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The following is an excerpt from a 10-K SEC Filing, filed by STANADYNE AUTOMOTIVE CORP on 3/28/2002.
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STANADYNE CORP - 10-K - 20020328 - PART_I

PART I

ITEM 1. BUSINESS

GENERAL

Stanadyne Corporation ("Stanadyne" or the "Company"), formerly known as Stanadyne Automotive Corp., is a designer and manufacturer of highly engineered, precision manufactured engine components, including fuel injection equipment for diesel engines and hydraulic lash compensating devices primarily for gasoline engines (the latter commonly known as "hydraulic valve lifters"). With over 100 years of machining experience and over 50 years as a supplier of diesel fuel injection equipment and hydraulic lash devices, Stanadyne's core competencies in product design, precision machining, and the assembly and testing of complex components have earned the Company a reputation for innovative, high quality products. The Company possesses an extremely broad range of manufacturing technology and know-how and is capable of high-volume production runs, machining high-quality components within tolerances of 20 millionths of an inch on a cost effective basis.

The Company sells engine components to original equipment manufacturers ("OEMs") in a variety of applications, including automobiles, light duty trucks, agricultural and construction vehicles and equipment, industrial products and marine equipment. The Company also sells replacement units and parts through its aftermarket distribution network. The Company conducts its business through two principal operating segments: the Diesel Group, which accounted for 85% of the Company's 2001 net sales, and Precision Engine Products Corp. ("Precision Engine"), a wholly-owned subsidiary, which accounted for 15% of the Company's 2001 net sales. Additional segment information can be found in Notes 17 and 18 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

The Company is a wholly-owned subsidiary of Stanadyne Automotive Holding Corp. ("Holdings"). The Company and Holdings were formed by American Industrial Partners Capital Fund II, L.P. ("AIP") upon the purchase of Stanadyne Automotive Corp. and Subsidiaries (the "Predecessor") from Metromedia Company (the "Sellers") on December 11, 1997 (the "Acquisition").

THE DIESEL GROUP

The Diesel Group is one of only four independent worldwide manufacturers selling to the geographic areas in which the Company competes. Net sales for the Diesel Group were $216.2 million, $248.4 million and $231.0 million for 2001, 2000 and 1999, respectively. Operating income for the Diesel Group was $15.0 million, $23.9 million and $17.7 million for 2001, 2000 and 1999, respectively. Total assets of the Diesel Group were $241.1 million, $257.4 million and $270.5 million at December 31, 2001, 2000 and 1999, respectively.

PRODUCTS

The Diesel Group produces fuel injection equipment for diesel engines of up to 250 horsepower, an engine range comprising approximately 90% of all diesel engines produced worldwide. The Diesel Group sells its fuel injection products to its customers on an individual component basis or by complete line. The primary focus of the Diesel Group is on the off highway agricultural and

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industrial segment of the market. Fuel pumps and injectors, the Diesel Group's primary products, are the most highly engineered, precision manufactured components on a diesel engine and comprise the core components of a diesel engine's fuel system. Because fuel system components are so elemental to the proper functioning and optimal performance of a diesel engine, they are essentially custom engineered for a specific engine platform. As a result, the Company typically supplies these components on a sole source basis for the life of engine platforms. The Diesel Group also manufactures diesel fuel filters, fuel heaters and water separators, oil pumps and other precision manufactured components and distributes diesel fuel conditioners, stabilizers and diesel engine diagnostic equipment.

CUSTOMERS

The Diesel Group's primary customers are OEMs of diesel engines. The Diesel Group's four largest customers, Deere & Company ("Deere"), General Motors Corporation ("GM"), Perkins Engines Company Limited, and Ford Motor Company ("Ford), accounted for approximately $136.5 million, or approximately 63.1% of the Diesel Group's net sales. The Diesel Group had two customers that accounted for more than 10% of 2001 net sales: Deere accounted for 26.2% and GM accounted for 23.2% of the Diesel Group's 2001 net sales.

The Diesel Group supports the servicing of the engine and its own products through sales of aftermarket units and parts to the service organizations of its OEM customers and through its own global network of authorized distributors and dealers.

INDIA BUSINESS STATUS

On October 22, 2001, the Company formed a joint venture with Amalgamations Private Limited to form a new company in the state of Tamil Nadu, India. The joint venture is named Stanadyne Amalgamations Private Limited ("SAPL") and will manufacture diesel fuel injection equipment for the domestic and export markets starting in 2003. The Diesel Group holds a 51% controlling share of SAPL.

PLANT CLOSING

On September 9, 1998, the Company announced the closure of its manufacturing facility in Bari, Italy. The Bari plant was part of a wholly-owned subsidiary, Stanadyne, SpA ("SpA"), which is headquartered in Brescia, Italy. This action was taken because of continuing financial losses at Bari resulting from worldwide excess manufacturing capacity for the types of diesel fuel injectors produced there. The cost of closing the operation resulted in a charge to 1998 earnings of $4.2 million. The Company favorably concluded the major cost elements of the plant closure in the third quarter of 1999 and as a result recorded a $1.9 million savings, primarily as a result of lower severance costs, to the reserve established in 1998.

PRECISION ENGINE

Precision Engine is a major independent (non-captive) manufacturer of hydraulic valve lifters primarily for gasoline engines. Net sales for Precision Engine were $38.2 million, $44.0 million and $50.5 million for 2001, 2000 and 1999, respectively. Operating (loss) income for Precision Engine was $(5.9) million, $0.0 million and $4.2 million for 2001, 2000 and 1999, respectively.

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Total assets of Precision Engine were $48.5 million, $46.0 million and $53.6 million at December 31, 2001, 2000 and 1999, respectively.

PRODUCTS

Precision Engine designs and manufactures four types of hydraulic valve lifters:
roller rocker arm assemblies, lash adjusters, roller valve lifters and slipper valve lifters. These products convert the rotary motion of a camshaft into a reciprocating motion and allow for the adjustment of lash (clearance) as valves are opened and closed in the cylinder head of an engine. Roller rocker arms accounted for 63.1% of Precision Engine's 2001 net sales.

CUSTOMERS

Precision Engine's primary customers are OEMs. DaimlerChrysler Corp. ("DCX"), Ford and Tritec Motors LTDA. ("Tritec") accounted for 49.4%, 14.3% and 14.0%, respectively, of Precision Engine's 2001 net sales. Precision Engine also sells to several companies for distribution into the aftermarket.

BRAZIL BUSINESS STATUS

Precision Engine was selected in 1997 as the sole supplier of roller rocker arm assemblies for use on an engine to be manufactured in Brazil by Tritec, a Brazilian joint venture company formed by DCX and BMW AG. To support this new business opportunity, Precision Engine established a new subsidiary in Brazil, Precision Engine Products LTDA. ("PEPL"), on October 16, 1998. This limited liability company manufactures, assembles and tests roller rocker arm assemblies for supply to Tritec. Investment in PEPL began in the first quarter of 1999. Limited production at PEPL began in the fourth quarter of 2000, with a ramp up to mature production completed during 2001.

COMPETITION

Because of the technical expertise required to design and manufacture the Company's products to the tolerances required, the existence of longstanding supply relationships in the engine component business and the significant capital expenditures and lead time required to enter the business, there are a limited number of manufacturers selling to the global markets in which the Company operates. The Company competes on the basis of technological innovation, product quality, processing and manufacturing capabilities, service support and price.

The main competitors of the Diesel Group are Robert Bosch GmbH, Delphi Automotive Systems ("Delphi") and Denso (formerly Nippondenso of Japan). In 1999, several acquisitions occurred within the diesel fuel injection industry. Robert Bosch GmbH, the largest fuel injection manufacturer, acquired the controlling share of ownership in Zexel of Japan. Also, Delphi entered the diesel market through the purchase of Lucas Diesel Systems from TRW Inc.

The main competitors of Precision Engine are INA Walzlager Schaeffler KG, Eaton Corporation, Delphi and in the aftermarket, WA Thomas (formerly the Hylift division of SPX Corporation).

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RAW MATERIALS AND COMPONENT PARTS

The Company's products are made largely of specially designed metal parts, most of which are designed, purchased, cast or stamped and machined by the Company to its own technical specifications. Metallic raw materials such as steel, aluminum, copper and brass are commodity items readily available from a number of suppliers. Certain parts, such as electronic components, are made to the Company's specifications. Other parts, such as fasteners, are purchased by the Company from outside suppliers as standardized parts or are made to the Company's specifications. Although from time to time the Company has experienced temporary supply shortages due to localized conditions, no such shortage has materially adversely affected the Company.

PATENTS AND TRADEMARKS

The Company relies upon patent, trademark and copyright protection as well as upon unpatented technological know-how and other trade secrets for certain products, components, processes and applications. However, the Company's operations are not dependent upon any single or related group of patents, copyrights or trademarks or their duration. The Company considers its proprietary information important, especially in the maintenance of its competitive position in the aftermarket business, and takes actions to protect its intellectual property rights.

EMPLOYEES

At December 31, 2001, the Company employed 2,043 persons of whom approximately 30% were salaried and 70% were hourly employees. All of the Company's employees are non-unionized with the exception of those in SpA. The Company believes its relations with its employees are good.

TECHNOLOGY, RESEARCH AND DEVELOPMENT

Engine manufacturers are required to continually improve engine performance and fuel economy. Accordingly, the Company's research and development investment is significant. In general, the Company funds its own research and development expenses, although during the pre-production program phase some of those expenses may be customer-funded. Research and development costs incurred for 2001, 2000 and 1999 were $11.6 million, $10.1 million and $9.1 million, respectively, of which $1.4 million, $0.9 million and $0.6 million, respectively, were reimbursed by customers. The Diesel Group accounts for over 95% of these amounts.

Once an OEM commits to purchasing a product from the Company, usually one to three years into the development or application process, the Company may need to allocate capital for the machinery, equipment and tooling necessary for engine program launch, ramp-up and product volume increases. Furthermore, given the significant existing capital investment in plant and equipment already made by the Company, the Company has on-going programs to maintain, upgrade and replace its investments. In 2001, 2000 and 1999, the Company spent $18.0 million, $9.5 million and $11.4 million, respectively, on capital investments.

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FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES

The Company has manufacturing operations in the United States, Italy and Brazil. The products manufactured in the United States and Italy are sold within their respective domestic markets, as well as exported throughout the world. These products are sold to both OEM and aftermarket customers. The products manufactured in Brazil are sold only to an OEM customer in Brazil.

The sales to OEM and aftermarket customers during 2001, 2000 and 1999 were as follows:

                                                   2001        2000        1999
                                                   ----        ----        ----
                                                       (dollars in millions)
Original Equipment:
     Diesel Group                                 $103.1      $147.5      $153.7
     Precision Engine                               30.3        38.9        45.0
Aftermarket:
     Diesel Group                                  113.2       100.9        77.4
     Precision Engine                                7.9         5.2         5.5
                                                  ------      ------      ------
           Total Net Sales                        $254.5      $292.5      $281.6
                                                  ======      ======      ======

Information regarding net sales to geographic areas, operating income (loss) from manufacturing facilities in geographic areas and assets by geographic areas for the years ended December 31, 2001, 2000 and 1999 appear below and in Note 18 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

                                                  2001        2000        1999
                                                  ----        ----        ----
                                                      (dollars in millions)
Net Sales:
     United States                               $151.1      $173.8      $168.5
     England                                       25.6        34.4        43.5
     All Other Geographic Areas                    77.8        84.3        69.6
                                                 ------      ------      ------
           Total Net Sales                       $254.5      $292.5      $281.6
                                                 ======      ======      ======

Operating Income (Loss):
     United States                               $ 11.0      $ 23.2      $ 20.8
     Italy                                          0.0         1.8         1.5
     Brazil                                        (1.9)       (1.0)        (.4)
                                                 ------      ------      ------
           Total Operating Income                $  9.1      $ 24.0      $ 21.9
                                                 ======      ======      ======

Identifiable Assets:
     United States                               $235.8      $249.8      $264.9
     Italy                                         33.5        33.0        40.1
     Brazil                                         3.8         1.3         1.1
                                                 ------      ------      ------
           Total Identifiable Assets             $273.1      $284.1      $306.1
                                                 ======      ======      ======

The Company's worldwide operations are subject to the risks normally associated with foreign operations, including but not limited to, the disruption of markets, changes in export or import laws, labor unrest, political instability, restrictions on transfers of funds, unexpected changes in regulatory environments, difficulty in obtaining distribution and support, and potentially adverse tax consequences. In addition, even though the Company generally matches, to the extent possible, related costs and revenues in a single currency, and generally includes exchange rate protections in its sales contracts, the U.S. dollar value of the Company's foreign sales varies with foreign currency

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exchange rate fluctuations. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company.

ENVIRONMENTAL MATTERS

The Company's facilities are subject to federal, state and local environmental requirements, including those governing discharges to the air and water, the handling and disposal of industrial and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. The Company operates under various environmental permits and approvals, the violation of which may subject the Company to fines and penalties. There are no known violations of environmental permits or approvals that may have a material adverse effect to the Company's financial position or results of operations. The Company's manufacturing operations involve the use of hazardous substances and, if a release of hazardous substances occurs or has occurred on or from the Company's facilities, the Company may be held liable and may be required to pay the cost of remedying the condition. The amount of any such liability could be material. Pursuant to the terms of the Acquisition, the Sellers have agreed to conduct and complete remediation of soil and groundwater contamination at the Company's Windsor, CT and Jacksonville, NC facilities. While many of these remediations are underway and the Sellers have agreed to complete these remediations and have indemnified the Company with respect to these matters and certain other environmental matters, there can be no assurance that the Sellers will have the ability to completely fulfill their obligations to indemnify the Company for such matters. If the Sellers are unable to fulfill their obligations, the Company will be responsible for such matters and the cost could be material. Estimates of the cost at the time of the Acquisition for the remediations to be completed by the Sellers at the Windsor, CT and Jacksonville, NC facilities were $1.7 million and $0.3 million, respectively. Additional information can be found in Note 16 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company, including financial statements, notes to financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. All of these forward-looking statements are based on estimates and assumptions made by the management of the Company which, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon such estimates and statements. No assurance can be given that any such estimates will be realized, and actual results may 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 retirement of key members of management; (4) increases in the Company's cost of borrowing or inability or unavailability of additional debt or equity capital; (5) loss of material customer; (6) adverse state or federal legislation or regulation or adverse determinations in pending litigation; and (7) changes in general economic conditions and/or in the automobile, light duty trucks, agricultural and construction vehicles and equipment, industrial products and marine equipment markets in which the Company competes. Many of such factors are beyond the control of the Company and its management. The forward-looking statements contained in this report speak only as of the date on which such statements are made. The Company assumes no duty to update them reflect new, changing or unanticipated events or circumstances.

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ITEM 2. PROPERTIES

The Company's executive offices are located in Windsor, Connecticut. The Company believes that substantially all of its properties and equipment are in good condition, and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs.

Below is a summary of the existing facilities:

                                Square         Type of
      Location                 Footage         Interest    Description of Use
      --------                 -------         --------    ------------------
DIESEL GROUP:
    Windsor, CT                571,000           Owned     Corporate Offices, Diesel Group Headquarters, Sales and
                                                           Marketing, Engineering Center, Manufacturing
    Jacksonville, NC           110,000           Owned     Manufacturing, Distribution
    Washington, NC             177,000           Owned     Manufacturing
    Trappes, France             23,000          Leased     Engineering, Sales
    Huntingdon, England          3,000          Leased     Engineering, Sales
    Brescia, Italy             175,000           Owned     SpA Headquarters, Engineering, Sales, Manufacturing

PRECISION ENGINE:
    Windsor, CT                119,000           Owned     Precision Engine Headquarters, Manufacturing
    Tallahassee, FL            125,000           Owned     Manufacturing, Engineering
    Curitiba, Brazil            10,000          Leased     Manufacturing

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal and regulatory proceedings generally incidental to its business. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding, or all of them combined, will not have a materially adverse effect on the Company's financial position or results of operations.

The Company is subject to potential environmental liability and various claims and legal actions, which are pending or may be asserted against the Company concerning environmental matters. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management's opinion, the aforementioned claims will be resolved without materially adverse effects on the results of operations, financial position or cash flows of the Company. In conjunction with the Acquisition of the Company from the Sellers on December 10, 1997, the Sellers agreed to partially indemnify the Company and AIP relating to certain environmental matters. See "Environmental Matters" in Item 1 of this report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2001.

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BROKERAGE PARTNERS