Note 9 to Consolidated Financial Statements of Katy included in Part II, Item 8.
Discontinued Operations
We identified and sold certain operations that we considered non-core to
the future operations of the Company. Hamilton Precision Metals L.P. (Hamilton),
a reroller of precision metal foils and strips located in Lancaster,
Pennsylvania, was sold on October 31, 2002 for net proceeds of $13.9 million.
Hamilton was formerly part of the Electrical Products Group. Prior to its sale
in 2002, Hamilton generated $10.4 million of net sales and $1.6 million of
operating income. GC/Waldom Electronics, Inc. (GC/Waldom), a leading value-added
distributor of high quality, brand name electrical and electronic parts,
components and accessories headquartered in Rockville, Illinois, was sold on
April 2, 2003 for net proceeds of $7.4 million. GC/Waldom was formerly part of
the Electrical Products Group. Prior to its sale, GC/Waldom generated $6.0
million in net sales, and incurred a net operating loss of ($0.1) million. A
loss (net of tax) of $0.2 million was recognized in the second
5
quarter of 2003 as a result of the GC/Waldom sale. Duckback Products, Inc.
(Duckback), a manufacturer of high quality exterior transparent coatings and
water repellents located in Chico, California, was sold on September 16, 2003
for net proceeds of $16.2 million. Duckback was formerly part of the Maintenance
Products Group. Prior to its sale, Duckback generated $12.9 million of net sales
and $3.1 million of operating income during 2003. A gain (net of tax) of $7.6
million was recognized in the third quarter of 2003 as a result of the Duckback
sale.
Customers
We have several large customers in the mass merchant/discount/home
improvement retail markets. Two customers, Wal*Mart and Lowe's, accounted for
17% and 11%, respectively, of consolidated net sales. Sales to Wal*Mart are made
by the Woods, Consumer, Glit/Microtron, Woods Canada, Wilen and Jan/San business
units. Sales to Lowe's are made by the Woods and Consumer business units. A
significant loss of business at either of these customers could have a material
adverse impact on our results.
Backlog
Maintenance Products:
Our aggregate backlog position for the Maintenance Products Group was $7.8
million and $7.9 million as of December 31, 2003 and 2002, respectively. The
orders placed in 2003 are firm and are expected to be shipped during 2004.
Electrical Products:
Our aggregate backlog position for the Electrical Products Group was $6.0
million and $3.6 million as of December 31, 2003 and 2002, respectively. The
orders placed in 2003 are firm and are expected to be shipped during 2004.
Markets and Competition
Maintenance Products:
We market a variety of professional cleaning products to the commercial
janitorial/sanitation markets. Sales and marketing of these products is handled
through a combination of direct sales personnel, manufacturers' sales
representatives, and wholesale distributors. Cleaning products sold by the
Company include 1) plastic items, such as commercial trash receptacles, buckets,
carts, and signs, 2) abrasive products, including floor cleaning and polishing
pads, and hand scouring pads, 3) mops, brooms, and brushes, and 4) items for the
food service industry, including filters, grill cleaning supplies, and food
storage containers.
The commercial distribution channels for these products are highly
fragmented, resulting in a large number of small customers, mainly distributors
of janitorial cleaning products. The markets for our maintenance products are
highly competitive. Competition is based primarily on price and the ability to
provide superior customer service in the form of complete and on-time product
delivery. Other competitive factors include brand recognition and product
design, quality and performance. We compete for market share with a number of
different competitors, depending upon the specific product. In large part, our
competition is unique in each area of 1) plastics, 2) abrasives, 3) mops, brooms
and brushes and 4) food service. We believe that we have established long
standing relationships with our major customers based on quality products and
service, while continuing to strive to be a low cost provider in this industry.
Our ability to remain a low cost provider in the industry is highly dependent on
the price of our raw materials, primarily resin. Resin prices are influenced to
a certain degree by market prices for natural gas and crude oil, as well as
supply and demand factors within the plastics manufacturing industry. Being a
low cost producer is also dependent upon our ability to reduce and subsequently
control our cost structure, which is further dependent upon our ongoing
restructuring efforts.
We market branded consumer in-home and automotive storage, and to a lesser
extent, abrasive products and mops and brooms, to consumer/retail outlets in the
U.S. The consumer distribution channels for these products, especially the
in-home and automotive storage products, are highly concentrated, with several
large "mass-market" retailers representing a very significant portion of the
customer base. However, we continue to develop new markets for our products,
including sporting goods. Sales and marketing of these products is generally
handled by direct sales personnel. Our ability to remain competitive in these
consumer markets is dependent upon our position as a low cost producer, and also
upon our development of new and innovative products. Being a low cost producer
is also dependent upon our ability to reduce and subsequently control our cost
structure, which is further dependent upon our ongoing restructuring efforts.
Our restructuring efforts include consolidation of facilities and headcount
reductions.
6
Less significant amounts (based on net sales dollars) are sold to
different markets, such as roofing ventilation products to the construction
trade, and resin fiber disks and other abrasive disks to the OEM trade.
Electrical Products:
We market branded electrical products primarily in North America through a
combination of direct sales personnel and manufacturers' sales representatives.
Our primary customer base consists of major national retail chains that service
the home improvement, hardware, mass merchant, discount and automotive markets,
and smaller regional concerns serving a similar customer base.
Electrical products sold by the Company are generally used by consumers
and include such items as extension cords, work lights, surge suppressors, power
taps and strips, and outdoor lights and timers. We have entered into license
agreements pursuant to which we market certain of our products using certain
other companies' proprietary brand names. Overall demand for our products is
highly correlated with consumer demand, the performance of the general economy
and, to a lesser extent, home construction and resale activity.
The markets for our electrical products are highly competitive.
Competition is based primarily on price and the ability to provide superior
customer service in the form of complete and on-time product delivery. Other
competitive factors include brand recognition, product design, quality and
performance. Foreign competitors, especially from Asia, provide an increasing
level of competition. Our ability to remain competitive in these markets is
dependent upon continued efforts to remain a low-cost provider of these
products.
Raw Materials
Our operations have not experienced significant difficulties in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages. Our
Electrical Products businesses are highly dependent upon products sourced from
Asia, and therefore remain vulnerable to potential disruptions in that supply
chain. We are also subject to uncertainties involving labor relations issues at
entities involved in our supply chain, both at suppliers and in the
transportation and shipping area. Our Jan/San and Consumer business units (and
some others to a lesser extent) use polyethylene, polypropylene and other
thermoplastic resins as raw materials in a substantial portion of its plastic
products. Prices of plastic resins, such as polyethylene and polypropylene,
increased steadily from the latter half of 2002 through the middle of 2003, then
fell slightly in the second half of the year, and have increased again during
the early months of 2004. Management has observed that the prices of plastic
resins are driven to an extent by prices for crude oil and natural gas, in
addition to other factors specific to the supply and demand of the resins
themselves. We cannot predict the direction resin prices will take during 2004
and beyond. We are also exposed to price changes for copper (used by Woods and
Woods Canada), aluminum and steel, corrugated packaging material and other raw
materials. Prices for copper, aluminum and steel have increased in recent
months. We have not employed an active hedging program related to our commodity
price risk, but are employing other strategies for managing this risk, including
contracting for a certain percentage of resin needs through supply agreements
and opportunistic spot purchases. In a climate of rising raw material costs, we
experience difficulty in raising prices to shift these higher costs to our
customers. Our future earnings may be negatively impacted to the extent
increased costs for raw materials cannot be recovered or offset.
Employees
As of December 31, 2003, we employed 1,808 people. 394 of these employees
were members of various unions. Our labor relations are generally satisfactory
and there have been no strikes in recent years. Our operations can be impacted
by labor relations issues involving other entities in our supply chain. We
recently entered into a new union contract with employees at the Wilen business
unit. The union contract with certain employees in the St. Louis area expires in
December 2004.
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or
regulations will have a material adverse effect on our consolidated operations
or financial position. We anticipate making additional expenditures for
environmental matters during 2004, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Note 20 to the Consolidated Financial Statements in Part II, Item
8.
7
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on
patent, trademark and license protection, but rather on the quality of our
products, proprietary technology, contract performance, customer service and the
technical competence and innovative ability of our personnel to develop and
introduce salable products. However, we do rely to a certain extent on patent
protection, trademarks and licensing arrangements in the marketing of certain
products. Examples of key licensed and protected trademarks include Yellow
Jacket(R), Woods(R), Tradesman(R), AC/Delco(TM) (Woods); Contico(R) and
Continental(R) (CCP); Glit(R), Microtron(R), Brillo(TM), and Kleenfast(R)
(Glit/Microtron); Wilen(R) (Wilen); and Trim-Kut(R) (Gemtex). Companies most
reliant upon patented products and technology are CCP, Woods, and Gemtex.
Further, we are renewing our emphasis on new product development, which will
increase our reliance on patent and trademark protection across all business
units.
Since 1998, Woods Canada has used the NOMA(R) trademark in Canada under
the terms of a license with Gentek Inc. (Gentek). In October 2002, Gentek filed
a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In
July 2003, as part of the bankruptcy proceedings, Gentek filed a motion to
reject this trademark license agreement. On November 5, 2003, Gentek's motion
was granted by the U.S. Bankruptcy Court. As a result, the trademark license
agreement is no longer in effect. Woods Canada will use the NOMA(R) trademark
through mid-2004 and, thereafter, will lose the right to brand certain of its
product with the NOMA(R) trademark. Approximately 50% of Woods Canada's sales
are of NOMA(R) - branded products. Woods Canada will seek to replace those sales
with sales of other products and will continue to act as a supplier for the new
licensee of the NOMA(R) trademark. However, there is no guarantee that Woods
Canada will be able to replace the lost sales of NOMA(R) - branded products.
Available Information
We maintain a website at http://www.katyindustries.com. We make available,
free of charge through our website, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and, if applicable, all
amendments to these reports as well as Section 16 reports on Forms 3, 4 and 5,
as soon as reasonably practicable after such reports are filed or furnished to
the SEC. The information on our website is not, and shall not be deemed to be, a
part of this report or incorporated into any other filings we make with the SEC.
8
|