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EX-31.1 - Victor Technologies Group, Inc.victor-ex311_2012630x10q.htm
EX-32.2 - Victor Technologies Group, Inc.victor-ex322_2012630x10q.htm
EX-32.1 - Victor Technologies Group, Inc.victor-ex321_2012630x10q.htm
EX-31.2 - Victor Technologies Group, Inc.victor-ex312_2012630x10q.htm
EX-10.2 - Victor Technologies Group, Inc.ex102-employment_agreement.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from                                       to                                       
 Commission file number 001-13023
Victor Technologies Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
74-2482571
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
16052 Swingley Ridge Road, Suite 300, Chesterfield, MO
 
 
63017
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code (636) 728-3000 
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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, on August 14, 2012 was 1,000.




PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
 
VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Net sales
$
132,257

 
$
129,269

 
$
259,128

 
$
245,766

Cost of goods sold
85,114

 
81,475

 
168,117

 
164,746

Gross margin
47,143

 
47,794

 
91,011

 
81,020

Selling, general and administrative expenses
27,459

 
27,725

 
53,901

 
52,555

Amortization of intangibles
1,584

 
1,583

 
3,167

 
3,129

Restructuring
848

 
615

 
1,659

 
615

Operating income
17,252

 
17,871

 
32,284

 
24,721

Other expense:
 
 
 
 
 
 
 
Interest, net
(8,453
)
 
(6,056
)
 
(15,183
)
 
(12,353
)
Amortization of deferred financing costs
(604
)
 
(432
)
 
(1,100
)
 
(821
)
Income before income tax provision
8,195

 
11,383

 
16,001

 
11,547

Income tax provision
2,209

 
5,311

 
4,803

 
5,387

Net income
$
5,986

 
$
6,072

 
$
11,198

 
$
6,160

 
See accompanying notes to condensed consolidated financial statements.

2



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Net Income
$
5,986

 
$
6,072

 
$
11,198

 
$
6,160

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,081
)
 
1,595

 
215

 
2,982

Pension and postretirement
56

 
6

 
39

 
10

Comprehensive income
$
3,961

 
$
7,673

 
$
11,452

 
$
9,152

 
See accompanying notes to condensed consolidated financial statements.

3



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
  
 
June 30, 2012
 
December 31, 2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
16,768

 
$
20,856

Accounts receivable, less allowance for doubtful accounts of $670 and $750, respectively
81,355

 
68,570

Inventories
101,239

 
96,011

Prepaid expenses and other
11,479

 
11,972

Deferred tax assets
2,823

 
2,823

Total current assets
213,664

 
200,232

Property, plant and equipment, net of accumulated depreciation of $20,993 and $15,073, respectively
73,226

 
73,861

Goodwill
182,649

 
182,429

Intangibles, net
137,387

 
140,265

Deferred financing fees
16,725

 
13,416

Other assets
503

 
502

Total assets
$
624,154

 
$
610,705

LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of other long-term obligations
$
1,662

 
$
1,715

Accounts payable
37,299

 
29,705

Accrued and other liabilities
37,643

 
43,560

Accrued interest
1,480

 
1,081

Income taxes payable
1,137

 
2,875

Deferred tax liabilities
3,584

 
3,584

Total current liabilities
82,805

 
82,520

Long-term obligations, less current maturities
357,853

 
263,607

Deferred tax liabilities
81,012

 
78,927

Other long-term liabilities
17,080

 
18,081

Total liabilities
538,750

 
443,135

Stockholder's Equity:
 
 
 
Common stock, $0.01 par value:
 
 
 
Authorized -- 1,000 shares
 
 
 
Issued and outstanding -- 1,000 shares at June 30, 2012, and at December 31, 2011

 

Additional paid-in capital
84,172

 
177,790

Retained earnings
3,259

 
(7,939
)
Accumulated other comprehensive income
(2,027
)
 
(2,281
)
Total stockholder's equity
85,404

 
167,570

Total liabilities and stockholder's equity
$
624,154

 
$
610,705


See accompanying notes to condensed consolidated financial statements.

4



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
Cash flows from operating activities:
 
 
 
Net income
$
11,198

 
$
6,160

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,290

 
12,241

Deferred income taxes
1,980

 
1,231

Stock compensation expense
378

 
258

Amortization of debt discount
214

 

Restructuring costs, net of payments
(753
)
 
396

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(12,772
)
 
(13,599
)
Inventories
(5,219
)
 
(15,570
)
Prepaids
831

 
(3,560
)
Accounts payable
8,029

 
12,783

Accrued interest
399

 
(8,092
)
Accrued taxes
(1,776
)
 
(1,128
)
Accrued and other liabilities
(6,584
)
 
(1,099
)
Net cash provided by (used in) operating activities
6,215

 
(9,979
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(5,700
)
 
(7,915
)
Other
(289
)
 
(322
)
Net cash used in investing activities
(5,989
)
 
(8,237
)
Cash flows from financing activities:
 
 
 
Issuance of Additional Notes of Senior Secured Notes due 2017
100,000

 

Senior Secured Notes discount
(5,200
)
 

Dividend payment to Parent
(93,507
)
 

Use of Trusteed Assets for redemption of Senior Subordinated Notes

 
183,685

Repayment of Senior Subordinated Notes

 
(176,095
)
Repayments of other long-term obligations
(818
)
 
(1,394
)
Deferred financing fees
(4,409
)
 

Proceeds from exercise of stock options
31

 

Other, net
(519
)
 
(275
)
Net cash provided by (used in) financing activities
(4,422
)
 
5,921

Effect of exchange rate changes on cash and cash equivalents
108

 
562

Total decrease in cash and cash equivalents
(4,088
)
 
(11,733
)
Total cash and cash equivalents beginning of period
20,856

 
22,399

Total cash and cash equivalents end of period
$
16,768

 
$
10,666

Income taxes paid
$
4,536

 
$
5,325

Interest paid, including $8,688 for defeased Sr Subordinated Notes in 2011
$
16,919

 
$
21,713

 See accompanying notes to condensed consolidated financial statements.

5



VICTOR TECHNOLOGIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
 
1.
Organization 
 
On December 3, 2010 (“Acquisition Date”), pursuant to an Agreement and Plan of Merger dated as of October 5, 2010 (the “Merger Agreement”), Razor Merger Sub Inc. (“Merger Sub”), a newly formed Delaware corporation, merged with and into Thermadyne Holdings Corporation ("Thermadyne"), with Thermadyne surviving as a direct, wholly-owned subsidiary of Razor Holdco Inc., a Delaware corporation (“Acquisition”). (Razor Holdco Inc. was renamed Thermadyne Technologies Holdings, Inc. ("Thermadyne Technologies"). Thermadyne Technologies' sole asset is its 100% ownership of the stock of Thermadyne.  Affiliates of Irving Place Capital (“IPC”), a private equity firm based in New York, along with its co-investors, hold 98.6% of the outstanding equity of Thermadyne Technologies, and certain members of Thermadyne management hold the remaining equity capital.
 
Effective May 21, 2012, Thermadyne changed its name to Victor Technologies Group, Inc. (“Victor Technologies” or the "Company"). Thermadyne Technologies, the parent company of Victor Technologies, accordingly changed its name to Victor Technologies Holdings, Inc. ("Holdings").

Victor Technologies, a Delaware corporation, is a designer, manufacturer and supplier of cutting, welding and gas control equipment used in various fabrication, construction and manufacturing operations around the world. The Company’s products are used in a wide variety of applications, across industries, where steel is cut and welded, including steel fabrication,  manufacturing of transportation and mining equipment, many types of construction such as offshore oil and gas rigs, repair and maintenance of manufacturing equipment and facilities, and  shipbuilding.   The Company designs, manufactures and sells products in five principal categories: (1) gas equipment; (2) plasma power supplies, torches and related consumable parts; (3) arc accessories, including torches, related consumable parts and accessories; (4) welding equipment; and (5) filler metals and hardfacing alloys.  The Company markets its products under a portfolio of brands, many of which are the leading brand in their industry, including Victor®, Tweco®, Thermal Dynamics®, Arcair®, Cigweld®, Thermal Arc®, Turbo Torch®, Firepower® and Stoody®.
 
2.
Summary of Significant Accounting Policies
 
Basis of Presentation
 
The Acquisition resulted in a 100% change in ownership of Victor Technologies and is accounted for in accordance with United States accounting guidance for business combinations.  Accordingly, the assets acquired and liabilities assumed were recorded at fair value as of December 3, 2010. The provisional amounts recognized for assets acquired and liabilities assumed as of December 3, 2010 were determined by management with the assistance of an externally prepared valuation study of inventories, property, plant and equipment, intangible assets, goodwill, and capital and operating leases. These provisional amounts were updated in the fourth quarter of 2011 upon the completion of such study and the determination of other facts impacting fair value estimates. The adjustments arising from the finalization of the amounts recognized for assets acquired and liabilities assumed did not impact cash flows. However, the Condensed Consolidating Statement of Income for the three and six months ended June 30, 2011 was retrospectively adjusted as a result of these changes. Specifically, these adjustments resulted in immaterial decreases to amortization of intangibles and immaterial increases to operating income, amortization of deferred financing fees,  income before income tax provision, income tax provision and net income in the second quarter and first half of 2011.  

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of the Company for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2012. The quarterly financial data should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The financial statements include the Company’s accounts and those of its subsidiaries, after the elimination of all significant intercompany balances and transactions. All dollar amounts are presented in thousands, unless otherwise noted, except share amounts.




6



Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Any significant unanticipated changes in business or market conditions that vary from current expectations could have an impact on the fair value of assets and result in a potential impairment loss.

Deferred Financing Costs

Loan origination fees and other costs incurred in arranging long-term financing are capitalized as deferred financing costs and amortized on an effective interest method over the term of the credit agreement.  Deferred financing costs totaled $19,706 and $15,297, less related accumulated amortization of $2,981 and $1,881, at June 30, 2012 and December 31, 2011, respectively.
 
Product Warranty Programs
 
Various products are sold with product warranty programs. Provisions for warranty programs are made as the products are sold, and such provisions are adjusted periodically based on current estimates of anticipated warranty costs and charged to cost of sales. The following table provides the activity in the warranty accrual:
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Balance at beginning of period
$
4,733

 
$
3,700

 
$
4,600

 
$
3,200

Charged to expense
1,126

 
1,015

 
2,227

 
2,630

Warranty payments
(1,099
)
 
(673
)
 
(2,067
)
 
(1,788
)
Balance at end of period
$
4,760

 
$
4,042

 
$
4,760

 
$
4,042

 
Fair Value
 
The Company estimated the fair value of the Senior Secured Notes due 2017 at $368,100 and $269,100 at June 30, 2012 and December 31, 2011, respectively, based on available market information. These Senior Secured Notes are considered Level 2 inputs in the three-level fair market value hierarchy. 
 
3.
Inventories
 
The composition of inventories was as follows:

 
June 30, 2012
 
December 31, 2011
Raw materials and component parts
$
38,825

 
$
32,009

Work-in-process
3,093

 
4,916

Finished goods
62,160

 
61,795

Subtotal
104,078

 
98,720

LIFO reserve
(2,839
)
 
(2,709
)
Total
$
101,239

 
$
96,011

 
The carrying value of inventories accounted for by the last-in, first-out (LIFO) inventory method exclusive of the LIFO reserve was $71,613 at June 30, 2012 and $74,885 at December 31, 2011.  The remaining inventory amounts are held in foreign locations and accounted for using the first-in first-out method.

7



4. Intangible Assets
 
The composition of intangibles was as follows:

 
June 30, 2012
 
December 31, 2011
Customer relationships
$
49,188

 
$
49,188

Intellectual property bundles
77,476

 
77,476

Patents
1,376

 
1,087

Trademarks
19,341

 
19,341

 
147,381

 
147,092

Accumulated amortization of customer relationships and intellectual property bundles
(9,994
)
 
(6,827
)
 
$
137,387

 
$
140,265

 
In the fourth quarter of 2011, the provisional amounts of assets acquired and liabilities assumed at the Acquisition Date were updated as the Company received a revised version of the externally prepared valuation study.  As a result, the intangible asset values were adjusted as of the Acquisition Date and intangible amortization expense for the three and six months ended June 30, 2011 decreased $121 and $279, respectively, as a result.
 
Amortization of customer relationships and intellectual property bundles (including patents) amounted to $1,584 and $1,583 for the three months ended June 30, 2012 and 2011, respectively, and $3,167 and $3,129 for the six months ended June 30, 2012 and 2011, respectively. 
 
Goodwill and trademarks are tested for impairment annually, as of December 1st, or more frequently if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The impairment analysis is performed on a consolidated enterprise level based on one reporting unit. No impairment adjustment to the carrying value of goodwill was deemed necessary in 2011. As of June 30, 2012, the Company considered possible impairment triggering events since December 1, 2011 based on relevant factors, and concluded that no triggering events or goodwill impairment resulted. Unforeseen events and changes in circumstances and market conditions, including the general economic and competitive conditions, could cause actual results to vary significantly from the estimates.
 
The change in the carrying amount of goodwill during the six-month period ending June 30, 2012 was as follows:
 
 
Carrying Amount of Goodwill
Balance as of December 31, 2011
$
182,429

Foreign currency translation
220

Balance as of June 30, 2012
$
182,649


5.
Debt and Capital Lease Obligations
 
The composition of debt and capital lease obligations was as follows:

 
June 30, 2012
 
December 31, 2011
Senior Secured Notes due December 15, 2017, 9% interest payable semi-annually on June 15 and December 15
$
360,000

 
$
260,000

Senior Secured Notes discount
(4,986
)
 

Capital leases
4,501

 
5,322

Long-term obligations
359,515

 
265,322

Current maturities
(1,662
)
 
(1,715
)
Long-term obligations, less current maturities
$
357,853

 
$
263,607



8



Senior Secured Notes due 2017
 
On December 3, 2010, Merger Sub issued $260,000 in aggregate principal of 9% Senior Secured Notes due 2017 (the “Senior Secured Notes”). The net proceeds from this issuance, together with funds received from the equity investments made by affiliates of IPC, its co-investors and certain members of Victor Technologies' management, were used to finance the acquisition of Victor Technologies, to redeem the Senior Subordinated Notes due 2014, and to pay the transaction-related expenses. 
 
The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, by each of Victor Technologies’ existing and future domestic subsidiaries and by its Australian subsidiaries, Thermadyne Australia Pty Ltd. and Cigweld Pty Ltd.  The Senior Secured Notes and guarantees are secured, subject to permitted liens and except for certain excluded assets, on a first priority basis by substantially all of Victor Technologies’ and the guarantors’ current and future property and assets (other than accounts receivable, inventory and certain other related assets that secure, on a first priority basis, Victor Technologies’ and the guarantors’ obligations under Victor Technologies’ Working Capital Facility (as defined below)), including the capital stock of each subsidiary of Victor Technologies (other than immaterial subsidiaries), which, in the case of non-guarantor foreign subsidiaries, is limited to 65% of the voting stock and 100% of the non-voting stock of each first-tier foreign subsidiary, and on a second priority basis by substantially all the collateral that secures the Working Capital Facility on a first priority basis.
 
The Senior Secured Notes contain customary covenants and events of default, including covenants that, among other things, limit the Company’s and its restricted subsidiaries’ ability to incur additional indebtedness, pay dividends on, repurchase or make distributions in respect of its capital stock or make other restricted payments, make certain investments, loans or advances, sell, transfer or otherwise convey certain assets, and create liens.  The Company was in compliance with the covenants as of June 30, 2012 and December 31, 2011.
 
Upon a change of control, as defined in the Indenture, each holder of the Senior Secured Notes has the right to require the Company to purchase the Senior Secured Notes at a purchase price in cash equal to 101% of the principal, plus accrued and unpaid interest. 
 
On March 6, 2012, the Company issued $100,000 in aggregate principal amount of 9% Senior Secured Notes due 2017 (the “Additional Notes”) at par plus accrued but unpaid interest since December 15, 2011. The Additional Notes mature on December 15, 2017 and were issued as “additional notes” pursuant to the Indenture. Prior to the issuance of the Additional Notes, $260,000 aggregate principal amount of 9% Senior Secured Notes due 2017 were outstanding (the “Original Notes” and together with the Additional Notes, the “Notes”). The Indenture provides that the Additional Notes are general senior secured obligations of the Company and are fully and unconditionally guaranteed on a senior secured basis by each of our existing and future domestic subsidiaries (other than immaterial subsidiaries) and certain of the Company's Australian subsidiaries. The Original Notes and the Additional Notes are treated as a single series under the Indenture and are therefore subject to the same terms, conditions and rights under the Indenture.

On February 27, 2012, the Company, the guarantors party to the Indenture and the Trustee entered into the First Supplemental Indenture to amend the terms of the Indenture to modify the restricted payments covenant to increase the restricted payments basket to $100,000 in order to permit the Company to use the proceeds of the Additional Notes to pay a cash dividend of $93,500 to the Company’s parent company to allow it to redeem a portion of its outstanding Series A preferred stock and to pay fees and expenses related to the offering of the Additional Notes and the related consent solicitation required to amend the Indenture in connection with the offering. The First Supplemental Indenture became operative on March 6, 2012 upon the issuance of the Additional Notes, at which time the Company made a cash payment of $20 per $1,000 in principal amount of Original Notes, or a total aggregate payment of $5,200, to Holders of such notes in connection with the solicitation of consents to amend the Indenture. This consent fee is accounted for as a debt discount, which is a reduction of the Senior Secured Notes, and is amortized against interest expense over the life of the Senior Secured Notes.
 
Senior Subordinated Notes due 2014
 
On December 3, 2010, Victor Technologies called for redemption of the $172,327 aggregate outstanding 9¼% Senior Subordinated Notes due 2014 on February 1, 2011 at a price of 101.542% plus accrued and unpaid interest. Victor Technologies irrevocably deposited with the trustee funds sufficient to pay the Redemption Price of the Senior Subordinated Notes.  Victor Technologies remained the primary obligor of the Senior Subordinated Notes through February 1, 2011.  The trustee acknowledged the satisfaction and discharge of the indenture as of December 3, 2010 and has informed the Company the Senior Subordinated Notes were paid on February 1, 2011. 
 
The indenture provided for the payment of an additional special interest adjustment based on the Company’s consolidated leverage ratio.  During the period from January 1, 2011 until the debt’s redemption on February 1, 2011, the quarterly special interest adjustment resulted in additional interest expense of $36.  Interest on the Senior Subordinated Notes due 2014, excluding the

9



special interest adjustment, totaled $1,328 for the period from January 1, 2011 until the debt’s redemption on February 1, 2011.  During the period from January 1, 2011 until the debt’s redemption on February 1, 2011, $1,110 of the fair value premium recorded for the Senior Subordinated Notes was amortized as a reduction of interest expense. 
 
Working Capital Facility
 
At both June 30, 2012 and December 31, 2011, $1,416 of letters of credit and no borrowings were outstanding under the Fourth Amended and Restated Credit Agreement (the “GE Agreement”).  Unused availability, net of these letters of credit, was $58,584 under the Working Capital Facility at June 30, 2012.
 
All obligations under the Working Capital Facility are unconditionally guaranteed by Holdings and substantially all of the Company’s existing and future, direct and indirect, wholly-owned domestic subsidiaries and its Australian subsidiaries Thermadyne Australia Pty Ltd. and Cigweld Pty Ltd.  The Working Capital Facility is secured, subject to certain exceptions, by substantially all of the assets of the guarantors and Holdings, including a first priority security interest in substantially all accounts receivable and other rights to payment, inventory, deposit accounts, cash and cash equivalents and a second priority security interest in all assets other than the Working Capital Facility collateral.
 
The Working Capital Facility has a minimum fixed charge coverage ratio test of 1:1 if the unused availability under the Facility is less than $9,000 (which minimum amount will be increased or decreased proportionally with any increase or decrease in the commitments thereunder). In addition, the Working Capital Facility includes negative covenants that limit the Company’s ability and the ability of Holdings and certain subsidiaries to, among other things: incur, assume or permit to exist additional indebtedness or guarantees; grant liens; consolidate, merge or sell all or substantially all of the Company’s assets; transfer or sell assets and enter into sale and leaseback transactions; make certain loans and investments; pay dividends, make other distributions or repurchase or redeem the Company’s or Holdings’ capital stock; and prepay or redeem certain indebtedness. The Company was in compliance with the covenants as of June 30, 2012 and December 31, 2011.

In connection with the Additional Notes offering, GE Capital Corporation agreed to amend the credit agreement to allow the Company, among other things, to issue the Additional Notes and use the net proceeds as described above. The amendment became effective concurrently with the consummation of the offering of Additional Notes on March 6, 2012.

6.
Restructuring
 
In 2011, the Company committed to restructuring plans that include exit activities at manufacturing sites in West Lebanon, New Hampshire and Pulau Indah, Selangor, Malaysia.  The Company expects to complete these activities in 2012.  These exit activities impact approximately 170 employees and are intended to reduce the Company’s fixed cost structure and better align its global manufacturing and distribution footprint.

The Company expects that approximately an additional $1,237 of restructuring expense associated with these activities will be incurred during the remainder of 2012 and into the first quarter of 2013.

10



The following provides a summary of restructuring costs incurred during the three and six months ended June 30, 2012, incurred to date and total expected restructuring costs:
 
 
Employee Termination Benefits
 
Other Restructuring Costs
 
Total
Three Months Ended
 
 
 
 
 
June 30, 2012
$
234

 
$
614

 
$
848

June 30, 2011
396

 
219

 
615


 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30, 2012
$
629

 
$
1,030

 
$
1,659

June 30, 2011
396

 
219

 
615


 
 
 
 
 
As of June 30, 2012
 
 
 
 
 
Cumulative restructuring costs
$
3,826

 
$
3,237

 
$
7,063

Total expected restructuring costs
$
3,900

 
$
4,400

 
$
8,300

Employee termination benefits primarily include severance and retention payments to employees impacted by exit activities.  Other restructuring costs include changes to the lease terms of the impacted facility, expense to relocate certain individuals and equipment to other manufacturing locations and employee training costs.
 
The following is a rollforward of the liabilities associated with the restructuring activities since December 31, 2011.  The liabilities are reported as a component of accrued and other liabilities in the accompanying consolidated balance sheet as of June 30, 2012.
 
 
Employee
Termination
Benefits
 
Other
Restructuring
Costs
 
Total
Balance as of December 31, 2011
$
1,571

 
$
295

 
$
1,866

Charges
629

 
1,030

 
1,659

Payments and other adjustments
(1,332
)
 
(1,080
)
 
(2,412
)
Balance as of June 30, 2012
$
868

 
$
245

 
$
1,113


7.
Comprehensive Income
 
Comprehensive income refers to net income adjusted by gains and losses that, according to GAAP, are excluded from net income and are instead included in stockholders’ equity in the consolidated balance sheets.  These items include foreign currency translation adjustments and pension and postretirement benefit liability adjustments.  For the Company, the difference between net income and comprehensive income is primarily attributable to adjustments arising from the translation of assets and liabilities of foreign subsidiaries from the local currency to the U.S. Dollar.
 
For the three and six months ended June 30, 2012, comprehensive income was $3,961 and $11,452, respectively.  For the three and six months ended June 30, 2011, comprehensive income was $7,673 and $9,152, respectively.  The deferred tax liability (asset) related to foreign currency translation for the three and six months ended June 30, 2012 was $(1,276) and $132, respectively. The deferred tax liability related to foreign currency translation for the three and six months ended June 30, 2011 was $978 and $1,820, respectively. The deferred tax asset related to pension and postretirement benefit plans activity for the three and six months ended June 30, 2012 was $13 and $24, respectively. The deferred tax asset related to pension and postretirement benefit plans activity for the three and six months ended June 30, 2011 was $0 and $0, respectively.
   
8.
Income Taxes
 
At the beginning of 2012, the Company had approximately $135,400 in U.S. net operating loss carry forwards from the years 2001 through 2010.  The net operating loss carry forwards in the U.S. will expire between the years 2020 and 2030.  Given the uncertainties regarding utilization of a portion of these net operating loss carry forwards, the Company has recorded, as of December 31, 2011, an approximately $14,600 valuation allowance related to the deferred tax asset of approximately $53,900

11



associated with the carry forwards.  For 2012, the Company’s management estimates that income tax payments will, as in prior years, primarily relate to state and foreign taxes due to the use of net operating loss carryovers to offset U.S. taxable income.
 
The Company’s projected 2012 income tax effective rate of approximately 30.0% is slightly lower than the federal statutory rate primarily due to the release of valuation allowances, partially offset by foreign earnings which are currently taxable as “deemed dividends” in the U.S.  These deemed dividends are not offset by the foreign tax credits due to uncertainty of their utilization. 

9.
Contingencies
 
The Company is party to certain environmental matters, although no claims are currently pending. All other legal proceedings and actions involving the Company are of an ordinary and routine nature and are incidental to the operations of the Company. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company’s business or financial condition or on the results of operations.
 
On April 12, 2012, a Resolution Agreement (the “Agreement”) became binding upon the Company, on behalf of itself and its subsidiaries, and a number of other defendants, which will resolve all pending claims related to welding fumes against the Company by all plaintiffs who have signed a release of claims under the Agreement. In connection with the Agreement, the Company did not admit any fault, wrongdoing, or liability with respect to the plaintiffs’ claims.  Pursuant to the terms of the Agreement and the releases, each signing plaintiff accepted his or her claim under the Agreement as full and final resolution of his or her welding fume claims, agreed to execute and deliver valid and binding releases and stipulations of dismissal with prejudice to the defendants, and consented to participate in the structured private resolution program established pursuant to the Agreement. In accordance with the Agreement, on April 20, 2012, the Company paid $500 in full satisfaction of its obligation to fund its portion of this private resolution program, which was established by plaintiffs’ counsel and in an aggregate amount, including contributions from other defendants, of $21,500. The Company’s obligations under the Agreement are limited to its partial funding of the private resolution program, and the Company will not have any responsibility for or role in staffing, administering, or operating such program.
 
On December 30, 2006, the Company committed to dispose of its Brazilian manufacturing operations.  Remaining Brazilian accrued liabilities are still held by the Company and are primarily associated with tax matters for which the timing of resolution is uncertain, and are classified within Accrued and Other Liabilities in the amounts of $499 and $660 as of June 30, 2012 and December 31, 2011, respectively.





























12



10. Employee Benefit Plans
 
Net periodic pension and other postretirement benefit costs include the following components:
 
 
U.S. Plan
 
U.S. Plan
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Components of net periodic benefit cost/(income):
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
266

 
301

 
532

 
602

Expected return on plan assets
(322
)
 
(324
)
 
(644
)
 
(648
)
Recognized loss
41

 

 
81

 

Net periodic benefit cost/(income)
$
(15
)
 
$
(23
)
 
$
(31
)
 
$
(46
)
 
 
 
 
 
 
 
 
 
Australian Plan
 
Australian Plan
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Components of net periodic benefit cost/(income):
 
 
 
 
 
 
 
Service cost
$
234

 
$
341

 
$
480

 
$
633

Interest cost
406

 
615

 
830

 
1,142

Expected return on plan assets
(370
)
 
(560
)
 
(756
)
 
(1,040
)
Recognized loss

 

 

 

Net periodic benefit cost
$
270

 
$
396

 
$
554

 
$
735

 
 
 
 
 
 
 
 
 
Canadian Plan
 
Canadian Plan
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Components of net periodic benefit cost/(income):
 
 
 
 
 
 
 
Service cost
$
48

 
$
45

 
$
97

 
$
90

Interest cost
49

 
(18
)
 
98

 
(36
)
Expected return on plan assets
(65
)
 

 
(132
)
 

Recognized loss
1

 

 
3

 

Net periodic benefit cost
$
33

 
$
27

 
$
66

 
$
54


11. Segment Information

The Company’s continuing operations are comprised of several product lines manufactured and sold in various geographic locations. The market channels and end users for products are similar. The production processes are shared across the majority of the products. Management evaluates performance and allocates resources on a combined basis and not as separate business units or profit centers. Accordingly, management has concluded the Company operates in one reportable segment.










13



Geographic Information
 
The reportable geographic regions are the Americas, Asia-Pacific and Europe/Rest of World (“RoW”). Sales have been attributed to geographic regions based on the country of our end customer.  The following tables provide summarized financial information concerning the Company’s geographic regions:
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Net Sales:
 
 
 
 
 
 
 
Americas
$
87,945

 
$
82,511

 
$
173,101

 
$
159,949

Asia-Pacific
34,123

 
36,052

 
66,939

 
65,281

Europe / RoW
10,189

 
10,706

 
19,088

 
20,536

Total
$
132,257

 
$
129,269

 
$
259,128

 
$
245,766

 
U.S. sales as a portion of Americas’ sales comprised approximately 82% and 86% for the three months ended June 30, 2012 and June 30, 2011, respectively, and approximately 83% and 86% for the six months ended June 30, 2012 and June 30, 2011, respectively.  Australia sales as a portion of Asia-Pacific sales comprised approximately 74% for the three months ended June 30, 2012 and June 30, 2011, respectively, and approximately 75% and 74% for the six months ended June 30, 2012 and June 30, 2011, respectively.
 
The following table shows identifiable assets (excluding working capital and intangibles) for each of the Company’s geographic regions:
 
 
June 30, 2012
 
December 31, 2011
Identifiable Assets:
 
 
 
Americas
$
70,682

 
$
67,683

Asia-Pacific
17,734

 
17,953

Europe / RoW
1,614

 
1,721

 
$
90,030

 
$
87,357


Product Line Information
 
The Company sells a variety of products, substantially all of which are used by manufacturing, construction and foundry operations to cut, join and reinforce steel, aluminum and other metals in various applications including construction, oil, gas rig and pipeline construction, repair and maintenance of manufacturing equipment, and shipbuilding. The following table shows sales for each of the product lines:
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Gas equipment
$
46,843

 
$
48,178

 
$
95,814

 
$
90,861

Plasma power supplies, torches and related consumable parts
22,541

 
20,903

 
43,291

 
41,053

Arc accessories, including torches, related consumable parts and accessories
25,066

 
22,965

 
46,036

 
43,677

Welding equipment
13,913

 
11,804

 
23,142

 
21,959

Filler metals and hardfacing alloys
23,894

 
25,419

 
50,845

 
48,216

 
$
132,257

 
$
129,269

 
$
259,128

 
$
245,766






14



12.
Relationships and Transactions
 
Relationship with Irving Place Capital
 
Victor Technologies is a wholly-owned subsidiary of Holdings.  Affiliates of Irving Place Capital, along with its co-investors, held 98.6% of the outstanding equity of Holdings at June 30, 2012 and December 31, 2011.  The Board of Directors of the Company and Holdings includes one IPC member.
 
IPC has the power to designate all of the members of the Board of Directors of the Company and the right to remove any directors whom it appoints.
 
Management Services Agreement
 
The Company has entered into a management services agreement with IPC.  For advisory and management services, IPC will receive annual advisory fees equal to the greater of (i) $1,500 or (ii) 2.5% of EBITDA (as defined under the management services agreement), payable quarterly.  In the event of a sale of all or substantially all of the Company’s assets to a third party, a change of control, whether by merger, consolidation, sale or otherwise, or, under certain circumstances, a public offering of the Company’s or any of its subsidiaries’ equity securities, the Company will be obligated to pay IPC an amount equal to the sum of the advisory fee that would be payable for the following four fiscal quarters.  Such fees were $613 and $705 for the three months ended June 30, 2012 and 2011, respectively, and $1,189 and $1,197 for the six months ended June 30, 2012 and 2011, respectively.
 
In connection with any subsequent material corporate transactions, such as an equity or debt offering, acquisition, asset sale, recapitalization, merger, joint venture formation or other business combination, IPC will receive a fee of 1% of the transaction value.  IPC will also receive fees in connection with certain strategic services, as determined by IPC, provided such fees will reduce the annual advisory fee on a dollar-for-dollar basis.
 
Victor Technologies Holdings Inc. (Holdings)
 
At June 30, 2012, an aggregate $98,619 in Holdings capital stock was outstanding, which was comprised of 56,775 shares of 8% cumulative preferred stock in the amount of $63,072 and 3,532,519 shares of common stock in the amount of $35,547. On March 6, 2012, the Company paid a cash dividend of $93,507 to Holdings, the sole stockholder of the Company, to allow it to redeem a portion of its outstanding Series A preferred stock, of which payment was funded by the net proceeds from the sale of the Additional Notes and cash on hand.  The redemption of Series A preferred stock was completed on March 12, 2012.  No dividends have been declared on either the preferred stock or common stock of Holdings at June 30, 2012 or December 31, 2011.   
 
Holdings’ stock based compensation costs relate to Victor Technologies' employees and were incurred for Victor Technologies' benefit, and accordingly recognized in Victor Technologies' consolidated selling, general & administrative expenses.

13. Subsequent Events

On July 13, 2012, the Company acquired all of the capital stock of Robotronic Oy, the parent company of ProMotion Controls, Inc., a leading maker of advanced, intelligent CNC controllers used in shape-cutting machines. The purchase price of $4,476, net of cash acquired, included assumed debt and an earn-out provision based on specific sales targets. The acquisition was financed with cash on hand. The purchase price is subject to normal post-closing adjustments.

14. Condensed Consolidating Financial Statements and Victor Technologies Group, Inc. (Parent) Financial Information
 
The 9% Senior Secured Notes due 2017 are obligations of, and were issued by, Victor Technologies. Each guarantor is wholly-owned by Victor Technologies. The Company’s management has determined the most appropriate presentation is to “push down” the Senior Secured Notes due 2017 to the guarantors in the accompanying condensed financial information, as such entities fully and unconditionally guarantee the Senior Secured Notes due 2017, and these subsidiaries are jointly and severally liable for all payments under these notes.  The Senior Secured Notes due 2017 were issued to finance the acquisition of the Company along with new stockholder’s equity. The guarantor subsidiaries’ cash flow will service the debt.
 
The following financial information presents the guarantors and non-guarantors of the 9% Senior Secured Notes due 2017 and, prior to February 1, 2011, the 9¼% Senior Subordinated Notes due 2014, in accordance with Rule 3-10 of Regulation S-X. The condensed consolidating financial information includes the accounts of Victor Technologies. (parent only), and the combined accounts of guarantor subsidiaries and combined accounts of the non-guarantor subsidiaries for the periods indicated. Separate

15



financial statements of the parent and each of the guarantor subsidiaries are not presented because management has determined such information is not material in assessing the financial condition, cash flows or results of operations of the Company and its subsidiaries. The Company’s Australian subsidiaries are included as guarantors for all years presented. Approximately 80% of the assets and the sales have been pledged by the guarantor subsidiaries to the holders of the Senior Secured Notes.


16



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2012
(unaudited)
(Dollars in thousands)
  
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
107,150

 
$
25,107

 
$

 
$
132,257

Cost of goods sold

 
64,994

 
20,120

 

 
85,114

Gross margin

 
42,156

 
4,987

 

 
47,143

Selling, general and administrative expenses

 
23,974

 
3,485

 

 
27,459

Amortization of intangibles

 
1,584

 

 

 
1,584

Restructuring

 
848

 

 

 
848

Operating income

 
15,750

 
1,502

 

 
17,252

Other income (expense):
 

 
 
 
 
 
 
 
 
Interest, net

 
(8,431
)
 
(22
)
 

 
(8,453
)
Amortization of deferred financing costs

 
(604
)
 

 

 
(604
)
Equity in net income (loss) of subsidiaries
5,986

 

 

 
(5,986
)
 

Income (loss) before income tax provision
5,986

 
6,715

 
1,480

 
(5,986
)
 
8,195

Income tax provision

 
1,819

 
390

 

 
2,209

Net income (loss)
$
5,986

 
$
4,896

 
$
1,090

 
$
(5,986
)
 
$
5,986


17



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
133,450

 
$
27,576

 
$
(31,757
)
 
$
129,269

Cost of goods sold

 
87,886

 
21,859

 
(28,270
)
 
81,475

Gross margin

 
45,564

 
5,717

 
(3,487
)
 
47,794

Selling, general and administrative expenses
(2
)
 
23,253

 
4,474

 

 
27,725

Amortization of intangibles

 
1,583

 

 

 
1,583

Restructuring

 
615

 

 

 
615

Operating income (loss)
2

 
20,113

 
1,243

 
(3,487
)
 
17,871

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest, net

 
(6,022
)
 
(34
)
 

 
(6,056
)
Amortization of deferred financing costs

 
(432
)
 

 

 
(432
)
Equity in net income (loss) of subsidiaries
6,070

 

 

 
(6,070
)
 

Income (loss) before income tax provision
6,072

 
13,659

 
1,209

 
(9,557
)
 
11,383

Income tax provision

 
4,656

 
655

 

 
5,311

Net income (loss)
$
6,072

 
$
9,003

 
$
554

 
$
(9,557
)
 
$
6,072


18



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2012
(unaudited)
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
211,027

 
$
48,101

 
$

 
$
259,128

Cost of goods sold

 
129,432

 
38,685

 

 
168,117

Gross margin

 
81,595

 
9,416

 

 
91,011

Selling, general and administrative expenses

 
46,833

 
7,068

 

 
53,901

Amortization of intangibles

 
3,167

 

 

 
3,167

Restructuring

 
1,659

 

 

 
1,659

Operating income (loss)

 
29,936

 
2,348

 

 
32,284

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest, net

 
(15,137
)
 
(46
)
 

 
(15,183
)
Amortization of deferred financing costs

 
(1,100
)
 

 

 
(1,100
)
Equity in net income (loss) of subsidiaries
11,198

 

 

 
(11,198
)
 

Income (loss) before income tax provision
11,198

 
13,699

 
2,302

 
(11,198
)
 
16,001

Income tax provision

 
4,448

 
355

 

 
4,803

Net income (loss)
$
11,198

 
$
9,251

 
$
1,947

 
$
(11,198
)
 
$
11,198


19



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
253,056

 
$
49,010

 
$
(56,300
)
 
$
245,766

Cost of goods sold

 
175,914

 
38,664

 
(49,832
)
 
164,746

Gross margin

 
77,142

 
10,346

 
(6,468
)
 
81,020

Selling, general and administrative expenses
(2
)
 
45,329

 
7,228

 

 
52,555

Amortization of intangibles

 
3,129

 

 

 
3,129

Restructuring

 
615

 

 

 
615

Operating income (loss)
2

 
28,069

 
3,118

 
(6,468
)
 
24,721

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest, net
484

 
(12,768
)
 
(69
)
 

 
(12,353
)
Amortization of deferred financing costs

 
(821
)
 

 

 
(821
)
Equity in net income (loss) of subsidiaries
5,674

 

 

 
(5,674
)
 

Income (loss) before income tax provision
6,160

 
14,480

 
3,049

 
(12,142
)
 
11,547

Income tax provision

 
4,184

 
1,203

 

 
5,387

Net income (loss)
$
6,160

 
$
10,296

 
$
1,846

 
$
(12,142
)
 
$
6,160



20



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2012
(unaudited)
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
5,986

 
$
4,896

 
$
1,090

 
$
(5,986
)
 
$
5,986

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,081
)
 
(3,611
)
 
(866
)
 
4,477

 
(2,081
)
Pension and postretirement
56

 
47

 
9

 
(56
)
 
56

Comprehensive income
$
3,961

 
$
1,332

 
$
233

 
$
(1,565
)
 
$
3,961


21



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
  
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
6,072

 
$
9,003

 
$
554

 
$
(9,557
)
 
$
6,072

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,595

 
1,896

 
180

 
(2,076
)
 
1,595

Pension and postretirement
6

 
6

 

 
(6
)
 
6

Comprehensive income
$
7,673

 
$
10,905

 
$
734

 
$
(11,639
)
 
$
7,673



22



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2012
(unaudited)
(Dollars in thousands)
  
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
11,198

 
$
9,251

 
$
1,947

 
$
(11,198
)
 
$
11,198

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
215

 
1,391

 
(50
)
 
(1,341
)
 
215

Pension and postretirement
39

 
38

 
1

 
(39
)
 
39

Comprehensive income
$
11,452

 
$
10,680

 
$
1,898

 
$
(12,578
)
 
$
11,452




23



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
  
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
6,160

 
$
10,296

 
$
1,846

 
$
(12,142
)
 
$
6,160

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,982

 
3,949

 
781

 
(4,730
)
 
2,982

Pension and postretirement
10

 
9

 
1

 
(10
)
 
10

Comprehensive income
$
9,152

 
$
14,254

 
$
2,628

 
$
(16,882
)
 
$
9,152



24



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2012
(unaudited)
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
12,564

 
$
4,204

 
$

 
$
16,768

Accounts receivable, net

 
67,237

 
14,118

 

 
81,355

Inventories

 
89,168

 
12,071

 

 
101,239

Prepaid expenses and other

 
5,271

 
6,208

 

 
11,479

Deferred tax assets

 
2,823

 

 

 
2,823

Total current assets

 
177,063

 
36,601

 

 
213,664

Property, plant and equipment, net

 
61,049

 
12,177

 

 
73,226

Goodwill

 
182,649

 

 

 
182,649

Intangibles, net

 
133,737

 
3,650

 

 
137,387

Deferred financing fees

 
16,725

 

 

 
16,725

Other assets

 
503

 

 

 
503

Investment in and advances to subsidiaries
174,467

 
79,232

 

 
(253,699
)
 

Total assets
$
174,467

 
$
650,958

 
$
52,428

 
$
(253,699
)
 
$
624,154

LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
 

 
 

 
 

 
 

 
 

Current Liabilities:
 

 
 

 
 

 
 

 
 

Current maturities of long-term obligations
$

 
$
1,246

 
$
416

 
$

 
$
1,662

Accounts payable

 
29,576

 
7,723

 

 
37,299

Accrued and other liabilities

 
32,137

 
5,506

 

 
37,643

Accrued interest

 
1,480

 

 

 
1,480

Income taxes payable

 
342

 
795

 

 
1,137

Deferred tax liability

 
3,584

 

 

 
3,584

Total current liabilities

 
68,365

 
14,440

 

 
82,805

Long-term obligations, less current maturities

 
357,698

 
155

 

 
357,853

Deferred tax liabilities

 
81,012

 

 

 
81,012

Other long-term liabilities

 
15,298

 
1,782

 

 
17,080

Net equity (deficit) and advances to / from subsidiaries
89,063

 
16,368

 
(36,952
)
 
(68,479
)
 

Stockholder's equity (deficit):
 

 
 

 
 

 
 

 
 

Common stock

 
2,555

 
55,145

 
(57,700
)
 

Additional paid-in-capital
84,171

 
111,586

 
15,569

 
(127,154
)
 
84,172

Accumulated deficit
3,259

 
4,032

 
1,901

 
(5,933
)
 
3,259

Accumulated other comprehensive income (loss)
(2,026
)
 
(5,956
)
 
388

 
5,567

 
(2,027
)
Total stockholder's equity (deficit)
85,404

 
112,217

 
73,003

 
(185,220
)
 
85,404

Total liabilities and stockholder's equity (deficit)
$
174,467

 
$
650,958

 
$
52,428

 
$
(253,699
)
 
$
624,154


25



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2011
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
15,298

 
$
5,558

 
$

 
$
20,856

Accounts receivable, net

 
56,893

 
11,677

 

 
68,570

Inventories

 
85,345

 
10,666

 

 
96,011

Prepaid expenses and other

 
7,057

 
4,915

 

 
11,972

Deferred tax assets

 
2,823

 

 

 
2,823

Total current assets

 
167,416

 
32,816

 

 
200,232

Property, plant and equipment, net

 
61,971

 
11,890

 

 
73,861

Deferred financing fees

 
13,416

 

 

 
13,416

Other assets

 
502

 

 

 
502

Goodwill

 
182,429

 

 

 
182,429

Intangibles, net

 
136,515

 
3,750

 

 
140,265

Investment in and advances to subsidiaries
191,135

 
79,232

 

 
(270,367
)
 

Total assets
$
191,135

 
$
641,481

 
$
48,456

 
$
(270,367
)
 
$
610,705

LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term obligations
$

 
$
1,276

 
$
439

 
$

 
$
1,715

Accounts payable

 
23,299

 
6,406

 

 
29,705

Accrued and other liabilities

 
38,120

 
5,440

 

 
43,560

Accrued interest

 
1,081

 

 

 
1,081

Income taxes payable

 
1,929

 
946

 

 
2,875

Deferred tax liability

 
3,584

 

 

 
3,584

Total current liabilities

 
69,289

 
13,231

 

 
82,520

Long-term obligations, less current maturities

 
263,246

 
361

 

 
263,607

Deferred tax liabilities

 
78,927

 

 

 
78,927

Other long-term liabilities

 
16,184

 
1,897

 

 
18,081

Net equity (deficit) and advances to / from subsidiaries
23,565

 
108,505

 
(39,149
)
 
(92,921
)
 

Stockholder's equity (deficit):
 
 
 
 
 
 
 
 
 
Common stock

 
2,555

 
55,145

 
(57,700
)
 

Additional paid-in-capital
177,790

 
111,207

 
15,456

 
(126,663
)
 
177,790

Accumulated deficit
(7,939
)
 
(323
)
 
1,044

 
(721
)
 
(7,939
)
Accumulated other comprehensive income (loss)
(2,281
)
 
(8,109
)
 
471

 
7,638

 
(2,281
)
Total stockholder's equity (deficit)
167,570

 
105,330

 
72,116

 
(177,446
)
 
167,570

Total liabilities and stockholder's equity (deficit)
$
191,135

 
$
641,481

 
$
48,456

 
$
(270,367
)
 
$
610,705


26



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2012
(unaudited)
(Dollars in thousands)

 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
11,576

 
$
7,516

 
$
(1,679
)
 
$
(11,198
)
 
$
6,215

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(4,787
)
 
(913
)
 

 
(5,700
)
Other

 
(389
)
 
100

 

 
(289
)
Net cash provided by (used in) investing activities

 
(5,176
)
 
(813
)
 

 
(5,989
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Issuance of Additional Notes of Senior Secured Notes due 2017

 
100,000

 

 

 
100,000

Senior Secured Notes discount

 
(5,200
)
 

 

 
(5,200
)
Repayments of other long-term obligations

 
(594
)
 
(224
)
 

 
(818
)
Deferred financing fees

 
(4,409
)
 

 

 
(4,409
)
Dividend payment to Parent
(93,507
)
 

 

 

 
(93,507
)
Proceeds from exercise of stock options
31

 

 

 

 
31

Changes in net equity
82,419

 
(95,014
)
 
1,397

 
11,198

 

Other, net
(519
)
 

 

 

 
(519
)
Net cash provided by (used in) financing activities
(11,576
)
 
(5,217
)
 
1,173

 
11,198

 
(4,422
)
Effect of exchange rate changes on cash and cash equivalents

 
143

 
(35
)
 

 
108

Total increase (decrease) in cash and cash equivalents

 
(2,734
)
 
(1,354
)
 

 
(4,088
)
Total cash and cash equivalents beginning of period

 
15,298

 
5,558

 

 
20,856

Total cash and cash equivalents end of period
$

 
$
12,564

 
$
4,204

 
$

 
$
16,768



27



VICTOR TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2011
(unaudited) 
(Dollars in thousands)
 
 
Parent
Victor
Technologies
Group, Inc.
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Cash flows from operations:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(1,164
)
 
$
1,441

 
$
1,641

 
$
(11,897
)
 
$
(9,979
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(5,530
)
 
(2,385
)
 

 
(7,915
)
Other

 
(322
)
 

 

 
(322
)
Net cash provided by (used in) investing activities

 
(5,852
)
 
(2,385
)
 

 
(8,237
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Repayments of other long-term obligations

 
(1,934
)
 
540

 

 
(1,394
)
Repayment of Senior Subordinated Notes
(176,095
)
 

 

 

 
(176,095
)
Use of Trusteed Assets for redemption of Senior Subordinated Notes
183,685

 

 

 

 
183,685

Changes in net equity
(6,426
)
 
(6,750
)
 
1,279

 
11,897

 

Other

 
(275
)
 

 

 
(275
)
Net cash provided by (used in) financing activities
1,164

 
(8,959
)
 
1,819

 
11,897

 
5,921

Effect of exchange rate changes on cash and cash equivalents

 
386

 
176

 

 
562

Total increase (decrease) in cash and cash equivalents

 
(12,984
)
 
1,251

 

 
(11,733
)
Total cash and cash equivalents beginning of period

 
18,692

 
3,707

 

 
22,399

Total cash and cash equivalents end of period
$

 
$
5,708

 
$
4,958

 
$

 
$
10,666


28



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Effective May 21, 2012, Thermadyne changed its name to Victor Technologies Group, Inc. (“Victor Technologies” or the "Company"). Thermadyne Technologies, the parent company of Victor Technologies, accordingly changed it named to Victor Technologies Holdings, Inc. ("Holdings").

We are a leading global designer, manufacturer and supplier of gas and arc cutting, welding and gas control equipment, accessories and consumables. Our products are used by manufacturing, construction, fabrication and foundry operations to cut, join and reinforce steel, aluminum and other metals. We design, manufacture and sell products in five principal categories: (1) gas equipment; (2) plasma power supplies, torches and consumable parts; (3) welding equipment; (4) arc accessories, including torches, consumable parts and accessories; and (5) filler metals and hardfacing alloys. We operate our business in one reportable segment.
 
Historically, demand for our products has been cyclical because many of the end users of our products are themselves in highly cyclical industries, such as commercial construction, steel shipbuilding, petrochemical construction and general manufacturing. The demand for our products and, therefore, our results of operations are related to the level of production in these end-user industries.
 
The availability and the cost of the components of our manufacturing processes, and particularly raw materials, are key determinants in achieving future success in the marketplace as well as profitability. The principal raw materials we use in manufacturing our products are copper, brass, steel and plastic, which are widely available. Certain other raw materials used in our hardfacing alloy products, such as cobalt and chromium, are available primarily from sources outside the United States. Historically, we have been able to obtain adequate supplies of raw materials at acceptable prices but with increasing volatility. To maintain our profit margins, we have redesigned the material content of selected products and continued to reduce our overhead and labor costs by improving our operational efficiency, relocating jobs, consolidating our manufacturing operations and outsourcing production of certain components and products. We have increased and continue to selectively increase our selling prices.
 
Our operating profit is also affected by the mix of the products we sell, as margins are generally higher on torches and their replacement parts, as compared to power supplies and filler metals.
 
We sell our products domestically primarily through industrial welding distributors and wholesalers. Internationally, we sell our products through our sales force, independent distributors and wholesalers.
 
Our international sales are influenced by fluctuations in exchange rates of foreign currencies, foreign economic conditions and other risks associated with foreign trade.  A weakening of the U.S. dollar increases our international sales and certain of our international manufacturing costs as translated into U.S. dollars and also may serve to increase our export sales.  Similarly, a strengthening of the U.S. dollar against other currencies is expected to have the opposite effects on our international sales and certain of our manufacturing costs.

On July 13, 2012, the Company acquired all of the capital stock of Robotronic Oy, the parent company of ProMotion Controls, Inc., a leading maker of advanced, intelligent CNC controllers used in shape-cutting machines. The purchase price of $4,476, net of cash acquired and subject to normal post-closing adjustments, was paid using existing cash on the acquisition date and includes assumed debt and an earn-out based on the growth in sales of the Company's automated plasma products over a three-year period ending December 31, 2014.
 
Key Indicators
 
Key economic measures relevant to our business include steel consumption, industrial production trends and purchasing manager indices. Industries that we believe provide a reasonable indication of demand for our products include industrial manufacturing, construction and transportation, oil and gas exploration, metal fabrication and farm machinery, shipbuilding and railcar manufacturing. The trends in these industries provide important data to us in forecasting our business. Indicators with a more direct relationship to our business that might provide a forward-looking view of market conditions and demand for our products are not available.
 
Key performance measurements we use to manage the business include orders, sales, commodity cost trends, operating expenses and efficiencies, inventory levels and fill-rates. The timing of these measurements vary but may be daily, weekly and monthly depending on the need for management information and the availability of data.
 

29



Key financial measurements we use to evaluate the results of our business as well as the operations of our individual units include customer order levels and mix, sales order profitability, production volumes and variances, selling, general and administrative expense leverage, earnings before interest, taxes, depreciation and amortization, operating cash flows, capital expenditures and working capital. We review these measurements monthly, quarterly and annually and compare them over historical periods, as well as with objectives that are established by management and approved by our Board of Directors.

Results of Operations
 
The following is a discussion of the results of operations for the three and six months ended June 30, 2012 and 2011.

 
Net sales
($ in thousands)


   
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2012
 
June 30, 2011
 
% Change
 
June 30, 2012
 
June 30, 2011
 
% Change
Net sales summary:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
87,945

 
$
82,511

 
6.6
 %
 
$
173,101

 
$
159,949

 
8.2
 %
Asia-Pacific
34,123

 
36,052

 
(5.4
)%
 
66,939

 
65,281

 
2.5
 %
Europe/RoW
10,189

 
10,706

 
(4.8
)%
 
19,088

 
20,536

 
(7.1
)%
Consolidated
$
132,257

 
$
129,269

 
2.3
 %
 
$
259,128

 
$
245,766

 
5.4
 %
 
Net sales for the three months ended June 30, 2012 increased $3.0 million as compared to the same period in 2011, with approximately $2.8 million related to increased volumes and $1.3 million associated with price increases, partially offset by $1.1 million decrease to net sales attributable to foreign currency translation.

Net sales for the six months ended June 30, 2012 increased $13.4 million as compared to the same period in 2011, with approximately $6.7 million related to increased volumes, $6.4 million associated with price increases and $0.3 million attributable to foreign currency translation.

 
Gross margin
($ in thousands)


   
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2012
 
June 30, 2011
 
% Change
 
June 30, 2012
 
June 30, 2011
 
% Change
Gross margin
$
47,143

 
$
47,794

 
(1.4
)%
 
$
91,011

 
$
81,020

 
12.3
%
% of sales
35.6
%
 
37.0
%
 
 

 
35.1
%
 
33.0
%
 
 
 
For the three months ended June 30, 2012, gross margin as a percent of net sales decreased 1.4% as compared to the same period in 2011.  Under its use of the last-in first-out (“LIFO”) inventory method, the Company recorded a $0.4 million charge to cost of sales resulting from expected inflation of manufacturing costs in 2012.  In the second quarter of 2011, a $0.5 million charge to cost of sales was recorded for LIFO.  Excluding these items, gross margin as a percent of sales was 35.9% in the second quarter of 2012 compared to 37.4% in the second quarter of 2011. This remaining decrease is due primarily to favorable absorption in the second quarter of 2011 as a result of an intended inventory build during the three months ended June 30, 2011.

For the six months ended June 30, 2012, gross margin as a percent of net sales increased as compared to the same period in 2011.  Under its use of the LIFO inventory method, the Company recorded a $0.1 million charge to costs of sales resulting from expected inflation of manufacturing costs in 2012.  In the first half of 2011, a $1.5 million charge to cost of sales was recorded for LIFO.  Also in the first half of 2011, the Company expensed $3.3 million to cost of sales related to fair value purchase accounting adjustments for inventory.  Excluding these items, gross margin as a percent of sales was 35.2% in the first half of 2012 compared to 34.9% in the first half of 2011. This remaining increase is due to the beneficial impact of manufacturing efficiencies arising from our total cost productivity (“TCP”) program to lower costs and improve efficiency and increased volumes of activity in 2012, despite the favorable absorption as a result of an intended inventory build primarily during the three months ended June 30, 2011 as compared to the current year. 


30



 Selling, general and administrative expenses
($ in thousands)


   
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2012
 
June 30, 2011
 
% Change
 
June 30, 2012
 
June 30, 2011
 
% Change
Selling, general and administrative expenses
$
27,459

 
$
27,725

 
(1.0
)%
 
$
53,901

 
$
52,555

 
2.6
%
% of sales
20.8
%
 
21.4
%
 
 

 
20.8
%
 
21.4
%
 
 
 
For the three months ended June 30, 2012, selling, general, and administrative (“S,G&A”) costs were largely in line with the costs of the prior year, decreasing approximately $0.3 million.

For the six months ended June 30, 2012, S,G&A costs increased $1.3 million over the comparable period of 2011.  This increased dollar spend is primarily a result of increased headcount and headcount-related expenses primarily in the sales and marketing areas and one-time costs associated with the Company's name change. These cost increases were partially offset by decreased incentive compensation.  Despite the additional investment in S,G&A cost, S,G&A as a percentage of net sales declined to 20.8% for the six months ended June 30, 2012.  The 60 basis point improvement during the first half of 2012 as compared to the first half of 2011 is a result of higher sales volumes.

 
Restructuring
 
In 2011, the Company committed to restructuring plans that include exit activities at manufacturing sites in West Lebanon, New Hampshire and Pulau Indah, Selangor, Malaysia.  The Company expects to complete these activities in 2012.  These exit activities impact approximately 170 employees and are intended to reduce the Company’s fixed cost structure and better align its global manufacturing and distribution footprint

The Company expects that an additional $1,237 of restructuring expense associated with these activities will be incurred during the remainder of 2012.
 
The following provides a summary of restructuring costs incurred during the three and six months ended June 30, 2012, incurred to date and total expected restructuring costs:
         
($ in thousands)


   
Employee Termination Benefits
 
Other Restructuring Costs
 
Total
Three Months Ended
 
 
 
 
 
June 30, 2012
$
234

 
$
614

 
$
848

June 30, 2011
396

 
219

 
615

 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30, 2012
$
629

 
$
1,030

 
$
1,659

June 30, 2011
396

 
219

 
615

 
 
 
 
 
 
As of June 30, 2012
 
 
 
 
 
Cumulative restructuring costs
$
3,826

 
$
3,237

 
$
7,063

Total expected restructuring costs
$
3,900

 
$
4,400

 
$
8,300

 
Employee termination benefits primarily include severance and retention payments to employees impacted by exit activities.  Other restructuring costs include changes to the lease terms of the impacted facility, expense to relocate certain individuals and equipment to other manufacturing locations and employee training costs.







31



Interest, net
($ in thousands)


   
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2012
 
June 30, 2011
 
% Change
 
June 30, 2012
 
June 30, 2011
 
% Change
Interest, net
$
8,453

 
$
6,056

 
39.6
%
 
$
15,183

 
$
12,353

 
22.9
%
 
Interest expense for the three months ended June 30, 2012 and 2011 was $8.5 million and $6.1 million, respectively.  The increase in interest expense is a result of the issuance of the Additional Notes in March 2012.

Interest expense for the six months ended June 30, 2012 and 2011 was $15.2 million and $12.4 million, respectively.  The increase in interest expense reflects the effect of the additional issuance of $100 million of Senior Secured Notes due 2017 on March 6, 2012 while the first half of 2011 partially included $176 million of Senior Subordinated Notes due 2014 that were redeemed on February 1, 2011.  The first half of 2012 also included a 66 basis point increase in the Company’s effective interest rate as compared to the first half of 2011.

 
Income tax provision
($ in thousands)


   
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2012
 
June 30, 2011
 
% Change
 
June 30, 2012
 
June 30, 2011
 
% Change
Income tax provision
$
2,209

 
$
5,311

 
(58.4
)%
 
$
4,803

 
$
5,387

 
(10.8
)%
% of income before tax
27.0
%
 
46.7
%
 
 

 
30.0
%
 
46.7
%
 
 
 
The effective tax rate for 2012 is estimated to approximate 30.0% for the year.  The decrease in the effective tax rate from the rate of 46.7% for the first half of 2011 is a result of an increased release of valuation allowances associated with higher U.S. operating income projected in 2012, partially offset by foreign earnings which are currently taxable as "deemed dividends" in the U.S. The income taxes currently payable for 2012 are estimated to be 20.2% and are primarily related to foreign jurisdictions.


Net income

($ in thousands)


   
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2012
 
June 30, 2011
 
% Change
 
June 30, 2012
 
June 30, 2011
 
% Change
Net income
$
5,986

 
$
6,072

 
(1.4
)%
 
$
11,198

 
$
6,160

 
81.8
%
% of sales
4.5
%

4.7
%
 
 

 
4.3
%
 
2.5
%
 
 
 
  
For the second quarter of 2012, net income was $6.0 million compared to $6.1 million in the second quarter of 2011.  The lower net income for the second quarter of 2012 reflects increased manufacturing costs and interest expense as compared to the second quarter of 2011. This decrease was partially offset by lower S,G&A spending, and a decreased effective tax rate in the second quarter of 2012 as compared to the comparable period in the prior year.

For the first half of 2012, net income was $11.2 million compared to $6.2 million in the first half of 2011.  The higher net income amount for the first half of 2012 reflects a higher net sales base over the first half of 2011 combined with the impact of the prior year $3.3 million pre-tax purchase accounting inventory charge, partially offset by higher interest expense and restructuring charges in the first half of 2012 as compared to the comparable period in the prior year.
  
Liquidity and Capital Resources
 
Our principal uses of cash are for working capital, debt service obligations and capital expenditures.  In 2012, we anticipate capital expenditures will be approximately $16.0 million.  We expect that these ongoing requirements will be funded from operating cash flow and periodic borrowings under the Working Capital Facility.
 



32



The Company’s cash flows from continuing operations from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows, are summarized in the following table:
 
($ in thousands)


   
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
Net cash provided by (used in):
 
 
 
Operating activities
$
6,215

 
$
(9,979
)
Investing activities
(5,989
)
 
(8,237
)
Financing activities
(4,422
)
 
5,921

 
Operating Activities
 
Net cash provided by operating activities for the first half of 2012 was $6.2 million compared to $10.0 million of cash used in same period in 2011. This increase in cash was driven largely by lower uses of cash for working capital, particularly inventory, and an $8.7 million payment of interest on the Senior Subordinated Notes in 2011.
 
Investing Activities
 
Investing activities used $6.0 million and $8.2 million of cash for the six months ended June 30, 2012 and 2011, respectively, primarily for manufacturing equipment purchases.

Financing Activities
 
During the six months ended June 30, 2012, the Company issued an additional $100.0 million of Senior Secured Notes due 2017, and paid $5.2 million of consent fees to bondholders as well as $4.4 million of financing fees in conjunction with the Notes offering.  The Company used the proceeds to pay a cash dividend of $93.5 million to its parent company to allow it to redeem a portion of its outstanding Series A preferred stock.  In the same period in 2011, the Company retired the $176.1 million of Senior Subordinated Notes outstanding and paid the related interest obligation of $8.7 million with the Trusteed Assets established in the December 2010 defeasance of the Notes.
 
With respect to the Working Capital Facility, $1.4 million of letters of credit were outstanding and the unused availability, net of these letters of credit, was $58.6 million at June 30, 2012.
 
At June 30, 2012, the Company was in compliance with its financial covenants. We believe the Company has sufficient funding and Working Capital Facility availability to satisfy its operating needs, to fulfill its current debt repayment obligations, and to fund capital expenditure commitments. Failure to comply with our financial covenants in future periods would result in defaults under our debt agreements unless covenants are amended or waived. We believe the most restrictive financial covenant under our debt agreements is the “fixed charge coverage” covenant under our Working Capital Facility. A default of the financial covenants under the Working Capital Facility would constitute a default under the Senior Secured Notes due 2017.  An event of default under our debt agreements, if not waived, could result in the acceleration of these debt obligations.
 
Cautionary Statement Concerning Forward-looking Statements
 
The statements in this Quarterly Report that relate to future plans, events or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, including statements regarding our future prospects. These statements may be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions that relate to future events and occurrences. Actual results could differ materially due to a variety of factors and the other risks described in this Quarterly Report and the other documents we file from time to time with the Securities and Exchange Commission. Factors that could cause actual results to differ materially from those expressed or implied in such statements include, but are not limited to, the following:  (a) the impact of uncertain global economic conditions on our business and those of our customers, (b) the cost and availability of raw materials, (c) our ability to implement cost-reduction initiatives timely and successfully, (d) operational and financial developments and restrictions affecting our international sales and operations, (e) the impact of currency fluctuations, exchange controls, and devaluations, (f) the impact of a change of control under our debt instruments and potential limits on our ability to use net operating loss carry forwards, (g) fluctuations in labor costs, (h) consolidation within our customer base and the resulting increased concentration of our sales, (i) actions taken by our

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competitors that affect our ability to retain our customers, (j) our ability to meet customer needs by introducing new and enhanced products, (k) our ability to adequately enforce or protect our intellectual property rights, (l) the detrimental cash flow impact of increasing interest rates and our ability to comply with financial covenants in our debt instruments, (m) disruptions in the credit markets, (n) our relationships with our employees and our ability to retain and attract qualified personnel, (o) the identification, completion and integration of strategic acquisitions, (p) our ability to implement our business strategy, (q) the impact of a material disruption of our operations on our ability to meet customer demand and on our capital expenditure requirements, (r) liabilities arising from litigation, including product liability risks, and (s) the costs of compliance with and liabilities arising under environmental laws and regulations.  Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof and are not guarantees of performance or results. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or that reflect the occurrence of unanticipated events.  For a discussion of factors that may affect future results see “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Our primary financial market risks relate to fluctuations in commodity prices, currency exchange rates and interest rates.
 
Copper, brass and steel constitute a significant portion of our raw material costs. These commodities are subject to price fluctuations which we may not be able to recover and maintain historical margins depending upon competitive pricing conditions at the time.  When feasible, we attempt to establish fixed price purchase commitments with suppliers to provide stability in our materials component costs for periods of three to six months. We have not experienced and do not anticipate constraints on the availability of these commodities. 
 
Approximately 31% of the net sales for both the three and six months ended June 30, 2012 were denominated in foreign currencies, primarily the Australian Dollar and the Euro.  Our exposure to foreign currency transactions is partially mitigated through our manufacturing locations in Australia, China and Italy for sales into those regions.  Additionally, we enter into forward foreign exchange rate contracts with two major commercial banks as counterparties for periods extending from four to six months principally to offset a portion of the currency fluctuations in transactions denominated in the Australian Dollar and the Euro.  We also engage in forward foreign exchange rate contracts with respect to the Mexican Peso to limit foreign exchange risks relative to our Mexican manufacturing costs.  However, our financial results could still be significantly affected by changes in foreign currency exchange rates in the foreign markets.  We are most susceptible to a strengthening U.S. Dollar, which would have a negative effect on our export sales and a negative effect on the translation of local currency financial statements into U.S. dollars, our reporting currency.
 
We are exposed to changes in interest rates through our Working Capital Facility, which has LIBOR based variable interest rates. At June 30, 2012, $1.4 million of letters of credit were outstanding under the Working Capital Facility.
 
Item 4. Controls and Procedures
 
The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2012. Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. They have also determined in their evaluation that there was no change in the Company’s internal controls over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

 Item 1.  Legal Proceedings
 
The information contained in Note 9 – “Contingencies” to the Company’s condensed consolidated financial statements is incorporated by reference herein.

Item 6.  Exhibits
 
EXHIBIT INDEX
 
 
 
 
 
Incorporated by Reference
 
 
Exhibit Number  
 
Description of Exhibit
 
Form
 
File Number
 
Exhibit 
 
Filing Date    
 
Filed or Furnished Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1
 
Fifth Amended and Restated Certificate of Incorporation

 
8-K
 
001-13023
 
3.1
 
5/23/2012
 
 
10.1
 
Resolution Agreement dated as of January 18, 2012, between the Company and other defendants identified therein and the plaintiffs' counsel listed on the signature pages thereto.

 
8-K
 
001-13023
 
99.1
 
4/18/2012
 
 
10.2
 
Executive Employment Agreement between Victor Technologies Group, Inc. and E. Lee Qualls, dated as of July 9, 2012.
 
 
 
 
 
 
 
 
 
X
31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X

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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.
 
VICTOR TECHNOLOGIES GROUP, INC.
 
 
 
 
By:
  /s/ Jeffrey S. Kulka
 
 
Jeffrey S. Kulka
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
Date: August 14, 2012
 
 

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