UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____.
Commission File number 333-61043
STEEL HEDDLE MFG. CO.
(Exact name of registrant as specified in its charter)
Pennsylvania 57-0543389
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 Rutherford Road, Greenville, South Carolina 29607
(Address of principal executive offices)
Registrant's telephone number (864) 244-4110
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. [X] yes [ ] no
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. 100 shares of the Company's
Common Stock, par value $0.10 per share, were outstanding as of August 1, 1999.
STEEL HEDDLE MFG. CO.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets:
as of June 26, 1999 (Unaudited) and January 2, 1999...............3
Unaudited Consolidated Statement of Operations and Comprehensive
Income (Loss):
for the Three Months Ended June 26, 1999 (Successor), the Five
Weeks Ended June 27, 1998 (Successor) and the Seven Weeks Ended
May 25, 1998 (Predecessor)........................................5
Unaudited Consolidated Statement of Operations and Comprehensive
Income (Loss):
for the Six Months Ended June 26, 1999 (Successor), the Five
Weeks Ended June 27, 1998 (Successor) and the Twenty Weeks Ended
May 25, 1998 (Predecessor)........................................6
Unaudited Consolidated Statements of Cash Flows:
for the Six Months Ended June 26, 1999 (Successor), the Five
Weeks Ended June 27, 1998 (Successor) and the Twenty Weeks Ended
May 25, 1998 (Predecessor)........................................7
Notes to Unaudited Consolidated Financial Statements...................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk............27
PART II OTHER INFORMATION.....................................................28
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SUCCESSOR SUCCESSOR
COMPANY COMPANY
JUNE 26, 1999 JANUARY 2, 1999
-------------------------------
(Unaudited) (1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 335 $ 1,182
Accounts receivable, net 12,428 9,873
Income taxes receivable 1,280 1,279
Inventories 18,271 19,730
Prepaid expenses 114 125
-------------------------------
Total current assets 32,428 32,189
PROPERTY, PLANT & EQUIPMENT:
Cost 46,294 46,014
Less accumulated depreciation (8,715) (4,510)
-------------------------------
37,579 41,504
OTHER ASSETS:
Prepaid pension costs 2,072 2,185
Goodwill, net 105,765 107,124
Identifiable intangible assets, net 11,691 12,203
Sundry 3,958 4,269
-------------------------------
123,486 125,781
-------------------------------
TOTAL ASSETS $ 193,493 $ 199,474
===============================
(1) Derived from January 2, 1999 audited financial statements
See notes to unaudited consolidated financial statements
3
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
SUCCESSOR SUCCESSOR
COMPANY COMPANY
JUNE 26, 1999 JANUARY 2, 1999
------------------------------
(Unaudited) (1)
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,669 $ 2,423
Accrued and sundry liabilities 6,562 6,078
Deferred income taxes 1,884 2,049
Income taxes payable 121 143
Current portion of long-term debt 7,024 6,328
------------------------------
Total current liabilities 19,260 17,021
LONG-TERM DEBT, LESS CURRENT PORTION 128,705 130,695
RETIREMENT BENEFITS PAYABLE 6,970 7,317
DEFERRED INCOME TAXES 13,932 15,528
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 1,754 1,960
SHAREHOLDER'S EQUITY:
Common stock - $0.10 par value per
share - authorized, issued and
outstanding 100 shares at April 3, 1999
and January 2, 1999 - -
Additional paid-in capital 37,943 37,943
Deficit (9,933) (6,060)
Notes receivable - shareholders (350) (350)
Carryover basis of management's
interest (4,494) (4,494)
Accumulated other comprehensive loss (294) (86)
------------------------------
Total shareholder's equity 22,872 26,953
------------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 193,493 $ 199,474
==============================
(1) Derived from January 2, 1999 audited financial statements.
See notes to unaudited consolidated financial statements
4
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
THREE MONTHS ENDED
JUNE 26,
1999 JUNE 27, 1998
--------- --------------------
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(12 WEEKS) (5 WEEKS) (7 WEEKS)
NET SALES $ 17,611 $ 7,161 $ 10,365
COST OF GOODS SOLD 13,410 4,973 6,698
--------- -------- ---------
GROSS PROFIT 4,201 2,188 3,667
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,433 845 1,646
MANAGEMENT FEES 270 74 64
AMORTIZATION OF GOODWILL 680 221 107
--------- -------- ---------
OPERATING INCOME 818 1,048 1,850
OTHER INCOME (EXPENSE):
Interest income 21 20 12
Interest expense, including
amortization of deferred financing
costs (3,415) (2,270) (501)
--------- -------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (2,576) (1,202) 1,361
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY (40) - -
--------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (2,616) (1,202) 1,361
INCOME TAX (BENEFIT) EXPENSE (782) (378) 521
--------- -------- ---------
NET INCOME (LOSS) (1,834) (824) 840
OTHER COMPREHENSIVE INCOME (LOSS) -
NET OF TAX:
Foreign currency translation
adjustment (65) (16) 2
--------- -------- ---------
COMPREHENSIVE INCOME (LOSS) $ (1,899) $ (840) $ 842
========= ======== =========
See notes to unaudited consolidated financial statements
5
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
SIX MONTHS ENDED
JUNE 26, 1999 JUNE 27, 1998
------------- ---------------------
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(25 WEEKS) (5 WEEKS) (20 WEEKS)
NET SALES $ 36,140 $ 7,161 $ 29,631
COST OF GOODS SOLD 27,531 4,973 18,628
--------- -------- ---------
GROSS PROFIT 8,609 2,188 11,003
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,223 845 3,824
MANAGEMENT FEES 551 74 132
AMORTIZATION OF GOODWILL 1,359 221 289
--------- -------- ---------
OPERATING INCOME 1,476 1,048 6,758
OTHER INCOME (EXPENSE):
Interest income 54 20 29
Interest expense, including
amortization of deferred financing
costs (6,895) (2,270) (1,528)
Other financing expense - - (50)
--------- -------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
INCOME TAXES (5,365) (1,202) 5,209
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY (25) - -
--------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,390) (1,202) 5,209
INCOME TAX (BENEFIT) EXPENSE (1,517) (378) 1,868
--------- -------- ---------
NET INCOME (LOSS) (3,873) (824) 3,341
OTHER COMPREHENSIVE INCOME (LOSS) -
NET OF TAX:
Foreign currency translation
adjustment (208) (16) 16
--------- -------- ---------
COMPREHENSIVE INCOME (LOSS) $(4,081) $ (840) $3,357
========= ======== =========
See notes to unaudited consolidated financial statements
6
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
SIX MONTHS ENDED
JUNE 26, 1999 JUNE 27, 1998
------------- -----------------------
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(25 WEEKS) (5 WEEKS) (20 WEEKS)
OPERATING ACTIVITIES:
Net income (loss) $ (3,873) $ (824) $ 3,341
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation 4,258 802 1,517
Amortization 2,098 1,289 346
Minority interest in
consolidated subsidiaries (206) - -
Benefit for deferred income
taxes (1,761) (382) (83)
Accrued retirement benefit
costs (234) (221) 176
Changes in operating assets
and liabilities:
Accounts receivable (2,555) (3) (1,977)
Inventories 1,459 277 (888)
Prepaid expenses 11 (18) (5)
Sundry assets 245 - -
Accounts payable 1,246 (870) 203
Accrued and sundry
liabilities 484 (374) (2,127)
Income taxes payable (22) (15) 1,707
---------- --------- ---------
Net cash provided
by (used in)
operating activities 1,150 (339) 2,210
INVESTING ACTIVITIES:
Acquisition of SH Holding Corp.:
Current Assets - (31,128) -
Property, plant and
equipment, net - (41,272) -
Other assets - (2,487) -
Intangible assets - (124,357) -
Current and noncurrent
liabilities - 16,906 -
Deferred income taxes - 16,890 -
Long-term debt - 52,492 -
---------- --------- ---------
Net cash used to acquire
SH Holdings Corp. - (112,956) -
Purchase of property, plant and
equipment, net (703) (199) (968)
Proceeds on disposals of property,
plant and equipment - - 238
---------- --------- ---------
Net cash used in
investing activities (703) (113,155) (730)
FINANCING ACTIVITIES:
Proceeds from debt 133,600 1,317
Capital contributions 37,561 -
Revolver borrowings (repayments),
net (947) - -
Payments of debt (347) (52,492) (1,625)
Financing costs incurred (4,928) -
---------- --------- ---------
Net cash provided
by (used in)
financing activities (1,294) 113,741 (308)
---------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (847) 247 1,172
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,182 1,551 379
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 335 $ 1,798 $ 1,551
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,688 $ 294 $ 1,893
Income taxes paid $ 10 $ 19 $ 270
See notes to unaudited consolidated financial statements
7
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. ORGANIZATION, ACQUISITIONS AND BASIS OF PRESENTATION
ORGANIZATION - Steel Heddle Mfg. Co. ("Steel Heddle" or the "Company"), a
Pennsylvania corporation and a wholly-owned subsidiary of Steel Heddle Group,
Inc., manufactures products and loom accessories used by textile weaving mills
and processes metal products from its wire rolling facilities for use in the
electronics, solar power and automotive industries, among others. The Company's
manufacturing plants are located in the southern United States, Mexico, and
Belgium. The Company sells to foreign and domestic companies.
THE ACQUISITION OF STEEL HEDDLE - On May 26, 1998, Steel Heddle Group, Inc. ("SH
Group") consummated the acquisition (the "Acquisition"), of SH Holdings Corp.
("Old Holdings"). SH Group, a corporation formed by American Industrial Partners
Capital Fund II, L.P. (together with its affiliates, "AIP"), was organized as a
holding company to effect the acquisition of all of the outstanding common stock
of Old Holdings. The purchase price, including transaction fees and expenses, of
approximately $175.2 million was financed with a $25 million capital
contribution from AIP (including rollover ownership interests of certain members
of management), approximately $15 million in proceeds from SH Group's issuance
of $29.25 million of 13 3/4 % Senior Subordinated Discount Debentures, issuance
of $100 million of 10 5/8% Senior Subordinated Notes (the "Notes") of Steel
Heddle and borrowings of approximately $33.6 million under a new bank credit
facility (the "Credit Facility") of Steel Heddle. The acquisition was accounted
for using the purchase method of accounting.
In accordance with the purchase method of accounting, the purchase price was
allocated to the underlying assets and liabilities of Old Holdings based upon
their estimated respective fair values at the date of Acquisition. The fair
values were determined by independent appraisals, valuations and other means
deemed appropriate by management. Based on such allocations, the purchase price
exceeded the fair value of the net assets acquired by approximately $108.7
million. In addition, certain options ("Rollover Options") to purchase the
common stock of the Predecessor that were held by continuing management
employees prior to the time of the Acquisition were converted into options to
acquire 17,707 shares of common stock of SH Group at an exercise price of $15
per share. On a fully-diluted basis, the Rollover Options represent
approximately 5% ownership interest in SH Group immediately following the
Acquisition. The carryover basis of management's interest in the Rollover
Options, $4,494, has been considered in the allocation of the purchase cost and
in the initial basis of equity. Since assets and liabilities of Old Holdings
have been adjusted to their fair values as of the date of Acquisition, the
financial information for periods prior to May 26, 1998 ("Predecessor Company")
are not comparable with financial information for periods subsequent to that
date ("Successor Company").
THE ACQUISITION OF MILLENTEX - On October 23, 1998, Steel Heddle, through its
wholly-owned subsidiary, Millentex Investment Corporation, acquired a 49%
ownership interest in Millentex, N.V. ("Millentex"), an entity organized under
the laws of the Kingdom of Belgium. Millentex was established on August 16, 1998
to effect the acquisition of the outstanding common stock of a company (the
"Belgium Company") with operations in the loom accessories industry. The
purchase price of approximately $2 million was financed via a capital
contribution from Steel Heddle and was accounted for using the purchase method
of accounting. The financial position of Millentex is included in the Company's
consolidated balance sheet at June 26, 1999 and January 2, 1999, and the results
of operations and comprehensive loss of Millentex for the three and six months
ended June 26, 1999 are included in the Company's consolidated statement of
operations and comprehensive loss for the three and six months ended June 26,
1999.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities of Millentex based upon
their estimated respective fair values at the date of acquisition. The fair
values were determined by independent appraisals, valuations and other means
deemed appropriate by management. Based on such allocations, the purchase price
was allocated to the identifiable assets and there was no goodwill.
8
BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In addition,
certain other significant accounting policies arising from the Acquisition
include the following:
Deferred financing costs associated with the Acquisition financing were
approximately $3,927 and are being amortized using the interest method.
Accumulated amortization was approximately $492 at June 26, 1999.
Goodwill arising from the acquisition is approximately $108,710 and is
being amortized over forty years using the straight-line method.
Accumulated amortization was approximately $2,945 on June 26, 1999.
Identifiable intangible assets acquired in the Acquisition, consisting
principally of engineering drawings, were approximately $12,800 and are
being amortized on the straight-line method over 12.5 years. Accumulated
amortization was approximately $1,109 at June 26, 1999.
In the opinion of the management of the Company, these unaudited consolidated
financial statements contain all of the adjustments, consisting of a normal
recurring nature, necessary for fair presentation. Operating results for the six
months ended June 26, 1999 are not necessarily indicative of the results that
may be expected for fiscal 1999. Certain amounts previously presented in the
Predecessor Company consolidated financial statements for the prior period have
been reclassified to conform to the current classification. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates. The notes included herein should be read in
conjunction with the audited consolidated financial statements included in Steel
Heddle's Annual Report on Form 10-K for the year ended January 2, 1999.
2. INVENTORIES
Unaudited
June 26, January 2,
1999 1999
------------ ------------
Raw materials and component parts $ 6,781 $ 7,614
Work in process and finished goods 11,490 12,116
------------ ------------
$ 18,271 $ 19,730
============ ============
Inventories priced by the LIFO method were approximately $10,063 at June 26,
1999 and approximately $11,067 at January 2, 1999. If all inventories had been
priced by the FIFO or average cost method, they would have been higher than the
amounts reported by approximately $1,089 and $779 at June 26, 1999 and January
2, 1999, respectively.
9
3. LONG-TERM DEBT
Unaudited
June 26, January 2,
1999 1999
----------- ------------
10 5/8 % Senior Subordinated Notes ("Notes") $ 100,000 $ 100,000
Bank Credit Facility ("Credit Facility"):
Term loan 30,000 30,000
Revolving loan 2,500 3,200
Foreign Notes Payable 307 654
Foreign Revolving Lines of Credit 2,922 3,169
----------- ------------
135,729 137,023
Less current portion 7,024 6,328
---------- ------------
$ 128,705 $ 130,695
=========== ============
The Notes are due in full on June 1, 2008. Interest on the Notes is payable
semi-annually in arrears each June 1 and December 1.
The Credit Facility consists of a $30 million term and a $20 million revolving
loan commitment. The term loan is payable in quarterly installments ranging from
$1 million to $2 million beginning July 3, 1999 through April 3, 2004. The term
loan and the revolving loan bear interest at the bank's prime rate (as defined)
plus 1.0 percent or Eurodollar rates (as defined) plus 2.25 percent, at the
Company's option. At June 3, 1999, the interest rates on the Credit Facility
borrowings ranged from 7.21% to 7.25% and approximately $16.8 million was
available for borrowing under the revolving loan facility. Substantially all of
the Company's assets are pledged as collateral under the Credit Facility.
The Credit Facility and the Notes contain various financial covenants, including
minimum levels of EBITDA, minimum interest coverage ratio and maximum capital
expenditures and total leverage ratio. The non-financial covenants restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness or amend certain debt
instruments, pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. The Company was
in compliance with its various financial and non-financial covenants at June 26,
1999.
The foreign notes payable incur interest at rates ranging from 4.0% to 7.2% with
interest payments due quarterly. Principal payments ranging from $11 to $29 are
due quarterly. At June 26, 1999, the foreign revolving lines of credit incurred
interest at rates ranging from 3.60% to 3.66%. The foreign subsidiary had
approximately $512 available under these revolving lines of credit at June 26,
1999. Substantially all of the foreign entity's current assets are pledged as
collateral under two of the foreign revolving lines of credit.
4. RELATED PARTY TRANSACTIONS
On May 26, 1998, the Company and SH Group, Inc. entered into a management
services agreement with AIP. AIP provides general management, financial and
other corporate advisory services to the Company for $895 annually, payable in
semi-annual installments on May 30 and November 29 and will be reimbursed for
out-of-pocket expenses. The agreement expires on the earlier of May 26, 2008, or
such other date as AIP and the Company mutually agree. The Company expensed $551
and $74 in such fees and reimbursements during the six months ended June 26,
1999 and the five weeks ended June 27, 1998, respectively.
BCC Industrial Services, Inc. ("BCC"), an affiliate of Butler Capital
Corporation, provided consulting services to the Company pursuant to a
Consulting Services Agreement dated as of January 1, 1996 and received
remuneration of $132 in the six months ended June 27, 1998.
10
In connection with the Acquisition, certain officers of the Company purchased
shares of the SH Group's common stock which are secured by notes from the
officers. The amended notes bear interest at 6% per year, require annual
payments beginning in 2000 and mature on May 26, 2003. The notes have been
presented as a separate component of shareholder's equity.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION - Although the Company may be subject to litigation from time to time
in the ordinary course of business, it is not a party to any pending or
threatened legal proceedings that management believes will have a material
impact on its financial position or results of operations.
ENVIRONMENTAL - The Company is subject to various federal, state and local
government laws and regulations concerning, among other things, the discharge,
storage, handling and disposal of a variety of hazardous and non-hazardous
substances and wastes.
The Company believes that it is in substantial compliance with all existing
environmental laws and regulations to which it is subject. In addition, the
Company is subject to liability under environmental laws relating to the past
release or disposal of hazardous materials. The Company has included in accrued
and sundry liabilities an accrual for hazardous waste site maintenance for the
estimated total cost over an initial period of 30 years to close out and monitor
its inactive hazardous waste site. Payment is secured by a standby letter of
credit of approximately $671. To date, and in management's belief for the
foreseeable future, additional liability under and compliance with existing
environmental laws has not had and will not have a material adverse effect on
the Company's financial position or results of operations.
COMMITMENT (RELATED PARTY) - Also in connection with the financing of the May
26, 1998 acquisition, SH Group issued $29,250 of 13 3/4% Senior Discounted
Debentures ("Debentures"). The Debentures are a legal obligation of SH Group;
however, SH Group is dependent on dividends from Steel Heddle to meet the debt
service requirements of the Debentures. The Debentures (original proceeds of
$15,016 and accreted value of $17,380 at June 26, 1999) will mature on June 1,
2009. The Debentures are accreting to a principal amount of $29,250 on June 1,
2003. Interest on the Debentures will be payable semi-annually in arrears
commencing on December 4, 2003. Cash flow requirements of Steel Heddle to
service SH Group's Debentures commence on December 4, 2003 and total
approximately $2,011 in 2003, $4,022 in each of 2004 to 2008, and $31,261
($2,011 representing interest and $29,250 representing principal) in 2009.
Payment of such dividends by Steel Heddle to SH Group are permitted under the
terms of the Credit Facility and Notes.
6. SEGMENT INFORMATION
The Company has two reportable segments, the Textile Products Group ("Textile
Products") and the Metal Products Group ("Metal Products"). Textile Products
manufactures textile loom accessories including heddles, dropwires, harness
frames and reeds, all of which are used to hold or guide individual yarns during
the weaving process. Metal Products processes and sells rolled products. Metal
Product's wire rolling operation provides material used by Textile Products and
a variety of other industries, including electronics, automotive and solar
power. Included in other below are amounts associated with the Company's Mexican
subsidiary, the shuttle division, frame reconditioning, tools and molds and the
corporate division. The Company's reportable segments are business units that
offer different products or primarily generate sales from different customers.
No customer accounted for over 10% of the consolidated sales of the Company
during the six months ended June 26, 1999 or the six months ended June 27, 1998.
The Company evaluates performance and allocates resources based on gross profit
or loss before selling, general and administrative expenses, management fees,
amortization of goodwill, net interest expense and income tax expense or
benefit. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. Intersegment
sales and transfers are recorded at cost. There is no intercompany profit or
loss on intersegment sales or transfers.
11
Unaudited Textile Metal
3 Months Ended June 26, 1999 Products Products Other Total
- ---------------------------- -------------------------------------------
SUCCESSOR COMPANY
Revenues from external
customers $ 14,470 $2,232 $ 909 $17,611
Intersegment revenues 64 1,676 31 1,771
Segment profit 3,144 819 238 4,201
Unaudited Textile Metal
3 Months Ended June 27, 1998 Products Products Other Total
- ---------------------------- -------------------------------------------
SUCCESSOR COMPANY
5 Weeks Ended June 27, 1998
Revenues from external
customers $ 5,790 $ 926 $ 445 $ 7,161
Intersegment revenues 45 535 18 598
Segment profit 1,833 268 87 2,188
PREDECESSOR COMPANY
7 Weeks Ended May 25, 1998
Revenues from external
customers $ 8,494 $1,318 $ 553 $10,365
Intersegment revenues 77 1,012 38 1,127
Segment profit 2,982 497 188 3,667
Unaudited Textile Metal
6 Months Ended June 26, 1999 Products Products Other Total
- ---------------------------- -------------------------------------------
SUCCESSOR COMPANY
Revenues from external
customers $ 29,745 $4,631 $1,764 $36,140
Intersegment revenues 144 3,486 62 3,692
Segment profit 6,596 1,709 304 8,609
Unaudited Textile Metal
6 Months Ended June 27, 1998 Products Products Other Total
- ---------------------------- -------------------------------------------
SUCCESSOR COMPANY
5 Weeks Ended June 27, 1998
Revenues from external
customers $ 5,790 $ 926 $ 445 $ 7,161
Intersegment revenues 45 535 18 598
Segment profit 1,833 268 87 2,188
PREDECESSOR COMPANY
20 Weeks Ended May 25, 1998
Revenues from external
customers $ 23,781 $ 4,012 $ 1,838 $ 29,631
Intersegment revenues 263 2,561 113 2,937
Segment profit 8,695 1,800 508 11,003
12
Unaudited
3 Months Ended June 27, 1998
Unaudited ----------------------------
3 Months 5 Weeks 7 Weeks
Ended Ended Ended
June 26, June 27, May 25,
1999 1999 1998
----------- ---------------------------
SUCCESSOR SUCCESSOR PREDECESSOR
PROFIT
Total profit for reportable
segments $ 3,963 $ 2,101 $ 3,478
Other profit 238 87 189
Unallocated amounts:
Selling, general and
administrative (2,433) (845) (1,646)
Management fees (270) (74) (64)
Amortization of goodwill (680) (221) (107)
Interest, net (3,394) (2,250) (489)
----------- ------------ ------------
(Loss) income before minority
interest and income taxes $(2,576) $ (1,202) $1,361
=========== ============ ============
Unaudited
6 Months Ended June 27, 1998
Unaudited ----------------------------
6 Months 5 Weeks 20 Weeks
Ended Ended Ended
June 26, June 27, May 25,
1999 1999 1998
----------- ---------------------------
SUCCESSOR SUCCESSOR PREDECESSOR
PROFIT
Total profit for reportable
segments $ 8,305 $ 2,101 $10,495
Other profit 304 87 508
Unallocated amounts:
Selling, general and
administrative (5,223) (845) (3,824)
Management fees (551) (74) (132)
Amortization of goodwill (1,359) (221) (289)
Interest, net (6,841) (2,250) (1,499)
Other - - (50)
----------- ------------ ------------
(Loss) income before minority
interest and income taxes $ (5,365) $(1,202) $ 5,209
=========== ============ ============
7. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES
Payment of the Notes is unconditionally guaranteed, jointly and severally, on a
senior subordinated basis by certain of Steel Heddle's wholly owned
subsidiaries. Management has determined that separate complete financial
statements of the guarantor entities would not be material to users of the
financial statements, therefore, the following information sets forth condensed
consolidating financial statements of the guarantor and non-guarantor
subsidiaries.
13
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 26, 1999
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Assets:
Cash and cash equivalents $ 5 $ 365 $(35) $ $ 335
Accounts receivable, net 3,846 8,582 12,428
Inventories, net 3,702 14,569 18,271
Income taxes receivable 29 1,251 1,280
Prepaid expenses 159 47 67 (159) 114
--------- -------- --------- ---------- ----------
Total current assets 164 7,989 24,434 (159) 32,428
Due from affiliates 3,305 77,369 (80,674) -
Notes receivable from
affiliates 77,452 (77,452) -
Investments in subsidiaries 3,229 80,606 (83,835) -
Property, plant &
equipment, net 2,899 34,680 37,579
Other assets and deferred
charges, net 524 122,962 123,486
========= ======== ========= ========== ==========
Total assets $ 80,845 $ 14,717 $340,051 $(242,120) $193,493
========= ======== ========= ========== ==========
Liabilities and
shareholder's equity:
Accounts payable and
accrued and
sundry liabilities $ $2,102 $8,290 $ (161) $10,231
Due to affiliates, net 357 (357) -
Deferred income taxes 1,884 1,884
Income taxes 1,593 121 (1,593) 121
Current portion of
long-term debt 3,024 4,000 7,024
---------- -------- --------- ---------- ---------
Total current
liabilities 1,950 5,247 14,174 (2,111) 19,260
Long-term debt, less
current portion 204 205,953 (77,452) 128,705
Retirement benefits payable 536 6,434 6,970
Deferred income taxes 1,091 12,841 13,932
Redeemable common stock
Minority interest 1,754 1,754
Shareholder's equity 78,895 7,639 100,649 (164,311) 22,872
---------- -------- --------- ---------- ---------
Total liabilities
and shareholder's
equity $ 80,845 $ 14,717 $340,051 $(242,120) 193,493
========== ======== ========= ========== =========
14
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 26, 1999
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net sales $ $ 3,193 $ 14,418 $ $ 17,611
Cost of goods sold 2,643 10,767 13,410
--------- -------- --------- --------- ----------
Gross profit 550 3,651 4,201
Selling, general and
administrative expenses 1 334 2,098 2,433
Other expenses 950 950
--------- -------- --------- --------- ----------
Operating income (loss) (1) 216 603 818
Other income (expense), net 2,190 (49) (5,535) (3,394)
--------- -------- --------- --------- ----------
Income (loss) before
minority interest
and income taxes 2,189 167 (4,932) (2,576)
Minority interest in income
of consolidated
subsidiary (40) (40)
--------- -------- --------- --------- ----------
Income (loss) before income
taxes 2,149 167 (4,932) (2,616)
Income tax expense (benefit) 790 71 (1,643) (782)
Equity in earnings (losses)
of subsidiaries 106 1,450 (1,556) -
-------- -------- --------- --------- ----------
Net income (loss) $ 1,465 $ 96 $ (1,839) $(1,556) $ (1,834)
======== ======== ========= ========= ==========
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 26, 1999
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net sales $ $ 5,945 $ 30,195 $ $ 36,140
Cost of goods sold 4,962 22,569 27,531
--------- --------- --------- --------- ----------
Gross profit 983 7,626 8,609
Selling, general and
administrative expenses 2 730 4,491 5,223
Other expenses 1,910 1,910
--------- --------- --------- --------- ----------
Operating income (loss) (2) 253 1,225 1,476
Other income (expense), net 4,553 (90) (11,304) (6,841)
--------- --------- --------- --------- ----------
Income (loss) before
minority interest
and income taxes 4,551 163 (10,079) (5,365)
Minority interest in income
of consolidated
subsidiary (25) (25)
--------- --------- --------- --------- ----------
Income (loss) before income
taxes 4,526 163 (10,079) (5,390)
Income tax expense (benefit) 1,593 60 (3,170) (1,517)
Equity in earnings (losses)
of subsidiaries 112 3,036 (3,148) -
--------- --------- --------- --------- ----------
Net income (loss) $ 3,045 $ 103 $ (3,873) $(3,148) $ (3,873)
========= ========= ========= ========= ==========
15
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FIVE WEEKS ENDED JUNE 27, 1998
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net sales $ $ 103 $ 7,058 $ $ 7,161
Cost of goods sold 74 4,899 4,973
--------- -------- --------- --------- ----------
Gross profit 29 2,159 2,188
Selling, general and
administrative expenses 845 845
Other expenses 295 295
--------- -------- --------- --------- ----------
Operating income 29 1,019 1,048
Other income (expense), net 796 (3,046) (2,250)
--------- -------- --------- --------- ----------
Income (loss) before income
taxes 796 29 (2,027) (1,202)
Income tax expense (benefit) 302 10 (690) (378)
Equity in earnings (losses)
of subsidiaries 19 513 (532) -
--------- -------- --------- --------- ----------
Net income (loss) $ 513 $19 $ (824) $(532) $ (824)
========= ======== ========= ========= ==========
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 7 WEEKS ENDED MAY 25, 1998
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net sales $ $ 124 $ 10,241 $ $ 10,365
Cost of goods sold 141 6,557 6,698
--------- --------- --------- --------- ----------
Gross profit (17) 3,684 3,667
Selling, general and
administrative expenses 1,646 1,646
Other expenses 171 171
--------- --------- --------- --------- ----------
Operating income (loss) (17) 1,867 1,850
Other income (expense), net 1,223 (19) (1,693) (489)
--------- --------- --------- --------- ----------
Income (loss) before income
taxes 1,223 (36) 174 1,361
Income tax expense 465 32 24 521
Equity in earnings (losses)
of subsidiaries (255) 690 (435) -
--------- --------- --------- --------- ----------
Net income (loss) $ 503 $ (68) $ 840 $ (435) $ 840
========= ========= ========= ========= ==========
16
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net sales $ $ 354 $ 29,277 $ $ 29,631
Cost of goods sold 392 18,236 18,628
--------- --------- --------- --------- ----------
Gross profit (38) 11,041 11,003
Selling, general and
administrative expenses 5 3,819 3,824
Other expenses 421 421
--------- --------- --------- --------- ----------
Operating income (loss) (43) 6,801 6,758
Other income (expense), net 3,417 (19) (4,947) (1,549)
--------- --------- --------- --------- ----------
Income (loss) before income
taxes 3,417 (62) 1,854 5,209
Income tax expense 1,299 23 546 1,868
Equity in earnings (losses)
of subsidiaries (255) 2,033 (1,778) -
--------- --------- --------- --------- ----------
Net income (loss) $ 1,863 $ (85) $3,341 $(1,778) $ 3,341
========= ========= ========= ========= ==========
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 26, 1999
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net cash provided by (used
in) operating activities $ 2,952 $202 $(2,004) $ - $1,150
--------- --------- --------- ---------- ---------
Investing activities:
Purchase of property
plant and equipment (3) (700) (703)
--------- --------- --------- ---------- ---------
Net cash used in investing
activities - (3) (700) - (703)
Financing activities:
Revolver borrowings
(payments) net (259) (699) (958)
Payments of debt (336) (336)
Intercompany
transactions, net (2,959) 2 2,957 -
--------- --------- --------- ---------- ---------
Net cash provided by (used
in) financing activities (2,959) (593) 2,258 - (1,294)
--------- --------- --------- ---------- ---------
Net decrease in cash and
cash equivalents (7) (394) (446) - (847)
Cash and cash equivalents
at beginning of period 12 759 411 - 1,182
--------- --------- --------- ---------- ---------
Cash and cash equivalents
at end of period $ 5 $365 $ (35) $ - $ 335
========= ========= ========= ========== =========
17
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FIVE WEEKS ENDED JUNE 27, 1998
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net cash provided by (used
in) operating activities $ 2,193 $ (140) $ (2,392) $ - $ (339)
Investing activities:
Purchases of property,
plant and equipment (199) (199)
Purchase of business (112,956) (112,956)
--------- --------- --------- -------- ----------
Net cash used in investing
activities (113,155) (113,155)
Financing activities:
Payments of debt (52,492) (52,492)
Proceeds from debt 133,600 133,600
Intercompany
transactions, net 141 (141)
Capital (contribution) 37,561 37,561
Other (4,928) (4,928)
--------- --------- --------- -------- ----------
Net cash provided by
financing activities 141 113,600 - 113,741
--------- --------- --------- -------- ----------
Net increase (decrease) in
cash and cash equivalents 2,193 1 (1,947) - 247
Cash and cash equivalents
at beginning of period 11 26 1,514 - 1,551
--------- --------- --------- -------- ----------
Cash and cash equivalents
at end of period $ 2,204 $27 $(433) $ - $1,798
========= ========= ========= ======== ==========
18
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
SUCCESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Net cash provided by
operating activities $ 1,158 $ 220 $ 832 $ - $ 2,210
Investing activities:
Purchases of property,
plant and equipment (20) (948) (968)
Proceeds from sale of
property, plant and
equipment 238 238
--------- --------- ---------- --------- ---------
Net cash used in investing
activities (20) (710) (730)
Financing activities:
Revolver borrowings, net 1,317 1,317
Payments of debt (1,625) (1,625)
Intercompany
transactions, net (1,163) (270) 1,433 -
--------- --------- ---------- --------- ---------
Net cash provided by (used
in) financing activities (1,163) (270) 1,125 - (308)
--------- --------- ---------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (5) (70) 1,247 - 1,172
Cash and cash equivalents
at beginning of period 16 96 267 - 379
--------- --------- ---------- --------- ---------
Cash and cash equivalents
at end of period $ 11 $26 $ 1,514 $ - $ 1,551
========= ========= ========== ========= =========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Although the Registrant believes its plans are based upon reasonable assumptions
as of the current date, it can give no assurances that such expectations can be
attained. Factors that could cause actual results to differ materially from the
Registrant's expectations can be found in the Registrant's Registration
Statement on Form S-4 (File No. 333-61043) under the heading "Risk Factors."
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form 10-Q as well as the Company's Annual Report on Form 10-K
for the year ended January 2, 1999.
OVERVIEW
The Company has two reportable segments, Textile Products and Metal Products.
Textile Products manufactures textile loom accessories including heddles,
dropwires, harness frames and reeds, all of which are used to hold or guide
individual yarns during the weaving process. In Metal Products, the Company
processes and sells rolled products. In its wire rolling operations, the Company
converts round rod to flat wire through a rolling process which results in a
flat wire with a round edge. Originally developed to satisfy in-house heddle
manufacturing needs, the Company's rolled products can also be found in a
variety of other industries, including electronics, automotive and solar power.
On May 26, 1998, Steel Heddle Group, Inc. consummated the acquisition of SH
Holdings Corp. ("Old Holdings"). SH Group, a corporation formed by AIP, was
organized as a holding company to effectuate the acquisition of substantially
all the outstanding stock of Old Holdings. The acquisition has been accounted
for using the purchase method of accounting, whereby the purchase cost has been
allocated to the fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed with the excess identified as goodwill.
As a result of the Acquisition, the assets and liabilities of Old Holdings were
revalued to their respective fair values under the principles of APB No. 16,
"Business Combinations." The most significant effects were to increase property,
plant and equipment, certain intangibles, inventory and certain liabilities.
Accordingly, financial information for periods prior to May 26, 1998
(Predecessor) is not comparable with that for periods subsequent to May 26, 1998
(Successor). The principal differences include increased depreciation and
amortization expense resulting from write-up of the Company's fixed and
intangible assets and goodwill and increased interest expense resulting from
financing the Acquisition.
On October 23, 1998, Steel Heddle, through its wholly owned subsidiary,
Millentex Investment Corporation, acquired a 49% ownership interest in
Millentex, an entity organized under the laws of the Kingdom of Belgium.
Millentex was established on August 16, 1998 to effect the acquisition of the
outstanding common stock of a company with operations in the loom accessories
industry. The purchase price of approximately $2 million was financed via a
capital contribution from Steel Heddle and was accounted for using the purchase
method of accounting.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities of Millentex based upon
their estimated respective fair values at the date of acquisition. The fair
values have been determined by independent appraisals, valuations and other
means deemed appropriate by management. Based on such allocations, the purchase
price was allocated to identifiable assets and there was no goodwill.
The financial position at June 26, 1999, and the results of operations for the
three and six months ended June 26, 1999 of Millentex are included in the
Company's consolidated financial statements at June 26, 1999. In the
20
calculation of Adjusted EBITDA for the twelve months ended June 26, 1999, in
accordance with the definition of consolidated EBITDA in the credit facility,
the results of Millentex are included on a pro forma basis for the full twelve
months.
BASIS OF PRESENTATION
The following table sets forth certain unaudited performance details for the
periods shown. Net sales, cost of sales, gross profit, selling, general and
administrative expenses, operating income and net income (loss) of the Company
are presented in thousands of dollars and as a percentage of sales.
Three Months Ended
-------------------------------------------
June 26,
1999 June 27, 1998
------------- ---------------------------
Successor Successor Predecessor
(12 Weeks) (5 Weeks) (7 Weeks)
------------- ------------ ------------
Net sales $17,611 100.0% $7,161 100.0% $10,365 100.0%
Cost of sales 13,410 76.1 4,973 69.4 6,698 64.6
Gross profit 4,201 23.9 2,188 30.6 3,667 35.4
SG&A 2,433 13.8 845 11.8 1,646 15.9
Operating income 818 4.6 1,048 14.6 1,850 17.8
Net income (loss) (1,834)(10.4) (824)(11.5) 840 8.1
Six Months Ended
-------------------------------------------
June 26,
1999 June 27, 1998
------------- ---------------------------
Successor Successor Predecessor
(25 Weeks) (5 Weeks) (20 Weeks)
------------- ------------ ------------
Net sales $36,140 100.0% $7,161 100.0% $29,631 100.0%
Cost of sales 27,531 76.2 4,973 69.4 18,628 62.9
Gross profit 8,609 23.8 2,188 30.6 11,003 37.1
SG&A 5,223 14.5 845 11.8 3,824 12.9
Operating income 1,476 4.1 1,048 14.6 6,758 22.8
Net income (loss) (3,873)(10.7) (824)(11.5) 3,341 11.3
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS (SECOND QUARTER) ENDED JUNE 26, 1999 (SUCCESSOR) COMPARED TO
THREE MONTHS (SECOND QUARTER) ENDED JUNE 27, 1998 (PREDECESSOR)
Net Sales. Net sales increased $85 or 0.5% for the three months ended June 26,
1999 compared to the three months ended June 27, 1998. This increase in net
sales resulted from an increase in Textile Products net sales of $186 or 1.3% to
$14,470, a decrease in Metal Products net sales of $12 or 0.5% to $2,232 and a
decrease in other net sales of $89 or 8.9% to $909. Textile Products net sales
includes net sales of Millentex (acquired October 23, 1998) of $2,898 during the
three months ended June 26, 1999. Textile Products domestic net sales have
decreased $2,579 or 6.7% during the three months ended June 26, 1999. Net sales
for Metal Products and other decreased due to a decrease in domestic net sales
as foreign net sales have increased for both of these segments.
The decrease in domestic net sales of Textile Products is attributable to a
number of factors. Mill operating rates in the filament sector have been
adversely affected by a surge in low cost fabric imports from Asia. Fewer new
looms and the Company's associated products were purchased during the three
months ended June 26, 1999. In addition, as a significant number of new looms
were installed in prior years, an increased amount of used accessories became
available within larger mills to support their short-term accessory needs.
Finally, mill managers have been reducing operating costs and expenditures for
new accessories in reaction to uncertainties created in the domestic textile
market by the Asian economic downturn.
21
The decrease in other net sales for the three months ended June 26, 1999 is due
to a decrease in shuttle net sales. Shuttle net sales decreased as fewer shuttle
looms remain in service as faster more efficient shuttleless looms are replacing
these looms.
Gross Profit. Gross profit for the three months ended June 26, 1999 decreased
$1,654 to $4,201, or 23.9% of nets sales, compared to gross profit of $5,855 or
33.4% of net sales for the three months ended June 27, 1998. Included in gross
profit for the three months ended June 26, 1999 is gross profit of $521 related
to Millentex. The decrease is primarily due to the decline in domestic sales in
the Textile Products business segment, lower international prices for Textile
Products sold in Asian markets due to heightened competition for fewer orders,
underabsorption of fixed costs resulting from decreased units sold or
transferred intercompany and to additional depreciation and amortization expense
resulting from the write-up of the Company's assets in connection with the new
basis of accounting used in the Acquisition. Depreciation and amortization,
including Millentex depreciation of $152, charged to cost of goods sold totaled
$2,120 for the three months ended June 26, 1999, an increase of $745 compared to
the comparable period of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 26, 1999 decreased $58
to $2,433 or 13.8% of net sales from $2,491 or 14.2% of net sales for the three
months ended June 27, 1998. The decrease is due to cost reduction actions made
by the Company during the first and second quarters of 1999 and a decrease in
expense incurred in connection with the Company's year 2000 computer project of
$71. The decrease was offset by increases due to the inclusion of Millentex
selling, general and administrative expenses of $323 and an increase in
depreciation expense of $80 associated with the write-up of the Company's assets
in connection with the new basis of accounting in the Acquisition.
Operating Income. Operating income for the three months ended June 26, 1999 was
$818, or 4.6% of net sales compared to $2,898, or 16.5% of nets sales for the
three months ended June 27, 1998. Millentex contributed operating income of $197
during the three months ended June 26, 1999. The decrease of $2,080, or 71.8% is
due to the decrease in gross profit as described above, a $132 increase in
management fees and an increase of $352 in amortization of goodwill in
connection with the new basis of accounting used in the Acquisition.
Net Income (Loss). The Company incurred a net loss of $(1,834), 10.4% of net
sales, for the three months ended June 26, 1999 compared to net income of $16,
0.1% of net sales, for the three months ended June 27, 1998. The loss during
1999 is due primarily to an increase in interest expense resulting from debt
issued in connection with the Acquisition and to the factors noted above. The
effective tax rate for the year ended January 1, 2000 is significantly different
from the statutory rate due to an increase in the amount of nondeductible
goodwill amortization related to the Acquisition.
SIX MONTHS ENDED JUNE 26, 1999 (SUCCESSOR) COMPARED TO SIX MONTHS ENDED JUNE 27,
1998 (PREDECESSOR)
Net Sales. Net sales decreased $652 or 1.8% for the six months ended June 26,
1999 compared to the six months ended June 27, 1998. This decrease in net sales
resulted from a decrease in Metal Products net sales of $307 or 6.2% to $4,631
and a decrease in other net sales of $519 or 22.7% to $1,764. The decrease in
net sales was partially offset by an increase in Textile Products net sales of
$174 or 0.7% to $29,745. Textile Products net sales includes net sales of
Millentex (acquired October 23, 1998) of $5,422 during the six months ended June
26, 1999. Textile Products domestic net sales have decreased $5,113 or 22.1%
during the six months ended June 26, 1999. Net sales for Metal Products and
other decreased due to a decrease in domestic net sales as foreign net sales
have increased for both of these segments.
The decrease in domestic net sales of Textile Products is attributable to a
number of factors. Mill operating rates in the filament sector have been
adversely affected by a surge in low cost fabric imports from Asia. Fewer new
looms and the Company's associated products were purchased during the six months
ended June 26, 1999. During the six months ended June 26, 1998, the Company made
some shipments related to the record number of new loom purchases in 1997. In
addition, as the significant number of new looms were installed in prior years,
22
an increased amount of used accessories became available within larger mills to
support their short-term accessory needs. Finally, mill managers have been
reducing operating costs and expenditures for new accessories in reaction to
uncertainties created in the domestic textile market by the Asian economic
downturn.
Metal Products net sales declined as a result of pricing pressures and as a
large customer began efforts to reduce inventory levels.
The decrease in other net sales for the six months ended June 26, 1999 is due to
a decrease in shuttle and tool and die net sales. Shuttle net sales decreased as
fewer shuttle looms remain as these looms are being replaced by faster more
efficient shuttleless looms. Tool and die net sales decreased during the six
months ended June 26, 1999 as certain large projects for a customer were
completed.
Gross Profit. Gross profit for the six months ended June 26, 1999 decreased
$4,582 to $8,609, or 23.8% of net sales, compared to gross profit of $13,191 or
35.8% of net sales for the six months ended June 27, 1998. Included in gross
profit for the six months ended June 26, 1999 is gross profit of $920 related to
Millentex. The decrease is primarily due to the decline in domestic sales in the
Textile Products business segment, lower international prices for Textile
Products sold in Asian markets due to heightened competition for fewer orders,
underabsorption of fixed costs resulting from decreased units sold or
transferred intercompany and to additional depreciation and amortization expense
resulting from the write-up of the Company's assets in connection with the new
basis of accounting used in the Acquisition. Depreciation and amortization,
including Millentex depreciation of $316, charged to cost of goods sold totaled
$4,384 for the six months ended June 26, 1999, an increase of $2,176 compared to
the comparable period of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 26, 1999 increased $554 to
$5,223 or 14.5% of net sales from $4,669 or 12.7% of net sales for the six
months ended June 27, 1998. The increase is due to the inclusion of Millentex
selling, general and administrative expenses of $719 and an increase in
depreciation expense of $190 associated with the write-up of the Company's
assets in connection with the new basis of accounting in the Acquisition. These
increases were partially offset by cost reduction actions taken by the Company
during the first six months of 1999.
Operating Income. Operating income for the six months ended June 26, 1999 was
$1,476, or 4.1% of net sales compared to $7,806, or 21.2% of nets sales for the
six months ended June 27, 1998. Millentex contributed operating income of $200
during the six months ended June 26, 1999. The decrease of $6,330, or 81.1% is
due to the decrease in gross profit and the increase in selling, general and
administrative expenses as described above, a $345 increase in management fees
and an increase of $849 in amortization of goodwill in connection with the new
basis of accounting used in the Acquisition.
Net Income (Loss). The Company incurred a net loss of $(3,873), 10.7% of net
sales, for the six months ended June 26, 1999 compared to net income of $2,517,
6.8% of net sales, for the six months ended June 27, 1998. The loss during 1999
is due primarily to an increase in interest expense resulting from debt issued
in connection with the Acquisition and to the factors noted above. The effective
tax rate for the year ended January 1, 2000 is significantly different from the
statutory rate due to an increase in the amount of nondeductible goodwill
amortization related to the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash provided by operating
activities and borrowings under its revolving credit facility. The Credit
Facility consists of a $30 million term loan and a $20 million revolving loan
commitment. The term loan is payable in quarterly installments ranging from $1
million to $2 million beginning July 3, 1999 through April 3, 2004. The term
loan and the revolving loan bear interest at the bank's prime rate plus 1.0
percent or Eurodollar rates plus 2.25 percent, at the Company's option. At June
26, 1999, the interest rates on the Credit Facility borrowings ranged from 7.21%
to 7.25% and approximately $16.8 million was available for borrowing under the
revolving loan facility.
The Credit Facility and the Notes contain various financial covenants, including
minimum levels of EBITDA, minimum interest coverage ratio and maximum capital
expenditures and total leverage ratio. The non-financial
23
covenants restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, prepay other indebtedness or amend
certain debt instruments, pay dividends, create liens on assets, enter into sale
and leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations or engage in certain
transactions with affiliates and otherwise restrict certain corporate
activities. The Company was in compliance with its various financial and
non-financial covenants at June 26, 1999.
Cash Flows from Operating Activities. The Company has historically generated
sufficient internal cash flow from operations to fund its operations, capital
expenditures and working capital requirements. Cash provided by operating
activities for the six months ended June 26, 1999 decreased to $1,150 from
$1,871. The decrease was primarily due to the Company incurring a net loss for
the six months ended June 26, 1999 compared to net income for the six months
ended June 27, 1998.
Cash Flows used in Investing Activities. Net cash used in investing activities
for the six months ended June 26, 1999 decreased to $703 from $113,885 for the
six months ended June 27, 1998. Net cash used in investing activities for the
six months ended June 27, 1998 reflect the acquisition of substantially all of
the Company's tangible and intangible assets and is not comparable to the prior
period. The Company's capital expenditures for the six months ended June 26,
1999 were $703, a decrease of $464 compared to the same period in 1998. These
expenditures were primarily for the replacement of machinery and equipment.
Cash Flows used in Financing Activities. Cash flows used in financing activities
for the six months ended June 26, 1999 was $1,294 compared to cash flows
provided by financing activities of $113,433 for the six months ended June 27,
1998. Cash flows from financing activities for the six months ended June 27,
1998 reflect the initial capitalization of the Company through the issuance of
Common Stock, Senior Discount Debentures, Senior Subordinated Notes and bank
debt, all of the associated fees, and is not directly comparable to the current
six months ended June 26, 1999.
Adjusted EBITDA. EBITDA represents operating income plus depreciation and
amortization and is calculated in a manner consistent with the definition of
"Consolidated EBITDA" in the Note Indenture. Adjusted EBITDA, as presented
below, represents EBITDA plus items which management believes to be unusual,
including, but not limited to, management and transaction fees paid to Butler
and AIP, supplemental bonus compensation, compensation expense for certain
eliminated management positions and incremental increases in obsolete inventory
reserves. Adjusted EBITDA is calculated in a manner substantially consistent
with the definition of "Consolidated EBITDA" in the credit agreement. Adjusted
EBITDA was $4,126 and $8,246 for the three and six months ended June 26, 1999,
respectively. Adjusted EBITDA was $4,721 and $10,870 for the three and six
months ended June 27, 1998, respectively. Adjusted EBITDA was $16,214 for the
twelve months ended June 26, 1999 and $22,805 for the twelve months ended June
27, 1998.
Adjusted EBITDA is included herein as it is a basis upon which the Company
assesses its financial performance, and certain covenants in the credit
agreement are tied to similar measures. Adjusted EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be used as
an alternative to net income as an indicator of operating performance or to cash
flows as a measure of liquidity. Adjusted EBITDA, as presented, represents a
useful measure of assessing the Company's ongoing operating activities without
the impact of financing activities and unusual items. While EBITDA and Adjusted
EBITDA are frequently used as a measure of operations and the ability to meet
debt service requirements, it is not necessarily comparable to other similarly
titled captions of other companies due to potential inconsistencies in the
method of calculation.
Liquidity. The Company's principal sources of funds are cash provided by
operating activities and borrowings under its revolving credit facility. The
Company believes that such funds will be adequate for the Company's foreseeable
working capital needs, planned capital expenditures and debt service obligations
on both a short-term and a long-term basis. However, the level of the Company's
indebtedness could have important consequences, including, but not limited to,
the following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, product
development, general corporate purposes or other purposes may be materially
limited or impaired; (ii) significant amounts of the Company's borrowings bear
interest at variable rates, which could result in higher interest expense in the
event
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of increases in interest rates; (iii) the Company's debt agreements
contain financial and restrictive covenants, the failure to comply with which
may result in an event of default which if not cured or waived, could have a
material adverse effect on the Company; (iv) the Company may be substantially
more leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage; and (v) the Company's substantial degree of leverage
may limit its flexibility to adjust to changing market conditions, reduce its
ability to withstand competitive pressures and make it more vulnerable to a
downturn in general economic conditions or in its business or be unable to carry
out capital spending. The Company's ability to fund its operations and make
planned capital expenditures, to make scheduled debt payments, to refinance
indebtedness and to remain in compliance with all of the financial covenants
under its debt agreements depends on its future operating performance and cash
flow, which in turn, are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond its control.
YEAR 2000 MATTERS
Certain computer programs written with two digits rather than four to define the
applicable year may experience problems handling dates near the end of and
beyond the year 1999. This may cause computer applications to fail or to create
erroneous results unless corrective actions are taken.
Steel Heddle initiated the process of preparing its computer systems and
applications for the Year 2000 in 1997. This process involves addressing the
impacts on information technology (IT) systems plus non-IT systems involving
embedded chip technology. The process involves modifying or replacing certain
hardware and software maintained by the Company as well as communicating with
customers and suppliers to ensure that they are taking appropriate actions to
remedy their Year 2000 issues. The Company will utilize both internal and
external resources to reprogram or replace, and test the software for Year 2000
modifications. The Company anticipates completing the Year 2000 project during
the third quarter of 1999, which is prior to any anticipated impact on its
operating systems. The Company is also developing contingency plans in the event
there are any systems disruptions as a result of the Year 2000 problem.
With respect to IT systems, the plan includes programs relating to (i) computer
applications, including those for mainframes, client server systems and personal
computers and (ii) IT infrastructure, including hardware, software, network
technology and data communications. In the case of non-IT systems, the Year 2000
plan includes programs relating to equipment and processes used in manufacturing
and equipment and systems in buildings not encompassed by manufacturing
equipment.
The project is being conducted in phases, described as follows:
Inventory Phase - Identify hardware, software, processes or devices that
use or process date information.
Assessment Phase - Identify Year 2000 date processing deficiencies and
related implications.
Planning Phase - Determine for each deficiency an appropriate solution and
budget.
Implementation and Testing Phase - Implement designed solutions and conduct
appropriate testing.
IT Applications: The Company has completed the inventory, assessment and
planning phases for all IT applications considered to be mission-critical and is
currently in the implementation and testing phase. Implementation and testing
involves repair of existing systems, and in some cases, complete replacement
with purchased systems that are Year 2000 compliant. Modified systems are
subjected to rigorous testing in a non-production environment with production
data and moved to a production environment for further testing and monitoring.
Modifications to existing systems are approximately 90% complete. Testing and
monitoring of those systems will continue throughout 1999. Mission-critical
systems scheduled for replacement include only the general ledger accounting
system, which will be replaced with a purchased system. Replacement and testing
is expected to be completed by August 31, 1999.
IT Infrastructure: The Company has completed the inventory, assessment, planning
phases and implementation phase. Implementation involves repairing or replacing
infrastructure hardware and software and obtaining vendor certifications.
Implementation was completed by June 26, 1999.
25
Non-IT Systems: Management has reviewed production and building infrastructure
equipment and systems used in its operations and has requested written
certification from vendors. Implementation was completed by June 26, 1999.
The Company has surveyed all of its significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable to
those parties' failures to remediate their Year 2000 issues. The Company has
received representations from its primary third-party vendors that they will
have resolved any Year 2000 problems in their software prior to any impact on
their operating systems. However, many of the responses will require follow-up,
which is to be completed during the third quarter of 1999.
The cost of the Year 2000 project is estimated at $1,000 and is being funded
through operating cash flows. Of the total project cost, an estimated $400 is
attributable to the purchase of new software and hardware and will be
capitalized. The remaining estimated $600, will be expensed as incurred and is
not expected to have a material effect on the results of operations. The Company
has incurred $829 of costs, ($367 during fiscal 1999), of which $508 has been
expensed, ($167 expensed in fiscal 1999).
The Company is preparing contingency plans relating specifically to identified
Year 2000 risks and developing cost estimates relating to these plans.
Contingency plans may include stockpiling raw materials, increasing inventory
levels, and securing alternative sources of materials and supplies and other
appropriate measures. Management anticipates completion of the Year 2000
contingency plans during the third quarter of 1999. Once developed, Year 2000
contingency plans and related cost estimates will be tested and continually
refined as additional information becomes available.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates can
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Further, there can be no assurance given that any or all of the Company's
systems are or will be Year 2000 compliant or that the impact of any failure to
achieve substantial Year 2000 compliance will not have a material adverse effect
on the Company's financial condition. Furthermore, no assurance can be given
that the third parties important to Steel Heddle will successfully and timely
reprogram or replace, and test, all of their own computer hardware, software and
process control systems. However, the Company believes that its Year 2000
readiness program, including related contingency planning, should significantly
reduce the possibility of significant interruptions of normal operations.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement 133",
which delays the effective date of FASB 133 for the Company until 2001. Adoption
of this statement is not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk relating to the Company's operations result primarily from
volatility in interest rates and foreign currency exchange rates.
Interest rate risk. The Company has exposure to interest rate changes primarily
relating to its bank term debt and revolver and its foreign debt. The bank debt
bears interest at rates which vary with changes in (i) the bank's prime rate, or
(ii) Eurodollar Rate. The foreign debt bears interest at rates which vary with
changes in the Belgium Interbank Offered Rate. The total of all such
variable-rate debt was approximately $35,422 at June 26, 1999. A 100 basis point
change in interest rates would not have a material impact on the Company's
consolidated financial position or results of operations.
Foreign currency risk. The Company has two foreign subsidiaries located in
Mexico and Belgium and conducts business in a number of other countries. Sales
by foreign subsidiaries are denominated in the local currency of the subsidiary,
and international sales from U.S. operations are generally denominated in U.S.
dollars. For the six months ended June 26, 1999, approximately 35% of the
Company's revenues are generated outside the United States. The Company's
ability to sell its products in these foreign markets may be affected by changes
in economic, political, and market conditions.
At June 26, 1999, the functional currency of the Belgium subsidiary and the
Mexican subsidiary was their respective local currency. At the beginning of
fiscal 1999, the functional currency of the Mexican subsidiary changed from the
US dollar to the local currency (peso) due to the fact that Mexico is no longer
considered highly inflationary. Gains or losses from translation of foreign
operations where the local currency is the functional currency are included as a
separate component of shareholder's equity. To date, translation losses have not
been significant. The Company's net investment in its foreign subsidiaries was
$1,540 at June 26, 1999. If the foreign currency exchange rates fluctuate by 10%
from rates at June 26, 1999, the effect on the Company's financial position and
results of operations would not be material.
27
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
ITEM 4. HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit - (27) Financial Data Schedule
(b) Reports on Form 8-K None
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.
STEEL HEDDLE MFG. CO.
Date: August 9, 1999 By: /s/ Jerry B. Miller
------------------------------------
Jerry B. Miller
Vice President Finance and Secretary
28