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 28, 2003
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
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 11, 2003, was 4,959,678.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The unaudited condensed consolidated financial information at June 28, 2003 and
for the quarter then ended, unaudited condensed consolidated statements of
operations and of cash flows for the quarter ended June 29, 2002 and the audited
condensed consolidated balance sheet at March 29, 2003 relate to Safety
Components International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Consolidated Balance Sheets as of June 28, 2003
(unaudited) and March 29, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the quarter ended June 28, 2003 and June 29, 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the quarter ended June 28, 2003 and June 29, 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14
ITEM 4. CONTROLS AND PROCEDURES 15
PART II OTHER INFORMATION 16
SIGNATURES 17
CERTIFICATIONS 18
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, those relating
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, including the marketplace for airbag related products; the
ability of the Company to effectively control costs and to satisfy customers on
timeliness and quality; approval by automobile manufacturers of airbag cushions
currently in production; pricing pressures and labor strikes.
2
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 28, 2003 March 29, 2003
------------- --------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 7,204 $ 7,564
Accounts receivable, net .............................................................. 45,357 43,882
Inventories, net ...................................................................... 23,688 24,000
Prepaid and other ..................................................................... 2,790 1,949
--------- ---------
Total current assets ............................................................... 79,039 77,395
Property, plant and equipment, net ......................................................... 52,827 52,622
Identifiable intangible assets, net ........................................................ 1,138 1,106
Other assets ............................................................................... 2,946 2,941
--------- ---------
Total assets ....................................................................... $ 135,950 $ 134,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 24,119 $ 26,713
Accrued and other current liabilities ................................................. 13,528 10,956
Current portion of long-term debt ..................................................... 27,455 31,710
--------- ---------
Total current liabilities .......................................................... 65,102 69,379
Long-term debt ............................................................................. 7,228 7,363
Other long-term liabilities ................................................................ 5,578 5,409
--------- ---------
Total liabilities .................................................................. 77,908 82,151
--------- ---------
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
Additional paid-in-capital ............................................................ 50,950 50,916
Treasury stock: 40,322 shares at cost ................................................. (411) (411)
Retained earnings (accumulated deficit) ............................................... 934 (3,446)
Accumulated other comprehensive income ................................................ 6,519 4,770
--------- ---------
Total stockholders' equity ......................................................... 58,042 51,913
--------- ---------
Total liabilities and stockholders' equity ......................................... $ 135,950 $ 134,064
========= =========
(1) Derived from the audited consolidated balance sheet as of March 29, 2003.
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 28, 2003 June 29, 2002
------------- -------------
Net sales .................................................................... $ 67,416 $ 61,448
Cost of sales, excluding depreciation ........................................ 54,099 50,463
Depreciation ................................................................. 2,731 2,196
-------- --------
Gross profit ......................................................... 10,586 8,789
Selling and marketing expenses ............................................... 773 552
General and administrative expenses .......................................... 3,151 3,799
Research and development expenses ............................................ 332 193
Amortization of intangible assets ............................................ 35 28
-------- --------
Income from operations ............................................... 6,295 4,217
Other income, net ............................................................ (1,397) (2,066)
Interest expense, net ........................................................ 668 1,021
-------- --------
Income before income tax provision and cumulative effect of change
in method of accounting ............................................ 7,024 5,262
Provision for income taxes ................................................... 2,644 2,553
-------- --------
Income before cumulative effect of change in method of accounting .... 4,380 2,709
Cumulative effect of change in method of accounting .......................... -- 14,651
-------- --------
Net income (loss) ............................................................ $ 4,380 $(11,942)
======== ========
Net income (loss) per common share - basic:
Income before cumulative effect of change in method of accounting .... $ 0.88 $ 0.55
Cumulative effect of change in method of accounting .................. -- (2.95)
-------- --------
Net income (loss) per common share - basic ................................... $ 0.88 $ (2.41)
======== ========
Net income (loss) per common share - diluted:
Income before cumulative effect of change in method of accounting .... $ 0.88 $ 0.55
Cumulative effect of change in method of accounting .................. -- (2.95)
-------- --------
Net income (loss) per common share - diluted ................................. $ 0.88 $ (2.41)
======== ========
Weighted average number of common shares outstanding - basic ................. 4,960 4,960
======== ========
Weighted average number of common shares outstanding - diluted ............... 4,970 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 28, 2003 June 29, 2002
------------- -------------
Cash Flows From Operating Activities:
Net income (loss) ...................................................................... $ 4,380 $(11,942)
Cumulative effect of change in method of accounting .................................... -- 14,651
------- --------
Income from continuing operations ...................................................... 4,380 2,709
Adjustments to reconcile income from continuing operations to net
cash provided by (used in) operating activities:
Depreciation ......................................................................... 2,731 2,196
Amortization ......................................................................... 35 28
Loss on disposition of assets ........................................................ 192 59
Net changes in operating assets and liabilities ...................................... (1,473) (10,627)
------- --------
Net cash provided by (used in) continuing operations ............................. 5,865 (5,635)
Net cash provided by discontinued operations ..................................... -- 87
------- --------
Net cash provided by (used in) operating activities .............................. 5,865 (5,548)
------- --------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ............................................. (1,281) (3,423)
------- --------
Net cash used in continuing operations ........................................... (1,281) (3,423)
Net cash used in discontinued operations ......................................... -- (32)
------- --------
Net cash used in investing activities ............................................ (1,281) (3,455)
------- --------
Cash Flows From Financing Activities:
Repayment of KeyBank Subordinated Secured term note .................................... (1,940) (90)
Repayment of Congress Subordinated term note ........................................... (252) (337)
Net (repayments) borrowings on Congress revolving credit facility ...................... (1,882) 11,279
Payment to former owner of acquired business ........................................... -- (955)
Repayments of other debt and long term obligations ..................................... (746) (771)
------- --------
Net cash (used in) provided by financing activities .............................. (4,820) 9,126
------- --------
Effect of exchange rate changes on cash and cash equivalents ................................ (124) 433
------- --------
(Decrease) increase in cash and cash equivalents ............................................ (360) 556
Cash and cash equivalents, beginning of period .............................................. 7,564 2,692
------- --------
Cash and cash equivalents, end of period .................................................... $ 7,204 $ 3,248
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ......................................................................... $ 529 $ 774
Income taxes ..................................................................... 866 1,239
Non-cash investing and financing activities:
Foreign currency translation adjustment .......................................... $ 1,542 $ 3,685
Unrealized gain (loss) on hedging transactions, net of taxes ..................... 207 (89)
See notes to unaudited condensed consolidated financial statements.
5
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Safety Components International, Inc. and its 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 29, 2003. 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
well as adjustments for the cumulative effect in change in method of accounting.
Discontinued Operations
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, the measurement date, through March 29, 2003. Prior to
March 29, 2003, the Company had disposed of the last of its discontinued
operations with the sale of Galion, Inc. on December 23, 2002. Accordingly, the
businesses' net losses during the quarter ended June 29, 2002, which were
incurred subsequent to the measurement date, were applied against the accrued
losses recorded at that date.
Segment Information
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company sells similar
products (airbag cushions, airbag fabric and technical fabrics), uses similar
processes in selling the products and sells the products to similar classes of
customers. As a result of these similar economic characteristics and the way the
business is managed, the Company has aggregated the results into a single
segment for purposes of reporting financial condition and results of operations.
Stock Based Compensation
The Company applies the principles of Accounting Principles Board ("APB")
Opinion 25 in accounting for employee stock option plans (the intrinsic value
method). All stock options granted during the fiscal periods presented had an
exercise price equal to the fair market value of the underlying common stock at
the date of grant. Accordingly, under APB 25, no compensation cost has been
recognized in the Company's financial statements for the quarters ended June 28,
2003 and June 29, 2002. Had compensation cost been determined on the basis of
SFAS 123, "Accounting for Stock-Based Compensation," compensation expense would
have been recorded based on the estimated fair value of stock options granted
during the fiscal periods presented. The total fair value of stock options
vested was estimated at $244,000 and $0 for the quarters ended June 28, 2003 and
June 29, 2002, respectively, based upon the Black-Scholes option-pricing model.
The fair values are estimated on the date of grant with the following
assumptions used for grants in fiscal years 2003 and 2002, respectively: risk
free interest rate of 4.79 and 5.45 percent; zero percent dividends; expected
lives of 6.0 years for each grant; and expected volatility of 80.9 and 188.0
percent.
Had compensation cost for the Company's stock option plans been determined
based on the estimated fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123 (as amended), the Company's
compensation cost (net of tax), net income (loss) and net income (loss) per
common share, basic and
6
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
diluted, would have been affected as indicated in the pro-forma amounts below
(unaudited) (in thousands, expect per share data):
Thirteen Thirteen
weeks ended weeks ended
June 28, 2003 June 29, 2002
-----------------------------
Net income (loss), as reported: $ 4,380 $ (11,942)
Deduct: Total stock-based employee compensation expense
determined under fair value, net of tax 244 --
-------------------------
Pro forma net income (loss): $ 4,136 $ (11,942)
=========================
Net income (loss) per share:
Basic and diluted - as reported: $ 0.88 $ (2.41)
Basic and diluted - pro forma: $ 0.83 $ (2.41)
Current Maturity of Credit Facilities
As discussed in Note 4, the Company's revolving credit facility with
Congress Financial Corporation (Southern) and subordinated secured note facility
with Key Bank National Association and Fleet Bank both mature in October 2003.
Accordingly, the Company has classified the amount outstanding for the Congress
Facility and the Subordinated Facility in the current portion of long-term debt
as of June 28, 2003. The ability of the Company to maintain continuity of
operations is dependent on the renewal or replacement of these facilities. The
Company intends to renegotiate or replace the Congress Facility and the
Subordinated Facility prior to maturity in October 2003 and is currently
evaluating proposals from the current lenders and other proposals to replace the
existing facilities. Although no assurances can be provided in this regard,
management believes that it will be able to renegotiate or replace these
facilities prior to their maturity with amended or new facilities on comparable
terms.
Note 2 Discontinued Operations
On December 23, 2002, the Company completed the disposal of its
discontinued operations with the sale of Galion, Inc. ("Galion") pursuant to a
stock purchase agreement between the Company and Galion Acquisition, LLC, an
affiliate of The Diversified Group Incorporated. The Company sold all its stock
in Galion for an adjusted purchase price of $454,000 in cash resulting in a loss
on disposition of discontinued operations of approximately $2.0 million
(including the recognition of a tax provision of approximately $660,000 related
to an adjustment of the deferred tax liabilities of the discontinued
operations). There was no tax effect on the loss on disposition as the Company
recorded a deferred tax asset and a concurrent reserve on the tax asset since
the loss on disposition was a capital loss and the Company's ability to utilize
the capital loss carryforward in the future is uncertain.
Net sales for the Company's discontinued metal and defense operations were
$2,136,000 for the quarter ended June 29, 2002 and no gain or loss was
recognized in this period.
Note 3 Inventories
Inventories reported on the Company's balance sheets were as follows
(unaudited) (in thousands):
June 29, 2003 March 29, 2003
------------------------------------
Raw materials $ 6,875 $ 7,023
Work-in-process 7,219 7,684
Finished goods 9,594 9,293
-------------------------------
Total $ 23,688 $ 24,000
===============================
7
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Long-Term Debt
The Company has an aggregate, $35.0 million revolving credit facility,
with Congress Financial Corporation (Southern) (the "Congress Facility")
expiring October 9, 2003 and currently bearing interest at 4.00%. Accordingly,
the Company has classified the amount outstanding for the Congress Facility in
the current portion of long-term debt as of June 28, 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 under the Congress
Facility (and its borrowing limitations) are $2.3 million in term loans which
are to be repaid in equal monthly installments of approximately $84,000, with
the unpaid principal amount due on October 9, 2003. The amount outstanding under
the facility at June 28, 2003 and March 29, 2003 (including term loans) was
$17.2 million and $19.7 million, respectively. Also included within the
borrowings under the Congress Facility is a $3.0 million letter of credit
facility, under which the Company had exposure of $497,000 and $424,000 pursuant
to letters of credit outstanding at June 28, 2003 and March 29, 2003,
respectively. At June 28, 2003, the Company's availability for additional
borrowings (under the maximum allowable limit) was approximately $16.4 million.
The Company's subordinated secured note facility (the "Subordinated
Facility"), bearing interest at 11%, with KeyBank National Association and Fleet
Bank is due on October 10, 2003. The amount outstanding under the Subordinated
Facility at June 28, 2003 and March 29, 2003 was $7.3 million and $9.2 million,
respectively.
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 28, 2003, 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.
The Company intends to renegotiate or replace the Congress Facility and
the Subordinated Facility when these facilities mature in October 2003. Although
no assurances can be provided in this regard, management currently believes that
it will be able to renegotiate or replace these facilities with amended or new
facilities on comparable terms.
Note 5 Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed using the weighted-average
number of common shares and potentially dilutive common shares outstanding for
the period. Potentially dilutive common shares consist of shares under option. A
reconciliation of basic and diluted weighted average shares outstanding is
presented below (unaudited):
--------------------------------
Thirteen Thirteen
weeks ended weeks ended
June 28, 2003 June 29, 2002
--------------------------------
Weighted average number of common shares
outstanding - basic 4,959,678 4,959,678
Net effect of dilutive stock options - based
on the treasury stock method using the
average market price 9,828 *
-----------------------------
Weighted average number of common shares
outstanding - diluted 4,969,506 4,959,678
=============================
* Effect is anti-dilutive for these periods (all options were
anti-dilutive).
8
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 Comprehensive Income (loss)
The components of comprehensive income (loss) are as follows (unaudited)
(in thousands):
-------------------------------
Thirteen Thirteen
weeks ended weeks ended
June 28, 2003 June 29, 2002
-------------------------------
Net income (loss) $ 4,380 $(11,942)
Foreign currency
translation adjustment 1,542 3,685
Unrealized gain (loss) on hedging
transactions, net of taxes 207 (89)
--------------------------
Comprehensive income (loss) $ 6,129 $ (8,346)
==========================
Note 7 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 8 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
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 April 10,
2003 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 28, 2003, the Company had outstanding forward exchange contracts that
mature between July 2003 and March 2004 to purchase Mexican pesos with an
aggregate notional amount of approximately $8.4 million. The fair values of
these contracts at June 28, 2003, totaled approximately $305,000, which is
recorded as an asset on the Company's balance sheet in other current assets. The
Company recorded a credit to earnings of approximately $57,000 for the quarter
ended June 28, 2003 and the unrealized gain on these forward contracts of
approximately $305,000 was included in "accumulated other comprehensive income"
at June 28, 2003.
Certain intercompany sales at the Company's Czech facility are denominated
and settled in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company entered into forward contracts on June 23,
2003 to buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts were designated as hedges at inception and are being monitored for
effectiveness on a routine basis. At June 28, 2003, the Company had outstanding
forward exchange contracts that mature between July 2003 and March 2004 to
purchase Czech Korunas with an aggregate notional amount of approximately $4.8
million. The fair values of these contracts at June 28, 2003 totaled
approximately $97,000, which is recorded as a liability on the Company's balance
sheet in other current liabilities. The Company recorded an insignificant amount
to earnings for the quarter ended June 28, 2003 and the
9
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
unrealized loss on these forward contracts of approximately $97,000 was included
in "accumulated other comprehensive income" at June 28, 2003.
Note 9 New Accounting Standards
In April 2003, Statement of Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
was issued which amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities under SFAS No. 133. It requires, among other things, that
contracts with comparable characteristics be accounted for similarly and
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective generally for contracts entered into and
modified after June 30, 2003. The adoption of this Statement did not have any
effect on the Company's financial position or statement of operations.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." This statement establishes new standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has not completed its evaluation of what, if any, impact this
statement will have on the Company's financial position or statement of
operations.
10
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 condensed 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 29, 2003. The Company's critical
accounting policies are further described under the caption "Critical Accounting
Policies" in Management's Discussion and Analysis in the Annual Report on Form
10-K for the year ended March 29, 2003.
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 condensed
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.
There have been no changes in the nature of the Company's critical
accounting policies or the application of those policies since March 29, 2003.
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 disposal of the final discontinued business on
December 23, 2002. The following summarizes the results of operations for the
Company for the quarters ended June 28, 2003 and June 29, 2002.
(In thousands)
Thirteen Thirteen
weeks ended weeks ended
June 28, 2003 June 29, 2002
------------------------------
Net sales $ 67,416 $ 61,448
Gross profit 10,586 8,789
Income from operations 6,295 4,217
Other income, net (1,397) (2,066)
Interest expense, net 668 1,021
Provision for income taxes 2,644 2,553
Cumulative effect of change in
method of accounting -- 14,651
Net income (loss) 4,380 (11,942)
11
First Quarter Ended June 28, 2003 Compared to First Quarter Ended June 29, 2002
Net Sales. Net sales increased $6.0 million, or 9.7%, to $67.4 million for
the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003.
North American operations' net sales decreased $1.0 million or 3.0% compared to
the first quarter of fiscal 2003, with the decrease principally due to decreased
demand in the North American automotive market. Net sales for European
operations increased $7.0 million or 26.1% compared to the first quarter of
fiscal 2003. The increase in Europe is due primarily to the effect of changes in
foreign currency exchange rates that increased net sales as expressed in US
dollars by approximately $5.3 million over the amount that would have been
reported based on exchange rates in effect in the first quarter of fiscal 2003,
and additional volumes resulting from new programs at the European operations.
Gross Profit. Gross profit increased $1.8 million, or 20.5%, to $10.6
million for the first quarter of fiscal 2004 compared to the third quarter of
fiscal 2003. The increase in gross profit is due primarily to European
operations, representing an increase of $1.6 million or 60.0% over the prior
year. This increase can be attributed to the increase in net sales as well as
improved operating efficiencies and cost savings in operations resulting from
the Company's prior year transfer of production lines within Europe. Gross
profit increased slightly in North America due to continued manufacturing
efficiency improvements. Gross profit as a percentage of net sales increased to
15.7% for the first quarter of fiscal 2004 from 14.3% for the first quarter of
fiscal 2003.
Income from Operations. Income from operations increased $2.1 million, or
49.3%, to $6.3 million for the first quarter of fiscal 2004 compared to the
first quarter of fiscal 2003. The increase is attributable to the gross profit
increase discussed above, as well as approximately $900,000 of prior year
expenses associated with the re-qualification and relocation of the Woodville
operation to other production facilities during the first quarter of fiscal
2003. Income from operations as a percentage of net sales increased to 9.3% for
the first quarter of fiscal 2004 from 6.9% for the first quarter of fiscal 2003.
Other Income, net. The Company recognized other income, net of $1.4
million for the first quarter of fiscal 2004 as compared to other income, net of
$2.1 million for the first quarter of fiscal 2003. Other income, net is realized
primarily from foreign transaction gains resulting from the revaluation of
intercompany balances between the European subsidiaries and the U.S. parent
company. The Company recorded net foreign transaction gains of $1.4 million
during the first quarter of fiscal 2004, compared to net foreign transaction
gains of $2.1 million recorded in the first quarter of fiscal 2003. The fiscal
2004 foreign transaction gains resulted from significant favorable changes in
foreign currency exchange rates of approximately 10.4% from those at June 28,
2003 as compared to those at March 29, 2003.
Interest Expense, net. Interest expense decreased $353,000, or 34.6%, to
$668,000 for the first quarter of fiscal 2004 compared to the first quarter of
fiscal 2003. The decrease is attributable primarily to a decrease in average
levels of outstanding debt from $44.3 million to $34.9 million in the first
quarter of fiscal 2004 as compared to the first quarter of fiscal 2003.
Provision for Income Taxes. The provision for income taxes for the first
quarter of fiscal 2004 increased $91,000 compared to the first quarter of fiscal
2003. The Company's effective tax rate for the first quarter of fiscal 2004 was
37.6% compared to 48.5% for the first quarter of fiscal 2003. The effective tax
rate for the first quarter of fiscal 2004 is lower than the U.S. statutory tax
rate due to lower tax rates at certain of the Company's European subsidiaries.
The effective tax rate for the first quarter of fiscal 2003 was substantially
higher than the U. S. statutory tax rate because the recognition of tax
provisions for the Company's German subsidiary at higher local rates and the
recording of an additional provision for income taxes resulting from an
examination by German taxing authorities.
Cumulative Effect of Change in Method of Accounting. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective March 31, 2002.
As a result of management's assessment of fair value, the Company's
"Reorganization value in excess of identifiable assets" and goodwill were
determined to be impaired and, accordingly, the total amount of approximately
$14.7 million was written off as the cumulative effect of a change in method of
accounting at March 31, 2002. There was no tax effect of the change in
accounting principle, as the excess reorganization value and goodwill were not
deductible for income tax purposes.
12
Net Income. The Company's net income was $4.4 million for the first
quarter of fiscal 2004 compared to net loss of $11.9 for the first quarter of
fiscal 2003. This change in net income resulted from the items discussed above.
Liquidity and Capital Resources
Net cash provided by operating activities of continuing operations was
$5.9 million for the first quarter of fiscal 2004, compared to cash used in
operating activities of continuing operations of $5.6 million in the comparable
period in the prior year. The cash provided by operating activities of
continuing operations was generated principally from the income of the
continuing operations. The cash used in operating activities in the comparable
period of the prior year was primarily due to the increased inventory levels
associated with the move of production lines and the ramp-up of programs in
Europe.
Net cash used in investing activities of continuing operations was $1.3
million for the first quarter of fiscal 2004, compared to net cash used in
investing activities of continuing operations of $3.4 million for the comparable
period in the prior year. Capital expenditures for the comparable period in the
prior year included those related to capacity increases necessitated by new
programs awarded by customers.
Net cash used in financing activities of continuing operations was $4.8
million for the first quarter of fiscal 2004, compared to net cash provided by
financing activities of continuing operations of $9.1 million for the comparable
period in the prior year. Net cash used in financing activities of continuing
operations for the first quarter of fiscal 2004 is attributable to the Company's
repayments of its revolving credit facility and payments on various other
long-term obligations. Borrowings under credit facilities in the first quarter
of fiscal 2003 were used to fund increases in working capital as well as
increased levels of capital expenditures offset by payments on various long-term
obligations.
The Company has an aggregate, $35.0 million revolving credit facility with
Congress Financial Corporation (Southern) (the "Congress Facility") expiring
October 9, 2003 and bearing interest at June 28, 2003 of 4.25%. Accordingly, the
Company has classified the amount outstanding for the Congress Facility in the
current portion of long-term debt as of June 28, 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 under the Congress
Facility (and its borrowing limitations) are $2.3 million in term loans which
are to be repaid in equal monthly installments of approximately $84,000, with
the unpaid principal amount due on October 9, 2003. The amount outstanding under
the facility at June 28, 2002 and March 29, 2003 (including term loans) was
$17.2 million and $19.7 million, respectively. Also included within the
borrowings under the Congress Facility is a $3.0 million letter of credit
facility, under which the Company had exposure of $497,000 and $424,000 pursuant
to letters of credit outstanding at June 28, 2003 and March 29, 2003. At June
28, 2003, the Company's availability for additional borrowings (under the
maximum allowable limit) was approximately $16.4 million.
The Company's subordinated secured note facility (the "Subordinated
Facility"), bearing interest at 11%, with KeyBank National Association and Fleet
Bank is due on October 10, 2003. Pursuant to the terms of an extension agreement
entered into on October 11, 2002, the Company repaid $5.0 million of the
outstanding principal balance on October 11, 2002. Such payment was funded by
borrowings under the Congress Facility. The amount outstanding under the
Subordinated Facility at June 28, 2003 and March 29, 2003 was $7.3 million and
$9.2 million, respectively.
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 28, 2003, 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.
The Company intends to renegotiate or replace the Congress Facility and
the Subordinated Facility when these facilities mature in October 2003. Although
no assurances can be provided in this regard, management
13
currently believes that it will be able to renegotiate or replace these
facilities with amended or new facilities on comparable terms.
New Accounting Standards
In April 2003, Statement of Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
was issued which amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities under SFAS No. 133. It requires, among other things, that
contracts with comparable characteristics be accounted for similarly and
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effectively generally for contracts entered into and
modified after June 30, 2003. The adoption of this Statement did not have any
effect on the Company's financial position or statement of operations.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." This statement establishes new standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has not completed its evaluation of what, if any, impact this
statement will have on the Company's financial position or statement of
operations.
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
28, 2003, the Company's interest rates under its revolving credit facility
approximated 4.25%. 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 annual interest expense of approximately $200,000.
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 Company uses
certain derivative financial instruments to reduce exposure to volatility of
foreign currencies. However, the changes in the relationship of other currencies
to the U.S. dollar could have a materially adverse affect to the consolidated
financial statements if there were a sustained decline of these currencies
versus the U.S. dollar. 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 April 10,
2003 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 28, 2003, the Company had outstanding forward exchange contracts that
mature between July 2003 and March 2004 to purchase Mexican pesos with an
aggregate notional amount of approximately $8.4 million. The fair values of
these contracts at June 28, 2003, totaled approximately $305,000, which is
recorded as an asset on the Company's balance sheet in other current assets. The
Company recorded a credit to earnings of approximately $57,000 for the quarter
ended June 28, 2003 and the unrealized gain on these forward contracts of
approximately $305,000 was included in "accumulated other comprehensive income"
at June 28, 2003.
14
Certain intercompany sales at the Company's Czech facility are denominated
and paid in Euros. To reduce exposure to fluctuation in the Euro and Czech
Koruna exchange rates, the Company entered into forward contracts on June 23,
2003 to buy Czech Korunas for periods and amounts consistent with the related,
underlying forecasted cash inflows associated with the intercompany sales. These
contracts were designated as hedges at inception and are being monitored for
effectiveness on a routine basis. At June 28,2003, the Company had outstanding
forward exchange contracts that mature between July 2003 and March 2004 to
purchase Czech Korunas with an aggregate notional amount of approximately $4.8
million. The fair values of these contracts at June 28, 2003 totaled
approximately $97,000, which is recorded as a liability on the Company's balance
sheet in other current liabilities. The Company recorded an insignificant amount
to earnings for the quarter ended June 28, 2003 and the unrealized loss on these
forward contracts of approximately $97,000 was included in "accumulated other
comprehensive income" at June 28, 2003.
ITEM 4 CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out
an evaluation of the effectiveness and design of the Company's disclosure
controls and procedures pursuant to Exchange Act Rules 13a-14 and 15d-14. Based
on this evaluation, the Company's principal executive officer, principal
financial officer and principal accounting officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic reports
filed with the SEC.
In addition, the Company reviewed its internal controls, and there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
15
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
----------- --------
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 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 28,
2003.
16
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.
DATED: August 11, 2003 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
(Principal Accounting Officer)
17
CERTIFICATIONS
I, John C. Corey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Safety
Components International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATED: August 11, 2003 By: \s\ John C. Corey
---------------------
John C. Corey
President and
Chief Executive Officer
18
I, Brian P. Menezes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Safety
Components International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATED: August 11, 2003 By: \s\ Brian P. Menezes
-----------------------------
Brian P. Menezes
Vice President and
Chief Financial Officer
(Principal Financial Officer)
19