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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 July 4, 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 333-49429-01
PEI Holding, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 943142033
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2100 Commonwealth Blvd., Ste. 300, Ann Arbor, Michigan 48105
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(Address of principal executive offices) (Zip Code)
(734) 913-6600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, address, and former fiscal year,
if changes since last report)
Indicate 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
preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of common shares
Class: outstanding as of August 4, 1998
Common Stock 1,993,000
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FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I: Financial Information
<S> <C>
Item 1: Condensed Consolidated Balance Sheets 3
at July 4, 1998 (unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations 4
Three months and six months ended July 4, 1998 (unaudited)
and July 5, 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows 5
Six months ended July 4, 1998 (unaudited) and
July 5, 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion & Analysis of
Financial Condition and Results of Operations 11
Part II: Other Information 16
Signatures 17
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PEI HOLDING, INC. AND SUBSIDIARIES
(INCLUDING PRESTOLITE ELECTRIC INCORPORATED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
July 4, December 31,
1998 1997
------------------ ------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 7,819 $ 455
Accounts receivable, net of allowances 45,644 26,326
Inventories, net 49,978 24,687
Deferred tax asset, net 4,657 3,226
Prepaid and other current assets 4,256 965
------------------ ------------------
Total current assets 112,354 55,659
Property, plant and equipment, net 60,778 26,179
Investments 4,597 2,597
Other long term assets 7,155 1,416
Intangible assets 1,717 2,834
================== ==================
Total assets $ 186,601 $ 88,685
================== ==================
Liabilities
Current liabilities
Revolving credit $ 1,611 $ 3,052
Current portion of long-term debt and
capital lease obligations 1,719 1,144
Accounts payable 25,807 12,042
Accrued liabilities 36,604 12,029
------------------ ------------------
Total current liabilities 65,741 28,267
Senior notes 125,000 -
Other long term debt, net of current maturities 1,009 29,467
Subordinated debt, net - 9,267
Other non-current liabilities 3,478 1,034
Deferred tax liability, net 1,707 1,707
------------------ ------------------
Total liabilities 196,935 69,742
Minority interest in Argentina subsidiary 38 -
Stockholders' equity
Common stock, par value $.01, 5,000,000 shares authorized,
3,303,000 shares issued and outstanding at July 4, 1998
and December 31, 1997, respectively 2 2
Paid-in capital 16,623 16,623
Stock warrants - 3,239
Retained earnings (accumulated deficit) (1,441) (634)
Notes receivable, employees' stock purchase (559) (346)
Foreign currency translation adjustment (548) 379
Treasury stock, 1,310,000 and 32,000 shares on July 4, 1998
and December 31, 1997, respectively (24,449) (320)
------------------ ------------------
Total stockholders' equity (10,372) 18,943
------------------ ------------------
Total liabilities and stockholders' equity $ 186,601 $ 88,685
================== ==================
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
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PEI HOLDING, INC. AND SUBSIDIARIES
(INCLUDING PRESTOLITE ELECTRIC INCORPORATED)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------- ------------------------
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 72,848 $ 43,216 $ 147,373 $ 87,518
Cost of goods sold 57,888 34,944 117,919 70,290
----------- ----------- ----------- -----------
Gross profit 14,960 8,272 29,454 17,228
Selling, general and administrative 9,832 5,832 19,638 11,461
Costs associated with option repurchase -- -- 2,101 --
Restructuring charge -- -- 980 --
----------- ----------- ----------- -----------
Operating income 5,128 2,440 6,735 5,767
Other expense (income) (436) (41) (522) (21)
Interest expense 3,245 1,403 6,526 2,836
----------- ----------- ----------- -----------
Income from continuing operations before
extraordinary loss and income taxes 2,319 1,078 731 2,952
Provision for income taxes 869 474 263 1,220
----------- ----------- ----------- -----------
Income from continuing operations 1,450 604 468 1,732
Income from discontinued operation, net -- 73 -- 98
Extraordinary loss, net of taxes of $716 -- -- 1,275 --
----------- ----------- ----------- -----------
Net income (loss) 1,450 677 (807) 1,830
Other comprehensive income (expense):
Foreign currency translation adjustment (968) 189 (927) (36)
----------- ----------- ----------- -----------
Comprehensive income (expense) $ 482 $ 866 $ (1,734) $ 1,794
=========== =========== =========== ===========
Basic earnings per common share
Income from continuing operations $ 0.73 $ 0.18 $ 0.22 $ 0.50
Discontinued operations -- 0.02 -- 0.03
Extraordinary item -- -- (0.59) --
----------- ----------- ----------- -----------
Net income (loss) $ 0.73 $ 0.20 $ (0.37) $ 0.53
=========== =========== =========== ===========
Diluted earnings per common share
Income from continuing operations $ 0.73 $ 0.17 $ 0.22 $ 0.47
Discontinued operations -- 0.02 -- 0.03
Extraordinary item -- -- (0.59) --
----------- ----------- ----------- -----------
Net income (loss) $ 0.73 $ 0.19 $ (0.37) $ 0.50
=========== =========== =========== ===========
Basic shares outstanding 1,993,000 3,450,740 2,160,774 3,450,740
Dilutive shares outstanding 2,103,860 3,655,180 2,284,495 3,655,180
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
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PEI HOLDING, INC. AND SUBSIDIARIES
(INCLUDING PRESTOLITE ELECTRIC INCORPORATED)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months ended
------------------------
July 4, July 5,
1998 1997
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (807) $ 1,830
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cash provided by (used in) discontinued operations 1,548 (2,553)
Loss (gain) on sale of property, plant, and equipment (122) 14
Compensation expense related to options 2,101 -
Depreciation and amortization 5,877 2,741
Deferred taxes (1,431) 624
Loss on debt extinguishment 1,991 -
Changes in working capital items: 3,707 (4,396)
----------------- -----------------
Net cash provided by operating activities 12,864 (1,740)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,557) (2,155)
Proceeds from disposal of fixed assets 12 -
Investment in affiliates (1,500) -
Acquisition of Lucas businesses (48,209) -
----------------- -----------------
Net cash provided by investing activities (55,254) (2,155)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior notes 125,000 -
Debt repaid in acquisition of Lucas businesses 3,227 -
Net increase (decrease) in revolving credit (1,377) 9,026
Redemption of subordinated notes (10,000) -
Payments on acquisition payable to Hobart - (1,289)
Payments on long term debt (31,146) (3,565)
Purchase of stock and warrants (27,692) -
Payments on deferred compensation - (35)
Payments of capital lease obligations and other obligations (33) (115)
Purchase of treasury stock and options (2,203) -
Debt refinancing costs (5,785) -
----------------- -----------------
Net cash from financing activities 49,991 4,022
Effect of exchange rate changes on cash (237) (3)
----------------- -----------------
Net increase (decrease) in cash 7,364 124
Cash - beginning of period 455 1,203
================= =================
Cash - end of period $ 7,819 $ 1,327
================= =================
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
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PEI HOLDING, INC. AND SUBSIDIARIES
(Including PRESTOLITE ELECTRIC INCORPORATED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL INFORMATION
PEI Holding, Inc. conducts all of its operations through its wholly-owned
principal subsidiary, Prestolite Electric Incorporated. There are no material
differences between the financial statements of PEI Holding, Inc. and Prestolite
Electric Incorporated (collectively, "the Company" or "Prestolite").
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company in accordance with Rule 10-01 of Regulation S-X and
have been prepared on a consistent basis with the Company's audited financial
statements for the year ended December 31, 1997. These statements reflect all
adjustments, consisting only of items of a normal recurring nature, which are,
in the opinion of management, necessary for the fair statement of the
consolidated financial condition and consolidated results of operations for the
interim period presented.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
and the related notes should be read in conjunction with the Company's audited
financial statements and notes thereto and other material included in the
Prospectus dated June 26, 1998 (the "Prospectus"). The year-end 1997 condensed
balance sheet data was derived from the Company's audited financial statements,
but does not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. The results of
operations for the six- and three-month periods ended July 4, 1998 are not
necessarily indicative of the operating results that may be expected for the
full year or any other interim period.
The equity securities of PEI Holding, Inc. are held by Genstar Capital
Corporation and Company management.
NOTE 2: ACQUISITION, SHARE REPURCHASE, AND REFINANCING
On January 22, 1998 Prestolite acquired three business units from a subsidiary
of Lucas Varity, plc. ("the Lucas Acquisition") for approximately $41.3 million
in cash, the assumption of approximately $7.1 million in debt and certain future
payments, some of which are contingent. On the same day, Prestolite Electric
Incorporated completed the offering of $125 million of 9.625% Senior Notes due
2008 (the "Notes"). The proceeds of the Notes were used to fund the Lucas
Acquisition, to repay approximately $42 million of outstanding indebtedness, and
to pay approximately $29.7 million for the repurchase of PEI Holding, Inc.
common stock plus warrants and options to purchase common stock. These
transactions are more fully described in the Prospectus.
6
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In conjunction with these transactions, the Company recorded expense of
$2,101,000 for the repurchase of options and an extraordinary item of $1,275,000
net-of-tax benefit in the first quarter of 1998. The extraordinary item
covered, on a pre-tax basis, $728,000 of fees associated with the prepayment of
previously-existing debt; $335,000 for the write-off of unamortized financing
costs; $733,000 to write off the unamortized discount on subordinated debt; and
$195,000 related to the repurchase of warrants. As described in Note 6, the
Company recorded a $980,000 restructuring charge in the first quarter related to
costs anticipated to be incurred at the Company's existing facilities as a
result of the Lucas Acquisition.
In the second quarter, the Company finalized the purchase price adjustments with
Lucas Varity, plc in connection with the Lucas Acquisition. The adjustment
resulted in a reduction in the purchase price of $1.9 million, with $0.5 million
of this adjustment applied to the amount payable in August 1998 upon the
exercise of an option to purchase substantially all the remaining shares of the
acquired Lucas business unit in Argentina. Professional fees and associated
costs incurred in connection with the Lucas Acquisition in the first half of
1998 were $2.1 million.
Results for the first half of 1998 are recorded as though the Lucas Acquisition
was completed on January 1, 1998, and an imputed interest cost of $213,000 was
charged to interest expense for the period from January 1 to January 22. The
Lucas Acquisition has been accounted for as a purchase and a preliminary
allocation of the purchase price has been made in accordance with Accounting
Principals Board Opinion 16. The purchase price allocation will be completed by
the end of the year and will likely change from that included in the
accompanying statements.
Pro forma unaudited consolidated operating results for the Company for the
second quarter and first six months of 1997 as though the Lucas Acquisition had
been consummated on January 1, 1997 are summarized below. Pro forma adjustments
include only the addition of the results of the acquired business units and do
not reflect anticipated efficiencies in operations. These results are not
necessarily indicative of future results of operations nor are they indicative
of the results of historical operations had the acquisitions been consummated as
of the assumed dates. These results also reflect the 20-for-one stock split
effective March 31, 1998.
<TABLE>
<CAPTION>
Second Quarter First Six Months
--------------------- -----------------
<S> <C> <C>
Net Sales, in thousands $ 78,734 $ 153,255
Net Income, in thousands $ 540 $ 106
Earnings (Loss) per Share
Basic $0.16 $0.03
Diluted $0.15 $0.03
</TABLE>
NOTE 3: INVENTORIES
Inventories are summarized as follows (in thousands of dollars):
7
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<TABLE>
<CAPTION>
As of As of
July 4, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Raw Material $ 14,533 $ 9,027
Work in Process 16,397 6,096
Finished Goods 19,048 9,564
---------------- ---------------
Total $ 49,978 $ 24,687
================ ===============
</TABLE>
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
As of As of
July 4, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Land & Buildings $ 22,544 $ 13,611
Machinery & Equipment 60,748 31,461
Construction in Progress 2,502 1,276
---------------- ---------------
Total, at Cost 85,794 46,348
Accumulated Depreciation (25,016) (20,169)
---------------- ---------------
Net $ 60,778 $ 26,179
================ ===============
</TABLE>
NOTE 5: DEBT
In connection with the Lucas Acquisition, share repurchase, and refinancing
discussed in Note 2, Prestolite Electric Incorporated issued $125 million of
9.625% Senior Notes due 2008 (the "Notes"). The Notes pay interest semi-
annually and mature on February 1, 2008 but may be redeemed earlier at the
Company's option under conditions specified in the indenture pursuant to which
the Notes were issued. The notes are senior unsecured obligations of Prestolite
Electric Incorporated, are fully and unconditionally guaranteed on a senior
basis by PEI Holding, Inc., and are subordinated to secured credit facilities
(to the extent of the value of the assets securing such indebtedness) of
Prestolite Electric Incorporated, including its existing credit facility
referred to below, and are structurally subordinated to indebtedness of any
subsidiary of Prestolite Electric Incorporated, including indebtedness of its
United Kingdom subsidiary. The Notes are more fully described in the
Prospectus.
On January 22, 1998 Prestolite Electric Incorporated entered into a new
financing agreement with the U.S. bank that had previously been Prestolite
Electric Incorporated's U.S. senior debt provider for up to $23 million of
borrowings at the bank's prime rate, secured by the U.S. receivables and
inventory of Prestolite Electric Incorporated. On January 28, the Company's
United Kingdom subsidiary entered into an interim borrowing agreement with an
affiliate of the U.K. bank that had previously been the Company's U.K. debt
provider. On April 21 that interim agreement was replaced with an agreement
providing for up to (Pounds)7 million (approximately $11.6 million based on
exchange rates of 1.657 $/Pound) of borrowings at the U.K. bank's base rate plus
1.75%,
8
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secured by the receivables of the United Kingdom subsidiary. In addition, the
Company's Argentina subsidiary has borrowing arrangements with several banks
secured by certain assets of the Company's Argentina subsidiary.
Debt is summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
As of As of
July 4, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
U.S. Bank Debt $ 1,488 $ 28,588
U.K. Bank Debt 169 3,785
Argentine Bank Debt 1,400 -
Senior Notes 125,000 -
Subordinated Debt - 10,000
Unamortized Discount on Subordinated Debt - (733)
Capital Lease Obligations 985 942
Other Debt 297 348
---------------- ----------------
Total 129,339 42,930
Current Maturities 3,330 4,196
---------------- ----------------
Long Term Debt $ 126,009 $ 38,734
================ ================
</TABLE>
NOTE 6: RESTRUCTURING
During 1997, the Company's board of directors approved a restructuring plan for
the Company's facility in Leyland, England, contingent upon completion of the
Lucas Acquisition. This plan was announced during the first quarter of 1998 and
includes moving production of certain products from the Leyland facility to a
facility in the United Kingdom acquired as part of the Lucas Acquisition. A
restructuring charge of $980,000 for employee severance costs was accrued and
charged to operations during the first quarter of 1998. During the first half
of 1998, the Company charged $353,000 against this accrual. The entire amount
is expected to be spent by the end of 1998.
As of the date of the Lucas Acquisition, management had begun to assess and
formulate restructuring plans related to operations acquired in the Lucas
Acquisition. These plans will include employee reductions and may include a
plant closure. Not all portions of the plan have been completed and approved as
of July 4, 1998. An accrual of $8,220,000 was established as a purchase
accounting adjustment related to these restructuring actions. Severance
payments of $2.3 million were made to employees and charged to this accrual
during the first half of 1998. Completion and approval of the restructuring
plans for these operations are expected by the end of 1998. The accrual will be
adjusted accordingly as a purchase price adjustment.
NOTE 7: INVESTMENTS
On June 24, 1998, the Company agreed to license certain alternator technology
from Ecoair Corp. ("Ecoair"). In addition, the Company purchased 66,667 shares
of Ecoair common stock for $1 million, and agreed to purchase an additional
33,333 shares for $500,000 on each of December 24, 1998 and June 24, 1999.
Prior to the Prestolite purchase, Ecoair had 1,347,646 shares and
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options to purchase 500,758 shares outstanding. The Company also received an
option to increase its ownership of Ecoair to 20% at varying prices through
June, 2000.
On July 2, 1998, the Company agreed to form a joint venture with Daewoo Heavy
Industries Ltd. ("Daewoo"). The joint venture, to be owned 50% by Prestolite
and 50% by Daewoo, is expected to produce material handling motors at a plant in
Inchon, South Korea. Daewoo is required to contribute to the joint venture
$500,000 of cash plus certain equipment currently used by Daewoo to produce
material handling motors. Prestolite is required to contribute $500,000 of cash
and to provide certain technology to the joint venture. In addition, Prestolite
and Daewoo have each agreed to provide loans of up to $700,000 to the joint
venture or to guarantee loans of that amount made by the joint venture if such
borrowings are deemed necessary by the joint venture. Daewoo has agreed to
purchase from the joint venture substantially all of the material handling
motors required by its Industrial Vehicle division, located in South Korea.
10
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PEI Holding, Inc., through its operating subsidiary Prestolite Electric
Incorporated, manufactures alternators, starter motors, direct current motors,
battery chargers, and switching devices. These are supplied under the
Prestolite, Leece-Neville, Hobart, Lucas, and Butec brand names for original
equipment and aftermarket application on a variety of vehicles and industrial
equipment. "Hobart" is used under license from a subsidiary of Illinois Tool
Works, Inc. "Lucas" is used under license from a subsidiary of LucasVarity plc.
Most of the Company's products are component parts used on diesel engines,
automobiles and electric vehicles. These components are sold to both aftermarket
and original equipment ("OEM") customers. The Company sells its products to a
variety of markets, in terms of both end-use and geography.
In January 1998, Prestolite acquired three businesses from a subsidiary of
LucasVarity plc. These businesses operate in England, South Africa, and
Argentina (collectively, the "Lucas Acquisition"). As summarized in Note 2 to
the financial statements and described more fully in the Prospectus, these
businesses were purchased for approximately $41.3 million in cash, the
assumption of $7.1 million in debt, and certain future obligations. Those
future obligations include an anticipated payment of $766,000 in August, 1998;
payments of approximately $2 million during 1998 for inventory and transition
assistance in the United Kingdom; and up to $19 million contingent on certain
events in Argentina. Including the sales of the acquired businesses, more than
half of the Company's sales are outside the United States.
The acquisition was financed from the sale of $125 million of 9.625% senior
notes due 2008, issued under Rule 144A of the Securities Act of 1933, as
amended. Proceeds from the 144A offering were also used to repay existing debt
in the United States and United Kingdom, to repurchase all of the warrants
issued to holders of the Company's subordinated debt, to repurchase 40% of the
common stock held by Genstar Capital Corporation, to repurchase 8.5% of the
common stock and 40% of the options held by management. The total cost
associated with the repurchase of these securities was approximately $29.7
million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 4, 1998 COMPARED TO THREE MONTHS ENDED JULY 5, 1997.
Net sales for the three months ended July 4, 1998 were $72.8 million, an
increase of $29.6 million or 68.6% from the $43.2 million recorded in the second
quarter of 1997. The Lucas Acquisition was responsible for an increase in net
sales of $30.4 million, more than the total net sales increase. Compared to pro
forma results including the Lucas Acquisition for the second quarter of 1997,
net sales declined by $5.9 million, approximately 7.5%. Sales of military
alternators in North America declined by $1.9 million; sales in the U.K.
declined by $2.9 million; and sales in Argentina declined by $2.4 million from
the second quarter of 1997. Sales in most other product and geographic markets
were about equal to or slightly above 1997 second quarter levels.
11
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Gross profit was $15.0 million in the second quarter of 1998 or 20.5% of net
sales. This compares to $8.3 million or 19.1% of net sales recorded for the
second quarter of 1997. On a pro forma basis to include the Lucas Acquisition,
gross profit in the second quarter of 1997 was $14.5 million or 18.5% of net
sales. Lower material costs, improved labor productivity, and a shift in sales
toward higher margin products all contributed to the improvement from the second
quarter 1997 gross profit percentage, both as reported and as pro forma to
include the Lucas Acquisition.
Selling, general, and administrative expense was $9.8 million or 13.5% of net
sales for the second quarter of 1998, an increase of 69% from the $5.8 million
or 13.5% of net sales recorded in the second quarter of 1997, but a decrease of
$523,000 from $10.4 million or 13.2% of net sales in the second quarter of 1997
on a pro forma basis to include the Lucas Acquisition. Reductions in selling,
general, and administrative expenses in the second quarter of 1998 as compared
with the pro forma results reflect the initial benefits of the integration of
the Lucas Acquisition.
As the result of the factors discussed above, operating income in the second
quarter of 1998 was $5.1 million, or 7.0% of net sales, versus $2.4 million, or
6.0% of net sales, recorded in the second quarter of 1997 and $4.0 million, or
5.1% of net sales, in the second quarter of 1997 on a pro forma basis to include
the Lucas Acquisition. Other income was $436,000 in the second quarter of 1998
versus $41,000 recorded in the second quarter of 1997. For the second quarter of
1998 other income consisted primarily of interest income, a workers compensation
refund, and the proceeds from the sale of certain emissions credits, partly
offset by loss on the sale of fixed assets and pension expense for inactive
defined benefit pension plans. For the pro forma second quarter of 1997, other
income consisted primarily of interest income.
Interest expense was $3.2 million in the second quarter of 1998 compared to $1.4
million recorded in the second quarter of 1997. The increase in interest
expense resulted from the increase in debt caused by the offering of $125.0
million of senior notes in January 1998, the proceeds of which were used to
finance the Lucas Acquisition and the repurchase of shares, options, and
warrants in the first quarter of 1998. Interest expense for the second quarter
of 1997, pro forma as though the issuance of the senior notes and the use of
proceeds as described above had occurred at the beginning of 1997, was also
$3.2 million.
The provision for income taxes was $869,000 for the second quarter of 1998,
37.4% of income from continuing operations before taxes and the extraordinary
item. This compares to $474,000 of income taxes recorded in the second quarter
of 1997, 44% of income from continuing operations before the extraordinary item.
The recorded 1997 tax rate was higher because of the fixed component of taxes
and certain U.S. state taxes. On a pro forma basis, the provision for income
taxes was $467,000 or 50% of income from continuing operations before taxes and
the extraordinary item. The pro forma provision for income taxes does not
include any tax benefit related to the Argentina loss of that period.
SIX MONTHS ENDED JULY 4, 1998 COMPARED TO SIX MONTHS ENDED JULY 5, 1997
Net sales for the six months ended July 4, 1998 were $147.4 million, an increase
of $59.9 million or 68.4% from the $87.5 million recorded in the first half of
1997. The Lucas Acquisition was responsible for an increase in net sales of
approximately $63 million, more than the total net sales increase. Compared to
pro forma results including the Lucas Acquisition for the first half of 1997,
net
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sales declined by $5.9 million, approximately 3.8%. Sales of military
alternators in North America declined by $4.0 million; sales in the United
Kingdom declined by $1.9 million; and sales in Argentina declined by $1.8
million from the first half of 1997. These declines were partly offset by a $1.3
million increase in original equipment commercial alternator sales and a $1.0
million increase in battery charger sales, both in North America.
Gross profit was $29.5 million in the first half of 1998 or 20.0% of net sales.
This compares to $17.2 million or 19.7% of net sales recorded for the first half
of 1997. On a pro forma basis to include the Lucas Acquisition, gross profit in
the first six months of 1997 was $28.7 million or 18.7% of net sales. Lower
material costs, improved labor productivity, and a shift in sales toward higher
margin products all contributed to the improvement from the first half of 1997
gross profit percentage both as reported and as pro forma to include the Lucas
Acquisition.
Selling, general, and administrative expense was $19.6 million or 13.3% of net
sales for the first half of 1998, an increase of 71.2% from the $11.5 million or
13.1% of net sales recorded in the first half of 1997, but a decrease of
$1,516,000 from $21.2 million or 13.8% of net sales in the first half of 1997
on a pro forma basis to include the Lucas Acquisition. Reductions in selling,
general, and administrative expenses in the first half of 1998 as compared with
the pro forma results reflect the initial benefits of the integration of the
Lucas Acquisition.
As discussed in notes 2 and 6 to the condensed consolidated financial
statements, the Company recorded a $2.1 million charge in the first quarter of
1998 to record the repurchase of 40% of the stock options outstanding. The
Company also recorded a charge of $980,000 to cover restructuring activities at
the existing Prestolite facility in Leyland, England. This charge relates to
severance costs to be paid in conjunction with the transfer of certain
activities from the existing Prestolite facility in Leyland, England, to a
facility acquired as part of the Lucas Acquisition. The Leyland facility will
remain in operation with employment levels lower than those that previously
existed; the severance costs are expected to be paid by the end of 1998. Pro
forma results for 1997 include redundancy costs of $455,000 incurred by the
former Lucas operations in England and Argentina.
As the result of the factors discussed above, operating income in the first half
of 1998 was $6.7 million, or 4.6% of net sales, versus $5.8 million, or 6.6% of
net sales, recorded in the first half of 1997 and $7.0 million, or 4.6% of net
sales, in the first half of 1997 on a pro forma basis to include the Lucas
Acquisition. Other income was $522,000 in the first half of 1998 versus $21,000
recorded in the first half of 1997. For the first half of 1998 other income
consisted primarily of interest income, a workers compensation refund, and the
proceeds from the sale of certain emissions credits, partly offset by loss on
the sale of fixed assets and pension expense for inactive defined benefit
pension plans. For the pro forma first half of 1997, other income consisted
primarily of interest income.
Interest expense was $6.5 million in the first half of 1998 compared to $2.8
million recorded in the first half of 1997. The increase in interest expense
resulted from the increase in debt caused by the offering of $125.0 million of
senior notes in January 1998, the proceeds of which were used to finance the
Lucas Acquisition and the repurchase of shares, options, and warrants in the
first quarter of 1998. Interest expense for the first half of 1997, pro forma
as though the issuance of the senior notes and the use of proceeds as described
above had occurred at the beginning of 1997, was $6.4 million.
13
<PAGE>
The net provision for income taxes was $263,000 for the first half of 1998,
36.0% of income from continuing operations before taxes and the extraordinary
item. This compares to $1.2 million of income taxes recorded in the first half
of 1997, 41.4% of income from continuing operations before taxes and the
extraordinary item. The recorded 1997 tax rate was higher because of the fixed
component of taxes and certain U.S. state taxes. On a pro forma basis, the
provision for income taxes was $880,000 or 99% of income from continuing
operations before taxes and the extraordinary item. The pro forma provision for
income taxes does not include any tax benefit related to the Argentina loss of
that period.
In conjunction with the refinancing and repurchase of shares, options, and
warrants, Prestolite recorded an extraordinary item of $1.3 million net-of-tax
in the first quarter of 1998. On a pre-tax basis this charge covered $728,000
in debt prepayment fees, $335,000 for the write-off of unamortized financing
costs, $733,000 to write-off the unamortized discount on subordinated debt, and
$195,000 related to the repurchase of the warrants.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities during the first half of 1998 was $12.8
million (including $2.7 million spent on redundancy costs during the period and
charged to the reserve established in connection with the Lucas Acquisition).
For the second quarter of 1998, capital spending totaled $2.9 million, as
compared with total capital spending of $2.5 million in the second quarter of
1997. Capital spending at the Company's North American locations was $2.3
million in the second quarter of 1998 as compared to $1.2 million in the second
quarter of 1997, an increase of $1.0 million. Capital spending at the ongoing
Prestolite United Kingdom facilities was $0.3 million in the second quarter of
1998, an increase of $0.1 million from the $0.2 million spent at those locations
in 1997. Capital spending at the locations acquired during the Lucas Acquisition
was $0.3 million for the second quarter of 1998, compared to $1.1 million for
the second quarter 1997. Capital spending in the first half of 1998 was $5.6
million, as compared with total capital spending of $4.5 million in the first
half of 1997. Capital spending at the ongoing Prestolite facilities was $4.2
million, an increase of $2.0 million from the $2.2 million spent in the first
half of 1997. Capital spending at the facilities acquired in the Lucas
Acquisition was $1.4 million in the first half of 1998, compared to $2.3
million for the first half of 1997. Capital expenditures for the remainder of
1998 are expected to be approximately $5.4 million. Planned capital expenditures
consist primarily of expenditures to reduce costs through automation, replace
existing equipment and enable the Company to manufacture new products, and
expenditures related to improving the Company's manufacturing infrastructure in
connection with realignment of certain manufacturing operations of the business
acquired in the Lucas Acquisition.
Debt, net of cash, increased from $42.4 million at December 31, 1997 to $121.5
million at July 4, 1998 (a decrease of $3.5 million from the April 4, 1998 level
of $125.0 million). That increase, partially offset by the positive cash flow
from operations of $12.8 million (net of $2.7 million spent for redundancy costs
during the first half of 1998 and charged to the reserve established in
connection with the Lucas Acquisition), was due to the issuance of 125.0 million
of senior notes on January 22, 1998 and the use of part of the proceeds of such
offering to effect the Lucas Acquisition, refinance existing indebtedness, and
repurchase securities from holders and management. As of July 4, 1998 additional
debt outstanding in Argentina and the United Kingdom was offset by cash balances
in South Africa and the United States. The Company had revolving credit
facilities with banks in the United States and United Kingdom under which
additional
14
<PAGE>
borrowings of $18.5 million and $8.3 million ((Pounds)5.0 million) were
available based on the July 4, 1998 levels of receivables (U.S. and U.K.) and
inventory (U.S. only) which are pledged to support that debt.
The Company's liquidity needs are expected to consist primarily of working
capital needs and scheduled payments of principal and interest on its
indebtedness, including the senior notes and any indebtedness that may be
outstanding from time to time under its U.S. and U.K. revolving credit
facilities. The Company's short-term liquidity needs, including a portion of the
one-time costs associated with the Lucas Acquisition and joint venture
agreements, are expected to be provided by: (i) existing cash balances; (ii)
operating cash flows; and (iii) borrowings under the Company's U.S. and U.K.
revolving credit facilities. The Company expects to fund its long term liquidity
needs from its operating cash flows, the issuance of debt and/or equity
securities and bank borrowings. The Company believes that cash flows from
operations, its existing cash balances and amounts available under its U.S. and
U.K. revolving credit facilities will be adequate to meet the Company's
anticipated requirements for working capital, planned capital expenditures,
investments, and principal and interest payments on debt for at least the next
twelve months. Estimates as to working capital needs and other expenditures may
be materially affected if the foregoing sources are not available or do not
otherwise provide sufficient funds to meet the Company's obligations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains, in addition to historical information, forward-looking
statements that involve certain risks and uncertainties. These risks include,
but are not limited to, risks associated with the uncertainty of future
financial results, acquisitions, additional financing requirements, development
of new products and services, the effect of competitive products or pricing, the
effect of economic conditions and other uncertainties detailed in the Company's
other filings with the Securities and Exchange Commission. The Company
undertakes no obligation to publicly release any revisions to any forward-
looking statements contained herein to reflect events or circumstances occurring
after the date of this Form 10-Q. The Company's actual results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company has not filed any reports on Form 8-K during
the quarterly period ended July 4, 1998.
16
<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.
Date: August 13, 1998 By: /s/ KENNETH C. CORNELIUS
--------------- ------------------------
Kenneth C. Cornelius
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
17
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR PEI
HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-04-1998
<CASH> 7,819
<SECURITIES> 0
<RECEIVABLES> 45,533
<ALLOWANCES> 2,889
<INVENTORY> 49,978
<CURRENT-ASSETS> 112,354
<PP&E> 85,794
<DEPRECIATION> 25,016
<TOTAL-ASSETS> 186,601
<CURRENT-LIABILITIES> 65,741
<BONDS> 126,009
0
0
<COMMON> 2
<OTHER-SE> 16,623
<TOTAL-LIABILITY-AND-EQUITY> 186,601
<SALES> 147,373
<TOTAL-REVENUES> 147,373
<CGS> 117,919
<TOTAL-COSTS> 117,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,526
<INCOME-PRETAX> 731
<INCOME-TAX> 263
<INCOME-CONTINUING> 468
<DISCONTINUED> 0
<EXTRAORDINARY> (1,275)
<CHANGES> 0
<NET-INCOME> (807)
<EPS-PRIMARY> (0.37)
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