United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1996 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at November 12, 1996
Common stock, $1 par value 8,254,562
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 2,3
Statements of Condensed Consolidated Income
Three Months and Nine Months Ended
September 30, 1996 and 1995 4
Statements of Condensed Consolidated Cash Flows
Nine Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Information 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 13
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30, December 31,
1996 1995
---- ----
(Thousands of Dollars)
CURRENT ASSETS:
Cash and cash equivalents $ 43,242 $ 43,701
Marketable securities - available for sale 8,395 16,653
Accounts receivable, trade, net 26,774 22,399
Notes and other receivables, net 1,505 15,645
Inventories - Note 1 39,703 35,902
Other current assets 17,535 15,297
------- -------
Total current assets 137,154 149,597
------- -------
OTHER ASSETS:
Investments, at equity, in
unconsolidated subsidiaries 6,617 7,328
Investments in waste-to-energy facility 11,134 11,360
Notes receivable, net 1,265 1,566
Cost in excess of net assets of
businesses acquired, net 6,861 7,249
Miscellaneous 5,420 5,664
------- -------
Total other assets 31,297 33,167
------- -------
PROPERTIES, at cost:
Land and improvements 3,759 4,308
Buildings and improvements 32,449 32,464
Machinery and equipment 40,700 38,723
------- -------
76,908 75,495
Accumulated depreciation (34,699) (32,847)
------- -------
Net properties 42,209 42,648
------- -------
$210,660 $225,412
======= =======
See Notes to Condensed Consolidated Financial Information.
September 30, December 31,
1996 1995
---- ----
(Thousands of Dollars)
CURRENT LIABILITIES:
Notes payable $ - $ 14,193
Accounts payable 9,833 8,361
Accrued compensation 3,228 3,792
Accrued expenses 24,152 23,947
Accrued interest and taxes 925 1,342
Current maturities, long-term debt 676 913
Dividends payable 683 624
------- -------
Total current liabilities 39,497 53,172
------- -------
LONG-TERM DEBT, less current maturities 8,704 9,346
------- -------
DEFERRED INCOME TAXES 25,922 24,598
------- -------
OTHER LIABILITIES 8,232 7,966
------- ------
Total liabilities 82,355 95,082
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, authorized
25,000,000 shares, issued 9,822,204 and
9,821,329 shares 9,822 9,821
Additional paid-in capital 51,117 51,111
Foreign currency translation adjustment (1,736) (1,640)
Unrealized holding gains, net of tax 2,762 5,297
Retained earnings 88,364 81,925
Treasury stock, 1,567,642 and 1,097,142 shares (22,024) (16,184)
------- -------
Total stockholders' equity 128,305 130,330
------- -------
$210,660 $225,412
======= =======
See Notes to Condensed Consolidated Financial Information.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
(Thousands of Dollars Except Per Share Data)
Net sales $46,068 $42,336 $133,390 $130,303
Cost of goods sold 32,084 29,047 90,907 92,138
------ ------ ------- -------
Gross Profit 13,984 13,289 42,483 38,165
Selling, general
and administrative 12,008 11,619 35,444 36,961
------ ------ ------- -------
Income from operations 1,976 1,670 7,039 1,204
Interest expense (207) (545) (804) (1,908)
Interest income 531 150 1,789 806
Other, net 455 641 896 1,463
Gain on marketable security
transactions - Note 2 - 6,882 4,914 6,882
Restoration of previously
recorded losses - Note 2 - - - 4,920
------ ------ ------- -------
Income from consolidated operations
before provision for income taxes 2,755 8,798 13,834 13,367
(Provision) for income taxes (976) (3,386) (5,051) (1,536)
------ ------ ------- -------
Income from consolidated operations 1,779 5,412 8,783 11,831
Equity in income (loss) of unconsolidated
subsidiaries (net of tax)- Note 2:
Income from continuing operations (144) 373 (420) 894
Income from discontinued operations - - - 678
Gain on sale of Syroco, Inc. - 4,904 - 4,904
------ ------ ------- -------
Net income $ 1,635 $10,689 $ 8,363 $ 18,307
====== ====== ======= =======
Earnings per share $ .20 $ 1.18 $ 1.00 $ 2.02
====== ====== ======= =======
Average shares
outstanding (in thousands) 8,258 9,012 8,380 9,055
====== ====== ======= =======
Dividends paid
per share - Common stock $ .0750 $ .0625 $ .2125 $ .1875
====== ====== ======= =======
See Notes to Condensed Consolidated Financial Information.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Nine Months Ended
September 30,
---------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 8,363 $18,307
Depreciation and amortization 4,362 5,952
Disposition of portion of investment in subsidiary - (7,902)
Gain on marketable security transactions (4,914) (4,315)
Gain on sale of Syroco, Inc., net of tax - (4,904)
Adjustments to reconcile net income to net cash
flows from operating activities (mainly changes
in working capital) (5,412) (1,264)
------ ------
Net cash flows from operating activities 2,399 5,874
------ ------
Cash flows from investing activities:
Proceeds from sale of assets 1,170 661
Collections of notes receivable 13,908 1,006
Proceeds from sale of marketable securities 9,191 14,756
Acquisition of business, net of cash acquired - (30,416)
Capital expenditures (4,047) (6,781)
------ ------
Net cash flows from investing activities 20,222 (20,774)
------ ------
Cash flows from financing activities:
Notes payable activity, net (14,193) 10,487
Principal payments on long-term debt (879) (2,059)
Payment of dividends (1,831) (1,702)
Purchase of treasury shares (6,177) (2,143)
Proceeds from issuance of long-term debt - 5,938
------ ------
Net cash flows from financing activities (23,080) 10,521
------ ------
Net decrease in cash and cash equivalents (459) (4,379)
Cash and cash equivalents beginning of period 43,701 8,475
------ ------
Cash and cash equivalents end of period $43,242 $ 4,096
====== ======
See Notes to Condensed Consolidated Financial Information.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 1996
(1) Significant Accounting Policies
-------------------------------
Consolidation Policy
- --------------------
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries ("Katy") in which it has
greater than 50% interest. The condensed consolidated financial statements at
September 30, 1996 and for the three and nine month periods then ended are
unaudited and reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial condition and results of
operations. Interim figures are subject to year-end audit adjustments and may
not be indicative of results to be realized for the entire year. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Inventories
- -----------
The components of inventories are as follows:
September 30, December 31,
1996 1995
---- ----
(Thousands of Dollars)
Raw materials $16,254 $14,471
Work in process 8,045 7,132
Finished goods 15,404 14,299
------- -------
$39,703 $35,902
======= =======
Earnings Per Share
- ------------------
Earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents, in the form of
stock options, have been included in the calculation of weighted average
shares outstanding under the treasury stock method.
Stock-Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosure of stock-based compensation
arrangements with employees. Companies are permitted to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of equity instruments awarded. Katy will continue to apply APB Opinion No. 25
to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
(2) Nonrecurring Items
------------------
Included in Gain on marketable security transactions for the nine months
ended September 30, 1996 was a gain of $4,914,000 resulting from the sale of
Union Pacific Corporation common stock during the first quarter of 1996.
On June 30, 1995 the Company sold one-half of its interest in Schoen &
Cie, AG,("Schoen") reducing its interest to 37.5%. In connection with the
sale, the Company recorded a gain of $4,920,000, reflecting the reversal of
previously recorded losses of Schoen, and recorded a tax benefit of $3,000,000
associated with the transaction. Losses from the operations of Schoen recorded
in the first and second quarters of 1995 were $2,124,000 and $1,658,000,
respectively.
At the end of the second quarter, 1996, Schoen acquired J. Sandt AG, a major
competitor in the same geographical area. The transaction reduced Katy's
interest in Schoen to 27.6%.
In the third quarter of 1995, Katy sold 248,566 shares of Union Pacific
Corporation common stock for proceeds of $15,550,000, resulting in a pre-tax
gain of $7,675,000. This transaction is reflected in Gain on marketable
security transactions.
In the third quarter of 1995, Katy recorded a gain of $4,904,000, net of
tax, for its share of Syratech's gain on the sale of a subsidiary. This
transaction is reflected in Equity in income of unconsolidated subsidiary as
Gain on sale of Syroco.
(3) Subsequent Event
----------------
On November 4, 1996 Katy announced that the Company had entered into a
letter of intent to purchase Woods Industries, Inc. ("Woods"). Woods is a
manufacturer and distributor of electrical corded products as well as
electrical and electronic passive components with annual sales in excess of
$150,000,000. The transaction, expected to close before year end, is subject
to negotiation and execution of a definitive contract.
KATY INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1996
- -------------------------------------
Following are summaries of sales and operating income for the three months
ended September 30, 1996 and 1995 by industry segment:
Sales
---------------------------------
Increase (Decrease)
---------------
1996 1995 Amount Percent
---- ---- ------ -------
(Thousands of Dollars)
Distribution and Service $22,760 $21,252 $1,508 7.1%
Industrial and
Consumer Manufacturing 16,149 12,978 3,171 24.4
Machinery Manufacturing 7,159 8,106 (947) (11.7)
Operating Income
--------------------------------
Percent of Sales
------------
1996 1995 1996 1995
---- ---- ---- ----
(Thousands of Dollars)
Distribution and Service $2,004 $1,462 8.8% 6.8%
Industrial and
Consumer Manufacturing 2,093 1,274 13.0 9.8
Machinery Manufacturing 180 942 2.5 11.6
The Distribution and Service Group's sales increase was due to increases in
the electronic components and electrical parts and accessories areas. The
increase in the Group's operating income was a result of this increased
volume and margin improvements in the group overall.
The increased sales of the Industrial and Consumer Manufacturing Group was
due primarily to the acquisition of Gemtex in August 1995 and increases in
sales of sanitary maintenance supplies, partially offset by the sale of
Moldan in December 1995. The increase in the Group's operating income was due
to the Gemtex acquisition and to the divestiture of Moldan which had incurred
losses during the third quarter of 1995 and to increases in operating income
from existing businesses.
The Machinery Manufacturing Group's sales decrease results primarily from
lower sales in the woodwork machinery area which contributed to the lower
operating income in the group.
Selling, general and administrative expenses remained constant as a
percentage of sales between the periods.
Interest expense declined due to lower debt levels, while interest income
increased due to higher cash levels resulting from the sale of Syratech stock
and Union Pacific Corporation common stock.
Gain on marketable security transactions for the three months ended September
30, 1995 is due mainly to the sale of Union Pacific Corporation common stock,
which resulted in a pre-tax gain of $7,675,000.
In the third quarter of 1995, the Company recorded a gain of $4,904,000, net
of tax, for its share of an equity investee's gain on the sale of a subsidiary.
Nine Months Ended September 30, 1996
- ------------------------------------
Following are summaries of sales and operating income for the nine months
ended September 30, 1996 and 1995 by industry segment:
Sales
------------------------------------
Increase (Decrease)
----------------
1996 1995 Amount Percent
---- ---- ------ -------
(Thousands of Dollars)
Distribution and Service $64,635 $49,815 $14,820 29.8%
Industrial and
Consumer Manufacturing 44,715 37,377 7,338 19.6
Machinery Manufacturing 24,040 43,111 (19,071) (44.2)
Operating Income
-------------------------------------
Percent of Sales
--------------
1996 1995 1996 1995
---- ---- ---- ----
(Thousands of Dollars)
Distribution and Service $5,971 $3,321 9.2% 6.7%
Industrial and
Consumer Manufacturing 5,035 3,976 11.3 10.6
Machinery Manufacturing 1,668 163 6.9 0.4
The increase in the Distribution and Service Group's sales was primarily due
to increases in sales of electronic components and rerolled metals and to the
addition of GC Thorsen at the end of the first quarter 1995. The increase in
operating income was primarily attributable to the addition of GC Thorsen.
The increased sales of the Industrial and Consumer Manufacturing Group was
due primarily to increases in sales throughout product lines from existing
businesses and the acquisition of Gemtex in August 1995, partially offset
by the divestiture of Moldan in December 1995. The increase in the Group's
operating income was due to the Gemtex acquisition and to the divestiture of
Moldan which had incurred losses during the third quarter of 1995 and to
increases in operating income from existing businesses.
The Machinery Manufacturing Group's sales decrease results primarily from the
absence of sales of Schoen and B.M. Root in 1996. The improvement in operating
income in 1996 was primarily due to the exclusion of losses from Schoen.
The decrease in selling, general and administrative expenses was primarily
due to the absence of Schoen and Moldan, offset by the addition of GC Thorsen
at the end of the first quarter of 1995 and Gemtex during the third quarter of
1995.
Interest expense declined due to lower debt levels, while interest income
increased due to higher cash levels resulting from the sale of Syratech stock
and Union Pacific Corporation common stock.
The gain on marketable security transactions for the nine months ended
September 30, 1996 represents a gain of $4,914,000 resulting from the sale of
Union Pacific Corporation common stock during the first quarter of 1996, and
for the nine months ended 1995 was primarily due to the sale of Union Pacific
common stock resulting in a gain of $7,675,000.
Restoration of previously recorded loss represents the reversal of losses
from Schoen, the investment in which was fully written-off in the second
quarter of 1995.
The effective tax rate in 1995 was impacted by the restoration of losses from
Schoen not requiring tax effect and the related tax benefit of $3,000,000.
Equity in income of unconsolidated subsidiaries in the 1995 period includes
income from Katy's interest in Syratech which was sold in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Combined cash, cash equivalents and marketable securities decreased to
$51,637,000 on September 30, 1996 compared to $60,354,000 on December 31, 1995
primarily due to the repurchase of Katy common stock and to increases in
working capital needs caused by higher sales and seasonal factors.
Katy expects to commit an additional $1,400,000 for capital projects during
the remainder of 1996. Funding for these expenditures and for working capital
needs is expected to be accomplished through use of available cash and
internally generated funds. The Company also continues to search for
appropriate acquisition candidates, and may obtain all or a portion of the
financing for future acquisitions through the incurrence of additional debt,
which the Company believes it can obtain at reasonable terms and pricing.
At September 30, 1996, Katy had short and long-term indebtedness for money
borrowed of $9,380,000. Total debt was 6.8% of total debt and equity at
September 30, 1996. Katy has a secured short-term line of credit with The
Northern Trust Company in the amount of $20,000,000 which it expects to use
principally for letters of credit.
In August 1995, Katy's Board of Directors authorized the Company to
repurchase up to 400,000 shares of its common stock over the subsequent
twelve months in open market transactions. In January 1996, the Board
authorized an additional 500,000 shares to be repurchased. In connection
therewith, Katy repurchased 22,700 shares in the three months ended
September 30, 1996 at a total cost of $292,000, bringing the total shares
repurchased under the authorization to 846,700. The Company expects to
conclude this program during the fourth quarter of 1996.
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
U.S. Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties ("PRP's") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The means of determining allocation among PRPs is generally set forth in a
written agreement entered into by the PRPs at a particular site. An allocation
share assigned to a PRP is often based on the PRP's volumetric contribution of
waste to a site. The Company is also involved in remedial response and
voluntary environmental clean-up at a number of other sites which are not
currently the subject of any legal proceedings under Superfund, including
certain of its current and formerly owned manufacturing facilities. Based on
its estimate of allocation of liability among PRPs, the probability that
other PRPs, many of whom are large, solvent, public companies, will fully pay
the costs apportioned to them, currently available information concerning the
scope of contamination, estimated remediation costs, estimated legal fees and
other factors, the Company believes that it has an adequate accrual for all
known liabilities at September 30, 1996. Although management believes that
these actions in the aggregate are not likely to have a material adverse effect
on Katy's consolidated financial position or results of operations, further
costs could be significant and will be recorded as a charge to operations when
such costs become probable and reasonably estimable.
Katy also has a number of product liability and workers' compensation claims
pending against it and its subsidiaries. With respect to the product liability
and workers' compensation claims, Katy has provided for its share of expected
losses beyond the applicable insurance coverage, including those incurred but
not reported. Such accruals are developed using currently available claim
information. The incurred but not reported component of the liability was
developed using actuarial techniques.
KATY INDUSTRIES, INC.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
During the quarter for which this report is filed, there have been no
material developments in previously reported legal proceedings, and no other
cases or legal proceedings, other than ordinary routine litigation incidental
to the Company's business and other nonmaterial proceedings, have been
brought against the Company.
EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------
(a) Reports on Form 8-K
On November 8, 1996, the Company filed a current report on From 8-K providing
information in response to Item 5 to Form 8-K with respect to an amendment to
the Rights Agreement, dated as of January 13, 1995 between Katy Industries,
Inc. and Harris Trust and Savings Bank, an Illinois banking corporation.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
---------------------
Registrant
DATE: November 13, 1996 By /s/John R. Prann, Jr.
---------------------
John R. Prann, Jr.
President,
Chief Executive Officer &
Chief Operating Officer
DATE: November 13, 1996 By /s/Stephen P. Nicholson
-----------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 43,242
<SECURITIES> 8,395
<RECEIVABLES> 26,774<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 39,703
<CURRENT-ASSETS> 137,154
<PP&E> 76,908
<DEPRECIATION> 34,699
<TOTAL-ASSETS> 210,660
<CURRENT-LIABILITIES> 39,497
<BONDS> 9,380
0
0
<COMMON> 9,822
<OTHER-SE> 118,483
<TOTAL-LIABILITY-AND-EQUITY> 210,660
<SALES> 133,390
<TOTAL-REVENUES> 133,390
<CGS> 90,907
<TOTAL-COSTS> 126,351
<OTHER-EXPENSES> (6,795)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 804
<INCOME-PRETAX> 13,834
<INCOME-TAX> 5,051
<INCOME-CONTINUING> 8,783
<DISCONTINUED> 0
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<NET-INCOME> 8,363
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<FN>
<F1>Accounts Receivable, Trade are reported net of allowance for
Doubtful Accounts in the Condensed Consolidated Balance Sheet.
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