<PAGE> 1
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 May 2, 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
(State or other jurisdiction of incorporation or organization)
31-1521125
(I.R.S. employer identification no.)
23555 EUCLID AVENUE
CLEVELAND, OHIO
(Address of principal executive offices)
44117
(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. X YES ____ NO
All of the outstanding capital stock of the registrant is held by AT
Holdings Corporation.
As of May 26, 1998, 3,000 shares of the registrant's common stock, $.01 par
value, were outstanding.
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INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets as of May 2, 1998 and October
25, 1997............................................... 3
Consolidated Statements of Operations for the 27 weeks and
13 weeks ended May 2, 1998 and May 3, 1997............. 4
Consolidated Statements of Cash Flows for the 27 weeks
ended May 2, 1998 and May 3, 1997...................... 5
Notes to Consolidated Financial Statements................ 6-7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8-10
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K.................. 11
Signature................................................... 12
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 2, OCTOBER 25,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,921 $ 9,361
Receivables, net.......................................... 22,906 24,383
Inventories............................................... 32,790 38,354
Deferred income taxes and prepaid expenses................ 4,795 1,636
-------- -----------
Total current assets.............................. 62,412 73,734
-------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation..... 34,843 37,181
GOODWILL, net of accumulated amortization................... 119,477 121,191
INTANGIBLE ASSETS........................................... 58,235 60,245
OTHER ASSETS................................................ 8,368 8,609
-------- -----------
Total Assets...................................... $283,335 $ 300,960
======== ===========
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 4,758 $ 6,904
Accounts payable.......................................... 5,947 6,369
Accrued liabilities....................................... 17,906 17,814
-------- -----------
Total current liabilities......................... 28,611 31,087
-------- -----------
LONG-TERM DEBT, net of current maturities................... 224,973 241,958
OTHER NONCURRENT LIABILITIES................................ 31,526 32,137
-------- -----------
Total Liabilities................................. 285,110 305,182
-------- -----------
REDEEMABLE COMMON STOCK..................................... 4,813 4,813
REDEEMABLE ESOP STOCK....................................... 29,738 29,826
Unearned ESOP stock....................................... (10,080) (10,920)
-------- -----------
19,658 18,906
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Common Stock, $.01 par value, authorized 3,000 shares;
3,000 shares issued and outstanding
Paid-in capital........................................ -- --
Accumulated deficit.................................... (26,246) (27,941)
-------- -----------
Total shareholders' equity/(deficiency)........... (26,246) (27,941)
-------- -----------
Total Liabilities and Shareholders' Equity/(Deficiency)..... $283,335 $ 300,960
======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
27 WEEKS ENDED 13 WEEKS ENDED
MAY 2, 1998 MAY 3, 1997 MAY 2, 1998 MAY 3, 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Revenues............................... $85,835 $53,159 $41,373 $27,968
Cost of Revenues........................... 55,500 31,891 28,018 16,739
------- ------- ------- -------
Gross profit............................. 30,335 21,268 13,355 11,229
------- ------- ------- -------
Selling, general and administrative........ 11,430 4,895 6,083 2,483
Research and development................... 3,091 3,569 1,351 1,488
Amortization of intangible assets.......... 3,755 1,255 1,823 606
------- ------- ------- -------
Operating expenses....................... 18,276 9,719 9,257 4,577
------- ------- ------- -------
Income from operations..................... 12,059 11,549 4,098 6,652
Interest expense........................... 11,337 5,640 5,253 3,024
Other, net................................. (216) (237) (14) (113)
------- ------- ------- -------
Income (loss) before income taxes.......... 938 6,146 (1,141) 3,741
------- ------- ------- -------
Income tax provision (benefit)............. 477 2,643 (166) 1,581
------- ------- ------- -------
Net income (loss).......................... $ 461 $ 3,503 $ (975) $ 2,160
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 2, MAY 3,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 461 $ 3,503
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.............................................. 3,399 2,258
Amortization of goodwill and deferred financing cost...... 4,267 1,839
Compensation expense recognized in connection with
employee stock ownership plan.......................... 2,057 1,689
Amortization of inventory step-up......................... 8,976 --
Deferred income taxes..................................... (4,482) (440)
Changes in operating assets and liabilities:
Receivables............................................ 1,477 (1,316)
Inventories............................................ (3,412) (1,938)
Prepaid expenses....................................... 59 (258)
Account payable........................................ (423) (1,544)
Accrued and other liabilities.......................... 609 278
Other, net............................................. 136 (186)
-------- --------
Net cash provided by operating activities................. 13,124 3,885
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,061) (798)
-------- --------
Net cash used in investing activities..................... (1,061) (798)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowing of long-term debt.................... -- 41,100
Repayment of long-term debt............................... (19,131) (3,200)
Redemption of redeemable preferred stock.................. -- (25,908)
Payment of redeemable preferred dividends................. -- (19,298)
Payment of financing related fees......................... (372) --
-------- --------
Net cash used in financing activities..................... (19,503) (7,306)
CASH AND CASH EQUIVALENTS:
Net decrease for the period................................. (7,440) (4,219)
Balance, Beginning of period................................ 9,361 13,556
-------- --------
Balance, End of period...................................... $ 1,921 $ 9,337
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 27 WEEKS ENDED MAY 2, 1998 AND MAY 3, 1997
(UNAUDITED)
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
27 weeks ended May 2, 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):
<TABLE>
<CAPTION>
MAY 2, OCTOBER 25,
1998 1997
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<S> <C> <C>
Finished Goods.............................................. $ 2,037 $ 1,874
Work-in-process and purchased parts......................... 22,905 19,918
Raw materials and supplies.................................. 12,196 20,160
------- -------
Total............................................. 37,138 41,952
Reserve for excess and obsolete inventory................... (4,348) (3,598)
------- -------
Inventories -- net.......................................... $32,790 $38,354
======= =======
</TABLE>
The Carter inventory amounts included $1.7 million and $10.8 million at May
2, 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."
6
<PAGE> 7
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 27 WEEKS ENDED MAY 2, 1998 AND MAY 3, 1997 -- (CONTINUED)
(UNAUDITED)
Based on Carter's inventory turnover rate, $9.0 million has been included in
cost of revenues for the 27 week period ended May 2, 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.
5. PROPOSED PUBLIC OFFERING AND BENEFITS RESTRUCTURING
The Company's parent anticipates making an initial public offering of the
parent's common stock in an underwritten public offering expected to occur later
this year. A wholly owned subsidiary of the Company's parent, Argo-Tech Group,
Inc., has filed a registration statement with respect to such offering with the
Securities and Exchange Commission. In connection with such offering, the
Company's parent would merge with and into Argo-Tech Group, Inc., with Argo-Tech
Group, Inc. becoming the Company's parent. Such offer shall only be made
pursuant to a prospectus, and this periodic report shall not be deemed to be an
offer or solicitation of an offer to buy any of the parent's securities.
In connection with the parent's initial public offering, the Company's
existing stock based compensation plans will be modified or terminated.
It is anticipated that the Company will elect to (i) terminate its Employee
Stock Ownership Plan ("ESOP"), (ii) grant all remaining stock appreciation
rights ("SARs") outstanding under its SAR Plan, (iii) immediately vest all
granted stock options and SARs and (iv) terminate the SAR Plan and supplemental
employee retirement plan ("SERP"). The Company will also recognize compensation
expense for the SERP in connection with the termination of the ESOP. The Company
expects that these actions will result in a non-recurring charge of $25.2
million ($25.2 million after-tax). The ESOP termination will result in the
repayment of the $10.9 million ESOP Loan to the Company through and return of
779,998 shares of the parent's common stock. The Company will also allow
management to purchase an aggregate of 295,050 shares of the parent's common
stock at the initial public offering price in settlement of SAR Plan and SERP
liability. Finally, in connection with the termination of the ESOP and the SAR
Plan, the Company anticipates that it will grant options to acquire an aggregate
of 878,412 shares of parent common stock to the 308 participating employees.
The Company anticipates that the net proceeds from its parent's initial
public offering would be used to repay bank debt under the Company's credit
facility. The Company expects to subsequently reborrow some or all of the
available amounts under its credit facility.
The foregoing statements are forward-looking statements and there can be no
assurance that the Company's parent's initial public offering will be
consummated or that any proceeds will be used to repay any portion of the
Company's indebtedness.
7
<PAGE> 8
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.
RESULTS OF OPERATIONS FOR THE 13 WEEK PERIOD ENDED MAY 2, 1998 COMPARED WITH THE
13 WEEK PERIOD ENDED MAY 3, 1997
Net revenues for the 13 week period ended May 2, 1998 increased $13.4
million, or 47.9%, to $41.4 million from $28.0 million for the 13 week period
ended May 3, 1997. This increase was primarily due to the acquisition of Carter
in September 1997 and increased customer demand in the ATC OEM and commercial
aftermarket product lines. Revenues attributed to Carter in the 13 week period
ended May 2, 1998, were $12.6 million, or 94.0% of the net revenue increase. ATC
commercial OEM revenues increased $.6 million, or 7.6%, to $8.5 million and
commercial aftermarket revenues increased $.3 million, or 1.9% to $16.5 million
in the 13 week period ended May 2, 1998 due to continued strength in airline
traffic and airline capital spending. ATC military revenues of $2.5 million and
industrial and other revenues of $1.4 million in the 13 week period ended May 2,
1998 were unchanged from the prior comparable period.
Gross profit for the 13 week period ended May 2, 1998 increased $2.2
million, or 19.6%, to $13.4 million from $11.2 million in the 13 week period
ended May 3, 1997 due to the inclusion of Carter, increased ATC aerospace
revenues and improved operating efficiency in the Cleveland facility, offset by
$4.5 million of amortization related to the step-up of Carter inventory to fair
market value. Gross margin for the 13 week period ended May 2, 1998 decreased to
32.3% from 40.0% for the 27 week period ended May 3, 1997 due to amortization
related to the step-up of Carter inventory to fair value, partially offset by
favorable Carter sales mix and improved operating efficiency in the Cleveland
facility manufacturing operations. Excluding the $4.5 million charge for
amortization related to the step-up of inventory to fair value in connection
with the Acquisition, gross margin increased to 43.2% for the 13 week period
ended May 2, 1998.
Operating expenses for the 13 week period ended May 2, 1998 increased $4.7
million, or 102.2%, to $9.3 million from $4.6 million in the 13 week period
ended May 3, 1997. This increase is primarily attributable to the inclusion of
Carter operating expenses and amortization of intangible assets which totaled
$4.7 million and an increase of $0.5 million in ATC expenses related to
acquisition expenses and the implementation of a stock appreciation rights plan
offset by a decrease of $0.5 million in ATC customer directed research and
development expense. Operating expenses as a percent of revenues increased to
22.4% for the 13 week period ended May 2, 1998 from 16.4% for the comparable
period in 1997. Excluding the $1.2 million of Carter amortization of intangible
assets, operating expenses as a percent of revenues would have been 19.6% for
the 13 week period ended May 2, 1998.
Income from operations for the 13 week period ended May 2, 1998 decreased
$2.5 million, or 37.9%, to $4.1 million from $6.6 million in the 13 week period
ended May 3, 1997. This decrease was primarily due to the amortization related
to the step-up of Carter inventory to fair market value and amortization of
Carter intangible
8
<PAGE> 9
assets, offset by the inclusion of Carter operating results, increased ATC
aerospace sales and improved operating efficiency in the Cleveland facility. As
a percent of revenues, income from operations for the 13 week period ended May
2, 1998 decreased to 9.9% from 23.6% for the 13 week period ended May 3, 1997.
Excluding the $4.5 million charge for amortization related to the step-up of
inventory to fair value in connection with the Acquisition, income from
operations as a percent of revenues decreased to 20.8%.
Interest expense for the 13 week period ended May 2, 1998 increased $2.2
million, or 73.3%, to $5.2 million from $3.0 million for the 13 week period
ended May 3, 1997 primarily due to the issuance of the Senior Subordinated Notes
in connection with the acquisition of Carter in September 1997, the repurchase
of all of the outstanding preferred stock of the Company in March, 1997, and an
increase in the average interest rate.
The income tax provision for the 13 week period ended May 2, 1998 decreased
$1.7 million, or 106.3%, to a tax benefit of $0.2 million from a tax expense of
$1.5 million in the 13 week period ended May 3, 1997 due to a pre-tax loss of
$1.1 million for the 13 week period ended May 2, 1998 as compared to income of
$3.7 million for the 13 week period ended May 3, 1997.
Net income for the 13 week period ended May 2, 1998 decreased $3.2 million,
or 145.5%, to a $1.0 million net loss from $2.2 million net income for the 13
week period ended May 3, 1997 primarily due to the revenue and expense factors
discussed above. Excluding the $4.5 million charge for amortization related to
the step-up of inventory to fair value in connection with the Acquisition, net
income would have been $1.7 million.
RESULTS OF OPERATIONS FOR THE 27 WEEK PERIOD ENDED MAY 2, 1998 COMPARED WITH THE
27 WEEK PERIOD ENDED MAY 3, 1997
Net revenues for the 27 week period ended May 2, 1998 increased $32.6
million, or 61.3%, to $85.8 million from $53.2 million for the 27 week period
ended May 3, 1997. This increase was primarily due to the acquisition of Carter
in September 1997 and increased customer demand in the ATC commercial
aftermarket and OEM product lines. Revenues attributable to Carter in the 27
week period ended May 2, 1998, were $24.6 million, accounting for 75.5% of the
net revenue increase. ATC commercial aftermarket revenues increased $5.2
million, or 16.3%, to $37.1 million and commercial OEM revenues, exclusive of
Carter, increased $1.6 million, or 11.0% to $16.1 million in the 27 week period
ended May 2, 1998 due to continued strength in airline traffic and airline
capital spending. ATC military revenues increased $1.4 million, or 35.0%, to
$5.4 million, while other revenues declined $0.2 million, or 7.7% to $2.6
million, in the 27 week period ended May 2, 1998. The increase in military
revenues was primarily due to increased F-15 foreign military shipments. The
decline in other revenues was due to a planned reduction of services offered to
Business Park tenants.
Gross profit for the 27 week period ended May 2, 1998 increased $9.0
million, or 42.3%, to $30.3 million from $21.3 million in the 27 week period
ended May 3, 1997 due to the inclusion of Carter, increased ATC aerospace
revenues and improved operating efficiency in the Cleveland facility, offset by
$9.0 million of amortization related to the step-up of Carter inventory to fair
market value. Gross margin for the 27 week period ended May 2, 1998 decreased to
35.3% from 40.0% for the 27 week period ended May 3, 1997 due to amortization
related to the step-up of Carter inventory to fair value, partially offset by
favorable Carter sales mix and improved operating efficiency in the Cleveland
Facility's manufacturing operations. Excluding the $9.0 million charge for
amortization related to the step-up of inventory to fair value in connection
with the Acquisition, gross margin increased to 45.8% for the 27 week period
ended May 2, 1998.
Operating expenses for the 27 week period ended May 2, 1998 increased $8.6
million, or 88.7%, to $18.3 million from $9.7 million in the 27 week period
ended May 3, 1997. This increase was primarily attributable to the inclusion of
Carter operating expenses and amortization of intangible assets, offset by a
decrease in ATC customer directed research and development expense. Operating
expenses as a percent of revenues increased to 21.3% for the 27 week period
ended May 2, 1998 from 18.3% for the comparable period in 1997. Excluding the
$2.5 million of Carter amortization of intangible assets, operating expenses as
a percent of revenues would have been 18.4% for the 27 week period ended May 2,
1998.
Income from operations for the 27 week period ended May 2, 1998 increased
$0.5 million, or 4.3%, to $12.1 million from $11.6 million in the 27 week period
ended May 3, 1997. This increase was primarily due to
9
<PAGE> 10
the inclusion of Carter, increased ATC aerospace sales and improved operating
efficiency in the Cleveland Facility, offset by the amortization related to the
step-up of Carter inventory to fair market value and amortization of Carter
intangible assets. As a percent of revenues, income from operations for the 27
week period ended May 2, 1998 decreased to 14.0% from 21.7% for the 27 week
period ended May 3, 1997. Excluding the $9.0 million charge for amortization
related to the step-up of inventory to fair value in connection with the
Acquisition, income from operations as a percent of revenues increased to 24.6%.
Interest expense for the 27 week period ended May 2, 1998 increased $5.7
million, or 101.8%, to $11.3 million from $5.6 million for the 27 week period
ended May 3, 1997 primarily due to the issuance of the Senior Subordinated Notes
in connection with the acquisition of Carter in September 1997, the repurchase
of all of the outstanding preferred stock of the Company in March, 1997, and an
increase in the average interest rate.
The income tax provision for the 27 week period ended May 2, 1998 decreased
$2.1 million, or 80.8%, to $0.5 million from $2.6 million in the 27 week period
ended May 3, 1997 attributable to a decrease of $5.2 million in pre-tax income,
to $0.9 million for the 27 week period ended May 2, 1998 from $6.1 million for
the 27 week period ended May 3, 1997.
Net income for the 27 week period ended May 2, 1998 decreased $3.0 million,
or 85.7%, to $0.5 million from $3.5 million for the 27 week period ended May 3,
1997 primarily due to the factors discussed above. Excluding the $9.0 million
charge for amortization related to the step-up of inventory to fair value in
connection with the Acquisition, net income increased 66.9% to $5.8 million.
Fluctuations of Operating Results; Limitations of Quarterly Comparisons.
The Company's results of operations are subject to fluctuations from quarter to
quarter due to changes in demand for its products, changes in product mix and
other factors. Demand for the Company's products can vary from quarter to
quarter due to changes in demand for, and timing of deliveries of, OEM,
aftermarket and military products and services. In particular, the timing of the
Company's aftermarket sales tend not to occur on a predictable schedule and,
furthermore, the sales tend to occur in large quantities which can significantly
impact quarterly comparisons. In addition, net revenues of the Company's
products in the third and fourth quarters can be lower than the first two
quarters because of planned production shut downs at the Company's Cleveland
Facility and holiday-related manufacturing facility shut downs by certain
customers. These changes in product mix may cause margins to vary from quarter
to quarter.
For example, in the first fiscal quarter of 1998, the Company's sales were
comparatively high due to large volumes shipped to a distributor. In addition,
the sales for this period consisted of a comparatively high percentage of
aftermarket sales. This combination of high-volume, high margin sales led to
comparatively favorable results in the first quarter, despite the amortization
charges relating to the Acquisition. However, in the second fiscal quarter of
1998, the Company's sales mix had a greater percentage of lower margin OEM sales
and, as a result, operational expenses rose despite a drop in net revenues and
the Company experienced a net loss of $975,000 for this quarterly period. A
similar fluctuation occurred in the third fiscal quarter of 1997 when, due to
comparatively high sales and a larger percentage of aftermarket sales, the
Company's net income was unusually high.
In addition, on September 26, 1997, ATC acquired all of the outstanding
shares of Carter for $107.6 million, including acquisition costs. Carter's
inventory was increased by $12.2 million to record 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, $1.5 million, $4.5 million and $4.5 million of this amount is
included in cost of revenues for the fourth quarter of 1997 and the first and
second quarters of 1998, respectively. In addition, $99.7 million of identified
intangibles and goodwill are being amortized over an 8 to 40 year period. These
amortizations increased operating expenses $0.4 million, $1.2 million and $1.3
million for the fourth quarter of 1997 and the first and second quarters of
1998, respectively.
Accordingly, year-to-year and quarter-to-quarter comparisons of quarterly
results may not be meaningful, and quarterly results during the year are not
necessarily indicative of the results that may be expected for any future period
or for the entire year.
10
<PAGE> 11
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 May 2, 1998 decreased $7.4 million, primarily due
to the repayment of $19.1 million on term loans, an increase in inventory and a
decrease in deferred tax liabilities offset by improved operating results and a
favorable change in receivables.
Capital expenditures for the 27 weeks ended May 2, 1998 totaled $1.1
million compared to $0.8 million for the 27 weeks ended May 3, 1997. The Company
expects to incur capital expenditures of approximately $4.9 million for the
remainder of fiscal year 1998, related to the continued maintenance of
facilities, equipment and systems to support current operating activities.
Long-term debt at May 2, 1998 consisted of $89.5 million principal amount
of term loans and $140.0 million principal amount of Senior Subordinated Debt.
Payments of $19.1 million were made on term loans, which included scheduled
payments of $2.7 million as well as prepayments 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 and $15.0 million as a voluntary prepayment. The Company has
available, after $0.3 million of letters of credit, a $19.7 million revolving
credit facility. As of May 2, 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.
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits -- Schedule 27 -- Financial Data Schedule
(b) Reports -- No reports on Form 8-K have been filed during the quarter
ended May 2, 1998.
11
<PAGE> 12
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: May 28, 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
Controller
(Principal Accounting Officer)
12
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