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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 the Quarterly period ended March 31, 2003
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
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(Registrant's Telephone Number, Including Area Code)
Commission File Number 333-58675-01
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 May 14, 2003, 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.
*Key Components Finance Corp. meets the conditions set forth in General
Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form
with reduced disclosure format.
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KEY COMPONENTS, LLC
Form 10-Q Index
March 31, 2003
Page
Number
------
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..................................... 10
Item 3.-- Quantitative and Qualitative Disclosures about Market Risk.... 18
Item 4.-- Controls and Procedures....................................... 19
PART II
Item 6.-- Exhibits and Reports on Form 8-K.............................. 19
Signatures .............................................................. 20
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
- ----------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------
Assets: (unaudited)
Current
Cash $ 1,520 $ 2,879
Accounts receivable, net of allowance for doubtful
accounts of $1,694 and $1,459 in 2003 and 2002,
respectively 28,868 21,447
Inventories 31,183 29,623
Prepaid expenses and other current assets 2,560 2,800
Prepaid income taxes 1,662 3,400
Deferred income taxes 5,296 5,295
- ----------------------------------------------------------------------------------------------------
Total current assets 71,089 65,444
Property, plant and equipment, net 24,826 23,883
Goodwill, net 98,025 95,554
Deferred financing costs, net 4,124 4,364
Prepaid pension cost 2,911 3,021
Other assets 930 448
- ----------------------------------------------------------------------------------------------------
Total assets $ 201,905 $ 192,714
====================================================================================================
Liabilities and Member's Equity:
Current
Current portion of long-term debt $ 11,094 $ 7,225
Accounts payable 12,431 9,940
Accrued compensation 4,085 4,098
Accrued expenses 7,418 7,087
Accrued interest 2,855 713
- ----------------------------------------------------------------------------------------------------
Total current liabilities 37,883 29,063
Long term debt 134,742 136,619
Accrued lease costs 453 469
Deferred income taxes 579 579
Other long-term liabilities 900 940
- ----------------------------------------------------------------------------------------------------
Total liabilities 174,557 167,670
Commitments and contingencies - -
Member's equity 27,348 25,044
- ----------------------------------------------------------------------------------------------------
Total liabilities and member's equity $ 201,905 $ 192,714
====================================================================================================
The accompanying notes are an integral part of these financial statements.
2
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands)
Three months ended March 31, 2003 2002
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Net sales $48,837 $46,619
Cost of goods sold 31,287 29,715
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Gross profit 17,550 16,904
Selling, general and administrative expenses 9,973 9,582
Other 217 110
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Income from operations 7,360 7,212
Interest expense (3,143) (3,410)
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Income before provision for income taxes and cumulative 4,217 3,802
effect of change in accounting principle
Provision for income taxes 1,813 1,740
----------------------------------------------------------------------------------------
Income before cumulative effect in change in accounting 2,404 2,062
principle
Cumulative effect in change of accounting principle, net of
taxes of $3,013 - (8,157)
----------------------------------------------------------------------------------------
Net income (loss) $ 2,404 $(6,095)
=========================================================================================
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 Three Months Ended March 31, 2003 2002
- -----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $2,404 $ (6,095)
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle - 8,157
Depreciation and amortization 1,162 1,267
Amortization of deferred finance costs 240 235
Deferred taxes (1) 58
Provision for bad debts 133 466
Changes in assets and liabilities:
Accounts receivable (6,640) (1,624)
Inventories (797) 269
Prepaid expenses and other assets 2,108 1,483
Accounts payable 2,226 3,658
Accrued expenses 1,428 1,786
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 2,263 9,660
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisition (4,421) -
Proceeds from assets held for sale - 365
Capital expenditures (1,093) (681)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (5,514) (316)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of long-term debt and capital lease obligations (8) (12,018)
Proceeds from long term debt borrowings 2,000 -
Member withdrawals (100) -
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,892 (12,018)
- -----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,359) (2,674)
Cash and cash equivalents, beginning of period 2,879 5,080
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,520 $ 2,406
=========================================================================================
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 is in the business of the manufacture and sale of custom engineered
essential componentry in a diverse array of end use markets. Through its two
business segments, mechanical engineered components and electrical components,
the Company targets its products to original equipment manufacturers. The
Company's electrical components business product offerings include power
conversion products, specialty electrical components and high-voltage utility
switches. The Company's mechanical engineered components business product
offerings consist primarily of flexible shaft and remote valve control
components, turbocharger components and medium security lock products and
accessories.
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, 2002 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
Arens Controls, LLC
On March 3, 2003, KCLLC and B.W Elliott Manufacturing Company, LLC acquired the
mechanical components business of Arens Controls, LLC for a purchase price of
approximately $4.4 million and assumed liabilities of approximately $1.2
million. The Company recorded the estimated excess purchase price over net
assets acquired of approximately $2.5 million as goodwill. The value ascribed to
the estimated excess purchase price over net assets acquired is preliminary and
is subject to change. Other intangibles acquired in the transaction were not
material. The product line, which manufactures mechanical push-pull control
solutions, will be integrated into the Company's Binghamton, New York
manufacturing facility. The Company borrowed $2.0 million on its revolving
credit facility to partially finance this acquisition. The product line acquired
has annual revenues of approximately $7.5 million (unaudited).
Acme Electric Corporation
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 decided to sell the electronics division of
Acme ("Electronics"). Electronics is a contract electronics manufacturer for
data storage, telecommunications and medical electronic applications.
5
On February 15, 2002 the Company sold the Electronics division for a purchase
price of $100,000 in cash and a 7% per annum, $300,000 note that was due on
February 15, 2006. The agreement also provided for additional consideration to
be paid to the Company if certain future operating targets were achieved.
However, in March 2003, Electronics was sold to a new buyer and the Company
collected the entire $300,000 note. The Company does not anticipate receiving
any additional consideration.
3. Inventories
Inventories consist of the following:
(In thousands) March 31, December 31,
2003 2002
- -----------------------------------------------------------
(unaudited)
Raw materials $17,042 $14,342
Work-in-process 7,887 7,734
Finished goods 6,254 7,547
- -----------------------------------------------------------
Total inventory $31,183 $29,623
===========================================================
4. Provision for Income Taxes
For the three months ended March 31, 2003 and 2002, 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.
5. Member withdrawals
During the three months ended March 31, 2003, KCLLC distributed approximately
$100,000 to its member, KCI, in order for KCI to repurchase common stock from a
shareholder.
6. Warranty Costs
The Company records a liability for its expected claims under existing product
warranty policies. The accrual is based on the Company's historical warranty
experience. For the three months ended March 31, 2003 and 2002, the Company's
warranty accrual changed as follows:
Three Months ended March 31, 2003 2002
- --------------------------------------------------------------------------
(unaudited)
Balance, beginning of period $ 985 $821
Additions 18 46
Charges - -
- --------------------------------------------------------------------------
Balance, end of period $1,003 $867
==========================================================================
6
7. Operating Segments
The Company conducts its operations through its two businesses, the manufacture
and sale of electrical components and mechanical engineered components. The
electrical components business ("EC product offerings include power conversion
products, specialty electrical components and high-voltage utility switches. The
mechanical engineered components business ("MEC") manufactures flexible shaft
products, turbo charger actuators and related componentry and specialty locks
and related accessories.
The Company evaluates its operating segments' performance and allocates
resources among them based on profit or loss from operations before interest,
taxes, depreciation and amortization ("EBITDA"). EBITDA is not based on
accounting principles generally accepted in the United States of America, but is
the performance measure used by Company management to analyze and monitor the
Company and is commonly used by investors and financial analysts to compare and
analyze companies. Corporate overhead expenses are not allocated to the
segments. In computation of all the financial maintenance covenants under the
Company's credit facility, the Company is allowed to adjust EBITDA for certain
charges as defined in the agreement. Segment information is as follows:
- --------------------------------------------------------------------------------
(In thousands) Mechanical
Electrical Engineered
Components Components Total
- --------------------------------------------------------------------------------
Three months ended March 31, 2003:
Net sales to external customers $ 29,446 $ 19,391 $ 48,837
Intersegment net sales - 14 14
Segment profit - EBITDA 5,162 4,030 9,192
Segment assets 113,881 84,985 198,866
Goodwill 59,192 38,833 98,025
Depreciation and amortization 626 527 1,153
================================================================================
Three months ended March 31, 2002:
Net sales to external customers $ 30,232 $ 16,387 $ 46,619
Intersegment net sales - 32 32
Segment profit - EBITDA 5,047 4,401 9,448
Segment assets 115,558 88,857 204,415
Goodwill 59,192 48,705 107,897
Depreciation and amortization 652 612 1,264
================================================================================
7
Reconciliation of Selected Segment Information to the Company's Consolidated
Totals:
(In thousands)
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------
Profit or loss:
Total profit from reportable segments- EBITDA $ 9,192 $ 9,448
Reconciling items:
Corporate expenses (670) (969)
Depreciation and amortization (1,162) (1,267)
Interest expense (3,143) (3,410)
- ------------------------------------------------------------------------------------
Income before provision for income taxes and cumulative
effect of change in accounting principle $ 4,217 $ 3,802
====================================================================================
March 31, 2003 2002
- ------------------------------------------------------------------------------------
Assets:
Total assets for reportable segments $198,866 $204,415
Corporate assets 3,039 5,578
- ------------------------------------------------------------------------------------
Total consolidated assets $201,905 $209,993
====================================================================================
- ------------------------------------------------------------------------------------
(In thousands)
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------
Geographical Sales Information:
United States $ 42,732 $41,116
China 1,164 1,165
England 1,291 942
Canada 1,118 917
Taiwan 699 228
Mexico 152 428
Other 1,681 1,823
- ------------------------------------------------------------------------------------
Total $ 48,837 $ 46,619
====================================================================================
8. Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("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.
8
Upon the adoption of SFAS 142, the Company stopped recording goodwill
amortization effective January 1, 2002. In June 2002, the Company completed the
assessment of its reporting units and its initial assessment of impairment upon
adoption. 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 a valuation methodology that triangulates the
discounted cash flows, market multiples and transactional multiples of the
reporting units. In accordance with SFAS 142, the Company, during the second
quarter 2002, estimated the amount of the impairment and recorded a cumulative
effect of change in 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 market conditions of that product line. The Company, as prescribed by SFAS
142, finalized its impairment testing by comparing the implied fair value of the
reporting unit's goodwill to its carrying value during the third quarter to
determine the amount of the final impairment upon adoption of SFAS 142. As a
result, the Company reduced the tax impact of the charge by approximately
$353,000 to reflect the proper deferred tax basis of the adjusted goodwill.
9. Stock Options
On January 1, 2003, the Company adopted the disclosure provisions of SFAS 148,
"Accounting for Stock-Based Compensation - transition and disclosure," which
amended SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation, effective as of the beginning of the fiscal year. The Company
continues to apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") in accounting for
stock-based compensation. In accordance with APB No. 25, compensation costs for
stock options is recognized in income based on the excess, if any, of the quoted
market price over the exercise price of the stock on the date of grant. The
exercise price for all stock option grants equals the fair market value on the
date of grant, therefore no compensation expense is recorded.
The following table illustrates the effect on net income (loss) as if the
Company had applied the fair value recognition provisions for the three months
ended March 31, 2003 and 2002:
Three Months Ended March 31, 2003 2002
- ---------------------------------------------------------------
(unaudited)
(in thousands)
Net income (loss):
As reported $2,404 $(6,095)
Pro forma $2,301 $(6,208)
===============================================================
10. New Accounting Pronouncements
In July 2002, 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 adoption of the SFAS
did not have a material effect on the Company's consolidated results of
operations and financial position.
In November 2002, the FASB released Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees it has issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee for guarantees issued or modified after December 31, 2002, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
Company adoption of the interpretation and valuation of future guarantees had no
material impact on the Company's consolidated results of operations and
financial position. See Note 6 regarding disclosures about the Company's
warranty costs.
9
In December 2002, the FASB issued SFAS No. 148, which requires disclosure in
both annual and interim financial statements about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The amendment relating to the additional disclosure
requirements in the interim financial statements are effective for interim
periods beginning after December 15, 2002. SFAS 148 is not expected to have a
material impact on the operations or cash flows of the Company. However,
additional disclosures have been incorporated into the Company's interim
consolidated financial statements beginning with this quarter ended March 31,
2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement is effective for contracts entered into or modified
after June 30, 2003, except as defined in the SFAS. The adoption of this SFAS is
not expected to have a material impact on the consolidated operations or
financial condition of the Company.
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 business
("MEC"). 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 $187.9 million for fiscal year 2002.
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.
10
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 results 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.
Three months ended March 31, 2003 2002
- -------------------------------------------------------------------------------------------------------------
(In thousands) % of % of
Amount Net Sales Amount Net Sales
- ---------------------------------------------------------------------------------------------------------------
Net Sales $48,837 100.0% $46,619 100.0%
Cost of Goods Sold 31,287 64.1 29,715 63.7
- ---------------------------------------------------------------------------------------------------------------
Gross Profit 17,550 35.9 16,904 36.3
Selling, general and administrative expenses 9,973 20.4 9,582 20.6
Other 217 0.4 110 0.2
- ---------------------------------------------------------------------------------------------------------------
Income from operations 7,360 15.1 7,212 15.5
Interest expense (3,143) (6.4) (3,410) (7.3)
- ---------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and cumulative
effect of change in accounting principle 4,217 8.6 3,802 8.2
Provision for income taxes 1,813 3.7 1,740 3.7
- ---------------------------------------------------------------------------------------------------------------
Income before cumulative effect in change in accounting
principle 2,404 4.9 $2,062 4.4
Cumulative effect in change of accounting principle, net of
taxes of $3,013 - - (8,157) (17.5)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $2,404 4.9% $(6,095) (13.1)%
===============================================================================================================
11
A summary of the Company's segments is as follows:
Electrical Components Business
Three Months Ended March 31, 2003 2002
- ---------------------------------------------------------------------------------------------------
(In thousands) % of % of
Amount Net Sales Amount Net Sales
- ---------------------------------------------------------------------------------------------------
Net Sales $29,446 100.0% $30,232 100.0%
Cost of Sales 18,211 61.8 19,272 63.7
- ---------------------------------------------------------------------------------------------------
Gross Profit 11,235 38.2 10,960 36.3
Selling, general and administrative expenses 6,699 22.8 6,565 21.7
- ---------------------------------------------------------------------------------------------------
Income from operations $4,536 15.4% $ 4,395 14.5%
===================================================================================================
Mechanical Engineered Components
Three Months Ended March 31, 2003 2002
- --------------------------------------------------------------------------------------------------
(In thousands) % of % of
Amount Net Sales Amount Net Sales
- --------------------------------------------------------------------------------------------------
Net Sales $19,391 100.0% $16,387 100.0%
Cost of Sales 13,076 67.4 10,443 63.7
- --------------------------------------------------------------------------------------------------
Gross Profit 6,315 32.6 5,944 36.3
Selling, general and administrative expenses 2,595 13.4 2,045 12.5
Other 217 1.1 110 0.7
- --------------------------------------------------------------------------------------------------
Income from operations $3,503 18.1% $ 3,789 23.1%
==================================================================================================
Three months ended March 31, 2003 compared to the three months ended March 31,
2002
Net Sales: Net sales for the three months ended March 31, 2003 ("Quarter 2003")
increased by approximately $2.2 million, or 4.8%, from net sales for the three
months ended March 31, 2002 ("Quarter 2002"). This increase was the sum of the
approximately $786,000, or 2.6%, decline in the net sales of the EC business and
the approximately $3.0 million, or 18.3%, increase in net sales of the MEC
business.
The approximately $786,000 decline in net sales of the EC business for the
Quarter 2003 as compared to the Quarter 2002 was primarily driven by the
approximately $932,000, or 21.5%, decline in sales of the utility product line.
During the second half of 2002, the Company's utility product line began to
experience a decline in orders as utilities reduced spending on capital projects
resulting from the disruption caused by the negative press the utility
marketplace received during 2002. During the Quarter 2003, the utility product
line continued to experience lower demand levels as compared to the Quarter
2002.
The approximately $3.0 million increase in net sales of the MEC business for the
Quarter 2003 as compared to the Quarter 2002 was driven by increased sales of
the flexible shaft and the turbocharger product lines. Net sales of the flexible
shaft product line increased by approximately $1.2 million, or 24.2%, for the
Quarter 2003 as compared to the Quarter 2002. This increase was driven by new
product introductions as well as the acquisition of the mechanical components
business of Arens Controls, LLC ("Arens Controls"). The Company completed this
acquisition on March 3, 2003 (See Liquidity and Capital Resources), which
increased net sales of the flexible shaft product line by approximately $562,000
for the Quarter 2003 as compared to the Quarter 2002. Net sales of the
turbocharger components product line increased by approximately $2.5 million, or
44.7%, for the Quarter 2003 as compared to the Quarter 2002. This increase was
driven primarily by a new product introduction. The net sales of the lock
product line declined by approximately $749,000, or 13.0%.
12
Gross Profit: Gross profit increased by approximately $646,000, or 3.8%, for
Quarter 2003 as compared to Quarter 2002, resulting from the sum of the
approximately $275,000, or 2.5%, increase in the gross profit of the EC business
and the approximately $371,000, or 6.2%, increase in gross profit of the MEC
business for the Quarter 2003.
The approximately $275,000, or 2.5% increase in gross profit of the EC business
for the Quarter 2003 as compared to the Quarter 2002 resulted from changes in
the product mix sold by the specialty electrical components product line for the
Quarter 2003 as compared to the Quarter 2002. The specialty electrical
components product line contributed an increase of approximately $178,000 in
gross profit for the Quarter 2003 as compared to the Quarter 2002, while sales
for the Quarter 2003 declined by approximately $31,000 as compared to the
Quarter 2002. In addition, continued productivity and negotiated material cost
savings related to the power conversion product line also increased gross profit
for the EC business for the Quarter 2003 as compared to the Quarter 2002.
The approximately $371,000, or 6.2%, increase in gross profit of the MEC
business for Quarter 2003 as compared to Quarter 2002 was driven by volume
increases of the flexible shaft and turbocharger components product lines offset
by the volume decline of the lock product line. In addition, the gross margin of
the flexible shaft product line was negatively impacted by a change in the
product mix sold as compared to the Quarter 2002. Further, the acquisition of
the mechanical components product line of Arens Controls negatively impacted the
gross margin of the flexible shaft product line as the Company is currently
working under an interim operating agreement with the seller until that product
line has been integrated into the Company's Binghamton, New York facility, which
is not anticipated to occur until September 2003 (See Liquidity and Capital
Resources). While sales of the flexible shaft product line increased by
approximately $1.2 million for the Quarter 2003 as compared to the Quarter 2002,
gross profit only increased by approximately $109,000. The increase in gross
profit for the Quarter 2003 as compared to the Quarter 2002 resulting from the
turbocharger components product line was approximately $796,000, or 40.5%. The
lock product line experienced a decline in gross profit of approximately
$658,000, or 36.3%, resulting from lower revenues, as well as a temporary margin
decline as a result of the relocation of production to Mexico.
The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business increased by approximately 1.9% for the Quarter 2003 as compared to the
Quarter 2002. For the MEC business, the GP percentage declined by approximately
3.7% during the Quarter 2003 as compared to the Quarter 2002. The change in GP
percentage for the EC business is the result of a change in product mix and the
productivity gains as described above. The change in GP percentage for the MEC
business is primarily related to the impact of the acquisition of the mechanical
components product line of Arens Controls, as well as the volume and margin
decline of the lock product line, as described above.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses increased approximately $391,000, or 4.1%, for
the Quarter 2003 as compared to the Quarter 2002. As a percentage of net sales,
SG&A declined to 20.4% for the Quarter 2003 from 20.6% of net sales for the
Quarter 2002. SG&A of the EC business increased by approximately $133,000, or
2.0%, for the Quarter 2003 as compared to the Quarter 2002 and as a percentage
of net sales, increased approximately 1.1%. SG&A of the MEC business increased
by approximately $550,000, or 26.9%, for the Quarter 2003 as compared to the
Quarter 2002 and increased as a percentage of net sales by approximately 0.9%.
The increase in SG&A expenses for the Quarter 2003 as compared to the Quarter
2002 is primarily related to the increase in SG&A of the MEC business. The
increase in SG&A of the MEC business is primarily the result of the Company
operating under an interim operating agreement relating to the acquisition of
the mechanical components product line of Arens Controls, which was completed on
March 3, 2003 (see Liquidity and Capital Resources). The Company will be
operating under the interim operating agreement with the seller until that
product line has been integrated into the Company's Binghamton, New York
facility, which is not expected to occur until September 2003. In addition,
higher incentive compensation accruals drove the increase in SG&A of the
turbocharger product line, as a result of the growth in the operating
performance of that product line during the Quarter 2003 as compared to the
Quarter 2002. The lock product line had an increase in SG&A resulting from the
increased costs of operating its Mexico production facility as compared to the
Quarter 2002. Commission and freight expense related to a change in product
sales mix drove the increase in SG&A for the EC business for the Quarter 2003 as
compared to the Quarter 2002. Higher insurance costs for the Quarter 2003 as
compared to the Quarter 2002 also impacted the SG&A of the businesses.
13
Other Expenses: Other expenses increased by approximately $107,000 for the
Quarter 2003 as compared to the Quarter 2002. The increase is related to the
expenses incurred in moving manufacturing to the new lock production facility in
Mexico.
Income from Operations: The increase in income from operations of approximately
$148,000, or 2.1%, for the Quarter 2003 as compared to the Quarter 2002,
resulted from the increase in gross profit of approximately $646,000, offset by
the increases in SG&A expenses of approximately $391,000 and other expenses of
approximately $107,000.
Interest Expense: Interest expense decreased by approximately $267,000, or 7.8%,
during the Quarter 2003 as compared to the Quarter 2002. This decrease is
primarily due to lower levels of outstanding borrowings during the Quarter 2003
as compared to the Quarter 2002.
Provision for Income Taxes: The provision for income taxes increased by
approximately $73,000, or 4.2%, for the Quarter 2003 as compared to the Quarter
2002. The Company's effective tax rate on income before provision for income
taxes and cumulative effect of change in accounting principle for the Quarter
2003 was approximately 43.0%. The effective rate on income before provision for
income taxes and cumulative effect of change in accounting principle for the
Quarter 2002 was approximately 45.8%. The decline in the effective rate from the
Quarter 2002 to the Quarter 2003 was primarily driven by the Company's foreign
tax credits.
Income before cumulative effect in change in accounting principle: Income before
cumulative effect in change in accounting principle increased by approximately
$342,000, or 16.6%, during the Quarter 2003 as compared to the Quarter 2002. The
increase resulted from the sum of the increase in income from operations of
approximately $148,000 and the decrease in interest expense of approximately
$267,000 offset by the increase in provision for income taxes of approximately $
73,000, due to the factors discussed above.
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 were effective for fiscal years beginning after December
15, 2001. In June 2002, the Company completed the assessment of its reporting
units and 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
and market and transactional multiples of the reporting units. 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. The Company finalized its
impairment testing, as prescribed by SFAS 142, during the third quarter of 2002
to determine the amount of final impairment. As a result, the Company reduced
the tax impact of the charge by approximately $353,000 to reflect the proper
deferred tax basis of the adjusted goodwill.
Net Income (loss): Net income (loss) increased by approximately $8.5 million for
the Quarter 2003, from a net loss of approximately $6.1 million for the Quarter
2002 to a net income of approximately $2.4 million for the Quarter 2003. Income
before cumulative effect in change in accounting principle increased by
approximately $342,000, as described above. The remainder of the approximately
$8.5 million increase in net income for the Quarter 2003 as compared to the
Quarter 2002 resulted from the Company's cumulative effect in change of
accounting principle recorded during 2002.
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, which as a result of the amendment
discussed below was reduced to $25.0 million through 2003, 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 was $2.0 million outstanding under the revolving credit facility
at March 31, 2003. 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.
14
The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At March 31, 2003, the Company had one letter of credit outstanding for
approximately $443,000. The letter of credit primarily relates to outstanding
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 September 30, 2002 through
March 30, 2004 from the original covenant ratios stipulated in the credit
agreement. The Company anticipated that certain of the original covenants, which
became more stringent over the term of the agreement, would not be met due to
the general decline in the economy. In addition, the Amendment revised the
Company's applicable margin on borrowings, the maximum allowable capital
expenditures through March 29, 2004 and reduced the amount allowed for permitted
acquisitions (as defined in the credit agreement) from $15 million to $7.5
million through March 30, 2004. Concurrent with the Amendment, the Company
voluntarily reduced the availability under its revolving credit facility by $15
million from $40 million to $25 million until March 30, 2004. At March 31, 2003,
the Company was in compliance with the covenants of the credit agreement set
forth in the Amendment.
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. At March 31, 2003, the Company had prepaid its next
principal payment. Principal payments required for the next 12 months will be
approximately $11.1 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. The Company's outstanding commitments for capital
expenditures at March 31, 2003 were not material. The Company anticipates its
capital expenditures for the year ended December 31, 2003 to be approximately
$3.5 million. The expenditures are primarily needed to maintain its facilities,
expand its production capacity for new product introduction as well as fund the
Company's ongoing plan to expand foreign operations 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 $107.0 million for its preferred stock plus any
dividends payable in arrears (at March 31, 2003 there were approximately $3.1
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 March 31,
2003 approximately 1.3 million KCI common shares plus potentially 192,000 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.
Cash flows provided by operating activities were approximately $2.3 million and
$9.7 million for the Quarter 2003 and the Quarter 2002, respectively. The net
decrease of approximately $7.4 million for the Quarter 2003 resulted primarily
from the increase in use of cash by the operating assets of the business. For
the Quarter 2003, the Company's working capital accounts (accounts receivable,
inventory and accounts payable) used net cash of approximately $5.2 million as
compared to the Quarter 2002, when the working capital accounts provided net
cash of approximately $2.3 million. The change in the cash provided by the
working capital accounts is a result of the growth of certain of the Company's
product lines. In addition, as a result of relocating production to Mexico,
inventory levels of the Company's lock product line have increased.
15
Cash flows used in investing activities were approximately $5.5 million and
$316,000 for the Quarter 2003 and Quarter 2002, respectively. Capital
expenditures for the Quarter 2003 and the Quarter 2002 were approximately $1.1
million and $681,000, respectively. The increase in capital expenditures from
the Quarter 2003 to the Quarter 2002 was primarily due tooling and machinery to
service demand related to new product introduction and expand foreign
manufacturing operations. Proceeds from the assets held for sale was
approximately $365,000 for the Quarter 2002, which was related to the sold
electronics division of Acme Electric Corporation.
On March 3, 2003, KCLLC and B.W Elliott Manufacturing Company, LLC acquired the
mechanical components business of Arens Controls, LLC for a purchase price of
approximately $4.4 million and assumed liabilities of approximately $1.2
million. The Company recorded the estimated excess purchase price over net
assets acquired of approximately $2.5 million as goodwill. The value ascribed to
the estimated excess purchase price over net assets acquired is preliminary and
is subject to change. Other intangibles acquired in the transaction were not
material. The product line, which manufactures push pull cable and related
components, will be integrated into the Company's Binghamton, New York
manufacturing facility. The Company borrowed $2.0 million on its revolving
credit facility to partially finance this acquisition. The product line acquired
has annual revenues of approximately $7.5 million.
Cash flows from financing activities provided net cash of approximately $1.9
million during the Quarter 2003 and used net cash of approximately $12.0 million
during the Quarter 2002. The net cash provided by financing activities was
driven primarily by the borrowing of $2.0 million under the Company's revolver
to partially finance the acquisition of the mechanical components product line
of Arens Controls. During the Quarter 2002, the Company repaid approximately
$12.0 million of its outstanding term debt. During the Quarter 2003, KCLLC
distributed approximately $100,000 to its member, KCI, in order for KCI to
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.
Critical Accounting Policies
Financial Reporting Release No. 60, 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
elsewhere in this 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, 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 March 31, 2003, the Company has
recorded approximately $98.0 million in goodwill and other intangible
assets related to acquisitions made in 2003 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 determined using a valuation methodology that triangulates
the discounted cash flows, market multiples and transactional multiples of
the reporting units. 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.
Pension Plans: The Company's assets and liabilities recorded in connection
with the Company's pension plans using estimates that include but are not
limited to expected return on assets and life expectancy of participants.
In preparation of the consolidated financial statements the Company
reviews these estimates by reviewing current market conditions and
internal information at its disposal.
16
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 the following:
(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 records as necessary, valuation allowances against
its deferred tax assets; if the Company were 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 Company evaluates the carrying amounts of its long-lived
assets for recoverability; 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 Company records the effects of its existing pension plans
in its financial statements 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; and,
(vi) The Company's financial covenants, as defined in its credit
facilities, were based, in part, by estimates of future
results of the Company's operations; 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 March 31, 2003, was approximately $29.6
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.
17
New Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Starndard ("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 adoption of
the SFAS did not have a material effect on the Company's consolidated results of
operations and financial position.
In November 2002, the FASB released Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees it has issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee for guarantees issued or modified after December 31, 2002, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
Company adoption of the interpretation and valuation of future guarantees had no
material impact on the Company's consolidated results of operations and
financial position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS 148 amends SFAS No.123 "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation prescribed by SFAS 123. SFAS 148 also amends the disclosure
provisions of SFAS 123 to require disclosure in both annual and interim
financial statements about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
The amendment relating to the additional disclosure requirements in the interim
financial statements are effective for interim periods beginning after December
15, 2002. The adoption of SFAS 148 did not have a material impact on the
operations or cash flows of the Company. However, additional disclosures have
been incorporated into the Company's interim consolidated financial statements
beginning with this quarter ended March 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement is effective for contracts entered into or modified
after June 30, 2003, except as defined in the SFAS. The adoption of this SFAS is
not expected to have a material impact on the consolidated operations or
financial condition of the Company.
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.
18
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 $63.0 million outstanding under its term loan
and with any amounts outstanding under its $25 million 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 4.38% until May 27, 2003, when the
underlying LIBOR contract is up for renewal. At March 31, 2003, the Company had
$2.0 million of borrowings under its line of credit and was one payment ahead of
schedule on its term debt. The borrowings under the revolving credit facility
were repaid in April 2003. A 1% change in the interest rate for the Company's
credit facilities in place at December 31, 2002 would have resulted in a change
in the Company's annual interest expense of approximately $736,000. 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.
As the Company has operations outside the United States of America, it is
subject to foreign currency exchange risk. To date those risks have not had a
material impact on the Company's results of operations or financial position.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, under the supervision and with
the participation of management, including KCLLC's Chief Executive Officer,
President and Chief Financial Officer, KCLLC evaluated the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to
Exchange Act Rule 15d-14. Based upon that evaluation, KCLLC's Chief Executive
Officer, President and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in timely alerting the Chief
Executive Officer, President and Chief Financial Officer to material information
relating to KCLLC (including its consolidated subsidiaries and its parent
company KCI) required to be included in its periodic SEC filings. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
Within the 90 days prior to the date of this report, under the supervision and
with the participation of management, including Finance Corp.'s Chief Executive
Officer, President and Finance Corp.'s Chief Financial Officer, Finance Corp.
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 15d-14. Based upon that
evaluation, Finance Corp.'s Chief Executive Officer, President and Chief
Financial Officer have concluded that the Finance Corp.'s disclosure controls
and procedures are effective in timely alerting the Chief Executive Officer,
President and Chief Financial Officer to material information relating to
Finance Corp. required to be included in its periodic SEC filings. There have
been no significant changes in Finance Corp.'s internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the first
quarter of the year ending December 31, 2003:
Date of Report Date Report Filed with SEC Items Reported
------------------ ------------------------------ -------------------------------------
March 6, 2003 March 6, 2003 Item 9. Regulation FD Disclosure
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS, LLC
---------------------------------
Date: May 14, 2003 By: /s/Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
Date: May 14, 2003 By: /s/ Robert B. Kay
--------------------
Robert B. Kay
President
Date: May 14, 2003 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: May 14, 2003 By: /s/ Clay B. Lifflander
-----------------------
Clay B. Lifflander
Chief Executive Officer
Date: May 14, 2003 By: /s/ Robert B. Kay
--------------------
Robert B. Kay
President
Date: May 14, 2003 By: /s/ Keith A. McGowan
---------------------
Keith A. McGowan
Chief Financial Officer
20
Certifications
I, Clay B. Lifflander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Clay B. Lifflander
- -----------------------
Clay B. Lifflander
Chief Executive Officer
21
I, Robert B. Kay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Robert B. Kay
- -----------------
Robert B. Kay
President
22
I, Keith A. McGowan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Keith A. McGowan
- -----------------------
Keith A. McGowan
Chief Financial Officer
23
I, Clay B. Lifflander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components Finance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Clay B. Lifflander
- -----------------------
Clay B. Lifflander
Chief Executive Officer
24
I, Robert B. Kay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components Finance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Robert B. Kay
- -----------------
Robert B. Kay
President
25
I, Keith A. McGowan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components Finance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Keith A. McGowan
- -----------------------
Keith A. McGowan
Chief Financial Officer