<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1995
-----------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
----------
K & F Industries, Inc.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
-----------------------------
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
----- -----
As of February 1, 1996, there were 553,344 shares of Class A common stock
outstanding and 458,994 shares of Class B common stock outstanding. All of the
Class A common stock of the Company except ten shares are owned by the Chairman
of the Company, all of the Class B common stock are owned by Loral Corporation
and all of the preferred stock except 44,999 shares are owned by four limited
partnerships of Lehman Brothers Holdings Inc.
<PAGE> 2
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,178,000 $ 8,493,000
Accounts receivable, net 36,424,000 33,548,000
Inventory 59,439,000 61,767,000
Other current assets 1,056,000 1,106,000
------------ ------------
Total current assets 100,097,000 104,914,000
------------ ------------
Property, plant and equipment 118,049,000 114,706,000
Less, accumulated depreciation and amortization 58,021,000 51,574,000
------------ ------------
60,028,000 63,132,000
------------ ------------
Deferred charges, net of amortization 24,507,000 26,508,000
Cost in excess of net assets acquired, net of
amortization 203,647,000 208,228,000
Intangible assets, net of amortization 23,749,000 26,292,000
------------ ------------
$412,028,000 $429,074,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 9,990,000 $ 10,345,000
Interest payable 11,398,000 8,771,000
Other current liabilities 39,771,000 37,773,000
------------ ------------
Total current liabilities 61,159,000 56,889,000
------------ ------------
Postretirement benefit obligation other
than pensions 76,462,000 77,717,000
Other long-term liabilities 15,734,000 19,216,000
Senior revolving loan 13,000,000 --
11 7/8% senior secured notes due 2003 100,000,000 100,000,000
13 3/4% senior subordinated debentures due 2001 180,000,000 210,000,000
Stockholders' Deficiency:
Preferred stock, $.01 par value-authorized,
1,050,000 shares; issued and outstanding,
1,027,635 shares (liquidation preference of
$60,110,000) 10,000 10,000
Common stock, Class B, $.01 par value-
authorized, 460,000 shares; issued and
outstanding, 458,994 shares (liquidation
preference of $26,848,000) 5,000 5,000
Common stock, Class A, $.01 par value-
authorized, 2,100,000 shares; issued and
outstanding, 553,344 shares 6,000 6,000
Additional paid-in capital 155,350,000 155,350,000
Deficit (182,138,000) (182,643,000)
Adjustment to equity for minimum pension
liability (7,192,000) (7,192,000)
Cumulative translation adjustment (368,000) (284,000)
------------ ------------
Total stockholders' deficiency (34,327,000) (34,748,000)
------------ ------------
$412,028,000 $429,074,000
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Sales $199,784,000 $175,089,000
Costs and expenses 158,265,000 141,560,000
Amortization 7,813,000 7,823,000
------------ ------------
Operating income 33,706,000 25,706,000
Interest and investment income 652,000 218,000
Interest expense (31,940,000) (35,868,000)
------------ ------------
Income (loss) before income taxes and
extraordinary charge 2,418,000 (9,944,000)
Income taxes -- --
------------ ------------
Income (loss) before extraordinary charge 2,418,000 (9,944,000)
Extraordinary charge from early
extinguishment of debt (1,913,000) --
------------ ------------
Net income (loss) $ 505,000 $ (9,944,000)
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Sales $68,298,000 $59,946,000
Costs and expenses 54,241,000 48,213,000
Amortization 2,600,000 2,593,000
----------- -----------
Operating income 11,457,000 9,140,000
Interest and investment income 259,000 140,000
Interest expense (10,642,000) (10,619,000)
----------- -----------
Income (loss) before income taxes and
extraordinary charge 1,074,000 (1,339,000)
Income taxes -- --
----------- -----------
Income (loss) before extraordinary charge 1,074,000 (1,339,000)
Extraordinary charge from early
extinguishment of debt (1,913,000) --
----------- -----------
Net loss $ (839,000) $(1,339,000)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 505,000 $ (9,944,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary charge from early
extinguishment of debt 1,913,000 --
Depreciation and amortization 14,260,000 14,496,000
Non-cash interest expense - amortization
of deferred financing charges 1,151,000 1,005,000
Non-cash interest expense - convertible
debentures -- 3,950,000
Changes in assets and liabilities:
Accounts receivable, net (2,910,000) (1,275,000)
Inventory 2,278,000 4,130,000
Other current assets 50,000 184,000
Accounts payable, interest payable, and
other current liabilities 4,270,000 3,845,000
Postretirement benefits other than
pensions (1,255,000) (1,705,000)
Other long-term liabilities (3,482,000) 2,705,000
------------ ------------
Net cash provided by operating
activities 16,780,000 17,391,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,343,000) (1,358,000)
Deferred charges (326,000) (215,000)
------------ ------------
Net cash used in investing activities (3,669,000) (1,573,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan -- (20,000,000)
Borrowings of senior revolving loan 13,000,000 10,000,000
Payment of senior subordinated debentures (30,000,000) --
Premiums paid on early extinguishment of debt (1,126,000) --
Payment of convertible debentures -- (12,764,000)
Proceeds from issuance of capital stock -- 12,764,000
Deferred charges-financing costs (300,000) --
------------ ------------
Net cash used by financing activities (18,426,000) (10,000,000)
------------ ------------
Net (decrease) increase in cash and cash
equivalents (5,315,000) 5,818,000
Cash and cash equivalents, beginning of
period 8,493,000 4,327,000
------------ ------------
Cash and cash equivalents, end of period $ 3,178,000 $ 10,145,000
============ ============
Supplemental cash flow information:
Cash interest paid during period $ 28,162,000 $ 26,710,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of financial
position, results of operations and cash flows. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules. The Company believes that
the disclosures made are adequate to make the information presented not
misleading. The consolidated statements of operations for the three and
nine months ended December 31, 1995 are not necessarily indicative of the
results to be expected for the full year. It is suggested that these
financial statements be read in conjunction with the audited financial
statements and notes thereto included in the Company's March 31, 1995
Annual Report on Form 10-K.
2. Redemption of Debt
On December 28, 1995, the Company redeemed $30,000,000 principal amount of
its 13 3/4% Senior Subordinated Debentures due 2001, at a redemption price
of 103.75% of the principal amount thereof. The Company used cash on hand
and proceeds from borrowings under its revolving loan facility to redeem
the debentures. In connection therewith, the Company recorded an
extraordinary charge of $1,913,000 consisting of redemption premiums and
the write-off of unamortized financing costs.
3. Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation," which encourages (but does not require) adoption of
the fair value method of accounting for stock-based compensation plans.
Entities may continue to measure compensation costs for those plans using
the intrinsic method of accounting, but must make pro forma disclosures
about the impact on results of operations as if the fair value method of
accounting had been applied. The company is currently evaluating the
impact, if any, of SFAS No. 123.
4. Receivables are summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ -----------
<S> <C> <C>
Accounts receivable, principally
from commercial customers $32,668,000 $30,036,000
Accounts receivable, on U. S.
Government and other long-term contracts 4,175,000 3,871,000
Allowances (419,000) (359,000)
----------- -----------
$36,424,000 $33,548,000
=========== ===========
</TABLE>
6
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ -----------
<S> <C> <C>
Raw materials and work-in-process $36,937,000 $35,819,000
Finished goods 10,829,000 15,500,000
Inventoried costs related to U.S.
Government and other long-term
contracts 12,010,000 11,072,000
----------- -----------
59,776,000 62,391,000
Less, unliquidated progress payments
received, principally related
to long-term government contracts 337,000 624,000
----------- -----------
$59,439,000 $61,767,000
=========== ===========
</TABLE>
The Company customarily sells original wheel and brake equipment below cost
as an investment in a new airframe which is expected to be recovered
through the subsequent sale of replacement parts. These commercial
investments (losses) are recognized when original equipment is shipped.
Losses on U.S. Government contracts are immediately recognized in full when
determinable.
Inventory is stated at average cost, not in excess of net realizable value.
In accordance with industry practice, inventoried costs may contain amounts
relating to contracts with long production cycles, a portion of which will
not be realized within one year.
6. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ -----------
<S> <C> <C>
Accrued payroll costs $14,934,000 $13,149,000
Accrued taxes 6,350,000 6,978,000
Accrued costs on long-term contracts 4,452,000 6,477,000
Accrued warranty costs 7,389,000 5,248,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 4,646,000 3,921,000
----------- -----------
$39,771,000 $37,773,000
=========== ===========
</TABLE>
7. Contingencies
On December 15, 1995 the Company's Aircraft Braking Systems ("ABS")
subsidiary filed an action in the Court of Common Pleas, Summit County,
Ohio against Hitco Technologies, Inc. ("Hitco"), a supplier of carbon brake
components, whose new owners threatened to breach existing supply contracts
unless prices were renegotiated. The complaint seeks injunctive relief and
specific performance, ordering Hitco to perform its obligations pursuant to
its existing contracts with ABS. On February 5, 1996 the court issued a
preliminary injunction, ordering Hitco to perform
7
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
its obligations pursuant to its existing contracts with ABS. In a related
matter, Hitco subsequently commenced an action in Superior Court, Los
Angeles County, California against ABS alleging breach of contract, fraud
and deceit, seeking damages and declaratory relief. Hitco also
counterclaimed on the same theories in Ohio. ABS intends to vigorously
contest these claims. Based on the preliminary injunction in favor of the
Company, management believes that the Hitco claims will not have a material
adverse effect on the Company's financial position or results of operation.
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits and
proceedings cannot be predicted with certainty, in the opinion of
management, the ultimate liability, if any, will not have a material
adverse effect on the Company.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operations for the Nine Months Ended December 31, 1995
and December 31, 1994
Sales for the first nine months of fiscal year 1996 totaled $199,784,000
reflecting an increase of $24,695,000 or 14.1% compared with $175,089,000 for
the same period in the prior year. This increase was due to higher military
sales of $13,971,000 on the F-16 and various other programs and higher
commercial sales of $10,724,000 primarily on the DC-9, DC-10, FO-100 and MD-80
programs.
Operating income increased 31.1% to $33,706,000 or 16.9% of sales for the first
nine months of fiscal year 1996 compared with $25,706,000 or 14.7% of sales for
the same period in the prior year. Operating margins increased primarily due to
operating efficiencies and the overhead absorption effect relating to the higher
sales volume. Partially offsetting this increase were higher shipments of
original equipment to airplane manufacturers at or below the cost of production.
Interest expense decreased $3,928,000 for the first nine months of fiscal year
1996 compared with the same period in the prior year. This decrease was
primarily due to the retirement of the 14 3/4% Subordinated Convertible
Debentures in the second quarter of fiscal year 1995.
Approximately 390 hourly employees of the Company's Aircraft Braking Systems
subsidiary are represented by the United Auto Workers' Union. Aircraft Braking
Systems' three-year contract with the United Auto Workers' Union expired on
August 10, 1991. Aircraft Braking Systems has not had a ratified collective
bargaining agreement since August 10, 1991, but has operated under Company
implemented terms and conditions of employment.
Comparison of Results of Operations for the Three Months Ended December 31, 1995
and December 31, 1994
Sales for the third quarter of fiscal year 1996 totaled $68,298,000 reflecting
an increase of $8,352,000 or 13.9% compared with $59,946,000 for the same period
in the prior year. This increase was due to higher military sales of $6,221,000
on the F-16 and various other programs and higher commercial sales of $2,131,000
primarily on MD-80 and FO-100 programs.
Operating income increased 25.4% to $11,457,000 or 16.8% of sales for the third
quarter of fiscal year 1996 compared with $9,140,000 or 15.2% of sales for the
same period in the prior year. Operating margins increased primarily due to
operating efficiencies and the overhead absorption effect relating to the higher
sales volume.
9
<PAGE> 10
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to pay interest and principal on indebtedness, fund capital expenditures
and make investments in equipment for new airframes. Amortization of the 13 3/4%
Senior Subordinated Debentures commences August 1, 1999. The Company's
management believes that it will have adequate resources to meet its cash
requirements through funds generated from operations and borrowings under its
$70 million revolving credit facility (maturing April 27, 1997, and subject to a
borrowing base of a portion of eligible accounts receivable and inventory). At
December 31, 1995, the Company had $43.2 million available under its revolving
credit facility.
On December 28, 1995, the Company redeemed $30,000,000 principal amount of its
13 3/4% Senior Subordinated Debentures due 2001, at a redemption price of
103.75% of the principal amount thereof. The Company used cash on hand and
borrowings under its revolving loan facility to redeem the debentures. Annual
interest payments will be approximately $3,000,000 lower, net of interest on
revolving loan borrowings related to the redemption. (See Note 2 to the
consolidated financial statements.)
Bookings
Bookings for the first nine months of fiscal year 1996 totaled $208,728,000
reflecting an increase of $15,724,000 or 8.1% compared with $193,004,000 for the
same period in the prior year. This increase is primarily due to higher
commercial bookings reflecting a generally stronger demand for replacement parts
on the Company's wheel and brake programs.
Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which encourages (but does not require) adoption of the fair
value method of accounting for stock-based compensation plans. Entities may
continue to measure compensation costs for those plans using the intrinsic
method of accounting, but must make pro forma disclosures about the impact on
results of operations as if the fair value method of accounting had been
applied. The company is currently evaluating the impact, if any, of SFAS No.
123. (See Note 3 to the consolidated financial statements.)
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 15, 1995 the Company's Aircraft Braking Systems ("ABS") subsidiary
filed an action in the Court of Common Pleas, Summit County, Ohio against Hitco
Technologies, Inc. ("Hitco"), a supplier of carbon brake components, whose new
owners threatened to breach existing supply contracts unless prices were
renegotiated. The complaint seeks injunctive relief and specific performance,
ordering Hitco to perform its obligations pursuant to its existing contracts
with ABS. On February 5, 1996 the court issued a preliminary injunction,
ordering Hitco to perform its obligations pursuant to its existing contracts
with ABS. In a related matter, Hitco subsequently commenced an action in
Superior Court, Los Angeles County, California against ABS alleging breach of
contract, fraud and deceit, seeking damages and declaratory relief. Hitco also
counterclaimed on the same theories in Ohio. ABS intends to vigorously contest
these claims. Based on the preliminary injunction in favor of the Company,
management believes that the Hitco claims will not have a material adverse
effect on the Company's financial position or results of operation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended December
31, 1995.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
KENNETH M. SCHWARTZ
----------------------
Kenneth M. Schwartz
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: February 14, 1996
12
<PAGE> 13
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,178,000
<SECURITIES> 0
<RECEIVABLES> 36,843,000
<ALLOWANCES> 419,000
<INVENTORY> 59,439,000
<CURRENT-ASSETS> 100,097,000
<PP&E> 118,049,000
<DEPRECIATION> 58,021,000
<TOTAL-ASSETS> 412,028,000
<CURRENT-LIABILITIES> 61,159,000
<BONDS> 293,000,000
0
10,000
<COMMON> 11,000
<OTHER-SE> (34,348,000)
<TOTAL-LIABILITY-AND-EQUITY> 412,028,000
<SALES> 199,784,000
<TOTAL-REVENUES> 199,784,000
<CGS> 136,277,000
<TOTAL-COSTS> 136,277,000
<OTHER-EXPENSES> 12,023,000
<LOSS-PROVISION> 94,000
<INTEREST-EXPENSE> 31,940,000
<INCOME-PRETAX> 2,418,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,418,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,913,000
<CHANGES> 0
<NET-INCOME> 505,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
