form10-q.htm
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, 2007
Or
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from_______________ to________________
Commission
File Number 001-05558
Katy
Industries, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
75-1277589
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
2461
South Clark Street, Suite 630, Arlington, Virginia 22202
(Address
of principal executive offices) (Zip
Code)
Registrant's
telephone number, including area code: (703) 236-4300
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock
as of the latest practicable date.
Class
|
|
Outstanding
at October 31, 2007
|
Common
Stock, $1 Par Value
|
|
7,951,176
Shares
|
KATY
INDUSTRIES, INC.
FORM
10-Q
September
30, 2007
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands)
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,171
|
|
|
$ |
7,392
|
|
Accounts
receivable, net
|
|
|
22,994
|
|
|
|
55,014
|
|
Inventories,
net
|
|
|
23,822
|
|
|
|
54,980
|
|
Other
current assets
|
|
|
2,160
|
|
|
|
2,991
|
|
Assets
held for sale
|
|
|
74,660
|
|
|
|
4,483
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
125,807
|
|
|
|
124,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
665
|
|
|
|
665
|
|
Intangibles,
net
|
|
|
5,001
|
|
|
|
6,435
|
|
Other
|
|
|
7,070
|
|
|
|
8,990
|
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
12,736
|
|
|
|
16,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
336
|
|
|
|
336
|
|
Buildings
and improvements
|
|
|
9,716
|
|
|
|
9,669
|
|
Machinery
and equipment
|
|
|
102,472
|
|
|
|
119,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,524
|
|
|
|
129,708
|
|
Less
- Accumulated depreciation
|
|
|
(77,595 |
) |
|
|
(87,964 |
) |
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
34,929
|
|
|
|
41,744
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
173,472
|
|
|
$ |
182,694
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands, Except Share Data)
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
18,317
|
|
|
$ |
33,684
|
|
Accrued
compensation
|
|
|
2,845
|
|
|
|
3,518
|
|
Accrued
expenses
|
|
|
26,422
|
|
|
|
38,187
|
|
Current
maturities of long-term debt
|
|
|
1,500
|
|
|
|
1,125
|
|
Revolving
credit agreement
|
|
|
41,977
|
|
|
|
43,879
|
|
Liabilities
held for sale
|
|
|
28,758
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
119,819
|
|
|
|
120,393
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
8,918
|
|
|
|
11,867
|
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
10,928
|
|
|
|
8,402
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
139,665
|
|
|
|
140,662
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 10)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
15%
Convertible Preferred Stock, $100 par value, authorized
|
|
|
|
|
|
|
|
|
1,200,000 shares, issued and outstanding 1,131,551 shares,
|
|
|
|
|
|
liquidation
value $113,155
|
|
|
108,256
|
|
|
|
108,256
|
|
Common
stock, $1 par value, authorized 35,000,000 shares,
|
|
|
|
|
|
|
|
|
issued
9,822,304 shares
|
|
|
9,822
|
|
|
|
9,822
|
|
Additional
paid-in capital
|
|
|
27,296
|
|
|
|
27,120
|
|
Accumulated
other comprehensive (loss) income
|
|
|
(2,439 |
) |
|
|
2,242
|
|
Accumulated
deficit
|
|
|
(87,195 |
) |
|
|
(83,434 |
) |
Treasury
stock, at cost, 1,871,128 and 1,869,827 shares,
respectively
|
|
|
(21,933 |
) |
|
|
(21,974 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
33,807
|
|
|
|
42,032
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
173,472
|
|
|
$ |
182,694
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Amounts
in Thousands, Except Share and Per Share Data)
(Unaudited)
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
As
Restated,
see
Note 1
|
|
|
|
|
|
As
Restated, see Note 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
49,208
|
|
|
$ |
51,920
|
|
|
$ |
144,732
|
|
|
$ |
148,823
|
|
Cost
of goods sold
|
|
|
43,669
|
|
|
|
44,354
|
|
|
|
126,957
|
|
|
|
129,594
|
|
Gross
profit
|
|
|
5,539
|
|
|
|
7,566
|
|
|
|
17,775
|
|
|
|
19,229
|
|
Selling,
general and administrative expenses
|
|
|
6,611
|
|
|
|
7,807
|
|
|
|
20,982
|
|
|
|
23,721
|
|
Severance,
restructuring and related charges
|
|
|
46
|
|
|
|
738
|
|
|
|
2,656
|
|
|
|
1,591
|
|
(Gain)
loss on sale of assets
|
|
|
(44 |
) |
|
|
39
|
|
|
|
1,527
|
|
|
|
48
|
|
Operating
loss
|
|
|
(1,074 |
) |
|
|
(1,018 |
) |
|
|
(7,390 |
) |
|
|
(6,131 |
) |
Gain
on SESCO joint venture transaction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
563
|
|
Interest
expense
|
|
|
(1,051 |
) |
|
|
(1,188 |
) |
|
|
(3,165 |
) |
|
|
(3,900 |
) |
Other,
net
|
|
|
(229 |
) |
|
|
19
|
|
|
|
(128 |
) |
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before (provision for)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
from income taxes
|
|
|
(2,354 |
) |
|
|
(2,187 |
) |
|
|
(10,683 |
) |
|
|
(9,053 |
) |
(Provision
for) benefit from income taxes from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(19 |
) |
|
|
731
|
|
|
|
(651 |
) |
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,373 |
) |
|
|
(1,456 |
) |
|
|
(11,334 |
) |
|
|
(8,212 |
) |
Income
(loss) from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax)
|
|
|
1,563
|
|
|
|
2,636
|
|
|
|
(264 |
) |
|
|
2,499
|
|
(Loss)
gain on sale of discontinued businesses (net of tax)
|
|
|
-
|
|
|
|
(3,200 |
) |
|
|
8,817
|
|
|
|
(3,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
(810 |
) |
|
|
(2,020 |
) |
|
|
(2,781 |
) |
|
|
(8,943 |
) |
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(810 |
) |
|
$ |
(2,020 |
) |
|
$ |
(2,781 |
) |
|
$ |
(9,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
|
$ |
(1.43 |
) |
|
$ |
(1.03 |
) |
Discontinued
operations
|
|
|
0.20
|
|
|
|
(0.07 |
) |
|
|
1.08
|
|
|
|
(0.10 |
) |
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.09 |
) |
Net
loss
|
|
$ |
(0.10 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.35 |
) |
|
$ |
(1.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,951
|
|
|
|
7,962
|
|
|
|
7,951
|
|
|
|
7,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE
NINE MONTHS ENDED SEPTEMBER 30, 2007
(Amounts
in Thousands, Except Share Data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Common
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Stock
|
|
|
Additional
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
Total
|
|
|
|
Number
of
|
|
|
Par
|
|
|
Number
of
|
|
|
Par
|
|
|
Paid-in
|
|
|
hensive
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
hensive
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Stock
|
|
|
Loss
|
|
|
Equity
|
|
Balance,
January 1, 2007
|
|
|
1,131,551
|
|
|
$ |
108,256
|
|
|
|
9,822,304
|
|
|
$ |
9,822
|
|
|
$ |
27,120
|
|
|
$ |
2,242
|
|
|
$ |
(83,434 |
) |
|
$ |
(21,974 |
) |
|
|
|
|
$ |
42,032
|
|
Implementation
of new accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pronouncement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(980 |
) |
|
|
|
|
|
|
|
|
|
(980 |
) |
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,781 |
) |
|
|
-
|
|
|
$ |
(2,781 |
) |
|
|
(2,781 |
) |
Foreign
currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,834 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,834 |
) |
|
|
(1,834 |
) |
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(75 |
) |
|
|
(75 |
) |
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,690 |
) |
|
|
|
|
Reclass
to assets held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,772 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(2,772 |
) |
Purchase
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Stock
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
220
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
220
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(44 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
|
|
|
|
|
|
-
|
|
Balance,
September 30, 2007
|
|
|
1,131,551
|
|
|
$ |
108,256
|
|
|
|
9,822,304
|
|
|
$ |
9,822
|
|
|
$ |
27,296
|
|
|
$ |
(2,439 |
) |
|
$ |
(87,195 |
) |
|
$ |
(21,933 |
) |
|
|
|
|
|
$ |
33,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Amounts
in Thousands)
(Unaudited)
|
|
|
|
|
As
Restated,
see
Note 1
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,781 |
) |
|
$ |
(9,699 |
) |
(Income)
loss from operations of discontinued business
|
|
|
(8,553 |
) |
|
|
731
|
|
Loss
from continuing operations
|
|
|
(11,334 |
) |
|
|
(8,968 |
) |
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
756
|
|
Depreciation
and amortization
|
|
|
5,492
|
|
|
|
5,711
|
|
Write-off
and amortization of debt issuance costs
|
|
|
1,194
|
|
|
|
877
|
|
Write-off
of assets due to lease termination
|
|
|
751
|
|
|
|
-
|
|
Stock
option expense
|
|
|
220
|
|
|
|
486
|
|
Loss
on sale of assets
|
|
|
1,527
|
|
|
|
48
|
|
Deferred
income taxes
|
|
|
(94 |
) |
|
|
-
|
|
|
|
|
(2,244 |
) |
|
|
(1,090 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(3,557 |
) |
|
|
(1,717 |
) |
Inventories
|
|
|
(3,064 |
) |
|
|
6,747
|
|
Other
assets
|
|
|
(1,219 |
) |
|
|
44
|
|
Accounts
payable
|
|
|
3,190
|
|
|
|
(717 |
) |
Accrued
expenses
|
|
|
(1,977 |
) |
|
|
1,831
|
|
Other,
net
|
|
|
2,155
|
|
|
|
(2,610 |
) |
|
|
|
(4,472 |
) |
|
|
3,578
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by continuing operations
|
|
|
(6,716 |
) |
|
|
2,488
|
|
Net
cash used in discontinued operations
|
|
|
(6,196 |
) |
|
|
(6,177 |
) |
Net
cash used in operating activities
|
|
|
(12,912 |
) |
|
|
(3,689 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures of continuing operations
|
|
|
(2,811 |
) |
|
|
(2,252 |
) |
Proceeds
from sale of assets
|
|
|
246
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in continuing operations
|
|
|
(2,565 |
) |
|
|
(1,967 |
) |
Net
cash provided by discontinued operations
|
|
|
16,645
|
|
|
|
1,747
|
|
Net
cash provided by (used in) investing activities
|
|
|
14,080
|
|
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(repayments) borrowings on revolving loans
|
|
|
(1,903 |
) |
|
|
7,783
|
|
Decrease
in book overdraft
|
|
|
(1,646 |
) |
|
|
(4,261 |
) |
Repayments
of term loans
|
|
|
(2,574 |
) |
|
|
(3,347 |
) |
Direct
costs associated with debt facilities
|
|
|
(130 |
) |
|
|
(166 |
) |
Repurchases
of common stock
|
|
|
(3 |
) |
|
|
(97 |
) |
Proceeds
from the exercise of stock options
|
|
|
-
|
|
|
|
147
|
|
Net
cash (used in) provided by financing activities
|
|
|
(6,256 |
) |
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(133 |
) |
|
|
(454 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(5,221 |
) |
|
|
(4,304 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
7,392
|
|
|
|
8,421
|
|
Cash
and cash equivalents, end of period
|
|
$ |
2,171
|
|
|
$ |
4,117
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
Note
receivable from sale of discontinued operations
|
|
$ |
-
|
|
|
$ |
1,200
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited)
(1) Restatement
of Prior Financial Information
Restatement–
As
a result of accounting errors in our raw material inventory records,
management and the Company’s Audit Committee determined on August 6, 2007 that
the Company’s previously issued consolidated financial statements for the three
and nine months ended September 30, 2006 should no longer be relied
upon. The Company’s decision to restate its consolidated financial
statements was based on facts obtained by management and the results of an
independent investigation of the physical raw material inventory counting
process at Continental Commercial Products, LLC (“CCP”). These procedures
resulted in the identification of the overstatement of raw material inventory
when completing the physical inventory. At the time of the physical
inventories, the Company did not have sufficient controls in place to ensure
that the accurate physical raw material inventory on hand was properly accounted
for and reported in the proper period. The Company filed on August
17, 2007 an amended Annual Report on Form 10-K/A as of December 31, 2006 and
an
amended Quarterly Report on Form 10-Q/A as of March 31, 2007 in order to restate
the consolidated financial statements.
(A)
Impact of error on previously filed financial statements – The impact of
the raw material inventory error on loss from continuing operations and net
loss
is approximately $0.2 million for the three months ended September 30, 2006,
and
$0.6 million for the nine months ended September 30, 2006.
Other
Out-of-Period Adjustments and Revisions– Due to the adjustments discussed
above that required a restatement of its previously filed consolidated financial
statements, the Company corrected these out-of-period adjustments and revisions
by recording them in the proper periods.
(B)
Deferred compensation – In conjunction with a retirement
compensation program, the Company made an adjustment for approximately $0.4
million in 2005 associated with the accounting for related compensation
expense. The Company had originally recorded the out-of-period
adjustment within the nine months ended September 30, 2006. This
adjustment has the effect of reducing compensation expense by approximately
$0.4
million during the nine months ended September 30, 2006.
(C)
Revision of SESCO as a continuing operation – For all years
presented, the Company revised the results from the Savannah Energy Systems
Company Partnership operation, as described further in Note 5. For
the three months ended September 30, 2006, the Company revised interest expense
by a corresponding amount from loss from operations of discontinued
businesses. The Company revised for the nine months ended September
30, 2006 $0.4 million from loss from operations of discontinued businesses
and
$0.1 million from gain on sale of discontinued
businesses. Accordingly, for the nine months ended September 30, 2006
the Company recorded a $0.6 million gain on SESCO joint venture transaction
offset by $0.1 million in interest expense.
All
affected amounts described in these Notes to Consolidated Financial Statements
have been restated. In addition to the above adjustments, the Company
sold its Contico Manufacturing Ltd. (“CML”) business unit in June
2007. Additionally, the Company entered into a definitive agreement
on November 1, 2007 to sell the Woods Industries, Inc. (“Woods US”) and Woods
Industries (Canada), Inc. (“Woods Canada”) business units. These
events are described further in Note 13. As a result of these events,
these business units’ financial results were reclassified as discontinued
operations for all periods presented.
The
Company’s three and nine months ended September 30, 2006 financial results were
adjusted as follows:
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended
|
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Previously
reported
|
|
|
CML
Transaction
|
|
|
Woods
Transaction
|
|
|
Restatement
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
121,217
|
|
|
$ |
(4,022 |
) |
|
$ |
(65,275 |
) |
|
$ |
-
|
|
|
$ |
51,920
|
|
Cost
of goods sold (A)
|
|
|
104,912
|
|
|
|
(2,986 |
) |
|
|
(57,780 |
) |
|
|
208
|
|
|
|
44,354
|
|
Gross
profit
|
|
|
16,305
|
|
|
|
(1,036 |
) |
|
|
(7,495 |
) |
|
|
(208 |
) |
|
|
7,566
|
|
Selling,
general and administrative expenses
|
|
|
11,753
|
|
|
|
(842 |
) |
|
|
(3,104 |
) |
|
|
-
|
|
|
|
7,807
|
|
Severance,
restructuring and related charges
|
|
|
738
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
738
|
|
Loss
on sale of assets
|
|
|
49
|
|
|
|
-
|
|
|
|
(10 |
) |
|
|
-
|
|
|
|
39
|
|
Operating
income (loss)
|
|
|
3,765
|
|
|
|
(194 |
) |
|
|
(4,381 |
) |
|
|
(208 |
) |
|
|
(1,018 |
) |
Interest
expense (C)
|
|
|
(1,715 |
) |
|
|
-
|
|
|
|
536
|
|
|
|
(9 |
) |
|
|
(1,188 |
) |
Other,
net
|
|
|
42
|
|
|
|
(3 |
) |
|
|
(20 |
) |
|
|
-
|
|
|
|
19
|
|
Income
(loss) from continuing operations before (provision for)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
from income taxes
|
|
|
2,092
|
|
|
|
(197 |
) |
|
|
(3,865 |
) |
|
|
(217 |
) |
|
|
(2,187 |
) |
(Provision
for) benefit from income taxes from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(553 |
) |
|
|
(185 |
) |
|
|
1,469
|
|
|
|
-
|
|
|
|
731
|
|
Income
(loss) from continuing operations
|
|
|
1,539
|
|
|
|
(382 |
) |
|
|
(2,396 |
) |
|
|
(217 |
) |
|
|
(1,456 |
) |
(Loss)
income from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax) (C)
|
|
|
(151 |
) |
|
|
382
|
|
|
|
2,396
|
|
|
|
9
|
|
|
|
2,636
|
|
Loss
on sale of discontinued businesses (net of tax)
|
|
|
(3,200 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,200 |
) |
Net
loss
|
|
$ |
(1,812 |
) |
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
(208 |
) |
|
$ |
(2,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.18 |
) |
Discontinued
operations
|
|
|
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.07 |
) |
Net
loss
|
|
$ |
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Previously
reported
|
|
|
CML
Transaction
|
|
|
Woods
Transaction
|
|
|
Restatement
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
285,653
|
|
|
$ |
(11,964 |
) |
|
$ |
(124,866 |
) |
|
$ |
-
|
|
|
$ |
148,823
|
|
Cost
of goods sold (A)
|
|
|
246,468
|
|
|
|
(8,711 |
) |
|
|
(108,760 |
) |
|
|
597
|
|
|
|
129,594
|
|
Gross
profit
|
|
|
39,185
|
|
|
|
(3,253 |
) |
|
|
(16,106 |
) |
|
|
(597 |
) |
|
|
19,229
|
|
Selling,
general and administrative expenses (B)
|
|
|
36,298
|
|
|
|
(2,460 |
) |
|
|
(9,734 |
) |
|
|
(383 |
) |
|
|
23,721
|
|
Severance,
restructuring and related charges
|
|
|
1,591
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,591
|
|
Loss
on sale of assets
|
|
|
103
|
|
|
|
-
|
|
|
|
(55 |
) |
|
|
-
|
|
|
|
48
|
|
Operating
income (loss )
|
|
|
1,193
|
|
|
|
(793 |
) |
|
|
(6,317 |
) |
|
|
(214 |
) |
|
|
(6,131 |
) |
Gain
on SESCO joint venture transaction (C)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
563
|
|
|
|
563
|
|
Interest
expense (C)
|
|
|
(5,198 |
) |
|
|
-
|
|
|
|
1,370
|
|
|
|
(72 |
) |
|
|
(3,900 |
) |
Other,
net
|
|
|
466
|
|
|
|
(12 |
) |
|
|
(39 |
) |
|
|
-
|
|
|
|
415
|
|
Loss
from continuing operations before (provision for)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
from income taxes
|
|
|
(3,539 |
) |
|
|
(805 |
) |
|
|
(4,986 |
) |
|
|
277
|
|
|
|
(9,053 |
) |
(Provision
for) benefit from income taxes from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(1,211 |
) |
|
|
9
|
|
|
|
2,043
|
|
|
|
-
|
|
|
|
841
|
|
Loss
from continuing operations
|
|
|
(4,750 |
) |
|
|
(796 |
) |
|
|
(2,943 |
) |
|
|
277
|
|
|
|
(8,212 |
) |
(Loss)
income from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax) (C)
|
|
|
(849 |
) |
|
|
796
|
|
|
|
2,943
|
|
|
|
(391 |
) |
|
|
2,499
|
|
Loss
on sale of discontinued businesses (net of tax) (C)
|
|
|
(3,130 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(100 |
) |
|
|
(3,230 |
) |
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(8,729 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(214 |
) |
|
|
(8,943 |
) |
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
(756 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(756 |
) |
Net
loss
|
|
$ |
(9,485 |
) |
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
(214 |
) |
|
$ |
(9,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.03 |
) |
Discontinued
operations
|
|
|
(0.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.10 |
) |
Cumulative
effect of a change in accounting principle
|
|
|
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.09 |
) |
Net
loss
|
|
$ |
(1.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Previously
reported
|
|
|
CML
Transaction
|
|
|
Woods
Transaction
|
|
|
Restatement
Adjustments
|
|
|
Restated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(9,485 |
) |
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
(214 |
) |
|
$ |
(9,699 |
) |
Loss
from operations of discontinued business (C)
|
|
|
3,979
|
|
|
|
(796 |
) |
|
|
(2,943 |
) |
|
|
491
|
|
|
|
731
|
|
Loss
from continuing operations
|
|
|
(5,506 |
) |
|
|
(796 |
) |
|
|
(2,943 |
) |
|
|
277
|
|
|
|
(8,968 |
) |
Cumulative
effect of a change in accounting principle
|
|
|
756
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
756
|
|
Depreciation
and amortization
|
|
|
6,578
|
|
|
|
(212 |
) |
|
|
(655 |
) |
|
|
-
|
|
|
|
5,711
|
|
Write-off
and amortization of debt issuance costs
|
|
|
877
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
877
|
|
Stock
option expense
|
|
|
486
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
486
|
|
Loss
on sale of assets
|
|
|
103
|
|
|
|
-
|
|
|
|
(55 |
) |
|
|
-
|
|
|
|
48
|
|
|
|
|
3,294
|
|
|
|
(1,008 |
) |
|
|
(3,653 |
) |
|
|
277
|
|
|
|
(1,090 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(8,589 |
) |
|
|
(478 |
) |
|
|
7,350
|
|
|
|
-
|
|
|
|
(1,717 |
) |
Inventories
(A)
|
|
|
(2,201 |
) |
|
|
(264 |
) |
|
|
8,615
|
|
|
|
597
|
|
|
|
6,747
|
|
Other
assets (B)
|
|
|
(490 |
) |
|
|
(1,047 |
) |
|
|
1,964
|
|
|
|
(383 |
) |
|
|
44
|
|
Accounts
payable
|
|
|
3,449
|
|
|
|
817
|
|
|
|
(4,983 |
) |
|
|
-
|
|
|
|
(717 |
) |
Accrued
expenses (C)
|
|
|
3,414
|
|
|
|
161
|
|
|
|
47
|
|
|
|
(1,791 |
) |
|
|
1,831
|
|
Other,
net (C)
|
|
|
(3,478 |
) |
|
|
716
|
|
|
|
252
|
|
|
|
(100 |
) |
|
|
(2,610 |
) |
|
|
|
(7,895 |
) |
|
|
(95 |
) |
|
|
13,245
|
|
|
|
(1,677 |
) |
|
|
3,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by continuing operations
|
|
|
(4,601 |
) |
|
|
(1,103 |
) |
|
|
9,592
|
|
|
|
(1,400 |
) |
|
|
2,488
|
|
Net
cash provided by (used in) discontinued operations (C)
|
|
|
2,116
|
|
|
|
798
|
|
|
|
(10,491 |
) |
|
|
1,400
|
|
|
|
(6,177 |
) |
Net
cash used in operating activities
|
|
|
(2,485 |
) |
|
|
(305 |
) |
|
|
(899 |
) |
|
|
-
|
|
|
|
(3,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures of continuing operations
|
|
|
(2,947 |
) |
|
|
125
|
|
|
|
570
|
|
|
|
-
|
|
|
|
(2,252 |
) |
Proceeds
from sale of assets (C)
|
|
|
263
|
|
|
|
-
|
|
|
|
(78 |
) |
|
|
100
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in continuing operations
|
|
|
(2,684 |
) |
|
|
125
|
|
|
|
492
|
|
|
|
100
|
|
|
|
(1,967 |
) |
Net
cash provided by discontinued operations (C)
|
|
|
2,464
|
|
|
|
(125 |
) |
|
|
(492 |
) |
|
|
(100 |
) |
|
|
1,747
|
|
Net
cash used in investing activities
|
|
|
(220 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings on revolving loans
|
|
|
7,418
|
|
|
|
209
|
|
|
|
156
|
|
|
|
-
|
|
|
|
7,783
|
|
Decrease
in book overdraft
|
|
|
(5,031 |
) |
|
|
-
|
|
|
|
770
|
|
|
|
-
|
|
|
|
(4,261 |
) |
Repayments
of term loans
|
|
|
(3,347 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,347 |
) |
Direct
costs associated with debt facilities
|
|
|
(166 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(166 |
) |
Repurchases
of common stock
|
|
|
(97 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(97 |
) |
Proceeds
from the exercise of stock options
|
|
|
147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,076 |
) |
|
|
209
|
|
|
|
926
|
|
|
|
-
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(523 |
) |
|
|
96
|
|
|
|
(27 |
) |
|
|
-
|
|
|
|
(454 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(4,304 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,304 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
8,421
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,421
|
|
Cash
and cash equivalents, end of period
|
|
$ |
4,117
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
4,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
receivable from sale of discontinued operations
|
|
$ |
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) 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
which are not majority owned but with respect to which the Company exercises
significant influence, are reported using the equity method. The
condensed consolidated financial statements at September 30, 2007 and December
31, 2006 and for the three and nine month periods ended September 30, 2007
and
September 30, 2006 are unaudited and reflect all adjustments (consisting only
of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial condition and results of operations
of
the Company. Interim results may not be indicative of results to be
realized for the entire year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management’s discussion and analysis
of financial condition and results of operations, contained in the Company’s
Annual Report on Form 10-K/A for the year ended December 31,
2006. The year-end condensed balance sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States.
Use
of
Estimates and Reclassifications
The
preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Certain
reclassifications associated
with the presentation of discontinued operations were made to the 2006 amounts
in order to conform to the 2007 presentation.
Inventories
The
components of inventories are as
follows (amounts in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
14,435
|
|
|
$ |
14,777
|
|
Work
in process
|
|
|
543
|
|
|
|
613
|
|
Finished
goods
|
|
|
13,888
|
|
|
|
47,230
|
|
Inventory
reserves
|
|
|
(1,232 |
) |
|
|
(3,905 |
) |
LIFO
reserve
|
|
|
(3,812 |
) |
|
|
(3,735 |
) |
|
|
$ |
23,822
|
|
|
$ |
54,980
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007 and December 31,
2006, approximately 61% and 23%, respectively, of Katy’s
inventories were accounted for using the last-in, first-out (“LIFO”) method of
costing, while the remaining inventories were accounted for using the first-in,
first-out (“FIFO”) method. Current cost, as determined using the FIFO
method, exceeded LIFO cost by $3.8 million and $3.7 million at September 30,
2007 and December 31, 2006, respectively.
Property,
Plant and Equipment
Property
and equipment are stated at cost and depreciated over their estimated useful
lives: buildings (10-40 years) using the straight-line method; machinery and
equipment (3-20 years) using the straight-line method; tooling (5 years) using
the straight-line method; and leasehold improvements using the straight-line
method over the remaining lease period or useful life, if
shorter. Costs for repair and maintenance of machinery and equipment
are expensed as incurred, unless the result significantly increases the useful
life or functionality of the asset, in which case capitalization is
considered. Depreciation expense from continuing operations was $1.6
million and $5.1 million, and $1.7 million and $5.3 million for the three and
nine month periods ended September 30, 2007 and 2006, respectively.
Stock
Options and Other Stock Awards
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standard
(“SFAS”) No. 123R, Share-Based Payment (“SFAS No. 123R”), which sets
accounting requirements for “share-based” compensation to employees, requires
companies to recognize the grant date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of intrinsic
value method of accounting for stock compensation. The Company has adopted
SFAS
No. 123R using the modified prospective method. Under this method,
compensation cost recognized during the three and nine month periods ended
September 30, 2007 includes: a) compensation cost for all stock options granted
prior to, but not yet vested as of January 1, 2006, based on the grant date
fair
value estimated in accordance with SFAS No. 123R amortized over the options’
vesting period and b) compensation cost for outstanding stock appreciation
rights based on the September 30, 2007 fair value estimated in accordance with
SFAS No. 123R. Compensation cost recognized during the three and nine
month periods 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 outstanding stock appreciation rights 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 (income) expense included in the
Condensed Consolidated Statements of Operations for the three and nine month
periods ended September 30, 2007 and 2006:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$ |
183
|
|
|
$ |
354
|
|
|
$ |
(44 |
) |
|
$ |
381
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
756
|
|
|
|
$ |
183
|
|
|
$ |
354
|
|
|
$ |
(44 |
) |
|
$ |
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value for stock options was estimated at the
date of grant using a Black-Scholes option pricing model. The Company
used the simplified method, as allowed by Staff Accounting Bulletin (“SAB”) No.
107, Share-Based Payment, for estimating the expected term by averaging
the minimum and maximum lives expected for each award. In addition,
the Company estimated volatility by considering its historical stock volatility
over a term comparable to the remaining expected life of each
award. The risk-free interest rate was the current yield available on
U.S. treasury rates with issues with a remaining term equal in term to each
award. The Company estimates forfeitures using historical
results. Its estimates of forfeitures will be adjusted over the
requisite service period based on the extent to which actual forfeitures differ,
or are expected to differ, from their estimate. The assumptions for
expected term, volatility and risk-free rate are presented in the table
below:
Expected
term (years)
|
5.3
- 6.5
|
Volatility
|
53.8%
- 57.6%
|
Risk-free
interest rate
|
3.98%
- 4.48%
|
The
fair
value for stock appreciation rights, a liability award, was estimated at the
effective date of SFAS No. 123R, and September 30, 2007 and 2006, using a
Black-Scholes option pricing model. The Company estimated the
expected term to be equal to the average between the minimum and maximum lives
expected for each award. In addition, the Company estimated
volatility by considering its historical stock volatility over a term comparable
to the remaining expected life of each award. The risk-free interest
rate was the current yield available on U.S. treasury rates with issues with a
remaining term equal in term to each award. The Company estimates
forfeitures using historical results. Its estimates of forfeitures
will be adjusted over the requisite service period based on the extent to which
actual forfeitures differ, or are expected to differ, from their
estimate. The assumptions for expected term, volatility and risk-free
rate are presented in the table below:
|
September
30,
|
|
September
30,
|
|
2007
|
|
2006
|
|
|
|
|
Expected
term (years)
|
0.1
- 4.8
|
|
3.0
- 5.8
|
Volatility
|
68.2%
- 77.2%
|
|
53.5%
- 54.9%
|
Risk-free
interest rate
|
3.43%
- 4.13%
|
|
4.57%
- 4.60%
|
(3) New
Accounting Pronouncements
As
discussed in Note 9, the Company
adopted, effective January 1, 2007, Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes (“FIN No. 48”), which describes a comprehensive model for the
measurement, recognition, presentation, and disclosure of uncertain tax
positions in the financial statements. Under the interpretation, the
financial statements will reflect expected future tax consequences of such
positions presuming the tax authorities’ full knowledge of the position and all
relevant facts, but without considering time values.
In
September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No.
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This standard does not require any new fair value
measurements but provides guidance in determining fair value measurements
presently used in the preparation of financial statements. For the
Company, SFAS No. 157 is effective January 1, 2008. The Company is
assessing the impact this statement may have in its future financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to
elect to measure many financial instruments and certain other items at fair
value, with unrealized gains and losses related to these financial instruments
reported in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact this statement may have in its future
financial statements.
(4) Intangible
Assets
Following
is detailed information
regarding Katy’s intangible assets (amounts in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Patents
|
|
$ |
1,017
|
|
|
$ |
(673 |
) |
|
$ |
344
|
|
|
$ |
1,511
|
|
|
$ |
(1,065 |
) |
|
$ |
446
|
|
Customer
lists
|
|
|
10,231
|
|
|
|
(8,197 |
) |
|
|
2,034
|
|
|
|
10,454
|
|
|
|
(8,111 |
) |
|
|
2,343
|
|
Tradenames
|
|
|
5,054
|
|
|
|
(2,431 |
) |
|
|
2,623
|
|
|
|
5,612
|
|
|
|
(2,345 |
) |
|
|
3,267
|
|
Other
|
|
|
441
|
|
|
|
(441 |
) |
|
|
-
|
|
|
|
441
|
|
|
|
(62 |
) |
|
|
379
|
|
Total
|
|
$ |
16,743
|
|
|
$ |
(11,742 |
) |
|
$ |
5,001
|
|
|
$ |
18,018
|
|
|
$ |
(11,583 |
) |
|
$ |
6,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of Katy’s intangible assets are definite long-lived
intangibles. Katy recorded amortization expense on intangible assets
of continuing operations of $0.1 million and $0.4 million, and $0.1 million
and
$0.4 million for the three and nine month periods ended September 30, 2007
and
2006, respectively. The nine month period ended September 30, 2007
includes a write-off of other intangible assets for approximately $0.4
million
associated with the impairment of the Washington, Georgia leased
facility. Estimated aggregate future amortization expense related to
intangible assets is as follows (amounts in thousands):
2007
(remainder)
|
|
$ |
147
|
|
2008
|
|
|
495
|
|
2009
|
|
|
474
|
|
2010
|
|
|
445
|
|
2011
|
|
|
418
|
|
2012
|
|
|
399
|
|
Thereafter
|
|
|
2,623
|
|
|
|
$ |
5,001
|
|
|
|
|
|
|
(5) Savannah
Energy Systems Company Partnership
In
1984, Savannah Energy Systems
Company (“SESCO”), an indirect wholly owned subsidiary of Katy, entered into a
series of contracts with the Resource Recovery Development Authority of the
City
of Savannah, Georgia (“the Authority”) to construct and operate a
waste-to-energy facility. The facility would be owned and operated by
SESCO solely for the purpose of processing and disposing of waste from the
City
of Savannah.
On
April 29, 2002, SESCO entered into a
partnership agreement with Montenay Power Corporation and its affiliates
(“Montenay”) that turned over the control of SESCO's waste-to-energy facility to
Montenay Savannah Limited Partnership. The Company caused SESCO to
enter into this agreement as a result of evaluations of SESCO's
business. First, Katy concluded that SESCO was not a core component
of the Company's long-term business strategy. Moreover, Katy did not
feel it had the management expertise to deal with certain risks and
uncertainties presented by the operation of SESCO's business, given that SESCO
was the Company's only waste-to-energy facility. Katy had explored
options for divesting SESCO for a number of years, and management felt that
this
transaction offered a reasonable strategy to exit this business.
On
June 27, 2006, the Company and
Montenay amended the partnership interest purchase agreement in order to allow
the Company to completely exit from the SESCO operations and related
obligations. Montenay purchased the Company’s limited partnership
interest for $0.1 million and a reduction of approximately $0.6 million in
the
face amount due to Montenay as agreed upon in the original partnership
agreement.
The
final payment of $0.4 million due
to Montenay as of December 31, 2006 was reflected in accrued expenses in the
Condensed Consolidated Balance Sheets, and was paid in January
2007.
(6) Indebtedness
Long-term
debt consists of the
following (amounts in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Term
loan payable under Bank of America Credit Agreement, interest
based
|
|
|
|
|
on
LIBOR and Prime Rates (8.25% - 8.75%), due through 2009
|
|
$ |
10,418
|
|
|
$ |
12,992
|
|
Revolving
loans payable under the Bank of America Credit Agreement,
|
|
|
|
|
|
|
|
|
interest
based on LIBOR and Prime Rates (8.00% - 8.50%)
|
|
|
41,977
|
|
|
|
43,879
|
|
Total
debt
|
|
|
52,395
|
|
|
|
56,871
|
|
Less
revolving loans, classified as current (see below)
|
|
|
(41,977 |
) |
|
|
(43,879 |
) |
Less
current maturities
|
|
|
(1,500 |
) |
|
|
(1,125 |
) |
Long-term
debt
|
|
$ |
8,918
|
|
|
$ |
11,867
|
|
|
|
|
|
|
|
|
|
|
Aggregate remaining scheduled maturities of the Term Loan as of September
30,
2007 are as follows (amounts in thousands):
2007
|
|
$ |
375
|
|
2008
|
|
|
1,500
|
|
2009
|
|
|
8,543
|
|
|
|
$ |
10,418
|
|
|
|
|
|
|
On
April 20, 2004, the Company
completed a refinancing of its outstanding indebtedness (the “Refinancing”) and
entered into a new agreement with Bank of America Business Capital (the “Bank of
America Credit Agreement”). The current Bank of America Credit
Agreement, as amended, is a $93.0 million facility with a $13.0 million term
loan (“Term Loan”) and an $80.0 million revolving credit facility (“Revolving
Credit Facility”). The Bank of America Credit Agreement is an asset-based
lending agreement and involves a syndicate of four banks.
The
Revolving Credit Facility has an
expiration date of April 20, 2009 and its borrowing base is determined by
eligible inventory and accounts receivable. Unused borrowing
availability on the Revolving Credit Facility was $16.4 million at September
30,
2007. All extensions of credit under the Bank of America Credit
Agreement are collateralized by a first priority security interest in and lien
upon the capital stock of each material domestic subsidiary (65% of the capital
stock of each material foreign subsidiary), and all present and future assets
and properties of Katy. The Term Loan also has a final maturity date
of April 20, 2009 with quarterly payments of $0.4 million, as amended and
beginning April 1, 2007. A final payment of $8.2 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. At September 30, 2007, total outstanding letters of credit
were $6.0 million.
On
March 8, 2007 the Company obtained
the Eighth Amendment to the Bank of America Credit Agreement. The
Eighth Amendment eliminated the Fixed Charge Coverage Ratio for the remaining
life of the debt agreement and requires the Company to maintain a minimum level
of availability (eligible collateral base less outstanding borrowings and
letters of credit) such that its eligible collateral must exceed the sum of
its
outstanding borrowings and letters of credit by at least $5.0 million from
the
effective date of the Eighth Amendment through September 29, 2007 and by $7.5
million from that point through December 2007. Thereafter, the
Company is required to maintain a minimum level of availability such that
eligible collateral must exceed the sum of its outstanding borrowings and
letters of credit by at least $5.0 million for the first three quarters of
the
year and $7.5 million for the fourth quarter. In addition, the
Company reduced its Revolving Credit Facility from $90.0 million to $80.0
million.
If
the
Company is unable to comply with the terms of the amended covenants, it could
seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets. It is possible,
however, the Company may not be able to obtain further amendments from the
lender or secure additional debt financing or liquidity through the sale of
assets on favorable terms or at all. However, the Company believes
that it will be able to comply with all covenants, as amended, throughout
2007.
Effective
since April 2005, interest
rate margins have been set at the largest margins set forth in the Bank of
America Credit Agreement, 275 basis points over applicable LIBOR rates for
Revolving Credit Facility borrowings and 300 basis points over LIBOR for
borrowings under the Term Loan. In accordance with the Bank of
America Credit Agreement, margins on the Term Loan will drop an additional
25
basis points if the balance of the Term Loan is reduced below $10.0
million. Interest accrues at higher margins on prime rates for swing
loans, the amounts of which were nominal at September 30, 2007.
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, 2007. For the three and nine
month periods ended September 30, 2007 and 2006, the Company had amortization
of
debt issuance costs, included within interest expense, of $0.3 million and
$1.2
million, and $0.3 million and $0.9 million, respectively. Included in
amortization of debt issuance costs is approximately $0.3 million for the nine
month period ended September 30, 2007 of debt issuance costs written off due
to
the reduction in the Revolving Credit Facility on March 8, 2007. In
addition, the Company incurred $0.1 million and $0.2 million associated with
amending the Bank of America Credit Agreement, as discussed above, for the
nine
month periods ended September 30, 2007 and 2006, respectively.
The
Revolving Credit Facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence
of a material adverse effect (“MAE”) clause in the Bank of America Credit
Agreement, caused the Revolving Credit Facility to be classified as a current
liability, per guidance in the Emerging Issues Task Force Issue No. 95-22,
Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that Include Both a Subjective Acceleration Clause and a
Lock-Box Arrangement. The Company does not expect to repay, or
be required to repay, within one year, the balance of the Revolving Credit
Facility classified as a current liability. The MAE clause, which is
a typical requirement in commercial credit agreements, allows the lenders to
require the loan to become due if they determine there has been a material
adverse effect on the Company’s operations, business, properties, assets,
liabilities, condition, or prospects. The classification of the
Revolving Credit Facility as a current liability is a result only of the
combination of the lockbox agreements and MAE clause. The Revolving
Credit Facility does not expire or have a maturity date within one year, but
rather has a final expiration date of April 20, 2009. The lender had
not notified the Company of any indication of a MAE at September 30, 2007,
and
the Company was not in default of any provision of the Bank of America Credit
Agreement at September 30, 2007.
(7) Retirement
Benefit Plans
Certain
active and inactive 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 Company’s funding policy, subject to the minimum funding
requirement of employee benefit and tax laws, is 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 postretirement health plans are
unfunded. Katy uses an annual measurement date of December 31 for the
majority of its pension and other postretirement benefit plans for all years
presented.
Information
regarding the Company’s net periodic benefit cost for pension and other
postretirement benefit plans for the three and nine month periods ended
September 30, 2007 and 2006 is as follows (amounts in thousands):
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
6
|
|
|
$ |
3
|
|
|
$ |
9
|
|
|
$ |
7
|
|
Interest
cost
|
|
|
22
|
|
|
|
24
|
|
|
|
68
|
|
|
|
68
|
|
Expected
return on plan assets
|
|
|
(22 |
) |
|
|
(24 |
) |
|
|
(70 |
) |
|
|
(68 |
) |
Amortization
of net loss
|
|
|
9
|
|
|
|
16
|
|
|
|
37
|
|
|
|
44
|
|
Net
periodic benefit cost
|
|
$ |
15
|
|
|
$ |
19
|
|
|
$ |
44
|
|
|
$ |
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
16
|
|
|
$ |
85
|
|
|
$ |
117
|
|
|
$ |
157
|
|
Amortization
of prior service cost
|
|
|
(30 |
) |
|
|
66
|
|
|
|
14
|
|
|
|
94
|
|
Amortization
of net loss
|
|
|
18
|
|
|
|
(8 |
) |
|
|
26
|
|
|
|
12
|
|
Net
periodic benefit cost
|
|
$ |
4
|
|
|
$ |
143
|
|
|
$ |
157
|
|
|
$ |
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required
contributions to the pension plans for 2007 are $10 thousand and Katy made
contributions of $0.1 million during 2007.
(8) Stock
Incentive Plans
Stock
Options
The
following table summarizes stock option activity under each of the Company’s
applicable plans:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Options
|
|
|
Price
|
|
Life
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,718,000
|
|
|
$ |
3.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$ |
0.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$ |
0.00
|
|
|
|
|
|
Expired
|
|
|
(6,000 |
) |
|
$ |
16.13
|
|
|
|
|
|
Cancelled
|
|
|
(78,200 |
) |
|
$ |
3.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,633,800
|
|
|
$ |
3.61
|
|
6.05
years
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at September 30, 2007
|
|
|
1,313,800
|
|
|
$ |
3.83
|
|
5.64
years
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2007, total unvested compensation expense associated with
stock
options amounted to $0.1 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 0.68 years
as
of September 30, 2007.
Stock
Appreciation Rights
The
following table summarizes SARs
activity under each of the Company’s applicable plans:
Non-Vested
at December 31, 2006
|
53,434
|
|
|
Granted
|
6,000
|
Vested
|
(42,768)
|
Cancelled
|
(3,333)
|
|
|
Non-Vested
at September 30, 2007
|
13,333
|
|
|
Total
Outstanding at September 30, 2007
|
731,748
|
|
|
For
the
three and nine month periods ended September 30, 2007 and 2006, total
compensation (income) expense associated with stock appreciation rights amounted
to approximately $0.1 million and ($0.3) million, and $0.2 million and $0.6
million, respectively.
(9) Income
Taxes
The
Company adopted FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN No. 48, the Company recognized approximately a $1.1
million increase in the liability for unrecognized tax benefits, which was
accounted for as an increase of $0.1 million to the January 1, 2007 balance
of
deferred tax assets and a reduction of $1.0 million to the January 1, 2007
balance of retained earnings.
Included
in the balance at September 30, 2007 are $2.0 million of tax positions for
which
the ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Because of the impact of
deferred tax accounting, other than interest and penalties, the disallowance
of
the shorter deductibility period would not affect the annual effective tax
rate
but would have accelerated the payment of cash to the taxing authority to an
earlier period.
The
Company recognizes interest and penalties accrued related to the unrecognized
tax benefits in the provision for income taxes. During the three and
nine month periods ended September 30, 2007, the Company recognized an
insignificant amount in interest and penalties. The Company had
approximately $0.5 million for the payment of interest and penalties accrued
at
September 30, 2007.
The
Company believes that it is
reasonably possible that the total amount of unrecognized tax benefits will
change within twelve months of the date of adoption. The Company has
certain tax return years subject to statutes of limitation which will close
within twelve months of the date of adoption. Unless challenged by
tax authorities, the closure of those statutes of limitation is expected to
result in the recognition of uncertain tax positions in the amount of $0.6
million. The Company has uncertain tax positions relating to transfer
pricing practices and filings in certain jurisdictions, none of which are
currently under examination.
The
Company and all of its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. The Company’s foreign subsidiaries file income
tax returns in certain foreign jurisdictions since they have operations outside
the U.S. The Company and its subsidiaries are generally no longer
subject to U.S. federal, state and local examinations by tax authorities for
years before 2002.
As
of
September 30, 2007 and December 31, 2006, the Company had deferred tax assets,
net of deferred tax liabilities and valuation allowances, of $0.1 million and
$1.0 million, respectively. During the third quarter of 2007,
approximately $1.0 million of deferred taxes were reclassified under assets
held
for sale associated with the sale of the Woods US and Woods Canada business
units as further described in Note 13. Domestic net operating loss
(“NOL”) carry forwards comprised $35.3 million of the deferred tax assets for
both periods. Katy’s history of operating losses in many of its
taxing jurisdictions provides significant negative evidence with respect to
the
Company’s ability to generate future taxable income, a requirement in order to
recognize deferred tax assets on the Condensed Consolidated Balance
Sheets. For this reason, the Company was unable to conclude at
September 30, 2007 and December 31, 2006 that NOLs and other deferred tax assets
in the United States and certain unprofitable foreign jurisdictions would be
utilized in the future. As a result, valuation allowances for these
entities were recorded as of such dates for the full amount of deferred tax
assets, net of the amount of deferred tax liabilities.
The
tax expense or benefit recorded in
continuing operations is generally determined without regard to other categories
of earnings, such as a loss from discontinued operations or other comprehensive
income. An exception is provided if there is aggregate pre-tax income
from other categories and a pre-tax loss from continuing operations, even if
a
valuation allowance has been established against deferred tax assets as of
the
beginning of the year. The tax benefit allocated to continuing
operations is the amount by which the loss from continuing operations reduces
the tax expense recorded with respect to the other categories or
earnings.
The
provision for income taxes for the
three month period ended September 30, 2007 reflects current expense for FIN
48
activity and miscellaneous state income taxes reduced by a benefit of $0.4
million recorded to offset the provision recorded under discontinued operations
for domestic income taxes on domestic pre-tax income. For the nine
months ended September 30, 2007, the provision for income taxes reflects current
expense for FIN 48 activity and miscellaneous state income taxes. No
benefit from income taxes from continuing and discontinued operations for the
nine month period ended September 30, 2007 was required as the Company had
a
domestic pre-tax loss within continuing and discontinued
operations. For the three and nine month periods ended September 30,
2006, the benefit from income taxes primarily reflects a benefit of $0.8 million
and $0.9 million, respectively, associated with the corresponding provision
recorded under discontinued operations for domestic income taxes on domestic
pre-tax income. This benefit from income taxes was reduced by
miscellaneous state income taxes.
Tax
benefits were not recorded on the
pre-tax net loss for the three and nine month periods ended September 30, 2007
and 2006 as valuation allowances were recorded related to deferred tax
assets created as a result of operating losses in the United States and certain
foreign jurisdictions. 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.
(10) 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 post-closure obligations in the
areas of groundwater monitoring, 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) (“Sterling”) has tendered over 2,305 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 Company, a former
division of an inactive subsidiary of Katy, 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 division of an inactive subsidiary of Katy, has been
named as a defendant in over 383 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, appeal docketed, United States Court of Appeals for the Seventh
Circuit, Appeal No. 07-2238).
In
December 1996, Banco del Atlantico
(“Plaintiff”), a bank located in Mexico, filed a lawsuit in federal court in
Texas against Woods Industries, Inc. (“Woods”), a subsidiary of Katy, and
against certain past and/or then present officers, directors and owners of
Woods
(collectively, “Defendants”). 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, 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. 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 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,
Plaintiff and HSBC Mexico, S.A. (collectively, “Plaintiffs”), who intervened in
the litigation as an additional alleged owner of the claims against Defendants,
filed a Second Amended Complaint.
On
August
11, 2005, the Court dismissed with prejudice all of the federal and
Indiana RICO claims asserted in the Second Amended Complaint against
Woods. During subsequent discovery, Defendants moved for sanctions
for Plaintiffs’ asserted failures to abide by the rules of discovery and produce
certain documents and witnesses, including the sanction of dismissal of the
case
with prejudice. Defendants also moved for summary judgment
on the remaining claims on January 16, 2007. Plaintiffs also
cross-moved for summary judgment in their favor on their claims under the
alleged guarantees purportedly executed by old Woods Wire Products,
Inc.
On
April
9, 2007, while the parties’ summary judgment motions were still being briefed,
the Court granted Defendants’ motion for sanctions and dismissed all of
Plaintiffs’ claims with prejudice. The Court’s dismissal
order dismisses all claims against Woods.
Plaintiffs
have appealed to the Seventh Circuit Court of Appeals both the District Court’s
dismissal of their RICO claims in its August 11, 2005 order and the District
Court’s dismissal of all their claims in its April 9, 2007
order. Plaintiffs filed their opening brief on appeal on July 13,
2007. Defendants filed their opposition brief on September 14, 2007
and Plaintiffs filed their reply brief on October 11, 2007. No oral
argument has yet been scheduled.
Plaintiffs’
claims as originally pled sought damages in excess of $24.0 million, requested
that the court void certain asset sales as purported “fraudulent transfers”
(including the 1993 Woods Wire Products, Inc./Woods asset sale), and treble
damages for some or all of their claims. Katy may have recourse
against the former owners of Woods and others for, among other things,
violations of covenants, representations and warranties under the purchase
agreement through which Katy acquired Woods, and under state, federal and common
law. Woods may also have indemnity claims against the former officers
and directors. In addition, there is a dispute with the former owners
of Woods regarding the final disposition of amounts withheld from the purchase
price, which may be subject to further adjustment as a result of the claims
by
Plaintiffs. The extent or limit of any such adjustment cannot be
predicted at this time.
While
the ultimate liability of the
Company related to this matter cannot be determined at this time, the Company
has recorded and accrued amounts that it deems reasonable for prospective
liabilities with respect to this matter.
Other
Claims
There
are
a number of product liability and workers’ compensation claims pending against
Katy 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 ten 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.
(11) 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. For all periods presented, information for the Maintenance
Products Group excludes amounts related to the Metal Truck Box business unit,
the United Kingdom consumer plastics business unit, and the Contico
Manufacturing, Ltd. (“CML”) business unit, as the units are classified as
discontinued operations as discussed further in Note 13.
The
Electrical Products Group is a marketer and distributor of consumer electrical
corded products. As described further in Note 13, the Electrical
Products Group meets the criteria to be classified as a discontinued operation
and as an Asset Held for Sale as of September 30, 2007. As a result,
no operations information is presented within this footnote. The
following table sets forth information by segment (amounts in
thousands):
|
|
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Maintenance
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
$ |
49,208
|
|
|
$ |
51,920
|
|
|
$ |
144,732
|
|
|
$ |
148,823
|
|
Operating
income
|
|
|
|
|
|
|
528
|
|
|
|
2,526
|
|
|
|
2,721
|
|
|
|
3,308
|
|
Operating
margin
|
|
|
|
|
|
|
1.1 |
% |
|
|
4.9 |
% |
|
|
1.9 |
% |
|
|
2.2 |
% |
Depreciation and amortization
|
|
|
1,667
|
|
|
|
1,826
|
|
|
|
5,401
|
|
|
|
5,619
|
|
Capital
expenditures
|
|
|
|
|
|
|
742
|
|
|
|
893
|
|
|
|
2,781
|
|
|
|
2,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
-
|
|
Operating
segments
|
|
$ |
49,208
|
|
|
$ |
51,920
|
|
|
$ |
144,732
|
|
|
$ |
148,823
|
|
|
|
|
|
|
Total
|
|
$ |
49,208
|
|
|
$ |
51,920
|
|
|
$ |
144,732
|
|
|
$ |
148,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
-
|
|
Operating
segments
|
|
$ |
528
|
|
|
$ |
2,526
|
|
|
$ |
2,721
|
|
|
$ |
3,308
|
|
|
|
|
-
|
|
Unallocated
corporate
|
|
|
(1,600 |
) |
|
|
(2,767 |
) |
|
|
(5,928 |
) |
|
|
(7,800 |
) |
|
|
|
-
|
|
Severance,
restructuring,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
related charges
|
|
|
(46 |
) |
|
|
(738 |
) |
|
|
(2,656 |
) |
|
|
(1,591 |
) |
|
|
|
-
|
|
Gain
(loss) on sale of assets
|
|
|
44
|
|
|
|
(39 |
) |
|
|
(1,527 |
) |
|
|
(48 |
) |
|
|
|
|
|
Total
|
|
$ |
(1,074 |
) |
|
$ |
(1,018 |
) |
|
$ |
(7,390 |
) |
|
$ |
(6,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
-
|
|
Operating
segments
|
|
$ |
1,667
|
|
|
$ |
1,826
|
|
|
$ |
5,401
|
|
|
$ |
5,619
|
|
|
|
|
-
|
|
Unallocated
corporate
|
|
|
23
|
|
|
|
20
|
|
|
|
91
|
|
|
|
92
|
|
|
|
|
|
|
Total
|
|
$ |
1,690
|
|
|
$ |
1,846
|
|
|
$ |
5,492
|
|
|
$ |
5,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
Operating
segments
|
|
$ |
742
|
|
|
$ |
893
|
|
|
$ |
2,781
|
|
|
$ |
2,232
|
|
|
|
|
-
|
|
Unallocated
corporate
|
|
|
30
|
|
|
|
7
|
|
|
|
30
|
|
|
|
20
|
|
|
|
|
-
|
|
Discontinued
operations
|
|
|
104
|
|
|
|
268
|
|
|
|
399
|
|
|
|
773
|
|
|
|
|
|
|
Total
|
|
$ |
876
|
|
|
$ |
1,168
|
|
|
$ |
3,210
|
|
|
$ |
3,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
-
|
|
Maintenance
Products Group
|
|
$ |
90,310
|
|
|
$ |
87,430
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Electrical
Products Group
|
|
|
-
|
|
|
|
74,025
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Other
[a]
|
|
|
76,934
|
|
|
|
14,389
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Unallocated
corporate
|
|
|
6,228
|
|
|
|
6,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
173,472
|
|
|
$ |
182,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Amounts shown as “Other” represent items associated with Sahlman Holding
Company, Inc., the Company’s equity method investment in both
periods. For September 30, 2007, the amount also includes the assets
of the Woods US and Woods Canada business units, which are classified as assets
held for sale at September 30, 2007 and further detailed in Note
13. For December 31, 2006, the amount also includes the real estate
holdings of the United Kingdom consumer plastics business unit, which is
classified as an asset held for sale at December 31, 2006, and the assets of
the
CML business unit.
(12) Severance,
Restructuring and Related Charges
Over
the past several 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 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$ |
-
|
|
|
$ |
704
|
|
|
$ |
882
|
|
|
$ |
1,403
|
|
Consolidation
of Glit facilities
|
|
|
46
|
|
|
|
-
|
|
|
|
1,774
|
|
|
|
-
|
|
Corporate
office relocation
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
188
|
|
Total
severance, restructuring and related charges
|
|
$ |
46
|
|
|
$ |
738
|
|
|
$ |
2,656
|
|
|
$ |
1,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of St. Louis
manufacturing/distribution facilities– In 2002, the Company committed to a
plan to consolidate the manufacturing and distribution of the four Continental
Commercial Products, LLC (“CCP”) facilities in the St. Louis, Missouri
area. Management believed that in order to implement a more
competitive cost structure and combat competitive pricing pressure, the excess
capacity at the Company’s four plastic molding facilities in this area would
need to be eliminated. This plan was expected to be completed by the
end of 2003; however, charges have been incurred past 2003 due to changes in
assumptions in non-cancelable lease accruals. Charges in 2007 were
for an adjustment to the non-cancelable lease accrual at the Hazelwood, Missouri
facility due to changes in the subleasing 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. Management believes that no further charges will be
incurred for this activity, except for potential adjustments to non-cancelable
lease liabilities as actual activity compares to assumptions
made. Following is a rollforward of restructuring liabilities by type
for the consolidation of St. Louis manufacturing/distribution facilities
(amounts in thousands):
|
|
Contract
|
|
|
|
Termination
|
|
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$ |
465
|
|
Additions
|
|
|
882
|
|
Payments
|
|
|
(351 |
) |
Restructuring
liabilities at September 30, 2007
|
|
$ |
996
|
|
|
|
|
|
|
Consolidation
of Glit
facilities– In 2002, the Company approved a plan to consolidate the
manufacturing facilities of its Glit business unit in order to implement a
more competitive cost structure. It was anticipated that this
activity would begin in early 2003 and be completed by the end of the second
quarter of 2004. Due to numerous operational issues, including
management turnover and a small fire at the Wrens, Georgia facility, the
completion of this consolidation was delayed. In 2007, the Company
closed the Washington, Georgia facility and integrated its operation into Wrens,
Georgia. Charges were incurred in 2007 associated with severance for
terminations at the Washington, Georgia facility ($0.1 million), costs for
the
removal of equipment and cleanup of the Washington, Georgia facility ($0.2
million), the establishment of non-cancelable lease liabilities for the
abandoned Washington, Georgia facility ($0.8 million), and other lease-related
costs ($0.7 million). Other lease-related costs represent write-offs
of leasehold improvements ($0.3 million) and a favorable lease intangible asset
($0.4 million) related to the Washington, Georgia
facility. Management believes that no further charges will be
incurred for this activity, except for potential adjustments to non-cancelable
lease liabilities as actual activity compares to assumptions
made. 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]
|
|
|
Other
[c]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$ |
5
|
|
|
$ |
-
|
|
|
$ |
5
|
|
|
$ |
-
|
|
Additions
|
|
|
1,774
|
|
|
|
151
|
|
|
|
1,450
|
|
|
|
173
|
|
Payments
|
|
|
(365 |
) |
|
|
(151 |
) |
|
|
(41 |
) |
|
|
(173 |
) |
Other
|
|
|
(689 |
) |
|
|
-
|
|
|
|
(689 |
) |
|
|
|
|
Restructuring
liabilities at September 30, 2007
|
|
$ |
725
|
|
|
$ |
-
|
|
|
$ |
725
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
office relocation– In
November 2005, the Company announced the closing of its corporate office in
Middlebury, Connecticut, and the relocation of certain corporate functions
to
the CCP location in Bridgeton, Missouri, the outsourcing of other functions,
and
the move of the remaining functions to a new location in Arlington,
Virginia. The amounts recorded in 2006 primarily relate to severance
for employees at the Middlebury office. There was no activity for
this initiative during the first nine months of 2007.
The
table
below details activity in restructuring reserves since December 31, 2006
(amounts in thousands):
|
|
|
|
|
One-time
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Termination
|
|
|
|
|
|
|
Total
|
|
|
Benefits
[a]
|
|
|
Costs
[b]
|
|
|
Other
[c]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$ |
470
|
|
|
$ |
-
|
|
|
$ |
470
|
|
|
$ |
-
|
|
Additions
|
|
|
2,656
|
|
|
|
151
|
|
|
|
2,332
|
|
|
|
173
|
|
Payments
|
|
|
(716 |
) |
|
|
(151 |
) |
|
|
(392 |
) |
|
|
(173 |
) |
Other
|
|
|
(689 |
) |
|
|
-
|
|
|
|
(689 |
) |
|
|
|
|
Restructuring
liabilities at September 30, 2007 [d]
|
|
$ |
1,721
|
|
|
$ |
-
|
|
|
$ |
1,721
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[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 $3.4 million
as of September 30, 2007. The Company has included $1.7 million as an
offset for sub-lease rentals.
[c]
Includes charges associated with equipment removal and cleanup of abandoned
facility.
[d]
The
remaining severance, restructuring and related charges for these initiatives
are
expected to be approximately $0.3 million, primarily related to the
consolidation of the Glit facilities program.
The
table
below details activity in restructuring reserves by operating segment since
December 31, 2006 (amounts in thousands):
|
|
Maintenance
|
|
|
|
Products
|
|
|
|
Group
|
|
Restructuring
liabilities at December 31, 2006
|
|
$ |
470
|
|
Additions
|
|
|
2,656
|
|
Payments
|
|
|
(716 |
) |
Other
|
|
|
(689 |
) |
Restructuring
liabilities at September 30, 2007
|
|
$ |
1,721
|
|
|
|
|
|
|
The
table
below summarizes the future obligations for severance, restructuring and other
related charges by operating segment detailed above (amounts in
thousands):
|
|
Maintenance
|
|
|
|
Products
|
|
|
|
Group
|
|
2007
|
|
$ |
169
|
|
2008
|
|
|
309
|
|
2009
|
|
|
271
|
|
2010
|
|
|
297
|
|
2011
|
|
|
299
|
|
Thereafter
|
|
|
376
|
|
Total
Payments
|
|
$ |
1,721
|
|
|
|
|
|
|
(13) Discontinued
Operations
Five
of
Katy’s operations have been classified as discontinued operations for the three
and nine month periods ended September 30, 2007 and 2006 in accordance with
SFAS
No. 144, Accounting for the Impairments or Disposal of Long Lived
Assets (“SFAS No. 144”).
On
June
2, 2006, the Company sold certain assets of the Metal Truck Box business unit
within the Maintenance Products Group for gross proceeds of $3.6 million,
including a $1.2 million note receivable. These proceeds were used to
pay off related portions of the Term Loan and the Revolving Credit
Facility. The Company recorded a loss of $50 thousand in 2006 in
connection with this sale. Management and the board of directors
determined that this business is not a core component of the Company’s long-term
business strategy.
On
November 27, 2006, the Company sold its United Kingdom consumer plastics
business unit (excluding the related real estate holdings) for gross proceeds
of
approximately $3.0 million. These proceeds were used to pay off
related portions of the Term Loan and the Revolving Credit
Facility. The Company recorded a loss of $5.4 million in the third
and fourth quarters of 2006 in connection with this sale. During the
first quarter of 2007, the Company incurred an additional $0.2 million loss
as a
result of finalizing the working capital adjustment. Management and
the board of directors determined that this business is not a core component
of
the Company’s long-term business strategy.
On
June
6, 2007, the Company sold the CML business unit for gross proceeds of
approximately $10.4 million. These proceeds were used to pay off
related portions of the Term Loan and the Revolving Credit
Facility. The Company recorded a gain of $7.1 million in the second
quarter of 2007 in connection with this sale. Management and the
board of directors determined that this business is not a core component of
the
Company’s long-term business strategy.
On
November 1, 2007, the Company entered into a definitive agreement to sell Woods
US and Woods Canada for $45.0 million subject to adjustments based on working
capital levels at closing. The ultimate sales price could change from
current expectation. As a result, the net assets of these business
units have been classified as assets and liabilities 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”).
Following
is a summary of the major asset and liability categories for the discontinued
operations not reflected as assets and liabilities held for sale:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$ |
-
|
|
|
$ |
3,364
|
|
Inventories,
net
|
|
|
-
|
|
|
|
2,947
|
|
Other
current assets
|
|
|
-
|
|
|
|
152
|
|
|
|
$ |
-
|
|
|
$ |
6,463
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
$ |
-
|
|
|
$ |
648
|
|
Property
and equipment, net
|
|
|
-
|
|
|
|
661
|
|
|
|
$ |
-
|
|
|
$ |
1,309
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
-
|
|
|
$ |
1,777
|
|
Accrued
expenses
|
|
|
350
|
|
|
|
2,590
|
|
|
|
$ |
350
|
|
|
$ |
4,367
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007, the balance represents remaining liabilities of the Metal
Truck Box business unit. At December 31, 2006, the balances represent
the assets and liabilities of the Metal Truck Box and CML business
units.
As
of
December 31, 2006, the Company was in the process of selling the related real
estate holdings of the United Kingdom consumer plastics business
unit. As a result, the real estate holdings were classified as an
asset held for sale on the Condensed Consolidated Balance Sheets in accordance
with SFAS No. 144. Accordingly, the carrying value of the business
unit’s net assets was adjusted to the lower of its costs or its fair value less
costs to sell, amounting to $4.5 million. Costs to sell include the
incremental direct costs to complete the sale and represent costs such as broker
commissions, legal and other closing costs. The transaction on the
sale of the real estate holdings was completed on January 9, 2007 and resulted
in a gain of approximately $1.9 million.
In
accordance with SFAS No. 144, the
Woods US and Woods Canada business units 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 these
discontinued operations, are comprised of the following assets and liabilities
as of September 30, 2007:
Assets
held for sale:
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,627
|
|
Accounts receivable, net
|
|
|
29,584
|
|
Inventories, net
|
|
|
41,744
|
|
Other current assets
|
|
|
2,037
|
|
Intangibles, net
|
|
|
174
|
|
Other
|
|
|
546
|
|
Property and equipment, net
|
|
|
1,720
|
|
Accumulated other comprehensive loss
|
|
|
(2,772 |
) |
|
|
$ |
74,660
|
|
|
|
|
|
|
Liabilities
held for sale:
|
|
|
|
|
Accounts payable
|
|
$ |
19,944
|
|
Accrued compensation
|
|
|
501
|
|
Accrued expenses
|
|
|
8,079
|
|
Other liabilities
|
|
|
234
|
|
|
|
$ |
28,758
|
|
|
|
|
|
|
At
December 31, 2006 the assets and liabilities of the Woods US and Woods Canada
business units are included within the individual line items on the balance
sheet. The amount classified as Asset Held for Sale represents the
real estate holdings of the United Kingdom consumer plastics business
unit.
The
historical operating results of the Metal Truck Box business unit, the United
Kingdom consumer plastics business unit, the CML business unit, and the Woods
US
and Woods Canada business units, 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
46,487
|
|
|
$ |
73,770
|
|
|
$ |
130,587
|
|
|
$ |
155,945
|
|
Pre-tax
profit
|
|
$ |
2,500
|
|
|
$ |
3,920
|
|
|
$ |
913
|
|
|
$ |
4,551
|
|
Pre-tax
(loss) gain on sale of discontinued operations
|
|
$ |
-
|
|
|
$ |
(3,200 |
) |
|
$ |
8,817
|
|
|
$ |
(3,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS
OF OPERATIONS
Restatement
of Prior Financial Information
As
a
result of accounting errors in our raw material inventory records, management
and the Company’s Audit Committee determined on August 6, 2007 that the
Company’s consolidated financial statements for the three and nine months ended
September 30, 2006 should no longer be relied upon. Our decision to
restate our consolidated financial statements is based on facts obtained by
management and the results of an internal investigation of the physical raw
material inventory counting process at CCP. These procedures resulted
in the identification of the overstatement of raw material inventory when
completing the physical inventory. At the time of the physical
inventories, the Company did not have sufficient controls in place to ensure
that the accurate physical raw material inventory on hand was properly accounted
for and reported in the proper period.
In
addition, as part of the restatement, the Company will be recording additional
items, certain of which were previously identified and determined to be
immaterial. The impact of these additional items on net loss is
approximately zero and $0.4 million for the three and nine months ended
September 30, 2006, respectively, which is allocated entirely to loss from
continuing operations.
Refer
to
Note 1 of the Consolidated Financial Statements for additional discussion
related to the effects of the restatement.
Three
Months Ended September 30, 2007 versus Three Months Ended September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% to
Sales
|
|
|
$
|
|
|
% to
Sales
|
|
Net
sales
|
|
$ |
49.2
|
|
|
|
100.0
|
|
|
$ |
51.9
|
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
43.7
|
|
|
|
88.8
|
|
|
|
44.4
|
|
|
|
85.5
|
|
Gross
profit
|
|
|
5.5
|
|
|
|
11.2
|
|
|
|
7.5
|
|
|
|
14.5
|
|
Selling,
general and administrative expenses
|
|
|
6.6
|
|
|
|
13.4
|
|
|
|
7.8
|
|
|
|
15.0
|
|
Severance,
restructuring and related charges
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
1.4
|
|
(Gain)
loss on sale of assets
|
|
|
-
|
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
0.1
|
|
Operating
loss
|
|
|
(1.1 |
) |
|
|
(2.2 |
) |
|
|
(1.0 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1.1 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
Other,
net
|
|
|
(0.2 |
) |
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before (provision for)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
from income taxes
|
|
|
(2.4 |
) |
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
(Provision
for) benefit from income taxes from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
-
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2.4 |
) |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
Income
from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax)
|
|
|
1.6
|
|
|
|
|
|
|
|
2.7
|
|
|
|
|
|
Loss
on sale of discontinued businesses (net of tax)
|
|
|
-
|
|
|
|
|
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(0.8 |
) |
|
|
|
|
|
$ |
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.30 |
) |
|
|
|
|
|
$ |
(0.18 |
) |
|
|
|
|
Discontinued
operations
|
|
|
0.20
|
|
|
|
|
|
|
|
(0.07 |
) |
|
|
|
|
Net
loss
|
|
$ |
(0.10 |
) |
|
|
|
|
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our
consolidated net sales for the three month period ended September 30, 2007
decreased $2.7 million compared to the three month period ended September 30,
2006. The decline in net sales of 5% was comprised of lower volumes
of 11% offset by higher pricing of 6%. Gross margins were 11.2% for
the three month period ended September 30, 2007, a decrease of 3.3 percentage
points compared to the three month period ended September 30,
2006. Selling, general and administrative expense (“SG&A”) as a
percentage of sales decreased from 15.0% for the third quarter of 2006 to 13.4%
for the third quarter of 2007. The operating loss of ($1.1) million
for the three month period ended September 30, 2007 was comparable to prior
year, primarily due to the lower selling, general and administrative expenses
as
well as severance, restructuring and related charges in 2007 offsetting the
above gross margin reduction.
Results
within both periods presented reflect activity of our discontinued business
units: the Metal Truck Box business unit, the United Kingdom consumer plastics
business unit, the CML business unit, and the Woods US and Woods Canada business
units as discontinued operations. Overall, we reported a net loss of
($0.8) million [($0.10) per share] for the three month period ended September
30, 2007, versus a net loss of ($2.0) million [($0.25) per share] in the same
period of 2006.
Net
Sales
Maintenance
Products Group
Net
sales from the Maintenance Products
Group decreased from $51.9 million for the three month period ended September
30, 2006 to $49.2 million in 2007. Overall, the decline of 5% was
primarily due to lower volumes of 11% partially offset by higher pricing of
6%. The lower sales volume was primarily at our Glit business unit as
it was adversely impacted by activity within the building
industry. Other business units selling suffered declines as well but
not to the extent of our Glit business.
Higher
pricing resulted from the implementation of selling price increases, most of
which took effect in the fourth quarter of 2006 and the first quarter of
2007. The implementation of price increases was in response to the
accelerating cost of our primary raw materials, packaging materials, utilities
and freight.
Operating
Loss
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
$
|
|
|
% Margin
|
|
|
$
|
|
|
% Margin
|
|
|
$
|
|
|
% Margin
|
|
Maintenance
Products Group
|
|
$ |
0.5
|
|
|
|
1.1
|
|
|
$ |
2.5
|
|
|
|
4.9
|
|
|
$ |
(2.0 |
) |
|
|
(3.8 |
) |
Unallocated
corporate expense
|
|
|
(1.6 |
) |
|
|
|
|
|
|
(2.8 |
) |
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
(2.2 |
) |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
restructuring and related charges
|
|
|
-
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
0.7
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Operating
loss
|
|
$ |
(1.1 |
) |
|
|
(2.2 |
) |
|
$ |
(1.0 |
) |
|
|
(2.0 |
) |
|
$ |
(0.1 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income decreased from $2.5 million (4.9%
of net sales) during the three month period ended September 30, 2006 to $0.5
million (1.1 % of net sales) for the three month period ended September 30,
2007. The reduction in operating income resulted from lower volume
and production inefficiencies at our Glit business as well as an unfavorable
variance in our quarterly LIFO adjustment of $0.7 million.
Corporate
Corporate
operating expenses decreased from $2.8 million in the three month period ended
September 30, 2006 to $1.6 million in three month period ended September 30,
2007 principally due to lower requirements under the Company’s incentive
compensation plan and self insurance programs as well as various cost
improvements implemented in the past year.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the three month period ended September 30, 2007
and 2006 were impacted by severance, restructuring and related charges of $46
thousand and $0.7 million, respectively. Charges in 2007 related to
the closure of the Washington, Georgia facility. Charges in 2006
related to changes in lease assumptions for the Hazelwood abandoned
facility.
Other
Items
Interest
expense decreased by $0.1 million in the third quarter of 2007 compared to
the
same period of 2006, primarily as a result of lower levels of outstanding
borrowings. The provision for income taxes for the three month period
ended September 30, 2007 reflects a current expense for FIN 48 related expense
along with miscellaneous state income taxes reduced by a benefit of $0.4 million
offsetting an income tax provision reflected under discontinued operations
for
income taxes associated with domestic pre-tax income. The benefit
from income taxes for the three month period ended September 30, 2006 primarily
reflects a benefit of $0.8 million associated with the corresponding provision
recorded under discontinued operations for income taxes associated with domestic
pre-tax income.
The
Woods
US and Woods Canada businesses meet the criteria for classification as an Asset
Held for Sale and as a discontinued operation and all activity associated with
these business units reflects this classification. In addition, with
the sale of the Metal Truck Box business unit, the United Kingdom consumer
plastics business unit, and the CML business unit over the past two years,
all
activity associated with these units are classified as a discontinued
operation. Income from operations, net of tax, for these business
units was approximately $1.6 million in 2007 compared to income of $2.7 million
in 2006. The three month period ended September 30, 2006 includes a
$3.2 million impairment charge related to the United Kingdom consumer plastics
business unit upon its classification as an Asset Held for Sale as of September
30, 2006.
Nine
Months Ended September 30, 2007 versus Nine Months Ended September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% to
Sales
|
|
|
$
|
|
|
% to
Sales
|
|
Net
sales
|
|
$ |
144.7
|
|
|
|
100.0
|
|
|
$ |
148.8
|
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
126.9
|
|
|
|
87.7
|
|
|
|
129.6
|
|
|
|
87.1
|
|
Gross
profit
|
|
|
17.8
|
|
|
|
12.3
|
|
|
|
19.2
|
|
|
|
12.9
|
|
Selling,
general and administrative expenses
|
|
|
21.0
|
|
|
|
14.5
|
|
|
|
23.7
|
|
|
|
15.9
|
|
Severance,
restructuring and related charges
|
|
|
2.7
|
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
1.1
|
|
Loss
on sale of assets
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
0.0
|
|
Operating
loss
|
|
|
(7.4 |
) |
|
|
(5.1 |
) |
|
|
(6.1 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on SESCO joint venture transaction
|
|
|
-
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
Interest
expense
|
|
|
(3.2 |
) |
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
Other,
net
|
|
|
(0.1 |
) |
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before (provision for)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
from income taxes
|
|
|
(10.7 |
) |
|
|
|
|
|
|
(9.0 |
) |
|
|
|
|
(Provision
for) benefit from income taxes from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(0.6 |
) |
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(11.3 |
) |
|
|
|
|
|
|
(8.2 |
) |
|
|
|
|
(Loss)
income from operations of discontinued businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax)
|
|
|
(0.3 |
) |
|
|
|
|
|
|
2.5
|
|
|
|
|
|
Gain
(loss) on sale of discontinued businesses (net of tax)
|
|
|
8.8
|
|
|
|
|
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(2.8 |
) |
|
|
|
|
|
|
(8.9 |
) |
|
|
|
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
-
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2.8 |
) |
|
|
|
|
|
$ |
(9.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(1.43 |
) |
|
|
|
|
|
$ |
(1.03 |
) |
|
|
|
|
Discontinued
operations
|
|
|
1.08
|
|
|
|
|
|
|
|
(0.10 |
) |
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
-
|
|
|
|
|
|
|
|
(0.09 |
) |
|
|
|
|
Net
loss
|
|
$ |
(0.35 |
) |
|
|
|
|
|
$ |
(1.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our
consolidated net sales for the nine month period ended September 30, 2007
decreased $4.1 million compared to the nine month period ended September 30,
2006. The decrease in net sales of 3% was comprised of lower volumes
of 6% offset by higher pricing of 3%. Gross margins were 12.3% for
the nine month period ended September 30, 2007; a decrease of 0.6 percentage
points compared to the nine month period ended September 30,
2006. SG&A as a percentage of sales decreased from 15.9% for the
first nine months of 2006 to 14.5% for the first nine months of 2007 primarily
as a result of lower Corporate costs. The operating loss increased by
$1.3 million to ($7.4) million, primarily due to higher severance, restructuring
and related charges and loss on sale of assets incurred during
2007.
Results
within both periods presented reflect activity of our discontinued business
units: the Metal Truck Box business unit, the United Kingdom consumer plastics
business unit, the CML business unit, and the Woods US and Woods Canada business
units as discontinued operations. During the nine month period ended
September 30, 2006, we reported a cumulative effect of a change in accounting
principle of ($0.8) million [($0.09) per share] associated with the adoption,
effective January 1, 2006, of SFAS No. 123R. Overall, we reported a
net loss of ($2.8) million [($0.35) per share] for the nine month period ended
September 30, 2007, versus a net loss of ($9.7) million [($1.22) per share]
in
the same period of 2006.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group decreased from $148.8 million during the
nine month period ended September 30, 2006 to $144.7 million during the nine
month period ended September 30, 2007. Overall, this decline of 3%
was primarily due to lower volumes of 6% partially offset by higher pricing
of
3%. Activity within the business units selling into the janitorial
markets as well as lower volume at our Glit business due to reduced building
industry activity were the primary reasons for the volume shortfall for the
nine
months ended September 30, 2007.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, which took effect throughout 2006 and the first
quarter of 2007. The implementation of price increases was in
response to the accelerating cost of our primary raw materials, packaging
materials, utilities and freight.
Operating
Loss
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
$
|
|
|
% Margin
|
|
|
$
|
|
|
% Margin
|
|
|
$
|
|
|
% Margin
|
|
Maintenance
Products Group
|
|
$ |
2.7
|
|
|
|
1.9
|
|
|
$ |
3.3
|
|
|
|
2.2
|
|
|
$ |
(0.6 |
) |
|
|
(0.3 |
) |
Unallocated
corporate expense
|
|
|
(5.9 |
) |
|
|
|
|
|
|
(7.8 |
) |
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
(3.2 |
) |
|
|
(2.2 |
) |
|
|
(4.5 |
) |
|
|
(3.0 |
) |
|
|
1.3
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
restructuring and related charges
|
|
|
(2.7 |
) |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
Loss
on sale of assets
|
|
|
(1.5 |
) |
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
Operating
loss
|
|
$ |
(7.4 |
) |
|
|
(5.1 |
) |
|
$ |
(6.1 |
) |
|
|
(4.1 |
) |
|
$ |
(1.3 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income decreased from $3.3 million (2.2%
of net sales) during the nine month period ended September 30, 2006 to $2.7
million (1.9% of net sales) for the nine month period ended September 30,
2007. The reduction was primarily attributable to the production
inefficiencies at the Glit business unit in the third quarter of 2007 as well
as
an unfavorable variance in our quarterly LIFO adjustments of $0.6 million.
SG&A as a percentage of net sales in the first nine months of 2007 was
slightly lower versus the first nine months of 2006 due mostly to cost
containment measures.
Corporate
Corporate
operating expenses decreased from $7.8 million in the nine month period ended
September 30, 2006 to $5.9 million in the nine month period ended September
30,
2007 principally due to lower compensation cost associated with stock
appreciation rights and stock options, as well as requirements under the
Company’s incentive compensation plan and lower health and general liability
insurance costs in 2007.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the nine month period ended September 30, 2007
and 2006 were negatively impacted by severance, restructuring and related
charges of $2.7 million and $1.6 million, respectively. Charges in
2007 related to changes in lease assumptions for the Hazelwood abandoned
facility. In addition, the Company incurred severance, restructuring
and related charges with the closure of the Washington, Georgia
facility. Upon ceasing use of the facility, costs included the
impairment of assets and other costs associated with abandoning the
facility. Charges in 2006 related to changes in lease assumptions for
an abandoned facility upon the execution of a sublease ($1.4 million) with
the
remaining charges primarily related to the relocation of the corporate
headquarters.
Other
Items
On
June
27, 2006, the Company and Montenay amended the partnership interest purchase
agreement in order to allow the Company to completely exit from the SESCO
operations and related obligations. 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 a gain of $0.4 million
within continuing operations 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 interest purchase agreement. In addition, the
Company recorded a gain on the sale of the partnership interest of approximately
$0.1 million as reflected within continuing operations.
Interest
expense was $0.7 million lower for the first nine months of 2007 versus the
same
period of 2006 as a result of lower average borrowings and interest
rates. The provision for income taxes for the nine month period ended
September 30, 2007 reflects current expense for FIN 48 activity and
miscellaneous state income taxes. The benefit from income taxes for
the nine month period ended September 30, 2006 reflects a benefit of $0.9
million which offsets a tax provision reflected under discontinued operations
for domestic income taxes. Tax benefits were not recorded on pre-tax
net loss for 2007 and 2006 as valuation allowances were recorded related to
deferred tax assets created as a result of operating losses in the United States
and certain foreign jurisdictions.
The
Woods
US and Woods Canada businesses meet the criteria for classification as an Asset
Held for Sale and as a discontinued operation and all activity associated with
these business units reflected this classification. In addition, with
the sale of the Metal Truck Box business unit, the United Kingdom consumer
plastics business unit, and the CML business unit over the past two years,
all
activity associated with these units are classified as a discontinued
operation. The Company had a ($0.3) million loss from operations for
these business units in 2007 compared to income of $2.5 million in 2006,
primarily resulting from activity associated with Woods US and Woods
Canada. The nine month period ended September 30, 2007 includes an
$8.8 million gain on the sale of the CML business unit and the real estate
assets of the United Kingdom consumer plastics business. The nine
month period ended September 30, 2006 includes a $30 thousand loss on the sale
of the Metal Truck Box business unit as well as $3.2 million impairment charge
related to the United Kingdom consumer plastics business unit upon its
classification as an Asset Held for Sale as of September 30, 2006.
Effective
January 1, 2006, the Company adopted SFAS No. 123R. As a result, a
cumulative effect of this adoption of $0.8 million was recognized associated
with the fair value of all vested SARs. See Note 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, 2007, we had cash and cash equivalents
of $2.2 million versus cash and cash equivalents of $7.4 million at December
31,
2006. Also as of September 30, 2007, we had outstanding borrowings of
$52.4 million [61% 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 $16.4 million. As of December
31, 2006, we had outstanding borrowings of $56.9 million [58% of total
capitalization]. We used $12.9 million of cash in operations during
the nine months ended September 30, 2007 versus $3.7 million during the nine
months ended September 30, 2006. The use of cash flow in operations
was primarily attributable to the change in working capital requirements within
our Maintenance Products Group.
Bank
of America Credit Agreement
On
April 20, 2004, the Company
completed a refinancing of its outstanding indebtedness (the “Refinancing”) and
entered into a new agreement with Bank of America Business Capital (the “Bank of
America Credit Agreement”). The current Bank of America Credit
Agreement, as amended, is a $93.0 million facility with a $13.0 million term
loan (“Term Loan”) and an $80.0 million revolving credit facility (“Revolving
Credit Facility”). The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four
banks.
The
Revolving Credit Facility has an
expiration date of April 20, 2009 and its borrowing base is determined by
eligible inventory and accounts receivable. Unused borrowing
availability on the Revolving Credit Facility was $16.4 million at September
30,
2007. All extensions of credit under the Bank of America Credit
Agreement are collateralized by a first priority security interest in and lien
upon the capital stock of each material domestic subsidiary (65% of the capital
stock of each material foreign subsidiary), and all present and future assets
and properties of Katy. The Term Loan also has a final maturity date
of April 20, 2009 with quarterly payments of $0.4 million, as amended and
beginning April 1, 2007. A final payment of $8.2 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. At September 30, 2007, total outstanding letters of credit
were $6.0 million.
On
March 8, 2007 the Company obtained
the Eighth Amendment to the Bank of America Credit Agreement. The
Eighth Amendment eliminates the Fixed Charge Coverage Ratio for the remaining
life of the debt agreement and requires the Company to maintain a minimum level
of availability (eligible collateral base less outstanding borrowings and
letters of credit) such that its eligible collateral must exceed the sum of
its
outstanding borrowings and letters of credit by at least $5.0 million from
the
effective date of the Eighth Amendment through September 29, 2007 and by $7.5
million from that point through December 2007. Thereafter, the
Company is required to maintain a minimum level of availability such that
eligible collateral must exceed the sum of its outstanding borrowings and
letters of credit by at least $5.0 million for the first three quarters of
the
year and $7.5 million for the fourth quarter. In addition, the
Company reduced its Revolving Credit Facility from $90.0 million to $80.0
million.
If
the
Company is unable to comply with the terms of the amended covenants, it could
seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets. It is possible,
however, the Company may not be able to obtain further amendments from the
lender or secure additional debt financing or liquidity through the sale of
assets on favorable terms or at all. However, the Company believes
that it will be able to comply with all covenants, as amended, throughout
2007.
Effective
since April 2005, interest
rate margins have been set at the largest margins set forth in the Bank of
America Credit Agreement, 275 basis points over applicable LIBOR rates for
Revolving Credit Facility borrowings and 300 basis points over LIBOR for
borrowings under the Term Loan. In accordance with the Bank of
America Credit Agreement, margins on the Term Loan will drop an additional
25
basis points if the balance of the Term Loan is reduced below $10.0
million. Interest accrues at higher margins on prime rates for swing
loans, the amounts of which were nominal at September 30, 2007.
Effective
August 17, 2005, the Company entered into a two-year interest rate swap on
a
notional amount of $25.0 million in the first year and $15.0 million in the
second year. The purpose of the swap was to limit the Company’s
exposure to interest rate increases on a portion of the Revolving Credit
Facility over the two-year term of the swap. The fixed interest rate
under the swap over the life of the agreement was 4.49%. The interest
rate swap expired on August 17, 2007.
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, 2007. For the three and nine
month periods ended September 30, 2007 and 2006, the Company had amortization
of
debt issuance costs, included within interest expense, of $0.3 million and
$1.2
million, and $0.3 million and $0.9 million, respectively. Included in
amortization of debt issuance costs is approximately $0.3 million for the nine
month period ended September 30, 2007 of debt issuance costs written off due
to
the reduction in the Revolving Credit Facility on March 8, 2007. In
addition, the Company incurred $0.1 million and $0.2 million associated with
amending the Bank of America Credit Agreement, as discussed above, for the
six
month periods ended September 30, 2007 and 2006, respectively.
The
Revolving Credit Facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence
of a material adverse effect (“MAE”) clause in the Bank of America Credit
Agreement, caused the Revolving Credit Facility to be classified as a current
liability, per guidance in the Emerging Issues Task Force Issue No. 95-22,
Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that Include Both a Subjective Acceleration Clause and a
Lock-Box Arrangement. The Company does not expect to repay, or
be required to repay, within one year, the balance of the Revolving Credit
Facility classified as a current liability. The MAE clause, which is
a typical requirement in commercial credit agreements, allows the lenders to
require the loan to become due if they determine there has been a material
adverse effect on the Company’s operations, business, properties, assets,
liabilities, condition, or prospects. The classification of the
Revolving Credit Facility as a current liability is a result only of the
combination of the lockbox agreements and MAE clause. The Revolving
Credit Facility does not expire or have a maturity date within one year, but
rather has a final expiration date of April 20, 2009. The lender had
not notified the Company of any indication of a MAE at September 30, 2007,
and
the Company was not in default of any provision of the Bank of America Credit
Agreement at September 30, 2007.
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, 2007, are summarized below (in thousands of
dollars):
Contractual
Cash Obligations
|
|
Total
|
|
|
Due
in
less
than
1 year
|
|
|
Due
in
1-3
years
|
|
|
Due
in
3-5
years
|
|
|
Due
after
5
years
|
|
Revolving
credit facility [a]
|
|
$ |
41,977
|
|
|
$ |
41,977
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Term
loans
|
|
|
10,418
|
|
|
|
1,500
|
|
|
|
8,918
|
|
|
|
-
|
|
|
|
-
|
|
Interest
on debt [b]
|
|
|
6,622
|
|
|
|
4,298
|
|
|
|
2,324
|
|
|
|
-
|
|
|
|
-
|
|
Operating
leases [c]
|
|
|
16,876
|
|
|
|
7,731
|
|
|
|
7,362
|
|
|
|
1,445
|
|
|
|
338
|
|
Severance
and restructuring [c]
|
|
|
1,081
|
|
|
|
400
|
|
|
|
347
|
|
|
|
202
|
|
|
|
132
|
|
Post-retirement
benefits [d]
|
|
|
5,447
|
|
|
|
754
|
|
|
|
1,375
|
|
|
|
1,020
|
|
|
|
2,298
|
|
Total
Contractual Obligations
|
|
$ |
82,421
|
|
|
$ |
56,660
|
|
|
$ |
20,326
|
|
|
$ |
2,667
|
|
|
$ |
2,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
350
|
|
|
$ |
350
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Stand-by
letters of credit
|
|
|
5,650
|
|
|
|
5,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Commercial Commitments
|
|
$ |
6,000
|
|
|
$ |
6,000
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
As
discussed in the Liquidity and Capital Resources section above and in Note
6 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. The amount also assumes the principal balance of the
Revolving Credit Facility remains constant through its expiration date of April
20, 2009 and the principal balance of the Term Loan amortizes in accordance
with
the terms of the Bank of America Credit Agreement. Due to the
variable nature of the Bank of America Credit Agreement, actual interest rates
could differ from the assumptions above. In addition, actual
borrowing levels could differ from the assumptions above due to liquidity
needs.
[c]
Future non-cancelable lease rentals are included in the line entitled “Operating
leases,” which also includes obligations associated with restructuring
activities. The Condensed Consolidated Balance Sheets at September
30, 2007 includes $1.7 million in discounted liabilities associated with
non-cancelable operating lease rentals, net of estimated sub-lease revenues,
related to facilities that have been abandoned as a result of restructuring
and
consolidation activities.
[d]
Benefits consist of postretirement medical obligations to retirees of former
subsidiaries of Katy, as well as deferred compensation plan liabilities to
former officers of the Company.
Off-balance
Sheet Arrangements
Not
applicable.
Cash
Flow
Liquidity
was favorably impacted during
the first nine months of 2007 as a result of proceeds received on the sale
of
the CML business unit. However, we used $12.9 million of operating
cash compared to $3.7 million during the same nine months of
2006. Debt obligations at September 30, 2007 decreased $4.5 million
from December 31, 2006, primarily as the result of proceeds received from the
sale of the CML business unit offset by lower operating earnings and higher
working capital requirements.
Operating
Activities
Cash
flow used in operating activities
before changes in operating assets was $2.2 million in the first nine months
of
2007 versus $1.1 million in the same period of 2006. While we had net
losses in both periods, these amounts included non-cash items such as
depreciation, amortization and amortization of debt issuance
costs. We used $4.5 million of cash related to operating assets and
liabilities during the nine months ended September 30, 2007 versus providing
$3.6 million during the nine months ended September 30,
2006. Our operating cash flow was adversely impacted by
inventory and accounts payable levels and the corresponding fluctuation from
the
year end position.
Investing
Activities
Capital
expenditures of continuing
operations totaled $2.8 million during the nine months ended September 30,
2007
as compared to $2.3 million during the nine months ended September 30,
2006. For the nine month period ended September 30, 2007, the Company
received $17.0 million in cash proceeds from the sale of the United Kingdom
consumer plastics business unit real estate holdings and the CML business unit,
compared to receiving $2.4 million in cash proceeds from the sale of the Metal
Truck Box business unit for the nine month period ended September 30,
2006.
Financing
Activities
Overall,
debt decreased $4.5 million during the nine months ended September 30, 2007
versus an increase of $4.4 million during the nine months ended September 30,
2006, primarily relating to the proceeds received on the sale of the CML
business unit. Direct debt costs totaling $0.1 million and $0.2
million in 2007 and 2006, respectively, primarily represents a fee paid to
our
lenders in connection with the amendments made to the Bank of America Credit
Agreement.
STOCK
EXCHANGE LISTING
On
April 9, 2007, the Company announced
that the New York Stock Exchange (“NYSE”) would suspend trading of the Company’s
shares of common stock due to noncompliance with the continuing listing
standards of the NYSE. The Company did not meet the required market
capitalization level of $75.0 million over a consecutive thirty day trading
period or the required total stockholders’ equity of not less than $75.0
million. The shares of Katy were suspended from trading on the NYSE
at the close of business on April 12, 2007. With the expectation that
the NYSE would delist the Company’s shares, the Company pursued conducting the
trading of its shares on another exchange or quotation system. On
April 16, 2007, the Company announced that its shares of common stock began
trading on the OTC Bulletin Board, effective immediately, under the ticker
symbol “KATY.”
SEVERANCE,
RESTRUCTURING AND RELATED
CHARGES
The Company has initiated several cost reduction and facility consolidation
initiatives, resulting in severance, restructuring and related
charges. Key initiatives were the consolidation of the St. Louis
manufacturing/distribution facilities 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$ |
-
|
|
|
$ |
704
|
|
|
$ |
882
|
|
|
$ |
1,403
|
|
Consolidation
of Glit facilities
|
|
|
46
|
|
|
|
-
|
|
|
|
1,774
|
|
|
|
-
|
|
Corporate
office relocation
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
188
|
|
Total
severance, restructuring and related charges
|
|
$ |
46
|
|
|
$ |
738
|
|
|
$ |
2,656
|
|
|
$ |
1,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
23,749
|
|
|
$ |
23,449
|
|
Electrical
Products Group
|
|
|
12,683
|
|
|
|
12,683
|
|
Corporate
|
|
|
12,290
|
|
|
|
12,290
|
|
|
|
$ |
48,722
|
|
|
$ |
48,422
|
|
|
|
|
|
|
|
|
|
|
A
rollforward of all restructuring and related reserves since December 31, 2006
is
as follows (amounts in thousands):
|
|
|
|
|
One-time
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Termination
|
|
|
|
|
|
|
Total
|
|
|
Benefits
[a]
|
|
|
Costs
[b]
|
|
|
Other
[c]
|
|
Restructuring
liabilities at December 31, 2006
|
|
$ |
470
|
|
|
$ |
-
|
|
|
$ |
470
|
|
|
$ |
-
|
|
Additions
|
|
|
2,656
|
|
|
|
151
|
|
|
|
2,332
|
|
|
|
173
|
|
Payments
|
|
|
(716 |
) |
|
|
(151 |
) |
|
|
(392 |
) |
|
|
(173 |
) |
Other
|
|
|
(689 |
) |
|
|
-
|
|
|
|
(689 |
) |
|
|
|
|
Restructuring
liabilities at September 30, 2007 [d]
|
|
$ |
1,721
|
|
|
$ |
-
|
|
|
$ |
1,721
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[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 $3.4 million
as of September 30, 2007. The Company has included $1.7 million as an
offset for sub-lease rentals.
[c]
Includes charges associated with equipment removal and cleanup of abandoned
facility.
[d]
The
remaining severance, restructuring and related charges for these initiatives
are
expected to be approximately $0.3 million, primarily related to the
consolidation of the Glit facilities program.
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 12 to the Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a
discussion of severance, restructuring and related charges.
OUTLOOK
FOR 2007
We
experienced lower volume performance during 2006 in our Contico and Glit
business units. For the first nine months of 2007, volume continues
to be lower within most of the Maintenance Products Group business
units. This lower volume has been partially offset by the impact of
price increases made over the past two years. Given the relative
stability of resin and other materials pricing projected through the end of
2007, we anticipate pricing levels to be stable for the remainder of 2007 for
products within the Maintenance Products Group. Any potential sales
growth over the fourth quarter of 2006 will be driven strictly by price
increases implemented in late 2006 and early 2007 as the trend present in the
first nine months of 2007 is expected to continue for the rest of the
year.
We
believe that the quality, shipping
and production issues present at our Glit business unit in 2005 significantly
improved in 2006. The Glit business unit improved its quality level
and has executed the consolidation of the Pineville, North Carolina and
Washington, Georgia operations into the Wrens, Georgia facility over the past
two years. However, our operating results have been adversely
impacted by Glit’s operating performance in 2007 due to lower volumes, mix of
products and overall production efficiencies.
Cost
of goods sold is subject to
variability in the prices for certain raw materials, most significantly
thermoplastic resins used in the manufacture of plastic products for the
Continental and Contico businesses. Prices of plastic resins, such as
polyethylene and polypropylene increased steadily from the latter half of 2002
through 2005 with prices in 2006 and 2007 being relatively stable.
Management has observed that the prices of plastic resins are driven to an
extent by prices for crude oil and natural gas, in addition to other factors
specific to the supply and demand of the resins themselves. Prices for
corrugated packaging material and other raw materials have also accelerated
over
the past few years. We have not employed an active hedging program
related to our commodity price risk, but are employing other strategies for
managing this risk, including contracting for a certain percentage of resin
needs through supply agreements and opportunistic spot purchases. We have
experienced cost increases within the past few years in the prices of primary
raw materials used in our products and inflation in other costs such as
packaging materials, utilities and freight. In a climate of rising
raw material costs, we experienced difficulty in raising prices to shift these
higher costs to our consumer customers for our plastic products. Our
future earnings may be negatively impacted to the extent further increases
in
costs for raw materials cannot be recovered or offset through higher selling
prices. We cannot predict the direction our raw material prices will
take beyond 2007.
Over
the
past few years, our management has been focused on a number of restructuring
and
cost reduction initiatives, including the consolidation of facilities,
divestiture of non-core operations, selling general and administrative
(“SG&A”) cost rationalization and organizational changes. We have
and expect to continue to benefit from various profit enhancing strategies
such
as process improvements (including Lean Manufacturing and Six Sigma), value
engineering products, improved sourcing/purchasing and lean
administration.
SG&A
expenses were comparable as a percentage of sales in 2006 versus 2005 and should
be lower as a percentage of sales in 2007 primarily from cost improvements
made
in the past year. We will continue to evaluate the possibility of
further consolidation of administrative processes.
Interest
rates rose in 2006, however, interest rates did decline during
2007. Ultimately, we cannot predict the future levels of interest
rates. Under the Bank of America Credit Agreement, as amended, the
Company’s interest rate margins on all of our outstanding borrowings and letters
of credit are at the highest levels set forth in the Bank of America Credit
Agreement.
Given
our
history of operating losses, along with guidance provided by the accounting
literature covering accounting for income taxes, we are unable to conclude
it is
more likely than not that we will be able to generate future taxable income
sufficient to realize the benefits of domestic deferred tax assets carried
on
our books. Therefore, except for our profitable foreign subsidiaries,
a full valuation allowance on the net deferred tax asset position was recorded
at December 31, 2006 and 2005, and we do not expect to record the benefit of
any
deferred tax assets that may be generated in 2007. We will continue
to record current expense, within continuing and discontinued operations,
associated with foreign and state income taxes.
Our
financial performance benefited from favorable currency translation as the
Canadian dollar throughout 2006 and first half of 2007 against the U.S.
dollar. While we cannot predict the ultimate direction of exchange
rates, we do not expect to see the same favorable impact on our financial
performance for the remainder of 2007.
We
expect
our working capital levels to remain constant as a percentage of
sales. However, inventory carrying values may be impacted by higher
material costs. We expect to use cash flow in 2007 for capital
expenditures and payments due under our term loan as well as the settlement
of
previously established restructuring accruals. The majority of these
accruals relate to non-cancelable lease obligations for abandoned
facilities. These accruals do not create incremental cash obligations
in that we are obligated to make the associated payments whether we occupy
the
facilities or not. The amount we will ultimately pay out under these
accruals is dependent on our ability to successfully sublet all or a portion
of
the abandoned facilities.
The
Company was in compliance with the covenants of the Bank of America Credit
Agreement as of December 31, 2006. Nevertheless, on March 8, 2007,
the Company obtained the Eighth Amendment to the Bank of America Credit
Agreement. The Eighth Amendment eliminates the Fixed Charge Coverage
Ratio for the remaining life of the debt agreement and requires the Company
to
maintain a minimum level of availability (eligible collateral base less
outstanding borrowings and letters of credit) such that its eligible collateral
must exceed the sum of its outstanding borrowings and letters of credit by
at
least $5.0 million from the effective date of the Eighth Amendment through
September 29, 2007 and by $7.5 million from that point through December 31,
2007. Thereafter, the Company is required to maintain a minimum level
of availability of $5.0 million for the first three quarters of the year and
$7.5 million for the fourth quarter. In addition, we reduced our
Revolving Credit Facility from $90.0 million to $80.0 million.
If
we are
unable to comply with the terms of the amended covenants, we could seek to
obtain further amendments and pursue increased liquidity through additional
debt
financing and/or the sale of assets. We believe that given our strong
working capital base, additional liquidity could be obtained through additional
debt financing, if necessary. However, there is no guarantee that
such financing could be obtained. The Company believes that we will
be able to comply with all covenants, as amended, throughout 2007. In
addition, we are continually evaluating alternatives relating to the sale of
excess assets and divestitures of certain of our business
units. Asset sales and business divestitures present opportunities to
provide additional liquidity by de-leveraging our financial
position. However, the Company may not be able to secure liquidity
through the sale of assets on favorable terms or at all.
Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
This
report and the information incorporated by reference in this report contain
various “forward-looking statements” as defined in Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended
(the “Exchange Act”). 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.
|
-
|
Our
failure to identify, and promptly and effectively remediate, any
material
weaknesses or significant deficiencies in our internal control over
financial reporting.
|
-
|
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 10 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 3 to the Condensed Consolidated Financial Statements in Part I, Item
1
of this Quarterly Report on Form 10-Q for a discussion of recently issued
accounting pronouncements.
CRITICAL
ACCOUNTING POLICIES
We
disclosed details regarding certain of our critical accounting policies in
the
Management’s Discussion and Analysis section of our Annual Report on Form 10-K
for the year ended December 31, 2006 (Part II, Item 7). There have
been no changes to policies as of September 30, 2007, except for the adoption
of
FIN No. 48.
The
Company adopted FIN No. 48 on
January 1, 2007. As a result of the implementation of FIN No. 48, the
Company recognized approximately a $1.1 million increase in the liability for
unrecognized tax benefits, which was accounted for as an increase of $0.1
million to the January 1, 2007 balance of deferred tax assets and a reduction
of
$1.0 million to the January 1, 2007 balance of retained earnings.
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 interest rate swap expired on August 17,
2007. As a result of the current changing interest rate environment
and the increase in the interest rate margins on our borrowings as a result
of
the Sixth Amendment to the Bank of America Credit Agreement, our exposures
to
interest rate risks could be material to our financial position or results
of
operations. For example, a 1% increase in the interest rate of the
Bank of America Credit Agreement would increase our annual interest expense
by
approximately $0.5 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,
2007 is $3.3 million. A 10% change in foreign currency exchange rates
would amount to $0.3 million change in our net investment in foreign
subsidiaries at September 30, 2007.
Commodity
Price Risk
We
have not employed an active hedging program related to our commodity price
risk,
but are employing other strategies for managing this risk, including contracting
for a certain percentage of resin needs through supply agreements and
opportunistic spot purchases. See Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Outlook for 2007 in
Part I, Item 2 of this Quarterly Report on Form 10-Q, for further discussion
of
our exposure to increasing raw material costs.
|
(a) Evaluation
of Disclosure Controls and
Procedures
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings with the Securities and
Exchange Commission (“SEC”) is reported within the time periods specified in the
SEC's rules, and that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Pursuant
to Rule 13a-15(b) under the Exchange Act, 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 Exchange Act) 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
were not effective at the reasonable assurance level because of the
identification of material weaknesses in our internal control over financial
reporting described further below.
In
the
second quarter of 2007, management of the Company noted discrepancies in its
physical raw material inventory levels and the corresponding perpetual inventory
records. These discrepancies led the Company to initiate an internal
investigation which resulted in the identification of errors in the physical
inventory count of raw material used for valuation purposes at one of the
Company’s wholly-owned subsidiaries.
When
management became aware of the issues referenced above, the Company, including
the Audit Committee, initiated an investigation of the
matter. Management has discussed the investigation, the resolution of
the problems and the strengthening of internal controls with the Audit
Committee.
Based
on
the results of the investigation, management and the Audit Committee determined
that (a) the errors were caused by intentional acts of a CCP employee who
improperly accounted for physical quantity of raw material inventory and who
has
since been dismissed; (b) the scope of the errors were contained in fiscal
2005,
fiscal 2006 and the three months ended March 31, 2007; and (c) the errors were
concentrated in the area discussed above.
In
connection with the Company's evaluation of the restatement described above,
management has concluded that the restatement is the result of previously
unidentified material weaknesses in the Company's internal control over
financial reporting. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements will not be prevented or detected.
The
Company believes the above errors resulted from the following material
weaknesses in internal control over financial reporting:
·
|
The
Company did not maintain a proper level of segregation of duties,
specifically the verification process of physical raw material inventory
on hand and the operational handling of this inventory;
and
|
·
|
The
Company did not maintain sufficient oversight of the raw material
inventory counting and reconciliation
process.
|
As
discussed above, these control deficiencies resulted in the restatement of
the
Company's consolidated financial statements for December 31, 2005 and 2006,
March 31, 2006 and 2007, June 30, 2006, and September 30,
2006. Additionally, these control deficiencies could result in
further misstatements to inventory and cost of goods sold, which would result
in
a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management determined that these control deficiencies represented material
weaknesses in internal control over financial reporting.
Remediation
of Material Weaknesses
The
Company initiated the following steps during the second quarter of 2007 and
continued during the third quarter of 2007 to address the above material
weaknesses within our internal controls over physical counting of
inventory:
·
|
Completed
a full resin physical inventory by independent employees not involved
in
the operational handling and reporting of resin
inventory;
|
·
|
Completed
a full comparison of the physical resin inventory to the general
ledger
and recorded the appropriate
adjustment;
|
·
|
Verified
the automated measurement systems with third parties as well as the
physical observation of the resin inventory by independent
employees;
|
·
|
Initiated
weekly physical counts of resin inventory and completed a comparison
to
the perpetual inventory system for any differences with any significant
differences investigated by management. We will continue to
perform these weekly physical counts until management believes the
process
and related controls are operating as designed;
and
|
·
|
Reviewed
and adjusted, as necessary, procedures and personnel involved in
the
physical inventory counting of
resin.
|
Management
and the Board of Directors of the Company are committed to the remediation
and
continued improvement of our internal control over financial
reporting. We have dedicated and will continue to dedicate
significant resources to this remediation effort and believe that we have made
significant progress in reestablishing effective internal controls over
financial reporting associated with the above raw material inventory counting
process.
|
(b) Change
in Internal Controls
|
There
have been no changes in Katy’s internal control over financial reporting during
the quarter ended September 30, 2007, except for the items noted under the
above
section Remediation of Material Weaknesses, that have materially
affected, or are reasonably likely to materially affect Katy’s internal control
over financial reporting.
Except
as otherwise noted in Note 10 to
the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q, during the quarter for which this report is
filed, there have been no material developments in previously reported legal
proceedings, and no other cases or legal proceedings, other than ordinary
routine litigation incidental to the Company’s business and other nonmaterial
proceedings, were brought against the Company.
We
are affected by risks specific to us
as well as factors that affect all businesses operating in a global
market. The significant factors known to us that could materially
adversely affect our business, financial condition, or operating results are
described in Part I, Item 1A of our Annual Report on Form 10-K/A, filed on
August 17, 2007. There has been no material change in those risk
factors, other than the following additional risk factor:
If
our internal controls over financial reporting are found not to be effective
or
if we make disclosure of existing or potential significant deficiencies or
material weaknesses in those controls, investors could lose confidence in our
financial reports, and our stock price may be adversely
affected.
Beginning
with our Annual Report for the year ending December 31, 2007,
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an
internal control report with our Annual Report on
Form 10-K. That report must include management’s assessment of
the effectiveness of our internal control over financial reporting as of the
end
of the fiscal year. Additionally, our independent registered public accounting
firm will be required to issue a report on management’s assessment of our
internal control over financial reporting and a report on their evaluation
of
the operating effectiveness of our internal control over financial reporting
beginning with our Annual Report for the year ending December 31,
2008.
We
continue to evaluate our existing internal control over financial reporting
against the standards adopted by the Public Company Accounting Oversight Board,
or PCAOB. During the course of our ongoing evaluation of the internal
controls, we may identify areas requiring improvement, and may have to design
enhanced processes and controls to address issues identified through this
review. Despite the existence of material weaknesses or significant
deficiencies in our internal control over financial reporting, we may fail
to
identify them. Remedying any deficiencies, significant deficiencies
or material weaknesses that we or our independent registered public accounting
firm may identify, may require us to incur significant costs and expend
significant time and management resources. Further, any of the
measures we implement to remedy any such deficiencies may not effectively
mitigate or remedy such deficiencies.
Any
failure to remedy the deficiencies identified by management, any failure to
implement required new or improved controls and the discovery of unidentified
deficiencies could harm our operating results, cause us to fail to meet our
reporting obligations, subject us to increased risk of errors and fraud related
to our financial statements or result in material misstatements in, and untimely
filing of, our financial statements. The existence of a material
weakness could also cause a restatement of future presented financial
statements. Investors could lose confidence in our financial reports,
and our stock price may be adversely affected, if our internal controls over
financial reporting are found not to be effective by management or by an
independent registered public accounting firm or if we make disclosure of
existing or potential significant deficiencies or material weaknesses in those
controls.
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. The Company suspended further purchases under the plan on May
10, 2004. On December 5, 2005, we announced the resumption of the
plan. During the three and nine month periods ended September 30,
2007 and 2006, the Company purchased zero and 1,301 shares, and 8,900 shares
and
35,900 shares, respectively, of common stock on the open market for zero and
$3
thousand, and $23 thousand and $0.1 million, respectively.
Item
3. DEFAULTS UPON SENIOR
SECURITIES
None.
None.
None.
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.
|
# These
certifications are being furnished solely to accompany this report pursuant
to
18 U.S.C. Section 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.
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 13,
2007 By
/s/
Anthony T. Castor III
Anthony
T.
Castor III
President
and
Chief Executive Officer
By /s/ Amir Rosenthal
Amir
Rosenthal
Vice
President, Chief Financial
Officer,
General
Counsel and
Secretary
44