UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
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: 001-13931
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE, SUITE 700
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (713) 860-1000
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 |_|
Number of shares of common stock of the Registrant, par value $.01 per share,
outstanding at April 28, 2000 was 16,741,268.
<PAGE>
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999.................................3
Consolidated Statements of Operations for the Three Months
ended March 31, 2000 and 1999.........................4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2000 and 1999.........................5
Notes to Consolidated Financial Statements.........................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................8
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K...............................11
Signature...............................................................11
2
<PAGE>
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(Unaudited)
(in thousands, except share data)
ASSETS
<S> <C> <C>
Cash and cash equivalents ....................... $ 128 $ 219
Accounts receivable, net ........................ 43,930 40,288
Inventories, net ................................ 125,853 127,397
Deferred income taxes ........................... 9,251 9,251
Other current assets ............................ 794 372
-------------- -----------------
Total current assets ........ 179,956 177,527
-------------- -----------------
Property and equipment, net of accumulated
depreciation .................................. 12,495 11,258
Goodwill, net of accumulated amortization ....... 131,974 132,838
Deferred income taxes ........................... 416 416
Other assets .................................... 5,015 5,080
-------------- -----------------
Total assets ................ $ 329,856 $ 327,119
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................ $ 24,789 $ 24,272
Accrued expenses ................................ 10,342 10,209
Accrued interest ................................ 6,593 3,202
Income taxes payable ............................ 869 334
Current maturities of long-term debt ............ 69,151 71,361
-------------- -----------------
Total current liabilities ... 111,744 109,378
Long-term debt, net of current maturities ....... 99,972 100,062
-------------- -----------------
Total liabilities ........... 211,716 209,440
-------------- -----------------
Commitments and contingencies
Preferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued and
outstanding ................................... -- --
Common stock, $.01 par value, 51,000,000
shares authorized, 16,740,826 and 16,681,261
shares issued and outstanding in 2000 and 1999,
respectively .................................. 167 167
Additional paid in capital ...................... 100,850 100,794
Retained earnings ............................... 17,123 16,718
-------------- -----------------
Total stockholders' equity .... 118,140 117,679
-------------- -----------------
Total liabilities and
stockholders' equity ........ $ 329,856 $ 327,119
============== =================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-------------------------
March 31,
-------------------------
2000 1999
-------- --------
(in thousands, except
share data)
Revenues ..................................... $ 74,365 $ 66,550
Cost of sales ................................ 51,637 44,648
-------- --------
Gross profit ....................... 22,728 21,902
Operating expenses ........................... 16,173 15,012
Goodwill amortization ........................ 864 858
-------- --------
Operating income ................... 5,691 6,032
Write-off of debt issuance costs ............. -- 2,308
Other (income) expense, net .................. (23) (18)
Interest expense ............................. 4,820 3,192
-------- --------
Income before taxes ............... 894 550
Income taxes ................................. 489 291
-------- --------
Net income ......................... $ 405 $ 259
======== ========
Net income per share:
Basic .............................. $ 0.02 $ 0.02
Diluted ............................ $ 0.02 $ 0.02
The accompanying notes are an integral part of these statements.
4
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
---------------------
March 31,
---------------------
2000 1999
-------- --------
(in thousands)
Cash Flows From Operating Activities:
Net income .................................. $ 405 $ 259
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ............... 1,583 1,406
Amortization of discount on notes due 2009 .. 38 4
Deferred income taxes ....................... -- 131
Write-off of debt issuance costs ............ -- 2,308
Changes in operating assets and liabilities:
Accounts receivable ................. (3,642) (3,532)
Inventories ......................... 1,543 (3,444)
Other current assets ................ (422) 86
Accounts payable and accrued expenses 4,047 (3,214)
Income taxes payable ................ 535 120
Other assets and liabilities, net ... 47 (991)
-------- --------
Net cash provided by (used in)
operating activities ................. 4,134 (6,867)
Cash Flows From Investing Activities:
Capital expenditures ........................ (1,878) (1,673)
Other ....................................... 9 --
-------- --------
Net cash used in investing
activities .......................... (1,869) (1,673)
Cash Flows From Financing Activities:
Repayments of term debt ..................... (118) (112)
Net borrowings (repayments) under
credit facility ........................... (2,238) 11,713
Debt issuance costs ......................... -- (3,037)
-------- --------
Net cash provided by (used in)
financing activities ................. (2,356) 8,564
(Decrease) Increase in cash and cash equivalents ..... (91) 24
Cash and cash equivalents, beginning of period ....... 219 744
-------- --------
Cash and cash equivalents, end of period ............. $ 128 $ 768
======== ========
The accompanying notes are an integral part of these statements.
5
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Pentacon, Inc. (the "Company")
included herein have been prepared without audit pursuant to the Rules and
Regulations for reporting on Form 10-Q. Accordingly, certain information and
footnotes required by generally accepted accounting principles for complete
financial statements are not included herein. The Company believes all
adjustments necessary for a fair presentation of these statements have been
included and are of a normal and recurring nature. There has been no change in
the accounting policies of the Company during the periods presented. The
statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
2. CREDIT FACILITY AND LONG-TERM DEBT
In March 1999, the Company sold $100 million of Senior Subordinated Notes
(the "Notes") due April 1, 2009. The net proceeds of $94.2 million, after the
original issue discount and paying underwriter's commissions, from the offering
of the Notes were used to repay indebtedness under the Company's credit
agreement (the "Bank Credit Facility"). The Notes accrue interest at 12.25%
which is payable on April 1 and October 1 of each year. The Notes are
publicly-registered and subordinated to all existing and future senior
subordinated obligations and will rank senior to all subordinated indebtedness.
The indenture governing the Notes contains covenants that limit the Company's
ability to incur additional indebtedness, pay dividends, make investments and
sell assets. At March 31, 2000, the Company was in compliance with the
covenants. Each of the Company's subsidiaries which are wholly-owned, fully,
unconditionally and jointly and severally guarantees the Notes on a senior
subordinated basis. Separate financial statements of the guarantors are not
presented because management has determined that they would not be material to
investors.
Effective September 30, 1999, the Company amended its Bank Credit Facility
to provide a revolving line of credit of up to $100 million (subject to a
borrowing base limitation) to be used for general corporate purposes, future
acquisitions, capital expenditures and working capital. The Bank Credit Facility
is secured by Company stock and assets. Advances under the Bank Credit Facility
bear interest at the banks' prime rate. At the Company's option, the loans may
bear interest based on a designated London interbank offered rate plus a margin
of 200 basis points. Commitment fees of 25 to 37.5 basis points per annum are
payable on the unused portion of the line of credit. The Bank Credit Facility
contains a provision for standby letters of credit up to $20 million. The Bank
Credit Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants including a minimum net worth and
minimum fixed charge ratio. At March 31, 2000, the Company was in compliance
with the covenants. Borrowings under the Bank Credit Facility are classified as
current liabilities in accordance with EITF 95-22 BALANCE SHEET CLASSIFICATION
OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT AGREEMENTS THAT INCLUDE BOTH A
SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX ARRANGEMENT. The Bank Credit
Facility will terminate and all amounts outstanding thereunder, if any, will be
due and payable September 30, 2004. At March 31, 2000, the Company had
approximately $28.9 million available under the Bank Credit Facility.
6
<PAGE>
In connection with the amendment of and reduction in the Bank Credit
Facility and issuance of the Notes in March 1999, the Company recorded a $2.3
million ($.07 impact on earnings per share) noncash charge for the write-off of
debt issuance costs.
3. EARNINGS PER SHARE
Basic and diluted net income per share is computed based on the following
information:
Three Months Ended
--------------------
March 31,
--------------------
2000 1999
-------- --------
BASIC: (in thousands)
Net income ............................................. $ 405 $ 259
======== ========
Average common shares .................................. 16,697 16,668
======== ========
DILUTED:
Net income ............................................. $ 405 $ 259
======== ========
Average common shares .................................. 16,697 16,668
Common share equivalents:
Warrants ........................................... -- --
Options ............................................ 9 --
-------- --------
Total common share equivalents ................. -- --
-------- --------
Average common shares and
common share equivalents .......................... 16,706 16,668
======== ========
4. INCOME TAXES
The provision for income taxes included in the Consolidated Statement of
Operations assumes the application of statutory federal and state income tax
rates and the non-deductibility of goodwill amortization. Interim period income
tax provisions are based upon estimates of annual effective tax rates and events
may occur which will cause such rates to vary.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
6. SEGMENT INFORMATION
The Company has two principal operating segments: the Industrial Group and
the Aerospace Group. The Industrial Group serves a broad base of industrial
manufacturers producing items such as
7
<PAGE>
diesel engines, locomotives, power turbines, motorcycles, telecommunications
equipment and refrigeration equipment and the Aerospace group serves the
aerospace and aeronautics industries. Financial information by industry segment
follows:
<TABLE>
<CAPTION>
Revenues Operating Income
------------------- --------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Industrial ........................... $ 43,168 $ 31,445 $ 4,089 $ 3,117
Aerospace ............................ 31,197 35,105 2,699 4,064
-------- -------- -------- --------
$ 74,365 $ 66,550 6,788 7,181
======== ========
Reconciliation to income before taxes:
Write-off of debt issuance costs ..... -- (2,308)
Other income (expense), net .......... 23 18
General corporate expense ............ (968) (1,023)
Goodwill amortization ................ (129) (126)
Interest expense ..................... (4,820) (3,192)
-------- --------
Income before taxes .................. $ 894 $ 550
======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the financial
statements of the Company and related notes thereto and management's discussion
and analysis of financial condition and results of operations related thereto
which are included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. This discussion contains forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Key factors that could cause actual results
to differ materially from expectations include, but are not limited to: (1)
estimates of costs or projected or anticipated changes to cost estimates
relating to entering new markets or expanding in existing markets; (2) changes
in economic and industry conditions; (3) changes in regulatory requirements; (4)
changes in interest rates; (5) levels of borrowings under the Company's Bank
Credit Facility; (6) accumulation of excess inventories by certain customers in
the aerospace industry; and (7) volume or price adjustments with respect to
sales to major customers.
RESULTS OF OPERATIONS
Quarterly results may be materially affected by the timing and magnitude
of assimilation costs, acquisitions, costs of opening new facilities, gain or
loss of a material customer and variation in product mix. Accordingly, the
operating results for any three-month period are not necessarily indicative of
the results that may be achieved for any subsequent three-month period or for a
full year.
8
<PAGE>
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
The following table sets forth certain selected financial data and the
related amounts as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Month Period Ended
March 31,
--------------------------------------
2000 1999
----------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues ................................. $74,365 100.0% $66,550 100.0%
Cost of sales ........................... 51,637 69.4 44,648 67.1
------- ------- ------- -------
Gross profit .......... 22,728 30.6 21,902 32.9
Operating expenses ....................... 16,173 21.7 15,012 22.5
Goodwill amortization .................... 864 1.2 858 1.3
------- ------- ------- -------
Operating income ...... $ 5,691 7.7% $ 6,032 9.1%
======= ======= ======= =======
</TABLE>
REVENUES
Revenues increased $7.8 million, or 11.7%, to $74.4 million for the three
months ended March 31, 2000 from $66.6 million for the three months ended March
31, 1999. The increase in revenues was attributable primarily to revenue growth
of 37.3% in the industrial group partially offset by an 11.1% decline in the
aerospace group. The industrial group's revenue growth resulted from the
implementation of new business with a major industrial customer and increased
revenues in all service centers. The revenue decline in the aerospace group
results from weakness in the aerospace market.
COST OF SALES
Cost of sales increased $7.0 million, or 15.7%, to $51.6 million for the
three months ended March 31, 2000 from $44.6 million for the three months ended
March 31, 1999. As a percentage of revenues, cost of sales increased from 67.1%
for the three months ended March 31, 1999, to 69.4% for the three months ended
March 31, 2000. The corresponding reduction in gross profit margin is due to
additional new business at lower margins with an existing customer in the
industrial group and the change in sales mix between the industrial and
aerospace groups. The aerospace group's gross margins as a percentage of
revenues were consistent in each period.
OPERATING EXPENSES
Operating expenses increased $1.2 million, or 8.0%, to $16.2 million for
the three months ended March 31, 2000 from $15.0 million for the three months
ended March 31, 1999. As a percentage of revenues, operating expenses decreased
from 22.5% for the three months ended March 31, 1999, to 21.7% for the three
months ended March 31, 2000. The percentage decrease was attributable to cost
reduction initiatives taken in the fourth quarter of 1999 in the industrial
group. This decrease was partially offset by a percentage increase in the
aerospace group as operating expenses were not reduced commensurate with the
decline in revenues as a result of the activity associated with the
consolidation of warehouses and information systems which was not completed
until the end of the first quarter of 2000.
OPERATING INCOME
Due to the factors discussed above, operating income decreased $0.3
million to $5.7 million for the three months ended March 31, 2000 from $6.0
million for the three months ended March 31, 1999. As a percentage of revenues,
operating income decreased to 7.7% for the three months ended March 31, 2000
from 9.1% for the three months ended March 31, 1999.
9
<PAGE>
NON-OPERATING COSTS AND EXPENSES
Interest expense for the three months ended March 31, 2000, totaled $4.8
million compared to $3.2 million for the three months ended March 31, 1999. The
increase in interest expense primarily resulted from higher debt levels and, to
a lesser extent, the higher rate of interest on the Senior Subordinated Notes
issued in March 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31, 2000
was $0.5 million (an effective rate of 54.7%) compared with $0.3 million (an
effective rate of 52.9%) for the three months ended March 31, 1999. The
effective income tax rate exceeds the statutory rate primarily due to
nondeductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided $4.1 million of net cash in operating activities
during the three months ended March 31, 2000; this cash was used for debt
reduction and capital expenditures. Net cash used in investing activities was
$1.9 million for capital expenditures. Net cash used by financing activities was
$2.4 million for the three months ended March 31, 2000 and primarily consisted
of repayments of debt. At March 31, 2000, the Company had cash of $0.1 million,
working capital of $68.2 million and long-term debt of $100.0 million.
In March 1999, the Company sold $100 million of Senior Subordinated Notes
due April 1, 2009. The net proceeds of $94.2 million, after the original issue
discount and paying underwriter's commissions, from the offering of the Notes
were used to repay indebtedness under the Company's Bank Credit Facility. The
Notes accrue interest at 12.25% which is payable on April 1 and October 1 of
each year. The Notes are publicly-registered and subordinated to all existing
and future senior subordinated obligations and will rank senior to all
subordinated indebtedness. The indenture governing the Notes contains covenants
that limit the Company's ability to incur additional indebtedness, pay
dividends, make investments and sell assets. At March 31, 2000, the Company was
in compliance with the covenants. Each of the Company's subsidiaries which are
wholly-owned, fully, unconditionally and jointly and severally guarantees the
Notes on a senior subordinated basis.
Effective September 30, 1999, the Company amended its Bank Credit Facility
to provide a revolving line of credit of up to $100 million (subject to a
borrowing base limitation) to be used for general corporate purposes, future
acquisitions, capital expenditures and working capital. The Bank Credit Facility
is secured by Company stock and assets. Advances under the Bank Credit Facility
bear interest at the banks' prime rate. At the Company's option, the loans may
bear interest based on a designated London interbank offered rate plus a margin
of 200 basis points. Commitment fees of 25 to 37.5 basis points per annum are
payable on the unused portion of the line of credit. The Bank Credit Facility
contains a provision for standby letters of credit up to $20 million. The Bank
Credit Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants including a minimum net worth and
minimum fixed charge ratio. At March 31, 2000, the Company was in compliance
with the covenants. Borrowings under the Bank Credit Facility are classified as
current liabilities in accordance with EITF 95-22 BALANCE SHEET CLASSIFICATION
OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT AGREEMENTS THAT INCLUDE BOTH A
SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX ARRANGEMENT. The Bank Credit
Facility will terminate and all amounts outstanding thereunder, if any, will be
due and payable September 30, 2004. At March 31, 2000, the Company had
approximately $28.9 million available under the Bank Credit Facility.
10
<PAGE>
In connection with the amendment of and reduction in the Bank Credit
Facility and issuance of the Notes in March 1999, the Company recorded a $2.3
million ($.07 impact on earnings per share) noncash charge for the write-off of
debt issuance costs.
The Company's aerospace group migrated to a common information system
during 1999. The Company's industrial group has selected the J. D. Edwards' One
World Enterprise Application Solution as its common information system. The
total expenditures for this information system are expected to be approximately
$5.5 million during the years 2000 and 2001, the majority of which will be
capitalized as computer hardware and software as it is installed and depreciated
over the estimated useful life of the assets. The total expenditures for this
system were $1.5 million during the three months ended March 31, 2000, the
majority of which has been capitalized as computer hardware and software.
Funding for these expenditures came from operating cash flows.
SEASONALITY AND INFLATION
The Company experiences seasonal declines in the fourth calendar quarter
due to declines in its customers' activities in that quarter. The Company's
volume of business may be adversely affected by a decline in projects as a
result of regional or national downturns in economic conditions. Quarterly
results may also be materially affected by the timing of acquisitions and the
timing and magnitude of acquisition assimilation costs. Inflation has not had a
material impact on the Company's results of operations.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
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.
PENTACON, INC.
Dated: May 12, 2000 By: /S/ BRIAN FONTANA
BRIAN FONTANA
Senior Vice President
& Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PENTACON, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 128
<SECURITIES> 0
<RECEIVABLES> 43,930
<ALLOWANCES> 0
<INVENTORY> 125,853
<CURRENT-ASSETS> 179,956
<PP&E> 16,800
<DEPRECIATION> (4,305)
<TOTAL-ASSETS> 329,856
<CURRENT-LIABILITIES> 111,744
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 117,973
<TOTAL-LIABILITY-AND-EQUITY> 329,856
<SALES> 74,365
<TOTAL-REVENUES> 74,365
<CGS> 51,637
<TOTAL-COSTS> 68,674
<OTHER-EXPENSES> (23)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,820
<INCOME-PRETAX> 894
<INCOME-TAX> 489
<INCOME-CONTINUING> 405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
