SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
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: 33-93302
AM General Corporation
(Exact name of registrant as specified in its charter)
----------------------------------
Delaware 35-1852615
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
Indicate by check mark whether the registrant; (1) has filed all reports 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 filing requirements for the
past 90 days. Yes X No
1,000 shares of the registrant's common stock, par value $.01 per share, were
outstanding as of March 17, 1997.
AM General Corporation
Form 10-Q
Quarter Ended January 31, 1997
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 7
Three Months Ended January 31, 1997 ("first quarter of 1997") compared
to Three Months Ended January 31, 1996 ("first quarter of 1996") 9
Liquidity and Capital Resources 12
PART II - OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM General Corporation and Subsidiary
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
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October 31, January 31,
Assets 1996 1997
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(unaudited)
Current assets:
Cash $ 5,867 2,608
Accounts receivable, net 57,126 45,125
Inventories 121,710 100,838
Prepaid expenses 1,675 1,470
Deferred income taxes 3,455 3,528
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Total current assets 189,833 153,569
Income taxes receivable 4,023 2,164
Property, plant, and equipment, net 56,463 54,622
Deferred income taxes 20,488 22,564
Goodwill, net 87,871 86,799
Other assets 14,504 13,802
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$ 373,182 333,520
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Liabilities and Stockholder's Deficit
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Current liabilities:
Accounts payable 59,212 36,240
Accrued expenses 42,670 45,051
Income taxes payable 44 352
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Total current liabilities 101,926 81,643
Long-term debt, excluding current maturities 126,865 107,037
Postretirement benefits other than pensions, noncurrent portion 150,134 151,398
Other liabilities, excluding current maturities 10,219 10,240
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Total liabilities 389,144 350,318
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Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized 10,000
shares; issued and outstanding 5,000 shares 5,000 5,000
Common stock, $.01 par value. Authorized, issued and
outstanding 900 shares 0 0
Paid-in capital 1,000 1,000
Accumulated deficit (21,962) (22,798)
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Total stockholder's deficit (15,962) (16,798)
Commitments and contingencies
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$ 373,182 333,520
See Accompanying Notes to Consolidated Financial Statements
3
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
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Three Months Ended
January 31,
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1996 1997
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Net sales $ 119,048 140,928
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Cost and expenses:
Cost of sales 103,878 125,565
Depreciation and amortization 5,085 3,501
Selling, general, and administrative expenses 8,197 8,668
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Earnings before interest and income taxes 1,888 3,194
Interest expense, net 3,307 3,999
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Loss before income taxes (1,419) (805)
Income tax (benefit)/expense (72) 31
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Net loss $ (1,347) (836)
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See Accompanying Notes to Consolidated Financial Statements
4
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
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Three Months Ended
January 31,
-------------------
1996 1997
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Cash flows from operating activities:
Net loss $(1,347) (836)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization of plant and equipment 3,754 2,166
Other amortization 1,594 1,594
Increase (decrease) in allowance for doubtful accounts 50 (48)
Increase in inventory reserve 501 737
Deferred income taxes (926) (2,149)
Amortization of bond discount 14 14
Noncash other postretirement cost 1,230 1,264
(Gain)/Loss on sale of equipment 3 (7)
Change in assets and liabilities
Accounts receivable 1,661 12,049
Inventories (458) 20,246
Prepaid expenses (785) 205
Other assets (55) 180
Accounts payable (4,861) (22,971)
Accrued expenses 3,759 881
Income taxes 853 2,167
Other liabilities (153) 1,520
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Net cash provided by operating activities 4,834 17,012
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Cash flows from investing activities:
Proceeds from sale of equipment 3 17
Capital expenditures (1,230) (446)
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Net cash used in investing activities (1,227) (429)
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Cash flows from financing activities:
Net repayments under line-of-credit agreement (973) (19,842)
Principal payments on senior note 0 0
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Net cash provided by (used in) financing activities (973) (19,842)
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Net change in cash 2,634 (3,259)
Cash and cash equivalents at beginning of period 1,140 5,867
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Cash and cash equivalents at end of period $ 3,774 2,608
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Supplemental disclosure of cash items
Interest paid $ 1,462 6,180
Taxes paid 1 13
See Accompanying Notes to Consolidated Financial Statements
5
AM General Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated 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 Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation.
In the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended January 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1997.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K.
Note 2. Inventories
Inventories consisted of the following:
January 31,
October 31, 1997
1996 (Unaudited)
----------- -----------
Finished Goods $ 73,128 $ 55,831
Service Parts 14,784 15,559
Extended Service Program
Production costs of goods currently
in process 3,748 3,998
Raw Materials, supplies and work in progress 33,752 29,889
-------- --------
125,412 105,277
Less allowance for inventory obsolescence (3,702) (4,439)
-------- --------
Total $121,710 $100,838
======== ========
Note 3. Reclassifications
Certain reclassifications have been made to previously reported costs and
expenses to conform to the presentation contained herein.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
AM General Corporation and its wholly-owned subsidiary, AM General Sales
Corporation, (collectively, the "Company" or "AM General") is the largest
supplier of light tactical wheeled vehicles for the Department of Defense (the
"DoD"). The Company is the original designer and sole manufacturer of the High
Mobility Multipurpose Wheeled Vehicle (the "HUMMER"(R)). The Company also
sells HUMMERs to foreign military services through the DoD's Foreign Military
Sales ("FMS") program and on a direct sale basis. In 1993, the Company began
selling to industrial and retail users through its commercial dealer network. In
1994, the Company began selling remanufactured 2.5 ton medium tactical vehicles
under the Army's Extended Service Program ("ESP").
HUMMERs
From November 1, 1993 through May 7, 1995, the Company's HUMMER production rate
was approximately 47 units per day including 35 units per day for the US
Military and its FMS customers. On May 8, 1995, the Company reduced its HUMMER
production rate to 25 units per day due to lower US and international military
demand. On February 3, 1997, the Company reduced its HUMMER production rate from
25 to 16.5 units per day due to continued lower international demand.
From 1990 through January 31, 1997, AM General sold 49,797 HUMMERs under its A1
Series program with the DoD. All production under that contract was completed by
April 30, 1996. With the sale of 601 vehicles to a particular FMS customer (the
"FMS Customer") in the first quarter of 1997, all units produced under the A-1
Series program have been sold.
The Company began producing the latest generation of military HUMMERs, the A2
series, in August 1995. On December 23, 1995, the Company entered into a new
multi-year annual requirements contract for A2 HUMMERs known as the X001
Contract which provides a mechanism for the US Army to procure at least 2,350
HUMMERs annually for the next five years. The contract, however, does not
require the Army to purchase the vehicles as funding for each of the respective
years must be appropriated via the annual Defense Budget. Through January 31,
1997, a total of 4,316 vehicles have been ordered on the X001 Contract. The FY97
Defense Bill currently contains the necessary funding for the second year of
this contract.
Remanufacturing
In September 1993, the Company was awarded the ESP contract, the first multiyear
contract to teardown and remanufacture aging 2-1/2-ton military trucks under the
ESP program. Approximately three old trucks are completely disassembled -
certain parts are reworked, others are scrapped and specific new parts are
added - for every two remanufactured vehicles under this contract. As of
January 31, 1997, a total of 2,167 trucks have been remanufactured and sold to
the US government.
The Company accounts for the ESP Contract on the Estimate at Completion ("EAC")
basis which recognizes estimated profits in the same percentage as revenues are
recognized over the term of the contract. Estimated contract costs and profits
are reviewed periodically and adjustments recorded as necessary.
On November 10, 1996, the Company was awarded a $6.9 million Phase I contract by
the DoD to build 10 prototype vehicles for the US Army's and Marines' Medium
Tactical Truck Remanufacture program. A competitor was awarded a similar
contract. These awards are the first phase of a remanufacturing program for
approximately 13,000 5-ton and 7-ton vehicles, a program valued at approximately
$1.8 billion. Prototypes are scheduled for delivery for test in August 1997. The
Company believes the DoD will award the final contract to the manufacturer of
its choice in late 1998.
7
Spare Parts Logistics Operation ("SPLO") and Systems Technical Support ("STS")
The Company's SPLO operation sells after-market parts and support services for
vehicles manufactured by the Company. Its STS operation performs engineering
services related to the Company's military trucks and certain other military
vehicles.
8
THREE MONTHS ENDED JANUARY 31, 1997 ("FIRST QUARTER OF 1997") COMPARED TO THREE
MONTHS ENDED JANUARY 31, 1996 ("FIRST QUARTER OF 1996")
AM General Corporation and Subsidiary
Table of Net Revenues and HUMMER Unit Sales Information
(in millions, except unit information)
Three months ended
January 31, %
----------------------
1996 1997 Change Change
---- ---- ------ ------
Net Sales
- ---------------------
HUMMERs
US Military $ 46.9 56.2 9.3 19.8%
International (1) 23.9 33.1 9.2 38.5%
Commercial 17.8 17.1 (0.7) (3.9)%
-------- --------- ---------
Total HUMMERs 88.6 106.4 17.8 20.1%
ESP 19.0 17.6 (1.4) (7.4)%
SPLO 6.5 10.3 3.8 58.5%
STS 4.9 6.6 1.7 34.7%
-------- --------- ---------
Total Net Sales $ 119.0 140.9 21.9 18.4%
HUMMER Unit Sales
- ---------------------
US Military 836 949 113 13.5%
International (1) 357 74 357 100.0%
Commercial 339 289 (50) (14.7)%
------ ------- -------
Total HUMMERs 1,532 1,952 420 27.4%
HUMMER Average Unit Selling Prices
- ----------------------------------
US Military $56,075 59,236 3,161 5.6%
International (1) 67,053 46,364 (20,689) (30.9)%
Commercial 52,437 59,308 6,871 13.1%
Total HUMMERs 57,828 54,538 (3,290) (5.7)%
(1) Includes FMS and Direct International Sales
9
Net Sales
The increase in net sales was due primarily to higher US and International
Military HUMMERs, SPLO and STS sales offset partially by lower Commercial HUMMER
sales. The increase in US Military HUMMER sales is primarily attributed to the
sale of certain units which were held in inventory at the end of the Company's
prior fiscal year due to delays in contract negotiations. The increase in
International Military HUMMER sales is primarily attributed to the sale of the
601 units for the FMS Customer, partially offset by a decline in overall
International Military HUMMER sales.
The increase in SPLO sales is primarily attributed to timing differences in US
military orders. The increase in STS sales is primarily attributed to
engineering services in connection with the Company's ESP contract.
Average HUMMER Unit Selling Prices
Average HUMMER unit selling prices for all HUMMERs decreased by 5.7% from the
first quarter of 1996 primarily due to lower unit selling prices in connection
with the 601 HUMMERs sold to the FMS Customer. Adjusting for these units the per
unit selling price for all HUMMERs would have increased by 3.9%. Average HUMMER
unit selling prices for the US Military increased 5.6% over the first quarter of
1996 due primarily to a higher ratio of more expensive models. Adjusting for the
601 vehicles sold to the FMS Customer, International HUMMER unit selling prices
increased 2.7% over the first quarter of fiscal 1996. The increase is primarily
attributed to the sale of units with more expensive options. Commercial HUMMER
average unit selling prices increased 13.1% primarily due to a higher ratio of
current versus prior model year vehicle sales in the first quarter of 1997.
Prior model year vehicles generally have a lower unit selling price than current
year models due to end of model year discounts.
Gross Profit
Gross profit was $15.4 million for the first quarter of 1997, an increase of $.2
million or 1.3% from gross profit of $15.2 million for the first quarter of
1996. The Company's gross profit margin declined from 12.7% in the first
quarter of 1996 to 10.9% in the first quarter of 1997. The decrease was
primarily due to the reduced ESP gross margin in connection with the Company's
third quarter 1996 gross profit EAC and special layoff costs resulting from the
Company's cost reduction program due to the reduction of the HUMMER production
rate from 25 to 16.5 units per day.
Depreciation and Amortization
Depreciation and amortization expense was $3.5 million for the first quarter of
1997, a decrease of $1.6 million or 31.4% over depreciation and amortization
expense of $5.1 million for the first quarter of 1996. The decrease was
primarily due to US Military tooling for the A-2 HUMMER being fully amortized
during the first quarter of 1996 under a prior HUMMER A-2 contract.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $8.7 million for the
first quarter of 1997, an increase of $.5 million or 6.1% from SG&A expense of
$8.2 million for the first quarter of 1996. The increase is primarily attributed
to an accrual for layoff costs in connection with the Company's cost reduction
plan implemented at the end of January 1997.
Operating Income
Operating income for the first quarter of 1997 was $3.2 million, an increase of
$1.3 million or 68.4% from operating income of $1.9 million for the first
quarter of 1996. The increase in operating income is attributed to lower
depreciation and amortization expense and higher gross profits partially offset
by higher SG&A costs.
10
Interest Income and Expense
Interest income was $.8 million higher in the first three months of 1996
compared to the first three months of 1997 because of the acceptance by the DoD
and the FMS Customer of interest expense associated with the 768 units held in
inventory during 1996. Interest expense for the first quarter of 1997 was $4.1
million, a decrease of $.1 million or 2.4% from interest expense of $4.2 million
for the first quarter of 1996. Average debt outstanding during the first quarter
of fiscal 1997 was $129.8 million at a weighted average interest rate of 11.65%.
Average debt outstanding during the first quarter of fiscal 1996 was $131.0
million at a weighted average interest rate of 11.83%.
Income Tax (Benefit) Expense
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was $.03 million for the first quarter of 1997, an increase of $.1
million from an income tax benefit of $.07 million for the first quarter of
1996. The increase in income tax expense was due to the increase of taxable
income.
Net Loss
As discussed above, the change in net loss was primarily due to higher operating
income partially offset by higher net interest expense and income taxes.
11
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, postretirement health care and pension funding, interest
expense, and, to a lesser extent, principal payments on its indebtedness. The
Company has met these requirements in each fiscal year since 1992 from cash
provided by operating activities and borrowings under its Revolving Credit
Facility.
Cash provided by operating activities was $17.0 million for the first three
months of 1997 compared to $4.8 million for the first three months of 1996. The
key factors affecting cash flow from operating activities were decreases in
inventory and accounts receivable partially offset by a reduction in accounts
payable. Other factors include non-cash charges to operating income including
depreciation, amortization and non-cash postretirement expenses.
Accounts receivable levels at the end of the first three months of 1997 were
significantly lower than levels at the end of the first three months of 1996
primarily due to the timely processing and acceptance of prompt payment discount
terms by the government payment office.
Inventory levels at the end of the first three months of 1997 were substantially
lower than levels at the end of the first three months of 1996 primarily due to
the sale of HUMMERs to the FMS Customer. These units which were included in
inventory and valued at $28.6 at the end of the first three months of 1996 and
at $22.4 at the end of the fiscal year were completely sold by the end of the
first three months of 1997. As a result of the sale to and subsequent cash
receipt from the FMS Customer, the Company's liquidity has significantly
improved.
During the first three months of 1997, the Company spent $.4 million on capital
expenditures primarily for tooling for vehicle production, as compared to $1.2
million during the first three months of 1996. The Company expects total capital
expenditures in fiscal 1997 of approximately $4.9 million to be funded from
operating cash flow and availability under the Revolving Credit Facility.
At the end of the first three months of 1997, the Company implemented a plan to
improve its operating results and financial liquidity. The plan includes a
reduction in the HUMMER production rate on its manufacturing line, as well as a
significant reduction in corporate overhead costs. Effective February 3, 1997,
the HUMMER line rate was reduced from 25 to 16.5 units per day with an average
of 12.5 units per day for the US Military and its FMS customers and 4 units per
day for commercial customers. As of the end of the first three months of 1997,
the Company has no significant orders for direct international customers. The
Company does not anticipate any further reductions in the HUMMER line rate for
fiscal 1997.
The Company also implemented a comprehensive cost reduction plan of each of its
business lines. The objective of such plan is to reduce significantly the
Company's variable and fixed costs, including corporate overhead. Specifically,
the Company reduced its salaried and hourly workforce in January 1997 by 143
employees and anticipates further reductions of 130 to its hourly workforce
throughout the remainder of the year. Additionally, certain operations and
facilities will be consolidated and eliminated. In March, the Company announced
its decision to close the Indianapolis Stamping Plant on October 1, 1997. In
addition to the layoffs cited above, 176 hourly and 32 salaried employees will
be laid off between May and September as a result of this decision. The Company
will procure its future needed stampings from various suppliers.
Management anticipates that cash flow from operations as impacted by the reduced
HUMMER line rate and overhead structure, as well as availability under its
Revolving Credit Facility will be sufficient to finance the Company's liquidity
needs for the foreseeable future.
12
The Company's Revolving Credit Facility has a maximum borrowing limit of $60
million, and is secured by eligible inventories and receivables, as defined
therein. On March 14, 1997, the Company entered into an agreement which extends
the Revolving Credit Facility until October 31, 1999. As of January 31, 1997,
the Company had borrowings of $32.8 million outstanding and approximately $10.0
million of excess availability under the Revolving Credit Facility.
The ability of the Company to meet its debt service requirements and to comply
with such covenants will be dependent upon future operating performance and
financial results of the Company, which will be subject to financial, economic,
political, competitive and other factors affecting the Company, many of which
are beyond its control.
13
Part II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K
during the quarter for which this report is filed.
14
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.
Date: March 17, 1997 AM GENERAL CORPORATION
Registrant
By _________________________
James A. Armour
Chief Executive Officer
and Chief Financial Officer
Duly authorized officer and
principal financial officer
15