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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2002
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 33-29035
K & F Industries, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
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 [ ]
As of August 1, 2002, there were 740,398 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2002 2001
------------- -------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 5,351,000 $ 5,136,000
Accounts receivable, net 38,941,000 43,595,000
Inventory 62,482,000 60,510,000
Other current assets 773,000 666,000
------------- -------------
Total current assets 107,547,000 109,907,000
------------- -------------
Property, plant and equipment 169,379,000 170,172,000
Less, accumulated depreciation and amortization 102,220,000 100,131,000
------------- -------------
67,159,000 70,041,000
------------- -------------
Deferred charges, net of amortization 46,007,000 41,126,000
Goodwill 167,011,000 167,011,000
Intangible assets, net of amortization 15,312,000 15,923,000
------------- -------------
$ 403,036,000 $ 404,008,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 12,991,000 $ 14,181,000
Current portion of senior term loans 10,625,000 1,500,000
Interest payable 3,691,000 3,712,000
Other current liabilities 48,386,000 51,291,000
------------- -------------
Total current liabilities 75,693,000 70,684,000
------------- -------------
Pension liabilities 5,685,000 5,685,000
Deferred income taxes 15,945,000 8,213,000
Postretirement benefit obligation other
than pensions 79,656,000 79,656,000
Other long-term liabilities 13,299,000 13,898,000
Senior revolving loan 19,000,000 --
Senior term loan A -- 47,375,000
Senior term loan B 51,250,000 51,750,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
Stockholders' Deficiency:
Common stock, $.01 par value - authorized,
1,000,000 shares; issued and
outstanding, 740,398 shares 7,000 7,000
Additional paid-in capital (63,259,000) (63,259,000)
Retained earnings 36,931,000 21,273,000
Accumulated other comprehensive loss (16,171,000) (16,274,000)
------------- -------------
Total stockholders' deficiency (42,492,000) (58,253,000)
------------- -------------
$ 403,036,000 $ 404,008,000
============= =============
See notes to consolidated financial statements.
2
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
----------------------------------
June 30, June 30,
2002 2001
------------- -------------
Sales $ 158,769,000 $ 182,806,000
Costs and expenses 117,000,000 126,416,000
Amortization 1,926,000 4,256,000
------------- -------------
Operating income 39,843,000 52,134,000
Interest and investment income 35,000 124,000
Interest expense (12,880,000) (16,798,000)
------------- -------------
Income before income taxes 26,998,000 35,460,000
Income tax provision (11,340,000) (14,115,000)
------------- -------------
Net income $ 15,658,000 $ 21,345,000
============= =============
See notes to consolidated financial statements.
3
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------------
June 30, June 30,
2002 2001
------------ ------------
Sales $ 80,662,000 $ 94,944,000
Costs and expenses 59,100,000 63,132,000
Amortization 1,003,000 2,135,000
------------ ------------
Operating income 20,559,000 29,677,000
Interest and investment income 15,000 49,000
Interest expense (7,433,000) (7,256,000)
------------ ------------
Income before income taxes 13,141,000 22,470,000
Income tax provision (5,520,000) (8,193,000)
------------ ------------
Net income $ 7,621,000 $ 14,277,000
============ ============
See notes to consolidated financial statements.
4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
--------------------------------
June 30, June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 15,658,000 $ 21,345,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,926,000 8,206,000
Non-cash interest expense - amortization
of deferred financing charges 804,000 840,000
Non-cash interest (income) expense - change
in fair market value of interest rate swap (204,000) 1,694,000
Deferred income taxes 7,732,000 11,964,000
Changes in assets and liabilities:
Accounts receivable, net 4,658,000 (2,794,000)
Inventory (1,965,000) (2,578,000)
Other current assets (107,000) (1,124,000)
Accounts payable, notes payable, interest
payable, and other current liabilities (4,025,000) (11,825,000)
Postretirement benefit obligation other
than pensions -- (250,000)
Other long-term liabilities (394,000) (1,738,000)
------------ ------------
Net cash provided by operating
activities 28,083,000 23,740,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,118,000) (1,960,000)
Deferred charges (7,000,000) (2,546,000)
------------ ------------
Net cash used in investing activities (8,118,000) (4,506,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan (15,000,000) (29,000,000)
Payments of senior term loans (38,750,000) (20,750,000)
Borrowings under senior revolving loan 34,000,000 28,000,000
------------ ------------
Net cash used by financing activities (19,750,000) (21,750,000)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 215,000 (2,516,000)
Cash and cash equivalents, beginning of
period 5,136,000 6,477,000
------------ ------------
Cash and cash equivalents, end of period $ 5,351,000 $ 3,961,000
============ ============
Supplemental cash flow information:
Interest paid during period $ 12,301,000 $ 14,565,000
============ ============
Income taxes paid during the period $ 3,438,000 $ 1,919,000
============ ============
See notes to consolidated financial statements.
5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of
financial position, results of operations and cash flows. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules. The
Company believes that the disclosures made are adequate to make the
information presented not misleading. The consolidated statements of
operations for the three and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
It is suggested that these financial statements be read in conjunction
with the audited financial statements and notes thereto included in the
Company's December 31, 2001 Annual Report on Form 10-K.
2. Accounting Changes
Effective January 1 ,2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill no longer be amortized,
but instead be tested for impairment at least annually. SFAS No. 142
also requires that any recognized intangible asset determined to have an
indefinite useful life not be amortized, but instead be tested for
impairment in accordance with this Standard until its life is determined
to no longer be indefinite. The Company adopted SFAS No. 142 on January
1, 2002, at which time amortization of goodwill ceased. During the three
months ended March 31, 2002, the Company completed its impairment
analysis in accordance with SFAS No. 142. The analysis did not result
in an impairment charge.
The following table adjusts net income assuming the adoption of SFAS No.
142 at the beginning of the periods presented:
Three Months Ended
-----------------------------
June 30, June 30,
2002 2001
----------- -----------
Reported net income $ 7,621,000 $14,277,000
Add back goodwill amortization,
net of tax -- 970,000
----------- -----------
Adjusted net income $ 7,621,000 $15,247,000
=========== ===========
6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended
-----------------------------
June 30, June 30,
2002 2001
----------- -----------
Reported net income $15,658,000 $21,345,000
Add back goodwill amortization,
net of tax -- 1,838,000
----------- -----------
Adjusted net income $15,658,000 $23,183,000
=========== ===========
There was no change in the carrying amount of goodwill during the three
and six months ended June 30, 2002. Goodwill at June 30, 2002 allocated
to the Company's segments, Aircraft Braking Systems and Engineered
Fabrics, was $135,683,000 and $31,328,000, respectively.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
establishes a single accounting model based on the framework established
in SFAS No. 121 for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. There was no impact to the
Company's financial position, results of operations or cash flows related
to the adoption of this Standard.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended and interpreted, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All derivatives,
whether designated in hedging relationships or not, are required to be
recorded on the balance sheet at fair value. SFAS No. 133 defines new
requirements for designation and documentation of hedging relationships
as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in
fair value will be recognized in earnings.
As a requirement of its credit facility, the Company entered into an
interest rate swap agreement in 1997 to reduce the impact of potential
increases in interest rates on the credit facility. This interest rate
swap agreement is the only financial instrument of the Company that is
required to be accounted for at fair value in accordance with SFAS No.
133.
The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction in other comprehensive income of $923,000 ($550,000
after tax) during the six months ended June 30, 2001, related to the
derivative designated in a cash flow-type hedge prior to adopting SFAS
No. 133. This amount is being amortized into interest expense over three
years which was the remaining life of the interest rate swap
7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
agreement at January 1, 2001. During the three months ended June 30, 2002
and 2001, the change in fair market value of this derivative instrument
resulted in a non-cash charge of $934,000 and non-cash income of
$221,000, respectively. During the six months ended June 30, 2002 and
2001, the change in fair market value of this derivative instrument
resulted in non-cash income of $204,000 and a non-cash charge of
$1,694,000, respectively. These amounts were recorded in interest expense
as this derivative was not designated as a hedging instrument. The
Company does not utilize derivatives for speculative purposes.
3. Receivables are summarized as follows:
June 30, December 31,
2002 2001
------------ ------------
Accounts receivable, principally
from commercial customers $ 35,112,000 $ 37,266,000
Accounts receivable, on U. S
Government and other long-term
contracts 4,645,000 6,976,000
Allowances (816,000) (647,000)
------------ ------------
$ 38,941,000 $ 43,595,000
============ ============
4. Inventory consists of the following:
June 30, December 31,
2002 2001
----------- -----------
Raw materials and work-in-process $32,286,000 $29,458,000
Finished goods 18,764,000 18,712,000
Inventoried costs related to U.S.
Government and other long-term
contracts 11,432,000 12,340,000
----------- -----------
$62,482,000 $60,510,000
=========== ===========
The Company customarily sells original wheel and brake equipment below
cost as an investment in a new airframe which is expected to be recovered
through the subsequent sale of replacement parts. These commercial
investments (losses) are recognized when original equipment is shipped.
Losses on U.S. Government contracts are immediately recognized in full
when determinable.
Inventory is stated at average cost, not in excess of net realizable
value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a
portion of which will not be realized within one year.
8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Other current liabilities consist of the following:
June 30, December 31,
2002 2001
----------- -----------
Accrued payroll costs $14,037,000 $18,086,000
Accrued property taxes and other taxes 4,137,000 3,264,000
Accrued costs on long-term contracts 3,757,000 3,420,000
Accrued warranty costs 13,291,000 12,619,000
Customer credits 2,454,000 2,766,000
Postretirement benefit obligation other
than pensions 3,000,000 3,000,000
Fair market value of interest rate swap 3,060,000 3,151,000
Other 4,650,000 4,985,000
----------- -----------
$48,386,000 $51,291,000
=========== ===========
6. Contingencies
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits and
proceedings cannot be predicted with certainty, in the opinion of the
Company's management, the ultimate liability, if any, will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
7. Comprehensive Income
Three Months Ended
-----------------------------
June 30, June 30,
2002 2001
----------- -----------
Net income $ 7,621,000 $14,277,000
Other comprehensive income:
Cumulative translation adjustments 20,000 2,000
Amortization of transition adjustment
included in interest expense 46,000 46,000
----------- -----------
Comprehensive income $ 7,687,000 $14,325,000
=========== ===========
9
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended
-------------------------------
June 30, June 30,
2002 2001
------------ ------------
Net income $ 15,658,000 $ 21,345,000
Other comprehensive income:
Cumulative translation adjustments 11,000 (155,000)
Cumulative effect of change in
accounting principle (SFAS No. 133) -- (550,000)
Amortization of transition adjustment
included in interest expense 92,000 92,000
------------ ------------
Comprehensive income $ 15,761,000 $ 20,732,000
============ ============
8. Segments
The following represents financial information about the Company's
segments:
Three Months Ended
--------------------------------
June 30, June 30,
2002 2001
------------ ------------
Sales:
Aircraft Braking Systems $ 69,275,000 $ 80,856,000
Engineered Fabrics 11,387,000 14,088,000
------------ ------------
$ 80,662,000 $ 94,944,000
============ ============
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $ 22,113,000 $ 31,936,000
Engineered Fabrics 1,456,000 1,855,000
------------ ------------
$ 23,569,000 $ 33,791,000
============ ============
Operating Profits:
Aircraft Braking Systems $ 19,338,000 $ 28,319,000
Engineered Fabrics 1,221,000 1,358,000
------------ ------------
Operating income 20,559,000 29,677,000
Interest expense, net (7,418,000) (7,207,000)
------------ ------------
Income before income taxes $ 13,141,000 $ 22,470,000
============ ============
10
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended
----------------------------------
June 30, June 30,
2002 2001
------------- -------------
Sales:
Aircraft Braking Systems $ 137,128,000 $ 157,255,000
Engineered Fabrics 21,641,000 25,551,000
------------- -------------
$ 158,769,000 $ 182,806,000
============= =============
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $ 43,459,000 $ 56,954,000
Engineered Fabrics 2,310,000 3,386,000
------------- -------------
$ 45,769,000 $ 60,340,000
============= =============
Operating Profits:
Aircraft Braking Systems $ 38,023,000 $ 49,752,000
Engineered Fabrics 1,820,000 2,382,000
------------- -------------
Operating income 39,843,000 52,134,000
Interest expense, net (12,845,000) (16,674,000)
------------- -------------
Income before income taxes $ 26,998,000 $ 35,460,000
============= =============
June 30, December 31,
2002 2001
------------ ------------
Total Assets:
Aircraft Braking Systems $339,870,000 $338,636,000
Engineered Fabrics 58,976,000 60,451,000
Deferred financing costs not
allocated to segments 3,659,000 4,463,000
Corporate assets 531,000 458,000
------------ ------------
$403,036,000 $404,008,000
============ ============
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
General
The Company is a supplier to manufacturers and operators of commercial, general
aviation and military aircraft. Results for the three and six months ended June
30, 2002 continue to be adversely affected by the sluggish economy and the
events of September 11, 2001.
Critical Accounting Policies
A summary of the Company's critical accounting policies is presented in Note 2
to the audited consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Comparison of Results of Operations for the Six Months Ended June 30, 2002 and
June 30, 2001
Sales for the six months ended June 30, 2002 totaled $158,769,000, reflecting a
decrease of $24,037,000 compared with $182,806,000 for the same period in the
prior year. This decrease was principally due to lower commercial transport
sales of wheels and brakes of $17,897,000, primarily on the Fokker FO-100, DC-9
and DC-10 programs. General aviation sales decreased $3,207,000 due to lower
sales of wheels, brakes and fuel tanks on various aircraft. Military sales
decreased $2,933,000 due to lower sales of fuel tanks primarily on the F/A-18
program.
Operating income decreased $12,291,000 to $39,843,000, or 25.1% of sales for the
six months ended June 30,2002, compared with $52,134,000, or 28.5% of sales for
the same period in the prior year. Operating margins decreased primarily due to
the unfavorable overhead absorption effect relating to the lower sales.
Partially offsetting this decrease was the elimination of $3,054,000 of goodwill
amortization during the six months ended June 30, 2002 due to the adoption of
SFAS No. 142 (see Note 2 to the consolidated financial statements), and lower
program investments.
Net interest expense decreased $3,829,000 for the six months ended June 30, 2002
compared with the same period in the prior year. This decrease was due to a
$1,898,000 decrease in non-cash interest expense (non-cash interest income of
$204,000 during the six months ended June 30, 2002 compared with a non-cash
charge of $1,694,000 for the same period in the prior year) relating to the
change in the fair market value of the Company's interest rate swap in
accordance with SFAS No. 133. Net interest expense also decreased due to a lower
average debt balance.
The Company's effective tax rate of 42.0% for the six months ended June 30, 2002
differs from the statutory rate of 35% primarily due to state, local and foreign
income taxes. The effective tax rate of 39.8% for the six months ended June 30,
2001 differs from the statutory rate of 35% primarily due to state, local and
foreign taxes. The increase in the effective rate in 2002 over 2001 is primarily
due to lower tax benefits derived from foreign sales.
Comparison of Results of Operations for the Three Months Ended June 30, 2002 and
June 30, 2001
Sales for the three months ended June 30, 2002 totaled $80,662,000, reflecting a
decrease of $14,282,000 compared with $94,944,000 for the same period in the
prior year. This decrease was principally due to lower commercial transport
sales of wheels and brakes of $8,044,000, primarily on the Fokker FO-100, DC-9
and DC-10 programs. General aviation sales decreased $3,171,000 due to lower
sales of wheels, brakes and fuel tanks on various aircraft. Military sales
decreased by $3,067,000 due to lower sales of
12
wheels and brakes primarily on the F-117 program and fuel tanks on the the
F/A-18 program.
Operating income decreased $9,118,000 to $20,559,000, or 25.5% of sales for the
three months ended June 30, 2002, compared with $29,677,000, or 31.3% of sales
for the same period in the prior year. Operating margins decreased primarily due
to the unfavorable overhead absorption effect relating to the lower sales.
Partially offsetting this decrease was the elimination of $1,527,000 of goodwill
amortization during the three months ended June 30, 2002 due to the adoption of
SFAS No. 142 (see Note 2 to the consolidated financial statements).
Net interest expense increased $211,000 for the three months ended June 30, 2002
compared with the same period in the prior year. This increase was due to higher
non-cash interest expense of $1,155,000, (non-cash interest expense of $934,000
during the three months ended June 30, 2002 compared with non-cash interest
income of $221,000 for the same period in the prior year) relating to the change
in the fair market value of the Company's interest rate swap in accordance with
SFAS No. 133. Partially offsetting this increase was lower interest expense due
to a lower average debt balance.
The Company's effective tax rate of 42.0% for the three months ended June 30,
2002 differs from the statutory rate of 35% primarily due to state, local and
foreign income taxes. The effective tax rate of 36.5% for the three months ended
June 30, 2001 differs from the statutory rate of 35% primarily due to state,
local and foreign taxes. The increase in the effective rate in 2002 over 2001 is
primarily due to lower tax benefits derived from foreign sales.
Liquidity and Capital Resources
The Company expects that its principal use of funds for the next several years
will be to fund capital expenditures, to make investments in new airframes and
to pay interest and principal on indebtedness. The Company's primary source of
funds for conducting its business activities and servicing its indebtedness has
been cash generated from operations and borrowings under its revolving credit
facility. At June 30, 2002, the Company had $29.2 million available to borrow
under its $50 million revolving credit facility.
Cash Flows
During the six months ended June 30, 2002, cash provided by operating activities
amounted to $28,083,000 and reflected $45,769,000 of earnings before interest,
taxes, depreciation and amortization ("EBITDA"), and decreases in accounts
receivable of $4,658,000, partially offset by increases in inventory of
$1,965,000, other current assets of $107,000, other working capital of $135,000,
decreases in accounts payable of $1,190,000, other current liabilities of
$2,814,000, other long-term liabilities of $394,000, interest payments of
$12,301,000 and tax payments of $3,438,000. During the six months ended June 30,
2001, cash provided by operating activities amounted to $23,740,000 and
reflected $60,340,000 of EBITDA, partially offset by increases in accounts
receivable of $2,794,000, inventory of $2,578,000, other current assets of
$1,124,000, decreases in accounts payable of $1,622,000, notes payable of
$2,600,000, other current liabilities of $7,302,000, long term liabilities of
$1,988,000, increases in other working capital of $108,000, interest payments of
$14,565,000 and tax payments of $1,919,000.
During the six months ended June 30, 2002, net cash used in investing activities
amounted to $8,118,000 due to $1,118,000 of capital expenditures and $7,000,000
of program participation payments. During the six months ended June 30, 2001,
net cash used in investing activities amounted to $4,506,000 due to $1,960,000
of capital expenditures and $2,546,000 of program participation payments.
13
During the six months ended June 30, 2002 and 2001, net cash used by financing
activities amounted to $19,750,000 and $21,750,000, respectively, each
representing the repayment of indebtedness.
Accounting Changes
Effective January 1 ,2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that any recognized
intangible asset determined to have an indefinite useful life not be amortized,
but instead be tested for impairment in accordance with this Standard until its
life is determined to no longer be indefinite. The Company adopted SFAS No. 142
on January 1, 2002, at which time amortization of goodwill ceased. At June 30,
2002, goodwill net of accumulated amortization was $167.0 million and goodwill
amortization expense during the three and six months ended June 30, 2001 was
$1,527,000 and $3,054,000, respectively. Amortization of goodwill had been
$6,108,000 per year prior to the adoption of this Standard. During the three
months ended March 31, 2002, the Company completed its impairment analysis in
accordance with SFAS No. 142. The analysis did not result in an impairment
charge. See Note 2 to the consolidated financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. There was no impact to the Company's financial position, results
of operations or cash flows related to the adoption of this Standard.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value will be recognized in earnings.
As a requirement of its credit facility, the Company entered into an interest
rate swap agreement in 1997 to reduce the impact of potential increases in
interest rates on the credit facility. This interest rate swap agreement is the
only financial instrument of the Company that is required to be accounted for at
fair value in accordance with SFAS No. 133.
The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative pre-
tax reduction in other comprehensive income of $923,000 ($550,000 after tax)
during the six months ended June 30, 2001, related to the derivative designated
in a cash flow-type hedge prior to adopting SFAS No. 133. This amount is being
amortized into interest expense over three years which was the remaining life of
the interest rate swap agreement at January 1, 2001. During the three months
ended June 30, 2002 and 2001, the change in fair market value of this derivative
instrument resulted in a non-cash charge of $934,000 and non-cash income of
$221,000, respectively. During the six months ended June 30, 2002 and 2001, the
change in fair market value of this derivative instrument resulted in non-cash
income of $204,000 and a non-cash charge of $1,694,000, respectively. These
amounts were recorded in interest expense as this derivative was not designated
as a hedging instrument. The Company does not utilize derivatives for
speculative purposes.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had $265.9 million of total debt outstanding at June 30, 2002. Of
this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the balance
is borrowed under the credit facility. The interest rate for borrowings under
the credit facility varies with LIBOR or the prime rate at the Company's option.
The Company entered into an interest rate swap agreement to reduce the impact of
potential increases in interest rates. The interest rate swap agreement
effectively fixes the Company's borrowing rate at 7.5% on $90.5 million at June
30, 2002 and expires on December 17, 2003. Therefore, the Company has
effectively fixed the interest rate on all of its indebtedness at June 30, 2002.
Given that all of the Company's borrowings are at fixed interest rates, a 10%
change in rates would not have a significant impact on fair values, cash flows
or earnings. The Company has no other derivative financial instruments.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended June 30,
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
/s/ DIRKSON R. CHARLES
------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: August 14, 2002
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