<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 March 31, 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 April 23, 1999, there were 20,263,172 shares of common stock of the
Registrant outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
FORM 10-Q
<TABLE>
<CAPTION>
Table of Contents
-----------------
Page Number
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1999 (unaudited)
and December 31, 1998 ................................................. 3
Consolidated Statements of Income (unaudited) for the Three
Months Ended March 31, 1999 and 1998 .................................. 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1999 and 1998............................. 5
Notes to Consolidated Financial Statements ............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................ 16
PART II. Other Information
Item 3. Defaults Upon Senior Securities........................................ 17
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
</TABLE>
Note: Items 1, 2, 4 and 5 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>
March 31, December 31,
1999 1998
------------------ ---------------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 17,847 $ 580
Accounts receivable, net 62,940 71,357
Inventories 98,544 98,696
Prepaid and other assets 3,738 3,959
Refundable income taxes 6,062 10,954
Deferred income taxes 8,387 8,240
--------- ---------
Total current assets 197,518 193,786
Property, plant and equipment, net 66,393 63,903
Debt issuance costs, net 5,343 5,044
Cost in excess of net assets acquired, net 265,516 267,947
Other assets 1,289 1,225
--------- ---------
Total assets $ 536,059 $ 531,905
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 33,887 $ 35,945
Accrued expenses 42,674 42,643
Amounts due to acquired companies 10,171 10,204
Bank line of credit 405 2,060
Current portion of credit facility 15,969 15,000
--------- ---------
Total current liabilities 103,106 105,852
12% Series B and D Senior Subordinated Notes 111,349 111,394
Amount drawn on credit facility, less current portion 128,246 123,350
Amounts due to acquired companies 8,662 8,483
Deferred compensation 3,394 3,323
Deferred income taxes 12,197 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 - 20,435,172 and 20,411,768 (including shares held in treasury) 204 204
Additional paid-in capital 135,143 135,104
Retained earnings 36,559 35,676
Accumulated other comprehensive loss (807) (979)
Common stock held in treasury, at cost (172,000 shares) (1,994) (1,994)
--------- ---------
Total stockholders' equity 169,105 168,011
--------- ---------
Total liabilities and stockholders' equity $ 536,059 $ 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 March 31,
1999 1998
------------------- -----------------
(Unaudited)
<S> <C> <C>
Net sales $ 135,198 $ 107,001
Cost of sales 93,916 69,523
------------------ ------------------
Gross profit 41,282 37,478
Selling, general and
administrative expense 30,133 21,106
Amortization of intangible assets 1,760 1,488
Special charges 1,900 -
------------------ ------------------
Income from operations 7,489 14,884
Other income, net 275 651
Interest expense 6,292 5,185
------------------ ------------------
Income before income taxes
and extraordinary item 1,472 10,350
Income tax expense 589 4,047
------------------ ------------------
Income before extraordinary item 883 6,303
Extraordinary item, net of income taxes - (363)
------------------ ------------------
Net income $ 883 $5,940
------------------ ------------------
------------------ ------------------
Per common share - basic:
Income before extraordinary item $ 0.04 $ 0.32
Extraordinary item - (0.02)
------------------ ------------------
Net income $ 0.04 $ 0.30
------------------ ------------------
------------------ ------------------
Weighted average number of common shares
outstanding 20,246 19,780
------------------ ------------------
------------------ ------------------
Per common share - diluted:
Income before extraordinary item $ 0.04 $ 0.30
Extraordinary item - (0.02)
------------------ ------------------
Net income $ 0.04 $ 0.28
------------------ ------------------
------------------ ------------------
Weighted average number of common and
common equivalent shares outstanding 21,001 21,266
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES -4-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
---------------- ------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 883 $ 5,940
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Extraordinary items - 605
Depreciation and amortization 4,529 2,840
Amortization of debt issuance costs 221 262
Provision for losses on accounts receivable 222 155
Loss on sale of equipment 7 5
Deferred income taxes 161 257
Changes in operating assets and liabilities (net of businesses
acquired/sold):
Accounts receivable 7,637 (11,269)
Inventories (1,984) (3,527)
Prepaid and other assets 4,864 (4,504)
Accounts payable and accrued expenses (2,055) 4,625
--------- ---------
Net cash provided by (used in) operating activities 14,485 (4,611)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,488) (1,312)
Acquisition of companies, net of cash received - (113,498)
Proceeds from sale of business 3,808 -
Proceeds from sale of equipment 19 194
--------- ---------
Net cash used in investing activities (661) (114,616)
FINANCING ACTIVITIES:
Borrowings on credit facility, net 5,865 128,825
Payments on bank line of credit, net (1,881) (2,450)
Payment of debt issuance costs (520) (2,425)
Proceeds from exercise of stock options 39 536
Payments on amounts due to acquired companies (60) (205)
--------- ---------
Net cash provided by financing activities 3,443 124,281
--------- ---------
Increase in cash and cash equivalents 17,267 5,054
Cash and cash equivalents at beginning of period 580 78
--------- ---------
Cash and cash equivalents at end of period $ 17,847 $ 5,132
--------- ---------
--------- ---------
Cash paid during the period for:
Interest $ 9,420 $ 7,938
Income taxes 22 166
</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 March 31, 1999 and for the
three months ended March 31, 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 months ended March 31, 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>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials, including core inventories......... $ 46,811 $ 46,102
Work-in-process................................... 2,336 3,051
Finished goods.................................... 49,397 49,543
----------- -----------
$ 98,544 $ 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,
to provide for a credit facility comprised of a $100.0 million 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 March
31, 1999 was $104.4 million. The Company may prepay outstanding advances
under the line of credit or the term loan portion of the Credit Facility in
whole or in part without incurring any premium or penalty. At March 31, 1999,
$39.8 million was outstanding under the 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 and certain other
adjustments made during 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. 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 the 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.
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 March 31, 1999:
- ------------------------------------------
Revenues from external customers $ 71,954 $ 49,393 $ 13,851 $135,198
Intersegment revenues 159 473 -- 632
Special charges -- 341 -- 341
Segment profit (loss) 6,058 (4,987) 1,627 2,698
For the three months ended March 31, 1998:
- ------------------------------------------
Revenues from external customers $ 53,058 $ 48,729 $ 5,214 $107,001
Intersegment revenues 216 38 -- 254
Segment profit 7,804 60 320 8,184
</TABLE>
-7-
<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
Three months ended March 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales:
- ----------
External revenues from reportable segments $ 121,347 $ 101,787
Intersegment revenues for reportable segments 632 254
Other revenues 13,851 5,214
Elimination of intersegment revenues (632) (254)
--------- ---------
Consolidated net sales $ 135,198 $ 107,001
--------- ---------
--------- ---------
Profit:
- -------
Total profit for reportable segments $ 1,071 $ 7,864
Other profit 1,627 320
Unallocated amounts:
Special charges (1,559) -
Corporate (expense) profit (1,464) 223
Depreciation and amortization (194) (34)
Other income (expense), net (1,557) (317)
Interest expense 3,548 2,294
--------- ---------
Income before income taxes and
Extraordinary item $ 1,472 $ 10,350
--------- ---------
--------- ---------
</TABLE>
NOTE 6: 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. This cost included $1,559 of severance costs related to
management reorganization and $341 of exit costs related to the consolidation
of the Company's distribution centers. 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 1,559 341 1,900
Payments 1999 (406) (5) (411)
------- ------- -------
Reserve at March 31, 1999 $ 3,021 $ 3,862 $ 6,883
------- ------- -------
------- ------- -------
</TABLE>
-8-
<PAGE>
NOTE 7: COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 1999 and
1998 were $1,055 and $5,944, respectively.
The following table sets forth the computation of comprehensive income for
the three months ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income ............................................ $ 883 $ 5,940
Other comprehensive income:
Translation adjustment, net of related taxes .......... 172 4
--------- ---------
$ 1,055 $ 5,944
--------- ---------
--------- ---------
</TABLE>
NOTE 8: 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 9: 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.
-9-
<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 MARCH 31, 1999
COMPARED TO THE THREE MONTH PERIOD ENDED MARCH 31, 1998.
After-tax net earnings before extraordinary item and special charges
decreased $4.3 million, or 68.3%, from $6.3 million for the three months
ended March 31, 1998 to $2.0 million for the three months ended March 31,
1999. This decrease was primarily attributable to a decline in profitability
from the Company's Independent Aftermarket segment during 1999 as compared to
1998. During the three months ended March 31, 1999, the Company recorded
special charges of $1.9 million related to certain initiatives designed to
improve operating efficiencies and reduce costs (see "Special Charges"
below). Excluding the special charges and extraordinary item, net income per
diluted share was $0.10 for the three months ended March 31, 1999 as compared
to $0.30 per diluted share for the three months ended March 31, 1998.
Including special charges, net income per diluted share was $0.04 for the
three months ended March 31, 1999.
NET SALES
Net sales increased $28.2 million, or 26.4%, from $107.0 million for
the three months ended March 31, 1998 to $135.2 million for the three months
ended March 31, 1999. This increase is primarily attributable to a full
quarter's net sales from Autocraft, acquired in March 1998. On a pro forma
basis, as if the Autocraft acquisition had taken place on January 1, 1998,
net sales would have been $134.1 million for the three months ended March 31,
1998.
Sales to DaimlerChrysler accounted for 18.2% and 24.3% of the Company's
revenues for the three months ended March 31, 1999 and 1998, respectively.
Sales to Ford accounted for 18.7% and 5.0% of the Company's revenues for the
three months ended March 31, 1999 and 1998, respectively. On a proforma
basis, as if the Autocraft acquisition had occurred on January 1, 1998, sales
to DaimlerChrysler would have accounted for 19.4% of the Company's revenues
for the three months ended March 31, 1998 and sales to Ford would have
accounted for 16.6% of the Company's revenues for the same period.
-10-
<PAGE>
GROSS PROFIT
Gross profit as a percentage of net sales decreased from 35.0% for the
three months ended March 31, 1998 to 30.5% for the three months ended March
31, 1999. This decrease was principally due to lower gross profit margins
experienced by the Company's Independent Aftermarket segment in 1999. Also
contributing to the lower gross profit margins 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 $9.0
million, or 42.7%, from $21.1 million for the three months ended March 31,
1998 to $30.1 million for the three months ended March 31, 1999. As a
percentage of net sales, SG&A expenses increased from 19.7% to 22.3% between
the two periods. The increase was primarily due to (i) $4.0 million
attributable principally to a full quarter of Autocraft, (ii) $1.8 million in
on-going infrastructure costs related to the Independent Aftermarket
segment's enterprise-wide information system implementation and (iii) $1.7
million of additional costs primarily related to the expansion of the OEM
segment's engine branch sales channel.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased $0.3 million, or 20.0%,
from $1.5 million for the three months ended March 31, 1998 to $1.8 million
for the three months ended March 31, 1999. The increase is attributable to
the March 1998 Autocraft acquisition.
SPECIAL CHARGES
During the three months ended March 31, 1999, the Company incurred $1.9
million of special charges. These restructuring charges consisted of $1.6
million of severance costs and $0.3 million of exit costs. The severance
costs related to the reorganization of certain management functions. The exit
costs related to the consolidation of certain leased facilities in the
Independent Aftermarket segment.
INCOME FROM OPERATIONS
Income from operations decreased $7.4 million, or 49.7%, from $14.9
million for the three months ended March 31, 1998 to $7.5 million for the
three months ended March 31, 1999, principally as a result of the factors
described above. As a percentage of net sales, income from operations
decreased from 13.9% to 5.5%, between the two periods.
INTEREST EXPENSE
Interest expense increased $1.1 million, or 21.2%, from $5.2 million
for the three months ended March 31, 1998 to $6.3 million for the three
months ended March 31, 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 three
months ended March 31, 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.
-11-
<PAGE>
OEM SEGMENT
The following table presents net sales and segment profit (EBT)
expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales........................ $ 72.0 100.0% $ 53.1 100.0%
-------- ------ ------- ------
-------- ------ ------- ------
Segment profit................... $ 6.1 8.5% $ 7.8 14.7%
-------- ------ ------- ------
-------- ------ ------- ------
</TABLE>
NET SALES. Net sales increased $18.9 million, or 35.6%, from $53.1
million for the three months ended March 31, 1998 to $72.0 million for the
three months ended March 31, 1999. The increase was primarily due to a full
quarter's sales of remanufactured transmissions to Ford (which became a
customer as part of the Autocraft acquisition on March 6, 1998), as well as
increased sales of remanufactured engines, offset in part by a decline in
sales of remanufactured transmissions to certain of the Company's other OEM
customers, including a $2.0 million decline in sales to DaimlerChrysler.
Sales to DaimlerChrysler accounted for 34.2% and 49.0% of segment
revenues for the three months ended March 31, 1999 and 1998, respectively.
Sales to Ford accounted for 31.3% and 9.1% of segment revenues for the three
months ended March 31, 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 35.9% of segment revenues for the
three months ended March 31, 1998 and sales to Ford would have accounted for
28.7% of segment revenues for the same period.
SEGMENT PROFIT. Segment profit decreased $1.7 million, or 21.8%, from
$7.8 million (14.7% of OEM net sales) for the three months ended March 31,
1998 to $6.1 million (8.5% of OEM net sales) for the three months ended March
31, 1999. The decline was primarily the result of changes in the sales mix,
additional costs primarily related to the expansion of the OEM segment's
engine branch sales channel and an increase in interest expense associated
with the acquisition of Autocraft.
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 March 31,
---------------------------------------------------
1999 1998
------------------------ ---------------------
<S> <C> <C> <C> <C>
Net sales ................. $ 49.4 100.0% $ 48.7 100.0%
------- ------ ------- ------
------- ------ ------- ------
Special charges ........... $ 0.3 1.0% $ -- -%
------- ------ ------- ------
------- ------ ------- ------
Segment profit (loss) ..... $ (5.0) (10.1)% $ 0.1 0.2%
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
NET SALES. Net sales increased $0.7 million, or 1.4%, from $48.7
million for the three months ended March 31, 1998 to $49.4 million for the
three months ended March 31, 1999.
SPECIAL CHARGES. Special charges of $0.3 million relate to exit costs
for the consolidation of certain leased facilities in the Independent
Aftermarket segment.
SEGMENT PROFIT (LOSS). Segment profit decreased $5.1 million, from $0.1
million for the three months ended March 31, 1998 to a $5.0 million loss for
the three months ended March 31, 1999.
-12-
<PAGE>
This decline was primarily attributable to (i) an increase of approximately
$1.8 million in on-going infrastructure costs related to the segment's
enterprise-wide information system implementation, (ii) approximately $0.7
million of costs related to the launch of the Company's independent
aftermarket remanufactured transmission program, (iii) increased costs of
$0.6 million related to management and systems upgrades, and (iv) and an
overall decline in gross profit margin of approximately $1.7 million
primarily due to a shift in sales mix.
OTHER OPERATING UNITS
The following table presents net sales and segment profit (EBT)
expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1999 1998
------------------- ---------------
<S> <C> <C> <C> <C>
Net sales............... $ 13.8 100.0% $ 5.2 100.0%
------ ------ ------ ------
------ ------ ------ ------
Segment profit.......... $ 1.6 11.6% $ 0.3 5.8%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
NET SALES. Net sales increased $8.6 million, or 165.4%, from $5.2
million for the three months ended March 31, 1998 to $13.8 million for the
three months ended March 31, 1999. The increase was attributable to sales by
the electronic components, 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 $1.3 million, or 433.3%, from
$0.3 million for the three months ended March 31, 1998 to $1.6 million for
the three months ended March 31, 1999. The increase was primarily the result
of sales volume from the Autocraft acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents on hand of $17.8
million at March 31, 1999. Net cash provided by operating activities was
$14.5 million for the three-month period. Net cash used in investing
activities was $0.7 million for the period, which consisted of $4.5 million
in capital expenditures largely for remanufacturing equipment partially
offset by $3.8 million of proceeds from the sale of Mascot. Net cash provided
by financing activities of $3.4 million was primarily from net borrowings of
$5.9 million made under the Credit Facility, partially offset by $1.9 million
in payment of the Canadian bank line of credit 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 March 31,
1999, the Alternate Base Rate margin was 1.25% and the Eurodollar margin was
2.25%.
-13-
<PAGE>
As of March 31, 1999, the Company had approximately $59.8 million
available under the revolving portion of the 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.
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 is in the process of implementing 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 is to inventory all of its
computer hardware and software and all of its devices having imbedded
computer technology. The Year 2000 project team is focusing on five 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); (iv) facilities (e.g., heating
and air conditioning systems, elevators, telephones, and fire and security
systems); and (v) significant vendors and customers. As of March 31, 1999,
this inventory had been completed.
In the second step, the project team is determining whether each
inventoried system, device, customer or vendor is Year 2000 compatible. In
the third step, those that are not compatible will be upgraded or replaced.
BUSINESS SYSTEMS. The business systems used by the Company's
electronics operation and the subsidiary that remanufactures transmissions
for Chrysler are both Year 2000 compatible. The systems used by the
Distribution Group, the logistical services operation and the subsidiaries
that remanufacture transmissions for Ford and General Motors are not
currently Year 2000 compatible but are in the process of being upgraded and
are expected to be compatible by the end of May 1999. The subsidiary that
remanufactures transmissions for the Company's foreign OEM customers is
beginning the implementation of a new business system that is Year 2000
compatible and expects to have the implementation completed by the end of the
third quarter of 1999. 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 is being tested for Year 2000 compatibility. In
the case of any Non-System Item that cannot be tested, the vendor is being
asked for a certification regarding compatibility. Each Non-System Item that
is noncompatible will be either upgraded or replaced. The Company expects
that
-14-
<PAGE>
substantially all of the Non-System Items will have been tested or certified and
upgraded or replaced by the end of the second quarter of 1999.
CUSTOMERS AND VENDORS. The project team is in the process of contacting
each of the Company's significant customers and 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 the date
for receiving substantially all customer and vendor responses, but has now moved
the target to the end of the second 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 March 31, 1999,
the Company had spent approximately $0.2 million in connection with the project,
consisting primarily of costs to upgrade noncompatible business systems. Over
the next nine months, the Company expects to spend approximately $0.6 million to
upgrade its business systems (including $0.2 million to upgrade business systems
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 inventory and the testing/certification processes are
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. Originally, it expected to have the
plan completed by the end of 1998 but now expects to have the plan completed by
the end of May 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"
-15-
<PAGE>
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.
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 three
months ended March 31, 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.
-16-
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
Part II. Other Information
Items 1-2 are not applicable.
Item 3. Defaults Upon Senior Securities.
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 the 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.
Items 4-5 are not applicable.
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
During the quarter ended March 31, 1999 the Company filed the
following reports on Form 8-K:
(1) Report dated February 24, 1999 reporting under Item 5
(i) the financial results expectations for the quarter
and year ended December 31, 1998 and (ii) additional
financial information as disclosed in a securities
analyst/investor meeting held on February 24, 1999. In
addition, reporting under Item 7 the Company's press
release dated February 23, 1999.
(2) Report dated March 31, 1999 reporting under Item 5 (i)
the financial results expectations for the year ended
December 31, 1999 the quarter ended March 31, 1999, and
(ii) the resignation of Fred J. Hall as a director of
the Company. In addition, reporting under Item 7 the
Company's press release dated March 31, 1999.
-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: April 30, 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.
-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>
For the three months ended March 31,
1999 1998
------------------- -------------------
(Unaudited)
<S> <C> <C>
Income before extraordinary item $ 883 $ 6,303
Extraordinary item - net of income taxes - (363)
------------------- -------------------
Net income per statements of income $ 883 $ 5,940
------------------- -------------------
------------------- -------------------
Shares:
Weighted average common shares outstanding 20,246 19,780
Net effect of stock options and warrants
outstanding, calculated using the treasury stock
method at the average price for the period 755 1,486
------------------- -------------------
Total 21,001 21,266
------------------- -------------------
------------------- -------------------
Per common share - diluted:
Income before extraordinary item $ 0.04 $ 0.30
Extraordinary item - (0.02)
------------------- -------------------
Net income per share $ 0.04 $ 0.28
------------------- -------------------
------------------- -------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,847
<SECURITIES> 0
<RECEIVABLES> 65,420
<ALLOWANCES> 2,480
<INVENTORY> 98,544
<CURRENT-ASSETS> 197,518
<PP&E> 90,960
<DEPRECIATION> 24,567
<TOTAL-ASSETS> 536,059
<CURRENT-LIABILITIES> 103,106
<BONDS> 111,349
0
0
<COMMON> 204
<OTHER-SE> 168,901
<TOTAL-LIABILITY-AND-EQUITY> 536,059
<SALES> 135,198
<TOTAL-REVENUES> 135,473
<CGS> 93,916
<TOTAL-COSTS> 127,487
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 222
<INTEREST-EXPENSE> 6,292
<INCOME-PRETAX> 1,472
<INCOME-TAX> 589
<INCOME-CONTINUING> 883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 883
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
