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 September 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 September 30, 1995
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$.01 Par Value 100
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 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 . . . . . . . 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 14
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
In Thousands of Dollars (Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 2,379 $ 16,894
Accounts receivable (net of allowance of
$3,700 and $3,537) . . . . . . . . . . . . . . . . . 169,800 144,595
Inventories . . . . . . . . . . . . . . . . . . . . . 155,484 145,706
Other current assets . . . . . . . . . . . . . . . . . 10,632 20,496
-------- --------
Total current assets . . . . . . . . . . . . . 338,295 327,691
Property, plant and equipment, (net of accumulated
depreciation of $76,378 and $57,127) . . . . . . . . 270,474 276,134
Excess of cost over net assets acquired (net of
accumulated amortization of $12,193 and $9,145) . . . 130,052 133,100
Other intangible assets and deferred costs (net of
accumulated amortization of $2,560 and $5,146) . . . 9,476 11,563
Other assets . . . . . . . . . . . . . . . . . . . . . 2,033 1,812
-------- --------
$750,330 $750,300
======== ========
See Notes to Consolidated Financial Statements
3
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31,
1995 1994
In Thousands of Dollars, Except Per Share Data (Unaudited)
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . $ 15,400 $ -
Current portion of long-term debt . . . . . . . . . . 14,500 -
Accounts payable . . . . . . . . . . . . . . . . . . . 65,492 47,421
Accrued liabilities . . . . . . . . . . . . . . . . . 49,077 45,821
Deferred income taxes . . . . . . . . . . . . . . . . 14,307 10,408
Due to Holdings . . . . . . . . . . . . . . . . . . . - 32,979
-------- --------
Total current liabilities . . . . . . . . . . . 158,776 136,629
Long-term debt . . . . . . . . . . . . . . . . . . . . 401,875 200,000
Deferred income taxes . . . . . . . . . . . . . . . . 68,535 72,771
Other long-term liabilities . . . . . . . . . . . . . 9,615 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 . . . . . . . . . . . . . . . . . . 7,493 31,119
-------- --------
Total stockholder's equity . . . . . . . . . . 111,529 333,903
-------- --------
$750,330 $750,300
======== ========
See Notes to Consolidated Financial Statements
4
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
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In Thousands of Dollars 1995 1994 1995 1994
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REVENUES:
Net sales . . . . . . . . . . . . . . . . . $308,288 $265,897 $886,471 $744,287
Interest income . . . . . . . . . . . . . 10 95 390 158
Other income . . . . . . . . . . . . . . . (91) 606 1,238 945
-------- -------- -------- --------
308,207 266,598 888,099 745,390
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . 263,523 223,522 761,682 623,048
Selling and administrative . . . . . . . . 21,892 22,035 65,175 62,337
Interest expense . . . . . . . . . . . . . 10,284 6,443 24,466 18,563
Other expense . . . . . . . . . . . . . . . 1,991 400 2,551 1,016
-------- -------- -------- --------
297,690 252,400 853,874 704,964
-------- -------- -------- --------
Income before income taxes and
extraordinary charge . . . . . . . . . . . . 10,517 14,198 34,225 40,426
Provision for income taxes . . . . . . . . . 4,400 6,200 14,880 17,500
-------- -------- -------- --------
Income before extraordinary charge . . . . . 6,117 7,998 19,345 22,926
Extraordinary charge - repurchase of debt,
net of income tax benefit . . . . . . . . . - - 2,971 -
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . $ 6,117 $ 7,998 $ 16,374 $ 22,926
======== ======== ======== ========
See Notes to Consolidated Financial Statements
5
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Month Period
Ended September 30,
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In Thousands of Dollars 1995 1994
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OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . $16,374 $ 22,926
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 24,493 23,046
Loss on debt retirement . . . . . . . . . . . . . . 4,951 -
Non cash interest expense . . . . . . . . . . . . . 1,501 2,002
Non cash pension expense . . . . . . . . . . . . . 1,710 1,672
Provision for losses on accounts receivable . . . . 372 562
(Benefit) for deferred income taxes . . . . . . . . (337) (3,891)
Loss on disposal of property, plant and equipment 2,093 776
Changes in operating assets and liabilities:
Increase in accounts receivable . . . . . . . . . (25,878) (34,027)
(Increase) decrease in inventories . . . . . . . . 14,354 (5,790)
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . 21,046 7,418
Net (increase) decrease in other assets and
liabilities . . . . . . . . . . . . . . . . . . . 10,591 (2,021)
Increase (decrease) in due to Holdings . . . . . (33,128) 10,829
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . 38,142 23,502
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (18,069) (18,707)
Acquisition of certain assets of Brownell Electro
Inc. . . . . . . . . . . . . . . . . . . . . . . . (24,934) -
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 1,151 171
Investment in subsidiary and other . . . . . . . . . (458) (364)
Issuance of equity interest in a subsidiary . . . . 1,063 -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (41,247) (18,900)
-------- --------
See Notes to Consolidated Financial Statements
6
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Nine Month Period
Ended September 30,
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In Thousands of Dollars 1995 1994
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FINANCING ACTIVITIES
Proceeds from revolving loan . . . . . . . . . . . . 289,040 97,500
Repayments of revolving loan . . . . . . . . . . . . (154,040) (97,500)
Repayments of other long-term debt . . . . . . . . . - (396)
Proceeds from notes payable to banks . . . . . . . . 72,345 -
Repayment of notes payable to banks . . . . . . . . (56,945) -
Proceeds from term loan . . . . . . . . . . . . . . 60,000 -
Repayments of term loan . . . . . . . . . . . . . . (3,000) -
Proceeds from lease obligation . . . . . . . . . . . 25,000 -
Repayments of lease obligation . . . . . . . . . . . (625) -
Dividend paid to Holdings . . . . . . . . . . . . . (238,748) -
Debt issuance costs . . . . . . . . . . . . . . . . (4,437) -
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES . . . . . . . (11,410) (396)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,515) 4,206
Cash and cash equivalents at beginning of period . . 16,894 10,346
-------- --------
Cash and cash equivalents at end of period . . . . . $ 2,379 $14,552
======== ========
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
September 30, 1995, and the consolidated results of operations for the
three month and nine month periods ended September 30, 1995 and 1994,
respectively, and cash flows of the Company for the nine month periods
ended September 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:
September 30, December 31,
1995 1994
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Finished goods . . . . . . . . . . . . . $131,217 $130,236
Raw materials and work in process . . . . 59,281 54,560
-------- --------
190,498 184,796
LIFO reserve . . . . . . . . . . . . . . (35,014) (39,090)
-------- --------
$155,484 $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 $150,614 and $141,847 at
September 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 LONG-TERM DEBT
Long-term debt consists of the following:
September 30, December 31,
1995 1994
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10% Senior notes . . . . . . . . . . . $200,000 $200,000
Revolving loan . . . . . . . . . . . . 135,000 -
Term loan . . . . . . . . . . . . . . . 57,000 -
Lease obligation . . . . . . . . . . . 24,375 -
-------- --------
416,375 200,000
Less: current portion . . . . . . . . . 14,500 -
-------- --------
$401,875 $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 the 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
$272,850. Holdings applied such funds to redeem all of its outstanding
9
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
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%. 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 uncommitted bank lines of credit which
provide for unsecured borrowings for working capital of up to $20,000, of
which $15,400 was outstanding at September 30, 1995 and denoted as notes
payable to banks in the Consolidated Balance Sheets. These lines of
credit bear interest at rates subject to agreement between the Company and
10
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
the lending banks. At September 30, 1995, such rates of interest averaged
7.9%.
11
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
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 SENIOR DISCOUNT DEBENTURES AND SERIES A PREFERRED STOCK
At September 30, 1995, Holdings had outstanding 1,960,272 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 $46,805 at September
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.
As of September 30, 1995 Holdings, in order to satisfy certain
obligations contained in the Registration Rights Agreement dated June 5,
1995, has filed with the Securities and Exchange Commission a registration
statement on Form S-4 with respect to 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 1,960,272 outstanding
12
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
shares of Series A Preferred Stock as of September 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 October 1, 1995.
NOTE 5 CONTINGENT LIABILITIES
There are various environmental claims and legal proceedings pending
against the Company which have arisen out of the ordinary course of its
business. Pursuant to the February 29, 1988 acquisition of the Company by
Holdings from United Technologies Corporation ("UTC"), UTC agreed to
indemnify the Company against all losses (as defined) resulting from or in
connection with damage or pollution to the environment and arising from
events, operations, or activities of the Company prior to February 29,
1988 or from conditions or circumstances existing at February 29, 1988.
Except for certain matters relating to permit compliance, the Company is
fully indemnified with respect to conditions, events or circumstances
known to UTC prior to February 29, 1988. The sites covered by this
indemnity are handled directly by UTC and all payments required to be made
are paid directly by UTC. The amounts related to this environmental
contingency are not material to the Company's consolidated financial
statements. UTC also provided a second environmental indemnity which
deals with losses related to environmental events, conditions or
circumstances existing at or prior to February 29, 1988, which only became
known in the five year period commencing February 29, 1988. As to any
such losses, the Company is responsible for the first $4,000 incurred.
Management and its legal counsel periodically review the probable outcome
of pending proceedings and the costs reasonably expected to be incurred.
The Company accrues for these costs when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
After consultation with counsel during the current quarter, in the opinion
of management, the ultimate cost to the Company, exceeding amounts
provided, will not materially affect the consolidated financial position
or results of operations.
13
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. During the third
quarter 1995, the Company reorganized its major product lines to operate
under two broad sectors--the Wire and Cable Sector and the Magnet Wire and
Insulation Sector. Major product lines within the Magnet Wire and
Insulation Sector include magnet wire, distribution and electrical
insulation while the Company's building wire, automotive wire,
communication wire and industrial wire product lines operate within the
Wire and Cable Sector. This reorganization was undertaken to increase the
focus on each of the Company's major product lines.
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 September 30, 1995
Net sales for the third quarter 1995 were $308.3 million or 15.9% higher
than third quarter 1994 sales of $265.9 million, resulting primarily from
higher copper prices and sales volume. Copper is the Company s principal
raw material. During the third quarter 1995 the average price of copper
on the New York Commodity Exchange, Inc. ( COMEX ) was 19.3% 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 third
quarter 1995. Sales volume and pricing of the Company's magnet wire
products have shown continued strength and improvement due to increased
demand for its motor and distribution wire products. Communication wire
sales in the third quarter 1995 increased significantly compared to the
same period in 1994 reflecting improved sales volume and product pricing
in addition to higher copper costs. The Company believes that such
improved pricing is attributable to sharply higher demand for copper
communication wire products in conjunction with a decline in industry
manufacturing capacities. Demand for the Company's automotive wire
products also improved over the third quarter 1994 reflecting increased
sales to United Technologies Automotive Group ("UTA") and to other
domestic manufacturers of automobile wire harnesses. Building wire sales
14
in the third quarter 1995 declined from the same period in 1994 due to a
reduction in sales volume and product pricing (without regard to copper
costs). Building wire sales volume declined in response to very
competitive pricing conditions.
Cost of goods sold for the third quarter 1995 was 17.9% higher than the
third 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
85.5% and 84.1% in the third 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 third quarter 1995 were
comparable to the third quarter 1994 as higher sales commissions related
to increased sales were essentially offset by a decline in other general
administrative expenses.
Third quarter 1995 interest expense was $10.3 million or $3.8 million
higher than the same period in 1994. The increase in interest expense was
attributable to additional 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 41.8% of pretax income in the third quarter 1995
compared with 43.7% 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.
Nine Month Period Ended September 30, 1995
Net sales for the first nine months of 1995 were $886.5 million or 19.1%
higher than the first nine months of 1994 sales of $744,287, resulting
primarily from higher copper prices and sales volume. Copper is the
Company s principal raw material. During the first nine months of 1995
the average price of COMEX copper was 36.0% 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 nine months of 1995.
Sales volume and pricing of the Company's magnet wire products have shown
continued strength and improvement during 1995 due to increased demand for
its motor and distribution wire products. Communication wire sales have
also improved substantially in 1995 over the first nine months of 1994 due
to higher sales volumes and copper prices and to strengthening product
prices. The Company believes that communication wire pricing is
strengthening due to sharply higher demand for copper communication wire
products coupled with a decline in industry manufacturing capacities. The
Company cannot, however, provide assurances that such favorable market
conditions will continue into 1996. Demand for the Company's automotive
wire products improved over the comparable period in 1994 reflecting
increased sales to UTA and to other domestic manufacturers of automobile
wire harnesses. Building wire sales for the first nine months of 1995
have increased over the first nine months of 1994 due to significantly
15
higher copper prices. However, building wire product pricing (without
regard to copper costs) have declined materially and, to a lesser extent,
sales volumes due to very competitive market conditions caused primarily
by excess industry capacity. It is uncertain whether the competitive
market conditions currently present will continue into 1996.
Cost of goods sold for the first nine months of 1995 was 22.3% 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 85.9% and 83.7% during the first nine months 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 nine months of 1995
were 4.6% above the comparable 1994 period, due primarily to higher sales
commissions related to increased sales.
Interest expense during the first nine months of 1995 was $24.5 million
or $5.9 million higher than the same period in 1994 reflecting additional
borrowings under the Company s new credit facilities to provide funds to
Holdings to effect the Holdings Debenture Redemption on May 15, 1995. See
Liquidity, Capital Resources and Financial Condition.
Income tax expense was 43.5% of pretax income during the first nine
months of 1995 compared with 43.3% 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 $16.4 million for the first nine
months of 1995 compared to net income of $22.9 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.
Liquidity, Capital Resources and Financial Condition
The Company's financial position at September 30, 1995 was highly
leveraged. The Company's aggregate notes payable to banks plus long-term
debt was $431.8 million and its stockholders' equity was $111.5 million.
The resulting ratio of debt to stockholders' equity of approximately 3.9
to 1 compares to a ratio of 0.6 to 1 at December 31, 1994 reflecting
additional borrowings under the Company's new credit facilities to effect
the Redemption of the Holdings Debentures on May 15, 1995 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
16
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 the remainder of 1995 and for 1996.
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.
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
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floating rates of interest at bank prime plus 2.75% or LIBOR plus 3.75%.
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 provided by operating activities through the first nine months
of 1995 was $38.1 million, compared to $23.5 million in the same period in
1994. The increase in cash provided by operating activities was primarily
attributable to a decline in inventories (net of the acquisition of
Brownell Electro Inc.'s ("Brownell") inventories as detailed in the
immediately following paragraph) related to lower building wire sales and
a change in inventory mix, reduced growth in accounts receivable and a
higher level of accounts payable and accrued liabilities as of September
30, 1995. Partially offsetting the increase in cash provided by operating
activities was the 1995 repayment of an intercompany liability with
Holdings, which was utilized by Holdings to fund part of its Redemption of
the Holdings Debentures as discussed above.
Capital expenditures of $18.1 million in the first nine months of 1995
were essentially unchanged from the comparable period in 1994. The
Company expects to make capital expenditures in 1995 approximating 1994
expenditure levels to reduce costs, complete modernization projects,
expand capacity and ensure continued compliance with regulatory
provisions. At September 30, 1995, approximately $7.3 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. Also, on September 29, 1995, the
Company completed its acquisition of certain assets of Brownell from
Avnet, Inc. Brownell, a distributor of magnet wire, electrical
insulation, motor repair parts, electric motors and pump seals, became
18
part of the Company's distribution operation within the Magnet Wire and
Insulation Sector. The acquisition consisted primarily of inventory and
some fixed assets which totalled approximately $24.9 million, subject to
final inventory reconciliations, and was financed from proceeds received
under the Company's Revolving Credit Agreement. Future cash requirements
of this operation are expected to be satisfied through the Company's
traditional sources of liquidity as previously discussed.
In the first nine months of 1995, average borrowings under the Company's
revolving credit facilities were $76.1 million compared to average
borrowings of $3.1 million in the first nine months 1994. The higher
level of revolving credit facility debt was attributable to additional
borrowings to effect the Holdings Debenture Redemption on May 15, 1995, as
discussed above.
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 traditional 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 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
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
19
onerous than those presently existing. At September 30, 1995, Holdings
had outstanding 1,960,272 shares of Series A Preferred Stock with an
accreted value of $46.8 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 Senior Note
Indenture restrict payments 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.
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 gross profits within the building wire
product line because such changes affect raw material costs more quickly
than those changes can be reflected in the pricing of building wire
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.
20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Item Exhibit Index
---- -------------
None
(b) Reports on Form 8-K:
None
21
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)
November 10, 1995 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
22