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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 January 31, 1998, or
--- Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from______ to______.
Commission file number 333-38223
ARGO-TECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1521125
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
23555 Euclid Avenue
Cleveland, Ohio 44117
(Address of principal executive offices) (Zip code)
(216) 692-6000
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
yes x no
--- ---
All of the outstanding capital stock of the registrant is held
by AT Holdings Corporation.
As of March 10, 1998, 3,000 shares of the registrant's common
stock, $.01 par value, were outstanding.
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INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of January 31, 1998 and October 25, 1997 3
Consolidated Statements of Net Income for the 14 weeks ended January 31, 1998
and February 1, 1997 4
Consolidated Statements of Cash Flows for the 14 weeks ended January 31, 1998
and February 1, 1997 5
Notes to Consolidated Financial Statements 6 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 8 - 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 10
Signature 11
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PART I - FINANCIAL INFORMATION
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND OCTOBER 25, 1997
(In thousands, except share data)
1998 1997
--------- ---------
ASSETS (Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 17,350 $ 9,361
Receivables, net 23,697 24,383
Inventories 35,400 38,354
Deferred income taxes and prepaid expenses 1,788 1,636
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Total current assets 78,235 73,734
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PROPERTY AND EQUIPMENT, net of
accumulated depreciation 35,784 37,181
GOODWILL, net of accumulated amortization 120,318 121,191
INTANGIBLE ASSETS 59,242 60,245
OTHER ASSETS 8,471 8,609
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Total Assets $ 302,050 $ 300,960
========= =========
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,536 $ 6,904
Accounts payable 4,522 6,369
Accrued liabilities 22,928 17,814
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Total current liabilities 32,986 31,087
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LONG-TERM DEBT, net of current maturities 240,578 241,958
OTHER NONCURRENT LIABILITIES 29,978 32,137
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Total Liabilities 303,542 305,182
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REDEEMABLE COMMON STOCK 4,813 3,932
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Common Stock, $.01 par value, authorized 3,000 shares;
3,000 shares issued and outstanding
Paid-in capital 11,457 11,452
Accumulated deficit (7,262) (8,686)
Unearned ESOP Shares (10,500) (10,920)
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Total shareholders' equity/(deficiency) (6,305) (8,154)
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Total Liabilities and Shareholders' Equity/(Deficiency) $ 302,050 $ 300,960
========= =========
The accompanying notes are an integral part of these statements.
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE 14 WEEKS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
(In thousands)
UNAUDITED
1998 1997
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Net Revenues $ 44,462 $ 25,191
Cost of Revenues 27,482 15,152
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Gross profit 16,980 10,039
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Selling, general and administrative 5,347 2,412
Research and development 1,740 2,081
Amortization of intangible assets 1,932 649
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Operating expenses 9,019 5,142
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Income from operations 7,961 4,897
Interest expense 6,084 2,616
Other, net (202) (124)
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Income before income taxes 2,079 2,405
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Income tax provision 643 1,062
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Net income $ 1,436 $ 1,343
======== ========
The accompanying notes are an integral part of these statements.
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 14 WEEKS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
(In thousands)
UNAUDITED
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,436 $ 1,343
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,710 1,108
Amortization of goodwill and deferred financing costs 2,198 952
Compensation expense recognized in connection with
employee stock ownership plan 1,306 1,074
Deferred income taxes (257) (291)
Changes in operating assets and liabilities:
Receivables 686 (1,393)
Inventories 2,954 (1,429)
Prepaid expenses 107 (516)
Accounts payable (1,847) (2,142)
Accrued and other liabilities 2,974 (392)
Other, net (31) 36
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Net cash provided by (used in) operating activities 11,236 (1,650)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (313) (407)
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Net cash used in investing activities (313) (407)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (2,748) (2,350)
Payment of financing related fees (186)
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Net cash used in financing activities (2,934) (2,350)
CASH AND CASH EQUIVALENTS:
Net increase/(decrease) for the period 7,989 (4,407)
Balance, Beginning of period 9,361 13,556
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Balance, End of period $ 17,350 $ 9,149
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The accompanying notes are an integral part of these statements.
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of AT Holdings Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 14 WEEKS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
- ------------------------------------------------------------
1. BASIS OF PRESENTATION
The principal operations of Argo-Tech Corporation (A Wholly-Owned Subsidiary
of AT Holdings Corporation) and its Subsidiaries (the "Company" ) include
the design, manufacture and distribution of aviation products, primarily
aircraft fuel pumps, throughout the world. In addition, the Company leases a
portion of its manufacturing facility to other parties. The Company's fiscal
year ends on the last Saturday in October. The Company is obligated to
fulfill certain obligations of AT Holdings Corporation. As a result, those
obligations have been reflected in the Company's financial statements.
Effective August 3, 1997, the Company established itself as a parent,
holding company with 3 wholly-owned operating guarantor subsidiaries,
Argo-Tech Corporation (HBP), Argo-Tech Corporation (OEM) and Argo-Tech
Corporation (Aftermarket). On September 26, 1997, the Company acquired a
fourth wholly-owned operating guarantor subsidiary, J.C. Carter Company,
Inc. ("Carter"). The Company has no outside assets, liabilities or
operations apart from its wholly-owned subsidiaries. The Senior Subordinated
Notes are fully, unconditionally, jointly and severally guaranteed by the
guarantor subsidiaries, and therefore, separate financial statements of the
guarantor subsidiaries will not be presented. Management has determined that
the information presented by such separate financial statements of the
guarantor subsidiaries is not material to investors. All of the Company's
subsidiaries are guarantors except two wholly-owned subsidiaries that have
inconsequential assets, liabilities and equity. Their only operations are
the result of intercompany activity which is immediately dividended back to
the Company.
2. UNAUDITED FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position and results of operations
and cash flows for the interim periods presented. The results of operations
for the 14 weeks ended January 31, 1998 are not necessarily indicative of
the results to be expected for the full year.
3. INVENTORIES
Inventories are stated at standard cost which approximates the costs which
would be determined using the first-in, first-out (FIFO) method. The
recorded value of inventories is not in excess of market value.
Inventories consist of the following (in thousands):
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January 31, October 25,
1998 1997
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Finished Goods $ 1,910 $ 1,874
Work-in-process and purchased parts 20,944 19,918
Raw materials and supplies 16,530 20,160
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Total 39,384 41,952
Reserve for excess and obsolete inventory (3,984) (3,598)
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Inventories - net $ 35,400 $ 38,354
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The Carter inventory amounts included $6.3 million and $10.8 million at
January 31, 1998 and October 25, 1997, respectively, which represents the
unamortized portion of inventories at their fair value as of the date of
acquisition in accordance with Accounting Principles Board Opinion No. 16
-"Business Combinations." Based on Carter's inventory turnover rate, $4.5
million has been included in cost of revenues for the 14 week period
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ended January 31, 1998.
4. CONTINGENCIES
Environmental Matters - The soil and groundwater at the Company's Euclid,
Ohio facility and the Costa Mesa, California facility contain elevated
levels of certain contaminants which are currently in the process of being
removed and/or remediated. Because the Company has certain indemnification
rights from former owners of the facilities for liabilities arising from
these or other environmental matters, in the opinion of the Company's
management, the ultimate outcome is not expected to materially affect the
Company's financial condition, results of operations or liquidity.
Other Matters - The Company is subject to various legal actions and other
contingencies. In the opinion of the Company's management, after reviewing
the information which is currently available with respect to such matters
and consulting with the Company's legal counsel, any liability which may
ultimately be incurred with respect to these additional matters is not
expected to materially affect the Company's financial condition, results of
operations or liquidity.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Argo-Tech Corporation ("Argo-Tech" or the "Company") is a leading
designer, manufacturer and servicer of high performance fuel flow devices for
the aerospace industry. The Company provides a broad range of products and
services to substantially all commercial and domestic military engine and
airframe manufacturers, to airlines worldwide and to the U.S. and certain
foreign militaries. The Company is the world's leading supplier of main engine
fuel pumps to the commercial aircraft industry and is a leading supplier of
airframe products and aerial refueling systems. The Company is also a leading
manufacturer of components for ground fueling systems. On September 26, 1997 the
Company acquired all the outstanding shares of J. C. Carter ("Carter"), a
manufacturer of aircraft fluid control component parts, industrial marine
cryogenic pumps and ground fueling components.
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying condensed
consolidated financial statements. Argo-Tech's fiscal year ends on the last
Saturday of October and is identified according to the calendar year in which it
ends. Both of the fiscal quarters discussed consisted of 14 weeks.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND FEBRUARY
1, 1997
Net revenues for the first quarter of 1998 increased $19.3 million, or
76.6%, to $44.5 million from $25.2 million in the first quarter of 1997. This
increase was primarily due to $12.1 million in revenues generated by Carter,
which was not part of the Company in the first quarter of 1997, and an increase
in sales volume in the Company's other aerospace products and services.
Gross profit for the first quarter of 1998 increased $7.0 million, or
70.0%, to $17.0 million from $10.0 million in the first quarter of 1997 due to
the inclusion of Carter and increased sales of Argo-Tech's aerospace products,
offset by $4.5 million of amortization related to the step-up of Carter
inventory to fair market value. Gross margin for the first quarter of 1998
decreased to 38.2% from 39.8% for the first quarter of 1997 due to amortization
related to the step-up of Carter inventory, partially offset by favorable Carter
sales mix and improved operating efficiency in the Cleveland manufacturing
operations.
Operating expenses for the first quarter of 1998 increased $3.9
million, or 76.5%, to $9.0 million from $5.1 million in the first quarter of
1997. This increase is primarily attributable to additional operating expenses
and amortization of intangible assets related to Carter, offset by a decrease in
customer directed research and development expense.
Income from operations for the first quarter of 1998 increased $3.1
million, or 63.3%, to $8.0 million from $4.9 million in the first quarter of
1997. The change was primarily a result of higher sales volume of aerospace
products and services.
Interest expense for the first quarter of 1998 increased $3.5 million,
or 134.6%, to $6.1 million from $2.6 million in the first quarter of 1997 due to
an increase in debt in connection with the acquisition of Carter, the repurchase
of all of the outstanding preferred stock of the Company in March 1997 and an
increase in the average interest rate.
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The income tax provision for the first quarter of 1998 of $0.6 million
represents an effective tax rate of 30.9% compared to 44.1% for the first
quarter of 1997, primarily due to a reduction in taxable income subject to state
and local taxes and an increase in the Company's foreign sales corporation
earnings, which are subject to lower tax rates.
Net income for the first quarter of 1998 increased $0.1 million, or
7.7%, to $1.4 million from $1.3 million in the first quarter of 1997, primarily
due to the revenue and expense factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that receives all of its operating
income from its subsidiaries. As a result, Argo-Tech's primary source of
liquidity for conducting business activities and servicing its indebtedness has
been cash flows from operating activities.
Cash for the period ended January 31, 1998 increased $8.0 million,
primarily due to improved operating results and favorable changes in
receivables, inventory, and accrued liabilities offset by a decrease in accounts
payable and the repayment of long-term debt.
Capital expenditures for the first quarter of 1998 totaled $0.3 million
compared to $0.4 million for the first quarter of 1997. The Company expects to
incur capital expenditures of approximately $4.7 million for the remainder of
fiscal year 1998, related to the continued maintenance of facilities and
equipment to support current operating activities.
Long-term debt at the end of the first quarter of 1998 consisted of
$105.9 million principal amount of term loans and $140.0 million principal
amount of Senior Subordinated Debt. Payments of $2.7 million were made on term
loans in the first quarter of 1998, which included a prepayment of $1.4 million
as a result of the Company's excess cash flow, as defined in the amended credit
facility, at October 25, 1997. The Company has available, after $0.4 million of
letters of credit, a $19.6 million revolving credit facility. As of January 31,
1998, there were no borrowings on the revolving credit facility. The amended
credit facility contains no restrictions on the ability of the Company's
subsidiaries to make distributions to the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements by
its employees or information included in its filings with the Securities and
Exchange Commission (including those portions of the Management's Discussion and
Analysis that refer to the future) may contain forward-looking statements that
are not historical facts. Those statements are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, and the Company's future performance, operating
results, financial position and liquidity, are subject to a variety of factors
that could materially affect results. Some, but not necessarily all, of these
factors include: the Company's dependence on the aerospace industry; government
regulation and oversight; defense spending; competition; product and
environmental liabilities; and risks associated with the Company's workforce,
suppliers, and future acquisitions.
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PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports - No reports on Form 8-K have been filed during the
quarter ended January 31, 1998.
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SIGNATURE
---------
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.
Date: March 13, 1998 ARGO-TECH CORPORATION
By: /s/ Yoichi Fujiki
-------------------
Yoichi Fujiki
Vice President and Treasurer
(Duly Authorized Officer)
By: /s/ Paul A. Sklad
-------------------
Paul A. Sklad
Manager, Financial Accounting
(Principal Accounting Officer)
