-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ObIPWq9CUE0IQEeFzT1vYRSrzi0vkg15iTRvubT7D/doTix0yrR+nfPNGlTcL9B/ vftxSiOxLrz78ZppdnV2Cw== 0001047469-99-020079.txt : 19990514 0001047469-99-020079.hdr.sgml : 19990514 ACCESSION NUMBER: 0001047469-99-020079 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTT TECHNOLOGIES INC CENTRAL INDEX KEY: 0000720032 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 521297376 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12558 FILM NUMBER: 99620375 BUSINESS ADDRESS: STREET 1: 5875 LANDERBROOK DR STREET 2: STE 250 CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 4404461333 MAIL ADDRESS: STREET 1: 5875 LANDERBROOK DR STREET 2: STE 250 CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 FORMER COMPANY: FORMER CONFORMED NAME: FIGGIE INTERNATIONAL INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIGGIE INTERNATIONAL HOLDINGS INC DATE OF NAME CHANGE: 19870112 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended March 31, 1999 Commission file number 1-8591 -------------- ------ SCOTT TECHNOLOGIES, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-1297376 - ---------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5875 Landerbrook Drive, Suite 250 Mayfield Heights, Ohio 44124 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (440) 446-1333 ------------------------------- (Registrant's telephone number) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding as of April 29, 1999 - ------------------------------------------------------------------------------ Common Stock, par value $.10 per share 18,241,037 SCOTT TECHNOLOGIES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998. . . . . . . . . . . . 3 CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND DECEMBER 31, 1998. . . . . . . . . . . . . . . . . . . 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998. . . . . . . . . . . . 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 7 Summary of Significant Accounting Policies. . . . . . . . . . . . . . . 7 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . 8 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Contingent Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 12 Extraordinary Item - Early Extinguishment of Debt . . . . . . . . . . . 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 13 Forward-Looking Information . . . . . . . . . . . . . . . . . . . . . . 13 Results of Operations Summary . . . . . . . . . . . . . . . . . . . . . 13 Scott Aviation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Corporate and Unallocated Costs and Expenses. . . . . . . . . . . . . . 16 Financial Position and Liquidity. . . . . . . . . . . . . . . . . . . . 16 Factors Affecting the Company's Prospects . . . . . . . . . . . . . . . 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . 20 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 20 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SCOTT TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data)
Three Months Ended March 31, 1999 1998 ------- ------- Net Sales $48,753 $46,214 Cost of Sales 32,929 31,311 ------- ------- Gross Profit on Sales 15,824 14,903 ------- ------- Operating Expenses: Selling, General and Administrative 6,047 6,150 Research and Development 756 891 ------- ------- Total Operating Expenses 6,803 7,041 ------- ------- Operating Income 9,021 7,862 ------- ------- Other Expense (Income): Refinancing Costs 94 259 Interest Expense 2,528 4,216 Interest Income (599) (1,441) Other, Net 472 542 ------- ------- Income from Continuing Operations before Income Tax and Extraordinary Item 6,526 4,286 Income Tax 2,355 1,712 ------- ------- Income from Continuing Operations before Extraordinary Item 4,171 2,574 Discontinued Operations, net of tax: Income (Loss) from Operations 999 (1,875) Income on Disposal 16,380 - ------- ------- 17,379 (1,875) Income before Extraordinary Item 21,550 699 Extraordinary Item - (Loss) on Extinguishment of Debt, net of tax - (80) ------- ------- Net Income $21,550 $ 619 ------- ------- ------- ------- Weighted Average Shares - Basic 18,182 18,479 Weighted Average Shares - Diluted 18,407 18,699 PER SHARE DATA - BASIC EPS: Income from Continuing Operations $ 0.23 $ 0.14 Income (Loss) from Discontinued Operations 0.96 (0.10) ------- ------- Income Before Extraordinary Item 1.19 0.04 Extraordinary Item (Loss) - (0.01) ------- ------- Net Income $ 1.19 $ 0.03 ------- ------- ------- ------- PER SHARE DATA - ASSUMING DILUTION: Income from Continuing Operations $ 0.23 $ 0.14 Income (Loss) from Discontinued Operations 0.94 (0.10) ------- ------- Income Before Extraordinary Item 1.17 0.04 Extraordinary Item (Loss) - (0.01) ------- ------- Net Income $ 1.17 $ 0.03 ------- ------- ------- -------
See Notes to Consolidated Financial Statements. 3 SCOTT TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
March 31, December 31, ASSETS 1999 1998 ----------- ------------ (Unaudited) CURRENT ASSETS Cash and Cash Equivalents $ 39,487 $ 39,344 Trade Accounts Receivable, less Allowance for Uncollectible Accounts of $318 in 1999 and $257 in 1998 17,849 13,978 Inventories 26,005 26,360 Prepaid Expenses 668 939 Recoverable Income Taxes 505 974 Current Deferred Tax Asset 23,000 28,000 Net Assets of Discontinued Operations 47,897 25,039 -------- -------- Total Current Assets 155,411 134,634 -------- -------- PROPERTY, PLANT AND EQUIPMENT Land and Land Improvements 36,678 37,395 Buildings and Leasehold Improvements 14,721 14,696 Machinery and Equipment 19,026 18,682 -------- -------- 70,425 70,773 Accumulated Depreciation (18,705) (17,972) -------- -------- Net Property, Plant and Equipment 51,720 52,801 -------- -------- OTHER ASSETS Deferred Divestiture Proceeds and Other, Net 20,359 20,803 Prepaid Pension Costs 15,687 15,687 Intangible Assets 1,845 1,866 Cash Surrender Value of Insurance Policies 4,838 4,838 Prepaid Finance Costs 2,158 1,800 Deferred Tax Asset 19,925 26,936 Other 2,908 3,819 -------- -------- Total Other Assets 67,720 75,749 -------- -------- Total Assets $274,851 $263,184 -------- -------- -------- --------
See Notes to Consolidated Financial Statements. 4 SCOTT TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
LIABILITIES March 31, December 31, CURRENT LIABILITIES 1999 1998 ----------- ------------ (Unaudited) Accounts Payable $ 14,047 $ 15,661 Accrued Insurance Reserves 11,182 10,853 Accrued Compensation 3,874 3,964 Accrued Interest 4,878 2,435 Accrued Liabilities and Expenses 11,816 18,135 Current Portion of Long-Term Debt 22,931 24,481 -------- -------- Total Current Liabilities 68,728 75,529 -------- -------- Long-Term Debt 75,545 75,550 Non-Current Insurance Reserves 25,551 26,172 Other Non-Current Liabilities 28,057 30,667 -------- -------- Total Liabilities 197,881 207,918 -------- -------- STOCKHOLDERS' EQUITY Series A Junior Participating Preferred Shares, $1.00 Par Value; Authorized, 500 Shares; Issued and Outstanding, None - - Preferred Stock, $1.00 Par Value; Authorized, 3,217 Shares; Issued and Outstanding, None - - Common Stock, $0.10 Par Value; Authorized, 36,000 Shares; Issued and Outstanding 1999 - 18,884; 1998 - 18,855 1,888 1,886 Capital Surplus 112,561 112,409 Accumulated Deficit (25,025) (46,575) Accumulated Other Comprehensive (Loss) (3,229) (3,229) Treasury Stock, Common Shares at Cost 1999 - 685 Shares; 1998 - 685 Shares (9,225) (9,225) -------- -------- Total Stockholders' Equity 76,970 55,266 -------- -------- Total Liabilities and Stockholders' Equity $274,851 $263,184 -------- -------- -------- --------
See Notes to Consolidated Financial Statements. 5 SCOTT TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Three Months Ended March 31, 1999 1998 -------- --------- Operating Activities: Income from Continuing Operations $ 4,171 $ 2,574 Income (Loss) from Discontinued Operations 17,379 (1,875) (Loss) from Extraordinary Item - (80) Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities- Depreciation and Amortization 1,433 1,330 Other, Net (13) 801 Changes in Operating Assets and Liabilities Accounts Receivable 564 (6,096) Inventories (1,018) (1,282) Prepaid Items 41 (490) Other Assets 787 725 Accounts Payable (557) (839) Accrued Liabilities and Expenses (2,661) 5,536 Accrued Income Taxes 12,408 4,486 Other Liabilities (3,231) (1,652) -------- -------- Net Cash Provided by Operating Activities 29,303 3,138 -------- -------- Investing Activities: Capital Expenditures for Continuing Operations 322 (2,485) Capital Expenditures for Discontinued Operations (1,012) (107) Proceeds from Sale of Property, Plant and Equipment 67 2,219 Receivable from Snorkel Earn-Out (See Note 4) (26,000) - -------- -------- Net Cash (Used) by Investing Activities (26,623) (373) -------- -------- Financing Activities: Principal Payments on Debt (1,555) (3,230) Proceeds from Issuing Common Stock 154 482 Payments to Reacquire Common Stock - (1) -------- -------- Net Cash (Used) by Financing Activities (1,401) (2,749) -------- -------- Net Increase in Cash and Cash Equivalents 1,279 16 Cash and Cash Equivalents at Beginning of Year 39,446 104,243 -------- -------- Cash and Cash Equivalents at End of Period $ 40,725 $104,259 -------- -------- -------- --------
Cash and Cash Equivalents include cash from Discontinued Operations. See Notes to Consolidated Financial Statements. 6 SCOTT TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The financial information included herein has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and properly reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present a fair statement of the financial results of operations for the periods covered by this report. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the entire year. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements have been prepared in accordance with the accounting policies described in Note 1 of the Notes to Consolidated Financial Statements appearing in SCOTT TECHNOLOGIES, INC.'s 1998 Form 10-K. (2) RECEIVABLES: Receivables consist of the following components (in thousands):
March 31, December 31, 1999 1998 --------- ------------ U.S. Government Billed $ 761 $ 398 Unbilled - - ------- ------- 761 398 Commercial Billed 17,406 13,837 Allowance for Uncollectible Accounts (318) (257) ------- ------- $17,849 $13,978 ------- ------- ------- -------
U.S. Government receivables include amounts derived from contracts on which the Company performs on a prime contractor or subcontractor basis. Costs charged by the Company to the U.S. Government in the performance of U.S. Government contracts are subject to audit. The year 1994 is currently under audit. (3) INVENTORIES: Inventories consist of the following components (in thousands):
March 31, December 31, 1999 1998 --------- ------------ Raw Materials $ 7,873 $ 7,323 Work In Process 3,185 3,526 Finished Goods 15,431 15,944 Inventory Reserves (484) (433) ------- ------- Total Inventories $26,005 $26,360 ------- ------- ------- -------
7 (4) DISCONTINUED OPERATIONS: INTERSTATE ELECTRONICS: On October 21, 1998, the Board of Directors announced that it intends to divest the Company's Interstate Electronics subsidiary ("IEC"). On April 19, 1999, the Company announced that it has signed a definitive agreement to sell IEC to L-3 Communications Corporation for $60 million, subject to a final purchase price adjustment. The transaction, which is also subject to regulatory approval and other customary closing conditions, is expected to close by the end of the second quarter. As a result of the Board's decision to divest IEC, the consolidated statements of income for the three months ended March 31, 1999 and 1998, and the consolidated balance sheets as of March 31, 1999 and December 31, 1998 reflect IEC as a discontinued operation; however, in the consolidated statements of cash flows, items relating to discontinued operations have not been disaggregated as they have in the aforementioned financial statements. Previously reported 1998 financial information has been restated to reflect IEC as a discontinued operation and is summarized as follows (in thousands):
As Previously As Reported IEC Restated ---------- ---------- ---------- Three Months ended March 31, 1998: Net Sales $64,861 $(18,647) $46,214 ------- -------- ------- ------- -------- ------- Income from Continuing Operations 699 1,875 2,574 (Loss) from Discontinued Operations - (1,875) (1,875) Extraordinary Item (80) - (80) ------- -------- ------- Net Income $ 619 $ - $ 619 ------- -------- ------- ------- -------- -------
SNORKEL: On November 17, 1997, the Company sold its Snorkel division. The agreement, as amended, provides for $100 million paid to the Company at closing plus a contingent additional amount. The contingent amount will be the amount of sales of the Snorkel business for the twelve-month period commencing on April 1, 1998 and ending on March 31, 1999 (the "Earn-Out Period") in excess of $140 million, such additional payment not to exceed $20 million, plus 70% of the amount of sales of the Snorkel business during the Earn-Out Period in excess of $160 million, such additional amount not to exceed $30 million. In the first quarter of 1999, the Company recognized $26 million of income as a result of the Earn-Out. On April 30, 1999, the company received an initial payment of $27 million related to the Earn-Out. The ultimate earn-out price is subject to audit and final purchase price adjustments. Any adjustments will be received in the second quarter of 1999. PRIOR DIVESTITURES: Prior to 1999, the Company divested a number of its businesses. The contract terms under which businesses were divested include representations and warranties, covenants and indemnification provisions made by the Company to purchasers of the businesses and by purchasers of the businesses to the Company. Under the contracts, the Company has generally retained liability for events that occurred prior to sale. The Company believes that it has established appropriate accruals for losses that may arise, such as workers' compensation, product liability, general liability, environmental risks and federal and state tax matters. 8 Proceeds and other consideration from divestitures which will be paid to the Company upon fulfillment of contractual provisions, the passage of time, or the occurrence of future events have been recorded as deferred divestiture proceeds classified as non-current assets. Deferred divestiture proceeds consist of cash due to the Company from future tax benefits under a tax sharing agreement with an unaffiliated public company, Rawlings Sporting Goods Company, Inc., former facilities of discontinued business units, a note receivable from the purchaser of the Taylor Instruments business, cash held in bank escrow accounts from the sale of the Company's Hartman Electrical and Safway Steel Products operations, and other items. Deferred divestiture proceeds include management's best estimates of the amounts expected to be realized on the collection of deferred proceeds and sale of residual assets related to discontinued operations. The amounts the Company will ultimately realize could differ materially from the amounts recorded. The Company has a reserve of $12.5 million at March 31, 1999 against these assets, which is presented as a deduction from deferred divestiture proceeds. (5) INCOME TAXES: For the three-month periods ended March 31, 1999 and 1998, the following income tax provisions (benefits) have been provided (in thousands):
1999 1998 ------- ------- Continuing Operations $ 2,355 $ 1,712 ------- ------- ------- ------- Discontinued Operations $10,189 $(1,250) ------- ------- ------- ------- Extraordinary Item $ - $ (54) ------- ------- ------- -------
For the period ended March 31, 1999, net federal tax expense amounts have decreased the deferred tax asset. The current deferred tax asset as of March 31, 1999 reflects the tax benefits the Company expects to utilize in the succeeding twelve-month period. (6) CREDIT FACILITY: On December 31, 1998, the Company obtained new loan facilities ("Amended Credit Agreement") through General Electric Capital Corporation ("GECC"). The Amended Credit Agreement includes a 72-month, $75 million revolving line of credit ("Revolver") and a 69-month, $75 million, delayed draw, term loan facility ("Term Loan"). Within the Revolver is a $30 million letter of credit sub-facility. Borrowings under the Revolver are available up to the lesser of: (1) $75 million, less outstanding letters of credit, or (2) four times the Company's trailing 12 month EBITDA plus cash and cash equivalents less: (a) outstanding indebtedness and (b) a 50% letter of credit reserve. At the Company's option, borrowings under the Revolver bear interest at alternate base rates based on (1) the higher of (a) U.S. prime rate or (b) the Federal Funds rate plus 50 basis points, plus a margin ranging from 25 to 150 basis points ("Index Margin"); or 9 (2) LIBOR plus a margin ranging from 175 to 300 basis points ("LIBOR Margin"). The Index Margin and LIBOR Margin are adjusted based on the Company's leverage ratio except in the first loan year during which the Index Margin is fixed at 100 basis points and the LIBOR Margin is fixed at 250 basis points. The Term Loan is available to pay the Company's 9.875% Senior Notes due on October 1, 1999. The Company can draw amounts under the Term Loan from time to time to pay for the purchase of Senior Notes in the open market. Borrowings under the Term Loan are subject to the same interest rate alternatives as the Revolver. The Company is also permitted to arrange for financial hedges to swap a variable interest rate on the Term Loan for a fixed interest rate. The Amended Credit Agreement is secured by a majority of the Company's non-real estate assets, including certain accounts receivable, inventory, machinery and equipment, and intangibles. The facility contains various affirmative and negative covenants, including restrictions on dividends and financial covenants (maximum leverage ratio, minimum fixed charge coverage ratio and limitations on capital expenditures). As of March 31, 1999, $15.8 million of letters of credit were outstanding under the Revolver ($53.6 million was available), no borrowings were outstanding under the Revolver or Term Loan and all financial covenants have been satisfied. (7) LONG-TERM DEBT: Total debt consists of the following components (in thousands):
March 31, December 31, 1999 1998 --------- ------------ Long-Term Debt: 9.875 Senior Notes due October 1, 1999 $97,647 $97,647 Credit Facility - 1,550 Mortgage Notes 829 834 ------- ------- Total 98,476 100,031 Less - Current Portion (22,931) (24,481) ------- ------- Long Term Debt $75,545 $75,550 ------- ------- ------- -------
The Company intends to extinguish its 9.875% Senior Notes, due October 1, 1999, by using cash and the $75 million Term Loan available under the Company's Amended Credit Agreement. As a result, $75 million of Senior Notes have been classified as long-term debt with the balance classified as current maturities. Interest on the Senior Notes is payable semi-annually on April 1 and October 1. (8) CAPITAL STOCK: Each share of Common Stock is entitled to one vote per share. The Company's Board of Directors has authorized the Company to purchase up to 3 million shares of its common stock. Through March 31, 1999, the Company has purchased 684,600 at a cost of $9.2 million on the open market. The total cost of purchasing the shares is reflected as treasury stock on the Company's Balance Sheet. 10 Earnings per share ("EPS") for the three-month periods ended March 31, 1999 and 1998 were calculated using the following share data. Reconciliation of the numerators and denominators of the basic and diluted EPS calculation are as follows (in thousands, except per share data):
FOR THE THREE-MONTH PERIOD ENDED Income Shares Per Share MARCH 31, 1999 Numerator Denominator Amount --------- ----------- --------- Basic EPS Income available to common stockholders $21,550 18,182 $1.19 Effect of dilutive securities Stock Options 225 Diluted EPS Income available to common stockholders $21,550 18,407 $1.17
Options to purchase shares of common stock which were outstanding as of March 31, 1999 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares are as follows:
Grant Date # of Shares Option Price Expiration Date ---------- ----------- ------------ --------------- None
FOR THE THREE-MONTH PERIOD ENDED Income Shares Per Share MARCH 31, 1998 Numerator Denominator Amount --------- ----------- --------- Basic EPS Income available to common stockholders $619 18,479 $0.03 Effect of dilutive securities Stock Options 220 Diluted EPS Income available to common stockholders $619 18,699 $0.03
Options to purchase shares of common stock which were outstanding as of March 31, 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares are as follows:
Grant Date # of Shares Option Price Expiration Date ---------- ----------- ------------ ------------------ April 16, 1996 1 $13.1875 April 16, 2003 August 27, 1996 9 $13.50 August 27, 2003 September 22, 1997 200 $13.75 September 22, 2004 March 9, 1998 89 $13.125 March 9, 2005
11 (9) CONTINGENT LIABILITIES: The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. In the opinion of management, any liability with respect to these matters will not have a material adverse effect on the Company's financial condition, cash flow or results of operations. The Company has been cooperating with the U.S. Government in a civil investigation involving possible improprieties at an Army facility where the Company's Scott Aviation division was a supplier. The Company has furnished documents and other requested information and denies any wrongdoing. (10) EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT: In March 1998, the Company paid $3.3 million to extinguish $3.1 million of its Senior Notes due October 1, 1999. The payment included a $0.1 million premium for the early retirement of the debt and $0.1 million of accrued interest. Accordingly, in the first quarter of 1998 the Company recorded an extraordinary loss of $0.1 million on the premium to extinguish $3.1 million of Senior Notes. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION: Information contained in this report includes forward-looking statements, which can be identified by the use of forward-looking terminology such as "believes," "may," "will," "expects," "intends," "plans," "anticipates," "estimates" or "continues" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. The Company undertakes no obligation to revise these forward-looking statements to reflect any future events or circumstances. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed under the caption "Factors Affecting the Company's Prospects."
RESULTS OF OPERATIONS SUMMARY (in thousands) 1st Qtr. 1st Qtr. 1999 1998 99 vs 98 ------- -------- -------- Net Sales $48,753 $46,214 $ 2,539 Cost of Sales 32,929 31,311 1,618 ------- ------- ------- Gross Profit on Sales 15,824 14,903 921 % of Net Sales 32.5% 32.2% Operating Expenses: Selling, General and Administrative 6,047 6,150 (103) Research & Development 756 891 (135) ------- ------- ------- Total Operating Expenses 6,803 7,041 (238) ------- ------- ------- Operating Income 9,021 7,862 1,159 ------- ------- ------- % of Net Sales 18.5% 17.0% Other Expense(Income): Refinancing Costs 94 259 (165) Interest Expense 2,528 4,216 (1,688) Interest Income (599) (1,441) 842 Other, Net 472 542 (70) ------- ------- ------- Income from Continuing Operations before Income Tax and Extraordinary Item 6,526 4,286 2,240 Income Tax 2,355 1,712 643 ------- ------- ------- Income from Continuing Operations before Extraordinary Item 4,171 2,574 1,597 Discontinued Operations, net of tax 17,379 (1,875) 19,254 Extraordinary Item -(Loss) on Extinguishment of Debt, net of tax - (80) 80 ------- ------- ------- Net Income $21,550 $ 619 $20,931 ------- ------- ------- ------- ------- -------
13 Net sales for the three months ended March 31, 1999 increased by approximately 6%, compared to net sales for the same periods in 1998. The increase was due to an increase in the amount of shipments of products, principally Air-Paks, to Health and Safety customers of approximately $5.1 million, or 23%, offset by a decrease in the amount of shipments of oxygen products to Aviation and Government customers of approximately $2.6 million, or 11%. Gross profit margin increased for the three months ended March 31, 1999 due primarily to increased sales volume. Selling, general and administrative expenses for the three months improved as a percentage of net sales to 12.4% in 1999, compared to 13.3% in 1998, due primarily to lower payroll and fringes at corporate and lower professional fees. As a result of higher sales and lower operating expenses, operating income for the first quarter of 1999 of $9.0 million represented an increase of $1.1 million compared to operating income of $7.9 million in 1998. Other expenses decreased by $1.1 million to $2.5 million in the first three months of 1999 when compared to the same period in 1998, due primarily to lower interest expense as a result of lower outstanding debt. Income from continuing operations in the first quarter of 1999 increased to $4.2 million from $2.6 million in the first quarter of 1998. The increase was attributable primarily to improved results at Scott Aviation and lower corporate net interest expense. Income on discontinued operations for the first quarter of 1999 included income from operations, representing IEC's net operating results, and income on disposal representing the recognized after-tax income from the anticipated second quarter earn-out amount of $26 million on the sale of the Company's Snorkel division. The loss on discontinued operations for the first quarter of 1998 represents IEC's net operating loss. SEGMENT INFORMATION The Company has operations in one reporting segment, Scott Aviation. The results of operations are as follows: 14 SCOTT AVIATION Scott Aviation is a leading manufacturer of life support respiratory products and consists of two principal business units: Health and Safety; and Aviation and Government. The two units have benefited from several similarities. Scott Aviation has used its broad experience and expertise in high pressure gas regulation and distribution developed from the two product lines to provide end-users with products that are reliable, light weight, compact in size and user-friendly. Each unit has also benefited from the common use of manufacturing cell and team technology. In addition, Scott Aviation's uniform quality assurance program has allowed the units to work jointly to comply with the rigorous quality requirements of the government, regulatory agencies and customers. Scott Aviation's Health and Safety unit manufactures the Scott Air-Pak (*) (a self-contained breathing apparatus), air-purifying products, gas detection instruments and other life support products for firefighting and personal protection against environmental and safety hazards. Scott Aviation's Aviation and Government unit manufactures protective breathing equipment, pilot and crew oxygen masks, and emergency oxygen for passengers and crew members on commercial, government and private aircraft and ships. RESULTS OF OPERATIONS SUMMARY (in thousands)
1st Qtr. 1st Qtr. 1999 1998 99 vs 98 -------- --------- -------- Net Sales $ 48,753 $ 46,214 $ 2,539 Cost of Sales 32,929 31,311 1,618 -------- --------- -------- Gross Profit on Sales 15,824 14,903 921 % of Net Sales 32.5% 32.2% Operating Expenses: Selling, General and Administrative 4,264 3,904 360 Research & Development 756 891 (135) -------- --------- -------- Total Operating Expenses 5,020 4,795 225 -------- --------- -------- Operating Income $ 10,804 $ 10,108 $ 696 -------- --------- -------- % of Net Sales 22.2% 21.9%
DISCUSSION OF 1999 COMPARED TO 1998: Net sales for the three months ended March 31, 1999 increased by approximately 6%, compared to net sales for the same period in 1998. The increase was due to an increase in the amount of shipments of products, principally Air-Paks, to Health and Safety customers of approximately $5.1 million, or 23%, offset by a decrease in the amount of shipments of oxygen products to Aviation and Government customers of approximately $2.6 million, or 11%. Gross profit margin increased for the three months ended March 31, 1999 due primarily to increased sales volume. Selling, general and administrative expenses increased slightly as a percentage of sales during the three months ended March 31, 1999, when compared to the same period for 1998, while research and development expenses in 1999 were slightly lower. (*) Registered or common law trademarks and service marks of SCOTT TECHNOLOGIES, INC. and its subsidiaries. 15 CORPORATE AND UNALLOCATED COSTS AND EXPENSES RESULTS OF OPERATIONS SUMMARY (in thousands)
1st Qtr. 1st Qtr. 1999 1998 99 vs 98 --------- --------- -------- Selling, General and Administrative $ 1,783 $ 2,246 $ (463) Other Expenses (Income): Refinancing Costs 94 259 (165) Interest Expense 2,528 4,216 (1,688) Interest Income (599) (1,441) 842 Other, Net 472 542 (70)
DISCUSSION OF 1999 COMPARED TO 1998: Selling, general and administrative expenses have decreased $0.5 million for the first quarter of 1999 compared with the first quarter of 1998 due primarily to lower payroll and fringes and professional fees. Interest expense decreased for the first quarter of 1999 when compared to the first quarter of 1998 as a result of lower outstanding debt. Interest income decreased for the first quarter of 1999 due to the reduction in the Company's cash position. FINANCIAL POSITION AND LIQUIDITY The Company's consolidated statements of cash flows contain items relating to discontinued operations which have not been disaggregated as they have in the consolidated balance sheet. At March 31, 1999 cash and cash equivalents for both continuing and discontinued operations totaled $40.7 million, compared to $39.4 million at December 31, 1998. Net cash provided by operating activities was $29.3 million reflecting the net income from continuing operations of $4.2 million and discontinued operations of $17.4 million; the change in accrued income taxes of $12.4 million, which includes the utilization of the deferred tax asset in connection with the Company's first quarter profit; and the net cash used by other operating activities of $4.7 million. Net cash used by investing activities of $26.6 million was due primarily to the receivable recorded to reflect the estimated payment to be received by the Company as a result of the gain recognized in the first quarter of 1999 on the Snorkel earn-out. On April 30, 1999, the Company received an initial payment of $27 million related to the earn-out. Capital expenditures were $0.7 million in the first three months of 1999 and are expected to be approximately $10 million for all of 1999. Capital expenditures will be funded from internally generated funds and/or credit facilities. Net cash used by financing activities was $1.4 million, which included a $1.6 million repayment of funds previously borrowed under the Company's revolving line of credit, and $0.2 million in proceeds from the issuing of common stock in connection with the Company's stock option plan. Liquidity is provided by the Company's cash and cash equivalents, which totaled $40.7 million at March 31, 1999, and by the credit facility of which $53.6 million was available at March 31, 1999. The Company intends to extinguish its 9.875% senior notes, due October 1, 1999, by using cash and the $75 million Term Loan available under the Company's Amended Credit Agreement. 16 The Company expects to continue to focus on internal growth and market expansion at Scott Aviation, investigate acquisitions, and consider alternative strategies that may further enhance stockholder value. The Company's cash balance at March 31, 1999 is available for general corporate purposes. Those purposes may include investment in the current operations of the Company, payment of liabilities associated with previously divested businesses, use as all or a portion of the purchase price of possible acquisitions, additional repurchases of its 9.875% Senior Notes and stock purchases. The Company's Board of Directors has authorized the Company to purchase up to 3 million shares of its common stock. In 1998, the Company purchased 684,600 shares of common stock at market prices. The Company did not purchase any of its common stock in the first quarter of 1999. FACTORS AFFECTING THE COMPANY'S PROSPECTS The prospects of the Company may be affected by a number of factors, including the matters discussed below: DEPENDENCE ON GOVERNMENT CONTRACTS - Sales to the U.S. Government represented approximately 40% of the Company's combined total net sales of IEC and Scott Aviation in each of the last three years. With the discontinuance of IEC, these sales represented 7.1%, 10.0% and 9.2% of Scott Aviation's sales in 1998, 1997 and 1996, respectively. The Company expects to continue to derive a portion of Scott Aviation's revenues from Government contracts. Consequently, fluctuations in military spending by the U.S. Government could adversely affect the Company's revenues and profitability. In addition, since these contracts are the result of competitive bidding processes, there can be no assurance that the Company will be awarded future contracts, or that once awarded, the Government will not terminate such contracts at its convenience. COMPETITION - Scott Aviation's Health and Safety unit manufactures the Scott Air-Pak, air-purifying products, gas detection instruments and other life support products for firefighting and personal protection against environmental and safety hazards. Scott Aviation's Aviation and Government unit manufactures protective breathing equipment, pilot and crew oxygen masks, and emergency oxygen for passengers and crew members on commercial, government and private aircraft and ships. Both of these manufacturing units participate in markets which are technology based, industry regulated, and highly competitive. Failure by Scott Aviation to develop new products and/or remain competitive with changing industry conditions could adversely affect market share. The GPS and Displays markets that IEC participates in are highly competitive, subject to rapid change and significantly affected by new product introductions. Competition may intensify, particularly as companies well established in the defense industry increase their focus on GPS. In addition, the development and commercialization of new types of displays or position measuring systems could reduce the demand for IEC's products. Certain competitors in the respective markets have significantly greater financial, technical and marketing resources. These competitive factors could adversely affect the Company's financial condition, cash flow, results of operations or expected benefits from its restructuring initiatives. LEVERAGE - Part of the Company's strategy is to grow through acquisitions. Any such future acquisition could involve the incurrence of significant additional debt. In addition, the Company's Board of Directors has authorized the Company to purchase up to 3 million shares of its common stock. In 1998, 684,600 shares were purchased. Future purchases of common stock could affect leverage. The degree to which the Company is leveraged could: (i) impair the Company's ability to obtain future financing for acquisitions, a refinancing, or other purposes; (ii) make it more vulnerable than some of its competitors in a prolonged economic 17 downturn; and (iii) restrict its ability to exploit new business opportunities and limit its flexibility to respond to changing business conditions. DISCONTINUED OPERATIONS - Since January 1, 1994, the Company has sold numerous businesses. The contract terms included representations, warranties, and indemnification provisions made by the Company. Remedies available for breaches of representations and warranties range from monetary relief in specific amounts for specific breaches to unlimited amounts. The Company has generally retained liability for the conduct of the sold businesses prior to the date of sale. As a result, the Company is subject to various known and contingent liabilities, including indemnification obligations, with respect to its discontinued operations. The Company has established accruals and reserves for losses that may arise out of workers' compensation, product liability and general liability claims, environmental risks, tax and other matters. The Company believes that its accruals and reserves are appropriate and adequate. However, as these contractual matters are subject to significant uncertainty, no assurances can be given that the ultimate resolution of these matters will not have a material adverse effect upon the Company's financial position, operating results or cash flows. Further, at March 31, 1999, the Company's balance sheet reflected $20.4 million of deferred divestiture proceeds which is net of a reserve of $12.5 million. Deferred divestiture proceeds include management's best estimates of the amounts expected to be realized after the resolution of the underlying matters. Additionally, at March 31, 1999, the Company's balance sheet reflected $47.9 million of net assets of discontinued operations, which represents the net book value of IEC and a $26.0 million receivable from the estimated Snorkel earn-out. The Company expects to realize net proceeds from the sale of IEC in excess of the carrying value. The amounts the Company will ultimately realize from these assets may differ materially from the amounts recorded. STRATEGIC PLAN - The Company's strategic plan is to grow through strategic acquisitions, systematic market expansion and continued growth through new and "next generation" product development. Part of the Company's strategy is to grow through acquisitions. There can be no assurance, however, that the Company will identify attractive acquisitions, that such acquisitions will be consummated, or that, if consummated, any anticipated benefits will be realized from such acquisitions. In addition, the availability of additional acquisition financing cannot be assured and, depending on the terms of such additional acquisitions, could be restricted by the terms of the Amended Credit Agreement. Moreover, the process of integrating acquired operations into the Company's existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of the Company's existing operations. Future acquisitions by the Company would likely result in amortization expense of goodwill, which could have a material adverse effect on the Company's financial condition and operating results. Expansion into international markets will depend on numerous factors that are beyond the Company's control, including its ability to develop or acquire additional manufacturing and distribution capabilities outside the United States. In addition, international expansion may increase the Company's exposure to certain risks inherent in doing business outside the United States, such as currency exchange rate fluctuations, compliance with foreign codes and standards and political risks. If the Company pursues this strategy through acquisitions, strategic alliances or joint ventures, any integration of the acquired businesses into the Company's business would entail expense and management attention. If the Company pursues this strategy through the establishment of new operations, it will be subject to the difficulties inherent in starting a new business in foreign jurisdictions. There can be no assurance that the business and 18 competitive environment in international markets will be as favorable to the Company as is the U.S. market currently. The Company expects to continue to make investments in new product development. There can be no assurance that the Company will be able to develop and introduce, in a timely manner, new products or enhancements to its existing products which satisfy customer needs or achieve market acceptance. To the extent that the Company makes substantial marketing and research and development investments and such investments do not lead to commercially successful products, the Company's results of operations could be adversely affected. YEAR 2000 ISSUE - The Year 2000 Issue refers to a number of date-related problems that may affect software applications, including codes imbedded in chips and other hardware devices. These problems include software programs that identify a year by its last two digits so that a year identified as "00" would be recognized as the year "1900" rather than the year "2000." STATE OF READINESS The Company has completed the process of identifying and assessing the extent to which its manufacturing equipment, business systems and products could be affected by the Year 2000 Issue. As part of its Year 2000 Issue assessment, the Company has taken into account whether third parties with which the Company has material relationships, including the U.S. Government, are Year 2000 compliant. The Company's formalized plan is comprised of the following phases: (1) development of an inventory and ranking of risks; (2) evaluation of compliance, impact of non-compliance, and development of remediation plans; (3) remediation of material non-compliance items; (4) testing and validation of remediation efforts; (5) implementation of upgrades or replacement of non-compliance items; and (6) establishment of support assistance, as required, during the year 2000. The Company has completed the first two phases and is currently in the process of implementing the third phase. The testing and validation of remediation efforts is scheduled to be completed in the third quarter and the implementation phase is scheduled to be completed by year-end 1999. COSTS The Company's expenses have been limited to internal costs incurred in the Year 2000 Issue assessment process. The Company does not separately track such internal costs which are principally associated with payroll expenses, but estimates that the Year 2000 compliance costs for 1998 and the first quarter of 1999 were minimal. The Company estimates that the total costs (including those costs already incurred) of the Company's formalized plan, as described above, will be approximately $1.5 million. However, there can be no assurance that the Company will not incur any unanticipated costs in completing its Year 2000 Compliance Project. The estimate of $1.5 million does not include Year 2000 compliance costs related to the Company's IEC subsidiary which it plans to sell in 1999. Such costs, estimated at $0.9 million, will be included in the valuation of the business and be reflected in the purchase price ultimately received for the business. RISKS As a result of completing the first two phases of its formalized plan, the Company has identified and developed remediation plans for several significant risks. These risks relate to vendors, suppliers, distributors, customers, and other third parties, as well as to the Company's own internal information and operation systems. Any failure by the Company or third parties to ensure that the applicable computer systems are Year 2000 compliant could have a material adverse effect on the Company's operations, liquidity and financial position. Any failure of the Company's products to perform could result in claims against the Company. 19 CONTINGENCY PLANS The Company will continue to develop contingency strategies, as appropriate, as part of its Year 2000 plan. These contingency strategies may include identifying alternate suppliers, developing procedures to override internal computer systems, increasing inventory levels, and reallocating internal resources as necessary. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits 27.0 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter - None. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SCOTT TECHNOLOGIES, INC. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTT TECHNOLOGIES, INC. By: /s/ ---------------------------------------- Mark A. Kirk Senior Vice President and Chief Financial Officer (Duly Authorized and Principal Accounting Officer) Date: May 10, 1999 21 EXHIBIT INDEX
Number Description of Exhibits Page No. - ------ ----------------------- -------- 27.0 Financial Data Schedule
22 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 39,487 0 18,167 318 26,005 155,411 70,425 18,705 274,851 68,728 75,545 0 0 1,888 75,082 274,851 48,753 48,753 32,929 39,732 566 15 1,929 6,526 2,355 4,171 17,379 0 0 21,550 1.19 1.17
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