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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 PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40 EAST 52ND STREET, NEW YORK, NY 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes No X
--- ---
AS OF NOVEMBER 11, 2004, THERE WERE 4,931,767 SHARES OF COMMON STOCK
OF THE REGISTRANT OUTSTANDING.
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<Table>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........27
Item 4. Controls and Procedures............................................28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................29
</Table>
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 27,485 $ 28,294 $ 91,901 $ 91,550
Cost of sales 25,103 26,278 82,973 82,518
-------- -------- -------- --------
Gross profit 2,382 2,016 8,928 9,032
Selling and administrative expenses 1,887 2,010 6,159 6,275
Impairment of long-lived assets 928 -- 928 --
-------- -------- -------- --------
Income (loss) from operations (433) 6 1,841 2,757
Gain on repurchase of debt -- -- 3,252 --
Interest expense 2,271 1,715 6,600 5,255
-------- -------- -------- --------
Loss before income taxes and cumulative effect of
change in accounting principle (2,704) (1,709) (1,507) (2,498)
Income tax provision 15 7 86 61
-------- -------- -------- --------
Loss before cumulative effect of change in
accounting principle (2,719) (1,716) (1,593) (2,559)
Cumulative effect of change in accounting principle -- (247) -- (247)
-------- -------- -------- --------
Net loss $ (2,719) $ (1,963) $ (1,593) $ (2,806)
======== ======== ======== ========
Per share data:
Basic and diluted loss before cumulative
effect of change in accounting principle $ (0.55) $ (0.36) $ (0.32) $ (0.53)
Cumulative effect of change in accounting principle -- (0.05) -- (0.05)
-------- -------- -------- --------
Basic and diluted net loss applicable to
common stockholders $ (0.55) $ (0.41) $ (0.32) $ (0.58)
======== ======== ======== ========
</Table>
See notes to unaudited interim consolidated financial statements.
-1-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(UNAUDITED)
ASSETS:
Current assets:
Cash $ 2,998 $ 189
Accounts receivable, net 19,392 17,277
Inventories, net 9,789 8,527
Prepaid expenses and other current assets 2,196 2,481
Deferred income taxes 1,360 1,360
---------- ----------
Total current assets 35,735 29,834
Property, plant, and equipment, net 39,772 42,632
Goodwill 7,623 7,623
Other assets, net 3,715 3,598
---------- ----------
Total assets $ 86,845 $ 83,687
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 10,797 $ 10,038
Accrued expenses 6,588 6,473
Deferred gain on repurchase of debt -- 3,252
Short-term debt 14,856 12,246
Current portion of long-term debt 6,815 5,585
---------- ----------
Total current liabilities 39,056 37,594
---------- ----------
Long-term debt, excluding current portion 67,064 63,681
---------- ----------
Deferred income taxes and other long-term liabilities 1,789 1,904
---------- ----------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,931,767 shares issued 1,233 1,233
Additional paid-in-capital 13,169 13,169
Accumulated deficit (35,466) (33,894)
---------- ----------
Total stockholders' deficit (21,064) (19,492)
---------- ----------
Total liabilities and stockholders' deficit $ 86,845 $ 83,687
========== ==========
</Table>
See notes to unaudited interim consolidated financial statements
-2-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2004 2003
--------- ---------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net loss $ (1,593) $ (2,806)
Cumulative effect of change in accounting principle -- 247
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 6,475 7,499
Amortization included in operating expense 407 360
Amortization included in interest expense 809 394
Impairment of long-lived assets 928 --
Gain on repurchase of debt (3,252) --
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net (2,115) (2,253)
Inventories, net (1,262) (191)
Prepaid expenses and other current assets 365 860
Accounts payable 2,448 1,040
Accrued expenses, excluding interest expense (620) 499
Accrued interest expense 735 3,351
Other long-term liabilities (115) 48
Other 37 57
--------- ---------
Net cash provided by operating activities 3,247 9,105
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (4,372) (3,844)
Net increase in equipment deposits (361) (80)
Expenditures for tooling owned by customers (451) (90)
Other (93) 372
--------- ---------
Net cash used by investing activities (5,277) (3,642)
--------- ---------
FINANCING ACTIVITIES:
Net increase in loans under revolving line of credit 2,610 1,308
Repayment of term notes and other debt (4,296) (6,534)
Proceeds from issuance of Increasing Rate Note 7,000 --
Deferred financing charges (475) (862)
--------- ---------
Net cash provided (used) by financing activities 4,839 (6,088)
--------- ---------
Net increase (decrease) in cash 2,809 (625)
Cash at beginning of period 189 1,753
--------- ---------
Cash at end of period $ 2,998 $ 1,128
========= =========
</Table>
See notes to unaudited interim consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiaries (collectively,
the "Company"), and have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the unaudited interim
consolidated financial statements do not include all the information and
footnotes included in the Company's annual consolidated financial statements.
Significant accounting policies followed by the Company are set forth in Note 1
to the consolidated financial statements in the Company's annual report on Form
10-K for the year ended December 31, 2003.In the opinion of management, the
unaudited interim consolidated financial statements contain all adjustments,
consisting only of adjustments of a normal, recurring nature, necessary to
present fairly the financial position of the Company at September 30, 2004, the
Company's results of operations for the three-month and nine-month periods ended
September 30, 2004 and 2003, and the Company's cash flows for the nine-month
periods ended September 30, 2004 and 2003. To prepare the accompanying unaudited
interim consolidated financial statements, the Company is required to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
The results of operations for the three-month and nine-month periods
ended September 30, 2004, are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
NOTE 2 -- CASH
On October 1, 2004, the Company utilized $2,892,000 of its cash on hand
at September 30, 2004, to repurchase a portion of its 12% Senior Subordinated
Notes due August 1, 2009. For more information on the repurchase, see Note 11,
"Subsequent Event."
NOTE 3 -- INVENTORIES
Inventories at September 30, 2004, and December 31, 2003, are set forth
below (dollar amounts in thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Finished goods $ 3,892 $ 3,793
Work in process 3,534 2,018
Raw material 2,363 2,716
-------- --------
$ 9,789 $ 8,527
======== ========
</Table>
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 2004, and December 31,
2003, are set forth below (dollar amounts in thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Land $ 2,287 $ 2,350
Buildings 22,349 22,863
Equipment 117,975 116,557
-------- --------
142,611 141,770
Accumulated depreciation 102,839 99,138
-------- --------
Property, plant, and equipment, net $ 39,772 $ 42,632
======== ========
</Table>
NOTE 5 -- DEBT
Debt at September 30, 2004, and December 31, 2003, is set forth below
(dollar amounts in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
Short-term debt:
Revolving line of credit $ 14,698 $ 12,088
12 3/4% Senior Subordinated Notes 158 158
---------- ----------
Subtotal 14,856 12,246
Current portion of long-term debt 6,815 5,585
---------- ----------
Total short-term debt 21,671 17,831
---------- ----------
Long-term debt:
Equipment Term Loan 11,100 13,500
Real Estate Term Loan 10,638 11,500
12% Senior Subordinated Notes 42,441 42,441
13% Junior Subordinated Notes 347 347
Increasing Rate Note 7,000 --
Unsecured, amortizing term notes 1,431 104
Capital lease obligations 210 573
Series B Preferred Stock 616 594
Other 96 207
---------- ----------
Subtotal 73,879 69,266
Less current portion (6,815) (5,585)
---------- ----------
Total long-term debt 67,064 63,681
---------- ----------
Total debt $ 88,735 $ 81,512
========== ==========
</Table>
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
REVOLVING LINE OF CREDIT
At September 30, 2004, the aggregate principal amount of loans
outstanding under the revolving line of credit was $14,698,000 and net unused
availability totaled $3,040,000. The revolving line of credit expires on June
30, 2006. Loans under the revolving line of credit bear interest at either the
prime rate plus 1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%,
at the Company's option. The loans outstanding under the revolving line of
credit are classified as short-term debt because the revolving line of credit
provides that the Company's cash receipts are automatically used to reduce such
loans on a daily basis, by means of a lock-box sweep arrangement, and the lender
has the ability to modify certain terms of the revolving line of credit without
the Company's approval. Loans under the revolving line of credit are limited to
88% of eligible accounts receivable plus 65% of eligible inventories. All loans
under the revolving line of credit are secured by first priority liens on
substantially all of the Company's assets other than real property.
At September 30, 2004, net availability under the revolving line of
credit was reduced by two separate reserves established by the lender, which
totaled $1,850,000. The release of $500,000 of such reserves is subject to the
attainment of certain specified financial performance goals and the release of
the balance of such reserves is at the discretion of the lender. The Company
cannot predict at this time whether any of the remaining reserves will be
released.
12 3/4% SENIOR SUBORDINATED NOTES
The 12 3/4% Senior Subordinated Notes matured on February 1, 2000, and
are unsecured obligations of the Company that are subordinated to all of the
Company's existing and future senior debt. In December 2003, 99.3% of the
12 3/4% Senior Subordinated Notes outstanding were exchanged for units
consisting of 12% Senior Subordinated Notes and warrants to purchase common
stock. The remaining $158,000 of 12 3/4% Senior Subordinated Notes that did not
participate in the exchange were outstanding at December 31, 2004.
12% SENIOR SUBORDINATED NOTES
The 12% Senior Subordinated Notes mature on August 1, 2009, and are
unsecured obligations of the Company that are subordinated in right of payment
to all of the Company's existing and future senior debt. Interest on the 12%
Senior Subordinated Notes is payable quarterly on February 1, May 1, August 1,
and November 1. On October 1, 2004, the Company purchased a total of $8,264,000
of its 12% Senior Subordinated Notes plus interest accrued thereon for
$2,892,000. See Note 11, "Subsequent Event."
INCREASING RATE NOTE
On September 3, 2004, the Company entered into a loan agreement with a
lender to provide unsecured loans to the Company in an aggregate principal
amount of up to $7,000,000. On September 7, 2004, the Company borrowed
$7,000,000 under the loan agreement.
The Increasing Rate Note is an unsecured obligation of the Company that
is senior in right of payment to the 12% Senior Subordinated Notes, the 12 3/4%
Senior Subordinated Notes, and the 13% Junior Subordinated Notes.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Increasing Rate Note matures on June 30, 2007. Interest is due
monthly and is currently being paid at the rate 13.8% per annum (the "Cash
Rate"). In lieu of paying the Cash Rate, the Company has the option to pay
interest at the rate of 12% in cash and an additional 3.6% in additional
Increasing Rate Notes (the "PIK Rate"). The cash rate will increase by up to 0.6
percentage points on each of September 1, 2005 and 2006, and the PIK Rate will
increase by up to 1.2 percentage points on each of September 1, 2005 and 2006.
The exact amount of each increase will depend upon the principal amount of the
Increasing Rate Note then outstanding.
SERIES B PREFERRED STOCK
At September 30, 2004, there were outstanding 3,300 shares of the
Company's $8 Cumulative Convertible Preferred Stock, Series B (the "Series B
Preferred Stock"), with a net carrying value of $616,000. Each share of Series B
Preferred Stock has a par value of $100 and a redemption value of $200.
Redemptions of 450 shares are scheduled on November 30 of each year. The Company
failed to make the scheduled redemptions on November 30, 2000, 2001, 2002, and
2003, in the aggregate amount of $360,000.
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("FAS 150"), which established
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer that have characteristics of
both liabilities and equity. As a result of the adoption of FAS 150, the Company
classifies the Series B Preferred Stock as debt in the consolidated financial
statements and records accretions in the fair value of the Series B Preferred
Stock and payments of quarterly dividends as interest expense.
RESTRICTIVE COVENANTS
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require the Company to maintain a minimum fixed charge coverage ratio, a
minimum level of net worth, a minimum level of earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), a maximum level of debt to EBITDA,
and a maximum amount of unfinanced capital expenditures. The Company also has
other covenants that place restrictions on its business and operations,
including covenants relating to the sale of all or substantially all of its
assets, the purchase of common stock, the payment of cash dividends, the
redemption of preferred stock, the financing of capital expenditures, and
compliance with specified laws and regulations.
From time to time, the Company's secured lenders have agreed to waive,
amend, or eliminate certain of the financial covenants contained in the
Company's various financing agreements in order to maintain or otherwise ensure
the Company's current or future compliance. Effective March 31, 2004, the
Company's two secured lenders amended their fixed charge coverage ratio and
their annual limitation on unfinanced capital expenditures. Effective May 31,
2004, one of the Company's secured lenders waived compliance with its minimum
net worth covenant. Effective June 30, 2004, the Company's two secured lenders
amended certain of their financial covenants, including the minimum net worth,
minimum fixed charge coverage, minimum EBITDA, and maximum debt to EBITDA
covenants. In the event that the Company is not in compliance with any of its
covenants in the future, and its lenders do not
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
agree to amend, waive, or eliminate those covenants, the lenders would have the
right to declare the borrowings under their financing agreements to be due and
payable immediately.
NOTE 6 -- INCOME TAXES
At September 30, 2004, and December 31, 2003, the Company's net
deferred income tax assets were fully reserved by a valuation allowance. The
income tax provisions recorded during the three-month and nine-month periods
ended September 30, 2004 and 2003, consisted of estimated state income taxes
payable.
NOTE 7 -- NET LOSS PER COMMON SHARE
For the three-month and nine-month periods ended September 30, 2004,
the assumed conversion of the Series B Preferred Stock and the assumed exercise
of outstanding warrants to purchase the Company's common stock, which were
issued on December 18, 2003, were not dilutive. As a result, the weighted
average number of common shares outstanding used in the calculation of net loss
per common share as set forth in the unaudited interim consolidated financial
statements do not reflect the assumed conversion of the Series B Preferred Stock
or the assumed exercise of the warrants.
(This space intentionally left blank)
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- SEGMENTS
Information relating to the Company's operating segments and its
Corporate Office for the three-month and nine-month periods ended September 30,
2004 and 2003, is summarized below (dollar amounts in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET SALES:
Rubber Group $ 23,499 $ 24,665 $ 78,346 $ 78,032
Metals Group 3,986 3,629 13,555 13,518
---------- ---------- ---------- ----------
Total net sales $ 27,485 $ 28,294 $ 91,901 $ 91,550
========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 2,253 $ 1,602 $ 8,402 $ 7,441
Metals Group (2,044) (976) (4,593) (2,818)
---------- ---------- ---------- ----------
Subtotal 209 626 3,809 4,623
Corporate Office (642) (620) (1,968) (1,866)
---------- ---------- ---------- ----------
Total income (loss) from operations $ (433) $ 6 $ 1,841 $ 2,757
========== ========== ========== ==========
ASSETS AT SEPTEMBER 30, 2004 AND 2003:
Rubber Group $ 64,476 $ 64,352 $ 64,476 $ 64,352
Metals Group 16,031 21,297 16,031 21,297
---------- ---------- ---------- ----------
Subtotal 80,507 85,649 80,507 85,649
Corporate Office 6,338 4,399 6,338 4,399
---------- ---------- ---------- ----------
Total assets $ 86,845 $ 90,048 $ 86,845 $ 90,048
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 1,739 $ 1,732 $ 5,163 $ 5,412
Metals Group 617 715 1,688 2,418
---------- ---------- ---------- ----------
Subtotal 2,356 2,447 6,851 7,830
Corporate Office 11 10 31 29
---------- ---------- ---------- ----------
Total depreciation and amortization $ 2,367 $ 2,457 $ 6,882 $ 7,859
========== ========== ========== ==========
CAPITAL EXPENDITURES (2):
Rubber Group $ 1,039 $ 1,651 $ 3,521 $ 3,870
Metals Group 141 64 1,042 683
---------- ---------- ---------- ----------
Subtotal 1,180 1,715 4,563 4,553
Corporate Office 7 9 7 11
---------- ---------- ---------- ----------
Total capital expenditures $ 1,187 $ 1,724 $ 4,570 $ 4,564
========== ========== ========== ==========
</Table>
(1) Does not include amortization of deferred financing expenses, which
totaled $281,000 and $121,000 during the three-month periods ended
September 30, 2004 and 2003, respectively, and $809,000 and $394,000
during the nine-month periods ended September 30, 2004 and 2003,
respectively, which is included in interest expense in the unaudited
interim consolidated financial statements.
(2) Capital expenditures for the nine-month period ended September 30, 2004,
include $198,000 of equipment purchased under a vendor financing
agreement. Capital expenditures for the three-month and nine-month
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
periods ended September 30, 2003, include equipment financed with capital
leases, which totaled $614,000 and $720,000, respectively.
NOTE 9 -- DEFERRED GAIN ON REPURCHASE OF DEBT
On December 18, 2003, the Company repurchased its 10 1/2% Senior,
Unsecured Note, in the principal amount of $7,500,000 and all accrued and unpaid
interest thereon, for $5,810,000. The pre-tax gain of $3,252,000 on the
repurchase of the 10 1/2% Senior, Unsecured Note was deferred and recorded in
current liabilities as "deferred gain on repurchase of debt" because the
agreement governing the repurchase of the note provided that the claim could be
reinstated if certain events occurred prior to April 20, 2004. Because none of
these events occurred prior to April 20, 2004, the Company realized the pre-tax
gain of $3,252,000 during the three-month period ended June 30, 2004.
NOTE 10 -- PLANT CLOSURE AND RELATED ASSET IMPAIRMENT CHARGE
During the third quarter of 2004, the Company committed to a plan to
discontinue the operations of the die casting division, which is one of two
operating units that comprise the Company's Metals Group segment. The Company
decided to discontinue the operations of the die casting division because of the
weak financial performance of the division over the past several years,
continued customer pricing pressures, intense offshore competition, and
resulting reduced expectations for the division's future financial performance.
The Company plans to close the operations of the die casting division during the
first half of 2005, after fulfilling certain agreed-upon customer purchase
orders. Because the assets will continue in service until those purchase orders
are fulfilled, the assets of the die casting division are classified as "held
and used" pursuant to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144");
however, the carrying value of the assets of the die casting division has been
adjusted to management's estimate of the fair value of such assets, which
approximates the projected proceeds to be realized on the disposition of the
assets, net of estimated selling costs. As a result, the Company recognized a
pretax impairment charge of $928,000 during the third quarter of 2004. The
results of operations, assets, liabilities, and cash flows of the division will
be classified as a discontinued operation in the quarter during which die
casting division meets the "held for sale" criteria set forth in FAS 144.
The following table summarizes certain operating data of the die
casting division for the three-month and nine-month periods ended September 30,
2004 and 2003 (dollar amounts in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 1,605 $ 1,743 $ 5,940 $ 6,125
========= ========= ========= =========
Loss from operations before asset impairment charge $ (537) $ (437) $ (1,533) $ (1,339)
Impairment of long-lived assets 928 -- 928 --
--------- --------- --------- ---------
Loss from operations $ (1,465) $ (437) $ (2,461) $ (1,339)
========= ========= ========= =========
Depreciation and amortization included in loss from
operations $ 242 $ 296 $ 567 $ 1,026
========= ========= ========= =========
</Table>
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table sets forth the assets and liabilities of the die
casting division at September 30, 2004, and December 31, 2003 (dollar amounts in
thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS:
Current assets:
Cash $ 4 $ 11
Accounts receivable, net 1,248 1,394
Inventories, net 1,044 894
Prepaid expenses and other current assets 318 388
--------- ---------
Total current assets 2,614 2,687
Property, plant, and equipment, net 3,481 4,438
Other assets, net 62 267
--------- ---------
Total assets $ 6,157 $ 7,392
========= =========
LIABILITIES (1):
Current liabilities:
Accounts payable $ 573 $ 516
Accrued expenses 178 166
--------- ---------
Total current liabilities 751 682
Long-term liabilities -- 93
--------- ---------
Total liabilities $ 751 $ 775
========= =========
</Table>
(1) Liabilities do not reflect debt for money borrowed by the Company
that is secured by assets of the division.
NOTE 11 -- SUBSEQUENT EVENT - REPURCHASE OF 12% SENIOR SUBORDINATED NOTES
On October 1, 2004, the Company repurchased $8,264,000 of its 12%
Senior Subordinated Notes plus interest accrued thereon for $2,892,000. After
the write-off of deferred financing expenses of $192,000, the Company realized a
net pre-tax gain on the repurchase of $5,345,000, which will be recorded during
the fourth quarter of 2004.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Some of our statements in this Form 10-Q, including this item, are
"forward-looking statements." Forward-looking statements usually can be
identified by our use of words like "believes," "expects," "may," "will,"
"should," "anticipates," "estimates," "projects," or the negative thereof. They
may be used when we discuss strategy, which typically involves risk and
uncertainty, and they generally are based upon projections and estimates rather
than historical facts and events.
Forward-looking statements are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from the future results or performance expressed in or
implied by those statements. Some of those risks and uncertainties are:
o increases and decreases in business awarded to us by our
customers,
o unanticipated price reductions for our products as a result
of competition,
o unanticipated operating results,
o changes in the cost of raw materials,
o increases or decreases in capital expenditures,
o changes in economic conditions,
o strength or weakness in the North American automotive market,
o changes in the competitive environment,
o changes in interest rates and the credit and securities
markets, and
o labor interruptions at our facilities or at our customers'
facilities.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size that has less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a representation
that any of the projections or estimates expressed in or implied by those
forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements
contained herein will prove to be accurate. All forward-looking statements are
expressly qualified by the discussion above.
-12-
RESULTS OF OPERATIONS -- THIRD QUARTER OF 2004 VERSUS THIRD QUARTER OF 2003
The following table sets forth the consolidated results of our
operations for the three-month periods ended September 30, 2004 and 2003, and
the reconciliation of income from operations to earnings before interest, taxes,
depreciation, and amortization, which is commonly referred to as EBITDA (dollar
amounts in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------
2004 2003
------------------------ -----------------------
Net sales $ 27,485 100.0% $ 28,294 100.0%
Cost of sales 25,103 91.3 26,278 92.9
---------- ---------- ---------- ----------
Gross profit 2,382 8.7 2,016 7.1
Selling and administrative expenses 1,887 6.9 2,010 7.1
Impairment of long-lived assets(1) 928 3.4 -- --
---------- ---------- ---------- ----------
Income (loss) from operations (433) (1.6) 6 0.0
Add back depreciation and amortization(2) 2,367 8.6 2,457 8.7
---------- ---------- ---------- ----------
EBITDA(3)(4) $ 1,934 7.0% $ 2,463 8.7%
========== ========== ========== ==========
Net cash provided by operating activities $ 1,515 5.5% $ 4,248 15.0%
========== ========== ========== ==========
</Table>
(1) During the third quarter of 2004, we committed to a plan to
discontinue the operations of our die casting division, which is
one of two operating units that comprise our Metals Group
segment. As a result, we recognized a pretax, non-cash
impairment charge of $928,000 during the third quarter of 2004.
(2) Does not include amortization of deferred financing expenses,
which totaled $281,000 and $121,000 during the three-month
periods ended September 30, 2004 and 2003, respectively, and
which is included in interest expense in the consolidated
financial statements.
(3) EBITDA is not a measure of performance under accounting
principles generally accepted in the United States and should
not be considered in isolation or used as a substitute for
income from operations, net income, net cash provided by
operating activities, or other operating or cash flow statement
data prepared in accordance with U.S. generally accepted
accounting principles. We have presented EBITDA here and
elsewhere in this Form 10-Q because this measure is used by
investors, as well as our own management, to evaluate the
operating performance of our business, including its ability to
incur and to service debt, and because it is used by our lenders
in setting financial covenants. Our definition of EBITDA may not
be the same as the definition of EBITDA used by other companies.
-13-
(4) EBITDA for the three-month period ended September 30, 2004,
included a non-cash impairment charge of $928,000; before giving
effect to this charge, EBITDA was $2,862,000.
Our net sales for the third quarter of 2004 were $27,485,000, compared
to net sales of $28,294,000 for the third quarter of 2003, a decrease of
$809,000, or 2.9%. The decrease in net sales was principally a result of
decreased net sales of rubber components, offset, in part, by increased sales of
metal components. EBITDA for the third quarter of 2004 was $1,934,000, or 7.0%
of net sales, compared to EBITDA of $2,463,000, or 8.7% of net sales, for the
third quarter of 2003. The change in EBITDA was primarily a result of a
$1,166,000 reduction in EBITDA at our Metals Group offset, in part, by a
$658,000 increase in EBITDA at our Rubber Group. EBITDA for the three-month
period ended September 30, 2004, included a non-cash impairment charge of
$928,000; before giving effect to this charge, EBITDA was $2,862,000.
Net cash provided by operating activities during the third quarter of
2004 totaled $1,515,000, compared to $4,248,000 for the third quarter of 2003.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for the
three-month periods ended September 30, 2004 and 2003.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any significant reduction in the
level of activity in the automotive industry may have a material adverse effect
on the results of operations of the Rubber Group and on our company as a whole.
Delphi Corporation is the Rubber Group's largest customer. During 2003,
2002, and 2001, the Rubber Group's net sales to Delphi totaled $24,150,000,
$24,837,000, and $23,660,000, respectively, which represented 23.4%, 25.1%, and
25.8%, respectively, of the Rubber Group's net sales. Net sales to Delphi of
connector seals for automotive wire harnesses totaled $20,227,000, $21,147,000,
and $22,295,000, during 2003, 2002, and 2001, respectively. Substantially all of
the connector seals we sell to Delphi are sold pursuant to a supply agreement
that expires on December 31, 2004. Delphi has told us that they plan to
in-source, during 2005, 36 connector seals currently manufactured by us under
the supply agreement. For the first nine months of 2004, sales of the parts
scheduled to be in-sourced by Delphi during 2005 totaled $6,497,000. We estimate
that, if those parts had been in-sourced on January 1, 2004, our income from
operations for the first nine months of 2004 would have been reduced by
approximately $1,300,000. We currently believe that, prior to the expiration of
our current agreement, we will enter into a new supply agreement with Delphi
with respect to the remaining connector seals we currently supply, and that the
new supply agreement will provide for higher prices on those parts, partially
offsetting the impact of the lost volume. We are developing plans to restructure
the operations of our connector seals business to reduce expenses and further
mitigate the impact of the reduced volume. The restructuring of our connector
seals business will probably include, among other things, the closing of one of
our existing manufacturing facilities, which could result in significant cash
and non-cash expenses.
-14-
The following table sets forth the operating results of the Rubber
Group for the three-month periods ended September 30, 2004 and 2003, and the
reconciliation of the Rubber Group's income from operations to its EBITDA
(dollar amounts in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------
2004 2003
--------------------- ---------------------
Net sales $ 23,499 100.0% $ 24,665 100.0%
Cost of sales 20,264 86.2 21,951 89.0
--------- --------- --------- ---------
Gross profit 3,235 13.8 2,714 11.0
Selling and administrative expenses 982 4.2 1,112 4.5
--------- --------- --------- ---------
Income from operations 2,253 9.6 1,602 6.5
Add back depreciation and amortization 1,739 7.4 1,732 7.0
--------- --------- --------- ---------
EBITDA $ 3,992 17.0% $ 3,334 13.5%
========= ========= ========= =========
</Table>
During the third quarter of 2004, net sales of the Rubber Group
decreased by $1,166,000, or 4.7%, compared to the third quarter of 2003. The
decrease in net sales was primarily due to (1) decreased unit sales of
insulators for automotive ignition wire sets due to reduced demand from both
aftermarket customers and original equipment customers, (2) reduced sales of
medical components, and (3) price reductions on certain automotive components,
partially offset by increased net sales of connector seals for automotive wiring
systems.
Cost of sales as a percentage of net sales decreased during the third
quarter of 2004 to 86.2% of net sales from 89.0% of net sales during the third
quarter of 2003, resulting primarily from reduced workers' compensation and
medical costs and from improvements in operations at our connector seals
division.
Operating results for the third quarter of 2004 and 2003 were adversely
affected by less than acceptable operating results at our connector seals
division, which have affected the Rubber Group's performance for the past
fifteen months. The main factors that affected the connector seals division's
operating results for the three-month period ended September 30, 2004, included:
o losses resulting from production problems encountered in the
manufacture of seals from liquid silicone rubber; and
o losses resulting from production problems encountered in the
manufacture of automotive door grommets.
During the second half of 2003, we initiated a plan to reduce or
eliminate operating issues at the connector seals division, which included:
o upgrading management and supervisory personnel;
o installing and utilizing improved process controllers and centralized
data collection capabilities on all molding presses;
-15-
o implementing improved manufacturing procedures throughout the
operation;
o installing automated visual inspection equipment; and
o improving utilization of the division's enterprise resource planning
software system.
During the second and third quarters of 2004, the plan was expanded to
include:
o upgrading certain material compounds;
o modifying or replacing certain tooling; and
o initiating price increases on selected products.
During the third quarter of 2004, the connector seals division's
operating profit, expressed as a percentage of net sales, improved to 2.8% from
negative 4.1% during the third quarter of 2003. We believe that the operations
improvement plan has begun to benefit our results of operations and will
continue to yield improved results as key components of the plan take effect.
Selling and administrative expenses as a percentage of net sales
decreased during the third quarter of 2004, compared to the third quarter of
2003, primarily because of reduced salary expense.
During the third quarter of 2004, income from operations totaled
$2,253,000, an increase of $651,000, or 40.6%, compared to the third quarter of
2003. EBITDA for the third quarter of 2004 was $3,992,000, or 17.0% of net
sales, compared to $3,334,000, or 13.5% of net sales, during the third quarter
of 2003.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars, primarily for automotive
industry customers. Any material reduction in the level of activity in the
automotive industry may have a material adverse effect on the results of
operations of the Metals Group and on our company as a whole.
The Metals Group has incurred significant operating losses and negative
EBITDA over the past eighteen months. During that time, we have been assessing
the economic viability of the business units comprising the Metals Group. During
the third quarter of 2004, we committed to a plan to discontinue the operations
of the die casting division, which is one of two operating units that comprise
our Metals Group segment. We decided to discontinue the operations of the die
casting division because of the weak financial performance of the division over
the past several years, continued customer pricing pressures, intense offshore
competition, and resulting reduced expectations for the division's future
financial performance. We plan to close the operations of the die casting
division during the first half of 2005, subsequent to the fulfillment of certain
agreed-upon customer purchase orders. Because the assets will continue in
service until those purchase orders are fulfilled, the assets of the die casting
division are classified as "held and used" pursuant to Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("FAS 144"); however, the carrying value of the assets of the
die casting division has been adjusted to our estimate of the fair value of such
assets, which approximates the projected proceeds to be realized on the
disposition of the assets, net of estimated selling costs. As a result, we
recognized a pretax impairment charge of $928,000 during the third quarter of
2004. The results of operations, assets, liabilities, and cash flows of the
division will be classified as a discontinued operation in the quarter during
which the division meets the "held for sale" criteria set forth in FAS 144.
-16-
The following table summarizes certain operating data of the die
casting division for the three-month periods ended September 30, 2004 and 2003
(dollar amounts in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30
------------------------------
2004 2003
------------ ------------
Net sales $ 1,605 $ 1,743
============ ============
Loss from operations before asset impairment charge $ (537) $ (437)
Impairment of long-lived assets 928 --
------------ ------------
Loss from operations $ (1,465) $ (437)
Depreciation and amortization included in loss from
operations $ 242 $ 296
============ ============
</Table>
The assets and liabilities of the die casting division are set forth in
Note 10 of our unaudited interim consolidated financial statements in Part I,
Item 1.
The following table sets forth the operating results of the Metals
Group for the three-month periods ended September 30, 2004 and 2003, and the
reconciliation of the Metals Group's loss from operations to its EBITDA (dollar
amounts in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------------------
2004 2003
-------------------------- --------------------------
Net sales $ 3,986 100.0% $ 3,629 100.0%
Cost of sales 4,839 121.4 4,327 119.2
---------- ---------- ---------- ----------
Gross profit (loss) (853) (21.4) (698) (19.2)
Selling and administrative expenses 263 6.6 278 7.7
Impairment of long-lived assets 928 23.3 -- --
---------- ---------- ---------- ----------
Loss from operations (2,044) (51.3) (976) (26.9)
Add back depreciation and amortization 617 15.5 715 19.7
---------- ---------- ---------- ----------
EBITDA $ (1,427) (35.8)% $ (261) (7.2)%
========== ========== ========== ==========
</Table>
During the third quarter of 2004, net sales of the Metals Group
increased by $357,000, or 9.8%, compared to the third quarter of 2003, primarily
because of increased sales of machined metal parts.
Cost of sales as a percentage of net sales increased to 121.4% of net
sales during the third quarter of 2004 from 119.2% of net sales during the third
quarter of 2003, primarily because of increased metal prices that had not yet
been passed on to customers and higher than anticipated start-up costs on
recently awarded machined metal components, offset, in part, by lower
depreciation and amortization expenses.
-17-
During the third quarter of 2004, the loss from operations was
$2,044,000 compared to a loss from operations of $976,000 during the third
quarter of 2003. EBITDA for the third quarter of 2004 was negative $1,427,000,
or negative 35.8% of net sales, a decrease of $1,166,000, compared to the third
quarter of 2003. EBITDA for the three-month period ended September 30, 2004,
included a non-cash impairment charge of $928,000; before giving effect to this
charge, EBITDA was negative $499,000.
CORPORATE OFFICE
Corporate Office expenses, which are not included in the operating
results of the Rubber Group or the Metals Group, represent administrative
expenses incurred primarily at our New York and Cleveland offices. Corporate
Office expenses are consolidated with the selling and administrative expenses of
the Rubber Group and the Metals Group in our unaudited interim consolidated
financial statements.
The following table sets forth the operating results of the Corporate
Office for the three-month periods ended September 30, 2004 and 2003, and the
reconciliation of the loss from operations to EBITDA (dollar amounts in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30
------------------------------
2004 2003
------------ ------------
Loss from operations $ (642) $ (620)
Add back depreciation and amortization 11 10
------------ ------------
EBITDA $ (631) $ (610)
============ ============
</Table>
INTEREST EXPENSE
During the three-month periods ended September 30, 2004 and 2003,
interest expense totaled $2,271,000 and $1,715,000, respectively, which included
amortization of deferred financing expenses of $281,000 and $121,000,
respectively. Interest expense increased primarily because the amount of
outstanding debt on which we accrued and paid interest increased to $88,735,000
at September 30, 2004, from $68,329,000 at September 30, 2003, principally due
to the exchange of our 12% Senior Subordinated Notes for our 12 3/4% Senior
Subordinated Notes, which converted $15,029,000 of accrued interest into 12%
Senior Subordinated Notes.
INCOME TAX PROVISION
At September 30, 2004, and December 31, 2003, our net deferred income
tax assets were fully reserved by a valuation allowance. The income tax
provisions recorded during the three-month periods ended September 30, 2004 and
2003, consisted of estimated state income taxes.
-18-
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF 2004 VERSUS FIRST NINE MONTHS OF
2003
The following table sets forth our consolidated operating results for
the nine-month periods ended September 30, 2004 and 2003, and the reconciliation
of income from operations to EBITDA (dollar amounts in thousands):
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------------------------
2004 2003
------------------------- -------------------------
Net sales $ 91,901 100.0% $ 91,550 100.0%
Cost of sales 82,973 90.3 82,518 90.1
---------- ---------- ---------- ----------
Gross profit 8,928 9.7 9,032 9.9
Selling and administrative expenses 6,159 6.7 6,275 6.9
Impairment of long-lived assets (1) 928 1.0 -- --
---------- ---------- ---------- ----------
Income from operations 1,841 2.0 2,757 3.0
Add back depreciation and amortization (2) 6,882 7.5 7,859 8.6
---------- ---------- ---------- ----------
EBITDA (3) (4) $ 8,723 9.5% $ 10,616 11.6%
========== ========== ========== ==========
Net cash provided by operating activities (5) $ 3,247 3.5% $ 9,105 9.9%
========== ========== ========== ==========
</Table>
(1) During the third quarter of 2004, we committed to a plan to
discontinue the operations of our die casting division, which
is one of two operating units that comprise our Metals Group
segment. As a result, we recognized a pretax, non-cash
impairment charge of $928,000 during the third quarter of
2004.
(2) Does not include amortization of deferred financing expenses,
which totaled $809,000 and $394,000 during the first nine
months of 2004 and 2003, respectively, and which is included
in interest expense in the unaudited interim consolidated
financial statements.
(3) EBITDA is not a measure of performance under accounting
principles generally accepted in the United States and should
not be considered in isolation or used as a substitute for
income from operations, net income, net cash provided by
operating activities, or other operating or cash flow
statement data prepared in accordance with U.S. generally
accepted accounting principles. We have presented EBITDA here
and elsewhere in this Form 10-Q because this measure is used
by investors, as well as our own management, to evaluate the
operating performance of our business, including its ability
to incur and to service debt, and because it is used by our
lenders in setting financial covenants. Our definition of
EBITDA may not be the same as the definition of EBITDA used by
other companies.
(4) EBITDA for the nine-month period ended September 30, 2004,
included a non-cash impairment charge of $928,000; before
giving effect to this charge, EBITDA was $9,651,000.
-19-
(5) The calculation of net cash provided by operating activities
is detailed in the consolidated statements of cash flows in
Part I, Item 1.
Our net sales for the first nine months of 2004 were $91,901,000,
compared to net sales of $91,550,000 for the first nine months of 2003, an
increase of $351,000, or 0.4%. EBITDA for the first nine months of 2004 was
$8,723,000, or 9.5% of net sales, compared to $10,616,000, or 11.6% of net
sales, for the first nine months of 2003. The change in EBITDA was primarily a
result of a $2,505,000 reduction in EBITDA at our Metals Group, offset, in part,
by an increase in EBITDA of $712,000 at our Rubber Group.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for the
nine-month periods ended September 30, 2004 and 2003.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any material reduction in the level
of activity in the automotive industry may have a material adverse effect on the
results of operations of the Rubber Group and on our company as a whole.
Delphi Corporation is the Rubber Group's largest customer. During 2003,
2002, and 2001, the Rubber Group's net sales to Delphi totaled $24,150,000,
$24,837,000, and $23,660,000, respectively, which represented 23.4%, 25.1%, and
25.8%, respectively, of the Rubber Group's net sales. Net sales to Delphi of
connector seals for automotive wire harnesses totaled $20,227,000, $21,147,000,
and $22,295,000, during 2003, 2002, and 2001, respectively. Substantially all of
the connector seals we sell to Delphi are sold pursuant to a supply agreement
that expires on December 31, 2004. Delphi has told us that they plan to
in-source, during 2005, 36 connector seals currently manufactured by us under
the supply agreement. For the first nine months of 2004, sales of the parts
scheduled to be in-sourced by Delphi during 2005 totaled $6,497,000. We estimate
that, if those parts had been in-sourced on January 1, 2004, our income from
operations for the first nine months of 2004 would have been reduced by
approximately $1,300,000. We currently believe that, prior to the expiration of
our current agreement, we will enter into a new supply agreement with Delphi
with respect to the remaining connector seals we currently supply, and that the
new supply agreement will provide for higher prices on those parts, partially
offsetting the impact of the lost volume. We are developing plans to restructure
the operations of our connector seals business to reduce expenses and further
mitigate the impact of reduced volume. The restructuring of our connector seals
business will probably include, among other things, the closing of one of our
existing manufacturing facilities, which could result in significant cash and
non-cash expenses.
-20-
The following table sets forth the operating results of the Rubber
Group for the nine-month periods ended September 30, 2004 and 2003, and the
reconciliation of the Rubber Group's income from operations to its EBITDA
(dollar amounts in thousands):
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------------------------
2004 2003
------------------------- -------------------------
Net sales $ 78,346 100.0% $ 78,032 100.0%
Cost of sales 66,723 85.2 67,192 86.1
---------- ---------- ---------- ----------
Gross profit 11,623 14.8 10,840 13.9
Selling and administrative
expenses 3,221 4.1 3,399 4.4
---------- ---------- ---------- ----------
Income from operations 8,402 10.7 7,441 9.5
Add back depreciation and
amortization 5,163 6.6 5,412 7.0
---------- ---------- ---------- ----------
EBITDA $ 13,565 17.3% $ 12,853 16.5%
========== ========== ========== ==========
</Table>
During the first nine months of 2004, net sales of the Rubber Group
increased by $314,000 or 0.4%, compared to the third quarter of 2003. The
increase in net sales was primarily due to increased unit sales of connector
seals for automotive wiring systems, offset, in part, by reduced unit sales of
insulators for automotive ignition wire sets, reduced sales of medical
components, and price reductions on certain automotive components.
Cost of sales as a percentage of net sales decreased during the first
nine months of 2004 to 85.2% of net sales from 86.1% of net sales during the
first nine months of 2003, resulting primarily from reduced workers'
compensation and medical expenses, offset, in part, by increased freight costs.
Operating results for the first nine months of 2004 and 2003 were
adversely affected by less than acceptable operating results at our connector
seals division. The main factors that affected the connector seals division's
operating results for the nine-month period ended September 30, 2004, included:
o Cost for scrap, sorting, and repair, relating to a particular type of
connector seal;
o freight costs, which resulted from delivery issues related to those
quality problems;
o losses resulting from production problems encountered in the
manufacture of seals from liquid silicone rubber;
o losses resulting from the production problems encountered in the
manufacture of automotive door grommets; and
o costs incurred due to the general disruption to our operations as we
attempted to cope with the problems listed above.
-21-
During the second half of 2003, we initiated a plan to reduce or
eliminate operating issues at the connector seals division, which included:
o upgrading management and supervisory personnel;
o installing and utilizing improved process controllers and centralized
data collection capabilities on all molding presses;
o implementing improved manufacturing procedures throughout the
operation;
o installing automated visual inspection equipment; and
o improving utilization of the division's enterprise resource planning
software system.
During the second and third quarters of 2004, the plan was expanded to include:
o upgrading certain material compounds;
o modifying or replacing certain tooling; and
o initiating price increases on selected products.
During the first nine months of 2004, the connector seals division's
operating profit, expressed as a percentage of net sales, improved to 2.7% from
0.9% during the first nine months of 2003. We believe that the operations
improvement plan has begun to benefit our results of operations and will yield
improved results as key components of the plan take effect.
Selling and administrative expenses as a percentage of net sales
decreased during the first nine months of 2004, compared to the first nine
months of 2003, primarily because of reduced salary expense.
During the first nine months of 2004, income from operations totaled
$8,402,000, an increase of $961,000, or 12.9%, compared to the first nine months
of 2003. EBITDA for the first nine months of 2004 was $13,565,000, or 17.3% of
net sales, compared to $12,853,000, or 16.5% of net sales, for the first nine
months of 2003.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars, primarily for automotive
industry customers. Any material reduction in the level of activity in the
automotive industry may have a material adverse effect on the results of
operations of the Metals Group and on our company as a whole.
The Metals Group has incurred significant operating losses and negative
EBITDA over the past eighteen months. During that time, we have been assessing
the economic viability of the business units comprising the Metals Group. During
the third quarter of 2004, we committed to a plan to discontinue the operations
of the die casting division, which is one of two operating units that comprise
our Metals Group segment. We decided to discontinue the operations of the die
casting division because of the weak financial performance of the division over
the past several years, continued customer pricing pressures, intense offshore
competition, and resulting reduced expectations for the division's future
financial performance. We plan to close the operations of the die casting
division during the first half of 2005, subsequent to the fulfillment of certain
agreed-upon customer purchase orders. Because the assets will continue in
service until those purchase orders are fulfilled, the assets of the die casting
division are
-22-
classified as "held and used" pursuant to FAS 144; however, the carrying value
of the assets of the die casting division have been adjusted to our estimate of
the fair value of such assets, which approximates the projected proceeds to be
realized on the disposition of the assets, net of estimated selling costs. As a
result, we recognized a pretax impairment charge of $928,000 during the third
quarter of 2004. The results of operations, assets, liabilities, and cash flows
of the division will be classified as a discontinued operation in the quarter
during which the division meets the "held for sale" criteria set forth in FAS
144.
The following table sets forth certain operating data of the die
casting division for the nine-month periods ended September 30, 2004 and 2003
(dollar amounts in thousands):
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
2004 2003
------------ ------------
Net sales $ 5,940 $ 6,125
============ ============
Loss from operations before asset impairment charge $ (1,533) $ (1,339)
============ ============
Impairment of long-lived assets 928 --
------------ ------------
Loss from operations $ (2,461) $ (1,339)
============ ============
Depreciation and amortization included in loss from
operations $ 567 $ 1,026
============ ============
</Table>
The assets and liabilities of the die casting division are set forth in
Note 10, of our unaudited interim consolidated financial statements in Part I,
Item 1.
The following table sets forth the operating results of the Metals
Group for the nine-month periods ended September 30, 2004 and 2003, and the
reconciliation of the Metals Group's loss from operations to its EBITDA (dollar
amounts in thousands):
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------------------
2004 2003
-------------------------- --------------------------
Net sales $ 13,555 100.0% $ 13,518 100.0%
Cost of sales 16,250 119.9 15,326 113.4
---------- ---------- ---------- ----------
Gross profit (loss) (2,695) (19.9) (1,808) (13.4)
Selling and administrative expenses 970 7.2 1,010 7.5
Impairment of long-lived assets 928 6.8 --
---------- ---------- ---------- ----------
Loss from operations (4,593) (33.9) (2,818) (20.9)
Add back depreciation and amortization 1,688 12.5 2,418 17.9
---------- ---------- ---------- ----------
EBITDA $ (2,905) (21.4)% $ (400) (3.0)%
========== ========== ========== ==========
</Table>
-23-
During the first nine months of 2004, net sales of the Metals Group
increased by $37,000 compared to the first nine months of 2003.
Cost of sales as a percentage of net sales increased to 119.9% of net
sales during the first nine months of 2004 from 113.4% of net sales during the
first nine months of 2003, primarily because of increased metal prices that had
not yet been passed on to customers, higher than anticipated start-up costs on
new machined metal components, and quality problems encountered on a particular
die cast component, offset, in part, by lower depreciation and amortization
expenses. During the first nine months of 2004, the loss from operations at the
Metals Group included a loss from operations of $270,000 incurred at the Group's
idle facility in Casa Grande, Arizona, primarily to maintain, insure, protect,
and depreciate the facility.
During the first nine months of 2004, the loss from operations was
$4,593,000 compared to a loss from operations of $2,818,000 during the first
nine months of 2003. EBITDA for the first nine months of 2004 was negative
$2,905,000, or negative 21.4% of net sales, a decrease of $2,505,000, compared
to the first nine months of 2003. EBITDA for the nine-month period ended
September 30, 2004, included a non-cash impairment charge of $928,000; before
giving effect to this charge, EBITDA was negative $1,977,000.
CORPORATE OFFICE
Corporate Office expenses, which are not included in the operating
results of the Rubber Group or the Metals Group, represent administrative
expenses incurred primarily at our New York and Cleveland offices. Corporate
Office expenses are consolidated with the selling and administrative expenses of
the Rubber Group and the Metals Group in our unaudited interim consolidated
financial statements.
The following table sets forth the operating results of the Corporate
Office for the nine-month periods ended September 30, 2004 and 2003, and the
reconciliation of the loss from operations to EBITDA (dollar amounts in
thousands):
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
2004 2003
------------ ------------
Loss from operations $ (1,968) $ (1,866)
Add back depreciation and amortization 31 29
------------ ------------
EBITDA $ (1,937) $ (1,837)
============ ============
</Table>
INTEREST EXPENSE
During the first nine months of 2004 and 2003, interest expense totaled
$6,600,000 and $5,255,000, respectively, which included amortization of deferred
financing expenses of $809,000 and $394,000, respectively. Interest expense
increased primarily because the amount of outstanding debt on which we accrued
and paid interest increased to $88,735,000 at September 30, 2004, from
$68,329,000 at September 30, 2003, principally due to the exchange of our 12%
Senior Subordinated Notes for our 12 3/4% Senior Subordinated Notes, which
converted $15,029,000 of accrued interest to 12% Senior Subordinated Notes.
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GAIN ON REPURCHASE OF SENIOR, UNSECURED NOTE
On December 18, 2003, we repurchased our $7,500,000 senior, unsecured
note, and all accrued and unpaid interest thereon, for $5,810,000. The pre-tax
gain of $3,252,000 on the repurchase of the senior, unsecured note was deferred
and recorded in current liabilities as "Deferred gain on repurchase of debt"
because the agreement governing the repurchase of the note provided that the
claim could be reinstated if certain events occurred prior to April 20, 2004.
Because none of these events occurred prior to April 20, 2004, we realized the
pre-tax gain of $3,252,000 during the three-month period ended June 30, 2004.
INCOME TAX PROVISION
At September 30, 2004, and December 31, 2003, our net deferred income
tax assets were fully reserved by a valuation allowance. The income tax
provision recorded during the nine-month periods ended September 30, 2004 and
2003, consisted of estimated state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first nine months of 2004, our operating activities provided
$3,247,000 of cash. Accounts receivable and inventories increased by $2,115,000
and $1,262,000, respectively, primarily due to increased levels of business
activity in August and September of 2004 compared to November and December of
2003. Accounts payable increased by $2,448,000, due to increased levels of
business activity and to a slowing in the timing of payments to vendors. During
the first nine months of 2004, $1,689,000 of accounts payable were converted
into unsecured, amortizing term notes. At September 30, 2004, and December 31,
2003, accounts payable included outstanding checks of $1,778,000 and $1,705,000,
respectively.
INVESTING ACTIVITIES
During the first nine months of 2004, our investing activities used
$5,277,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group, the Metals Group, and the corporate office
totaled $3,521,000, $1,042,000, and $7,000, respectively, primarily for the
purchase of equipment. Capital expenditures for the Rubber Group during the
first nine months of 2004 include $198,000 of equipment financed by the vendor
of the equipment. Capital expenditures for the Rubber Group, the Metals Group,
and the Corporate Office are currently projected to total $5,219,000, $759,000,
and $8,000, respectively, during 2004. At September 30, 2004, we had outstanding
commitments to purchase plant and equipment of approximately $495,000.
FINANCING ACTIVITIES
During the first nine months of 2004, our financing activities provided
$4,839,000 of cash.
On September 3, 2004, we entered into a loan agreement with a lender to
provide unsecured loans to us in an aggregate principal amount of up to
$7,000,000. On September 7, 2004, we borrowed $7,000,000 under the loan
agreement.
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The Increasing Rate Note is an unsecured obligation that is senior in
right of payment to the 12% Senior Subordinated Notes, the 12 3/4% Senior
Subordinated Notes, and the 13% Junior Subordinated Notes.
The Increasing Rate Note matures on June 30, 2007. Interest is due
monthly and is currently being paid at the rate 13.8% per annum (the "Cash
Rate"). In lieu of paying the Cash Rate, we have the option to pay interest at
the rate of 12% in cash and an additional 3.6% in additional Increasing Rate
Notes (the "PIK Rate"). The cash rate will increase by up to 0.6 percentage
points on each of September 1, 2005 and 2006 and the PIK Rate will increase by
up to 1.2 percentage points on each of September 1, 2005 and 2006. The exact
amount of each increase will depend upon the principal amount of the Increasing
Rate Note then outstanding. If any payment is not made when due, the Increasing
Rate Note will bear interest at a default rate equal to the Cash Rate plus 5%
per annum.
LIQUIDITY
We operate with substantial financial leverage and limited liquidity.
Our aggregate indebtedness as of September 30, 2004, totaled $88,735,000 and our
cash balances totaled $2,998,000. On October 1, 2004, we used $2,892,000 of our
cash to repurchase $8,264,000 principal amount of our 12% Senior Subordinated
Notes plus interest. If the repurchase had occurred on September 30, 2004, our
total outstanding indebtedness on that date would have been $80,471,000. During
the three-month period ending December 31, 2004, and the three-month period
ending March 31, 2005, interest and scheduled principal payments are projected
to be approximately $3,800,000 and $3,900,000, respectively.
We finance our operations with cash from operating activities and a
variety of financing arrangements, including the Equipment Term Loan, the Real
Estate Term Loan, and loans under our revolving line of credit. The Equipment
Term Loan bears interest at the prime rate plus 1 3/4% or the London Interbank
Offered Rate ("LIBOR") plus 4%, at our option. The Real Estate Term Loan bears
interest at the prime rate plus 5%, subject to a minimum rate of 9 1/4% and
requires us to pay a fee of 1.875% of the outstanding principal amount of the
loan on each anniversary of the closing date. Loans under the revolving line of
credit bear interest at the prime rate plus 1% or LIBOR plus 3 1/4%, at our
option. The revolving loans are limited to 88% of eligible accounts receivable
plus 65% of eligible inventories. Our revolving line of credit is currently
scheduled to expire on June 30, 2006.
The revolving line of credit and the Equipment Term Loan are secured by
first priority liens on substantially all of our assets other than real
property. The Real Estate Term Loan is secured by first priority liens on all of
our real property and second priority liens on substantially all of our other
assets. At September 30, 2004, availability under the revolving line of credit
was reduced by two separate reserves established by the lender, which totaled
$1,850,000. The release of $500,000 of such reserves is subject to the
attainment of certain specified financial performance goals and the release of
the balance of the reserves is at the discretion of the lender. We cannot
predict at this time whether any of the remaining reserves will be released.
At September 30, 2004, net availability under our revolving line of
credit totaled $3,040,000. At November 9, 2004, net availability under our
revolving line of credit totaled $1,148,000.
At September 30, 2004, and December 31, 2003, the aggregate principal
amount of loans outstanding under the revolving line of credit was $14,698,000
and $12,088,000, respectively. These loans are classified as short-term debt
because the revolving line of credit requires that our cash receipts are
automatically used to reduce such loans on a daily basis, by means of a lock-box
sweep arrangement, and the lender has the ability to modify certain terms of the
revolving line of credit without our approval.
-26-
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require us to maintain specified financial ratios as of the end of
specified periods, including the maintenance of a minimum level of fixed charge
coverage, minimum levels of net worth and EBITDA, and a maximum ratio of debt to
EBITDA. We also have covenants that limit our unfinanced capital expenditures to
$6,250,000 per annum and limit the amount of additional secured financing we can
incur for the purchase of plant and equipment to $2,500,000 per annum. Although
there can be no assurance, we currently believe that this provision will not
limit our planned capital expenditures during the remainder of 2004. We also
have other covenants that place restrictions on our business and operations,
including covenants relating to the sale of all or substantially all of our
assets, the purchase of common stock, the redemption of preferred stock,
compliance with specified laws and regulations, and the payment of cash
dividends.
From time to time, our secured lenders have agreed to waive, amend, or
eliminate certain of the financial covenants contained in our various financing
agreements in order to maintain or otherwise ensure our current or future
compliance. Effective March 31, 2004, our two secured lenders amended their
fixed charge coverage ratio and their annual limitation on unfinanced capital
expenditures. Effective May 31, 2004, one of our secured lenders waived
compliance with its minimum net worth covenant. Effective June 30, 2004, our two
secured lenders amended certain of their financial covenants, including the
minimum net worth, minimum fixed charge coverage, minimum EBITDA, and maximum
debt to EBITDA covenants. In the event that we are not in compliance with any of
our covenants in the future and our lenders do not agree to amend, waive, or
eliminate those covenants, the lenders would have the right to declare the
borrowings under their financing agreements to be due and payable immediately.
We had a net working capital deficit of $3,321,000 at September 30,
2004, compared to a net working capital deficit of $7,760,000 at December 31,
2003. The net working capital deficit exists primarily because we are required,
under U.S. generally accepted accounting principles, to classify the loans
outstanding under the revolving line of credit, which totaled $14,698,000 and
$12,088,000, at September 30, 2004, and December 31, 2003, respectively, as
current liabilities.
Although there can be no assurance, based on our most recent financial
projections, we estimate that, in addition to cash flow from operations and
borrowings under our revolving line of credit, we will not require any
significant new borrowings during the six months ended March 31, 2005, to meet
our foreseeable working capital, debt service requirements, and capital
expenditure requirements. If cash flow from operations or availability under
existing financing arrangements fall below expectations, we may be forced to
delay certain capital expenditures, reduce certain operating expenses, extend
certain trade accounts payable beyond terms that we believe are customary in the
industries in which we operate, or consider other alternatives designed to
improve our liquidity. Some of these actions could have a material adverse
effect on our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is insignificant.
At September 30, 2004, we had $36,436,000 of outstanding floating rate
debt at interest rates equal to either LIBOR plus 3 1/4%, LIBOR plus 4%, the
prime rate plus 1%, the prime rate plus 1 3/4%, or the prime rate plus 5%.
Currently, we do not purchase derivative financial instruments to hedge or
reduce
-27-
our interest rate risk. As a result, changes in either LIBOR or the prime rate
affect the rates at which we borrow funds under these agreements.
At September 30, 2004, we had outstanding $52,299,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 12.3%, of which $158,000
had matured.
We currently estimate that our monthly cash interest expense during the
next six months will be approximately $3,800,000 and that a one percentage point
increase or decrease in short-term interest rates would increase or decrease our
monthly interest expense by approximately $30,000.
For further information about our indebtedness, we recommend that you
also read Note 5 to our unaudited interim consolidated financial statements in
Part I, Item 1 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Our Chairman of the Board, President, and Chief Financial Officer, with
the participation of the management of our operating divisions, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2004. Based on that evaluation, our Principal
Executive Officers and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. We also
reviewed our internal controls and determined that there have been no changes in
our internal controls or in other factors identified in connection with this
evaluation that have materially affected, or are reasonably likely to materially
affect our internal controls over financial reporting.
-28-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
31-1 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Michael A.
Lubin, Chairman of the Board and Co-Principal Officer of the
registrant.
31-2 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Warren
Delano, President and Co-Principal Officer of the registrant.
31-3 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Dennis J.
Welhouse, Chief Financial Officer and Principal Financial
Officer of the registrant.
32-1 Certification of Michael A. Lubin, Chairman of the Board and
Co-Principal Executive Officer of the registrant, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32-2 Certification of Warren Delano, President and Co-Principal
Executive Officer of the registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32-3 Certification of Dennis J. Welhouse, Chief Financial Officer
and Principal Financial Officer of the registrant, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On August 18, 2004, we filed a report on Form 8-K that included a press
release dated August 18, 2004, announcing financial results for the
quarter and six-month period ended June 30, 2004.
On September 10, 2004, we filed a report on Form 8-K announcing a new
loan agreement among Lexington Precision Corporation, Lexington Rubber
Group, Inc., and Cohanzick High Yield Partners, L.P.
On October 4, 2004, we filed a report on Form 8-K announcing a plan to
discontinue the operations of the Lexington Die Casting division.
On October 4, 2004, we filed a report on Form 8-K announcing Lexington
Precision Corporation's repurchase $8,264,000 principal amount of its
12% Senior Subordinated Notes.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
SEPTEMBER 30, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
November 12, 2004 By: /s/ Michael A. Lubin
- ----------------- -----------------------------------
Date Michael A. Lubin
Chairman of the Board
November 12, 2004 By: /s/ Warren Delano
- ----------------- -----------------------------------
Date Warren Delano
President
November 12, 2004 By: /s/ Dennis J. Welhouse
- ----------------- -----------------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-30-