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 March 31, 2004
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of April 30, 2004 was 1,000.
STANADYNE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and December 31, 2003............................ 3
Condensed Consolidated Statements of Income for the three months ended
March 31, 2004 and 2003 (unaudited)......................................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 (unaudited)............................ 5
Notes to Condensed Consolidated Financial Statements (unaudited)............ 6-19
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
- 2 -
STANADYNE CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, DECEMBER 31,
2004 2003
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,798 $ 17,977
Accounts receivable, net of allowance for uncollectible
accounts of $618 at March 31, 2004 and $588 at December 31, 2003 47,807 38,903
Inventories, net 34,249 30,094
Prepaid expenses and other current assets 2,444 2,552
Deferred income taxes 4,712 4,471
-------- --------
Total current assets 107,010 93,997
Property, plant and equipment, net 104,000 106,250
Goodwill 71,492 70,819
Intangible and other assets, net 7,800 8,390
Due from Stanadyne Automotive Holding Corp. 4,269 4,269
-------- --------
Total assets $294,571 $283,725
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,063 $ 22,719
Accrued liabilities 34,243 31,249
Current maturities of long-term debt 7,123 6,523
Current installments of capital lease obligations 292 280
-------- --------
Total current liabilities 67,721 60,771
Long-term debt, excluding current maturities 87,753 88,631
Capital lease obligations, excluding current installments 638 653
Other noncurrent liabilities 50,990 51,332
-------- --------
Total liabilities 207,102 201,387
-------- --------
Minority interest in consolidated subsidiary 197 238
Commitments and contingencies - -
Stockholders' equity:
Common stock - -
Additional paid-in capital 59,858 59,858
Other accumulated comprehensive income 2,500 1,479
Retained earnings 24,914 20,763
-------- --------
Total stockholders' equity 87,272 82,100
-------- --------
Total liabilities and stockholders' equity $294,571 $283,725
======== ========
See notes to condensed consolidated financial statements.
- 3 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
------------ ------------
Net sales $ 81,957 $ 70,867
Cost of goods sold 65,216 57,057
-------- --------
Gross profit 16,741 13,810
Selling, general and administrative expenses 7,526 7,790
Amortization of intangibles 344 616
Management fees 275 275
-------- --------
Operating income 8,596 5,129
Other income (expenses):
Gain from extinguishment of debt - 813
Interest, net (1,966) (2,124)
-------- --------
Income before income taxes and minority interest 6,630 3,818
Income taxes 2,520 1,301
-------- --------
Income before minority interest 4,110 2,517
Minority interest in loss of consolidated subsidiary 41 73
-------- --------
Net income $ 4,151 $ 2,590
======== ========
See notes to condensed consolidated financial statements.
- 4 -
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 4,151 $ 2,590
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,189 5,222
Deferred income tax benefit (13) (1,630)
Loss applicable to minority interest (41) (73)
Loss on disposal of property, plant and equipment 119 52
Changes in operating assets and liabilities (7,065) (1,679)
-------- --------
Net cash provided by operating activities 2,340 4,482
-------- --------
Cash flows from investing activities:
Capital expenditures (1,993) (2,648)
-------- --------
Cash flows from financing activities:
Proceeds on foreign term loan - 749
Net proceeds on revolving credit facilities - 475
Net proceeds on foreign overdraft facilities 491 823
Principal payments on long-term debt (893) (6,944)
Payments of capital lease obligations (42) (30)
Proceeds from investment by minority interest - 148
-------- --------
Net cash used in financing activities (444) (4,779)
-------- --------
Cash and cash equivalents:
Net decrease in cash and cash equivalents (97) (2,945)
Effect of exchange rate changes on cash (82) (57)
Cash and cash equivalents at beginning of period 17,977 4,683
-------- --------
Cash and cash equivalents at end of period $ 17,798 $ 1,681
======== ========
See notes to condensed consolidated financial statements.
- 5 -
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") and Precision
Engine Products LTDA ("PEPL"). 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, 2003 is condensed
financial information derived from the audited balance sheet. The interim
financial statements are unaudited. These financial 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 2003 financial statements to conform to the 2004 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.
Stock Options. The Company follows the intrinsic method of accounting for its
stock-based compensation under the guidelines set forth in Accounting Principles
Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees."
Intrinsic value is the excess of the market value of the common stock over the
exercise price at the date of grant. Because stock options are granted with
fixed terms and with an exercise price equal to the market price of the common
stock at the date of grant, there is no measured compensation cost of stock
options.
- 6 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
Had compensation costs for options been determined based on the fair value of
options outstanding for the three-month periods ended March 31, 2004 and 2003,
pro forma net income would be as follows:
March 31,
--------------------
2004 2003
---- ----
Net income as reported $4,151 $2,590
Stock based compensation using Black-Scholes option valuation
model, net of related tax effects 44 52
------ ------
Pro forma net income $4,107 $2,538
====== ======
The Company has adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB
Statement No. 123. The Statement requires prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
Adoption of FASB Statement No. 145. In April 2002, the FASB issued Statement of
Financial Accounting Standards ("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 are applicable for transactions entered
into after May 15, 2002, and the provisions affecting classification of gains
and losses from the extinguishment of debt, which are applicable for fiscal
years beginning after May 15, 2002. Application of SFAS 145 in the first quarter
of 2003 resulted in the classification of an $0.8 million gain from the
extinguishment of $5.0 million in Senior Subordinated Notes ("Notes") as other
income.
Accounting for Certain Financial Instruments With Characteristics of Both
Liabilities and Equity. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments With Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify certain financial instruments as
a liability (or an asset in some circumstances). The scope of SFAS No. 150
includes financial instruments issued in the form of shares that are mandatorily
redeemable and
- 7 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
that employ unconditional obligations requiring the issuer to redeem it by
transferring its assets at a specific or determinable date or upon an event that
is certain to occur.
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. Mandatorily redeemable financial
instruments of nonpublic entities are subject to the provisions of SFAS No. 150
for the first fiscal period beginning after December 15, 2003. The Company
believes that adoption of this statement has no material impact on the
consolidated financial condition or results of operations.
(2) INVENTORIES
Components of inventories are as follows:
As of As of
March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials and purchased parts $11,715 $ 8,025
Work-in-process 15,191 14,506
Finished goods 7,343 7,563
------- -------
$34,249 $30,094
======= =======
(3) INCOME TAXES
The Company had an effective income tax rate of 38.0% for the first three months
of 2004, compared to 34.1% for the first three months of 2003. In the first
three months of 2004, the Company recorded $2.5 million of tax expense on a
pre-tax income of $6.6 million. In 2003, the Company recorded $1.3 million of
tax expense on a pre-tax income of $3.8 million. Taxes for 2003 include $0.5
million for a valuation allowance associated with foreign net operating loss
carry-forwards in SpA that were anticipated to expire in 2003 without
utilization. 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.
- 8 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(4) LONG-TERM DEBT
The Company had $66.0 million of Notes at an interest rate of 10.25% outstanding
at March 31, 2004 and December 31, 2003, respectively. The Notes are due on
December 15, 2007. On January 15, 2003 the Company retired $5.0 million in Notes
resulting in a $0.8 million gain after the write off of unamortized debt
issuance costs of $0.1 million. The transaction was recorded as other income in
the Company's consolidated financial statements.
The Company had $24.1 million and $25.0 million in U.S.-based term loans (the
"Term Loan") outstanding at March 31, 2004 and December 31, 2003, respectively.
The relative interest rates on March 31, 2004 ranged from 4.34% to 6.25%. The
Company had no borrowings against the Revolving Credit Line at March 31, 2004
and December 31, 2003 and had $28.2 million and $24.7 million available for
borrowings at March 31, 2004 and December 31, 2003, respectively. The Term Loan
and the Revolving Credit Line are governed by a Loan and Security Credit
Agreement dated October 24, 2003, (the "Senior Bank Facility"). The Company was
in compliance with the quarterly financial performance covenants as established
by the Senior Bank Facility as of the March 31, 2004 measurement date.
Overseas operations included $3.2 million and $2.6 million in overdraft
borrowings at SpA outstanding at March 31, 2004 and December 31, 2003,
respectively. The Company also had $1.6 million and $1.5 million in foreign
borrowings at SAPL outstanding at March 31, 2004 and December 31, 2003,
respectively.
(5) GOODWILL AND INTANGIBLE AND OTHER ASSETS
Goodwill for the Precision Products & Technologies Group (the "Precision
Products") was $60.0 million and $59.4 million at March 31, 2004 and December
31, 2003, respectively. The change in goodwill balances between periods is due
to foreign currency translation of Euro-denominated goodwill at SpA. Goodwill
for Precision Engine Products ("Precision Engine") was $11.4 million at March
31, 2004 and December 31, 2003. Major components of intangible and other assets
at March 31, 2004 and December 31, 2003 are listed below:
- 9 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
March 31, 2004 December 31, 2003
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
-------- ------------ -------- ------------
Patents $ 9,809 $ 7,785 $ 9,809 $ 7,681
Debt issuance costs 4,913 2,288 4,886 2,105
Pension intangible asset 1,604 - 1,604 -
Customer contracts 1,310 1,181 1,310 1,134
Deferred income taxes 36 - 335 -
Other 1,846 464 1,820 454
------- ------- ------- -------
$19,518 $11,718 $19,764 $11,374
======= ======= ======= =======
Amortization expense of intangible assets was $344 and $616 for the three months
ended March 31, 2004 and 2003, respectively. Estimated annual amortization
expense of intangible assets is expected to be $1,358 in 2004, $1,181 in 2005,
$1,168 in 2006, $926 in 2007 and $293 in 2008.
(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 the
Company's financial exposure for known environmental issues.
- 10 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
The changes in the Company's warranty accrual is provided below:
Three Months Ended
March 31,
2004 2003
------- -------
Warranty liability, beginning of period $ 1,842 $ 1,875
Warranty expense based on products sold 212 210
Adjustments to warranty estimates (79) (150)
Warranty claims paid (281) (247)
------- -------
Warranty liability, end of period $ 1,694 $ 1,688
======= =======
The Company's warranty accrual is included as a component of accrued liabilities
on the consolidated balance sheets.
(7) COMPREHENSIVE INCOME
The Company's comprehensive income is as follows:
Three Months
Ended March 31,
2004 2003
------ ------
Net income $4,151 $2,590
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,021 2,043
------ ------
Comprehensive income $5,172 $4,633
====== ======
(8) SEGMENTS
The Company has two reportable segments, the Precision Products and Precision
Engine. Precision Products manufactures its own proprietary products including
pumps for gasoline and diesel engines, injectors and filtration systems for
diesel engines, and various non-proprietary products manufactured under contract
for other companies. The Company's proprietary products currently account for
the majority of Precision Products sales. This segment accounted for
approximately 83% and 75% of the Company's total revenues for the three months
ended March 31, 2004 and 2003, respectively.
Precision Engine manufactures roller-rocker arms, hydraulic valve lifters and
lash adjusters primarily for gasoline engines. Revenues for Precision Engine
accounted for approximately 17%
- 11 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
and 25% of the Company's total revenues for the three months ended March 31,
2004 and 2003, respectively.
The Company's reportable segments are strategic business units that offer
similar products (engine parts) to customers in related industries
(agricultural, industrial and automotive engine manufacturers). The Company
considers the Precision Products and Precision Engine to be two distinct
segments because the operating results of each are compiled, reviewed and
managed separately by the Company's chief operating officer.
The following summarizes key information used by the Company in evaluating the
performance of each segment as of and for the three months ended March 31, 2004
and 2003:
As of and For the Three Months Ended March 31, 2004
-----------------------------------------------------------------
Precision Precision
Products Engine Eliminations Totals
--------- --------- ------------ --------
Net sales $ 67,634 $ 14,342 $ (19) $ 81,957
Gross profit (loss) 17,523 (782) - 16,741
Depreciation and amortization
expense 4,282 907 - 5,189
Operating income (loss) 10,093 (1,497) - 8,596
Net income (loss) 5,808 (1,657) - 4,151
Total assets 263,397 48,277 (17,103) 294,571
Total capital expenditures 1,498 495 - 1,993
As of and For the Three Months Ended March 31, 2003
----------------------------------------------------------------
Precision Precision
Products Engine Eliminations Totals
--------- --------- ------------ --------
Net sales $ 53,405 $ 17,462 $ - $ 70,867
Gross profit 12,057 1,753 - 13,810
Depreciation and amortization
expense 4,401 821 - 5,222
Operating income 4,612 517 - 5,129
Net income 2,484 106 - 2,590
Total assets 241,876 50,280 (15,981) 276,175
Total capital expenditures 2,424 224 - 2,648
- 12 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(9) PENSIONS AND OTHER POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE
PENSIONS
The Company has a noncontributory defined benefit pension plan for eligible
domestic employees and also has two nonqualified plans, which are designed to
supplement the benefits payable to designated employees. The components of the
net periodic benefit costs for the three months ended March 31 were as follows:
2004 2003
------- -------
Service cost $ 774 $ 807
Interest cost 1,208 1,293
Expected return on plan assets (1,042) (926)
Amortization of prior service costs 43 48
Recognized net actuarial loss 14 113
------- -------
Net periodic pension cost $ 997 $ 1,335
======= =======
It is the policy of the Company to fund the pension plan in an amount at least
equal to the minimum required contribution as determined by the plan's
actuaries, but not in excess of the maximum tax-deductible amount under Section
404 of the Internal Revenue Code. The Company may make discretionary
contributions of any amount within this range based on financial circumstances
and strategic considerations, which typically vary from year to year. The
Company was not required to make any contributions in the first quarter of 2004,
but expects to contribute approximately $6,000 in cash to its defined benefit
pension plan by the third quarter of 2004.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE
The Company and its domestic subsidiaries currently make available certain
health care and life insurance benefits for eligible retired employees. The
components of the net periodic benefit costs for the three months ended March 31
were as follows:
2004 2003
----- -----
Service cost $ 76 $ 77
Interest cost 202 474
Amortization of prior service costs (666) -
Recognized net actuarial loss 15 -
----- -----
Net periodic postretirement benefits (income) cost $(373) $ 551
===== =====
The Company has elected to defer recognition of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 ("the Act") as permitted under FASB
Staff Position FAS 106-1. The Company has already taken steps to limit its
postretirement health care benefits; any reductions in postretirement benefit
costs resulting from the Act are not expected to be material.
- 13 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(10) SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Notes issued December 11, 1997 by the Company are guaranteed jointly, fully,
severally and unconditionally by PEPC (the "Subsidiary Guarantor") on a
subordinated basis and are not guaranteed by 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.
- 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
March 31, 2004
---------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,993 $ 20 $ 360 $ 425 $ 17,798
Accounts receivable, net 34,075 9,352 4,380 - 47,807
Inventories, net 21,914 6,609 6,489 (763) (a) 34,249
Other current assets 5,418 294 1,444 - 7,156
--------- --------- --------- --------- ---------
Total current assets 78,400 16,275 12,673 (338) 107,010
Property, plant and equipment, net 68,370 16,468 19,162 - 104,000
Goodwill 43,465 11,360 16,667 - 71,492
Intangible and other assets, net 7,026 1,165 2,407 (2,798) (b) 7,800
Investment in subsidiaries 29,481 (3,222) - (26,259) (c) -
Due from Stanadyne Automotive Holding Corp. 4,269 - - - 4,269
--------- --------- --------- --------- ---------
Total assets $ 231,011 $ 42,046 $ 50,909 $ (29,395) $ 294,571
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 44,894 $ 10,010 $ 5,380 $ 22 $ 60,306
Current maturities of long-term
debt and capital lease obligations 2,900 671 3,844 - 7,415
--------- --------- --------- --------- ---------
Total current liabilities 47,794 10,681 9,224 22 67,721
Long-term debt and capital lease obligations 82,675 3,861 1,855 - 88,391
Other noncurrent liabilities 35,121 9,770 8,797 (2,698) (b) 50,990
Minority interest in consolidated subsidiary - - - 197 197
Intercompany accounts (18,419) 3,171 15,230 18 -
Stockholders' equity 83,840 14,563 15,803 (26,934) (c) 87,272
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 231,011 $ 42,046 $ 50,909 $ (29,395) $ 294,571
========= ========= ========= ========= =========
(a) Amount represents the elimination of inventory for out of period transfers.
(b) Reclassification of deferred tax liability to consolidated net deferred tax
asset.
(c) Elimination of investments in subsidiaries of the Parent and Subsidiary
Guarantor.
- 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 Balance Sheets
December 31, 2003
----------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,514 $ 19 $ 388 $ 56 $ 17,977
Accounts receivable, net 27,846 6,695 4,362 - 38,903
Inventories, net 18,044 6,375 6,065 (390) (a) 30,094
Other current assets 5,255 315 1,453 - 7,023
--------- --------- --------- --------- ---------
Total current assets 68,659 13,404 12,268 (334) 93,997
Property, plant and equipment, net 70,620 16,808 18,822 - 106,250
Goodwill 43,465 11,360 15,994 - 70,819
Intangible and other assets, net 7,817 1,246 2,027 (2,700) (b) 8,390
Investment in subsidiaries 29,856 (3,264) - (26,592) (c) -
Due from Stanadyne Automotive Holding Corp. 4,269 - - - 4,269
--------- --------- --------- --------- ---------
Total assets $ 224,686 $ 39,554 $ 49,111 $ (29,626) $ 283,725
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 39,729 $ 8,024 $ 6,214 $ 1 $ 53,968
Current maturities of long-term
debt and capital lease obligations 2,900 671 3,232 - 6,803
--------- --------- --------- --------- ---------
Total current liabilities 42,629 8,695 9,446 1 60,771
Long-term debt and capital lease obligations 83,400 4,029 1,855 - 89,284
Other noncurrent liabilities 35,059 10,300 8,562 (2,589) (b) 51,332
Minority interest in consolidated subsidiary - - - 238 238
Intercompany accounts (16,048) 320 15,729 (1) -
Stockholders' equity 79,646 16,210 13,519 (27,275) (c) 82,100
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 224,686 $ 39,554 $ 49,111 $ (29,626) $ 283,725
========= ========= ========= ========= =========
(a) Amount represents the elimination of inventory for out of period transfers.
(b) Reclassification of deferred tax liability to consolidated net deferred tax
asset.
(c) Elimination of investments in subsidiaries of the Parent and Subsidiary
Guarantor.
- 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
Three Months Ended March 31, 2004
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Net sales $ 64,027 $ 13,736 $ 5,451 $ (1,257) (a) $ 81,957
Cost of goods sold 46,163 14,626 5,632 (1,205) (a) 65,216
---------- -------- -------- -------- ---------
Gross profit (loss) 17,864 (890) (181) (52) 16,741
Selling, general, administrative and
other operating expenses 6,969 716 428 32 8,145
---------- -------- -------- -------- ---------
Operating income (loss) 10,895 (1,606) (609) (84) 8,596
Other expenses:
Interest, net (1,662) (48) (239) (17) (1,966)
---------- -------- -------- -------- ---------
Income (loss) before income taxes
(benefit) and minority interest 9,233 (1,654) (848) (101) 6,630
Income taxes (benefit) 2,534 34 (38) (10) 2,520
---------- -------- -------- -------- ---------
Income (loss) before
minority interest 6,699 (1,688) (810) (91) 4,110
Minority interest in loss of consolidated subsidiary - - - 41 41
---------- -------- -------- -------- ---------
Net income (loss) $ 6,699 $ (1,688) $ (810) $ (50) $ 4,151
========== ======== ======== ======== =========
Consolidating Condensed Statements of Operations
Three Months Ended March 31, 2003
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Net sales $ 49,535 $ 16,959 $ 5,075 $ (702) (a) $ 70,867
Cost of goods sold 37,597 15,259 4,914 (713) (a) 57,057
---------- -------- -------- -------- --------
Gross profit 11,938 1,700 161 11 13,810
Selling, general, administrative and
other operating expenses 6,982 1,234 415 50 8,681
---------- -------- -------- -------- --------
Operating income (loss) 4,956 466 (254) (39) 5,129
Other income (expenses):
Gain from extinguishment of debt 813 - - - 813
Interest, net (1,633) (158) (309) (24) (2,124)
---------- -------- -------- -------- --------
Income (loss) before income taxes
and minority interest 4,136 308 (563) (63) 3,818
Income taxes 498 182 634 (13) 1,301
---------- -------- -------- -------- --------
Income (loss) before
minority interest 3,638 126 (1,197) (50) 2,517
Minority interest in loss of consolidated subsidiary - - - 73 73
---------- -------- -------- -------- --------
Net income (loss) $ 3,638 $ 126 $ (1,197) $ 23 $ 2,590
========== ======== ======== ======== ========
(a) Elimination of intercompany sales and cost of goods sold.
- 17 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Cash Flows
Three Months Ended March 31, 2004
--------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 6,699 $ (1,688) $ (810) $ (50) $ 4,151
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,820 901 468 - 5,189
Other adjustments 655 19 (558) (10) 106
Loss applicable to minority interest - - - (41) (41)
Changes in operating assets and
liabilities (7,420) 1,432 (1,608) 531 (7,065)
-------- -------- -------- ------- --------
Net cash provided by (used in)
operating activities 3,754 664 (2,508) 430 2,340
-------- -------- -------- ------- --------
Cash flows from investing activities:
Capital expenditures (1,416) (495) (82) - (1,993)
Investment in subsidiaries (2,135) - - 2,135 (a) -
-------- -------- -------- ------- --------
Net cash used in
investing activities (3,551) (495) (82) 2,135 (1,993)
-------- -------- -------- ------- --------
Cash flows from financing activities:
Net change in debt (725) (168) 449 - (444)
Net change in equity - - 2,135 (2,135) (a) -
-------- -------- -------- ------- --------
Net cash (used in) provided by
financing activities (725) (168) 2,584 (2,135) (444)
-------- -------- -------- ------- --------
Net (decrease) increase in cash and
cash equivalents (522) 1 (6) 430 (97)
Effect of exchange rate changes on cash 1 - (22) (61) (82)
Cash and cash equivalents at
beginning of period 17,514 19 388 56 17,977
-------- -------- -------- ------- --------
Cash and cash equivalents at
end of period $ 16,993 $ 20 $ 360 $ 425 $ 17,798
======== ======== ======== ======= ========
(a) Elimination of additional investment in SpA by the Company.
- 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
Three Months Ended March 31, 2003
----------------------------------------------------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
----------- ---------- ------------- ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 3,638 $ 126 $(1,197) $ 23 $ 2,590
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,038 813 371 - 5,222
Other adjustments (2,079) (7) 521 (13) (1,578)
Loss applicable to minority interest - - - (73) (73)
Changes in operating assets and
liabilities 1,239 (1,955) (783) (180) (1,679)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities 6,836 (1,023) (1,088) (243) 4,482
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures (1,626) (223) (1,111) 312 (2,648)
Investment in subsidiaries (106) - - 106 -
------- ------- ------- ------- -------
Net cash used in
investing activities (1,732) (223) (1,111) 418 (2,648)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net change in debt (6,469) - 1,542 - (4,927)
Net change in equity (2,293) 1,355 1,119 (33) 148
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities (8,762) 1,355 2,661 (33) (4,779)
------- ------- ------- ------- -------
Net (decrease) increase in cash and
cash equivalents (3,658) 109 462 142 (2,945)
Effect of exchange rate changes on cash 3 - 14 (74) (57)
Cash and cash equivalents at
beginning of period 4,223 8 452 - 4,683
------- ------- ------- ------- -------
Cash and cash equivalents at
end of period $ 568 $ 117 $ 928 $ 68 $ 1,681
======= ======= ======= ======= =======
- 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 Precision Products and Precision Engine. Precision Products manufactures its
own proprietary products including pumps for gasoline and diesel engines,
injectors and filtration systems for diesel engines, and various non-proprietary
products manufactured under contract for other companies. Precision Engine
manufactures valve train components including roller-rocker arm assemblies,
hydraulic valve lifters and lash adjusters for gasoline and diesel engines.
Detailed segment information can be found in Note 8 of Notes to Condensed
Consolidated Financial Statements.
The Company's sales totaled $82.0 million in the first quarter of 2004,
representing a 6.8% increase from the same period last year. Continued strength
in demand from the off-highway markets for the Company's products drove most of
this increase. Sales to off-highway markets accounted for 61.3% of total first
quarter 2004 sales. Sales to on-highway markets accounted for 38.7% of total
first quarter sales. A major change in first quarter sales to on-highway markets
was a decrease of $3.1 million or 17.9% in sales of valve train components
produced by the Precision Engine segment.
Sales to the original equipment manufacturers ("OEMs") and the service markets
increased by $3.9 million and $7.2 million, respectively, in the first quarter
2004 compared to the first quarter of 2003. Major components of the increase in
sales to the service markets include $3.0 million in additional shipments of
replacement fuel filter elements, $3.3 million of electronic fuel pumps sold to
General Motors and $1.2 million of fuel pumps sold to the U.S. Government in
support of HUMMV's.
The increased levels of business in the Precision Products segment have required
the factories in Connecticut and North Carolina to add staff and incur
considerable amounts of overtime. Employment in the first quarter of 2004 for
Precision Products increased by 19% when compared to the employment levels in
the first quarter of 2003.
In response to the lower first quarter sales in the Company's Precision Engine
segment, a total of 34 positions were eliminated requiring a $0.3 million charge
to earnings for severance costs. Employment in the first quarter of 2004 for
Precision Engine decreased by 16.3% when compared to the employment levels in
the first quarter of 2003.
The general global economic recovery has created an imbalance in the supply and
demand for many of the purchased components and raw materials used by the
Company. The Company has taken proactive steps to ensure an adequate supply of
these materials through the latter part of 2004. Through the end of the first
quarter of the year, the Company has only experienced a minor amount of cost
premium associated with the procurement of necessary materials.
- 20 -
STANADYNE CORPORATION AND SUBSIDIARIES
Net income in the first quarter of 2004 grew to $4.2 million or 5.1% of net
sales - representing an increase of 60% from the net income of $2.6 million or
3.7% for the same period last year. Improved operating leverage on increased
sales volumes, especially in the higher margin service markets, and effective
cost management combined to produce this result.
BASIS OF PRESENTATION
The following table displays unaudited performance details for the periods
shown. Net sales, cost of goods sold, gross profit, selling, general and
administrative expense ("SG&A"), amortization of intangibles, management fees,
operating income and net income of the Company are presented in thousands of
dollars and as a percentage of net sales. Historical results and percentage
relationships are not necessarily indicative of the results that may be expected
for any future period.
Three Months Ended March 31,
------------------------------------------------
2004 2003
--------------------- ---------------------
$ % $ %
------ ----- ------ -----
Net sales...................... 81,957 100.0 70,867 100.0
Cost of goods sold............. 65,216 79.6 57,057 80.5
Gross profit................... 16,741 20.4 13,810 19.5
SG&A........................... 7,526 9.2 7,790 11.0
Amortization of intangibles.... 344 0.4 616 0.9
Management fees................ 275 0.3 275 0.4
Operating income............... 8,596 10.5 5,129 7.2
Net income..................... 4,151 5.1 2,590 3.7
COMPARISON OF RESULTS OF OPERATIONS:
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
NET SALES. Net sales for the first quarter of 2004 totaled $82.0 million
compared to $70.9 million in the first quarter of 2003, representing an increase
of $11.1 million or 15.6%. A significant increase in Precision Products sales of
$14.2 million or 26.6% was only partially offset by a decrease in Precision
Engine sales of $3.1 million or 17.9%.
Precision Products sales reflected a 15.8% increase in shipments to OEM's and a
40.4% increase in sales to the aftermarkets. The growth in sales to OEM's
resulted primarily from increased demand for diesel fuel injection equipment
from Deere & Company ("Deere"). Sales to Deere increased by $6.1 million in the
first quarter of 2004 as compared to the same period of 2003. Sales of the DS
electronic fuel pump to General Engine Products for the Hummer vehicle increased
by $0.5 million in the first quarter of 2004 versus 2003. Year-over-year first
quarter Precision Products sales to the aftermarket increased by $9.5 million.
Sales of filter replacement elements accounted for $3.0 million of this growth,
with much of the remainder of the growth
- 21 -
STANADYNE CORPORATION AND SUBSIDIARIES
due to $3.3 million higher demand for electronic pumps from General Motors
Corporation and $1.2 million additional fuel pumps to the U.S. military.
Precision Engine segment sales were $3.1 million lower in the first quarter of
2004 compared to the same period in 2003. Sales to OEM customers totaled $0.8
million less due primarily to the expected decline of $0.9 million in tappets
sold to Ford Motor Company related to the phase-out of production of the Escort.
Sales in the first quarter of 2004 included the first shipments of valve-train
actuator assemblies ("VTAA's") for the new DaimlerChrysler Corp. full-sized
sedans. Aftermarket demand for hardenable iron tappets was $1.3 million lower in
the first quarter of 2004, as customers for these tappets are reportedly
reducing inventory levels accumulated in 2003.
GROSS PROFIT for the Company improved in the first quarter of 2004 to $16.7
million and 20.4% of net sales, from $13.8 million and 19.5% of net sales for
the same period in 2003. Gross profit results by segment followed the changes in
sales reported above. The first quarter gross profits in 2004 were not
significantly impacted by the global market supply shortages or cost surcharges
for raw materials. The Company has taken proactive steps to minimize supply
shortages in 2004 but cannot foresee the extent of the impact that may be felt
on future earnings.
Precision Products recorded gross profit of $17.5 million or 25.9% of net sales
in the first quarter of 2004, considerably higher than the $12.1 million or
22.6% of net sales recorded for the same period in 2003. Most of this
improvement was due to improved operating leverage from higher sales volumes in
the first quarter of 2004 and particularly to the strength in higher margin
aftermarket sales. The quarter to quarter comparison of manufacturing costs was
unfavorable due to cost premiums incurred in 2004, including higher levels of
overtime and inefficiencies associated with the introduction of new workers,
related to the significant increase in demand for virtually all of the segments
products.
Gross profit in the Precision Engine segment in the first quarter of 2004 was a
loss of $0.3 million or (5.5)% of net sales as compared to the gross profit of
$1.8 million or 10.0% of net sales reported for the same period of 2003. The
combination of lower sales volumes, particularly for product sold to the
aftermarket, and increased manufacturing and overhead costs in this segment,
resulted in staff reductions during March 2004. Thirty-four positions were
eliminated requiring a $0.3 million charge to earnings for severance costs.
Additional changes to the management structure intended to improve operational
performance were also completed in the first quarter of 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A of $7.5 million in
the first quarter of 2004 was slightly lower than the $7.8 million reported for
the same period of 2003. Changes to the Company's retiree health benefit plans
enacted in June, 2003 reduced the Company's first quarter 2004 versus 2003 cost
for retiree health benefits by $0.9 million. Higher first quarter 2004 SG&A
included $0.5 million in product development costs and $0.2 million for freight
on sales.
- 22 -
STANADYNE CORPORATION AND SUBSIDIARIES
AMORTIZATION OF INTANGIBLE ASSETS decreased to $0.3 million in the first quarter
of 2004 from $0.6 million in the first quarter of 2003. This reduction reflected
the conclusion of the amortization of some the Company's patents and a change to
lower amortization on debt issuance costs as a result of refinancing in 2003.
OPERATING INCOME for the first quarter of 2004 totaled $8.6 million or 10.5% of
net sales versus $5.1 million or 7.2% for the same period a year ago. All of
this improvement occurred in the Precision Products segment, where higher gross
profits produced operating income of $10.1 million or 14.9% of net sales versus
the $4.6 million or 8.6% of net sales in the first quarter of 2003. Lower gross
profits recorded by the Precision Engine segment in the first quarter of 2004
resulted in an operating loss of $1.5 million or (10.4)% of net sales compared
to an operating income of $0.5 million or 3.0% of net sales in the first quarter
of 2003.
NET INCOME for the first quarter of 2004 totaled $4.2 million versus $2.6
million for the same period in 2003. This improvement reflected the combined
results of $3.5 million of higher operating income in 2004, $0.1 million in
lower interest expense due to less debt, and a $1.2 million increase in income
taxes, partially offset by a $0.8 million gain on the repurchase of a portion of
the Company bonds in the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operations
supplemented by a U.S.-based revolving credit facility under which $28.2 million
was available for borrowings as of March 31, 2004. The Company occasionally
utilizes capital leasing and, for its foreign operations in Italy and India,
maintains a combination of overdraft and term loan facilities with local
financial institutions on an as needed basis. As of March 31, 2004, there were
borrowings of $24.1 million under the Term Loans, no borrowings under the
Revolving Credit Lines, $3.2 million in foreign overdraft facilities and $1.9
million in foreign term loans. The Company met all financial covenants required
by the Senior Bank Facility for the March 31, 2004 measurement date.
Cash Flows From Operating Activities. Cash flows from operating activities for
the three months ended March 31, 2004 totaled $2.3 million and were $2.1 million
lower than the $4.5 million generated in the same period of 2003. This
year-to-year decline was primarily accounted for by $6.4 million in additional
working capital requirements in the first quarter of 2004 due to the higher
levels of business in the Precision Products segment. Total accounts receivable
and inventories increased by $8.8 and $3.9 million, respectively, and were only
partially offset by higher accounts payable and accrued liabilities of $6.1
million. Close attention to managing accounts receivable resulted in a reduction
in the days sales outstanding measurement that averaged 48.7 days for the first
quarter of 2004 as compared to 54.7 days for the same period of 2003. Inventory
turnover, averaging 8.4 turns for the first three months of 2004, reflected an
improvement from the 7.9 turns recorded for the same period of 2003, but was
disappointing when compared to the 9.1 turns reported for the previous quarter.
Growth in purchased materials
- 23 -
STANADYNE CORPORATION AND SUBSIDIARIES
inventories occurred to ensure availability to meet increasing customer demand.
The Company continues to expand the use of lean manufacturing techniques
intended to minimize work in process inventories and increase turnover.
Cash Flows From Investing Activities. The Company's capital expenditures for the
first quarter of 2004 totaled $2.0 million, compared to $2.6 million for the
same period of 2003. Capital expenditures in 2004 included $1.0 million in
support of new products and programs, with the remainder applied to cost
reduction, quality enhancements, safety and ergonomics improvements, added
capacity and general maintenance projects.
Cash Flows From Financing Activities. Cash flows from financing activities for
the three months ended March 31, 2004 resulted in a net reduction in cash of
$0.4 million. A scheduled principal payment against the Term Loans totaled $0.9
million. There were no borrowings under the Revolving Credit Facility.
Additional overdraft borrowings at SpA and SAPL for the first three months of
2004 totaled $0.5 million. Payments against capital lease obligations totaled
$0.04 million.
Pension Plans. The Company maintains a qualified defined benefit pension plan
(the "Qualified Plan"), which covers substantially all domestic hourly and
salary employees, except for Tallahassee hourly employees, and an unfunded
nonqualified plan to provide benefits in excess of amounts permitted to be paid
under the provisions of the tax law to participants in the Qualified Plan.
The value of the Qualified Plan assets increased from $37.8 million at December
31, 2002 to $48.2 million at December 31, 2003. The combination of improved
investment performance offset by a declining discount rates during 2003 resulted
in an increase in the Qualified Plan unfunded benefit obligation. Cash
contributions to the Qualified Plan for the 2002 plan year of $2.5 million were
paid in the third quarter of 2003 to achieve a current liability funding level
of 80%. Based on recent legislation enacted to provide guidance on interest
rates used to value the obligations in the Qualified Plan, contributions for the
2003 plan year will require approximately $2.0 million by September, 2004 to
achieve a current liability funding level of 80%. The Company is considering the
effect of additional amounts on future funding requirements and continues to
examine the longer term projections for pension expense and cash contributions.
(2) NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149 ("FAS 149"), "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." FAS 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts and for hedging activities under FAS 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company adopted FAS
149 in 2003 with no material impact on its consolidated financial statements.
- 24 -
STANADYNE CORPORATION AND SUBSIDIARYES
In May 2003, the FASB issued SFAS No. 150 ("FAS 150"), "Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity." FAS
150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or an asset in some circumstances). The scope of FAS 150 includes financial
instruments issued in the form of shares that are mandatorily redeemable and
that employ unconditional obligations requiring the issuer to redeem it by
transferring its assets at a specific or determinable date or upon an event that
is certain to occur. FAS 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. Mandatorily redeemable
financial instruments of nonpublic entities are subject to the provisions of FAS
150 for the first fiscal period beginning after December 15, 2003. The Company
believes that adoption of this statement will not have any material impact on
the consolidated financial condition or results of operations.
In December 2003, the FASB issued Statement of Financial Standards No. 132R
("FAS 132R"), "Employers' Disclosures about Pensions and Other Postretirement
Benefits." FAS 132R amends the disclosure requirements of FAS 132 to require
additional disclosures about assets, obligations, cash flow and net periodic
benefit cost. FAS 132R is effective for annual and interim periods with fiscal
years ending after December 15, 2003. The Company has adopted the revised
disclosure provisions.
(3) CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, the Company is required to make certain estimates, judgments and
assumptions that it believes 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 the Company believes are the most
critical to aid in fully understanding and evaluating the reported financial
results include: product warranty reserves, inventory reserves for excess or
obsolescence, income taxes, self-insured healthcare benefit costs, and pension
and postretirement benefit liabilities. All of the preceding are more fully
described in the notes to the consolidated financial statements contained in the
annual report on Form 10-K.
(4) CAUTIONARY STATEMENT
This quarterly report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
statements with respect to the financial condition, results of operations and
business of the Company and management's discussion and analysis of financial
condition and results of operations. All of these forward-looking statements
- 25 -
STANADYNE CORPORATION AND SUBSIDIARYES
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) loss of
material customers; (6) adverse state or federal legislation or regulation or
adverse determinations in pending litigation; (7) changes in the value of the
U.S. dollar relative to foreign currencies of countries where the Company
conducts its business; and (8) 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 forward-looking statements contained in this report speak only
as of the date on which such statements were made. The Company undertakes no
duty or obligation to publicly update or revise any forward-looking statements
or to reflect new, changing or unanticipated events or circumstances.
- 26 -
STANADYNE CORPORATION AND SUBSIDIARYES
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 values 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 every one to three months. A 10% change in the
interest rate on the term loans would have had a negligible effect on the
interest expense recorded in the first three months of 2004. The Notes bear
interest at a fixed rate and, therefore, are not sensitive to interest rate
fluctuation. The fair value of the Company's $66.0 million in Notes based on
quoted market prices on March 31, 2004 was approximately $67.7 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 U.S. dollars. Foreign currency exchange differences were
net gain of $0.7 million for the three months ended March 31, 2004 and a net
loss of $(0.9) million for the same period in 2003. A majority of the exchange
differences are related to the Company's operations in Brazil. The Company does
not hedge against foreign currency risk.
- 27 -
STANADYNE CORPORATION AND SUBSIDIARYES
ITEM 4: CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly 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 was no change in internal control over financial reporting that materially
affected or is reasonably likely to materially affect the Company's internal
control over financial reporting, including any corrective actions with regard
to significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting, 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 filed as exhibits to this
report.
- 28 -
STANADYNE CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to
Rule 15d-14(a) of the Securities Exchange Act as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer Rule 15d-14(a)
of the Securities Exchange Act as Adopted Pursuant to
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification Pursuant to Rule 15d-14(b) of the
Securities Exchange Act and 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 March 31,
2004.
- 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: May 11, 2004 /s/ Stephen S. Langin
---------------------------------
Stephen S. Langin
Vice President and
Chief Financial Officer
- 30 -
EXHIBIT INDEX:
31.1 Certification of Chief Executive Officer Pursuant to
Rule 15d-14(a) of the Securities Exchange Act as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer Pursuant to
Rule 15d-14(a) of the Securities Exchange Act as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification Pursuant to Rule 15d-14(b) of the
Securities Exchange Act and 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002