Back to GetFilings.com
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 incorporation or organization) (I.R.S. Employer I.D.)
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 October 31, 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
September 30, 2004 (unaudited) and December 31, 2003 ............. 3
Condensed Consolidated Statements of Operations for August 6
through September 30, 2004 (Company), July 1, 2004 through August
5, 2004 (Predecessor) and three months ended September 30, 2003
(Predecessor) (unaudited) ........................................ 4
Condensed Consolidated Statements of Operations for August 6
through September 30, 2004 (Company), January 1, 2004 through
August 5, 2004 (Predecessor) and nine months ended September 30,
2003 (Predecessor) (unaudited) ................................... 5
Condensed Consolidated Statements of Cash Flows for August 6
through September 30, 2004 (Company), January 1, 2004 through
August 5, 2004 (Predecessor) and nine months ended September 30,
2003 (Predecessor) (unaudited) ................................... 6
Notes to Condensed Consolidated Financial Statements (unaudited) . 7-19
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 20-33
Item 3 Quantitative and Qualitative Disclosures About Market Risk ....... 34
Item 4 Controls and Procedures .......................................... 35
Part II Other Information
Item 6 Exhibits ......................................................... 36-37
Signature ................................................................ 38
-2-
STANADYNE CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
Company Predecessor
September 30, December 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,568 $ 17,977
Accounts receivable, net of allowance for uncollectible
accounts of $714 at September 30, 2004 and $588
at December 31, 2003 60,178 38,903
Inventories, net 42,216 30,094
Prepaid expenses and other current assets 3,049 2,552
Deferred income taxes 7,941 4,471
----------- -----------
Total current assets 114,952 93,997
Property, plant and equipment, net 131,835 106,250
Goodwill 146,893 70,819
Intangible and other assets, net 109,631 8,390
Due from Stanadyne Automotive Holding Corp. -- 4,269
----------- -----------
Total assets $ 503,311 $ 283,725
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,425 $ 22,719
Accrued liabilities 39,619 31,249
Current maturities of long-term debt 3,611 6,523
Current installments of capital lease obligations 287 280
----------- -----------
Total current liabilities 72,942 60,771
Long-term debt, excluding current maturities 228,121 88,631
Deferred income taxes 48,635 --
Capital lease obligations, excluding current installments 517 653
Other noncurrent liabilities 45,436 51,332
----------- -----------
Total liabilities 395,651 201,387
----------- -----------
Minority interest in consolidated subsidiary 176 238
Commitments and contingencies -- --
Stockholders' equity:
Common stock -- --
Additional paid-in capital 105,000 59,858
Other accumulated comprehensive income 178 1,479
Retained earnings 2,306 20,763
----------- -----------
Total stockholders' equity 107,484 82,100
----------- -----------
Total liabilities and stockholders' equity $ 503,311 $ 283,725
=========== ===========
See notes to condensed consolidated financial statements.
-3-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Company Predecessor
------- -----------
August 6, 2004 July 1, 2004 Three Months
through through Ended
September 30, August 5, September 30,
2004 2004 2003
----------- ----------- -----------
Net sales $ 57,377 $ 29,076 $ 70,007
Cost of goods sold 43,906 26,439 58,734
----------- ----------- -----------
Gross profit 13,471 2,637 11,273
Selling, general and administrative expenses 5,073 2,919 7,208
Amortization of intangibles 678 62 367
Transactions related costs -- 22,702 --
Management fees 114 106 275
----------- ----------- -----------
Operating income (loss) 7,606 (23,152) 3,423
Other income (expenses):
Interest, net (3,463) (843) (2,295)
----------- ----------- -----------
Income (loss) before income taxes (benefit) and
minority interest 4,143 (23,995) 1,128
Income taxes (benefit) 1,858 (7,366) 630
----------- ----------- -----------
Income (loss) before minority interest 2,285 (16,629) 498
Minority interest in loss of consolidated subsidiary 21 7 78
----------- ----------- -----------
Net income (loss) $ 2,306 $ (16,622) $ 576
=========== =========== ===========
See notes to condensed consolidated financial statements.
-4-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Company Predecessor
------- -----------
August 6, 2004 January 1, 2004 Nine Months
through through Ended
September 30, August 5, September 30,
2004 2004 2003
----------- ----------- -----------
Net sales $ 57,377 $ 203,100 $ 214,341
Cost of goods sold 43,906 162,665 173,680
----------- ----------- -----------
Gross profit 13,471 40,435 40,661
Selling, general and administrative expenses 5,073 19,199 21,513
Amortization of intangibles 678 389 1,106
Transactions related costs -- 22,702 --
Management fees 114 656 825
----------- ----------- -----------
Operating income (loss) 7,606 (2,511) 17,217
Other income (expenses):
Gain from extinguishment of debt -- -- 813
Interest, net (3,463) (5,114) (6,977)
----------- ----------- -----------
Income (loss) before income taxes (benefit) and
minority interest 4,143 (7,625) 11,053
Income taxes (benefit) 1,858 (2,105) 4,430
----------- ----------- -----------
Income (loss) before minority interest 2,285 (5,520) 6,623
Minority interest in loss of consolidated subsidiary 21 41 237
----------- ----------- -----------
Net income (loss) $ 2,306 $ (5,479) $ 6,860
=========== =========== ===========
See notes to condensed consolidated financial statements.
-5-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Company Predecessor
------- -----------
August 6, 2004 January 1, 2004 Nine Months
through through Ended
September 30, August 5, September 30,
2004 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 2,306 $ (5,479) $ 6,860
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,378 11,974 15,067
Amortization of debt issuance costs 308 430 753
Deferred income taxes (benefit) 1,790 (4,551) 667
Loss applicable to minority interest (21) (41) (237)
Loss on disposal of property, plant and equipment 73 187 28
Changes in operating assets and liabilities (35,708) 17,543 (1,853)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (27,874) 20,063 21,285
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (2,163) (6,361) (7,585)
Proceeds from disposal of property, plant and equipment -- 5 2
Acquisition, net of cash acquired (225,492) -- --
----------- ----------- -----------
Net cash used in investing activities (227,655) (6,356) (7,583)
----------- ----------- -----------
Cash flows from financing activities:
Contribution to capital 105,000
Payments of financing fees (15,946)
Proceeds from long-term debt 225,000
(Payments) proceeds on foreign term loan -- (173) 1,451
Net proceeds on revolving credit facilities 2,750 -- --
Net proceeds on foreign overdraft facilities (487) 476 527
Principal payments on long-term debt (88,321) (2,679) (10,833)
Payments of capital lease obligations (17) (127) (96)
Proceeds from investment by minority interest -- -- 251
----------- ----------- -----------
Net cash provided by (used in) financing activities 227,979 (2,503) (8,700)
----------- ----------- -----------
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents (27,550) 11,204 5,002
Effect of exchange rate changes on cash (98) 35 (761)
Cash and cash equivalents at beginning of period 29,216 17,977 4,683
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,568 $ 29,216 $ 8,924
=========== =========== ===========
See notes to condensed consolidated financial statements.
-6-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
(1) SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Stanadyne Corporation (the "Company"), is a
wholly-owned subsidiary of Stanadyne Automotive Holding Corp. ("Holdings").
Holdings is owned by KSTA Holdings, Inc. ("KSTA") and a majority of the
outstanding equity of KSTA is owned by funds managed by Kohlberg Management IV,
L.L.C., an affiliate of Kohlberg and Company L.L.C. ("Kohlberg"). Prior to
August 6, 2004, a majority of the outstanding equity of Holdings was owned by
American Industrial Partners Capital Fund II, L.P. ("AIP").
Basis of Presentation. On August 6, 2004, stockholders of the Company's parent
Holdings, led by AIP, completed the sale of all of their stock to KSTA
Acquisition, LLC, an affiliate of Kohlberg Management IV, L.L.C., for $221.4
million. In addition to AIP, the selling stockholders included certain current
and former members of management of the Company. Immediately following this
transaction, KSTA Acquisition, LLC distributed all of the stock of Holdings to
its parent, KSTA, and merged with and into the Company, which continues as the
surviving corporation. As a result, KSTA owns 100% of the stock of Holdings. The
stock purchase and the related transactions, including the issuance of new
senior subordinated notes, the entering into a new senior secured credit
facility, the repayment of certain existing indebtedness, including the tender
for certain outstanding senior subordinated promissory notes by KSTA
Acquisition, LLC, and the payment of related fees and expenses are collectively
defined as the "Transactions."
The financial statements of Stanadyne Corporation and Subsidiaries are presented
as "Predecessor" for operations prior to the August 6, 2004 Transactions (See
Note 2) and "Company" for operations after the Transactions.
The financial statements presented herein 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.
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.
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.
-7-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
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.
In connection with the Transactions, Holdings amended the terms of the
Management Stock Option Plan to provide for vesting of all unvested options and
purchased all of the outstanding stock options requiring a charge to earnings in
the third quarter of 2004 of approximately $14.3 million reflected as
Transactions related costs in the condensed consolidated statement of operation
of the Predecessor for the 2004 periods presented.
Following the Transactions in the third quarter of 2004, KSTA established the
2004 Equity Incentive Plan ("Option Plan") to provide for the award of
non-qualified stock options to attract and retain persons who are in a position
to make a significant contribution to the success of the Company and its
subsidiaries. A total of 14,740,000 options to purchase KSTA common stock were
awarded to certain members of management as of September 30, 2004. The exercise
price of these options equaled the fair value of the common stock of KSTA on the
date of the Transactions. Accordingly, no compensation cost is associated with
the issuance of these options.
Pro forma information regarding net income is presented below as if the Company
had accounted for its employee stock options under the fair value method using
SFAS No. 123:
Predecessor
-----------
Company Three Months Nine Months
August 6, 2004 to Ended Ended
September 30, September 30, September 30,
2004 2003 2003
---- ---- ----
Net income as reported $ 2,306 $ 576 $ 6,860
Stock based compensation using Black-Scholes
option valuation model, net of related
tax effects 147 100 153
----------- ----------- -----------
Pro forma net income $ 2,159 $ 476 $ 6,707
=========== =========== ===========
The pro forma effects of compensation costs on net income under the fair value
method for the period from January 1, 2004 to August 5, 2004 and July 1, 2004 to
August 5, 2004, respectively, of the Predecessor have not been presented since
all options were purchased and expensed in these periods.
-8-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
(2) CHANGE IN CONTROL
a. OVERVIEW
On August 6, 2004, stockholders of the Company's parent Holdings, led by AIP,
completed the sale of all of their stock to KSTA Acquisition, LLC, an affiliate
of Kohlberg Management IV, L.L.C. Immediately following this transaction, KSTA
Acquisition, LLC distributed all of the stock of Holdings to its parent, KSTA
Holdings, Inc. and merged with and into the Company, which continues as the
surviving corporation.
b. TRANSACTIONS
The amounts necessary to consummate the Transactions totaled approximately $330
million, including approximately $221.4 million to purchase all of the
outstanding stock of Holdings, approximately $88.3 million to repay existing
indebtedness, approximately $20.0 million in related fees and expenses, and
approximately $0.3 million in net change in cash balances.
The Transactions were financed as follows:
- - a cash common equity investment of $105 million in Holdings by an investor
group led by funds managed by Kohlberg Management IV, L.L.C. and certain
members of management of the Company;
- - KSTA Acquisition, LLC and the Company issued new senior subordinated notes
to various qualified institutional buyers for $160 million (see Note 5);
- - KSTA Acquisition, LLC and the Company borrowed $65 million under a new six
year term loan senior secured credit facility (see Note 5).
c. ALLOCATION OF PURCHASE PRICE
The Transactions have been accounted for using the purchase method of
accounting, whereby the purchase cost has been allocated to the fair value of
the tangible and identifiable intangible assets acquired and liabilities assumed
with the excess identified as goodwill, as set forth in the table below. The
consolidated goodwill resulting from the transaction was approximately $146.9
million. Fair values are based on valuations and other studies that are
substantially complete. The Company does not expect that the effect of any final
adjustments to such valuations and studies will result in material adjustment to
the purchase price allocation. The fair value of the purchase price has been
allocated as of August 6, 2004 as follows:
-9-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
Current assets $111,297
Property, plant and equipment 132,113
Goodwill 146,893
Intangible and other assets 110,609
Deferred income taxes 7,221
--------
Total assets acquired 508,133
--------
Current liabilities 61,674
Capital lease obligations 811
Foreign debt 4,429
Senior subordinated notes (Old Notes) 11,793
Long term deferred income taxes 46,132
Pension and other post-retirement liabilities 53,097
Other long term liabilities 197
--------
Total liabilities 178,133
--------
Net assets acquired $330,000
========
The current assets included $23.0 million of acquired cash, with $11.8 million
used for the settlement of the 10.25% Senior Subordinated Notes (the "Old
Notes") (See Note 5).
The intangible assets totaling $110.6 million included $51.1 million of
non-amortizing trademarks and trade names, $15.9 million of debt issuance costs
with an average useful life of 8.6 years, $24.3 million of technology with an
average useful life of 12.8 years, and $18.6 million assigned to customer
relationships with an estimated useful life of 10 years.
d. PRO FORMA INFORMATION
Presented below are unaudited pro forma data for the three months and nine
months periods ended September 30, 2004 and 2003, after giving effect to the
Transactions as if they had occurred on January 1, and July 1, 2004 and 2003,
respectively. The pro forma adjustments give consideration to (a) the allocation
of the August 6, 2004 purchase price, (b) the Company's new capital structure,
and (c) the new Kohlberg management fee.
Unaudited Pro Forma Data
------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 86,453 $ 70,007 $ 260,477 $ 214,341
Operating (loss) income (16,945) 2,343 814 14,673
Net loss $ (16,120) $ (1,943) $ (10,704) $ (764)
-10-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
The unaudited pro forma financial information is presented for informational
purposes only and does not purport to represent what the Company's results of
operations would have been if the Transactions had taken place as of the dates
indicated, or what such results will be for any future period.
(3) INVENTORIES
Components of inventories are as follows:
As of As of
September 30, December 31,
2004 2003
------------- ------------
Raw materials and purchased parts $ 16,185 $ 8,025
Work-in-process 18,599 14,506
Finished goods 7,432 7,563
------------- ------------
$ 42,216 $ 30,094
============= ============
(4) INCOME TAXES
The Company had an effective income tax rate of 44.8% for the period from August
6, 2004 to September 30, 2004 and an effective tax rate of 27.6% for the period
January 1, 2004 to August 5, 2004, compared to 40.1% for the first nine months
of 2003. In the period from August 6, 2004 to September 30, 2004 the Company
recorded $1.9 million of tax expense on a pre-tax income of $4.1 million and for
the period January 1, 2004 to August 5, 2004, the Company recorded $2.1 million
of tax benefit on a pre-tax loss of $7.6 million. In the nine months ended
September 30, 2003, the Company recorded $4.4 million of tax expense on a
pre-tax income of $11.1 million. Taxes for 2003 include $0.7 million for a
valuation allowance associated with foreign net operating loss carry-forwards in
SpA that expired in 2003 without utilization. The Company received U.S. income
tax benefits for export sales in all periods. The tax rate for 2004 included the
transaction costs related to the Transactions (see Note 2). 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.
-11-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
(5) LONG-TERM DEBT
On August 6, 2004 the Company issued new senior subordinated notes (the "New
Notes") totaling $160 million. The New Notes bear interest of 10%, payable
semi-annually and will mature on August 15, 2014. Payment of the New Notes is an
obligation of the Company and is guaranteed by its subsidiaries. Additionally,
the New Notes are subject to covenants including limitations on indebtedness,
liens, and dividends or other distributions to stockholders.
Following the Transactions, the Company purchased $54.5 million of its old
senior subordinated notes issued in 1997 (the "Old Notes") based on the terms of
a tender offer dated July 19, 2004. An $11.5 million outstanding balance of the
Old Notes was called by the Company according to the terms of the original
indenture and purchased on September 7, 2004.
The Company had $160.0 million of the New Notes at an interest rate of 10.0%
outstanding at September 30, 2004 and $66.0 million of Old Notes at an interest
rate of 10.25% outstanding at December 31, 2003. The Old Notes were due on
December 15, 2007. On January 15, 2003, the Company retired $5.0 million in Old
Notes resulting in a $0.8 million gain after the write off of unamortized debt
issuance costs of $0.1 million. See Part I, Item 2 - Change in Control of
Company's Parent, for information on the tender offer for these Old Notes.
The Old Notes issued by the Company were guaranteed jointly, fully, severally
and unconditionally by certain subsidiaries of the Company. After the completion
of the tender offer of the Old Notes, these guarantees were extinguished.
The Company also refinanced its existing senior bank facility comprised of a
term loan (the "Old Term Loan") and revolving credit line (the "Old Revolving
Credit Line"). The Company borrowed $65 million under a new six year term loan
with various lenders (the "New Term Loan") which bears interest at prime plus
2.5% or Libor plus 3.5%, at the discretion of the Company, with certain
limitations. Principal payments of $0.2 million are due quarterly with a final
payment of the unamortized balance due on August 6, 2010. The Company also
negotiated a "New Revolving Credit Line" of $35 million, which bears interest at
prime plus 1.25% or Libor plus 2.25%, at the discretion of the Company, with
certain limitations, and is payable on August 6, 2009.
The Company had $65.0 million of New Term Loan and $25.0 million of Old Term
Loan outstanding at September 30, 2004 and December 31, 2003, respectively. The
relative interest rates on September 30, 2004 ranged from 5.34% to 7.25%. The
Company had borrowings of $2.8 against the New Revolving Credit Line at
September 30, 2004 and no borrowings against the Old Revolving Credit Line at
December 31, 2003. The amount available for borrowing was $25.4 million and
$24.7 million at September 30, 2004 and December 31, 2003, respectively.
-12-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
The New Term Loan is governed by a Credit and Guaranty Agreement dated August 6,
2004 and the New Revolving Credit Facility is governed by a Revolving Credit and
Guaranty Agreement dated August 6, 2004 (together, the "Senior Credit
Facilities"). The Senior Credit Facilities are guaranteed by Holdings and
Precision Engine Products Corp. The Senior Credit Facilities are secured by
substantially all of the domestic assets of the Company. The New Revolving
Credit Line requires that the Company maintain a minimum fixed charge coverage
ratio if available borrowings fall below $5.0 million. This covenant was not
applicable as of the September 30, 2004 measurement date.
Indebtedness in overseas operations included $2.6 million in overdraft
borrowings at SpA outstanding at September 30, 2004 and also December 31, 2003.
The Company also had $1.4 million and $1.5 million in foreign borrowings at SAPL
outstanding at September 30, 2004 and December 31, 2003, respectively.
(6) GOODWILL , INTANGIBLE ASSETS AND OTHER ASSETS
Goodwill for the Precision Products & Technologies Group segment ("Precision
Products") was $112.5 million and $59.4 million at September 30, 2004 and
December 31, 2003, respectively. Goodwill for the Precision Engine Products
segment ("Precision Engine") was $34.4 million and $11.4 million at September
30, 2004 and December 31, 2003, respectively. The change in goodwill balances
between periods is due to the Transactions on August 6, 2004.
Major components of intangible and other assets at September 30, 2004 and
December 31, 2003 are listed below:
As of September 30, 2004 As of December 31, 2003
------------------------ -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
----- ------------ ----- ------------
Trademarks / Trade names $ 51,100 $ -- $ 1,027 $ 371
Technology / Patents 24,300 391 9,809 7,681
Debt issuance costs 15,946 308 4,886 2,105
Pension intangible asset -- -- 1,604 --
Customer contracts 18,600 284 1,310 1,134
Deferred income taxes -- -- 335 --
Other 671 3 793 83
--------- ----------- --------- -----------
$ 110,617 $ 986 $ 19,764 $ 11,374
========= =========== ========= ===========
-13-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
Amortization expense of intangible assets was $678 for the period from August 6,
2004 to September 30, 2004, $389 for the period from January 1, 2004 to August
5, 2004 and $62 for the period from July 1, 2004 to August 5, 2004. Amortization
of intangible assets for the three and nine months ended September 30, 2003 was
$367 and $1,106, respectively. Estimated annual amortization expense of
intangible assets is expected to be $1,786 for the period from August 6, 2004 to
December 31, 2004, $4,774 in 2005, $4,147 in 2006, $4,096 in 2007 and $3,599 in
2008.
Amortization of debt issuance costs of $308, $430 and $71 is included as
interest expense in the accompanying condensed consolidated statements of
operations for the periods August 6, 2004 to September 30, 2004, January 1, 2004
to August 5, 2004 and July 1, 2004 to August 5, 2004.
(7) 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.
The changes in the Company's warranty accrual is provided below:
Company Predecessor
------- ----------------------------------------------------------------
August 6, 2004 July 1, 2004 Three Months January 1, 2004 Nine Months
through through Ended through Ended
September 30, August 5, September 30, August 5, September 30,
2004 2004 2003 2004 2003
----------- ----------- ----------- ----------- -----------
Warranty liability, beginning of period $ 1,762 $ 1,871 $ 1,613 $ 1,842 $ 1,875
Warranty expense based on products sold 127 76 210 491 630
Adjustments to warranty estimates 24 64 (150) 122 (450)
Warranty claims paid (179) (249) (152) (693) (534)
----------- ----------- ----------- ----------- -----------
Warranty liability, end of period $ 1,734 $ 1,762 $ 1,521 $ 1,762 $ 1,521
=========== =========== =========== =========== ===========
-14-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
The Company's warranty accrual is included as a component of accrued liabilities
on the condensed consolidated balance sheets.
(8) COMPREHENSIVE INCOME
The Company's comprehensive income is as follows:
Company Predecessor
------- --------------------------------------------------------------
August 6, 2004 July 1, 2004 Three Months January 1, 2004 Nine Months
through through Ended through Ended
September 30, August 5, September 30, August 5, September 30,
2004 2004 2003 2004 2003
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 2,306 $ (16,622) $ 576 $ (5,479) $ 6,860
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 178 (406) (2,012) (26) 2,220
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss) $ 2,484 $ (17,028) $ (1,436) $ (5,505) $ 9,080
=========== =========== =========== =========== ===========
(9) SEGMENTS
The Company has two reportable segments, 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% for the period from August 6 to September 30, 2004, 83% for
the period from January 1, 2004 to August 5, 2004 and 80% for the period from
July 1, 2004 to August 5, 2004 of the Company's total 2004 revenues. This
segment accounted for approximately 77% and 76% of the Company's total revenues
for the three months and nine months ended September 30, 2003, respectively.
Precision Engine manufactures roller-rocker arms, hydraulic valve lifters and
lash adjusters primarily for gasoline engines. This segment accounted for
approximately 17% for the period from August 6 to September 30, 2004, 17% for
the period from January 1, 2004 to August 5, 2004 and 20% for the period from
July 1, 2004 to August 5, 2004 of the Company's total 2004 revenues. This
segment accounted for approximately 23% and 24% of the Company's total revenues
for the three months and nine months ended September 30, 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 Precision Products and Precision Engine to be two
-15-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
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 for the Company as of and for the period from August
6 to September 30, 2004 and for the Predecessor as of and for the nine months
ended September 30, 2003 and for the periods July 1, 2004 to August 5, 2004,
January 1, 2004 to August 5, 2004 and for the three months ended September 30,
2003:
Company
-------
As of and For the Period August 6, 2004 through September 30, 2004
------------------------------------------------------------------
Precision Precision
Products Engine Eliminations Totals
-------- ------ ------------ ------
Net sales $ 47,827 $ 9,610 $ (60) $ 57,377
Gross profit (loss) 13,527 (56) -- 13,471
Depreciation and amortization expense 2,867 511 -- 3,378
Operating income (loss) 8,237 (631) -- 7,606
Net income (loss) 3,611 (1,305) -- 2,306
Total assets 439,288 77,844 (13,821) 503,311
Total capital expenditures 1,712 451 -- 2,163
Predecessor
-----------
For the Period July 1, 2004 through August 5, 2004
--------------------------------------------------
Precision Precision
Products Engine Eliminations Totals
-------- ------ ------------ ------
Net sales $ 24,170 $ 4,936 $ (30) $ 29,076
Gross profit (loss) 3,369 (732) -- 2,637
Depreciation and amortization expense 1,748 308 -- 2,056
Operating loss (22,271) (881) -- (23,152)
Net (loss) income (16,680) 58 -- (16,622)
Total capital expenditures 2,057 78 -- 2,135
Predecessor
-----------
For the Three Months Ended September 30, 2003
---------------------------------------------
Precision Precision
Products Engine Eliminations Totals
-------- ------ ------------ ------
Net sales $ 54,166 $ 15,848 $ (7) $ 70,007
Gross profit 10,929 344 -- 11,273
Depreciation and amortization expense 4,261 850 -- 5,111
Operating income (loss) 4,068 (645) -- 3,423
Net income (loss) 723 (147) -- 576
Total capital expenditures 1,705 518 -- 2,223
-16-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
Predecessor
-----------
For Period January 1, 2004 through August 5, 2004
-------------------------------------------------
Precision Precision
Products Engine Eliminations Totals
-------- ------ ------------ ------
Net sales $ 168,060 $ 35,168 $ (128) $ 203,100
Gross profit (loss) 40,950 (515) -- 40,435
Depreciation and amortization expense 10,038 1,936 -- 11,974
Operating income (loss) 95 (2,606) -- (2,511)
Net loss (3,740) (1,739) -- (5,479)
Total capital expenditures 5,926 435 -- 6,361
Predecessor
-----------
As of and For the Nine Months Ended September 30, 2003
------------------------------------------------------
Precision Precision
Products Engine Eliminations Totals
-------- ------ ------------ ------
Net sales $ 162,102 $ 52,246 $ (7) $ 214,341
Gross profit 35,759 4,902 -- 40,661
Depreciation and amortization expense 12,586 2,481 -- 15,067
Operating income 14,725 2,492 -- 17,217
Net income 5,473 1,387 -- 6,680
Total assets 250,382 47,422 (18,824) 278,980
Total capital expenditures 6,589 996 -- 7,585
(10) 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 periods shown were as follows:
-17-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
Company Predecessor
------- ----------------------------------------------------------------
August 6, 2004 July 1, 2004 Three Months January 1, 2004 Nine Months
through through Ended through Ended
September 30, August 5, September 30, August 5, September 30,
2004 2004 2003 2004 2003
----------- ----------- ----------- ----------- -----------
Service cost $ 476 $ 301 $ 716 $ 1,854 $ 2,149
Interest cost 744 470 1,147 2,898 3,440
Expected return on plan assets (623) (403) (821) (2,486) (2,463)
Amortization of prior service costs -- 17 43 103 130
Recognized net actuarial loss -- 5 101 33 301
----------- ----------- ----------- ----------- -----------
Net periodic pension cost $ 597 $ 390 $ 1,186 $ 2,402 $ 3,557
=========== =========== =========== =========== ===========
The pension assets and liabilities were remeasured as of the closing date of the
Transactions, resulting in an accrued liability equal to the funded status of
the plans. As a result, $11.9 million of unrecognized actuarial losses existing
prior to the Transactions were eliminated.
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 contributed $1.8 million on September 30, 2004 and will not be required
to make any further contributions this year.
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 periods shown were as
follows:
Company Predecessor
------- ---------------------------------------------------------------
August 6, 2004 July 1, 2004 Three Months January 1, 2004 Nine Months
through through Ended through Ended
September 30, August 5, September 30, August 5, September 30,
2004 2004 2003 2004 2003
----------- ----------- ----------- ----------- -----------
Service cost $ 36 $ 23 $ 78 $ 142 $ 233
Interest cost 102 64 232 396 845
Amortization of prior service costs -- (258) (666) (1,590) (1,555)
Recognized net actuarial loss -- -- 46 -- 108
----------- ----------- ----------- ----------- -----------
Net periodic postretirement benefits
(income) cost $ 138 $ (171) $ (310) $ (1,052) $ (369)
=========== =========== =========== =========== ===========
The postretirement benefit liabilities were remeasured as of the closing date of
the Transactions, resulting in an accrued postretirement benefit liability equal
to the benefit
-18-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
obligation of the plan, and $9.9 million of unrecognized actuarial gains
existing prior to the Transactions were eliminated.
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 106-2. The Company has already taken steps to limit its costs
for postretirement health care benefits; any reductions in postretirement
benefit costs resulting from the Act are not expected to be material.
-19-
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
CHANGE IN CONTROL OF COMPANY'S PARENT:
On August 6, 2004, stockholders of the Company's parent Holdings, led by
American Industrial Partners Capital Fund II, L.P. ("AIP"), completed the sale
of all of their stock to KSTA Acquisition, LLC, an affiliate of Kohlberg
Mangement IV, L.L.C., for $221.4 million. In addition to AIP, the selling
stockholders included certain current and former members of management of the
Company. Immediately following this transaction, KSTA Acquisition, LLC
distributed all of the stock of Holdings to its parent, KSTA Holdings, Inc.
("KSTA") and merged with and into the Company, which continues as the surviving
corporation. As a result, KSTA owns 100% of the stock of Holdings. The stock
purchase and the related transactions, including the issuance of the New Notes,
the entering into the Senior Credit Facilities, the repayment of certain
existing indebtedness, including the tender for the Old Notes by KSTA
Acquisition, LLC, and the payment of related fees and expenses are collectively
defined as the "Transactions."
The amounts necessary to consummate the Transactions totaled approximately $330
million, including approximately $221.4 million to purchase all of the
outstanding stock of Holdings, approximately $88.3 million to repay existing
indebtedness, approximately $20.0 million in related fees and expenses, and
approximately $0.3 million in net change in cash balances.
The Transactions were financed as follows:
- - a cash common equity investment of $105 million in Holdings by an investor
group led by funds managed by Kohlberg Management IV, L.L.C. and certain
members of management of the Company;
- - KSTA Acquisition, LLC and the Company issued the New Notes to various
qualified institutional buyers for $160 million;
- - KSTA Acquisition, LLC and the Company borrowed $65 million of New Term
Loans.
The New Notes bear interest of 10.0%, payable semi-annually and will mature on
August 15, 2014. The New Term Loans bear interest at prime plus 2.5% or Libor
plus 3.5% and principal is repaid in 0.25% quarterly installments with a final
payment of the unamortized balance due on August 6, 2010. The Company also
negotiated a new $35.0 revolving credit facility, which bears interest at prime
plus 1.25% or Libor plus 2.25% payable on August 6, 2009. This new revolving
credit facility requires that the Company maintain a minimum fixed charge
coverage ratio if available borrowings fall below $5.0 million. The New Term
Loans and revolving credit facility are secured by substantially all of the
Company's domestic accounts receivable, inventory and assets.
Following the Transactions, the Company purchased $54.5 million of the Old Notes
under the terms of a tender offer dated July 19, 2004. The $11.5 million balance
of the
-20-
STANADYNE CORPORATION AND SUBSIDIARIES
outstanding Old Notes was called by the Company according to the terms of the
original indenture and purchased on September 7, 2004.
In connection with the Transactions, the Company amended the terms of the
Management Stock Option Plan to provide for vesting of all unvested options and
purchased all of the outstanding stock options requiring a charge in the third
quarter of 2004 for approximately $14.3 million in the predecessor financial
statements. Other Transactions related costs totaling $8.4 million were charged
to earnings in the third quarter of 2004 in the predecessor financial
statements.
Following the Transactions, the Company's board of directors was reconstituted.
All of the directors serve until a successor is duly elected and qualified or
until the earlier of his death, resignation or removal. There are no family
relationships between any of the directors or executive officers.
NAME AGE
---- ---
Samuel P. Frieder 39
William D. Gurley 55
James A. Kohlberg 46
Christopher Lacovara 39
James D. Wiggins 56
Gordon H. Woodward 35
SAMUEL P. FRIEDER, Director. Mr. Frieder is a Principal of Kohlberg & Company,
L.L.C., which he joined in 1989. He is a member of the board of directors of
Allied Aerospace Engineering, Inc., Applied Graphics Technologies, Inc., CUSA
Busways, L.L.C., Holley Performance Products, Inc., Innotek, Inc., Katy
Industries, Inc., Nancy's Specialty Foods, Inc., Nevamar Company, L.L.C., Orion
Food Systems, L.L.C., Redaelli Tecna, S.p.A, Simplicity Manufacturing, Inc. and
KTTI Holding Company, Inc. He is also a member of the Management Committee of
Katonah Capital, L.L.C. Mr. Frieder received an A.B. from Harvard College.
WILLIAM D. GURLEY, President, Chief Executive Officer and Director. Mr. Gurley
came to Precision Products in 1984 as Vice President of Marketing and Planning
and was promoted in 1987 to the position of Vice President, Marketing and
Product Engineering. In 1989, Mr. Gurley was promoted to the position of
Executive Vice President, Marketing, Engineering and Operations. At that time,
he was elected as a director. In 1995, he was promoted to his current position.
Prior to joining Stanadyne, he worked for the Garrett Corporation's Automotive
Products Company (now a portion of Allied Signal purchased by Honeywell) in a
series of sales and management positions. Mr. Gurley subsequently became the
President and General Manager of its Japanese subsidiary. Before Garrett
Corporation, he worked at the Packard Electric Division, General Motors in
engineering, manufacturing and sales positions. Mr. Gurley holds a B.S. in
mechanical engineering from Rose Hulman Institute of Technology and an M.B.A.
degree from Pepperdine University.
JAMES A. KOHLBERG, Director. Mr. Kohlberg is a Managing Principal of Kohlberg &
Company, L.L.C., which he co-founded in 1987. He is a member of the board of
directors of
-21-
STANADYNE CORPORATION AND SUBSIDIARIES
Allied Aerospace Engineering, Inc., Applied Graphics Technologies, Inc., CUSA
Busways, L.L.C., Holley Performance Products, Inc., Innotek, Inc., Katy
Industries, Inc., Nancy's Specialty Foods, Inc., Nevamar Company, L.L.C., Orion
Food Systems, L.L.C. and KTTI Holding Company, Inc. Mr. Kohlberg received a B.A.
from Golden Gate University and an M.B.A. from New York University.
CHRISTOPHER LACOVARA, Director. Mr. Lacovara is a Principal of Kohlberg &
Company, L.L.C., which he joined in 1988. He is a member of the board of
directors of Allied Aerospace Engineering, Inc., Applied Graphics Technologies,
Inc., CUSA Busways, L.L.C., Holley Performance Products, Inc., Innotek, Inc.,
Katy Industries, Inc., Nancy's Specialty Foods, Inc., Orion Food Systems, L.L.C,
Redaelli Tecna, S.p.A. and KTTI Holding Company, Inc. He is also a member of
the Management Committee of Katonah Capital, L.L.C. Mr. Lacovara received an
A.B. from Harvard College, a B.E.E.S. from Hofstra University and an M.S. from
Columbia University.
JAMES D. WIGGINS, Chairman. Mr. Wiggins is a Principal of Kohlberg & Company,
L.L.C., which he joined in 2002. He also is currently Chairman and Chief
Executive Officer of Holley Performance Products, Inc., a Kohlberg portfolio
company. Prior to joining Kohlberg & Company, Mr. Wiggins was President and
Chief Executive Officer of the Gates Group of Companies, a subsidiary of Tomkins
PLC, which acquired Schrader-Bridgeport International, Inc. from Kohlberg &
Company in 1998. Mr. Wiggins received a B.S.M.E. from Lawrence Technological
University and an MBA from Ball State University.
GORDON H. WOODWARD, Director. Mr. Woodward is a Principal of Kohlberg & Company,
L.L.C., which he joined in 1996. He is a member of the board of directors of
CUSA Busways, L.L.C., Innotek, Inc., Nancy's Specialty Foods, Inc., Nevamar
Company, L.L.C. and Redaelli Tecna, S.p.A. Mr. Woodward received an A.B. from
Harvard College.
-22-
STANADYNE CORPORATION AND SUBSIDIARIES
(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 9 of Notes to Condensed
Consolidated Financial Statements.
Amounts and percentages relating to 2004 in the following pages are presented on
a combined basis of the Company and the Predecessor.
The Company's sales totaled $86.5 million and $260.5 million for the three and
nine months ended September 30, 2004 respectively, representing increases of
23.5% and 21.5% when compared to the same periods of 2003. These increases
reflect continued strong demand for the Company's products from the off-highway
markets, where sales accounted for 64% of the total nine months year-to-date
2004 sales as compared to 60% for the first nine months of 2003. Sales to the
original equipment manufacturers ("OEMs") and the service markets increased by
$23.3 million or 19% and $23.0 million or 25.2%, respectively, for the first
nine months of 2004 compared to the same period in 2003.
Performance by segment for the third quarter of 2004 was mixed, with continued
increases in sales and earnings in the Precision Products segment contrasted by
declines in the Company's predominantly on-highway Precision Engine segment.
Precision Products sales increased by $17.8 million for the three months ended
September 30, 2004 when compared to the same period in 2003. Highlighted by a
$9.6 million increase in year-to-year third quarter sales to Deere and Company
("Deere"), this improvement resulted from continued strength in the underlying
demand for this segment's products in both the OEM and service markets.
Operating income was negative for the three months ended September 30, 2004 due
to $22.7 million of costs related to the Transactions, which, if excluded, would
reflect operating income of $8.7 million or more than twice the result for the
same period in 2003.
Precision Engine sales and operating income decreased by $1.3 million and $1.1
million, respectively, for the three months ended September 30, 2004 when
compared to the same period in 2003. Although demand from DaimlerChrysler
("DCX") for valve-train actuator assembly ("VTAA's") increased in the third
quarter of 2004, continued weakness in the aftermarket demand for hardenable
iron tappets explained most of the lower sales result. Precision Engine entered
into a multi-year arrangement with Madison-Kipp Corporation during the third
quarter of 2004 as the sole supplier of certain components for VTAA's produced
for DCX. We believe this change will reduce cost and improve quality in this
segment.
-23-
STANADYNE CORPORATION AND SUBSIDIARIES
Although prior reporting periods were not significantly impacted, the third
quarter gross profits in 2004 included $0.5 million in cost surcharges for
purchased materials. The Company continues to act to minimize supply shortages
in 2004 but cannot foresee the extent of the impact that may be felt on future
earnings.
BASIS OF PRESENTATION
The following table displays unaudited performance details for the periods
shown. The three months and nine months periods ending September 30, 2004
include the combined results of the Predecessor through August 5, 2004 and the
Company beginning August 6, 2004. Net sales, cost of goods sold, gross profit,
selling, general and administrative expense ("SG&A"), amortization of
intangibles, Transactions related costs, 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -
Net sales 86,453 100.0 70,007 100.0 260,477 100.0 214,341 100.0
Cost of goods sold 70,345 81.4 58,734 83.9 206,571 79.3 173,680 81.0
Gross profit 16,108 18.6 11,273 16.1 53,906 20.7 40,661 19.0
SG&A 7,992 9.2 7,208 10.3 24,272 9.3 21,513 10.0
Amortization of intangibles 740 0.9 367 0.5 1,067 0.4 1,106 0.5
Transactions related costs 22,702 26.3 -- 0.0 22,702 8.7 -- 0.0
Management fees 220 0.3 275 0.4 770 0.3 825 0.4
Operating (loss) income (15,546) (18.0) 3,423 4.9 5,095 2.0 17,217 8.0
Net (loss) income (14,316) (16.6) 576 0.8 (3,173) (1.2) 6,860 3.2
COMPARISON OF RESULTS OF OPERATIONS:
The Period August 6, 2004 through September 30, 2004 for the Company and the
Period July 1, 2004 through August 5, 2004 for the Predecessor
Compared to
The Three Months Ended September 30, 2003
NET SALES. Net sales for the third quarter of 2004 totaled $86.5 million
compared to $70.0 million in the third quarter of 2003, representing an increase
of $16.5 million or 23.5%. The trends by operating segment, end markets and
product lines for the third quarter of 2004, which are described below, are
consistent with those experienced in the first six months of 2004.
-24-
STANADYNE CORPORATION AND SUBSIDIARIES
Sales by operating segment reflect an increase in third quarter 2004 Precision
Products revenues of $17.8 million or 32.9% more than the same period in 2003,
while Precision Engine revenues declined by $1.3 million or 8.2% during the same
period.
Precision Products sales reflect continued strength in the underlying demand for
this segment's products in both the OEM and service markets. Shipments to OEM's
in the third quarter of 2004 increased by 30.8% or $8.3 million and shipments to
the service markets increased by 35.0% or $9.6 million when compared to the
third quarter of 2003. The strength in demand for diesel powered equipment in
the agricultural and construction markets drove a 56.1% increase in third
quarter business with Deere as compared to the same period in 2003. Precision
Products recorded significant increases in third quarter sales of fuel filters,
fuel pumps and fuel injectors. Third quarter shipments of diesel fuel pumps and
injectors in 2004 and 2003 were $49.7 million versus $35.4 million,
respectively. In addition to the added demand from Deere, this increase of $14.3
million or 40.3% was also driven by higher sales of fuel pumps for the Hummer
and HUMMV vehicles produced by General Engine Products and the U.S. military.
Sales of the Company's new Integrated Fuel System ("IFS") launched into
production late last year, totaled $1.6 million in the third quarter of 2004.
Sales of fuel filters totaled $18.6 million in the third quarter of 2004 or
25.5% more than the third quarter of 2003, with significant growth in both OEM
and service market sales. Delivery of new automated assembly equipment for
filter elements was delayed until the fourth quarter of 2004 due to scheduling
problems with the machine manufacturer. Finally, the Precision Components and
Assembly ("PCA") product line reported sales totaling $3.6 million in the third
quarter of 2004, reflecting a slight decrease of $0.2 million from the same
period in 2003.
Sales of valve train products produced by the Precision Engine segment totaled
$14.5 million in the third quarter of 2004 and were $1.3 million or 8.2% less
than the same period in 2003. Sales to OEM customers totaled $0.2 million less
in the third quarter of 2004 versus the third quarter of 2003. An inventory
adjustment by Tritec Motors, Ltda. resulted in a $1.3 million reduction in third
quarter 2004 sales of roller rocker arms for the 1.6 liter engine produced in
Brazil. This change was offset by $1.6 million increased demand in the third
quarter of 2004 from DCX for VTAA's used in their 3.5 liter engine powering the
Pacifica and 300 vehicles. The balance of the change in OEM sales was due to an
expected decline of $0.5 million in tappets sold to Ford Motor Company related
to the phase-out of production of the Escort. Aftermarket demand for hardenable
iron tappets was $1.1 million lower in the third quarter of 2004 as compared to
the same period a year ago.
GROSS PROFIT. Gross profit for the Company totaled $16.1 million and 18.6% of
net sales in the third quarter of 2004, versus $11.3 million and 16.1% of net
sales for the same period in 2003. Gross profit results by segment followed the
changes in sales reported above with improved gross profit in Precision Products
more than offsetting lower gross profit in Precision Engine.
The Precision Products segment recorded gross profit of $16.9 million or 23.5%
of net sales in the third quarter of 2004, compared to $10.9 million or 20.2% of
net sales recorded for the same
-25-
STANADYNE CORPORATION AND SUBSIDIARIES
period in 2003. All of this improvement was due to additional operating leverage
from higher sales volumes in the third quarter of 2004 and a more favorable mix
of higher margin aftermarket sales of filter and pump products. Gross profits
were unfavorably impacted by higher manufacturing costs in the third quarter of
2004, due to cost premiums incurred for expedited production ramp up of the new
IFS product and higher levels of overtime and inefficiencies associated with the
significant increase in demand for virtually all of the segment's products.
Material cost surcharges related to the increased global demand for raw
materials totaled $0.2 million in the third quarter of 2004.
The Precision Engine segment recorded negative gross profits of $(0.8) million
or (5.4)% of net sales in the third quarter of 2004 as compared to the gross
profit of $0.4 million or 2.2% of net sales reported for the same period of
2003. All of the negative gross profit was recorded in July when reduced demand
from both OEM and aftermarket customers combined with annual plant maintenance
costs during the summer shutdown period to produce the loss. In August 2004,
segment management introduced an Operational Performance Improvement Plan for
the business that included several Lean Manufacturing, Six Sigma and competitive
sourcing initiatives scheduled for implementation in 2004 and 2005. Gross profit
results showed signs of improvement in August and September but were not large
enough to erase the losses recorded in July. Material cost surcharges in this
segment totaled $0.3 million in the third quarter of 2004 and are expected to
continue to escalate through the balance of the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A in the third quarter
of 2004 totaled $8.0 million and 9.2% of net sales as compared to the $7.2
million and 10.3% of net sales reported for the same period of 2003. The $0.8
million increase was primarily due to third quarter 2004 increases of $0.2
million for expedited freight on sales costs in the Precision Products segment
to support increases in customer schedules and $0.2 million higher
post-retirement health care costs. The SG&A costs in the Precision Engine
segment reflected a decrease of $0.1 million from third quarter 2003 to third
quarter 2004 due mostly to a shift from foreign exchange losses of $0.1 million
recorded in 2003 to foreign exchange gains of $0.2 million recorded in 2004,
offset by $0.2 million higher post-retirement health care costs in the third
quarter of 2004. Higher post-retirement health care costs in both segments in
the third quarter of 2004 are the result of the elimination through purchase
accounting of unamortized actuarial gains recorded as income prior to the
Transactions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $0.7 million in the third quarter of 2004 from $0.4 million in the third
quarter of 2003. This increase reflected the additional amortization resulting
from the valuation of the Company's intangible assets acquired through the
Transactions.
TRANSACTION RELATED COSTS. The predecessor company incurred approximately $22.7
million of costs related to the Transactions in the third quarter of 2004. This
amount included $16.3 million
-26-
STANADYNE CORPORATION AND SUBSIDIARIES
paid to certain members of management in connection with the settlement of
outstanding stock options issued under the Management Stock Option Plan and
other compensation related to the change of control; and $6.4 million for
professional services and other fees incurred in support of the Transactions.
OPERATING (LOSS) INCOME. An operating loss for the third quarter of 2004 totaled
$(15.5) million or (18.0)% of net sales versus operating income of $3.4 million
or 4.9% for the same period in 2003. The change in operating income from year to
year was driven primarily by the $22.7 million of transaction costs, which if
excluded, would reflect an operating income result of $7.2 million and 8.3% of
sales. Excluding transaction costs, results by segment reflect improvement in
the Precision Products segment, where higher gross profits produced third
quarter 2004 operating income of $8.7 million or 12.0% of net sales versus the
$4.1 million or 7.5% of net sales in the third quarter of 2003. Lower gross
profits recorded in the Precision Engine segment in the third quarter of 2004
resulted in an operating loss of $1.5 million or (10.4)% of net sales compared
to an operating loss of $0.6 million or (4.1)% of net sales in the third quarter
of 2003.
NET (LOSS) INCOME. Net losses in the third quarter of 2004 totaled $14.3 million
due to the $22.7 million of transaction costs, which if excluded, would reflect
a net income result of approximately $2.1 million versus $0.6 million for the
same period in 2003. This improvement reflected the combined results of $3.8
million of higher operating income in 2004, offset by $2.0 million in higher
interest expense due to higher debt, and increased income taxes on higher
earnings.
The Period August 6, 2004 through September 30, 2004 for the Company and the
Period January 1, 2004 through August 5, 2004 for the Predecessor
Compared to
The Nine Months Ended September 30, 2003
NET SALES. Net sales for the first nine months of 2004 totaled $260.5 million
compared to $214.3 million in the first nine months of 2003, representing an
increase of $46.1 million or 21.5%.
Sales by operating segment reflect an increase in the first nine months 2004
Precision Products revenues of $53.8 million or 33.2% more than the same period
in 2003, while Precision Engine revenues declined by $7.5 million or 14.3%
during the same period.
Precision Products sales for the first nine months of 2004 totaled $215.9
million, reflecting a 29.1% increase in shipments to OEM's and a 37.6% increase
in sales to the aftermarket when compared to the same period of 2003. The growth
in sales to OEM's resulted primarily from increased demand from Deere for diesel
fuel injection equipment. Sales to Deere increased by $26.7 million in the first
nine months of 2004 as compared to the same period of 2003. Included
-27-
STANADYNE CORPORATION AND SUBSIDIARIES
in this increase was $2.8 million of 2004 sales of the new IFS product. Sales
for the first nine months of 2004 increased by $6.0 million from the same period
of 2003 due primarily to the production ramp up for PCA products, with
additional injector and filter sales contributing to the year-over-year increase
as well. Fuel pump sales to General Engine Products for the Hummer vehicle
increased by $1.3 million in the first nine months of 2004 versus 2003.
Precision Products sales to the aftermarket in the first nine months of 2004
increased by $29.2 million when compared to the same period in 2003. In addition
to the increased service demand from Deere, sales of filter replacement elements
accounted for $9.9 million of added revenues, with much of the remainder of the
increase due to $8.8 million higher demand for service pumps from General Motors
Corporation and $3.5 million additional fuel pumps to the U.S. military.
Precision Engine segment sales were $7.5 million lower in the first nine months
of 2004 compared to the same period in 2003. Sales to OEM customers decreased by
$1.2 million in the first nine months of 2004. An inventory adjustment by Tritec
Motors, Ltda. in the third quarter of 2004, resulted in a $1.3 million reduction
in 2004 sales of roller rocker arms for the 1.6 liter engine produced in Brazil.
This change was offset by $2.0 million increased demand in the first nine months
of 2004 from DCX, primarily for VTAA's used in their 3.5 liter engine powering
the Pacifica and 300 vehicles. The balance of the change in OEM sales was due to
an expected decline of $2.3 million in tappets sold to Ford Motor Company
related to the phase-out of production of the Escort. Aftermarket demand for
hardenable iron tappets was $5.9 million lower in the first nine months of 2004
as compared to the same period a year ago due to customer inventory reductions
early in the year and added competition from foreign suppliers.
GROSS PROFIT. Gross profit for the Company in the first nine months of 2004
improved to $53.9 million and 20.7% of net sales, from $40.7 million and 19.0%
of net sales for the same period in 2003. Gross profit results by segment
followed the changes in sales reported above, with improved gross profit in
Precision Products more than offsetting lower gross profit in Precision Engine.
Precision Products gross profit of $54.5 million or 25.2% of net sales in the
first nine months of 2004 was significantly higher than the gross profit of
$35.8 million or 22.1% of net sales for the same period in 2003. All of this
improvement was due to additional operating leverage from higher sales volumes
in the first nine months of 2004 and a more favorable mix of higher margin
aftermarket sales of filter and pump products. Gross profits were unfavorably
impacted by higher manufacturing costs in 2004, due to cost premiums incurred
for expedited production ramp up of the new IFS product and higher levels of
overtime and inefficiencies associated with the significant increase in demand
for virtually all of the segments products. Material cost surcharges related to
the increased global demand for raw materials, negatively impacted gross profits
in the first nine months of 2004 by approximately $0.4 million.
Gross profit for the first nine months of 2004 in the Precision Engine segment
was negative $(0.6) million or (1.3)% of net sales as compared to $4.9 million
or 9.4% of net sales reported for the same period of 2003. A combination of
lower sales volumes, particularly for product sold to the aftermarket, and
increased manufacturing and overhead costs in this segment, resulted in the poor
gross margin. Stronger gross profit results in the second quarter of 2004 were
offset by negative gross profit in the third quarter driven by large losses in
July. Material cost surcharges related to the increased global demand for raw
materials negatively impacted gross profits in the first nine months of 2004 by
approximately $0.7 million.
-28-
STANADYNE CORPORATION AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A totaled $24.3
million in the first nine months of 2004 and was $2.8 million higher than the
$21.5 million reported for the same period of 2003. Increases in 2004 SG&A costs
included $1.3 million of higher costs in the Precision Products segment for
salaries and accrued profit sharing expense based on higher earnings; a
reduction in foreign exchange gains from $0.8 million recorded in 2003 to only
$0.1 million recorded in 2004; and higher freight on sales cost of $0.7 million
driven by increased revenues in the Precision Products segment.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was $1.1
million the first nine months of 2004 and 2003. These amounts reflect the
conclusion of the amortization of some the Company's patents in 2003 offset by
increased amortization of the intangible assets acquired through the
Transactions in 2004.
TRANSACTION RELATED COSTS. The Predecessor incurred approximately $22.7 million
of costs related to the Transactions in the third quarter of 2004. This amount
included $16.3 million paid to certain members of management in connection with
the settlement of outstanding stock options issued under the Management Stock
Option Plan and other compensation related to the change of control; and $6.4
million for professional services and other fees incurred in support of the
Transactions.
OPERATING INCOME. Operating income for the first nine months of 2004 totaled
$5.1 million or 2.0% of net sales and was significantly less than the $17.2
million or 8.0% reported for the same period a year ago. If transaction costs
incurred in the third quarter of 2004 were excluded, the operating income in
2004 would have been $27.8 million or 10.8% of net sales. All of this
improvement occurred in the Precision Products segment, where higher gross
profits were only partially offset by increased SG&A costs, resulting in
operating income of $31.0 million or 14.4% of net sales versus the $14.7 million
or 9.1% of net sales in the first nine months of 2003. Lower gross profits
recorded by the Precision Engine segment in the first nine months of 2004
resulted in an operating loss of $3.2 million or (7.2)% of net sales compared to
an operating income of $2.5 million or 4.8% of net sales for the same period of
2003.
NET (LOSS) INCOME. Net losses in the first nine months of 2004 totaled ($3.2)
million due to the $22.7 million of transaction costs, which if excluded, would
reflect a net income result of approximately $13.2 million versus $6.9 million
of net income for the same period in 2003. This improvement reflected the
combined results of $10.6 million of higher operating income in 2004, offset by
$1.6 million in additional interest expense due to higher debt, and a $1.6
million increase in income taxes. The net income for 2003 included an after-tax
gain of $0.8 million on the repurchase of a portion of the Company's Old Notes.
-29-
STANADYNE CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand and cash flows
from operations supplemented by a U.S.-based revolving credit facility under
which $25.4 million was available for borrowings as of September 30, 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 September 30,
2004, there were borrowings of $65.0 million under the New Term Loans,
borrowings of $2.8 million under the New Revolving Credit Line, $2.6 million in
foreign overdraft facilities and $1.4 million in foreign term loans. Unless the
availability of funds under the New Revolving Credit Line is less than $5.0
million, the U.S.-based Senior Credit Facilities have no maintenance financial
covenants.
The following discussion of cash flows are significantly impacted by $23.1
million of cash disbursements made in connection with the Transactions. The
major elements of the Transactions cash flows were $6.8 million to prepare and
market the sale of the Company and $16.3 million to certain members of
management and employees of the Company to settle stock option awards and
compensate for sale-related activities.
Cash Flows From Operating Activities. Cash flows from operating activities for
the nine months ended September 30, 2004, were a negative $(7.8) million,
including $23.1 million associated with the Transactions, which, if removed,
would reflect cash flows from operations of $15.3 million or $6.0 million less
than the $21.3 million generated in the same period of 2003. Despite an
additional $12.8 million of positive cash flow generated on earnings, this
overall year-to-year decline was primarily due to cash requirements to support
increases to working capital accounts driven by higher levels of business in the
Precision Products segment. Increases in the Company's accounts receivable and
inventory balances during the first nine months of 2004 were greater than during
the same period of 2003 by $4.7 and $9.0 million, respectively, with the
majority of the cash requirement traceable to the Precision Products segment.
Despite the higher levels of working capital in 2004, the Company continues to
aggressively manage the accounts receivable and inventory relative to business
levels. Accounts receivable days sales outstanding averaged 49.8 days for the
first nine months of 2004, an improvement from the 53.7 days averaged for the
same period in 2003. Inventory turnover averaged 8.4 turns for the first nine
months of 2004, also reflecting an improvement from the 7.8 turns recorded for
the like-period of 2003. An accrued liability of $3.1 million for workers'
compensation claims incurred in prior years was settled during the second
quarter of 2004, thus further reducing the first nine months' cash flows as
compared to the prior year.
Cash Flows From Investing Activities. The Company's capital expenditures for the
first nine months of 2004 totaled $8.5 million, compared to $7.6 million for the
same period of 2003. Capital expenditures in 2004 included $3.9 million in
support of new products and programs, with the remainder applied to cost
reduction, quality enhancements, safety and ergonomics improvements and general
maintenance projects.
-30-
STANADYNE CORPORATION AND SUBSIDIARIES
Cash Flows From Financing Activities. Cash flows from financing activities for
the nine months ended September 30, 2004 included a restructuring of the
U.S.-based indebtedness in conjunction with the Transactions. The Company
entered into new $100.0 million Senior Credit Facilities comprised of a six year
$65.0 million term loan and a $35.0 million 5 year asset-based revolving loan.
The Company also issued $160.0 million of senior subordinated 10 year notes. The
combined proceeds of the $65.0 million term loan, the $160.0 million notes and
an equity investment of $105.0 million from funds managed by Kohlberg Management
IV, L.L.C. were used to repay the Old Term Loans, redeem the Old Notes and
purchase the shares of the Company's parent from AIP and related investors.
Borrowings under the New Revolving Credit Line totaled $2.8 million as of
September 30, 2004, which after reductions for outstanding letters of credit,
left available liquidity of $25.4 million.
Cash flows from financing activities outside of the Company's U.S. operations
during the first nine months of 2004 included payments against the foreign term
loan in India for $0.2 million, additional overdraft borrowings of $0.1 million
at SAPL and overdraft repayment of $0.1 million at SpA. Payments against foreign
capital lease obligations totaled $0.1 million for the first nine months of
2004.
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 2003 and 2002 plan years were $1.8
million and $2.5 million respectively and were paid in the third quarter of 2003
and in 2004 to achieve a current liability funding level of 80%. Funding levels
for the 2004 plan year, while dependant on the return on invested assets and
direction in market interest rates for the balance of this year, are expected to
be approximately $10.0 million to achieve a 90% current liability funding level.
-31-
STANADYNE CORPORATION AND SUBSIDIARIES
(1) 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 post-retirement 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.
(2) 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. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "estimate", anticipate", "believe", "project", or "continue"
or other similar words. All of these forward-looking statements are based on
estimates and assumptions made by the management of the Company which, although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed upon such estimates and statements. No assurance can be
given that any such estimates will be realized, and it is likely that actual
results will differ materially from those contemplated by such forward-looking
statements. Factors that may cause such differences include:
o changes in technology, manufacturing techniques or customer demands;
o loss or adverse change in our relationship with our material customers;
o changes in the performance or growth of our customers;
o increased competition and pricing pressures in our existing and future
markets;
o changes in the price and availability of raw materials, particularly
steel and aluminum;
o risks associated with international operations;
o the loss of key members of management;
o risk that our intellectual property may be misapporpriated;
o loss of any of our key manufacturing facilities;
o adverse state or federal legislative or regulatory developments or
litigation or other disputes;
-32-
o changes in the business, market trends, projected growth rates and
general economic conditions related to the markets in which we operate,
including agricultural and construction equipment, industrial machinery,
trucks, marine equipment and automobiles;
o our ability to satisfy our debt obligations, including related
covenants; and
o increases in our cost of borrowing or inability or unavailability of
additional debt or equity capital.
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
to reflect new, changing or unanticipated events or circumstances.
-33-
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks which include changes in interest rates
and changes in foreign currency exchange rates as measured against the U.S.
dollar.
Interest Rate Risk. The carrying 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 nine months of 2004. The New Notes bear
interest at a fixed rate and, therefore, are not sensitive to interest rate
fluctuation. The fair value of the Company's $160.0 million in New Notes on
September 30, 2004 was approximately $160.0 million. Market quotations are not
available at this time because the New Notes have not yet been registered for
trading.
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
negligible for the nine months ended September 30, 2004 and a net gain of $0.7
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.
-34-
STANADYNE CORPORATION AND SUBSIDIARIES
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.
-35-
STANADYNE CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS
4.4.1 Credit and Guaranty Agreement dated as of August 6, 2004 among
Stanadyne Corporation, as Borrower, Stanadyne Automotive Holding
Corp. and Certain Subsidiaries of Stanadyne Corporation, as
Guarantors, Various Lenders, and Goldman Sachs Credit Partners L.P.,
as Sole Lead Arranger, Sole Bookrunner, Syndication Agent,
Administrative Agent and Collateral Agent, for $65,000,000 Senior
Secured Credit Facility
4.4.2 Pledge and Security Agreement dated as of August 6, 2004 between
each of Stanadyne Corporation, Stanadyne Automotive Holdings Corp.,
and Precision Engine Products Corp. and Goldman Sachs Credit
Partners L.P. as the Term Collateral Agent
4.5.1 Revolving Credit and Guaranty Agreement dated as of August 6, 2004
among Stanadyne Corporation, as Borrower, Stanadyne Automotive
Holding Corp. and Certain Subsidiaries of Stanadyne Corporation, as
Guarantors, Various Lenders, Goldman Sachs Credit Partners L.P., as
sole Lead Arranger, Sole Bookrunner and Syndication Agent, The CIT
Group/Business Credit Inc., as Administration Agent and Collateral
Agent, Antares Capital Corporation as Co-Documentation Agent, and
Lasalle Bank National Association, as Co-Documentation Agent, for
$35,000,000 Senior Secured Revolving Credit Facilities
4.5.2 Pledge and Security Agreement dated as of August 6, 2004 between
each of Stanadyne Corporation, Stanadyne Automotive Holdings Corp.,
and Precision Engine Products Corp. and The CIT Group/Business
Credit, Inc. as the Revolving Collateral Agent
4.6.1 Indenture dated as of August 6, 2004, among KSTA Acquisition, LLC to
be merged with and into Stanadyne Corporation and each of the
Guarantors party thereto and The Bank of New York, Trustee, for
10.00% Senior Subordinated Notes Due 2014
4.6.2 Exchange and Registration Rights Agreement dated as of August 6,
2004 among KSTA Acquisition, LLC, Stanadyne Corporation, Precision
Engine Products Corp. and Goldman, Sachs & Co.
10.18 Supply Agreement dated as of July 22, 2004 between Precision Engine
Products Corp. (PEPC) and Madison - Kipp Corporation for Purchase of
VTAA Pedestals (Pursuant to Rule 24b-2 under the Exchange Act, the
Company has requested confidential treatment of portions of this
exhibit deleted from the filed copy.)
10.19 KSTA Holdings, Inc., 2004 Equity Incentive Plan
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
-36-
STANADYNE CORPORATION AND SUBSIDIARIES
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
-37-
STANADYNE CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Stanadyne Corporation
(Registrant)
Date: November 15, 2004 /s/ Stephen S. Langin
------------------------------
Stephen S. Langin
Vice President and
Chief Financial Officer
-38-
EXHIBIT INDEX:
4.4.1 Credit and Guaranty Agreement dated as of August 6, 2004 among
Stanadyne Corporation, as Borrower, Stanadyne Automotive Holding
Corp. and Certain Subsidiaries of Stanadyne Corporation, as
Guarantors, Various Lenders, and Goldman Sachs Credit Partners L.P.,
as Sole Lead Arranger, Sole Bookrunner, Syndication Agent,
Administrative Agent and Collateral Agent, for $65,000,000 Senior
Secured Credit Facility
4.4.2 Pledge and Security Agreement dated as of August 6, 2004 between
each of Stanadyne Corporation, Stanadyne Automotive Holdings Corp.,
and Precision Engine Products Corp. and Goldman Sachs Credit
Partners L.P. as the Term Collateral Agent
4.5.1 Revolving Credit and Guaranty Agreement dated as of August 6, 2004
among Stanadyne Corporation, as Borrower, Stanadyne Automotive
Holding Corp. and Certain Subsidiaries of Stanadyne Corporation, as
Guarantors, Various Lenders, Goldman Sachs Credit Partners L.P., as
sole Lead Arranger, Sole Bookrunner and Syndication Agent, The CIT
Group/Business Credit Inc., as Administration Agent and Collateral
Agent, Antares Capital Corporation as Co-Documentation Agent, and
Lasalle Bank National Association, as Co-Documentation Agent, for
$35,000,000 Senior Secured Revolving Credit Facilities
4.5.2 Pledge and Security Agreement dated as of August 6, 2004 between
each of Stanadyne Corporation, Stanadyne Automotive Holdings Corp.,
and Precision Engine Products Corp. and The CIT Group/Business
Credit, Inc. as the Revolving Collateral Agent
4.6.1 Indenture dated as of August 6, 2004, among KSTA Acquisition, LLC to
be merged with and into Stanadyne Corporation and each of the
Guarantors party thereto and The Bank of New York, Trustee, for
10.00% Senior Subordinated Notes Due 2014
4.6.2 Exchange and Registration Rights Agreement dated as of August 6,
2004 among KSTA Acquisition, LLC, Stanadyne Corporation, Precision
Engine Products Corp. and Goldman, Sachs & Co.
10.18 Supply Agreement dated as of July 22, 2004 between Precision Engine
Products Corp. (PEPC) and Madison - Kipp Corporation for Purchase of
VTAA Pedestals (Pursuant to Rule 24b-2 under the Exchange Act, the
Company has requested confidential treatment of portions of this
exhibit deleted from the filed copy.)
10.19 KSTA Holdings, Inc., 2004 Equity Incentive Plan
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