UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- -----------
Commission File Number 1-7418
------
ESSEX GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 35-1313928
--------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 WALL STREET, FORT WAYNE, INDIANA 46802
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (219) 461-4000
None
------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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.
[X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of Shares Outstanding
Common Stock As of September 30, 1994
-------------- ----------------------------
$.01 Par Value 100<PAGE>
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . . . 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
In Thousands of Dollars (Unaudited)
--------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 14,552 $ 10,346
Accounts receivable (net of allowance of
$2,912 and $2,811) . . . . . . . . . . . . . . . . . 152,231 116,733
Inventories . . . . . . . . . . . . . . . . . . . . . 146,981 139,357
Other current assets . . . . . . . . . . . . . . . . . 11,646 9,738
-------- --------
Total current assets . . . . . . . . . . . . . 325,410 276,174
Property, plant and equipment, (net of accumulated
depreciation of $49,939 and $30,373) . . . . . . . . 272,663 273,084
Excess of cost over net assets acquired (net of
accumulated amortization of $8,129 and $5,081) . . . 134,116 137,164
Other intangible assets and deferred costs (net of
accumulated amortization of $5,155 and $2,986) . . . 12,252 13,921
Other assets . . . . . . . . . . . . . . . . . . . . . 2,061 6,654
-------- --------
$746,502 $706,997
======== ========
See Notes to Consolidated Financial Statements
3<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31,
1994 1993
In Thousands of Dollars, Except Per Share Data (Unaudited)
--------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 45,217 $ 45,535
Accrued liabilities . . . . . . . . . . . . . . . . . 50,768 42,863
Deferred income taxes . . . . . . . . . . . . . . . . 14,986 14,277
Due to Holdings . . . . . . . . . . . . . . . . . . . 29,192 18,363
-------- --------
Total current liabilities . . . . . . . . . . . 140,163 121,038
Long-term debt . . . . . . . . . . . . . . . . . . . . 200,000 200,000
Deferred income taxes . . . . . . . . . . . . . . . . 73,266 77,794
Other long-term liabilities . . . . . . . . . . . . . 6,415 4,433
Stockholder's equity:
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding; plus
additional paid in capital . . . . . . . . . . . . . 302,784 302,784
Retained earnings . . . . . . . . . . . . . . . . . . 23,874 948
-------- --------
Total stockholder's equity . . . . . . . . . . 326,658 303,732
-------- --------
$746,502 $706,997
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
------------------------ -----------------------
In Thousands of Dollars 1994 1993 1994 1993
----------------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $265,897 $220,249 $744,287 $655,023
Interest income . . . . . . . . . . . . . 95 28 158 240
Other income . . . . . . . . . . . . . . . 606 500 945 1,289
-------- -------- -------- --------
266,598 220,777 745,390 656,552
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . 223,522 192,702 623,048 567,866
Selling and administrative . . . . . . . . 22,035 20,156 62,337 58,085
Interest expense . . . . . . . . . . . . . 6,443 5,886 18,563 20,000
Other expense . . . . . . . . . . . . . . . 400 421 1,016 818
-------- -------- -------- --------
252,400 219,165 704,964 646,769
-------- -------- -------- --------
Income before income taxes and
extraordinary charge . . . . . . . . . . . . 14,198 1,612 40,426 9,783
Provision for income taxes . . . . . . . . . 6,200 2,600 17,500 6,652
-------- -------- -------- --------
Income before extraordinary charge . . . . . 7,998 (988) 22,926 3,131
Extraordinary charge - repurchase of debt,
net of income tax benefit . . . . . . . . . - - - 3,367
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . $ 7,998 $ (988) $ 22,926 $ (236)
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period
Ended September 30,
------------------------
In Thousands of Dollars 1994 1993
-------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . $22,926 $(236)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 23,046 22,063
Loss on repurchase of debt . . . . . . . . . . . . - 5,519
Non cash interest expense . . . . . . . . . . . . . 2,002 4,300
Non cash pension expense . . . . . . . . . . . . . 1,672 1,987
Provision for losses on accounts receivable . . . . 562 603
(Benefit) provision for deferred income taxes . . . (3,891) 898
Loss on disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . 776 165
Changes in operating assets and liabilities:
Increase in accounts receivable . . . . . . . . . (34,027) (12,973)
(Increase) decrease in inventories . . . . . . . . (5,790) 762
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . 7,418 2,308
Net (increase) decrease in other assets and
liabilities . . . . . . . . . . . . . . . . . . . (2,021) 2,925
Increase in due to Holdings . . . . . . . . . . . 10,829 7,727
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . 23,502 36,048
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (18,707) (17,115)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 171 334
Investment in subsidiary and other . . . . . . . . . (364) -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (18,900) (16,781)
-------- --------
See Notes to Consolidated Financial Statements
6<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Nine Month Period
Ended September 30,
------------------------
In Thousands of Dollars 1994 1993
-------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in revolving loan . . . . . . . . . . . - 2,500
Net payments of other long-term debt . . . . . . . . (396) -
Proceeds from senior notes . . . . . . . . . . . . . - 200,000
Repayment of term loans . . . . . . . . . . . . . . - (120,500)
Repurchase of 12 3/8% senior subordinated
debentures . . . . . . . . . . . . . . . . . . . . - (89,983)
Debt issuance costs . . . . . . . . . . . . . . . . - (7,097)
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES . . . . . . . (396) (15,080)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . 4,206 4,187
Cash and cash equivalents at beginning of period . . 10,346 9,033
-------- --------
Cash and cash equivalents at end of period . . . . . $14,552 $13,220
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
7<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In Thousands of Dollars
-----------------------
NOTE 1 BASIS OF PRESENTATION
The unaudited interim consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of the management of Essex Group, Inc. (the "Company"), necessary
to present fairly the consolidated financial position of the Company as of
September 30, 1994, and the consolidated results of operations for the
three month and nine month periods ended September 30, 1994 and 1993,
respectively, and cash flows of the Company for the nine month periods
ended September 30, 1994 and 1993, respectively. Results of operations
for the periods presented are not necessarily indicative of the results
for the full fiscal year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31,
1993.
NOTE 2 INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . $111,034 $97,332
Raw materials and work in process . . . . 54,849 27,927
-------- --------
165,883 125,259
LIFO reserve . . . . . . . . . . . . . . (18,902) 14,098
-------- --------
$146,981 $139,357
======== ========
</TABLE>
The Company values a major portion of its inventories at the lower of
cost or market based on a last-in, first-out ("LIFO") method. Principal
elements of cost included in the Company's inventories are copper,
purchased materials, direct labor and manufacturing overhead. Inventories
valued using the LIFO method amounted to $142,521 and $136,980 at
September 30, 1994 and December 31, 1993, respectively.
8<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
NOTE 3 LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
10% Senior notes . . . . . . . . . . . $200,000 $200,000
</TABLE>
There are no maturities of long-term debt within the next five years.
Bank Financing
The Company, a wholly-owned subsidiary of BCP/Essex Holdings Inc.
("Holdings"), entered into a credit agreement dated September 25, 1992,
among the Company, Holdings, the lenders named therein and Chemical Bank,
as agent (the "Credit Agreement"). Under the Credit Agreement, the
Company borrowed $130,000 in term loans (the "Term Credit"). In May 1993,
the Company applied $111,000 of the proceeds from the sale of its 10%
Senior Notes due 2003 (the "Senior Notes") to repay the outstanding
balance under the Term Credit. See Senior Notes below.
In May 1993, an amendment and restatement of the Credit Agreement (the
"Restated Credit Agreement") became effective. The Restated Credit
Agreement provides for $175,000 in revolving credit, subject to specified
percentages of eligible assets, reduced by outstanding letters of credit
($11,732 at September 30, 1994) (the "Revolving Credit"). Further, the
amount of Revolving Credit available to the Company is also subject to
certain debt limitation covenants contained in the indenture under which
the Senior Notes were issued. The Revolving Credit expires in 1998.
Revolving Credit loans bear interest at floating rates at bank prime rate
plus 1.25% or a reserve adjusted Eurodollar rate (LIBOR) plus 2.25%. The
effective interest rate can be reduced by 0.25% to 0.75% if certain
specified financial conditions are achieved. Commitment fees during the
revolving loan period are 0.5% of the average daily unused portion of the
available credit. The Company has purchased interest rate cap protection
through 1994 with respect to $100,000 of debt which carries a strike rate
of 6% (three month LIBOR). The indebtedness under the Restated Credit
Agreement is guaranteed by Holdings and all of the Company's subsidiaries,
and is secured by a pledge of the capital stock of the Company and its
subsidiaries and by a first lien on substantially all assets.
9<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
Senior Notes
In May 1993, the Company issued $200,000 aggregate principal amount of
its Senior Notes which bear interest at 10% per annum, payable
semiannually and are due in May 2003. The net proceeds to the Company
from the sale of the Senior Notes, after underwriting discounts,
commissions and other offering expenses, were $193,450. The Company
applied $111,000 of such proceeds to the repayment of the Term Credit and
in June 1993 applied the balance of such proceeds, together with new
borrowings under the Revolving Credit, to redeem all of its outstanding 12
3/8% Senior Subordinated Debentures due 2000 (the "Debentures").
Debentures
The Debentures were due in 2000 and bore interest at 12 3/8% per annum
payable semiannually. However, the Restated Credit Agreement required the
Debentures, which were callable at 106% commencing May 15, 1993, to be
retired no later than June 30, 1993. Because of the mandatory retirement,
the Debentures were valued by the Company at the expected retirement cost,
discounted at 11.5%. In June 1993, the Company redeemed all of the
outstanding Debentures at 106% of their principal amount.
NOTE 4 HOLDINGS SENIOR DISCOUNT DEBENTURES AND SERIES A PREFERRED STOCK
In May 1989, Holdings (then known as MS/Essex Holdings Inc.) issued
$342,000 aggregate principal amount ($135,117 aggregate proceeds amount)
of its Senior Discount Debentures due 2004 (the "Holdings Debentures").
As of September 30, 1994 Holdings had a liability of $249,891 related to
the Holdings Debentures. The Holdings Debentures are unsecured debt of
Holdings and are effectively subordinated to all outstanding indebtedness
of the Company, including the Senior Notes, and will be effectively
subordinated to other indebtedness incurred by direct and indirect
subsidiaries of Holdings if issued. The Holdings Debentures are not
expected to have an impact on the Company's liquidity prior to November
15, 1995 (unless they are repurchased or refinanced prior to that date)
when cash interest at 16.0% per annum first becomes payable semiannually.
At September 30, 1994, Holdings had outstanding 1,630,708 shares of
Series A Cumulative Redeemable Exchangeable Preferred Stock, Liquidation
Preference $25 Per Share, (the "Series A Preferred Stock") and 5,666,738
warrants to purchase an equivalent number of shares of common stock of
Holdings at a per share exercise price of approximately $2.86. The
accreted balance of the Series A Preferred Stock was $39,395 at September
30, 1994. Dividends on the Series A Preferred Stock are payable quarterly
at a rate of 15.0% per annum. Under the terms of the Series A Preferred
Stock, at the option of Holdings, dividends may be paid in additional
shares of Series A Preferred Stock in lieu of cash through September 1998.
The Restated Credit Agreement permits Holdings to pay dividends in cash on
the Series A Preferred Stock subject to certain limitations. The Series A
Preferred Stock is subject to mandatory redemption on September 30, 2004.
10<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
Holdings may not redeem the Series A Preferred Stock until September 30,
1995. Thereafter, the Series A Preferred Stock may be redeemed at the
option of Holdings at a percentage of liquidation preference declining
from 107.5% from and after September 30, 1995 to 100% beginning September
30, 1998.
Holdings is a holding company with no operations and has virtually no
assets other than its ownership of the outstanding common stock of the
Company. All of such stock is pledged, however, to the lenders under the
Restated Credit Agreement. Accordingly, Holdings' ability to meet its
obligations when due under the terms of its indebtedness will be dependent
on the Company's ability to pay dividends, to loan, or otherwise advance
or transfer funds, to Holdings in amounts sufficient to service Holdings'
debt obligations.
11<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Introduction
Essex Group, Inc. (the "Company") is engaged in one principal line of
business, the production of electrical wire and cable. It classifies its
operations into three major divisions based on the markets served: Wire
and Cable Division ("WCD"), Magnet Wire and Insulation Division ("MWI")
and Engineered Products Division ("EPD"). During the second quarter 1994,
the former Telecommunication Products Division ("TPD") was merged with and
into EPD. The electrical wire products manufactured and sold by TPD were
incorporated within a new Communications business unit of EPD to
facilitate the realignment of its telecommunication wire manufacturing
capacity from primarily outside-plant telecommunication cables to a
broader mix of voice and data communication wire products.
In October 1992, MS/Essex Holdings Inc. ("Holdings") was acquired (the
"Acquisition") by merger (the "Merger") of BE Acquisition Corporation
("BE") with and into Holdings with Holdings surviving under the name
BCP/Essex Holdings Inc. BE was a newly organized Delaware corporation
formed for the purpose of effecting the Acquisition. The shareholders of
BE included Bessemer Capital Partners, L.P. ("BCP"), affiliates of
Goldman, Sachs & Co. ("Goldman Sachs"), affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Chemical Equity Associates, A
California Limited Partnership ("CEA"), and members of management and
other employees of the Company. As a result of the Merger, the
stockholders of BE became stockholders of Holdings. During 1993, BCP
transferred its ownership in Holdings to Bessemer Holdings, L.P. ("BHLP"),
an affiliate of BCP. Prior to the Acquisition, the outstanding common
stock of Holdings was beneficially owned by The Morgan Stanley Leveraged
Equity Fund II, L.P., certain directors and members of management of
Holdings and the Company, and others. Holdings acquired the Company from
United Technologies Corporation ("UTC") in February 1988.
Results of Operations
Three Month Period Ended September 30, 1994 Compared With The Three Month
Period Ended September 30, 1993
Net sales for the third quarter 1994 were 20.7% greater than the
comparable period in 1993 resulting from higher copper prices and improved
sales volume and product pricing. Copper is the Company's principal raw
material and copper costs are generally passed on to customers through
product pricing. During the third quarter 1994 the average price of
copper on the New York Commodity Exchange, Inc. ("COMEX") was 35.9% higher
than the comparable period in 1993. Consistent with historical
experience, this increase in copper price (notwithstanding its magnitude)
was generally passed on to customers through product pricing during the
third quarter 1994. The Company achieved a record sales volume during the
third quarter 1994 which exceeded the comparable period in 1993 by 7.2%.
Such sales volume improvement was primarily attributable to increased
demand for the Company's magnet wire and automotive wire products. MWI
recorded significant sales volume improvements in automotive, distributor,
and motor wires while EPD also experienced increased demand for its
automotive wire products. EPD's communications wire sales for the third
quarter 1994 were below those of the comparable 1993 period due to reduced
sales of the Company's outside-plant telecommunication wire products
12<PAGE>
partially offset by improved sales of its other voice and data
communication wires. Although building wire sales volumes were comparable
to third quarter 1993 levels, WCD's sales for the third quarter 1994 were
significantly greater than the third quarter 1993 due to higher COMEX
copper prices coupled with improved product pricing.
Cost of goods sold for the third quarter 1994 was 16.0% greater than the
comparable period of 1993 due primarily to higher sales volume and
increased copper costs, partially offset by a change in product mix and a
third quarter 1993 lower of cost or market inventory valuation charge.
The lower of cost or market inventory valuation charge, in the amount of
$2.0 million, resulted from a marked decline in COMEX copper prices
beginning in the second quarter 1993. The Company's cost of goods sold as
a percentage of net sales was 84.1% and 87.5% in the third quarter 1994
and 1993, respectively. The cost of goods sold percentage in the third
quarter 1994 was lower due primarily to improved product pricing and the
1993 lower of cost or market inventory valuation charge as noted above.
Selling and administrative expenses for the third quarter 1994 were 9.3%
above the comparable 1993 period due primarily to higher sales commissions
related to increased sales and higher accruals for incentive compensation
attributable to improved operating results.
Interest expense in the third quarter 1994 was 9.5% higher than the
comparable period in 1993 due primarily to an increase in the Company's
average interest rate incurred from 9.9% to 10.4%, partially offset by a
reduction in weighted average debt outstanding. The reduction in weighted
average debt outstanding resulted primarily from reduced usage of the
Company's revolving credit facility in the third quarter 1994 compared to
the same period in 1993.
Income tax expense was 43.7% of pretax income in the third quarter 1994
compared with 161% for the same period in 1993. The effective income tax
rate of the Company is higher than the approximate statutory rate of 40%
due to the effect of the amortization of excess of cost over net assets
acquired which is not deductible for income tax purposes and for which no
deferred income taxes have been provided. During the third quarter 1993,
with respect to the Omnibus Budget Reconciliation Act of 1993 ("OBRA
1993"), the Company's tax balances were adjusted to reflect the new
federal statutory tax rate of 35%. The adjustment increased income tax
expense by approximately $2.2 million for the quarter or 138% of pretax
income.
Nine Month Period Ended September 30, 1994 Compared With The Nine Month
Period Ended September 30, 1993
Net sales for the first nine months of 1994 were 13.6% greater than the
comparable period in 1993 resulting from higher copper prices and improved
sales volume and product pricing. Copper is the Company's principal raw
material and copper costs are generally passed on to customers through
product pricing. During the first nine months of 1994 the average COMEX
price of copper was 12.9% higher than the comparable period in 1993.
Sales volume in 1994 has been running consistently ahead of 1993 with the
Company experiencing record-setting levels in the second and third
quarters of 1994. These results are primarily attributable to increased
demand for the Company's magnet wire and automotive wire products. MWI
has reported increased demand in all major markets served, most notably
the motor, automotive, and transformer wire markets while EPD has also
13<PAGE>
recorded volume increases over 1993 in its automotive wire products.
Additionally, EPD's fourth quarter 1993 acquisition of Interstate
Industries, Inc. ("Interstate Industries"), a manufacturer of specialty
wiring assemblies including heavy truck harnesses and automotive ignition
wire assemblies, has provided $10.7 million in incremental sales for the
Company for the nine months ended September 30, 1994. EPD's communication
wire sales are below 1993 levels due to reduced sales of the Company's
outside-plant telecommunication wire products partially offset by
increased sales of its other voice and data communication wires. Although
building wire volume is consistent with 1993 levels, WCD has experienced a
significant increase in sales resulting from higher COMEX copper prices
and improved product pricing.
Cost of goods sold for the first nine months of 1994 increased 9.7% over
the same period in 1993 due primarily to higher sales volume, increased
copper costs and the addition of Interstate Industries' cost of sales,
partially offset by a change in product mix. Also, during the second
quarter 1994, in respect of changing competitive and technological
conditions within the telecommunications wire market, TPD was merged with
EPD and at such time the Company recorded a charge of $1.3 million. This
charge was primarily related to employee termination costs. The Company's
cost of goods sold as a percentage of net sales was 83.7% and 86.7% in the
first nine months of 1994 and 1993, respectively. The cost of goods sold
percentage in the first nine months of 1994 was lower due primarily to
improved product pricing.
Selling and administrative expenses for the first nine months of 1994
were 7.3% higher than the comparable period in 1993 due primarily to
increased sales commissions attributable to higher sales, the addition of
Interstate Industries' selling and administrative expenses, and higher
accruals for incentive compensation related to improved operating results,
partially offset by lower amortization charges in 1994. Amortization
charges were lower in 1994 due to the expiration in February 1993 of a
non-compete agreement with UTC. The associated amortization charges, in
the amount of $1.1 million, were recorded during the first quarter 1993.
Interest expense in the first nine months of 1994 was 7.2% lower than the
comparable period in 1993 due primarily to lower deferred debt
amortization charges and a reduction in weighted average debt outstanding,
partially offset by an increase in the Company's average interest rate
incurred from 9.4% to 10.4%. Deferred debt amortization charges decreased
from 1993 due primarily to the repayment in May 1993 of the term loans
(the "Term Credit") under the credit agreement entered into in September
1992 (the "Credit Agreement") and the redemption in June 1993 of the 12
3/8% Senior Subordinated Debentures due 2000 (the "Debentures"), partially
offset by the May 1993 issuance of the 10% Senior Notes due 2003 (the
"Senior Notes"). The decrease in weighted average debt outstanding
resulted primarily from reduced usage of the Company's revolving credit
facility during the first nine months of 1994 compared to the same period
in 1993. The increase in average interest rate reflected the higher rate
of interest payable on the Senior Notes compared with the rate of interest
on the Term Credit, which was repaid from the sale of the Senior Notes,
partially offset by the rate of interest on the Debentures, which were
also redeemed.
Income tax expense was 43.3% of pretax income in the first nine months of
1994 compared with 68.0% in the same period of 1993. The effective income
tax rate of the Company is higher than the approximate statutory rate of
14<PAGE>
40% due to the effect of the amortization of excess of cost over net
assets acquired which is not deductible for income tax purposes and for
which no deferred income taxes have been provided. During the third
quarter 1993, with respect to OBRA 1993, the Company's tax balances were
adjusted to reflect the new federal statutory tax rate of 35%. The
adjustment increased income tax expense by approximately $2.2 million for
the nine months ended September 30, 1993 or 22.8% of pretax income.
Liquidity, Capital Resources and Financial Condition
The Company had a ratio of debt to stockholder's equity of approximately
0.6 to 1 at September 30, 1994 and 0.7 to 1 at December 31, 1993.
In general, the Company requires liquidity for working capital, capital
expenditures, cash interest expenses and taxes. Of particular
significance to the Company in this respect is its working capital
requirements which increase whenever the Company experiences strong
incremental demand in its business and/or a significant rise in copper
prices. Historically, (including, without limitation, the first nine
months of 1994) the Company has satisfied its liquidity requirements
through a combination of funds generated from operating activities
together with funds available under its credit facilities. Based upon
historical experience and the substantial availability of funds under its
revolving credit facility, the Company expects that its usual sources of
liquidity will be more than sufficient to enable it to meet its cash
requirements for working capital, capital expenditures, interest and taxes
for 1994.
Net cash provided by operating activities through the first nine months
of 1994 was $23.5 million, compared to $36.0 million in the same period of
1993. The reduction was due primarily to increased cash requirements to
fund higher accounts receivable and inventory balances resulting from
increased sales volume and higher COMEX copper prices during the first
nine months of 1994.
During the first nine months of 1994, the Company also used its $175
million revolving credit facility (the "Revolving Credit") to satisfy
liquidity needs. This facility is available to the Company under its
Credit Agreement as restated and amended in April 1993 (the "Restated
Credit Agreement"). The amount available for borrowing under the
Revolving Credit at any time is reduced by the amount of outstanding
borrowings and letters of credit and may be further reduced depending upon
the amount of the Company's "eligible assets" as defined. In addition,
the amount of Revolving Credit available to the Company is also subject to
certain debt limitation covenants contained in the indenture under which
the Senior Notes were issued (the "Indenture"). The Revolving Credit
expires in 1998. Revolving Credit loans bear interest at floating rates
at bank prime rate plus 1.25% or a reserve adjusted Eurodollar rate
(LIBOR) plus 2.25%. The effective interest rate can be reduced by 0.25%
to 0.75% if certain specified financial conditions are achieved. The
Company has purchased interest rate cap protection through 1994 covering
up to $100.0 million of Revolving Credit borrowings. At September 30,
1994, the amount of Revolving Credit available to the Company was $175.0
million reduced by outstanding letters of credit of $11.7 million. During
the first nine months of 1994, average borrowings under the Company's
revolving credit facility were $3.1 million compared to $12.8 million
during the same period in 1993.
15<PAGE>
The Restated Credit Agreement and the Indenture contain provisions which
may restrict the liquidity of the Company. These include restrictions on
the incurrence of additional indebtedness and mandatory principal
repayment requirements for all indebtedness that exceeds the Borrowing
Base as defined in the Restated Credit Agreement or exceeds the Indenture
debt limitation covenants. Through September 30, 1994, the Company fully
complied with all of the financial ratios and covenants contained in the
Restated Credit Agreement and the Indenture.
Capital expenditures of $18.7 million for the first nine months of 1994
were $1.6 million greater than the comparable period in 1993. The Company
expects to make capital expenditures in 1994 approximating 1993
expenditure levels to expand capacity, complete modernization projects,
reduce costs and ensure continued compliance with regulatory provisions.
At September 30, 1994, approximately $8.6 million was committed to outside
vendors for capital expenditures. The Restated Credit Agreement imposes
annual limits on the Company's capital expenditures and business
acquisitions.
Considerations Relating to Holdings' Cash Obligations
The Company expects that it may make certain cash payments to Holdings or
other affiliates during the remainder of 1994 to the extent cash is
available and to the extent it is permitted to do so under the terms of
the Restated Credit Agreement and the Indenture. Such payments may
include (i) an amount necessary under the tax sharing agreement between
the Company and Holdings to enable Holdings to pay the Company's taxes as
if computed on an unconsolidated basis; (ii) an annual management fee to
an affiliate of BHLP of up to $1.0 million; (iii) amounts to repurchase
outstanding Senior Discount Debentures due 2004 of Holdings (the "Holdings
Debentures") to the extent they may become available for repurchase in the
open market at prices which Holdings and the Company find attractive and
to the extent such repurchases are permitted under the terms of the
instruments governing Holdings and the Company's indebtedness; and (iv)
other amounts to meet ongoing expenses of Holdings (such amounts are
considered to be immaterial both individually and in the aggregate). To
the extent the Company makes any such payments during the remainder of
1994, it will do so out of operating cash flow or borrowings under the
Restated Credit Agreement and only to the extent such payments are
permitted under the terms of the Restated Credit Agreement and the
Indenture. Each of the foregoing payments is either completely
discretionary on the part of the Company or may be waived by an affiliate
of the Company.
Notwithstanding any of the foregoing payments which the Company may make
to Holdings, Holdings' actual liquidity requirements are expected to be
insubstantial in 1994 on an unconsolidated basis because Holdings has no
operations (other than those conducted through the Company) or employees
and is not expected to have any tax liability on an unconsolidated basis.
Holdings' Series A Cumulative Redeemable Exchangeable Preferred Stock,
Liquidation Preference $25 Per Share (the "Series A Preferred Stock"),
which was issued in connection with the Acquisition and Merger, provides
that dividends may be paid in kind at the option of Holdings until 1998
and is not subject to mandatory redemption until 2004 (except upon the
occurrence of certain specified events). The redemption price is $25 per
share plus accrued and unpaid dividends to the date of redemption. A
dividend of $1.5 million on the Series A Preferred Stock was recorded
during the third quarter 1994 to be paid in kind by the issuance of 61,152
16<PAGE>
additional shares of Series A Preferred Stock in the fourth quarter 1994.
The Restated Credit Agreement permits Holdings to pay dividends in cash on
the Series A Preferred Stock subject to certain limitations. Although
dividends on the Series A Preferred Stock have historically been paid in
additional shares of Series A Preferred Stock, Holdings can make no
assurances that future dividends will not be paid in cash. The Holdings
Debentures are not expected to have an impact on the Company's liquidity
prior to November 15, 1995 (unless they are repurchased or refinanced
prior to that date) when cash interest at 16.0% per annum first becomes
payable semiannually.
The Holdings Debentures are unsecured debt of Holdings and are
effectively subordinated to all outstanding indebtedness of the Company,
including the Senior Notes, and will be effectively subordinated to other
indebtedness incurred by direct and indirect subsidiaries of Holdings, if
issued. The Holdings Debentures were issued at an original issue
discount. At September 30, 1994, the Holdings Debentures had a carrying
value, net of repurchases, of $249.9 million. They will accrete to their
full face value (an aggregate principal amount of $272.9 million, assuming
no further repurchases by the Company or Holdings) on May 15, 1995.
Commencing that date, the Holdings Debentures will be redeemable at their
face value and will also accrue interest payable semiannually in cash
beginning November 15, 1995 at the rate of 16.0% per annum. Holdings will
have several alternatives with respect to the Holdings Debentures: it
could pay cash interest on the Holdings Debentures (which would entail
approximately $22 million in cash payments semiannually assuming no change
in the aggregate principal amount of Holdings Debentures outstanding), or
Holdings could redeem some or all of the Holdings Debentures. In either
case, Holdings will have cash needs which are considerably greater than
its present requirements.
Because Holdings is a holding company with no operations and has
virtually no assets other than the outstanding capital stock of the
Company (all of which is pledged to the lenders under the Restated Credit
Agreement), Holdings' ability to meet its cash obligations will be
dependent upon the Company's ability to pay dividends, loan or to
otherwise advance or transfer funds to Holdings in sufficient amounts.
The Company believes that the Restated Credit Agreement and the Indenture
permit the Company to dividend or otherwise provide funds to Holdings to
enable Holdings to meet its known cash obligations during the next twelve
months provided that the Company meets certain conditions. Among such
conditions, however, are that the Company meet various financial
maintenance tests. There can be no assurance that such tests will be met
at any given time when Holdings may require cash, in which case the
Company would not be able to pay dividends to Holdings without the consent
of the percentage of the lenders specified in the Restated Credit
Agreement and/or the holders of the percentage of the Senior Notes
specified in the Indenture. There can be no assurance that the Company
would be able to obtain such consents, or meet the terms on which such
consents might be granted if they were obtainable. Moreover, a violation
of the Restated Credit Agreement and/or the Indenture could lead to an
event of default and acceleration of outstanding indebtedness under the
Restated Credit Agreement and to acceleration of the indebtedness
represented by the Senior Notes and the Holdings Debentures. Because the
capital stock of the Company and its subsidiaries, as well as virtually
all of the assets of the Company and its subsidiaries, are pledged to the
lenders under the Restated Credit Agreement, such lenders would have a
claim over such assets prior to holders of the Senior Notes and the
17<PAGE>
Holdings Debentures. In the event Holdings were unable to meet its cash
obligations, a sequence of events similar to that described above could
ultimately occur.
In light of the fact that the Holdings Debentures will begin to accrue
cash interest for the first time during 1995, Holdings may give
consideration to effecting a redemption of such securities during that
year. Holdings will also have the ability to effect a redemption of the
Series A Preferred Stock on or after September 30, 1995. If Holdings were
to seek to effect redemption of either or both the Holdings Debentures and
the Series A Preferred Stock, it could have several sources from which to
obtain the necessary funds to effect such redemptions including funds from
the Company's operations, borrowings under the Restated Credit Agreement,
the sale of stock by either Holdings or the Company, the issuance of new
debt securities by either Holdings or the Company or some combination of
the foregoing. In any case, however, pursuit of each of the foregoing
options will be subject to covenants and restrictions contained in the
Restated Credit Agreement and the Indenture relating to debt incurrence,
transactions between the Company and Holdings, the ability of the Company
to pay dividends to Holdings or otherwise undertake payment of Holdings'
obligations and the pledge of the Company's outstanding common stock to
the lenders under the Restated Credit Agreement. There can be no
assurance that Holdings will decide to redeem either the Holdings
Debentures or the Series A Preferred Stock during 1995, or, if it seeks to
do so, that it will be successful in its ability to finance any such
redemption.
General Economic Conditions and Inflation
The Company faces various economic risks ranging from an economic
downturn adversely impacting the Company's primary markets to marked
fluctuations in copper prices. In the short-term, pronounced changes in
the price of copper tend to affect WCD's gross profits because such
changes affect raw material costs more quickly than those changes can be
reflected in the pricing of WCD's products. In the long-term, however,
copper price changes have not had a material adverse effect on gross
profits because cost changes generally have been passed through to
customers over time. In addition, the Company believes that its
sensitivity to downturns in its primary markets is less significant than
it might otherwise be due to its diverse customer base and its strategy of
attempting to match its copper purchases with its needs. The Company
cannot predict either the continuation of current economic conditions or
future results of its operations in light thereof.
The Company believes that it is not particularly affected by inflation
except to the extent that the economy in general is thereby affected.
Should inflationary pressures drive costs higher, the Company believes
that general industry competitive price increases would sustain operating
results, although there can be no assurance that this will be the case.
18<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the
Company during the quarter ended September 30,
1994.
19<PAGE>
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.
ESSEX GROUP, INC.
(Registrant)
November 9, 1994 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
20<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS
OF SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000033565
<NAME> ESSEX GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 14,552
<SECURITIES> 0
<RECEIVABLES> 152,231
<ALLOWANCES> 2,912
<INVENTORY> 146,981
<CURRENT-ASSETS> 325,410
<PP&E> 272,663
<DEPRECIATION> 49,939
<TOTAL-ASSETS> 746,502
<CURRENT-LIABILITIES> 140,163
<BONDS> 200,000
<COMMON> 302,784
0
0
<OTHER-SE> 23,874
<TOTAL-LIABILITY-AND-EQUITY> 746,502
<SALES> 744,287
<TOTAL-REVENUES> 745,390
<CGS> 623,048
<TOTAL-COSTS> 623,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,563
<INCOME-PRETAX> 40,426
<INCOME-TAX> 17,500
<INCOME-CONTINUING> 22,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,926
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
