UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-33438
PRECISION PARTNERS, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 22-3639336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Village Court
Suite 301
Hazlet, New Jersey 07730
(Address of principal executive offices)
(732) 335-3300
Indicate by check mark whether 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.
YES X NO
--- ---
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 100 as of July 31, 2001.
1
PRECISION PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
Disclosure Concerning Forward Looking Statements 3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 4
June 30, 2001 (Unaudited) and December 31, 2000
Unaudited Condensed Consolidated Statements of Operations 5
for the Three Months and Six Months Ended June 30, 2001 and 2000
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Securities Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE
2
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of the historical information contained in this report,
the matters described herein contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and may
contain the words "believe," "anticipate," "expect," "estimate," "intend,"
"project," "will be," "will likely continue," "will likely result," or words or
phrases of similar meaning including, statements concerning:
o our liquidity and capital resources,
o our debt levels and ability to obtain financing and service debt,
o competitive pressures and trends in the precision machined parts,
tooling and assembly industry,
o prevailing interest rates,
o legal proceedings and regulatory matters,
o general economic and business conditions, and
o other factors discussed under "Other Considerations" in Item 2.
Forward-looking statements involve risks and uncertainties (including, but not
limited to, economic, competitive, governmental and technological factors
outside of our control) which may cause actual results to differ materially from
the forward-looking statements. These risks and uncertainties may include the
ability of management to implement its business strategy in view of our limited
operating history; our ability to comply with the covenants in our bank
agreement, the highly competitive nature of the precision tooling industry and
the intense competition from other makers of precision machined metal parts,
tooling and assemblies, our dependence on certain key customers; our ability to
consummate suitable acquisitions, our ability to effectively integrate
acquisitions or new production programs, our dependence on certain executive
officers; and changes in environmental and other government regulations. We
operate in a very competitive environment in which new risks can emerge from
time to time. It is not possible for management to predict all such risks, nor
can it assess the impact of all such risks on our business or the extent to
which any risk, or a combination of risks, may cause actual results to differ
materially from those contained in forward-looking statements. Given these risks
and uncertainties, readers are cautioned not to place undue reliance on
forward-looking statements.
3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Precision Partners, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
June 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 667 $ --
Trade accounts receivable, less allowance for doubtful accounts
of $686 at June 30, 2001 and $590 at December 31, 2000 23,039 22,043
Inventories 20,518 18,635
Deferred income taxes 1,634 1,634
Other current assets 1,444 1,078
----------- -----------
Total current assets 47,302 43,390
Property, plant and equipment, at cost, net 80,615 86,214
Goodwill, net 69,647 71,661
Other assets 5,425 6,086
----------- -----------
Total assets $ 202,989 $ 207,351
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 12,558 $ 15,429
Accrued expenses 11,112 12,324
Income taxes payable 1,603 922
Deferred revenue 4,545 1,616
Current portion of long term debt 8,408 7,975
Other current liabilities 224 132
----------- -----------
Total current liabilities 38,450 38,398
Long term debt, less current portion 142,676 141,860
Deferred income taxes 1,846 1,846
Commitments and Contingencies
Stockholder's equity:
Common stock, $.01 par value; 100 shares authorized, issued and
outstanding -- --
Additional paid-in capital 48,069 48,056
Accumulated deficit (28,052) (22,809)
----------- -----------
Total stockholder's equity 20,017 25,247
----------- -----------
Total liabilities and stockholder's equity $ 202,989 $ 207,351
=========== ===========
See accompanying notes
4
Precision Partners, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands)
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 47,393 $ 43,188 $ 96,874 $ 88,075
Cost of sales 37,935 34,077 77,592 67,845
----------- ----------- ----------- -----------
Gross profit 9,458 9,111 19,282 20,230
Selling, general and administrative expenses 6,590 7,439 14,605 14,973
----------- ----------- ----------- -----------
Operating income 2,868 1,672 4,677 5,257
Interest income 5 11 18 23
Interest expense (4,439) (4,245) (8,985) (8,337)
Other (expense) income (119) (71) (311) (51)
----------- ----------- ----------- -----------
Loss before income taxes (1,685) (2,633) (4,601) (3,108)
Provision (benefit) for income taxes 342 (818) 642 (764)
----------- ----------- ----------- -----------
Net loss $ (2,027) $ (1,815) $ (5,243) $ (2,344)
=========== =========== =========== ===========
See accompanying notes
5
Precision Partners, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six months ended
June 30,
--------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net loss $ (5,243) $ (2,344)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 7,700 5,904
Amortization of goodwill 2,014 2,040
Amortization of debt issue costs 443 439
Amortization of covenant not to compete -- 100
Loss on disposal of fixed assets 336 --
Changes in operating assets and liabilities:
Trade accounts receivable (996) (2,029)
Inventories (1,883) (676)
Other current assets (366) 330
Advance deposit for equipment leases -- 1,179
Other assets 218 2,591
Accounts payable (2,871) 2,175
Accrued expenses (1,212) 5,165
Income taxes payable 681 (1,014)
Deferred revenue 2,929 (2,538)
Other current liabilities 92 (2,298)
----------- -----------
Net cash provided by operating activities 1,842 9,024
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 684 212
Purchases of property, plant and equipment (3,121) (2,769)
Acquisition of subsidiaries, net of cash -- (206)
----------- -----------
Net cash used in investing activities (2,437) (2,763)
FINANCING ACTIVITIES
Repayments of borrowings from revolving line of credit (28,947) (32,800)
Proceeds from revolving line of credit 33,882 28,050
Repayments of long term debt (3,686) (916)
Contributions of capital 13 6
Payment of debt issue costs -- (914)
----------- -----------
Net cash provided by (used in) financing activities 1,262 (6,574)
----------- -----------
Net increase (decrease) in cash and cash equivalents 667 (313)
Cash and cash equivalents, beginning of period -- 313
----------- -----------
Cash and cash equivalents, end of period $ 667 $ --
=========== ===========
SUPPLEMENTARY INFORMATION FOR THE STATEMENT OF CASH FLOWS:
Interest payments $ 8,951 $ 7,449
Income tax (refunds) payments $ (68) $ 298
Non-cash investing and financing activities - purchase of
computer software under financing agreements $ -- $ 68
See accompanying notes
6
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Precision Partners, L.L.C. ("LLC") was formed on September 9, 1998 for the
purpose of acquiring and operating companies in the business of manufacturing
and supplying precision machined parts, tooling and assemblies for original
equipment manufacturers.
On September 30, 1998, investors contributed approximately $32 million of
capital to LLC which was then contributed by LLC to two wholly-owned
subsidiaries, Mid State Acquisition Corp. and Galaxy Acquisition Corp., which
were established to acquire all of the outstanding capital stock of Mid State
Machine Products ("Mid State") and Galaxy Industries Corporation ("Galaxy") on
September 30, 1998 (Mid State and Galaxy, collectively the "1998 Acquisitions").
The purchase price, including transaction expenses, was approximately
$54,725,000 and was financed by the proceeds of the contributed capital and
borrowings under LLC's credit facilities.
In February 1999, Precision Partners, Inc. ("Precision" or the "Company")
was formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of LLC. On March 19, 1999, as part of a
reorganization, LLC contributed to Precision, through Holdings, its investments
and related assets in Galaxy, Mid State and Precision Partners Management
Corporation ("Management Corporation"), which comprised substantially all of the
assets of LLC ("the 1999 Reorganization"). Simultaneous with this
reorganization, Precision purchased all of the issued and outstanding capital
stock of Certified Fabricators, Inc. and its sister company Calbrit Design, Inc.
(together, "Certified") and purchased substantially all of the assets and
assumed certain liabilities of General Automation, Inc. ("General Automation")
and Nationwide Precision Products Corp. ("Nationwide"). Also, on September 1,
1999, Precision purchased all of the issued and outstanding capital stock of
Gillette Machine & Tool Co., Inc. ("Gillette") using existing cash and
borrowings under Precision's credit facilities. The acquisitions of Certified,
General Automation, Nationwide, and Gillette are referred to collectively as the
"1999 Acquisitions."
The 1999 Acquisitions were financed through the net proceeds of the
issuance of $100,000,000 aggregate principal amount 12% senior subordinated
notes due 2009, together with borrowings under Precision's credit facilities, an
equity contribution of approximately $10,000,000 and available cash. The total
purchase price, including transaction expenses, was approximately $116,593,000.
In connection with the refinancing of Precision's bank credit facilities
and the execution of a term loan with General Electric Capital Corporation in
December 2000, capital contributions of $6.0 million were made to LLC by
investors in 2000 bringing the aggregate capital contributed to $48.1 million.
LLC contributed this capital through Holdings to Precision.
All significant inter-company balances and transactions have been
eliminated in consolidation.
Financial information of the guarantor subsidiaries has been omitted
because Precision's outstanding senior subordinated notes are fully,
unconditionally and jointly and severally guaranteed by all direct and indirect
subsidiaries of Precision. Precision has no operations or assets separate from
its investments in its subsidiaries. The indenture governing the outstanding
Notes as well as the agreements governing the credit facilities (described
below) restrict the ability of Precision and its subsidiaries to make dividend
payments.
7
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 2001 are not necessarily, and should not be construed as,
indicative of the results that may be achieved for a full year.
2. INVENTORIES AND COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Inventories consist of the following at:
June 30, December 31,
2001 2000
----------- -----------
(in thousands)
(Unaudited)
Raw materials $ 5,505 $ 4,061
Work in process 11,202 10,443
Finished goods 4,517 4,350
----------- -----------
21,224 18,854
Less reserves 706 219
----------- -----------
$ 20,518 $ 18,635
=========== ===========
Information regarding contract costs, estimated earnings and progress
billings on long term contacts consist of the following at:
June 30, December 31,
2001 2000
----------- -----------
(in thousands)
(Unaudited)
Costs incurred on uncompleted contracts $ 197 $ 237
Estimated earnings on uncompleted contracts 67 22
----------- -----------
264 259
Less net progress billings 93 --
----------- -----------
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 171 $ 259
=========== ===========
There were no significant billings in excess of net costs and estimated
earnings on uncompleted contracts.
8
3. DEBT
Long-term debt consists of the following at:
(Unaudited)
June 30, December 31,
2001 2000
----------- -----------
(In thousands)
Precision Partners, Inc. 12% Senior Subordinated Notes due 2009, interest due
semiannually on March 15 and September 15 commencing on September 15, 1999. $ 100,000 $ 100,000
Term loan payable to a bank group, due in quarterly principal installments plus
interest at a variable rate (8.9% as of June 30, 2001), maturing March 31,
2005, secured by a first priority lien in all assets and property of
Precision and its subsidiaries, except those assets pledged to General
Electric Capital Corporation in which the bank group has a second priority
lien. Quarterly principal installments of $805,000 began on June 30, 2000,
increased to $920,000 on June 30, 2001, and will increase to $1,150,000 on
June 30, 2002, $1,380,000 on June 30, 2003, and $1,495,000 on June 30, 2004. 19,505 21,390
Revolving line of credit with a limit of $22.0 million payable to a bank group,
maturing March 31, 2005, secured by a first priority lien in all assets and
property of Precision and its subsidiaries, except those assets pledged to
General Electric Capital Corporation in which the bank group has a second
priority lien. Advances under the line are available based upon 85% of
eligible accounts receivable and 50% of eligible inventories. Interest is
charged at a variable rate (8.0% as of June 30, 2001) and there is a
commitment fee of 0.5% per year based on the unused portion of the line, 12,400 7,465
payable quarterly.
Term loan payable to General Electric Capital Corporation, due in monthly
principal installments of $288,484 plus interest at a variable rate (9.1% as
of June 30, 2001), maturing December 31, 2005, subject to a 12-month
extension, at the Borrower's election, if no default or event of default has
occurred or is continuous at the time the extension becomes effective,
secured by a first priority lien in all equipment financed by the term loan
and a second priority lien in all other assets and property of Precision and its 19,040 20,771
subsidiaries (other than Certified and Gillette).
Other 139 209
----------- -----------
151,084 149,835
Less current portion 8,408 7,975
----------- -----------
$ 142,676 $ 141,860
=========== ===========
4. LITIGATION
Precision or its subsidiaries are defendants from time to time in lawsuits
and disputes arising in the normal course of business. Management believes that
the ultimate outcome of those matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows.
5. INCOME TAXES
The tax provisions (benefits) for the three and six months ended June 30,
2001 and 2000 were each impacted by permanent differences between pre-tax loss
for financial reporting purposes and tax
9
reporting purposes resulting primarily from non-deductible goodwill generated by
the stock acquisitions of Mid State, Galaxy, Certified, and Gillette. Further,
in accordance with Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes, the Company recorded a valuation allowance equal to
the deferred tax assets recorded in relation to the net operating losses
incurred during the three and six months ended June 30, 2001. While Precision,
on a consolidated basis, has incurred taxable losses during the three and six
months ended June 30, 2001, certain of its subsidiaries have generated taxable
income for state tax purposes. Thus, Precision recognized state tax provisions
of $0.3 million and $0.6 million for the three and six months ended June 30,
2001 as compared to the tax benefits of $0.8 million in each of the three and
six months ended June 30, 2000.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with these Statements. Other intangible assets
will continue to be amortized over their useful lives.
The Company, as required, will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in operating income of approximately $4.0 million per
year. During the first quarter of 2002, the Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements, including the notes
thereto, included elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial information for
the periods indicated:
Precision Partners, Inc.
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(In thousands)
OPERATING DATA:
Net sales $ 47,393 $ 43,188 $ 96,874 $ 88,075
Gross profit 9,458 9,111 19,282 20,230
Operating income 2,868 1,672 4,677 5,257
Interest expense, net 4,434 4,234 8,967 8,314
Net loss (2,027) (1,815) (5,243) (2,344)
OTHER FINANCIAL DATA:
Depreciation and
amortization 4,884 4,031 9,714 8,044
EBITDA (1) 7,752 5,703 14,391 13,301
(1) EBITDA is defined as operating income plus depreciation and
amortization, excluding amortization of debt issue costs. EBITDA is
not a measure of performance under generally accepted accounting
principles. While EBITDA should not be used in isolation or as a
substitute for net income, cash flows from operating activities or
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles, or as a measure of
profitability or liquidity, management believes that it may be used
by certain investors as supplemental information to evaluate a
company's financial performance. In addition, the definition of
EBITDA used in this report may not be comparable to the definition
of EBITDA used by other companies.
11
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
NET SALES
Net sales increased 9.7% to $47.4 million in the second quarter of 2001
compared to $43.2 million in the second quarter of 2000. The increase is
primarily due to continued growth in power generation component sales and the
first-time inclusion of sales of heavy construction, off-road diesel engine
blocks and heavy truck axle components. These increases were offset in part by
continued weakness in aerospace shipments at Certified and lower sales volume in
automotive and light truck components at Galaxy, General Automation, and
Nationwide.
GROSS PROFIT
Gross profit increased 3.8% to $9.5 million in the second quarter of 2001
compared to $9.1 million in the second quarter of 2000. Gross margin decreased
to 20.0% in the second quarter of 2001 from 21.1% in the comparable period of
2000. Strength in power generation components and the absence of start-up
losses, which were incurred in the prior year period, in the heavy construction,
off-road diesel engine block plant were offset in part by the impact of lower
sales volume in automotive, light truck and aerospace components. Higher than
expected start-up costs at Nationwide's truck axle component facility and cost
overruns on a completed aerospace job also negatively impacted gross profits.
Additionally, depreciation expense and equipment lease expense increased
approximately $1.4 million, in the aggregate, over the comparable period, as a
result of the completion of various capital projects in fiscal 2000 to support
increased delivery requirements and plant expansions for new production
contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased 11.4% to $6.6
million in the second quarter of 2001 compared to $7.4 million in the second
quarter of 2000. Corporate office bonuses accrued in the first quarter of 2001
were reversed and no further corporate bonus accruals were made in the second
quarter. Further, Certified significantly lowered its selling, general and
administrative costs as a result of the restructuring that took place in the
third quarter of 2000. These reductions were offset in part by higher costs at
Mid State relating to its strong growth. Additionally, the three months ended
June 30, 2000 included severance costs related to corporate management changes.
OPERATING INCOME
As a result of all of the foregoing, operating income increased to $2.9
million in the second quarter of 2001 from $1.7 million in the second quarter of
2000. Operating income was negatively impacted by $0.2 million of expenses
related to the restructuring of Galaxy and Certified.
NET INTEREST EXPENSE
For the second quarter of 2001, net interest expense increased 4.7% to
$4.4 million from $4.2 million for the comparable period of 2000. The increase
is primarily attributable to higher average outstanding debt and higher average
interest rates in 2001 versus 2000. Higher average debt balances were due to the
refinancing and restructuring which occurred in the fourth quarter of 2000 and
higher outstanding borrowings under the Company's revolving line of credit.
Higher average borrowing rates reflect higher borrowing spreads resulting from
the restructuring and refinancing of our credit facilities in the fourth quarter
of 2000, partially offset by lower market rates.
12
INCOME TAXES
The tax provision for the second quarter of 2001 and the tax benefit for
the second quarter of 2000 were each impacted by permanent differences between
pre-tax loss for financial reporting purposes and tax reporting purposes
resulting primarily from non-deductible goodwill generated by the stock
acquisitions. Further, in accordance with Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes, the Company recorded a valuation
allowance equal to the deferred tax assets recorded in relation to the net
operating losses incurred during the quarter ended June 30, 2001. While
Precision, on a consolidated basis, has incurred taxable losses during the
second quarter of 2001 and management has taken a valuation allowance against
those tax benefits, certain of its subsidiaries have generated taxable income
for state tax purposes. Thus, Precision recognized a state tax provision
totaling $0.3 million for the quarter ended June 30, 2001 versus a tax benefit
of $0.8 million in the comparable period of the prior year.
NET LOSS
Net loss was $2.0 million in the second quarter of 2001 compared to $1.8
million in the second quarter of 2000 due to the aforementioned reasons.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 21.2% to $4.9 million in the
second quarter of 2001 compared to $4.0 million in the second quarter of 2000.
The increase is primarily due to increased depreciation expense related to the
significant expenditures on capital equipment in 2000 that supported new
customer contracts and increased capacity for higher volumes in power generation
components.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
NET SALES
Net sales increased 10.0% to $96.9 million in the first six months of 2001
compared to $88.1 million in the first six months of 2000. The increase is
primarily due to continued growth in power generation component sales and the
first-time inclusion of sales of heavy construction, off-road diesel engine
blocks and heavy truck axle components, and growth in sales of business and
medical machine equipment components. These increases were offset in part by
continued weakness in aerospace shipments at Certified and lower sales volume in
automotive and light truck components at Galaxy, General Automation and
Nationwide.
GROSS PROFIT
Gross profit decreased 4.7% to $19.3 million in the first six months of 2001
compared to $20.2 million in the first six months of 2000. Gross margin
decreased to 19.9% in the first six months of 2001 from 23.0% in the comparable
period of 2000. Strength in the power generation, business equipment and medical
equipment markets were offset in part by the impact of lower sales volume in
automotive, light truck and aerospace components. Higher than expected start-up
costs at Nationwide's truck axle component facility, low sales volumes in heavy
equipment engine blocks, and cost overruns on a
13
completed aerospace job also negatively impacted gross profits. Additionally,
depreciation expense and equipment lease expense increased approximately $2.8
million, in the aggregate, over the comparable period of the prior year, as a
result of the completion of various capital projects in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased 2.5% to $14.6
million in the first six months of 2001 compared to $15.0 million in the first
six months of 2000. This is primarily related to Certified significantly
lowering its selling, general and administrative costs as a result of the
restructuring that took place in the third quarter of 2000. Further, the absence
of severance costs related to management changes at the corporate office during
2000 contributed to the period over period reduction in selling, general and
administrative costs. These reductions were offset in part by higher costs at
Mid State relating to its strong growth.
OPERATING INCOME
As a result of all of the foregoing, operating income decreased to $4.7
million in the first six months of 2001 from $5.3 million in the comparable
period of 2000. Operating income for the period was negatively impacted by
approximately $1.0 million in expenses related to the restructuring of Galaxy
and Certified.
NET INTEREST EXPENSE
For the six months ended June 30, 2001, net interest expense increased
7.9% to $9.0 million from $8.3 million for the comparable period of 2000. The
increase is primarily attributable to higher average outstanding debt and higher
average interest rates in 2001 versus 2000. Higher average debt balances were
due to the refinancing and restructuring which occurred in the fourth quarter of
2000 and higher outstanding borrowings under the Company's revolving line of
credit. Higher average borrowing rates reflect higher borrowing spreads
resulting from the restructuring and refinancing of our credit facilities in the
fourth quarter of 2000, partially offset by lower market rates.
INCOME TAXES
The tax provision for the first six months of 2001 and the tax benefit for
the first six months of 2000 were each impacted by permanent differences between
pre-tax loss for financial reporting purposes and tax reporting purposes
resulting primarily from non-deductible goodwill generated by the stock
acquisitions. Further, in accordance with Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes, the Company recorded a valuation
allowance equal to the deferred tax assets recorded in relation to the net
operating losses incurred during the six months ended June 30, 2001. While
Precision, on a consolidated basis, has incurred taxable losses during the first
six months of 2001 and management has taken a valuation allowance against those
tax benefits, certain of its subsidiaries have generated taxable income for
state tax purposes. Thus, Precision recognized a state tax provision totaling
$0.6 million for the six months ended June 30, 2001 versus a tax benefit of $0.8
million in the comparable period of the prior year.
NET LOSS
Net loss was $5.2 million in the first six months of 2001 compared to $2.3
million in the same period of 2000 due to the aforementioned reasons and $0.3
million of losses on assets disposed during the six months ended June 30, 2001
included in other expense.
14
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 20.8% to $9.7 million in the first
six months of 2001 compared to $8.0 million in the comparable period of 2000.
The increase is primarily due to increased depreciation expense related to the
significant expenditures on capital equipment in 2000 that supported new
customer contracts and increased capacity for higher volumes in power generation
components.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June
30, 2001 was $1.8 million compared to $9.0 million in the comparable period of
2000. This decrease primarily reflects the larger net loss generated in the
current period and unfavorable working capital fluctuations offset by higher
depreciation and higher deferred revenue.
Net cash used in investing activities decreased to $2.4 million for the
six months ended June 30, 2001 from $2.8 million in the comparable period of
2000. This decrease primarily reflects the proceeds from the sale of assets
related to the bearing cap business at Galaxy that was partially offset by an
increase in capital expenditures primarily to expand machining capacity and
efficiency.
Net cash provided by financing activities for the six months ended June
30, 2001 was $1.3 million compared to net cash used in financing activities of
$6.6 million for the six months ended June 30, 2000 primarily reflecting
scheduled principal repayments on Precision's term loans to its bank group and
GECC and net borrowings on its revolving credit facility.
Precision's principal sources of liquidity are available borrowings under
its revolving credit facility and cash flow from operations. Precision expects
that its principal liquidity requirements will continue to be working capital,
capital expenditures, debt service and required lease payments.
Precision's credit facilities at June 30, 2001 consisted of a $19.5
million bank term loan and a $22.0 million revolving credit facility, including
a $2.0 million sublimit for letters of credit, each payable to a bank group
maturing on March 31, 2005, and a $19.0 million equipment term loan from GECC
maturing December 31, 2005, subject to the borrower's option to extend for 12
months if no default or event of default has occurred or is continuing. As of
June 30, 2001, Precision had total debt of approximately $151.1 million,
primarily consisting of the outstanding aggregate principal amount of its $100
million senior subordinated notes, the outstanding principal amount on its bank
term loan, the outstanding principal amount of its GECC term loan and $12.4
million of outstanding borrowings under its revolving credit facility.
Precision's ability to borrow under the revolving credit facility is subject to
its compliance with financial covenants and a borrowing base that is based on
Precision's eligible accounts receivables and inventory.
Precision also leases equipment from GECC under a master lease. As of June
30, 2001, Precision had operating leases outstanding under its master lease
agreement with GECC for equipment with a cost of $6.6 million. Rent payments
under the amended and restated master lease consist of payments of principal
plus interest at a rate per annum of LIBOR plus a margin of 5.0%, subject to
reduction in certain circumstances.
Precision's debt amortization requirements over the next two years are
limited to the term loan payable to the bank group and the GECC equipment term
loan facility, and total $15.8 million over this
15
period. Precision's other debt service requirements over the next two years
consist primarily of interest expense on those loans, on the senior subordinated
notes and on borrowings under the revolving credit facility. Precision's other
short-term cash requirements are expected to consist mainly of capital
expenditures to maintain and expand Precision's manufacturing capabilities,
rental payments under the GECC master lease and working capital requirements.
Precision currently expects that its capital expenditures will be approximately
$4.5 million in 2001, including capital expenditures to maintain current
production capabilities. However, Precision's capital expenditures will be
affected by, and may be greater or less than currently anticipated depending
upon, among other things, the size and nature of new business opportunities and
bank credit limitations.
Based upon current operations and the historical results of its
subsidiaries, Precision believes that its cash flow from operations, together
with borrowings under its revolving credit facility ($9.6 million unused at June
30, 2001), will be adequate to meet its anticipated requirements for working
capital, capital expenditures, scheduled lease payments, and scheduled debt
service over the next 12 months. However, there can be no assurance that
Precision will generate adequate cash flow. In addition, Precision's ability to
repay outstanding debt at maturity may depend on the availability of
refinancing. On July 18, 2001, the Company borrowed substantially all available
funds under its revolving line of credit facility. As of August 10, 2001, the
Company maintained a cash balance in its bank accounts of approximately $17.7
million and $20.2 million was outstanding under the revolver.
INFLATION
We do not believe that inflation has had a significant impact on our cost
of operations.
OTHER CONSIDERATIONS
PRECISION'S SUBSTANTIAL DEBT AND THE SIGNIFICANT DEMANDS ON ITS CASH RESOURCES
COULD AFFECT ITS ABILITY TO MAKE PAYMENTS ON THE OUTSTANDING DEBT AND ACHIEVE
ITS BUSINESS PLAN.
Substantial Debt. Precision has incurred a substantial amount of
indebtedness that requires significant interest payments. As of June 30, 2001,
Precision had total consolidated debt of $151.1 million and net interest expense
of approximately $9.0 million for the six months then ended. In addition, as of
the same date, Precision had operating leases outstanding under its master lease
agreement with GECC for equipment with a cost of $6.6 million. Subject to the
limits contained in the indenture governing Precision's outstanding senior
subordinated notes, its bank credit facilities, the GECC master lease and the
GECC equipment term loan facility, Precision and its subsidiaries may incur
additional indebtedness from time to time to finance capital expenditures,
investments or acquisitions or for other general corporate purposes. On July 18,
2001, the Company borrowed substantially all available funds under its revolving
line of credit facility. As of August 10, 2001, $20.2 million was outstanding
under the revolver and the Company maintained a cash balance in its bank
accounts of approximately $17.7 million.
Demands on Cash Resources. Precision has substantial demands on its cash
resources in addition to operating expenses and interest expense on the senior
subordinated notes, including, among others, interest and amortization payments
under its credit facilities and the GECC equipment term loan as well as rental
payments under the GECC master lease. See "Liquidity and Capital Resources"
above.
Effects on Precision's Business Strategy. Precision's level of
indebtedness and these significant demands on its cash resources could have
important effects on Precision's business. For example these demands could,
among other things,:
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o make it more difficult for Precision to satisfy its debt service
obligations with respect to the senior subordinated notes and its
secured indebtedness under its credit facilities and the GECC
equipment term loan;
o require Precision to dedicate a substantial portion of its cash flow
from operations to debt service, thereby reducing the amount of its
cash flow available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
o limit Precision's flexibility in planning for, or reacting to,
changes in its industry (including the pursuit of its growth
strategy);
o place Precision at a competitive disadvantage compared to its
competitors that have fewer debts and significantly greater
operating and financing flexibility than Precision does;
o limit, along with the financial and other restrictive covenants
applicable to Precision's indebtedness, among other things, its
ability to borrow additional funds even when necessary to maintain
adequate liquidity; and
o increase Precision's vulnerability to general adverse economic and
industry conditions.
Precision's ability to pay interest on its long-term indebtedness and to
satisfy its other debt obligations will depend upon its future operating
performance and may depend upon the availability of refinancing indebtedness,
which will be affected by the instruments governing its indebtedness, including
the indenture, the credit facilities, the GECC master lease and the GECC
equipment term loan facility, prevailing economic conditions and financial,
business and other factors, certain of which are beyond its control.
If Precision is unable to service its indebtedness and fund its business,
it may be forced to adopt an alternative strategy that may include:
o reducing or delaying capital expenditures;
o seeking additional debt financing or equity capital;
o selling assets; or
o restructuring or refinancing its indebtedness.
There can be no assurance that any such strategy could be effected on
terms satisfactory to Precision or at all.
Effect of Additional Debt. Subject to and within the limits of Precision's
debt instruments and the GECC master lease, Precision may incur additional
indebtedness from time to time to finance capital expenditures, investments and
operations or for other purposes, including the borrowing of amounts repaid
under its credit facilities. This could further exacerbate the risks described
below.
PRECISION'S DEBT INSTRUMENTS AND AGREEMENTS RESTRICT ITS ABILITY AND THE ABILITY
OF ITS SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS.
Indenture. The indenture governing Precision's outstanding senior
subordinated notes restricts our ability and the ability of some of its
subsidiaries to, among other things:
o incur additional debt;
o pay dividends on or redeem or repurchase capital stock;
o issue or allow any person to own preferred stock of subsidiaries;
17
o incur or permit to exist indebtedness senior to the senior
subordinated notes, but subordinated to any of its other
indebtedness;
o in the case of non-guarantor subsidiaries, guarantee debt without
also guaranteeing the Notes;
o in the case of restricted subsidiaries, create or permit to exist
dividend or payment restrictions with respect to Precision;
o make investments;
o incur or permit to exist liens;
o enter into transactions with affiliates;
o merge, consolidate or amalgamate with another company; and
o transfer or sell assets.
Bank Credit Facilities, GECC Master Lease and GECC Equipment Term Loan.
Precision's bank credit facilities, the GECC master lease and the GECC equipment
term loan also contain similar covenants, as well as a restriction on
acquisitions and a number of financial covenants requiring Precision to meet
financial ratios and financial condition tests. Precision's ability to borrow
under its revolving credit facility and GECC's obligation to lease equipment to
Precision and its subsidiaries under the master lease depends upon satisfaction
of these covenants and, in the case of the revolving credit facilities,
borrowing base requirements. Precision's ability to meet these covenants and
requirements can be affected by events beyond its control. There can be no
assurance that Precision will meet these requirements. For example, Precision
was not in compliance with financial covenants under its credit facilities and
the GECC master lease during the third and fourth quarters of 2000. Although
Precision has received permanent waivers from its bank group and GECC, and the
related covenants have been amended, there can be no assurance that Precision
will be able to meet these revised covenants in the future.
Effect of Future Breach. Precision's failure to comply with the
obligations and covenants in the credit facilities, the GECC equipment term
loan, the GECC master lease or the indenture could result in an event of default
under one or more of those agreements that, if not cured or waived, could
terminate its ability to borrow under the revolving credit facility or lease
additional equipment under the GECC master lease, could permit acceleration of
the relevant debt and acceleration of debt under other instruments and, in the
case of the credit facilities and the GECC equipment term loan, could permit
foreclosure on any collateral granted.
PRECISION IS STRUCTURED AS A HOLDING COMPANY AND IT DEPENDS ON ITS SUBSIDIARIES
IN ORDER TO SERVICE ITS DEBT.
Precision is structured as a holding company. Precision's only significant
asset is the capital stock or other equity interests of Precision's operating
subsidiaries. As a holding company, Precision conducts all of its business
through its subsidiaries. Consequently, Precision's cash flow and ability to
service its debt obligations are dependent upon the earnings of Precision's
operating subsidiaries and the distribution of those earnings to Precision, or
upon loans, advances or other payments made by these subsidiaries to Precision.
The ability of Precision's subsidiaries to pay dividends or make other payments
or advances to Precision will depend upon their operating results and will be
subject to applicable laws and contractual restrictions contained in the
instruments governing their indebtedness, including Precision's bank credit
facilities, the indenture, the GECC master lease and the GECC equipment term
loan. Although the indenture limits the ability of these subsidiaries to enter
into consensual restrictions on their ability to pay dividends and make other
payments to Precision, these limitations are subject to a number of significant
qualifications. There can be no assurance that the earnings of Precision's
operating subsidiaries will be adequate for Precision to service its debt
obligations.
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PRECISION'S SUCCESS DEPENDS ON ITS ABILITY TO SUCCESSFULLY OPERATE ITS
SUBSIDIARIES ON A COMBINED BASIS.
Precision's operating subsidiaries operate independently of one another
and there can be no assurance that Precision will be able to effectively manage
these operating companies on a combined basis. In addition, to the extent
management time may be diverted to any one or more of the companies, the other
operating companies may be adversely affected. A failure by Precision to operate
these businesses profitably or to manage them effectively on a combined basis
could have a material adverse effect on its results of operations and financial
condition.
Although Precision performs a due diligence investigation of each business
that it acquires, there may be liabilities of acquired companies, including
those previously acquired and those that may be acquired in the future, that
Precision fails or is unable to discover during its due diligence investigation
and for which it, as a successor owner, may be responsible. In connection with
acquisitions, Precision generally seeks to minimize the impact of these
liabilities by obtaining indemnities and warranties from the seller that may be
supported by deferring payment of a portion of the purchase price. However,
these indemnities and warranties, if obtained, may not fully cover the
liabilities due to their limited scope, amount, or duration, the financial
limitations of the indemnitor or warrantor, or other reasons.
THE SUCCESS OF PRECISION'S BUSINESS STRATEGY TO REALIZE A NUMBER OF CROSS
SELLING OPPORTUNITIES COULD BE AFFECTED BY A NUMBER OF FACTORS BEYOND ITS
CONTROL.
As part of its business strategy, Precision intends to pursue and
capitalize on a number of cross-selling opportunities it believes exist as a
result of the complementary customer bases and manufacturing capabilities of the
acquired companies and to implement certain operating improvements. Precision's
ability to implement and realize the benefits of this strategy could be affected
by a number of factors beyond its control, such as operating difficulties,
increased operating costs, regulatory developments, general economic conditions,
increased competition, or the inability to obtain adequate financing for
Precision's operations on suitable terms. In addition, after gaining experience
with its operations under this strategy, Precision may decide to alter or
discontinue certain aspects of it. Any failure to implement aspects of
Precision's strategy may adversely affect its results of operations, financial
condition and ability to service debt.
PRECISION'S INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT
ON ITS GROWTH STRATEGY.
Precision's current business strategy will require additional capital
investment. Capital will be required for, among other purposes, managing
acquired companies, acquiring new equipment, maintaining the condition of
Precision's existing equipment and completing new acquisitions. To the extent
that cash generated internally and cash available under Precision's credit
facilities is not sufficient to fund capital requirements, Precision will
require additional debt and/or equity financing. There can be no assurance,
however, that such financing will be available or, if available, will be
available on terms satisfactory to Precision. Future debt financing, if
available, may result in increased interest and amortization expense, increased
leverage and decreased income available to fund further acquisitions and
expansion, and may limit Precision's ability to withstand competitive pressures
and render it more vulnerable to economic downturns. If Precision fails to
obtain sufficient additional capital in the future, it could be forced to
curtail its growth strategy by reducing or delaying capital expenditures and
acquisitions, selling assets or restructuring or refinancing its indebtedness.
A LOSS OF KEY EMPLOYEES AND HIGHLY SKILLED WORKERS COULD ADVERSELY AFFECT
PRECISION'S BUSINESS.
19
Some of Precision's executive officers are key to Precision's management
and direction. Precision's future success will depend on its ability to retain
capable management. Precision recently appointed a new executive management
team, and Precision's continued success will depend in part on the successful
integration of that team with the operations of Precision's subsidiaries.
Although Precision believes it will be able to attract and retain talented
personnel and that it could replace key management personnel should the need
arise, the inability to attract or retain such personnel could have a material
adverse effect on its business. In addition, because its products and processes
are complex and require a high level of precision, Precision is generally
dependent on an educated and trained workforce. Precision would be adversely
affected by a shortage of skilled employees.
FAILURE TO MAINTAIN RELATIONSHIPS WITH PRECISION'S LARGER CUSTOMERS AND FAILURE
BY PRECISION'S CUSTOMERS TO CONTINUE TO PURCHASE EXPECTED QUANTITIES DUE TO
CHANGES IN MARKET CONDITIONS COULD HAVE AN ADVERSE EFFECT ON ITS OPERATIONS.
Precision's largest customer, General Electric Power Systems, accounted
for approximately 42% of net sales in the first six months of 2001, and its top
ten customers accounted for approximately 83% of its sales during the same
period. The termination by General Electric Power Systems or any one or more of
Precision's other top 10 customers of their relationship with Precision or their
failure to purchase expected quantities from Precision could have a material
adverse effect upon Precision's business, financial condition and results of
operations.
PRECISION'S REVENUES AND OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT
FLUCTUATION.
A significant portion of Precision's revenues is derived from new projects
and contracts, the timing of which is subject to a variety of factors beyond
Precision's control, including customer budgets and modifications in customer
products. Precision cannot predict the degree to which these trends will
continue. A portion of Precision's operating expenses is relatively fixed.
Cancellations, reductions or delays in orders by a customer or group of
customers could have a material adverse effect on our business, financial
condition or results of operations. Additionally, Precision may periodically
incur cost increases due to hiring and training of new employees in anticipation
of future growth. The size, timing and integration of possible future
acquisitions may also cause substantial fluctuations in operating results from
quarter to quarter. As a result, operating results for any fiscal quarter may
not be indicative of the results that may be achieved for any subsequent fiscal
quarter or for a full fiscal year.
SIGNIFICANT COMPETITION FOR PRECISION PART MANUFACTURING OUTSOURCED BY ORIGINAL
EQUIPMENT MANUFACTURERS MAY AFFECT PRECISION'S ABILITY TO SUCCEED.
Precision operates in an industry that is highly fragmented and
competitive. A variety of suppliers with different subsets of Precision's
manufacturing capabilities compete to supply the stringent demands of large
original equipment manufacturers. In addition, Precision's customers are
continually seeking to consolidate their business among one or more "Preferred"
or "Qualified" suppliers. There can be no assurance that Precision will be able
to successfully implement new production programs to supply products to original
equipment manufacturers. If any customer becomes dissatisfied with Precision's
prices, quality or timeliness of delivery, among other things, it could award
future business or move existing business to our competitors. There can be no
assurance that Precision's products will continue to compete successfully with
the products of its competitors, including original equipment manufacturers
themselves, many of which are significantly larger and have greater financial
and other resources than Precision does.
20
THE CYCLICAL NATURE OF THE INDUSTRIES PRECISION CURRENTLY SERVES COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS.
A majority of Precision's revenues are derived from customers that are in
industries and businesses that are cyclical in nature and subject to change in
general economic conditions, such as the power generation, construction,
aerospace and automotive industries. General economic or industry specific
downturns could have a material adverse effect on Precision and its business,
results of operations and financial condition.
PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO OBTAIN RAW
MATERIALS AND COMPONENTS FROM ITS SUPPLIERS ON FAVORABLE TERMS.
Generally, Precision's major raw materials consist of traditional
materials such as steel, aluminum, iron, copper, magnesium and bronze, as well
as exotic and difficult to machine materials such as titanium, inconel and
invar. A portion of its raw materials are supplied by its customers on
consignment. Raw materials not supplied by its customers are purchased from
several suppliers. Although all of these materials have been available in
adequate quantities to meet its production demands in the past, Precision can
give you no assurance that such materials will be available in adequate
quantities in the future. Precision does not presently anticipate any raw
material shortages that would significantly affect production. However, the lead
times between the placement of orders for certain raw materials and actual
delivery to Precision may vary significantly and Precision may from time to time
be required to order raw materials in quantities and at prices less than optimal
to compensate for the variability of lead times of delivery. Precision's
business could be adversely affected if Precision is unable to obtain raw
materials and components from suppliers on favorable terms.
PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED TO THE EXTENT THE U.S.
GOVERNMENT TERMINATED OR MODIFIED A CONTRACT WITH PRECISION OR ONE OF ITS
CUSTOMERS.
Precision is generally not a direct party to any contracts with the U.S.
government. However, a portion of its sales are to customers who use the parts,
assemblies or tooling Precision supplies to them to fill orders under U.S.
government contracts to which they are a party. U.S. government contracts have
significant inherent risks, including:
o the ability of the U.S. government to terminate a contract for
convenience, in which case the other party could be limited to
receiving only costs already incurred or committed;
o modification of U.S. government contracts due to lack of
Congressional funding or changes in such funds; and
o an extensive and complex regulatory structure, which could subject
the other party to contract termination, civil and criminal
penalties and in some cases, suspension or disbarment from future
U.S. government contracts.
To the extent the U.S. government terminates or modifies a contract with
one of Precision's customers, Precision could be adversely affected if the
affected customer reduced its purchases from Precision as a result. In addition,
in the few instances where Precision is a direct party to a U.S. government
contract, the inherent risks described above, as well as risks associated with
the competitive bidding atmosphere under which U.S. government contracts are
awarded and unreimbursed cost overruns in fixed-price contracts, could have a
material adverse effect on its results of operations and financial condition.
21
PRECISION'S EQUIPMENT, FACILITIES AND OPERATIONS ARE SUBJECT TO NUMEROUS
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS THAT MAY BECOME MORE STRINGENT IN
THE FUTURE AND MAY RESULT IN INCREASED LIABILITY AND INCREASED CAPITAL
EXPENDITURES.
Precision's equipment, facilities and operations are subject to
increasingly complex and stringent federal, state and local laws and regulations
pertaining to protection of human health and the environment. These include,
among other things, the discharge of contaminants into the environment and the
handling and disposition of wastes (including industrial, solid and hazardous
wastes). In addition, Precision is required to obtain and maintain regulatory
approvals in the United States in connection with its operations. Many
environmental laws and regulations provide for substantial fines and criminal
sanctions for violations. It is difficult to predict the future development of
such laws and regulations or their impact on future earnings and operations, but
Precision anticipates that these laws and regulations will continue to require
increased capital expenditures because environmental standards will become more
stringent. Precision cannot assure you that material costs or liabilities will
not be incurred.
Certain environmental laws provide for strict, joint and several liability
for investigation and remediation of spills and other releases of hazardous
materials. These laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of any hazardous
materials. Persons who "arrange", as defined under these laws, for the disposal
or treatment of hazardous materials also may be liable for the costs of
investigation, removal or remediation of such materials at the disposal or
treatment site, regardless of whether the affected site is owned or operated by
them. Such liability is strict, and may be joint and several.
Because Precision owns and operates a number of facilities, and because it
arranges for the disposal of hazardous materials at many disposal sites, it may
incur costs for investigation, removal and remediation, as well as capital costs
associated with compliance with environmental laws and regulations. Although
such environmental costs have not been material in the past and are not expected
to be material in the future, changes in environmental laws and regulations or
unexpected investigations and clean-up costs could have a material adverse
effect on Precision's business, financial condition or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Precision's bank term loan provides for interest to be charged at either
the LIBOR rate or a base rate plus, in each case, a margin determined in
accordance with the credit agreement. Based on Precision's level of outstanding
borrowings under its term loan at June 30, 2001, a 100 basis point change in
interest rate would result in a $0.2 million annual change in interest expense.
Precision's revolving line of credit provides for interest to be charged at
either the LIBOR rate or a base rate plus, in each case, a margin determined in
accordance with the credit agreement. Based on Precision's level of outstanding
borrowings under its revolving line of credit as of June 30, 2001, a 100 basis
point change in interest rates would result in a $0.1 million annual change in
interest expense.
Precision's GECC term loan provides for interest to be charged at the
LIBOR rate plus 500 basis points in accordance with the term loan agreement.
Based on Precision's level of borrowings under the equipment term loan as of
June 30, 2001, a 100 basis points change in interest rates would result in a
$0.2 million annual change in interest expense.
Precision's $6.6 million operating lease program provides for interest to
be charged at the LIBOR rate plus 500 basis points in accordance with the master
lease agreement. Based on Precision's level of outstanding operating lease
obligations at June 30, 2001, a 100 basis point change in the LIBOR interest
rate would result in a $0.1 million annual change in equipment rental expense.
The remainder of Precision's debt is at fixed interest rates. Our senior
subordinated notes have a carrying value of $100 million, but we believe that
the fair value of the senior subordinated notes is substantially below the
carrying value. Because the notes are held by a limited number of institutional
investors and are not actively traded among those investors or the general
public, we are unable to accurately determine the current fair value of the
notes. The last trade of these notes known to management took place in March
2001 at approximately 45% of face value.
Precision does not own nor is it obligated for other significant debt or
equity securities that would be affected by fluctuations in market risk, and our
exposure to foreign currency exchange rate risk and commodity price risk is not
significant.
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) through (d) Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Not applicable.
(b) REPORTS ON FORM 8-K
Not applicable.
24
PRECISION PARTNERS, INC.
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.
PRECISION PARTNERS, INC.
Dated: August 13, 2001 By: /s/ Frank R. Reilly
----------------------------------------------
Frank R. Reilly
Executive Vice President and Chief Financial
Officer