##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q  [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004  [  ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE 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 
  (440) 349-2630 
  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 [ X ] No [  ] 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 ] At September 30, 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 StatementsCondensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    2Condensed Consolidated Income Statements for the Three and Nine Months Ended
September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22Part II.
    
    Other InformationItem 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24EX-31.1 Form of Rule 13A-14(A) Certification of CEOEX-31.2 Form of Rule 13A-14(A) Certification of CFOEX-32 Form of Section 1350 Certification of CFO and CEO
  1




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements ERICO International Corporation and Subsidiaries 
 Condensed Consolidated Balance Sheets(Dollars in thousands, except per share amounts) September 30,
    
    December 31,2004
    
    2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,738
    
    
    $
    2,421Trade accounts receivable, net
    
    
    59,698
    
    
    
    54,252Inventories, net
    
    
    57,795
    
    
    
    45,513Other current assets
    
    
    8,162
    
    
    
    7,745Total current assets
    
    
    127,393
    
    
    
    109,931Property, plant and equipment, net
    
    
    53,705
    
    
    
    60,630Goodwill
    
    
    105,237
    
    
    
    105,194Other intangible assets, net
    
    
    36,776
    
    
    
    36,572Other assets
    
    
    15,505
    
    
    
    11,440Total assets
    
    $
    338,616
    
    
    $
    323,767Liabilities and stockholders net investmentCurrent liabilities:Trade accounts payable
    
    $
    30,237
    
    
    $
    29,607Accrued compensation
    
    
    12,784
    
    
    
    9,216Accrued expenses and other current liabilities
    
    
    28,808
    
    
    
    25,956Total current liabilities
    
    
    71,829
    
    
    
    64,779Long-term debt
    
    
    164,075
    
    
    
    140,920Deferred income taxes
    
    
    28,269
    
    
    
    28,939Other long-term liabilities
    
    
    16,029
    
    
    
    16,699Stockholders net investment:Common stock, par value $1.00 per share, 1,500,000 shares authorized,
1 share issued and outstanding
    
    
    
    
    
    
    Parent company investment
    
    
    59,098
    
    
    
    72,668Accumulated other comprehensive loss
    
    
    (684
    )
    
    
    (238
    )Total stockholders net investment
    
    
    58,414
    
    
    
    72,430Total
liabilities and stockholders net investment
    
    $
    338,616
    
    
    $
    323,767
 The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 2




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ERICO International Corporation and Subsidiaries 
 Condensed Consolidated Income Statements (Unaudited)(Dollars in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 302004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    92,398
    
    
    $
    82,339
    
    
    $
    267,960
    
    
    $
    232,113Cost of sales
    
    
    59,468
    
    
    
    51,219
    
    
    
    171,608
    
    
    
    146,970Gross profit
    
    
    32,930
    
    
    
    31,120
    
    
    
    96,352
    

    
    
    85,143Operating expenses
    
    
    22,395
    
    
    
    20,606
    
    
    
    64,660
    
    
    
    60,926Operating income
    
    
    10,535
    
    
    
    10,514
    
    
    
    31,692
    
    
    
    24,217Interest expense, net
    
    
    3,927
    
    
    
    3,294
    
    
    
    11,274
    
    
    
    9,555Foreign exchange loss (gain), net
    
    
    212
    
    
    
    (35
    )
    
    
    (181
    )
    
    
    (3,635
    )Other expense (income), net
    
    
    461
    
    
    
    (42
    )
    
    
    1,743
    
    
    
    (96
    )Income before income taxes
    
    
    5,935
    
    
    
    7,297
    
    
    
    18,856
    
    
    
    18,393Provision for income taxes
    
    
    2,349
    
    
    
    2,590
    
    
    
    7,426
    
    
    
    6,529Net income
    
    $
    3,586
    
    
    $
    4,707
    
    
    $
    11,430
    
    
    $
    11,864
 The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 3




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ERICO International Corporation and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows (Unaudited)(Dollars in thousands) Nine Months EndedSeptember 30,2004
    
    2003Operating activitiesNet income
    
    $
    11,430
    
    
    $
    11,864Depreciation and amortization
    
    
    9,049
    
    
    
    8,800Other operating activities
    
    
    (10,558
    )
    
    
    (15,171
    )Net cash provided by operating activities
    
    
    9,921
    
    
    
    5,493Investing activitiesAcquisition payments, net of cash acquired
    
    
    
    
    
    
    (3,329
    )Capital expenditures
    
    
    (2,024
    )
    
    
    (4,619
    )Other investing activities
    
    
    (463
    )
    
    
    (165
    )Net cash used in investing activities
    
    
    (2,487
    )
    
    
    (8,113
    )Financing activitiesNet transfers to parent company
    
    
    (25,000
    )
    
    
    Net (payments) borrowing on revolving line of credit
    
    
    (26,100
    )
    
    
    6,745Proceeds from issuance of subordinated debt
    
    
    121,500
    
    
    
    Principal payments on long-term debt
    
    
    (72,950
    )
    
    
    (4,500
    )Financing fees paid
    
    
    (5,582
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (8,132
    )
    
    
    2,245Effect of exchange rate changes on cash and cash
equivalents
    
    
    15
    
    
    
    (103
    )Decrease in cash and cash equivalents
    
    
    (683
    )
    
    
    (478
    )Cash and cash equivalents at beginning of period
    
    
    2,421
    
    
    
    3,374Cash and cash equivalents at end of period
    
    $
    1,738
    
    
    $
    2,896
 The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 4




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ERICO International Corporation and Subsidiaries 
 Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of ERICO
International Corporation and subsidiaries (ERICO or the Company) have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements, and should be read together with the
consolidated financial statements and footnotes thereto included in the
Companys Prospectus filed on July 16, 2004. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented have been included. Certain prior year amounts have been
reclassified to conform to the current year presentation. Operating results
for the three and nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. Nature of Operations: The 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 and outstanding through February 20, 2004, including related
financing costs, have been pushed down and are reflected in the accompanying
financial statements through February 20, 2004. 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 Company operates in one reportable
segment. Use of Estimates: 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. Principles of Consolidation: The unaudited condensed consolidated financial
statements include the accounts of the Company and its subsidiaries.
Intercompany accounts and transactions are eliminated in consolidation. 2. Inventories Inventories are stated at the lower of cost or market with cost being
determined by the first-in, first-out (FIFO) method. The components of
inventory are as follows: September 30,
    
    December 31,2004
    
    2003Finished goods
    
    $
    48,193
    
    
    $
    37,156Work in process
    
    
    3,453
    
    
    
    2,978Raw materials
    
    
    11,047
    
    
    
    8,94162,693
    
    
    
    49,075Inventory reserves
    
    
    (4,898
    )
    
    
    (3,562
    )Inventories, net
    
    $
    57,795
    
    
    $
    45,513
 5




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ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 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 nine months ended September 30, 2004. The acquisition cost, accumulated amortization and net carrying value for other
intangible assets are as follows: September 30, 2004Acquisition
    
    AccumulatedCost
    
    Amortization
    
    NetFinite-lived intangible assets:Patents
    
    $
    3,374
    
    
    $
    (860
    )
    
    $
    2,514Customer relationships
    
    
    787
    
    
    
    (72
    )
    
    
    715Total intangible assets subject to amortization
    
    
    4,161
    
    
    
    (932
    )
    
    
    3,229Indefinite-lived intangible asset  trademarks
    
    
    33,547
    
    
    
    
    
    
    
    33,547Total other intangible assets
    
    $
    37,708
    
    
    $
    (932
    )
    
    $
    36,776
 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 expense for finite-lived intangible assets was $209 and $80 for
the three months ended September 30, 2004 and 2003, respectively, and $459 and
$249 for the nine months ended September 30, 2004 and 2003, respectively.
Based upon the acquisition costs of finite-lived intangible assets as of
September 30, 2004, amortization expense for 2005 through 2009 is expected to
be approximately $520 per year. 6




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ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 4. Debt and Financing Arrangements Long-term debt at September 30, 2004 and December 31, 2003 consists of the
following: September 30,
    
    December 31,2004
    
    2003Revolving credit facility with commercial banks
    
    $
    11,900
    
    
    $
    38,000Term loans with commercial banks
    
    
    
    
    
    
    39,0008.875% subordinated notes  ERICO International Corporation
    
    
    151,500
    
    
    
    11.0% subordinated notes  ERICO International Corporation
    
    
    
    
    
    
    30,00011.0% subordinated notes  ERICO Holding Company
    
    
    
    
    
    
    35,00011.0% subordinated notes  original issue discount
    
    
    
    
    
    
    (1,755
    )Other
    
    
    675
    
    
    
    675$
    164,075
    
    
    $
    140,920
 On February 20, 2004, the Company refinanced substantially all of its long-term
debt. The Company issued $140,900 of 8.875% senior subordinated notes due 2012
(the Subordinated Notes), of which $19,400 was exchanged for its 11.0% senior
subordinated notes. The proceeds of $140,900 were used in part to reduce
amounts outstanding under the Companys previous revolving credit facility, to
repay $39,000 of term loans outstanding, to repay $35,000 of the 11.0% 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. On August 13, 2004, the
Company exchanged the remaining $10,600 of 11.0% senior subordinated notes for
$10,600 of its Subordinated Notes. The Company recorded non-cash charges of
$1,236 and $500 in the first quarter and third quarter of 2004, respectively,
to write-off original issue discount costs and deferred financing costs related
to the February 2004 refinancing and August 2004 debt exchange transactions. In connection with the February 20, 2004 refinancing, the Company amended its
$75,000 Multicurrency Credit and Security Agreement (the Credit Facility)
that expires December 2, 2007. The Credit Facility provides a revolving credit
line of $75,000, of which $25,000 may be used for the issuance of letters of
credit. The Credit Facility allows for multicurrency borrowing options in
Australian dollars, Euros, Swiss francs, Swedish kronas, British pounds and
other currencies that are readily available and freely traded. Borrowings
under the Credit Facility are secured by substantially all of the assets of the
Company and 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 provides for a commitment fee of 0.25% on the revolving credit line. The Credit Facility and the Subordinated Notes contain certain customary
covenants that impose limitations on the Company, 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
requirements to meet certain financial tests and to maintain on a quarterly
basis certain consolidated financial ratios, including minimum net worth,
minimum fixed charge coverage ratio, maximum leverage ratio and minimum net
income before interest expense, net, income taxes, depreciation, amortization and
certain other non-cash, non-recurring items (EBITDA). The Company was in
compliance with all covenants of the Credit Facility and the Subordinated
Notes, and the conditions of the Credit Facility, at September 30, 2004. At September 30, 2004, the Company had borrowings outstanding of $11,900 under
the revolving credit line of the Credit Facility, all in U.S. dollars, and
letters of credit outstanding of $268 supported by the Credit Facility. The
amount available for additional borrowing under the Credit Facility at
September 30, 2004 was $62,832. 7




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ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 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 $2,349, or 39.6%, and $2,590, or 35.5%,
for the three months ended September 30, 2004 and 2003, respectively, and
$7,426, or 39.4%, and $6,529, or 35.5%, for the nine months ended September 30,
2004 and 2003, respectively. Income tax expense 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 Company provides health care post-retirement benefits to certain employees
in the United States hired prior to January 1, 1993. The following table sets
forth the components of net periodic expense for the Companys health care
post-retirement benefit plan for the three and nine months ended September 30,
2004 and 2003: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    29
    
    
    $
    29
    
    
    $
    87
    
    
    $
    88Interest cost
    
    
    98
    
    
    
    99
    
    
    
    295
    
    
    
    296Net periodic benefit expense
    
    $
    127
    
    
    $
    128
    
    
    $
    382
    
    
    $
    384
 The Company made health care post-retirement benefit payments of $182 in the
nine months ended September 30, 2004 and expects these payments to total
approximately $250 in 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 three-month period ending September 30, 2004. The
Companys accumulated post-retirement benefit obligation at September 30, 2004
and post-retirement benefit costs for the three and nine months ended September
30, 2004 do not reflect any amount associated with the Medicare Act because the
Company is unable to conclude at this time whether the benefits provided by the
Companys health care post-retirement plan are actuarially equivalent to
Medicare Part D under the Medicare Act. The Company will continue to evaluate
the effects of the Medicare Act on the accumulated post-retirement benefit
obligation and post-retirement benefit costs to determine the amount of any
subsidy, if any, that may be available. 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 September 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 Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 8. Comprehensive Income (Loss) Accumulated other comprehensive loss consists entirely of foreign currency
translation adjustments. Total comprehensive income and its components are as
follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    3,586
    
    
    $
    4,707
    
    
    $
    11,430
    
    
    $
    11,864Foreign currency translation adjustments
    
    
    1,279
    
    
    
    268
    
    
    
    (446
    )
    
    
    (925
    )Comprehensive income
    
    $
    4,865
    
    
    $
    4,975
    
    
    $
    10,984
    
    
    $
    10,939
 9




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ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 9. Guarantor and Non-Guarantor Subsidiaries The following unaudited condensed consolidating financial statements set forth
the Companys balance sheets as of September 30, 2004 and December 31, 2003,
the statements of income for the three and nine months ended September 30, 2004
and 2003 and the statements of cash flows for the nine months ended September
30, 2004 and 2003. In the following schedules, Parent refers to ERICO
International Corporation, ERICO Holding Company and ERICO Global Company,
Guarantor Subsidiary refers to the Companys U.S. subsidiary, ERICO Products,
Inc., and Non-Guarantor Subsidiaries refers to the Companys 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 Balance SheetsSeptember 30, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    521
    
    
    $
    
    
    
    $
    1,217
    
    
    $
    
    
    
    $
    1,738Trade accounts receivable, net
    
    
    
    
    
    
    30,867
    
    
    
    28,831
    
    
    
    
    
    
    
    59,698Inventories, net
    
    
    
    
    
    
    32,485
    
    
    
    25,310
    
    
    
    
    
    
    
    57,795Other current assets
    
    
    666
    
    
    
    2,658
    
    
    
    4,838
    
    
    
    
    
    
    
    8,162Total current assets
    
    
    1,187
    
    
    
    66,010
    
    
    
    60,196
    
    
    
    
    
    
    
    127,393Property, plant and equipment, net
    
    
    224
    
    
    
    40,629
    
    
    
    12,852
    
    
    
    
    
    
    
    53,705Goodwill
    
    
    105,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,237Other intangible assets, net
    
    
    36,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,776Investment in and advances to subsidiaries
    
    
    97,723
    
    
    
    
    
    
    
    
    
    
    
    (97,723
    )
    
    
    Other assets
    
    
    7,765
    
    
    
    5,764
    
    
    
    1,976
    
    
    
    
    
    
    
    15,505Total assets
    
    $
    248,912
    
    
    $
    112,403
    
    
    $
    75,024
    
    
    $
    (97,723
    )
    
    $
    338,616Trade accounts payable
    
    $
    
    
    
    $
    19,988
    
    
    $
    10,249
    
    
    $
    
    
    
    $
    30,237Accrued compensation
    
    
    1,672
    
    
    
    6,715
    
    
    
    4,397
    
    
    
    
    
    
    
    12,784Accrued expenses and other current liabilities
    
    
    2,558
    
    
    
    14,591
    
    
    
    11,659
    
    
    
    
    
    
    
    28,808Total current liabilities
    
    
    4,230
    
    
    
    41,294
    
    
    
    26,305
    
    
    
    
    
    
    
    71,829Long-term debt
    
    
    163,400
    
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    164,075Deferred income taxes
    
    
    14,576
    
    
    
    9,349
    
    
    
    4,344
    
    
    
    
    
    
    
    28,269Intercompany payable
    
    
    
    
    
    
    29,960
    
    
    
    59,304
    
    
    
    (89,264
    )
    
    
    Other long-term liabilities
    
    
    8,292
    
    
    
    6,662
    
    
    
    1,075
    
    
    
    
    
    
    
    16,029Stockholders net investment
    
    
    58,414
    
    
    
    24,463
    
    
    
    (16,004
    )
    
    
    (8,459
    )
    
    
    58,414Total liabilities and stockholders net
investment
    
    $
    248,912
    
    
    $
    112,403
    
    
    $
    75,024
    
    
    $
    (97,723
    )
    
    $
    338,616
 10




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 9. Guarantor and Non-Guarantor Subsidiaries (continued) Condensed Consolidating Balance SheetsDecember 31, 2003 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    400
    
    
    $
    3
    
    
    $
    2,018
    
    
    $
    
    
    
    $
    2,421Trade accounts receivable, net
    
    
    
    
    
    
    25,316
    
    
    
    28,936
    
    
    
    
    
    
    
    54,252Inventories, net
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,194Other intangible assets, net
    
    
    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
    
    
    
    
    
    
    
    9,216Accrued expenses and other current liabilities
    
    
    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 Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 9. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating Income Statements
Three Months Ended September 30, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    59,139
    
    
    $
    37,306
    
    
    $
    (4,047
    )
    
    $
    92,398Cost of sales
    
    
    
    
    
    
    39,187
    
    
    
    24,328
    
    
    
    (4,047
    )
    
    
    59,468Gross profit
    
    
    
    
    
    
    19,952
    
    
    
    12,978
    
    
    
    
    
    
    
    32,930Operating expenses
    
    
    2,349
    
    
    
    10,573
    
    
    
    9,473
    
    
    
    
    
    
    
    22,395Operating (loss) income
    
    
    (2,349
    )
    
    
    9,379
    
    
    
    3,505
    
    
    
    
    
    
    
    10,535Interest expense, net
    
    
    3,077
    
    
    
    683
    
    
    
    167
    
    
    
    
    
    
    
    3,927Foreign exchange loss, net
    
    
    
    
    
    
    85
    
    
    
    127
    
    
    
    
    
    
    
    212Other expense (income), net
    
    
    470
    
    
    
    (12
    )
    
    
    3
    
    
    
    
    
    
    
    461(Loss) income before income taxes
and equity income
    
    
    (5,896
    )
    
    
    8,623
    
    
    
    3,208
    
    
    
    
    
    
    
    5,935(Benefit) provision for income taxes
    
    
    (2,374
    )
    
    
    3,443
    
    
    
    1,280
    
    
    
    
    
    
    
    2,349(Loss) income before equity income
    
    
    (3,522
    )
    
    
    5,180
    
    
    
    1,928
    
    
    
    
    
    
    
    3,586Equity income from subsidiaries
    
    
    7,108
    
    
    
    
    
    
    
    
    
    
    
    (7,108
    )
    
    
    Net income
    
    $
    3,586
    
    
    $
    5,180
    
    
    $
    1,928
    
    
    $
    (7,108
    )
    
    $
    3,586
 Unaudited Condensed Consolidating Income Statements
Three Months Ended September 30, 2003 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    52,222
    
    
    $
    33,512
    
    
    $
    (3,395
    )
    
    $
    82,339Cost of sales
    
    
    
    
    
    
    32,229
    
    
    
    22,385
    
    
    
    (3,395
    )
    
    
    51,219Gross profit
    
    
    
    
    
    
    19,993
    
    
    
    11,127
    
    
    
    
    
    
    
    31,120Operating expenses
    
    
    1,315
    
    
    
    9,533
    
    
    
    9,758
    
    
    
    
    
    
    
    20,606Operating (loss) income
    
    
    (1,315
    )
    
    
    10,460
    
    
    
    1,369
    
    
    
    
    
    

    
    10,514Interest expense, net
    
    
    2,434
    
    
    
    674
    
    
    
    186
    
    
    
    
    
    
    
    3,294Foreign exchange loss (gain), net
    
    
    
    
    
    
    82
    
    
    
    (117
    )
    
    
    
    
    
    
    (35
    )Other expense (income), net
    
    
    50
    
    
    
    230
    
    
    
    (322
    )
    
    
    
    
    
    
    (42
    )(Loss) income before income taxes
and equity income
    
    
    (3,799
    )
    
    
    9,474
    
    
    
    1,622
    
    
    
    
    
    
    
    7,297(Benefit) provision for income taxes
    
    
    (1,413
    )
    
    
    3,807
    
    
    
    196
    
    
    
    
    
    
    
    2,590(Loss) income before equity income
    
    
    (2,386
    )
    
    
    5,667
    
    
    
    1,426
    
    
    
    
    
    
    
    4,707Equity income from subsidiaries
    
    
    7,093
    
    
    
    
    
    
    
    
    
    
    
    (7,093
    )
    
    
    Net income
    
    $
    4,707
    
    
    $
    5,667
    
    
    $
    1,426
    
    
    $
    (7,093
    )
    
    $
    4,707
 12




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 9. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating Income Statements
Nine Months Ended September 30, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    169,846
    
    
    $
    110,048
    
    
    $
    (11,934
    )
    
    $
    267,960Cost of sales
    
    
    
    
    
    
    110,826
    
    
    
    72,716
    
    
    
    (11,934
    )
    
    
    171,608Gross profit
    
    
    
    
    
    
    59,020
    
    
    
    37,332
    
    
    
    
    
    
    
    96,352Operating expenses
    
    
    5,010
    
    
    
    30,507
    
    
    
    29,143
    
    
    
    
    
    
    
    64,660Operating (loss) income
    
    
    (5,010
    )
    
    
    28,513
    
    
    
    8,189
    
    
    
    
    
    
    
    31,692Interest expense, net
    
    
    8,689
    
    
    
    2,035
    
    
    
    550
    
    
    
    
    
    
    
    11,274Foreign exchange loss (gain), net
    
    
    
    
    
    
    300
    
    
    
    (481
    )
    
    
    
    
    
    
    (181
    )Other expense (income), net
    
    
    1,857
    
    
    
    10
    
    
    
    (124
    )
    
    
    
    
    
    
    1,743(Loss) income before income taxes
and equity income
    
    
    (15,556
    )
    
    
    26,168
    
    
    
    8,244
    
    
    
    
    
    
    
    18,856(Benefit) provision for income taxes
    
    
    (6,238
    )
    
    
    10,460
    
    
    
    3,204
    
    
    
    
    
    
    
    7,426(Loss) income before equity income
    
    
    (9,318
    )
    
    
    15,708
    
    
    
    5,040
    
    
    
    
    
    
    
    11,430Equity income from subsidiaries
    
    
    20,748
    
    
    
    
    
    
    
    
    
    
    
    (20,748
    )
    
    
    Net income
    
    $
    11,430
    
    
    $
    15,708
    
    
    $
    5,040
    
    
    $
    (20,748
    )
    
    $
    11,430
 Unaudited Condensed Consolidating Income Statements
Nine Months Ended September 30, 2003 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    146,196
    
    
    $
    94,250
    
    
    $
    (8,333
    )
    
    $
    232,113Cost of sales
    
    
    
    
    
    
    92,519
    
    
    
    62,784
    
    
    
    (8,333
    )
    
    
    146,970Gross profit
    
    
    
    
    
    
    53,677
    
    
    
    31,466
    
    
    
    
    
    
    
    85,143Operating expenses
    
    
    3,684
    
    
    
    28,371
    
    
    
    28,871
    
    
    
    
    
    
    
    60,926Operating (loss) income
    
    
    (3,684
    )
    
    
    25,306
    
    
    
    2,595
    
    
    
    
    
    
    
    24,217Interest expense, net
    
    
    6,797
    
    
    
    2,034
    
    
    
    724
    
    
    
    
    
    
    
    9,555Foreign exchange loss (gain), net
    
    
    2
    
    
    
    1,669
    
    
    
    (5,306
    )
    
    
    
    
    
    
    (3,635
    )Other expense (income), net
    
    
    50
    
    
    
    265
    
    
    
    (411
    )
    
    
    
    
    
    
    (96
    )(Loss) income before income taxes
and equity income
    
    
    (10,533
    )
    
    
    21,338
    
    
    
    7,588
    
    
    
    
    
    
    
    18,393(Benefit) provision for income taxes
    
    
    (3,918
    )
    
    
    8,577
    
    
    
    1,870
    
    
    
    
    
    
    
    6,529(Loss) income before equity income
    
    
    (6,615
    )
    
    
    12,761
    
    
    
    5,718
    
    
    
    
    
    
    
    11,864Equity income from subsidiaries
    
    
    18,479
    
    
    
    
    
    
    
    
    
    
    
    (18,479
    )
    
    
    Net income
    
    $
    11,864
    
    
    $
    12,761
    
    
    $
    5,718
    
    
    $
    (18,479
    )
    
    $
    11,864
 13




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 9. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income
    
    $
    11,430
    
    
    $
    15,708
    
    
    $
    5,040
    
    
    $
    (20,748
    )
    
    $
    11,430Depreciation and amortization
    
    
    534
    
    
    
    6,417
    
    
    
    2,098
    
    
    
    
    
    
    
    9,049Other operating activities
    
    
    4,954
    
    
    
    (6,386
    )
    
    
    (9,126
    )
    
    
    
    
    
    
    (10,558
    )Net cash provided by (used in) operating activities
    
    
    16,918
    
    
    
    15,739
    
    
    
    (1,988
    )
    
    
    (20,748
    )
    
    
    9,921Investing activitiesCapital expenditures
    
    
    (2
    )
    
    
    (1,258
    )
    
    
    (764
    )
    
    
    
    
    
    
    (2,024
    )Other investing activities
    
    
    (706
    )
    
    
    3
    
    
    
    240
    
    
    
    
    
    
    
    (463
    )Net cash used in investing activities
    
    
    (708
    )
    
    
    (1,255
    )
    
    
    (524
    )
    
    
    
    
    
    
    (2,487
    )Financing activitiesTransfer to parent company
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Change in intercompany payables/receivables
    
    
    (7,957
    )
    
    
    (14,487
    )
    
    
    1,696
    
    
    
    20,748
    
    
    
    Net payments on revolving line of credit
    
    
    (26,100
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,100
    )Proceeds from issuance of subordinated debentures
    
    
    121,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,500Principal payments on long-term debt
    
    
    (72,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,950
    )Financing fees paid
    
    
    (5,582
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,582
    )Net cash (used in) provided by financing activities
    
    
    (16,089
    )
    
    
    (14,487
    )
    
    
    1,696
    
    
    
    20,748
    
    
    
    (8,132
    )Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15Net increase (decrease) in cash and cash equivalents
    
    
    121
    
    
    
    (3
    )
    
    
    (801
    )
    
    
    
    
    
    
    (683
    )Cash and cash equivalents at beginning of period
    
    
    400
    
    
    
    3
    
    
    
    2,018
    
    
    
    
    
    
    
    2,421Cash and cash equivalents at end of period
    
    $
    521
    
    
    $
    
    
    
    $
    1,217
    
    
    $
    
    
    
    $
    1,738
 14




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##### Table of Contents



ERICO International Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004(Dollars in thousands) 9. Guarantor and Non-Guarantor Subsidiaries (continued) Unaudited Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2003 Non-Guarantor
    
    GuarantorParent
    
    Subsidiary
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income
    
    $
    11,864
    
    
    $
    12,761
    
    
    $
    5,718
    
    
    $
    (18,479
    )
    
    $
    11,864Depreciation and amortization
    
    
    1,887
    
    
    
    5,065
    
    
    
    1,848
    
    
    
    
    
    
    
    8,800Other operating activities
    
    
    (6,566
    )
    
    
    7,021
    
    
    
    (15,626
    )
    
    
    
    
    
    
    (15,171
    )Net cash provided by (used in) operating activities
    
    
    7,185
    
    
    
    24,847
    
    
    
    (8,060
    )
    
    
    (18,479
    )
    
    
    5,493Investing activitiesAcquisition payments, net of cash acquired
    
    
    
    
    
    
    (3,329
    )
    
    
    
    
    
    
    
    
    
    
    (3,329
    )Capital expenditures
    
    
    (11
    )
    
    
    (3,433
    )
    
    
    (1,175
    )
    
    
    
    
    
    
    (4,619
    )Other investing activities
    
    
    (165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165
    )Net cash used in investing activities
    
    
    (176
    )
    
    
    (6,762
    )
    
    
    (1,175
    )
    
    
    
    
    
    
    (8,113
    )Financing activitiesChange in intercompany payables/receivables
    
    
    (17,159
    )
    
    
    (23,160
    )
    
    
    21,840
    
    
    
    18,479
    
    
    
    Net borrowing (payments) on revolving line of credit
    
    
    14,548
    
    
    
    5,208
    
    
    
    (13,011
    )
    
    
    
    
    
    
    6,745Principal payments on long-term debt
    
    
    (4,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Net cash (used in) provided by financing activities
    
    
    (7,111
    )
    
    
    (17,952
    )
    
    
    8,829
    
    
    
    18,479
    
    
    
    2,245Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    (103
    )
    
    
    
    
    
    
    (103
    )Net (decrease) increase in cash and cash equivalents
    
    
    (102
    )
    
    
    133
    
    
    
    (509
    )
    
    
    
    
    
    
    (478
    )Cash and cash equivalents at beginning of period
    
    
    138
    
    
    
    3
    
    
    
    3,233
    
    
    
    
    
    
    
    3,374Cash and cash equivalents at end of period
    
    $
    36
    
    
    $
    136
    
    
    $
    2,724
    
    
    $
    
    
    
    $
    2,896
 15




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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 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 charges 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. 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 fourth quarter of 2004 as a result of this continued
recovery, new product introductions and market penetration. During the first nine months 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 these cost increases to our customers. However, we may not be
successful in recovering all of the increases in steel and copper costs. 16




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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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    64.4
    %
    
    
    62.2
    %
    
    
    64.0
    %
    
    
    63.3
    %Gross profit
    
    
    35.6
    %
    
    
    37.8
    %
    
    
    36.0
    %
    
    
    36.7
    %Operating expenses
    
    
    24.2
    %
    
    
    25.0
    %
    
    
    24.1
    %
    
    
    26.3
    %Interest expense, net
    
    
    4.3
    %
    
    
    4.0
    %
    
    
    4.2
    %
    
    
    4.1
    %Foreign exchange loss (gain), net
    
    
    0.2
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    (1.6
    )%Other expense, net
    
    
    0.5
    %
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    0.0
    %Income before income taxes
    
    
    6.4
    %
    
    
    8.8
    %
    
    
    7.1
    %
    
    
    7.9
    %Provision for income taxes
    
    
    2.5
    %
    
    
    3.1
    %
    
    
    2.8
    %
    
    
    2.8
    %Net income
    
    
    3.9
    %
    
    
    5.7
    %
    
    
    4.3
    %
    
    
    5.1
    %
 Three Months Ended September 30, 2004 Compared With Three Months Ended
September 30, 2003 Net sales.Net sales for the three months ended September 30, 2004 were $92.4
million, an increase of $10.1 million, or 12.2%, from the $82.3 million reported
for the three months ended September 30, 2003. The increase in net sales in
the three months ended September 30, 2004 compared with the three months ended
September 30, 2003 was due primarily to increased selling prices and the
favorable effect of foreign currency exchange rates. Gross profit.Gross profit for the three months ended September 30, 2004
increased by $1.8 million, or 5.8%, to $32.9 million from the $31.1 million
reported for the three months ended September 30, 2003. Gross profit margin
declined to 35.6% in the three months ended September 30, 2004 from 37.8% in
the three months ended September 30, 2003. Gross profit margin decreased
primarily due to the significant increase in raw material costs, primarily
steel and copper, experienced by the Company. Operating expenses. Operating expenses include engineering and
development expenses, selling and marketing expenses, and general and
administrative expenses. Operating expenses increased by $1.8 million, or 8.7%,
to $22.4 million in the three months ended September 30, 2004 from $20.6
million in the three months ended September 30, 2003. As a percentage of net
sales, operating expenses decreased to 24.2% in the three months ended
September 30, 2004 from 25.0% in the three months ended September 30, 2003. The
decrease in operating expenses as a percent of sales in the three months ended
September 30, 2004 was primarily due to the higher sales level along with
managements continued focus on controlling expenses. Interest expense, net.Interest expense for the three months ended September
30, 2004 was $3.9 million compared with $3.3 million for the three months ended
September 30, 2003. The increase in interest expense was primarily caused by
higher average debt balances in the three months ended September 30, 2004
compared with the three months ended September 30, 2003 as a result of the
February 2004 refinancing. Foreign exchange loss (gain) net. The Company reported a foreign exchange loss
of $0.2 million for the three months ended September 30, 2004 compared with a
foreign exchange gain of less than $0.1 million for the three months ended
September 30, 2003. 17




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##### Table of Contents



Other expense (income) net.Other expense for the three months ended September
30, 2004 consisted primarily of a $0.5 million non-cash charge to write-off
previously deferred financing costs and original issue discount costs related
to the August 2004 exchange of 11.0% senior subordinated notes for our
Subordinated Notes. Provision for income taxes.The provision for income taxes was $2.3 million
for the three months ended September 30, 2004 compared with $2.6 million for
the three months ended September 30, 2003. The effective tax rate was 39.6%
for the three months ended September 30, 2004 compared with 35.5% for the three
months ended September 30, 2003. During the third quarter of 2003, we
recognized foreign currency transaction gains for which there was no income tax
expense, which resulted in a lower effective tax rate. Net income.As a result of the foregoing, the Company reported net income of
$3.6 million for the three months ended September 30, 2004, a decrease of $1.1
million, or 23.8%, from net income of $4.7 million in the three months ended
September 30, 2003. Nine Months Ended September 30, 2004 Compared With Nine Months Ended September
30, 2003 Net sales.Net sales for the nine months ended September 30, 2004 totaled
$268.0 million, an increase of $35.9 million, or 15.4%, from the $232.1 million
reported for the nine months ended September 30, 2003. The increase in net
sales in the nine months ended September 30, 2004 compared with the nine months
ended September 30, 2003 was due primarily to a combination of sales volume,
increased selling prices and the favorable effect of foreign currency exchange
rates. Gross profit.Gross profit for the nine months ended September 30, 2004
increased by $11.3 million, or 13.2%, to $96.4 million from the $85.1 million
reported for the nine months ended September 30, 2003. Gross profit margin was
relatively constant at 36.0% for the nine months ended September 30, 2004
compared with 36.7% for the nine months ended September 30, 2003. Gross profit
increased primarily due to sales volume, increased selling prices and the
favorable effect on net sales of foreign currency exchange rates, but gross
profit margin in the nine months ended September 30, 2004 was negatively
impacted by the increases in raw material costs previously discussed. Operating expenses. Operating expenses increased by $3.8 million, or 6.1%, to
$64.7 million in the nine months ended September 30, 2004 from $60.9 million in
the nine months ended September 30, 2003. As a percentage of net sales,
operating expenses decreased to 24.1% in the nine months ended September 30,
2004 from 26.3% in the nine months ended September 30, 2003. The decrease in
operating expenses as a percent of sales in the nine months ended September 30,
2004 was primarily due to the higher sales level along with managements
continued focus on controlling expenses. Interest expense, net.Interest expense for the nine months ended September
30, 2004 was $11.3 million compared with $9.6 million for the nine months ended
September 30, 2003. The increase in interest expense was primarily caused by
higher average debt balances in the nine months ended September 30, 2004
compared with the nine months ended September 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
$0.2 million for the nine months ended September 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 nine months ended
September 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 expense (income), net. Other expense was $1.7 million for the nine
months ended September 30, 2004 and consisted primarily of a non-cash charge of
$1.2 million related to the write-off of previously deferred financing costs
and original issue discount costs resulting from the February 2004 refinancing
of our Credit Facility and $0.5 million of previously deferred financing costs
and original issue discount costs related to the August 2004 exchange of 11.0%
senior subordinated notes for our Subordinated Notes. 18




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##### Table of Contents



Provision for income taxes.The provision for income taxes was $7.4 million
for the nine months ended September 30, 2004 compared with $6.5 million for the
nine months ended September 30, 2003. The effective tax rate was 39.4% for the
nine months ended September 30, 2004 compared with 35.5% for the nine months
ended September 30, 2003. During the nine months ended September 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.As a result of the foregoing, the Company reported net income of
$11.4 million for the nine months ended September 30, 2004, a decrease of $0.5
million, or 3.7%, from the $11.9 million in the nine months ended September 30,
2003. 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 credit portion of our Credit
Facility. On February 20, 2004, we refinanced substantially all of our long-term debt
outstanding. We issued $140.9 million aggregate principal amount of 8.875%
senior subordinated notes due 2012 (the Subordinated Notes), of which $19.4
million was exchanged for our 11.0% senior subordinated notes. The proceeds of
$140.9 million were used in part to reduce amounts outstanding under the
previous revolving credit facility, to repay $39.0 million of term loans
outstanding and to repay $35.0 million of the 11.0% senior subordinated notes
of ERICO Holding Company. 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 Class L shares. On August 13, 2004, we
exchanged the remaining $10.6 million of 11.0% senior subordinated notes for
$10.6 million of our Subordinated Notes. In connection with the February 20, 2004 refinancing, the Company amended its
Credit Facility that expires December 2, 2007. The Credit Facility provides a
revolving credit line of $75.0 million, of which $25.0 million may be used for
the issuance of letters of credit. The Credit Facility allows for
multicurrency borrowing options in Australian dollars, Euros, Swiss francs,
Swedish kronas, British pounds and other currencies that are readily available
and freely traded. Borrowings under the Credit Facility are secured by
substantially all of the assets of the Company and 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 provides for a commitment fee
of 0.25% on the revolving credit line. The Credit Facility and the Subordinated Notes contain certain customary
covenants that impose limitations on the Company, 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
requirements to meet certain financial tests and to maintain on a quarterly
basis certain consolidated financial ratios, including minimum net worth,
minimum fixed charge coverage ratio, maximum leverage ratio and minimum EBITDA.
The Company was in compliance with all covenants of the Credit Facility and
the Subordinated Notes, and the conditions of the Credit Facility, at September
30, 2004. At September 30, 2004, the Company had borrowings outstanding of $11.9 million
under the revolving credit line of the Credit Facility, all in U.S. dollars,
and letters of credit outstanding of $0.3 million supported by the Credit
Facility. The amount available for additional borrowing under the Credit
Facility at September 30, 2004 was $62.8 million. Nine Months Ended September 30, 2004 Compared With Nine Months Ended September
30, 2003 Cash provided by operating activities for the nine months ended September 30,
2004 was $9.9 million compared with $5.5 million for the nine months ended
September 30, 2003. The increase was primarily attributable to the higher
sales level and improvements in collections of accounts receivable. 19




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##### Table of Contents



Capital expenditures were $2.0 million for the nine months ended September 30,
2004, compared with $4.6 million for the nine months ended September 30, 2003.
We currently do not have any significant capital projects in process. During the nine months ended September 30, 2003, we paid $3.3 million to
acquire the net assets of Hunt Manufacturing Ltd. Cash used in financing activities was $8.1 million for the nine months ended
September 30, 2004 compared with cash provided by financing activities of $2.2
million for the nine months ended September 30, 2003. The 2004 financing
activities primarily reflect the net effect of our February 2004 debt
refinancing activities previously discussed. We have significant future cash commitments, primarily for debt service
requirements and scheduled lease payments. There have been no material changes
to our cash commitments and commercial commitments in the nine months ended
September 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. We believe that cash forecasted to be generated from operations, together with
amounts available under our Credit Facility, will be adequate to meet our cash
commitments, capital expenditures, working capital needs and pension plan
termination payments of approximately $6.3 million for at least the next twelve
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 general financing and business factors, many of which
are beyond our control. Reconciliation of EBITDA to Net Cash Provided by Operating Activities The Company has chosen to present EBITDA because the Company believes it is a
widely accepted financial indicator of a companys ability to service and incur
indebtedness, and because EBITDA is used in the Companys financial covenants
under the Credit Facility and the Subordinated Notes. Additionally, 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 GAAP. 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. Following is a reconciliation of EBITDA to net cash provided
by operating activities, which the Company believes is the most directly
comparable GAAP measure of a companys ability to service and incur
indebtedness: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net cash provided by operating activities
    
    $
    3,523
    
    
    $
    5,603
    
    
    $
    9,921
    
    
    $
    5,493Interest expense, net
    
    
    3,927
    
    
    
    3,294
    
    
    
    11,274
    
    
    
    9,555Provision for income taxes
    
    
    2,349
    
    
    
    2,590
    
    
    
    7,426
    
    
    
    6,529Foreign exchange (loss) gain, net
    
    
    (212
    )
    
    
    35
    
    
    
    181
    
    
    
    3,635Deferred taxes
    
    
    232
    
    
    
    261
    
    
    
    690
    
    
    
    1,060Amortization of financing fees and discount on
senior subordinated notes included in interest
expense, net
    
    
    (287
    )
    
    
    (165
    )
    
    
    (686
    )
    
    
    (497
    )Net changes in operating assets and liabilities
    
    
    3,805
    
    
    
    1,902
    
    
    
    12,109
    
    
    
    10,973EBITDA
    
    $
    13,337
    
    
    $
    13,520
    
    
    $
    40,915
    
    
    $
    36,748
 20




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##### Table of Contents



Critical Accounting Policies and Estimates The Companys unaudited condensed consolidated financial statements have been
prepared in accordance with GAAP. As such, some accounting policies have a
significant impact on amounts reported in these unaudited condensed
consolidated financial statements. A summary of those significant accounting
policies can be found in the Companys Prospectus filed July 16, 2004, in Note
2 of the Notes to the Consolidated Financial Statements and under the caption
Critical Accounting Polices and Estimates within Managements Discussion and
Analysis of Financial Condition and Results of Operations. In particular,
judgment is used in areas such as determining the allowance for doubtful
accounts and inventory valuation reserves, goodwill and indefinite lived
intangible assets, product warranty costs, debt covenants and deferred tax
assets. FORWARD-LOOKING STATEMENTS The Company is making this statement in order to satisfy the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Quarterly Report on Form 10-Q includes statements that are not historical
facts. These forward-looking statements relate to the business of the
Company and 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. These 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. The Company undertakes no
obligation, except as required by law, to update these statements. Such risks, uncertainties and contingencies include, without limitation, the
following:  
    
    economic and other conditions in the markets in which we operate;
    
    raw material price increases, particularly for steel and copper,
that we are unable to pass through to customers on a timely basis via
increased selling prices;
    
    acts of war or terrorism;
    
    risks associated with foreign operations, including fluctuations in
exchange rates of foreign currencies;
    
    competitive pressure on pricing;
    
    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 Credit Facility and Subordinated Notes;
    
    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. 21




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, 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
Credit Facility. Borrowings under the Credit 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 outstanding as of September 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 Credit Facility, 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 at
September 30, 2004. We had net assets denominated in foreign currencies of
approximately $43.3 million associated with our foreign subsidiaries at
September 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 September 30, 2004 an evaluation was performed, under the supervision and
with the participation of the Companys management including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities and Exchange Act of 1934, as
amended (the Exchange Act). Based upon that evaluation, such officers
concluded that the Companys disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. There were no changes in the Companys internal control over financial
reporting that occurred during the Companys most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 22




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 6. Exhibits Exhibit Number
    
    Description of Document31.1
    
    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
 23




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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:
    
    Chairman, Chief Executive Officer
and DirectorNovember 3, 2004By:
    
    /s/ Jeffrey R. SteinhilberName:
    
    Jeffrey R. SteinhilberTitle:
    
    Chief Financial Officer
and DirectorNovember 3, 2004
 24