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, 2004
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, 2004), as of June 30,
2004 was $22,935,357. As of March 15, 2005, 7,945,377 shares of common stock,
$1.00 par value, were outstanding, the only class of the registrant's common
stock.
* 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 2005 annual meeting - Part III.
Exhibit index appears on page 86. Report consists of 96 pages.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (Katy or the Company) was organized as a Delaware
corporation in 1967 and has an even longer history of successful operations,
with some of its predecessor companies having been established for as long as 75
years. We are organized into two operating groups, Maintenance Products and
Electrical Products, and a corporate group. Each majority-owned company in the
two groups operates within a broad framework of policies and corporate goals.
Katy's corporate group 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).
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 12 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.
Since the Recapitalization, the Company's management has been focused on
the following restructuring and cost reduction initiatives:
o Consolidation of facilities: 35 manufacturing, distribution and
office facilities closed or consolidated (including 2 to be closed
during 2005); manufacture and distribution of each business unit
centralized; Electrical Products manufacturing outsourced to Asia.
o Divestitures of non-core operations: 4 non-core business units have
been sold or otherwise exited and proceeds have been applied to
reduce debt.
o Selling general and administrative (SG&A) cost rationalization:
restructured duplicative corporate and support functions; overhead
reduced; implemented shared sales, administrative and support
services model.
o Organizational changes: across-the-board review of management talent
and key hires made at both the corporate and operational levels.
With these initiatives nearly complete, the Company's focus has shifted to
sustaining revenue growth and managing raw material costs. Our future cost
reductions, if any, will continue to 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 17 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 have restructured 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 and distribution operations. We have incurred significant costs in
this respect, approximately $44 million since the beginning of 2001. As our
post-Recapitalization restructuring plan winds down, we expect to incur
additional costs of approximately $1.5 million to $2.5 million in 2005, mostly
related to the consolidation of abrasives facilities. Additional details
regarding severance, restructuring and related charges can be found in Note 19
to the Consolidated Financial Statements of Katy included in Part II, Item 8.
2
Maintenance Products Group
The Maintenance Products Group's principal business is the manufacturing
and distribution of commercial cleaning products as well as consumer home and
automotive storage products. Commercial cleaning products are sold primarily to
janitorial/sanitary and foodservice distributors who supply end users such as
restaurants, hotels, healthcare facilities and schools. Consumer home and
automotive storage products are primarily sold through major home improvement
and mass market retail outlets. Total revenues and operating loss for the
Maintenance Products Group during 2004 were $278.9 million and ($2.7) million,
respectively. The group accounted for 61% of the Company's revenues in 2004.
Total assets for the group were $154.6 million at December 31, 2004. The
business units in this group are:
Continental Commercial Products, LLC (CCP) is the successor entity to
Contico International, L.L.C. (Contico) and includes as divisions all the former
business units of Contico (JanSan Plastics, Consumer Plastics, Metal Truck Box
and Container), as well as the following business units: Filters and
Grillbricks, Domestic Abrasives and Textiles. 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 JanSan Plastics business unit is a plastics manufacturer and a
distributor of products for the commercial janitorial/sanitary maintenance
and food service markets. JanSan Plastics products include commercial
waste receptacles, buckets, mop wringers, janitorial carts, and other
products designed for commercial cleaning and food service. JanSan
Plastics products are sold under the following brand names:
Continental(R), Kleen Aire(TM), Huskee(TM), SuperKan(TM), KingKan(TM),
Unibody(TM) and Tilt'N Wheel(TM).
The Consumer Plastics business unit is a plastics manufacturer and
distributor of home storage products, sold primarily through major home
improvement and mass market retail outlets. Consumer Plastic products
include plastic home storage units such as domestic storage containers,
shelving and hard plastic gun cases and are sold under the following brand
names: Contico(R) and Tuffbin(R).
The Metal Truck Box business unit is a manufacturer and distributor of
aluminum and steel automotive storage products, sold primarily through
major home improvement outlets. Metal Truck Box products are sold under
the following brand names: Husky(R), Tradesman(R) and Tuff Box(R).
Husky(R) is a registered trademark of Stanley Works.
The Container business unit is a plastics manufacturer and distributor of
industrial storage drums, pails and bins for commercial and industrial
use. Products are sold under the Contico(R) Container brand name.
The Filters and Grillbricks business unit (operating under the Disco name)
is a manufacturer and distributor of filtration, cleaning and specialty
products sold to the restaurant/food service industry. Filters and
Grillbricks products include fryer filters, oil stabilizing powder, grill
cleaning implements and other food service items and are sold under the
Disco name as well as Britesorb(TM), and the Brillo(R) line of cleaning
products.
The Abrasives business unit (operating under the Glit-Microtron and Loren
names) is a manufacturer and distributor of non-woven abrasive products
for commercial and industrial use and also supplies materials to various
original equipment manufacturers (OEM). The Abrasives unit's products
include floor maintenance pads, hand pads, scouring pads, specialty
abrasives for cleaning and finishing and roof ventilation products.
Products are sold primarily in the commercial sanitary maintenance, food
service and construction markets. Glit-Microtron and Loren products are
sold under the following brand names: Glit Kleenfast(R), Fiber
Naturals(R), Big Boss II(R), Blue Ice(R), Brillo(R), BAB-O(R) and Old
Dutch(R) brand names. Brillo(R), Old Dutch(R) and BAB-O(R) are registered
trademarks used under license.
This unit's primary manufacturing facilities are in Wrens, Georgia,
Lawrence, Massachusetts and Pineville, North Carolina. The Lawrence and
Pineville facilities are expected to close during 2005 and their
operations consolidated into the Wrens facility.
The Textiles business unit (operating under the Wilen name) is a
manufacturer and distributor of professional cleaning products which
includes mops, brooms, brushes, and plastic cleaning accessories. Textiles
products are sold primarily through commercial sanitary maintenance and
food service markets, with some products sold through consumer retail
outlets. Products are sold under the following brand names:
Wax-o-matic(TM), Wilen(TM) and Rototech(R).
The Maintenance Products Group also has operations in Canada and the United
Kingdom.
3
The CCP Canada business unit, headquartered in Etobicoke, Ontario, Canada,
is a distributor of primarily plastic products for the commercial and sanitary
maintenance markets in Canada.
The Abrasives Canada business unit (operating under the name Gemtex) is
headquartered in Etobicoke, Ontario, Canada, and is a manufacturer and
distributor of resin fiber disks and other coated abrasives for the OEM's,
automotive, industrial, and home improvement markets. The most prominent brand
name under which the product is sold is TRIM-KUT(R).
The UK JanSan Plastics business unit (operating under the Contico
Manufacturing, Ltd. name) is a distributor of a wide range of cleaning
equipment, storage solutions and washroom dispensers for the commercial and
sanitary maintenance and food service markets in the United Kingdom (U.K.) and
Ireland.
The UK Consumer Plastics business unit (operating under the Contico Europe
Limited name), is a manufacturer and distributor of plastic consumer storage and
home products, sold primarily to major retail outlets in the U.K.
Electrical Products Group
The Electrical Products Group's principal business is the design and
distribution of consumer electric corded products. Products are sold principally
to national home improvement and mass merchant retailers, who in-turn sell to
consumer end-users. Total revenues and operating income for the Electrical
Products Group during 2004 were $178.7 million and $16.8 million, respectively.
The group accounted for 39% of the Company's revenues in 2004. Total assets for
the group were $57.7 million at December 31, 2004. Woods Industries, Inc. (Woods
US) and Woods Industries (Canada), Inc. (Woods Canada) are both subject to
seasonal sales trends in connection with the holiday shopping season, with
stronger sales and profits realized in the third and early fourth quarters. The
business units in this group are:
The Woods US business unit is headquartered in Carmel, Indiana, and
distributes consumer electric corded products and electrical accessories.
Examples of Woods US products are outdoor and indoor extension cords, work
lights, surge protectors, and power strips. Woods US products are sold under the
following brand names: Woods(R), Yellow Jacket(R), Tradesman(R), SurgeHawk(R)
and AC/Delco(R). AC/Delco(R) is a registered trademark of The General Motors
Corporation. These products are sold primarily through national home improvement
and mass merchant retail outlets in the United States. Woods US' products are
sourced primarily from Asia.
The Woods Canada business unit is headquartered in Toronto, Ontario,
Canada, and distributes consumer electric corded products and electrical
accessories. In addition to the products listed above for Woods US, Woods
Canada's primary product offerings include garden lighting and timers. Woods
Canada products are sold under the following brand names: MoonRays(R),
Intercept(TM), and Pro Power(TM). These products are sold primarily through
major home improvement and mass merchant 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
Katy's other operations include a 43% equity investment in a shrimp
harvesting and farming operation, Sahlman Holding Company, Inc. (Sahlman), and a
100% interest in Savannah Energy Systems Company (SESCO), the limited partner in
a waste-to-energy facility operator.
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 Sahlman is an equity investment. During the third quarter of
2003, after a review of Sahlman's results for 2002 (and in the first half of
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 5 to the Consolidated Financial Statements of Katy included
in Part II, Item 8.
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 7 to the Consolidated Financial Statements
of Katy included in Part II, Item 8.
4
Discontinued Operations
In 2002 and 2003, we identified and sold certain business units 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. A gain of $3.3 million (net of tax) was recognized in the fourth
quarter of 2002 as a result of the Hamilton sale. Hamilton was formerly part of
the Electrical Products Group. 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. 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. GC/Waldom was formerly part of the Electrical
Products Group. 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. A
gain (net of tax) of $7.6 million was recognized in the third quarter of 2003 as
a result of the Duckback sale. Duckback was formerly part of the Maintenance
Products Group.
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 12%, respectively, of consolidated net sales. Sales to Wal*Mart are made
by the Woods US, Consumer Plastics, Domestic Abrasives, Woods Canada, Textiles
and JanSan Plastics business units. Sales to Lowe's are made by the Woods US and
Consumer Plastics business units. A significant loss of business from 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 $7.3
million and $7.8 million as of December 31, 2004 and 2003, respectively. The
orders placed in 2004 are believed to be firm and based on historical
experience, substantially all orders are expected to be shipped during 2005.
Electrical Products:
Our aggregate backlog position for the Electrical Products Group was $13.9
million and $6.0 million as of December 31, 2004 and 2003, respectively. The
orders placed in 2004 are believed to be firm and based on historical
experience, substantially all orders are expected to be shipped during 2005.
Markets and Competition
Maintenance Products:
We market a variety of commercial cleaning products and supplies to the
commercial janitorial/sanitary maintenance and foodservice markets. Sales and
marketing of these products is handled through a combination of direct sales
personnel, manufacturers' sales representatives, and wholesale distributors.
The commercial distribution channels for our commercial cleaning products
are highly fragmented, resulting in a large number of small customers, mainly
distributors of janitorial cleaning products. The markets for these commercial
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)
textiles and 4) foodservice. We believe that we have established long standing
relationships with our major customers based on quality products and service,
and a complete line of products. While each product line is marketed under a
different brand name, they are sold as complementary products, with customers
able to access all products through a single purchase order. We also continue to
strive to be a low cost provider in this industry; however, our ability to
remain a low cost provider in the industry is highly dependent on the price of
our raw materials, primarily resin (see discussion below). Being a low cost
producer is also dependent upon our ability to reduce and subsequently control
our cost structure, which has benefited from our nearly completed restructuring
efforts.
We market branded plastic home storage units and plastic, aluminum and
steel automotive storage, and to a lesser extent, abrasive products and mops and
brooms, to mass merchant and discount club retailers in the U.S. Sales and
marketing
5
of these products is generally handled by direct sales personnel and external
representative groups. The consumer distribution channels for these products,
especially the in-home and automotive storage products, are highly concentrated,
with several large mass merchant retailers representing a very significant
portion of the customer base. We compete with a limited number of large
companies that offer a broad array of products and many small companies with
niche offerings. With few consumer storage products enjoying patent protection,
the primary basis for competition is price. Therefore, efficient manufacturing
and distribution capability is critical to success. Ultimately, 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.
We continue to pursue new markets for our products. Our ability to remain a low
cost provider in the industry is highly dependent on the price of our raw
materials, primarily resin (see discussion above). Being a low cost producer is
also dependent upon our ability to reduce and subsequently control our cost
structure, which has benefited from our nearly completed restructuring efforts.
Our restructuring efforts have and will include consolidation of facilities and
headcount reductions.
We also market certain of our 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, mass merchant, hardware and electronic and office supply
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 outdoor and indoor extension cords, work lights, surge
protectors, power strips, garden lighting 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 the number of suburban homes and the consumer
demand for appliances, computers, home entertainment equipment, and other
electronic equipment.
The markets for our electrical products are highly competitive.
Competition is based primarily on price and the ability to provide a high level
of customer service in the form of inventory management, high fill rates and
short lead times. Other competitive factors include brand recognition, a broad
product offering, 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. In December 2002 and December
2003, Woods US and Woods Canada, respectively, closed their North American
manufacturing facilities and are now sourcing products almost entirely from
international suppliers.
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 JanSan Plastics and Consumer Plastics
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 have increased steadily from the latter half of 2002 through
the early months of 2005 with a notable acceleration in the second half 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 are equally
exposed to price changes for copper at our Woods US and Woods Canada business
units. Prices for copper increased in late 2003 and early 2004, stabilized in a
historically high range in mid-2004 and increased again in late 2004 and early
2005. Prices for aluminum and steel (raw materials used in our Metal Truck Box
business), corrugated packaging material and other raw materials have also
accelerated over the past year. 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 2004, we
experienced $33 million of cost increases in the primary raw materials used in
our products and inflation on other costs such as packaging materials, utilities
and freight. We were able to reduce the impact of these increases to
approximately $24 million through supply contracts, opportunistic buying, vendor
negotiations and other measures. These cost increases have continued in the
first quarter of 2005, and if sustained throughout 2005, would amount to an
increase of over $50 million compared to 2003. In 2004, we passed on about $15
million of these increases through price increases and are announcing additional
price increases in the first and second quarters this year. In a climate of
rising raw material costs (and especially in 2004), we experience difficulty in
raising prices to shift these higher costs to our customers for our plastic
6
products. Our future earnings may be negatively impacted to the extent further
increases in costs for raw materials cannot be recovered or offset through
higher selling prices. We cannot predict the direction our raw material prices
will take during 2005 and beyond.
Employees
As of December 31, 2004, we employed 1,793 people, of which 428 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 our St. Louis based business
units.
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 2005, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Note 18 to the Consolidated Financial Statements in Part II, Item
8.
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(R) (Woods US); Contico(R) (Consumer
Plastics); Continental(R) (JanSan Plastics); Glit(R), Microtron(R), Brillo(R),
and Kleenfast(R) (Abrasives) Wilen(TM) (Textiles); and Trim-Kut(R) (Abrasives
Canada). Companies most reliant upon patented products and technology are CCP,
Woods US, Woods Canada 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 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 the trademark license agreement. On November 5, 2003, Gentek's motion was
granted by the U.S. Bankruptcy Court. As a result, this trademark license
agreement is no longer in effect. Woods Canada used the NOMA(R) trademark
through mid-2004 and, subsequently lost the right to brand certain of its
product with the NOMA(R) trademark. Approximately 50% of Woods Canada's sales
were of NOMA(R) - branded products. Woods Canada is replacing those sales with
sales of other products and continues to act as a supplier for the new licensee
of the NOMA(R) trademark.
Available Information
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act. The public may read and copy any materials that the
Company files with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
Also, the SEC maintains an Internet Website that contains reports, proxy and
information statements, and other information regarding issuers, including Katy,
that file electronically with the SEC. The public can obtain documents that we
file with the SEC at http://www.sec.gov.
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.
7
Item 2. PROPERTIES
As of December 31, 2004, our total building floor area owned or leased was
3,274,000 square feet, of which 504,000 square feet were owned and 2,770,000
square feet were leased. The following table shows a summary by location of our
principal facilities including the nature of the facility and the related
business unit.
Location Facility Business Unit
-------- -------- -------------
UNITED STATES
California
Norwalk* Manufacturing, Distribution JanSan Plastics, Consumer Plastics,
Container
Santa Fe Springs* ** Distribution JanSan Plastics, Consumer Plastics,
Abrasives, Textiles
Filters & Grillbricks,
Connecticut
Middlebury* Corporate Headquarters Corporate
Georgia
Atlanta* Manufacturing, Distribution Textiles
McDonough* Manufacturing, Distribution Filters & Grillbricks
Wrens Manufacturing, Distribution Abrasives
Indiana
Carmel* Office Woods US
Indianapolis* Distribution Woods US
Massachusetts
Lawrence* ** Manufacturing, Distribution Abrasives
Missouri
Bridgeton* Office, Manufacturing, JanSan Plastics, Consumer Plastics
Distribution
Hazelwood* Manufacturing JanSan Plastics, Consumer Plastics
North Carolina
Pineville* ** Manufacturing Abrasives
Texas
Winters Manufacturing, Distribution Metal Truck Box
CANADA
Ontario
Toronto* Manufacturing, Distribution Abrasives Canada
Toronto* Distribution Woods Canada, CCP Canada
CHINA
Shenzhen* Office Woods US
UNITED KINGDOM
Cornwall
Redruth Manufacturing, Distribution UK Consumer Plastics,
UK JanSan Plastics
Berkshire
Slough* UK JanSan Plastics
* Facility is leased.
** During 2005 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. Also during 2005, we
expect to close our distribution facility in Santa Fe Springs, California
and relocate to a nearby facility in southern California.
8
We believe that our current facilities meet our needs in our existing markets
for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
General Environmental Claims
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions are involved in remedial
activities at certain present and former locations and have been identified by
the United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for environmental liabilities in amounts that it deems
reasonable. The ultimate costs will depend on a number of factors and the amount
currently accrued represents management's best current estimate of the total
costs to be incurred. The Company expects this amount to be substantially paid
over the next one to four years.
W.J. Smith Wood Preserving Company ("W.J. Smith")
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. 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 in
Denison, Texas (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
(RCRA) 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 the EPA 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.
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 Property. 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. 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. The Company 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 that 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. By
Memorandum Opinion and Order dated June 8, 2004, the Court granted the Company's
Motion for Summary Judgment on the federal jurisdictional claim and dismissed
the case. The Company has not been notified of an appeal and the time for
appealing the decision has passed.
9
Since 1990, the Company has spent in excess of $7.0 million undertaking
cleanup and compliance activities in connection with the WJ Smith 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.
Asbestos Claims
A. The Company has recently been named as a defendant in four lawsuits filed in
state court in Alabama by a total of approximately 24 individual plaintiffs.
There are over 100 defendants named in each case. In all four cases, the
plaintiffs claim that they were exposed to asbestos in the course of their
employment at a former U.S. Steel plant in Alabama and, as a result, contracted
mesothelioma, asbestosis, lung cancer or other illness. They claim that they
were exposed to asbestos in products in the plant which were manufactured by
each defendant. In three of the cases, plaintiffs also assert wrongful death
claims. The Company will vigorously defend the claims against it in these
matters.
B. Sterling Fluid Systems (USA) has tendered over 1,500 cases pending in
Michigan, New Jersey, Illinois, Nevada, Mississippi, Wyoming, Louisiana,
Massachusetts and California to the Company for defense and indemnification.
Sterling bases its tender of the complaints on the provisions contained in a
1993 Purchase Agreement between the parties whereby Sterling purchased the
LaBour Pump business and other assets from the Company. Sterling has not filed a
lawsuit against Katy in connection with these matters.
The tendered complaints all purport to state claims against Sterling and
its subsidiaries. The Company and its current subsidiaries are not named as
defendants. The plaintiffs in the cases also allege that they were exposed to
asbestos and products containing asbestos in the course of their employment.
Each complaint names as defendants many manufacturers of products containing
asbestos, apparently because plaintiffs came into contact with a variety of
different products in the course of their employment. Plaintiffs' claim that
LaBour Pump and/or Sterling may have manufactured some of those products.
With respect to many of the tendered complaints, the Company has taken the
position that Sterling has waived its right to indemnity by failing to timely
request it as required under the 1993 Purchase Agreement. With respect to the
balance of the tendered complaints, the Company has elected not to assume the
defense of Sterling in these matters.
C. LaBour Pump Company, a former subsidiary of the Company, has been named as a
defendant in over 280 similar cases in New Jersey. These cases have also been
tendered by Sterling. The Company has elected to defend these cases, many of
which have been dismissed or settled for nominal sums.
While the ultimate liability of the Company related to the asbestos
matters above cannot be determined at this time, the Company has recorded and
accrued amounts that it deems reasonable for prospective liabilities with
respect to this matter.
Non-Environmental Litigation - Banco del Atlantico, S.A.
In December 1996, Banco del Atlantico ("plaintiff"), a bank located in
Mexico, filed a lawsuit in Texas against Woods US, a subsidiary of Katy, and
against certain past and/or then present officers, directors and former owners
of Woods US (collectively, "defendants"). The plaintiff alleges that the
defendants participated in violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO") involving, among other things, allegedly fraudulently
obtained loans from Mexican banks (including the plaintiff) and "money
laundering" of the proceeds of the illegal enterprise. The plaintiff alleges
that it made loans to a Mexican corporation controlled by certain past officers
and directors of Woods US based upon fraudulent representations and guarantees.
The plaintiff also alleges violations of the Indiana RICO and Crime Victims Act,
common law fraud and conspiracy, fraudulent transfer claims, and seeks recovery
upon certain alleged guarantees purportedly executed by Woods Wire Products,
Inc., a predecessor company from which Woods US purchased certain assets in 1993
(prior to Woods US's ownership by Katy, which began in December 1996). 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.
After several years of procedural disputes, this lawsuit has become more
active recently. In 2003, by order of the Southern District of Texas court, the
case was 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. In December 2003, the plaintiff
filed an Amended Complaint. There have been various motions to dismiss filed by
the defendants. These motions have been denied by the court or have become
mooted by subsequent filings by the plaintiff.
In September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
"plaintiffs"), an additional owner of the Amended Complaint's claims against the
defendants, filed a Second Amended Complaint, which includes new allegations and
10
seeks additional relief from the defendants. The Second Amended Complaint also
adds new defendants (none of which is affiliated with the Company) and claims,
although the fundamental nature of the lawsuit, described above, remains the
same.
The Defendants filed motions to dismiss the Second Amended Complaint on
November 8, 2004. These motions sought dismissal of plaintiffs' Second Amended
Complaint on grounds of, among other things, forum non conveniens and failure to
state a claim. The plaintiffs have responded to defendants' motions and the
defendants have replied. A new Case Management Plan has also been entered in the
case, which ties further case deadlines, including the date for close of
discovery and trial of this action, to the Court's "last ruling" on the pending
motions to dismiss. Discovery is continuing.
The plaintiffs' Second Amended Complaint claims damages in excess of $24
million and requests that damages be trebled under Indiana and federal RICO,
and/or the Indiana Crime Victims Act. The Second Amended Complaint also requests
that the Court void certain transactions and asset sales as purported
"fraudulent transfers," including the 1993 Woods Wire Products, Inc. - Woods US
asset sale, and seeks other relief. Because various jurisdictional and
substantive 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 also have recourse against
the former owners of Woods US and others for, among other things, violations of
covenants, representations and warranties under the purchase agreement through
which Katy acquired Woods US, and under state, federal and common law. Woods US
may also have indemnity claims against the former officers and directors. In
addition, there is a dispute with the former owners of Woods US 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. While
the ultimate liability of the Company related to this matter cannot be
determined at this time, the Company has recorded and accrued amounts that it
deems reasonable for prospective liabilities with respect to this matter.
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 2004.
11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER MARKET PURCHASES OF EQUITY SECURITIES
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.
Period High Low
------ ---- ---
2004
First Quarter $6.50 $5.70
Second Quarter 6.47 4.71
Third Quarter 5.40 4.94
Fourth Quarter 5.45 4.36
2003
First Quarter $3.61 $2.54
Second Quarter 4.89 2.40
Third Quarter 5.20 4.80
Fourth Quarter 6.75 5.20
As of March 15, 2005, there were 636 holders of record of our common
stock, in addition to approximately 1,800 holders in street name, and there were
7,945,377 shares of common stock outstanding.
Dividend Policy
Dividends are paid at the discretion of the Board of Directors. Since the
Board of Directors suspended quarterly dividends on March 30, 2001 in order to
preserve cash for operations, the Company has not declared or paid any cash
dividends on its common stock. In addition, the Company's Amended and Restated
Loan Agreement (the "Bank of America Credit Agreement") prohibits the Company
from paying dividends on its securities, other than dividends paid solely in
securities. The Company currently intends to retain its future earnings, if any,
to fund the development and growth of its business and, therefore, does not
anticipate paying any dividends, either in cash or securities, in the
foreseeable future. Any future decision concerning the payment of dividends on
the Company's common stock will be subject to its obligations under the Bank of
America Credit Agreement and will depend upon the results of operations,
financial condition and capital expenditure plans of the Company, as well as
such other factors as the Board of Directors, in its sole discretion, may
consider relevant. For a discussion of our Bank of America Credit Agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Equity Compensation Plan Information
Information regarding securities authorized for issuance under the
Company's equity compensation plans as of December 31, 2004 is set forth in Item
12, "Security Ownership of Certain Beneficial Owners and Management."
Share Repurchase Plan
On April 20, 2003, the Company announced a plan to repurchase up to $5.0
million shares of its common stock. In 2004, 12,000 shares of common stock were
repurchased on the open market for approximately $0.1 million, while in 2003,
482,800 shares of common stock were repurchased on the open market for
approximately $2.5 million. We suspended further repurchases under the plan
again on May 10, 2004 and there currently are no plans to resume the share
repurchase program.
12
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Amounts in Thousands, except per share data and percentages)
Net sales $ 457,642 $ 436,410 $ 445,755 $ 447,108 $ 508,850
=========== ========== ========== ========== ==========
Loss from continuing operations [a] $ (36,121) $ (18,887) $ (53,083) $ (65,464) $ (9,111)
Discontinued operations [b] -- 9,523 (1,152) 2,202 3,653
Cumulative effect of a change in accounting principle [b] [c] -- -- (2,514) -- --
----------- ---------- ---------- ---------- ----------
Net loss $ (36,121) $ (9,364) $ (56,749) $ (63,262) $ (5,458)
=========== ========== ========== ========== ==========
(Loss) earnings per share - Basic and diluted:
Loss from continuing operations $ (6.45) $ (3.06) $ (7.67) $ (7.54) $ (1.08)
Discontinued operations -- 1.16 (0.14) 0.26 0.43
Cumulative effect of a change in accounting principle -- -- (0.30) -- --
----------- ---------- ---------- ---------- ----------
Loss per common share $ (6.45) $ (1.90) $ (8.11) $ (7.28) $ (0.65)
=========== ========== ========== ========== ==========
Total assets $ 224,464 $ 241,708 $ 275,977 $ 347,955 $ 446,723
Total liabilities 155,879 139,416 157,405 173,691 263,490
Preferred interest in subsidiary -- -- 16,400 16,400 32,900
Stockholders' equity 68,585 102,292 102,172 157,864 150,333
Long-term debt, including current maturities 58,737 39,663 45,451 84,093 133,838
Impairments of long-lived assets 30,831 11,880 21,204 47,469 --
Severance, restructuring and related charges 3,505 8,132 19,155 13,380 2,651
Depreciation and amortization [d] 14,266 21,954 19,259 20,216 21,096
Capital expenditures 13,876 13,435 10,119 12,566 14,196
Working capital [e] 59,855 43,439 35,206 65,733 97,258
Ratio of debt to capitalization 46.1% 27.9% 27.7% 32.5% 42.2%
Weighted average common shares outstanding - Basic and diluted 7,883,265 8,214,712 8,370,815 8,393,210 8,403,701
Number of employees 1,793 1,808 2,261 2,922 3,509
Cash dividends declared per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.30
[a] Includes distributions on preferred securities in 2003, 2002, 2001 and
2000.
[b] Presented net of tax.
[c] This amount is a transitional impairment of goodwill recorded with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
[d] From continuing operations only.
[e] Defined as current assets minus current liabilities, exclusive of deferred
tax assets and liabilities and debt classified as current.
13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY OVERVIEW
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 Sahlman and
SESCO. Two business units 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 for
the periods prior to their sale. 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, the Company's management has been focused on
the following restructuring and cost reduction initiatives:
o Consolidation of facilities: 35 manufacturing, distribution and office
facilities closed or consolidated (including 2 expected to be closed
during 2005); manufacture and distribution of each business unit
centralized; Electrical Products manufacturing outsourced to Asia.
o Divestitures of non-core operations: 4 non-core business units have been
sold or otherwise exited and proceeds have been applied to reduce debt.
o Selling general and administrative (SG&A) cost rationalization:
restructured duplicative corporate and support functions; overhead
reduced; implemented shared sales, administrative and support services
model.
o Organizational changes: across-the-board review of management talent and
key hires made at both the corporate and operational levels.
With these initiatives nearly complete, the Company's focus has shifted to
sustaining revenue growth and containing raw material costs. Our future cost
reductions are expected to continue to come from process improvements (such as
Lean Manufacturing and Six Sigma), value engineering products, improved
sourcing/purchasing and lean administration.
End-user demand for our Maintenance and Electrical products is relatively
stable and recurring, particularly in comparison to other traditional
manufacturing segments. Demand for products in our markets is strong and
supported by the necessity of the products to users, creating a steady and
predictable market. In the core janitorial/sanitary and foodservice segments,
sanitary and health standards create a steady flow of ongoing demand. The
consumable or short-life nature of most of the products used for cleaning
applications (primarily floor pads, hand pads, and mops, brooms and brushes)
means that they are replaced frequently, creating further demand stability.
During the past few years, we did experience limited recession-driven sales
declines, which we believe was primarily attributable to both reductions in
inventory held by distributors as well as reduced end-user consumption caused by
declines in airport occupancy (particularly after September 11th) and general
hospital occupancy. In addition, many of our Electrical products can be
characterized as "value" items that are frequently lost or discarded, with
subsequent replacement ensuring continuing and stable demand. This is
particularly the case with electrical cords, which consistently experience
strong sales ahead of the holiday season.
The markets in which we compete are expected to experience steady growth
over the next several years. Our core commercial cleaning product markets are
expected to grow at rates approximating gross domestic product (GDP), driven by
increasing sanitary standards as a result of heightened health concerns. In
addition, the improvement in general economic conditions will increase demand
for Katy's cleaning products, due to higher commercial occupancy rates and
increased demand for travel and hospitality industries. The consumer plastics
market as a whole is relatively mature, with its growth characteristics linked
to household expenditures. Demand is driven by the increasing competition of
material possessions by North American households and the desire of consumers to
store those possessions in an attractive and orderly manner. Demand for consumer
plastic storage products is also typically stable, due to consumer perception of
these products as "value" items. The market for automotive storage units, is
driven by sales of trucks, sports utility vehicles (SUV's) and cross/utility
vehicles (CUV's) which grew at a combined average rate of 3.9% per annum between
2000 and 2002. End-users are relatively insensitive to both price and brand-name
offering, instead focusing on product quality and size.
We estimate that the North American market for cords and work lights will
grow at above-GDP growth rates, driven by the growing number of suburban homes
(particularly those with outdoor spaces) and the growth in the use of outdoor
appliances. The market for surge protectors and multiple outlet products is also
expected to grow at above-GDP growth rates driven by the continued use in
consumer purchasers of appliances, computers, home entertainment equipment, and
other electronic equipment, as well as the growing public awareness of the need
to protect these products from power surges.
Key elements in achieving profitability in the Maintenance Products Group
include 1) maintaining a low cost structure, from a production, distribution and
administrative standpoint, 2) providing outstanding customer service and 3)
14
containing raw material costs (especially plastic resins) or raising prices to
shift these higher costs to our customers for our plastic products. In addition
to continually striving to reduce our cost structure, we are seeking to offset
pricing challenges by developing new products for the consumer markets, 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 merchant retail area.
Retention of customers, or more specifically, product lines with those
customers, is also very important in the mass merchant retail area, given the
vast size of these national accounts. Since the fourth quarter of 2003, we
centralized our customer service and administrative functions for CCP divisions
JanSan Plastics, Abrasives (Glit-Microtron portion only), Textiles and Filters
and Grillbricks in one location, allowing customers to order products from any
CCP commercial unit on one purchase order. We expect to add the customer service
and administrative functions for the remaining Abrasives operations during 2005.
We believe that operating these business units 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. We believe that this may increase customer loyalty, help in
attracting new customers and lead to increased top line sales in future years.
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 US 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. Woods US and Woods Canada are both subject to seasonal sales trends in
connection with the holiday shopping season, with stronger sales and profits
realized in the third and early fourth quarters. Retention of customers is
critical in the Electrical Products Group, given the size of national accounts.
See "OUTLOOK FOR 2005" in this section for discussion of recent
developments related to the Maintenance Products Group and the Electrical
Products Group.
15
Years Ended December 31,
---------------------------------------------------------------
2004 2003 2002
------------------- ------------------- --------------------
(Amounts in Millions, except per share data and percentages)
------- ---------- ------- ---------- --------------------
$ % to Sales $ % to Sales $ % to Sales
------- ---------- ------- ---------- ------- ----------
Net sales $ 457.6 100.0 $ 436.4 100.0 $ 445.8 100.0
Cost of goods sold 396.6 86.7 365.5 83.8 373.6 83.8
------- ---------- ------- ---------- ------- ----------
Gross profit 61.0 13.3 70.9 16.2 72.2 16.2
Selling, general and administrative expenses 57.3 (12.5) 59.8 (13.7) 63.7 (14.3)
Impairments of long-lived assets 30.8 (6.7) 11.9 (2.7) 21.2 (4.8)
Severance, restructuring and related charges 3.5 (0.8) 8.1 (1.8) 19.1 (4.3)
Loss on SESCO joint venture transaction -- -- -- -- 6.0 (1.3)
------- ----- ------- ----- ------- -----
Operating loss (30.6) (6.7) (8.9) (2.0) (37.8) (8.5)
===== ===== =====
Equity in (loss) income of equity method investment -- (5.7) 0.3
Gain (loss) on sale of assets 0.3 0.6 (0.2)
Interest expense (4.0) (6.2) (6.2)
Other, net (0.9) (1.8) (0.1)
------- ------- -------
Loss from continuing operations before (provision) benefit for
income taxes (35.2) (22.0) (44.0)
(Provision) benefit for income taxes from continuing operations (0.9) 3.2 (7.5)
------- ------- -------
Loss from continuing operations before distributions on preferred
interest of subsidiary (36.1) (18.8) (51.5)
Distributions on preferred interest of subsidiary (net of tax) -- (0.1) (1.6)
------- ------- -------
Loss from continuing operations (36.1) (18.9) (53.1)
Income (loss) from operations of discontinued businesses
(net of tax) -- 2.1 (4.5)
Gain on sale of discontinued businesses (net of tax) -- 7.4 3.3
------- ------- -------
Loss before cumulative effect of a change in accounting principle (36.1) (9.4) (54.3)
Cumulative effect of a change in accounting principle (net of tax) -- -- (2.5)
------- ------- -------
Net loss (36.1) (9.4) (56.8)
Gain on early redemption of preferred interest of subsidiary -- 6.6 --
Payment in kind of dividends on convertible preferred stock (14.8) (12.8) (11.1)
------- ------- -------
Net loss attributable to common stockholders $ (50.9) $ (15.6) $ (67.9)
======= ======= =======
Loss per share of common stock - basic and diluted:
Loss from continuing operations $ (4.58) $ (2.30) $ (6.34)
Gain on early redemption of preferred interest of subsidiary -- 0.80 --
Payment-in-kind (PIK) dividends on convertible preferred stock (1.87) (1.56) (1.33)
------- ------- -------
Loss from continuing operations attributable to common
stockholders (6.45) (3.06) (7.67)
Discontinued operations (net of tax) -- 1.16 (0.14)
Cumulative effect of a change in accounting principle (net of tax) -- -- (0.30)
------- ------- -------
Net loss attributable to common stockholders $ (6.45) $ (1.90) $ (8.11)
======= ======= =======
RESULTS OF OPERATIONS
16
2004 COMPARED TO 2003
Overview
Our consolidated net sales in 2004 increased $21.2 million, or 5%, from
2003. Higher net sales resulted from a higher pricing of 4% and favorable
currency translation of 2%, offset by lower volumes of 1%. Gross margins were
13.3% in the year ended December 31, 2004 a decrease of 2.9 percentage points
from the year ended December 31, 2003. Accelerating raw material costs and
incremental operating costs incurred due to the delayed consolidation of the
abrasives facilities were partially offset by the favorable impact of
restructuring, cost containment, lower depreciation and pricing increases. SG&A
as a percentage of sales declined from 13.7% in 2003 to 12.5% in 2004. This
decrease can be primarily attributed to maintaining these costs despite the
increase in net sales. The operating loss increased by $21.7 million to $(30.6)
million, principally due to higher impairments of long-lived assets and lower
gross margins, partially offset by lower severance, restructuring and related
charges.
Overall, we reported a net loss attributable to common shareholders of
($50.9) million [($6.45) per share] for the year ended December 31, 2004, versus
a net loss attributable to common shareholders of ($15.6) million [($1.90) per
share] in the same period of 2003. During the year ended December 31, 2004, we
recorded the impact of paid-in-kind dividends earned on our convertible
preferred stock of ($14.8) million [($1.87) per share]. During the year ended
December 31, 2003, we reported income from discontinued operations of $9.5
million, net of tax [$1.16 per share], a gain on the early redemption of a
preferred interest in a subsidiary of $6.6 million [$0.80 per share] and the
impact of payment-in-kind dividends earned on its convertible preferred stock of
($12.8) million [($1.56) per share].
Net Sales
Maintenance Products Group
Net sales from the Maintenance Products Group decreased from $285.3
million during the year ended December 31, 2003 to $278.8 million during the
year ended December 31, 2004, a decrease of 2%. Overall, this decline was
primarily due to lower volumes of sales of 5%, partially offset by higher
pricing of 1% and the favorable impact of exchange rates of 2%. Sales volume for
the Consumer Plastics business unit, which sells primarily to mass merchant
customers, was significantly lower due to the elimination of certain product
lines with major outlet customers and to a lesser extent due to promotions in
2003 which did not recur in 2004. We also experienced volume declines in our
Abrasives business unit in the U.S. due to shipping and production
inefficiencies caused by the delayed consolidation of two abrasives facilities
into the Wrens, Georgia facility and a fire at our facility in Wrens in the
fourth quarter of 2004 that disrupted production for several weeks. These
decreases in Abrasives sales were partially offset by stronger sales of roofing
products to the construction industry. We experienced volume gains in certain of
our businesses that sell to commercial customers, particularly in our Abrasives
Canada, Textiles, Filters and Grillbricks business units. Abrasives Canada sales
benefited from an improving North American economy, while sales of Textiles and
Filters and Grillbricks products benefited from the ability of customers to
order products from all CCP divisions on one purchase order. The JanSan Plastics
business unit experienced volume declines primarily due to bid business obtained
in 2003 but not repeated in 2004, customer "buy-ins" to achieve certain rebates
in 2003 also not repeated in 2004 and lost market share. Lower JanSan Plastics
volume was partially offset by price increases implemented to combat
accelerating raw material costs. UK JanSan Plastics volumes increased primarily
as a result of the acquisition of Spraychem Limited on April 1, 2003. The UK
Consumer Plastics and UK JanSan Plastics business units also benefited from
favorable exchange rates in 2004 versus 2003.
Electrical Products Group
The Electrical Products Group's sales improved from $151.1 million for the
year ended December 31, 2003 to $178.7 million for the year ended December 31,
2004, an increase of 18%. Sales improved as a result of a higher pricing of 9%,
an increase in volume of 7%, and favorable currency translation of 2%. Multiple
selling price increases were implemented throughout 2004 at Woods US (and to a
lesser extent at Woods Canada) to offset the rising cost of copper and PVC.
Volume at Woods US benefited principally from the acquisition of significant new
product lines with both existing and new customers. Woods Canada experienced a
slight volume increase as sales to its two largest customers benefited from new
product offerings and higher demand was partially offset by the loss of certain
lines of business at certain customers. Sales at Woods Canada were also
favorably impacted by a stronger Canadian dollar versus the U.S. dollar in 2004
versus 2003.
17
Operating Income
Operating income (loss) 2004 2003 Change
---------------------- ---------------------- -----------------------
$ % Margin $ % Margin $ % Margin
- -------- - -------- - --------
Maintenance Products Group $ (2.7) (1.0) $ 9.3 3.3 $ (12.0) (4.3)
Electrical Products Group 16.8 9.4 15.6 10.3 1.2 (0.9)
Unallocated corporate expense (10.4) (13.8) 3.4
-------- -------- --------
3.7 0.8 11.1 2.5 (7.4) (1.7)
Impairments of long-lived assets (30.8) (11.9) (18.9)
Severance, restructuring and related charges (3.5) (8.1) 4.6
-------- -------- --------
Operating loss $ (30.6) (6.7) $ (8.9) (2.0) $ (21.7) (4.7)
======== ======== ========
Maintenance Products Group
The Maintenance Products Group's operating income decreased from $9.3
million (3.3% of net sales) during the year ended December 31, 2003 to an
operating loss of $2.7 million (-1.0% of net sales) for the year ended December
31, 2004. The decrease was primarily attributable to lower volumes and higher
raw material costs in 2004 versus 2003 (that were only partially recovered
through higher selling prices), as well as a decline in the profitability of our
Abrasives business resulting from shipping and production inefficiencies caused
by the delayed consolidation of two facilities into the Wrens, Georgia facility
and the fire at our facility in Wrens in the 4th quarter of 2004 that disrupted
production for several weeks. Operating results were positively impacted by $5.4
million of incremental depreciation in 2003 related to the revision of the
estimated useful lives of certain manufacturing assets, effective January 1,
2003. Operating income was also favorably impacted through benefits realized
from the implementation of cost reduction strategies.
Electrical Products Group
The Electrical Products Group's operating income increased from $15.6
million (10.3% of net sales) for the year ended December 31, 2003 to $16.8
million (9.4% of net sales) for the year ended December 31, 2004, an increase of
8%. The increase in profitability was due to the strong volume increases at the
Woods US business unit as well as improved margins due to the closure of the
Woods Canada manufacturing facility in December 2003 and the completion of a
fully outsourced product strategy for that business. Overall, margins declined
as a result of selling price increases (especially at Woods Canada) not quite
keeping pace with the increasing costs of copper and PVC and the impact of
increased lower-margin direct import sales.
Corporate
Corporate operating expenses decreased from $13.8 million in 2003 to $10.4
million in 2004 principally due to lower casualty insurance costs, lower bonus
expense resulting from a decline in operating performance and decreased expense
for stock appreciation rights due to a lower stock price affecting the variable
plan accounting for these awards.
Impairments of Long-lived Assets
During the fourth quarter of 2004, we recognized an impairment loss of
$29.9 million related to the US Plastics business units (JanSan Plastics,
Consumer Plastics and Container - see discussion of reporting units in Note 4 to
the Consolidated Financial Statements in Part II, Item 8) including $8.0 million
related to goodwill, $8.4 million related to machinery and equipment, $10.9
million related to a customer list intangible and $2.6 million related to a
trademark. In the fourth quarter of 2004, the profitability of the Consumer
Plastics business unit declined sharply as we were unable to pass along
sufficient selling price increases to combat the accelerating cost of resin (a
key raw material used in all of the US Plastics units). We believe that our
future earnings and cash flow could be negatively impacted to the extent further
increases in resin and other raw material costs cannot be offset or recovered
through higher selling prices. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets, we (through
an independent third party valuation firm) performed an analysis of discounted
future cash flows which indicated that the book value of the US Plastics units
was significantly greater than the fair value of those businesses. In addition,
as a result of the goodwill analysis, we also assessed whether there had been an
impairment of the long-lived assets in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The Company concluded that
the book value of equipment, a customer list intangible and trademark associated
with the US Plastics business unit significantly exceeded the fair value and
impairment had occurred. Also in 2004, we recorded impairment charges of $0.8
million related to property and equipment at our Metal Truck Box business unit
and $0.1 million related to certain assets at the Woods US business unit.
18
Impairment charges in 2003 included $7.2 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 of costs related to the partial closure of Abrasives facilities in
Lawrence, Massachusetts and Pineville, North Carolina and the consolidation into
the Wrens, Georgia facility, $0.4 million of obsolete molds and tooling at our
UK Consumer Plastics facility and $0.4 million associated with the write down of
certain equipment at Woods Canada and Woods US as a result of the closure of the
manufacturing operations at both business units. In addition, $2.6 million of
goodwill and patents of the Abrasives Canada 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. This business unit has experienced a
decline in profitability in recent years principally as a result of increasing
foreign competition.
Severance, Restructuring and Related Charges
Operating results for the Company during the years ended December 31, 2004
and 2003 were negatively impacted by severance, restructuring and related
charges of $3.5 million and $8.1 million, respectively. Charges in 2004 related
to adjustments to previously established non-cancelable lease liabilities for
abandoned facilities ($0.9 million); a non-cancelable lease accrual and
severance as a result of the shutdown of manufacturing and severance at Woods
Canada ($0.9 million); the restructuring of the Abrasives business ($0.8
million); costs for the movement of inventory and equipment in connection with
the consolidation of St. Louis manufacturing and distribution facilities ($0.3
million); the shutdown and relocation of a procurement office in Asia ($0.3
million); costs incurred for the consolidation of administrative functions for
CCP ($0.2 million); and expenses for the closure of CCP Canada's facility and
the subsequent consolidation into the Woods Canada facility ($0.1 million).
The largest of these charges in 2003 related 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 ($3.7 million). A charge of $1.5 million was recorded related to
severance associated with the shutdown of the Woods Canada manufacturing
operations in December 2003. Charges of $1.2 million were also incurred relating
to the restructuring of the Abrasives business unit, principally to consolidate
the Lawrence, Massachusetts and Pineville, North Carolina facilities into the
newly expanded Wrens, Georgia location. We also incurred charges in 2003 related
to severance costs for headcount reductions ($0.6 million), an adjustment to a
non-cancelable lease accrual due to a change in sub-lease assumptions at Woods
US ($0.5 million), the consolidation of the customer service and administrative
functions for CCP ($0.3 million), costs related to the closure of CCP's metals
facility in Santa Fe Springs, California ($0.2 million) and consulting fees
associated with product outsourcing strategies ($0.1 million).
Other
Upon review of Sahlman's results for 2002 and the first half of 2003, and
after initial study of the status of the shrimp industry and markets in the
United States, we evaluated the business further to determine if there had been
a loss in the value of the investment that was other than temporary. Based upon
the results of a third party appraisal, we estimated the fair value of the
Sahlman business through a liquidation value analysis whereby all of Sahlman's
assets would be sold and all of its obligations would be settled. Also based on
the aforementioned appraisal, we evaluated the business by using various
discounted cash flow analyses, estimating future free cash flows of the business
with different assumptions regarding growth, and reducing the value of the
business arrived at through this analysis by its outstanding debt. All values
were then multiplied by 43%, Katy's investment percentage. The answers derived
by each of the three assumption models were then probability weighted. As a
result, Katy concluded that $1.6 million was a reasonable estimate of the value
of its investment in Sahlman, and therefore a charge of $5.5 million was
recorded in the third quarter of 2003 to reduce the carrying value of the
investment. Based on our assessment at December 31, 2004, we continue to believe
that $1.6 million is a reasonable estimate of our investment in Sahlman.
Interest expense decreased by $2.2 million in 2004 versus 2003, primarily
due to the write-off of unamortized debt costs of $1.8 million in 2003 resulting
from a February 2003 refinancing and other reductions in overall availability.
The remaining decrease in interest expense of $0.4 million was due mainly to
slightly lower average borrowings during 2004, principally as a result of
applying the proceeds from the sale of non-core businesses in 2003 to repay
debt.
Other, net for the year ended December 31, 2004 included the write-off of
certain receivables related to businesses disposed of prior to 2002 ($0.8
million) and the write-off of fees and expenses associated with a financing
which we chose not to pursue ($0.5 million). Other, net for the year ended
December 31, 2003 included the write-off of certain receivables related to
businesses disposed prior to 2002 ($0.7 million), realized foreign exchange
losses ($0.6 million) and costs associated with the proposed sale of certain
subsidiaries ($0.3 million). The gain on sale of assets in 2004 and 2003 were
primarily due to the sales of excess real estate.
19
The provision for income taxes for the year ended December 31, 2004
reflects current expense for state and foreign income taxes offset by the
reduction of certain tax reserves and the recognition of certain foreign
deferred tax assets. During the year ended December 31, 2003, a tax benefit of
$3.2 million 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. Also in 2003, $1.1
million and $3.8 million of income tax expense were attributable to income from
discontinued businesses and the gain on the sale of discontinued businesses,
respectively.
Discontinued Operations
The GC/Waldom and Duckback business units are reported as discontinued
operations for the year ended December 31, 2003. There was no discontinued
operations activity for 2004.
GC/Waldom reported income of $0.1 million (net of tax) in the first half
of 2003. We sold GC/Waldom on April 2, 2003 and recognized a loss (net of tax)
of $0.2 million in the second quarter of 2003 as a result of the sale.
Duckback generated income of $2.0 million (net of tax) in the first nine
months of 2003. We sold Duckback on September 16, 2003 and recognized a gain
(net of tax) of $7.6 million in the third quarter of 2003 as a result of the
sale.
2003 COMPARED TO 2002
Overview
Our consolidated 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 Operating Income -Maintenance Products Group below). 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, lower
impairments of long-lived assets and the loss on the SESCO joint venture in
2002.
Overall, we reported a net loss attributable to common shareholders of
($15.6) million [($1.90) per share] for the year ended December 31, 2003, versus
a net loss attributable to common shareholders of ($67.9) million, or ($8.11)
per share in the same period of 2002. During the year ended December 31, 2003,
we reported income from discontinued operations of $9.5 million, net of tax
[$1.16 per share], a gain on the early redemption of a preferred interest in a
subsidiary of $6.6 million, net of tax [$0.80 per share], and the impact of
paid-in-kind dividends earned on convertible preferred stock of ($12.8) million
[($1.56) per share]. During the year ended December 31, 2002, we reported
results of discontinued operations of ($1.2) million, net of tax [($0.14) per
share], a cumulative effect of a change in accounting principle of ($2.5)
million [($0.30) per share], as well as the impact of paid-in-kind dividends
earned on convertible preferred stock of ($11.1) million [($1.33) per share].
The tables and narrative below summarize the key factors in the
year-to-year changes in operating results.
Net Sales
Maintenance Products Group
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 decline in sales is attributed to both commercial and consumer
customers. On the commercial side, sales were lower at the Abrasives Canada
business unit, primarily due to increased foreign competition, and in the
Abrasives business unit, primarily because a major customer increased their
supplier base in 2003. In addition, we believe that the JanSan Plastics 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 JanSan Plastics 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 UK
JanSan Plastics unit. Sales for the Consumer Plastics business unit, which sells
primarily to mass merchant retail customers, were lower due to the loss of
certain product lines with major retailers and to a lesser extent, downward
pricing pressures and allowance, rebate, and other programs. The UK Consumer
Plastics business
20
benefited overall from stronger volumes and favorable exchange rates, partially
offset by price erosion similar to that in the JanSan Plastics business.
Electrical Products Group
The Electrical Product Group's sales increased from $144.3 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%. The Woods US business unit experienced a 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 (such as extension cords and
power strips), which are shipped directly from our suppliers to our customers.
Woods US 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 home improvement 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.
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.
Operating Income
Operating income (loss) 2003 2002 Change
---------------------------------------------------------------------------
$ % Margin $ % Margin $ % Margin
- -------- - -------- - --------
Maintenance Products Group $ 9.3 3.3 $ 11.7 3.9 $ (2.4) (0.6)
Electrical Products Group 15.6 10.3 8.5 5.9 7.1 4.4
Other (0.8) 0.8
Unallocated corporate expense (13.8) (10.9) (2.9)
-------- -------- --------
11.1 2.5 8.5 1.9 2.6 0.6
Impairments of long-lived assets (11.9) (21.2) 9.3
Severance, restructuring and related charges (8.1) (19.1) 11.0
Loss on SESCO joint venture transaction (6.0) 6.0
-------- -------- --------
Operating loss $ (8.9) (2.0) $ (37.8) (8.5) $ 28.9 6.5
======== ======== ========
Maintenance Products Group
Operating income decreased by $2.4 million from $11.7 million in 2002
(3.9% of net sales) to $9.3 million in 2003 (3.3% of net sales). An overall
decline in net sales for the year (mostly due to volume declines) along with
high raw material 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. Profitability for
the year was lower at the Metal Truck Box, Abrasives and Abrasives Canada
business units, due to volume-related issues, while the Consumer Plastics and
Consumer Plastics UK businesses were negatively impacted by top-line pricing
pressures and an unfavorable mix of lower margin products. In addition, all
Consumer Plastics and JanSan Plastics 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 JanSan Plastics business unit which benefited from the implementation of
cost reduction strategies. Operating results continue to be favorably impacted
by the numerous cost reduction initiatives including the consolidation of our
manufacturing and distribution facilities in the St. Louis area. In the fourth
quarter of 2003, net sales were only down 1% from the fourth quarter of 2002 as
compared to a 6% decline for the first nine months of the year. Operating income
for the fourth quarter of 2003 was $4.6 million as compared to $3.4 million in
the fourth quarter of 2002, an increase of 36%.
Electrical Products Group
21
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. Operating income jumped from $8.5 million
(5.9% of net sales) in 2002 to $15.6 million (10.3% of net sales) in 2003, an
increase of 82%. Profitability in 2003 was positively impacted by cost reduction
strategies at both Woods US and Woods Canada. After significant study and
research into different sourcing alternatives, we decided that Woods US and
Woods Canada would source substantially all of their products from Asia. In
December 2002, Woods US shut down all of its manufacturing facilities, which
were in suburban Indianapolis and in southern Indiana. This was the most
significant initiative benefiting 2003, resulting in approximately $4.6 million
in savings. We believe that restructuring steps executed in 2002 and 2003
related to the Woods US and Woods Canada businesses will allow those businesses
to remain competitive within their markets. The fully outsourced product
strategy has reduced headcount at Woods US by 361 employees (effective in
December 2002) and Woods Canada by 100 employees (effective in December 2003).
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 margins. During 2002, Woods US
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 its
manufacturing facilities.
Corporate
Corporate operating expenses increased from $10.9 million in 2002 to $13.8
million in 2003 principally due to higher casualty insurance costs, and
increased expense for stock appreciation rights due to an increasing stock price
affecting the variable plan accounting for these awards.
Impairments of Long-lived Assets
The Company recorded impairments of long-lived assets of $11.9 million
during 2003 and $21.2 million during 2002. Charges in 2003 included $7.2 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 of costs related to the closure of Abrasives facilities
in Lawrence, Massachusetts and Pineville, North Carolina and the consolidation
into the Wrens, Georgia facility, $0.4 million of obsolete molds and tooling at
our UK Consumer Plastics facility and $0.4 million associated with the write
down of certain equipment at Woods Canada and Woods US as a result of the
closure of the manufacturing operations at both business units. In addition,
$2.6 million of goodwill and patents of the Abrasives Canada 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. This business unit has
experienced a decline in profitability in recent years principally as a result
of increasing foreign competition.
In 2002, CCP impaired property, plant and equipment (primarily molds and
tooling assets) and a customer list intangible by $15.3 million and $3.6
million, respectively. The impairments were primarily associated with assets
used in the Consumer Plastics 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 are often less than historical
cost, resulting in impairments. The Textiles business unit recorded asset
impairments of $1.9 million, resulting from management decisions on the future
use of certain manufacturing assets in their Atlanta, Georgia facility. In
addition, Woods US impaired $0.4 million of equipment as a result of the closure
of its manufacturing operations in December 2002.
Severance, Restructuring and Related Charges
Operating results for the Company during the years ended December 31, 2003
and 2002 were negatively impacted by severance, restructuring and related
charges of $8.1 million and $19.1 million, respectively. The largest of these
charges in 2003 related 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 ($3.7 million). A
charge of $1.5 million was recorded related to severance associated with the
shutdown of the Woods Canada manufacturing operations in December 2003. Charges
of $1.2 million were also incurred relating to the restructuring of the
Abrasives business unit, principally to consolidate the Lawrence, Massachusetts
and Pineville, North Carolina facilities into the newly expanded Wrens, Georgia
location. We also incurred charges in 2003 related to severance costs for
headcount reductions ($0.6 million), an adjustment to a non-cancelable lease
accrual due to a change in sub-lease assumptions at Woods US ($0.5 million), the
consolidation of the customer service and administrative functions for CCP ($0.3
million), costs related to the closure of CCP's metals facility in Santa Fe
Springs, California ($0.2 million) and consulting fees associated with product
outsourcing strategies ($0.1 million).
During 2002, the Company recorded $11.7 million related to the St. Louis
facility consolidation (mostly for non-cancelable lease payments); $3.6 million
in consulting fees associated with product outsourcing strategies, relating to
the Woods
22
US, Woods Canada and Textiles business units; $2.4 million for severance and
other exit costs related to the shut down of all Woods US manufacturing
operations; $0.9 million for severance costs related to various headcount
reductions, mostly in the management level of various business units; $0.3
million for legal fees and involuntary termination benefits related to SESCO;
and $0.2 million related to the consolidation of the customer service and
administrative functions for CCP.
SESCO Joint Venture Transaction
During 2002, we recorded a charge of $6.0 million consisting of 1) the
discounted value of an obligation created by Katy to the third party who took
over daily operation of the SESCO facility, 2) the carrying value of certain
assets contributed to the partnership formed in connection with this transaction
and 3) costs to close the transaction.
Other
Upon review of Sahlman's results for 2002 and the first half of 2003, and
after initial study of the status of the shrimp industry and markets in the
United States, we evaluated the business further to determine if there had been
a loss in the value of the investment that was other than temporary. Based upon
the results of a third party appraisal, we estimated the fair value of the
Sahlman business through a liquidation value analysis whereby all of Sahlman's
assets would be sold and all of its obligations would be settled. Also based on
the aforementioned appraisal, we evaluated the business by using various
discounted cash flow analyses, estimating future free cash flows of the business
with different assumptions regarding growth, and reducing the value of the
business arrived at through this analysis by its outstanding debt. All values
were then multiplied by 43%, Katy's investment percentage. The answers derived
by each of the three assumption models were then probability weighted. As a
result, Katy concluded that $1.6 million was a reasonable estimate of the value
of its investment in Sahlman, and therefore a charge of $5.5 million was
recorded in the third quarter of 2003 to reduce the carrying value of the
investment.
Interest expense was essentially unchanged 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. The amount of this write-off is included in
interest expense. The offsetting decrease in interest expense in 2003 was 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). Other, net in 2002 was
comprised primarily of realized foreign exchange losses. The gain on sale of
assets in 2003 was primarily due to the sales of excess real estate.
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 14 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 Statements of Operations as a cumulative effect of a change in
accounting principle. See Note 3 to the Consolidated Financial Statements in
Part II, Item 8 for a further discussion of goodwill impairments.
Discontinued Operations
Three business units are reported as discontinued operations for 2003 and
2002: Hamilton Precisions Metals, L.P. (Hamilton), GC/Waldom and Duckback.
Hamilton generated $0.2 million (net of tax) of income in 2002 (prior to
its sale on October 31, 2002) and a gain (net of tax) of $3.3 million was
recognized in the fourth quarter of 2002 as a result of the sale.
GC/Waldom reported operating income of $0.1 million (net of tax) in 2003
(prior to its sale on April 2, 2003), versus a $6.4 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 this 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.
23
Duckback generated operating income of $2.0 million (net of tax) in 2003
(prior to its sale on September 16, 2003) versus $1.7 million (net of tax) 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.
LIQUIDITY AND CAPITAL RESOURCES
We require funding for working capital needs and capital expenditures. We
believe that our cash flow from operations and the use of available borrowings
under the Bank of America Credit Agreement (as defined below) provide sufficient
liquidity for our operations going forward. As of December 31, 2004, we had cash
and cash equivalents of $8.5 million versus cash and cash equivalents of $6.7
million at December 31, 2003. Also as of December 31, 2004, we had outstanding
borrowings of $58.7 million [46% of total capitalization], under the Bank of
America Credit Agreement with unused borrowing availability on the Revolving
Credit Facility of $33.0 million. As of December 31, 2003, we had outstanding
borrowings of $39.7 million [28% of total capitalization]. We used cash flow
from operations of $8.0 million during the year ended December 31, 2004 versus
the $8.0 million provided by cash flow from operations during the year ended
December 31, 2003. The increased use of cash flow from operations during 2004
versus 2003 was primarily attributable to higher inventories in 2004 due to
higher material costs and increased levels to support higher volumes in the
Electrical Products Group and provide higher levels of customer service. We
expect these liquidity trends to reverse in 2005 as capital expenditures are
expected to be lower in 2005, inventory is being reduced and other elements of
working capital are being managed.
We have a number of obligations and commitments, which are listed on the
schedule later in this section entitled "Contractual and Commercial
Obligations." 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.
We believe that given our strong working capital base, additional liquidity
could be obtained through additional debt financing, if necessary. However,
there is no guarantee that such financing could be obtained. In addition, we are
continually evaluating alternatives relating to the sale of excess assets and
divestitures of certain of our business units. Asset sales and business
divestitures present opportunities to provide additional liquidity by
de-leveraging our financial position.
Bank of America Credit Agreement
On April 20, 2004, we completed a refinancing of our outstanding
indebtedness (the "Refinancing") and entered into a new agreement with Bank of
America Business Capital (formerly Fleet Capital Corporation) (the "Bank of
America Credit Agreement"). Like the previous credit agreement with Fleet
Capital Corporation, the Bank of America Credit Agreement is a $110 million
facility with a $20 million term loan ("Term Loan") and a $90 million revolving
credit facility ("Revolving Credit Facility") with essentially the same terms as
the previous credit agreement. The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks, all of
which participated in the syndicate from the previous credit agreement. Since
the inception of the previous credit agreement, we had repaid $18.2 million of
the previous Term Loan. The ability to repay that loan on a faster than
anticipated timetable was primarily due to funds generated by the sale of
GC/Waldom in April 2003, the sale of Duckback in September 2003 and various
sales of excess real estate. The Bank of America Credit Agreement, and the
additional borrowing ability under the Revolving Credit Facility obtained by
incurring new term debt, results in three important benefits related to our
long-term strategy: (1) additional borrowing capacity to invest in capital
expenditures and/or acquisitions key to our strategic direction, (2) increased
working capital flexibility to build inventory when necessary to accommodate
lower cost outsourced finished goods inventory and (3) the ability to borrow
locally in Canada and the United Kingdom and provide a natural hedge against
currency fluctuations.
Below is a summary of the sources and uses associated with the funding of
the Bank of America Credit Agreement (in thousands):
Sources:
Term Loan incremental borrowings $18,152