KATY INDUSTRIES, INC. 10-Q 9/30/2006
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
[
x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended: September 30, 2006
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
of Incorporation)
|
|
(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 October 31, 2006
|
Common
Stock, $1 Par Value
|
|
7,957,377
Shares
|
KATY
INDUSTRIES, INC.
FORM
10-Q
September
30, 2006
INDEX
|
|
|
Page |
PART I |
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
Item 1. |
Financial Statements: |
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets |
|
|
|
September 30, 2006 and December 31,
2005 (unaudited) |
3,4 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations |
|
|
|
Three Months and Nine Months Ended
September 30, 2006 and 2005 (unaudited) |
5 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows |
|
|
|
Nine Months Ended September 30, 2006
and 2005 (unaudited) |
6 |
|
|
|
|
|
|
Notes to Condensed Consolidated
Financial Statements (unaudited) |
7 |
|
|
|
|
|
Item 2. |
Management's
Discussion and Analysis of Financial |
|
|
|
Condition and Results of
Operations |
30 |
|
|
|
|
|
Item 3. |
Quantitative and Qualitative
Disclosures about Market Risk |
46 |
|
|
|
|
|
Item 4. |
Controls and Procedures |
47 |
|
|
|
|
|
|
|
|
PART II |
OTHER INFORMATION |
|
|
|
|
|
|
|
Item 1. |
Legal Proceedings |
50 |
|
|
|
|
|
Item 1A. |
Risk Factors |
50 |
|
|
|
|
|
Item 2. |
Unregistered Sales of Equity Securities
and Use of Proceeds |
50 |
|
|
|
|
|
Item 3. |
Defaults Upon Senior
Securities |
50 |
|
|
|
|
|
Item 4. |
Submission of Matters to a Vote of
Security Holders |
50 |
|
|
|
|
|
Item 5. |
Other Information |
50 |
|
|
|
|
|
Item 6. |
Exhibits |
50 |
|
|
|
|
|
Signatures |
|
52 |
PART
I
- FINANCIAL INFORMATION
Item
1. Financial Statements
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands)
(Unaudited)
ASSETS
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,117
|
|
$
|
8,421
|
|
Accounts
receivable, net
|
|
|
66,966
|
|
|
63,612
|
|
Inventories,
net
|
|
|
60,247
|
|
|
62,799
|
|
Other
current assets
|
|
|
4,376
|
|
|
3,600
|
|
Assets
held for sale
|
|
|
12,152
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
147,858
|
|
|
138,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
665
|
|
|
665
|
|
Intangibles,
net
|
|
|
6,481
|
|
|
6,946
|
|
Other
|
|
|
9,253
|
|
|
8,643
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
16,399
|
|
|
16,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
336
|
|
|
1,732
|
|
Buildings
and improvements
|
|
|
9,695
|
|
|
14,011
|
|
Machinery
and equipment
|
|
|
119,206
|
|
|
140,514
|
|
|
|
|
|
|
|
|
|
|
|
|
129,237
|
|
|
156,257
|
|
Less
- Accumulated depreciation
|
|
|
(86,801
|
)
|
|
(98,260
|
)
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
42,436
|
|
|
57,997
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
206,693
|
|
$
|
212,683
|
|
|
|
|
|
|
|
|
|
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
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
42,936
|
|
$
|
47,449
|
|
Accrued
compensation
|
|
|
4,008
|
|
|
4,071
|
|
Accrued
expenses
|
|
|
38,659
|
|
|
37,713
|
|
Current
maturities of long-term debt
|
|
|
2,857
|
|
|
2,857
|
|
Revolving
credit agreement
|
|
|
49,729
|
|
|
41,946
|
|
Liabilities
held for sale
|
|
|
3,434
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
141,623
|
|
|
134,036
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
9,510
|
|
|
12,857
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
9,012
|
|
|
10,497
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
160,145
|
|
|
157,390
|
|
|
|
|
|
|
|
|
|
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
|
|
|
26,968
|
|
|
27,016
|
|
Accumulated
other comprehensive income
|
|
|
3,362
|
|
|
3,158
|
|
Accumulated
deficit
|
|
|
(79,900
|
)
|
|
(70,415
|
)
|
Treasury
stock, at cost, 1,864,927 and 1,874,027 shares,
respectively
|
|
|
(21,960
|
)
|
|
(22,544
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
46,548
|
|
|
55,293
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
206,693
|
|
$
|
212,683
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Amounts
in Thousands, Except Share and Per Share Data)
(Unaudited)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
121,217
|
|
$
|
133,165
|
|
$
|
285,653
|
|
$
|
309,724
|
|
Cost
of goods sold
|
|
|
104,912
|
|
|
116,402
|
|
|
246,468
|
|
|
273,460
|
|
Gross
profit
|
|
|
16,305
|
|
|
16,763
|
|
|
39,185
|
|
|
36,264
|
|
Selling,
general and administrative expenses
|
|
|
11,753
|
|
|
12,820
|
|
|
36,298
|
|
|
39,058
|
|
Severance,
restructuring and related charges
|
|
|
738
|
|
|
254
|
|
|
1,591
|
|
|
892
|
|
Loss
(gain) on sale of assets
|
|
|
49
|
|
|
(176
|
)
|
|
103
|
|
|
(342
|
)
|
Operating
income (loss)
|
|
|
3,765
|
|
|
3,865
|
|
|
1,193
|
|
|
(3,344
|
)
|
Interest
expense
|
|
|
(1,715
|
)
|
|
(1,457
|
)
|
|
(5,198
|
)
|
|
(4,031
|
)
|
Other,
net
|
|
|
42
|
|
|
215
|
|
|
466
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
2,092
|
|
|
2,623
|
|
|
(3,539
|
)
|
|
(7,172
|
)
|
Provision
for income taxes from continuing operations
|
|
|
553
|
|
|
304
|
|
|
1,211
|
|
|
722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
1,539
|
|
|
2,319
|
|
|
(4,750
|
)
|
|
(7,894
|
)
|
Loss
from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax)
|
|
|
(151
|
)
|
|
(986
|
)
|
|
(849
|
)
|
|
(1,467
|
)
|
Loss
on sale of discontinued businesses (net of tax)
|
|
|
(3,200
|
)
|
|
-
|
|
|
(3,130
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before cumulative effect of a change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
(1,812
|
)
|
|
1,333
|
|
|
(8,729
|
)
|
|
(9,361
|
)
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
-
|
|
|
-
|
|
|
(756
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1,812
|
)
|
$
|
1,333
|
|
$
|
(9,485
|
)
|
$
|
(9,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per share of common stock - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.19
|
|
$
|
0.29
|
|
$
|
(0.60
|
)
|
$
|
(0.99
|
)
|
Discontinued
operations
|
|
|
(0.42
|
)
|
|
(0.12
|
)
|
|
(0.50
|
)
|
|
(0.19
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
(0.09
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
(0.23
|
)
|
$
|
0.17
|
|
$
|
(1.19
|
)
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per share of common stock - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$
|
(0.60
|
)
|
$
|
(0.99
|
)
|
Discontinued
operations
|
|
|
(0.13
|
)
|
|
(0.04
|
)
|
|
(0.50
|
)
|
|
(0.19
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
(0.09
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
(0.07
|
)
|
$
|
0.05
|
|
$
|
(1.19
|
)
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,962
|
|
|
7,951
|
|
|
7,971
|
|
|
7,948
|
|
Diluted
|
|
|
26,825
|
|
|
26,880
|
|
|
7,971
|
|
|
7,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Amounts
in Thousands)
(Unaudited)
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,485
|
)
|
$
|
(9,361
|
)
|
Loss
from operations of discontinued business
|
|
|
3,979
|
|
|
1,467
|
|
Loss
from continuing operations
|
|
|
(5,506
|
)
|
|
(7,894
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
756
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
6,578
|
|
|
6,733
|
|
Amortization
of debt issuance costs
|
|
|
877
|
|
|
844
|
|
Stock
option expense
|
|
|
486
|
|
|
1,953
|
|
Loss
(gain) on sale of assets
|
|
|
103
|
|
|
(342
|
)
|
|
|
|
3,294
|
|
|
1,294
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(8,589
|
)
|
|
(12,343
|
)
|
Inventories
|
|
|
(2,201
|
)
|
|
3,580
|
|
Other
assets
|
|
|
(490
|
)
|
|
(1,279
|
)
|
Accounts
payable
|
|
|
3,449
|
|
|
16,191
|
|
Accrued
expenses
|
|
|
3,414
|
|
|
1,085
|
|
Other,
net
|
|
|
(3,478
|
)
|
|
(926
|
)
|
|
|
|
(7,895
|
)
|
|
6,308
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by continuing operations
|
|
|
(4,601
|
)
|
|
7,602
|
|
Net
cash provided by (used in) discontinued operations
|
|
|
2,116
|
|
|
(461
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(2,485
|
)
|
|
7,141
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures of continuing operations
|
|
|
(2,947
|
)
|
|
(5,402
|
)
|
Capital
expenditures of discontinued operations
|
|
|
(78
|
)
|
|
(383
|
)
|
Acquisition
of business, net of cash acquired
|
|
|
-
|
|
|
(1,115
|
)
|
Collections
of note receivable from sale of subsidiary
|
|
|
-
|
|
|
106
|
|
Proceeds
from sale of discontinued operations, net
|
|
|
2,542
|
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
263
|
|
|
931
|
|
Net
cash used in investing activities
|
|
|
(220
|
)
|
|
(5,863
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
borrowings on revolving loans
|
|
|
7,418
|
|
|
1,045
|
|
Decrease
in book overdraft
|
|
|
(5,031
|
)
|
|
-
|
|
Repayments
of term loans
|
|
|
(3,347
|
)
|
|
(2,143
|
)
|
Direct
costs associated with debt facilities
|
|
|
(166
|
)
|
|
(244
|
)
|
Repurchases
of common stock
|
|
|
(97
|
)
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
147
|
|
|
-
|
|
Net
cash used in financing activities
|
|
|
(1,076
|
)
|
|
(1,342
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(523
|
)
|
|
166
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(4,304
|
)
|
|
102
|
|
Cash
and cash equivalents, beginning of period
|
|
|
8,421
|
|
|
8,525
|
|
Cash
and cash equivalents, end of period
|
|
$
|
4,117
|
|
$
|
8,627
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
Note
receivable from sale of discontinued operations
|
|
$
|
1,200
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2006
(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 September 30, 2006 and December 31, 2005 and for the three and
nine month periods ended September 30, 2006 and September 30, 2005 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, 2005. 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
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories
The
components of inventories are as follows (amounts in thousands):
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
16,246
|
|
$
|
23,314
|
|
Work
in process
|
|
|
779
|
|
|
1,766
|
|
Finished
goods
|
|
|
52,778
|
|
|
48,949
|
|
Excess
and obsolete inventory reserve
|
|
|
(4,213
|
)
|
|
(4,548
|
)
|
LIFO
reserve
|
|
|
(5,343
|
)
|
|
(6,682
|
)
|
|
|
$
|
60,247
|
|
$
|
62,799
|
|
|
|
|
|
|
|
|
|
At
September 30, 2006 and December 31, 2005, approximately 27% and 39%,
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 $5.3 million and $6.7
million at September 30, 2006 and December 31, 2005, respectively. The reduction
in the LIFO reserve primarily resulted from the sale of the Metal Truck Box
business unit.
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4
(“SFAS
No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and spoilage. In addition, SFAS No.
151 requires that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of SFAS No. 151 are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Effective January 1, 2006, the
Company adopted SFAS No. 151 which did not have a material impact on the results
of operations and financial position.
Property,
Plant and Equipment
Property
and equipment are stated at cost and depreciated over their estimated useful
lives: buildings (10-40 years) generally using the straight-line method;
machinery and equipment (3-20 years) using straight-line or composite methods;
tooling (5 years) using the straight-line method; and leasehold improvements
using the straight-line method over the remaining lease period or useful life,
if shorter. Costs for repair and maintenance of machinery and equipment are
expensed as incurred, unless the result significantly increases the useful
life
or functionality of the asset, in which case capitalization is considered.
Depreciation expense from continuing operations was $2.0 million and $6.1
million, and $2.0 million and $6.2 million for the three and nine month periods
ended September 30, 2006 and 2005, respectively.
Katy
adopted SFAS No. 143, Accounting
for Asset Retirement Obligations
(“SFAS
No. 143”), on January 1, 2003. SFAS No. 143 requires that an asset retirement
obligation associated with the retirement of a tangible long-lived asset be
recognized as a liability in the period in which it is incurred or becomes
determinable, with an associated increase in the carrying amount of the related
long-term asset. The cost of the tangible asset, including the initially
recognized asset retirement cost, is depreciated over the useful life of the
asset. In accordance with SFAS No. 143, the Company has recorded as of September
30, 2006 an asset of $0.8 million and related liability of $1.1 million for
retirement obligations associated with returning certain leased properties
to
the respective lessors upon the termination of the lease arrangements. A summary
of the changes in asset retirement obligation since December 31, 2005 is
included in the table below (amounts in thousands):
SFAS
No. 143 Obligation at December 31, 2005
|
|
$
|
1,068
|
|
Accretion
expense
|
|
|
38
|
|
Changes
in estimates, including timing
|
|
|
-
|
|
SFAS
No. 143 Obligation at September 30, 2006
|
|
$
|
1,106
|
|
|
|
|
|
|
Stock
Options and Other Stock Awards
Prior
to
January 1, 2006, the Company accounted for stock options and other stock awards
under the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting
for Stock Issued to Employees
(“APB
No. 25”), as allowed by SFAS No. 123, Accounting
for Stock-Based Compensation (“SFAS
No. 123”), as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS
No. 148”). APB No. 25 dictated a measurement date concept in the determination
of compensation expense related to stock awards including stock options,
restricted stock, and stock appreciation rights (“SARs”).
Katy’s
outstanding stock options all had established measurement dates and therefore,
fixed plan accounting was applied, generally resulting in no compensation
expense for stock option awards. However, the Company issued stock appreciation
rights, stock awards and restricted stock awards which were accounted for as
variable stock compensation awards for which compensation (income) expense
was
recorded. Compensation income associated with stock appreciation rights was
$0.1
million and $0.9 million for the three and nine month periods ended September
30, 2005, respectively. No compensation expense relative to restricted stock
awards was recognized in the three and nine month periods ended September 30,
2005. Compensation (income) expense for stock awards and stock appreciation
rights is recorded in selling, general and administrative expenses in the
Condensed Consolidated Statements of Operations.
Effective
January 1, 2006, the Company has adopted SFAS No. 123R, Share-Based
Payment
(“SFAS
No. 123R”), using the modified prospective method. Under this method,
compensation cost recognized during the nine month period ended September 30,
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 stock
appreciation rights granted prior to and vested as of September 30, 2006 based
on the September 30, 2006 fair value estimated in accordance with SFAS No.
123R.
The
following table shows total compensation expense (see Note 7 for descriptions
of
Stock Incentive Plans) included in the Condensed Consolidated Statements of
Operations for the three and nine month periods ended September 30,
2006:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$
|
354
|
|
$
|
381
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
756
|
|
|
|
$
|
354
|
|
$
|
1,137
|
|
|
|
|
|
|
|
|
|
The
cumulative effect of a change in accounting principle reflects the compensation
cost for stock appreciation rights granted prior to, but vested as of January
1,
2006, based on the January 1, 2006 fair value. Prior to the effective date,
no
compensation cost was accrued associated with SARs as all of these stock awards
were out of the money. Pro forma results for the prior period have not been
restated. As a result of adopting SFAS No. 123R on January 1, 2006, the
Company’s net loss for the three and nine month periods ended September 30, 2006
is approximately $0.4 million and $1.1 million higher, respectively, than had
it
continued to account for stock-based employee compensation under APB No. 25.
Basic net loss per share for the three month period ended September 30, 2006
would have been $0.18 had the Company not adopted SFAS No. 123R, compared to
reported basic net loss per share of $0.23. Diluted net loss per share for
the
three month period ended September 30, 2006 would have been $0.05 had the
Company not adopted SFAS No. 123R, compared to reported diluted net loss per
share of $0.07. Basic and diluted net loss per share for the nine month period
ended September 30, 2006 would have been $1.05 had the Company not adopted
SFAS
No. 123R, compared to reported basic and diluted net loss per share of $1.19.
The adoption of SFAS No. 123R had approximately $0.7 million positive impact
on
cash flows from operations with the recognition of a liability for the
outstanding and vested stock appreciation rights. The adoption of SFAS No.
123R
had no impact on cash flows from financing.
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 equal to the average between the minimum and
maximum lives expected for each award, ranging from 5.30 years to 6.50 years.
In
addition, the Company estimated volatility, ranging from 53.8% to 57.6%, by
considering its historical stock volatility over a term comparable to the
remaining expected life of each award. The risk-free interest rate, ranging
from
3.98% to 4.48%, 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
fair
value for stock appreciation rights, a liability award, was estimated at the
effective date of SFAS No. 123R and September 30, 2006 using a Black-Scholes
option pricing model. The Company estimated the expected term equal to the
average between the minimum and maximum lives expected for each award, ranging
from 3.0 years to 5.8 years. In addition, the Company estimated volatility,
ranging from 53.5% to 54.9%, by considering its historical stock volatility
over
a term comparable to the remaining expected life of each award. The risk-free
interest rate, ranging from 4.57% to 4.60%, was the current yield available
on
U.S. treasury rates with issues with a remaining term equal in term of 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
following table illustrates the effect on net income (loss) and net income
(loss) per share had the Company applied the fair value recognition provisions
of SFAS No. 123R to account for the Company’s employee stock option awards for
the three and nine month periods ended September 30, 2005 because these awards
were not accounted for using the fair value recognition method during those
periods. However, no impact was present on net income (loss) as all stock option
awards were vested prior to the time period presented. For purposes of pro
forma
disclosure, the estimated fair value of the stock awards, as prescribed by
SFAS
No. 123, is amortized to expense over the vesting period:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2005
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,333
|
|
$
|
(9,361
|
)
|
Add:
Stock-based employee compensation expense
|
|
|
|
|
|
|
|
included in reported net income (loss), with no
|
|
|
|
|
|
|
|
related tax effects
|
|
|
-
|
|
|
1,953
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
compensation expense determined under fair
|
|
|
|
|
|
|
|
value based method for all awards, with no
|
|
|
|
|
|
|
|
related tax effects
|
|
|
(120
|
)
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
$
|
1,213
|
|
$
|
(7,542
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) per share - Basic:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.17
|
|
$
|
(1.18
|
)
|
Pro
forma
|
|
$
|
0.15
|
|
$
|
(0.95
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) per share - Diluted:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.05
|
|
$
|
(1.18
|
)
|
Pro
forma
|
|
$
|
0.05
|
|
$
|
(0.95
|
)
|
The
historical pro forma impact of applying the fair value method prescribed by
SFAS
No. 123 is not representative of the impact that may be expected in the future
due to changes resulting from additional grants and changes in assumptions
such
as volatility, interest rates, and the expected life used to estimate fair
value
of stock options and other stock awards. Note that the above pro forma
disclosure was not presented for the three and nine month periods ended
September 30, 2006 because all stock awards have been accounted for using the
fair value recognition method under SFAS No. 123R for these
periods.
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 related to the debt upon settlement. 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 hedge under SFAS No. 133,
changes in the fair value of the derivative will be offset against the change
in
fair value of the hedged liability through earnings, or 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 September 30, 2006,
with changes in fair market value included in other comprehensive
income.
The
Company reported no gain or loss for the three and nine months ended September
30, 2006, 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 September 30, 2006 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)
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) Income
The
components of comprehensive (loss) income are as follows (amounts in
thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
(loss) income
|
|
$
|
(1,812
|
)
|
$
|
1,333
|
|
$
|
(9,485
|
)
|
$
|
(9,361
|
)
|
Foreign
currency translation (losses) gains
|
|
|
(593
|
)
|
|
256
|
|
|
161
|
|
|
(1,188
|
)
|
Unrealized
(losses) gains on interest rate swap
|
|
|
(90
|
)
|
|
(38
|
)
|
|
43
|
|
|
(38
|
)
|
|
|
|
(683
|
)
|
|
218
|
|
|
204
|
|
|
(1,226
|
)
|
Comprehensive
(loss) income
|
|
$
|
(2,495
|
)
|
$
|
1,551
|
|
$
|
(9,281
|
)
|
$
|
(10,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share (EPS)
The
Condensed Consolidated Financial Statements include basic and diluted earnings
per share. Diluted per share information is calculated by also considering
the
impact of potential common stock on the weighted average shares outstanding.
Potential common stock consists of (a) stock options “in the money” based on the
average stock price for the respective period and (b) convertible preferred
shares accounted for using the “if converted” basis, which assumes their
conversion to common stock at a ratio of 16.6:1. The following table sets forth
the computation of diluted earnings per share for the three months ended
September 30, 2006 and 2005 (amounts in thousands):
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Basic
EPS
|
|
Income
|
|
Shares
|
|
Per-share
amount
|
|
Income
|
|
Shares
|
|
Per-share
amount
|
|
Net
(loss) income
|
|
$
|
(1,812
|
)
|
|
7,962
|
|
$
|
(0.23
|
)
|
$
|
1,333
|
|
|
7,951
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities [a]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
Convertible
preferred stock
|
|
|
|
|
|
18,859
|
|
|
|
|
|
|
|
|
18,859
|
|
|
|
|
Diluted
EPS
|
|
$
|
(1,812
|
)
|
|
26,825
|
|
$
|
(0.07
|
)
|
$
|
1,333
|
|
|
26,880
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] For
the
nine months ended September 30, 2006 and 2005, the stock options and convertible
preferred stock were not reflected as their effect on loss per share for the
periods were anti-dilutive.
Reclassifications
Certain
immaterial reclassifications were made to the 2005 financial statements in
order
to conform to the 2006 presentation. The Company in the fourth quarter of 2005
determined that certain items previously classified as severance, restructuring
and related charges during the first three quarters of 2005 of $1.1 million
should have been classified as costs of goods sold ($0.7 million) and selling,
general and administrative expenses ($0.4 million). For the three and nine
months ended September 30, 2005, the Company reclassified $0.4 million and
$0.7
million, respectively, from severance, restructuring and related charges to
cost
of goods sold. For the three and nine months ended September 30, 2005, the
Company reclassified less than $0.1 million and $0.4 million, respectively,
from
severance, restructuring and related charges to selling, general and
administrative expenses. These reclassifications did not impact the Company’s
reported net (loss) income, income (loss) from continuing operations or cash
flows from operations. Additionally, the impact to the Company’s reported gross
profit in these quarters was not significant.
(2)
New
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
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. For the Company, the provisions of FIN 48 are effective
January 1, 2007. The Company is assessing the impact this interpretation may
have in its future financial statements.
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 standard may have in its future financial statements.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R).
This
new standard requires employers to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in
its
statement of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income. For
employers that have equity securities that trade in the public market, this
new
standard requires the recognition of the funded status of a defined benefit
postretirement plan and requires disclosures as of the end of the fiscal year
ending after December 15, 2006. The Company is currently evaluating the impact
of adopting this standard in its financial statements.
(3)
Intangible
Assets
Following
is detailed information regarding Katy’s intangible assets (amounts in
thousands):
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Patents
|
|
$
|
1,477
|
|
$
|
(1,032
|
)
|
$
|
445
|
|
$
|
1,409
|
|
$
|
(954
|
)
|
$
|
455
|
|
Customer
lists
|
|
|
10,445
|
|
|
(8,061
|
)
|
|
2,384
|
|
|
10,643
|
|
|
(7,997
|
)
|
|
2,646
|
|
Tradenames
|
|
|
5,539
|
|
|
(2,276
|
)
|
|
3,263
|
|
|
5,498
|
|
|
(2,075
|
)
|
|
3,423
|
|
Other
|
|
|
441
|
|
|
(52
|
)
|
|
389
|
|
|
441
|
|
|
(19
|
)
|
|
422
|
|
Total
|
|
$
|
17,902
|
|
$
|
(11,421
|
)
|
$
|
6,481
|
|
$
|
17,991
|
|
$
|
(11,045
|
)
|
$
|
6,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2006 and 2005, and $0.5 million for both the nine month periods
ended September 30, 2006 and 2005. Estimated aggregate future amortization
expense related to intangible assets is as follows (amounts in
thousands):
2006 (remainder) |
$
|
128
|
2007 |
|
638
|
2008 |
|
624
|
2009 |
|
590
|
2010 |
|
542
|
2011 |
|
506
|
Thereafter |
|
3,453
|
(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. In 1984, the Authority issued $55.0 million
of
Industrial Revenue Bonds (“the IRBs”) and lent the proceeds to SESCO under the
loan agreement for the acquisition and construction of the waste-to-energy
facility. The funds required to repay the loan agreement come from the monthly
disposal fee paid by the Authority under the service agreement for certain
waste
disposal services, a component of which is for debt service. The debt service
component of the monthly fee is paid into a trust, outside of the Company’s
control, which is then utilized to make the scheduled debt payments on the
IRBs.
The Authority is unconditionally obligated to pay the monthly fee whether or
not
the facility is operating unless SESCO and Katy are insolvent and the facility
is deemed incapable of handling the required amount of waste.
SESCO
has
a legally enforceable right to offset amounts it owes to the Authority under
the
loan agreement (scheduled principal repayments) against amounts that are owed
from the Authority under the service agreement. At September 30, 2006, no
amounts were outstanding as a result of the sale of the partnership discussed
further below. Accordingly, the amounts owed to and due from SESCO have been
netted for financial reporting purposes and are not shown on the Condensed
Consolidated Balance Sheets in accordance with FIN No. 39, Offsetting
of Amounts Related to Certain Contracts.
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 the partnership. The Company caused SESCO
to
enter into this agreement as a result of evaluations of SESCO's business. First,
Katy concluded that SESCO was not a core component of the Company's long-term
business strategy. Moreover, Katy did not feel it had the management expertise
to deal with certain risks and uncertainties presented by the operation of
SESCO's business, given that SESCO was the Company's only waste-to-energy
facility. Katy had explored options for divesting SESCO for a number of years,
and management felt that this transaction offered a reasonable strategy to
exit
this business.
The
partnership, with Montenay's leadership, assumed SESCO's position in various
contracts relating to the facility's operation. Under the partnership agreement,
SESCO contributed its assets and liabilities (except for its liability under
the
loan agreement with the Authority and the related receivable under the service
agreement with the Authority) to the partnership. While SESCO had a 99% interest
as a limited partner, profits and losses were allocated 1% to SESCO and 99%
to
Montenay. In addition, Montenay had the day to day responsibility for
administration, operations, financing and other matters of the partnership.
While the above partnership qualifies as a variable interest entity, the Company
was not the primary beneficiary as defined by FIN No. 46, Consolidation
of Variable Interest Entities,
and
accordingly, the partnership is not consolidated. SESCO did not meet the
criteria as the primary beneficiary as Montenay receives 99% of all profits
and
losses, Montenay was required to finance the partnership, partners were not
obligated to contribute additional capital, and Montenay had agreed to indemnify
SESCO for any losses incurred due to a breach in the service agreement.
Katy
agreed to pay Montenay $6.6 million over the span of seven years under a note
payable in return for Montenay assuming the risks associated with the
partnership and its operation of the waste-to-energy facility. In the first
quarter of 2002, the Company recognized a charge of $6.0 million consisting
of
1) the discounted value of the $6.6 million note, 2) the carrying value of
certain assets contributed to the partnership, consisting primarily of machinery
spare parts, and 3) costs to close the transaction. It should be noted that
all
of SESCO's long-lived assets were reduced to a zero value in 2001, so no
additional impairment was required. On a going forward basis, Katy expected
that
income statement activity associated with its involvement in the partnership
would not be material, and Katy's Consolidated Balance Sheets would carry the
liability mentioned above.
Certain
amounts may have been due to SESCO upon expiration of the service agreement
in
2008; also, Montenay may have purchased SESCO's interest in the partnership
at
that time. Katy did not record any amounts receivable or other assets relating
to amounts that may have been received at the time the service agreement
expired, given their uncertainty.
To
induce
the required parties to consent to the SESCO partnership transaction, SESCO
retained its liability under the loan agreement. In connection with that
liability, SESCO also retained its right to receive the debt service component
of the monthly disposal fee. In addition to SESCO retaining its liabilities
under the loan agreement, to induce the required parties to consent to the
partnership transaction, Katy continued to guarantee the obligations of the
partnership under the service agreement. The partnership was liable for
liquidated damages under the service agreement if it failed to accept the
minimum amount of waste or to meet other performance standards under the service
agreement. Additionally, Montenay had agreed to indemnify Katy for any breach
of
the service agreement by the partnership.
On
June
27, 2006, the Company and Montenay amended the partnership agreement in order
to
allow the Company to completely exit from the SESCO operations and related
obligations. In addition, Montenay became the guarantor under the loan
obligation for the IRBs. 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. In addition, Montenay removed the Company as the performance
guarantor under the service agreement. As a result of the above transaction,
the
Company recorded $0.4 million within loss from operations of discontinued
businesses during the nine months ended September 30, 2006 given the reduction
in the face amount due to Montenay as agreed upon in the original partnership
agreement. In addition, the Company recorded a gain on the sale of the
partnership interest of approximately $0.1 million as reflected within loss
on
sale of discontinued businesses.
The
table
below schedules the remaining payments due to Montenay as of September 30,
2006
which are reflected in accrued expenses in the Condensed Consolidated Balance
Sheets (amounts in thousands):
2006
|
|
$
|
400
|
|
2007
|
|
|
400
|
|
|
|
$
|
800
|
|
|
|
|
|
|
(5)
Indebtedness
Long-term
debt consists of the following (amounts in thousands):
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Term
loan payable under Bank of America Credit Agreement, interest based
|
|
|
|
|
|
|
|
on
LIBOR and Prime Rates (8.38% - 9.50%), due through 2009
|
|
$
|
12,367
|
|
$
|
15,714
|
|
Revolving
loans payable under the Bank of America Credit Agreement,
|
|
|
|
|
|
|
|
interest
based on LIBOR and Prime Rates (8.13% - 9.25%)
|
|
|
49,729
|
|
|
41,946
|
|
Total
debt
|
|
|
62,096
|
|
|
57,660
|
|
Less
revolving loans, classified as current (see below)
|
|
|
(49,729
|
)
|
|
(41,946
|
)
|
Less
current maturities
|
|
|
(2,857
|
)
|
|
(2,857
|
)
|
Long-term
debt
|
|
$
|
9,510
|
|
$
|
12,857
|
|
|
|
|
|
|
|
|
|
Aggregate
remaining scheduled
maturities of the Term Loan as of September 30, 2006 are as follows (amounts
in
thousands):
2006
|
|
$ |
714
|
|
2007
|
|
|
2,857
|
|
2008
|
|
|
2,857
|
|
2009
|
|
|
5,939
|
|
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 (formerly Fleet Capital Corporation) (the “Bank of America
Credit Agreement”). Like the previous credit agreement with Fleet Capital
Corporation, the Bank of America Credit Agreement is a $110.0 million facility
with a $20.0 million term loan (“Term Loan”) and a $90.0 million revolving
credit facility (“Revolving Credit Facility”) with essentially the same terms as
the previous credit agreement. The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks, all of
which participated in the syndicate from the previous credit agreement. The
Bank
of America Credit Agreement, and the additional borrowing ability under the
Revolving Credit Facility obtained by incurring new term debt, results in three
important benefits related to the Company’s long-term strategy: (1) additional
borrowing capacity to invest in capital expenditures and/or acquisitions key
to
the Company’s strategic direction, (2) increased working capital flexibility to
build inventory when necessary to accommodate lower cost outsourced finished
goods inventory and (3) the ability to borrow locally in Canada and the United
Kingdom and provide a natural hedge against currency fluctuations.
The
Revolving Credit Facility has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
The
Term Loan also has a final maturity date of April 20, 2009 with quarterly
payments of $0.7 million. A final payment of $5.2 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 our casualty insurance programs.
Letters of credit totaling $8.4 million were outstanding at September 30, 2006,
which reduced the unused borrowing availability under the Revolving Credit
Facility.
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. Customary financial covenants and restrictions apply under
the Bank of America Credit Agreement. Current margins of 275 basis points over
applicable LIBOR rates for Revolving Credit Facility borrowings and 300 basis
points over LIBOR for borrowings under the Term Loan reflect the highest spread
under the Bank of America Credit Agreement, as amended. Additionally, 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 September 30,
2006.
With
the
Sixth Amendment in the Bank of America Credit Agreement (“Sixth Amendment”), the
Company’s current debt covenants under the Bank of America Credit Agreement are
as follows:
Minimum
Availability
-
Eligible collateral must exceed the sum of the Company’s outstanding borrowings
and letters of credit under the Revolving Credit Facility by at least $5.0
million from the effective date of the Sixth Amendment through September 29,
2006 and by at least $7.5 million from September 30, 2006 until the date the
Company delivers its financial statements for the first quarter of 2007 to
its
lenders.
Fixed
Charge Coverage Ratio
- The
Company is required to maintain a Fixed Charge Coverage Ratio (as defined in
the
Bank of America Credit Agreement) of 1.1:1. Pursuant to the Sixth Amendment,
this covenant was suspended and will be reinstated following the first quarter
of 2007.
Capital
Expenditures
- For
the year ended December 31, 2006, the Company is not to exceed $12.0 million
in
capital expenditures. Subsequent to 2006, the Company is not to exceed $15.0
million during a single fiscal year.
Leverage
Ratio
- The
Third Amendment to the Bank of America Credit Agreement eliminated the Leverage
Ratio (as defined in the Bank of America Credit Agreement) as a financial
covenant. Following the first quarter of 2007, the Leverage Ratio will be
utilized to determine the interest rate margin over the applicable LIBOR
rate.
The
Company believes that it will be able to comply with all covenants, as amended,
throughout 2006. 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
(see discussion above). It is possible, however, the Company may not be able
to
obtain further amendments from the lender under the Bank of America Credit
Agreement or secure additional financing or liquidity through the sale of assets
on favorable terms or at all.
For
the
three and nine months ended September 30, 2006 and 2005, the Company had
amortization of debt issuance costs of $0.3 million and $0.9 million, and $0.3
million and $0.8 million, respectively. In addition, the Company incurred and
expensed zero and $0.2 million, and $0.1 million and $0.2 million associated
with amending the Bank of America Credit Agreement, as discussed above, in
the
three and nine months ended September 30, 2006 and 2005,
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
Bank of America Credit Agreement 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 September 30, 2006,
and the Company was not in default of any provision of the Bank of America
Credit Agreement at September 30, 2006.
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 September 30, 2006.
(6)
Retirement
Benefit Plans
Several
of the Company’s 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 post-retirement benefit plans for all years presented.
Information regarding the Company’s net periodic benefit cost for pension and
other post-retirement benefit plans for the three and nine months ended
September 30, 2006 and 2005, is as follows (amounts in thousands):
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
3
|
|
$
|
2
|
|
$
|
7
|
|
$
|
6
|
|
Interest
cost
|
|
|
24
|
|
|
23
|
|
|
68
|
|
|
70
|
|
Expected
return on plan assets
|
|
|
(24
|
)
|
|
(25
|
)
|
|
(68
|
)
|
|
(77
|
)
|
Amortization
of net gain
|
|
|
16
|
|
|
20
|
|
|
44
|
|
|
59
|
|
Net
periodic benefit cost
|
|
$
|
19
|
|
$
|
20
|
|
$
|
51
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Benefits
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
85
|
|
$
|
47
|
|
$
|
157
|
|
$
|
142
|
|
Amortization
of prior service cost
|
|
|
66
|
|
|
15
|
|
|
94
|
|
|
45
|
|
Amortization
of net gain
|
|
|
(8
|
)
|
|
15
|
|
|
12
|
|
|
45
|
|
Net
periodic benefit cost
|
|
$
|
143
|
|
$
|
77
|
|
$
|
263
|
|
$
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required
contributions to the pension plans for 2006 are $0.1 million. Katy made this
required contribution during the first quarter of 2006.
(7)
Stock
Incentive Plans
Stock
Options
At
the
1995 Annual Meeting, the Company’s stockholders approved the Long-Term Incentive
Plan (the “1995 Incentive Plan”) authorizing the issuance of up to 500,000
shares of Company common stock pursuant to the grant or exercise of stock
options, including incentive stock options, nonqualified stock options, SARs,
restricted stock, performance units or shares and other incentive awards to
executives and certain key employees. The Compensation Committee of the Board
of
Directors administers the 1995 Incentive Plan and determines to whom awards
may
be granted and the type of award, as well as the number of shares of Company
common stock to be covered by each award and the terms and conditions of such
awards. The exercise price of stock options granted under the 1995 Incentive
Plan cannot be less than 100 percent of the fair market value of such stock
on
the date of grant. In the event of a Change in Control of the Company, awards
granted under the 1995 Incentive Plan are subject to substantially similar
provisions to those described under the 1997 Incentive Plan. The definition
of
Change in Control of the Company under the 1995 Incentive Plan is substantially
similar to the definition described under the 1997 Incentive Plan below.
At
the
1995 Annual Meeting, the Company’s stockholders approved the Non-Employee
Directors Stock Option Plan (the “Directors Plan”) authorizing the issuance of
up to 200,000 shares of Company common stock pursuant to the grant or exercise
of nonqualified stock options to outside directors. The Board of Directors
administers the Directors Plan. The exercise price of stock options granted
under the Directors Plan is equal to the fair market value of the Company’s
common stock on the date of grant. Stock options granted pursuant to the
Directors Plan are immediately vested in full on the date of grant and generally
expire 10 years after the date of grant. This plan has expired as of December
31, 2005 and no further grants will be made.
At
the
1998 Annual Meeting, the Company’s stockholders approved the 1997 Long-Term
Incentive Plan (the “1997 Incentive Plan”), authorizing the issuance of up to
875,000 shares of Company common stock pursuant to the grant or exercise of
stock options, including incentive stock options, nonqualified stock options,
SARs, restricted stock, performance units or shares and other incentive awards.
The Compensation Committee of the Board of Directors administers the 1997
Incentive Plan and determines to whom awards may be granted and the type of
award, as well as the number of shares of Company common stock to be covered
by
each award and the terms and conditions of such awards. The exercise price
of
stock options granted under the 1997 Incentive Plan cannot be less than 100
percent of the fair market value of such stock on the date of grant.
The
1997
Incentive Plan also provides that in the event of a Change in Control of the
Company, as defined below, 1) any SARs and stock options outstanding as of
the
date of the Change in Control which are neither exercisable or vested will
become fully exercisable and vested (the payment received upon the exercise
of
the SARs shall be equal to the excess of the fair market value of a share of
the
Company’s Common Stock on the date of exercise over the grant date price
multiplied by the number of SARs exercised); 2) the restrictions applicable
to
restricted stock will lapse and such restricted stock will become free of all
restrictions and fully vested; and 3) all performance units or shares will
be
considered to be fully earned and any other restrictions will lapse, and such
performance units or shares will be settled in cash or stock, as applicable,
within 30 days following the effective date of the Change in Control. For
purposes of subsection 3), the payout of awards subject to performance goals
will be a pro rata portion of all targeted award opportunities associated with
such awards based on the number of complete and partial calendar months within
the performance period which had elapsed as of the effective date of the Change
in Control. The Compensation Committee will also have the authority, subject
to
the limitations set forth in the 1997 Incentive Plan, to make any modifications
to awards as determined by the Compensation Committee to be appropriate before
the effective date of the Change in Control.
For
purposes of the 1997 Incentive Plan, “Change in Control” of the Company means,
and shall be deemed to have occurred upon, any of the following events: 1)
any
person (other than those persons in control of the Company as of the effective
date of the 1997 Incentive Plan, a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned directly
or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company) becomes the beneficial
owner, directly or indirectly, of securities of the Company representing
30 percent or more of the combined voting power of the Company’s then
outstanding securities; or 2) during any period of two consecutive years (not
including any period prior to the effective date), the individuals who at the
beginning of such period constitute the Board of Directors (and any new
director, whose election by the Company’s stockholders was approved by a vote of
at least two-thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was so approved), cease for any reason to constitute a majority
thereof, or 3) the stockholders of the Company approve: (a) a plan of complete
liquidation of the Company; or (b) an agreement for the sale or disposition
of
all or substantially all the Company’s assets; or (c) a merger, consolidation,
or reorganization of the Company with or involving any other corporation, other
than a merger, consolidation, or reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to
represent at least 50 percent of the combined voting power of the voting
securities of the Company (or such surviving entity) outstanding immediately
after such merger, consolidation, or reorganization. The Company has determined
that the Recapitalization did not result in such a Change in
Control.
In
March
2004, the Company’s Board of Directors approved the vesting of all previously
unvested stock options. The Company did not recognize any compensation expense
upon this vesting of options because, based on the information available at
that
time, the Company did not have an expectation that the holders of the previously
unvested options would terminate their employment with the Company prior to
the
original vesting period.
On
June
28, 2001, the Company entered into an employment agreement with C. Michael
Jacobi, its former President and Chief Executive Officer. To induce Mr. Jacobi
to enter into the employment agreement, on June 28, 2001, the Compensation
Committee of the Board of Directors approved the Katy Industries, Inc. 2001
Chief Executive Officer’s Plan. Under this plan, Mr. Jacobi was granted 978,572
stock options. Mr. Jacobi was also granted 71,428 stock options under the
Company’s 1997 Incentive Plan. Upon Mr. Jacobi’s retirement in May 2005, all but
300,000 of these options were cancelled. All of the remaining options are under
the 2001 Chief Executive Officer’s Plan. In the second quarter of 2005, Mr.
Jacobi retired from the Company. Upon this event, the Company recognized $2.0
million of non-cash compensation expense related to his 1,050,000 options using
the intrinsic method of accounting under APB No. 25, because he would not have
otherwise vested in these options but for the March 2004 accelerated
vesting.
On
September 4, 2001, the Company entered into an employment agreement with Amir
Rosenthal, its Vice President, Chief Financial Officer, General Counsel and
Secretary. To induce Mr. Rosenthal to enter into the employment agreement,
on
September 4, 2001, the Compensation Committee of the Board of Directors approved
the Katy Industries, Inc. 2001 Chief Financial Officer’s Plan. Under this plan,
Mr. Rosenthal was granted 123,077 stock options. Mr. Rosenthal was also granted
76,923 stock options under the Company’s 1995 Incentive Plan.
On
June
1, 2005, the Company entered into an employment agreement with Anthony T. Castor
III, its President and Chief Executive Officer. To induce Mr. Castor to enter
into the employment agreement, on July 15, 2005, the Compensation Committee
of
the Board of Directors approved the Katy Industries, Inc. 2005 Chief Executive
Officer’s Plan. Under this plan, Mr. Castor was granted 750,000 stock options.
These options vest evenly over a three-year period.
The
following table summarizes stock option activity under each of the 1997
Incentive Plan, 1995 Incentive Plan, the Chief Executive Officer’s Plan, the
Chief Financial Officer’s Plan and the Directors Plan:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Options
|
|
Price
|
|
Life
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,856,350
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
(45,000
|
)
|
$
|
3.26
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,000
|
)
|
$
|
13.57
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(31,000
|
)
|
$
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
1,774,350
|
|
$
|
3.96
|
|
|
6.73
years
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at September 30, 2006
|
|
|
1,144,350
|
|
$
|
4.65
|
|
|
5.63
years
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, total unvested compensation expense associated
with
stock options amounted to $0.4 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
0.8
years as of September 30, 2006.
Stock
Appreciation Rights
During
2002, a non-employee consultant was awarded 200,000 SARs under the 1997
Incentive Plan. As of December 31, 2005, these SARs were outstanding at an
exercise price of $6.00.
On
November 21, 2002, the Board of Directors approved the 2002 Stock Appreciation
Rights Plan (the “2002 SAR Plan”), authorizing the issuance of up to 1,000,000
SARs. Vesting of the SARs occurs ratably over three years from the date of
issue. The 2002 SAR Plan provides limitations on redemption by holders,
specifying that no more than 50% of the cumulative number of vested SARs held
by
an employee could be exercised in any one calendar year. The SARs expire ten
years from the date of issue. The Board approved grants on November 22, 2002,
of
717,175 SARs to 60 individuals with an exercise price of $3.15, which equaled
the market price of Katy’s stock on the grant date. In addition, 50,000 SARs
were granted to four individuals during 2003 with exercise prices ranging from
$3.01 through $5.05. In 2004, 275,000 SARs were granted to fifteen individuals
with exercise prices ranging from $5.20 through $6.45. No SARs were granted
in
2005. At December 31, 2005, Katy had 671,781 SARs outstanding at a weighted
average exercise price of $4.16.
The
2002
SAR Plan also provides that in the event of a Change in Control of the Company,
all outstanding SARs may become fully vested. In accordance with the 2002 SAR
Plan, a “Change in Control” is deemed to have occurred upon any of the following
events: 1) a sale of 100 percent of the Company’s outstanding capital stock, as
may be outstanding from time to time; 2) a sale of all or substantially all
of
the Company’s operating subsidiaries or assets; or 3) a transaction or series of
transactions in which any third party acquires an equity ownership in the
Company greater than that held by KKTY Holding Company, L.L.C. and in which
Kohlberg & Co., L.L.C. relinquishes its right to nominate a majority of the
candidates for election to the Board of Directors.
The
following table summarizes SARs activity under each of the 1997 Incentive Plan
and the 2002 SAR Plan:
Non-Vested
at December 31, 2005
|
|
|
85,115
|
|
|
|
|
|
|
Granted
|
|
|
26,000
|
|
Vested
|
|
|
(55,998
|
)
|
Cancelled
|
|
|
(1,683
|
)
|
|
|
|
|
|
Non-Vested
at September 30, 2006
|
|
|
53,434
|
|
|
|
|
|
|
Total
Outstanding at September 30, 2006
|
|
|
813,281
|
|
|
|
|
|
|
(8)
Income
Taxes
As
of
September 30, 2006 and December 31, 2005, the Company had deferred tax assets,
net of deferred tax liabilities and valuation allowances, of $1.0 million,
respectively. Domestic net operating loss (“NOL”) carry forwards comprised $34.8
million of the deferred tax assets. 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 September 30,
2006 and December 31, 2005 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 and nine months ended September 30,
2006 and 2005 reflects current expense for state and foreign income taxes.
Tax
benefits were not recorded on the pre-tax net income (loss) for the three and
nine months ended September 30, 2006 and 2005 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 2,055 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 335 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).
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. As discussed below, certain of the
plaintiff’s claims were dismissed with prejudice by the Court. 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. The
defendants filed motions to dismiss the Second Amended Complaint on November
8,
2004. These motions sought dismissal of plaintiffs’ Second Amended Complaint on
grounds of, among other things, failure to state a claim and forum non
conveniens.
On
August
11, 2005, the court granted significant aspects of Defendants’ motions to
dismiss for failure to state a claim. Specifically, the Court dismissed
with
prejudice all
of
the federal and Indiana RICO claims asserted in the Second Amended Complaint
against Woods. This ruling removes the treble damages exposure associated with
the federal and Indiana RICO claims. Recently, the Court also denied the
defendants’ renewed motion to dismiss for forum non conveniens. The sole claims
now remaining against Woods are certain common law claims and claims under
the
Indiana Crime Victims Act. Fact discovery is continuing, and trial is scheduled
for fall of 2007. Expert discovery is also ongoing.
The
plaintiffs seek damages in excess of $24.0 million, request that the Court
void
certain asset sales as purported “fraudulent transfers” (including the 1993
Woods Wire Products, Inc./Woods asset sale), and continue to claim that the
Indiana Crime Victims Act entitles them to 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 the plaintiff. 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
|
|
Nine
months ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Maintenance
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
|
|
$
|
55,942
|
|
$
|
56,621
|
|
$
|
160,787
|
|
$
|
164,799
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
2,928
|
|
|
298
|
|
|
4,698
|
|
|
(4,254
|
)
|
Operating
margin (deficit)
|
|
|
|
|
|
|
|
|
5.2
|
%
|
|
0.5
|
%
|
|
2.9
|
%
|
|
(2.6
|
%)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
1,899
|
|
|
1,881
|
|
|
5,831
|
|
|
5,719
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
896
|
|
|
2,604
|
|
|
2,356
|
|
|
5,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
|
|
$
|
65,275
|
|
$
|
76,544
|
|
$
|
124,866
|
|
$
|
144,925
|
|
Operating
income
|
|
|
|
|
|
|
|
|
4,391
|
|
|
6,099
|
|
|
6,372
|
|
|
10,166
|
|
Operating
margin
|
|
|
|
|
|
|
|
|
6.7
|
%
|
|
8.0
|
%
|
|
5.1
|
%
|
|
7.0
|
%
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
188
|
|
|
245
|
|
|
650
|
|
|
948
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
235
|
|
|
100
|
|
|
571
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
-
|
|
|
Operating
segments
|
|
$
|
121,217
|
|
$
|
133,165
|
|
$
|
285,653
|
|
$
|
309,724
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,217
|
|
$
|
133,165
|
|
$
|
285,653
|
|
$
|
309,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
-
|
|
|
Operating
segments
|
|
$
|
7,319
|
|
$
|
6,397
|
|
$
|
11,070
|
|
$
|
5,912
|
|
|
|
|
-
|
|
|
Unallocated
corporate
|
|
|
(2,767
|
)
|
|
(2,454
|
)
|
|
(8,183
|
)
|
|
(8,706
|
)
|
|
|
|
-
|
|
|
Severance,
restructuring,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
related charges
|
|
|
(738
|
)
|
|
(254
|
)
|
|
(1,591
|
)
|
|
(892
|
)
|
|
|
|
-
|
|
|
(Loss)
gain on sale of assets
|
|
|
(49
|
)
|
|
176
|
|
|
(103
|
)
|
|
342
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,765
|
|
$
|
3,865
|
|
$
|
1,193
|
|
$
|
(3,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
Operating
segments
|
|
$
|
2,087
|
|
$
|
2,126
|
|
$
|
6,481
|
|
$
|
6,667
|
|
|
|
|
-
|
|
|
Unallocated
corporate
|
|
|
25
|
|
|
26
|
|
|
97
|
|
|
66
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,112
|
|
$
|
2,152
|
|
$
|
6,578
|
|
$
|
6,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
Operating
segments
|
|
$
|
1,131
|
|
$
|
2,704
|
|
$
|
2,927
|
|
$
|
5,402
|
|
|
|
|
-
|
|
|
Unallocated
corporate
|
|
|
7
|
|
|
-
|
|
|
20
|
|
|
-
|
|
|
|
|
-
|
|
|
Discontinued
operations
|
|
|
30
|
|
|
127
|
|
|
78
|
|
|
383
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,168
|
|
$
|
2,831
|
|
$
|
3,025
|
|
$
|
5,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Total
assets
|
|
|
-
|
|
|
Maintenance
Products Group
|
|
$
|
102,016
|
|
$
|
108,012
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Electrical
Products Group
|
|
|
84,315
|
|
|
66,744
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Other
[a]
|
|
|
14,369
|
|
|
27,391
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Unallocated
corporate
|
|
|
5,993
|
|
|
10,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
206,693
|
|
$
|
212,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Amounts shown as “Other” primarily represent items associated with Sahlman
Holding Company, Inc., the Company’s equity method investment, and United
Kingdom consumer plastics business unit, which is classified as an asset held
for sale. The amount on December 31, 2005 also includes the assets of the Metal
Truck Box business unit.
(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 US 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
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$
|
704
|
|
$
|
146
|
|
$
|
1,403
|
|
$
|
100
|
|
Consolidation
of Glit facilities
|
|
|
-
|
|
|
(23
|
)
|
|
-
|
|
|
659
|
|
Consolidation
of administrative functions for CCP
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
-
|
|
|
131
|
|
|
-
|
|
|
112
|
|
Corporate
office relocation
|
|
|
34
|
|
|
-
|
|
|
188
|
|
|
-
|
|
Total
severance, restructuring and related charges
|
|
$
|
738
|
|
$
|
254
|
|
$
|
1,591
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, including the buyout of the Warson
Road (St. Louis, Missouri) lease and changes in sublet assumptions. 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,
as well as changes in the amount of usable manufacturing space. Charges in
2005
were for an adjustment to the non-cancelable lease accrual at the Hazelwood
facility due to a change in the amount of sublease rental income anticipated
as
well as miscellaneous charges for the termination of the Warson Road facility
lease. 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 St. Louis manufacturing/distribution facilities (amounts
in
thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
1,845
|
|
$
|
-
|
|
$
|
1,845
|
|
Additions
|
|
|
1,403
|
|
|
-
|
|
|
1,403
|
|
Payments
|
|
|
(601
|
)
|
|
-
|
|
|
(601
|
)
|
Restructuring
liabilities at September 30, 2006
|
|
$
|
2,647
|
|
$
|
-
|
|
$
|
2,647
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2005, the Company completed the closure of the Lawrence,
Massachusetts facility and is expected to close the Pineville, North Carolina
facility in the fourth quarter of 2006. In 2005, the Company recorded a charge
related to severance for terminations at the Lawrence facility. Other than
closure costs and severance for the Pineville facility, management does not
anticipate any material charges beyond 2005. 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, 2005
|
|
$
|
505
|
|
$
|
255
|
|
$
|
250
|
|
Additions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(176
|
)
|
|
(176
|
)
|
|
-
|
|
Restructuring
liabilities at September 30, 2006
|
|
$
|
329
|
|
$
|
79
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of administrative functions for CCP
- In
2002, in order to streamline processes and eliminate duplicate functions, the
Company initiated a plan to centralize certain administrative and back office
functions into Bridgeton, Missouri from certain businesses within the
Maintenance Products Group. This plan was anticipated to be completed in 2004
upon the transfer of functions from the Lawrence, Massachusetts facility (see
Consolidation of Glit facilities above); however, the closure was delayed and
subsequently contributed to the delay in this plan until completion in 2005.
Katy has incurred primarily severance costs over the past three years for this
integration of back office and administrative functions. The most significant
project is the centralization of the customer service functions for the
Continental, Glit, Wilen, and Disco business units. Charges in 2005 relate
to
costs associated with an accrual for idle space at the Company’s facility in
Atlanta. There was no activity for this initiative during the three and nine
months ended September 30, 2006. The Company does not expect to incur any
additional charges on this initiative.
Shutdown
of Woods US manufacturing
- During
2002, a major restructuring occurred at the Woods business unit. After
significant study and research into different sourcing alternatives, Katy
decided that Woods would source all of its products from Asia. In December
2002,
Woods shut down all U.S. manufacturing facilities, which were in suburban
Indianapolis and in southern Indiana. All 2005 activity reflects payments on
the
non-cancelable lease accrual. No charges were recorded in the three and nine
months ended September 30, 2006 and 2005. Following is a rollforward of
restructuring liabilities by type for the shutdown of Woods US manufacturing
(amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
195
|
|
$
|
20
|
|
$
|
175
|
|
Additions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(80
|
)
|
|
(1
|
)
|
|
(79
|
)
|
Restructuring
liabilities at September 30, 2006
|
|
$
|
115
|
|
$
|
19
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
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. In 2005, a credit was recorded
to finalize the severance paid over the past two years. Management believes
that
no more 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 shutdown of Woods Canada manufacturing
(amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
717
|
|
$
|
-
|
|
$
|
717
|
|
Additions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(133
|
)
|
|
-
|
|
|
(133
|
)
|
Restructuring
liabilities at September 30, 2006
|
|
$
|
584
|
|
$
|
-
|
|
$
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
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 relate to severance for employees at the Middlebury
office. Following is a rollforward of restructuring liabilities by type for
the
corporate office relocation (amounts in thousands):
|
|
One-time
|
|
|
|
Termination
|
|
|
|
Benefits
[a]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
157
|
|
Additions
|
|
|
188
|
|
Payments
|
|
|
(345
|
)
|
Restructuring
liabilities at September 30, 2006
|
|
$
|
-
|
|
|
|
|
|
|
The
table
below details activity in restructuring reserves since December 31, 2005
(amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
3,419
|
|
$
|
432
|
|
$
|
2,987
|
|
Additions
|
|
|
1,591
|
|
|
188
|
|
|
1,403
|
|
Payments
|
|
|
(1,335
|
)
|
|
(522
|
)
|
|
(813
|
)
|
Restructuring
liabilities at September 30, 2006 [c]
|
|
$
|
3,675
|
|
$
|
98
|
|
$
|
3,577
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Includes severance, benefits, and other employee-related charges associated
with
the 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 sub-lease rentals, is $4.2 million as of September
30, 2006. The Company has included $0.6 million as an offset for sub-lease
rentals.
[c]
Katy
expects to substantially complete its current restructuring programs in 2006.
The remaining severance, restructuring and related charges for these initiatives
are expected to be approximately $0.3 million.
The
table
below details activity in restructuring and related reserves by operating
segment since December 31, 2005 (amounts in thousands):
|
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
Corporate
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
3,419
|
|
$
|
2,350
|
|
$
|
912
|
|
$
|
157
|
|
Additions
|
|
|
1,591
|
|
|
1,403
|
|
|
-
|
|
|
188
|
|
Payments
|
|
|
(1,335
|
)
|
|
(777
|
)
|
|
(213
|
)
|
|
(345
|
)
|
Restructuring
liabilities at September 30, 2006
|
|
$
|
3,675
|
|
$
|
2,976
|
|
$
|
699
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table
below summarizes the future obligations for severance, restructuring and other
related charges by operating segment detailed above (amounts in
thousands):
|
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
Corporate
|
|
2006
|
|
$
|
853
|
|
$
|
680
|
|
$
|
173
|
|
$
|
-
|
|
2007
|
|
|
745
|
|
|
498
|
|
|
247
|
|
|
-
|
|
2008
|
|
|
704
|
|
|
450
|
|
|
254
|
|
|
-
|
|
2009
|
|
|
452
|
|
|
427
|
|
|
25
|
|
|
-
|
|
2010
|
|
|
449
|
|
|
449
|
|
|
-
|
|
|
-
|
|
Thereafter
|
|
|
472
|
|
|
472
|
|
|
-
|
|
|
-
|
|
Total
Payments
|
|
$
|
3,675
|
|
$
|
2,976
|
|
$
|
699
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
Discontinued
Operations
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 $30,000 in the second quarter of 2006 in connection with
this
sale. Management and the board of directors determined that this business is
not
a core component to the Company’s long-term business strategy.
On
June
27, 2006, the Company sold its limited partnership interest in a waste-to-energy
facility (“SESCO”) for gross proceeds of approximately $0.1 million. These
proceeds were used to reduce our 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 was 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 and SESCO on the Condensed Consolidated Balance
Sheets. Following is a summary of the major asset and liability categories
for
these discontinued operations:
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
-
|
|
$
|
2,419
|
|
Inventories,
net
|
|
|
-
|
|
|
3,422
|
|
Other
current assets
|
|
|
-
|
|
|
5
|
|
|
|
$
|
- |
|
$
|
5,846
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
$
|
-
|
|
$
|
166
|
|
Property
and equipment, net
|
|
|
-
|
|
|
1,728
|
|
|
|
$ |
- |
|
$
|
1,894
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
$
|
1,741
|
|
Accrued
compensation
|
|
|
-
|
|
|
530
|
|
Accrued
expenses
|
|
|
1,195
|
|
|
1,219
|
|
|
|
$
|
1,195
|
|
$
|
3,490
|
|
|
|
|
|
|
|
|
|
Other
liabilities:
|
|
$
|
-
|
|
$
|
1,486
|
|
|
|
|
|
|
|
|
|
On
September 29, 2006, the Board of Directors of Katy approved managements’ plan to
sell the United Kingdom consumer plastics business. The Company has identified
a
potential purchaser and expects the sale will be completed in the fourth quarter
of 2006; however, no definitive agreement has been reached and the Company
may
not meet its expectation. As a result, the net assets of this business have
been
classified as an asset held for sale on the Condensed Consolidated Balance
Sheets in accordance with SFAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets
(“SFAS
No. 144”). Accordingly, the carrying value of the business unit’s net assets was
adjusted to its fair value less costs to sell, amounting to $8.7 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. Costs to sell
exclude future expected losses associated with the operations of the disposal
group while held for sale. The ultimate sales price could change from current
expectation. With the classification as an asset held for sale and its adjusted
valuation, the Company incurred a $3.2 million impairment charge as reflected
in
the loss on the sale of discontinued businesses within the Condensed
Consolidated Statements of Operations during the three months ended September
30, 2006. Management’s undiscounted cash flows used to previously support the
account balances did not identify prior period adjustments.
In
accordance with SFAS No. 144, the United Kingdom consumer plastics business
will
be classified as a discontinued operation as operations and cash flows will
be
eliminated from on-going operations with no significant continuing involvement
in this business. Assets and liabilities held for sale, related to this
discontinued operation, is comprised of the following assets and liabilities
as
of September 30, 2006:
Assets
held for sale:
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
3,494
|
|
Inventories,
net
|
|
|
2,384
|
|
Other
current assets
|
|
|
308
|
|
Property
and equipment, net
|
|
|
7,107
|
|
Accumulated
other comprehensive income
|
|
|
(1,141
|
)
|
|
|
$
|
12,152
|
|
|
|
|
|
|
Liabilities
held for sale:
|
|
|
|
|
Accounts
payable
|
|
$
|
2,661
|
|
Accrued
expenses
|
|
|
773
|
|
|
|
$
|
3,434
|
|
|
|
|
|
|
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
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
4,473
|
|
$
|
7,392
|
|
$
|
19,115
|
|
$
|
24,556
|
|
Pre-tax
loss
|
|
$
|
(151
|
)
|
$
|
(986
|
)
|
$
|
(849
|
)
|
$
|
(1,467
|
)
|
Pre-tax
loss on sale of discontinued businesses
|
|
$
|
(3,200
|
)
|
$
|
-
|
|
$
|
(3,130
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
Acquisition
During
the third quarter of 2005, CCP acquired substantially all of the assets and
assumed certain liabilities of Washington International Non-Wovens, LLC (“WIN”),
based in Washington, Georgia. The purchase price was approximately $1.7 million,
including $0.6 million of assumed debt, and was allocated to he acquired net
assets and intangible lease asset at their estimated fair values. The WIN
acquisition is not material for purposes of presenting pro forma financial
information. This acquired business is part of the Glit business unit in the
Maintenance Products Group.
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s
discussion and analysis of financial condition and results of operations
(“MD&A”) is designed to provide a reader of these financial statements with
a narrative from the perspective of the management of Katy Industries, Inc.
(“Katy” or the “Company”) on Katy’s financial condition, results of operations,
liquidity and other factors which may affect the Company’s future results. The
MD&A in this quarterly report should be read in conjunction with the
MD&A in Katy’s 2005 annual report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 2006 and as amended on October 18,
2006.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2006 versus Three Months Ended September 30,
2005
|
|
|
|
|
2006
|
|
2005
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
to Sales
|
|
$
|
|
%
to Sales
|
|
Net
sales
|
|
$
|
121.2
|
|
|
100.0
|
|
$
|
133.2
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
104.9
|
|
|
86.6
|
|
|
116.4
|
|
|
87.4
|
|
Gross
profit
|
|
|
16.3
|
|
|
13.4
|
|
|
16.8
|
|
|
12.6
|
|
Selling,
general and administrative expenses
|
|
|
11.8
|
|
|
9.7
|
|
|
12.8
|
|
|
9.6
|
|
Severance,
restructuring and related charges
|
|
|
0.7
|
|
|
0.6
|
|
|
0.3
|
|
|
0.2
|
|
Loss
(gain) on sale of assets
|
|
|
-
|
|
|
0.0
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Operating
income
|
|
|
3.8
|
|
|
3.1
|
|
|
3.9
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1.7
|
)
|
|
|
|
|
(1.5
|
)
|
|
|
|
Other,
net
|
|
|
-
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
2.1
|
|
|
|
|
|
2.6
|
|
|
|
|
Provision
for income taxes from continuing operations
|
|
|
0.6
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
1.5
|
|
|
|
|
|
2.3
|
|
|
|
|
Loss
from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax)
|
|
|
(0.1
|
)
|
|
|
|
|
(1.0
|
)
|
|
|
|
Loss
on sale of discontinued businesses (net of tax)
|
|
|
(3.2
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before cumulative effect of a change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
(1.8
|
)
|
|
|
|
|
1.3
|
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1.8
|
)
|
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per share of common stock - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.19
|
|
|
|
|
$
|
0.29
|
|
|
|
|
Discontinued
operations
|
|
|
(0.42
|
)
|
|
|
|
|
(0.12
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Net
(loss) income
|
|
$
|
(0.23
|
)
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per share of common stock - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.06
|
|
|
|
|
$
|
0.09
|
|
|
|
|
Discontinued
operations
|
|
|
(0.13
|
)
|
|
|
|
|
(0.04
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Net
(loss) income
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our
consolidated net sales for the three month period ended September 30, 2006
decreased $12.0 million compared to the three month period ended September
30,
2005. The decline in net sales of 9% was comprised of lower volumes of 21%
offset by higher pricing of 11% and favorable currency translation of 1%. Gross
margins were 13.4% for the three month period ended September 30, 2006, an
increase of 0.8 percentage points compared to the three month period ended
September 30, 2005. In 2005, incremental operating costs incurred due to the
delayed consolidation of the Glit facilities adversely impacted gross margin
levels. In 2006, the lower volume impact was partially offset by the improvement
in pricing. In addition, production efficiencies gained at our Glit facilities
improved our margins. Selling, general and administrative expense (“SG&A”)
as a percentage of sales of 9.7% for the third quarter of 2006 was comparable
to
9.6% for the third quarter of 2005. Operating income of $3.8 million for the
three month period ended September 30, 2006 was comparable to $3.9 million
of
operating income for the prior period, mostly due to higher gross margins
offsetting the lower net sales levels and higher severance and restructuring
costs.
Overall,
we reported a net loss of ($1.8) million [($0.07) per diluted share] for the
three month period ended September 30, 2006, versus net income of $1.3 million
[$0.05 per diluted share] for the same period of 2005.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group decreased from $56.6 million during the
three month period ended September 30, 2005 to $55.9 million during the three
month period ended September 30, 2006. Overall, this decline of 1% was primarily
due to lower sales volumes of 6% partially offset by higher pricing of 4% and
favorable currency translation of 1%. Sales activity for the Contico business
unit continues to be impacted by the reduced volumes which were partially offset
by sales improvement in our core Continental business unit.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, most of which took effect throughout 2005. 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 decreased from $76.5 million for the three
month period ended September 30, 2005 to $65.3 million for the three month
period ended September 30, 2006. The sales decrease of 15% was primarily the
result of lower volume of 33% partially offset by higher pricing of 17% and
favorable currency translation of 1%. Lower volume resulted from the loss of
certain product lines with certain customers. In addition, a milder hurricane
season in the United States has resulted in lower volume requirements in 2006.
Multiple selling price increases have been implemented since the beginning
of
2004 to offset the rising cost of copper and PVC. We may continue to implement
price increases; however, there can be no assurance that such increases, if
implemented, will be accepted. In addition, sales at Woods Canada were favorably
impacted by a stronger Canadian dollar versus the U.S. dollar in the third
quarter of 2006 as compared to the same period in 2005.
Operating
Income
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
Maintenance
Products Group
|
|
$
|
2.9
|
|
|
5.2
|
|
$
|
0.3
|
|
|
0.5
|
|
$
|
2.6
|
|
|
4.7
|
|
Electrical
Products Group
|
|
|
4.4
|
|
|
6.7
|
|
|
6.1
|
|
|
8.0
|
|
|
(1.7
|
)
|
|
(1.3
|
)
|
Unallocated
corporate expense
|
|
|
(2.8
|
)
|
|
|
|
|
(2.4
|
)
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
4.5
|
|
|
3.8
|
|
|
4.0
|
|
|
3.0
|
|
|
0.5
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
restructuring and related charges
|
|
|
(0.7
|
)
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
(0.4
|
)
|
|
|
|
(Loss)
gain on sale of assets
|
|
|
-
|
|
|
|
|
|
0.2
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
Operating
income
|
|
$
|
3.8
|
|
|
3.1
|
|
$
|
3.9
|
|
|
2.9
|
|
$
|
(0.1
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance Products
Group
The
Maintenance Products Group’s operating income improved from $0.3 million (0.5%
of net sales) during the three month period ended September 30, 2005 to $2.9
million (5.2% of net sales) for the three month period ended September 30,
2006.
The improvement was primarily attributable to the production efficiencies gained
within our Glit business unit. In addition, higher pricing resulting from the
implementation of selling price increases across the Maintenance Products Group,
most of which took effect throughout 2005, improved gross margins.
Electrical
Products Group
The
Electrical Products Group’s operating income decreased from $6.1 million (8.0%
of net sales) for the three month period ended September 30, 2005 to $4.4
million (6.7% of net sales) for the three month period ended September 30,
2006.
The volume lost during the quarter as discussed above impacted the overall
reduction in operating income. In addition, operating margins were negatively
impacted from the change in material costs and the ability to recover from
the
customer.
Corporate
Corporate
operating
expenses increased from $2.4 million in the three month period ended September
30, 2005 to $2.8 million in three month period ended September 30, 2006
principally due to stock compensation, both stock options and stock appreciation
rights.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the three months ended September 30, 2006 and
2005 were impacted by severance, restructuring and related charges of $0.7
million and $0.3 million, respectively. Charges in 2006 related to costs
associated with additional impairment for our Hazelwood facility as lower amount
of space is required for the remaining manufacturing. Charges in 2005 primarily
related to severance and facility closure costs associated with the closure
of
one of our Glit facilities.
Other
Items
Interest
expense increased by $0.3 million in the third quarter of 2006 compared to
the
same period of 2005, primarily as a result of higher interest rates in 2006
and
higher levels of outstanding borrowings.
The
provision for income taxes for the three months ended September 30, 2006 and
2005 reflects a current expense for state income taxes and foreign income taxes.
In both 2006 and 2005, tax benefits were not recorded in the U.S. (for federal
and certain state income taxes) on pre-tax net income (loss) as a result of
accumulated operating losses in the those jurisdictions, as we concluded that
it
was more likely than not that such benefits would not be realized. We recorded
tax benefits for other foreign subsidiaries as we concluded that it was more
likely than not that such benefits would be realized.
With
the
classification of the United Kingdom consumer plastics business unit as an
asset
held for sale, all activity associated with this business unit is classified
as
a discontinued operation. Included within the loss on sale of discontinued
businesses is a $3.2 million impairment charge upon the valuation of this
business unit as an asset held for sale as discussed further in Note 12 of
the
Condensed Consolidated Financial Statements. Loss from operations of
discontinued businesses includes activity from the United Kingdom consumer
plastics business, plus the Metal Truck Box business unit and our SESCO
partnership interest, which were both sold during the second quarter of
2006.
Nine
Months Ended September 30, 2006 versus Nine Months Ended September 30,
2005
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
to Sales
|
|
$
|
|
%
to Sales
|
|
Net
sales
|
|
$
|
285.7
|
|
|
100.0
|
|
$
|
309.7
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
246.5
|
|
|
86.3
|
|
|
273.4
|
|
|
88.3
|
|
Gross
profit
|
|
|
39.2
|
|
|
13.7
|
|
|
36.3
|
|
|
11.7
|
|
Selling,
general and administrative expenses
|
|
|
36.3
|
|
|
12.7
|
|
|
39.1
|
|
|
12.6
|
|
Severance,
restructuring and related charges
|
|
|
1.6
|
|
|
0.6
|
|
|
0.9
|
|
|
0.3
|
|
Loss
(gain) on sale of assets
|
|
|
0.1
|
|
|
0.0
|
|
|
(0.4
|
)
|
|
(0.1
|
)
|
Operating
income (loss)
|
|
|
1.2
|
|
|
0.4
|
|
|
(3.3
|
)
|
|
(1.1
|
)
|
Interest
expense
|
|
|
(5.2
|
)
|
|
|
|
|
(4.1
|
)
|
|
|
|
Other,
net
|
|
|
0.5
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
(3.5
|
)
|
|
|
|
|
(7.2
|
)
|
|
|
|
Provision
for income taxes from continuing operations
|
|
|
1.2
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(4.7
|
)
|
|
|
|
|
(7.9
|
)
|
|
|
|
Loss
from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax)
|
|
|
(0.9
|
)
|
|
|
|
|
(1.5
|
)
|
|
|
|
Loss
on sale of discontinued businesses (net of tax)
|
|
|
(3.1
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(8.7
|
)
|
|
|
|
|
(9.4
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
(0.8
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9.5
|
)
|
|
|
|
$
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.60
|
)
|
|
|
|
$
|
(0.99
|
)
|
|
|
|
Discontinued
operations
|
|
|
(0.50
|
)
|
|
|
|
|
(0.19
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
(0.09
|
)
|
|
|
|
|
-
|
|
|
|
|
Net
loss
|
|
$
|
(1.19
|
)
|
|
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.60
|
)
|
|
|
|
$
|
(0.99
|
)
|
|
|
|
Discontinued
operations
|
|
|
(0.50
|
)
|
|
|
|
|
(0.19
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
(0.09
|
)
|
|
|
|
|
-
|
|
|
|
|
Net
loss
|
|
$
|
(1.19
|
)
|
|
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our
consolidated net sales for the nine month period ended September 30, 2006
decreased $24.0 million compared to the nine month period ended September 30,
2005. The decline in net sales of 8% was comprised of lower volumes of 17%
offset by higher pricing of 8% and favorable currency translation of 1%. Gross
margins were 13.7% for the nine month period ended September 30, 2006; an
increase of 2.0 percentage points compared to the nine month period ended
September 30, 2005. In 2005, higher raw material costs and incremental operating
costs incurred due to the delayed consolidation of the Glit facilities were
partially offset by selling price increases and the favorable impact of
restructuring and cost containment. In 2006, the lower volume impact was offset
by the improvement in pricing and the production efficiencies being gained
at
our Glit business unit. SG&A as a percentage of sales for the first nine
months of 2006 was 12.7% which was comparable to the first nine months of 2005.
Operating income for the first nine months of 2006 improved to $1.2 million
from
an operating loss of ($3.3) million in 2005, mostly due to higher gross margins
and reduced selling, general and administrative expense.
Overall,
we reported a net loss of ($9.5) million [($1.19) per share] for the nine month
period ended September 30, 2006, versus a net loss of ($9.4) million [($1.18)
per share] for the same period of 2005.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group decreased from $164.8 million during the
nine month period ended September 30, 2005 to $160.8 million during the nine
month period ended September 30, 2006. Overall, this decline of 2% was primarily
due to lower volumes of 7% partially offset by higher pricing of 5%. Activity
within the Contico and Glit business units were the primary reasons for the
volume shortfall for the nine months ended September 30, 2006.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, which took effect throughout the last half of 2005,
with the most significant increases in the domestic business units. 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 decreased from $144.9 million for the nine
month period ended September 30, 2005 to $124.9 million for the nine month
period ended September 30, 2006. The sales reduction of 14% was primarily the
result of lower volume of 28% partially offset by higher pricing of 13% and
favorable currency translation of 1%. Volume in 2006 at Woods US was adversely
impacted by the absence of 2005 non-recurring activity with one of its major
customers which did not repeat in the first quarter of 2006. In addition, 2006
was adversely impacted by the loss of certain product lines with certain
customers along with a milder hurricane season in the United States. Sales
at
Woods Canada were favorably impacted by a stronger Canadian dollar versus the
U.S. dollar in the first half of 2006 as compared to the same period in 2005.
Operating
Income
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
Maintenance
Products Group
|
|
$
|
4.7
|
|
|
2.9
|
|
$
|
(4.3
|
)
|
|
(2.6
|
)
|
$
|
9.0
|
|
|
5.5
|
|
Electrical
Products Group
|
|
|
6.4
|
|
|
5.1
|
|
|
10.2
|
|
|
7.0
|
|
|
(3.8
|
)
|
|
(1.9
|
)
|
Unallocated
corporate expense
|
|
|
(8.2
|
)
|
|
|
|
|
(8.7
|
)
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
2.9
|
|
|
1.0
|
|
|
(2.8
|
)
|
|
(0.9
|
)
|
|
5.7
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
restructuring and related charges
|
|
|
(1.6
|
)
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
(0.7
|
)
|
|
|
|
(Loss)
gain on sale of assets
|
|
|
(0.1
|
)
|
|
|
|
|
0.4
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
Operating
income (loss)
|
|
$
|
1.2
|
|
|
0.4
|
|
$
|
(3.3
|
)
|
|
(1.1
|
)
|
$
|
4.5
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income increased from an operating loss
of ($4.3) million (2.6% of net sales) during the nine month period ended
September 30, 2005 to operating income of $4.7 million (2.9% of net sales)
for
the nine month period ended September 30, 2006. The improvement was primarily
attributable to production efficiencies gained at our Glit business unit gained
over 2005 as well as higher pricing levels in 2006. In 2005, lower volumes
and
higher raw material costs adversely impacted our business units which sell
plastic products. SG&A as a percentage of net sales in the first nine months
of 2006 was slightly lower versus 2005 due mostly to cost containment measures.
Electrical
Products Group
The
Electrical Products Group’s operating income decreased from $10.2 million (7.0%
of net sales) for the nine month period ended September 30, 2005 to $6.4 million
(5.1% of net sales) for the nine month period ended September 30, 2006. The
decrease in profitability was primarily due to the reduced volume levels at
the
Woods US business unit as discussed above. Gross margin performance in 2005
includes higher than historical one-time sales to a specific customer which
resulted in a favorable gross margin in 2005. In addition, operating margins
were negatively impacted, primarily during the third quarter, from the change
in
material costs and the ability to recover from the customer.
Corporate
Corporate
operating expenses decreased from $8.7 million in the nine month period ended
September 30, 2005 to $8.2 million in the nine month period ended September
30,
2006 principally due to compensation cost associated with the acceleration
of
vesting of stock options in 2005 offset by higher health insurance costs in
2006.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the nine months ended September 30, 2006 and
2005
were negatively impacted by severance, restructuring and related charges of
$1.6
million and $0.9 million, respectively. Charges in 2006 related to changes
in
lease assumptions for an abandoned facility ($1.4 million) with the remaining
charges primarily related to the relocation of the corporate headquarters.
Charges in 2005 primarily related to severance and facility closure costs
associated with the closure of one of our Glit facilities ($0.7
million).
Other
Items
Interest
expense increased by $1.2 million in the first nine months of 2006 versus the
same period of 2005, primarily as a result of higher interest rates and higher
average borrowings in 2006 (principally due to increased working capital levels
and lower financial performance in the second half of 2005). Other income,
net
for the nine months ended September 30, 2006 included a gain on foreign currency
transactions.
The
provision for income taxes for the nine months ended September 30, 2006 reflects
current expense for state and foreign income taxes. In both 2006 and 2005,
tax
benefits were not recorded in the U.S. (for federal and certain state income
taxes) and for certain foreign subsidiaries on pre-tax net losses 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.
With
the
classification of the United Kingdom consumer plastics business unit as an
asset
held for sale, all activity associated with this business unit is classified
as
a discontinued operation. Included within the loss on sale of discontinued
businesses is a $3.2 million impairment charge upon the valuation of this
business unit as an asset held for sale as discussed further in Note 12 of
the
Condensed Consolidated Financial Statements. Loss from operations of
discontinued businesses includes activity from the United Kingdom consumer
plastics business, plus the Metal Truck Box business unit and our SESCO
partnership interest, which were both sold during the second quarter of 2006
for
a net gain of $0.1 million. For the nine months ended September 30, 2006, the
Company incurred a loss from operations of discontinued businesses of $0.8
million compared to a loss from operations of discontinued businesses of $1.5
million for the nine months ended September 30, 2005.
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 2 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 September 30, 2006, we had cash and
cash
equivalents of $4.1 million versus cash and cash equivalents of $8.4 million
at
December 31, 2005. Also as of September 30, 2006, we had outstanding borrowings
of $62.1 million [57% 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 $22.3 million. As of December 31, 2005,
we
had outstanding borrowings of $57.7 million [51% of total capitalization].
We
used $2.5 million of cash in operations during the nine months ended September
30, 2006 versus providing $7.1 million of cash flow from operations during
the
nine months ended September 30, 2005. The
use
of cash flow in operations was primarily attributable to the pay down of
accounts payable in the first quarter of 2006 as well as the on-going investment
in inventory within our Electrical Products Group.
Bank
of America Credit Agreement
On
April
20, 2004, we completed a refinancing of our outstanding indebtedness (the
“Refinancing”) and entered into a new agreement with Bank of America Business
Capital (formerly Fleet Capital Corporation) (the “Bank of America Credit
Agreement”). Like the previous credit agreement with Fleet Capital Corporation,
the Bank of America Credit Agreement is a $110.0 million facility with a $20.0
million term loan (“Term Loan”) and a $90.0 million revolving credit facility
(“Revolving Credit Facility”) with essentially the same terms as the previous
credit agreement. The Bank of America Credit Agreement is an asset-based lending
agreement and involves a syndicate of four banks, all of which participated
in
the syndicate from the previous credit agreement. The Bank of America Credit
Agreement, and the additional borrowing ability under the Revolving Credit
Facility obtained by incurring new term debt, results in three important
benefits related to our long-term strategy: (1) additional borrowing capacity
to
invest in capital expenditures and/or acquisitions key to our strategic
direction, (2) increased working capital flexibility to build inventory when
necessary to accommodate lower cost outsourced finished goods inventory and
(3)
the ability to borrow locally in Canada and the United Kingdom and provide
a
natural hedge against currency fluctuations.
The
Revolving Credit Facility has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
The
Term Loan also has a final maturity date of April 20, 2009 with quarterly
payments of $0.7 million. A final payment is scheduled to be paid in April
2009.
The Term Loan is collateralized by our property, plant and equipment.
Our
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 we conduct business may
require letters of credit in the future that either (1) do not exist today
or
(2) would be at higher amounts than those that exist today. Currently, our
largest letters of credit relate to our casualty insurance programs. At
September 30, 2006, total outstanding letters of credit were $8.4 million.
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. Customary financial covenants and restrictions apply under
the Bank of America Credit Agreement. Current margins of 275 basis points over
applicable LIBOR rates for Revolving Credit Facility borrowings and 300 basis
points over LIBOR for borrowings under the Term Loan reflect the highest spread
under the Bank of America Credit Agreement, as amended. Additionally, 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 September 30,
2006.
With
the
Sixth Amendment in the Bank of America Credit Agreement (“Sixth Amendment”), the
Company’s current debt covenants under the Bank of America Credit Agreement are
as follows:
Minimum
Availability
-
Eligible collateral must exceed the sum of our outstanding borrowings and
letters of credit under the Revolving Credit Facility by at least $5.0 million
from the effective date of the Sixth Amendment through September 29, 2006 and
by
at least $7.5 million from September 30, 2006 until the date we deliver our
financial statements for the first quarter of 2007 to our lenders.
Fixed
Charge Coverage Ratio
- The
Company is required to maintain a Fixed Charge Coverage Ratio (as defined in
the
Bank of America Credit Agreement) of 1.1:1. Pursuant to the Sixth Amendment,
this covenant was suspended and will be reinstated following the first quarter
of 2007.
Capital
Expenditures
- For
the year ended December 31, 2006, the Company is not to exceed $12.0 million
in
capital expenditures. Subsequent to 2006, the Company is not to exceed $15.0
million during a single fiscal year.
Leverage
Ratio
- The
Third Amendment to the Bank of America Credit Agreement eliminated the Leverage
Ratio (as defined in the Bank of America Credit Agreement) as a financial
covenant. Following the first quarter of 2007, the Leverage Ratio will be
utilized to determine the interest rate margin over the applicable LIBOR
rate.
If
we are
unable to comply with the terms of the amended covenants, we could seek to
obtain further amendments or pursue increased liquidity through additional
debt
financing and/or the sale of assets. However, there is no guarantee that such
financing could be obtained. The Company is in compliance with the Credit
Agreement as of September 30, 2006 and believes that we will be able to comply
with all covenants, as amended, throughout 2006.
For
the
three and nine months ended September 30, 2006 and 2005, the Company had
amortization of debt issuance costs of $0.3 million and $0.9 million, and $0.3
million and $0.8 million, respectively. In addition, the Company incurred and
expensed zero and $0.2 million, and $0.1 million and $0.2 million associated
with amending the Bank of America Credit Agreement, as discussed above, in
the
three and nine months ended September 30, 2006 and 2005,
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
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.
We do
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 our 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 Bank of America Credit Agreement 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 us of any
indication of a MAE at September 30, 2006, and we were not in default of any
provision of the Bank of America Credit Agreement at September 30,
2006.
Contractual
Obligations
We
have
contractual obligations associated with our debt, operating lease agreements,
severance and restructuring, and other obligations. Our obligations as of
September 30, 2006, 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]
|
|
$
|
49,729
|
|
$
|
49,729
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Term
loans
|
|
|
12,367
|
|
|
2,857
|
|
|
9,510
|
|
|
-
|
|
|
-
|
|
Interest
on debt [b]
|
|
|
10,925
|
|
|
4,628
|
|
|
6,297
|
|
|
-
|
|
|
-
|
|
Operating
leases [c]
|
|
|
24,072
|
|
|
7,709
|
|
|
11,413
|
|
|
4,171
|
|
|
779
|
|
Severance
and restructuring [c]
|
|
|
1,919
|
|
|
953
|
|
|
543
|
|
|
372
|
|
|
51
|
|
SESCO
payable to Montenay [d]
|
|
|
800
|
|
|
800
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Post-retirement
benefits [e]
|
|
|
5,376
|
|
|
834
|
|
|
1,421
|
|
|
1,080
|
|
|
2,041
|
|
Total
Contractual Obligations
|
|
$
|
105,188
|
|
$
|
67,510
|
|
$
|
29,184
|
|
$
|
5,623
|
|
$
|
2,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
835
|
|
$
|
835
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Stand-by
letters of credit
|
|
|
7,529
|
|
|
7,529
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Guarantees
[f]
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Commercial Commitments
|
|
$
|
8,364
|
|
$
|
8,364
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[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 includes obligations associated with restructuring activities.
The Condensed Consolidated Balance Sheet at September 30, 2006 includes $3.6
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]
Amount owed to Montenay as a result of the SESCO partnership, discussed in
Note
4 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q. This obligation is classified in the Condensed
Consolidated Balance Sheets in accrued expenses within Current Liabilities,
recorded on a discounted basis.
[e]
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.
[f]
As
discussed in Note 4 to the Condensed Consolidated Financial Statements in Part
I, Item 1 of this Quarterly Report on Form 10-Q, SESCO, an indirect wholly-owned
subsidiary of Katy, was party to a partnership that operated a waste-to-energy
facility, and had certain contractual obligations, for which Katy provided
certain guarantees. If the partnership was not able to perform its obligations
under the contracts, under certain circumstances SESCO and Katy could have
been
subject to damages equal to the amount of Industrial Revenue Bonds (“IRBs”)
outstanding (which financed construction of the facility) less amounts held
by
the partnership in debt service reserve funds. As of September 30, 2006, none
of
the IRBs remained outstanding (see Note 4 to Condensed Consolidated Financial
Statements).
For
items
noted as [d] and [f], on June 27, 2006, the Company and Montenay amended the
partnership agreement in order to allow the Company to completely exit from
the
SESCO operations and related obligations. In addition, Montenay became the
guarantor under the loan obligation for the IRBs. Montenay purchased the
Company’s limited partnership interest for $75 thousand and a reduction of
approximately $0.6 million in the face amount due to Montenay as agreed upon
in
the original partnership agreement. In addition, Montenay removed the Company
as
the performance guarantor under the service agreement. As a result of the above
transaction, the Company recorded $0.4 million within loss from operations
of
discontinued businesses during the nine months ended September 30, 2006 given
the reduction in the face amount due to Montenay as agreed upon in the original
partnership agreement. In addition, the Company recorded a gain on the sale
of
the partnership interest of approximately $0.1 million as reflected within
loss
on sale of discontinued businesses.
Off-balance
Sheet Arrangements
See
Note
4 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a discussion of SESCO.
Cash
Flow
Liquidity
was adversely impacted during the first nine months of 2006 as a result of
higher operating cash requirements. We used $2.5 million of operating cash
compared to providing operating cash of $7.1 million during the first nine
months of 2005. Debt obligations at September 30, 2006 increased $4.1 million
from December 31, 2005, primarily the result of higher working capital offset
by
proceeds received from the sale of the Metal Truck Box business
unit.
Operating
Activities
Cash
flow
provided by operating activities before changes in operating assets was $3.3
million in the first nine months of 2006 versus cash flow provided by operating
activities before changes in operating assets of $1.3 million in the first
nine
months of 2005. 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 $7.9 million of cash related to operating assets and
liabilities during the nine months ended September 30, 2006 versus cash provided
related to operating assets and liabilities of $6.3 million during the nine
months ended September 30, 2005. Our operating cash flow was adversely impacted
in 2006 by the pay down of accounts payable during the first quarter of 2006
along with our seasonal investment into inventory within our Electrical Products
Group.
Investing
Activities
Capital
expenditures totaled $3.0 million during the nine months ended September 30,
2006 as compared to $5.8 million during the nine months ended September 30,
2005. Anticipated capital expenditures in 2006 are expected to be slightly
lower
than in 2005. In addition, the Company received $2.5 million in cash proceeds
from the sale of the Metal Truck Box business unit and the SESCO partnership
interest.
Financing
Activities
Overall,
debt increased $4.1 million during the nine months ended September 30, 2006
versus a decrease of $1.1 million during the nine months ended September 30,
2005, primarily relating to the changes in working capital during those periods.
Direct debt costs totaling $0.2 million and $0.2 million in the first nine
months of 2006 and 2005, respectively, primarily represents a fee paid to our
lenders in connection with the amendments made to the Bank of America Credit
Agreement.
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
manufacturing/distribution facilities, shutdown of both Woods US 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
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$
|
704
|
|
$
|
146
|
|
$
|
1,403
|
|
$
|
100
|
|
Consolidation
of Glit facilities
|
|
|
-
|
|
|
(23
|
)
|
|
-
|
|
|
659
|
|
Consolidation
of administrative functions for CCP
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
-
|
|
|
131
|
|
|
-
|
|
|
112
|
|
Corporate
office relocation
|
|
|
34
|
|
|
-
|
|
|
188
|
|
|
-
|
|
Total
severance, restructuring and related charges
|
|
$
|
738
|
|
$
|
254
|
|
$
|
1,591
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
22,646
|
|
$
|
22,396
|
|
Electrical
Products Group
|
|
|
12,776
|
|
|
12,776
|
|
Corporate
|
|
|
12,323
|
|
|
12,261
|
|
|
|
$
|
47,745
|
|
$
|
47,433
|
|
|
|
|
|
|
|
|
|
A
rollforward of all restructuring and related reserves since December 31, 2005
is
as follows (amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
3,419
|
|
$
|
432
|
|
$
|
2,987
|
|
Additions
|
|
|
1,591
|
|
|
188
|
|
|
1,403
|
|
Payments
|
|
|
(1,335
|
)
|
|
(522
|
)
|
|
(813
|
)
|
Restructuring
liabilities at September 30, 2006 [c]
|
|
$
|
3,675
|
|
$
|
98
|
|
$
|
3,577
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Includes severance, benefits, and other employee-related charges 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 $4.2 million as of September
30, 2006. We have included $0.6 million as an offset for sublease
rentals.
[c]
Katy
expects to substantially complete its current restructuring programs in 2006.
The remaining severance, restructuring and related charges 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 2006
We
experienced strong sales performance during 2005 from the Woods US retail
electrical corded products business, offset by lower volumes in our Contico
and
Glit business units. Price increases were passed along to our Woods US customers
during 2005 as a result of the rise in copper prices in the last two years
and
we have implemented additional price increases in 2006; however, not as quickly
as material prices increased. We anticipate a reduction in net sales from Woods
US, as experienced in the first half of 2006, due to customers moving more
of
their purchases directly to Asian manufacturers. We have implemented price
increases primarily in the last half of 2005 for the Continental, Container
and
Contico business units in response to higher raw material costs. 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.
We
expect
that the quality, shipping and production issues present at our Glit facilities
in 2005 have improved and will continue to improve throughout 2006. We believe
the Glit business unit will improve its quality level and cost control in its
Wrens operations and as they consolidate the Pineville, North Carolina operation
into the Wrens, Georgia facility. This consolidation is expected to occur in
the
fourth quarter of 2006 and will result in improved profitability of our Glit
business. In addition, we believe the disruption to our Glit operations over
the
last two years resulted in the loss of certain customers. Currently, we do
not
anticipate additional lost sales for the rest of 2006.
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, have increased steadily from the latter
half of 2002 through 2005. 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. Resin prices for 2006 are expected to remain stable as
experienced to date in 2006. We are equally exposed to price changes for copper
at our Woods US and Woods Canada business units. Prices for copper increased
in
late 2003 and have continued through the first nine months of 2006. 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 on other costs such
as
packaging materials, utilities and freight. In a climate of rising raw material
costs (and especially in 2005), we experience difficulty in raising prices
to
shift these higher costs to our consumer customers for our plastic and copper
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 2006 and beyond.
Since
the
Recapitalization, our management has executed 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. In the future, we continue to expect
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 2005 versus 2004 and should
remain stable as a percentage of sales in 2006. We have completed the process
of
transferring back-office functions of our Wilen, Glit and Disco business units
from Georgia to Bridgeton, Missouri, the headquarters of CCP. We will continue
to evaluate the possibility of further consolidation of administrative
processes.
Interest
rates rose in 2005 and we expect rates to increase slightly in 2006. Ultimately,
we cannot predict the future levels of interest rates. With the execution of
the
Sixth Amendment under the Bank of America Credit Agreement, the Company will
have the interest rate margins on all of our outstanding borrowings and letters
of credit set at the largest margins set forth in the Bank of America Credit
Agreement. Interest rate margins will return to levels set forth in the Bank
of
America Credit Agreement subsequent to the delivery of our financial statements
for the first quarter of 2007 to our lenders.
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, 2005 and 2004, and we do not expect to record the benefit of any
deferred tax assets that may be generated in 2006. We will continue to record
current expense associated with federal, foreign and state income
taxes.
In
2005,
our financial performance benefited from favorable currency translation as
the
Canadian dollar and the British sterling strengthened throughout the year
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 in 2006.
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 2006 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.
On
March
9, 2006, in anticipation of not achieving the minimum Fixed Charge Coverage
Ratio as of the end of each quarter of 2006, we obtained the Sixth Amendment
to
the Bank of America Credit Agreement. The Sixth Amendment adjusts the Minimum
Availability such that our eligible collateral must exceed the sum of our
outstanding borrowings and letters of credit under the Revolving Credit Facility
by at least $5.0 million from the effective date of the Sixth Amendment through
September 29, 2006 and by at least $7.5 million from September 30, 2006 until
the date we deliver our financial statements for the first quarter of 2007
to
our lenders. Subsequent to the delivery of the financial statements for the
first quarter of 2007, the Sixth Amendment reestablishes the minimum Fixed
Charge Coverage Ratio as originally set forth in the Bank of America Credit
Agreement. The Sixth Amendment also reduces the maximum allowable capital
expenditures for 2006 from $15.0 million to $12.0 million, and increases the
interest rate margins on all of our outstanding borrowings and letters of credit
to the largest margins set forth in the Bank of America Credit Agreement.
Interest rate margins will return to levels set forth in the Bank of America
Credit Agreement subsequent to the delivery of our financial statements for
the
first quarter of 2007 to our lenders.
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 2006. 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.
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, 2005 (Part II, Item 7). There have been no
changes to policies as of September 30, 2006, except for the adoption of SFAS
No. 123R.
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
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. The Company is assessing the impact this interpretation
may have in its future financial statements.
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 standard may have in its future financial statements.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R).
This
new standard requires employers to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in
its
statement of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income. For
employers that have equity securities that trade in the public market, this
new
standard requires the recognition of the funded status of a defined benefit
postretirement plan and requires disclosures as of the end of the fiscal year
ending after December 15, 2006. The Company is currently evaluating the impact
of adopting this standard in its financial statements.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
Our exposure to market risk associated with changes in interest rates relates
primarily to our debt obligations. 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 September 30, 2006 and over the life of the
agreement is 4.49%. Our interest obligations on outstanding debt at September
30, 2006 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 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 September 30, 2006 is $22.6 million. A 10% change in
foreign currency exchange rates would amount to $2.3 million change in our
net
investment in foreign subsidiaries at September 30, 2006.
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 2006 in Part I,
Item
2 of this Quarterly Report on Form 10-Q, for further discussion of our exposure
to increasing raw material costs.
Item
4. CONTROLS AND PROCEDURES
(a) |
Evaluation
of Disclosure Controls and
Procedures
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our 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 September 30, 2006 that has materially affected, or is
reasonably likely to materially affect Katy’s internal control over financial
reporting.
As
noted
in our Annual Report on Form 10-K for the year ended December 31, 2004, our
Glit
facility in Wrens, Georgia lacks a perpetual inventory system and relies on
quarterly physicals to value inventory. Throughout 2004, we adjusted our
material cost of sales estimate (for preparation of non-quarter-end interim
financial statements) to reflect rising material cost of sales.
Also
during 2004 and 2005, the Wrens facility experienced significant personnel
turnover, consolidation of other operations (consistent with our strategy of
consolidating our abrasives operations into the Wrens facility), and
manufacturing disruption events such as the production interruption caused
by
the air handling system fire in October 2004. Management determined that key
inventory processes, such as receiving, production reporting, scrap, and
shipping, required improvement.
In
light
of the above developments, our management requested that our independent
auditor, PricewaterhouseCoopers LLP (“PwC”), perform a comprehensive analysis of
the Wrens inventory process controls. As part of the analysis, PwC conducted,
in
the Spring of 2005, an on-site review of the operations and inventory-related
process controls of the Wrens facility as well as related certain back-office
processes conducted in St. Louis, Missouri.
The
PwC
review concluded that inventory process controls were inadequate. Among the
inadequacies identified were those relating to shipping and receiving controls,
bills of material and routings, security measures, and systems implementation
(we are in the process of re-implementing a new ERP system). As a result of
its
review, PwC recommended that we take certain corrective actions, including
the
establishment of a perpetual inventory system. In response to each of PwC’s
detailed recommendations, management developed an itemized corrective action
plan which was discussed with our Audit Committee, Board of Directors and PwC.
We believe that the action plan developed by our management will correct the
inadequacies in our internal control over financial reporting as they relate
to
our inventory process at our Wrens facility. We also believe that despite these
inadequacies, the quarterly physical inventory process at this facility has
provided us with an accurate inventory valuation.
The
following is a summary of the specific actions that have been taken to correct
the internal control deficiencies and related status as of September 30,
2006:
· |
Implementation
of short term corrective actions in shipping and receiving
-
Revised shipping, receiving, physical inventory, period end cut-off
and
returned goods procedures have been issued. Training to reinforce
the
importance of the physical verification was provided to all appropriate
material handlers. Products loaded for shipment are now verified
against
system generated bill of ladings. A receiving log was implemented
in the
first quarter of 2005 and is reviewed at least weekly by the distribution
manager.
|
· |
Establishment
of improved interim recording of raw material usage - The shop floor
module in PRMS (the facility’s ERP system) was activated on July 1, 2005.
Large raw material variances continue to be reviewed and/or isolated
by
work order to allow bill of material (“BOM”) corrections as required.
Miscellaneous inventory transactions are being downloaded and reviewed
at
least weekly by cost accounting. In 2005, a supplemental system was
also
re-implemented to allow the daily review of costed non-woven production
runs to identify process or material variances. The output of this
system
yields a daily cost per yard of non-woven material produced, as well
as an
average cost per yard over multiple batches/runs. This information
was
used as a reference point and allowed material cost verifications
with
PRMS formula BOMs. During the third quarter of 2006, the Company
discontinued the supplemental system given the higher level of accuracy
being obtained from the shop floor module in
PRMS.
|
· |
Reestablishment
of a monthly physical inventory until the PRMS perpetual inventory
process
is re-implemented - This location’s monthly physical inventory was
reinstituted for the February 2005 accounting close. We continue
taking a
monthly physical inventory throughout 2005 and 2006. Over the past
year,
overall accuracy, based on inventory value, continues to significantly
improve.
|
· |
Establishment
of security measures to mitigate the risk of theft - All employees
were issued parking permits to help identify on-site traffic of
non-employees. A security camera system was installed and became
operational in June 2005. Cameras provide monitoring of key plant
areas by
both security personnel and key
managers.
|
· |
Improvement
in bill of material and routing accuracy - In July 2005, a BOM
accuracy project was completed which encompassed the review of the
most
significant BOMs across all product lines. Efforts are now ongoing
to
review remaining BOMs, prioritizing based on sales volumes and comparative
analysis with other BOMs of like material/sizes. All remaining significant
BOMs, based on volume levels, were updated by February 1,
2006.
|
· |
Proper
staffing and planning of PRMS re-implementation - The PRMS
re-implementation was completed at the end of July 2005. The Material
Planning and Scheduling module of PRMS was completed in the fourth
quarter
of 2005. The total re-implementation was facilitated by a consultant
with
expertise with both PRMS and ERP system implementation across varied
industries.
|
· |
Establishment
of procedures for production reporting and inventory transactions -
Detailed procedures for reporting of production in PRMS have been
issued.
The implementation of scanning for inventory transactions was completed
in
August and documented procedures were completed in September, 2005.
Any
additional procedures will be finalized and documented when they
are
validated.
|
· |
Activation
of PRMS production and inventory system - The system was fully
activated on February 1, 2006 which allows the accumulation and reporting
of transactions, maintenance of perpetual inventory records, and
the
calculation of standard cost and related variances. The system will
continue to operate in parallel with the monthly physical inventory
until
all significant variances will be identified and
corrected.
|
The
implementation of our action plan is an ongoing process. Although we
believe that we have made significant progress in the items noted above, we
have
not yet fully implemented certain of the PwC recommendations, including the
establishment and validation, to an appropriate accuracy level, of a perpetual
inventory system. Accordingly, we are unable to conclude as of September
30, 2006 that our inventory process controls at our Wrens facility are adequate
without the monthly physical inventory counts. In our Annual Report for the
year
ended December 31, 2005, we believed that the activation of the PRMS production
and inventory system would allow the Company to rely on the adequacy of internal
controls (without the monthly physical inventory counts) at our Wrens, Georgia
facility by the end of the second quarter of 2006. The Company now believes
that
it will not be able to eliminate the monthly physical inventory counts as an
inventory process control until the fourth quarter of 2006.
PART
II - OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
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.
Item
1A. RISK FACTORS
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.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
April
20, 2003, the Company announced a plan to spend up to $5.0 million to repurchase
shares of its common stock. In 2004, 12,000 shares of common stock were
repurchased on the open market for approximately $75 thousand under this plan,
while in 2003, 482,800 shares of common stock were repurchased on the open
market for approximately $2.5 million. The Company suspended further purchases
under the plan on May 10, 2004. On December 5, 2005, we announced the resumption
of the plan. During 2005, the Company purchased 3,200 shares of common stock
on
the open market for less than $0.1 million. During the three and nine months
ended September 30, 2006, the Company purchased 8,900 and 35,900 shares of
common stock on the open market for less than $0.1 million.
Item
3. DEFAULTS UPON SENIOR SECURITIES
None.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item
5. OTHER INFORMATION
None.
Item
6. EXHIBITS
Exhibit
Number
|
Exhibit
Title
|
|
|
|
|
31.1
|
CEO
Certification pursuant to Securities Exchange Act Rule 13a-14, as
adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
*
|
31.2
|
CFO
Certification pursuant to Securities Exchange Act Rule 13a-14, as
adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
*
|
32.1
|
CEO
Certification required by 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
*#
|
32.2
|
CFO
Certification required by 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
*#
|
* Indicates filed herewith.
#
These
certifications are being furnished solely to accompany this report pursuant
to
18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the
Securities and Exchange Act of 1934, as amended, and are not to be incorporated
by reference into any filing of Katy Industries, Inc. whether made before or
after the date hereof, regardless of any general incorporation language in
such
filing.
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KATY
INDUSTRIES, INC.
Registrant
DATE:
November 14, 2006
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