<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-33438
PRECISION PARTNERS, INC.
(Exact name of registrant as specified in its charter)
---------------------------------------- -------------------------------------
DELAWARE 75-2783285
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5605 N. MacArthur Boulevard
Suite 760
IRVING, TEXAS 75038
(Address of principal executive offices)
(972) 580-1550
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 100 as of July 31, 2000.
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PRECISION PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
June 30, 2000 (Unaudited) and December 31, 1999
Unaudited Consolidated Statements of Operations for the 4
Three Months and Six Months Ended June 30, 2000 and 1999
Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Securities Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
2
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<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Precision Partners, Inc.
Consolidated Balance Sheets
June 30, December 31,
2000 1999
----------- --------------
(Unaudited)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ --- $ 313
Trade accounts receivable, less allowance for doubtful accounts
of $261 at June 30, 2000 and December 31, 1999 25,642 23,613
Inventories 19,080 18,404
Current deferred income taxes 1,303 1,303
Other current assets 1,586 1,916
----------- -----------
Total current assets 47,611 45,549
Property, plant and equipment, at cost, net 67,778 71,057
Goodwill, net 75,596 77,429
Non-compete agreement 833 933
Advance deposits for equipment leases 2,353 3,532
Other assets 5,774 7,891
----------- -----------
Total assets $ 199,945 $ 206,391
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings $ 6,450 $ 11,200
Accounts payable 9,878 7,703
Accrued expenses 16,571 11,406
Income taxes payable --- 1,014
Deferred revenue 2,162 4,700
Current installments of long term debt 3,498 2,611
Other current liabilities 773 3,071
----------- -----------
Total current liabilities 39,332 41,705
Long term debt, less current portion 119,002 120,737
Non-current deferred taxes 7,817 7,817
Stockholder's equity:
Common stock, $.01 par value; 100 shares authorized, issued and
outstanding --- ---
Additional paid-in capital 42,048 42,042
Accumulated deficit (8,254) (5,910)
--------- ---------
Total stockholder's equity 33,794 36,132
========= =========
Total liabilities and stockholder's equity $ 199,945 $ 206,391
========= =========
SEE ACCOMPANYING NOTES
</TABLE>
3
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<TABLE>
<CAPTION>
Precision Partners, Inc.
Unaudited Consolidated Statements of Operations
Three months ended Six months ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 43,188 $ 33,922 $ 88,075 $ 45,930
Cost of sales 34,077 24,499 67,845 33,071
--------- --------- --------- ---------
Gross profit 9,111 9,423 20,230 12,859
Selling, general and administrative expenses 7,439 5,396 14,973 8,056
--------- --------- --------- ---------
Operating income 1,672 4,027 5,257 4,803
Other income (expense):
Interest income 11 105 23 120
Interest expense (4,245) (3,574) (8,337) (5,001)
Other (71) (43) (51) 6
--------- --------- --------- ---------
Income before income taxes (2,633) 515 (3,108) (72)
Provision (benefit) for income taxes (818) 251 (764) 295
--------- --------- --------- ---------
Net (loss) income $ (1,815) $ 264 $ (2,344) $ (367)
========= ========= ========= =========
SEE ACCOMPANYING NOTES
</TABLE>
4
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<TABLE>
<CAPTION>
Precision Partners, Inc.
Unaudited Consolidated Statements of Cash Flows
Six months ended
June 30,
-----------------------------
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,344) $ (367)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 5,904 3,109
Amortization 2,579 2,091
Loss on sale of fixed assets --- ---
Changes in operating assets and liabilities, net of
acquisitions:
Trade accounts receivable (2,029) (1,979)
Inventories (676) (1,492)
Other current assets 330 (447)
Advance deposit for equipment leases 1,179 ---
Other assets 2,591 121
Accounts payable 2,175 2,632
Accrued expenses 5,165 4,195
Income taxes payable (1,014) (180)
Deferred revenue (2,538) (15)
Other current liabilities (2,298) (17)
Net cash provided by operating activities --------- ---------
9,024 7,651
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 212 ---
Purchase of property, plant and equipment (2,769) (6,636)
Acquisition of subsidiaries, net of cash (206) (96,392)
Net cash used in investing activities --------- ---------
(2,763) (103,028)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 28,050 ---
Repayment of revolving line of credit (32,800) ---
Repayment of long-term debt (916) (23,145)
Proceeds from long-term debt --- 123,000
Contribution of capital 6 10,035
Payment of debt issue costs (914) (5,411)
--------- ---------
Net cash (used in) provided by financing activities (6,574) 104,479
--------- ---------
Net (decrease) increase in cash and cash equivalents (313) 9,102
Cash and cash equivalents, beginning of period 313 963
========= =========
Cash and cash equivalents, end of period $ --- $ 10,065
========= =========
SUPPLEMENTARY INFORMATION FOR THE STATEMENT OF CASH FLOWS:
Interest payments $ 7,449 $ 834
Income tax payments $ 298 $ 272
Non-cash investing and financing activities - purchase of
computer hardware/software under financing agreements $ 68 $ 344
Non-cash Director and Officer insurance premium financing
activities $ --- $ 164
SEE ACCOMPANYING NOTES
</TABLE>
5
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Precision Partners, L.L.C. ("LLC") was incorporated on September 9, 1998
for the purpose of acquiring and operating companies in the business of
manufacturing and supplying complex precision metal parts, toolings and
assemblies for original equipment manufacturers ("OEMS").
On September 30, 1998, investors contributed approximately $32 million of
capital to LLC which was then contributed by LLC to two wholly-owned
subsidiaries, Mid State Acquisition Corp. and Galaxy Acquisition Corp., which
were established to acquire all of the outstanding capital stock of Mid State
Machine Products ("Mid State") and Galaxy Industries Corporation ("Galaxy") on
September 30, 1998 (Mid State and Galaxy, collectively the "1998 Acquisitions").
The purchase price, including transaction expenses, was approximately
$54,725,000 and was financed by the proceeds of the contributed capital and
borrowings under LLC's credit facilities. The purchase price was allocated to
the estimated fair value of the assets acquired and liabilities assumed in
accordance with the purchase method of accounting as follows:
Current assets $12,370,000
Property, plant and equipment 14,854,000
Goodwill 36,553,000
Other assets 526,000
Current liabilities (5,458,000)
Deferred taxes, non-current (4,120,000)
In February 1999, Precision Partners, Inc. ("Precision" or "Company") was
formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of LLC. On March 19, 1999, as part of a
reorganization, LLC contributed to Precision, through Holdings, its investments
and related assets in Galaxy, Mid State and Precision Partners Management
Corporation ("Management Corporation"), which comprised substantially all of the
assets of LLC. Simultaneous with this reorganization, Precision issued
$100,000,000 of 12% Senior Subordinated Notes (the "Notes") in order to purchase
all of the issued and outstanding capital stock of Certified Fabricators, Inc.
and its sister company Calbrit Design, Inc. (together, "Certified") and to
purchase substantially all of the assets and assume certain liabilities of
General Automation, Inc. ("General Automation") and Nationwide Precision
Products Corp. ("Nationwide"). Also, on September 1, 1999, Precision purchased
all of the issued and outstanding capital stock of Gillette Machine & Tool, Inc.
("Gillette") using existing cash and borrowings under Precision's credit
facilities. The acquisitions of Certified, General Automation, Nationwide, and
Gillette are referred to collectively as the "1999 Acquisitions." Subsequent to
this reorganization, capital totaling approximately $42 million had been
contributed to LLC by investors; this capital has been contributed through
Holdings to Precision.
The 1999 Acquisitions were financed through the net proceeds of the
issuance of the Notes, together with borrowings under Precision's credit
facilities, an equity contribution of approximately $10,000,000 and available
cash. The total purchase price, including transaction expenses, was
approximately $116,593,000. The purchase price was allocated to estimated fair
value of the assets acquired and liabilities assumed in accordance with the
purchase method of accounting as follows:
Current assets $27,852,000
Property, plant and equipment 54,658,000
Goodwill 45,842,000
Other assets 309,000
Current liabilities (6,466,000)
Deferred taxes, non-current (5,602,000)
The excess of the purchase price over the net fair value of the assets
acquired was allocated to goodwill, which is being amortized over 20 years.
6
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Prior to the 1998 Acquisitions, LLC had substantially no operations, and
prior to the reorganization and 1999 Acquisitions, Precision had substantially
no operations. For financial statement presentation purposes, the reorganization
is accounted for as if it had occurred on September 9, 1998, in a manner similar
to a pooling of interests. The 1999 Acquisitions for accounting purposes are
assumed to have occurred on March 31, 1999. Therefore, the Consolidated
Statement of Operations and Cash Flows for the periods ended June 30, 1999
include (i) the operations of Mid State and Galaxy for the six months ended June
30, 1999, (ii) the operations of Certified, General, and Nationwide for the
three months ended June 30, 1999, and (iii) expenses related to the Management
Corporation from January 1, 1999 to March 19, 1999 (prior to the
reorganization).
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2000
are not necessarily, and should not be construed as, indicative of the results
that may be achieved for a full year.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
2. INVENTORIES AND COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Inventories consist of the following at:
June 30, December 31,
2000 1999
------------- --------------
(IN THOUSANDS)
Raw materials $ 3,857 $ 2,575
Work in process 13,278 13,978
Finished goods 2,312 2,365
---------- ----------
19,447 18,918
Less reserves for obsolescence 367 514
---------- ----------
$ 19,080 $ 18,404
========== ==========
Information regarding contract costs, estimating earnings and progress
billings consist of the following:
June 30,
2000
-----------
(IN THOUSANDS)
Costs incurred on uncompleted contracts $ 6,227
Estimated earnings 529
---------
6,756
Less net progress billings 4,594
Costs and estimated earnings on uncompleted contracts included ---------
in work in progress inventory $ 2,162
=========
There were no significant billings in excess of net costs and estimated
earnings on uncompleted contracts.
7
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3. DEBT
Precision maintains a line of credit of $25.0 million, which matures on
March 31, 2005, under which it can borrow funds or secure letters of credit at
prevailing market rates. As of June 30, 2000, Precision had outstanding draws on
the line of credit totaling approximately $6.5 million (approximately 9.2% at
June 30, 2000). The revolving line of credit is secured by substantially all
accounts receivable and inventory. Advances under the line are available based
upon 85% of outstanding eligible accounts receivable and 50% of eligible
inventories. A commitment fee of 0.5% per annum is payable in connection with
the line of credit in arrears on the last day of each quarter. The fee is
calculated from the closing date, March 19, 1999, to the date the revolving
commitments are terminated, computed at the applicable rate based on the actual
daily amount of available revolving commitment of each lending during the
period. As of June 30, 2000, the Company had approximately $18.5 million of
available borrowing capacity under the revolving credit facility.
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Precision Partners, Inc. 12% Senior Subordinated Notes due 2009, interest paid
semiannually on March 15 and September 15 commencing on September 15, 1999. $100,000 $100,000
Notepayable to a bank, due in quarterly principal installments plus interest at
a variable rate (8.6875% as of June 30, 2000), maturing March 31, 2005.
Quarterly principal installments of $805,000 began on June 30, 2000, and
increase to $920,000 on June 30, 2001, $1,150,000 on June 30, 2002,
$1,380,000 on June 30, 2003, and $1,495,000 on June 30,2004, secured
by all assets of Precision Partners and its subsidiaries 22,195 23,000
Financial software financing agreement due in twelve quarterly installments of
$32,471, including interest at 7.8% per annum 210 265
Director and officer insurance premium financing agreement, due in six quarterly
installments of $28,997, including interest at 7.15% per annum 27 83
Computer hardware financing agreement due in thirty six monthly installments of
$2,214, including interest at 10.8% per annum 68 ---
---------- ----------
122,500 123,348
Less current portion 3,478 2,611
========== ==========
$119,022 $120,737
========== ==========
</TABLE>
Pursuant to the terms entered into in conjunction with the March 19,
1999 issuance of the Notes, the interest payable on the Notes increased from
12.00% to 12.50% on September 16, 1999, from 12.50% to 12.75% on December 16,
1999, and from 12.75% to 13.00% on March 14, 2000. This increase in the
interest rate was a contractual obligation that arose because Precision
did not file a registration statement with the SEC relating to an offer to
exchange new notes for the Notes issued in March 1999, and because Precision
did not have the registration statement declared effective and did not
consummate the exchange within prescribed time periods. The exchange offer
registration statement was filed and became effective on May 5, 2000 and the
exchange offer was completed on June 7, 2000. Upon the completion of the
exchange offer, the interest payable on the Notes reverted to 12.00%, the
stated amount of interest payable on the face of the Notes.
Precision has unamortized deferred costs of $5.4 million related to the
Notes and the $23.0 million term loan and credit facilities. The costs are being
amortized over the life of the related Notes, term loan and credit facilities.
Under the terms of the term loan and credit facilities, Precision is
required to maintain certain leverage, interest coverage, and fixed charge
coverage ratios on a consolidated basis. The company was in compliance with all
of the restrictive covenants at June 30, 2000.
8
<PAGE>
The indenture governing the Notes, as well as the terms of the term loan
and credit facilities, contain covenants that limit Precision's and some of its
subsidiaries' ability to incur additional debt, pay dividends on or redeem or
repurchase capital stock, enter into transactions with affiliates and transfer
or sell assets, among other things.
4. LITIGATION
Precision and/or its subsidiaries are defendants from time to time in
lawsuits and disputes arising in the normal course of business. Management
believes that the ultimate outcome of those matters will not have a materially
adverse effect on the consolidated financial position, results of operations or
cash flows.
5. INCOME TAXES
The tax provisions for the second quarter and six month period ended
June 30, 2000 and 1999 are impacted by permanent differences between pre-tax
loss for financial reporting purposes and taxable income resulting primarily
from non-deductible goodwill generated by the stock acquisitions.
6. OPERATING LEASES
As of June 30, 2000, Precision had funded approximately $18.5 million of
its capital equipment needs under its $35.0 million operating lease
facility with General Electric Credit Corporation. This equipment is primarily
related to Precision's recent contracts with Caterpillar and Dana and increased
unit delivery requirements from General Electric. Minimum rental commitments
under noncancellable operating leases are as follows: 2001--$6.9million;
2002--$6.6 million; 2003--$5.7 million; 2004--$5.5 million; 2005--$5.3 million;
thereafter--$2.0million.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Precision Partners, Inc. is a leading contract mechanical manufacturing
services supplier of complex precision metal parts, tooling and assemblies for
original equipment manufacturers. Precision's broad manufacturing capabilities
and highly engineered processes allow Precision to meet the critical
specifications of its customers across a wide range of industries. Precision has
earned "Preferred or "Qualified" supplier status with most of its customers and
are predominately the sole-source supplier to its customers of the parts it
manufactures.
Precision Partners, L.L.C. was formed in September 1998 and Precision was
formed in February 1999 for the sole purpose of acquiring and operating
companies in the business of manufacturing and supplying complex precision metal
parts, tooling and assemblies for original equipment manufacturers. On September
30, 1998, Precision Partners, L.L.C. acquired all of the outstanding capital
stock of Mid State and Galaxy. In March 1999, Precision underwent a corporate
reorganization under which it acquired all of the issued and outstanding capital
stock of Mid State and Galaxy. At the same time, Precision also purchased all of
the issued and outstanding capital stock of Certified and Calbrit and it
purchased substantially all of the assets and assumed some liabilities of
General Automation and Nationwide. The aggregate purchase price including fees
and expenses for the March acquisitions was approximately $102.2 million and was
financed through the net proceeds from the sale of the outstanding notes,
borrowings under Precision's credit facilities, an equity contribution and
available cash. In July 1999, Precision merged Calbrit into Certified and in
September 1999 Precision acquired Gillette. The purchase price for the Gillette
acquisition was approximately $14.4 million and was financed using existing cash
and borrowings under Precision's revolving credit facility.
Prior to the acquisitions of Mid State and Galaxy, Precision Partners,
L.L.C. had substantially no operations and, prior to the consummation of the
reorganization and the acquisitions of Certified, Calbrit, Nationwide and
General
9
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Automation, Precision had substantially no operations. For financial
statement presentation purposes, and for purposes of the following discussion,
the reorganization is accounted for as if it occurred on September 9, 1998 and
Precision is treated as having commenced operations at that time. See Note 1 to
the unaudited consolidated financial statements. For this reason, with respect
to the prior periods of 1999, the following management's discussion and analysis
includes the results of operations of:
- (1) Mid State and Galaxy for the three months and six months ended June 30,
1999, (2) Certified, General, and Nationwide for the three months ended
June 30, 1999, (3) the expenses of the Management Corporation from January
1, 1999 through March 19, 1999, and (4) the expenses of Precision's
management office from March 20, 1999 through June 30, 1999.
The Historical Results of Operations discusses the results of operations of
Precision and its subsidiaries for the three and six months ended June 30, 2000
and 1999.
HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET SALES
Net sales increased 27.3% to $43.2 million in the second quarter of 2000
compared to $33.9 million in the same period 1999. The increase is primarily due
to the acquisition of Gillette in 1999 and significant growth in sales in the
power generation sector partially offset by declines in aerospace volumes.
GROSS PROFIT
Gross profit decreased 3.3% to $9.1 million in the second quarter of 2000
compared to $9.4 million in the same period 1999. The decrease is primarily due
to operational difficulties at Galaxy and declining sales volumes in the
aerospace business. Gross margin decreased by 6.7% to 21.1% in the second
quarter of 2000 from 27.8% in the comparable period in 1999. This decrease is
due to the operational difficulties at Galaxy, aerospace volume declines, and
changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased 37.9% to $7.4
million in the second quarter of 2000 compared to $5.4 million in the same
period 1999. The increase is primarily due to the acquisition of Gillette in
1999, additional costs related to sales volume increases, and severance costs
relating to management changes.
OPERATING INCOME
As a result of the foregoing, operating income was $1.7 million in the
second quarter of 2000 compared to $4.0 million in the same period in 1999.
INCOME TAX EXPENSE
The second quarter of 2000 and 1999 tax provisions are impacted by
permanent differences between pre-tax loss for financial reporting purposes and
taxable income resulting primarily from non-deductible goodwill generated by the
stock acquisitions.
NET INCOME (LOSS)
Net loss was ($1.8 million) in the second quarter of 2000, compared to net
income of $0.3 million in the same period of 1999 due to the aforementioned
reasons, as well as interest expense associated with funding the Gillette
acquisition and new capital equipment programs at Mid State, Galaxy, and
Nationwide.
10
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DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation and goodwill amortization increased 19.6% to $4.0 million
in the second quarter of 2000 compared to $3.4 million in the same period of
1999. The increase is primarily due to depreciation on capital expenditures, as
well as depreciation and goodwill amortization from the acquisition of Gillette
in 1999, including additional depreciation on the step-up in basis of property,
plant, and equipment of this acquisition.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES
Net sales increased 91.8% to $88.1 million in the six months ending June
30, 2000 compared to $45.9 million in the same period 1999. The increase is
primarily due to the acquisitions of Certified, General, Nationwide, and
Gillette in 1999, but also includes significant growth in power generation, as
well as increases in heavy construction.
GROSS PROFIT
Gross profit increased 57.3% to $20.2 million in the six months ending
June 30, 2000 compared to $12.9 million in the same period 1999. The increase is
primarily due to the acquisitions of Certified, General, Nationwide, and
Gillette in 1999, as well as volume increases in power generation, offset by
operational difficulties at Galaxy and declining aerospace sales. Gross margin
decreased by 5.0% to 23.0% in the six months ending June 30, 2000 from 28.0% in
the comparable period in 1999. This decrease is due to Galaxy operational
difficulties, aerospace volume declines, and changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased 85.9% to $15.0
million in the six months ending June 30, 2000 compared to $8.1 million in the
same period 1999. The increase is primarily due to the acquisition of Certified,
General, Nationwide, and Gillette in 1999, additional costs related to sales
volume increases, and severance costs relating to management changes.
OPERATING INCOME
As a result of the foregoing, operating income increased to $5.3 million in
the six months ending June 30, 2000 from $4.8 million in the same period in
1999.
INCOME TAX EXPENSE
Tax provisions for the six months ending June 30, 2000 and 1999 were
impacted by permanent differences between pre-tax loss for financial reporting
purposes and taxable income resulting primarily from non-deductible goodwill
generated by the stock acquisitions.
NET LOSS
Net loss was $2.3 million in the six months ending June 30, 2000, compared
to a net loss of $0.4 million in the same period of 1999 due to the
aforementioned reasons and interest expense associated with the outstanding 12%
senior notes, the proceeds of which were used to fund the Certified, General,
and Nationwide acquisitions.
DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation and goodwill amortization increased 80.5% to $8.0 million in
the six months ending June 30, 2000 compared to $4.5 million in the same period
of 1999. The increase is primarily due to depreciation and goodwill amortization
from the acquisitions of Certified, General, Nationwide, and Gillette in 1999,
including additional depreciation on the step-up in basis of property, plant,
and equipment of these acquisitions.
11
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PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations for the six
month period ended June 30, 1999 includes the operations of Mid State and Galaxy
for the period and gives effect to the 1999 Acquisitions as if the transactions
had occurred on January 1, 1999. For purposes of the unaudited pro forma
consolidated statements of operations, the historical financial information of
General and Nationwide has been adjusted to eliminate the effect of certain
assets not acquired and certain liabilities not assumed in the acquisition by
Precision company, in each case in accordance with the terms of the purchase
agreement relating to such acquisition. The unaudited pro forma consolidated
financial statements should be read in conjunction with the unaudited historical
consolidated financial statements of Precision, including the notes thereto,
included elsewhere in this report.
Management believes that the adjustments necessary to fairly present
this pro forma consolidated financial information have been made based on
available information and in the opinion of management are reasonable and are
described in the accompanying notes. The pro forma consolidated financial
information should not be considered indicative of actual results that would
have been achieved had the transactions been consummated on the respective
dates indicated and do not purport to indicate results of operations as of
any future date or for any future period. The assumptions used in the
preparation of the pro forma consolidated financial information include
significant subjective judgment on the part of management, and although it
believes such assumptions to be reasonable, Precision cannot assure you that
all investors would make the same assumptions. Although not required by
Regulation S-X, due to the significance of the 1999 Acquisitions, Precision
is presenting this pro forma consolidated financial information to provide a
meaningful comparison for the six months ended June 30, 2000 and the
corresponding period in the prior year.
The following table sets forth Precision's unaudited historical
consolidated statement of operations and other information for the six months
ended June 30, 2000 and the pro forma statement of operations and other pro
forma information for the six months ended June 30, 1999, both in dollars and
expressed as a percentage of net sales:
Six months ending
June 30,
-------------------
2000 1999
--------- --------
(IN THOUSANDS)
(PRO FORMA)
Net sales $ 88,075 $69,702
Cost of sales (1) 67,845 51,387
---------- ----------
Gross profit 20,230 18,315
% of sales 23.0% 26.3%
Selling, general and
administrative expenses (2) 14,973 11,263
---------- ----------
Operating income 5,257 7,052
% of sales 6.0% 10.1%
Other income (expense):
Net interest expense (3) (8,314) (8,034)
Other (51) 58
---------- -----------
Loss before income taxes (3,108) (924)
% of sales (3.5%) (1.3%)
Provision (benefit) for income taxes(4) (764) (206)
=========== =========
Net loss $(2,344) $ (718)
=========== ==========
% of sales (2.7%) (1.0%)
PRO FORMA EBITDA: (5)
Operating income $ 5,257 $ 7,052
Depreciation 5,904 5,598
Goodwill amortization 2,140 2,050
---------- -----------
Total $ 13,301 $ 14,700
% of sales 15.1% 21.1%
12
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<TABLE>
<CAPTION>
NOTES TO PRO FORMA FINANCIAL INFORMATION
Six months ended
----------------------------
June 30, June 30,
2000 1999
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
(1) COST OF SALES PRO FORMA ADJUSTMENTS:
Increased depreciation due to fixed asset step up to
fair market value $ --- $ 742
Adjustment for new lease terms of facilities at Nationwide
made as part of the purchase, net of the elimination of
depreciation expense on a building not acquired --- 136
Adjustment for new lease terms of facilities at General made
as part of the purchase agreement --- (24)
------------ -----------
$ --- $ 854
------------ -----------
(2) SG&A PRO FORMA ADJUSTMENTS:
Goodwill amortization related to the acquisitions $ --- $ 640
Adjustments for termination of executive positions held by
shareholders and related parties as part of the purchase
contract of Gillette whose positions will not be replaced --- (389)
Reduction in shareholders' compensation, bonus, and benefits as a
result of employment contracts executed in connection with the --- (254)
transactions
Elimination of acquisition related expenses --- (128)
------------ -----------
$ --- $ (131)
------------ -----------
</TABLE>
(3) Interest expense related to the $100,000,000 Precision
Partners, Inc. 12% Senior Subordinated Notes due 2009, the
$23,000,000 term loan facility, the $25,000,000 revolving credit
facility, and debt issue costs expensed in refinancing.
(4) Adjustment to record the income tax benefit on pro forma
income before income taxes.
(5) Pro forma EBITDA is defined as operating income plus
depreciation and amortization. EBITDA is not a measure
of performance under generally accepted accounting principles.
While EBITDA should not be used in isolation or as a substitute
for net income, cash flows from operating activities or other
income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of
profitability or liquidity, management believes that it may be
used by certain investors as supplemental information to evaluate
a company's financial performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In
addition, the definition of EBITDA used in this report may not be
comparable to the definition of EBITDA used by other companies.
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<PAGE>
PRO FORMA RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO PRO FORMA SIX MONTHS ENDED
JUNE 30, 1999
NET SALES
Net sales increased 26.4% to $88.1 million for the six months ended
June 30, 2000, compared to $69.7 million for the same period in 1999. During
this period sales at Mid State and Galaxy increased 64.4% to $45.9 million
from $27.9 million in the prior period, mainly due to increased orders for
power generation and heavy truck components. Sales at General and Nationwide
for the period ending June 30, 2000 increased 9.8% to $25.6 million from
$23.3 million during the comparable period in 1999 due to increased
automotive tooling and component business. Gillette sales for the period
increased 25.0% to $9.2 million from $7.4 million during the comparable
period of 1999 due to increased business machine and medical product volume.
Sales at Certified for the six month period ending June 30, 2000 decreased
33.4% to $7.4 million from $11.1 million during the comparable period in
1999, due to a decrease in defense and aerospace business. (Net sales for the
three months ended June 30, 2000 increased 13.5% to $43.2 million from net
sales, on a pro forma basis, of $37.3 million for the comparable period in
1999.)
GROSS PROFIT
Gross profit for the period ending June 30, 2000 increased 10.5% to $20.2
million from $18.3 million in the comparable period in 1999 primarily due to
increased power generation sales. Gross margin decreased 3.3% during this period
to 23.0% from 26.3% in the comparable period in 1999 due to Galaxy operational
difficulties, aerospace volume declines, and changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the period ending June
30, 2000 increased 32.9% to $15.0 million from $11.3 million during the same
period in 1999 due to increased salary expense, additional corporate office
expense required to manage the acquisitions, as well as severance costs relating
to management changes. Selling, general and administrative expenses as a percent
of sales for these periods increased to 17.0% in 2000 from 16.2% in 1999.
OPERATING INCOME
As a result of the foregoing, operating income decreased 25.5% to $5.3
million from $7.1 million during the comparable period in 1999. (Operating
income for the three months ended June 30, 2000 decreased to $1.7 million
from operating income, on a pro forma basis, of $4.4 million for the
comparable period in 1999.)
INCOME TAX BENEFIT
Income tax benefit increased to $.8 million for the six months ended June
30, 2000 from $0.2 million in the same period in 1999 due to the increase in
taxable loss.
NET LOSS
As a result of the foregoing, the net loss during the period ending June
30, 2000 was ($2.3 million) compared to ($.7 million) during the same period
in 1999. (Net loss for the quarter ended June 30, 2000 was ($1.8 million)
compared to net income, on a pro forma basis, of $0.5 million for the
comparable period in 1999.)
DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation and goodwill amortization expense increased 5.2% in the six
months ended June 30, 2000 to $8.0 million from $7.6 million in the six months
ended June 30, 1999 due to capital expenditures between these periods.
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<PAGE>
BACKLOG
Backlog for the period ending June 30, 2000 increased 5.1% to $113.2
million from $107.7 million at December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Precision Partners, Inc.'s principal sources of liquidity are available
borrowings under Precision's revolving credit facility and cash flow from
operations. Precision expects that its principal uses of liquidity will continue
to be working capital, capital expenditures, debt service requirements and
permitted acquisitions.
Precision's credit facilities consist of a $23.0 million term loan facility
and a $25.0 million revolving credit facility, including a $2.0 million sublimit
for letters of credit, each maturing on March 31, 2005, unless terminated sooner
upon an event of default. As of June 30, 2000, Precision has total debt of
approximately $129.0 million, primarily consisting of the outstanding principal
amount on Precision's term loan of $22.2 million, the outstanding aggregate
principal amount of the Notes and $6.5 million of outstanding borrowings under
Precision's revolving credit facility. Precision's ability to borrow under the
revolving credit facility is subject to Precision's compliance with the
financial covenants described below and a borrowing base that is based on
Precision's eligible accounts receivables and inventory.
The indenture and Precision's credit facilities impose limitations on
Precision's ability to, among other things, incur additional indebtedness
(including capital leases), incur liens, pay dividends or make other restricted
payments, consummate asset sales, enter into transactions with affiliates, issue
preferred stock, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
Precision's assets. In addition, the credit facilities limit Precision's ability
to enter into sale and leaseback transactions and to make capital expenditures.
The credit facilities also require that Precision meet and maintain certain
financial ratios and tests, including (i) a minimum interest coverage ratio,
EBITDA to interest expense, (ii) a maximum leverage ratio, total debt to EBITDA,
and (iii) a minimum fixed charge coverage ratio, EBITDA to interest expense plus
other fixed charges. Precision's ability to comply with these covenants and to
meet and maintain these financial ratios and tests may be affected by events
beyond Precision's control, such as those described under "Risk Factors."
Since Precision did not have an exchange offer registration statement
filed by September 15, 1999, did not have it declared effective by September
16, 1999 and did not complete the exchange offer by October 15, 1999, it paid
additional interest on the outstanding Notes. The amount of additional
interest ranged from 0.5% per annum for the period from September 15, 1999
through December 14, 1999 to 0.75% per annum for the period December 15, 1999
through March 14, 2000. Beginning March 15, 2000, the amount of additional
interest increased to 1.0% per annum and continued at that rate until the
completion of the exchange offer on June 7, 2000. Upon the close of the
exchange offer, the interest payable on the Notes reverted to its stated
amount of 12.00% per annum.
Precision has limited amortization requirements under its credit facilities
over the next two years. Precision's other debt service requirements over the
next two years consist primarily of interest expense on the Notes. Precision's
short-term cash requirements for its operations are expected to consist mainly
of capital expenditures to continue to maintain and expand Precision's
manufacturing capabilities and working capital requirements. Precision currently
expects that its capital expenditures will be approximately $10.6 million in
2000, including maintenance capital expenditures of approximately $5.0 million.
However, Precision's capital expenditures will be affected by, and may be
greater than currently anticipated depending upon the size and nature of new
business opportunities. As of June 30, 2000, Precision has funded approximately
$18.5 million of capital equipment needs under its $35.0 million operating lease
facility with General Electric Credit Corporation. This equipment is related to
Precision's recent contracts with Caterpillar and Dana and increased unit
delivery requirements from General Electric.
The aggregate purchase price, including fees and expenses, for the
acquisitions of Certified, Calbrit, Nationwide and General Automation of $102.0
million does not include potential effects of certain contingent purchase
arrangements. A contingent payment may be payable by Precision's parent,
Precision Partners Holdings Company, in the form of cash or a note
payable-in-kind maturing September 30, 2009, based on one of the companies
Precision acquired in March 1999 achieving specified EBITDA targets in 2000.
Payment by Precision Partners Holding Company of this additional contingent
payment, assuming the maximum amount is earned, would result in an annual
increase in Precision's goodwill amortization of approximately $0.5 million.
Additional contingent payments, which were payable by Precision
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<PAGE>
Partners Holding Company, based on this company and another company acquired in
March 1999 meeting certain EBITDA targets in 1999 were not earned. In addition,
a bonus payment of $3.0 million, based on one of the acquired companies
achieving certain 1999 EBITDA targets, to the former stockholder of this company
who is now an employee of Precision was accrued in December 1999 as
compensation expense and was paid in April 2000.
Precision plans to continue its acquisition strategy and expect to finance
future acquisitions using cash, capital stock, notes and/or assumption of
indebtedness. However, the restrictions imposed on Precision by its long-term
debt instruments may affect this strategy. In addition, to fully implement its
growth strategy and meet the resulting capital requirements, Precision may be
required to request increases in amounts available under its credit facilities,
issue future debt securities or raise additional capital through equity
financings. There can be no assurance that any such increase to Precision's
credit facilities will be available or, if available, will be on terms
satisfactory to Precision, or that it will be able to successfully complete any
future debt or equity financings on satisfactory terms, if at all. As a result,
Precision could be placed at a competitive disadvantage in pursuing
acquisitions.
Based upon current operations and the historical results of its
subsidiaries, Precision believes that its cash flow from operations, together
with available borrowings under its revolving credit facility, will be adequate
to meet its anticipated requirements for working capital, capital expenditures,
lease payments, and scheduled interest payments over the next 12 months.
However, there can be no assurance that Precision will continue to generate cash
flow above current levels or that the acquired companies will repeat their
performance. In addition, Precision's ability to pay the outstanding senior
notes at maturity will depend on the availability of refinancing.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, such as statements relating to trends
in revenues, gross profit margin expenses, net income and the adequacy of
capital resources, and are therefore prospective. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "project," and "continue" or similar words.
You should read statements that contain these words carefully because they:
- Discuss Precision's future expectations
- Contain projections of Precision's future results of operations or of
Precision's financial condition
- State other "forward-looking" information
Such forward looking statements are subject to a number of risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Potential risks and uncertainties include, but are not limited to,
those risk factors summarized below.
RISK FACTORS ASSOCIATED WITH PRECISION'S INDEBTEDNESS
PRECISION'S SUBSTANTIAL DEBT AND THE SIGNIFICANT DEMANDS ON ITS CASH RESOURCES
COULD AFFECT ITS ABILITY TO MAKE PAYMENTS ON THE EXCHANGE NOTES AND ACHIEVE ITS
BUSINESS PLAN.
SUBSTANTIAL DEBT. Precision has incurred a substantial amount of
indebtedness that requires significant interest payments. As of June 30, 2000,
Precision had total consolidated debt of $129.0 million and net interest expense
of approximately $8.3 million for the six month period then ended. Subject to
the limits contained in the indenture governing the Notes and the new credit
facilities, Precision and its subsidiaries may incur additional indebtedness
from time to time to finance capital expenditures, investments or acquisitions
or for other general corporate purposes.
DEMANDS ON CASH RESOURCES. Precision has substantial demands on its cash
resources in addition to operating expenses and interest expense on the Notes,
including, among others, interest and amortization payments under its credit
facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
16
<PAGE>
EFFECTS ON YOUR INVESTMENTS AND PRECISION'S BUSINESS STRATEGY. Precision's
level of indebtedness and these significant demands on its cash resources could
have important effects on your investment in the Notes. For example these
demands could:
- make it more difficult for Precision to satisfy its obligations with
respect to the Notes and its secured indebtedness;
- require Precision to dedicate a substantial portion of its cash flow from
operations to payments on its indebtedness, thereby reducing the amount of
its cash flow available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
- limit Precision's flexibility in planning for, or reacting to, changes in
its industry (including the pursuit of its growth strategy);
- place Precision at a competitive disadvantage compared to its competitors
that have fewer debts and significantly greater operating and financing
flexibility than Precision does;
- limit, along with the financial and other restrictive covenants applicable
to Precision's indebtedness, among other things, its ability to borrow
additional funds even when necessary to maintain adequate liquidity;
- increase Precision's vulnerability to general adverse economic and industry
conditions; and
- result in an event of default upon a failure to comply with these covenants
which, if not cured or waived, could have a material adverse effect on
Precision's business, financial condition or results of operations.
Precision's ability to pay interest on the Notes, to repay portions of its
long-term indebtedness included under the Notes and the credit facilities, and
to satisfy its other debt obligations will depend upon its future operating
performance and the availability of refinancing indebtedness, which will be
affected by the instruments governing its indebtedness, including the indenture
and the credit facilities, prevailing economic conditions and financial,
business and other factors, certain of which are beyond its control.
If Precision is unable to service its indebtedness and fund its business, it
will be forced to adopt an alternative strategy that may include:
- reducing or delaying capital expenditures;
- seeking additional debt financing or equity capital;
- selling assets; or
- restructuring or refinancing its indebtedness.
Precision cannot assure you that any such strategy could be effected on
terms satisfactory to it or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital
Resources."
EFFECT OF ADDITIONAL DEBT. Subject to the limits of Precision's debt
instruments, it may incur additional indebtedness from time to time to finance
capital expenditures, investments or acquisitions for other purposes, including
the borrowing of amounts repaid under its credit facilities. This could further
exacerbate the risks described below.
THE INDENTURE AND PRECISION'S CREDIT FACILITIES RESTRICT ITS ABILITY AND THE
ABILITY OF SOME OF ITS SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS.
INDENTURE. The indenture restricts Precision's ability and the ability of
some of its subsidiaries to, among other things:
- incur additional debt;
- pay dividends on or redeem or repurchase capital stock;
- issue or allow any person to own preferred stock of subsidiaries;
- incur or permit to exist indebtedness senior to the Notes, but subordinated
to any of its other indebtedness;
- in the case of non-guarantor subsidiaries, guarantee debt without also
guaranteeing the Notes;
- in the case of restricted subsidiaries, create or permit to exist dividend
or payment restrictions with respect to Precision;
- make investments;
- incur or permit to exist liens;
17
<PAGE>
- enter into transactions with affiliates;
- merge, consolidate or amalgamate with another company; and
- transfer or sell assets.
CREDIT FACILITIES. The credit facilities also contain similar covenants, as
well as a number of financial covenants requiring Precision to meet financial
ratios and financial condition tests. Precision's ability to borrow under its
revolving credit facility depends upon satisfaction of these covenants and its
borrowing base requirements. Its ability to meet these covenants and
requirements can be affected by events beyond its control. There can be no
assurance that Precision will meet these requirements.
EFFECT OF BREACH. Precision's failure to comply with the obligations and
covenants in the credit facilities or the indenture could result in an event of
default under the credit facilities or the indenture that, if not cured or
waived, could terminate its ability to borrow under the revolving credit
facility, could permit acceleration of the relevant debt and acceleration of
debt under other instruments and, in the case of the credit facilities, could
permit foreclosure on any collateral granted.
THE EXCHANGE NOTES AND SUBSIDIARY GUARANTEES ARE JUNIOR IN RIGHT OF PAYMENT TO
ALL OF PRECISION'S AND ITS SUBSIDIARY GUARANTOR'S INDEBTEDNESS, WHICH COULD
ADVERSELY AFFECT YOUR INVESTMENT.
The payment of principal, premium, if any, interest and additional interest,
if any, on the exchange notes and the subsidiary guarantees will, to the extent
set forth in the indenture, be subordinated in right of payment to all of
Precision's and the subsidiary guarantors' indebtedness, including under the
credit facilities, except any future indebtedness that expressly provides that
it ranks equal with, or junior in right of payment to, the exchange notes and
the subsidiary guarantees.
SUBSTANTIALLY ALL OF PRECISION'S ASSETS AND THOSE OF ITS SUBSIDIARIES SECURE
OTHER LONG TERM DEBT WHICH COULD REQUIRE IT TO SATISFY THOSE OBLIGATIONS BEFORE
THE EXCHANGE NOTES IN THE EVENT OF BANKRUPTCY, LIQUIDATION OR REORGANIZATION.
The credit facilities are secured by, among other things, substantially all
of Precision's assets and those of its subsidiaries. Consequently, upon any
distribution to its creditors or the creditors of a subsidiary guarantor in a
bankruptcy, liquidation or reorganization or similar proceeding relating to
Precision or that subsidiary guarantor or Precision or that subsidiary
guarantor's property, the holders of Precision's and that subsidiary's senior
debt, including the lenders under the credit facilities, will be entitled to be
paid in full in cash before any payment may be made with respect to the exchange
notes. Because a subsidiary guarantor or Precision, as applicable, may not have
sufficient funds or assets to pay all of the creditors, holders of exchange
notes may receive less, ratably, than the holders of senior debt.
In addition, the payment of principal, premium, if any, interest and
additional interest, if any, on the exchange notes will be prohibited in the
event of a payment default on any of Precision's or its subsidiary guarantor's
senior debt and may be blocked, at the option of the holders of such senior
debt, for up to 179 of 180 consecutive days in the event of specified
non-payment defaults.
As of June 30, 2000, Precision had approximately $129.2 million of
consolidated senior debt outstanding, excluding $18.5 million of availability
under its revolving credit facility. In addition, subject to the terms of the
indenture and the credit facilities, Precision will be permitted to borrow
substantial additional indebtedness, including senior debt, in the future.
RISKS ASSOCIATED WITH PRECISION PARTNERS, INC.
PRECISION IS STRUCTURED AS A HOLDING COMPANY AND IT DEPENDS ON ITS SUBSIDIARIES
IN ORDER TO SERVICE ITS DEBT.
Precision is structured as a holding company. Precision's only
significant asset is the capital stock or other equity interests of
Precision's operating subsidiaries. As a holding company, Precision conducts
all of its business through its subsidiaries. Consequently, Precision's cash
flow and ability to service Precision's debt obligations, including the
Notes, are dependent upon the earnings of Precision's operating subsidiaries
and the distribution of those earnings to Precision,
18
<PAGE>
or upon loans, advances or other payments made by these subsidiaries to
Precision. The ability of Precision's subsidiaries to pay dividends or make
other payments or advances to Precision will depend upon their operating
results and will be subject to applicable laws and contractual restrictions
contained in the instruments governing their indebtedness, including
Precision's credit facilities and the indenture. Although the indenture
limits the ability of these subsidiaries to enter into consensual
restrictions on their ability to pay dividends and make other payments to
Precision, these limitations will be subject to a number of significant
qualifications. There can be no assurance that the earnings of Precision's
operating subsidiaries will be adequate for Precision to service its debt
obligations, including the Notes.
THE SUCCESS OF PRECISION'S ACQUISITION STRATEGY DEPENDS ON THE AVAILABILITY OF
SUITABLE ACQUISITION CANDIDATES, DIVERSION OF MANAGEMENT TIME AND RISK OF
UNDISCLOSED LIABILITIES.
A significant aspect of Precision's strategy is to continue to pursue
select strategic acquisitions of companies that Precision believes can benefit
from its operations, management and access to capital and enhance Precision's
relationships with existing customers or augment Precision's manufacturing
capabilities. Precision's ability to grow by acquisition is dependent upon, and
may be limited by, the availability of suitable acquisition candidates and
capital, and the restrictions contained in the new credit facilities, the
indenture governing the Notes and any future financing arrangements. In
addition, growth by acquisition involves risks that could adversely affect
Precision's operating results, including the substantial amount of management
time that may be diverted from operations in order to pursue and complete such
acquisitions, difficulties in managing the additional operations and personnel
of acquired companies and the potential loss of key employees of acquired
companies. There can be no assurance that Precision will be able to obtain the
capital necessary to pursue its growth strategy or consummate acquisitions on
satisfactory terms, if at all. Possible future acquisitions could result in the
incurrence of additional debt, costs, contingent liabilities and amortization
expenses related to goodwill and other intangible assets, all of which could
materially adversely affect Precision's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Although Precision performs a due diligence investigation of each business
that it acquires, there may be liabilities of the acquired companies, including
Mid State, Galaxy, Certified, General Automation, Nationwide and Gillette, that
Precision fails or is unable to discover during its due diligence investigation
and for which it, as a successor owner, may be responsible. In connection with
acquisitions, Precision generally seeks to minimize the impact of these
liabilities by obtaining indemnities and warranties from the seller that may be
supported by deferring payment of a portion of the purchase price. However,
these indemnities and warranties, if obtained, may not fully cover the
liabilities due to their limited scope, amount, or duration, the financial
limitations of the indemnitor or warrantor, or other reasons.
PRECISION'S SUCCESS DEPENDS ON ITS ABILITY TO SUCCESSFULLY OPERATE ITS
SUBSIDIARIES ON A COMBINED BASIS.
Mid State, Galaxy, Certified, Nationwide, General Automation and Gillette
previously operated independently of one another and there can be no assurance
that Precision will be able to effectively manage these six operating companies
on a combined basis. In addition, to the extent management time may be diverted
to any one or more of the companies, the other operating companies may be
adversely affected. A failure by Precision to operate these businesses
profitably or to manage them effectively on a combined basis could have a
material adverse effect on its results of operations and financial condition.
THE SUCCESS OF PRECISION'S BUSINESS STRATEGY TO REALIZE A NUMBER OF CROSS
SELLING OPPORTUNITIES COULD BE AFFECTED BY A NUMBER OF FACTORS BEYOND ITS
CONTROL.
As part of its business strategy, Precision intends to capitalize on a
number of cross-selling opportunities it believes exist as a result of the
complementary customer bases and manufacturing capabilities of the acquired
companies and to implement certain operating improvements. Precision's
ability to implement and realize the benefits of this strategy could be
affected by a number of factors beyond its control, such as operating
difficulties, increased operating costs, regulatory developments, general
economic conditions, increased competition, or the inability to obtain
adequate financing for Precision's operations on suitable terms. In addition,
after gaining experience with its operations under this strategy, Precision
may decide to alter or discontinue certain aspects of it. Any failure to
implement aspects of Precision's strategy may adversely affect its results of
operations, financial condition and ability to service debt, including
Precision's ability to make principal and interest payments on the Notes.
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PRECISION'S INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT
ON ITS GROWTH STRATEGY.
Precision's growth strategy will require additional capital investment.
Capital will be required for, among other purposes, completing acquisitions,
managing acquired companies, acquiring new equipment and maintaining the
condition of Precision's existing equipment. Precision intends to pay for future
acquisitions using cash, capital stock, debt financings and/or assumption of
indebtedness. However, Precision's ability to make acquisitions and the manner
in which they are financed will be limited by the covenants contained in the
indenture governing the Notes and Precision's credit facilities. To the extent
that cash generated internally and cash available under Precision's credit
facilities is not sufficient to fund capital requirements, Precision will
require additional debt and/or equity financing. There can be no assurance,
however, such financing will be available or, if available, will be available on
terms satisfactory to Precision. Future debt financings, if available, may
result in increased interest and amortization expense, increased leverage and
decreased income available to fund further acquisitions and expansion, and may
limit Precision's ability to withstand competitive pressures and render it more
vulnerable to economic downturns. If Precision fails to obtain sufficient
additional capital in the future, it could be forced to curtail its growth
strategy by reducing or delaying capital expenditures and acquisitions, selling
assets or restructuring or refinancing its indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
A LOSS OF KEY EMPLOYEES AND HIGHLY SKILLED WORKERS COULD ADVERSELY AFFECT
PRECISION'S BUSINESS.
Some of Precision's executive officers are key to Precision's management
and direction. Precision's future success will depend on its ability to retain
capable management. Precision recently appointed a new executive management
team, and Precision's continued success will depend in part on the successful
integration of that team with the operations of Precision's subsidiaries. To
assist with the integration of the operations of its subsidiaries, Precision has
retained the services of key personnel of these companies. The success of
Precision's operations may depend, in part, on the successful retention, at
least initially, of these key personnel, as well as Precision's ability to
attract and retain additional talented personnel. Although Precision believe it
will be able to attract and retain talented personnel and that it could replace
key personnel should the need arise, the inability to attract or retain such
personnel could have a material adverse effect on its business. In addition,
because its products and processes are complex and require a high level of
precision, Precision is generally dependent on an educated and trained
workforce. Precision would be adversely affected by a shortage of skilled
employees.
FAILURE TO MAINTAIN RELATIONSHIPS WITH PRECISION'S LARGER CUSTOMERS AND FAILURE
BY PRECISION'S CUSTOMERS TO CONTINUE TO PURCHASE EXPECTED QUANTITIES DUE TO
CHANGES IN MARKET CONDITIONS COULD HAVE AN ADVERSE EFFECT ON ITS OPERATIONS.
Precision's largest customer, General Electric, accounted for
approximately 35.3% of its 2000 net sales and its top ten customers accounted
for approximately 77.11% of its 2000 net sales. The termination by General
Electric or any one or more of Precision's other top 10 customers of their
relationship with Precision could have a material adverse effect upon its
business, financial condition and results of operations.
In addition, Precision has been awarded long-term contracts with
Caterpillar and Dana. As of June 30, 2000, Precision funded approximately $18.5
million of its capital equipment needs under its $35.0 million operating lease
facility with General Electric Credit Corporation. This equipment is related to
Precision's recent contracts with Caterpillar and Dana and increased unit
delivery requirements from General Electric. To the extent Precision is unable
to purchase, integrate and make operational this equipment on a cost-effective
or timely basis, or to the extent the costs associated with purchasing,
integrating or making operational this equipment are higher than Precision
currently anticipates, its relationship with these customers and its business
and results of operations could be negatively impacted.
PRECISION'S REVENUES AND OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT
FLUCTUATION.
A significant portion of Precision's revenues is derived from new
projects and contracts, the timing of which is subject to a variety of
factors beyond Precision's control, including customer budgets and
modifications in customer products. Precision cannot predict the degree to
which, on a consolidated basis, these trends will continue. A portion of
Precision's operating expenses are relatively fixed. Because it typically do
not enter into long-term contracts or have volume commitments with its
customers, Precision must anticipate the future volume of orders based upon
the historic
20
<PAGE>
purchasing patterns of its customers and upon discussions with its customers as
to their future requirements. Cancellations, reductions or delays in orders by a
customer or group of customers could have a material adverse effect on
Precision's business, financial condition or results of operations.
Additionally, Precision may periodically incur cost increases due to hiring and
training of new employees in anticipation of future growth. The size, timing and
integration of possible future acquisitions may also cause substantial
fluctuations in operating results from quarter to quarter. As a result,
operating results for any fiscal quarter may not be indicative of the results
that may be achieved for any subsequent fiscal quarter or for a full fiscal
year.
SIGNIFICANT COMPETITION FOR PRECISION PART MANUFACTURING OUTSOURCED BY ORIGINAL
EQUIPMENT MANUFACTURERS MAY AFFECT PRECISION'S ABILITY TO SUCCEED.
Precision operates in an industry that is highly fragmented and
competitive. A variety of suppliers with different subsets of Precision's
manufacturing capabilities compete to supply the stringent demands of large
original equipment manufacturers. In addition, Precision's customers are
continually seeking to consolidate their business among one or more "Preferred"
or "Qualified" suppliers. If any customer becomes dissatisfied with Precision's
prices, quality or timeliness of delivery, among other things, it could award
future business or, in an extreme case, move existing business to Precision's
competitors. Precision cannot assure you that its products will continue to
compete successfully with the products of its competitors, including original
equipment manufacturers themselves, many of which are significantly larger and
have greater financial and other resources than Precision does.
THE CYCLICAL NATURE OF THE INDUSTRIES PRECISION CURRENTLY SERVES COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS COMPANY.
A majority of Precision's revenues are derived from customers that are in
industries and businesses that are cyclical in nature and subject to changes in
general economic conditions, such as the construction, aerospace and automotive
industries. General economic or industry specific downturns could have a
material adverse effect on Precision and its business, results of operations and
financial condition.
PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO OBTAIN RAW
MATERIALS AND COMPONENTS FROM ITS SUPPLIERS ON FAVORABLE TERMS.
Generally, Precision's major raw materials consist of traditional
materials such as steel, aluminum, iron, copper, magnesium and bronze, as well
as exotic and difficult to machine materials such as titanium, inconel, invar
and hastelloy. A majority of its raw materials are supplied by its customers on
consignment. Raw materials not supplied by its customers are purchased from
several suppliers. Although all of these materials have been available in
adequate quantities to meet its production demands, Precision can give you no
assurance that such materials will be available in adequate quantities in the
future. Precision does not presently anticipate any raw material shortages that
would significantly affect production. However, the lead times between the
placement of orders for certain raw materials and actual delivery to Precision
may vary significantly and Precision may from time to time be required to order
raw materials in quantities and at prices less than optimal to compensate for
the variability of lead times of delivery. Because Precision maintains a
relatively small inventory of raw materials and component parts, its business
could be adversely affected if it is unable to obtain these raw materials and
components from its suppliers on favorable terms.
PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED TO THE EXTENT THE U.S.
GOVERNMENT TERMINATED OR MODIFIED A CONTRACT WITH PRECISION OR ONE OF ITS
CUSTOMERS.
Precision is generally not a direct party to any contracts with the U.S.
Government. However, a portion of its sales are to customers who use the parts,
assemblies or tooling Precision supplies to them to fill orders under U.S.
government contracts to which they are a party. U.S. government contracts have
significant inherent risks, including:
- the ability of the U.S. government to terminate a contract for convenience,
in which case the other party could be limited to receiving only costs
already incurred or committed;
- modification of U.S. government contracts due to lack of Congressional
funding or changes in such funds; and
- an extensive and complex regulatory structure, which could subject the
other party to contract termination, civil and criminal penalties and in
some cases, suspension or disbarment from future U.S. government contracts.
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To the extent the U.S. government terminates or modifies a contract with
one of Precision's customers, Precision could be adversely affected if the
affected customer reduced its purchases from Precision as a result. In addition,
in the few instances where Precision is a direct party to a U.S. government
contract, the inherent risks described above, as well as risks associated with
the competitive bidding atmosphere under which U.S. government contracts are
awarded and unreimbursed cost overruns in fixed-price contracts, could have a
material adverse effect on its results of operations and financial condition.
PRECISION'S EQUIPMENT, FACILITIES AND OPERATIONS ARE SUBJECT TO NUMEROUS
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS THAT MAY BECOME MORE STRINGENT IN
THE FUTURE AND MAY RESULT IN INCREASED LIABILITY AND INCREASED CAPITAL
EXPENDITURES.
Precision's equipment, facilities and operations are subject to
increasingly complex and stringent federal, state and local laws and regulations
pertaining to protection of human health and the environment. These include,
among other things, the discharge of contaminants into the environment and the
handling and disposition of wastes (including industrial, solid and hazardous
wastes). In addition, Precision is required to obtain and maintain regulatory
approvals in the United States in connection with its operations. Many
environmental laws and regulations provide for substantial fines and criminal
sanctions for violations. It is difficult to predict the future development of
such laws and regulations or their impact on future earnings and operations, but
Precision anticipates that these laws and regulations will continue to require
increased capital expenditures because environmental standards will become more
stringent. Precision cannot assure you that material costs or liabilities will
not be incurred.
Certain environmental laws provide for strict, joint and several liability
for investigation and remediation of spills and other releases of hazardous
materials. These laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of any hazardous
materials. Persons who "arrange", as defined under these laws, for the disposal
or treatment of hazardous materials also may be liable for the costs of
investigation, removal or remediation of such materials at the disposal or
treatment site, regardless of whether the affected site is owned or operated by
them. Such liability is strict, and may be joint and several.
Because Precision owns and operates a number of facilities, and because it
arranges for the disposal of hazardous materials at many disposal sites, it may
incur costs for investigation, removal and remediation, as well as capital costs
associated with compliance with environmental laws and regulations. Although
such environmental costs have not been material in the past and are not expected
to be material in the future, changes in environmental laws and regulations or
unexpected investigations and clean-up costs could have a material adverse
effect on Precision's business, financial condition or results of operations.
On the basis of historical financial information, recent operating history
and other factors, Precision believes that the subsidiary guarantees are being
incurred for proper purposes and in good faith and that each subsidiary
guarantor, after giving effect to its guarantee of the Notes, will not be
insolvent, will not have unreasonably small capital for the business in which it
is engaged and will not have incurred debts beyond its ability to pay such debts
as they mature. There can be no assurance, however, as to what standard a court
would apply in making such determinations or that a court would agree with
Precision's conclusions in this regard.
INFLATION
Precision does not believe that inflation has had a significant impact on
its cost of operations.
YEAR 2000
Precision did not experience any significant malfunctions or errors in
its operating or business systems when the date changed from 1999 to 2000.
Based on operations since January 1, 2000, Precision does not expect any
significant impact to its on-going business as a result of the "Year 2000
issue". However, it is possible that the full impact of the date change,
which was of concern due to computer programs that use two digits instead of
four digits to define years, has not been fully recognized. For example, it
is possible that Year 2000 or similar issues such as leap year-related
problems may occur with billing, payroll, or financial closings at month,
quarter, or year end. Precision believes that such problems are likely to be
minor and correctable. In addition, Precision could still be negatively
impacted if its
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customers or suppliers are adversely affected by the Year 2000
or similar issues. Precision currently is not aware of any significant Year 2000
or similar problems that have arisen for its customers and suppliers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Precision's term loan facility provides for interest to be charged at either
the eurodollar rate or a base rate determined in accordance with the credit
agreement. Based on Precision's current level of borrowings from its term loan
facility, a 1.0% change in interest rate would result in a $0.2 million annual
change in interest expense. Precision's revolving line of credit provides for
interest to be charged at either the Eurodollar rate or a base rate determined
in accordance with the credit agreement. Based on Precision's current level of
outstanding revolving line of credit, a 1.0% change in interest rates would
result in a $0.1 million annual change in interest expense. Precision's $35.0
million operating lease program provides for interest to be charged at the LIBOR
rate plus basis points in accordance with the master lease agreement. Based on
Precision's current level of outstanding operating lease obligations, a 1.0%
change in the LIBOR interest rate would result in a $0.2 annual change in
equipment rental expense.
The remainder of Precision's debt is at fixed interest rates that are not
subject to changes in interest rates. Precision does not own nor is it obligated
for other significant debt or equity securities that would be affected by
fluctuations in market risk.
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) through (d) Not applicable.
ITEM 5: OTHER INFORMATION
Subsequent to the end of the quarter ended March 31, 2000, the resignations of
Dr. James Ashton, Chairman and Chief Executive Officer of Precision, Mr. Ronald
Miller, Chief Financial Officer of Precision and Mr. Melvin Johnson,
Vice-President of Operations of Precision, were accepted by the Board of
Directors of Precision as tendered. The executives agreed to continue their
leadership roles until a successor team was named and a transition strategy was
executed.
On July 10, 2000, a new management team, headed by John G. Raos, was appointed
to succeed Dr. Ashton, Mr. Miller, and Mr. Johnson. Mr. Raos, who was named
President and Chief Executive Officer, is joined by Frank R. Reilly as Executive
Vice-President and Chief Financial Officer and Peter J. Statile as Executive
Vice-President of Corporate Development and Operations.
For the last five years, Mr. Raos served U.S. Industries, Inc., a $3 billion
building products and industrial company, as President, Chief Operating Officer
and Director. Mr. Reilly was a consultant with the Sumner Group, a financial
advisory and investment business that he founded in 1998. Prior to the Sumner
Group, Mr. Reilly served U.S. Industries as Senior Vice President, Chief
Financial Officer, and Director. Prior to joining Precision, Mr. Statile was
Executive Vice President - Operations of Strategic Industries, Inc., a
diversified company with revenues in excess of $850 million.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
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PRECISION PARTNERS, INC.
SIGNATURE
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.
PRECISION PARTNERS, INC.
Dated: August [14], 2000 By: /s/ FRANK R. REILLY
----------------------------------------
Frank R. Reilly
Chief Financial Officer
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