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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 March 31, 2005
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 April 30, 2005 was 5,370,147.
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
The financial statements noted in Item 1 below relate to Safety Components
International, Inc. and its subsidiaries.
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004 3
Unaudited Consolidated Statements of Operations for the
three-month periods ended March 31, 2005 and March 31, 2004 4
Unaudited Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2005 and March 31, 2004 5
Notes to Unaudited 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 15
ITEM 4. CONTROLS AND PROCEDURES 16
PART II OTHER INFORMATION 17
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS 17
SIGNATURES 18
Private Securities Litigation Reform Act of 1995
The discussion in this report contains 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 Safety Components 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.
Except as may be required by law, the Company expressly disclaims any obligation
to update these forward-looking statements to reflect events or circumstances
after the date of this Quarterly Report on Form 10-Q or to reflect the
occurrence of unanticipated events.
2
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, 2005 December 31, 2004
-------------- -----------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 8,307 $ 4,184
Accounts receivable, net .................................................................. 39,774 39,272
Inventories, net .......................................................................... 24,595 26,882
Assets held in deferred compensation plan ................................................. 4,706 4,361
Prepaid and other ......................................................................... 2,300 2,653
----------- -----------
Total current assets .................................................................. 79,682 77,352
Property, plant and equipment, net .......................................................... 45,482 48,449
Identifiable intangible assets, net ......................................................... 1,009 1,108
Other assets ................................................................................ 557 617
----------- -----------
Total assets .......................................................................... $ 126,730 $ 127,526
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................................... $ 14,009 $ 16,828
Accrued salaries and benefits ............................................................. 3,872 4,270
Deferred compensation ..................................................................... 3,918 3,666
Accrued and other current liabilities ..................................................... 4,688 4,486
Income taxes payable ...................................................................... 6,009 6,715
Current portion of long-term debt ......................................................... 2,745 3,263
----------- -----------
Total current liabilities ............................................................. 35,241 39,228
Long-term debt, net of current maturities ................................................... 6,453 3,729
Deferred income taxes ....................................................................... 3,255 3,635
Other long-term liabilities ................................................................. 277 277
----------- -----------
Total liabilities ..................................................................... 45,226 46,869
----------- -----------
Commitments and contingencies
Minority interest ........................................................................... 35 133
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized and unissued ................................. -- --
Common stock: $0.01 par value per share - 20,000,000 shares authorized; 5,370,147 and
5,295,778 shares outstanding at March 31, 2005 and December 31, 2004, respectively ...... 54 53
Additional paid-in-capital ................................................................ 55,496 54,660
Treasury stock: 40,322 shares at cost ..................................................... (411) (411)
Retained earnings ......................................................................... 15,094 12,904
Accumulated other comprehensive income .................................................... 11,236 13,318
----------- -----------
Total stockholders' equity ............................................................ 81,469 80,524
----------- -----------
Total liabilities and stockholders' equity ............................................ $ 126,730 $ 127,526
=========== ===========
(1) Derived from the audited consolidated balance sheet as of December 31, 2004.
See notes to unaudited consolidated financial statements.
3
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Quarter Ended Quarter Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net sales .................................................................. $ 58,612 $ 69,231
Cost of sales, excluding depreciation ...................................... 48,024 55,601
Depreciation ............................................................... 2,450 2,791
--------- ---------
Gross profit ........................................................ 8,138 10,839
Selling, general and administrative expenses ............................... 4,371 4,907
--------- ---------
Income from operations .............................................. 3,767 5,932
Other expense, net ......................................................... 439 215
Interest expense ........................................................... 175 212
--------- ---------
Income from operations before income taxes and minority interest .... 3,153 5,505
Provision for income taxes ................................................. 1,088 2,382
Minority interest in loss of consolidated subsidiaries ..................... (125) --
--------- ---------
Net income ................................................................. $ 2,190 $ 3,123
========= =========
Net income per common share, basic ......................................... $ 0.41 $ 0.62
========= =========
Net income per common share, diluted ....................................... $ 0.40 $ 0.60
========= =========
Weighted average number of shares outstanding, basic ....................... 5,329 5,043
========= =========
Weighted average number of shares outstanding, diluted ..................... 5,425 5,167
========= =========
See notes to unaudited consolidated financial statements.
4
SAFETY COMPONENTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Quarter Ended Quarter Ended
March 31, 2005 March 31, 2004
-------------- --------------
Cash Flows From Operating Activities:
Net income .................................................... $ 2,190 $ 3,123
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .............................. 2,490 2,829
Provision for bad debts .................................... 137 114
Loss on disposition of assets .............................. -- 33
Minority interest .......................................... (125) --
Deferred taxes ............................................. (154) 378
Tax benefit from exercise of stock options ................. 187 219
Changes in operating assets and liabilities:
Accounts receivable ...................................... (639) (10,648)
Inventories .............................................. 2,287 520
Prepaid and other current assets ......................... (124) 75
Other non-current assets ................................. 33 (402)
Accounts payable ......................................... (2,819) (932)
Income taxes payable ..................................... (706) 1,139
Deferred compensation .................................... 252 391
Accrued and other liabilities ............................ (228) 1,905
--------- ---------
Net cash provided by (used in) operating activities ...... 2,781 (1,256)
--------- ---------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment ................. (638) (869)
--------- ---------
Net cash used in investing activities .................... (638) (869)
Cash Flows From Financing Activities:
Repayment of Wachovia term note ............................ (134) (216)
Net borrowings on Wachovia revolving credit facility ....... 3,350 3,222
Repayments of other debt and long-term obligations ......... (879) (664)
Proceeds from issuance of common stock ..................... 650 760
--------- ---------
Net cash provided by financing activities ............... 2,987 3,102
--------- ---------
Effect of exchange rate changes on cash and cash equivalents .... (1,007) (54)
--------- ---------
Change in cash and cash equivalents ............................. 4,123 923
Cash and cash equivalents, beginning of period .................. 4,184 4,376
--------- ---------
Cash and cash equivalents, end of period ........................ $ 8,307 $ 5,299
========= =========
See notes to unaudited consolidated financial statements.
5
Note 1 Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by Safety Components International, Inc. and its subsidiaries ("Safety
Components" or the "Company") pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "SEC"). 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 included herein are adequate to make the information
presented not misleading. It is suggested that these unaudited consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004. 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 statement of
the results for the reported interim periods, including those of a normal
recurring nature.
The Company
The Company is an independent supplier of automotive airbag fabric and
cushions and technical fabrics with operations in North America and Europe. The
Company has recently entered into joint ventures to produce products in China
and South Africa, although commercial production has not yet commenced in either
of these locations. The Company sells airbag fabric domestically and cushions
worldwide to the major airbag module integrators that outsource such products.
The Company is also a manufacturer of value-added technical fabrics used in a
variety of niche industrial and commercial applications such as fire service
apparel, ballistics material for luggage, filtration and military tents. See the
Company's Annual Report on Form 10-K for the year ended December 31, 2004 for
additional information on the Company's business and its establishment of joint
ventures.
Segment Information
The Company uses Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information" to
account for business segments. The Company sells similar products (airbag
cushions, airbag fabrics and technical fabrics), generates similar margins on
these products, uses similar processes in producing the products and sells the
products to similar classes of customers. As a result of these similar
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
On May 18, 2001, the Safety Components International, Inc. 2001 Stock
Option Plan ("Stock Option Plan") became effective pursuant to shareholder
approval. The Stock Option Plan provides for the issuance of options to purchase
up to an aggregate of 900,000 shares of the Company's common stock to key
officers, employees, directors and consultants of the Company or its affiliates.
Unless designated otherwise by the Compensation Committee of the Board of
Directors, options granted pursuant to the Stock Option Plan are intended to be
non-statutory stock options. The Compensation Committee determines the exercise
price and the term of options granted pursuant to the Stock Option Plan at the
time of grant. Each award is determined by the Compensation Committee on an
individual basis. Options to purchase a total of 510,100 shares of common stock
at a fair market price of $8.75 per share (subject to adjustment in certain
circumstances), to vest ratably over a period of three years from the date of
grant on May 18, 2001, were granted by the Compensation Committee to 22 employee
participants and to the outside directors under the Stock Option Plan.
Additional options to purchase 190,000 shares of common stock at a fair market
price of $6.71 per share, to vest ratably over a period of three years from the
date of grant on April 1, 2002, were granted by the Compensation Committee to
employees and outside directors. All options expire on October 31, 2010.
6
The Company applies the principles of Accounting Principles Board Opinion
("APB") No. 25 in accounting for employee stock option plans (the intrinsic
value method). All stock options granted had an exercise price equal to the fair
market value of the underlying common stock at the date of grant. As all options
were fully vested at September 27, 2003 and no further options were granted
subsequent to September 27, 2003, a reconciliation of net income affected by
pro-forma fair value compensation cost is not disclosed for any periods
subsequent to September 27, 2003.
There were 279,900 and 439,167 options outstanding as of March 31, 2005
and March 31, 2004, respectively. During the quarter ended March 31, 2005, there
were exercises of 74,369 options, and no options expired or were forfeited or
granted. Of the 279,900 options outstanding at March 31, 2005, 198,200 have an
exercise price of $8.75, 7,500 have an exercise price of $0.01 and 74,200 have
an exercise price of $6.71, with all options having a weighted average remaining
contractual life of 5.59 years. All options outstanding are fully vested and are
currently exercisable.
Note 2 Inventories
Inventories reported on the Company's balance sheets were as follows (in
thousands):
March 31, 2005 December 31, 2004
----------------------------------
(unaudited)
Raw materials $ 5,819 $ 7,153
Work-in-process 7,982 8,073
Finished goods 10,794 11,656
--------------------------
Total $ 24,595 $ 26,882
==========================
Note 3 Credit Facilities
The Company has a credit facility with Wachovia Bank, National Association
("Wachovia"), successor by merger to Congress Financial Corporation (Southern).
The Company has an aggregate $35.0 million revolving credit facility with
Wachovia (the "Wachovia Revolver") expiring October 8, 2006. Under the Wachovia
Revolver, 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. The amount outstanding under the Wachovia
Revolver at March 31, 2005 was $3.5 million and is included in long-term debt,
net of current maturities on the Company's consolidated balance sheet. The
Wachovia Revolver also includes a $5.0 million letter of credit facility, which
was unutilized at March 31, 2005.
In addition, the Company has a term facility with Wachovia (the "Wachovia
Term A loan") under which $1.9 million was outstanding as of March 31, 2005. At
March 31, 2005, $534,000 of the $1.9 million outstanding was included in current
portion of long-term debt on the Company's consolidated balance sheet. The
Wachovia Term A loan is payable in equal monthly installments of approximately
$45,000, with the unpaid principal amount due on October 8, 2006. Additional
amounts are not available for borrowing under the Wachovia Term A loan. In
addition to the Wachovia Revolver and the Wachovia Term A loan, the Company also
has an additional term loan (the "Wachovia Term B loan" and, collectively with
the Wachovia Revolver and the Wachovia Term A loan, the "Wachovia Facilities")
which is undrawn and under which $3.0 million was available as of March 31,
2005. At March 31, 2005, the Company's availability for additional borrowings
(based on the maximum allowable limit) under the Wachovia Revolver and the
Wachovia Term B loan was approximately $34.5 million.
The interest rate on the Wachovia Revolver and Wachovia Term A loan is
variable, depending on the amount of the Company's Excess Availability (as
defined in the Wachovia Facilities) at any particular time and the ratio of the
Company's EBITDA, less certain capital expenditures made by the Company, to
certain fixed charges of the Company (the "Fixed Charge Coverage Ratio"). The
Company may make borrowings based on the prime rate as described in the Wachovia
Facilities (the "Prime Rate") or the LIBOR rate as described in the Wachovia
Facilities, in each case with an applicable margin applied to the rate. The
Wachovia Term B loan bears interest at the Prime
7
Rate plus 3%. At March 31, 2005, the margin on Prime Rate loans was 0.0% and the
margin on LIBOR rate loans was 1.75%. The Company is required to pay a monthly
unused line fee of 0.25% per annum on the unutilized portion of the Wachovia
Revolver and a monthly fee equal to 1.75% per annum of the amount of any
outstanding letters of credit.
Under the Wachovia Revolver and Wachovia Term A loan, the Company is
subject to a covenant that requires it to maintain a certain tangible net worth.
To the extent that the Company has borrowings outstanding under the Wachovia
Term B loan, it is subject to additional financial covenants that require the
Company: (i) to maintain EBITDA of no less than certain specified amounts, (ii)
to maintain a Fixed Charge Coverage Ratio of no less than a specified amount,
(iii) to maintain a ratio of certain indebtedness to EBITDA not in excess of a
specified amount, and (iv) not to make capital expenditures in excess of
specified amounts. In addition, the Company would be required to repay the
Wachovia Term B loan to the extent of certain excess cash flow.
The Wachovia Facilities also impose limitations upon the Company's ability
to, among other things, incur indebtedness (including capitalized lease
arrangements); become or remain liable with respect to any guaranty; make loans;
acquire investments; declare or make dividends or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At March 31, 2005, the Company was in
compliance with all financial covenants. At March 31, 2005, the Company was also
in compliance with all non-financial covenants or had obtained a waiver of
non-compliance from Wachovia. Substantially all assets of the Company are
pledged as collateral for the borrowings under the Wachovia Facilities.
Note 4 Reconciliation to Diluted 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 issuable upon
the exercise of options. A reconciliation of basic and diluted weighted average
shares outstanding is presented below (unaudited):
Quarter ended Quarter ended
March 31, 2005 March 31, 2004
-------------------------------
Weighted average number of common shares used
in basic earnings per share 5,329 5,043
Effect of dilutive stock options 96 124
------- -------
Weighted average number of common shares and
potentially dilutive common shares outstanding
used in diluted earnings per share 5,425 5,167
======= =======
Note 5 Comprehensive Income
The components of comprehensive income are as follows (unaudited) (in
thousands):
Quarter ended Quarter ended
March 31, 2005 March 31, 2004
-------------------------------
Net income $ 2,190 $ 3,123
Foreign currency translation adjustment (2,141) (883)
Unrealized gain on hedging transactions, net of
taxes 59 --
Reclassification adjustment for losses in net
income -- 152
-----------------------
Comprehensive income $ 108 $ 2,392
=======================
8
Note 6 Contingencies
The Company, from time to time, becomes 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
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 trading or 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 February 16,
2005 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 monitored for effectiveness on a routine basis. At March
31, 2005, the Company had outstanding forward exchange contracts that mature
between April 2005 and December 2005 to purchase Mexican pesos with an aggregate
notional amount of approximately $6.3 million. The fair values of these
contracts at March 31, 2005 totaled approximately $9,000 which is recorded as an
asset on the Company's balance sheet in other current assets. Changes in the
derivatives' fair values are deferred and recorded in the balance sheet as a
component of accumulated other comprehensive income ("AOCI"), until the
underlying transaction is recorded in earnings. When the hedged item affects
earnings, gains or losses are reclassified from AOCI to the consolidated
statement of operations as cost of goods sold.
Certain intercompany sales at the Company's Czech Republic facility are
denominated and settled in Euros. To reduce exposure to fluctuations in the Euro
and Czech Koruna exchange rates, the Company entered into forward contracts on
March 3, 2005 to buy Czech Korunas for periods and amounts consistent with the
related, underlying forecasted cash outflows. These contracts were designated as
hedges at inception and are monitored for effectiveness on a routine basis. At
March 31, 2005, the Company had outstanding forward exchange contracts that
mature between April 2005 and December 2005 to purchase Czech Korunas with an
aggregate notional amount of approximately $4.2 million. The fair values of
these contracts at March 31, 2005 totaled approximately $74,000 which is
recorded as an asset on the Company's balance sheet in other current assets.
Changes in the derivatives' fair values are deferred and recorded in the balance
sheet as a component of AOCI, until the underlying transaction is recorded in
earnings. When the hedged item affects earnings, gains or losses are
reclassified from AOCI to the consolidated statement of operations as cost of
goods sold.
Note 8 Guarantees
FASB Interpretation No. 45 provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has issued
and specific disclosures related to product warranties. As of March 31, 2005,
the Company and various consolidated subsidiaries of the Company are borrowers
under the Wachovia Facilities (as defined above) and a note payable to a bank in
the Czech Republic, and are party to forward hedge contracts for foreign
currency with a U.S. bank (together, the "Guarantee Facilities"). The Guarantee
Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Guarantee Facilities. The guarantees are in effect for the
duration of the related Guarantee Facilities. The Company does not provide
product warranties within the disclosure provisions of Interpretation No. 45.
9
Note 9 New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for annual reporting periods beginning on or after June 15, 2005, which begins
on January 1, 2006 for calendar year filers such as the Company. The Company is
in the process of evaluating the effect, if any, that the adoption of SFAS No.
123(R) will have on its financial position and results 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 the Company's 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 December 31, 2004. 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 December 31, 2004.
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 understands 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 December 31,
2004.
Results of Operations
The following summarizes the results of operations for the Company for the
quarters ended March 31, 2005 and March 31, 2004.
(In thousands)
Quarter ended Quarter ended
March 31, 2005 March 31, 2004
--------------------------------
Net sales $ 58,612 $ 69,231
Cost of sales, including depreciation 50,474 58,392
Selling, general and administrative expenses 4,371 4,907
Other expense, net 439 215
Interest expense 175 212
Provision for income taxes 1,088 2,382
Net income 2,190 3,123
Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004.
NET SALES. Net sales decreased $10.6 million, or 15.3%, to $58.6 million
for the quarter ended March 31, 2005 compared to the quarter ended March 31,
2004. North American operations' net sales decreased approximately $4.3 million,
or 13.9%, compared to the quarter ended March 31, 2004, with the decrease
principally due to decreased demand in the North America automotive market. Net
sales for European operations decreased $6.3 million, or 16.6%, resulting from
decreased overall demand in the automotive market and decisions by certain
customers to insource production of certain programs. This decrease in net sales
was partially offset by the $1.3 million favorable effect of changes in foreign
currency exchange rates compared to the quarter ended March 31, 2004.
11
COST OF SALES, INCLUDING DEPRECIATION. Cost of sales decreased $7.9
million, or 13.6%, to $50.5 million for the quarter ended March 31, 2005
compared to the quarter ended March 31, 2004. The decrease was attributable to
North American operations' cost of sales decreasing approximately $3.2 million,
or 12.4%, and European operations' cost of sales decreasing $4.7 million, or
14.4%, compared to the quarter ended March 31, 2004. The overall decrease in
cost of sales is primarily attributable to the decrease in net sales in the
corresponding time periods. Cost of sales as a percentage of net sales increased
to 86.1% for the quarter ended March 31, 2005 from 84.3% for the quarter ended
March 31, 2004. The increase in cost of sales as a percentage of net sales is a
result of a relative increase as a percentage of net sales of the fixed cost
component of cost of sales which was not reduced commensurate with the decrease
in net sales in the corresponding time periods, as well as inflationary
increases on raw materials and supplies, offset by a decrease in depreciation
expense of approximately $341,000 due to the maturation of the depreciable lives
of certain property, plant and equipment.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $536,000, or 10.9%, to $4.4 million for the quarter ended
March 31, 2005 compared to the quarter ended March 31, 2004. The decrease in
selling, general and administrative expenses is attributable to reduced
professional services and the one-time charge associated with the closure of the
Company's U.K. facility of approximately $300,000 recorded in the quarter ended
March 31, 2004. Additionally, the Company incurred costs of approximately
$240,000 related to the ongoing joint venture pre-production activities in South
Africa and China. Expenses from pre-production activities are expected to
continue until commercial production begins at these joint venture facilities,
which is expected to occur in the second half of 2005. Selling, general and
administrative expenses as a percentage of net sales increased to 7.5% for the
quarter ended March 31, 2005 from 7.1% for the quarter ended March 31, 2004 due
to the corresponding decrease in net sales in the quarter as a result of certain
fixed costs that were not reduced commensurate with the decrease in net sales.
OTHER EXPENSE, NET. The Company recognized other expense, net of $439,000
for the quarter ended March 31, 2005 compared to $215,000 for the quarter ended
March 31, 2004. Other expense, net is realized primarily from foreign
transaction gains and losses resulting from the revaluation of intercompany
balances between the Company's European subsidiaries and the U.S. parent
company. Net foreign transaction losses during the quarter ended March 31, 2005
resulted from changes in foreign currency exchange rates of approximately 3.9%
from those at December 31, 2004.
INTEREST EXPENSE. Interest expense decreased $37,000, or 17.5%, to
$175,000 for the quarter ended March 31, 2005 compared to the quarter ended
March 31, 2004. The decrease is attributable to average outstanding debt
decreasing to $8.1 million from $17.1 million, offset by the average weighted
interest rate for all Company debt increasing to 5.11% from 3.68% for the
quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.
Because a substantial portion of the Company's debt carries interest rates based
on the prime rate, such increase in the Company's average weighted interest rate
is primarily attributable to increases totaling 150 basis points in the prime
rate over the past 12 months.
PROVISION FOR INCOME TAXES. The provision for income taxes for the quarter
ended March 31, 2005 was approximately $1.1 million compared to approximately
$2.4 million for the quarter ended March 31, 2004. The Company's effective tax
rate for the quarter ended March 31, 2005 was 34.5% compared to 43.3% for the
quarter ended March 31, 2004. The lower effective tax rate for the quarter ended
March 31, 2005 is a result of foreign taxes related to its German operation that
are deductible and certain non-taxable income at the Company's Mexico
operations.
NET INCOME. The Company's net income was $2.2 million for the quarter
ended March 31, 2005 compared to $3.1 million for the quarter ended March 31,
2004. This change in net income resulted from a combination of the items
discussed above.
12
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was approximately $2.8 million
for the quarter ended March 31, 2005, compared to cash used in operating
activities of $1.3 million in the comparable period in the prior year. The cash
provided by operating activities resulted principally from net income plus the
effect of non-cash charges offset by changes in working capital. The cash used
in operating activities in the comparable period of the prior year was primarily
due to income from operations combined with non-cash additions of depreciation
and deferred taxes, offset by a net decrease in cash from operating assets and
liability balances since December 31, 2003.
Net cash used in investing activities was approximately $638,000 for the
quarter ended March 31, 2005, compared to net cash used in investing activities
of approximately $869,000 for the comparable period in the prior year. Capital
expenditures in the current and prior years were necessitated primarily by new
programs awarded by customers. The Company expects to spend approximately $11.0
million for the remainder of 2005 on capital expenditures, including
approximately $2.0 million on its joint ventures in South Africa and China. In
2004 the Company's capital expenditures were approximately $6.5 million.
Net cash provided by financing activities was approximately $3.0 million
in the quarter ended March 31, 2005, compared to net cash provided by financing
activities of $3.1 million for the comparable period in the prior year. Net cash
provided by financing activities for the quarter ended March 31, 2005 is
attributable to the Company's net borrowings on its revolving credit facility
and cash receipts from the exercise of stock options by certain of the Company's
employees. Net borrowings under credit facilities in the quarter ended March 31,
2005 were used to fund increases in working capital and to make payments on
various other long-term obligations.
The Company's capital expenditure and working capital requirements are
expected to be funded through a combination of cash flows from operations,
equipment financing and borrowings under the Company's credit facilities. These
sources are considered to be adequate to fund the Company's requirements for at
least the next twelve months.
The activities discussed above in conjunction with the unfavorable effects
of foreign exchange rates of $1.0 million, resulted in a net increase in cash
and cash equivalents of approximately $4.1 million in the quarter ended March
31, 2005.
Credit Facilities
The Company has a credit facility with Wachovia Bank, National Association
("Wachovia"), successor by merger to Congress Financial Corporation (Southern).
The Company has an aggregate $35.0 million revolving credit facility with
Wachovia (the "Wachovia Revolver") expiring October 8, 2006. Under the Wachovia
Revolver, 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. The amount outstanding under the Wachovia
Revolver at March 31, 2005 was $3.5 million and is included in long-term debt,
net of current maturities on the Company's consolidated balance sheet. The
Wachovia Revolver also includes a $5.0 million letter of credit facility, which
was unutilized at March 31, 2005.
In addition, the Company has a term facility with Wachovia (the "Wachovia
Term A loan") under which $1.9 million was outstanding as of March 31, 2005. At
March 31, 2005, $534,000 of the $1.9 million outstanding was included in current
portion of long-term debt on the Company's consolidated balance sheet. The
Wachovia Term A loan is payable in equal monthly installments of approximately
$45,000, with the unpaid principal amount due on October 8, 2006. Additional
amounts are not available for borrowing under the Wachovia Term A loan. In
addition to the Wachovia Revolver and the Wachovia Term A loan, the Company also
has an additional term loan (the "Wachovia Term B loan" and, collectively with
the Wachovia Revolver and the Wachovia Term A loan, the "Wachovia Facilities")
which is undrawn and under which $3.0 million was available as of March 31,
2005. At March 31, 2005, the Company's availability for additional borrowings
(based on the maximum allowable limit) under the Wachovia Revolver and the
Wachovia Term B loan was approximately $34.5 million.
13
The interest rate on the Wachovia Revolver and Wachovia Term A loan is
variable, depending on the amount of the Company's Excess Availability (as
defined in the Wachovia Facilities) at any particular time and the ratio of the
Company's EBITDA, less certain capital expenditures made by the Company, to
certain fixed charges of the Company (the "Fixed Charge Coverage Ratio"). The
Company may make borrowings based on the prime rate as described in the Wachovia
Facilities (the "Prime Rate") or the LIBOR rate as described in the Wachovia
Facilities, in each case with an applicable margin applied to the rate. The
Wachovia Term B loan bears interest at the Prime Rate plus 3%. At March 31,
2005, the margin on Prime Rate loans was 0.0% and the margin on LIBOR rate loans
was 1.75%. The Company is required to pay a monthly unused line fee of 0.25% per
annum on the unutilized portion of the Wachovia Revolver and a monthly fee equal
to 1.75% per annum of the amount of any outstanding letters of credit.
Under the Wachovia Revolver and Wachovia Term A loan, the Company is
subject to a covenant that requires it to maintain a certain tangible net worth.
To the extent that the Company has borrowings outstanding under the Wachovia
Term B loan, it is subject to additional financial covenants that require the
Company: (i) to maintain EBITDA of no less than certain specified amounts, (ii)
to maintain a Fixed Charge Coverage Ratio of no less than a specified amount,
(iii) to maintain a ratio of certain indebtedness to EBITDA not in excess of a
specified amount, and (iv) not to make capital expenditures in excess of
specified amounts. In addition, the Company would be required to repay the
Wachovia Term B loan to the extent of certain excess cash flow.
The Wachovia Facilities also impose limitations upon the Company's ability
to, among other things, incur indebtedness (including capitalized lease
arrangements); become or remain liable with respect to any guaranty; make loans;
acquire investments; declare or make dividends or other distributions; merge,
consolidate, liquidate or dispose of assets or indebtedness; incur liens; issue
capital stock; or change its business. At March 31, 2005, the Company was in
compliance with all financial covenants. At March 31, 2005, the Company was also
in compliance with all non-financial covenants other than a covenant requiring
the company to dissolve certain inactive subsidiaries. The non-compliance under
this covenant was waived by Wachovia. Substantially all assets of the Company
are pledged as collateral for the borrowings under the Wachovia Facilities.
Contractual Obligations
The following table aggregates the Company's contractual obligations
(including those described above) related to long-term debt, non-cancelable
leases and other obligations at March 31, 2005.
Payments due by Period (in thousands)
--------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Contractual obligations Total 1 year years years 5 years
--------------------------------------------------------
Long-term debt $ 8,779 $ 2,658 $ 6,121 $ -- $ --
Capital lease obligations 1,119 582 537 -- --
Operating leases 2,043 917 1,000 126 --
Purchase obligations 10,568 10,568 -- -- --
-------- -------- -------- -------- --------
Total $ 22,509 $ 14,725 $ 7,658 $ 126 $ --
======== ======== ======== ======== ========
The amounts of contractual obligations set forth above include an assumed annual
interest rate of 5.0% for long term debt and an assumed range of interest rates
of between 6.0% and 8.5% for capital lease obligations.
Additionally, the Company has material commitments for funding of the
South Africa Joint Venture through the combination of machinery and equipment
and related in-kind services of $1.1 million and the intention, but not an
obligation, for funding of its China Joint Venture through potential loan or
capital contributions of up to $6.3 million as of March 31, 2005.
14
Off-Balance Sheet Arrangements
As of March 31, 2005, the Company does not have any off-balance sheet
arrangements that are material to its financial condition, results of operations
or cash flows as defined by Item 303 (a)(4) of Regulation S-K promulgated by the
SEC. The Company enters into derivative foreign contracts as noted and included
below in "Quantitative and Qualitative Disclosures about Market Risk" in Item 3
of this report.
Guarantees
FASB Interpretation No. 45 provides guidance on the disclosures to be made
by a guarantor about its obligations under certain guarantees that it has issued
and specific disclosures related to product warranties. As of March 31, 2005,
the Company and various consolidated subsidiaries of the Company are borrowers
under the Wachovia Facilities (as defined above) and a note payable to a bank in
the Czech Republic, and are party to forward hedge contracts for foreign
currency with a U.S. bank (together, the "Guarantee Facilities"). The Guarantee
Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Guarantee Facilities. The guarantees are in effect for the
duration of the related Guarantee Facilities. The Company does not provide
product warranties within the disclosure provisions of Interpretation No. 45.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for annual reporting periods beginning on or after June 15, 2005, which begins
on January 1, 2006 for calendar year filers such as the Company. The Company is
in the process of evaluating the effect, if any, that the adoption of SFAS No.
123(R) will have on its financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent that amounts borrowed under the Wachovia Facilities and
certain other facilities are outstanding, the Company has market risk relating
to such amounts because the interest rates under the Wachovia Facilities and
certain other facilities are variable. As of March 31, 2005, the Company's
interest rates under the Wachovia Facilities and those certain other facilities
approximated 5.5%. A hypothetical increase or decrease in interest rates of 100
basis points relating to the Wachovia Facilities would result in an addition to
or reduction in annual interest expense of approximately $35,000. As of December
31, 2004, the Company's interest rate, inclusive of credit fees under the
Wachovia Facilities, approximated 5.00%.
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 material adverse effect on 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 trading or 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 February 16,
2005 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 monitored for effectiveness on a
15
routine basis. At March 31, 2005, the Company had outstanding forward exchange
contracts that mature between April 2005 and December 2005 to purchase Mexican
pesos with an aggregate notional amount of approximately $6.3 million. The fair
values of these contracts at March 31, 2005 totaled approximately $9,000 which
is recorded as an asset on the Company's balance sheet in other current assets.
Changes in the derivatives' fair values are deferred and recorded in the balance
sheet as a component of accumulated other comprehensive income ("AOCI"), until
the underlying transaction is recorded in earnings. When the hedged item affects
earnings, gains or losses are reclassified from AOCI to the consolidated
statement of operations as cost of goods sold.
Certain intercompany sales at the Company's Czech Republic facility are
denominated and settled in Euros. To reduce exposure to fluctuations in the Euro
and Czech Koruna exchange rates, the Company entered into forward contracts on
March 3, 2005 to buy Czech Korunas for periods and amounts consistent with the
related, underlying forecasted cash outflows. These contracts were designated as
hedges at inception and are monitored for effectiveness on a routine basis. At
March 31, 2005, the Company had outstanding forward exchange contracts that
mature between April 2005 and December 2005 to purchase Czech Korunas with an
aggregate notional amount of approximately $4.2 million. The fair values of
these contracts at March 31, 2005 totaled approximately $74,000 which is
recorded as an asset on the Company's balance sheet in other current assets.
Changes in the derivatives' fair values are deferred and recorded in the balance
sheet as a component of AOCI, until the underlying transaction is recorded in
earnings. When the hedged item affects earnings, gains or losses are
reclassified from AOCI to the consolidated statement of operations as cost of
goods sold.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,
as amended, the Company's management, under the supervision and with the
participation of its principal executive and principal financial officers
(Messrs. Corey and Menezes, respectively), conducted an evaluation as of the end
of the period covered by this report, of the effectiveness of the Company's
disclosure controls and procedures as defined in Rule 13a-15(e) under the
Exchange Act. Based on that evaluation, each of Messrs. Corey and Menezes
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation required by
Rule 13a-15(d) of the Exchange Act that occurred during the Company's last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
By letter dated November 2, 2004, a division employee, at the time a
controller for the Company's North American Automotive Group, filed
a complaint with the U.S. Department of Labor, Occupational Safety &
Health Administration ("OSHA"), pursuant to Section 806 of the
Corporate and Criminal Fraud Accountability Act of 2002, Title VIII
of the Sarbanes-Oxley Act of 2002 (the "Act"), alleging that a
change in his duties in September 2004 resulted from his allegations
of improprieties in the Company's operations in Mexico and
California. Neither the internal investigation conducted by
management nor the ensuing external investigation led by the Audit
Committee following notification by management of the issues raised
substantiated any of the allegations. Due to circumstances unrelated
to the investigation or the complaint, the Company terminated the
employee on December 15, 2004. By letter dated December 15, 2004,
the employee amended his complaint to allege that his termination
was also in retaliation for his allegations. By letter dated
February 14, 2005, the Company was notified by OSHA that it had
completed its investigation and found that there is no reasonable
cause to believe that the Company violated the Act, and that the
employee has 30 days from his receipt of such notification to
request a hearing before an Administrative Law Judge. The employee
has requested such a hearing.
ITEM 2. UNREGISTERED SALES OF EQUITY 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
At a meeting of the Board of Directors (the "Board") of the Company
on May 3, 2005, the Board elected Daniel D. Tessoni as a director.
Mr. Tessoni joined the Board effective May 3, 2005 as a Class I
director. The terms of the Class I directors expire at the Company's
2005 annual meeting. Mr. Tessoni is expected to serve as a member of
the Audit Committee. Mr. Tessoni was not named as a director
pursuant to any arrangement or understanding with any other person.
Mr. Tessoni is not a party to any transaction described in Item
404(a) of Regulation S-K involving the Company or any of its
subsidiaries.
Also on May 3, 2005, each of Andy Goldfarb, W. Allan Hopkins, and
Carroll R. Wetzel, Jr. resigned as members of the Board, effective
as of May 3, 2005, and Ben E. Waide III resigned as a member of the
Board, effective as of May 10, 2005. None of the resignations were a
result of a disagreement with the Company.
ITEM 6. EXHIBITS
Exhibit No. Exhibits
----------- --------
31.1 Certification of CEO as required by Rule
13a-14(a), as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of CFO as required by Rule
13a-14(a), as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of CEO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFETY COMPONENTS INTERNATIONAL, INC.
DATED: May 3, 2005 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
18