SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_________________________________
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1998 Commission File Number: 333-19257
MOTORS AND GEARS, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
(847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable.
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 twelve (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 ninety (90) days.
Yes X No
The aggregate market value of voting stock held by non-affiliates of the
Registrant is not determinable as such shares were privately place and there
is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of May
15, 1998: 100,000.
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MOTORS AND GEARS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Securities
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-k 14
Signatures 15
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PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
PAGE NO.
Condensed Consolidated Balance Sheets at March 31, 1998,
and December 31, 1997 4
Condensed Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for three
months ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-10
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MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 33,565 $ 28,880
Accounts receivable, net 42,558 40,679
Inventories 32,962 31,665
Prepaid expenses and other current assets 1,368 1,300
Total Current Assets 110,453 102,524
Property, plant, and equipment, net 14,617 15,201
Goodwill, net 191,884 195,424
Deferred financing costs, net 15,430 15,877
Deferred income taxes 3,825 3,825
Other assets, net 2,241 2,293
Total Assets $338,450 $335,144
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Notes payable $ 2,107 $ 2,009
Accounts payable 19,646 17,424
Accrued interest payable 11,255 4,232
Accrued expenses and other 8,237 12,297
Due to affiliated company 1,605 1,488
Total Current Liabilities 42,850 37,450
Long-Term debt 283,488 283,613
Deferred income taxes 4,144 3,880
Other non-current liabilities 2,620 2,649
Shareholder's Equity:
Common Stock 1 1
Additional paid-in-capital 50,005 50,005
Accumulated other comprehensive income (loss) (3,104) (16)
Accumulated deficit (41,554) (42,438)
Total Shareholder's Equity 5,348 7,552
Total Liabilities and Shareholder's Equity $338,450 $335,144
See accompanying notes to condensed consolidated financial statements.
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MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March
1998 1997
Net Sales $58,567 $31,519
Cost of sales, excluding depreciation 38,212 20,380
Selling, general, and administrative expenses 7,722 2,241
Depreciation 1,205 971
Amortization of goodwill and other 1,819 986
Management fees and other 618 326
Operating income 8,991 6,615
Other (income) and expense:
Interest expense 7,820 4,894
Interest income (363) (141)
Total other expenses 7,457 4,753
Income before income taxes 1,534 1,862
Provision for income taxes 651 743
Net income $ 883 $ 1,119
See accompanying notes to condensed consolidated financial statements.
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MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
1998 1997
Cash flows from operating activities:
Net income $ 883 $ 1,119
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,345 2,218
Provision for deferred income taxes 264 310
Changes in operating assets and liabilities net
of effects from acquisitions:
Increase in current assets (3,244) (3,948)
Increase in current liabilities 5,175 7,883
Increase in non-current assets & liabilities (8) (48)
Increase (Decrease) in payables to affiliated
company 117 (1,443)
Net cash provided by operating activities 6,532 6,091
Cash flows from investing activities:
Capital expenditures, net (902) (100)
Acquisitions of subsidiaries (50) (454)
Net cash used in investing activities (952) (554)
Cash flows from financing activities:
Repayment of long-term debt (5) (4)
Other - (13)
Net cash used in financing activities (5) (17)
Effect of exchange rate changes on cash (890) -
Net increase in cash and cash equivalents 4,685 5,520
Cash and cash equivalents at beginning of period 28,880 10,011
Cash and cash equivalents at end of period $33,565 $15,531
See accompanying notes to condensed consolidated financial statements.
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MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
A. Organization
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results
of interim operations and are of a normal recurring nature, should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 1997, included in the Company's annual report on Form
10-K. The Company conducts its operations exclusively through its
subsidiaries. Results of operations for the interim periods are not
necessarily indicative of annual results of operations.
B. Significant Accounting Policies - Consolidation Principles
The condensed consolidated financial statements include the accounts of Motors
and Gears, Inc. and its subsidiaries. Material intercompany transactions and
balances are eliminated in consolidation. Operations of subsidiaries outside
the United States are included for periods ending two months prior to the
Company's year end and interim periods to ensure timely preparation of the
condensed consolidated financial statements.
C. Inventories
Inventories are summarized as follows:
March 31, December 31,
1998 1997
Raw materials $22,709 $21,639
Work in process 7,328 7,375
Finished goods 2,925 2,651
$32,962 $31,665
D. Acquisition of Subsidiaries
On June 12, 1997, the Company purchased all of the common stock of the FIR
Group Companies, consisting of CIME S.p.A., SELIN, S.p.A. and FIR S.p.A.
(collectively "FIR") for $50,496. The purchase price, including costs
incurred directly related to the transaction, was allocated to working capital
of $16,562; property and equipment of $4,918; other long-term assets and
liabilities of ($3,442); and resulted in an excess purchase price over net
identifiable assets of $32,458. FIR is a manufacturer of electric motors and
pumps for niche applications such as pumps for commercial dishwashers, motors
for industrial sewing machines and motors for industrial fans and
ventilators.
On October 27, 1997, the Company acquired all of the outstanding stock of E.D.
and C. Company, Inc. ("ED&C") for $16,000 in cash and a $4,000 Subordinated
Junior Seller Note. The purchase price, including costs incurred directly
related to the transaction, was allocated to working capital of $3,514;
property
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PAGE 8
MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
and equipment of $132; covenants not to compete of $120; and resulted in an
excess purchase price over net identifiable assets of $16,234. ED&C is a
full-service electrical engineering company which designs, engineers and
manufactures electrical control systems and panels for material handling
systems and other like applications. ED&C provides comprehensive design,
build and support services to produce electronic control panels which regulate
the speed and movement of conveyor systems used in a variety of automotive
plants and other industrial applications.
On December 18, 1997, the Company purchased all of the stock of Motion Control
Engineering, Inc. ("Motion Control") for $53,600. The purchase price,
including costs incurred directly related to the transaction, was allocated to
working capital of $10,071; property and equipment of $1,428; covenants not to
compete of $1,005; other long-term assets and liabilities of ($12); and
resulted in an excess purchase price over net identifiable assets of $41,108.
Motion Control manufactures electronic motion control products for elevator
markets, primarily the elevator modernization market.
Unaudited proforma information with respect to the Company as if the 1997
acquisitions had occurred on January 1, 1997 is as follows:
Three Months Ended
March 31, 1997
(Unaudited)
Net sales $40,484
Income before income taxes 288
Net income $ 166
E. Comprehensive Income
As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to
be included in other comprehensive income. Prior year financial statements
have been reclassified to conform to the requirements of Statement 130.
During the first quarter of 1998 and 1997, total comprehensive income (loss)
was $(2,205) and $1,119, respectively.
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PAGE 9
MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
F. Business Segment Information
See Part 1 "Financial Information" - Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the Company's
business
segment disclosures. There have been no changes from the Company's December
31, 1997 consolidated financial statements with respect to segmentation or
the measurement of segment profit.
G. Foreign Exchange Instruments and Risk Management
The Company entered into foreign currency forward exchange contracts to hedge
transactions and firm commitments that are denominated in foreign currencies
(principally the Italian Lira) and not to engage in currency speculation. The
Company primarily utilizes forward exchange contracts with a duration of one
year or less. Gains or losses on hedges of transaction exposures are included
in income in the period in which exchange rates change. Gains and losses on
contracts which hedge specific foreign currency denominated commitments are
deferred and recognized on the same basis as the transactions underlying the
commitments.
Forward exchange contracts generally require the Company to exchange U.S.
dollars for foreign currencies at maturity, at rates that are agreed upon at
inception of the contracts. If the counterparties to the exchange contracts
(primarily highly-rated financial institutions) do not fulfill their
obligations to deliver the contracted currencies, the Company could be at risk
for any currency related fluctuation.
The Company has $4,190 notional amount of foreign currency forward exchange
contracts outstanding at March 31, 1998 ($0 at December 31, 1997).
H. Subsequent Events
On May 15, 1998, the Company, through a newly formed wholly-owned subsidiary,
Advanced D.C. Holdings, Inc., acquired all of the outstanding stock of
Advanced D.C. Motors, Inc. and its affiliates ("ADC"). ADC is a designer and
manufacturer of direct current ("DC") permanent magnet motors and starters
(generators) which range from 4.5 inces to 9 inches in frame size. The
Company sells special purpose, custom designed motors for use in electric
lift trucks, power sweepers, electric utility vehicles, golf carts, electric
boats, and other niche products. ADC also designs and manufactures its own
production equipment as well as electric motor components known as
commutators.
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MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
In connection with the acquisition, the Company paid $53.0 million to the
sellers in cash. The acquisition was financed with existing cash and
borrowings under the Motors & Gears Industries, Inc. Credit Agreement.
The Company has a contingent purchase price agreement of $5.6 million
relating to the acquisition of ADC whereas the contingent purchase price is
dependent upon the acquired entity's results of operations exceeding certain
targeted levels substantially above the historical experience of ADC at the
time of acquisitions. The purchase price has not been allocated at this
time.
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PAGE 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Summary financial information included in the financial statements of the
Company is as follows:
Three Months Ended
March 31,
1998 1997
Net sales $58,567 $31,519
Gross profit (excluding depreciation) 20,355 11,139
EBITDA (2) 12,015 8,572
Operating income 8,991 6,615
Interest expense $ 7,820 $ 4,894
Gross margin (excluding depreciation) (3) 34.8% 35.3%
EBITDA margin (3) 20.5 27.2
Operating margin (3) 15.4 21.0
(1) With the acquisition of ED&C and Motion Control during 1997, the results
of operations for the three months ended March 31, 1998 include
operations for both the motors and controls segments. The controls
segment is responsible for $15,072 of net sales, $5,666 of gross profit
(excluding depreciation), $2,282 of EBITDA (earnings before interest,
income taxes, depreciation and amortization) and $1,678 of operating
income for the three months ended March 31, 1998.
(2) EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring the ability of the
Company to service its debt.
(3) All margins are calculated as a percentage of net sales.
Consolidated Results of Operations
Net sales for the first quarter increased 86% to $58.6 million, up $27.0
million from the first quarter of 1997. The strong sales growth was primarily
driven by the three acquisitions in 1997. The Company acquired FIR in June of
1997, ED&C in October of 1997, and Motion Control in December of 1997. The
1997 acquisitions accounted for $24.5 million of the sales growth in the first
quarter while the remaining $2.5 million was the result of organic sales
growth. Net sales of sub-fractional motors for the first quarter increased
6%, primarily attributed to continued strength in the vending and appliance
markets. Net sales of fractional/integral motors, excluding the FIR
acquisition in June of 1997, increased 17%, driven by stronger sales in the
floor care and elevator markets.
Operating income for the first quarter increased 36% to $9.0 million, up $2.4
million from the first quarter of 1997. The increase in operating income was
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PAGE 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
primarily the result of the increased sales described above. Gross margins
decreased slightly from 35.3% to 34.8%, primarily driven by the effects of the
1997 acquisitions. Increased operating income resulting from the increased
sales described above was partially offset by increased corporate expenses.
Operating margins decreased from 21.0% to 15.4%, primarily the result of the
1997 acquisitions, which operate at slightly lower operating margins than the
rest of the Company, and the increase in corporate expenses.
Interest expense increased $2.9 million from $4.9 million in the first quarter
of 1997 to $7.8 million in the first quarter of 1998, reflecting higher debt
levels relating to the financing of new acquisitions and the Company's
December 1997 $100.0 million debt offering.
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital expendit
ures, interest, taxes, debt repayment and its acquisition strategy. Of
primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating
activities and the funds available under its revolving line-of-credit
agreement.
Operating activities. Net cash provided by operating activities for the first
quarter ended March 31, 1998 was $6.5 million, compared to $6.1 million
provided from operating activities during the same period in 1997. Increases
in accounts receivable and inventory due to revenue growth were more than
offset by increases in accounts payable and accrued expenses.
Investing activities. Capital expenditures of $0.9 million for the first
quarter ended March 31, 1998 were $0.8 million greater than the comparable
period in 1997. The Company expects its capital investment in 1998 to be
greater than the 1997 spending level as a result of late 1997 acquisitions of
the Controls' companies.
The Company plans to fund future acquisitions through its revolving
line-of-credit agreement and excess operating cash flow.
Financing activities. The Company's annual cash interest expense on the
Senior Notes, which are due 2006, will be approximately $29.0 million.
Interest on the Senior Notes is payable semi-annually on May 15 and November
15 of each year. Interest paid on the Junior Seller Notes was $0.5 million in
the first quarter of 1998.
The Company is party to a Credit Agreement under which the Company is able to
borrow up to approximately $75.0 million to fund acquisitions and provide
working capital and for other general corporate purposes. The Credit
Agreement provides for a revolving line of credit of $75.0 million over a term
of five years. Obligations under the Credit Agreement are guaranteed by M&G
Industries' subsidiaries, and secured by pledges of the stock of M&G
Industries' subsidiaries and liens in respect of certain assets of M&G
Industries and its subsidiaries.
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PAGE 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As of May 15, 1998, the Company has approximately $35.0 million of available
funds under this Agreement. In addition, under the terms of the Series D
Notes, the Company is able to increase the credit facility to approximately
$115.0 million.
The Company expects its principal sources of liquidity to be from its
operating activities and funding from the revolving line-of-credit agreement.
The Company further expects that these sources will enable it to meet its
long-term cash requirements for working capital, capital expenditures,
interest, taxes, and debt repayment for at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
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PAGE 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1) 27. EDGAR Financial Data Schedule
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PAGE 15
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.
MOTORS AND GEARS, INC.
By: /s/ Norman R. Bates
Norman R. Bates
Chief Financial Officer
May 15, 1998
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<FISCAL-YEAR-END> DEC-21-1997
<PERIOD-END> MAR-31-1998
<CASH> 33,565
<SECURITIES> 0
<RECEIVABLES> 42,973
<ALLOWANCES> (415)
<INVENTORY> 32,962
<CURRENT-ASSETS> 110,453
<PP&E> 32,439
<DEPRECIATION> (17,822)
<TOTAL-ASSETS> 338,450
<CURRENT-LIABILITIES> 42,850
<BONDS> 274,375
0
0
<COMMON> 1
<OTHER-SE> 5,348
<TOTAL-LIABILITY-AND-EQUITY> 338,450
<SALES> 58,567
<TOTAL-REVENUES> 58,567
<CGS> 38,212
<TOTAL-COSTS> 38,212
<OTHER-EXPENSES> 11,364
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,820
<INCOME-PRETAX> 1,534
<INCOME-TAX> 651
<INCOME-CONTINUING> 883
<DISCONTINUED> 0
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<CHANGES> 0
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