<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 June 30, 1997
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 August 1, 1997, 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 one share is owned by the Chairman of
the Company, all of the Class B common stock is owned by Loral Space &
Communications Ltd. and all of the preferred stock except 44,999 shares is 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>
June 30, December 31,
1997 1996
------------------------- -------------------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,710,000 $ 1,508,000
Accounts receivable, net 37,382,000 36,032,000
Inventory 69,757,000 68,334,000
Deferred tax asset 1,698,000 1,411,000
Other current assets 404,000 586,000
------------------------- -------------------------
Total current assets 112,951,000 107,871,000
------------------------- -------------------------
Property, plant and equipment 140,027,000 136,900,000
Less, accumulated depreciation and amortization 71,552,000 66,914,000
------------------------- -------------------------
68,475,000 69,986,000
------------------------- -------------------------
Deferred charges, net of amortization 24,273,000 24,674,000
Cost in excess of net assets acquired, net of
amortization 192,370,000 196,446,000
Intangible assets, net of amortization 18,524,000 20,138,000
------------------------- -------------------------
$416,593,000 $419,115,000
========================= =========================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 11,284,000 $ 11,253,000
Current portion of senior term loan 5,500,000 6,000,000
Interest payable 5,909,000 6,689,000
Other current liabilities 48,594,000 49,740,000
------------------------- -------------------------
Total current liabilities 71,287,000 73,682,000
------------------------- -------------------------
Postretirement benefit obligation other
than pensions 75,949,000 75,439,000
Other long-term liabilities 19,470,000 16,300,000
Senior term loan 31,000,000 34,000,000
Senior revolving loan 31,000,000 13,000,000
11 7/8% senior secured notes due 2003 70,000,000 100,000,000
10 3/8% senior subordinated notes due 2004 140,000,000 140,000,000
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 (166,798,000) (178,147,000)
Adjustment to equity for minimum pension
liability (10,649,000) (10,649,000)
Cumulative translation adjustment (37,000) 119,000
------------------------- -------------------------
Total stockholders' deficiency (22,113,000) (33,306,000)
------------------------- -------------------------
$416,593,000 $419,115,000
========================= =========================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------------------------
June 30, June 30,
1997 1996
--------------------------- ---------------------------
<S> <C> <C>
Sales $146,174,000 $136,489,000
Costs and expenses 110,797,000 108,375,000
Amortization 5,152,000 5,203,000
--------------------------- ---------------------------
Operating income 30,225,000 22,911,000
Interest and investment income 121,000 118,000
Interest expense (15,707,000) (19,450,000)
--------------------------- ---------------------------
Income before income taxes and
extraordinary charge 14,639,000 3,579,000
Income tax provision (1,577,000) (220,000)
--------------------------- ---------------------------
Income before extraordinary charge 13,062,000 3,359,000
Extraordinary charge from early
extinguishment of debt, net of tax (1,713,000) --
--------------------------- ---------------------------
Net income $ 11,349,000 $ 3,359,000
=========================== ===========================
</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
-----------------------------------------------------------------
June 30, June 30,
1997 1996
--------------------------- ---------------------------
<S> <C> <C>
Sales $73,564,000 $71,537,000
Costs and expenses 55,599,000 53,874,000
Amortization 2,581,000 2,601,000
--------------------------- ---------------------------
Operating income 15,384,000 15,062,000
Interest and investment income 68,000 48,000
Interest expense (7,739,000) (9,620,000)
--------------------------- ---------------------------
Income before income taxes and
extraordinary charge 7,713,000 5,490,000
Income tax provision (940,000) (220,000)
--------------------------- ---------------------------
Income before extraordinary charge 6,773,000 5,270,000
Extraordinary charge from early
extinguishment of debt, net of tax (1,713,000) --
--------------------------- ---------------------------
Net income $ 5,060,000 $ 5,270,000
=========================== ===========================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------------
June 30, June 30,
1997 1996
------------------------ ------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 11,349,000 $ 3,359,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 9,790,000 9,448,000
Non-cash interest expense - amortization
of deferred financing charges 733,000 798,000
Deferred income taxes 1,290,000 --
Extraordinary charge from early
extinguishment of debt 1,713,000 --
Changes in assets and liabilities:
Accounts receivable, net (1,436,000) 543,000
Inventory (1,493,000) (6,170,000)
Other current assets 182,000 600,000
Accounts payable, interest payable, and
other current liabilities (1,895,000) 9,257,000
Postretirement benefit obligation other than
pensions 510,000 (1,587,000)
Other long-term liabilities 3,170,000 2,438,000
------------------------ ------------------------
Net cash provided by operating
activities 23,913,000 18,686,000
------------------------ ------------------------
Cash flows from investing activities:
Capital expenditures (3,127,000) (11,343,000)
Deferred charges (1,500,000) (212,000)
------------------------ ------------------------
Net cash used in investing activities (4,627,000) (11,555,000)
------------------------ ------------------------
Cash flows from financing activities:
Payments of senior term loan (3,500,000) --
Payments of senior revolving loan (21,000,000) (16,000,000)
Payments of long-term debt (30,000,000) (343,000)
Borrowings under senior revolving loan 39,000,000 13,000,000
Premiums paid on early extinguishment of debt (1,584,000) --
------------------------ ------------------------
Net cash used by financing activities (17,084,000) (3,343,000)
------------------------ ------------------------
Net increase in cash and cash
equivalents 2,202,000 3,788,000
Cash and cash equivalents, beginning of
period 1,508,000 3,178,000
------------------------ ------------------------
Cash and cash equivalents, end of period $ 3,710,000 $ 6,966,000
======================== ========================
Supplemental cash flow information:
Cash interest paid during period $15,754,000 $18,832,000
======================== ========================
</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 six months ended June 30,
1997 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 December 31, 1996 Transition Report on Form
10-K.
2. On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of 11 7/8% Senior Notes at a redemption price of 105.28% of the
principal amount thereof. In connection therewith, the Company
recorded an extraordinary charge of $1,713,000 (net of income tax
benefit of $553,000) for the write-off of unamortized financing costs
and redemption premiums.
3. Receivables are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable, principally
from commercial customers $ 34,848,000 $ 34,086,000
Accounts receivable, on U. S
Government and other long-term
contracts 2,869,000 2,359,000
Allowances (335,000) (413,000)
------------ ------------
$ 37,382,000 $ 36,032,000
============ ============
</TABLE>
4. Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials and work-in-process $44,909,000 $46,742,000
Finished goods 12,593,000 10,821,000
Inventoried costs related to U.S.
Government and other long-term
contracts 12,255,000 10,771,000
----------- -----------
$69,757,000 $68,334,000
=========== ===========
</TABLE>
6
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
5. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Accrued payroll costs $13,991,000 $15,170,000
Accrued taxes 7,336,000 6,504,000
Accrued costs on long-term contracts 6,325,000 5,744,000
Accrued warranty costs 7,317,000 6,695,000
Customer credits 5,253,000 7,483,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 6,372,000 6,144,000
----------- -----------
$48,594,000 $49,740,000
=========== ===========
</TABLE>
6. Contingencies
Until recently, the Company's Aircraft Braking Systems subsidiary had
been purchasing substantially all of the carbon for its carbon brakes
under supply arrangements with Hitco Technologies, Inc. ("Hitco").
Hitco is no longer supplying carbon to Aircraft Braking Systems and,
as described below, Aircraft Braking Systems and Hitco are in
litigation. The Company has developed an alternate supplier for
certain programs and also has expanded its carbon manufacturing
facility in Akron, Ohio. The Company believes it has sufficient
sources of carbon to meet all of its expected requirements for brake
production at the current level of business.
On December 15, 1995, Aircraft Braking Systems commenced an action in
the Court of Common Pleas, Summit County, Ohio against Hitco after
Hitco threatened to breach existing supply contracts unless prices
were renegotiated. Hitco had been the principal supplier of carbon
used by Aircraft Braking Systems for its carbon brakes. Hitco claimed
that Aircraft Braking Systems breached the supply arrangements by
electing to begin to expand its own carbon production facility. The
Aircraft Braking Systems' complaint, as amended, seeks damages in
excess of $47
7
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
million for various breaches of the contracts, injunctive relief and
specific performance requiring Hitco to perform its obligations
pursuant to existing contracts and purchase orders. Hitco has
counterclaimed in the matter seeking, among other things, damages up
to $130 million for the alleged breach by Aircraft Braking Systems of
alleged long-term contracts to purchase carbon. Hitco was enjoined
from refusing to perform its obligations pursuant to existing
contracts and purchase orders without change in terms. Through January
1997, Hitco continued to supply carbon to the Company, although Hitco
failed to acknowledge certain purchase orders, and Hitco alleges that
its obligation to supply carbon to Aircraft Braking Systems expired on
December 13, 1996. Aircraft Braking Systems has sought to hold Hitco
in contempt of the court's injunction. Hitco's motion for an
injunction seeking to require that the Company turn over technology
allegedly jointly developed and owned under the prior contractual
arrangements, has been denied. The case is presently scheduled for
trial in January, 1998.
In related actions, a suit filed by Hitco in Superior Court, Los
Angeles County, California against Aircraft Braking Systems seeking
substantially the same relief as is asserted in the Ohio action has
been stayed. Hitco also filed suit in the Federal District Court in
the Northern District of Ohio for damages and injunctive relief
against a third party claiming that such party, in supplying certain
carbon to Aircraft Braking Systems, has acquired trade secrets of
Hitco from Aircraft Braking Systems and has misappropriated trade
secrets and technology developed under the same research and
development contracts between Hitco and Aircraft Braking Systems which
are the subject of the Ohio case and the California case. Aircraft
Braking Systems has been granted leave to intervene and the other
party has moved to dismiss the Federal action.
Management intends to vigorously advocate its interests in all
lawsuits, to seek dismissal of the California action and to proceed in
the Ohio case to enforce the preliminary injunction and otherwise to
protect Aircraft Braking Systems' carbon supply as well as to seek
damages from Hitco. Based upon the proceedings to date, advice of
counsel and its own assessment of the matters in dispute, management
does not expect the outcome of the litigation to be unfavorable to the
Company.
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 Six Months Ended June 30, 1997 and
June 30, 1996
Sales for the six months ended June 30, 1997 totaled $146,174,000 reflecting an
increase of $9,685,000 or 7.1% compared with $136,489,000 for the same period in
the prior year. This increase was due to higher sales of wheels and brakes for
commercial transport and general aviation aircraft of $13,660,000, primarily on
the Fokker Fo-100, F-27 and F-28, Canadair Regional Jet, McDonnell Douglas MD-90
and Lear programs. Partially offsetting this increase were lower military sales
of $3,975,000 primarily on the F-16 program.
Operating income increased 31.9% or $7,314,000 to $30,225,000 or 20.7% of
sales for the six months ended June 30, 1997 compared with $22,911,000 or 16.8%
of sales for the same period in the prior year. Operating margins increased
primarily due to the overhead absorption effect relating to the higher sales
volume, a favorable sales mix whereby commercial sales, with higher margins,
composed a greater percentage of total sales, lower costs relating to
litigation and lower independent research and development costs relating to the
MD-90 program and carbon research. Partially offsetting this increase were
higher shipments of original equipment to airframe manufacturers at or below
the cost of production.
Interest expense, net decreased $3,746,000 for the six months ended June 30,
1997 compared with the same period in the prior year. This decrease was due to
lower interest rates on outstanding debt as a result of the refinancing in
August 1996 of the 13 3/4% Senior Subordinated Debentures with 10 3/8% Senior
Subordinated Notes and borrowings under the Amended and Restated Credit
Agreement.
The Company's effective tax rate of 8.3% for the six months ended June 30, 1997
and the effective rate of 6.1% for the same period in the prior year differs
from the statutory rate of 35% due to partial utilization of tax net operating
losses and the change in the valuation allowance. The increase in the effective
rate in 1997 is primarily due to a greater portion of the change in the
valuation allowance being applied to reduce goodwill.
Approximately 400 hourly employees of the Company's Aircraft Braking Systems
subsidiary are represented by the United Auto Workers' Union. 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. The Company is currently involved in discussions with union
representatives regarding a new collective bargaining agreement. The Company
believes that, whether or not a satisfactory agreement is reached, there will be
no material disruption to the business of Aircraft Braking Systems.
Comparison of Results of Operations for the Three Months Ended June 30, 1997 and
June 30, 1996
Sales for the three months ended June 30, 1997 totaled $73,564,000 reflecting an
increase of $2,027,000 or 2.8% compared with $71,537,000 for the same period in
the prior year. This increase was due to higher sales of wheels and brakes for
commercial transport and general aviation aircraft of $2,601,000, primarily on
the McDonnell Douglas MD-90 and Fokker F-27 and F-28 programs partially offset
by lower military sales.
Operating income increased $322,000 to $15,384,000 or 20.9% of sales for the
three months ended June 30, 1997 compared with $15,062,000 or 21.1% of sales for
the same period in the prior year. Operating margins decreased primarily
9
<PAGE> 10
due to higher shipments of original equipment to airframe manufacturers at or
below the cost of production partially offset by the overhead absorption effect
relating to the higher sales volume.
Interest expense, net decreased $1,901,000 for the three months ended June 30,
1997 as compared with the same period in the prior year. This decrease was due
to lower interest rates on outstanding debt as a result of the refinancing in
August 1996 of the 13 3/4% Senior Subordinated Debentures with 10 3/8% Senior
Subordinated Notes and borrowings under the Amended and Restated Credit
Agreement.
The Company's effective tax rate of 7.1% for the three months ended June 30,
1997 and the effective rate of 4.0% for the same period in the prior year
differs from the statutory rate of 35% due to partial utilization of tax net
operating losses and the change in the valuation allowance. The increase in the
effective rate in 1997 is primarily due to a greater portion of the change in
the valuation allowance being applied to reduce goodwill.
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to fund capital expenditures, make investments in new airframes (which
were $14.2 million and $13.0 million for the six months ended June 30, 1997 and
1996, respectively) and pay interest and principal on indebtedness. The
Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations. In addition,
the Company has a $70 million revolving loan facility, maturing August 14, 2001
with availability determined by reference to a borrowing base of eligible
accounts receivable and inventory. At June 30, 1997, the Company had $34.4
million available to borrow under the revolving loan facility.
On June 1, 1997, the Company redeemed $30 million aggregate principal amount of
11 7/8% Senior Notes at a redemption price of 105.28% of the principal amount
thereof. In connection therewith, the Company recorded an extraordinary charge
of $1,713,000 (net of income tax benefit of $553,000) for the write-off of
unamortized financing costs and redemption premiums. The Company used borrowings
under the revolving loan facility to effect such redemption.
10
<PAGE> 11
PART II - OTHER INFORMATION
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 June 30,
1997.
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
DIRKSON R. CHARLES
------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: August 14, 1997
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,710,000
<SECURITIES> 0
<RECEIVABLES> 37,717,000
<ALLOWANCES> 335,000
<INVENTORY> 69,757,000
<CURRENT-ASSETS> 112,951,000
<PP&E> 140,027,000
<DEPRECIATION> 71,552,000
<TOTAL-ASSETS> 416,593,000
<CURRENT-LIABILITIES> 71,287,000
<BONDS> 277,500,000
0
10,000
<COMMON> 11,000
<OTHER-SE> (22,134,000)
<TOTAL-LIABILITY-AND-EQUITY> 416,593,000
<SALES> 146,174,000
<TOTAL-REVENUES> 146,174,000
<CGS> 92,667,000
<TOTAL-COSTS> 92,667,000
<OTHER-EXPENSES> 8,719,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,707,000
<INCOME-PRETAX> 14,639,000
<INCOME-TAX> 1,577,000
<INCOME-CONTINUING> 13,062,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,713,000
<CHANGES> 0
<NET-INCOME> 11,349,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
