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As a result of a restructuring program undertaken by the Corporation during fiscal 2002, the Corporation has
classified all of the business units that made up its Specialty Fastener segment in prior years and its Aerospace
Rivet Manufacturers business, which had been included in its Aerospace Products segment in fiscal 2002 quarterly
reports but in the Specialty Fasteners segment in prior fiscal years' annual reports, as discontinued operations.
All discussions related to ongoing operations, or the Corporation, refer only to continuing operations, which
consist of the Breeze-Eastern division and the Norco Inc. subsidiary. Discontinued operations are discussed
separately in this report.
TransTechnology Corporation reported consolidated net sales of $72.3 million and income from continuing operations
of $0.8 million, or $0.12 per diluted share, for the year ended March 31, 2002. Sales for the current fiscal year
increased 3% from fiscal year 2001 sales of $70.5 million and 18.9% over fiscal 2000 sales of $60.8 million.
During fiscal 2002 the Corporation reported a loss from discontinued operations of $72.6 million, or $11.64 per
diluted share compared to a loss from discontinued operations of $66.9 million in the 2001 fiscal year and income
from discontinued operations of $4.6 million in fiscal 2000. The net loss reported for fiscal 2002 decreased to
$71.8 million from a net loss of $73.0 million in 2001 but was worse than the net income of $6.6 million reported
in fiscal 2000. The net losses for fiscal 2002 and 2001 include several nonrecurring items, which impact a
year-to-year comparison. The following table depicts the Corporation's "normalized" results, which should present
a clearer picture of after-tax performance:
Normalized Net Earnings (In thousands, except per share amounts):
Sale of Real Property - In March 2002, the Corporation sold approximately ten acres of unused land located
at its Breeze-Eastern facility in Union, New Jersey, for $2.3 million, which resulted in an after tax gain of $0.7 million.
Corporate Office Restructuring Costs - As part of its restructuring plan, in fiscal 2002 the Corporation began
a program of reducing the size of its corporate office staff. In fiscal 2002 the Corporation recognized severance and other
costs associated with its corporate office downsizing of $1.6 million and in fiscal 2001 $11.2 million before taxes, which
included the write-down of the value of certain real estate and the write-off of a note receivable and equity relative to a
business divested in a prior fiscal year.
Forbearance fees and costs - During fiscal 2002 the Corporation incurred $2.7 million of costs related to
forbearance fees paid to its banks in association with their agreement not to pursue any actions against the Corporation
for its violation of certain financial covenants in the Corporation's senior credit agreement. There were no such fees
recognized in fiscal 2001 or 2000. Further information on the status of the Corporation's credit agreements is included
later in this discussion under Liquidity and Capital Resources.
Excluding these nonrecurring items, "normalized" income from continuing operations for fiscal 2002 of $2.2 million, or
$0.35 per diluted share, was a substantial improvement from the "normalized" earnings from continuing operations of
$1.0 million, or $0.16 per diluted share, for fiscal 2001 although down 13% from normalized net earnings of $2.5
million or $.40 per diluted share for fiscal 2000. Excluding the above mentioned non-operating and non-recurring items,
"normalized" operating income, before interest and taxes, from the Corporation's continuing operations totaled $12.6
million for fiscal 2002, a 103% improvement over "normalized" operating income of $6.2 million in fiscal 2001 and 110%
above fiscal 2000's $6.0 million.
The improvement in financial results comparing fiscal 2002 to fiscal 2001 largely reflects higher sales of aerospace
OEM products, weapons system products, repair, overhaul and spare parts products provided to military and search and
rescue agencies, and motion control devices. These increases were offset by a decrease in sales of new equipment to
large airframe manufacturers and of repairs and spare parts to airlines.
New orders received in fiscal 2002 totaled $77.8 million which represents a 17.0% increase over fiscal 2001 new orders
of $66.5 million and a 25.9% increase over $61.8 million of new orders received in fiscal 2000. Backlog at March 31,
2002 stands at $43.7 million compared with $40.2 million at March 31, 2001 and $44.2 million at March 31, 2000. Both
Breeze-Eastern and Norco saw increases in new orders and backlog in fiscal 2002 compared to fiscal 2001. A significant
portion of fiscal 2002 sales is derived from long-term contracts. Generally, new equipment sales are the subject of
long-term contracts while repair, overhaul and spare parts sales have much shorter lead times.
Sales for the Corporation increased to $72.3 million for fiscal 2002, a 3% increase over fiscal 2001 sales of $70.5
million. Both Breeze-Eastern and Norco saw fiscal 2002 revenues increase over fiscal 2001. The Corporation's Norco
subsidiary saw a drop in orders received and sales of products to airframe manufacturers as a result of an expected
reduction in the build rate of large commercial airliners in fiscal 2002. The anticipated decline in aircraft build
rates was accelerated and exacerbated by the impact of the events of September 11th. Lower utilization rates of the
existing commercial airline fleet as a result of the slowing economy and the post-September 11th reduction in travel
resulted in lower order rates and sales of hold-open rod spare parts and replacement parts which are sold directly to
the airlines as maintenance items. This decline was offset by increased sales of Norco's developing product line of
motion control products for use in medical testing equipment and increased sales of new equipment and spare parts to
military agencies. Higher orders and shipments of Breeze-Eastern rescue hoists and cargo hooks for military and
civilian rescue agencies as well as increases in spare parts, repair and overhaul of equipment already in the field
provided further sales increases.
Operating income, before corporate office expenses, increased 11.1% in fiscal 2002 to $21.1 million over the prior
year's $18.9 million. This increase was due mainly to a favorable mix of repair, overhaul and spare parts business
and the realization of the benefit of spreading a fixed cost base over a larger sales volume. Generally, repair and
overhaul services and spare parts sales have higher gross margins than sales of new equipment or engineering services.
These improvements in product mix and fixed cost absorption led to an increase in gross margin to 44.8% in fiscal 2002
from 42.5% in fiscal 2001. Both Breeze-Eastern and Norco realized improvements in gross margin during fiscal 2002.
Sales for fiscal 2001 of $70.5 million were 16% above fiscal 2000 sales of $60.8 million. This sales increase was due
primarily to strong product demand across all Breeze-Eastern and Norco product lines and increased sales of repair and
overhaul services and spare parts, and, to a lesser degree, improved product pricing. The Corporation's Norco division
also saw increased revenues from its developing product line of motion control products for use in medical testing
equipment. Fiscal 2001 operating income of $18.9 million, before corporate expenses, showed a 22.7% improvement over
fiscal 2000's operating income of $15.4 million.
Corporate and Other Expenses - Corporate office expenses, exclusive of restructuring charges, amounted
to $8.5 million in fiscal 2002, a decrease of 32.5% from the $12.6 million of such expenses in fiscal 2001.
Restructuring charges of $1.6 million and $11.2 million were also recognized in fiscal 2002 and 2001, respectively, and
included in corporate office expenses. Restructuring charges in fiscal 2002 included the costs of severance and other
items associated with the 50% reduction in headcount included in the restructuring plan. Restructuring charges in
fiscal 2001 included costs associated with the elimination of certain positions as well as write-offs associated with
notes receivable and investments in companies that had been divested in previous fiscal years and the write-down to
net realizable value of certain parcels of real estate.
Other Income/Expense - The Corporation recorded other non-operating income for fiscal 2002 aggregating
$1.6 million compared with $0.2 million in fiscal 2001 and $0.7 million in fiscal 2000. Of the $1.6 million generated
in fiscal 2002, $1.4 million relates to the pre-tax gain resulting from the sale of ten acres of unused land at the
Corporation's Union, New Jersey facility for $2.3 million in March 2002. Interest income of $0.1 million was
essentially unchanged from the prior year's level. In fiscal 2000 the Corporation recognized an extraordinary expense
of $0.5 million as the result of the write-off of capitalized financing costs when the Corporation's debt was
refinanced in August 1999.
Discontinued Operations - During fiscal 2002, the Corporation determined that it would enter into a plan
of restructuring so as to focus its resources and capital on its aerospace products business and exit the Specialty
Fastener segment. As a result, this report includes in discontinued operations all of the operations that formerly
made up the Specialty Fastener segment of the Corporation, which included TransTechnology Engineered Components (sold
in December 2001), Breeze Industrial Products and Pebra (sold in July 2001), TransTechnology Engineered Rings (of
which Seeger Orbis was sold in February 2002 and TTERUSA was sold in May 2002), Aerospace Rivet Manufacturers'
Corporation Inc. (sold in April 2002) and TCR Corporation. Of the operations included in fiscal 2002 discontinued
operations, only the US, UK and Brazilian retaining ring operations, the aerospace rivet business, and TCR were
carried into fiscal 2003. As noted, the aerospace rivet and U.S. retaining ring businesses were sold early in
fiscal 2003. The Corporation expects that the divestitures of the remaining retaining ring operations will be
concluded during its first fiscal quarter and that TCR will be divested during its second fiscal quarter.
The Corporation reported losses from discontinued operations of $72.6 million in fiscal 2002 and $66.9 million in
fiscal 2001, compared to income from discontinued operations of $4.6 million in fiscal 2000. The fiscal 2002 loss
was composed of $110.3 million of impairment charges related to reducing the carrying values of the discontinued
businesses to their estimated net realizable values; $3.7 million of actual operating income of the discontinued
businesses through their expected divestiture dates; $17.0 million of allocated interest expense; $8.4 million from
the write-off of capitalized loan fees and the mark to market of interest rate swaps required under the terms of
the Corporation's credit agreements; $24.7 million of gains recognized on the sale of certain business units; and,
$0.2 million of other income or credits associated with the discontinued operations. These gains and losses, which
aggregated $107.1 million, were reduced by a tax benefit of $34.5 million. The fiscal 2001 loss from discontinued
operations consisted of $67.9 million of impairment charges; $23.3 million of actual operating income of the
discontinued businesses; and $29.6 million of allocated interest expense. This fiscal 2001 loss, which aggregated
$74.2 million, was reduced by a tax benefit of $7.3 million. The fiscal 2000 income from discontinued operations
included $24.5 million of operating income from the discontinued businesses and $17.0 million of allocated interest
expense, the net of which was reduced by an income tax provision of $2.9 million.
Liquidity and Capital Resources - The restructuring and divestiture program of the Corporation has
had a substantial impact upon its financial condition at March 31, 2002. During the fiscal year, the Corporation
sold its hose clamp operations in Germany and the US, its engineered components businesses, and its German retaining
ring operation for aggregate cash proceeds of $162 million. All of these proceeds, after payment of transaction
fees and expenses, were used to reduce the Corporation's senior credit facility. At March 31, 2002 the senior
facility was $29.1 million compared to $195.0 million at the end of the prior fiscal year. In addition to the cash
generated from the divestiture program, the Corporation realized $2.2 million of net proceeds from the sale of
unused real estate in New Jersey and $5.5 million through federal income tax refunds obtained by carrying back the
fiscal 2001 operating loss to prior years.
The Corporation is in the process of divesting its US, UK and Brazilian retaining ring operations and its TCR
Corporation subsidiary in separate transactions expected to aggregate $22 million. The Corporation hopes to complete
these transactions during the first and second quarters of fiscal year 2003 and anticipates applying all of the
proceeds to the reduction of its credit facilities. The assets and liabilities of these business units are
presented on the March 31, 2002 balance sheet in Assets Held for Sale and Liabilities of Discontinued Businesses at
their estimated net realizable values.
Working Capital - The Corporation's working capital at the end of fiscal 2002 was $41.8 million
compared to $19.1 million at the end of the prior fiscal year. Excluding the effect of the classification of
assets held for sale and liabilities of discontinued businesses, and, with respect to March 31, 2001 only, all
callable debt as current assets and liabilities, respectively, working capital at March 31, 2002 was $25.3
million as compared to $22.3 million at the end of fiscal 2001. The ratio of current assets to current
liabilities improved to 1.98 to 1 at March 31, 2002 compared with 1.06 to 1 at the end of fiscal 2001.
Excluding the impact of the reclassification of all callable debt and liabilities of discontinued businesses
as current liabilities and assets held for sale as current assets, the current ratio would have been 2.04 at
March 31, 2002 compared to 1.94 at March 31, 2001.
Working capital changes, exclusive of changes in callable debt, liabilities of discontinued businesses, and
assets held for sale, were generated by a decrease in accounts receivable of $1.4 million and an increase in
inventories of $3.7 million. The decrease in accounts receivable was due to the improvement in collections
during the fiscal year and the increase in inventory was largely due to the advance purchase of long lead-time
materials needed to fulfill customers' long-term purchase orders. Days sales outstanding in accounts
receivable at March 31, 2002 decreased to 58 days from 66 days at March 31, 2001 while inventory turnover
decreased to 1.7 turns versus 2.0 turns at March 31, 2001. Current liabilities, without regard to changes in
callable debt and liabilities of discontinued businesses increased $3.4 million, primarily the result of the
receipt of a $1.8 million advance payment by a customer in January, 2002 which has been included in current
liabilities as a customer deposit at March 31, 2002 and $3.8 million of liabilities associated with the cost
of closing out certain interest rate swap obligations which are discussed further elsewhere in this report.
These increases offset reductions in accounts payable and other accrued expenses. Callable long-term debt
decreased to zero during 2002 because it was reclassified to long term effective March 31, 2002 due to the
receipt of a commitment to refinance the existing debt for a three-year period. Assets held for sale and
liabilities of discontinued businesses were reduced during 2002 primarily as a result of the sale of some of
the businesses treated as discontinued, changes in the estimate of net realizable value in others, and
operating profits, losses and allocated expenses recognized during the year.
Credit Facilities - At March 31, 2002, the Corporation had two credit agreements in effect
aggregating $107.6 million. The first, a Revolving Credit Agreement (the "Credit Agreement") with a group
of eight banks (the "Lenders"), commits a maximum of $36.3 million to the Corporation for cash borrowings
and letters of credit. The second credit facility consists of Senior Subordinated Notes in the amount of
$78.6 million.
Effective December 31, 2000, the Corporation was not able to meet certain financial ratio requirements of
the Credit Agreement, as amended. Pursuant to discussions with the Lenders, the Corporation and the Lenders
agreed to an amendment to the Credit Agreement to include a forbearance agreement, the payment of certain
other fees by the Corporation and imposition of certain conditions on the Corporation including the
suspension of dividend payments. During the forbearance period the Lenders agree not to exercise certain
of their rights and remedies under the Credit Agreement. The Corporation accordingly classified its bank
debt as "current" to reflect the fact that the forbearance period is less than one year. The term of the
forbearance period, initially scheduled to expire on January 31, 2001, was subsequently extended through
additional amendments to September 25, 2002. These additional amendments also reduced the amount of the
Revolving Credit facility of the Credit Agreement (the "Revolver") from $200 million to $36.3 million at
March 31, 2002. The extension of the forbearance through September 25, 2002 is conditioned on certain
performance and debt reduction requirements, including a reduction in the Revolver commitment to $28
million and the borrowing sub-limit to $24.5 million by June 25, 2002. The forbearance agreement also
requires the achievement of minimum levels of EBITDA (earnings before interest, taxes, depreciation, and
amortization), and the adherence to borrowing limits as adjusted based on the scheduled debt reduction.
Other terms of the forbearance agreement include the payment of certain fees, reporting and consulting
requirements. The Corporation has made all of its scheduled interest and principal payments on a timely
basis and, as previously noted, during fiscal 2002 the Corporation paid $165.1 million towards its
outstanding debt under the Credit Agreement, which included the retirement of a $38.8 million term loan
outstanding to the same group of Lenders.
The Corporation has unused borrowing capacity for both domestic and international operations of $7.2
million as of March 31, 2002, including letters of credit of $5.0 million. Borrowings under the Revolver
as of March 31, 2002, were $29.1 million. Interest on the Revolver is tied to the primary bank's prime
rate, or at the Corporation's option, the London Interbank Offered Rate ("LIBOR"), plus a margin that
varies depending upon the Corporation's achievement of certain operating results. As of March 31, 2002,
$9.6 million of the Corporation's outstanding borrowings utilized LIBOR, all of which were payable in
Pounds sterling. One $2.5 million tranche of the Revolver, the proceeds of which were used to pay
interest on the Corporation's Senior Subordinated Notes during fiscal 2002, carries an interest rate of
25% and cannot be repaid until all other amounts outstanding under the Revolver have been repaid. The
weighted average interest rate on all outstanding borrowings under the revolver at March 31, 2002 was
14.1%.
The Credit Agreement requires the Corporation to maintain interest rate protection on a minimum of 50%
of its variable rate debt. The Corporation has, accordingly, provided sufficiently for this protection
by means of interest rate swap agreements which have fixed the rate of interest on $50.0 million of debt
at a base rate of 5.48% through May 4, 2002, and $75.0 million of debt at a base rate of 6.58% through
March 3, 2003. Under the Credit Agreement, the base interest rate is added to the applicable interest
rate margin to determine the total interest rate in effect. The Revolver, as amended by the forbearance
agreements, restricts annual capital expenditures to $2.0 million in fiscal 2003 and contains other
customary financial covenants, including the requirement to maintain certain financial ratios relating
to performance, interest expense and debt levels. As noted above, the Corporation is currently operating
under a forbearance arrangement and is in the process of reducing its debt through the sale of certain
of its businesses in order to either comply with the requirements of the existing agreement or to be in
an improved financial position to negotiate further amendments or borrowing alternatives.
On August 30, 2000, the Corporation completed a private placement of $75 million in senior subordinated
notes (the "Notes") and certain warrants to purchase shares of the Corporation's common stock (the
"Warrants") to a group of institutional investors (collectively, the "Purchasers"). The Corporation used
the proceeds of the private placement to retire, in full, a $75 million Bridge Loan held by a group of
lenders led by Fleet National Bank. The Notes are due on August 29, 2005 and bear interest at a rate
of 16% per annum, consisting of 13% cash interest on principal, payable quarterly, and 3% interest on
principal, payable quarterly in "payment-in-kind" promissory notes. Prepayment of the Notes is
permitted after August 29, 2001 at a premium initially of 9% declining to 5%, 3%, and 1% annually,
respectively, thereafter. The Notes contain customary financial covenants and events of default, including
a cross-default provision to the Corporation's Credit Agreement. At March 31, 2002 the principal balance
outstanding on the notes amounted to $78.6 million, which includes the original principal amount plus
the "payment-in-kind" notes.
The Warrants entitle the Purchasers to acquire, in the aggregate, 427,602 shares, or 6.5%, of the common
stock of the Corporation at an exercise price of $9.93 a share, which represents the average daily
closing price of the Corporation's common stock on the New York Stock Exchange for the thirty (30)
days preceding the completion of the private placement. The Warrants must be exercised by August 29,
2010. These Warrants have been valued at an appraised amount of $0.2 million and have been recorded
in paid in capital. In connection with the transaction, the Corporation and certain of its subsidiaries
signed a Consent and Amendment Agreement with its senior debt lenders (the "Lenders") under the
Corporation's $250 million Credit Facility existing at that time, in which the Lenders consented to
the private placement and amended certain financial covenants associated with the Credit Facility.
As a result of the violation of certain financial covenants under the Credit Agreement, the Corporation
is also in violation of the covenants of the Notes. The Purchasers of the Notes have entered into a
letter agreement with the Corporation under which they agree to forbear from taking any action relative
to such violations. This forbearance extends through September 29, 2002 and is conditioned upon the
Corporation's continued compliance with the terms of its forbearance agreement with the Lenders under
the Credit Agreement.
On June 13, 2002, the Company received a commitment to refinance its senior debt for a period of three
years and a commitment from the note holders to amend the financial covenants to bring the company into
compliance. Management expects to complete the proposed refinancing by the end of June 2002 and has,
accordingly, classified its senior debt, as well as its subordinated notes, as long term.
Capital Expenditures - Capital expenditures were $0.3 million in fiscal 2002, as compared
to $0.3 million spent in fiscal 2001 and $0.5 million in fiscal 2000. Principal expenditures were for
the modernization of facilities and new machinery, equipment and information systems equipment.
Capital expenditures in fiscal 2001 included the purchase and installation of a company-wide virtual
private network and modernization of facilities and new production machinery and equipment. Capital
expenditures in fiscal 2000 included the replacement of the roof and windows at the Breeze-Eastern
facility.
In fiscal 2003, capital expenditures are expected to be in a range of $1.0 – 1.5 million. Projects
budgeted in fiscal 2003 include refurbishment of the Breeze-Eastern offices, the purchase of new
production machinery at the Norco facility, and the initial phase of installing a new ERP system at
Breeze-Eastern.
The Corporation has divested or made plans to divest nine businesses since March 31, 2001. Under
the terms of the agreements associated with the sales of those businesses, the Corporation has agreed
to indemnify the purchasers for certain damages that might arise in the event a representation of the
Corporation has been materially misstated. Additionally, the terms of such divestiture agreements
generally require the calculation of purchase price adjustments based upon the amount of working
capital or net assets transferred at the closing date.
Inflation - While neither inflation nor deflation has had, and the Corporation does
not expect it to have, a material impact upon operating results, there can be no assurance that its
business will not be affected by inflation or deflation in the future.
Environmental Matters - During the fourth quarter of fiscal 2000, the Corporation
presented an environmental cleanup plan for a portion of a site in Pennsylvania which the Corporation
continues to own although the related business has been sold. This plan was submitted pursuant to
the Consent Order and Agreement with the Pennsylvania Department of Environmental Protection
("PaDEP") concluded in fiscal 1999. Pursuant to the Consent Order, upon its execution the
Corporation paid $0.2 million for past costs, future oversight expenses and in full settlement
of claims made by PaDEP related to the environmental remediation of the site with an additional
$0.2 million paid in fiscal 2001. A second Consent Order was concluded with PaDEP in the third
quarter of fiscal 2001 for another portion of the site, and a third Consent Order for the remainder
of the site is contemplated by October 1, 2002. The Corporation is also administering an agreed
settlement with the Federal government under which the government pays 50% of the environmental
response costs associated with a portion of the site. The Corporation has also reached an agreement
in principle with the Federal government and is in the process of finalizing the necessary
documentation under which the Federal government will pay 45% of the environmental response costs
associated with another portion of the site. At March 31, 2002, the Corporation's cleanup reserve
was $1.8 million based on the net present value of future expected cleanup costs. The Corporation
expects that remediation at the Pennsylvania site will not be completed for several years.
The Corporation also continues to participate in environmental assessments and remediation work at
nine other locations, which include operating facilities, facilities for sale, and previously owned
facilities. The Corporation estimates that its potential cost for implementing corrective action
at these sites will not exceed $0.4 million payable over the next several years, and has provided
for the estimated costs in its accrual for environmental liabilities.
In addition, the Corporation has been named as a potentially responsible party in eight environmental
proceedings pending in several other states in which it is alleged that the Corporation was a
generator of waste that was sent to landfills and other treatment facilities and, as to several sites,
it is alleged that the Corporation was an owner or operator. Such properties generally relate to
businesses which have been sold or discontinued. The Corporation estimates that its expected future
costs, and its estimated proportional share of remedial work to be performed, associated with these
proceedings will not exceed $0.1 million and has provided for these estimated costs in its accrual
for environmental liabilities.
Litigation - The Corporation is also engaged in various other legal proceedings
incidental to its business. It is the opinion of management that, after taking into consideration
information furnished by its counsel, the above matters will have no material effect on the
Corporation's consolidated financial position or the results of the Corporation's operations in
future periods.
Revenue Recognition - The Corporation uses the completed contract method for
recognizing revenue. This method recognizes revenue when the contract is completed, i.e., the
later of when the products are shipped and accepted by the customer, if such acceptance is
required under the contract, or when title passes to the purchaser.
Inventory - The Corporation purchases materials for the manufacture of components
for use in its products and for use by its engineering, repair and overhaul businesses. The
decision to purchase a set quantity of a particular item is influenced by several factors
including: current and projected cost; future estimated availability; lead time for production
of the materials; existing and projected contracts to produce certain items; and the estimated
needs for its repair and overhaul business. The Corporation values its inventories using the
lower of cost or market on a first in first out basis (FIFO) and establishes reserves to reduce
the carrying amount of these inventories as necessary to net realizable value.
Environmental Reserves - The Corporation provides for environmental reserves when,
in conjunction with its internal and external counsel, it determines that a liability is both
probable and estimable. In many cases, the liability is not fixed or capped when the Corporation
first records a liability for a particular site. Factors that affect the recorded amount of the
liability in future years include: the Corporation's participation percentage due to a settlement
by or bankruptcy of other Potentially Responsible Parties; a change in the environmental laws
requiring more stringent requirements; a change in the estimate of future costs that will be
incurred to remediate the site; and changes in technology related to environmental remediation.
Current estimated exposure to environmental claims is discussed above in Liquidity and Capital
Resources.
Goodwill and Other Intangible Assets - At March 31, 2002, the Corporation has
recorded $10.8 million in net goodwill and other intangible assets related to acquisitions
made in prior years. The recoverability of these assets is subject to an impairment test based
on the estimated fair value of the underlying businesses. Under SFAS 121 these estimated fair
values are based on estimates of future cash flows of the businesses. Factors affecting these
future cash flows include: the continued market acceptance of the products and services offered
by the businesses; the development of new products and services by the businesses and the
underlying cost of development; the future cost structure of the businesses; and future
technological changes. Effective April 1, 2002, the Corporation implemented SFAS 142, as
discussed below, relative to the non-recognition of goodwill amortization and will no longer
reflect such charges in its results.
Financial Derivatives - As noted previously, the Corporation has outstanding
interest rate swaps in association with its Credit Agreement. These swaps are valued using
certain estimates and the amount the Corporation is required to pay is significantly impacted
by changes in interest rates. The Corporation estimates that a .67% change in interest rates
changes its exposure under these instruments by $.5 million.
Valuation of Assets Held for Sale - The Corporation reflects significant amounts of Assets
held for sale and Liabilities of discontinued businesses on its balance sheet. In the event
the net realizable values of the businesses being divested are less than that estimated, or
the length of time required to complete the divestiture is longer than estimated, the amounts
realized from these accounts may be impacted.
Deferred Tax Assets - The Company maintains a significant asset on its balance which represents
the value of income tax benefits expected to be realized in the future, primarily as a result
of the use of a net operating loss carry-forward. In the event the company did not generate
adequate amounts of taxable income prior to the expiry of the tax loss carry-forwards, the
amount of this asset may not be realized. Additionally, changes to the federal and state
income tax laws could also impact the Corporation's ability to utilize this asset.
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141, which requires all business combinations to be accounted
for under the purchase method of accounting, was effective for business combinations
initiated after June 30, 2001. Under the new rules of SFAS No. 142, goodwill will no longer
be amortized but will be subject to annual impairment tests in accordance with the statement.
Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. Accordingly, the Corporation
will apply the new rules on accounting for goodwill and other intangible assets beginning in
2002. Application of the "no-amortization" provisions of the statement is expected to
increase operating income in 2003 by approximately $0.2 million.
In August, 2001, the Financial Accounting Standards Board issued SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement defines the accounting for
long-lived assets to be held and used, assets held for sale, and assets to be disposed of by
other than sale, and is effective for fiscal years beginning after December 15, 2001. The
Corporation has adopted SFAS No. 144 in connection with the sale of Aerospace Rivet
Manufacturers Corporation, which has been recorded as part of Discontinued Operations.
On April 16, 2002 the Corporation completed the sale of all of the shares of its Aerospace
Rivet Manufacturers Corporation Inc. subsidiary for $3.2 million of cash consideration.
On May 30, 2002 the Corporation completed the sale of substantially all of the assets of its
US retaining ring business for $3.7 million. The consideration was paid $2.9 million in
cash and $0.8 million in the form of a promissory note. The Corporation also received
warrants for 5% of the equity of the purchaser, a newly formed, privately held company
controlled by SeaView Capital LLC of Providence, Rhode Island.
The Company is exposed to various market risks, primarily changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates and prices,
such as foreign currency exchange rates and interest rates.
The Company enters into interest rate swap agreements to manage a portion of its exposure
to interest rate changes as a result of requirements under its Credit Agreement. The swaps
involve the exchange of fixed and variable interest rate payments without exchanging the
notional principal amount. Payments or receipts on the swap agreements are recorded as
adjustments to interest expense. At March 31, 2002, the Company had outstanding interest
rate swap agreements to convert $125 million of floating rate debt to fixed rate debt.
The fair value of these swaps was approximately $3.4 million at March 31, 2002.
| |
|
Notional
Amount
(In thousands) |
|
Maturities |
|
Receive
Rate(1) |
|
Pay
Rate |
| March 31, 2002 |
$ 25,000 |
5/02 |
1.88% |
5.48% |
| |
25,000 |
5/02 |
1.88 |
5.48 |
| |
37,500 |
3/03 |
1.90 |
6.58 |
| |
37.500 |
3/03 |
1.90 |
6.58 |
(1) Based on three-month LIBOR |
Financial instruments expose the Corporation to counter-party credit risk for nonperformance and to market
risk for changes in interest and currency rates. The Corporation manages exposure to counter-party credit
risk through specific minimum credit standards, diversification of counter-parties and procedures to monitor
concentrations of credit risk. The Corporation monitors the impact of market risk on the fair value and cash
flows of its investments by considering reasonably possible changes in interest rates and by limiting the
amount of potential interest and currency rate exposures to amounts that are not material to the Corporation's
consolidated results of operations and cash flows.
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