S&P Announces: Summary Analysis — Key Components LLC

Business Wire, June 7, 2004

Business Editors

NEW YORK--(BUSINESS WIRE)--June 7, 2004

Key Components LLC:

Credit Rating History:

            Local currency    Foreign currency
29-Jun-2000     B /--               B /--
15-May-1998     B/--                B/--

Rationale

The ratings on Key Components LLC reflect the company's aggressive financial policy, partially offset by its respectable positions in niche markets. Tarrytown, N.Y.-based Key Components operates two business segments, electrical components and mechanical engineered components, which manufacture flexible shaft and remote valve components, turbocharger actuators and related accessories, battery chargers, wiring for uninterruptible power supplies, and other specialty electrical components.

The company targets original equipment manufacturer markets, which have been soft during the past three years but are beginning to show signs of improvement. In particular, Key Components' turbocharger components product line, which supplies trucking manufacturers worldwide, is well positioned to benefit from the increase of heavy-duty trucking production occurring in 2004. Key Components is a privately held affiliate of investment firms Kelso & Co. and Millbrook Capital Management Inc.

High financial risk results from a leveraged capital structure, weak cash flow protection, and an aggressive growth strategy. The company has grown through acquisitions, but it has been able to integrate operations and rationalize redundancies. The company integrated recently acquired Arens Controls LLC's mechanical components product line into its Binghamton, N.Y., manufacturing facility. In May 2004, Key Components acquired specialty-wiring manufacturer Advanced Devices Inc. (ADI), which Standard & Poor's Ratings Services expects to be immediately accretive and to enhance the company's electrical components product line.

Key Components is in the process of selling its unprofitable lock product line, which recently relocated to its Massachusetts facility from Mexico. Proceeds from the divestiture are expected to be partially dedicated to reducing debt. As a result, credit measures should improve to reach Standard & Poor's expectations of total debt to EBITDA of 3.5x-4x (actual was 4x for the 12 months ended March 31, 2004) and EBITDA to interest coverage in the 3x area (actual was 2.7x for the 12 months ended March 31, 2004). Although Key Components is expected to continue pursuing acquisitions of light manufacturing companies, transactions should be financed through a combination of debt and equity so as to not materially weaken its financial profile.

Liquidity

Liquidity is modest. After drawing down on the revolving credit facility to finance the acquisition of ADI, Key Components had about $19 million in availability under its $25 million revolving credit facility. The company anticipates possibly utilizing its revolving credit facility to support capital spending needs in 2004, which are expected to reach $4 million. At March 31, 2004, Key Components prepaid two of its principal payments on its $100 million term loan, which is payable in quarterly installments through September 2006. The company entered into a second amendment to its credit agreement in September 2003 in order to modify covenants, which were about to step down, through March 30, 2005. As of March 31, 2004, Key Components was in compliance with the revised financial covenants.

Outlook

The outlook is stable. Standard & Poor's expects Key Components to continue to generate free cash flow, which will be partially used for debt reduction in the near term. However, an aggressive growth strategy will limit credit protection measures from improving beyond current expectations.