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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 September 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 Registrant's Common Stock as of
November 15, 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 12
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 September 30, 2004 4
and December 31, 2003
Condensed Consolidated Statements of Operations for the 5
three and nine months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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)
September 30, December 31,
2004 2003
--------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 17,982 $ 7,615
Accounts receivable, net 67,585 59,286
Inventories 61,605 51,141
Prepaid expenses and other current assets 2,608 4,604
Taxes receivable 2,886 5,637
--------- ---------
Total Current Assets 152,666 128,283
Property, plant, and equipment, net 29,137 30,811
Goodwill, net 180,653 180,361
Deferred financing costs, net 5,307 7,293
Due from affiliated company 8,872 7,716
Investment in affiliate 12,344 12,344
Other non-current assets, net 901 839
--------- ---------
Total Assets $ 389,880 $ 367,647
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 33,785 $ 26,705
Accrued interest payable 11,313 4,104
Accrued expenses and other current liabilities 16,833 13,289
Current portion of long term debt 10,607 10,783
--------- ---------
Total Current Liabilities 72,538 54,881
Long-term debt 302,422 296,843
Deferred income taxes 24,431 20,550
Other non-current liabilities 5,342 5,744
Shareholders' Deficit:
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit (67,410) (61,343)
Accumulated other comprehensive income 2,551 966
--------- ---------
Total Shareholders' Deficit $ (14,853) $ (10,371)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 389,880 $ 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 Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales $ 84,917 $ 72,655 $ 242,525 $ 215,847
Cost of sales, excluding
depreciation 58,050 47,936 164,379 141,400
Selling, general and
administrative expenses 14,720 15,028 44,668 42,251
Depreciation 1,402 1,750 4,504 5,348
Amortization 29 27 106 113
Management fees and other 848 731 2,429 2,177
--------- --------- ---------- ---------
Operating Income 9,868 7,183 26,439 24,558
Other (income)/ expense:
Interest expense 7,748 8,724 26,197 26,159
Interest income (36) - (109) (69)
Miscellaneous, net (34) 157 (547) (5,063)
---------- --------- ----------- ----------
Income (loss) before income taxes 2,190 (1,698) 898 3,531
Income tax provision 2,528 168 6,965 6,770
--------- --------- ---------- ---------
Net Loss $ (338) $ (1,866) $ (6,067) $ (3,239)
========== ========= ========== ==========
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended
September 30,
--------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (6,067) $ (3,239)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 6,918 7,676
Deferred income taxes 3,881 3,467
Gain on extinguishment of debt, see note 7 - (4,543)
Changes in operating assets and liabilities:
Current assets (11,766) (10,558)
Current liabilities 15,809 7,113
Non-current assets and liabilities (606) 121
Due from (payable to) affiliated company (1,156) 1,150
--------- --------
Net cash provided by operating activities 7,013 1,187
Cash flows from investing activities:
Acquisition of business (315) -
Capital expenditures, net (2,394) (2,920)
--------- ---------
Net cash used in investing activities (2,709) (2,920)
Cash flows from financing activities:
Net borrowings (payment) under revolving credit facility 5,009 (775)
and other long-term debt -------- ---------
Net cash provided by (used in) financing activities 5,009 (775)
Effect of exchange rate changes on cash 1,054 5,031
--------- ---------
Net increase in cash and cash equivalents 10,367 2,523
Cash and cash equivalents at beginning of period 7,615 14,654
--------- ---------
Cash and cash equivalents at end of period $ 17,982 $ 17,177
========= =========
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, as well as the change in its deferred tax items. The
Company's domestic losses have not been benefited for federal tax purposes.
3. Inventories
Inventories are summarized as follows:
September 30, December 31,
2004 2003
----------------------------- -----------------------
Raw materials $34,396 $27,847
Work in process 18,681 15,542
Finished goods 8,528 7,752
------- -------
$61,605 $51,141
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three and nine months ended September
30, 2004 and 2003 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss $ (338) $(1,866) $ (6,067) $ (3,239)
Foreign currency
translation adjustments 105 967 1,585 6,964
-------- -------- --------- --------
Comprehensive income (loss) $ (233) $ (899) $ (4,482) $ 3,725
======== ======== ========= ========
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 Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Dollar amounts in thousands)
Net sales
Motors $ 61,963 $ 50,296 $ 174,714 $ 152,734
Controls 22,954 22,359 67,811 63,113
---------- ---------- --------- ---------
84,917 72,655 242,525 215,847
Operating income
Motors 10,222 9,100 29,239 28,143
Controls 2,443 2,241 7,244 7,287
---------- ---------- --------- ---------
12,665 11,341 36,483 35,430
Management fees and unallocated
corporate overhead 2,797 4,158 10,044 10,872
---------- ---------- --------- ---------
Total operating income 9,868 7,183 26,439 24,558
Interest expense 7,748 8,724 26,197 26,159
Interest income (36) - (109) (69)
Miscellaneous, net (34) 157 (547) (5,063)
----------- ---------- --------- ---------
Income (loss) before income taxes $ 2,190 $ (1,698) $ 898 $ 3,531
=========== ========== ========= =========
9
Consolidated Results of Operations
Net sales for the third quarter of 2004 were 16.9% ($12.3 million) above those
of the same period for 2003 at $84.9 million. Net sales for the first nine
months of 2004 increased 12.4% ($26.7 million) from 2003, to $242.5 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 23.2% increase in third quarter sales versus 2003,
with year to date sales 14.4% above the same period in 2003. Net sales of
subfractional motors increased 18.7% ($3.3 million) for the third quarter,
driven by the introduction of a redesigned ice-crusher motor sold to Whirlpool
and higher demand for "other" products such as those used in medical,
restaurant, and automotive end markets. Net sales of subfractional products were
5.0% ($2.9 million) higher than the prior year to date, as a result of the third
quarter improvements cited above which were partially offset by 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. Net sales of
fractional/integral motors increased 25.3% ($8.4 million) for the third quarter
and increased 20.4% ($19.6 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 Group of subsidiaries were modestly
lower for the third quarter (down 1.9%) and year to date (down 4.8%) 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 $0.7 million and $3.8 million for the third
quarter and year to date periods, respectively. Net sales in the controls
segment rose 2.7% ($0.6 million) in the third quarter and 7.4% ($4.7 million)
for the year to date compared with 2003 performance. The Company's elevator
controls product line delivered revenue increases of 7.3% for the third quarter
and 8.8% for the year to date. Sales of the Company's automotive assembly line
controls products were down 30.9% for the third quarter and down 3.2% for the
year to date as a result of refocusing the Electrical Design and Control
subsidiary away from projects with high material content.
Total operating income for the third quarter of 2004 was $9.9 million, an
increase of $2.7 million, or 37.4% from the third quarter of 2003. Total year to
date operating income was $26.4 million, an increase of $1.9 million, or 7.7%
from the same period of 2003. Operating income for the motors segment increased
12.3% for the quarter ended on September 30, 2004 to $10.2 million, and was 3.9%
higher than the prior year to date at $29.2 million. The operating income of the
controls segment increased 9.0% to $2.4 million for the quarter, and decreased
0.6% to $7.2 million for the nine-month period then ended.
Total company gross margin was $26.9 million in the third quarter, an increase
of 8.7% from 2003. For the nine-month period, gross margin increased 5.0% to
$78.1 million. Gross margin as a percentage of sales fell from 34.0% in 2003's
third quarter to 31.6% in 2004. For the year to date, gross margin fell from
34.5% of sales in 2003 to 32.2% in 2004. The declines in gross margin were
caused by a number of factors, the most significant of which are: 1)
Throughout the first nine months 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, 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) The Company completed two
facility moves during the first quarter of 2004 and began implementing closure
of a third facility (Gear Research, Inc., located in Grand Rapids, MI) during
the third quarter. All three actions adversely affected operating performance
within the subfractional and fractional/integral products groups from
increased costs related directly to the moves and to temporarily lower
efficiencies during the planning and execution phases. 4) The aforementioned
refocusing of Electrical Design and Control away from projects with high
material content caused significantly higher material costs in the third
quarter as these projects were pushed to completion.
Selling, general, and administrative expenses ("SG&A") decreased $0.3 million,
or 2.0%, to $14.7 million for the third quarter of 2004. This decrease is due to
10
a one-time charge of $1.0 million in the third quarter of 2003 for medical
insurance costs and a $0.5 million reduction in corporate overhead allocated
by our Parent company in the third quarter of 2004. These decreases were
mostly offset by the cumulative impact of employment increases and other
expenses 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. For the first nine months of 2004, SG&A increased
5.7% ($2.4 million) to $44.7 million. Most of the increase is due to
increases in commission expenses related to higher sales, the cumulative
impact of employment increases and other expenses since 2003 at Motion Control
Engineering in preparation for production release of its "I" family of
elevator control products, expenses related to the facility moves, and
increases in professional service fees. These increases were partly offset by
the aforementioned third quarter reductions in allocated overhead and medical
insurance costs.
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 provided by operating activities for the nine
months ended September 30, 2004 was $7.0 million, compared to $1.2 million for
the nine months ended September 30, 2003. The favorable performance year over
year in cash is attributable to the higher operating income discussed under
"Consolidated Results of Operations" and to improved working capital
management, particularly a larger increase in accounts payable during 2004
compared with the previous year.
Investing activities. In the nine months ended September 30, 2004, the Company
used $2.7 million for investing activities, compared to $2.9 million used in the
same period of 2003. The decrease is due to a decrease in capital expenditures
of $0.5 million, offset by third quarter acquisition activity.
During September 2004, the Company acquired substantially all of the net assets
of O. Thompson, a New York City-based elevator control company. The total
acquisition cost was $887,000 of which $315,000 was paid in cash during the
third quarter of 2004, with the remaining to be paid during the fourth quarter
of 2004. The $572,000 of deferred acquisition costs are a component of other
current liabilities at September 30, 2004. The acquisition has been accounted
for using the purchase method of accounting. Accordingly, the operating results
of the acquired business have been included in the consolidated operating
results of Kinetek since the date of acquisition. The operating results of O.
Thompson are included with those of Kinetek's wholly-owned subsidiary, Motion
Control Engineering, within the "Controls" segment.
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 September 30, 2004, the Company had approximately $16.0 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 September 30, 2004 the
Company had variable rate debt outstanding of $6.3 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
financial instruments on September 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
11
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
-----------------
Dennis R. ("Randy") Bays, 49, has been appointed President
and Chief Operating Officer of Kinetek, Inc. ("the
Company"). As President, Mr. Bays succeeds Thomas H.Quinn,
who will continue to be the Company's Chief Executive
Officer and a Director. Chief Operating Officer is a newly
created post.
Since April 1997, Mr. Bays has been President of the
Company's Imperial Electric subsidiary, and in January
2003 he was appointed President of the Company's
Fractional/Integral Products Group, which is comprised of
Imperial Electric, Euclid Universal, Gear Research,
Advanced DC Motors, FIR Group, and Kinetek De Sheng.
Before joining the Company, Mr. Bays held several senior
management positions in General Electric's motor and
control business from 1991 to 1997. Prior to that, Mr.
Bays held senior management positions in Bomar Aerospace,
Inc.
Item 6. EXHIBITS
--------
A list of exhibits filed with this report is contained on
the Exhibit Index immediately preceding such exhibits and is
incorporated herein by reference.
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
November 15, 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