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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 SECURITIESEXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004  [   ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the transition period from           to Commission file number 333-115267 ERICO INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in Its Charter)
 Ohio
    
    34-0201460(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
   30575 Bainbridge Road, Suite 300, Solon, OH
    
    44139(Address of Principal Executive Offices)
    
    (Zip Code)
 (440) 349-2630 
 (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. Yes [   ] No [X ] Indicate by a check mark whether the registrant is an accelerated filer
(as determined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X ] As of August 4, 2004, the Registrant had one outstanding share of common stock.




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INDEX TO QUARTERLY REPORT Page No.Part I. Financial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Financial Statements of ERICO International
Corporation and SubsidiariesCondensed Consolidated Balance Sheets as of December 31, 2003 and
June 30, 2004
    
    
    2Statements of Condensed Consolidated Income for the three and six
months ended June 30, 2003 and 2004
    
    
    3Statements of Condensed Consolidated Cash Flows for the six months
ended June 30, 2003 and 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    21Signatures
    
    
    22EX-31.1 CertificationEX-31.2 CertificationEX-32 Certification
 1




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PART 1. FINANCIAL INFORMATION 
 Item 1. Financial Statements ERICO International Corporation and Subsidiaries 
 Condensed Consolidated Balance Sheets (thousands of dollars)
 June 30,
    
    December 31,2004
    
    2003(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,215
    
    
    $
    2,421Trade accounts receivable, net
    
    
    58,051
    
    
    
    54,252Inventories
    
    
    51,990
    
    
    
    45,513Other current assets
    
    
    9,622
    
    
    
    7,745Total current assets
    
    
    122,878
    
    
    
    109,931Property, plant and equipment, net
    
    
    55,141
    
    
    
    60,630Goodwill
    
    
    105,237
    
    
    
    105,194Trademarks and other intangible assets
    
    
    36,469
    
    
    
    36,572Other assets
    
    
    15,211
    
    
    
    11,440Total assets
    
    $
    334,936
    
    
    $
    323,767Liabilities and stockholders net investmentCurrent liabilities:Trade accounts payable
    
    $
    33,749
    
    
    $
    29,607Accrued compensation
    
    
    8,711
    
    
    
    9,216Other accrued expenses
    
    
    27,584
    
    
    
    25,956Total current liabilities
    
    
    70,044
    
    
    
    64,779Long-term debt
    
    
    166,715
    
    
    
    140,920Deferred income taxes
    
    
    28,490
    
    
    
    28,939Other long-term liabilities
    
    
    16,138
    
    
    
    16,699Stockholders net investment:Common stock, $1.00 par value, authorized 1,500,000 shares,
issued and outstanding 1 share
    
    
    
    
    
    
    Parent company investment
    
    
    55,512
    
    
    
    72,668Accumulated other comprehensive loss
    
    
    (1,963
    )
    
    
    (238
    )Total stockholders net investment
    
    
    53,549
    
    
    
    72,430Total liabilities and stockholders net investment
    
    $
    334,936
    
    
    $
    323,767
 See notes to unaudited condensed consolidated financial statements. 2




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ERICO International Corporation and Subsidiaries 
 Statements of Condensed Consolidated Income (thousands of dollars)
  For the three months ended
    
    For the six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    92,112
    
    
    $
    80,381
    
    
    $
    175,562
    
    
    $
    149,774Cost of products sold
    
    
    58,529
    
    
    
    51,391
    
    
    
    112,140
    
    
    
    95,751Gross profit
    
    
    33,583
    
    
    
    28,990
    
    
    
    63,422
    
    
    
    54,023Operating expenses
    
    
    20,915
    
    
    
    20,327
    
    
    
    42,265
    
    
    
    40,320Interest expense, net
    
    
    3,857
    
    
    
    3,511
    
    
    
    7,347
    
    
    
    6,261Foreign exchange gain, net
    
    
    (817
    )
    
    
    (1,224
    )
    
    
    (393
    )
    
    
    (3,600
    )Other (income) expense, net
    
    
    57
    
    
    
    (66
    )
    
    
    1,282
    
    
    
    (54
    )Income before income taxes
    
    
    9,571
    
    
    
    6,442
    
    
    
    12,921
    
    
    
    11,096Provision for income taxes
    
    
    3,749
    
    
    
    2,289
    
    
    
    5,077
    
    
    
    3,939Net income
    
    $
    5,822
    
    
    $
    4,153
    
    
    $
    7,844
    
    
    $
    7,157
 See notes to unaudited condensed consolidated financial statements. 3




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ERICO International Corporation and Subsidiaries 
 Statements of Condensed Consolidated Cash Flows (thousands of dollars)
  For the six monthsended June 30,2004
    
    2003Net cash provided by (used in) operating activities
    
    $
    6,398
    
    
    $
    (110
    )Investing activitiesAcquisition payments, net of cash acquired
    
    
    
    
    
    
    (3,329
    )Capital expenditures
    
    
    (1,000
    )
    
    
    (2,532
    )Net cash used in investing activities
    
    
    (1,000
    )
    
    
    (5,861
    )Financing activitiesNet transfers to parent company
    
    
    (25,000
    )
    
    
    Net borrowing (payments) on revolving line of credit
    
    
    (23,200
    )
    
    
    7,785Borrowings from subordinated debt
    
    
    121,500
    
    
    
    Principal payments on long-term debt
    
    
    (72,950
    )
    
    
    (3,000
    )Financing fees paid
    
    
    (4,970
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (4,620
    )
    
    
    4,785Effect of exchange rate changes on cash and cash
equivalents
    
    
    16
    
    
    
    (55
    )Increase (decrease) in cash and cash equivalents
    
    
    794
    
    
    
    (1,241
    )Cash and cash equivalents at beginning of period
    
    
    2,421
    
    
    
    3,374Cash and cash equivalents at end of period
    
    $
    3,215
    
    
    $
    2,133
 See notes to unaudited condensed consolidated financial statements. 4




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ERICO International Corporation and Subsidiaries 
 Notes to Condensed Consolidated Financial Statements June 30, 2004
 (thousands of dollars)
  1. Basis of Presentation ERICO International Corporation (ERICO or Company) is a wholly owned
subsidiary of ERICO Holding Company (Holding), which is a wholly owned
subsidiary of ERICO Global Company (Global) (the Companys ultimate parent).
All activity associated with Holding and Global relates to the operations of
the Company. Accordingly, all operating costs incurred by Holding and Global
are reflected in the Companys financial statements. In addition, senior
subordinated notes issued by Holding, including related financing costs, have
been pushed down and are reflected in the accompanying financial statements. The Company operates in one reportable segment. The Company manufactures
precision-engineered specialty metal products serving global niche product
markets in a diverse range of electrical, commercial and industrial
construction, utility and rail applications. The Company distributes its products to customers
through a global sales and distribution network serving more than 25 countries. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
to present fairly the financial position, results of operations and cash flows
for the periods presented have been included. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Operating results for the
six months ended June 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. For further
information, refer to the consolidated financial statements and notes thereto
for the year ended December 31, 2003, not included herein. 2. Inventories The major categories of inventories at June 30, 2004 and December 31, 2003 are
as follows: June 30,
    
    December 31,2004
    
    2003Finished goods
    
    $
    42,340
    
    
    $
    37,156Work in process
    
    
    3,480
    
    
    
    2,978Raw materials
    
    
    10,779
    
    
    
    8,94156,599
    
    
    
    49,075Inventory reserves
    
    
    (4,609
    )
    
    
    (3,562
    )Net inventories
    
    $
    51,990
    
    
    $
    45,513
 3. Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price paid over the fair value of
the net assets acquired. Goodwill and indefinite-lived intangible assets are
no longer amortized but are subject to annual impairment testing. Impairment
exists when the carrying amount of goodwill or indefinite-lived intangible
assets exceeds its fair value. The Companys policy is to perform its annual
impairment testing in the fourth quarter of each year, unless circumstances
dictate the need for more frequent assessments. The 2003 annual impairment
assessments confirmed that the fair value of the Company exceeded its carrying
value and no impairment loss recognition was required for goodwill or
indefinite-lived intangible assets. There were no significant changes in the
carrying amount of goodwill for the six months ended June 30, 2004. 5




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ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 3. Goodwill and Other Intangible Assets (continued) Trademarks and other intangible assets, are as follows: As of June 30, 2004Acquisition
    
    AccumulatedCost
    
    Amortization
    
    NetFinite-lived intangible assets:Patents
    
    $
    2,879
    
    
    $
    (664
    )
    
    $
    2,215Customer relationships
    
    
    787
    
    
    
    (59
    )
    
    
    728Total intangible assets subject to amortization
    
    
    3,666
    
    
    
    (723
    )
    
    
    2,943Indefinite-lived intangible asset  trademarks
    
    
    33,526
    
    
    
    
    
    
    
    33,526Total other intangible assets
    
    $
    37,192
    
    
    $
    (723
    )
    
    $
    36,469
 As of December 31, 2003Acquisition
    
    AccumulatedCost
    
    Amortization
    
    NetFinite-lived intangible assets:Patents
    
    $
    2,732
    
    
    $
    (434
    )
    
    $
    2,298Customer relationships
    
    
    787
    
    
    
    (39
    )
    
    
    748Total intangible assets subject to amortization
    
    
    3,519
    
    
    
    (473
    )
    
    
    3,046Indefinite-lived intangible asset  trademarks
    
    
    33,526
    
    
    
    
    
    
    
    33,526Total other intangible assets
    
    $
    37,045
    
    
    $
    (473
    )
    
    $
    36,572
 Amortization of other intangible assets was $124 and $54 for the three months
ended June 30, 2004 and 2003, respectively, and $240 and $170 for the six
months ended June 30, 2004 and 2003, respectively. Amortization expense for
each of the five succeeding years is expected to be approximately $500 per
year. 6




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ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 4. Debt and Financing Arrangements Long-term debt at June 30, 2004 and December 31, 2003 consists of the
following: 2004
    
    2003Credit facility with commercial banks
    
    $
    14,800
    
    
    $
    38,000Term loans with commercial banks
    
    
    
    
    
    
    39,0008 7/8% Subordinated notes  ERICO International Corporation
    
    
    140,900
    
    
    
    11% Subordinated notes  ERICO International Corporation
    
    
    10,600
    
    
    
    30,00011% Subordinated notes  ERICO Holding Company
    
    
    
    
    
    
    35,000Notes  original issue discount
    
    
    (260
    )
    
    
    (1,755
    )Other
    
    
    675
    
    
    
    675$
    166,715
    
    
    $
    140,920
 On February 20, 2004, the Company refinanced substantially all of its long-term
debt. The Company issued $140,900 of 8 7/8% senior subordinated notes, of
which $19,400 was exchanged for its 11% senior subordinated notes. The
proceeds of $140,900 were used in part to reduce amounts outstanding under the
previous revolving credit facility, to repay term loans outstanding, to repay
$35,000 of the 11% senior subordinated notes of ERICO Holding Company, and to
pay a dividend of $25,000 to the holders of ERICO Global Company Class L
shares. In connection with the refinancing, the Company also amended its Multicurrency
Credit and Security Agreement (the Credit Facility). The Credit Facility has
$75,000 of committed capital and a term of five years. The Credit Facility
contains various customary covenants, including covenants limiting the ability
of the Company and its subsidiaries to sell, pledge or incur liens on assets
and to incur additional debt. The Credit Facility also includes financial
covenants requiring the Company to maintain certain minimum net worth levels
and to achieve certain ratios of debt to cash flow, and cash flow to fixed
charges. Borrowings under the Credit Facility are secured by all assets of the
Company. Borrowings under the Credit Facility accrue interest at the Alternate
Base Rate (as defined in the Credit Facility) plus a 1.25% margin or LIBOR plus
a 2.00% margin. The Credit Facility also provides multicurrency borrowing options in Australian
dollars, Euros, Swiss francs, Swedish kronas, British pounds and other
currencies that are readily available and freely traded. There were no amounts
outstanding at June 30, 2004 under the multicurrency borrowing options. The Credit Facility provides for a commitment fee of 0.25% basis points on the
total facility. The amount available for borrowing under the Credit Facility
at June 30, 2004 was $59,932. The Credit Facility permits up to $25,000 in outstanding letters of credit
under the revolving portion. At June 30, 2004 the Company had $268 of
outstanding letters of credit. 7




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ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 5. Income Taxes The Companys operations have been included in the consolidated income tax
returns filed by Global. Income tax expense in the Companys consolidated
income statements is calculated on a separate tax return basis as if the
Company had operated as a stand-alone entity. The Companys income tax provision was $3,749, or 39.2%, and $2,289, or 35.5%,
for the three months ended June 30, 2004 and 2003, respectively, and $5,077, or
39.3%, and $3,939, or 35.5%, for the six months ended June 30, 2004 and 2003,
respectively. Income tax expense in 2004 varies from the amount computed by applying
the statutory federal tax rate to income before income taxes, due principally
to state and local taxes. In 2003, the impact of state and local taxes was substantially offset by certain foreign currency transaction gains for which there was no income tax expense. 6. Retirement and Post-retirement Benefit Plans The following table sets forth the components of net periodic expense for the
post-retirement benefit plan for the three months and six months ended June 30: For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    30
    
    
    $
    29
    
    
    $
    60
    
    
    $
    58Interest cost
    
    
    100
    
    
    
    99
    
    
    
    200
    
    
    
    197Net periodic post-retirement benefit expense
    
    $
    130
    
    
    $
    128
    
    
    $
    260
    
    
    $
    255
 The Company previously disclosed in its annual financial statements that it
expects health care post-retirement contributions to be $250 and benefit
payments to be $325 in 2004. The Company has made health care post-retirement
benefit payments of $128 in the six months ended June 30, 2004. On December 8, 2003, Congress passed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (Medicare Act). On May 19, 2004,
the Financial Accounting Standards Board issued Financial Staff Position Number
106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003(FSP). The FSP
is effective for the first interim or annual period beginning after June 15,
2004. The Company is currently evaluating the effects of the Medicare Act on
the accumulated post-retirement benefit obligation and post-retirement benefit
costs and has not determined the amount of any subsidy, if any, that may be
available. While the Company evaluates the effects of the Medicare Act, it has
elected under the provisions of the FSP to defer recognizing any potential
subsidy from the Medicare Act. The Company also sponsored a defined benefit pension plan covering U.S.
employees hired prior to January 1, 1997. Effective January 1, 1997, the
Company froze all benefits under the Plan. In 2003, the pension plan was
terminated and plan assets are expected to be distributed to participants in
the fourth quarter of 2004. At both June 30, 2004 and December 31, 2003, the
Company had a termination liability of $6,335. 7. Commitments and Contingencies The Company is subject to legal proceedings, claims and litigation arising in
the ordinary course of business. The Companys management does not expect that
the ultimate costs to resolve these matters will have a material adverse effect
on the Companys consolidated financial position, results of operations or cash
flows. 8




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ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 8. Comprehensive Income Total comprehensive income and its components are as follows: For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    5,822
    
    
    $
    4,153
    
    
    $
    7,844
    
    
    $
    7,157Foreign currency translation adjustments
    
    
    (1,482
    )
    
    
    (61
    )
    
    
    (1,725
    )
    
    
    (1,193
    )Comprehensive income
    
    $
    4,340
    
    
    $
    4,092
    
    
    $
    6,119
    
    
    $
    5,964
 9. Reconciliation of EBITDA to Net Cash Provided by Operating Activities EBITDA is defined as net income plus income taxes, interest expense, net, and
depreciation and amortization. EBITDA is presented in this manner because the
Company believes it is a widely accepted financial indicator of a companys
ability to service and incur indebtedness. In addition, EBITDA is
used in the
Companys financial debt covenants. Also, management uses EBITDA, among other
financial measures, for planning and forecasting purposes. However, EBITDA
should not be considered as an alternative to net cash provided by operating
activities as a measure of liquidity in accordance with accounting principles
generally accepted in the United States. Since EBITDA is not calculated
identically by all companies, the Companys method of computation may not be
comparable to those disclosed by other companies. Below is a reconciliation of
EBITDA to net cash provided by operating activities: For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Net cash provided by (used in) operating activities
    
    $
    11,454
    
    
    $
    7,753
    
    
    $
    6,398
    
    
    $
    (110
    )Interest expense, net
    
    
    3,857
    
    
    
    3,511
    
    
    
    7,347
    
    
    
    6,261Income taxes
    
    
    3,749
    
    
    
    2,289
    
    
    
    5,077
    
    
    
    3,939Foreign exchange
    
    
    817
    
    
    
    1,224
    
    
    
    393
    
    
    
    3,600Deferred taxes
    
    
    253
    
    
    
    66
    
    
    
    458
    
    
    
    799Amortization of financing fees and discount on
senior subordinated notes included in interest
expense, net
    
    
    (224
    )
    
    
    (149
    )
    
    
    (399
    )
    
    
    (332
    )Net changes in operating assets and liabilities
    
    
    (3,440
    )
    
    
    (1,887
    )
    
    
    8,304
    
    
    
    9,071EBITDA
    
    $
    16,466
    
    
    $
    12,807
    
    
    $
    27,578
    
    
    $
    23,228
 9




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ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 10. Guarantor and Non-Guarantor Subsidiaries The following condensed consolidating financial statements set forth the
Companys balance sheets as of June 30, 2004 and December 31, 2003, the
statements of income for the three months ended June 30, 2004 and 2003 and for
the six months ended June 30, 2004 and 2003 and the statements of cash flows
for the six months ended June 30, 2004 and 2003. In the following schedules,
Parent refers to ERICO International Corporation, Guarantor Subsidiary
refers to the U.S. subsidiary, ERICO Products, Inc., and Non-Guarantor
Subsidiaries refers to non-U.S. subsidiaries. Eliminations represent the
adjustments necessary to (a) eliminate intercompany transactions and (b)
eliminate the investments in the Companys subsidiaries accounted for under the
equity method. Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Balance Sheets
    
    
    
    
    
    Guarantor
    
    GuarantorJune 30, 2004
    
    Parent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    309
    
    
    $
    
    
    
    $
    2,906
    
    
    $
    
    
    
    $
    3,215Trade accounts receivable, net
    
    
    
    
    
    
    29,855
    
    
    
    28,196
    
    
    
    
    
    
    
    58,051Inventories
    
    
    
    
    
    
    29,089
    
    
    
    22,901
    
    
    
    
    
    
    
    51,990Other current assets
    
    
    754
    
    
    
    3,979
    
    
    
    4,889
    
    
    
    
    
    
    
    9,622Total current assets
    
    
    1,063
    
    
    
    62,923
    
    
    
    58,892
    
    
    
    
    
    
    
    122,878Property, plant and equipment, net
    
    
    249
    
    
    
    41,575
    
    
    
    13,317
    
    
    
    
    
    
    
    55,141Goodwill
    
    
    105,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,237Trademarks and other intangible assets
    
    
    36,469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,469Investment in and advances to subsidiaries
    
    
    98,584
    
    
    
    
    
    
    
    
    
    
    
    (98,584
    )
    
    
    Other assets
    
    
    7,522
    
    
    
    5,759
    
    
    
    1,930
    
    
    
    
    
    
    
    15,211Total assets
    
    $
    249,124
    
    
    $
    110,257
    
    
    $
    74,139
    
    
    $
    (98,584
    )
    
    $
    334,936Trade accounts payable
    
    $
    
    
    
    $
    20,600
    
    
    $
    13,149
    
    
    $
    
    
    
    $
    33,749Accrued compensation
    
    
    474
    
    
    
    5,020
    
    
    
    3,217
    
    
    
    
    
    
    
    8,711Other accrued expenses
    
    
    5,912
    
    
    
    13,356
    
    
    
    8,316
    
    
    
    
    
    
    
    27,584Total current liabilities
    
    
    6,386
    
    
    
    38,976
    
    
    
    24,682
    
    
    
    
    
    
    
    70,044Long-term debt
    
    
    166,040
    
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    166,715Deferred income taxes
    
    
    14,795
    
    
    
    9,349
    
    
    
    4,346
    
    
    
    
    
    
    
    28,490Intercompany payable
    
    
    
    
    
    
    35,285
    
    
    
    63,672
    
    
    
    (98,957
    )
    
    
    Other long-term liabilities
    
    
    8,354
    
    
    
    6,689
    
    
    
    1,095
    
    
    
    
    
    
    
    16,138Stockholders net investment
    
    
    53,549
    
    
    
    19,283
    
    
    
    (19,656
    )
    
    
    373
    
    
    
    53,549Total liabilities and stockholders
net investment
    
    $
    249,124
    
    
    $
    110,257
    
    
    $
    74,139
    
    
    $
    (98,584
    )
    
    $
    334,936
 10




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 10. Guarantor and Non-Guarantor Subsidiaries (continued) Non-Condensed Consolidating Balance Sheets
    
    
    
    
    
    Guarantor
    
    GuarantorDecember 31, 2003
    
    Parent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    400
    
    
    $
    3
    
    
    $
    2,018
    
    
    $
    
    
    
    $
    2,421Trade accounts receivable, net
    
    
    
    
    
    
    25,316
    
    
    
    28,936
    
    
    
    
    
    
    
    54,252Inventories
    
    
    
    
    
    
    23,532
    
    
    
    21,981
    
    
    
    
    
    
    
    45,513Other current assets
    
    
    1,926
    
    
    
    3,316
    
    
    
    2,503
    
    
    
    
    
    
    
    7,745Total current assets
    
    
    2,326
    
    
    
    52,167
    
    
    
    55,438
    
    
    
    
    
    
    
    109,931Property, plant and equipment, net
    
    
    297
    
    
    
    45,231
    
    
    
    15,102
    
    
    
    
    
    
    
    60,630Goodwill
    
    
    105,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,194Trademarks and other intangible assets
    
    
    36,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,572Investment in and advances to subsidiaries
    
    
    60,477
    
    
    
    
    
    
    
    
    
    
    
    (60,477
    )
    
    
    Other assets
    
    
    3,713
    
    
    
    5,785
    
    
    
    1,942
    
    
    
    
    
    
    
    11,440Total assets
    
    $
    208,579
    
    
    $
    103,183
    
    
    $
    72,482
    
    
    $
    (60,477
    )
    
    $
    323,767Trade accounts payable
    
    $
    
    
    
    $
    15,884
    
    
    $
    13,723
    
    
    $
    
    
    
    $
    29,607Accrued compensation
    
    
    443
    
    
    
    4,947
    
    
    
    3,826
    
    
    
    
    
    
    
    9,216Other accrued expenses
    
    
    3,223
    
    
    
    11,091
    
    
    
    11,642
    
    
    
    
    
    
    
    25,956Total current liabilities
    
    
    3,666
    
    
    
    31,922
    
    
    
    29,191
    
    
    
    
    
    
    
    64,779Long-term debt
    
    
    108,225
    
    
    
    32,695
    
    
    
    
    
    
    
    
    
    
    
    140,920Deferred income taxes
    
    
    15,232
    
    
    
    9,349
    
    
    
    4,358
    
    
    
    
    
    
    
    28,939Intercompany payable
    
    
    
    
    
    
    13,986
    
    
    
    58,780
    
    
    
    (72,766
    )
    
    
    Other long-term liabilities
    
    
    9,026
    
    
    
    6,476
    
    
    
    1,197
    
    
    
    
    
    
    
    16,699Stockholders net investment
    
    
    72,430
    
    
    
    8,755
    
    
    
    (21,044
    )
    
    
    12,289
    
    
    
    72,430Total liabilities and stockholders
net investment
    
    $
    208,579
    
    
    $
    103,183
    
    
    $
    72,482
    
    
    $
    (60,477
    )
    
    $
    323,767
 11




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 10. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Statements of Income
    
    
    
    
    
    Guarantor
    
    GuarantorThree months ended June 30, 2004
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    58,796
    
    
    $
    37,560
    
    
    $
    (4,244
    )
    
    $
    92,112Cost of products sold
    
    
    
    
    
    
    38,452
    
    
    
    24,321
    
    
    
    (4,244
    )
    
    
    58,529Gross profit
    
    
    
    
    
    
    20,344
    
    
    
    13,239
    
    
    
    
    
    
    
    33,583Operating expenses
    
    
    1,454
    
    
    
    9,832
    
    
    
    9,629
    
    
    
    
    
    
    
    20,915Interest expense, net
    
    
    3,024
    
    
    
    673
    
    
    
    160
    
    
    
    
    
    
    
    3,857Foreign exchange (gain) loss, net
    
    
    
    
    
    
    101
    
    
    
    (918
    )
    
    
    
    
    
    
    (817
    )Other (income) expense, net
    
    
    97
    
    
    
    (26
    )
    
    
    (14
    )
    
    
    
    
    
    
    57Income (loss) before income taxes
and equity income
    
    
    (4,575
    )
    
    
    9,764
    
    
    
    4,382
    
    
    
    
    
    
    
    9,571Provision (benefit) for income taxes
    
    
    (1,831
    )
    
    
    3,884
    
    
    
    1,696
    
    
    
    
    
    
    
    3,749Income (loss) before equity income
    
    
    (2,744
    )
    
    
    5,880
    
    
    
    2,686
    
    
    
    
    
    
    
    5,822Equity income from subsidiaries
    
    
    8,566
    
    
    
    
    
    
    
    
    
    
    
    (8,566
    )
    
    
    Net income
    
    $
    5,822
    
    
    $
    5,880
    
    
    $
    2,686
    
    
    $
    (8,566
    )
    
    $
    5,822
 Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Statements of Income
    
    
    
    
    
    Guarantor
    
    GuarantorThree Months ended June 30, 2003
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    50,219
    
    
    $
    32,451
    
    
    $
    (2,289
    )
    
    $
    80,381Cost of products sold
    
    
    
    
    
    
    30,818
    
    
    
    22,862
    
    
    
    (2,289
    )
    
    
    51,391Gross profit
    
    
    
    
    
    
    19,401
    
    
    
    9,589
    
    
    
    
    
    
    
    28,990Operating expenses
    
    
    1,012
    
    
    
    9,116
    
    
    
    10,199
    
    
    
    
    
    
    
    20,327Interest expense, net
    
    
    2,619
    
    
    
    674
    
    
    
    218
    
    
    
    
    
    
    
    3,511Foreign exchange (gain) loss, net
    
    
    2
    
    
    
    1,557
    
    
    
    (2,783
    )
    
    
    
    
    
    
    (1,224
    )Other (income) expense, net
    
    
    (1
    )
    
    
    28
    
    
    
    (93
    )
    
    
    
    
    
    
    (66
    )Income (loss) before income taxes
and equity income
    
    
    (3,632
    )
    
    
    8,026
    
    
    
    2,048
    
    
    
    
    
    
    
    6,442Provision (benefit) for income taxes
    
    
    (1,351
    )
    
    
    3,227
    
    
    
    413
    
    
    
    
    
    
    
    2,289Income (loss) before equity income
    
    
    (2,281
    )
    
    
    4,799
    
    
    
    1,635
    
    
    
    
    
    
    
    4,153Equity income from subsidiaries
    
    
    6,434
    
    
    
    
    
    
    
    
    
    
    
    (6,434
    )
    
    
    Net income
    
    $
    4,153
    
    
    $
    4,799
    
    
    $
    1,635
    
    
    $
    (6,434
    )
    
    $
    4,153
 12




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 10. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Statements of Income
    
    
    
    
    
    Guarantor
    
    GuarantorSix months ended June 30, 2004
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    110,707
    
    
    $
    72,742
    
    
    $
    (7,887
    )
    
    $
    175,562Cost of products sold
    
    
    
    
    
    
    71,639
    
    
    
    48,388
    
    
    
    (7,887
    )
    
    
    112,140Gross profit
    
    
    
    
    
    
    39,068
    
    
    
    24,354
    
    
    
    
    
    
    
    63,422Operating expenses
    
    
    2,715
    
    
    
    19,934
    
    
    
    19,616
    
    
    
    
    
    
    
    42,265Interest expense, net
    
    
    5,612
    
    
    
    1,352
    
    
    
    383
    
    
    
    
    
    
    
    7,347Foreign exchange (gain) loss, net
    
    
    
    
    
    
    215
    
    
    
    (608
    )
    
    
    
    
    
    
    (393
    )Other (income) expense, net
    
    
    1,333
    
    
    
    22
    
    
    
    (73
    )
    
    
    
    
    
    
    1,282Income (loss) before income taxes
and equity income
    
    
    (9,660
    )
    
    
    17,545
    
    
    
    5,036
    
    
    
    
    
    
    
    12,921Provision (benefit) for income taxes
    
    
    (3,864
    )
    
    
    7,017
    
    
    
    1,924
    
    
    
    
    
    
    
    5,077Income (loss) before equity income
    
    
    (5,796
    )
    
    
    10,528
    
    
    
    3,112
    
    
    
    
    
    
    
    7,844Equity income from subsidiaries
    
    
    13,640
    
    
    
    
    
    
    
    
    
    
    
    (13,640
    )
    
    
    Net income
    
    $
    7,844
    
    
    $
    10,528
    
    
    $
    3,112
    
    
    $
    (13,640
    )
    
    $
    7,844
 Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Statements of Income
    
    
    
    
    
    Guarantor
    
    GuarantorSix Months ended June 30, 2003
    
    Parent
    
    Subsidiaries
    

    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    93,974
    
    
    $
    60,738
    
    
    $
    (4,938
    )
    
    $
    149,774Cost of products sold
    
    
    
    
    
    
    60,290
    
    
    
    40,399
    
    
    
    (4,938
    )
    
    
    95,751Gross profit
    
    
    
    
    
    
    33,684
    
    
    
    20,339
    
    
    
    
    
    
    
    54,023Operating expenses
    
    
    2,369
    
    
    
    18,838
    
    
    
    19,113
    
    
    
    
    
    
    
    40,320Interest expense, net
    
    
    4,363
    
    
    
    1,360
    
    
    
    538
    
    
    
    
    
    
    
    6,261Foreign exchange (gain) loss, net
    
    
    2
    
    
    
    1,587
    
    
    
    (5,189
    )
    
    
    
    
    
    
    (3,600
    )Other (income) expense, net
    
    
    
    
    
    
    35
    
    
    
    (89
    )
    
    
    
    
    
    
    (54
    )Income (loss) before income taxes
and equity income
    
    
    (6,734
    )
    
    
    11,864
    
    
    
    5,966
    
    
    
    
    
    
    
    11,096Provision (benefit) for income taxes
    
    
    (2,505
    )
    
    
    4,770
    
    
    
    1,674
    
    
    
    
    
    
    
    3,939Income (loss) before equity income
    
    
    (4,229
    )
    
    
    7,094
    
    
    
    4,292
    
    
    
    
    
    
    
    7,157Equity income from subsidiaries
    
    
    11,386
    
    
    
    
    
    
    
    
    
    
    
    (11,386
    )
    
    
    Net income
    
    $
    7,157
    
    
    $
    7,094
    
    
    $
    4,292
    
    
    $
    (11,386
    )
    
    $
    7,157
 13




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements  (Continued)
June 30, 2004(thousands of dollars)
(unaudited) 10. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Statements of Cash Flows
    
    
    
    
    
    Guarantor
    
    GuarantorSix Months ended June 30, 2004
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in) operating activities
    
    $
    12,342
    
    
    $
    11,384
    
    
    $
    (3,688
    )
    
    $
    (13,640
    )
    
    $
    6,398Cash flows from investing activitiesCapital expenditures
    
    
    
    
    
    
    (598
    )
    
    
    (402
    )
    
    
    
    
    
    
    (1,000
    )Net cash used in investing activities
    
    
    
    
    
    
    (598
    )
    
    
    (402
    )
    
    
    
    
    
    
    (1,000
    )Cash flows from financing activitiesTransfer to parent company
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Change in intercompany payables/receivables
    
    
    (7,813
    )
    
    
    (10,789
    )
    
    
    4,962
    
    
    
    13,640
    
    
    
    Net borrowing (payments) on revolving line of credit
    
    
    (23,200
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,200
    )Proceeds from issuance of subordinated debentures
    
    
    121,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,500Principal payments on long-term debt
    
    
    (72,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,950
    )Financing fees paid
    
    
    (4,970
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,970
    )Net cash (used in) provided by financing activities
    
    
    (12,433
    )
    
    
    (10,789
    )
    
    
    4,962
    
    
    
    13,640
    
    
    
    (4,620
    )Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    16Net (decrease) increase in cash and cash equivalents
    
    
    (91
    )
    
    
    (3
    )
    
    
    888
    
    
    
    
    
    
    
    794Cash and cash equivalents at beginning of period
    
    
    400
    
    
    
    3
    
    
    
    2,018
    
    
    
    
    
    
    
    2,421Cash and cash equivalents at end of period
    
    $
    309
    
    
    $
    
    
    
    $
    2,906
    
    
    $
    
    
    
    $
    3,215
 Unaudited Condensed Consolidating
    
    
    
    
    
    
    
    
    
    Non-Statements of Cash Flows
    
    
    
    
    
    Guarantor
    
    GuarantorSix Months ended June 30, 2003
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in) operating activities
    
    $
    6,634
    
    
    $
    10,592
    
    
    $
    (5,950
    )
    
    $
    (11,386
    )
    
    $
    (110
    )Cash flows from investing activitiesAcquisition payments, net of cash acquired
    
    
    
    
    
    
    (3,329
    )
    
    
    
    
    
    
    
    
    
    
    (3,329
    )Capital expenditures
    
    
    
    
    
    
    (1,509
    )
    
    
    (1,023
    )
    
    
    
    
    
    
    (2,532
    )Net cash used in investing activities
    
    
    
    
    
    
    (4,838
    )
    
    
    (1,023
    )
    
    
    
    
    
    
    (5,861
    )Cash flows from financing activitiesChange in intercompany payables/receivables
    
    
    (21,946
    )
    
    
    (10,964
    )
    
    
    21,524
    
    
    
    11,386
    
    
    
    Net borrowing on revolving line of credit
    
    
    18,256
    
    
    
    5,207
    
    
    
    (15,678
    )
    
    
    
    
    
    
    7,785Principal payments on long-term debt
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Net cash (used in) provided by financing activities
    
    
    (6,690
    )
    
    
    (5,757
    )
    
    
    5,846
    
    
    
    11,386
    
    
    
    4,785Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    (55
    )Net (decrease) increase in cash and cash equivalents
    
    
    (56
    )
    
    
    (3
    )
    
    
    (1,182
    )
    
    
    
    
    
    
    (1,241
    )Cash and cash equivalents at beginning of period
    
    
    138
    
    
    
    3
    
    
    
    3,233
    
    
    
    
    
    
    
    3,374Cash and cash equivalents at end of period
    
    $
    82
    
    
    $
    
    
    
    $
    2,051
    
    
    $
    
    
    
    $
    2,133
 14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our consolidated financial condition
and results of operations should be read in conjunction with our unaudited
condensed consolidated financial statements and the accompanying notes, which
are included elsewhere in this report. The following discussion and analysis
also contains forward-looking statements, which reflect the expectations,
beliefs, plans and objectives of management about future financial performance
and assumptions underlying our judgments concerning matters discussed below.
These statements, accordingly, involve estimates, assumptions, judgments and
uncertainties. In particular, this discussion pertains to managements
comments on financial resources, capital spending and the outlook for our
business. You should read and review the section entitled Forward-Looking
Statements for some important factors that could cause actual results or
outcomes to differ materially from those addressed in forward-looking
statements. Overview We are a leading designer, manufacturer and marketer of precision-engineered
specialty metal products serving global niche product markets in a diverse
range of electrical, commercial and industrial construction, utility and rail
applications. We
distribute our products to customers through a well-established global sales
and distribution network serving more than 25 countries. In 2001, we implemented a One Company strategy in order to bring uniformity
to our worldwide operations and as a result increase our operational
efficiency. As part of this plan, we have reduced the number of employees by
12.8% from a twelve-month average of 1,546 in 2001 to a twelve-month average of
1,348 in 2003. We recognized a charge to operations of $1.9 million in 2001
and $3.7 million in 2002 to cover severance and outplacement costs related to
employee termination and certain other exit costs. These efforts along with
productivity improvements enabled us to improve our operating margin from 5.4%
in 2001 to 9.4% in 2003. The Company is a wholly owned subsidiary of ERICO Holding Company. On December
2, 2002, a newly formed wholly owned subsidiary of ERICO Global Company merged
with ERICO Holding Company, with ERICO Holding Company as the surviving
company. As a result, ERICO Holding Company became a wholly owned subsidiary
of ERICO Global Company. In connection with the merger, affiliates of
Citigroup Venture Capital Equity Partners, L.P. and other investors acquired
approximately two-thirds of the stock of ERICO Global Company. Market Outlook We expect a continued recovery in the electrical, commercial and industrial
construction, utility and rail markets in 2004. We continue to expect modest growth
in sales in the second half of 2004 as a result of this continued recovery, new product
introductions and market penetration. During the first half of the year, we experienced a significant increase in the
prices we pay for steel and copper. We have or intend to pass on the majority
of the increase in these costs to our customers. However, we may not be
successful in recovering all of the increases in steel and copper costs. 15




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##### Table of Contents



Results of Operations The following table sets forth statements of operations data expressed as a
percentage of net sales: Three months
    
    Six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold
    
    
    63.5
    %
    
    
    63.9
    %
    
    
    63.9
    %
    
    
    63.9
    %Gross profit
    
    
    36.5
    %
    
    
    36.1
    %
    
    
    36.1
    %
    
    
    36.1
    %Operating expenses
    
    
    22.8
    %
    
    
    25.3
    %
    
    
    24.1
    %
    
    
    26.9
    %Interest expense, net
    
    
    4.2
    %
    
    
    4.4
    %
    
    
    4.2
    %
    
    
    4.2
    %Foreign exchange gain, net
    
    
    (1.0
    %)
    
    
    (1.5
    %)
    
    
    (0.2
    %)
    
    
    (2.4
    %)Other (income) expense, net
    
    
    0.1
    %
    
    
    (0.1
    %)
    
    
    0.6
    %
    
    
    (0.0
    %)Income before income taxes
    
    
    10.4
    %
    
    
    8.0
    %
    
    
    7.4
    %
    
    
    7.4
    %Provision for income taxes
    
    
    4.1
    %
    
    
    2.8
    %
    
    
    2.9
    %
    
    
    2.6
    %Net income
    
    
    6.3
    %
    
    
    5.2
    %
    
    
    4.5
    %
    
    
    4.8
    %
 Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Net sales.Net sales for the three months ended June 30, 2004 totaled $92.1
million, an increase of $11.7 million, or 14.6% from the $80.4 million reported
for the three months ended June 30, 2003. The increase in net
sales was due primarily to higher sales volumes in the three
months ended June 30, 2004 compared to the three months ended June 30, 2003. Gross profit.Gross profit for the three months ended June 30, 2004 increased
by $4.6 million, or 15.9%, to $33.6 million from the $29.0 million reported for
the three months ended June 30, 2003. Gross profit as a percentage of net
sales was relatively constant at 36.5% in the three months ended June 30, 2004
from
36.1% in the three months ended June 30, 2003. Gross profit increased
primarily due to sales volume increases and the favorable effect on net sales
of currency exchange rates. Operating expenses. Operating expenses include engineering and development
expenses, selling and marketing expenses, and general and administrative
expenses. Operating expenses increased by $0.6 million, or 3.0%, to $20.9
million in the three months ended June 30, 2004 from $20.3 million in the three
months ended June 30, 2003. As a percentage of net sales, operating expenses
decreased to 22.8% in the three months ended June 30, 2004 from 25.3% in the
three months ended June 30, 2003. The decrease in operating expenses as a
percent of sales in the three months ended June 30, 2004 was primarily due to
higher sales volumes along with managements continued focus on controlling
expenses. Interest expense, net.Interest expense for the three months ended June 30,
2004 was $3.9 million compared with $3.5 million in the three months ended June
30, 2003. The increase in interest expense was primarily caused by higher
average debt balances in the three months ended June 30, 2004 compared to the
three months ended June 30, 2003 as a result of the February 2004 refinancing. Foreign exchange gain, net. The gain on the exchange of foreign currencies was
$0.8 million for the three months ended June 30, 2004 caused by the weakening
of the U.S. dollar compared to some currencies. The gain on the exchange of
foreign currencies was $1.2 million for the three months ended June 30, 2003.
The largest component of this gain was $1.1 million associated with debt held
by our Australian subsidiary, denominated in U.S. dollars, which was paid off
in May 2003. Provision for income taxes.The provision for income taxes increased $1.4
million to $3.7 million for the three months ended June 30, 2004 from $2.3
million for the three months ended June 30, 2003. The effective tax rate was
39.2% for the three months ended June 30, 2004 compared to 35.5% for three
months ended June 30, 2003. During 2003, including the three months ended June
30, 2003, we recognized certain foreign currency transaction gains
for which there was no income tax expense, which resulted in a lower effective
tax rate in 2003. Net income.Net income was $5.8 million in the three months ended June 30,
2004, an increase of $1.6 million, or 38.1%, from the $4.2 million in the three
months ended June 30, 2003. The increase in net income was due primarily to
increased sales from higher volumes and higher prices, partially offset by
higher interest expense and income taxes. 16




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##### Table of Contents



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Net sales.Net sales for the six months ended June 30, 2004 totaled $175.6
million, an increase of $25.8 million, or 17.2% from the $149.8 million
reported for the six months ended June 30, 2003. The increase in net sales
was due primarily to higher sales volumes in the six months ended June 30, 2004
compared to the six months ended June 30, 2003. Gross profit.Gross profit for the six months ended June 30, 2004 increased by
$9.4 million, or 17.4%, to $63.4 million from the $54.0 million reported for
the six months ended June 30, 2003. Gross profit as a percentage of net sales
was relatively constant at 36.1% for the six months ended June 30, 2004
compared to the equivalent prior period. Gross profit increased primarily due
to sales volume increases and the favorable effect on net sales of currency
exchange rates. Operating expenses. Operating expenses include engineering and development
expenses, selling and marketing expenses, and general and administrative
expenses. Operating expenses increased by $2.0 million, or 5.0%, to $42.3
million in the six months ended June 30, 2004 from $40.3 million in the six
months ended June 30, 2003. As a percentage of net sales, operating expenses
decreased to 24.1% in the six months ended June 30, 2004 from 26.9% in the six
months ended June 30, 2003. The decrease in operating expenses as a percent of
sales in the six months ended June 30, 2004 was primarily due to higher sales
volumes along with managements continued focus on controlling expenses. Interest expense, net.Interest expense for the six months ended June 30,
2004 was $7.3 million compared with $6.3 million in the six months ended June
30, 2003. The increase in interest expense was primarily caused by higher
average debt balances in the six months ended June 30, 2004 compared to the six
months ended June 30, 2003 as a result of the debt refinancing in February
2004. Foreign exchange gain, net. The gain on the exchange of foreign currencies was
$0.4 million for the six months ended June 30, 2004 caused by the weakening of
the U.S. dollar compared to some currencies. The gain on the exchange of
foreign currencies was $3.6 million for the six months ended June 30, 2003.
The largest component of this gain was $2.2 million associated with debt held
by our Australian subsidiary, denominated in U.S. dollars, which was paid off
in May 2003. Other (income) expense, net. Other expense was $1.3 million for the six months
ended June 30, 2004 and consisted primarily of the acceleration of previously
deferred financing costs resulting from the February 2004 refinancing of our
credit facility. Provision for income taxes.The provision for income taxes increased $1.2
million to $5.1 million for the six months ended June 30, 2004 from $3.9
million for the six months ended June 30, 2003. The effective tax rate was
39.3% for the six months ended June 30, 2004 compared to 35.5% for six months
ended June 30, 2003. During 2003, including the six months ended June 30,
2003, we recognized foreign currency transaction gains for which there was no income tax expense, which resulted in a lower effective tax rate in 2003. Net income.Net income was $7.8 million in the six months ended June 30, 2004,
an increase of $0.6 million or 8.3% from the $7.2 million in the six months
ended June 30, 2003. The increase in net income was due primarily to the
increased sales from the higher volumes and higher prices partially offset by
higher interest expense and income taxes. Liquidity and Capital Resources Short-term liquidity requirements consist of activities related to day-to-day
operations, required debt service, capital expenditure funding and meeting
working capital requirements. Long-term liquidity requirements include
principal payments relating to long-term debt and acquisition funding.
Sources for our short-term liquidity needs are primarily cash generated from
operations and borrowings under the revolving portion of our credit facility.
As of June 30, 2004, the revolving portion of our current senior credit
facility had commitments in the amount of $75.0 million. Borrowings against
the revolving portion were $14.8 million as of June 30, 2004. On February 20, 2004, we refinanced substantially all of our outstanding
long-term indebtedness. We issued $140.9 million aggregate principal amount of
8 7/8% senior subordinated notes, of which $19.4 million were exchanged for our
11% senior subordinated notes. As a result, an aggregate principal amount of
$10.6 million of these 11% senior subordinated notes remain outstanding. In
connection with the refinancing, we also amended our existing credit facility.
The amended credit facility has $75.0 million of committed capital and a term
of five years. Borrowings under our amended credit facility accrue interest at
LIBOR plus 2.00%. We used the proceeds of $140.9 million in part to repay our $39.0 million
senior term loan and $42.4 million revolver outstanding at February 20, 2004
under our previous credit facility. We also used a portion of the proceeds to
repay $35.0 million of the 11% senior subordinated notes of ERICO Holding
Company, our direct parent. In addition, we transferred $25.0 million to ERICO
Global Company, our ultimate parent, which was paid as a dividend to the
holders of ERICO Global Companys Class L Common Stock. These repayments and
the dividend payment were financed with the net cash proceeds from the sale of
the 8 7/8% senior subordinated notes, together with borrowings under our
amended credit facility. 17




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##### Table of Contents



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Cash provided by operating activities for the six months ended June 30, 2004
was $6.4 million. For the six months ended June 30, 2003, cash used in
operating activities was $0.1 million. The increase was primarily attributable
to improved working capital management. Cash used in investing activities decreased $4.9 million to $1.0 million for
the six months ended June 30, 2004. The decrease was primarily due to
acquisition payments of $3.3 million for the net assets of Hunt Manufacturing
Ltd. made in the six months ended June 30, 2003. Capital expenditures were
also lower in the six months ended June 30, 2004 compared to the equivalent
prior period. Cash used in financing activities was $4.6 million for the six months ended
June 30, 2004. Cash provided by financing activities was $4.8 million for the
six months ended June 30, 2003. The change was primarily attributable to
higher payments made on our revolving line of credit in the six months ended
June 30, 2004, versus borrowings made in the comparable period of 2003, and the net effect of our debt refinancing in February 2004. We believe that cash generated from operations, together with amounts available
under our amended credit facility, will be adequate to meet our debt service
requirements, capital expenditures, cash disbursements in connection with the
termination of our pension plan and working capital needs for at least the next
12 months, although no assurance can be given. Our future operating performance
and ability to extend or refinance our indebtedness will be dependent on future
economic conditions and financing, business and other factors that are beyond
our control. We have significant future cash commitments, primarily maturities of long-term
debt and scheduled lease payments. There have been no material changes to our
cash commitments and commercial commitments in the six months ended June 30,
2004 from those shown as of December 31, 2003 in our Prospectus
filed on July 16, 2004 under Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources. Critical Accounting Policies and Estimates It is important to understand our significant accounting policies in order to
understand our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These accounting principles require us to make estimates and assumptions that
affect amounts reported in our consolidated financial statements and the
accompanying notes. We base our estimates on historical experience and various
other assumptions that we believe to be reasonable under the circumstances. On
an ongoing basis, we evaluate our estimates to ensure that they appropriately
reflect changes in our business or new information as it becomes available.
Actual results are likely to differ from our estimates, but we do not believe
such differences will materially affect our financial position or results of
operations for the periods presented in this report. The Company has not
changed any of its critical accounting policies or estimates, or adopted any
new accounting policies in 2004. 18




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##### Table of Contents



FORWARD-LOOKING STATEMENTS This report includes statements that are not historical facts. These
forward-looking statements can be identified by the use of terminology such
as believe, may, anticipate, should, intend, plan, will,
expect, estimate, continue, positioned, strategy and similar
expressions. Those statements are only our predictions. The forward-looking
statements included in this report are not guarantees of future performances,
and should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results could differ materially
from those contemplated by these forward-looking statements. In the light of
these risks and uncertainties, we cannot assure that the results and events
contemplated by the forward-looking information contained in this report will
in fact transpire. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. Such risks, uncertainties and contingencies include, without limitation, the
following:  
    
    economic and other conditions in the markets in which we operate;
    
    raw material prices for steel and copper;  
    
    acts of war or terrorism;
    
    risks associated with foreign operations, including fluctuations in
exchange rates of foreign currencies;
    
    competitive pressure on pricing;
    
    operational issues at our facilities;
    
    availability of financing to fund operations at anticipated rates and terms;
    
    prolonged work stoppages;
    
    governmental or regulatory policies;
    
    rapid increases in health care costs;
    
    our acquisition activities;
    
    our substantial debt and leverage and our ability to service our debt;
    
    the restrictive covenants contained in our senior secured credit facility;
    
    potential pension plan funding requirements;
    
    our ability to realize revenue growth;
    
    our ability to implement initiatives designed to increase operating
efficiencies and improve results; and
    
    the loss of major customers. 19




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Derivative Financial Instruments and Market Risk We are exposed to various changes in financial market conditions, including
fluctuations in interest rates, foreign currency exchange rates and commodity
prices. We manage our exposure to such risks through various operating and
financing activities. We are exposed to interest rate risk associated with
borrowings under our bank Credit Facility. Borrowings under this facility bear
interest at variable rates, based upon published indices. In order to partially
mitigate this exposure, we have historically entered into interest rate swaps
to fix a portion of our interest payable. At December 31, 2003, we had a swap
with a notional amount of $15.0 million that matured on February 2, 2004.
There were no interest rate swaps as of June 30, 2004 We are also exposed to various foreign currency risks, i.e., there is a risk
that we will incur economic losses due to adverse changes in foreign currency
exchange rates. Our foreign currency exchange rate risks primarily relate to
the Euro, the Australian dollar and the Brazilian real. We monitor these risks,
and attempt to establish offsetting positions, when practical, between our
various subsidiaries. Under our senior Credit Facility with a group of banks,
we also have the option of denominating a portion of our borrowings in multiple
foreign currencies. There are no amounts outstanding under the multicurrency
borrowing options. We had net assets denominated in foreign currencies of
approximately $44.0 million associated with our foreign subsidiaries at June
30, 2004. We utilize various raw material commodities in our manufacturing
process, including steel and copper. These materials are obtained from various
supply sources, and there have historically been adequate levels of material
available. We are exposed to adverse price fluctuations when purchasing these
materials, and may not necessarily be able to offset such increases through
increased selling prices for our products. We do not hedge our commodity price
risks via the derivatives markets. 
 Item 4. Controls and Procedures As of the end of the period covered by this report, the Companys management,
under the supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, performed an evaluation of the effectiveness of
the design and operation of the Companys disclosure controls and procedures.
Based on that evaluation, the Companys management, including the Chief
Executive Officer and Chief Financial Officer, concluded that the disclosure
controls and procedures are effective. There were no material changes
made in the Companys internal controls
over financial reporting during the period covered by this report. 20




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 6. Exhibits and Current Reports A. Exhibits Exhibit Number
    
    Description31.1
    
    Form of Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Form of Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    Form of Section 1350 Certification of Chief Financial Officer and Chief
Executive Officer
 B. Reports on Form 8-K None 21




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##### Table of Contents



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. ERICO INTERNATIONAL CORPORATIONBy:
    
    /s/ William H. RojName:
    
    William H. RojTitle:
    
    Chief Executive OfficerAugust 4, 2004By:
    
    /s/ Jeffrey R. SteinhilberName:
    
    Jeffrey R. SteinhilberTitle:
    
    Chief Financial OfficerAugust 4, 2004
 22