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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 PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK, $.25 PAR VALUE --4,238,036 SHARES AS OF MAY 6, 1996
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements ....................................................................... 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................................. 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K .......................................................... 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 64 $ 118
Accounts receivable 13,971 12,959
Inventories 8,827 8,105
Prepaid expenses and other assets 2,718 2,101
Deferred income taxes 1,195 1,195
------- -------
Total current assets 26,775 24,478
------- -------
Property, plant and equipment:
Land 1,525 1,525
Buildings 18,576 17,190
Equipment 60,997 57,110
------- -------
81,098 75,825
Less accumulated depreciation 32,461 30,887
------- -------
Property, plant and equipment, net 48,637 44,938
------- -------
Excess of cost over net assets of businesses acquired, net 9,647 9,726
------- -------
Other assets, net 2,797 2,734
------- -------
$87,856 $81,876
======= =======
</TABLE>
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 10,200 $ 10,628
Accrued expenses 5,637 6,572
Short-term debt 12,935 7,522
Current portion of long-term debt 5,392 4,531
-------- --------
Total current liabilities 34,164 29,253
-------- --------
Long-term debt, excluding current portion 56,711 56,033
-------- --------
Deferred income taxes and other long-term liabilities 1,100 1,056
-------- --------
Redeemable preferred stock, $100 par value,
at redemption value 1,020 1,020
Less excess of redemption value over par value 510 510
-------- --------
Redeemable preferred stock, at par value 510 510
-------- --------
Stockholders' deficit:
Common stock, $.25 par value, 10,000,000
shares authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,537 12,547
Accumulated deficit (17,948) (18,305)
Cost of common stock in treasury, 120,915 shares (305) (305)
-------- --------
Total stockholders' deficit (4,629) (4,976)
-------- --------
$ 87,856 $ 81,876
======== ========
</TABLE>
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $27,898 $27,074
------- -------
Costs and expenses:
Cost of sales 22,742 21,541
Selling and administrative expenses 2,664 2,620
------- -------
Total costs and expenses 25,406 24,161
------- -------
Income from operations 2,492 2,913
Interest expense 1,954 1,810
------- -------
Income before income taxes 538 1,103
Provision for income taxes 181 284
------- -------
Net income $ 357 $ 819
======= =======
Net income per primary and fully diluted common share:
Primary $ .08 $ .19
======= =======
Fully diluted $ .08 $ .18
======= =======
</TABLE>
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 357 $ 819
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,937 1,438
Changes in operating assets and liabilities which
provided/(used) cash:
Receivables (1,012) (1,495)
Inventories (722) (543)
Prepaid expenses and other assets (617) (172)
Accounts payable (428) (999)
Accrued expenses (935) (641)
Other 42 -
------- -------
Net cash used by operating activities (1,378) (1,593)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,320) (2,723)
Increase in equipment deposits, net (79) (675)
Proceeds from sales of property, plant and equipment 35 -
Additions to deferred tooling expense (116) (256)
------- -------
Net cash used by investing activities (5,480) (3,654)
------- -------
FINANCING ACTIVITIES:
Net increase in short-term debt 5,413 4,921
Proceeds from issuance of long-term debt 6,947 1,000
Repayment of long-term debt (5,416) (504)
Preferred stock dividends (10) (11)
Other (130) (167)
------- -------
Net cash provided by financing activities 6,804 5,239
------- -------
Net decrease in cash (54) (8)
Cash at beginning of period 118 79
------- -------
Cash at end of period $ 64 $ 71
======= =======
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation ("LPC") and its wholly owned
subsidiary, Lexington Components, Inc. ("LCI"). Unless the context otherwise
requires, all references herein to the "Company" are to LPC and LCI. The
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the financial statements do
not include all the information and footnotes normally included in the annual
consolidated financial statements prepared in accordance with generally accepted
accounting principles. Significant accounting policies followed by the Company
are set forth, except as described below, in Note 1 to the consolidated
financial statements in the Company's annual report on Form 10-K for the year
ended December 31, 1995, which was filed with the Securities and Exchange
Commission.
In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at March 31, 1996 and the Company's results of
operations and cash flows for the fiscal quarters ended March 31, 1996 and 1995.
All such adjustments were of a normal recurring nature. Certain amounts in the
consolidated financial statements for 1995 have been reclassified to conform to
the presentation for 1996.
The results of operations for the first fiscal quarter of 1996 are not
necessarily indicative of the results to be expected for the full year or for
any succeeding quarter.
Effective January 1, 1996, the Company adopted "Financial Accounting
Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("FAS 121"), which requires losses to be
recorded on long-lived assets used in operations where indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of such assets. The adoption of FAS 121
on January 1, 1996 did not affect the financial position or the operating
results of the Company.
NOTE 2 -- INVENTORIES
Inventories at March 31, 1996 and December 31, 1995 are summarized below
(in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ----------
<S> <C> <C>
Finished goods $ 3,083 $ 3,040
Work in process 2,952 2,213
Raw materials and purchased parts 2,792 2,852
-------- ---------
$ 8,827 $ 8,105
======== =========
</TABLE>
NOTE 3 -- SHORT-TERM DEBT
At March 31, 1996, short-term debt consisted of $11,935,000 of loans
outstanding under the Company's revolving line of credit and a $1,000,000
construction loan. Loans outstanding under the revolving line of credit bear
interest at the London Interbank Offered Rate ("LIBOR") plus 3-1/4% and/or Prime
Rate plus 1% and the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
construction loan bears interest at a fixed rate of 8.37% per annum. At
December 31, 1995, short-term debt consisted of loans outstanding under the
Company's revolving line of credit.
NOTE 4 -- ACCRUED EXPENSES
At March 31, 1996 and December 31, 1995, accrued expenses included
accrued interest expense of $793,000 and $1,717,000, respectively.
NOTE 5 -- LONG-TERM DEBT
Long-term debt at March 31, 1996 and December 31, 1995 is summarized
below (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Loans outstanding under revolving line of credit $ - $ 3,730
Term loans, payable in monthly installments, final
maturities in 2000, 2001, 2002 or 2003 25,895 20,488
12% Note, payable in monthly installments through 2000 2,515 2,635
Industrial Revenue Bond, 75% of prime, payable in monthly
installments, final maturity in 2000 473 498
12-3/4% Senior Subordinated Notes, due 2000 31,691 31,682
14% Junior Subordinated Convertible Notes, due 2000 1,000 1,000
14% Junior Subordinated Nonconvertible Notes, due 2000 347 347
Other 182 184
------- -------
Total long-term debt 62,103 60,564
Less current portion 5,392 4,531
------- -------
Total long-term debt, excluding current portion $56,711 $56,033
======= =======
</TABLE>
LOANS OUTSTANDING UNDER REVOLVING LINE OF CREDIT
At December 31, 1995, $3,730,000 of borrowings outstanding under the
Company's revolving line of credit were classified as long-term debt in the
Company's consolidated financial statements because the borrowings were
refinanced under long-term agreements before the consolidated financial
statements for the year ended December 31, 1995 were issued.
TERM LOANS
Term loans having an aggregate principal balance of $24,395,000 at
March 31, 1996 are payable in equal monthly principal installments with
maturities in 2000, 2001, 2002 or 2003. A term loan having a principal balance
of $1,500,000 at March 31, 1996 is payable in equal monthly principal
installments of $8,000 until 2001 when the remaining principal balance of
$1,008,000 will be due. Term loans having a principal balance of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$17,218,000 at March 31, 1996 are subject to earlier maturity in the event the
Company's revolving line of credit terminates or expires.
Term loans having a principal balance of $24,395,000 bear interest at
LIBOR plus 3% or 3-1/4% or Prime Rate plus 3/4% or 1%. A term loan having a
principal balance of $1,500,000 bears interest at a fixed rate of 8.37% per
annum. The term loans are secured by the Company's receivables, inventories and
equipment and by certain of the Company's real property.
12% NOTE
The 12% Note, due April 30, 2000 (the "12% Note"), is payable by LCI, is
secured by a mortgage on LCI's Rock Hill, South Carolina, facility and is
guaranteed by LPC. Level payments of principal and interest in the amount of
$66,000 are due monthly until the 12% Note is paid in full.
12-3/4% NOTES
The 12-3/4% Senior Subordinated Notes, due February 1, 2000 (the "12-3/4%
Notes"), are unsecured obligations of the Company, redeemable at the option of
the Company, in whole or in part, at a declining premium over the principal
amount thereof. Interest on the 12-3/4% Notes is due semi-annually on February 1
and August 1.
14% NOTES
The 14% Junior Subordinated Convertible Notes, due May 1, 2000 (the "14%
Convertible Notes"), and 14% Junior Subordinated Nonconvertible Notes, due May
1, 2000 (collectively, the "14% Notes"), are unsecured obligations of the
Company and are redeemable at the option of the Company, in whole or in part, at
a declining premium over the principal amount thereof. Interest on the 14% Notes
is due quarterly on February 1, May 1, August 1 and November 1. The 14%
Convertible Notes are convertible into 440,000 shares of the Company's common
stock.
RESTRICTIVE COVENANTS
Certain of the Company's loan agreements contain requirements with
respect to the maintenance of minimum levels of working capital, net worth and
cash flow coverage, and place certain restrictions on the Company's business and
operations, including restrictions on the issuance or assumption of additional
debt, the sale of all or substantially all of the Company's assets, the funding
of capital expenditures, the purchase of common stock, the redemption of
preferred stock and the payment of cash dividends.
NOTE 6 -- PROVISION FOR INCOME TAXES
At March 31, 1996 and December 31, 1995, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in the components of the
deferred tax assets, the deferred tax liabilities or the valuation allowance
during the first quarter of 1996.
The income tax provision recorded for the first quarter of 1996 was
calculated using the estimated annual effective tax rate (primarily attributable
to federal alternative minimum taxes) for the year ending December 31,
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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1996. The income tax provisions otherwise recognizable during the first quarters
of 1996 and 1995 were reduced by the utilization of portions of the Company's
tax loss carryforwards and tax credit carryforwards.
NOTE 7 -- INCOME PER SHARE
The calculations for primary and fully diluted net income per share
for the first quarters of 1996 and 1995 are set forth below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1996 1995
---- ----
<S> <C> <C>
PRIMARY NET INCOME PER COMMON SHARE:
Weighted average common shares outstanding during period 4,228 4,203
Common stock equivalents - incentive stock options 26 25
------- -------
Weighted average common and common equivalent shares 4,254 4,228
======= =======
Net income $ 357 $ 819
Preferred stock dividends (10) (11)
Pro rata portion of the excess of the redemption cost over the
value of preferred stock redeemed (11) (11)
------- -------
Income for primary net income per share $ 336 $ 797
======= =======
Primary net income per common share $ .08 $ .19
======= =======
FULLY DILUTED NET INCOME PER COMMON SHARE:
Weighted average common shares outstanding during period 4,228 4,203
Pro forma conversion of 14% Convertible Notes 440 440
Common stock equivalents - incentive stock options 26 25
------- -------
Weighted average common and common equivalent shares 4,694 4,668
======= =======
Net income $ 357 $ 819
Preferred stock dividends (10) (11)
Pro rata portion of the excess of the redemption cost over the
value of preferred stock redeemed (11) (11)
Pro forma elimination of interest expense on the 14%
Convertible Notes, net of applicable income taxes 27 26
------- -------
Income for fully diluted net income per share $ 363 $ 823
======= =======
Fully diluted net income per common share $ .08 $ .18
======= =======
</TABLE>
During 1995, the Financial Accounting Standards Board issued "Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation" ("FAS
123"), which establishes new standards for the measurement
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<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and recognition of stock-based compensation, but allows entities to continue
using "Accounting Principles Board Opinion Number 25" ("APB 25") to account for
the issuance of stock-based compensation if they disclose the pro forma effect
of stock-based compensation on net income and earnings per share in their annual
financial statements as if FAS 123 had been adopted. FAS 123 is effective for
1996. The Company has chosen to continue using the provisions of APB 25 to
account for the effect stock-based compensation has on its primary and fully
diluted net income per share calculations.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities. In addition, the Company has been named a potentially responsible
party or a third-party defendant, along with other companies, for certain waste
disposal sites. Each of these matters is subject to various uncertainties and it
is possible that some of these matters may be decided unfavorably to the
Company. Management believes that any liability that may ultimately result from
the resolution of these matters will not have a material adverse effect on the
financial position of the Company.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless the context otherwise requires, all references herein to the
"Company" are to Lexington Precision Corporation ("LPC") and its wholly-owned
subsidiary, Lexington Components, Inc. ("LCI"). Through its two business
segments, the Rubber Group and the Metals Group, the Company manufactures, to
customer specifications, rubber and metal component parts. The Rubber Group
manufactures silicone and organic rubber components for sale primarily to
manufacturers of automobiles, automotive replacement parts and medical devices.
The Metals Group manufactures metal components for sale primarily to
manufacturers of automobiles, industrial equipment, home appliances and business
machines. The Rubber Group operates through three divisions of LCI, the
Electrical Insulator Division, the Precision Seals Division and Lexington
Medical, and through a division of LPC, Lexington Manufacturing. The Metals
Group operates through two divisions of LPC, Falconer Die Casting Company
("Falconer") and Ness Precision Products ("Ness").
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Various statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon projections and estimates,
as distinct from past or historical facts and events. These forward-looking
statements are subject to a number of risks and uncertainties that could cause
actual results to be materially different. Such risks and uncertainties include
changes in future economic conditions, changes in the competitive environment,
changes in the capital markets, unanticipated operating results and cash flows
and a number of other factors.
The results of operations for any particular fiscal period of the Company
are not necessarily indicative of the results to be expected for any one or more
succeeding fiscal periods.
RESULTS OF OPERATIONS -- FIRST QUARTER OF 1996 VERSUS FIRST QUARTER OF 1995
NET SALES
A summary of the net sales of the Rubber Group and the Metals Group for
the first quarters of 1996 and 1995 follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, PERCENTAGE
------------------------- INCREASE/
1996 1995 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
Rubber Group $ 18,151 $ 15,688 15.7%
Metals Group 9,747 11,386 (14.4)
-------- -------- ------
$ 27,898 $ 27,074 3.0%
======== ======== ======
</TABLE>
The increase in net sales of the Rubber Group was the result of increased
sales of seals and insulators for automotive wiring systems and, to lesser
degree, increased sales of tooling and increased sales of medical components.
During the first quarter of 1996, net sales of seals and insulators to the
Company's largest customer, Delphi Packard Electric Systems, a division of
General Motors Corporation, were essentially unchanged when compared to the
first quarter of 1995 primarily because of the impact of the recent strike at
GM's Dayton, Ohio, facility and the resulting shutdown of GM assembly lines. The
first quarter of 1995
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<PAGE> 13
included net sales of $656,000 from the Rubber Group's Extruded and Lathe-Cut
Products Division, which was sold in June 1995.
The decrease in net sales of the Metals Group resulted from lower sales
at both Falconer and Ness. Net sales of a single component to TRW Vehicle Safety
Systems, Inc. ("TRW VSSI") declined by $1,428,000 in the first quarter of 1996,
compared to the first quarter of 1995. The decline in sales of the single
component resulted from the planned phase-out during 1995 and 1996 of the
inflator system in which the component is used. The decline in sales of the
single component will continue to negatively affect net sales and profitability
of the Company for the remainder of 1996. Currently, the Company believes that
it will experience a decline in net sales of the single component of
approximately $2,400,000 during the remaining nine months of 1996, compared to
the same period in 1995.
COST OF SALES
A summary of cost of sales and cost of sales as a percentage of net sales
for the Rubber Group and the Metals Group for the first quarters of 1996 and
1995 follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, PERCENTAGE
--------------------------------------- INCREASE/
1996 1995 (DECREASE)
---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Rubber Group $ 14,272 78.6% $ 12,420 79.2% 14.9%
Metals Group 8,470 86.9 9,121 80.1 (7.1)
-------- ----- -------- ----- ------
$ 22,742 81.5% $ 21,541 79.6% 5.6%
======== ===== ======== ===== ======
</TABLE>
Cost of sales of the Rubber Group as a percentage of net sales decreased
to 78.6% during the first quarter of 1996 from 79.2% during the first quarter of
1995 primarily because of reduced factory overhead expense expressed as a
percentage of net sales. Factory overhead expense as a percentage of net sales
decreased during the first quarter because certain factory overhead expenses
grew at a slower rate than sales and because of reduced workers' compensation
and health care expenses. Although factory overhead expense as a percentage of
net sales decreased during the first quarter of 1996, the reduction was
partially offset by start-up expenses incurred at Lexington Manufacturing, the
Rubber Group's new mold manufacturing and engineering facility, and by increased
depreciation expense.
Cost of sales of the Metals Group as a percentage of net sales increased
to 86.9% during the first quarter of 1996 from 80.1% during the first quarter of
1995. Factory overhead expense as a percentage of net sales and, to a lesser
extent, direct labor cost as a percentage of net sales both increased during the
first quarter of 1996 primarily because of additional expenses incurred in
connection with the start-up of new metal machining equipment, reduced
absorption of fixed factory overhead expenses due to the decrease in net sales
and increased depreciation expense.
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<PAGE> 14
SELLING AND ADMINISTRATIVE EXPENSES
A summary of selling and administrative expenses and selling and
administrative expenses as a percentage of net sales for the Rubber Group, the
Metals Group and the Corporate Office for the first quarters of 1996 and 1995
follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, PERCENTAGE
--------------------------------------- INCREASE/
1996 1995 (DECREASE)
---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Rubber Group $ 985 5.4% $ 1,010 6.4% (2.5)%
Metals Group 983 10.1 957 8.4 2.7
Corporate Office 696 N/A 653 N/A 6.6
-------- ----- -------- ----- -------
$ 2,664 9.5% $ 2,620 9.7% 1.7 %
======== ===== ======== ===== =======
</TABLE>
At the Rubber Group, selling and administrative expenses as a percentage
of net sales decreased to 5.4% during the first quarter of 1996 primarily
because most selling and administrative expenses grew at a slower rate than net
sales and because employee related relocation expenses declined.
At the Metals Group, selling and administrative expenses as a percentage
of net sales increased to 10.1% during the first quarter of 1996 primarily
because most selling and administrative expenses remained unchanged while net
sales declined. Legal expenses and personnel costs at the Metals Group also
increased during first quarter of 1996, compared with the first quarter of 1995.
INTEREST EXPENSE
Interest expense totaled $1,954,000 during the first quarter of 1996, an
increase of $144,000 compared to the first quarter of 1995. This increase was
caused primarily by an increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At March 31, 1996 and December 31, 1995, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in the components of the
deferred tax assets, the deferred tax liabilities or the valuation allowance
during the first quarter of 1996.
The income tax provision recorded for the first quarter of 1996 was
calculated using the estimated annual effective tax rate (primarily attributable
to federal alternative minimum taxes) for the year ending December 31, 1996. The
income tax provisions otherwise recognizable during the first quarters of 1996
and 1995 were reduced by the utilization of portions of the Company's tax loss
carryforwards and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 1996, net cash used by the operating
activities of the Company totaled $1,378,000. Cash was used during the quarter
to fund increased accounts receivable, inventories and prepaid
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<PAGE> 15
expenses and other current assets and to reduce accounts payable and accrued
expenses. Account receivable increased by $1,012,000 primarily because net sales
in March 1996 exceeded net sales in December 1995. Inventories increased by
$722,000 primarily because of higher production levels at the end of the
quarter. Prepaid expenses and other current assets increased by $617,000
primarily because of increased prepaid workers' compensation premiums and
increased customer tooling in process. Accounts payable decreased by $428,000
primarily because of a reduction in payables to building contractors. Accrued
expenses decreased by $935,000 primarily because of the payment on February 1,
1996 of the semi-annual interest payment in the amount of $2,022,000 on the
12-3/4% Senior Subordinated Notes, due February 1, 2000 (the "12-3/4 Notes").
Net working capital declined by $2,614,000, primarily because capital
expenditures were financed with increased borrowings under the Company's
revolving line of credit and by a short-term construction loan.
INVESTING ACTIVITIES
During the first quarter of 1996, the investing activities of the Company
used $5,480,000 of cash, primarily for capital expenditures. During the first
quarter of 1996, capital expenditures attributable to the Rubber Group and the
Metals Group totaled $3,973,000 and $1,347,000, respectively. The Company
presently expects that capital expenditures will total approximately $14,000,000
during 1996, which will be comprised of approximately $11,000,000 for equipment
and approximately $3,000,000 for buildings. At March 31, 1996, the Company had
commitments outstanding for capital expenditures totaling approximately
$4,000,000.
FINANCING ACTIVITIES
During the first quarter of 1996, the financing activities of the Company
provided $6,804,000 of cash.
The Company finances its day-to-day operations through a revolving line
of credit. The Company borrows and repays loans outstanding under the revolving
line of credit daily, depending on cash receipts and disbursements. The ability
of the Company to borrow under the revolving line of credit is governed by
certain availability formulas which are based on the levels of accounts
receivable and inventories of the Company. The Company also uses the revolving
line of credit to fund capital expenditures with the intention of later
refinancing a portion of such borrowings with term loans. Additionally, the
Company also uses an equipment line of credit to finance a portion of qualified
new equipment purchases with term loans. Generally, the amount of financing
available under the equipment line of credit to fund new equipment purchases is
equal to 85% of the appraised orderly liquidation value of the equipment being
purchased. At March 31, 1996, subject to the acquisition of new equipment as
collateral, funding potentially available under the equipment line of credit
totaled approximately $5,700,000.
During the first quarter of 1996, the Company's net borrowings under the
revolving line of credit increased by $683,000. Also, during the first quarter
of 1996, the Company incurred additional short-term borrowings of $1,000,000 in
connection with the construction of its new facility in North Canton, Ohio. The
additional short-term borrowings bear interest at a fixed rate of 8.37% per
annum and are expected to be refinanced as part of a $2,500,000 term loan upon
completion of the facility (the "North Canton Commitment"). At December 31,
1995, $3,730,000 of borrowings outstanding under the revolving line of credit
were classified as long-term debt in the Company's consolidated financial
statements because the borrowings were refinanced under long-term agreements
before the Company's consolidated financial statements for the year ended
December 31, 1995 were issued.
During the first quarter of 1996, the Company borrowed $10,677,000 in
term loans to refinance $4,035,000 of pre-existing term loans and $6,642,000 of
loans outstanding under the revolving line of credit.
-14-
<PAGE> 16
The new term loans are secured by the Company's receivables, inventories and
equipment and by certain of the Company's real property. Term loans totaling
$2,000,000 bear interest at the London Interbank Offered Rate ("LIBOR") plus
3-1/4% and/or Prime Rate plus 1% and are payable in either seventy or
eighty-four monthly principal installments. Term loans totaling $5,377,000 bear
interest at LIBOR plus 3% and are payable in 48 equal monthly principal
installments. A $1,800,000 term loan bears interest at LIBOR plus 3% and/or
Prime Rate plus 3/4% and is payable in 60 equal monthly principal installments.
A $1,500,000 term loan bears interest at a fixed rate of 8.37% per annum and is
payable in 59 monthly installments of $8,000 with a final payment of $1,008,000
due in 2001.
LIQUIDITY
The Company operates with high financial leverage and limited liquidity.
During the first quarter of 1996, aggregate indebtedness of the Company,
excluding accounts payable, increased by $6,952,000 to $75,038,000. During the
year ending December 31, 1996, cash interest and principal payments are
projected to total approximately $8,000,000 and $5,200,000, respectively.
Availability under the Company's revolving line of credit totaled
$2,011,000 at May 6, 1996. Availability under the revolving line of credit is
calculated without deducting outstanding checks issued by the Company.
Typically, outstanding checks total approximately $1,500,000.
During the remaining nine months of 1996 and the first quarter of 1997,
the Company anticipates that, in addition to cash flows from operations, new
loans in the amount of approximately $5,000,000 will be required to meet the
Company's working capital, capital expenditure and debt service requirements.
During the same period, aggregate indebtedness, excluding accounts payable, are
presently expected to peak at approximately $78,000,000 on August 1, 1996, the
scheduled payment date for $2,022,000 of interest then due on the 12-3/4% Notes.
Although no assurance can be given, the Company currently believes that cash
flows from operations and availability under the revolving line of credit, the
equipment line of credit, and the North Canton Commitment should be adequate to
meet its anticipated working capital, capital expenditure and debt service
requirements for the remainder of 1996 and the first quarter of 1997. If cash
flows from operations or availability under the revolving line of credit, the
equipment line of credit, and the North Canton Commitment fall below
expectations, the Company intends to reduce or delay its capital expenditure
program and/or to extend accounts payable balances with suppliers beyond terms
which the Company believes are customary in the industries in which it operates.
Certain of the Company's loan agreements contain requirements with
respect to the maintenance of minimum levels of working capital, net worth and
cash flow coverage and place certain restrictions on the Company's business and
operations, including restrictions on the issuance or assumption of additional
debt, the sale of all or substantially all of the Company's assets, the funding
of capital expenditures, the purchase of common stock, the redemption of
preferred stock and the payment of cash dividends.
ACQUISITIONS
The Company may seek, from time to time, to acquire assets and businesses
related to its current operations with the intention of expanding its existing
operations. Depending on, among other things, the size and terms of such
acquisitions, the Company may be required to obtain additional financing and, in
some cases, the approval of certain holders of the Company's debt. The Company's
ability to effect acquisitions may be dependent upon its ability to obtain such
financing and, to the extent applicable, consents.
-15-
<PAGE> 17
ENVIRONMENTAL MATTERS
The Company has been named from time to time as one of numerous
potentially responsible parties under applicable environmental laws for
restoration costs at waste disposal sites, as a third-party defendant in cost
recovery actions pursuant to applicable environmental laws and as a defendant or
potential defendant in various other environmental law matters. It is the
Company's policy to record accruals for such matters when a loss is deemed
probable and the amount of such loss can be reasonably estimated. The various
actions to which the Company is or may be a party in the future are at various
stages of completion and, although there can be no assurance as to the outcome
of existing or potential environmental litigation, in the event such litigation
were commenced, based upon the information currently available to the Company,
the Company believes that the outcome of such actions would not have a material
adverse effect upon its financial position.
-16-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
27-1 Financial Data Schedule*
* Not deemed filed for purposes of Section 11 of the Securities
Act of 1933, Section 18 of the Securities Exchange Act of 1934
and Section 323 of the Trust Indenture Act of 1939, or
otherwise subject to the liabilities of such sections and not
deemed part of any registration statement to which such
exhibit relates.
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
-17-
<PAGE> 19
LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 1996
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.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 9, 1996 By: /s/ Michael A. Lubin
- ----------- -------------------------
Date Michael A. Lubin
Chairman of the Board
May 9, 1996 By: /s/ Warren Delano
- ----------- -------------------------
Date Warren Delano
President
May 9, 1996 By: /s/ Dennis J. Welhouse
- ----------- -------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-18-
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