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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 0-21803
AFTERMARKET TECHNOLOGY CORP.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4486486
-------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Oak Hill Center - Suite 400, Westmont, IL 60559
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (630) 455-6000
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 ( )
As of April 20, 2001, there were 20,466,871 shares of common stock of the
Registrant outstanding.
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AFTERMARKET TECHNOLOGY CORP.
FORM 10-Q
TABLE OF CONTENTS
Page Number
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PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 2001 (unaudited)
and December 31, 2000 ........................................ 3
Consolidated Statements of Income (unaudited) for the Three
Months Ended March 31, 2001 and 2000 ......................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2001 and 2000.................... 5
Notes to Consolidated Financial Statements (unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................... 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES.................................................................... 19
Note: Items 1 - 5 of Part II are omitted because they are not applicable.
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AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 424 $ 2,035
Accounts receivable, net 56,118 58,624
Inventories 48,325 43,513
Prepaid and other assets 5,201 4,976
Refundable income taxes 2,730 2,730
Deferred income taxes 28,622 31,904
Assets of discontinued operations held for sale, net 5,843 6,002
--------- ---------
Total current assets 147,263 149,784
Property, plant and equipment, net 44,625 44,070
Debt issuance costs, net 3,944 4,175
Cost in excess of net assets acquired, net 173,578 174,833
Deferred income taxes 12,871 12,852
Other assets 10,305 10,308
Assets of discontinued operations held for sale, net 4,157 3,998
--------- ---------
Total assets $ 396,743 $ 400,020
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 47,324 $ 54,163
Accrued expenses 21,410 26,584
Bank line of credit 595 --
Credit facility 14,700 14,700
Amounts due to sellers of acquired companies 2,697 2,672
Liabilities of discontinued operations 6,527 8,125
--------- ---------
Total current liabilities 93,253 106,244
12% Series B and D Senior Subordinated Notes 110,988 111,033
Amount drawn on credit facility, less current portion 97,125 92,000
Amounts due to sellers of acquired companies, less current portion 7,059 6,931
Deferred compensation, less current portion 3,183 3,125
Other long-term liabilities 763 448
Stockholders' Equity:
Preferred stock, $.01 par value; shares authorized - 2,000,000; none issued -- --
Common stock, $.01 par value; shares authorized - 30,000,000;
issued - 20,935,206 and 20,923,510 (including shares held in treasury) 209 209
Additional paid-in capital 136,901 136,882
Accumulated deficit (48,380) (54,400)
Accumulated other comprehensive loss (1,021) (458)
Common stock held in treasury, at cost (458,472 and 172,000 shares) (3,337) (1,994)
--------- ---------
Total stockholders' equity 84,372 80,239
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Total liabilities and stockholders' equity $ 396,743 $ 400,020
========= =========
SEE ACCOMPANYING NOTES.
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AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months
ended March 31,
2001 2000
-------- --------
(Unaudited)
Net sales $ 92,421 $ 86,502
Cost of sales 61,468 55,128
-------- --------
Gross profit 30,953 31,374
Selling, general and
administrative expense 14,481 11,661
Amortization of intangible assets 1,256 1,257
-------- --------
Income from operations 15,216 18,456
Interest income 356 --
Other income, net 6 52
Interest expense 5,790 5,836
-------- --------
Income from continuing operations,
before income taxes 9,788 12,672
Income tax expense 3,768 4,841
-------- --------
Income from continuing operations 6,020 7,831
Loss from discontinued operations, net
of income taxes -- (2,494)
-------- --------
Net income $ 6,020 $ 5,337
======== ========
Per common share - basic:
Income from continuing operations $ 0.29 $ 0.38
Loss from discontinued operations -- (0.12)
-------- --------
Net income $ 0.29 $ 0.26
======== ========
Weighted average number of common shares
outstanding 20,578 20,539
======== ========
Per common share - diluted:
Income from continuing operations $ 0.29 $ 0.37
Loss from discontinued operations -- (0.12)
-------- --------
Net income $ 0.29 $ 0.25
======== ========
Weighted average number of common and
common equivalent shares outstanding 20,763 21,387
======== ========
SEE ACCOMPANYING NOTES.
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AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the three months
ended March 31,
2001 2000
-------- --------
(Unaudited)
OPERATING ACTIVITIES:
Net income $ 6,020 $ 5,337
Net loss from discontinued operations -- 2,494
-------- --------
Income from continuing operations 6,020 7,831
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities - continuing operations:
Depreciation and amortization 3,369 2,851
Amortization of debt issuance costs 324 293
Provision for losses on accounts receivable 24 27
Loss on sale of equipment 1 1
Deferred income taxes 3,282 1,358
Changes in operating assets and liabilities,
net of businesses discontinued/sold:
Accounts receivable 2,189 (1,108)
Inventories (5,015) (95)
Prepaid and other assets (236) (1,252)
Accounts payable and accrued expenses (13,015) (8,095)
-------- --------
Net cash provided by (used in) operating activities - continuing operations (3,057) 1,811
Net cash provided by (used in) operating activities - discontinued operations (181) 2,849
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,708) (1,135)
Proceeds from sale of equipment 30 10
-------- --------
Net cash used in investing activities - continuing operations (2,678) (1,125)
Net cash used in investing activities - discontinued operations -- (975)
FINANCING ACTIVITIES:
Borrowings (payments) on credit facility, net 5,125 (4,540)
Borrowings (payments) on bank line of credit, net 614 (543)
Payment of debt issuance costs (94) --
Proceeds from exercise of stock options 20 250
Purchase of common stock for treasury (1,343) --
-------- --------
Net cash provided by (used in) financing activities 4,322 (4,833)
Effect of exchange rate changes on cash and cash equivalents (17) 3
-------- --------
Decrease in cash and cash equivalents (1,611) (2,270)
Cash and cash equivalents at beginning of period 2,035 8,469
-------- --------
Cash and cash equivalents at end of period $ 424 $ 6,199
======== ========
Cash paid during the period for:
Interest $ 8,728 $ 10,543
Income taxes, net 304 3,563
SEE ACCOMPANYING NOTES.
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AFTERMARKET TECHNOLOGY CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Aftermarket Technology Corp. (the "Company") as of March 31, 2001 and for the
three months ended March 31, 2001 and 2000 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
As discussed more thoroughly in Note 3, the Company's Independent
Aftermarket segment (which contained (i) ATC Distribution Group, Inc.
("Distribution Group"), a distributor of remanufactured transmissions and
related drivetrain components to independent aftermarket customers, which was
sold in October 2000, and (ii) the domestic remanufactured engines business,
which remanufactures and distributes domestic and foreign engines primarily
through a branch distribution network to independent aftermarket customers) is
presented as discontinued operations in the accompanying financial statements.
Certain prior-year amounts have been reclassified to conform to the 2001
presentation.
NOTE 2: INVENTORIES
Inventories consist of the following:
March 31, 2001 December 31, 2000
-------------- -----------------
Raw materials, including core inventories.. $41,372 $38,075
Work-in-process............................ 1,647 1,672
Finished goods............................. 5,306 3,766
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$48,325 $43,513
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NOTE 3: DISCONTINUED INDEPENDENT AFTERMARKET SEGMENT
On August 3, 2000, the Company adopted a plan to discontinue the
Independent Aftermarket segment of its business, containing the Distribution
Group, located in the United States, Canada and Mexico, and its remanufactured
engines business located in the United States. The Distribution Group
distributed remanufactured transmissions and related drive train components to
independent aftermarket customers for use in the repair of automobiles and light
trucks primarily following expiration of the new vehicle warranty. The
remanufactured engines business remanufactures and distributes domestic and
foreign engines primarily through a branch distribution network to independent
aftermarket customers. Because the measurement date occurred prior to issuance
of the Company's June 30, 2000 interim financial statements, the discontinued
presentation was first shown on those second quarter and year-to-date condensed
interim financial statements.
On October 27, 2000, the Company consummated the sale of all the
outstanding capital stock of the Distribution Group to ATCDG Acquisition Corp.,
Inc. ("Buyer"), an indirect wholly owned
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subsidiary of Aceomatic-Recon Holdings Corporation, which is an affiliate of The
Riverside Company. The purchase price for the stock of the Distribution Group
was comprised of $60,079 in cash, Series B preferred stock of Buyer valued by
the Company at $1,929 (stated value of $8,650 net of a valuation allowance of
$6,721) and an 18% senior subordinated promissory note of the Buyer with a
principal amount of $10,050 and a discounted value of $8,365. In addition, the
cash purchase price is subject to increase or decrease if it is determined that
the Distribution Group's net working capital as of the closing was above or
below a specified target amount.
On the measurement date, the Company estimated a loss on disposal of the
Independent Aftermarket segment of $114,849 (net of tax benefit of $59,164),
which includes a provision for anticipated losses from the measurement date
until disposal, the write-off of previously allocated goodwill, provisions for
the valuation of certain assets, and anticipated costs of disposal including
lease terminations, severance, retention and other employee benefits,
professional fees and other costs directly associated with the discontinuance.
The estimated loss on the sale of the Distribution Group and the actual
losses from discontinued operations incurred since the measurement date have
been applied against the accrued loss established effective with the measurement
date. The accrual balance as of March 31, 2001 of $6,527, classified as
liabilities of discontinued operations, represents an estimate of the remaining
obligations and other costs related to the sale of the Distribution Group and
the disposal of the remanufactured aftermarket engines business.
The consolidated statements of operations have been reclassified to report
the operating results of the Independent Aftermarket segment as discontinued
operations and accordingly, their results have been excluded from continuing
operations for all periods presented. Net sales from the Independent Aftermarket
segment were $6,808 and $63,458 for the three months ended March 31, 2001 and
2000, respectively. Interest expense for the three months ended March 31, 2001
of $219 has been allocated to the discontinued operations based on the
anticipated consideration from the sale of the remanufactured aftermarket
engines business. Interest expense for the three months ended March 31, 2000 of
$1,919 has been allocated to the discontinued operations based on the
anticipated consideration to be received from the sale of the Distribution Group
and the remanufactured aftermarket engines business. The loss from discontinued
operations reported for the three months ended March 31, 2000 was $2,494, net of
tax benefit of $1,705.
The net assets of discontinued operations held for sale in the balance sheets
include the following:
March 31, 2001 December 31, 2000
-------------- -----------------
Accounts receivable, net................................... $ 4,774 $ 3,823
Inventories, net........................................... 14,086 16,012
Other current assets....................................... 380 355
Property, plant and equipment, net......................... 7,771 7,996
Cost in excess of net assets acquired, net................. 15,614 15,614
Other, net................................................. 272 --
Accounts payable........................................... (471) (52)
Accrued expenses........................................... (6,806) (8,661)
-------- --------
35,620 35,087
Valuation allowance for losses on disposal of discontinued
operations............................................... (25,620) (25,087)
-------- --------
Assets of discontinued operations held for sale, net....... 10,000 10,000
Liabilities of discontinued operations..................... (6,527) (8,125)
-------- --------
Net assets of discontinued operations...................... $ 3,473 $ 1,875
======== ========
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NOTE 4: BANK LINE OF CREDIT
During the three months ended March 31, 2001, the Company entered into a
revolving credit agreement with HSBC Bank Plc ("HSBC"), providing (pound)1,000
to finance the working capital requirements of its U.K. subsidiary. Amounts
advanced are secured by substantially all assets of the U.K. subsidiary. In
addition, HSBC may at any time demand repayment of all sums owing. Interest is
payable monthly at the HSBC prime lending rate (5.75% at March 31, 2001) plus
1.50%. At March 31, 2001, (pound)420 ($595 in U.S. currency) was outstanding
under this line of credit.
NOTE 5: CREDIT FACILITY
The Company has a credit facility with J.P. Morgan Chase, as agent (the
"Bank"), comprised of a $100,000 line of credit (the "Revolver") and a $130,000
term loan (the "Term Loan") (collectively, the "Credit Facility") to finance the
Company's working capital requirements and future acquisitions. Amounts advanced
under the Credit Facility are secured by substantially all the assets of the
Company. The Credit Facility contains several covenants, including ones that
require the Company to maintain certain levels of net worth, leverage and cash
flow coverage, and others that limit the Company's ability to incur
indebtedness, make capital expenditures, create liens, engage in mergers and
consolidations, make restricted payments (including dividends), sell assets,
make investments, issue stock and engage in transactions with affiliates of the
Company and its subsidiaries. Amounts outstanding under the Term Loan are
payable in quarterly installments through December 31, 2003. Amounts advanced
under the Revolver become due on December 31, 2003. The Company may prepay
outstanding advances under the Revolver or the Term Loan in whole or in part
without incurring any premium or penalty. At March 31, 2001, $40,425 and $71,400
was outstanding under the Term Loan and Revolver, respectively.
During 1998, in order to convert $50,000 of its Credit Facility to a fixed
rate, the Company entered into a series of interest rate swap agreements
scheduled to mature during July 2003. During 1999, the Company revised the
maturity dates on $35,000 of the swap agreements to January 2001 in exchange for
proceeds of $636. The proceeds were recorded as a deferred gain and are being
amortized over the original life of the interest rate swap agreements. The
remaining $15,000 swap agreement is a derivative financial instrument and is
accounted for under the provisions of SFAS No. 133. (See Note 6.)
NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES (as amended by SFAS No. 137 and 138). SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated a part of a hedge and, if it is, the type of hedge transaction. For
derivatives qualifying as hedges of future cash flows, the effective portion of
changes in fair value is recorded temporarily in equity, then recognized in
earnings along with the related effects of the hedged items. Any ineffective
portion of a hedge is reported in earnings as it occurs.
The Company uses interest rate swaps to convert variable rate debt to
fixed rate debt to reduce interest rate volatility risk. In accordance with SFAS
No. 133, the Company has designated its swap agreement as a cash flow hedge and
recorded the fair value of this hedge agreement as part of other comprehensive
income (see Note 8). The swap is based on a notional amount of $15,000 at the
fixed interest rate of 5.95% during the term of the swap agreement. At January
1, 2001, the Company's financial statements were adjusted to record a cumulative
effect of adopting this accounting change as an addition to other long-term
liabilities of $45, and a reduction to other comprehensive income in the amount
of $28 (net of income tax benefit of $17). For the three months ended March 31,
2001, the effective portion of changes in fair value of this
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derivative amounted to $332 and is recorded as an addition to other long-term
liabilities and a reduction to other comprehensive income in the amount of
$204 (net of income tax benefit of $128). The fair value of this derivative
as a liability amounted to $377 at March 31, 2001.
NOTE 7. COMMON STOCK
During the first quarter of 2001, the Company, together with certain
members of management and directors of the Company, certain principals and
affiliates of the Aurora Capital Group and certain other shareholders of the
Company, announced its intention to commence a program for the purchase of up to
1,750 shares of the Company's common stock. Such purchases may be made from time
to time in the open market, through privately negotiated transactions or through
block purchases. The purchase program commenced on January 8, 2001, and is being
conducted in accordance with the Securities and Exchange Commission's Rule
10b-18, subject to market conditions, applicable legal requirements and other
factors. As of March 31, 2001, 1,197 shares of the Company's common stock have
been purchased under the program, of which 286 shares at an average price of
$4.69 per share were purchased by the Company.
NOTE 8: COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 2001 and
2000 was $5,457 and $5,288, respectively.
The following table sets forth the computation of comprehensive income for
the three months ended March 31, 2001 and 2000, respectively:
For the three months
ended March 31,
--------------------
2001 2000
------ ------
Net income............................................. $6,020 $5,337
Other comprehensive income:
Interest rate swap agreements, net of related taxes:
Transition adjustment as of January 1, 2001....... (28) -
Current period decline in fair value.............. (204) -
Translation adjustment, net of related taxes........... (331) (49)
------ ------
$5,457 $5,288
====== ======
NOTE 9: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
For the three months
ended March 31,
--------------------
2001 2000
------ ------
Numerator:
Income from continuing operations ..................... $ 6,020 $ 7,831
======= =======
Denominator:
Weighted-average common shares outstanding ............ 20,578 20,539
Effect of stock options and warrants .................. 185 848
------- -------
Denominator for diluted earnings per common share...... 20,763 21,387
======= =======
Basic earnings per common share ....................... $ 0.29 $ 0.38
Diluted earnings per common share ..................... 0.29 0.37
-9-
NOTE 10. REPORTABLE SEGMENTS
The Company has two reportable segments in continuing operations: the
Drivetrain Remanufacturing segment and the Logistics segment. The Drivetrain
Remaufacturing segment consists of five operating units that primarily sell
remanufactured transmissions directly to DaimlerChrysler, Ford, General Motors
and several foreign OEMs, primarily for use as replacement parts by their
domestic dealers during the warranty and post-warranty periods following the
sale of a vehicle. In addition, the Drivetrain Remanufacturing segment sells
select remanufactured and newly assembled engines to certain European OEMs
including Ford's and General Motor's European operations and Jaguar. The
Company's Logistics segment consists of three operating units: a provider of
value added warehouse and distribution services, turnkey order fulfillment and
information services for AT&T Wireless Services; a provider of returned material
reclamation and disposition services to Ford and General Motors; and an
automotive electronic components remanufacturing and distribution business,
primarily for Delphi and Visteon.
The Company evaluates performance based upon income from operations. The
reportable segments' accounting policies are the same as those of the Company.
The reportable segments are each managed and measured separately primarily
due to the differing customers, production processes, products sold and
distribution channels. The reportable segments are as follows:
Drivetrain
---------------
Remanufacturing Logistics Totals
--------------- --------- -------
FOR THE THREE MONTHS ENDED MARCH 31, 2001:
Revenues from external customers ...... $67,538 $24,883 $92,421
Segment profit ........................ 9,502 5,714 15,216
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
Revenues from external customers ...... $66,935 $19,567 $86,502
Segment profit ........................ 15,033 3,423 18,456
NOTE 11: SPECIAL CHARGES
During 1998 and 1999, the Company implemented certain initiatives designed
to improve operating efficiencies and reduce costs. In 1998, the Company
recorded $4,024 in special charges related to these initiatives, consisting of
$1,624 in restructuring costs and $2,400 in non-income related taxes. The $1,624
restructuring cost includes $975 of severance costs for three people, $349 of
exit costs and $300 of other costs. The severance costs were incurred in
connection with the replacement of the Company's Chief Executive Officer and
other members of management. The non-income related tax charge is due to a
state's 1998 interpretation of tax laws. This interpretation was applied
retroactively to prior fiscal years. Due to a change in distribution operations,
the Company's exposure to the effect of this tax interpretation has been
significantly reduced in future tax periods.
In 1999, the Company recorded $3,977 of special charges primarily related
to the initiation of three actions. First, the Company recorded $2,557 of costs
primarily related to its management reorganization consisting of $2,282 of
severance costs for 41 people and $275 of other costs. Second, the Company
recorded $850 of costs to exit a plant within its Drive Train Remanufacturing
segment consisting of $500 of costs related to the write-down of fixed assets
and $350 of severance costs for 130 people. Third, the Company recorded $570 of
costs related to its Logistics segment consisting of $168 related to the
write-down of accounts receivable balances from customers the segment no longer
services, $164 of severance costs for nine people, $125 of exit and other costs
and $113 of inventory write-downs classified as Cost of Sales - Special Charges.
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Loss on
Termination Exit/Other Write-Down
Benefits Costs of Assets Total
----------- ---------- ---------- -------
Provision 1998 ............... $ 975 $ 3,049 $ -- $ 4,024
Payments 1998 ................ (135) -- -- (135)
------- ------- ------- -------
Reserve at December 31, 1998.. 840 3,049 -- 3,889
Provision 1999 ............... 2,796 400 781 3,977
Payments 1999 ................ (1,289) (1,026) -- (2,315)
------- ------- ------- -------
Reserve at December 31, 1999.. 2,347 2,423 781 5,551
Payments 2000 ................ (1,802) (344) -- (2,146)
Asset write-offs 2000 ........ -- -- (825) (825)
Reclassification 2000 ........ -- (44) 44 --
------- ------- ------- -------
Reserve at December 31, 2000.. 545 2,035 -- 2,580
Payments 2001 ................ (186) -- -- (186)
------- ------- ------- -------
Reserve at March 31, 2001 .... $ 359 $ 2,035 $ -- $ 2,394
======= ======= ======= =======
NOTE 12: CONTINGENCIES
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from past spills,
disposals or other releases of hazardous substances.
In connection with the acquisition of certain subsidiaries, the Company
conducted certain investigations of these companies' facilities and their
compliance with applicable environmental laws. The investigations, which
included "Phase I" assessments by independent consultants of all manufacturing
and certain distribution facilities, found that certain facilities have had or
may have had releases of hazardous materials that may require remediation and
also may be subject to potential liabilities for contamination from off-site
disposal of substances or wastes. These assessments also found that certain
reporting and other regulatory requirements, including certain waste management
procedures, were not or may not have been satisfied. Although there can be no
assurance, the Company believes that, based in part on the investigations
conducted, in part on certain remediation completed prior to the acquisitions,
and in part on the indemnification provisions of the agreements entered into in
connection with the Company's acquisitions, the Company will not incur any
material liabilities relating to these matters.
The company from which RPM Merit ("RPM") acquired its assets (the "Prior
RPM Company") has been identified by the United States Environmental Protection
Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund")
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from potentially responsible parties ("PRPs").
PRPs are broadly defined under CERCLA and generally include present owners and
operators of a site and certain past owners and operators. As a general rule,
courts have interpreted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the PRPs according to a volumetric or other standard. The EPA
has preliminarily estimated that it will cost approximately $47,000 to construct
and approximately $4,000 per year for an indefinite period to operate an interim
remedial groundwater pumping and treatment system for
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the part of the Superfund site within which RPM's former manufacturing
facilities and current distribution facility, as well as those of many other
potentially responsible parties, are located. The actual cost of this remedial
action could vary substantially from this estimate, and additional costs
associated with the Superfund site are likely to be assessed. The Company has
significantly reduced its presence at the site and has moved all manufacturing
operations off-site. Since July 1995, the Company's only real property interest
in this site has been the lease of a 6,000 square foot storage and distribution
facility. The RPM acquisition agreement and the leases pursuant to which the
Company leased RPM's facilities after the Company acquired the assets of RPM
(the "RPM Acquisition") expressly provide that the Company did not assume any
liabilities for environmental conditions existing on or before the RPM
Acquisition, although the Company could become responsible for these liabilities
under various legal theories. The Company is indemnified against any such
liabilities by the seller of RPM as well as the Prior RPM Company shareholders.
There can be no assurance, however, that the Company would be able to make any
recovery under any indemnification provisions. Since the RPM Acquisition, the
Company has been engaged in negotiations with the EPA to settle any liability
that it may have for this site. Although there can be no assurance, the Company
believes that it will not incur any material liability as a result of these
environmental conditions.
In connection with the sale of the Distribution Group (the "DG Sale") on
October 27, 2000 (see Note 3), the Company agreed to certain matters with
Buyer that could result in contingent liability to the Company in the future.
These include the Company's indemnification of Buyer against (i) environmental
liability at former Distribution Group facilities that had been closed prior to
the DG Sale, including the former manufacturing facility in Azusa, California
mentioned above and the former manufacturing facilities in Mexicali, Mexico and
Dayton, Ohio, (ii) any other environmental liability of the Distribution Group
relating to periods prior to the DG Sale, in most cases subject to a $750
deductible and a $12,000 cap, (iii) liabilities of the Distribution Group
existing at the time of the DG Sale but not disclosed to Buyer, subject to the
$750 deductible and $12,000 cap, (iv) any tax liability of the Distribution
Group relating to periods prior to the DG Sale and (v) certain health claims
that may be asserted by employees of the Distribution Group relating to the air
quality at one of its facilities prior to the DG Sale. In addition, prior to the
DG Sale several of the Distribution Group's real estate and equipment leases
were guaranteed by the Company. These guarantees remain in effect after the DG
Sale so the Company continues to be liable for the Distribution Group's
obligations under such leases in the event that the Distribution Group does not
honor those obligations. Buyer has agreed to indemnify the Company for any
liability that the Company may incur pursuant to the guarantees.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENT NOTICE
Readers are cautioned that certain statements contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations that are not related to historical results are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Statements that are predictive, that depend upon or refer to future
events or conditions, or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "hopes," and similar expressions
constitute forward-looking statements. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible future Company
actions are also forward-looking statements.
Forward-looking statements are based on current expectations, projections
and assumptions regarding future events that may not prove to be accurate.
Actual results may differ materially from those projected or implied in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, dependence on significant
customers, possible component parts shortages, the ability to achieve and manage
growth, future indebtedness and liquidity, environmental matters, and
competition. For a discussion of these and certain other factors, please refer
to Item 1. "Business--Certain Factors Affecting the Company" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Please also refer to the Company's other filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2001 COMPARED
TO THE THREE MONTH PERIOD ENDED MARCH 31, 2000.
Due to the Company's decision to exit the Independent Aftermarket segment,
the consolidated statements of income have been restated to report the operating
results of the Independent Aftermarket segment as discontinued operations and
accordingly, its results have been excluded from the continuing operations for
all periods presented. With the exception of the discussion on discontinued
operations, the discussion below relates to the continuing operations of the
Company.
Income from continuing operations decreased $1.8 million, or 23.1%, to
$6.0 million for the three months ended March 31, 2001 from $7.8 million for the
three months ended March 31, 2000. This decrease was primarily attributable to
decreased profitability within the Company's Drivetrain Remanufacturing segment,
largely driven by changes in customer price and mix, and severance costs
associated with the de-layering of certain management functions and other
headcount reductions. In addition, the prior year period benefited from the
favorable resolution of certain events and contractual issues. The decrease in
profitability of the Drivetrain Remanufacturing segment was partially offset by
increased sales and profitability within the Logistics segment for the three
months ended March 31, 2001 as compared to the three months ended March 31,
2000. Income from continuing operations per diluted share was $0.29 for the
three months ended March 31, 2001 as compared to $0.37 for the three months
ended March 31, 2000.
NET SALES
Net sales increased $5.9 million, or 6.8%, to $92.4 million for the three
months ended March 31, 2001 from $86.5 million for the three months ended March
31, 2000. This increase was driven primarily by growth in the Company's
Logistics segment. See "Drivetrain Remanufacturing Segment" and "Logistics
Segment" for discussions of net sales.
-13-
Sales to DaimlerChrysler accounted for 27.2% and 36.3%, Ford accounted for
35.0% and 28.7% and AT&T Wireless Services accounted for 17.1% and 11.3% of the
Company's revenues for the three months ended March 31, 2001 and 2000,
respectively.
GROSS PROFIT
Gross profit as a percentage of net sales decreased to 33.5% for the three
months ended March 31, 2001 from 36.3% for the three months ended March 31,
2000. This decrease was primarily the result of (i) price concessions provided
to Chrysler as a result of their request for supplier participation in their
cost reduction initiatives and (ii) unfavorable revenue mix and production
inefficiencies resulting from the impact of Chrysler's inventory reduction
initiatives, which reduce Chrysler's targeted inventories by nearly 50%, from
about 13 to 7 weeks. Additionally, during the three months ended March 31, 2000,
the Company benefited from favorable adjustments of approximately $1.2 million,
primarily related to the resolution of discrepancies on certain component
inventories, the retroactive impact of pricing revisions and an inventory
adjustment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $2.8
million, or 23.9%, to $14.5 million for the three months ended March 31, 2001
from $11.7 million for the three months ended March 31, 2000. The increase was
primarily due to the recording of $0.9 million of severance primarily associated
with the de-layering of certain management functions, combined with an increase
in spending in support of growth initiatives in the Logistics segment and to a
lesser extent on the Company's Lean and Continuous Improvement and Customer
Delight initiatives. As a percentage of net sales, SG&A expenses increased to
15.7% from 13.5% between the two periods.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets remained constant at $1.3 million for
the three months ended March 31, 2001 and 2000.
INCOME FROM OPERATIONS
Income from operations decreased $3.3 million, or 17.8%, to $15.2 million
for the three months ended March 31, 2001 from $18.5 million for the three
months ended March 31, 2000. The decrease is primarily the result of an increase
in revenue, offset by the decline in gross profit margins and an increase in
SG&A expense due to the factors described above. As a percentage of net sales,
income from operations decreased to 16.5% from 21.3%, between the two periods.
INTEREST INCOME
During the three months ended March 31, 2001, $0.4 million of interest
income was recorded on the 18% senior subordinated promissory note received by
the Company as partial consideration from the sale of the Distribution Group.
INTEREST EXPENSE
Interest expense remained constant at $5.8 million for the three months
ended March 31, 2001 and 2000. Interest expense for the three months ended March
31, 2001 of $0.2 million was allocated to discontinued operations based on the
anticipated consideration from the sale of the remanufactured aftermarket
engines business. Interest expense for the three months ended March 31, 2000 of
$1.9 million was allocated to the discontinued operations based on the
anticipated
-14-
consideration to be received from the sale of the Distribution Group and the
remanufactured aftermarket engines business.
DISCONTINUED OPERATIONS
During the three months ended March 31, 2000, the independent aftermarket
segment reported a loss from its operations of $2.5 million, net of income tax
benefits of $1.7 million.
REPORTABLE SEGMENTS
DRIVETRAIN REMANUFACTURING SEGMENT
The following table presents net sales and segment profit expressed in
millions of dollars and as a percentage of net sales:
For the Three Months Ended March 31,
------------------------------------
2001 2000
------------------ --------------
Net sales........................ $67.5 100.0% $66.9 100.0%
===== ===== ===== =====
Segment profit................... $ 9.5 14.1% $15.0 22.4%
===== ===== ===== =====
NET SALES. Net sales increased $0.6 million, or 0.9%, to $67.5 million for
the three months ended March 31, 2001 from $66.9 million for the three months
ended March 31, 2000. The increase was primarily due to an increase in sales of
remanufactured transmissions to Ford and growth in the Company's engine
remanufacturing program with Jaguar, partially offset by a decrease in sales of
remanufactured transmissions to Chrysler due to price concessions provided as a
result of their request for supplier participation in their cost reduction
initiatives and reduced volume resulting from their inventory reduction
initiatives, which reduce Chrysler's targeted inventories by nearly 50%, from
about 13 to 7 weeks.
Sales to Ford accounted for 45.3% and 34.1% of segment revenues for the
three months ended March 31, 2001 and 2000, respectively. Sales to
DaimlerChrysler accounted for 37.3% and 47.0% of segment revenues for the three
months ended March 31, 2001 and 2000, respectively.
SEGMENT PROFIT. Segment profit decreased $5.5 million, or 36.7%, to $9.5
million (14.1% of segment net sales) for the three months ended March 31, 2001
from $15.0 million (22.4% of segment net sales) for the three months ended March
31, 2000. The decrease was primarily the result of the changes in sales volume,
price and mix of remanufactured transmissions as referenced above, combined with
production inefficiencies resulting from the impact of Chrysler's inventory
reduction initiatives and $0.8 million of severance primarily associated with
the de-layering of certain management functions. Additionally, during the three
months ended March 31, 2000, the Company benefited from favorable adjustments of
approximately $1.2 million, primarily related to the resolution of discrepancies
on certain component inventories, the retroactive impact of pricing revisions
and an inventory adjustment.
-15-
LOGISTICS SEGMENT
The following table presents net sales and segment profit expressed in
millions of dollars and as a percentage of net sales:
For the Three Months Ended March 31,
------------------------------------
2001 2000
------------------ --------------
Net sales........................ $ 24.9 100.0% $ 19.6 100.0%
====== ===== ====== =====
Segment profit................... $ 5.7 22.9% $ 3.4 17.3%
====== ===== ====== =====
NET SALES. Net sales increased $5.3 million, or 27.0%, to $24.9 million
for the three months ended March 31, 2001 from $19.6 million for the three
months ended March 31, 2000. This increase was primarily attributable to an
increase in sales for value added warehouse and distribution services, driven by
the growth in the market for cellular phones and services and coupled with the
benefit of two new programs the Company was awarded by AT&T Wireless Services
covering the packaging and distribution of cell phone accessories and the
distribution of point-of-sale and other marketing materials. Sales to AT&T
Wireless Services accounted for 63.7% and 49.9% of segment revenues for the
three months ended March 31, 2001 and 2000, respectively.
SEGMENT PROFIT. Segment profit increased $2.3 million, or 67.6%, to $5.7
million (22.9% of segment net sales) for the three months ended March 31, 2001
from $3.4 million (17.3% of segment net sales) for the three months ended March
31, 2000. The increase was primarily the result of the increased sales volume as
referenced above, partially offset by an increase in spending in support of the
Company's key growth initiatives in the segment.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents on hand of $0.4 million at
March 31, 2001. Net cash used in operating activities from continuing operations
was $3.1 million for the three-month period then ended. Net cash used in
investing activities from continuing operations was $2.7 million for the period
primarily related to equipment purchases. Net cash provided by financing
activities of $4.3 million includes net borrowings of $5.1 million made on the
Credit Facility and $0.6 million of borrowings on the bank line of credit
established in 2001 for the Company's European operations, partially offset by
$1.3 million of common stock purchased for treasury.
Amounts outstanding under the Credit Facility bear interest at either the
"Alternate Base Rate" or the "Eurodollar Rate" (as defined in the Credit
Facility) plus an applicable margin. As of March 31, 2001, the Alternate Base
Rate margin was 1.00% and the Eurodollar margin was 2.00%.
During the three months ended March 31, 2001, the Company entered into a
revolving credit agreement with HSBC Bank Plc ("HSBC"), providing (pound)1.0
million to finance the working capital requirements of its U.K. subsidiary.
Amounts advanced are secured by substantially all assets of the U.K. subsidiary.
In addition, HSBC may at any time demand repayment of all sums owing. Interest
is payable monthly at the HSBC prime lending rate (5.75% at March 31, 2001) plus
1.50%.
As of March 31, 2001, the Company's borrowing capacity under the Credit
Facility and the European line of credit was $24.3 million and (pound)0.6
million, respectively, and the Company had cash and cash equivalents on hand of
$0.4 million at March 31, 2001. Additionally, as a result of the sale of the
Distribution Group, as of December 31, 2000 the Company had approximately $109
million in Federal and State net operating loss carryforwards available as an
offset to future taxable income.
-16-
During the period ended March 31, 2001, the Company entered into an
agreement with Chrysler to procure and manage an all-time buy of the inventory
to support the service requirements of a transmission family to be discontinued
after the current model year. As a result, the Company expects to make an
investment in inventory of approximately $20.0 million. As of March 31, 2001,
$14.3 million and $11.6 million are reflected in inventory and accounts payable,
respectively, related to this agreement.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect any such acquisition costs may have
on its liquidity. In order to consummate such acquisitions, the Company may need
to seek funds through additional borrowings or equity financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company uses derivative financial instruments to manage
its exposure to fluctuations in interest rates. Neither the aggregate value of
these derivative financial instruments nor the market risk posed by them is
material to the Company. The Company uses interest rate swaps to convert
variable rate debt to fixed rate debt to reduce interest rate volatility risk.
For additional discussion regarding the Company's use of such instruments, see
Item 1. "Notes to Consolidated Financial Statements--Note 5 and Note 6."
INTEREST RATE EXPOSURE
Based on the Company's overall interest rate exposure during the three
months ended March 31, 2001, and assuming similar interest rate volatility in
the future, a near-term (12 months) change in interest rates would not
materially affect the Company's consolidated financial position, results of
operation or cash flows. A 10% change in the rate of interest would not have a
material effect on the Company's financial position, results of operation or
cash flows.
FOREIGN EXCHANGE EXPOSURE
The Company has one foreign operation that exposes it to translation risk
when the local currency financial statements are translated to U.S. dollars.
Since changes in translation risk are reported as adjustments to stockholders'
equity, a 10% change in the foreign exchange rate would not have a material
effect on the Company's financial position, results of operation or cash flows.
-17-
AFTERMARKET TECHNOLOGY CORP.
Part II. Other Information
Items 1-5 are not applicable.
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended March 31, 2001 the Company filed the
following reports on Form 8-K:
(1) On January 10, 2001, an Amendment to the Periodic Report
on Form 8-K dated October 27, 2000, reporting under
Item 7, certain pro forma financial information to
reflect the Company's sale of the Distribution Group.
(2) Report dated February 22, 2001, reporting under Items 5
and 7 the Company's press release dated February 22,
2001 regarding fourth quarter and year-end 2000
financial results and certain other information.
-18-
AFTERMARKET TECHNOLOGY CORP.
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.
AFTERMARKET TECHNOLOGY CORP.
Date: April 26, 2001 /s/ Barry C. Kohn
---------------------- ------------------------------------------
Barry C. Kohn, Chief Financial Officer
o Barry C. Kohn is signing in the dual capacities as i) the principal
financial officer, and ii) a duly authorized officer of the company.
-19-