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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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
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Commission File Number 0-21803
AFTERMARKET TECHNOLOGY CORP.
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(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/A
Item 2. ("Management's Discussion and Analysis of Financial Conditions and
Results of Operations") of Part I of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998 is hereby amended to correct the
following typographical errors: in "Results of Operations for the Six Month
Period Ended June 30, 1998 Compared to the Six Month Period Ended June 30,
1997--Net Sales" the reference in the second paragraph to the $10.3 million or
24.1% decline in net sales to OEM customers during the six months ended June 30,
1998 (excluding the benefit of the ATS and Autocraft acquisitions) compared with
the same period in the prior year is changed to a $13.1 million or 15.8%
decline.
Item 2, as so amended, reads in its entirety as follows:
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
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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 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.
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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.
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
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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.
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.
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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 $13.1 million,
or 15.8%, 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.
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.
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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.
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.
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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.
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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 12, 1998 /s/ John C. Kent
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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.
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