UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2006
Commission File No. 333-27665
CONTINENTAL GLOBAL GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1506889
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
Continental Conveyor & Equipment Company Delaware 34-1603197
Goodman Conveyor Company Delaware 34-1603196
Continental Conveyor & Equipment
Continental Global Group, Inc. Company Goodman Conveyor Company
438 Industrial Drive 438 Industrial Drive Route 178 South
Winfield, Alabama 35594 Winfield, Alabama 35594 Belton, South Carolina 29627
(205) 487-6492 (205) 487-6492 (864) 338-7793
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of April 30, 2005, there were 100 shares of the registrant's common stock
outstanding.
INDEX
CONTINENTAL GLOBAL GROUP, INC.
Page
Part I Financial Information Number
Item 1 Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
March 31, 2006 and December 31, 2005 2
Condensed Consolidated Statements of Operations
Three Months ended March 31, 2006 and 2005 3
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2006 and 2005 4
Notes to Condensed Consolidated Financial Statements 5-12
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 13-17
Item 3 Quantitative and Qualitative Disclosures about Market Risk 18
Item 4 Controls and Procedures 18
Part II Other Information
Item 1 Legal Proceedings 19
Item 1A Risk Factors 19
Item 6 Exhibits 19
Signatures 20
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
March 31 December 31
2006 2005
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 890,706 $ 543,400
Accounts receivable, net 52,828,956 49,294,104
Inventories 45,580,994 42,170,889
Deferred income taxes 1,449,813 1,466,751
Other current assets 1,713,846 1,980,832
-------------------- --------------------
Total current assets 102,464,315 95,455,976
Property, plant and equipment 35,410,057 35,387,432
Less accumulated depreciation 21,753,788 21,821,194
-------------------- --------------------
13,656,269 13,566,238
Goodwill 13,715,733 13,789,054
Deferred financing costs 519,902 649,878
Other assets 735,524 745,199
-------------------- --------------------
$ 131,091,743 $ 124,206,345
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 10,759,681 $ 12,485,090
Trade accounts payable 32,583,965 33,797,142
Accrued compensation and employee benefits 7,784,269 7,270,396
Accrued interest on senior notes 590,150 295,075
Other accrued liabilities 11,378,400 9,376,016
Management fees payable to Nesco, Inc. 3,599,080 2,996,054
Income taxes payable 1,908,933 2,942,570
Current maturities of long-term obligations 8,452,136 7,829,379
-------------------- --------------------
Total current liabilities 77,056,614 76,991,722
Pension obligations 1,542,888 1,483,305
Deferred income taxes 4,729,993 4,790,887
Senior notes 91,316,624 91,316,624
Note payable to N.E.S. Investment Co. 13,462,235 13,171,985
Other long-term obligations, less current maturities 4,481,578 4,697,353
Stockholder's equity (deficit):
Common stock, $0.01 par value, authorized 5,000,000 shares,
issued and outstanding 100 shares 1 1
Paid-in capital 1,993,687 1,993,687
Accumulated deficit (56,613,908) (63,536,195)
Accumulated other comprehensive loss (6,877,969) (6,703,024)
-------------------- --------------------
(61,498,189) (68,245,531)
-------------------- --------------------
$ 131,091,743 $ 124,206,345
==================== ====================
See notes to condensed consolidated financial statements.
2
Continental Global Group, Inc.
Condensed Consolidated Statements of Operations
Three months ended March 31
2006 2005
------------------- -------------------
(Unaudited)
Net sales $ 87,012,545 $ 65,054,714
Cost of products sold 68,342,154 52,492,226
------------------- -------------------
Gross profit 18,670,391 12,562,488
Operating expenses:
Selling and engineering 4,013,278 3,687,878
General and administrative 3,117,058 3,175,027
Management fee 603,026 309,802
Amortization expense 6,590 6,590
Restructuring charges - 2,490
------------------- -------------------
Total operating expenses 7,739,952 7,181,787
------------------- -------------------
Operating income 10,930,439 5,380,701
Other expense (income):
Interest expense, net 1,231,313 1,092,789
Miscellaneous expense (income) (76,005) 66,996
------------------- -------------------
Total other expenses 1,155,308 1,159,785
------------------- -------------------
Income before income taxes 9,775,131 4,220,916
Income tax expense 2,852,844 928,602
------------------- -------------------
Net income $ 6,922,287 $ 3,292,314
=================== ===================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Three months ended March 31
2006 2005
---------------------- ---------------------
(Unaudited)
Operating activities:
Net income $ 6,922,287 $ 3,292,314
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for depreciation and amortization 527,057 505,540
Amortization of deferred financing costs 129,976 129,976
Deferred income taxes (132,010) (177,969)
Non-cash interest paid in-kind 290,250 225,000
Loss (gain) on disposal of assets 4,818 (528)
Changes in operating assets and liabilities (5,543,402) (7,570,410)
---------------------- ---------------------
Net cash provided by (used in) operating activities 2,198,976 (3,596,077)
---------------------- ---------------------
Investing activities:
Purchases of property, plant, and equipment (679,380) (406,839)
Proceeds from sale of property, plant, and equipment 1,414 1,778
---------------------- ---------------------
Net cash used in investing activities (677,966) (405,061)
---------------------- ---------------------
Financing activities:
Net increase (decrease) in borrowings on notes payable (1,656,410) 3,415,730
Proceeds from long-term obligations 739,800 778,100
Principal payments on long-term obligations (265,219) (405,319)
---------------------- ---------------------
Net cash provided by (used in) financing activities (1,181,829) 3,788,511
Effect of exchange rate changes on cash 8,125 (15,566)
---------------------- ---------------------
Increase (decrease) in cash and cash equivalents 347,306 (228,193)
Cash and cash equivalents at beginning of period 543,400 887,256
---------------------- ---------------------
Cash and cash equivalents at end of period $ 890,706 $ 659,063
====================== =====================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
A. Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2006
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. For further information, refer to the consolidated
financial statements and footnotes of Continental Global Group, Inc. and
subsidiaries for the year ended December 31, 2005, included in the Company's
Form 10-K.
B. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
C. Inventories
Inventories, which consist of raw materials, manufactured and purchased parts,
and work in process, are stated at the lower of cost or market. Since inventory
records are maintained on a job order basis, it is not practical to segregate
inventories into their major classes. The cost for approximately 58% and 67% of
inventories at March 31, 2006 and December 31, 2005, respectively, is determined
using the last-in, first-out (LIFO) method with the remainder determined using
the first-in, first-out (FIFO) method. Had the FIFO method of inventory (which
approximates replacement cost) been used to cost all inventories, inventories
would have increased by approximately $4,489,000 and $4,302,000 at March 31,
2006 and December 31, 2005, respectively.
D. Warranty Costs
The Company's products are generally covered by warranties against defects in
material and workmanship for periods up to two years from the date of sale or
installation of the product. The Company records a provision for estimated
warranty cost based on historical experience and expectations of future
conditions and continuously assesses the adequacy of its product warranty
accrual and makes adjustments as needed. A summary of accrued warranty costs
follows:
2006 2005
----------------- -----------------
Balance as of January 1 $ 1,731,456 $ 1,634,049
Provision for warranties 338,444 283,522
Settlements made during the period (267,535) (77,296)
Effect of exchange rate changes (2,029) (15,034)
----------------- -----------------
Balance as of March 31 $ 1,800,335 $ 1,825,241
================= =================
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
E. Comprehensive Income
The components of comprehensive income for the three months ended March 31 are
as follows:
2006 2005
-----------------------------------
Net income $ 6,922,287 $ 3,292,314
Other comprehensive income (loss):
Foreign currency translation adjustment (174,945) (149,788)
Change in fair value of derivative hedge, net of tax - (5,333)
-----------------------------------
Comprehensive income $ 6,747,342 $ 3,137,193
===================================
F. Employee Benefit Plans
The components of net periodic benefit cost for the three months ended March 31
are as follows:
2006 2005
----------------- -----------------
Service cost $ 51,203 $ 53,857
Interest cost 132,349 128,347
Expected return on plan assets (154,472) (146,479)
Amortization of prior service cost 19,342 11,161
Recognized loss 11,161 14,898
----------------- -----------------
Net periodic benefit cost $ 59,583 $ 61,784
================= =================
G. Income Taxes
Income taxes are provided using the liability method in accordance with SFAS No.
109, "Accounting for Income Taxes". For tax reporting purposes, the Company is
included in the consolidated federal tax return of N.E.S. Investment Co.
However, for financial reporting purposes, the Company's tax provision has been
calculated on a stand-alone basis.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries.
The Company's effective income tax rate is less than the statutory rate
primarily due to a favorable income tax benefit for interest payments on the New
Series A and Series B Notes due 2008 which are recorded as a reduction of the
outstanding indebtedness for financial reporting purposes. In addition, the
Company has not recognized income tax expense in certain of its foreign
subsidiaries due to the reversal of an income tax valuation allowance.
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
H. Segment Information
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business markets its
products in four main business areas. The mining equipment business area
includes the design, manufacture and testing of complete belt conveyor systems
and components for mining application primarily in the coal industry. The
conveyor components business area manufactures and sells components for conveyor
systems primarily for resale through distributor networks. The engineered
systems business area uses specialized project management and engineering skills
to combine mining equipment products, purchased equipment, steel fabrication and
other outside services for sale as complete conveyor equipment systems that meet
specific customer requirements. The bulk conveyor equipment business area
designs and manufactures a complete range of conveyor equipment sold to
transport bulk materials, such as cement, lime, food products and industrial
waste.
The Company's manufactured housing products business manufactures and/or
refurbishes axle components sold directly to the manufactured housing industry.
As part of this segment the Company also sells mounted tire and rim assemblies
to the manufactured housing industry. Included in the other category is
primarily the manufacture and sale of air filtration equipment for use in
enclosed environments, principally in the textile industry.
Three months ended
March 31
2006 2005
--------------------------------------
(in thousands)
Net sales:
Conveyor equipment $ 77,352 $ 57,486
Manufactured housing products 9,472 7,440
Other 188 129
--------------------------------------
Total net sales $ 87,012 $ 65,055
======================================
Segment operating income:
Conveyor equipment $ 11,158 $ 5,717
Manufactured housing products 711 350
Other 27 31
--------------------------------------
Total segment operating income 11,896 6,098
Management fee 603 310
Amortization expense 7 7
Restructuring charges - 2
Corporate expense 356 398
--------------------------------------
Total operating income 10,930 5,381
Interest expense, net 1,231 1,093
Miscellaneous expense (income) (76) 67
--------------------------------------
Income before income taxes $ 9,775 $ 4,221
======================================
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
I. Guarantor and Non-Guarantor Subsidiaries
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), both of which are wholly owned, are
the guarantors of the Senior Notes. The guarantees are full, unconditional, and
joint and several. Separate financial statements of these guarantor subsidiaries
are not presented as management has determined that they would not be material
to investors. The Company's Australian, United Kingdom and South African
subsidiaries are not guarantors of the Senior Notes.
Summarized consolidating balance sheets as of March 31, 2006 and December 31,
2005 for the Company, the guarantor subsidiaries, and the non-guarantor
subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
March 31, 2006: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 72 $ 700 $ 119 $ - $ 891
Accounts receivable, net - 28,876 23,957 (4) 52,829
Inventories - 36,195 9,386 - 45,581
Deferred income taxes 81 830 538 - 1,449
Other current assets 20,242 2,190 1,629 (22,347) 1,714
-------------------------------------------------------------------------------
Total current assets 20,395 68,791 35,629 (22,351) 102,464
Property, plant, and
equipment, net - 7,945 5,711 - 13,656
Goodwill - 10,987 2,729 - 13,716
Investment in subsidiaries 60,309 35,788 - (96,097) -
Deferred financing costs 520 - - - 520
Other assets 1,138 4,905 115 (5,422) 736
-------------------------------------------------------------------------------
Total assets $ 82,362 $ 128,416 $ 44,184 $ (123,870) $ 131,092
===============================================================================
Current liabilities:
Notes payable $ - $ 3,564 $ 7,945 $ (749) $ 10,760
Trade accounts payable 192 17,673 16,566 (1,847) 32,584
Accrued compensation and
employee benefits 20 5,514 2,250 - 7,784
Accrued interest 590 - - - 590
Other accrued liabilities 5,640 5,515 5,722 (1,900) 14,977
Income taxes payable - 22,151 - (20,242) 1,909
Current maturities of
long-term obligations 6,146 500 1,806 - 8,452
-------------------------------------------------------------------------------
Total current liabilities 12,588 54,917 34,289 (24,738) 77,056
Pension obligation - 1,543 - - 1,543
Deferred income taxes - 5,868 - (1,138) 4,730
Senior notes 91,317 - - - 91,317
N/P to N.E.S. Investment Co. 13,462 - - - 13,462
Other long-term obligations - 3,792 3,030 (2,340) 4,482
Stockholder's equity
(deficit) (35,005) 62,296 6,865 (95,654) (61,498)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 82,362 $ 128,416 $ 44,184 $ (123,870) $ 131,092
===============================================================================
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
December 31, 2005: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 40 $ 470 $ 33 $ - $ 543
Accounts receivable, net - 28,139 21,155 - 49,294
Inventories - 33,310 8,861 - 42,171
Deferred income taxes 81 759 627 - 1,467
Other current assets 18,729 2,242 1,804 (20,794) 1,981
-------------------------------------------------------------------------------
Total current assets 18,850 64,920 32,480 (20,794) 95,456
Property, plant, and
equipment, net - 7,685 5,881 - 13,566
Goodwill - 10,986 2,803 - 13,789
Investment in subsidiaries 60,309 35,788 - (96,097) -
Deferred financing costs 650 - - - 650
Other assets 1,138 4,916 118 (5,427) 745
-------------------------------------------------------------------------------
Total assets $ 80,947 $ 124,295 $ 41,282 $ (122,318) $ 124,206
===============================================================================
Current liabilities:
Notes payable $ - $ 7,172 $ 6,082 $ (769) $ 12,485
Trade accounts payable 239 17,221 18,214 (1,877) 33,797
Accrued compensation and
employee benefits - 5,139 2,132 - 7,271
Accrued interest 295 - - - 295
Other accrued liabilities 5,072 5,482 3,722 (1,904) 12,372
Income taxes payable - 21,623 - (18,680) 2,943
Current maturities of
long-term obligations 6,146 500 1,183 - 7,829
-------------------------------------------------------------------------------
Total current liabilities 11,752 57,137 31,333 (23,230) 76,992
Pension obligation - 1,483 - - 1,483
Deferred income taxes - 5,929 - (1,138) 4,791
Senior notes 91,317 - - - 91,317
N/P to N.E.S. Investment Co. 13,172 - - - 13,172
Other long-term obligations - 3,917 3,129 (2,349) 4,697
Stockholder's equity
(deficit) (35,294) 55,829 6,820 (95,601) (68,246)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 80,947 $ 124,295 $ 41,282 $ (122,318) $ 124,206
===============================================================================
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months ended
March 31, 2006 and 2005, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2006:
Net sales $ - $ 64,088 $ 22,924 $ - $ 87,012
Cost of products sold - 48,297 20,045 - 68,342
------------- ------------- --------------- ------------- -------------
Gross profit - 15,791 2,879 - 18,670
Total operating expenses 559 4,593 2,588 - 7,740
------------- ------------- --------------- ------------- -------------
Operating income (loss) (559) 11,198 291 - 10,930
Interest expense, net 715 313 203 - 1,231
Miscellaneous expense (income) - 77 (153) - (76)
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (1,274) 10,808 241 - 9,775
Income tax expense (benefit) (1,562) 4,341 74 - 2,853
------------- ------------- --------------- ------------- -------------
Net income $ 288 $ 6,467 $ 167 $ - $ 6,922
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2005:
Net sales $ - $ 44,179 $ 20,876 $ - $ 65,055
Cost of products sold - 34,728 17,764 - 52,492
------------- ------------- --------------- ------------- -------------
Gross profit - 9,451 3,112 - 12,563
Total operating expenses 68 4,507 2,607 - 7,182
------------- ------------- --------------- ------------- -------------
Operating income (loss) (68) 4,944 505 - 5,381
Interest expense, net 650 276 167 - 1,093
Miscellaneous expense (income) 6 111 (50) - 67
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (724) 4,557 388 - 4,221
Income tax expense (benefit) (895) 1,824 - - 929
------------- ------------- --------------- ------------- -------------
Net income $ 171 $ 2,733 $ 388 $ - $ 3,292
============= ============= =============== ============= =============
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating cash flow statements for the three months ended March
31, 2006 and 2005, respectively, for the Company, the guarantor subsidiaries,
and the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2006:
Net cash provided by (used in)
operating activities $ 32 $ 4,480 $ (2,302) $ (11) $ 2,199
Investing activities:
Purchases of property, plant, and
equipment - (517) (162) - (679)
Proceeds from sale of property,
plant, and equipment - - 1 - 1
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (517) (161) - (678)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase (decrease) in
borrowings on notes payable - (3,608) 1,952 - (1,656)
Proceeds from long-term obligations - - 740 - 740
Principal payments on long-term
obligations - (125) (140) - (265)
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities - (3,733) 2,552 - (1,181)
Exchange rate changes on cash - - (3) 11 8
------------- ------------- --------------- ------------- -------------
Increase in cash and cash equivalents 32 230 86 - 348
Cash and cash equivalents at beginning
of period 40 470 33 - 543
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 72 $ 700 $ 119 $ - $ 891
============= ============= =============== ============= =============
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2005:
Net cash provided by (used in)
operating activities $ 49 $ (1,202) $ (2,443) $ - $ (3,596)
Investing activities:
Purchases of property, plant, and
equipment - (254) (153) - (407)
Proceeds from sale of property,
plant, and equipment - 1 1 - 2
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (253) (152) - (405)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 1,607 1,809 - 3,416
Proceeds from long-term obligations - - 778 - 778
Principal payments on long-term
obligations - (172) (233) - (405)
------------- ------------- --------------- ------------- -------------
Net cash provided by financing - 1,435 2,354 - 3,789
activities
Exchange rate changes on cash - - (16) - (16)
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents 49 (20) (257) - (228)
Cash and cash equivalents at beginning
of period 12 509 366 - 887
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 61 $ 489 $ 109 $ - $ 659
============= ============= =============== ============= =============
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Form 10-K for
the year ended December 31, 2005 and the unaudited financial statements and
notes contained herein.
General
The Company, through its subsidiaries, is a leading designer and manufacturer of
conveyor systems and components for mining applications, primarily in the coal
industry. The Company is a holding company organized under the Delaware General
Corporation Law and conducts all of its business through its direct and indirect
operating subsidiaries. The Company's direct operating subsidiaries are
Continental Conveyor and Equipment Company and Goodman Conveyor Company. The
Company also owns indirectly all of the capital stock of Continental Conveyor &
Equipment Pty. Ltd., an Australian holding company that owns all of the capital
stock of four Australian operating companies. The Company also owns indirectly
all of the capital stock of Continental Conveyor Ltd., a U.K. operating company,
and Continental MECO (Pty.) Ltd., a South African operating company. The assets
and liabilities of the Company's foreign subsidiaries are translated at current
exchange rates, while revenues and expenses are translated at average rates
prevailing during the year.
Results of Operations
The following table sets forth, on a comparative basis, selected income
statement data as a percentage of net sales for the three months ended March 31,
2006 and 2005.
Three months ended
March 31
--------------------------
2006 2005
Net sales 100.0% 100.0%
Cost of products sold 78.5 80.7
Gross profit 21.5 19.3
SG&A expenses 8.2 10.5
Management fee 0.7 0.5
Operating income 12.6 8.3
Three months ended March 31, 2006, compared to three months ended March 31,
2005:
Net Sales
Net sales increased $21.9 million, or 34%, from $65.1 million in 2005 to $87.0
million in 2006. Net sales in the domestic operations of the Company's conveyor
equipment segment increased $17.8 million due primarily to increased sales
volumes. The increased sales volumes resulted from improved market conditions in
the coal industry creating higher demand for coal which resulted in increased
capital spending by the Company's major customers in the coal industry. The
Company's domestic subsidiaries began 2005 with a backlog of $21.5 million. At
the beginning of 2006, the backlog in the domestic subsidiaries was $92.4
million. Net sales in the foreign operations of the Company's conveyor equipment
segment increased $2.0 million, net of a $1.4 million decrease due to changes in
foreign currency translation rates. When adjusted for foreign currency
fluctuations, net sales in Australia and the United Kingdom increased by $1.2
million and $2.6 million, respectively, and net sales in South Africa decreased
by $0.4 million. The increase in Australia resulted from increased shipments due
to improved market conditions. The backlog in the Company's Australian
13
subsidiary was $34.7 million at the beginning of 2006, an increase of $20.7
million from the beginning of 2005. The increase in the United Kingdom was due
to increased sales of engineered systems projects. Net sales in the Company's
manufactured housing segment increased $2.0 million as a result of increased
shipments and a change in the product mix with more sales of new manufactured
products which have a higher selling price than refurbished products. Based on
the Manufactured Housing Institute Economic Report for March 2006, shipments of
manufactured homes for the first three months of 2006 increased 9% from the same
period of the prior year. While shipments to FEMA and other hurricane related
demand also contributed to this increase, FEMA production was concluded by
February 2006. Net sales in the Company's other segment increased $0.1 million.
Gross Profit
Gross profit increased $6.1 million, or 48%, from $12.6 million in 2005 to $18.7
million in 2006, due to a $4.6 million increase in volume and a $1.5 million
increase in margin. Gross profit in the domestic operations of the Company's
conveyor equipment segment increased $5.9 million due to the increased sales
volumes which contributed to a more efficient utilization of overhead expenses
and resulted in improved gross profit margins. Gross profit in the foreign
operations of the conveyor equipment segment decreased $0.2 million and was
primarily due to a decrease in the South African operations which resulted from
decreased sales volumes. Gross profit in the Company's manufactured housing
segment increased $0.4 due to increased sales volume.
Gross profit as a percentage of net sales increased from 19.3% in 2005 to 21.5%
in 2006. The improvement primarily resulted from the increased sales volume and
improved utilization in the domestic conveyor equipment operations.
SG&A Expenses
SG&A expenses increased $0.3 million, or 4%, from $6.8 million in 2005 to $7.1
million in 2006. This increase resulted from increased employee expenses at the
Company's domestic subsidiaries.
Operating Income
Operating income increased $5.5 million, from $5.4 million in 2005 to $10.9
million in 2006. This increase resulted from the $6.1 million increase in gross
profit, partially offset by the $0.3 million increase in SG&A expenses and a
$0.3 million increase in management fees. Management fees are based on the
Company's Adjusted EBITDA earnings and this increase is a direct result of the
Company's increased profits.
Income Tax Expense
Income tax expense increased $1.9 million, from $0.9 million in 2005 to $2.8
million in 2006. The increase resulted from Company's increased profits.
The Company's effective income tax rate is less than the statutory rate
primarily due to a favorable income tax benefit for interest payments on the New
Series A and Series B Notes due 2008 which are recorded as a reduction of the
outstanding indebtedness for financial reporting purposes. In addition, the
Company has not recognized income tax expense in certain of its foreign
subsidiaries due to the reversal of an income tax valuation allowance.
Net Income
Net income increased $3.6 million, from $3.3 million in 2005 to $6.9 million in
2006. The increase resulted from the $5.5 million increase in operating income,
combined with a $0.1 million decrease in miscellaneous expenses, and offset by a
$0.1 million increase in interest expense and the $1.9 million increase in
income tax expense.
14
Backlog
Backlog at March 31, 2006 was $144.1 million, an increase of $7.0 million, or
5%, from $137.1 million at December 31, 2005. At March 31, 2006, backlog in the
domestic operations of the Company's conveyor equipment segment was $104.7
million, an increase of $12.3 million from December 31, 2005, and backlog in the
foreign operations of the Company's conveyor equipment segment was $39.4
million, a decrease of $5.3 million from December 31, 2005. Management believes
that approximately 90% of the backlog will be shipped in 2006.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $2.2 million and $(3.6)
million for the three months ended March 31, 2006 and 2005, respectively. Net
cash provided by operating activities in 2006 resulted from net income of $6.9
million, combined with non-cash expenses of $0.8 million, and partially offset
by a net increase in operating assets and liabilities of $5.5 million. The net
increase in operating assets primarily resulted from increased accounts
receivable and inventory balances. The increase in accounts receivable resulted
from increased sales in the first quarter of 2006 compared to the fourth quarter
of 2005. The increase in inventory resulted from increased production to support
the increased backlog in the domestic operations. Net cash used in operating
activities in 2005 resulted from net income of $3.3 million, combined with
non-cash expenses of $0.7 million and offset by a net increase in operating
assets and liabilities of $7.6 million.
Net cash used in investing activities was $0.7 million and $0.4 million for the
three months ended March 31, 2006 and 2005, respectively, and represents net
purchases of property, plant, and equipment for both years.
Net cash provided by (used in) financing activities was $(1.2) million and $3.8
million for the three months ended March 31, 2006 and 2005, respectively. Net
cash used in financing activities in 2006 resulted from a net decrease in
borrowings on notes payable of $1.6 million combined with principal payments on
long-term obligations of $0.3 million, partially offset by proceeds from
long-term obligations of $0.7 million. Net borrowings on notes payable in the
domestic subsidiaries decreased $3.6 million while net borrowings on notes
payable in the foreign subsidiaries increased $2.0 million. Proceeds from
long-term obligations represent additional proceeds on the Australian
subsidiary's term loan with National Australia Bank. Net cash provided by
financing activities in 2005 resulted from a net increase in borrowings on notes
payable of $3.4 million combined with proceeds from long-term obligations of
$0.8 million and offset by principal payments on long-term obligations of $0.4
million.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company utilizes cash on hand and its available credit
facilities to satisfy these requirements. Capital expenditures for the first
three months of 2006 were $0.7 million, which included expenditures to improve
productivity and for maintenance capital. In addition to the Company's debt
service requirements for interest expense, as of March 31, 2006, the Company had
outstanding principal balances on its domestic and foreign credit facilities of
approximately $3.6 million and $7.2 million, respectively.
15
The Company's Senior Notes outstanding indebtedness has been classified as short
and long-term liabilities as of March 31, 2006 based upon the payment terms of
the debt. The following table summarizes the reduction in the balance of the
Senior Notes based upon the payment requirements over the terms of the Series A
and Series B Notes:
Balance at March 31, 2006 of Senior Notes, including
current portion of $6,146,438 $ 97,463,062
Interest payments on Series A Notes, 2006-2008 (15,980,737)
Interest payments on Series B Notes, 2006-2008 (2,458,575)
Maturity of outstanding 11% Senior Notes due 2007 (10,730,000)
------------------
Maturity of Series A and Series B Notes due 2008 $ 68,293,750
==================
At March 31, 2006, the Company had cash and cash equivalents of approximately
$0.9 million and approximately $23.1 million available for use under its
domestic credit facility, representing approximately $24.0 million of liquidity.
With the completion of the debt exchange in October 2004, the Company reduced
its annual debt service requirements related to interest payments on its Senior
debt by approximately $5.9 million. Annual debt service on the New Series A and
Series B Notes due 2008 combined with the outstanding Senior Notes due 2007 is
approximately $7.3 million, down from $13.2 million prior to the debt exchange.
In order to partially fund the cash payments as additional consideration to the
Series A and Series B bondholders, the Company increased the balance of a term
loan with Bank One by approximately $3.8 million and entered into subordinated
promissory notes with N.E.S. Investment Co. in the amount of $12 million. The
debt service requirements for interest related to these debt instruments in 2005
was approximately $0.3 million in cash and $1.0 million in kind. The Company
expects current financial resources, existing lines of credit, and funds from
operations to be adequate to meet anticipated cash requirements.
International Operations
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Australia, the United Kingdom, and South
Africa. As a result, the Company is subject to business risks inherent in
non-U.S. operations, including political and economic uncertainty, import and
export limitations, exchange controls and currency fluctuations. The Company
believes that the risks related to its foreign operations are mitigated by the
relative political and economic stability of the countries in which its largest
foreign operations are located. The principal foreign currencies in which the
Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. As the U.S. dollar strengthens and weakens
against these foreign currencies, the Company's financial results will be
affected. As discussed previously, the Company's net sales for the three months
ended March 31, 2006 decreased by approximately $1.4 million from the
corresponding period in the prior year due to changes in foreign currency
translation rates. The fluctuation of the U.S. dollar versus other currencies
also resulted in foreign currency translation losses included in the accumulated
other comprehensive income (loss) component of stockholder's equity (deficit) of
approximately $0.2 million for the three months ended March 31, 2006 and 2005.
16
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
In addition, the Company's future results of operations, financial condition,
liquidity and capital resources could be materially adversely affected by, among
other things, economic and political uncertainties or prolonged economic
recession.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents as well as
interest paid on its debt. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally borrows on a long-term basis to maintain a
debt structure that is fixed rate in nature.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures and sells its
products in the United States, Australia, the United Kingdom, and South Africa.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The Company's operating results are exposed to changes in exchange rates between
the U.S. dollar and the Australian dollar, the British pound sterling, and the
South African rand.
Item 4. Controls and Procedures
As of March 31, 2006, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There were no significant changes in the Company's internal controls
over financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
18
Part II. Other Information
Item 1. Legal Proceedings
There are pending or threatened against the Company or its subsidiaries various
claims and lawsuits, all arising from the ordinary course of business with
respect to commercial and products liability matters, which seek remedies or
damages. The Company believes that any liability that may finally be determined
with respect to commercial and product liability claims should not have a
material adverse effect on its financial condition. Legal costs are generally
expensed when incurred.
At March 31, 2006 and December 31, 2005, the Company's Consolidated Balance
Sheet includes an accrued liability for any pending or threatened claim with
respect to any commercial and products liability matter of $0.3 million, and was
included in current liabilities as Other Accrued Liabilities.
In August and September 2003, Continental Conveyor & Equipment Company was
served as one of fifty-eight known and unknown defendants in nineteen separate
actions pending in various state courts in the State of Alabama alleging various
contract, tort and warranty claims. All claims in such actions arose out of
alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine
which occurred on September 23, 2001. A settlement of these actions has been
agreed to by the parties involved, pending approval by the courts. The proposed
settlement does not materially impact the Company's financial condition.
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as described
in the Company's Report on Form 10-K for the year ended December 31, 2005.
Item 6. Exhibits
Exhibits: Refer to the index of exhibits.
19
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.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Jimmy L. Dickinson
-------------------------
Jimmy L. Dickinson
Vice President and Chief Financial Officer
(As duly authorized representative and as
Principal Financial and Accounting Officer)
CONTINENTAL CONVEYOR & EQUIPMENT COMPANY
By: /s/ Jimmy L. Dickinson
-------------------------
Jimmy L. Dickinson
Vice President - Finance (As duly authorized
representative and as Principal Financial
and Accounting Officer)
GOODMAN CONVEYOR COMPANY
By: /s/ J. Mark Etchberger
-------------------------
J. Mark Etchberger
Controller (As duly authorized representative
and as Principal Financial and Accounting
Officer)
Date: May 15, 2006
20
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
3.1
(a) Certificate of Incorporation of Continental Global Group, Inc.,
as currently in effect. *
(b) Certificate of Amendment of Certificate of Incorporation of
Continental Global Group, Inc. (Filed as Exhibit 3.1(b) to the
Company's Form 10-K for the year ended December 31, 2005, and
is incorporated herein by reference.)
3.2 By-Laws of Continental Global Group, Inc., as currently in
effect. *
3.3 Certificate of Incorporation of Continental Conveyor & Equipment
Company, as currently in effect. *
3.4 By-Laws of Continental Conveyor & Equipment Company, as currently
in effect. *
3.5 Certificate of Incorporation of Goodman Conveyor Company, as
currently in effect. *
3.6 By-Laws of Goodman Conveyor Company, as currently in effect. *
4.1 Indenture, dated as of April 1, 1997, among Continental Global
Group, Inc., Continental Conveyor & Equipment Company, Goodman
Conveyor Company, and the Trustee (containing, as exhibits,
specimens of the Series A Notes and the Series B Notes). *
4.2 Supplemental Indenture, dated as of October 4, 2004, between
Continental Global Group, Inc., Continental Conveyor & Equipment
Pty., Ltd., Continental ACE Pty., Goodman Conveyor Company,
Continental Conveyor & Equipment Company, and Wells Fargo Bank,
National Association, as trustee. (Filed as Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30, 2004,
and is incorporated herein by reference.)
4.3 Indenture, dated October 4, 2004, among Continental Global Group,
Inc., Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Wells Fargo Bank, National Association. (Filed as
Exhibit 4.1 to Form 8-K filed by the Company on October 7, 2004,
and is incorporated herein by reference.)
4.4 9% Convertible Subordinated Promissory Note, dated October 4,
2004, from Continental Global Group, Inc. to N.E.S. Investment
Co. in the amount of $10,000,000. (Filed as Exhibit 4.3 to Form
8-K filed by the Company on October 7, 2004, and is incorporated
herein by reference.)
10.1 Second Amended and Restated Credit Facility and Security
Agreement, dated October 4, 2004, by and among Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and Bank
One, N.A. (Filed as Exhibit 4.2 to Form 8-K filed by the Company
on October 7, 2004, and is incorporated herein by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between
Continental Global Group, Inc. and Nesco, Inc. *
10.3 Employment Agreement, effective February 13, 2006, between
Continental Global Group, Inc. and Ronald Kaplan. (Filed as
Exhibit 10.3 to Form 8-K filed by the Company on March 17, 2006,
and is incorporated herein by reference.)
10.4 Reserved
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
10.5 First Amendment to Second Amended and Restated Credit Facility
and Security Agreement, dated March 9, 2006, by Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and JP
Morgan Chase Bank, N.A., successor by merger to Bank One, N.A.
(Filed as Exhibit 10.5 to the Company's Form 10-K for the year
ended December 31, 2005, and is incorporated herein by reference.)
10.6 Forbearance Agreement, effective as of April 26, 2004, by and
among Continental Global Group, Inc., N.E.S. Investment Co., and
CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 2003, and
is incorporated herein by reference.)
10.7 Forbearance Agreement, effective as of May 1, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.7 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.8 Amendment 1, dated as of May 27, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc. (Filed as Exhibit 10.8 to the Company's Form 10-K for the
year ended December 31, 2003, and is incorporated herein by
reference.)
10.9 Forbearance Agreement, effective as of June 1, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.10 Amendment 2, dated as of June 14, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc. (Filed as Exhibit 10.10 to the Company's Form 10-K for the
year ended December 31, 2003, and is incorporated herein by
reference.)
10.11 Forbearance Agreement, effective as of June 15, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.11 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.12 Commitment Letter, dated as of July 12, 2004, from Bank One, NA to
Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Continental Global Group, Inc. (Filed as Exhibit
10.12 to the Company's Form 10-K for the year ended December 31,
2003, and is incorporated herein by reference.)
10.13 Amendment 3, dated as of July 13, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and Wayzata Advisers LLC.
(Filed as Exhibit 10.13 to the Company's Form 10-K for the year
ended December 31, 2003, and is incorporated herein by reference.)
10.14 Forbearance Agreement, effective as of July 13, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.14 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
10.15 Forbearance Agreement, effective as of July 29, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.15 to the Company's
Form 10-Q for the quarter ended June 30, 2004, and is incorporated
herein by reference.)
10.16 Forbearance Agreement, effective as of August 31, 2004, by and
among Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.16 to the Company's
Form 10-Q for the quarter ended September 30, 2004, and is
incorporated herein by reference.)
10.17 Restructuring Agreement, dated as of July 22, 2004, by and among
Continental Global Group, Inc., N.E.S. Investment Co. and Wayzata
Investment Partners LLC. (Filed as Exhibit 99.1 to Form 8-K filed
by the Company on July 23, 2004, and is incorporated herein by
reference.)
10.18 First Amendment, dated as of July 30, 2004, to Restructuring
Agreement, dated as of July 22, 2004, by and among Continental
Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment
Partners LLC. (Filed as Exhibit 99.1 to Form 8-K filed by the
Company on August 3, 2004, and is incorporated herein by
reference.)
10.19 Second Amendment, dated as of October 1, 2004, to Restructuring
Agreement, dated as of July 22, 2004, by and among Continental
Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment
Partners LLC. (Filed as Exhibit 10.19 to the Company's Form 10-Q
for the quarter ended September 30, 2004, and is incorporated
herein by reference.)
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to 18, U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certain instruments with respect to long-term debt have not been filed as
exhibits as the total amount of securities authorized under any one of such
instruments does not exceed 10 percent of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant agrees to furnish to
the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933.