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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2004
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 0-9576
K-TRON INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-1759452
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification #)
Incorporation or Organization)
Routes 55 & 553, P.O. Box 888, Pitman, New Jersey 08071-0888
- ------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (856) 589-0500
Not Applicable
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The Registrant had 2,515,242 shares of Common Stock outstanding as of August 12,
2004.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets 1
July 3, 2004 (Unaudited) and January 3, 2004
Consolidated Statements of Income & Retained 2
Earnings (Unaudited) for the Three and Six Months
Ended July 3, 2004 and June 28, 2003
Consolidated Statements of Cash Flows (Unaudited) 3
for the Six Months Ended July 3, 2004 and
June 28, 2003
Notes to Consolidated Financial Statements 4 - 10
Item 2. Management's Discussion and Analysis 11 - 18
of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About 18
Market Risk.
Item 4. Controls and Procedures. 18 - 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 6. Exhibits and Reports on Form 8-K. 19 - 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share Data)
(Unaudited)
July 3, January 3,
2004 2004
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,510 $ 4,506
Accounts receivable, net of allowance for
doubtful accounts of $785 and $820 19,610 19,273
Inventories, net 15,375 13,566
Deferred income taxes 442 442
Prepaid expenses and other current assets 2,166 1,698
-------- --------
Total current assets 46,103 39,485
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 25,050 26,916
PATENTS, net 1,813 1,893
GOODWILL 2,053 2,053
OTHER INTANGIBLES, net 10,098 10,218
NOTES RECEIVABLE AND OTHER ASSETS 2,394 2,111
DEFERRED INCOME TAXES 375 405
-------- --------
Total assets $ 87,886 $ 83,081
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 138 $ --
Current portion of long-term debt 3,876 3,541
Accounts payable 6,342 6,361
Accrued expenses and other current liabilities 9,561 8,518
Accrued commissions 1,499 1,393
Customer advances 2,543 1,757
Deferred income taxes 794 794
-------- --------
Total current liabilities 24,753 22,364
-------- --------
LONG-TERM DEBT, net of current portion 23,098 24,574
DEFERRED INCOME TAXES 947 947
OTHER NON-CURRENT LIABILITIES 7 82
SERIES B JUNIOR PARTICIPATING PREFERRED SHARES,
$.01 par value - authorized 50,000 shares; none issued -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value - authorized 950,000 shares; none issued -- --
Common stock, $.01 par value - authorized 50,000,000 shares;
issued 4,504,316 shares and 4,449,928 shares 45 44
Paid-in capital 17,792 16,922
Retained earnings 45,302 42,491
Accumulated other comprehensive income 3,456 3,171
-------- --------
66,595 62,628
Treasury stock, 2,002,574 shares - at cost (27,514) (27,514)
-------- --------
Total shareholders' equity 39,081 35,114
-------- --------
Total liabilities and shareholders' equity $ 87,886 $ 83,081
======== ========
See Notes to Consolidated Financial Statements
-1-
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME & RETAINED EARNINGS
(Dollars in Thousands except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES $ 27,062 $ 22,661 $ 53,383 $ 46,059
COST OF REVENUES 15,712 13,663 30,849 27,620
----------- ----------- ----------- -----------
Gross Profit 11,350 8,998 22,534 18,439
OPERATING EXPENSES:
Selling, general & administrative 8,462 6,682 16,734 13,947
Research and development 588 678 1,237 1,349
----------- ----------- ----------- -----------
9,050 7,360 17,971 15,296
----------- ----------- ----------- -----------
Operating Income 2,300 1,638 4,563 3,143
INTEREST (EXPENSE) (348) (400) (714) (780)
GAIN ON SALE OF OFFICE BUILDING -- -- 164 --
----------- ----------- ----------- -----------
Income before income taxes 1,952 1,238 4,013 2,363
INCOME TAX PROVISION 563 373 1,202 663
----------- ----------- ----------- -----------
NET INCOME 1,389 865 2,811 1,700
RETAINED EARNINGS
Beginning of period 43,913 39,603 42,491 38,768
----------- ----------- ----------- -----------
End of period $ 45,302 $ 40,468 $ 45,302 $ 40,468
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.56 $ 0.36 $ 1.13 $ 0.70
=========== =========== =========== ===========
Diluted $ 0.53 $ 0.35 $ 1.08 $ 0.68
=========== =========== =========== ===========
Average common shares outstanding 2,491,000 2,433,000 2,477,000 2,433,000
=========== =========== =========== ===========
Average common and common
equivalents shares outstanding 2,617,000 2,493,000 2,599,000 2,489,000
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
-2-
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
-----------------------
July 3, June 28,
2004 2003
---- ----
OPERATING ACTIVITIES:
Net income $ 2,811 $ 1,700
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposition of asset (164) --
Depreciation and amortization 2,021 1,457
Changes in assets and liabilities:
Accounts receivable, net (246) 3,338
Inventories (1,773) 367
Prepaid expenses and other current assets (334) 520
Other assets 122 198
Accounts payable 258 (1,037)
Accrued expenses and other current liabilities 1,697 (1,340)
-------- --------
Net cash provided by operating activities 4,392 5,203
-------- --------
INVESTING ACTIVITIES:
Proceeds from disposition of assets 996 --
Business acquired, net of cash acquired -- (18,988)
Capital expenditures (712) (1,769)
Other (49) (8)
-------- --------
Net cash provided by (used in) investing activities 235 (20,765)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under notes payable to banks 1,856 236
Proceeds from issuance of long-term debt 4,000 20,000
Principal payments on long-term debt (6,873) (1,603)
Proceeds from issuance of common stock 352 36
-------- --------
Net cash (used in) provided by financing activities (665) 18,669
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 42 149
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,004 3,256
-------- --------
CASH AND CASH EQUIVALENTS
Beginning of period 4,506 2,694
-------- --------
End of period $ 8,510 $ 5,950
======== ========
See Notes to Consolidated Financial Statements
-3-
K-TRON INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 3, 2004
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The consolidated financial statements include the
accounts of K-Tron International, Inc. and its subsidiaries ("K-Tron" or
the "Company"). All intercompany transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting
of a normal recurring nature) considered necessary for a fair presentation
of results for interim periods have been made.
Certain reclassifications were made to the prior year's consolidated
financial statements to conform them to the current period presentation.
The unaudited financial statements herein should be read in conjunction
with the Company's annual report on Form 10-K for the year ended January
3, 2004 which was previously filed with the Securities and Exchange
Commission.
2. New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). In general, a variable interest
entity is a corporation, partnership, trust or any other legal structure
used for business purposes that either (a) does not have equity investors
with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The adoption of the
provisions of FIN 46 effective February 1, 2003 did not have a material
impact on the Company's consolidated financial statements since the
Company currently does not have any variable interest entities. In
December 2003, the FASB issued FIN 46R with respect to variable interest
entities created before January 31, 2003 which, among other things,
revised the implementation date to the first fiscal year or interim period
ending after March 15, 2004, with the exception of Special Purpose
Entities ("SPEs"). The consolidation requirements apply to all SPEs in the
first fiscal year or interim period ending after December 15, 2003. The
Company's adoption of the provisions of FIN 46R effective January 3, 2004
did not have a material impact on the Company's consolidated financial
statements since the Company currently does not have any SPEs, nor does it
have any variable interest entities.
-4-
3. Supplemental Disclosures of Cash Flow Information
The Company considers all highly liquid short-term investments purchased
with an original maturity of three months or less to be cash equivalents.
Cash paid for interest in the six-month periods ended July 3, 2004 and
June 28, 2003 was $712,000 and $674,000, respectively, and for income
taxes was $568,000 and $228,000, respectively.
4. Inventories
Inventories consist of the following:
July 3, January 3,
2004 2004
---- ----
(in thousands)
Components $ 13,769 $ 13,676
Work-in-process 3,225 1,635
Finished goods 57 62
Inventory reserves (1,676) (1,807)
-------- --------
$ 15,375 $ 13,566
======== ========
5. Intangible Assets
July 3, 2004 January 3, 2004
---------------------- -----------------------
(in thousands)
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets
Patents $ 2,790 $ 977 $ 2,780 $ 887
Drawings 3,550 142 3,550 71
Customer Relationships 4,898 98 4,898 49
------- ------- ------- -------
$11,238 $ 1,217 $11,228 $ 1,007
======= ======= ======= =======
Unamortized intangible assets
Trademarks and tradenames $ 1,890 $ 1,890
======= =======
The amortized intangible assets are being amortized on the straight-line
basis (half-year expense in the year of acquisition) over the expected
period of benefits, which is 17 to 50 years. The amortization expense of
intangible assets for the six-month periods ended July 3, 2004 and June
28, 2003 was $210,000 and $139,000, respectively.
-5-
6. Accrued Warranty
The Company offers a one-year product warranty on a majority of its
products. Warranty is accrued as a percentage of sales on a monthly basis
and is included in accrued expenses and other current liabilities. The
following is an analysis of accrued warranty for the six-month periods
ended July 3, 2004 and June 28, 2003.
July 3, June 28,
2004 2003
---- ----
(in thousands)
Beginning balance $ 967 $ 687
Accrued warranty of acquired business -- 553
Accrual of warranty expense 753 746
Warranty costs incurred (770) (918)
Foreign exchange adjustment 3 13
------- -------
Ending balance $ 953 $ 1,081
======= =======
7. Long-Term Debt
Long-term debt consists of the following:
July 3, January 3,
2004 2004
---- ----
(in thousands)
U.S. mortgage, interest at 6.45% $ 1,976 $ 2,052
U.S. line of credit, interest at 3.75% 3,655 1,935
U.S. term facilities, interest at 2.94% to 5.75% 20,892 18,317
Unsecured notes payable, interest at 6% -- 4,000
Swiss facilities, interest at 1.7% to 2.1% -- 1,211
Other 451 600
-------- --------
26,974 28,115
Less current portion (3,876) (3,541)
-------- --------
$ 23,098 $ 24,574
======== ========
8. Earnings Per Share
The Company previously adopted SFAS No. 128, "Earnings Per Share", which
requires that the Company report Basic and Diluted Earnings Per Share.
Basic Earnings Per Share represents net income less preferred dividends
divided by the weighted average number of common shares outstanding.
Diluted Earnings Per Share is calculated similarly, except that the
denominator includes the weighted average number of common shares
outstanding plus the dilutive effect of options, warrants, convertible
securities and other instruments with dilutive effects if exercised.
The Company's Diluted Earnings Per Share shown in the table below are
based on the weighted average number of common and common equivalent
shares outstanding during a given time period. Such average shares include
the weighted average number of
-6-
common shares outstanding plus the shares issuable upon exercise of stock
options after the assumed repurchase of common shares with the related
proceeds.
The Company's Basic and Diluted Earnings Per Share are calculated as
follows:
For the Three Months Ended July 3, 2004
-------------------------------------------------------------
Net Income Available
(Dollars and Shares in Thousands To Common Earnings
except Per Share Data) Shareholders Shares Per Share
------------ ------ ---------
Basic $1,389 2,491 $ 0.56
Common Share Equivalent
of Outstanding Options -- 126 (0.03)
------ ------ --------
Diluted $1,389 2,617 $ 0.53
====== ====== ========
For the Three Months Ended June 28, 2003
-------------------------------------------------------------
Net Income Available
(Dollars and Shares in Thousands To Common Earnings
except Per Share Data) Shareholders Shares Per Share
------------ ------ ---------
Basic $ 865 2,433 $ 0.36
Common Share Equivalent
of Outstanding Options -- 60 (0.01)
------ ----- --------
Diluted $ 865 2,493 $ 0.35
====== ===== ========
For the Six Months Ended July 3, 2004
-------------------------------------------------------------
Net Income Available
(Dollars and Shares in Thousands To Common Earnings
except Per Share Data) Shareholders Shares Per Share
------------ ------ ---------
Basic $2,811 2,477 $ 1.13
Common Share Equivalent
of Outstanding Options -- 122 (0.05)
------ ----- --------
Diluted $2,811 2,599 $ 1.08
====== ===== ========
For the Six Months Ended June 28, 2003
-------------------------------------------------------------
Net Income Available
(Dollars and Shares in Thousands To Common Earnings
except Per Share Data) Shareholders Shares Per Share
------------ ------ ---------
Basic $1,700 2,433 $ 0.70
Common Share Equivalent
of Outstanding Options -- 56 (0.02)
------ ----- --------
Diluted $1,700 2,489 $ 0.68
====== ===== ========
-7-
9. Stock-Based Compensation
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", the Company has elected to
continue to account for compensation cost using the intrinsic value-based
method of accounting as prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123
requires the Company to disclose pro forma net income and pro forma
earnings per share amounts, as if compensation expense were recognized for
options granted after fiscal year 1994. Using this approach, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the following table:
Three Months Ended Six Months Ended
------------------------ ------------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except per share)
Net income - as reported $ 1,389 $ 865 $ 2,811 $ 1,700
Net income - pro forma 1,337 794 2,728 1,561
Basic earnings per share - as reported 0.56 0.36 1.13 0.70
Basic earnings per share - pro forma 0.54 0.33 1.10 0.64
Diluted earnings per share - as reported 0.53 0.35 1.08 0.68
Diluted earnings per share - pro forma 0.51 0.32 1.05 0.63
This pro forma impact may not be representative of the effects for future
years, and could increase if additional options are granted and amortized
over the vesting period. For disclosure purposes, the fair value of each
stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield; expected volatility of 31.45% and 30.80%;
risk-free interest rate of 4.15% and 2.76%; and expected life of 6.00
years and 6.00 years for grants in 2004 and 2003, respectively.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input
of subjective assumptions, including the expected stock price volatility.
10. Comprehensive Income
Comprehensive income is the total of net income, the change in the
unrealized gain or loss on the Company's interest rate swap, net of tax,
and the change in foreign currency translation adjustments, all for a
given period, which are the Company's only non-owner changes in equity.
For the three and six-month periods ending July 3, 2004 and June 28, 2003,
the following table sets forth the Company's comprehensive income:
-8-
Three Months Ended Six Months Ended
-------------------- --------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Net income $ 1,389 $ 865 $ 2,811 $ 1,700
Unrealized gain (loss) on
interest rate swap, net of tax 61 (80) 45 (178)
Foreign currency translation gain 1,266 341 240 674
------- ------- ------- -------
Comprehensive income $ 2,716 $ 1,126 $ 3,096 $ 2,196
======= ======= ======= =======
11. Management Segment Information
The Company has adopted the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131
introduced a model for segment reporting called the management approach.
The management approach is based on the way that the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. The Company is engaged in one
business segment, material handling equipment and systems. The Company
operates in two primary geographic locations, North and South America (the
"Americas") and Europe, the Middle East, Africa and Asia ("EMEA/Asia").
For the three and six months ended July 3, 2004 and June 28, 2003, the
following table sets forth the Company's geographic information:
EMEA/
Americas Asia Eliminations Consolidated
-------- ---- ------------ ------------
(in thousands)
THREE MONTHS ENDED
July 3, 2004
Revenues
Sales to unaffiliated customers $ 15,098 $ 11,964 $ -- $ 27,062
Sales to affiliates 965 855 (1,820) --
-------- -------- -------- --------
Total sales $ 16,063 $ 12,819 $ (1,820) $ 27,062
======== ======== ======== ========
Operating income (loss) $ 1,164 $ 1,173 $ (37) $ 2,300
======== ======== ========
Interest expense (348)
--------
Income before income taxes $ 1,952
========
-9-
EMEA/
Americas Asia Eliminations Consolidated
-------- ---- ------------ ------------
(in thousands)
THREE MONTHS ENDED
June 28, 2003
Revenues
Sales to unaffiliated customers $ 13,191 $ 9,470 $ -- $ 22,661
Sales to affiliates 563 450 (1,013) --
-------- -------- -------- --------
Total sales $ 13,754 $ 9,920 $ (1,013) $ 22,661
======== ======== ======== ========
Operating income (loss) $ 1,135 $ 503 $ -- $ 1,638
======== ======== ========
Interest expense (400)
--------
Income before income taxes $ 1,238
========
EMEA/
Americas Asia Eliminations Consolidated
-------- ---- ------------ ------------
(in thousands)
SIX MONTHS ENDED
July 3, 2004
Revenues
Sales to unaffiliated customers $ 29,891 $ 23,492 $ -- $ 53,383
Sales to affiliates 1,660 1,681 (3,341) --
-------- -------- -------- --------
Total sales $ 31,551 $ 25,173 $ (3,341) $ 53,383
======== ======== ======== ========
Operating income (loss) $ 2,528 $ 2,106 $ (71) $ 4,563
======== ======== ========
Interest expense (714)
Gain on sale of office building 164
--------
Income before income taxes $ 4,013
========
EMEA/
Americas Asia Eliminations Consolidated
-------- ---- ------------ ------------
(in thousands)
SIX MONTHS ENDED
June 28, 2003
Revenues
Sales to unaffiliated customers $ 26,408 $ 19,651 $ -- $ 46,059
Sales to affiliates 1,312 1,018 (2,330) --
-------- -------- -------- --------
Total sales $ 27,720 $ 20,669 $ (2,330) $ 46,059
======== ======== ======== ========
Operating income (loss) $ 1,808 $ 1,354 $ (19) $ 3,143
======== ======== ========
Interest expense (780)
--------
Income before income taxes $ 2,363
========
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
We are engaged in one principal business segment - material handling
equipment and systems. We operate in two primary geographic locations - North
and South America (the "Americas") and Europe, the Middle East, Africa and Asia
("EMEA/Asia").
We have three main business lines within the material handling equipment
and systems segment. They are our feeding, size reduction and pneumatic
conveying business lines.
The following provides information that management believes is relevant to
an assessment and understanding of our consolidated results of operations and
financial condition. The discussion should be read in conjunction with our
consolidated financial statements and accompanying notes. All references in this
Item 2 to the second quarter or first six months of 2004 or 2003 mean the fiscal
quarter or six-month period ended July 3, 2004 or June 28, 2003, as the case may
be.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations is based on the accounting policies used and disclosed in
our 2003 consolidated financial statements and accompanying notes that were
prepared in accordance with accounting principles generally accepted in the
United States of America and included as part of our annual report on Form 10-K
for the year ended January 3, 2004 (the "2003 Form 10-K"). The preparation of
those financial statements required management to make estimates and assumptions
that affected the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The significant accounting policies of the Company are described in Note 2
to the 2003 consolidated financial statements, and the critical accounting
policies and estimates are described in Management's Discussion and Analysis
included in our 2003 Form 10-K. Information concerning our implementation and
the impact of new accounting standards issued by the Financial Accounting
Standards Board (FASB) is included in the notes to the 2003 consolidated
financial statements. We did not adopt an accounting policy in the first six
months of 2004 that had a material impact on our financial condition, liquidity
or results of operations.
-11-
RESULTS OF OPERATIONS
Overview
For the second quarter and first six months of 2004, we reported revenues
of $27,062,000 and $53,383,000 and net income of $1,389,000 and $2,811,000,
respectively, compared to revenues of $22,661,000 and $46,059,000 and net income
of $865,000 and $1,700,000 for the same periods in 2003. The increases in second
quarter and first six months of 2004 revenues and net income compared with the
same periods in 2003 were primarily the result of improved business conditions
in all three of our main business lines, and also reflected the positive effect
of a weaker U.S. dollar when translating the revenues and profits of our foreign
operations into U.S. dollars. First six months of 2004 net income also benefited
from the profit contribution from the first quarter sale of an office building
by one of our United Kingdom subsidiaries.
Foreign Exchange Rates
We are an international company, and we derived 44% and 43% of our
revenues for the first six months of 2004 and 2003, respectively, from products
manufactured in, and services performed from, our facilities located outside the
United States, primarily in Europe. Since we operate globally, we are sensitive
to changes in foreign currency exchange rates ("foreign exchange rates"), which
can affect both the translation of financial statement items into U.S. dollars
as well as transactions where the revenues and related expenses may initially be
accounted for in different currencies, such as sales made from our Swiss
manufacturing facility in currencies other than the Swiss franc.
Since we have received substantial revenues in recent years from
activities in foreign jurisdictions, our results can be significantly affected
by changes in foreign exchange rates, particularly in U.S. dollar exchange rates
with respect to the Swiss franc, euro and British pound sterling and, to a
lesser degree, the Singapore dollar and other currencies. When the U.S. dollar
weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based
sales increases. When the U.S. dollar strengthens against these currencies, the
U.S. dollar value of non-U.S. dollar-based sales decreases. Correspondingly, the
U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar
weakens and decreases when the U.S. dollar strengthens. Overall, our revenues in
U.S. dollars generally benefit from a weaker dollar and are adversely affected
by a stronger dollar relative to major currencies worldwide, especially those
identified above. In particular, a general weakening of the U.S. dollar against
other currencies would positively affect our revenues, gross profit and
operating income as expressed in U.S. dollars (provided that the gross profit
and operating income numbers from foreign operations are not losses, since in
the case of a loss, the effect would be to increase the loss), whereas a general
strengthening of the U.S. dollar against such currencies would have the opposite
effect. In addition, our revenues and income with respect to particular
transactions may be affected by changes in foreign exchange rates where sales
are made in currencies other than the functional currency of the facility
manufacturing the product subject to the sale.
-12-
For the second quarter and first six months of 2004 and 2003, the changes
in certain key exchange rates affecting the Company were as follows:
Three Months Ended Six Months Ended
---------------------------- ----------------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
---- ---- ---- ----
Average U.S. dollar equivalent of
one Swiss franc 0.787 0.749 0.790 0.740
% change vs. prior year +5.1% +6.8%
Average U.S. dollar equivalent of
one euro 1.207 1.138 1.226 1.106
% change vs. prior year +6.1% +10.9%
Average U.S. dollar equivalent of
one British pound sterling 1.809 1.619 1.823 1.611
% change vs. prior year +11.7% +13.2%
Average Swiss franc equivalent of
one euro 1.534 1.519 1.552 1.495
% change vs. prior year +1.0% +3.8%
Average Swiss franc equivalent of
one British pound sterling 2.299 2.162 2.308 2.177
% change vs. prior year +6.3% +6.0%
Presentation of Results and Analysis
The following table sets forth our results of operations, expressed as a
percentage of total revenues for the periods indicated, as well as our backlog
at the end of such periods:
Three Months Ended Six Months Ended
------------------- -------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
---- ---- ---- ----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 58.1 60.3 57.8 60.0
----- ----- ----- -----
Gross profit 41.9 39.7 42.2 40.0
Selling, general and administrative 31.2 29.5 31.4 30.3
Research and development 2.2 3.0 2.3 2.9
----- ----- ----- -----
Operating income 8.5 7.2 8.5 6.8
Interest 1.3 1.7 1.3 1.7
Gain on sale of office building -- -- 0.3 --
----- ----- ----- -----
Income before income taxes 7.2% 5.5% 7.5% 5.1%
===== ===== ===== =====
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July 3, 2004 January 3, 2004 June 28, 2003
------------ --------------- -------------
Backlog (at July 3, 2004
exchange rates, in thousands
of dollars) $21,445 $17,385 $15,763
======= ======= =======
Total revenues increased by $4,401,000 or 19.4% in the second quarter of
2004 and by $7,324,000 or 15.9% in the first six months of 2004 compared to the
same periods in 2003. These increases in revenues were primarily attributable to
improved business conditions in all three of our main business lines, feeding,
size reduction and pneumatic conveying, and, to a lesser degree, to the positive
effect of a weaker U.S. dollar when translating the revenues of foreign
operations into U.S. dollars. The favorable impact of foreign currency
translation accounted for approximately 15% of the $4,401,000 revenue increase
in the second quarter and approximately 23% of the $7,324,000 revenue increase
in the first six months of 2004 compared to the same periods in 2003.
Gross profit as a percent of total revenues increased to 41.9% in the
second quarter of 2004 and 42.2% in the first six months of 2004 from 39.7% and
40.0%, respectively, for the same periods in 2003. These increases in gross
profit were primarily due to higher revenues, which led to fixed costs being
absorbed over a larger revenue base, and to geographic and product sales mix.
Selling, general and administrative (SG&A) expenses increased by
$1,780,000 or 26.6% in the second quarter of 2004 and by $2,787,000 or 20.0% in
the first six months of 2004 compared to the same periods in 2003. These
increases in SG&A were primarily the result of higher sales commissions due to
increased revenues, a higher bonus accrual, the effect of a weaker U.S. dollar
and an increase in depreciation and amortization expense related to the
implementation of software systems within our feeding business line. As a
percent of total revenues, SG&A was 31.2% in the second quarter of 2004 and
31.4% in the first six months of 2004 compared to 29.5% and 30.3%, respectively,
for the same periods in 2003.
Research and development (R&D) expenditures decreased by $90,000 or 13.3%
in the second quarter of 2004 and by $112,000 or 8.3% in the first six months of
2004 compared to the same periods in 2003. These decreases were primarily due to
lower prototype expenditures and a small reduction in staff partially offset by
the effect of a weaker U.S. dollar. R&D expense as a percent of total revenues
was 2.2% in the second quarter of 2004 and 2.3% in the first six months of 2004
compared to 3.0% and 2.9%, respectively, for the same periods in 2003.
Interest expense decreased by $52,000 or 13.0% in the second quarter of
2004 and by $66,000 or 8.5% in the first six months of 2004 compared to the same
periods in 2003. These decreases primarily reflected debt reductions. Interest
expense as a percent of total revenues was 1.3% in the second quarter and first
six months of 2004 compared to 1.7% for the same periods in 2003.
In the first quarter of 2004, one of our United Kingdom subsidiaries sold
its office building for $996,000 and realized a pre-tax gain of $164,000. All
employees were relocated to a nearby office building that is leased by another
United Kingdom subsidiary.
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Income before income taxes was $1,952,000 in the second quarter of 2004
and $4,013,000 in the first six months of 2004 compared to $1,238,000 and
$2,363,000, respectively, for the same periods in 2003. Income before income
taxes improved versus the same periods in 2003 as a result of the items
discussed above.
The effective tax rate for the second quarter and first six months of 2004
was 28.8% and 30.0%, respectively, compared to 30.1% and 28.1% for the same
periods in 2003. The decrease in the effective tax rate in the second quarter of
2004 compared to the same period in 2003 was due to a higher percentage of
foreign taxable income in the second quarter of 2004, while the increase in the
effective tax rate for the first six months of 2004 compared to the same period
in 2003 was the result of a higher percentage of U.S. taxable income in the
first six months of 2004.
Our backlog at constant foreign exchange rates increased by $4,060,000 or
23.4% and $5,682,000 or 36.0% at the end of the second quarter of 2004 compared
to the backlog at January 3, 2004 and June 28, 2003, respectively. This increase
in our backlog resulted from the improved business conditions previously
described.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
Our capitalization at the end of the second quarter of 2004 and at the end
of fiscal years 2003 and 2002 is summarized below:
July 3, January 3, December 28,
(Dollars in Thousands) 2004 2004 2002
------- ------- -------
Short-term debt, including current
portion of long-term debt $ 4,014 $ 3,541 $ 2,005
Long-term debt 23,098 24,574 6,499
------- ------- -------
Total debt 27,112 28,115 8,504
Shareholders' equity 39,081 35,114 28,419
------- ------- -------
Total debt and shareholders' equity $66,193 $63,229 $36,923
======= ======= =======
(total capitalization)
Percent total debt to total capitalization 41% 44% 23%
Percent long-term debt to equity 59% 70% 23%
Percent total debt to equity 69% 80% 30%
Total debt decreased by $1,003,000 in the first six months of 2004
($1,017,000 at constant foreign exchange rates). At July 3, 2004 and subject to
certain conditions which may limit the amount that may be borrowed at any
particular time, we had $4,845,000 of unused borrowing capacity under our U.S.
loan agreements and $10,597,000 of unused borrowing capacity under our foreign
loan agreements.
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In June 2004, we prepaid $4,000,000 of unsecured promissory notes bearing
interest at 6% per annum that were payable to the former stockholders of
Pennsylvania Crusher Corporation which we acquired in January 2003. These notes
were payable in three equal annual installments beginning in January 2005. The
payoff was financed with a $4,000,000 term loan from a U.S. bank, repayable over
60 months, with 48 monthly principal payments of $50,000 beginning January 2005,
11 monthly principal payments of $133,333 beginning January 2009 and a final
principal payment of $133,337 in December 2009. Interest is payable monthly
beginning July 2004 at a fixed rate of 5.75% on principal of $1,600,000 and at a
variable rate of one-month LIBOR plus 1.85% (2.94% as of July 3, 2004) on the
remaining principal of $2,400,000. The term loan is guaranteed by the U.S.
manufacturing subsidiary for our feeder line and contains the same annual
consolidated financial covenants that already exist with the lender.
In June 2004, the same U.S. bank extended the term of a $5,000,000 secured
revolving credit facility with the same U.S. manufacturing subsidiary through
July 2006.
Other Items
At July 3, 2004, working capital was $21,350,000 compared to $17,121,000
at January 3, 2004, and the ratio of current assets to current liabilities at
those dates was 1.86 and 1.77, respectively. The working capital increase during
the first six months of 2004 was primarily from an increase in cash from
operating activities and from the sale of the U.K. office building previously
described.
In the first six months of 2004 and 2003, we utilized internally generated
funds and our lines of credit to meet our working capital needs.
Net cash provided by operating activities was $4,392,000 in the first six
months of 2004 compared to $5,203,000 in the same period of 2004. The decrease
in operating cash flow during the first six months of 2004 compared to the same
period in 2003 was primarily due to an increase in accounts receivable,
inventories and prepaid expenses resulting from the stronger business conditions
and higher revenues discussed above, partially offset by increases in net
income, depreciation and amortization, accounts payable and accrued expenses.
Net cash provided by investing activities in the first six months of 2004
was primarily from the disposition of the U.K. office building noted above,
partially offset by capital additions. Net cash used in investing activities for
the first six months of 2003 was for the acquisition of Pennsylvania Crusher
Corporation in January 2003 and capital additions.
Cash used in financing activities in the first six months of 2004 was for
net debt reductions, which were partially offset by the proceeds of stock option
exercises, while cash provided by financing activities in the first six months
of 2003 was from borrowings related to the acquisition of Pennsylvania Crusher
Corporation in January 2003.
Of the total increase in shareholders' equity of $3,967,000 in the first
six months of 2004, $2,811,000 was from net income, $240,000 was from changes in
foreign exchange rates, particularly the strengthening of the Swiss franc and
euro versus the U.S. dollar, $871,000 was from the issuance of common stock
related to the exercise of stock options, and $45,000 was from an unrealized
gain net of taxes on an interest rate swap.
-16-
Future Payments Under Contractual Obligations
We are obligated to make future payments under various contracts such as
debt agreements and lease agreements, and we are subject to certain other
commitments and contingencies. There have been no material changes to Future
Payments Under Contractual Obligations as reflected in the Liquidity and Capital
Resources section of Management's Discussion and Analysis in the Company's 2003
Form 10-K except for the $4,000,000 debt refinancing and $5,000,000 revolving
credit facility extension, each of which occurred in June 2004 and was described
above. Refer to Notes 9 and 16 to the consolidated financial statements in the
2003 Form 10-K for additional information on long-term debt and commitments and
contingencies.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a safe harbor for forward-looking statements made by us or on our behalf. We and
our representatives may from time to time make written or oral statements that
are "forward-looking," including statements contained in this report and other
filings with the Securities and Exchange Commission, reports to our shareholders
and news releases. All statements that express expectations, estimates,
forecasts or projections are forward-looking statements within the meaning of
the Act. In addition, other written or oral statements which constitute
forward-looking statements may be made by us or on our behalf. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"projects," "forecasts," "may," "should," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in or suggested by such forward-looking statements. The forward-looking
statements contained in this report include but are not limited to statements
regarding the effect of changes in foreign exchange rates on our business. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
A wide range of factors could materially affect our future performance and
financial and competitive position, including the following: (i) increasing
price and product/service competition by domestic and foreign competitors,
including new entrants; (ii) the mix of products/services sold by us; (iii)
rapid technological changes and developments and our ability to continue to
introduce competitive new products on a timely and cost-effective basis; (iv)
changes in U.S. and global financial and currency markets, including significant
interest rate and foreign currency exchange rate fluctuations; (v) protection
and validity of patents and other intellectual property rights held by us and
our competitors; (vi) the cyclical nature of our business as an industrial
capital goods supplier; (vii) possible future litigation and governmental
proceedings; (viii) the availability of financing and financial resources in the
amounts, at the times and on the terms required to support our future business,
including for debt refinancings, capacity expansions and possible acquisitions;
(ix) the loss of key customers, employees or suppliers; (x) the failure to carry
out marketing and sales plans; (xi) the failure to integrate acquired businesses
without substantial costs, delays or other operational or financial problems;
(xii) economic, business and regulatory conditions and changes which may affect
the level of new investments and purchases made by our customers, including
economic and business
-17-
conditions that are less favorable than expected; (xiii) domestic and
international political and economic conditions; and (xiv) the outcome of any
legal proceedings in which we are involved.
This list of factors that may affect our future performance and financial
and competitive position and also the accuracy of forward-looking statements is
illustrative, but it is by no means exhaustive. Accordingly, all forward-looking
statements should be evaluated with the understanding of their inherent
uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is currently exposed to certain market risks related to (i)
fluctuations in foreign exchange rates and (ii) interest rate changes.
Foreign Exchange Rate Risk
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Foreign Exchange Rates" in
Item 2 of this report.
Interest Rate Risk
The Company has several credit facilities or loans that require the
Company to pay interest at a rate which may change periodically. These variable
rate obligations expose the Company to the risk of increased interest expense in
the event of increases in short-term interest rates. As of July 3, 2004,
approximately $12,336,000 of the Company's total debt of $27,112,000 was subject
to variable interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report was carried out by us under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed
under the Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Subsequent to the date of the most recent evaluation of our
internal controls, there were no significant changes in our internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
-18-
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Shareholders of the Company was held on May
14, 2004.
(b) Not applicable
(c) Shareholders of the Company were asked to vote on a proposal to
elect two Class III directors. The Board of Directors nominated
Norman Cohen and Richard J. Pinola as the Class III directors. There
were no other nominations. Messrs. Cohen and Pinola were then
elected as the Class III directors, with the result of the vote
being as follows:
Number of Votes
---------------
For Withheld
--- --------
Norman Cohen 2,027,025 54,190
Richard J. Pinola 2,027,345 53,870
Directors are elected by a plurality of the votes cast; therefore,
votes cast in the election could not be recorded against or as an
abstention, nor could broker non-votes be recorded.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Chief Executive Officer Certification pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Chief Financial Officer Certification pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 Chief Executive Officer and Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.1 Note dated June 9, 2004 from K-Tron International, Inc. in
favor of The Bank
10.2 Loan Modification/Renewal Agreement dated June 9, 2004 between
K-Tron America, Inc. and The Bank
-19-
(b) Reports on Form 8-K.
Current Report on Form 8-K dated April 27, 2004 and furnished to the
Securities and Exchange Commission on April 29, 2004 reporting first
quarter 2004 financial results.
-20-
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.
K-TRON INTERNATIONAL, INC.
Date: August 16, 2004 By: RONALD R. REMICK
----------------
Ronald R. Remick
Senior Vice President & Chief
Financial Officer
(Duly authorized officer and principal
financial officer of the registrant)
By: ALAN R. SUKONECK
----------------
Alan R. Sukoneck
Vice President, Chief Accounting
& Tax Officer
(Duly authorized officer and principal
accounting officer of the registrant)
-21-
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Chief Executive Officer and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
10.1 Note dated June 9, 2004 from K-Tron International, Inc. in favor of
The Bank
10.2 Loan Modification/Renewal Agreement dated June 9, 2004 between
K-Tron America, Inc. and The Bank
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