UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001
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: 001-13931
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE, SUITE 700
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (713) 860-1000
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 [ ]
Number of shares of common stock of the Registrant, par value $.01 per share,
outstanding at April 30, 2001 was 16,839,898.
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2001
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000............................. 3
Consolidated Statements of Operations for the
Three Months ended March 31, 2001 and 2000........ 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2001 and 2000........ 5
Notes to Consolidated Financial Statements............. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K....................... 12
Signature....................................................... 12
2
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(Unaudited)
(in thousands)
ASSETS
Cash and cash equivalents ....................................... $ 124 $ 158
Accounts receivable ............................................. 43,263 41,433
Inventories ..................................................... 123,642 124,530
Deferred income taxes ........................................... 9,242 9,865
Other current assets ............................................ 1,002 1,044
-------- --------
Total current assets ........................ 177,273 177,030
-------- --------
Property and equipment, net ..................................... 14,444 14,319
Goodwill, net ................................................... 128,519 129,383
Deferred income taxes ........................................... 208 516
Other assets .................................................... 4,324 4,532
-------- --------
Total assets ................................ $324,768 $325,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................................ $ 27,866 $ 28,303
Accrued expenses ................................................ 7,212 7,564
Accrued interest ................................................ 7,216 4,154
Income taxes payable ............................................ 399 1,387
Current maturities of long-term debt ............................ 65,116 67,501
-------- --------
Total current liabilities ................... 107,809 108,909
Long-term debt, net of current maturities ....................... 99,709 99,745
-------- --------
Total liabilities ........................... 207,518 208,654
-------- --------
Commitments and contingencies
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding ............... -- --
Common stock, $.01 par value, 51,000,000 shares
authorized, 16,839,898 and 16,769,251 shares issued and
outstanding in 2001 and 2000, respectively ................. 168 168
Additional paid in capital ...................................... 101,162 101,122
Retained earnings ............................................... 15,915 15,833
Accumulated comprehensive income ................................ 5 3
-------- --------
Total stockholders' equity .................... 117,250 117,126
-------- --------
Total liabilities and stockholders' equity .... $324,768 $325,780
======== ========
The accompanying notes are an integral part of these statements.
3
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
------------------------------
2001 2000
-------- --------
(in thousands, except share data)
Revenues ........................................ $ 71,311 $ 74,365
Cost of sales ................................... 49,992 51,637
-------- --------
Gross profit ............................... 21,319 22,728
Operating expenses .............................. 15,752 16,173
Goodwill amortization ........................... 864 864
-------- --------
Operating income ........................... 4,703 5,691
Other (income) expense, net ..................... 2 (23)
Interest expense ................................ 4,599 4,820
-------- --------
Income before taxes ....................... 102 894
Income taxes .................................... 20 489
-------- --------
Net income ................................. $ 82 $ 405
======== ========
Net income per share:
Basic ...................................... $ 0.00 $ 0.02
Diluted .................................... $ 0.00 $ 0.02
Reconciliation of net income to
Comprehensive income:
Net income ................................ $ 82 $ 405
Currency translation adjustment ........... 5 --
-------- --------
Comprehensive income ...................... $ 87 $ 405
======== ========
The accompanying notes are an integral part of these statements.
4
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
------------------------------
2001 2000
------- -------
(in thousands)
Cash Flows From Operating Activities:
Net income ............................................. $ 82 $ 405
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .......................... 1,634 1,583
Amortization of discount on notes ...................... 44 38
Deferred income taxes .................................. 931 --
Changes in operating assets and liabilities:
Accounts receivable ....................... (1,830) (3,642)
Inventories ............................... 888 1,543
Other current assets ...................... 42 (422)
Other assets .............................. 207 47
Accounts payable and accrued expenses ..... 2,273 4,047
Income taxes payable ...................... (988) 535
------- -------
Net cash provided by operating activities ......... 3,283 4,134
Cash Flows From Investing Activities:
Capital expenditures ................................... (844) (1,878)
Other .................................................. 17 9
------- -------
Net cash used in investing activities ............ (827) (1,869)
Cash Flows From Financing Activities:
Repayments of term debt ................................ (142) (118)
Net repayments under credit facility ................... (2,348) (2,238)
------- -------
Net cash used in financing activities ............. (2,490) (2,356)
------- -------
Decrease in cash and cash equivalents ........................... (34) (91)
Cash and cash equivalents, beginning of period .................. 158 219
------- -------
Cash and cash equivalents, end of period ........................ $ 124 $ 128
======= =======
The accompanying notes are an integral part of these statements.
5
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Pentacon, Inc. (the "Company")
included herein have been prepared without audit pursuant to the Rules and
Regulations for reporting on Form 10-Q. Accordingly, certain information and
footnotes required by generally accepted accounting principles for complete
financial statements are not included herein. The Company believes all
adjustments necessary for a fair presentation of these statements have been
included and are of a normal and recurring nature. There has been no significant
change in the accounting policies of the Company during the periods presented.
The statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
("SFAS No. 133"). SFAS No. 133 requires that all derivatives be recognized as
assets and liabilities and measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
the resulting designation. The Company adopted this standard in the quarter
ended March 31, 2001. The adoption had no impact on net income because of the
Company's minimal use of derivatives.
2. CREDIT FACILITY AND LONG-TERM DEBT
In March 1999, the Company sold $100 million of Senior Subordinated Notes
(the "Notes") due April 1, 2009. The net proceeds of $94.2 million, after the
original issue discount and paying underwriter's commissions, from the offering
of the Notes were used to repay indebtedness under the Company's credit
agreement (the "Bank Credit Facility"). The Notes accrue interest at 12.25%
which is payable on April 1 and October 1 of each year. The Notes are publicly
registered and subordinated to all existing and future senior subordinated
obligations and will rank senior to all subordinated indebtedness. The indenture
governing the Notes contains covenants that limit the Company's ability to incur
additional indebtedness, pay dividends, make investments and sell assets. At
March 31, 2001, the Company was in compliance with the covenants. Each of the
Company's subsidiaries, all of which are wholly owned, fully, unconditionally
and jointly and severally guarantees the Notes on a senior subordinated basis.
Separate financial statements of the guarantors are not presented because
management has determined that they would not be material to investors.
Effective September 30, 1999, the Company amended its Bank Credit Facility
to provide a revolving line of credit of up to $100 million (subject to a
borrowing base limitation) to be used for general corporate purposes, future
acquisitions, capital expenditures and working capital. The Bank Credit Facility
is secured by Company stock and assets. Advances under the Bank Credit Facility
bear interest at the banks' prime rate. At the Company's option, the loans may
bear interest based on a designated London interbank offered rate plus a margin
of 200 basis points. Commitment fees of 25 to 37.5 basis points per annum are
payable on the unused portion of the line of credit. The Bank Credit Facility
contains a provision for standby letters of credit up to $20 million. The Bank
Credit Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants including a minimum
6
net worth and, under certain circumstances, a minimum fixed charge ratio. At
March 31, 2001, the Company was in compliance with the covenants. Borrowings
under the Bank Credit Facility are classified as current liabilities in
accordance with EITF 95-22 BALANCE SHEET CLASSIFICATION OF BORROWINGS
OUTSTANDING UNDER REVOLVING CREDIT AGREEMENTS THAT INCLUDE BOTH A SUBJECTIVE
ACCELERATION CLAUSE AND A LOCK-BOX ARRANGEMENT. The Bank Credit Facility will
terminate and all amounts outstanding thereunder, if any, will be due and
payable September 30, 2004. At March 31, 2001, the Company had approximately
$22.5 million available under the Bank Credit Facility.
3. EARNINGS PER SHARE
Basic and diluted net income per share is computed based on the following
information:
Three Months Ended March 31,
-----------------------------
2001 2000
------- -------
(in thousands)
BASIC:
Net income .................................... $ 82 $ 405
======= =======
Average common shares ......................... 16,788 16,697
======= =======
DILUTED:
Net income .................................... $ 82 $ 405
======= =======
Average common shares ......................... 16,788 16,697
Common share equivalents:
Warrants .................................. -- --
Options ................................... 12 9
------- -------
Total common share equivalents ........ 12 9
------- -------
Average common shares and
Common share equivalents ................. 16,800 16,706
======= =======
4. INCOME TAXES
The provision for income taxes included in the Consolidated Statement of
Operations assumes the application of statutory federal and state income tax
rates and the non-deductibility of goodwill amortization. Interim period income
tax provisions are based upon estimates of annual effective tax rates and events
may occur which will cause such rates to vary.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
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6. SEGMENT INFORMATION
The Company has two principal operating segments: the Industrial Group and
the Aerospace Group. The Industrial Group serves a broad base of industrial
manufacturers producing items such as diesel engines, locomotives, power
turbines, motorcycles, telecommunications equipment, and refrigeration
equipment. The Aerospace Group serves the aerospace and aeronautics industries.
Financial information by industry segment follows:
Revenues Operating Income
----------------------- -----------------------
Three Months Ended Three Months Ended
March 31, March 31,
----------------------- -----------------------
2001 2000 2001 2000 (1)
-------- -------- -------- --------
(in thousands)
Industrial ................................... $ 36,348 $ 43,168 $ 3,171 $ 4,380
Aerospace .................................... 34,963 31,197 3,422 3,143
-------- -------- -------- --------
$ 71,311 $ 74,365 6,593 7,523
======== ========
Reconciliation to income before taxes:
Other income (expense), net .................. (2) 23
General corporate expense .................... (1,026) (968)
Goodwill amortization ........................ (864) (864)
Interest expense ............................. (4,599) (4,820)
-------- --------
Income before taxes .......................... $ 102 $ 894
======== ========
(1) Goodwill and related amortization has been excluded from segment operating
income. The prior year has been restated to conform to the 2001 presentation.
7. SUBSEQUENT EVENTS
On April 25, 2001, the Company announced that Mark E. Baldwin had resigned
the positions of Chairman and Chief Executive Officer, and that Robert L. Ruck,
President of the Company's Aerospace Group, was elected Chief Executive Officer
and a Board member, and Cary M. Grossman, an outside director and co-founder of
the Company, was elected Chairman. The Company also announced that it would be
closing its corporate office in Houston, Texas and relocating those functions to
Chatsworth, California, where its Aerospace Group is headquartered.
In addition, the Company announced that it had decided to offer up to $10
million of slower moving Aerospace Group inventory at substantially discounted
prices. The Company is in the process of identifying the specific inventory and
will take a non-cash charge for the estimated loss in the second quarter.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the financial
statements of the Company and related notes thereto and management's discussion
and analysis of financial condition and results of operations related thereto
which are included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000. This discussion contains forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Key factors that could cause actual results
to differ materially from expectations include, but are not limited to: (1)
estimates of costs or projected or anticipated changes to cost estimates
relating to entering new markets or expanding in existing markets; (2) changes
in economic and industry conditions; (3) changes in regulatory requirements; (4)
changes in interest rates; (5) levels of borrowings under the Company's Bank
Credit Facility; (6) accumulation of excess inventories; and (7) volume or price
adjustments with respect to sales to major customers. These and other risks and
assumptions are described in the company's Annual Report of Form 10-K for the
year ended December 31, 2000.
RESULTS OF OPERATIONS
Quarterly results may be materially affected by the timing and magnitude
of assimilation costs, costs of opening new facilities, gain or loss of a
material customer and variation in product mix. Accordingly, the operating
results for any three-month period are not necessarily indicative of the results
that may be achieved for any subsequent three-month period or for a full year.
THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
The following table sets forth certain selected financial data and the
related amounts as a percentage of revenues for the periods indicated:
Three Month Period Ended
March 31,
----------------------------------------------
2001 2000
-------------------- -------------------
(dollars in thousands)
Revenues ............................. $71,311 100.0% $74,365 100.0%
Cost of sales ........................ 49,992 70.1 51,637 69.4
------- ------- ------- -------
Gross profit ................. 21,319 29.9 22,728 30.6
Operating expenses ................... 15,752 22.1 16,173 21.7
Goodwill amortization ................ 864 1.2 864 1.2
------- ------- ------- -------
Operating income ............. $ 4,703 6.6% $ 5,691 7.7%
======= ======= ======= =======
REVENUES
Revenues decreased $3.1 million, or 4.2%, to $71.3 million for the three
months ended March 31, 2001 from $74.4 million for the three months ended March
31, 2000. The decrease in revenues was attributable to a 15.8% revenue decline
in the Industrial Group offset by a 12.1% revenue increase in the Aerospace
Group. The Aerospace Group increase primarily relates to the new contract
business signed in the year 2000. The reduction in the Industrial Group revenues
was primarily the result of a decline in sales to the heavy-duty truck market
that began in the third quarter of 2000. In addition, the Company experienced
softening sales to the telecommunications customers. However, strong revenue
growth was experienced in the power generation sector of the business.
9
COST OF SALES
Cost of sales decreased $1.6 million, or 3.1%, to $50.0 million for the
three months ended March 31, 2001 from $51.6 million for the three months ended
March 31, 2000. As a percentage of revenues, cost of sales increased from 69.4%
for the three months ended March 31, 2000, to 70.1% for the three months ended
March 31, 2001. As a result of the implementation of the new contracts in the
Aerospace Group, gross margins declined from the comparable year 2000 period.
Contract business in the Aerospace Group typically carries a lower margin than
bid and buy business because the working capital investment is lower. Gross
margins for the quarter in the Industrial Group increased in the current year
quarter compared to the prior year quarter as a result of a change in sales mix.
OPERATING EXPENSES
Operating expenses decreased $0.4 million, or 2.5%, to $15.8 million for
the three months ended March 31, 2001 from $16.2 million for the three months
ended March 31, 2000. As a percentage of revenues, operating expenses increased
from 21.7% for the three months ended March 31, 2000, to 22.1% for the three
months ended March 31, 2001. The Company continues to realize the operating
efficiency benefits of the consolidation of its information technology systems
and facilities in the Aerospace Group. In addition, the fourth quarter 2000
decision to exit certain non-core and under-performing businesses contributed to
the reduction in operating expenses in the first quarter of 2001. The increase
in operating expenses in the Industrial Group as a percentage of revenue was
largely due to the decline in revenues as operating expenses in absolute dollar
terms were lower in the current year quarter than in the prior year quarter.
OPERATING INCOME
Due to the factors discussed above, operating income decreased $1.0
million to $4.7 million for the three months ended March 31, 2001 from $5.7
million for the three months ended March 31, 2000. As a percentage of revenues,
operating income decreased to 6.6% for the three months ended March 31, 2001
from 7.7% for the three months ended March 31, 2000.
NON-OPERATING COSTS AND EXPENSES
Interest expense for the three months ended March 31, 2001, totaled $4.6
million compared to $4.8 million for the three months ended March 31, 2000. The
decrease in interest expense resulted from both lower debt levels and lower
interest rates.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31, 2001
was $20 thousand (an effective rate of 19.6%) compared with $0.5 million (an
effective rate of 54.7%) for the three months ended March 31, 2000. The lower
effective tax rate in the current year primarily relates to anticipated
Aerospace Group inventory disposals at substantially discounted prices. The
higher effective tax rate for the three-months ended March 31, 2000 primarily
related to nondeductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided $3.3 million of net cash from operating activities
during the three months ended March 31, 2001; this cash was used for debt
reduction and capital expenditures. Net cash used in investing activities was
$0.8 million for capital expenditures. Net cash used in financing activities was
$2.5 million for the three months ended March 31, 2001 and consisted of
repayments of debt. At March
10
31, 2001, the Company had cash of $0.1 million, working capital of $69.5 million
and long-term debt of $99.7 million.
In March 1999, the Company sold $100 million of Senior Subordinated Notes
due April 1, 2009. The net proceeds of $94.2 million, after the original issue
discount and paying underwriter's commissions, from the offering of the Notes
were used to repay indebtedness under the Company's Bank Credit Facility. The
Notes accrue interest at 12.25% which is payable on April 1 and October 1 of
each year. The Notes are publicly registered and subordinated to all existing
and future senior subordinated obligations and will rank senior to all
subordinated indebtedness. The indenture governing the Notes contains covenants
that limit the Company's ability to incur additional indebtedness, pay
dividends, make investments and sell assets. At March 31, 2001, the Company was
in compliance with the covenants. Each of the Company's subsidiaries, all of
which are wholly owned, fully, unconditionally and jointly and severally
guarantees the Notes on a senior subordinated basis.
Effective September 30, 1999, the Company amended its Bank Credit Facility
to provide a revolving line of credit of up to $100 million (subject to a
borrowing base limitation) to be used for general corporate purposes, future
acquisitions, capital expenditures and working capital. The Bank Credit Facility
is secured by Company stock and assets. Advances under the Bank Credit Facility
bear interest at the banks' prime rate. At the Company's option, the loans may
bear interest based on a designated London interbank offered rate plus a margin
of 200 basis points. Commitment fees of 25 to 37.5 basis points per annum are
payable on the unused portion of the line of credit. The Bank Credit Facility
contains a provision for standby letters of credit up to $20 million. The Bank
Credit Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants including a minimum net worth and, under
certain circumstances, a minimum fixed charge ratio. At March 31, 2001, the
Company was in compliance with the covenants. Borrowings under the Bank Credit
Facility are classified as current liabilities in accordance with EITF 95-22
BALANCE SHEET CLASSIFICATION OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT
AGREEMENTS THAT INCLUDE BOTH A SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX
ARRANGEMENT. The Bank Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable September 30, 2004. At March 31,
2001, the Company had approximately $22.5 million available under the Bank
Credit Facility.
The Company's Industrial Group is implementing the J.D. Edwards' One World
Enterprise Application Solution as its common information system. The total
expenditures for this information system are expected to be approximately $5.5
million during the years 2000 and 2001. The majority of these expenditures are
capitalized as computer hardware and software and depreciated over the estimated
useful life of the assets. The total expenditures for this system were $4.7
million through March 31, 2001. Funding for these expenditures and future
capital expenditures will be provided by operating cash flows.
In April 2001, the Company announced that it had decided to offer up to
$10 million of slower moving Aerospace Group inventory at substantially
discounted prices. The Company is in the process of identifying the specific
inventory and will take a non-cash charge for the estimated loss in the second
quarter. The disposal of this inventory will allow the Company to improve its
inventory mix, obtain refunds of previously paid taxes and eliminate the current
year tax liability.
SEASONALITY AND INFLATION
The Company experiences seasonal declines in the fourth quarter due to
declines in its customers' activities in that quarter. The Company's volume of
business may be adversely affected by a decline in projects as a result of
regional or national downturns in economic conditions. Inflation has not had a
material impact on the Company's results of operations.
11
PART II -OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated April 26, 2001 which
included a copy of a press release announcing among other things the
resignation of Mark E. Baldwin, Chairman and Chief Executive Officer.
SIGNATURE
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.
PENTACON, INC.
Dated: May 11, 2001 By: /s/ JAMES C. JACKSON
--------------------
JAMES C. JACKSON
Vice President & Controller
(Principal Financial & Accounting Officer)
12