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 March 31, 2005 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)
Registrants 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 May
16, 2005: 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
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14
Part II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-k 15
Signatures 16
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
--------------------------------
PAGE NO.
--------
Condensed Consolidated Balance Sheets at March 31, 2005
and December 31, 2004 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7-10
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
2005 2004
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 9,697 $ 10,863
Accounts receivable, net 64,573 62,379
Inventories 54,497 53,658
Prepaid expenses and other current assets 3,921 4,373
Taxes receivable 2,652 3,631
Assets from discontinued operation 1,502 2,024
------- -------
Total Current Assets 136,842 136,928
Property, plant, and equipment, net 29,389 29,753
Goodwill, net 181,349 181,141
Deferred financing costs, net 3,984 4,646
Due from affiliated company 7,756 7,743
Investment in affiliate 12,344 12,344
Other non-current assets, net 920 893
-------- --------
Total Assets $372,584 $373,448
======== ========
LIABILITIES AND SHAREHOLDERS DEFICIT
Current Liabilities:
Accounts payable $ 32,652 $ 33,262
Accrued interest payable 11,695 4,109
Accrued expenses and other current liabilities 10,775 12,269
Current portion of long term debt 17,379 20,959
Liabilities from discontinued operation 726 548
-------- --------
Total Current Liabilities 73,227 71,147
Long-term debt 294,859 296,109
Deferred income taxes 26,899 25,801
Other non-current liabilities 5,664 5,627
Shareholders' Deficit:
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit (84,321) (80,238)
Accumulated other comprehensive income 6,250 4,996
-------- --------
Total Shareholders' Deficit $(28,065) $(25,236)
-------- --------
Total Liabilities and Shareholders Deficit $372,584 $373,448
======== ========
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
March 31,
-----------------------
2005 2004
---- ----
Net Sales $80,277 $73,113
Cost of sales, excluding
depreciation 56,684 49,086
Selling, general and
administrative expenses 14,347 14,977
Depreciation 1,346 1,591
Amortization 30 36
Management fees and other 793 758
------- -------
Operating Income 7,077 6,665
Other (income)/ expense:
Interest expense 8,831 8,819
Interest income (49) (30)
Miscellaneous, net 11 339
------- -------
Loss from continuing operations
before income taxes (1,716) (2,463)
Income tax provision 1,727 1,772
------- -------
Loss from continuing operations (3,443) (4,235)
(Loss)/income from
discontinued operations, net (640) 31
Net Loss $(4,083) $(4,204)
======= =======
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
-----------------------
2005 2004
---- ----
Cash flows from operating activities:
Net loss $(4,083) $ (4,204)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,178 2,394
Deferred income taxes 1,801 1,278
Changes in operating assets and liabilities:
Current assets (1,636) (4,936)
Current liabilities 5,997 8,820
Net change in assets and liabilities from
discontinued operation 700 145
Non-current assets and liabilities 4 97
Due from (payable to) affiliated company (716) (1,783)
------- -------
Net cash provided by operating activities 4,245 1,811
Cash flows from investing activities:
Acquisition of business (481) -
Capital expenditures, net (681) (818)
------- -------
Net cash used in investing activities (1,162) (818)
Cash flows from financing activities:
Net borrowings (payments) under revolving credit
facility and other long-term debt (5,129) 4,531
------- -------
Net cash provided by (used in) financing activities (5,129) 4,531
Effect of exchange rate changes on cash 880 1,870
Net change in cash and cash equivalents (1,166) 7,394
Cash and cash equivalents at beginning of period 10,863 6,959
------- -------
Cash and cash equivalents at end of period $ 9,697 $14,353
======= =======
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, 2004, 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 Companys year-end and interim periods to ensure timely preparation of the
condensed consolidated financial statements.
The Company has recorded an income tax provision primarily attributable to
foreign taxes, state taxes and the change in the Company's deferred tax
liability . Due to the uncertainty of when the goodwill deferred tax liability
will reverse, the Company has not considered any future reversal of the
deferred tax liability related to goodwill to support the realization of
deferred tax assets. Additionally, the Company continues to maintain a full
valuation allowance against its deferred tax assets.
The Company and its domestic subsidiaries (Kinetek Group) join in the filing
of a U.S. federal consolidated income tax return with their ultimate parent
company, Jordan Industries, Inc. (Parent). During 2004, the Parent realized
cancellation of indebtedness income as a result of modifications to certain of
its outstanding debt. The Internal Revenue Code provides exceptions to the
recognition of certain types of cancellation of indebtedness income for U.S.
federal income tax purposes. These rules will require the Parent and possibly
certain subsidiaries, including members of the Kinetek Group, to reduce
specified tax attributes which may include the reduction of net operating loss
carryforwards and the tax basis of assets. However, the amount of reduction
to any specific attribute is dependent upon an election not required to be
madeuntil the filing of the consolidated 2004 federal tax return. It is
possible that the effect of the attribute reduction could result in a decrease
in the tax basis of goodwill, which would result in an increase in the
Company's deferred tax liabilities and could result in a financial statement
charge to income tax expense in the period when the election is made.
7
3. Inventories
Inventories are summarized as follows:
March 31, December 31,
2005 2004
---------- ------------
Raw materials $34,070 $30,509
Work in process 10,664 11,507
Finished goods 9,763 11,642
------- -------
$54,497 $53,658
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three months ended March 31, 2005 and
2004 is as follows:
Three Months Ended
March 31,
2005 2004
--------- ---------
Net loss $ (4,083) $ (4,204)
Foreign currency
translation adjustments 1,254 2,808
-------- --------
Comprehensive loss $ (2,829) $ (1,396)
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 "Managements 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, 2004 consolidated financial statements with respect to
segmentation or the measurement of segment profit.
8
7. Discontinued Operation
During 2004, the Company undertook a plan to sell Electrical Design and
Control ("ED&C"), a wholly-owned subsidiary.
Summarized selected financial information for the discontinued operation is as
follows:
Three months ended
March 31,
--------------------
2005 2004
-------- --------
Revenues $ 868 $ 2,604
Income (Loss) from
discontinued operations (640) 31
The major classes of assets and liabilities of the discontinued operation is as
follows:
March 31, December 31,
2005 2004
--------- ------------
Current assets $ 1,462 $ 1,978
Property, plant and equipment 10 14
Other long term assets 30 32
-------- --------
Total assets 1,502 2,024
Current liabilities 726 548
-------- --------
Net assets of discontinued operations $ 776 $ 1,476
-------- --------
On May 2, 2005, the Company sold certain inventory, equipment, intellectual
property assets and contracts of ED&C. This sale occurred subsequent to March
31, 2005, and has no impact on the financial statements of the Company as of
that date. The results of the sale will be reflected in the quarter ended
June 30, 2005.
8. O Thompson Acquisition
On March 28, 2005, the Company paid in cash the remaining acquisition cost for
its September 30, 2004 acquisition of O. Thompson, a New York City-based
elevator control company. The total acquisition cost was originally $887 which
was subsequently adjusted to $853 during the first quarter of 2005. Of the
total acquisition price, $372 was paid during 2004, and the remaining $481 was
paid during the first quarter of 2005.
9
9. Warranties
The Company provides warranties on certain products for varying lengths of
time. The Company estimates the costs at the time product revenue is
recognized. Changes to the Company's product warranty accrual during the three
months ended March 31, 2005 and 2004 are as follows:
2005 2004
------- -------
Balance, beginning of year $ 1,934 $ 1,615
Warranties issued 179 144
Change in estimate (225) -
------- -------
Settlements (98) (29)
------- -------
Balance, end of year $ 1,790 $ 1,730
------- -------
10. Adoption of Accounting Principles
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities - An Interpretation of Accounting Research
Bulletin (ARB) No. 51." This interpretation provides guidance on how to
identify variable interest entities and how to determine whether or not those
entities should be consolidated. The Company adopted the provisions of FIN 46
as of January 1, 2005 and determined that there are no variable interest
entities that the Company would be required to consolidate.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
---------------------------------------------------------------
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 Companys 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
March 31,
------------------
2005 2004
---- ----
Net sales
Motors $60,207 $54,048
Controls 20,070 19,065
------- -------
80,277 73,113
Operating income
Motors 8,580 8,462
Controls 2,039 1,945
------- -------
10,619 10,407
Management fees and unallocated
corporate overhead 3,542 3,742
------- -------
Total operating income 7,077 6,665
Interest expense 8,831 8,819
Interest income (49) (30)
Miscellaneous, net 11 339
------- -------
Loss from continuing operations
before income taxes $(1,716) $(2,463)
======= =======
11
Consolidated Results of Operations
Consolidated net sales for the three months ended March 31, 2005 were $80.3
million, an increase of $7.2 million, or 9.8% from the same period in 2004.
Sales of the Company's Motors segment were $60.2 million, an increase of
11.4%, or $6.2 million from $54.0 million posted in the first quarter of the
previous year. Sales of subfractional motor products were $19.9 million, an
increase of $0.8 million, or 4.4%, from the first quarter of 2004. The
increase was driven by sales of a product introduced during the fourth quarter
of 2004 to a certain restaurant equipment customer. This project has been
substantially completed, and the Company expects lower sales of this product
after the first quarter of 2005. Sales of products used by major appliance
customers were about flat with the previous year, with the loss of business
value-added subassembly products substantially replaced by sales of a new
product to a certain major appliance customer which began during the third
quarter of 2004, and which is expected to continue. Sales of fractional and
integral motor products increased $5.3 million, or 15.2%, to $40.3 million
from the year-earlier first quarter sales of $35.0 million. The increase in
sales was driven by share gains for DC motors used in battery-electric golf
cars, and to improvements in North American markets for motors used in
material handling and commercial floor care equipment. Sales in European
markets which are served by the company's FIR Group of subsidiaries continued
to be difficult, with sales in local currency declining 5.8% for the 2005
quarter compared with the previous year. This decline was mostly offset by the
favorable impact of translation, which added $0.5 million in sales over the
first quarter of 2004. First quarter 2005 sales for the Company's Controls
segment were $20.1 million, an increase of $1.0 million, or 5.3%, from the
same period of 2004. The increased sales were attributable to sales of
elevator control products that were designed and produced by the Company's
recently acquired O. Thompson subsidiary (see Item 8. "O Thompson Acquisition"
under "Notes to Condensed Consolidated Financial Statements"), which were
partially offset by a somewhat softer market for elevator control products in
comparison to the first quarter of 2004.
Total operating income for the first quarter of 2005 was $7.1 million, an
increase of $0.4 million, or 6.2%, from the same period of the previous year.
Operating income for the first three months of 2005 in the Motors segment was
$8.6 million, an increase of $0.1 million, or 1.4% higher than in 2004's first
quarter. Operating income for the Controls segment was $2.0 million, an
increase of $0.1 million, or 4.8% from the corresponding quarter of the prior
year. Total Company gross margin was $23.6 million, which was $0.4 million, or
1.8% lower than in 2004. Gross margin as a percentage of sales decreased to
29.4% in 2005, from 32.9% in 2004. The decrease in margin percentage is
attributable to a combination of factors, the most significant of which are:
1) during the first quarter of 2005, the Company continued to experience
significant inflation on metal (primarily copper and steel) components used in
the assembly of motor products, as well as on freight and plastic resins and
competitive pressures in the Company's principal markets have made it
difficult to pass along these higher costs to its customers in the form of
higher prices; 2) several sizable pieces of market share gained in the golf
car, material handling, and floor care segments carry lower margins than the
Company's historical levels. It has been the Company's recent strategy to
capture share gains at competitive prices and to expand margins as we gain
volume leverage and implement planned cost reductions.
12
Selling, general, and administrative expenses decreased $0.6 million, or 4.2%,
to $14.3 million for the first three months of 2005. Most of the decrease is
due to reductions in overhead costs which are allocated to the Company from
its Parent.
The Company has recorded an income tax provision primarily attributable to
foreign taxes, state taxes and the change in the Company's deferred tax
liability. Due to the uncertainty of when the goodwill deferred tax liability
will reverse, the Company has not considered any future reversal of the
deferred tax liability related to goodwill to support the realization of
deferred tax assets.
Additionally, the Company continues to maintain a full valuation allowance
against its deferred tax assets.
The Company and its domestic subsidiaries (Kinetek Group) join in the filing
of a U.S. federal consolidated income tax return with their ultimate parent
company, Jordan Industries, Inc. (Parent). During 2004, the Parent realized
cancellation of indebtedness income as a result of modifications to certain of
its outstanding debt. The Internal Revenue Code provides exceptions to the
recognition of certain types of cancellation of indebtedness income for U.S.
federal income tax purposes. These rules will require the Parent and possibly
certain subsidiaries, including members of the Kinetek Group, to reduce
specified tax attributes which may include the reduction of net operating
loss carryforwards and the tax basis of assets. However, the amount of
reduction to any specific attribute is dependent upon an election not required
to be made until the filing of the consolidated 2004 federal tax return. It is
possible that the effect of the attribute reduction could result in a decrease
in the tax basis of goodwill, which would result in an increase in the
Company's deferred tax liabilities and could result in a financial statement
charge to income tax expense in the period when the election is made.
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 three
months ended March 31, 2004 was $4.2 million, compared to $1.8 million for the
three months ended March 31, 2004. The favorable performance year over year in
cash is attributable to the slightly higher operating income discussed under
"Consolidated Results of Operations" and to improved working capital
management, particularly a $3.3 million increase in cash from changes in current
assets, as well as $1.1 million from our change in our due to affiliate
compared with the corresponding period in the previous year. These favorable
changes were slightly offset by an unfavorable change in our current liabilities
of $2.8 million compared to last year.
Investing activities. In the three months ended March 31, 2005, the Company
used $1.2 million for investing activities, compared to $0.8 million used in
the same period of 2004. The increase in usage is primarily driven by the
payment of the remaining acquisition cost for O Thompson, a New York-based
elevator control company acquired during 2004. This payment was for $0.5
million.
13
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 March 31, 2005, the Company had approximately
$15.3 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 March 31, 2005 the
Company had variable rate debt outstanding of $7.9 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 March 31, 2005 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.
14
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
--------
A list of exhibits filed with this report is contained on
the Exhibit Index immediately preceding such exhibits and
is incorporated herein by reference.
15
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
May 16, 2005
16
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)
16