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 June 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
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Commission File Number 1-7418
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ESSEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN 35-1313928
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 WALL STREET, FORT WAYNE, INDIANA 46802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (219) 461-4000
None
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(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 June 30, 1994
-------------- ----------------------------
$.01 Par Value 100<PAGE>
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 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 4. Submission of Matters to a Vote of Security Holders . . . . 19
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>
June 30, December 31,
1994 1993
In Thousands of Dollars (Unaudited)
--------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 11,136 $ 10,346
Accounts receivable (net of allowance of
$3,081 and $2,811) . . . . . . . . . . . . . . . . . 142,718 116,733
Inventories . . . . . . . . . . . . . . . . . . . . . 145,359 139,357
Other current assets . . . . . . . . . . . . . . . . . 10,947 9,738
-------- --------
Total current assets . . . . . . . . . . . . . 310,160 276,174
Property, plant and equipment, (net of accumulated
depreciation of $43,299 and $30,373) . . . . . . . . 274,659 273,084
Excess of cost over net assets acquired (net of
accumulated amortization of $7,113 and $5,081) . . . 135,132 137,164
Other intangible assets and deferred costs (net of
accumulated amortization of $4,435 and $2,986) . . . 12,971 13,921
Other assets . . . . . . . . . . . . . . . . . . . . . 2,101 6,654
-------- --------
$735,023 $706,997
======== ========
See Notes to Consolidated Financial Statements
3<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
June 30, December 31,
1994 1993
In Thousands of Dollars, Except Per Share Data (Unaudited)
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 45,311 $ 45,535
Accrued liabilities . . . . . . . . . . . . . . . . . 43,641 42,863
Deferred income taxes . . . . . . . . . . . . . . . . 14,605 14,277
Due to Holdings . . . . . . . . . . . . . . . . . . . 26,080 18,363
-------- --------
Total current liabilities . . . . . . . . . . . 129,637 121,038
Long-term debt . . . . . . . . . . . . . . . . . . . . 205,000 200,000
Deferred income taxes . . . . . . . . . . . . . . . . 75,853 77,794
Other long-term liabilities . . . . . . . . . . . . . 5,873 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 . . . . . . . . . . . . . . . . . . 15,876 948
-------- --------
Total stockholder's equity . . . . . . . . . . 318,660 303,732
-------- --------
$735,023 $706,997
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
------------------------ -----------------------
In Thousands of Dollars 1994 1993 1994 1993
----------------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $246,558 $230,465 $478,390 $434,774
Interest income . . . . . . . . . . . . . 27 177 63 212
Other income . . . . . . . . . . . . . . . 210 306 339 789
-------- -------- -------- --------
246,795 230,948 478,792 435,775
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . 207,878 200,398 399,526 375,164
Selling and administrative . . . . . . . . 20,071 18,229 40,302 37,929
Interest expense . . . . . . . . . . . . . 6,120 7,124 12,120 14,114
Other expense . . . . . . . . . . . . . . . 281 262 616 397
-------- -------- -------- --------
234,350 226,013 452,564 427,604
-------- -------- -------- --------
Income before income taxes and
extraordinary charge . . . . . . . . . . . . 12,445 4,935 26,228 8,171
Provision for income taxes . . . . . . . . . 5,300 2,352 11,300 4,052
-------- -------- -------- --------
Income before extraordinary charge . . . . . 7,145 2,583 14,928 4,119
Extraordinary charge - repurchase of debt,
net of income tax benefit . . . . . . . . . - 3,367 - 3,367
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . $ 7,145 $ (784) $ 14,928 $ 752
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period
Ended June 30,
------------------------
In Thousands of Dollars 1994 1993
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OPERATING ACTIVITIES
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . $14,928 $752
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 15,233 14,907
Loss on repurchase of debt . . . . . . . . . . . . - 5,519
Non cash interest expense . . . . . . . . . . . . . 1,335 3,632
Non cash pension expense . . . . . . . . . . . . . 1,175 1,333
Provision for losses on accounts receivable . . . . 507 417
(Benefit) provision for deferred income taxes . . . (1,685) 347
Loss on disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . 449 122
Changes in operating assets and liabilities:
(Increase) in accounts receivable . . . . . . . . (24,608) (20,562)
(Increase) decrease in inventories . . . . . . . . (4,168) 3,180
Increase (decrease) in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . 205 (522)
Net (increase) decrease in other assets and
liabilities . . . . . . . . . . . . . . . . . . . (1,078) 3,971
Increase in due to Holdings . . . . . . . . . . . 7,717 6,001
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . 10,010 19,097
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (13,586) (10,496)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 126 19
Investment in subsidiary and other . . . . . . . . . (364) -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (13,824) (10,477)
-------- --------
See Notes to Consolidated Financial Statements
6<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Six Month Period
Ended June 30,
------------------------
In Thousands of Dollars 1994 1993
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FINANCING ACTIVITIES
Net increase in revolving loan . . . . . . . . . . . 5,000 9,000
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 PROVIDED BY (USED FOR) FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . . . . 4,604 (8,580)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . 790 40
Cash and cash equivalents at beginning of period . . 10,346 9,033
-------- --------
Cash and cash equivalents at end of period . . . . . $11,136 $9,073
======== ========
</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
June 30, 1994, and the consolidated results of operations for the three
month and six month periods ended June 30, 1994 and 1993, respectively,
and cash flows of the Company for the six month periods ended June 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>
June 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . $106,355 $97,332
Raw materials and work in process . . . . 49,291 27,927
-------- --------
155,646 125,259
LIFO reserve . . . . . . . . . . . . . . (10,287) 14,098
-------- --------
$145,359 $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 $140,678 and $136,980 at June 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>
June 30, December 31,
1994 1993
------------- -------------
<S> <C> <C>
10% Senior notes . . . . . . . . . . . $200,000 $200,000
Revolving loan . . . . . . . . . . . . 5,000 -
-------- --------
$205,000 $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
($11,546 at June 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 June 30, 1994 Holdings had a liability of $245,637 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. No periodic cash payments of interest
are required to be made by Holdings prior to November 15, 1995 on the
Holdings Debentures. Thereafter, interest is payable semiannually in cash
at 16% per annum.
At June 30, 1994, Holdings had outstanding 1,571,766 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 $37,694 at June 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. Holdings
10<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
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 in order 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 June 30, 1994 Compared With The Three Month
Period Ended June 30, 1993
Net sales for the second quarter 1994 were 7.0% greater than the
comparable period in 1993 as a result of 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 second quarter 1994 the average price of
copper on the New York Commodity Exchange, Inc. ("COMEX") was 18.5% 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
second quarter 1994. The Company recorded record sales volume during the
second quarter 1994, up 2.4% from the second quarter 1993 (which had been
the previous record quarter). Sales volume improvements were primarily
attributable to increased demand for the Company's magnet wire and
automotive wire products partially offset by reduced sales volume to the
Company's building wire markets. MWI reported significant sales volume
improvements in their automotive and motor wire products while EPD also
reported increased automotive sales volume in addition to improved
appliance wire and recreational vehicle wire sales. EPD's communication
12<PAGE>
wire sales for the second quarter 1994 were below those of the comparable
1993 period due to reduced demand for the Company's outside-plant
telecommunication wire products, partially offset by improved sales of its
other voice and data communication wire products. Although sales volume
at WCD was below that experienced in the second quarter 1993, higher COMEX
copper prices coupled with improved product pricing provided higher sales
for the quarter ended June 30, 1994.
Cost of goods sold for the second quarter 1994 was 3.7% 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. Also,
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 during the second quarter
1994. This charge was primarily related to employee termination costs.
The Company's cost of goods sold as a percentage of net sales was 84.3%
and 87.0% in the second quarter 1994 and 1993, respectively. The cost of
goods sold percentage in the second quarter 1994 was lower due primarily
to improved product pricing and enhanced manufacturing cost efficiencies
partially attributable to increased sales volume.
Selling and administrative expenses for the second quarter 1994 were
10.1% higher than the comparable 1993 period due primarily to a reduction
in favorable insurance adjustments and higher accruals for incentive
compensation attributable to improved operating results.
Interest expense in the second quarter 1994 was 14.1% lower than the
comparable period in 1993 due primarily to a reduction in weighted average
debt outstanding and lower deferred debt amortization charges, partially
offset by an increase in the Company's average interest rate incurred from
9.7% to 10.3%. The reduction in weighted average debt outstanding
resulted primarily from reduced usage of the Company's revolving credit
facility in the second quarter 1994 compared to the same period in 1993.
Deferred debt amortization charges declined from 1993 due primarily to the
repayment in May 1993 of the term loans under the credit agreement entered
into in September 1992 (the "Term Credit") 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 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 redemption of the Debentures.
Income tax expense was 42.6% of pretax income in the second quarter 1994
compared with 47.7% 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.
Six Month Period Ended June 30, 1994 Compared With The Six Month Period
Ended June 30, 1993
Net sales for the first six months of 1994 were 10.0% greater than the
comparable period in 1993 as a result of 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 half of 1994 the average COMEX price of
13<PAGE>
copper was 2.3% higher than the comparable period in 1993. Sales volume
improvements were primarily attributable to increased demand for the
Company's magnet wire and automotive wire products. MWI reported
significant sales volume improvements in their automotive, transformer and
motor wire products while EPD also reported increased automotive sales
volume in addition to improved appliance wire and recreational vehicle
wire sales. EPD's communication wire sales for the first half of 1994
were below those of the comparable 1993 period due to reduced demand for
the Company's outside-plant telecommunication wire products, partially
offset by improved sales of its other voice and data communication wire
products. Sales volume at WCD was essentially equal to that experienced
in the first half of 1993 although higher COMEX copper prices coupled with
improved product pricing provided materially higher sales for the first
half of 1994.
Cost of goods sold for the first half of 1994 increased 6.5% over the
same period in 1993 due primarily to higher sales volume. Also, 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 during the second quarter
1994. This charge was primarily related to employee termination costs.
The Company's cost of goods sold as a percentage of net sales was 83.5%
and 86.3% in the first half of 1994 and 1993, respectively. The cost of
goods sold percentage in the first six months of 1994 was lower due
primarily to improved product pricing and enhanced manufacturing cost
efficiencies partially attributable to increased sales volume.
Selling and administrative expenses for the first half of 1994 were 6.3%
higher than the comparable period in 1993 due primarily to a reduction in
favorable insurance adjustments and higher accruals for incentive
compensation attributable 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 half of 1993.
Interest expense in the first half of 1994 was 14.1% lower than the
comparable period in 1993 due primarily to a reduction in weighted average
debt outstanding and lower deferred debt amortization charges partially
offset by an increase in the Company's average interest rate incurred from
9.1% to 10.4%. The decrease in weighted average debt outstanding resulted
primarily from reduced usage of the Company's revolving credit facility in
the first half of 1994 compared to the same period in 1993. Deferred debt
amortization charges decreased from 1993 due primarily to the repayment in
May 1993 of the Term Credit and the redemption in June 1993 of the
Debentures, partially offset by the May 1993 issuance of the Senior Notes.
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 redemption of the Debentures.
Income tax expense was 43.1% of pretax income in the first six months of
1994 compared with 49.6% in the same period of 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.
14<PAGE>
Liquidity, Capital Resources and Financial Condition
The Company had a ratio of debt to stockholder's equity of approximately
0.6 to 1 at June 30, 1994 and 0.7 to 1 at December 31, 1993.
The Company entered into a credit agreement in September 1992, among the
Company, Holdings, the lenders named therein and Chemical Bank, as agent
(the "Credit Agreement"). The Credit Agreement provided for $155.0
million in revolving credit, expiring April 9, 1998, and Term Credit in
the amount of $130.0 million.
In May 1993, the Company issued $200.0 million aggregate principal amount
of its Senior Notes. The net proceeds to the Company from the sale of the
Senior Notes, after underwriting discounts, commissions and other offering
expenses, were approximately $193.5 million. The Company applied
approximately $111.0 million of such proceeds to the repayment of the
outstanding balance under the Term Credit and, in June 1993, applied the
balance of such proceeds, together with new borrowings under the revolving
credit facility of the amended and restated credit agreement (see
immediately following paragraph) to redeem all of its outstanding
Debentures.
Upon application of the net proceeds received from the Senior Notes to
repay the Term Credit, as discussed above, an amendment and restatement of
the Credit Agreement became effective (the "Restated Credit Agreement").
The Restated Credit Agreement provides for $175.0 million in revolving
credit, subject to specified percentages of eligible assets, reduced by
outstanding letters of credit (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 "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. No term facility is
available under the Restated Credit Agreement. Through June 30, 1994, the
Company fully complied with all of the financial ratios and covenants
contained in the Restated Credit Agreement and the Indenture.
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.
Net cash provided by operating activities through the first six months of
1994 was $10.0 million, compared to $19.1 million in the same period of
1993. The reduction was due primarily to increased cash requirements to
fund higher accounts receivable and inventory balances at June 30, 1994,
which resulted from increased sales volume and higher COMEX copper prices
during the first half of 1994. Cash flow provided by operating activities
in the first six months of 1994, together with borrowings under the
Revolving Credit were sufficient to meet the Company's cash interest
requirements, working capital and capital expenditure needs.
15<PAGE>
Capital expenditures of $13.6 million for the first six months of 1994
were $3.1 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 June 30, 1994, approximately $9.0 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.
The Company anticipates that its working capital, capital expenditure and
cash interest requirements for 1994 will be satisfied through a
combination of funds generated from operating activities together with
funds available under the Revolving Credit. Management bases such belief
on historical experience and the substantial availability of funds under
the Revolving Credit. Increased working capital needs occur whenever the
Company experiences strong incremental demand in its business and/or a
significant rise in copper prices. At June 30, 1994, the amount of
Revolving Credit available to the Company was $170.0 million reduced by
outstanding letters of credit of $11.5 million. During the first six
months of 1994, average borrowings under the Company's revolving credit
facility were $3.9 million compared to $12.8 million during the same
period in 1993.
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
16<PAGE>
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 second quarter 1994 to be paid in kind by the issuance of
58,941 additional shares of Series A Preferred Stock in the third 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 June 30, 1994, the Holdings Debentures had a carrying value,
net of repurchases, of $245.6 million. They will accrete to their full
face value (an aggregate principal amount of $277.9 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 opt to 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
17<PAGE>
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
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 4. Submission of Matters to a Vote of Security Holders
By a Consent dated April 15, 1994 the following were elected
as Directors of the Company: Steven R. Abbott, John L. Cox,
Stanley C. Craft, Robert J. Faucher, Robert D. Lindsay,
Charles W. McGregor, David A. Owen, Thomas A. Twehues and Ward
W. Woods, Jr.
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 June 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)
August 10, 1994 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
20<PAGE>
