UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-22098
INSILCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0635844
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Metro Place North
Fifth Floor
Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)
614-792-0468
(Registrant's telephone number, including area code)
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
The registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 3, 1999, 100
shares of common stock, $.001 par value, were outstanding.
INSILCO CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
- ------------------------------- ----
Item 1. Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 26
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Securities
Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
2
INSILCO CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page
-------------------------------- ----
Condensed Consolidated Balance Sheets at September 30,
1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations for
the three months and nine months ended September 30,
1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1999 and 1998 6
Notes to the Condensed Consolidated Financial
Statements 7
Independent Auditors' Review Report 19
3
INSILCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
As of
-------------------------------
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note 1)
Assets
------
Current assets:
Cash and cash equivalents $ 14,734 7,430
Trade receivables, net 95,188 74,969
Other receivables 11,570 4,337
Receivables from related party -- 4,882
Inventories, net 64,381 64,565
Deferred taxes 1,547 6,143
Prepaid expenses and other current assets 4,563 4,387
--------- ---------
Total current assets 191,983 166,713
Property, plant and equipment, net 125,048 114,756
Deferred taxes 6,206 1,517
Other assets and deferred charges 46,247 40,040
--------- ---------
Total assets $ 369,484 323,026
========= =========
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,264 1,265
Accounts payable 38,581 34,513
Accrued expenses and other 55,113 63,693
--------- ---------
Total current liabilities 94,958 99,471
Long-term debt, excluding current portion 355,530 311,144
Other long-term obligations, excluding current portion 46,873 46,329
Amounts due to Insilco Holding Co. 2,980 2,991
Minority interest 100 --
Stockholder's deficit:
Common stock, $.001 par value; 1,000 shares authorized; 100 shares
issued and outstanding at September 30, 1999 and December 31, 1998 -- --
Other stockholder's deficit (130,957) (136,909)
Contingencies (See Note 6)
--------- ---------
Total liabilities and stockholder's deficit $ 369,484 323,026
========= =========
See accompanying notes to the unaudited condensed consolidated financial statements.
4
INSILCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
------------ ---------- ----------- -----------
Sales $ 144,254 135,065 449,590 422,388
Cost of products sold (includes restructuring
expenses of $0 and $3,156 for the three and nine
months ended 1999, respectively) 107,394 98,072 327,216 298,743
Depreciation and amortization 5,722 5,144 17,507 15,787
Selling, general and administrative expenses
(includes restructuring expenses of $0 and $211 for the
three and nine months ended 1999, respectively) 20,927 23,995 75,486 74,698
Merger fees - 19,549 - 20,890
Restructuring charge 1,017 - 6,532 -
------------ ---------- ----------- -----------
Operating income (loss) 9,194 (11,695) 22,849 12,270
Other income expense:
Interest expense (9,368) (6,762) (27,745) (20,567)
Interest income 54 22 347 94
Equity in net income of Thermalex 655 693 2,596 2,144
Other income, net 9,882 405 10,142 2,430
------------ ---------- ----------- -----------
Total other expense 1,223 (5,642) (14,660) (15,899)
------------ ---------- ----------- -----------
Income (loss) before income taxes 10,417 (17,337) 8,189 (3,629)
Income tax (expense) benefit (1,157) 5,280 (1,176) (1,214)
------------ ---------- ----------- -----------
Net income (loss) $ 9,260 (12,057) 7,013 (4,843)
============ ========== =========== ===========
See accompanying notes to the unaudited condensed consolidated financial statements.
5
INSILCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30,
----------------------------
1999 1998
------------- ------------
Cash flows from operating activities:
Net income (loss) $ 7,013 (4,843)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 17,507 15,787
Deferred taxes 8 350
Other noncash charges and credits 1,509 (2,569)
Gain on Sale of Romac and McKenica Equipment (9,576) -
Change in operating assets and liabilities:
Receivables (17,663) (16,665)
Inventories 5,573 27
Prepaids 244 (1,419)
Payables 2,988 (3,133)
Other current liabilities and other (9,582) (10,439)
------------- ------------
Net cash used in operating activities (1,979) (22,904)
------------- ------------
Cash flows from investing activities:
Proceeds from sale of Romac and McKenica equipment 18,115 -
Other investing activities 5,597 711
Capital expenditures (10,734) (15,714)
Acquisitions, net of cash acquired (48,695) -
------------- ------------
Net cash used in investing activities (35,717) (15,003)
------------- ------------
Cash flows from financing activities:
Proceeds from revolving credit facility 52,343 56,684
Funds received from excess deposited for 10 1/4% bonds 2,032 -
Proceeds from sale of minority interest 100 -
Loan (to) from Insilco Holding Co. (11) 3,500
Payment of prepetition liabilities (1,086) (2,735)
Retirement of 10 1/4% bonds (1,526) -
Repurchase of common stock and equity units (2,300) -
Retirement of long-term debt (4,639) (1,171)
Equity investment from Insilco Holding Co. - 3,668
Proceeds from sale of common stock - 3,281
Dividend to Insilco Holding Co. - (30,856)
Debt issuance and tender costs - (580)
------------- ------------
Net cash provided by financing activities 44,913 31,791
------------- ------------
Effect of exchange rate changes on cash 87 124
------------- ------------
Net increase (decrease) in cash and cash equivalents 7,304 (5,992)
Cash and cash equivalents at beginning of period 7,430 10,651
------------- ------------
Cash and cash equivalents at end of period $ 14,734 4,659
============= ============
Interest paid $ 27,694 23,722
============= ============
Income taxes paid $ 776 3,592
============= ============
See accompanying notes to the unaudited condensed consolidated financial statements.
6
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(1) 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 and nine-month periods
ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
As a result of the transactions described in Note 2, Insilco Corporation
and Subsidiaries (the "Company") is a wholly-owned subsidiary of Insilco
Holding Co. ("Holdings") and is included in Holdings' consolidated
financial statements and is a part of Holdings' consolidated group for
tax purposes. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
(2) Significant Transactions
------------------------
The Company consummated several material transactions in 1998 that
resulted in significant changes to its debt and capital structure. The
following is a brief description of these transactions; for further
information see the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The Mergers. On August 17, 1998, the Company's management, Holdings and
Silkworm Acquisition Corporation ("Silkworm"), an affiliate of
Donaldson, Lufkin & Jenrette Merchant Banking Partners ("DLJMB"),
completed a series of merger transactions. As a result, the Company
became a wholly-owned subsidiary of Holdings and is included in
Holdings' consolidated financial statements and is a part of Holdings'
consolidated group for tax purposes.
Refinancing of 10 1/4% Subordinated Debt. As a result of the Mergers,
the Company was required to make an offer to purchase all of the $150
million of outstanding 10 1/4% Senior Subordinated Notes due 2007 (the
"10 1/4% Notes") at 101% of their aggregate principal amount, plus
accrued interest. To fund a portion of the repurchase of the 10 1/4%
Notes, the Company sold $120 million of 12% Senior Subordinated Notes
due 2007 (the "12% Notes") with warrants to purchase 62,400 shares of
Holdings common stock at $45 per share on November 9, 1998. The balance
of the repurchase was funded by borrowings under the Company's Credit
Facilities.
In addition, on November 24, 1998, the Company amended and restated its
Bank Credit Agreement to, among other things, provide for two Credit
Facilities: a $175 million Revolving Facility and $125 million Term
Facility.
7
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
As a result of these transactions, the Company's condensed consolidated
results for the periods presented are not directly comparable. Pro forma
results of operations for the three and nine months ended September 30,
1998, which assume these transactions occurred at the beginning of the
period, and actual results for the three and nine months ended September
30, 1999, are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $144,254 135,065 449,590 422,388
Income from continuing operations 9,260 384 7,013 7,720
(3) Acquisitions
------------
On July 20, 1999, the Company, through its wholly-owned subsidiary
Insilco, executed a definitive merger agreement with Thermal Transfer
Products, Ltd., whereby Thermal Transfer Acquisition Corporation, a
newly created wholly-owned subsidiary of Insilco, was merged with
Thermal Transfer Products. The surviving entity, Thermal Transfer
Products, Ltd. ("TTP"), is a wholly-owned subsidiary of Insilco and is a
leading manufacturer of industrial oil coolers and other heat exchanger
products. TTP is based in Racine, Wisconsin. The entire purchase price
was financed from borrowings under the Company's Revolving Credit
Facility.
The gross purchase price paid by the Company was $26.5 million. The
purchase price net of cash acquired and including estimated costs
incurred directly related to the transaction was $23.3 million. The
merger has been accounted for using the purchase method of accounting
and, accordingly, the results of operations of TTP have been included in
the Company's consolidated financial statements from July 20, 1999. The
preliminary excess of the purchase price over net identifiable assets
acquired is $8.7 million, including costs for employee terminations of
$0.1 million, and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years. The Company expects
any further purchase price adjustments to be completed within one year
from the date of purchase.
The following unaudited pro forma financial information for the three
and nine months ended September 30 present the Company's combined
results of operations as if the acquisition had occurred at the
beginning of each period.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $ 144,254 142,013 462,067 443,232
Income (loss) from continuing operations 9,260 (11,872) 6,575 (5,980)
On January 25, 1999, the Company purchased the stock of Eyelets for
Industry, Inc. and EFI Metal Forming, Inc. (collectively referred to as
"EFI") a precision stamping manufacturer, for $25.3 million, including
costs incurred directly related to the transaction. The entire purchase
was financed from borrowings under the Company's Revolving Credit
Facility. The acquisition has been accounted for using the purchase
method of accounting. The preliminary excess of the purchase price over
the net identifiable assets acquired of $3.7 million includes costs for
employee terminations, facility closure and related costs of $0.4
million and has been recorded as goodwill and is being amortized on a
straight-line basis over 20 years and is pending the calculation
8
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
of deferred taxes. In addition, the Company also entered into a Sales
Participation Agreement, which provides for additional payments over the
next 13 years contingent on future sales of a specific product line. The
additional payments, if any, will be accounted for as additional
goodwill. The acquisition did not result in a significant business
combination within the definition provided by the Securities and
Exchange Commission and therefore, pro forma financial information has
not been presented.
(4) Divestitures
------------
On August 20, 1999, the Company sold the assets of its welded stainless
steel tubing business (Romac) for $16.5 million, which resulted in a
gain of approximately $9.2 million.
On July 16, 1999, the Company sold certain assets and intellectual
property relating to its heat exchanger machinery and equipment business
(McKenica) for $1.7 million, which resulted in a gain of approximately
$0.4 million.
These gains are included in other income on the statement of operations
and the proceeds from the sales were used to pay down $3.7 million of
its Term Facility and the balance was used to pay down on the Company's
Revolving Facility.
(5) Inventories
-----------
Inventories consisted of the following (in thousands):
As of As of
September 30, December 31,
1999 1998
---------- ---------
Raw materials and supplies $ 29,459 27,238
Work-in-process 17,998 23,559
Finished goods 16,924 13,768
---------- ---------
Total inventories $ 64,381 64,565
========== =========
(6) Contingencies
-------------
The Company is implicated in various claims and legal actions arising in
the ordinary course of business. Those claims or liabilities will be
addressed in the ordinary course of business and will be paid as
expenses are incurred. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
9
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(7) Segment Information
-------------------
There have been no changes in the basis of segmentation or in the basis
of measurement of segment profit or loss from the Company's December 31,
1998 consolidated financial statements.
Summary financial information by business segment is as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------- ------------ -------------
Net sales:
Automotive Components $ 56,219 53,414 169,313 162,318
Technologies 58,901 45,739 170,163 144,756
Specialty Publishing 25,981 27,381 92,047 91,922
Other 3,153 8,531 18,067 23,392
------------ ------------- ------------ -------------
Total net sales $144,254 135,065 449,590 422,388
============ ============= ============ =============
Operating income:
Automotive Components $ 4,287 5,389 16,289 18,390
Technologies 5,695 4,802 15,207 17,380
Specialty Publishing 1,580 740 8,846 5,739
Other 147 411 586 763
Unallocated amounts:
Corporate expenses (1,192) (2,074) (4,911) (6,037)
Significant legal, professional and
merger expenses - (19,928) (2,503) (22,230)
Severance, write-downs and other (1,323) (1,035) (10,665) (1,735)
------------ ------------- ------------ -------------
Total operating income 9,194 (11,695) 22,849 12,270
Interest expense (9,368) (6,762) (27,745) (20,567)
Interest income 54 22 347 94
Equity in net income of Thermalex 655 693 2,596 2,144
Other income, net 9,882 405 10,142 2,430
------------ ------------- ------------ -------------
Income (loss) from operations
before income taxes $ 10,417 (17,337) 8,189 (3,629)
============ ============= ============ =============
10
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
A summary of identifiable assets by segment follows (in thousands):
As of As of
September 30, December 31,
1999 1998
------------- -------------
Automotive Components $ 159,373 135,525
Technologies 130,839 96,742
Specialty Publishing 46,205 42,073
Other 85 17,342
Corporate 32,982 31,344
------------- -------------
Total $ 369,484 323,026
============= =============
The significant increase in identifiable assets of Technologies and
Automotive Components relates to the acquisition of EFI in January 1999
and Thermal Transfer in July 1999, respectively (see Note 3). The
decrease in identifiable assets of other relates to the divestitures of
the welded stainless steel tubing business in August 1999 and the heat
exchanger machinery and equipment business in July 1999 (see Note 4).
(8) Comprehensive Income
--------------------
Comprehensive income (loss) was $9,569,000 and ($12,171,000) for the
three months ended September 1999 and 1998, respectively, including other
comprehensive income consisting of foreign currency translation
adjustments (losses) totaling $309,000 and ($114,000), respectively.
Comprehensive income (loss) for the nine months ended September 30, 1999
and 1998 was $7,006,000 and ($4,867,000), respectively, including other
comprehensive income consisting of foreign currency translation losses
totaling ($7,000) and ($24,000), respectively.
(9) Related Party Transactions
--------------------------
In the first quarter of 1999, the Company received from Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJSC") $2,032,000 for funds
deposited in excess of the retired 10 1/4% Notes, which had been included
in "Receivables from related parties" at December 31, 1998. In addition,
the Company paid DLJSC advisory and retainer fees of $500,000 and
$110,000, respectively, year-to-date September 30, 1999, and at September
30, 1999 had a payable to DLJSC of $225,000 of retainer fees for
investment banking services.
11
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(10) Guarantor Subsidiaries
----------------------
In connection with the November 1998 sale of $120 million of 12% Notes,
the Company permitted its wholly-owned domestic subsidiaries
("Guarantors") to unconditionally guarantee the 12% Notes on a senior
subordinated basis.
The guarantees are general unsecured obligations of the Guarantors, are
subordinated in right of payment to all existing and future senior
indebtedness of the guarantors (including indebtedness of the Credit
Facilities) and will rank senior in right of payment to any future
subordinated indebtedness of the Guarantors. The following condensed
consolidating financial information of the Company includes the accounts
of the Guarantors, the combined accounts of the non-guarantors and the
Company for the periods indicated. Separate financial statements of each
of the Guarantors are not presented because management has determined
that such information is not material in assessing the Guarantors.
12
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(10) Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheet (in thousands)
----------------------------------------------------------
September 30, 1999
----------------------------------------------------------
Non-
Insilco Guarantors Guarantors Consolidated
------- ---------- ---------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 10,344 1,622 2,768 14,734
Accounts receivable 250 102,063 4,445 106,758
Inventories -- 62,266 2,115 64,381
Deferred taxes 1,547 -- -- 1,547
Prepaid expenses and other 225 4,204 134 4,563
--------- --------- --------- ---------
Total current assets 12,366 170,155 9,462 191,983
Property, plant and equipment, net 123 114,703 10,222 125,048
Deferred taxes 6,105 101 -- 6,206
Other assets and deferred charges 14,388 28,713 3,146 46,247
--------- --------- --------- ---------
Total assets $ 32,982 313,672 22,830 369,484
========= ========= ========= =========
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 1,250 14 -- 1,264
Accounts payable -- 36,038 2,543 38,581
Customer deposits -- 6,025 41 6,066
Accrued expenses and other 10,366 37,510 1,171 49,047
--------- --------- --------- ---------
Total current liabilities 11,616 79,587 3,755 94,958
Long-term debt, less current portion 355,341 189 -- 355,530
Other long-term obligations, excluding
current portion, and minority interest 27,787 19,186 -- 46,973
Intercompany payable (141,834) 126,349 18,465 2,980
--------- --------- --------- ---------
Total liabilities 252,910 225,311 22,220 500,441
Stockholder's equity (deficit) (219,928) 88,361 610 (130,957)
--------- --------- --------- ---------
Total liabilities and
stockholder's equity (deficit) $ 32,982 313,672 22,830 369,484
========= ========= ========= =========
Condensed Consolidating Balance Sheet (in thousands)(Cont.)
-----------------------------------------------------------
December 31, 1998
-----------------------------------------------------------
Non-
Insilco Guarantors Guarantors Consolidated
------- ---------- ---------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 6,472 23 935 7,430
Accounts receivable 2,131 76,899 5,158 84,188
Inventories -- 61,178 3,387 64,565
Deferred taxes 6,143 -- -- 6,143
Prepaid expenses and other 838 3,506 43 4,387
--------- --------- --------- ---------
Total current assets 15,584 141,606 9,523 166,713
Property, plant and equipment, net 208 103,061 11,487 114,756
Deferred taxes 1,517 -- -- 1,517
Other assets and deferred charges 14,035 22,463 3,542 40,040
--------- --------- --------- ---------
Total assets $ 31,344 267,130 24,552 323,026
========= ========= ========= =========
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 1,250 15 -- 1,265
Accounts payable -- 31,097 3,416 34,513
Customer deposits -- 24,981 -- 24,981
Accrued expenses and other 12,411 5,360 20,941 38,712
--------- --------- --------- ---------
Total current liabilities 13,661 61,453 24,357 99,471
Long-term debt, less current portion 310,945 199 -- 311,144
Other long-term obligations, excluding
current portion, and minority interest 13,243 32,938 148 46,329
Intercompany payable (79,887) 82,878 -- 2,991
--------- --------- --------- ---------
Total liabilities 257,962 177,468 24,505 459,935
Stockholder's equity (deficit) (226,618) 89,662 47 (136,909)
--------- --------- --------- ---------
Total liabilities and
stockholder's equity (deficit) $ 31,344 267,130 24,552 323,026
========= ========= ========= =========
13
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(10) Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Operations (in thousands)
---------------------------------------------------------------------
Three Months Ended September 30, 1999
---------------------------------------------------------------------
Non-
Insilco Guarantors Guarantors Consolidated
------------- ------------- ------------ ---------------
Sales $ -- 136,585 7,669 144,254
Cost of products sold -- 101,184 6,210 107,394
Depreciation and amortization 9 5,309 404 5,722
Selling, general and administrative
expenses 1,108 19,188 631 20,927
Merger fees -- -- -- --
Restructuring charge 535 482 -- 1,017
------------- ------------- ------------ ---------------
Operating income (loss) (1,652) 10,422 424 9,194
Other income expense:
Interest expense (9,197) (148) (23) (9,368)
Interest income 21 25 8 54
Other income, net 9,466 988 83 10,537
------------- ------------- ------------ ---------------
Income (loss) before income taxes (1,362) 11,287 492 10,417
Income tax benefit (expense) 2,101 (3,258) -- (1,157)
------------- ------------- ------------ ---------------
Net income (loss) $ 739 8,029 492 9,260
============= ============= ============ ===============
Condensed Consolidating Statement of Operations (in thousands)(Cont.)
---------------------------------------------------------------------
Three Months Ended September 30, 1998
---------------------------------------------------------------------
Non-
Insilco Guarantors Guarantors Consolidated
------------- ------------- ------------ ---------------
Sales $ -- 126,804 8,261 135,065
Cost of products sold -- 91,485 6,587 98,072
Depreciation and amortization 18 4,732 394 5,144
Selling, general and administrative
expenses 3,070 20,238 687 23,995
Merger fees 19,549 -- -- 19,549
Restructuring charge -- -- -- --
-------- -------- -------- --------
Operating income (loss) (22,637) 10,349 593 (11,695)
Other income expense:
Interest expense (6,627) (129) (6) (6,762)
Interest income 9 8 5 22
Other income, net 465 602 31 1,098
-------- -------- -------- --------
Income (loss) before income taxes (28,790) 10,830 623 (17,337)
Income tax benefit (expense) 8,609 (3,329) -- 5,280
-------- -------- -------- --------
Net income (loss) $(20,181) 7,501 623 (12,057)
======== ======== ======== ========
14
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(10) Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Operations (in thousands)
---------------------------------------------------------------------
Nine Months Ended September 30, 1999
---------------------------------------------------------------------
Non-
Insilco Guarantors Guarantors Consolidated
------------- ------------- ------------ ---------------
Sales $ -- 425,199 24,391 449,590
Cost of products sold -- 307,637 19,579 327,216
Depreciation and amortization 41 16,290 1,176 17,507
Selling, general and administrative
expenses 7,495 66,005 1,986 75,486
Merger fees -- -- -- --
Restructuring charge 3,450 3,082 -- 6,532
-------- -------- -------- --------
Operating income (loss) (10,986) 32,185 1,650 22,849
Other income expense:
Interest expense (27,206) (516) (23) (27,745)
Interest income 298 54 (5) 347
Other income, net 9,588 2,999 151 12,738
-------- -------- -------- --------
Income (loss) before income taxes (28,306) 34,722 1,773 8,189
Income tax benefit (expense) 10,079 (11,255) -- (1,176)
-------- -------- -------- --------
Net income (loss) $(18,227) 23,467 1,773 7,013
======== ======== ======== ========
Condensed Consolidating Statement of Operations (in thousands)(Cont.)
---------------------------------------------------------------------
Nine Months Ended September 30, 1998
---------------------------------------------------------------------
Non-
Insilco Guarantors Guarantors Consolidated
------------- ------------- ------------ ---------------
Sales $ -- 398,504 23,884 422,388
Cost of products sold -- 280,068 18,675 298,743
Depreciation and amortization 54 14,341 1,392 15,787
Selling, general and administrative
expenses 8,350 64,292 2,056 74,698
Merger fees 20,890 -- -- 20,890
Restructuring charge -- -- -- --
-------- -------- -------- --------
Operating income (loss) (29,294) 39,803 1,761 12,270
Other income expense:
Interest expense (20,131) (403) (33) (20,567)
Interest income 25 25 44 94
Other income, net 2,608 1,775 191 4,574
-------- -------- -------- --------
Income (loss) before income taxes (46,792) 41,200 1,963 (3,629)
Income tax benefit (expense) 12,099 (13,345) 32 (1,214)
-------- -------- -------- --------
Net income (loss) $(34,693) 27,855 1,995 (4,843)
======== ======== ======== ========
15
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(10) Guarantor Subsidiaries (continued)
Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 1999
(In thousands)
Non-
Insilco Guarantors Guarantors Consolidated
--------------- -------------- ------------- ---------------
Net cash provided by (used in)
operating activities $ (23,815) 19,331 2,505 (1,979)
--------------- -------------- ------------- ---------------
Cash flows used in investing activities:
Proceeds from sale of Romac and McKenica equip. 18,115 - - 18,115
Other investing activities 5,597 - - 5,597
Capital expenditures, net (9) (9,966) (759) (10,734)
Acquisitions, net of cash (48,695) - - (48,695)
--------------- -------------- ------------- ---------------
Net cash used in investing activities (24,992) (9,966) (759) (35,717)
--------------- -------------- ------------- ---------------
Cash flows provided by (used in)
financing activities:
Proceeds from revolving credit facility 52,343 - - 52,343
Intercompany transfer of funds 7,758 (7,758) - -
Funds deposited in excess of retired 10 1/4% Notes 2,032 - - 2,032
Proceeds from sale of minority interest 100 - - 100
Loan to Insilco Holding Co. (11) - - (11)
Payment of prepetition liabilities (1,086) - - (1,086)
Retirement of 10 1/4% Notes (1,526) - - (1,526)
Repurchase of common stock and equity units (2,300) - - (2,300)
Repayment of long term debt (4,631) (8) - (4,639)
--------------- -------------- ------------- ---------------
Net cash provided by (used in)
financing activities 52,679 (7,766) - 44,913
--------------- -------------- ------------- ---------------
Effect of exchange rate changes on cash - - 87 87
--------------- -------------- ------------- ---------------
Net increase in cash
and cash equivalents 3,872 1,599 1,833 7,304
Cash and cash equivalents at
beginning of the period 6,472 23 935 7,430
--------------- -------------- ------------- ---------------
Cash and cash equivalents
at end of the period $ 10,344 1,622 2,768 14,734
=============== ============== ============= ===============
16
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(10) Guarantor Subsidiaries (continued)
Condensed Statement of Cash Flows
Nine Months Ended September 30, 1998
(In thousands)
Non-
Insilco Guarantors Guarantors Consolidated
--------------- -------------- ------------- --------------
Net cash provided by (used in)
operating activities $ (34,844) 11,224 716 (22,904)
--------------- -------------- ------------- --------------
Cash flows used in investing activities:
Other investing activities 711 - - 711
Capital expenditures, net (40) (15,276) (398) (15,714)
--------------- -------------- ------------- --------------
Net cash provided by (used in) investing activities 671 (15,276) (398) (15,003)
--------------- -------------- ------------- --------------
Cash flows provided by financing activities:
Proceeds from revolving credit facility 56,684 - - 56,684
Equity investment from Holding Co. 3,668 - - 3,668
Loan from Insilco Holding Co. 3,500 - - 3,500
Proceeds from stock option exercise 3,281 - - 3,281
Repayment of long term debt (25) (1,146) - (1,171)
Debt issuance and tender costs (580) - - (580)
Payment of prepetition liabilities (2,735) - - (2,735)
Intercompany transfer of funds (3,280) 3,280 - -
Dividend from Holding Co. (30,856) - - (30,856)
Net cash provided by
--------------- -------------- ------------- --------------
financing activities 29,657 2,134 - 31,791
--------------- -------------- ------------- --------------
Effect of exchange rate changes on cash - - 124 124
--------------- -------------- ------------- --------------
Net increase (decrease) in cash
and cash equivalents (4,516) (1,918) 442 (5,992)
Cash and cash equivalents at
beginning of the period 9,809 (185) 1,027 10,651
--------------- -------------- ------------- --------------
Cash and cash equivalents
at end of the period $ 5,293 (2,103) 1,469 4,659
=============== ============== ============= ==============
17
INSILCO CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(11) Restructuring and Plant Closing Costs
-------------------------------------
During the quarter ended September 30, 1999, the Company recorded
$1,017,000 of restructuring and plant closing costs relating to its
Corporate office restructuring and the announced closing of its Duncan,
South Carolina heat exchanger tubing manufacturing facility. These
costs include $845,000 of employee separation costs, $104,000 in plant
closing costs and $68,000 of noncash asset impairment costs.
For the nine months ended September 30, 1999, the Company recorded
$9,899,000 of restructuring and plant closing costs relating to
corporate staff reductions, restructuring of certain heat exchanger and
tubing manufacturing facilities and the closure of its heat exchanger
machinery and equipment manufacturing operation (McKenica) with the
objective of lowering operating costs and focusing resources on core
business units.
The cost of these actions has been reflected in cost of sales
($3,156,000), SG&A ($211,000) and restructuring and plant closing costs
($6,532,000). The charge consists of employee separation costs of
$3,885,000, asset impairments of $922,000, remaining noncancellable
lease costs $1,267,000, other exit costs of $1,467,000 and non cash
charges of $2,358,000. Employee separations occurred at manufacturing
facilities affected by the plan and at the corporate office. The
decision to exit the heat exchanger machinery and equipment business
decreased cash flows triggering the asset impairment. The amount of
impairment of such assets was based on the estimated net realizable
market value of the assets. Other exit costs consist of warranty
reserves and losses on remaining percentage of completion contracts.
Non cash charges consist of inventory write-downs and receivable
write-offs.
As of September 30, 1999, the Company has an accrual of $3,396,00
relating to these restructuring charges, which is included in accrued
expenses and other on the balance sheet. A summary of the accrual is as
follows:
As of As of
December Cash September
31, 1998 Accruals Outlays 30, 1999
------------- -------------- ------------- -------------
Restructuring charges:
Employee separations $ - 3,885 (2,176) 1,709
Other exit costs - 1,467 (931) 536
Remaining noncancellable lease costs - 1,267 (116) 1,151
------------- ------------- ------------- -------------
Restructuring costs $ - 6,619 (3,223) 3,396
============= -------------- ============= =============
Noncash charges 2,358
Asset impairments 922
--------------
Total restructuring and plant closing costs 9,899
==============
The headcount reduction from these activities was approximately 171
employees.
18
INDEPENDENT AUDITORS' REVIEW REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDER
INSILCO CORPORATION:
We have reviewed the condensed consolidated balance sheet of Insilco Corporation
and subsidiaries as of September 30, 1999, and the related condensed
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 30, 1999 and 1998. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Insilco Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended (not presented herein); and in our report dated February 10, 1999, except
as to the first paragraph of Note 7, which is as of March 26, 1999, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1998, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
Columbus, Ohio
November 3, 1999 /s/ KPMG LLP
19
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
The Company consummated several material transactions in 1998 that resulted in
significant changes to its debt and capital structure and acquired and divested
certain operations during 1999. As a result of these transactions, the Company's
condensed consolidated results for the three-month and nine-month periods ended
September 30, 1999 and 1998 are not directly comparable. Pro forma results of
operations, which assume these transactions occurred at the beginning of their
respective periods, and additional details are presented in Notes 2, 3, and 4 of
the Notes to the Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
The discussion that follows is based on a management approach and is consistent
with the basis and manner in which the Company's management internally
disaggregates financial information for the purposes of assisting in making
internal operating decisions. See Note 7 of the Notes to the Condensed
Consolidated Financial Statements for summary financial information by business
segment.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
--------------------------------------------------------------------
SEPTEMBER 30, 1998
------------------
CONSOLIDATED RESULTS OF OPERATIONS. Our results for the third quarter of 1999
were impacted by the following:
o We incurred $0.8 million of severance costs relating to
rationalization activities within our operating units and the
reduction of our corporate office staff, which are included in
severance, writedowns and other.
o We incurred $0.5 million of restructuring charges relating to the
closing of the Duncan, South Carolina based heat exchanger tubing
manufacturing facility, which are also included in severance,
writedowns and other.
o On July 20, 1999, we acquired Thermal Transfer Products, LTD ("TTP")
for $23.3 million, net of cash acquired, with borrowings under our
Revolving Facility.
o During the quarter, we sold the assets of our welded stainless steel
tubing business for $16.5 million and sold certain assets and
intellectual property of our heat exchanger machinery and equipment
business for $1.7 million. The combined gain on these sales of $9.6
million is reflected in other income. The proceeds from these
divestitures were used to pay down on our Revolving and Term Loan
Facilities.
Similarly, our results for the third quarter of 1998 were impacted by the
following:
o Merger fees relating to the August 1998 merger with DLJMB of $19.5
million were incurred and are included in significant legal,
professional and merger expenses (see Note 2 of the Notes to the
Condensed Consolidated Financial Statements).
o We incurred $0.4 million in legal fees relating to our antitrust cases
and other significant legal cases; these expenses are included in
significant legal, professional and merger expenses.
o We incurred $0.4 million in relocation expenses in consolidating our
Great Lake and General ThermoDynamics company locations and this
amount is included in severance, writedowns and other.
o We incurred severance costs relating to corporate staff reductions of
$0.7 million and this amount is included in severance, writedowns and
other.
Our net sales for the three months ended September 30, 1999 increased $9.2
million, or 7%, to $144.3 million from $135.1 million for the same period last
year. Sales in the Automotive Components segment increased $2.8 million, or 5%,
over last year. Sales in the Technologies segment increased $13.2 million or
29%. Contributing to these sales increases were $17.0 million from this year's
acquisitions of EFI in January and TTP in July and lasts year's acquisition of
two cable assembly operations in Ireland, which began reporting in the fourth
quarter of 1998. Seasonal
20
sales from the Specialty Publishing segment decreased by $1.4 million, or 5%,
from last year, because of accelerated yearbook shipments in the previous
quarters. Finally, other segment sales, which consisted of heat exchanger
machinery and equipment and welded stainless steel tubing products, declined
$5.4 million, or 63%, due to the divestiture of the welded stainless steel
tubing products business and the heat exchanger machinery and equipment
business.
Operating income for the three months ended September 30, 1999 increased $20.9
million to $9.2 million from a loss of ($11.7) million for the same period last
year. The 1999 and 1998 results reflect $1.3 million and $21.0 million,
respectively, in charges and expenses relating to the actions mentioned earlier.
Without these charges, operating income for the three months ended September 30,
1999, would have increased $1.2 million to $10.5 million from $9.3 million for
the same period last year. Operating income for the Automotive Components
segment declined $1.1 million, or 20%, reflecting continued weakness in demand
for aftermarket heat exchangers and tubing and lower sales of transmission
components. Operating income from the Technologies segment increased $0.9
million, or 19%, as a result of improved power transformer margins, increased
utilization of lower-cost manufacturing facilities, ongoing cost reductions and
the results from the acquired businesses. Operating income from the Specialty
Publishing segment rose $0.8 million, or 114%, as a result of process
improvements and improved on-time deliveries. Other segment operating income
decreased $0.3 million as a result of the divestitures. Lower corporate expenses
reflect corporate staff reductions made at the end of June 1999.
Interest expense for the quarter ended September 30, 1999 increased $2.6 million
to $9.4 million from $6.8 million last year, reflecting the higher interest
rates of our 1998 debt offerings and higher debt levels as a result of our
acquiring EFI and Thermal Transfer Products and the merger with DLJMB.
Other income increased $9.4 million due to the gain recorded on the sale of our
welded stainless steel tubing products business (Romac), recorded in the
current quarter.
We had an income tax expense for the period of $1.2 million compared to a
benefit of $5.3 million last year due to the pre-tax loss in the third quarter
of 1998. The effective income tax expense rate of 11% for the third quarter of
1999 increased from the 1998 third quarter income tax benefit rate of 30%. This
increase was due to the increase in net income to $9.2 million for the third
quarter of 1999 from the 1998 third quarter net loss of $12.1 million, primarily
due to the gain on sale of the welded stainless steel tubing business in the
quarter ended September 30, 1999.
AUTOMOTIVE COMPONENTS SEGMENT. Net sales for the quarter increased $2.8 million,
or 5%, to $56.2 million from $53.4 million in the same period last year. Current
quarter sales benefited $5.6 million from our acquisition of Thermal Transfer
Products, which was acquired July 20, 1999. Weakness in demand for aftermarket
heat exchangers and tubing and lower sales of transmission components, as well
as an unfavorable foreign currency exchange rate relative to our Germany based
business unit resulted in lower sales for the quarter.
Operating income for the period decreased $1.1 million, or 20%, to $4.3 million
from $5.4 million last year. This decline was primarily the result of the lower
sales, especially lower copper and brass tubing sales, which generally provide
higher margins. Operating margins fell to 7.6% from 10.0% last year, reflecting
the tubing mix change and lower sales.
TECHNOLOGIES SEGMENT. Net sales for the period increased $13.2 million, or 29%,
to $58.9 million from $45.7 million last year. Sales from our acquisition of EFI
and two cable assembly operations in Ireland, which began reporting after
September 30, 1998, accounted for approximately $11.5 million in new revenues.
Higher power transformer sales and domestic wire and cable assembly sales were
partially offset by lower sales of patch cord assemblies. Connector sales
continue to reflect pricing pressures on certain connector products.
Operating income for the quarter increased $0.9 million, or 19%, to $5.7 million
from $4.8 million last year. The increase was due to the higher sales and the
rationalization of our manufacturing facilities to better utilize our lower cost
facilities, particularly for cable assemblies and transformer products and the
results of the acquired businesses.
21
Operating margins fell to 9.7% from 10.5% last year reflecting product mix
changes and pricing pressures on certain connector products.
SPECIALTY PUBLISHING SEGMENT. Sales decreased by $1.4 million, or 5%, from last
year, because of accelerated yearbook shipments in the previous quarters.
Operating income rose $0.8 million, or 114%, reflecting cost reduction
activities and productivity improvements implemented last year.
OTHER SEGMENT. Net sales declined $5.4 million, or 63%, to $3.1 million from
$8.5 million last year. The decline was due to the divestiture of the welded
stainless steel tubing products business and the heat exchanger machinery and
equipment business.
Other segment operating income decreased $0.3 million to $0.1 million from $0.4
million last year as a result of the divestitures.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
------------------------------------------------------------------
SEPTEMBER 30, 1998
------------------
CONSOLIDATED RESULTS OF OPERATIONS. Our results for the first nine months of
1999 were impacted by the following:
o We announced the closing of our heat exchanger machinery and equipment
business (McKenica) and took a $5.8 million charge relating to this
action, which is included in severance, writedowns and other.
o We announced the closing of our Duncan, South Carolina heat exchanger
tubing manufacturing facility and took a $0.5 million charge relating
to this action, which is included in severance, writedowns and other.
o We announced the restructuring of our corporate staff and rationalized
activities within our operating units and took a $4.3 million charge
relating to this action, which is included in severance, writedowns
and other.
o As part of our reorganization, we created a separate legal entity to
better manage our future health care costs. Consulting fees relating
to the analysis of potential cost benefits and the expense of
establishing this subsidiary were $1.8 million and are included in
significant legal, professional and merger expenses.
o We incurred $0.7 million of legal fees relating to our antitrust and
other significant legal cases, which are included in significant
legal, professional and merger expenses.
o During the period, we acquired EFI and TTP with $48.7 million of
borrowings under our Revolving Facility.
o We sold the assets of our welded stainless steel tubing business for
$16.5 million and sold certain assets and intellectual property of our
heat exchanger machinery and equipment business for $1.7 million. The
combined gain on these sales of $9.6 million is reflected in other
income. The proceeds from these divestitures were used to pay down on
our Revolving and Term Loan Facilities.
Similarly, our results for the first nine months of 1998 were impacted by the
following:
o Merger fees relating to the August 1998 merger with DLJMB of $20.8
million were incurred and are included in significant legal,
professional and merger expenses (see Note 2 of the Notes to the
Condensed Consolidated Financial Statements).
o We incurred $1.4 million in legal fees relating to our antitrust and
other significant legal cases; these expenses are included in
significant legal, professional and merger expenses.
o We incurred $0.4 million in relocation expenses in consolidating our
Great Lake and General ThermoDynamics company locations; this amount
is included in severance, writedowns and other.
o We incurred severance costs relating to corporate staff reductions of
$1.4 million; these amounts are included in severance, writedowns and
other.
Our net sales for the nine months ended September 30, 1999 increased $27.2
million, or 6%, to $449.6 million from $422.4 million for the same period last
year. Sales in the Automotive Components segment increased $7.0 million, or 4%,
over last year. Sales in the Technologies segment increased $25.4 million, or
18%. Contributing to these sales
22
increases were $30.7 million from this year's acquisition of EFI in January, TTP
in July 1999 and last year's acquisition of two cable assembly operations in
Ireland. Seasonal sales from the Specialty Publishing segment were flat with the
prior year. Finally, other segment sales, which include heat exchanger machinery
and equipment and welded stainless steel tubing products, declined by $5.3
million or, 23%, from the prior year as a result of our divesting the two
business units that comprise this segment.
Operating income for the nine months ended September 30, 1999 increased $10.6
million, or 86%, to $22.9 million from $12.3 million for the same period last
year. The 1999 and 1998 results reflect $13.1 million and $24.0 million,
respectively, in charges and expenses relating to the actions mentioned earlier.
Without these charges, operating income for the nine months ended September 30,
1999 would have decreased $0.3 million to $36.0 million from $36.3 million for
the same period last year. Operating income for the Automotive Components
segment declined $2.1 million or 11%. Aftermarket tubing sales, which generally
provide higher margins for our tubing products, have lagged behind the prior
year and are offsetting higher operating income from our vehicle heat exchanger
products. Operating income from the Technologies segment declined $2.2 million,
or 13%, as a result of lower sales in core product lines reflecting a weakness
in worldwide demand for electronic components during the first half of 1999.
Operating income from the Specialty Publishing segment rose $3.1 million, or
54%, as a result of process improvements and improved on-time deliveries. Other
segment operating income decreased $0.2 million, or 23%, due to the
divestitures. Lower corporate expenses reflect corporate staff reductions made
at the end of June 1999.
Interest expense for the nine months ended September 30, 1999 increased $7.2
million to $27.8 million from $20.6 million last year, reflecting the higher
interest rates of our 1998 debt offerings and higher debt levels as a result of
our acquiring EFI and Thermal Transfer Products and the merger with DLJMB.
Other income increased $8.2 million due to the gain recorded on the sale of our
welded stainless steel tubing products business (Romac).
Income tax expense of $1.2 million for the period was flat compared to last
year. Our year to date effective tax expense rate of 14% for the nine-month
period ended September 30, 1999 decreased from the prior year effective tax
expense rate of 33%. This decrease occurred because the merger expenses incurred
in the prior year were mainly not tax deductible, while the gain on the sale of
a business was not taxable in the current year.
AUTOMOTIVE COMPONENTS SEGMENT. Net sales for the nine-month period increased
$7.0 million, or 4%, to $169.3 million from $162.3 million in the same period
last year. Sales benefited $5.6 million from our acquisition of Thermal Transfer
Products, which was acquired July 20, 1999. Transmission component, vehicle heat
exchanger, and heat exchanger tubing sales were up 3%, collectively, from the
same period last year. Copper and brass tubing sales, which generally provide
higher margins, declined 26% from the same period last year due to weaker demand
for industrial and aftermarket radiators. Sales of industrial radiators trail
last year's same period revenues by 11%.
Operating income for the period decreased $2.1 million, or 11%, to $16.3 million
from $18.4 million last year. This decline was the result of lower copper and
brass tubing sales. Operating margins fell to 9.6% from 11.3% last year,
reflecting the tubing mix change and lower industrial radiator sales.
TECHNOLOGIES SEGMENT. Net sales for the period increased $25.4 million, or 18%,
to $170.2 million from $144.8 million last year. Sales from our acquisition of
EFI and two cable assembly operations in Ireland, which began reporting after
September 30, 1998, accounted for approximately $30.7 million in new revenues.
Offsetting these new revenues were lower domestic cable assembly, transformer,
precision stampings and patch cord assembly sales, reflecting inventory
corrections and weakness in worldwide demand for electronic components during
the first half of 1999.
Operating income declined $2.2 million, or 13%, to $15.2 million from $17.4
million last year. The decline was due to the lower sales mentioned above.
Operating margins fell to 8.9% from 12.0% last year reflecting product mix
changes and pricing pressures on certain connector products.
23
SPECIALTY PUBLISHING SEGMENT. Seasonal net sales were flat with the prior year
at $92.0 million.
Operating income rose $3.1 million, or 54%, to $8.8 million from $5.7 million,
as a result of process improvements and improved on-time deliveries.
OTHER SEGMENT. Net sales decreased $5.3 million due to the divestitures.
Operating income decreased $0.2 million, or 23%, due to the divestitures.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. For the nine months ended September 30, 1999, net cash
used in operating activities was $2.0 million compared to $22.9 million used in
operating activities during same period last year. The $20.9 million reduction
in cash requirements was due to increased net income and improved working
capital management, including inventories and accounts payable.
Through September 30, 1999, we paid $11.0 million in interest on our 12% Senior
Subordinated Notes due 2007.
INVESTING ACTIVITIES. Capital expenditures for the nine months ended September
30, 1999 were $5.0 million less than the comparable period for 1998. We expect
our 1999 capital expenditures to be slightly less than 1998. Capital spending
allocations during the period were 45% to the Automotive Components segment and
47% to the Technologies segment.
We borrowed $48.7 million under our Revolving Facility to acquire of EFI and
Thermal Transfer. Year-to-date, we have received cash dividends of $5.2 million
from our investment in Thermalex compared to $1.3 million received year-to-date
last year. We also received an additional $5.2 million in cash dividends on
October 27, 1999.
We received proceeds of $16.5 million on the sale of our welded stainless steel
tubing products business and $1.7 million of proceeds from the sale of certain
equipment and intellectual property of our heat exchanger machinery and
equipment business.
FINANCING ACTIVITIES. During the first nine months of 1999, we purchased the
remaining $1.5 million of outstanding 10 1/4% Senior Notes. We used the
proceeds, from the divestitures, discussed in Investing Activities, to pay down
our Revolving and Term Loan Facilities.
We expect our principal sources of liquidity to be from our operating activities
and funding from the Revolving Facility. We are also investigating the potential
divestiture of business units that no longer meet our long-term strategic goals.
We expect that these sources will enable us to meet our cash requirements for
working capital, capital expenditures, interest, taxes, debt repayments and to
execute our acquisition strategies for the foreseeable future.
ACCUMULATED DEFICIT. At September 30, 1999, we had a stockholder's deficit
totaling $131.0 million, which is a result of both the Mergers (see Note 2 of
the Notes to the Condensed Consolidated Financial Statements) and the 1997 share
repurchases as described in our Annual Report on Form 10-K for the year ended
December 31, 1998.
MARKET RISK AND RISK MANAGEMENT
Our general policy is to use foreign currency borrowings as needed to finance
our foreign currency denominated assets. We use such borrowings to reduce our
asset exposure to the effects of changes in exchange rates - not as speculative
investments. As of September 30, 1999, we did not have any derivative
instruments in place for managing foreign currency exchange rate risks.
24
At the end of the third quarter of 1999, we had $235.6 million in variable rate
debt outstanding. A one-percentage point increase in interest rates would
increase the amount of annual interest paid by approximately $2.3 million. As of
September 30, 1999, we had no interest rate derivative instruments in place for
managing interest rate risks.
THE YEAR 2000 ISSUES
As is more fully described in our Annual Report on Form 10-K for the year ended
December 31, 1998, we commenced an assessment in 1996 of the potential effects
of the Year 2000 issue on our business, financial condition and results of
operations. The costs incurred to implement our Year 2000 compliance program
have been immaterial. Our management estimates future costs of addressing the
potential Year 200 issue will remain immaterial. Our Year 2000 compliance
program is directed primarily towards ensuring that we will be able to continue
to perform three critical functions: (i) make and sell products; (ii) order and
receive raw material and supplies; and (iii) pay our employees and vendors. It
is difficult, if not impossible, to assess with any degree of accuracy the
impact on any of these three areas of the failure of one or more aspects of our
compliance program.
The novelty and complexity of the issues presented and the proposed solutions
therefore and our dependence on the technical skills of employees and
independent contractors and on the representations and preparedness of their
parties are among the factors that could cause our efforts to be less than fully
effective. Moreover, Year 2000 compliance issues present a number of risks that
are beyond our reasonable control, such as failure of utility companies to
deliver electricity, the failure of telecommunications companies to provide
voice and data services, the failure of financial institutions to process
transactions and transfer funds, the failure of vendors to deliver materials and
perform services required by us and the collateral effects on us of the effects
of Year 2000 issues on the economy in general or on our customers in particular.
Although we believe that our Year 2000 compliance program has appropriately
identified and addressed potential Year 2000 issues that are subject to our
reasonable control, there can be no assurance that our efforts in this regard
will be fully effective or that Year 2000 issues will not have a material
adverse effect on our business, financial condition or results of operations.
Our Year 2000 compliance program is essentially in place, subject to numerous
assumptions about future events including the continued availability of certain
resources and other factors. Therefore, there can be no guarantee that our
program will fully address all possible Year 2000 issues and our actual results
could differ materially from our expectations. 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.
The information above contains forward-looking statements, including, without
limitation, statements relating to our plans, strategies, objectives,
expectations, intentions, and adequate resources that are made pursuant to the
"safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Readers are cautioned that forward-looking statements about Year 2000
should be read in conjunction with our disclosures under the heading FORWARD
LOOKING INFORMATION.
FORWARD-LOOKING INFORMATION
Except for the historical information contained herein, the matters discussed in
this Form 10-Q included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" include "Forward Looking Statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although we
believe that the expectations reflected in the Forward-Looking Statements
contained herein are reasonable, no assurance can be given that such
expectations will prove to have been correct. Certain important factors that
could cause actual results to differ materially from expectations ("Cautionary
Statements") include, but are not limited to the following: delays in new
product introductions; lack of market acceptance of new products; changes in
demand for our products; changes in market trends; operating hazards; general
competitive pressures from existing and new competitors; effects of governmental
regulations; changes in interest rates; and, adverse economic conditions which
could affect the amount of cash available for debt servicing and
25
capital investments. All subsequent written and oral Forward-Looking Statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The information called for by this item is provided under the caption "Market
Risk and Risk Management" under Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
26
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)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
-----------------------------------------------------
(None)
ITEM 5. OTHER INFORMATION
-----------------
(None)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
A report, dated July 20, 1999, on Form 8-K was filed during the
quarter ended September 30, 1999, pursuant to Items 2 and 7 of that
form.
A report dated August 5, 1999, on Form 8-K was filed during the
quarter ended September 30, 1999, pursuant to Items 5 and 7 of that
form.
A report dated August 24, 1999 on Form 8-K was filed during the
quarter ended September 30, 1999, pursuant to Item 5 and 7 of that
form.
A report dated July 20, 1999 on Form 8-K/A was filed with the SEC on
October 4, 1999, pursuant to Item 7 of that form.
27
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.
INSILCO CORPORATION
Date: November 5, 1999 By: /s/ Michael R. Elia
------------------------
Michael R. Elia
Vice President and
Chief Financial Officer