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, 1999 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 12,1999
Common stock, $1 par value 8,369,958
KATY INDUSTRIES, INC.
FORM 10-Q
September 30, 1999
INDEX Page
----- ----
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 2,3
Statements of Condensed Consolidated
Income Three Months and Nine Months Ended
September 30, 1999 and 1998 4
Statements of Condensed Consolidated Cash Flows
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
- 1 -
PART I FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
-----------------------------
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Thousands of Dollars)
(Unaudited)
ASSETS
------
September 30, December 31,
1999 1998
CURRENT ASSETS: ---- ----
Cash and cash equivalents $ 11,473 $ 12,898
Accounts receivable, net 97,256 53,449
Inventories 124,177 69,394
Deferred income taxes 13,233 13,268
Other current assets 5,054 6,404
Net current assets of operations to be disposed of 203 1,203
Net current assets of discontinued operations 2,078 10,959
------- -------
Total current assets 253,474 167,575
------- -------
OTHER ASSETS:
Cost in excess of net assets acquired 63,149 33,576
Other intangibles 23,600 23,621
Miscellaneous 5,795 3,504
Net noncurrent assets of operations to be disposed of 15,411 15,521
Net noncurrent assets of discontinued operations 1,263 4,279
------- ------
Total other assets 109,218 80,501
------- ------
PROPERTIES:
Land and improvements 2,512 1,435
Buildings and improvements 25,160 10,677
Machinery and equipment 144,835 60,340
------- ------
Accumulated depreciation (38,178) (27,353)
------- ------
Net properties 134,329 45,099
------- -------
$497,021 $293,175
======= =======
See Notes to Condensed Consolidated Financial Statements.
- 2 -
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Thousands of Dollars)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1999 1998
CURRENT LIABILITIES: ---- ----
Accounts payable $56,992 $28,017
Accrued compensation 9,168 5,354
Accrued expenses 42,048 31,626
Accrued interest and taxes 5,656 910
Other current liabilities 694 697
------- ------
Total current liabilities 114,558 66,604
------- ------
LONG TERM DEBT, less current maturities 157,850 39,908
------- ------
OTHER LIABILITIES 9,729 9,310
------- ------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 3,921 5,198
------- ------
DEFERRED INCOME TAXES 22,157 22,839
------- ------
COMMITMENTS AND CONTINGENCIES
PREFERRED INTEREST OF SUBSIDIARY 32,900 -
------- ------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,285 51,243
Accumulated other comprehensive income (595) (2,309)
Other adjustments (1,001) (1,302)
Retained earnings 116,898 112,784
Treasury stock, at cost, 1,452,246
and 1,483,890 shares (20,503) (20,922)
------- ------
Total stockholders' equity 155,906 149,316
------- -------
$497,021 $293,175
======= =======
See Notes to Condensed Consolidated Financial Statements.
- 3 -
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Thousands of Dollars Except Per Share Data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $145,548 $ 94,814 $401,371 $235,296
Cost of goods sold 98,978 66,632 273,357 165,599
------- ------- ------- -------
Gross profit 46,570 28,182 128,014 69,697
Selling, general and administrative 36,520 22,774 106,936 58,385
Restructuring charge - - 600 -
------- ------- ------- -------
Operating income 10,050 5,408 20,478 11,312
Equity in loss of operations
to be disposed of (32) (150) (922) (102)
Interest and other, net (2,675) 588 (8,401) 1,802
------- ------- ------- -------
Income before provision for
income taxes 7,343 5,846 11,155 13,012
Provision for income taxes (2,570) (2,046) (3,904) (4,554)
------- ------- ------- -------
Income before distributions on
preferred securities 4,773 3,800 7,251 8,458
Distributions on preferred interest of
subsidiary (net of tax) (465) - (1,255) -
------- ------- ------- -------
Income from continuing operations 4,308 3,800 5,996 8,458
Income from operations of discontinued
businesses (net of tax) - - - -
------- ------- ------- -------
Net income $ 4,308 $ 3,800 $ 5,996 $ 8,458
------- ------- ------- -------
Earnings per share - Basic
Income from continuing operations $ 0.52 $ 0.46 $ 0.72 $ 1.02
Discontinued Operations $ - $ - $ - $ -
---- ---- ---- ----
Net Income $ 0.52 $ 0.46 $ 0.72 $ 1.02
==== ==== ==== ====
Earnings per share - Diluted
Income from continuing operations $ 0.48 $ 0.45 $ 0.71 $ 1.00
Discontinued Operations $ - $ - $ - $ -
---- ---- ---- ----
Net Income $ 0.48 $ 0.45 $ 0.71 $ 1.00
==== ==== ==== ====
Average shares outstanding
Basic 8,351 8,294 8,349 8,290
===== ===== ===== =====
Diluted 9,960 8,442 8,412 8,449
===== ===== ===== =====
Dividends paid per share
Common stock $ 0.075 $ 0.075 $ 0.225 $ 0.225
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements.
- 4 -
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Thousands of Dollars)
(Unaudited)
1999 1998
Cash flows from operating activities: ---- ----
Net income $ 5,996 $ 8,458
Depreciation and amortization 14,491 6,270
Net changes in assets and liabilities: 1,100 (1,929)
------ ------
Net cash flows provided by
operating activities 21,587 12,799
------ ------
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired (135,821) (66,575)
Capital expenditures (11,256) (8,047)
Proceeds from sale of assets 187 31
Collections of notes receivable 647 584
Proceeds from sale of subsidiaries 7,222 12,243
------ ------
Net cash flows used in investing activities (139,021) (61,764)
------ ------
Cash flows from financing activities:
Proceeds from borrowings under revolving credit
facility, net of repayments 117,937 34,762
Payment of dividends (1,880) (1,866)
Purchase of treasury shares (160) (217)
Other - (248)
------ ------
Net cash flows provided by
financing activities 115,897 32,431
------ ------
Net decrease in cash and cash equivalents (1,537) (16,534)
Cash and cash equivalents, beginning of period 13,883 24,300
------ ------
Cash and cash equivalents, end of period 12,346 7,766
Cash of discontinued operations and other
operations to be disposed of 873 842
------ ------
Cash and cash equivalents of continuing operations $ 11,473 $ 6,924
====== ======
See Notes to Condensed Consolidated Financial Statements.
- 5 -
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) Significant Accounting Policies
- -----------------------------------
Consolidation Policy
- --------------------
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority owned and
where the Company does not exercise control are reported using the equity
method. The Condensed Consolidated Financial Statements at September 30, 1999
and December 31, 1998, and for the three and nine month periods ended September
30, 1999 and September 30, 1998 are unaudited and reflect all adjustments
(consisting only of normal recurring 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 and notes thereto
should be read in conjunction 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, 1998.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Discontinued Operations and Operations to be Disposed Of
- --------------------------------------------------------
The historical operating results for "Discontinued operations" have been
segregated as "Discontinued operations" on the accompanying Statements of
Condensed Consolidated Income for all periods presented. The related assets
and liabilities have been aggregated and separately identified on the Condensed
Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of
discontinued operations". Discontinued operations have not been segregated on
the Statements of Condensed Consolidated Cash Flows, except for cash and cash
quivalents. The net income from these operations during the nine months ended
September 30, 1999 and 1998 has been deferred and will not be recognized until
the total of the gains and losses from the sales of these companies can be
determined with certainty. The Company does not expect the net result of these
dispositions to be material to its financial position or results of operations.
The historical operating results for "Operations to be disposed of" have been
segregated as "Equity in loss of operations to be disposed of" on the
accompanying Statements of Condensed Consolidated Income for all periods
presented. The related assets and liabilities have been separately identified
on the Condensed Consolidated Balance Sheets as "Net current assets or Net
noncurrent assets of operations to be disposed of". Operations to be disposed
of have not been segregated on the Statements of Condensed Consolidated Cash
Flows, except for cash and cash equivalents.
- 6 -
Inventories
- -----------
The components of inventories are as follows:
September 30, December 31,
1999 1998
---- ----
(Thousands of dollars)
Raw materials $ 37,800 $ 26,155
Work in process 8,688 6,073
Finished goods 77,689 37,166
------- -------
$124,177 $ 69,394
======= =======
At September 30, 1999, approximately 34% of the Company's inventories are
accounted for using the last-in, first-out ("LIFO") method. The remaining
inventories are accounted for using the first-in, first-out ("FIFO") method.
The LIFO cost of inventory approximated its cost determined by the FIFO method
at September 30, 1999. All inventories were accounted for using the FIFO method
at December 31, 1998.
Earnings Per Share
- ------------------
Basic and diluted earnings per share were arrived at using the calculations
outlined below. Potentially dilutive securities, in the form of stock options
have been included in the calculation of weighted average shares outstanding
under the treasury stock method. The only other potentially dilutive
securities are convertible preferred shares of a subsidiary (See Note 7).
Stock options were the only securities that had a dilutive impact on earnings
per share for the nine months ended September 30, 1999. For the quarter ended
September 30, 1999 stock options and convertible preferred shares had a
dilutive impact on earnings per share.
Three Months Nine Months
Ended September 30, Ended September 30,
Net Income (Basic) 1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
Income from continuing operations $4,308 $3,800 $5,996 $8,458
Income from discontinued operations $ - $ - $ - $ -
----- ----- ----- -----
Total Income $4,308 $3,800 $5,996 $8,458
===== ===== ===== =====
Net Income (Diluted)
Income from continuing operations $4,308 $3,800 $5,996 $8,458
Income from discontinued operations $ - $ - $ - $ -
Distributions on preferred interest of
subsidiary (net of tax) $ 465 $ - $ - $ -
----- ----- ----- -----
Total Income $4,773 $3,800 $5,996 $8,458
===== ===== ===== =====
Earnings Per Share - Basic
Weighted Average Shares 8,351 8,294 8,349 8,290
Per share amount
Continuing operations $0.52 $0.46 $0.72 $1.02
Discontinued operations $ - $ - $ - $ -
----- ----- ----- -----
$0.52 $0.46 $0.72 $1.02
===== ===== ===== =====
- 7 -
Effect of potentially dilutive securities
Stock options 43 148 63 159
Convertible preferred shares 1,566 - - -
Earnings Per Share - Diluted
Weighted Average Shares 9,960 8,442 8,412 8,449
Per share amount
Continuing operations $0.48 $0.45 $0.71 $1.00
Discontinued operations $ - $ - $ - $ -
----- ----- ----- -----
$0.48 $0.45 $0.71 $1.00
===== ===== ===== =====
(2) Commitments and Contingencies
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of
the Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. All of the
foregoing is alleged to have occurred prior to the Company's purchase of Woods.
The plaintiff also alleges that it made loans to an entity controlled by
certain officers and directors based upon fraudulent representations. The
plaintiff seeks to hold Woods liable for its alleged damage under principles
of respondeat superior and successor liability. The plaintiff is claiming
damages in excess of $24,000,000 and is requesting treble damages under the
statutes. The defendants have filed a motion, which has not been ruled on,
to dismiss this action on jurisdictional grounds. Because the litigation is
in preliminary stages, it is not possible at this time for the Company to
determine an outcome or reasonably estimate the range of potential exposure.
The Company may have recourse against the former owner of Woods and others
for, among other things, violations of covenants, representations and
warranties under the purchase agreement through which the Company acquired
Woods, and under state, federal and common law. In addition, the purchase
price under the purchase agreement may be subject to adjustment as a result
of the claims made by Banco del Atlantico. The extent or limit of any such
recourse cannot be predicted at this time.
(3) Acquisitions and Dispositions
Acquisitions
On January 8, 1999, the Company purchased all of the common membership
interest (the "Common Interest") in Contico International, L.L.C., (the "LLC"),
the successor to the janitorial, consumer products and industrial packaging
businesses of Contico International, Inc. ("Contico"). Contico had previously
contributed substantially all of the assets and certain of the liabilities of
the business to the LLC and entered into leases with the LLC for certain real
property used in the business and retained by Contico. The purchase price for
the Common Interest was approximately $132,100,000. The payment of the purchase
price was financed by the Company's unsecured revolving credit agreement
agented by Bank of America. Contico has retained a preferred membership
interest in the LLC (the "Preferred Interest"), having a stated value of
$32,900,000, which yields an 8% annual return on its stated value while
outstanding (see Note 7). The LLC, based in St. Louis, Missouri, manufactures
and distributes janitorial equipment and supplies, consumer storage, home and
automotive products, as well as food service equipment and supplies. The
acquisition has been accounted for under the purchase method and,
accordingly, the purchase price is preliminary and adjustments may be recorded
through January 2000. The accounts of this acquisition have been included in
the Company's Condensed Consolidated Financial Statements from the acquisition
date. The estimated cost in excess of net assets acquired of approximately
$30,000,000,
- 8 -
subject to additional purchase accounting adjustments, has been
recorded as "Cost in excess of net assets acquired" in the Condensed
Consolidated Balance Sheets and is being amortized on a straight line basis
over twenty years. The following unaudited pro forma information reflects the
pro forma results of operations for the Company giving effect to the Contico
acquisition as if the Contico acquisition occurred on January 1, 1998. The
unaudited pro forma results include the unaudited historical operating results
of Contico for the week ended January 8, 1999 and the nine months ended
September 30, 1998. The Company's historical information presented below
excludes a net loss of $599,000 or $0.07 per share (diluted) from discontinued
operations and operations to be disposed of and an after tax restructuring
charge of $390,000 or $.05 per share (diluted) for the nine months ended
September 30, 1999. The Company's historical information presented below
excludes a net loss of $66,000 from discontinued operations and operations to
be disposed of for the nine months ended September 30, 1998. Disclosed results
may not be indicative of future results.
September 30, 1999 September 30, 1998
------------------ ------------------
(In thousands, except per share data)
Katy Pro Katy Pro
Historical Forma Historical Forma
Net Sales $ 401,371 $ 405,411 $ 235,296 $ 393,284
Operating Income $ 21,078 $ 21,466 $ 11,312 $ 25,116
Net Income $ 6,985 $ 7,077 $ 8,524 $ 11,622
Earnings per share - Basic $ .84 $ .84 $ 1.03 $ 1.40
Earnings per share - Diluted $ .83 $ .84 $ 1.01 $ 1.29
Dispositions
On January 25, 1999, the Company completed the divestiture of Bach Simpson,
Ltd. for approximately $550,000. The Company has retained ownership of Bach
Simpson, Ltd.'s building and has leased it to the buyer. Bach Simpson, Ltd.
is one of the businesses that comprise the discontinued operations.
Accordingly, the loss on disposal has been deferred pending the disposal of
all of the discontinued operations (see Note 1).
On May 7, 1999, the Company completed the divestiture of Diehl Machines, Inc.
for approximately $3,700,000. Diehl Machines, Inc. is one of the businesses
that comprise the discontinued operations. Accordingly, the loss on disposal
will be deferred as a component of net income from discontinued operations
pending the disposal of all of the discontinued operations (see Note 1).
On September 24, 1999, the Company completed the divestiture of Peters
Machinery, Inc. for approximately $5,400,000. Peters Machinery, Inc. is one
of the businesses that comprise the discontinued operations. Accordingly, the
gain on disposal will be deferred as a component of net income from
discontinued operations pending the disposal of all of the discontinued
operations (see Note 1).
(4) Industry Segment Information
- --------------------------------
The Company is a manufacturer and distributor of a variety of industrial and
consumer products, including sanitary maintenance supplies, coated abrasives,
stains, electrical and electronic components, and nonpowered hand tools.
Principal markets are in the United States, Canada and the United Kingdom,
and include the sanitary maintenance, restaurant supply, retail, electronic,
automotive, and computer markets. These activities are grouped into two
industry segments: Electrical/Electronics and Maintenance Products.
- 9 -
The tables below summarize the key factors in the year-to-year changes in
operating results.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(Thousands of dollars)
Electrical/Electronics
Net External Sales $49,682 $61,902 $134,637 $155,842
Net Internal Sales 12,348 8,837 40,235 16,236
Operating Income 3,795 4,939 4,636 9,907
Operating Margin 7.64% 7.98% 3.44% 6.36%
Depreciation & Amortization 454 517 1,848 1,263
Identifiable Assets 143,917 129,429 143,917 129,429
Capital Expenditures 479 1,762 2,086 5,463
Maintenance Products
Net External Sales 95,866 32,912 266,734 79,454
Net Internal Sales 3,422 1,885 8,106 4,776
Operating Income 8,565 2,902 24,026 8,185
Operating Margin 8.93% 8.82% 9.01% 10.30%
Depreciation & Amortization 4,380 1,046 12,316 2,320
Identifiable Assets 314,757 110,454 314,757 110,454
Capital Expenditures 2,638 742 8,756 1,822
Discontinued Operations
Net External Sales 1,565 5,405 9,391 17,882
Net Internal Sales - - - -
Operating Income / (Loss) (43) 275 338 1,685
Operating Margin (2.75)% 5.09% 3.60% 9.42%
Depreciation & Amortization 34 149 249 474
Identifiable Assets 3,559 16,780 3,559 16,780
Capital Expenditures 12 100 80 391
Operations to be Disposed Of
Net External Sales 961 828 2,606 5,148
Net Internal Sales - - - -
Operating Loss (178) (306) (706) (479)
Operating Margin (18.52)% (36.96)% (27.09)% (9.30)%
Depreciation & Amortization 1 138 1 874
Identifiable Assets 16,843 26,654 16,843 26,654
Equity Investments 135 582 6,779 7,294
Capital Expenditures 140 25 147 4,810
Corporate
Corporate Expenses (2,310) (2,433) (8,184) (6,780)
Depreciation & Amortization 39 19 77 61
Identifiable Assets 19,412 22,053 19,412 22,053
Capital Expenditures - 38 187 167
- 10 -
Company
Net External Sales [a] 148,074 101,047 413,368 258,326
Net Internal Sales 15,770 10,722 48,341 21,012
Operating Income [a] 9,829 5,377 20,110 12,518
Operating Margin [a] 6.63% 5.32% 4.86% 4.85%
Depreciation & Amortization [a] 4,908 1,869 14,491 4,992
Identifiable Assets [a] 498,488 305,370 498,488 305,370
Capital Expenditures 3,269 2,667 11,256 12,653
[a] Company balances include amounts from both "Discontinued Operations" and
"Operations to be Disposed of", whereas the Condensed Consolidated Financial
Statements separately classify such amounts as "Discontinued Operations" and
"Operations to be Disposed of".
The following tables reconcile the Company's total revenues, operating income
and assets to the Company's Statements of Condensed Consolidated Income and
Condensed Consolidated Balance Sheets.
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
---- ---- ---- ----
(Thousands of dollars)
Revenues
Total Revenues for Reportable
Segments $163,844 $111,769 $461,709 $279,338
Elimination of Intersegment
Revenues (15,770) (10,722) (48,341) (21,012)
Revenues included in Equity in
Income Of Operations to be
Disposed Of (961) (828) (2,606) (5,148)
Revenues included in
Discontinued Operations (1,565) (5,405) (9,391) (17,882)
------- ------- ------- -------
Total Consolidated Revenues 145,548 94,814 401,371 235,296
======= ======= ======= =======
Operating Income
Total Operating Income for
Reportable Segments 9,829 5,377 20,110 12,518
Operating Loss included in
Equity in Income Of
Operations to be Disposed Of 178 306 706 479
Operating (Income) Loss
included in Discontinued
Operations 43 (275) (338) (1,685)
------- ------- ------- -------
Total Consolidated Operating
Income 10,050 5,408 20,478 11,312
======= ======= ======= =======
Assets
Total Assets for Reportable
Segments 498,488 305,370 498,488 305,370
Liabilities included in Net
Assets from Operations to be
Disposed Of (1,230) (697) (1,230) (697)
Liabilities included in Net
Assets from Discontinued
Operations (237) (1,724) (237) (1,724)
------- ------- ------- -------
Total Consolidated Assets $497,021 $302,949 $497,021 $302,949
======= ======= ======= =======
- 11 -
(5) Comprehensive Income
Comprehensive income for the nine months ended September 30,1999,is as follows:
Net Income $5,996
Foreign Currency Translation Adjustments 1,714
-----
Comprehensive Income $7,710
=====
The foreign currency translation adjustment relates primarily to the sale of
Bach Simpson, Ltd. on January 25, 1999 (see Note 3). The company did not have
any significant adjustments for comprehensive income for the nine months
ended September 30, 1998.
(6) Indebtedness
- ----------------
Long-term debt includes: September 30, December 31,
1999 1998
---- ----
(Thousands of dollars)
Revolving loans payable, interest at various LIBOR Base
Rates (7.31% - 7.65%), due through 2001, unsecured $157,000 $39,000
Real estate and chattel mortgages, with interest
at fixed rates (7.14%), due through 2002 917 980
Less current maturities, included in other current
liabilities (67) (72)
------- -------
$157,850 $39,908
======= =======
Aggregate scheduled maturities of long-term debt are as follows:
(Thousands of dollars)
1999 $ 67
2000 71
2001 157,071
2002 71
2003 and beyond 637
--------
Total $ 157,917
========
As of September 30, 1999, the Company is no longer contingently liable for $8.0
million (original face value) of 8-1/8% Subordinated Industrial Development
Bonds issued by Bee Gee Holding Company, Inc. an unconsolidated subsidiary in
which Katy holds a 43% equity investment. As of September 30, 1999, these
bonds have been paid in full.
(7) Preferred Interest of Subsidiary
- ------------------------------------
Upon the Company's purchase of the Common Interest of the LLC during the
first quarter of 1999, Contico retained a Preferred Interest in the LLC,
represented by 329 preferred units, each with a stated value of $100,000,for
an aggregate stated value of $32.9 million. The Preferred Interest yields an
8% cumulative annual return on its stated value while outstanding, payable in
cash. The holder of the Preferred Interest have a put option which allows,
at certain times beginning on January 8, 2001, or upon the occurrence of
certain events, each preferred unit to be exchangeable for 4,762 shares of
Katy common stock. Upon the exercise of the put, Katy has the option to settle
in cash, in lieu of delivering Katy common stock, in an amount equal to the
then market value of Katy common stock multiplied by the number of shares
implied by the exchange.
- 12 -
(8) Restructuring Charge
- ------------------------
During the second quarter of 1999, the Company undertook a restructuring of
the Electrical/Electronics businesses, which included severance and related
costs for certain employees. Approximately 22 employees accepted severance
packages. Total severance and related costs were $600,000, which are shown
as a Restructuring Charge on the Statements of Condensed Consolidated Income.
Substantially, all of these costs were paid during the third quarter of 1999.
(9) Supplemental Cash Flow Information
- ---------------------------------------
A portion of the net assets included in the Condensed Consolidated Financial
Statements as a result of the Contico acquisition was financed through a
preferred membership interest in the LLC held by Contico's former owners.
This interest has a stated value of $32.9 million (see Notes 3 and 7).
During the nine months ended September 30, 1998, the Company incurred
additional debt of $1,018,000 relating to capital equipment. The Company also
incurred $3,589,000 of debt for capital equipment relating to C.E.G.F. (USA),
Inc., which the Company disposed of during 1998.
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999
- -------------------------------------
Following are summaries of sales and operating income for the three months
ended September 30, 1999 and 1998 by industry segment:
Net Sales Increase (Decrease)
- --------- ------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $49,682 $61,902 $(12,220) (19.7)%
Maintenance Products 95,866 32,912 62,954 191.3 %
Operations to be Disposed Of 961 828 133 16.1 %
Discontinued Operations 1,565 5,405 (3,840) (71.0)%
Operating Income (Loss) Increase (Decrease)
------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $3,795 $4,939 $(1,144) (23.2)%
Maintenance Products 8,565 2,902 5,663 195.1 %
Operations to be Disposed Of (178) (306) 128 41.8 %
Discontinued Operations (43) 275 (318) (115.6)%
The Electrical/Electronics Group's sales decreased $12,220,000 or 19.7%
primarily due to decreased volumes in the consumer electric corded products
and electrical and electronic parts and accessories businesses. These lower
volumes were primarily a result of the loss of consumer electric corded
products business announced on November 4, 1998.
The Group's operating income decreased $1,144,000 or 23.2% mainly as a result
of decreased volumes and higher selling, general and administrative costs as a
percentage of sales in the electric corded products and electrical and
electronic parts and accessories businesses.
Sales from the Maintenance Products Group increased $62,954,000 or 191.3%
primarily as a result of the Contico acquisition in January of 1999 and the
Wilen acquisition in August of 1998. Excluding these acquisitions, the
Group's sales increased $1,375,000, primarily due to increased volumes in the
coated abrasives business.
The Group's operating income increased $5,663,000 or 195.1%. Excluding the
acquisitions mentioned above, operating income increased $762,000. The
increase was primarily a result of the increased volumes, complemented
with increased margins in the coated abrasives businesses.
Sales from Operations to be Disposed Of increased $133,000 or 16.1%, mainly
as a result of increased volumes in the waste-to-energy business.
- 14 -
The Group's operating income increased $128,000 or 41.8% primarily as a
result of the increased volumes and lower depreciation as a result of the
impairment recorded at the waste-to-energy facility during the fourth
quarter of 1998.
Sales from Discontinued Operations decreased $3,840,000 or 71.0% primarily
as a result of the disposition of Bach Simpson, Ltd., which was sold in January
of 1999, and Diehl Machines, Inc., which was sold in May of 1999. Excluding
these dispositions, sales decreased $903,000 primarily due to lower volumes in
the cookie sandwich machinery business.
The Group's operating income decreased $318,000 or 115.6% primarily as a
result of the above-mentioned dispositions and decreased volumes.
Selling, general and administrative expenses for the Company's continuing
segments increased as a percentage of sales to 25.1% in the third quarter of
1999 from 24.0% for the same period in 1998. The increase was primarily a
result of the increased amortization of goodwill and other intangibles
associated with the acquisitions during 1998 and the first part of 1999.
Interest and other, net decreased substantially for the third quarter of 1999
compared to the third quarter of 1998. The higher costs are primarily due to
increased interest expense associated with bank borrowings to fund the
Company's acquisitions.
Nine Months Ended September 30, 1999
Following are summaries of sales and operating income for the nine months
ended September 30, 1999 and 1998 by industry segment:
Net Sales Increase (Decrease)
------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $134,637 $155,842 $ (21,205) (13.6)%
Maintenance Products 266,734 79,454 187,280 235.7 %
Operations to be Disposed Of 2,606 5,148 (2,542) (49.4)%
Discontinued Operations 9,391 17,882 (8,491) (47.5)%
Operating Income (Loss) Increase (Decrease)
------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $4,636 $9,907 $(5,271) (53.2)%
Maintenance Products 24,026 8,185 15,841 193.5 %
Operations to be Disposed Of (706) (479) (227) (47.4)%
Discontinued Operations 338 1,685 (1,347) (79.9)%
The Electrical/Electronics Group's sales decreased $21,205,000 or 13.6%
primarily due to decreased volumes in the consumer electric corded products and
electrical and electronic parts and accessories businesses, offset by increased
volumes associated with the Company's Woods Canada acquisition in May of 1998.
Excluding this acquisition, the Electrical/Electronics Group's sales decreased
- 15 -
$31,418,000. These lower volumes were primarily a result of the loss of
consumer electric corded products business announced on November 4, 1998.
The Group's operating income decreased $5,271,000 or 53.2% mainly as a result
of decreased volumes, offset slightly by the increased operating income
associated with the Woods Canada acquisition in May of 1998. Excluding the
acquisition, operating income decreased $4,346,000. A pre-tax restructuring
charge of $600,000 relating primarily to severance costs for the elimination
of 22 positions in the Electrical/Electronics businesses and competitive market
pressures in the electrical and electronic components business contributed to
the decrease.
Sales from the Maintenance Products Group increased $187,280,000 or 235.7%
primarily as a result of the Contico acquisition in January of 1999, the Disco
acquisition in May of 1998 and the Wilen acquisition in August of 1998.
Excluding these acquisitions, the Group's sales increased $4,672,000,
primarily due to increased volumes in the Group's stain and coated abrasives
businesses.
The Group's operating income increased $15,841,000 or 193.5%. Excluding the
acquisitions mentioned above, operating income increased $1,807,000. The
increase was primarily a result of the increased volumes and the slightly
higher margins in the stain and coated abrasives businesses. The higher
margins resulted from the introduction of new products and a favorable
product mix.
Sales from Operations to be Disposed Of decreased $2,542,000 or 49.4%, mainly
as a result of decreased volumes associated with the disposal of the
refrigeration and cold storage facilities business in September of 1998.
Excluding the disposition, sales remained relatively stable compared to the
prior year.
The Group's operating income decreased $227,000 or 47.4% primarily as a
result of the disposition mentioned above. Excluding the disposition,
operating income increased slightly from the prior year due to lower
depreciation costs resulting from the impairment recorded at the
waste-to-energy facility during the fourth quarter of 1998.
Sales from Discontinued Operations decreased $8,491,000 or 47.5% primarily as
a result of the disposition of Bach Simpson, Ltd., in January of 1999, and
Diehl Machines, Inc., in May of 1999. Excluding these dispositions, sales
decreased $2,256,000 primarily due to lower volumes in the cookie sandwich
machinery business.
The Group's operating income decreased $1,347,000 or 79.9% primarily as a
result of the lower volumes and lower margins in the cookie sandwich machinery
business.
Selling, general and administrative expenses for the Company's continuing
segments increased as a percentage of sales to 26.8% in 1999 from 24.8% for
the same period in 1998. The increase was primarily a result of the increased
amortization of goodwill and other intangibles associated with the acquisitions
during 1998 and the first part of 1999 and the restructuring charge in the
Electrical/Electronics Group.
Interest and other, net decreased substantially for the first nine months of
1999 compared to the same period of 1998. The higher costs are primarily due
to increased interest expense associated with bank borrowings to fund the
Company's acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents decreased 11% to $11,473,000 on September
30, 1999 compared to $12,898,000 on December 31, 1998. Current ratios were
2.21 to 1.00 at September 30, 1999 compared to 2.52 to 1.00 at December 31,
- 16 -
1998. Working capital increased to $138,916,000 at September 30, 1999 from
$100,971,000 on December 31, 1998 primarily as a result of the Contico
acquisition in January of 1999, offset partially by better management of
working capital.
Katy expects to commit an estimated $10,000,000 for planned capital projects
in the continuing businesses during the remainder of 1999. Funding for these
expenditures and for working capital needs is expected to be accomplished
through the 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 using the Company's unsecured $215 million credit
line. As of September 30, 1999, $157 million was outstanding under this
facility. Certain terms and conditions in the credit agreement may limit the
amount available at any given time.
At September 30, 1999, Katy had short and long-term indebtedness for money
borrowed of $157,917,000. Total debt was 45.5% of total capitalization at
September 30, 1999.
RESTRUCTURING AND EVALUATION OF ALTERNATIVES FOR ELECTRICAL/ELECTRONICS SEGMENT
In June 1999, the Company announced a restructuring plan for its
Electrical/Electronics businesses as a result of weaker than expected sales
performance and lower margins. The restructuring plan includes (i) making
substantial cost reductions in these operations, (ii) intensifying the
marketing and product development efforts initiated earlier this year; and,
(iii) accelerating the consolidation of operations within the segment begun
earlier in the second quarter.
The cost of this restructuring, which includes severance costs related to the
elimination of 22 management employees, resulted in a pre-tax charge to
earnings in the second quarter of approximately $600,000. Additionally, plant
personnel levels were reduced in excess of 100 persons and 24 unfilled
administrative positions were eliminated.
The Company also announced that it has retained Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") to assist in exploring strategic alternatives
relating to the Electrical/Electronics businesses, including the possible sale
thereof. The Electrical/Electronics businesses: Woods North America
(inclusive of Woods Industries, Inc., Woods Industries (Canada) Inc., Thorsen
Tools) and GC/Waldom, Inc., account for approximately one-third of Katy's 1999
forecasted sales and approximately one-quarter of Katy's total 1999 forecasted
earnings before interest, taxes, depreciation and amortization, respectively.
Any proceeds from a potential sale of Electrical/Electronics businesses would
be applied to currently outstanding debt. Hamilton Precision Metals, Inc.,
which is part of the Electrical/Electronics segment, will not be included in
DLJ's assignment.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position and requires that those assets and liabilities be measured
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and its resulting designation.
In September 1999, the FASB issued statement No. 137, which delays the required
implementation of Statement No. 133 to years beginning after September 15,
2000. While the Company is still evaluating the potential effect of this
statement, its adoption is not expected to have a significant impact on the
Company's financial position or results of operations.
- 17 -
ENVIRONMENAL AND OTHER CONTINGENCIES
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or 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.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. 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 has
recorded and accrued for indicated environmental liabilities in the aggregate
amount of approximately $5,000,000 at December 31, 1998. The ultimate cost will
depend on a number of factors and the amount currently accrued represents
management's best current estimate of the total cost to be incurred. The
Company expects this amount to be substantially paid over the next one to four
years.
Katy also has a number of product liability and workers' compensation claims
pending against it and its subsidiaries. Many of these claims are proceeding
through the litigation process and the final outcome will not be known until a
settlement is reached with the claimant or the case is adjudicated. It can
take up to 10 years from the date of the injury to reach a final outcome for
such claims. 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, which
are developed using actuarial techniques. Such accruals are developed using
currently available claim information, and represent management's best
estimates. The ultimate cost of any individual claim can vary based upon, among
other factors, the nature of the injury, the duration of the disability period,
the length of the claim period, the jurisdiction of the claim and the nature
of the final outcome.
YEAR 2000
The year 2000 issue is a problem that has a potentially material adverse
impact on the Company as well as governments, businesses, and individuals
throughout the world. The year 2000 issue affects computer programs and
microchips that cannot properly recognize the first two digits of a year,
beginning after December 31, 1999. The problem has the potential to disrupt
the operation of products and services that rely on these computer programs
or microchips.
Based on assessment activities conducted by the Company beginning in 1997
regarding the year 2000 issue, Katy determined that the Company required
modification or replacement of a moderate number of computer programs and
microchips. The changes required were necessary for a wide variety of assets
that include, but were not limited to, computer hardware and software,
production machinery and phone systems. The Company believes that it has
identified the major sources of potential internal year 2000 issues and
implemented a company wide year 2000 remediation program (the "Y2K Program")
during 1998 which includes the performance of due diligence procedures for all
acquisitions made by the Company. The Company has significantly completed the
Y2K Program as of September 30, 1999 and expects to fully complete the Y2K
Program by November 30, 1999, however, testing of new systems will continue
throughout the year. The Company believes that completion of the Y2K Program
- 18 -
will substantially mitigate all known significant potential internal year 2000
problems by November 30, 1999. The Company will continue to investigate
additional year 2000 risks as they come to the attention of the Company.
The Company has contacted many of its critical suppliers, financial
institutions, public utilities and other entities to determine the year 2000
readiness of its material business relationships. Although the company has not
been informed of any material risks associated with these entities, there is
no certainty that material adverse effects on the Company will be avoided.
The Company has expensed approximately $1,198,000 of costs incurred to date
related to the Y2K Program. Approximately $373,000 was expensed in the first
nine months of 1999. The total remaining costs of remediation are estimated
to be $115,000. The costs of the Y2K Program to date and estimated future
costs, as well as Y2K Program completion dates are based on management's best
estimates. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty of the year 2000 readiness of third-party suppliers, customers and
others, the Company is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on its results
of operations, liquidity or financial condition. However, the Y2K Program is
expected to significantly reduce Katy's level of uncertainty about the year
2000 problem.
OTHER FACTORS
The Company, particularly its Contico International L.L.C. subsidiary, uses
polyethylene, polypropylene and other thermoplastic resins as raw material in
a substantial portion of its products. Resin prices have increased steadily,
beginning in mid-year 1999. At this time, the portion of these cost increases
recoverable through product price increases cannot be accurately estimated.
The Company's future earnings may be negatively impacted to the extent that
these increased costs cannot be recovered.
Some of the statements in this Form 10-Q, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about
the Company and conference calls following earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
the forward-looking statements.
- 19 -
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Reports on Form 8-K
There were no reports on Form 8-K filed during the third quarter ended
September 30, 1999.
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 12, 1999 By /s/ Stephen P. Nicholson
------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
- 20 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,473,000
<SECURITIES> 0
<RECEIVABLES> 97,256,000<F1>
<ALLOWANCES> 0
<INVENTORY> 124,177,000
<CURRENT-ASSETS> 253,474,000
<PP&E> 172,507,000
<DEPRECIATION> 38,178,000
<TOTAL-ASSETS> 497,021,000
<CURRENT-LIABILITIES> 114,558,000
<BONDS> 157,850,000
32,900,000
0
<COMMON> 9,822,000
<OTHER-SE> 146,084,000
<TOTAL-LIABILITY-AND-EQUITY> 497,021,000
<SALES> 401,371,000
<TOTAL-REVENUES> 401,371,000
<CGS> 273,357,000
<TOTAL-COSTS> 380,893,000
<OTHER-EXPENSES> (136,000)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,459,000
<INCOME-PRETAX> 11,155,000
<INCOME-TAX> 3,904,000
<INCOME-CONTINUING> 5,996,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,996,000
<EPS-BASIC> $ 0.72
<EPS-DILUTED> $ 0.71
<FN>
<F1>Net of allowances of $ 3,637,000
<F2>Includes equity in loss of other operations to be disposed of, $ 922,000.
</FN>
</TABLE>
