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FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from........................to........................
Commission File Number 333-45823
STANADYNE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2940378
(State or other jurisdiction of (I.R.S. Employer I.D.)
incorporation or organization)
92 Deerfield Road, Windsor, Connecticut 06095-4209
(Address of principal executive offices) (zip code)
(860) 525-0821
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of July 31, 2002 was 1,000.
STANADYNE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001........... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2002 and 2001 (unaudited)..... 4
Condensed Consolidated Statements of Operations for the
six months ended June 30, 2002 and 2001 (unaudited)....... 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 (unaudited)....... 6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 7-19
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 20-26
Item 3 Quantitative and Qualitative Disclosures About
Market Risk............................................... 27
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K.......................... 28
Signature.......................................................... 29
-2-
STANADYNE CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 606 $ 120
Accounts receivable, net of allowance for uncollectible
accounts of $579 at June 30, 2002 and $524 at December 31, 2001 47,929 36,872
Inventories 35,998 32,660
Prepaid expenses and other current assets 845 869
Deferred income taxes 7,161 6,955
--------- ---------
Total current assets 92,539 77,476
Property, plant and equipment, net 110,438 113,361
Goodwill 67,264 66,782
Intangible and other assets, net 9,370 11,229
Due from Stanadyne Automotive Holding Corp. 4,216 4,216
--------- ---------
Total assets $ 283,827 $ 273,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,752 $ 21,639
Accrued liabilities 24,569 24,599
Current maturities of long-term debt 8,616 6,143
Current installments of capital lease obligations 102 42
--------- ---------
Total current liabilities 55,039 52,423
Long-term debt, excluding current maturities 104,513 106,177
Deferred income taxes 3,694 4,017
Capital lease obligations, excluding current installments 332 --
Other noncurrent liabilities 49,559 44,723
--------- ---------
Total liabilities 213,137 207,340
--------- ---------
Minority interest in consolidated subsidiary 210 --
Commitments and contingencies -- --
Stockholders' equity:
Common stock -- --
Additional paid-in capital 59,858 59,858
Other accumulated comprehensive loss (3,675) (4,716)
Retained earnings 14,297 10,582
--------- ---------
Total stockholders' equity 70,480 65,724
--------- ---------
Total liabilities and stockholders' equity $ 283,827 $ 273,064
========= =========
See notes to condensed consolidated financial statements.
-3-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Months Three Months
Ended Ended
June 30, June 30,
2002 2001
------------ ------------
Net sales $ 73,986 $ 61,067
Cost of goods sold 58,581 49,926
-------- --------
Gross profit 15,405 11,141
Selling, general and administrative expenses 8,278 8,030
Amortization of intangibles 868 1,336
Management fees 275 275
-------- --------
Operating income 5,984 1,500
Interest, net 2,394 2,546
-------- --------
Income (loss) before income taxes (benefit)
and minority interest 3,590 (1,046)
Income taxes (benefit) 1,104 (426)
-------- --------
Income (loss) before minority interest 2,486 (620)
Minority interest in loss of consolidated subsidiary 69 --
-------- --------
Net income (loss) $ 2,555 $ (620)
======== ========
See notes to condensed consolidated financial statements.
-4-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
---------- ----------
Net sales $137,773 $128,901
Cost of goods sold 109,793 103,973
-------- --------
Gross profit 27,980 24,928
Selling, general and administrative expenses 15,702 16,023
Amortization of intangibles 1,736 2,679
Management fees 550 550
-------- --------
Operating income 9,992 5,676
Interest, net 4,804 5,217
-------- --------
Income before income taxes
and minority interest 5,188 459
Income taxes 1,593 249
-------- --------
Income before minority interest 3,595 210
Minority interest in loss of consolidated subsidiary 120 --
-------- --------
Net income $ 3,715 $ 210
======== ========
See notes to condensed consolidated financial statements.
-5-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 3,715 $ 210
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,337 10,554
Deferred income tax benefit (554) (1,491)
Loss applicable to minority interest (120) --
Gain on disposal of property plant and equipment -- (24)
Changes in operating assets and liabilities (9,369) (5,405)
-------- --------
Net cash provided by operating activities 4,009 3,844
-------- --------
Cash flows from investing activities:
Capital expenditures (4,758) (5,666)
Proceeds from disposal of property, plant and equipment -- 53
-------- --------
Net cash used in investing activities (4,758) (5,613)
-------- --------
Cash flows from financing activities:
Net borrowings on revolving credit facilities 2,225 --
Net borrowings on foreign overdraft facilities 1,308 1,109
Principal payments on long-term debt (2,803) (2,196)
Payments of capital lease obligations (42) (305)
Proceeds from investment by minority interest 330 --
-------- --------
Net cash provided by (used in) financing activities 1,018 (1,392)
-------- --------
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents 269 (3,161)
Effect of exchange rate changes on cash 217 720
Cash and cash equivalents at beginning of period 120 13,647
-------- --------
Cash and cash equivalents at end of period $ 606 $ 11,206
======== ========
See notes to condensed consolidated financial statements.
-6-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(1) SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Stanadyne Corporation (the "Company"), formerly known
as Stanadyne Automotive Corp., is a wholly-owned subsidiary of Stanadyne
Automotive Holding Corp. ("Holdings"). A majority of the outstanding equity of
Holdings is owned by American Industrial Partners Capital Fund II, L.P. ("AIP").
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and all of the Company's wholly-owned subsidiaries:
Precision Engine Products Corp. ("PEPC"), Stanadyne, SpA ("SpA"), Precision
Engine Products LTDA ("PEPL") and Stanadyne Automotive Foreign Sales Corp.
("FSC"). A joint venture, Stanadyne Amalgamations Private Limited ("SAPL"), is
fully consolidated based on the Company's 51% controlling share, while the
remaining 49% is recorded as a minority interest. Intercompany balances have
been eliminated in consolidation.
Basis of Presentation. The balance sheet as of December 31, 2001 is condensed
financial information derived from the audited balance sheet. The interim
financial statements are unaudited. These statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation for the periods
presented. Certain amounts have been reclassified in the 2001 financial
statements to conform to the 2002 presentation. The Company's quarterly results
are subject to fluctuation, consequently the results of operations and cash
flows for any quarter are not necessarily indicative of the results and cash
flows for any future period.
Goodwill and Other Intangible Assets. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 142 required that upon
adoption, amortization of goodwill cease and instead, the carrying value of
goodwill be evaluated for impairment on an annual basis by applying a fair value
based test. Identifiable intangible assets will continue to be amortized over
their useful lives and be reviewed for impairment in accordance with SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", as amended by SFAS No. 144.
Adoption of FASB Statement No. 145. In April 2002, the FASB issued SFAS No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". SFAS No. 145 primarily affects the reporting
requirements and classification of gains and losses from the extinguishment of
debt, rescinds the transitional accounting requirements for intangible assets of
motor carriers, and requires that certain lease modifications with economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. SFAS No. 145 is effective for financial
-7-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
statements issued after April 2002, with the exception of the provisions
affecting the accounting for lease transactions, which is applicable for
transactions entered into after May 15, 2002, and the provisions affecting
classification of gains and losses from the extinguishment of debt, which is
applicable for fiscal years beginning after May 15, 2002.
Accounting for Costs Associated with Exit or Disposal Activities. In June 2002,
the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 eliminates the definition and requirement for recognition of
exit costs in Emerging Issues Task Force Issue No. 94-3. This statement is
effective for exit or disposal activities initiated after December 31, 2002.
(2) INVENTORIES
Components of inventories are as follows:
As of As of
June 30, 2002 December 31, 2001
Raw materials and $10,546 $ 8,499
purchased parts
Work-in-process 18,318 19,567
Finished goods 7,134 4,594
------- -------
$35,998 $32,660
======= =======
(3) INCOME TAXES
The Company utilized an effective income tax rate of 30.7% for the first six
months of 2002, compared to 54.2% for the first six months of 2001. In the first
six months of 2002, the Company recorded $1.6 million of tax expense on a
pre-tax income of $5.2 million. In 2001, the Company recorded $0.2 million of
tax expense on a pre-tax income of $0.5 million. The Company received U.S.
income tax benefits for export sales in both periods. The Company applies the
estimated annual tax rate to the quarterly earnings to provide consistent
quarterly tax rates based on the estimated effective tax rate for the year. The
lower tax rate for 2002 is the result of a combination of net income and losses
at different tax rates of various foreign and domestic subsidiaries. To the
extent there are differences between components of planned and actual net
income, the estimated annual tax rate for the year could change and, in turn,
have an impact on future quarterly tax rates.
-8-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(4) LONG-TERM DEBT
The Company had $76.0 million of Senior Subordinated Notes ("Notes") at an
interest rate of 10.25% outstanding at June 30, 2002 and December 31, 2001. The
Notes are due on December 15, 2007. The Company had $27.6 million and $30.4
million in term loans (the "Term Loans") outstanding at June 30, 2002 and
December 31, 2001, respectively, at various interest rates on June 30, 2002
ranging from 4.31% to 6.5%. The Company had $18.0 million and $20.2 million in
revolving credit lines (the "Revolving Credit Lines") available for borrowings
at June 30, 2002 and December 31, 2001, respectively. The Company had $7.6
million and $5.4 million borrowed against the Revolving Credit Lines at June 30,
2002 and December 31, 2001, respectively, at an interest rate on June 30, 2002
of 6.25%. The Term Loans and the Revolving Credit Lines are governed by a Credit
Agreement dated December 11, 1997, as amended (the "Credit Agreement"). The
Company was in compliance with the quarterly financial performance covenants as
established by the Credit Agreement as of the June 30, 2002 measurement date. In
addition, the Company had $1.9 million and $0.5 million in overdraft borrowings
at SpA outstanding at June 30, 2002 and December 31, 2001.
(5) GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization but will be annually assessed for impairment by applying
a fair-value based test. The effect of the discontinuation of goodwill
amortization for the year 2002 will be an increase of net income of
approximately $1.9 million compared to net income if there had been amortization
of goodwill. Within six months of adoption of SFAS No. 142, the Company was
required to complete a transitional impairment review using a fair value
methodology to identify if there was an impairment to the goodwill or intangible
assets of indefinite life. Any impairment loss resulting from the transitional
impairment test would have been recorded as a cumulative effect of a change in
accounting principle for the quarter ended June 30, 2002. The Company completed
its evaluation of the carrying value of goodwill during the quarter and has
determined that there is no impairment of goodwill. SFAS No. 142 requires that
goodwill be tested annually and between annual tests if events or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying value. Subsequent impairment losses will be reflected in
operating income in the Statement of Operations.
-9-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
As required by SFAS No. 142, the effect of this accounting change has been
reflected prospectively. A reconciliation of net income as if SFAS No. 142 had
been adopted is presented below for the three months ended June 30, 2002 and
2001 and for the six months ended June 30, 2002 and 2001.
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Reported net income(loss) $ 2,555 $ (620) $ 3,715 $ 210
Goodwill amortization - 464 - 931
-------- --------- --------- ----------
Adjusted net income(loss) $ 2,555 $ (156) $ 3,715 $ 1,141
======== ========= ========= ==========
Goodwill for the Diesel Group was $55.9 million and $55.4 million at June 30,
2002 and December 31, 2001, respectively, and goodwill for Precision Engine was
$11.4 million at June 30, 2002 and December 31, 2001. The change in goodwill
balances between periods is due to foreign currency translation of Euros at SpA.
Major components of intangible and other assets at June 30, 2002 and December
31, 2001 consisted of:
June 30, 2002 December 31, 2001
-------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
-------- ------------ -------- ------------
Patents $ 9,809 $ 5,865 $ 9,809 $ 5,243
Debt issuance costs 8,149 4,953 8,149 4,438
Software 3,544 3,232 3,544 2,878
Customer contracts 2,690 2,104 2,690 1,880
Other 1,721 389 1,844 368
------- ------- ------- -------
$25,913 $16,543 $26,036 $14,807
======= ======= ======= =======
Amortization expense of other intangible assets was $868 and $1,336 for the
three months ended June 30, 2002 and 2001, respectively, and $1,736 and $2,679
for the six months ended June 30, 2002 and 2001, respectively. Estimated annual
amortization expense of other intangible assets is expected to be $3,428 in
2002, $2,425 in 2003, $1,178 in 2004, $843 in 2005 and $830 in 2006.
(6) CONTINGENCIES
The Company is involved in various legal and regulatory proceedings generally
incidental to its business. While the results of any litigation or regulatory
issue contain an element of uncertainty, management believes that the outcome of
any known, pending or threatened legal proceeding, or all of them combined, will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is subject to potential environmental liabilities as a result of
various claims and legal actions, which are pending or may be asserted against
the Company. Reserves for such
-10-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
liabilities have been established and no insurance recoveries have been
anticipated in the determination of the reserves. In management's opinion, the
aforementioned claims will be resolved without material adverse effect on the
consolidated results of operations, financial position or cash flows of the
Company. Also, in conjunction with the acquisition of the Company from
Metromedia Company ("Metromedia") on December 11, 1997, Metromedia agreed to
partially indemnify the Company and AIP for certain environmental matters. The
effect of this indemnification is to limit financial exposure for known
environmental issues.
(7) COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the three month and six month
periods ended June 30, 2002 and 2001 are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------- ------- ------- -------
Net income (loss) $ 2,555 $ (620) $ 3,715 $ 210
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 1,626 (1,706) 1,041 (260)
------- ------- ------- -------
Comprehensive (loss) income $ 4,181 $(2,326) $ 4,756 $ (50)
======= ======= ======= =======
(8) SEGMENTS
The Company has two reportable segments, the Diesel Systems Group (the "Diesel
Group") and Precision Engine Products ("Precision Engine"). The Diesel Group
manufactures diesel fuel injection equipment including fuel pumps, injectors,
filtration systems and miscellaneous non-proprietary products. This segment
accounted for approximately 80% and 85% of the Company's revenues for the three
months ended June 30, 2002 and 2001, respectively and approximately 80% and 86%
of total revenues for the six months ended June 30, 2002 and 2001, respectively.
Precision Engine manufactures roller-rocker arms, hydraulic valve lifters and
lash adjusters for gasoline engines. Revenues for Precision Engine accounted for
approximately 20% and 15% of total revenues for the three months ended June 30,
2002 and 2001, respectively and approximately 20% and 14% of total revenues for
the six months ended June 30, 2002 and 2001, respectively. The Company considers
the Diesel Group and Precision Engine to be two distinct segments because the
operating results of each are compiled, reviewed and managed separately. In
addition, the products and services of each segment have an end use (diesel
versus gasoline engines), which entails different engineering and marketing
efforts. There were no inter-segment sales between the Diesel Group and
Precision Engine for any of the periods presented.
-11-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
The following summarizes key information used by the Company in evaluating the
performance of each segment for the three months ended June 30, 2002 and 2001
and as of and for the six months ended June 30, 2002 and 2001:
FOR THE THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------
DIESEL PRECISION
GROUP ENGINE ELIMINATIONS TOTALS
------- --------- ------------ -------
Net sales $58,814 $15,172 $ -- $73,986
Gross profit 14,156 1,249 -- 15,405
Depreciation and amortization
expense 4,305 855 -- 5,160
Operating income (loss) 6,434 (450) -- 5,984
Net income (loss) 3,396 (841) -- 2,555
Total capital expenditures 2,639 732 -- 3,371
FOR THE THREE MONTHS ENDED JUNE 30, 2001
-------------------------------------------------
DIESEL PRECISION
GROUP ENGINE ELIMINATIONS TOTALS
------- --------- ------------ --------
Net sales $51,713 $ 9,354 $ -- $61,067
Gross profit 10,937 204 -- 11,141
Depreciation and amortization
expense 4,355 923 -- 5,278
Operating income (loss) 2,997 (1,497) -- 1,500
Net income (loss) 587 (1,207) -- (620)
Total capital expenditures 2,977 321 -- 3,298
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2002
-------------------------------------------------
DIESEL PRECISION
GROUP ENGINE ELIMINATIONS TOTALS
-------- --------- ------------ --------
Net sales $109,488 $ 28,285 $ -- $137,773
Gross profit 25,579 2,401 -- 27,980
Depreciation and amortization
expense 8,626 1,711 -- 10,337
Operating income (loss) 10,185 (193) -- 9,992
Net income (loss) 4,776 (1,061) -- 3,715
Total assets 247,923 52,040 (16,136) 283,827
Total capital expenditures 3,781 977 -- 4,758
-12-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2001
-------------------------------------------------
DIESEL PRECISION
GROUP ENGINE ELIMINATIONS TOTALS
-------- --------- ------------ --------
Net sales $110,372 $ 18,529 $ -- $128,901
Gross profit 24,783 145 -- 24,928
Depreciation and amortization
expense 8,707 1,847 -- 10,554
Operating income (loss) 8,533 (2,857) -- 5,676
Net income (loss) 3,082 (2,872) --
Total assets 251,862 47,169 (17,481) 281,550
Total capital expenditures 5,208 458 -- 5,666
(9) SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Notes issued December 11, 1997 by the Company are guaranteed jointly, fully,
severally and unconditionally by Precision Engine Products Corp. (the
"Subsidiary Guarantor") on a subordinated basis and are not guaranteed by FSC,
SpA, PEPL and SAPL (the "Non-Guarantor Subsidiaries").
Supplemental combining condensed financial statements for Stanadyne Corporation
("Parent"), the Subsidiary Guarantor and the Non-Guarantor Subsidiaries are
presented below. Separate complete financial statements of the Subsidiary
Guarantor are not presented because management has determined that they are not
material to investors.
-13-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Balance Sheets
June 30, 2002
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 233 $ 144 $ 1,025 $ (796)(d) $ 606
Accounts receivable, net 34,649 7,972 5,631 (323) 47,929
Inventories 21,484 8,725 5,128 661(c) 35,998
Other current assets 5,459 740 1,807 -- 8,006
-----------------------------------------------------------------------
Total current assets 61,825 17,581 13,591 (458) 92,539
Property, plant and equipment, net 79,041 17,902 13,495 -- 110,438
Intangible and other assets, net 51,712 11,957 13,921 (956)(b) 76,634
Investment in subsidiaries 42,882 (2,355) -- (40,527)(a) --
Due from Stanadyne Automotive Holding Corp. 4,216 -- -- -- 4,216
-----------------------------------------------------------------------
Total assets $ 239,676 $ 45,085 $ 41,007 $ (41,941) $ 283,827
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 33,845 $ 8,626 $ 3,823 $ 27 $ 46,321
Current maturities of long-term
debt and capital lease obligations 6,692 -- 2,026 -- 8,718
-----------------------------------------------------------------------
Total current liabilities 40,537 8,626 5,849 27 55,039
Long-term debt and capital lease obligations 104,513 -- 332 -- 104,845
Other noncurrent liabilities 36,780 11,037 6,392 (956)(b) 53,253
Minority interest in consolidated subsidiary -- -- -- 210 210
Intercompany accounts (16,391) 9,921 6,879 (409) --
Stockholders' equity 74,237 15,501 21,555 (40,813)(a) 70,480
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 239,676 $ 45,085 $ 41,007 $ (41,941) $ 283,827
=======================================================================
(a) Amount represents the elimination of investments in subsidiaries.
(b) Reclassify deferred tax asset to deferred tax liability.
(c) Amount represents the elimination of inventory for out of period transfers.
(d) Amount represents the elimination of cash for out of period cash payments.
-14-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Balance Sheets
December 31, 2001
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 483 $ 5 $ 772 $ (1,140)(d) $ 120
Accounts receivable, net 27,076 5,234 4,577 (15) 36,872
Inventories 18,960 8,947 4,296 457 (c) 32,660
Other current assets 5,791 649 1,347 37 7,824
-----------------------------------------------------------------------
Total current assets 52,310 14,835 10,992 (661) 77,476
Property, plant and equipment, net 82,114 18,445 12,802 -- 113,361
Intangible and other assets, net 53,334 12,181 13,564 (1,068)(b) 78,011
Investment in subsidiaries 42,399 (2,567) -- (39,832)(a) --
Due from Stanadyne Automotive Holding Corp. 4,216 -- -- -- 4,216
-----------------------------------------------------------------------
Total assets $ 234,373 $ 42,894 $ 37,358 $ (41,561) $ 273,064
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 34,832 $ 6,966 $ 4,442 $ (2) $ 46,238
Current maturities of long-term
debt and capital lease obligations 5,607 -- 578 -- 6,185
-----------------------------------------------------------------------
Total current liabilities 40,439 6,966 5,020 (2) 52,423
Long-term debt and capital lease obligations 106,177 -- -- -- 106,177
Other noncurrent liabilities 32,535 11,010 6,263 (1,068)(b) 48,740
Intercompany accounts (15,321) 8,904 6,952 (535) --
Stockholders' equity 70,543 16,014 19,123 (39,956)(a) 65,724
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 234,373 $ 42,894 $ 37,358 $ (41,561) $ 273,064
=======================================================================
(a) Amount represents the elimination of investments in subsidiaries.
(b) Reclassify deferred tax asset to deferred tax liability.
(c) Amount represents the elimination of inventory for out of period transfers.
(d) Amount represents the elimination of cash for out of period cash payments.
-15-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Operations
Three Months Ended June 30, 2002
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
Net sales $ 54,824 $ 13,739 $ 7,380 $ (1,957)(a) $ 73,986
Cost of goods sold 41,335 13,096 6,168 (2,018)(a) 58,581
-----------------------------------------------------------------------
Gross profit 13,489 643 1,212 61 15,405
Selling, general, administrative and
other operating expenses 7,305 1,212 904 -- 9,421
-----------------------------------------------------------------------
Operating income (loss) 6,184 (569) 308 61 5,984
Interest, net 1,854 167 328 45(b) 2,394
-----------------------------------------------------------------------
Income (loss) before income
taxes (benefit) and minority interest 4,330 (736) (20) 16 3,590
Income taxes (benefit) 1,391 104 (391) -- 1,104
-----------------------------------------------------------------------
Income (loss) before
minority interest 2,939 (840) 371 16 2,486
Minority interest in loss of consolidated subsidiary -- -- -- 69 69
-----------------------------------------------------------------------
Net income (loss) $ 2,939 $ (840) $ 371 $ 85 $ 2,555
=======================================================================
Consolidating Condensed Statements of Operations
Three Months Ended June 30, 2001
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
Net sales $ 47,676 $ 9,849 $ 4,565 $ (1,023)(a) $ 61,067
Cost of goods sold 36,987 9,288 4,720 (1,069)(a) 49,926
-----------------------------------------------------------------------
Gross profit (loss) 10,689 561 (155) 46 11,141
Selling, general, administrative and
other operating expenses 7,597 1,119 925 -- 9,641
Intercompany FSC commissions 785 18 (803) -- --
-----------------------------------------------------------------------
Operating income (loss) 2,307 (576) (277) 46 1,500
Interest, net 1,995 149 370 32 (b) 2,546
-----------------------------------------------------------------------
Income (loss) before income
taxes (benefit) 312 (725) (647) 14 (1,046)
Income taxes (benefit) (645) (207) 426 -- (426)
-----------------------------------------------------------------------
Net income (loss) $ 957 $ (518) $ (1,073) $ 14 $ (620)
=======================================================================
(a) Elimination of intercompany sales and cost of goods sold.
(b) Elimination of intercompany lease activity between PEPC and PEPL.
-16-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Operations
Six Months Ended June 30, 2002
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
Net sales $102,056 $ 26,798 $ 13,431 $ (4,512)(a) $137,773
Cost of goods sold 77,585 25,193 11,509 (4,494)(a) 109,793
-----------------------------------------------------------------------
Gross profit 24,471 1,605 1,922 (18) 27,980
Selling, general, administrative and
other operating expenses 14,606 2,334 1,048 -- 17,988
-----------------------------------------------------------------------
Operating income (loss) 9,865 (729) 874 (18) 9,992
Interest, net 3,709 334 656 105 4,804
-----------------------------------------------------------------------
Income (loss) before income
taxes (benefit) and minority interest 6,156 (1,063) 218 (123) 5,188
Income taxes (benefit) 1,784 161 (352) -- 1,593
-----------------------------------------------------------------------
Income (loss) before
minority interest 4,372 (1,224) 570 (123) 3,595
Minority interest in loss of consolidated subsidiary -- -- -- 120 120
-----------------------------------------------------------------------
Net income (loss) $ 4,372 $ (1,224) $ 570 $ (3) $ 3,715
=======================================================================
Consolidating Condensed Statements of Operations
Six Months Ended June 30, 2001
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
Net sales $102,370 $ 19,579 $ 9,030 $ (2,078)(a) $128,901
Cost of goods sold 78,080 18,929 9,116 (2,152)(a) 103,973
-----------------------------------------------------------------------
Gross profit (loss) 24,290 650 (86) 74 24,928
Selling, general, administrative and
other operating expenses 15,483 2,230 1,551 (12) 19,252
Intercompany FSC commissions 1,710 35 (1,745) -- --
-----------------------------------------------------------------------
Operating income (loss) 7,097 (1,615) 108 86 5,676
Interest, net 4,115 306 729 67 5,217
-----------------------------------------------------------------------
Income (loss) before income taxes (benefit) 2,982 (1,921) (621) 19 459
Income taxes (benefit) 110 (13) 152 -- 249
-----------------------------------------------------------------------
Net income (loss) $ 2,872 $ (1,908) $ (773) $ 19 $ 210
=======================================================================
(a) Elimination of intercompany sales and cost of goods sold.
-17-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Cash Flows
Six Months Ended June 30, 2002
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 4,372 $ (1,224) $ 570 $ (3) $ 3,715
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,077 1,692 568 -- 10,337
Other adjustments (219) (300) (35) -- (554)
Loss applicable to minority interest -- -- -- (120) (120)
Changes in operating assets and
liabilities (7,259) 396 (2,764) 258 (9,369)
-----------------------------------------------------------------------
Net cash provided by (used in)
operating activities 4,971 564 (1,661) 135 4,009
-----------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,481) (924) (353) -- (4,758)
Investment in subsidiaries (343) -- -- 343 --
-----------------------------------------------------------------------
Net cash used in
investing activities (3,824) (924) (353) 343 (4,758)
-----------------------------------------------------------------------
Cash flows from financing activities:
Net change in debt (578) -- 1,266 -- 688
Net change in equity (844) 499 981 (306) 330
-----------------------------------------------------------------------
Net cash (used in) provided by
financing activities (1,422) 499 2,247 (306) 1,018
-----------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (275) 139 233 172 269
Effect of exchange rate changes on cash 25 -- 20 172 217
Cash and cash equivalents at
beginning of period 483 5 772 (1,140) 120
-----------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 233 $ 144 $ 1,025 $ (796) $ 606
=======================================================================
-18-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (concluded)
Consolidating Condensed Statements of Cash Flows
Six Months Ended June 30, 2001
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
---------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,872 $ (1,908) $ (773) $ 19 $ 210
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,041 1,829 684 -- 10,554
Other adjustments (697) (447) (371) -- (1,515)
Changes in operating assets and
liabilities (5,946) 977 55 (491) (5,405)
-----------------------------------------------------------------------
Net cash provided by (used in)
operating activities 4,270 451 (405) (472) 3,844
-----------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,957) (450) (245) (14) (5,666)
Proceeds from disposal of property,
plant and equipment 436 -- 8 (391) 53
-----------------------------------------------------------------------
Net cash used in
investing activities (4,521) (450) (237) (405) (5,613)
-----------------------------------------------------------------------
Cash flows from financing activities:
Net change in debt (2,196) -- 804 -- (1,392)
-----------------------------------------------------------------------
Net cash (used in) provided by
financing activities (2,196) -- 804 -- (1,392)
-----------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (2,447) 1 162 (877) (3,161)
Effect of exchange rate changes on cash (6) -- (18) 744 720
Cash and cash equivalents at
beginning of period 13,383 14 85 165 13,647
-----------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 10,930 $ 15 $ 229 $ 32 $ 11,206
=======================================================================
-19-
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
(1) OVERVIEW
The Company is a leading designer and manufacturer of highly-engineered,
precision manufactured engine components. The Company's two reporting segments
are the Diesel Group and Precision Engine. The Diesel Group manufactures diesel
fuel injection equipment including fuel pumps, injectors and filtration systems
as well as miscellaneous non-proprietary products. Precision Engine manufactures
roller-rocker arms, hydraulic valve lifters and lash adjusters for gasoline
engines. Detailed segment information can be found in Note 8 of Notes to
Condensed Consolidated Financial Statements.
Continued strength in demand for the Company's products resulted in a 6.9%
increase in overall revenues through the first six months as compared to the
same period last year. The resulting net income of $3.7 million was
significantly ahead of the $0.2 million reported for the first six months of
2001. Despite this improvement, the volatility of the underlying economy in 2002
could affect demand for the Company's products in the second half of the year.
The Company remains cautious in its outlook for the remainder of the year.
The Diesel Group segment reported a 13.7% increase in second quarter sales in
comparison to the same period a year ago. All of the major product lines
contributed to the increase, including $1.8 million in sales recorded by the
Precision Components and Assembly ("PCA") product line. Begun only last year,
the market strategy for this product line is to use the Company's precision
manufacturing expertise, coupled with its experience in component assembly and
test technology, as a basis for developing a contract manufacturing business for
a select group of key customers worldwide. Growth in this product line is
expected to generate approximately $10 million in new revenues in 2002, with a
target objective of $50 million in annual revenues by 2005. Sales through the
first six months totaled 0.8% less than the same period last year, resulting in
net income of $4.5 million versus $3.1 million last year.
The Precision Engine segment continued to recover from the losses reported in
2001. Second quarter sales were 62.2% higher than the same period a year ago,
with increased customer demand from DaimlerChrysler Corp. ("DCX"), Tritec
Motors, Ltd. and the service aftermarket sector. Sales through the first six
months totaled 52.7% more than the same period last year, resulting in net
losses of $1.1 million versus $2.9 million last year.
STANADYNE CORPORATION AND SUBSIDIARIES
BASIS OF PRESENTATION
The following table displays unaudited performance details for the periods
shown. Net sales, cost of goods sold, gross profit, selling, general and
administrative expense ("SG&A"), amortization of intangibles, management fees,
operating income and net income (loss) of the Company are presented in thousands
of dollars and as a percentage of net sales.
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
$ % $ % $ % $ %
------ ----- ------ ----- ------- ----- ------- -----
Net sales 73,986 100.0 61,067 100.0 137,773 100.0 128,901 100.0
Cost of goods sold 58,581 79.2 49,926 81.8 109,793 79.7 103,973 80.7
Gross profit 15,405 20.8 11,141 18.2 27,980 20.3 24,928 19.3
SG&A 8,278 11.2 8,030 13.1 15,702 11.4 16,023 12.4
Amortization of intangibles 868 1.2 1,336 2.2 1,736 1.3 2,679 2.1
Management fees 275 0.4 275 0.5 550 0.4 550 0.4
Operating income 5,984 8.1 1,500 2.5 9,992 7.3 5,676 4.4
Net income (loss) 2,555 3.5 (620) (1.0) 3,715 2.7 210 0.2
COMPARISON OF RESULTS OF OPERATIONS:
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Sales. Net sales for the second quarter of 2002 totaled $74.0 million and
were 21.2% higher than the $61.1 million reported in the same period last year.
Higher sales were reported in both segments: Diesel Group up $7.1 million or
13.7% and Precision Engine up $5.8 million or 62.2%. The broad-based sales
increase in the Diesel Group included most major customers and all of the major
product lines, including the PCA product line which reported $1.8 million in
second quarter revenues. One exception to the overall increase in demand for
Diesel Group products was a $4.6 million reduction in service sales of the DS
fuel pump to General Motors Corporation ("GM"). This lower level of demand for
the DS fuel pump is expected to continue for the balance of the year. The
increase in demand for products produced in the Precision Engine segment
resulted in higher OEM sales of $1.2 million to DCX in the US and $1.6 million
to Tritec Motors, Ltd. in Brazil. Demand for hydraulic tappets produced by
Precision Engine in the service aftermarket has increased substantially since
the second quarter of 2001, resulting in $2.8 million of additional sales in the
second quarter of 2002.
Gross Profit. Gross profit for the Company in the second quarter of 2002
increased to $15.4 million and 20.8% of net sales, from $11.1 million and 18.2%
of net sales for the same period in 2001. Both segments contributed to this
increase. Higher sales in the Diesel Group pushed gross profit to 24.1% in the
second quarter of 2002, as compared to 21.1% in the same period a year ago.
Gross profits in Precision Engine increased as a percentage of net sales to
8.2%, as compared to 2.2% in the second quarter of 2001. The sales increase
reported during the second quarter of 2002 in Precision Engine included lower
margin hydraulic tappets sold to the aftermarket and therefore reduced the
impact on gross profits.
-21-
STANADYNE CORPORATION AND SUBSIDIARIES
SG&A. SG&A totaled $8.3 million or 11.2% of net sales for the second quarter of
2002, up from $8.0 million or 13.1% in 2001. A portion of the increase is
accounted for by $0.1 million in start-up costs for operations in India for
SAPL and $0.1 million of additional freight on sales in support of higher
business levels. The second quarter 2002 SG&A results for Precision Engine
include $0.2 million of foreign exchange losses on operations in Brazil as
compared to $0.5 million in the same period of 2001.
Amortization of Intangibles. Amortization of intangible assets decreased to $0.9
million in the second quarter of 2002 from $1.3 million in the second quarter of
2001. The discontinuance of goodwill amortization in 2002 in accordance with the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", resulted in a
reduction of amortization from the second quarter of 2001 of $0.4 million.
Operating Income. Operating income for the second quarter of 2002 totaled $6.0
million versus $1.5 million in the second quarter of 2001, representing an
increase of $4.5 million. As a percentage of net sales, operating income
increased to 8.1% in the second quarter of 2002 from 2.5% in the second quarter
of 2001 for the Company. Higher gross profits in both segments resulted in
additional operating income in the second quarter of 2002 versus 2001. Operating
income as a percentage of net sales improved in the Diesel Group to 10.9% from
5.8% and in Precision Engine to (3.0%) from (16.0%).
Net Income. Net income in the second quarter of 2002 totaled $2.6 million versus
a net loss of ($0.6) million for the same period in 2001. Most of this
improvement was produced through the $4.5 million of higher operating income in
2002. The improvement in operating income and $0.2 million in lower interest
expense, due to less debt and lower interest rates, were partially offset by a
$1.5 million increase in income taxes.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Sales. Net sales for the first six months of 2002 totaled $137.8 million and
were 6.9% higher than the $128.9 million reported for the same period last year.
All of the increase was produced by the Precision Engine segment where sales
grew $9.8 million or 52.7%, while Diesel Group sales were lower by $0.9 million
or 0.8%. The increase in Precision Engine included higher OEM sales of $1.6
million to DCX in the US and $3.5 million to Tritec Motors, Ltd. in Brazil.
Demand in the service aftermarket for hydraulic tappets has increased
substantially from last year, resulting in $4.6 million of additional sales in
the first six months of 2002. Diesel Group sales increased in the second quarter
of 2002 to erase most of the deficit from the first quarter of 2002 compared
to the first quarter of 2001. Sales through the first six months of 2002
increased, in comparison to the same period last year, for most major customers,
offset by $10.1 million less service sales of the DS fuel pump to GM and $2.7
million less fuel pump sales to Perkins.
Gross Profit. Gross profit for the Company in the first six months of 2002
increased to $28.0 million from $24.9 million for the same period in 2001.
Despite the slight decline in revenues,
-22-
STANADYNE CORPORATION AND SUBSIDIARIES
gross profit for the first six months of 2002 in the Diesel Group increased as a
percentage of net sales to 23.4% from 22.5% in the same period last year due to
a change in the mix of products sold in both periods. Higher sales volumes in
the first six months for Precision Engine drove gross profit as a percentage of
net sales to 8.5%, as compared to 0.8% in the first six months of 2001.
SG&A. SG&A totaled $15.7 million for the first six months of 2002, down from
$16.0 million in 2001 and down as a percentage of net sales to 11.4% from 12.4%.
While there was little overall change in expenses in the Diesel Group segment,
SG&A in Precision Engine improved to 8.0% of net sales from 14.6% in the prior
year. This reduction in SG&A was primarily due to lower reported losses on
foreign currency transactions on operations in Brazil in 2002 of $0.1 million
versus $0.6 million of losses in 2001. SG&A for the first six months of 2002
also includes $0.2 million in start-up costs for operations in India for SAPL.
Amortization of Intangibles. Amortization of intangible assets decreased to $1.7
million in the first six months of 2002 from $2.7 million in the first six
months of 2001. The discontinuance of goodwill amortization in 2002 in
accordance with the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets", resulted in a reduction of amortization from the first six months of
2001 of $0.9 million.
Operating Income. Operating income for the first six months of 2002 totaled
$10.0 million or 7.3% of net sales versus $5.7 million or 4.4% of net sales in
the first six months of 2001. A combination of higher gross profits and lower
SG&A and amortization expense in both segments contributed to the $4.3 million
improvement. Operating income as a percentage of net sales increased in the
first six months of 2002 in the Diesel Group to 9.3% from 7.7% for the same
period last year and increased in Precision Engine for the first six months of
2002 to (0.7%) from (15.4%) for the same period last year.
Net Income. Net income in the first six months of 2002 totaled $3.7 million
versus $0.2 million for the same period in 2001. Higher net income resulted from
$4.3 million increased operating income in 2002, $0.4 million in lower interest
expense, due to less debt and lower interest rates, partially offset by a $1.3
million increase in income taxes on higher earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operations
supplemented by a revolving credit facility under which $18.0 million was
available for borrowings as of June 30, 2002. The Company occasionally utilizes
capital leasing and, for its Italian subsidiary, SpA, maintains overdraft
facilities with local financial institutions on an as needed basis. As of June
30, 2002, there were borrowings of $27.6 million under the Term Loans, $7.6
million under the Revolving Credit Lines and $1.9 million in foreign overdraft
facilities. The Company met all financial covenants set forth in the Credit
Agreement for the June 30, 2002 measurement date.
-23-
STANADYNE CORPORATION AND SUBSIDIARIES
Cash Flows From Operating Activities. Cash flows from operations for the six
months ended June 30, 2002 totaled $4.0 million as compared to $3.8 million for
the same period of 2001. A $4.1 million increase in cash flows from operations
other than changes in operating assets and liabilities was almost entirely
offset by growth in net asset accounts, especially accounts receivable and
inventories. Changes in net operating asset and liability accounts decreased
cash flows from operations by $9.4 million during the six months ended June 30,
2002 compared to a decrease of $5.4 million for the first six months of 2001.
Increases to accounts receivable and inventories in both segments totaled $14.1
million in the first six months of 2002 and were partially offset by a $4.7
million increase to accrued liability accounts. While a portion of these
increases reflect the overall higher levels of business in each segment, the
Company continues to struggle with the new ERP systems installed during the
first quarter. Many of the challenges have been concentrated in the planning
and scheduling of production and are reflected in the inventory turnover
measurement which, for the first six months of 2002, averaged 7.1 turns or
considerably less than the 8.1 turns recorded for the same period a year ago.
Aggressive management efforts continue to improve this situation.
Cash Flows From Investing Activities. The Company's capital expenditures for the
first six months of 2002 totaled $4.8 million compared to $5.7 million for the
same period of 2001. Capital expenditures in 2002 included $3.1 million in
support of new product launches with the remainder applied to cost reduction,
quality enhancements and general maintenance projects. The amounts reported in
the first six months of 2001 included $1.8 million for the Company's ERP
implementation project.
Cash Flows From Financing Activities. Cash flows from financing activities for
the six months ended June 30, 2002 resulted in a net increase in cash of $1.0
million. Principal payments of long-term debt totaled $2.8 million. Borrowings
under the Revolving Credit Facility totaled $2.2 million and additional
overdraft borrowings at SpA amounted to $1.3 million. As of June 30, 2002 there
was $7.6 million in borrowings against the Company's Revolving Credit Facility
and $1.9 million of foreign overdraft borrowings. Investments in the share
capital of SAPL by the minority partner increased cash flows by $0.3 million for
the first six months of 2002.
(2) NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 142 "Goodwill
and Other Intangible Assets". SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying value of goodwill
will be evaluated for impairment on an annual basis. Identifiable intangible
assets will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 142 was
effective for the Company beginning on January 1, 2002. The Company has
completed an evaluation of the carrying value of goodwill and has determined
that no impairment exists.
-24-
STANADYNE CORPORATION AND SUBSIDIARIES
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 primarily affects the reporting requirements and classification of
gains and losses from the extinguishment of debt, rescinds the transitional
accounting requirements for intangible assets of motor carriers, and requires
that certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 is effective for financial statements issued after April 2002, with
the exception of the provisions affecting the accounting for lease transactions,
which is applicable for transactions entered into after May 15, 2002, and the
provisions affecting classification of gains and losses from the extinguishment
of debt, which is applicable for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 eliminates the definition and requirement for recognition of
exit costs in Emerging Issues Task Force Issue No. 94-3. This statement is
effective for exit or disposal activities initiated after December 31, 2002.
(3) CRITICAL ACCOUNTING POLICIES
We prepare the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting policies which we
believe are the most critical to aid in fully understanding and evaluating our
reported financial results include: product warranty reserves, inventory
reserves for excess or obsolescence, and pension and postretirement benefit
liabilities and are fully described in the notes to our consolidated financial
statements contained in our annual report on Form 10-K.
(4) CAUTIONARY STATEMENT
This quarterly report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
statements with respect to the financial condition, results of operations and
business of the Company and management's discussion and analysis of financial
condition and results of operations. All of these forward-looking statements are
based on estimates and assumptions made by the management of the Company which,
although believed to be reasonable, are inherently uncertain. Therefore, undue
reliance should not be placed upon such estimates and statements. No assurance
can be given that any such estimates will be realized, and it is likely that
actual results will differ materially from those contemplated by such
forward-looking statements. Factors that may cause such differences
-25-
STANADYNE CORPORATION AND SUBSIDIARIES
include: (1) increased competition; (2) increased costs; (3) loss or retirement
of key members of management; (4) increases in the Company's cost of borrowing
or inability or unavailability of additional debt or equity capital; (5) adverse
state or federal legislation or regulation or adverse determinations in pending
litigation; (6) changes in the value of the U.S. Dollar relative to foreign
currencies of countries where the Company conducts its business; and (7) changes
in general economic conditions and/or in the automobile, light duty trucks,
agricultural and construction vehicles and equipment, industrial products and
marine equipment markets in which the Company competes. Many of such factors are
beyond the control of the Company and its management. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
the result of new information, future events or otherwise.
-26-
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks which include changes in interest rates
and changes in foreign currency exchange rates as measured against the U.S.
dollar.
Interest Rate Risk. The carrying value of the Company's revolving credit lines
and term loans approximate fair value. The term loans are primarily LIBOR-based
borrowings and are re-priced approximately every three months based on
prevailing market rates. A 10% change in the interest rate on the term loans
would have increased or decreased the first six months of 2002 interest expense
by $0.1 million. The 10-1/4% Notes bear interest at a fixed rate and, therefore,
are not sensitive to interest rate fluctuation. The fair value of the Company's
$76.0 million in Notes based on quoted market prices on June 30, 2002 was
approximately $60.8 million.
Foreign Currency Risk. The Company has subsidiaries in Brazil and Italy, a joint
venture in India and a branch office in France, and therefore is exposed to
changes in foreign currency exchange rates. Changes in exchange rates may
positively or negatively affect the Company's sales, gross margins, and retained
earnings. However, historically, these locations have contributed less than 15%
of the Company's net sales and retained earnings, with most of these sales
attributable to the Italian and Brazilian subsidiaries. The Company also sells
its products from the United States to foreign customers for payment in foreign
currencies as well as dollars. Foreign currency exchange losses totaled ($0.1)
million and ($0.8) million for the six months ended June 30, 2002 and 2001,
respectively. A majority of the exchange gains and losses are related to the
Company's operations in Brazil. The Company does not hedge against foreign
currency risk.
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STANADYNE CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
99 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. No report on Form 8-K was filed during the quarter ended June 30, 2002.
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STANADYNE CORPORATION AND SUBSIDIARIES
SIGNATURE
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.
Stanadyne Corporation
--------------------------
(Registrant)
Date: August 13, 2002 /s/ Stephen S. Langin
--------------- --------------------------
Stephen S. Langin
Vice President and
Chief Financial Officer
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EXHIBIT INDEX:
99 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002