FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended DECEMBER 28, 1996
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 1-7737
ARROW AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of incorporation or organization)
04-1449115
(I.R.S. Employer I.D. No.)
3 SPEEN STREET, FRAMINGHAM, MASSACHUSETTS 01701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 872-3711
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,873,083 shares of the
Company's Common Stock ($.10 par value) were outstanding as of February 5,
1997.
ARROW AUTOMOTIVE INDUSTRIES, INC.
INDEX
Page NUMBER
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Balance Sheets -
December 28, 1996 and June 29, 3
1996......................................
Condensed Statements of Operations - Three Months Ended
December 28, 1996 and December 30, 4
1995.............................
Condensed Statement of Operations - Six Months Ended
December 28, 1996 and December 30, 5
1995.............................
Condensed Statements of Cash Flows - Six Months Ended
December 28, 1996 and December 30, 6
1995.............................
Notes to Condensed Financial 7
Statements.................................
ITEM 2. Management's Discussion and Analysis of the Financial
Condition and Results of 8
Operations.......................................
PART II OTHER INFORMATION
ITEM 1. Legal 13
Proceedings......................................................................
ITEM 2. Changes in 13
Securities.................................................................
ITEM 3. Default upon Senior 13
Securities...................................................
ITEM 4. Submission of Matters to a Vote of Security 13
Holders..................
ITEM 5. Other 13
Information........................................................................
ITEM 6. Exhibits and Reports on Form 8- 13
K..............................................
SIGNATURES .................................................................................................... 14
1
PART I - ITEM 1 -- FINANCIAL INFORMATION
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
December 28, 1996 June 29,
1996
ASSETS
CURRENT ASSETS
Cash and equivalents $ 443,704 $ 850,537
Accounts receivable, less allowances 12,508,658 16,468,224
Inventories - Note B 38,001,704 37,312,671
Prepaid expenses and other current assets 3,574,936 3,164,661
TOTAL CURRENT ASSETS 54,529,002 57,796,093
PROPERTY, PLANT AND EQUIPMENT 36,246,339 35,727,256
Less allowances for depreciation 23,560,090 22,912,356
12,686,249 12,814,900
OTHER ASSETS 2,290,869 2,500,718
TOTAL ASSETS $ 69,506,120 $ 73,111,711
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of advances under revolving
line of credit $ 3,420,670 $ 5,104,715
Accounts payable 6,850,827 6,647,237
Cash overdrafts 863,092 1,260,165
Other current liabilities - Note C 5,683,898 5,272,737
Current portion of long-term debt 1,379,575 1,385,672
TOTAL CURRENT LIABILITIES 18,198,062 19,670,526
LONG-TERM DEBT 17,287,722 17,969,339
DEFERRED INCOME TAXES 1,748,000 1,748,000
ACCRUED RETIREMENT BENEFITS 2,580,049 2,428,226
STOCKHOLDERS' EQUITY
Common stock 296,887 296,887
Other stockholders' equity 29,844,724 31,448,057
Less cost of common stock in treasury 449,324 449,324
TOTAL STOCKHOLDERS' EQUITY 29,692,287 31,295,620
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 69,506,120 $ 73,111,711
See accompanying notes to the condensed financial statements.
2
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
December 28, 1996 December 30,
(13 Weeks) (13 Weeks) 1995
Net sales $ 21,230,177 $ 23,738,037
Cost and expenses:
Cost of products sold 17,018,945 19,233,926
Selling, administrative and general 5,061,826 5,299,088
Interest 564,442 487,509
22,645,213 25,020,523
Loss before income taxes (1,415,036) (1,282,486)
Benefit from income taxes (395,900) (489,000)
NET LOSS $ (1,019,136) $ (793,486)
Weighted average number of shares
outstanding
2,873,083 2,873,083
NET LOSS PER SHARE $ (0.35) $ (0.28)
See accompanying notes to the condensed financial statements.
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
December 28, 1996 December 30,
(26 Weeks) (27 Weeks) 1995
Net sales $ 45,711,325 $ 52,875,236
Cost and expenses:
Cost of products sold 36,045,923 42,100,268
Selling, administrative and general 9,714,244 10,485,363
Restructuring charge - Note C 1,200,000 0
Interest 1,108,491 1,034,913
48,068,658 53,620,544
Loss before income taxes (2,357,333) (745,308)
Benefit from income taxes (754,000) (284,000)
NET LOSS $ (1,603,333) $ (461,308)
Weighted average number of shares
outstanding 2,873,083 2,873,083
NET LOSS PER SHARE $ (0.56) $ (0.16)
See accompanying notes to the condensed financial statements.
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
December 28, 1996 December 30, 1995
(26 Weeks) (27 Weeks)
OPERATING ACTIVITIES
Net cash provided by
operating activities $ 2,286,639 $ 24,406
INVESTING ACTIVITIES
Net cash used in investing activities (321,712) (405,704)
FINANCING ACTIVITIES
Payment of long-term debt and capital (687,715) (687,098)
lease obligations
(Decrease) increase in advances under (1,684,045) 915,362
revolving line of credit
Proceeds from exercise of stock option 0 331
Net cash (used in) provided by financing
activities (2,371,760) 228,595
DECREASE IN CASH AND EQUIVALENTS (406,833) (152,703)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
850,537 753,010
CASH AND EQUIVALENTS AT END OF PERIOD $ 443,704 $ 600,307
See accompanying notes to the condensed financial statements.
3
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENT
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. 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 the fair presentation have
been included. Operating results for the six month period ended December 28,
1996 are not necessarily indicative of the results that may be expected for the
year ending June 28, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended June 29, 1996. The balance sheet at June 29, 1996
has been derived from the audited financial statements at that date.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
December 28, 1996 June 29,
1996
Stated at cost on the first-in, first-out
(FIFO)
method:
Finished goods $ 12,432,399 $ 11,522,643
Work in process and materials 31,943,305 32,260,028
44,375,704 43,782,671
Less reserve required to state inventory on
the
last-in, first-out (LIFO) method (6,374,000) (6,470,000)
$ 38,001,704 $ 37,312,671
NOTE C -- RESTRUCTURING CHARGE
In September, 1996, the Board of Directors of the Company approved a plan to
restructure its operations by closing its Santa Maria, California production
facility and transferring its manufacturing operations formerly conducted at
that facility to the Morrilton, Arkansas plant. The action was taken to
enhance profit margins by streamlining the Company's productive capacity to
better match its production requirements. As a result, a $1.2 million
restructuring charge was recorded in the first quarter of fiscal 1997. Of the
total charge, $625,000 related to the disposal of the facility, $360,000
related to termination benefits for displacement of its 350-employee workforce,
$150,000 relates to the write-off of machinery and equipment, and $65,000 to
other closing expenses. During the second quarter of fiscal 1997, the Company
paid $257,000 in termination benefits to its displaced employees.
4
PART I
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto. All forward looking statements
contained in the following discussion and analysis and elsewhere in this
report are qualified in their entirety by the cautionary statement appearing
at the end of the discussion and analysis.
RESTRUCTURING PLAN
During the first quarter of fiscal 1997, the Board of Directors of the Company
approved a plan to restructure its operations by closing its Santa Maria,
California production facility and transferring its manufacturing operations
to its Morrilton, Arkansas plant. Production at the Santa Maria, California
facility ceased in early December, 1996. As a result of this plan, a $1.2
million restructuring charge was recorded in the first quarter of fiscal 1997.
Of the total charge, $360,000 related to termination benefits for displacement
of its 350-employee workforce and $840,000 related to closing the facility.
In addition to recording the restructuring charge, the Company anticipates
that during fiscal 1997 it will incur non-recurring period costs relating to
the restructuring estimated at $1.5 million. These costs relate to ongoing
operations and include such costs as the shipment of inventory and equipment,
employee relocation and anticipated initial labor and production
inefficiencies resulting from the consolidation of production facilities from
three to two plants. One time period costs relating to the restructuring were
incurred in the first and second quarters of fiscal 1997 of $10,000 and
$880,000, respectively.
OPERATING RESULTS
Operations during the second quarter of fiscal 1997 resulted in a net loss of
$1,019,000 compared to a net loss of $793,000 for the second quarter of fiscal
1996. The six months ended December 28, 1996, resulted in a net loss of
$1,603,000 compared to a net loss of $461,000 for the comparable period in
fiscal 1996. The operating results for the first quarter of fiscal 1997
include the previously discussed restructuring charge which reduced operating
income before income taxes by $1,200,000. The second quarter's pre-tax loss
included $880,000 of non-recurring costs related to the California plant
closing.
Net sales for the second quarter of fiscal 1997 of $21,230,000 were down 10.6%
compared to net sales for the comparable period in fiscal 1996. Unit sales
for the second quarter in the current fiscal year were down 10.5%, compared to
the second quarter of the prior fiscal year. For the six months ended
December 28, 1996 (26 weeks), net sales of $45,711,000 were down 13.5% (10.2%
adjusted for the number of weeks differential) from net sales of the first six
months in the prior fiscal year (27 weeks). Unit sales for the first six
months in the current fiscal year are down 11.8% (8.4% adjusted for the number
of weeks differential) from unit sales of the same period in fiscal 1996.
The sales decline of $2,508,000 in the second quarter of fiscal 1997, compared
to the second quarter of the prior fiscal year, is due to overall lower
customer demand and the impact of the loss of a significant customer in the
third quarter of fiscal 1996. The sales attributable to this customer in the
second quarter of the prior fiscal year were approximately $2 million. The
$4,656,000 decline in net sales in the first quarter of fiscal 1997, compared
to the first quarter of fiscal 1996, was due to several factors. It is
estimated that approximately $1.9 million of the decline was due to the number
of weeks differential (14 weeks in 1995 /13 weeks in 1996) in the two
periods. Of the remaining decrease in net sales approximately 25% was due to
the adverse impact of higher levels of customer returns (which are deductions
in calculating net sales) and 75% of the decline is attributable to lower
customer demand.
In the current fiscal year, the Company's mix of product sold reflects a
higher level of mechanical product sales with a decline in electrical product
sales. Net sales in the current fiscal year have been adversely impacted by
this product mix because mechanical products have a lower average sales price
than electrical products.
During the current fiscal year, more so in the first quarter of the year, the
Company experienced a higher level of customer returns compared to the
comparable periods of the prior fiscal year. Customer returns are for re-
usable "cores" (our basic raw material), warranty and stock adjustments
received in the normal course of business. The Company believes that it has
experienced a greater level of returns as our customers have excess
inventories due to increased consolidation/merger activity, as discussed in
the Management's Discussion and Analysis of the Financial Condition and
Results of Operations in the 1996 Annual Report. The Company believes that to
help rectify their surplus inventory issues, these businesses return as much
of their excess inventory as possible to their vendors.
The Company's gross margin percentage for the second quarter of fiscal 1997
was 19.8%, up slightly from corresponding period last fiscal year. For the
six months ended December 28, 1996, the gross margin percentage was 21.1%, up
from the prior year of 20.4%. The cost of goods sold in the current year
included one-time period costs of $580,000 related to the closing of the
California manufacturing facility. The gross margin percentage before the
impact of these costs would have been 22.5% and 22.4%, for the second
quarter and the first six months of fiscal 1997, respectively. These costs
included underabsorbed overhead, additional overtime and inefficient labor
costs as the production of the California plant was shifted to the Company's
remaining manufacturing plants. The Company anticipates that it will
continue to incur one-time period expenses related to the closing of the plant
in the third quarter of fiscal 1997.
The margin improvement in the second quarter of fiscal 1997 is due to several
factors. Compared to fiscal 1996, the mix of products sold in the current
quarter of fiscal 1997 had a higher level of mechanical products sold than
electrical product . While mechanical products have a lower average selling
price, they generally result in a higher average gross margin. As mentioned
in the Management's Discussion and Analysis of the Financial Condition and
Results of Operations in the 1996 Annual Report, in the fourth quarter of
fiscal 1996, the Company expanded the recovery departments at all
manufacturing locations to maximize the recovery (return to finished goods) of
warranty returns. The Company's recovery dollars of these product returns
increased 75% in the first quarter of fiscal 1997 and doubled in the second
quarter of fiscal 1997, compared to the comparable periods of fiscal 1996.
The improved recovery of warranty returns has mitigated the impact of the
increased product returns and contributed to the improved gross margin in both
the first and second quarters of the current fiscal year.
Selling, general and administrative expenses in the second quarter of fiscal
1997 of $5,061,000 were down 4.5% or $237,000 from the same period in fiscal
1996. For the six months ended December 28, 1996, selling, general and
administrative expenses of $9,714,000 declined 7.4% or $711,000 compared to
the first six months of the prior fiscal year. These expenses for the second
quarter of fiscal 1997 included non-recurring period costs related to the
closing of the California facility of $300,000, including shipping costs to
transport inventory and equipment, relocation costs and public relations
costs. The Company expects that it will continue to incur non-recurring
period expenses related to the closing of the plant in the third quarter of
fiscal 1997.
On a regular basis, the Company reviews its operations and during fiscal 1997
consolidated production operations and administrative functions, which have
had a positive impact on operations.
Interest expense increased 15.8% and 7.1% in the second quarter and the first
six months of the current fiscal year, respectively, over the comparable
period of the last fiscal year. The increases are due primarily to the higher
interest rates in the current year compared to the prior year.
CAPITAL RESOURCES
Net cash of $2,287,000 was provided by operating activities for the six months
ended December 28, 1996. This is down $862,000 from net cash of $3,148,000
provided by operating activities at the end of the first quarter of the
current fiscal year. The six months ended December 30, 1995, provided net
cash from operating activities of $24,000. In the current fiscal year, cash
was primarily provided by a decrease in accounts receivable of approximately
$4 million. The decline in accounts receivable is consistent with the lower
sales volume in the second quarter of the current fiscal year. The net loss
in the current fiscal year used cash from operating activities as did an
increase in inventory of approximately $700,000 and an increase in income
taxes receivable of approximately $400,000. The increase in inventory levels
is due primarily to management's plan to maintain higher on-hand inventories
during the transition of the production operations from the California
manufacturing facility to the Company's remaining manufacturing facilities.
Cash of $321,000 was used in investing activities, primarily in property,
plant and equipment in the first six months of the current fiscal year
compared to $406,000 used in the comparable period in the prior fiscal year.
Cash was used in the first six months of the current fiscal year to reduce
debt and advances under a revolving line of credit totaling $2,372,000. In
the comparable period of the prior fiscal year, cash of $915,000 was provided
by an increase in its borrowings under its revolving line of credit and cash
of $687,000 was used to decrease long term debt.
During the second quarter of fiscal 1997 a second commercial lender joined
with the Company's primary lender to the extent of a one-third participation
in the Company's line of credit and term loan.
During the second quarter of the current fiscal year compliance with tangible
net worth, debt service and operating performance covenants were waived such
that the loss sustained by the Company did not result in a default under its
financing agreement. Also, the Company's revolving line of credit which
allows the Company to borrow up to $20 million through September 30, 1997, has
been extended to December 31, 1997.
The Company believes that its existing cash balance and cash generated from
operations combined with its borrowing ability under the Company's financing
agreements will provide sufficient funds to meet the Company's cash
requirements for operations for the next twelve months and to complete the
planned restructuring efforts.
OUTLOOK
Consolidations and mergers have been frequent recently within the automotive
aftermarket. The Company, too, has mirrored the industry dynamics by
consolidating its own production facilities. The restructuring plan announced
by the Company in the first quarter of fiscal 1997 called for the closure of
the Company's California plant in December of 1996. This consolidation was
aimed at streamlining the Company's productive capacity to better match its
production requirements. Improved manufacturing efficiencies and profit
margins are expected to result from the restructuring. However, as
anticipated, the restructuring has included significant non-recurring period
costs that were expensed as incurred in the first six months of fiscal 1997.
It is also anticipated that there remains approximately $600,000 of additional
one-time period costs, to be incurred in the latter half of fiscal 1997.
The Company's net sales have experienced large month to month fluctuations in
the current year as well as during the last two years. It is believed that
the consolidation and merger activity within the distribution sector of the
industry has contributed to these swings. Consolidations and mergers result
in excess inventory for our customers, thereby affecting the Company with
reduced orders. Also, the consolidation of distribution frequently results in
large product returns by customers as they streamline newly combined
operations. The resulting larger customers in our marketplace employ
inventory management techniques that negatively impact the Company with
inconsistent ordering patterns. Finally, while over longer periods of time
the relationship of returns to sales remains relatively constant, the timing
of customer returns has been unpredictable and inconsistent in relation to the
orders received from customers in a given time frame. The aftermarket
continues to be fiercely competitive and price sensitive resulting in a
dynamic customer base. These factors make revenue forecasting unpredictable,
and could subject the Company to fluctuations in both revenue and earnings.
Fluctuations in channel mix (retail versus traditional warehouse distributors,
for example) and product mix in product sales can also be significant. All of
these factors can have a significant impact on gross margins as a percentage
of revenue. However, management believes that the streamlining of its
manufacturing operations will position the Company competitively in the
marketplace.
During the month of January, 1997, the Company experienced unit sales 5% lower
than those of the comparable period in fiscal 1996. However, it is uncertain
at this time if the lower unit sales in the month of January will be
indicative of the Company's performance for its third quarter.
CAUTIONARY STATEMENT
All statements in the foregoing discussion and analysis which are not
historical fact are forward looking statements. In connection with the "Safe
Harbor" provision of the Private Securities Litigation Reform Act of 1995, the
Company is providing the following cautionary statement to identify some (but
not necessarily all) of the important factors that could cause its actual
results to differ materially from those anticipated in any forward looking
statements made in this report or otherwise by or on behalf of the Company.
Actual results of the Company may differ from those anticipated in any forward
looking statement made by on behalf of the Company due to the following
factors, among other risks and uncertainties affecting the Company's business:
the inability to realize the cost savings as estimated in the Company's plan
to restructure its operations, lack of availability to the Company of adequate
funding sources and cash from operations, reduced product demand and industry
over-capacity, the loss of or a material reduction in orders from the
Company's largest customer or other material loss of business, new business
acquisition costs, unseasonably mild weather patterns, the impact of inflation
and various other factors identified in the discussion appearing under the
heading "Outlook" above and elsewhere in this report.
5
ARROW AUTOMOTIVE INDUSTRIES, INC.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
None.
ITEM 3. Default upon Senior
Securities.
None.
ITEM 4. Submission of Matters to a
Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form
8-K.
A. Exhibits
Exhibit 10.1 Amended and Restated Revolving
Credit and Term Loan Agreement
dated December 3, 1996 among Arrow
Automotive Industries, Inc. and the
First National Bank of Boston and
BTM Capital Corporation.
Pg 15 - 184
Exhibit 10.2 Waiver and First Amendment to
Amended and Restated Revolving
Credit and Term Loan Agreement
dated December 28, 1996. Pg. 185-188
Exhibit 27 Financial Data Schedule
6
ARROW AUTOMOTIVE INDUSTRIES, INC.
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.
ARROW AUTOMOTIVE INDUSTRIES, INC.
(Registrant)
February 7, 1997 /s/ Jim L. Osment
Jim L. Osment
President and Chief Executive Officer
February 7, 1997 /s/ James F. Fagan
James F. Fagan
Executive Vice President, Treasurer
and Chief Financial Officer
7