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: OCTOBER 4, 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
-----------------------------------------------
(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 October 4, 1997
2
AMTROL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED OCTOBER 4, 1997
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets -
October 4, 1997 and December 31, 1996 1
Consolidated Statements of Operations -
For the Quarter and Nine Months Ended October 4, 1997
(Successor Company) and September 28, 1996
(Predecessor Company) 2
Consolidated Statement of Shareholders' Equity -
For the Nine Months Ended October 4, 1997 3
Consolidated Statements of Cash Flows -
For the Nine Months Ended October 4, 1997
(Successor Company)
and September 28, 1996 (Predecessor Company) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K 16
Signatures 17
3
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS )
ASSETS
OCTOBER 4, DECEMBER 31,
1997 1996
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,636 $ 6,383
Accounts receivable, less allowance for doubtful accounts 32,508 21,861
Accounts receivable - tax refund. 549 2,000
Inventories 26,667 24,783
Prepaid income taxes 1,734 1,734
Prepaid expenses and other 912 691
Assets held for sale 846 1,500
-------- --------
Total current assets 69,852 58,952
-------- --------
Net Property, Plant and Equipment 48,272 36,889
OTHER ASSETS:
Cash surrender value of officers' life insurance 506 1,614
Goodwill 167,882 147,756
Financing Costs 7,722 8,387
Other 1,417 1,285
-------- --------
177,527 159,042
-------- --------
$295,651 $254,883
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term debt $4,849 $825
Accounts payable 13,617 5,794
Accrued expenses 13,627 14,472
Accrued interest 3,964 2,232
Accrued income taxes 1,757 582
-------- --------
Total current liabilities 37,814 23,905
-------- --------
LONG TERM DEBT, LESS CURRENT INSTALLMENTS 182,546 159,175
-------- --------
OTHER NONCURRENT LIABILITIES 12,211 4,544
-------- --------
DEFERRED INCOME TAXES 224 222
-------- --------
SHAREHOLDERS' EQUITY:
Common stock $.01 par value- Authorized-1,000 shares
Issued-100 shares. -- --
Additional paid-in capital 69,326 69,326
Retained earnings (6,470) (2,289)
-------- --------
Total shareholders' equity 62,856 67,037
-------- --------
$295,651 $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 FOR THE NINE MONTHS ENDED
----------------------------- ---------------------------
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
1997 1996 1997 1996
(SUCCESSOR (PREDECESSOR (SUCCESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY) COMPANY)
---------- ------------- ---------- -------------
Net sales $48,166 $45,400 $136,711 $134,816
Cost of goods sold 35,905 32,852 101,788 98,018
------- ------- -------- --------
Gross profit 12,261 12,548 34,923 36,798
Selling 3,378 4,363 10,265 12,420
General and administrative 3,270 3,129 9,058 10,373
Plant Closing Costs 2,500 -- 2,500 --
Amortization of Goodwill 1,035 -- 2,910 --
------- ------- -------- --------
Income from operations 2,078 5,056 10,190 14,005
Interest expense (4,949) (105) (13,896) (149)
Interest income 55 20 345 180
License and distributorship fees 80 50 190 156
Other, net 297 37 286 84
------- ------- -------- --------
Income (loss) before provision
for income taxes (2,439) 5,058 (2,885) 14,276
Provision for income taxes 456 1,947 1,253 5,496
------- ------- -------- --------
Net (loss) income ($2,895) $ 3,111 ($4,138) $ 8,780
======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
(2)
5
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)
Currency Conversion Loss (43)
Net Loss. - (4,138)
===== ====== ======
BALANCE, October 4, 1997 - 69,326 (6,470)
===== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
(3)
6
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
FOR THE NINE MONTHS ENDED
OCTOBER 4, SEPTEMBER 28,
1997 1996
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY)
---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income ($4,138) $ 8,780
Adjustments to reconcile net (loss) income to net cash used by
operating activities -
Depreciation 4,394 3,932
Amortization 3,782
Provision for losses on accounts receivable 207 181
Loss on sale of fixed assets 2 92
Changes in assets and liabilities 2,637 (6,431)
-------- -------
Net cash provided by operating activities 6,884 6,554
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Alfa (22,786)
Investment in Alfa net non-cash assets (4,173)
Proceeds from sale of fixed assets 681 1,991
Capital expenditures (6,061) (8,053)
-------- -------
Net cash used in investing activities (32,339) (6,062)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt (1,292)
Repayment of short term debt (3,500)
Issuance of short term debt 20,000 3,500
Deferred installment finance and acquisition costs 7,000
Cash dividends (6,321)
Issuance of common stock - exercise of stock options 188
Repurchase of treasury stock (15)
-------- -------
Net cash provided by (used) in financing 25,708 (6,148)
activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 253 (5,656)
CASH AND CASH EQUIVALENTS, beginning of period 6,383 9,078
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 6,636 $ 3,422
======== =======
CASH PAID FOR:
Interest $ 11,112 $ 121
Income taxes $ 36 $ 4,258
The accompanying notes are an integral part of these consolidated financial
statements.
(4)
7
AMTROL INC. AND SUBSIDIARIES
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(UNAUDITED)
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 (approximately $146
million) and the Alfa Acquisition (approximately $22 million) and is
included in other assets. Goodwill is being amortized over 40 years.
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)
9
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(UNAUDITED)
6. INVENTORIES
Inventories are stated at the lower of cost or market and were as
follows:
OCTOBER 4, 1997 DECEMBER 31, 1996
--------------- -----------------
(in thousands)
Raw Materials and Work in Process $ 8,704 $ 9,429
Finished Goods 17,581 15,354
------- -------
$26,667 $24,783
======= =======
Inventories valued under the last-in, first-out (LIFO) cost method
comprised approximately 62.4% of the October 4, 1997 totals and 60.5 %
of the 1997 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).
On June 30, 1997, the Company borrowed $20.0 million under the
Revolving Credit Facility to finance the Alfa Acquisition (see Note
10).
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, which is 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 October 4, 1997.
(7)
10
AMTROL INC. AND SUBSIDIARIES
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.
9. SALE OF ASSETS
In May 1997, the Company sold all of the assets, subject to
substantially all liabilities, of its American Granby Inc. subsidiary.
Accordingly, the results of American Granby are included in the
accompanying consolidated statements of operations for the first five
months of 1997 as compared to the entire nine month period in 1996. Net
sales and operating income included in the accompanying consolidated
statements are as follows:
QUARTER ENDED NINE MONTHS ENDED
October 4, September 28, October 4, September 28,
1997 1996 1997 1996
---------- ------------- ---------- -------------
Net Sales $-- $4.8 $7.6 $15.4
Operating Income -- -- -- .2
In May 1997, the Company sold its Peru, Indiana production facility and
the related pump business. AMTROL transferred certain production
activities performed in Peru to the Company's West Warwick, RI
facility. The Company believes that the operational efficiencies gained
through production consolidation will offset lost contribution from the
pump business.
The Company utilized the net proceeds of the sales of approximately
$6.0 million to fund seasonal working capital demands as well as the
Alfa Acquisition.
10. ACQUISITION
On June 30, 1997, the Company entered into a Promissory Agreement and a
Complementary Document to the Promissory Agreement (collectively, the
"Purchase Agreements") to acquire all the outstanding capital shares of
Petroleo Mecanica Alfa, S.A., a corporation organized under the laws of
Portugal ("Alfa").
Alfa is a leading designer and manufacturer of reusable steel gas
cylinders used for heating and refrigerant gases and maintains a
production facility in Guimaraes, Portugal. AMTROL expects to integrate
Alfa into its existing business of manufacturing and distributing water
and HVAC systems. This will provide a significant low cost
manufacturing base for AMTROL products for distribution in Europe and
the Far East.
(8)
11
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(UNAUDITED)
The agreement is for an aggregate purchase price of $25,500,000 (in
United States dollars). AMTROL assumed immediate management control of
Alfa (the "Acquisition") and, accordingly, the consolidated balance
sheet of AMTROL as of October 4, 1997 reflects the balances of Alfa as
of such date. AMTROL paid $20 million of the purchase price on June 30,
1997 from borrowings available under AMTROL's existing credit facility.
The balance of $5.5 million, which is reflected in Other Non-current
Liabilities on the balance sheet, is expected to be paid in December
1997 and will be funded by cash provided from working capital. The
Acquisition is subject to, and has received, approvals required under
Portuguese laws governing concentration of industries and free
competition.
The operating results of Alfa are included in the third quarter and
year-to-date sales and operating income in the accompanying financial
statements and amounted to $7.8 million and $.8 million, respectively.
11. PLANT CLOSING
In September 1997, the Company ceased operations at its Singapore
production facility. The Company plans to relocate its production of
non-returnable chemical containers to other facilities, including its
newly acquired "Alfa" facility in Guimaraes, Portugal. The Company's
third quarter and year-to-date results include a pre-tax charge to
operating expenses of $2.5 million in connection with the closure. At
October 4, 1997, the $2.5 million charge is included in accrued
expenses on the consolidated balance sheet.
(9)
12
AMTROL INC. AND SUBSIDIARIES
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 rationalize its
manufacturing operations and improve plant productivity will be successful.
Other significant potential risks and uncertainties include the following: risks
associated with indebtedness; uncertainties of its acquisition strategy,
including the successful integration of the Alfa Acquisition; 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 effects of economic and regulatory conditions
on sales; and risks associated with environmental matters.
The consolidated balance sheet of the Company at October 4, 1997 reflects
allocation of the purchase price to the assets acquired in the Merger and
reflects the balances of Alfa as of such date. Operating results subsequent to
the Merger are comparable to prior periods, with the exception of depreciation,
interest expense and amortization of intangible assets, the sale of the
Company's American Granby accessory business and the acquisition of the Alfa
subsidiary.
(10)
13
AMTROL INC. AND SUBSIDIARIES
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 For The Nine Months Ended
Oct.4, 1997 Sept. 28, 1996 Oct. 4, 1997 Sept. 28, 1996
Successor Predecessor Successor Predecessor
Company Company Company Company
----------- -------------- ------------ --------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Good Sold 74.5 72.4 74.5 72.7
----- ----- ----- -----
Gross Profit 25.5 27.6 25.5 27.3
Selling, General and
Administrative Expenses 13.8 16.5 14.1 16.9
Plant Closing Costs 5.2 -- 1.8 --
Amortization of Goodwill 2.1 -- 2.1 --
----- ----- ----- -----
Income from Operations 4.4 11.1 7.5 10.4
Interest Expense (10.3) (.2) (10.2) (.1)
Interest Income .1 -- .3 .1
Other Income, net .8 .2 .3 .2
----- ----- ----- -----
Income before provision
for income taxes (5.0) 11.1 (2.1) 10.6
Provision for Income Taxes 1.0 4.3 .9 4.1
----- ----- ----- -----
Net (Loss) Income (6.0)% 6.8% (3.0)% 6.5%
===== ===== ===== =====
Results for the quarter and year-to-date periods were impacted by: (i) the
acquisition of Alfa on June 30, 1997 (see Note 10) as sales and income from this
subsidiary were included in the quarter and year-to-date periods in 1997, but
were not included in the comparable period in 1996; (ii) the divestiture of the
American Granby accessory business in May 1997 (see Note 9) as 1997 did not
include sales and income from the accessory business subsequent to May which
were included in the comparable period in 1996; and (iii) the closing of the
Company's Singapore production facility in the third quarter which resulted in a
charge of $2.5 million to operating expenses (See Note 11).
Net third quarter sales increased $2.8 million or 6.1% compared to the
comparable 1996 period. The quarter-to-quarter comparison is affected by the
acquisition of Alfa and the sale of American Granby, as well as the sale of the
Company's pump business at the Peru facility. Excluding the results of these
businesses, sales would have increased approximately 1%. Container product sales
increased approximately $.9 million or 11% in the 1997 third quarter as compared
to 1996. Sales of the Company's water systems products and plumbing and heating
products in the third quarter were essentially even with the 1996 period, after
giving effect to the sale of the Company's pump business in May 1997.
(11)
14
AMTROL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONT'D)
The gross profit in the third quarter decreased by $0.3 million or 2.3% from the
previous year, while the margin percentage decreased to 25.5% of net sales in
1997 from 27.6% in 1996. The inclusion of the operating results for the Alfa
subsidiary in the consolidated results for the quarter deflated the margin
percentage as the margins generated on reusable steel gas cylinders produced at
this facility are lower than many other Amtrol products. Excluding the results
of the new Alfa subsidiary, the margin percentage for the third quarter would
have been 27.3%. The gross profit percentage was unfavorably affected by
unanticipated high costs associated with the new Singapore production facility
through the end of August. Also, during 1997 the Company experienced higher
product returns than normal, caused by a manufacturing process problem which has
since been corrected. The Company believes these incremental product returns
will diminish significantly by the end of 1997. In addition, while the Company
believes it has successfully maintained market volume and position in the
chemical container business, competitive pricing actions as well as the movement
of chemical container customers towards long-term single source contracts, have
adversely affected margins.
Net sales for the nine months ended October 4, 1997 increased $1.9 million or
about 1% compared to 1996. The year-to-year comparison is affected by the
acquisition of Alfa and the sale of American Granby, as well as the sale of
the Company's pump business at the Peru facility. Excluding the results of these
businesses, sales would have increased approximately 2%. Sales of water systems
products were even with last year, while sales of container products and
plumbing and heating products increased.
The gross profit and margin percentage for the nine months ended October 4, 1997
were impacted by the same business influences which affected the quarterly
results. Gross profit decreased by $1.9 million or 5.1% as compared to the same
period in 1996, and the gross profit percentage decreased to 25.5% of net sales
in 1997 from 27.3% in 1996. Excluding the results of the new Alfa subsidiary,
the margin percentage for the nine month period would have been 26.1%.
Selling, General and Administrative expenses decreased $.8 million or 11.2% to
$6.6 million in the third quarter of 1997, and as a percentage of net sales was
13.8% in 1997 and 16.5% in 1996. For the first nine months of 1997, Selling,
General and Administrative Expenses decreased by $3.5 million to $19.3 million,
or 14.1% of net sales in 1997 from $22.8 million or 16.9% of net sales in 1996.
In the third quarter and the nine month period, 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.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
in the third quarter of 1997 amounted to $7.7 million compared to $6.5 million
in the 1996 third quarter, an increase of $1.2 million or 18.5%. For the nine
months, EBITDA increased by $2.7 million or 14.9% to $20.8 million, from $18.1
million in 1996.
(12)
15
AMTROL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONT'D)
As discussed in the accompanying financial statements, the Company ceased
operations of its Singapore production facility at the end of August. In
connection with the closure of this facility, the Company recorded a pre-tax
charge of $2.5 million relating to severance, lease termination and other
related costs. The facility had generated losses since it was placed into
production in the fourth quarter of 1996 due to difficulties in sourcing quality
steel and high fixed costs in relation to production volume. The Company is
currently relocating production to other facilities, including the recently
acquired Alfa facility in Portugal, and continues to serve the needs and
requirements of its Asia/Pacific customers without interruption.
Amortization expense of $1.0 million for the second quarter and $2.9 million for
the nine months of 1997 results from amortization of goodwill recorded as part
of purchase accounting in connection with the Merger and the acquisition of
Alfa.
Interest expense of $4.9 million for the third quarter and $13.9 million for the
nine month period reflects the Company's higher levels of debt related to the
financing of the Merger and the Alfa acquisition.
Net (loss) for the third quarter was $2.9 million, a decrease in income of $6.0
million compared to 1996. The third quarter net loss includes the $2.5 million
pre-tax charge relating to the closure of the Singapore facility as well as the
higher amortization and interest expense of $5.9 associated with the Merger and
the Alfa acquisition.
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 October 4, 1997 was $32.0 million and the ratio of current
assets to current liabilities was 1.85 to 1.0. This compares with working
capital of $35.1 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, reflecting seasonal demand, when compared
to the fourth quarter of 1996, and to the inclusion of receivables from the
recently acquired Alfa subsidiary. Inventories, as well as accounts payable,
also increased from the previous year end due to the inclusion of the Alfa
subsidiary.
The Company's cash balance increased $.3 million compared to the end of 1996.
During the nine months ended October 4, 1997, operating activities provided cash
of $6.9 million. During this same period, the Company invested $5.4 million,
net, in machinery and equipment and repaid debt of $1.3 million. Proceeds from
the May 1997 sale of the American Granby accessories business approximated $6.0
million. These funds were used to partly fund the acquisition of Alfa in June
1997.
(13)
16
AMTROL INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT'D.)
The Company's total capital expenditures for 1997 are projected to be $8.0
million. The projection reflects planned capital investments at the new Alfa
facility intended to exploit opportunities for improving productivity at that
location.
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 contains
affirmative and negative covenants and restrictions similar to those required
under the terms of the Bank Credit Agreement discussed below. As of October 4,
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
initiatives to significantly reduce operating expenses), borrowings under the
revolving credit facility (the "Revolving Credit Facility") provided under the
Bank Credit Agreement and through the use of available cash balances ($6.6
million at October 4, 1997). (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 "Tranche 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. On June 30, 1997, the Company borrowed $20
million, representing the entire acquisition sublimit under the Revolving Credit
Facility, to fund the acquisition of Alfa. 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, November 13, 1996. 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.
(14)
17
AMTROL INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT'D.)
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.
In May 1997, the Company sold all of the assets, subject to substantially all
liabilities, of its American Granby Inc. subsidiary. Also in May 1997, the
Company sold its Peru, Indiana production facility and the related pump
business. AMTROL transferred certain production activities performed in Peru to
the Company's West Warwick, RI facility. The Company believes that the
operational efficiencies gained through production consolidation will offset
lost contribution from the pump business. As discussed previously, the Company
ceased operations of its Singapore Facility at the end of August 1997 and
expects to relocate the production of non-returnable chemical containers to
other facilities, including the newly acquired Alfa facility in Portugal.
(15)
18
AMTROL INC. AND SUBSIDIARIES
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports or exhibits on form 8-K were filed during the period covered by this
report.
(16)
19
AMTROL INC. AND SUBSIDIARIES
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: November 17, 1997 By: s\s John P. Cashman
----------------- -------------------------
John P. Cashman
Chairman, President and
Chief Executive Officer
Date: November 17, 1997 By: s\s Edward J. Cooney
----------------- -------------------------
Edward J. Cooney
Senior Vice President
Chief Financial Officer
(17)