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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
Commission File No. 333-81139
American Plumbing & Mechanical, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware 76-0577626
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
1950 Louis Henna Blvd.
Round Rock, Texas 78664
(Address of Principal Executive Offices) (ZIP Code)
(512) 246-5260
(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 of 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]
As of November 14, 2000, there were outstanding 13,271,383 shares of
common stock and 331,116 shares of Class B common stock of the Registrant.
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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1 - Financial Statements 2
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
Item 3 - Quantitative and Qualitative Disclosures About
Market Risks 3
Part II - Other Information
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities and Use of Proceeds 14
Item 3 - Defaults Upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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Part I - Financial Information
Item 1. Financial Statements
AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 393 $ 1,910
Accounts receivable, net 73,726 93,705
Inventories 8,356 10,127
Costs and estimated earnings in excess of billings on uncompleted contracts 13,919 21,682
Prepaid expenses and other current assets 2,135 3,164
------------ ------------
Total current assets 98,529 130,588
PROPERTY AND EQUIPMENT, net 17,266 19,838
GOODWILL, net 146,050 161,798
OTHER NONCURRENT ASSETS 5,906 4,988
------------ ------------
Total assets $ 267,751 $ 317,212
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 1,031 $ 858
Accounts payable and accrued expenses 42,871 60,866
Accounts payable, related parties, including acquisition consideration payable 12,160 6,903
Billings in excess of costs and estimated earnings on uncompleted contracts 16,721 18,492
------------ ------------
Total current liabilities 72,783 87,119
LONG-TERM LIABILITIES:
Long-term debt 136, 623 154,218
Deferred income taxes 1,319 1,026
------------ ------------
Total liabilities 210,725 242,363
------------ ------------
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE PREFERRED STOCK, $.01 par value, 10,000,000 shares
authorized, 1,048,820 shares issued and outstanding 13,635 13,635
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized, 11,265,229
and 13,271,383 shares issued and outstanding, respectively 113 133
Class B common stock, $.01 par value, 5,000,000 shares authorized, 2,423,517
and 331,116 shares issued and outstanding, respectively 24 3
Additional paid-in capital 35,143 41,888
Retained earnings 8,111 19,190
------------ ------------
Total stockholders' equity 43,391 61,214
------------ ------------
Total liabilities and stockholders' equity $ 267,751 $ 317,212
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1999 2000 1999 2000
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 102,071 $ 145,460 $ 213,210 $ 412,276
COST OF REVENUES
(including depreciation) 82,110 118,944 170,995 337,097
------------- ----------- ------------ ------------
Gross profit 19,961 26,516 42,215 75,179
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,246 11,436 18,805 34,624
NONCASH COMPENSATION EXPENSE - - 7,992 -
GOODWILL AMORTIZATION 951 1,411 1,901 4,157
------------- ----------- ------------ ------------
Income from operations 9,764 13,669 13,517 36,398
OTHER INCOME (EXPENSE), net:
Interest income 81 25 150 105
Interest expense (4,179) (4,662) (7,445) (13,745)
Other 19 225 138 552
------------- ----------- ------------ ------------
Other expense, net (4,079) (4,412) (7,157) (13,088)
------------- ----------- ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS 5,685 9,257 6,360 23,310
PROVISION FOR INCOME TAXES 2,280 4,271 4,975 10,864
------------- ----------- ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS 3,405 4,986 1,385 12,446
EXTRAORDINARY LOSS, net of tax - 344 455 344
------------- ----------- ------------ ------------
NET INCOME 3,405 4,642 930 12,102
PREFERRED DIVIDENDS 341 341 681 1,023
------------- ----------- ------------ ------------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 3,064 $ 4,301 $ 249 $ 11,079
============= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 930 $ 12,102
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation and amortization 4,083 7,898
Noncash compensation charge related to issuance of stock to management 7,992 -
Amortization of deferred compensation expense 228 241
Extraordinary loss on early extinguishments of debt 769 530
Gain on disposal of property and equipment - (119)
Deferred income taxes (401) (822)
Increase (decrease) in cash flows from:
Accounts receivable, net (9,571) (13,442)
Inventories (1,788) (1,518)
Costs and estimated earnings in excess of billings on uncompleted contracts (1,924) (4,362)
Prepaid expenses and other current assets 1,240 (91)
Accounts payable and accrued expenses 2,324 10,002
Billings in excess of costs and estimated earnings on uncompleted contracts 4,775 926
Other (1,497) 621
------------- -------------
Net cash provided by operating activities 7,160 11,966
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (3,660) (4,900)
Proceeds from sale of property and equipment 66 462
Acquisition of companies, net of cash acquired (77,698) (13,427)
------------- -------------
Net cash used in investing activities (81,292) (17,865)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on subordinated loan 30,000 -
Payments on subordinated loan (30,000) -
Payments of long-term debt (9,959) (876)
Payments on notes to stockholders (5,766) -
Issuance of senior subordinated notes 118,668 -
Repurchase of senior subordinated notes - (15,963)
Net borrowings on bank credit facility 14,975 34,000
Distributions to stockholders (40,643) (1,756)
Repurchase of Class B stock - (6,966)
Proceeds from issuance of stock 70 -
Preferred dividends (681) (1,023)
------------- -------------
Net cash provided by financing activities 76,664 7,416
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,532 1,517
CASH AND CASH EQUIVALENTS, beginning of period 1,980 393
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 4,512 $ 1,910
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest $ 6,697 $ 9,772
Income taxes 3,170 10,487
Capital lease additions 393 -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
American Plumbing and Mechanical, Inc. (the "Company"), was organized
in June 1998, and acquired ten U.S. businesses (the "Founding Companies") on
April 1, 1999. The acquisitions were accounted for using the purchase method of
accounting with Christianson Enterprises, Inc. and affiliates ("Christianson")
being reflected as the accounting acquiror. Subsequently, the Company acquired
the outstanding stock of three additional companies and the assets of a fourth
company (the "Subsequent Acquisitions", and collectively with the Founding
Companies, the "Acquired Companies").
Prior to April 1, 1999, Christianson elected S Corporation status.
Under S Corporation status, as defined by the Internal Revenue Code,
Christianson itself was not subject to taxation for federal purposes; rather,
the stockholders reported their share of Christianson's taxable earnings or
losses in their personal tax returns. Certain states do not recognize S
Corporation status for purposes of state taxation. Consequently, the provision
for current and deferred income taxes for the nine months ended September 30,
1999, does not include federal income taxes for the first three months of this
period. Christianson terminated its S Corporation status concurrent with the
effective date of the merger discussed above.
These unaudited interim statements should be read in conjunction with
the Company's historical consolidated financial statements and related notes
included in the Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the year ended December 31, 1999.
These unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the Securities and Exchange Commission
for reporting interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. The
Company believes all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.
The results of operations for interim periods are not necessarily indicative of
the results for the fiscal year.
2. SENIOR SUBORDINATED NOTES:
During the current quarter, the Company repurchased approximately $16.3
million in face amount of its outstanding 11 5/8% Senior Subordinated Notes at
various prices ranging from 95.5 to 100.0 percent of par value. In conjunction
with the repurchases, the Company recognized an extraordinary loss of $0.5
million ($0.3 million, net of taxes) related to capitalized issuance costs
attributable to the notes repurchased. Subsequent to the end of the quarter, the
Company repurchased an additional $13.7 million in face amount of its
outstanding notes at various prices ranging from 99.5 to 100.0 percent of par
value. All notes repurchased were retired. The estimated extraordinary loss to
be recorded on the notes repurchased subsequent to the end of the quarter is
$0.5 million, net of taxes.
3. COMMITMENTS AND CONTINGENCIES:
As of January 1, 2000, the Company became self insured for health care,
workers' compensation, and general, property and auto liability up to
predetermined amounts above which third party insurance applies. The Company is
fully insured through third party insurance for all other types of exposures
including an umbrella policy. The Company has not incurred significant claims or
losses on any of these insurance policies.
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4. STOCKHOLDERS' EQUITY:
At December 31, 1999, the Company had 11,265,229 shares of $.01 par
value common stock and 2,423,517 shares of $.01 par value Class B common stock
outstanding. Class B shares differ from common shares in voting rights and are
subordinate in liquidation to all other classes of stock.
In February 2000, the Company agreed to purchase approximately 1.5
million shares of Class B common stock from Sterling City Capital, LLC, the
original sponsor of the Company, at a price of $3.25 per share. On April 7,
2000, the Company completed the transaction with funding from the Company's
Credit Facility. A similar offer was made to the holders of the remaining 0.9
million shares of Class B common stock; however, the members of the Company's
management that are holders of the Class B common stock did not tender their
shares (approximately 0.3 million shares). The purchase of the remaining shares
closed in May 2000, and was also funded from the Company's Credit Facility.
On March 1, 2000, the Company issued an additional 1,346,154 shares of
common stock in connection with an acquisition. The shares were valued at $10.00
per share for a total increase in additional paid in capital of $13.5 million
(see Note 5).
In April 2000, pursuant to the terms of "Earn-Out" provisions contained
in the original acquisition agreements, the Company also issued 659,927 shares
of common stock to certain former stockholders of certain Founding Companies. No
future share issuance is required under the terms of any of the acquisition
agreements relating to any of the Acquired Companies.
5. ACQUISITION:
On March 1, 2000, the Company acquired the stock of Lindy Dennis
Industries and related affiliates (collectively "LDI"), headquartered in Corona,
California. LDI operates primarily as a heating, ventilation and air
conditioning ("HVAC") contractor specializing in the multifamily residential
market. LDI had revenues of approximately $37.0 million in 1999. The
consideration paid by the Company for LDI consisted of 1,346,154 shares of the
Company's common stock and approximately $12.0 million in cash (See Note 4). The
cash portion of the consideration was funded through borrowings under the
Company's existing $95.0 million Credit Facility.
The Company accounted for the acquisition of LDI using the purchase
method of accounting. The results of operations of LDI are included in the
accompanying financial statements from the date of acquisition forward. The
accompanying consolidated balance sheet as of September 30, 2000, includes a
preliminary allocation of the purchase price to the assets acquired and
liabilities assumed, as well as an estimate of the amount of goodwill generated
by the transaction. The purchase accounting for the acquisition has been based
on an estimate of fair value and is subject to final adjustment.
The pro forma data presented below consists of the income statement
data presented in the accompanying consolidated financial statements plus pro
forma income statement data for the Acquired Companies as if the acquisitions
and related financing were effective on January 1, 1999 (in thousands):
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<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1999 2000
---------------- ---------------
<S> <C> <C>
Revenues $ 356,912 $ 421,106
Net income available to common stockholders 5,921 11,831
</TABLE>
6. RECLASSIFICATIONS:
Certain reclassifications have been made to the prior-year financial
statements to conform to the current-year presentation.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q, THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES AND OTHER DETAILED INFORMATION REGARDING THE
COMPANY INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999, AND OTHER REPORTS FILED BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act which
are intended to be covered by safe harbors created thereby. Readers are
cautioned that such information involves risks and uncertainties, including
those created by general market conditions, competition and the possibility that
events may occur which limit the ability of the Company to maintain or improve
its operating results. All statements, other than statements of historical
facts, included or incorporated by reference in this section that address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement such strategy, competitive strengths, goals, expansion and growth of
the Company's business and operations, plans, references to future success as
well as other statements which include words such as "anticipate," "believe,"
"plan," "estimate," "expect," and "intend" and other similar expressions,
constitute forward-looking statements. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
GENERAL
American Plumbing and Mechanical, Inc. (the "Company"), a Delaware
corporation, is the largest company in the United States focused primarily on
the plumbing contracting services industry. The Company provides plumbing,
heating, ventilation and air conditioning ("HVAC") and mechanical contracting
services to single family residential, multifamily residential and
commercial/institutional customers.
The Company was organized in June 1998, and acquired ten U.S.
businesses (the "Founding Companies") on April 1, 1999. The acquisitions were
accounted for using the purchase method of accounting with Christianson
Enterprises, Inc. and affiliates ("Christianson") being reflected as the
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accounting acquiror. In September 1999, the Company acquired the outstanding
stock of two additional companies and the assets of a third company. On March 1,
2000, the Company acquired the stock of Lindy Dennis Industries and related
affiliates (collectively "LDI"), headquartered in Corona, California.
All of the above companies acquired subsequent to the acquisition of
the Founding Companies are herein referred to as the "Subsequent Acquisitions",
and collectively with the Founding Companies, the "Acquired Companies."
RESULTS OF OPERATIONS
Historical Financial Information
The following historical consolidated financial information represents
the operations of Christianson, the accounting acquiror, prior to April 1, 1999,
and the remaining Acquired Companies from their respective dates of acquisition.
Historical selling, general and administrative expenses for the periods prior to
April 1, 1999, reflect salaries, bonuses, benefits, and lease payments to the
former stockholders of Christianson. These amounts have been prospectively
reduced in accordance with the terms of the acquisition agreement. Additionally,
Christianson operated as an S Corp prior to April 1, 1999. Under S Corporation
status, Christianson itself was not subject to taxation for federal purposes.
8
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<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -------------------------------------------
1999 2000 1999 2000
------------------ ------------------- -------------------- -------------------
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 102,071 100% $ 145,460 100% $ 213,210 100% $ 412,276 100%
Cost of revenues 82,110 80 118,944 82 170,995 80 337,097 82
--------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit 19,961 20 26,516 18 42,215 20 75,179 18
Selling, general and
administrative expenses 9,246 9 11,436 8 18,805 9 34,624 8
Noncash compensation expense - - - - 7,992 4 - -
Goodwill amortization 951 1 1,411 1 1,901 1 4,157 1
--------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations 9,764 10 13,669 9 13,517 6 36,398 9
Interest expense (4,179) (4) (4,662) (3) (7,445) (3) (13,745) (3)
Other, net 100 - 250 - 288 - 657 -
--------- ----- ---------- ----- ---------- ----- ---------- -----
Income before taxes and
extraordinary loss 5,685 6 9,257 6 6,360 3 23,310 6
Provision for income taxes 2,280 3 4,271 3 4,975 2 10,864 3
--------- ----- ---------- ----- ---------- ----- ---------- -----
Income before extraordinary loss 3,405 3 4,986 3 1,385 1 12,446 3
Extraordinary loss - - 344 - 455 - 344 -
--------- ----- ---------- ----- ---------- ----- ---------- -----
Net income 3,405 3 4,642 3 930 1 12,102 3
Preferred dividends 341 - 341 - 681 - 1,023 -
--------- ----- ---------- ----- ---------- ----- ---------- -----
Net income available to common
shareholders $ 3,064 3% $ 4,301 3% $ 249 -% $ 11,079 3%
========= ===== ========== ===== ========== ===== ========== =====
</TABLE>
Three months ended September 30, 1999 compared to three months ended September
30, 2000
Revenues increased $43.4 million, from $102.1 million for the three
months ended September 30, 1999, to $145.5 million for the three months ended
September 30, 2000. The increase in revenues resulted from a $10.3 million
increase in "same store" revenues, combined with $33.1 million generated by the
Subsequent Acquisitions. The increase in "same store" revenues was primarily
from residential customers, offset by a $1.6 million decrease in commercial
revenues. The increase in residential revenue is the result of modest price
increases offset by 6% fewer housing starts in the single family residential
area and an increase in volume in the multifamily area. The decline in revenue
from commercial operations primarily resulted from a focus on higher margin
contracts and an overall reduction in the number of contracts signed.
Gross profit increased $6.5 million, from $20.0 million for the three
months ended September 30, 1999, to $26.5 million for the three months ended
September 30, 2000. The increase in gross profit resulted from a $0.4 million
increase in "same store" gross profit generated by the Founding Companies,
combined with $6.1 million generated by the Subsequent Acquisitions. Gross
margin declined from 20%
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of revenue for the three months ended September 30, 1999, to 18% of revenue for
the three months ended September 30, 2000. The decline in gross margin is
primarily due to increases in labor costs.
Selling, general and administrative expenses increased $2.2 million, or
24%, from $9.2 million for the three months ended September 30, 1999 to $11.4
million for the three months ended September 30, 2000. As a percentage of
revenue, selling, general and administrative expenses decreased from 9% for the
three months ended September 30, 1999, to 8% for the three months ended
September 30, 2000, reflecting, among other things, the leverage gained from
increased volume. The increase in selling, general and administrative expenses
was primarily due to the Subsequent Acquisitions.
Goodwill amortization increased $0.4 million for the three months ended
September 30, 2000, as compared to the same period in 1999. The increase in
amortization is associated with the goodwill generated by the Subsequent
Acquisitions and amortization of the goodwill generated by payments to certain
Founding Company stockholders under "earn out" provisions in the purchase
agreements. The Company amortizes goodwill on a straight-line basis over a 30
year period.
Interest expense increased $0.5 million for the three months ended
September 30, 2000 as compared to the same period in 1999. This increase is a
result of the interest on higher borrowings under the Credit Facility used to
fund the cash portion of the consideration paid for the Subsequent Acquisitions
and the repurchase of the Class B shares.
The increase in the provision for income taxes of $2.0 million resulted
from taxes on the income of the Subsequent Acquisitions.
During the three months ended September 30, 2000, the Company
repurchased $16.3 million face amount of its senior subordinated notes at an
average price of approximately 96.8% of par value. Accordingly, the Company
recorded an extraordinary loss of $0.3 million, net of taxes, related to the
write-off of capitalized issuance costs attributable to the notes repurchased.
Net income increased $1.2 million, from $3.4 million for the three
months ended September 30, 1999 to $4.6 million for the three months ended
September 30, 2000.
Nine months ended September 30, 1999 compared to nine months ended September 30,
2000
Results of operations for the nine months ended September 30, 1999,
include the results of Christianson, the accounting acquiror, for the entire
period and the results of the remaining Founding Companies for the period from
April 1, 1999, through September 30, 1999.
Revenues increased $199.1 million from $213.2 million for the nine
months ended September 30, 1999, to $412.3 million for the nine months ended
September 30, 2000. The increase in revenues resulted from $168.7 million
related to the acquisition of the remaining Acquired Companies. "Same store"
growth for the period was $30.4 million, with an increase of $22.3 million
generated by single family residential operations.
Gross profit increased $33.0 million, from $42.2 million for the nine
months ended September 30, 1999, to $75.2 million for the nine months ended
September 30, 2000. Approximately, $29.2 million of the increase in gross profit
was generated by the acquisition of the remaining Acquired Companies. The
decline in gross margin from 20% for the nine months ended September 30, 1999,
to 18% for the nine months ended September 30, 2000, is the result of lower
gross margins associated with the Subsequent Acquisitions and lower gross
margins generated by the remaining Founding Companies due to higher labor costs.
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Selling, general and administrative expenses increased $15.8 million,
from $18.8 million for the nine months ended September 30, 1999 (excluding a
non-cash compensation charge of $8.0 million relating to the issuance of shares
to management on April 1, 1999), to $34.6 million for the nine months ended
September 30, 2000. Approximately $8.7 million of the increase in selling,
general and administrative expenses was associated with the remaining Founding
Companies not being included in the first three months of 1999. An additional
$6.2 million of the increase was associated with the Subsequent Acquisitions.
Goodwill amortization increased $2.3 million for the nine months ended
September 30, 2000, as compared to the same period in 1999. The increase in
amortization is associated with the goodwill generated by the acquisition of the
remaining Acquired Companies and amortization of the goodwill generated by
payments to certain Founding Company stockholders under "earn out" provisions in
the purchase agreements. The Company amortizes goodwill on a straight-line basis
over a 30 year period.
Interest expense increased $6.3 million for the nine months ended
September 30, 2000 as compared to the same period in 1999. This is a result of
the interest on the Senior Subordinated Notes, issued May 19, 1999, and
increased borrowings under the Credit Facility.
The increase in the provision for income taxes of $5.9 million results
from higher net income before taxes and the Company recording federal income
taxes for the period after April 1, 1999. Prior to this date, Christianson
elected S Corp status.
Net income increased $3.2 million, from $8.9 million for the nine
months ended September 30, 1999, (excluding a non-cash compensation charge of
$8.0 million relating to the issuance of shares to management on April 1, 1999),
to $12.1 million for the nine months ended September 30, 2000 for the reasons
discussed above.
Pro Forma Results
The following unaudited pro forma discussion and analysis includes the
results of operations of the Acquired Companies, as if they were combined on
January 1, 1999. This data does not indicate the results that may have been
obtained had these events actually occurred on January 1 of the respective
period presented, or future results. The unaudited pro forma financial data is
based on preliminary estimates, available information, and certain assumptions
that management deems appropriate. Selling, general and administrative expenses
for the periods prior to the acquisitions have been decreased for reductions in
salaries, bonuses, benefits and lease payments to former owners of the Acquired
Companies, agreed to in accordance with the terms of the employment agreements
and lease agreements executed as a part of the acquisitions. The data will not
be comparable to, and may not be indicative of, the Company's post-combination
results of operations because:
o the Acquired Companies were not under common control or management;
o the Company incurs incremental costs for its corporate management; and,
o the pro forma data does not reflect the potential benefits and cost
savings the Company expects to realize by operating as a combined
entity.
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The following table sets forth pro forma financial information of the
Acquired Companies for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
1999 2000
------------------- ------------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 356,912 100% $ 421,106 100%
Cost of revenues 282,762 79 343,796 82
---------- ---- ----------- ----
Gross profit 74,150 21 77,310 18
Selling, general and administrative expenses 31,126 9 35,376 8
Noncash compensation expense 7,992 2 - -
Goodwill amortization 3,922 1 4,260 1
---------- ---- ----------- ----
Income from operations $ 31,110 9% $ 37,674 9%
========== ==== =========== ====
</TABLE>
Nine months ended September 30, 1999 compared to nine months ended September 30,
2000
Pro forma revenues were $421.1 million for the nine months ended
September 30, 2000, an increase of $64.2 million, or 18%, from $356.9 million
for the nine months ended September 30, 1999. The largest increase in revenues
was associated with the single family and commercial operations. Revenues also
increased due to modest price increases at most of the companies in response to
rising labor and material costs.
Pro forma gross profit was $77.3 million for the nine months ended
September 30, 2000, an increase of $3.1 million, or 4%, from $74.2 million for
the nine months ended September 30, 1999. The increase in gross profit was the
result of increased volume partially offset by higher labor costs.
Pro forma selling, general and administrative expenses were $35.4
million for the nine months ended September 30, 2000, an increase of $4.3
million from $31.1 million for the nine months ended September 30, 1999
(excluding a non-cash compensation charge of $8.0 million relating to the
issuance of shares to management on April 1, 1999). The increase was the result
of an higher level of activity offset by the leverage gained from increased
volume.
Pro forma goodwill amortization increased to $4.3 million for the nine
months ended September 30, 2000, from $3.9 million for the nine months ended
September 30, 1999. The increase in amortization is associated with the
amortization of the goodwill generated by payments to certain stockholders of
the Founding Companies under "Earn-Out" provisions contained in the acquisition
agreements. The Company amortizes goodwill on a straight-line basis over a 30
year period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had $43.5 million in working
capital and $154.2 million of outstanding long-term indebtedness, including
capital lease obligations totaling $1.3 million.
For the nine months ended September 30, 2000, net cash provided by
operating activities was $12.0 million resulting primarily from net income. Cash
used in investing activities was $17.9 million which primarily relates to the
acquisition of LDI and capital expenditures. Cash provided by financing
activities for the nine months ended September 30, 2000, was $7.4 million and
was primarily provided by net borrowings on the Company's Credit Facility offset
by the $7.0 million repurchase of the Class B common stock and the $16.0 million
repurchase of the Senior Subordinated Notes.
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<PAGE> 14
On April 1, 1999, the Company entered into the Credit Facility with a
total commitment of $95.0 million. At the option of the Company, the Credit
Facility bears interest at the base rate of the arranging bank plus an
applicable margin or at LIBOR, plus an applicable margin and has a three year
term. At September 30, 2000, $45.2 million was available under the Credit
Facility.
The Company's capital expenditures, for the nine months ended September
30, 2000, primarily relate to the purchase of equipment and leasehold
improvements that were funded from cash flow from operations. During the nine
months ended September 30, 2000, capital expenditures were $4.9 million.
The Company anticipates that its cash flow from operations will provide
sufficient cash to enable the Company to meet its working capital needs, debt
service requirements, and planned capital expenditures for property and
equipment through the foreseeable future.
While the Company continues to pursue acquisitions of leading
companies, it has identified several markets where there are no suitable
acquisition candidates. Therefore, the Company intends to enter these markets
through "start ups" which will initially focus on serving existing customers in
the new markets. From this base, the Company will work to develop relationships
with new customers. The Company intends to fund start up costs with working
capital, cash flow from operations and borrowings from the Credit Facility. In
July 2000, the Company commenced operations in Denver, Colorado. Start up costs
associated with hiring and training personnel are expensed as incurred and are
reflected in the results of operations for the quarter ended September 30, 2000.
SEASONALITY
The plumbing and mechanical contracting services industry is influenced
by seasonal factors, which generally result in lower activity during winter
months than in other periods. As a result, the Company expects that its revenues
and profits will generally be lower in the first and fourth quarters of each
fiscal year, and higher in the second and third quarters.
RECENT ACCOUNTING PRONOUCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133," establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. These statements are effective for
the Company on January 1, 2001. Management does not believe the adoption of SFAS
No. 133 and No. 138 will have a material impact on the Company's financial
position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to various market risks primarily related to
potential adverse changes in interest rates. In the normal course of business,
the Company employs established policies and procedures to manage this risk. The
Company is not exposed to any other significant market risks including foreign
currency exchange risk, or interest rate risks from the use of derivative
financial instruments. The Company does not use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.
The Company's exposure to changes in interest rates primarily results from its
short-term and long-term debt with both fixed and floating interest rates. The
Company's debt with fixed interest rates consists of Senior Subordinated Notes
and capital leases. The Company's debt with variable interest rates consists
primarily of the Credit Facility. There were no significant changes in market
risks during the nine months ended September 30, 2000.
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<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
From time to time, the Company is involved in litigation relating to
claims arising out of operations in the normal course of business. The Company
maintains insurance coverage against potential claims in an amount which
management believes to be adequate. Currently, the Company is not aware of any
legal proceedings or pending claims that management believes will have a
material adverse effect on the Company's consolidated financial position or
consolidated results of operations.
ITEM 2. - Changes in Securities and Use of Proceeds
On August 22, 2000, the company sold 74 shares of common stock to an
employee under the terms of the Company's nonqualified stock option plan. Total
proceeds from the sale were $518. The shares were issued pursuant to Rule 701 of
the Securities Act of 1933.
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
(a) The exhibits to this report are listed below
<TABLE>
<CAPTION>
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation (American Plumbing& Mechanical, Inc.
Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.1).
*3.2 Amended and Restated Bylaws (American Plumbing & Mechanical, Inc. Registration Statement on
Form S-4 (File No. 333-81139), Exhibit 3.2).
*3.3 Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A
(American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139),
Exhibit 3.3).
*4.1 Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc., State Street
Bank and Trust Company and the other parties named therein with respect to $125,000,000
11 5/8% Senior Subordinated Notes due 2008 (American Plumbing & Mechanical, Inc. Registration
Statement on Form S-4 (File No. 333-81139), Exhibit 4.1).
27.1 Financial data schedule
</TABLE>
* Incorporated by reference
14
<PAGE> 16
(b) The registrant filed a report dated October 6, 2000 on
Form 8-K and a report dated October 12, 2000 on Form 8-K/A
during the period covered by this quarterly report on Form
10-Q related to a change in the Company's independent
accountants.
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.
AMERICAN PLUMBING AND MECHANICAL, INC.
Date: November 14, 2000 By: /s/ DAVID C. BAGGETT
-------------------------------
David C. Baggett
Senior Vice President
and Chief Financial Officer
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation (American Plumbing& Mechanical, Inc.
Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.1).
*3.2 Amended and Restated Bylaws (American Plumbing & Mechanical, Inc. Registration Statement on
Form S-4 (File No. 333-81139), Exhibit 3.2).
*3.3 Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A
(American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139),
Exhibit 3.3).
*4.1 Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc., State Street
Bank and Trust Company and the other parties named therein with respect to $125,000,000
11 5/8% Senior Subordinated Notes due 2008 (American Plumbing & Mechanical, Inc. Registration
Statement on Form S-4 (File No. 333-81139), Exhibit 4.1).
27.1 Financial data schedule
</TABLE>
