Back to GetFilings.com
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 September 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 October 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
September 30, 2002 (unaudited) and December 31, 2001 ....................3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 (unaudited) ....................4
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2002 and 2001 (unaudited) ....................5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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
Item 4 Controls and Procedures ................................................28
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K .......................................29
Signature .......................................................................30
Certification of Chief Executive Officer .....................................31-32
Certification of Principal Financial Officer .................................33-34
- 2 -
STANADYNE CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 946 $ 120
Accounts receivable, net of allowance for uncollectible
accounts of $618 at September 30, 2002 and $524 at
December 31, 2001 .......................................... 38,844 36,872
Inventories ................................................... 36,121 32,660
Prepaid expenses and other current assets ..................... 1,489 869
Deferred income taxes ......................................... 7,148 6,955
--------- ---------
Total current assets ............................ 84,548 77,476
Property, plant and equipment, net ................................. 110,337 113,361
Goodwill ........................................................... 67,936 66,782
Intangible and other assets, net ................................... 8,508 11,229
Due from Stanadyne Automotive Holding Corp. ........................ 4,216 4,216
--------- ---------
Total assets .................................... $ 275,545 $ 273,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 21,698 $ 21,639
Accrued liabilities ........................................... 30,175 24,599
Current maturities of long-term debt .......................... 9,119 6,143
Current installments of capital lease obligations ............. 108 42
--------- ---------
Total current liabilities ....................... 61,100 52,423
Long-term debt, excluding current maturities ....................... 95,394 106,177
Deferred income taxes .............................................. 2,122 4,017
Capital lease obligations, excluding current installments .......... 322 --
Other noncurrent liabilities ....................................... 45,323 44,723
--------- ---------
Total liabilities ............................... 204,261 207,340
--------- ---------
Minority interest in consolidated subsidiary ....................... 262 --
Commitments and contingencies ...................................... -- --
Stockholders' equity:
Common stock .................................................. -- --
Additional paid-in capital .................................... 59,858 59,858
Other accumulated comprehensive loss .......................... (2,459) (4,716)
Retained earnings ............................................. 13,623 10,582
--------- ---------
Total stockholders' equity ...................... 71,022 65,724
--------- ---------
Total liabilities and stockholders' equity ............... $ 275,545 $ 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
September 30, September 30,
2002 2001
-------- --------
Net sales $ 62,877 $ 60,864
Cost of goods sold 53,775 51,697
-------- --------
Gross profit 9,102 9,167
Selling, general and administrative expenses 7,819 7,752
Amortization of intangibles 867 1,334
Management fees 275 275
-------- --------
Operating income (loss) 141 (194)
Interest, net 2,261 2,523
-------- --------
Loss before income tax benefit
and minority interest (2,120) (2,717)
Income tax benefit (1,397) (396)
-------- --------
Loss before minority interest (723) (2,321)
Minority interest in loss of
consolidated subsidiary 49 --
-------- --------
Net loss $ (674) $ (2,321)
======== ========
See notes to condensed consolidated financial statements.
- 4 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
--------- ---------
Net sales $ 200,650 $ 189,765
Cost of goods sold 163,568 155,670
--------- ---------
Gross profit 37,082 34,095
Selling, general and administrative expenses 23,521 23,775
Amortization of intangibles 2,603 4,013
Management fees 825 825
--------- ---------
Operating income 10,133 5,482
Interest, net 7,065 7,740
--------- ---------
Income (loss) before income taxes (benefit)
and minority interest 3,068 (2,258)
Income taxes (benefit) 196 (147)
--------- ---------
Income (loss) before minority interest 2,872 (2,111)
Minority interest in loss of consolidated
subsidiary 169 --
--------- ---------
Net income (loss) $ 3,041 $ (2,111)
========= =========
See notes to condensed consolidated financial statements.
- 5 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss) $ 3,041 $ (2,111)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 15,532 15,831
Deferred income tax benefit (2,353) (3,486)
Loss applicable to minority interest (169) --
Gain on disposal of property, plant and equipment (1) (53)
Changes in operating assets and liabilities (102) (3,645)
-------- --------
Net cash provided by operating activities 15,948 6,536
-------- --------
Cash flows from investing activities:
Capital expenditures (8,305) (11,677)
Proceeds from disposal of property, plant and equipment 1 53
-------- --------
Net cash used in investing activities (8,304) (11,624)
-------- --------
Cash flows from financing activities:
Net (payments) proceeds on revolving credit facilities (4,950) 5,475
Net proceeds on foreign overdraft facilities 1,171 1,352
Principal payments on long-term debt (4,205) (14,815)
Payments of capital lease obligations (68) (431)
Proceeds from investment by minority interest 431 --
-------- --------
Net cash used in financing activities (7,621) (8,419)
-------- --------
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents 23 (13,507)
Effect of exchange rate changes on cash 803 793
Cash and cash equivalents at beginning of period 120 13,647
-------- --------
Cash and cash equivalents at end of period $ 946 $ 933
======== ========
See notes to condensed consolidated financial statements.
- 6 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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.
Foreign Currency Translation. Effective with the beginning of the third quarter
of 2002, the Company determined that $2.2 million of intercompany debt between
PEPC and PEPL should be considered a long-term-investment. Foreign exchange
related gains and losses on this intercompany debt will be excluded from
operating income and included in other comprehensive income (loss), in
accordance with the Statement of Financial Accounting Standards ("SFAS") No. 52
"Foreign Currency Translation".
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.
- 7 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
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
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. The adoption of SFAS
145 is not expected to have a material impact on the Company's consolidated
financial statements.
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. The
adoption of SFAS 146 is not expected to have a material impact on the Company's
consolidated financial statements.
(2) INVENTORIES
Components of inventories are as follows:
As of As of
September 30, December 31,
2002 2001
------- -------
Raw materials and purchased
parts $ 9,804 $ 8,499
Work-in-process 17,441 19,567
Finished goods 8,876 4,594
------- -------
$36,121 $32,660
======= =======
Due to the implementation of the Company's new Enterprise Resource Planning
(ERP) system in the first quarter of 2002, the inventory components at December
31, 2001 have been reclassified to reflect the 2002 format.
- 8 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(3) INCOME TAXES
The Company utilized an effective income tax rate of 6.4% for the first nine
months of 2002, compared to 6.5% for the first nine months of 2001. In the first
nine months of 2002, the Company recorded $0.2 million of tax expense on a
pre-tax income of $3.1 million. In 2001, the Company recorded $0.1 million of
tax benefit on a pre-tax loss of $2.3 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. 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.
(4) LONG-TERM DEBT
The Company had $76.0 million of Senior Subordinated Notes ("Notes") at an
interest rate of 10.25% outstanding at September 30, 2002 and December 31, 2001.
The Notes are due on December 15, 2007. The Company had $26.2 million and $30.4
million in term loans (the "Term Loans") outstanding at September 30, 2002 and
December 31, 2001, respectively, at various interest rates on September 30, 2002
ranging from 3.88% to 6.25%. The Company had $23.9 million and $20.2 million in
revolving credit lines (the "Revolving Credit Lines") available for borrowings
at September 30, 2002 and December 31, 2001, respectively. The Company had $0.5
million and $5.4 million borrowed against the Revolving Credit Lines at
September 30, 2002 and December 31, 2001, respectively, at an interest rate on
September 30, 2002 of 6.0%. 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 September
30, 2002 measurement date. In addition, the Company had $1.9 million and $0.5
million in overdraft borrowings at SpA outstanding at September 30, 2002 and
December 31, 2001, respectively.
(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 is 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 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
- 9 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
change in accounting principle for the quarter ended June 30, 2002. The Company
completed its evaluation of the carrying value of goodwill during the second
quarter of 2002 and determined that there was 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 consolidated Statement of
Operations.
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 September 30, 2002
and 2001 and for the nine months ended September 30, 2002 and 2001.
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Reported net (loss) income $ (674) $(2,321) $ 3,041 $(2,111)
Goodwill amortization -- 463 -- 1,394
------- ------- ------- -------
Adjusted net (loss) income $ (674) $(1,858) $ 3,041 $ (717)
======= ======= ======= =======
Goodwill for the Diesel Group was $56.5 million and $55.4 million at September
30, 2002 and December 31, 2001, respectively, and goodwill for Precision Engine
was $11.4 million at September 30, 2002 and December 31, 2001. The change in
goodwill balances between periods is due to foreign currency translation of
Euros-denominated goodwill at SpA. Major components of intangible and other
assets at September 30, 2002 and December 31, 2001 consisted of:
September 30, 2002 December 31, 2001
------------------------ ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
----- ------------ ----- ------------
Patents $ 9,809 $ 6,176 $ 9,809 $ 5,243
Debt issuance costs 8,149 5,210 8,149 4,438
Software 3,544 3,410 3,544 2,878
Customer contracts 2,690 2,215 2,690 1,880
Other 1,727 400 1,844 368
------- ------- ------- -------
$25,919 $17,411 $26,036 $14,807
======= ======= ======= =======
Amortization expense of other intangible assets was $867 and $1,334 for the
three months ended September 30, 2002 and 2001, respectively, and $2,603 and
$4,013 for the nine months ended September 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.
- 10 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(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 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 nine month
periods ended September 30, 2002 and 2001 are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net (loss) income $ (674) $(2,321) $ 3,041 $(2,111)
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,216 1,553 2,257 1,293
------- ------- ------- -------
Comprehensive income (loss) $ 542 $ (768) $ 5,298 $ (818)
======= ======= ======= =======
(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 77% and 85% of the Company's revenues for the three
months ended September 30, 2002 and 2001, respectively, and
- 11 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
approximately 79% and 85% of total revenues for the nine months ended September
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 23% and 15% of total revenues
for the three months ended September 30, 2002 and 2001, respectively, and
approximately 21% and 15% of total revenues for the nine months ended September
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. There were no inter-segment
sales between the Diesel Group and Precision Engine for any of the periods
presented.
The following summarizes key information used by the Company in evaluating the
performance of each segment for the three months ended September 30, 2002 and
2001 and as of and for the nine months ended September 30, 2002 and 2001:
For the Three Months Ended September 30, 2002
---------------------------------------------------------
Diesel Precision
Group Engine Eliminations Totals
-------- -------- ------------ --------
Net sales $ 48,442 $ 14,435 $ -- $ 62,877
Gross profit 8,103 999 -- 9,102
Depreciation and
amortization expense 4,341 854 -- 5,195
Operating income (loss) 1,072 (931) -- 141
Net income (loss) 103 (777) -- (674)
Total capital expenditures 2,936 611 -- 3,547
For the Three Months Ended September 30, 2001
----------------------------------------------------------
Diesel Precision
Group Engine Eliminations Totals
-------- -------- ------------ --------
Net sales $ 51,755 $ 9,109 $ -- $ 60,864
Gross profit (loss) 10,251 (1,084) -- 9,167
Depreciation and
amortization expense 4,354 923 -- 5,277
Operating income (loss) 2,462 (2,656) -- (194)
Net loss (412) (1,909) -- (2,321)
Total capital expenditures 5,241 770 -- 6,011
As of and For the Nine Months Ended September 30, 2002
----------------------------------------------------------
Diesel Precision
Group Engine Eliminations Totals
-------- -------- ------------ --------
Net sales $157,930 $ 42,720 $ -- $200,650
Gross profit 33,682 3,400 -- 37,082
Depreciation and
amortization expense 12,967 2,565 -- 15,532
Operating income (loss) 11,257 (1,124) -- 10,133
Net income (loss) 4,879 (1,838) -- 3,041
Total assets 238,701 52,711 (15,867) 275,545
Total capital expenditures 6,717 1,588 -- 8,305
- 12 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
As of and For the Nine Months Ended September 30, 2001
--------------------------------------------------------------
Diesel Precision
Group Engine Eliminations Totals
--------- --------- ------------ ---------
Net sales $ 162,127 $ 27,638 $ -- $ 189,765
Gross profit (loss) 35,034 (939) -- 34,095
Depreciation and
amortization expense 13,061 2,770 -- 15,831
Operating income (loss) 10,995 (5,513) -- 5,482
Net income (loss) 2,670 (4,781) -- (2,111)
Total assets 246,388 47,375 (17,921) 275,842
Total capital expenditures 10,449 1,228 -- 11,677
(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
September 30, 2002
--------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
--------- --------- ------------ ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 678 $ 61 $ 207 $ -- $ 946
Accounts receivable, net 25,380 8,499 4,965 -- 38,844
Inventories 21,040 9,125 5,140 816 36,121
Other current assets 5,901 430 2,306 -- 8,637
--------- --------- --------- --------- ---------
Total current assets 52,999 18,115 12,618 816 84,548
Property, plant and equipment, net 77,853 17,780 14,704 -- 110,337
Goodwill 43,465 11,360 13,111 -- 67,936
Intangible and other assets, net 7,492 484 1,740 (1,208)(a) 8,508
Investment in subsidiaries 41,437 (3,223) -- (38,214)(b) --
Due from Stanadyne Automotive Holding Corp. 4,216 -- -- -- 4,216
--------- --------- --------- --------- ---------
Total assets $ 227,462 $ 44,516 $ 42,173 $ (38,606) $ 275,545
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 37,468 $ 9,395 $ 4,980 $ 30 $ 51,873
Current maturities of long-term
debt and capital lease obligations 7,235 -- 1,992 -- 9,227
--------- --------- --------- --------- ---------
Total current liabilities 44,703 9,395 6,972 30 61,100
Long-term debt 95,394 -- 322 -- 95,716
Other noncurrent liabilities 31,462 10,398 6,793 (1,208)(a) 47,445
Minority interest in consolidated subsidiary -- -- -- 262 262
Intercompany accounts (17,593) 10,149 6,618 826 --
Stockholders' equity 73,496 14,574 21,468 (38,516)(b) 71,022
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 227,462 $ 44,516 $ 42,173 $ (38,606) $ 275,545
========= ========= ========= ========= =========
(a) Reclassification of Non-Guarantor deferred tax asset to consolidate
net deferred tax liability.
(b) Elimination of investments in subsidiaries of the Parent.
- 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
Goodwill 43,465 11,360 11,957 -- 66,782
Intangible and other assets, net 9,869 821 1,607 (1,068)(b) 11,229
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 September 30, 2002
-------------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
-------- --------- ------------ ------------ --------------
Net sales $ 45,135 $ 13,500 $ 6,644 $ (2,402)(a) $ 62,877
Cost of goods sold 37,369 12,549 6,275 (2,418)(a)(b) 53,775
-------- -------- -------- -------- --------
Gross profit 7,766 951 369 16 9,102
Selling, general, administrative and
other operating expenses 6,647 1,038 1,670 (394) 8,961
-------- -------- -------- -------- --------
Operating income (loss) 1,119 (87) (1,301) 410 141
Interest, net 1,806 140 317 (2)(b) 2,261
-------- -------- -------- -------- --------
Loss before income taxes (benefit)
and minority interest (687) (227) (1,618) 412 (2,120)
Income taxes (benefit) (1,939) 87 455 -- (1,397)
-------- -------- -------- -------- --------
Income (loss) before
minority interest 1,252 (314) (2,073) 412 (723)
Minority interest in loss of consolidated
subsidiary -- -- -- 49 49
-------- -------- -------- -------- --------
Net income (loss) $ 1,252 $ (314) $ (2,073) $ 461 $ (674)
======== ======== ======== ======== ========
Consolidating Condensed Statements of Operations
Three Months Ended September 30, 2001
-------------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
-------- --------- ------------ ------------ --------------
Net sales $ 48,288 $ 8,924 $ 5,363 $ (1,711)(a) $ 60,864
Cost of goods sold 38,252 9,730 5,488 (1,773)(a)(b) 51,697
-------- -------- -------- -------- --------
Gross profit (loss) 10,036 (806) (125) 62 9,167
Selling, general, administrative and
other operating expenses 7,495 1,153 713 -- 9,361
Intercompany FSC commissions 855 17 (872) -- --
-------- -------- -------- -------- --------
Operating income (loss) 1,686 (1,976) 34 62 (194)
Interest, net 1,982 135 364 42(b) 2,523
-------- -------- -------- -------- --------
Loss before income taxes (benefit) (296) (2,111) (330) 20 (2,717)
Income taxes (benefit) 389 (732) (53) -- (396)
-------- -------- -------- -------- --------
Net loss $ (685) $ (1,379) $ (277) $ 20 $ (2,321)
======== ======== ======== ======== ========
(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
Nine Months Ended September 30, 2002
----------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
--------- --------- ------------ ------------ --------------
Net sales $ 147,191 $ 40,298 $ 20,075 $ (6,914)(a) $ 200,650
Cost of goods sold 114,954 37,742 17,784 (6,912)(a)(b) 163,568
--------- --------- --------- --------- ---------
Gross profit 32,237 2,556 2,291 (2) 37,082
Selling, general, administrative and
other operating expenses 21,253 3,372 2,718 (394) 26,949
--------- --------- --------- --------- ---------
Operating income (loss) 10,984 (816) (427) 392 10,133
Interest, net 5,515 474 973 103 7,065
--------- --------- --------- --------- ---------
Income (loss) before income
taxes (benefit) and minority interest 5,469 (1,290) (1,400) 289 3,068
Income taxes (benefit) (155) 248 103 -- 196
--------- --------- --------- --------- ---------
Income (loss) before
minority interest 5,624 (1,538) (1,503) 289 2,872
Minority interest in loss of consolidated subsidiary -- -- -- 169 169
--------- --------- --------- --------- ---------
Net income (loss) $ 5,624 $ (1,538) $ (1,503) $ 458 $ 3,041
========= ========= ========= ========= =========
Consolidating Condensed Statements of Operations
Nine Months Ended September 30, 2001
----------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
--------- --------- ------------ ------------ --------------
Net sales $ 150,658 $ 28,503 $ 14,393 $ (3,789)(a) $ 189,765
Cost of goods sold 116,332 28,659 14,604 (3,925)(a)(b) 155,670
--------- --------- --------- --------- ---------
Gross profit (loss) 34,326 (156) (211) 136 34,095
Selling, general, administrative and
other operating expenses 22,978 3,383 2,264 (12)(b) 28,613
Intercompany FSC commissions 2,565 52 (2,617) -- --
--------- --------- --------- --------- ---------
Operating income (loss) 8,783 (3,591) 142 148 5,482
Interest, net 6,097 441 1,093 109(b) 7,740
--------- --------- --------- --------- ---------
Income (loss) before income taxes (benefit) 2,686 (4,032) (951) 39 (2,258)
Income taxes (benefit) 499 (745) 99 -- (147)
--------- --------- --------- --------- ---------
Net income (loss) $ 2,187 $ (3,287) $ (1,050) $ 39 $ (2,111)
========= ========= ========= ========= =========
(a) Elimination of intercompany sales and cost of goods sold.
(b) Elimination of intercompany lease activity between PEPC and PEPL.
- 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
Nine Months Ended September 30, 2002
----------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------- --------------
Cash flows from operating activities:
Net income (loss) $ 5,624 $ (1,538) $ (1,503) $ 458 $ 3,041
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,116 2,537 879 -- 15,532
Other adjustments (1,655) (299) (400) -- (2,354)
Loss applicable to minority interest -- -- -- (169) (169)
Changes in operating assets and
liabilities 552 136 (705) (85) (102)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 16,637 836 (1,729) 204 15,948
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (5,577) (1,534) (1,194) -- (8,305)
Proceeds from disposal of property,
plant and equipment -- -- 1 -- 1
Investment in subsidiaries (448) -- -- 448 --
-------- -------- -------- -------- --------
Net cash used in
investing activities (6,025) (1,534) (1,193) 448 (8,304)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net change in debt (9,155) -- 1,103 -- (8,052)
Net change in equity (1,276) 754 1,361 (408) 431
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (10,431) 754 2,464 (408) (7,621)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents 181 56 (458) 244 23
Effect of exchange rate changes on cash 14 -- (107) 896 803
Cash and cash equivalents at
beginning of period 483 5 772 (1,140) 120
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period $ 678 $ 61 $ 207 $ -- $ 946
======== ======== ======== ======== ========
- 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
Nine Months Ended September 30, 2001
--------------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
-------- --------- ------------ ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 2,187 $ (3,287) $ (1,050) $ 39 $ (2,111)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 12,055 2,744 1,032 -- 15,831
Other adjustments (2,499) (482) (558) -- (3,539)
Changes in operating assets and
liabilities (5,445) 2,240 717 (1,157) (3,645)
-------- -------- -------- -------- --------
Net cash provided by
operating activities 6,298 1,215 141 (1,118) 6,536
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (10,075) (1,219) (774) 391 (11,677)
Proceeds from disposal of property,
plant and equipment 436 -- 8 (391) 53
-------- -------- -------- -------- --------
Net cash used in
investing activities (9,639) (1,219) (766) -- (11,624)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net change in debt (9,340) -- 921 -- (8,419)
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (9,340) -- 921 -- (8,419)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (12,681) (4) 296 (1,118) (13,507)
Effect of exchange rate changes on cash (1) -- (33) 827 793
Cash and cash equivalents at
beginning of period 13,383 14 85 165 13,647
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period $ 701 $ 10 $ 348 $ (126) $ 933
======== ======== ======== ======== ========
- 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.
Company sales and net income for the first nine months of 2002 increased $10.9
million and $5.2 million, respectively, from the same period a year ago. While
stronger customer demand for products produced in the Precision Engine segment
continued through the third quarter, sales in the Diesel Group segment took a
sharp downturn during September. Demand from the major original equipment
manufacturers for fuel pumps and injectors in September was off approximately
33% from the 2002 monthly average of the first eight months. Lower level of
demand is believed to be related to a weak underlying economy and the resulting
impact on demand for our customers' end products. Sales to the US and
international service after-markets remain strong with the exception of service
sales of the DS fuel pump to General Motors Corporation ("GM"). The Company
remains cautious in its outlook for the remainder of the year and began late in
the third quarter to reduce the size of the Diesel Group workforce in the US.
These reductions will be completed in the fourth quarter, with any associated
severance costs recorded in that period.
The Precision Engine segment continued to recover from the losses reported in
2001, recording third quarter sales 58.5% 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 nine
months totaled 54.6% more than the same period last year. A continued
devaluation of the Brazilian Real versus the US Dollar during 2002 has resulted
in $0.9 million of unrealized losses on foreign currency transactions on
Precision Engine operations in that country, accounting for approximately half
of the $1.8 million net losses in the first nine months of 2002 in this segment.
The Company has taken steps to reduce its amount of dollar-denominated
transactions in Brazil, thereby limiting the exposure to future foreign exchange
gains and losses.
The Company provides a defined benefit pension plan to substantially all of the
domestic hourly and salaried employees. The pension plan assets are invested
primarily in a diversified portfolio of equity and fixed income securities. Due
to the general economic conditions in the US, a combination of low interest
rates and weak equity markets have resulted in lower returns on the pension plan
assets which could result in significant increases to the Company's pension
expense and cash contributions next year. The extent of these increases will not
be known until the first quarter of 2003.
- 20 -
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 (loss) and net (loss) income of the Company are presented in
thousands of dollars and as a percentage of net sales.
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
$ % $ % $ % $ %
------ ----- ------ ----- ------- ----- ------- -----
Net sales ................. 62,877 100.0 60,864 100.0 200,650 100.0 189,765 100.0
Cost of goods sold ........ 53,775 85.5 51,697 84.9 163,568 81.5 155,670 82.0
Gross profit .............. 9,102 14.5 9,167 15.1 37,082 18.5 34,095 18.0
SG&A ...................... 7,819 12.4 7,752 12.7 23,521 11.7 23,775 12.5
Amortization of intangibles 867 1.4 1,334 2.2 2,603 1.3 4,013 2.1
Management fees ........... 275 0.4 275 0.5 825 0.4 825 0.4
Operating income (loss) ... 141 0.2 (194) (0.3) 10,133 5.1 5,482 2.9
Net (loss) income ......... (674) (1.1) (2,321) (3.8) 3,041 1.5 (2,111) (1.1)
COMPARISON OF RESULTS OF OPERATIONS:
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Net Sales. Net sales for the third quarter of 2002 totaled $62.9 million and
were 3.3% higher than the $60.9 million reported in the same period last year.
All of the increase occurred in the Precision Engine segment, where higher OEM
sales of $2.0 million to DCX in the US and $2.1 million to Tritec Motors, Ltd.
in Brazil reflected the overall increase in demand for vehicles produced by
these companies in 2002 versus last year. Continued strong demand for hydraulic
tappets produced by Precision Engine for the service aftermarket, combined with
July 1, 2002 price increases, resulted in $1.2 million of additional sales in
the third quarter of 2002 versus the same period last year. Diesel Group
reported a same period decline in sales of $3.3 million due primarily to a $5.2
million reduction in service sales of the DS fuel pump to GM. This lower level
of demand for the DS fuel pump is expected to continue as the in-service vehicle
population diminishes with time. Partially offsetting these lower sales was an
increase of $2.3 million in first year Precision Components and Assembly ("PCA")
sales to Cummins Inc. ("Cummins").
Gross Profit. Gross profit for the Company in the third quarter of 2002
decreased to $9.1 million and 14.5% of net sales, from $9.2 million and 15.1% of
net sales for the same period in 2001. Gross Profit results by operating segment
were heavily influenced by the changes in sales discussed above. Driven by
higher sales volumes and price increases on aftermarket tappets, gross profits
in Precision Engine doubled to $1.0 million and 6.9% on net sales in the third
quarter of 2002 as compared to the loss of $1.1 million and (11.9%) reported in
the same period last year. Lower sales in the Diesel Group resulted in gross
profit of only 16.7% in the third quarter of 2002, as compared to 19.8% in the
same period a year ago. Much of this deterioration
- 21 -
STANADYNE CORPORATION AND SUBSIDIARIES
occurred late in the third quarter of 2002 and will be addressed during the
fourth quarter through reductions in overhead staff and other costs.
SG&A. SG&A totaled $7.8 million for each of the third quarters of 2002 and 2001.
SG&A decreased as a percentage of net sales to 12.4% from 12.7%. Diesel Group
SG&A costs decreased by $0.6 million from the third quarter of 2001 which
included the same amount for one-time Enterprise Resource Planning (ERP)
implementation expenses. SG&A results as a percentage of net sales in Precision
Engine were higher in the third quarter of 2002 due primarily to $0.8 million of
foreign exchange losses on operations in Brazil as compared to $0.4 million in
the same period of 2001.
Amortization of Intangibles. Amortization of intangible assets decreased to $0.9
million in the third quarter of 2002 from $1.3 million in the third 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 third quarter of 2001 of $0.5 million.
Operating Income. Operating income for the third quarter of 2002 totaled $0.1
million versus a loss of $0.2 million for the same period a year ago. As a
percentage of net sales, operating income increased to 0.2% in the third quarter
of 2002 from (0.3%) in the third quarter of 2001. Lower gross profits in the
Diesel Group were only partially offset by reduced SG&A costs, resulting in
operating income of only $1.1 million or 2.2% of net sales in the third quarter
of 2002. Despite higher sales and gross profits in the third quarter of 2002,
Precision Engine reported an operating loss of $1.0 million in the third quarter
of 2002, due primarily to higher foreign exchange losses on operations in
Brazil.
Net Loss. Net loss in the third quarter of 2002 totaled $0.7 million versus a
net loss of $2.3 million for the same period in 2001. This improvement reflects
a combined result of $0.3 million of higher operating income in 2002, $0.3
million in lower interest expense, due to less debt and lower interest rates,
and $1.0 million increase in income tax benefit.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Net Sales. Net sales for the first nine months of 2002 totaled $200.7 million
and were 5.7% higher than the $189.8 million reported for the same period last
year. All of the increase was produced by the Precision Engine segment where
sales grew $15.1 million or 54.6%, while Diesel Group sales were lower by $4.2
million or 2.6%. The increase in Precision Engine included higher OEM sales of
$3.6 million to DCX in the US and $5.6 million to Tritec Motors, Ltd. in Brazil.
Demand in the service aftermarket for hydraulic tappets has increased
substantially from last year, resulting in $5.6 million of additional sales in
the first nine months of 2002. A $4.2 million decline in Diesel Group sales in
the first nine months of 2002 was due primarily to a $15.4 million reduction in
service sales of the DS fuel pump to GM. Partially offsetting these lower sales
were increases in demand for fuel pump, injector and filtration products as well
as $3.5 million of first year PCA sales to Cummins.
- 22 -
STANADYNE CORPORATION AND SUBSIDIARIES
Gross Profit. Gross profit for the Company in the first nine months of 2002
increased to $37.1 million from $34.1 million for the same period in 2001. Gross
profit as a percentage of net sales improved to 18.5% in the first nine months
of 2002 as compared to 18.0% last year. Higher sales volumes and increased
aftermarket prices in Precision Engine drove gross profit as a percentage of net
sales to 8.0%, as compared to (3.4%) in the first nine months of 2001. Despite
the 2.6% decline in Diesel Group sales during the first nine months of 2002,
gross profit as a percentage of net sales decreased only slightly to 21.3%
versus 21.6% last year. All of this deterioration occurred in the third quarter
of 2002.
SG&A. SG&A totaled $23.5 million for the first nine months of 2002, down from
$23.8 million in 2001 and down as a percentage of net sales to 11.7% from 12.5%.
SG&A in Precision Engine improved to 9.4% of net sales from 13.7% in the prior
year due primarily to higher sales and a $0.1 million reduction in losses on
foreign currency transactions on operations in Brazil. SG&A costs for the Diesel
Group were unchanged as a percentage of net sales at 12.3% for the first nine
months of 2002 and 2001 but reflected an overall decrease of $0.5 million
traceable to $0.6 million of last year's ERP implementation expenses.
Amortization of Intangibles. Amortization of intangible assets decreased to $2.6
million in the first nine months of 2002 from $4.0 million in the first nine
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 nine months of
2001 of $1.4 million.
Operating Income. Operating income for the first nine months of 2002 totaled
$10.1 million or 5.1% of net sales versus $5.5 million or 2.9% of net sales in
the first nine months of 2001. A combination of higher gross profits in
Precision Engine and lower SG&A and amortization expense in both segments
contributed to the $4.6 million improvement. Operating income as a percentage of
net sales increased in the first nine months of 2002 in the Diesel Group to 7.1%
from 6.8% for the same period last year and increased in Precision Engine for
the first nine months of 2002 to (2.6%) from (19.9%) for the same period last
year.
Net Income (Loss). Net income in the first nine months of 2002 totaled $3.0
million versus ($2.1) million for the same period in 2001. This improvement
resulted from $4.7 million increased operating income in 2002 and $0.7 million
in lower interest expense, due to less debt and lower interest rates, partially
offset by a $0.3 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 $23.9 million was
available for borrowings as of September 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
- 23 -
STANADYNE CORPORATION AND SUBSIDIARIES
September 30, 2002, there were borrowings of $26.2 million under the Term Loans,
$0.5 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 September 30, 2002 measurement date.
Cash Flows From Operating Activities. Cash flows from operations for the nine
months ended September 30, 2002 totaled $15.9 million as compared to $6.5
million for the same period of 2001. Much of this $9.4 million year-over-year
improvement is accounted for by the $5.2 million higher net income results
described above. Changes in net operating asset and liability accounts during
the nine months ended September 30, 2002 decreased cash flows from operations by
only $0.1 million compared to a decrease of $3.6 million for the first nine
months of 2001. Increases to accounts receivable and inventories in both
segments totaled $5.1 million in the first nine months of 2002 and were offset
by a $5.7 million increase to accrued liability accounts. Much of these
increases reflect the overall higher levels of business in each segment as
compared to the same period last year. Average 2002 inventory turnover of 7.2
turns however has not returned to the 7.9 turn level achieved last year. The new
ERP systems installed during the first quarter still pose challenges to the
Company's planning and scheduling of production. Aggressive management efforts
continue to improve this situation.
Cash Flows From Investing Activities. The Company's capital expenditures for the
first nine months of 2002 totaled $8.3 million compared to $11.7 million for the
same period of 2001. Capital expenditures in 2002 included $5.0 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 nine months of 2001 included $3.5 million for the Company's ERP
implementation project.
Cash Flows From Financing Activities. Cash flows from financing activities for
the nine months ended September 30, 2002 resulted in a net decrease in cash of
$7.6 million. Principal payments of long-term debt totaled $4.2 million.
Payments under the Revolving Credit Facility totaled $5.0 million and additional
overdraft borrowings at SpA amounted to $1.2 million. As of September 30, 2002
there was $0.5 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 $0.4
million for the first nine 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 completed an
- 24 -
STANADYNE CORPORATION AND SUBSIDIARIES
evaluation of the carrying value of goodwill during the second quarter of 2002
and determined that no impairment exists.
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. The
adoption of SFAS 145 is not expected to have a material impact on the Company's
consolidated financial statements.
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. The
adoption of SFAS 146 is not expected to have a material impact on the Company's
consolidated financial statements.
(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 involving
estimates 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
- 25 -
STANADYNE CORPORATION AND SUBSIDIARIES
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 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 nine 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 September 30, 2002 was
approximately $60.7 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 differences were net
losses of $0.9 million and $1.0 million for the nine months ended September 30,
2002 and 2001, respectively. A majority of the exchange losses are related to
the Company's operations in Brazil. The Company does not hedge against foreign
currency risk.
- 27 -
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
was conducted under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures were adequate and designed to
ensure that information required to be disclosed by the Company in this report
is recorded, processed, summarized and reported in a timely manner, including
that such information is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(B) CHANGES IN INTERNAL CONTROLS
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses in internal
controls, subsequent to the evaluation described above.
Reference is made to the Certifications of the Chief Executive Officer and Chief
Financial Officer about these and other matters following the signature page of
this report.
- 28 -
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 September
30, 2002.
- 29 -
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: November 14, 2002 /s/ Stephen S. Langin
---------------------
Stephen S. Langin
Vice President and
Chief Financial Officer
- 30 -
CERTIFICATIONS
I, William D. Gurley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stanadyne Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
- 31 -
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ William D. Gurley
- ---------------------
William D. Gurley
President and Chief Executive Officer
- 32 -
CERTIFICATIONS
I, Stephen S. Langin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stanadyne
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
- 33 -
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Stephen S. Langin
- ---------------------
Stephen S. Langin
Vice President and Chief Financial Officer
- 34 -
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