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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from________________to___________________
Commission File Number 333-45823
STANADYNE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2940378
- -------------------------------------------------------------- ----------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D.)
92 Deerfield Road, Windsor, Connecticut 06095-4209
- -------------------------------------------------------------- ----------------------
(Address of principal executive offices) (zip code)
(860) 525-0821
- ---------------------------------------------------
(Registrant's telephone number, including area code)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of July 31, 2003 was 1,000.
STANADYNE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2003 (unaudited) and December 31, 2002.................................... 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2003 and 2002 (unaudited).................................... 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2003 and 2002 (unaudited).................................... 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (unaudited).................................... 6
Notes to Condensed Consolidated Financial Statements (unaudited)................... 7-20
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 21-28
Item 3 Quantitative and Qualitative Disclosures About Market Risk......................... 29
Item 4 Controls and Procedures............................................................ 30
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K.................................................. 31
Signature .............................................................................. 32
-2-
STANADYNE CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
June 30, DECEMBER 31,
ASSETS 2003 2002
-------- ---------
Current assets:
Cash and cash equivalents $ 5,952 $ 4,683
Accounts receivable, net of allowance for uncollectible
accounts of $660 at June 30, 2003 and $522 at December 31, 2002 45,028 33,045
Inventories, net 33,432 33,395
Prepaid expenses and other current assets 1,540 1,299
Deferred income taxes 5,515 5,919
-------- ---------
Total current assets 91,467 78,341
Property, plant and equipment, net 107,112 108,326
Goodwill 70,525 68,090
Intangible and other assets, net 8,218 9,485
Due from Stanadyne Automotive Holding Corp. 4,216 4,216
-------- ---------
Total assets $281,538 $ 268,458
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,929 $ 19,864
Accrued liabilities 29,458 26,532
Current maturities of long-term debt 6,862 9,456
Current installments of capital lease obligations 140 117
-------- ---------
Total current liabilities 57,389 55,969
Long-term debt, excluding current maturities 89,321 92,999
Deferred income taxes 107 666
Capital lease obligations, excluding current installments 310 324
Other noncurrent liabilities 56,298 50,949
-------- ---------
Total liabilities 203,425 200,907
-------- ---------
Minority interest in consolidated subsidiary 278 232
Commitments and contingencies -- --
Stockholders' equity:
Common stock -- --
Additional paid-in capital 59,858 59,858
Other accumulated comprehensive income (loss) 58 (4,174)
Retained earnings 17,919 11,635
-------- ---------
Total stockholders' equity 77,835 67,319
-------- ---------
Total liabilities and stockholders' equity $281,538 $ 268,458
======== =========
See notes to condensed consolidated financial statements.
-3-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Months Three Months
Ended Ended
June 30, June 30,
2003 2002
------------- ------------
Net sales $ 73,467 $ 73,986
Cost of goods sold 57,889 58,581
-------- --------
Gross profit 15,578 15,405
Selling, general and administrative expenses 6,515 8,278
Amortization of intangibles 625 868
Management fees 275 275
-------- --------
Operating income 8,163 5,984
Other income (expenses):
Interest, net (2,056) (2,394)
-------- --------
Income before income taxes and minority interest 6,107 3,590
Income taxes 2,499 1,104
-------- --------
Income before minority interest 3,608 2,486
Minority interest in loss of consolidated subsidiary 86 69
-------- --------
Net income $ 3,694 $ 2,555
======== ========
See notes to condensed consolidated financial statements.
-4-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Six Months Six Months
Ended Ended
June 30, June 30,
2003 2002
--------- ---------
Net sales $ 144,334 $ 137,773
Cost of goods sold 114,946 109,793
--------- ---------
Gross profit 29,388 27,980
Selling, general and administrative expenses 14,305 15,702
Amortization of intangibles 1,241 1,736
Management fees 550 550
--------- ---------
Operating income 13,292 9,992
Other income (expenses):
Gain from extinguishment of debt 813 --
Interest, net (4,180) (4,804)
--------- ---------
Income before income taxes and minority interest 9,925 5,188
Income taxes 3,800 1,593
--------- ---------
Income before minority interest 6,125 3,595
Minority interest in loss of consolidated subsidiary 159 120
--------- ---------
Net income $ 6,284 $ 3,715
========= =========
See notes to condensed consolidated financial statements.
-5-
STANADYNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Six Months
Ended Ended
June 30, June 30,
2003 2002
---------- ----------
Cash flows from operating activities:
Net income $ 6,284 $ 3,715
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,458 10,337
Deferred income tax benefit (106) (554)
Loss applicable to minority interest (159) (120)
Loss on disposal of property, plant and equipment 28 --
Changes in operating assets and liabilities (2,789) (9,369)
-------- --------
Net cash provided by operating activities 13,716 4,009
-------- --------
Cash flows from investing activities:
Capital expenditures (5,362) (4,758)
Proceeds from disposal of property, plant and equipment 2 --
-------- --------
Net cash used in investing activities (5,360) (4,758)
-------- --------
Cash flows from financing activities:
Proceeds on foreign term loan 1,396 --
Net proceeds on revolving credit facilities -- 2,225
Net proceeds on foreign overdraft facilities 822 1,308
Principal payments on long-term debt (8,889) (2,803)
Payments of capital lease obligations (63) (42)
Proceeds from investment by minority interest 205 330
-------- --------
Net cash (used in) provided by financing activities (6,529) 1,018
-------- --------
Cash and cash equivalents:
Net increase in cash and cash equivalents 1,827 269
Effect of exchange rate changes on cash (558) 217
Cash and cash equivalents at beginning of period 4,683 120
-------- --------
Cash and cash equivalents at end of period $ 5,952 $ 606
======== ========
See notes to condensed consolidated financial statements.
-6-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(1) SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Stanadyne Corporation (the "Company"), formerly known
as Stanadyne Automotive Corp., is a wholly-owned subsidiary of Stanadyne
Automotive Holding Corp. ("Holdings"). A majority of the outstanding equity of
Holdings is owned by American Industrial Partners Capital Fund II, L.P. ("AIP").
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and all of the Company's wholly-owned subsidiaries:
Precision Engine Products Corp. ("PEPC"), Stanadyne, SpA ("SpA"), Precision
Engine Products LTDA ("PEPL") and Stanadyne Automotive Foreign Sales Corp.
("FSC") which was dissolved December 30, 2002. A joint venture, Stanadyne
Amalgamations Private Limited ("SAPL"), is fully consolidated based on the
Company's 51% controlling share, while the remaining 49% is recorded as a
minority interest. Intercompany balances have been eliminated in consolidation.
Basis of Presentation. The balance sheet as of December 31, 2002 is condensed
financial information derived from the audited balance sheet. The interim
financial statements are unaudited. These financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation for the periods presented. Certain amounts have been reclassified
in the 2002 financial statements to conform to the 2003 presentation. The
Company's quarterly results are subject to fluctuation; consequently the results
of operations and cash flows for any quarter are not necessarily indicative of
the results and cash flows for any future period.
Stock Options. The Company follows the intrinsic method of accounting for its
stock-based compensation under the guidelines set forth in Accounting Principles
Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees."
Intrinsic value is the excess of the market value of the common stock over the
exercise price at the date of grant. Because stock options are granted with
fixed terms and with an exercise price equal to the market price of the common
stock at the date of grant, there is no measured compensation cost of stock
options.
-7-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
Had compensation costs for options been determined based on the fair value of
options outstanding for the three-month periods ended June 30, 2003 and 2002 and
for the six-month periods ended June 30, 2003 and 2002, pro forma net income
would be as follows:
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
Net income as reported $3,694 $2,555 $6,284 $3,715
Stock based compensation
using Black-Scholes option
valuation model, net of
related tax effects 100 73 153 103
------ ------ ------ ------
Pro forma net income $3,594 $2,482 6,131 3,612
====== ====== ====== ======
The Company has adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB
Statement No. 123. The Statement requires prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
Adoption of FASB Statement No. 145. In April 2002, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 primarily affects the reporting requirements and
classification of gains and losses from the extinguishment of debt, rescinds the
transitional accounting requirements for intangible assets of motor carriers,
and requires that certain lease modifications with economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 is effective for financial statements
issued after April 2002, with the exception of the provisions affecting the
accounting for lease transactions, which are applicable for transactions entered
into after May 15, 2002, and the provisions affecting classification of gains
and losses from the extinguishment of debt, which are applicable for fiscal
years beginning after May 15, 2002. The adoption of SFAS 145 in the first
quarter of 2003 resulted in a $0.8 million gain from the extinguishment of $5.0
million in Senior Subordinated Notes ("Notes") being classified as other income.
-8-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(2) INVENTORIES
Components of inventories are as follows:
As of As of
June 30, 2003 December 31, 2002
------------- -----------------
Raw materials and purchased parts $ 9,113 $ 9,028
Work-in-process 17,537 16,453
Finished goods 6,782 7,914
------- -------
$33,432 $33,395
======= =======
(3) INCOME TAXES
The Company had an effective income tax rate of 38.3% for the first six months
of 2003, compared to 30.7% for the first six months of 2002. In the first six
months of 2003, the Company recorded $3.8 million of tax expense on a pre-tax
income of $9.9 million. Taxes for 2003 include $0.7 million for a valuation
allowance associated with foreign net operating loss carryforwards of SpA that
are anticipated to expire at year end without utilization. In 2002, the Company
recorded $1.6 million of tax expense on a pre-tax income of $5.2 million. The
Company received U.S. income tax benefits for export sales in both periods. The
Company applies the estimated annual tax rate to the quarterly earnings to
provide consistent quarterly tax rates based on the estimated effective tax rate
for the year. To the extent there are differences between components of planned
and actual net income, the estimated annual tax rate for the year could change
and, in turn, have an impact on future quarterly tax rates.
(4) LONG-TERM DEBT
The Company had $71.0 million and $76.0 million of Notes at an interest rate of
10.25% outstanding at June 30, 2003 and December 31, 2002, respectively. The
Notes are due on December 15, 2007. On January 15, 2003 the Company retired $5.0
million in Notes at the market price of $4.1 million. As a result of the early
retirement of the Notes, the Company realized a $0.8 million gain after the
write off of unamortized debt issuance costs of $0.1 million. The transaction
was recorded as other income in the Company's consolidated financial statements.
The Company had $20.9 million and $24.8 million in U.S.-based term loans (the
"Term Loans") outstanding at June 30, 2003 and December 31, 2002, respectively,
at various interest rates on June 30, 2003 ranging from 3.31% to 5.5%. The
Company had $24.4 million in revolving credit lines (the "Revolving Credit
Lines") available for borrowings at June 30, 2003 and December 31, 2002. The
Company had no borrowings against the Revolving Credit Lines at June 30, 2003
and December 31, 2002. The Term Loans and the Revolving Credit Lines are
governed by a Credit
-9-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
Agreement dated December 11, 1997, as amended (the "Credit Agreement"). The
Company was in compliance with the quarterly financial performance covenants as
established by the Credit Agreement as of the June 30, 2003 measurement date.
Overseas operations included $2.9 million and $1.7 million in overdraft
borrowings at SpA outstanding at June 30, 2003 and December 31, 2002,
respectively. Also, the Company had $1.4 million in foreign term loan borrowings
at SAPL outstanding at June 30, 2003.
(5) GOODWILL AND INTANGIBLE AND OTHER ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization but is annually assessed for impairment by applying a
fair-value based test. Within six months of adoption of SFAS No. 142, the
Company was required to complete a transitional impairment review using a fair
value methodology to identify if there was impairment to the goodwill or
intangible assets of indefinite life. Any impairment loss resulting from the
transitional impairment test would have been recorded as a cumulative effect of
a change in accounting principle for the quarter ended June 30, 2002. The
Company completed its evaluation of the carrying value of goodwill during the
second quarter of 2002 and determined that there was no impairment of goodwill.
SFAS No. 142 requires that goodwill be tested annually and between annual tests
if events or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value. The Company's annual
evaluation of the carrying value of goodwill completed during the second quarter
of 2003 also determined that there was no impairment of goodwill. Subsequent
impairment losses, if any, will be reflected in operating income in the
consolidated Statement of Operations.
Goodwill for the Diesel Systems Group (the "Diesel Group") was $59.1 million and
$56.7 million at June 30, 2003 and December 31, 2002, respectively. The change
in goodwill balances between periods is due to foreign currency translation of
Euro-denominated goodwill at SpA. Goodwill for Precision Engine Products
("Precision Engine") was $11.4 million at June 30, 2003 and December 31, 2002.
Major components of intangible and other assets at June 30, 2003 and December
31, 2002 are listed below:
-10-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
June 30, 2003 December 31, 2002
------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
--------- ------------ -------- ------------
Patents $ 9,809 $ 7,109 $ 9,809 $ 6,487
Debt issuance costs 8,024 5,969 8,149 5,466
Pension intangible asset 1,796 -- 1,796 --
Software 3,544 3,544 3,544 3,544
Customer contracts 1,310 1,042 1,310 947
Other 1,831 432 1,732 411
------- ------- ------- -------
$26,314 $18,096 $26,340 $16,855
======= ======= ======= =======
Amortization expense of intangible assets was $1,241 and $1,736 for the six
months ended June 30, 2003 and 2002, respectively. Estimated annual amortization
expense of intangible assets is expected to be $2,400 in 2003, $1,153 in 2004,
$818 in 2005, $805 in 2006 and $632 in 2007.
(6) CONTINGENCIES
The Company is involved in various legal and regulatory proceedings generally
incidental to its business. While the results of any litigation or regulatory
issue contain an element of uncertainty, management believes that the outcome of
any known, pending or threatened legal proceeding, or all of them combined, will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is subject to potential environmental liabilities as a result of
various claims and legal actions, which are pending or may be asserted against
the Company. Reserves for such liabilities have been established, and no
insurance recoveries have been anticipated in the determination of the reserves.
In management's opinion, the aforementioned claims will be resolved without
material adverse effect on the consolidated results of operations, financial
position or cash flows of the Company. Also, in conjunction with the acquisition
of the Company from Metromedia Company ("Metromedia") on December 11, 1997,
Metromedia agreed to partially indemnify the Company and AIP for certain
environmental matters. The effect of this indemnification is to limit the
Company's financial exposure for known environmental issues.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The disclosure for the Company's warranty accrual is
provided below:
-11-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Warranty liability, beginning of period $ 1,688 $ 2,260 $ 1,875 $ 3,000
Warranty expense based on products sold 210 131 420 262
Adjustments to warranty estimates (150) (104) (300) (808)
Warranty claims paid (135) (156) (382) (323)
------- ------- ------- -------
Warranty liability, end of period $ 1,613 $ 2,131 $ 1,613 $ 2,131
======= ======= ======= =======
The Company's warranty accrual is included as components of accrued liabilities
and other noncurrent liabilities on the consolidated balance sheets.
(7) COMPREHENSIVE INCOME
The Company's comprehensive income is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $3,694 $2,555 $ 6,284 $3,715
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2,189 1,626 4,232 1,041
------ ------ ------- ------
Comprehensive income $5,883 $4,181 $10,516 $4,756
====== ====== ======= ======
(8) SEGMENTS
The Company has two reportable segments, the Diesel Group and Precision Engine.
The Diesel Group manufactures diesel fuel injection equipment including fuel
pumps, injectors, filtration systems and miscellaneous non-proprietary products.
This segment accounted for approximately 74% and 79% of the Company's revenues
for the three months ended June 30, 2003 and 2002, respectively, and
approximately 75% and 79% of total revenues for the six months ended June 30,
2003 and 2002, respectively. Precision Engine manufactures roller-rocker arms,
hydraulic valve lifters and lash adjusters for gasoline engines. Revenues for
Precision Engine accounted for approximately 26% and 21% of total revenues for
the three months ended June 30, 2003 and 2002, respectively, and approximately
25% and 21% of total revenues for the six months ended June 30, 2003 and 2002,
respectively. The Company considers the Diesel Group and Precision Engine to be
two distinct segments because the operating results of each are compiled,
reviewed and managed separately. There were no inter-segment sales between the
Diesel Group and Precision Engine for any of the periods presented.
-12-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
The following summarizes key information used by the Company in evaluating the
performance of each segment for the three months ended June 30, 2003 and 2002
and as of and for the six months ended June 30, 2003 and 2002:
For the Three Months Ended June 30, 2003
----------------------------------------
Diesel Precision
Group Engine Eliminations Totals
------- ------- ------------ -------
Net sales $54,531 $18,936 $-- $73,467
Gross profit 12,773 2,805 -- 15,578
Depreciation and amortization
expense 4,426 810 -- 5,236
Operating income 5,543 2,620 -- 8,163
Net income 2,266 1,428 -- 3,694
Total capital expenditures 2,460 254 -- 2,714
For the Three Months Ended June 30, 2002
----------------------------------------
Diesel Precision
Group Engine Eliminations Totals
------- --------- ------------ -------
Net sales $58,814 $ 15,172 $ -- $73,986
Gross profit 14,156 1,249 -- 15,405
Depreciation and amortization
expense 4,305 855 -- 5,160
Operating income (loss) 6,434 (450) -- 5,984
Net income (loss) 3,396 (841) -- 2,555
Total capital expenditures 2,639 732 -- 3,371
As of and For the Six Months Ended June 30, 2003
------------------------------------------------
Diesel Precision
Group Engine Eliminations Totals
------- --------- ------------ -------
Net sales $107,936 $36,398 $ -- $144,334
Gross profit 24,830 4,558 -- 29,388
Depreciation and amortization
expense 8,827 1,631 -- 10,458
Operating income 10,155 3,137 -- 13,292
Net income 4,750 1,534 -- 6,284
Total assets 249,001 51,477 (18,940) 281,538
Total capital expenditures 4,884 478 -- 5,362
As of and For the Six Months Ended June 30, 2002
------------------------------------------------
Diesel Precision
Group Engine Eliminations Totals
------- --------- ------------ ---------
Net sales $109,488 $ 28,285 $ -- $137,773
Gross profit 25,579 2,401 -- 27,980
Depreciation and amortization
expense 8,626 1,711 -- 10,337
Operating income (loss) 10,185 (193) -- 9,992
Net income (loss) 4,776 (1,061) -- 3,715
Total assets 247,923 52,040 (16,136) 283,827
Total capital expenditures 3,781 977 -- 4,758
-13-
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
(9) SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Notes issued December 11, 1997 by the Company are guaranteed jointly, fully,
severally and unconditionally by Precision Engine Products Corp. (the
"Subsidiary Guarantor") on a subordinated basis and are not guaranteed by FSC,
SpA, PEPL and SAPL (the "Non-Guarantor Subsidiaries").
Supplemental combining condensed financial statements for Stanadyne Corporation
("Parent"), the Subsidiary Guarantor and the Non-Guarantor Subsidiaries are
presented below. Separate complete financial statements of the Subsidiary
Guarantor are not presented because management has determined that they are not
material to investors.
- 14 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Balance Sheets
June 30, 2003
-------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,055 $ 221 $ 321 $ 355 $ 5,952
Accounts receivable, net 29,170 11,197 4,661 -- 45,028
Inventories, net 19,674 8,577 5,466 (285)(a) 33,432
Other current assets 5,348 341 1,366 -- 7,055
--------- -------- ------- -------- --------
Total current assets 59,247 20,336 11,814 70 91,467
Property, plant and equipment, net 72,578 16,044 18,490 -- 107,112
Goodwill 43,465 11,360 15,700 -- 70,525
Intangible and other assets, net 7,952 667 1,994 (2,395)(b) 8,218
Investment in subsidiaries 29,459 (3,446) -- (26,013)(c) --
Due from Stanadyne Automotive Holding Corp. 4,216 -- -- -- 4,216
--------- -------- ------- -------- --------
Total assets $ 216,917 $ 44,961 $47,998 $(28,338) $281,538
========= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 34,784 $ 10,528 $ 5,076 $ (1) $ 50,387
Current maturities of long-term
debt and capital lease obligations 3,978 -- 3,024 -- 7,002
--------- -------- ------- -------- --------
Total current liabilities 38,762 10,528 8,100 (1) 57,389
Long-term debt and capital lease obligations 87,910 -- 1,721 -- 89,631
Other noncurrent liabilities 39,678 10,959 8,047 (2,279)(b) 56,405
Minority interest in consolidated subsidiary -- -- -- 278 278
Intercompany accounts (25,300) 6,553 18,854 (107) --
Stockholders' equity 75,867 16,921 11,276 (26,229)(c) 77,835
--------- -------- ------- -------- --------
Total liabilities and stockholders' equity $ 216,917 $ 44,961 $47,998 $(28,338) $281,538
========= ======== ======= ======== ========
(a) Amount represents the elimination of inventory for out of period
transfers.
(b) Reclassification of deferred tax liability to consolidated net deferred
tax asset.
(c) Elimination of investments in subsidiaries of the Parent and Subsidiary
Guarantor.
- 15 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Balance Sheets
December 31, 2002
-----------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,223 $ 8 $ 452 $ -- $ 4,683
Accounts receivable, net 22,869 6,506 3,670 -- 33,045
Inventories, net 20,348 8,480 4,902 (335)(a) 33,395
Other current assets 5,369 378 1,471 -- 7,218
--------- -------- ------- -------- --------
Total current assets 52,809 15,372 10,495 (335) 78,341
Property, plant and equipment, net 75,564 17,114 15,336 312 108,326
Goodwill 43,465 11,360 13,265 -- 68,090
Intangible and other assets, net 8,474 930 2,037 (1,956)(b) 9,485
Investment in subsidiaries 27,218 (4,328) -- (22,890)(c) --
Due from Stanadyne Automotive Holding Corp. 4,216 -- -- -- 4,216
--------- -------- ------- -------- --------
Total assets $ 211,746 $ 40,448 $41,133 $(24,869) $268,458
========= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 33,507 $ 8,083 $ 4,764 $ 42 $ 46,396
Current maturities of long-term
debt and capital lease obligations 7,777 -- 1,796 -- 9,573
--------- -------- ------- -------- --------
Total current liabilities 41,284 8,083 6,560 42 55,969
Long-term debt and capital lease obligations 92,999 -- 324 -- 93,323
Other noncurrent liabilities 35,763 10,686 6,856 (1,690)(b) 51,615
Minority interest in consolidated subsidiary -- -- -- 232 232
Intercompany accounts (27,950) 7,949 20,034 (33) --
Stockholders' equity 69,650 13,730 7,359 (23,420)(c) 67,319
--------- -------- ------- -------- --------
Total liabilities and stockholders' equity $ 211,746 $ 40,448 $41,133 $(24,869) $268,458
========= ======== ======= ======== ========
(a) Amount represents the elimination of inventory for out of period
transfers.
(b) Reclassification of deferred tax asset to deferred tax liability.
(c) Elimination of investments in subsidiaries of the Parent and Subsidiary
Guarantor.
- 16 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Operations
Three Months Ended June 30, 2003
--------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
Net sales $ 50,725 $ 18,078 $ 5,473 $ (809)(a) $ 73,467
Cost of goods sold 37,921 15,652 5,068 (752)(a) 57,889
--------- --------- --------- --------- ---------
Gross profit 12,804 2,426 405 (57) 15,578
Selling, general, administrative and
other operating expenses 6,670 770 (428) 403 7,415
--------- --------- --------- --------- ---------
Operating income 6,134 1,656 833 (460) 8,163
Interest, net (1,604) (145) (288) (19) (2,056)
--------- --------- --------- --------- ---------
Income before income taxes
and minority interest 4,530 1,511 545 (479) 6,107
Income taxes 1,431 683 522 (137) 2,499
--------- --------- --------- --------- ---------
Income before minority interest 3,099 828 23 (342) 3,608
Minority interest in loss of
consolidated subsidiary -- -- -- 86 86
--------- --------- --------- --------- ---------
Net income $ 3,099 $ 828 $ 23 $ (256) $ 3,694
========= ========= ========= ========= =========
Consolidating Condensed Statements of Operations
Three Months Ended June 30, 2002
--------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
Net sales $ 54,824 $ 13,739 $ 7,380 $ (1,957)(a) $ 73,986
Cost of goods sold 41,335 13,096 6,168 (2,018)(a) 58,581
--------- --------- --------- --------- ---------
Gross profit 13,489 643 1,212 61 15,405
Selling, general, administrative and
other operating expenses 7,305 1,212 904 -- 9,421
--------- --------- --------- --------- ---------
Operating income (loss) 6,184 (569) 308 61 5,984
Interest, net (1,854) (167) (328) (45) (2,394)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
(benefit) and minority interest 4,330 (736) (20) 16 3,590
Income taxes (benefit) 1,391 104 (391) -- 1,104
--------- --------- --------- --------- ---------
Income (loss) before minority interest 2,939 (840) 371 16 2,486
Minority interest in loss of
consolidated subsidiary -- -- -- 69 69
--------- --------- --------- --------- ---------
Net income (loss) $ 2,939 $ (840) $ 371 $ 85 $ 2,555
========= ========= ========= ========= =========
(a) Elimination of intercompany sales and cost of goods sold.
- 17 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Operations
Six Months Ended June 30, 2003
------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
Net sales $ 100,260 $ 35,037 $ 10,548 $(1,511)(a) $ 144,334
Cost of goods sold 75,518 30,911 9,982 (1,465)(a) 114,946
--------- -------- -------- ------- ---------
Gross profit 24,742 4,126 566 (46) 29,388
Selling, general, administrative and
other operating expenses 13,652 2,004 (13) 453 16,096
--------- -------- -------- ------- ---------
Operating income 11,090 2,122 579 (499) 13,292
Other income (expenses):
Gain from extinguishment of debt 813 -- -- -- 813
Interest, net (3,237) (303) (597) (43) (4,180)
--------- -------- -------- ------- ---------
Income (loss) before income
taxes and minority interest 8,666 1,819 (18) (542) 9,925
Income taxes 1,929 865 1,156 (150) 3,800
--------- -------- -------- ------- ---------
Income (loss) before minority interest 6,737 954 (1,174) (392) 6,125
Minority interest in loss of
consolidated subsidiary -- -- -- 159 159
--------- -------- -------- ------- ---------
Net income (loss) $ 6,737 $ 954 $ (1,174) $ (233) $ 6,284
========= ======== ======== ======= =========
Consolidating Condensed Statements of Operations
Six Months Ended June 30, 2002
------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
Net sales $ 102,056 $ 26,798 $ 13,431 $ (4,512)(a) $ 137,773
Cost of goods sold 77,585 25,193 11,509 (4,494)(a) 109,793
--------- --------- --------- --------- ---------
Gross profit 24,471 1,605 1,922 (18) 27,980
Selling, general, administrative and
other operating expenses 14,606 2,334 1,048 -- 17,988
--------- --------- --------- --------- ---------
Operating income (loss) 9,865 (729) 874 (18) 9,992
Interest, net (3,709) (334) (656) (105) (4,804)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
(benefit) and minority interest 6,156 (1,063) 218 (123) 5,188
Income taxes (benefit) 1,784 161 (352) -- 1,593
--------- --------- --------- --------- ---------
Income (loss) before minority interest 4,372 (1,224) 570 (123) 3,595
Minority interest in loss of
consolidated subsidiary -- -- -- 120 120
--------- --------- --------- --------- ---------
Net income (loss) $ 4,372 $ (1,224) $ 570 $ (3) $ 3,715
========= ========= ========= ========= =========
(a) Elimination of intercompany sales and cost of goods sold.
- 18 -
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Consolidating Condensed Statements of Cash Flows
Six Months Ended June 30, 2003
------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 6,737 $ 954 $ (1,174) $ (233) $ 6,284
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,079 1,615 764 -- 10,458
Other adjustments (1,045) 194 923 (150) (78)
Loss applicable to minority interest -- -- -- (159) (159)
Changes in operating assets and
liabilities 2,642 (3,429) (3,129) 1,127 (2,789)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 16,413 (666) (2,616) 585 13,716
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (3,936) (476) (1,260) 312 (5,360)
Investment in subsidiaries (214) -- -- 214 --
-------- -------- -------- -------- --------
Net cash used in
investing activities (4,150) (476) (1,260) 526 (5,360)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net change in debt (8,889) -- 2,155 -- (6,734)
Net change in equity (2,549) 1,355 1,536 (137) 205
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (11,438) 1,355 3,691 (137) (6,529)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents 825 213 (185) 974 1,827
Effect of exchange rate changes on cash 7 -- 54 (619) (558)
Cash and cash equivalents at
beginning of period 4,223 8 452 -- 4,683
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period $ 5,055 $ 221 $ 321 $ 355 $ 5,952
======== ======== ======== ======== ========
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STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED OTHERWISE)
SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONCLUDED)
Consolidating Condensed Statements of Cash Flows
Six Months Ended June 30, 2002
------------------------------
Stanadyne Stanadyne
Corporation Subsidiary Non-Guarantor Corporation
Parent Guarantor Subsidiaries Eliminations & Subsidiaries
------ --------- ------------ ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 4,372 $ (1,224) $ 570 $ (3) $ 3,715
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,077 1,692 568 -- 10,337
Other adjustments (219) (300) (35) -- (554)
Loss applicable to minority interest -- -- -- (120) (120)
Changes in operating assets and
liabilities (7,259) 396 (2,764) 258 (9,369)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 4,971 564 (1,661) 135 4,009
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (3,481) (924) (353) -- (4,758)
Proceeds from disposal of property,
plant and equipment (343) -- -- 343 --
-------- -------- -------- -------- --------
Net cash used in
investing activities (3,824) (924) (353) 343 (4,758)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net change in debt (578) -- 1,266 -- 688
Net change in equity (844) 499 981 (306) 330
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (1,422) 499 2,247 (306) 1,018
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (275) 139 233 172 269
Effect of exchange rate changes on cash 25 -- 20 172 217
Cash and cash equivalents at
beginning of period 483 5 772 (1,140) 120
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period $ 233 $ 144 $ 1,025 $ (796) $ 606
======== ======== ======== ======== ========
- 20 -
STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
(1) Overview
The Company is a leading designer and manufacturer of highly-engineered,
precision manufactured engine components. The Company's two reporting segments
are the Diesel Group and Precision Engine. The Diesel Group manufactures diesel
fuel injection equipment including fuel pumps, injectors, filtration systems and
other non-proprietary products. Precision Engine manufactures roller-rocker
arms, hydraulic valve lifters and lash adjusters for gasoline engines. Detailed
segment information can be found in Note 8 of Notes to Condensed Consolidated
Financial Statements.
Continued strength in demand for the Company's products resulted in a 4.8%
increase in overall revenues through the first six months of 2003 as compared to
the same period last year. Results by operating segment were unbalanced with
small reductions in sales and net income reported for the Diesel Group more than
offset by improved results in Precision Engine. Net income for the Company of
$6.3 million was significantly ahead of the $3.7 million reported for the first
six months of 2002. Despite this improvement, the volatility of the underlying
economy in 2003 could affect demand for the Company's products in the second
half of the year. The Company remains cautious in its outlook for the remainder
of the year.
After a strong first quarter, the Diesel Group segment reported a 7.3% decrease
in second quarter sales in comparison to the same period a year ago. Weaker
customer demand was evident in most aspects of the business except some fuel
pump applications and PCA products. The impact of lower sales on operating
income was minimized by reductions in manufacturing and overhead costs,
including a $0.7 million reduction in second quarter 2003 versus 2002 cost for
retiree health benefits. (See discussion under SG&A sections). The Diesel Group
began production of two new products late in the second quarter of 2003: the
Integrated Fuel System for Deere & Company's new PowerTech(TM) diesel engines
and PCA components for Caterpillar's new ACERT(TM)technology-equipped engines.
Second quarter results for the Precision Engine segment included a 24.8%
increase in sales from the same period in 2002 and a net income of $1.4 million.
The sales increase was due primarily to higher demand from DaimlerChrysler
("DCX") for the combined shipments of roller rocker arms for the L/H platform,
scheduled to phase out later this year, and the new CS platform supporting the
Pacifica vehicle. During the second quarter of 2003, Precision Engine entered
into an agreement with The Timken Company to jointly develop and market engine
valve train components. The alliance will build on the respective strengths of
Precision Engine and Timken's Automotive Powertrain Group to produce
cost-effective products that will deliver significant valve train system value.
The Company has evaluated proposals from multiple financial institutions
offering to provide a US-based credit facility to replace the existing Credit
Agreement that begins to expire in December 2003. The Company expects to
complete the new credit arrangements prior to December.
- 21 -
STANADYNE CORPORATION AND SUBSIDIARIES
BASIS OF PRESENTATION
The following table displays unaudited performance details for the periods
shown. Net sales, cost of goods sold, gross profit, selling, general and
administrative expense ("SG&A"), amortization of intangibles, management fees,
operating income and net income of the Company are presented in thousands of
dollars and as a percentage of net sales. Historical results and percentage
relationships are not necessarily indicative of the results that may be expected
for any future period.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
$ % $ % $ % $ %
------ ----- ------ ----- ------- ----- ------- -----
Net sales 73,467 100.0 73,986 100.0 144,334 100.0 137,773 100.0
Cost of goods sold 57,889 78.8 58,581 79.2 114,946 79.6 109,793 79.7
Gross profit 15,578 21.2 15,405 20.8 29,388 20.4 27,980 20.3
SG&A 6,515 8.9 8,278 11.2 14,305 9.9 15,702 11.4
Amortization of intangibles 625 0.9 868 1.2 1,241 0.9 1,736 1.3
Management fees 275 0.4 275 0.4 550 0.4 550 0.4
Operating income 8,163 11.1 5,984 8.1 13,292 9.2 9,992 7.3
Net income 3,694 5.0 2,555 3.5 6,284 4.4 3,715 2.7
COMPARISON OF RESULTS OF OPERATIONS:
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Net Sales. Net sales for the second quarter of 2003 totaled $73.5 million and
were, overall, slightly lower by 0.7% than the $74.0 million reported in the
same period last year. Results by segment were mixed. Sales in the Diesel Group
decreased by $4.3 million, or 7.3%, to $54.5 million in the second quarter of
2003 compared to the second quarter of 2002. Reflecting weaker overall customer
demand, reductions were broad-based, occurring in all of the major product
lines, except PCA, and with most of the major OEM customers. The continued
decline in service demand for the DS fuel pump accounted for $1.2 million of the
overall reduction in 2003 versus 2002 second quarter sales. Sales in the
Precision Engine segment increased by $3.8 million, or 24.8%, to $18.9 million
in the second quarter of 2003 compared to the same period in 2002. This increase
was due primarily to higher demand from DCX for the combined shipments of roller
rocker arms for the L/H platform, scheduled to phase out later this year, and
the new CS platform supporting the Pacifica vehicle.
Gross Profit. Gross profit for the Company improved in the second quarter of
2003 to $15.6 million from $15.4 million for the same period in 2002. The gross
profit as a percentage of net sales also increased to 21.2% from 20.8%. Driven
primarily by the 24.8% increase in second quarter net sales in Precision Engine,
gross profit results were also favorably impacted by lower overhead costs in the
Diesel Group segment during the second quarter of 2003 and price increases on
slipper tappets implemented in July 2002.
- 22 -
STANADYNE CORPORATION AND SUBSIDIARIES
SG&A. SG&A of $6.5 million in the second quarter of 2003 was significantly lower
than the $8.3 million reported for the second quarter of 2002. There were two
major components to this reduction. First, on June 1, 2003 the Company
implemented changes to the retiree health benefit plans by standardizing cost
sharing guidelines for all US retirees. The impact of this change reduced the
Company's second quarter 2003 versus 2002 cost for retiree health benefits by
$1.2 million. The full-year 2003 versus 2002 impact of the change in cost
sharing is projected to be approximately $3.0 million. The second major
component to the reduction in second quarter 2003 SG&A costs is $1.1 million of
foreign exchange gains on Precision Engine operations in Brazil.
Amortization of Intangibles. Amortization of intangible assets decreased to $0.6
million in the second quarter of 2003 from $0.9 million in the second of 2002.
This reduction reflected the conclusion of the amortization of the Company's old
business systems software that was replaced by the new ERP system in 2002.
Operating Income. Operating income for the second quarter of 2003 totaled $8.2
million versus $6.0 million for the same period a year ago. As a percentage of
net sales, operating income increased to 11.1% in the second quarter of 2003
from 8.1% in the second quarter of 2002. In the Diesel Group, lower gross profit
of $1.4 million was only partially offset by lower amortization expense of $0.2
million and lower SG&A of $0.3 million, leaving operating income for the second
quarter of 2003 of $5.5 million or 10.2% of net sales versus $6.4 million or
10.9% of net sales in the second quarter of 2002. Driven primarily by higher
gross profits and lower SG&A, operating income for Precision Engine increased in
the second quarter of 2003 to $2.6 million or 13.8% of net sales compared to an
operating loss of $0.5 million or (3.0)% of net sales in the second quarter of
2002.
Net Income. Net income in the second quarter of 2003 totaled $3.7 million versus
a net income of $2.6 million for the same period in 2002. This improvement
reflects the combined result of $2.2 million of higher operating income in 2003,
$0.3 million in lower interest expense due to less debt and lower interest
rates, and a $1.4 million increase in income taxes. The increase to income taxes
included $0.2 million for a valuation allowance associated with net operating
loss carry forwards in SpA that are anticipated to expire at year end.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net Sales. Despite the downturn in year over year second quarter sales, net
sales for the first six months of 2003 totaled $144.3 million and were still
4.8% higher than the $137.8 million reported in the same period last year.
Heavily influenced by the second quarter reduction in customer demand, net sales
in the Diesel Group for the first six months of 2003 decreased by $1.6 million,
or 1.4%, to $107.9 million. The continued decline in service demand for the DS
fuel pump accounted for $2.1 million of the reduction in the Diesel Group first
six months sales. The Precision Engine segment reported sales of $36.4 million
for the first six months of 2003, totaling $8.1 million or 28.7% more than the
same period in 2002. A significant portion of this increase, $5.6 million, was
due to higher demand from DCX for the combined shipments of
- 23 -
STANADYNE CORPORATION AND SUBSIDIARIES
roller rocker arms for the L/H platform, scheduled to phase out later this year,
and the new CS platform supporting the Pacifica vehicle. Higher OEM sales to
Tritec in Brazil totaled $2.4 million more through the first six months of 2003
as success of the Mini Cooper continues to drive demand for roller rocker arms.
Finally, Precision Engine aftermarket sales of slipper tappets began to slow in
the second quarter of 2003 as competitors re-entered this segment of the market.
Gross Profit. Gross profit for the Company in the first six months of 2003
increased to $29.4 million and 20.4% of net sales from $28.0 million and 20.3%
of net sales for the same period in 2002. Gross profit results in each segment
changed in proportion to the changes in sales discussed above. In addition to
the impact of lower sales in the first six months in the Diesel Group, the
Euro-denominated portion of gross profits generated by operations in Italy were
approximately 17.5% lower due to deterioration of the dollar versus the Euro.
Gross profits in Precision Engine in the first six months of 2003 totaled $4.6
million or almost twice the amount recorded in the same period of 2002.
Primarily due to the 28.7% increase in first six months net sales, higher gross
profits in Precision Engine were also favorably influenced by price increases on
slipper tappets implemented in July 2002.
SG&A. SG&A of $14.3 million in the first six months of 2003 was $1.4 million
lower than the $15.7 million reported for the first six months of 2002. There
were two major components to this reduction. First, on June 1, 2003 the Company
implemented changes to the retiree health benefit plans by standardizing cost
sharing guidelines for all US retirees. The impact of this change reduced the
Company's year-to-date 2003 versus 2002 cost for retiree health benefits by $1.0
million. The full-year 2003 versus 2002 impact of the change in cost sharing is
projected to be approximately $3.0 million. The second major component to the
reduction in SG&A costs for the first six months of 2003 is $0.8 million of
foreign exchange gains on Precision Engine operations in Brazil.
Amortization of Intangibles. Amortization of intangible assets decreased to $1.2
million for the first six months of 2003 from $1.7 million for the same period
in 2002. This reduction reflected the conclusion of the amortization of the
Company's old business systems software that was replaced by the new ERP system
in 2002.
Operating Income. Operating income for the first six months of 2003 totaled
$13.3 million versus $10.0 million for the same period a year ago. As a
percentage of net sales, operating income increased to 9.2% in the first six
months of 2003 from 7.3% in the first six months of 2002. Higher sales generated
$1.4 million in additional gross profits which, when combined with $1.4 million
in lower SG&A costs and $0.5 million in lower amortization expense, resulted in
the significant improvement from the prior year. Although sales and gross
profits in the Diesel Group were lower in the first six months of 2003 versus
the same period in 2002, the lower SG&A and amortization expenses resulted in a
slight improvement in operating income as a percentage of net sales to 9.4% from
9.3%. Driven primarily by higher gross profits and lower SG&A, operating income
for Precision Engine in the first six months of 2003 totaled $3.3
- 24 -
STANADYNE CORPORATION AND SUBSIDIARIES
million or 8.6% of net sales compared to an operating loss of $0.2 million or
(0.7)% of net sales in the first six months of 2002.
Net Income. Net income in the first six months of 2003 totaled $6.3 million or
4.4% of net sales versus a net income of $3.7 million or 2.7% for the same
period last year. This improvement reflects the combined result of $3.3 million
in added operating income in 2003, a $0.8 million gain on the repurchase of a
portion of the Company's bonds, $0.6 million in lower interest expense, due to
less debt and lower interest rates, all partially offset by a $2.2 million
increase in income taxes. The increase to income taxes included $0.7 million for
a valuation allowance associated with net operating loss carry forwards in SpA
that are anticipated to partially expire at year end.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operations
supplemented by a revolving credit facility under which $24.4 million was
available for borrowings as of June 30, 2003. The Company occasionally utilizes
capital leasing and, for its foreign operations in Italy and India, maintains a
combination of overdraft and term loan facilities with local financial
institutions on an as needed basis. As of June 30, 2003, there were borrowings
of $20.9 million under the Term Loans, no borrowings under the Revolving Credit
Lines, $2.9 million in foreign overdraft facilities and $1.4 million in foreign
term loans. The Company met all financial covenants set forth in the Credit
Agreement for the June 30, 2003 measurement date.
Cash Flows From Operating Activities. Cash flows from operations for the six
months ended June 30, 2003 totaled $13.7 million as compared to $4.0 million for
the same period of 2002. This $9.7 million year-to-year increase was primarily
accounted for by $2.6 million in additional net income, supplemented by $6.6
million from lower working capital requirements. Increased levels of sales in
the first six months of 2003, most notably in the Precision Engine segment,
drove accounts receivable balances $11.3 million higher, consuming $0.4 million
in additional cash as compared to the same period last year. Despite the
increased sales levels in 2003, improved use and understanding of the Company's
ERP system installed in the first quarter of 2002 has resulted in better
inventory management. Inventory overall declined by $0.8 million in the first
six months of 2003, consuming $4.0 million less cash than the same period in
2002. Monthly inventory turnover averaged 7.7 turns at the end of the first six
months, reflecting a significant improvement from the 6.9 turns recorded for the
same period in 2002. The growth in first quarter 2003 liability accounts was
primarily in support of higher business levels, including a $0.2 million
increase to the Company's federal and state income tax liabilities for 2002 and
2003.
Cash Flows From Investing Activities. The Company's capital expenditures for the
first six months of 2003 totaled $5.4 million compared to $4.8 million for the
same period of 2002. Capital expenditures in 2003 included $3.2 million in
support of new product launches with the remainder applied to cost reduction,
quality enhancements and general maintenance projects.
- 25 -
STANADYNE CORPORATION AND SUBSIDIARIES
Cash Flows From Financing Activities. Cash flows from financing activities for
the six months ended June 30, 2003 resulted in a net decrease in cash of $6.5
million. Principal payments of long-term debt totaled $8.9 million, including
the early retirement of $5.0 million in outstanding Notes. There were no
borrowings under the Revolving Credit Facility. Additional overdraft borrowings
at SpA this year totaled $0.8 million. Foreign term loan borrowings at SAPL
totaling $1.4 million were required to purchase machinery and equipment for the
Company's joint venture activities in India. Investments in the share capital of
SAPL by the minority partner increased cash flows by $0.2 million in the first
six months of 2003.
Pension Plans. The Company maintains a qualified defined benefit pension plan
(the "Qualified Plan"), which covers substantially all domestic hourly and
salary employees except for Tallahassee hourly employees and an unfunded
nonqualified plan to provide benefits in excess of amounts permitted to be paid
under the provisions of the tax law to participants in the Qualified Plan.
The value of the Qualified Plan assets decreased from $43.8 million at December
31, 2001 to $37.8 million at December 31, 2002. The combination of weak
investment performance and declining discount rates during 2002 resulted in an
increase in the Qualified Plan unfunded benefit obligation. Contributions to the
Qualified Plan for the 2002 plan year are expected to be approximately $2.6
million to achieve a current liability funding level of 80%. The contribution
will be made on or before September 15, 2003. The Company continues to examine
the longer term projections for pension expense and cash contributions.
(2) NEW ACCOUNTING STANDARDS
The Company has adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB
Statement No. 123. The Statement requires prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock compensation awards under the intrinsic
method of APB Opinion No. 25 requiring compensation cost to be recognized based
on the excess, if any, between the quoted market price of the stock at the date
of grant and the amount an employee must pay to acquire the stock. All options
awarded under the Company's stock option plans are granted with an exercise
price equal to the fair market value on the date of the grant.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or an asset in some circumstances). The scope of SFAS No. 150 includes
financial instruments issued in the form of shares that are mandatorily
redeemable and that employ unconditional obligations requiring the issuer to
redeem it by transferring its assets at a specific or determinable date or upon
an event that is certain to occur.
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STANADYNE CORPORATION AND SUBSIDIARIES
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. Mandatorily redeemable financial
instruments of nonpublic entities are subject to the provisions of SFAS No. 150
for the first fiscal period beginning after December 15, 2003. The Company
believes that adoption of this statement will not have any material impact on
the consolidated financial condition or results of operations.
(3) CRITICAL ACCOUNTING POLICIES
The Company prepares the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, the Company is required to make certain estimates, judgments and
assumptions that it believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The significant
accounting policies involving estimates which the Company believes are the most
critical to aid in fully understanding and evaluating the reported financial
results include: product warranty reserves, inventory reserves for excess or
obsolescence, income taxes, self insurance healthcare costs, and pension and
postretirement benefit liabilities and are more fully described in the notes to
the consolidated financial statements contained in the annual report on Form
10-K.
(4) CAUTIONARY STATEMENT
This quarterly report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
statements with respect to the financial condition, results of operations and
business of the Company and management's discussion and analysis of financial
condition and results of operations. All of these forward-looking statements are
based on estimates and assumptions made by the management of the Company which,
although believed to be reasonable, are inherently uncertain. Therefore, undue
reliance should not be placed upon such estimates and statements. No assurance
can be given that any such estimates will be realized, and it is likely that
actual results will differ materially from those contemplated by such
forward-looking statements. Factors that may cause such differences include: (1)
increased competition; (2) increased costs; (3) loss or retirement of key
members of management; (4) increases in the Company's cost of borrowing or
inability or unavailability of additional debt or equity capital; (5) loss of
material customers; (6) adverse state or federal legislation or regulation or
adverse determinations in pending litigation; (7) changes in the value of the
U.S. dollar relative to foreign currencies of countries where the Company
conducts its business; and (8) changes in general economic conditions and/or in
the automobile, light duty trucks, agricultural and construction vehicles and
equipment, industrial products and marine equipment markets in which the Company
competes. Many of such factors are beyond the control of the Company and its
management. The forward-looking statements contained in this
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STANADYNE CORPORATION AND SUBSIDIARIES
report speak only as of the date on which such statements were made. The Company
undertakes no duty or obligation to publicly update or revise any
forward-looking statements or to reflect new, changing or unanticipated events
or circumstances.
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STANADYNE CORPORATION AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks which include changes in interest rates
and changes in foreign currency exchange rates as measured against the U.S.
dollar.
Interest Rate Risk. The carrying values of the Company's revolving credit lines
and term loans approximate fair value. The term loans are primarily LIBOR-based
borrowings and are repriced every one to three months. A 10% change in the
interest rate on the term loans would have had a negligible effect on the
interest expense recorded in the six three months of 2003. The 10-1/4% Notes
bear interest at a fixed rate and, therefore, are not sensitive to interest rate
fluctuation. The fair value of the Company's $71.0 million in Notes based on
quoted market prices on June 30, 2003 was approximately $57.5 million.
Foreign Currency Risk. The Company has subsidiaries in Brazil and Italy, a joint
venture in India and a branch office in France, and therefore is exposed to
changes in foreign currency exchange rates. Changes in exchange rates may
positively or negatively affect the Company's sales, gross margins, and retained
earnings. However, historically, these locations have contributed less than 15%
of the Company's net sales and retained earnings, with most of these sales
attributable to the Italian and Brazilian subsidiaries. The Company also sells
its products from the United States to foreign customers for payment in foreign
currencies as well as dollars. Foreign currency exchange differences were net
gain (loss) of $0.8 million and $(0.1) million for the six months ended June 30,
2003 and 2002, respectively. A majority of the exchange differences are related
to the Company's operations in Brazil. The Company does not hedge against
foreign currency risk.
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ITEM 4: CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were adequate
and designed to ensure that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
manner, including that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
(B) CHANGES IN INTERNAL CONTROLS
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses in internal
controls, subsequent to the evaluation described above.
Reference is made to the Certifications of the Chief Executive Officer and Chief
Financial Officer about these and other matters filed as exhibits to this
report.
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STANADYNE CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. No report on Form 8-K was filed during the quarter ended June 30,
2003.
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STANADYNE CORPORATION AND SUBSIDIARIES
SIGNATURE
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.
Stanadyne Corporation
(Registrant)
Date: August 13, 2003 /s/ Stephen S. Langin
--------------------------
Stephen S. Langin
Vice President and
Chief Financial Officer
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EXHIBIT INDEX:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002