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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, 2008
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 001-33337
COLEMAN CABLE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 36-4410887 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1530 Shields Drive, Waukegan, Illinois 60085
(Address of Principal Executive Offices)
(Address of Principal Executive Offices)
(847) 672-2300
(Registrant’s Telephone Number, including Area Code)
(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.þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filero | Non-accelerated filerþ | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)o Yes þ No
Common shares outstanding as of November 3, 2008: 16,786,895
INDEX
Page | ||||
3 | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
23 | ||||
36 | ||||
37 | ||||
37 | ||||
38 | ||||
39 | ||||
Certification of Chief Executive Officer | ||||
Certification of Chief Financial Officer | ||||
Section 1350 Certification |
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PART I.
ITEM 1. Financial Statements
COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share data)
(unaudited)
(Thousands, except per share data)
(unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
NET SALES | $ | 270,712 | $ | 253,453 | $ | 790,775 | $ | 609,867 | ||||||||
COST OF GOODS SOLD | 240,814 | 224,287 | 703,736 | 535,837 | ||||||||||||
GROSS PROFIT | 29,898 | 29,166 | 87,039 | 74,030 | ||||||||||||
SELLING, ENGINEERING, GENERAL AND ADMINISTRATIVE EXPENSES | 14,228 | 11,753 | 40,472 | 31,238 | ||||||||||||
INTANGIBLE AMORTIZATION EXPENSE | 3,121 | 2,522 | 8,889 | 5,085 | ||||||||||||
RESTRUCTURING CHARGES | 2,504 | 53 | 5,515 | 580 | ||||||||||||
OPERATING INCOME | 10,045 | 14,838 | 32,163 | 37,127 | ||||||||||||
INTEREST EXPENSE | 7,211 | 8,187 | 22,545 | 19,411 | ||||||||||||
OTHER (INCOME) LOSS, NET | (56 | ) | 2 | 68 | 29 | |||||||||||
INCOME BEFORE INCOME TAXES | 2,890 | 6,649 | 9,550 | 17,687 | ||||||||||||
INCOME TAX EXPENSE | 1,153 | 2,606 | 3,716 | 6,752 | ||||||||||||
NET INCOME | $ | 1,737 | $ | 4,043 | $ | 5,834 | $ | 10,935 | ||||||||
EARNINGS PER COMMON SHARE DATA | ||||||||||||||||
NET INCOME PER SHARE | ||||||||||||||||
Basic | $ | 0.10 | $ | 0.24 | $ | 0.35 | $ | 0.65 | ||||||||
Diluted | 0.10 | 0.24 | 0.35 | 0.65 | ||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||||||
Basic | 16,787 | 16,787 | 16,787 | 16,787 | ||||||||||||
Diluted | 16,825 | 16,796 | 16,811 | 16,789 |
See notes to condensed consolidated financial statements.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except per share data)
(unaudited)
(Thousands, except per share data)
(unaudited)
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 3,504 | $ | 8,877 | ||||
Accounts receivable, net of allowances of $3,384 and $4,601, respectively | 174,134 | 159,133 | ||||||
Inventories | 115,998 | 138,359 | ||||||
Deferred income taxes | 4,327 | 3,776 | ||||||
Assets held for sale | 4,116 | 661 | ||||||
Prepaid expenses and other current assets | 4,490 | 8,647 | ||||||
Total current assets | 306,569 | 319,453 | ||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
Land | 1,675 | 2,772 | ||||||
Buildings and leasehold improvements | 14,954 | 14,780 | ||||||
Machinery, fixtures and equipment | 106,979 | 101,701 | ||||||
123,608 | 119,253 | |||||||
Less accumulated depreciation and amortization | (53,532 | ) | (42,918 | ) | ||||
Construction in progress | 4,309 | 3,628 | ||||||
Property, plant and equipment, net | 74,385 | 79,963 | ||||||
GOODWILL | 111,000 | 108,461 | ||||||
INTANGIBLE ASSETS, NET OF AMORTIZATION of $16,537 and $7,669, respectively | 49,299 | 58,181 | ||||||
OTHER ASSETS, NET | 8,147 | 9,594 | ||||||
TOTAL ASSETS | $ | 549,400 | $ | 575,652 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of long-term debt | $ | 502 | $ | 936 | ||||
Accounts payable | 54,831 | 49,519 | ||||||
Accrued liabilities | 41,372 | 38,473 | ||||||
Total current liabilities | 96,705 | 88,928 | ||||||
LONG-TERM DEBT | 330,788 | 366,905 | ||||||
LONG-TERM LIABILITIES | 1,546 | 281 | ||||||
DEFERRED INCOME TAXES | 16,803 | 23,567 | ||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Common stock, par value $0.001; 75,000 authorized; and 16,787 issued and outstanding on September 30, 2008 and December 31, 2007 | 17 | 17 | ||||||
Additional paid-in capital | 85,724 | 83,709 | ||||||
Retained earnings | 18,127 | 12,293 | ||||||
Accumulated other comprehensive loss | (310 | ) | (48 | ) | ||||
Total shareholders’ equity | 103,558 | 95,971 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 549,400 | $ | 575,652 | ||||
See notes to condensed consolidated financial statements.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(unaudited)
(Thousands)
(unaudited)
Nine months ended September 30, | ||||||||
2008 | 2007 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 5,834 | $ | 10,935 | ||||
Adjustments to reconcile net income to net cash flow from operating activities: | ||||||||
Depreciation and amortization | 22,306 | 14,811 | ||||||
Stock-based compensation | 2,015 | 3,121 | ||||||
Inventory theft insurance receivable allowance | 1,588 | — | ||||||
Deferred tax provision (credit) | (5,737 | ) | (3,924 | ) | ||||
(Gain) loss on disposal of fixed assets | 178 | (12 | ) | |||||
Changes in operating assets and liabilities, excluding impact of acquisitions: | ||||||||
Accounts receivable | (15,183 | ) | (25,950 | ) | ||||
Inventories | 22,312 | (20,180 | ) | |||||
Prepaid expenses and other assets | 2,564 | (1,706 | ) | |||||
Accounts payable | 6,503 | 7,891 | ||||||
Accrued liabilities | (15 | ) | 9,654 | |||||
Net cash flow from operating activities | 42,365 | (5,360 | ) | |||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (10,930 | ) | (4,929 | ) | ||||
Acquisition of businesses, net of cash acquired | (708 | ) | (214,810 | ) | ||||
Proceeds from sale of fixed assets | 17 | 18 | ||||||
Proceeds from sale of investment | — | 59 | ||||||
Net cash flow from investing activities | (11,621 | ) | (219,662 | ) | ||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
Net borrowings (repayments) under revolving loan facilities | (35,188 | ) | 98,196 | |||||
Issuance of senior notes, net of issuance costs | — | 119,380 | ||||||
Common stock issuance costs | — | (451 | ) | |||||
Repayment of long-term debt | (1,027 | ) | (917 | ) | ||||
Net cash flow from financing activities | (36,215 | ) | 216,208 | |||||
Effect of exchange rate changes on cash and cash equivalents | 98 | — | ||||||
DECREASE IN CASH AND CASH EQUIVALENTS | (5,373 | ) | (8,814 | ) | ||||
CASH AND CASH EQUIVALENTS — Beginning of period | 8,877 | 14,734 | ||||||
CASH AND CASH EQUIVALENTS — End of period | $ | 3,504 | $ | 5,920 | ||||
NONCASH ACTIVITY | ||||||||
Unpaid capital expenditures | 202 | 210 | ||||||
Capital lease obligations | 135 | 16 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Income taxes paid | 4,821 | 12,244 | ||||||
Cash interest paid | 16,272 | 9,557 |
See notes to condensed consolidated financial statements.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands, except per share data)
(unaudited)
(Thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been condensed or omitted. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2007. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
During the first quarter of 2008, we changed our management reporting structure and the manner in which we report financial results internally. These changes resulted in a change in the Company’s reportable segments, as further discussed in Note 13.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R),Business Combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until December 31, 2008. The impact SFAS No. 141(R) will have on our consolidated financial statements when effective will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements.SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements. SFAS No. 157 was required to be adopted by the Company in the first quarter of 2008 for financial assets and is effective in the first quarter of 2009 for non-financial assets. Our adoption of SFAS No. 157 in the first quarter of 2008 did not have a material impact on our financial position, results of operations or cash flows. At September 30, 2008, we had copper futures contracts with an aggregate fair value of $1,266 to sell 2,800 pounds of copper in December 2008. These derivatives have been determined to be Level 2 under the fair value hierarchy in accordance with SFAS No. 157. The adoption of SFAS No. 157 for non-financial assets is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 was effective for the Company at the beginning of 2008. The Company’s adoption of the provisions of SFAS No. 159 did not impact our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51. This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, effective as of the beginning of 2009, noncontrolling interests will be classified as equity in the consolidated financial statements and income and comprehensive income attributed to the noncontrolling interest will be included in income and comprehensive income. The provisions of this standard must be applied retrospectively upon adoption. We do not currently have any minority interest components at any of our subsidiaries, and we do not anticipate the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements.
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In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133. SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. This Statement specifically requires entities to provide enhanced disclosures addressing the following: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 is effective for us on January 1, 2009. We are currently evaluating the impact of SFAS No. 161, but do not believe that our adoption of the standard will have a material impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company does not expect that this standard will have a material impact on its results of operations, financial position or cash flows.
In April 2008, the FASB issued Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”. FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP No. 142-3 is effective for us in the first quarter of 2009. The Company is currently assessing the impact, if any, of FSP No. 142-3 on our results of operations, financial position and cash flows.
In May 2008, the FASB issued Statement issued SFAS No. 163Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60. SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. The accounting and disclosure requirements of the this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. We do not operate as an insurance enterprise with financial guaranteed insurance contracts and do not anticipate the adoption of SFAS No. 163 will have a material impact on our consolidated financial statements.
3. ACQUISITIONS
Copperfield, LLC
On April 2, 2007, we acquired 100% of the outstanding equity interests of Copperfield, LLC (“Copperfield”) for $215,449, including acquisition-related costs and working capital adjustments. We believe the acquisition of Copperfield, which at the time of our acquisition was one of the largest privately-owned manufacturers and suppliers of electrical wire and cable products in the United States, has presented us with a number of strategic benefits. In particular, the acquisition increases our scale, diversifies and expands our customer base and strengthens our competitive position in the industry. Copperfield’s results of operations have been included in our consolidated financial statements since the acquisition date.
In connection with our financing of the Copperfield acquisition, we issued senior notes with an aggregate principal amount of $120,000 (the “2007 Notes”), and entered into an amended and restated credit facility (the “Revolving Credit Facility”) with Wachovia Bank, National Association, which amended and restated our previous revolving credit agreement in its entirety and, among other things, increased our total borrowing capacity under the Revolving Credit Facility to a maximum of $200,000. See Note 7 for further discussion.
Woods Industries
On November 30, 2007, we acquired the electrical products business of Katy Industries, Inc. (“Katy”), which operated in the United States as Woods Industries, Inc. (“Woods U.S.”) and in Canada as Woods Industries (Canada) Inc. (“Woods Canada”), collectively referred to herein as Woods (“Woods”). The principal business of Woods was the design and distribution of consumer electrical cord products, sold principally to national home improvement, mass merchant, hardware and other retailers. We believe the acquisition of Woods provides us with the opportunity to expand our U.S. business while enhancing our market presence and penetration in Canada. We purchased certain assets of Woods U.S. and all the stock of Woods Canada for $53,803, including acquisition-related costs and working capital adjustments. We utilized our Revolving Credit Facility to finance the acquisition. Woods’ results of operations have been included in our consolidated financial statements since the acquisition date.
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Purchase Price Allocations
The above acquisitions (“2007 Acquisitions”) were accounted for under the purchase method of accounting in accordance with SFAS No. 141,Business Combinations. Accordingly, we have allocated the purchase price for each acquisition to the net assets acquired based on the related estimated fair values at each respective acquisition date. We finalized the purchase price allocation for Copperfield during the first quarter of 2008. For the Woods acquisition, the purchase price allocation is preliminary, including the allocation of goodwill. Certain costs related to the integration of Woods have been reflected as purchase accounting adjustments in 2008, as further detailed in Note 4. We will finalize the purchase price allocation for the Woods acquisition during the fourth quarter of 2008 which may result in adjustments to the carrying value of Woods’ recorded assets and liabilities. These adjustments could be significant.
The table below summarizes the final purchase price allocation related to the Copperfield acquisition and the preliminary purchase price allocation related to the Woods acquisition as of their respective acquisition dates.
Copperfield | Woods | Total | ||||||||||
Cash and cash equivalents | $ | 639 | $ | 4,884 | $ | 5,523 | ||||||
Accounts receivable | 61,592 | 30,644 | 92,236 | |||||||||
Inventories | 41,601 | 27,231 | 68,832 | |||||||||
Prepaid expenses and other current assets | 832 | 2,942 | 3,774 | |||||||||
Property, Plant and equipment | 62,656 | 1,604 | 64,260 | |||||||||
Intangible assets | 64,400 | 1,400 | 65,800 | |||||||||
Goodwill | 43,733 | 6,705 | 50,438 | |||||||||
Other assets | 607 | — | 607 | |||||||||
Total assets acquired | 276,060 | 75,410 | 351,470 | |||||||||
Current liabilities | (36,806 | ) | (21,280 | ) | (58,086 | ) | ||||||
Long-term liabilities | (42 | ) | — | (42 | ) | |||||||
Deferred income taxes | (23,763 | ) | (327 | ) | (24,090 | ) | ||||||
Total liabilities assumed | (60,611 | ) | (21,607 | ) | (82,218 | ) | ||||||
Net assets acquired | $ | 215,449 | $ | 53,803 | $ | 269,252 | ||||||
The purchase price allocation to identifiable intangible assets, which are all amortizable, along with their respective weighted-average amortization periods at the acquisition date are as follows:
Weighted Average | ||||||||||||||||
Amortization Period | Copperfield | Woods | Total | |||||||||||||
Customer relationships | 4 | $ | 55,600 | $ | 900 | $ | 56,500 | |||||||||
Trademarks and trade names | 11 | 7,800 | 500 | 8,300 | ||||||||||||
Non-competition agreements | 2 | 1,000 | — | 1,000 | ||||||||||||
Total intangible assets | $ | 64,400 | $ | 1,400 | $ | 65,800 | ||||||||||
Approximately 41% of the Copperfield acquisition related to the acquisition of partnership interests, which resulted in a corresponding step up in basis for U.S. income tax purposes. As such, approximately $12,000 of the goodwill and $26,800 of the acquired intangible assets recorded in connection with the Copperfield acquisition is deductible for U.S. income tax purposes, primarily over 15 years. For the Woods acquisition, goodwill and intangible assets attributable to the acquisition of Woods U.S. will be deductible for U.S. income tax purposes, while goodwill attributable to Woods Canada will not be deductible for Canadian income tax purposes.
Unaudited Selected Pro Forma Financial Information
The following unaudited pro forma financial information summarizes our estimated combined results of operations assuming that our acquisitions of Copperfield and Woods had taken place at the beginning of 2007. The unaudited pro forma combined results of operations were prepared on the basis of information provided to us by the former management of Copperfield and Woods and we make no representation with respect to the accuracy of such information. The pro forma combined results of operations reflect adjustments for interest expense, additional depreciation based on the fair value of acquired property, plant and equipment, amortization of acquired identifiable intangible assets, cost of goods sold and income tax expense. The unaudited pro forma
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information is presented for informational purposes only and does not include any cost savings or other effects of integration. Accordingly, it is not indicative of the results of operations that may have been achieved if the acquisition had taken place at the beginning of the period presented or that may result in the future.
Three months | Nine months | |||||||
ended | ended | |||||||
September 30, 2007 | September 30, 2007 | |||||||
Net sales | $ | 305,072 | $ | 858,905 | ||||
Net income | $ | 4,989 | $ | 13,634 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.30 | $ | 0.81 | ||||
Diluted | $ | 0.30 | $ | 0.81 |
4. RESTRUCTURING AND INTEGRATION ACTIVITIES
2008 Restructuring and Integration Activities
We incurred restructuring costs of $2,504 and $5,515 during the third quarter and first nine months of 2008, respectively, primarily in connection with the on-going integration of our 2007 Acquisitions. As shown in the table below, restructuring charges related to the integration of 2007 Acquisitions expensed during the first nine months of 2008 included $3,705 in equipment relocation costs, $381 in employee severance and relocation costs and $1,429 in other exit costs. During the third quarter, we initiated a workforce reduction at our Oswego, New York manufacturing facility, which resulted in the recognition of a $298 charge in the third quarter of 2008 for severance and related benefits to be paid to effected employees at this facility. These reductions were made as the result of a decision to transition copper fabrication activities from the Oswego plant to our Bremen, Indiana facility.
In October of 2008, we announced to our employees a series of separate planned workforce reductions affecting primarily our El Paso, Texas facilities, as well as our corporate office in Waukegan, Illinois. Such plans include the possible elimination of approximately 160 positions over the remainder of 2008 and into 2009, with the final number of positions to be eliminated, expense and timing of such actions, contingent upon our performance for the remainder of 2008.
During 2008, we have completed many aspects of the integration of our 2007 Acquisitions. We completed the integration of the Woods acquisition, incorporating this business into our core operations and eliminating separate corporate and distribution functions. We have also made significant progress on the previously announced plan to consolidate three of our distribution facilities (located in Indianapolis, Indiana; Gurnee, Illinois; and Waukegan, Illinois) into a single leased distribution facility which we opened in April 2008 in Pleasant Prairie, Wisconsin. In addition, we continued the execution of our integration strategy for a number of the manufacturing and distribution facilities we acquired as part of the Copperfield acquisition. This plan includes the consolidation and closure of Copperfield manufacturing and distribution facilities located in Avilla, Indiana; Nogales, Arizona; and El Paso, Texas, primarily into operations at one modern new facility in El Paso, Texas. As a result, we have ceased manufacturing operations at the Avilla, Indiana; Nogales, Arizona; and within our Zaragosa Road facility in El Paso, Texas. The building and property associated with both the Avilla and Zaragosa facility are owned and have been classified as assets held for sale in the accompanying condensed consolidated balance sheet at September 30, 2008.
We expect to incur between $6.0 million and $7.0 million in restructuring charges in 2008 for such activities. The ultimate amount of cash expended relative to such efforts is dependent on various factors including the timing of the sale of owned properties and the amount of proceeds received. We expect the majority of these integration activities to be complete by the end of 2008.
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The following table summarizes activity for 2008 restructuring activities:
Employee | ||||||||||||||||||||
Severance | Lease | |||||||||||||||||||
and | Termination | Equipment | ||||||||||||||||||
Relocation | & Facility | Relocation | Other | |||||||||||||||||
Costs | Closure Costs | Costs | Costs | Total | ||||||||||||||||
BALANCE — December 31, 2007 | $ | 385 | $ | — | $ | — | $ | — | $ | 385 | ||||||||||
Provision | 381 | — | 3,705 | 1,371 | 5,457 | |||||||||||||||
Purchase accounting adjustments | 740 | 2,802 | — | 132 | 3,674 | |||||||||||||||
Uses | (1,023 | ) | (810 | ) | (3,705 | ) | (1,479 | ) | (7,017 | ) | ||||||||||
BALANCE — September 30, 2008 | $ | 483 | $ | 1,992 | $ | — | $ | 24 | $ | 2,499 | ||||||||||
2006 Restructuring Activities
During 2006, we ceased operations at our owned manufacturing facility in Siler City, North Carolina. The building and property we own in Siler City, North Carolina has been classified as an asset held for sale in the amount of $661 in our consolidated balance sheet at September 30, 2008. We incurred approximately $58 in holding costs associated with the Siler City location during the first nine months of 2008, and incurred $580 in exit costs related to the facility during the first nine months of 2007.
5. INVENTORIES
Inventories consisted of the following:
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
FIFO cost: | ||||||||
Raw materials | $ | 30,568 | $ | 31,626 | ||||
Work in progress | 4,169 | 4,324 | ||||||
Finished products | 81,261 | 102,409 | ||||||
Total | $ | 115,998 | $ | 138,359 | ||||
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Salaries, wages and employee benefits | $ | 5,578 | $ | 9,503 | ||||
Sales incentives | 12,483 | 14,383 | ||||||
Income taxes | 239 | — | ||||||
Interest | 12,053 | 6,505 | ||||||
Other | 11,019 | 8,082 | ||||||
Total | $ | 41,372 | $ | 38,473 | ||||
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7. DEBT
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Revolving credit facility expiring April 2012 | $ | 88,250 | $ | 123,438 | ||||
9.875% Senior notes due October 2012, including unamortized premium of $2,509 and $2,980, respectively | 242,509 | 242,980 | ||||||
Capital lease obligations | 531 | 782 | ||||||
Other long-term debt | — | 641 | ||||||
331,290 | 367,841 | |||||||
Less current portion | (502 | ) | (936 | ) | ||||
Long-term debt | $ | 330,788 | $ | 366,905 | ||||
Revolving Credit Facility
Our five-year revolving credit facility (the “Revolving Credit Facility”) is a senior secured facility that provides for aggregate borrowings of up to $200,000, subject to certain limitations as discussed below. The proceeds from the Revolving Credit Facility are available for working capital and other general corporate purposes, including merger and acquisition activity. At September 30, 2008, we had $88,250 in borrowings outstanding under the facility, with $93,154 in remaining excess availability.
Pursuant to the terms of the Revolving Credit Facility, we are required to maintain a minimum of $10,000 in excess availability under the facility at all times. Borrowing availability under the Revolving Credit Facility is limited to the lesser of (i) $200,000 or (ii) the sum of 85% of eligible accounts receivable, 55% of eligible inventory and an advance rate to be determined of certain appraised fixed assets, with a $10,000 sublimit for letters of credit. Interest is payable, at our option, at the agent’s prime rate plus a range of 0.0% to 0.5% or the Eurodollar rate plus a range of 1.25% to 1.75%, in each case based on quarterly average excess availability under the Revolving Credit Facility. The average rate of interest incurred under the Revolving Credit Facility during the third quarter and first nine months of 2008 approximated 3.7% and 4.2%, respectively. The Revolving Credit Facility combined with the previously existing revolving credit facility accrued interest at an average rate of 7.0% for the six months ended September 30, 2007. We had no borrowings for the three months ended March 31, 2007.
The Revolving Credit Facility is guaranteed by our domestic subsidiaries on a joint and several basis, either as a co-borrower of the Company or a guarantor, and is secured by substantially all of our assets and the assets of our domestic subsidiaries, including accounts receivable, inventory and any other tangible and intangible assets (including real estate, machinery and equipment and intellectual property), as well as by a pledge of all the capital stock of each of our domestic subsidiaries and 65% of the capital stock of our foreign subsidiary.
The Revolving Credit Facility contains financial and other covenants that limit or restrict our ability to pay dividends or distributions, incur indebtedness, permit liens on property, make investments, provide guarantees, enter into mergers, acquisitions or consolidations, conduct asset sales, enter into leases or sale and lease back transactions, and enter into transactions with affiliates. We are also prohibited from making prepayments on the Senior Notes (defined below), except for scheduled payments required pursuant to the terms of such Senior Notes. In addition to maintaining a minimum of $10,000 in excess availability under the facility at all times, the financial covenants in the Revolving Credit Facility require us to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 for any month during which our excess availability under the Revolving Credit Facility falls below $30,000. We maintained greater than $30,000 of monthly excess availability during the third quarter of 2008.
On November 1, 2007, the Revolving Credit Facility was amended to allow for our acquisition of Woods. The amendment also permitted us to make future investments in our Canadian subsidiaries in an aggregate amount, together with the investment made to acquire Woods Canada, not to exceed $25,000.
9.875% Senior Notes
At September 30, 2008, we had $240,000 in aggregate principal amount of 9.875% senior notes outstanding, all of which mature on October 1, 2012 (the “Senior Notes”). The Senior Notes include the $120,000 aggregate principal amount of senior notes issued in connection with our acquisition of Copperfield (the “2007 Notes”). The 2007 Notes are governed by the same indenture (the “Indenture”) and have substantially the same terms and conditions as our $120,000 aggregate principal of 9.875% senior notes issued
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in 2004 (the “2004 Notes”). We received a premium of $3,450 in connection with the issuance of the 2007 Notes due to the fact that the 2007 Notes were issued at 102.875% of the principal amount thereof, resulting in proceeds of $123,450. This premium is being amortized to par value over the remaining life of the 2007 Notes.
Our Indenture governing the Senior Notes and Revolving Credit Facility contains covenants that limit our ability to pay dividends. As of September 30, 2008, we were in compliance with all of the covenants of our Senior Notes and Revolving Credit Facility.
8. EARNINGS PER SHARE
As of September 30, 2008 and 2007, the dilutive effect of share-based awards outstanding on weighted average shares outstanding was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Basic weighted average shares outstanding | 16,787 | 16,787 | 16,787 | 16,787 | ||||||||||||
Dilutive effect of share-based awards | 38 | 9 | 24 | 2 | ||||||||||||
Diluted weighted average share outstanding | 16,825 | 16,796 | 16,811 | 16,789 | ||||||||||||
Options with respect to 824 and 825 common shares were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2008 and September 30, 2007, respectively, because they were antidilutive.
9. SHAREHOLDERS’ EQUITY
Stock-Based Compensation
The Company has a stock-based compensation plan for its directors, executives and certain key employees which authorizes the grant of stock options and other share-based awards. In April 2008, an amended and restated plan was approved by shareholders that, among other things, (1) increased the number of shares authorized for issuance under the Company’s plan from 1,650 to 2,440 and (2) added stock appreciation rights, restricted or unvested stock, restricted stock units, performance shares, performance units and incentive performance bonuses as available awards under the plan. Of the total 2,440 shares authorized for issuance under the plan, 1,162 were issued as of September 30, 2008, with the remaining 1,278 shares available for future grant over the balance of the plan’s ten-year life, which ends in 2016. The Company recorded $693 and $2,015 in stock compensation expense for the three and nine months ended September 30, 2008, respectively, compared to $1,099 and $3,121 for the three and nine months ended September 30, 2007, respectively.
Stock Options
In January 2008, options with an exercise price of $8.38 on 206 shares were granted to executives and other key employees, with the exercise price being equal to the average market price of our stock on the date of grant. The options issued become exercisable over a three-year annual vesting period in three equal installments beginning one year from the date of grant, and expire 10 years from the date of grant.
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Changes in stock options were as follows:
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Weighted-Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Terms | Value | |||||||||||||
Outstanding January 1, 2008 | 888 | $ | 15.52 | 8.8 | — | |||||||||||
Granted | 206 | 8.38 | 9.8 | |||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited or expired | (65 | ) | 15.00 | |||||||||||||
Outstanding September 30, 2008 | 1,029 | $ | 14.12 | 8.3 | 341 | |||||||||||
Vested or expected to vest | 987 | $ | 14.19 | — | 315 | |||||||||||
Exercisable | — | — | ||||||||||||||
Intrinsic value for stock options is defined as the difference between the current market value of the Company’s common stock and the exercise price of the stock option. When the current market value is less than the exercise price, there is no aggregate intrinsic value.
Stock Awards
In January 2008, the Company granted unvested common shares to the members of its board of directors. In total, 67 shares were granted with an approximate aggregate fair value of $566. One-third of the shares vest on the first, second and third anniversary of the grant date.
Comprehensive Income
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net Income | $ | 1,737 | $ | 4,043 | $ | 5,834 | $ | 10,935 | ||||||||
Other comprehensive income | ||||||||||||||||
Currency translation adjustment, net of tax | (250 | ) | — | (262 | ) | — | ||||||||||
Total comprehensive income | $ | 1,487 | $ | 4,043 | $ | 5,572 | $ | 10,935 | ||||||||
10. RELATED PARTIES
We lease our corporate office facility from HQ2 Properties, LLC (“HQ2”). HQ2 is owned by certain members of our Board of Directors and executive management. We made rental payments of $95 and $93 to HQ2 for the third quarter of 2008 and 2007, respectively. Rental payments to HQ2 for the nine months ended September 30, 2008 and 2007 were $282 and $275, respectively. In addition, we lease three manufacturing facilities and three vehicles from DJR Ventures, LLC in which one of our executive officers has substantial minority interest, and we paid a total of $346 and $303 to these entities for the third quarter of 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, such payments totaled $928 and $605, respectively.
For 2007 and prior years, we had consulting arrangements with two of our shareholders whereby, in addition to their service as directors of the Company, they provided advice and counsel on business planning and strategy, including advice on potential acquisitions. Under these consulting arrangements, each eligible individual received $175 as annual compensation for their services. Pursuant to these arrangements, and for their service as directors, we paid each eligible individual $44 and $131 for the third quarter and first nine months of 2007, respectively. The consulting arrangements were terminated effective December 31, 2007. Additionally, from October of 2006 through December 2007, in addition to the above-noted consulting services, each received $75 as annual compensation for their services as co-chairmen of the board of directors. On January 1, 2008 the Company amended its compensation arrangements for its directors. Under these arrangements, annually the co-chairmen each receive $100 in cash and $100 in Company stock. For the third quarter of 2008 and 2007, $39 and $19, respectively, was expensed for each individual’s services as co-chairmen. $116 and $56 was expensed for each individual’s services for the nine months ended September 30, 2008 and 2007, respectively.
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David Bistricer is a member of the Company’s Board of Directors and owns Morgan Capital LLC (“Morgan Capital”), a company with 15 employees engaged in the real estate business. Prior to July 1, 2007, Morgan Capital’s employees purchased health insurance for themselves and their dependents from the Company’s insurance carrier at the same rates we paid for our employees. This arrangement resulted in no additional cost to us. On July 1, 2007, we revised our health insurance arrangements in order to self-insure our employees’ health coverage subject to an insurance policy providing catastrophic health coverage in the event the claims of any employee exceeded $40 in any year. The employees of Morgan Capital became part of the self-insurance arrangement. Morgan Capital agreed to indemnify us for any payments made by us for any Morgan Capital participants in excess of premiums paid to us by Morgan Capital, as well as for any administrative expenses related to the participation of the Morgan Capital participants, which were not significant in either 2008 or 2007. Morgan Capital has obtained separate and independent insurance arrangements for its employees as of February 2008.
11. INVENTORY THEFT
In 2005, we experienced a theft of inventory resulting from break-ins at our manufacturing facility in Miami Lakes, Florida, which we have since closed. We have been in discussion with our insurance carriers relative to this matter, and during the first quarter of 2008, we engaged outside legal counsel in an effort to resolve certain disputes pertaining to our coverage under our related insurance policies. During the third quarter of 2008, as a result of failing to secure satisfactory settlement of the matter with our insurers, we commenced legal action in regard to this matter and recorded an allowance for the related insurance receivable. Accordingly, we recorded a $1,588 non-cash charge during the third quarter of 2008 that fully reserves the insurance receivable reflected on our condensed consolidated balance sheet for the theft of the related inventory and associated product reels. Though an ultimate resolution is still to be determined, we are seeking to recover the related loss, net of deductibles, under such insurance policies.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease certain of our buildings, machinery and equipment under lease agreements that expire at various dates over the next ten years. Rental expense under operating leases was $1,736, and $1,180 for the third quarter of 2008 and 2007, respectively. Rental expense under operating leases was $5,715, and $2,939 for the nine months ended September 30, 2008 and 2007, respectively. During the first quarter of 2008, we signed a lease agreement which will require we make approximately $7,200 in minimum rental payments over the next five years, and another $10,400 over the remaining term of the lease.
Legal Matters
We are party to one environmental claim. The Leonard Chemical Company Superfund site consists of approximately 7.1 acres of land in an industrial area located a half mile east of Catawba, York County, South Carolina. The Leonard Chemical Company operated this site until the early 1980s for recycling of waste solvents. These operations resulted in the contamination of soils and groundwaters at the site with hazardous substances. In 1984, the U.S. Environmental Protection Agency (the “EPA”) listed this site on the National Priorities List. Riblet Products Corporation, with which the Company merged in 2000, was identified through documents as a company that sent solvents to the site for recycling and was one of the companies receiving a special notice letter from the EPA identifying it as a party potentially liable under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) for cleanup of the site.
In 2004, along with other “potentially responsible parties” (“PRPs”), we entered into a Consent Decree with the EPA requiring the performance of a remedial design and remedial action (“RD/RA”) for this site. We have entered into a Site Participation Agreement with the other PRPs for fulfillment of the requirements of the Consent Decree. Under the Site Participation Agreement, we are responsible for 9.19% share of the costs for the RD/RA. As of September 30, 2008, we had a $460 accrual recorded for this liability.
We believe that our accruals related to the environmental litigation and other claims are sufficient and that these items and our rights to available insurance and indemnity will be resolved without material adverse effect on our financial position, results of operations and liquidity, individually or in the aggregate. We cannot, however, provide assurance that this will be the case.
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Tax Matters Agreement
In connection with the closing of a private placement of our common stock in 2006, we entered into a tax matters agreement with our then-existing S corporation shareholders (the “Tax Matters Agreement”) that provides for, among other things, the indemnification of these shareholders for any increase in their tax liability, including interest and penalties, and reimbursement of their expenses (including attorneys’ fees) related to the period prior to our conversion to a C corporation.
On April 24, 2006, the Internal Revenue Service (“IRS”) issued a Notice of Proposed Adjustment claiming that we were not entitled to tax deductions in connection with our then-existing practice involving the prepayment of certain management fees and our payment of certain factoring costs to CCI Enterprises, Inc., our wholly-owned C corporation subsidiary. We have appealed the IRS findings. If our appeal of the IRS findings is unsuccessful, our obligation will be to indemnify our S corporation shareholders on record as of the effective date of the Tax Matters Agreement. We have recorded estimated costs of approximately $586, including interest regarding this matter.
Derivative Financial Instruments
From time-to-time, we enter into derivative contracts, including copper futures contracts, to mitigate the potential impact of fluctuations in the price of copper on our pricing terms with certain customers. We record these derivative contracts at fair value on our consolidated balance sheet as either an asset or liability, and record changes in the fair value of such contracts within cost of goods sold as they occur. At September 30, 2008, we had outstanding contracts, with an aggregate fair value of $1,266 to sell 2,800 pounds of copper in December 2008, recorded as a component of prepaid expenses and other current assets on our condensed consolidated balance sheet at September 30, 2008. We recorded aggregate gains of $2,839 and $696 as a reduction to cost of goods sold in our condensed consolidated income statement for the third quarter and first nine months of 2008. We did not utilize derivatives during the first nine months of 2007, and there were no outstanding contracts at September 30, 2007.
13. BUSINESS SEGMENT INFORMATION
During the first quarter of 2008, we changed our management reporting structure and the manner in which we report our financial results internally, including the integration of our 2007 Acquisitions for reporting purposes. These changes resulted in a change in the Company’s reportable segments. As a result of these changes, we now have two reportable segments: (1) Distribution and (2) Original Equipment Manufacturers (“OEMs”). The Distribution segment serves our customers in distribution businesses, who are resellers of our products, while our OEM segment serves our OEM customers, who generally purchase more tailored products from us which are used as inputs into subassemblies of manufactured finished goods. We have recast prior year segment information to conform to the new segment presentation. The changes do not change our consolidated statements of income, balance sheets, and statement of cash flows.
Financial data for the Company’s reportable segments is as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net Sales: | ||||||||||||||||
Distribution Segment | $ | 188,384 | $ | 152,599 | $ | 528,886 | $ | 410,213 | ||||||||
OEM Segment | 82,328 | 100,854 | 261,889 | 199,654 | ||||||||||||
Total | $ | 270,712 | $ | 253,453 | $ | 790,775 | $ | 609,867 | ||||||||
Operating Income: | ||||||||||||||||
Distribution Segment | $ | 18,961 | $ | 15,044 | $ | 51,872 | $ | 40,046 | ||||||||
OEM Segment | 264 | 4,086 | 3,730 | 6,795 | ||||||||||||
Total segments | 19,225 | 19,130 | 55,602 | 46,841 | ||||||||||||
Corporate | (9,180 | ) | (4,292 | ) | (23,439 | ) | (9,714 | ) | ||||||||
Consolidated operating income | $ | 10,045 | $ | 14,838 | $ | 32,163 | $ | 37,127 | ||||||||
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The Company’s operating segments have common production processes, and manufacturing and distribution capacity. Accordingly, we do not identify net assets to our segments. Depreciation expense is not allocated to segments but is included in manufacturing overhead cost pools and is absorbed into product cost (and inventory) as each product passes through our numerous manufacturing work centers. Accordingly, as products are sold across our segments, it is impracticable to determine the amount of depreciation expense included in the operating results of each segment.
Segment operating income represents income from continuing operations before interest income or expense, other income or expense, and income taxes. Corporate consists of items not charged or allocated to the segments, including costs for employee relocation, discretionary bonuses, professional fees, restructuring, and intangible amortization.
14. SUPPLEMENTAL GUARANTOR INFORMATION
The payment obligations of the Company under the Senior Notes and the Revolving Credit Facility (see Note 7) are guaranteed by certain of our wholly-owned subsidiaries (“Guarantor Subsidiaries”). Such guarantees are full, unconditional and joint and several. The following unaudited supplemental financial information sets forth, on a combined basis, balance sheets, statements of income and statements of cash flows for Coleman Cable, Inc. (the “Parent”) and the Guarantor Subsidiaries — CCI Enterprises, Inc., Oswego Wire Incorporated, CCI International, Copperfield, LLC, and Spell Capital Corporation. On April 2, 2007, Copperfield became a guarantor of the Notes and of the Revolving Credit Facility (see Note 7).
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
Guarantor | Non Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
NET SALES | $ | 141,396 | $ | 115,639 | $ | 13,677 | $ | — | $ | 270,712 | ||||||||||
COST OF GOODS SOLD | 121,804 | 108,390 | 10,620 | — | 240,814 | |||||||||||||||
GROSS PROFIT | 19,592 | 7,249 | 3,057 | — | 29,898 | |||||||||||||||
SELLING, ENGINEERING, GENERAL AND ADMINISTRATIVE EXPENSES | 11,584 | 1,451 | 1,193 | — | 14,228 | |||||||||||||||
INTANGIBLE AMORTIZATION | 65 | 3,030 | 26 | — | 3,121 | |||||||||||||||
RESTRUCTURING CHARGES | 412 | 2,092 | — | — | 2,504 | |||||||||||||||
OPERATING INCOME | 7,531 | 676 | 1,838 | — | 10,045 | |||||||||||||||
INTEREST EXPENSE | 7,176 | (52 | ) | 87 | — | 7,211 | ||||||||||||||
OTHER LOSS (GAIN), NET | 11 | — | (67 | ) | — | (56 | ) | |||||||||||||
INCOME BEFORE INCOME TAXES | 344 | 728 | 1,818 | — | 2,890 | |||||||||||||||
INCOME FROM SUBSIDIARIES | 1,608 | — | — | (1,608 | ) | — | ||||||||||||||
INCOME TAX EXPENSE | 215 | 285 | 653 | — | 1,153 | |||||||||||||||
NET INCOME | $ | 1,737 | $ | 443 | $ | 1,165 | $ | (1,608 | ) | $ | 1,737 | |||||||||
COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
NET SALES | $ | 107,690 | $ | 150,976 | $ | (5,213 | ) | $ | 253,453 | |||||||
COST OF GOODS SOLD | 89,791 | 134,496 | — | 224,287 | ||||||||||||
GROSS PROFIT | 17,899 | 16,480 | (5,213 | ) | 29,166 | |||||||||||
SELLING, ENGINEERING, GENERAL AND ADMINISTRATIVE EXPENSES | 10,082 | 6,884 | (5,213 | ) | 11,753 | |||||||||||
INTANGIBLE AMORTIZATION EXPENSE | 3 | 2,519 | — | 2,522 | ||||||||||||
RESTRUCTURING CHARGES | 53 | — | — | 53 | ||||||||||||
OPERATING INCOME | 7,761 | 7,077 | — | 14,838 | ||||||||||||
INTEREST EXPENSE | 5,208 | 2,979 | — | 8,187 | ||||||||||||
OTHER LOSS | 2 | — | — | 2 | ||||||||||||
INCOME BEFORE INCOME TAXES | 2,551 | 4,098 | — | 6,649 | ||||||||||||
INCOME TAX EXPENSE | 2,289 | 317 | — | 2,606 | ||||||||||||
INCOME FROM SUBSIDIARIES | 3,781 | — | (3,781 | ) | — | |||||||||||
NET INCOME | $ | 4,043 | $ | 3,781 | $ | (3,781 | ) | $ | 4,043 | |||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Guarantor | Non Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
NET SALES | $ | 376,613 | $ | 383,634 | $ | 30,528 | $ | — | $ | 790,775 | ||||||||||
COST OF GOODS SOLD | 320,954 | 360,081 | 22,701 | — | 703,736 | |||||||||||||||
GROSS PROFIT | 55,659 | 23,553 | 7,827 | — | 87,039 | |||||||||||||||
SELLING, ENGINEERING, GENERAL AND ADMINISTRATIVE EXPENSES | 33,154 | 3,921 | 3,397 | — | 40,472 | |||||||||||||||
INTANGIBLE AMORTIZATION | 200 | 8,605 | 84 | — | 8,889 | |||||||||||||||
RESTRUCTURING CHARGES | 668 | 4,847 | — | — | 5,515 | |||||||||||||||
OPERATING INCOME | 21,637 | 6,180 | 4,346 | — | 32,163 | |||||||||||||||
INTEREST EXPENSE | 22,411 | (71 | ) | 205 | — | 22,545 | ||||||||||||||
OTHER LOSS, NET | 36 | — | 32 | — | 68 | |||||||||||||||
INCOME BEFORE INCOME TAXES | (810 | ) | 6,251 | 4,109 | — | 9,550 | ||||||||||||||
INCOME FROM SUBSIDIARIES | 7,317 | — | — | (7,317 | ) | — | ||||||||||||||
INCOME TAX EXPENSE | 673 | 1,565 | 1,478 | — | 3,716 | |||||||||||||||
NET INCOME | $ | 5,834 | $ | 4,686 | $ | 2,631 | $ | (7,317 | ) | $ | 5,834 | |||||||||
COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
NET SALES | $ | 324,270 | $ | 298,745 | $ | (13,148 | ) | $ | 609,867 | |||||||
COST OF GOODS SOLD | 270,709 | 265,128 | — | 535,837 | ||||||||||||
GROSS PROFIT | 53,561 | 33,617 | (13,148 | ) | 74,030 | |||||||||||
SELLING, ENGINEERING, GENERAL AND ADMINISTRATIVE EXPENSES | 27,716 | 16,670 | (13,148 | ) | 31,238 | |||||||||||
INTANGIBLE AMORTIZATION EXPENSE | 10 | 5,075 | — | 5,085 | ||||||||||||
RESTRUCTURING CHARGES | 580 | — | — | 580 | ||||||||||||
OPERATING INCOME | 25,255 | 11,872 | — | 37,127 | ||||||||||||
INTEREST EXPENSE | 13,840 | 5,571 | — | 19,411 | ||||||||||||
OTHER LOSS | 29 | — | — | 29 | ||||||||||||
INCOME BEFORE INCOME TAXES | 11,386 | 6,301 | — | 17,687 | ||||||||||||
INCOME TAX EXPENSE | 6,285 | 467 | — | 6,752 | ||||||||||||
INCOME FROM SUBSIDIARIES | 5,834 | — | (5,834 | ) | — | |||||||||||
NET INCOME | $ | 10,935 | $ | 5,834 | $ | (5,834 | ) | $ | 10,935 | |||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2008
Guarantor | Non Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,933 | $ | 49 | $ | 1,522 | $ | — | $ | 3,504 | ||||||||||
Accounts receivable—net of allowances | 102,821 | 60,351 | 10,962 | — | 174,134 | |||||||||||||||
Intercompany receivable | — | 28,207 | — | (28,207 | ) | — | ||||||||||||||
Inventories | 64,364 | 42,251 | 9,383 | — | 115,998 | |||||||||||||||
Deferred income taxes | 4,322 | 5 | — | — | 4,327 | |||||||||||||||
Assets held for sale | 4,116 | — | — | — | 4,116 | |||||||||||||||
Prepaid expenses and other current assets | 645 | 3,717 | 128 | — | 4,490 | |||||||||||||||
Total current assets | 178,201 | 134,580 | 21,995 | (28,207 | ) | 306,569 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 19,055 | 54,747 | 583 | — | 74,385 | |||||||||||||||
GOODWILL | 64,650 | 43,957 | 2,393 | — | 111,000 | |||||||||||||||
INTANGIBLE ASSETS, NET | 822 | 48,192 | 285 | — | 49,299 | |||||||||||||||
OTHER ASSETS, NET | 16,900 | 651 | 104 | (9,508 | ) | 8,147 | ||||||||||||||
INVESTMENT IN SUBSIDIARIES | 251,941 | — | — | (251,941 | ) | — | ||||||||||||||
TOTAL ASSETS | $ | 531,569 | $ | 282,127 | $ | 25,360 | $ | (289,656 | ) | $ | 549,400 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||
Current portion of long-term debt | $ | 502 | $ | — | $ | — | $ | — | $ | 502 | ||||||||||
Accounts payable | 33,908 | 15,477 | 5,446 | — | 54,831 | |||||||||||||||
Intercompany payable | 26,055 | — | 2,152 | (28,207 | ) | — | ||||||||||||||
Accrued liabilities | 18,663 | 17,365 | 5,344 | — | 41,372 | |||||||||||||||
Total current liabilities | $ | 79,128 | $ | 32,842 | $ | 12,942 | $ | (28,207 | ) | $ | 96,705 | |||||||||
LONG-TERM DEBT | 330,788 | — | — | — | 330,788 | |||||||||||||||
Long-term liabilities | 1,163 | 383 | 9,508 | (9,508 | ) | 1,546 | ||||||||||||||
DEFERRED INCOME TAXES | 16,932 | (68 | ) | (61 | ) | — | 16,803 | |||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||||||
Common stock | 17 | — | — | — | 17 | |||||||||||||||
Additional paid-in capital | 85,724 | 215,449 | — | (215,449 | ) | 85,724 | ||||||||||||||
Accumulated other comprehensive income | (310 | ) | — | (310 | ) | 310 | (310 | ) | ||||||||||||
Retained earnings | 18,127 | 33,521 | 3,281 | (36,802 | ) | 18,127 | ||||||||||||||
Total shareholders’ equity | 103,558 | 248,970 | 2,971 | (251,941 | ) | 103,558 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 531,569 | $ | 282,127 | $ | 25,360 | $ | (289,656 | ) | $ | 549,400 | |||||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2007
Guarantor | Non Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,822 | $ | 14 | $ | 5,041 | $ | — | $ | 8,887 | ||||||||||
Accounts receivable—net of allowances | 83,596 | 68,533 | 7,004 | — | 159,133 | |||||||||||||||
Intercompany receivable | 27,006 | 17,273 | 1,736 | (46,015 | ) | — | ||||||||||||||
Inventories | 80,231 | 51,303 | 6,825 | — | 138,359 | |||||||||||||||
Deferred income taxes | 3,169 | 607 | — | — | 3,776 | |||||||||||||||
Assets held for sale | 661 | — | — | — | 661 | |||||||||||||||
Prepaid expenses and other current assets | 7,839 | 3,167 | 187 | (2,546 | ) | 8,647 | ||||||||||||||
Total current assets | 206,324 | 140,897 | 20,793 | (48,561 | ) | 319,453 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 16,352 | 63,104 | 507 | — | 79,963 | |||||||||||||||
GOODWILL | 62,413 | 43,638 | 2,410 | — | 108,461 | |||||||||||||||
INTANGIBLE ASSETS, NET | 1,022 | 56,788 | 371 | — | 58,181 | |||||||||||||||
OTHER ASSETS, NET | 8,811 | 783 | — | — | 9,594 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES | 260,247 | — | — | (260,247 | ) | — | ||||||||||||||
TOTAL ASSETS | $ | 555,169 | $ | 305,210 | $ | 24,081 | $ | (308,808 | ) | $ | 575,652 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||
Current portion of long-term debt | $ | 310 | $ | 626 | $ | — | $ | — | $ | 936 | ||||||||||
Accounts payable | 25,515 | 21,586 | 2,418 | — | 49,519 | |||||||||||||||
Intercompany payable | 19,009 | 27,006 | — | (46,015 | ) | — | ||||||||||||||
Accrued liabilities | 24,051 | 11,217 | 5,751 | (2,546 | ) | 38,473 | ||||||||||||||
Total current liabilities | $ | 68,885 | $ | 60,435 | 8,169 | $ | (48,561 | ) | $ | 88,928 | ||||||||||
LONG-TERM DEBT | 366,635 | 270 | — | — | 366,905 | |||||||||||||||
LONG-TERM LIABILITIES NET | — | 281 | — | — | 281 | |||||||||||||||
DEFERRED INCOME TAXES | 23,519 | 48 | — | — | 23,567 | |||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||||||
Common stock | 17 | — | — | — | 17 | |||||||||||||||
Additional paid-in capital | 83,709 | 215,341 | 15,421 | (230,762 | ) | 83,709 | ||||||||||||||
Accumulated other comprehensive income | 111 | — | (159 | ) | — | (48 | ) | |||||||||||||
Retained earnings (accumulated deficit) | 12,293 | 28,835 | 650 | (29,485 | ) | 12,293 | ||||||||||||||
Total shareholders’ equity | 96,130 | 244,176 | 15,912 | (260,247 | ) | 95,971 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 555,169 | $ | 305,210 | $ | 24,081 | $ | (308,308 | ) | $ | 575,652 | |||||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Guarantor | Non Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
Net income | $ | 5,834 | $ | 4,686 | $ | 2,631 | $ | (7,317 | ) | $ | 5,834 | |||||||||
Adjustments to reconcile net income to net cash flow from operating activities: | ||||||||||||||||||||
Depreciation and amortization | 4,578 | 17,523 | 205 | — | 22,306 | |||||||||||||||
Stock-based compensation | 2,015 | — | — | — | 2,015 | |||||||||||||||
Inventory theft insurance receivable allowance | 1,588 | — | — | — | 1,588 | |||||||||||||||
Deferred tax provision | (6,163 | ) | 486 | (60 | ) | — | (5,737 | ) | ||||||||||||
Loss on disposal of fixed assets | 36 | 142 | — | — | 178 | |||||||||||||||
Equity in consolidated subsidiaries | (7,317 | ) | — | — | 7,317 | — | ||||||||||||||
Changes in operating assets and liabilities excluding impact of acquisitions: | ||||||||||||||||||||
Accounts receivable | (19,225 | ) | 8,182 | (4,140 | ) | — | (15,183 | ) | ||||||||||||
Inventories | 15,867 | 9,052 | (2,607 | ) | — | 22,312 | ||||||||||||||
Prepaid expenses and other assets | 5,608 | (454 | ) | (44 | ) | (2,546 | ) | 2,564 | ||||||||||||
Accounts payable | 8,436 | (4,903 | ) | 2,970 | — | 6,503 | ||||||||||||||
Intercompany accounts | 35,619 | (33,727 | ) | (1,892 | ) | — | — | |||||||||||||
Accrued liabilities | (8,161 | ) | 6,045 | (445 | ) | 2,546 | (15 | ) | ||||||||||||
Net cash flow from operating activities | 38,715 | 7,032 | (3,382 | ) | — | 42,365 | ||||||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
Capital expenditures | (4,324 | ) | (6,371 | ) | (235 | ) | — | (10,930 | ) | |||||||||||
Acquisition of businesses, net of cash acquired | (708 | ) | — | — | — | (708 | ) | |||||||||||||
Proceeds from sale of fixed assets | 17 | — | — | — | 17 | |||||||||||||||
Net cash flow from investing activities | (5,015 | ) | (6,371 | ) | (235 | ) | — | (11,621 | ) | |||||||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
Net borrowings under revolving loan facilities | (35,188 | ) | — | — | — | (35,188 | ) | |||||||||||||
Repayment of long -term debt | (401 | ) | (626 | ) | — | — | (1,027 | ) | ||||||||||||
Net cash flow from financing activities | (35,589 | ) | (626 | ) | — | — | (36,215 | ) | ||||||||||||
Effect of exchange rate on cash and cash equivalents | — | — | 98 | — | 98 | |||||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,889 | ) | 35 | (3,519 | ) | — | (5,373 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS — Beginning of period | 3,822 | 14 | 5,041 | — | 8,877 | |||||||||||||||
CASH AND CASH EQUIVALENTS — End of period | $ | 1,933 | $ | 49 | $ | 1,522 | $ | — | $ | 3,504 | ||||||||||
NONCASH ACTIVITY | ||||||||||||||||||||
Unpaid capital expenditures | — | 202 | — | — | 202 | |||||||||||||||
Capital lease obligation | 135 | — | — | — | 135 | |||||||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||||||||
Income taxes paid | 3,660 | — | 1,161 | — | 4,821 | |||||||||||||||
Cash interest paid | 16,272 | — | — | — | 16,272 |
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 10,935 | $ | 5,834 | $ | (5,834 | ) | $ | 10,935 | |||||||
Adjustments to reconcile net income to net cash flow from operating activities: | ||||||||||||||||
Depreciation and amortization | 3,431 | 11,380 | — | 14,811 | ||||||||||||
Stock-based compensation | 2,974 | 147 | — | 3,121 | ||||||||||||
Deferred tax provision | 20,547 | (24,471 | ) | — | (3,924 | ) | ||||||||||
(Gain) loss on disposal of fixed assets | (12 | ) | — | — | (12 | ) | ||||||||||
Equity in consolidated subsidiaries | (5,834 | ) | — | 5,834 | — | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (9,733 | ) | (16,217 | ) | — | (25,950 | ) | |||||||||
Inventories | (9,742 | ) | (10,438 | ) | — | (20,180 | ) | |||||||||
Prepaid expenses and other assets | (1,513 | ) | (1,250 | ) | 1,057 | (1,706 | ) | |||||||||
Accounts payable | 8,855 | (964 | ) | — | 7,891 | |||||||||||
Intercompany accounts | (36,718 | ) | 36,718 | — | — | |||||||||||
Accrued liabilities | 8,236 | 2,475 | (1,057 | ) | 9,654 | |||||||||||
Net cash flow from operating activities | (8,574 | ) | 3,214 | — | (5,360 | ) | ||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (1,510 | ) | (3,419 | ) | — | (4,929 | ) | |||||||||
Acquisition of business, net of cash acquired | (215,449 | ) | 639 | — | (214,810 | ) | ||||||||||
Proceeds from sale of fixed assets | 18 | — | — | 18 | ||||||||||||
Proceeds from sale of investment | 59 | — | — | 59 | ||||||||||||
Net cash flow from investing activities | (216,882 | ) | (2,780 | ) | — | (219,662 | ) | |||||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net borrowings under revolving loan facilities, net of issuance costs | 98,196 | — | — | 98,196 | ||||||||||||
Issuance of senior notes, net of issuance costs | 119,380 | — | — | 119,380 | ||||||||||||
Common stock issuance costs | (451 | ) | — | — | (451 | ) | ||||||||||
Repayment of long -term debt | (483 | ) | (434 | ) | — | (917 | ) | |||||||||
Net cash flow from financing activities | 216,642 | (434 | ) | — | 216,208 | |||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (8,814 | ) | — | — | (8,814 | ) | ||||||||||
CASH AND CASH EQUIVALENTS — Beginning of period | 14,719 | 15 | — | 14,734 | ||||||||||||
CASH AND CASH EQUIVALENTS — End of period | $ | 5,905 | $ | 15 | $ | — | 5,920 | |||||||||
NONCASH ACTIVITY | ||||||||||||||||
Unpaid capital expenditures | 210 | — | — | 210 | ||||||||||||
Capital lease obligations | — | 16 | — | 16 | ||||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||||
Income taxes paid | 12,209 | 35 | — | 12,244 | ||||||||||||
Cash Interest paid | 9,497 | 60 | — | 9,557 |
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this report under “Cautionary Note Regarding Forward-Looking Statements” and under “Item 1A.Risk Factors” in our Annual Report onForm 10-K, for the fiscal year ended December 31, 2007. We assume no obligation to update any of these forward-looking statements. You should read the following discussion in conjunction with our condensed consolidated financial statements and the notes thereto included in this report.
Overview
General
We are a leading designer, developer, manufacturer and supplier of electrical wire and cable products for consumer, commercial and industrial applications, with operations primarily in the U.S. and, to a lesser degree, Canada. We manufacture and supply a broad line of wire and cable products, which enables us to offer our customers a single source of supply for many of their wire and cable product requirements. We manufacture our products in eight domestic manufacturing facilities and supplement our domestic production with both international and domestic sourcing. We sell our products to a variety of customers, including a wide range of specialty distributors, retailers and original equipment manufacturers (“OEMs”). Virtually all of our products are sold to customers located in the U.S. and Canada.
During the first quarter of 2008, we changed our management reporting structure and the manner in which we report our financial results internally, including the integration of 2007 Acquisitions (defined below) for reporting purposes. These changes resulted in a change in our reportable segments. As a result of these changes, we now have two reportable business segments: (1) Distribution, and (2) OEM. Prior period amounts have been recast. The Distribution segment serves our customers in distribution businesses, who are resellers of our products, while our OEM segment serves our OEM customers, who generally purchase more tailored products from us which are used as inputs into sub-assemblies of manufactured finished goods.
Acquisitions
We made two acquisitions during 2007 (the “2007 Acquisitions”) which have significantly increased our scale and presented us with what we believe are a number of strategic benefits.
Copperfield, LLC
On April 2, 2007, we acquired 100% of the outstanding equity interests of Copperfield, LLC (“Copperfield”) for $215.4 million, including acquisition-related costs and working capital adjustments. At the time of our acquisition, Copperfield was one of the largest privately-owned manufacturers and suppliers of electrical wire and cable products in the U.S., with annual sales in excess of $500 million.
Woods Industries, Inc.
On November 30, 2007, we acquired the electrical products business of Katy Industries, Inc., which operated in the U.S. as Woods Industries, Inc. (“Woods U.S.”) and in Canada as Woods Industries (Canada) Inc. (“Woods Canada”), collectively referred to herein as Woods (“Woods”). The principal business of Woods was the design and distribution of consumer electrical cord products, sold principally to national home improvement, mass merchant, hardware and other retailers. We purchased certain assets of Woods U.S. and all the stock of Woods Canada for $53.8 million, including acquisition-related costs and working capital adjustments.
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Raw Material Costs
Our products contain copper and other raw materials, including petroleum-based compounds. Prices for such raw materials can be volatile and affect our net sales and profitability. Prices for copper, the primary material component in most of our products, have an established history of volatility, and in 2008 we have experienced higher volatility and inflationary increases in other raw material costs, as well. The daily selling price of copper cathode on the COMEX averaged $3.45 per pound during the third quarter of 2008, a decrease of 0.9% from the average of $3.48 per pound for the third quarter of 2007. For the first nine months of 2008, copper cathode on the COMEX averaged $3.59 per pound, an increase of 11.5% over the same period in 2007. The average copper price on the COMEX was $2.19 per pound for October 2008. We purchase our copper at prevailing market prices. Through multiple pricing strategies, we generally attempt to pass along changes in the price of copper and other raw materials to our customers. Our ability to pass along copper price increases is greater when copper prices increase quickly and significantly. Gradual price increases may be more difficult to pass on to our customers and may affect our short-term profitability. Conversely, the prices of our products tend to fall more quickly in the event the price of copper drops significantly over a relatively short period of time and more slowly in the event of more gradual decreases in the price of copper. In addition to inflationary cost pressures stemming from increased prices for our material inputs and fuel, our profitability and strategies in setting prices are also affected by the type of product involved, competitive conditions, including underutilized manufacturing capacity in our industry, and particular customer arrangements.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, our consolidated results of operations and related data in thousands of dollars and as a percentage of net sales. The results for 2008 reflect the impact of our above-noted 2007 Acquisitions, whereas the results for the first nine months of 2007 do not include the entire impact of the 2007 Acquisitions, which occurred subsequent to the first quarter of 2007. As noted above, Copperfield was acquired April 2, 2007, and Woods was acquired November 30, 2007. Accordingly, results from these acquisitions have been included in our condensed consolidated results subsequent to their respective acquisition dates.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Net sales | $ | 270,712 | 100.0 | % | $ | 253,453 | 100.0 | % | $ | 790,775 | 100.0 | % | $ | 609,867 | 100.0 | % | ||||||||||||||||
Gross profit | 29,898 | 11.0 | 29,166 | 11.5 | 87,039 | 11.0 | 74,030 | 12.1 | ||||||||||||||||||||||||
Selling, engineering, general and Administrative expenses | 14,228 | 5.3 | 11,753 | 4.6 | 40,472 | 5.1 | 31,238 | 5.1 | ||||||||||||||||||||||||
Intangible amortization expense | 3,121 | 1.2 | 2,522 | 1.0 | 8,889 | 1.1 | 5,085 | 0.8 | ||||||||||||||||||||||||
Restructuring charges | 2,504 | 0.9 | 53 | 0.0 | 5,515 | 0.7 | 580 | 0.1 | ||||||||||||||||||||||||
Operating income | 10,045 | 3.7 | 14,838 | 5.9 | 32,163 | 4.1 | 37,127 | 6.1 | ||||||||||||||||||||||||
Interest expense | 7,211 | 2.7 | 8,187 | 3.2 | 22,545 | 2.9 | 19,411 | 3.2 | ||||||||||||||||||||||||
Other expense (income), net | (56 | ) | 0.0 | 2 | 0.0 | 68 | 0.0 | 29 | 0.0 | |||||||||||||||||||||||
Income before income taxes | 2,890 | 1.0 | 6,649 | 2.6 | 9,550 | 1.2 | 17,687 | 2.9 | ||||||||||||||||||||||||
Income tax expense | 1,153 | 0.4 | 2,606 | 1.0 | 3,716 | 0.5 | 6,752 | 1.1 | ||||||||||||||||||||||||
Net income | $ | 1,737 | 0.6 | $ | 4,043 | 1.6 | $ | 5,834 | 0.7 | $ | 10,935 | 1.8 | ||||||||||||||||||||
Earnings per diluted share | $ | 0.10 | $ | 0.24 | $ | 0.35 | $ | 0.65 | ||||||||||||||||||||||||
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In addition to GAAP earnings, we also use earnings from continuing operations before net interest, income taxes, depreciation and amortization expense (“EBITDA”) as a means to evaluate the liquidity and performance of our business, including the preparation of annual operating budgets and the determination of levels of operating and capital investments. In particular, we believe EBITDA allows us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. For example, we believe the inclusion of items such as taxes, interest expense, intangible asset amortization and interest income can make it more difficult to identify and assess operating trends affecting our business and industry. We also believe EBITDA is a performance measure that provides investors, securities analysts and other interested parties a measure of operating results unaffected by differences in capital structures, business acquisitions, capital investment cycles and ages of related assets among otherwise comparable companies in our industry. However, EBITDA’s usefulness as a performance measure is limited by the fact that it excludes the impact of interest expense, depreciation and amortization expense and taxes. We borrow money in order to finance our operations; therefore, interest expense is a necessary element of our costs and ability to generate revenue. Similarly, our use of capital assets makes depreciation and amortization expense a necessary element of our costs and ability to generate income. Since we are subject to state and federal income taxes, any measure that excludes tax expense has material limitations. Due to these limitations, we do not, and you should not, use EBITDA as the only measure of our performance and liquidity. We also use, and recommend that you consider, net income in accordance with GAAP as a measure of our performance or cash flows from operating activities in accordance with GAAP as a measure of our liquidity. Finally, other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies.
The following is a reconciliation of net income, as determined in accordance with GAAP, to EBITDA.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income | $ | 1,737 | $ | 4,043 | $ | 5,834 | $ | 10,935 | ||||||||
Interest expense | 7,211 | 8,187 | 22,545 | 19,411 | ||||||||||||
Income tax expense | 1,153 | 2,606 | 3,716 | 6,752 | ||||||||||||
Depreciation and amortization expense | 7,294 | 6,422 | 21,184 | 13,945 | ||||||||||||
EBITDA | $ | 17,395 | $ | 21,258 | $ | 53,279 | $ | 51,043 | ||||||||
Note that depreciation and amortization expense shown in the schedule above excludes amortization of debt issuance costs, which is included in interest expense.
The following is a reconciliation of cash flow from operating activities, as determined in accordance with GAAP, to EBITDA.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash flow from operating activities | $ | 30,055 | $ | 8,616 | $ | 42,365 | $ | (5,360 | ) | |||||||
Interest expense | 7,211 | 8,187 | 22,545 | 19,411 | ||||||||||||
Income tax expense | 1,153 | 2,606 | 3,716 | 6,752 | ||||||||||||
Deferred tax provisions | 5,794 | 1,977 | 5,737 | 3,924 | ||||||||||||
Gain (loss) on sale of fixed assets | (110 | ) | 11 | (178 | ) | 12 | ||||||||||
Stock-based compensation | (693 | ) | (1,099 | ) | (2,015 | ) | (3,121 | ) | ||||||||
Changes in operating assets and liabilities | (26,015 | ) | 960 | (18,891 | ) | 29,425 | ||||||||||
EBITDA | $ | 17,395 | $ | 21,258 | $ | 53,279 | $ | 51,043 | ||||||||
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Earnings and Performance Summary
As noted above, the results for 2008 shown above and discussed in the following section reflect the impact of our above-noted 2007 Acquisitions, and therefore are not comparable to the results for the first nine months of 2007 which do not include the entire impact of the 2007 Acquisitions, which occurred subsequent to the first quarter of 2007.
For the quarter, we generated net income of $1.7 million ($0.10 per diluted share) in 2008, as compared to $4.0 million ($0.24 per diluted share) for the third quarter of 2007. For the first nine months of 2008, we generated net income of $5.8 million ($0.35 per diluted share), as compared to $10.9 million ($0.65 per diluted share) for the first nine months of 2007. Net income for these periods was impacted by certain significant items. The magnitude of such items may vary significantly from period to period and, thereby, have a disproportionate effect on the earnings reported for any given period. Accordingly, we consider the aggregate impact of these items, along with reported results, in evaluating our financial performance. Our results for the third quarter and first nine months of 2008 included $2.5 million ($1.5 million after tax or $0.09 per diluted share) and $5.5 million ($3.3 million after tax or $0.20 per diluted share), respectively, in restructuring charges primarily incurred in connection with the integration of our 2007 Acquisitions, as further discussed below. Restructuring costs were negligible in the third quarter of 2007, and totaled $0.6 million ($0.4 million after tax or $0.02 per diluted share) for the first nine months of 2007. In addition, our results for 2008 included the negative impact of a non-cash charge in the amount of $1.6 million ($1.0 million after tax or $0.06 per diluted share) recorded in the third quarter to fully reserve for an insurance receivable first recorded in 2005 related to an inventory theft which occurred that same year, as further discussed below. The following summarizes the impact of the above-described items:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Earnings per diluted share | $ | 0.10 | $ | 0.24 | $ | 0.35 | $ | 0.65 | ||||||||
Less impact of: | ||||||||||||||||
Restructuring charges | 0.09 | — | 0.20 | 0.02 | ||||||||||||
Insurance recovery allowance | 0.06 | — | 0.06 | — | ||||||||||||
Earnings per diluted share excluding above items | $ | 0.25 | $ | 0.24 | $ | 0.61 | $ | 0.67 | ||||||||
Excluding the above-noted items, our earnings for the third quarter and first nine months of 2008, as compared to same periods last year, largely reflect increased operating income within our Distribution segment, offset by lower operating income within our OEM segment. Segment results are discussed in further detail below within the “Segment Results” section. For the third quarter of 2008, in addition to the favorable impact of increased operating income generated within our Distribution segment, our earnings also benefited from lower interest costs, given lower average interest rates and a reduction in our outstanding debt levels. We have reduced our long-term debt (including current portion) by approximately $36.6 million from December 31, 2007, as further discussed within the “Liquidity and Capital Resources” section.
For the first nine months of 2008, our operating results include the impact of increased interest expense recorded during the first quarter of 2008, as compared to the first quarter of 2007, as well as higher depreciation and amortization expense recorded during the first nine months of 2008, as compared to the same period last year. These increased expenses are a function of our 2007 Acquisitions, which occurred subsequent to the first quarter of 2007. As a result, our results for 2008 reflect a full nine months’ of interest expense associated with acquisition-related debt, as well as the impact of amortization and depreciation expense related to applying purchase accounting to such acquisitions, whereas our 2007 results do not include a full nine months’ impact from such items.
As in previous quarters this year, our third quarter Distribution segment results benefited from the expansion of our customer base brought about by our 2007 Acquisitions, while we experienced overall lower demand from existing customers. Our OEM segment also experienced lower overall demand, with the rate of sales volume declines (measured in total pounds shipped) accelerating during the third quarter. Total OEM sales volume declined 18.1% for the quarter, as compared to the same quarter last year, and declined 3.7% versus the second quarter of 2008. These declines reflect what we believe is the combined impact of increased indicators of recessionary conditions in the third quarter, as well as continued general market uncertainty which has been prevalent during all of 2008. We believe these factors are likely to continue during the last quarter of 2008 and in 2009.
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In the midst of the difficult current market conditions, which we believe will continue to be very challenging during the remainder of 2008 and in 2009, both our immediate and longer-term success is contingent upon our successfully completing the integration of our 2007 Acquisitions, effectively managing our balance sheet, costs and production scheduling, right-sizing our production capabilities and capacity, as well as focusing on profitably serving our existing customer base. In this regard, as noted above, we have reduced our debt levels by $36.2 million during the year, in part as the result of management’s efforts to lower working capital requirements, particularly inventory levels. We have also made significant progress toward fully integrating our 2007 Acquisitions, as further detailed in the “Restructuring and Integration of 2007 Acquisitions” section that follows. In addition, as we have previously indicated, and as discussed in the OEM financial operations review section below, we have worked to adjust our pricing and rationalize our customer base within our OEM segment to mitigate the impact of increased raw material costs on our profitability. We have met with some level of success in this area, but anticipate losing some level of OEM sales in 2009 as a result of these efforts. Reduced sales volumes in this segment will require us to review and adjust our related asset base and capacity accordingly. In this regard, during September we announced a workforce reduction at our Oswego, New York facility, as further discussed in the “Restructuring and Integration of 2007 Acquisitions” section that follows. Furthermore, in October of 2008, we announced internally a series of separate planned workforce reductions affecting primarily our El Paso, Texas facilities, as well as our corporate office in Waukegan, Illinois. These plans include the elimination of approximately 160 positions over the remainder of 2008 and into 2009. The final number of positions to be eliminated, expense and timing of such actions are contingent upon both the final results of our efforts relative to our OEM customer base and our performance during the remainder of 2008. As of September 30, 2008, we had eliminated approximately 270 positions since the start of 2008, including those positions eliminated as a result of integrating our 2007 Acquisitions and changes in current macro-economic conditions.
Restructuring and Integration of 2007 Acquisitions
We incurred restructuring costs of $2.5 million and $5.5 million during the third quarter and first nine months of 2008, respectively, primarily in connection with the on-going integration of our 2007 Acquisitions. Restructuring charges expensed during the first nine months of 2008 included $3.7 million in equipment relocation costs, $0.4 million in employee severance and relocation costs and $1.4 million in other exit costs. As noted above, we initiated a workforce reduction at our Oswego, New York manufacturing facility during the third quarter of 2008 which resulted in the recognition of a $0.3 million charge for severance and related benefits to be paid to effected employees at this facility. These reductions were made as the result of a decision to transition copper fabrication activities from the Oswego plant to our Bremen, Indiana facility.
During 2008, we have completed many aspects of the integration of our 2007 Acquisitions. We completed the integration of the Woods acquisition, incorporating this business into our core operations and eliminating separate corporate and distribution functions. We have also made significant progress on the previously announced plan to consolidate three of our distribution facilities (located in Indianapolis, Indiana; Gurnee, Illinois; and Waukegan, Illinois) into a single leased distribution facility which we opened in April 2008 in Pleasant Prairie, Wisconsin. In addition, we continued the execution of our integration strategy for a number of the manufacturing and distribution facilities we acquired as part of the Copperfield acquisition. This plan includes the consolidation and closure of Copperfield manufacturing and distribution facilities located in Avilla, Indiana; Nogales, Arizona; and El Paso, Texas, primarily into operations at one modern new facility in El Paso, Texas. As a result, we have ceased manufacturing operations at the Avilla, Indiana; Nogales, Arizona; and within our Zaragosa Road facility in El Paso, Texas. The building and property associated with both the Avilla and Zaragosa facility are owned and have been classified as assets held for sale in the accompanying condensed consolidated balance sheet at September 30, 2008.
In addition to those exit costs classified as restructuring charges within our condensed consolidated income statements for the three and nine months ended September 30, 2008, we have also incurred costs associated with certain exit activities conducted relative to facilities and other resources acquired as part of our 2007 Acquisitions, with such costs being reflected as a component of purchase accounting for these acquisitions. These amounts are detailed in Note 4 to our condensed consolidated financial statements included herein.
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We expect to incur between $6.0 million and $7.0 million in restructuring charges in 2008 for such activities. The ultimate amount of cash expended relative to such efforts is dependent on various factors including the timing of the sale of owned properties and the amount of proceeds received. We expect the majority of these integration activities to be complete by the end of 2008, with the expectation that the changes will result in annual cash savings of approximately $3.0 million in 2009 and subsequent years.
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
Net sales— Net sales for the quarter were $270.7 million compared to $253.5 million for the third quarter of 2007, an increase of $17.2 million or 6.8%. For the quarter, our total sales volume (measured in total pounds shipped) increased 9.4% compared to the third quarter of 2007. This increase in total sales volume was driven by a 32.1% increase in total sales volume within our Distribution segment, due primarily to the expansion of our customer base within this segment brought about by our 2007 Acquisitions, partially offset by an 18.1% decline in total sales volume within our OEM segment, primarily reflecting decreased demand from existing customers within the OEM segment. Average COMEX copper prices for the third quarter of 2008 were largely consistent with the same quarter last year. The daily selling price of copper cathode on the COMEX averaged $3.45 per pound during the third quarter of 2008, a decrease of 0.9% from the average of $3.48 per pound for the third quarter of 2007.
Gross profit— We generated $29.9 million in total gross profit for the quarter, as compared to $29.2 million in the third quarter of 2007. For the quarter, gross profit within our Distribution segment increased, partially offset by lower gross profit within our OEM segment, as further discussed in the segment-level discussions that follow. In addition, our gross margin for the third quarter of 2008 was favorably impacted by gains recorded on copper-based futures contracts used as hedges designed to mitigate the potential impact of fluctuations in the price of copper on our pricing terms with certain customers. In total, we recognized approximately $2.8 million in gains on such derivative contracts during the third quarter of 2008. Our gross profit as a percentage of net sales (“gross profit rate”) for the third quarter of 2008 was 11.0%, as compared to 11.5% for the third quarter of 2007, with the decrease largely a function of a decline in our OEM gross profit rate, as discussed in the OEM segment review that follows.
Selling, engineering, general and administrative (“SEG&A”) expenses— We incurred total SEG&A expense of $14.2 million for the third quarter of 2008, as compared to $11.8 million for the third quarter of 2007. Our SEG&A as a percentage of total net sales increased to 5.3% for the third quarter of 2008, as compared to 4.6% for the third quarter of 2007. SEG&A expense for the third quarter of 2008 included a non-cash charge of $1.6 million for an allowance established during the third quarter of 2008 relative to an insurance claim we filed for thefts which occurred in 2005 at our manufacturing facility in Miami Lakes, Florida, which we have since closed. During the third quarter of 2008, as a result of failing to secure satisfactory settlement of the matter with our insurers, we commenced legal action in regard to this matter and recorded an allowance for the related insurance receivable. Excluding the impact of this non-cash charge, SEG&A expense for the third quarter of 2008 was $12.6 million, as compared to $11.8 million for the third quarter of 2007, with the $0.8 million increase primarily reflecting higher expenses across a number of non-payroll selling and marketing expense categories. Excluding the same $1.6 million non-cash charge, SEG&A as a percentage of total net sales was 4.7% for the third quarter of 2008, which was largely consistent with a SEG&A percentage of sales of 4.6% for the third quarter of 2007.
Intangible amortization expense— Intangible amortization expense for the third quarter of 2008 was $3.1 million, as compared to $2.5 million for the third quarter of 2007, with the expense in both periods arising from the amortization of intangible assets recorded in relation to our 2007 Acquisitions. These intangible assets are amortized using an accelerated amortization method which reflects our estimate of the pattern in which the economic benefit derived from such assets is to be consumed, and this methodology is the reason for the above-noted increase in amortization expense.
Restructuring charges— Restructuring charges for the three months ended September 30, 2008 were $2.5 million, as compared to $0.1 million for the third quarter of 2007. For the third quarter of 2008, these expenses were primarily incurred in connection with the above-described integration of Copperfield facilities. For the third quarter of 2007, these expenses were the result of 2006 closure of our Siler City, North Carolina facility.
Interest expense —We incurred $7.2 million in interest expense for the third quarter of 2008, as compared to $8.2 million for the three months ended September 30, 2007. The decline in net interest expense was due primarily to lower borrowings and interest rates.
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Income tax expense— Income tax expense was $1.2 million for the quarter, as compared to $2.6 million for the third quarter of 2007, with the decrease primarily attributable to lower pre-tax income in the third quarter of 2008, as compared to the third quarter of 2007.
Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007
Net sales— Net sales for the nine months ended September 30, 2008 were $790.8 million compared to $609.9 million for the nine months ended September 30, 2007, an increase of $180.9 million or 29.7%. For the nine months ended September 30, 2008, our total sales volume (measured in total pounds shipped) increased 27.7% compared to the nine months ended September 30, 2007. The increases in net sales and total sales volume was primarily due to the expansion of our customer base brought about by our 2007 Acquisitions, which occurred after the first quarter in 2007. As a result of the timing of such Acquisitions, the magnitude of the sales increases recorded for the first nine months of 2008 is greater than the sales increases we recorded during the third quarter of 2008, as compared to the same periods last year. In addition, our year-to-date sales amount reflects the impact of increased copper prices for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. The daily selling price of copper cathode on the COMEX averaged $3.59 per pound during the nine months ended September 30, 2008, an increase of 11.5% from the average of $3.22 per pound for the nine months ended September 30, 2007.
Gross profit— We generated $87.0 million in total gross profit for the nine months ended September 30, 2008, as compared to $74.0 million for the nine months ended September 30, 2007. The increase in gross profit dollars primarily reflects the impact of increased volume brought about by our 2007 Acquisitions, partially offset by lower second and third quarter gross profit realized within our OEM segment in 2008, as compared to the same periods last year. Our gross profit rate for the first nine months of 2008 was 11.0% compared to 12.1% for the first nine months of 2007, with the decline largely a function of a decline in our OEM segment gross profit rate, as noted above. In addition, as we have noted in previous quarters, as a result of the expansion of our customer base from the 2007 Acquisitions, we now have a significant portion of our business where our products are priced to earn a fixed dollar margin, which causes gross profit rates to compress in higher copper price environments, as was the case in the nine months ended September 30, 2008. Such customers are primarily within our OEM segment.
Selling, engineering, general and administrative (“SEG&A”) expenses— We incurred total SEG&A expense of $40.5 million for the nine months ended September 30, 2008, as compared to $31.2 million for the nine months ended September 30, 2007. As noted above, SEG&A expense for the first nine months of 2008 included a $1.6 million charge recorded during the third quarter of 2008 related to an insurance recoverable receivable for a 2005 inventory theft at our Miami Lakes, Florida manufacturing facility. Excluding this charge, SEG&A expense for the first nine months of 2008 was $38.9 million, an increase of $7.7 million as compared to the first nine months of 2007. The $7.7 million increase reflects, in part, the impact of additional payroll-related expense as a result of 2007 Acquisitions, which have increased our sales and administrative headcounts. Such payroll-related expenses accounted for approximately $3.7 million of the total increase, with the remaining $4.0 million increase reflecting higher expenses across a number of general and administrative expense areas. Our SEG&A as a percentage of total net sales was 5.1% for both the nine months ended September 30, 2008, and nine months ended September 30, 2007. Excluding the impact of the above-noted $1.6 million non-cash charge, our SEG&A rate for the first nine months of 2008 was 4.9%, reflecting the impact of increased expense leverage realized during the first quarter of 2008, as our fixed costs were spread over a higher net sales base given both increased copper prices and the impact of 2007 Acquisitions, which occurred after the first quarter of 2007. This favorable impact on our SEG&A rate was partially offset by increased expenses incurred in the second and third quarters of 2008, as discussed above.
Intangible amortization expense— Intangible amortization expense for the nine months ended September 30, 2008 was $8.9 million, as compared to $5.1 million for the nine months ended September 30, 2007. The increase primarily reflects additional amortization expense recorded in the current year given the 2007 Acquisitions, which occurred after the first quarter of 2007.
Restructuring charges— Restructuring charges for the nine months ended September 30, 2008 were $5.5 million, as compared to $0.6 million for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, these expenses were primarily incurred in connection with the integration of Copperfield facilities. For the nine months ended September 30, 2007, these expenses were the result of 2006 closure of our Siler City, North Carolina facility.
Interest expense —We incurred $22.5 million in interest expense for the nine months ended September 30, 2008, as compared to $19.4 million for the nine months ended September 30, 2007. The increase in net interest expense was due primarily to additional expense related to the 2007 Notes and increased borrowings under our Revolving Line of Credit, both due to 2007 Acquisitions, which occurred subsequent to the first quarter of 2007.
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Income tax expense— Income tax expense was $3.7 million for the nine months ended September 30, 2008, as compared to $6.8 million for the nine months ended September 30, 2007, with the decrease primarily attributable to lower levels of pre-tax income in 2008, as compared to 2007.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment in thousands of dollars, segment net sales as a percentage of total net sales and segment operating income as a percentage of segment net sales. We have recast the 2007 data shown below to be reflective of our new segment presentation.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||
Distribution | $ | 188,384 | 69.6 | % | $ | 152,599 | 60.2 | % | $ | 528,886 | 66.9 | % | $ | 410,213 | 67.3 | % | ||||||||||||||||
OEM | 82,328 | 30.4 | 100,854 | 39.8 | 261,889 | 33.1 | 199,654 | 32.7 | ||||||||||||||||||||||||
Total | $ | 270,712 | 100.0 | % | $ | 253,453 | 100.0 | % | $ | 790,775 | 100.0 | % | $ | 609,867 | 100.0 | % | ||||||||||||||||
Operating Income: | ||||||||||||||||||||||||||||||||
Distribution | $ | 18,961 | 10.1 | % | $ | 15,044 | 9.9 | % | $ | 51,872 | 9.8 | % | $ | 40,046 | 9.8 | % | ||||||||||||||||
OEM | 264 | 0.3 | 4,086 | 4.1 | 3,730 | 1.4 | 6,795 | 3.4 | ||||||||||||||||||||||||
Total segments | 19,225 | 19,130 | 55,602 | 46,841 | ||||||||||||||||||||||||||||
Corporate | (9,180 | ) | (4,292 | ) | (23,439 | ) | (9,714 | ) | ||||||||||||||||||||||||
Consolidated operating income | $ | 10,045 | 3.7 | % | $ | 14,838 | 5.9 | % | $ | 32,163 | 4.1 | % | $ | 37,127 | 6.1 | % | ||||||||||||||||
The Company’s operating segments have common production processes, and manufacturing and distribution capacity. Accordingly, we do not identify net assets to our segments. Depreciation expense is not allocated to segments but is included in manufacturing overhead cost pools and is absorbed into product cost (and inventory) as each product passes through our numerous manufacturing work centers. Accordingly, as products are sold across our segments, it is impracticable to determine the amount of depreciation expense included in the operating results of each segment.
Segment operating income represents income from continuing operations before interest income or expense, other income or expense, and income taxes. Corporate consists of items not charged or allocated to the segments, including costs for employee relocation, discretionary bonuses, professional fees, restructuring, and intangible amortization. We are in process of re-assigning goodwill to our reportable segments to reflect the changes.
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
Distribution Segment
For the quarter, net sales were $188.4 million, as compared to $152.6 million for the third quarter of 2007, an increase of $35.8 million, or 23.5%. For the quarter, our total sales volume (measured in total pounds shipped) increased 32.1% compared to the third quarter of 2007. As noted above in our discussion of consolidated results, these increases were due primarily to an increase in our customer base as a result of our 2007 Acquisitions. We have experienced lower sales demand from existing customers within our Distribution segment, which we believe reflects a general slow down in demand given the current economic environment.
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Operating income was $19.0 million for the third quarter of 2008, as compared to $15.0 million for the third quarter of 2007, an increase of $4.0 million, primarily reflecting the above-noted impact of increased sales levels in 2008, and to a lesser degree, an improvement in our operating income as a percentage of segment net sales (“segment operating income rate”). Our segment operating income rate was 10.1% for the quarter, as compared to 9.9% for the same period last year.
OEM Segment
For the quarter, net sales were $82.3 million compared to $100.9 million for the third quarter of 2007, a decrease of $18.6 million, or 18.4%. As noted above in our discussion of consolidated results, this decrease in net sales was largely attributable to a decline in total sales volume. For the quarter, our total sales volume within our OEM segment declined 18.1%, as compared to the third quarter of 2007, largely reflecting decreased demand from our existing customers.
Operating income was $0.3 million for the third quarter of 2008, as compared to $4.1 million for the third quarter of 2007, a decline of $3.8 million. This decline was driven by a decline in our OEM segment gross profit, which we believe reflects, in part, the impact of lower sales demand, as well as lower gross profit, which in part reflects our inability to timely pass on inflationary raw material cost increases to our customers within this segment. As noted above, given the current economic environment and lower overall demand levels, we anticipate potentially losing sales volume in 2009 as we work to mitigate the impact of increased material costs on our gross profit by adjusting the prices for our products.
Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007
Distribution Segment
For the nine months ended September 30, 2008, net sales were $528.9 million, as compared to $410.2 million for the nine months ended September 30, 2007, an increase of $118.7 million, or 28.9%. As noted above in our discussion of consolidated results for the nine months ended September 30, 2008, this increase was due primarily to an increase in our customer base as a result of our 2007 Acquisitions which occurred subsequent to the first quarter of 2007, and increased copper prices in 2008, as compared to the same period last year, which resulted in price increases and thereby increased our total net sales. For the nine months ended September 30, 2008, our total sales volume (measured in total pounds shipped) increased 26.8% compared to the first nine months of 2007. The increase in volume primarily reflects the impact of the above-noted 2007 Acquisitions.
Operating income was $51.9 million for the nine months ended September 30, 2008, as compared to $40.0 million for the nine months ended September 30, 2007, an increase of $11.9 million, primarily reflecting the above-noted impact of increased sales levels in 2008, most notably during the first quarter.
OEM Segment
For the nine months ended September 30, 2008, net sales were $261.9 million compared to $199.7 million for the nine months ended September 30, 2007, an increase of $62.2 million, or 31.1%. As noted above, this increase was due primarily to an increase in our customer base as a result of our 2007 Acquisitions that occurred in 2007 after the first quarter, and increased copper prices in 2008, as compared to the same period last year, which resulted in price increases and thereby increased our total net sales. For the nine months ended September 30, 2008, our total sales volume increased 29.1% as compared to the nine months ended September 30, 2007. The increase in volume primarily reflects the impact of our 2007 Acquisitions. As noted above, our total sales volume declined 18.1% for the third quarter of 2008, as compared to the third quarter of 2007.
Operating income was $3.7 million for the nine months ended September 30, 2008, as compared to $6.8 million for the nine months ended September 30, 2007, a decline of $3.1 million, primarily reflecting the impact of the above-noted decline in sales levels and gross profit in the third quarter of 2008. For the nine months ended September 30, 2008, the decline in our segment gross profit rate compared to the first nine months of 2007 reflects, in part, the above-noted impact of inflationary raw materials cost increases, as well as a shift in sales mix that occurred during the first quarter of 2008, as compared to the same quarter of 2007. Additionally, our segment gross profit rate for the first quarter of 2008 included the impact of our 2007 Acquisitions, which occurred after the first quarter of 2007, and which resulted in us having a significant portion of our business tied to products priced to earn a fixed dollar margin, which causes gross profit rates to compress in higher copper price environments, as was the case in the first quarter and nine months of 2008.
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Liquidity and Capital Resources
Debt
The following summarizes long-term debt (including current portion and capital lease obligations) outstanding in thousands of dollars:
As of | As of | |||||||
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Revolving credit facility | $ | 88,250 | $ | 123,438 | ||||
Senior notes | 242,509 | 242,980 | ||||||
Capital lease obligations | 531 | 782 | ||||||
Other long-term debt | — | 641 | ||||||
Total long-term debt, including current portion | $ | 331,290 | $ | 367,841 | ||||
Revolving Credit Facility
Our five-year Revolving Credit Facility, which expires in April 2012, is a senior secured facility that provides for aggregate borrowings of up to $200.0 million, subject to certain limitations. The proceeds from the Revolving Credit Facility are available for working capital and other general corporate purposes, including merger and acquisition activity.
Pursuant to the terms of the Revolving Credit Facility, we are required to maintain a minimum of $10.0 million in excess availability under the facility at all times. Borrowing availability under the Revolving Credit Facility is limited to the lesser of (1) $200.0 million or (2) the sum of 85% of eligible accounts receivable, 55% of eligible inventory and an advance rate to be determined of certain appraised fixed assets, with a $10.0 million sublimit for letters of credit. At September 30, 2008, we had $93.2 million in remaining excess availability.
The Revolving Credit Facility is guaranteed by our domestic subsidiaries on a joint and several basis, either as a co-borrower of the Company or a guarantor, and is secured by substantially all of our assets and the assets of our domestic subsidiaries, including accounts receivable, inventory and any other tangible and intangible assets (including real estate, machinery and equipment and intellectual property), as well as by a pledge of all the capital stock of each of our domestic subsidiaries and 65% of the capital stock of our foreign subsidiary.
The Revolving Credit Facility contains financial and other covenants that limit or restrict our ability to pay dividends or distributions, incur indebtedness, permit liens on property, make investments, provide guarantees, enter into mergers, acquisitions or consolidations, conduct asset sales, enter into leases or sale and lease back transactions, and enter into transactions with affiliates. We are also prohibited from making prepayments on the Senior Notes, except for scheduled payments required pursuant to the terms of such Senior Notes. In addition to maintaining a minimum of $10.0 million in excess availability under the facility at all times, the financial covenants in the Revolving Credit Facility require us to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 for any month during which our excess availability under the Revolving Credit Facility falls below $30.0 million. We maintained greater than $30.0 million of monthly excess availability during the third quarter of 2008.
On November 1, 2007, the Revolving Credit Facility was amended to allow for our acquisition of Woods. The amendment also permitted us to make future investments in our Canadian subsidiaries in an aggregate amount, together with the investment made to acquire Woods Canada, not to exceed $25.0 million. As of September 30, 2008, we were in compliance with all of the covenants of our Revolving Credit Facility.
9.875% Senior Notes
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At September 30, 2008, we had $240.0 million in aggregate principal amount of 9.875% senior notes outstanding, all of which mature on October 1, 2012 (the “Senior Notes”). As noted above, the Senior Notes include the $120.0 million aggregate principal amount of 2007 Notes issued in connection with our acquisition of Copperfield. The 2007 Notes are governed by the same indenture (the “Indenture”) and have substantially the same terms and conditions as our $120.0 million aggregate principal of 9.875% senior notes issued in 2004 (the “2004 Notes”).
The Indenture includes a covenant that prohibits us from incurring additional indebtedness (other than certain permitted indebtedness, including but not limited to the maximum availability under our Revolving Credit Facility), unless our consolidated fixed charge coverage ratio is greater than 2.0 to 1.0.
As of September 30, 2008, we were in compliance with all of the covenants of our Senior Notes.
Current and Future Liquidity
In general, we require cash for working capital, capital expenditures, debt repayment and interest. Our working capital requirements tend to increase when we experience significant demand for products or significant raw material price increases.
Our management assesses the future cash needs of our business by considering a number of factors, including: (1) historical earnings and cash flow performance, (2) future working capital needs, (3) current and projected debt service, (4) projected capital expenditures, and (5) our ability to borrow additional funds.
Based on the foregoing, we believe that our operating cash flows and borrowing capacity under the Revolving Credit Facility will be sufficient to fund our operations, debt service and capital expenditures for the foreseeable future.
If we experience a deficiency in earnings with respect to our fixed charges in the future, we would need to fund the fixed charges through a combination of cash flows from operations and borrowings under the Revolving Credit Facility. If cash flows generated from our operations, together with borrowings under our Revolving Credit Facility, are not sufficient to fund our operations, debt service and capital expenditures and we need to seek additional sources of capital, the limitations on our ability to incur debt contained in the Revolving Credit Facility and the Indenture relating to our Senior Notes could prevent us from securing additional capital through the issuance of debt. In that case, we would need to secure additional capital through other means, such as the issuance of equity. In addition, we may not be able to obtain additional debt or equity financing on terms acceptable to us, or at all. If we were not able to secure additional capital, we could be required to delay or forego capital spending or other corporate initiatives, such as the development of products, or acquisition opportunities. Due to the length of time to maturity remaining on our Senior Notes and Revolving Credit Facility and the availability remaining under our Revolving Credit Facility, we expect we will have the liquidity necessary to satisfy our business needs in the foreseeable future unless the recent credit crisis worsens or persists for a protracted period of time.
Net cash provided by operating activities for the nine months ended September 30, 2008 was $42.4 million compared to net cash used by operating activities of $5.4 million for the nine months ended September 30, 2007. The primary factors contributing to the increase in cash provided by operating activities for the first nine months of 2008 compared to the same period of 2007 were: (1) a $42.4 million increase in cash provided from inventories due to decreased quantities; and (2) a $10.8 million decrease in accounts receivable due to timing of collections, partially offset by a $9.6 million reduction in cash provided by accrued liabilities. The average price of COMEX copper was $2.19 in October 2008. To the extent copper prices remain at relatively lower levels for an extended period our working capital requirements are reduced. We believe such an environment, in concert with efforts to reduce inventory levels and rationalize certain customer relationships within our OEM business could further improve our cash flows from operations by the end of 2008.
Net cash used in investing activities for the nine months ended September 30, 2008 was $11.6 million due primarily to capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2008 was $36.2 million primarily due to decreased borrowings under our Revolving Credit Facility.
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New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until December 31, 2008. The impact SFAS No. 141(R) will have on our consolidated financial statements when effective will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements.SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements. SFAS No. 157 was required to be adopted by us in the first quarter of 2008 for financial assets and is effective in the first quarter of 2009 for non-financial assets. Our adoption of SFAS No. 157 in the first quarter of 2008 did not have a material impact on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 was effective for the Company at the beginning of 2008. The Company’s adoption of the provisions of SFAS No. 159 did not impact our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, effective as of the beginning of 2009, noncontrolling interests will be classified as equity in the consolidated financial statements and income and comprehensive income attributed to the noncontrolling interest will be included in income and comprehensive income. The provisions of this standard must be applied retrospectively upon adoption. We do not currently have any minority interest components at any of our subsidiaries, and we do not anticipate the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133. SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. This Statement specifically requires entities to provide enhanced disclosures addressing the following: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 is effective for us on January 1, 2009. We are currently evaluating the impact of SFAS No. 161, but do not believe that our adoption of the standard will have a material impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. We do not expect that this standard will have a material impact on its results of operations, financial position or cash flows.
In April 2008, the FASB issued Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”. FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP No. 142-3 is effective for us in the first quarter of 2009. We are currently assessing the impact, if any, of FSP No. 142-3 on our results of operations, financial position and cash flows.
In May 2008, the FASB issued Statement issued SFAS No. 163Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60. SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. The accounting and disclosure requirements of the this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. We do not operate as an insurance enterprise with financial guaranteed insurance contracts and do not anticipate the adoption of SFAS No. 163 will have a material impact on our consolidated financial statements.
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There were no significant changes to our critical accounting policies during the third quarter of 2008.
Cautionary Note Regarding Forward-Looking Statements
Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report, including certain statements contained in “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under “Item 1A. Risk Factors,” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (available atwww.sec.gov) , may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
Some of the key factors that could cause actual results to differ from our expectations include:
• | fluctuations in the supply or price of copper and other raw materials; | ||
• | increased competition from other wire and cable manufacturers, including foreign manufacturers; | ||
• | pricing pressures causing margins to decrease; | ||
• | general economic conditions and changes in the demand for our products by key customers; | ||
• | the consummation of acquisitions; | ||
• | failure to identify, finance or integrate acquisitions; | ||
• | failure to accomplish integration activities on a timely basis; | ||
• | failure to achieve expected efficiencies in our manufacturing and integration consolidations; | ||
• | changes in the cost of labor or raw materials, including PVC and fuel costs; | ||
• | inaccuracies in purchase agreements relating to acquisitions; | ||
• | failure of customers to make expected purchases, including customers of acquired companies; | ||
• | unforeseen developments or expenses with respect to our acquisition, integration and consolidation efforts; and | ||
• | other risks and uncertainties, including those described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. |
In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and, therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, our principal market risks are exposure to changes in commodity prices, primarily copper prices, and interest rates on borrowings.
Commodity Risk.Certain raw materials used in our products are subject to price volatility, most notably copper, which is the primary raw material used in our products. The price of copper is particularly volatile and can affect our net sales and profitability. We purchase copper at prevailing market prices and, through multiple pricing strategies, generally attempt to pass along to our customers changes in the price of copper and other raw materials. From time-to-time, we enter into derivatives, including copper futures contracts, to mitigate the potential impact of fluctuations in the price of copper on our pricing terms with certain customers. We do not speculate on copper prices. We record these derivative contracts at fair value on our consolidated balance sheet as either an asset or liability, and record changes in the fair value of such contracts within cost of goods sold as they occur. At September 30, 2008, we had contracts with an aggregate fair value of $1.3 million to sell 2.8 million pounds of copper in December 2008. A hypothetical adverse movement of 10% in the price of copper at September 30, 2008, with all other variables held constant, would have resulted in a loss in the fair value of our commodity futures contracts of approximately $0.5 million as of September 30, 2008.
Interest Rate Risk.We have exposure to changes in interest rates on a portion of our debt obligations. As of September 30, 2008, approximately 27% of our debt was variable rate, comprised of our borrowings under our Revolving Credit Facility for which interest costs are based on either the lenders’ prime rate or LIBOR. Based on the amount of our variable rate borrowings at September 30, 2008, which totaled approximately $88.3 million, an immediate one percentage point change in LIBOR would change our annual interest expense by approximately $0.9 million. This estimate assumes that the amount of variable rate borrowings remains constant for an annual period and that the interest rate change occurs at the beginning of the period.
ITEM 4. Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of September 30, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There were no changes in our internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(d) and 15d-15(f)) during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II —OTHER INFORMATION
ITEM 1. Legal Proceedings
We are involved in legal proceedings and litigation arising in the ordinary course of business. In those cases in which we are the defendant, plaintiffs may seek to recover large and sometimes unspecified amounts or other types of relief and some matters may remain unresolved for several years. We believe that none of the litigation that we now face, individually or in the aggregate, will have a material effect on our consolidated financial position, cash flow or results of operations. We maintain insurance coverage for litigation that arises in the ordinary course of our business and believe such coverage is adequate.
ITEM 6. Exhibits
See Index to Exhibits
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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.
COLEMAN CABLE, INC. (Registrant) | ||||
Date: November 6, 2008 | By | /s/ G. Gary Yetman | ||
Chief Executive Officer and President | ||||
Date: November 6, 2008 | By | /s/ Richard N. Burger | ||
Chief Financial Officer, Executive | ||||
Vice President, Secretary and Treasurer | ||||
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INDEX TO EXHIBITS
Item No. | Description | |
2.0 — | Equity Interest Purchase Agreement dated as of March 11, 2007, among Coleman Cable, Inc., the Copperfield Sellers defined therein and, solely with respect to Section 10.10 thereof, the additional signatures thereto; incorporated herein by reference to our quarterly report on Form 10-Q for the quarter ended March 31, 2007. | |
2.1 — | Purchase Agreement, dated as of November 1, 2007, by and among Coleman Cable, Inc., Woods Industries, Inc., Woods Industries (Canada) Inc. and Katy Industries, Inc., incorporated by reference herein to our Current Report on Form 8-K filed on November 2, 2007. | |
3.1 — | Certificate of Incorporation of Coleman Cable, Inc., as filed with the Delaware Secretary of State on October 10, 2006, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
3.2 — | Amended and Restated By-Laws of Coleman Cable, Inc., incorporated herein by reference to our Current Report on Form 8-K as filed on May 5, 2008. | |
4.1 — | Registration Rights Agreement dated September 28, 2004 between Coleman Cable, Inc. and Wachovia Capital Markets, LLC, as Initial Purchaser under the Purchase Agreement, incorporated herein by reference to our Form S-4 filed on April 26, 2005. | |
4.2 — | Indenture dated as of September 28, 2004 among Coleman Cable, Inc., the Note Guarantors from time to time party thereto and Deutsche Bank Trust Company Americas, as Trustee, incorporated herein by reference to our Form S-4 filed on April 26, 2005. | |
4.3 — | Registration Rights Agreement, dated October 11, 2006 between Coleman Cable, Inc. and Friedman, Billings, Ramsey & Co., Inc., incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
4.4 — | Shareholders Agreement, dated October 11, 2006 between Coleman Cable, Inc. and its Existing Holders, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
4.5 — | Registration Rights Agreement dated April 2, 2007 between Coleman Cable, Inc. and Wachovia Capital Markets, LLC, as Initial Purchaser under the Purchase Agreement, incorporated herein by reference to our Form S-4 filed on July 13, 2007. | |
10.1 — | Amended and Restated Credit Agreement dated as of April 2, 2007 among Coleman Cable, Inc., certain of its Subsidiaries, the Lenders named therein, and Wachovia Bank, National Association, as administrative agent, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007. | |
10.2 — | First Amendment to Amended and Restated Credit Agreement dated as of November 1, 2007 by and among Coleman Cable, Inc., certain of its Subsidiaries, the Lenders named therein, and Wachovia Bank, National Association, as administrative agent, incorporated herein by reference to our Form 8-K filed on November 2, 2007. | |
10.3 — | Lease dated as of September 11, 2003, by and between Panattoni Development Company, LLC and Coleman Cable, Inc., as subsequently assumed by HQ2 Properties, LLC pursuant to an Assignment and Assumption of Lease, dated as of August 15, 2005, amended by First Amendment to Lease, dated as of August 15, 2005, by and between HQ2 Properties, LLC and Coleman Cable, Inc., incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. |
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Item No. | Description | |
10.4 — | Amended and Restated Employment Agreement, dated as of September 1, 2006 by and between Coleman Cable, Inc. and G. Gary Yetman, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
10.5 — | Amended and Restated Employment Agreement, dated as of September 1, 2006 by and between Coleman Cable, Inc. and Richard N. Burger, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
10.6 — | Amended and Restated Employment Agreement, dated as of September 1, 2006 by and between Coleman Cable, Inc. and Jeffrey D. Johnston, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
10.7 — | Long-Term Incentive Plan, as amended and restated on April 30, 2008, incorporated herein by reference to our Proxy Statement filed on April 3, 2008. | |
10.8 — | Form of Non-Qualified Stock Option Agreement Under the Long-Term Incentive Plan, incorporated herein by reference to our Form- S-1 filed on November 16, 2006. | |
10.9 — | Indemnification Agreement, dated as of November 13, 2007, by and between Coleman Cable, Inc. and Morgan Capital LLC, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | |
10.10 — | Lease by and between Copperfield, LLC and DJR Ventures, LLC dated as of February 1, 2008, incorporated herein by reference to our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2008. | |
31.1 — | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 — | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 — | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Denotes management contract or compensatory plan or arrangement. |
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