<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 March 31, 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 May 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>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,995,000 $ 1,508,000
Accounts receivable, net 39,043,000 36,032,000
Inventory 68,383,000 68,334,000
Deferred tax asset 1,515,000 1,411,000
Other current assets 548,000 586,000
------------- -------------
Total current assets 113,484,000 107,871,000
------------- -------------
Property, plant and equipment 138,326,000 136,900,000
Less, accumulated depreciation and amortization 69,231,000 66,914,000
------------- -------------
69,095,000 69,986,000
------------- -------------
Deferred charges, net of amortization 25,565,000 24,674,000
Cost in excess of net assets acquired, net of
amortization 194,282,000 196,446,000
Intangible assets, net of amortization 19,331,000 20,138,000
------------- -------------
$ 421,757,000 $ 419,115,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 11,937,000 $ 11,253,000
Current portion of senior term loan 5,000,000 6,000,000
Interest payable 5,325,000 6,689,000
Other current liabilities 51,160,000 49,740,000
------------- -------------
Total current liabilities 73,422,000 73,682,000
------------- -------------
Postretirement benefit obligation other
than pensions 75,189,000 75,439,000
Other long-term liabilities 17,812,000 16,300,000
Senior term loan 32,500,000 34,000,000
Senior revolving loan 10,000,000 13,000,000
11 7/8% senior secured notes due 2003 100,000,000 100,000,000
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 (171,858,000) (178,147,000)
Adjustment to equity for minimum pension
liability (10,649,000) (10,649,000)
Cumulative translation adjustment (30,000) 119,000
------------- -------------
Total stockholders' deficiency (27,166,000) (33,306,000)
------------- -------------
$ 421,757,000 $ 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>
Three Months Ended
--------------------------------
March 31, March 31,
1997 1996
-------------- ---------------
<S> <C> <C>
Sales $ 72,610,000 $ 64,952,000
Costs and expenses 55,198,000 54,501,000
Amortization 2,571,000 2,602,000
------------ ------------
Operating income 14,841,000 7,849,000
Interest and investment income 53,000 70,000
Interest expense (7,968,000) (9,830,000)
------------ ------------
Income (loss) before income taxes 6,926,000 (1,911,000)
Income tax provision (637,000) --
------------ ------------
Net income (loss) $ 6,289,000 $ (1,911,000)
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, March 31,
1997 1996
-------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 6,289,000 $ (1,911,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,888,000 4,661,000
Non-cash interest expense - amortization
of deferred financing charges 372,000 410,000
Deferred income taxes 533,000 --
Changes in assets and liabilities:
Accounts receivable, net (3,093,000) 1,162,000
Inventory (116,000) (3,942,000)
Other current assets 38,000 224,000
Accounts payable, interest payable, and
other current liabilities 740,000 4,318,000
Postretirement benefit obligation other than
pensions (250,000) (1,072,000)
Other long-term liabilities 1,512,000 1,671,000
------------ ------------
Net cash provided by operating
activities 10,913,000 5,521,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,426,000) (7,075,000)
Deferred charges (1,500,000) (212,000)
------------ ------------
Net cash used in investing activities (2,926,000) (7,287,000)
------------ ------------
Cash flows from financing activities:
Payments of senior term loan (2,500,000) --
Payments of senior revolving loan (11,000,000) (9,000,000)
Borrowings under senior revolving loan 8,000,000 10,000,000
------------ ------------
Net cash (used) provided by financing
activities (5,500,000) 1,000,000
------------ ------------
Net increase (decrease) in cash and cash
equivalents 2,487,000 (766,000)
Cash and cash equivalents, beginning of
period 1,508,000 3,178,000
------------ ------------
Cash and cash equivalents, end of period $ 3,995,000 $ 2,412,000
============ ============
Supplemental cash flow information:
Cash interest paid during period $ 8,960,000 $ 12,601,000
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
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 statement of
operations for the three months ended March 31, 1997 is 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. Effective June 1, 1997, the Company will redeem $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 will
record an extraordinary charge of approximately $2.3 million for the
write-off of unamortized financing costs and redemption premiums.
3. Receivables are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable, principally
from commercial customers $36,296,000 $34,086,000
Accounts receivable, on U. S
Government and other long-term
contracts 3,099,000 2,359,000
Allowances (352,000) (413,000)
----------- -----------
$39,043,000 $36,032,000
=========== ===========
</TABLE>
4. Inventory consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and work-in-process $45,457,000 $46,742,000
Finished goods 11,402,000 10,821,000
Inventoried costs related to U.S.
Government and other long-term
contracts 11,524,000 10,771,000
----------- -----------
$68,383,000 $68,334,000
=========== ===========
</TABLE>
5
<PAGE> 6
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>
March 31, December 31,
1997 1996
------------ --------------
<S> <C> <C>
Accrued payroll costs $16,088,000 $15,170,000
Accrued taxes 7,694,000 6,504,000
Accrued costs on long-term contracts 7,075,000 5,744,000
Accrued warranty costs 7,195,000 6,695,000
Customer credits 5,425,000 7,483,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 5,683,000 6,144,000
----------- -----------
$51,160,000 $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 facility is producing carbon and is expected to be fully
operational during the second quarter of calendar year 1997. 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
6
<PAGE> 7
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, and Hitco has sought an injunction
requiring that the Company turn over technology allegedly jointly
developed and owned under the prior contractual arrangements. These
motions have not been decided by the court, nor has the court set a
trial date.
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.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operations for the Three Months Ended March 31,
1997 and March 31,1996
Sales for the three months ended March 31, 1997 totaled $72,610,000 reflecting
an increase of $7,658,000 or 11.8% compared with $64,952,000 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 $11,058,000, primarily
on the Fokker Fo-100, McDonnell Douglas MD-80, Canadair Regional Jet and Lear
programs. Partially offsetting this increase were lower military sales of
$3,400,000 primarily on the F-16 program.
Operating income increased 89.1% to $14,841,000 or 20.4% of sales for the three
months ended March 31, 1997 compared with $7,849,000 or 12.1% 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, comprised a greater
percentage of total sales and lower costs relating to litigation.
Interest expense, net decreased $1,845,000 for the three months ended March 31,
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.
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.
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 $7.5 million and $7.3 million for the three months ended March 31, 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 March 31, 1997, the Company had $54.9
million available to borrow under the revolving loan facility.
Effective June 1, 1997, the Company will redeem $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 will record an
extraordinary charge of approximately $2.3 million for the write-off of
unamortized financing costs and redemption premiums. The Company will use
borrowings under the revolving loan facility to effect such redemption.
8
<PAGE> 9
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 March 31,
1997.
9
<PAGE> 10
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
/s/ DIRKSON R. CHARLES
-------------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: May 14, 1997
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,995,000
<SECURITIES> 0
<RECEIVABLES> 39,395,000
<ALLOWANCES> 352,000
<INVENTORY> 68,383,000
<CURRENT-ASSETS> 113,484,000
<PP&E> 138,326,000
<DEPRECIATION> 69,231,000
<TOTAL-ASSETS> 421,757,000
<CURRENT-LIABILITIES> 73,422,000
<BONDS> 287,500,000
0
10,000
<COMMON> 11,000
<OTHER-SE> (27,187,000)
<TOTAL-LIABILITY-AND-EQUITY> 421,757,000
<SALES> 72,610,000
<TOTAL-REVENUES> 72,610,000
<CGS> 45,839,000
<TOTAL-COSTS> 45,839,000
<OTHER-EXPENSES> 4,410,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,968,000
<INCOME-PRETAX> 6,926,000
<INCOME-TAX> 637,000
<INCOME-CONTINUING> 6,289,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,289,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
