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 June 30, 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
August 13, 1998: 100,000.
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PAGE 2
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 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Securities
Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-k 13
Signatures 14
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PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
PAGE NO.
Condensed Consolidated Balance Sheets at June 30, 1998,
and December 31, 1997 4
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for six
months ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-9
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MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,640 $ 28,880
Accounts receivable, net 49,089 40,679
Inventories 42,551 31,665
Prepaid expenses and other current assets 1,626 1,300
Total Current Assets 99,906 102,524
Property, plant, and equipment, net 18,659 15,201
Goodwill, net 232,217 195,424
Deferred financing costs, net 14,982 15,877
Deferred income taxes 3,825 3,825
Other assets, net 2,922 2,293
Total Assets $372,511 $335,144
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Notes payable $ 227 $ 2,009
Accounts payable 23,950 17,424
Accrued interest payable 4,207 4,232
Accrued expenses and other 11,585 12,297
Due to affiliated company 681 1,488
Total Current Liabilities 40,650 37,450
Long-Term debt 316,479 283,613
Deferred income taxes 4,467 3,880
Other non-current liabilities 2,691 2,649
Shareholder's Equity:
Common Stock 1 1
Additional paid-in-capital 50,005 50,005
Accumulated other comprehensive income (loss) (2,407) (16)
Accumulated deficit (39,375) (42,438)
Total Shareholder's Equity 8,224 7,552
Total Liabilities and Shareholder's Equity $372,511 $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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net Sales $ 71,700 $ 34,999 $130,267 $ 66,518
Cost of Sales, excluding
depreciation 46,440 22,396 84,652 42,776
Selling, general and
administrative expenses 9,047 2,691 16,769 4,932
Depreciation 1,356 969 2,561 1,940
Amortization of goodwill
and other intangibles 2,004 989 3,823 1,975
Management fees and other 815 353 1,433 679
Operating Income 12,038 7,601 21,029 14,216
Other (income) and expense:
Interest expense 8,241 5,247 16,061 10,141
Interest income (259) (178) (622) (319)
Total other expense 7,982 5,069 15,439 9,822
Income before income taxes 4,056 2,532 5,590 4,394
Provision for income taxes 1,877 1,196 2,528 1,939
Net income $ 2,179 $ 1,336 $ 3,062 $ 2,455
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)
Six Months Ended
June 30 ,
1998 1997
Cash flows from operating activities:
Net income $ 3,062 $ 2,455
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,029 4,437
Provision for deferred income taxes 587 612
Changes in operating assets and liabilities net
of effects from acquisitions:
Increase in current assets (7,498) (3,328)
Increase in current liabilities 2,801 2,914
Increase in non-current assets & liabilities (44) (380)
Decrease in payables to affiliated company (807) (516)
Net cash provided by operating activities 5,130 6,194
Cash flows from investing activities:
Capital expenditures, net (2,140) (249)
Acquisitions of subsidiaries (55,852) (51,767)
Cash acquired in acquisition of subsidiaries 360 -
Net cash used in investing activities (57,632) (52,016)
Cash flows from financing activities:
Proceeds from revolving credit facilities 40,000 50,000
Repayment of long-term debt (2,040) (11)
Repayment of revolving credit facilities (7,000) -
Other - 32
Net cash provided by financing activities 30,960 50,021
Effect of exchange rate changes on cash (698) -
Net increase (decrease) in cash and cash equivalents (22,240) 4,199
Cash and cash equivalents at beginning of period 28,880 10,011
Cash and cash equivalents at end of period $ 6,640 $14,210
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. Operating results
of a subsidiary in Italy 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:
June 30, December 31,
1998 1997
Raw materials $29,213 $21,639
Work in process 8,782 7,375
Finished goods 4,556 2,651
$42,551 $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.
On May 15, 1998, the Company acquired all of the outstanding stock of
Advanced D.C. Motors, Inc. and its affiliated corporations (collectively
"ADC") for $55,500. The purchase price, including costs incurred directly
related to the transaction, was allocated to working capital of $9,247;
property and equipment of $4,088; covenants not to compete of $662; other
long-term assets and liabilities of $53; and resulted in an excess purchase
price over net identifiable assets of $41,450. The Company also has a
contingent purchase price agreement of up to $5,600 relating to the
acquisition of ADC. 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
acquisition. ADC designs and manufactures 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.
Unaudited proforma information with respect to the Company as if the 1997 and
1998 acquisitions had occurred on January 1, 1997 is as follows:
Six Months Ended
June 30,
1998 1997
(Unaudited)
Net sales $148,036 $128,655
Income before income taxes 8,595 5,556
Net income $ 4,714 $ 3,056
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PAGE 9
MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
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. The Company's only comprehensive income relates to foreign currency
translation. 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.
Total comprehensive income was $2,876 and $1,336 for the three months ended
June 30, 1998 and 1997, respectively, and $671 and $2,455 for the six months
ended June 30, 1998 and 1997, respectively.
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 with the exception of the
acquisition of ADC which is included in the motors segment.
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 $2,834 notional amount of foreign currency forward exchange
contracts outstanding at June 30, 1998 ($0 at December 31, 1997).
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PAGE 10
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net sales $71,700 $34,999 $130,267 $66,518
Gross profit
(excluding depreciation) 25,260 12,603 45,615 23,742
EBITDA (2) 15,398 9,559 27,413 18,131
Operating income 12,038 7,601 21,029 14,216
Interest expense $ 8,241 $ 5,247 $ 16,061 $10,141
Gross margin (excluding
depreciation) (3) 35.2% 36.0% 35.0% 35.7%
EBITDA margin (3) 21.5 27.3 21.0 27.3
Operating margin (3) 16.8 21.7 16.1 21.4
(1) With the acquisition of ED&C and Motion Control during 1997, the results
of operations for the three and six months ended June 30, 1998 include
operations for both the motors and controls segments. The controls segment
accounted for $16,455 and $31,527 of net sales, $6,290 and $11,956 of gross
profit (excluding depreciation), $2,661 and $4,943 of EBITDA (earnings before
interest, income taxes, depreciation and amortization) and $2,042 and $3,720
of operating income for the three and six months ended June 30, 1998,
respectively.
(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 second quarter and first half of 1998 increased 105% ($36.7
million) and 95.8% ($63.7 million), respectively, as compared with the same
periods in the prior year. The strong sales growth was primarily driven by
the three acquisitions in the latter part of 1997 and the acquisition in the
second quarter of 1998. The Company acquired FIR in June of 1997, ED&C in
October of 1997, Motion Control in December of 1997 and ADC in May of 1998.
These acquisitions accounted for $33.4 million (91%) and $57.9 million (91%)
of the sales growth in the second quarter and first half, respectively,
while the remaining growth was the result of organic sales growth. Net sales
of sub-fractional motors for the second quarter and first half increased 11%
and 9% over the same periods in the prior year, primarily attributed to
continued strength in the vending machine and appliance markets. Excluding
the 1997 and 1998 acquisitions, net sales of fractional/integral motors
increased 2% and 9% for the three and six months ended June 30, 1998 over the
same period of 1997, driven by stronger sales in the floor care and elevator
markets.
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PAGE 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating income for the second quarter and first half of 1998 increased 58%
($4.4 million) and 48% (6.8 million), respectively. The increase in
operating income was primarily the result of the increased sales described
above. Gross margins decreased slightly over both periods as compared to
1997 attributed mainly to the effects of the 1997 acquisitions. Increased
operating income resulting from the increased sales described above was
partially offset by increased corporate expenses. The decrease in operating
income margins was 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 in the second quarter and first half of 1998 over
the same periods of 1997, reflecting higher debt levels relating to the
financing of new acquisitions, the Company's December 1997 $100.0 million
debt offering and the draw down of $40.0 million on the Company's revolving
credit facility in May of 1998.
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital
expenditures, 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 six
months ended June 30, 1998 was $5.1 million, compared to $6.2 million
provided from operating activities during the same period in 1997. Increases
in accounts receivable and inventory due to revenue growth were greater than
increases in accounts payable and accrued expenses.
Investing activities. Capital expenditures of $2.1 million for the first
half of 1998 were $1.9 million greater than the comparable period in 1997.
In addition, the cost of the ADC acquisition in May of 1998 was approximately
$5.0 million greater than the cost of the FIR acquisition in June of 1997.
The Company expects its capital investment in 1998 to be greater than the
1997 spending level as a result of late 1997 acquisitions and the acquisition
of ADC in the second quarter of 1998.
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 half of 1998.
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PAGE 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
As of August 13, 1998, the Company has approximately $42.0 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 13
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 14
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
August 13, 1998
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<FISCAL-YEAR-END> DEC-21-1997
<PERIOD-END> JUN-30-1998
<CASH> 6,640
<SECURITIES> 0
<RECEIVABLES> 49,781
<ALLOWANCES> (692)
<INVENTORY> 42,551
<CURRENT-ASSETS> 99,906
<PP&E> 38,938
<DEPRECIATION> (20,279)
<TOTAL-ASSETS> 372,511
<CURRENT-LIABILITIES> 40,650
<BONDS> 274,250
0
0
<COMMON> 1
<OTHER-SE> 8,223
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<SALES> 130,267
<TOTAL-REVENUES> 130,267
<CGS> 84,652
<TOTAL-COSTS> 84,652
<OTHER-EXPENSES> 24,586
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