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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 September 30, 1999
[ ] 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 (I.R.S. Employer
of 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 October 31, 1999, there were 481,971 shares of the registrant's common
stock outstanding, all of which were owned by an affiliate of the registrant.
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International Knife & Saw, Inc. and Subsidiaries
Index
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 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 13
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
(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 Balance Sheets
(Unaudited)
September 30, December 31,
1999 1998
-------------------------------------
Assets (in thousands)
Current assets:
Cash and cash equivalents $ 3,093 $ 2,032
Accounts receivable, trade, less allowances for
doubtful accounts of $1,787 and $1,780 27,445 25,595
Inventories 28,255 30,981
Due from parent 1,961 249
Other current assets 2,267 2,964
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Total current assets 63,021 61,821
Other assets:
Goodwill 16,981 18,284
Debt issuance costs 2,853 3,203
Other noncurrent assets 2,333 2,307
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22,167 23,794
Property, plant and equipment-net 47,397 49,360
-------------------------------------
Total assets $ 132,585 $ 134,975
=====================================
See accompanying notes.
3
International Knife & Saw, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1999 1998
---------------------------------------
(in thousands)
Liabilities and shareholder's deficit
Current liabilities:
Notes payable $ 2,678 $ 12,667
Current portion of long-term debt 2,478 2,555
Accounts payable 10,214 9,546
Accrued liabilities 13,488 10,958
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Total current liabilities 28,858 35,726
Long-term debt, less current portion 114,214 107,954
Other liabilities 7,169 7,004
---------------------------------------
Total liabilities 150,241 150,684
Minority interest 2,511 2,384
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 (23,486) (22,508)
Accumulated other comprehensive loss (3,407) (2,311)
Treasury stock, at cost (3,432) (3,432)
---------------------------------------
Total shareholder's deficit (20,167) (18,093)
=======================================
Total liabilities and shareholder's deficit $ 132,585 $ 134,975
=======================================
See accompanying notes.
4
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Quarter ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
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(in thousands, except per share amounts)
Net sales $ 37,473 $ 35,844 $ 113,989 $ 111,881
Cost of sales 26,299 25,242 80,809 78,023
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Gross profit 11,174 10,602 33,180 33,858
Selling, general and administrative expenses 8,478 7,123 25,093 22,015
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Operating income 2,696 3,479 8,087 11,843
Other expenses (income):
Interest income (33) (37) (90) (77)
Interest expense 3,093 3,026 9,404 9,037
Minority interest 75 5 256 28
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3,135 2,994 9,570 8,988
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Income (loss) before income taxes (439) 485 (1,483) 2,855
Income tax (benefit) provision (150) 215 (506) 1,270
----------------------------------------------------------
Net (loss) income $ (289) $ 270 $ (977) $ 1,585
==========================================================
Net income (loss) per common share $ (.60) $ .56 $ (2.03) $ 3.29
See accompanying notes.
5
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
1999 1998
----------------------------
(in thousands)
Operating activities
Net (loss) income $ (977) $ 1,585
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 5,030 4,391
Loss on sale of property, plant and equipment 34 40
Minority interest in income of subsidiary 256 29
Changes in operating assets and liabilities, net of
effects from purchases of operations:
Accounts receivable (2,482) 543
Inventories 1,844 (1,239)
Accounts payable (1,267) 265
Accrued liabilities 5,378 3,607
Other 514 438
----------------------------
Net cash provided by operating activities 8,330 9,659
Investing activities
Purchases of operations, net of cash acquired - (1,288)
Purchases of property, plant and equipment (4,646) (6,290)
Proceeds from sale of property, plant and equipment 428 137
Decrease in notes receivable and other assets 233 42
----------------------------
Net cash used by investing activities (3,985) (7,399)
Financing activities
Decrease in amounts due to parent (1,712) (86)
Increase in notes payable and long-term debt 15,351 7,370
Repayment of notes payable and long-term debt (16,865) (9,000)
Cash received from investees - 4
----------------------------
Net cash used by financing activities (3,226) (1,712)
Effect of exchange rates on cash and cash equivalents (58) 5
----------------------------
Increase in cash and cash equivalents 1,061 553
Cash and cash equivalents at beginning of period 2,032 2,350
----------------------------
Cash and cash equivalents at end of period $ 3,093 $ 2,903
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See accompanying notes.
6
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands)
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 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.
These financial statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the Company's
Form 10-K for the year ended December 31, 1998. The consolidated balance sheet
at December 31, 1998 has been derived from the audited consolidated financial
statements at that date. Certain 1998 amounts have been reclassified to conform
to the current year presentation.
2. Comprehensive Income
The Company includes minimum pension liabilities and foreign currency
translation adjustments in other comprehensive income. For the nine months ended
September 30, 1999 and 1998, total comprehensive (losses) income amounted to
$(2,074) and $1,665, respectively, including $(1,096) and $80 of other
comprehensive (losses) gains related to foreign currency translation
adjustments.
3. Notes Payable and Long -Term Debt
September 30, December 31,
1999 1998
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Notes payable:
Notes payable on demand in German Marks to a German bank,
issued under revolving credit agreements, interest
payable quarterly $ 816 $7,922
Notes payable on demand in Chinese Yuan Renminbi to Chinese
banks, issued under revolving credit agreements, interest
payable monthly 1,791 1,259
Notes payable on demand in U.S. Dollars to a German bank,
issued under revolving credit agreements, interest payable
quarterly - 3,280
Other 71 206
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$ 2,678 $12,667
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7
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
3. Notes Payable and Long-Term Debt (continued)
September 30, December 31,
1999 1998
----------------------------------------
Long-term debt:
11-3/8% Senior Subordinated Notes due 2006 $90,000 $90,000
Notes payable in German Marks to a German bank 17,716 12,830
Notes payable in Chinese Yuan Renminbi to
Chinese banks 1,800 2,989
Capitalized lease obligations in U.S. dollars to
U.S. banks 3,740 721
Promissory note payable in German Marks to a
former shareholder of the Rolf Meyer Company 791 787
Promissory note payable in Dutch Guilders to a
former shareholder of the Diacarb Company 2,523 2,682
Other 122 500
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116,692 110,509
Less current portion 2,478 2,555
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$114,214 $107,954
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At September 30, 1999, the Company had a DM 61,355 (US$33,385) committed global,
multi-currency credit facility. Unused committed lines of credit from this
global facility were US$18,516, compared to US$15,188 at December 31, 1998. A
facility fee of 0.25% per annum is charged on the unused portion of the U.S.
dollar component of the facility.
4. 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/benefit 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 provision 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/benefit for United States income taxes is recorded
to the intercompany account with IKS Corporation.
8
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
5. Inventories
September 30, December 31,
1999 1998
-----------------------------------
Finished goods $ 18,442 $ 20,373
Work in process 4,664 4,101
Raw materials and supplies 5,149 6,507
-----------------------------------
$ 28,255 $ 30,981
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6. Organization
The Company operates in one business segment - industrial knives and saws. The
Company manufactures, markets and services primarily industrial knives and saws
internationally, and its customers include distributors, original equipment
manufacturers and customers purchasing replacement parts and services. The
Company has a leading market share in each of the major sectors it serves: Paper
& Packaging; Wood; Metal; and Plastic/Recycling. The Company's operations are
principally in the United States, Germany and Canada, representing 57%, 23% and
8% of 1999 net sales, respectively. The Company plans to continue its
international growth. As a result of the Company's broad product range and
numerous applications, no customer accounts for more than 3% of net sales. The
Company performs periodic credit evaluations of its customers and generally does
not require collateral.
Sales attributable to German and Canadian operations are based on external sales
generated by subsidiaries located in those countries.
9
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
6. Organization (continued)
The following table summarizes the Company's United States, German, Canadian and
other operations.
Nine months ended September 30,
1999 1998
- ------------------------------------------------------------------------------
United States Operations:
Net sales - Customers $ 65,240 $ 71,024
Long Lived Assets 21,726 20,931
German Operations:
Net sales - Customers $ 26,602 $ 25,374
Long Lived Assets 14,438 14,044
Canadian Operations:
Net sales - Customers $ 8,995 $ 9,703
Long Lived Assets 1,074 1,197
Other Operations:
Net sales - Customers $ 13,152 $ 5,780
Long Lived Assets 10,721 5,145
Consolidated:
Net sales $ 113,989 $ 111,881
Long Lived Assets 47,959 41,317
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. Management's 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,
1998.
General
The Company is a global leader in the manufacturing, servicing and
marketing of industrial and commercial machine knives and saws. 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
South 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 66% of its net
sales and 44% of its operating income for the first nine months of 1999. Its
other international operations account for the remainder and are located
primarily in Europe, 30% of first nine months of 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, Dutch, French, Canadian, Mexican 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 nine months of 1999 to the first nine months of 1998, there was
minimal effect on sales or net income. In addition, in the first nine months of
1999 there was a decrease in shareholder's equity from December 31, 1998 due to
a $1.1 million change in foreign currency translation adjustment. To mitigate
the short-term effect of changes in currency exchange rates on the Company's
foreign currency based purchases and its functional currency based sales, the
Company occasionally hedges its exposure by entering into foreign exchange and
U.S. dollar forward contracts to hedge a portion of its budgeted (future) net
foreign exchange and U.S. dollar transactions over periods ranging from one to
six months.
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
Third quarter and nine months ended September 30, 1999 compared to third quarter
and nine months ended September 30, 1998
Net Sales: Net sales increased 4.5% and 1.9% to $37.5 million and
$114.0 million for the third quarter and first nine months 1999, respectively
from $35.8 and $111.9 million for the same periods in 1998. The Company
experienced sales declines in its North American operations of 4.2% and 7.9% to
$24.9 and $74.8 million for the third quarter and first nine months of 1999,
respectively, from $26.0 and $81.2 million for the same periods in 1998. The
sales declines are primarily attributable to organizational issues and to a
lesser extent due to pricing pressures from Asian, South American and domestic
competitors that led to a loss of business in the major markets sectors the
Company serves. The Company has addressed these organizational issues through
several senior management changes, including the hiring of a new CEO. In its
other operations, the Company experienced sales improvements of 27.3% and 27.7%
to $12.6 and $39.2 million for the third quarter and first nine months of 1999,
respectively, from $9.9 and $30.7 million for the same periods in 1998,
primarily attributable to the Diacarb and Buland acquisitions.
Gross Profit: Gross profit increased 5.4% and decreased 2.0% to $11.2
and $33.2 million for the third quarter and first nine months of 1999 from $10.6
and $33.9 million for the same periods in 1998. Gross margin increased to 29.8%
and decreased to 29.1% for the third quarter and first nine months of 1999
compared to 29.6% and 30.3% in the third quarter and first nine months of 1998.
The Company experienced gross profit declines in its North American operations
of 15.0% and 21.5% to $6.5 and $19.9 million for the third quarter and first
nine months of 1999, respectively, from $7.7 and $25.3 million for the same
periods in 1998. The gross profit declines are primarily attributable to the
above mentioned factors. Gross profit for the Company's other operations
increased 62.1% and 54.7% to $4.7 and $13.3 million for the third quarter and
first nine months of 1999, respectively, from $2.9 and $8.6 million for the same
periods in 1998, primarily attributable to the Diacarb and Buland acquisitions.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $8.5 and $25.1 million for the third quarter and
first nine months of 1999 as compared to $7.1 and $22.0 million for the same
periods in 1998 and increased as a percentage of sales to 22.6% and 22.0% from
19.9% and 19.7% of sales for the respective periods. The increase is primarily
attributable to the Diacarb and Buland acquisitions.
Interest Expense, net: Net interest expense increased slightly to $3.1
and $9.4 million for the third quarter and first nine months of 1999 from $3.0
and $9.0 million for the same periods in 1998 due to higher average debt
outstanding in the first nine months of 1999 compared to the first nine months
of 1998.
Income Taxes: Due to pre-tax losses in the third quarter and first nine
months of 1999, the Company recorded tax benefits at effective tax rates of
34.2% and 34.1% respectively. For the same periods in 1998, the Company had
pre-tax income and recorded tax provisions at an effective tax rate of 44.5%.
The change in the effective tax rates from 1998 is due to significant changes in
income contributions from the Company's operations in certain tax jurisdictions.
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 $18.5 million under
existing credit facilities, will be sufficient to meet its capital requirements.
As of September 30, 1999, the Company's total debt and shareholder's deficit was
$119.4 million and $20.2 million, respectively.
Net cash flow provided by operations aggregated $8.3 million for the
first nine months of 1999 compared to $9.7 million for the same period in 1998.
The decrease was primarily attributable to a $2.6 million decrease in net
income.
12
Cash used in investing activities for the first nine months of 1999 was
$4.0 million compared to $7.4 million for the same period in 1998. The decreased
use of cash is primarily due to reduced purchases of property, plant and
equipment of $1.6 million compared to 1998 and to the acquisitions in 1998.
Cash used in financing activities for the first nine months of 1999 was
$3.2 million compared to $1.7 million for the same period in 1998. The increased
use of cash compared to the prior year is primarily due to repayments of amounts
due to parent and decreased net borrowings in 1999 compared to 1998.
Year 2000
The Year 2000 problem exists because many computer systems and
applications use two-digit fields to designate a year. As the century date
change occurs, date sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly.
In 1996, the Company began to develop a plan to upgrade its information
systems to enable it to realize cost savings through centralization of functions
that would result in reductions in working capital items such as inventory and
accounts receivable. This plan also was developed to assess and resolve Year
2000 compliance issues potentially affecting the Company, both with respect to
internal systems and systems on which the Company's major vendors, suppliers,
and distributors are reliant. To date, the Company has completed the assessment
phase of its internal information systems and successfully implemented its plan
to resolve potential problems. The Company believes that 100% of its critical
systems are Year 2000 compliant.
The Company has also assessed the embedded systems that operate such
items as manufacturing, phone, security, heating and air conditioning systems.
This assessment was completed in September 30, 1998. All non-compliant embedded
systems have been replaced or modified as necessary.
The Company has incurred approximately $4.1 million in costs primarily
to upgrade its systems, and to a lesser extent to address Year 2000 issues. The
Company estimates costs associated with scheduled system upgrades for the
remainder of 1999 will approximate $.5 million.
The Company has made inquiries and gathered information regarding Year
2000 compliance exposures faced by its principal vendors and suppliers, and its
major dealers and distributors. No major part or critical operation of any
segment of the Company's business is reliant on a single source for raw
materials, supplies, or services, and the Company has multiple distribution
channels for most of its products. Based on our inquiries, the Company believes
that no critical supplier, vendor or distributor will be adversely affected or
experience business interruptions due to Year 2000 issues. However, should this
occur, the Company believes it will be able to find cost-competitive,
alternative sources for raw materials, supplies, and services necessary to
continue production and distribution.
The costs of the project and the completion dates are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the availability of certain resources, third party
Year 2000 compliance modification plans, and other factors. There can be no
guarantee that the Company will be completely successful in its efforts to
address Year 2000 issues, or that these estimates will be achieved and actual
results could differ materially from these estimates. The Company has no
contingency plans in place. To date, the Company has completed its Year 2000
project with respect to internal systems and discontinued the use of any
non-compliant business systems.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information required by Item 3 is included in Item 2 on page 11 of this
Form 10-Q.
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 and Use of Proceeds
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/ P. Daniel Miller
--------------------------------------
P. Daniel Miller
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)
November 12, 1999
15
EXHIBIT INDEX
Exhibit
No. Description
-------- -----------------------
27 Financial Data Schedule
16