<PAGE>
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 quarterly period ended January 31, 1999, 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 No. 0-16115
IMPCO TECHNOLOGIES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1039211
- ------------------------ --------------------
(State of Incorporation) IRS Employer I.D. No.
16804 Gridley Place, Cerritos, CA 90703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (562) 860-6666
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
------ ------
Number of shares outstanding of each of the issuer's classes of common
stock, as of February 28, 1999:
7,270,570 shares of Common Stock, $.001 par value per share
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1999 and April 30, 1998
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash......................................... $ 1,545,801 $ 2,617,869
Accounts receivable.......................... 17,612,507 14,528,000
Less allowance for doubtful accounts........ 379,234 314,794
------------ -------------
Net accounts receivable.................... 17,233,273 14,213,206
Note receivable (Note 6)..................... 3,500,000 -
Inventories:
Raw materials and parts..................... 10,217,112 9,565,310
Work-in-process............................. 1,178,863 1,055,411
Finished goods.............................. 11,465,677 7,308,190
------------- -------------
Total inventories........................... 22,861,652 17,928,911
Other current assets......................... 1,799,861 2,731,963
------------- -------------
Total current assets....................... 46,940,587 37,491,949
Equipment and leasehold improvements:
Dies, molds and patterns.................... 5,612,271 5,039,892
Machinery and equipment..................... 7,925,385 7,074,004
Office furnishings and equipment............ 5,701,849 4,968,605
Leasehold improvements...................... 2,860,041 2,288,022
Land and buildings ......................... - 267,000
------------- -------------
22,099,546 19,637,523
Less accumulated depreciation
and amortization............................ 12,259,376 10,613,052
------------- -------------
Net equipment and leasehold improvements.... 9,840,170 9,024,471
Net intangibles arising from acquisitions.... 9,860,341 9,759,100
Other assets................................. 589,638 1,109,888
------------- -------------
$ 67,230,736 $ 57,385,408
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
<PAGE>
IMPCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1999 and April 30, 1998
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable................ ............ 6,242,160 5,606,922
Accrued payroll obligations.................. 1,718,643 1,848,425
Income taxes payable......................... 476,304 746,587
Other accrued expenses....................... 3,199,737 1,807,032
Current portion of term loans................ 2,279,524 1,408,225
----------- -----------
Total current liabilities................... 13,916,368 11,417,191
Lines of credit............................... 2,536,936 3,047,805
Term loans--Bank of America NT&SA............. 6,696,954 3,799,395
Term loan--DEPA Holding BV.................... - 1,820,000
Other long term liabilities................... 2,200,747 1,927,166
Minority interest............................. 1,264,883 1,068,500
Stockholders' equity:
1993 Series 1 Preferred Stock, $0.01
par value, 5,950 shares authorized,
issued and outstanding, $5,950,000
liquidation value............................ 5,650,000 5,650,000
Common stock, $.001 par value, authorized
25,000,000 shares; 7,207,236 issued and
outstanding at January 31, 1999 and 7,091,601
at April 30, 1998 ........................... 7,207 7,092
Additional paid-in capital
relating to common stock.................... 39,415,998 38,386,357
Shares held in trust.......................... (60,983) (36,759)
Accumulated deficit........................... (2,745,506) (8,197,885)
Foreign currency translation adjustment....... (1,651,868) (1,503,454)
----------- ------------
Total stockholders' equity.................. 40,614,848 34,305,351
----------- -----------
$67,230,736 $57,385,408
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
IMPCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and nine months ended January 31, 1999 and 1998
--------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product sales $16,043,513 $14,835,303 $50,132,257 $44,716,184
Contract revenue 3,824,974 2,157,932 9,930,840 6,728,637
----------- ----------- ----------- -----------
Net revenue 19,868,487 16,993,235 60,063,097 51,444,821
Costs and expenses:
Cost of sales 10,933,381 8,657,506 33,775,854 27,232,314
Research and
development expense 3,133,207 3,627,760 9,614,834 9,971,106
Selling, general and
administrative expense 3,370,198 2,712,120 10,140,298 9,197,024
----------- ----------- ----------- -----------
Total costs and expenses 17,436,786 14,997,386 53,530,986 46,400,444
----------- ----------- ----------- -----------
Operating income 2,431,701 1,995,849 6,532,111 5,044,377
Interest Expense 377,705 184,131 904,568 686,056
Gain on Sale of minority
interest in Subsidiary 2,169,405 - 2,169,405 -
----------- ----------- ----------- -----------
Income before income taxes,
minority interest in
income of consolidated
subsidiaries and dividends 4,223,401 1,811,718 7,796,948 4,358,321
Provision for income taxes 1,004,841 348,248 1,898,228 740,915
Minority interest in income
of consolidated
subsidiaries 614 117,704 7,529 291,667
----------- ----------- ----------- -----------
Net income before dividends 3,217,946 1,345,766 5,891,191 3,325,739
Dividends on preferred stock 142,550 148,749 438,812 446,248
----------- ----------- ----------- -----------
Net income applicable
to common stock $ 3,075,396 $ 1,197,017 $ 5,452,379 $ 2,879,491
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share
Basic $0.43 $0.18 $0.76 $0.47
Diluted $0.36 $0.16 $0.65 $0.42
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in
per share calculation
Basic 7,200,577 6,625,179 7,178,115 6,087,671
Diluted 8,993,805 8,392,559 9,008,848 7,897,790
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
IMPCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended January 31, 1999 and 1998
--------------------------
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $3,223,014 $3,888,191
Cash flows from investing activities:
Purchase of equipment and leasehold
improvements (2,150,774) (2,772,273)
Purchase of businesses (4,097,903) (3,531,593)
Proceeds from sale of fixed assets 475,626 55,108
------------ ------------
Net cash used in investing activities (5,773,051) (6,248,758)
Cash flows from financing activities:
Repayments under lines of credit (443,805) (5,450,000)
Payments on notes payable - (328,839)
Proceeds from issuance of bank term loans 5,288,000 3,300,000
Proceeds from issuance of common stock 1,005,532 8,454,347
Payments on term loans (3,216,827) (3,761,111)
Payments of capital lease obligation (654,729) (318,416)
Dividends on preferred stock (438,812) (446,248)
------------ ------------
Net cash provided by
financing activities 1,539,359 1,449,733
------------ ------------
Translation adjustment (61,390) (100,949)
Net decrease in cash (1,072,068) (1,011,783)
Cash beginning of year 2,617,869 1,975,903
------------ ------------
Cash, end of period $ 1,545,801 $ 964,120
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
<PAGE>
IMPCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999 and 1998
----------------------
1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for the fair
presentation of the financial position and operating results for the interim
periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
the results of operations, contained in the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1998. Certain reclassifications have
been made to the fiscal year 1998 financial statements to conform to the
current year presentation. The condensed consolidated balance sheet of IMPCO
Technologies, Inc. (IMPCO or the Company), as of January 31, 1999 includes
the accounts of the Company, its wholly owned subsidiary IMPCO Technologies,
Pty. Limited (IMPCO Pty), and its majority owned subsidiaries Grupo
I.M.P.C.O. Mexicano (IMPCO Mexicano) and IMPCO-BERU Technologies B.V.,
formerly IMPCO Technologies, B.V., (IMPCO BV). The results of operations for
the three and nine months ended January 31, 1999 are not necessarily
indicative of the results that may be expected for the entire year ending
April 30, 1999.
2) BANK OF AMERICA AGREEMENT
Including the revolving line of credit, the capital lease facility and
the acquisition facilities, the total Bank of America credit facility was
$28,208,000 at January 31, 1999.
LINES OF CREDIT - At January 31, 1999, the outstanding line of credit
balance was $2,537,000 of which $2,190,000 was subject to the bank's
reference rate less .50 percent (which was 7.25 percent on January 31, 1999)
and $347,000 was borrowed by IMPCO Mexicano and subject to the Bank of
America Mexico (BAMSA) cost of funds plus 1.50 percent (36.60 percent at
January 31, 1999). The Company may elect to have all or portions of the U.S.
borrowings bear interest at an alternative interest rate agreed upon by the
Bank for periods of not less than 30 days nor more than one year.
TERM LOANS FOR ACQUISITION OF IMPCO BV - At January 31, 1999, the total
outstanding balance was $1,306,000 of which $717,000 which was subject to a
fixed interest rate of 7.90 percent and $589,000 was subject to a fixed
interest rate of 7.80 percent.
TERM LOAN FOR THE ACQUISITION OF ALGAS CARBURETION - At January 31,
1999, the total outstanding balance was $2,640,000 which was subject to a
fixed interest rate of 7.74 percent.
TERM LOAN FOR ACQUISITION OF CRUSADER ENGINE DIVISION - At January 31,
1999, the total outstanding balance was $3,190,000 which was subject to the
London Inter-Bank Offer Rate plus 1.50 percent (6.78 percent at January 31,
1999).
IMPCO BV TERM LOAN - At January 31, 1999, the total outstanding balance
was $1,840,000 which was subject to the Amsterdam Inter-Bank Offer Rate plus
1.50 percent (4.63 percent at January 31, 1999).
CAPITAL LEASE FACILITY - At January 31, 1999, approximately $3,041,000
was outstanding on the capital lease facility which is included in other
accrued expenses and other long term liabilities. At January 31, 1999,
approximately
<PAGE>
$1,381,000 remained available on the capital lease facility. Of the amount
outstanding, $946,000 was subject to the variable rate of interest based on
Bank America's London Branch 3-month LIBOR rate plus 2.00 percentage points
(6.97 percent at January 31, 1999), $957,000 was fixed at 8.50 percent,
$1,088,000 was fixed at 8.20 percent, and $50,000 was fixed at 8.05 percent.
LOAN COVENANTS AND COLLATERAL - The Bank of America credit facility
contains certain restrictions and financial covenants, including liquidity,
tangible net worth and cash flow coverage thresholds, as well as limitations
on other indebtedness, and is secured by substantially all of the Company's
assets. At January 31, 1999, the Company was in compliance with all covenants.
3) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income before dividends $3,217,946 $1,345,766 $5,891,191 $3,325,739
Dividends on preferred stock (142,550) (148,749) (438,812) (446,248)
---------- --------- ---------- ----------
Numerator for basic earnings per
share - income available to
common stockholders to common stock 3,075,396 1,197,017 5,452,379 2,879,491
Effect of dilutive securities:
Preferred stock dividends 142,550 148,749 438,812 446,248
---------- --------- --------- ---------
Numerator for diluted earnings per
share - income available to
common stockholders after
assumed conversions $3,217,946 $1,345,765 $5,891,191 $3,325,739
Denominator:
Denominator for basic earnings per
Share -- weighted-average shares 7,200,577 6,625,179 7,178,115 6,087,671
Effect of dilutive securities:
Employee stock options 662,901 514,295 699,807 394,463
Warrants 5,563 129,596 6,162 292,167
Convertible preferred stock 1,124,764 1,123,489 1,124,764 1,123,489
--------- --------- --------- ---------
Dilutive potential common shares 1,793,228 1,767,380 1,830,733 1,810,119
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions 8,993,805 8,392,559 9,008,848 7,897,790
--------- --------- --------- ---------
Basic earnings per share $0.43 $0.18 $0.76 $0.47
--------- --------- --------- ---------
Diluted earnings per share $0.36 $0.16 $0.65 $0.42
--------- --------- --------- ---------
</TABLE>
<PAGE>
4) COMPREHENSIVE INCOME
As of May 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity; to be
included in other comprehensive income.
The components of comprehensive income for the three month and nine
month periods ended January 31, 1999, and January 31, 1998, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
----------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net income...........................$3,075,396 $1,197,017 $5,452,379 $2,879,491
Foreign currency translation
Adjustment (58,390) (266,007) (148,414) (541,039)
---------- ---------- --------- ---------
Comprehensive income.................$3,017,006 $ 931,010 $5,303,965 $2,338,452
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
5) ACQUISITION OF CRUSADER ENGINE DIVISION
On December 4, 1998, the Company acquired certain assets of the Crusader
Engine division of Thermo Power Corporation, a subsidiary of Thermo Power
Electron Corporation, for approximately $3,900,000. The Crusader Engine division
provides engine dressing and related devices for material handling engines. The
Company funded $3,190,000 of the purchase price using the Bank of America
acquisition facility and $710,000 using the Bank of America capital lease
facility. The acquisition will be accounted for under the purchase method of
accounting and goodwill of approximately $644,000 will be amortized on the
straight-line method over 20 years.
6) SALE OF 49 PERCENT INTEREST IN IMPCO BV
On January 28, 1999, the Company sold a 49 percent interest in IMPCO BV to
BERU Aktiengesellschaft, an international Original Equipment Manufacturer (OEM)
and aftermarket supplier of diesel and automotive engine components and systems,
for $3,500,000 in cash. The Company recorded a pre-tax gain of $2,169,000 and an
after-tax gain of $1,627,000, or $0.18 per share on a diluted basis. At January
31, 1999, the Company had not yet received the international transfer of funds
from the escrow account and thus recorded a $3,500,000 note receivable on the
balance sheet. The new company will be operated as IMPCO-BERU Technologies, B.V.
7) ACQUISITION OF ALTERNATIVE FUELS DIVISION OF MIKUNI CORPORATION
On February 17, 1999, the Company entered into a Memorandum of
Understanding with Mikuni Corporation to purchase certain assets of the
alternative fuels division of Mikuni Corporation, headquartered in Tokyo, Japan.
The alternative fuels division, based in Fukuoka, Japan, is a distributor of
alternative fuels products and systems throughout Asia, with a focus on the
Japanese market. Mikuni has distributed IMPCO products in Japan since 1994. The
transaction is subject to the approval by the boards of directors of both
companies and execution of a definitive agreement. It is expected that the
transaction will be completed by March 31, 1999.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
The statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not historical in
nature are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to,
those identified in "Certain Factors" in the Company's April 30, 1998 Form
10-K filed July 29, 1998 and other factors identified from time to time in
the Company's reports filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
NET REVENUE
- -----------
Net revenue for the three months and nine months ended January 31, 1999,
increased by approximately $2,875,000 or 17 percent and $8,618,000 or 17
percent, respectively, as compared to the same periods in the prior fiscal year.
For the current quarter, contract revenues and motor vehicle OEM upfit sales,
primarily from the General Motors (GM) program, represented 58 percent and 37
percent of this increase, respectively. For the nine month period ended January
31, 1999, contract revenues and motor vehicle OEM upfit sales represented 37
percent and 57 percent of the increase, respectively.
Product sales for the three months and nine months ended January 31, 1999,
increased by 8 percent and 12 percent, respectively, as compared to the same
periods in the prior fiscal year. During the current quarter, the increase in
product sales was favorably increased by $69,000, or less than 1 percent, as a
result of a weakening U.S. Dollar against foreign currencies. For the nine month
period, the increase in product sales was unfavorably reduced by $535,000, or 1
percent, as a result of a strengthening U.S. Dollar against foreign currencies.
The following table sets forth the Company's product sales by application (all
dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Motor vehicle products $ 6,231 $ 5,164 $ 20,044 $ 15,943
Forklifts and other material
handling equipment 7,475 7,394 22,501 20,825
Small portable to
large stationary engines 2,338 2,277 7,587 7,948
-------- -------- -------- --------
Total product sales $16,044 $ 14,835 $ 50,132 $ 44,716
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
MOTOR VEHICLE PRODUCTS - During the three months and nine months ended
January 31, 1999, net revenue attributable to the Company's motor vehicle
products increased by 21 percent and 26 percent, respectively, as compared to
the same periods in the prior fiscal year.
<PAGE>
Revenue attributable to direct motor vehicle OEM upfits with the
Company's systems increased 137 percent to $1,840,000 during the three months
ended January 31, 1999, and increased 244 percent to $6,934,000 during the
nine months ended January 31, 1999, as compared to the same periods in the
prior fiscal year. The revenue in the current fiscal year represents sales of
mid-1998 GM pick-up trucks and GM mid-size automobiles upfit with the
Company's bi-fuel natural gas fuel system, and sales of medium-duty dedicated
Liquid Propane Gas (LPG) kits under a cross-license agreement with GM. Upfit
revenues for the current quarter would have been higher than revenues
actually realized if there had not been part shortages from suppliers. The
direct OEM upfit revenue in the prior fiscal year represented sales of
mid-1997 GM pick-ups upfit with the Company's bi-fuel natural gas fuel
system. Management anticipates that the commercialization by GM of model year
1999 Chevrolet and GMC pickup trucks and other vehicles with the Company's
systems will result in significantly higher OEM upfit revenue during the
final quarter of the current fiscal year compared to the final quarter of
fiscal year 1998. Additionally, management expects direct OEM upfit revenues
to be significantly higher during the remaining quarter of the current year
compared to the current quarter of this year due to higher customer orders
and the make-up of conversions from the third quarter caused by part
shortages. These are forward looking statements.
During the three months and nine months ended January 31, 1999, sales
for the Company's motor vehicle component parts increased by $2,000, or less
than 1 percent, and decreased by $816,000, or 6 percent, respectively, as
compared to the same periods in the prior fiscal year. For the nine month
period, the decrease was primarily attributable to lower product sales for
aftermarket conversions in the U.S. market due to regulatory requirements
shifting the automotive conversion market to direct OEM upfits. During the
three months and nine months ended January 31, 1999, sales from the
Australian operation, which primarily sells motor vehicle equipment,
decreased by $361,000 and $1,067,000, respectively. These decreases primarily
resulted from the weakening of the Australian Dollar versus the U.S. Dollar
which negatively impacts the conversion of foreign currency denominated
sales. Additionally, the decrease in Australia sales in the current quarter
was further impacted by a slowdown in component sales to OEMs. These
decreases for the three month and nine month periods were partially offset by
approximately $273,000 and $1,520,000, respectively, in incremental revenues
generated by the Mexico operation which was acquired in December 1997.
Management anticipates that revenues generated from automotive component
parts during the fourth quarter of the current fiscal year will be higher as
compared to sales realized during the current quarter as a result of an
increase in Mexico, Latin America, and Australian sales. This is a forward
looking statement.
FORKLIFTS AND OTHER MATERIAL HANDLING EQUIPMENT - During the three months
and nine months ended January 31, 1999, net revenue attributable to the
Company's products for forklifts and other material handling equipment increased
by approximately 1 percent and approximately 8 percent, respectively, as
compared to the same periods in the prior fiscal year. During the three months
ended January 31, 1999, the Company realized an incremental $1,059,000 in
material handling equipment related sales from the December 1998 Crusader Engine
division acquisition. The Company also realized increased revenues of $367,000
from its European operations which primarily sells material handling equipment.
During the current quarter, the increase in forklift related sales was offset by
reduced sales in the domestic market (independent of the Crusader Engine
division sales) and Pacific rim market. These markets realized decreases as a
result of delayed customer orders due to concern over general downturns in
economic activity. During the nine months ended January 31, 1999, increased
revenues of $1,168,000 were realized from its European operations. This increase
is a result of the general upswing in economic conditions and demand for
forklifts and related products. The remaining increase in forklift related sales
for the nine month period was derived from domestic operations, including
<PAGE>
sales from the Crusader Engine division. Management anticipates sales for
forklifts and other material handling equipment during the fourth quarter of
fiscal year 1999 will be higher compared to the current quarter primarily due
to the reporting of a full quarter for the Crusader Engine division sales and
higher domestic sales. This is a forward-looking statement.
SMALL PORTABLE TO LARGE STATIONARY ENGINES - During the three months and
nine months ended January 31, 1999, net revenue for the Company's small
portable to large stationary engine market increased by $61,000, or 3
percent, and decreased by $361,000, or 5 percent, respectively, as compared
to the same periods in the prior fiscal year. For the current quarter, the
increase in revenues resulted from higher demand for small portable engines -
primarily generators - as consumers and small business prepare for the Year
2000. This increase was partially offset by reduced large engine sales in the
Far East. For the nine months ended January 31, 1999, the decrease was due to
reduced large stationary engine sales in the Far East, in addition to EPA
regulations affecting the small engine aftermarket. Management anticipates
that net revenue for the Company's small portable to large stationary engines
in the fourth quarter of the current year will be higher compared to the
current quarter as a result of the increasing demand for small portable
engines. This is a forward-looking statement.
CONTRACT REVENUES - Contract revenue for the three and nine months ended
January 31, 1999, increased by $1.7 million, or 77 percent, and $3.2 million,
or 48 percent, respectively, as compared to the same periods in the prior
fiscal year. This increase was due to the addition of several vehicle
platforms and additional future model years for existing platforms under the
GM development contract and development contracts funded by the Southern
California Air Quality Management District and VarietyPerkins. For the three
month period ended January 31, 1999, contract revenue comprised 19 percent of
total revenue compared to 13 percent for the same period in the previous
year. For the nine month period ended January 31, 1999, contract revenue
comprised 17 percent of total revenue compared to 13 percent for the same
period in the previous year. Contract revenue is principally recognized by
the percentage of completion method. Profits expected to be realized on
contracts are based on the Company's estimates of total contract sales value
and costs at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts. Management anticipates,
based on new contracts negotiated with GM and expected levels of contract
completion at fiscal year end, that contract revenue during the remainder of
the current fiscal year will be lower than levels experienced during the
current quarter. Additionally, profit levels expected on the contracts in the
fourth quarter of the current year will be lower than levels realized during
the first nine months of this fiscal year due to the new contracts. These are
forward-looking statements.
During the three months and nine months ended January 31, 1999, the
Company's revenues were generated in the following geographic regions:
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States and Canada 50% 56% 56% 56%
Pacific Rim 10% 12% 10% 14%
Europe 20% 20% 19% 19%
Latin America 20% 12% 15% 11%
</TABLE>
<PAGE>
GROSS PROFIT MARGIN
- -------------------
The Company's gross profit margin on product sales for the three month
period ended January 31, 1999 was 32 percent, as compared to 42 percent for
the same period during the prior fiscal year. The Company's gross profit
margin on product sales for the nine month period ended January 31, 1999 was
33 percent, as compared to 39 percent for the same period during the prior
fiscal year. For both the three month and nine month period, the decreases
are a result of a higher percent of U.S. based OEM upfit sales that have
significantly lower gross margins than component sales.
U.S. BASED PRODUCT MARGINS - During the three months and nine months
ended January 31, 1999 the Company's gross profit margin on U.S. based
product sales decreased from 45 percent to 33 percent and from 42 percent to
33 percent, respectively, as compared to the same periods in the prior fiscal
year. The gross profit margin during the current fiscal year is lower
primarily as a result of the significantly higher volume of direct OEM upfit
sales and inherently lower upfit margins on those sales. The gross profit
margin on U.S. based component sales during the current quarter is lower
compared to the same period in the prior year as result of product mix and
higher manufacturing overhead costs. Management anticipates that gross profit
margins on U.S. based component sales for the fourth quarter of fiscal year
1999 will be comparable to the current quarter. Additionally, management
anticipates that percent profit margins on product sales will continue to be
impacted by lower upfit margins as direct OEM upfit sales become a larger
segment of the Company's business. However, as the direct OEM upfit business
increases, overall gross profit amounts should increase. These are
forward-looking statements.
FOREIGN-SUBSIDIARY BASED PRODUCT MARGINS - During the three months and
nine months ended January 31, 1999 the Company's gross profit margin on
foreign-subsidiary based product sales decreased from 35 percent to 29
percent and from 34 percent to 32 percent, respectively, as compared to the
same periods in the prior fiscal year. During the current quarter, the
Company's gross profit margin on foreign-subsidiary based product sales
decreased as a result of higher material costs at the Australian and Mexico
subsidiaries due to a strengthening U.S. Dollar against those country's
foreign currencies. Also, this decrease is a result of higher material costs
at the European subsidiary due to higher transfer pricing between the U.S.
parent and the subsidiary. For the nine months ended January 31, 1999, the
Company's gross profit margin on foreign-subsidiary based product sales was
favorably impacted by the newly acquired Mexico subsidiary which has realized
higher margins than the European and Australian subsidiaries. Management
anticipates that gross profit percentages at the foreign operations could be
lower in the future as a result of the strengthening U.S. Dollar versus
foreign currencies and adjustments to transfer pricing. This is a
forward-looking statement.
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development ("R&D") expense for the three months and nine
months ended January 31, 1999 decreased approximately $495,000, or 14
percent, and $356,000, or 4 percent, respectively, as compared to the same
periods in the prior fiscal year. R&D expense is primarily for system
development and application engineering of the Company's products under the
funded General Motors contract, other funded contract R&D work with
VarietyPerkins and the Southern California Air Quality Management District,
and for internally funded product and component development work. For the
three months ended January 31, 1999, R&D expense directly related to
externally funded R&D work decreased from $1.9 million in fiscal year 1998 to
$1.4 million in fiscal year 1999. For the nine months ended January 31, 1999,
R&D expense directly related to externally
<PAGE>
funded R&D work decreased from $5.4 million in fiscal year 1998 to $4.3
million in fiscal year 1999. These decreases are a result of improved
productivities resulting from knowledge transfer over multiple platforms and
application of knowledge to non-GM funded contracts. For the three months
ended January 31, 1999, R&D expense directly related to internally funded R&D
work remained flat at $1.7 million compared to the same period in fiscal year
1998. For the nine months ended January 31, 1999, R&D expense directly
related to internally funded R&D work increased from $4.6 million in fiscal
year 1998 to $5.3 million in fiscal year 1999. This increase is a result of
additional efforts to develop new advanced technology and products.
Management believes the Company's future success depends on its ability to
design, develop and market new products that interface successfully with new
engine electronic technology, and which meet mandated emission standards and
advanced fuel storage technology. Management anticipates that R&D expense
during the remaining quarter of fiscal year 1999 will be comparable to levels
experienced during the current quarter. This is a forward-looking statement.
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
Selling, general and administrative (SG&A) expense for the three months
and nine months ended January 31, 1998, increased by approximately $658,000,
or 24 percent, and $943,000, or 10 percent, respectively, as compared to the
same periods in the prior fiscal year. For the three month period, the newly
acquired Crusader Engine Division added $155,000, the European operations
added $121,000, and the Mexico operation added $93,000 in SG&A expenses. The
remaining increase in SG&A expense for the current quarter resulted from
additional administrative expenses from corporate operations. These expenses
included administrative salaries, employee-related costs, and incentive
compensation. For the nine month period, the newly acquired Mexico operation
added $471,000 and the European operation added $143,000 in SG&A expenses.
This increase was partially offset by lower SG&A expense from the Australian
operation, primarily due to the effect of currency conversion as the weaker
Australian dollar versus the U.S. Dollar resulted in lower U.S. Dollar
values. The remaining increase in SG&A expense for the current nine month
period resulted from additional administrative expenses from the corporate
operations. Management anticipates that SG&A expense for remaining quarter in
fiscal year 1999 will be higher than the current quarter primarily due to the
reporting of a full quarter of SG&A expenses for the Crusader Engine division
and higher corporate SG&A expenses. However, as a percentage of net revenues,
SG&A expense is expected to be lower for the current fiscal year as compared
to fiscal year 1998. These are forward-looking statements.
INTEREST EXPENSE
- -----------------
Interest expense for the three months and nine months ended January 31,
1999, increased by $194,000, or 105 percent, and $219,000, or 32 percent,
respectively, as compared to the same periods in the prior fiscal year. For
the current year, the increase is a result of higher borrowings on the
Company's lines of credit as compared to the same period in the prior year
and as a result of higher long-term borrowings to fund the Algas Carburetion
acquisition (December 1997), the purchase of the remaining 49 percent
interest of IMPCO BV (May 1998) and the purchase of the Crusader Engine
Division (December 1998). The higher interest expense was partially offset by
lower interest rates on the Company's credit facility with Bank of America
and prepayments on certain long-term borrowings from funds received from the
Company's redemption of its common stock purchase warrants during the third
quarter of fiscal year 1998. Management anticipates that financing charges
for fiscal year 1999 will be higher as compared to fiscal year 1998 due to
the
<PAGE>
higher borrowings on the line of credit and acquisition loans. This is a
forward-looking statement.
PROVISION FOR INCOME TAXES
- --------------------------
The estimated effective annual tax rate of 24 percent for fiscal year
1999 is significantly higher than the previous year due to the exhaustion of
federal net operating loss carryforwards during the previous fiscal year. The
current year provision includes presumed utilization of estimated research and
development credits of $1,900,000. At January 31, 1999, net deferred tax assets,
included in other current and other assets, was approximately $700,000.
Management has determined, based on the Company's history of prior operating
earnings and its expectations for the future, that operating income of the
Company will more likely than not be sufficient to recognize fully these net
deferred tax assets and that the estimated effective annual tax rate in the
future years will more closely approximate the statutory rate. This is a
forward-looking statement.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company uses cash generated from its operations and external
financing to fund capital expenditures, pay dividends on the preferred stock
and invest in and operate its existing operations and new businesses. These
sources are sufficient to meet all current obligations on a timely basis.
Management believes that such sources of funds will be sufficient to meet the
needs of its business for the foreseeable future. This is a forward-looking
statement.
The Company's financial condition remains strong. The ratio of current
assets to current liabilities was 3.37 and 3.28 at January 31, 1999 and April
30, 1999, respectively. During the current year, the total amount of working
capital increased by approximately $6,949,000 to $33,024,000 at January 31,
1999. Net cash provided by operating activities was $3,223,000 during the
current nine month period, compared to $3,888,000 provided by operating
activities for the same period in the previous year. The decrease in cash
provided by operating activities during the current nine month period compared
to the same period in the prior year resulted primarily from an increase in
accounts receivable, partially offset by an increase in other accrued expenses,
a decrease in inventory and higher net income. The increase in accounts
receivable and other accrued expenses was mostly due to increased billings on
the GM contract, which is recorded in other accrued expenses until the revenue
is earned, and shipments of OEM upfit vehicles. The decrease in inventory is
primarily due to higher turnover of component part inventory.
The Company's foreign subsidiaries generated net cash from operating
activities of approximately $45,000 during the current nine month period,
compared to net cash used in operating activities of $856,000 during the same
period in the previous year. This increase in net cash provided by operating
activities from foreign operations is a result of a decrease in inventory,
primarily from the European operations. This increase in cash flow was
partially offset by cash requirements to fund working capital at IMPCO
Mexicano in the current year. There are currently no restrictions on the
transfer of foreign subsidiary funds within the Company; however, the Company
generally re-invests these funds in the foreign subsidiaries as needed.
Net cash used in investing activities in the first nine months of fiscal
year 1999 was approximately $5,773,000, compared to $6,249,000 for the same
period in the prior year. The primary investing activities during the current
nine month period were the $3,900,000 acquisition of tangible and intangible
assets from the Crusader Engine division during the current quarter, the
$693,000 investment in the remaining 49 percent interest in the Company's
<PAGE>
European subsidiary (Impco BV) during the first quarter, and normal capital
expenditures. The primary investing activities during the same period in the
prior year were the $2,400,000 acquisition of tangible and intangible assets
from Algas Carburetion division, the $961,000 investment in IMPCO Mexicano,
and normal capital expenditures. Management projects capital expenditures
during the current year, primarily relating to equipment enhancements and
facilities for the development and production of new products, to be
comparable to expenditures during fiscal year 1998. The Company expects to
fund a major portion of these expenditures from cash generated from
operations and/or by use of its bank credit facility. These are
forward-looking statements.
Net cash provided by financing activities during the current nine month
period was approximately $1,539,000. The Company made $444,000 in repayments
on the operating line of credit and borrowed $5,288,000 on bank term loans to
fund the 49 percent acquisition of IMPCO BV and the acquisition of the
Crusader Engine division. Additionally, during the current nine month period,
the Company received approximately $1,030,000 from the issuance of common
stock from the exercise of stock options, partially offset by the purchase of
shares held in trust. Payments made on term loans, including the retirement
of the DEPA Holding BV term loan as part of the May 1998 49 percent
acquisition of IMPCO BV, were approximately $3,217,000.
The Company maintains a $12,000,000 revolving line of credit, $2,810,000
of available credit on the acquisition facility, and approximately $1,381,000 of
available credit under a capital lease facility with Bank of America. At January
31, 1999, approximately $2,537,000 and $3,041,000 was outstanding under the
revolving line of credit and the capital lease facility, respectively. The
revolving line of credit expires on August 31, 2000, the acquisition facility
expires on August 31, 1999, and the capital lease facility expires on September
1, 2004. In addition, the Company's subsidiary in the Netherlands has a
3,000,000 NLG (U.S. $1,600,000) credit facility with Mees Pierson, a financial
institution in the Netherlands. At January 31, 1999, there was no outstanding
balance on the Mees Pierson credit facility.
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest and foreign exchange
rates. While these hedging instruments are subject to fluctuations in value,
such fluctuations are generally offset by the value of the underlying exposures
being hedged. The Company is not a party to leveraged derivatives and does not
hold or issue financial instruments for speculative purposes.
FOREIGN CURRENCY MANAGEMENT - The results and financial condition of the
Company's international operations are affected by changes in exchange rates
between certain foreign currencies and the U.S. Dollar. The Company's exposure
to fluctuations in currency exchange rates has increased as a result of the
growth of its international subsidiaries. The functional currency for all of the
Company's international subsidiaries is the local currency of the subsidiary. An
increase in the value of the U.S. Dollar increases costs incurred by the
subsidiaries because most of its international subsidiaries' inventory purchases
are U.S. Dollar denominated. The Company monitors this risk and attempts to
minimize the exposure through forward currency contracts and the management of
cash disbursements in local currencies. The Company uses forward currency
contracts, which typically expire within one year, to hedge payments related to
the purchase of goods by its international subsidiaries. Realized gains and
losses on these contracts are recognized as part of cost of sales in the same
period as the hedged transactions. At January 31, 1999, the Company had currency
forward currency contracts protecting U.S. $1,800,000 in
<PAGE>
inventory purchases. At January 31, 1999 the fair value of forward currency
contracts approximated contract values.
The Company seeks to hedge its foreign currency economic risk by
minimizing its U.S. Dollar investment in foreign operations using foreign
currency term loans and lines of credit to finance the operations of its
foreign subsidiaries. The term loans and lines of credit are denominated in
local currencies and translated to U.S. Dollars at period end exchange rates.
INTEREST RATE MANAGEMENT - The Company uses interest rate swap
agreements with Bank of America to manage its exposure to interest rate
changes and stabilize the cost of borrowed funds. When an agreement is
executed, the interest rate swap is matched as a hedge to a specific debt
instrument and has the same notional amount and tenor as the related debt
instrument principal. Since the interest rate instruments effectively hedge
the underlying interest rate exposure, the net cash amounts paid or received
on the agreements are accrued and recognized as an adjustment to interest
expense. At January 31, 1999, the Company had $6,041,000 secured under fixed
interest rate agreements at a weighted-average fixed interest rate of 7.97%.
Absent these fixed rate agreements, the weighted-average variable rate for
this debt at January 31, 1999 would have been 6.85%. Fair value of these
instruments is based on estimated current settlement cost. At January 31,
1999 the fair value of interest rate swap agreements was approximately
($104,000).
Year 2000
- ---------
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures, due to
processing errors potentially arising from calculations using the Year 2000,
could result in miscalculations or a complete system failure causing
disruptions of operations, including, among other things, a temporary
inability to process financial transactions, update customer accounts, bill
customers, plan production, or engage in similar normal business activities.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates
in the year 2000 and thereafter. First, the Company has completed its
assessment of the Year 2000 issue through 1) communication with key
customers, suppliers, financial institutions and others with which it
conducts business and 2) review of its current internal computer systems to
identify potential Year 2000 issues. Based on this assessment, the Company is
not aware of any key customer, supplier, or financial institution with
inadequate solutions. Secondly, the Company has upgraded all computer
hardware to comply with year 2000 dates and dates thereafter. Finally, the
Company has developed plans to address system modifications required by
December 31, 1999 and these plans basically require the upgrade to new
versions of packaged software. At the end of the current quarter, the Company
has completed a majority of these upgrades and plans to have all system
software upgraded by the end of the current fiscal year.
Direct costs associated with addressing the Year 2000 issue have not
been significant to date and other information technology plans have not been
deferred due to Year 2000 efforts. The financial impact of making the
required systems changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flows. This is
a forward looking statement.
The Company has not yet established a contingency plan to address Year
2000 risk factors outside the Company's control, but it expects to create
such a plan by July 31, 1999.
<PAGE>
The Company's Year 2000 compliance initiatives are ongoing and its
ultimate scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available. In addition,
it is important to note that the description of the Company's efforts
necessarily involves estimates and projections with respect to activities
required in the future. These estimates and projections are subject to
changes as work continues, and such changes may be substantial.
Part II - OTHER INFORMATION
Items 1-5 Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
--------
N/A
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the quarter ended
January 31, 1999.
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.
IMPCO Technologies, Inc.
Date: March 16, 1999 By /s/ Thomas M. Costales
-------------------------
Thomas M. Costales
Chief Financial Officer
and Treasurer
[Authorized Signatory]
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<RECEIVABLES> 21,112,507
<ALLOWANCES> 379,234
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5,650,000
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