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: April 3, 2009
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.)
|
305 Rock
Industrial Park Drive, Bridgeton, Missouri 63044
(Address
of principal executive
offices)
(Zip Code)
Registrant's
telephone number, including area code: (314) 656-4321
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date.
Class
|
|
Outstanding
at April 30, 2009
|
Common
Stock, $1 Par Value
|
|
7,951,176
Shares
|
KATY
INDUSTRIES, INC.
FORM
10-Q
April 3,
2009
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS OF
APRIL 3, 2009 (UNAUDITED) AND DECEMBER 31, 2008
(Amounts
in Thousands)
ASSETS
|
|
April
3,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
855 |
|
|
$ |
683 |
|
Accounts
receivable, net
|
|
|
15,220 |
|
|
|
13,773 |
|
Inventories,
net
|
|
|
15,808 |
|
|
|
19,911 |
|
Other
current assets
|
|
|
1,136 |
|
|
|
3,516 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
33,019 |
|
|
|
37,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
665 |
|
|
|
665 |
|
Intangibles,
net
|
|
|
4,355 |
|
|
|
4,455 |
|
Other
|
|
|
2,861 |
|
|
|
1,809 |
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
7,881 |
|
|
|
6,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
336 |
|
|
|
336 |
|
Buildings
and improvements
|
|
|
8,691 |
|
|
|
8,686 |
|
Machinery
and equipment
|
|
|
92,772 |
|
|
|
92,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
101,799 |
|
|
|
101,715 |
|
Less
- Accumulated depreciation
|
|
|
(70,672 |
) |
|
|
(69,232 |
) |
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
31,127 |
|
|
|
32,483 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
72,027 |
|
|
$ |
77,295 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS OF
APRIL 3, 2009 (UNAUDITED) AND DECEMBER 31, 2008
(Amounts
in Thousands, Except Share Data)
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
April
3,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
9,531 |
|
|
$ |
10,283 |
|
Book
overdraft
|
|
|
1,776 |
|
|
|
2,289 |
|
Accrued
compensation
|
|
|
2,949 |
|
|
|
3,015 |
|
Accrued
expenses
|
|
|
13,953 |
|
|
|
14,266 |
|
Current
maturities of long-term debt
|
|
|
1,500 |
|
|
|
1,500 |
|
Revolving
credit agreement
|
|
|
8,957 |
|
|
|
9,118 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
38,666 |
|
|
|
40,471 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
6,553 |
|
|
|
6,928 |
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
9,804 |
|
|
|
10,603 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
55,023 |
|
|
|
58,002 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
15%
Convertible preferred stock, $100 par value; authorized
|
|
|
|
|
|
|
|
|
1,200,000
shares; issued and outstanding 1,131,551 shares;
|
|
|
|
|
|
|
|
|
liquidation
value $113,155
|
|
|
108,256 |
|
|
|
108,256 |
|
Common
stock, $1 par value; authorized 35,000,000 shares;
|
|
|
|
|
|
|
|
|
issued
9,822,304 shares
|
|
|
9,822 |
|
|
|
9,822 |
|
Additional
paid-in capital
|
|
|
26,951 |
|
|
|
27,248 |
|
Accumulated
other comprehensive loss
|
|
|
(1,776 |
) |
|
|
(1,742 |
) |
Accumulated
deficit
|
|
|
(104,812 |
) |
|
|
(102,397 |
) |
Treasury
stock, at cost, 1,871,128 shares
|
|
|
(21,437 |
) |
|
|
(21,894 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
17,004 |
|
|
|
19,293 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
72,027 |
|
|
$ |
77,295 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE MONTHS ENDED APRIL 3, 2009 AND MARCH 31, 2008
(Amounts
in Thousands, Except Per Share Data)
(Unaudited)
|
|
April
3,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
35,092 |
|
|
$ |
41,691 |
|
Cost
of goods sold
|
|
|
29,955 |
|
|
|
37,863 |
|
Gross
profit
|
|
|
5,137 |
|
|
|
3,828 |
|
Selling,
general and administrative expenses
|
|
|
7,164 |
|
|
|
6,737 |
|
Severance,
restructuring and related charges
|
|
|
- |
|
|
|
138 |
|
Loss
on sale or disposal of assets
|
|
|
- |
|
|
|
533 |
|
Operating
loss
|
|
|
(2,027 |
) |
|
|
(3,580 |
) |
Interest
expense
|
|
|
(309 |
) |
|
|
(483 |
) |
Other,
net
|
|
|
(73 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income tax (provision)
benefit
|
|
|
(2,409 |
) |
|
|
(4,077 |
) |
Income
tax (provision) benefit from continuing operations
|
|
|
(6 |
) |
|
|
352 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,415 |
) |
|
|
(3,725 |
) |
Loss
from operations of discontinued businesses (net of tax)
|
|
|
- |
|
|
|
(252 |
) |
Gain
on sale of discontinued businesses (net of tax)
|
|
|
- |
|
|
|
543 |
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,415 |
) |
|
$ |
(3,434 |
) |
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and diluted:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.30 |
) |
|
$ |
(0.47 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
0.04 |
|
Net
loss
|
|
$ |
(0.30 |
) |
|
$ |
(0.43 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,951 |
|
|
|
7,951 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED APRIL 3, 2009 AND MARCH 31, 2008
(Amounts
in Thousands)
(Unaudited)
|
|
April
3,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,415 |
) |
|
$ |
(3,434 |
) |
Income
from discontinued operations
|
|
|
- |
|
|
|
(291 |
) |
Loss
from continuing operations
|
|
|
(2,415 |
) |
|
|
(3,725 |
) |
Depreciation
and amortization
|
|
|
1,656 |
|
|
|
1,823 |
|
Amortization
of debt issuance costs
|
|
|
96 |
|
|
|
96 |
|
Stock-based
compensation
|
|
|
7 |
|
|
|
(127 |
) |
Loss
on sale or disposal of assets
|
|
|
- |
|
|
|
533 |
|
|
|
|
(656 |
) |
|
|
(1,400 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,479 |
) |
|
|
(1,833 |
) |
Inventories
|
|
|
4,032 |
|
|
|
928 |
|
Other
assets
|
|
|
1,148 |
|
|
|
134 |
|
Accounts
payable
|
|
|
(728 |
) |
|
|
(1,489 |
) |
Accrued
expenses
|
|
|
(214 |
) |
|
|
(853 |
) |
Other
|
|
|
(749 |
) |
|
|
(363 |
) |
|
|
|
2,010 |
|
|
|
(3,476 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) continuing operations
|
|
|
1,354 |
|
|
|
(4,876 |
) |
Net
cash used in discontinued operations
|
|
|
- |
|
|
|
(320 |
) |
Net
cash provided by (used in) operating activities
|
|
|
1,354 |
|
|
|
(5,196 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(186 |
) |
|
|
(1,037 |
) |
Proceeds
from sale of assets
|
|
|
- |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in continuing operations
|
|
|
(186 |
) |
|
|
(1,002 |
) |
Net
cash provided by discontinued operations
|
|
|
- |
|
|
|
4,424 |
|
Net
cash (used in) provided by investing activities
|
|
|
(186 |
) |
|
|
3,422 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(repayments) borrowings on revolving loans
|
|
|
(131 |
) |
|
|
2,940 |
|
Decrease
in book overdraft
|
|
|
(513 |
) |
|
|
(2,110 |
) |
Repayments
of term loans
|
|
|
(375 |
) |
|
|
(399 |
) |
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,019 |
) |
|
|
431 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
23 |
|
|
|
(54 |
) |
Net
increase (decrease) in cash
|
|
|
172 |
|
|
|
(1,397 |
) |
Cash,
beginning of period
|
|
|
683 |
|
|
|
2,015 |
|
Cash,
end of period
|
|
$ |
855 |
|
|
$ |
618 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy and
Basis of Presentation – The condensed consolidated financial statements
include the accounts of Katy Industries, Inc. and subsidiaries in which it has a
greater than 50% interest, collectively “Katy” or the “Company”. All
significant intercompany accounts, profits and transactions have been eliminated
in consolidation. The condensed consolidated balance sheet at April
3, 2009 and the related condensed consolidated statements of operations and cash
flows for the three months ended April 3, 2009 and March 31, 2008 have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission, and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial condition and results of operations of the
Company. Interim results may not be indicative of results to be
realized for the entire year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management’s discussion and analysis
of financial condition and results of operations, contained in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008. The
condensed consolidated balance sheet as of December 31, 2008 was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States
(“GAAP”).
Fiscal Year –
The Company operates and reports using a 4-4-5 fiscal year which always
ends on December 31. As a result, December and January do not typically
consist of five and four weeks, respectively. The first quarter of 2009
and 2008 consisted of 66 shipping days and 62 shipping days,
respectively.
Use of Estimates and
Reclassifications – The preparation of financial statements in conformity
with GAAP 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 on the cash flow statement were made to the 2008 amounts in
order to conform to the 2009 presentation.
Inventories – The
components of inventories are as follows (amounts in thousands):
|
|
April
3,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
10,089 |
|
|
$ |
12,764 |
|
Work
in process
|
|
|
606 |
|
|
|
718 |
|
Finished
goods
|
|
|
9,549 |
|
|
|
12,054 |
|
Inventory
reserves
|
|
|
(1,344 |
) |
|
|
(1,345 |
) |
LIFO
reserve
|
|
|
(3,092 |
) |
|
|
(4,280 |
) |
|
|
$ |
15,808 |
|
|
$ |
19,911 |
|
|
|
|
|
|
|
|
|
|
At April 3, 2009 and December 31, 2008,
approximately 51% and 50%, 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 $3.1 million and $4.3 million at
April 3, 2009 and December 31, 2008, respectively.
Property, Plant and
Equipment – Property and equipment are stated at cost and depreciated
using the straight-line method over their estimated useful lives: buildings
(10-40 years); machinery and equipment (3-20 years); tooling (5 years); and
leasehold improvements 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 $1.5
million and $1.7 million for the three months ended April 3, 2009 and March 31,
2008, 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”) using the modified prospective method. Under this method,
compensation cost recognized during the three months ended April 3, 2009 and
March 31, 2008 includes: a) compensation cost for all stock options granted
prior to, but not yet vested as of January 1, 2006, and granted subsequent to
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 (“SARs”) as of April 3, 2009 and
March 31, 2008 based on the April 3, 2009 and March 31, 2008 fair value,
respectively, estimated in accordance with SFAS No. 123R.
Compensation
expense (income) is included in selling, general and administrative expense in
the Condensed Consolidated Statements of Operations. The components
of compensation expense (income) are as follows (amounts in
thousands):
|
|
Three
Months Ended
|
|
|
|
April
3,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Stock
option expense
|
|
$ |
161 |
|
|
$ |
37 |
|
Stock
appreciation right income
|
|
|
(154 |
) |
|
|
(164 |
) |
|
|
$ |
7 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
The fair value of stock options is
estimated at the date of grant using a Black-Scholes option pricing
model. As the Company does not have sufficient historical exercise
data to provide a basis for estimating the expected term, the Company uses 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 is the current yield available on U.S. treasury rates for issues with a
remaining term equal to that of each award. The Company estimates
forfeitures using historical results. Its estimates of forfeitures
will be adjusted over the requisite service period based on the extent to which
actual forfeitures differ, or are expected to differ, from their
estimate. There were no stock options granted during the three months
ended April 3, 2009 and March 31, 2008.
The fair
value of stock appreciation rights, a liability award, was estimated at April 3,
2009 and March 31, 2008 using a Black-Scholes option pricing
model. The Company estimated 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
for issues with a remaining term equal to the term remaining for 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:
|
April
3,
|
|
March
31,
|
|
2009
|
|
2008
|
|
|
|
|
Expected
term (years)
|
0.1
- 4.6
|
|
3.0
- 4.5
|
Volatility
|
127.5%
- 203.4%
|
|
92.3%
- 105.1%
|
Risk-free
interest rate
|
0.2%
- 1.8%
|
|
1.8%
- 2.1%
|
Comprehensive Loss –
The components of comprehensive loss are as follows (amounts in
thousands):
|
|
Three
Months Ended
|
|
|
|
April
3,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,415 |
) |
|
$ |
(3,434 |
) |
Foreign
currency translation losses
|
|
|
(34 |
) |
|
|
(165 |
) |
Comprehensive
loss
|
|
$ |
(2,449 |
) |
|
$ |
(3,599 |
) |
|
|
|
|
|
|
|
|
|
Treasury Stock –
During the three months ended April 3, 2009, the Company sold shares held in a
rabbi trust for a deferred compensation plan in the amount of $0.5
million. This transaction caused no net impact to stockholders’
equity.
Note
2. NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting
Standards – In December 2007, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
No. 141R”). SFAS No. 141R establishes principles and requirements for
how an acquirer in a business combination (a) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, (b) recognizes and measures the
goodwill acquired in a business combination or a gain from a bargain purchase,
and (c) determines what information to disclose to enable users of financial
statements to evaluate the nature and financial effects of the business
combination. This standard is effective for the Company for business
combination transactions for which the acquisition date is on or after January
1, 2009. In April 2009, the FASB issued FASB Staff Position (“FSP”)
No. 141R-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies (“FSP No. 141R-1”). FSP No. 141R-1 amends
some of the guidance in SFAS No. 141R. No business combination
transactions occurred during the three months ended April 3, 2009.
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 disclosure 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. In October 2008, the FASB issued FSP No. 157-3,
Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (“FSP No.
157-3”). FSP No. 157-3 clarifies the application of SFAS No. 157 in
an inactive market and illustrates how an entity would determine fair value when
the market for a financial asset is not active. For the Company, SFAS
No. 157 was originally effective January 1, 2008; however, the effective date of
SFAS No. 157 was deferred for one year and was effective for the Company January
1, 2009. The Company’s adoption of SFAS No. 157 did not have a
material impact on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS No.
160”). SFAS No. 160 requires the recognition of a noncontrolling
interest, or minority interest, as equity in the consolidated financial
statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No.
160 also includes expanded disclosure requirements regarding the interests of
the parent and its noncontrolling interest. For the Company, SFAS No.
160 was effective January 1, 2009. The Company’s adoption of SFAS No.
160 did not have a material impact on its consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS No. 161”). SFAS No. 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand the
effects of the derivative instruments on an entity’s financial position,
operating results and cash flows. For the Company, SFAS No. 161 was
effective January 1, 2009. The Company’s adoption of SFAS No. 161 did
not have a material impact on the Company’s consolidated financial
statements.
In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP No. 142-3”). FSP No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. For the Company, FSP No. 142-3 was
effective January 1, 2009. The Company’s adoption of FSP No. 142-3
did not have a material impact on its consolidated financial
statements.
Recently Issued Accounting
Standards – In December 2008, the FASB issued FSP No. 132R-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets (“FSP No. 132R-1”), which requires
companies to disclose information about fair value measurements of retirement
plans that would be similar to the disclosures about fair value measurements
required by SFAS No. 157. The provisions of FSP No. 132R-1 are
effective for fiscal years ending after December 15, 2009. FSP No.
132R-1 is not expected to have a material impact on the Company’s consolidated
financial statements, as its requirements impact financial statement disclosures
only.
In April
2009, the FASB issued FSP No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, as well as
FSP No. 107-1 and Accounting Principles Board No. 28-1, Interim Disclosures about Fair Value
of Financial Instruments. These two pronouncements relate to
fair value measurements and related disclosures. The FASB also issued
FSP No. 115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, relating to the accounting for impaired
debt securities. These pronouncements are effective for interim and
annual periods ending after June 15, 2009, and are not expected to have a
material impact on the Company’s consolidated financial statements.
Note
3. INTANGIBLE ASSETS
Following is detailed information
regarding Katy’s intangible assets (amounts in thousands):
|
|
April
3,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Patents
|
|
$ |
1,136 |
|
|
$ |
(854 |
) |
|
$ |
282 |
|
|
$ |
1,118 |
|
|
$ |
(832 |
) |
|
$ |
286 |
|
Customer
lists
|
|
|
10,231 |
|
|
|
(8,446 |
) |
|
|
1,785 |
|
|
|
10,231 |
|
|
|
(8,406 |
) |
|
|
1,825 |
|
Tradenames
|
|
|
5,054 |
|
|
|
(2,766 |
) |
|
|
2,288 |
|
|
|
5,054 |
|
|
|
(2,710 |
) |
|
|
2,344 |
|
Total
|
|
$ |
16,421 |
|
|
$ |
(12,066 |
) |
|
$ |
4,355 |
|
|
$ |
16,403 |
|
|
$ |
(11,948 |
) |
|
$ |
4,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for each of the
three month periods ended April 3, 2009 and March 31, 2008. Estimated
aggregate future amortization expense related to intangible assets is as follows
(amounts in thousands):
2009
(remainder)
|
|
$ |
354 |
|
2010
|
|
|
511 |
|
2011
|
|
|
484 |
|
2012
|
|
|
459 |
|
2013
|
|
|
438 |
|
Thereafter
|
|
|
2,109 |
|
|
|
$ |
4,355 |
|
|
|
|
|
|
Note
4. INDEBTEDNESS
Long-term debt consists of the
following (amounts in thousands):
|
|
April
3,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Term
loan payable under the Bank of America Credit Agreement,
interest
|
|
|
|
based
on LIBOR and Prime Rates (3.38% - 4.25%), due through 2010
|
|
$ |
8,053 |
|
|
$ |
8,428 |
|
Revolving
loans payable under the Bank of America Credit Agreement,
|
|
|
|
|
interest
based on LIBOR and Prime Rates (3.13% - 5.00%)
|
|
|
8,957 |
|
|
|
9,118 |
|
Total
debt
|
|
|
17,010 |
|
|
|
17,546 |
|
Less
revolving loans, classified as current (see below)
|
|
|
(8,957 |
) |
|
|
(9,118 |
) |
Less
current maturities
|
|
|
(1,500 |
) |
|
|
(1,500 |
) |
Long-term
debt
|
|
$ |
6,553 |
|
|
$ |
6,928 |
|
|
|
|
|
|
|
|
|
|
Aggregate remaining scheduled
maturities of the Term Loan as of April 3, 2009 are as follows (amounts in
thousands):
2009
(remainder)
|
|
$ |
1,125 |
|
2010
|
|
|
6,928 |
|
|
|
$ |
8,053 |
|
|
|
|
|
|
On
November 30, 2007, the Company entered into the Second Amended and Restated
Credit Agreement with Bank of America (the “Bank of America Credit
Agreement”). The Bank of America Credit Agreement is a $50.6 million
credit facility with a $10.6 million term loan (“Term Loan”) and a $40.0 million
revolving loan (“Revolving Credit Facility”), including a $10.0 million
sub-limit for letters of credit. The Bank of America Credit Agreement
replaces the previous credit agreement (“Previous Credit Agreement”) as
originally entered into on April 20, 2004. The Bank of America Credit
Agreement is an asset-based lending agreement and only involves one bank
compared to a syndicate of four banks under the Previous Credit
Agreement.
The
annual amortization on the Term Loan, paid quarterly, is $1.5 million with final
payment due November 30, 2010. The Term Loan is collateralized by the
Company’s property, plant and equipment. The Revolving Credit
Facility has an expiration date of November 30, 2010 and all extensions of
credit are collateralized by a first priority security interest in and lien upon
the capital stock of each material domestic subsidiary of the Company (65% of
the capital stock of certain foreign subsidiaries of the Company), and all
present and future assets and properties of the Company.
The
Company’s borrowing base under the Bank of America Credit Agreement is
determined by eligible inventory and accounts receivable, amounting to $21.0
million at April 3, 2009, and is reduced by the outstanding amount of standby
and commercial letters of credit. The Bank of America
Credit Agreement requires the Company to maintain a minimum level of
availability such that its eligible collateral must exceed the sum of its
outstanding borrowings under the Revolving Credit Facility and letters of credit
by at least $5.0 million. Currently, the Company’s largest letters of
credit relate to its casualty insurance programs. At April 3, 2009, total
outstanding letters of credit were $4.1 million. In addition, the
Bank of America Credit Agreement prohibits the Company from paying dividends on
its securities, other than dividends paid solely in securities.
Borrowings
under the Bank of America Credit Agreement bear interest, at the Company’s
option, at either a rate equal to the bank’s base rate or LIBOR plus a margin
based on levels of borrowing availability. Interest rate margins for
the Revolving Credit Facility under the applicable LIBOR option will range from
2.00% to 2.50%, or under the applicable prime option will range from 0.25% to
0.75% on borrowing availability levels of $20.0 million to less than $10.0
million, respectively. For the Term Loan, interest rate margins under
the applicable LIBOR option will range from 2.25% to 2.75%, or under the
applicable prime option will range from 0.50% to 1.00%. Financial
covenants such as minimum fixed charge coverage and leverage ratios are not
included in the Bank of America Credit Agreement.
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 April 3, 2009. For both of the three month
periods ended April 3, 2009 and March 31, 2008, the Company had amortization of
debt issuance costs, included within interest expense, of $0.1
million.
The
Revolving Credit Facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all Company 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, result in the Revolving Credit Facility being classified as a
current liability, per guidance in EITF 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, which has a final expiration date of
November 30, 2010. The MAE clause, which is a fairly common
requirement in commercial credit agreements, allows the lender to require the
loan to become due if it determines there has been a material adverse effect on
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 the MAE clause.
Note
5. RETIREMENT BENEFIT PLANS
Certain
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 policies, subject to the minimum funding requirements of employee
benefit and tax laws, are to contribute such amounts as determined on an
actuarial basis to provide the plans with assets sufficient to meet the benefit
obligations. Plan assets consist primarily of fixed income
investments, corporate equities and government securities. The
Company also provides certain health care and life insurance benefits for some
of its retired employees. The postretirement health plans are
unfunded.
Information
regarding the Company’s net periodic benefit cost for pension and other
postretirement benefit plans for the three months ended April 3, 2009 and March
31, 2008 is as follows (amounts in thousands):
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
April
3,
|
|
|
March
31,
|
|
|
April
3,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
cost
|
|
|
19 |
|
|
|
23 |
|
|
|
36 |
|
|
|
37 |
|
Expected
return on plan assets
|
|
|
(13 |
) |
|
|
(25 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of net loss
|
|
|
11 |
|
|
|
11 |
|
|
|
- |
|
|
|
8 |
|
Net
periodic benefit cost
|
|
$ |
17 |
|
|
$ |
12 |
|
|
$ |
36 |
|
|
$ |
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three month period ended April 3, 2009, the Company made contributions of
$73,000 to the pension plans. The Company expects to contribute an
additional $44,000 to the pension plans in 2009.
Note
6. STOCK INCENTIVE PLANS
The Company has various stock incentive
plans that provide for the granting of stock options, nonqualified stock
options, SARs, restricted stock, performance units or shares and other incentive
awards to certain employees and directors. Options have been granted
at or above the market price of the Company’s stock at the date of grant,
typically vest over a three-year period, and are exercisable not less than
twelve months or more than ten years after the date of grant. Stock
appreciation rights have been granted at or above the market price of the
Company’s stock at the date of grant, typically vest over periods up to three
years, and expire ten years from the date of issue. No more than 50%
of the cumulative number of vested SARs held by an employee can be exercised in
any one calendar year.
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, 2008
|
|
|
1,624,600 |
|
|
$ |
2.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
Expired
|
|
|
(14,300 |
) |
|
$ |
17.00 |
|
|
|
|
|
Cancelled
|
|
|
(30,000 |
) |
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at April 3, 2009
|
|
|
1,580,300 |
|
|
$ |
2.26 |
|
7.06
years
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at April 3, 2009
|
|
|
580,300 |
|
|
$ |
4.11 |
|
3.39
years
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 3, 2009, total unvested
compensation expense associated with stock options amounted to $0.5 million and
is being amortized on a straight-line basis over the respective options’ vesting
period. The weighted average period in which the above compensation
cost will be recognized is 1.2 years as of April 3, 2009.
The following table summarizes SARs
activity under each of the Company’s applicable plans:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
SARs
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-Vested
at December 31, 2008
|
|
|
6,666 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
Vested
|
|
|
(6,666 |
) |
|
$ |
0.66 |
|
Cancelled
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Non-Vested
at April 3, 2009
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Total
Outstanding at April 3, 2009
|
|
|
545,717 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
Note
7. INCOME TAXES
The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“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 both April 3, 2009 and December 31, 2008 are $1.3 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 accelerate 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 income tax provision. During the three months
ended April 3, 2009 and March 31, 2008, the Company recognized an insignificant
amount of interest and penalties. The Company had approximately $0.4
million of interest and penalties accrued at both April 3, 2009 and December 31,
2008.
The Company believes that it is
reasonably possible that the total amount of unrecognized tax benefits will
change within twelve months of April 3, 2009. The Company has certain
tax return years subject to statutes of limitation which will close within
twelve months of April 3, 2009. 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 $0.3
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 domestic 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 2004.
As of
April 3, 2009 and December 31, 2008, the Company had deferred tax assets, net of
deferred tax liabilities, of $74.0 million. Domestic net operating
loss (“NOL”) carry forwards comprised $44.1 million of the deferred tax assets
for both periods. Katy’s history of operating losses in many of its
taxing jurisdictions provides significant negative evidence with respect to the
Company’s ability to generate future taxable income, a requirement in order to
recognize deferred tax assets on the Condensed Consolidated Balance
Sheets. For this reason, the Company was unable to conclude at April
3, 2009 and December 31, 2008 that NOLs and other deferred tax assets in the
United States and 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 of
earnings. The benefit from income taxes for the three months ended
March 31, 2008 primarily reflects current tax benefit for FIN No. 48 activity as
well as a tax benefit of $0.1 million recorded to offset the provision recorded
under discontinued operations for domestic income taxes on domestic pre-tax
income.
Tax benefits were not recorded on the
pre-tax net loss for the three months ended April 3, 2009 and March 31,
2008 as valuation allowances were recorded related to deferred tax assets
created as a result of operating losses in the United States and 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.
Note
8. 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
matter with W. J. Smith, a subsidiary of the Company, 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 the Company. 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, the Company
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 eleven lawsuits filed in state court in
Alabama by a total of approximately 325 individual plaintiffs. There
are over 100 defendants named in each case. In all eleven 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 nine 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 approximately 2,700 cases pending
in Michigan, New Jersey, New York, Illinois, Nevada, Mississippi, Wyoming,
Louisiana, Georgia, Massachusetts, Missouri, Kentucky, and California to the
Company for defense and indemnification. With respect to one case,
Sterling has demanded that the Company 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 the Company 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 the Company, 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 the Company, has
been named as a defendant in approximately 400 of the New Jersey cases tendered
by Sterling. The Company has elected to defend these cases, the
majority of which have been dismissed or settled for nominal
sums. There are approximately 130 cases which remain active as of
April 3, 2009.
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.
Other
Claims
There are
a number of product liability and workers’ compensation claims pending against
the Company 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, the Company 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.
Note
9. INDUSTRY SEGMENT INFORMATION
The
Company is organized into one reporting segment: Maintenance Products
Group. The activities of the Maintenance Products Group include the
manufacture, import and distribution of a variety of commercial cleaning
supplies and storage products. Principal geographic markets are in
the United States, Canada, and Europe and include the sanitary maintenance,
foodservice, mass merchant retail and home improvement markets.
For all
periods presented, information for the Maintenance Products Group excludes
amounts related to the Contico Manufacturing, Ltd. (“CML”) and Metal Truck Box
business units as these units are classified as discontinued operations as
discussed further in Note 11. The table below summarizes the key
financial statement information (amounts in thousands):
|
|
|
|
|
|
Three
months ended
|
|
|
|
|
|
|
|
April
3,
|
|
|
March
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Maintenance Products Group
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
$ |
35,092 |
|
|
$ |
41,691 |
|
Operating
income (loss)
|
|
|
|
|
|
|
289 |
|
|
|
(875 |
) |
Operating
margin (deficit)
|
|
|
|
|
|
|
0.8 |
% |
|
|
(2.1 |
%) |
Depreciation and amortization
|
|
|
|
|
1,638 |
|
|
|
1,798 |
|
Capital
expenditures
|
|
|
|
|
|
|
186 |
|
|
|
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
- |
|
Segment
|
|
$ |
35,092 |
|
|
$ |
41,691 |
|
|
|
|
|
|
Total
|
|
$ |
35,092 |
|
|
$ |
41,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
- |
|
Segment
|
|
$ |
289 |
|
|
$ |
(875 |
) |
|
|
|
- |
|
Unallocated
corporate
|
|
|
(2,316 |
) |
|
|
(2,034 |
) |
|
|
|
- |
|
Severance,
restructuring, and related charges
|
|
|
- |
|
|
|
(138 |
) |
|
|
|
- |
|
Loss
on sale or disposal of assets
|
|
|
- |
|
|
|
(533 |
) |
|
|
|
|
|
Total
|
|
$ |
(2,027 |
) |
|
$ |
(3,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
- |
|
Segment
|
|
$ |
1,638 |
|
|
$ |
1,798 |
|
|
|
|
- |
|
Unallocated
corporate
|
|
|
18 |
|
|
|
25 |
|
|
|
|
|
|
Total
|
|
$ |
1,656 |
|
|
$ |
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
Segment
|
|
$ |
186 |
|
|
$ |
1,037 |
|
|
|
|
|
|
Total
|
|
$ |
186 |
|
|
$ |
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
3,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Total
assets
|
|
|
- |
|
Segment
|
|
$ |
68,137 |
|
|
$ |
73,304 |
|
|
|
|
- |
|
Other
[a]
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
|
- |
|
Unallocated
corporate
|
|
|
2,690 |
|
|
|
2,791 |
|
|
|
|
|
|
Total
|
|
$ |
72,027 |
|
|
$ |
77,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] Amount
shown as “Other” represents the note receivable from the sale of the Metal
Truck Box business unit.
|
Note
10. SEVERANCE, RESTRUCTURING AND RELATED CHARGES
In 2002, the Company committed to a
plan to consolidate the manufacturing and distribution of the four 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 four plastic molding facilities in
this area would need to be eliminated. This plan was completed by the
end of 2003. The Company incurred $0.1 million of charges in the
three months ended March 31, 2008 associated with adjustments to the
non-cancelable lease accrual at the Hazelwood, Missouri facility due to changes
in assumptions. 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 for the
consolidation of St. Louis manufacturing/distribution facilities (amounts in
thousands):
|
|
Contract
|
|
|
|
Termination
|
|
|
|
Costs
|
|
Restructuring
liabilities at December 31, 2008
|
|
$ |
569 |
|
Additions
|
|
|
- |
|
Payments
|
|
|
(27 |
) |
Restructuring
liabilities at April 3, 2009
|
|
$ |
542 |
|
|
|
|
|
|
These
amounts relate 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 $1.4 million as of April 3,
2009. The Company has included $0.8 million as an offset for
sub-lease rentals. As of April 3, 2009, the Company does not
anticipate any further significant severance, restructuring and other related
charges in the upcoming year related to the plans discussed above.
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
|
|
2009
(remainder)
|
|
|
161 |
|
2010
|
|
|
186 |
|
2011
|
|
|
195 |
|
|
|
$ |
542 |
|
|
|
|
|
|
Note
11. DISCONTINUED OPERATIONS
Certain of the Company’s former
operations have been classified as discontinued operations as of and for the
three months ended March 31, 2008 in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. All of these dispositions
occurred as a result of determinations by management and the Board of Directors
that the businesses were not a core component of the Company’s long-term
business strategy. The proceeds from each disposition were used to
pay off portions of the Company’s then outstanding debt.
On June
2, 2006, the Company sold certain assets of the Metal Truck Box business unit
for gross proceeds of approximately $3.6 million, including a $1.2 million note
receivable. The note receivable is included in Other Assets in the
Condensed Consolidated Balance Sheets.
On June
6, 2007, the Company sold the CML business unit for gross proceeds of
approximately $10.6 million, including a receivable of $0.6 million associated
with final working capital levels. The Company recorded a gain of
$0.1 million during the three month period ended March 31, 2008 in connection
with the ultimate collection of the receivable.
On
November 30, 2007, the Company sold the Woods Industries, Inc. (“Woods US”) and
Woods Industries (Canada), Inc. (“Woods Canada”) business units for gross
proceeds of approximately $50.7 million, including amounts placed into escrow of
$7.7 million related to the filing and receipt of a foreign tax certificate and
the sale of specific inventory. During fiscal 2007 the Company
recognized a gain on sale of discontinued businesses of $1.3 million in
connection with this sale. The gain in fiscal 2007 did not include
$0.9 million of the $7.7 million in escrow as further steps were required to
realize those funds. During the three months ended March 31, 2008 the
Company received $3.7 million from escrow upon the receipt of the foreign tax
certificate, and recognized an additional $0.5 million gain on sale of
discontinued businesses of the $0.9 million in escrow not recognized at the time
of sale. As of April 3, 2009 there were no amounts remaining in
escrow.
The
historical operating results of the discontinued 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 (amounts in thousands):
|
|
Three
Months Ended
|
|
|
|
April
3,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
- |
|
|
$ |
- |
|
Pre-tax
operating loss
|
|
$ |
- |
|
|
$ |
(130 |
) |
Pre-tax
gain on sale of discontinued operations
|
|
$ |
- |
|
|
$ |
543 |
|
|
|
|
|
|
|
|
|
|
The loss
from operations of discontinued businesses, as shown in the Condensed
Consolidated Statements of Operations, includes a tax provision of $0.1 million
for the three months ended March 31, 2008.
Forward-Looking
Statements
This
report and the information incorporated by reference in this report contain
various “forward-looking statements” as defined in Section 27A of the Securities
Act of 1933 and Section 21E of the Exchange Act of 1934, as
amended. The forward-looking statements are based on the beliefs of
our management, as well as assumptions made by, and information currently
available to, our management. We have based these forward-looking
statements on current expectations and projections about future events and
trends affecting the financial condition of our business. Additional information
concerning these and other risks and uncertainties is included in Item 1A under
the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2008. 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. 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 thermoplastic resins, paper board packaging, and other raw
materials.
|
-
|
Our
inability to reduce product costs, including manufacturing, sourcing,
freight, and other product costs.
|
-
|
Our
inability to reduce administrative costs through consolidation of
functions and systems improvements.
|
-
|
Our
inability to protect our intellectual property rights
adequately.
|
-
|
Our
inability to reduce our raw materials
costs.
|
-
|
Our
inability to expand our customer base and increase corresponding
revenues.
|
-
|
Our
inability to achieve product price increases, especially as they relate to
potentially higher raw material
costs.
|
-
|
Competition
from foreign competitors.
|
-
|
The
potential impact of higher interest rates on our debt outstanding under
the Bank of America Credit
Agreement.
|
-
|
Our
inability to meet covenants associated with the Bank of America Credit
Agreement.
|
-
|
Our
inability to access funds under our current loan agreements given the
current instability in the credit
markets.
|
-
|
Our
failure to identify, and promptly and effectively remediate, any material
weaknesses or significant deficiencies in our internal controls 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 Canadian operations.
|
-
|
Labor
issues, including union activities that require an increase in production
costs or lead to a strike, thus impairing production and decreasing sales,
and 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.
|
OVERVIEW
We are a
manufacturer, importer and distributor of commercial cleaning and storage
products. Our commercial cleaning products are sold primarily to
janitorial/sanitary and foodservice distributors that supply end users such as
restaurants, hotels, healthcare facilities and schools. Our storage
products are primarily sold through major home improvement and mass market
retail outlets.
RESULTS
OF OPERATIONS
Three Months Ended April 3,
2009 versus Three Months Ended March 31, 2008
Net sales
decreased from $41.7 million in the first quarter of 2008 to $35.1 million in
the first quarter of 2009, a decrease of 15.8%. Overall, this decline
resulted from lower volumes across all of our business units driven by market
softness, as well as our decision to exit certain unprofitable business
lines.
Gross margin was 14.6% for the first
quarter of 2009, an increase of 5.4 percentage points from the same period a
year ago. Gross margin was impacted by a favorable quarter over
quarter variance in our LIFO adjustment of $1.5 million resulting from a
decrease in resin costs and lower inventory levels, in addition to improved
factory productivity and cost controls. Selling, general and
administrative (“SG&A”) expenses increased $0.4 million from the first
quarter of 2008 to $7.2 million for the first quarter of 2009. This
variance related primarily to costs associated with the transition and hiring of
executive level personnel, restructuring of our commercial organization and
costs related to the Company’s plan to deregister its common stock under the
Securities and Exchange Act of 1934, as amended, which the Company abandoned on
March 12, 2009.
Other
Interest
expense decreased by $0.2 million during the three months ended April 3, 2009 as
compared to the three months ended March 31, 2008, primarily as a result of
lower average borrowings and interest rates.
The
income tax benefit for the three months ended March 31, 2008 reflects a benefit
of $0.1 million which offsets a tax provision reflected under discontinued
operations for domestic income taxes. The benefit from income taxes
for the three month period ended March 31, 2008 also reflects FIN No. 48
benefits of $0.3 million.
With the
sale of the Metal Truck Box, CML, Woods US, and Woods Canada business units in
2006 and 2007, all activity associated with these units is classified as
discontinued operations. Loss from operations, net of tax, for these
business units was approximately $0.3 million for the three months ended March
31, 2008. Gain on sale of discontinued businesses for the three
months ended March 31, 2008 includes a gain of $0.5 million recorded for the
finalization and receipt of the working capital adjustments associated with the
CML business unit, as well as recognition of part of the escrow receivable from
the sales of the Woods US and Woods Canada business units.
Overall,
we reported a net loss of $2.4 million, or $0.30 per share, for the first
quarter of 2009, as compared to $3.4 million, or $0.43 per share, for the first
quarter of 2008.
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 April 3, 2009, we
had cash of $0.9 million as compared to cash of $0.7 million at December 31,
2008. Also as of April 3, 2009, we had outstanding borrowings of
$17.0 million (50% of total capitalization) under the Bank of America Credit
Agreement. Our unused borrowing availability at April 3, 2009 on the
Revolving Credit Facility (as defined below) was $3.0 million after the $5.0
million minimum availability requirement discussed below. As of
December 31, 2008, we had outstanding borrowings of $17.5 million (48% of total
capitalization) with unused borrowing availability of $2.9 million after the
$5.0 million minimum availability requirement.
Bank of America Credit
Agreement
On
November 30, 2007, the Company entered into the Second Amended and Restated
Credit Agreement with Bank of America (the “Bank of America Credit
Agreement”). The Bank of America Credit Agreement is a $50.6 million
credit facility with a $10.6 million term loan (“Term Loan”) and a $40.0 million
revolving loan (“Revolving Credit Facility”), including a $10.0 million
sub-limit for letters of credit. The Bank of America Credit Agreement
replaces the previous credit agreement (“Previous Credit Agreement”) as
originally entered into on April 20, 2004. The Bank of America Credit
Agreement is an asset-based lending agreement and only involves one bank
compared to a syndicate of four banks under the Previous Credit
Agreement.
The
annual amortization on the Term Loan, paid quarterly, is $1.5 million with final
payment due November 30, 2010. The Term Loan is collateralized by the
Company’s property, plant and equipment. The Revolving Credit
Facility has an expiration date of November 30, 2010 and all extensions of
credit are collateralized by a first priority security interest in and lien upon
the capital stock of each material domestic subsidiary of the Company (65% of
the capital stock of certain foreign subsidiaries of the Company), and all
present and future assets and properties of the Company.
The
Company’s borrowing base under the Bank of America Credit Agreement is
determined by eligible inventory and accounts receivable, amounting to $21.0
million at April 3, 2009, and is reduced by the outstanding amount of standby
and commercial letters of credit. The Bank of America Credit
Agreement requires the Company to maintain a minimum level of availability such
that its eligible collateral must exceed the sum of its outstanding borrowings
under the Revolving Credit Facility and letters of credit by at least $5.0
million. Currently, the Company’s largest letters of credit relate to
its casualty insurance programs. At April 3, 2009, total outstanding letters of
credit were $4.1 million. In addition, the Bank of America Credit
Agreement prohibits the Company from paying dividends on its securities, other
than dividends paid solely in securities.
Borrowings
under the Bank of America Credit Agreement bear interest, at the Company’s
option, at either a rate equal to the bank’s base rate or LIBOR plus a margin
based on levels of borrowing availability. Interest rate margins for
the Revolving Credit Facility under the applicable LIBOR option will range from
2.00% to 2.50%, or under the applicable prime option will range from 0.25% to
0.75% on borrowing availability levels of $20.0 million to less than $10.0
million, respectively. For the Term Loan, interest rate margins under
the applicable LIBOR option will range from 2.25% to 2.75%, or under the
applicable prime option will range from 0.50% to 1.00%. Financial
covenants such as minimum fixed charge coverage and leverage ratios are not
included in the Bank of America Credit Agreement.
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 April 3, 2009. For both of the three month
periods ended April 3, 2009 and March 31, 2008, the Company had amortization of
debt issuance costs, included in interest expense, of $0.1 million.
The
Revolving Credit Facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all Company 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, result in the Revolving Credit Facility being classified as a
current liability, per guidance in the EITF 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, which has a final expiration date of
November 30, 2010. The MAE clause, which is a fairly common
requirement in commercial credit agreements, allows the lender to require the
loan to become due if it determines there has been a material adverse effect on
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 the MAE clause.
Cash
Flow
Cash used in operating activities
before changes in operating assets and liabilities and discontinued operations
was $0.7 million in the first quarter of 2009 as compared to $1.4 million in the
same period of 2008. This decrease was a result of a $1.3 million
reduction in net loss from continuing operations quarter over quarter, offset
partially by a lower level of non-cash addbacks, such as loss on sale or
disposal of assets, in the current quarter. Changes in operating
assets and liabilities provided $2.0 million in the first quarter of 2009
compared to a use of $3.5 million in the first quarter of 2008. This
variance resulted primarily from a reduction in inventory balances and the
receipt in the first quarter of 2009 of certain insurance claims recorded as a
receivable at December 31, 2008. During the first quarter of 2009 we
were turning our inventory at 4.3 times per year as compared to 4.9 times per
year in the same period a year ago.
Capital
expenditures from continuing operations totaled $0.2 million and $1.0 million
for the three months ended April 3, 2009 and March 31, 2008,
respectively. First quarter of 2008 amounts include capital spending
to rebuild manufacturing lines at our Bridgeton, Missouri
location. Cash provided by discontinued operations in the first
quarter of 2008 consisted of proceeds from receivables from the 2007 sales of
the Woods US, Woods Canada and CML business units.
Cash
flows used in financing activities in the first quarter of 2009 reflect a $0.5
million decrease in our debt levels since December 31, 2008.
OFF-BALANCE
SHEET ARRANGEMENTS
As of
April 3, 2009, the Company had no off-balance sheet arrangements.
SEVERANCE,
RESTRUCTURING AND RELATED CHARGES
See Note 10 to the Condensed
Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q for further discussion of severance, restructuring and related
charges.
ENVIRONMENTAL
AND OTHER
CONTINGENCIES
See
Note 8 to the Condensed Consolidated Financial Statements in Part I, Item 1 of
this Quarterly Report on Form 10-Q for a discussion of environmental and other
contingencies.
RECENTLY
ISSUED ACCOUNTING
PRONOUNCEMENTS
See Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1
of this Quarterly Report on Form 10-Q for a discussion of recently issued
accounting pronouncements.
CRITICAL
ACCOUNTING
POLICIES
We
disclosed details regarding certain of our critical accounting policies in the
Management’s Discussion and Analysis section of our Annual Report on Form 10-K
for the year ended December 31, 2008 (Part II, Item 7). There have
been no changes to policies as of April 3, 2009.
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, regulations and related forms, and that such information is
accumulated and communicated to our management, including the principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Katy
carried out an evaluation, under the supervision and with the participation of
our management, including the principal executive officer and principal
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 principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective as of the
end of the period covered by this report.
Changes
in Internal Control over Financial Reporting
There
have been no changes in Katy’s internal control over financial reporting during
the quarter ended April 3, 2009 that have materially affected, or are reasonably
likely to materially affect, Katy’s internal control over financial
reporting.
Except as otherwise noted in Note 8 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, filed on March
31, 2009. There has been no material change in those risk
factors.
None.
None.
None.
None.
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# 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: May
14,
2009 By /s/ David J.
Feldman
David J.
Feldman
President and Chief
Executive Officer
By /s/ James W.
Shaffer
James W.
Shaffer
Vice President,
Treasurer and Chief Financial Officer