UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
Commission File Number 0-23938
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0596831
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
41 Stevens Street, Greenville, South Carolina 29605
(Address and zip code of principal executive offices)
(864) 240-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |X| No |_|
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share, as of August 5, 2002, was 4,959,678.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The unaudited condensed consolidated financial information at June 29, 2002 and
for the thirteen week period then ended, unaudited condensed consolidated
statements of operations and of cash flows for the period ended June 30, 2001
and the audited condensed consolidated balance sheet at March 30, 2002 relate to
Safety Components International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
-------------------- ----
Condensed Consolidated Balance Sheets as of June 29, 2002
(unaudited) and March 30, 2002 3
Unaudited Condensed Consolidated Statements of Operations for
the thirteen weeks ended June 29, 2002 and June 30, 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the thirteen weeks ended June 29, 2002 and June 30, 2001 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
PART II OTHER INFORMATION 14
SIGNATURES 15
Private Securities Litigation Reform Act of 1995
The discussion in this report may contain forward-looking statements that
involve risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, dependence of revenues upon several major
module suppliers; worldwide economic conditions; the results of cost savings
programs being implemented; domestic and international automotive industry
trends, the marketplace for airbag related products; the ability of the Company
to effectively control costs and to satisfy customers on timeliness and quality;
approval of automobile manufacturers of airbag cushions currently in production;
pricing pressures; labor strikes; the anticipated positive results from
restructuring efforts; the continued performance by its discontinued operations
at or above the estimated levels; and the ability to sell the Company's
discontinued operations.
2
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 29, March 30,
2002 2002
----------- -----------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 3,248 $ 2,692
Accounts receivable, net ............................................. 43,387 35,056
Inventories, net ..................................................... 19,870 16,774
Prepaid and other .................................................... 3,015 2,521
----------- -----------
Total current assets ............................................. 69,520 57,043
Property, plant and equipment, net ........................................ 53,483 48,044
Reorganization value in excess of amounts allocable to identifiable assets 14,576 14,576
Identifiable intangible assets, net ....................................... 1,181 1,071
Other assets .............................................................. 1,932 1,900
Net assets held for sale .................................................. 2,595 2,637
----------- -----------
Total assets ..................................................... $ 143,287 $ 125,271
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 18,261 $ 18,516
Accrued and other current liabilities ................................ 11,457 9,635
Current portion of long-term debt .................................... 24,204 25,181
----------- -----------
Total current liabilities ........................................ 53,922 53,332
Long-term debt ............................................................ 23,325 12,182
Other long-term liabilities ............................................... 3,897 3,919
----------- -----------
Total liabilities ................................................ 81,144 69,433
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ............ -- --
Common stock: $0.01 par value per share - 20,000,000 shares authorized;
5,000,000 shares issued and 4,959,678 shares outstanding ......... 50 50
Common stock warrants ................................................ 34 34
Additional paid-in-capital ........................................... 50,916 50,916
Treasury stock: 40,322 shares at cost ................................ (411) (411)
Retained earnings .................................................... 8,048 5,339
Accumulated other comprehensive income (loss) ........................ 3,506 (90)
----------- -----------
Total stockholders' equity ....................................... 62,143 55,838
----------- -----------
Total liabilities and stockholders' equity ....................... $ 143,287 $ 125,271
=========== ===========
(1) Derived from the audited consolidated balance sheet as of March 30, 2002
See notes to unaudited condensed consolidated financial statements.
3
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 29, 2002 June 30, 2001
------------- -------------
Net sales ......................................................................... $ 61,448 $ 50,291
Cost of sales, excluding depreciation ............................................. 50,463 41,000
Depreciation ...................................................................... 2,196 1,652
------------- -------------
Gross profit ............................................................. 8,789 7,639
Selling and marketing expenses .................................................... 552 469
General and administrative expenses ............................................... 3,799 2,369
Research and development expenses ................................................. 193 162
Amortization of intangible assets ................................................. 28 225
------------- -------------
Income from operations ................................................... 4,217 4,414
Other (income) expense, net ....................................................... (2,066) 160
Interest expense, net ............................................................. 1,021 1,264
------------- -------------
Income before income tax provision ....................................... 5,262 2,990
Provision for income taxes ........................................................ 2,553 1,064
------------- -------------
Income from continuing operations ........................................ 2,709 1,926
Loss on disposition of discontinued operations, net of income tax benefit of $1,511 -- 2,267
------------- -------------
Net income (loss) ................................................................. $ 2,709 $ (341)
============= =============
Net income (loss) per common share, basic and diluted:
Income from continuing operations ........................................ $ 0.55 $ 0.39
Loss on disposition of discontinued operations ........................... -- (0.46)
------------- -------------
Net income (loss) per common share, basic and diluted ............................. $ 0.55 $ (0.07)
============= =============
Weighted average number of common shares outstanding, basic and diluted ........... 4,960 4,960
============= =============
See notes to unaudited condensed consolidated financial statements.
4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 29, 2002 June 30, 2001
------------- -------------
Cash Flows From Operating Activities:
Net income (loss) ...................................................... $ 2,709 $ (341)
Loss on disposition of discontinued operations ......................... -- 2,267
------------- -------------
Income from continuing operations ...................................... 2,709 1,926
Adjustments to reconcile income from continuing operations to net
cash (used in) provided by operating activities:
Depreciation ........................................................ 2,196 1,652
Amortization ........................................................ 28 225
Loss on disposition of assets ....................................... 59 --
Deferred taxes ...................................................... -- 934
Accretion of interest on current obligation ......................... (37) --
Changes in operating assets and liabilities ......................... (10,590) (97)
------------- -------------
Net cash (used in) provided by continuing operations ........... (5,635) 4,640
Net cash provided by (used in) discontinued operations ......... 87 (3,551)
------------- -------------
Net cash (used in) provided by operating activities ............ (5,548) 1,089
------------- -------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............................. (3,423) (1,130)
------------- -------------
Net cash used in continuing operations ......................... (3,423) (1,130)
Net cash used in discontinued operations ....................... (32) (550)
------------- -------------
Net cash used in investing activities .......................... (3,455) (1,680)
------------- -------------
Cash Flows From Financing Activities:
Repayment of KeyCorp Subordinated Secured term note .................... (90) --
Repayment of Congress Subordinated term note ........................... (337) (382)
Net borrowing on Congress revolving credit facility .................... 11,279 4,050
Payment on note due to former owner of acquired business ............... (955) --
Repayments of other debt and long term obligations ..................... (771) (578)
Acquisition of treasury stock .......................................... -- (7)
------------- -------------
Net cash provided by continuing operations ..................... 9,126 3,083
Net cash used in discontinued operations ....................... -- (120)
------------- -------------
Net cash provided by financing activities ...................... 9,126 2,963
------------- -------------
Effect of exchange rate changes on cash ...................................... 433 (339)
------------- -------------
Increase in cash and cash equivalents ........................................ 556 2,033
Cash and cash equivalents, beginning of period ............................... 2,692 4,694
------------- -------------
Cash and cash equivalents, end of period ..................................... $ 3,248 $ 6,727
============= =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ....................................................... $ 543 $ 1,167
Income taxes ................................................... $ 1,239 $ --
See notes to unaudited condensed consolidated financial statements.
5
Note 1 Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Safety Components International, Inc. and subsidiaries
("Safety Components" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted from this report, as is permitted by such
rules and regulations; however, Safety Components believes that the disclosures
are adequate to make the information presented not misleading. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Form 10-K for
the year ended March 30, 2002. The Company has experienced, and expects to
continue to experience, variability in net sales and net income from quarter to
quarter. Therefore, the results of the interim periods presented herein are not
necessarily indicative of the results to be expected for any other interim
period or the full year. In the opinion of management, the information furnished
reflects all adjustments necessary for a fair presentation of the results for
the reported interim periods, including those of a normal recurring nature.
As discussed in Note 2, the Company has reported its metal and defense
businesses as discontinued operations in the consolidated financial statements
from October 11, 2000, through June 29, 2002. At June 29, 2002, the Company has
disposed of all discontinued operations except Galion, Inc. Reporting Galion,
Inc. as a discontinued operation requires the Company to estimate, based on
currently available information, the results of operations to the expected
disposal date and the expected proceeds to be received upon sale. The net assets
held for sale of approximately $2.6 million at June 29, 2002 reflect these
estimates.
Note 2 Discontinued Operations
On October 10, 2000, the Company concluded to exit and sell its metal and
defense businesses consisting of Valentec Wells, LLC, the metallic belt links
business located in Missouri (relocated from Costa Mesa, CA) and Galion, Inc.,
the defense systems and products divisions located in Ohio.
At June 29, 2002, the only remaining discontinued operation is Galion,
Inc. The Company had previously expressed its belief that the disposal of this
remaining business on acceptable terms would be consummated by approximately
September 2002. While the Company remains committed to, and is continuing to
aggressively pursue plans for disposition, the current estimate of such
disposition is November 2002 due to unexpected and uncontrollable delays
recently encountered in the disposal process.
Following is a summary of financial information for the Company's
discontinued metal and defense operations (unaudited) (in thousands):
-----------------------------
Thirteen Thirteen
weeks ended weeks ended
June 29, 2002 June 30, 2001
-----------------------------
Net sales $ 2,136 $ 2,915
Discontinued operations:
Loss on disposition, net of income taxes -- 2,267
6
Net assets of discontinued operations at June 29, 2002 and March 30, 2002
were as follows (unaudited) (in thousands):
June 29, 2002 March 30, 2002
------------------------------
Accounts receivable, net $ 1,506 $ 1,630
Inventories, net 677 843
Property, plant and equipment, net 2,195 2,376
------------------------------
Total assets 4,378 4,849
Current liabilities (1,541) (1,970)
Other liabilities (242) (242)
------------- -------------
Net assets held for sale $ 2,595 $ 2,637
============= =============
Note 3 Inventories
Inventories reported on the Company's balance sheets were as follows
(unaudited) (in thousands):
June 29, 2002 March 30, 2002
-----------------------------
Raw materials $ 5,938 $5,493
Work-in-process 6,985 5,922
Finished goods 6,947 5,359
-----------------------------
Total $ 19,870 $ 16,774
=============================
Note 4 Long-Term Debt
The Company has available a three-year, $35.0 million, revolving credit
facility with Congress Financial Corporation (Southern) (the "Congress
Facility"), expiring October 11, 2003. Under the Congress Facility, the Company
may borrow up to the lesser of (a) $35.0 million or (b) 85% of eligible accounts
receivable, plus 60% of eligible finished goods, plus 50% of eligible raw
materials. Included within borrowings permitted under the Congress Facility (and
its borrowing limitations) are $4.6 million in term loans which are to be repaid
in equal monthly installments of approximately $112,000, with the unpaid
principal amount due on October 11, 2003, unless the Congress Facility is
renewed at that time. Also included within the borrowings permitted under the
Congress Facility is a $3.0 million letter of credit facility, through which the
Company had exposure of $424,000 and $0 pursuant to letters of credit
outstanding at June 29, 2002 and March 30, 2002, respectively. At June 29, 2002,
the Company's availability for additional borrowings (under the maximum
allowable limit) was approximately $18.7 million.
The Company's $17.6 million subordinated secured note facility (the
"Subordinated Facility") with KeyBank National Association and Fleet Bank
expires on October 11, 2002; accordingly, such amount is classified in the
current portion of long term debt as of June 29, 2002 and March 30, 2002. The
Company is negotiating a replacement for this facility and has also requested an
extension of its maturity with the current lenders. Although no assurances can
be given in this regard, management believes that it will be able to obtain
either a replacement or an extension for the facility prior to its maturity in
October 2002.
The Congress Facility and the Subordinated Facility both require the
Company to meet a minimum adjusted net worth (as defined) covenant along with
other certain non-financial covenants. At June 29, 2002, the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are pledged as collateral for the borrowings under the
Congress Facility and the Subordinated Facility.
7
Note 5 Comprehensive Income (loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
------------------------------------------
Thirteen weeks Thirteen weeks
ended June 29, 2002 ended June 30, 2001
------------------------------------------
Net income (loss) $ 2,709 $ (341)
Foreign currency translation adjustment 3,685 (673)
Unrealized loss on hedging transactions,
net of tax of $50 (89) --
------------------------------------------
Comprehensive income (loss) $ 6,305 $ (1,014)
==========================================
Note 6 Contingencies
The Company, from time to time, is a party to legal proceedings and
administrative actions, which are of an ordinary or routine nature, incidental
to the operations of the Company. Although it is difficult to predict the
outcome of any legal proceeding, in the opinion of the Company's management,
such proceedings and actions should not, individually or in the aggregate, have
a material adverse effect on the Company's financial condition, operations or
cash flow.
Note 7 Derivatives and Hedging
Safety Components monitors its risk associated with the volatility of
certain foreign currencies against its functional currency, the U.S. dollar. The
impact of changes in the relationship of other currencies to the U.S. dollar has
historically not been significant, and such changes in the future are not
expected to have a material impact on the Company's results of operations or
cash flows. However, the Company uses certain derivative financial instruments
to reduce exposure to volatility of foreign currencies. The Company has formally
documented all relationships between hedging instruments and hedged items, as
well as risk management objectives and strategies for undertaking various hedge
transactions. Derivative financial instruments are not entered into for
speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on May 31, 2002
to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are being monitored for effectiveness on a routine basis. At
June 29, 2002, the Company had outstanding forward exchange contracts that
mature between October 2002 and March 2003 to purchase Mexican pesos with an
aggregate notional amount of approximately $4.7 million. The fair values of
these contracts at June 29, 2002, totaled approximately $150,000, which is
recorded as a derivative liability on the Company's balance sheet in other
current liabilities. Substantially all of the loss on these forward contracts
was recorded in "accumulated other comprehensive income" at June 29, 2002.
On December 18, 2001, the Company entered into two forward exchange
contracts, with notional amounts totaling $2.2 million, to buy British pounds
for an amount consistent with the related underlying obligation of its U.K.
subsidiary for the May 2, 2002 and November 2, 2002 scheduled payments for the
acquisition of Woodville. The change in fair value of these contracts has been
recognized in income because the forward contracts did not qualify as cash flow
hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The impact on earnings resulting from the forward contract for the
thirteen weeks ended June 29, 2002 was income of approximately $105,000,
recorded in "other income".
8
Note 8 New Accounting Standards
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS 144 on March 31, 2002, the beginning
of fiscal year 2003. The adoption of SFAS 144 had no effect on the Company's
financial position and results of operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets". This new standard requires that upon adoption, amortization of goodwill
(in the Company's case, principally its "reorganization value in excess of
amounts allocable to identifiable assets") and indefinite lived intangible
assets be ceased and instead, the carrying value of such assets be evaluated for
impairment on an annual basis. Identifiable intangible assets continue to be
amortized over their useful lives and reviewed for impairment. The Company
adopted the provisions of SFAS 142 on March 31, 2002, the first day of the
Company's new fiscal year, and accordingly, the Company has (1) reclassified its
reorganization value in excess of amounts allocable to identifiable assets to
goodwill, and (2) ceased amortization of the goodwill. The Company previously
reported in its Consolidated Financial Statements included in the Annual Report
on Form 10-K for the year ended March 30, 2002, that it had preliminarily
determined the effect of adopting SFAS 142 may result in a charge, as the
cumulative effect of a change in method of accounting, for as much as $14.6
million upon adoption of the new standard on March 31, 2002. The Company is in
the process of finalizing its determination of fair value which must be
completed within six months of the adoption of SFAS 142. The Company is
evaluating fair value methodologies and upon completion of the fair value
determination, the Company will finalize its determination of impairment and
will record the effect, if any, as the cumulative effect of a change in method
of accounting before the end of its fiscal year.
The following table summarizes and reconciles the reported net income
(loss) and net income (loss) per common share for the thirteen weeks ended June
29, 2002 and June 30, 2001, to adjusted net income (loss) and net income (loss)
per common share as if the amortization expense related to excess reorganization
value in the thirteen weeks ended June 30, 2001 were not recorded (in
thousands):
Thirteen Thirteen
weeks ended weeks ended
June 29, 2002 June 30, 2001
-----------------------------
Reported net income (loss) $ 2,709 $ (341)
Add: amortization of excess reorganization value -- 198
-----------------------------
Adjusted net income (loss) $ 2,709 $ (143)
=============================
Reported net income (loss) per common share, basic and diluted:
Income from continuing operations $ 0.55 $ 0.39
Loss on disposition of discontinued operations -- (0.46)
-----------------------------
Reported net income (loss) per common share, basic and diluted 0.55 (0.07)
-----------------------------
Add: amortization of excess reorganization value -- 0.04
-----------------------------
Adjusted net income (loss) per common share, basic and diluted $ 0.55 $ (0.03)
=============================
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
The following discussion and analysis of financial condition and results
of operations are based on the Company's unaudited Consolidated Financial
Statements. A summary of significant accounting policies is disclosed in Note 2
to the Consolidated Financial Statements included in the Annual Report on Form
10-K for the year ended March 30, 2002. The Company's critical accounting
policies are described under the caption "Critical Accounting Policies" in
Management's Discussion and Analysis on Form 10-K for the year ended March 30,
2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and judgments. Estimates and
assumptions are based on historical data and other assumptions that management
believes are reasonable in the circumstances. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of revenues and expenses during the
reported period.
Judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in the unaudited Consolidated
Financial Statements. It is important that the reader of the unaudited financial
statements understand that actual results could differ from these estimates,
assumptions and judgments.
Results of Operations
The Company has reported its metal and defense businesses as discontinued
operations in the consolidated financial statements from October 10, 2000, the
measurement date, through June 29, 2002. At June 29, 2002, the Company has
disposed of all discontinued operations except Galion, Inc. The following
summarizes the results of operations for the Company for the thirteen weeks
ended June 29, 2002 and June 30, 2001.
(In thousands)
Thirteen weeks ended Thirteen weeks ended
June 29, 2002 June 30, 2001
-------------------- --------------------
Net sales $ 61,448 $ 50,291
Gross profit 8,789 7,639
Income from operations 4,217 4,414
Other (income) expense, net (2,066) 160
Interest expense, net 1,021 1,264
Provision for income taxes 2,553 1,064
Loss on discontinued operations, net of taxes -- (2,267)
Net income (loss) 2,709 (341)
First Quarter (Thirteen Weeks) Ended June 29, 2002 Compared to First Quarter
(Thirteen Weeks) Ended June 30, 2001
Net Sales. Net sales increased $11.2 million or 22.2% to $61.4 million for
the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002.
North American operations net sales increased $1.8 million or 5.6% compared to
the first quarter of fiscal 2002, with the increase due to greater demand in the
North American market. Net sales for European operations increased $9.4 million
or 53.3% compared to the first quarter of fiscal 2002. The increase is due
primarily to the acquisition of Woodville, which accounted for approximately
$5.2 million of the increase, increased volumes at our other European operations
representing $3.4 million and the favorable effect of
10
fluctuations in the average quarterly foreign currency exchange rates of
approximately 3%, representing an increase of approximately $800,000.
Gross Profit. Gross profit increased $1.2 million or 15.1% to $8.8 million
for the first quarter of fiscal 2003 compared to the first quarter of fiscal
2002. The increase in gross profit did not correspond with the increase in net
sales due to losses associated with the continued ramp up of new programs and
higher operating costs at the Woodville operations, including the costs of
relocation of Woodville's production lines to other production facilities. For
these reasons, gross profit as a percentage of net sales decreased to 14.3% for
the first quarter of fiscal 2003 from 15.2% for the first quarter of fiscal
2002.
Income from Operations. Income from operations decreased $197,000 or 4.5%
to $4.2 million for the first quarter of fiscal 2003 compared to the first
quarter of fiscal 2002. The decrease is attributed primarily to an increase in
general and administrative expenses resulting from approximately $900,000 of
re-qualification and other costs incurred in preparation for the relocation of
the Woodville operation to other production facilities. The relocation of the
Woodville operations was completed in July 2002 and is expected to reduce future
production costs. Income from operations as a percentage of net sales decreased
to 6.9% for the first quarter of fiscal 2003 from 8.8% for the first quarter of
fiscal 2002. The decrease as a percentage of net sales was due to the items
discussed above.
Other (Income) Expense, net. The Company recorded other income of $2.1
million for the first quarter of fiscal 2003 as compared to other expense of
$160,000 for the first quarter of fiscal 2002. Other income/expense is derived
primarily from foreign transaction and translation activity. The Company
recorded net foreign transaction and translation gains during the first quarter
of fiscal 2003, while net foreign transaction and translation losses were
recorded in the first quarter of fiscal 2002. The fiscal 2003 transaction and
translation gains resulted from significant favorable foreign currency
fluctuations of approximately 13% in the June 29, 2002 exchange rates from those
rates at March 30, 2002.
Interest Expense, net. Interest expense decreased $243,000 or 19.2% to
$1.0 million for the first quarter of fiscal 2003 compared to the first quarter
of fiscal 2002. The decrease is attributable to both lower interest rates and
lower levels of debt in the first quarter of fiscal 2003 as compared to the
first quarter of fiscal 2002.
Provision for Income Taxes. The provision for income taxes for the first
quarter of fiscal 2003 increased $1.5 million compared to the first quarter of
fiscal 2002 due to (i) an increase of $2.3 million in income from continuing
operations compared to the comparable quarter in the prior year, (ii) the
recording of tax provisions for the Company's German and Czech Republic
subsidiaries in fiscal 2003 as net operating losses of those subsidiaries have
now been fully utilized, and (iii) the recording of an additional provision for
income taxes resulting from an examination by German taxing authorities. The
German taxing authorities have completed an examination covering years 1997
through 1999 and, based on the status of the examination at this time, the
Company has provided $350,000 for the estimated tax liability that will result
from this tax examination. The final German tax assessment is expected to be
completed and settled in the Company's second quarter of fiscal 2003. The
Company's effective tax rate for the thirteen weeks ended June 29, 2002 and June
30, 2001 were 48.5% and 35.6%, respectively. The increase in the effective tax
rate is due primarily to the effects of the matters described above. The income
tax provision and the effective tax rate for the first quarter of fiscal 2002
were lower than the statutory tax rate due to the Company's ability to utilize
existing net operating loss carryforwards in Germany and the Czech Republic
during that quarter.
Discontinued Operations. Loss on discontinued operations was $2.3 million
for the thirteen weeks ended June 30, 2001, net of income taxes of $1.5 million,
arising primarily from the relocation of, and other costs associated with the
former Valentec Wells, LLC operations, during the first quarter of fiscal 2002.
Valentec Wells, LLC was sold in September 2001.
Net Income (Loss). The Company's net income was $2.7 million for the first
quarter of fiscal 2003 compared to net loss of $341,000 for the first quarter of
fiscal 2002. This change to net income resulted from the
11
items discussed above, including primarily the $2.3 million charge for the
discontinued operations in the first quarter of fiscal 2002.
Liquidity and Capital Resources
Net cash used in operating activities of continuing operations was $5.6
million for the thirteen weeks ended June 29, 2002, compared to cash provided of
$4.6 million in the comparable period in the prior year. The cash used in
operating activities of continuing operations was principally due to timing in
the collection of accounts receivable balances as well as a build up of
inventory levels that did not occur in the first quarter of fiscal 2002. Net
cash provided by operating activities of discontinued operations of $87,000 for
the thirteen weeks ended June 29, 2002 compared to net cash used of $3.6 million
in the comparable period in the prior year. The improvement was principally
related to the former Valentec Wells, LLC operations, which, as previously
discussed, were relocated in the first quarter of fiscal 2002.
Net cash used in investing activities of continuing operations was $3.4
million for the thirteen weeks ended June 29, 2002, compared to net cash used in
investing activities of continuing operations of $1.1 million for the comparable
period in the prior year. This increase in cash used in investing activities of
continuing operations was attributable to an increase in capital expenditures
from the comparable period in the prior year for expansion of capacity due to
awarded new programs.
Net cash provided by financing activities of continuing operations was
$9.1 million for the thirteen weeks ended June 29, 2002, compared to net cash
provided by financing activities of continuing operations of $3.1 million for
the comparable period in the prior year. Net cash provided by financing
activities of continuing operations for the thirteen weeks ended June 29, 2002
is attributable to the Company's borrowings on its revolving credit facility,
partially offset by principal payments on other various long-term obligations.
The Company's capital expenditure and working capital requirements will be
funded through a combination of cash flows from operations, equipment financing
and borrowings under the Company's line of credit. These sources are considered
to be adequate to fund the Company's requirements for at least the next twelve
months. The Company has budgeted capital expenditures of approximately $6.3
million for the remainder of fiscal 2003.
The Company has available a three-year, $35.0 million, revolving credit
facility with Congress Financial Corporation (Southern), expiring October 11,
2003. Under the Congress Facility, the Company may borrow up to the lesser of
(a) $35.0 million or (b) 85% of eligible accounts receivable, plus 60% of
eligible finished goods, plus 50% of eligible raw materials. Included within
borrowings permitted under the Congress Facility (and its borrowing limitations)
are $4.6 million in term loans which are to be repaid in equal monthly
installments of approximately $112,000, with the unpaid principal amount due on
October 11, 2003, unless the Congress Facility is renewed at that time. Also
included within the borrowings permitted under the Congress Facility is a $3.0
million letter of credit facility, through which the Company had exposure of
$424,000 and $0 pursuant to letters of credit outstanding at June 29, 2002 and
March 30, 2002, respectively. At June 29, 2002, the Company's availability for
additional borrowings (under the maximum allowable limit) was approximately
$18.7 million.
The Company's $17.6 million subordinated secured note facility with
KeyBank National Association and Fleet Bank expires on October 11, 2002;
accordingly, such amount is classified in the current portion of long term debt
as of June 29, 2002 and March 30, 2002. The Company is negotiating a replacement
for this facility and has also requested an extension of its maturity with the
current lenders. Although no assurances can be given in this regard, management
believes that it will be able to obtain either a replacement or an extension for
the facility prior to its maturity in October 2002.
The Congress Facility and the Subordinated Facility both require the
Company to meet a minimum adjusted net worth (as defined) covenant along with
other certain non-financial covenants. At June 29, 2002, the Company was in
compliance with all financial and non-financial covenants. Substantially all
assets of the Company are
12
pledged as collateral for the borrowings under the Congress Facility and the
Subordinated Facility.
New Accounting Standards
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS 144 on March 31, 2002, the beginning
of fiscal year 2003. The adoption of SFAS 144 had no effect on the Company's
financial position and results of operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets". This new standard requires that upon adoption, amortization of goodwill
(in the Company's case, principally its "reorganization value in excess of
amounts allocable to identifiable assets") and indefinite lived intangible
assets be ceased and instead, the carrying value of such assets be evaluated for
impairment on an annual basis. Identifiable intangible assets continue to be
amortized over their useful lives and reviewed for impairment. The Company
adopted the provisions of SFAS 142 on March 31, 2002, the first day of the
Company's new fiscal year, and accordingly, the Company has (1) reclassified its
reorganization value in excess of amounts allocable to identifiable assets to
goodwill, and (2) ceased amortization of the goodwill. The Company previously
reported in its Consolidated Financial Statements included in the Annual Report
on Form 10-K for the year ended March 30, 2002, that it had preliminarily
determined the effect of adopting SFAS 142 may result in a charge, as the
cumulative effect of a change in method of accounting, for as much as $14.6
million upon adoption of the new standard on March 31, 2002. The Company is in
the process of finalizing its determination of fair value which must be
completed within six months of the adoption of SFAS 142. The Company is
evaluting fair value methodologies and upon completion of the fair value
determination, the Company will finalize its determination of impairment and
will record the effect, if any, as the cumulative effect of a change in method
of accounting before the end of its fiscal year.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
To the extent that amounts borrowed under the Company's revolving credit
facility are outstanding, the Company has market risk relating to such amounts
because the interest rates under the Congress Facility are variable. As of June
29, 2002, the Company's interest rates under its revolving credit facility
approximated 4.75%. A hypothetical increase or decrease in interest rates of 100
basis points relating to the Congress Facility would result in an addition to or
reduction in interest expense of approximately $150,000 on an annual basis.
The Company's operations in Mexico, Germany, the United Kingdom and the
Czech Republic expose the Company to currency exchange rate risks. Safety
Components monitors its risk associated with the volatility of certain foreign
currencies against its functional currency, the U.S. dollar. The impact of
changes in the relationship of other currencies to the U.S. dollar has
historically not been significant, and such changes in the future are not
expected to have a material impact on the Company's results of operations or
cash flows. If, however, there were a sustained decline of these currencies
versus the U.S. dollar, the consolidated financial statements could be
materially adversely affected. The Company uses certain derivative financial
instruments to reduce exposure to volatility of foreign currencies. The Company
has formally documented all relationships between hedging instruments and hedged
items, as well as risk management objectives and strategies for undertaking
various hedge transactions. Derivative financial instruments are not entered
into for speculative purposes.
Certain operating expenses at the Company's Mexican facilities are paid in
Mexican pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican
peso exchange rates, the Company entered into forward contracts on May 31, 2002
to buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are being monitored for
13
effectiveness on a routine basis. At June 29, 2002, the Company had outstanding
forward exchange contracts that mature between October 2002 and March 2003 to
purchase Mexican pesos with an aggregate notional amount of approximately $4.7
million. The fair values of these contracts at June 29, 2002, totaled
approximately $150,000, which is recorded as a derivative liability on the
Company's balance sheet in other current liabilities. Substantially all of the
loss on these forward contracts was recorded in "accumulated other comprehensive
income" at June 29, 2002.
On December 18, 2001, the Company entered into two forward exchange
contracts, with notional amounts totaling $2.2 million, to buy British pounds
for an amount consistent with the related underlying obligation of its U.K.
subsidiary for the May 2, 2002 and November 2, 2002 scheduled payments for the
acquisition of Woodville. The change in fair value of these contracts has been
recognized in income because the forward contracts did not qualify as cash flow
hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The impact on earnings resulting from the forward contract for the
thirteen weeks ended June 29, 2002 was income of approximately $105,000,
recorded in "other income".
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibits
10.25 Form of Stock Option Agreement - Class C
99.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended
June 29, 2002.
14
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
(Registrant)
DATED: August 9, 2002 By: /s/ Brian P. Menezes
----------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ William F. Nelli
-----------------------------
William F. Nelli
Controller
15