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, 1996
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, 1996
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$.01 Par Value 100
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . . . 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
In Thousands of Dollars (Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 3,874 $ 3,157
Accounts receivable (net of allowance of
$4,409 and $3,930) . . . . . . . . . . . . . . . . . 169,302 154,584
Inventories . . . . . . . . . . . . . . . . . . . . . 172,599 166,076
Other current assets . . . . . . . . . . . . . . . . . 17,210 8,988
-------- --------
Total current assets . . . . . . . . . . . . . 362,985 332,805
Property, plant and equipment, (net of accumulated
depreciation of $105,546 and $84,341) . . . . . . . . 264,542 270,546
Excess of cost over net assets acquired (net of
accumulated amortization of $16,343 and $13,221) . . 127,665 129,943
Other intangible assets and deferred costs (net of
accumulated amortization of $4,846 and $3,102) . . . 7,443 9,187
Other assets . . . . . . . . . . . . . . . . . . . . . 3,525 1,987
-------- --------
$766,160 $744,468
======== ========
See Notes to Consolidated Financial Statements
3
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31,
1996 1995
In Thousands of Dollars, Except Per Share Data (Unaudited)
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . $ 10,536 $ 11,760
Current portion of long-term debt . . . . . . . . . . 11,576 24,734
Accounts payable . . . . . . . . . . . . . . . . . . . 51,847 66,797
Accrued liabilities . . . . . . . . . . . . . . . . . 54,927 45,864
Deferred income taxes . . . . . . . . . . . . . . . . 16,377 15,345
Due to Holdings . . . . . . . . . . . . . . . . . . . 3,365 384
-------- --------
Total current liabilities . . . . . . . . . . . 148,628 164,884
Long-term debt . . . . . . . . . . . . . . . . . . . . 401,334 388,016
Deferred income taxes . . . . . . . . . . . . . . . . 63,114 66,809
Other long-term liabilities . . . . . . . . . . . . . 12,812 10,081
Stockholder's equity:
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding; plus
additional paid in capital . . . . . . . . . . . . . 104,036 104,036
Retained earnings . . . . . . . . . . . . . . . . . . 36,236 10,642
-------- --------
Total stockholder's equity . . . . . . . . . . 140,272 114,678
-------- --------
$766,160 $744,468
======== ========
See Notes to Consolidated Financial Statements
4
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
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In Thousands of Dollars 1996 1995 1996 1995
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REVENUES:
Net sales . . . . . . . . . . . . . . . . . $328,777 $308,288 $974,720 $886,471
Interest income . . . . . . . . . . . . . 7 10 55 390
Other income . . . . . . . . . . . . . . . 305 (91) 870 1,238
-------- -------- -------- --------
329,089 308,207 975,645 888,099
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . 269,813 263,523 813,106 761,682
Selling and administrative . . . . . . . . 28,881 21,892 86,331 65,175
Interest expense . . . . . . . . . . . . . 9,555 10,284 29,879 24,466
Other expense . . . . . . . . . . . . . . . 819 1,991 1,235 2,551
-------- -------- -------- --------
309,068 297,690 930,551 853,874
-------- -------- -------- --------
Income before income taxes and
extraordinary charge . . . . . . . . . . . . 20,021 10,517 45,094 34,225
Provision for income taxes . . . . . . . . . 8,500 4,400 19,500 14,880
-------- -------- -------- --------
Income before extraordinary charge . . . . . 11,521 6,117 25,594 19,345
Extraordinary charge - repurchase of debt,
net of income tax benefit . . . . . . . . . - - - 2,971
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . $ 11,521 $ 6,117 $ 25,594 $ 16,374
======== ======== ======== ========
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 1996 1995
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OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . $25,594 $ 16,374
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 25,489 24,493
Non cash interest expense . . . . . . . . . . . . . 1,585 1,501
Non cash pension expense . . . . . . . . . . . . . 2,170 1,710
Loss on debt retirement . . . . . . . . . . . . . . - 4,951
Provision for losses on accounts receivable . . . . 958 372
Benefit for deferred income taxes . . . . . . . . . (2,664) (337)
Loss on disposal of property, plant and equipment 1,045 2,093
Changes in operating assets and liabilities:
Increase in accounts receivable . . . . . . . . . (15,572) (25,878)
(Increase) decrease in inventories . . . . . . . . (1,813) 14,354
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . (5,349) 21,046
Net (increase) decrease in other assets and
liabilities . . . . . . . . . . . . . . . . . . . (9,377) 10,591
Increase (decrease) in due to Holdings . . . . . 2,980 (33,128)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . 25,046 38,142
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (15,677) (18,069)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 405 1,151
Acquisitions and other investments . . . . . . . . . (7,993) (25,392)
Issuance of equity interest in a subsidiary . . . . - 1,063
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (23,265) (41,247)
-------- --------
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 1996 1995
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FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . 110,800 374,040
Repayment of long-term debt . . . . . . . . . . . . (110,640) (157,665)
Proceeds from notes payable to banks . . . . . . . . 390,259 72,345
Repayment of notes payable to banks . . . . . . . . (391,483) (56,945)
Dividend paid to Holdings . . . . . . . . . . . . . - (238,748)
Debt issuance costs . . . . . . . . . . . . . . . . - (4,437)
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES . . . . . . . (1,064) (11,410)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 717 (14,515)
Cash and cash equivalents at beginning of period . . 3,157 16,894
-------- --------
Cash and cash equivalents at end of period . . . . . $ 3,874 $ 2,379
======== ========
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, 1996, and the consolidated results of operations for the
three month and nine month periods ended September 30, 1996 and 1995,
respectively, and cash flows of the Company for the nine month periods
ended September 30, 1996 and 1995, 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, 1995.
NOTE 2 INVENTORIES
The components of inventories are as follows:
September 30, December 31,
1996 1995
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Finished goods . . . . . . . . . . . . . $128,006 $146,821
Raw materials and work in process . . . . 43,955 52,366
-------- --------
171,961 199,187
LIFO reserve . . . . . . . . . . . . . . 638 (33,111)
-------- --------
$172,599 $166,076
======== ========
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 $166,519 and $161,449 at
September 30, 1996 and December 31, 1995, 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,
1996 1995
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10% Senior notes . . . . . . . . . . . $200,000 $200,000
Revolving loan . . . . . . . . . . . . 157,000 135,000
Term loan . . . . . . . . . . . . . . . 34,035 54,000
Lease obligation . . . . . . . . . . . 21,875 23,750
-------- --------
412,910 412,750
Less: current portion . . . . . . . . . 11,576 24,734
-------- --------
$401,334 $388,016
======== ========
Bank Financing
In April 1995, in connection with the redemption (the "Redemption") by
BCP/Essex Holdings Inc. ("Holdings"), holding company of the Company, 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 ($238,748) and
repayment of a portion of an intercompany liability ($34,102) totaling
$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
9
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
15, 1995.
The Revolving Credit Agreement provides for up to $260,000 in revolving
loans, subject to specified percentages of eligible assets, reduced by
outstanding borrowings under the Company's Canadian credit agreement and
unsecured bank lines of credit ($4,476 and $6,060, respectively, at
September 30, 1996), as described below. The Revolving Credit Agreement
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%, in 0.25% increments, 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. See Note 5 for further information.
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, subject to the loan's excess cash provision,
commencing August 15, 1995. The Term Loan requires 50% of excess cash, as
defined, to be applied against the outstanding term loan balance. The
excess cash calculation for the year ended December 31, 1995 required the
Company to repay $12,427 of the term loan. Such payment was made in March
1996. After the 1996 excess cash repayment, principal payments will be
made in 17 equal quarterly installments of $2,269. Amounts repaid with
respect to the excess cash provision may not be reborrowed.
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.
10
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
On May 30, 1996, a subsidiary of the Company entered into a $12,000
(Canadian dollar) credit agreement by and between the subsidiary and a
Canadian chartered bank (the "Canadian Credit Agreement"). Borrowings are
restricted to meeting the working capital requirements of the subsidiary
and are secured by the subsidiary's accounts receivable. As of September
30, 1996, $4,476 was outstanding under the Canadian Credit Agreement and
denoted as notes payable to banks in the Consolidated Balance Sheets. The
Canadian Credit Agreement bears interest at rates similar to the Revolving
Credit Agreement and terminates one year from its effective date of May
30, 1996, although it may be extended for successive one year periods upon
the mutual consent of the subsidiary and lending bank.
In addition, the Company also has uncommitted bank lines of credit which
provide for unsecured borrowings for working capital of up to $25,000, of
which $6,060 and $11,760 were outstanding at September 30, 1996 and
December 31, 1995, respectively. Amounts outstanding under these lines of
credit are also denoted as notes payable to banks in the Consolidated
Balance Sheets and bear interest at rates subject to agreement between the
Company and the lending banks. At September 30, 1996 and December 31,
1995, such rates of interest averaged 6.7%.
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).
11
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
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 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.
NOTE 5 SUBSEQUENT EVENTS
On October 31, 1996, the Company acquired substantially all of the assets
of Triangle Wire and Cable, Inc. of Lincoln, Rhode Island ("Triangle"),
related to the sales, marketing, manufacturing and distribution of
electrical wire and cable and the assets of its Canadian affiliate, FLI
Royal Wire and Cable. The acquisition included four manufacturing
facilities which produce a broad range of building and industrial wire and
cable. The total purchase price for the net assets of Triangle
12
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
approximated $75,000, subject to post closing adjustment. The acquisition
was financed from proceeds received under the Company's new revolving
credit agreement as detailed in the following paragraph.
In connection with the Triangle acquisition, the Company terminated the
Revolving Credit Agreement and entered into a new revolving credit
agreement, dated as of October 31, 1996, by and among the Company,
Holdings, the Lenders named therein, and The Chase Manhattan Bank, as
administrative agent (the "New Revolving Credit Agreement"). The New
Revolving Credit Agreement provides for up to $370,000 in revolving loans
and bears terms and conditions similar to the terminated Essex Revolving
Credit Agreement. The Company will recognize an extraordinary charge of
approximately $1,183 ($1,971 before applicable income tax benefit) in the
fourth quarter 1996 for the write-off of unamortized deferred debt expense
associated with the termination of the Revolving Credit Agreement.
13
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Introduction
Essex Group, Inc. (the "Company"), founded in Detroit, Michigan in 1930,
is engaged in one principal line of business, the development, production
and marketing of electrical wire and cable and electrical insulation
products. Among the Company's products are building wire for residential
and commercial applications; magnet wire for electromechanical devices
such as motors, transformers and electrical controls; voice and data
communication wire; automotive wire and specialty wiring assemblies for
automobiles and trucks; industrial wire for applications in appliances,
construction and recreational vehicles and insulation products including
mica paper and mica-based composites.
In October 1992, MS/Essex Holdings Inc. ("Holdings") was acquired (the
"Acquisition") by merger (the "Merger") of B E Acquisition Corporation
("BE") with and into Holdings with Holdings surviving under the name
BCP/Essex Holdings Inc. ("Holdings"). BE was a newly organized Delaware
corporation formed for the purpose of effecting the Acquisition.
Shareholders of BE included Bessemer Holdings, L.P. (an affiliate and
successor in interest to Bessemer Capital Partners, L.P. ["BCP"])
("BHLP"), 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. As a result of the Merger, the stockholders of BE became
stockholders of Holdings. Holdings is the holding company of the Company.
The principal asset of Holdings is all the outstanding common stock of the
Company. Holdings acquired the Company from United Technologies
Corporation ("UTC") in February 1988.
Results of Operations
Three Month Period Ended September 30, 1996
Net sales for the third quarter 1996 were $328.8 million or 6.6% higher
than the comparable period in 1995, resulting primarily from improved
sales volumes and increased sales attributable to the distribution
operations acquired in September 1995, partially offset by lower copper
prices, the Company's principal raw material. During the third quarter
1996, the average price of copper on the New York Commodity Exchange, Inc.
("COMEX") was 33.0% lower than the comparable period in 1995. Copper
costs are generally passed on to customers through product pricing. Third
quarter 1996 sales volumes were at record levels with respect to
historical third quarter operating performance and exceeded the third
quarter 1995 by 16.5%. Sales volumes improved due primarily to increased
demand for the Company's building wire and magnet wire products. Building
wire sales for the third quarter 1996 increased as compared to the third
quarter 1995 due primarily to higher sales volumes and an increase in
product pricing (without regard to copper costs), partially offset by
decreased copper prices. Although the building wire market has been
experiencing very competitive conditions due primarily to excess industry
capacity, product pricing improved during the third quarter 1996. The
Company believes this improvement to be the result of higher end user
demand coupled with low distributor inventories. Sales of magnet wire
during the third quarter 1996 improved from the comparable 1995 period due
to improved sales volumes partially offset by declining copper prices.
Improved sales volumes were attributable to increased demand for magnet
14
wire in the transformer market as well as increased sales to distributors.
Voice and data communication wire sales for the third quarter 1996
declined from the comparable period in 1995 due to lower copper prices,
decreased sales to regional Bell operating companies and reduced export
sales. Continued strong growth in premise wire sales, however, have
partially offset those unfavorable sales conditions. Automotive wire
sales in the third quarter 1996 were below the comparable 1995 period due
primarily to the decline in copper prices as sales volumes were
essentially unchanged.
Cost of goods sold for the third quarter 1996 was 2.4% higher than the
same period in 1995 due primarily to higher sales volumes and increased
sales attributable to the distribution operations acquired in September
1995, partially offset by lower copper prices. The Company's cost of
goods sold as a percentage of net sales was 82.1% and 85.5% in the third
quarter 1996 and 1995, respectively. The cost of goods sold percentage
decrease resulted primarily from the sharp decline in copper prices,
improved building wire product prices (without regard to copper costs), a
change in product mix associated with the distribution operations acquired
in September 1995 and higher manufacturing volumes.
Selling and administrative expenses for the third quarter 1996 were 31.9%
above the comparable 1995 period, due primarily to increased overhead
expenses related to the distribution operations acquired in September
1995.
Interest expense in the third quarter 1996 was $0.7 million lower than
the same period in 1995 due primarily to lower interest rates.
Income tax expense was 42.5% of pretax income in the third quarter 1996
compared with 41.8% for the same period in 1995. 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.
Nine Month Period Ended September 30, 1996
Net sales for the first nine months of 1996 were $974.7 million or 10.0%
higher than the comparable period in 1995, resulting primarily from
improved sales volumes and increased sales attributable to the
distribution operations acquired in September 1995, partially offset by
lower copper prices, the Company's principal raw material. During the
first nine months of 1996, the average COMEX price of copper was 20.2%
lower than the comparable period in 1995. Copper costs are generally
passed on to customers through product pricing. Sales volumes for the
first nine months of 1996 were at record levels with respect to historical
first nine months operating performance and exceeded the comparable 1995
period by 13.4%. Improved sales volumes resulted primarily from increased
demand for the Company's building wire and magnet wire products. Building
wire sales for the first nine months of 1996 increased as compared to the
first nine months of 1995 due primarily to an increase in sales volumes,
partially offset by declining copper prices. Building wire market demand
has exhibited continued growth during 1996 on the strength of new non-
residential construction and sustained expansion of the repair and
remodeling segment of the market. The Company believes this continued
growth in demand coupled with low distributor inventories, has led to an
improvement in the depressed market conditions of the most recent quarters
resulting in improved product pricing during the third quarter 1996. The
Company cannot, however, provide assurances that such favorable market
15
conditions will continue into 1997. Sales of magnet wire during the first
nine months of 1996 improved from the comparable 1995 period due to
improved sales volumes partially offset by declining copper prices.
Improved sales volumes were attributable to increased demand for magnet
wire in the electric motor and transformer markets as well as increased
sales to distributors. Communication wire sales for the first nine months
of 1996 are below the comparable period in 1995 due to the decrease in
copper prices partially offset by improved product pricing, increased
domestic sales volume and sales of premise wire products, which are up 18%
as compared to year-to-date 1995, reflecting continued strong growth in
this segment of the communication wire market. Automotive wire sales in
the first nine months of 1996 were below the comparable 1995 period due to
the decrease in copper prices partially offset by improved sales volumes.
Cost of goods sold for the first nine months of 1996 was 6.8% higher than
the same period in 1995 due primarily to higher sales volumes and
increased sales attributable to the distribution operations acquired in
September 1995, partially offset by lower copper prices. The Company's
cost of goods sold as a percentage of net sales was 83.4% and 85.9% in the
first nine months of 1996 and 1995, respectively. The cost of goods sold
percentage decrease resulted primarily from the marked decline in copper
costs, improved building wire and communications product pricing (without
regard to copper costs), a change in product mix associated with the
distribution operations acquired in September 1995 and higher
manufacturing volumes.
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Selling and administrative expenses for the first nine months of 1996
were 32.5% above the comparable 1995 period, due primarily to increased
overhead expenses attributable to the distribution operations acquired in
September 1995.
Interest expense in the first nine months of 1996 was $5.4 million higher
than the same period in 1995 due primarily to additional borrowings under
the Company's new credit facilities to effect the May 1995 redemption (the
"Redemption") of all of Holdings' outstanding Senior Discount Debentures
due 2004 (the "Debentures"). See "Liquidity, Capital Resources and
Financial Condition" under this caption.
Income tax expense was 43.2% of pretax income in the first nine months of
1996 compared with 43.5% for the same period in 1995. 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 $25.6 million for the first nine
months of 1996 compared to net income of $16.4 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. The former revolving credit agreement
was terminated in connection with the Redemption of Holding's Debentures.
Liquidity, Capital Resources and Financial Condition
The Company's financial position at September 30, 1996 was highly
leveraged. The Company's aggregate notes payable to banks plus long-term
debt totalled $423.4 million and its stockholder's equity was $140.3
million. The Company's ratio of debt to stockholder's equity was
approximately 3.0 to 1 at September 30, 1996 and 3.7 to 1 at December 31,
1995.
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 it 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 the remainder of 1996 and for 1997. As
of September 30, 1996, the Company was in compliance with all covenants
under the agreements governing its outstanding indebtedness.
In April 1995, in connection with the Redemption of all of Holdings'
outstanding 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,
17
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").
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.
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 Debentures, at 100% of their principal amount of $272.9
million, on May 15, 1995.
On October 31, 1996, the Company acquired substantially all of the assets
of Triangle Wire and Cable, Inc. of Lincoln, Rhode Island ("Triangle") and
the assets of its Canadian affiliate, FLI Royal Wire and Cable. See
"Subsequent Event" under this caption for further information. In
connection with the Triangle acquisition, the Company terminated the
revolving credit agreement and entered into a new revolving credit
agreement, dated as of October 31, 1996, by and among the Company,
Holdings, the Lenders named therein, and The Chase Manhattan Bank, as
administrative agent (the "New Revolving Credit Agreement"). The New
Revolving Credit Agreement provides for up to $370.0 million in revolving
loans, subject to specified percentages of eligible assets reduced by
outstanding borrowings under the Company's Canadian credit facility and
unsecured bank lines of credit. The New Revolving Credit Agreement also
provides a $25.0 million letter of credit subfacility. The Company's
ability to borrow under the New Revolving Credit Agreement is restricted
by the financial covenants contained therein as well as those contained in
the Term Loan (together with the New Revolving Credit Agreement, the "New
Credit Facilities") and by 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 New Revolving Credit
Agreement terminates five years from its effective date of October 31,
1996. The New 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 1.50%, in 0.25% increments, if certain
specified financial conditions are achieved. Commitment fees during the
revolving loan period are .25%, .375% or .5% of the average daily unused
portion of the available credit based upon certain specified financial
conditions. Holdings is a party to the New Credit Facilities and has
guaranteed the Company's obligations under the New Revolving Credit
Agreement. Holdings has secured its obligations pursuant to the guarantee
of the New Revolving Credit Agreement by a pledge of all of the
outstanding stock of the Company to the lending banks.
The Term Loan provides for an aggregate $60.0 million in term loans, and
is to be repaid in 20 equal quarterly installments, subject to the loan's
excess cash provision, beginning August 15, 1995 and ending May 15, 2000.
The Term Loan bears floating rates of interest at bank prime plus 2.75% or
LIBOR plus 3.75%. The Term Loan requires 50% of excess cash, as defined,
18
to be applied against the outstanding term loan balance. The excess cash
calculation for the year ended December 31, 1995 required the Company to
repay $12.4 million of the term loan. Such payment was made in March
1996. After the 1996 excess cash repayment, the remaining principal
payments will be made in 17 equal quarterly installments of $2.3 million.
Amounts repaid with respect to the excess cash provision may not be
reborrowed.
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 paid quarterly, with the amount of each of the first 27
payments equal to 2.5% of Lessor's cost of the equipment, and the balance
due at the final payment. The interest component is paid on the unpaid
principal balance and is 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.
On May 30, 1996, a subsidiary of the Company entered into a $12.0 million
(Canadian dollar) credit agreement by and between the subsidiary and a
Canadian chartered bank (the "Canadian Credit Agreement"). Borrowings are
restricted to meeting the working capital requirements of the subsidiary
and are secured by the subsidiary's accounts receivable. As of September
30, 1996, $4.5 million was outstanding under the Canadian Credit Agreement
and denoted as notes payable to banks in the Consolidated Balance Sheets.
The Canadian Credit Agreement bears interest at rates similar to the New
Revolving Credit Agreement and terminates one year from its effective date
of May 30, 1996, although it may be extended for successive one year
periods upon the mutual consent of the subsidiary and lending bank.
The Company also has uncommitted bank lines of credit which provide for
unsecured borrowings for working capital of up to $25.0 million of which
$6.0 million was outstanding at September 30, 1996 and also 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
the lending banks. At September 30, 1996, such rates of interest averaged
6.7%.
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).
The New 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.
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.
Net cash provided by operating activities of the Company through the
first nine months of 1996 was $25.0 million, compared to $38.1 million
19
during the same period in 1995. The decrease in cash provided was due to
a reduction in accounts payable and accrued liabilities, increased
inventory levels to accommodate higher sales volumes, and the collection
in 1995 of a miscellaneous receivable. Partially offsetting the decrease
in cash provided by operating activities was the 1995 repayment of an
intercompany liability with Holdings in the amount of $34.1 million
coupled with reduced growth in accounts receivable attributable to a
marked decline in copper prices.
Capital expenditures of $15.7 million in the first nine months of 1996
were $2.4 million less than the comparable period in 1995. Capital
expenditures for the remainder of 1996 and for 1997 will be used for
modernization projects, to enhance efficiency, expand capacity and ensure
continued compliance with regulatory requirements. At September 30, 1996,
approximately $5.4 million was committed to outside vendors for capital
expenditures. On March 25, 1996, the Company acquired the Canadian
building wire operations of BICC Phillips, Inc. The acquisition consisted
primarily of inventory and equipment and was financed from proceeds
received under the Company's Revolving Credit Agreement. Future cash
requirements of this and the Triangle operations are expected to be
satisfied through the Company's traditional sources of liquidity as
previously discussed.
Regarding long-term liquidity issues, future capital expenditures are
anticipated to be at recent historical levels while the 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 the Sale and Leaseback Agreement.
The Company's operations involve the use, disposal and clean-up of
certain substances regulated under environmental protection laws. The
Company has accrued $0.9 million for environmental remediation and
restoration costs. The accruals were based upon management's best
estimate of the Company's exposure in light of relevant available
information including the allocations and remedies set forth in applicable
consent decrees, third party estimates of remediation costs, the estimated
ability of other potentially responsible parties to pay their
proportionate share of remediation costs, the nature of each site and the
number of participating parties. Subject to the difficulty in estimating
future environmental costs, the Company expects that any sum it may have
to pay in connection with environmental matters in excess of the amounts
recorded or disclosed will not have a material adverse effect on its
financial position, results of operations or cash flows.
Considerations Relating to Holdings' Cash Obligations
Holdings is a holding company with no operations and has virtually no
assets other than its ownership of the outstanding common stock of the
Company. All of such stock is pledged, however, to the lenders under the
New Revolving Credit Agreement. Accordingly, Holdings' ability to meet
its cash obligations is dependent on the Company's ability to pay
dividends, to loan, or otherwise advance or transfer funds to Holdings in
amounts sufficient to service Holdings' obligations.
20
The Company expects that it may make certain cash payments to Holdings
from time to time to the extent cash is available and to the extent it is
permitted under the terms of the New 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
New Revolving Credit Agreement or other sources of funds it may obtain in
the future subject to the extent such payments are permitted under the
terms of the New Credit Facilities and the Senior Note Indenture.
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.
Subsequent Event
On October 31, 1996, the Company acquired substantially all of the assets
of Triangle related to the sales, marketing, manufacturing and
distribution of electrical wire and cable and the assets of its Canadian
affiliate, FLI Royal Wire and Cable. The acquisition included four
manufacturing facilities which produce a broad range of building and
industrial wire and cable. The total purchase price for the net assets of
Triangle approximated $75 million, subject to post closing adjustment.
The acquisition was financed from proceeds received under the Company's
New Revolving Credit Agreement. See "Liquidity, Capital Resources and
Financial Condition" under this caption.
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Item Exhibit Index
---- -------------
10.1 Credit Agreement dated as of October 31, 1996 among
BCP/Essex Holdings Inc., the registrant, the Lenders
named therein and The Chase Manhattan Bank, as
administrative agent.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A Current Report on Form 8-K (Items 5 and 7) was filed on July
12, 1996 to report second quarter 1996 earnings.
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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)
November 13, 1996 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
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