<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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from________________to____________
Commission File Number 0-21803
AFTERMARKET TECHNOLOGY CORP.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4486486
- ------------------------------ ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Oak Hill Center - Suite 400, Westmont, IL 60559
- ---------------------------------------------- ---------
(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 16, 1999, there were 20,333,390 shares of common stock of the
Registrant outstanding.
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<PAGE>
AFTERMARKET TECHNOLOGY CORP.
FORM 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Number
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<S> <C>
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 1999 (unaudited)
and December 31, 1998 ........................................ 3
Consolidated Statements of Income (unaudited) for the
Three and Six Months Ended June 30, 1999 and 1998 ........... 4
Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 1999 and 1998.................. 5
Notes to Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 21
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders........... 22
SIGNATURES................................................................. 23
EXHIBIT INDEX.............................................................. 24
</TABLE>
Note: Items 1, 2, 3, 5 and 6 of Part II are omitted because they
are not applicable.
-2-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,842 $ 580
Accounts receivable, net 76,778 71,357
Inventories 107,102 98,696
Prepaid and other assets 3,741 3,959
Refundable income taxes 6,250 10,954
Deferred income taxes 8,540 8,240
------------------ ------------------
Total current assets 204,253 193,786
Property, plant and equipment, net 73,408 63,903
Debt issuance costs, net 5,030 5,044
Cost in excess of net assets acquired, net 263,702 267,947
Other assets 21 1,225
------------------ ------------------
Total assets $ 546,414 $ 531,905
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 34,779 $ 35,945
Accrued expenses 50,986 42,643
Amounts due to acquired companies 8,173 10,204
Bank line of credit 681 2,060
Current portion of credit facility 17,198 15,000
------------------ ------------------
Total current liabilities 111,817 105,852
12% Series B and D Senior Subordinated Notes 111,304 111,394
Amount drawn on credit facility, less current portion 127,332 123,350
Amounts due to acquired companies 8,841 8,483
Deferred compensation 3,464 3,323
Deferred income taxes 12,526 11,492
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 2,000,000; none issued - -
Common stock, $.01 par value; shares authorized - 30,000,000;
Issued - 20,481,998 and 20,411,768 (including shares held in treasury) 205 204
Additional paid-in capital 135,361 135,104
Retained earnings 38,312 35,676
Accumulated other comprehensive loss (754) (979)
Common stock held in treasury, at cost (172,000 shares) (1,994) (1,994)
------------------ ------------------
Total stockholders' equity 171,130 168,011
------------------ ------------------
Total liabilities and stockholders' equity $ 546,414 $ 531,905
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES
-3-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
1999 1998 1999 1998
--------------- -------------- ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 141,203 $ 130,468 $ 276,401 $ 237,469
Cost of sales 97,445 89,038 191,361 158,561
--------------- -------------- ------------- --------------
Gross profit 43,758 41,430 85,040 78,908
Selling, general and
administrative expense 30,416 23,157 60,549 44,263
Amortization of intangible assets 1,823 1,751 3,583 3,239
Special charges 2,100 3,580 4,000 3,580
--------------- -------------- ------------- --------------
Income from operations 9,419 12,942 16,908 27,826
Other income, net 84 299 359 950
Interest expense 6,507 6,451 12,799 11,636
--------------- -------------- ------------- --------------
Income before income taxes
and extraordinary item 2,996 6,790 4,468 17,140
Income tax expense 1,243 2,792 1,832 6,839
--------------- -------------- ------------- --------------
Income before extraordinary item 1,753 3,998 2,636 10,301
Extraordinary item - net of income taxes - - - 363
--------------- -------------- ------------- --------------
Net income $ 1,753 $ 3,998 $ 2,636 $ 9,938
=============== ============== ============= ==============
Per common share - basic:
Income before extraordinary item $ 0.09 $ 0.20 $ 0.13 $ 0.52
Extraordinary item - - - (0.02)
--------------- -------------- ------------- --------------
Net income $ 0.09 $ 0.20 $ 0.13 $ 0.50
=============== ============== ============= ==============
Weighted average number of common shares
outstanding 20,268 20,015 20,257 19,898
=============== ============== ============= ==============
Per common share - diluted:
Income before extraordinary item $ 0.08 $ 0.19 $ 0.12 $ 0.49
Extraordinary item - - - (0.02)
--------------- -------------- ------------- --------------
Net income $ 0.08 $ 0.19 $ 0.12 $ 0.47
=============== ============== ============= ==============
Weighted average number of common and
common equivalent shares outstanding 21,204 21,251 21,101 21,259
=============== ============== ============= ==============
</TABLE>
SEE ACCOMPANYING NOTES
-4-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the six months ended June 30,
1999 1998
----------------------- --------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,636 $ 9,938
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Extraordinary item - 605
Depreciation and amortization 9,174 7,114
Amortization of debt issuance costs 468 546
Provision for losses on accounts receivable 420 402
Loss on sale of equipment 22 10
Deferred income taxes 349 211
Changes in operating assets and liabilities, net of businesses
acquired/sold:
Accounts receivable (6,816) 1,533
Inventories (10,458) (7,246)
Prepaid and other assets 5,927 (4,321)
Accounts payable and accrued expenses 7,377 12,358
----------------------- --------------------
Net cash provided by operating activities 9,099 21,150
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (14,584) (8,184)
Acquisition of companies, net of cash received - (113,498)
Proceeds from sale of business 3,808 -
Proceeds from sale of equipment 101 337
----------------------- --------------------
Net cash used in investing activities (10,675) (121,345)
FINANCING ACTIVITIES:
Borrowings on credit facility, net 6,179 108,900
Payments on bank line of credit, net (1,590) (2,831)
Payment of debt issuance costs (520) (2,425)
Proceeds from exercise of stock options 258 780
Payments on amounts due to acquired companies (1,489) (302)
----------------------- --------------------
Net cash provided by financing activities 2,838 104,122
----------------------- --------------------
Increase in cash and cash equivalents 1,262 3,927
Cash and cash equivalents at beginning of period 580 78
----------------------- --------------------
Cash and cash equivalents at end of period $ 1,842 $ 4,005
======================= ====================
Cash paid during the period for:
Interest $ 12,097 $ 8,944
Income taxes, net (3,386) 3,634
</TABLE>
SEE ACCOMPANYING NOTES
-5-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
Notes to Consolidated Financial Statements
(In thousands)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Aftermarket Technology Corp. (the "Company") as of June 30, 1999 and for the
three and six months ended June 30, 1999 and 1998 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, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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, 1998.
Certain prior-year amounts have been reclassified to conform to the 1999
presentation.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost (first in, first out method)
or market:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
-------------------- ---------------------------
<S> <C> <C>
Raw materials, including core inventories......... $ 48,146 $ 46,102
Work-in-process................................... 3,032 3,051
Finished goods.................................... 55,924 49,543
-------------------- ---------------------------
$ 107,102 $ 98,696
==================== ===========================
</TABLE>
Finished goods include purchased parts which are available for sale.
NOTE 3: CREDIT FACILITY
The Company has an agreement with The Chase Manhattan Bank, as agent,
providing for a credit facility comprised of a $100.0 million revolving line of
credit and a $120.0 million term loan (the "Credit Facility") to finance the
Company's working capital requirements, future acquisitions and the acquisition
of Autocraft (see Note 4). Amounts advanced under the Credit Facility are
secured by substantially all the assets of the Company. Amounts advanced under
the revolving portion of the Credit Facility will become due on December 31,
2003. The balance outstanding on the term loan as of June 30, 1999 was $100.7
million. The Company may prepay outstanding advances under the revolving line of
credit or the term loan portion of the Credit Facility in whole or in part
without incurring any premium or penalty. At June 30, 1999, $43.8 million was
outstanding under the revolving line of credit.
During 1998, the Company entered into an interest rate swap agreement in
order to convert $50.0 million of its Credit Facility to a fixed rate.
Based on its operating results during 1998, the Company was in technical
default of the leverage and cash flow covenants of the Credit Facility and the
Company's interest rate swap agreement as of December 31, 1998. Due to the
defaults, the Company was not able to borrow under the Credit Facility. In March
1999, the Company obtained from its lenders waivers of the various defaults and
certain amendments to the Credit Facility and the interest rate swap agreement.
-6-
<PAGE>
NOTE 4: ACQUISITIONS
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 drive train and electronic parts used in the warranty and
aftermarket repair of passenger cars and light trucks. The purchase price was
approximately $115.9 million, including transaction fees and related expenses.
The Company has estimated an additional payment of approximately $5.9 million to
be paid in 1999 based on the performance of the OEM Division's European
operations during 1998. Goodwill recorded of approximately $74.3 million
includes the additional payment to be made and certain other adjustments that
were made during the first quarter of 1999.
The Autocraft acquisition has 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 Autocraft from the date of acquisition.
NOTE 5: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income............................... $ 1,753 $ 3,998 $ 2,636 $ 9,938
=========== ============ =========== ===========
Denominator:
Weighted-average common shares outstanding 20,268 20,015 20,257 19,898
Effect of stock options and warrants..... 936 1,236 844 1,361
----------- ------------ ----------- -----------
Denominator for diluted earnings per common
share.................................... 21,204 21,251 21,101 21,259
=========== ============ =========== ===========
Basic earnings per common share.......... $ 0.09 $ 0.20 $ 0.13 $ 0.50
Diluted earnings per common share........ 0.08 0.19 0.12 0.47
</TABLE>
NOTE 6. REPORTABLE SEGMENTS
The Company has two reportable segments: Original Equipment Manufacturer
("OEM") segment and Independent Aftermarket segment. The Company's OEM segment
consists of four operating units that primarily sell remanufactured
transmissions and engines directly to OEMs. The Company's Independent
Aftermarket segment consists of the Company's Distribution Group, which
primarily sells transmission repair kits, soft parts, remanufactured torque
converters and new and remanufactured hard parts used in drive train repairs to
independent transmission rebuilders and to a lesser extent to general repair
shops, wholesale distributors and retail automotive parts stores. Other
operating units, which are not reportable segments, consist of an electronic
parts remanufacturing and distribution business, warehouse and distribution
services for AT&T Wireless and a material recovery processing business primarily
for Ford.
-7-
<PAGE>
The Company evaluates performance and allocates resources based upon
profit or loss before income taxes and extraordinary items ("EBT"). The
reportable segments' accounting policies are the same as those of the Company.
Intersegment sales and transfers are recorded at the Company's standard cost and
all intersegment profits, if any, are eliminated.
The reportable segments are each managed and measured separately primarily
due to the differing customers, production processes, products sold and
distribution channels. The reportable segments are as follows:
<TABLE>
<CAPTION>
Independent
OEM Aftermarket Other Totals
--- ----------- ----- ------
<S> <C> <C> <C> <C>
For the three months ended June 30, 1999:
- -----------------------------------------
Revenues from external customers................ $ 78,695 $ 48,716 $ 13,792 $ 141,203
Intersegment revenues........................... 197 387 - 584
Special charges................................. - 1,525 80 1,605
Segment profit (loss)........................... 9,678 (7,621) 1,413 3,470
For the six months ended June 30, 1999:
- ---------------------------------------
Revenues from external customers............... $ 150,649 $ 98,109 $ 27,643 $ 276,401
Intersegment revenues.......................... 356 860 - 1,216
Special charges................................. - 1,866 80 1,946
Segment profit ................................ 15,736 (12,608) 3,040 6,168
Independent
OEM Aftermarket Other Totals
--- ----------- ----- ------
<CAPTION>
<S> <C> <C> <C> <C>
For the three months ended June 30, 1998:
- -----------------------------------------
Revenues from external customers................ $ 68,314 $ 48,701 $ 13,453 $ 130,468
Intersegment revenues........................... 169 49 - 218
Special charges................................. 2,650 795 - 3,445
Segment profit (loss)........................... 4,897 (1,141) 655 4,411
For the six months ended June 30, 1998:
- ---------------------------------------
Revenues from external customers............... $ 121,372 $ 97,430 $ 18,667 $ 237,469
Intersegment revenues.......................... 385 87 - 472
Special charges................................. 2,650 795 - 3,445
Segment profit ................................ 12,701 (1,081) 975 12,595
</TABLE>
-8-
<PAGE>
A reconciliation of the reportable segments to consolidated net sales and
income before income taxes and extraordinary item are as follows:
<TABLE>
<CAPTION>
For the For the
Three months ended June 30, Six months ended June 30,
------------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
- ----------
External revenues from reportable segments........ $ 127,411 $ 117,015 $ 248,758 $ 218,802
Intersegment revenues for reportable segments..... 584 218 1,216 472
Other revenues.................................... 13,792 13,453 27,643 18,667
Elimination of intersegment revenues.............. (584) (218) (1,216) (472)
--------- -------------- ----------- ------------
Consolidated net sales..................... $ 141,203 $ 130,468 $ 276,401 $ 237,469
========= ============== =========== ============
Profit:
- -------
Total profit for reportable segments.............. $ 2,057 $ 3,756 $ 3,128 $ 11,620
Other profit...................................... 1,413 655 3,040 975
Unallocated amounts:
Special charges................................. (495) (135) (2,054) (135)
Corporate (expense) profit...................... (1,532) 340 (2,996) 563
Depreciation and amortization................... (202) (37) ( 396) (71)
Interest expense, net........................... 1,755 2,211 3,746 4,188
--------- -------------- ----------- ------------
Income before income taxes and
Extraordinary item....................... $ 2,996 $ 6,790 $ 4,468 $ 17,140
========= ============== =========== ============
</TABLE>
NOTE 7: SPECIAL CHARGES
During 1998, the Company took actions related to certain initiatives
designed to improve operating efficiencies and reduce costs and recorded special
charges of $3,580 and $5,164 in the second and fourth quarters of 1998,
respectively. In the first quarter of 1999, the Company recorded special charges
of $1,900, which consisted of $1,559 of severance costs related to its
management reorganization and $341 of exit costs related to the consolidation of
certain of the Company's distribution centers. In the second quarter of 1999,
the Company recorded special charges of $2,100, which included $1,280 of exit
and other costs related to the consolidation of certain of the Company's
distribution centers, as well as $820 of severance and other costs related to
the Company's management reorganization. The Company is continuing to evaluate
its business to identify additional improvements that may result in additional
special charges.
The following table summarizes the provisions and reserves for
restructuring and special charges as included in accrued expenses:
<TABLE>
<CAPTION>
Termination
Benefits Exit/Other Costs Total
------------ ---------------- ----------
<S> <C> <C> <C>
Provision 1998.................... $ 2,690 $ 6,054 $ 8,744
Payments 1998..................... (822) (2,528) (3,350)
------------ ---------------- ----------
Reserve at December 31, 1998...... $ 1,868 $ 3,526 $ 5,394
Provision 1999.................... 1,829 2,171 4,000
Payments 1999..................... (1,046) (714) (1,760)
------------ ---------------- ----------
Reserve at June 30, 1999.......... $ 2,651 $ 4,983 $ 7,634
============ ================ ==========
</TABLE>
-9-
<PAGE>
NOTE 8: COMPREHENSIVE INCOME
Total comprehensive income for the six months ended June 30, 1999 and 1998
were $2,861 and $10,050, respectively.
The following table sets forth the computation of comprehensive income for
the six months ended June 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
For the six months ended June 30,
----------------------------------------
1999 1998
------------------ --------------------
<S> <C> <C>
Net income............................................. $ 2,636 $ 9,938
Other comprehensive income:
Translation adjustment, net of related taxes........... 225 112
------------------ --------------------
$ 2,861 $ 10,050
================== ====================
</TABLE>
NOTE 9: EXTRAORDINARY ITEM
In March 1998, in connection with the restatement and amendment of the
credit agreement to provide for the Credit Facility, the Company recorded an
extraordinary item of $0.4 million related to the write-off of previously
capitalized debt issuance costs.
NOTE 10: SALE OF SUBSIDIARY
In December 1998, the Company agreed to sell the assets of its Canadian
heavy-duty truck remanufacturing operation ("Mascot") for $3.8 million in cash
and the assumption of certain liabilities. As part of this transaction, the
Company recorded a $1.2 million loss in the fourth quarter of 1998. In February
1999, the Company collected the $3.8 million of cash proceeds, of which $1.9
million was used to retire Mascot's bank line of credit and certain other
liabilities and $1.9 million was paid against the term loan portion of the
Credit Facility.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT NOTICE
Readers are cautioned that 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" within the meaning of the Private Securities Litigation Reform Act
of 1995. Statements that are predictive, that depend upon or refer to future
events or conditions, or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "hopes," and similar expressions
constitute forward-looking statements. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible future Company
actions are also forward-looking statements.
Forward-looking statements are based on current expectations, projections
and assumptions regarding future events that may not prove to be accurate.
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, dependence on significant
customers, possible component parts shortages, the ability to achieve and manage
growth, future indebtedness and liquidity, environmental matters, and
competition. For a discussion of these and certain other factors, please refer
to 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, 1998.
Please also refer to the Company's other filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO
THE THREE MONTH PERIOD ENDED JUNE 30, 1998.
Net income decreased $2.2 million, or 55.0%, from $4.0 million for the
three months ended June 30, 1998 to $1.8 million for the three months ended June
30, 1999. During the three months ended June 30, 1999 and 1998, the Company
recorded special charges of $2.1 million and $3.6 million, respectively, related
to certain initiatives designed to improve operating efficiencies and reduce
costs (see "Special Charges" below). After-tax net earnings before special
charges decreased $3.1 million, or 50.8%, from $6.1 million for the three months
ended June 30, 1998 to $3.0 million for the three months ended June 30, 1999.
This decrease was primarily attributable to a decline in profitability of the
Company's Independent Aftermarket segment partially offset by an increase in
profitability of the Company's OEM segment during 1999 as compared to 1998. Net
income per diluted share was $0.08 for the three months ended June 30, 1999 as
compared to $0.19 per diluted share for the three months ended June 30, 1998.
Excluding the special charges, net income per diluted share was $0.14 for the
three months ended June 30, 1999 as compared to $0.29 per diluted share for the
three months ended June 30, 1998.
NET SALES
Net sales increased $10.7 million, or 8.2%, from $130.5 million for the
three months ended June 30, 1998 to $141.2 million for the three months ended
June 30, 1999. On a proforma basis, excluding $1.9 million of 1998 sales from
Mascot, the Company's Canadian heavy-duty truck remanufacturing operation, which
was sold in February 1999, sales increased $12.6 million, or 9.8%, from $128.6
million for the three months ended June 30, 1998. This increase was primarily
attributable to increased sales from the Company's OEM segment and its' Logistic
Services and Material Recovery business units.
-11-
<PAGE>
Sales to DaimlerChrysler accounted for 20.0% and 17.1% of the Company's
revenues for the three months ended June 30, 1999 and 1998, respectively. Sales
to Ford accounted for 19.9% and 18.8% of the Company's revenues for the three
months ended June 30, 1999 and 1998, respectively.
GROSS PROFIT
Gross profit increased $2.4 million, or 5.8%, from $41.4 million for the
three months ended June 30, 1998 to $43.8 million for the three months ended
June 30, 1999. This increase was principally due to the increased sales from the
Company's OEM segment and its' Logistic Services and Material Recovery business
units, partially offset by a decline in gross profit experienced by the
Company's Independent Aftermarket segment. Gross profit as a percentage of net
sales decreased slightly from 31.8% for the three months ended June 30, 1998 to
31.0% for the three months ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $7.2
million, or 31.0%, from $23.2 million for the three months ended June 30, 1998
to $30.4 million for the three months ended June 30, 1999. As a percentage of
net sales, SG&A expenses increased from 17.7% to 21.5% between the two periods.
The increase was primarily due to (i) $2.9 million of additional costs largely
related to the expansion of the OEM segment's branch sales channel for
remanufactured engines, (ii) $1.9 million of additional infrastructure costs
related to the Independent Aftermarket segment's enterprise-wide information
system, (iii) $1.0 million of costs primarily associated with the Company's
turnaround activities and (iv) $0.6 million of additional costs related to the
increased sales volumes from the Logistic Services business unit in 1998 as
compared to 1999.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets remained constant at $1.8 million for
the three months ended June 30, 1998 and 1999.
SPECIAL CHARGES
During the three months ended June 30, 1999, the Company incurred $2.1
million of special charges. These charges consisted of $1.3 million of exit and
other costs principally related to the consolidation of certain of the Company's
distribution centers as well as $0.8 million of severance and other costs
related to the reorganization of certain management functions.
During the three months ended June 30, 1998, the Company incurred $3.6
million of special charges, consisting of $2.5 million of costs relating
principally to idle plant capacity costs and $1.1 million of restructuring
charges consisting principally of employee severance costs and certain other
exit costs. These were the initial special charges the Company incurred in its
ongoing efforts designed to improve operating efficiencies and reduce costs.
INCOME FROM OPERATIONS
Income from operations decreased $3.5 million, or 27.1%, from $12.9
million for the three months ended June 30, 1998 to $9.4 million for the three
months ended June 30, 1999, principally as a result of the factors described
above. As a percentage of net sales, income from operations decreased from 9.9%
to 6.7%, between the two periods.
INTEREST EXPENSE
Interest expense remained constant at $6.5 million for the three months
ended June 30,1998 and 1999.
-12-
<PAGE>
OEM Segment
-----------
The following table presents net sales, special charges and segment
profit (EBT) expressed in millions of dollars and as a percentage of net
sales:
<TABLE>
<CAPTION>
For the three months ended June 30,
-------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C> <C> <C>
Net sales............................. $ 78.7 100.0% $ 68.3 100.0%
======== ======== ======== =======
Special charges....................... $ - - % $ 2.6 3.8%
======== ======== ======== =======
Segment profit........................ $ 9.7 12.3% $ 4.9 7.2%
======== ======== ======== =======
</TABLE>
NET SALES. Net sales increased $10.4 million, or 15.2%, from $68.3 million
for the three months ended June 30, 1998 to $78.7 million for the three months
ended June 30, 1999. The increase was primarily due to (i) increased sales of
remanufactured transmissions to DaimlerChrysler and Ford and (ii) increased
sales from the OEM segment's engine branch sales channel during the three months
ended June 30, 1999 as compared to 1998.
Sales to DaimlerChrysler accounted for 35.9% and 32.6% of segment revenues
for the three months ended June 30, 1999 and 1998, respectively. Sales to Ford
accounted for 33.1% and 33.8% of segment revenues for the three months ended
June 30, 1999 and 1998, respectively.
SPECIAL CHARGES. Special charges of $2.6 million during 1998 were incurred
primarily in connection with the consolidation of certain OEM segment
manufacturing plants. There were no such charges incurred during the three
months ended June 30, 1999.
SEGMENT PROFIT. Segment profit increased $4.8 million, or 98.0%, from $4.9
million (7.2% of OEM net sales) for the three months ended June 30, 1998 to $9.7
million (12.3% of OEM net sales) for the three months ended June 30, 1999.
Segment profit before special charges increased $2.2 million, or 29.3%, from
$7.5 million (11.0% of OEM net sales) for the three months ended June 30, 1998
to $9.7 million (12.3% of OEM net sales) for the three months ended June 30,
1999. The increase is primarily attributable to the increased sales of
remanufactured transmissions.
Independent Aftermarket Segment
-------------------------------
The following table presents net sales, special charges and segment profit
(loss) (EBT) expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the three months ended June 30,
------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C> <C> <C>
Net sales........................... $ 48.7 100.0% $ 48.7 100.0%
======= ======== ======== ======
Special charges..................... $ 1.5 3.1% $ 0.8 1.6%
======= ======== ======== ======
Segment profit (loss) .............. $ (7.6) (15.6)% $ (1.1) (2.3)%
======= ======== ======== ======
</TABLE>
NET SALES. Net sales remained constant at $48.7 million for the three
months ended June 30, 1998 and 1999.
SPECIAL CHARGES. Special charges increased $0.7 million, from $0.8 million
for the three months ended June 30, 1998 to $1.5 million for the three months
ended June 30, 1999. Special charges incurred during 1998 consisted of $0.3
million of severance costs and $0.5 million of costs related to the
centralization of the Independent Aftermarket segment's management team and its
MIS function and certain other personnel matters. Special charges incurred
during 1999
-13-
<PAGE>
consisted of $1.2 million of exit and other costs related to the
consolidation of the Independent Aftermarket's distribution centers, as well as
$0.3 million of severance and other costs related to the reorganization of
certain management functions.
SEGMENT PROFIT (LOSS). Segment profit decreased $6.5 million, from a $1.1
million loss for the three months ended June 30, 1998 to a $7.6 million loss for
the three months ended June 30, 1999. Before special charges, segment profit
decreased $5.8 million. This decline was primarily attributable to (i) an
overall decline in gross profit margin of approximately $2.3 million due
primarily to changes in sales mix, an increase in costs and selected temporary
sales discounts to maintain customer satisfaction and service levels as the
Company implemented enhancements to its enterprise-wide information system and
an increase in costs associated with the relocation of one of the Company's
primary distribution centers to a larger and more suitable facility, (ii) an
increase of approximately $1.9 million of additional infrastructure costs
related to the segment's enterprise-wide information system and (iii)
approximately $0.9 million of costs related to the launch of the Company's
independent aftermarket remanufactured transmission program.
Other Operating Units
---------------------
The following table presents net sales, special charges and segment
profit (EBT) expressed in millions of dollars and as a percentage of net
sales:
<TABLE>
<CAPTION>
For the three months ended June 30,
---------------------------------------
1999 1998
----------------- -------------------
<S> <C> <C> <C> <C>
Net sales............................. $ 13.8 100.0% $ 13.5 100.0%
======= ====== ========= =======
Special charges....................... $ 0.1 0.7% $ - - %
======= ====== ========= =======
Segment profit........................ $ 1.4 10.1% $ 0.7 5.2%
======= ====== ========= =======
</TABLE>
NET SALES. Net sales increased $0.3 million, or 2.2%, from $13.5 million
for the three months ended June 30, 1998 to $13.8 million for the three months
ended June 30, 1999. On a proforma basis, excluding $1.9 million of 1998 sales
from the Company's Canadian heavy-duty truck remanufacturing operation (Mascot)
that was sold in February 1999, sales increased $2.2 million, or 19.0%, from
$11.6 million for three months ended June 30, 1998. The increase was primarily
attributable to increased sales by the Logistics Services and Material Recovery
business units, partially offset by a decline in sales from the Electronics
business unit.
SEGMENT PROFIT. Segment profit before special charges increased $0.8
million, or 114.3%, from $0.7 million for the three months ended June 30, 1998
to $1.5 million for the three months ended June 30, 1999. The increase was
primarily the result of increased sales volumes by the Logistics Services and
Material Recovery business units in 1999 versus 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO
THE SIX MONTH PERIOD ENDED JUNE 30, 1998.
Net income decreased $7.3 million, or 73.7%, from $9.9 million for the six
months ended June 30, 1998 to $2.6 million for the six months ended June 30,
1999. During the six months ended June 30, 1999 and 1998, the Company recorded
special charges of $4.0 million and $3.6 million, respectively, related to
certain initiatives designed to improve operating efficiencies and reduce costs
(see "Special Charges" below). After-tax net earnings before extraordinary item
and special charges decreased $7.4 million, or 59.7%, from $12.4 million for the
six months ended June 30, 1998 to $5.0 million for the six months ended June 30,
1999. This decrease was primarily attributable to a decline in profitability
from the Company's Independent Aftermarket segment during 1999 as compared to
1998. Net income per diluted share was $0.12 for the six
-14-
<PAGE>
months ended June 30,1999 as compared to $0.47 per diluted share for the six
months ended June 30,1998. Excluding the special charges and extraordinary item,
net income per diluted share was $0.24 for the six months ended June 30, 1999 as
compared to $0.59 per diluted share for the six months ended June 30, 1998.
NET SALES
Net sales increased $38.9 million, or 16.4%, from $237.5 million for the
six months ended June 30, 1998 to $276.4 million for the six months ended June
30, 1999. This increase is partially attributable to a full six months of net
sales from Autocraft, acquired in March 1998. On a pro forma basis, as if the
Autocraft acquisition and the sale of Mascot had taken place on January 1, 1998,
net sales would have been $260.8 million and $275.7 million for the six months
ended June 30, 1998 and 1999, respectively. The increase, on a pro forma basis,
was primarily attributable to increased sales from the Company's OEM segment and
its' Logistic Services and Material Recovery business units during 1999 as
compared to 1998.
Sales to DaimlerChrysler accounted for 19.1% and 20.3% of the Company's
revenues for the six months ended June 30, 1999 and 1998, respectively. Sales to
Ford accounted for 19.3% and 12.5% of the Company's revenues for the six months
ended June 30, 1999 and 1998, respectively. On a pro forma basis, as if the
Autocraft acquisition and the sale of Mascot had occurred on January 1, 1998,
sales to DaimlerChrysler would have accounted for 18.5% of the Company's
revenues for the six months ended June 30, 1998 and sales to Ford would have
accounted for 17.9% of the Company's revenues for the same period.
GROSS PROFIT
Gross profit increased $6.1 million, or 7.7%, from $78.9 million for the
six months ended June 30, 1998 to $85.0 million for the six months ended June
30, 1999. This increase was principally due to the Autocraft acquisition and
increased sales in the Company's OEM segment, partially offset by a decline in
gross profit experienced by the Company's Independent Aftermarket segment. As a
result, gross profit as a percentage of net sales decreased from 33.2% to 30.8%
between the two periods. Also contributing to the lower gross profit margin
percentage in 1999 was the effect of the Autocraft acquisition, which
historically operated at a lower gross profit margin percentage than that of the
Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $16.3
million, or 36.8%, from $44.3 million for the six months ended June 30, 1998 to
$60.6 million for the six months ended June 30, 1999. As a percentage of net
sales, SG&A expenses increased from 18.6% to 21.9% between the two periods. This
increase was due primarily to (i) $4.8 million of additional costs primarily
related to the expansion of the OEM segment's engine branch sales channel, (ii)
$3.7 million of additional infrastructure costs related to the Independent
Aftermarket segment's enterprise-wide information system, (iii) $2.9 million of
additional cost due to a full six months of SG&A cost from Autocraft, acquired
on March 6, 1998, (iv) $2.7 million primarily associated with the Company's
turnaround activities and (v) $1.5 million of additional costs related to the
increased sales volume from the Logistic Services business unit.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased $0.4 million, or 12.5%, from
$3.2 million for the six months ended June 30, 1998 to $3.6 million for the six
months ended June 30, 1999. The increase is attributable to the March 1998
Autocraft acquisition.
-15-
<PAGE>
SPECIAL CHARGES
During the six months ended June 30, 1999, the Company incurred $4.0
million of special charges. These charges consisted of $2.4 million of severance
and other costs related to the Company's reorganization of certain management
functions and $1.6 million of exit and other costs principally related to the
consolidation of certain of the Company's distribution centers.
During the six months ended June 30, 1998, the Company incurred $3.6
million of special charges, consisting of $2.5 million of costs relating
principally to idle plant capacity costs and $1.1 million of restructuring
charges consisting principally of employee severance costs and certain other
exit costs. These were the initial special charges the Company incurred in its
efforts designed to improve operating efficiencies and reduce costs.
INCOME FROM OPERATIONS
Income from operations decreased $10.9 million, or 39.2%, from $27.8
million for the six months ended June 30, 1998 to $16.9 million for the six
months ended June 30, 1999, principally as a result of the factors described
above. As a percentage of net sales, income from operations decreased from 11.7%
to 6.1%, between the two periods.
INTEREST EXPENSE
Interest expense increased $1.2 million, or 10.3%, from $11.6 million for
the six months ended June 30, 1998 to $12.8 million for the six months ended
June 30, 1999. The increase primarily resulted from borrowing under the $120.0
million term loan portion of the Credit Facility in March 1998 to finance the
Autocraft acquisition.
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 Credit Facility.
OEM Segment
-----------
The following table presents net sales, special charges and segment
profit (EBT) expressed in millions of dollars and as a percentage of net
sales:
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------------------
1999 1998
-------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales............................. $ 150.6 100.0% $ 121.4 100.0%
======= ======== ========= ========
Special charges....................... $ - - % $ 2.6 2.1%
======= ======== ========= ========
Segment profit........................ $ 15.7 10.4% $ 12.7 10.5%
======= ======== ========= ========
</TABLE>
NET SALES. Net sales increased $29.2 million, or 24.1%, from $121.4
million for the six months ended June 30, 1998 to $150.6 million for the six
months ended June 30, 1999. The increase was primarily due to the timing of the
Autocraft acquisition which was acquired on March 6, 1998, increased sales of
remanufactured engines, and increased sales of remanufactured transmissions to
Ford and DaimlerChrysler, offset in part by a decline in sales of remanufactured
transmissions to certain of the Company's other OEM customers.
-16-
<PAGE>
Sales to DaimlerChrysler accounted for 35.1% and 39.8% of segment revenues
for the six months ended June 30, 1999 and 1998, respectively. Sales to Ford
accounted for 32.2% and 23.0% of segment revenues for the six months ended June
30, 1999 and 1998, respectively. On a pro forma basis, as if the Autocraft
acquisition had occurred on January 1, 1998, sales to DaimlerChrysler would have
accounted for 34.3% of segment revenues for the six months ended June 30, 1998
and sales to Ford would have accounted for 31.2% of segment revenues for the
same period.
SPECIAL CHARGES. Special charges of $2.6 million during 1998 were
primarily incurred in connection with the consolidation of certain OEM segment
manufacturing plants. There were no such charges incurred during the three
months ended June 30, 1999.
SEGMENT PROFIT. Segment profit increased $3.0 million, or 23.6%, from
$12.7 million (10.5% of OEM net sales) for the six months ended June 30, 1998 to
$15.7 million (10.4% of OEM net sales) for the six months ended June 30, 1999.
Excluding 1998 special charges of $2.6 million, segment profit increased by $0.4
million, as sales volume related increases in gross profit were largely offset
by increased SG&A expenses associated with the expansion of the Company's branch
sales network for remanufactured engines.
Independent Aftermarket Segment
-------------------------------
The following table presents net sales, special charges and segment profit
(loss) (EBT) expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------------------
1999 1998
----------------------- --------------------
<S> <C> <C> <C> <C>
Net sales......................... $ 98.1 100.0% $ 97.4 100.0%
========= ======== ======= =======
Special charges.................. $ 1.9 1.9% $ 0.8 0.8%
========= ======== ======= =======
Segment profit (loss)............ $ (12.6) (12.8)% $ (1.1) ( 1.1)%
========= ======== ======= =======
</TABLE>
NET SALES. Net sales increased $0.7 million, or 0.7%, from $97.4 million
for the six months ended June 30, 1998 to $98.1 million for the six months ended
June 30, 1999.
SPECIAL CHARGES. Special charges increased $1.1 million, from $0.8 million
for the six months ended June 30, 1998 to $1.9 million for the six months ended
June 30, 1999. Special charges incurred during 1998 consisted of $0.3 million of
severance costs and $0.5 million of costs related to the centralization of the
Independent Aftermarket segment's management team and its MIS function and
certain other personnel matters. Special charges incurred during 1999 consisted
of $1.6 million of exit costs of other costs related to the consolidation of the
Independent Aftermarket's distribution centers, as well as $0.3 million of
severance and other costs related to the reorganization of certain management
functions.
SEGMENT PROFIT (LOSS). Segment profit decreased $11.5 million, from a $1.1
million loss for the six months ended June 30, 1998 to a $12.6 million loss for
the six months ended June 30, 1999. Excluding 1999 and 1998 special charges of
$1.9 million and $0.8 million, respectively, segment profit decreased $10.4
million between the two periods. This decline was primarily attributable to (i)
an overall decline in gross profit margin of approximately $4.1 million due
primarily to changes in sales mix, an increase in costs and selected temporary
sales discounts to maintain customer satisfaction and service levels as the
Company implemented enhancements to its enterprise-wide information system and
an increase in costs associated with the relocation of one the Company's primary
distribution centers to a larger and more suitable facility, (ii) an increase of
approximately $3.7 million of additional infrastructure costs related to the
segment's enterprise-wide information system and (iii) approximately $1.6
million of costs related to the launch of the Company's independent aftermarket
remanufactured transmission program.
-17-
<PAGE>
Other Operating Units
---------------------
The following table presents net sales, special charges and segment
profit (EBT) expressed in millions of dollars and as a percentage of net
sales:
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------
1999 1998
----------------- -------------------
<S> <C> <C> <C> <C>
Net sales............................. $27.6 100.0% $ 18.7 100.0%
===== ======= ========= =======
Special charges....................... $ 0.1 0.3% $ - - %
===== ======= ========= =======
Segment profit........................ $ 3.0 10.9% $ 1.0 5.3%
===== ======= ========= =======
</TABLE>
NET SALES. Net sales increased $8.9 million, or 47.6%, from $18.7 million
for the six months ended June 30, 1998 to $27.6 million for the six months ended
June 30, 1999. On a pro forma basis, as if the Autocraft acquisition and the
sale of Mascot had taken place on January 1, 1998, net sales would have been
$22.5 million and $26.9 million for the six months ended June 30, 1998 and 1999,
respectively. This increase was primarily attributable to increased sales in the
Logistics Services and Material Recovery business units, which were acquired in
March 1998 as part of the Autocraft acquisition. Prior to the Autocraft
acquisition, revenue in this segment was entirely attributable to Mascot, the
Company's Canadian heavy-duty truck remanufacturing operation, which was sold in
February 1999.
SEGMENT PROFIT. Segment profit increased $2.0 million, or 200.0%, from
$1.0 million for the six months ended June 30, 1998 to $3.0 million for the six
months ended June 30, 1999. The increase was primarily the result of additional
sales volume described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents on hand of $1.8 million at
June 30, 1999. Net cash provided by operating activities was $9.1 million for
the six-month period. Net cash used in investing activities was $10.7 million
for the period, which consisted of $14.6 million in capital expenditures largely
for remanufacturing equipment and systems implementation costs partially offset
by $3.8 million of proceeds from the sale of Mascot. Net cash provided by
financing activities of $2.8 million was primarily from net borrowings of $6.2
million made under the Credit Facility, partially offset by $1.6 million in
payment of the Canadian bank line of credit, $1.5 million in payment of amounts
due to acquired companies and $0.5 million in payment of deferred financing fees
related to amendments made to the Credit Facility.
Based on its operating results during 1998, the Company was in technical
default of the leverage and cash flow covenants of the Credit Facility and the
Company's interest rate swap agreement as of December 31, 1998. This resulted in
a cross default under the line of credit for the Company's Canadian
subsidiaries. Due to the defaults, the Company was prohibited from further
borrowings under the Credit Facility and its Canadian line of credit. In March
1999, the Company obtained from its lenders waivers of the various defaults and
certain amendments to the Credit Facility and the interest rate swap agreement
that the Company believes will enable it to comply with the covenants in the
future.
Amounts outstanding under the Credit Facility bear interest at either the
"Alternate Base Rate" or the "Eurodollar Rate" (as defined in the Credit
Agreement) plus an applicable margin. At December 31, 1998 the Alternate Base
Rate margin was zero and the Eurodollar margin was 1.0%. As of June 30, 1999,
the Alternate Base Rate margin was 1.25% and the Eurodollar margin was 2.25%.
As of June 30, 1999, the Company had approximately $54.8 million available
under the revolving portion of the Credit Facility.
-18-
<PAGE>
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.
YEAR 2000 COMPLIANCE
The Company has assembled an internal project team that is addressing the
issue of computer programs and embedded computer chips being unable to
distinguish between the Year 1900 and the Year 2000. The project team has
developed and implemented a three-step plan intended to result in the Company's
operations continuing with no or minimal interruption through the Year 2000. The
plan has been designed to comply with guidelines established by the Automotive
Industry Action Group (an industry association supported by several of the major
OEMs).
For purposes of this discussion, "Year 2000 compatible" means that the
computer hardware, software or device in question will function in 2000 without
modification or adjustment or will function in 2000 with a one-time manual
adjustment. However, there can be no assurance that any such Year 2000
compatible hardware, software or device will function properly when interacting
with any Year 2000 noncompatible hardware, software or device.
PROCESS OVERVIEW
The first step in the Company's plan was to inventory all of its computer
hardware and software and all of its devices having imbedded computer
technology. The Year 2000 project team focused on four areas: (i) business
systems; (ii) production (e.g., desk top computers and remanufacturing
machinery); (iii) financial management (e.g., banking software, postage
equipment and time clocks); and (iv) facilities (e.g., heating and air
conditioning systems, elevators, telephones, and fire and security systems).
This inventory has been completed.
In the second step, the project team is determining whether each
inventoried system or device is Year 2000 compatible. In the third step, those
that are not compatible are being upgraded or replaced.
BUSINESS SYSTEMS. The business systems used by the Company's logistics
services, material recovery and electronics operations and the business systems
used by its subsidiaries that remanufacture transmissions for Chrysler, Ford,
General Motors and the Company's foreign OEM transmission customers, have each
been certified by the respective vendor as being Year 2000 compatible. The
enterprise system being integrated for the Independent Aftermarket segment has
also been certified by the vendor as being Year 2000 compatible. Certain
operations within the Independent Aftermarket segment that are not yet
integrated into the enterprise system, are expected to be upgraded or replaced
before the end of the year in order to be Year 2000 compatible. The business
system used by the Company's European operation is not Year 2000 compatible and
will be replaced with a compatible system by the end of the third quarter of
1999.
PRODUCTION, FINANCIAL MANAGEMENT AND FACILITIES. Each device and each
piece of hardware and non-business system software (a "Non-System Item") that
can be tested by the Company has been tested for Year 2000 compatibility. In the
case of any Non-System Item that cannot be tested, the vendor has been asked for
a certification regarding compatibility. Each Non-System Item that is
noncompatible will be either upgraded or replaced. The Company expects that
substantially all of the Non-System Items will have been tested or certified and
upgraded or replaced by the end of the third quarter of 1999.
VENDORS. The project team is also in the process of contacting each of the
Company's significant vendors and requesting that they apprise the Company of
the status of their Year 2000 compliance programs. The Company had originally
targeted the end of the first quarter of 1999 as
-19-
<PAGE>
the date for receiving substantially all vendor responses, but has now moved
the target to the end of the third quarter of 1999. There can be no assurance
as to when this process will be completed.
COSTS
The total cost associated with the Company becoming Year 2000 compatible
is not expected to be material to its financial position. As of June 30, 1999,
the Company had spent approximately $0.5 million in connection with the project,
consisting primarily of costs to upgrade noncompatible business systems. During
the balance of the year, the Company expects to spend approximately $0.2 million
to replace the business system used by the Company's European operation and less
than $0.2 million to upgrade or replace Non-System Items.
The estimate of the cost to upgrade or replace Non-System Items is subject
to change once the testing/certification process is completed. As a result, the
actual amount that is ultimately expended to upgrade or replace Non-System Items
could be substantially higher or lower than the above estimate.
Excluded from the above cost estimates are the costs associated with the
Distribution Group's enterprise-wide computer system to the extent that such
costs relate to implementation of the system as opposed to making it Year 2000
compatible.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in or failure of certain normal business activities or operations
of the Company. Such failures could have a material adverse effect on the
Company. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of Year 2000 compliance by the Company's
significant customers and vendors, the Company is unable to determine at this
time whether the consequences of Year 2000 noncompliance will have a material
adverse effect on the Company, although its Year 2000 project is expected to
significantly reduce that uncertainty.
The Company believes that the areas that present the greatest risk to the
Company are (i) disruption of the Company's business due to Year 2000
noncompatibility of one of its critical business systems and (ii) disruption of
the business of certain of its significant customers and vendors due to their
noncompliance. At this time, the Company believes that all of its business
systems will be Year 2000 compatible before the end of 1999. Whether disruption
of a customer's or vendor's business due to noncompliance will have a material
adverse effect on the Company will depend on several factors including the
nature and duration of the disruption, the significance of the customer or
vendor and, in the case of vendors, the availability of alternate sources for
the vendor's products.
The Company is in the process of developing a contingency plan to address
any material Year 2000 noncompliance issues. The Company projects to have the
plan completed by the end of October 1999.
FORWARD-LOOKING STATEMENT NOTICE
Readers are cautioned that the preceding discussion contains numerous
forward-looking statements and should be read in conjunction with the
"Forward-Looking Statement Notice" appearing at the beginning of "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Expectations about future Year 2000-related costs and the progress of the
Company's Year 2000 program are subject to various uncertainties that could
cause the actual results to differ materially from the Company's expectations,
including the success of the Company in identifying hardware, software and
devices that are not Year 2000 compatible, the nature and amount of remediation
required to make them compatible, the availability, rate and amount of related
labor and consulting costs and the success of the Company's significant vendors
and customers in addressing their Year 2000 issues.
-20-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company uses derivative financial instruments to manage
its exposure to fluctuations in interest rates. Neither the aggregate value of
these derivative financial instruments nor the market risk posed by them is
material to the Company. The Company uses interest rate swaps to convert
variable rate debt to fixed rate debt to reduce volatility risk. For additional
discussion regarding the Company's use of such instruments, see Item 1. "Notes
to Consolidated Financial Statements--Note 3."
INTEREST RATE EXPOSURE
Based on the Company's overall interest rate exposure during the six
months ended June 30, 1999, and assuming similar interest rate volatility in the
future, a near-term (12 months) change in interest rates would not materially
affect the Company's consolidated financial position, results of operation or
cash flows. A 10% change in the rate of interest would not have a material
effect on the Company's financial position, results of operation or cash flows.
FOREIGN EXCHANGE EXPOSURE
The Company has two foreign operations that expose it to translation risk
when the local currency financial statements are translated to U.S. dollars.
Since changes in translation risk are reported as adjustments to stockholders'
equity, a 10% change in the foreign exchange rate would not have a material
effect on the Company's financial position, results of operation or cash flows.
-21-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
PART II. OTHER INFORMATION
Items 1-3 are not applicable.
Item 4. - Submission of Matters to a Vote of Security Holders
The 1999 annual meeting of stockholders of the Company was held on May 5,
1999 for the purpose of electing ten directors to hold office until the next
annual meeting of stockholders and thereafter until their successors are elected
and qualified.
The following directors were elected by the following vote:
<TABLE>
<CAPTION>
Votes
-------------------------------
For Against
--- -------
<S> <C> <C>
Robert Anderson 18,653,305 695,095
Richard R. Crowell 18,658,522 689,878
Michael T. DuBose 18,657,022 691,378
Dale F. Frey 18,658,522 689,878
Mark C. Hardy 18,658,522 689,878
Dr. Michael J. Hartnett 18,658,522 689,878
Gerald L. Parsky 18,658,522 689,878
Richard K. Roeder 18,658,522 689,878
William A. Smith 18,657,222 691,178
J. Richard Stonesifer 18,658,522 689,878
</TABLE>
Items 5 and 6 are not applicable.
-22-
<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: July 29, 1999 /s/ Barry C. Kohn
- ------------------------ ---------------------------------------
Barry C. Kohn, Chief Financial Officer
- - Barry C. Kohn is signing in the dual capacities as i) the principal
financial officer, and ii) a duly authorized officer of the company.
-23-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
EXIBIT INDEX
Exhibit
Number Description Electronic (E)
- -------- --------------------------- --------------
27 Financial Data Schedules (E)
-24-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,842
<SECURITIES> 0
<RECEIVABLES> 79,539
<ALLOWANCES> 2,761
<INVENTORY> 107,102
<CURRENT-ASSETS> 204,253
<PP&E> 100,420
<DEPRECIATION> 27,012
<TOTAL-ASSETS> 546,414
<CURRENT-LIABILITIES> 111,817
<BONDS> 111,304
0
0
<COMMON> 205
<OTHER-SE> 170,925
<TOTAL-LIABILITY-AND-EQUITY> 546,414
<SALES> 276,401
<TOTAL-REVENUES> 276,760
<CGS> 191,361
<TOTAL-COSTS> 259,073
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 420
<INTEREST-EXPENSE> 12,799
<INCOME-PRETAX> 4,468
<INCOME-TAX> 1,832
<INCOME-CONTINUING> 2,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,636
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
