Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
o | 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 333-115267
ERICO INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Ohio | 34-0201460 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification Number) |
30575 Bainbridge Road
Suite 300
Solon, Ohio 44139
(440) 349-2630
(Address, including zip code, and telephone number, including area code, of Registrant’s Principal Executive Offices)
Suite 300
Solon, Ohio 44139
(440) 349-2630
(Address, including zip code, and telephone number, including area code, of Registrant’s Principal Executive Offices)
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. Yeso Noþ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
At November 2, 2005, the registrant had one outstanding share of common stock.
INDEX TO QUARTERLY REPORT
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PART 1. FINACIAL INFORMATION
Item 1. Financial Statements
ERICO International Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,009 | $ | 2,321 | ||||
Trade accounts receivable, net | 65,218 | 50,485 | ||||||
Inventories, net | 47,262 | 59,600 | ||||||
Other current assets | 6,078 | 8,909 | ||||||
Total current assets | 126,567 | 121,315 | ||||||
Property, plant and equipment, net | 43,958 | 52,522 | ||||||
Goodwill | 101,847 | 101,303 | ||||||
Other intangible assets, net | 36,844 | 36,905 | ||||||
Other assets | 10,085 | 10,676 | ||||||
Total assets | $ | 319,301 | $ | 322,721 | ||||
Liabilities and stockholder’s net investment | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 26,736 | $ | 26,422 | ||||
Accrued compensation | 14,870 | 13,446 | ||||||
Dividend payable | — | 15,000 | ||||||
Other current liabilities | 20,587 | 21,874 | ||||||
Total current liabilities | 62,193 | 76,742 | ||||||
Long-term debt | 152,175 | 152,175 | ||||||
Deferred income taxes | 29,082 | 28,894 | ||||||
Other long-term liabilities | 15,195 | 16,785 | ||||||
Stockholder’s net investment: | ||||||||
Common stock, par value $1.00 per share, 1,500,000 shares authorized, 1 share issued and outstanding | — | — | ||||||
Parent company investment | 63,323 | 46,699 | ||||||
Accumulated other comprehensive (loss) income | (2,667 | ) | 1,426 | |||||
Total stockholder’s net investment | 60,656 | 48,125 | ||||||
Total liabilities and stockholder’s net investment | $ | 319,301 | $ | 322,721 | ||||
The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ERICO International Corporation and Subsidiaries
Condensed Consolidated Income Statements (Unaudited)
(Dollars in thousands)
(Dollars in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales | $ | 104,435 | $ | 92,398 | $ | 294,513 | $ | 267,960 | ||||||||
Cost of sales | 65,318 | 59,468 | 188,408 | 171,608 | ||||||||||||
Gross profit | 39,117 | 32,930 | 106,105 | 96,352 | ||||||||||||
Operating expenses | 23,435 | 22,356 | 68,058 | 64,667 | ||||||||||||
Operating income | 15,682 | 10,574 | 38,047 | 31,685 | ||||||||||||
Interest expense, net | 3,658 | 3,927 | 11,443 | 11,274 | ||||||||||||
Foreign exchange loss (gain), net | 196 | 212 | 662 | (181 | ) | |||||||||||
Other expense | — | 500 | — | 1,736 | ||||||||||||
Income before income taxes | 11,828 | 5,935 | 25,942 | 18,856 | ||||||||||||
Provision for income taxes | 4,207 | 2,349 | 9,318 | 7,426 | ||||||||||||
Net income | $ | 7,621 | $ | 3,586 | $ | 16,624 | $ | 11,430 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ERICO International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
(Dollars in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2005 | 2004 | |||||||
Operating activities | ||||||||
Net income | $ | 16,624 | $ | 11,430 | ||||
Depreciation and amortization | 9,594 | 9,049 | ||||||
Other operating activities | (3,083 | ) | (10,558 | ) | ||||
Net cash provided by operating activities | 23,135 | 9,921 | ||||||
Investing activities | ||||||||
Capital expenditures | (1,810 | ) | (2,024 | ) | ||||
Other investing activities | (559 | ) | (463 | ) | ||||
Net cash used in investing activities | (2,369 | ) | (2,487 | ) | ||||
Financing activities | ||||||||
Dividends paid | (15,000 | ) | (25,000 | ) | ||||
Net payments on revolving line of credit | — | (26,100 | ) | |||||
Proceeds from issuance of subordinated debt | — | 121,500 | ||||||
Principal payments on long-term debt | — | (72,950 | ) | |||||
Financing fees paid | — | (5,582 | ) | |||||
Net cash used in financing activities | (15,000 | ) | (8,132 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (78 | ) | 15 | |||||
Increase (decrease) in cash and cash equivalents | 5,688 | (683 | ) | |||||
Cash and cash equivalents at beginning of period | 2,321 | 2,421 | ||||||
Cash and cash equivalents at end of period | $ | 8,009 | $ | 1,738 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of ERICO International Corporation and subsidiaries (“ERICO” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read together with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 9, 2005. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been included. Certain prior year amounts have been reclassified to conform to the current year presentation. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
Nature of Operations: The Company is a wholly owned subsidiary of ERICO Holding Company (“Holding”), which is a wholly owned subsidiary of ERICO Global Company (“Global”), the Company’s ultimate parent. All activity associated with Holding and Global relates to the operations of the Company. Accordingly, all operating costs incurred by Holding and Global are reflected in the Company’s financial statements. In addition, in accordance with Staff Accounting Bulletin (“SAB”) No. 73, “Pushdown” Basis of Accounting Required in Certain Limited Circumstances, senior subordinated notes issued by Holding and outstanding through February 20, 2004, including related financing costs, have been “pushed down” and are reflected in the accompanying financial statements.
The Company is a leading designer, manufacturer and marketer of precision-engineered specialty metal products serving global niche product markets in a diverse range of electrical, commercial and industrial construction, utility and rail applications. The Company is headquartered in Solon, Ohio, USA with a network of sales locations serving more than 25 countries. The Company operates in one reportable segment.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Principles of Consolidation: The unaudited condensed consolidated financial statements include the accounts of ERICO International Corporation and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.
Recently Issued Accounting Standards:In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151,Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material, and requires that such items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept of “normal capacity” and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. While we are still evaluating the impact of this statement, we do not currently believe it will have a material impact on our consolidated results of operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment, which replaces the prior SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, awards of liability instruments will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. This new standard will become effective for the Company on January 1, 2006. While we are still evaluating the impact of this statement, we do not currently believe it will have a material impact on our consolidated results of operations, financial position or cash flows.
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
2. Inventories
Inventories are stated at the lower of cost or market with cost being determined by the first-in, first-out (“FIFO”) method. The components of inventory are as follows:
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
Finished goods | $ | 37,672 | $ | 51,439 | ||||
Work in process | 4,379 | 4,166 | ||||||
Raw materials | 10,236 | 9,515 | ||||||
52,287 | 65,120 | |||||||
Inventory reserves | (5,025 | ) | (5,520 | ) | ||||
Inventories, net | $ | 47,262 | $ | 59,600 | ||||
3. Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price paid over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are no longer amortized but are subject to annual impairment testing. Impairment exists when the carrying amount of goodwill or indefinite-lived intangible assets exceeds its fair value. The Company’s policy is to perform its annual impairment testing in the fourth quarter of each year, unless circumstances dictate the need for more frequent assessments. The 2004 annual impairment assessments confirmed that the fair value of the Company exceeded its carrying value, and no impairment loss recognition was required for goodwill or indefinite-lived intangible assets.
The following table displays the gross carrying amount, accumulated amortization amount and net carrying value for finite-lived intangible assets and indefinite-lived intangible assets:
September 30, 2005 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Amount | Amortization | Net | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Patents | $ | 4,011 | $ | (1,424 | ) | $ | 2,587 | |||||
Customer relationships | 787 | (112 | ) | 675 | ||||||||
$ | 4,798 | $ | (1,536 | ) | $ | 3,262 | ||||||
Indefinite-lived intangible assets: | ||||||||||||
Trademarks | $ | 33,582 | $ | — | $ | 33,582 | ||||||
Goodwill | 101,847 | — | 101,847 | |||||||||
$ | 135,429 | $ | — | $ | 135,429 | |||||||
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
3. Goodwill and Other Intangible Assets (continued)
December 31, 2004 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Amount | Amortization | Net | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Patents | $ | 3,647 | $ | (1,010 | ) | $ | 2,637 | |||||
Customer relationships | 787 | (82 | ) | 705 | ||||||||
$ | 4,434 | $ | (1,092 | ) | $ | 3,342 | ||||||
Indefinite-lived intangible assets: | ||||||||||||
Trademarks | $ | 33,563 | $ | — | $ | 33,563 | ||||||
Goodwill | 101,303 | — | 101,303 | |||||||||
$ | 134,866 | $ | — | $ | 134,866 | |||||||
Amortization expense for finite-lived intangible assets was $146 and $209 for the three months ended September 30, 2005 and 2004, respectively, and $444 and $459 for the nine months ended September 30, 2005 and 2004, respectively. Based upon the gross carrying amount of finite-lived intangible assets as of September 30, 2005, amortization expense for 2005 through 2010 is expected to be approximately $600 per year.
4. Debt and Financing Arrangements
Long-term debt at September 30, 2005 and December 31, 2004 consists of the following:
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
8.875% subordinated notes, due 2012 | $ | 151,500 | $ | 151,500 | ||||
Other notes, due 2009 | 675 | 675 | ||||||
$ | 152,175 | $ | 152,175 | |||||
On February 20, 2004, the Company refinanced substantially all of its long-term debt. The Company issued $140,900 of 8.875% senior subordinated notes due 2012 (the “Subordinated Notes”), of which $19,400 was exchanged for its 11.0% senior subordinated notes. The proceeds of $140,900 were used in part to reduce amounts outstanding under the Company’s previous revolving credit facility, to repay $39,000 of term loans outstanding, to repay $35,000 of the 11.0% senior subordinated notes of Holding and to pay a dividend of $25,000 to the holders of Global Class L shares. On August 13, 2004, the Company exchanged the remaining $10,600 of 11.0% senior subordinated notes for $10,600 of its Subordinated Notes. The Company recorded non-cash charges of $1,236 and $500 in the first quarter and third quarter of 2004, respectively, to write-off original issue discount costs and deferred financing costs related to the February 2004 refinancing and August 2004 debt exchange transactions.
In connection with the February 20, 2004 refinancing, the Company amended its $75,000 Multicurrency Credit and Security Agreement (the “Credit Facility”) that expires December 2, 2007. The Credit Facility provides a revolving credit line of $75,000, of which $25,000 may be used for the issuance of letters of credit. The Credit Facility allows for multicurrency borrowing options in Australian dollars, Euros, Swiss francs, Swedish kronor, British pounds and other currencies that are readily available and freely traded. Borrowings under the Credit Facility are secured by substantially all of the assets of the Company and accrue interest at the Alternate Base Rate (as defined in the Credit Facility) or LIBOR plus a 1.75% margin. The Credit Facility provides for a commitment fee of 0.25% on the revolving credit line.
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
4. Debt and Financing Arrangements (continued)
The Credit Facility and the Subordinated Notes contain certain customary covenants that impose limitations on the Company, including covenants limiting the ability of the Company and its subsidiaries to sell, pledge or incur liens on assets and to incur additional debt. The Credit Facility also includes requirements to meet certain financial tests and to maintain on a quarterly basis certain consolidated financial ratios, including minimum net worth, minimum fixed charge coverage ratio, maximum leverage ratio and minimum net income before interest expense, net, income taxes, depreciation, amortization and certain other non-cash, non-recurring items (“EBITDA”). The Company was in compliance with all covenants of the Credit Facility and the Subordinated Notes, and the conditions of the Credit Facility, at September 30, 2005.
At September 30, 2005, the Company did not have any borrowings outstanding under the revolving credit line of the Credit Facility, but did have letters of credit outstanding of $40 supported by the Credit Facility. The amount available for additional borrowing under the Credit Facility at September 30, 2005 was $74,960.
In October 2005, the Company purchased and retired $10,500 of its Subordinated Notes that were offered for sale in the open market. The Company paid varying prices representing principal, accrued interest and a premium.
5. Income Taxes
The Company’s income tax provision was $4,207 or 35.6%, and $2,349, or 39.6%, for the three months ended September 30, 2005 and 2004, respectively, and $9,318 or 35.9%, and $7,426, or 39.4%, for the nine months ended September 30, 2005 and 2004, respectively. The Company’s income tax provision for the nine months ended September 30, 2005 includes a $698 reduction in income tax expense related to a change in state tax laws. Income tax expense varies from the amount computed by applying the statutory federal tax rate to income before income taxes, due principally to rates on foreign income, state and local taxes, exclusions related to profits on export sales and tax credits.
The Company’s operations have been included in the consolidated income tax returns filed by Global. Income tax expense in the Company’s consolidated income statements is calculated on a separate tax return basis as if the Company had operated as a stand-alone entity.
6. Post-Retirement Benefit Plan
The Company has a health care post-retirement benefit plan (the “Health Care Plan”) that provides benefits to certain employees in the United States hired prior to January 1, 1993. On February 10, 2005, the Company amended the Health Care Plan to limit eligibility to those employees hired prior to January 1, 1993 that also have at least 24 years of service as of December 31, 2004. This amendment eliminated approximately 50 employees from eligibility and caused the Company to recognize a curtailment gain of $68 in the first quarter of 2005. At the same time, the Company increased retiree contributions such that retirees will pay 100% of medical costs by January 1, 2010. This change in assumption resulted in an unrecognized net gain that is being amortized to income as a component of periodic benefit income.
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
6. Post-Retirement Benefit Plan (continued)
The following table sets forth the components of net periodic (income) expense for the Company’s Health Care Plan for the three and nine months ended September 30, 2005 and 2004:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 1 | $ | 29 | $ | 4 | $ | 87 | ||||||||
Interest cost | 7 | 98 | 31 | 295 | ||||||||||||
Amortization of net gain | (106 | ) | — | (416 | ) | — | ||||||||||
Curtailment gain | — | — | (68 | ) | — | |||||||||||
Net periodic (income) expense | $ | (98 | ) | $ | 127 | $ | (449 | ) | $ | 382 | ||||||
On December 8, 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Act”). On May 19, 2004, the Financial Accounting Standards Board issued Financial Staff Position Number 106-2,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003(“FSP”). The FSP was effective for the three-month period ending September 30, 2004. In September 2005, the Company determined the benefits provided by the Company’s Health Care Plan are actuarially equivalent to Medicare Part D under the Medicare Act, and the Company has applied to receive the applicable subsidy from Medicare. However, the Company’s accumulated post-retirement benefit obligation at September 30, 2005 and net periodic (income) expense for the three and nine months ended September 30, 2005 and 2004 do not reflect any amount associated with the Medicare Act because the Company believes the effects of the Medicare Act on the accumulated post-retirement benefit obligation and post-retirement benefit cost will be immaterial.
7. Commitments and Contingencies
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company’s management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.
8. Comprehensive Income
Accumulated other comprehensive (loss) income of ($2,667) and $1,426 at September 30, 2005 and December 31, 2004, respectively, consists entirely of foreign currency translation adjustments. Total comprehensive income and its components are as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||||
Net income | $ | 7,621 | $ | 3,586 | $ | 16,624 | $ | 11,430 | |||||||||||
Foreign currency translation adjustments | 178 | 1,279 | (4,093 | ) | (446 | ) | |||||||||||||
Comprehensive income | $ | 7,799 | $ | 4,865 | $ | 12,531 | $ | 10,984 | |||||||||||
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
9. Guarantor and Non-Guarantor Subsidiaries
The following unaudited condensed consolidating financial statements set forth the Company’s balance sheets as of September 30, 2005 and December 31, 2004, the statements of income for the three and nine months ended September 30, 2005 and 2004 and the statements of cash flows for the nine months ended September 30, 2005 and 2004. In the following schedules, “Parent” refers to ERICO International Corporation, Holding and Global, collectively, “Guarantor Subsidiary” refers to ERICO Products, Inc., ERICO International Corporation’s sole domestic subsidiary, and “Non-Guarantor Subsidiaries” refers to ERICO International Corporation’s non-U.S. subsidiaries. “Eliminations” represent the adjustments necessary to (a) eliminate intercompany transactions and (b) eliminate the investments in ERICO International Corporation’s subsidiaries.
Unaudited Condensed Consolidating Balance Sheets
September 30, 2005
September 30, 2005
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash and cash equivalents | $ | 2,291 | $ | 36 | $ | 5,682 | $ | — | $ | 8,009 | ||||||||||
Trade accounts receivable, net | — | 35,722 | 29,496 | — | 65,218 | |||||||||||||||
Inventories, net | — | 27,041 | 20,221 | — | 47,262 | |||||||||||||||
Other current assets | 1,285 | 2,522 | 2,271 | — | 6,078 | |||||||||||||||
Total current assets | 3,576 | 65,321 | 57,670 | — | 126,567 | |||||||||||||||
Property, plant and equipment, net | 173 | 33,801 | 9,984 | — | 43,958 | |||||||||||||||
Goodwill | 101,847 | — | — | — | 101,847 | |||||||||||||||
Other intangible assets, net | 36,844 | — | — | — | 36,844 | |||||||||||||||
Investment in and advances to subsidiaries | 99,274 | — | — | (99,274 | ) | — | ||||||||||||||
Other assets | 6,203 | 3,006 | 876 | — | 10,085 | |||||||||||||||
Total assets | $ | 247,917 | $ | 102,128 | $ | 68,530 | $ | (99,274 | ) | $ | 319,301 | |||||||||
Trade accounts payable | $ | — | $ | 20,229 | $ | 6,507 | $ | — | $ | 26,736 | ||||||||||
Accrued compensation | 1,533 | 8,175 | 5,162 | — | 14,870 | |||||||||||||||
Other current liabilities | 1,686 | 8,433 | 10,468 | — | 20,587 | |||||||||||||||
Total current liabilities | 3,219 | 36,837 | 22,137 | — | 62,193 | |||||||||||||||
Long-term debt | 151,500 | 675 | — | — | 152,175 | |||||||||||||||
Deferred income taxes | 22,015 | 5,750 | 1,317 | — | 29,082 | |||||||||||||||
Intercompany payable | — | 6,314 | 58,066 | (64,380 | ) | — | ||||||||||||||
Other long-term liabilities | 7,860 | 6,077 | 1,258 | — | 15,195 | |||||||||||||||
Total stockholder’s net investment | 63,323 | 46,475 | (14,248 | ) | (34,894 | ) | 60,656 | |||||||||||||
Total liabilities and stockholder’s net investment | $ | 247,917 | $ | 102,128 | $ | 68,530 | $ | (99,274 | ) | $ | 319,301 | |||||||||
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
9. Guarantor and Non-Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheets
December 31, 2004
December 31, 2004
Non - | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash and cash equivalents | $ | 398 | $ | 21 | $ | 1,902 | $ | — | $ | 2,321 | ||||||||||
Trade accounts receivable, net | — | 24,646 | 25,839 | — | 50,485 | |||||||||||||||
Inventories, net | — | 32,709 | 26,891 | — | 59,600 | |||||||||||||||
Other current assets | 2,801 | 2,498 | 3,610 | — | 8,909 | |||||||||||||||
Total current assets | 3,199 | 59,874 | 58,242 | — | 121,315 | |||||||||||||||
Property, plant and equipment, net | 224 | 38,986 | 13,312 | — | 52,522 | |||||||||||||||
Goodwill | 101,303 | — | — | — | 101,303 | |||||||||||||||
Other intangible assets, net | 36,905 | — | — | — | 36,905 | |||||||||||||||
Investment in and advances to subsidiaries | 102,684 | — | — | (102,684 | ) | — | ||||||||||||||
Other assets | 6,680 | 2,983 | 1,013 | — | 10,676 | |||||||||||||||
Total assets | $ | 250,995 | $ | 101,843 | $ | 72,567 | $ | (102,684 | ) | $ | 322,721 | |||||||||
Trade accounts payable | $ | — | $ | 15,972 | $ | 10,450 | $ | — | $ | 26,422 | ||||||||||
Accrued compensation | 1,555 | 6,547 | 5,344 | — | 13,446 | |||||||||||||||
Dividend payable | 15,000 | — | — | — | 15,000 | |||||||||||||||
Other current liabilities | 5,664 | 6,184 | 10,026 | — | 21,874 | |||||||||||||||
Total current liabilities | 22,219 | 28,703 | 25,820 | — | 76,742 | |||||||||||||||
Long-term debt | 151,500 | 675 | — | — | 152,175 | |||||||||||||||
Deferred income taxes | 22,030 | 5,761 | 1,103 | — | 28,894 | |||||||||||||||
Intercompany payable | — | 31,906 | 59,444 | (91,350 | ) | — | ||||||||||||||
Other long-term liabilities | 8,547 | 6,860 | 1,378 | — | 16,785 | |||||||||||||||
Total stockholder’s net investment | 46,699 | 27,938 | (15,178 | ) | (11,334 | ) | 48,125 | |||||||||||||
Total liabilities and stockholder’s net investment | $ | 250,995 | $ | 101,843 | $ | 72,567 | $ | (102,684 | ) | $ | 322,721 | |||||||||
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
9. Guarantor and Non-Guarantor Subsidiaries (continued)
Unaudited Condensed Consolidating Income Statements
Three Months Ended September 30, 2005
Three Months Ended September 30, 2005
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | — | $ | 68,431 | $ | 40,588 | $ | (4,584 | ) | $ | 104,435 | |||||||||
Cost of sales | — | 43,398 | 26,504 | (4,584 | ) | 65,318 | ||||||||||||||
Gross profit | — | 25,033 | 14,084 | — | 39,117 | |||||||||||||||
Operating expenses | 1,834 | 11,858 | 9,743 | — | 23,435 | |||||||||||||||
Operating (loss) income | (1,834 | ) | 13,175 | 4,341 | — | 15,682 | ||||||||||||||
Interest expense, net | 2,792 | 681 | 185 | — | 3,658 | |||||||||||||||
Foreign exchange loss, net | — | 59 | 137 | — | 196 | |||||||||||||||
(Loss) income before income taxes and equity income | (4,626 | ) | 12,435 | 4,019 | — | 11,828 | ||||||||||||||
(Benefit) provision for income taxes | (2,651 | ) | 4,867 | 1,991 | — | 4,207 | ||||||||||||||
(Loss) income before equity income | (1,975 | ) | 7,568 | 2,028 | — | 7,621 | ||||||||||||||
Equity income from subsidiaries | 9,596 | — | — | (9,596 | ) | — | ||||||||||||||
Net income | $ | 7,621 | $ | 7,568 | $ | 2,028 | $ | (9,596 | ) | $ | 7,621 | |||||||||
Unaudited Condensed Consolidating Income Statements
Three Months Ended September 30, 2004
Three Months Ended September 30, 2004
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | — | $ | 59,139 | $ | 37,306 | $ | (4,047 | ) | $ | 92,398 | |||||||||
Cost of sales | — | 39,187 | 24,328 | (4,047 | ) | 59,468 | ||||||||||||||
Gross profit | — | 19,952 | 12,978 | — | 32,930 | |||||||||||||||
Operating expenses | 2,319 | 10,561 | 9,476 | — | 22,356 | |||||||||||||||
Operating (loss) income | (2,319 | ) | 9,391 | 3,502 | — | 10,574 | ||||||||||||||
Interest expense, net | 3,077 | 683 | 167 | — | 3,927 | |||||||||||||||
Foreign exchange loss, net | — | 85 | 127 | — | 212 | |||||||||||||||
Other expense | 500 | — | — | — | 500 | |||||||||||||||
(Loss) income before income taxes and equity income | (5,896 | ) | 8,623 | 3,208 | — | 5,935 | ||||||||||||||
(Benefit) provision for income taxes | (2,374 | ) | 3,443 | 1,280 | — | 2,349 | ||||||||||||||
(Loss) income before equity income | (3,522 | ) | 5,180 | 1,928 | — | 3,586 | ||||||||||||||
Equity income from subsidiaries | 7,108 | — | — | (7,108 | ) | — | ||||||||||||||
Net income | $ | 3,586 | $ | 5,180 | $ | 1,928 | $ | (7,108 | ) | $ | 3,586 | |||||||||
12
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
9. Guarantor and Non-Guarantor Subsidiaries (continued)
Unaudited Condensed Consolidating Income Statements
Nine Months Ended September 30, 2005
Nine Months Ended September 30, 2005
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | — | $ | 189,520 | $ | 119,688 | $ | (14,695 | ) | $ | 294,513 | |||||||||
Cost of sales | — | 123,122 | 79,981 | (14,695 | ) | 188,408 | ||||||||||||||
Gross profit | — | 66,398 | 39,707 | — | 106,105 | |||||||||||||||
Operating expenses | 4,638 | 33,579 | 29,841 | — | 68,058 | |||||||||||||||
Operating (loss) income | (4,638 | ) | 32,819 | 9,866 | — | 38,047 | ||||||||||||||
Interest expense, net | 8,877 | 2,044 | 522 | — | 11,443 | |||||||||||||||
Foreign exchange loss, net | 1 | 234 | 427 | — | 662 | |||||||||||||||
(Loss) income before income taxes and equity income | (13,516 | ) | 30,541 | 8,917 | — | 25,942 | ||||||||||||||
(Benefit) provision for income taxes | (6,580 | ) | 12,004 | 3,894 | — | 9,318 | ||||||||||||||
(Loss) income before equity income | (6,936 | ) | 18,537 | 5,023 | — | 16,624 | ||||||||||||||
Equity income from subsidiaries | 23,560 | — | — | (23,560 | ) | — | ||||||||||||||
Net income | $ | 16,624 | $ | 18,537 | $ | 5,023 | $ | (23,560 | ) | $ | 16,624 | |||||||||
Unaudited Condensed Consolidating Income Statements
Nine Months Ended September 30, 2004
Nine Months Ended September 30, 2004
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | — | $ | 169,846 | $ | 110,048 | $ | (11,934 | ) | $ | 267,960 | |||||||||
Cost of sales | — | 110,826 | 72,716 | (11,934 | ) | 171,608 | ||||||||||||||
Gross profit | — | 59,020 | 37,332 | — | 96,352 | |||||||||||||||
Operating expenses | 5,131 | 30,517 | 29,019 | — | 64,667 | |||||||||||||||
Operating (loss) income | (5,131 | ) | 28,503 | 8,313 | — | 31,685 | ||||||||||||||
Interest expense, net | 8,689 | 2,035 | 550 | — | 11,274 | |||||||||||||||
Foreign exchange loss (gain), net | — | 300 | (481 | ) | — | (181 | ) | |||||||||||||
Other expense | 1,736 | — | — | — | 1,736 | |||||||||||||||
(Loss) income before income taxes and equity income | (15,556 | ) | 26,168 | 8,244 | — | 18,856 | ||||||||||||||
(Benefit) provision for income taxes | (6,238 | ) | 10,460 | 3,204 | — | 7,426 | ||||||||||||||
(Loss) income before equity income | (9,318 | ) | 15,708 | 5,040 | — | 11,430 | ||||||||||||||
Equity income from subsidiaries | 20,748 | — | — | (20,748 | ) | — | ||||||||||||||
Net income | $ | 11,430 | $ | 15,708 | $ | 5,040 | $ | (20,748 | ) | $ | 11,430 | |||||||||
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
9. Guarantor and Non-Guarantor Subsidiaries (continued)
Unaudited Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2005
Nine Months Ended September 30, 2005
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income | $ | 16,624 | $ | 18,537 | $ | 5,023 | $ | (23,560 | ) | $ | 16,624 | |||||||||
Depreciation and amortization | 509 | 6,301 | 2,784 | — | 9,594 | |||||||||||||||
Other operating activities | (182 | ) | (350 | ) | (2,551 | ) | — | (3,083 | ) | |||||||||||
Net cash provided by (used in) operating activities | 16,951 | 24,488 | 5,256 | (23,560 | ) | 23,135 | ||||||||||||||
Investing activities | ||||||||||||||||||||
Capital expenditures | (10 | ) | (1,038 | ) | (762 | ) | — | (1,810 | ) | |||||||||||
Other investing activities | (581 | ) | (85 | ) | 107 | — | (559 | ) | ||||||||||||
Net cash used in investing activities | (591 | ) | (1,123 | ) | (655 | ) | — | (2,369 | ) | |||||||||||
Financing activities | ||||||||||||||||||||
Dividends paid | (15,000 | ) | — | — | — | (15,000 | ) | |||||||||||||
Change in intercompany payables/receivables | 533 | (23,350 | ) | (743 | ) | 23,560 | — | |||||||||||||
Net borrowings on revolving line of credit | — | — | — | — | — | |||||||||||||||
Net cash (used in) provided by financing activities | (14,467 | ) | (23,350 | ) | (743 | ) | 23,560 | (15,000 | ) | |||||||||||
Effect of exchange rates on cash | — | — | (78 | ) | — | (78 | ) | |||||||||||||
Net increase in cash and cash equivalents | 1,893 | 15 | 3,780 | — | 5,688 | |||||||||||||||
Cash and cash equivalents at beginning of period | 398 | 21 | 1,902 | — | 2,321 | |||||||||||||||
Cash and cash equivalents at end of period | $ | 2,291 | $ | 36 | $ | 5,682 | $ | — | $ | 8,009 | ||||||||||
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ERICO International Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2005
(Dollars in thousands)
September 30, 2005
(Dollars in thousands)
9. Guarantor and Non-Guarantor Subsidiaries (continued)
Unaudited Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2004
Nine Months Ended September 30, 2004
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income | $ | 11,430 | $ | 15,708 | $ | 5,040 | $ | (20,748 | ) | $ | 11,430 | |||||||||
Depreciation and amortization | 534 | 6,417 | 2,098 | — | 9,049 | |||||||||||||||
Other operating activities | 4,954 | (6,386 | ) | (9,126 | ) | — | (10,558 | ) | ||||||||||||
Net cash provided by (used in) operating activities | 16,918 | 15,739 | (1,988 | ) | (20,748 | ) | 9,921 | |||||||||||||
Investing activities | ||||||||||||||||||||
Capital expenditures | (2 | ) | (1,258 | ) | (764 | ) | — | (2,024 | ) | |||||||||||
Other investing activities | (706 | ) | 3 | 240 | — | (463 | ) | |||||||||||||
Net cash used in investing activities | (708 | ) | (1,255 | ) | (524 | ) | — | (2,487 | ) | |||||||||||
Financing activities | ||||||||||||||||||||
Transfer to parent company | (25,000 | ) | — | — | — | (25,000 | ) | |||||||||||||
Change in intercompany payables/receivables | (7,957 | ) | (14,487 | ) | 1,696 | 20,748 | — | |||||||||||||
Net payments on revolving line of credit | (26,100 | ) | — | — | — | (26,100 | ) | |||||||||||||
Proceeds from issuance of subordinated debentures | 121,500 | — | — | — | 121,500 | |||||||||||||||
Principal payments on long-term debt | (72,950 | ) | — | — | — | (72,950 | ) | |||||||||||||
Financing fees paid | (5,582 | ) | — | — | — | (5,582 | ) | |||||||||||||
Net cash (used in) provided by financing activities | (16,089 | ) | (14,487 | ) | 1,696 | 20,748 | (8,132 | ) | ||||||||||||
Effect of exchange rates on cash | — | — | 15 | — | 15 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | 121 | (3 | ) | (801 | ) | — | (683 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 400 | 3 | 2,018 | — | 2,421 | |||||||||||||||
Cash and cash equivalents at end of period | $ | 521 | $ | — | $ | 1,217 | $ | — | $ | 1,738 | ||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes, which are included elsewhere in this report. The following discussion and analysis also contains forward-looking statements, which reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying our judgments concerning matters discussed below. These statements, accordingly, involve estimates, assumptions, judgments and uncertainties. In particular, this discussion pertains to management’s comments on financial resources, capital spending and the outlook for our business. You should read and review the section entitled “Forward-Looking Statements” for some important factors that could cause actual results or outcomes to differ materially from those addressed in forward-looking statements.
Overview
ERICO is a leading designer, manufacturer and marketer of precision-engineered specialty metal products serving global niche product markets in a diverse range of electrical, commercial and industrial construction, utility and rail applications. The Company is headquartered in Solon, Ohio, USA, with a network of sales locations serving more than 25 countries and with manufacturing and distribution facilities worldwide.
The Company is a wholly owned subsidiary of Holding. On December 2, 2002, a newly formed wholly owned subsidiary of Global merged with Holding, with Holding as the surviving company. As a result, Holding became a wholly owned subsidiary of Global. In connection with the merger, Citigroup Venture Capital Equity Partners, L.P. and its affiliates acquired approximately two-thirds of the stock of Global.
Market Outlook
Based on our year to date performance and our positive outlook for the remainder of the year, we expect continued strong operating results driven by increased sales in the electrical, commercial and industrial construction, utility and rail markets in the fourth quarter of 2005 in comparison to 2004 levels. We continue to expect this additional sales growth will be generated through higher sales volume, new product introductions and further market penetration.
Results of Operations
The following table sets forth statements of operations data expressed as a percentage of net sales:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales | 62.5 | 64.4 | 64.0 | 64.0 | ||||||||||||
Gross profit | 37.5 | 35.6 | 36.0 | 36.0 | ||||||||||||
Operating expenses | 22.5 | 24.2 | 23.1 | 24.1 | ||||||||||||
Interest expense, net | 3.5 | 4.3 | 3.9 | 4.2 | ||||||||||||
Foreign exchange loss (gain), net | 0.2 | 0.2 | 0.2 | — | ||||||||||||
Other expense, net | — | 0.5 | — | 0.6 | ||||||||||||
Income before income taxes | 11.3 | 6.4 | 8.8 | 7.1 | ||||||||||||
Provision for income taxes | 4.0 | 2.5 | 3.2 | 2.8 | ||||||||||||
Net income | 7.3 | 3.9 | 5.6 | 4.3 |
Three Months Ended September 30, 2005 Compared With Three Months Ended September 30, 2004
Net sales.Net sales for the three months ended September 30, 2005 were $104.4 million, an increase of $12.0 million, or 13.0%, from net sales of $92.4 million for the three months ended September 30, 2004. This increase in net sales was due primarily to increased selling prices and higher sales volumes. This performance is a new record for quarterly net sales.
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Gross profit.Gross profit for the three months ended September 30, 2005 increased by $6.2 million, or 18.8%, to $39.1 million from $32.9 million for the three months ended September 30, 2004. Gross profit margin increased to 37.5% in the three months ended September 30, 2005 from 35.6% in the three months ended September 30, 2004. Gross profit margin increased primarily due to increased selling prices and higher sales volumes, partially offset by increases in raw material costs, primarily steel and copper, that the Company has experienced since the late second quarter of 2004.
Operating expenses. Operating expenses include engineering and development expenses, selling and marketing expenses, and general and administrative expenses. Operating expenses increased by $1.0 million, or 4.8%, to $23.4 million in the three months ended September 30, 2005 from $22.4 million in the three months ended September 30, 2004. As a percentage of net sales, operating expenses decreased to 22.5% in the three months ended September 30, 2005 from 24.2% in the three months ended September 30, 2004, primarily due to higher sales levels and ongoing control of expenses.
Interest expense, net.Interest expense for the three months ended September 30, 2005 and 2004 was $3.7 and $3.9 million, respectively, primarily reflecting interest on the Company’s Subordinated Notes.
Foreign exchange loss (gain), net. The Company reported a foreign exchange loss of $0.2 million for the three months ended September 30, 2005 and September 30, 2004, primarily due to the strengthening of the U.S. dollar against the Euro in both periods.
Other expense.Other expense for the three months ended September 30, 2004 represented a $0.5 million non-cash charge to write-off previously deferred financing costs and original issue discount costs related to the August 2004 exchange of 11.0% senior subordinated notes for our Subordinated Notes.
Provision for income taxes.The provision for income taxes was $4.2 million for the three months ended September 30, 2005 compared with $2.3 million for the three months ended September 30, 2004. The effective tax rate was 35.6% for the three months ended September 30, 2005 compared with 39.6% for the three months ended September 30, 2004. The decrease in the effective tax rate is primarily the result of increased exclusions related to profits on export sales and tax credits available to the Company.
Net income.As a result of the foregoing, the Company reported net income of $7.6 million for the three months ended September 30, 2005, an increase of $4.0 million, or 112.5%, from net income of $3.6 million for the three months ended September 30, 2004.
Nine Months Ended September 30, 2005 Compared With Nine Months Ended September 30, 2004
Net sales.Net sales for the nine months ended September 30, 2005 were $294.5 million, an increase of $26.5 million, or 9.9%, from $268.0 million of net sales for the nine months ended September 30, 2004. This increase in net sales was due primarily to increased selling prices and higher sales volumes.
Gross profit. Gross profit for the nine months ended September 30, 2005 increased by $9.7 million, or 10.1%, to $106.1 million from $96.4 million in the nine months ended September 30, 2004. Gross profit margin was 36.0% in the nine months ended September 30, 2005 and in the nine months ended September 30, 2004. Gross profit increased primarily due to increased selling prices and higher sales volumes.
Operating expenses. Operating expenses in the nine months ended September 30, 2005 were $68.1 million, up $3.4 million, or 5.2%, from operating expenses of $64.7 million in the nine months ended September 30, 2004. As a percentage of net sales, operating expenses declined to 23.1% in the nine months ended September 30, 2005 from 24.1% in the nine months ended September 30, 2004, primarily due to higher sales levels.
On February 10, 2005, the Company amended the Health Care Plan to limit eligibility to those employees hired prior to January 1, 1993 that also have at least 24 years of service as of December 31, 2004. This amendment eliminated approximately 50 employees from eligibility and caused the Company to recognize a curtailment gain of $0.1 million in the first quarter of 2005. At the same time, the Company increased retiree contributions such that retirees will pay 100% of medical costs by January 1, 2010. This change in assumption resulted in an unrecognized net gain that is being amortized to income as a component of periodic benefit income.
Interest expense, net.Interest expense for the nine months ended September 30, 2005 was $11.4 million compared with $11.3 million for the nine months ended September 30, 2004. The increase in interest expense was primarily
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caused by slightly higher average debt balances in the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004 as a result of the February 2004 refinancing.
Foreign exchange loss (gain), net. The Company reported a foreign exchange loss of $0.7 million for the nine months ended September 30, 2005 compared with a foreign exchange gain of $0.2 million for the nine months ended September 30, 2004, primarily due to the stronger U.S. dollar in the first nine months of 2005 in comparison to the first nine months of 2004.
Other expense.Other expense for the nine months ended September 30, 2004 was $1.7 million and consisted primarily of a non-cash charge of $1.2 million related to the write-off of previously deferred financing costs and original issue discount costs resulting from the February 2004 refinancing of our Credit Facility and $0.5 million of previously deferred financing costs and original issue discount costs related to the August 2004 exchange of 11.0% senior subordinated notes for our Subordinated Notes.
Provision for income taxes.The provision for income taxes was $9.3 million for the nine months ended September 30, 2005 and was $7.4 million for the nine months ended September 30, 2004. The effective tax rate was 35.9% for the nine months ended September 30, 2005 compared with 39.4% for the nine months ended September 30, 2004. The Company’s income tax provision and decreased effective tax rate for the nine months ended September 30, 2005 are due to the benefits of increased exclusions related to profits on export sales and tax credits available to the Company, combined with a $0.7 million reduction in income tax expense related to a change in state tax laws.
Net income.As a result of the foregoing, the Company reported net income of $16.6 million for the nine months ended September 30, 2005, an increase of $5.2 million, or 45.4%, from net income of $11.4 million in the nine months ended September 30, 2004.
Liquidity and Capital Resources
Short-term liquidity requirements consist of activities related to day-to-day operations, required debt service, capital expenditure funding and meeting working capital requirements. Long-term liquidity requirements include principal payments relating to long-term debt and acquisition funding. Sources for our short-term liquidity needs are primarily cash generated from operations and borrowings under the revolving credit portion of our Credit Facility.
On February 20, 2004, we refinanced substantially all of our long-term debt outstanding. We issued $140.9 million aggregate principal amount of Subordinated Notes, of which $19.4 million was exchanged for our 11.0% senior subordinated notes. The proceeds of $140.9 million were used in part to reduce amounts outstanding under the previous revolving credit facility, to repay $39.0 million of term loans outstanding and to repay $35.0 million of the 11.0% senior subordinated notes of Holding. In addition, we paid a dividend of $25.0 million to Holding, as our sole stockholder. On August 13, 2004, we exchanged the remaining $10.6 million of 11.0% senior subordinated notes for $10.6 million of our Subordinated Notes.
In connection with the February 20, 2004 refinancing, the Company amended its Credit Facility, which expires December 2, 2007. The Credit Facility provides a revolving credit line of $75.0 million, of which $25.0 million may be used for the issuance of letters of credit. The Credit Facility allows for multicurrency borrowing options in Australian dollars, Euros, Swiss francs, Swedish kronor, British pounds and other currencies that are readily available and freely traded. Borrowings under the Credit Facility are secured by substantially all of the assets of the Company and accrue interest at the Alternate Base Rate (as defined in the Credit Facility) or LIBOR plus a 1.75% margin. The Credit Facility provides for a commitment fee of 0.25% on the revolving credit line.
The Credit Facility and the Subordinated Notes contain certain customary covenants that impose limitations on the Company, including covenants limiting the ability of the Company and its subsidiaries to sell, pledge or incur liens on assets and to incur additional debt. The Credit Facility also includes requirements to meet certain financial tests and to maintain on a quarterly basis certain consolidated financial ratios, including minimum net worth, minimum fixed charge coverage ratio, maximum leverage ratio and minimum EBITDA. The Company was in compliance with all covenants of the Credit Facility and the Subordinated Notes, and the conditions of the Credit Facility, at September 30, 2005.
At September 30, 2005, the Company did not have any borrowings outstanding under the revolving credit line of the Credit Facility, but did have letters of credit outstanding of $0.1 million supported by the Credit Facility. The amount available for additional borrowing under the Credit Facility at September 30, 2005 was $74.9 million.
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In October 2005, the Company purchased $10.5 million of its Subordinated Notes that were offered for sale in the open market. The Company paid varying prices representing principal, accrued interest and a premium.
Nine Months Ended September 30, 2005 Compared With Nine Months Ended September 30, 2004
Cash provided by operating activities for the nine months ended September 30, 2005 was $23.1 million, compared with $9.9 million for the nine months ended September 30, 2004. In comparison to the first nine months of 2004, the Company’s operating cash flow for the first nine months of 2005 reflects a $5.7 million increase in net income plus depreciation and amortization, combined with a $7.5 million decrease in cash used for working capital, primarily due to a reduction in inventory levels.
Capital expenditures were $1.8 million for the nine months ended September 30, 2005, compared with $2.0 million for the nine months ended September 30, 2004. We currently do not have any significant capital projects in process.
Cash used in financing activities was $15.0 million for the nine months ended September 30, 2005 and reflects the $15.0 million dividend paid to the holders of Global Class L Shares in January 2005. The 2004 financing activities primarily reflect the net effect of the February 2004 debt refinancing activities previously discussed.
We have significant future cash commitments, primarily for debt service requirements and scheduled lease payments. There have been no material changes to our cash commitments and commercial commitments in the nine months ended September 30, 2005 from those shown as of December 31, 2004 in our Annual Report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” other than the payment in January 2005 of the dividend as discussed above.
We believe that cash forecasted to be generated from operations, together with amounts available under our Credit Facility, will be adequate to meet our cash commitments, capital expenditures and working capital needs for at least the next 12 months, although no assurance can be given. Our future operating performance and ability to extend or refinance our indebtedness will be dependent on future economic conditions and general financial, business and other factors, many of which are beyond our control.
Reconciliation of EBITDA to Net Cash Provided by Operating Activities
The Company has chosen to present EBITDA because the Company believes it is a widely accepted financial indicator of a company’s ability to service and incur indebtedness, and because EBITDA is used in the Company’s financial covenants under the Credit Facility and in the indenture governing the Subordinated Notes. Additionally, management uses EBITDA, among other financial measures, for planning and forecasting purposes. However, EBITDA should not be considered as an alternative to net cash provided by operating activities as a measure of liquidity in accordance with GAAP. Since EBITDA is not calculated identically by all companies, the Company’s method of computation may not be comparable to those disclosed by other companies. Following is a reconciliation of EBITDA to net cash used in operating activities, which the Company believes is the most directly comparable GAAP measure of a company’s ability to service and incur indebtedness:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net cash provided by operating activities | $ | 14,316 | $ | 3,318 | $ | 23,135 | $ | 9,921 | ||||||||
Interest expense, net | 3,658 | 3,927 | 11,443 | 11,274 | ||||||||||||
Provision for income taxes | 4,207 | 2,349 | 9,318 | 7,426 | ||||||||||||
Foreign exchange (loss) gain, net | (196 | ) | (212 | ) | (662 | ) | 181 | |||||||||
Deferred taxes | 209 | 233 | 1,345 | 690 | ||||||||||||
Amortization of financing fees and discount on senior subordinated notes included in interest expense, net | (223 | ) | (287 | ) | (669 | ) | (686 | ) | ||||||||
Net changes in operating assets and liabilities | (3,554 | ) | 4,009 | 3,069 | 12,109 | |||||||||||
EBITDA | $ | 18,417 | $ | 13,337 | $ | 46,979 | $ | 40,915 | ||||||||
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Critical Accounting Policies and Estimates
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. As such, some accounting policies have a significant impact on amounts reported in these unaudited condensed consolidated financial statements. A summary of those significant accounting policies can be found in the Company’s Annual Report on Form 10-K filed with the SEC March 9, 2005 under the caption “Critical Accounting Policies and Estimates” within Management’s Discussion and Analysis of Financial Condition and Results of Operations. In particular, judgment is used in areas such as determining the allowance for doubtful accounts and inventory valuation reserves, goodwill and indefinite lived intangible assets, product warranty costs, debt covenants and deferred tax assets.
Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151,Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material, and requires that such items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept of “normal capacity” and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. While we are still evaluating the impact of this statement, we do not currently believe it will have a material impact on our consolidated results of operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment, which replaces the prior SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, awards of liability instruments will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. This new standard will become effective for the Company on January 1, 2006. While we are still evaluating the impact of this statement, we do not currently believe it will have a material impact on our consolidated results of operations, financial position or cash flows.
FORWARD-LOOKING STATEMENTS
The Company is making this statement in order to satisfy the “safe harbor” provisions contained in the Private Securities Litigation Reform Act of 1995. This Quarterly Report on Form 10-Q includes forward-looking statements related to the business of the Company that are not historical facts. These “forward-looking statements” can be identified by the use of terminology such as “believe,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “continue,” “positioned,” “strategy” and similar expressions. These statements are only our predictions. The forward-looking statements included in this report are not guarantees of future performances, and should one or more of these, or other, risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from those contemplated by these forward-looking statements. In the light of these risks and uncertainties, we cannot assure you that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements, which, unless otherwise noted, speak only as of the date of this report. The Company undertakes no obligation, except as required by law, to update these statements.
Risks, uncertainties and contingencies that could cause actual results to vary materially from those anticipated in forward-looking statements in this report include general economic conditions in the markets in which we operate and industry related and other factors including, without limitation, the following:
• | the availability of sufficient amounts of raw materials, particularly steel and copper, and our ability to acquire these raw materials on an economic basis; | ||
• | risks associated with foreign operations, including fluctuations in exchange rates of foreign currencies; | ||
• | competitive pressures on pricing; | ||
• | operational issues at our facilities; | ||
• | availability of financing to fund operations at anticipated rates and terms; | ||
• | prolonged work stoppages; |
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• | governmental or regulatory policies; | ||
• | product warranty, product liability and product recall costs; | ||
• | rapid increases in health care costs; | ||
• | our acquisition activities; | ||
• | our substantial debt and leverage and our ability to service our debt; | ||
• | the restrictive covenants contained in the agreements governing our indebtedness; | ||
• | our ability to realize revenue growth; | ||
• | our ability to implement initiatives designed to increase operating efficiencies and improve results; | ||
• | the loss of major customers; | ||
• | and acts of war or terrorism. |
For additional information on risks and uncertainties that could cause actual results to differ from those anticipated in forward-looking statements, see the discussion set forth under “Risk Factors” in the Company’s SEC filings, including its Annual Report on Form 10-K filed with the SEC on March 9, 2005.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to various changes in financial market conditions, including fluctuations in interest rates, foreign currency exchange rates and commodity prices. We manage our exposure to such risks through various operating and financing activities.
We are exposed to interest rate risk associated with borrowings under our Credit Facility. Borrowings under the Credit Facility bear interest at variable rates, based upon published indices. In order to partially mitigate this exposure, we have occasionally entered into interest rate swaps to fix a portion of our interest payable. There were no interest rate swaps outstanding as of September 30, 2005.
We are also exposed to various foreign currency risks, i.e., there is a risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. Our foreign currency exchange rate risks primarily relate to the Euro, the Australian dollar and the Brazilian real. We monitor these risks, and attempt to establish offsetting positions, when practical, between our various subsidiaries. Under our Credit Facility, we also have the option of denominating a portion of our borrowings in multiple foreign currencies. There are no amounts outstanding under the multicurrency borrowing options at September 30, 2005. We had net assets denominated in foreign currencies of approximately $43.8 million associated with our foreign subsidiaries at September 30, 2005.
We utilize various raw material commodities in our manufacturing processes, including steel and copper. These materials are obtained from various supply sources, and there have historically been adequate levels of material available. We are exposed to adverse price fluctuations when purchasing these materials, and may not necessarily be able to offset such increases through increased selling prices for our products. We do not hedge our commodity price risks via the derivatives markets.
Item 4. Controls and Procedures
As of September 30, 2005 an evaluation was performed, under the supervision and with the participation of the Company’s management including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, such officers concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit Number | Description of Document | |
10.1 | Amendment No. 3 to Second Amended and Restated Multicurrency Credit and Security Agreement, dated as of December 2, 2002, by and among ERICO International Corporation, ERICO Products, Inc. and ERICO Europa B.V., as Borrowers, and the Banks that are signatories thereto and LaSalle Bank National Association, as Administrative Agent, Lead Arranger and Issuing Bank, and General Electric Capital Corporation, as Co-Lead Arranger and Co-Documentation Agent, National City Bank as Syndication Agent, and Key Bank National Association, as Documentation Agent (the “Second Amended and Restated Multicurrency Credit and Security Agreement”) dated as of December 22, 2004. | |
10.2 | Amendment No. 4 to the Second Amended and Restated Multicurrency Credit and Security Agreement, dated as of June 16, 2005. | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32 | Section 1350 Certification of Chief Financial Officer and Chief Executive Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ERICO INTERNATIONAL CORPORATION | ||||||
By: | /s/ William H. Roj | |||||
Name: | William H. Roj | |||||
Title: | Chairman, Chief Executive Officer | |||||
and Director | ||||||
November 2, 2005 | ||||||
By: | /s/ Jeffrey R. Steinhilber | |||||
Name: | Jeffrey R. Steinhilber | |||||
Title: | Chief Financial Officer and Director | |||||
November 2, 2005 |
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