<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: October 2, 1999
---------------
Commission file number: 0-20328
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AMTROL INC.
(exact name of registrant as specified in its charter)
Rhode Island 05-0246955
- ------------------------- --------------------
1400 Division Road, West Warwick, RI 02893-1008
-----------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (401) 884-6300
--------------
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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
100 shares of Common stock $.01 par value
-----------------------------------------
as of October 2, 1999
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AMTROL INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED OCTOBER 2, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets -
October 2, 1999 and December 31, 1998 2
Consolidated Statements of Operations -
For the Quarter and Nine Months Ended October 2, 1999
and October 3, 1998 3
Consolidated Statement of Shareholders' Equity -
For the Nine Months Ended October 2, 1999 4
Consolidated Statements of Cash Flows -
For the Nine Months Ended October 2, 1999 and October 3, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
1
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
OCTOBER 2, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 577 $ 1,088
Accounts receivable, less allowance for doubtful accounts 34,737 28,938
Inventories 23,650 24,319
Prepaid income taxes 2,419 2,271
Prepaid expenses and other 2,100 3,241
Assets held for sale -- 572
--------- ---------
Total current assets 63,483 60,429
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 47,616 51,783
OTHER ASSETS:
Goodwill 167,815 171,166
Deferred financing costs 5,970 6,770
Deferred income taxes 8,208 8,205
Other 2,216 2,314
--------- ---------
184,209 188,455
--------- ---------
$ 295,308 $ 300,667
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,676 $ 4,043
Notes payable to banks 3,106 10,660
Accounts payable 22,052 21,193
Accrued expenses 15,020 14,242
Accrued interest 4,132 777
Accrued income taxes 6,101 2,872
--------- ---------
Total current liabilities 54,087 53,787
--------- ---------
LONG TERM DEBT, LESS CURRENT MATURITIES 168,112 173,023
OTHER NONCURRENT LIABILITIES 6,600 7,909
SHAREHOLDERS' EQUITY
Capital stock $.01 par value - authorized 1,000 shares,
100 shares issued -- --
Additional paid-in capital 90,156 89,823
Retained deficit (22,604) (24,363)
Accumulated other comprehensive (loss) income (1,043) 488
--------- ---------
Total shareholders' equity 66,509 65,948
--------- ---------
$ 295,308 $ 300,667
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 53,153 $ 55,573 $ 163,471 $ 154,924
COST OF GOODS SOLD-Note 6 37,348 43,820 118,498 125,349
--------- --------- --------- ---------
GROSS PROFIT 15,805 11,753 44,973 29,575
OPERATING EXPENSES
Selling, general and administrative 6,858 7,113 22,222 20,477
Plant closing and reorganization costs-Note 6 -- -- -- 4,450
Management restructuring-Note 6 -- -- -- 3,500
Amortization of goodwill 1,116 1,136 3,347 3,348
--------- --------- --------- ---------
Income (loss) from operations 7,831 3,504 19,404 (2,200)
OTHER INCOME (EXPENSE):
Interest expense (4,841) (5,289) (14,763) (15,755)
Interest income 39 43 95 117
License and distributorship fees 60 72 150 170
Other, net 76 172 238 696
--------- --------- --------- ---------
Income (loss) before provision for
(benefit from) income taxes 3,165 (1,498) 5,124 (16,972)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 1,600 (110) 3,365 (5,072)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 1,565 ($ 1,388) $ 1,759 ($ 11,900)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS )
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID - IN RETAINED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME (LOSS)
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 -- $ 89,823 $(24,363) $ 488
Capital Contribution -- 333 -- --
Net Income -- -- 1,759 --
Currency Translation Adjustment -- -- --
(1,531)
-------- -------- -------- --------
BALANCE, October 2, 1999 -- $ 90,156 $(22,604) $ (1,043)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,759 $(11,900)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 10,530 9,399
Provision for losses on accounts receivable 127 177
Non-cash charges -- 11,600
Changes in operating assets and liabilities 1,389 (9,069)
-------- --------
Net cash provided by operating activities 13,805 207
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of NOVA, net of cash acquired -- (5,855)
Proceeds from sale of property, plant and equipment 961 2,025
Capital expenditures (4,008) (9,358)
-------- --------
Net cash used in investing activities (3,047) (13,188)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (32,203) (43,048)
Issuance of debt 20,685 35,486
Capital contribution 333 20,497
-------- --------
Net cash (used in) provided by financing activities (11,185) 12,935
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (427) (46)
Effect of exchange rate changes on cash and cash equivalents (84) 8
Cash and Cash Equivalents, beginning of period 1,088 544
-------- --------
Cash and Cash Equivalents, end of period $ 577 $ 506
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly,
in accordance with generally accepted accounting principles, the Company's
financial position, results of operations and cash flows for the interim
periods presented. Such adjustments consisted of only normal recurring
items. The results of operations for the interim periods shown in this
report are not necessarily indicative of results for any future interim
period or for the entire year. These consolidated financial statements do
not include all disclosures associated with annual financial statements and
accordingly should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
GOODWILL
Goodwill represents the excess of purchase price over the fair value of net
assets acquired in connection with the 1996 acquisition of the Company by
affiliates of the Cypress Group L.L.C., the 1997 acquisition of Petroleo
Mecanica ALFA, S.A. ("ALFA") and the 1998 acquisition of NOVA
Wassererwarmer GmbH ("NOVA") and is included in other assets. Goodwill is
being amortized up to 40 years.
6
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other assets
and are amortized over the life of the related debt using the effective
interest method. Amortization of deferred financing costs is included in
interest expense.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to permit
comparison to the current year presentation.
4. INVENTORIES
Inventories are stated at the lower of cost or market and were as follows
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Raw materials and work in process $12,349 $14,548
Finished goods 11,301 9,771
------- -------
$23,650 $24,319
======= =======
</TABLE>
5. LONG-TERM DEBT
The Bank Credit Agreement (the "Agreement") between the Company and a
syndicate of lenders provides for secured borrowings consisting of (i) a
five and one-half year revolving credit facility providing for up to $30
million in revolving loans, $5.0 million of which may be used for letters
of credit (the "Revolving Credit Facility") and (ii) a term loan facility
consisting of a five and one-half year Tranche A Term Loan, $8.8 million at
October 2, 1999, and a seven and one-half year Tranche B Term Loan, $43.9
million at October 2, 1999, (collectively, the Term Loans). In addition,
the Company has issued $115.0 million of Senior Subordinated Notes due in
2006 (the "Notes"). The Notes are unsecured obligations of the Company. The
Notes bear interest at a rate of 10.625% per annum, which is payable
semi-annually on each June 30 and December 31.
Under the terms of the Agreement, AMTROL is required to comply, and is in
compliance, with certain financial covenants and restrictions as of October
2, 1999.
7
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
6. 1998 PLANT CLOSING, REORGANIZATION AND RESTRUCTURING CHARGES
The Company recorded aggregate charges of $16.3 million through the third
quarter of 1998 primarily related to a management restructuring and
reorganization, abnormal warranty costs associated with a production
problem (since corrected) and relocating and consolidating certain
production lines. The abnormal warranty charge and manufacturing
inefficiencies associated with the relocation of production are included in
cost of sales.
7. PROVISION FOR INCOME TAXES
The effective income tax rates used in the interim financial statements are
estimates of the full year's rates. The difference for 1999 between the
provision computed using the statutory U.S. federal income tax rate and the
provision for income taxes in the accompanying consolidated financial
statements is primarily the result of goodwill amortization.
8. COMPREHENSIVE INCOME
The total comprehensive income (loss), which is comprised of the net income
(loss) and the foreign currency translation adjustment, was as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------- -----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total Comprehensive Income (Loss) $2,710 $230 $228 ($10,552)
</TABLE>
9. ACQUISITION
On June 9, 1998, the Company acquired NOVA Wassererwarmer GmbH ("NOVA")
located in Donaueschingen, Germany for approximately $6.0 million (United
States Dollars) plus assumed debt of $2.0 million. NOVA manufactures
high-end residential and commercial water heaters which are marketed
primarily in Germany, Switzerland and Austria. This acquisition provides
AMTROL with expanded manufacturing and distribution capabilities in central
Europe, in addition to the opportunity to offer many of AMTROL's
complementary hydronic heating and water systems products in the European
market. AMTROL assumed immediate management control of NOVA and,
accordingly, the operating results and financial position of NOVA are
included in the consolidated results of operations and consolidated balance
sheets of AMTROL from the acquisition date. The following represents
proforma net sales and net loss for year-to-
8
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
date October 3, 1998 as though the acquisition of NOVA occurred as of
January 1, 1998 (in thousands): Net sales $160,643, net loss $11,806.
10. BUSINESS SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, in 1998. AMTROL's reportable segments
are delineated geographically. The segments are managed separately because
of their different product offerings, markets served, manufacturing
processes and cost structures.
The Company's North American segment operates manufacturing facilities in
Rhode Island, Kentucky, Maryland and Ohio, and operates a distribution
facility in Ontario, Canada. This segment manufactures and markets products
used principally in flow control, storage, heating, and other treatment of
fluids in the water system and HVAC markets. These products are marketed
throughout the world but primarily in North America, Western Europe, Asia
and Mexico.
The Company's European segment includes the Company's facilities in
Guimaraes, Portugal and Donaueschingen, Germany. The Guimaraes facility
manufactures returnable and non-returnable steel gas cylinders for storing
cooking, heating and refrigerant gases which are marketed throughout
Europe, the Middle East and Africa, as well as the Far East. The
Donaueschingen facility, acquired during the second quarter of 1998,
manufactures and distributes residential and commercial water heaters which
are marketed primarily in Switzerland, Austria and Germany.
The primary criteria by which financial performance is evaluated and
resources are allocated include revenues and operating income. The
following is a summary of key financial data by segment:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales to external customers
North America $ 36,666 $ 38,912 $ 111,758 $ 112,883
Europe 16,487 16,661 51,713 42,041
--------- --------- --------- ---------
Consolidated $ 53,153 $ 55,573 $ 163,471 $ 154,924
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS
North America $ 6,083 $ 2,622 $ 14,614 $ (5,761)
Europe 1,748 882 4,790 3,561
--------- --------- --------- ---------
Consolidated $ 7,831 $ 3,504 $ 19,404 $ (2,200)
========= ========= ========= =========
</TABLE>
9
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AMTROL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such statements involve risks and uncertainties that could cause actual
results to differ materially from those set forth in such forward-looking
statements. Among other things, expectations for upcoming periods are based on
assumptions which management believes to be reasonable at this time, including
assumptions concerning the volume and product mix of sales. Other significant
potential risks and uncertainties include the following: risks associated with
indebtedness; high level of competition in the Company's markets; importance and
costs of product innovation; risks associated with international operations;
product liability exposure and the risk of adverse effects of economic and
regulatory conditions on sales; and risks associated with environmental matters.
10
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
the Company's net sales represented by certain income and expense items in the
Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 70.3 78.9 72.5 80.9
----- ----- ----- -----
Gross Profit 29.7 21.1 27.5 19.1
Selling, General and
Administrative Expenses 12.9 12.8 13.6 13.2
Plant Closing and Reorganization Costs -- -- -- 2.9
Management Restructuring -- -- 2.3
Amortization of Goodwill 2.1 2.0 2.0 2.1
----- ----- ----- -----
Income (Loss) from Operations 14.7 6.3 11.9 (1.4)
Interest Expense (9.1) (9.5) (9.0) (10.2)
Interest Income -- 0.1 -- 0.1
Other Income, net 0.3 0.4 0.2 0.5
----- ----- ----- -----
Income (loss) before Provision for
(Benefit from) Income Taxes 5.9 (2.7) 3.1 (11.0)
Provision for (Benefit from) Income
Taxes 3.0 (0.2) 2.0 (3.3)
----- ----- ----- -----
Net Income (Loss) 2.9% (2.5)% 1.1% (7.7)%
===== ===== ===== =====
</TABLE>
Year-to-date results are impacted by the acquisition of NOVA Wassererwarmer GmbH
("NOVA") on June 9, 1998 (see Note 9) as operating results of this subsidiary
are included in the nine months ended October 2, 1999, but are only included in
1998 from the acquisition date.
11
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER ENDED OCTOBER 2, 1999
The Company's 1999 third quarter operating results compared to the corresponding
period of 1998 reflect significant increases in gross profit, net income and
earnings before interest, taxes, depreciation and amortization ("EBITDA"), even
though net sales for the quarter were somewhat lower.
Net sales for the third quarter decreased $2.4 million or 4.4% compared to the
same period in 1998. The quarter-to-quarter comparison is impacted by unusually
strong sales in 1998 resulting from a significant order backlog at the beginning
of the 1998 third quarter. Back orders at the beginning of the 1999 third
quarter were approximately $2.0 million less than at the beginning of the same
quarter in 1998 as a result of a significantly increased effort to improve
customer service. Sales in North America, adjusted for certain markets which
were transferred to Alfa in 1998, were down 2.0% in the 1999 third quarter,
primarily due to the lower backorder position. Sales in Europe in the 1999 third
quarter, also adjusted for transferred markets, decreased approximately 9.0%
primarily due to weaker European currencies compared to the U.S. Dollar in 1999.
Despite higher local currency sales in 1999, the weak Escudo decreased the
reported amount of those sales in U.S. dollars.
Gross profit for the third quarter of 1999 increased from the third quarter of
1998 by $4.1 million or 34.5% with the margin percentage increasing to 29.7%
from 21.1%. The higher margins in 1999 are mainly attributable to productivity
improvements at the Company's West Warwick, Rhode Island manufacturing facility
and to worldwide cost reduction initiatives.
Selling, general and administrative expenses for the 1999 third quarter
decreased approximately $0.3 million compared to 1998. The decrease was the
result of cost containment actions in 1999.
EBITDA in the third quarter of 1999 increased $4.4 million, or 66%, to $11.1
million, compared to $6.7 million in the 1998 third quarter. Third quarter 1999
EBITDA was the highest in the Company's history and is the third consecutive
record setting quarter.
Goodwill amortization expense of $1.1 million for the third quarter of 1999 was
relatively unchanged from the third quarter of 1998, and interest expense of
$4.8 million for the third quarter decreased $0.5 million over the comparable
1998 period as a result of a reduction in long term debt.
Pre-tax income for the 1999 third quarter was $3.2 million, an increase of
approximately $4.7 million over the 1998 third quarter pre-tax loss.
NINE MONTHS ENDED OCTOBER 2, 1999
The Company's operating results for the nine months ended October 2, 1999
compared to the
12
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
same period of 1998 reflect higher net sales, gross profit, net income and
EBITDA.
Net sales for the first nine months of 1999 increased $8.5 million or 5.5%
compared to the same period in 1998. The comparison is favorably impacted by the
acquisition of NOVA. Excluding this acquisition, year-to-date 1999 net sales
would have increased approximately 3.0%. Sales in North America, adjusted for
certain markets which were transferred to ALFA from North America starting in
May 1998, increased by 4.2% for the 1999 nine month period compared to the same
period in 1998. European sales in local currency, excluding the impact of NOVA
and markets transferred from North America increased 2.2% in 1999, compared to
the same period in 1998.
Gross profit for the nine months ended October 2, 1999 increased by $10.9
million or 32.0% in comparison to the same period in 1998 (excluding the 1998
provision for abnormal warranty costs). The gross profit percentage increased to
27.5% in 1999 from 22.0% in 1998. Similar to the third quarter comparison, the
increase in gross profit and the margin percentage is primarily due to
productivity improvements at the Company's West Warwick, Rhode Island
manufacturing facility and worldwide cost reduction initiatives. Excluding the
results of NOVA, the margin percentage for the first nine months of 1999 would
have been 28.6%.
Selling, general and administrative expenses for the nine months ended October
2, 1999 increased approximately $1.7 million from 1998. The increase is mainly
attributable to the inclusion of NOVA in all of 1999 but only four months in
1998; and higher operating costs at Alfa, related to substantially higher
revenues, added an additional $0.7 million to 1999 expenses.
EBITDA for the nine months ended October 2, 1999 increased $22.2 million to
$29.5 million, compared to $7.3 million for the nine months ended October 3,
1998. The nine months ended October 3, 1998 included restructuring and
reorganization costs, costs related to a plant relocation and abnormal warranty
costs aggregating $16.3 million.
Goodwill amortization expense of $3.3 million for the first nine months of 1999
was relatively unchanged from the comparable period in 1998 and interest expense
decreased $1.0 million from 1998 to $14.8 million. The decrease in interest
expense primarily relates to the reduction of debt offset by the acquisition and
financing of NOVA.
Year-to-date pre-tax income was $5.1 million, an increase of approximately $22.1
million over the year-to-date 1998 pre-tax loss of $17.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital at October 2, 1999 was $9.4 million and the ratio of current
assets to current liabilities was 1.17 to 1.0. This compares with working
capital of $6.6 million and a current ratio
13
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
of 1.12 to 1.0 at December 31, 1998. The increase in working capital resulted,
in part, from an increase in accounts receivable of $5.8 million, offset by an
inventory decline of approximately $0.7 million. The increase in receivables and
the decrease in inventory are primarily the result of seasonally higher sales.
Accounts payable and accrued expenses combined increased from the previous
year-end by approximately $1.6 million, largely due to the timing of payments.
The Company's cash balance declined $0.5 million as compared to the end of 1998.
During this same period, the Company invested approximately $4.0 million in
plant and equipment and decreased net borrowings by $12.8 million.
The Company's total capital expenditures for 1999 are projected to approximate
$8.5 million. The projection reflects planned capital investments at the
Guimaraes, Portugal and West Warwick, Rhode Island facilities to improve
productivity and additional investments in information systems at all of the
Company's locations.
The Company is a party to a Bank Credit Facility (the "Facility") which consists
of $52.7 million of senior term loans (the "Term Loans") and a $30.0 million
revolving credit facility (the "Revolving Credit Facility"). A portion ($8.8
million) of the Term Loans (the "Tranche A Term Loans") will mature on May 13,
2002, with quarterly amortization payments during the term of such loans. The
remainder ($43.9 million) of the Term Loans (the "Tranche B Term Loans") will
mature on May 13, 2004, with nominal quarterly amortization prior to the
maturity of the Tranche A Term Loans and with the remaining amounts amortizing
on a quarterly basis thereafter.
The Revolving Credit Facility includes a sublimit providing for up to $20.0
million of availability on a revolving credit basis to finance permitted
acquisitions. The commitments under the Revolving Credit Facility and the
acquisition sublimit will each reduce by $5.0 million on November 13, 2000 and
$10.0 million on November 13, 2001. The Revolving Credit Facility will mature on
May 13, 2002. At October 2, 1999, amounts available under the revolver
approximated $28.6 million. The Bank Credit Facility is secured by substantially
all assets of the Company and its domestic subsidiaries.
The Company issued $115.0 million of Senior Subordinated Notes due 2006 (the
"Notes") under an Indenture dated as of November 13, 1996. The Notes are
unsecured obligations of AMTROL. The Notes bear interest at a rate of 10.625%
per annum which is payable semi-annually on each June 30 and December 31
commencing on June 30, 1997. In addition, on or prior to December 31, 1999, the
Company may use the net cash proceeds of one or more public equity offerings to
redeem up to 35% of the aggregate principal amount of the Notes originally
issued at a redemption price of 110.625% of the principal amount thereof plus
accrued interest to the date of redemption. Upon a "Change of Control" (as
defined in the Indenture), each Note holder has the right to require the Company
to repurchase such holder's Notes at a purchase price of 101% of the principal
amount plus accrued interest.
14
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Bank Credit Facility and the Indenture contain various affirmative and
negative covenants and restrictions. The Company was in compliance with all such
covenants at October 2, 1999.
During 1999, members of the Company's management have contributed an additional
$0.3 million of new equity into the Company's parent, AMTROL Holdings Inc. In
turn, AMTROL Holdings Inc. contributed a like amount to the Company. The
Company's management agreed to make additional capital contributions of $0.7
million to AMTROL Holdings Inc. over the next two years.
Management believes that cash generated from operations, together with
borrowings available under the Revolving Credit Facility, will be sufficient to
meet the Company's working capital and capital expenditure needs in the
foreseeable future. The Company may consider other options available to it in
connection with funding future working capital and capital expenditure needs,
including the issuance of additional debt and equity securities.
INFLATION
The Company believes that inflation does not have a material effect on its
results of operations or financial condition. To insulate against fluctuating
prices, the Company has negotiated annual contracts with suppliers of certain
key raw materials (primarily steel) for a significant percentage of its expected
usage through 1999.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the Year 1900 rather than the Year 2000. The Company has recently
completed the implementation of a new Enterprise Resource Planning System
("ERP") in its West Warwick, Rhode Island corporate headquarters. The ERP, in
addition to providing the Company with a wide-range of operational and
administrative efficiencies, supports most of the Company's North American
operations and ensures that virtually all of the Company's core business systems
are Year 2000 compliant. All remaining business software programs are expected
to be made Year 2000 compliant by the end of 1999, including those supplied by
vendors, or they will be retired. The cost to remediate possible exposures
resulting from the Year 2000 problem cannot be distinguished from the overall
cost of the ERP which approximated $3.0 million as of the end of 1998. Costs to
remediate Year 2000 exposures other than costs incurred in connection with the
ERP are not material.
The Company communicated with its most significant suppliers to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 issues. The Company has also
communicated with its large customers to assess the same issue. While there can
be no guarantee that the systems of other companies on which the Company's
system rely will be timely converted and will not have an adverse effect
15
<PAGE> 17
AMTROL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
on the Company's systems, the Company does not believe that its operations are
materially vulnerable to the failure of any vendor or customer to properly
address the Year 2000 issue. The Company believes it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.
The Company has also communicated with the vendors supplying manufacturing
equipment utilizing hardware, software and associated embedded computer chips
and has determined that the majority of its equipment is Year 2000 compliant.
The remaining equipment not currently Year 2000 compliant will be compliant by
January 1 or retired.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company believes
that the successful implementation of the ERP supporting the Company's North
American operations in 1998 has substantially mitigated the most pervasive risks
to the Company resulting from Year 2000 related computer failures. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The aforementioned
steps being undertaken by the Company are expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its material suppliers and
customers.
The Company has developed a contingency plan to address exposures to its
business resulting from possible Year 2000 problems. Because its core systems
have been made Year 2000 compliant already, the Company's contingency plan
primarily addresses identifying alternate sources for key materials and supplies
in the event that the Company's primary vendors are not able to supply the
Company in a timely fashion. For most such materials and supplies, alternate
sources have already been identified. The Company believes that, with the recent
implementation of the ERP and the other steps being taken, the possibility of
significant interruptions of normal operations should be reduced.
16
<PAGE> 18
AMTROL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits or reports on Form 8-K were filed during the period covered by this
report.
17
<PAGE> 19
AMTROL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
AMTROL INC.
Date: November 16, 1999 By: /s/ALBERT D. INDELICATO
----------------------- --------------------------------
Albert D. Indelicato
President,
Chief Executive Officer and
Director
Date: November 16, 1999 By: /s/DONALD W. REILLY
----------------------- --------------------------------
Donald W. Reilly,
Vice President,
Chief Financial Officer and
Treasurer
18
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