee of 0.5% on
the unused portion of the facility as well as quarterly commitment fees.
The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At June 30, 2002, the Company had one letter of credit outstanding for
approximately $443,000. The letter of credit primarily relates to outstanding
Acme workman's compensation claims.
The credit agreement contains certain covenants and restrictions, which require
the maintenance of financial ratios and restrict or limit dividends and other
shareholder distributions, transactions with affiliates, capital expenditures,
rental obligations and the incurrence of indebtedness.
In June 2002, the Company amended its credit agreement (the "Amendment") to
provide for revised financial covenant ratios from June 30, 2002 through
December 2003 from the original covenant ratios stipulated in the agreement. In
addition, the Amendment revises the Company's pricing, the allowed maximum
capital expenditures through 2003 and reduces the amount to be paid for
permitted acquisitions (as defined) from $15 million to $7.5 million through the
end of 2003. In connection with the Amendment, the Company voluntarily reduced
its revolving credit facility by $15 million from $40 million to $25 million
through the end of 2003. At June 30, 2002, the Company was in compliance with
the covenants of the credit agreement, as amended. In connection with the new
amendment, as a result of the Company voluntarily reducing its loan commitment
through the end of 2003, the Company wrote down $145,000 of the deferred finance
costs related to closing the Company's credit facility.
The Company's remaining liquidity demands will be for capital expenditures,
general corporate purposes, and principal and interest payments on its
outstanding debt. The Company's senior notes require semiannual interest
payments on the outstanding principal. The term loan requires quarterly
principal payments. Principal payments required for the next 12 months will be
approximately $9.8 million. Under the revolving credit facility and term loan,
the Company has the option to lock in a specified interest rate by entering into
a contract, for different periods, which cannot exceed 180 days. As the
underlying contract comes up for renewal, the interest associated with the
contract becomes due. As of June 30, 2002, the Company had no outstanding
commitments for capital expenditures. The Company anticipates its capital
expenditures for the year ended December 31, 2002 to be approximately $3.6
million. The expenditures are primarily needed to maintain its facilities and
expand its production capacity for the company's ongoing plan to expand
operations in Mexico and in order to take advantage of profitable market
opportunities. To the extent cash flow from operations is insufficient to cover
the Company's capital expenditures, debt service and other general requirements,
the Company would seek to utilize its borrowing availability under its existing
revolving credit facility.
KCI has no operations and is dependent on KCLLC for financial resources in the
form of capital distributions to meet its obligations. KCI obligations include
the liquidation preferences of $107 million for its preferred stock plus any
dividends payable in arrears (at June 30, 2002 there were approximately $2.1
million in cumulative dividends in arrears, payable in-kind), which are
redeemable for cash at the option of the holder after June 2, 2009, the
requirement to purchase shares from its common shareholders under certain
circumstances and its tax obligations. Repurchases of KCI Common Stock are made
at fair market value as defined in KCI's shareholder agreement. At June 30, 2002
approximately 1.3 million KCI common shares plus potentially 190,000 shares
covered by stock options were subject to repurchase by KCI. The ability of KCLLC
to make such capital distributions will be limited by its available resources
and is limited by restrictions of debt and other agreements. KCLLC reflects the
tax obligations of KCI in its tax provision.
18
Cash flows provided by operating activities were approximately $11.7 million and
$6.0 million for the Six Months 2002 and the Six Months 2001, respectively. The
net increase of approximately $5.7 million for the Six Months 2002 resulted
primarily from the increase in net income plus non-cash charges of the Company
of approximately $523,000 as compared to the Six Months 2001 and the decrease in
prepaid expenses for the Six Months 2002. The decrease in prepaid expenses is
primarily attributable to the reduction of prepaid taxes as the Company has
utilized its prepaid balances to offset current estimated payments. The working
capital accounts (accounts receivable, inventory and accounts payables) used net
cash of $269,000 for the Six Months 2002 compared to the approximately $185,000
of net cash used during the Six Months 2001. Accrued expenses attributed $2.4
million of the $5.7 million increase in cash flows from operations over the Six
Months 2002 primarily related to the reduction of severance and other payments
related to the acquisition of Acme that occurred during the Six Months 2001.
Cash flows used in investing activities were approximately $943,000 and $519,000
for the Six Months 2002 and the Six Months 2001, respectively. Capital
expenditures for the Six Months 2002 and the Six Months 2001 were approximately
$1.3 million and $2.3 million, respectively. The decrease in capital
expenditures from the Six Months 2002 to the Six Months 2001 was primarily due
to the Company's cost containment strategies in response to the downturn in the
economy. Proceeds from the assets held for sale were approximately $364,000 and
$1.7 million for the Six Months 2002 and the Six Months 2001, respectively.
Cash flows from financing activities used net cash of approximately $12.0
million and approximately $8.4 million during the Six Months 2002 and the Six
Months 2001, respectively. The net cash used in financing activities for the Six
Months 2002 was related to the Company's net repayment of outstanding debt under
its existing credit facilities during the two periods. The debt payments during
the Six Months 2002 were prepayments against its outstanding term loan. The
payments are first applied to the Company's next two scheduled payments and then
are ratably applied to the remaining required principal payments. During the Six
Months 2001, the Company repaid a net of approximately $4.7 million of term debt
and $2.8 million of debt outstanding on the revolving credit facility. The
Company also distributed approximately $865,000 during the Six Months 2001 to
its member so that it could repurchase common stock from a shareholder.
Management believes that the Company's cash flow from operations, together with
its borrowing availability under its existing credit facilities, will be
adequate to meet its anticipated capital requirements for the next twelve
months.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the consolidated financial statements, included
in the Company's Form 10-K, includes a summary of the significant accounting
policies and methods used in the preparation of the Company's consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by the Company.
Revenue recognition: The Company recognizes revenue upon shipment of
products to customers, when title passes and all risks and rewards of
ownership have transferred. The Company considers revenue realized or
realizable and earned when the product has been shipped, the sales
price is fixed or determinable and collectibility is reasonably
assured. The Company reduces revenue for estimated customer returns.
Inventory: Inventories are stated at the lower of cost or market value,
on a first-in, first-out basis. The Company purchases materials for the
manufacture of inventory for sale in its various markets. The decision
to purchase a set quantity of a particular inventory item is influenced
by several factors including current and projected cost, future
estimated availability and existing and projected sales to produce
certain items. The Company evaluates the net realizable value of its
inventories and establishes allowances to reduce the carrying amount of
these inventories as deemed necessary.
Goodwill and other intangible assets: At June 30, 2002, the Company had
recorded approximately $108.1 million in goodwill and other intangible
assets, net of accumulated amortization related to acquisitions made in
2000 and prior years. The recoverability of these assets is subject to
an impairment test based on the estimated fair value of the underlying
businesses. These estimated fair values are based on estimates of the
future cash flows of the businesses. Factors affecting these future
cash flows include: the continued market acceptance of the products and
services offered by the businesses; the development of new products and
services by the businesses and the underlying cost of development; the
future cost structure of the businesses; and future technological
changes.
19
Management's Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to product returns, bad debts,
inventories, intangible assets, pensions and post retirement benefits, warranty
obligations and contingencies and litigation. The Company bases its estimates on
historical experience, the use of external resources and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Significant estimates used by the Company that are subject to change include,
but are not limited to (i) the Company's allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments for their open accounts receivable with the Company; if the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be
required, (ii) allowances established against its inventory carrying value to
record its inventories at net realizable value; if actual market conditions are
less favorable than those projected by management, additional inventory
allowances may be required, (iii) the Company's valuation allowances against its
deferred tax assets; were the Company to determine that it would not be able to
realize its deferred tax assets in the future, additional valuation allowances
could be required, (iv) the carrying amounts of its long lived assets; if the
Company were to determine that the value ascribed to any of its long-lived
assets was not recoverable an allowance could be required, (v) the effects of
its existing pension plans in its financial statements which the Company records
using various assumptions and the use of independent actuaries; if any of the
underlying assumptions were to change, the carrying value of the pension assets
and obligations may require adjustment, (vi) the Company's ability to evaluate
the fair market value of its reporting units to assess the book value of
goodwill, and (vii) estimates of future results of the Company's operations on
which the Company's financial covenants, as defined in its credit facilities,
were based, in part; if actual results were not to meet those expectations, the
Company may not meet its financial covenants and may be required to obtain
waivers for those covenants.
Inflation
Inflation has not been material to the Company's operations for the periods
presented.
Backlog
The Company's backlog of orders as of June 30, 2002, was approximately $30.0
million. The Company includes in its backlog only accepted purchase orders.
However, backlog is not necessarily indicative of future sales. In addition,
purchase orders can generally be cancelled at any time without penalty.
New Accounting Pronouncements
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the Company reclassify the carrying amount of
certain intangible assets into or out of goodwill.
20
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill. Goodwill amortization for the years ended December 31,
2001, 2000 and 1999 was approximately $3.6 million, $2.6 million and $2.5
million, respectively.
In June 2002, the Company completed the assessment of its reporting units and
completed its initial step one impairment test on January 1, 2002 financial
information. As a result, the Company identified one reporting unit in the MEC
business with a book value of goodwill that exceeded its fair market value.
Further procedures, as prescribed by SFAS 142 will be performed in the third
quarter to determine the amount of final impairment. In accordance with SFAS
142, the Company estimated the amount of the impairment and recorded a
cumulative effect in change of accounting principle, as of January 1, 2002, of
approximately $7.8 million, net of taxes of approximately $3.4 million, to write
down the goodwill associated with the Company's lock product line, resulting
from the current market conditions of that product line.
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 provides guidance on the accounting for
long-lived assets to be held and used and for assets to be disposed of through
sale or other means. SFAS 144 also broadens the definition of what constitutes a
discontinued operation and how such results are to be measured and presented.
FAS 144 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 did not have a material impact on the earnings or financial
position of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from
the extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. . SFAS 145 requires
that most gains and losses from the extinguishment of debt no longer be
classified as extraordinary items and that they be recorded as part of the
results of operations. In additions, SFAS 145 amends FASB Statement No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Lastly, SFAS 145 makes technical corrections to
existing pronouncements. While those corrections are not substantive in nature,
in some instances, they may change accounting practice. The Company adopted the
statement as of January 1, 2002. The adoption of SFAS 145 did not have a
material effect to the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued and
recorded as liabilities in financial statements. This statement is effective for
exit or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of this statement to determine the effect, if
any, it may have on its consolidated results of operations and financial
position.
Other Matters
Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risk is related to the variability in
interest rates associated with the $73.0 million outstanding under its term loan
and with any amounts outstanding under its $40-million revolving credit
facility. In connection with the Amendment to the credit facility (see Liquidity
and Capital Resources) the Company has voluntarily reduced its borrowing
capacity under the revolving credit facility by $15.0 million through the end of
2003. There were no borrowings were outstanding on June 30, 2002 under the
revolving credit facility. Under both the term loan and the revolving credit
facility, the Company has the option to lock in a certain interest rate based on
either the base rate, which is equivalent to prime, or LIBOR plus an applicable
margin specified in the agreement. Principally all of the borrowings under the
term loan are locked in at approximately 4.75% until August 15, 2002, when the
underlying LIBOR contract is up for renewal. At June 30, 2002, the Company had
no borrowings under its revolving credit facility and was one payment ahead of
its amended schedule on its term loan. A 1% change in the interest rate for the
Company's credit facilities in place at December 31, 2001 would have resulted in
a change in the Company's annual interest expense of approximately $940,000. The
senior notes bear a fixed rate of interest and therefore are not subject to
market risk. The Company does not hold derivative financial instruments or
believe that material imbedded derivatives exist within its contracts.
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
10.40 First Amendment to the Credit Agreement, dated June 28,
2002, among KCLLC, the Lenders (as defined) and Wachovia Bank,
National Association
(b) Reports on Form 8-K
Form 8-K, dated August 14, 2002
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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.
KEY COMPONENTS, LLC
Date: August 14, 2002 By: /s/Clay B. Lifflander
--------------------------------
Clay B. Lifflander
Chief Executive Officer
Date: August 14, 2002 By: /s/ Robert. B. Kay
--------------------------------
Robert B. Kay
President
Date: August 14, 2002 By: /s/Keith A. McGowan
--------------------------------
Keith A. McGowan
Chief Financial Officer
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.
KEY COMPONENTS FINANCE CORP.
Date: August 14, 2002 By: /s/ Clay B. Lifflander
--------------------------------
Clay B. Lifflander
Chief Executive Officer
Date: August 14, 2002 By: /s/ Robert. B. Kay
--------------------------------
Robert B. Kay
President
Date: August 14, 2002 By: /s/ Keith A. McGowan
--------------------------------
Keith A. McGowan
Chief Financial Officer
23