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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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
----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3425424
--------------------------------- ---------------------------------
(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
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COMMISSION FILE NUMBER 333-58675-01
KEY COMPONENTS FINANCE CORP. *
------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1805946
--------------------------------- ---------------------------------
(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
--------------
(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
As of October 31, 2004, 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.
================================================================================
KEY COMPONENTS, LLC
FORM 10-Q INDEX
SEPTEMBER 30, 2004
PAGE
NUMBER
------
PART I
Item 1. -- Consolidated Financial Statements:
Balance Sheets.................................................. 2
Statements of Income............................................ 3
Statements of Member's Equity................................... 4
Statements of Cash Flows........................................ 5
Statements of Comprehensive Income (Loss)....................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
Item 3. -- Quantitative and Qualitative Disclosures about Market Risk ..... 26
Item 4. -- Controls and Procedures......................................... 26
PART II
Item 6. -- Exhibits........................................................ 26
Signatures ................................................................ 28
1
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------------------------------
ASSETS:
Current
Cash $1,091 $ 3,872
Accounts receivable, net of allowance for doubtful
accounts of $1,843 and $1,702 in 2004 and 2003, respectively 29,961 23,989
Inventories 35,760 24,063
Prepaid expenses and other current assets 2,373 1,862
Deferred income taxes 4,933 5,308
Assets held for sale 15,633 20,464
-------------------------------------------------------------------------------------------------------------
Total current assets 89,751 79,558
Property, plant and equipment, net 18,944 18,149
Goodwill, net 89,085 80,165
Deferred financing costs, net 2,652 3,370
Prepaid pension cost 2,436 2,684
Other assets 2,386 779
- ---------------------------------------------------------------------------------------------------------------
Total assets $205,254 $184,705
===============================================================================================================
LIABILITIES AND MEMBER'S EQUITY:
Current
Current portion of long-term debt $17,724 $ 12,196
Accounts payable 15,186 11,010
Accrued compensation 5,210 4,170
Accrued expenses 10,647 6,541
Accrued income taxes 9,017 1,458
Accrued interest 3,301 1,102
Liabilities associated with assets held for sale 1,049 1,922
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 62,134 38,399
Long-term debt 109,271 120,561
Deferred income taxes 2,469 2,626
Other long-term liabilities 2,484 1,739
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 176,358 163,325
Commitments and contingencies
Member's equity 28,896 21,380
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and member's equity $205,254 $184,705
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
2
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------
NET SALES $163,200 $134,190 $57,372 $45,370
COST OF GOODS SOLD 101,511 83,008 36,339 28,251
-----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 61,689 51,182 21,033 17,119
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 31,461 28,667 10,063 9,906
OTHER
-----------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 30,228 22,515 10,970 7,213
INTEREST EXPENSE (9,041) (9,349) (3,037) (3,071)
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES AND DISCONTINUED 21,187 13,166
OPERATIONS
7,933 4,142
PROVISION FOR INCOME TAXES 8,419 5,511 3,140 1,624
----------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 12,768 7,655 4,793 2,518
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
BENEFIT OF $3,281, $202, $144 AND $292, RESPECTIVELY (5,448) (315) (357) (456)
-----------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,320 $ 7,340 $4,436 $2,062
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
3
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY
(IN THOUSANDS)
FOR THE NINE MONTHS For the Year
ENDED SEPTEMBER 30, 2004 Ended December 31, 2003
- ---------------------------------------------------------------------------------------------------------
(UNAUDITED)
MEMBER'S EQUITY, BEGINNING OF PERIOD $21,380 $25,044
NET INCOME (LOSS) 7,320 (3,430)
MEMBER CONTRIBUTIONS 196 -
MEMBER WITHDRAWAL - (100)
MINIMUM PENSION LIABILITY, NET OF TAX - (134)
- ---------------------------------------------------------------------------------------------------------
MEMBER'S EQUITY, END OF PERIOD $28,896 $21,380
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
4
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 2003
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,320 7,340
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (income) of discontinued operations 5,448 315
Depreciation and amortization 2,838 2,708
Amortization of deferred finance costs 718 719
Deferred taxes 275 (2)
Provision for bad debts 585 255
Changes in assets and liabilities:
Accounts receivable (4,669) (4,292)
Inventories (9,579) 809
Prepaid expenses and other assets (263) 3,614
Accounts payable 3,140 281
Accrued expenses 12,641 4,020
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY CONTINUING OPERATIONS 18,454 15,767
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (1,377) 851
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,077 16,618
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition (11,950) (4,548)
Capital expenditures (2,229) (2,061)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN CONTINUING OPERATIONS (14,179) (6,609)
NET CASH USED IN DISCONTINUED OPERATIONS (113) (534)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,292) (7,143)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt and capital lease obligations (28,462) (9,208)
Proceeds from long-term debt borrowings 22,700 2,000
Member contributions 196 -
Member withdrawal - (100)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (5,566) (7,308)
- -----------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,781) 2,167
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,872 2,879
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,091 $ 5,046
===========================================================================================================
5
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------------
(UNAUDITED)
NET INCOME (LOSS) $ 7,320 $ (3,430)
MINIMUM PENSION LIABILITY, NET OF TAX - (134)
-----------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 7,320 $ (3,564)
=====================================================================================================
6
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 and turbocharger components.
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, 2003 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
AMVECO INTERNATIONAL
On August 23, 2004, the Company acquired the common stock of Amveco
International, Inc. ("Amveco") for a purchase price of approximately $6.0
million, subject to adjustment, less assumed liabilities of approximately $2.1
million. In October 2004, the Company paid approximately $462,000 of additional
consideration related to the closing balance sheet. 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 were not material. The agreement calls for three contingent
payments, two of which up to $1.0 million in aggregate and the other based upon
a percentage of revenues exceeding a baseline specified in the purchase
agreement, based on the performance of the business for the six months ended
September 30, 2004 and for the year ending December 31, 2005. In addition, the
Company currently has approximately $1.6 million in escrow, which is included in
other assets, related to the Amveco transaction. The escrow was established to
cover potential liabilities related to the Mexico operation of Amveco. The
agreement calls for the escrow to be paid upon certain open issues related to
the legal and tax establishment of the Mexico operation are rectified. The
contingent payments and any payments out of escrow, if made, will be recorded as
goodwill at the time of payment. Amveco, which manufactures torroidal
transformers primarily for medical applications, will be integrated into the
Company's Monterrey, Mexico and Lumberton, North Carolina facilities. The
Company paid approximately $6.0 million in cash at closing and borrowed
approximately $5.0 million on its revolving credit facility to partially finance
this acquisition.
7
ADVANCED DEVICES, INC.
On May 7, 2004, the Company acquired the net assets of Advanced Devices, Inc.
("ADI") for a purchase price of approximately $8.0 million and assumed
liabilities of approximately $62,000. The Company recorded the estimated excess
purchase price over net assets acquired of approximately $6.2 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 were not material. The ADI product line, which manufactures electrical
wiring devices, will be integrated into the Company's Napa Valley, California
manufacturing facility. The Company paid approximately $6.1 million in cash at
closing and borrowed approximately $4.5 million on its revolving credit facility
to partially finance this acquisition. The purchase agreement required
approximately 75% of the total purchase price to be paid at closing, 10% to be
paid at the earlier of the date when the product line is fully integrated into
the Company's Napa, California manufacturing facility or March 7, 2005, and the
remainder over the next four years annually commencing on May 7, 2005.
ARENS CONTROLS, LLC
On March 3, 2003, the Company acquired the mechanical components business of
Arens Controls, LLC for a purchase price of approximately $4.5 million and
assumed liabilities of approximately $642,000. The Company recorded the
estimated excess purchase price over net assets acquired of approximately $2.0
million as goodwill. Other intangibles acquired in the transaction were not
material. The product line, which manufactures mechanical push-pull control
solutions, was fully integrated into the Company's Binghamton, New York
manufacturing facility in November 2003. The Company borrowed $2.0 million on
its revolving credit facility to partially finance this acquisition.
HUDSON LOCK, LLC
The Company's lock product line's net sales declined significantly during the
three years ended December 31, 2003. Net sales of the lock product line were
approximately $17.2 million, $21.8 million and $32.6 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Management attributes such
decline to the downturn in the economy plus the impact of foreign competition,
both of which have led to the product line becoming a commodity over that
period. As the net sales volume eroded, the shift in manufacturing to Mexico
negatively impacted customer service and quality. Further, the decline in sales
volume made it prohibitive to support the dual overhead infrastructures of its
domestic and Mexico manufacturing facilities. As a result, the Company closed
the lock manufacturing facility in Mexico in February 2004. In closing the
facility, the Company recorded a charge of approximately $664,000 for severance,
closing costs and to adjust inventory and leaseholds to the lower of cost or
fair value. In addition, the Company recorded a charge of approximately $605,000
to record the balance of the lease of the facility on a present value basis,
less any estimate for sublease income.
In March 2004, the Board of Directors of KCI and KCLLC concluded to sell Hudson
Lock, LLC ("Hudson"). In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company recorded the assets and liabilities of Hudson as
held for sale and reported the results as discontinued operations. Based on
initial indications of value from prospective buyers, at June 30, 2004, the
Company recorded a charge of approximately $4.3 million (net of tax benefit of
approximately $2.6 million) to reduce the carrying value of the assets held for
sale to its fair value.
On October 22, 2004, the Company consummated the sale of the net assets of
Hudson to Waveland Investments ("the Buyer"), an independent third party. As a
result of the sale, the domestic assets, which primarily consisted of accounts
receivable, inventory and fixed assets, and the domestic liabilities of Hudson
were sold to the Buyer for consideration of approximately $4.5 million,
consisting of a note receivable of approximately $1.2 million with the balance
of the proceeds being paid in cash. The note receivable matures on April 22,
2008 and requires payment of interest at 8.0% per annum through April 22, 2005,
10% per annum through October 2005 and 14% per annum subsequent to October 2005
until the maturity date. The Buyer has the ability to convert the outstanding
interest due to the Company to additional notes receivable, which would then be
due and payable on the same date as the original note. If Hudson meets certain
operating thresholds the Buyer is required to prepay portions of the outstanding
note receivable and the Buyer has the right to prepay the balance of the notes
receivable. The note receivable is subordinate to the Buyer's acquisition and
operating debt. The remaining assets and liabilities of Hudson's Mexico
operations, which are not material, were not sold in the transaction. The
Company used the cash proceeds received in the transaction to pay down
outstanding bank debt. As a result of the expected proceeds from the sale, at
September 30, 2004, the Company recorded an additional charge of approximately
$680,000 (net of tax benefit of approximately $351,000) to reduce the carrying
value of the assets held for sale to the lower of cost or fair value.
8
The following table summarizes the net assets of the lock product line
(unaudited):
-----------------------------------------------------------------------------------------
(In thousands) SEPTEMBER 30, DECEMBER 31,
2004 2003
-----------------------------------------------------------------------------------------
Accounts receivable $ 2,193 $ 2,011
Inventory 5,509 4,628
Other current assets and prepaid expenses 91 524
Plant and equipment, net - 6,018
Deferred tax assets 7,840 7,283
-----------------------------------------------------------------------------------------
ASSETS HELD FOR SALE 15,633 20,464
-----------------------------------------------------------------------------------------
Accounts payable 565 845
Accrued wages and related expenses 192 562
Accrued expenses 292 515
-----------------------------------------------------------------------------------------
LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE 1,049 1,922
-----------------------------------------------------------------------------------------
NET ASSETS OF LOCK PRODUCT LINE $14,584 $18,542
=========================================================================================
The summary of the operations of the lock business for the nine and three months
ended September 30, 2004 and 2003 are as follows:
(In thousands) NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------
NET SALES $11,834 $13,206 $4,040 $3,942
- -------------------------------------------------------------------------------------------------------
Loss from operations of the lock business, net of tax
credit of $3,281, $202, $144 and $292, respectively $(5,448) $ (315) $(357) $(456)
=======================================================================================================
3. INVENTORIES
Inventories consist of the following:
- ------------------------------------------------------------------------------------------------------
(In thousands) SEPTEMBER 30, DECEMBER 31,
2004 2003
- ------------------------------------------------------------------------------------------------------
(unaudited)
Raw materials $19,526 $12,805
Work-in-process 5,451 4,856
Finished goods 10,783 6,402
- ------------------------------------------------------------------------------------------------------
Total inventory $35,760 $24,063
======================================================================================================
9
4. PROVISION FOR INCOME TAXES
For the nine months ended September 30, 2004 and 2003, 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. Accrued income taxes increased during the Nine
Months 2004 since the Company had not made any estimated payments for
income taxes. The Company anticipates the sale of its lock product line to
generate a tax loss, which will offset a majority of the Company's current tax
liability. The sale of the lock product line was consummated in October 2004.
5. MEMBER CONTRIBUTIONS AND WITHDRAWALS
During the nine months ended September 30, 2004, KCLLC received contributions of
approximately $196,000 from KCI related to proceeds from stock options exercised
to purchase KCI common stock. During the nine months ended September 30, 2003,
KCLLC distributed approximately $100,000 to its member, KCI, to enable 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 nine months ended September 30, 2004 and 2003, the Company's
warranty accrual changed as follows:
- -------------------------------------------------------------------------------
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2004 2003
- -------------------------------------------------------------------------------
(unaudited)
Balance, beginning of period $1,372 985
Additions 618 123
Charges (26) -
- -------------------------------------------------------------------------------
Balance, end of period $1,964 $1,108
===============================================================================
10
7. OPERATING SEGMENTS
The Company conducts its continuing 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 and turbo charger actuators.
The Company evaluates its operating segments' performance and allocates
resources among them based on profit or loss from continuing 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. The Company's non-GAAP financial measures
may not necessarily be comparable to other companies.
- --------------------------------------------------------------------------------------------------
(In thousands) MECHANICAL
ELECTRICAL ENGINEERED
COMPONENTS COMPONENTS TOTAL
- --------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2004: (UNAUDITED)
Net sales to external customers $ 98,448 $ 64,752 $163,200
Intersegment net sales - 65 65
Segment profit - EBITDA 18,914 17,127 36,041
Segment assets 127,069 60,956 188,025
Goodwill 67,863 21,222 89,085
Depreciation and amortization 1,906 898 2,804
==================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2003:
Net sales to external customers 88,507 45,683 $134,190
Intersegment net sales - 53 53
Segment profit - EBITDA 16,695 11,225 27,920
Segment assets 108,110 52,511 160,621
Goodwill 59,192 20,973 80,165
Depreciation and amortization 1,872 806 2,678
==================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2004:
Net sales to external customers $34,269 $23,103 $57,372
Intersegment net sales
Segment profit - EBITDA 6,454 6,199 12,653
Segment assets 127,069 60,956 188,025
Goodwill 67,863 21,222 89,085
Depreciation and amortization 692 326 1,018
==================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2003:
Net sales to external customers $ 29,874 $ 15,496 $ 45,370
Intersegment net sales - 19 19
Segment profit - EBITDA 5,674 3,546 9,220
Segment assets 108,110 52,511 160,621
Goodwill 59,192 20,973 80,165
Depreciation and amortization 622 239 861
==================================================================================================
DECEMBER 31, 2003:
Segment assets $107,656 $52,567 $160,223
==================================================================================================
11
RECONCILIATION OF SELECTED SEGMENT INFORMATION TO THE COMPANY'S CONSOLIDATED
TOTALS:
(In thousands) NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
PROFIT OR LOSS: (UNAUDITED)
Total profit from reportable segments- EBITDA $36,041 $27,920 $12,653 $9,220
Reconciling items:
Corporate expenses (2,975) (2,697) (653) (1,135)
Depreciation and amortization (2,838) (2,708) (1,030) (872)
Interest expense (9,041) (9,349) (3,037) (3,071)
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and
discontinued operations $21,187 $ 13,166 $7,933 $ 4,142
===========================================================================================================================
SEPTEMBER 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS: (UNAUDITED)
Total assets for reportable segments $188,025 $160,223
Corporate assets 1,596 4,018
Discontinued assets 15,633 20,464
- ---------------------------------------------------------------------------------------------------------------------------
Total consolidated assets $205,254 $184,705
===========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
(In thousands) NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ------------------------------------------------------------------- ----------------------------------------------
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
GEOGRAPHICAL SALES INFORMATION:
United States $146,114 $116,873 $51,803 $39,403
England 4,430 4,479 1,655 1,595
Canada 3,327 2,930 930 650
China 3,854 3,340 1,465 1,258
Taiwan 630 1,270 213 569
Netherlands 1,502 1,387 474 642
Japan 886 1,064 359 351
Other 2,457 2,847 473 902
- ------------------------------------------------------------------------------------------------------------------
Total $163,200 $134,190 $57,372 $45,370
==================================================================================================================
12
8. STOCK OPTIONS
The Company applies 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.
In accordance with the disclosure provisions of SFAS 148, "Accounting for
Stock-Based Compensation - transition and disclosure," which amended SFAS No.
123, "Accounting for Stock-Based Compensation", the following table illustrates
the effect on net income as if the Company had applied the fair value
recognition provisions for the nine and three months ended September 30, 2004
and 2003:
(in thousands) NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------
(UNAUDITED)
Net income:
As reported $7,320 $7,340 $4,436 $2,062
Pro forma $7,318 $7,031 $4,435 $1,959
===================================================================================================
9. PENSION PLANS
The components of the net periodic benefit (cost) for the nine and three months
ended September 30, 2004 and 2003 related to the Company's pension plans were as
follows:
(in thousands) NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
(UNAUDITED)
Service Cost $ 330 $298 $ 110 $ 99
Interest Cost 765 797 255 266
Expected return on plan assets (908) (931) (303) (310)
Amortization of net loss 60 57 20 19
- ---------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 247 $ 221 $ 82 $ 74
===================================================================================================
EMPLOYER CONTRIBUTIONS
The Company is not required to make any contributions in 2004 and did not make
any contributions in 2003 to its defined benefit plans.
13
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
GENERAL
KCLLC is the parent holding company of the wholly owned subsidiaries of the
Company. 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. Further, as the Company
leverages itself in order to acquire additional product lines, management uses
free cash flow (a non-GAAP financial measure defined by the Company as cash flow
provided by operating activities of its continuing operations less cash flow
used in investing activities of its continuing operations) as a key indicator of
each product line. The EC business product lines include power conversion
products, specialty electrical components and high-voltage utility switches. The
product lines of the MEC business consist primarily of flexible shaft and remote
valve control components and turbo-charger actuators.
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 $197.3 million for fiscal year 2003.
The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies (see Note 2 elsewhere in this Form 10-Q).
14
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.
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ----------------------------------------
2004 2003 2004 2003
-------------------- --------------------- ------------------- --------------------
(In thousands) % OF % OF % OF % OF
NET NET NET NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT SALES
---------- --------- ----------- --------- ---------- -------- ---------- ---------
Net Sales $ 163,200 100.0% $134,190 100.0% $57,372 100.0% $45,370 100.0%
Cost of Goods Sold 101,511 62.2 83,008 61.9 36,339 63.3 28,251 62.3
- --------------------------------------------------------------------------------------------------------------------------
Gross Profit 61,689 37.8 51,182 38.1 21,033 36.7 17,119 37.7
Selling, general and
administrative expenses 31,461 19.3 28,667 21.4 10,063 17.5 9,906 21.8
- --------------------------------------------------------------------------------------------------------------------------
Income from operations 30,228 18.5 22,515 16.8 10,970 19.1 7,213 15.9
Interest expense 9,041 5.5 9,349 7.0 3,037 5.3 3,071 6.8
- --------------------------------------------------------------------------------------------------------------------------
Income before provision for
income taxes and discontinued
operations 21,187 13.0 13,166 9.8 7,933 13.8 4,142 9.1
Provision for income taxes 8,419 5.2 5,511 4.1 3,140 5.5 1,624 3.6
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations 12,768 7.8 7,655 5.7 4,793 8.4 2,518 5.5
Loss from discontinued
operations, net of tax
benefits of $(3,281),
$(202), $(144), and
$(292), respectively (5,448) (3.3) (315) (0.2) (357) 0.6 (456) (1.0)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 7,320 4.5% $ 7,340 5.5% $4,436 7.7% $2,062 4.5%
==========================================================================================================================
15
A summary of the Company's segments is as follows:
ELECTRICAL COMPONENTS BUSINESS
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- --------------------------------------------
2004 2003 2004 2003
--------------------- ---------------------- ----------------------- --------------------
% OF % OF % OF % OF
NET NET NET NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT SALES
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales $98,448 100.0% $88,507 100.0% $34,269 100.0% $29,874 100.0%
Cost of Sales 59,319 60.3 54,059 61.1 21,005 61.3 18,412 61.6
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit 39,129 39.7 34,448 38.9 13,264 38.7 11,462 38.4
Selling, general and
administrative expenses 22,121 22.5 19,625 22.2 7,502 21.9 6,410 21.5
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations $17,008 17.3% $14,823 16.7% $ 5,762 16.8% $ 5,052 16.9%
============================================================================================================================
MECHANICAL ENGINEERED
COMPONENTS BUSINESS NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- --------------------------------------------
2004 2003 2004 2003
----------------------- -------------------- ------------------------ -------------------
% OF % OF % OF % OF
NET NET NET NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT SALES
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales $64,752 100.0% $45,683 100.0% $23,103 100.0% $15,496 100.0%
Cost of Sales 42,192 65.2 28,949 63.4 15,334 66.4 9,839 63.5
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit 22,560 34.8 16,734 36.6 7,769 33.6 5,657 36.5
Selling, general and
administrative expenses 6,331 9.8 6,315 13.8 1,896 8.2 2,350 15.2
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations $16,229 25.1% $ 10,419 22.8% $5,873 25.4% $3,307 21.3%
============================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003
NET SALES: Net sales for the nine months ended September 30, 2004 ("Nine Months
2004") increased by approximately $29.0 million, or 21.6%, from net sales for
the nine months ended September 30, 2003 ("Nine Months 2003"). This increase was
the sum of the approximately $19.1 million, or 41.3%, increase in the net sales
of the MEC business and the approximately $9.9 million, or 11.2%, increase in
net sales of the EC business.
The approximately $19.1 million, or 41.3%, increase in net sales of the MEC
business for the Nine Months 2004 as compared to the Nine Months 2003 was driven
by continued growth of both MEC product lines. Net sales of the flexible shaft
product line increased by approximately $5.3 million, or 27.7%, for the Nine
Months 2004 as compared to the Nine Months 2003. 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 Note 2 to the consolidated financials
elsewhere in this Form 10-Q), which resulted in having this product line in the
Company's results for seven months during the Nine Months 2003. Net sales of the
turbocharger components product line increased by approximately $13.8 million,
or 51.5%, for the Nine Months 2004 as compared to the Nine Months 2003. This
increase was driven primarily by continued volume growth of a new product
introduced in December 2002.
16
The approximately $9.9 million or 11.2% increase in the EC business for the Nine
Months 2004 as compared to the Nine Months 2003 was driven primarily by the
growth in the Company's specialty electrical components product line, which had
net sales growth of approximately $5.6 million, or 15.5%. This growth was
generated through both its recreational and industrial channels. In addition, in
May 2004, the Company acquired Advanced Devices, Inc., whose primary products
are electrical connectors to the entertainment industry. This product line was
integrated into one of the manufacturing facilities of the specialty electrical
business unit. ADI sales included in the Nine Months 2004 was approximately $1.3
million.
The Company's power conversion product line also experienced net sales growth
from the Nine Months 2003 to the Nine Months 2004 of approximately $5.1 million,
or 12.4%. This growth was generated primarily as a result of the recovery of the
end markets served by the electrical distribution channels as well as demand
through the direct OEM sales channels for transformers and related products.
GROSS PROFIT: Gross profit increased by approximately $10.5 million or 20.5% for
the Nine Months 2004 as compared to the Nine Months 2003, resulting from the sum
of the approximately $5.8 million, or 34.8%, increase in the gross profit of the
MEC business an the approximate $4.7 million, or 13.6%, increase in gross profit
of the EC business.
The approximately $5.8 million, or 34.8%, increase in gross profit of the MEC
business for Nine Months 2004 as compared to Nine Months 2003 was driven
primarily by the net sales increases of the flexible shaft and turbocharger
components product lines.
The approximately $4.7 million, or 13.6% increase in gross profit of the EC
business for the Nine Months 2004 as compared to the Nine Months 2003 resulted
primarily from the net sales increases of the specialty electrical components
and power conversion product lines for the Nine Months 2004 as compared to the
Nine Months 2003. In addition, product mix as well as productivity gains also
increased gross profit for the EC business for the Nine Months 2004 as compared
to the Nine Months 2003.
The gross profit, as a percentage of net sales ("GP percentage"), for the MEC
business declined by approximately 1.8% for the Nine Months 2004 as compared to
the Nine Months 2003 primarily related to price concessions to customers of the
Company's turbocharger product line. For the EC business, the GP percentage
increased by approximately 0.8% during the Nine Months 2004 as compared to the
Nine Months 2003 due to change in product mix, productivity gains as well as
servicing more volume of the business over its fixed overhead.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative ("SG&A") expenses increased approximately $2.8 million, or 9.7%,
for the Nine Months 2004 as compared to the Nine Months 2003. As a percentage of
net sales, SG&A declined to 19.3% for the Nine Months 2004 from 21.4% for the
Nine Months 2003. SG&A of the MEC business increased by approximately $16,000,
or 0.3%, for the Nine Months 2004 as compared to the Nine Months 2003 and as a
percentage of net sales, decreased approximately 4.0%. SG&A of the EC business
increased by approximately $2.5 million, or 12.7%, for the Nine Months 2004 as
compared to the Nine Months 2003 and increased as a percentage of net sales by
approximately 0.3%.
The SG&A of the MEC business remained in line with the prior year due to the
inclusion of the costs of an interim operating agreement it had in place with
the seller of Arens Controls ("Arens"), which was acquired in March 2003. The
interim operating agreement added duplicative cost during 2003 until the
manufacturing of that product line was fully integrated into the Company's
Binghamton, NY manufacturing facility, which was not completed until November
2003. Without such costs in the prior period, the SG&A of the MEC business would
have shown more growth on a year over year comparison due to increased selling
costs as well as more infrastructure costs to support the size of the
turbocharger business.
The primary drivers of the increased SG&A costs of the EC business during the
Nine Months 2004 as compared to the Nine Months 2003, were commission and
freight expense related to additional volume. In addition certain costs were
incurred as the Company continues to explore migrating production offshore as
well as investing in new product development. Corporate expenses were higher
during the Nine Months 2004 as compared to the Nine Months 2003, related to
professional fees and accrued incentive compensation for the executive
management team of the Company.
17
INCOME FROM OPERATIONS: Income from operations increased approximately $7.7
million, or 34.3%, for the Nine Months 2004 as compared to the Nine Months 2003,
resulted from the increase in gross profit of approximately $10.5 million,
offset by the increase in SG&A expenses of approximately $2.8 million.
INTEREST EXPENSE: Interest expense decreased by approximately $308,000, or 3.3%,
during the Nine Months 2004 as compared to the Nine Months 2003. This decrease
is primarily due to lower levels of outstanding borrowings during the Nine
Months 2004 as compared to the Nine Months 2003.
PROVISION FOR INCOME TAXES: The provision for income taxes increased by
approximately $2.9 million, or 52.8%, for the Nine Months 2004 as compared to
the Nine Months 2003. The Company's effective tax rate on income before
provision for income taxes and discontinued operations for the Nine Months 2004
was approximately 39.7%. The effective rate on income before provision for
income taxes and discontinued operations for the Nine Months 2003 was
approximately 41.9%.
INCOME FROM CONTINUING OPERATIONS: Income from continuing operations increased
by approximately $5.1 million, or 66.8%, during the Nine Months 2004 as compared
to the Nine Months 2003. The increase resulted from the sum of the increase in
income from operations of approximately $7.7 million and the decrease in
interest expense of approximately $308,000 offset by the increase in provision
for income taxes of approximately $2.9 million, due to the factors discussed
above.
LOSS FROM DISCONTINUED OPERATIONS: In March 2004, after reviewing the lock
product line's 2003 operating performance as well as its long-term strategic
plan, the Board of Directors of KCI and KCLLC concluded to sell Hudson Lock, LLC
("Hudson"). In accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company recorded the assets and liabilities of Hudson as held for sale and
reported the results of operations, which were formerly included in the results
of the Company's MEC business, as discontinued operations.
On October 22, 2004, the Company consummated the sale of the net assets of
Hudson to Waveland Investments ("the Buyer"), an independent third party. As a
result of the sale, the domestic assets, which primarily consisted of accounts
receivable, inventory and fixed assets, and the domestic liabilities of Hudson
were sold to the Buyer for consideration of approximately $4.5 million,
consisting of a note receivable of approximately $1.2 million with the balance
of the proceeds being paid in cash. The note receivable matures on April 22,
2008 and requires payment of interest at 8.0% per annum through April 22, 2005,
10% per annum through October 2005 and 14% per annum subsequent to October 2005
until the maturity date. The Buyer has the ability to convert the outstanding
interest due to the Company to additional notes receivable, which would then be
due and payable on the same date as the original note. If Hudson meets certain
operating thresholds the Buyer is required to prepay portions of the outstanding
note receivable and the Buyer has the right to prepay the balance of the notes
receivable. The note receivable is subordinate to the Buyer's acquisition and
operating debt. The remaining assets and liabilities of Hudson's Mexico
operations, which are not material, were not sold in the transaction. The
Company used the cash proceeds received in the transaction to pay down
outstanding bank debt. As a result of the expected proceeds from the sale, the
Company recorded charges of approximately $4.9 million (net of tax benefit of
approximately $3.0 million) during the Nine Months 2004, to reduce the carrying
value of the assets held for sale to the lower of cost or fair value.
The Lock product line had a net loss from operations for the Nine Months 2004 of
approximately $498,000 (net of tax benefit of approximately $318,000). This
compares to a net loss of approximately $315,000 (net of a tax benefit of
approximately $202,000) for the Nine Months 2003. In February 2004, management
concluded to close the lock manufacturing facility in Mexico as the continuing
decline in net sales volume of this product line made it prohibitive to carry
the dual overhead infrastructures of its domestic and Mexico manufacturing
facilities. The assets of Mexico were primarily inventory, leasehold
improvements and machinery and equipment. In closing down the facility, the
Company recorded a charge of approximately $664,000 for severance and closing
costs and to write down inventory and leaseholds. In addition, the Company
recorded a charge of approximately $605,000 to record the balance of the lease
on the facility on a present value basis, less any estimate for sublease income.
18
NET INCOME: Net income decreased by approximately $20,000 for the Nine Months
2004 as compared to the Nine Months 2003. Income from continuing operations
increased approximately $5.1 million, as described above. This was offset by the
increase in loss from discontinued operations of approximately $5.1 million,
discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
NET SALES: Net sales for the three months ended September 30, 2004 ("Quarter
2004") increased by approximately $12.0 million, or 26.5%, from net sales for
the three months ended September 30, 2003 ("Quarter 2003"). This increase was
the sum of the approximately $7.6 million, or 49.1%, increase in the net sales
of the MEC business and the approximately $4.4 million, or 14.7%, increase in
net sales of the EC business.
The approximately $7.6 million increase in net sales of the MEC business for the
Quarter 2004, as compared to the Quarter 2003, was driven by continued growth of
both MEC product lines. Net sales of the flexible shaft product line increased
by approximately $1.4 million, or 22.1%, for the Quarter 2004 as compared to the
Quarter 2003. This increase was driven by new product introductions, a longer
season for products sold into the lawn and garden channels as well as increased
demand for the Arens Controls product line, which was acquired in March of 2003.
Net sales of the turbocharger components product line increased by approximately
$6.2 million, or 66.8%, for the Quarter 2004 as compared to the Quarter 2003.
This increase was driven primarily by continued volume growth of a new product
introduced in December 2002.
The approximately $4.4 million or 14.7% increase in the EC business for the
Quarter 2004 as compared to the Quarter 2003 was driven primarily by the growth
in the Company's specialty electrical components product line, which had net
sales growth of approximately $2.0 million, or 17.0%. This growth was generated
through both its recreational and industrial channels as they continued to
experience demand related to new products focused on the recreational vehicle
market as well as continued recovery of the end markets of its industrial sales
channels. In addition, the power conversion product line posted net sales growth
from the Quarter 2003 to the Quarter 2004 of approximately $3.2 million, or
22.8%. This growth was generated primarily as a result of the recovery of the
end markets served by the electrical distribution channels as well as demand
through the direct OEM sales channels for transformers and related products.
GROSS PROFIT: Gross profit increased by approximately $3.9 million, or 22.9%,
for Quarter 2004 as compared to Quarter 2003, resulting from the sum of the
approximately $2.1 million, or 37.3%, increase in the gross profit of the MEC
business and the approximately $1.8 million, or 15.7%, increase in gross profit
of the EC business for the Quarter 2004.
The approximately $2.1 million, or 37.3%, increase in gross profit of the MEC
business for Quarter 2004 as compared to Quarter 2003 was driven by the net
sales increases of the flexible shaft and turbocharger components product lines.
The approximately $1.8 million, or 15.7% increase in gross profit of the EC
business for the Quarter 2004 as compared to the Quarter 2003 resulted primarily
from the net sales increases of the specialty electrical components and power
conversion product lines for the Quarter 2004 as compared to the Quarter 2003.
The GP percentage for the MEC business declined by approximately 2.9% for the
Quarter 2004 as compared to the Quarter 2003 related to price concessions of the
Company's turbocharger product line. For the EC business, the GP percentage
decreased by approximately 0.3% during the Quarter 2004 as compared to the
Quarter 2003 primarily related to product mix as well as price increases which
more than offset the impact of commodity costs during the quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: SG&A expenses increased
approximately $157,000, or 1.6%, for the Quarter 2004 as compared to the Quarter
2003. As a percentage of net sales, SG&A declined to 17.5% for the Quarter 2004
from 21.8% for the Quarter 2003. SG&A of the MEC business declined by
approximately $454,000, or 19.3%, for the Quarter 2004 as compared to the
Quarter 2003 and as a percentage of net sales, decreased approximately 3.3%.
SG&A of the EC business increased by approximately $1.1 million, or 17.0%, for
the Quarter 2004 as compared to the Quarter 2003 and increased as a percentage
of net sales by approximately 0.4%.
The decline in SG&A of the MEC business is primarily the result of the
duplicative costs in 2003 related to the Arens interim operating agreement,
which terminated in the fourth quarter of 2003. Commission and freight expense
related to additional volume were the main drivers of the increase in SG&A for
the EC business for the Quarter 2004 as compared to the Quarter 2003. In
addition, one-time expenses were incurred related to the migration of production
of the ADI acquisition into the Company's Napa Valley, California manufacturing
operations. The Company's corporate expenses were lower than last year,
primarily due to reduced professional fees, travel expenses and the reduction of
estimates related to anticipated professional fees in 2004.
19
INCOME FROM OPERATIONS: The increase in income from operations of approximately
$3.8 million, or 52.1%, for the Quarter 2004 as compared to the Quarter 2003,
resulted from the increase in gross profit of approximately $3.9 million, offset
by the increase in SG&A expenses of approximately $157,000.
INTEREST EXPENSE: Interest expense decreased by approximately $34,000, or 1.1%,
during the Quarter 2004 as compared to the Quarter 2003. This decrease is
primarily due to lower levels of outstanding borrowings during the Quarter 2004
as compared to the Quarter 2003.
PROVISION FOR INCOME TAXES: The provision for income taxes increased by
approximately $1.5 million, or 93.3%, for the Quarter 2004 as compared to the
Quarter 2003. The Company's effective tax rate on income before provision for
income taxes and discontinued operations for the Quarter 2004 was approximately
39.6%. The effective rate on income before provision for income taxes and
discontinued operations for the Quarter 2003 was approximately 39.2%.
INCOME FROM CONTINUING OPERATIONS: Income from continuing operations increased
by approximately $2.3 million, or 90.4%, during the Quarter 2004 as compared to
the Quarter 2003. The increase resulted from the sum of the increase in income
from operations of approximately $3.8 million and the decrease in interest
expense of approximately $34,000 offset by the increase in provision for income
taxes of approximately $1.5 million, due to the factors discussed above.
LOSS INCOME FROM DISCONTINUED OPERATIONS: As discussed above, in March 2004,
after reviewing the lock product line's 2003 operating performance as well as
its long-term strategic plan, the Board of Directors of KCI and KCLLC concluded
to sell Hudson Lock, LLC ("Hudson"). In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company recorded the assets and liabilities of Hudson as
held for sale and reported the results of operations, which were formerly
included in the results of the Company's MEC business, as discontinued
operations. The Lock product line had net income from operations for the Quarter
2004 of approximately $322,000 (net of taxes of approximately $207,000). This
compares to net loss of approximately $456,000 (net of a tax benefit of
approximately $292,000) for the Quarter 2003.
On October 22, 2004, the "Company", consummated the sale of the net assets of
Hudson to Waveland Investments. As a result of the expected proceeds from the
sale, during the Quarter 2004, the Company recorded an additional charge of
approximately $680,000 (net of tax benefit of approximately $351,000) to reduce
the carrying value of the assets held for sale to its fair value.
NET INCOME: Net income increased by approximately $2.4 million, for the Quarter
2004 as compared to the Quarter 2003. Income from continuing operations
increased approximately $2.3 million, and the loss from discontinued operations
declined approximately $99,000, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated funds from its continuing 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
March 30, 2005, and a six-year $100.0 million term loan facility. The
obligations under the credit agreement governing the credit facilities are
guaranteed by the Company's subsidiaries and KCI, and are 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 September 30, 2004. 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 3.75% and require the payment of
a commitment fee of ranging from 0.375% to 0.5% on the unused portion of the
facility as well as quarterly commitment fees.
20
The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At September 30, 2004, the Company had two letters of credit outstanding
for approximately $1.9 million. The letters of credit relate to the Company's
workman's compensation insurance programs. Currently, the Company believes that
the $5.0 million allowance for letters of credit is sufficient for its needs.
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 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.
In 2003 the Company entered into a second amendment to its credit agreement (the
"Second Amendment"), modifying certain financial covenants. The financial
covenants modified by the Second Amendment apply from September 30, 2003 through
March 30, 2005, at which time the financial covenants return to the financial
covenants in effect before the Amendment. At September 30, 2004, the Company was
in compliance with the credit agreement, as amended.
The Company's remaining liquidity demands are 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 $17.7
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 anticipates its capital expenditures for the year ended December 31,
2004 to be approximately $4.0 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 continuing 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, which it believes to be sufficient for any such
purpose.
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 $108.0 million for its preferred stock plus any
dividends payable in arrears (at September 30, 2004 there were approximately
$4.8 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 September 30,
2004 approximately 1.3 million KCI common shares plus potentially 177,000 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.
21
Cash flows provided by operating activities were approximately $17.0 million and
$16.6 million for Nine Months 2004 and 2003, respectively. The net increase in
cash flows of approximately $459,000 for Nine Months 2004 was the result of
approximately $2.7 million increase in cash flows provided by continuing
operations offset by an increase of approximately $2.2 million of cash flows
used in discontinued operations. For the Nine Months 2004 cash provided by
operating activities of continuing operations was approximately $18.4 million as
compared to approximately $15.8 million for the Nine Months 2003. This was
primarily driven by (i) the growth in earnings less the increase in working
capital related to such growth; and (ii) the increase in income taxes payable
during the Nine Months ended 2004 as the Company's sale of Hudson Lock will
generate a taxable loss that will offset most of the 2004 taxable income from
income taxes. For the Nine Months 2004, net income plus non-cash charges totaled
approximately $17.2 million as compared to the Nine Months 2003 of approximately
$11.3 million. The Company's primary working capital accounts (accounts
receivable, inventory and accounts payable) used net cash in its continuing
operations of approximately $11.1 million for the Nine Months 2004 as compared
to Nine Months 2003, when the working capital accounts used net cash of
approximately $3.2 million. The main driver in the working capital use for the
Nine Months 2004 was inventory, which increase due to the net sales growth the
Company had experienced during the Nine Months 2004 as well as increasing safety
stock levels of certain inventories as the Company is currently migrating the
production of such inventory to Asia. Accrued income taxes increased during the
Nine Months 2004 since the Company had not made any estimated payments for
income taxes as the Company anticipates the sale of its lock product line to
generate tax losses, which will offset most of the Company's current tax
liability. The sale of the lock product line was consummated in October 2004.
The approximately $2.2 million increase in cash used in operating activities of
discontinued operations was driven by the losses related to the operations of
the Lock product line, which led to the closure of the lock manufacturing
facility in Mexico in February 2004. The decline in net sales volume made it
prohibitive to carry the dual overhead infrastructures of the domestic and
Mexico lock manufacturing facilities. In closing down the facility the Company
recorded a charge of approximately $664,000 for severance and closing costs and
to write down inventory and leaseholds. In addition the Company recorded a
charge of approximately $605,000 to record the balance on the lease of the
facility on a present value basis, less any estimate for sublease income. (see
Note 2 to the consolidating financial statements elsewhere in this Form 10-Q).
Cash flows used in investing activities were approximately $14.3 million and
$7.1 million for Nine Months 2004 and the Nine Months 2003, respectively. Cash
flows used in investing activities of continuing operations were approximately
$14.2 million and $6.6 million for Nine Months 2004 and the Nine Months 2003,
respectively. Capital expenditures for continuing operations for the Nine Months
2004 and 2003 were approximately $2.2 million and $2.1 million, respectively.
On August 23, 2004, the Company acquired the common stock of Amveco
International, Inc. ("Amveco") for a purchase price of approximately $6.0
million, subject to adjustment, less assumed liabilities of approximately $2.1
million. In October 2004, the Company paid approximately $462,000 of additional
consideration related to the closing balance sheet. 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 were not material. The agreement calls for three contingent
payments, two of which up to $1.0 million in aggregate and the other based upon
a percentage of revenues exceeding a baseline specified in the purchase
agreement, based on the performance of the business for the six months ended
September 30, 2004 and for the year ending December 31, 2005. In addition, the
Company currently has approximately $1.6 million in escrow, which is included in
other assets, related to the Amveco transaction. The escrow was established to
cover potential liabilities related to the Mexico operation of Amveco. The
agreement calls for the escrow to be paid upon certain open issues related to
the legal and tax establishment of the Mexico operation are rectified. The
contingent payments and any payments out of escrow, if made, will be recorded as
goodwill at the time of payment. Amveco, which manufactures torroidal
transformers primarily for medical applications, will be integrated into the
Company's Monterrey, Mexico and Lumberton, North Carolina facilities. The
Company paid approximately $6.0 million in cash at closing and borrowed
approximately $5.0 million on its revolving credit facility to partially finance
this acquisition.
22
On May 7, 2004, the Company acquired the net assets of Advanced Devices, Inc.
("ADI") for a purchase price of approximately $8.0 million and assumed
liabilities of approximately $62,000. The Company recorded the estimated excess
purchase price over net assets acquired of approximately $6.2 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 are
not material. The ADI product line, which manufactures electrical wiring
devices, will be integrated into the Company's Napa Valley, California
manufacturing facility. The Company paid approximately $6.1 million in cash at
closing and borrowed approximately $4.5 million on its revolving credit facility
to partially finance this acquisition. The purchase agreement calls for
approximately 75% of the total purchase price to be paid at closing, 10% to be
paid at the earlier of the date when the product line is fully integrated into
the Company's Napa, California manufacturing facility or March 7, 2005, and the
remainder over the next four years annually.
On March 3, 2003, the Company acquired the mechanical components business of
Arens Controls for a purchase price of approximately $4.4 million and assumed
liabilities of approximately $642,000. The Company recorded the estimated excess
purchase price over net assets acquired of approximately $2.0 million as
goodwill. Other intangibles acquired in the transaction were not material. The
product line, which manufactures mechanical push-pull control solutions, was
fully integrated into the Company's Binghamton, New York manufacturing facility
in November 2003. The Company borrowed $2.0 million on its revolving credit
facility to partially finance this acquisition.
Cash flows used in investing activities of discontinued operations was
approximately $113,000 and $534,000 for Nine Months 2004 and Nine Months 2003,
respectively. These amounts relate to capital expenditures of the lock product
line for those periods.
Cash flows from financing activities used net cash for the Nine Months 2004 of
approximately $5.6 million and $7.3 million, respectively. The net cash used in
financing activities for Nine Months 2004 was primarily related to the Company's
repayment of debt under its existing credit facilities of approximately $28.5
million, of which approximately $15.0 million was related to the repayment of
borrowings on its revolver. Of the $22.7 million of gross debt borrowings during
the Nine Months 2004, $5.5 million relates to borrowing funds in anticipation of
the closing of the Amveco transaction, which was then delayed. The Company
repaid the funds the following business day. The Company borrowed the money
primarily to partially finance the acquisitions of Amveco and ADI, which were
both acquired during 2004. For the Nine Months 2003, the cash used in financing
activities primarily related to the repayment of approximately $9.2 million in
debt of which $2.0 million was to repay borrowings under its revolver to
partially finance the acquisition of Arens Controls.
On October 22, 2004, the Company, consummated the sale of the net assets of
Hudson to Waveland Investments ("the Buyer"), an independent third party. As a
result of the sale, the domestic assets, which primarily consisted of accounts
receivable, inventory and fixed assets, and the domestic liabilities of Hudson
were sold to the Buyer for consideration of approximately $4.5 million,
consisting of a note receivable of approximately $1.2 million with the balance
of the proceeds being paid in cash. The note receivable matures on April 22,
2008 and requires payment of interest at 8.0% per annum through April 22, 2005,
10% per annum through October 2005 and 14% per annum subsequent to October 2005
until the maturity date. The Buyer has the ability to convert the outstanding
interest due to the Company to additional notes receivable, which would then be
due and payable on the same date as the original note. If Hudson meets certain
operating thresholds the Buyer is required to prepay portions of the outstanding
note receivable and the Buyer has the right to prepay the balance of the notes
receivable. The note receivable is subordinate to the Buyer's acquisition and
operating debt. The remaining assets and liabilities of Hudson's Mexico
operations, which are not material, were not sold in the transaction. The
Company used the cash proceeds received in the transaction to pay down
outstanding bank debt.
Management believes that the Company's cash flow from continuing 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.
23
COMMITMENTS AND CONTINGENCIES
The following is a schedule of the Company's contractual obligations outstanding
at September 30, 2004:
(IN THOUSANDS) PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT OBLIGATIONS $126,995 $17,724 $28,590 $80,681 $ -
OPERATING LEASE OBLIGATIONS 7,884 1,632 2,511 1,714 2,027
ACCRUED LEASE COSTS 862 331 375 156 -
OTHER LONG-TERM LIABILITIES 983 50 121 142 670
ACQUISITION PURCHASE PRICE
LIABILITIES 1,728 1,057 447 224 -
STAND BY LETTERS OF CREDIT 1,975 - - - 1,975
- ---------------------------------------------------------------------------------------------------------------------
$140,427 $20,794 $32,044 $82,917 $4,672
=====================================================================================================================
CRITICAL ACCOUNTING POLICIES
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 to produce certain
items, future estimated availability and existing and projected sales of
such 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 September 30, 2004, the Company
has recorded approximately $89.4 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 use 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.
24
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's deferred tax assets primarily relate to deductible tax
intangibles resulting from the Company's acquisition transactions
and temporary differences in the basis of its working capital
accounts due to non-deductible reserves. The Company records as
necessary, valuation allowances against its deferred tax assets. To
date the Company believes that it will realize the benefits from its
deferred tax assets as it is expected to generate taxable income in
the future. If the Company were to determine that it would not be
able to realize its deferred tax assets in the future, 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 continuing 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 continuing operations for the
periods presented.
BACKLOG
The Company's backlog of orders as of September 30, 2004 was approximately $32.3
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.
25
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.
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 $44.2 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 4.5% until January 2005, when the underlying
LIBOR contract is up for renewal. At September 30, 2004, the Company had $2.0
million outstanding under its line of credit, which was repaid in October 2004.
A 1.0% change in the interest rate for the Company's credit facilities in place
at December 31, 2003 would have resulted in a change in the Company's annual
interest expense of approximately $603,000. 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.
While the Company uses commodity metals in certain of its products, its exposure
to market risk is reduced by the pass-through of increased costs to its customer
base.
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
The management of KCLLC carried out an evaluation, with the participation of its
President and Chief Financial Officer, of the effectiveness of its disclosure
controls and procedures as of September 30, 2004. Based upon that evaluation,
KCLLC's President and Chief Financial Officer concluded that KCLLC's disclosure
controls and procedures were effective to ensure that information required to be
disclosed by KCLLC in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the Securities and Exchange
Commission.
There has not been any change in KCLLC's internal control over financial
reporting in connection with the evaluation required by Rule 15d-15(d) under the
Exchange Act that occurred during the quarter ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, KCLLC's
internal control over financial reporting.
The management of Key Components Finance Corp. ("Finance Corp.") carried out an
evaluation, with the participation of its President and Chief Financial Officer,
of the effectiveness of its disclosure controls and procedures as of September
30, 2004. Based upon that evaluation, Finance Corp.'s President and Chief
Financial Officer concluded that Finance Corp.'s disclosure controls and
procedures were effective to ensure that information required to be disclosed by
Finance Corp. in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
There has not been any change in Finance Corp.'s internal control over financial
reporting in connection with the evaluation required by Rule 15d-15(d) under the
Exchange Act that occurred during the quarter ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, Finance
Corp.'s internal control over financial reporting.
26
PART II - OTHER INFORMATION
ITEM 6 -- EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certifications
31.2 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
27
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: November 12, 2004 By: /s/ Robert. B. Kay
--------------------
Robert B. Kay
President
Date: November 12, 2004 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: November 12, 2004 By: /s/ Robert. B. Kay
--------------------
Robert B. Kay
President
Date: November 12, 2004 By: /s/ Keith A. McGowan
---------------------
Keith A. McGowan
Chief Financial Officer