Attached files
file | filename |
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EX-31 - SOX CERTIFICATION OF THE CFO - Victor Technologies Group, Inc. | exhibit312ecs.htm |
EX-32 - SOX SECTION 906 CERTIFICATION OF THE CFO - Victor Technologies Group, Inc. | exhibit322ecs.htm |
EX-32 - SOX SECTION 906 CERTIFICATION OF THE CEO - Victor Technologies Group, Inc. | exhibit321ecs.htm |
EX-31 - SOX CERTIFICATION OF THE CEO - Victor Technologies Group, Inc. | exhibit311ecs.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2011 |
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OR | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 001-13023
Thermadyne Holdings Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
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74-2482571 |
(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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16052 Swingley Ridge Road, Suite 300, Chesterfield, MO |
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63017 |
(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code (636) 728-3000
Indicate by checkmark 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 o
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, on August 15, 2011 was 1,000.
THERMADYNE HOLDINGS CORPORATION
INDEX
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Page |
PART I — FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets |
3 |
Condensed Consolidated Statements of Operations |
4 |
Condensed Consolidated Statements of Cash Flows |
5 |
Notes to Condensed Consolidated Financial Statements |
6 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
30 |
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Item 4. Controls and Procedures |
30 |
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PART II — OTHER INFORMATION |
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Item 1. Legal Proceedings |
31 |
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Item 1A. Risk Factors |
31 |
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Item 6. Exhibits |
31 |
2
PART I. FINANCIAL INFORMATION
Item 1.
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
Successor | ||||||||
June 30, |
December 31, | |||||||
2011 |
2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ 10,666 |
$ 22,399 | ||||||
Trusteed assets |
- |
183,685 | ||||||
Accounts receivable, less allowance for doubtful accounts of |
||||||||
$600 and $400, respectively |
77,674 |
62,912 | ||||||
Inventories |
101,982 |
85,440 | ||||||
Prepaid expenses and other |
15,081 |
11,310 | ||||||
Deferred tax assets |
2,644 |
2,644 | ||||||
Total current assets |
208,047 |
368,390 | ||||||
Property, plant and equipment, net of accumulated depreciation |
||||||||
of $9,324 and $1,274, respectively |
75,929 |
75,796 | ||||||
Goodwill |
168,865 |
164,678 | ||||||
Intangibles, net |
151,950 |
155,036 | ||||||
Deferred financing fees |
14,039 |
14,553 | ||||||
Other assets |
1,540 |
1,632 | ||||||
Total assets |
$ 620,370 |
$ 780,085 | ||||||
LIABILITIES AND STOCKHOLDER'S EQUITY |
||||||||
Current Liabilities: |
||||||||
Senior subordinated notes due 2014 |
$ - |
$ 176,095 | ||||||
Current maturities of other long-term obligations |
1,621 |
2,207 | ||||||
Accounts payable |
39,388 |
26,976 | ||||||
Accrued and other liabilities |
39,752 |
37,995 | ||||||
Accrued interest |
1,092 |
9,184 | ||||||
Income taxes payable |
3,236 |
4,155 | ||||||
Deferred tax liability |
6,014 |
6,014 | ||||||
Total current liabilities |
91,103 |
262,626 | ||||||
Long-term obligations, less current maturities |
263,818 |
264,564 | ||||||
Deferred tax liabilities |
78,594 |
74,832 | ||||||
Other long-term liabilities |
13,038 |
14,659 | ||||||
Stockholder's equity: |
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Common stock, $0.01 par value: |
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Authorized -- 1,000 shares |
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Issued and outstanding -- 1,000 shares at June 30, 2011 and |
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at December 31, 2010 |
- |
- | ||||||
Additional paid-in capital |
176,293 |
176,035 | ||||||
Accumulated deficit |
(8,765) |
(14,680) | ||||||
Accumulated other comprehensive income |
6,289 |
2,049 | ||||||
Total stockholder's equity |
173,817 |
163,404 | ||||||
Total liabilities and stockholder's equity |
$ 620,370 |
$ 780,085 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Successor |
Predecessor |
Successor |
Predecessor | |||||
Three Months |
Three Months |
Six Months |
Six Months | |||||
Ended |
Ended |
Ended |
Ended | |||||
June 30, 2011 |
June 30, 2010 |
June 30, 2011 |
June 30, 2010 | |||||
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Net sales |
$ 129,269 |
$ 108,596 |
$ 245,766 |
$ 205,213 | ||||
Cost of goods sold |
81,475 |
71,725 |
164,746 |
136,302 | ||||
Gross margin |
47,794 |
36,871 |
81,020 |
68,911 | ||||
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Selling, general and administrative expenses |
27,725 |
24,722 |
52,555 |
46,144 | ||||
Amortization of intangibles |
1,704 |
680 |
3,408 |
1,357 | ||||
Restructuring |
615 |
- |
615 |
- | ||||
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Operating income |
17,750 |
11,469 |
24,442 |
21,410 | ||||
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Other income (expenses): |
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Interest, net |
(6,056) |
(5,939) |
(12,353) |
(12,275) | ||||
Amortization of deferred financing costs |
(417) |
(251) |
(788) |
(515) | ||||
Loss on debt extinguishment |
- |
(1,867) |
- |
(1,867) | ||||
Income before income tax provision |
11,277 |
3,412 |
11,301 |
6,753 | ||||
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Income tax provision |
5,311 |
841 |
5,386 |
1,886 | ||||
Net income (loss) |
$ 5,966 |
$ 2,571 |
$ 5,915 |
$ 4,867 | ||||
See accompanying notes to condensed consolidated financial statements.
4
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Successor |
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Predecessor | |||||
Six Months |
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Six Months | |||||
Ended |
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Ended | |||||
June 30, 2011 |
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June 30, 2010 | |||||
Cash flows from (used in) operating activities: |
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Net income (loss) |
$ 5,915 |
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$ 4,867 | ||||
Adjustments to reconcile net income (loss) to net cash |
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provided by (used in) operating activities: |
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Depreciation and amortization |
12,487 |
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6,831 | ||||
Deferred income tax benefit |
1,231 |
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(2,268) | ||||
Stock compensation expense |
258 |
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248 | ||||
Restructuring costs, net of payments |
396 |
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- | ||||
Loss on debt extinguishment |
- |
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1,867 | ||||
Changes in operating assets and liabilities: |
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Accounts receivable, net |
(13,599) |
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(9,493) | ||||
Inventories |
(15,570) |
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(6,834) | ||||
Prepaids |
(3,560) |
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320 | ||||
Accounts payable |
12,783 |
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23,426 | ||||
Accrued and other liabilities |
(463) |
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10,276 | ||||
Accrued interest |
(8,092) |
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737 | ||||
Other, net |
(1,765) |
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(1,132) | ||||
Net cash provided by (used in) operating activities |
(9,979) |
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28,845 | ||||
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Cash flows from (used in) investing activities: |
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Capital expenditures |
(7,915) |
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(4,474) | ||||
Other |
(322) |
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(253) | ||||
Net cash used in investing activities |
(8,237) |
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(4,727) | ||||
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Cash flows from (used in) financing activities: |
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Use of Trusteed Assets for redemption of Senior Subordinated Notes |
183,685 |
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- | ||||
Repayment of Senior Subordinated Notes |
(176,095) |
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- | ||||
Repayments of Working Capital Facility |
- |
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(1,142) | ||||
Repayments of other long-term obligations |
(1,394) |
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- | ||||
Borrowings under Working Capital Facility |
- |
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1,161 | ||||
Repayments under Second-Lien Facility and other |
- |
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(25,731) | ||||
Other, net |
(275) |
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46 | ||||
Net cash provided by (used in) financing activities |
5,921 |
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(25,666) | ||||
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Effect of exchange rate changes on cash and cash equivalents |
562 |
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(430) | ||||
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Total decrease in cash and cash equivalents |
(11,733) |
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(1,978) | ||||
Total cash and cash equivalents beginning of period |
22,399 |
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14,886 | ||||
Total cash and cash equivalents end of period |
$ 10,666 |
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$ 12,908 | ||||
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Income taxes paid |
$ 5,325 |
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$ 2,252 | ||||
Interest paid, including $8,688 for defeased Sr Subordinated Notes in 2011 |
$ 21,713 |
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$ 11,405 | ||||
See accompanying notes to condensed consolidated financial statements.
5
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
1. Organization
Thermadyne Holdings Corporation (“Thermadyne” or the “Company”), a Delaware corporation, is a designer and manufacturer of cutting and welding products used in various fabrication, construction and manufacturing operations around the world. We market our products under a portfolio of brands including Victor ®, Tweco®, Thermal Dynamics®, Arcair®, Cigweld®, Thermal Arc®, Turbo Torch® and Stoody®.
On December 3, 2010 (“Acquisition Date”), pursuant to an Agreement and Plan of Merger dated as of October 5, 2010 (the “Merger Agreement”), Razor Merger Sub Inc. (“Merger Sub”), a newly formed Delaware corporation, merged with and into Thermadyne, with Thermadyne surviving as a direct, wholly-owned subsidiary of Razor Holdco Inc., a Delaware corporation (“Acquisition”). (Razor Holdco Inc. was renamed Thermadyne Technologies Holdings, Inc. (“Technologies”).) Technologies’ sole asset is its 100% ownership of the stock of Thermadyne. Affiliates of Irving Place Capital (“IPC”), a private equity firm based in New York, along with its co-investors, hold approximately 99% of the outstanding equity of Technologies, and certain members of Thermadyne management hold the remaining equity capital.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Acquisition resulted in a 100% change in ownership of Thermadyne and is accounted for in accordance with United States accounting guidance for business combinations. Accordingly, the assets acquired and liabilities assumed, excluding deferred income taxes, were recorded at fair value as of December 3, 2010. The purchase price paid and related costs and transaction fees incurred by IPC have been accounted for in Successor Company’s period ending December 31, 2010 consolidated financial statements. The provisional amounts recognized for assets acquired and liabilities assumed as of December 3, 2010 have been determined by management with the assistance of an externally prepared valuation study of inventories, property, plant and equipment, intangible assets, goodwill, and capital and operating leases. These provisional amounts are subject to change based on the completion of such study and the determination of other facts impacting fair value estimates. The evaluation of the assets acquired and liabilities assumed is ongoing with the assistance of the third party asset appraisal firm and will be finalized prior to the end of calendar year 2011. The evaluation of the adjustments, if any, arising out of the finalization of the value of the assets acquired and liabilities assumed will not impact cash flow. However, such adjustments could result in material increases or decreases to depreciation and amortization, earnings before interest expense, income taxes and net income.
Although Thermadyne continued as the same legal entity after the Acquisition, the application of push down accounting represents the termination of the old reporting entity and the creation of a new one. In addition, the basis of presentation is not consistent between the successor and predecessor entities and the financial statements are not presented on a comparable basis. As a result, the accompanying condensed consolidated statements of operations and cash flows are presented for two different reporting entities: Predecessor and Successor, which related to the periods and balance sheets preceding the Acquisition (prior to December 3, 2010), and the periods and balance sheets succeeding the Acquisition, respectively.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of the Company for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2011. The quarterly financial data should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s annual report for the period ended December 31, 2010.
The financial statements include the Company’s accounts and those of its subsidiaries, after the elimination of all significant intercompany balances and transactions. All dollar amounts are presented in thousands, unless otherwise noted, except share amounts.
6
Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Any significant unanticipated changes in business or market conditions that vary from current expectations could have an impact on the fair market value of assets and result in a potential impairment loss.
Reclassifications
The costs of certain purchasing functions previously included in Selling, General, and Administrative expenses have been reclassified to Cost of Goods Sold in the amounts and $360 and $705 for the three and six months ended June 30, 2010, respectively, to conform with the current year presentation.
Miscellaneous receivables as of December 31, 2010 have been reclassified from Accounts Receivable to Prepaid Expenses and Other in the amount of $2,729 to conform with the current year presentation.
Deferred Financing Costs
Loan origination fees and other costs incurred arranging long-term financing are capitalized as deferred financing costs and amortized on an effective interest method over the term of the credit agreement. Deferred financing costs totaled $14,998 and $14,723, less related accumulated amortization of $959 and $170, at June 30, 2011 and December 31, 2010, respectively.
Product Warranty Programs
Various products are sold with product warranty programs. Provisions for warranty programs are made as the products are sold and such provisions are adjusted periodically based on current estimates of anticipated warranty costs and charged to cost of sales. The following table provides the activity in the warranty accrual:
Successor |
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Predecessor |
Successor |
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Predecessor | |||||
Three Months |
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Three Months |
Six Months |
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Six Months | |||||
Ended |
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Ended |
Ended |
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Ended | |||||
June 30, 2011 |
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June 30, 2010 |
June 30, 2011 |
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June 30, 2010 | |||||
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Balance at beginning of period |
$ 3,700 |
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$ 2,400 |
$ 3,200 |
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$ 2,300 | ||||
Charged to expense |
1,015 |
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1,200 |
2,630 |
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2,091 | ||||
Warranty payments |
(673) |
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(980) |
(1,788) |
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(1,771) | ||||
Balance at end of period |
$ 4,042 |
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$ 2,620 |
$ 4,042 |
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$ 2,620 |
Fair Value
The Company estimated the fair value of the Senior Secured Notes due 2017 at $270,725 and $265,200 at June 30, 2011 and December 31, 2010, respectively, based on available market information. The Company’s Senior Subordinated Notes due 2014 were redeemed February 1, 2011. The carrying values of the other long-term obligations are estimated to approximate fair value since these obligations are fully secured and have varying interest charges based on current market rates.
Recent Accounting Pronouncements
Comprehensive Income
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they
7
3. Inventories
The composition of inventories was as follows:
Successor | |||
June 30, |
December 31, | ||
2011 |
2010 | ||
Raw materials and component parts |
$ 33,367 |
$ 25,075 | |
Work-in-process |
5,997 |
3,853 | |
Finished goods |
64,118 |
56,512 | |
103,482 |
85,440 | ||
LIFO reserve |
(1,500) |
- | |
$ 101,982 |
$ 85,440 |
The carrying value of inventories accounted for by the last-in, first-out (LIFO) inventory method exclusive of the LIFO reserve was $67,829 at June 30, 2011 and $61,577 at December 31, 2010. The remaining inventory amounts are held in foreign locations and accounted for using the first-in first-out method.
4. Intangible Assets
The composition of intangibles was as follows:
Successor | |||
June 30, |
December 31, | ||
2011 |
2010 | ||
Goodwill |
$ 168,865 |
$ 164,678 | |
Customer relationships |
54,920 |
54,920 | |
Intellectual property bundles |
81,890 |
81,568 | |
Trademarks |
19,079 |
19,079 | |
324,754 |
320,245 | ||
Accumulated amortization of customer relationships |
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and intellectual property bundles |
(3,939) |
(531) | |
$ 320,815 |
$ 319,714 |
Amortization of customer relationships and intellectual property bundles (including patents) amounted to $1,704 and $3,408 for the three and six month periods ended June 30, 2011, respectively, and to $680 and $1,357 for the three and six month periods ended June 30, 2010, respectively.
Goodwill and trademarks are tested for impairment annually, as of December 1st (Successor), or more frequently if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The impairment analysis is performed on a consolidated enterprise level based on one reporting unit. No impairment adjustment to the carrying value of goodwill was deemed necessary in 2010. As of June 30, 2011, the Company considered possible impairment triggering events since December 3, 2010 (Acquisition Date) based on relevant factors, and concluded that no triggering events or goodwill impairment were indicated at that date. Unforeseen events and changes in circumstances and market conditions, including the general economic and competitive conditions, could cause actual results to vary significantly from the estimates.
The change in the carrying amount of goodwill during the six-month period ending June 30, 2011 was as follows:
8
Carrying Amount | |
of Goodwill | |
Successor: |
|
Balance as of January 1, 2011 |
$ 164,678 |
Foreign currency translation |
4,187 |
Balance as of June 30, 2011 |
$ 168,865 |
5. Debt and Capital Lease Obligations
The composition of debt and capital lease obligations was as follows:
Successor | ||||
June 30, |
December 31, | |||
2011 |
2010 | |||
Senior Secured Notes due December 15, 2017, 9% interest |
||||
payable semi-annually on June 15 and December 15 |
$ 260,000 |
$ 260,000 | ||
Senior Subordinated Notes due February 1, 2014, 9 1/4% interest |
||||
payable semiannually on February 1 and August 1 |
- |
176,095 | ||
Capital leases |
5,439 |
6,771 | ||
265,439 |
442,866 | |||
Current maturities |
(1,621) |
(178,302) | ||
$ 263,818 |
$ 264,564 |
Senior Secured Notes due 2017
On December 3, 2010, Merger Sub issued $260,000 in aggregate principal of 9% Senior Secured Notes due 2017 (the “Senior Secured Notes”). The net proceeds from this issuance, together with funds received from the equity investments made by affiliates of IPC, its co-investors and certain members of Thermadyne management, were used to finance the acquisition of Thermadyne, to redeem the Senior Subordinated Notes due 2014, and to pay the transaction related expenses.
The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, by each of Thermadyne’s existing and future domestic subsidiaries and by its Australian subsidiaries Thermadyne Australia Pty Ltd. and Cigweld Pty Ltd. The Senior Secured Notes and guarantees are secured, subject to permitted liens and except for certain excluded assets, on a first priority basis by substantially all of Thermadyne’s and the guarantors’ current and future property and assets (other than accounts receivable, inventory and certain other related assets that secure, on a first priority basis, Thermadyne’s and the guarantors’ obligations under Thermadyne’s Working Capital Facility (as defined below)), including the capital stock of each subsidiary of Thermadyne (other than immaterial subsidiaries), which, in the case of non-guarantor foreign subsidiaries, is limited to 65% of the voting stock and 100% of the non-voting stock of each first-tier foreign subsidiary, and on a second priority basis by substantially all the collateral that secures the Working Capital Facility on a first priority basis.
The Senior Secured Notes contain customary covenants and events of default, including covenants that, among other things, limit the Company’s and its restricted subsidiaries’ ability to incur additional indebtedness, pay dividends on, repurchase or make distributions in respect of its capital stock or make other restricted payments, make certain investments, loans or advances, sell, transfer or otherwise convey certain assets, and create liens.
Upon a change of control, as defined in the Indenture, each holder of the Senior Secured Notes has the right to require the Company to purchase the Senior Secured Notes at a purchase price in cash equal to 101% of the principal, plus accrued and unpaid interest.
On August 2, 2011, the Company completed its offer to exchange $260,000 of its 9% Senior Secured Notes due 2017, which have been registered under the Securities Act of 1933 (the "Exchange Notes"), for $260,000 of its outstanding Senior Secured Notes The Company accepted for exchange all Senior Secured Notes validly tendered and not withdrawn prior to the expiration of the exchange offer. The terms of the Exchange Notes are substantially identical to the terms of the Senior Secured Notes, including subsidiary guarantees, except that provisions relating to transfer restrictions, registration rights and related additional interest will not apply to the Exchange Notes.
9
Senior Subordinated Notes due 2014
On December 3, 2010, Thermadyne called for redemption of the $172,327 aggregate outstanding 9¼% Senior Subordinated Notes due 2014 on February 1, 2011 at a price of 101.542% plus accrued and unpaid interest. Thermadyne irrevocably deposited, with the Trustee, funds sufficient to pay the Redemption Price of the Senior Subordinated Notes. Thermadyne remained the primary obligor of the Senior Subordinated Notes through February 1, 2011. Accordingly, the Senior Subordinated Notes and related assets placed with the Trustee remained on Thermadyne’s balance sheet through the redemption date, and were classified as current at December 31, 2010. Successor’s opening balance sheet at December 3, 2010 includes the fair value of the Senior Subordinated Notes due 2014 at that date of $177,066.
The Trustee acknowledged the satisfaction and discharge of the indenture as of December 3, 2010 and informed the Company the Senior Subordinated Notes were paid on February 1, 2011.
The Senior Subordinated Notes accrued interest at the rate of 9 1/4% per annum payable semi-annually in arrears on February 1 and August 1 of each year. The indenture provided for the payment of an additional Special Interest Adjustment based on the Company’s consolidated leverage ratio. During the period from January 1, 2011 until the debt’s redemption on February 1, 2011, interest expense on the Senior Subordinated Notes due 2014 including Special Interest Adjustment was $1,364 and $1,110 of the fair value premium recorded for the Senior Subordinated Notes was amortized as a reduction of interest expense. Interest on the Senior Subordinated Notes due 2014 including the Special Interest Adjustment totaled $4,954 and $9,972 for the three and six months ended June 30, 2010.
Working Capital Facility
At June 30, 2011 and December 31, 2010, respectively, $2,122 and $2,347 of letters of credit and no borrowings were outstanding under the Fourth Amended and Restated Credit Agreement (the “GE Agreement”). Unused availability, net of these letters of credit, was $55,917 under the Working Capital Facility at June 30, 2011.
All obligations under the Working Capital Facility are unconditionally guaranteed by Technologies and substantially all of the Company’s existing and future, direct and indirect, wholly-owned domestic subsidiaries and its Australian subsidiaries Thermadyne Australia Pty Ltd. and Cigweld Pty Ltd. The Working Capital Facility is secured, subject to certain exceptions, by substantially all of the assets of the guarantors and Technologies, including a first priority security interest in substantially all accounts receivable and other rights to payment, inventory, deposit accounts, cash and cash equivalents and a second priority security interest in all assets other than the Working Capital Facility collateral.
The Working Capital Facility has a minimum fixed charge coverage ratio test of 1.1 if the excess availability under the Facility is less than $9,000 (which minimum amount will be increased or decreased proportionally with any increase or decrease in the commitments thereunder). In addition, the Working Capital Facility includes negative covenants that limit the Company’s ability and the ability of Technologies and certain subsidiaries to, among other things: incur, assume or permit to exist additional indebtedness or guarantees; grant liens; consolidate, merge or sell all or substantially all of the Company’s assets; transfer or sell assets and enter into sale and leaseback transactions; make certain loans and investments; pay dividends, make other distributions or repurchase or redeem the Company’s or Technologies’ capital stock; and prepay or redeem certain indebtedness.
Second Lien Facility
In June 2010, Predecessor voluntarily repaid all of the second lien indebtedness due November 30, 2012 and terminated the related credit agreement. The prepayment was funded primarily with borrowings under the Company’s Working Capital Facility.
6. Restructuring
In the second quarter of 2011, the Company committed to a restructuring plan that includes exit activities at a manufacturing site in West Lebanon, New Hampshire. The Company expects to complete these activities in the first half of 2012. These exit activities impact approximately 100 employees and are intended to reduce the Company’s fixed cost structure and better align its global manufacturing and distribution footprint.
The following provides a summary of restructuring costs incurred during 2011 to date and total expected restructuring costs associated with these activities by major type of cost:
10
Incurred during |
Total estimated | ||
the quarter ended |
amount expected | ||
June 30, 2011 |
to be incurred | ||
Employee termination benefits |
$ 396 |
$ 3,300 | |
Other restructuring costs |
219 |
4,200 | |
Total restructuring costs |
$ 615 |
$ 7,500 |
Employee termination benefits primarily include severance and retention payments to employees impacted by exit activities. Other restructuring costs include changes to the lease terms of the impacted facility, expense to relocate certain individuals and equipment to other manufacturing locations and employee training costs.
The following is a rollforward of the liabilities associated with the restructuring activities since the inception of the plan. The liabilities are reported as a component of accrued and other liabilities in the accompanying consolidated balance sheet as of June 30, 2011.
Employee |
Other |
Total | |||
Charges |
$ 396 |
$ 219 |
$ 615 | ||
Payments and other adjustments |
- |
(219) |
(219) | ||
Balance as of June 30, 2011 |
$ 396 |
$ - |
$ 396 |
All payments related to these exit activities are expected to be made in the second half of 2011 and throughout 2012.
7. Comprehensive Income
Comprehensive income for the three and six months ended June 30, 2011 and 2010 was as follows:
Successor |
|
Predecessor |
Successor |
|
Predecessor | ||||
Three Months |
|
Three Months |
Six Months |
|
Six Months | ||||
Ended |
|
Ended |
Ended |
|
Ended | ||||
June 30, 2011 |
|
June 30, 2010 |
June 30, 2011 |
|
June 30, 2010 | ||||
|
|
||||||||
Net Income |
$ 5,966 |
|
$ 2,571 |
$ 5,915 |
|
$ 4,867 | |||
Cumulative foreign currency translation gains (losses) |
1,563 |
|
(2,878) |
4,230 |
|
(2,378) | |||
Pension and post-retirement benefit plans income (loss) |
6 |
|
99 |
9 |
|
171 | |||
Comprehensive income (loss) |
$ 7,535 |
|
$ (208) |
$ 10,154 |
|
$ 2,660 |
8. Income Taxes
At the beginning of 2011, the Company had approximately $151,700 in U.S. net operating loss carry forwards from the years 1998 through 2010. The net operating loss carry forwards in the U.S. will expire between the years 2019 and 2030 at June 30, 2011. Given the uncertainties regarding utilization of a portion of these net operating loss carry forwards, the Company has recorded a $14,100 valuation allowance related to the deferred tax asset of approximately $60,000 associated with the carry forwards. For 2011, the Company’s management estimates that income tax payments will, as in prior years, primarily relate to state and foreign taxes due to the use of net operating loss carryovers to offset U.S. taxable income.
The Company’s projected 2011 income tax effective rate of approximately 48% exceeds the federal statutory rate primarily because foreign earnings are currently taxable as “deemed dividends” in the U.S. These deemed dividends are not offset by the foreign tax credits due to uncertainty of their utilization.
9. Contingencies
The Company and certain of its wholly owned subsidiaries are defendants in various legal actions, primarily related to welding fumes and other product liability claims. While there is uncertainty relating to any litigation, management is of the opinion that the outcome of this litigation will not have a material adverse effect on the Company’s financial condition or results of operations.
11
In October 2010, two identical purported class action lawsuits were filed in connection with the Acquisition against the Company, the Company’s directors, and Irving Place Capital. On November 25, 2010, the Company, the Company’s directors and Irving Place Capital entered into a memorandum of understanding with the plaintiffs regarding the settlement of these actions. On June 30, 2011, the Circuit Court issued an order approving the settlement and resolving and releasing all claims in all actions that were or could have been brought. The Circuit Court further awarded attorneys’ fees and expenses to plaintiffs’ counsel in the amount of $399, which were paid on July 21, 2011.
The Company is party to certain environmental matters, although no claims are currently pending. Any related obligations are not expected to have a material adverse effect on the Company’s financial condition, cash flows or operating results. All other legal proceedings and actions involving the Company are of an ordinary and routine nature and are incidental to the operations of the Company. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company’s business or financial condition or on the results of operations.
On December 30, 2006, the Company committed to dispose of its Brazilian manufacturing operations. Remaining Brazilian accrued liabilities are still held by the Company and are primarily associated with tax matters for which the timing of resolution is uncertain, and are classified within Accrued and Other Liabilities in the amounts of $1,100 and $1,600 as of June 30, 2011 and December 31, 2010, respectively.
10. Employee Benefit Plans
Net periodic pension and other postretirement benefit costs include the following components:
U.S. and Canadian Plans |
Australian Plan | |||||||
Successor |
Predecessor |
Successor |
Predecessor | |||||
Three Months |
Three Months |
Three Months |
Three Months | |||||
Ended |
Ended |
Ended |
Ended | |||||
June 30, 2011 |
June 30, 2010 |
June 30, 2011 |
June 30, 2010 | |||||
|
|
|||||||
Components of the net periodic benefit cost: |
|
|
||||||
Service Cost |
$ 45 |
$ 45 |
$ 341 |
$ 202 | ||||
Interest Cost |
283 |
302 |
615 |
342 | ||||
Expected return on plan assets |
(324) |
(279) |
(560) |
(315) | ||||
Recognized (gain) loss |
- |
149 |
- |
51 | ||||
Net periodic benefit cost |
$ 4 |
$ 217 |
$ 396 |
$ 280 | ||||
U.S. and Canadian Plans |
Australian Plan | |||||||
Successor |
Predecessor |
Successor |
Predecessor | |||||
Six Months |
Six Months |
Six Months |
Six Months | |||||
Ended |
Ended |
Ended |
Ended | |||||
June 30, 2011 |
June 30, 2010 |
June 30, 2011 |
June 30, 2010 | |||||
|
|
|||||||
Components of the net periodic benefit cost: |
|
|
||||||
Service Cost |
$ 90 |
$ 90 |
$ 633 |
$ 393 | ||||
Interest Cost |
566 |
604 |
1,142 |
666 | ||||
Expected return on plan assets |
(648) |
(558) |
(1,040) |
(614) | ||||
Recognized (gain) loss |
- |
297 |
- |
100 | ||||
Net periodic benefit cost |
$ 8 |
$ 434 |
$ 735 |
$ 546 |
11. Segment Information
The Company’s continuing operations are comprised of several product lines manufactured and sold in various geographic locations. The market channels and end users for products are similar. The production processes are shared across the majority of the products. Management evaluates performance and allocates resources on a combined basis and not as separate business units or profit centers. Accordingly, management has concluded the Company operates in one reportable segment.
12
Geographic Information
The reportable geographic regions are the Americas, Europe/Middle East and Asia-Pacific. Sales have been attributed to geographic regions based on the country of our end customer. The following tables provide summarized financial information concerning the Company’s geographic segments:
Successor |
|
Predecessor |
Successor |
|
Predecessor | |||||
Three Months |
|
Three Months |
Six Months |
|
Six Months | |||||
Ended |
|
Ended |
Ended |
|
Ended | |||||
June 30, 2011 |
|
June 30, 2010 |
June 30, 2011 |
|
June 30, 2010 | |||||
|
|
|||||||||
Net Sales: |
|
|
||||||||
Americas |
|
$ 82,511 |
|
$ 69,863 |
$ 159,949 |
|
$ 133,134 | |||
Asia-Pacific |
|
36,052 |
|
30,208 |
20,536 |
|
55,550 | |||
Europe/ Middle East |
|
10,706 |
|
8,526 |
65,281 |
|
16,529 | |||
Total |
$ 129,269 |
|
$ 108,596 |
$ 245,766 |
|
$ 205,213 |
Prior year sales have been reclassified to conform to the current year presentation which attributes sales to the geographic location of the customer.
U.S. sales as a portion of Americas’ sales comprised approximately 86% for the three and six months ended June 30, 2011, respectively, and approximately 84% for the three and six months ended June 30, 2010, respectively. Australia sales as a portion of Asia-Pacific sales comprised approximately 74% for the three and six months ended June 30, 2011, respectively, and approximately 76% for the three and six months ended June 30, 2010, respectively.
Identifiable Assets (excluding working capital and intangibles):
Successor | ||||
June 30, |
December 31, | |||
2011 |
2010 | |||
Americas |
$ 69,426 |
$ 69,696 | ||
Asia-Pacific |
19,658 |
19,930 | ||
Europe/Middle East |
2,011 |
1,940 | ||
$ 91,095 |
$ 91,566 |
Product Line Information
The Company sells a variety of products, substantially all of which are used by manufacturing, construction and foundry operations to cut, join and reinforce steel, aluminum and other metals in various applications including construction, oil, gas rig and pipeline construction, repair and maintenance of manufacturing equipment, and shipbuilding. The following table shows sales for each of the product lines:
Successor |
|
Predecessor |
Successor |
|
Predecessor | ||||||
Three Months |
|
Three Months |
Six Months |
|
Six Months | ||||||
Ended |
|
Ended |
Ended |
|
Ended | ||||||
June 30, 2011 |
|
June 30, 2010 |
June 30, 2011 |
|
June 30, 2010 | ||||||
|
|
||||||||||
Gas equipment |
$ 48,178 |
|
$ 40,173 |
$ 90,861 |
|
$ 75,015 | |||||
Filler metals including hardfacing |
25,419 |
|
21,853 |
48,216 |
|
43,141 | |||||
Arc accessories including torches, related consumable parts and accessories |
22,965 |
|
18,601 |
43,677 |
|
34,359 | |||||
Plasma power supplies, torches and related consumable parts |
20,903 |
|
16,913 |
41,053 |
|
32,141 | |||||
Welding equipment |
11,804 |
|
11,056 |
21,959 |
|
20,557 | |||||
$ 129,269 |
|
$ 108,596 |
$ 245,766 |
|
$ 205,213 |
13
12. Relationships and Transactions
Relationship with Irving Place Capital
Thermadyne Holdings Corporation is a wholly-owned subsidiary of Thermadyne Technologies Holdings, Inc. Affiliates of Irving Place Capital, along with its co-investors, hold approximately 99% Technologies’ common stock at June 30, 2011 and December 31, 2010. The board of directors of the Company and Technologies includes two IPC members.
IPC has the power to designate all of the members of the board of directors of the Company and the right to remove any directors that it appoints.
Management Services Agreement
The Company has entered a management services agreement with IPC. For advisory and management services, IPC will receive annual advisory fees equal to the greater of (i) $1,500 or (ii) 2.5% of EBITDA (as defined under the management services agreement), payable monthly. In the event of a sale of all or substantially all of the Company’s assets to a third party, a change of control, whether by merger, consolidation, sale or otherwise, or, under certain circumstances, a public offering of the Company’s or any of its subsidiaries’ equity securities, the Company will be obligated to pay IPC an amount equal to the sum of the advisory fee that would be payable for the following four fiscal quarters. Such fees were $705 and $1,197 for the three and six months ended June 30, 2011.
In connection with any subsequent material corporate transactions, such as an equity or debt offering, acquisition, asset sale, recapitalization, merger, joint venture formation or other business combination, IPC will receive a fee of 1% of the transaction value. IPC will also receive fees in connection with certain strategic services, as determined by IPC, provided such fees will reduce the annual advisory fee on a dollar-for-dollar basis.
Thermadyne Technologies Holdings Inc. (Technologies)
The capital stock of Technologies in the aggregate of $176,470 was outstanding as of June 30, 2011, with 141,176 shares of 8% cumulative preferred stock in the amount of $141,176 and 3,529,400 shares of common stock in the amount of $35,294. No dividends have been declared on either the preferred stock or common stock at June 30, 2011 or December 31, 2010.
Technologies’ stock based compensation costs relate to Thermadyne employees and were incurred for Thermadyne’s benefit, and accordingly recognized in Thermadyne’s consolidated selling, general & administrative expenses.
13. Condensed Consolidating Financial Statements and Thermadyne Holdings Corporation (Parent) Financial Information
The 9% Senior Secured Notes due 2017 are obligations of, and were issued by, Thermadyne Holdings Corporation. Thermadyne Holdings Corporation’s (parent only) assets at June 30, 2011 are its investments in its subsidiaries and its liabilities are the Senior Secured Notes due 2017. Each guarantor is wholly owned by Thermadyne Holdings Corporation. Successor’s management has determined the most appropriate presentation is to “push down” the Senior Secured Notes due 2017 to the guarantors in the accompanying condensed financial information, as such entities fully and unconditionally guarantee the Senior Secured Notes due 2017, and these subsidiaries are jointly and severally liable for all payments under these notes. The Senior Secured Notes due 2017 were issued to finance the acquisition of the Company along with new stockholder’s equity. The guarantor subsidiaries’ cash flow will service the debt.
The following financial information presents the guarantors and non-guarantors of the 9% Senior Secured Notes due 2017 and, prior to February 1, 2011, the 9 ¼ % Senior Subordinated Notes due 2014, in accordance with Rule 3-10 of Regulation S-X. The condensed consolidating financial information includes the accounts of Thermadyne Holding Corporation (parent only), and the combined accounts of guarantor subsidiaries and combined accounts of the non-guarantor subsidiaries for the periods indicated. Separate financial statements of the parent and each of the guarantor subsidiaries are not presented because management has determined such information is not material in assessing the financial condition, cash flows or results of operations of the Company and its subsidiaries. This information was prepared on the same basis as the consolidated financial statements. The Company’s Australian subsidiary is included as guarantors for all years presented. With respect to the non-guarantor subsidiaries, approximately 70% of the assets and the sales have been pledged by the guarantor subsidiaries to the holders of the Senior Secured Notes.
14
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2011
(unaudited)
(Dollars in thousands)
Parent |
||||||||||||
Thermadyne |
||||||||||||
Holdings |
Non- |
|||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | ||||||||
ASSETS |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ - |
$ 5,708 |
$ 4,958 |
$ - |
$ 10,666 | |||||||
Accounts receivable, net |
- |
63,779 |
13,895 |
- |
77,674 | |||||||
Inventories |
- |
87,203 |
14,779 |
- |
101,982 | |||||||
Prepaid expenses and other |
- |
10,272 |
4,809 |
- |
15,081 | |||||||
Deferred tax assets |
- |
2,644 |
- |
- |
2,644 | |||||||
Total current assets |
- |
169,606 |
38,441 |
- |
208,047 | |||||||
Property, plant and equipment, net |
- |
61,181 |
14,748 |
- |
75,929 | |||||||
Deferred financing fees |
- |
14,039 |
- |
- |
14,039 | |||||||
Other assets |
- |
1,540 |
- |
- |
1,540 | |||||||
Goodwill |
- |
168,865 |
- |
- |
168,865 | |||||||
Intangibles, net |
- |
151,950 |
- |
- |
151,950 | |||||||
Investment in and advances to subsidiaries |
173,817 |
79,232 |
- |
(253,049) |
- | |||||||
Total assets |
$ 173,817 |
$ 646,413 |
$ 53,189 |
$ (253,049) |
$ 620,370 | |||||||
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) |
||||||||||||
Current Liabilities: |
||||||||||||
Current maturities of long-term obligations |
$ - |
$ 1,132 |
$ 489 |
$ - |
$ 1,621 | |||||||
Accounts payable |
- |
30,133 |
9,255 |
- |
39,388 | |||||||
Accrued and other liabilities |
- |
34,528 |
5,224 |
- |
39,752 | |||||||
Accrued interest |
- |
1,092 |
- |
- |
1,092 | |||||||
Income taxes payable |
- |
1,744 |
1,492 |
- |
3,236 | |||||||
Deferred tax liability |
- |
6,014 |
- |
- |
6,014 | |||||||
Total current liabilities |
- |
74,643 |
16,460 |
- |
91,103 | |||||||
Long-term obligations, less current maturities |
- |
263,197 |
621 |
- |
263,818 | |||||||
Deferred tax liabilities |
- |
78,594 |
- |
- |
78,594 | |||||||
Other long-term liabilities |
- |
11,493 |
1,545 |
- |
13,038 | |||||||
Net equity (deficit) and advances to / from subsidiaries |
- |
102,667 |
(35,525) |
(67,142) |
- | |||||||
Stockholder's equity (deficit): |
||||||||||||
Common stock |
- |
2,555 |
55,145 |
(57,700) |
- | |||||||
Additional paid-in-capital |
176,293 |
111,490 |
11,270 |
(122,760) |
176,293 | |||||||
Accumulated deficit |
(8,765) |
(2,917) |
1,185 |
1,732 |
(8,765) | |||||||
Accumulated other comprehensive income (loss) |
6,289 |
4,691 |
2,488 |
(7,179) |
6,289 | |||||||
Total stockholder's equity (deficit) |
173,817 |
115,819 |
70,088 |
(185,907) |
173,817 | |||||||
Total liabilities and stockholder's equity (deficit) |
$ 173,817 |
$ 646,413 |
$ 53,189 |
$ (253,049) |
$ 620,370 | |||||||
15
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2010
(Dollars in thousands)
Parent |
||||||||||||
Thermadyne |
||||||||||||
Holdings |
Non- |
|||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | ||||||||
ASSETS |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ - |
$ 18,692 |
$ 3,707 |
$ - |
$ 22,399 | |||||||
Trusteed assets |
183,685 |
- |
- |
- |
183,685 | |||||||
Accounts receivable, net |
- |
53,399 |
12,242 |
- |
65,641 | |||||||
Inventories |
- |
75,391 |
10,049 |
- |
85,440 | |||||||
Prepaid expenses and other |
725 |
4,912 |
2,944 |
- |
8,581 | |||||||
Deferred tax assets |
- |
2,644 |
- |
- |
2,644 | |||||||
Total current assets |
184,410 |
155,038 |
28,942 |
- |
368,390 | |||||||
Property, plant and equipment, net |
- |
70,584 |
5,212 |
- |
75,796 | |||||||
Deferred financing fees |
- |
14,553 |
- |
- |
14,553 | |||||||
Other assets |
- |
1,632 |
- |
- |
1,632 | |||||||
Goodwill |
- |
164,678 |
- |
- |
164,678 | |||||||
Intangibles, net |
- |
155,036 |
- |
- |
155,036 | |||||||
Investment in and advances to subsidiaries |
163,876 |
79,232 |
- |
(243,108) |
- | |||||||
Total assets |
$ 348,286 |
$ 640,753 |
$ 34,154 |
$ (243,108) |
$ 780,085 | |||||||
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) |
||||||||||||
Current Liabilities: |
||||||||||||
Senior subordinated notes due 2014 |
$ 176,095 |
$ - |
$ - |
$ - |
$ 176,095 | |||||||
Current maturities of long-term obligations |
- |
2,006 |
201 |
- |
2,207 | |||||||
Accounts payable |
- |
22,137 |
4,839 |
- |
26,976 | |||||||
Accrued and other liabilities |
- |
33,162 |
4,833 |
- |
37,995 | |||||||
Accrued interest |
8,062 |
1,122 |
- |
- |
9,184 | |||||||
Income taxes payable |
- |
3,722 |
433 |
- |
4,155 | |||||||
Deferred tax liability |
- |
6,014 |
- |
- |
6,014 | |||||||
Total current liabilities |
184,157 |
68,163 |
10,306 |
- |
262,626 | |||||||
Long-term obligations, less current maturities |
- |
264,238 |
326 |
- |
264,564 | |||||||
Deferred tax liabilities |
- |
74,832 |
- |
- |
74,832 | |||||||
Other long-term liabilities |
- |
13,551 |
1,108 |
- |
14,659 | |||||||
Net equity (deficit) and advances to / from subsidiaries |
725 |
210,319 |
3,291 |
(214,335) |
- | |||||||
Stockholder's equity (deficit): |
||||||||||||
Common stock |
- |
- |
- |
- |
- | |||||||
Additional paid-in-capital |
176,035 |
- |
- |
- |
176,035 | |||||||
Accumulated deficit |
(14,680) |
(12,968) |
(661) |
13,629 |
(14,680) | |||||||
Accumulated other comprehensive income (loss) |
2,049 |
22,618 |
19,784 |
(42,402) |
2,049 | |||||||
Total stockholder's equity (deficit) |
163,404 |
9,650 |
19,123 |
(28,773) |
163,404 | |||||||
Total liabilities and stockholder's equity (deficit) |
$ 348,286 |
$ 640,753 |
$ 34,154 |
$ (243,108) |
$ 780,085 | |||||||
16
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
Parent |
|||||||||||
Thermadyne |
|||||||||||
Holdings |
Non- |
||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | |||||||
Net sales |
$ - |
$ 133,450 |
$ 27,576 |
$ (31,757) |
$ 129,269 | ||||||
Cost of goods sold |
- |
90,886 |
22,344 |
(31,755) |
81,475 | ||||||
Gross margin |
- |
42,564 |
5,232 |
(2) |
47,794 | ||||||
Selling, general and administrative expenses |
(2) |
23,253 |
4,474 |
- |
27,725 | ||||||
Amortization of intangibles |
- |
1,704 |
- |
- |
1,704 | ||||||
Restructuring |
- |
615 |
- |
- |
615 | ||||||
Operating income (loss) |
2 |
16,992 |
758 |
(2) |
17,750 | ||||||
Other income (expense): |
|||||||||||
Interest, net |
- |
(6,022) |
(34) |
- |
(6,056) | ||||||
Amortization of deferred financing costs |
- |
(417) |
- |
- |
(417) | ||||||
Equity in net income (loss) of subsidiaries |
5,964 |
- |
- |
(5,964) |
- | ||||||
Income (loss) before tax provision |
5,966 |
10,553 |
724 |
(5,966) |
11,277 | ||||||
Income tax provision |
- |
4,656 |
655 |
- |
5,311 | ||||||
Net income (loss) |
$ 5,966 |
$ 5,897 |
$ 69 |
$ (5,966) |
$ 5,966 |
17
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2010
(unaudited)
(Dollars in thousands)
Parent |
|||||||||||
Thermadyne |
|||||||||||
Holdings |
Non- |
||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | |||||||
Net sales |
$ - |
$ 117,738 |
$ 10,902 |
$ (20,044) |
$ 108,596 | ||||||
Cost of goods sold |
- |
84,214 |
7,419 |
(19,908) |
71,725 | ||||||
Gross margin |
- |
33,524 |
3,483 |
(136) |
36,871 | ||||||
Selling, general and administrative expenses |
231 |
22,804 |
1,687 |
- |
24,722 | ||||||
Amortization of intangibles |
- |
680 |
- |
- |
680 | ||||||
Operating income (loss) |
(231) |
10,040 |
1,796 |
(136) |
11,469 | ||||||
Other income (expenses): |
|||||||||||
Interest, net |
(4,839) |
(1,090) |
(10) |
- |
(5,939) | ||||||
Amortization of deferred financing costs |
(124) |
(127) |
- |
- |
(251) | ||||||
Equity in net income (loss) of subsidiaries |
7,765 |
- |
- |
(7,765) |
- | ||||||
Loss on debt extinguishment |
- |
(1,867) |
- |
- |
(1,867) | ||||||
Income (loss) before tax provision |
2,571 |
6,956 |
1,786 |
(7,901) |
3,412 | ||||||
Income tax provision |
- |
393 |
448 |
- |
841 | ||||||
Net income (loss) |
$ 2,571 |
$ 6,563 |
$ 1,338 |
$ (7,901) |
$ 2,571 | ||||||
18
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
Parent |
|||||||||||
Thermadyne |
|||||||||||
Holdings |
Non- |
||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | |||||||
Net sales |
$ - |
$ 53,056 |
$ 49,010 |
$ (56,300) |
$ 245,766 | ||||||
Cost of goods sold |
- |
180,896 |
39,664 |
(55,814) |
164,746 | ||||||
Gross margin |
- |
72,160 |
9,346 |
(486) |
81,020 | ||||||
Selling, general and administrative expenses |
(2) |
45,329 |
7,228 |
- |
52,555 | ||||||
Amortization of intangibles |
- |
3,408 |
- |
- |
3,408 | ||||||
Restructuring |
- |
615 |
- |
- |
615 | ||||||
Operating income (loss) |
2 |
22,808 |
2,118 |
(486) |
24,442 | ||||||
Other income (expense): |
|||||||||||
Interest, net |
484 |
(12,768) |
(69) |
- |
(12,353) | ||||||
Amortization of deferred financing costs |
- |
(788) |
- |
- |
(788) | ||||||
Equity in net income (loss) of subsidiaries |
5,429 |
- |
- |
(5,429) |
- | ||||||
Income (loss) before tax provision |
5,915 |
9,252 |
2,049 |
(5,915) |
11,301 | ||||||
Income tax provision |
- |
4,183 |
1,203 |
- |
5,386 | ||||||
Income (loss) from continuing operations |
5,915 |
5,069 |
846 |
(5,915) |
5,915 | ||||||
Discontinued Operations: |
|||||||||||
Income(Loss) from discontinued operations, net of tax |
- |
- |
- |
- |
- | ||||||
Net income (loss) |
$ 5,915 |
$ 5,069 |
$ 846 |
$ (5,915) |
$ 5,915 | ||||||
19
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2010
(unaudited)
(Dollars in thousands)
Parent |
|||||||||||
Thermadyne |
|||||||||||
Holdings |
Non- |
||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | |||||||
Net sales |
$ - |
$ 223,956 |
$ 19,864 |
$ (38,607) |
$ 205,213 | ||||||
Cost of goods sold |
- |
160,769 |
13,778 |
(38,245) |
136,302 | ||||||
Gross margin |
- |
63,187 |
6,086 |
(362) |
68,911 | ||||||
Selling, general and administrative expenses |
248 |
42,084 |
3,812 |
- |
46,144 | ||||||
Amortization of intangibles |
- |
1,357 |
- |
- |
1,357 | ||||||
Operating income (loss) |
(248) |
19,746 |
2,274 |
(362) |
21,410 | ||||||
Other income (expense): |
|||||||||||
Interest, net |
(9,741) |
(2,489) |
(45) |
- |
(12,275) | ||||||
Amortization of deferred financing costs |
(247) |
(268) |
- |
- |
(515) | ||||||
Equity in net income (loss) of subsidiaries |
15,103 |
- |
- |
(15,103) |
- | ||||||
Loss on debt extinguishment |
- |
(1,867) |
- |
- |
(1,867) | ||||||
Income (loss) before tax provision |
4,867 |
15,122 |
2,229 |
(15,465) |
6,753 | ||||||
Income tax provision |
- |
1,224 |
662 |
- |
1,886 | ||||||
Net income (loss) |
$ 4,867 |
$ 13,898 |
$ 1,567 |
$ (15,465) |
$ 4,867 | ||||||
20
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2011
(unaudited)
(Dollars in thousands)
Parent |
||||||||||||
Thermadyne |
||||||||||||
Holdings |
Non- |
|||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | ||||||||
Cash flows from operations: |
||||||||||||
Net cash provided by (used in) operating activities |
$ (1,164) |
$ 1,441 |
$ 1,641 |
$ (11,897) |
$ (9,979) | |||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
- |
(5,530) |
(2,385) |
- |
(7,915) | |||||||
Other |
- |
(322) |
- |
- |
(322) | |||||||
Net cash provided by (used in) investing activities |
- |
(5,852) |
(2,385) |
- |
(8,237) | |||||||
Cash flows from financing activities: |
||||||||||||
Repayments of other long-term obligations |
- |
(1,934) |
540 |
- |
(1,394) | |||||||
Repayment of Senior Subordinated Notes |
(176,095) |
- |
- |
- |
(176,095) | |||||||
Use of Trusteed Assets for redemption of Senior Subordinated Notes |
183,685 |
- |
- |
- |
183,685 | |||||||
Changes in net equity |
(6,426) |
(6,750) |
1,279 |
11,897 |
- | |||||||
Other |
- |
(275) |
- |
- |
(275) | |||||||
Net cash provided by (used in) financing activities |
1,164 |
(8,959) |
1,819 |
11,897 |
5,921 | |||||||
- | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
- |
386 |
176 |
- |
562 | |||||||
- | ||||||||||||
Net cash provided by (used in) continuing operations |
- |
(12,984) |
1,251 |
- |
(11,733) | |||||||
Total increase (decrease) in cash and cash equivalents |
- |
(12,984) |
1,251 |
- |
(11,733) | |||||||
Total cash and cash equivalents beginning of period |
- |
18,692 |
3,707 |
- |
22,399 | |||||||
Total cash and cash equivalents end of period |
$ - |
$ 5,708 |
$ 4,958 |
$ - |
$ 10,666 | |||||||
21
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010
(unaudited)
(Dollars in thousands)
Parent |
||||||||||||
Thermadyne |
||||||||||||
Holdings |
Non- |
|||||||||||
Corporation |
Guarantors |
Guarantors |
Eliminations |
Consolidated | ||||||||
Cash flows from operations: |
||||||||||||
Net cash provided by (used in) operating activities |
$ 5,861 |
$ 35,021 |
$ 3,428 |
$ (15,465) |
$ 28,845 | |||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
- |
(4,217) |
(257) |
- |
(4,474) | |||||||
Other |
- |
- |
(253) |
- |
(253) | |||||||
Net cash provided by (used in) investing activities |
- |
(4,217) |
(510) |
- |
(4,727) | |||||||
Cash flows from financing activities: |
||||||||||||
Borrowings under Working Capital Facility |
- |
1,161 |
- |
- |
1,161 | |||||||
Repayments under Working Capital Facility |
- |
(1,142) |
- |
- |
(1,142) | |||||||
Repayments of Second-Lien Facility and other |
- |
(25,656) |
(75) |
- |
(25,731) | |||||||
Exercise of employee stock purchases |
46 |
- |
- |
- |
46 | |||||||
Other |
(5,907) |
(6,995) |
(2,563) |
15,465 |
- | |||||||
Net cash provided by (used in) financing activities |
(5,861) |
(32,632) |
(2,638) |
15,465 |
(25,666) | |||||||
- | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
- |
(279) |
(151) |
- |
(430) | |||||||
- | ||||||||||||
Total increase (decrease) in cash and cash equivalents |
- |
(2,107) |
129 |
- |
(1,978) | |||||||
Total cash and cash equivalents beginning of period |
- |
11,740 |
3,146 |
- |
14,886 | |||||||
Total cash and cash equivalents end of period |
$ - |
$ 9,633 |
$ 3,275 |
$ - |
$ 12,908 | |||||||
Stock compensation expense was reclassified from financing activities to operating activities for period shown.
22
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global designer and manufacturer of gas and arc cutting and welding products, including equipment, accessories and consumables. Our products are used by manufacturing, construction, fabrication and foundry operations to cut, join and reinforce steel, aluminum and other metals. We design, manufacture and sell products in five principal categories: (1) gas equipment; (2) plasma power supplies, torches and related consumable parts; (3) arc accessories, including torches, guns, related consumable parts and accessories; (4) welding equipment; and (5) filler metals. We operate our business in one reportable segment. Our products are sold domestically primarily through industrial welding distributors, retailers and wholesalers. Internationally, we sell our products through our sales force, independent distributors and wholesalers. Our operating profit is affected by the mix of our products sold during a period as margins vary between torches, guns, power supplies, consumables and replacement parts.
Demand for our products is highly cyclical because many of the end-users of our products are themselves in highly cyclical industries, such as commercial construction, steel shipbuilding, petrochemical construction and general manufacturing. The demand for our products and, therefore, our results of operations are directly related to the level of production in these end-user industries.
The availability and the cost of the components of our manufacturing processes, and particularly raw materials, are key determinants in achieving future success in the marketplace and profitability. The principal raw materials we use in manufacturing our products are copper, brass, steel and plastic, which are widely available. Certain other raw materials used in our hardfacing products, such as cobalt and chromium, are available primarily from sources outside the United States. Historically, we have been able to obtain adequate supplies of raw materials at acceptable prices but with increasing volatility. To maintain our profit margins, we have redesigned the material content of selected products and continued to reduce our overhead and labor costs by improving our operational efficiency, relocating jobs, consolidating our manufacturing operations and outsourcing production of certain components and products. We have increased and continue to selectively increase our selling prices.
Our operating profit is also affected by the mix of the products we sell, as margins are generally higher on torches and guns and their replacement parts, as compared to power supplies and filler metals.
We sell our products domestically primarily through industrial welding distributors and wholesalers. Internationally, we sell our products through our sales force, independent distributors and wholesalers.
On December 3, 2010 (“Acquisition Date”), pursuant to an Agreement and Plan of Merger dated as of October 5, 2010 (the “Merger Agreement”), Razor Merger Sub Inc. (“Merger Sub”), a newly formed Delaware corporation, merged with and into Thermadyne, with Thermadyne surviving as a direct, wholly-owned subsidiary of Razor Holdco Inc., a Delaware corporation (“Acquisition”). Razor Holdco Inc. was renamed Thermadyne Technologies Holdings, Inc. (“Technologies”). Technologies’ sole asset is its 100% ownership of the stock of Thermadyne. Affiliates of Irving Place Capital (“IPC”), a private equity firm based in New York focused on making equity investments in middle-market companies, along with its co-investors, hold approximately 99% of the outstanding equity of Technologies, and certain members of Thermadyne management hold the remaining equity capital.
Although Thermadyne continued as the same legal entity after the Acquisition, the application of push down accounting represents the termination of the old accounting entity and the creation of a new one. In addition, the basis of presentation is not consistent between the successor and predecessor entities and the financial statements are not presented on a comparable basis. As a result, the accompanying consolidated statements of operations, cash flows, and stockholders’ equity are presented for two periods: Predecessor and Successor, which related to the period preceding the Acquisition (prior to December 3, 2010), and the period succeeding the Acquisition, respectively.
23
Cautionary Statement Concerning Forward-looking Statements
The statements in this Quarterly Report that relate to future plans, events or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, including statements regarding our future prospects. These statements may be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions that relate to future events and occurrences. Actual results could differ materially due to a variety of factors and the other risks described in this Quarterly Report and the other documents we file from time to time with the Securities and Exchange Commission. Factors that could cause actual results to differ materially from those expressed or implied in such statements include, but are not limited to, the following: (a) the impact of uncertain global economic conditions on our business and those of our customers, (b) the cost and availability of raw materials, (c) operational and financial developments and restrictions affecting our international sales and operations, (d) the impact of currency fluctuations, exchange controls, and devaluations, (e) consolidation within our customer base and the resulting increased concentration of our sales, (f) actions taken by our competitors that affect our ability to retain our customers, (g) the effectiveness of our cost reduction initiatives in our continuous improvement program, (h) our ability to meet customer needs by introducing new and enhanced products, (i) our ability to adequately enforce or protect our intellectual property rights, (j) the detrimental cash flow impact of increasing interest rates and our ability to comply with financial covenants in our debt instruments, (k) disruptions in the credit markets, (l) our relationships with our employees and our ability to retain and attract qualified personnel, (m) liabilities arising from litigation, including product liability risks, (n) the costs of compliance with and liabilities arising under environmental laws and regulations, and (o) the reorganization of our North American manufacturing could result in disruptions in production and an inability to satisfy customer demands. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof and are not guarantees of performance or results. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or that reflect the occurrence of unanticipated events. For a discussion of factors that may affect future results see “Risk Factors” included in our Registration Statement on Form S-4 declared effective by the SEC on July 1, 2011.
Key Indicators
Key economic measures relevant to our business include steel consumption, industrial production trends and purchasing manager indices. Industries that we believe provide a reasonable indication of demand for our products include industrial manufacturing, construction and transportation, oil and gas exploration, metal fabrication and farm machinery, shipbuilding, and railcar manufacturing. The trends in these industries provide insights to us in gauging our business. Indicators with a more direct relationship to our business that might provide a forward-looking view of market conditions and demand for our products are not available.
Key performance measurements we use to manage the business include orders, sales, commodity cost trends, warranty claims, operating expenses and efficiencies, inventory levels and fill-rates. The timing of these measurements varies but may be daily, weekly and monthly depending on the need for management information and the availability of data.
Key financial measurements we use to evaluate the results of our business as well as the operations of our individual units include customer order levels and mix, sales order profitability, production volumes and variances, selling, general and administrative expense leverage, earnings before interest, taxes, depreciation and amortization, operating cash flows, capital expenditures and working capital. We define controllable working capital as accounts receivable and inventory, reduced by accounts payable. We review these measurements monthly, quarterly and annually and compare them over historical periods, as well as with objectives that are established by management and approved by our Board of Directors.
RESULTS OF OPERATIONS
All references to the second quarter and first six months of 2011 relate to the three and six months ended June 30, 2011 of the Successor. All references to the second quarter and first six months of 2010 relate to the three and six months ended June 30, 2010 of the Predecessor. We believe that the discussion of our operational results of our Successor and Predecessor periods, while on different bases of accounting related to the application of purchase accounting, is appropriate as we highlight changes to operational results as well as purchase accounting related items.
The following is a discussion of the results of continuing operations for the three and six months ended June 30, 2011 and 2010.
24
Net sales
Successor |
Predecessor |
Successor |
Predecessor |
|||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
(Dollars in thousands) |
2011 |
2010 |
% Change |
2011 |
2010 |
% Change | ||||||
Net sales summary: |
||||||||||||
U.S. |
$ 71,187 |
$ 58,756 |
21.2% |
$ 137,285 |
$ 111,379 |
23.3% | ||||||
International |
58,082 |
49,840 |
16.5% |
108,481 |
93,834 |
15.6% | ||||||
Consolidated |
$ 129,269 |
$ 108,596 |
19.0% |
$ 245,766 |
$ 205,213 |
19.8% |
Net sales for the three months ended June 30, 2011 increased $20.7 million as compared to the same period in 2010 with approximately $12.4 million related to increased volumes, $2.7 million associated with price increases and $5.6 million attributable to foreign currency translation.
Net sales for the six months ended June 30, 2011 increased $40.6 million as compared to the same period in 2010 with approximately $29.8 million related to increased volumes, $2.4 million associated with price increases and $8.4 million attributable to foreign currency translation.
Gross margin
Successor |
Predecessor |
Successor |
Predecessor |
|||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
(Dollars in thousands) |
2011 |
2010 |
% Change |
2011 |
2010 |
% Change | ||||||
Gross margin |
$ 47,794 |
$ 36,871 |
29.6% |
$ 81,020 |
$ 68,911 |
17.6% | ||||||
Gross margin as a percent of net sales |
37.0% |
34.0% |
33.0% |
33.6% |
For the three months ended June 30, 2011, gross margin as a percent of net sales increased as compared to the same period in 2010. In the second quarter of 2011, the Company charged cost of sales with $1.2 million of depreciation related to fair value purchase accounting adjustments for fixed assets. Under its use of the last-in first-out (“LIFO”) inventory method, the Company also recorded a $0.5 million charge to cost of sales in the second quarter of 2011 and with no LIFO related charges in the second quarter of 2010. Excluding these items, gross margin as a percent of net sales was 38.3% in 2011 as compared to 34.0% in 2010. This increase in gross margin is due to the beneficial impact of manufacturing efficiencies arising from increased volumes of activity in 2011 and the timing of price increases in the second quarter.
For the six months ended June 30, 2011, gross margin as a percent of net sales decreased as compared to the same period in 2010. In the first half of 2011, the Company expensed $5.6 million to cost of sales related to fair value purchase accounting adjustments for inventory and depreciation of fixed assets. Under its use of the last-in first-out (“LIFO”) inventory method, the Company also recorded a $1.5 million charge to cost of sales in the first six months of 2011 resulting from expected inflation in 2011. In 2010, the Company recorded a $0.1 million charge to cost of sales under its use of LIFO inventory method. Excluding these items, gross margin as a percent of net sales was 35.9% in 2011 as compared to 33.6% in 2010. The increase in gross margin is primarily due to the beneficial impact of manufacturing efficiencies arising from increased volumes of activity in 2011 and our price increases in the second quarter.
Selling, general and administrative expenses
Successor |
Predecessor |
Successor |
Predecessor |
|||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
(Dollars in thousands) |
2011 |
2010 |
% Change |
2011 |
2010 |
% Change | ||||||
Selling, general and administrative expenses |
$ 27,725 |
$ 24,722 |
12.1% |
$ 52,555 |
$ 46,144 |
13.9% | ||||||
SG&A as a percent of net sales |
21.4% |
22.8% |
21.4% |
22.5% |
For the three months ended June 30, 2011, selling, general, and administrative (“SG&A) costs increased $3.0 million over the comparable period of 2010. SG&A expenses for the three months ended June 30, 2011 includes $0.7 million of increased salary and benefit costs, $0.7 million of IPC management service fees and $0.3 million in additional fees for strategic consulting as compared to the same period of 2010. SG&A expenses in the second quarter of 2011 also reflect an increase of $0.9 million due to changes in foreign exchange rates when compared to the second quarter of 2010.
25
For the six months ended June 30, 2011, SG&A costs increased $6.4 million over the comparable period of 2010. SG&A expenses for the six months ended June 30, 2011 include $2.4 million of increased salary and benefits costs, $1.1 million of IPC management service fees, $1.0 million in additional fees for strategic consulting and $0.5 million of increased incentive compensation as compared to the same period of 2010. SG&A expenses in the first six months of 2011 also reflect an increase of $1.4 million due to changes in foreign exchange rates when compared to the first six months of 2010.
Restructuring
In the second quarter of 2011, the Company committed to a restructuring plan that includes exit activities at a manufacturing site in West Lebanon, New Hampshire. The Company expects to complete these activities during the first half of 2012. These exit activities impact approximately 100 employees and are intended to reduce the Company’s fixed cost structure and better align its global manufacturing and distribution footprint.
The following provides a summary of restructuring costs incurred during 2011 to date and total expected restructuring costs associated with these activities by major type of cost:
Incurred during |
Total estimated | ||
the quarter ended |
amount expected | ||
June 30, 2011 |
to be incurred | ||
Employee termination benefits |
$ 396 |
$ 3,300 | |
Other restructuring costs |
219 |
4,200 | |
Total restructuring costs |
$ 615 |
$ 7,500 |
Employee termination benefits primarily include severance and retention payments to employees impacted by exit activities. Other restructuring costs include changes to the lease terms of the impacted facility, expense to relocate certain individuals and equipment to other manufacturing locations and employee training costs.
The payments for these exit activities are expected to be made primarily in the second half of 2011 with some continuing payments throughout 2012.
Interest, net
(Dollars in thousands) |
2011 |
2010 |
% Change |
2011 |
2010 |
% Change | ||||||
Interest, net |
$ 6,056 |
$ 5,939 |
2.0% |
$ 12,353 |
$ 12,275 |
0.6% |
Interest expense for the three months ended June 30, 2011 and 2010 was $6.1 million and $5.9 million. The increase in interest expense reflects the effect of $73 million of incremental average debt in 2011 as compared to 2010 and a reduced effective interest rate of 9.02% in 2011 as compared to 11.77% in 2010.
Interest expense for the six months ended June 30, 2011 and 2010 was $12.4 million and $12.3 million. The increase in interest expense reflects the effect of $68 million of incremental average debt in 2011 as compared to 2010 and a reduced effective interest rate of 9.21% in 2011 as compared to 11.92% in 2010.
Income tax provision
Successor |
Predecessor |
Successor |
Predecessor |
|||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
(Dollars in thousands) |
2011 |
2010 |
% Change |
2011 |
2010 |
% Change | ||||||
Income tax provision (benefit) |
$ 5,311 |
$ 841 |
531.5% |
$ 5,386 |
$ 1,886 |
185.6% | ||||||
Percent of income before tax |
47.1% |
24.6% |
47.7% |
27.9% |
The effective tax rate for 2011 is estimated to approximate 47.7% for the year. The effective tax rate exceeds the federal statutory rate primarily because foreign earnings are currently taxable as “deemed dividends” in the U.S. These deemed dividends are not offset by the foreign tax credits due to the uncertainty of their utilization. For the first half of 2010, the effective income tax rate was 27.9%. The lower effective rate in 2010 of the Predecessor resulted from the use of net operating loss carryovers to offset U.S. pre-tax income. The income taxes currently payable for 2011 are estimated to be 35% and are primarily related to foreign jurisdictions.
26
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that all recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of cash are working capital needs, capital expenditures and debt service obligations. We expect that these ongoing requirements will be funded from operating cash flow and periodic borrowings under the Working Capital Facility.
The Company’s cash flows from continuing operations from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows, are summarized in the following table:
Successor |
Predecessor | ||||
(Dollars in thousands) |
Six Months Ended | ||||
June 30, | |||||
Net cash provided by (used in): |
2011 |
2010 | |||
Operating activities |
$ (9,979) |
$ 28,845 | |||
Investing activities |
(8,237) |
(4,727) | |||
Financing activities |
5,921 |
(25,666) |
Operating Activities
Operating activities for the first six months of 2011 used $10.0 million of cash compared to the $28.8 million of cash provided during the same period in 2010. The change in operating assets and liabilities required $30.3 million of cash during the six months ended June 30, 2011 compared to the $17.3 million of cash provided in the six months ended June 30, 2010. The changes in operating assets and liabilities, excluding foreign currency translation effects, included:
• Accounts receivable increased $13.6 million during the six months ended June 30, 2011 and increased $9.5 million during the same period in 2010 as a result of increased sales in each of these periods and to provide safety stock of $3.0 million in connection with the exit from our New Hampshire manufacturing facility.
• Inventory increases required $15.6 million and $6.8 million of cash for the first six months of 2011 and 2010, respectively, as inventories were increased to satisfy increased customer demand.
• Prepaid expenses increased $3.6 million in the first six months of 2011 as compared to a decrease of $0.3 million in the same period in 2010. The changes in both periods resulted primarily from changes in U.S. dollar currency hedges by our Australian subsidiary.
• Accounts payable increases provided $12.8 million and $23.4 million of cash in the first six months of 2011 and 2010, respectively. The first six months of 2011 reflect increases in amounts payable to suppliers related to increased inventory purchases in support of the increase in customer demand. The six months ended June 30, 2010 reflects the beneficial impact of approximately $14.0 million of early payment of supplier invoices during the fourth quarter of 2009, which reduced the cash usage requirements for the six months ended June 30, 2010.
• Accrued liabilities decreased $0.5 million in the first six months of 2011 due to payments of prior year incentive compensation liabilities and acquisition-related accruals, partially offset by increases in U.S. dollar currency hedges of $2.9 million. During the first six months of 2010, accrued liabilities increased $10.3 million due primarily to increases in incentive compensation and customer rebates with minimal payments during the period for prior year liabilities.
· Accrued interest decreased $8.1 million in the first six months of 2011 compared to an increase of $0.7 in the first six months of 2010. The difference in activity reflects an $8.7 million payment on the Senior Subordinated Notes in conjunction with their redemption on February 1, 2011.
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Investing Activities
Investing activities used $8.2 million and $4.7 million of cash for the six months ended June 30, 2011 and 2010, respectively, primarily for manufacturing equipment purchases.
Financing Activities
During the six months ended June 30, 2011, the Company retired the $176.1 million of Senior Subordinated Notes outstanding and paid the related interest obligation of $8.7 million with the Trusteed Assets established in the December 2010 defeasance of the Notes. For the same period in 2010, the Company had net repayments of $25.7 million of the Working Capital Facility.
With respect to the Working Capital Facility, $2.1 million of letters of credit were outstanding and the unused availability, net of these letters of credit, was $55.9 million at June 30, 2011.
In 2011, we anticipate capital expenditures will be $16 million to $18 million, including $10 million to $12 million to expand our manufacturing facilities in Hermosillo, Mexico and machining equipment in Denton, Texas. For the six months ended June 30, 2011, we incurred $7.9 million in capital expenditures.
At June 30, 2011, the Company was in compliance with its financial covenants. We believe the Company has sufficient funding and Working Capital Facility availability to satisfy its operating needs, to fulfill its current debt repayment obligations, and to fund capital expenditure commitments. Failure to comply with our financial covenants in future periods would result in defaults under our debt agreements unless covenants are amended or waived. We believe the most restrictive financial covenant under our debt agreements is the “fixed charge coverage” covenant under our Working Capital Facility, which was amended on December 3, 2010. A default of the financial covenants under the Working Capital Facility would constitute a default under the Senior Secured Notes due 2017. An event of default under our debt agreements, if not waived, could result in the acceleration of these debt obligations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary financial market risks relate to fluctuations in commodity prices, currency exchange rates and interest rates.
Copper, brass and steel constitute a significant portion of our raw material costs. These commodities are subject to price fluctuations which we may not be able to recover and maintain historical margins depending upon competitive pricing conditions at the time. When feasible, we attempt to establish fixed price purchase commitments with suppliers to provide stability in our materials component costs for periods of three to six months. We have not experienced and do not anticipate constraints on the availability of these commodities.
Approximately one-half of our international sales are export sales from the United States which are primarily denominated in U.S. dollars. The balance of the international sales arises from sales conducted in foreign currencies primarily in Australia, Canada and Europe. Our exposure to foreign currency transactions is partially mitigated through our manufacturing locations in Australia, Italy and Malaysia. Our Australian operations execute 60 and 90 day forward purchase commitments for U.S. dollars to help provide stability in the cost of purchased materials and components which are payable in U.S. dollars. However, our financial results could be significantly affected by changes in foreign currency exchange rates in the foreign markets. We are most susceptible to a strengthening U.S. dollar, which would have a negative effect on our export sales and a negative effect on the translation of local currency financial statements into U.S. dollars, our reporting currency. We may also incur transaction gains or losses resulting from changes in foreign currency exchange rates primarily between our U.K. distribution operations and continental Europe.
We are exposed to changes in interest rates through our Working Capital Facility, which has LIBOR based variable interest rates. At June 30, 2011, $2.1 million of letters of credit were outstanding under the Working Capital Facility.
Item 4. Controls and Procedures
The Company’s management, under the supervision and with the participation of the Company’s President and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2011. Based upon their evaluation, the Company’s President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. They have also determined in their evaluation that there was no change in the Company’s internal controls over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note 9 – “Contingencies” to the Company’s condensed consolidated financial statements is incorporated by reference herein.
Item 1A. Risk Factors
The reorganization of our North American manufacturing could result in disruptions in production and an inability to satisfy customer demands.
On June 14, 2011, we announced that we will be relocating the manufacturing operations located in West Lebanon, New Hampshire, to our facilities in Denton, Texas, and Hermosillo, Mexico. This reorganization, which requires the relocation of significant equipment and other assets used to produce plasma cutting and welding equipment, will ultimately impact approximately 100 employees and is not expected to be completed until December, 31, 2011. Due to the degree of complexity and time required to relocate our operations, we might experience disruptions in the production of such equipment and our ability to meet customer demand might be adversely affected.
Other than as set forth above, there have been no material changes to the risk factors disclosed in the Company’s Registration Statement on Form S-4, as filed with the SEC and declared effective on July 1, 2011.
Item 6. Exhibits
*31.1 |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | ||
*31.2 |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | ||
*32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002. * | ||
*32.2 |
— |
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002. * |
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* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THERMADYNE HOLDINGS CORPORATION |
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/s/ Steven A. Schumm | ||||
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Steven A. Schumm |
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Executive Vice President, Chief Financial and Administrative Officer |
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(Principal Financial and Accounting Officer) |
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Date: August 15, 2011 |
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