<PAGE> 1
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 April 3, 1999
[ ] 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: N/A
Simonds Industries Inc.
(Exact name of registrant as specified in its charter)
- ------------------------------------ ------------------------------------------
Delaware 05-0484518
- ------------------------------------ ------------------------------------------
- ------------------------------------ ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
- ------------------------------------ ------------------------------------------
- ------------------------------------ ------------------------------------------
Incorporation or organization) Identification No.)
- ------------------------------------ ------------------------------------------
135 Intervale Road
Fitchburg, MA 01420
(Address of principal executive offices)
(978) 343-3731
(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 [ ]
Number of shares outstanding of the registrant's voting and non-voting common
stock, as of April 3, 1999: 68,435.10 and 7,897.45, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Simonds Industries Inc.
Form 10-Q Index
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - January 2, 1999 and
April 3, 1999 3
Consolidated Condensed Statements of Operations - three
months ended March 28, 1998 and April 3, 1999 4
Consolidated Statements of Cash Flows - three months
ended March 28, 1998 and April 3, 1999 5
Consolidated Statements of Shareholders' Equity - for
the three months ended March 28, 1998 and April 3, 1999 6
Notes to Consolidated Financial Statements -
April 3, 1999 7
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit No. 27 - Financial Data Schedule 19
2
<PAGE> 3
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share amounts)
ASSETS January 2, April 3,
1999 1999
--------------- ----------------
(unaudited)
CURRENTS ASSETS:
<S> <C> <C>
Cash $9,298 $5,720
Accounts receivable, net of reserves of $992 and $999 16,250 16,927
Inventories 27,226 29,221
Other current assets 3,208 2,669
Refundable income taxes 1,157 1,157
--------------- ----------------
Total current assets 57,139 55,694
PROPERTY, PLANT AND EQUIPMENT:
Land 2,332 2,313
Buildings and improvements 12,118 11,910
Machinery and equipment 27,009 27,503
Construction-in-progress 1,296 1,527
--------------- ----------------
42,755 43,253
Less- Accumulated depreciation 8,370 9,117
--------------- ----------------
Net property, plant and equipment 34,385 34,136
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,581 and $1,733 21,765 21,608
Deferred financing costs, net of accumulated amortization of $252 4,389 4,253
and $384
Other 561 720
--------------- ----------------
Total other assets 26,715 26,581
--------------- ----------------
Total assets $118,239 $116,411
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Overdraft facilities $149 $163
Revolving credit loans and notes payable 1,613 1,723
Current portion of long-term debt 35 29
Accounts payable 6,783 8,008
Accrued payroll and employee benefits 3,953 3,351
Accrued Interest 5,011 2,619
Other accrued liabilities 1,351 1,217
Currently deferred income taxes 2,448 2,449
--------------- ----------------
Total current liabilities 21,343 19,559
LONG-TERM DEBT, net of current portion (Note 5) 102,362 102,698
DEFERRED INCOME TAXES 4,939 4,930
OTHER NONCURRENT LIABILITIES (Note 4) 2,275 2,176
COMMITMENTS AND CONTINGENCIES (Note 6) - -
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized - 200,000 shares
Issued and outstanding - 76,333 1 1
Capital in excess of par value (24,405) (24,405)
Retained earnings 12,696 13,013
Accumulated other comprehensive loss (907) (1,496)
Treasury stock, at cost (65) (65)
--------------- ----------------
Total shareholders' equity (deficit) (12,680) (12,952)
--------------- ----------------
Total liabilities and shareholders' equity $118,239 $116,411
=============== ================
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC.
Consolidated Statements of Operations
(In Thousands)
---------------------------------------
Three Months
Ended Ended
March 28, April 3,
1998 1999
------------------ -------------------
(Unaudited)
<S> <C> <C>
Net sales $30,546 $31,419
Cost of goods sold 20,728 21,677
------------------ -------------------
Gross profit 9,818 9,742
Selling, general and administrative expense 5,732 6,409
------------------ -------------------
Operating income 4,086 3,333
Other expenses:
Interest expense 1,142 2,770
Other, net 68 (53)
------------------ -------------------
Income before income taxes 2,876 616
Provision for income taxes 1,216 299
------------------ -------------------
Net Income $1,660 $317
================== ===================
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED ENDED
MARCH 28, APRIL 3,
1998 1999
-----------------------------------
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $1,660 $317
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 978 1,207
Gain on asset sales (33) (9)
(Benefit) from deferred
income taxes (7) (8)
Changes in assets & liabilities, net
of acquisitions
Accounts receivable 320 (677)
Inventories (1,802) (1,995)
Other current and noncurrent assets 25 289
Accounts payable 1,264 1,225
Accrued expenses (908) (3,128)
Other non-current liabilities (29) (99)
-----------------------------------
Net cash provided by (used in) operating
activities 1,468 (2,878)
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 41 23
Purchases of equipment (983) (1,035)
-----------------------------------
Net cash (used in) investing activities (942) (1,012)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in overdrafts 36 14
Net proceeds under revolving credit 498 110
Proceeds from issuance of long-
term debt-net of issuance costs - 336
Principal payments of long-term debt (1,974) (6)
Other - (1)
-----------------------------------
Net cash provided by (used in ) financing (1,440) 453
activities
-----------------------------------
EFFECT OF EXCHANGE RATE ON CASH 72 (141)
-----------------------------------
NET (DECREASE) IN CASH (842) (3,578)
CASH AT BEGINNING OF PERIOD 1,255 9,298
-----------------------------------
CASH AT END OF PERIOD $413 $5,720
===================================
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 28,1998 AND APRIL 3,1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON COMMON IN RETAINED
EXCESS COMPREHENSIVE TREASURY SHAREHOLDERS' COMPREHENSIVE
OF PAR EARNINGS LOSS STOCK EQUITY INCOME
SHARES STOCK (DEFICIT) (LOSS)
---------- -------- --------- ----------------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 148,371 $1 $10,553 $11,859 ($798) $0 $21,615 -
27,1997
Net Income - - - 1,660 - - 1,660 $1,660
Foreign Currency
Translation Adjustment - - - - (39) - (39) (39)
========== ======== ========= ========= ============ ========= ============= =============
Balance at March 28,1998 148,371 $1 $10,553 $13,519 ($837) $0 $23,236 $1,621
========== ======== ========= ========= ============ ========= ============= =============
Balance at January 2,1999 76,333 $1 ($24,405) $12,696 ($907) ($65) ($12,680) -
Net Income - - - 317 - - 317 $317
Foreign Currency
Translation Adjustment - - - - (589) - (589) (589)
========== ======== ========= ========= ============ ========= ============= =============
Balance at April 3,1999 76,333 $1 ($24,405) $13,013 ($1,496) ($65) ($12,952) ($272)
========== ======== ========= ========= ============ ========= ============= =============
</TABLE>
6
<PAGE> 7
Notes to Consolidated Financial Statements
(in thousands except share and per share amounts)
(unaudited)
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements presented
herein have been prepared by Simonds Industries Inc. ("Simonds" or the
"Company") and, in the opinion of management, reflect all adjustments of a
normal recurring nature necessary for a fair presentation. Interim results are
not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of January 2, 1999 has been derived
from the consolidated financial statements that have been audited by the
Company's independent public accountants. The unaudited condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to those rules and regulations, but the Company believes that the
disclosures are adequate to make the information presented not misleading.
Operating results for the three months ended April 3, 1999 are not necessarily
indicative of the results that may be expected for the year ending January 1,
2000. For further information refer to the financial statements and footnotes
included in the Company's annual report Form 10-K for the year ended January 2,
1999.
2. Acquisitions
On May 8, 1998, the Company acquired 100% of the outstanding stock of W. Notting
Limited. The acquisition is accounted for as a purchase and the purchase price
has been allocated based on the fair market value of the underlying assets and
liabilities. The purchase allocation is preliminary and subject to adjustment.
However, management believes that any actual variations will not materially
impact the purchase price allocation. The consolidated financial statements
include the results of operations of W. Notting Limited subsequent to the date
of acquisition.
Inventories at January 2, 1999 and April 3, 1999 were as follows (in thousands).
January 2, April 3,
1999 1999
------------------ -----------------
Raw Materials $5,323 $6,233
Work in progress 7,341 7,668
Finished goods 14,562 15,320
------------------ -----------------
Total $27,226 $29,221
================== =================
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4. Debt
Debt consists of the following at January 2, 1999 and April 3, 1999 (in
thousands):
<TABLE>
<CAPTION>
January 2, April 3,
1999 1999
----------------- -----------------
<S> <C> <C>
Line of credit facility for German Subsidiary with First Union $2,362 $2,698
National Bank, up to approximately $3,300 interest payable
quarterly at FIBOR (3.0% at April 3,1999) plus 1.25%, terminating
on October 1, 2003.
Line of credit facilities for Notting with Banco Sabadell and 62 96
Banco Popular of Spain, bearing interest at rates from 6.35% to
10%, terminating on April 1, 2001 and May 17, 1999, respectively.
Three term loans payable by Notting, payable to National 390 411
Westminster Bank on various dates between June 7, 1999 and August
1, 2000, bearing interest at varying rates.
Notes payable to Notting shareholders, issued May 8, 1998, 1,196 1,245
interest payable semi-annually at 8.5%, maturing April 30, 1999,
secured by a guarantee of the Company.
Senior Subordinated Notes issued July 8, 1998, and maturing July 100,000 100,000
1, 2008, interest payable semi-annually at 10.25%.
----------------- -----------------
104,010 104,450
Less-current maturities 1,648 1,752
================= =================
$102,362 $102,698
================= =================
</TABLE>
5. Operating and Geographic Segment Information and Concentration of
Credit Risk
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments of
business enterprise. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are
components of an enterprise which are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and
8
<PAGE> 9
in assessing performance. The Company's chief operating decision maker is the
President, Chief Executive Officer of the Company. The Company has identified
its reportable operating business segment as industrial cutting tools and
related machinery, based on how the business is strategically managed.
The Company's cutting tool business segment consists of metal (51% of 1998 net
sales), wood (42%), and paper (7%) cutting products. The cutting tool business
segment is managed as a single strategic unit which derives its revenues
primarily from sales to privately owned distributors throughout the world.
No single customer accounts for 10% or more of consolidated net sales. Foreign
net sales are attributed based on the location of the Company's subsidiary
responsible for the sale.
6. Selected consolidating financial statements of parent, guarantors, and
non-guarantors
The Company's wholly owned domestic subsidiaries fully and unconditionally
guarantee, on a senior subordinated basis, the Notes, jointly and severally. The
guarantor subsidiaries data below includes combining financial statements of
Armstrong, which was acquired in August 1997, and Simonds Holding Company. The
non-guarantor subsidiaries data below includes combining financial statements of
Wespa, Simonds UK, UK Holding Co., and Simonds Canada. Separate financial
statements of the guarantor subsidiaries have not been presented because
management believes that such financial statements are not material to
investors. In addition, the Senior Credit Facility is guaranteed on a full and
unconditional basis by all guarantors. The following data summarizes the
consolidating results of the Company on the equity method of accounting for the
following periods presented:
9
<PAGE> 10
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC.
BALANCE SHEET
(In Thousands)
(unaudited)
AS OF APRIL 3, 1999
--------------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
ASSETS
CURRENTS ASSETS:
<S> <C> <C> <C> <C> <C>
Cash $4,893 $84 $743 - $5,720
Accounts receivable 7,321 903 8,703 - 16,927
Intercompany accounts 1,731 867 11 (2,609) -
receivable
Inventories:
Raw Materials 3,477 359 2,397 - 6,233
Work in progress 5,850 412 1,406 - 7,668
Finished goods 6,651 602 8,414 (347) 15,320
Other current assets 3,425 59 342 3,826
---------- ------------ ---------------- ------------- -------------
Total current 33,348 3,286 22,016 (2,956) 55,694
assets ---------- ------------ ---------------- ------------- -------------
Net property, plant and 23,606 3,084 7,446 - 34,136
equipment
OTHER ASSETS:
Investment in subsidiaries 41,716 5,031 - (46,747) -
Intercompany loan - 23,914 - (23,914) -
receivable
Other assets 19,663 4,041 2,877 - 26,581
---------- ------------ ---------------- ------------- -------------
Total assets $118,333 $39,356 $32,339 $(73,617) $116,411
========== ============ ================ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES $12,644 $766 $8,747 $(2,598) $19,559
LONG-TERM DEBT, net of current
portion 100,000 - 2,698 - 102,698
INTERDIVISION LONG-TERM DEBT 15,145 - 8,609 (23,754) -
OTHER NONCURRENT LIABILITIES 3,496 638 2,972 - 7,106
SHAREHOLDERS' EQUITY (DEFICIT) (12,952) 37,952 9,313 (47,265) (12,952)
========== ============ ================ ============= =============
Total liabilities and $118,333 $39,356 $32,339 $(73,617) $116,411
shareholders' equity
========== ============ ================ ============= =============
</TABLE>
SIMONDS INDUSTRIES INC.
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
AS OF JANUARY 2, 1999
--------------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
ASSETS
CURRENTS ASSETS:
<S> <C> <C> <C> <C> <C>
Cash $8,602 $209 $487 - $9,298
Accounts receivable 7,705 714 7,831 - 16,250
Intercompany accounts 2,015 626 383 (3,024) -
receivable
Inventories:
Raw Materials 2,930 372 2,021 - 5,323
Work in progress 5,614 289 1,438 - 7,341
Finished goods 5,316 758 8,835 (347) 14,562
Other current 3,464 78 823 - 4,365
assets ---------- ------------ ---------------- ------------- -------------
Total current 35,646 3,046 21,818 (3,371) 57,139
assets ---------- ------------ ---------------- ------------- -------------
Net property, plant and 23,896 2,527 7,962 - 34,385
equipment
OTHER ASSETS:
Investment in subsidiaries 40,817 7,555 - (48,372) -
Intercompany loan receivables - 23,163 - (23,163) -
Other assets 19,903 4,108 2,704 - 26,715
---------- ------------ ---------------- ------------- -------------
Total assets $120,262 $40,399 $32,484 $(74,906) $118,239
========== ============ ================ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT $14,301 $464 $9,600 $(3,022) $21,343
LIABILITIES
LONG-TERM DEBT, net of current
portion 100,000 - 2,362 - 102,362
INTERDIVISION LONG-TERM DEBT 15,145 - 8,018 (23,163) -
OTHER NONCURRENT LIABILITIES 3,496 638 3,080 - 7,214
SHAREHOLDERS' EQUITY (DEFICIT) (12,680) 39,297 9,424 (48,721) (12,680)
========== ============ ================ ============= =============
Total liabilities and $120,262 $40,399 $32,484 $(74,906) $118,239
shareholders' equity ========== ============ ================ ============= =============
</TABLE>
10
<PAGE> 11
SIMONDS INDUSTRIES INC.
Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended March 28, 1998
-------------------------------------------------------------------
Parent Guarantors Non-guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $22,018 $2,539 $9,667 ($3,678) $30,546
Cost of goods sold 15,245 1,698 7,463 (3,678) 20,728
----------- ----------- -------------- ------------ ------------
Gross profit 6,773 841 2,204 0 9,818
Selling, general and administrative 3,647 664 1,421 0 5,732
expense
----------- ----------- -------------- ------------ ------------
Operating income 3,126 177 783 0 4,086
Other expenses (income):
Interest expense 1,459 121 161 (595) 1,146
Interest income 0 (523) (76) 595 (4)
Other, net 114 7 (53) 0 68
Equity in earnings of subsidiaries (775) (419) 0 1,194 0
----------- ----------- -------------- ------------ ------------
Income before income taxes 2,328 991 751 (1,194) 2,876
Provision for income taxes 668 216 332 0 1,216
----------- ----------- -------------- ------------ ------------
Net income $1,660 $775 $419 ($1,194) $1,660
=========== =========== ============== ============ ============
</TABLE>
SIMONDS INDUSTRIES INC.
Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended April 3, 1999
-------------------------------------------------------------------
Parent Guarantors Non-guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $20,370 $2,413 $12,035 ($3,399) $31,419
Cost of goods sold 14,299 1,541 9,236 (3,399) 21,677
----------- ----------- -------------- ------------ ------------
Gross profit 6,071 872 2,799 0 9,742
Selling, general and administrative 3,735 669 2,005 0 6,409
expense
----------- ----------- -------------- ------------ ------------
Operating income 2,336 203 794 0 3,333
Other expenses (income):
Interest expense 3,066 110 330 (697) 2,809
Interest income (35) (636) (65) 697 (39)
Other, net (49) 12 (16) 0 (53)
Equity in earnings of subsidiaries (738) (309) 0 1,047 0
----------- ----------- -------------- ------------ ------------
Income before income taxes 92 1,026 545 (1,047) 616
Provision (benefit) for income taxes (225) 288 236 0 299
----------- ----------- -------------- ------------ ------------
Net income $317 $738 $309 ($1,047) $317
=========== =========== ============== ============ ============
</TABLE>
11
<PAGE> 12
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 28, 1998
--------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities: $2,021 $482 ($1,049) $14 $1,468
Cash flows from investing activities:
Proceeds from asset sales 41 41
Purchase of equipment (948) (7) (28) (983)
Acquisitions
--------- ---------- -------------- ------------ --------------
Net cash (used in) investing (948) (7) 13 (942)
activities
Cash flows from financing activities:
Change in overdraft 38 (2) 36
Net proceeds from revolving credit 498 498
facility
Proceeds from issuance of long-term debt-
net of issuance cost
Principal payments of long-term debt (1,870) (104) (1,974)
Intercompany loans 131 (131)
Dividends (paid) received 755 (755)
Other
--------- ---------- -------------- ------------ --------------
Net cash (used in)/provided by financing (1,077) (624) 261 (1,440)
activities
Effect of Foreign Exchange 86 (14) 72
--------- ---------- -------------- ------------ --------------
Increase (decrease) in cash (4) (149) (689) (842)
Cash at beginning of the period 25 188 1,042 1,255
--------- ---------- -------------- ------------ --------------
Cash at end of the period $21 $39 $353 $413
========= ========== ============== ============ ==============
</TABLE>
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 3, 1999
--------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net cash (used in)/provided by operating
activities: ($3,405) $490 ($743) $780 ($2,878)
Cash flows from investing activities:
Proceeds from asset sales 8 15 23
Purchase of equipment (311) (614) (110) (1,035)
Acquisitions
--------- ---------- -------------- ------------ --------------
Net cash (used in) investing (303) (614) (95) (1,012)
activities
Cash flows from financing activities:
Change in overdraft 14 14
Net proceeds from revolving credit 110 110
facility
Proceeds from issuance of long-term debt-
net of issuance cost 336 336
Principal payments of long-term debt (6) (6)
Intercompany loans (751) 591 160
Issuance of common stock 750 (750)
Other (1) (1)
--------- ---------- -------------- ------------ --------------
Net cash (used in)/provided by financing (1) (1) 1,045 (590) 453
activities
Effect of Foreign Exchange 49 (190) (141)
--------- ---------- -------------- ------------ --------------
Increase (decrease) in cash (3,709) (125) 256 (3,578)
Cash at beginning of the period 8,602 209 487 9,298
--------- ---------- -------------- ------------ --------------
Cash at end of the period $4,893 $84 $743 $5,720
========= ========== ============== ============ ==============
</TABLE>
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Company's consolidated
financial statements and notes thereto.
Results of Operations
Comparison of First Quarter 1999 and First Quarter 1998
Net Sales: Net Sales for the first quarter of 1999 were 2.9% higher than first
quarter 1998 net sales. The improvement was due to the inclusion in the 1999
period of sales of W. Notting Limited which was acquired in the second quarter
of 1998. During the first quarter of 1999 there was a softening in demand for
wood and metal products in the U.S compared to 1998. This has been offset
somewhat with improvement in Canada during the first quarter of 1999, in spite
of a lower Canadian dollar value.
Gross Profit Margin: Gross Profit decreased to $9.7 million for the first
quarter of 1999 from $9.8 million for the corresponding period in 1998. Gross
Profit as a percentage of net sales for 1999 was 31.0 % and 32.1% for the three
months ended April 3, 1999 and March 28, 1998, respectively. Domestic operations
experienced spending and volume variances as they lowered production levels in
response to a shortfall in shipments.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses as a percent of net sales were 20.4% or $6,409 and 18.8%
or $5,732 for the first quarter of 1999 and 1998, respectively. The majority of
the increase in 1999 is the addition of Notting, which accounted for $640 of the
additional expense.
Operating Income: As a result of the foregoing, operating income decreased $753
in the first quarter of 1999 when compared to the comparable period in 1998.
Interest Expense: Interest expense was higher in the first quarter of 1999
compared to the corresponding period in 1998 due to the recapitalization of the
Company in July 1998. The recapitalization constituted refinancing most of the
Company's debt with $100 million of notes bearing an annual interest rate of
10.25%.
Income Taxes: The provision for income taxes was approximately $300 for the
first quarter of 1999, as compared to approximately $1,200 for the first quarter
of 1998. The income tax rates differed from the statutory rate principally as a
result of state income tax provisions, nondeductible amortization expense (for
tax purposes) and the effect of foreign income tax on foreign source income.
13
<PAGE> 14
Net Income: As a result of the aforementioned factors, net income decreased
$1,343 in 1999 when compared to the first quarter of 1998.
Liquidity and Capital Resources
In July 1998, the Company issued $100,000 of Senior Subordinated Notes. Interest
on the Notes will accrue from date of issuance at 10.25% and is payable
semi-annually on January 1 and July 1. The Notes are due in 2008 but may be
redeemed on or after July 1, 2003 at specified premium prices. Proceeds from the
Notes were primarily used for repayment of indebtedness, acquisition of treasury
stock, and buyout of all outstanding stock options and warrants. The buyout of
stock options resulted in a pretax compensation charge of approximately $4.5
million recorded in July 1998. The repayment of indebtedness resulted in an
extraordinary charge of approximately $0.5 million, net of tax benefit, recorded
in July 1998 to write off unamortized debt discount and deferred financing
costs.
The Company concurrently entered into a new Senior Credit Facility with a
commercial lender, that provides $30,000 availability, undrawn as of April 3,
1999. Borrowings under the Senior Credit Facility are available for permitted
acquisitions and working capital, including letters of credit. The Senior Credit
Facility is secured by first priority liens on all tangible and intangible
personal property and real property assets of the Company and its subsidiaries.
The Senior Credit Facility will expire in 2003, unless extended. The interest
rate per annum applicable to the Senior Credit Facility will be, at the
Company's option, either LIBOR or the greater of the prime rate or the overnight
federal funds rate plus 0.50%, in each case plus 0.125% to 2.375% depending on
the Company's financial leverage (the "Applicable Margin"). The Company will be
required to pay certain fees in connection with the Senior Credit Facility,
including a commitment fee of 0.50% initially and thereafter at a per annum rate
equal to the Applicable Margin on the unutilized portion of the revolver.
The Company's principal capital requirements are to fund working capital needs,
meet required debt payments, and to complete planned maintenance and
manufacturing improvements.
The Company believes that future cash flows from operations, together with the
borrowings available under the new Senior Credit Facility will provide the
Company with sufficient liquidity and financial resources to finance its growth
and satisfy its working capital requirements for the foreseeable future. The
Company may not be able to generate sufficient cash flows from operations to pay
the entire principal amount of the Notes when due in 2008. In such event, the
Company would be required to refinance the Notes. However, there can be no
assurance that the Company will be able to obtain acceptable financing terms.
14
<PAGE> 15
Net Cash Flow: Operations used cash flow of $2,818 for the three month period
ended April 3, 1999 compared to providing cash flow of $1,468 for the comparable
period a year ago. This results from paying in 1999 bond interest which is
payable semi-annually on July 1 and January 1.
Seasonality
Historically, the Company's business has not been subject to seasonality in any
material respect. The Company's third quarter, which includes July through
September, is typically lower due to customers' and plant vacation shutdowns.
Inflation
Certain of the Company's expenses, such as wages and benefits, occupancy costs
and equipment repair and replacement, are subject to normal inflationary
pressures. Although the Company to date has been able to offset inflationary
cost increases through operating efficiencies, there can be no assurance that
the Company will be able to offset any future inflationary cost increases
through similar efficiencies.
Year 2000
The Company has a formal Year 2000 Compliance Plan which it began to implement
in 1996 to ensure that its hardware, operating systems and software will
function properly with respect to dates in the year 2000 and thereafter.
The Company does not expect that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not anticipate any material
disruption in its operations as a result of any failure by the Company to be in
compliance. The Company has initiated formal communication with all of its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to their third parties' failure to
remediate their own Year 2000 issues. In the event that any of the Company's
significant suppliers or customers does not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected. The Company is in the process of preparing appropriate contingency
plans in the event that a significant internal or external exposure is
identified.
Forward Looking Statements
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words "believes,"
"expects," "anticipates" and similar expressions are used to identify forward
looking statements. The Company cautions that a number of important factors
could cause actual results for fiscal 1999 and beyond to differ materially from
those expressed in any forward looking statements made by or on
15
<PAGE> 16
behalf of the Company. All of these forward looking statements are based on
estimates and assumptions made by management of the Company, which although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed on such estimates and statements. No assurance can be given
that any of such estimates or statements will be realized and it is likely that
actual results will differ materially from those contemplated by such forward
looking statements. Factors that may cause such differences include: (1)
increased competition; (2) increased costs; (3) loss or disruption of supply
sources of specialty steels; (4) loss or retirement of key members of
management; (5) increases in the Company's cost of borrowings or unavailability
of additional debt or equity capital on terms considered reasonable by
management; (6) adverse state, federal or foreign legislation or regulation or
adverse determinations by regulators; and (7) changes in general economic
conditions in the markets in which the Company may compete and fluctuations in
demand in the metal processing and primary wood industries. Many of such factors
will be beyond the control of the Company and its management.
16
<PAGE> 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None
Reports On Form 8-K
No reports on Form 8-K were filed during the quarter ended April 3, 1999.
17
<PAGE> 18
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.
SIMONDS INDUSTRIES INC.
By: /s/ Joseph L. Sylvia
----------------------
Joseph L. Sylvia
Executive Vice President, CFO
May 14, 1999
18
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