United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2003
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
765 Straits Turnpike, Suite 2000, Middlebury, CT 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 598-0397
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
YES |_| NO |X|
The aggregate market value of the voting common stock held by
non-affiliates of the registrant* (based upon its closing transaction price on
the New York Stock Exchange Composite Tape on June 30, 2003), as of March 15,
2004 was $25,022,302. On that date 7,880,877 shares of common stock, $1.00 par
value, were outstanding, the only class of the registrant's common stock.
5,127,561 shares of common stock were held by non-affiliates of the registrant.
* Calculated by excluding all shares held by executive officers and directors of
the registrant without conceding that all such persons are "affiliates" of the
registrant for purposes of federal securities laws.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2004 annual meeting - Part III.
Exhibit index appears on page 87. Report consists of 94 pages.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (Katy or the Company) was organized as a Delaware
corporation in 1967. We carry on our business through two principal operating
groups: Maintenance Products and Electrical Products. We also have a minority
interest in a seafood harvesting company. Each majority-owned company operates
within a broad framework of policies and corporate goals. Katy's corporate
management is responsible for overall planning, financial management,
acquisitions, dispositions, and other related administrative and corporate
matters.
Recapitalization
On June 28, 2001, we completed a recapitalization of the Company following
an agreement dated June 2, 2001 with KKTY Holding Company, L.L.C. (KKTY), an
affiliate of Kohlberg Investors IV, L.P. (Kohlberg) (the "Recapitalization"). On
June 28, 2001, our stockholders approved proposals to effectuate the
Recapitalization at their annual meeting, including classification of the board
of directors into two classes with staggered terms of two years. Under the terms
of the Recapitalization, directors designated by KKTY represent a majority of
our Board of Directors. The Class 1 directors include C. Michael Jacobi,
President and CEO, and three directors who were not designated by KKTY. The
Class I directors elected at the 2002 stockholders' meeting are up for election
at this year's annual meeting. The other five directors are Class II directors
and are all designees of KKTY. The Class II directors will stand for re-election
at the Company's annual meeting in 2005.
Under the terms of the Recapitalization, KKTY purchased 700,000 shares of
newly issued preferred stock, $100 par value per share (Convertible Preferred
Stock), which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. More information regarding the Convertible
Preferred Stock can be found in Note 11 to the Consolidated Financial Statements
of Katy included in Part II, Item 8. The Recapitalization allowed us to retire
obligations we had under the then-current revolving credit agreement which was
agented by Bank of America (Bank of America Credit Agreement). In connection
with the Recapitalization, we entered into a new credit agreement, agented by
Bankers Trust Company, a subsidiary of Deutsche Bank (Deutsche Bank Credit
Agreement) to finance the future operations of Katy. Our debt obligations under
the Deutsche Bank Credit Agreement were refinanced on February 3, 2003, under a
new credit agreement agented by Fleet Capital (Fleet Credit Agreement). More
information regarding the Fleet Credit Agreement can be found in Note 10 to the
Consolidated Financial Statements of Katy included in Part II, Item 8, and in
the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations, included in Part II,
Item 7
Also in connection with the Recapitalization, we entered into an agreement with
the holder of the preferred interest in one of our subsidiaries to redeem early
approximately half of such interest at a 40% discount, plus accrued
distributions thereon, which had a stated value prior to the Recapitalization of
$32.9 million. See Note 14 to the Consolidated Financial Statements of Katy
included in Part II, Item 8. We utilized approximately $10.2 million of the
proceeds from the issuance of the Convertible Preferred Stock for this purpose.
The difference between the amount paid on redemption and the stated value of
preferred interest redeemed ($6.6 million, plus the tax effect of $0.1 million)
was recognized as an increase to Additional Paid-in Capital on the Consolidated
Statements of Stockholders' Equity. This gain is also reflected in the
Consolidated Statement of Operations as a reduction in net loss attributable to
common shareholders. Following is a summary of the sources and uses of funds
from, and in connection with, the Recapitalization:
2
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the Deutsche Bank Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Bank of America Credit Agreement $144,300
Payment of accrued interest under the Bank of America Credit Agreement 624
Purchase of one-half of preferred interest of a subsidiary at a discount 9,900
Payment of accrued distributions on one-half of preferred interest of a subsidiary 322
Certain costs associated with the Recapitalization 8,065
--------
$163,211
========
In connection with the Fleet Credit Agreement completed in February 2003,
the remainder of the preferred interest in our subsidiary with a carrying value
of $16.4 million was redeemed early at a similar 40% discount. The difference
between the amount paid on redemption and the stated value of the preferred
interest redeemed ($6.6 million) was recognized as an increase to Additional
Paid-In Capital on the Consolidated Statements of Stockholders' Equity. More
information regarding this redemption can be found in Note 14 to the
Consolidated Financial Statements of Katy included in Part II, Item 8.
Since the Recapitalization (as described above) on June 28, 2001, the
Company's management has been focused on the following initiatives:
o Restructuring of core operations: 35 facilities closed or
consolidated (including 3 to be closed by the end of 2004).
o Cost reductions: central services model, sourcing in Asia, product
re-engineering, headcount reductions, and improved management of raw
material price exposure.
o Balance sheet review: in light of ongoing business profitability and
requirements, approximately $90.0 million of obsolete assets were
impaired.
o Divestitures of non-core business: 4 businesses have been sold or
otherwise exited and proceeds have been applied to reduce debt.
o Re-development of new product pipeline: capital and management
expertise has been re-dedicated to this critical area.
o Organizational changes: across-the-board review of management talent
and key hires made.
With these initiatives accomplished or well under way, the Company's focus
has shifted to revenue growth through a variety of means (recent business "wins"
include new product introductions, introduction of products to new distribution
channels, and acquisitions). Our future cost reductions will come from process
improvements (such as Lean Manufacturing and Six Sigma), value engineering
products, improved sourcing/purchasing and lean administration.
Operations
Selected operating data for each operating group can be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Part II, Item 7. Information regarding foreign and
domestic operations and export sales can be found in Note 19 to the Consolidated
Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in
general.
We are restructuring many of our operations in order to maintain a low
cost structure, which is essential for us to be competitive in the markets we
serve. These restructuring efforts include consolidation of facilities,
headcount reductions, and evaluation of sourcing strategies to determine the
lowest cost method for obtaining finished product. Costs associated with these
efforts include expenses for recording liabilities for non-cancelable leases at
facilities that are abandoned, severance and other employee termination costs,
costs to move inventory and equipment, consultant costs for sourcing strategy
evaluation, and other exit costs that may be incurred not only with
consolidation of facilities, but potentially the complete shut down of certain
manufacturing operations. We have incurred significant costs in this respect
during 2003 ($8.1 million), 2002 ($19.2 million) and 2001 ($13.4 million). We
expect to incur additional costs of approximately $4 million to $6 million in
2004, significantly lower than those recognized in each of the last three years.
Additional details regarding severance, restructuring and related charges can be
found in Note 21 to the Consolidated Financial Statements of Katy included in
Part II, Item 8.
3
Maintenance Products Group
The Maintenance Products Group's principal business is the manufacturing,
distribution and sale of sanitary maintenance supplies, professional cleaning
products, home and automotive storage products and abrasives. Total revenues
during 2003 were $285.3 million, and operating loss was ($7.9) million. The
operating loss included $11.5 million of impairments of long-lived assets, and
$5.7 million of severance, restructuring and related charges. The group
accounted for 65% of the Company's sales from continuing operations in 2003.
Total assets for the group were $176.2 million at December 31, 2003. The
Maintenance Products Group sells product to both commercial and consumer
end-users. The business units in this group are:
Continental Commercial Products, LLC (CCP) CCP is the successor entity to
Contico International, L.L.C. (Contico) and includes as divisions all the former
business units of Contico as well as the following business units: Disco
(Disco), Glit/Microtron Abrasives (Glit/Microtron), Loren Products (Loren), and
Wilen Products (Wilen). CCP is headquartered in Bridgeton, Missouri near St.
Louis, has additional operations in California, Georgia and Texas, and was
created mainly for the purpose of simplifying our business transactions and
improving our customer relationships by allowing customers to order products
from any CCP division on one purchase order.
The Janitorial/Sanitation (Jan/San) business unit is a plastics
manufacturer and a distributor of products for the commercial sanitary
maintenance and food service markets. Examples of Jan/San products are
commercial trash receptacles, bucket/wringer combo units for mops, wet
floor signs, janitorial carts, food storage bins, and other products
designed for commercial cleaning and food service. Jan/San products are
sold under the following brand names: Continental, Kleen Aire, Huskee,
SuperKan, KingKan and Tilt'N Wheel.
The Consumer/Retail (Consumer) business unit is a plastics and metals
manufacturer of home and automotive storage products, sold primarily
through major home improvement and mass market retail outlets. Examples of
Consumer products are metal and plastic storage boxes designed for pickup
trucks, shelving, drawer storage units, and clear plastic and heavy duty
storage bins. Consumer products are sold under the following brand names:
Contico, Tradesman, Tuff Box, and Tuffbin.
The Container business unit is a plastics manufacturer of drums and pails
for commercial and industrial use.
The Disco business unit, headquartered in McDonough, Georgia, is a
manufacturer and distributor of filtration, cleaning and specialty
products sold to the restaurant/food service industry. Examples of Disco
products include fryer filters, grill bricks, and other food service
items.
The Glit/Microtron business unit is headquartered in Wrens, Georgia, and
has an additional manufacturing facility in Pineville, North Carolina,
which is expected to be closed in the first half of 2004. Glit/Microtron
manufactures non- woven floor maintenance pads, abrasive hand pads,
scouring pads and specialty abrasive products for cleaning and finishing.
Products are sold primarily through commercial sanitary maintenance and
food service markets, with some products sold through consumer/retail
outlets. Glit/Microtron products are sold under the following brand names:
Kleenfast, Fiber Naturals, and Big Boss II.
The Loren business unit, headquartered in Lawrence, Massachusetts, is a
manufacturer and distributor of abrasive products and roof ventilation
products for the sanitary maintenance and construction industries. The
facility in Lawrence will be closed in the first half of 2004 and the
Loren operations will become part of the Glit/Microtron business unit.
Through licenses, Loren sells certain abrasives products under the Brillo,
Babbo, and Old Dutch brand names in commercial channels. Brillo is a
registered trademark of Church & Dwight Co., Inc.
The Wilen business unit, headquartered in Atlanta, Georgia, is a
manufacturer and distributor of professional cleaning products, including
mops, brooms, brushes, and plastic cleaning accessories. Wilen's products
are sold primarily through commercial sanitary maintenance and food
service markets, with some products sold through consumer/retail outlets.
Wilen products are sold under the following brand names: Wax-o-matic,
Wilen and Rototech.
CCP also has operations in Canada and the United Kingdom. CCP Canada is a
distributor of primarily plastic products for the commercial and sanitary
maintenance markets in Canada. Contico Manufacturing, Ltd. is a distributor of
primarily plastic products for the commercial and sanitary maintenance markets
in the UK. Contico Europe Limited (formerly Contico Europe Holdings) is a
plastics manufacturer of consumer storage products, sold primarily to major
retail outlets in the UK.
4
Glit/Gemtex, Ltd. (Gemtex) Gemtex, headquartered in Etobicoke, Ontario, Canada,
is a manufacturer and distributor of resin fiber disks and other coated
abrasives for the original equipment manufacturers (OEM), automotive,
industrial, and home improvement markets.
Electrical Products Group
The Electrical Products Group's principal business is the distribution and
sale of consumer electric corded products and electrical accessories. Revenues
in 2003 were $151.1 million and operating income was $13.0 million. Operating
income in 2003 included $0.4 million of impairments of long-lived assets, and
$2.1 million of severance, restructuring and related charges. The group
accounted for 35% of the Company's consolidated sales in 2003. Total assets for
the group were $51.4 million at December 31, 2003. Woods Industries, Inc.
(Woods) and Woods Industries (Canada), Inc. are both subject to seasonal sales
trends, with higher sales in the third and early fourth quarters in connection
with the holiday shopping season. The Electrical Products Group sells product
principally to large, national retailers, who in-turn sell to consumer
end-users. The business units in this group are:
Woods Industries, Inc. (Woods) Woods, headquartered in Carmel, Indiana,
distributes consumer electric corded products and electrical accessories.
Examples of Woods products are outdoor and indoor extension cords, cord reels,
surge protectors, power strips, and work lights. Woods products are sold under
the following brand names: Woods, Yellow Jacket, Tradesman, SurgeHawk and
AC/Delco. AC/Delco is registered trademark of The General Motors Corporation.
These products are sold primarily through major home improvement and mass market
retail outlets. Woods' products are sourced primarily from Asia.
Woods Industries (Canada), Inc. (Woods Canada) Woods Canada, headquartered
in Toronto, Ontario, Canada, distributes consumer electric corded products and
electrical accessories. In addition to products listed above for Woods, Woods
Canada's primary product offerings include garden lighting and timers. Woods
Canada products are sold under the following brand names: MoonRays, Intercept,
and Pro Power. These products are sold primarily through major home improvement
and mass market retail outlets in Canada. Woods Canada's products are sourced
primarily from Asia.
See Licenses, Patents, and Trademarks below for further discussion
regarding the trademarks used by Katy companies.
Other Operations
The businesses in this group include a 43% equity investment in a shrimp
harvesting and farming operation, Sahlman Holding Company, Inc., and a 100%
interest in Savannah Energy Systems Company, the limited partner in a
waste-to-energy facility operator.
Sahlman Holding Company, Inc. (Sahlman) Sahlman harvests shrimp off the
coast of South and Central America and owns shrimp farming operations in
Nicaragua. Sahlman has a number of competitors, some of which are larger and
have greater financial resources. Katy's interest in this company is an equity
investment. During the third quarter of 2003, after review of Sahlman's results
for 2002 (and year to date in 2003), and after study of the status of the shrimp
industry and markets in the United States, Katy determined there had been a loss
in the value of the investment that was other than temporary. As a result, Katy
concluded that $1.6 million was a reasonable estimate of the value of its
investment in Sahlman, and a charge of $5.5 million was recorded to reduce the
carrying value of the investment. See Note 6 to Consolidated Financial
Statements of Katy included in Part II, Item 8.
Savannah Energy Systems Company (SESCO). SESCO is the limited partner of
the operator of a waste-to-energy facility in Savannah, Georgia. The general
partner of the partnership is an affiliate of Montenay Power Corporation. See
Note 9 to Consolidated Financial Statements of Katy included in Part II, Item 8.
Discontinued Operations
We identified and sold certain operations that we considered non-core to
the future operations of the Company. Hamilton Precision Metals L.P. (Hamilton),
a reroller of precision metal foils and strips located in Lancaster,
Pennsylvania, was sold on October 31, 2002 for net proceeds of $13.9 million.
Hamilton was formerly part of the Electrical Products Group. Prior to its sale
in 2002, Hamilton generated $10.4 million of net sales and $1.6 million of
operating income. GC/Waldom Electronics, Inc. (GC/Waldom), a leading value-added
distributor of high quality, brand name electrical and electronic parts,
components and accessories headquartered in Rockville, Illinois, was sold on
April 2, 2003 for net proceeds of $7.4 million. GC/Waldom was formerly part of
the Electrical Products Group. Prior to its sale, GC/Waldom generated $6.0
million in net sales, and incurred a net operating loss of ($0.1) million. A
loss (net of tax) of $0.2 million was recognized in the second
5
quarter of 2003 as a result of the GC/Waldom sale. Duckback Products, Inc.
(Duckback), a manufacturer of high quality exterior transparent coatings and
water repellents located in Chico, California, was sold on September 16, 2003
for net proceeds of $16.2 million. Duckback was formerly part of the Maintenance
Products Group. Prior to its sale, Duckback generated $12.9 million of net sales
and $3.1 million of operating income during 2003. A gain (net of tax) of $7.6
million was recognized in the third quarter of 2003 as a result of the Duckback
sale.
Customers
We have several large customers in the mass merchant/discount/home
improvement retail markets. Two customers, Wal*Mart and Lowe's, accounted for
17% and 11%, respectively, of consolidated net sales. Sales to Wal*Mart are made
by the Woods, Consumer, Glit/Microtron, Woods Canada, Wilen and Jan/San business
units. Sales to Lowe's are made by the Woods and Consumer business units. A
significant loss of business at either of these customers could have a material
adverse impact on our results.
Backlog
Maintenance Products:
Our aggregate backlog position for the Maintenance Products Group was $7.8
million and $7.9 million as of December 31, 2003 and 2002, respectively. The
orders placed in 2003 are firm and are expected to be shipped during 2004.
Electrical Products:
Our aggregate backlog position for the Electrical Products Group was $6.0
million and $3.6 million as of December 31, 2003 and 2002, respectively. The
orders placed in 2003 are firm and are expected to be shipped during 2004.
Markets and Competition
Maintenance Products:
We market a variety of professional cleaning products to the commercial
janitorial/sanitation markets. Sales and marketing of these products is handled
through a combination of direct sales personnel, manufacturers' sales
representatives, and wholesale distributors. Cleaning products sold by the
Company include 1) plastic items, such as commercial trash receptacles, buckets,
carts, and signs, 2) abrasive products, including floor cleaning and polishing
pads, and hand scouring pads, 3) mops, brooms, and brushes, and 4) items for the
food service industry, including filters, grill cleaning supplies, and food
storage containers.
The commercial distribution channels for these products are highly
fragmented, resulting in a large number of small customers, mainly distributors
of janitorial cleaning products. The markets for our maintenance products are
highly competitive. Competition is based primarily on price and the ability to
provide superior customer service in the form of complete and on-time product
delivery. Other competitive factors include brand recognition and product
design, quality and performance. We compete for market share with a number of
different competitors, depending upon the specific product. In large part, our
competition is unique in each area of 1) plastics, 2) abrasives, 3) mops, brooms
and brushes and 4) food service. We believe that we have established long
standing relationships with our major customers based on quality products and
service, while continuing to strive to be a low cost provider in this industry.
Our ability to remain a low cost provider in the industry is highly dependent on
the price of our raw materials, primarily resin. Resin prices are influenced to
a certain degree by market prices for natural gas and crude oil, as well as
supply and demand factors within the plastics manufacturing industry. Being a
low cost producer is also dependent upon our ability to reduce and subsequently
control our cost structure, which is further dependent upon our ongoing
restructuring efforts.
We market branded consumer in-home and automotive storage, and to a lesser
extent, abrasive products and mops and brooms, to consumer/retail outlets in the
U.S. The consumer distribution channels for these products, especially the
in-home and automotive storage products, are highly concentrated, with several
large "mass-market" retailers representing a very significant portion of the
customer base. However, we continue to develop new markets for our products,
including sporting goods. Sales and marketing of these products is generally
handled by direct sales personnel. Our ability to remain competitive in these
consumer markets is dependent upon our position as a low cost producer, and also
upon our development of new and innovative products. Being a low cost producer
is also dependent upon our ability to reduce and subsequently control our cost
structure, which is further dependent upon our ongoing restructuring efforts.
Our restructuring efforts include consolidation of facilities and headcount
reductions.
6
Less significant amounts (based on net sales dollars) are sold to
different markets, such as roofing ventilation products to the construction
trade, and resin fiber disks and other abrasive disks to the OEM trade.
Electrical Products:
We market branded electrical products primarily in North America through a
combination of direct sales personnel and manufacturers' sales representatives.
Our primary customer base consists of major national retail chains that service
the home improvement, hardware, mass merchant, discount and automotive markets,
and smaller regional concerns serving a similar customer base.
Electrical products sold by the Company are generally used by consumers
and include such items as extension cords, work lights, surge suppressors, power
taps and strips, and outdoor lights and timers. We have entered into license
agreements pursuant to which we market certain of our products using certain
other companies' proprietary brand names. Overall demand for our products is
highly correlated with consumer demand, the performance of the general economy
and, to a lesser extent, home construction and resale activity.
The markets for our electrical products are highly competitive.
Competition is based primarily on price and the ability to provide superior
customer service in the form of complete and on-time product delivery. Other
competitive factors include brand recognition, product design, quality and
performance. Foreign competitors, especially from Asia, provide an increasing
level of competition. Our ability to remain competitive in these markets is
dependent upon continued efforts to remain a low-cost provider of these
products.
Raw Materials
Our operations have not experienced significant difficulties in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages. Our
Electrical Products businesses are highly dependent upon products sourced from
Asia, and therefore remain vulnerable to potential disruptions in that supply
chain. We are also subject to uncertainties involving labor relations issues at
entities involved in our supply chain, both at suppliers and in the
transportation and shipping area. Our Jan/San and Consumer business units (and
some others to a lesser extent) use polyethylene, polypropylene and other
thermoplastic resins as raw materials in a substantial portion of its plastic
products. Prices of plastic resins, such as polyethylene and polypropylene,
increased steadily from the latter half of 2002 through the middle of 2003, then
fell slightly in the second half of the year, and have increased again during
the early months of 2004. Management has observed that the prices of plastic
resins are driven to an extent by prices for crude oil and natural gas, in
addition to other factors specific to the supply and demand of the resins
themselves. We cannot predict the direction resin prices will take during 2004
and beyond. We are also exposed to price changes for copper (used by Woods and
Woods Canada), aluminum and steel, corrugated packaging material and other raw
materials. Prices for copper, aluminum and steel have increased in recent
months. We have not employed an active hedging program related to our commodity
price risk, but are employing other strategies for managing this risk, including
contracting for a certain percentage of resin needs through supply agreements
and opportunistic spot purchases. In a climate of rising raw material costs, we
experience difficulty in raising prices to shift these higher costs to our
customers. Our future earnings may be negatively impacted to the extent
increased costs for raw materials cannot be recovered or offset.
Employees
As of December 31, 2003, we employed 1,808 people. 394 of these employees
were members of various unions. Our labor relations are generally satisfactory
and there have been no strikes in recent years. Our operations can be impacted
by labor relations issues involving other entities in our supply chain. We
recently entered into a new union contract with employees at the Wilen business
unit. The union contract with certain employees in the St. Louis area expires in
December 2004.
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or
regulations will have a material adverse effect on our consolidated operations
or financial position. We anticipate making additional expenditures for
environmental matters during 2004, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Note 20 to the Consolidated Financial Statements in Part II, Item
8.
7
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on
patent, trademark and license protection, but rather on the quality of our
products, proprietary technology, contract performance, customer service and the
technical competence and innovative ability of our personnel to develop and
introduce salable products. However, we do rely to a certain extent on patent
protection, trademarks and licensing arrangements in the marketing of certain
products. Examples of key licensed and protected trademarks include Yellow
Jacket(R), Woods(R), Tradesman(R), AC/Delco(TM) (Woods); Contico(R) and
Continental(R) (CCP); Glit(R), Microtron(R), Brillo(TM), and Kleenfast(R)
(Glit/Microtron); Wilen(R) (Wilen); and Trim-Kut(R) (Gemtex). Companies most
reliant upon patented products and technology are CCP, Woods, and Gemtex.
Further, we are renewing our emphasis on new product development, which will
increase our reliance on patent and trademark protection across all business
units.
Since 1998, Woods Canada has used the NOMA(R) trademark in Canada under
the terms of a license with Gentek Inc. (Gentek). In October 2002, Gentek filed
a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In
July 2003, as part of the bankruptcy proceedings, Gentek filed a motion to
reject this trademark license agreement. On November 5, 2003, Gentek's motion
was granted by the U.S. Bankruptcy Court. As a result, the trademark license
agreement is no longer in effect. Woods Canada will use the NOMA(R) trademark
through mid-2004 and, thereafter, will lose the right to brand certain of its
product with the NOMA(R) trademark. Approximately 50% of Woods Canada's sales
are of NOMA(R) - branded products. Woods Canada will seek to replace those sales
with sales of other products and will continue to act as a supplier for the new
licensee of the NOMA(R) trademark. However, there is no guarantee that Woods
Canada will be able to replace the lost sales of NOMA(R) - branded products.
Available Information
We maintain a website at http://www.katyindustries.com. We make available,
free of charge through our website, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and, if applicable, all
amendments to these reports as well as Section 16 reports on Forms 3, 4 and 5,
as soon as reasonably practicable after such reports are filed or furnished to
the SEC. The information on our website is not, and shall not be deemed to be, a
part of this report or incorporated into any other filings we make with the SEC.
8
Item 2. PROPERTIES
As of December 31, 2003, our total building floor area owned or leased was
3,749,000 square feet, of which 758,000 square feet were owned and 2,991,000
square feet were leased. The following table shows by industry segment a summary
of the size (in square feet) and character of the various facilities included in
the above totals together with the location of the principal facilities.
Industry Segment Owned Leased Total
- ---------------- ----- ------ -----
(In thousands of square feet)
Maintenance Products - primarily
plant and office facilities with principal
facilities located in Norwalk and
Santa Fe Springs, California; Wrens,
McDonough and Atlanta, Georgia; Bridgeton,
and Hazelwood, Missouri;
Pineville, North Carolina; Lawrence,
Massachusetts; Winters, Texas;
Etobicoke, Ontario, Canada; and
Redruth, Cornwall, England 543 2,464 3,007
Electrical Products - primarily plant and
office facilities with principal facilities
located in Carmel and Indianapolis, Indiana,
Toronto, Ontario, Canada,
and Taipei, Taiwan 215 522 737
Corporate - office facility in Middlebury, Connecticut 5 5
During 2002 and 2003, we consolidated the following into our Bridgeton,
Missouri (Bridgeton) facility: the Warson Road facility in St. Louis, Missouri
(Warson Road), the Earth City, Missouri (Earth City) facility and a portion of
the Hazelwood, Missouri (Hazelwood) facility. During 2004, we expect to
consolidate all of our abrasives operations in Lawrence, Massachusetts and
Pineville, North Carolina into our recently expanded Wrens, Georgia (Wrens)
abrasives facility. We believe that our current facilities meet our needs in our
existing markets for the foreseeable future.
9
Item 3. LEGAL PROCEEDINGS
Except as set forth below, no cases or legal proceedings are pending
against Katy, other than ordinary routine litigation incidental to Katy and our
businesses and other non-material cases and proceedings.
1. Environmental Claims - Administrative Order on Consent - W.J. Smith Wood
Preserving Company ("W.J. Smith") and Katy Industries, Inc., U.S. EPA Docket No.
RCRA-VI-7003-93-02 and Texas Water Commission Administrative Enforcement Action.
The W. J. Smith matter originated in the 1980s when the United States and
the State of Texas, through the Texas Water Commission, initiated environmental
enforcement actions against W.J. Smith alleging that certain conditions on the
W.J. Smith property (the "Property") violated environmental laws. In order to
resolve the enforcement actions, W.J. Smith engaged in a series of cleanup
activities on the Property and implemented a groundwater monitoring program.
In 1993, the United States Environmental Protection Agency (EPA) initiated
a proceeding under Section 7003 of the Resource Conservation and Recovery Act
against W.J. Smith and Katy. The proceeding sought certain actions at the site
and at certain off-site areas, as well as development and implementation of
additional cleanup activities to mitigate off-site releases. In December 1995,
W.J. Smith, Katy and USEPA agreed to resolve the proceeding through an
Administrative Order on Consent under Section 7003 of RCRA. W.J. Smith and Katy
have completed the cleanup activities required by the Order. W.J. Smith is
currently implementing an RCRA facility investigation of the site and an
investigation of certain off-site areas pursuant to a request from the U.S. EPA.
Since 1990, the Company has spent in excess of $7.0 million undertaking
cleanup and compliance activities in connection with this matter. While ultimate
liability with respect to this matter is not easy to determine, the Company has
recorded and accrued amounts that it deems reasonable for prospective
liabilities with respect to this matter and believes that any additional
liability with respect to this matter in excess of the accrual will not be
material.
In addition to the administrative claim specifically identified above, a
purported class action lawsuit was filed by twenty individuals in federal court
in the Marshall Division of the Eastern District of Texas, on behalf of
"landowners and persons who reside and/or work in" an identified geographical
area surrounding the W.J. Smith Wood Preserving facility in Denison, Texas. The
lawsuit purported to allege claims under state law for negligence, trespass,
nuisance and assault and battery. It sought damages for personal injury and
property damage, as well as punitive damages. The named defendants were Union
Pacific Corporation, Union Pacific Railroad Company, Katy Industries and W.J.
Smith Wood Preserving Company, Inc. On June 10, 2002, Katy and W.J. Smith filed
a motion to dismiss the case for lack of federal jurisdiction, or in the
alternative, to transfer the case to the Sherman Division. In response,
plaintiffs filed a motion for leave to amend the complaint to add a federal
claim under the Resource Conservation and Recovery Act. On July 30, 2002, the
court dismissed plaintiffs' lawsuit in its entirety.
On July 31, 2002, plaintiffs filed a new lawsuit against the same
defendants, again in the Marshall Division of the Eastern District of Texas,
alleging property damage class action claims under the federal Comprehensive
Environmental Response Compensation & Liability Act (CERCLA), as well as state
common law theories. While Plaintiffs' counsel has confirmed that Plaintiffs are
no longer seeking class-wide relief for personal injury claims, certain
Plaintiffs continue to allege individual common law claims for personal injury.
Because certain threshold issues, including the basis for federal jurisdiction,
statute of limitations defenses and class certification, have not yet been fully
evaluated in this litigation, it is not possible at this time for Katy to
reasonably determine an outcome or accurately estimate the range of potential
exposure. Katy and W.J. Smith filed a motion to dismiss the lawsuit or, in the
alternative, to transfer venue. In response, plaintiffs filed a motion for leave
to amend the complaint. The court granted plaintiffs' motion to amend and denied
Katy and W.J. Smith's motion to dismiss or transfer venue. On September 5, 2003,
the court entered an Amended Agreed Initial Case Management Order limiting
discovery during an initial phase to the threshold issues. The Company has
deposed all of the proposed class representatives and on October 31, 2003, filed
a motion for summary judgment on the grounds that the court lacks jurisdiction
and Plaintiffs' claims are barred by the applicable statute of limitations.
Plaintiffs filed a motion for class certification on the property damage claims
on that date as well. Both motions are fully briefed. No dates are currently set
for the Court's hearing and ruling on these motions. A determination of ultimate
liability with respect to this matter is not estimable art this time.
General Environmental Claims
Katy and certain of our current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by USEPA, state
environmental agencies and private parties as potentially responsible parties at
a number of waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) or equivalent state laws, and, as such,
may be liable for the costs of cleanup and other remedial activities at these
sites. The costs involved in these matters are, by nature, difficult to estimate
and subject to substantial change as litigation or negotiations with
10
the United States, states and other parties proceed. While ultimate liability
with respect to these matters is difficult to predict, the Company has recorded
and accrued amounts that it deems reasonable for prospective liabilities and
believes that any liability with respect to such matters in excess of the
accruals will not be material.
2. Banco del Atlantico, S.A. v. Woods Industries, Inc., et al., Civil Action No.
L-96-139 (U.S. District Court, Southern District of Texas).
In December 1996, Banco del Atlantico ("plaintiff"), a bank located in
Mexico, filed a lawsuit in Texas against Woods, a subsidiary of Katy, and
against certain past and/or then present officers, directors and former owners
of Woods (collectively, "defendants"). The plaintiff alleges that the defendants
participated in violations of the Racketeer Influenced and Corrupt Organizations
Act ("RICO") involving allegedly fraudulently obtained loans from Mexican banks,
including the plaintiff, and "money laundering" of the proceeds of the illegal
enterprise. In its recently-filed Amended Complaint, the plaintiff also alleges
violations of the Indiana RICO and Crime Victims Act. All of the foregoing is
alleged to have occurred prior to Katy's purchase of Woods.
The plaintiff alleges that it made loans to a Mexican corporation
controlled by certain past officers and directors of Woods based upon fraudulent
representations and guarantees. In addition to its fraud, conspiracy, and RICO
claims, the plaintiff seeks recovery upon certain alleged guarantees purportedly
executed by Woods Wire Products, Inc., a predecessor company from which Woods
purchased certain assets in 1993. The primary legal theories under which the
plaintiff seeks to hold Woods liable for its alleged damages are respondeat
superior, conspiracy, successor liability, or a combination of the three.
On March 31, 2003, the Southern District of Texas court ordered that the
case be transferred to the Southern District of Indiana on the ground that
Indiana has a closer relationship to this case than Texas.
The case is currently pending in the Southern District of Indiana. The
plaintiff filed its Amended Complaint on December 17, 2003. Pursuant to court
order, the defendants filed motions to dismiss the Amended Complaint on February
17, 2004. All defendants have moved to dismiss the Amended Complaint and all
claims contained within it on grounds of forum non conveniens and comity. All
defendants have also moved to dismiss the Indiana RICO and Indiana Crime Victims
Act claims as barred by the applicable statutes of limitations. Additionally,
Woods and certain other defendants have separately moved to dismiss certain
claims of the Amended Complaint pursuant to Federal Rules of Civil Procedure
12(b)(6) and 9(b) for failure to state a claim upon which relief can be granted.
The plaintiff's responses to these motions to dismiss have not yet been filed.
The parties are currently engaged in discovery, and the trial of the action
(assuming any is needed) is scheduled for January 2006.
The plaintiff is claiming damages in excess of $24 million and is
requesting that damages be trebled under Indiana and federal RICO, and/or the
Indiana Crime Victims Act. Because defendants' motions to dismiss have not yet
been briefed and certain jurisdictional issues have not yet been fully
adjudicated, it is not possible at this time for the Company to reasonably
determine an outcome or accurately estimate the range of potential exposure.
Katy may have recourse against the former owner of Woods and others for, among
other things, violations of covenants, representations and warranties under the
purchase agreement through which Katy acquired Woods, and under state, federal
and common law. Woods may also have indemnity claims against the former officers
and directors. In addition, there is a dispute with the former owners of Woods
regarding the final disposition of amounts withheld from the purchase price,
which may be subject to further adjustment as a result of the claims by the
plaintiff. The extent or limit of any such adjustment cannot be predicted at
this time. An adverse judgment in this matter could have a material impact on
the Company's results of operations, liquidity and financial position if the
Company were not able to exercise recourse against the former owner of Woods.
3. General
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome on certain claims. With respect to the
product liability and workers' compensation claims, Katy has provided for its
share of expected losses beyond the applicable insurance coverage, including
those incurred but not reported to the Company or its insurance providers, which
are developed using actuarial techniques. Such accruals are developed using
currently available claim information, and represent management's best
estimates. The ultimate cost of any individual claim can vary based upon, among
other factors, the nature of the injury, the duration of the disability period,
the length of the claim period, the jurisdiction of the claim and the nature of
the final outcome.
11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of 2003.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (NYSE). The
following table sets forth high and low sales prices for the common stock in
composite transactions as reported on the NYSE composite tape for the prior two
years and cash dividends declared during the respective periods.
Dividends
Period High Low Declared
------ ---- --- --------
2003
First Quarter $ 3.61 $ 2.54 $.000
Second Quarter 4.89 2.40 .000
Third Quarter 5.20 4.80 .000
Fourth Quarter 6.75 5.20 .000
2002
First Quarter $ 6.75 $ 3.40 $.000
Second Quarter 6.28 4.85 .000
Third Quarter 4.99 2.90 .000
Fourth Quarter 3.70 2.50 .000
Dividends are paid at the discretion of the Board of Directors. On March
30, 2001, our Board of Directors decided to suspend quarterly dividends in order
to preserve cash for operations.
As of March 15, 2004, there were approximately 680 holders of record of
our common stock, in addition to approximately 1,500 holders in street name, and
there were 7,880,877 shares of common stock outstanding.
13
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- -----------
(Thousands of Dollars, except per share data and ratios)
Net sales $ 436,410 $ 445,755 $ 447,108 $ 508,850 $ 511,933
========== ========== ========== ========== ===========
(Loss) income from continuing operations [a] $ (18,887) $ (53,083) $ (65,464) $ (9,111) $ 8,944
Discontinued operations [b] 9,523 (1,152) 2,202 3,653 1,511
Cumulative effect of a change in accounting
principle [b] [e] -- (2,514) -- -- --
---------- ---------- ---------- ---------- -----------
Net (loss) income $ (9,364) $ (56,749) $ (63,262) $ (5,458) $ 10,455
========== ========== ========== ========== ===========
(Loss) earnings per share - Basic:
(Loss) income from continuing operations $ (3.06) $ (7.67) $ (7.54) $ (1.08) $ 1.07
Discontinued operations 1.16 (0.14) 0.26 0.43 0.18
Cumulative effect of a change in accounting principle -- (0.30) -- -- --
---------- ---------- ---------- ---------- -----------
(Loss) earnings per common share $ (1.90) $ (8.11) $ (7.28) $ (0.65) $ 1.25
========== ========== ========== ========== ===========
(Loss) earnings per share - Diluted:
(Loss) income from continuing operations $ (3.06) $ (7.67) $ (7.54) $ (1.08) $ 0.91
Discontinued operations 1.16 (0.14) 0.26 0.43 0.18
Cumulative effect of a change in accounting principle -- (0.30) -- --
---------- ---------- ---------- ---------- -----------
(Loss) earnings per common share $ (1.90) $ (8.11) $ (7.28) $ (0.65) $ 1.21
========== ========== ========== ========== ===========
Total assets $ 241,708 $ 275,977 $ 347,955 $ 446,723 $ 493,104
Total liabilities 139,416 157,405 173,691 263,490 299,893
Preferred interest in subsidiary -- 16,400 16,400 32,900 32,900
Stockholders' equity 102,292 102,172 157,864 150,333 160,311
Long-term debt, excluding current portion 806 -- 12,474 771 150,835
Current portion of long-term debt 2,857 700 14,619 133,067 67
Revolving credit agreement, classified as current 36,000 44,751 57,000 -- --
Depreciation and amortization [c] 21,954 19,259 20,216 21,096 17,772
Capital expenditures 13,435 10,119 12,566 14,196 21,066
Working capital [d] 43,439 35,206 65,733 97,258 112,463
Ratio of debt to capitalization 27.9% 27.7% 32.5% 42.2% 43.8%
Weighted average common shares outstanding - Basic 8,214,712 8,370,815 8,393,210 8,403,701 8,366,178
Weighted average common shares outstanding -Diluted 8,214,712 8,370,815 8,393,210 8,403,701 10,015,238
Number of employees 1,808 2,261 2,922 3,509 3,834
Cash dividends declared per common share $ 0.00 $ 0.00 $ 0.00 $ 0.30 $ 0.30
[a] Includes distributions on preferred securities in 2003, 2002, 2001, 2000
and 1999.
[b] Presented net of tax.
[c] From continuing operations only.
[d] Defined as current assets minus current liabilities, exclusive of 1)
current balances of deferred tax assets and liabilities, and 2) debt
classified as current.
[e] This amount is a transitional impairment of goodwill recorded with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For purposes of this discussion and analysis section, reference is made to
the table below and the Company's Consolidated Financial Statements included in
Part II, Item 8. We have two principal operating groups: Maintenance Products
and Electrical Products. The group labeled as other consists of a minority
equity investment in a seafood harvesting and farming company, as well as the
limited partnership interest SESCO holds in the operator of a waste-to-energy
facility. Two businesses formerly included in the Electrical Products Group,
GC/Waldom and Hamilton, and one business formerly included in the Maintenance
Products Group, Duckback, have been classified as Discontinued Operations.
Duckback was sold on September 16, 2003, GC/Waldom was sold on April 2, 2003,
and Hamilton was sold on October 31, 2002.
Since the Recapitalization (as described in Item 1) on June 28, 2001, the
Company's management has been focused on the following initiatives:
o Restructuring of core operations: 35 facilities closed or
consolidated (including 3 to be closed by the end of 2004).
o Cost reductions: central services model, sourcing in Asia, product
re-engineering, headcount reductions, and improved management of raw
material price exposure.
o Balance sheet review: in light of ongoing business profitability and
requirements, approximately $90.0 million of obsolete assets were
impaired.
o Divestitures of non-core business: 4 businesses have been sold or
otherwise exited and proceeds have been applied to reduce debt.
o Re-development of new product pipeline: capital and management
expertise has been re-dedicated to this critical area.
o Organizational changes: across-the-board review of management talent
and key hires made.
With these initiatives accomplished or well under way, the Company's focus
has shifted to revenue growth through a variety of means (recent business "wins"
include new product introductions, introduction of products to new distribution
channels, and acquisitions). Our future cost reductions will come from process
improvements (such as Lean Manufacturing and Six Sigma), value engineering
products, improved sourcing/purchasing and lean administration.
Key elements in achieving profitability in the Maintenance Products Group
include 1) maintaining a low cost structure, both from a production and
administrative standpoint, and 2) providing outstanding customer service. Most
of the Maintenance Products Group products do not rely upon strong brand equity,
so achieving and maintaining a position as a low cost producer is a necessity,
given that our comparative price point on many products is below those of our
competitors. New product development is especially important in the
consumer/retail markets for Maintenance Products, as new products or beneficial
modifications of existing products increase demand from our customers, provide
novelty to the consumer, and offer an opportunity for favorable pricing from
customers in the national mass market retail area. Retention of customers, or
more specifically, product lines with those customers, is also very important in
the mass market retail area, given the vast size of these national accounts.
Prices for raw materials, especially plastic resins, have a very significant
impact on the Maintenance Products Group.
Key elements in achieving profitability in the Electrical Products Group
are in many ways similar to those mentioned for our Maintenance Products Group.
The achievement and maintenance of a low cost structure is critical given the
significant level of foreign competition, primarily from Asia and Latin America.
For this reason, in December 2002 and December 2003, Woods and Woods Canada,
respectively, ceased all manufacturing and initiated a fully outsourced strategy
for their consumer electrical products. Customer service, specifically the
ability to fill orders at a rate designated by our customers, is very important
to customer retention, given seasonal sales pressures in the consumer electrical
area. Retention of customers is critical in the Electrical Products Group, given
the size of national accounts.
15
Years Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 285,289 $ 300,336 $ 311,574
Operating loss (7,924) (22,736) (41,589)
Operating deficit (2.8%) (7.6%) (13.3%)
Impairments of long-lived assets 11,516 20,812 36,087
Severance, restructuring and related charges 5,720 13,629 3,489
Depreciation and amortization 20,162 17,625 19,414
Capital expenditures 12,366 9,228 9,975
Total assets 176,214 195,121 228,482
Electrical Products Group
Net external sales $ 151,121 $ 144,242 $ 130,949
Operating income (loss) 13,026 2,874 (166)
Operating margin (deficit) 8.6% 2.0% (0.1%)
Impairments of long-lived assets 364 392 1,565
Severance, restructuring and related charges 2,083 5,239 1,552
Depreciation and amortization 1,217 1,484 220
Capital expenditures 833 601 301
Total assets 51,353 48,228 51,591
Total Company [a]
Net external sales [b] $ 436,410 $ 445,755 $ 447,108
Operating loss [b] (8,905) (37,849) (72,776)
Operating deficit [b] (2.0%) (8.5%) (16.3%)
Impairments of long-lived assets [b] 11,880 21,204 47,469
Severance, restructuring and related charges [b] 8,132 19,155 13,380
Depreciation and amortization [b] 21,954 19,259 20,216
Capital expenditures [c] 13,435 10,119 12,566
Total assets [c] 241,708 275,977 347,955
[a] Included in "Total Company" are certain amounts in addition
to those shown for the Maintenance Products and Electrical Products segments,
including amounts associated with 1) unallocated corporate expenses, 2) our
equity investment in a shrimp harvesting and farming operation, and 3) SESCO's
limited partnership interest in the operation of a waste-to-energy facility. See
Note 19 to Consolidated Financial Statements for detailed reconciliations of
segment information to the Consolidated Financial Statements.
[b] Excludes discontinued operations
[c] Includes discontinued operations
2003 Compared to 2002
Company Overview
Overall, net sales for the Company declined $9.3 million, or 2% from 2002
levels, due to a volume decline of 3% and lower pricing of 1%, partially offset
by favorable currency translation of 2%. Gross margins held constant at
approximately 16.2% as the benefit of implemented cost reduction strategies
offset lower pricing, higher resin costs and atypically high depreciation (see
discussion under Maintenance Products Group - Operating income (loss) below).
Selling, general and administrative expenses (SG&A) as a percentage of sales
declined from 14.3% in 2002 to 13.7% in 2003. The operating deficit was reduced
significantly from $37.8 million to $8.9 million mostly as a result of reduced
severance, restructuring and related charges and lower impairments of long-lived
assets. Excluding these charges, the Company experienced operating profit of
$11.1 million during 2003 versus $2.5 million in 2002. To provide transparency
about measures of the Company's performance, we supplement the reporting of our
financial information under generally accepted accounting principles (GAAP) with
non-GAAP information on operating income (loss) excluding severance,
restructuring and related charges and impairments of long-lived assets. We
believe the use of this measure is a better indicator of the underlying
operating performance of the Company's businesses and allows us to make
meaningful comparisons of different operating periods.
16
Maintenance Products Group
An overall decline in net sales for the year (mostly due to volume
declines) along with high raw materials costs and atypically high depreciation
contributed to the reduced profitability (excluding severance, restructuring and
related charges and impairments of long-lived assets) of this group in 2003.
Operating results continue to be favorably impacted by the numerous cost
reduction initiatives including the consolidation of our facilities in the St.
Louis area as well as the consolidation of two abrasives facilities into our
Wrens, Georgia facility. In the fourth quarter of 2003, net sales were down 1%
from the fourth quarter of 2002 as compared to a 6% decline for the first nine
months of the year. Operating loss for the fourth quarter of 2003 was $1.6
million as compared to $5.4 million in the fourth quarter of 2002. Severance,
restructuring and related costs and impairments of long lived assets totaled
$6.2 million and $8.8 million in the three months ended December 31, 2003 and
2002, respectively. Excluding these costs, operating profit for the fourth
quarter of 2003 increased 36% over the same period last year.
Net sales
Net sales from the Maintenance Products Group decreased from $300.3
million in 2002 to $285.3 million in 2003, a decrease of 5%. The decline was due
to a volume decrease of 6%, partially offset by the favorable impact of exchange
rates of 1%. The sales shortfalls to the prior year were realized in the
businesses that sell to both commercial and consumer customers. On the
commercial side, sales were lower at Gemtex, primarily due to increased foreign
competition, and at Loren, primarily because a major customer increased their
supplier base in 2003. In addition, we believe that the Jan/San business unit
was impacted during the first three quarters of 2003 by the general economic
conditions and reduced demand for cleaning products, due to commercial real
estate vacancy rates and reduced demand in the travel and hospitality
industries. In the fourth quarter, sales for the Jan/San business unit were
higher in 2003 than in 2002 representing an improvement in the health of the
aforementioned industries. Sales were higher in the international markets for
Katy's commercial and sanitary maintenance products, primarily in the U.K. Sales
for the Consumer business unit, which sells primarily to mass market retail
customers, were lower due to the loss of certain product lines with major outlet
customers and to a lesser extent, downward pricing pressures and allowance,
rebate, and other programs. The U.K. consumer plastics business benefited
overall from stronger volumes and favorable exchange rates, partially offset by
price erosion similar to that in the U.S. business. In addition to continually
striving to reduce our cost structure, we are seeking to offset pricing
challenges by developing new products for the retail markets. The development of
new products is essential to remaining competitive and to maintaining strong
relationships with large national mass market retail customers. In the fourth
quarter of 2003, we centralized our customer service and administrative
functions for CCP divisions Jan/San, Glit/Microtron, and Wilen in one location,
allowing customers to order products from any CCP division on one purchase
order. The customer service and administrative functions for Disco, Loren and
CCP Canada will be added during 2004. We believe that operating these businesses
as a cohesive unit will improve customer service in that our customers'
purchasing processes will be simplified, as will follow up on order status,
billing, collection and other related functions. This should also increase
customer loyalty, help in attracting new customers and lead to increased top
line sales in future years.
Operating loss
The group's operating loss improved by $14.8 million from ($22.7) million
in 2002 to ($7.9) million in 2003, an improvement of 65%. The operating losses
were primarily a result of costs for severance, restructuring and related costs,
and asset impairments in both periods, which are discussed further below.
Excluding those items, operating income decreased by $2.4 million from $11.7
million in 2002 to $9.3 million in 2003. Profitability was lower at CCP's metal
truck box business, Loren and Gemtex, due to volume-related issues, while the
Consumer business in the U.S. and in the U.K. was negatively impacted by
top-line pricing pressures and an unfavorable mix of lower margin products. In
addition, the Consumer and Jan/San businesses worldwide experienced higher raw
material costs (principally resin) in 2003. Operating results were also
negatively impacted by $5.4 million of incremental depreciation related to the
revision of the estimated useful lives of certain manufacturing assets,
specifically molds and tooling equipment used in the manufacture of plastic
products, from seven to five years, effective January 1, 2003. This change in
estimate was made following significant impairments to these types of assets
recorded during 2002. These shortfalls were partially offset by improved results
at the CCP Jan/San business which benefited from the implementation of cost
reduction strategies.
Operating results in 2003 and 2002 were negatively impacted by several
unusual charges. In 2003, the group incurred severance, restructuring and
related charges of $5.7 million. The largest of these charges ($3.7 million)
relates principally to non-cancelable leases at abandoned facilities as a result
of the consolidation of the CCP facilities in the St. Louis area into CCP's
largest and most modern plant in Bridgeton, Missouri. The establishment of these
liabilities involves estimates of future sub-lease income, where we generally
assumed that the amount of sub-lease income on these facilities would increase
over time. Adjustments to these liabilities are possible in the future depending
upon the accuracy of sub-lease assumptions made. Charges of $1.2 million were
also incurred in 2003 relating to the restructuring of the abrasives business,
principally to consolidate the Lawrence, Massachusetts and Pineville, North
Carolina facilities into the newly expanded Wrens, Georgia location. The group
17
also incurred charges in 2003 related to the consolidation of the customer
service and administrative functions for CCP ($0.3 million), severance costs for
headcount reductions ($0.4 million) and costs related to the closure of CCP's
metals facility in Santa Fe Springs, California ($0.2 million). During 2002, the
Maintenance Products Group recorded $13.6 million of severance, restructuring
and related charges. Included in this amount was $11.7 million related to the
St. Louis facility consolidation (mostly for non-cancelable lease payments),
$0.9 million for severance costs related to various headcount reductions,
including the management level of various business units, $0.8 million in
consulting fees associated with outsourcing strategies, relating mainly to the
Wilen business unit and $0.2 million related to the consolidation of the
customer service and administrative functions for CCP.
The group recorded impairments of long-lived assets of $11.5 million
during 2003 and $20.8 million during 2002. Charges in 2003 included $7.1 million
related to idle and obsolete equipment, tooling and leasehold improvements at
Warson Road, Hazelwood, Bridgeton, and the Santa Fe Springs, California metals
facility, $1.3 million related to the closure of abrasives facilities in
Lawrence, Massachusetts and Pineville, North Carolina and the subsequent
consolidation into the Wrens, Georgia facility, and $0.4 million of obsolete
molds and tooling at our plastics facility in the United Kingdom. In addition,
$2.6 million of goodwill and patents of the Gemtex business unit were impaired
as it was determined that future cash flows of this business could not support
the carrying value of its intangible assets. The Gemtex unit has experienced a
decline in profitability in recent years principally as a result of increasing
foreign competition. In 2002, certain CCP property, plant and equipment,
primarily molds and tooling assets, were impaired by $15.3 million, and a
customer list intangible was impaired by $3.6 million. The majority of these
impairments were associated with assets used in the Consumer business, and were
the result of analyses indicating insufficient future cash flows over the
remaining useful life of the assets to cover the carrying values of the assets.
Given the unique nature of molds for specific products, the fair values, if any,
are often less than historical cost, resulting in impairments. The Wilen
business unit recorded asset impairments of $1.9 million, resulting from
management decisions on the future use of certain manufacturing assets in the
Atlanta, Georgia facility.
Total assets for the group decreased primarily as a result of the
impairments of $11.9 million, and due to the atypically high depreciation
expense related to the revision of lives of certain assets (both noted above).
Electrical Products Group
The Electrical Products Group continued its solid performance in 2003,
once again driven primarily by improved sales volume over 2002, and secondarily,
by higher margins over the prior year. In addition, during 2002 and 2003 a major
restructuring occurred within the Electrical Products Group. After significant
study and research into different sourcing alternatives, we decided that Woods
and Woods Canada would source substantially all of their products from Asia. In
December 2002, Woods shut down all U.S. manufacturing facilities, which were in
suburban Indianapolis and in southern Indiana. As a result of these plant
closures, 361 employees were terminated. In December 2003, Woods Canada shut
down its manufacturing facility in Toronto, Ontario, terminating 100 employees
in the process. See below for a discussion of severance and restructuring costs
and impairments recorded as a result of these facility closures.
Net sales
The Electrical Product Group's sales increased from $144.2 million in 2002
to $151.1 million in 2003, an increase of 5%. An increase in volume of 5% and
favorable currency translation of 3% was partially offset by lower pricing of
3%. Woods experienced year over year increase in volume as a result of a strong
fourth quarter in 2003. The improvement was primarily due to higher volumes of
direct import merchandise, which are shipped directly from our suppliers to our
customers, such as extension cords and power strips. Woods sales performance in
2003 also benefited from the introduction of new surge products, sales to new
customers and same store growth for its largest customer, a national mass market
retailer. Offsetting these volume increases was a slight reduction in pricing
which was implemented to remain competitive in certain product lines. Higher
sales at Woods Canada in 2003 compared to 2002 were principally due to the
impact of a stronger Canadian dollar versus the U.S. dollar. This increase was
offset partially by lower pricing mostly due to a shift during 2003 to direct
import products.
Operating income
The group's operating income increased from $2.9 million in 2002 to $13.0
million in 2003. Operating income in both years was reduced by costs for
severance, restructuring and related costs, and asset impairments, which are
discussed further below. Excluding these costs, operating income increased from
$8.5 million in 2002 to $15.5 million in 2003, an increase of 82%. Profitability
in 2003 was positively impacted by cost reduction strategies at both Woods and
Woods Canada. The most significant initiative benefiting 2003 was the closure of
the Woods manufacturing facility in December 2002, resulting in approximately
$4.6 million in savings. In December 2003, Woods Canada shut down its
manufacturing facility to pursue a fully outsourced product strategy similar to
Woods. Cost reduction initiatives at Woods Canada to reduce product and variable
costs also had a favorable impact on 2003. Higher sales volumes and favorable
currency translation also aided in maintaining
18
margins. During 2002, Woods incurred a loss of $0.9 million related to obsolete
raw material and packaging inventory on hand which could not be utilized
following the shutdown of the U.S. manufacturing facilities (see next
paragraph).
Operating results in 2003 and 2002 were negatively impacted by a number of
restructuring-related charges. During 2003, the group recognized $2.1 million of
severance, restructuring and related charges. Of this amount, $1.5 million
related to severance associated with the shutdown of the Woods Canada
manufacturing operations, $0.5 million at Woods primarily for an adjustment to a
non-cancelable lease accrual due to a change in sub-lease assumptions and $0.1
million of consulting fees associated with product outsourcing strategies. In
2002, the Electrical Products Group incurred consulting fees of $2.8 million
associated with product outsourcing strategies and charges related to the shut
down of all U.S. manufacturing operations and $2.4 million for severance and
other exit costs.
The group recorded impairments of $0.4 million in both 2003 and 2002
associated with the write down of certain equipment at Woods Canada and Woods as
a result of the closure of the manufacturing operations at both business units.
We believe that restructuring steps executed in 2002 and 2003 related to
the Woods and Woods Canada businesses will allow those businesses to remain
competitive within their markets. The fully outsourced product strategy has
reduced headcount at Woods by 361 employees (effective in December 2002) and
Woods Canada by 100 employees (effective in December 2003).
Total assets for the group increased primarily as a result of higher
accounts receivable balances due to stronger sales at the end of 2003 versus the
end of 2002.
Other
Sales from other operations decreased by $1.2 million, as a result of the
SESCO waste-to-energy operation being turned over to a third party in April
2002. The operating loss from other operations in 2002 was primarily
attributable to a charge of $6.0 million, relating to an obligation created by
Katy to the third party who took over daily operation of the SESCO facility.
Amounts will be paid in roughly equal installments through 2007. See Note 9 to
the Consolidated Financial Statements for Katy in Part II, Item 8, for a
discussion of the SESCO partnership transaction.
Discontinued Operations
Three business units are reported as discontinued operations for all
periods presented: Hamilton Precisions Metals, L.P. (Hamilton), GC/Waldom
Electronics, Inc. (GC/Waldom) and Duckback Products, Inc. (Duckback). Hamilton
generated $1.5 million of operating income in 2002 (prior to its sale on October
31, 2002). GC/Waldom reported operating loss of ($0.2) million in 2003 (prior to
its sale on April 2, 2003), versus a $6.3 million operating loss in 2002. Nearly
the entire operating loss of GC/Waldom in 2002 was the result of asset valuation
adjustments in anticipation of a sale of the business unit. A loss (net of tax)
of $0.2 million was recognized in the second quarter of 2003 as a result of the
GC/Waldom sale. Duckback generated operating income of $3.1 million in 2003
(prior to its sale on September 16, 2003) versus $2.8 million in 2002. A gain
(net of tax) of $7.6 million was recognized in the third quarter of 2003 as a
result of the Duckback sale.
Corporate
During 2003, the corporate group recorded $1.0 million of compensation
expense versus an insignificant amount in 2002 associated with stock
appreciation rights (SARs) and $0.3 million related to severance.
Interest, net was $0.1 million higher in 2003 as compared to 2002. During
2003, we wrote off $1.8 million of unamortized debt issuance costs due to the
reduction in our borrowing capacity as a result of the refinancing of our debt
obligations in February 2003 and due to the permanent reduction in term loan
debt resulting from proceeds of the sale of GC/Waldom and Duckback. The amount
of this write-off is included in interest expense. Excluding the write-off,
interest, net decreased by $1.8 million, or 29%, due mainly to lower average
borrowings during 2003, principally as a result of applying proceeds from the
sale of non-core businesses in 2002 and 2003. To a lesser extent, lower interest
rates contributed to the decline in interest expense. Other, net in 2003
included the write-off of certain deferred payment receivables associated with
businesses disposed of prior to 2002 ($0.7 million) and realized foreign
exchange losses ($0.6 million), offset partially by the net gain on the sale of
real estate assets ($0.5 million). Other, net in 2002 was comprised primarily of
realized foreign exchange losses ($0.4 million) and the loss on the sale of
assets ($0.1 million). Our effective tax rate in 2003 was 14%, indicating that a
$3.2 million tax benefit was recorded on a $22.0 million pretax loss from
continuing operations. A tax benefit was recorded on pre-tax loss to the extent
a provision was provided for the gain on sale of discontinued businesses and
income from operations of discontinued businesses. A further benefit was not
recorded due to the valuation allowance recorded against our net deferred tax
assets. See "Deferred Income Taxes" in "Critical Accounting Policies" and Note
16 to the Consolidated Financial Statements in Part II, Item 8, for further
discussion of income tax accounting. In 2002, we recorded a $2.5 million
transitional goodwill impairment, net of tax as a result of the adoption of SFAS
No. 142, which is shown on the Consolidated
19
Statements of Operations as a cumulative effect of a change in accounting
principle. See Note 4 to the Consolidated Financial Statements in Part II, Item
8 for a further discussion of goodwill impairments.
2002 Compared to 2001
Maintenance Products Group
The Maintenance Products Group had a mixed year in 2002. Operating income,
excluding severance, restructuring, and impairment charges, was up over 2001, as
the various cost reduction programs put into place over the last two years began
to impact results. While the improvement in profitability was a positive step,
significant improvement over 2001 was expected since 2001 was an especially weak
year in the Maintenance Products Group. Sales volumes were down overall from
2001, with the largest decrease in the Consumer business unit.
Net sales
Sales from the Maintenance Products Group decreased from $311.6 million in
2001 to $300.3 million in 2002, a decrease of 4%. The largest sales decrease
occurred within the consumer business, which sells primarily to mass market
retail customers. While certain product lines with retail customers remained
stable, the revenue declines were caused by the loss of certain product lines,
as well as selected price erosion with retail customers through allowance,
rebate, and other pricing programs. Sales in the Maintenance Products divisions
serving commercial markets (primarily Jan/San) were essentially flat versus
2001. Glit/Microtron's abrasives business saw a significant increase in sales
from 2001, with sales increasing year-over-year for seven of their top ten
customers. Glit/Microtron's sales increases included increases with several key,
sizable, janitorial/sanitation distributors. Glit/Microtron also grew its
business with a large national retail chain, for which Glit/Microtron supplies
their full stock of floor cleaning abrasive pads for internal use at their
stores nationwide. Sales were also higher in the international markets for
Katy's commercial and sanitary maintenance products, primarily in the U.K. and
Canada. These positive sales trends were offset by lower sales at CCP's Jan/San
business and at Wilen. The Maintenance Products Group also made positive steps
in 2002 toward managing the various janitorial/sanitation supply divisions as
one group, consolidating more of the customer service and administrative
functions of these divisions in St. Louis.
Operating loss
The group's operating loss improved by $18.9 million from ($41.6) million
in 2001 to ($22.7) million in 2002, an improvement of 45%. The operating loss
was primarily a result of costs for severance, restructuring and related costs,
and asset impairments, which are discussed further below. Excluding those items,
operating income improved by $13.7 million from ($2.0) million in 2001 to $11.7
million in 2002. The improvement in operating income was primarily driven by
various CCP business units. Glit/Microtron's operating income improvement was
driven by strong sales volume and cost reductions in numerous areas, including
raw materials, freight, and headcount. CCP's operating income improved mainly
due to cost reductions implemented on a continuing basis throughout 2001 and
2002. The Wilen business unit deteriorated during 2000 and 2001 due to
operational problems that were largely remedied in 2002. In addition,
significant new business was gained in early 2003 from a large national mass
market retail store chain, who will use Wilen mops for their in-store floor care
needs, providing meaningful levels of new sales to use capacity existing at the
Wilen plant. During 2001, the Maintenance Products Group recorded significant
valuation reserve adjustments associated with inventory and receivables,
totaling $3.5 million. Operating income improved by $1.8 million during 2002 as
a result of the cessation of goodwill amortization per the adoption of Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets.
Operating results in 2002 were negatively impacted by several unusual
charges. The group incurred severance and restructuring charges of $13.6
million. The largest of these charges was the establishment of $10.9 million of
liabilities for non-cancelable lease payments at abandoned St. Louis facilities,
the operations of which have been consolidated into CCP's largest and most
modern plant in Bridgeton, Missouri. Charges of $0.5 million were incurred in
2002 related to the movement of equipment and inventory from an abandoned
facility, and severance payments of $0.1 million were made to employees impacted
by this move. The Maintenance Products Group incurred approximately $0.8 million
in consulting fees associated with outsourcing strategies, relating mainly to
the Wilen business unit. While plans called for Wilen to continue in a
manufacturing capacity, the outsourcing project resulted in improved prices from
some new vendors on products that had already been outsourced. The group
incurred $0.4 million of severance costs related to various headcount
reductions, primarily at the management level of operating divisions. The
Maintenance Products Group also incurred $0.5 million associated with
transitioning administrative and accounting functions of Wilen and
Glit/Microtron to St. Louis, Missouri.
The Maintenance Products Group recognized impairment charges on certain
long-lived assets totaling $20.8 million in 2002. Certain CCP property, plant
and equipment, primarily molds and tooling assets, were impaired by $15.3
million, and a customer list intangible was impaired by $3.6 million. The
majority of these impairments was associated with assets used in the
20
CCP Consumer business, and was the result of analyses indicating insufficient
future cash flows to cover the carrying values of the assets. It was determined
that portions of the carrying values of certain assets would not be recovered by
future cash flows over the remaining useful life of the assets. Given the unique
nature of molds for specific products, the fair values, if any, are often less
than historical cost, resulting in impairments. The Wilen business unit recorded
asset impairments of $1.9 million, resulting from management decisions on the
future use of certain manufacturing assets in the Atlanta, Georgia facility.
Operating results in 2001 for the Maintenance Products Group were also
negatively impacted by several unusual charges. We recorded an impairment charge
of $33.0 million at Wilen as consistently poor operating performance led us to
conclude that the carrying values of certain long-lived assets were not
recoverable through future cash flows. In addition to the impairment at Wilen,
an additional $3.1 million of impairment charges were taken, related primarily
to management decisions regarding the discontinuance of certain property, plant
and equipment. Additional items that negatively impacted operating results
during 2001 include severance and restructuring charges of $3.5 million,
primarily at CCP and Wilen.
Total assets for the group decreased primarily as a result of the
impairments noted above, and due to the fact that depreciation expense exceeded
capital expenditures for the group.
Electrical Products Group
The Electrical Products Group had a positive year in 2002, driven
primarily by improved sales volume over 2001, and secondarily, by higher margins
over the prior year. In addition, during 2002 a major restructuring occurred at
the Woods business. After significant study and research into different sourcing
alternatives, we decided that Woods would source all of its products from Asia.
In December 2002, Woods shut down all U.S. manufacturing facilities, which were
in suburban Indianapolis and in southern Indiana. As a result of these plant
closures, 361 employees were terminated. The following charges were recorded
related to the shut down: severance and other closure costs of $2.4 million,
asset impairments of $0.4 million, and write-off of excess raw material
inventory on hand at the time of the shut down of $0.9 million.
Net sales
The Electrical Products Group's sales increased from $130.9 million in
2001 to $144.2 million in 2002, an increase of 10%. Higher sales volumes to the
two largest customers of Woods, both national mass market retailers, drove the
sales increase. Sales to these two customers combined were up $13.2 million, or
21%, from 2001. Higher volumes of direct import merchandise, which are shipped
directly from our suppliers to our customers, such as extension cords and power
strips, drove the higher sales to one of these customers. The strong
relationships with these large customers have provided a solid foundation for
growth in the Woods business. Woods Canada also experienced a significant sales
increase to its largest customer, also a large mass market retailer, to whom
sales were higher by 21%.
Operating income (loss)
The group's operating income increased from ($0.2) million in 2001 to $2.9
million in 2002. Operating income was reduced by costs for severance,
restructuring and related costs, and asset impairments, which are discussed
further below. Excluding these costs, operating income increased from $3.0
million in 2001 to $8.5 million in 2002, an increase of 183%. Higher sales
volumes aided in maintaining margins, and ongoing cost control has allowed Woods
and Woods Canada to reduce product and variable costs. During 2002, Woods
incurred a loss of $0.9 million related to the write-off of obsolete raw
material and packaging inventory on hand which could not be utilized following
the shutdown of the U.S. manufacturing facilities (see next paragraph).
Significant factors impacting 2001 results include lower of cost or market
inventory valuation adjustments totaling $4.3 million, the largest of which
related to the exit of certain licensed branded product lines by Woods in the
first quarter of 2001. Woods had entered into several proprietary licensed
branding agreements with several companies well known in the electronics and
computer industries, but efforts to market the products proved unsuccessful.
Woods also incurred a litigation loss reserve of $0.5 million. Woods also wrote
off a related $0.1 million amount of prepaid maintenance related to software
licenses (see next paragraph). Selling, general and administrative (SG&A)
expenses were negatively impacted in 2002 versus 2001, as a result of the
existence in 2001 of amortization of negative goodwill (an income item) of $1.7
million.
Operating results in 2002 were negatively impacted by a number of
restructuring-related charges. The Electrical Products Group incurred consulting
fees of $2.8 million associated with product outsourcing strategies. In December
2002, as mentioned above, Woods incurred charges related to the shut down of all
U.S. manufacturing operations of $2.4 million for severance and other exit
costs, and $0.4 million of impaired assets that were not be utilized following
the shut down of Woods' facilities. The group also incurred several unusual
charges in 2001. Woods incurred $1.5 million of severance and other exit costs
in early 2001 associated with the closure of several satellite manufacturing
facilities in southern Indiana. Asset impairments of $0.7 million were recorded,
related primarily to previously capitalized software licenses that were not
being used.
21
Other
Sales from other operations decreased by $3.4 million, or 74%, as a result
of the SESCO waste-to-energy facility operation being turned over to a third
party in April 2002, compared to a full year's sales in 2001. Operating income
from other operations in 2002 was driven by an unusual charge of $6.0 million,
relating to an obligation created by Katy to the third party who took over daily
operation of the SESCO facility. Amounts will be paid in roughly equal
installments through 2007. See Note 9 to the Consolidated Financial Statements
for Katy in Part II, Item 8, for a discussion of the SESCO partnership
transaction. Operating income in 2001 was impacted primarily by the $9.8 million
impairment of all of the long-lived assets of the SESCO operation. The assets
were written down in anticipation of a cash flow-negative transaction that would
be necessary for Katy to exit the SESCO business.
Discontinued Operations
Hamilton generated $1.5 million of operating income in 2002 (prior to its
sale on October 31, 2002), versus operating income of $3.5 million in 2001.
Hamilton's business was affected by general economic conditions and lower
capital spending within the markets Hamilton serves. A gain of $3.3 million (net
of tax) was recognized in the fourth quarter of 2002 as a result of the Hamilton
sale. GC/Waldom incurred a $6.3 million operating loss in 2002, versus a $2.5
million operating loss in 2001. Nearly the entire operating loss of GC/Waldom in
2002 is the result of asset valuation adjustments in anticipation of a sale of
the business unit in early 2003. Duckback generated operating income of $2.8
million in 2002 versus $1.9 million in 2001.
Corporate
During 2001, the corporate group incurred $8.3 million of severance and
restructuring charges and $3.0 million of costs associated with completing the
Recapitalization. The majority of the severance and restructuring charges relate
to payments made in connection with management transition. Included in this
amount is approximately $1.0 million of charges that relate to outside
consultants working with Katy to modify operating and financial strategies, and
$0.7 million of non-cancelable rent and other exit costs associated with the
premature termination of our leased office facility in Englewood, Colorado. The
largest portions of the $3.0 million of costs associated with the
Recapitalization were non-capitalizable legal fees and investment banker fees,
board and committee fees and other internal incremental costs.
Total assets at corporate decreased due to two primary items. Cash was
lower by $3.0 million due to more efficient management of borrowed funds at the
end of 2002 versus 2001 and net deferred tax assets were lower by $10.5 million
as a result of an additional valuation allowance provided in 2002.
Interest was lower by $3.6 million, or 25%, in 2002 compared to 2001,
primarily due to significant reductions in outstanding debt balances due to 1)
the infusion of equity capital with the Recapitalization on June 28, 2001, and
2) reductions in debt as a result of working capital reductions in the last half
of 2001. Our effective tax rate in 2002 was (17%), indicating that a $7.5
million tax provision was recorded on a $44.0 million pretax loss from
continuing operations. A net tax provision was recorded on the loss rather than
a net tax benefit because we determined that a greater valuation allowance was
required on our net deferred tax asset position. The effective tax rate in 2001,
while resulting in book benefit on a pretax book loss, was only 25%, due to a
significant increase in valuation allowances on net operating loss deferred tax
assets. See "Deferred Income Taxes" in "Critical Accounting Policies" and Note
16 to the Consolidated Financial Statements in Part II, Item 8, for further
discussion of income tax accounting. In 2002, we also recorded a $2.5 million
transitional goodwill impairment, net of tax, as a result of the adoption of
SFAS No. 142, which is shown on the Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle. See Note 4 to the
Consolidated Financial Statements in Part II, Item 8 for a further discussion of
goodwill impairments.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity was further improved in 2003, with overall debt
(including the preferred interest in a subsidiary) decreasing by $22.2 million
from $61.9 million at the end of 2002 to $39.7 million at the end of 2003. Cash
increased by $1.9 million from $4.8 million at the end of 2002 to $6.7 million
at the end of 2003. During 2003, we accomplished the following:
o In February 2003, we entered into a new credit agreement, agented by
Fleet Capital (Fleet Credit Agreement), which replaced the credit
agreement entered into at the time of the Recapitalization in June
of 2001 (Deutsche Bank Credit Agreement). The Fleet Credit Agreement
provides for $110 million of borrowing capacity, including $20
million of term debt and $90 million of revolving debt, with a
syndicate of banks, all of whom had participated in the Deutsche
Bank Credit Agreement. The Fleet Credit Agreement is an asset-based
lending agreement which expires on January 31, 2008.
o We were able to redeem at a 40% discount the remaining preferred
interest that the former owner of a subsidiary had held. This
balance sheet liability, which had a carrying value of $16.4 million
at December 31, 2002, was redeemed for $9.8 million in February
2003. The gain on this redemption was added to stockholders' equity,
and had a favorable impact on earnings per share. This redemption
resulted in a reduction of preferred cash distributions by
approximately $1.3 million annually, which had accrued at an annual
rate of 8%. After giving effect to the interest cost incurred by the
Company to fund the redemption, the net decrease in financing cost
for the Company is approximately $1.0 million annually.
o We generated operating cash flow of $8.0 million, despite $14.2
million of payments to satisfy severance, restructuring and related
liabilities.
o We incurred capital expenditures from continuing operations of $13.3
million, including $5.5 million for restructuring initiatives.
o We sold the GC/Waldom and Duckback businesses for net proceeds of
$7.4 million and $16.2 million, respectively, and we used those
proceeds to repay outstanding debt.
o Total debt was 27.9% of total capitalization at December 31, 2003
versus 30.8% at December 31, 2002.
While our net loss in 2003 was $9.4 million, it included many significant
non-cash events such as depreciation and amortization ($22.0 million),
impairments of long-lived assets ($11.9 million), the write-down of our equity
investment in Sahlman ($5.5 million), and the write-off and amortization of
capitalized debt costs ($3.0 million). We used $9.8 million in cash related to
operating assets and liabilities; however, excluding $14.2 million of payments
related to severance, restructuring and related liabilities, operating assets
and liabilities provided cash of $4.4 million. By the end of 2003, we were
turning our inventory at 5.6 times per year versus 5.5 times per year in 2002.
The Fleet Credit Agreement allows us to more efficiently leverage our
entire asset base, and to create more borrowing room under our revolving credit
facility, which is based on the liquidation values of accounts receivable and
inventories. The term loan is collateralized by real and personal property.
Below is a summary of the sources and uses associated with the funding of the
Fleet Credit Agreement:
(Thousands of Dollars)
Sources:
Term loan borrowings under the Fleet Credit Agreement $20,000
Revolving loan borrowings under the Fleet Credit Agreement 43,743
-------
$63,743
=======
Uses:
Payment of interest and principal under the Deutsche Bank Credit Agreement $52,895
Purchase of outstanding preferred interest of a subsidiary at a discount 9,840
Payment of accrued distributions on outstanding preferred interest of a
subsidiary 122
Certain costs associated with the Fleet Credit Agreement 886
-------
$63,743
=======
Under the Fleet Credit Agreement, the term loan originally had a final
maturity date of February 3, 2008 and quarterly repayments of $0.7 million,
three of which were made on April 1, July 1 and October 1, 2003, respectively.
However, the net proceeds received from the GC/Waldom and Duckback sales (see
above), were used to prepay the term loan, which is now
23
scheduled to be repaid in its entirety by early 2005. The revolving credit
facility has an expiration date of January 31, 2008. Unused borrowing
availability on the revolving credit facility was $16.3 million at February 27,
2004.
Our borrowing base under the Fleet Credit Agreement is reduced by the
outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom we conduct business may
require letters of credit in the future that either 1) do not exist today or 2)
would be at higher amounts than those that exist today. Currently, our largest
letters of credit relate to our casualty insurance programs. At December 31,
2003, total outstanding letters of credit were $9.1 million.
All extensions of credit under the Fleet Credit Agreement are
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the Fleet Credit Agreement. Until June 30, 2003, interest accrued on revolving
borrowings at 225 basis points over applicable LIBOR rates, and at 250 basis
points over LIBOR for term borrowings. Subsequent to June 30, 2003 and in
accordance with the Fleet Credit Agreement, Katy's margins dropped an additional
25 basis points from the pre-June 30 levels on both the revolving credit
facility and the term loan based on the achievement of a financial covenant
target. During October 2003, also in accordance with the Fleet Credit Agreement,
margins on the term borrowings dropped an additional 25 basis points a the
balance of the term loan was reduced below $10.0 million as a result of the
application of the proceeds from the Duckback sale. Interest accrues at higher
margins on prime rates for swing loans, the amounts of which were nominal at
December 31, 2003.
Katy incurred $1.6 million in debt issuance costs in 2003 associated with
the Fleet Credit Agreement. Additionally, at the time of the inception of the
Fleet Credit Agreement, Katy had approximately $5.6 million of unamortized debt
issuance costs associated with the Deutsche Bank Credit Agreement. Based on the
pro rata reduction in borrowing capacity from the Deutsche Bank Credit Agreement
to the Fleet Credit Agreement and in the connection with the sale of assets
(primarily the GC/Waldom and Duckback businesses), Katy charged to expense $1.8
million of previously unamortized debt issuance costs. The remainder of the
previously capitalized costs, along with the capitalized costs from the Fleet
Credit Agreement is being amortized over the life of the Fleet Credit Agreement
through January 2008.
The revolving credit facility under the Fleet Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence of a
material adverse effect (MAE) clause in the Fleet Credit Agreement, causes the
revolving credit facility to be classified as a current liability, per guidance
in the Emerging Issues Task Force (EITF) Issue No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement.
However, the Company does not expect to repay, or be required to repay, within
one year, the balance of the revolving credit facility classified as a current
liability. The MAE clause, which is a fairly typical requirement in commercial
credit agreements, allows the lender to require the loan to become due if it
determines there has been a material adverse effect on our operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the revolving credit facility as a current liability is a result only of the
combination of the two aforementioned factors: the lockbox agreements and the
MAE clause. The revolving credit facility does not expire or have a maturity
date within one year, but rather has a final expiration date of January 31,
2008. Also, we were in compliance with the applicable financial covenants at
December 31, 2003. The lender had not notified us of any indication of a MAE at
December 31, 2003, and we were not in default of any provision of the Fleet
Credit Agreement at December 31, 2003.
The Fleet Credit Agreement, and the additional borrowing ability on
revolving credit obtained by incurring new term debt, results in three important
benefits related to the long-term strategy of Katy: 1) allowed us to redeem
early at a discount a preferred interest obligation of a subsidiary, 2) provides
borrowing power to invest in capital expenditures key to our strategic
direction, and 3) provides working capital flexibility to build inventory when
necessary to accommodate lower cost outsourced finished goods inventory. We
believe that our operations and the Fleet Credit Agreement provide sufficient
liquidity for our operations going forward.
Funding for capital expenditures and working capital needs is expected to
be accomplished through the use of available borrowings under the Fleet Credit
Agreement. Anticipated capital expenditures are expected to be slightly higher
in 2004 than in 2003, mainly due to additional investments planned for the
development of new products. Restructuring and consolidation activities are
important to reducing our cost structure to a competitive level.
We have a number of obligations and commitments, which are listed on the
schedule later in this section entitled "Contractual Obligations and Commercial
Commitments." We have considered all of these obligations and commitments in
structuring our capital resources to ensure that they can be met. See the notes
accompanying the table in that section for further discussions of those items.
24
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
In addition to the sale of the GC/Waldom and Duckback businesses in 2003 for
aggregate proceeds of $23.6 million (see above), we have sold additional assets
in 2003 (primarily excess real estate) for proceeds of $2.8 million. The largest
of these was the February 3, 2003 sale of the Woods manufacturing facility in
Moorseville, Indiana. Gross proceeds were $1.9 million, of which $0.7 million
was used to repay a mortgage loan payable on the property. The remainder of the
proceeds reduced our debt obligations.
OFF-BALANCE SHEET ARRANGEMENTS
See Note 9 to the Consolidated Financial Statements in Part II, Item 8 for
a discussion of SESCO.
CONTRACTUAL OBLIGATIONS
We also enter into operating lease agreements in the ordinary course of
business, and many of our facilities are leased. Contractual obligations
associated with these leases are listed in the table under the following section
entitled "Contractual Obligations and Commercial Obligations."
Contractual Obligations and Commercial Obligations
Katy's obligations are summarized below:
(In thousands of dollars)
Due in less Due in Due in Due after
Contractual Cash Obligations Total than 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----- ----------- --------- --------- -------
Revolving credit facility [d] $36,000 $ -- $ -- $36,000 $ --
Term loans 3,663 2,857 806 -- --
Operating leases [c] 33,892 9,412 13,734 8,877 1,869
Severance and restructuring [c] 4,213 2,499 1,293 215 206
SESCO payable to Montenay [b] 4,800 1,000 2,050 1,750 --
------- ------- ------- ------- -------
Total Contractual Obligations $82,568 $15,768 $17,883 $46,842 $ 2,075
======= ======= ======= ======= =======
Due in less Due in Due in Due after
Other Commercial Commitments Total than 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----- ----------- --------- --------- -------
Commercial letters of credit $ 749 $ 749 $ -- $ -- $ --
Stand-by letters of credit 8,379 8,379 -- -- --
Guarantees [a] 30,435 6,765 23,670 -- --
------- ------- ------- ------- -------
Total Commercial Commitments $39,563 $15,893 $23,670 $ -- $ --
======= ======= ======= ======= =======
[a] As discussed in Note 9 to the Consolidated Financial Statements in Part II,
Item 8, SESCO, an indirect wholly-owned subsidiary of Katy, is party to a
partnership that operates a waste-to-energy facility, and has certain
contractual obligations, for which Katy provides certain guarantees. If the
partnership is not able to perform its obligations under the contracts, under
certain circumstances SESCO and Katy could be subject to damages equal to the
amount of Industrial Revenue Bonds outstanding (which financed construction of
the facility) less amounts held by the partnership in debt service reserve
funds. Katy and SESCO do not anticipate non-performance by parties to the
contracts.
[b] Amount owed to Montenay as a result of the SESCO partnership, discussed in
Note 9 to the Consolidated Financial Statements. $1.0 million of this obligation
is classified in the Consolidated Balance Sheets as an Accrued Expense in
Current Liabilities, while the remainder is included in Other Liabilities,
recorded on a discounted basis.
[c] These obligations represent liabilities associated with restructuring
activities, other than liabilities for non-cancelable lease rentals. Future
non-cancelable lease rentals are included in the line entitled "Operating
leases." The Consolidated Balance Sheet at December 31, 2003, includes $6.9
million in discounted liabilities associated with non-cancelable operating lease
rentals, net of estimated sub-lease revenues, related to facilities that have
been abandoned as a result of restructuring and consolidation activities.
25
[d] As discussed in the Liquidity and Capital Resources section above, the
entire revolving credit facility under the Fleet Credit Agreement is classified
as a current liability on the Consolidated Statements of Financial Position as a
result of the combination in the Fleet Credit Agreement of 1) lockbox agreements
on Katy's depository bank accounts and 2) a subjective Material Adverse Effect
(MAE) clause.
OTHER ITEMS
Effect of Transactions with Related and Certain Other Parties
In connection with the Contico International, L.L.C. (now CCP) acquisition
on January 8, 1999, we entered into building lease agreements with Newcastle
Industries, Inc. (Newcastle). Lester Miller, the former owner of CCP, and a Katy
director from 1999 to 2000, is the majority owner of Newcastle. Since the
acquisition of CCP, several additional properties utilized by CCP are leased
directly from Lester Miller. Rental expense for these properties approximates
historical market rates. Related party rental expense for the years ended
December 31, 2003, 2002, and 2001 was approximately $0.5 million, $0.8 million,
and $1.5 million, respectively.
We paid Newcastle $0.1 million, $1.3 million and $2.0 million of preferred
distributions for each of the years ended December 31, 2003, 2002 and 2001,
respectively, on the preferred units of CCP held by Newcastle. The decreases in
distributions were due to the early redemptions (at a discount) of the preferred
interest at the time of the Recapitalization in June 2001 and in February 2003
(which was the remainder of the preferred interest). As a result, we do not owe
any further distributions.
Kohlberg & Co., L.L.C., an affiliate of Kohlberg Investors IV, L.P., whose
affiliate holds all 925,750 shares of our Convertible Preferred Stock, provides
ongoing management oversight and advisory services to Katy. We paid $0.5
million, $0.5 million and $0.3 million for such services in 2003, 2002 and 2001,
respectively. We expect to pay $0.5 million annually in future years.
SEVERANCE, RESTRUCTURING AND RELATED CHARGES
See Note 21 to the Consolidated Financial Statements in Part II, Item 8
for a discussion of severance, restructuring and related charges.
26
OUTLOOK FOR 2004
We anticipate only a modest improvement in 2004 from the general economic
conditions and business environment that existed in 2003. However, we have seen
recent improvement in the restaurant, travel and hotel markets to which we sell
products. We have seen continued strong sales performance from the Woods and
Woods Canada retail electrical corded products business, but we do not expect to
see the same level of year-over-year top line growth from those businesses in
2004 as we experienced in 2003. We have a significant concentration of customers
in the mass-market retail, discount and do-it-yourself market channels. Our
ability to maintain and increase our sales levels depends in part on our ability
to retain and improve relationships with these customers. In addition, we face
uncertainty with respect to the replacement of NOMA(R)-branded sales as Woods
Canada has lost the right to use the NOMA(R) trademark, effective mid-200