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 Quarterly period ended: March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURTIES EXCHANGE ACT OF 1934
For the transition period from_______________ to________________
Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
765 Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203)598-0397
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at April 30, 2004
Common Stock, $1 Par Value 7,870,677
KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 2004
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 (unaudited) 2,3
Condensed Consolidated Statements of Operations
Three Months Ended
March 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Certifications 34-37
- 1 -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
March 31, December 31,
2004 2003
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 3,996 $ 6,748
Accounts receivable, net 59,517 65,197
Inventories, net 66,865 53,545
Other current assets 4,216 1,658
--------- ---------
Total current assets 134,594 127,148
--------- ---------
OTHER ASSETS:
Goodwill 10,215 10,215
Intangibles, net 22,040 22,399
Other 9,615 10,352
--------- ---------
Total other assets 41,870 42,966
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 2,640 3,196
Buildings and improvements 14,867 17,198
Machinery and equipment 131,187 129,240
--------- ---------
148,694 149,634
Less - Accumulated depreciation (80,680) (78,040)
--------- ---------
Property and equipment, net 68,014 71,594
--------- ---------
Total assets $ 244,478 $ 241,708
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 2 -
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2004 2003
---- ----
CURRENT LIABILITIES:
Accounts payable $ 31,267 $ 37,259
Accrued compensation 5,834 6,212
Accrued expenses 38,701 40,238
Current maturities of long-term debt 1,848 2,857
Revolving credit agreement 32,763 36,000
--------- ---------
Total current liabilities 110,413 122,566
--------- ---------
REVOLVING CREDIT AGREEMENT 17,143 --
LONG-TERM DEBT, less current maturities -- 806
OTHER LIABILITIES 15,965 16,044
--------- ---------
Total liabilities 143,521 139,416
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12) -- --
--------- ---------
STOCKHOLDERS' EQUITY
15% Convertible Preferred Stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 925,750 shares,
liquidation value $101,858 and $98,396, respectively 96,969 93,507
Common stock, $1 par value authorized 35,000,000 shares,
issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 36,979 40,441
Accumulated other comprehensive income 2,833 2,387
Accumulated deficit (22,918) (21,137)
Treasury stock, at cost, 1,941,327 shares (22,728) (22,728)
--------- ---------
Total stockholders' equity 100,957 102,292
--------- ---------
Total liabilities and stockholders' equity $ 244,478 $ 241,708
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
2004 2003
---- ----
Net sales $ 99,895 $ 90,452
Cost of goods sold 83,265 76,167
-------- --------
Gross profit 16,630 14,285
Selling, general and administrative expenses (14,748) (14,818)
Severance, restructuring and related charges (1,898) (228)
-------- --------
Operating loss (16) (761)
Equity in loss of equity method investment -- (367)
Gain on sale of assets -- 753
Interest expense (800) (2,427)
Other, net (375) (4)
-------- --------
Loss before (provision) benefit for income taxes (1,191) (2,806)
(Provision) benefit for income taxes (590) 27
-------- --------
Loss from continuing operations before distributions on preferred
interest of subsidiary (1,781) (2,779)
Distributions on preferred interest of subsidiary (net of tax) -- (123)
-------- --------
Loss from continuing operations (1,781) (2,902)
Income from operations of discontinued businesses (net of tax) -- 1,058
-------- --------
Net loss (1,781) (1,844)
Gain on early redemption of preferred interest of subsidiary -- 6,560
Payment-in-kind of dividends on convertible preferred stock (3,462) (3,014)
-------- --------
Net (loss) income attributable to common stockholders $ (5,243) $ 1,702
======== ========
(Loss) income per share of common stock - Basic and diluted
(Loss) income from continuing operations attributable to common stockholders $ (0.67) $ 0.07
Discontinued operations -- 0.13
-------- --------
Net (loss) income attributable to common stockholders $ (0.67) $ 0.20
======== ========
Weighted average common shares outstanding (thousands):
Basic and diluted 7,881 8,362
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 4 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(Thousands of Dollars)
(Unaudited)
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (1,781) $ (1,844)
Income from operations of discontinued businesses -- (1,058)
-------- --------
Loss from continuing operations (1,781) (2,902)
Depreciation and amortization 3,802 5,414
Write-off and amortization of debt issuance costs 264 1,397
Gain on sale of assets -- (753)
Equity in loss of equity method investment -- 367
-------- --------
2,285 3,523
-------- --------
Changes in operating assets and liabilities:
Accounts receivable 5,956 3,743
Inventories (13,188) (8,475)
Other assets (2,514) 16
Accounts payable (6,243) (4,906)
Accrued expenses (1,923) (4,085)
Other, net (91) (717)
-------- --------
(18,003) (14,424)
-------- --------
Net cash used in continuing operations (15,718) (10,901)
Net cash used in discontinued operations -- (2,589)
-------- --------
Net cash used in operating activities (15,718) (13,490)
-------- --------
Cash flows from investing activities:
Capital expenditures of continuing operations (2,415) (1,258)
Capital expenditures of discontinued operations -- (57)
Proceeds from sale of assets 3,673 1,900
-------- --------
Net cash provided by investing activities 1,258 585
-------- --------
Cash flows from financing activities:
Net borrowings on revolving loans 13,906 5,651
Proceeds of term loans -- 20,000
Repayments of term loans (1,815) --
Direct costs associated with debt facilities (209) (886)
Redemption of preferred interest of subsidiary -- (9,840)
Repayment of real estate and chattel mortgages -- (700)
-------- --------
Net cash provided by financing activities 11,882 14,225
-------- --------
Effect of exchange rate changes on cash and cash equivalents (174) (66)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,752) 1,254
Cash and cash equivalents, beginning of period 6,748 4,842
-------- --------
Cash and cash equivalents, end of period $ 3,996 $ 6,096
======== ========
See Notes to Condensed Consolidated Financial Statements
- 5 -
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(1) Significant Accounting Policies
Consolidation Policy and Basis of Presentation
The condensed consolidated financial statements include the accounts of
Katy Industries, Inc. and subsidiaries in which it has a greater than 50%
interest, collectively "Katy" or "the Company". All significant intercompany
accounts, profits and transactions have been eliminated in consolidation.
Investments in affiliates that are not majority owned and where the Company
exercises significant influence are reported using the equity method. The
condensed consolidated financial statements at March 31, 2004 and December 31,
2003 and for the three month periods ended March 31, 2004 and March 31, 2003 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial condition and results of operations of the
Company. Interim results may not be indicative of results to be realized for the
entire year. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Inventories
The components of inventories are as follows:
March 31, December 31,
2004 2003
---- ----
(Thousands of dollars)
Raw materials $ 21,729 $ 18,664
Work in process 1,748 1,573
Finished goods 47,801 38,938
Inventory reserves (4,413) (5,630)
-------- --------
$ 66,865 $ 53,545
======== ========
At March 31, 2004 and December 31, 2003, approximately 34% and 35%,
respectively, of Katy's inventories were accounted for using the last-in,
first-out ("LIFO") method of costing, while the remaining inventories were
accounted for using the first-in, first-out ("FIFO") method. Current cost, as
determined using the FIFO method, exceeded LIFO cost by $1.7 million and $1.9
million at March 31, 2004 and December 31, 2003, respectively.
Property, Plant and Equipment
Property and equipment are stated at cost and depreciated over their
estimated useful lives: buildings (10-40 years) generally using the
straight-line method; machinery and equipment (3-20 years) using straight-line
or composite methods; tooling (5 years) using the straight-line method; and
leasehold improvements using the straight-line method over the remaining lease
period or useful life, if shorter. Costs for repair and maintenance of machinery
and equipment are expensed as incurred, unless the result significantly
increases the useful life or functionality of the asset, in which case
capitalization is considered. Depreciation expense from continuing operations
was $3.4 million and $4.8 million in the three-month periods ending March 31,
2004 and 2003, respectively.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset Retirement Obligations, the Company has recorded an
asset and related liability for retirement obligations associated with returning
certain leased properties to the respective lessors upon the termination of the
lease agreements.
- 6 -
Stock Options and Other Stock Awards
The Company follows the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, regarding accounting
for stock options and other stock awards. APB Opinion No. 25 dictates a
measurement date concept in the determination of compensation expense related to
stock awards including stock options, restricted stock, and stock appreciation
rights. Katy's outstanding stock options all have established measurement dates
and therefore, fixed plan accounting is applied, generally resulting in no
compensation expense for stock option awards. However, the Company has issued
stock appreciation rights and restricted stock awards which are accounted for as
variable stock compensation awards and compensation expense or income has been
recorded for these awards. No compensation expense or income was recorded
relative to restricted stock awards during the three months ended March 31, 2004
and 2003, respectively. Compensation income recorded associated with the vesting
of stock appreciation rights was $20.0 thousand and $17.0 thousand for the three
months ended March 31, 2004 and 2003, respectively. Compensation expense or
income for stock awards and stock appreciation rights is recorded in selling,
general and administrative expenses in the Condensed Consolidated Statements of
Operations.
SFAS No. 123, Accounting for Stock-Based Compensation, was issued and, if
fully adopted by the Company, would change the method for recognition of expense
related to option grants to employees. Under SFAS No. 123, compensation cost
would be recorded based upon the fair value of each option at the date of grant
using an option-pricing model that takes into account as of the grant date the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. No options
were granted during the three months ended March 31, 2004 and 2003,
respectively.
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This standard provides alternative methods of transition for a
voluntary change to the fair value based methods of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 were adopted by the Company at December
31, 2002. Katy will continue to comply with the provisions under APB Opinion No.
25 for accounting for stock-based employee compensation.
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with an expected life of five to ten
years for all grants. Had compensation cost been determined based on the fair
value method of SFAS No. 123, the Company's net (loss) income and (loss)
earnings per share would have been adjusted to the pro forma amounts indicated
below (thousands of dollars, except per share data).
Three Months
Ended March 31,
2004 2003
---- ----
Net (loss) income attributable to common stockholders, as reported $ (5,243) $ 1,702
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (96) (30)
-------- --------
Pro forma net (loss) income $ (5,339) $ 1,672
======== ========
(Loss) earnings per share
Basic and diluted - as reported $ (0.67) $ 0.20
Basic and diluted - pro forma $ (0.68) $ 0.20
- 7 -
(2) New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. The
consolidation provisions of FIN 46 were originally effective for financial
periods ending after July 15, 2003. In October 2003, the FASB issued Staff
Position FIN 46-6, "Effect Date of FIN46," which delays the implementation date
to financial periods ending after December 31, 2003. In December 2003, the FASB
published a revision to FIN 46 (FIN 46-R) to clarify some of the provisions of
FIN 46, and to exempt certain entities from its requirements. The adoption of
these standards did not have a material impact on the Company's consolidated
financial position, consolidated results of operations or consolidated cash
flows.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) became law in the U.S. The act introduces a
prescription drug benefit under Medicare, as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide retiree benefits in
certain circumstances. It is not yet clear what impact, if any, the new
legislation will have on Katy's postretirement health care plans. The
accumulated postretirement benefit obligation (APBO) reflected in the other
liabilities section of the accompanying Condensed Consolidated Balance Sheet,
and the net periodic postretirement benefit cost (NPPBC) reflected in the
accompanying Condensed Consolidated Statement of Operations do not reflect the
effects, if any, of the Act. Specific authoritative guidance from the FASB on
the proper accounting for any such effect is pending and may require in the
future that Katy change APBO and NPPBC amounts disclosed herein.
(3) Intangible Assets
Following is detailed information regarding Katy's intangible assets (in
thousands):
March 31, December 31,
2004 2003
---------- ------------
Tradenames $ 9,160 $ 9,160
Customer lists 21,908 21,890
Patents 2,725 2,689
Non-compete agreements 1,000 1,000
---------- ----------
Subtotal 34,793 34,739
Accumulated amortization (12,753) (12,340)
---------- ----------
Intangible assets, net $ 22,040 $ 22,399
========== ==========
All of Katy's intangible assets are definite long-lived intangibles. Katy
recorded amortization expense on intangible assets of $0.4 million and $0.6
million in the three-month periods ending March 31, 2004 and 2003, respectively.
Estimated aggregate future amortization expense related to intangible assets is
as follows (in thousands):
2004 $1,654
2005 1,654
2006 1,651
2007 1,647
2008 1,642
(4) Discontinued Operations
Two of Katy's operations have been classified as discontinued operations
as of and for the three months ended March 31, 2003, in accordance with SFAS No.
144, Accounting for the Impairments or Disposal of Long Lived Assets. There was
no discontinued operations activity in the first quarter of 2004.
Duckback Products, Inc. (Duckback) was sold on September 16, 2003, with
Katy collecting net proceeds of $16.2 million. The proceeds were used to pay
down a portion of the Company's term loan and revolving credit line. A gain (net
of tax) of $7.6 million was recognized in the third quarter of 2003 as a result
of the Duckback sale.
GC/Waldom Electronics, Inc. (GC/Waldom) was sold on April 2, 2003, with
Katy collecting net proceeds of $7.4 million. The proceeds were used to pay down
a portion of the Company's term loan and revolving credit line. A loss (net of
tax) of $0.2 million was recognized in the second quarter of 2003 as a result of
the GC/Waldom sale.
- 8 -
Duckback was historically presented as part of the Maintenance Products
Group for segment reporting purposes, while GC/Waldom was historically presented
as part of the Electrical Products Group. Management and the board of Katy
determined that these businesses were not core to the Company's long-range
strategic goals.
The historical operating results have been segregated as discontinued
operations on the Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003. As of March 31, 2004 and December 31, 2003, there
were no discontinued operations. Selected financial data for the discontinued
operations is summarized as follows (in thousands):
Three months ended
March 31, 2003
------------------
Net sales $ 11,420
Pre-tax profit $ 1,628
Katy anticipates that SFAS No. 144 will likely continue to have a future
impact on its financial reporting as 1) Katy is considering further divestitures
of certain businesses and exiting of certain facilities and operational
activities, 2) the statement broadens the presentation of discontinued
operations, and 3) the Company anticipates that impairments of long-lived assets
may be necessitated as a result of the above contemplated actions. If certain
divestitures occur, they may qualify as discontinued operations under SFAS No.
144, whereas they would have not met the requirements of discontinued operations
treatment under APB Opinion No. 30. However, the Company does not feel that it
is probable that these divestitures will occur within one year, and notes that
significant changes to plans or intentions may occur. Therefore, these
operations have not presently been classified as discontinued operations.
(5) SESCO Partnership
On April 29, 2002, SESCO, an indirect wholly owned subsidiary of Katy,
entered into a partnership agreement with Montenay Power Corporation and its
affiliates (Montenay) that turned over the control of SESCO's waste-to-energy
facility to the partnership. The Company caused SESCO to enter into this
agreement as a result of evaluations of SESCO's business. First, Katy concluded
that SESCO was not a core component of the Company's long-term business
strategy. Moreover, Katy did not feel it had the management expertise to deal
with certain risks and uncertainties presented by the operation of SESCO's
business, given that SESCO was the Company's only waste-to-energy facility. Katy
had explored options for divesting SESCO for a number of years, and management
felt that this transaction offered a reasonable strategy to exit this business.
The partnership, with Montenay's leadership, assumed SESCO's position in
various contracts relating to the facility's operation. Under the partnership
agreement, SESCO contributed its assets and liabilities (except for its
liability under the loan agreement with the Resource Recovery Development
Authority (the Authority) of the City of Savannah and the related receivable
under the service agreement with the Authority) to the partnership. While SESCO
has a 99% interest as a limited partner, Montenay has the day to day
responsibility for administration, operations, financing and other matters of
the partnership, and accordingly, the partnership will not be consolidated. Katy
agreed to pay Montenay $6.6 million over the span of seven years under a note
payable as part of the partnership and related agreements. Certain amounts may
be due to SESCO upon expiration of the service agreement in 2008; also, Montenay
may purchase SESCO's interest in the partnership at that time. Katy has not
recorded any amounts receivable or other assets relating to amounts that may be
received at the time the service agreement expires, given their uncertainty.
The Company made a payment of $1.0 million in July 2003 on the $6.6
million note. The table below schedules the remaining payments as of March 31,
2004 which are reflected in accrued expenses and other liabilities in the
Condensed Consolidated Balance Sheet (in thousands):
2004 $ 1,000
2005 1,050
2006 1,100
2007 1,100
2008 550
-------
$ 4,800
=======
In the first quarter of 2002, the Company recognized a charge of $6.0
million consisting of 1) the discounted value of the $6.6 million note, 2) the
carrying value of certain assets contributed to the partnership, consisting
primarily of machinery spare parts, and 3) costs to close the transaction. It
should be noted that all of SESCO's long-lived assets were reduced to a zero
value at March 31, 2002, so no additional impairment was required. On a going
forward basis, Katy would expect that income statement activity associated with
its involvement in the partnership will not be material, and Katy's Condensed
Consolidated Balance Sheet will carry the liability mentioned above.
In 1984, the Authority issued $55.0 million of Industrial Revenue Bonds
and lent the proceeds to SESCO under the loan agreement for the acquisition and
construction of the waste-to-energy facility that has now been transferred to
the partnership. The funds required to repay the loan agreement come from the
monthly disposal fee paid by the Authority under the service agreement for
certain waste disposal services, a component of which is for debt service. To
induce the required parties to consent to the SESCO partnership transaction,
SESCO retained its liability under the loan agreement. In connection with that
liability, SESCO also retained its right to receive the debt service component
of the monthly disposal fee.
Based on an opinion from outside legal counsel, SESCO has a legally
enforceable right to offset amounts it owes to the Authority under the loan
agreement against amounts that are owed from the Authority under the service
agreement. At March 31, 2004, this amount was $30.4 million. Accordingly, the
amounts owed to and due from SESCO have been netted for financial reporting
purposes and are not shown on the Condensed Consolidated Balance Sheets.
In addition to SESCO retaining its liabilities under the loan agreement,
to induce the required parties to consent to the partnership transaction, Katy
also continues to guarantee the obligations of the partnership under the service
agreement. The partnership is liable for liquidated damages under the service
agreement if it fails to accept the minimum amount of waste or to meet other
performance standards under the service agreement. The liquidated damages, an
off balance sheet risk for Katy, are equal to the amount of the Industrial
Revenue Bonds outstanding, less $4.0 million maintained in a debt service
reserve trust. Management does not expect non-performance by the other parties.
Additionally, Montenay has agreed to indemnify Katy for any breach of the
service agreement by the partnership.
Following are scheduled principal repayments on the loan agreement (and
the Industrial Revenue Bonds) as of March 31, 2004 (in thousands):
2004 $ 6,765
2005 8,370
2006 15,300
--------
Total $ 30,435
========
(6) Indebtedness
Katy's indebtedness at March 31, 2004 was comprised of amounts outstanding
under a credit facility agented by Fleet Capital Corporation that became
effective on February 3, 2003 (the Fleet Credit Agreement). This $110 million
facility was comprised of a $20 million term loan (Term Loan) and a $90 million
revolving credit line (Revolving Credit Facility). The Fleet Credit Agreement
was an asset-based lending agreement and involved a syndicate of banks.
Under the Fleet Credit Agreement, the Term Loan had a final maturity date
of January 31, 2008 with quarterly repayments of $0.7 million. The Term Loan was
collateralized by the Company's property, plant and equipment. The Revolving
Credit Facility also had an expiration date of January 31, 2008 and its
borrowing base was determined by eligible inventory and accounts receivable.
Unused borrowing availability on the Revolving Credit Facility was $17.6 million
at March 31, 2004. As discussed further below and in Note 13, the Company
refinanced the Fleet Credit Agreement on April 20, 2004. Had the new facility
been in effect on March 31, 2004, unused borrowing availability would have been
approximately $34 million.
All extensions of credit under the Fleet Credit Agreement were
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions applied under
the Fleet Credit Agreement. As of March 31, 2004, interest accrued on Revolving
Credit Facility and Term Loan borrowings at 200 basis points over applicable
London Inter-bank Offered Rates (LIBOR) rates in accordance with the provisions
of the Fleet Credit Agreement. Interest accrued at higher margins on prime rates
for swing loans, the amounts of which were nominal at March 31, 2004.
- 9 -
Long-term debt consists of the following (in thousands):
March 31, December 31,
2004 2003
---------- ------------
(Thousands of Dollars)
Term loan payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (3.25% - 4.50%), due through 2005 $ 1,848 $ 3,663
Revolving loans payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (3.25% - 4.50%) 49,906 36,000
---------- ----------
Total debt 51,754 39,663
Less revolving loans, classified as current (see below) (32,763) (36,000)
Less current maturities (1,848) (2,857)
---------- ----------
Long-term debt $ 17,143 $ 806
========== ==========
Aggregate remaining scheduled maturities of the Term Loan as of March 31,
2004 were as follows (in thousands):
2004 $1,428
2005 420
The Revolving Credit Facility under the Fleet Credit Agreement required
lockbox agreements which provided for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence of a
material adverse effect (MAE) clause in the Fleet Credit Agreement, caused the
Revolving Credit Facility to be classified as a current liability (except as
noted below), per guidance in Emerging Issues Task Force (EITF) Issue No. 95-22,
Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement. Historically, the Company did not expect to repay, or be required
to repay, within one year, the balance of the Revolving Credit Facility
classified as a current liability. However, on April 20, 2004, the Company
refinanced the Fleet Credit Agreement (the Refinancing) through an amended and
restated agreement (New Fleet Credit Agreement) whereby $17.1 million of the
Revolving Credit Facility was repaid with the non-current portion of a new term
loan. Accordingly, $17.1 million of Revolving Credit Facility borrowings were
classified as non-current as of March 31, 2004. (See Note 13 for further
information regarding the Refinancing and the New Fleet Credit Agreement). The
MAE clause, which is a typical requirement in commercial credit agreements,
allows the lender to require the loan to become due if it determines there has
been a material adverse effect on its operations, business, properties, assets,
liabilities, condition or prospects. The classification of the Revolving Credit
Facility as a current liability (except as noted above) was a result only of the
combination of the two aforementioned factors: the lockbox agreements and the
MAE clause. The Revolving Credit Facility did not expire or have a maturity date
within one year, but rather had a final expiration date of January 31, 2008.
Also, the Company was in compliance with the applicable financial covenants of
the Fleet Credit Agreement at March 31, 2004. The lender had not notified Katy
of any indication of a MAE at March 31, 2004, and to management's knowledge, the
Company was not in violation of any provision of the Fleet Credit Agreement at
March 31, 2004.
Letters of credit totaling $8.6 million were outstanding at March 31,
2004, which reduced the unused borrowing availability under the Revolving Credit
Facility.
All of the debt under the Fleet Credit Agreement was re-priced to current
rates at frequent intervals. Therefore, its fair value approximates its carrying
value at March 31, 2004.
Katy has incurred additional debt issuance costs in 2004 associated with
the New Fleet Credit Agreement. Additionally, at the time of the inception of
the New Fleet Credit Agreement, Katy had approximately $4.0 million of
unamortized debt issuance costs associated with the Fleet Credit Agreement. The
remainder of the previously capitalized costs, along with the capitalized costs
from the New Fleet Credit Agreement, will be amortized over the life of the New
Fleet Credit Agreement through April 2009. Future quarterly amortization expense
is expected to be approximately $0.3 million. Also during the first quarter of
2004, Katy incurred fees and expenses of $0.4 million (reported in Other, net on
the
- 10 -
Condensed Consolidated Statement of Operations) associated with a financing
which the Company chose not to pursue.
(7) Retirement Benefit Plans
Several subsidiaries have pension plans covering substantially all of
their employees. These plans are noncontributory, defined benefit pension plans.
The benefits to be paid under these plans are generally based on employees'
retirement age and years of service. The companies' funding policies, subject to
the minimum funding requirement of employee benefit and tax laws, are to
contribute such amounts as determined on an actuarial basis to provide the plans
with assets sufficient to meet the benefit obligations. Plan assets consist
primarily of fixed income investments, corporate equities and government
securities. The Company also provides certain health care and life insurance
benefits for some of its retired employees. The post-retirement health plans are
unfunded. Katy uses an annual measurement date of December 31 for the majority
of its pension and other postretirement benefit plans for all years presented.
Information regarding the Company's net periodic benefit cost for pension and
other postretirement benefit plans as of March 31, 2004 is as follows:
Pension Benefits Other Benefits
---------------- --------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
(Thousands of dollars)
Components of net periodic benefit cost:
Service cost $ 1 $ 19 $ 7 $ 7
Interest cost 32 38 40 42
Expected return on plan assets (33) (37) -- --
Amortization of prior service cost -- -- 15 15
Amortization of net gain 17 18 -- --
------- ------- ------- -------
Net periodic benefit cost $ 17 $ 38 $ 62 $ 64
======= ======= ======= =======
There are no required contributions to the pension plans for 2004 and Katy
did not make any contributions during the first quarter of 2004.
(8) Preferred Interest in Subsidiary
Coincident with a refinancing of Katy's debt obligations on February 3,
2003, the Company redeemed early, at a discount, the remaining preferred
interest in a subsidiary, plus accrued distributions thereon, which had a stated
value of $16.4 million. Katy utilized $10.0 million of the proceeds from the
Fleet Credit Agreement for this purpose, with $9.8 million applied toward the
preferred interest and the remainder applied toward accrued distributions
through the date of the redemption. The difference between the amount paid on
redemption and the stated value of preferred interest redeemed ($6.6 million
pre-tax) was recognized as an increase to Additional paid-in capital on the
Condensed Consolidated Balance Sheets, and is an addition to earnings available
to common stockholders in the calculation of basic and diluted earnings per
share during 2003.
(9) Income Taxes
As of December 31, 2003, the Company had deferred tax assets, net of
deferred tax liabilities, of $46.2 million. Domestic net operating loss (NOL)
carry forwards comprised $26.3 million of the deferred tax assets. Katy's
history of operating losses provides significant negative evidence with respect
to the Company's ability to generate future taxable income, a requirement in
order to recognize deferred tax assets on the Condensed Consolidated Balance
Sheets. For this
- 11 -
reason, the Company was unable at March 31, 2004 and December 31, 2003 to
conclude that NOLs and other deferred tax assets would be utilized in the
future. As a result, valuation allowances were recorded as of such dates for the
full amount of deferred tax assets, net of the amount of deferred tax
liabilities.
The provision/benefit for income taxes reflected on the Condensed
Consolidated Statements of Operations for the three months ended March 31, 2004
and 2003 represents current tax expense associated with federal, state and
foreign taxes and additional provisions against originating deferred income tax
assets.
(10) Commitments and Contingencies
As set forth more fully in the Company's 2003 Annual Report on Form 10-K,
the Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions are involved in remedial activities at
certain present and former locations and have been identified by the United
States Environmental Protection Agency, state environmental agencies and private
parties as potentially responsible parties (PRPs) at a number of hazardous waste
disposal sites under the Comprehensive Environmental Response, Compensation and
Liability Act (Superfund) or equivalent state laws and, as such, may be liable
for the cost of cleanup and other remedial activities at these sites.
Responsibility for cleanup and other remedial activities at a Superfund site is
typically shared among PRPs based on an allocation formula. Under the federal
Superfund statute, parties could be held jointly and severally liable, thus
subjecting them to potential individual liability for the entire cost of cleanup
at the site. Based on its estimate of allocation of liability among PRPs, the
probability that other PRPs, many of whom are large, solvent, public companies,
will fully pay the costs apportioned to them, currently available information
concerning the scope of contamination, estimated remediation costs, estimated
legal fees and other factors, the Company has recorded and accrued for
environmental liabilities at amounts that it deems reasonable and believes that
any liability with respect to these matters in excess of the accruals will not
be material. The ultimate costs will depend on a number of factors and the
amount currently accrued represents management's best current estimate of the
total costs to be incurred. The Company expects this amount to be substantially
paid over the next one to four years.
The W. J. Smith matter originated in the 1980s when the United States and
the State of Texas, through the Texas Water Commission, initiated environmental
enforcement actions against W.J. Smith alleging that certain conditions on the
W.J. Smith property (the "Property") violated environmental laws. In order to
resolve the enforcement actions, W.J. Smith engaged in a series of cleanup
activities on the Property and implemented a groundwater monitoring program.
In 1993, the United States Environmental Protection Agency (EPA) initiated
a proceeding under Section 7003 of the Resource Conservation and Recovery Act
against W.J. Smith and Katy. The proceeding sought certain actions at the site
and at certain off-site areas, as well as development and implementation of
additional cleanup activities to mitigate off-site releases. In December 1995,
W.J. Smith, Katy and USEPA agreed to resolve the proceeding through an
Administrative Order on Consent under Section 7003 of RCRA. W.J. Smith and Katy
have completed the cleanup activities required by the Order. W.J. Smith is
currently implementing an RCRA facility investigation of the site and an
investigation of certain off-site areas pursuant to a request from the U.S. EPA.
Since 1990, the Company has spent in excess of $7.0 million undertaking
cleanup and compliance activities in connection with this matter. While ultimate
liability with respect to this matter is not easy to determine, the Company has
recorded and accrued amounts that it deems reasonable for prospective
liabilities with respect to this matter and believes that any additional
liability with respect to this matter in excess of the accrual will not be
material.
In addition to the administrative claim specifically identified above, a
purported class action lawsuit was filed by twenty individuals in federal court
in the Marshall Division of the Eastern District of Texas, on behalf of
"landowners and persons who reside and/or work in" an identified geographical
area surrounding the W.J. Smith Wood Preserving facility in Denison, Texas. The
lawsuit purported to allege claims under state law for negligence, trespass,
nuisance and assault and battery. It sought damages for personal injury and
property damage, as well as punitive damages. The named defendants were Union
Pacific Corporation, Union Pacific Railroad Company, Katy Industries and W.J.
Smith Wood Preserving Company, Inc. On June 10, 2002, Katy and W.J. Smith filed
a motion to dismiss the case for lack of federal jurisdiction, or in the
alternative, to transfer the case to the Sherman Division. In response,
plaintiffs filed a motion for leave to amend the complaint to add a federal
claim under the Resource Conservation and Recovery Act. On July 30, 2002, the
court dismissed plaintiffs' lawsuit in its entirety.
On July 31, 2002, plaintiffs filed a new lawsuit against the same
defendants, again in the Marshall Division of the Eastern District of Texas,
alleging property damage class action claims under the federal Comprehensive
Environmental Response Compensation & Liability Act (CERCLA), as well as state
common law theories. While Plaintiffs' counsel has confirmed that Plaintiffs are
no longer seeking class-wide relief for personal injury claims, certain
Plaintiffs continue to allege individual common law claims for personal injury.
Because certain threshold issues, including the basis for federal jurisdiction,
statute of limitations defenses and class certification, have not yet been fully
evaluated in this litigation, it is not possible at this time for Katy to
reasonably determine an outcome or accurately estimate the range of potential
exposure. Katy and W.J. Smith filed a motion to dismiss the lawsuit or, in the
alternative, to transfer venue. In response, plaintiffs filed a motion for leave
to amend the complaint. The court granted plaintiffs' motion to amend and denied
Katy and W.J. Smith's motion to dismiss or transfer venue. On September 5, 2003,
the court entered an Amended Agreed Initial Case Management Order limiting
discovery during an initial phase to the threshold issues. The Company has
deposed all of the proposed class representatives and on October 31, 2003, filed
a motion for summary judgment on the grounds that the court lacks jurisdiction
and Plaintiffs' claims are barred by the applicable statute of limitations.
Plaintiffs filed a motion for class certification on the property damage claims
on that date as well. Both motions are fully briefed. No dates are currently set
for the Court's hearing and ruling on these motions. A determination of ultimate
liability with respect to this matter is not estimable art this time.
In December 1996, Banco del Atlantico ("plaintiff"), a bank located in
Mexico, filed a lawsuit in Texas against Woods, a subsidiary of Katy, and
against certain past and/or then present officers, directors and former owners
of Woods (collectively, "defendants"). The plaintiff alleges that the defendants
participated in violations of the Racketeer Influenced and Corrupt Organizations
Act ("RICO") involving allegedly fraudulently obtained loans from Mexican banks,
including the plaintiff, and "money laundering" of the proceeds of the illegal
enterprise. In its recently-filed Amended Complaint, the plaintiff also alleges
violations of the Indiana RICO and Crime Victims Act. All of the foregoing is
alleged to have occurred prior to Katy's purchase of Woods.
The plaintiff alleges that it made loans to a Mexican corporation
controlled by certain past officers and directors of Woods based upon fraudulent
representations and guarantees. In addition to its fraud, conspiracy, and RICO
claims, the plaintiff seeks recovery upon certain alleged guarantees purportedly
executed by Woods Wire Products, Inc., a predecessor company from which Woods
purchased certain assets in 1993. The primary legal theories under which the
plaintiff seeks to hold Woods liable for its alleged damages are respondeat
superior, conspiracy, successor liability, or a combination of the three.
On March 31, 2003, the court in the Southern District of Texas ordered
that the case be transferred to the Southern District of Indiana on the ground
that Indiana has a closer relationship to this case than Texas.
The case is currently pending in the Southern District of Indiana. The
plaintiff filed its Amended Complaint on December 17, 2003. The defendants filed
motions to dismiss the Amended Complaint on February 17, 2004. All
- 12 -
defendants have moved to dismiss the Amended Complaint and all claims contained
within it on grounds of forum non conveniens and comity. All defendants have
also moved to dismiss the Indiana RICO and Indiana Crime Victims Act claims as
barred by the applicable statutes of limitations. Additionally, Woods and
certain other defendants have separately moved to dismiss certain claims of the
Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b)
for failure to state a claim upon which relief can be granted. The plaintiff
filed responses to these motions to dismiss on April 19, 2004, and defendants'
replies in support of their various motions to dismiss are due on May 19, 2004.
The parties are currently engaged in discovery. On April 14, 2004, the Court set
the trial for this action (assuming any is needed) for October 2005.
The plaintiff is claiming damages in excess of $24 million and is
requesting that damages be trebled under Indiana and federal RICO, and/or the
Indiana Crime Victims Act. Because defendants' motions to dismiss have not yet
been fully briefed and certain jurisdictional issues have not yet been fully
adjudicated, it is not possible at this time for the Company to reasonably
determine an outcome or accurately estimate the range of potential exposure.
Katy may have recourse against the former owner of Woods and others for, among
other things, violations of covenants, representations and warranties under the
purchase agreement through which Katy acquired Woods, and under state, federal
and common law. Woods may also have indemnity claims against the former officers
and directors. In addition, there is a dispute with the former owners of Woods
regarding the final disposition of amounts withheld from the purchase price,
which may be subject to further adjustment as a result of the claims by the
plaintiff. The extent or limit of any such adjustment cannot be predicted at
this time.
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome on certain claims. With respect to the
product liability and workers' compensation claims, Katy has provided for its
share of expected losses beyond the applicable insurance coverage, including
those incurred but not reported to the Company or its insurance providers, which
are developed using actuarial techniques. Such accruals are developed using
currently available claim information, and represent management's best
estimates. The ultimate cost of any individual claim can vary based upon, among
other factors, the nature of the injury, the duration of the disability period,
the length of the claim period, the jurisdiction of the claim and the nature of
the final outcome.
Since 1998, Woods Canada has used the NOMA(R) trademark in Canada under
the terms of a license with Gentek Inc. (Gentek). In October 2002, Gentek filed
a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In
July 2003, as part of the bankruptcy proceedings, Gentek filed a motion to
reject the trademark license agreement. On November 5, 2003, Gentek's motion was
granted by the U.S. Bankruptcy Court. As a result, this trademark license
agreement is no longer in effect. Woods Canada will use the NOMA(R) trademark
through mid-2004 and, thereafter, will lose the right to brand certain of its
product with the NOMA(R) trademark. Approximately 50% of Woods Canada's sales
are of NOMA(R) - branded products. Woods Canada will seek to replace those sales
with sales of other products and will continue to act as a supplier for the new
licensee of the NOMA(R) trademark. However, there is no guarantee that Woods
Canada will be able to replace the lost sales of NOMA(R) - branded products.
Although management believes that these actions individually and in the
aggregate are not likely to have outcomes that will have a material adverse
effect on the Company's financial position, results of operations or cash flow,
further costs could be significant and will be recorded as a charge to
operations when, and if, current information dictates a change in management's
estimates.
(11) Industry Segment Information
The Company is a manufacturer and distributor of a variety of industrial
and consumer products, including sanitary maintenance supplies, coated
abrasives, and electrical components. Principal markets are the United States,
Canada and Europe, and include the sanitary maintenance, restaurant supply,
retail, electronic and automotive markets. These activities are grouped into two
industry segments: Electrical Products and Maintenance Products.
- 13 -
The following table sets forth information by segment:
Three months ended March 31,
2004 2003
---- ----
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 70,490 $ 68,825
Operating income 1,619 1,174
Operating margin 2.3% 1.7%
Severance, restructuring and related charges 787 209
Depreciation and amortization 3,447 5,094
Capital expenditures 2,366 1,205
Electrical Products Group
Net external sales $ 29,405 $ 21,627
Operating income 926 644
Operating margin 3.1% 3.0%
Severance, restructuring and related charges 1,111 14
Depreciation and amortization 303 298
Capital expenditures 48 45
Total
Net external sales - Operating segments $ 99,895 $ 90,452
--------- ---------
Total $ 99,895 $ 90,452
========= =========
Operating income (loss) - Operating segments $ 2,545 $ 1,818
- Unallocated corporate (2,561) (2,579)
--------- ---------
Total $ (16) $ (761)
========= =========
Severance, restructuring and related charges - Operating segments $ 1,898 $ 223
- Unallocated corporate -- 5
--------- ---------
Total $ 1,898 $ 228
========= =========
Depreciation and amortization - Operating segments $ 3,750 $ 5,392
- Unallocated corporate 52 22
--------- ---------
Total $ 3,802 $ 5,414
========= =========
Capital expenditures - Operating segments $ 2,414 $ 1,250
- Unallocated corporate 1 8
- Discontinued operations -- 57
--------- ---------
Total $ 2,415 $ 1,315
========= =========
March 31, December 31,
2004 2003
---- ----
Total assets - Maintenance Products Group $ 182,722 $ 176,214
- Electrical Products Group 49,544 51,353
- Other [a] 1,624 1,627
- Unallocated corporate 10,588 12,514
--------- ---------
Total $ 244,478 $ 241,708
========= =========
[a] Amounts shown as "Other" represent items associated with the SESCO
partnership and an equity investment in a shrimp harvesting and farming
operation.
- 14 -
(12) Severance, Restructuring and Related Charges
The Company has initiated several cost reduction and facility
consolidation initiatives since its recapitalization in mid-2001, resulting in
severance, restructuring and related charges over the past three years. A
summary of severance, restructuring and related charges (by major initiative)
for the three months ended March 31, 2004 and 2003 is as follows (in thousands):
2004 2003
-------- --------
Shutdown of Woods Canada manufacturing $ 1,102 $ --
Consolidation of abrasives facilities 346 58
Consolidation of St. Louis manufacturing/distribution facilities 177 140
Consolidation of administrative functions for CCP 140 11
Other 133 19
-------- --------
Total severance, restructuring and related costs $ 1,898 $ 228
======== ========
Shutdown of Woods Canada manufacturing - In December 2003, Woods Canada
closed its manufacturing facility in Toronto, Ontario, after a decision was made
to source all of its products from Asia. In the first quarter of 2004, Woods
Canada incurred a charge of $1.0 million for a non-cancelable lease accrual
associated with a sale/leaseback transaction and idle capacity as a result of
the shutdown of manufacturing. Also in the first quarter of 2004, Woods Canada
recorded $0.1 million for additional severance.
Consolidation of abrasives facilities - In 2003, the Company initiated a
plan to consolidate the manufacturing facilities of its abrasives business in
order to implement a more competitive cost structure. It is expected that the
Lawrence, Massachusetts and the Pineville, North Carolina facilities will be
closed in 2004 and those operations consolidated into the newly expanded Wrens,
Georgia facility. Costs were incurred in the three months ended March 31, 2004
related to severance for expected terminations at the Lawrence facility ($0.2
million) and expenses for the preparation of the Wrens facility ($0.1 million).
Charges for the three months ended March 31, 2003 also related to severance and
preparation costs.
Consolidation of St. Louis manufacturing/distribution facilities -
Starting in 2001, the Company developed a plan to consolidate the manufacturing
and distribution of the four CCP facilities in the St. Louis area. In the first
quarter of 2004, costs of $0.2 million were incurred related primarily to the
movement of inventory and equipment. In the first quarter of 2003, charges were
incurred for the movement of equipment between facilities and to a lesser
extent, the adjustment of accruals related to non-cancelable leases for the
vacated facilities.
Consolidation of administrative functions for CCP - Katy has incurred
various costs in 2004 and 2003 for the integration of back office and
administrative functions into St. Louis, Missouri from the various operating
divisions within the Maintenance Products Group. For the three months ended
March 31, 2004, costs were incurred for system conversions and the consolidation
of administrative personnel.
Other - Costs in the first quarter of 2004 relate primarily to the closure
of CCP's facility in Canada and the subsequent consolidation into the Woods
Canada facility, and the closure of CCP's metals facility in Santa Fe Springs,
California.
- 15 -
The table below details activity in restructuring reserves since December
31, 2003 (in thousands).
One-time Contract
Termination Termination
Total Benefits [a] Costs [b] Other [c]
--------- ------------ ----------- ---------
Restructuring and related liabilities at December 31, 2003 $ 8,476 $ 1,570 $ 6,851 $ 55
Additions to restructuring liabilities 1,898 346 1,244 308
Payments on restructuring liabilities (2,519) (925) (1,279) (315)
--------- --------- --------- ---------
Restructuring and related liabilities at March 31, 2004 $ 7,855 $ 991 $ 6,816 $ 48
========= ========= ========= =========
[a] Includes severance, benefits, and other employee-related costs associated
with the employee terminations.
[b] Includes charges related to non-cancelable lease liabilities for abandoned
facilities, net of potential sub-lease revenue.
[c] Includes charges associated with moving inventory, machinery and equipment,
consolidation of administrative and operational functions, and consultants
working on sourcing and other manufacturing and production efficiency
initiatives.
The table below details activity in restructuring and related reserves by
operating segment since December 31, 2003 (in thousands).
Maintenance Electrical
Products Products
Total Group Group Corporate
--------- --------- --------- ---------
Restructuring and related liabilities at December 31, 2003 $ 8,476 $ 6,569 $ 1,749 $ 158
Additions to restructuring liabilities 1,898 786 1,112 --
Payments on restructuring liabilities (2,519) (1,591) (844) (84)
--------- --------- --------- ---------
Restructuring and related liabilities at March 31, 2004 $ 7,855 $ 5,764 $ 2,017 $ 74
========= ========= ========= =========
The table below summarizes the future obligations for severance,
restructuring and other related charges by operating segment detailed above (in
thousands):
Maintenance Electrical
Products Products
Total Group Group Corporate
--------- --------- --------- ---------
2004 $ 2,885 $ 2,224 $ 587 $ 74
2005 1,998 1,444 554 --
2006 1,359 999 360 --
2007 706 497 209 --
2008 355 136 219 --
Thereafter 552 464 88 --
--------- --------- --------- ---------
Total Payments $ 7,855 $ 5,764 $ 2,017 $ 74
========= ========= ========= =========
(13) Subsequent Events
On April 20, 2004 (as previously discussed in Note 6) the Company
completed a refinancing of its outstanding indebtedness (the Refinancing) and
entered into the New Fleet Credit Agreement. Like the previous credit agreement,
the New Fleet Credit Agreement is a $110 million facility with a $20 million
term loan (New Term Loan) and a $90 million revolving credit facility (New
Revolving Credit Facility) with essentially the same terms as the previous
credit agreement. The New Fleet Credit Agreement is an asset-based lending
agreement and involves a syndicate of four banks, all of which participated in
the syndicate from the previous credit agreement. Since the inception of the
previous credit agreement, Katy had repaid $18.2 million of the previous Term
Loan. The ability to repay that loan on a faster than anticipated timetable was
primarily due to funds generated by the sale of GC/Waldom in April 2003, the
sale of Duckback in September 2003 and various sales of excess real estate. The
additional funds raised by the New Term Loan were used to
- 16 -
pay down revolving loans (after costs of the transaction), creating additional
borrowing capacity. In addition, the New Fleet Credit Agreement contains
separate credit facilities in Canada and the United Kingdom which will allow the
Company to borrow funds locally in these countries and provide a natural hedge
against currency fluctuations.
Below is a summary of the sources and uses associated with the funding of
the New Fleet Credit Agreement (in thousands):
Sources:
New Term Loan incremental borrowings $ 18,152
========
Uses:
Repayment of Revolving Credit Facility borrowings 17,042
Certain costs associated with the New Fleet Credit Agreement (through April 30, 2004) 1,110
--------
$ 18,152
========
The New Term Loan has a final maturity date of April 20, 2009 with
quarterly repayments of $0.7 million, the first of which will be made on July 1,
2004. A final payment of $5.7 million will be made upon final maturity in 2009.
The New Term Loan is collateralized by real and personal property. The New
Revolving Credit Facility also has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
All extensions of credit under the New Fleet Credit Agreement are
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of certain foreign subsidiaries), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the New Fleet Credit Agreement. Until September 30, 2004, interest accrues on
New Revolving Credit Facility borrowings at 175 basis points over applicable
LIBOR rates, and at 200 basis points over LIBOR for borrowings under the New
Term Loan. Subsequent to September 30, 2004, in accordance with the New Fleet
Credit Agreement, margins (i.e. the interest rate spread above LIBOR) could
increase depending on certain leverage measurements. Also in accordance with the
New Fleet Credit Agreement, margins on the New Term Loan will drop an additional
25 basis points if the balance of the New Term Loan is reduced below $10.0
million. Interest accrues at higher margins on prime rates for Swingline Loans,
as defined in the agreement, the amounts of which are expected to be nominal.
On April 20, 2004, the Company also announced that it has resumed its $5.0
million share repurchase program, which had been previously suspended in
November 2003. During 2003 and prior to the suspension, 482,800 shares of common
stock were repurchased on the open market for approximately $2.5 million under
this plan.
- 17 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 versus Three Months Ended March 31, 2003
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
Three months ended March 31, Percentage
2004 2003 Variance
---- ---- --------
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 70,490 $ 68,825 2.4%
Operating income 1,619 1,174 37.9%
Operating margin 2.3% 1.7% N/A
Severance, restructuring and related charges 787 209 276.6%
Depreciation and amortization 3,447 5,094 (32.3%)
Capital expenditures 2,366 1,205 96.3%
Electrical Products Group
Net external sales $ 29,405 $ 21,627 36.0%
Operating income 926 644 43.8%
Operating margin 3.1% 3.0% N/A
Severance, restructuring and related charges 1,111 14 0.0%
Depreciation and amortization 303 298 1.7%
Capital expenditures 48 45 6.7%
Total Company [a]
Net external sales [b] $ 99,895 $ 90,452 10.4%
Operating loss [b] (16) (761) (97.9%)
Operating deficit [b] (0.0%) (0.8%) N/A
Severance, restructuring and related charges [b] 1,898 228 732.5%
Depreciation and amortization [b] 3,802 5,414 (29.8%)
Capital expenditures [c] 2,415 1,315 83.7%
March 31, December 31, Percentage
2004 2003 Variance
---- ---- --------
Total assets
Maintenance Products Group $ 182,722 $ 176,214 3.7%
Electrical Products Group 49,544 51,353 (3.5%)
Corporate, discontinued operations and other 12,212 14,141 (13.6%)
--------- ---------
$ 244,478 $ 241,708 1.1%
========= =========
[a] Included in "Total Company" are certain amounts in addition to those shown
for the Maintenance Products and Electrical Products segments, including amounts
associated with 1) unallocated corporate expenses, 2) our equity investment in a
shrimp harvesting and farming operation, and 3) our waste-to-energy facility
(SESCO). See Note 11 to the Condensed Consolidated Financial Statements for
detailed reconciliations of segment information to the Condensed
- 18 -
Consolidated Financial Statements.
[b] Excludes discontinued operations.
[c] Includes discontinued operations.
Company Overview
Overall, net sales for the Company in the first quarter of 2004 increased
$9.4 million, or 10%, from the first quarter of 2003. Higher net sales resulted
from a volume increase of 8% and favorable currency translation of 3%, partially
offset by lower pricing of 1%. Gross margins were 16.6% in the first quarter of
2004 an increase of 0.8 percentage points from the first quarter of 2003. The
favorable impact of restructuring, cost containment and lower depreciation was
offset partially by higher raw material costs. Selling, general and
administrative expenses (SG&A) as a percentage of sales declined from 16.4% in
the first quarter of 2003 to 14.8% in the first quarter of 2004. This decrease
can be primarily attributed to the increase in net sales. The operating deficit
was reduced $0.7 million to essentially break even, mostly as a result of
improved sales and lower SG&A, offset by higher severance, restructuring and
related charges. Excluding these charges, the Company experienced operating
profit of $1.9 million during the first three months of 2004 versus an operating
deficit of $0.5 million in the first three months of 2003. To provide additional
transparency about measures of the Company's performance, we supplement the
reporting of our financial information under generally accepted accounting
principles (GAAP) with non-GAAP information on operating income (loss) excluding
severance, restructuring and related charges and impairments of long-lived
assets. We believe the use of this measure is a better indicator of the
underlying operating performance of the Company's businesses and allows us to
make meaningful comparisons of different operating periods.
Maintenance Products Group
The Maintenance Products Group's performance improved during the first
quarter of 2004 due to an overall increase in net sales for the quarter (mostly
due to favorable currency translation) along with lower depreciation from levels
that were atypically high in 2003 (related to the revision of the estimated
useful lives of certain manufacturing assets), partially offset by higher raw
materials costs. Operating results continue to be favorably impacted by the
numerous cost reduction initiatives including the consolidation of our
facilities in the St. Louis area.
Net sales
Net sales from the Maintenance Products Group increased from $68.8 million
during the three months ended March 31, 2003 to $70.5 million during the three
months ended March 31, 2004, an increase of 2%. Overall, this improvement was
principally due to the favorable impact of exchange rates of 2%, since volume
and pricing were essentially flat versus the same period last year. We
experienced volume gains in certain businesses that sell to commercial
customers, principally for our domestic abrasives and mops, brooms and brushes
as well as our Jan/San business in the United Kingdom. Stronger sales of roofing
products to the construction industry contributed to the increase in domestic
abrasives sales, while sales of mops, brooms and brushes benefited from the
ability of customers to order products from all CCP divisions on one purchase
order. Jan/San volumes in the U.K. increased primarily as a result of the
acquisition of Spraychem Limited on April 1, 2003. Sales volume for the Consumer
business unit in the U.S., which sells primarily to mass market retail
customers, was lower due to the loss of certain product lines with major outlet
customers. The U.K. consumer plastics business benefited overall from favorable
exchange rates, partially offset by weaker volumes as we declined to offer lower
margin business in the first quarter.
Since the fourth quarter of 2003, we centralized our customer service and
administrative functions for CCP divisions Jan/San, Glit/Microtron, Wilen and
Disco in one location, allowing customers to order products from any CCP
division on one purchase order. The customer service and administrative
functions for the Loren business unit will be added during 2004. We believe that
operating these businesses as a cohesive unit will improve customer service in
that our customers' purchasing processes will be simplified, as will follow up
on order status, billing, collection and other related functions. This should
also increase customer loyalty, help in attracting new customers and lead to
increased top line sales in future years.
- 19 -
Operating income
The group's operating income improved by $0.4 million from $1.2 million in
the first quarter of 2003 to $1.6 million in 2004, an improvement of 38%. The
increase in operating income was almost entirely attributable to the business
units which sell to commercial customers, principally as a result of higher
volumes. Operating results were positively impacted by lower depreciation levels
that were atypically high in 2003 related to the revision of the estimated
useful lives of certain manufacturing assets and benefits realized from the
implementation of cost reduction strategies. Operating income was negatively
impacted by higher raw material costs in the first quarter of 2004 versus 2003.
Operating income for both periods was also impacted by costs for severance,
restructuring and related costs, which are discussed further below. Excluding
those charges, operating income increased by $1.0 million from $1.4 million
during the three months ended March 31, 2003 to $2.4 million for the same period
in 2004.
Operating results for the group during the three months ended March 31,
2004 and 2003 were negatively impacted by severance, restructuring and related
charges of $0.8 million and $0.2 million, respectively. Charges in the first
quarter of 2004 related to the restructuring of the abrasives business ($0.3
million); the movement of inventory and equipment in connection with the
consolidation of St. Louis manufacturing and distribution facilities ($0.2
million); costs incurred for the consolidation of administrative functions for
CCP ($0.1 million) and expenses for the closure of CCP's facility in Canada and
the subsequent consolidation into the Woods Canada facility ($0.1 million).
During the first quarter of 2003, costs were incurred in connection with the
consolidation of St. Louis manufacturing and distribution facilities ($0.1
million) and the restructuring of the abrasives business ($0.1 million).
Total assets for the group increased primarily as a result of increased
inventory due to early purchasing of certain raw materials in advance of
anticipated cost increases.
Electrical Products Group
The Electrical Products Group continued its strong performance into the
first quarter of 2004, driven primarily by improved sales volume over the first
quarter of 2003, and secondarily, by higher margins over the prior year
resulting from Woods Canada's decision to source substantially all of its
products from Asia.
Net sales
The Electrical Product Group's sales improved from $21.6 million in the
first quarter of 2003 to $29.4 million in the first quarter of 2004, an increase
of 36%. An increase in volume of 34% and favorable currency translation of 5%
were partially offset by lower pricing of 3%. Both Woods and Woods Canada
experienced increases in sales as a result of higher volumes of direct import
merchandise, which are shipped directly from our suppliers to our customers,
such as extension cords and power strips. Woods' sales performance during the
three months ended March 31, 2004 also benefited from new stores and same store
growth for its largest customer, a national mass market retailer, and a price
increase implemented late in the quarter to offset the rising cost of copper.
Sales at Woods Canada in the first quarter of 2004 compared to the first quarter
of 2003 were favorably impacted by a stronger Canadian dollar versus the U.S.
dollar and fewer sales returns in the current year quarter. However, this was
mostly offset by lower pricing resulting from downward pricing pressures from a
mass market retailer.
Operating income
The group's operating income increased from $0.6 million for the three
months ended March 31, 2003 to $0.9 million for the three months ended March 31,
2004. The strong volume increases as well as improved gross margins contributed
to the higher profitability of the Electrical Products Group. Margins were
positively impacted in the first quarter of 2004 by the closure of the Woods
Canada manufacturing facility in December and the pursuit of a fully outsourced
product strategy. Operating income in the first quarter of 2003 and 2004 was
reduced by costs for severance, restructuring and related costs, which are
discussed further below. Excluding these costs, operating income increased from
$0.7 million for the first three months of 2003 to $2.0 million for the same
period in 2004, an increase of 210%.
Operating results in the first three months of 2004 and 2003 were
negatively impacted by severance,
- 20 -
restructuring and related charges of $1.1 million and $14 thousand,
respectively. In the first quarter of 2004, Woods Canada incurred a charge of
$1.0 million for a non-cancelable lease accrual associated with a sale/leaseback
transaction and idle capacity as a result of the shutdown of manufacturing and
$0.1 million for additional severance. Costs in the first quarter of 2003
related to the shutdown of the Woods manufacturing facility in December 2002.
Total assets for the group decreased $1.8 million as lower accounts
receivable balances due to seasonally lower sales at the end of the first
quarter of 2004 versus the end of 2003 were partially offset by higher inventory
levels resulting from the early purchasing of products in advance of anticipated
supplier price increases.
Discontinued Operations
Two business units are reported as discontinued operations for the three
months ended March 31, 2003: GC/Waldom Electronics, Inc. (GC/Waldom) and
Duckback Products, Inc. (Duckback). GC/Waldom reported income (net of tax) of
less than $0.1 million in the first quarter of 2003. GC/Waldom was sold on April
2, 2003 and a loss (net of tax) of $0.2 million was recognized in the second
quarter of 2003 as a result of the sale. Duckback generated income of $1.0
million (net of tax) in the first quarter of 2003. Duckback was sold on
September 16, 2003 and a gain (net of tax) of $7.6 million was recognized in the
third quarter of 2003 as a result of the sale. There was no discontinued
operations activity for the first quarter of 2004.
Other Items
Interest expense decreased by $1.6 million in the first quarter of 2004
versus the same period of 2003, primarily due to the write-off of unamortized
debt costs of $1.2 million in the first quarter of 2003 resulting from the
February 2003 refinancing. Excluding the write-off, interest expense decreased
by $0.4 million, due mainly to lower average borrowings during the first quarter
of 2004, principally as a result of applying proceeds from the sale of non-core
businesses in 2003. Other, net for the three months ended March 31, 2004
included the write-off of fees and expenses of $0.4 million associated with a
financing which the Company chose not to pursue.
The provision for income taxes for the three months ended March 31, 2004
reflects current expense for federal, state and foreign income taxes. No federal
benefit was recorded on the pre-tax net loss for the first quarter of 2004 as
valuation allowances were recorded related to any deferred tax asset created as
a result of the book loss. The Company's income tax expense for the first
quarter of 2003 was $0.5 million. Of this amount, $0.6 million of income tax
expense was attributable to income from discontinued operations, thereby
resulting in a tax benefit of $27 thousand related to continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity was negatively impacted during the first quarter of 2004 as a
result of lower operating cash flow during the quarter. The Company used $15.7
million of operating cash compared to operating cash flow used during the first
quarter of 2003 of $13.5 million. Debt obligations at March 31, 2004 increased
$12.1 million from December 31, 2003. This increase in debt was primarily the
result of working capital changes, primarily higher inventory and lower payables
and accruals, offset by the proceeds from the sale of assets. The inventory
build was due to the early purchase of certain materials in advance of scheduled
supplier price increases and to a seasonal increase in the Electrical Products
Group. Accounts payable were lower as a result of our decision to take advantage
of discount terms offered by certain vendors while accruals were impacted by the
settlement of previously recorded restructuring charges. On March 31, 2004,
Woods Canada sold its manufacturing facility for net proceeds of $3.2 million
and immediately entered into a sale/leaseback arrangement to allow that business
unit to occupy this property as a distribution facility.
Since February 3, 2003 and through April 20, 2004, liquidity was provided
by the Fleet Credit Agreement. This $110 million facility was comprised of a $20
million term loan and a $90 million revolving credit line. The Fleet Credit
Agreement was an asset-based lending agreement and involved a syndicate of six
banks. On April 20, 2004, we refinanced the Fleet Credit Agreement through an
amended and restated agreement (New Fleet Credit Agreement) with essentially the
same terms as the Fleet Credit Agreement. The New Fleet Credit Agreement is also
a $110 million facility
- 21 -
with a $20 million term loan (New Term Loan) and a $90 million revolving credit
line (New Revolving Credit Facility). Since the inception of the Fleet Credit
Agreement, we had repaid $18.2 million of the previous Term Loan. The ability to
repay that loan on a faster than anticipated timetable was primarily due to
funds generated by the sale of GC/Waldom in April 2003, the sale of Duckback in
September 2003 and various sales of excess real estate. The additional funds
raised by the New Term Loan were used to pay down revolving loans (after costs
of the transaction), creating additional borrowing capacity. In addition, the
New Fleet Credit Agreement contains separate credit facilities in Canada and the
United Kingdom which will allow us to borrow funds locally in these countries
and provide a natural hedge against currency fluctuations. The New Revolving
Credit Facility has an expiration date of April 20, 2009.
The New Fleet Credit Agreement allows us to efficiently leverage our
entire asset base, and to create more borrowing capacity under our New Revolving
Credit Facility, which is based on the liquidation values of accounts receivable
and inventories. Unused borrowing availability on the previous revolving credit
facility was $17.6 million at March 31, 2004. Had the New Revolving Credit
Facility been in effect on March 31, 2004, unused borrowing availability would
have been approximately $34 million. The New Term Loan is collateralized by real
and personal property. Below is a summary of the sources and uses associated
with the funding of the New Fleet Credit Agreement (in thousands):
Sources:
New Term Loan incremental borrowings $ 18,152
========
Uses:
Repayment of Revolving Credit Facility borrowings 17,042
Certain costs associated with the New Fleet Credit Agreement (through April 30, 2004) 1,110
--------
$ 18,152
========
Our borrowing base under the New Fleet Credit Agreement is reduced by the
outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom we conduct business may
require letters of credit in the future that either 1) do not exist today or 2)
would be at higher amounts than those that exist today. Currently, our largest
letters of credit relate to our casualty insurance programs. At March 31, 2004,
total outstanding letters of credit were $8.6 million.
All extensions of credit under the New Fleet Credit Agreement are
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of certain foreign subsidiaries), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the New Fleet Credit Agreement. Until September 30, 2004, interest accrues on
New Revolving Credit Facility borrowings at 175 basis points over applicable
LIBOR rates, and at 200 basis points over LIBOR for term borrowings. Subsequent
to September 30, 2004 in accordance with the New Fleet Credit Agreement, our
margins (i.e. the interest rate spread above LIBOR) could increase depending
upon certain leverage measurements. Also in accordance with the New Fleet Credit
Agreement, margins on the term borrowings will drop an additional 25 basis
points if the balance of the New Term Loan is reduced below $10.0 million.
Interest accrues at higher margins on prime rates for swing loans, the amounts
of which were nominal at March 31, 2004.
Katy has incurred additional debt issuance costs in 2004 associated with
the New Fleet Credit Agreement. Additionally, at the time of the inception of
the New Fleet Credit Agreement, Katy had approximately $4.0 million of
unamortized debt issuance costs associated with the Fleet Credit Agreement. The
remainder of the previously capitalized costs, along with the capitalized costs
from the New Fleet Credit Agreement will be amortized over the life of the New
Fleet Credit Agreement through April 2009. Also during the first quarter of
2004, we incurred fees and expenses of $0.4 million associated with a financing
which the Company chose not to pursue.
The revolving credit facility under the New Fleet Credit Agreement
requires lockbox agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements, combined with the existence of
a material adverse effect (MAE) clause in the Fleet Credit Agreement, causes the
revolving credit facility to be classified as a current liability (except as
noted below), per guidance in the Emerging Issues Task Force (EITF) Issue No.
95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that Include Both a Subjective Acceleration Clause and a
Lock-Box Arrangement. Historically, the Company did not expect to repay, or be
required to repay, within one year, the balance of the revolving credit facility
classified as a current liability. However, on April 20, 2004, we refinanced
- 22 -
the Fleet Credit Agreement (the Refinancing) through an amended and restated
agreement (New Fleet Credit Agreement) whereby $17.1 million of the Revolving
Credit Facility was repaid with the non-current portion of a new term loan.
Accordingly, $17.1 million of Revolving Credit Facility borrowings were
classified as non-current as of March 31, 2004. (See Note 13 for further
information regarding the Refinancing and the New Fleet Credit Agreement). The
MAE clause, which is a fairly typical requirement in commercial credit
agreements, allows the lender to require the loan to become due if it determines
there has been a material adverse effect on our operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the revolving credit facility as a current liability (except as noted above) is
a result only of the combination of the two aforementioned factors: the lockbox
agreements and the MAE clause. The previous revolving credit facility did not
expire or have a maturity date within one year, but rather had a final
expiration date of January 31, 2008. Also, we were in compliance with the
applicable financial covenants of the Fleet Credit Agreement at March 31, 2004.
The lender had not notified us of any indication of a MAE at March 31, 2004, and
we were not in default of any provision of the Fleet Credit Agreement at March
31, 2004.
The New Fleet Credit Agreement, and the additional borrowing ability under
the New Revolving Credit Facility obtained by incurring new term debt, results
in three important benefits related to the long-term strategy of Katy: 1)
additional borrowing capacity to invest in capital expenditures and/or
acquisitions key to our strategic direction, 2) increased working capital
flexibility to build inventory when necessary to accommodate lower cost
outsourced finished goods inventory and 3) the ability to borrow locally in
Canada and the United Kingdom and provide a natural hedge against currency
fluctuations.
In April 2004, we also announced that we have resumed our $5.0 million
share repurchase plan, which had been previously suspended in November 2003.
During 2003 and prior to the suspension, 482,800 shares of common stock were
repurchased on the open market for approximately $2.5 million under this plan.
Funding for capital expenditures and working capital needs is expected to
be accomplished through the use of available borrowings under the New Fleet
Credit Agreement. Anticipated capital expenditures are expected to be slightly
higher in 2004 than in 2003, mainly due to additional investments planned for
the development of new products. Restructuring and consolidation activities are
important to reducing our cost structure to a competitive level. We believe that
our operations and the New Fleet Credit Agreement provide sufficient liquidity
for our operations going forward.
We have a number of obligations and commitments, which are listed on the
schedule later in this section entitled "Contractual Obligations and Commercial
Commitments." We have considered all of these obligations and commitments in
structuring our capital resources to ensure that they can be met. See the notes
accompanying the table in that section for further discussions of those items.
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
In addition to the sale of the GC/Waldom and Duckback businesses in 2003 for
aggregate proceeds of $23.6 million, we have sold additional assets in 2003 and
the first quarter of 2004 for net proceeds of $2.8 million and $3.7 million,
respectively. The largest of these was the March 31, 2004 sale of the Woods
Canada manufacturing facility in Toronto, Ontario for net proceeds were $3.2
million, all of which was used to repay our outstanding debt obligations.
Contemporaneously with the sale, Woods Canada entered into a five-year lease
with the buyer to continue the distribution of their products from that
facility.
- 23 -
OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations and Commercial Obligations
Katy's obligations as of March 31, 2004 are summarized below:
(In thousands of dollars)
Due in less Due in Due in Due after
Contractual Cash Obligations Total than 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----- ----------- --------- --------- -------
Revolving credit facility [a] $ 49,906 $ -- $ -- $ 49,906 $ --
Term loans 1,848 1,848 -- -- --
Operating leases [b] 31,460 9,140 12,970 7,653 1,697
Severance and restructuring [b] 3,607 1,625 1,301 440 241
SESCO payable to Montenay [c] 4,800 1,000 2,050 1,750 --
--------- --------- --------- --------- ---------
Total Contractual Obligations $ 91,621 $ 13,613 $ 16,321 $ 59,749 $ 1,938
========= ========= ========= ========= =========
Due in less Due in Due in Due after
Other Commercial Commitments Total than 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----- ----------- --------- --------- -------
Commercial letters of credit $ 316 $ 316 $ -- $ -- $ --
Stand-by letters of credit 8,310 8,310 -- -- --
Guarantees [d] 30,435 6,765 23,670 -- --
--------- --------- --------- --------- ---------
Total Commercial Commitments $ 39,061 $ 15,391 $ 23,670 $ -- $ --
========= ========= ========= ========= =========
[a] As discussed in the Liquidity and Capital Resources section above, a portion
of the Fleet Revolving Credit Facility is classified as a current liability on
the Condensed Consolidated Balance Sheets as a result of the combination in the
Fleet Credit Agreement of 1) lockbox agreements on Katy's depository bank
accounts and 2) a subjective Material Adverse Effect (MAE) clause. The New
Revolving Credit Facility expires in April of 2009.
[b] These obligations represent liabilities associated with restructuring
activities, other than liabilities for non-cancelable lease rentals. Future
non-cancelable lease rentals are included in the line entitled "Operating
leases." Our Condensed Consolidated Balance Sheet at March 31, 2004 includes
$6.8 million in discounted liabilities associated with non-cancelable operating
lease rentals, net of estimated sub-lease revenues, related to facilities that
have been abandoned as a result of restructuring and consolidation activities.
[c] Amount owed to Montenay as a result of the SESCO partnership. $1.0 million
of this obligation is classified in the Condensed Consolidated Balance Sheets as
an Accrued Expense in Current Liabilities, while the remainder is included in
Other Liabilities, recorded on a discounted basis.
[d] SESCO, an indirect wholly-owned subsidiary of Katy, is party to a
partnership that operates a waste-to-energy facility and has certain contractual
obligations, for which Katy provides certain guarantees. If the partnership is
not able to perform its obligations under the contracts, under certain
circumstances SESCO and Katy could be subject to damages equal to the amount of
Industrial Revenue Bonds outstanding (which financed construction of the
facility) of $30.4 million less amounts held by the partnership in debt service
reserve funds. Katy and SESCO do not anticipate non-performance by parties to
the contracts. See Note 5 to the Condensed Consolidated Financial Statements in
Part I, Item 1.
SEVERANCE, RESTRUCTURING AND RELATED CHARGES
See Note 12 to the Condensed Consolidated Financial Statements in Part I,
Item 1 for a discussion of severance, restructuring and related charges.
OUTLOOK FOR 2004
We anticipate only a modest improvement in 2004 from the general economic
conditions and business environment that existed in 2003. However, we have seen
recent improvement in the restaurant, travel and hotel markets to which we sell
products. We have seen continued strong sales performance from the Woods and
Woods Canada retail electrical corded products business, but we do not expect to
see the same level of year-over-year top line growth from those businesses in
2004 as we experienced in 2003. We have a significant concentration of customers
in the mass-market retail, discount and do-it-yourself market channels. Our
ability to maintain and increase our sales levels depends
- 24 -
in part on our ability to retain and improve relationships with these customers.
In addition, we face uncertainty with respect to the replacement of
NOMA(R)-branded sales as Woods Canada has lost the right to use the NOMA(R)
trademark, effective mid-2004. We also face the continuing challenge of
recovering or offsetting cost increases for raw materials.
Despite increases in raw materials costs, gross margins have been
improving and are expected to continue to improve in 2004 as we realize the
benefits of various profit-enhancing strategies implemented since a
recapitalization of the Company in June 2001. These strategies include sourcing
previously manufactured products, as well as locating new sources for products
already sourced outside of our facilities. We have significantly reduced
headcount, and continue to monitor whether we can consolidate any of our
facilities. Cost of goods sold is subject to variability in the prices for
certain raw materials, most significantly thermoplastic resins used in the
manufacture of plastic products for the Jan/San and consumer plastic businesses.
Prices of plastic resins, such as polyethylene and polypropylene, increased
steadily from the latter half of 2002 through the middle of 2003, then fell
slightly in the second half of the year, and have increased again during the
early months of 2004. Management has observed that the prices of plastic resins
are driven to an extent by prices for crude oil and natural gas, in addition to
other factors specific to the supply and demand of the resins themselves. We
cannot predict the direction resin prices will take during 2004 and beyond. We
are also exposed to price changes for copper (a primary material in many of the
products sold by Woods and Woods Canada), aluminum and steel (primary materials
in production of truck boxes), corrugated packaging material and other raw
materials. Prices for copper, aluminum and steel all have increased in recent
months. We have not employed an active hedging program related to our commodity
price risk, but are employing other strategies for managing this risk, including
contracting for a certain percentage of resin needs through supply agreements
and opportunistic spot purchases. In a climate of rising raw material costs, we
experience difficulty in raising prices to share these higher costs to our
customers.
Depreciation expense was higher during 2003 as a result of the reduction
in depreciable lives for certain CCP manufacturing assets, specifically molds
and tooling equipment used in the manufacture of plastic products, from seven to
five years, effective January 1, 2003. This change in estimate was made
following significant impairments to these types of assets recorded during 2002.
The amount of incremental depreciation expense during 2003 as a result of this
reduction in depreciable lives was $5.4 million. However, many of these assets
became fully depreciated during 2003 since the CCP acquisition occurred in early
1999. Therefore, depreciation expense related to these assets is expected to
reduce again in 2004 and subsequent years. Our total depreciation expense in
2004 and subsequent years will also depend on changes in the level of
depreciable assets.
Selling, general and administrative expenses have remained stable and are
expected to continue to remain stable as a percentage of sales from 2003 levels.
Cost reduction efforts are ongoing throughout the Company. Our corporate office
was relocated in 2001 and we expect to maintain modest headcount and rental
costs for that office. We have completed the process of transferring most
back-office functions of our Wilen (mops, brooms and brushes) and Glit/Microtron
(abrasives) businesses from Georgia to Bridgeton, Missouri, the headquarters of
CCP. We are nearly complete with the process of transferring most back-office
functions of our Disco (filters and miscellaneous food service items) business
in McDonough, Georgia to Bridgeton, Missouri. We will consolidate administrative
processes at our Loren business unit during 2004 and will continue to evaluate
the possibility of further consolidation of administrative processes.
We have announced or committed to several restructuring plans involving
our operations. During 2002 and 2003, we announced plans to consolidate the
Warson Road and Earth City facilities as well as a portion of the Hazelwood
facility into the Bridgeton facility. All of these facilities are located in the
St. Louis, Missouri area. The moves from the Warson Road, Hazelwood and Earth
City facilities are now complete. Hazelwood will continue to operate on a
satellite basis. Certain molding machines have been and will continue to be
transferred to the Bridgeton facility and excess machinery will be sold. The
significant charges recorded during 2002 and 2003 related to these facilities
were mainly to accrue non-cancelable lease payments for these facilities. These
accruals do not create incremental cash obligations in that we are obligated to
make the associated payments whether we occupy the facilities or not. The amount
we will ultimately pay out under these accruals is dependent on our ability to
successfully sublet all or a portion of abandoned facilities. We expect the
Jan/San and consumer plastics business units to continue to benefit from lower
overhead costs in 2004 as a result of these consolidations. Further facility
consolidations with respect to the CCP operations are under review. In 2003, we
initiated a plan to consolidate the manufacturing facilities of its abrasives
business in order to implement a more competitive cost structure. It is expected
that the Lawrence, Massachusetts and the Pineville, North Carolina facilities
will be closed in 2004 and those operations consolidated into the newly expanded
Wrens, Georgia
- 25 -
facility.
In December 2003, we closed the Woods Canada manufacturing facility in
Toronto, necessitated by our decision to fully outsource the manufacturing of
its products to lower cost sources. Prior to the plant closure, Woods Canada
already sourced a portion of its finished goods from vendors. While outsourcing
of the Woods Canada products is a cost-saving measure, Woods Canada expects to
maintain higher inventory levels, especially through mid-2004, as a result of
this move.
We have committed to other restructuring alternatives as well, most of
which center around consolidation of operations into fewer facilities. Certain
of these projects will require additional levels of cash for both capital
expenditures and moving and relocation costs. Capital expenditures and
severance, restructuring and related costs associated with these initiatives are
expected to be approximately $2 million to $3 million for the remainder of 2004.
We continue to pursue a strategy within the Maintenance Products Group to
simplify our business transactions and improve our customer relationships. We
have centralized customer service functions for the Continental (Jan/San),
Glit/Microtron, Wilen and Disco business units allowing customers to order
products from any CCP division on one purchase order. We expect to include the
Loren business unit as part of this shared services model during 2004. We
believe that operating these businesses as a cohesive unit will improve customer
service because our customers' purchasing processes will be simplified, as will
follow up on order status, billing, collection and other related functions. We
expect that these steps will increase customer loyalty and help in attracting
new customers and increasing top line sales in future years.
Our integration cost reduction efforts, integration of back office
functions and simplifications of our business transactions are all dependent on
executing a system integration plan. This plan involves the migration of data
across information technology platforms and implementation of new software and
hardware. The domestic systems integration plan was substantially completed in
October 2003, while the international systems integration plan will be completed
by the end of 2004.
We expect interest rates in 2004 to be slightly higher than 2003; however,
we cannot predict the future levels of interest rates. Until September 30, 2004,
interest accrues on New Revolving Credit Facility borrowings at 175 basis points
over applicable LIBOR rates, and at 200 basis points over LIBOR for New Term
Loan borrowings. Subsequent to September 30, 2004 in accordance with the New
Fleet Credit Agreement, our margins (i.e. the interest rate spread above LIBOR)
could increase depending upon certain leverage measurements. Also in accordance
with the New Fleet Credit Agreement, margins on the term borrowings will drop an
additional 25 basis points if the balance of the New Term Loan is reduced below
$10.0 million.
Given our history of operating losses, along with guidance provided by the
accounting literature covering accounting for income taxes, we were unable to
conclude it is more likely than not that we will be able to generate future
taxable income sufficient to realize the benefits of deferred tax assets carried
on our books. Therefore, a full valuation allowance on the net deferred tax
asset position was recorded at March 31, 2004 and December 31, 2003, and we do
not expect to record the benefit of any deferred tax assets that may be
generated in 2004. We will continue to record current expense associated with
federal, foreign and state income taxes.
We are continually evaluating alternatives that relate to divestitures of
non-core businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
This report and the information incorporated by reference in this report
contain various "forward-looking statements" as defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended.
The forward-looking statements are based on the beliefs of our management, as
well as assumptions made by, and information currently available to, our
management. We have based these forward-looking statements on current
expectations and projections about future events and trends affecting the
financial condition of our business. These forward-looking statements are
subject to risks and uncertainties that may lead to results that differ
materially from those
- 26 -
expressed in any forward-looking statement made by us or on our behalf,
including, among other things:
- Increases in the cost of, or in some cases continuation of, the
current price levels of plastic resins, copper, paper board
packaging, and other raw materials.
- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
- Greater reliance on third parties for our finished goods as we
increase the portion of our manufacturing that is outsourced.
- Our inability to reduce administrative costs through consolidation
of functions and systems improvements.
- Our inability to execute our systems integration plan.
- Our inability to successfully integrate our operations as a result
of the facility consolidations.
- Our inability to sub-lease rented facilities which have been
abandoned as a result of consolidation and restructuring
initiatives.
- Our inability to achieve product price increases, especially as they
relate to potentially higher raw material costs.
- The potential impact of losing lines of business at large retail
outlets in the discount and do-it-yourself markets.
- Competition from foreign competitors.
- The potential impact of new distribution channels, such as
e-commerce, negatively impacting us and our existing channels.
- The potential impact of rising interest rates on our LIBOR-based New
Fleet Credit Agreement.
- Our inability to meet covenants associated with the New Fleet Credit
Agreement.
- The potential impact of rising costs for insurance for properties
and various forms of liabilities.
- The potential impact of changes in foreign currency exchange rates
related to our foreign operations.
- Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales. We are also subject to labor relations issues at
entities involved in our supply chain, including both suppliers and
those involved in transportation and shipping.
- Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
- Our inability to replace lost sales due the loss of the
NOMA(R)-branded products at Woods Canada.
Words and phrases such as "expects," "estimates," "will," "intends,"
"plans," "believes," "anticipates" and the like are intended to identify
forward-looking statements. The results referred to in forward-looking
statements may differ materially from actual results because they involve
estimates, assumptions and uncertainties. Forward-looking statements
included herein are as of the date hereof and we undertake no obligation
to revise or update such statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of
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unanticipated events. All forward-looking statements should be viewed with
caution.
ENVIRONMENTAL AND OTHER CONTINGENCIES
See Note 10 to the Condensed Consolidated Financial Statements in Part I,
Item 1 for a discussion of environmental and other contingencies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Condensed Consolidated Financial Statements in Part I,
Item 1 for a discussion of recently issued accounting pronouncements.
CRITICAL ACCOUNTING POLICIES
We disclosed details regarding certain of our critical accounting policies
in the Management's Discussion and Analysis section of our 2003 Annual Report on
Form 10-K (Part II, Item 7). There have been no changes to policies as of March
31, 2004.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates
relates primarily to our debt obligations. We currently do not use derivative
financial instruments relating to this exposure. Our interest obligations on
outstanding debt at March 31, 2004 were indexed from short-term LIBOR. We do not
believe our exposures to interest rate risks are material to our financial
position or results of operations.
Foreign Exchange Risk
We are exposed to fluctuations in the Euro, British pound, Canadian dollar
and Chinese Yuan Renminbi. Some of our subsidiaries make significant U.S. dollar
purchases from Asian suppliers, particularly in China. An adverse change in
foreign currency exchange rates of Asian countries could result in an increase
in the cost of purchases. We do not currently hedge foreign currency transaction
or translation exposures.
Commodity Price Risk
We have not employed an active hedging program related to our commodity
price risk, but are employing other strategies for managing this risk, including
contracting for a certain percentage of resin needs through supply agreements
and opportunistic spot purchases. See Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OUTLOOK FOR 2004,
for further discussion of our exposure to increasing raw material costs.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our SEC filings is reported within
the time periods specified in the SEC's rules, and that such information is
accumulated and communicated to the management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We also have investments in certain
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unconsolidated entities. As we do not control or manage these entities, the
disclosure controls and procedures with respect to such entities are necessarily
more limited than those we maintain with respect to our consolidated
subsidiaries.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, Katy
carried out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (pursuant to Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period of our report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to Katy (including its
consolidated subsidiaries) required to be included in our periodic SEC filings.
(b) Change in Internal Controls
There have been no changes in Katy's internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonable likely to materially affect Katy's internal control over
financial reporting.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the quarter for which this report is filed, there have been no
material developments in previously reported legal proceedings, and no other
cases or legal proceedings, other than ordinary routine litigation incidental to
the Company's business and other nonmaterial proceedings, brought against the
Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Loan Agreement dated as of April 20, 2004 with
Fleet Capital Corporation, filed herewith.
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
- Form 8-K, Item 12 furnished March 10, 2004, including press release
and schedules announcing results of operations for the fourth
quarter of 2003 and full year 2003 earnings (not incorporated by
reference).
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
Registrant
DATE: May 10, 2004 By /s/ C. Michael Jacobi
---------------------
C. Michael Jacobi
President and Chief Executive Officer
By /s/ Amir Rosenthal
------------------
Amir Rosenthal
Vice President, Chief Financial Officer,
General Counsel and Secretary
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