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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2003 Commission File Number 333-19257
KINETEK, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
(847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (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 ninety (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 number of shares outstanding of Registrant's Common Stock as of
August 13, 2003: 10,000.
KINETEK, INC.
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
------ --------------------- --------
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 1
Market Risk
Item 4. Controls and Procedures 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security 13
Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-k 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
--------------------------------
PAGE NO.
--------
Condensed Consolidated Balance Sheets at June 30, 2003 4
and December 31, 2002
Condensed Consolidated Statements of Operations for the 5
three and six months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the six 6
months ended June 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 7-8
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
2003 2002
-------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 16,614 $ 14,654
Accounts receivable, net 58,185 53,495
Inventories 52,120 47,524
Deferred income taxes 4,059 4,545
Prepaid expenses and other current assets 3,954 4,261
Due from affiliated company 5,480 6,540
-------- --------
Total Current Assets 140,412 131,019
Property, plant, and equipment, net 30,994 32,148
Goodwill, net 179,746 179,069
Deferred financing costs, net 8,616 9,939
Investment in affiliate 12,344 12,344
Other assets, net 883 738
-------- ---------
Total Assets $372,995 $365,257
======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET
CAPITAL DEFICIENCY)
Current Liabilities:
Accounts payable $30,196 $ 27,083
Accrued interest payable 4,124 4,989
Accrued expenses and other current liabilities 11,802 12,313
Current portion of long term debt 11,355 17,448
-------- ---------
Total Current Liabilities 57,477 61,833
Long-term debt 300,543 295,517
Deferred income taxes 18,145 16,067
Other non-current liabilities 5,412 5,046
Shareholder's Equity (Net Capital Deficiency):
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit 57,370) (55,997)
Accumulated other comprehensive loss (1,218) (7,215)
-------- ---------
Total Shareholder's Equity (Net Capital
Deficiency) (8,582) $(13,206)
--------- ---------
Total Liabilities and Shareholder's Equity
(Net Capital Deficiency) $372,995 $365,257
======== =========
See accompanying notes to condensed consolidated financial statements.
4
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $ 71,940 $ 74,243 $ 143,192 $ 142,441
Cost of sales, excluding
depreciation 47,086 47,723 93,464 91,423
Selling, general and
administrative expenses 13,749 12,105 27,223 24,566
Depreciation 1,796 1,683 3,598 3,209
Amortization 31 123 86 227
Management fees and other 711 745 1,446 1,437
---------- ---------- ---------- ---------
Operating Income 8,567 11,864 17,375 21,579
Other (income)/ expense:
Interest expense 8,632 8,453 17,435 16,551
Interest income (21) (74) (69) (149)
Miscellaneous, net (5,536) (69) (5,220) (74)
---------- ---------- ---------- ---------
Income before income taxes and cumulative
effect of accounting change 5,492 3,554 5,229 5,251
Income tax provision 4,709 1,600 6,602 2,364
---------- ---------- ---------- ---------
Income before cumulative effect of accounting
change 783 1,954 (1,373) 2,887
---------- ---------- ---------- ---------
Cumulative effect of change in accounting
principle - - - (21,992)
--------- ---------- ---------- ---------
Net Income (loss) $ 783 $ 1,954 $ (1,373) $ (19,105)
========= ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Six Months Ended
June 30,
----------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (1,373) $(19,105)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in accounting principle -- 21,992
Depreciation and amortization 5,160 4,676
Deferred income taxes 2,564 176
Gain on extinguishment of debt, see note 7 (4,543) --
Changes in operating assets and liabilities net of
effects of acquisitions:
Current assets (8,979) 354
Current liabilities 2,430 3,986
Non-current assets & liabilities 239 (1,921)
Payable to affiliated company 1,060 912
-------- --------
Net cash (used in) provided by operating activities (3,442) 11,070
Cash flows from investing activities:
Capital expenditures, net (1,892) (1,949)
Acquisition of subsidiary -- (9,503)
--------- --------
Net cash used in investing activities (1,892) (11,452)
Cash flows from financing activities:
Net increase (repayment) of borrowings under revolving
credit facility and other long-term debt 2,631 (22,048)
Proceeds from issuance of long term debt -- 20,456
Cash acquired in purchase of subsidiary -- 892
Additional purchase price for acquisition -- (100)
-------- --------
Net cash provided by (used in) financing activities 2,631 (800)
Effect of exchange rate changes on cash 4,663 327
-------- --------
Net increase (decrease) in cash and cash equivalents 1,960 (855)
Cash and cash equivalents at beginning of period 14,654 17,558
-------- --------
Cash and cash equivalents at end of period $ 16,614 $ 16,703
======== ========
See accompanying notes to condensed consolidated financial statements.
6
KINETEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. Organization
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results of
interim operations and which are of a normal recurring nature, should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 2002, included in the Company's annual report on Form 10-K.
The Company conducts its operations exclusively through its subsidiaries.
Results of operations for the interim periods are not necessarily indicative of
annual results of operations.
2. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of Kinetek,
Inc. and its subsidiaries. Material intercompany transactions and balances are
eliminated in consolidation. Operations of certain subsidiaries outside the
United States are included for periods ending two months prior to the Company's
year-end and interim periods to ensure timely preparation of the condensed
consolidated financial statements.
3. Inventories
Inventories are summarized as follows:
June 30, December 31,
2003 2002
--------------------------------------------
Raw materials $21,693 $23,445
Work in process 22,673 16,842
Finished goods 7,754 7,237
------- -------
$52,120 $47,524
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three and six months ended June 30,
2003 and 2002 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 783 $ 1,954 $(1,373) $(19,105)
Foreign currency
translation adjustment 681 2,477 5,997 120
------- ------- ------- --------
Comprehensive income (loss) $ 1,464 $ 4,431 $ 4,624 $(18,985)
======= ======= ======= ========
7
5. Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards, No. 142, "Goodwill and Other Intangible Assets". As a result, the
Company recorded a non-cash pretax and after-tax charge of $21,992, which has
been shown as a cumulative effect of a change in accounting principle.
6. Business Segment Information
See Part 1 "Financial Information" - Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the Company's
business segment disclosures. There have been no changes from the Company's
December 31, 2002 consolidated financial statements with respect to segmentation
or the measurement of segment profit.
7. Settlement of Litigation
In June 2003, the Company reached a settlement with the former shareholders of
ED&C in which the Company received $1,150 cash, and $3,850 in Subordinated Notes
Payable to the ED&C shareholders plus $693 of accrued and unpaid interest were
extinguished. The settlement is recognized as income on the Condensed
Consolidated Statement of Operations within Other (income)/expense -
Miscellaneous, net.
8. Income taxes
The second quarter tax provision consists primarily of federal tax of
approximately $1,941, state and local tax of approximately $357 and foreign
income tax of approximately $729. The tax provision also includes a charge of
approximately $1,682 to increase the valuation allowance related to deferred
tax assets. As a result of the adoption of Statement of Financial Accounting
Standards, No. 142, "Goodwill and Other Intangible Assets", and ceasing
amortization of goodwill for book purposes, the reversal of the temporary
difference related to goodwill amortization for income tax purposes is
indefinite and can no longer be utilized to offset deferred tax assets.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
Overview
The following discussion and analysis of the Company's results of operations and
of its liquidity and capital resources should be read in conjunction with the
financial statements and the related notes thereto appearing elsewhere in this
Form 10-Q.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The statement regarding the Company in this document that
are not historical in nature, particularly those that utilize terminology such
as "may," "will," "should," "likely," expects," "anticipates," "estimates,"
"believes" or "plans," or comparable terminology, are forward-looking statements
based on current expectations about future events, which the Company has derived
from information currently available. These forward-looking statements involve
known and unknown risks and uncertainties that may cause our results to be
materially different from results implied in such forward-looking statements.
Those risks include, among others, risks associated with the industry in which
the Company operates, the dependence on senior management, maintaining
sufficient working capital financing, competitive pressures, general economic
conditions and a softening of consumer acceptance of the Company's products
leading to a decrease in anticipated revenue and gross profit margins.
Summary financial information included in the financial statements of the
Company is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollar amounts in thousands)
Net sales
Motors $51,108 $53,485 $102,438 $101,918
Controls 20,832 20,758 40,754 40,523
------- ------- -------- --------
71,940 74,243 143,192 142,441
Operating income
Motors 9,861 11,794 19,180 21,277
Controls 2,324 2,469 5,046 5,080
------- ------- -------- --------
12,185 14,263 24,226 26,357
Management fees and
unallocated corporate
overhead 3,618 2,399 6,851 4,778
------- ------- -------- --------
Total operating income 8,567 11,864 17,375 21,579
Interest expense 8,632 8,453 17,435 16,551
Interest income (21) (74) (69) (149)
Miscellaneous, net (5,536) (69) (5,220) (74)
------- ------- -------- --------
Income before income taxes
and cumulative effect
of accounting change $ 5,492 $ 3,554 $5,229 $5,251
======= ======= ======== ========
9
Consolidated Results of Operations
Net sales for the second quarter of 2003 were 3.1% ($2.3 million) below those of
the same period for 2002 at $71.9 million. Net sales for the first six months of
2003 increased 0.5% ($0.8 million) from 2002, to $143.2 million. The decline in
sales resulted from general softness in substantially all of the Company's
principal markets. The motors segment delivered a 4.4% decrease in second
quarter sales versus 2002, with year to date sales 0.5% above the same period in
2002. Net sales of subfractional motors decreased 6.8% for the second quarter,
driven by protracted weakness in the bottle and can vending market and reduced
demand for refrigeration appliance motors, which were offset in part by good
demand for other products, such as those used in medical, restaurant, and
automotive end markets. Net sales of subfractional products are even with the
prior year to date, as a result of strong first quarter sales that were offset
entirely by the second quarter softness described previously. Net sales of
fractional/integral motors decreased 2.9% for the second quarter and increased
0.9% for the year to date, compared with the same periods in 2002. The
reductions in sales were led by declines in sales of DC products used in
material handling and golf car applications and reduced demand for AC and DC
products used in the floor care end market, and a weak market in Europe. These
declines were offset in part by the impact of Euro currency translation on sales
by FIR, which resulted in increases in sales of $0.2 million and $1.5 million
for the second quarter and year to date periods, respectively. Net sales in the
controls segment rose 0.4% in the second quarter and 0.6% for the year to date
compared with 2002 performance. The changes in controls segment sales were
driven by an improved elevator modernization market (up 6.4% for the second
quarter while remaining 1.2% below the first half of 2002) and higher automotive
conveyor controls driven by share gains during the first quarter of 2003.
Total company gross margin was $24.9 million in the second quarter, a decline of
6.3% from 2002. For the six-month period, gross margin fell 2.5% to $49.7
million. Gross margin as a percentage of sales fell from 35.7% in 2002's second
quarter to 34.5% in 2003. For the year to date, gross margin fell from 35.8% of
sales in 2002 to 34.7% in 2003. The slightly lower gross margins as a percentage
of sales are primarily attributable to unfavorable product sales mix and to
direct material cost inflation in China.
Total operating income for the second quarter of 2003 was $8.6 million, a
decline of $3.3 million, or 27.8% from the second quarter of 2002. Total year to
date operating income was $17.4 million, down $4.2 million, or 19.5% from the
same period of 2002. Operating income for the motors segment decreased 16.4% for
the quarter ended on June 30, 2003 to $9.9 million, and decreased 9.9% to $19.2
million for the year to date. The operating income of the controls segment
decreased 5.9% to $2.3 million for the quarter, and decreased 0.7% to $5.0
million for the six-month period then ended. Selling, general, and
administrative expenses ("SG&A") were $13.8 million for the second quarter, an
increase of 13.6% ($1.6 million) from 2002. The increases during the second
quarter are driven by unallocated corporate overhead that was $1.2 million
higher and increases in research and development costs at Motion Control
Engineering ("MCE") relating to upcoming new product introductions ($0.4
million). For the 2003 year to date, SG&A expenses were $27.2 million, an
increase of 10.8% ($2.7 million) from the previous year. The year to date
increases are driven by unallocated corporate overhead that was $2.1 million
higher, and to the aforementioned research and development costs at MCE.
10
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy. Of
primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating activities
and the funds available under its revolving credit facility.
Operating activities. Net cash used by operating activities for the six months
ended June 30, 2003 was $3.4 million, compared to $11.1 million provided from
operating activities for the six months ended June 30, 2003. The decrease is due
to the Company's lower operating performance discussed under the heading
"Consolidated Results of Operations", and to increases in working capital in
2003. Current assets increased $9.0 million in the first half of 2003, primarily
as the result of foreign currency revaluation ($3.1 million), increased
inventory and accounts receivable associated with numerous long-term contracts
in the Controls segment ($2.3 million), and increased inventory for the
Company's strategic manufacturing initiatives ($1.0 million).
Investing activities. In the first half of 2003, the Company made $1.9 million
in payments for capital expenditures, an amount slightly lower than in the same
period of 2002. In 2002, the Company made $9.5 million in payments, including
related transaction costs, to form the Kinetek De Sheng joint venture.
Financing activities. The Company is party to a Credit Agreement under which the
Company is able to borrow up to approximately $35.0 million to fund acquisitions
and provide working capital, and for other general corporate purposes.
Borrowings are secured by the stock and substantially all of the assets of the
Company. As of August 13, 2003, the Company has approximately $17.7 million of
available funds under this Credit Agreement.
On April 12, 2002, Kinetek Industries, Inc., a wholly-owned subsidiary of the
Company, issued $15 million principal amount of 5% Senior Secured Notes and $11
million principal amount of 10% Senior Secured Notes for total net proceeds of
approximately $20.5 million.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's debt obligations are primarily fixed-rate in nature and, as such,
are not sensitive to changes in interest rates. At June 30, 2003 the Company had
variable rate debt outstanding of $5.3 million. A one-percentage point increase
in interest rates would increase the amount of annual interest paid by
approximately $0.1 million. The Company does not believe that its market risk
from financial instruments on June 30, 2003 would have a material effect on
future operations or cash flow.
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currency of foreign operations.
The functional currency of operations outside the United States is the
respective local currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
11
Item 4. CONTROLS AND PROCEDURES
-----------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the
Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, our
chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report (the "Evaluation Date") with the Securities and
Exchange Commission. Based on such evaluation, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures were effective as of the Evaluation Date to ensure that information
required to be disclosed in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms. There have been no changes in our internal
controls over financial reporting during the period covered by this report that
were identified in connection with the evaluation referred to above that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) A list of exhibits filed with this report is contained on
the Exhibit Index immediately preceding such exhibits and
is incorporated herein by reference.
(b) None.
13
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.
KINETEK, INC.
By: /s/ Daniel Drury
------------------------------
Daniel Drury
Chief Financial Officer
August 13, 2003
14
EXHIBIT INDEX
Exhibit
Number Description
31.1 Certificate of Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certificate of Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a)
15