1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: April 5, 1997
---------------
Commission file number: 0-20328
---------------
AMTROL INC.
(exact name of registrant as specified in its charter)
Rhode Island 05-0246955
------------------ ----------------
1400 Division Road, West Warwick, RI 02893-1008
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(Address of principal executive offices)
Registrant's telephone number, including area code: (401) 884-6300
----------------------
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.
100 shares of Common stock $.01 par value
-----------------------------------------
as of April 5, 1997
2
AMTROL INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED APRIL 5, 1997
---------------------------------------------
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets -
April 5, 1997 (Successor Company) and
December 31, 1996 1
Consolidated Statements of Operations -
For the Quarters Ended April 5, 1997 (Successor Company)
and March 30, 1996 (Predecessor Company) 2
Consolidated Statement of Shareholders' Equity -
For the Quarter Ended April 5, 1997 3
Consolidated Statements of Cash Flows -
For the Quarters Ended April 5, 1997 (Successor Company)
and March 30, 1996 (Predecessor Company) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION 13
Signatures 14
3
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS )
ASSETS
APRIL 5, DECEMBER 31,
1997 1996
-------- ------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ......................................... $ 864 $ 6,383
ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS ......... 30,702 21,861
ACCOUNTS RECEIVABLE - TAX REFUND .................................. - 2,000
INVENTORIES ....................................................... 26,503 24,783
PREPAID INCOME TAXES .............................................. 2,044 1,734
PREPAID EXPENSES AND OTHER ........................................ 944 691
ASSETS HELD FOR SALE .............................................. 1,500 1,500
--------- ---------
TOTAL CURRENT ASSETS ........................................... 62,557 58,952
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT ........................................ 37,713 36,889
OTHER ASSETS:
CASH SURRENDER VALUE OF OFFICERS' LIFE INSURANCE .................. 475 1,614
GOODWILL .......................................................... 146,752 147,756
FINANCING COSTS ................................................... 8,176 8,387
OTHER ............................................................. 1,620 1,285
--------- ---------
157,023 159,042
--------- ---------
$ 257,293 $ 254,883
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG TERM DEBT .............................. $ 1,001 $ 825
ACCOUNTS PAYABLE .................................................. 9,787 5,794
ACCRUED EXPENSES .................................................. 9,368 14,472
ACCRUED INTEREST .................................................. 5,494 2,232
ACCRUED INCOME TAXES .............................................. 1,362 582
--------- ---------
TOTAL CURRENT LIABILITIES ...................................... 27,012 23,905
--------- ---------
LONG TERM DEBT, LESS CURRENT INSTALLMENTS ................................ 158,850 159,175
--------- ---------
OTHER NONCURRENT LIABILITIES ............................................. 4,416 4,544
--------- ---------
DEFERRED INCOME TAXES .................................................... 318 222
--------- ---------
SHAREHOLDERS' EQUITY:
COMMON STOCK $.01 PAR VALUE- AUTHORIZED-1,000 SHARES
ISSUED-100 SHARES ............................................... - -
ADDITIONAL PAID-IN CAPITAL ........................................ 69,326 69,326
RETAINED EARNINGS ................................................. (2,629) (2,289)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ..................................... 66,697 67,037
--------- ---------
$ 257,293 $ 254,883
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
(1)
4
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS)
FOR THE QUARTER ENDED
-----------------------------------
APRIL 5, MARCH,30
1997 1996
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY)
---------------- ----------------
NET SALES ............................................... $45,035 $41,162
COST OF GOODS SOLD ...................................... 33,359 30,436
------- -------
Gross profit ..................................... 11,676 10,726
OPERATING EXPENSES:
Selling .......................................... 3,568 3,855
General and administrative ....................... 2,850 3,837
Amortization of Goodwill ......................... 938 -
------- -------
Income from operations ................. 4,320 3,034
OTHER INCOME (EXPENSE):
Interest expense ................................. (4,529) (35)
Interest income .................................. 234 65
License and distributorship fees ................. 50 56
Other, net ....................................... 173 58
------- -------
Income before provision for income taxes 248 3,178
PROVISION FOR INCOME TAXES .............................. 588 1,239
------- -------
NET (LOSS) INCOME ...................................... ($ 340) $ 1,939
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
(2)
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS )
Additional
Common Paid-in Retained
Stock Capital Earnings
------ ------- --------
BALANCE, December 31, 1996 ...... - 69,326 (2,289)
Net Loss ................. - - (340)
====== ====== ======
BALANCE, April 5, 1997 .......... - 69,326 (2,629)
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
(3)
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
FOR THE QUARTER ENDED
---------------------------------------------
APRIL 5, MARCH 30,
1997 1996
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY)
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income ................................................. ($340) $ 1,939
------- -------
Adjustments to reconcile net (loss) income to net cash used by
operating activities -
Depreciation and amortization ......................... 2,583 1,385
Provision for losses on accounts receivable ........... 61 126
(Gain)Loss on sale of fixed assets .................... 2 4
Change in assets and liabilities -
(Increase)decrease in assets -
Accounts receivable, net ....................... (8,902) (6,280)
Income tax receivable .......................... 2,000 -
Inventory ...................................... (1,720) (2,011)
Prepaid income taxes ........................... (310) (128)
Prepaid expenses and other ..................... (253) (167)
Cash surrender value of officers' life insurance 1,139 1,477
Other assets ................................... (377) 22
Increase(decrease) in liabilities -
Accounts payable ............................... 3,993 977
Accrued expenses ............................... (1,842) (2,363)
Accrued income taxes ........................... 780 1,141
Deferred income taxes .......................... 96 -
Other noncurrent liabilities ................... (128) 3
------- -------
(2,878) (5,814)
------- -------
Net cash used by operating activities .......... (3,218) (3,875)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets ................................ 28 18
Capital expenditures .............................................. (2,180) (1,801)
------- -------
Net cash used in investing activities .......... (2,152) (1,783)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt ....................................... (149) -
Cash dividends .................................................... - (371)
Issuance of common stock - exercise of stock options .............. - 94
Repurchase of treasury stock ...................................... - (15)
------- -------
Net cash used in financing activities .......... (149) (292)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS .............................. (5,519) (5,950)
CASH AND CASH EQUIVALENTS, beginning of period ......................... 6,383 9,078
------- -------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 864 $ 3,128
------- -------
CASH PAID FOR:
Interest .......................................................... $ 942 $ 44
Income taxes ...................................................... $ 5 $ 39
The accompanying notes are an integral part of these consolidated financial
statements.
(4)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly,
in accordance with generally accepted accounting principles, the Company's
financial position, results of operations and cash flows for the interim
periods presented. Such adjustments consisted of only normal recurring
items. The results of operations for the interim periods shown in this
report are not necessarily indicative of results for any future interim
period or for the entire year. These consolidated financial statements do
not include all disclosures associated with annual financial statements and
accordingly should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10K.
2. BASIS OF PRESENTATION
---------------------
For periods prior to November 13, 1996, the accompanying consolidated
financial statements represent the consolidated results and financial
position of AMTROL Inc. and Subsidiaries (the Predecessor). On November 13,
1996, the Predecessor merged with AMTROL Acquisition, Inc. a wholly-owned
subsidiary of AMTROL Holdings Inc., a Delaware corporation organized by
The Cypress Group L.L.C. as more fully described in Note 3 (the Merger).
Financial statements for periods subsequent to November 12, 1996 represent
the consolidated financial statements of AMTROL Inc. and Subsidiaries (the
Successor) after giving effect to the Merger. References to the Company
refer to the Predecessor prior to the Merger and the Successor post-Merger.
3. MERGER AND FINANCING
--------------------
AMTROL Acquisition Inc. ("Acquisition") and AMTROL Holdings Inc.
("Holdings") were formed by The Cypress Group L.L.C. ("Cypress") in 1996 to
effect the acquisition of all of the outstanding common stock of the
Predecessor through the Merger of Acquisition with and into the Successor.
Upon consummation of the Merger on November 13, 1996, all of the
outstanding common stock of Acquisition was converted into common stock of
the Successor and the Successor became a wholly owned subsidiary of
Holdings. The Successor, as the surviving entity, continues to be named
AMTROL Inc. Holdings has no other material assets, liabilities or
operations other than those that result from its ownership of the common
stock of the Successor.
(5)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
----------------------------------------------------
(UNAUDITED)
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3. MERGER AND FINANCING (CONT'D.)
------------------------------
The Merger has been accounted for as a purchase transaction effective as of
November 13, 1996, in accordance with Accounting Principles Board Opinion
No. 16, Business Combinations, and EITF Issue No. 88-16, Basis in Leveraged
Buyout Transactions and, accordingly, the consolidated financial statements
for the periods subsequent to November 12, 1996 reflect the purchase price,
including transaction costs, allocated to tangible and intangible assets
acquired and liabilities assumed, based on their estimated fair values as
of November 12, 1996, which may be revised at a later date. The excess of
the purchase price over the fair value of net assets acquired has been
allocated to goodwill.
4. USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
GOODWILL
Goodwill represents the excess of purchase price over the fair value of net
assets acquired in connection with the Merger and is included in other
assets. Goodwill is being amortized over 40 years.
INCOME TAXES
The Company utilizes an asset and liability approach to determine income
tax liabilities in accordance with SFAS No. 109. The standard recognizes
tax assets and liabilities for the cumulative effect of all temporary
differences between financial statement carrying amounts and the tax basis
of assets and liabilities. The standard also requires the adjustment of
deferred tax liabilities or assets for an enacted change in tax laws or
rates.
(6)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
----------------------------------------------------
(UNAUDITED)
-----------
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other assets
and amortized over the life of the related debt using the effective
interest method. Amortization of deferred financing costs is included in
interest expense.
6. INVENTORIES
Inventories are stated at the lower of cost or market and were as follows:
April 5, 1997 December 31, 1996
------------- -----------------
(in thousands)
Raw Materials and Work in Process $ 8,844 $ 9,429
Finished Goods 17,659 15,354
------- -------
$26,503 $24,783
======= =======
Inventories valued under the last-in, first-out (LIFO) cost method
comprised of approximately 61.7% of the April 5, 1997 totals and 60.5 % of
the 1996 totals.
7. LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
-----------------------------------------
In November 1996, the Company entered into a Bank Credit Agreement (the
"Agreement") that provides for secured borrowings from a syndicate of
lenders consisting of (i) a five and one-half year revolving credit
facility providing for up to $30 million in revolving loans, $5.0 million
of which may be used for letters of credit (the "Revolving Credit
Facility") and (ii) a term loan facility providing for $45.0 million in
term loans, consisting of a five and one-half year Tranche A Term Loan of
$20.0 million and a seven and one-half year Tranche B Term Loan for $25.0
million (collectively, the Term Loans).
The Revolving Credit Facility includes a $20.0 million sublimit which is
available to finance permitted acquisitions. At April 5, 1997, there were
no borrowings outstanding in the Revolving Credit Facility. During the
period from November 13, 1996 to April 5, 1997, the Company did not borrow
under the Revolving Credit Facility.
In connection with the Merger, the Company issued $115.0 million of Senior
Subordinated Notes due in 2006 (the "Notes"). The Notes are unsecured
obligations of the Company. The Notes bear interest at a rate of 10.625%
per annum, and are payable semi-annually on each June 30 and December 31,
commencing on June 30, 1997.
Under the terms of both the Agreement and the Note indenture, AMTROL is
required to comply with certain financial covenants and restrictions with
which AMTROL was in compliance at April 5, 1997.
(7)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
----------------------------------------------------
(UNAUDITED)
-----------
8. PROVISION FOR INCOME TAXES
--------------------------
The effective income tax rates used in the interim financial statements are
estimates of the full year's rates. The difference for 1997 between a
provision computed using the respective statutory U.S. federal income tax
rate and the provision for income taxes in the accompanying consolidated
financial statements is primarily the result of goodwill amortization and
certain foreign operating losses for which there is no tax benefit.
(8)
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AMTROL INC. AND SUBSIDIARIES
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ITEM 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
OVERVIEW
- --------
The following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1993 and Section 21E of the Securities Exchange Act of
1934. Such statements involve risks and uncertainties that could cause actual
results to differ materially from those set forth in such forward-looking
statements. Among other things, expectations for upcoming periods are based on
assumptions which management believes to be reasonable at this time, including
assumptions concerning the volume and product mix of sales. Moreover, there can
be no assurances when initiatives undertaken by the Company to improve plant
productivity will be successful. Other significant potential risks and
uncertainties include the following: risks associated with indebtedness;
uncertainties of acquisition strategy; high level of competition in the
Company's markets; importance and costs of product innovation; risks associated
with international operations; product liability exposure and the risk of
adverse effect of economic and regulatory conditions on sales; and risks
associated with environmental matters.
The consolidated balance sheet of the Company at April 5, 1997 reflects
allocation of the purchase price to the assets acquired in the Merger. Operating
results subsequent to the Merger are comparable to prior periods, with the
exception of depreciation, interest expense and amortization of intangible
assets.
(9)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth, for the periods indicated, the percentages of
the Company's net sales represented by certain income and expense items in the
Company's Consolidated Statements of Operations.
For the Quarter Ended
-----------------------------
April 5, March 30,
1997 1996
--------- -----------
Successor Predecessor
Company Company
--------- -----------
Net Sales 100.0% 100.0%
Cost of Good Sold 74.1 73.9
----- -----
Gross Profit 25.9 26.1
Selling, General and
Administrative Expenses 14.3 18.7
Amortization of Goodwill 2.0 -
----- -----
Income from Operations 9.6 7.4
Interest Expense (10.1) -
Interest Income .5 .1
Other Income, net .5 .2
----- -----
Income before provision
for income taxes .5 7.7
Provision for Income Taxes 1.3 3.0
----- -----
Net (Loss) Income (.8)% 4.7%
===== =====
Net sales for the first quarter of 1997 increased by $3.9 million, or 9.5%, from
the same period in 1996. The net sales increase for the quarter resulted
primarily from increased water systems sales of $1.9 million due to softness in
the previous year's quarter in the domestic water systems market and increased
sales of domestic disposable containers of $1.6 million compared to the first
quarter 1996.
The gross profit in the first quarter increased by $1.0 million or 9.3% from the
previous year and the margin percentage decreased to 25.9% of net sales in 1997
from 26.1% in 1996. The gross profit percentage was unfavorably affected by
start-up costs associated with the new Singapore production facility and
increased raw material costs.
Selling, general and administrative expenses decreased $1.3 million or 16.9% to
$6.4 million in the first quarter of 1997, and as a percentage of net sales was
14.3% in 1997 and 18.7% in 1996. Expenses decreased primarily due to reductions
in corporate overhead and restructuring of the Company's general and
administrative staff, as part of the Company's new business strategy.
(10)
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AMTROL INC. AND SUBSIDIARIES
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RESULTS OF OPERATIONS (CONT'D)
- ------------------------------
Amortization expense of $.9 million results from amortization of goodwill
recorded as part of purchase accounting in connection with the Merger.
Interest expense of $4.5 million reflects the Company's higher levels of debt
related to the financing of the Merger.
Net (loss) for the period was $.3 million, a decrease in income of $2.3 million
as the increase in operating income was more than offset by the increase in
interest expense.
INFLATION
- ---------
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working Capital at April 5, 1997 was $35.5 million and the ratio of current
assets to current liabilities was 2.3 to 1.0. This compares with working capital
of $35.2 million and a current ratio of 2.5 to 1.0 at December 31, 1996.
The Company experienced an increase in its Accounts Receivable balance due to
the increased level of sales activity when compared to the fourth quarter of
1996. Inventories increased from year end due to seasonality and increased
inventory service levels to provide improved customer service.
During the three months ended April 5, 1997, the Company used cash flows from
operating activities of $3.2 million. During this same period, the Company
invested $2.2 million, net, in machinery and equipment and repaid debt of $.2
million. As a result of the foregoing, the Company's cash balance decreased by
$5.5 million.
The Company's total capital expenditures for 1997 are projected to be $7.0
million.
In connection with the Merger, AMTROL issued $115.0 million of Senior
Subordinated Notes due 2006 (the "Notes") issued under an Indenture dated as of
November 13, 1996. The Notes are unsecured obligations of AMTROL. The Notes bear
interest at a rate of 10.625% per annum and are payable semi-annually on each
June 30 and December 31 commencing on June 30, 1997. In addition, on or prior to
December 31, 1999, the Company may use the net cash proceeds of one or more
public equity offerings to redeem up to 35% of the aggregate principal amount of
the Notes originally issued at a redemption price of 110.625% of the principal
amount thereof plus accrued interest to the date of redemption. Upon a "Change
of Control" (as defined in the Indenture), each Note holder has the right to
require the Company to repurchase such holder's Notes at a purchase price of
101% of the principal amount plus accrued interest. The Indenture
(11)
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AMTROL INC. AND SUBSIDIARIES
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LIQUIDITY AND CAPITAL RESOURCES (CONT'D.)
- -----------------------------------------
contains affirmative and negative covenants and restrictions similar to those
required under the terms of the Bank Credit Agreement discussed below. As of
April 5, 1997, AMTROL is in compliance with the various covenants of the
Indenture.
The Company has a substantial amount of indebtedness. The Company intends to
fund its future working capital expenditures and debt service requirements
through cash flows generated from operations (including the results of
significantly reduced operating expenses) and borrowings under the revolving
credit facility (the "Revolving Credit Facility") provided under the Bank Credit
Agreement. Upon consummation of the Merger on November 13, 1996, the Company
became party to the Bank Credit Agreement. The Bank Credit Agreement provides
for $45.0 million of senior term loans (the "Term Loans") and a $30.0 million
Revolving Credit Facility. A portion ($20.0 million) of the Term Loans (the
"Trance A Term Loans") will mature five and one-half years after the effective
date of the Merger, with quarterly amortization payments during the term of such
loans. The remainder ($25.0 million) of the Term Loans (the "Tranche B Term
Loans") will mature seven and one-half years after the effective date of the
Merger, with nominal quarterly amortization prior to the maturity of the Tranche
A Term Loans and with the remaining amounts amortizing on a quarterly basis
thereafter. The Revolving Credit Facility includes a sublimit providing for up
to $20.0 million of availability on a revolving credit basis to finance
permitted acquisitions. The commitments under the Revolving Credit Facility and
the acquisition sublimit will reduce by $5.0 million in the fourth year and
$10.0 million in the fifth year after the effective date of the Merger. The
Revolving Credit Facility will mature five and one-half years after the
effective date of the Merger. The Bank Credit Facility is secured by
substantially all assets of the Company and its subsidiaries.
Management believes that cash generated from operations, together with
borrowings available under the Revolving Credit Facility, will be sufficient to
meet the Company's working capital and capital expenditure needs in the
foreseeable future. The Company may consider other options available to it in
connection with funding future working capital and capital expenditure needs,
including the issuance of additional debt and equity securities.
The Company has entered into an agreement to sell all of the assets, subject to
all liabilities, of its American Granby Inc. subsidiary. It expects to apply
the net proceeds of the sale, estimated at between $4.8 and $5.3 million, to the
repayment of debt and to fund future growth.
(12)
15
AMTROL INC. AND SUBSIDIARIES
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PART II
-------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
(13)
16
AMTROL INC. AND SUBSIDIARIES
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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.
AMTROL INC.
Date: May 20, 1997 By: /s/ John P. Cashman
----------------------- ----------------------------
John P. Cashman
Chairman, President and
Chief Executive Officer
Date: May 20, 1997 By: /s/ Edward J. Cooney
----------------------- ----------------------------
Edward J. Cooney
Senior Vice President
Chief Financial Officer
(14)