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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 Quarterly Period Ended September 30, 1995
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(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
--- ---
COMMON STOCK, $.25 PAR VALUE -- 4,228,036 SHARES AS OF NOVEMBER 10, 1995
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
2
LEXINGTON PRECISION CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
ASSETS:
Current assets:
Cash $ 73 $ 79
Accounts receivable 13,745 12,478
Inventories 9,322 8,186
Prepaid expenses and other current assets 3,002 1,958
-------- --------
Total current assets 26,142 22,701
-------- --------
Property, plant and equipment:
Land 1,507 823
Buildings 13,665 12,274
Equipment 54,693 46,516
-------- --------
69,865 59,613
Less accumulated depreciation 29,465 27,019
-------- --------
Property, plant and equipment, net 40,400 32,594
-------- --------
Excess of cost over net assets of businesses acquired, net 9,805 10,041
-------- --------
Other assets, net 3,021 2,060
-------- --------
$ 79,368 $ 67,396
======== ========
See notes to consolidated financial statements. (Continued)
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT.)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 9,917 $ 10,489
Accrued expenses 6,119 6,289
Short-term debt 11,553 5,052
Current portion of long-term debt 3,776 2,599
------- --------
Total current liabilities 31,365 24,429
------- --------
Long-term debt, excluding current portion 52,876 49,627
------- --------
Redeemable preferred stock, $100 par value,
at redemption value 1,110 1,110
Less excess of redemption value over par value 555 555
------- -------
Redeemable preferred stock, at par value 555 555
------- -------
Stockholders' deficit:
Common stock, $.25 par value, 10,000,000 shares
authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,604 12,659
Accumulated deficit (18,814) (20,593)
Cost of common stock in treasury, 120,915 and 145,915
shares, respectively (305) (368)
------- --------
Total stockholders' deficit (5,428) (7,215)
------- --------
$79,368 $ 67,396
======= ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
Net sales $ 24,221 $ 23,045 $ 77,728 $ 66,035
-------- -------- -------- --------
Costs and expenses:
Cost of sales 20,135 18,662 62,925 52,823
Selling and administrative expenses 2,306 2,066 7,440 6,704
------- -------- -------- ---------
Total costs and expenses 22,441 20,728 70,365 59,527
------- -------- -------- ---------
Income from operations 1,780 2,317 7,363 6,508
Interest expense 1,962 1,607 5,629 4,601
Other income - - 641 336
------- -------- -------- ---------
Income/(loss) before income taxes (182) 710 2,375 2,243
Provision/(credit) for income taxes (73) 5 594 34
------- -------- -------- ---------
Net income/(loss) $ (109) $ 705 $ 1,781 $ 2,209
======= ======== ======== ========
Net income/(loss) per common share:
Primary $ (.03) $ 0.16 $ .40 $ 0.51
======= ======== ======= ========
Fully diluted $ (.03) $ 0.15 $ .38 $ 0.48
======== ======== ======= ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1994
---- ----
OPERATING ACTIVITIES:
Net income $ 1,781 $ 2,209
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization 4,671 3,625
Gain on sale of property, plant and equipment (668) -
Gain on sale of marketable securities - (336)
Changes in operating assets and liabilities which
provided/(used) cash:
Receivables (1,267) (2,470)
Inventories (1,136) (1,821)
Prepaid expenses and other current assets (1,044) (816)
Accounts payable (572) 3,581
Accrued expenses (170) (1,048)
Other - 162
-------- ---------
Net cash provided by operating activities 1,595 3,086
-------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (11,9435) (8,861)
Decrease/(increase) in deposits relating to equipment purchases (396) 326
Proceeds from sales of property, plant and equipment 998 414
Proceeds from sale of marketable equity securities - 338
Additions to deferred tooling expense (705) (514)
-------- ---------
Net cash used by investing activities (12,046) (8,297)
-------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 6,501 1,810
Proceeds from issuance of long-term debt 6,700 8,468
Repayments of long-term debt (2,301) (5,124)
Other (455) 72
-------- ---------
Net cash provided by financing activities 10,445 5,226
-------- ---------
Net increase/(decrease) in cash (6) 15
Cash at beginning of period 79 33
-------- ---------
Cash at end of period $ 73 $ 48
======== =========
See Notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Lexington Precision
Corporation (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, 1994, which was filed with the Securities and Exchange
Commission. Unless the context otherwise requires, all references to the
"Company" in this quarterly report on Form 10-Q shall be to Lexington Precision
Corporation and its wholly-owned subsidiary, Lexington Components, Inc.
("LCI").
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated financial position of the Company as of September 30, 1995, the
Company's consolidated results of operations for the three-month and nine-month
periods ended September 30, 1995 and 1994 and the Company's consolidated cash
flows for the nine-month periods ended September 30, 1995 and 1994. All such
adjustments were of a normal recurring nature. Certain amounts in the
consolidated financial statements for 1994 have been reclassified to conform to
the presentation for 1995.
The results of operations for the three-month and nine-month periods
ended September 30, 1995 are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
NOTE 2 -- INVENTORIES
Inventories as of September 30, 1995 and December 31, 1994 are summarized
below (in thousands of dollars):
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
Raw materials and purchased parts $ 3,309 $ 3,205
Work in process 2,909 2,285
Finished goods 3,104 2,696
------- -------
$ 9,322 $ 8,186
======= =======
NOTE 3 -- SHORT-TERM DEBT
As of September 30, 1995 and December 31, 1994, short-term debt consisted
of borrowings under the revolving line of credit available under the Company's
borrowing arrangement (the "Working Capital Facility") with its working capital
lender (the "Working Capital Lender"). As of September 30, 1995, $1,200,000 of
revolving loans were classified as long-term debt because they were refinanced
by terms loan in October 1995. (For additional information regarding the
Working Capital Facility, see Note 5 -- Long-Term Debt.)
NOTE 4 -- ACCRUED EXPENSES
As of September 30, 1995 and December 31, 1994, accrued expenses included
accrued interest expense of $753,000 and $1,716,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- LONG-TERM DEBT
Long-term debt as of September 30, 1995 and December 31, 1994 is
summarized below (in thousands of dollars):
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
Term loans outstanding under the Working Capital Facility,
payable in monthly installments through 2002 $20,154 $ 15,296
12% Term Note, payable in monthly installments through 2000 2,750 3,078
Industrial Revenue Bond, 75% of the Prime Rate, payable in
monthly installments through 2000 523 598
12-3/4% Senior Subordinated Notes, due 2000 31,674 31,647
14% Junior Subordinated Convertible Notes, due 2000 1,000 1,000
14% Junior Subordinated Non-Convertible Notes, due 2000 347 347
Other 204 260
------- --------
Total long-term debt 56,652 52,226
Less current portion 3,776 2,599
------- --------
Total long-term debt, excluding current portion $52,876 $ 49,627
======= ========
WORKING CAPITAL FACILITY
The Working Capital Facility, which expires in January 1998, enables the
Company to borrow up to $40,000,000, subject to availability formulas set by
the Working Capital Lender. Interest is charged on loans outstanding under the
Working Capital Facility at either the Prime Rate plus 1% or the London
Interbank Offered Rate plus 3-1/4%. The Working Capital Facility includes a
revolving line of credit, term loans and an equipment line of credit. The
Company classifies loans outstanding under the revolving line of credit as
short-term debt. The unused portion of the equipment line of credit, which
totaled $5,600,000 at September 30, 1995, can be used to finance a portion of
the purchase price of new equipment through new term loans which will be
payable in equal monthly principal installments through 2002. As of
November 9, 1995, the Company had borrowings of $32,143,000 outstanding under
the Working Capital Facility and had approximately $1,145,000 of unused
availability.
Under the terms of the Working Capital Facility, the Company is required,
among other things, to maintain net working capital of not less than
$1,000,000, exclusive of amounts borrowed under the Working Capital Facility
which are classified as current liabilities, and net worth of not less than
negative $9,500,000.
Amounts outstanding under the Working Capital Facility are collateralized
by substantially all of the personal property of the Company, including
accounts receivable, inventory and equipment, and certain real property of the
Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12-3/4% SENIOR SUBORDINATED NOTES
The 12-3/4% Senior Subordinated Notes, due February 1, 2000, are
unsecured obligations of the Company, redeemable at the option of the Company,
in whole or in part, at a declining premium over the principal amount thereof.
(See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part I, Item 2.)
NOTE 6 -- PROVISIONS OR CREDITS FOR INCOME TAXES
As of September 30, 1995 and December 31, 1994, the Company's net
deferred tax assets were entirely offset by a valuation allowance.
The provisions for income taxes otherwise recognizable during the three
and nine months ended September 30, 1995 and 1994 were reduced by the
utilization of portions of the Company's tax loss carryforwards and tax credit
carryforwards. The provisions or credits for income taxes recorded for the
three and nine months ended September 30, 1995 were calculated using the
projected annual effective tax rate (primarily attributable to federal
alternative minimum taxes) for the year ending December 31, 1995.
- 8 -
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NOTE 7 -- INCOME/(LOSS) PER SHARE
The calculation of primary and fully diluted income/(loss) per share
for the three-month and nine-month September 30, 1995 and 1994 are set forth
below (in thousands, except per share amounts):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
PRIMARY NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,228 4,203 4,215 4,173
Common stock equivalents - incentive stock options 28 25 28 25
------ ----- ----- -----
Weighted average common and common equivalent shares 4,256 4,228 4,243 4,198
====== ===== ===== =====
Net income/(loss) $ (109) $ 705 $ 1,781 $ 2,209
Preferred stock dividends (11) (12) (33) (36)
Pro rata portion of the excess of the redemption cost over
the value of preferred stock redeemed (11) (11) (33) (33)
------ ------ ------ ------
Income/(loss) for primary income per share $ (131) $ 682 $ 1,715 $ 2,140
====== ====== ======= ======
Primary net income/(loss) per common share $ (.03) $ .16 $ .40 $ .51
====== ====== ======= ======
FULLY DILUTED NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,228 4,203 4,228 4,196
Pro forma conversion of 14% Junior Subordinated
Convertible Notes 440 440 440 440
Common stock equivalents - incentive stock options 28 25 28 25
------- ------ ------- ------
Weighted average common and common equivalent shares 4,696 4,668 4,696 4,661
======= ====== ======= ======
Net income/(loss) $ (109) $ 705 $ 1,781 $ 2,209
Preferred stock dividends (11) (12) (33) (36)
Pro rata portion of the excess of the redemption cost over
the value of preferred stock redeemed (11) (11) (33) (33)
Pro forma elimination of interest expense on the 14%
Junior Subordinated Convertible Notes, net of applicable
income taxes 26 35 78 105
------ ------ ------ ------
Income/(loss) for fully diluted income/(loss) per share $ (105) $ 717 $ 1,793 $ 2,245
====== ====== ====== ======
Fully diluted net income/(loss) per common share $ (.02) $ .15 $ .38 $ .48
====== ====== ====== ======
The fully diluted loss per common share for the three months ended
September 30, 1995 is less than the primary loss per common share for the three
months ended September 30, 1995 because the calculation of fully diluted loss
per common share includes the effect of the pro forma conversion of the 14%
Junion Subordinated
- 9 -
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Notes. As a result, the primary and fully diluted net loss per
common share for the three months ended September 30, 1995 is equal to
$.03 per common share.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its business
activities. In addition, the Company has been named a potentially responsible
party or a third-party defendant, along with other companies, with respect to
certain waste disposal sites. Each of these matters is subject to various
uncertainties and it is possible that some of these matters may be decided
unfavorably to the Company. Management believes that any liability that may
ultimately result from the resolution of these matters will not have a material
adverse effect on the financial position of the Company.
- 10 -
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Through its two business segments, the Rubber Group and the Metals
Group, the Company manufactures, to customers' specifications, high tolerance
rubber and metal components. The Rubber Group manufactures silicone and
organic rubber components for sale primarily to manufacturers of automobiles,
automotive replacement parts and medical devices. The Metals Group
manufactures metal components for sale primarily to manufacturers of
automobiles, industrial equipment, home appliances and business machines. The
Rubber Group operates through three divisions of Lexington Components, Inc., a
wholly owned subsidiary of the Company ("LCI"), the Electrical Insulator
Division, the Precision Seals Division and Lexington Medical and through
Lexington Manufacturing, a division of the Company. The Metals Group operates
through two divisions of the Company, Falconer Die Casting Company and Ness
Precision Products.
The results of operations for any particular fiscal period of the
Company are not necessarily indicative of the results to be expected for any
one or more succeeding fiscal periods. In addition, because the Company's
business is materially affected by the level of activity in the automotive
industry, any material reduction in the level of activity in that industry may
have a material adverse effect on the Company's results of operations.
RESULTS OF OPERATIONS --THIRD QUARTER OF 1995 VERSUS THIRD QUARTER OF 1994
NET SALES
A summary of the net sales of the Rubber Group and the Metals Group for
the third quarters of 1995 and 1994 follows (dollar amounts in thousands):
THREE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
-------------------- INCREASE/
1995 1994 (DECREASE)
---- ---- ----------
Rubber Group $ 14,335 $ 12,486 14.8%
Metals Group 9,886 10,559 (6.4)
-------- -------- ----
$ 24,221 $ 23,045 5.1%
======== ======== ====
The increase in net sales of the Rubber Group was primarily the result
of increased sales of cable and connector seals for automotive wire harnesses,
electrical insulators for ignition wire harnesses and components for medical
devices and increased sales of tooling. The third quarter of 1995 did not
include any sales of the Rubber Group's Extruded and Lathe-Cut Products Division
which was sold on June 30, 1995. During the third quarter of 1994, the Extruded
and Lathe-Cut Products Division had net sales of $760,000. Excluding the net
sales of the Extruded and Lathe-Cut Products Division from the third quarter of
1994, net sales of the Rubber Group increased 22.2%. The $673,000 decrease in
net sales of the Metals Group was principally caused by a $1,353,000 decline in
sales of a single component to TRW Vehicle Safety Systems, Inc. ("TRW VSSI").
The decline in sales of the component resulted from the planned phase-out of the
component. If sales of the component were excluded from both the third quarter
of 1994 and the third quarter of 1995, net sales of the Metals Group would have
increased by 8.4%.
- 11 -
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COST OF SALES
A summary of the cost of sales for the Rubber Group and the Metals
Group follows (in thousands of dollars and as a percentage of net sales of each
Group):
Three Months Ended September 30,
---------------------------------------- PERCENTAGE
1995 1994 INCREASE
------------------ ------------------ ----------
Rubber Group $ 11,943 83.3% $ 10,638 85.2% 12.3%
Metals Group 8,192 82.9 8,024 76.0 2.1
------- ----- ------- ----- -----
$ 20,135 83.1% $ 18,662 81.0% 7.9%
======= ===== ======= ===== =====
Cost of sales of the Rubber Group as a percentage of net sales
decreased to 83.3% during the third quarter of 1995. During the third quarter
of 1995, reduced material costs as a percentage of net sales were offset in
part by increased factory overhead expenses as a percentage of net sales,
primarily because of increased costs associated with the development and
start-up of new products at Lexington Medical and start-up expenses incurred at
the Precision Seals Division's new 78,000 square foot facility in LaGrange,
Georgia.
Cost of sales of the Metals Group as a percentage of net sales
increased to 82.9% during the third quarter of 1995. During the third quarter
of 1995, reduced material costs as a percentage of net sales were offset by
increased direct labor and factory overhead expenses as a percentage of net
sales which resulted from increased costs associated with the installation of
new equipment and the start-up of new products at Ness Precision Products and
reduced absorption of fixed factory overhead expenses due to the decrease in
net sales.
SELLING AND ADMINISTRATIVE EXPENSES
A summary of the selling and administrative expenses for the Rubber
Group, the Metals Group and the Corporate Office follows (dollar amounts in
thousands and as a percentage of net sales of each Group):
Three Months Ended September 30,
-------------------------------- PERCENTAGE
1995 1994 INCREASE
----------------- ------------------ ----------
Rubber Group $ 910 6.3% $ 814 6.5% 11.8%
Metals Group 892 9.0 800 7.6 11.5
Corporate Office 504 N/A 452 N/A 11.5
------- ----- ------- ---- ----
$ 2,306 9.5% $ 2,066 9.0% 11.6%
======= ===== ======= ==== ====
As a percentage of Rubber Group net sales, selling and administrative
expenses decreased slightly to 6.3% during the third quarter of 1995, primarily
because most selling and administrative expenses grew at a slower rate than net
sales and because of reduced legal expenses. As a percentage of Metals Group
net sales, selling and administrative expenses increased to 9.0% during the
third quarter of 1995, primarily because of reduced absorption of selling and
administrative expenses resulting from lower net sales and because of increased
legal fees. Corporate Office administrative expenses increased during the
third quarter of 1995 primarily because of increased accruals of incentive
compensation and increased recruiting expenses.
- 12 -
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INTEREST EXPENSE
Interest expense totaled $1,962,000 during the third quarter of 1995,
an increase of $355,000 compared to the third quarter of 1994. This increase
was caused by an increase of $11,947,000 in average borrowings outstanding
under the Company's borrowing arrangement (the "Working Capital Facility") with
its working capital lender (the "Working Capital Lender").
PROVISIONS OR CREDITS FOR INCOME TAXES
As of September 30, 1995 and December 31, 1994, the Company's net
deferred tax assets were entirely offset by a valuation allowance.
The provisions for income taxes otherwise recognizable during the third
quarters of 1995 and 1994 were reduced by the utilization of portions of the
Company's tax loss carryforwards and tax credit carryforwards. At September
30, 1995, the Company adjusted its estimate of its projected annual effective
tax rate (primarily attributable to federal alternative minimum tax) from 26%
to 25% of net income. As a result, the income tax credit recorded for the
third quarter of 1995 reflects the adjustment of the Company's projected annual
effective tax rate.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 1995 VERSUS NINE MONTHS
ENDED SEPTEMBER 1994
NET SALES
A summary of the net sales of the Rubber Group and the Metals Group for
the first nine months of 1995 and 1994 follows (dollar amounts in thousands):
Nine Months Ended
September 30,
-------------------- Percentage
1995 1994 Increase
------ ------ --------
Rubber Group $ 45,946 $ 34,446 33.4%
Metals Group 31,782 31,589 .6
------- -------- -----
$ 77,728 $ 66,035 17.7%
======= ======== =====
The increase in net sales of the Rubber Group was primarily the result
of increased sales of cable and connector seals for automotive wire harnesses,
electrical insulators for ignition wire harnesses and components for medical
devices and increased sales of tooling. Although sales by the Metals Group of a
single component to TRW VSSI declined by $3,132,000, the decline was more than
offset by increased sales of other components. The decline in sales of the
component resulted from the planned phase-out of the component. If sales of the
component were excluded from both the first nine months of 1994 and the first
nine months of 1995, net sales of the Metals Group would have increased by
14.0%.
- 13 -
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COST OF SALES
A summary of the cost of sales for the Rubber Group and the Metals
Group follows (in thousands of dollars and as a percentage of net sales of each
Group):
Nine Months Ended September 30,
-------------------------------- PERCENTAGE
1995 1994 INCREASE
------------------ ------------------ ----------
Rubber Group $ 37,379 81.4% $ 28,661 83.2% 30.4%
Metals Group 25,546 80.4 24,162 76.5 5.7
------- ---- -------- ---- ----
$ 62,925 80.9% $ 52,823 79.9% 19.1%
======= ==== ======== ==== ====
Cost of sales of the Rubber Group as a percentage of net sales decreased
to 81.4% during the first nine months of 1995. During the first nine months of
1995, material costs as a percentage of net sales increased because of increased
sales of tooling, which generally have higher material costs as a percentage of
net sales. Increased material costs as a percentage of net sales were offset by
reduced factory overhead expense as a percentage of net sales, primarily because
factory overhead expenses grew at a slower rate than sales. Although factory
overhead expenses as a percentage of net sales decreased during the first nine
months of 1995, the reduction was partially offset by start-up expenses incurred
at the Precision Seals Division's new facility in LaGrange, Georgia.
Cost of sales of the Metals Group as a percentage of net sales increased
to 80.4% during the first nine months of 1995, primarily because of increased
factory overhead expenses. Increased factory overhead expenses as a percentage
of net sales primarily resulted from increased costs associated with the
installation of new equipment and the start-up of new products at Ness Precision
Products.
SELLING AND ADMINISTRATIVE EXPENSES
A summary of the selling and administrative expenses for the Rubber
Group, the Metals Group and the Corporate Office follows (dollar amounts in
thousands and as a percentage of net sales of each Group):
Nine Months Ended September 30,
------------------------------ PERCENTAGE
1995 1994 INCREASE
------------------ ------------------ -----------
Rubber Group $ 2,981 6.5% $ 2,517 7.3% 18.4%
Metals Group 2,736 8.6 2,500 7.9 9.4
Corporate Office 1,723 N/A 1,687 N/A 2.1
------- ---- ------- ---- ----
$ 7,440 9.6% $ 6,704 10.2% 11.0%
======= ==== ======= ==== ====
Selling and administrative expenses of the Rubber Group increased
primarily as a result of the addition of administrative personnel and increased
relocation costs. As a percentage of Rubber Group net sales, selling and
administrative expenses fell to 6.5% during the first nine months of 1995. As a
percentage of Metals Group net sales, selling and administrative expenses
increased to 8.6% during the first nine months of 1995, primarily because of the
addition of administrative personnel, increased legal fees and relocation costs.
- 14 -
16
INTEREST EXPENSE
Interest expense totaled $5,629,000 during the first nine months of
1995, an increase of $1,028,000 compared to the first nine months of 1994.
This increase was caused by an increase of $11,942,000 in average borrowings
outstanding under the Working Capital Facility and an increase in the average
rate of interest charged on borrowings outstanding under the Working Capital
Facility due to increases in short-term interest rates.
OTHER INCOME
On June 30, 1995, the Company sold the inventory, equipment and
manufacturing facility of the Extruded and Lathe-Cut Products Division of LCI
for cash and the assumption by the purchaser of certain liabilities, which
resulted in a pre-tax gain of $578,000. During 1994, the Extruded and
Lathe-Cut Products Division had net sales of approximately $2,600,000, which
represented approximately 3% of the Company's consolidated net sales. In
addition, during the first nine months of 1995, the Company realized a pretax
gain on the sale of several other pieces of equipment in the amount of $63,000.
PROVISION FOR INCOME TAXES
As of September 30, 1995 and December 31, 1994, the Company's net
deferred tax assets were entirely offset by a valuation allowance.
The income tax provisions otherwise recognizable during the first nine
months of 1995 and 1994 were reduced by the utilization of portions of the
Company's tax loss carryforwards and tax credit carryforwards. The income tax
provision recorded for the first nine months of 1995 was calculated using the
projected annual effective tax rate (primarily attributable to federal
alternative minimum taxes) for the year ending December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS RELATING TO OPERATING ACTIVITIES
During the first nine months of 1995, net cash provided by the
operating activities of the Company totaled $1,595,000. During the first nine
months of 1995, $2,403,000 of cash was used to fund increased levels of
accounts receivable and inventories resulting primarily from increased levels
of sales and orders. Also during the first nine months of 1995, $1,044,000 of
cash was used to fund an increase in other current assets which resulted
primarily from increased customer orders for production tooling. At
September 30, 1995, the Company's trade accounts payable included approximately
$2,900,000 relating to the purchase of new equipment and tooling, a decrease
from $4,325,000 at December 31, 1994. Compared to December 31, 1994, accrued
expenses at September 30, 1995, included increased accruals for employee
compensation and related taxes and benefits and increased accruals for
alternative minimum taxes. The increased accruals were offset by a lower
accrual for interest expense on the Company's 12-3/4% Senior Subordinated Notes
because interest is paid on these notes on February 1 and August 1 of each
year.
Net working capital declined during the first nine months of 1995 by
$3,495,000 primarily because capital expenditures were financed with increased
short-term borrowings under the Working Capital Facility.
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CASH FLOWS RELATING TO INVESTING ACTIVITIES
During the first nine months of 1995, the investing activities of the
Company used $12,046,000 of cash. Capital expenditures totaled $11,943,000
during the first nine months of 1995, of which $8,784,000 was attributable to
the Rubber Group and $3,159,000 was attributable to the Metals Group. The
Company presently estimates that capital expenditures will total approximately
$20,000,000 during 1995, including approximately $6,000,000 for the
construction or improvement of manufacturing facilities and approximately
$14,000,000 for the purchase of equipment. The Company currently estimates
that approximately $4,000,000 of anticipated 1995 capital expenditures are
being made to maintain or replace existing equipment or to effect cost
reductions and that the balance of capital expenditures are primarily for the
purchase of production equipment to meet orders which have been awarded to the
Company or the expansion of manufacturing facilities required to accommodate
the anticipated future growth of the Company. As of September 30, 1995, the
Company had commitments outstanding for capital expenditures totaling
approximately $11,400,000.
CASH FLOWS RELATING TO FINANCING ACTIVITIES
During the first nine months of 1995, the financing activities of the
Company provided $10,445,000 of cash, primarily from increased borrowings under
the Working Capital Facility. The Company operates with high financial
leverage. During the first nine months of 1995, the aggregate indebtedness of
the Company, excluding trade payables, increased by $10,927,000 to $68,205,000.
Cash interest and principal payments required under the terms of the Company's
loan agreements are expected to total approximately $7,045,000 and $3,227,000,
respectively, in 1995.
The Company finances its operations primarily through the Working
Capital Facility, which expires in January 1998. The Company's maximum
borrowing availability under the Working Capital Facility is $40,000,000,
subject to availability formulas set by the Working Capital Lender. The
Working Capital Facility includes a revolving line of credit, term loans and an
equipment line of credit. Term loans outstanding under the Working Capital
Facility are due in equal monthly principal installments through February 2002
(subject to accelerated maturity in the event of the termination or non-renewal
of the Working Capital Facility). As of September 30, 1995, the equipment line
of credit totaled $5,600,000. The equipment line of credit can be used to
finance a portion of qualifying new equipment purchases through term loans.
The Company classifies loans outstanding under the revolving line of credit as
short-term debt.
In August 1995, the Working Capital Facility was amended in order to,
among other things, increase the advance rates on equipment and inventory. As
a result of the change in the equipment advance rate, the Working Capital
Lender made available to the Company $2,000,000 of additional term loans. As a
result of the change in the inventory advance rate, the Company's availability
under its revolving loan agreement increased by $905,000. Furthermore, on
September 13, 1995 and October 11, 1995, the Company converted $1,200,000 of
borrowings outstanding under its revolving line of credit to term loans.
LIQUIDITY
As of November 9, 1995, the Company had approximately $1,145,000 of
unused availability under the Working Capital Facility. Amounts outstanding
under the Working Capital Facility are collateralized by substantially all of
the personal property of the Company, including accounts receivable, inventory
and equipment, and certain real property of the Company.
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As a result of increasing market share in certain market niches and
growing overall volume because of a generally healthy economic environment and,
in particular, a strong automotive industry, the Company commenced a major
expansion plan in 1994 which is currently expected to be completed during the
first half of 1996. During 1994, 1995 and the first half of 1996, capital
expenditures have totaled or are projected to total $15,319,000, $20,000,000
and $7,000,000, respectively, or an aggregate of $42,319,000. The Company
estimates that approximately $35,000,000 of those capital expenditures
represent investments for expansion of the Company's business of which
approximately $9,000,000 will represent capital expenditures for real estate
and approximately $26,000,000 will represent capital expenditures for
equipment. Net sales have grown from $74,976,000 in 1993 to a projected level
of $102,000,000 in 1995. Net sales for 1996 are currently projected to range
between $110,000,000 and $120,000,000. The Company currently anticipates that
the rate of sales growth will be reduced beginning in the second half of 1996
and, as a result, that capital expenditure requirements of the Company will
drop to a level of approximately $5,000,000 annually. This amount would
provide for technological upgrades, maintenance, cost reduction programs and
nominal growth.
The Company anticipates that, in addition to its projected cash flows
from operations and projected availability under the Working Capital Facility
as currently in effect, incremental borrowings in the amount of approximately
$4,900,000 will be required to meet the Company's working capital, capital
expenditure and debt service requirements for the balance of 1995 and the first
quarter of 1996. Management of the Company believes that three factors have
caused liquidity to be less than had been planned. First, operating profits
for 1995 are projected to fall approximately $1,500,000 below planned levels.
Second, approximately $1,300,000 in excess of planned amounts is currently
invested in tooling which will be billed to customers after certification of
the tooling has been obtained. Third, but perhaps most important, although
capital expenditures are expected to approximate planned levels, the mix of
spending has been weighted more heavily than planned to assets that do not
generate borrowing availability under the Working Capital Facility. Such
assets include purchased land, new buildings, building additions and upgrades
and equipment modifications and retrofits. Although these three factors have
had a negative impact on the Company's short term liquidity, they do not
necessarily reflect negatively on the business of the Company.
As previously stated, projected incremental borrowings in the amount of
approximately $4,900,000 will be required to meet the Company's working
capital, capital expenditure and debt service requirements for the balance of
1995 and the first quarter of 1996. Projected peak incremental borrowing
requirements of approximately $5,300,000 will occur on February 1, 1996, the
scheduled payment date for $2,069,000 of interest then due on the 12-3/4%
Senior Subordinated Notes and 14% Junior Subordinated Notes. Assuming a
moderate extension of accounts payable balances with suppliers beyond terms
which the Company believes are customary in the industries in which it
operates, projected incremental borrowings required to meet the Company's
working capital, capital expenditure and debt service requirements for the
balance of 1995 and the first quarter of 1996 would be reduced to approximately
$3,400,000 and projected peak incremental borrowing requirements on February 1,
1996 would be reduced to approximately $3,800,000. In order to finance its
projected cash requirements, the Company has commenced negotiations with the
Working Capital Lender and two other financial institutions regarding three new
borrowing facilities which would generate approximately $5,500,000 of
incremental borrowing availability. Although there can be no assurance that
the incremental financing can be obtained, the Company presently believes that
such financing can be obtained on terms which are satisfactory to the Company.
If the Company is unable to obtain incremental financing in adequate amounts
and on satisfactory terms or if the Company's cash flow from operations falls
below expectations, the Company will attempt to reduce its cash requirements by
reducing or delaying its capital expenditure program, renegotiating payment
terms with certain suppliers of capital assets on terms which are more
favorable to the Company, and extending accounts payable balances with
suppliers beyond terms which the Company believes are customary in the
industries in which it operates. If the Company is
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19
unsuccessful in its efforts, the Company may be forced to defer the
payment of the February 1, 1996 interest due on the 12-3/4% Senior Subordinated
Notes and 14% Junior Subordinated Notes. Under certain circumstances, such
non-payment could result in defaults under other loan and financing agreements
of the Company and could have a material adverse effect upon the Company and
its operations. The Company believes that its tight cash position is short
term in nature and that, after completion of its real estate expansion program,
cash flow from operations in conjunction with the borrowing availability under
the Working Capital Facility will be more than adequate to meet the projected
cash requirements of the Company.
DEPENDENCE ON LARGE CUSTOMERS
During the first nine months of 1995, the Company's three largest
customers accounted for 35.5% of the Company's total net sales. The Company
has limited ability to predict the volume and pricing of orders from such
customers. Loss of all or a major portion of the business of any of the
Company's three largest customers would have a material adverse effect on the
Company's operations.
ACQUISITIONS
The Company is seeking to acquire assets and businesses related to its
current operations with the intention of expanding its existing operations.
Depending on, among other things, the size and terms of such acquisitions, the
Company may be required to obtain additional financing and, in some cases, the
approval of the Working Capital Lender and the holders of other debt of the
Company. The Company's ability to effect acquisitions may be dependent upon its
ability to obtain such financing and, to the extent applicable, consents.
ENVIRONMENTAL MATTERS
The Company has been named as one of numerous potentially responsible
parties under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA") for restoration costs at three waste disposal
sites, as a third-party defendant in cost recovery actions initiated by the
Environmental Protection Agency pursuant to applicable sections of CERCLA and
as a defendant or potential defendant in various other legal matters. It is
the Company's policy to record accruals for such matters when a loss is deemed
probable and the amount of such loss can be reasonably estimated. The various
actions to which the Company is or may be a party in the future are at various
stages of completion and, although there can be no assurance as to the outcome
of existing or potential litigation, in the event such litigation were
commenced, based upon the information currently available to the Company, the
Company believes that the outcome of such actions would not have a material
adverse effect upon its financial position.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
10-1 Amendment to Financing Agreements dated August 1, 1995
from Lexington Precision Corporation in favor of Congress
Financial Corporation
10-2 Amendment to Financing Agreements dated August 1, 1995
from Lexington Components, Inc. in favor of Congress
Financial Corporation
10-3 Term Note dated September 13, 1995 from Lexington
Precision Corporation in favor of Congress Financial
Corporation
10-4 Term Note dated September 13, 1995 from Lexington
Components, Inc. in favor of Congress Financial
Corporation
10-5 Term Note dated October 11, 1995 from Lexington
Precision Corporation in favor of Congress Financial
Corporation
10-6 Term Note dated October 11, 1995 from Lexington
Components, Inc. in favor of Congress Financial
Corporation
27-1 Financial Data Schedule*
* Not deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities Exchange
Act of 1934 and Section 323 of the Trust Indenture Act of
1939, or otherwise subject to the liabilities of such sections
and not deemed part of any registration statement to which
such exhibit relates.
(b) REPORTS ON FORM 8-K
On July 5, 1995, the Company filed a Form 8-K with the Securities
and Exchange Commission stating that, on June 30, 1995, Lexington
Components, Inc., a wholly-owned subsidiary, of the Company, had
sold assets of its Extruded and Lathe-Cut Products Division to
Kismet Products, Inc., of Painesville, Ohio, recognizing a
pre-tax gain of $578,000 on the sale.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
SEPTEMBER 30, 1995
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 10, 1995 By: /s/ Michael A. Lubin
- ----------------- -------------------------
Date Michael A. Lubin
Chairman of the Board
November 10, 1995 By: /s/ Warren Delano
- ----------------- -------------------------
Date Warren Delano
President
November 10, 1995 By: /s/ Dennis J. Welhouse
- ----------------- -------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Exhibit Location
- ------- ------- --------
10-1 Amendment to Financing Agreements Filed with this Form 10-Q
dated August 1, 1995 from Lexington
Precision Corporation in favor of
Congress Financial Corporation
10-2 Amendment to Financing Agreements Filed with this Form 10-Q
dated August 1, 1995 from Lexington
Components, Inc. in favor of Congress
Financial Corporation
10-3 Term Note dated September 13, 1995 from Filed with this Form 10-Q
Lexington Precision Corporation in favor
of Congress Financial Corporation
10-4 Term Note dated September 13, 1995 from Filed with this Form 10-Q
Lexington Components, Inc. in favor of
Congress Financial Corporation
10-5 Term Note dated October 11, 1995 from Filed with this Form 10-Q
Lexington Precision Corporation in favor
of Congress Financial Corporation
10-6 Term Note dated October 11, 1995 from Filed with this Form 10-Q
Lexington Components, Inc. in favor of
Congress Financial Corporation
27-1 Financial Data Schedule Filed with this Form 10-Q