<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 September 30, 2000
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.
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(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
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(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
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As of November 1, 2000, there were 740,398 shares of common stock outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 6,389,000 $ 3,584,000
Accounts receivable, net 44,135,000 51,870,000
Inventory 70,397,000 68,848,000
Other current assets 2,502,000 801,000
Deferred income taxes 24,586,000 18,063,000
------------ ------------
Total current assets 148,009,000 143,166,000
------------ ------------
Property, plant and equipment 163,374,000 159,331,000
Less, accumulated depreciation and amortization 91,331,000 88,130,000
------------ ------------
72,043,000 71,201,000
------------ ------------
Prepaid pension cost 17,814,000 17,814,000
Deferred charges, net of amortization 27,437,000 30,534,000
Cost in excess of net assets acquired, net of
amortization 164,206,000 168,787,000
Intangible assets, net of amortization 9,925,000 10,366,000
------------ ------------
$439,434,000 $441,868,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 14,928,000 $ 17,687,000
Current portion of senior term loans 1,500,000 1,500,000
Interest payable 8,436,000 4,506,000
Other current liabilities 41,679,000 42,851,000
------------ ------------
Total current liabilities 66,543,000 66,544,000
------------ ------------
Postretirement benefit obligation other
than pensions 79,417,000 78,667,000
Other long-term liabilities 3,866,000 6,266,000
Deferred income taxes 29,357,000 --
Senior revolving loan 15,000,000 7,000,000
Senior term loan A 48,125,000 48,375,000
Senior term loan B 118,250,000 191,750,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
Stockholders' Deficiency:
Common stock, $.01 par value - authorized,
1,000,000 shares; issued and
outstanding, 740,398 shares 7,000 7,000
Additional paid-in capital (63,259,000) (63,259,000)
Deficit (42,787,000) (78,696,000)
Accumulated other comprehensive (loss) income (85,000) 214,000
------------- ------------
Total stockholders' deficiency (106,124,000) (141,734,000)
------------- ------------
$439,434,000 $441,868,000
============= ============
</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
-----------------
September 30, September 30,
2000 1999
---- ----
<S> <C> <C>
Sales $277,772,000 $262,153,000
Costs and expenses 183,410,000 181,007,000
Amortization 6,068,000 6,535,000
------------ ------------
Operating income 88,294,000 74,611,000
Interest and investment income 225,000 189,000
Interest expense (27,994,000) (30,721,000)
------------ ------------
Income before income taxes 60,525,000 44,079,000
Income tax (provision) benefit (24,616,000) 600,000
------------ ------------
Net income $ 35,909,000 $ 44,679,000
============ ============
</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
------------------
September 30, September 30,
2000 1999
---- ----
<S> <C> <C>
Sales $93,569,000 $89,122,000
Costs and expenses 58,533,000 60,287,000
Amortization 1,984,000 2,197,000
----------- -----------
Operating income 33,052,000 26,638,000
Interest and investment income 75,000 78,000
Interest expense (8,842,000) (10,087,000)
----------- -----------
Income before income taxes 24,285,000 16,629,000
Income tax provision (9,900,000) (7,257,000)
----------- -----------
Net income $14,385,000 $ 9,372,000
=========== ===========
</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
-----------------
September 30, September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 35,909,000 $ 44,679,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 11,922,000 12,766,000
Non-cash interest expense - amortization
of deferred financing charges 1,314,000 1,377,000
Deferred income taxes 22,834,000 (1,557,000)
Changes in assets and liabilities:
Accounts receivable, net 7,619,000 (16,839,000)
Inventory (1,732,000) (5,369,000)
Other current assets 299,000 79,000
Accounts payable, interest payable, and
other current liabilities (1,000) 10,120,000
Postretirement benefit obligation other
than pensions 750,000 1,600,000
Other long-term liabilities (2,400,000) (1,241,000)
------------ ------------
Net cash provided by operating
activities 76,514,000 45,615,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (6,696,000) (5,988,000)
Deferred charges (1,263,000) (392,000)
------------ ------------
Net cash used in investing activities (7,959,000) (6,380,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan (75,000,000) (46,000,000)
Payments of senior term loans (73,750,000) (38,125,000)
Borrowings under senior revolving loan 83,000,000 46,000,000
Proceeds from sale and leaseback transaction -- 5,997,000
------------ ------------
Net cash used by financing activities (65,750,000) (32,128,000)
------------ ------------
Net increase in cash and cash equivalents 2,805,000 7,107,000
Cash and cash equivalents, beginning of
period 3,584,000 6,844,000
------------ ------------
Cash and cash equivalents, end of period $ 6,389,000 $ 13,951,000
============ ============
------------
Supplemental cash flow information:
Interest paid during period $ 22,750,000 $ 25,791,000
============ ============
</TABLE>
See notes to consolidated 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
September 30, 2000 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, 1999 Annual Report on Form
10-K.
2. Receivables are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Accounts receivable, principally
from commercial customers $39,402,000 $46,510,000
Accounts receivable, on U. S.
Government and other long-term
contracts 4,971,000 5,634,000
Allowances (238,000) (274,000)
----------- -----------
$44,135,000 $51,870,000
============ ============
</TABLE>
3. Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials and work-in-process $37,345,000 $37,216,000
Finished goods 19,017,000 22,069,000
Inventoried costs related to U.S.
Government and other long-term
contracts 14,035,000 9,563,000
----------- -----------
$70,397,000 $68,848,000
=========== ===========
</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.
6
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
4. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Accrued payroll costs $16,922,000 $18,733,000
Accrued taxes 3,804,000 3,429,000
Accrued costs on long-term contracts 2,546,000 2,875,000
Accrued warranty costs 11,981,000 9,626,000
Customer credits 2,016,000 3,312,000
Postretirement benefit obligation other
than pensions 3,000,000 3,000,000
Other 1,410,000 1,876,000
----------- ----------
$41,679,000 $42,851,000
=========== ===========
</TABLE>
5. Contingencies
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
the Company's management, the ultimate liability, if any, will not
have a material adverse effect on the Company's financial position,
results of operations or cash flows.
6. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Net income $14,385,000 $ 9,372,000
Other comprehensive income:
Cumulative translation adjustments (43,000) 256,000
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Comprehensive income $14,342,000 $ 9,628,000
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Net income $35,909,000 $44,679,000
Other comprehensive income:
Cumulative translation adjustments (299,000) 51,000
------------ ------------
Comprehensive income $35,610,000 $44,730,000
============ ============
</TABLE>
7
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Segments
The following represents financial information about the Company's
segments:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales:
Aircraft Braking Systems $82,309,000 $78,579,000
Engineered Fabrics 11,260,000 10,543,000
----------- -----------
$93,569,000 $89,122,000
=========== ===========
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $34,403,000 $28,405,000
Engineered Fabrics 2,671,000 2,292,000
----------- -----------
$37,074,000 $30,697,000
=========== ===========
Operating Profits:
Aircraft Braking Systems $30,872,000 $24,826,000
Engineered Fabrics 2,180,000 1,812,000
----------- -----------
Operating income 33,052,000 26,638,000
Interest expense, net (8,767,000) (10,009,000)
----------- ------------
Income before income taxes $24,285,000 $16,629,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales:
Aircraft Braking Systems $243,770,000 $229,929,000
Engineered Fabrics 34,002,000 32,224,000
------------ ------------
$277,772,000 $262,153,000
============ ============
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $ 93,454,000 $81,514,000
Engineered Fabrics 6,762,000 5,863,000
------------ -----------
$100,216,000 $87,377,000
============ ============
Operating Profits:
Aircraft Braking Systems $ 83,006,000 $70,233,000
Engineered Fabrics 5,288,000 4,378,000
------------ -----------
Operating income 88,294,000 74,611,000
Interest expense, net (27,769,000) (30,532,000)
------------ ------------
Income before income taxes $ 60,525,000 $44,079,000
============ ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Total Assets:
Aircraft Braking Systems $350,169,000 $360,490,000
Engineered Fabrics 57,776,000 55,055,000
Deferred tax asset not allocated
to segments 24,586,000 18,063,000
Deferred financing costs not
allocated to segments 6,584,000 7,898,000
Corporate assets 319,000 362,000
------------ ------------
$439,434,000 $441,868,000
============ ============
</TABLE>
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 September 30, 2000
and September 30, 1999
Sales for the nine months ended September 30, 2000 totaled $277,772,000,
reflecting an increase of $15,619,000 compared with $262,153,000 for the same
period in the prior year. This increase was due to higher commercial transport
and general aviation sales of $7,875,000 primarily for wheels and brakes on the
MD-90, A-321, Canadair Regional Jet and Gulfstream programs, partially offset by
lower sales on the MD-80, DC-10 and DC-9 programs. Military sales increased
$7,744,000 primarily due to higher shipments of aircraft fuel tanks on the
F/A-18 program and wheels and brakes on the F-14 and various helicopter
programs.
Operating income increased by $13,683,000 to $88,294,000, or 31.8% of sales for
the nine months ended September 30, 2000, compared with $74,611,000, or 28.5% of
sales for the same period in the prior year. Operating margins increased
primarily due to a favorable sales mix, the overhead absorption effect relating
to the higher sales and operating efficiencies. Partially offsetting this
increase was higher investments in original equipment for airframe
manufacturers.
Net interest expense decreased by $2,763,000 for the nine months ended September
30, 2000 compared with the same period in the prior year. This decrease was due
to a lower average debt balance, partially offset by higher interest rates on
the Company's variable rate indebtedness.
The Company's effective tax rate of 40.7% for the nine months ended September
30, 2000 differs from the statutory rate of 35% primarily due to state and local
income taxes. The effective tax rate of (1.4)% for the nine months ended
September 30, 1999 differs from the statutory rate of 35% due to a net decrease
in the valuation allowance partially offset by state and local income taxes. The
increase in the effective rate in 2000 over 1999 is primarily due to a net
decrease in the valuation allowance in the prior year.
Comparison of Results of Operations for the Three Months Ended September 30,
2000 and September 30, 1999
Sales for the three months ended September 30, 2000 totaled $93,569,000,
reflecting an increase of $4,447,000 compared with $89,122,000 for the same
period in the prior year. This increase was due to higher military sales of
$4,608,000 primarily for wheels and brakes on the F-14 and various helicopter
programs. Commercial transport and general aviation sales were essentially even
with the prior year.
Operating income increased by $6,414,000 to $33,052,000, or 35.3% of sales for
the three months ended September 30, 2000, compared with $26,638,000, or 29.9%
of sales for the same period in the prior year. Operating margins increased
primarily due to a favorable sales mix, the overhead absorption effect relating
to higher sales and operating efficiencies.
Net interest expense decreased by $1,242,000 for the three months ended
September 30, 2000 compared with the same period in the prior year. This
decrease was due to a lower average debt balance, partially offset by higher
interest rates on the Company's variable rate indebtedness.
The Company's effective tax rate of 40.8% for the three months ended September
30, 2000 differs from the statutory rate of 35% primarily due to state and local
income taxes. The effective tax rate of 43.6% for the three months ended
September 30, 1999 differs from the statutory rate of 35% due to a net
<PAGE> 10
decrease in the valuation allowance partially offset by state and local income
taxes. The decrease in the effective rate in 2000 over 1999 is primarily due to
a net decrease in the valuation allowance in the prior year.
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to fund capital expenditures, to make investments in new airframes and
to 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 and borrowings under its revolving credit
facility. At September 30, 2000, the Company had $28.6 million available to
borrow under its $50 million revolving credit facility.
Cash Flows
During the nine months ended September 30, 2000, cash provided by operating
activities amounted to $76,514,000 and reflected $100,216,000 of earnings before
interest, taxes, depreciation and amortization ("EBITDA"), decreases in accounts
receivable of $7,619,000, partially offset by increases in inventory of
$1,732,000, decreases in accounts payable of $2,759,000, other current
liabilities of $1,172,000, long-term liabilities of $1,650,000, increases in
other working capital of $1,258,000 and interest payments of $22,750,000. During
the nine months ended September 30, 1999, cash provided by operating activities
amounted to $45,615,000 and reflected $87,377,000 of EBITDA, increases in
accounts payable of $5,273,000, long-term liabilities of $359,000, decreases in
other working capital of $605,000, partially offset by increases in accounts
receivable of $16,839,000, inventory of $5,369,000 and interest payments of
$25,791,000.
During the nine months ended September 30, 2000, net cash used in investing
activities amounted to $7,959,000 due to $6,696,000 of capital expenditures and
$1,263,000 of program participation payments. During the nine months ended
September 30, 1999, net cash used in investing activities amounted to $6,380,000
due to $5,988,000 of capital expenditures and $392,000 of program participation
payments.
During the nine months ended September 30, 2000, net cash used by financing
activities amounted to $65,750,000 due to the repayment of indebtedness. During
the nine months ended September 30, 1999, net cash used by financing activities
amounted to $32,128,000 due to the repayment of indebtedness of $38,125,000,
partially offset by $5,997,000 of proceeds received from a sale and leaseback
transaction.
Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective January 1, 2001 for the Company. The Company believes the adoption of
SFAS No. 133 will not have a material impact on its financial position, results
of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has $367.9 million of total debt outstanding at September 30, 2000.
Of this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the
balance is borrowed under our credit facility. The interest rate for borrowings
under the credit facility varies with LIBOR or the prime rate at the Company's
option.
<PAGE> 11
The Company entered into an interest rate swap agreement to reduce the impact of
potential increases in interest rates. The interest rate swap agreement fixes
the Company's LIBOR borrowing rate at 5.95% on $118.5 million at September 30,
2000 and matures on December 17, 2001 with an option for the counterparty to
extend the agreement to December 17, 2003. Therefore, the Company has
effectively fixed the interest rate on $303.5 million of its indebtedness at
September 30, 2000. Given that approximately 83% of the Company's borrowings are
at fixed interest rates, a 10% change in rates would not have a significant
impact on fair values, cash flows or earnings. The Company has no other
derivative financial instruments.
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 September
30, 2000.
<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 hereunto duly authorized.
K & F INDUSTRIES, INC.
Registrant
DIRKSON R. CHARLES
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: November 13, 2000