<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 26, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File #0-18018
AEROVOX INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 76-0254329
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
740 Belleville Avenue, New Bedford, MA 02745
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(Address of principal executive offices) (Zip Code)
(508) 994-9661
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Registrant's telephone number
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:
At November 10, 1998, 5,390,505 shares of registrant's common stock (par value,
$1.00) were outstanding.
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AEROVOX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 27,384 $ 26,126 $ 89,140 $ 92,927
Cost of sales 22,846 23,583 73,207 78,915
--------- --------- --------- ---------
Gross profit 4,538 2,543 15,933 14,012
Selling, general and administrative expenses 4,437 3,643 13,515 12,743
--------- --------- --------- ---------
Income (loss) from operations 101 (1,100) 2,418 1,269
Other income (expense):
Gain on sale of business unit 949 - 949 -
Interest expense (358) (432) (1,185) (1,407)
Other income 136 63 349 120
--------- --------- --------- ---------
Income (loss) before income taxes 828 (1,469) 2,531 (18)
Provision for income taxes 278 (631) 908 (33)
--------- --------- --------- ---------
Net income (loss) $ 550 $ (838) $ 1,623 $ 15
========= ========= ========= =========
Basic earnings (loss) per share $ 0.10 $ (0.16) $ 0.30 $ 0.00
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.10 $ (0.16) $ 0.30 $ 0.00
========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED, CONDENSED,
CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AEROVOX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash $ 625 $ 693
Accounts receivable, net 15,484 14,249
Inventories:
Raw materials 9,947 8,612
Work in progress 2,864 3,938
Finished goods 5,795 5,626
Prepaid expenses and other current assets 1,190 637
--------- ---------
Total current assets 35,905 33,755
Property, plant and equipment, net 29,684 32,263
Deferred income taxes 5,412 5,385
Other assets - 156
--------- ---------
Total assets $ 71,001 $ 71,559
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,403 $ 10,351
Accrued compensation and related expenses 3,292 2,887
Other accrued expenses 3,380 3,030
Current maturities of long-term debt 1,645 1,909
Income taxes 1,158 362
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Total current liabilities 18,878 18,539
Deferred income taxes 5,474 5,446
Industrial revenue bond 1,458 1,750
Long-term debt less current maturities 13,189 14,973
Reserve for environmental costs and plant remediation 6,033 6,033
Other liabilities 670 1,052
Stockholders' equity:
Common stock 5,387 5,384
Additional paid-in capital 1,045 1,037
Retained earnings 18,905 17,282
Foreign currency translation adjustments (38) 63
--------- ---------
Total stockholders' equity 25,299 23,766
--------- ---------
Total liabilities and stockholders' equity $ 71,001 $ 71,559
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED, CONDENSED,
CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AEROVOX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Sept. 26, Sept. 27,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,623 $ 15
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of business unit (949) -
Depreciation and amortization 3,471 3,705
Deferred income taxes - (11)
Changes in operating assets and liabilities:
Accounts receivable (1,519) 750
Inventories (516) 2,336
Prepaid expenses and other current assets (538) 95
Accounts payable (941) 1,031
Accrued expenses 202 457
Income taxes payable 783 (149)
--------- ---------
Net cash provided by operating activities 1,616 8,229
--------- ---------
Cash flows from investing activities:
Proceeds from sale of business unit 2,000 -
Acquisition of property, plant and equipment (941) (2,000)
Other (252) (122)
--------- ---------
Net cash used in investing activities 807 (2,122)
--------- ---------
Cash flows from financing activities:
Proceeds from employee stock purchase
plan and exercise of stock options 10 247
Net repayments under line of credit (826) (4,945)
Long-term debt borrowings - 946
Repayment of long-term debt (1,545) (2,816)
--------- ---------
Net cash used in financing activities (2,361) (6,568)
--------- ---------
Effects of exchange rate on cash (130) 39
--------- ---------
Decrease in cash (68) (422)
Cash at beginning of year 693 864
--------- ---------
Cash at end of period $ 625 $ 442
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED, CONDENSED,
CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AEROVOX INCORPORATED
NOTES TO UNAUDITED, CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
These unaudited, condensed, consolidated financial statements should be
read in conjunction with Aerovox Inc.'s ("the Company") Annual Report on
Form 10-K for the fiscal year ended December 27, 1997, and the financial
statements and footnotes included therein. In the opinion of management,
the accompanying financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the
consolidated financial position, results of operation and cash flows of the
Company. The December 27, 1997 balance sheet was derived from the
Company's audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Securities and
Exchange Commission rules and regulations.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current presentation.
The Company has revised its fiscal calendar for 1998 and 1999. Fiscal 1998
will have 53 weeks, and will end on January 2, 1999. Fiscal 1999 will
consist of 52 weeks, and will end on January 1, 2000.
<PAGE>
(2) EARNINGS PER SHARE (BASIC AND DILUTED)
The Company computes basic and diluted earnings per share in accordance
with Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share", which the Company adopted as of December 27, 1997. Basic earnings
per share is computed by dividing income (the numerator) by the weighted-
average number of common shares outstanding (the denominator). Diluted
earnings per share is computed by dividing income (the numerator) by the
weighted-average number of common shares outstanding plus potentially
dilutive common shares applying the treasury stock method (the
denominator).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 26, 1998 SEPTEMBER 27, 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income Shares Per share Net income Shares Per share
amount (loss) amount
- --------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 550 5,388,235 $ 0.10 $ (838) 5,380,589 $ (0.16)
- --------------------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
Options 7,247 0
- --------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE 5,395,482 $ 0.10 5,380,589 $(0.16)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 26, 1998 SEPTEMBER 27, 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income Shares Per share Net income Shares Per share
amount amount
- --------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1,623 5,386,721 $ 0.30 $ 15 5,351,189 $ 0.00
- --------------------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
Options 15,009 72,626
- --------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE 5,401,730 $ 0.30 5,423,815 $ 0.00
- --------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 686,375 shares of common stock at prices ranging from
$3.375 to $9.625 per share and 443,375 shares at prices ranging from $3.625
to $9.625 per share were outstanding at September 26, 1998 but were not
included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of
common shares during the three months and nine months ended September 26,
1998, respectively. Options to purchase 92,500 shares of common stock at
the price of $3.00 and 335,500 shares at prices ranging from $3.00 to $3.50
per share were outstanding at September 26, 1998 and were included in the
calculation of dilutive options under the treasury stock method because
they had a dilutive effect on earnings per share for the three months and
nine months ended September 26, 1998, respectively.
Options to purchase 299,250 shares of common stock at prices ranging from
$6.00 to $9.625 per share were outstanding at September 27, 1997 but were
not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of
common shares. Options to purchase 276,625 shares of common stock at prices
<PAGE>
ranging from $3.00 to $5.00 per share were outstanding at September 27,
1997 and were included in the calculation of dilutive options under the
treasury stock method because they had a dilutive effect on earnings per
share for the three months and nine months ended September 27, 1997,
respectively.
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
This statement 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. The Company's comprehensive earnings were as follows:
<TABLE>
<CAPTION>
(In thousands) For the Three Months Ended For the Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 550 $ (838) $ 1,623 $ 15
Foreign currency translation adjustments 55 (222) (101) (336)
--------- --------- --------- ---------
Total comprehensive income (loss) $605 $ (1,060) $ 1,522 $ (321)
========= ========= ========= =========
</TABLE>
(4) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Early adoption is encouraged but it is permitted only as of the
beginning of any fiscal quarter that begins after June 1998. The Statement
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Under the new Statement, the
accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS 133 for its fiscal year beginning
January 2, 2000. Management estimates that the effect of adopting SFAS 133
would not be material to the consolidated financial statements.
(5) SALE OF BUSINESS UNIT
On July 29, 1998, the Company sold its Power Factor Correction ("PFC")
Systems business to a unit of General Electric Company. The PFC unit
manufactured and sold equipment used to enhance the efficient use of power
by large industrial plants. Proceeds from the sale were $2,000,000; the
value of assets transferred in connection with the sale was immaterial in
relation to total assets. Included in income for the third quarter was a
gain of $949,000 on the sale of the business. Excluding this gain, the
Company sustained a loss before taxes of $121,000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended September 26, 1998 compared to Three Months Ended
September 27, 1997.
Net sales for the third quarter of 1998 totaled $27,384,000 compared to
$26,126,000 for the third quarter of 1997, an increase of $1,258,000 or 4.8%.
The increase in revenue for the quarter was the result of continued strong
demand from HVAC OEMs, who were reacting to the hot summer across the United
States. The increase was partially offset by reductions in sales resulting from
the elimination of unprofitable product lines and accounts.
Gross profit for the third quarter of 1998 totaled $4,538,000 or 16.6% of net
sales compared to $2,543,000 or 9.7% of net sales, for the same period in 1997.
Gross margins improved due to cost reduction programs implemented earlier in the
year, improved volume in the more profitable lines of business, and the
intentional discontinuance of business among less profitable product lines and
accounts.
Selling, general and administrative expenses for the third quarter of 1998
totaled $4,437,000 or 16.2% of net sales versus $3,643,000 or 13.9% of net
sales, for the same period in 1997. Continuing costs associated with the
conversion to new information systems and increases in salaries and other
consulting expenses were responsible for the increase.
Interest expense for the third quarter of 1998 was $358,000, compared to
$432,000 in the third quarter of 1997. The decrease was due to lower
borrowings. Other income in the third quarter of 1998 included a gain of
$949,000 on the sale of the Company's Power Factor Correction business unit (See
Note 5). The remaining portion of other income resulted primarily from royalty
income and foreign exchange gains.
Income before taxes was $828,000 or 3.0% of net sales compared to a loss of
$1,469,000 or (5.6%) of net sales for the third quarter of 1997. The provision
for income taxes for the third quarter of 1998 was $278,000, reflecting
statutory rates plus adjustments for certain credits, compared to an income tax
benefit of $631,000 for the third quarter of 1997. Net income for the quarter
was $550,000 or $0.10 per common share--diluted, compared to a net loss in the
third quarter of 1997 of $838,000 or ($0.16) per common share diluted.
LIQUIDITY AND CAPITAL RESOURCES
Cash at the end of the third quarter of 1998 totaled $625,000 compared to
$693,000 as of December 27, 1997. Working capital totaled $17,027,000 on
September 26, 1998, and was $15,216,000 at December 27, 1997. The current
ratio was 1.9:1 at the end of the third quarter, compared to a ratio of 1.8:1 at
December 27, 1997. Expenditures for equipment during the first nine months of
1998 were $664,000 compared to $2,000,000 during the first nine months of 1997.
<PAGE>
At the end of the third quarter of 1998, the Company had borrowings of
$16,292,000 compared to $18,632,000 at December 27, 1997.
The Company maintains a Revolving Credit Agreement, which as amended provides a
credit line of approximately $22 million to the Company, including 4,400,000
British pounds sterling ($7,464,000 at quarter-end exchange rates) line to BHC
Aerovox Ltd., the Company's wholly owned subsidiary in England. On September 26,
1998, total borrowings outstanding under that agreement were approximately
$11,848,000 compared to approximately $12,693,000 on December 27, 1997 with
interest rates ranging from 7.55% to 9.44%. At September 26, 1998, the Company
was in compliance with all financial covenants specified in the agreement.
The Company also has a term line of credit. This line of $10,000,000,
collateralized by certain equipment, has annual interest rates ranging from 7.5%
to 7.89% and matures at various dates through the year 2002. At September 26,
1998, borrowings outstanding under this agreement were $2,576,000 compared to
$3,764,000 outstanding at the end of December 27, 1997. At September 26, 1998,
the Company was in compliance with all financial covenants specified in the
agreement.
An Industrial Revenue Bond was issued in July 1982 to finance the acquisition of
equipment. Principal and interest, at an annual rate of 7.42%, are payable
monthly to July 1, 2002. On September 26, 1998 the bond balance outstanding
under this agreement was $1,868,000 compared to $2,175,000 on December 27, 1997.
On July 29, 1998, the Company sold its Power Factor Correction Systems ("PFC")
business to a unit of General Electric Company. The PFC business manufactured
and sold equipment used to enhance the efficient use of power by large
industrial plants. A gain on the sale of $949,000 was recorded in the third
quarter of 1998.
OTHER MATTERS
YEAR 2000 ISSUE
Many currently installed computer systems, software products and other equipment
utilizing microprocessors are coded to accept only two digit entries in the date
code field. These date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. This is
commonly referred to as the "Year 2000 issue".
The Company has commenced a program to identify, remediate, test and develop
contingency plans for the Year 2000 issue and, at the same time, implement a
state-of-the-art enterprise resource planning (ERP) system (the "Millennium
Project"), to be substantially completed by the fourth quarter of 1999.
Regarding the Year 2000 issue, the Millennium Project is focused on two major
objectives: (1) the software and systems used in the Company's internal
business; and (2) the software and systems of the Company's customers and third
party suppliers. The Company's products have no date-oriented functionality and,
therefore, pose no risks to our customers with respect to the Year 2000 issue.
The new ERP system is now operational in two of the Company's four North
American plants, as well as in its British subsidiary, BHC Aerovox Ltd. The
remaining two plants in North America will implement the system during the first
quarter of 1999.
<PAGE>
The Company expects to spend approximately $1,000,000 on the Millennium Project
during 1998 and is approximately 85% complete with the project tasks.
Substantially all of these expenditures are related to the implementation of the
above mentioned ERP system. In addition to addressing the Year 2000 issue, this
system is expected to eventually improve operating efficiencies, customer
service levels, and product costing data. It is therefore impossible to
distinguish how much of the cost of implementation can be attributed to the Year
2000 issue versus the cost of implementing a more up-to-date and functional
information system.
Satisfactorily addressing the Year 2000 issue is dependent on many factors, some
of which are not completely within the Company's control. Should the Company's
internal systems or the internal systems of one or more significant suppliers
fail to achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected.
ENVIRONMENTAL
As a result of the identification of PCB contamination in the New Bedford plant,
operations in that facility will have to be relocated, the existing facility
razed, and all contaminated building materials disposed of in a legally
compliant manner. A reserve of $7,233,000 was established as of December 27,
1997 to cover the cost of the remediation and related legal and engineering
costs. The Company spent $381,000 during the nine months ended September 26,
1998, primarily for legal and relocation consulting expenses.
SAFE HARBOR STATEMENT
This form 10Q contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include expectations regarding the
Company's expenditures and improved operations resulting from the Millennium
Project. Such statements are based on management's current expectations and are
subject to a number of uncertainties and risks that could cause actual results
to differ materially from those described in the forward-looking statements.
Such risks include, but are not limited to, delays in the Company's state of
readiness resulting from unforeseen events and the preparedness of its vendors,
suppliers, and/or customers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6 (a). Exhibits: None
6 (b). Reports on Form 8-K: None filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AEROVOX INCORPORATED
DATE November 10, 1998 BY /S/ JEFFREY A. TEMPLER
--------------------------
Jeffrey A. Templer
Senior Vice President/Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 625
<SECURITIES> 0
<RECEIVABLES> 16,224
<ALLOWANCES> 740
<INVENTORY> 18,606
<CURRENT-ASSETS> 35,905
<PP&E> 65,211
<DEPRECIATION> 35,527
<TOTAL-ASSETS> 71,001
<CURRENT-LIABILITIES> 18,878
<BONDS> 0
0
0
<COMMON> 5,387
<OTHER-SE> 19,912
<TOTAL-LIABILITY-AND-EQUITY> 71,001
<SALES> 27,384
<TOTAL-REVENUES> 27,384
<CGS> 22,846
<TOTAL-COSTS> 27,283
<OTHER-EXPENSES> (1,085)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 358
<INCOME-PRETAX> 828
<INCOME-TAX> 278
<INCOME-CONTINUING> 550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
