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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 March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from______ to _______
Commission file number: 333-17305
International Knife & Saw, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0697252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1299 Cox Avenue
Erlanger, Kentucky 41018
(Address of principal executive offices)
(606) 371-0333
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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.
Yes |X| No __
As of April 30, 1998, there were 481,971 shares of the registrant's common
stock, no par value, outstanding, all of which were owned by an affiliate of the
registrant.
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1
International Knife & Saw, Inc. and Subsidiaries
Index
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Change in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
(a) Exhibits 14
(b) Reports on Form 8-K 14
Signatures 15
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
(in thousands)
Mar. 31, Dec. 31,
1998 1997
------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,976 $ 2,349
Accounts receivable, trade, less allowances for
doubtful accounts of $1,558 and $1,480 25,471 24,253
Inventories 29,684 29,335
Other current assets 3,529 3,738
---------------------------
Total current assets 61,660 59,675
Other assets:
Goodwill 12,191 12,087
Debt issuance costs 3,553 3,670
Other noncurrent assets 2,235 2,356
---------------------------
17,979 18,113
Property, plant and equipment-net 38,842 37,486
---------------------------
Total assets $ 118,481 $ 115,274
===========================
See accompanying notes.
3
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
(in thousands)
Mar. 31, Dec. 31,
1998 1997
------------------------------
Liabilities and Shareholder's deficit
Current liabilities:
Notes payable $ 4,084 $ 5,683
Current portion of long-term debt 2,395 2,218
Accounts payable 10,671 9,707
Accrued liabilities 12,949 8,596
Due to parent 595 561
-----------------------------
Total current liabilities 30,694 26,765
Long-term debt, less current portion 101,919 102,314
Other liabilities 3,361 3,415
-----------------------------
Total liabilities 135,974 132,494
Minority interest 2,410 2,387
Shareholder's deficit:
Common stock, no par value - authorized - 580,000 shares;
Issued - 526,904 shares; outstanding - 481,971 shares 5 5
Additional paid-in capital 10,153 10,153
Retained deficit (23,444) (24,098)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustment (3,185) (2,235)
Treasury stock, at cost (3,432) (3,432)
------------------------------
Total shareholder's deficit (19,903) (19,607)
------------------------------
Total liabilities and shareholder's deficit $ 118,481 $ 115,274
==============================
See accompanying notes.
4
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Statements of Income
(Unaudited)
(in thousands, except per
share amounts)
Three months ended
March 31,
1998 1997
-----------------------------
Net sales $ 38,703 $ 30,508
Cost of sales 27,105 20,894
---------------------------
Gross Profit 11,598 9,614
Selling, general and administrative
expenses 7,412 5,850
--------------------------
Operating income 4,186 3,764
Other expenses (income):
Interest income (5) (315)
Interest expense 2,990 3,125
Minority interest 23 (6)
----------------------------
3,008 2,804
---------------------------
Income before income taxes 1,178 960
Provision for income taxes ---------------------------
Net income 654 522
===========================
Net income per common share $ 1.36 $ 1.08
See accompanying notes.
5
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
Three months ended
March 31,
1998 1997
----------------------------
Operating activities
Net income $ 654 $ 522
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,474 1,268
Loss (gain) on sale of property, plant and equipment 15 (16)
Minority interest in income (loss) of subsidiary 23 (6)
Changes in operating assets and liabilities net of effects
from purchases of operations:
Accounts receivable (1,157) (1,925)
Inventories (534) (571)
Accounts payable (466) 396
Accrued liabilities 4,376 2,992
Other 595 100
---------- -----------
Net cash provided by operating activities 4,980 2,760
Investing activities
Purchases of operations, net of cash acquired (410) -
Purchases of property, plant and equipment (2,244) (629)
Proceeds from sale of property, plant and equipment 2 17
Decrease in notes receivables and other assets 74 122
----------------------------
Net cash used in investing activities (2,578) (490)
Financing activities
Increase (decrease) in amounts due to parent 34 (1,830)
Increase in notes payable and long-term debt 1,511 234
Repayment of notes payable, lease obligations and long-term debt (3,307) (346)
Cash received from investment - 10
--------------------------
Net cash used in financing activities (1,762) (1,932)
Effect of exchange rate changes on cash and cash equivalents (13) (148)
--------------------------
Increase in cash and cash equivalents 627 190
Cash and cash equivalents at beginning of period 2,349 11,701
-------------------------
Cash and cash equivalents at end of period $ 2,976 $ 11,891
=========================
See accompanying notes.
6
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(in thousands)
1. Basis of Presentation
The unaudited interim consolidated condensed financial statements contain all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of the management of International Knife & Saw, Inc. and its
consolidated subsidiaries, ("the Company"), necessary to present fairly the
consolidated financial position and consolidated results of operations and cash
flows of the Company. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year.
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholder's
equity. Statement 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in shareholder's equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130. During the
first quarter of 1998 and 1997, total comprehensive losses amounted to $296 and
$870, including $950 and $1,392 of other comprehensive losses related to foreign
currency translation adjustments, net of tax benefits of $761 and $1,168,
respectively.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 1997. The consolidated condensed Balance Sheet at December 31, 1997 has been
derived from the audited consolidated financial statements at that date.
2. Acquisitions
In February, 1998, the Company completed the acquisitions of the Atlanta, GA
division of K.S.W. Corporation and Sheridan Saw Works, Sheridan, OR for
approximately $400 in cash, post closing contingent payments of $100 for
achieving certain annualized earnings levels and a $100 promissory note to one
of the sellers, subject to post-closing adjustments. These service center
acquisitions were financed from available cash balances. The above acquisitions
generate annual sales of approximately $500 and were accounted for by the
purchase method. Goodwill totaled $300 on these acquisitions.
The consolidated financial statements include the results of operations
generated by and financial position of the above acquisitions from the dates of
acquisition.
3. Foreign Currency Risk
The Company's operating results are subject to fluctuations in foreign currency
exchange rates as well as the currency translation of its foreign operations
into U.S. dollars. The Company manufactures products in the U.S., Germany,
Canada and China and exports products to more than 75 countries. The Company's
7
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(in thousands)
3. Foreign Currency Risk (continued)
foreign sales, the majority of which occur in European countries, are subject to
exchange rate volatility. The Company has not historically hedged its foreign
currency risk.
4. Notes Payable and Long-Term Debt
Mar. 31, Dec. 31,
1998 1997
------------------------------------
Notes payable:
Notes payable on demand in Deutsche Marks to German
banks, issued under revolving credit agreements, interest
payable quarterly $ 1,534 $ 1,140
Notes payable on demand in Chinese Renminbi to Chinese
Banks, issued under revolving credit agreements, interest
payable monthly 2,375 2,468
Notes payable on demand in U.S. Dollars to a German bank,
Issued under revolving credit agreements, interest payable
Quarterly - 2,000
Other 175 75
-------------------------------
$ 4,084 $ 5,683
===============================
Long-term debt:
11-3/8% Senior Subordinated Notes due 2006 $ 90,000 $ 90,000
Notes payable in Deutsche Marks to a German bank 10,122 10,371
Notes payable in Chinese Renminbi to Chinese banks 1,820 1,777
Capitalized lease obligations in U.S. dollars to a U.S. bank 939 950
Promissory note payable in Deutsche Marks to a former
shareholder of the Rolf Meyer Company 1,433 1,434
------------------------------
104,314 104,532
Less current portion 2,395 2,218
------------------------------
$ 101,919 $ 102,314
==============================
8
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
4. Notes Payable and Long-Term Debt (continued)
At March 31, 1998, the Company had revolving credit facilities of $20,000 (all
unused), DM 7,500 (all used) and DM 8,500 (DM 3,342 unused). A facility fee of
0.25% per annum is charged on the U.S. dollar facility.
5. Income Taxes
IKS Corporation, of which the Company is a wholly-owned subsidiary, files a
consolidated Federal income tax return which includes the Company. The Company's
provision for income taxes includes U.S. federal, state, and local income taxes
as well as non-U.S. income taxes in certain jurisdictions. The current and
deferred tax expense and benefit for the Company are recorded as if it filed on
a stand-alone basis. All participants in the consolidated income tax return are
separately liable for the full amount of the taxes, including penalties and
interest, if any, which may be assessed against the consolidated group. The
current provision for United States income taxes is recorded to the intercompany
account with IKS Corporation.
6. Inventories
Mar. 31, Dec. 31,
1998 1997
---------------------------------
Finished goods $ 18,843 $ 18,118
Work in process 3,809 4,036
Raw materials and supplies 7,032 7,181
---------------------------------
$ 29,684 $ 29,335
=================================
7. Organization
The Company's operations are principally in North America representing 73% of
net sales for the quarter ended March 31, 1998.
9
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited)
(in thousands)
7. Organization (continued)
The following table summarizes the Company's North American operations and other
international operations.
Three months ended
March 31,
--------------------------------
1998 1997
-------------- --------------
North American Operations
Net sales - Customers $ 28,206 $ 22,075
Interarea transfers 36 156
------------- -----------
Total net sales $ 28,242 $ 22,231
Operating income 2,942 3,119
Other International Operations
Net sales - Customers $ 10,497 $ 8,433
Interarea transfers 2,019 1,642
-------------- -----------
Total net sales $ 12,516 $ 10,075
Operating income 1,244 716
Eliminations
Net sales $ (2,055) $ (1,798)
Operating income - (5)
Consolidated
Net sales $ 38,703 $ 30,508
Operating income 4,186 3,830
10
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward looking statements. Certain matters discussed in
this filing could be characterized as forward looking statements, such as
statements relating to plans for future expansion, other capital spending,
financing sources and effects of regulation and competition. Such forward
looking statements involve important risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward looking
statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included in the Company's
Form 10-K as of and for each of the three years in the period ended December 31,
1997.
General
The Company is a global leader in the manufacturing, servicing and
marketing of industrial and commercial machine knives and saws. Together with
its predecessor, the Company has been manufacturing knives and saws for nearly
100 years, beginning in Europe and expanding its presence to the United States
in the 1960s. The Company operates on an international basis with facilities in
North America, Europe, Asia and Latin America and products sold in over 75
countries. The Company offers a broad range of products, used for various
applications in numerous markets.
Presence outside the U.S.
The Company's North American operations account for 73% of its net
sales and 76% of its operating income. Its other international operations
account for the remainder and are located primarily in Europe, 22% of first
quarter sales, and to a lesser extent in Asia.
The Company's operating results are subject to fluctuations in foreign
currency exchange rates as well as the currency translation of its foreign
operations into U.S. dollars. The Company manufactures products in the U.S.,
Germany, Canada and China and exports products to more than 75 countries. The
Company's foreign sales, the majority of which occur in European countries, are
subject to exchange rate volatility. In addition, the Company consolidates
German, Canadian and Asian operations and changes in exchange rates relative to
the U.S. dollar have impacted financial results. As a result, a decline in the
value of the dollar relative to these other currencies can have a favorable
effect on the profitability of the Company and an increase in the value of the
dollar relative to these other currencies can have a negative effect on the
profitability of the Company. Comparing exchange rates for the first quarter of
1998 to the first quarter of 1997, the weaker German Mark and Indonesian Rupiah
had the translation effect of decreasing first quarter 1998 sales by $.8 million
and $.2 million, respectively, with minimal effect on net earnings. In addition,
in the first quarter of 1998 there was a decrease in shareholder's equity from
December 31, 1997 due to a $1.0 million change in foreign currency translation
adjustment. The Company has not historically hedged its foreign currency risk.
Subsequent to December 31, 1997, the Indonesian Rupiah has
significantly declined in value relative to the U.S. dollar. At December 31,
1997, the exchange rate was 5,444 Rupiah to one U.S. dollar. At March 31, 1998
the rate had increased to 8,376 Rupiah to one U.S. dollar and by April 29, 1998
the rate was 8,166 Rupiah to one U.S. dollar. In the first quarter of 1998, the
Company limited its currency exposure by billing the majority of its sales to
Indonesian customers in U.S. dollars.
Results of Operations
As used in the following discussion of the Company's results of
operations, (i) the term "gross profit" means the dollar difference between the
Company's net sales and cost of sales and (ii) the term "gross margin" means the
Company's gross profit divided by its net sales.
11
First Quarter ended March 31, 1998 Compared to First Quarter ended March 31,
1997
Net Sales: Net sales increased 26.9% to $38.7 million for the first
quarter of 1998 from $30.5 million for the first quarter of 1997, primarily
attributable to the 1997 acquisitions and partially offset by softness in the
wood industry caused by wet weather, pricing pressures from Asian and domestic
competitors and a reduction in production capacity resulting from decreased
demand in the Asian, western U.S. and Canadian markets. The Company experienced
sales improvements in its North American operations (27.6% to $28.2 million) for
the first quarter of 1998 compared to the same period in 1997, primarily
attributable to the factors noted above. The Company experienced sales
improvements (25.0% to $10.5 million) in its other operations for the first
quarter of 1998 compared to the same period in 1997. These improvements are
attributable to increased sales from the second quarter, 1997 Rolf Meyer
acquisition partially offset by the negative translation effects of a weaker
German Mark and Indonesian Rupiah. The effects of a weaker German Mark and
Indonesian Rupiah in the first quarter of 1998 compared to the same period in
1997 resulted in a translation effect that reduced first quarter 1998 sales by
$.8 and $.2 million, respectively.
Gross Profit: Gross profit increased 20.8% to $11.6 for the first
quarter of 1998 up from $9.6 million for the same period in 1997, primarily
attributable to the 1997 acquisitions offset by softness in the wood industry
caused by wet weather, pricing pressures from Asian and domestic competitors and
a reduction in production capacity resulting from decreased demand in the Asian,
western U.S. and Canadian markets. Gross margin decreased to 30.0% for the first
quarter of 1998 compared to 31.5% for the same period in 1997 primarily
attributable to the 1997 acquisitions and softness in the wood industry caused
by the factors noted above. The Company experienced gross profit improvements in
its North American operations (19.2% to $8.7 million) for the first quarter of
1998 compared to the same period in 1997 primarily attributable to the factors
noted above. The Company experienced gross profit improvements (26.1% to $2.9
million) in its other operations for the first quarter of 1998 compared to the
same period in 1997, primarily attributable to the Rolf Meyer acquisition.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $7.4 million for the first quarter of 1998 compared
to $5.9 million for the same period in 1997 but stayed constant at 19.2% of
sales for the respective periods.
Interest Expense, net: Net interest expense increased to $3.0 million
for the first quarter of 1998 from $2.8 million for the same period in 1997 due
to higher average debt outstanding in the first quarter of 1998 compared to the
first quarter of 1997.
Income Taxes: The Company's effective tax rate stayed relatively
constant at 44.5% for the first quarter of 1998 compared to 45.6% for the same
period in 1997.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working
capital needs, to meet required debt and interest payments, and to complete
planned maintenance and expansion expenditures. The Company anticipates that its
operating cash flow, together with available borrowings of $20.0 million and DM
3,342 under existing credit facilities, will be sufficient to meet its capital
requirements. As of March 31, 1998, the Company's total debt and shareholder's
deficit was $108.4 million and $19.9 million, respectively.
Net cash flow provided by operations aggregated $5.0 million for the
first quarter of 1998 compared to $2.8 million provided for the same period in
1997. The increase was primarily attributable to a $1.8 million decrease in
working capital needs.
12
Cash used in investing activities for the first quarter of 1998 was
$2.6 million as compared to $.5 million for the same period in 1997. The
increased use of cash is primarily due to a $1.6 million increase in fixed asset
purchases and the first quarter 1998 acquisitions.
Cash used by financing activities for the first quarter of 1998 was
$1.8 million as compared to a $1.9 million used for the same period in 1997. The
cash used by financing activities in the first quarter of 1998 primarily
represents a $1.8 million net decrease in debt borrowings while the cash used by
financing activities for the first quarter of 1997 primarily represents a
decrease in amounts due to parent of $1.8 million.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in legal proceedings arising
in the normal course of business. The Company believes there is no outstanding
litigation which could have a material impact on its financial position or
results of operations.
Item 2. Change in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description
------- ---------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL KNIFE & SAW, INC.
By: /s/ John E. Halloran
----------------------------------------
John E. Halloran
President and Chief Executive Officer
By: /s/ William M. Schult
----------------------------------------
William M. Schult
Vice President-Finance, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
May 13, 1998
15
EXHIBIT INDEX
Exhibit
No. Description
------- -----------------------------------
27 Financial Data Schedule
16