UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 1-7418
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ESSEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN 35-1313928
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 WALL STREET, FORT WAYNE, INDIANA 46802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (219) 461-4000
None
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(Former name, former address and former fiscal year, if
changed since last report)
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.
[X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of Shares Outstanding
Common Stock As of June 30, 1995
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$.01 Par Value 100
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1995
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . . . . 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 13
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
In Thousands of Dollars (Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 5,666 $ 16,894
Accounts receivable (net of allowance of
$3,609 and $3,537) . . . . . . . . . . . . . . . . . 158,955 144,595
Inventories . . . . . . . . . . . . . . . . . . . . . 147,228 145,706
Other current assets . . . . . . . . . . . . . . . . . 12,097 20,496
-------- --------
Total current assets . . . . . . . . . . . . . 323,946 327,691
Property, plant and equipment, (net of accumulated
depreciation of $70,357 and $57,127) . . . . . . . . 271,617 276,134
Excess of cost over net assets acquired (net of
accumulated amortization of $11,177 and $9,145) . . . 131,068 133,100
Other intangible assets and deferred costs (net of
accumulated amortization of $2,061 and $5,146) . . . 10,627 11,563
Other assets . . . . . . . . . . . . . . . . . . . . . 2,117 1,812
-------- --------
$739,375 $750,300
======== ========
See Notes to Consolidated Financial Statements
3
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
June 30, December 31,
1994 1993
In Thousands of Dollars, Except Per Share Data (Unaudited)
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . $ 10,000 $ -
Current portion of long-term debt . . . . . . . . . . 14,500 -
Accounts payable . . . . . . . . . . . . . . . . . . . $ 50,603 $ 47,421
Accrued liabilities . . . . . . . . . . . . . . . . . 41,355 45,821
Deferred income taxes . . . . . . . . . . . . . . . . 12,149 10,408
Due to Holdings . . . . . . . . . . . . . . . . . . . - 32,979
-------- --------
Total current liabilities . . . . . . . . . . . 128,607 136,629
Long-term debt . . . . . . . . . . . . . . . . . . . . 425,600 200,000
Deferred income taxes . . . . . . . . . . . . . . . . 70,255 72,771
Other long-term liabilities . . . . . . . . . . . . . 9,501 6,997
Stockholder's equity:
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding; plus
additional paid in capital . . . . . . . . . . . . . 104,036 302,784
Retained earnings . . . . . . . . . . . . . . . . . . 1,376 31,119
-------- --------
Total stockholder's equity . . . . . . . . . . 105,412 333,903
-------- --------
$739,375 $750,300
======== ========
See Notes to Consolidated Financial Statements
4
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Six Month Period
Ended June 30, Ended June 30,
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In Thousands of Dollars 1995 1994 1995 1994
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REVENUES:
Net sales . . . . . . . . . . . . . . . . . $288,534 $246,558 $578,183 $478,390
Interest income . . . . . . . . . . . . . 174 27 380 63
Other income . . . . . . . . . . . . . . . 470 210 1,329 339
-------- -------- -------- --------
289,178 246,795 579,892 478,792
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . 250,936 207,878 498,159 399,526
Selling and administrative . . . . . . . . 21,559 20,071 43,283 40,302
Interest expense . . . . . . . . . . . . . 8,426 6,120 14,182 12,120
Other expense . . . . . . . . . . . . . . . 433 281 560 616
-------- -------- -------- --------
281,354 234,350 556,184 452,564
-------- -------- -------- --------
Income before income taxes and
extraordinary charge . . . . . . . . . . . . 7,824 12,445 23,708 26,228
Provision for income taxes . . . . . . . . . 3,780 5,300 10,480 11,300
-------- -------- -------- --------
Income before extraordinary charge . . . . . 4,044 7,145 13,228 14,928
Extraordinary charge - debt retirement,
net of income tax benefit . . . . . . . . . 2,971 - 2,971 -
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . $ 1,073 $ 7,145 $ 10,257 $ 14,928
======== ======== ======== ========
See Notes to Consolidated Financial Statements
5
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Month Period
Ended June 30,
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In Thousands of Dollars 1995 1994
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OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . $ 10,257 $ 14,928
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 16,267 15,233
Loss on debt retirement . . . . . . . . . . . . . . 4,951 -
Non cash interest expense . . . . . . . . . . . . . 1,054 1,335
Non cash pension expense . . . . . . . . . . . . . 1,254 1,175
Provision for losses on accounts receivable . . . . 243 507
(Benefit) for deferred income taxes . . . . . . . . (775) (1,685)
Loss on disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . 418 449
Changes in operating assets and liabilities:
Increase in accounts receivable . . . . . . . . . (14,903) (24,608)
Increase in inventories . . . . . . . . . . . . . (1,522) (4,168)
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . (1,493) 205
Net (increase) decrease in other assets and
liabilities . . . . . . . . . . . . . . . . . . . 10,180 (1,078)
Increase (decrease) in due to Holdings . . . . . (33,961) 7,717
-------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (8,030) 10,010
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (11,098) (13,586)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 1,069 126
Investment in subsidiary and other . . . . . . . . . (492) (364)
Issuance of equity interest in a subsidiary . . . . 1,063 -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (9,458) (13,824)
-------- --------
See Notes to Consolidated Financial Statements
6
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Six Month Period
Ended June 30,
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In Thousands of Dollars 1995 1994
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FINANCING ACTIVITIES
Proceeds from revolving loan . . . . . . . . . . . . 200,100 86,800
Repayment of revolving loan . . . . . . . . . . . . (45,000) (81,800)
Repayments of other long-term debt . . . . . . . . . - (396)
Proceeds from notes payable to banks . . . . . . . . 28,200 -
Repayment of notes payable to banks . . . . . . . . (18,200) -
Proceeds from term loan . . . . . . . . . . . . . . 60,000 -
Proceeds from lease obligation . . . . . . . . . . . 25,000 -
Dividend paid to Holdings . . . . . . . . . . . . . (238,748) -
Debt issuance costs . . . . . . . . . . . . . . . . (5,092) -
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . 6,260 4,604
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,228) 790
Cash and cash equivalents at beginning of period . . 16,894 10,346
-------- --------
Cash and cash equivalents at end of period . . . . . $ 5,666 $11,136
======== ========
See Notes to Consolidated Financial Statements
7
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In Thousands of Dollars
-----------------------
NOTE 1 BASIS OF PRESENTATION
The unaudited interim consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of the management of Essex Group, Inc. (the "Company"), necessary
to present fairly the consolidated financial position of the Company as of
June 30, 1995, and the consolidated results of operations for the three
month and six month periods ended June 30, 1995 and 1994, respectively,
and cash flows of the Company for the six-month periods ended June 30,
1995 and 1994, respectively. Results of operations for the periods
presented are not necessarily indicative of the results for the full
fiscal year. These financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K, as amended, filed
with the Securities and Exchange Commission for the year ended December
31, 1994.
NOTE 2 INVENTORIES
The components of inventories are as follows:
June 30, December 31,
1995 1994
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Finished goods . . . . . . . . . . . . $122,055 $130,236
Raw materials and work in process . . 64,808 54,560
-------- --------
186,863 184,796
LIFO reserve . . . . . . . . . . . . . (39,635) (39,090)
-------- --------
$147,228 $145,706
======== ========
The Company values a major portion of its inventories at the lower of
cost or market based on a last-in, first-out ("LIFO") method. Principal
elements of cost included in the Company's inventories are copper,
purchased materials, direct labor and manufacturing overhead. Inventories
valued using the LIFO method amounted to $141,889 and $141,847 at June 30,
1995 and December 31, 1994, respectively.
8
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
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NOTE 3 DEBT ARRANGEMENTS
Long-term debt consists of the following:
June 30, December 31,
1995 1994
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10% Senior notes . . . . . . . . . . . $200,000 $200,000
Revolving loan . . . . . . . . . . . . 155,100 -
Term loan . . . . . . . . . . . . . . . 60,000 -
Lease obligation . . . . . . . . . . . 25,000 -
-------- --------
440,100 200,000
Less: current portion . . . . . . . . . 14,500 -
-------- --------
$425,600 $200,000
======== ========
Bank Financing
In April, 1995, in connection with the redemption (the "Redemption") by
BCP/Essex Holdings Inc. ("Holdings") of all of its outstanding 16% Senior
Discount Debentures due 2004 (the "Holdings Debentures"), the Company
terminated its previous credit agreement (the "Former Credit Agreement")
and entered into three new facilities: (i) a $260,000 revolving credit
agreement, dated as of April 12, 1995, by and among the Company, Holdings,
the Lenders named therein, and Chemical Bank, as agent (the "Revolving
Credit Agreement"); (ii) a $60,000 senior unsecured note agreement, dated
as of April 12, 1995, by and among the Company, Holdings, as guarantor,
the Lenders named therein, and Chemical Bank, as administrative agent (the
"Term Loan", together with the Revolving Credit Agreement, the "Credit
Facilities"); and (iii) a $25,000 agreement and lease, dated as of April
12, 1995, by and between the Company and Mellon Financial Services
Corporation #3 (the "Sale and Leaseback Agreement"). The Company
recognized an extraordinary charge of $2,971, net of applicable tax
benefit ($1,980), in the second quarter 1995 for the write-off of
unamortized deferred debt expense in connection with the termination of
its Former Credit Agreement.
On May 12, 1995, the Company borrowed the full amount available under
the Term Loan and Sale and Leaseback Agreement. These funds, together
with available cash and borrowings under the Revolving Credit Agreement,
were paid to Holdings in the form of a cash dividend ($238,750) and
repayment of a portion of an intercompany liability ($34,100) totaling
9
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
$272,850. Holdings applied such funds to redeem all of its outstanding
Holdings Debentures at 100% of their principal amount of $272,850 on May
15, 1995.
The Revolving Credit Agreement provides for up to $260,000 in revolving
loans, subject to specified percentages of eligible assets and also
provides a $25,000 letter of credit subfacility. The Company's ability to
borrow under the Revolving Credit Agreement is restricted by the financial
covenants contained therein as well as those contained in the Term Loan
and to certain debt limitation covenants contained in the indenture under
which the 10% Senior Notes due 2003 (the "Senior Notes") were issued (the
"Senior Note Indenture"). The Revolving Credit Agreement terminates five
years from its effective date of April 12, 1995. Revolving Credit
Agreement loans bear floating rates of interest, at the Company's option,
at bank prime plus 1.25% or a reserve adjusted Eurodollar rate (LIBOR)
plus 2.25%. The effective interest rate can be reduced by 0.25% to 1.25%
if certain specified financial conditions are achieved. Commitment fees
during the revolving loan period are .375% or .5% of the average daily
unused portion of the available credit based upon certain specified
financial conditions. Indebtedness under the Revolving Credit Agreement
is guaranteed by Holdings and all of the Company's subsidiaries, and is
secured by a pledge of the capital stock of the Company and its
subsidiaries and by a first lien on substantially all assets.
The Term Loan provides for an aggregate of $60,000 in term loans, the
last payment of which is due in May 2000. Borrowings under the Term Loan
bear floating rates of interest at bank prime plus 2.75% or LIBOR plus
3.75%. The effective interest rate can be reduced by 0.25% to 1.25% if
certain specified financial conditions are achieved. Principal payments
on the term loans will be made in 20 equal quarterly installments of
$3,000 commencing August 15, 1995.
The Sale and Leaseback Agreement provides $25,000 for the sale and
leaseback of certain of the Company's fixed assets. The Sale and
Leaseback Agreement has a seven-year term expiring in May 2002. The
principal component of the rental is to be paid quarterly, with the amount
of each of the first 27 payments to be equal to 2.5% of lessor's cost of
the equipment, and the balance due at the final payment. The interest
component is to be paid on the unpaid principal balance and is to be
calculated by lessor at LIBOR plus 2.5%. The effective interest rate can
be reduced by 0.25% to 1.125% if certain specified financial conditions
are achieved.
The Company has purchased interest rate cap protection through May 15,
1997 with respect to $150,000 of debt with a strike rate of 10.0% (three
month LIBOR).
In addition, the Company also has an uncommitted bank line of credit
which provides for unsecured borrowings for working capital of up to
$10,000, of which the full amount was outstanding at June 30, 1995 and
10
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
denoted as notes payable to banks in the Consolidated Balance Sheets.
This line of credit bears interest at rates subject to agreement between
the Company and the lending bank. At June 30, 1995, such rate of interest
was 8.0%.
Senior Notes
In May 1993, the Company issued $200,000 aggregate principal amount of
its Senior Notes which bear interest at 10% per annum, payable
semiannually and are due in May 2003. The Senior Notes rank pari passu in
right of payment with all other senior indebtedness of the Company. To
the extent that any other senior indebtedness of the Company is secured by
liens on the assets of the Company, the holders of such secured senior
indebtedness will have a claim prior to any claim of the holders of the
Senior Notes as to those assets.
NOTE 4 HOLDINGS PREFERRED STOCK AND WARRANTS
At June 30, 1995, Holdings had outstanding 1,889,420 shares of 15%
Series A Cumulative Redeemable Exchangeable Preferred Stock, Liquidation
Preference $25 Per Share, (the "Series A Preferred Stock") and 5,666,738
warrants to purchase an equivalent number of shares of common stock of
Holdings at a per share exercise price of approximately $2.86. The
accreted balance of the Series A Preferred Stock was $44,857 at June 30,
1995. The Series A Preferred Stock is subject to mandatory redemption on
September 30, 2004. At the option of Holdings, the Series A Preferred
Stock may be redeemed at a percentage of liquidation preference declining
from 107.5% beginning September 30, 1995 to 100% beginning September 30,
1998, plus accumulated and unpaid dividends. The Revolving Credit
Agreement permits the optional redemption of the Series A Preferred Stock
only out of proceeds of a Holdings primary offering (public or private) of
common stock, or in exchange for debentures with terms similar to those of
the Series A Preferred Stock or in exchange for other preferred stock on
terms no more onerous than those presently existing.
Dividends on the Series A Preferred Stock are payable quarterly at a
rate of 15.0% per annum. Dividends accruing on or before September 30,
1998 may, at the option of Holdings, be paid in cash, paid in additional
shares of Series A Preferred Stock or in any combination thereof.
Dividends on the Series A Preferred Stock accruing after September 30,
1998 must be paid in cash. Holdings does not expect to pay cash dividends
on or prior to September 30, 1998. Each of the Credit Facilities and the
Senior Note Indenture restricts the payment of cash to Holdings. In order
to make cash dividend payments on the Series A Preferred Stock under the
terms of the Senior Note Indenture, Holdings would be required, among
other things, to seek the consent of the holders of the Senior Notes,
refinance the Senior Notes after they become redeemable in May, 1998, or
obtain funds through the sale of equity securities.
11
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
On June 7, 1995 Holdings, in order to satisfy certain obligations
contained in the Registration Rights Agreement dated June 5, 1995
(incorporated by reference herein), filed with the Securities and Exchange
Commission a registration statement on Form S-4 an offer to exchange an
equal number of 15% Series B Cumulative Redeemable Exchangeable Preferred
Stock due 2004 ("the Series B Preferred Stock") for all of its 1,889,420
outstanding shares of Series A Preferred Stock as of June 30, 1995. The
terms of the Series A Preferred Stock and the Series B Preferred Stock are
identical in all material respects, except for certain transfer
restrictions relating to the Series A Preferred Stock. The Series B
Preferred Stock issued in exchange for Series A Preferred Stock will
accrue dividends from July 1, 1995.
12
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Introduction
Essex Group, Inc. (the "Company") is engaged in one principal line of
business, the production of electrical wire and cable. It classifies its
operations into three major divisions based on the markets served: Wire
and Cable Division ("WCD"), Magnet Wire and Insulation Division ("MWI")
and Engineered Products Division ("EPD"). During the second quarter 1994,
the former Telecommunication Products Division ("TPD") was merged with and
into EPD. The electrical wire products manufactured and sold by TPD were
incorporated within a new communications business unit of EPD in order to
facilitate the realignment of its telecommunication wire manufacturing
capacity from primarily outside-plant telecommunication cables to a
broader mix of voice and data communication wire products.
In October 1992, MS/Essex Holdings Inc. ("Holdings") was acquired (the
"Acquisition") by merger (the "Merger") of BE Acquisition Corporation
("BE") with and into Holdings with Holdings surviving under the name
BCP/Essex Holdings Inc. BE was a newly organized Delaware corporation
formed for the purpose of effecting the Acquisition. The shareholders of
BE included Bessemer Capital Partners, L.P. ("BCP"), affiliates of
Goldman, Sachs & Co. ("Goldman Sachs"), affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Chemical Equity Associates, A
California Limited Partnership ("CEA"), and members of management and
other employees of the Company. As a result of the Merger, the
stockholders of BE became stockholders of Holdings. During 1993, BCP
transferred its ownership in Holdings to Bessemer Holdings, L.P. ("BHLP"),
an affiliate of BCP. Prior to the Acquisition, the outstanding common
stock of Holdings was beneficially owned by The Morgan Stanley Leveraged
Equity Fund II, L.P., certain directors and members of management of
Holdings and the Company, and others. Holdings acquired the Company from
United Technologies Corporation ("UTC") in February 1988.
Results of Operations
Three Month Period Ended June 30, 1995
Net sales for the second quarter 1995 were $288.5 million or 17.0% higher
than the comparable period in 1994, resulting primarily from higher copper
prices. Copper is the Company s principal raw material. During the
second quarter 1995 the average price of copper on the New York Commodity
Exchange, Inc. ("COMEX") was 34.8% higher than the comparable period in
1994. Consistent with historical experience, this increase in copper
price (notwithstanding its magnitude) was generally passed on to customers
through product pricing during the second quarter 1995. The Company's
second quarter 1995 sales volume declined approximately 4% from the second
quarter 1994 results, which was primarily attributable to a reduction in
building wire and automotive wire sales volume, partially offset by
increased demand for the Company s magnet wire and communications wire
products. Building wire sales in the second quarter 1995 were comparable
to the same period in 1994, resulting from the significant increase in
copper prices offset by a decline in sales volume and other competitive
pricing conditions. The Company's building wire sales volume declined due
to selective market participation in response to very competitive pricing
conditions. Demand for the Company's automotive wire products also
13
declined from the second quarter 1994 as U.S. car and light truck sales
softened in the second quarter 1995. Sales volume and pricing of the
Company's magnet wire products, however, have shown continued strength and
improvement due to increased demand for its motor and distribution wire
products. Communication wire sales in the second quarter 1995 increased
significantly compared to the same period in 1994 reflecting improved
product pricing and higher copper costs. The Company believes that such
improved pricing is attributable to the recent rationalization of industry
capacity.
Cost of goods sold for the second quarter 1995 was 20.7% higher than the
second quarter 1994 due primarily to increased copper and other material
costs. The Company s cost of goods sold as a percentage of net sales was
87.0% and 84.3% in the second quarter 1995 and 1994, respectively. The
cost of goods sold percentage increase resulted primarily from the impact
of higher copper and other material costs as well as competitive pricing
conditions within the building wire market. Partially offsetting these
negative influences was a reduction in manufacturing costs attributable to
continued capital investments.
Selling and administrative expenses for the second quarter 1995 were 7.4%
above the comparable 1994 period, due primarily to higher sales
commissions related to increased sales.
Interest expense in the second quarter 1995 was $8.4 million or $2.3
million higher than the same period in 1994. This increase in interest
expense was attributable to borrowings under the Company s new credit
facilities to provide funds to Holdings to redeem (the "Redemption") all
of its outstanding Senior Discount Debentures Due 2004 (the Holdings
Debentures ) on May 15, 1995. See Liquidity, Capital Resources and
Financial Condition.
Income tax expense was 48.3% of pretax income in the second quarter 1995
compared with 42.6% for the same period in 1994. The effective income tax
rate of the Company is higher than the approximate statutory rate of 40%
due primarily to the effect of the amortization of excess of cost over net
assets acquired which is not deductible for income tax purposes.
The Company recorded net income of $1.1 million for the second quarter
1995 compared to net income of $7.1 million for the comparable period last
year. The 1995 results include an extraordinary charge of $3.0 million
($5.0 million before applicable tax benefit) for the write-off of
unamortized deferred debt expense associated with the Company s former
revolving credit agreement.
14
Six Month Period Ended June 30, 1994 Compared With The Six Month Period
Ended June 30, 1993
Net sales for the first six months of 1995 were $578.2 million or 20.9%
higher than the comparable period in 1994, resulting primarily from higher
copper prices. Copper is the Company s principal raw material. During
the first half of 1995 the average price of copper on the New York
Commodity Exchange, Inc. ("COMEX") was 45.9% higher than the comparable
period in 1994. Consistent with historical experience, this increase in
copper price (notwithstanding its magnitude) was generally passed on to
customers through product pricing during the first half of 1995. The
Company's sales volume for the first six months of 1995 was down
approximately 2% from the first six months of 1994, due primarily to a
reduction in building wire sales volume, partially offset by increased
demand for the Company s magnet wire and automotive wire products.
Building wire sales for the first six months of 1995, although higher than
the same period in 1994 due to a marked increase in copper prices, have
been negatively impacted, with respect to volume and price, by very
competitive market conditions. Sales volumes of magnet wire and
automotive wire, however, have increased significantly over the first half
of 1994 due to increased demand for the Company's motor, distribution and
primary wire products. Communication wire sales have improved
substantially in 1995 over the first six months of 1994 due to higher
copper prices and to strengthening product prices; sales volumes were
comparable for the two periods.
Cost of goods sold for the first six months of 1995 was 24.7% higher than
the same period in 1994 due primarily to increased copper and other
material costs. The Company s cost of goods sold as a percentage of net
sales was 86.2% and 83.5% in the first half of 1995 and 1994,
respectively. The cost of goods sold percentage increase resulted
primarily from the impact of higher copper and other material costs as
well as competitive pricing conditions within the building wire market.
These increases were partially offset by lower manufacturing costs
attributable to continued capital investments.
Selling and administrative expenses for the first six months of 1995 were
7.4% above the comparable 1994 period, due primarily to higher sales
commissions related to increased sales.
Interest expense in the first half of 1995 was $14.2 million or $2.1
million higher than the same period in 1994. This increase in interest
expense resulted from borrowings under the Company s new credit facilities
to provide Holdings with funds to effect the Redemption on May 15, 1995.
See Liquidity, Capital Resources and Financial Condition.
Income tax expense was 44.2% of pretax income in the first six months of
1995 compared with 43.1% for the same period in 1994. The effective
income tax rate of the Company is higher than the approximate statutory
rate of 40% due to the effect of the amortization of excess of cost over
net assets acquired which is not deductible for income tax purposes.
The Company recorded net income of $10.3 million for the first six months
of 1995 compared to net income of $14.9 million for the comparable period
last year. The 1995 results include an extraordinary charge of $3.0
million ($5.0 million before applicable tax benefit) for the write-off of
unamortized deferred debt expense associated with the Company s former
revolving credit agreement.
15
Liquidity, Capital Resources and Financial Condition
The Company's financial position at June 30, 1995 was highly leveraged.
The Company's notes payable to banks plus long-term debt totaled $450.1
million and its stockholders' equity was $105.4 million. The resulting
ratio of debt to stockholders' equity of approximately 4.3 to 1 compares
to a ratio of 0.6 to 1 at December 31, 1994. This change resulted from
financing a dividend and repayment of an intercompany liability to
Holdings with funds available under the Company's new credit facilities as
discussed below.
In general, the Company requires liquidity for working capital, capital
expenditures, debt repayments, interest and taxes. Of particular
significance to the Company is its working capital requirements which
increase whenever the Company experiences strong incremental demand in its
business and/or a significant rise in copper prices. Historically, the
Company has satisfied its liquidity requirements through a combination of
funds generated from operating activities together with funds available
under its credit facilities. Based upon historical experience and the
availability of funds under its credit facilities, the Company expects
that its usual sources of liquidity will be sufficient to enable it to
meet its cash requirements for working capital, capital expenditures, debt
repayments, interest and taxes for 1995.
In April, 1995, in connection with the Redemption of all of the
outstanding Holdings Debentures at their principal amount of $272.9
million, the Company terminated its previous credit agreement (the "Former
Credit Agreement") and entered into three new facilities: (i) a $260.0
million revolving credit agreement, dated as of April 12, 1995, by and
among the Company, Holdings, the lenders named therein and Chemical Bank,
as agent (the "Revolving Credit Agreement"); (ii) a $60.0 million senior
unsecured note agreement, dated as of April 12, 1995, by and among the
Company, Holdings, as guarantor, the lenders named therein and Chemical
Bank, as administrative agent (the "Term Loan", together with the
Revolving Credit Agreement, the "Credit Facilities"); and (iii) a $25.0
million agreement and lease dated as of April 12, 1995, by and between the
Company and Mellon Financial Services Corporation #3 (the "Sale and
Leaseback Agreement" and together with the Credit Facilities, the "New
Company Facilities"). The Company recognized an extraordinary charge of
approximately $3.0 million, net of applicable tax benefit, in the second
quarter 1995 for the write-off of unamortized deferred debt expense in
connection with the termination of its Former Credit Agreement. Holdings
is a party to each of the Credit Facilities and has guaranteed the
Company's obligations under the Revolving Credit Agreement. Holdings has
secured its obligations pursuant to the guarantee of the Revolving Credit
Agreement by a pledge of all of the outstanding stock of the Company to
the lending banks.
On May 12, 1995, the Company borrowed the full amounts available under
the Term Loan and Sale and Leaseback Agreement. These funds, together
with available cash and borrowings under the Revolving Credit Agreement,
were paid to Holdings in the form of a cash dividend ($238.8 million) and
repayment of a portion of an intercompany liability ($34.1 million)
totaling $272.9 million. Holdings applied such funds to effect the
Redemption of its Holdings Debentures at 100% of their principal amount of
$272.9 million on May 15, 1995.
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The Revolving Credit Agreement provides for up to $260.0 million in
revolving loans, subject to specified percentages of eligible assets and
also provides a $25.0 million letter of credit subfacility. The Company's
ability to borrow under the Revolving Credit Agreement is restricted by
the financial covenants contained therein as well as those contained in
the Term Loan and to certain debt limitation covenants contained in the
indenture under which the 10% Senior Notes due 2003 (the "Senior Notes")
were issued (the "Senior Note Indenture"). The Revolving Credit Agreement
terminates five years from its effective date of April 12, 1995.
Revolving Credit Agreement loans bear floating rates of interest, at the
Company's option, at bank prime plus 1.25% or a reserve adjusted
Eurodollar rate (LIBOR) plus 2.25%. The effective interest rate can be
reduced by 0.25% to 1.25% if certain specified financial conditions are
achieved. Commitment fees during the revolving loan period are .375% or
0.5% of the average daily unused portion of the available credit based
upon certain specified financial conditions.
The Term Loan provides an aggregate $60.0 million in term loans, the last
payment of which is due in May 2000. Borrowings under the Term Loan bear
floating rates of interest at bank prime plus 2.75% or LIBOR plus 3.75%.
The effective interest rate can be reduced by 0.25% to 1.25% if certain
specified financial conditions are achieved. Principal payments on the
Term Loans will be made in 20 equal quarterly installments of $3.0 million
commencing August 15, 1995.
The Sale and Leaseback Agreement provides $25.0 million for the sale and
leaseback of certain of the Company's fixed assets. The lease obligation
has a seven-year term expiring in May 2002. The principal component of
the rental is to be paid quarterly, with the amount of each of the first
27 payments to be equal to 2.5% of Lessor's cost of the equipment, and the
balance due at the final payment. The interest component is to be paid on
the unpaid principal balance and is to be calculated by Lessor at LIBOR
plus 2.5%. The effective interest rate can be reduced by 0.25% to 1.125%
if certain specified financial conditions are achieved.
The Revolving Credit Agreement restricts incurrence of indebtedness,
liens, guarantees, mergers, sales of assets, lease obligations, payment of
dividends, capital expenditures and investments and, with certain
exceptions, limits prepayment of indebtedness, including the Senior Notes,
and early redemption of Holdings' outstanding preferred stock.
Transactions with affiliates are also restricted subject to certain
exceptions. The Term Loan and the Senior Note Indenture prohibit, with
certain exceptions, the incurrence by the Company of any secured
indebtedness unless such indebtedness is equally and ratably secured. The
failure by Holdings or the Company to comply with any of the foregoing
covenants, if such failure is not timely cured or waived, could lead to
acceleration of the indebtedness covered by the applicable agreement and
to cross-defaults and cross-acceleration of other indebtedness of the
Company.
The Company has purchased interest rate cap protection through May 15,
1997 with respect to $150.0 million of debt with a strike rate of 10.0%
(three month LIBOR).
Net cash used for operating activities through the first six months of
1995 was $8.0 million, compared to net cash provided by operating
activities of $10.0 million in the same period in 1994. The increase in
cash requirements was primarily attributable to the repayment of an
17
intercompany liability with Holdings, which was utilized by Holdings to
fund part of the Redemption of the Holdings Debentures as discussed above.
Capital expenditures of $11.1 million in the first six months of 1995
were $2.5 million lower than the comparable period in 1994. The Company
expects to make capital expenditures in 1995 approximating 1994
expenditure levels to expand capacity, complete modernization projects,
reduce costs and ensure continued compliance with regulatory provisions.
At June 30, 1995, approximately $9.5 million was committed to outside
vendors for capital expenditures. The New Company Facilities impose
limitations on the Company's capital expenditures, business acquisitions
and investments.
In the first six months of 1995, average borrowings under the Company's
Revolving Credit Agreement were $45.5 million compared to average
borrowings of $3.9 million in the first six months 1994.
Regarding long-term liquidity issues, capital expenditures are
anticipated to be consistent with historical levels while the Company's
Senior Notes mature in 2003 and are expected to be replaced by similar
financing at that time. The terms of the Sale and Leaseback Agreement
include a balloon payment of $8.1 million in 2002. The Company expects
that its usual sources of liquidity will enable it to meet its long-term
cash requirements for working capital, capital expenditures, interest and
taxes, as well as its debt repayment obligations under both the Term Loan
and the Sale and Leaseback Agreement.
Considerations Relating To Holdings' Cash Obligations
The Company expects that it may make certain cash payments to Holdings or
other affiliates from time to time to the extent cash is available and to
the extent it is permitted to do so under the terms of the Credit
Facilities and the Senior Note Indenture. Such payments may include (i)
an amount necessary under the tax sharing agreement between the Company
and Holdings to enable Holdings to pay the Company's taxes as if computed
on an unconsolidated basis; (ii) an annual management fee to an affiliate
of BHLP of up to $1.0 million; (iii) amounts necessary to repurchase
management stockholders' shares of Holdings' common stock under certain
specified conditions; and (iv) other amounts to meet ongoing expenses of
Holdings (such amounts are considered to be immaterial both individually
and in the aggregate, however, because Holdings has no operations, other
than those conducted through the Company, or employees). To the extent
the Company makes any such payments, it will do so out of operating cash
flow, borrowings under the Revolving Credit Agreement or other sources of
funds it may obtain in the future and only to the extent such payments are
permitted under the terms of the Credit Facilities and the Senior Note
Indenture.
Holdings' 15% Series A Cumulative Redeemable Exchangeable Preferred
Stock, Liquidation Preference $25 Per Share (the "Series A Preferred
Stock"), which was issued in connection with the Acquisition and Merger,
is not subject to mandatory redemption until September 30, 2004. At the
option of Holdings, the Series A Preferred Stock may be redeemed at a
percentage of liquidation preference declining from 107.5% beginning
September 30, 1995 to 100% beginning September 30, 1998, plus accumulated
and unpaid dividends. The Revolving Credit Agreement permits the optional
redemption of the Series A Preferred Stock only out of proceeds of a
Holdings primary offering (public or private) of common stock, or in
18
exchange for debentures with terms similar to those of the Series A
Preferred Stock or in exchange for other preferred stock on terms no more
onerous than those presently existing. At June 30, 1995, Holdings had
outstanding 1,889,420 shares of Series A Preferred Stock with an accreted
value of $44.9 million.
Dividends on the Series A Preferred Stock are payable quarterly at a rate
of 15.0% per annum. Dividends accruing on or before September 30, 1998
may, at the option of Holdings, be paid in cash, paid in additional shares
of Series A Preferred Stock or in any combination thereof. Dividends on
the Series A Preferred Stock accruing after September 30, 1998 must be
paid in cash. Holdings does not expect to pay cash dividends on or prior
to September 30, 1998. Each of the Credit Facilities and the Senior Note
Indenture restrict the payment of cash to Holdings. In order to make cash
dividend payments on the Series A Preferred Stock under the terms of the
Senior Note Indenture, Holdings would be required, among other things, to
seek the consent of the holders of the Senior Notes, refinance the Senior
Notes after they become redeemable in May, 1998, or obtain funds through
the sale of equity securities.
Subsequent Event
On July 14, 1995 the Company entered into an agreement with Avnet, Inc.
to acquire certain assets of its subsidiary Brownell Electro Inc.
("Brownell"). Brownell is a distributor of electrical products for
electrical and electronic original equipment manufacturers and electric
motor repair shops. The transaction is pending government approval and is
expected to be completed by September, 1995. It is estimated that the
acquisition will require an on-going working capital investment of
approximately $25-$30 million which will be financed from cash provided by
operations and/or funds available under the Revolving Credit Agreement.
General Economic Conditions and Inflation
The Company faces various economic risks ranging from an economic
downturn adversely impacting the Company's primary markets to marked
fluctuations in copper prices. In the short-term, pronounced changes in
the price of copper tend to affect WCD's gross profits because such
changes affect raw material costs more quickly than those changes can be
reflected in the pricing of WCD's products. In the long-term, however,
copper price changes have not had a material adverse effect on gross
profits because cost changes generally have been passed through to
customers over time. In addition, the Company believes that its
sensitivity to downturns in its primary markets is less significant than
it might otherwise be due to its diverse customer base and its strategy of
attempting to match its copper purchases with its needs. The Company
cannot predict either the continuation of current economic conditions or
future results of its operations in light thereof.
The Company believes that it is not particularly affected by inflation
except to the extent that the economy in general is thereby affected.
Should inflationary pressures drive costs higher, the Company believes
that general industry competitive price increases would sustain operating
results, although there can be no assurance that this will be the case.
19
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
(a)Exhibits:
Item Exhibit Index
---- -------------
9.01 Amendment dated as of June 5, 1995 to the Investors Shareholders
Agreement among B.E. Acquisition Corporation, Bessemer Capital
Partners, L.P., certain affiliates of Donaldson, Lufkin &
Jenrette, Inc., certain affiliates of Goldman, Sachs & Co. and
Chemical Equity Associates, incorporated by reference to Exhibit
9.04 to the BCP/Essex Holdings Inc. Registration Statement on
Form S-4, filed with the Securities and Exchange Commission on
June 7, 1995.
10.01 First Amendment dated May 16, 1995 among the registrant,
Holdings, the lenders named therein and Chemical Bank, as agent,
to the Credit Agreement dated April 12, 1995, incorporated by
reference to Exhibit 10.07 to the BCP/Essex Holdings Inc.
Registration Statement on Form S-4, filed with the Securities
and Exchange Commission on June 7, 1995.
99.01 Amendment No. 1 dated as of June 5, 1995 to the 1992
Registration Rights Agreement, incorporated by reference t o
Exhibit 99.03 to the BCP/Essex Holdings Inc. Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on June 7, 1995.
99.0 Registration Rights Agreement between Holdings and Donaldson,
Lufkin & Jenrette Securities Corporation and Goldman, Sachs &
Co. dated as of June 5, 1995, incorporated by reference to
Exhibit 9.04 to the BCP/Essex Holdings Inc. Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on June 7, 1995.
(b) Reports on Form 8-K:
A Current Report on Form 8-K (Items 5 and 7) was filed on April 26
to announce the redemption of the Holdings Debentures and the
Company's new financing arrangements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX GROUP, INC.
(Registrant)
August 10, 1995 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
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