SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2004 Commission File Number 333-19257
KINETEK, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction of (I.R.S. Employer
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 Registrants Common Stock as of
August 16, 2004: 10,000.
1
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 11
Market Risk
Item 4. Controls and Procedures 11
Part II OTHER INFORMATION
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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
Item 1. FINANCIAL STATEMENTS (Unaudited)
--------------------------------
PAGE
NO.
----
Condensed Consolidated Balance Sheets at June 30, 2004 4
and December 31, 2003
Condensed Consolidated Statements of Operations for the 5
three and six months ended June 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the six month
ended June 30, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7-8
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, 2004 December 31,
2003
-------------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 17,406 $ 7,615
Accounts receivable, net 64,295 59,286
Inventories 54,990 51,141
Prepaid expenses and other current assets 2,832 4,604
Taxes receivable 4,287 5,637
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Total Current Assets 143,810 128,283
Property, plant, and equipment, net 29,642 30,811
Goodwill, net 180,587 180,361
Deferred financing costs, net 5,969 7,293
Due from affiliated company 8,434 7,716
Investment in affiliate 12,344 12,344
Other non-current assets, net 859 839
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Total Assets $381,645 $367,647
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $30,595 $ 26,705
Accrued interest payable 4,650 4,104
Accrued expenses and other current liabilities 12,938 13,289
Current portion of long term debt 6,396 10,783
-------- --------
Total Current Liabilities 54,579 54,881
Long-term debt 313,090 296,843
Deferred income taxes 23,269 20,550
Other non-current liabilities 5,327 5,744
Shareholders' Deficit:
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit (67,072) (61,343)
Accumulated other comprehensive loss 2,446 966
-------- --------
Total Shareholders' Deficit $(14,620) $(10,371)
-------- --------
Total Liabilities and Shareholders' Deficit $381,645 $367,647
======== ========
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,
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales $81,891 $71,940 $157,608 $143,192
Cost of sales, excluding
depreciation 54,967 47,065 106,329 93,464
Selling, general and
administrative expenses 14,704 13,770 29,948 27,223
Depreciation 1,492 1,796 3,102 3,598
Amortization 41 31 77 86
Management fees and other 823 711 1,581 1,446
Operating Income 9,864 8,567 16,571 17,375
Other (income)/ expense:
Interest expense 9,630 8,632 18,449 17,435
Interest income (43) (21) (73) (69)
Miscellaneous, net (854) (5,536) (513) (5,220)
Income (loss) before income taxes 1,131 5,492 (1,292) 5,229
Income tax provision 2,656 4,709 4,437 6,602
Net Income (loss) $ (1,525 $ 783 $ (5,729) $(1,373)
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,
-----------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (5,729) $ (1,373)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Depreciation and amortization 4,714 5,160
Deferred income taxes 2,718 2,564
Gain on extinguishment of debt, see note 7 - (4,543)
Changes in operating assets and liabilities net of
effects of acquisitions:
Current assets (5,736) (8,979)
Current liabilities 4,085 2,430
Non-current assets & liabilities (535) 239
Due from (payable to) affiliated company (718) 1,060
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Net cash (used in) operating activities (1,201) (3,442)
Cash flows from investing activities:
Capital expenditures, net 1,639 1,892
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Net cash used in investing activities (1,639) (1,892)
Cash flows from financing activities:
Net borrowings under revolving credit facility and
other long-term debt 11,579 2,631
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Net cash provided by financing activities 11,579 2,631
Effect of exchange rate changes on cash 1,052 4,663
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Net increase in cash and cash equivalents 9,791 1,960
Cash and cash equivalents at beginning of period 7,615 14,654
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Cash and cash equivalents at end of period $ 17,406 $ 16,614
======== ========
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, 2003, 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.
The Company has recorded an income tax provision primarily due to its foreign
and state tax expense. The Company's domestic losses have not been benefited for
federal tax purposes.
3. Inventories
Inventories are summarized as follows:
June 30, December 31,
2004 2003
----------- ------------
Raw materials $30,010 $27,847
Work in process 16,640 15,542
Finished goods 8,340 7,752
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$54,990 $51,141
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4. Comprehensive Income
Total comprehensive income (loss) for the three and six months ended June 30,
2004 and 2003 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ (1,525) $ 783 $(5,729) $(1,373)
Foreign currency
translation adjustments (1,328) 681 1,480 5,997
-------- ------ ------- -------
Comprehensive income (loss) $ (2,853) $1,464 $(4,249) $ 4,624
======== ====== ======= =======
7
5. Additional Purchase Price Agreement
Kinetek has a contingent purchase price agreement relating to its acquisition of
Motion Control Engineering on December 18, 1997. The terms of this agreement
provide for additional consideration to be paid to the sellers. The agreement is
exercisable at the sellers' option during a five year period that began in 2003.
When exercised, the additional consideration will be based on Motion Control
Engineering's operating results over the two preceding fiscal years. Payments,
if any, under the contingent agreement will be placed in a trust and paid out in
cash over a three or four-year period, in annual installments according to a
schedule, which is included in the agreement. Additional consideration, if any,
will be recorded as an addition to goodwill.
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, 2003 consolidated financial statements with respect to segmentation
or the measurement of segment profit.
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,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
(Dollar amounts in thousands)
Net sales
Motors $58,703 $51,108 $112,751 $102,438
Controls 23,188 20,832 44,857 40,754
------ ------ ------- -------
81,891 71,940 157,608 143,192
Operating income
Motors 10,556 9,806 19,017 19,043
Controls 2,813 2,324 4,801 5,046
------ ------ ------- -------
13,369 12,130 23,818 24,089
Management fees and unallocated
corporate overhead 3,505 3,563 7,247 6,714
------ ------ ------- ------
Total operating income 9,864 8,567 16,571 17,375
Interest expense 9,630 8,632 18,449 17,435
Interest income (43) (21) (73) (69)
Miscellaneous, net (854) (5,536) (513) (5,220)
------- ------- ------- -------
Income (loss) before income
taxes $ 1,131 $ 5,492 $(1,292) $ 5,229
======= ======= ======= =======
9
Consolidated Results of Operations
Net sales for the second quarter of 2004 were 13.8% ($10.0 million) above those
of the same period for 2003 at $81.9 million. Net sales for the first six months
of 2004 increased 10.1% ($14.4 million) from 2003, to $157.6 million. The
increases in sales resulted from improvement in substantially all of the
Company's principal domestic markets, net gains in market share, and favorable
impact of foreign currency translation on the Company's European sales. The
motors segment delivered a 14.9% increase in second quarter sales versus 2003,
with year to date sales 10.1% above the same period in 2003. Net sales of
subfractional motors increased 4.6% ($0.9 million) for the second quarter,
driven by slightly higher demand for refrigeration appliance motors and "other"
products such as those used in medical, restaurant, and automotive end markets.
Net sales of subfractional products were 1.2% ($0.5 million) below the prior
year to date, as a result of the loss of value-added sub-assembly products sold
to major appliance customers and the inclusion of significant one-time sales to
a general vending customer, both of which occurred during the first quarter of
2003, offset in part by the aforementioned second quarter strength. Net sales of
fractional/integral motors increased 21.4% ($6.7 million) for the second quarter
and increased 17.3% ($10.8 million) for the year to date, compared with the same
periods in 2003. The increases in sales were led by sharp growth in U.S. sales
of DC products used in material handling and golf car applications and strong
demand for AC and DC products used in the floor care end market in the U.S.
European sales through the Company's FIR subsidiary were modestly lower for the
second quarter (down 3.5%) and year to date (down 6.5%) periods of 2004, due to
general weakness in the subsidiary's principal markets in Europe and the Middle
East. Favorable Euro currency translation on sales by FIR resulted in increases
in sales of $1.5 million and $3.1 million for the second quarter and year to
date periods, respectively. Net sales in the controls segment rose 11.3% ($2.4
million) in the second quarter and 10.1% ($4.1 million) for the year to date
compared with 2003 performance. The Company's elevator controls and automotive
assembly line controls product lines both contributed to the increase in sales
during both periods.
Total operating income for the second quarter of 2004 was $9.9 million, an
increase of $1.3 million, or 15.1% from the second quarter of 2003. Total year
to date operating income was $16.6 million, down $0.8 million, or 4.6% from the
same period of 2003. Operating income for the motors segment increased 7.6% for
the quarter ended on June 30, 2004 to $10.6 million, and was even with the prior
year to date at $19.0 million. The operating income of the controls segment
increased 21.0% to $2.8 million for the quarter, and decreased 4.9% to $4.8
million for the six-month period then ended.
Total company gross margin was $26.9 million in the second quarter, an increase
of 8.2% from 2003. For the six-month period, gross margin increased 3.1% to
$51.3 million. Gross margin as a percentage of sales fell from 34.6% in 2003's
second quarter to 32.9% in 2004. For the year to date, gross margin fell from
34.7% of sales in 2003 to 32.5% in 2004. The declines in gross margin were
caused by a number of factors, the most significant of which are: 1) Throughout
the first half of 2004, the Company has experienced significant inflation on
metal (copper, steel, aluminum, etc.) components used in the assembly of motor
and control products. Pricing pressures on motors have prevented these cost
increases from being fully passed along to customers in the form of higher
prices, which has compressed profitability of sales. 2) Several sizable pieces
of market share gained in the material handling and floor care segments, and a
new elevator control product shipped in limited quantities during the period,
10
carry lower margins than the Company's historical product mix. It is expected
that margins on these products will expand over time as the Company moves up the
learning curve, gains volume leverage, and implements planned cost reductions.
3) Two facility moves completed in the first quarter of 2004 within the
subfractional and fractional/integral products groups led to increased costs
related directly to the moves and to temporarily lower efficiencies for the
period.
Selling, general, and administrative expenses ("SG&A") increased $1.0 million,
or 6.8%, to $14.7 million for the second quarter of 2004. For the first half of
2004, SG&A increased 10.0% ($2.7 million) to $29.9 million. Most of the
increases is due to increases in commission expenses related to higher sales,
the cumulative impact of employment increases since 2003 at Motion Control
Engineering in preparation for production release of its "I" family of elevator
control products during 2004, expenses related to the aforementioned facility
moves, and increases in professional service fees.
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, 2004 was $1.2 million, compared to $3.4 million used by operating
activities for the six months ended June 30, 2003. The favorable performance
year over year in cash is attributable to improved working capital management in
2004 compared to the previous year, offset partly by the lower operating income
discussed under "Consolidated Results of Operations".
Investing activities. In the first half of 2004, the Company used $1.6 million
- ---------------------
for capital expenditures, compared to $1.9 million used in the same period of
2003.
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 June 30, 2004, the Company had approximately $11.1 million of
available funds under this Credit Agreement.
The Company is, and expects to be, in compliance with the provisions of its
Indentures.
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, 2004 the Company had
variable rate debt outstanding of $12.1 million. A one-percentage point increase
in interest rates would not have a material effect on the amount of annual
interest paid. The Company does not believe that its market risk from
11
financial instruments on June 30, 2004 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.
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 16, 2004
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