Katy Industries, Inc. 10-Q 3/31/07
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
[
x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended: March 31, 2007
or
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from_______________ to________________
Commission
File Number 001-05558
Katy
Industries, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
75-1277589
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
2461
South Clark Street, Suite 630, Arlington, Virginia 22202
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (703) 236-4300
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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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, 2007
|
Common
Stock, $1 Par Value
|
|
7,951,177
Shares
|
FORM
10-Q
March
31,
2007
INDEX
Item
1. FINANCIAL STATEMENTS
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands)
(Unaudited)
ASSETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,919
|
|
$
|
7,392
|
|
Accounts
receivable, net
|
|
|
47,811
|
|
|
55,014
|
|
Inventories,
net
|
|
|
61,484
|
|
|
55,960
|
|
Other
current assets
|
|
|
3,592
|
|
|
2,991
|
|
Asset
held for sale
|
|
|
-
|
|
|
4,483
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
115,806
|
|
|
125,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
665
|
|
|
665
|
|
Intangibles,
net
|
|
|
6,358
|
|
|
6,435
|
|
Other
|
|
|
8,576
|
|
|
8,990
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
15,599
|
|
|
16,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
336
|
|
|
336
|
|
Buildings
and improvements
|
|
|
9,710
|
|
|
9,669
|
|
Machinery
and equipment
|
|
|
120,701
|
|
|
119,703
|
|
|
|
|
|
|
|
|
|
|
|
|
130,747
|
|
|
129,708
|
|
Less
- Accumulated depreciation
|
|
|
(89,780
|
)
|
|
(87,964
|
)
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
40,967
|
|
|
41,744
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
172,372
|
|
$
|
183,674
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands, Except Share Data)
(Unaudited)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
32,836
|
|
$
|
33,684
|
|
Accrued
compensation
|
|
|
3,814
|
|
|
3,518
|
|
Accrued
expenses
|
|
|
33,624
|
|
|
38,187
|
|
Current
maturities of long-term debt
|
|
|
1,500
|
|
|
1,125
|
|
Revolving
credit agreement
|
|
|
41,491
|
|
|
43,879
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
113,265
|
|
|
120,393
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
11,468
|
|
|
11,867
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
9,889
|
|
|
8,402
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
134,622
|
|
|
140,662
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 9)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
15%
Convertible preferred stock, $100 par value,
authorized
|
|
|
|
|
|
|
|
1,200,000
shares, issued and outstanding 1,131,551 shares,
|
|
|
|
|
|
|
|
liquidation
value $113,155
|
|
|
108,256
|
|
|
108,256
|
|
Common
stock, $1 par value; authorized 35,000,000 shares;
|
|
|
|
|
|
|
|
issued
9,822,304 shares
|
|
|
9,822
|
|
|
9,822
|
|
Additional
paid-in capital
|
|
|
27,145
|
|
|
27,069
|
|
Accumulated
other comprehensive income
|
|
|
1,862
|
|
|
2,242
|
|
Accumulated
deficit
|
|
|
(87,375
|
)
|
|
(82,403
|
)
|
Treasury
stock, at cost, 1,871,127 shares and 1,869,827 shares,
respectively
|
|
|
(21,960
|
)
|
|
(21,974
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
37,750
|
|
|
43,012
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
172,372
|
|
$
|
183,674
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Amounts
in Thousands, Except Per Share Data)
(Unaudited)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
94,803
|
|
$
|
75,818
|
|
Cost
of goods sold
|
|
|
86,559
|
|
|
65,407
|
|
Gross
profit
|
|
|
8,244
|
|
|
10,411
|
|
Selling,
general and administrative expenses
|
|
|
11,440
|
|
|
12,481
|
|
Severance,
restructuring and related charges
|
|
|
244
|
|
|
782
|
|
(Gain)
loss on sale of assets
|
|
|
(120
|
)
|
|
102
|
|
Operating
loss
|
|
|
(3,320
|
)
|
|
(2,954
|
)
|
Interest
expense
|
|
|
(1,949
|
)
|
|
(1,740
|
)
|
Other,
net
|
|
|
70
|
|
|
341
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before provision for income
taxes
|
|
|
(5,199
|
)
|
|
(4,353
|
)
|
Provision
for income taxes from continuing operations
|
|
|
(459
|
)
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5,658
|
)
|
|
(4,615
|
)
|
Loss
from operations of discontinued businesses (net of tax)
|
|
|
-
|
|
|
(420
|
)
|
Gain
on sale of discontinued businesses (net of tax)
|
|
|
1,666
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(3,992
|
)
|
|
(5,035
|
)
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
-
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,992
|
)
|
$
|
(5,791
|
)
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and diluted
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.71
|
)
|
$
|
(0.58
|
)
|
Discontinued
operations
|
|
|
0.21
|
|
|
(0.05
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
(0.10
|
)
|
Net
loss
|
|
$
|
(0.50
|
)
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (thousands):
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,951
|
|
|
7,971
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Amounts
in Thousands)
(Unaudited)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,992
|
)
|
$
|
(5,791
|
)
|
(Income)
loss from discontinued operations
|
|
|
(1,666
|
)
|
|
420
|
|
Loss
from continuing operations
|
|
|
(5,658
|
)
|
|
(5,371
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
756
|
|
Depreciation
and amortization
|
|
|
2,072
|
|
|
2,241
|
|
Write-off
and amortization of debt issuance costs
|
|
|
619
|
|
|
287
|
|
Stock
option expense
|
|
|
94
|
|
|
191
|
|
(Gain)
loss on sale of assets
|
|
|
(120
|
)
|
|
102
|
|
Deferred
income taxes
|
|
|
(94
|
)
|
|
-
|
|
|
|
|
(3,087
|
)
|
|
(1,794
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,115
|
|
|
18,302
|
|
Inventories
|
|
|
(5,498
|
)
|
|
(6,451
|
)
|
Other
assets
|
|
|
(708
|
)
|
|
(76
|
)
|
Accounts
payable
|
|
|
1,301
|
|
|
(14,470
|
)
|
Accrued
expenses
|
|
|
(4,078
|
)
|
|
(1,794
|
)
|
Other,
net
|
|
|
485
|
|
|
(1,048
|
)
|
|
|
|
(1,383
|
)
|
|
(5,537
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in continuing operations
|
|
|
(4,470
|
)
|
|
(7,331
|
)
|
Net
cash (used in) provided by discontinued operations
|
|
|
(565
|
)
|
|
389
|
|
Net
cash used in operating activities
|
|
|
(5,035
|
)
|
|
(6,942
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures of continuing operations
|
|
|
(1,130
|
)
|
|
(816
|
)
|
Proceeds
from sale of discontinued operations, net
|
|
|
6,609
|
|
|
-
|
|
Proceeds
from sale of assets, net
|
|
|
120
|
|
|
163
|
|
Net
cash provided by (used in) investing activities
|
|
|
5,599
|
|
|
(653
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
(repayments) borrowings on revolving loans
|
|
|
(2,454
|
)
|
|
8,578
|
|
Decrease
in book overdraft
|
|
|
(2,153
|
)
|
|
(5,360
|
)
|
Repayments
of term loans
|
|
|
(24
|
)
|
|
(714
|
)
|
Direct
costs associated with debt facilities
|
|
|
(125
|
)
|
|
(165
|
)
|
Repurchases
of common stock
|
|
|
(3
|
)
|
|
(4
|
)
|
Proceeds
from the exercise of stock options
|
|
|
-
|
|
|
147
|
|
Net
cash (used in) provided by financing activities
|
|
|
(4,759
|
)
|
|
2,482
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(278
|
)
|
|
(307
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(4,473
|
)
|
|
(5,420
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
7,392
|
|
|
8,421
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,919
|
|
$
|
3,001
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2007
(Unaudited)
(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, which do not meet the criteria of a variable interest entity and
are
not majority owned or where the Company exercises significant influence, are
reported using the equity method. The condensed consolidated financial
statements at March 31, 2007 and December 31, 2006 and for the three month
periods ended March 31, 2007 and March 31, 2006 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, 2006. The year-end condensed balance sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States.
Use
of
Estimates and Reclassifications
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.
Certain
reclassifications associated with the presentation of discontinued operations
were made to the 2006 amounts in order to conform to the 2007
presentation.
Inventories
The
components of inventories are as follows (amounts in thousands):
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
16,800
|
|
$
|
15,915
|
|
Work
in process
|
|
|
1,279
|
|
|
613
|
|
Finished
goods
|
|
|
54,012
|
|
|
47,230
|
|
Inventory
reserves
|
|
|
(6,833
|
)
|
|
(3,769
|
)
|
LIFO
reserve
|
|
|
(3,774
|
)
|
|
(4,029
|
)
|
|
|
$
|
61,484
|
|
$
|
55,960
|
|
|
|
|
|
|
|
|
|
At
March
31, 2007 and December 31, 2006, approximately 22% and 24%, 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 $3.8 million and $4.0 million at March 31, 2007
and December 31, 2006, respectively. The primary increase in the inventory
reserves relates to an adjustment for approximately $2.5 million associated
with
the net realizable value and potential obsolescence of inventory within the
Electrical Products Group.
Property
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 method; 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 $1.9 million and $2.1
million for the three month periods ended March 31, 2007 and 2006, respectively.
Stock
Options and Other Stock Awards
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123R, Share-Based
Payment
(“SFAS
No. 123R”), which sets accounting requirements for “share-based” compensation to
employees, requires companies to recognize the grant date fair value of stock
options and other equity-based compensation issued to employees and disallows
the use of intrinsic value method of accounting for stock compensation. The
Company has adopted SFAS No. 123R using the modified prospective method. Under
this method, compensation cost recognized during the three month period ended
March 31, 2007 includes: a) compensation cost for all stock options granted
prior to, but not yet vested as of January 1, 2006, based on the grant date
fair
value estimated in accordance with SFAS No. 123R amortized over the options’
vesting period and b) compensation cost for outstanding stock appreciation
rights based on the March 31, 2007 fair value estimated in accordance with
SFAS
No. 123R. Compensation cost recognized during the three month period ended
March
31, 2006 includes: a) compensation cost for all stock options granted prior
to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with SFAS No. 123R amortized over the options’ vesting
period; b) compensation cost for stock appreciation rights granted prior to,
but
vested as of January 1, 2006, based on the January 1, 2006 fair value estimated
in accordance with SFAS No. 123R; and c) compensation cost for outstanding
stock
appreciation rights as of March 31, 2006 based on the March 31, 2006 fair value
estimated in accordance with SFAS No. 123R.
The
following table shows total compensation (income) expense included in the
Condensed Consolidated Statement of Operations for the three month periods
ended
March 31, 2007 and 2006:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$
|
(85
|
)
|
$
|
489
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
756
|
|
|
|
$
|
(85
|
)
|
$
|
1,245
|
|
|
|
|
|
|
|
|
|
The
fair
value for stock options was estimated at the date of grant using a Black-Scholes
option pricing model. The Company used the simplified method, as allowed by
Staff Accounting Bulletin (“SAB”) No. 107, Share-Based
Payment,
for
estimating the expected term by averaging the minimum and maximum lives expected
for each award. In addition, the Company estimated volatility by considering
its
historical stock volatility over a term comparable to the remaining expected
life of each award. The risk-free interest rate was the current yield available
on U.S. treasury rates with issues with a remaining term equal in term to each
award. The Company estimates forfeitures using historical results. Its estimates
of forfeitures will be adjusted over the requisite service period based on
the
extent to which actual forfeitures differ, or are expected to differ, from
their
estimate. The assumptions for expected term, volatility and risk-free rate
are
presented in the table below:
Expected
term (years)
|
|
5.3
- 6.5
|
Volatility
|
|
53.8%
- 57.6%
|
Risk-free
rate
|
|
3.98%
- 4.48%
|
The
fair
value for stock appreciation rights, a liability award, was estimated at the
effective date of SFAS No. 123R, and March 31, 2007 and 2006, using a
Black-Scholes option pricing model. The Company estimated the expected term
to
be equal to the average between the minimum and maximum lives expected for
each
award. In addition, the Company estimated volatility by considering its
historical stock volatility over a term comparable to the remaining expected
life of each award. The risk-free interest rate was the current yield available
on U.S. treasury rates with issues with a remaining term equal in term to each
award. The Company estimates forfeitures using historical results. Its estimates
of forfeitures will be adjusted over the requisite service period based on
the
extent to which actual forfeitures differ, or are expected to differ, from
their
estimate. The assumptions for expected term, volatility and risk-free rate
are
presented in the table below:
|
March
31,
|
|
March
31,
|
|
2007
|
|
2006
|
|
|
|
|
Expected
term (years)
|
0.1
- 5.3
|
|
3.0
- 5.3
|
Volatility
|
53.7%
- 80.6%
|
|
48.2%
- 55.0%
|
Risk-free
rate
|
4.54%
- 5.07%
|
|
4.37%
- 4.83%
|
Derivative
Financial Instruments
Effective
August 17, 2005, the Company entered into an interest rate swap agreement
designed to limit exposure to increasing interest rates on its floating rate
indebtedness. The differential to be paid or received is recognized as an
adjustment of interest expense when the interest expense on the debt is
recognized. In connection with the Company’s adoption of SFAS No. 133,
Accounting
for Derivative Financial Instruments and Hedging Activities
(“SFAS
No. 133”), the Company is required to recognize all derivatives, such as
interest rate swaps, on its balance sheet at fair value. As the derivative
instrument held by the Company is classified as a cash flow hedge under SFAS
No.
133, changes in the fair value of the derivative will be recognized in other
comprehensive income until the hedged item is recognized in earnings. Hedge
ineffectiveness associated with the swap will be reported by the Company in
interest expense.
The
agreement has an effective date of August 17, 2005 and a termination date of
August 17, 2007 with a notional amount of $25.0 million in the first year
declining to $15.0 million in the second year. The Company is hedging its
variable LIBOR-based interest rate for a fixed interest rate of 4.49% for the
term of the swap agreement to protect the Company from potential interest rate
increases. The Company has designated its benchmark variable LIBOR-based
interest rate on a portion of the Bank of America Credit Agreement as a hedged
item under a cash flow hedge. In accordance with SFAS No. 133, the Company
recorded an asset of $0.1 million on its balance sheet at March 31, 2007, with
changes in fair market value included in other comprehensive
income.
The
Company reported no gain or loss for the three months ended March 31, 2007,
as a
result of any hedge ineffectiveness. Future changes in this swap arrangement,
including termination of the agreement, may result in a reclassification of
any
gain or loss reported in other comprehensive income into earnings as an
adjustment to interest expense.
Details
regarding the swap as of March 31, 2007 are as follows (amounts in
thousands):
|
Notional
Amount
|
|
Maturity
|
|
Rate
Paid
|
|
Rate
Received
|
|
Fair
Value (2)
|
|
$
15,000
|
|
August
17, 2007
|
|
4.49%
|
|
LIBOR
(1)
|
|
$
58
|
|
|
|
|
|
|
|
|
|
|
(1)
|
LIBOR
rate is determined on the 23rd of each month and continues up to
and
including the maturity date.
|
|
|
|
|
|
|
|
|
|
|
(2)
|
The
fair value is the mark-to-market
value.
|
Comprehensive
Loss
The
components of comprehensive loss are as follows (amounts in
thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Net
loss
|
|
$
|
(3,992
|
)
|
$
|
(5,791
|
)
|
Foreign
currency translation losses
|
|
|
(334
|
)
|
|
(417
|
)
|
Unrealized
(losses) gains on interest rate swap
|
|
|
(29
|
)
|
|
93
|
|
Other
|
|
|
(17
|
)
|
|
-
|
|
|
|
|
(380
|
)
|
|
(324
|
)
|
Comprehensive
loss
|
|
$
|
(4,372
|
)
|
$
|
(6,115
|
)
|
|
|
|
|
|
|
|
|
(2)
New
Accounting Pronouncements
As
discussed in Note 8, the Company adopted, effective January 1, 2007, Financial
Accounting Standards Board ("FASB") Interpretation (“FIN”) No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
No. 48”), which describes a comprehensive model for the measurement,
recognition, presentation, and disclosure of uncertain tax positions in the
financial statements. Under the interpretation, the financial statements will
reflect expected future tax consequences of such positions presuming the tax
authorities’ full knowledge of the position and all relevant facts, but without
considering time values.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This standard does not require any
new fair value measurements but provides guidance in determining fair value
measurements presently used in the preparation of financial statements. For
the
Company, SFAS No. 157 is effective January 1, 2008. The Company is assessing
the
impact this statement may have in its future financial statements.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including
an
Amendment of FASB Statement No. 115
(“SFAS
No. 159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, with unrealized
gains and losses related to these financial instruments reported in earnings
at
each subsequent reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact this statement may have in its future financial statements.
(3)
Intangible
Assets
Following
is detailed information regarding Katy’s intangible assets (amounts in
thousands):
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Patents
|
|
$
|
1,583
|
|
$
|
(1,093
|
)
|
$
|
490
|
|
$
|
1,511
|
|
$
|
(1,065
|
)
|
$
|
446
|
|
Customer
lists
|
|
|
10,454
|
|
|
(8,157
|
)
|
|
2,297
|
|
|
10,454
|
|
|
(8,111
|
)
|
|
2,343
|
|
Tradenames
|
|
|
5,613
|
|
|
(2,410
|
)
|
|
3,203
|
|
|
5,612
|
|
|
(2,345
|
)
|
|
3,267
|
|
Other
|
|
|
441
|
|
|
(73
|
)
|
|
368
|
|
|
441
|
|
|
(62
|
)
|
|
379
|
|
Total
|
|
$
|
18,091
|
|
$
|
(11,733
|
)
|
$
|
6,358
|
|
$
|
18,018
|
|
$
|
(11,583
|
)
|
$
|
6,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
of
Katy’s intangible assets are definite long-lived intangibles. Katy recorded
amortization expense on intangible assets of $0.2 million for both the three
month periods ended March 31, 2007 and 2006. Estimated aggregate future
amortization expense related to intangible assets is as follows (amounts in
thousands):
2007
(remainder)
|
|
$
|
639
|
|
2008
|
|
|
635
|
|
2009
|
|
|
600
|
|
2010
|
|
|
547
|
|
2011
|
|
|
507
|
|
2012
|
|
|
505
|
|
Thereafter
|
|
|
2,925
|
|
|
|
$
|
6,358
|
|
|
|
|
|
|
(4)
Savannah
Energy Systems Company Partnership
In
1984,
Savannah Energy Systems Company (“SESCO”), an indirect wholly owned subsidiary
of Katy, entered into a series of contracts with the Resource Recovery
Development Authority of the City of Savannah, Georgia (“the Authority”) to
construct and operate a waste-to-energy facility. The facility would be owned
and operated by SESCO solely for the purpose of processing and disposing of
waste from the City of Savannah.
On
April
29, 2002, SESCO 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 Montenay Savannah Limited 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.
On
June
27, 2006, the Company and Montenay amended the partnership interest purchase
agreement in order to allow the Company to completely exit from the SESCO
operations and related obligations. Montenay purchased the Company’s limited
partnership interest for $0.1 million and a reduction of approximately $0.6
million in the face amount due to Montenay as agreed upon in the original
partnership agreement.
The
final
payment of $0.4 million due to Montenay as of December 31, 2006 was reflected
in
accrued expenses in the Condensed Consolidated Balance Sheets, and was paid
in
January 2007.
(5)
Indebtedness
Long-term
debt consists of the following (amounts in thousands):
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Term
loan payable under Bank of America Credit Agreement, interest based
|
|
|
|
|
|
|
|
on
LIBOR and Prime Rates (8.38% - 9.50%), due through 2009
|
|
$
|
12,968
|
|
$
|
12,992
|
|
Revolving
loans payable under the Bank of America Credit Agreement,
|
|
|
|
|
|
|
|
interest
based on LIBOR and Prime Rates (8.13% - 9.25%)
|
|
|
41,491
|
|
|
43,879
|
|
Total
debt
|
|
|
54,459
|
|
|
56,871
|
|
Less
revolving loans, classified as current (see below)
|
|
|
(41,491
|
)
|
|
(43,879
|
)
|
Less
current maturities
|
|
|
(1,500
|
)
|
|
(1,125
|
)
|
Long-term
debt
|
|
$
|
11,468
|
|
$
|
11,867
|
|
|
|
|
|
|
|
|
|
Aggregate
remaining scheduled maturities of the Term Loan as of March 31, 2007 are as
follows (amounts in thousands):
2007
|
|
$
|
1,125
|
|
2008
|
|
|
1,500
|
|
2009
|
|
|
10,343
|
|
|
|
$
|
12,968
|
|
|
|
|
|
|
On
April
20, 2004, the Company completed a refinancing of its outstanding indebtedness
(the “Refinancing”) and entered into a new agreement with Bank of America
Business Capital (the “Bank of America Credit Agreement”). The current Bank of
America Credit Agreement, as amended is a $93.0 million facility with a $13.0
million term loan (“Term Loan”) and a $80.0 million revolving credit facility
(“Revolving Credit Facility”). The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks.
The
Revolving Credit Facility has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
Unused borrowing availability on the Revolving Credit Facility was $14.2 million
at March 31, 2007. All extensions of credit under the Bank of America Credit
Agreement are collateralized by a first priority 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. The Term Loan also has a final maturity date of April
20, 2009 with quarterly payments of $0.4 million, as amended and beginning
April
1, 2007. A final payment of $10.0 million is scheduled to be paid in April
2009.
The Term Loan is collateralized by the Company’s property, plant and equipment.
The
Company’s borrowing base under the Bank of America Credit Agreement is reduced
by the outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom the Company conducts 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, the
Company’s largest letters of credit relate to its casualty insurance programs.
At March 31, 2007, total outstanding letters of credit were $6.6
million.
On
March
8, 2007 the Company obtained the Eighth Amendment to the Bank of America Credit
Agreement. The Eighth Amendment eliminates the Fixed Charge Coverage Ratio
for
the remaining life of the debt agreement and requires the Company to maintain
a
minimum level of availability (eligible collateral base less outstanding
borrowings and letters of credit) such that its eligible collateral must exceed
the sum of its outstanding borrowings and letters of credit by at least $5.0
million from the effective date of the Eighth Amendment through September 29,
2007 and by $7.5 million from that point through December 2007. Thereafter,
the
Company is required to maintain a minimum level of availability such that
eligible collateral must exceed the sum of its outstanding borrowings and
letters of credit by at least $5.0 million for the first three quarters of
the
year and $7.5 million for the fourth quarter. In addition, the Company reduced
its Revolving Credit Facility from $90.0 million to $80.0 million.
If
the
Company is unable to comply with the terms of the amended covenants, it could
seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets. It is possible, however,
the Company may not be able to obtain further amendments from the lender or
secure additional debt financing or liquidity through the sale of assets on
favorable terms or at all. However, the Company believes that it will be able
to
comply with all covenants, as amended, throughout 2007.
Effective
since April 2005, interest rate margins have been set at the largest margins
set
forth in the Bank of America Credit Agreement, 275 basis points over applicable
LIBOR rates for Revolving Credit Facility borrowings and 300 basis points over
LIBOR for borrowings under the Term Loan. In accordance with the Bank of America
Credit Agreement, margins on the Term Loan will drop an additional 25 basis
points if the balance of the 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, 2007.
Effective
August 17, 2005, the Company entered into a two-year interest rate swap on
a
notional amount of $25.0 million in the first year and $15.0 million in the
second year. The purpose of the swap was to limit the Company’s exposure to
interest rate increases on a portion of the Revolving Credit Facility over
the
two-year term of the swap. The fixed interest rate under the swap at March
31,
2007 and over the life of the agreement is 4.49%.
All
of
the debt under the Bank of America Credit Agreement is re-priced to current
rates at frequent intervals. Therefore, its fair value approximates its carrying
value at March 31, 2007. For the three month periods ended March 31, 2007 and
2006, the Company had amortization of debt issuance costs, included within
interest expense, of $0.6 million and $0.3 million, respectively. Included
in
amortization of debt issuance costs is approximately $0.3 million for the three
month period ended March 31, 2007 of debt issuance costs written off due to
the
reduction in the Revolving Credit Facility on March 8, 2007. In addition, the
Company incurred $0.1 million and $0.2 million associated with amending the
Bank
of America Credit Agreement, as discussed above, for the three month periods
ended March 31, 2007 and 2006, respectively.
The
Revolving Credit Facility under the Bank of America 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 Bank of America Credit Agreement,
caused the Revolving Credit Facility to be classified as a current liability,
per guidance in the Emerging Issues Task Force 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.
The
Company does not expect to repay, or be required to repay, within one year,
the
balance of the Revolving Credit Facility classified as a current liability.
The
MAE clause, which is a typical requirement in commercial credit agreements,
allows the lenders to require the loan to become due if they determine there
has
been a material adverse effect on the Company’s operations, business,
properties, assets, liabilities, condition, or prospects. The classification
of
the Revolving Credit Facility as a current liability is a result only of the
combination of the lockbox agreements and MAE clause. The Revolving Credit
Facility does not expire or have a maturity date within one year, but rather
has
a final expiration date of April 20, 2009. The lender had not notified the
Company of any indication of a MAE at March 31, 2007, and the Company was not
in
default of any provision of the Bank of America Credit Agreement at March 31,
2007.
(6)
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 for the three month periods ended March 31, 2007
and 2006 are as follows (amounts in thousands):
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2
|
|
$
|
2
|
|
$
|
-
|
|
$
|
-
|
|
Interest
cost
|
|
|
23
|
|
|
22
|
|
|
51
|
|
|
36
|
|
Expected
return on plan assets
|
|
|
(24
|
)
|
|
(22
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
-
|
|
|
22
|
|
|
14
|
|
Amortization
of net loss
|
|
|
13
|
|
|
14
|
|
|
4
|
|
|
10
|
|
Net
periodic benefit cost
|
|
$
|
14
|
|
$
|
16
|
|
$
|
77
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required
contributions to the pension plans for 2007 are $10 thousand and Katy made
contributions of $35 thousand during the first quarter of 2007.
(7)
Stock
Incentive Plans
Stock
Options
The
following table summarizes stock option activity under each of the applicable
Company’s plans:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Options
|
|
Price
|
|
Life
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,718,000
|
|
$
|
3.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
1,718,000
|
|
$
|
3.66
|
|
|
6.45
years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at March 31, 2007
|
|
|
1,098,000
|
|
$
|
4.20
|
|
|
5.44
years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
March 31, 2007, total unvested compensation expense associated with stock
options amounted to $0.2 million and is being amortized on a straight-line
basis
over the respective option’s vesting period. The weighted average period in
which the above compensation cost will be recognized is 0.7 years as of March
31, 2007.
Stock
Appreciation Rights
The
following table summarizes SARs activity under each of the applicable Company’s
plans:
Non-Vested
at December 31, 2006
|
|
|
53,434
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
Vested
|
|
|
(26,667
|
)
|
|
|
|
|
|
Non-Vested
at March 31, 2007
|
|
|
26,767
|
|
|
|
|
|
|
Total
Outstanding at March 31, 2007
|
|
|
798,281
|
|
|
|
|
|
|
For
the
three months ended March 31, 2007 and 2006, total compensation (income) expense
associated with stock appreciation rights amounted to approximately ($0.2)
million and $1.0 million, respectively.
(8)
Income
Taxes
The
Company adopted FIN No. 48 on January 1, 2007. As a result of the implementation
of FIN No. 48, the Company recognized approximately a $1.1 million increase
in
the liability for unrecognized tax benefits, which was accounted for as an
increase of $0.1 million to the January 1, 2007 balance of deferred tax assets
and a reduction of $1.0 million to the January 1, 2007 balance of retained
earnings.
Included
in the balance at March 31, 2007 are $1.8 million of tax positions for which
the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
have accelerated the payment of cash to the taxing authority to an earlier
period.
The
Company recognizes interest and penalties accrued related to the unrecognized
tax benefits in the provision for income taxes. During the three months ended
March 31, 2007, the Company recognized an insignificant amount in interest
and
penalties. The Company had approximately $0.3 million for the payment of
interest and penalties accrued at March 31, 2007.
The
Company believes that it is reasonably possible that the total amount of
unrecognized tax benefits will change within twelve months of the date of
adoption. The Company has certain tax return years subject to statutes of
limitation which will close within twelve months of the date of adoption. Unless
challenged by tax authorities, the closure of those statutes of limitation
is
expected to result in the recognition of uncertain tax positions in the amount
of $0.2 million. The Company has uncertain tax positions relating to transfer
pricing practices and filings in certain jurisdictions, none of which are
currently under examination.
The
Company and all of its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. The Company’s foreign subsidiaries file income
tax returns in certain foreign jurisdictions since they have operations outside
the U.S. The Company and its subsidiaries are generally no longer subject to
U.S. federal, state and local examinations by tax authorities for years before
2002.
As
of
March 31, 2007 and December 31, 2006, the Company had deferred tax assets,
net
of deferred tax liabilities and valuation allowances, of $1.1 million and $1.0
million, respectively. Domestic net operating loss (“NOL”) carry forwards
comprised $35.1 million of the deferred tax assets for both periods. Katy’s
history of operating losses in many of its taxing jurisdictions 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 reason, the Company
was
unable to conclude at March 31, 2007 and December 31, 2006 that NOLs and other
deferred tax assets in the United States and certain unprofitable foreign
jurisdictions would be utilized in the future. As a result, valuation allowances
for these entities were recorded as of such dates for the full amount of
deferred tax assets, net of the amount of deferred tax liabilities.
The
provision for income taxes for the three months ended March 31, 2007 and 2006
reflects current expense for state and foreign income taxes. Tax benefits were
not recorded on the pre-tax net loss for the first quarter of 2007 as valuation
allowances were recorded related to deferred tax assets created as a result
of
operating losses in the United States and certain foreign jurisdictions. As
a
result of accumulated operating losses in those jurisdictions, the Company
has
concluded that it was more likely than not that such benefits would not be
realized.
(9)
Commitments
and Contingencies
General
Environmental Claims
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 (“EPA”), 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 in 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 five to ten years.
W.J.
Smith Wood Preserving Company (“W.J. Smith”)
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 EPA initiated a proceeding under Section 7003 of the Resource Conservation
and Recovery Act (“RCRA”) 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 the EPA agreed to
resolve the proceeding through an Administrative Order on Consent under Section
7003 of RCRA. While the Company has completed the cleanup activities required
by
the Administrative Order on Consent under Section 7003 of RCRA, the Company
still has further obligations with respect to this matter in the areas of
groundwater and land treatment unit monitoring and closure as well as ongoing
site operation and maintenance costs.
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.
Asbestos
Claims
A. The
Company has been named as a defendant in ten lawsuits filed in state court
in
Alabama by a total of approximately 324 individual plaintiffs. There are over
100 defendants named in each case. In all ten cases, the Plaintiffs claim that
they were exposed to asbestos in the course of their employment at a former
U.S.
Steel plant in Alabama and, as a result, contracted mesothelioma, asbestosis,
lung cancer or other illness. They claim that they were exposed to asbestos
in
products in the plant which were manufactured by each defendant. In eight of
the
cases, Plaintiffs also assert wrongful death claims. The Company will vigorously
defend the claims against it in these matters. The liability of the Company
cannot be determined at this time.
B. Sterling
Fluid Systems (USA) has tendered over 2,086 cases pending in Michigan, New
Jersey, New York, Illinois, Nevada, Mississippi, Wyoming, Louisiana, Georgia,
Massachusetts and California to the Company for defense and indemnification.
With respect to one case, Sterling has demanded that Katy indemnify it for
a
$200,000 settlement. Sterling bases its tender of the complaints on the
provisions contained in a 1993 Purchase Agreement between the parties whereby
Sterling purchased the LaBour Pump business and other assets from the Company.
Sterling has not filed a lawsuit against Katy in connection with these
matters.
The
tendered complaints all purport to state claims against Sterling and its
subsidiaries. The Company and its current subsidiaries are not named as
defendants. The plaintiffs in the cases also allege that they were exposed
to
asbestos and products containing asbestos in the course of their employment.
Each complaint names as defendants many manufacturers of products containing
asbestos, apparently because plaintiffs came into contact with a variety of
different products in the course of their employment. Plaintiffs claim that
LaBour Pump and/or Sterling may have manufactured some of those
products.
With
respect to many of the tendered complaints, including the one settled by
Sterling for $200,000, the Company has taken the position that Sterling has
waived its right to indemnity by failing to timely request it as required under
the 1993 Purchase Agreement. With respect to the balance of the tendered
complaints, the Company has elected not to assume the defense of Sterling in
these matters.
C. LaBour
Pump Company, a former subsidiary of the Company, has been named as a defendant
in over 364 similar cases in New Jersey. These cases have also been tendered
by
Sterling. The Company has elected to defend these cases, many of which have
been
dismissed or settled for nominal sums.
While
the
ultimate liability of the Company related to the asbestos matters above cannot
be determined at this time, the Company has recorded and accrued amounts that
it
deems reasonable for prospective liabilities with respect to this matter.
Non-Environmental
Litigation - Banco del Atlantico, S.A.
Banco
del Atlantico, S.A. v. Woods Industries, Inc., et al. Civil
Action No. L-96-139
(now 1:03-CV-1342-LJM-VSS,
U.S.
District Court, Southern District of Indiana).
The case
against Woods Industries, Inc. (“Woods”) was dismissed by order of the District
Court dated April 9, 2007. As reflected below, however, motions to reconsider
and/or an appeal are likely, and certain disputes remain between Woods, Katy,
and certain of Woods’ codefendants.
In
December 1996, Banco del Atlantico (“plaintiff”), a bank located in Mexico,
filed a lawsuit in Texas against Woods Industries, Inc., a subsidiary of Katy,
and against certain past and/or then present officers, directors and owners
of
Woods (collectively, “defendants”). The plaintiff alleges that it was defrauded
into making loans to a Mexican corporation controlled by certain past officers
and directors of Woods based upon fraudulent representations and purported
guarantees. Based on these allegations, and others, the plaintiff originally
asserted claims for alleged violations of the federal Racketeer Influenced
and
Corrupt Organizations Act (“RICO”); “money laundering” of the proceeds of the
illegal enterprise; the Indiana RICO and Crime Victims Act; common law fraud
and
conspiracy; and fraudulent transfer. The plaintiff also seeks recovery upon
certain alleged guarantees purportedly executed by Woods Wire Products, Inc.,
a
predecessor company from which Woods purchased certain assets in 1993 (prior
to
Woods’s ownership by Katy, which began in December 1996). 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.
The
case
was transferred from Texas to the Southern District of Indiana in 2003. In
September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
“plaintiffs”), who intervened in the litigation as an additional alleged owner
of the claims against the defendants, filed a Second Amended
Complaint.
On
August
11, 2005, the Court dismissed with
prejudice all
of
the federal and Indiana RICO claims asserted in the Second Amended Complaint
against Woods. During subsequent discovery, Defendants moved for sanctions
for
the Plaintiffs’ asserted failures to abide by the rules of discovery and produce
certain documents and witnesses, including the sanction of dismissal of the
case
with
prejudice.
Defendants also moved for summary judgment on the remaining claims on January
16, 2007. Plaintiffs also cross-moved for summary judgment in their favor on
their claims under the alleged guarantees purportedly executed by old Woods
Wire
Products, Inc.
On
April
9, 2007, while the parties’ summary judgment motions were still being briefed,
the Court granted Defendants’ motion for sanctions and dismissed all of
Plaintiffs’ claims with
prejudice.
The
Court’s dismissal order dismisses all remaining claims against
Woods.
Katy
expects Plaintiffs to request a reconsideration of and/or appeal the Court’s
dismissal orders, although no such request or notice of appeal has yet been
filed. Plaintiffs’ claims as originally pled sought damages in excess of $24.0
million, requested that the Court void certain asset sales as purported
“fraudulent transfers” (including the 1993 Woods Wire Products, Inc./Woods asset
sale), and treble damages for some or all of their claims. Katy may have
recourse against the former owners 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
Plaintiffs. The extent or limit of any such adjustment cannot be predicted
at
this time.
While
the
ultimate liability of the Company related to this matter cannot be determined
at
this time, the Company has recorded and accrued amounts that it deems reasonable
for prospective liabilities with respect to this matter.
Other
Claims
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.
Although
management believes that the actions specified above in this section
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.
(10)
Industry
Segment Information
The
Company is organized into two operating segments: Maintenance Products and
Electrical Products. The activities of the Maintenance Products Group include
the manufacture and distribution of a variety of commercial cleaning supplies
and consumer home products. The Electrical Products Group is a marketer and
distributor of consumer electrical corded products. For all periods presented,
information for the Maintenance Products Group excludes amounts related to
the
United Kingdom consumer plastics and Metal Truck Box business units as the
units
are classified as discontinued operations as discussed further in Note 12.
The
following table sets forth information by segment (amounts in
thousands):
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Maintenance
Products Group
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
$
|
50,308
|
|
$
|
49,973
|
|
Operating
income
|
|
|
|
|
|
830
|
|
|
946
|
|
Operating
margin
|
|
|
|
|
|
1.6
|
%
|
|
1.9
|
%
|
Depreciation
and amortization
|
|
|
|
|
|
1,873
|
|
|
1,968
|
|
Capital
expenditures
|
|
|
|
|
|
1,017
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
Products Group
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
$
|
44,495
|
|
$
|
25,845
|
|
Operating
(loss) income
|
|
|
|
|
|
(1,360
|
)
|
|
59
|
|
Operating
(deficit) margin
|
|
|
|
|
|
(3.1
|
%)
|
|
0.2
|
%
|
Depreciation
and amortization
|
|
|
|
|
|
165
|
|
|
239
|
|
Capital
expenditures
|
|
|
|
|
|
113
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
-
|
|
Operating
segments
|
|
$
|
94,803
|
|
$
|
75,818
|
|
|
|
|
Total
|
|
$
|
94,803
|
|
$
|
75,818
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
-
|
|
Operating
segments
|
|
$
|
(530
|
)
|
$
|
1,005
|
|
|
-
|
|
Unallocated
corporate
|
|
|
(2,666
|
)
|
|
(3,075
|
)
|
|
-
|
|
Severance,
restructuring and related charges
|
|
|
(244
|
)
|
|
(782
|
)
|
|
-
|
|
Gain
(loss) on sale of assets
|
|
|
120
|
|
|
(102
|
)
|
|
|
|
Total
|
|
$
|
(3,320
|
)
|
$
|
(2,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
-
|
|
Operating
segments
|
|
$
|
2,038
|
|
$
|
2,207
|
|
|
-
|
|
Unallocated
corporate
|
|
|
34
|
|
|
34
|
|
|
|
|
Total
|
|
$
|
2,072
|
|
$
|
2,241
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
-
|
|
Operating
segments
|
|
$
|
1,130
|
|
$
|
816
|
|
|
|
|
Total
|
|
$
|
1,130
|
|
$
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Total
assets
|
-
|
|
Maintenance
Products Group
|
|
$
|
99,221
|
|
$
|
95,963
|
|
|
-
|
|
Electrical
Products Group
|
|
|
66,253
|
|
|
74,161
|
|
|
-
|
|
Other
[a]
|
|
|
2,217
|
|
|
6,700
|
|
|
-
|
|
Unallocated
corporate
|
|
|
4,681
|
|
|
6,850
|
|
|
|
|
Total
|
|
$
|
172,372
|
|
$
|
183,674
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Amounts shown as “Other” represent items associated with Sahlman Holding
Company, Inc., the Company’s equity method investment in both periods. For
December 31, 2006, amount also includes the real assets of the United Kingdom
consumer plastics business unit, which is classified as an asset held for sale
at December 31, 2006.
(11)
Severance,
Restructuring and Related Charges
Over
the
past three years, the Company has initiated several cost reduction and facility
consolidation initiatives, resulting in severance, restructuring and related
charges. Key initiatives were the consolidation of the St. Louis, Missouri
manufacturing/distribution facilities, shutdown of both Woods U.S. and Woods
Canada manufacturing as well as the consolidation of the Glit facilities. These
initiatives resulted from the on-going strategic reassessment of the Company’s
various businesses as well as the markets in which they operate.
A
summary
of charges by major initiative is as follows (amounts in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$
|
189
|
|
$
|
699
|
|
Consolidation
of Glit facilities
|
|
|
19
|
|
|
-
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
36
|
|
|
-
|
|
Corporate
office relocation
|
|
|
-
|
|
|
83
|
|
Total
severance, restructuring and related charges
|
|
$
|
244
|
|
$
|
782
|
|
|
|
|
|
|
|
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
- In
2002, the Company committed to a plan to consolidate the manufacturing and
distribution of the four Continental Commercial Products, LLC (“CCP”) facilities
in the St. Louis, Missouri area. Management believed that in order to implement
a more competitive cost structure and combat competitive pricing pressure,
the
excess capacity at the Company’s four plastic molding facilities in this area
would need to be eliminated. This plan was expected to be completed by the
end
of 2003; however, charges have been incurred past 2003 due to changes in
assumptions in non-cancelable lease accruals. Charges in 2007 were for an
adjustment to the non-cancelable lease accrual at the Hazelwood, Missouri
facility due to changes on the estimates for insurance and maintenance costs.
Charges in 2006 were for an adjustment to the non-cancelable lease accrual
at
the Hazelwood, Missouri facility due to the execution of a sublease on the
property. Management believes that no further charges will be incurred for
this
activity, except for potential adjustments to non-cancelable lease liabilities.
Following is a rollforward of restructuring liabilities by type for the
consolidation of St. Louis manufacturing/distribution facilities (amounts in
thousands):
|
|
Contract
|
|
|
|
Termination
|
|
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$
|
465
|
|
Additions
|
|
|
189
|
|
Payments
|
|
|
(223
|
)
|
Restructuring
liabilities at March 31, 2007
|
|
$
|
431
|
|
|
|
|
|
|
Consolidation
of Glit facilities
- In
2002, the Company approved a plan to consolidate the manufacturing facilities
of
its Glit business
unit in
order to implement
a more competitive cost structure. It was anticipated that this activity would
begin in early 2003 and be completed by the end of the second quarter of 2004.
Due to numerous operational issues, including management turnover and a small
fire at the Wrens, Georgia facility, the completion of this consolidation was
delayed. In 2007, the Company began the process of closing the Washington,
Georgia facility. Charges were incurred in 2007 associated with severance for
terminations at the Washington, Georgia facility. Management believes that
no
further charges will be incurred for this activity. Following is a rollforward
of restructuring liabilities by type for the consolidation of Glit facilities
(amounts in thousands):
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$
|
5
|
|
$
|
-
|
|
$
|
5
|
|
Additions
|
|
|
19
|
|
|
19
|
|
|
-
|
|
Payments
|
|
|
(24
|
)
|
|
(19
|
)
|
|
(5
|
)
|
Restructuring
liabilities at March 31, 2007
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Shutdown
of Woods Canada manufacturing
- In
2003, the Company approved a plan to shut down the manufacturing operation
in
Toronto, Ontario and source substantially all of its products from Asia.
Management believed that this action was necessary in order to implement a
more
competitive cost structure to combat pricing pressure by producers in Asia.
In
connection with this shutdown, the Company also anticipated the sale and
leaseback of this facility, which would provide additional liquidity. In
December 2003, Woods Canada closed this manufacturing facility in Toronto,
Ontario, but was unable to complete the sale/leaseback transaction at that
time.
Accordingly, the charge for the non-cancelable lease accrual was recorded in
the
first quarter of 2004, upon the completion of the sale/leaseback transaction.
The idle capacity was a direct result of the elimination of the manufacturing
function from this facility. A portion of the facility was available for
sublease at the time the accrual was established. Charges in 2007 were for
an
adjustment to the non-cancelable lease accruals. Management believes that no
more costs will be incurred for this activity, except for potential adjustments
to non-cancelable lease liabilities. Following is a rollforward of restructuring
liabilities by type for the shutdown of Woods Canada manufacturing (amounts
in
thousands):
|
|
Contract
|
|
|
|
Termination
|
|
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$
|
491
|
|
Additions
|
|
|
36
|
|
Payments
|
|
|
(67
|
)
|
Restructuring
liabilities at March 31, 2007
|
|
$
|
460
|
|
|
|
|
|
|
Corporate
office relocation
- In
November 2005, the Company announced the closing of its corporate office in
Middlebury, Connecticut, and the relocation of certain corporate functions
to
the CCP location in Bridgeton, Missouri, the outsourcing of other functions,
and
the move of the remaining functions to a new location in Arlington, Virginia.
The amounts recorded in 2006 primarily relate to severance for employees at
the
Middlebury office. There was no activity for this initiative during the first
quarter of 2007.
The
table
below details activity in restructuring reserves since December 31, 2006
(amounts in thousands):
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$
|
961
|
|
$
|
-
|
|
$
|
961
|
|
Additions
|
|
|
244
|
|
|
19
|
|
|
225
|
|
Payments
|
|
|
(314
|
)
|
|
(19
|
)
|
|
(295
|
)
|
Restructuring
liabilities at March 31, 2007 [c]
|
|
$
|
891
|
|
$
|
-
|
|
$
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Includes severance, benefits, and other employee-related costs associated with
employee terminations.
[b]
Includes charges related to non-cancelable lease liabilities for abandoned
facilities, net of potential sub-lease revenue. Total maximum potential amount
of lease loss, excluding any sublease rentals, is $1.7 million as of March
31,
2007. The Company has included $0.8 million as an offset for sublease
rentals.
[c]
Katy
expects to substantially complete its current restructuring programs in 2007.
The remaining severance, restructuring and related costs for these initiatives
are expected to be approximately $0.3 million.
The
table
below details activity in restructuring reserves by operating segment since
December 31, 2006 (amounts in thousands):
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
Restructuring
liabilities at December 31, 2006
|
|
$
|
961
|
|
$
|
470
|
|
$
|
491
|
|
Additions
|
|
|
244
|
|
|
208
|
|
|
36
|
|
Payments
|
|
|
(314
|
)
|
|
(247
|
)
|
|
(67
|
)
|
Restructuring
liabilities at March 31, 2007
|
|
$
|
891
|
|
$
|
431
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table
below summarizes the future payments for severance, restructuring and other
related charges by operating segment detailed above (amounts in
thousands):
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
2007
|
|
$
|
325
|
|
$
|
148
|
|
$
|
177
|
|
2008
|
|
|
341
|
|
|
99
|
|
|
242
|
|
2009
|
|
|
98
|
|
|
57
|
|
|
41
|
|
2010
|
|
|
61
|
|
|
61
|
|
|
-
|
|
2011
|
|
|
66
|
|
|
66
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Payments
|
|
$
|
891
|
|
$
|
431
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
Discontinued
Operations
Three
of
Katy’s operations have been classified as discontinued operations for the
quarters ended March 31, 2007 and 2006 in accordance with SFAS No. 144,
Accounting
for the Impairments or Disposal of Long Lived Assets
(“SFAS
No. 144”).
On
June
2, 2006, the Company sold certain assets of the Metal Truck Box business unit
within the Maintenance Products Group for gross proceeds of $3.6 million,
including a $1.2 million note receivable. These proceeds were used to pay off
related portions of the Term Loan and the Revolving Credit Facility. The Company
recorded a loss of $50 thousand in 2006 in connection with this sale. Management
and the board of directors determined that this business is not a core component
of the Company’s long-term business strategy.
On
June
27, 2006, the Company sold its limited partnership interest in Montenay Savannah
Limited Partnership, which was held by SESCO and operated a waste-to-energy
facility, for gross proceeds of approximately $0.1 million. These proceeds
were
used to reduce the Company’s outstanding borrowings under the Revolving Credit
Facility. The Company recorded a gain of $0.1 million in the second quarter
of
2006 in connection with this sale. Management and the board of directors
determined that SESCO is not a core component of the Company’s long-term
business strategy.
On
November 27, 2006, the Company sold its United Kingdom consumer plastics
business unit (excluding the related real estate holdings) for gross proceeds
of
approximately $3.0 million. These proceeds were used to pay off related portions
of the Term Loan and the Revolving Credit Facility. The Company recorded a
loss
of $5.4 million in the third and fourth quarters of 2006 in connection with
this
sale. During the first quarter of 2007, the Company incurred an additional
$0.2
million loss as a result of finalizing the working capital adjustment.
Management and the board of directors determined that this business is not
a
core component of the Company’s long-term business strategy.
The
Company did not separately identify the related assets and liabilities of the
Metal Truck Box business unit, SESCO, and the United Kingdom consumer plastics
business unit on the Condensed Consolidated Balance Sheets, except for the
Asset
Held for Sale. Following is a summary of the major asset and liability
categories for these discontinued operations:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
-
|
|
$
|
83
|
|
|
|
$ |
-
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
492
|
|
$
|
1,143
|
|
|
|
$
|
492
|
|
$
|
1,143
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company was in the process of selling the related
real estate holdings of the United Kingdom consumer plastics business unit.
As a
result, the real estate holdings were classified as an asset held for sale
on
the Condensed Consolidated Balance Sheets in accordance with SFAS No. 144.
Accordingly, the carrying value of the business unit’s net assets was adjusted
to the lower of its costs or its fair value less costs to sell, amounting to
$4.5 million. Costs to sell include the incremental direct costs to complete
the
sale and represent costs such as broker commissions, legal and other closing
costs. The transaction on the sale of the real estate holdings was completed
on
January 9, 2007 and resulted in a gain of approximately $1.9
million.
The
historical operating results of the United Kingdom consumer plastics business
unit, the Metal Truck Box business unit, and SESCO have been segregated as
discontinued operations on the Condensed Consolidated Statements of Operations.
Selected financial data for discontinued operations is summarized as follows
(in
thousands):
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
8,078
|
|
Pre-tax
operating loss
|
|
$
|
-
|
|
$
|
(430
|
)
|
Pre-tax
gain on sale of discontinued businesses
|
|
$
|
1,666
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2007 versus Three Months Ended March 31,
2006
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
to Sales
|
|
$
|
|
%
to Sales
|
|
Net
sales
|
|
$
|
94.8
|
|
|
100.0
|
|
$
|
75.8
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
86.6
|
|
|
91.3
|
|
|
65.4
|
|
|
86.3
|
|
Gross
profit
|
|
|
8.2
|
|
|
8.7
|
|
|
10.4
|
|
|
13.7
|
|
Selling,
general and administrative expenses
|
|
|
11.4
|
|
|
12.1
|
|
|
12.5
|
|
|
16.5
|
|
Severance,
restructuring and related charges
|
|
|
0.2
|
|
|
0.3
|
|
|
0.8
|
|
|
1.0
|
|
(Gain)
loss on sale of assets
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
|
0.2
|
|
Operating
loss
|
|
|
(3.3
|
)
|
|
(3.6
|
)
|
|
(3.0
|
)
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2.0
|
)
|
|
|
|
|
(1.7
|
)
|
|
|
|
Other,
net
|
|
|
0.1
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before provision for income
taxes
|
|
|
(5.2
|
)
|
|
|
|
|
(4.4
|
)
|
|
|
|
Provision
for income taxes from continuing operations
|
|
|
(0.5
|
)
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5.7
|
)
|
|
|
|
|
(4.6
|
)
|
|
|
|
Loss
from operations of discontinued businesses (net of tax)
|
|
|
-
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
Gain
on sale of discontinued businesses (net of tax)
|
|
|
1.7
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(4.0
|
)
|
|
|
|
|
(5.0
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
-
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4.0
|
)
|
|
|
|
$
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.71
|
)
|
|
|
|
$
|
(0.58
|
)
|
|
|
|
Discontinued
operations
|
|
|
0.21
|
|
|
|
|
|
(0.05
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
|
|
(0.10
|
)
|
|
|
|
Net
loss
|
|
$
|
(0.50
|
)
|
|
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our
consolidated net sales for the three month period ending March 31, 2007
increased $19.0 million compared to the three month period ending March 31,
2006. The increase in net sales of 25% was comprised of higher volumes of 16%,
higher pricing of 8% and favorable foreign currency translation of 1%. Gross
margins were 8.7% for the three month period ending March 31, 2007, a decrease
of 5.0 percentage points compared to the three month period ending March 31,
2006. In 2007, higher raw material costs and our inability to recover these
costs from customers within our Electrical Products Group even though major
price increases were implemented adversely impacted gross margin levels.
Selling, general and administrative expense (“SG&A”) as a percentage of
sales decreased to 12.1% for the first quarter of 2007 from 16.5% in the first
quarter of 2006, primarily due to the cost improvements implemented throughout
2006 and the fixed nature of these expenses as a percentage of net sales. The
operating loss of ($3.3) million was comparable to the operating loss of ($3.0)
million in 2006 due to the factors noted above.
Results
within both periods presented reflect the activity of our discontinued
businesses units: United Kingdom consumer plastics, Metal Truck Box and SESCO,
as discontinued operations. During the three month period ending March 31,
2006,
we reported a cumulative effect of a change in accounting principle of ($0.8)
million [($0.10) per share] associated with the adoption, effective January
1,
2006, of SFAS No. 123R. Overall, we reported a net loss of ($4.0) million
[($0.50) per share] for the three month period ending March 31, 2007, versus
a
net loss of ($5.8) million [($0.73) per share] in the same period of 2006.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group of $50.3 million during the three month
period ending March 31, 2007 were comparable to net sales of $50.0 million
during the three month period ending March 31, 2006. Overall, this increase
of
1% was due to lower volumes of 2% offset by higher pricing of 2% and foreign
currency translation of 1%. Sales activity for the Contico business unit
continues to be impacted by reduced volumes. In addition, lower sales volume
present for the other business units selling into the janitorial markets were
offset by improved volume at our Glit business unit.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, most of which took effect throughout 2006. The
implementation of price increases was in response to the accelerating cost
of
our primary raw materials, packaging materials, utilities and freight.
Electrical
Products Group
The
Electrical Products Group’s sales increased from $25.8 million for the three
month period ending March 31, 2006 to $44.5 million for the three month period
ending March 31, 2007. The increase in sales of 72% was a result of higher
volume of 52% and higher pricing of 20%. Volume in the first quarter of 2007
in
the U.S. was positively impacted by activity with its major customers. Sales
in
2006 were adversely impacted by the absence of activity given the inventory
positions of certain customers and the related reduced orders. Multiple selling
price increases were implemented throughout 2006 to try to offset the rising
cost of copper and polyvinyl chloride.
Operating
Income (Loss)
|
Three
months ended March 31,
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
Maintenance
Products Group
|
$
|
0.8
|
|
|
1.6
|
|
$
|
0.9
|
|
|
1.9
|
|
$
|
(0.1
|
)
|
|
(0.3
|
)
|
Electrical
Products Group
|
|
(1.3
|
)
|
|
(3.1
|
)
|
|
0.1
|
|
|
0.2
|
|
|
(1.4
|
)
|
|
(3.3
|
)
|
Unallocated
corporate expense
|
|
(2.7
|
)
|
|
|
|
|
(3.1
|
)
|
|
|
|
|
0.4
|
|
|
|
|
|
|
(3.2
|
)
|
|
(3.4
|
)
|
|
(2.1
|
)
|
|
(2.7
|
)
|
|
(1.1
|
)
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
restructuring and related charges
|
|
(0.2
|
)
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
0.6
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
0.1
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
0.2
|
|
|
|
|
Operating
loss
|
$
|
(3.3
|
)
|
|
(3.5
|
)
|
$
|
(3.0
|
)
|
|
(3.9
|
)
|
$
|
(0.3
|
)
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income for the three month period ending
March 31, 2007 was $0.8 million (1.6% of net sales) compared to operating income
of $0.9 million (1.9% of net sales) for the three month period ending March
31,
2006. The reduction in operating margin was driven primarily by mix of business
as discussed above.
Electrical
Products Group
The
Electrical Products Group’s operating income decreased from $0.1 million (0.2%
of net sales) for the three month period ending March 31, 2006 to an operating
loss of ($1.3) million ((3.1)% of net sales) for the three month period ending
March 31, 2007. The decrease in profitability was primarily due to the increased
costs of copper, our primary raw material, and our inability to recover all
of
these cost increases from customers. The three months ended March 31, 2007
operating loss includes an adjustment of approximately $2.5 million associated
with the net realizable value and potential obsolescence of inventory. The
adjustment was made due to the on-going volatility of copper costs.
Corporate
Corporate
operating expenses decreased from $3.1 million in the three month period ending
March 31, 2006 to $2.7 million in the three month period ending March 31, 2007
principally due to variation of compensation expense recognized for stock
options and SARs. During the first quarter of 2006, the Company recognized
$0.3
million in compensation expense associated with SARs. In 2007, we recognized
income associated with SARs of $0.2 million as a result of Katy’s reduced stock
price impacting the valuation of SARs.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the three months ended March 31, 2007 and 2006
were impacted by severance, restructuring and related charges of $0.2 million
and $0.8 million, respectively. Charges in 2007 related to changes in lease
assumptions for abandoned facilities. Charges in 2006 related to changes in
lease assumptions for an abandoned facility upon the execution of a sublease
($0.7 million) with the remaining charges primarily related to the relocation
of
the corporate headquarters.
Other
Items
Interest
expense increased by $0.3 million in the first quarter of 2007 versus the same
period of 2006, primarily from the write-off of debt issuance costs as a result
of reducing the Revolving Credit Facility under the Bank of America Credit
Agreement from $90.0 million to $80.0 million. Overall, average borrowing levels
were lower in 2007 compared to 2006; however, this impact was offset by higher
interest rates. Other, net for the three months ended March 31, 2006 included
gain on foreign currency transactions.
The
provision for income taxes for the three months ended March 31, 2007 and 2006
reflects current expense for state and foreign income taxes. Tax benefits were
not recorded on the pre-tax net loss for the first quarter of 2007 and 2006
as
valuation allowances were recorded related to deferred tax assets created as
a
result of operating losses in the United States and certain foreign
jurisdictions.
Gain
on
sale of discontinued businesses in the first quarter of 2007 reflects the sale
of our real estate holdings of the United Kingdom consumer plastics business
unit. We recorded a $1.9 million gain on this sale which was offset by a $0.2
million loss resulting from the final working capital adjustment for the United
Kingdom consumer plastics business unit. For the first quarter of 2006, loss
from operations of discontinued businesses reflects the activity for the United
Kingdom consumer plastics business unit, plus the Metal Truck Box business
unit
and our SESCO partnership interest, which were sold in 2006.
Effective
January 1, 2006, the Company adopted SFAS No. 123R. As a result, a cumulative
effect of this adoption of $0.8 million was recognized associated with the
fair
value of all vested SARs. See Note 1 to the Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a
discussion of the cumulative effect of a change in accounting
principle.
LIQUIDITY
AND CAPITAL RESOURCES
We
require funding for working capital needs and capital expenditures. We believe
that our cash flow from operations and the use of available borrowings under
the
Bank of America Credit Agreement (as defined below) provide sufficient liquidity
for our operations going forward. As of March 31, 2007, we had cash and cash
equivalents of $2.9 million versus cash and cash equivalents of $7.4 million
at
December 31, 2006. Also as of March 31, 2007, we had outstanding borrowings
of
$54.5 million [59% of total capitalization], under the Bank of America Credit
Agreement, as defined below, with unused borrowing availability on the Revolving
Credit Facility, as defined below, of $14.2 million. As of December 31, 2006,
we
had outstanding borrowings of $56.9 million [57% of total capitalization].
We
used $5.0 million of cash in operations during the quarter ended March 31,
2007
versus using $6.9 million of cash in operations during the quarter ended March
31, 2006. Cash flow use in 2007 was lower than in 2006 primarily due to the
improvement in working capital levels.
We
have a
number of obligations and commitments, which are listed on the schedule later
in
this section entitled “Contractual Obligations.” 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 believe that given our strong working
capital base, additional liquidity could be obtained through additional debt
financing, if necessary. However, there is no guarantee that such financing
could be obtained. In addition, we are continually evaluating alternatives
relating to the sale of excess assets and divestitures of certain of our
business units. Asset sales and business divestitures present opportunities
to
provide additional liquidity by de-leveraging our financial position. However,
the Company may not be able to secure liquidity through the sale of assets
on
favorable terms or at all.
Bank
of America Credit Agreement
On
April
20, 2004, the Company completed a refinancing of its outstanding indebtedness
(the “Refinancing”) and entered into a new agreement with Bank of America
Business Capital (the “Bank of America Credit Agreement”). The current Bank of
America Credit Agreement, as amended is a $93.0 million facility with a $13.0
million term loan (“Term Loan”) and a $80.0 million revolving credit facility
(“Revolving Credit Facility”). The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks.
The
Revolving Credit Facility has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
Unused borrowing availability on the Revolving Credit Facility was $14.2 million
at March 31, 2007. All extensions of credit under the Bank of America Credit
Agreement are collateralized by a first priority 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. The Term Loan also has a final maturity date of April
20, 2009 with quarterly payments of $0.4 million, as amended and beginning
April
1, 2007. A final payment of $10.0 million is scheduled to be paid in April
2009.
The Term Loan is collateralized by the Company’s property, plant and equipment.
The
Company’s borrowing base under the Bank of America Credit Agreement is reduced
by the outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom the Company conducts 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, the
Company’s largest letters of credit relate to its casualty insurance programs.
At March 31, 2007, total outstanding letters of credit were $6.6
million.
On
March
8, 2007 the Company obtained the Eighth Amendment to the Bank of America Credit
Agreement. The Eighth Amendment eliminates the Fixed Charge Coverage Ratio
for
the remaining life of the debt agreement and requires the Company to maintain
a
minimum level of availability (eligible collateral base less outstanding
borrowings and letters of credit) such that its eligible collateral must exceed
the sum of its outstanding borrowings and letters of credit by at least $5.0
million from the effective date of the Eighth Amendment through September 29,
2007 and by $7.5 million from that point through December 2007. Thereafter,
the
Company is required to maintain a minimum level of availability such that
eligible collateral must exceed the sum of its outstanding borrowings and
letters of credit by at least $5.0 million for the first three quarters of
the
year and $7.5 million for the fourth quarter. In addition, the Company reduced
its Revolving Credit Facility from $90.0 million to $80.0 million.
If
the
Company is unable to comply with the terms of the amended covenants, it could
seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets. It is possible, however,
the Company may not be able to obtain further amendments from the lender or
secure additional debt financing or liquidity through the sale of assets on
favorable terms or at all. However, the Company believes that it will be able
to
comply with all covenants, as amended, throughout 2007.
Effective
since April 2005, interest rate margins have been set at the largest margins
set
forth in the Bank of America Credit Agreement, 275 basis points over applicable
LIBOR rates for Revolving Credit Facility borrowings and 300 basis points over
LIBOR for borrowings under the Term Loan. In accordance with the Bank of America
Credit Agreement, margins on the Term Loan will drop an additional 25 basis
points if the balance of the 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, 2007.
Effective
August 17, 2005, the Company entered into a two-year interest rate swap on
a
notional amount of $25.0 million in the first year and $15.0 million in the
second year. The purpose of the swap was to limit the Company’s exposure to
interest rate increases on a portion of the Revolving Credit Facility over
the
two-year term of the swap. The fixed interest rate under the swap at March
31,
2007 and over the life of the agreement is 4.49%.
All
of
the debt under the Bank of America Credit Agreement is re-priced to current
rates at frequent intervals. Therefore, its fair value approximates its carrying
value at March 31, 2007. In each of the three months ended March 31, 2007 and
2006, the Company had amortization of debt issuance costs, included within
interest expense, of $0.6 million and $0.3 million, respectively. Included
in
amortization of debt issuance costs is approximately $0.3 million in the three
months ended March 31, 2007 of debt issuance costs written off due to the
reduction in the Revolving Credit Facility on March 8, 2007. In addition, the
Company incurred $0.1 million and $0.2 million associated with amending the
Bank
of America Credit Agreement, as discussed above, in the three months ended
March
31, 2007 and 2006, respectively.
The
Revolving Credit Facility under the Bank of America 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 Bank of America Credit Agreement,
caused the Revolving Credit Facility to be classified as a current liability,
per guidance in the Emerging Issues Task Force 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.
The
Company does not expect to repay, or be required to repay, within one year,
the
balance of the Revolving Credit Facility classified as a current liability.
The
MAE clause, which is a fairly typical requirement in commercial credit
agreements, allows the lenders to require the loan to become due if they
determine there has been a material adverse effect on the Company’s operations,
business, properties, assets, liabilities, condition, or prospects. The
classification of the Revolving Credit Facility as a current liability is a
result only of the combination of the lockbox agreements and MAE clause. The
Revolving Credit Facility does not expire or have a maturity date within one
year, but rather has a final expiration date of April 20, 2009. The lender
had
not notified the Company of any indication of a MAE at March 31, 2007, and
the
Company was not in default of any provision of the Bank of America Credit
Agreement at March 31, 2007.
Contractual
Obligations
We
have
contractual obligations associated with our debt, operating lease agreements,
severance and restructuring, and other obligations. Our obligations as of March
31, 2007, are summarized below (in thousands of dollars):
Contractual
Cash Obligations
|
|
Total
|
|
Due
in less than 1 year
|
|
Due
in 1-3 years
|
|
Due
in 3-5 years
|
|
Due
after 5 years
|
|
Revolving
Credit Facility [a]
|
|
$
|
41,491
|
|
$
|
41,491
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Term
Loan
|
|
|
12,968
|
|
|
1,500
|
|
|
11,468
|
|
|
-
|
|
|
-
|
|
Interest
on debt [b]
|
|
|
8,861
|
|
|
4,379
|
|
|
4,482
|
|
|
-
|
|
|
-
|
|
Operating
leases [c]
|
|
|
20,366
|
|
|
7,751
|
|
|
9,423
|
|
|
2,668
|
|
|
524
|
|
Severance
and restructuring [c]
|
|
|
521
|
|
|
148
|
|
|
265
|
|
|
108
|
|
|
-
|
|
Postretirement
benefits [d]
|
|
|
5,807
|
|
|
694
|
|
|
1,498
|
|
|
1,194
|
|
|
2,421
|
|
Total
Contractual Obligations
|
|
$
|
90,014
|
|
$
|
55,963
|
|
$
|
27,136
|
|
$
|
3,970
|
|
$
|
2,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Commercial Commitments
|
|
Total
|
|
Due
in less than 1 year
|
|
Due
in 1-3 years
|
|
Due
in 3-5 years
|
|
Due
after 5 years
|
|
Commercial
letters of credit
|
|
$
|
664
|
|
$
|
664
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Stand-by
letters of credit
|
|
|
5,949
|
|
|
5,949
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Commercial Commitments
|
|
$
|
6,613
|
|
$
|
6,613
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
As
discussed in the Liquidity and Capital Resources section above and in Note
5 to
the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q, the entire Revolving Credit Facility under the
Bank of America Credit Agreement is classified as a current liability on the
Condensed Consolidated Balance Sheets as a result of the combination in the
Bank
of America Credit Agreement of (i) lockbox agreements on Katy’s depository bank
accounts, and (ii) a subjective Material Adverse Effect (MAE) clause. The
Revolving Credit Facility expires in April of 2009.
[b]
Represents interest on the Revolving Credit Facility and Term Loan of the Bank
of America Credit Agreement. Amounts assume interest accrues at the current
rate
in effect, including the effect of the impact of the increased margins through
the end of the first quarter of 2007 pursuant to the Sixth Amendment. The amount
also assumes the principal balance of the Revolving Credit Facility remains
constant through its expiration date of April 20, 2009 and the principal balance
of the Term Loan amortizes in accordance with the terms of the Bank of America
Credit Agreement. Due to the variable nature of the Bank of America Credit
Agreement, actual interest rates could differ from the assumptions above. In
addition, actual borrowing levels could differ from the assumptions above due
to
liquidity needs.
[c]
Future non-cancelable lease rentals are included in the line entitled “Operating
leases,” which also includes obligations associated with restructuring
activities. The Condensed Consolidated Balance Sheets at March 31, 2007 includes
$0.9 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.
[d]
Benefits consist of post-retirement medical obligations to retirees of former
subsidiaries of Katy, as well as deferred compensation plan liabilities to
former officers of the Company.
Off-balance
Sheet Arrangements
Not
applicable.
Cash
Flow
Liquidity
was positively impacted during the first quarter of 2007 as a result of the
sale
of the real estate holdings of the United Kingdom consumer plastics business
unit for approximately $6.6 million. We used $5.0 million of operating cash
compared to using $6.9 million of operating cash during the first quarter of
2006. Debt obligations at March 31, 2007 decreased $2.4 million from December
31, 2006, primarily the result of the above proceeds from the sale of real
estate offsetting any seasonal working capital requirements.
Operating
Activities
Cash
flow
used in operating activities before changes in operating assets was $3.1 million
in the first quarter of 2007 versus cash flow used in operating activities
before changes in operating assets of $1.8 million in the first quarter of
2006.
While we had net losses in both periods, these amounts included non-cash items
such as depreciation, amortization and amortization of debt issuance costs.
We
used $1.4 million of cash related to operating assets and liabilities during
the
three months ended March 31, 2007 versus using cash related to operating assets
and liabilities of $5.5 million during the three months ended March 31, 2006.
Our operating cash flow was positively impacted in the first quarter of 2007
by
improvements in working capital performance. During the first quarter of 2007,
we were turning our inventory at 5.9 times per year versus 4.4 times per year
during the first quarter of 2006.
Investing
Activities
Capital
expenditures totaled $1.1 million during the three months ended March 31, 2007
as compared to $0.8 million during the three months ended March 31, 2006.
Anticipated capital expenditures in 2007 are expected to be comparable to 2006.
In addition, cash flows from investing activities reflect proceeds from the
sale
of a discontinued business for $6.6 million.
Financing
Activities
Overall,
debt decreased $2.4 million during the three months ended March 31, 2007 versus
an increase of $7.8 million during the three months ended March 31, 2006,
primarily relating to the levels of accounts payable during these time periods.
Direct debt costs totaling $0.1 million and $0.2 million in the first quarter
of
2007 and 2006, respectively, represents a fee paid to our lenders in connection
with the amendments made to the Bank of America Credit Agreement.
STOCK
EXCHANGE LISTING
On
April
9, 2007, the Company announced that the New York Stock Exchange (“NYSE”) would
suspend trading of the Company’s shares of common stock due to noncompliance
with the continuing listing standards of the NYSE. The Company did not meet
the
required market capitalization level of $75.0 million over a consecutive thirty
day trading period or the required total stockholders’ equity of not less than
$75.0 million. The shares of Katy were suspended from trading on the NYSE at
the
close of business on April 12, 2007. With the expectation that the NYSE would
delist the Company’s shares, the Company pursued conducting the trading of its
shares on another exchange or quotation system. On April 16, 2007, the Company
announced that its shares of common stock began trading on the OTC Bulletin
Board, effective immediately, under the ticker symbol KATY.
SEVERANCE,
RESTRUCTURING AND RELATED CHARGES
The Company has initiated several cost reduction and facility consolidation
initiatives, resulting in severance, restructuring and related charges. Key
initiatives were the consolidation of the St. Louis manufacturing/distribution
facilities, shutdown of both Woods U.S. and Woods Canada manufacturing as well
as the consolidation of the Glit facilities. These initiatives resulted from
the
on-going strategic reassessment of our various businesses as well as the markets
in which they operate.
A
summary
of charges by major initiative is as follows (amounts in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$
|
189
|
|
$
|
699
|
|
Consolidation
of Glit facilities
|
|
|
19
|
|
|
-
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
36
|
|
|
-
|
|
Corporate
office relocation
|
|
|
-
|
|
|
83
|
|
Total
severance, restructuring and related charges
|
|
$
|
244
|
|
$
|
782
|
|
|
|
|
|
|
|
|
|
The
impact of actions in connection with the above initiatives on the Company’s
reportable segments (before tax) is as follows (amounts in
thousands):
|
|
Total
Expected Cost
|
|
Total
Provision to Date
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
|
|
$
|
21,301
|
|
$
|
21,001
|
|
Electrical
Products Group
|
|
|
12,683
|
|
|
12,683
|
|
Corporate
|
|
|
12,290
|
|
|
12,290
|
|
|
|
$
|
46,274
|
|
$
|
45,974
|
|
|
|
|
|
|
|
|
|
A
rollforward of all restructuring and related reserves since December 31, 2006
is
as follows (amounts in thousands):
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$
|
961
|
|
$
|
-
|
|
$
|
961
|
|
Additions
|
|
|
244
|
|
|
19
|
|
|
225
|
|
Payments
|
|
|
(314
|
)
|
|
(19
|
)
|
|
(295
|
)
|
Restructuring
liabilities at March 31, 2007 [c]
|
|
$
|
891
|
|
$
|
-
|
|
$
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
[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 estimated sub-lease revenue. Total maximum potential amount
of lease loss, excluding any sublease rentals, is $1.7 million as of March
31,
2007. We have included $0.8 million as an offset for sublease
rentals.
[c]
Katy
expects to substantially complete its current restructuring programs in 2007.
The remaining severance, restructuring and related costs for these initiatives
are expected to be approximately $0.3 million.
Since
2001, the Company has been focused on a number of restructuring and cost
reduction initiatives, resulting in severance, restructuring and related
charges. With these changes, we anticipated cost savings from reduced headcount,
higher utilized facilities and divested non-core operations. However,
anticipated cost savings have been impacted from such factors as material price
increases, competitive markets and inefficiencies incurred from consolidation
of
facilities. See Note 11 to the Condensed Consolidated Financial Statements
in
Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of
severance, restructuring and related charges.
OUTLOOK
FOR 2007
We
experienced lower sales performance during 2006 from the Electrical Products
Group as well as lower volumes in our Contico and Glit business units. Price
increases were passed along to our Electrical Products Group customers during
2006 as a result of the rise in copper prices in the last two years; however,
pricing pressure is anticipated given the volatility in copper pricing over
the
last twelve months. Despite the net sales increase in the first quarter, we
anticipate a further reduction in net sales from the Electrical Products Group
due to customers moving more of their purchases directly to Asian manufacturers.
Given the relative stability of resin and other materials pricing for the
short-term period, we anticipate pricing levels to be stable in 2007 for
products within the Maintenance Products Group with sales growth being driven
by
volume improvement over 2006. However, in the Contico business, we face the
continuing challenge of passing through price increases to offset these higher
costs, and sales volumes have been and are likely to continue to be negatively
impacted as a result of raising prices and our decision to exit certain
unprofitable products.
We
believe that the quality, shipping and production issues present at our Glit
facilities in 2005 have been resolved in 2006 as the Glit business unit has
improved its quality level and has executed the consolidation of the Pineville,
North Carolina operation into the Wrens, Georgia facility. We currently believe
the consolidation of the Washington, Georgia facility into Wrens, Georgia will
occur in mid-2007 and will result in improved profitability of our Glit
business.
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 Continental and Contico businesses. Prices of plastic resins,
such as polyethylene and polypropylene increased steadily from the latter half
of 2002 through 2005 with prices in 2006 being relatively stable.
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 are equally
exposed to price changes for copper within our Electrical Products Group. Prices
for copper increased in late 2003 and continued through 2006. Copper prices
remain and expect to be volatile over the remainder of 2007. Prices for
corrugated packaging material and other raw materials have also accelerated
over
the past few years. 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. We have experienced
cost increases in the prices of primary raw materials used in our products
and
inflation in other costs such as packaging materials, utilities and freight.
In
a climate of rising raw material costs, we experience difficulty in raising
prices to shift these higher costs to our consumer customers for our plastic
products. Our future earnings may be negatively impacted to the extent
further increases in costs for raw materials cannot be recovered or offset
through higher selling prices. We cannot predict the direction our raw material
prices will take during 2007 and beyond.
Over
the
past few years, our management has been focused on a number of restructuring
and
cost reduction initiatives, including the consolidation of facilities,
divestiture of non-core operations, selling general and administrative
(“SG&A”) cost rationalization and organizational changes. We have and expect
to continue to benefit from various profit enhancing strategies such as process
improvements (including Lean Manufacturing and Six Sigma), value engineering
products, improved sourcing/purchasing and lean administration.
SG&A
expenses were comparable as a percentage of sales in 2006 versus 2005 and should
remain stable as a percentage of sales in 2007. We will continue to evaluate
the
possibility of further consolidation of administrative processes.
Interest
rates rose in 2006 and we expect rates to stabilize in 2007. Ultimately, we
cannot predict the future levels of interest rates. Under the Bank of America
Credit Agreement, as amended, the Company’s interest rate margins on all of our
outstanding borrowings and letters of credit are at the highest levels set
forth
in the Bank of America Credit Agreement.
Given
our
history of operating losses, along with guidance provided by the accounting
literature covering accounting for income taxes, we are 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 domestic deferred tax assets carried
on
our books. Therefore, except for our profitable foreign subsidiaries, a full
valuation allowance on the net deferred tax asset position was recorded at
December 31, 2006 and 2005, and we do not expect to record the benefit of any
deferred tax assets that may be generated in 2007. We will continue to record
current expense associated with foreign and state income taxes.
Our
financial performance benefited from favorable currency translation as the
Canadian dollar and British pound strengthened throughout 2006 and first quarter
of 2007 against the U.S. dollar. While we cannot predict the ultimate direction
of exchange rates, we do not expect to see the same favorable impact on our
financial performance for the remainder of 2007.
We
expect
our working capital levels to remain constant as a percentage of sales. However,
inventory carrying values may be impacted by higher material costs. Cash flow
will be used in 2007 for capital expenditures and payments due under our term
loan as well as the settlement of previously established restructuring accruals.
The majority of these accruals relate to non-cancelable lease obligations for
abandoned 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 the
abandoned facilities.
The
Company was in compliance with the covenants of the Bank of America Credit
Agreement as of December 31, 2006. Nevertheless, on March 8, 2007, the Company
obtained the Eighth Amendment to the Bank of America Credit Agreement. The
Eighth Amendment eliminates the Fixed Charge Coverage Ratio for the remaining
life of the debt agreement and requires the Company to maintain a minimum level
of availability (eligible collateral base less outstanding borrowings and
letters of credit) such that its eligible collateral must exceed the sum of
its
outstanding borrowings and letters of credit by at least $5.0 million from
the
effective date of the Eighth Amendment through September 29, 2007 and by $7.5
million from that point through December 31, 2007. Thereafter, the Company
is
required to maintain a minimum level of availability of $5.0 million for the
first three quarters of the year and $7.5 million for the fourth quarter. In
addition, we reduced our Revolving Credit Facility from $90.0 million to $80.0
million.
If
we are
unable to comply with the terms of the amended covenants, we could seek to
obtain further amendments and pursue increased liquidity through additional
debt
financing and/or the sale of assets. We believe that given our strong working
capital base, additional liquidity could be obtained through additional debt
financing, if necessary. However, there is no guarantee that such financing
could be obtained. The Company believes that we will be able to comply with
all
covenants, as amended, throughout 2007. In addition, we are continually
evaluating alternatives relating to the sale of excess assets and divestitures
of certain of our business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position. However, the Company may not be able to secure liquidity through
the
sale of assets on favorable terms or at all.
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
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 achieve product price increases, especially as they
relate to
potentially higher raw material
costs.
|
- |
The
potential impact of losing lines of business at large mass merchant
retailers in the discount and do-it-yourself
markets.
|
- |
Competition
from foreign competitors.
|
- |
The
potential impact of rising interest rates on our LIBOR-based Bank
of
America Credit Agreement.
|
- |
Our
inability to meet covenants associated with the Bank of America 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.
|
Words
and
phrases such as “expects,” “estimates,” “will,” “intends,” “plans,” “believes,”
“should”, “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 unanticipated events. All forward-looking statements should be
viewed with caution.
ENVIRONMENTAL
AND OTHER CONTINGENCIES
See Note 9 to the Condensed Consolidated Financial Statements in Part I, Item
1
of this Quarterly Report on Form 10-Q 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
of this Quarterly Report on Form 10-Q 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 Annual Report on Form
10-K for the year ended December 31, 2006 (Part II, Item 7). There have been
no
changes to policies as of March 31, 2007, except for the adoption of FIN
48.
The
Company adopted FIN No. 48 on January 1, 2007. As a result of the implementation
of FIN No. 48, the Company recognized approximately a $1.1 million increase
in
the liability for unrecognized tax benefits, which was accounted for as an
increase of $0.1 million to the January 1, 2007 balance of deferred tax assets
and a reduction of $1.0 million to the January 1, 2007 balance of retained
earnings.
Interest
Rate Risk
Our exposure to market risk associated with changes in interest rates relates
primarily to our debt obligations. Accordingly, effective August 17, 2005,
we
entered into a two-year interest rate swap agreement on a notional amount of
$25.0 million in the first year and $15.0 million in the second year. The fixed
interest rate under the swap at March 31, 2007 and over the life of the
agreement is 4.49%. Our interest obligations on outstanding debt at March 31,
2007 were indexed from short-term LIBOR. As a result of the current rising
interest rate environment and the increase in the interest rate margins on
our
borrowings as a result of the Sixth Amendment to the Bank of America Credit
Agreement, our exposures to interest rate risks could be material to our
financial position or results of operations. For example, a 1% increase in
the
interest rate of the Bank of America Credit Agreement would increase our annual
interest expense by approximately $0.4 million.
Foreign
Exchange Risk
We are exposed to fluctuations in the Euro, British pound, Canadian dollar
and
Chinese 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. Our net investment in foreign subsidiaries translated
into U.S. dollars at March 31, 2007 is $9.1 million. A 10% change in foreign
currency exchange rates would amount to $0.9 million change in our net
investment in foreign subsidiaries at March 31, 2007.
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 Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Outlook for 2007 in Part I,
Item
2 of this Quarterly Report on Form 10-Q, for further discussion of our exposure
to increasing raw material costs.
(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 filings with the Securities and
Exchange Commission (“SEC”) is reported within the time periods specified in the
SEC's rules, and that such information is accumulated and communicated to our
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 unconsolidated entities. The oversight of these
entities includes an assessment of controls over the recording of related
amounts in the consolidated financial statements, including controls over the
selection of accounting methods, the recognition of equity method income and
losses, and the determination, valuation, and recording of assets in our
investment account balances.
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 to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and primary financial officer, as appropriate,
to
allow timely decisions regarding required disclosure.
(b) |
Change
in Internal Controls
|
There
have been no changes in Katy’s internal control over financial reporting during
the quarter ended March 31, 2007 that has materially affected, or is reasonably
likely to materially affect Katy’s internal control over financial reporting.
Except
as
otherwise noted in Note 9 to the Condensed Consolidated Financial Statements
in
Part I, Item 1 of this Quarterly Report on Form 10-Q, 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, were brought against the Company.
We
are
affected by risks specific to us as well as factors that affect all businesses
operating in a global market. The significant factors known to us that could
materially adversely affect our business, financial condition, or operating
results are described in our most recently filed Annual Report on Form 10-K
(Item 1A of Part I). There has been no material change in those risk factors.
On
April
20, 2003, the Company announced a plan to spend up to $5.0 million to repurchase
shares of its common stock. The Company suspended purchases under the plan
on
May 10, 2004. On December 5, 2005, we announced the resumption of the plan.
During the three months ended March 31, 2007 and 2006, the Company purchased
1,300 shares and 1,200 shares, respectively, of common stock on the open market
for less than $0.1 million.
None.
The
Company has filed a Proxy Statement pursuant to Section 14(a) of the Securities
Exchange Act of 1934 in advance of our Annual Meeting of Shareholders to be
held
on Thursday, May 31, 2007.
None.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KATY
INDUSTRIES, INC.
Registrant
DATE:
May
10, 2007
By
/s/
Anthony T. Castor III
Anthony
T. Castor III
President
and Chief Executive Officer
By
/s/
Amir Rosenthal
Amir
Rosenthal
Vice
President, Chief Financial Officer,
General
Counsel and Secretary