<PAGE>
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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 June 30, 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 Number 0-21803
AFTERMARKET TECHNOLOGY CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4486486
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
900 Oakmont Lane - Suite 100, Westmont, IL 60559
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (630) 455-6000
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 ( )
As of July 31, 1998, there were 20,043,986 shares of common stock of the
Registrant outstanding.
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AFTERMARKET TECHNOLOGY CORP.
FORM 10-Q
Table of Contents
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<TABLE>
<CAPTION>
Page Number
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<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income (unaudited) for the Three
and Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 9
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT 11. - Statement Re Computation of Net Income Per Share . . . . . . . . . . . 20
Note: Items 1,2,3 and 5 of Part II are omitted because they are not
applicable.
</TABLE>
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AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $4,005 $78
Accounts receivable, net 73,049 53,761
Inventories 105,245 76,166
Prepaid and other assets 9,585 4,706
Refundable income taxes 329 1,011
Deferred income taxes 4,574 3,478
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Total current assets 196,787 139,200
Property, plant and equipment:
Land 1,672 -
Buildings 9,881 -
Machinery and equipment 38,564 19,335
Autos and trucks 3,718 2,712
Furniture and fixtures 7,248 3,139
Leasehold improvements 10,762 6,058
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71,845 31,244
Less accumulated depreciation and amortization (17,532) (6,830)
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54,313 24,414
Debt issuance costs, net 5,535 4,260
Cost in excess of net assets acquired, net 260,096 200,393
Other assets 2,378 410
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Total assets $ 519,109 $ 368,677
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $34,465 $16,055
Accrued payroll and related costs 10,251 5,820
Accrued interest payable 7,653 6,253
Other accrued expenses 11,314 4,904
Bank lines of credit 1,765 4,596
Acquisition notes payable 1,458 1,435
Due to former owners 1,312 1,614
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Total current liabilities 68,218 40,677
12% Series B and D Senior Subordinated Notes 121,189 121,288
Acquisition notes payable 9,509 9,097
Amount drawn on revolving credit facility 120,000 11,100
Deferred compensation 3,183 3,042
Deferred income taxes 9,101 8,044
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 5,000,000;
Issued and outstanding shares - none - -
Common stock, $.01 par value; shares authorized - 30,000,000;
Issued and outstanding shares - 20,043,986 and 19,577,274
at June 30, 1998 and December 31, 1997, respectively 200 195
Additional paid-in capital 134,029 131,604
Accumulated other comprehensive gain 248 136
Retained earnings 53,432 43,494
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Total stockholders' equity 187,909 175,429
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Total liabilities and stockholders' equity $ 519,109 $ 368,677
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</TABLE>
SEE ACCOMPANYING NOTES.
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AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Net sales $130,468 $ 85,410 $237,469 $168,098
Cost of sales 89,038 52,047 158,561 103,160
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Gross profit 41,430 33,363 78,908 64,938
Selling, general and
administrative expense 23,157 8,277 44,263 35,736
Amortization of intangible assets 1,751 1,007 3,239 1,991
Special charges 3,580 - 3,580 -
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Income from operations 12,942 14,079 27,826 27,211
Interest and other income 299 307 950 1,008
Interest expense 6,451 4,499 11,636 9,023
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Income before income taxes
and extraordinary item 6,790 9,887 17,140 19,196
Provision for income taxes 2,792 3,975 6,839 7,717
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Income before extraordinary item 3,998 5,912 10,301 11,479
Extraordinary item - net of income tax
benefit of $242 and $2,520 for
1998 and 1997 - - 363 3,749
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Net income $ 3,998 $ 5,912 $ 9,938 $ 7,730
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Basic earnings per common share:
Income before extraordinary item $0.20 $0.35 $ 0.52 $ 0.68
Extraordinary item - - (0.02) (0.22)
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Net income $0.20 $0.35 $ 0.50 $ 0.46
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Weighted average number of common shares
outstanding 20,015 17,000 19,898 16,990
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Diluted earnings per common share:
Income before extraordinary item $0.19 $0.31 $ 0.49 $ 0.61
Extraordinary item - - (0.02) (0.20)
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Net income $0.19 $0.31 $ 0.47 $ 0.41
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Weighted average number of common and
common equivalent shares outstanding 21,251 18,897 21,259 18,882
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</TABLE>
SEE ACCOMPANYING NOTES.
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<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
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<S> <C> <C>
(Unaudited)
OPERATING ACTIVITIES:
Net Income $ 9,938 $ 7,730
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item 605 6,269
Depreciation and amortization 7,114 3,437
Amortization of debt issuance costs 546 446
Provision for losses on accounts receivable 402 433
Loss on sale of equipment 10 5
Deferred income taxes 211 715
Changes in operating assets and liabilities
(net of acquired businesses):
Accounts receivable 1,533 (4,863)
Inventories (7,246) (2,597)
Prepaid and other assets (4,321) (152)
Accounts payable and accrued expenses 12,358 (7,824)
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Net cash provided by operating activities 21,150 3,599
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INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (8,184) (4,962)
Acquisition of companies, net of cash received (113,498) (14,183)
Proceeds from sale of equipment 337 35
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Net cash used in investing activities (121,345) (19,110)
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FINANCING ACTIVITIES:
Borrowings on revolving credit facility, net 108,900 19,000
Payments on bank lines of credit, net (2,831) (25)
Payment of debt issuance costs (2,425) (745)
Redemption of senior subordinated notes - (44,800)
Proceeds from exercise of stock options 780 90
Payments on amounts due to former owners (302) -
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Net cash provided by (used in) financing activities 104,122 (26,480)
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Increase (decrease) in cash and cash equivalents 3,927 (41,991)
Cash and cash equivalents at beginning of period 78 46,498
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Cash and cash equivalents at end of period $ 4,005 $ 4,507
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Cash paid during the period for:
Interest $ 8,944 $ 10,556
Income taxes $ 3,634 $ 3,596
</TABLE>
SEE ACCOMPANYING NOTES.
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AFTERMARKET TECHNOLOGY CORP.
Notes to Consolidated Financial Statements
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Aftermarket Technology Corp. (the "Company") as of June 30, 1998 and for the
three and six months ended June 30, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Certain prior-year amounts have been reclassified to conform to the 1998
presentation.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost (first in, first out method)
or market:
<TABLE>
<CAPTION>
(In thousands) JUNE 30, 1998 DECEMBER 31, 1997
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<S> <C> <C>
Raw materials, including core inventories.. $ 35,983 $24,788
Work-in-process............................ 2,923 3,125
Finished goods............................. 66,339 48,253
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$105,245 $76,166
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</TABLE>
Finished goods include purchased parts which are available for sale.
NOTE 3: REVOLVING CREDIT FACILITY
In March 1998, the credit agreement for the Company's $100.0 million
credit facility with The Chase Manhattan Bank, as agent (the "Bank"), was
amended and restated to provide for a new credit facility comprised of a
$100.0 million revolving portion and a $120.0 million term loan portion (the
"New Credit Facility") to finance the Company's working capital requirements,
future acquisitions and the acquisition of Autocraft (See Note 4). Amounts
advanced under the New Credit Facility are secured by substantially all the
assets of the Company. Amounts advanced under the revolving portion of the
New Credit Facility will become due on December 31, 2003. The term loan
portion of the New Credit Facility is due and payable in quarterly
installments beginning in September 1998 and ending on December 31, 2003 as
outlined in the credit agreement. The Company may prepay outstanding
advances under the revolving portion or the term loan portion of the New
Credit Facility in whole or in part without incurring any premium or penalty.
NOTE 4: ACQUISITIONS
In January 1997, the Company acquired all of the outstanding capital stock
of Replacement & Exchange Parts Co., Inc. ("REPCO"), a Texas based
distributor of transmission repair parts, for a purchase price of
approximately $12.3 million, including transaction fees and related expenses.
Goodwill recorded approximated $6.8 million.
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<PAGE>
In July 1997, the Company acquired substantially all of the assets of ATS
Remanufacturing ("ATS"), a remanufacturer of automatic transmissions and
related components located in Gastonia, North Carolina. In August 1997, the
Company acquired all of the outstanding capital stock of Trans Mart, Inc.
("Trans Mart"), a distributor of automatic and standard transmission parts
and related drive train components based in Florence, Alabama. To complete
these acquisitions, the Company made cash payments totaling $12.9 million and
$27.9 million for ATS and Trans Mart, respectively, including transaction
fees and related expenses. In addition, the ATS acquisition calls for
subsequent payments due on each of the first eight anniversaries of the
closing date. Substantially all of these additional payments, which will
aggregate up to approximately $19.0 million (present value $14.2 million as
of June 30, 1998), are contingent upon the attainment of certain sales levels
by ATS, which the Company believes are more likely than not to be attained.
Goodwill recorded for ATS and Trans Mart approximated $26.1 million and $20.9
million, respectively.
In November 1997, the Company acquired all of the outstanding capital
stock of Metran Automatic Transmission Parts Corp. ("Metran"), a New York
based distributor of automatic and manual transmission parts and related
drive train components, for a purchase price of approximately $8.1 million,
including transaction fees and related expenses. Goodwill recorded
approximated $5.4 million.
On March 6, 1998, the Company acquired substantially all the assets of the
OEM Division of Autocraft Industries, Inc. ("Autocraft"), a remanufacturer
and distributor of drivetrain and electronic parts used in the warranty and
aftermarket repair of passenger cars and light trucks. The purchase price
consists of approximately $115.7 million, including transaction fees and
related expenses, paid at closing and up to an additional $12.5 million to be
paid in 1999 based on the performance of the OEM Division's European
operations during 1998. Goodwill recorded approximated $62.0 million, which
would increase by up to an additional $12.5 million dependent on the
potential 1999 payment described above.
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the allocation of the cost of the acquired assets
and liabilities has been made on the basis of the estimated fair value.
Goodwill for all acquisitions is amortized over a period not to exceed 40
years on a straight-line basis. The consolidated financial statements
include the operating results of each business from the date of acquisition.
NOTE 5: SPECIAL CHARGES
The Company has commenced certain initiatives designed to improve
operating efficiencies and reduce costs. In the second quarter of 1998 the
Company recorded $3.6 million in special charges related to these
initiatives, consisting of $1.1 million of restructuring charges and $2.5
million of other charges. The $1.1 million restructuring charges includes
$0.8 million of severance costs for approximately 11 people and $0.3 million
of exit costs. The severance costs were incurred in connection with the
reorganization of the ATC Distribution Group's management structure,
centralization of the ATC Distribution Group's Management Information Systems
("MIS") operations and certain other personnel matters. The exit costs were
incurred to consolidate the Company's Joplin and Springfield Missouri engine
remanufacturing lines into the Springfield facility. The other charges
consisted of $2.0 million of idle plant capacity costs incurred at the Joplin
facility due to the consolidation of the remanufacturing lines and $0.5
million of relocation costs related to the centralization of the ATC
Distribution Group's management team and to centralize the ATC Distribution
Group's MIS operations.
As part of its ongoing effort to maximize operating efficiencies and lower
costs, the Company is continuing to evaluate its business to identify
additional improvements that may result in additional special charges.
-7-
<PAGE>
The following table summarizes the provisions and reserves for
restructuring and special charges as included in other accrued expenses:
<TABLE>
<CAPTION>
(In thousands) Termination
Benefits Exit / Other Costs Total
------------ ------------------- ---------
<S> <C> <C> <C>
Provision 1998 $ 822 $ 2,758 $ 3,580
Payments 1998 (398) (1,256) (1,654)
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Reserve at June 30, 1998 $ 424 $ 1,502 $ 1,926
------------ ------------------- ---------
------------ ------------------- ---------
</TABLE>
NOTE 6: COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income (loss) and its components; however, the adoption of the Statement had
no impact on the Company's net income or stockholders' equity. SFAS No. 130
requires changes in the accumulated foreign currency translation adjustments,
which, prior to adoption of SFAS No. 130, were reported separately in
stockholders' equity, to be included in other comprehensive gain. Prior year
financial statements have been reclassified as necessary to conform to the
requirements of SFAS No. 130.
During the first six months of 1998 and 1997 total comprehensive income
amounted to $10,050,000 and $7,759,000, respectively.
The following table sets forth the computation of comprehensive income for
the six months ended June 30, 1998 (In thousands):
<TABLE>
<CAPTION>
Accumulated
Compre- Additional Other
hensive Common Paid-in Comprehensive Retained
Income Stock Capital Gain Earnings Total
------------ ----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 $ - $ 195 $131,604 $ 136 $ 43,494 $ 175,429
Net Income 9,938 - - - 9.938 9.938
Other comprehensive gains:
Cumulative translation adj. 112 - - 112 - 112
------------
Comprehensive income $10,050 - - - - -
------------
Issuance of common stock from
exercise of stock options 5 2,425 - - 2,430
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Balances, June 30, 1998 $ 200 $134,029 $ 248 $ 53,432 $ 187,909
----------- ----------- -------------- ----------- ------------
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</TABLE>
NOTE 7: EXTRAORDINARY ITEM
The extraordinary item in 1998 consists of a pre-tax charge of $0.6
million related to the write-off of previously capitalized debt issuance
costs in connection with the restatement and amendment of the credit
agreement to provide for the New Credit Facility in March 1998.
The extraordinary item in 1997 of $3.8 million, net of income tax benefit
of $2.5 million, consists largely of a pre-tax charge of $5.7 million related
to the early redemption of $40.0 million in principal amount of the Company's
12% Senior Subordinated Notes due 2004 (the "Senior Notes"), consisting of
the early redemption premium charge of $4.3 million plus unamortized deferred
financing fees of $1.4 million. The extraordinary item also includes a
pre-tax charge of $0.6 million related to the restructuring of the Company's
original revolving credit facility. Both events occurred in February 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT NOTICE
Certain statements contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations that are not related to
historical results are forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in Item 1. "Business--Certain Factors
Affecting the Company" contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. Further, certain forward-looking
statements are based upon assumptions as to future events that may not prove
to be accurate.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1998 COMPARED
TO THE THREE MONTH PERIOD ENDED JUNE 30, 1997
After-tax net earnings before special charges increased $0.2 million, or
3.4%, from $5.9 million for the three months ended June 30, 1997 to $6.1
million for the three months ended June 30, 1998. During the three month
period ended June 30, 1998 the Company recorded a special charge of $3.6
million relating to certain actions the Company is taking in order to reduce
costs and increase efficiencies (see "Special Charges" below). Net income
decreased $1.9 million, or 32.4%, from $5.9 million for the three months
ended June 30, 1997 to $4.0 million for the three months ended June 30, 1998.
Revenue increased 52.8% during the three months ended June 30, 1998 as
compared to the same period last year. Revenue growth was achieved from both
of the Company's primary customer groups: original equipment manufacturers
("OEMs") and independent transmission rebuilders, general repair shops,
distributor and retail automotive parts stores (the "Independent
Aftermarket"). This increase resulted from OEM customer revenue growth of
72.4% and Independent Aftermarket revenue growth of 33.1%. Both of these
increases were largely the result of the strategic acquisitions the Company
has completed in the last twelve months.
On a per share basis, absent the special charges, net income per diluted
share would have been $0.29 for the three months ended June 30, 1998. As
reported, net income per share decreased from $0.31 per diluted share for the
three months ended June 30, 1997 to $0.19 per diluted share for the three
months ended June 30, 1998. Special charges recorded during the three months
ended June 30, 1998 resulted in a reduction of $0.10 per diluted share. The
number of shares used in the per diluted share calculations were 18.9 million
for the three months ended June 30, 1997 and 21.3 million for the three
months ended June 30, 1998. The increase in shares resulted primarily from
the Company's public offering of Common stock in October 1997.
NET SALES
Net sales increased $45.1 million, or 52.8%, from $85.4 million for the
three months ended June 30, 1997 to $130.5 million for the three months ended
June 30, 1998. Incremental net sales of $54.4 million for the three months
ended June 30, 1998 were generated by the companies acquired in the second
half of 1997 and in 1998 (ATS, Trans Mart, Metran and Autocraft).
Excluding the benefit of the ATS and Autocraft acquisitions, net sales to
OEM customers during the three months ended June 30, 1998 decreased $10.6
million, or 24.7%, compared with the same period in the prior year.
Management believes that the mild winter across much of the U.S. and Canada
has reduced the need for transmission replacement. Net sales to Chrysler (a
significant customer to the Company) represented 17.1% of total net sales for
the three months ended June 30, 1998, as compared to 35.2% for the three
months ended June 30, 1997. The
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reduction in net sales to Chrysler as a percentage of total net sales is due
primarily to the increase in the Company's revenue base from the acquisitions
in the second half of 1997 and in 1998. As a result of the Autocraft
acquisition in March 1998, Ford has become a significant customer, accounting
for 18.8% of total net sales for the three months ended June 30, 1998.
Excluding the benefits of the Trans Mart and Metran acquisitions, net
sales to Independent Aftermarket customers during the second quarter of 1998
increased $1.3 million, or 2.6%, compared with the same quarter in the prior
year. This increase was primarily due to increased engine and related parts
sales to Independent Aftermarket customers.
Management believes that the reduced need to replace transmissions during
the mild winter of 1997-1998 was common to all the Company's OEM customers
and expects that net sales to the OEMs will remain soft through the end of
1998 as the OEMs adjust excess inventory that resulted from the reduced
transmission replacements. Previously, management had expected that the
excess inventory adjustment would be completed by the end of the second
quarter, but recently available data from the Company's OEM customers showed
that inventory levels were higher than management previously believed.
Shipping levels to the OEMs in the second half of 1998 will be reduced below
demand levels in order for the OEMs to achieve targeted inventory levels by
the end of the year. Management expects that normal shipping levels will be
resumed by the end of the fourth quarter of 1998, although no assurance can
be given that that will be the case.
GROSS PROFIT
Gross profit as a percentage of net sales decreased from 39.1% for the
three months ended June 30, 1997 to 31.8% for the three months ended June 30,
1998. Of the 7.3% gross profit margin percentage reduction, 4.8% was
attributable to those companies acquired during the second half of 1997 (ATS,
Trans Mart and Metran) and the acquisition of Autocraft in March of 1998,
which combined have historically operated at a lower gross margin percentage
than the consolidated company. The balance of the reduction is primarily due
to a change in the mix of product sales during the three months ended June
30, 1998 as compared to comparable period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $4.9
million, or 26.7%, from $18.3 million for the three months ended June 30,
1997 to $23.2 million for the three months ended June 30, 1998. The higher
SG&A resulted largely from the companies acquired in the second half of 1997
and in 1998 (ATS, Trans Mart, Metran and Autocraft). As a percentage of net
sales, SG&A decreased from 21.4% to 17.7% between the two periods. This
decrease was principally due to companies acquired in the second half of 1997
and in 1998, which combined have historically operated at a lower SG&A
percentage of sales than the consolidated company.
Included in SG&A expenses are non-cash charges totaling $0.2 million in
1998 and $0.5 million in 1997. These charges represent the pro rata portion
for each period of deferred compensation expense relating to the difference
between the exercise price and the intrinsic value for financial statement
presentation purposes of stock options granted by the Company in 1996. The
Company expects to recognize additional compensation expense aggregating $0.7
million over the balance of the respective vesting periods of the options,
which generally range from three to five years from the date of grant.
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<PAGE>
SPECIAL CHARGES
The Company has commenced two initiatives designed to improve operating
efficiencies and reduce costs:
- "LEAN" MANUFACTURING. The Company is beginning the process of
reorganizing its production lines using a cellular concept.
Workers are organized into teams and the members of each team are
responsible for feeding one another with product through the
entire remanufacturing process. This is expected to reduce the
time and floor space required to remanufacture product, which in
turn will reduce production costs. This will also enable the
Company to consolidate production facilities as the need for
square footage is reduced.
- DISTRIBUTION GROUP CONSOLIDATION. At the end of 1997, the Company
began to integrate the operations of the nine companies that make
up the ATC Distribution Group. The first steps in this process
were begun when the Distribution Group management function was
centralized and most of the Distribution Group companies were
merged into a single entity. In addition, the Company developed
a common product identification and numbering system that is
being implemented throughout the Distribution Group in
conjunction with a computer network electronically linking its
distribution centers, which system is expected to be fully
operational by the end of 1998. During the second quarter of
1998, the Distribution Group management structure was reorganized
to eliminate certain positions that were no longer necessary as a
result of the ongoing consolidation. In addition, certain
functions such as purchasing and MIS were centralized. In the
future, the Company expects to be able to consolidate other
Distribution Group functions and operations.
As a result of these initiatives, the Company recorded $3.6 million of
special charges during the second quarter of 1998, consisting of $1.1 million
of restructuring charges and $2.5 million of other charges. The
restructuring charges were: (i) $0.3 million of exit costs incurred when the
Company consolidated its Joplin and Springfield, Missouri engine
remanufacturing lines into the Springfield facility, which was made possible
by the production space savings achieved through use of cellular
remanufacturing; and (ii) $0.8 million of severance costs in connection with
the reorganization of the Distribution Group's management structure, the
centralization of its MIS function and certain other personnel matters. The
other charges consisted of (i) $2.0 million of idle plant capacity costs
incurred at the Joplin facility due to the consolidation of the engine
remanufacturing lines, and (ii) $0.5 million of relocation costs related to
the centralization of the Distribution Group's management team and to
centralize the Distribution Group's MIS function. Management expects to realize
annual pre-tax savings of approximately $3.0 million from the changes to
which these special charges relate.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased $0.7 million, or 73.9%, from
$1.0 million for the three months ended June 30, 1997 to $1.7 million for the
three months ended June 30, 1998. The increase resulted from the additional
intangible assets arising from the acquisitions of ATS, Trans Mart, Metran
and Autocraft.
INCOME FROM OPERATIONS
Income from operations decreased $1.1 million, or 8.1%, from $14.1 million
for the three months ended June 30, 1997 to $12.9 million for the three
months ended June 30, 1998. As a percentage of net sales, income from
operations decreased from 16.5% for the three months ended June 30, 1997 to
9.9% for the three months ended June 30, 1998. The lower income from
operations as a percentage of sales recorded in the second quarter of 1998 as
compared to 1997 is principally due to the special charges recorded in 1998
and the lower gross margin percentages in 1998 as compared to 1997.
-11-
<PAGE>
INTEREST EXPENSE
Interest expense increased $2.0 million, or 43.4%, from $4.5 million for
the three months ended June 30, 1997 to $6.5 million for the three months
ended June 30, 1998. The higher interest expense was largely due to the
borrowing of $120.0 million under the term loan portion of the New Credit
Facility in order to finance the Autocraft acquisition on March 6, 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 COMPARED
TO THE SIX MONTH PERIOD ENDED JUNE 30, 1997
After-tax net earnings before extraordinary item and special charges
increased $1.0 million, or 8.7%, from $11.5 million for the six months ended
June 30, 1997 to $12.5 million for the six months ended June 30, 1998.
During the six month period ended June 30, 1998 the Company recorded a
special charge of $3.6 million relating to certain actions the Company is
taking in order to reduce costs and increase efficiencies (see "Special
Charges" below). Income before extraordinary item as reported decreased $1.2
million, or 10.3%, from $11.5 million for the six months ended June 30, 1997
to $10.3 million for the six months ended June 30, 1998.
Revenue increased 41.3% during the six months ended June 30, 1998 as
compared to the same period last year. Revenue growth was achieved from the
Company's two primary customer groups (OEMs and the Independent Aftermarket).
Revenues from OEM customers increased 49.0% and revenues from Independent
Aftermarket customers increased 33.7%. Both of these increases were largely
the result of the strategic acquisitions the Company has completed since the
beginning of 1997.
On a per share basis, absent the extraordinary item and special charges,
net income per diluted share would have been $0.59 for the six months ended
June 30, 1998. As reported, income per share before extraordinary item
decreased from $0.61 per diluted share for the six months ended June 30, 1997
to $0.49 per diluted share for the six months ended June 30, 1998. Special
charges recorded during the six months ended June 30, 1998 resulted in a
reduction of $0.10 per diluted share. The number of shares used in the per
share calculations were 18.9 million for the six months ended June 30, 1997
and 21.3 million for the six months ended June 30, 1998. The increase in
shares resulted primarily from the Company's public offering of Common stock
in October 1997.
NET SALES
Net sales increased $69.4 million, or 41.3%, from $168.1 million for the
six months ended June 30, 1997 to $237.5 million for the six months ended
June 30, 1998. Incremental net sales of $82.3 million for the six months
ended June 30, 1998 were generated by the companies acquired in 1997 and 1998
(REPCO, ATS, Trans Mart, Metran and Autocraft).
Excluding the benefit of the ATS and Autocraft acquisitions, net sales to
OEM customers during the six months ended June 30, 1998 decreased $10.3
million, or 24.1%, compared with the same period in the prior year.
Management believes that the mild winter across much of the U.S. and Canada
has reduced the need for transmission replacement. Net sales to Chrysler
represented 20.3% of total net sales for the six months ended June 30, 1998,
as compared to 34.9% for the six months ended June 30, 1997. The reduction
in net sales to Chrysler as a percentage of total net sales is due primarily
to the increase in the Company's revenue base from the acquisitions in 1997
and 1998. As a result of the Autocraft acquisition in March 1998, Ford has
become a significant customer, accounting for 12.5% of total net sales for
the six months ended June 30, 1998.
Excluding the benefits of the REPCO, Trans Mart and Metran acquisitions,
net sales to Independent Aftermarket customers during the six months ended
June 30, 1998 and 1997 were $85.4 million and $85.2 million, respectively.
-12-
<PAGE>
Management believes that the reduced need to replace transmissions during
the mild winter of 1997-1998 was common to all the Company's OEM customers
and expects that net sales to the OEMs will remain soft through the end of
1998 as the OEMs adjust excess inventory that resulted from the reduced
transmission replacements. Previously, management had expected that the
excess inventory adjustment would be completed by the end of the second
quarter, but recently available data from the Company's OEM customers showed
that inventory levels were higher than management previously believed.
Shipping levels to the OEMs in the second half of 1998 will be reduced below
demand levels in order for the OEMs to achieve targeted inventory levels by
the end of the year. Management expects that normal shipping levels will be
resumed by the end of the fourth quarter of 1998, although no assurance can
be given that that will be the case.
GROSS PROFIT
Gross profit as a percentage of net sales decreased from 38.6% for the six
months ended June 30, 1997 to 33.2% for the six months ended June 30, 1998.
Of the 5.4% gross profit margin percentage reduction, 4.4% was attributable
to those companies acquired during 1997 and 1998 (REPCO, ATS, Trans Mart,
Metran and Autocraft), which combined have historically operated at a lower
gross margin percentage than the consolidated company. The balance of the
reduction is primarily due to a change in the mix of product sales during the
six months ended June 30, 1998 as compared to the comparable period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's SG&A expenses increased $8.5 million, or 23.9%, from $35.7
million for the six months ended June 30, 1997 to $44.3 million for the six
months ended June 30, 1998. The higher SG&A resulted largely from the
companies acquired in 1997 and 1998 (REPCO, ATS, Trans Mart, Metran and
Autocraft). As a percentage of net sales, SG&A decreased from 21.3% to 18.6%
between the two periods. This decrease was principally due to companies
acquired in 1997 and 1998, which combined have historically operated at a
lower SG&A percentage of sales than the consolidated company.
Included in SG&A expenses are non-cash charges totaling $0.4 million in
1998 and $1.0 million in 1997. These charges represent the pro rata portion
for each period of deferred compensation expense relating to the difference
between the exercise price and the intrinsic value for financial statement
presentation purposes of stock options granted by the Company in 1996. The
Company expects to recognize additional compensation expense aggregating $0.7
million over the balance of the respective vesting periods of the options,
which generally range from three to five years from the date of grant.
SPECIAL CHARGES
The Company has commenced the consolidation of the Distribution Group and
the implementation of lean manufacturing techniques in order to improve
operating efficiencies and reduce costs. As a result of these initiatives,
the Company recorded $3.6 million of special charges during the second
quarter of 1998. For a discussion of these charges, see "Results of
Operations for the Three Month Period Ended June 30, 1998 Compared to the
Three Month Period Ended June 30, 1997--Special Charges."
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased $1.2 million, or 62.7%, from
$2.0 million for the six months ended June 30, 1997 to $3.2 million for the
six months ended June 30, 1998. The increase resulted from the additional
intangible assets arising from the acquisitions of REPCO, ATS, Trans Mart,
Metran and Autocraft.
-13-
<PAGE>
INCOME FROM OPERATIONS
Principally as a result of the factors described above, income from
operations increased $0.6 million, or 2.3%, from $27.2 million for the six
months ended June 30, 1997 to $27.8 million for the six months ended June 30,
1998.
INTEREST EXPENSE
Interest expense increased $2.6 million, or 29.0%, from $9.0 million for
the six months ended June 30, 1997 to $11.6 million for the six months ended
June 30, 1998. The higher interest expense was largely due to the borrowing
of $120.0 million under the term loan portion of the New Credit Facility in
order to finance the Autocraft acquisition on March 6, 1998.
EXTRAORDINARY ITEM
An extraordinary item in the amount of $0.4 million ($0.6 million, net of
related income tax benefit of $0.2 million) was recorded during the six
months ended June 30, 1998. This amount was related to the write-off of
previously capitalized debt issuance costs in connection with the restatement
and amendment of the credit agreement for the New Credit Facility.
An extraordinary item in the amount of $3.8 million ($6.3 million, net of
related income tax benefit of $2.5 million) was recorded during the six
months ended June 30, 1997. This amount was comprised of (i) a $5.7 million
charge resulting from the early redemption of $40.0 million of the Senior
Notes in February 1997, which included the payment of a 12% early redemption
premium and the write-off of related debt issuance costs and (ii) a charge of
$0.6 million for the write-off of previously capitalized debt issuance costs
in connection with the termination of the Company's previous revolving credit
facility.
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents on hand of $4.0 million at
June 30, 1998, representing an increase in net cash of $3.9 million for the
six months then ended. Net cash provided by operating activities was $21.2
million for the six-month period, after giving effect to the scheduled
semi-annual interest payment of $7.2 million on the Senior Notes made
February 1, 1998. Net cash used in investing activities was $121.3 million
for the period, including $113.5 million (net of $2.2 million of cash
received) for the acquisition of Autocraft and $8.2 million in capital
expenditures largely for remanufacturing equipment and leasehold
improvements. Net cash provided by financing activities of $104.1 million
was primarily from net borrowings of $108.9 million made under the New Credit
Facility, partially offset by $2.8 million in payments on bank lines of
credit and $2.4 million in payment of debt issuance costs related to the New
Credit Facility.
In March 1998 the credit agreement for the Company's credit facility was
amended and restated to provide the New Credit Facility, which consists of a
$120.0 million term loan facility in addition to the existing $100.0 million
revolving facility. The Company borrowed $120.0 million under the term loan
facility on March 6, 1998 to purchase Autocraft and pay related transaction
expenses, pay debt issuance costs related to the New Credit Facility and
contribute to its current working capital requirements. The term loan is
payable in quarterly installments through December 31, 2003 and bears
interest at a rate of at either (i) the Alternate Base Rate plus a specified
margin or (ii) the Eurodollar Rate plus a specified margin. The "Alternate
Base Rate" is equal to the highest of (a) the Bank's prime rate, (b) the
secondary market rate for three-month certificates of deposit plus 1.0% and
(c) the federal funds rate plus 0.5%, in each case as in effect from time to
time. The "Eurodollar Rate" is the rate offered by the Bank for eurodollar
deposits for one, two, three, six or, if available by all lenders, nine
months (as selected by the Company) in the interbank eurodollar market in the
approximate amount of the Bank's share of the advance under the New Credit
Facility. The applicable margins for both Alternate Base Rate and Eurodollar
Rate loans are subject to a quarterly adjustment based on the Company's
leverage ratio as of the end of the four fiscal quarters then completed. The
Alternate Base Rate margin is currently zero and the Eurodollar margin is
currently at 1.0%.
In July 1998 the Company negotiated a fixed interest rate at 5.932% plus a
specified margin (currently 100 basis points) on $50.0 million of the $120.0
million term loan facility for five years. The remaining $70.0 million is at
the rate determined per the description in the proceeding paragraph.
As of June 30, 1998, the Company had approximately $98.5 million
available under the revolving portion on the New Credit Facility.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company
may need to seek funds through additional borrowings or equity financing.
-15-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
Part II. Other Information
Item 4. - Submission of Matters to a Vote of Security Holders
The 1998 annual meeting of stockholders of the Company was held on May 6,
1998 for the purpose of the following: (i) electing eleven directors to hold
office until the next annual meeting of stockholders and thereafter until
their successors are elected and qualified; (ii) reapproval of the previously
approved amendment to the Company's Amended and Restated Certificate of
Incorporation to reduce the number of authorized shares of preferred stock
from 5,000,000 to 2,000,000, and rescind the previously approved amendment to
the Amended and Restated Certificate of Incorporation to reduce the number of
authorized shares of common stock from 30,000,000 to 24,000,000; and (iii)
approval of the adoption of the 1998 Stock Incentive Plan.
The following directors were elected by the following vote:
<TABLE>
<CAPTION>
Votes
---------------------------
For Against
----------- ---------
<S> <C> <C>
Robert Anderson 17,390,600 168,229
Richard R. Crowell 17,390,600 168,229
Dale F. Frey 17,390,300 168,529
Fred J. Hall 17,390,550 168,279
Mark C. Hardy 17,389,600 169,229
Dr. Michael J. Hartnett 17,390,300 168,529
Gerald L. Parsky 17,390,600 168,229
Stephen J. Perkins 17,389,300 169,529
Richard K. Roeder 17,390,600 168,229
William A. Smith 17,387,506 171,323
J. Richard Stonesifer 17,390,600 168,229
</TABLE>
The proposal to amend the Company's Amended and Restated Certificate of
Incorporation to reduce the authorized shares of capital stock of the Company
from 35,000,000 to 32,000,000 was approved by the following vote:
<TABLE>
<CAPTION>
Nonvotes and
For Against Abstentions
------------- ----------- -------------
<S> <C> <C>
14,317,609 2,024,443 112,234
</TABLE>
The proposal to approve the adoption of the 1998 Stock Incentive Plan was
approved by the following vote:
<TABLE>
<CAPTION>
Nonvotes and
For Against Abstentions
------------- ----------- -------------
<S> <C> <C>
16,131,144 314,492 8,650
</TABLE>
-16-
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Re Computation of Net Income Per Share
(b) Reports on Form 8-K
(1) On April 13, 1998 the Company filed a Periodic Report
on Form 8-K dated March 6, 1998 reporting under Item 2
that on March 6, 1998 the Company completed the
acquisition of substantially all the assets of the OEM
Division of Autocraft Industries, Inc.
(2) On May 21, 1998 the Company filed an Amendment to the
Periodic Report on Form 8-K/A dated March 6, 1998
reporting under Item 7 certain historical financial
information of the OEM Division of Autocraft
Industries, Inc and financial information of the
Company adjusted for the proforma effects of the
acquisition of the OEM Division of Autocraft
Industries, Inc.
-17-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
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.
AFTERMARKET TECHNOLOGY CORP.
Date: August 7, 1998 /s/ John C. Kent
- ---------------------------------- -------------------------------------
John C. Kent, Chief Financial Officer
- - John C. Kent is signing in the dual capacities as i) the principal
financial officer, and ii) a duly authorized officer of the company.
-18-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
EXIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Paper (P) or
Number Description Electronic (E)
- --------- -------------------- --------------
<S> <C> <C>
11 Statement Re Computation of Net Income Per Share (P)
27 Financial Data Schedules (E)
</TABLE>
-19-
<PAGE>
EXHIBIT 11
AFTERMARKET TECHNOLOGY CORP.
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
-------------- ------------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Income before extraordinary item $ 3,998 $ 5,912 $10,301 $11,479
Extraordinary item - net of income tax benefit - - 363 3,749
-------------- ------------- ------------ -------------
Net income per statements of income $ 3,998 $ 5,912 $ 9,938 $ 7,730
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
Shares:
Weighted average common shares outstanding 20,015 17,000 19,898 16,990
Net effect of stock options and warrants
outstanding, calculated using the treasury
stock method at the average price for the period 1,236 1,897 1,361 1,892
-------------- ------------- ------------ -------------
Total 21,251 18,897 21,259 18,882
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
Diluted earnings per common share:
Income before extraordinary item $ 0.19 $ 0.31 $ 0.49 $ 0.61
Extraordinary item, net of income tax benefit - - (0.02) (0.20)
-------------- ------------- ------------ -------------
Net income per share $ 0.19 $ 0.31 $ 0.47 $ 0.41
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
</TABLE>
-20-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4005
<SECURITIES> 0
<RECEIVABLES> 74272
<ALLOWANCES> 1223
<INVENTORY> 105245
<CURRENT-ASSETS> 196787
<PP&E> 71845
<DEPRECIATION> 17532
<TOTAL-ASSETS> 519109
<CURRENT-LIABILITIES> 68218
<BONDS> 121189
0
0
<COMMON> 200
<OTHER-SE> 187709
<TOTAL-LIABILITY-AND-EQUITY> 519109
<SALES> 237469
<TOTAL-REVENUES> 238419
<CGS> 158561
<TOTAL-COSTS> 209241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 402
<INTEREST-EXPENSE> 11636
<INCOME-PRETAX> 17140
<INCOME-TAX> 6839
<INCOME-CONTINUING> 10301
<DISCONTINUED> 0
<EXTRAORDINARY> 363
<CHANGES> 0
<NET-INCOME> 9938
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.47
</TABLE>
