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 September 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 (I.R.S. Employer Identification No.)
of 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 October 31, 2001.
1
PRECISION PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
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Disclosure Concerning Forward Looking Statements 3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 4
September 30, 2001 (Unaudited) and December 31,
2000
Unaudited Condensed Consolidated Statements of 5
Operations for the Three Months and Nine Months
Ended September 30, 2001 and 2000
Unaudited Condensed Consolidated Statements of 6
Cash Flows for the Nine Months Ended September 30,
2001 and 2000
Notes to Unaudited Condensed Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market 32
Risk
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Securities Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
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,
including the proposed refinancing discussed under "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations - Liquidity and Capital Resources",
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 implement 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)
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,403 $ --
Trade accounts receivable, less allowance for doubtful accounts of
$710 at September 30, 2001 and $590 at December 31, 2000 22,802 22,043
Inventories 15,796 18,635
Deferred income taxes 1,961 1,634
Other current assets 3,331 1,078
------------ ------------
Total current assets 48,293 43,390
Property, plant and equipment, at cost, net 69,782 86,214
Goodwill, net 68,691 71,661
Other assets 5,357 6,086
------------ ------------
Total assets $ 192,123 $ 207,351
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 12,469 $ 15,429
Accrued expenses 9,043 12,324
Income taxes payable 962 922
Deferred revenue 4,075 1,616
Current portion of long term debt 55,685 7,975
Other current liabilities 1,495 132
------------ ------------
Total current liabilities 83,729 38,398
Long term debt, less current portion 100,018 141,860
Deferred income taxes 2,173 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 (41,866) (22,809)
------------ ------------
Total stockholder's equity 6,203 25,247
------------ ------------
Total liabilities and stockholder's equity $ 192,123 $ 207,351
============ ============
See accompanying notes
4
Precision Partners, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 42,963 $ 37,589 $ 139,837 $ 125,664
Cost of sales 39,685 33,986 117,276 101,831
Restructuring charges and impairment of long-lived assets 5,150 4,270 5,150 4,270
----------- ----------- ----------- -----------
Gross (loss) profit (1,872) (667) 17,411 19,563
Selling, general and administrative expenses 6,991 8,315 21,595 23,288
Restructuring charges and impairment of long-lived assets 1,315 2,501 1,315 2,501
----------- ----------- ----------- -----------
Operating loss (10,178) (11,483) (5,499) (6,226)
Interest income 56 7 74 30
Interest expense (4,320) (3,860) (13,306) (12,197)
Other expense, net (16) (888) (326) (936)
----------- ----------- ----------- -----------
Loss before income taxes (14,458) (16,224) (19,057) (19,329)
Benefit for income taxes (642) (3,920) -- (4,685)
----------- ----------- ----------- -----------
Net loss $ (13,816) $ (12,304) $ (19,057) $ (14,644)
=========== =========== =========== ===========
See accompanying notes
5
Precision Partners, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine months ended
September 30,
----------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net loss $ (19,057) $ (14,644)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 11,595 8,848
Amortization of goodwill 2,970 3,057
Amortization of debt issue costs 658 648
Amortization of covenant not to compete -- 747
Impairment of long-lived assets 5,275 6,771
Loss on disposal of fixed assets 361 1,325
Deferred income taxes -- (5,246)
Changes in operating assets and liabilities:
Trade accounts receivable (759) 2,685
Inventories 2,839 1,449
Other current assets (271) 352
Advance deposit for equipment leases -- (6,015)
Other assets 71 2,029
Accounts payable (2,960) 5,859
Accrued expenses (3,281) (115)
Income taxes payable 40 (714)
Deferred revenue 2,459 (2,828)
Other current liabilities 1,363 2,656
----------- -----------
Net cash provided by operating activities 1,303 6,864
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 717 366
Purchases of property, plant and equipment (3,498) (4,104)
Acquisition of subsidiaries, net of cash -- (206)
----------- -----------
Net cash used in investing activities (2,781) (3,944)
FINANCING ACTIVITIES
Repayments of borrowings from revolving line of credit (30,338) (33,450)
Proceeds from revolving line of credit 41,683 32,055
Repayments of debt (5,477) (909)
Contributions of capital 13 9
Payment of debt issue costs -- (938)
----------- -----------
Net cash provided by (used in) financing activities 5,881 (3,233)
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,403 (313)
Cash and cash equivalents, beginning of period -- 313
----------- -----------
Cash and cash equivalents, end of period $ 4,403 $ --
=========== ===========
SUPPLEMENTARY INFORMATION FOR THE STATEMENT OF CASH FLOWS:
Interest payments $ 16,238 $ 14,850
Income tax (refunds) payments $ (68) $ 1,274
Non-cash investing and financing activities - purchase of
computer software under financing agreements
$ -- $ 97
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 nine month period
ended September 30, 2001 are not necessarily, and should not be construed as,
indicative of the results that may be achieved for a full year.
2. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Due to continuing losses at Galaxy and Certified, management has approved
and begun to implement plans to further restructure these operations. Management
has determined that it will consolidate the operations into one facility for
each of Galaxy and Certified and that excess equipment will be disposed of.
Galaxy has begun to consolidate its operations and will close one of its two
plants by December 31, 2001. The equipment that was located in the plant that is
closing has been or is expected to be moved prior to year-end. The majority of
the equipment that will be retained will be moved to Galaxy's other operating
plant, but some will be moved to other Precision subsidiaries. The following
summarizes charges recorded during the third quarter of 2001 in connection with
the restructuring of Galaxy (in thousands):
Impairment of long-lived assets to be abandoned or disposed $ 2,432
Future rent and taxes on plant to be eliminated 622
Provision for terminating equipment leases 165
Employee termination costs 50
--------
Total restructuring and impairment charges - Galaxy $ 3,269
========
Additionally, management expects to incur pre-tax cash costs of
approximately $0.4 million in the fourth quarter of 2001 to move equipment in
connection with the restructuring of Galaxy.
Certified intends to consolidate its operations into one plant during the
first and second quarters of 2002. Equipment to be retained will be relocated
from two other operating facilities, both of which are leased. Certified has
begun to market equipment which will become excess as a result of this
restructuring. The following summarizes charges recorded during the third
quarter of 2001 in connection with the restructuring of Certified (in
thousands):
Impairment of long-lived assets to be abandoned or disposed $ 2,128
Future rent and taxes on plants to be eliminated 353
--------
Total restructuring and impairment charges - Certified $ 2,481
========
Additionally, management expects to incur pre-tax cash costs of
approximately $0.6 million in the first and second quarters of 2002 to move
equipment in connection with the restructuring of Certified.
8
Also during the third quarter of 2001, management determined that General
Automation would dispose of certain under-utilized production equipment in order
to make better use of its available production floor space. General Automation
intends to dispose of these assets by December 31, 2001. An impairment charge of
$0.7 million has been recorded in the third quarter of 2001.
Of the restructuring charges and impairment of long-lived assets recorded
in the third quarter of 2001 as noted above, $5.2 million is included in cost of
sales, and $1.3 million is included in selling, general and administrative
expenses. As a result of the recognition of the impairment charges, management
estimates an annual reduction of approximately $1.5 million in depreciation
expense.
In addition to the charges noted above, Gillette, General Automation and
Galaxy recorded adjustments to reduce inventory balances in aggregate by $3.5
million. These adjustments, which are recorded in cost of sales, resulted from
the performance of physical inventory procedures, the identification of obsolete
items and, in the case of Gillette, implementation of a new cost system.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Significant adverse changes in Galaxy's and Certified's business
environments, as well as historical, current and projected cash flow losses led
management to evaluate the operations of these two businesses in the third
quarter of 2000. As a result of this evaluation, management concluded that
goodwill and machinery and equipment were impaired, and in accordance with
Precision's accounting policies, impairment losses of $2.3 million relating to
goodwill and $4.5 million relating to machinery and equipment at Galaxy and
Certified were recognized in the third quarter of 2000. Of these amounts, $4.3
million is included in cost of sales and $2.5 million is included in selling,
general and administrative expenses. The Company also incurred $1.1 million of
cash charges related to the reorganization. As a result of the recognition of
these impairment charges, an annual reduction of approximately $0.1 million in
goodwill amortization and $0.9 million in depreciation expense have been
realized.
Further, based on the results of that assessment, adjustments of $3.0
million, $0.4 million and $0.7 million are included in cost of sales, selling,
general and administrative expenses, and other expense, respectively in the
third quarter of 2000. The adjustments relate to the write-off of certain
inventory, accounts receivable, and machinery and equipment no longer in use.
In addition, as part of the settlement agreement with a former president
of one of Precision's subsidiaries, additional amortization expense of $0.6
million relating to a non-compete agreement previously entered into with this
individual is included in selling, general, and administrative expenses in the
third quarter of 2000. This additional amortization expense reflects the change
in the termination date of that former president's covenant not to compete
agreement from August 31, 2004 to December 31, 2000.
9
3. INVENTORIES
Inventories consist of the following at:
September 30, December 31,
2001 2000
----------- -----------
(in thousands)
(Unaudited)
Raw materials $ 4,811 $ 4,061
Work in process 7,666 10,443
Finished goods 3,832 4,350
----------- -----------
16,309 18,854
Less reserves 513 219
----------- -----------
$ 15,796 $ 18,635
=========== ===========
4. DEBT
Long-term debt consists of the following at:
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
(Unaudited)
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 (7.8% as of September 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, 18,585 21,390
$1,380,000 on June 30, 2003, and $1,495,000 on June 30, 2004.
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 (6.6% as of September 30, 2001) and there is a
commitment fee of 0.5% per year based on the unused portion of the line, 18,809 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 (7.6% as of September
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 subsidiaries (other 18,174 20,771
than Certified and Gillette).
Other 135 209
------------- -------------
155,703 149,835
Less current portion 55,685 7,975
------------- -------------
$ 100,018 $ 141,860
============= =============
10
Precision did not comply with certain financial covenants contained in its
bank credit agreement for the period ended September 30, 2001. Precision has
notified its bank group and General Electric Capital Corporation ("GECC") of
this non-compliance which is an event of default under the bank credit agreement
and the GECC credit agreement.
On November 16, 2001, the bank group and GECC agreed to waive these
covenant defaults through December 19, 2001. Additionally, on November 16, 2001,
Precision accepted a commitment from GECC and Ableco Finance LLC, collectively
the "GECC Lending Group", for a new credit agreement. The proceeds from the new
facility will be utilized to refinance the bank and GECC debt currently
outstanding, to satisfy all obligations under our master lease agreement with
GECC and for working capital and other general corporate purposes. The
commitment of the GECC Lending Group to underwrite a new credit arrangement is
subject to the satisfaction of certain conditions and there can be no assurance
that the Company will be able to complete the refinancing. Additionally, the
terms and conditions discussed below may change prior to a closing.
The new credit arrangement is anticipated to consist of a $50 million term
loan and a $25 million revolving credit facility. The term loan would amortize
over 48 months with quarterly principal payments of 2.5% of the original
principal amount in each of quarters three through twelve, 5.0% in each of
quarters thirteen through fifteen and 60.0% in quarter sixteen. Interest on the
term loan would be payable at an annual rate of either LIBOR plus a margin of
5.00% or the lender's index rate plus a margin of 3.50%, at Precision's option,
subject to a minimum interest rate of 10.00% in the first year, increasing to
11.00% in the second and third years and to 12.00% in the final year.
The revolving credit facility would be for a term of 48 months. Borrowings
under this facility would be limited to 85% of eligible accounts receivable and
50% of eligible inventory and subject to other eligibility requirements and
reserves to be agreed in the loan documentation. Interest on the revolving
credit facility would be payable at an annual rate of either LIBOR plus a margin
of 3.25% or the lender's index rate plus a margin of 1.75%, at Precision's
option. There would also be an unused facility fee payable at an annual rate of
0.50% on any unused portion of the revolving credit facility.
Additionally, if the ratio of Precision's senior debt to EBITDA (as to be
defined in the anticipated agreement) exceeds certain predetermined levels, then
Precision's borrowing rate will increase 2% on an in-kind basis over the
otherwise applicable annual rate, with such in-kind amounts being payable at the
maturity date of the credit agreement. If Precision has a continuing event of
default, its borrowing rate will increase 2% over the otherwise applicable
annual rate.
The GECC lending group will attempt to syndicate the revolving credit
facility, but the success of the syndication will not be a condition precedent
to the closing of the transaction. However, the GECC Lending Group has the right
to adjust the structure and pricing of the revolving credit facility to
facilitate the syndication, provided that the pricing shall be increased by no
more than 100 basis points and the term of the credit facilities shall be
reduced to no less than three years.
The GECC Lending Group would have a fully perfected first priority
security interest in all existing and after-acquired assets of Precision and its
subsidiaries. Precision and each of its subsidiaries will be borrowers under the
new credit agreement and each borrower will guarantee the obligations of every
other borrower. Precision's immediate parent, Precision Partners Holding
Company, will guarantee the new credit agreement. Precision would be subject to
certain covenants expected to include, but not limited to, maximum Senior
Leverage Ratio, minimum Senior Interest Coverage Ratio, maximum Total Interest
Leverage Ratio, minimum Fixed Charge Coverage Ratio and maximum Capital
Expenditures.
11
There would be mandatory repayment obligations related to certain asset
dispositions, sales of equity and a portion of any excess cash flow. In the
event of optional pre-payments on the term loan, Precision would be obligated to
pay pre-payment premiums of 3.0%, 1.5%, 1.0% and 0.5% of the amounts prepaid in
the first, second, third and fourth years, respectively.
The financing commitment described above is subject to final negotiations
and documentation and includes other significant terms and conditions.
Because the Company's current lenders have agreed to waive the
aforementioned defaults for a period of less than one year from the date of the
financial statements and the fact that the GECC Lending Group has the right to
withdraw its commitment if there is a material adverse change that affects the
Company or its subsidiaries taken as a whole, or the industry in which they
operate, and under certain other conditions, the Company has classified its
outstanding bank and GECC debt as current in the September 30, 2001 condensed
consolidated balance sheet. Further, if the Company is unable to complete the
refinancing by December 19, 2001, the bank group and GECC could pursue certain
remedies that may include, but are not limited to, accelerating the maturity of
the outstanding debt. If this were to occur, it would be an event of default
under the Company's $100 million senior subordinated notes and as a result, the
holders of those notes would have the right to declare them immediately due and
payable.
5. 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.
6. INCOME TAXES
The tax provisions (benefits) for the three and nine months ended
September 30, 2001 and 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 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 nine months ended September 30, 2001. During the
first six months of 2001 Precision had recorded a provision for taxes based on
its expectation that it would incur certain state tax obligations during the
year, notwithstanding that it had incurred significant losses on a consolidated
basis. Precision no longer expects to incur state tax obligations in 2001 and
has therefore reversed the previously recorded tax provision in the third
quarter. Accordingly, Precision has recognized a state tax benefit of $0.6
million for the three months ended September 30, 2001, and no provision or
benefit for the nine months then ended, as compared to the tax benefits of $3.9
million and $4.7 million in the three and nine months ended September 30, 2000.
7. 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
12
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.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, effective for fiscal years beginning after June 15, 2002. The
statement requires companies to record a liability for asset retirement
obligations in the period in which they are incurred, which typically could be
upon the completion of construction or shortly thereafter. This statement is not
expected to have a material effect on the Company.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years beginning after
December 15, 2001. This statement supercedes Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement is not expected to have a
material effect on the Company.
13
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.
GENERAL
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Due to continuing losses at Galaxy and Certified following the completion
of reorganization plans announced in the third quarter of 2000, management has
approved and begun to implement plans to further restructure these operations.
Management has determined that it will consolidate the operations into one
facility for each of Galaxy and Certified and that excess equipment will be
disposed of.
Galaxy has begun to consolidate its operations and will close one of its
two plants by December 31, 2001. The equipment that was located in the plant
that is closing has been or is expected to be moved prior to year-end. The
majority of the equipment that will be retained will be moved to Galaxy's other
operating plant, but some will be moved to other Precision subsidiaries. The
following summarizes charges recorded during the third quarter of 2001 in
connection with the restructuring of Galaxy (in thousands):
Impairment of long-lived assets to be abandoned or disposed $ 2,432
Future rent and taxes on plant to be eliminated 622
Provision for terminating equipment leases 165
Employee termination costs 50
--------
Total restructuring and impairment charges - Galaxy $ 3,269
========
Additionally, management expects to incur pre-tax cash costs of
approximately $0.4 million in the fourth quarter of 2001 to move equipment in
connection with the restructuring of Galaxy.
Certified intends to consolidate its operations into one plant during the
first and second quarters of 2002. Equipment to be retained will be relocated
from two other operating facilities, both of which are leased. Certified has
begun to market equipment which will become excess as a result of this
restructuring. The following summarizes charges recorded during the third
quarter of 2001 in connection with the restructuring of Certified (in
thousands):
Impairment of long-lived assets to be abandoned or disposed $ 2,128
Future rent and taxes on plants to be eliminated 353
--------
Total restructuring and impairment charges - Certified $ 2,481
========
Additionally, management expects to incur pre-tax cash costs of
approximately $0.6 million in the first and second quarters of 2002 to move
equipment in connection with the restructuring of Certified.
14
Also during the third quarter of 2001, management determined that General
Automation would dispose of certain under-utilized production equipment in order
to make better use of its available production floor space. General Automation
intends to dispose of these assets by December 31, 2001. An impairment charge of
$0.7 million has been recorded in the third quarter of 2001.
Of the restructuring charges and impairment of long-lived assets recorded
in the third quarter of 2001 as noted above, $5.2 million is included in cost of
sales, and $1.3 million is included in selling, general and administrative
expenses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations". As a result of the recognition
of the impairment charges, management estimates an annual reduction of $1.5
million in depreciation expense.
In addition to the charges noted above, Gillette, General Automation and
Galaxy recorded adjustments to reduce inventory balances in aggregate by $3.5
million. These adjustments, which are recorded in cost of sales, resulted from
the performance of physical inventory procedures, the identification of obsolete
items and, in the case of Gillette, implementation of a new cost system. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations".
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Significant adverse changes in Galaxy's and Certified's business
environments, as well as historical, current and projected cash flow losses led
management to evaluate the operations of these two businesses in the third
quarter of 2000. As a result of this evaluation, management concluded that
goodwill and machinery and equipment were impaired, and in accordance with
Precision's accounting policies, impairment losses of $2.3 million relating to
goodwill and $4.5 million relating to machinery and equipment at Galaxy and
Certified were recognized in the third quarter of 2000. Of these amounts, $4.3
million is included in cost of sales and $2.5 million is included in selling,
general and administrative expenses. The Company also incurred $1.1 million of
cash charges related to the reorganization. As a result of the recognition of
these impairment charges, an annual reduction of approximately $0.1 million in
goodwill amortization and $0.9 million in depreciation expense have been
realized.
Further, based on the results of that assessment, adjustments of $3.0
million, $0.4 million and $0.7 million are included in cost of sales, selling,
general and administrative expenses, and other expense, respectively in the
third quarter of 2000. The adjustments relate to the write-off of certain
inventory, accounts receivable, and machinery and equipment no longer in use.
In addition, as part of the settlement agreement with a former president
of one of Precision's subsidiaries, additional amortization expense of $0.6
million relating to a non-compete agreement previously entered into with this
individual is included in selling, general, and administrative expenses in the
third quarter of 2000. This additional amortization expense reflects the change
in the termination date of that former president's covenant not to compete
agreement from August 31, 2004 to December 31, 2000.
15
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial information for
the periods indicated:
Precision Partners, Inc.
------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands)
OPERATING DATA:
Net sales $ 42,963 $ 37,589 $ 139,837 $ 125,664
Cost of sales 39,685 33,986 117,276 101,831
Restructuring charges and impairment of long-lived assets 5,150 4,270 5,150 4,270
--------- --------- --------- ---------
Gross (loss) profit (1,872) (667) 17,411 19,563
Selling, general and administrative expenses 6,991 8,315 21,595 23,288
Restructuring charges and impairment of long-lived assets 1,315 2,501 1,315 2,501
--------- --------- --------- ---------
Operating loss (10,178) (11,483) (5,499) (6,226)
Interest expense, net 4,264 3,853 13,232 12,167
Net loss (13,816) (12,304) (19,057) (14,644)
OTHER FINANCIAL DATA:
Depreciation and amortization 4,851 4,608 14,565 12,652
EBITDA (1), (2) $ (5,327) $ (6,875) $ 9,066 $ 6,426
Restructuring, impairment and other charges 9,978 10,154 9,978 10,154
Adjusted EBITDA (1), (2) $ 4,651 $ 3,279 $ 19,044 $ 16,580
(1) EBITDA is defined as operating income plus depreciation and amortization,
excluding amortization of debt issue costs. Adjusted EBITDA is defined as
EBITDA plus non-cash restructuring, impairment and other charges (See (2)
below). EBITDA and Adjusted EBITDA are not measures of performance under
generally accepted accounting principles. While EBITDA and Adjusted 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
they may be used by certain investors as supplemental information to
evaluate a company's financial performance. In addition, the definition of
EBITDA and Adjusted EBITDA used in this
16
report may not be comparable to the definition of EBITDA and Adjusted
EBITDA used by other companies.
(2) EBITDA for the three and nine months ended September 30, 2001 includes
non-cash restructuring, impairment and other charges of approximately
$10.0 million consisting of restructuring charges of $1.2 million,
impairment of property, plant and equipment of $5.3 million and inventory
adjustments of $3.5 million. EBITDA for the three and nine months ended
September 30, 2000 includes non-cash impairment and other charges of $10.2
million consisting of goodwill impairment of $2.3 million, equipment
impairment of $4.5 million, and other asset write-offs of $3.4 million.
These amounts have been added back to EBITDA to arrive at Adjusted EBITDA.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
- --------------------------------------------------------------------
NET SALES
Net sales increased 14.3% to $43.0 million in the third quarter of 2001
compared to $37.6 million in the third quarter of 2000. The increase is
primarily due to continued growth in power generation component sales at Mid
State and the first-time inclusion of sales of heavy construction, off-road
diesel engine blocks and heavy truck axle components at Galaxy and Nationwide,
respectively. These increases were offset in part by weakness in medical and
business machine equipment component sales at Gillette and lower sales volume in
automotive and light truck components at Galaxy, General Automation, and
Nationwide.
COST OF SALES
Cost of sales increased 16.8% to $39.7 million in the third quarter of
2001 compared to $34.0 million in the third quarter of 2000. The third quarter
of 2001 included inventory adjustments of $3.5 million as compared to
adjustments of $3.0 million in the third quarter of 2000. Excluding these
adjustments from both periods , cost of sales increased 16.7% to $36.2 million
primarily related to the increase in sales. See discussion of Gross Profit
(Loss) below.
RESTRUCTURING AND IMPAIRMENT CHARGES AFFECTING GROSS PROFIT
During the third quarter of 2001, management approved restructuring plans
for its Galaxy and Certified operations. In connection with these plans,
Precision recorded restructuring and impairment charges that affected gross
profit in the amount of $4.5 million. Also during the third quarter of 2001,
management determined that General Automation would dispose of certain
under-utilized production equipment resulting in an impairment charge of $0.7
million.
In connection with reorganization plans implemented during the third
quarter of 2000, management concluded that machinery and equipment was impaired
at Galaxy and Certified and recorded an impairment loss of $4.3 million that
affected gross profit.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General".
17
GROSS PROFIT (LOSS)
Gross loss increased to $1.9 million in the third quarter of 2001 compared
to a loss of $0.7 million in the third quarter of 2000. Excluding the
restructuring and impairment charges and the inventory adjustments discussed
above, gross profit increased 6.7% to $6.8 million. Gross margin, also excluding
these items, decreased to 15.8% in the third quarter of 2001 from 17.6% in the
comparable period of 2000. Strength in power generation components and the
absence of start-up losses incurred in the prior year period at the heavy
construction and off-road diesel engine plant were offset in part by the impact
of lower sales volume in automotive, light truck and medical and business
machine equipment component sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased 15.9% to $7.0
million in the third quarter of 2001 compared to $8.3 million in the third
quarter of 2000. The reduction in selling, general and administrative expenses
was primarily the result of expense reductions at Certified offset in part by
higher costs at Mid State relating to its strong growth. Also, in the three
months ended September 30, 2000, the Company recorded additional amortization
expense of $0.6 million to reflect the acceleration of the termination date of a
former employee's non-compete agreement. Further, Galaxy incurred bad debt
expense of $0.4 million in the three months ended September 30, 2000.
RESTRUCTURING AND IMPAIRMENT CHARGES NOT AFFECTING GROSS PROFIT
During the third quarter of 2001, management approved restructuring plans
for its Galaxy and Certified operations. In connection with these plans,
Precision recorded restructuring and impairment charges that affected operating
loss, but not gross profit in the amount of $1.3 million.
In connection with reorganization plans implemented during the third
quarter of 2000, management concluded that goodwill and machinery and equipment
was impaired at Galaxy and Certified and recorded an impairment loss of $2.5
million that affected operating loss, but not gross profit.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General".
OPERATING LOSS
As a result of all of the foregoing, operating loss decreased to $10.2
million in the third quarter of 2001 from a loss of $11.5 million in the third
quarter of 2000. Excluding the restructuring and impairment charges and other
adjustments discussed above, the operating loss for the third quarter of 2001
was $0.2 million, an improvement over the $1.3 million operating loss for the
third quarter of 2000.
NET INTEREST EXPENSE
For the third quarter of 2001, net interest expense increased 10.7% to
$4.3 million from $3.9 million for the comparable period of 2000. The increase
is primarily attributable to higher average outstanding debt in 2001 versus
2000. Higher average debt balances were due to the refinancing and restructuring
18
which occurred in the fourth quarter of 2000 and higher outstanding borrowings
under the Company's revolving line of credit.
INCOME TAXES
The tax provision for the third quarter of 2001 and the tax benefit for
the third 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 September 30, 2001. During
the first six months of 2001 Precision had recorded a provision for taxes based
on its expectation that it would incur certain state tax obligations during the
year, notwithstanding that it had incurred significant losses on a consolidated
basis. Precision no longer expects to incur state tax obligations in 2001 and
has therefore reversed the previously recorded tax provision in the third
quarter. Accordingly, Precision has recognized a state tax benefit of $0.6
million for the three months ended September 30, 2001, as compared to a tax
benefit of $3.9 million in the three months ended September 30, 2000.
NET LOSS
Net loss was $13.8 million in the third quarter of 2001 compared to $12.3
million in the third quarter of 2000 due to the aforementioned reasons and a
loss of $0.9 million included in other expenses in the third quarter of 2000
mainly related to the disposal of idle and obsolete equipment at Galaxy and
Certified.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 5.3% to $4.9 million in the third
quarter of 2001 compared to $4.6 million in the third 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.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
- --------------------------------------------------------------------------------
NET SALES
Net sales increased 11.3% to $139.8 million in the first nine months of 2001
compared to $125.7 million in the first nine months of 2000. The increase is
primarily due to continued growth in power generation component sales at Mid
State and the first-time inclusion of sales of heavy construction and off-road
diesel engine blocks and heavy truck axle components at Galaxy and Nationwide,
respectively. These increases were offset in part by weakness in aerospace
shipments at Certified and lower sales volume in automotive and light truck
components at Galaxy, General Automation and Nationwide.
COST OF SALES
Cost of sales increased 15.2% to $117.3 million in the first nine months of
2001 compared to $101.8 million in the first nine months of 2000. The first nine
months of 2001 included inventory adjustments of $3.5 million as compared to
adjustments of $3.0 million in the first nine months of 2000. Excluding
19
these adjustments, cost of sales increased 15.1% to $113.8 million primarily
related to the increase in sales. See discussion of Gross Profit (Loss) below.
RESTRUCTURING AND IMPAIRMENT CHARGES AFFECTING GROSS PROFIT
During the third quarter of 2001, management approved restructuring plans
for its Galaxy and Certified operations. In connection with these plans,
Precision recorded restructuring and impairment charges that affected gross
profit in the amount of $4.5 million. Also during the third quarter of 2001,
management determined that General Automation would dispose of certain
under-utilized production equipment resulting in an impairment charge of $0.7
million.
In connection with reorganization plans implemented during the third
quarter of 2000, management concluded that machinery and equipment was impaired
at Galaxy and Certified and recorded an impairment loss of $4.3 million that
affected gross profit.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General".
GROSS PROFIT (LOSS)
Gross profit decreased 11.0% to $17.4 million in the first nine months of
2001 compared to $19.6 million in the first nine months of 2000. Excluding the
restructuring and impairment charges and the inventory adjustments discussed
above, gross profit decreased 2.8% to $26.1 million. Gross margin, also
excluding these items, decreased to 18.6% in the first nine months of 2001 from
21.2% in the comparable period of 2000. Strength in the power generation was
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 completed aerospace job also negatively impacted
gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased 7.3% to $21.6
million in the first nine months of 2001 compared to $23.3 million in the first
nine months of 2000. This is primarily related to Galaxy and Certified
significantly lowering their selling, general and administrative costs offset in
part by higher costs at Mid State relating to its strong growth. Also, in the
nine months ended September 30, 2000, the Company recorded additional
amortization expense of $0.6 million to reflect the acceleration of the
termination date of a former employee's non-compete agreement. Further, Galaxy
incurred bad debt expense of $0.4 million in the nine months ended September 30,
2000.
RESTRUCTURING AND IMPAIRMENT CHARGES NOT AFFECTING GROSS PROFIT
During the third quarter of 2001, management approved restructuring plans
for its Galaxy and Certified operations. In connection with these plans,
Precision recorded restructuring and impairment charges that affected operating
loss, but not gross profit in the amount of $1.3 million.
In connection with reorganization plans implemented during the third
quarter of 2000, management concluded that goodwill and machinery and equipment
was impaired at Galaxy and Certified and recorded an impairment loss of $2.5
million that affected operating loss, but not gross profit.
20
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General".
OPERATING LOSS
As a result of all of the foregoing, operating loss decreased to $5.5
million in the first nine months of 2001 from a loss of $6.2 million in the
comparable period of 2000. Excluding the restructuring and impairment charges
and other adjustments discussed above, operating income for the first nine
months of 2001 was $4.5 million, as compared to $3.9 million operating income
for the first nine months of 2000.
NET INTEREST EXPENSE
For the nine months ended September 30, 2001, net interest expense
increased 8.8% to $13.2 million from $12.2 million for the comparable period of
2000. The increase is primarily attributable to higher average outstanding debt
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.
INCOME TAXES
The tax provision for the first nine months of 2001 and the tax benefit
for the first nine 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 nine months ended September 30, 2001.
During the first six months of 2001 Precision had recorded a provision for taxes
based on its expectation that it would incur certain state tax obligations
during the year, notwithstanding that it had incurred significant losses on a
consolidated basis. Precision no longer expects to incur state tax obligations
in 2001 and has therefore reversed the previously recorded tax provision in the
third quarter. Accordingly, Precision has recognized no provision or benefit for
the nine months ended September 30, 2001, as compared to a tax benefit of $4.7
million in the nine months ended September 30, 2000.
NET LOSS
Net loss was $19.1 million in the first nine months of 2001 compared to
$14.6 million in the same period of 2000 due to the aforementioned reasons and
fluctuations in other expense, primarily losses on disposal of equipment.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 15.1% to $14.6 million in the
first nine months of 2001 compared to $12.7 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.
21
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended
September 30, 2001 was $1.3 million compared to $6.9 million in the comparable
period of 2000. This decrease primarily reflects the larger net loss generated
in the current period and unfavorable working capital changes offset by higher
depreciation and higher deferred revenue.
Net cash used in investing activities improved to $2.8 million for the
nine months ended September 30, 2001 from $3.9 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 and a decrease in capital
expenditures.
Net cash provided by financing activities for the nine months ended
September 30, 2001 was $5.9 million compared to net cash used in financing
activities of $3.2 million for the nine months ended September 30, 2000. The
increase is primarily due to net borrowings during the current year period
compared to net repayments of debt and debt issue costs in the comparable period
of the prior year.
Precision's principal sources of liquidity are cash balances 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 September 30, 2001 consisted of a $18.6
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 $18.2 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
September 30, 2001, Precision had total debt of approximately $155.7 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 $18.8
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
September 30, 2001, Precision had operating leases with outstanding principal of
approximately $6.1 million under this master lease. 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 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,
excluding approximately $6.1 million of equipment currently under operating
leases expected to be refinanced as discussed below, will be approximately $5.0
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. Precision may consider the purchase of its senior subordinated
notes, from time to time, subject to permission from its bank group.
22
Based upon current operations and the historical results of its
subsidiaries, Precision believes that its cash flow from operations, together
with current cash balances 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. As of November 16, 2001, $16.8 million was
outstanding under the revolver and the Company maintained a cash balance in its
bank accounts of approximately $9.5 million. The amount outstanding under the
revolver was the maximum available at that date based on the calculated
borrowing base in effect.
Precision did not comply with certain financial covenants contained in its
bank credit agreement for the period ended September 30, 2001. Precision has
notified its bank group and General Electric Capital Corporation ("GECC") of
this non-compliance which is an event of default under the bank credit agreement
and the GECC credit agreement.
On November 16, 2001, the bank group and GECC agreed to waive these
covenant defaults through December 19, 2001. Additionally, on November 16, 2001,
Precision accepted a commitment from GECC and Ableco Finance LLC, collectively
the "GECC Lending Group", for a new credit agreement. The proceeds from the new
facility will be utilized to refinance the bank and GECC debt currently
outstanding, to satisfy all obligations under our master lease agreement with
GECC and for working capital and other general corporate purposes. The
commitment of the GECC Lending Group to underwrite a new credit arrangement is
subject to the satisfaction of certain conditions and there can be no assurance
that the Company will be able to complete the refinancing. Additionally, the
terms and conditions discussed below may change prior to a closing.
The new credit arrangement is anticipated to consist of a $50 million term
loan and a $25 million revolving credit facility. The term loan would amortize
over 48 months with quarterly principal payments of 2.5% of the original
principal amount in each of quarters three through twelve, 5.0% in each of
quarters thirteen through fifteen and 60.0% in quarter sixteen. Interest on the
term loan would be payable at an annual rate of either LIBOR plus a margin of
5.00% or the lender's index rate plus a margin of 3.50%, at Precision's option,
subject to a minimum interest rate of 10.00% in the first year, increasing to
11.00% in the second and third years and to 12.00% in the final year.
The revolving credit facility would be for a term of 48 months. Borrowings
under this facility would be limited to 85% of eligible accounts receivable and
50% of eligible inventory and subject to other eligibility requirements and
reserves to be agreed in the loan documentation. Interest on the revolving
credit facility would be payable at an annual rate of either LIBOR plus a margin
of 3.25% or the lender's index rate plus a margin of 1.75%, at Precision's
option. There would also be an unused facility fee payable at an annual rate of
0.50% on any unused portion of the revolving credit facility.
Additionally, if the ratio of Precision's senior debt to EBITDA (as to be
defined in the anticipated agreement) exceeds certain predetermined levels, then
Precision's borrowing rate will increase 2% on an in-kind basis over the
otherwise applicable annual rate, with such in-kind amounts being payable at the
maturity date of the credit agreement. If Precision has a continuing event of
default, its borrowing rate will increase 2% over the otherwise applicable
annual rate.
The GECC lending group will attempt to syndicate the revolving credit
facility, but the success of the syndication will not be a condition precedent
to the closing of the transaction. However, the GECC Lending Group has the right
to adjust the structure and pricing of the revolving credit facility to
facilitate
23
the syndication, provided that the pricing shall be increased by no more than
100 basis points and the term of the credit facilities shall be reduced to no
less than three years.
The GECC Lending Group would have a fully perfected first priority
security interest in all existing and after-acquired assets of Precision and its
subsidiaries. Precision and each of its subsidiaries will be borrowers under the
new credit agreement and each borrower will guarantee the obligations of every
other borrower. Precision's immediate parent, Precision Partners Holding
Company, will guarantee the new credit agreement. Precision would be subject to
certain covenants expected to include, but not limited to, maximum Senior
Leverage Ratio, minimum Senior Interest Coverage Ratio, maximum Total Interest
Leverage Ratio, minimum Fixed Charge Coverage Ratio and maximum Capital
Expenditures. There would be mandatory repayment obligations related to certain
asset dispositions, sales of equity and a portion of any excess cash flow. In
the event of optional pre-payments on the term loan, Precision would be
obligated to pay pre-payment premiums of 3.0%, 1.5%, 1.0% and 0.5% of the
amounts prepaid in the first, second, third and fourth years, respectively.
The financing commitment described above is subject to final negotiations
and documentation and includes other significant terms and conditions.
Because the Company's current lenders have agreed to waive the
aforementioned defaults for a period of less than one year from the date of the
financial statements and the fact that the GECC Lending Group has the right to
withdraw its commitment if there is a material adverse change that affects the
Company or its subsidiaries taken as a whole, or the industry in which they
operate, and under certain other conditions, the Company has classified its
outstanding bank and GECC debt as current in the September 30, 2001 condensed
consolidated balance sheet. Further, if the Company is unable to complete the
refinancing by December 19, 2001, the bank group and GECC could pursue certain
remedies that may include, but are not limited to, accelerating the maturity of
the outstanding debt. If this were to occur, it would be an event of default
under the Company's $100 million senior subordinated notes and as a result, the
holders of those notes would have the right to declare them immediately due and
payable.
INFLATION
We do not believe that inflation has had a significant impact on our cost
of operations.
OTHER CONSIDERATIONS
PRECISION DID NOT COMPLY WITH CERTAIN FINANCIAL COVENANTS CONTAINED IN ITS BANK
DEBT AGREEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2001. HOWEVER, WAIVERS OF
THESE COVENANT DEFAULTS WERE OBTAINED THROUGH DECEMBER 19, 2001. IF PRECISION
DOES NOT REFINANCE THIS DEBT BY DECEMBER 19, 2001, EACH OF THE BANK GROUP AND
GECC COULD PURSUE REMEDIES UNDER THESE AGREEMENTS WHICH MAY INCLUDE, BUT ARE NOT
LIMITED TO, ACCELERATING THE MATURITY OF THE DEBT OUTSTANDING THEREUNDER AND
FORECLOSING ON AND/OR SELLING ANY OR ALL OF THE PROPERTY OF THE COMPANY THAT HAS
BEEN PLEDGED TO SECURE THE DEBT.
Precision did not meet certain financial covenants contained in its bank
credit agreement for the period ended September 30, 2001. Precision has notified
its bank group and General Electric Capital Corporation ("GECC") of this
non-compliance which is an event of default under the bank credit agreement and
the GECC credit agreement.
24
On November 16, 2001, the bank group and GECC agreed to waive these
covenant defaults through December 19, 2001. Additionally, on November 16, 2001,
Precision accepted a commitment from GECC and another lender to underwrite a new
credit arrangement. The proceeds from the new facility will be utilized to
refinance the bank and GECC debt currently outstanding, to satisfy all
obligations under our master lease agreement with GECC and for general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
The commitment from the GECC lending group to underwrite a new credit
agreement is subject to the satisfaction of certain conditions. The GECC lending
group has the right to withdraw its commitment if there is a material adverse
change that affects the Company or its subsidiaries taken as a whole, or the
industry in which they operate and under certain other conditions. There can be
no assurance that the aforementioned refinancing will be completed by December
19, 2001 on the terms discussed or at all. If Precision is unable to complete
this refinancing, its bank group and GECC could declare the outstanding loans
immediately due and payable. If this were to occur, it would be an event of
default under the Company's $100 million senior subordinated notes and as a
result, the holders of those notes would have the right to declare them
immediately due and payable.
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 September 30,
2001, Precision had total consolidated debt of $155.7 million and net interest
expense of approximately $13.2 million for the nine 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. As of November 16, 2001, $16.8 million was outstanding under the
revolver and the Company maintained a cash balance in its bank accounts of
approximately $9.5 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 the corresponding demands on its cash resources could have
important effects on Precision's business. For example these demands could,
among other things,:
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);
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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;
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.
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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 temporary waivers from its bank group and GECC to
December 19, 2001, there can be no assurance that Precision will be able to
consummate a refinancing of this debt prior to December 19, 2001, or obtain
extensions of the waivers of these covenants.
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.
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.
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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.
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 appointed a new executive management team during
2000, and Precision's 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.
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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 nine months of 2001, and its top
ten customers accounted for approximately 86% 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.
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.
29
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.
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
30
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 September 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 September 30,
2001, a 100 basis point change in interest rates would result in a $0.2 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
September 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 September 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 June 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
Precision did not comply with certain financial covenants contained in its bank
credit agreement for the period ended September 30, 2001. Precision has notified
its bank group and General Electric Capital Corporation ("GECC") of this
non-compliance which is an event of default under the bank credit agreement and
the GECC credit agreement. On November 16, 2001, the bank group and GECC agreed
to waive these covenant defaults through December 19, 2001.
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.
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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: November 19, 2001 By: /s/ Frank R. Reilly
--------------------------------
Frank R. Reilly
Executive Vice President and
Chief Financial Officer
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