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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 March 31, 2003
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 May 1, 2003, there were 740,398 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2003 2002
------------- -------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 34,482,000 $ 22,735,000
Accounts receivable, net 36,600,000 38,228,000
Inventory 55,891,000 52,006,000
Other current assets 1,256,000 1,353,000
Income taxes receivable -- 2,609,000
------------- -------------
Total current assets 128,229,000 116,931,000
------------- -------------
Property, plant and equipment 171,196,000 171,374,000
Less, accumulated depreciation and amortization 106,832,000 105,326,000
------------- -------------
64,364,000 66,048,000
------------- -------------
Deferred charges, net of amortization 52,926,000 54,195,000
Intangible assets, net of amortization 17,554,000 17,860,000
Goodwill 167,011,000 167,011,000
------------- -------------
$ 430,084,000 $ 422,045,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 15,970,000 $ 15,081,000
Interest payable 14,661,000 4,367,000
Other current liabilities 49,501,000 61,936,000
------------- -------------
Total current liabilities 80,132,000 81,384,000
------------- -------------
Minimum pension liability 19,819,000 19,819,000
Deferred income taxes 15,770,000 16,767,000
Postretirement benefit obligation other
than pensions 82,082,000 81,307,000
Other long-term liabilities 17,403,000 15,424,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
9 5/8% senior subordinated notes due 2010 250,000,000 250,000,000
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 (263,259,000) (263,259,000)
Retained earnings 70,822,000 63,406,000
Accumulated other comprehensive loss (27,692,000) (27,810,000)
------------- -------------
Total stockholders' deficiency (220,122,000) (227,656,000)
------------- -------------
$ 430,084,000 $ 422,045,000
============= =============
See notes to consolidated financial statements.
2
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------------------
March 31, March 31,
2003 2002
------------- -------------
Sales $ 82,075,000 $ 78,107,000
Costs and expenses 59,888,000 57,900,000
Amortization 1,040,000 923,000
------------- -------------
Operating income 21,147,000 19,284,000
Interest and investment income 85,000 20,000
Interest expense (11,083,000) (5,447,000)
------------- -------------
Income before income taxes 10,149,000 13,857,000
Income tax provision (2,733,000) (5,820,000)
------------- -------------
Net income $ 7,416,000 $ 8,037,000
============= =============
See notes to consolidated financial statements.
3
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
------------------------------
March 31, March 31,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 7,416,000 $ 8,037,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,010,000 2,916,000
Non-cash interest expense - amortization
of deferred financing charges 535,000 402,000
Non-cash interest income - change in fair
market value of interest rate swap (732,000) (1,138,000)
Deferred income taxes 2,732,000 5,628,000
Changes in assets and liabilities:
Accounts receivable, net 1,664,000 3,124,000
Inventory (3,849,000) (1,857,000)
Other current assets 97,000 (186,000)
Accounts payable, notes payable, interest
payable, and other current liabilities (1,594,000) (478,000)
Postretirement benefit obligation other
than pensions 775,000 --
Other long-term liabilities 1,979,000 1,934,000
------------- -------------
Net cash provided by operating
activities 12,033,000 18,382,000
------------- -------------
Cash flows from investing activities:
Capital expenditures (286,000) (694,000)
Deferred charges -- (2,500,000)
------------- -------------
Net cash used in investing activities (286,000) (3,194,000)
------------- -------------
Cash flows from financing activities:
Payments of senior revolving loan -- (6,000,000)
Payments of senior term loans -- (30,375,000)
Borrowings under senior revolving loan -- 23,000,000
------------- -------------
Net cash used in financing activities -- (13,375,000)
------------- -------------
Net increase in cash and cash equivalents 11,747,000 1,813,000
Cash and cash equivalents, beginning of
period 22,735,000 5,136,000
------------- -------------
Cash and cash equivalents, end of period $ 34,482,000 $ 6,949,000
============= =============
Supplemental cash flow information:
Interest paid during period $ 986,000 $ 1,914,000
============= =============
Income taxes paid during the period $ 1,000 $ 192,000
============= =============
See notes to consolidated financial statements.
4
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 statement of operations for the three months
ended March 31, 2003 is 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, 2002 Annual
Report on Form 10-K.
2. Accounting Changes and Pronouncements
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. The impairment
analysis did not result in an impairment charge upon adoption or any
subsequent periods thereafter.
There was no change in the carrying amount of goodwill during the three
months ended March 31, 2003. Goodwill at March 31, 2003 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, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143, which amends SFAS No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies,"
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. The
objective of SFAS No. 143 is to provide guidance for legal obligations
associated with the retirement of tangible long- lived assets. The
retirement obligations included within the scope of this project are those
that an entity cannot avoid as a result of either
5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
acquisition, construction or normal operation of a long-lived asset. The
adoption of this standard did not have a material impact on the Company's
consolidated financial position, results of operation or cash flows.
Effective January 1, 2003, the Company adopted SFAS No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections as of April 2002." SFAS No. 145 rescinds
Statement of Financial Accounting Standards No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement,
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under
changed conditions. The adoption of this standard did not have a material
impact on the Company's consolidated financial position, results of
operations or cash flows.
Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146
replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Cost Incurred in a Restructuring)." This
Statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation,
plant closing, or other exit or disposal activity. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of this standard did not have an impact on
the Company's consolidated financial position, results of operations or
cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure-an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 did not require the Company
to change to the fair value method of accounting for stock based
compensation. Effective January 1, 2002, the disclosure provisions of SFAS
No. 148 have been adopted by the Company.
6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation using the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
requires the disclosure of pro forma net income had the Company adopted
the fair value method. However, disclosure has been omitted because the
pro forma effect on net income required to be disclosed under SFAS No. 123
is not material to the Company's results of operations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which expands
previously issued accounting guidance and disclosure requirements for
certain guarantees. FIN No. 45 requires the Company to recognize an
initial liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted the disclosure
provisions of FIN No. 45 as of December 31, 2002. In 2003, the Company
adopted the initial recognition and initial measurement provisions of FIN
No. 45. The Company does not provide guarantees for performance of third
parties, and therefore, there was no impact on our consolidated financial
position, results of operations or cash flows.
3. Receivables are summarized as follows:
March 31, December 31,
2003 2002
------------- -------------
Accounts receivable, principally
from commercial customers $ 33,330,000 $ 36,027,000
Accounts receivable, on U. S.
Government and other long-term
contracts 4,335,000 3,257,000
Allowances (1,065,000) (1,056,000)
------------- -------------
$ 36,600,000 $ 38,228,000
============= =============
4. Inventory consists of the following:
March 31, December 31,
2003 2002
------------- -------------
Raw materials and work-in-process $ 27,799,000 $ 24,830,000
Finished goods 15,968,000 17,017,000
Inventoried costs related to U.S.
Government and other long-term
contracts 12,124,000 10,159,000
------------- -------------
$ 55,891,000 $ 52,006,000
============= =============
7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. Reserves for slow moving and
obsolete inventories are provided based on current assessments about
future product demand and production requirements for the next twelve
months. The Company evaluates the adequacy of these reserves quarterly.
5. Other current liabilities consist of the following:
March 31, December 31,
2003 2002
------------- -------------
Accrued payroll costs $ 11,720,000 $ 22,888,000
Accrued property taxes and other taxes 4,320,000 3,665,000
Accrued costs on long-term contracts 3,922,000 4,605,000
Accrued warranty costs 12,541,000 12,810,000
Customer credits 4,789,000 5,128,000
Postretirement benefit obligation other
than pensions 3,000,000 3,000,000
Fair market value of interest rate swap 2,937,000 3,715,000
Other 6,272,000 6,125,000
------------- -------------
$ 49,501,000 $ 61,936,000
============= =============
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.
8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Comprehensive Income
Three Months Ended
------------------------------
March 31, March 31,
2003 2002
------------- -------------
Net income $ 7,416,000 $ 8,037,000
Other comprehensive income (loss):
Cumulative translation adjustments 72,000 (9,000)
Amortization of transition adjustment
included in interest expense 46,000 46,000
------------- -------------
Comprehensive income $ 7,534,000 $ 8,074,000
============= =============
8. Segments
The following represents financial information about the Company's
segments:
Three Months Ended
------------------------------
March 31, March 31,
2003 2002
------------- -------------
Sales:
Aircraft Braking Systems $ 71,158,000 $ 67,853,000
Engineered Fabrics 10,917,000 10,254,000
------------- -------------
$ 82,075,000 $ 78,107,000
============= =============
Operating Profits:
Aircraft Braking Systems $ 20,476,000 $ 18,685,000
Engineered Fabrics 671,000 599,000
------------- -------------
Operating income 21,147,000 19,284,000
Interest expense, net (10,998,000) (5,427,000)
------------- -------------
Income before income taxes $ 10,149,000 $ 13,857,000
============= =============
March 31, December 31,
2003 2002
------------- -------------
Total Assets:
Aircraft Braking Systems $ 357,844,000 $ 346,956,000
Engineered Fabrics 61,367,000 60,034,000
Deferred financing costs not
allocated to segments 10,110,000 10,645,000
Corporate assets 763,000 1,801,000
Income taxes receivable
not allocated to segments -- 2,609,000
------------- -------------
$ 430,084,000 $ 422,045,000
============= =============
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
General
We are a supplier to manufacturers and operators of commercial, general
aviation and military aircraft. Results for the three months ended March 31,
2003 continue to be adversely affected by the sluggish economy that reduced
demand for air travel and financial difficulties that confronted commercial
aircraft operators.
Critical Accounting Policies and Estimates
This section is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
our management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories, intangible assets,
income taxes, warranty obligations, workers compensation liabilities, pension
and other postretirement benefits, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of the
consolidated financial statements.
Inventory. Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts related to contracts with long production cycles, a portion
of which will not be realized within one year. Reserves for slow moving and
obsolete inventories are provided based on current assessments about future
product demand and production requirements for the next twelve months. These
factors are impacted by market conditions, technology changes, and changes in
strategic direction, and require estimates and management judgment that may
include elements that are uncertain. We evaluate the adequacy of these
reserves quarterly.
Although we strive to achieve a balance between market demands and risk of
inventory excess or obsolescence, it is possible that, should conditions
change, additional reserves may be needed. Any changes in reserves will
impact operating income during a given period. This policy is consistently
applied to all of our operating segments and we do not anticipate any changes
to our policy in the near term.
Evaluation of Long-Lived Assets. Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with SFAS No. 144. In
evaluating the value and future benefits of long-lived assets, their carrying
value is compared to management's estimate of the anticipated undiscounted
future net cash flows of the related long-lived asset. Any necessary
impairment charges would be recorded when we do not believe the carrying
value of the long-lived asset will be recoverable.
Warranty. Estimated costs of product warranty are accrued when individual
claims arise with respect to a product. When we become aware of those types
of defects, the estimated costs of all potential warranty claims arising from
those types of defects are fully accrued.
10
Pension and Other Postretirement Benefits. We have significant pension and
postretirement benefit costs and liabilities. The determination of our
obligation and expense for pension and other postretirement benefits is
dependent on our selection of certain assumptions used by actuaries in
calculating those amounts. Assumptions are made about interest rates,
expected investment return on plan assets, rate of increase in health care
costs, total and involuntary turnover rates, and rates of future compensation
increases. In addition, our actuarial consultants use subjective factors
such as withdrawal rates and mortality rates to develop our valuations. We
generally review and update these assumptions at the beginning of each fiscal
year. We are required to consider current market conditions, including
changes in interest rates, in making these assumptions. The actuarial
assumptions that we may use may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. These differences may result
in a significant impact to the amount of pension and postretirement benefits
expense we have recorded or may record.
The discount rate enables us to state expected future cash flows at a present
value on the measurement date. We have little latitude in selecting this
rate, and it must represent the market rate of high-quality fixed income
investments. A lower discount rate increases the present value of benefit
obligations and increases pension expense. We used a 7 1/2% discount rate in
2002 and are using a 6 3/4% discount rate for 2003 to reflect market interest
rate conditions.
To determine the expected long-term rate of return on pension plan assets, we
consider the current and expected asset allocations, as well as historical
and expected returns on various categories of plan assets. We assumed that
the long-term returns on our pension plan assets was 9 1/2% in 2002. We
reduced our expected long-term rate of return on pension plan assets for 2003
to 9% to reflect projected returns in the fixed income and equity markets.
The annual postretirement expense was calculated using a number of actuarial
assumptions, including a health care cost trend rate and a discount rate.
Our discount rate assumption for postretirement benefits is consistent with
that used in the calculation of pension benefits. The healthcare cost trend
rate being used to calculate the calendar year 2003 postretirement expense is
10.2% in 2003 trending down to 4.5% for 2009.
Comparison of Results of Operations for the Three Months Ended March 31, 2003
and March 31, 2002
Sales for the three months ended March 31, 2003 totaled $82,075,000,
reflecting an increase of $3,968,000 or 5.1%, compared with $78,107,000 for
the same period in the prior year. This increase was principally due to
higher sales of wheels and brakes at Aircraft Braking Systems of $3,305,000.
Commercial sales at Aircraft Braking Systems increased $3,609,000, primarily
on the Boeing MD-80 and the Canadair CRJ-100/200 and CRJ-700 programs.
General aviation sales decreased $4,333,000, primarily on Israeli Aircraft
Industries, Raytheon and Canadair aircraft. Military sales increased
$4,029,000, primarily due to strong sales on the B-1B program. Engineered
Fabrics' sales increased $663,000, primarily due to higher sales of oil
containment booms.
Operating income increased $1,863,000 to $21,147,000 or 25.8% of sales for
the three months ended March 31, 2003, compared with $19,284,000 or 24.7% of
sales for the same period in the prior year. Operating margins increased at
Aircraft Braking Systems to 28.8% during the three months ended March 31,
2003 compared with 27.5% in the same period in the prior year. This increase
in margins at Aircraft Braking Systems was primarily due to the favorable
overhead absorption effect relating to the higher sales, partially offset by
higher program investments. Operating margins at Engineered Fabrics were
11
relatively level at 6.1% during the three months ended March 31,2003,
compared with 5.8% for the same period in the prior year.
Net interest expense increased $5,571,000 for the three months ended March
31, 2003 compared with the same period in the prior year. This increase was
primarily due to higher interest of $6,016,000 relating to our issuance of
$250.0 million of 9 5/8% senior subordinated notes in December 2002, which
were not outstanding during the three months ended March 31, 2002. These
notes were issued in connection with the December 2002 recapitalization.
Our effective tax rate of 26.9% for the three months ended March 31, 2003
differs from the statutory rate of 35% due to tax benefits derived from
export sales. Our effective tax rate of 42.0% for the three months ended
March 31, 2002 differs from the statutory rate of 35% due to state, local and
foreign taxes. The decrease in the effective rate in 2003 over 2002 is
primarily due to favorable tax benefits derived from export sales and lower
state and local taxes.
Liquidity and Financial Position
Our cash and cash equivalents totaled $34.5 million at March 31, 2003,
compared with $22.7 million at December 31, 2002. Our total debt was $435.0
million at March 31, 2003, and we had $27.1 million available to borrow under
our $30.0 million revolving credit facility.
We expect that our principal use of funds for the next several years will be
to pay interest and principal on indebtedness, fund capital expenditures and
make program investments. Our primary source of funds for conducting our
business activities and servicing our indebtedness has been cash generated
from operations and borrowings under our credit facility.
Cash Flows
Net cash provided by operating activities during the three months ended March
31, 2003 amounted to $12,033,000 versus $18,382,000 for the same period in
the prior year, a decrease of $6,349,000. Decreased cash flow from operating
activities during the three months ended March 31, 2003, compared to the
three months ended March 31, 2002, was primarily due to payments made in 2003
to the holders of our common stock options in connection with the December
2002 recapitalization.
Net cash used in investing activities during the three months ended March 31,
2003 amounted to $286,000 versus $3,194,000 for the same period in the prior
year, a decrease of $2,908,000. This decrease was primarily due to a
$2,500,000 program participation payment made during the first three months
of 2002.
There was no net cash used in financing activities during the three months
ended March 31, 2003 versus $13,375,000 of net cash used for the same period
in the prior year. This decrease occurred because we made principal payments
during the first three months of 2002 on our prior bank credit facility that
we repaid as part of the December 2002 recapitalization. We had no
borrowings on our new revolving facility during the three months ended March
31, 2003.
Accounting Changes and Pronouncements
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards, or 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
12
standard until its life is determined to no longer be indefinite. We adopted
SFAS No. 142 on January 1, 2002, at which time amortization of goodwill
ceased. The impairment analysis did not result in an impairment charge upon
adoption or any subsequent periods thereafter. See Note 2 to the consolidated
financial statements.
Effective January 1, 2002, we 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 our financial position,
results of operations or cash flows related to the adoption of this standard.
Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies," establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. The
objective of SFAS No. 143 is to provide guidance for legal obligations
associated with the retirement of tangible long-lived assets. The retirement
obligations included within the scope of this project are those that an
entity cannot avoid as a result of either acquisition, construction or normal
operation of a long-lived asset. The adoption of this standard did not have
a material impact on our consolidated financial position, results of
operation or cash flows.
Effective January 1, 2003, we adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002." SFAS No. 145 rescinds Statement of
Financial Accounting Standards No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS
No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their
applicability under changed conditions. The adoption of this standard did not
have a material impact on our consolidated financial position, results of
operations or cash flows.
Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." This Statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this standard did not
have an impact on our consolidated financial position, results of operations
or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
13
addition, this Statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No.
148 did not require the Company to change to the fair value method of
accounting for stock based compensation. Effective January 1, 2002, the
disclosure provisions of SFAS No. 148 have been adopted by the Company.
In November 2002, the FASB issued Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which expands previously
issued accounting guidance and disclosure requirements for certain
guarantees. FIN No. 45 requires the Company to recognize an initial
liability for the fair value of an obligation assumed by issuing a guarantee.
The provision for initial recognition and measurement of the liability will
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002. We adopted the disclosure provisions of FIN No. 45 as of
December 31, 2002. In 2003, we adopted the initial recognition and initial
measurement provisions of FIN No. 45. We do not provide guarantees for
performance of third parties, and therefore, there was no impact on our
consolidated financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have $435.0 million of total fixed rate debt outstanding at March 31, 2003.
Borrowings under the credit facility bear interest that varies with LIBOR.
As a requirement of a previous credit facility, we entered into an interest rate
swap agreement to reduce the impact of potential increases in interest rates.
This agreement has a notional amount of $84.0 million and we are required to
make payments for the difference between actual three month LIBOR and 5.95% on
this amount. The interest rate swap agreement expires on December 17, 2003. The
payments made under the swap agreement were $953,000 and $1,000,000 million
during the three months ended March 31, 2003 and 2002, respectively, and are
expected to be approximately $4,000,000 in 2003 assuming three month LIBOR at
March 31, 2003 remains constant throughout the year. If interest rates change by
10%, it would not have a significant impact on the fair value or the future
payments to be made under our swap agreement. Given that all of our outstanding
debt is at a fixed rate, a 10% change in interest rates would not have a
significant impact on fair values, cash flows or earnings. We have no other
derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days before the filing date of this
quarterly report. Based on that evaluation, our management, including the CEO
and CFO, concluded that our disclosure controls and procedures were effective.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to their
evaluation.
14
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 March 31,
2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
K & F INDUSTRIES, INC.
Registrant
/s/ DIRKSON R. CHARLES
------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: May 14, 2003
16
CERTIFICATION
I, Bernard L. Schwartz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of K & F Industries,
Inc.;
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 we
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 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 function):
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, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003 /s/ BERNARD L. SCHWARTZ
-----------------------
Bernard L. Schwartz
Chief Executive Officer
17
CERTIFICATION
I, Dirkson R. Charles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of K & F Industries,
Inc.;
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 we
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 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 function):
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, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003 /s/ DIRKSON R. CHARLES
----------------------
Dirkson R. Charles
Chief Financial Officer
18