================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30,1998
[ ] 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: 333-17305
International Knife & Saw, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0697252
(State or other jurisdiction (I.R.S. Employer
of incorporation or
organization)
Identification No.)
1299 Cox Avenue
Erlanger, Kentucky 41018
(Address of principal executive offices)
(606) 371-0333
(Registrant's telephone number, including area code)
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No __
As of July 31, 1998, there were 481,971 shares of the registrant's common stock
outstanding, all of which were owned by an affiliate of the registrant.
================================================================================
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Index
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Change in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. (a) Exhibits 14
(b) Reports on 8-K 14
Signatures 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
June 30, December 31,
1998 1997
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,415 $ 2,349
Accounts receivable, trade, less allowances for
doubtful accounts of $1,446 and $1,480 24,447 24,253
Inventories 30,319 29,335
Other current assets 3,975 3,738
------------------------------
Total current assets 61,156 59,675
Other assets:
Goodwill 13,188 12,087
Debt issuance costs 3,436 3,670
Other noncurrent assets 2,374 2,356
------------------------------
18,998 18,113
Property, plant and equipment-net 39,273 37,486
==============================
Total assets $ 119,427 $ 115,274
==============================
</TABLE>
See accompanying notes.
3
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
June 30, December 31,
1998 1997
------------------------------
<S> <C> <C>
Liabilities and Shareholder's deficit
Current liabilities:
Notes payable $ 7,337 $ 5,683
Current portion of long-term debt 2,021 2,218
Accounts payable 10,116 9,707
Accrued liabilities 9,141 8,596
Due to parent 475 561
------------------------------
Total current liabilities 29,090 26,765
Long-term debt, less current portion 102,633 102,314
Other liabilities 4,471 3,415
--------------------------------
Total liabilities 136,194 132,494
Minority interest 2,273 2,387
Shareholder's deficit:
Common stock, no par value - authorized - 580,000 shares;
issued - 526,904 shares; outstanding - 481,971 shares 5 5
Additional paid-in capital 10,153 10,153
Retained deficit (22,783) (24,098)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustment (2,983) (2,235)
Treasury stock, at cost (3,432) (3,432)
-------------------------------
Total shareholder's deficit (19,040) (19,607)
================================
Total liabilities and shareholder's deficit $ 119,427 $ 115,274
================================
</TABLE>
See accompanying notes.
4
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Quarter ended Six months ended
June 30, June 30,
1998 1997 1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 37,334 $ 37,396 $ 76,037 $ 67,904
Cost of sales 25,676 26,316 52,781 47,210
----------------------------------------------------------
Gross profit 11,658 11,080 23,256 20,694
Selling, general and administrative
Expenses 7,480 7,071 14,892 12,921
----------------------------------------------------------
Operating Income 4,178 4,009 8,364 7,773
Other expenses (income):
Interest income (35) (83) (40) (198)
Interest expense 3,021 3,122 6,011 6,047
Minority interest - 90 23 84
----------------------------------------------------------
2,986 3,129 5,994 5,933
----------------------------------------------------------
Income before income taxes 1,192 880 2,370 1,840
Provision for income taxes 531 392 1,055 830
----------------------------------------------------------
Net income $ 661 $ 488 $ 1,315 $ 1,010
==========================================================
Net income per common share $ 1.37 $ 1.01 $ 2.73 $ 2.10
</TABLE>
See accompanying notes.
5
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Six months ended
June 30,
1998 1997
---------------------------
<S> <C> <C>
Operating activities
Net income $ 1,315 $ 1,010
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 3,024 2,671
Loss (gain) on sale of property, plant and equipment 22 (23)
Minority interest in income of subsidiary 23 84
Changes in operating assets and liabilities net of effects
from purchases of operations:
Accounts receivable (87) (2,529)
Inventories (1,252) (1,550)
Accounts payable (254) 3,539
Accrued liabilities 398 (4,313)
Other 400 (707)
---------------------------
Net cash provided (used) by operating activities 3,589 (1,818)
Investing activities
Purchases of operations, net of cash acquired (1,219) (13,463)
Purchases of property, plant and equipment (3,935) (2,252)
Proceeds from sale of property, plant and equipment 30 43
Decrease in notes receivable and other assets 71 33
---------------------------
Net cash used in investing activities (5,053) (15,639)
Financing activities
Decrease in amounts due to parent (86) (1,285)
Increase in notes payable and long-term debt 6,509 13,825
Repayment of notes payable and long-term debt (4,828) (3,628)
Cash received from investees 4 19
---------------------------
Net cash provided by financing activities 1,599 8,931
Effect of exchange rates on cash and cash equivalents (69) (43)
---------------------------
Increase (decrease) in cash and cash equivalents 66 (8,569)
Cash and cash equivalents at beginning of period 2,349 11,701
---------------------------
Cash and cash equivalents at end of period $ 2,415 $ 3,132
============================
</TABLE>
See accompanying notes.
6
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(in thousands)
1. Basis of Presentation
The unaudited interim consolidated condensed financial statements contain all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of the management of International Knife & Saw, Inc. and its
consolidated subsidiaries, ("the Company"), necessary to present fairly the
consolidated financial position and consolidated results of operations and cash
flows of the Company. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year.
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholder's
deficit. Statement 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in shareholder's deficit to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130. For the six
months ended June 30, 1998 and 1997, total comprehensive gains (losses) amounted
to $567 and $(47), including $748 and $1,057 of other comprehensive losses
related to foreign currency translation adjustments, net of tax benefits of $600
and $869, respectively.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 1997. The consolidated condensed Balance Sheet at December 31, 1997 has been
derived from the audited consolidated financial statements at that date.
2. Acquisitions
In June, 1998, the Company completed the acquisition of the assets of Valiquet,
Inc., Des Plaines, IL, for approximately $800 in cash, $29 in assumed debt, and
a $40 promissory note to the seller subject to post closing entries. This
service center acquisition was financed from available cash balances. The above
acquisition generates annual sales of approximately $1,200 and was accounted for
by the purchase method. Goodwill totaled $485 on this acquisition.
In February, 1998, the Company completed the acquisitions of the assets of the
Atlanta, GA division of K.S.W. Corporation and Sheridan Saw Works, Sheridan, OR
for approximately $400 in cash, post closing contingent payments of $55 for
achieving certain annualized earnings levels and a $100 promissory note to one
of the sellers, subject to post-closing adjustments. These service center
acquisitions were financed from available cash balances. The above acquisitions
generate annual sales of approximately $500 and were accounted for by the
purchase method. Goodwill totaled $300 on these acquisitions.
The consolidated financial statements include the results of operations
generated by and financial position of the above acquisitions from the dates of
acquisition.
7
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
3. Foreign Currency Risk
The Company's operating results are subject to fluctuations in foreign currency
exchange rates as well as the currency translation of its foreign operations
into U.S. dollars. The Company manufactures products in the U.S., Germany,
Canada and China and exports products to more than 75 countries. The Company's
foreign sales, the majority of which occur in European countries, are subject to
exchange rate volatility. The Company has not historically hedged its foreign
currency risk.
4. Notes Payable and Long-Term Debt
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------------------------------
<S> <C> <C>
Notes payable:
Notes payable on demand in Deutsche Marks to German
banks, issued under revolving credit agreements,
interest payable quarterly $ 1,512 $ 1,140
Notes payable on demand in Chinese Renminbi to Chinese
banks, issued under revolving credit agreements, interest
payable monthly 2,271 2,468
Notes payable on demand in U.S. Dollars to a German bank,
issued under revolving credit agreements, interest payable
quarterly 3,344 2,000
Other 210 75
---------------------------------------
$ 7,337 $ 5,683
=======================================
Long-term debt:
11-3/8% Senior Subordinated Notes due 2006 $ 90,000 $ 90,000
Notes payable in Deutsche Marks to a German bank 10,280 10,371
Notes payable in Chinese Renminbi to Chinese banks 1,939 1,777
Capitalized lease obligations in U.S. dollars to a U.S. bank 923 950
Promissory note payable in Deutsche Marks to a former
shareholder of the Rolf Meyer Company 1,483 1,434
Other 29 -
----------------------------------------
104,654 104,532
Less current portion 2,021 2,218
========================================
$ 102,63 $ 102,314
========================================
</TABLE>
8
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
4. Notes Payable and Long-Term Debt (continued)
At June 30, 1998, the Company had revolving credit facilities of $20,000
($16,656 unused), DM 7,500 (all used) and DM 8,500 (DM 3,258 unused). A facility
fee of 0.25% per annum is charged on the unused portion of the U.S.
dollar facility.
5. Income Taxes
IKS Corporation, of which the Company is a wholly-owned subsidiary, files a
consolidated Federal income tax return which includes the Company. The Company's
provision for income taxes includes U.S. Federal, state, and local income taxes
as well as non-U.S. income taxes in certain jurisdictions. The current and
deferred tax expense and benefit for the Company are recorded as if it filed on
a stand-alone basis. All participants in the consolidated income tax return are
separately liable for the full amount of the taxes, including penalties and
interest, if any, which may be assessed against the consolidated group. The
current provision for United States income taxes is recorded to the intercompany
account with IKS Corporation.
6. Inventories
June 30, Dec. 31,
1998 1997
--------------------------------
Finished goods $ 19,056 $ 18,118
Work in process 4,475 4,036
Raw materials and supplies 6,784 7,181
--------------------------------
$ 30,319 $ 29,335
================================
7. Organization
The Company's operations are principally in North America representing 73% of
net sales for the six months ended June 30, 1998.
9
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited)
(in thousands)
7. Organization (continued)
The following table summarizes the Company's North American operations and other
international operations.
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
North American Operations
Net sales - Customers $ 55,258 $ 48,952
Interarea transfers 46 59
----------------- -------------------
Total net sales 55,304 49,011
Operating income 5,958 6,197
Other International Operations
Net sales - Customers $ 20,779 $ 18,952
Interarea transfers 3,846 3,668
----------------- -------------------
Total net sales 24,625 22,620
Operating income 2,406 1,576
Eliminations
Net sales $ (3,892) $ (3,727)
Operating income - -
Consolidated
Net sales $ 76,037 $ 67,904
Operating income 8,364 7,773
</TABLE>
10
<PAGE>
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward looking statements. Certain matters discussed in
this filing could be characterized as forward looking statements, such as
statements relating to plans for future expansion, other capital spending,
financing sources and effects of regulation and competition. Such forward
looking statements involve important risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward looking
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included in the Company's
Form 10-K as of and for each of the three years in the period ended December 31,
1997.
General
The Company is a global leader in the manufacturing, servicing and
marketing of industrial and commercial machine knives and saws. Together with
its predecessor, the Company has been manufacturing knives and saws for nearly
100 years, beginning in Europe and expanding its presence to the United States
in the 1960s. The Company operates on an international basis with facilities in
North America, Europe, Asia and Latin America and products sold in over 75
countries. The Company offers a broad range of products, used for various
applications in numerous markets.
Presence outside the U.S.
The Company's North American operations account for 73% of its net
sales and 77% of its operating income. Its other international operations
account for the remainder and are located primarily in Europe, 22% of first half
sales, and to a lesser extent in Asia.
The Company's operating results are subject to fluctuations in foreign
currency exchange rates as well as the currency translation of its foreign
operations into U.S. dollars. The Company manufactures products in the U.S.,
Germany, Canada and China and exports products to more than 75 countries. The
Company's foreign sales, the majority of which occur in European countries, are
subject to exchange rate volatility. In addition, the Company consolidates
German, Canadian and Asian operations and changes in exchange rates relative to
the U.S. dollar have impacted financial results. As a result, a decline in the
value of the dollar relative to these other currencies can have a favorable
effect on the profitability of the Company and an increase in the value of the
dollar relative to these other currencies can have a negative effect on the
profitability of the Company. Comparing exchange rates for the first six months
of 1998 to the first six months of 1997, the weaker German Mark, Canadian Dollar
and Indonesian Rupiah had the translation effect of decreasing first six months
1998 sales by $1.7 million with minimal effect on net earnings. In addition, in
the first six months of 1998 there was a decrease in shareholder's equity from
December 31, 1997 due to a $.7 million change in foreign currency translation
adjustment. The Company has not historically hedged its foreign currency risk.
Subsequent to December 31, 1997, the Indonesian Rupiah has
significantly declined in value relative to the U.S. dollar. At December 31,
1997, the exchange rate was 5,444 Rupiah to one U.S. dollar. At June 30, 1998
the rate had increased to 14,692 Rupiah to one U.S. dollar, but at August 10,
1998 the rate had decreased to 12,975 Rupiah to one U.S. dollar. In 1998, the
Company has limited its currency exposure by billing the majority of its sales
to Indonesian customers in U.S. dollars.
Results of Operations
As used in the following discussion of the Company's results of
operations, (i) the term "gross profit" means the dollar difference between the
Company's net sales and cost of sales and (ii) the term "gross margin" means the
Company's gross profit divided by its net sales.
11
<PAGE>
Second quarter and six months ended June 30, 1998 compared to second
quarter and six months ended June 30, 1997
Net Sales: Net sales remained constant at $37.3 million and increased
12.0% to $76.0 million for the second quarter and first half of 1998,
respectively from $37.4 and $67.9 million for the same periods in 1997. Softness
in the wood industry caused by wet weather, pricing pressures from Asian and
domestic competitors and a reduction in production capacity resulting from
decreased demand in the Asian, western U.S. and Canadian markets contributed to
the flat second quarter sales and partially offset the first half 1998 increase
in net sales attributable to the second quarter 1997 acquisitions. The Company
experienced sales improvements in its North American operations of 1.0% and
12.9% to $27.0 million and $55.2 million for the second quarter and first half
of 1998, respectively, from $26.9 and $49.0 million for the same periods in
1997. In its other operations, the Company experienced a sales decline of 1.9%
and improvement of 9.6% to $10.3 million and $20.8 million for the second
quarter and first half of 1998, respectively, from $10.5 and $18.9 million for
the same periods in 1997. The effects of a weaker German Mark, Canadian Dollar
and Indonesian Rupiah in the first half of 1998 compared to the same period in
1997 resulted in a translation effect that reduced second quarter and first six
months 1998 sales by $.5 and $1.7 million, respectively.
Gross Profit: Gross profit increased 5.2% and 12.4% to $11.7 and $23.3
million for the second quarter and first half of 1998 up from $11.1 and $20.7
million for the same periods in 1997, primarily attributable to the 1997
acquisitions offset by softness in the wood industry caused by wet weather,
pricing pressures from Asian and domestic competitors and a reduction in
production capacity resulting from decreased demand in the Asian, western U.S.
and Canadian markets. Gross margin increased to 31.2% and 30.6% for the second
quarter and first half of 1998 compared to 29.6% and 30.5% in the second quarter
and first half of 1997. The Company experienced gross profit improvements in its
North American operations of 1.7% and 14.6% to $8.9 and $17.6 million for the
second quarter and first half of 1998, respectively, from $8.0 and $15.3 million
for the same periods in 1997, primarily attributable to the factors noted above.
Gross profit for the Company's other operations decreased 2.9% and increased
6.0% to $2.8 and $5.7 million for the second quarter and first half of 1998,
respectively, from $3.1 and $5.4 million for the same periods in 1997.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $7.5 and $14.9 million for the second quarter and
first half of 1998 as compared to $7.1 and $12.9 million for the same periods in
1997 and increased as a percentage of sales to 20.0% and 19.6% from 18.9% and
19.0% of sales for the respective periods.
Interest Expense, net: Net interest expense remained constant at $3.0
million for the second quarter of 1998 compared to the same period in 1997, and
increased to $6.0 million for the first half of 1998 from $5.8 million for the
first half of 1997.
Income Taxes: The Company's effective tax rate remained relatively
constant at 44.5% for the second quarter and first half of 1998 compared to
44.5% and 45.1% for the same periods in 1997.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working
capital needs, to meet required debt and interest payments, and to complete
planned maintenance and expansion expenditures. The Company anticipates that its
operating cash flow, together with available borrowings of $16.7 million and DM
3,258 under existing credit facilities, will be sufficient to meet its capital
requirements. As of June 30, 1998, the Company's total debt and shareholder's
deficit was $112.0 million and $19.2 million, respectively.
12
<PAGE>
Net cash flow provided by operations aggregated $3.6 million for the
first half of 1998 compared to net cash flow used in operations of $1.8 million
for the same period in 1997. The increase was primarily attributable to a $4.8
million decrease in working capital needs.
Cash used in investing activities for the first half of 1998 was $5.1
million compared to $15.6 million for the same period in 1997. The decreased use
of cash is primarily due to the acquisitions in the second quarter of 1997.
Cash provided by financing activities for the first half of 1998 was
$1.6 million compared to $8.9 million provided for the same period in 1997. The
decrease in cash provided compared to the prior year is primarily due to
increased borrowings in 1997 to fund the second quarter 1997 acquisitions.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in legal proceedings arising
in the normal course of business. The Company believes there is no outstanding
litigation which could have a material impact on its financial position or
results of operations.
Item 2. Change in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL KNIFE & SAW, INC.
By: /s/ John E. Halloran
---------------------------------------------
John E. Halloran
President and Chief Executive Officer
By: /s/ William M. Schult
---------------------------------------------
William M. Schult
Vice President-Finance, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
August 12, 1998
15
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<S>
<C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,415,000
<SECURITIES> 0
<RECEIVABLES> 25,893,000
<ALLOWANCES> 1,446,000
<INVENTORY> 30,319,000
<CURRENT-ASSETS> 61,156,000
<PP&E> 70,136,000
<DEPRECIATION> (30,863,000)
<TOTAL-ASSETS> 119,427,000
<CURRENT-LIABILITIES> 29,090,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> (19,045,000)
<TOTAL-LIABILITY-AND-EQUITY> 119,427,000
<SALES> 76,037,000
<TOTAL-REVENUES> 76,037,000
<CGS> 52,781,000
<TOTAL-COSTS> 52,781,000
<OTHER-EXPENSES> 14,892,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,011,000
<INCOME-PRETAX> 2,370,000
<INCOME-TAX> 1,055,000
<INCOME-CONTINUING> 1,315,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,315,000
<EPS-PRIMARY> 2.73
<EPS-DILUTED> 2.73
</TABLE>
