10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from __________ to __________ Commission File No. 333-43523 Elgin National Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 36-3908410 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Butterfield Road, Suite 1020, Downers Grove, Illinois 60515-1050 (Address of principal executive offices) Telephone Number: 630-434-7243 (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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes No [ ] As of July 31, 2002, there were outstanding 6,408.3 shares of Class A Common Stock and 19,951.7 shares of Preferred Stock. ELGIN NATIONAL INDUSTRIES, INC. TABLE OF CONTENTS

PART I ITEM 1. FINANCIAL STATEMENTS ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (in thousands except share data) (Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements 3 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (in thousands) (Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements 4 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT For the Six Months Ended June 30, 2002 (in thousands except share data) (Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements 5 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002 and 2001 (in thousands) (Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements 6 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Report Preparation The accompanying condensed consolidated financial statements, which have not been audited by independent certified public accountants, were prepared in conformity with accounting principles generally accepted in the United States and such principles were applied on a basis consistent with the preparation of the audited consolidated financial statements included in the Company's December 31, 2001 10-K filed with the Securities and Exchange Commission. The financial information furnished includes all normal recurring accrual adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim period. Results for the first six months of 2002 are not necessarily indicative of the results to be expected for the full year. For further information refer to the Company's consolidated financial statements included in the annual report on Form 10-K. 2. Inventories June 30, December 31, 2002 2001 -------- ------------ (in thousands) Finished goods ...................... $11,038 $ 10,990 Work-in-process ..................... 2,416 2,387 Raw materials ....................... 6,341 6,744 ------- -------- 19,795 20,121 Less excess and obsolete reserve .... 1,944 1,762 ------- -------- $17,851 $ 18,359 ======= ======== 7 3. Segment Information The Company operates primarily in two industries, Manufactured Products and Engineering Services. In accordance with the Company's method of internal reporting, corporate headquarters costs are not allocated to the individual segments. Information about the Company by industry is presented below for the six months and three months ended June 30:

4. Contingencies The Company has claims against others, and there are claims by others against it, in a variety of matters arising out of the conduct of the Company's business. The ultimate resolution of all such claims would not, in the opinion of management, have a material effect on the Company's financial position, cash flows or results of operations. 5. Adoption of Accounting Principles In June 2001, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company has applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in a decrease 8 in net loss of approximately $660,000 per year. During the quarter ended June 30, 2002, the Company performed the first annual impairment evaluation and determined that none of the recorded goodwill was impaired. The Company has two reporting segments, Manufactured Products and Engineering Services, goodwill was allocated to these segments as follows:

The proforma impact of eliminating goodwill amortization on the consolidated statements of income is as follows:

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Net Sales: Net sales for the quarter ended June 30, 2002 decreased $13.7 million, or 26.9%, to $37.3 million from $51.0 million for the corresponding period in 2001. The Engineering Services Segment's sales decreased $13.5 million or 49.7% to $13.7 million for the quarter ended June 30, 2002 from $27.2 million for the quarter ended June 30, 2001. For the quarter ended June 30, 2002 the Company had three larger projects with sales in excess of $1.0 million, totalling $8.0 million in sales, compared to five such projects totalling $19.7 million in sales for the quarter 9 ended June 30, 2001. The Manufactured Products Segment's sales decreased $0.2 million, or 0.8%, primarily due to decreased capital equipment sales, partially offset with increased fastener sales and sales of electronic componants. Gross Profit: Gross profit for the quarter ended June 30, 2002 decreased $3.8 million, or 36.5%, to $6.8 million from $10.6 million for the corresponding period in 2001. As a percentage of net sales, the gross profit decreased to 18.1% for the quarter ended June 30, 2002 from 20.8% for the corresponding period in 2001. The decrease resulted from a reduction of margin on a larger project within the Engineering Services Segment due to higher than anticipated labor and equipment costs in the quarter ended June 2002 as well as higher margins realized upon the completion of Engineering Services Segment projects within the quarter ended June 2001. Selling, General and Administrative Expenses: Selling, general and administrative expenses of the Company for the quarter ended June 30, 2002 of $6.4 million was $0.2 million, or 3.0%, lower than the selling and administrative expenses of $6.6 million for the corresponding period in 2001 due to lower payroll related costs. As a percentage of net sales, selling, general and administrative expenses increased from 12.9% for the quarter ended June 30, 2001 to 17.2% for the quarter ended June 30, 2002 due to decreased sales. Amortization Expense: Beginning January 1, 2002 the Company discontinued the amortization of goodwill in accordance with the provisions of Statement of Accounting Standards No. 142 - Goodwill and Other Intangible Assets. Goodwill amortization was $0.3 milion for the quarter ended June 30, 2001. Interest Income: Interest income of the Company for the quarter ended June 30, 2002 of $0.1 million approximated interest income for the corresponding period ended June 30, 2001. Interest Expense: Interest expense of the Company for the quarter ended June 30, 2002 of $2.4 million approximated interest expense for the corresponding period in 2001. (Benefit) Provision for Income Taxes: Benefit for income taxes of the Company for the quarter ended June 30, 2002 of $0.8 million compared to an income tax provision of $0.6 million for the quarter ended June 30, 2001. The decrease of $1.4 million was due to the loss before income taxes for the quarter ended June 30, 2002. Net (Loss) Income: The net loss for the Company for the quarter ended June 30, 2002 of $1.1 million was $1.9 million lower than the net income of $0.8 million for the quarter ended June 30, 2001 for the reasons discussed above. Net loss as a percentage of net sales was 3.0% for the quarter ended June 30, 2002 compared to net income as a percentage of net sales of 1.6% for the corresponding quarter in 2001. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Net Sales: Net sales for the six months ended June 30, 2002 decreased $19.1 million, or 20.2%, to $75.5 million from $94.6 million for the corresponding period in 2001. The Engineering Services Segment's sales decreased $19.2 million, or 40.7% from $47.2 million for the six months ended June 30, 2001 to $28.0 million for the six months ended June 30, 2002, due to the timing and size of projects. For the six months ended June 30, 2002 the Company had six projects with sales over $1.0 million, totalling $20.0 million in sales, compared to eight such projects totalling $38.7 million in sales for the six months ended June 30, 2001. The Manufactured Products Segment's sales increased $0.1 million from $47.4 million for the six months ended June 30, 2001 to $47.5 million for the six months ended June 30, 2002, primarily due to increased fastener and electronic componant sales, partially offset with decreased sales of capital equipment. 10 Gross Profit: Gross profit for the six months ended June 30, 2002 decreased $4.8 million, or 24.0%, to $15.1 million from $19.9 million for the corresponding period in 2001. As a percentage of net sales, the gross profit decreased to 20.0% for the six months ended June 30, 2002 from 21.0% for the corresponding period in 2001. The decrease resulted from a reduction of margin on larger projects within the Engineering Services Segment due to higher than anticipated labor and equipment costs in the six months ended June 2002 as well as higher margins realized upon the completion of Engineering Services Segment projects within the six months ended June 2001. The Manufactured Products Segment had a lower gross profit margin earned due to lower margins earned on the sale of screens and screen cloths. Selling, General and Administrative Expenses: Selling, general and administrative expenses of the Company for the six months ended June 30, 2002 of $12.4 million were $0.1 million, or 0.9% higher than the selling, general and administrative expenses for the corresponding period in 2001 mainly due to the reversal of a provision on a loan receivable within the Engineering Services Segment in 2001, partially offset with lower payroll related expenses in 2002. Amortization Expense: Beginning January 1, 2002 the Company discontinued the amortization of goodwill in accordance with the provisions of Statement of Accounting Standards No. 142 - Goodwill and Other Intangible Assets. Goodwill amortization was $0.5 million for the six months ended June 30, 2001. Interest Income: Interest income of the Company of $0.2 million for the six months ended June 30, 2002 decreased $0.3 million or 54.8% from $0.5 million for the corresponding period in 2001. The decrease was due to interest earned on a note receivable within the Engineering Services Segement during 2001. Interest Expense: Interest expense of the Company for the six months ended June 30, 2002 of $4.7 million was $0.1 million or 2.4% lower than the interest expense of $4.8 million for the corresponding period in 2001. This decrease was due to decreased interest rates, partially offset with an increased debt level. (Benefit) Provision for Income Taxes: Benefit for income taxes of the Company for the six months ended June 30, 2002 of $0.7 million was $1.9 million lower than the provision for income taxes of $1.2 million for the six months ended June 30, 2001 due to the loss before taxes for the six month period ended June 30, 2002. Net (Loss) Income: The net loss for the Company for the six months ended June 30, 2002 of $1.1 million compared to net income of $1.6 million for the six months ended June 30, 2001 for the reasons discussed above. Net loss as a percentage of net sales was 1.4% for the six months ended June 30, 2002 compared to net income as a percentage of sales of 1.7% for the corresponding six month period in 2001. Liquidity and Capital Resources Net cash used by operating activities for the six months ended June 30, 2002 of $5.5 million was used to decrease accounts payable and accrued expenses and to increase prepaid expenses and other assets. These uses were partially offset with cash generated by the net loss adjusted by non-cash charges and decreased accounts receivable and inventory. Included in non-cash charges for the six months ended June 30, 2002 was depreciation of $1.7 million and other non-cash charges of $0.5 million, partially offset with pension overfunding income of $0.6 million. Cash flows from operations for any specific period are often materially affected by the timing and amounts of cash receipts and cash disbursements related to engineering services projects. Cash used in investing activities for the six months ended June 30, 2002 of $2.5 million of which $1.9 million was used for the construction of a plating facility and $0.6 million was used for the Company's regular practice of upgrading and maintaining its equipment base and facilities. 11 Cash provided by financing activities for the six months ended June 30, 2002 of $8.0 million consisted of the issuance of $8.8 million of long-term debt drawn on the Company's revolver loan and borrowings of $0.9 million on the construction loan for the plating facility, partially offset by repayment of long-term debt of $1.7 million. The Company's liquidity requirements, both long term (over one year) and short term, are for working capital, capital expenditures and debt service. The primary source for meeting these needs has been funds provided by operations. Although a net loss was reported for the six months ended June 30, 2002, the company believes that funds provided from future operations and available credit, should be adequate to meet its anticipated debt service requirements, working capital needs and capital expenditures. Backlog The Company's backlog consists primarily of that portion of engineering services contracts that have been awarded but not performed and also includes open manufacturing orders. Backlog at June 30, 2002 was $44.9 million. Approximately $9.4 million relates to the Manufactured Products Segment, with the remainder of $35.5 million relating to the Engineering Services Segment. A substantial majority of current backlog is expected to be realized in the next twelve months. Safe Harbor Statements herein regarding the Company's ability to meet its liquidity requirements, and the Company's expected realization of current backlog constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Act of 1934. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Further, statements herein regarding the Company's performance in future periods are subject to risks relating to, deterioration of relationships with, or the loss of material customers or suppliers, possible product liability claims, decreases in demand for the Company's products, and adverse changes in general market and industry conditions. Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on such forward-looking statements, which are based on current expectations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company continues to use its reputation in the United States to expand into international markets. In the six months ended June 30, 2002 approximately 14% of the Company's net sales were attributable to services provided or products sold for use outside the United States, primarily to Puerto Rico, Australia and Venezuela. A portion of these net sales and cost of sales is derived from international operations which are conducted in foreign currencies. Changes in the value of these foreign currencies relative to the U.S. dollar could adversely affect the Company's business, financial condition, results of operation and debt service capability. The majority of the Company's foreign sales and costs are denominated in U.S. dollars. With respect to transactions denominated in foreign currencies, the Company attempts to mitigate foreign exchange risk by contractually shifting the burden of the risk of currency fluctuations to the other party to the transactions. It has been the Company's historic practice to conduct international sales in accordance with the foregoing. There can be no assurance that the Company's strategies will ensure that the Company will be fully protected from foreign exchange risk. Foreign sales, particularly construction management projects undertaken at foreign locations, are subject to various risks, including exposure to currency fluctuations, political, religious and economic instability, local labor market conditions, the imposition of foreign tariffs and other 12 trade barriers, and changes in governmental policies. There can be no assurance that the Company's foreign operations, or expansion thereof, would not have a material adverse effect on the Company's business, financial condition, results of operations and debt service capability. PART II ITEM 1. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in legal proceedings from time to time in the ordinary course of its business. As of the date of this filing, neither the Company nor any of its subsidiaries are a party to any lawsuit or proceeding which, individually or in the aggregate, in the opinion of management, is reasonably likely to have a material adverse effect on the financial condition, results of operation or cash flow of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits none (b) Reports on Form 8-K none 13 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. ELGIN NATIONAL INDUSTRIES, INC. By /S/ WAYNE J. CONNER ------------------------------------ Name: Wayne J. Conner Title: Vice President, Treasurer, and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Dated: August 14, 2002 14 EXHIBIT INDEX

EXHIBIT INDEX (Continued)

(1) Incorporated by reference to Form S-4 Registration Statement of the Company (File No. 333-43523) filed with the Commission on December 30, 1997. (2) Incorporated by reference to Amendment No. 1 to Form S-4 Registration Statement of the Company (File No. 333-43523) filed with the Commission on January 23, 1998. (3) Incorporated by reference to Form 10-Q of the Company (File No. 001-03771) filed with the Commission on August 10, 2001. (4) Incorporated by reference to Form 10-Q of the Company (File No. 001-05771) filed with the Commission on May 15, 2002. * Management contract or compensatory plan or arrangement. 16

ELGIN NATIONAL INDUSTRIES INC 10-Q