10-Q 1 form10q_10785.txt SIMONDS INDUSTRIES INC. FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001. [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the transition period from _____ to _____ Commission file number: N/A Simonds Industries Inc. ----------------------- (Exact name of registrant as specified in its charter) Delaware 05-0484518 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 135 Intervale Road Fitchburg, MA 01420 ------------------- (Address of principal executive offices) (978) 343-3731 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 [ ] Number of shares outstanding of the registrant's voting and non-voting common stock, as of July 25, 2001: 66,145.77 and 8,968.01, respectively. 1 ================================================================================ Simonds Industries Inc. Form 10-Q Index Page No. Part I. Financial Information ------------------------------ Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - December 30, 2000 and June 30, 2001 3 Consolidated Statements of Operations - three and six months ended July 1, 2000 and June 30, 2001 4 Consolidated Statements of Cash Flows - six months ended July 1, 2000 and June 30, 2001 5 Consolidated Statements of Shareholders' Equity (Deficit)- for the six months ended July 1, 2000 and June 30, 2001 6 Notes to Consolidated Financial Statements - June 30, 2001 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Part II. Other Information --------------------------- Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 2 Part 1. Financial Information Item 1. Financial Statements (Unaudited) SIMONDS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (In Thousands, except share amounts)

3 SIMONDS INDUSTRIES INC. Consolidated Statements of Operations (In Thousands) (Unaudited)

4 SIMONDS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)

5 SIMONDS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the six months ended July 1, 2000 and June 30, 2001 (In thousands, except share amounts) (Unaudited)

6 Notes to Consolidated Financial Statements (In thousands except share and per share amounts) (Unaudited) 1. Basis of Presentation The unaudited interim consolidated financial statements presented herein have been prepared by Simonds Industries Inc. ("Simonds" or the "Company") and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of December 30, 2000 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, but the Company believes that the disclosures are adequate to make the information presented not misleading. Operating results for the six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 29, 2001. For further information, refer to the financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 30, 2000. 2. Inventories at December 30, 2001 and June 30, 2001 were as follows (in thousands). December 30, June 30, 2000 2001 ---------- ---------- Raw Materials $ 4,921 $ 5,539 Work in progress 6,731 5,914 Finished goods 13,217 14,681 ---------- ---------- Total $ 24,869 $ 26,134 ========== ========== 3. Debt Debt consists of the following at December 30, 2000 and June 30, 2001 (in thousands):

On December 29, 2000 the Company entered into a new agreement for a New Senior Credit Facility ("Credit Facility"). The Credit Facility provides for $40,000 of availability. Borrowings under the Credit Facility are available for permitted acquisitions and working capital, including letters of credit. The Credit Facility is secured by first priority liens on all tangible and intangible personal property and real property assets of the Company and its subsidiaries. The Credit Facility expires on December 29, 2003, unless extended. Under the New Senior Credit Facility the Company is required to comply with certain covenants. The Company is required to maintain a ratio of Debt to Worth where indebtedness is required to be less than 1.0 times the amount of its tangible capital base, capital expenditures during any fiscal year is to be less than $5,000, and cash flow coverage requires that the ratio of cash flow to fixed charges to be greater than 1.0 to 1.0 for all fiscal quarters during 2001 and 1.20 to 1.0 thereafter. As of December 30, 2000 and June 30, 2001, the Company was in compliance with all covenants. 8 4. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, is effective for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, an amendment of FASB Statement No. 133. On December 31, 2000, the Company adopted of SFAS No. 133 as amended by SFAS No. 138. The adoption did not have a material impact on the Company's financial position or results of operations. In September 2000, the FASB issued SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, a replacement to SFAS No. 125. This statement defines specific provisions on when liabilities should be derecognized. This statement is effective for transactions occurring after March 31, 2001. The adoption of this statement did not have a material impact on the Company's financial position or statement of operations. The Emerging Issues Task Force (EITF) recently released Issue No. 00-10, ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS. This Issue provides guidance as to the classification and disclosure of shipping and handling costs that are billed to customers. In order to present the financial statements on a comparable basis, sales and cost of sales were increased by $164 and $328 for the three months and six-months ended July 1, 2000, respectively. In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, which supercedes APB Opinion No. 16, BUSINESS COMBINATIONS and SFAS No. 38, ACCOUNTING FOR PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and that all acquired intangible assets be recorded separate from goodwill if they meet certain criteria. 9 In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which supercedes APB Opinion No. 17, INTANGIBLE ASSETS. SFAS No. 142 addresses the accounting for the acquisition of intangible assets and the financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under SFAS No. 142, goodwill will have an indefinite useful life and no longer be amortized, but other intangible assets will continue to be amortized over their determinable lives. These assets will be subject to periodic impairment tests. This Statement is effective for all fiscal years beginning after December 15, 2001. The Company is assessing the statements requirements, but has not yet determined the impact the adoption of this statement will have on its financial statements. 5. Selected consolidating financial statements of parent, guarantors, and non-guarantors The Company's wholly owned domestic subsidiaries fully and unconditionally guarantee, on a senior subordinated basis, the 10.25% Senior Subordinated Notes, jointly and severally. The guarantor subsidiary data below includes financial statements of Armstrong Manufacturing Company. The non-guarantor subsidiaries data below includes combining financial statements of Wespa, Simonds UK, UK Holding Co., and Simonds Canada. Separate financial statements of the guarantor subsidiary have not been presented because management believes that such financial statements are not material to investors. In addition, the Senior Credit Facility is guaranteed on a full and unconditional basis by the guarantor subsidiary. The following data summarizes the consolidating results of the Company on the equity method of accounting for the following periods presented: 10 SIMONDS INDUSTRIES INC. CONSOLIDATING BALANCE SHEET (In Thousands)

SIMONDS INDUSTRIES INC. CONSOLIDATING BALANCE SHEET (In Thousands) (Unaudited)

11 SIMONDS INDUSTRIES INC. CONSOLIDATING STATEMENT OF OPERATIONS (In Thousands) (Unaudited)

SIMONDS INDUSTRIES INC. CONSOLIDATING STATEMENT OF OPERATIONS (In Thousands) (Unaudited)

12 SIMONDS INDUSTRIES INC. CONSOLIDATING STATEMENT OF OPERATIONS (In Thousands) (Unaudited)

SIMONDS INDUSTRIES INC. CONSOLIDATING STATEMENT OF OPERATIONS (In Thousands) (Unaudited)

13 SIMONDS INDUSTRIES INC. CONSOLIDATING STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)

SIMONDS INDUSTRIES INC. CONSOLIDATING STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)

14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Thousands) The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and notes thereto. Results of Operations Comparison of Second Quarter 2001 and Second Quarter 2000 Net Sales: Net Sales for the second quarter of 2001 were $28,336 or 12.5% lower than second quarter 2000 net sales of $32,383. The lower 2001 quarterly results reflect reduced demand for our cutting tools in the wood, paper, and metal products due to lower industrial production in our served markets. In round numbers, the volume decline on core sales was down 14% versus prior year; currency and price negatively impacted sales by 3% while acquisitions and divestitures offset these decreases by 4%. Gross Profit Margin: Gross Profit was $6,722 for the second quarter of 2001, a decrease of $3,358 from $10,080 for the corresponding period in 2000. Gross Profit as a percentage of net sales was 23.7 % and 31.1% for the three months ended June 30, 2001 and July 1, 2000, respectively. Gross profit was lower in 2001 due to the impact of lower sales ($1,763), lower standard margins ($598), and higher manufacturing variances ($997). Selling, General and Administrative Expenses: Selling, general and administrative (SG&A) expenses as a percent of net sales were 21.2% or $5,999 and 19.5% or $6,308 for the second quarter of 2001 and 2000, respectively. Expenses were below last year's level primarily due to lower research and development and administrative expenses. However, the SG&A expenses as a percent of sales were up from the comparable quarter last year due to the shortfall in sales. Operating Income: As a result of the foregoing, operating income decreased $3,049 to $723 in the second quarter of 2001 when compared to the comparable period in 2000. Interest Expense: Interest expense was higher by $134 in the second quarter of 2001 compared to the corresponding period in 2000 due to increased borrowings used to finance the Nicholson acquisition. Income Taxes: The provision (benefit) for income taxes was approximately ($830) or a 35.7% effective tax rate for the second quarter of 2001, as compared 15 to approximately $350 or a 42.7% effective tax rate for the second quarter of 2000. The effective tax rates differ from the statutory rates primarily as a result of goodwill amortization and certain expenses that are not deductible for tax purposes. Net Income (Loss): As a result of the foregoing, net income decreased $1,966 in the second quarter of 2001 when compared to the comparable period of 2000. Comparison of Six Months Ended June 30, 2001 and July 1, 2000 Net Sales: Net Sales for the six months ended June 30, 2001 were $58,989 or 9.7% lower than six months ended July 1, 2000 net sales of $65,339. In round numbers, core volume was down 12%, foreign exchange rates impacted sales negatively 2%, and acquisitions accounted for a 4% improvement in sales. Gross Profit Margin: Gross Profit was $15,155 for the first six months of 2001, a decrease of $5,290 from $20,445 for the corresponding period in 2000. Gross Profit as a percentage of net sales was 25.7 % and 31.3% for the six months ended June 30, 2001 and July 1, 2000, respectively. This is the result of the sales shortfall and lower manufacturing productivity in 2001 vs. 2000. The Company is addressing the weakness in the market by reducing staffing and controlling expenses. Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percent of net sales were 20.8% or $12,293 and 19.6% or $12,797 for the six months of 2001 and 2000, respectively. Expenses were lower by $504 in the most recent quarter due to headcount and spending reductions. Operating Income: As a result of the foregoing, operating income decreased $4,786 to $2,862 in the first six months of 2001 when compared to the comparable period in 2000. Interest Expense: Interest expense was higher by $232 in the first six months of 2001 compared to the corresponding period in 2000. This is primarily due to higher outstanding debt. Other, net: The primary reason for other expense of $296 in the six months of 2001 and $471 in the comparable six months of 2000 was realized foreign exchange losses. The Company has managed its foreign currency exposure by redirecting product flows to mitigate the strength of the U.S. dollar. Income Taxes: The provision (benefit) for income taxes was approximately ($1,042) or a 33.9% effective tax rate for the first six months of 2001, as compared to approximately $785 or a 44.4% effective tax rate for the first six months of 2000. The effective tax rates differ from the statutory rates primarily 16 as a result of goodwill amortization and certain expenses that are not deductible for tax purposes. Net Income (Loss): As a result of the foregoing, net income decreased $3,016 in the first six months of 2001 when compared to the comparable period of 2000. Liquidity and Capital Resources Simonds principal capital requirements are to fund working capital needs, meet required debt payments, and to complete planned maintenance and manufacturing improvements. The Company's Senior Credit Facility provides a $40,000 line of credit to meet acquisition and expansion needs as well as seasonal working capital and general corporate requirements. This credit line was drawn as of June 30, 2001 in the amount of $2,782. Borrowings under the Senior Credit Facility bear interest at a fluctuating rate based on, at the Company's option, either the lender's prime rate, or LIBOR plus 2.7%. A commitment fee calculated based upon the unused portion of the revolving credit facility is payable quarterly in arrears. The Company believes that future cash flows from operations, together with the borrowings available under the Senior Credit Facility will provide the Company with sufficient liquidity and financial resources to finance its growth and satisfy its working capital requirements for the foreseeable future. The Company may not be able to generate sufficient cash flows from operations to pay the entire principal amount of the Notes when due in 2008. In such event, the Company would be required to refinance the Notes. However, there can be no assurance that the Company will be able to obtain financing on acceptable terms. Net Cash Flow: Operations used $2,919 for the six-month period ended June 30, 2001 compared to net cash provided of $3,246 for the comparable period last year. The primary reason for the large swing between periods is the decrease in Net Income ($3,016). Seasonality Historically, the Company's business has not been subject to seasonality in any material respect. The Company's third quarter, which includes July through September, is typically lower due to customers' and plant vacation shutdowns. 17 Inflation Certain of the Company's expenses, such as wages and benefits, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures. Although the Company to date has been able to offset inflationary cost increases through operating efficiencies, there can be no assurance that the Company will be able to offset any future inflationary cost increases through similar efficiencies. Forward Looking Statements Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words "believes," "expects," "anticipates" and similar expressions are used to identify forward-looking statements. The Company cautions that a number of important factors could cause actual results for fiscal 2001 and beyond to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. All of these forward-looking statements are based on estimates and assumptions made by management of the Company, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and it is likely that actual results will differ materially from those contemplated by such forward looking statements. Factors that may cause such differences include: (1) increased competition; (2) increased costs; (3) loss or disruption of supply sources of specialty steels; (4) loss or retirement of key members of management; (5) increases in the Company's cost of borrowings or unavailability of additional debt or equity capital on terms considered reasonable by management; (6) adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and (7) changes in general economic conditions in the markets in which the Company may compete and fluctuations in demand in the metal processing and primary wood industries. Many of such factors are beyond the control of the Company and its management. 18 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K Exhibits -------- None Reports On Form 8-K ------------------- No reports on Form 8-K were filed during the quarter ended June 30, 2001. 19 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. SIMONDS INDUSTRIES INC. By: /s/ Henry J. Botticello --------------------------------- Henry J. Botticello CFO August 14, 2001 20

SIMONDS INDUSTRIES INC 10-Q