1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X|/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
| |1996
/ / 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 1-6176
AUGAT INC.
--------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2022285
------------------------------- ------------------------- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
89 Forbes Boulevard, P.O. Box 448, Mansfield, Massachusetts 02048
------------------------------------------------------------ --------- ----------------------------------------------------------- -----
(Address of principal executive offices) (Zip
Code)
(508) 543-4300
----------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
The number of shares of the Registrant's common stock outstanding on
September 30, 19951996 was 19,767,974.20,039,443.
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2
AUGAT INC.
INDEX
Page No.
--------------------
Part I - Financial Information -------------------------------..................... 3
Financial Statements (Unaudited)
Statements of Consolidated Income - For the
Three Months Ended and Nine Months Ended
September 30, 1996 and 1995 and 1994 -----------------------------.................... 3
Consolidated Balance Sheets - September 30, 19951996
and December 31, 1994 ------------------------------------1995 .......................... 4 - 5
Statements of Consolidated Cash Flows For the Nine
Months Ended September 30, 1996 and 1995 and 1994 -----------------....... 6
Notes to Unaudited Consolidated Financial
Statements ---------....................................... 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of
Operations ------------------------ 8and Financial Condition ............... 10 - 913
Part II - Other Information ---------------------------------- 10........................ 14
Signatures -------------------------------------------------- 10......................................... 15
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3
PART I - FINANCIAL INFORMATION
Statements of Consolidated Income
For the Three Months and Nine Months Ended September 30, 1995 and 1994
(In thousands, except per share data)
Three Months Ended* Nine Months Ended*
1995 1994 1995 1994
-------- -------- -------- --------
Net sales $131,860 $127,709 $396,999 $389,511
Cost of products sold 105,417 100,405 313,553 306,230
-------- -------- -------- --------
Gross margin 26,443 27,304 83,446 83,281
Selling, general and
administrative expenses 18,952 16,524 54,797 50,906
-------- -------- -------- --------
Income from operations 7,491 10,780 28,649 32,375
Other income (expense):
Interest income, etc. 32 (52) 505 (40)
Interest expense (1,143) (1,028) (2,978) (3,200)
-------- -------- -------- --------
Net (1,111) (1,080) (2,473) (3,240)
-------- -------- -------- --------
Income before taxes on
income 6,380 9,700 26,176 29,135
Provision for taxes on
income 2,170 3,300 9,106 10,085
-------- -------- -------- --------
Net income $ 4,210 $ 6,400 $ 17,070 $ 19,050
======== ======== ======== ========
Earnings per share $.21 $.33 $.87 $.99
Average common shares
outstanding 19,901 19,366 19,711 19,225
Dividends paid per share $.04 $.04 $.12 $.04
Statements of Consolidated Income
For the Three Months and Nine Months Ended September 30,1996 and
1995
(In thousands, except per share data)
THREE MONTHS NINE MONTHS
ENDED* ENDED*
1996 1995 1996 1995
---- ---- ---- ----
Net sales ............... $145,835 $131,860 $441,271 $396,999
Cost of products sold ... 113,475 105,417 344,237 313,553
-------- -------- -------- --------
Gross margin ............ 32,360 26,443 97,034 83,446
Selling, general and
administrative expenses 19,995 18,952 60,575 54,797
-------- -------- -------- --------
Income from operations .. 12,365 7,491 36,459 28,649
Other income (expense):
Interest income, etc 565 32 676 505
Interest expense .... (1,730) (1,143) (3,735) (2,978)
-------- -------- -------- --------
Net ..................... (1,165) (1,111) (3,059) (2,473)
-------- -------- -------- --------
Income before taxes on
income ................. 11,200 6,380 33,400 26,176
Provision for taxes on
income ................. 3,400 2,170 11,400 9,106
-------- -------- -------- --------
Net income .............. $ 7,800 $ 4,210 $ 22,000 $ 17,070
======== ======== ======== ========
Earnings per share ...... $ 0.39 $ 0.21 $ 1.10 $ 0.87
Average common shares
outstanding ............ 20,080 19,901 19,965 19,711
Dividends paid per share $ 0.04 $ 0.04 $ 0.12 $ 0.12
* Unaudited
See notes to unaudited consolidated financial statements.
- 3 --3-
Consolidated Balance Sheets, September 30, 1995 and December 31, 1994
(In thousands)
Assets 1995* 1994*
-------- --------
Current Assets:
Cash and cash equivalents . . . . . $ 23,962 $ 20,535
Accounts receivable-net . . . . . . . 89,729 89,521
Inventories:
Finished goods . . . . . . . . . . 34,989 33,359
Work in process . . . . . . . . . 27,000 20,894
Raw materials . . . . . . . . . . 35,434 28,698
-------- --------
Total inventories . . . . . . 97,423 82,951
Deferred income taxes . . . . . . . . 3,145 2,873
Prepaid expenses . . . . . . . . . . 3,036 2,580
-------- --------
Total current assets . . . 217,295 198,460
Property, Plant, and Equipment:
Land . . . . . . . . . . . . . . . . 4,593 3,826
Buildings and building improvements . 67,087 63,365
Machinery and equipment . . . . . . 151,280 137,978
Furniture and fixtures . . . . . . . 23,715 22,590
Construction in progress - buildings
and machinery . . . . . . . . . . 22,798 13,543
-------- --------
Total . . . . . . . . . . . . 269,473 241,302
Less accumulated depreciation . . . (137,752) (120,463)
-------- --------
Property, plant, and equipment-net . . 131,721 120,839
Other Assets:
Goodwill-net . . . . . . . . . . . . 32,119 25,454
Property held for sale-net . . . . . 4,404 4,829
Other . . . . . . . . . . . . . . . 6,876 6,392
-------- --------
Total other assets . . . . . . . . 43,399 36,675
-------- --------
Total . . . . . . . . . . . . $392,415 $355,974
======== ========4
Consolidated Balance Sheets, September 30,1996 and December 31,1995
(In thousands)
Assets 1996* 1995*
----- -----
Current Assets:
Cash and cash equivalents .......... $ 45,494 $ 30,744
Accounts receivable-net ............ 97,882 85,887
Refundable income taxes ............ 4,000
Inventories:
Finished goods .............. 36,860 34,859
Work in process ............. 27,473 29,325
Raw materials ............... 38,614 28,945
--------- ---------
Total inventories ......... 102,947 93,129
Deferred income taxes .............. 7,286 7,481
Prepaid expenses ................... 2,686 1,530
--------- ---------
Total current assets ...... 256,295 222,771
Property, Plant, and Equipment:
Land ............................... 4,832 4,910
Buildings and building improvements 70,146 69,455
Machinery and equipment ............ 158,566 163,142
Furniture and fixtures ............. 25,911 24,457
Construction in progress - buildings
and machinery ............... 20,068 14,496
--------- ---------
Total ..................... 279,523 276,460
Less accumulated depreciation ...... (139,828) (141,808)
--------- ---------
Property, plant, and equipment-net ... 139,695 134,652
Other Assets:
Goodwill-net ....................... 37,800 31,697
Property held for sale-net ......... 2,831 2,183
Other .............................. 17,606 16,173
--------- ---------
Total other assets .......... 58,237 50,053
--------- ---------
Total ..................... $ 454,227 $ 407,476
========= =========
* Unaudited
See notes to unaudited consolidated financial statements.
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Consolidated Balance Sheets, September 30, 1995 and December 31, 1994
(In thousands)
Liabilities and Shareholders' Equity
1995* 1994*
Current Liabilities: --------- ---------
Notes payable . . . . . . . . . . . . . . . . $ 26,700
Current maturities of long-term debt . . . . . . 9,301 $ 10,884
Accounts payable . . . . . . . . . . . . . . . 37,037 32,744
Federal, state and foreign taxes payable . . . . 2,349 4,963
Accrued compensation and benefits . . . . . . . 7,340 11,274
Other accrued expenses . . . . . . . . . . . . . 12,255 11,794
--------- --------
Total current liabilities . . . . . . . . . . 94,982 71,659
Long-Term Debt . . . . . . . . . . . . . . . . . 25,801 35,033
Deferred Income Taxes . . . . . . . . . . . . . . 12,419 11,761
Shareholders' Equity:
Common stock . . . . . . . . . . . . . . . . . 1,978 1,947
Paid-in capital . . . . . . . . . . . . . . . . 79,823 75,730
Retained earnings . . . . . . . . . . . . . . . 158,245 143,526
Cumulative translation adjustment . . . . . . . 19,827 17,088
Treasury stock, at cost . . . . . . . . . . . . (110) (110)
Unearned compensation-restricted stock awards. . (550) (660)
-------- --------
Shareholders' equity . . . . . . . . . . . . 259,213 237,521
-------- --------
Total . . . . . . . . . . . . . . . . . . $392,415 $355,9745
Consolidated Balance Sheets, September 30,1996 and December 31,1995
(In thousands)
Liabilities and Shareholders' Equity
1996* 1995*
----- -----
Current Liabilities:
Notes payable ......................... $ 22,500
Current maturities of long-term debt .. $ 10,015 9,362
Accounts payable ...................... 41,739 36,192
Federal, state and foreign taxes
payable ............................. 4,277 3,667
Accrued compensation and benefits ..... 11,875 14,456
Accrued restructuring costs ........... 7,462 17,322
Other accrued expenses ................ 17,270 16,454
-------- --------
Total current liabilities ...... 92,638 119,953
Long-Term Debt .......................... 74,578 25,854
Deferred Income Taxes ................... 14,436 11,931
Shareholders' Equity:
Common stock .......................... 2,006 1,979
Paid-in capital ....................... 84,355 80,751
Retained earnings ..................... 167,596 147,984
Cumulative translation adjustment ..... 19,768 20,258
Treasury stock, at cost ............... (110) (110)
Other ................................. (1,040) (1,124)
-------- --------
Shareholders' equity ................ 272,575 249,738
-------- --------
Total ......................... $454,227 $407,476
======== ========
* Unaudited
See notes to unaudited consolidated financial statements.
-5-
Statements of Consolidated Cash Flows
For the Nine Months Ended September 30, 1995 and 1994
(In thousands)
1995* 1994*
Cash Flows From Operating Activities: ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . .$17,070 $19,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 16,863 14,281
(Gain) loss on the sale of property,
plant and equipment . . . . . . . . . . . . . . . . 227 (122)
Deferred federal income taxes . . . . . . . . . . . 429 403
Amortization of restricted stock awards . . . . . . 328 205
Increase (decrease) in cash from changes in assets and
liabilities, net of effects from businesses acquired:
Accounts receivable . . . . . . . . . . . . . . . . 638 (12,798)
Refundable income taxes . . . . . . . . . . . . . . - 138
Inventories . . . . . . . . . . . . . . . . . . . .(13,499) (5,173)
Prepaid expenses . . . . . . . . . . . . . . . . . (434) 99
Other assets . . . . . . . . . . . . . . . . . . . (550) (1,131)
Accounts payable . . . . . . . . . . . . . . . . . . 3,631 6,696
Income taxes payable . . . . . . . . . . . . . . . .(2,794) 738
Accrued compensation and other expenses . . . . . . .(4,086) (3,833)
Effect of exchange rate changes on current assets
and liabilities (other than cash) . . . . . . . . . . 375 552
------- -------
Net cash provided by operating activities . . . . . . 18,198 19,105
------- -------
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment . . . . .(23,463) (22,349)
Proceeds from the sale of property, plant, and
equipment . . . . . . . . . . . . . . . . . . . . . 493 285
Payments for businesses acquired, net of
cash acquired . . . . . . . . . . . . . . . . . . . (7,917)
------- -------
Net cash used for investing activities . . . . . . . .(30,887) (22,064)
------- -------
Cash Flows From Financing Activities:
Cash dividends paid . . . . . . . . . . . . . . . . (2,351) (774)
Net borrowings on credit line . . . . . . . . . . . 26,700 1,000
Payments for long-term debt . . . . . . . . . . . .(11,765) (492)
Common stock issued under employee benefit plans . . 3,906 4,605
------- -------
Net cash provided by financing activities . . . . . . . 16,490 4,339
Effect of exchange rate changes on cash . . . . . . . . (374) 1,374
------- -------
Net changes in cash and cash equivalents . . . . . . . . 3,427 2,754
Cash and cash equivalents at beginning of the period . . 20,535 8,540
------- -------
Cash and cash equivalents at end of the period . . . . .$23,962 $11,294
======= =======6
Statements of Consolidated Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
(In thousands)
1996* 1995*
----- -----
Cash Flows From Operating Activities:
Net income ................................... $ 22,000 $ 17,070
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............. 18,450 16,863
(Gain) loss on the sale of property,
plant and equipment ...................... (127) 227
Deferred federal income taxes - net ........ 2,700 429
Amortization of restricted stock awards .... 353 328
Changes in operating assets and liabilities,
net of effects from business acquired:
Accounts receivable ........................ (11,996) 638
Refundable income taxes .................... 4,000
Inventories ................................ (7,818) (13,499)
Prepaid expenses ........................... (1,156) (434)
Other assets ............................... (1,610) (550)
Accounts payable ........................... 4,761 3,631
Income taxes payable ....................... 610 (2,794)
Accrued restructuring, compensation and
other expenses ........................... (8,915) (4,086)
Effect of exchange rate changes on current
assets and liabilities (other than cash) . 344 375
-------- --------
Net cash provided by operating activities ...... 21,596 18,198
-------- --------
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment ... (26,266) (23,463)
Proceeds from the sale of property, plant,
and equipment .............................. 2,512 493
Acquisitions, net of cash acquired ........... (8,295) (7,917)
-------- --------
Net cash used for investing activities ......... (32,049) (30,887)
-------- --------
Cash Flows From Financing Activities:
Cash dividends paid .......................... (2,388) (2,351)
Proceeds from short-term borrowings .......... 43,060 80,500
Payments for short-term borrowings ........... (65,560) (53,800)
Payments for long-term debt .................. (11,568) (11,765)
Proceeds from senior notes ................... 58,350
Proceeds from issuance of common stock ....... 3,362 3,906
-------- --------
Net cash provided by financing activities ...... 25,256 16,490
Effect of exchange rate changes on cash ........ (53) (374)
-------- --------
Net changes in cash and cash equivalents ....... 14,750 3,427
Cash and cash equivalents at beginning of the
period ....................................... 30,744 20,535
-------- --------
Cash and cash equivalents at end of the
period ....................................... $ 45,494 $ 23,962
======== ========
* Unaudited
See notes to unaudited consolidated financial statements.
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7
AUGAT INC.
Notes to Unaudited Consolidated Financial Statements
------------------------------------------------------------------------------------------------------------
1. In the opinion of the Company, theThe accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of September 30, 1995,1996, the results
of operations for the three months and nine months ended September 30, 19951996
and 19941995 and the cash flows for the nine month periods then ended. During
the third quarter of 1996, the Company determined that compensation and
benefit related accruals which had been recorded through June 30, 1996,
totaling $1.8 million, would not be required. Accordingly, such accruals
were reversed. Also during the third quarter of 1996, the Company recorded
charges of $1.4 million for merger costs incurred through September 30,
1996, additional inventory reserves related to the Company's
Communications Division, and an estimate of the liability associated with
the severance payments related to the resignation of the Company's prior
Chief Executive Officer.
2. The results of operations for the nine month period ended September 30,
19951996 and 19941995 are not necessarily indicative of the results to be expected
for the full year. The accompanying consolidated financial statements do
not include certain footnotes and financial presentations normally
required under generally accepted accounting principles and, therefore,
should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K as at December 31,
1995.
3. Earnings Per Share - Earnings per share are based on the weighted average number of shares
outstanding during each period. The exercise of all presently issued
outstanding stock options and the issuance of shares under the "Employee
Stock Purchase Plan" would have no material dilutive effect on earnings per
share.
4. The acquisition of National Industries, Inc. in 1991 included a liability
of approximately $5.4 million to cover the estimated costs of site
remediation for certain National facilities. Management estimated the
liability using third-party consultants. Costs incurred as of September 30,
19951996 (approximately $1.2$1.4 million) represent amounts expended for
preliminary site evaluation and design and testing and remediation.remediation at
Plant 1. The Company has obtainedentered into administrative Consent Orders with
the necessary permitsAlabama Department of Environmental Management ("ADEM") for continuing
remediation of Plant 1 and is ininvestigation of Plant 3. At the processconclusion of
remediating the site. TheConsent Orders, the Company is keeping the
state informed of its progress.will file final close-out and further
remediation plans with ADEM. The Company believes the recorded liability of
approximately $4.2$4.0 million at September 30, 19951996 to be adequate.
During an environmental investigation in December 1995 and January 1996 in
anticipation of the disposition of its Mashpee, Massachusetts manufacturing
facility, the Company discovered contaminated soil and groundwater which
may have been associated with the use of industrial solvents on its
property. On further investigation following notice to the Massachusetts
Department of Environmental Protection ("DEP"), contamination was
discovered off-site, including two private drinking wells. The Company has
been issued two Notices of Responsibility ("NOR") pursuant to Massachusetts
Chapter 21E by the DEP, one for its facility and a second for the private
residence where the well contamination exceeded applicable limits.
The Company has installed and is operating remediation equipment on its
property. This portion of the facility is expected by the Company to be
remediated within one year. The Company is also completing its off-site
investigation as part of its compliance efforts pursuant to the
above-referenced NORs. Remediation options for off-site contamination,
including a no action alternative, are under development for submission to
the DEP. The Company believes, based on information currently available,
that its current accrual of $1.3 million is a reasonable estimate of the
likely remediation and compliance obligations pursuant to the NORs.
However, as the investigation and remediation activities proceed, the
estimated costs may change and, accordingly, the ultimate obligations may
exceed the amounts currently accrued. The liability for environmental
matters is reported with other accrued expenses in the accompanying balance
sheets.
Claims and/or notices of intent to sue have been formally or informally
communicated to the Company by the Town of Mashpee (for reimbursement of
response costs) and certain individual property owners. No judicial actions
have been filed; however, the Company is engaged in early settlement
discussions with certain claimants. While the Company believes that
portions of certain claims may be valid and that reasonable settlement is
possible, the Company believes that it is premature to predict whether any
or all claims will be settled or to estimate the total cost to the Company
for settling with the various third party claimants. Additionally, on
September 25, 1996, the Company was notified that 117 employees of its
Mashpee facility filed charges with the Massachusetts Commission Against
Discrimination alleging age discrimination. The ultimate outcome of the
issues discussed in this paragraph cannot presently be determined.
Accordingly, no provision for any liability that may result upon resolution
of these issues has been made in the financial statements.
5. In June 1996, the Company completed a private placement of $85.0 million of
senior notes. These notes replaced the $40.0 million of senior notes issued
in 1992 which had a remaining balance of approximately $26.7 million. The
$58.3 million net proceeds
-7-
8
from the new issuance of senior notes were used to pay off approximately
$24.9 million outstanding under the Company's revolving credit line, and
the remaining $33.4 million was invested in short term deposits. As of
September 30, 1996, $8.9 million of the senior notes is classified as
current and the balance of $71.7 million as long-term. The note agreement
includes certain financial covenants and limitations on dividends,
investments, indebtedness, and the sale of certain assets, none of which
the Company considers restrictive. The long-term portions of the senior
notes bear interest at rates ranging from 7.31% to 8.61% and are payable in
the following years:
Year Dollars in millions
---- -------------------
1998 .......................... 8.9
1999 .......................... 4.4
2000 .......................... 4.2
2001 .......................... 33.4
2002 and beyond ............... 20.8
6. During the secondfirst quarter of 1995,1996, the RegistrantCompany acquired two
businesses, Photonthe fiber optics
business of Porta Systems Corp. and Elastomeric Technologies
Inc.,Corporation for an aggregate amount of cash consideration of
approximately $8.4$8.2 million. The acquisitions haveacquisition has been accounted for by the
purchase method of accounting. Preliminary goodwill of approximately $7.9$7.4
million has been recorded and is being amortized on a straight-line basis
over 20 years. The operating results of these acquisitionsthis acquisition are included in
the Company's consolidated results of operations from the date of
acquisition. Pro-forma results of these acquisitions,the Company including this acquisition,
assuming theyit had been made at the beginning of each periodthe periods presented, would
not be materially different from the results reported.
-7-
7. In December 1995, the Company recorded estimated restructuring costs of
$18.7 million. These costs included $9.3 million related to redundant or
excess facilities and equipment; $5.5 million for employee severance costs
and $3.9 million related to the cost to exit low-margin product lines. The
Company expects that the restructuring program will be substantially
completed during the fourth quarter of 1996. The following table reflects
the status of the 1996 restructuring charges by component:
1995 Balance
Restructuring September
(In millions) Charges Incurred to Date 30, 1996
- ------------- ------------- ---------------- --------
Operating assets to
be sold/disposed of $9.3 $7.2 $2.1
Employee severance
costs ............. 5.5 2.3 3.2
-8-
9
1995 Balance
Restructuring September 30,
(In millions) Charges Incurred to Date 1996
- ------------- ------------- ---------------- -------------
Low-margin product
lines to be sold/
disposed of ..... 3.9 1.7 2.2
----- ----- ----
Total .... $18.7 $11.2 $7.5
===== ===== ====
8. Subsequent Events. On October 7, 1996, the Company entered into an
Agreement and Plan of Merger with Thomas & Betts Corporation (T&B), a
New York Stock Exchange listed company providing for the merger (the
"Merger") of the Company with a wholly-owned transitory subsidiary of T&B.
T&B is a leading producer of connectors and components for worldwide
electrical and electronics markets. In the Merger, each outstanding share
of Augat common stock will be converted into 0.68 share of T&B common
stock, subject to exchange ratio adjustments should the price of T&B's
stock fall below a certain minimum or exceed a certain maximum level. The
exchange ratio will be adjusted if the average closing price of T&B's
shares for the 20 trading days ending three trading days before the
Company's special shareholders' meeting to approve the Merger falls
outside the range of $37.50 to $41.50. Below an average price of $37.50,
the exchange ratio would be increased to maintain a minimum of $25.50 worth
of T&B's stock received in exchange for each Augat share. Above a $41.50
average price the exchange ratio would be reduced to limit the monetary
value of T&B's stock received to $28.22 for each Augat share. If the
average price is below $32.00 per share, T&B has the right to terminate the
Agreement and Plan of Merger and abandon the Merger. The Merger is subject
to approval by shareholders of each of T&B and the Company and certain
other conditions. The transaction has been structured to be a tax-free
exchange for the Company's shareholders, and is intended to be accounted
for under the "pooling-of-interests" method. Under certain conditions, if
the Merger Agreement is terminated at any time prior to its consummation,
the Company will pay T&B a fee of $15 million plus reasonably documented
out-of-pocket expenses not to exceed $1.5 million.
On October 8, 1996, the Company was informed that the U.S. Securities and
Exchange Commission (the "SEC") was conducting an informal inquiry which
relates to securities trading by unknown persons. On October 16, 1996, the
SEC informed the Company that it was conducting an informal inquiry which
relates to certain of the Company's accounting policies, especially as
such policies relate to the Communications Division. The Company is
cooperating with the SEC in connection with these matters.
-9-
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS.
Net Sales: Net sales for the quarter and nine months ended
---------
September 30, 1995 by product group, compared to the quarter and
nine months ended September 30, 1994, are as follows (dollars in
thousands):
------------------------------------------------------------------OPERATIONS
QuartersNET SALES: Net sales by product group for the quarter and nine months ended
September 30, 1996 and for the comparable prior year periods are shown below
(In thousands):
- --------------------------------------------------------------------------------
Quarter Ended September 30,
1996 1995
1994
--------------- ------------------------------- ----------------
Product Group $ % $ %
---------------------------------------------------------------------Total Total
- ----------------------------- ------ ----- ------ -----
InterconnectionCommunications Products Business $ 35,293 26.8% $ 31,618 24.8%45,841 31.4 35,096 26.6
Wiring Systems and Components Business 61,471 46.6% 67,333 52.7%
Communication66,316 45.5 59,803 45.4
Interconnection Products Business 35,096 26.6% 28,758 22.5%
-------- ------ -------- ------33,678 23.1 36,961 28.0
------- ----- ------- -----
Total $131,860 100.0% $127,709 100.0%
======== ====== ======== ======
---------------------------------------------------------------------145,835 100.0 131,860 100.0
======= ===== ======= =====
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
1996 1995
1994
---------------- ------------------------------
Product Group $ % $ %
---------------------------------------------------------------------
InterconnectionTotal Total
- ----------------------------- ------- ----- ------- -----
Communications Products Business $104,627 26.3% $ 97,590 25.0%131,584 29.8 105,838 26.7
Wiring Systems and Components Business 186,534 47.0% 216,157 55.5%
Communication210,499 47.7 184,151 46.3
Interconnection Products Business 105,838 26.7% 75,764 19.5%
-------- ------ -------- ------99,188 22.5 107,010 27.0
------- ----- ------- -----
Total $396,999 100.0% $389,511 100.0%
======== ====== ======== ======
---------------------------------------------------------------------441,271 100.0 396,999 100.0
======= ===== ======= =====
- --------------------------------------------------------------------------------
NetQUARTERLY COMPARISON
Augat Inc. sales for the third quarter and nine months ended September 30, 1995of 1996 increased primarily11 percent versus the
same period a year earlier. Net income increased 85 percent for the third
quarter to $7.8 million. Earnings per share for the quarter were $0.39 compared
to $0.21 last year.
Communications sales increased 31 percent over the past year's third quarter due
to strong demand by the increased volumedomestic cable television (CATV) market and continued
growth in the worldwide
Communication's business,Far East. Sales of Wiring Systems and Components to the improvement inautomotive
industry for the quarter were 11 percent higher than the comparable prior year
period primarily on the continued strength of increased domestic automotive
demand. The Interconnection Products Division (IPD) and the Automotive strength in Europe. Net
sales of the domestic Automotive division decreased during the
current periods due to reduced production demand for the Ford
Aerostar and Mustang platforms. This reduction in production
demand for these two vehicle platforms is expected to continue into
the fourth quarter of 1995.
With the exception of the domestic Automotive division, business
conditions in the third quarter and nine months of 1995 continue to
reflect improvement in all other domestic and European markets in
which the Company serves. In the Far East markets, the
Communications Division sales have significantly improved inwere 9 percent lower
than the third quarter of 1995 while there has been no significant change in
IPD third quarter 1995as a result of continued lower demand from the PC
industry.
The company's non-U.S. sales versus 1994. Incoming orders for the third quarter of 1996 decreased 18 percent
from the prior year primarily due to softness in key European and nine months of 1995 were $134 million and $403
million, respectively, compared with $128 million and $405 millionAsian markets
for the same periodsIPD products. Non-U.S. sales represented 21 percent of the prior year.Company's total
third quarter sales in 1996 compared to 29 percent for fiscal 1995.
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BACKLOG AND ORDERS: The backlog at September 30, 1996 was $132 million, compared
to $126 million at September 30, 1995. Incoming orders for the third quarter of
19951996 were $148 million, compared with $134 million in the same period of fiscal
1995.
GROSS MARGIN: Higher gross margins in the third quarter of 1996 are directly
related to higher sales volume and, as an improved percentage of revenues (22
percent versus 20 percent), reflect the cost savings arising from the
restructuring programs implemented during the fourth quarter of fiscal 1995.
This overall improvement was partially offset by operational problems within
the Communications Division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: These expenses for the third
quarter of 1996 increased approximately 9$1.0 million, or 6 percent, over the
comparable prior year period primarily to support the growth of the
Communications business with additional sales and 15marketing programs. In
addition, the accrual of estimated severance payments related to the
resignation of the Company's prior Chief Executive Officer increased expense in
this year's third quarter. SG&A, as a percentage of sales declined from the
prior year's 14.4 percent for IPD, and Communication Products Business, respectively,
while decreasing 2to 13.7 percent as a result of increased sales in the
Wiring Systems and Components Businessdivision which typically operates with relatively
lower expense to sales ratios.
OTHER INCOME (EXPENSE): Other expenses increased versus the comparable quarter
last year due to higher interest expense resulting from higher average
outstanding borrowings. This expense was offset by higher interest income earned
on the higher cash balance arising from the partial proceeds of a private
placement of $85 million of senior notes.
INCOME TAXES: The Company's effective tax rate was 30.4 percent for the quarter,
compared to the previous year's rate of 34 percent. This reduction was due to a
year-to-date adjustment in the tax rate to reflect greater contributions from
subsidiaries with lower tax rates.
YEAR-TO-DATE COMPARISON
NET SALES: Sales for the first nine months of 1996 were up 11 percent versus the
comparable period last year. Net income improved 29 percent, and earnings per
share increased to $1.10 from $0.87.
Communications products sales were up 24 percent over last year driven by the
demand from domestic and Far Eastern cable television markets. Wiring Systems
and Components products sales rose 14 percent due to increased demand from the
domestic automotive markets. The Interconnection products sales were 7 percent
lower than the comparable period for 1996 as a result of continued weakness in
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12
its non-U.S. markets and the exiting of certain low margin commodity-type
products.
Non-U.S. sales for the year-to-date September 1996 period increased 5 percent
compared withto the same period a year earlier. These non-U.S. sales represent
approximately 24 percent of the prior year.
Incoming orderscompany's total sales for this period.
GROSS MARGIN: Higher gross margins are directly related to higher sales volume
and as an improved percentage of revenues (22 percent versus 21 percent) reflect
the cost savings arising from the restructuring programs implemented during the
fourth quarter of fiscal 1995. This overall improvement was moderated by
operational problems within the Communications Division. The Company generally
offsets increases in material and wage costs by enhanced productivity and
on-going cost reduction programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: These expenses for the nine months
of 19951996 increased approximately 14 percent for the IPD Business and$5.8 million, or 11 percent, forover the Communication Products Business while decreasing 12comparable
prior year period primarily to support the growth of the Communications
business. SG&A, as a percentage of sales, declined slightly from the prior
year's 13.8 percent in the
Wiring Systems and Components Business asto 13.7 percent.
OTHER INCOME (EXPENSE): Other expense has increased compared withto the same period
of the prior year. The backlog at September 30, 1995 was
$126 million compared with $121 million at September 30, 1994.
-8-
Gross Margin: Gross margin was 20 and 21 percent of sales in the
------------
third quarter and nine months ended September 30, 1995,
respectively, comparedlast year due to 21 percent of sales in the third quarter
and nine months of 1994. The significant increase in Communication
Products Business sales generated higher gross margin dollars in
1995. However, gross margin in 1995 was negatively impacted by
selected selling price decreases in this business and in the IPD
business and increases in material costs, wages and overhead in all
three businesses. In addition, the Automotive division was also
affected by an unfavorable mix within product lines, pricing
pressures and an inability to pass through raw material cost
increases. Also, this division was affected by the slow ramp up of
Chrysler's new mini-van whose production run-rate for the third
quarter of 1995 was 15 to 20 percent lower than expected. These
increased expenses were partially offset by improved manufacturing
methods and on-going cost cutting programs.
Selling, General and Administrative Expenses: These expenses were
--------------------------------------------
14.4 percent of sales in the third quarter of 1995 compared to 12.9
percent in the comparable quarter of the prior year. For the nine
months ended September 30, 1995, these expenses were 13.8 percent
of sales compared to 13.1 percent of sales in the comparable period
of the prior year. These expenses variedinterest expense resulting from period to period
based on various factors, none of which, individually were
significant. While the dollars spent in this area have increased,
the Company intends to maintain these expenses in the 13 percent to
15 percent range of sales.
Other Income (Expense): Interest income, etc. increased in 1995
----------------------
versus 1994 due to the increase in
cash availability to invest in
the current periods over the comparable periods and the increasedaverage outstanding borrowings.
INCOME TAXES: The effective tax rate of return on short-term investments over the comparable
periods. Interest expense increased in the third quarter34 percent approximates last year's
corresponding rate of 1995
over the comparable quarter of the prior year due to the increased
borrowings under the credit line. Interest expense for the nine
months ended September 30, 1995 decreased over the same periods in
1994 due to the decrease in long-term debt in 1995 when compared to
1994.
Income Taxes:35 percent.
LIQUIDITY AND CAPITAL RESOURCES
The effective income tax rate for the Company was 34
------------
percent for the third quarter of 1995 and 1994 and was 35 percent
for the nine months ended September 30, 1995 and September 30,
1994. The tax rate for the third quarter in both periods is lower
than the U.S. statutory rate primarily due to income earned in
jurisdictions with lower effective tax rates.
Net Income: Net income was $4.2 million and $17.1 million for the
----------
three months and nine months ended September 30, 1995 respectively,
compared to net income of $6.4 million and $19.0 million in the
same periods of the prior year. The decrease in net income for the
third quarter and nine months ended September 30, 1995 resulted
principally from decreased sales volume in our domestic automotive
business.
Liquidity and Capital Resources: The Registrant continues to
------------------------------- maintain sufficient liquidity and has adequate
resources to fund its operations under current business conditions. The
Company believes that the income generated from operations, along with the cash
on hand and established bank credit facilities, are sufficient to coverfinance
expected salesworking capital growth and planned capital expenditure programs.
-9-In connection with the proposed Merger (See Note 8 to Notes to Unaudited
Consolidated Financial Statements), the Company will be required to pay merger
costs, legal, accounting and investment advisory fees aggregating approximately
$5.3 million. In addition, upon consummation of the Merger, the Company may be
required to make cash payments of up to $18 million for change of control and
related employee benefit costs to key employees of the Company.
During the second quarter ended June 30, 1996 the Company completed a
refinancing of its long-term debt and increased the amount outstanding by
approximately $58.3 million. Covenants under the debt agreement were modified to
provide the Company with greater flexibility. See Note 5 to
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13
the Notes to Unaudited Consolidated Financial Statements for further discussion.
In March 1996, the Company was notified by Ford Motor Company that it was
proceeding with a plan to consolidate its suppliers. The financial impact to
Company of this consolidation is not expected until 1998 at which time the
Company will cease manufacturing various wiring cable products currently
manufactured for Ford. Although the Company cannot at this time predict with
certainty the future impact of the Ford consolidation plans, at present, such
supplier base consolidation could represent a reduction of approximately $15-20
million in sales volume for 1998. As part of this supplier base consolidation,
Ford will discontinue the Company as the harness supplier for Ford's Mustang
car platform effective in the year 2001. The Mustang harnesses represent
approximately $30-40 million in reduced sales in 2002. The Company believes
there may be some reduction in sales in 2001, but it is unable at this time to
quantify the magnitude of such impact. The Company has continued to implement
programs within its Automotive Business to diversify both its products and
customer base for the long term.
This Form 10-Q contains certain forward-looking statements within the meaning
of Section 27A of the Securities Exchange Act of 1934, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Actual events and
results could differ materially from those set forth in such forward-looking
statements. Certain factors that may cause such differences include worldwide
economic and political conditions, industry specific factors, the Company's
ability to maintain access to external financing sources and its financial
liquidity, the Company's ability to timely develop and produce commercially
viable products at competitive prices, the availability and cost of components,
the Company's ability to manage expense levels, the Company's ability to manage
growth, the continued financial strength of the Company's dealers and
distributors, and the Company's ability to accurately anticipate customer
demand.
Additional examples of such uncertainties include, but are not limited to:
changes in customer demand for various Company products that could affect its
overall product mix, margins, plant utilization levels and asset valuations;
economic slowdown in the U.S. (contrary to the Company's expectations of
continued economic growth in the second half of 1996) or economic slowdowns in
the Company's major offshore markets, effects of significant changes in
monetary and fiscal policies in the U.S. and abroad which could result in
currency fluctuations in the significant foreign currencies including British
Pound Sterling, Italian Lira, Japanese Yen, Swiss Franc, and German Deutschmark;
inflationary pressures which could raise interest rates and consequently
the Company's cost of funds; unforeseen difficulties in completing identified
restructuring actions begun in 1995, including disposal of idle facilities,
geographic shifts of production locations and integration of new distribution
facilities; availability and pricing of commodities and materials needed for
production of the Company's products; increased downward pressure on selling
prices for the Company's products; unforeseen difficulties and associated costs
arising from environmental regulations and policies that could impact
projections of remediation expenses and identification of unknown environmental
issues; the ultimate outcome of legal and other proceedings; unforeseen
difficulties in connection with increasing competitive pressures arising from
the continued consolidation of the Company's primary market; significant changes
in governmental policies domestically and abroad that could create trade
restrictions, patent enforcement issues, tax rate changes and changes in tax
treatment of such items as tax credits, withholding taxes, transfer pricing and
other income and expense recognition for tax purposes.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On September 25, 1996, the Company was notified that 117 employees of its
Mashpee facility filed charges with the Massachusetts Commission Against
Discrimination ("MCAD") alleging age discrimination. To date, the Company
has not received any notice that the charges have been docketed with MCAD
or any other administrative agency or court.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(2) Agreement and Plan of Merger, by and among the Registrant, Thomas &
Betts Corporation and EG Acquisitions Corp., dated as of October 7,
1996.
(10) Material Contracts
(a) Employment Agreement, dated July 17, 1996, between the Company
and John N. Lemasters.
(b) Change of Control Agreement dated July 17, 1996 between the
Company and John N. Lemasters.
(c) Employment Agreement, dated July 17, 1996, between the Company
and Marcel P. Joseph.
(d) Change of Control Agreement dated July 17, 1996 between the
Company and Marcel P. Joseph.
(e) Amendment to the Registrant's 1993 Employee Stock Purchase Plan.
(f) Amendment to the Registrant's 1996 Stock Plan.
(27) Financial Data Schedule.
(b) The following exhibitsreport on Form 8-K werewas filed during the Third Quarter of 1995:
1) The Registrants News Release dated September 11, 1995
(b) The following reports on1996:
(1) On July 26, 1996 the Registrant filed Form 8-K were filed during the
Third Quarterin Item 6 for
Resignation of 1995:
1) Form 8-K filed SeptemberRegistrant's Directors.
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15
1995 for Item 5, Other
Events.
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 thereto duly authorized.
AUGAT INC.
---------------------------------------------------------------------
(Registrant)
Ellen B. Richstone
------------------------------
Ellen B. Richstone/s/ F. Gordon Bitter
---------------------------------------
F. Gordon Bitter
Vice President and
Chief Financial Officer
Date: November 2, 1995
-10- 4, 1996
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