1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: July 4, 1998
------------
Commission file number: 0-20328
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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 July 4, 1998
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AMTROL INC. AND SUBSIDIARIES
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FORM 10-Q FOR THE QUARTER ENDED JULY 4, 1998
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets -
July 4, 1998 and December 31, 1997 2
Consolidated Statements of Operations -
For the Quarter and Six Months Ended
July 4, 1998 and July 5, 1997 3
Consolidated Statement of Shareholders' Equity -
For the Six Months Ended July 4, 1998 4
Consolidated Statements of Cash Flows -
For the Six Months Ended July 4, 1998 and
July 5, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II. OTHER INFORMATION
Signatures 20
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
ASSETS
PRO FORMA
REPORTED BASIS(a)
------------------------- ---------
JULY 4, DECEMBER 31, JULY 4,
1998 1997 1998
-------- ----------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 702 $ 544 $ 702
Accounts receivable, less allowance
for doubtful accounts 37,798 30,180 37,798
Inventories 28,286 31,285 28,286
Prepaid income taxes 2,444 2,495 2,444
Prepaid expenses and other 2,348 1,412 2,348
Assets held for sale 1,533 1,533 1,533
-------- -------- --------
Total current assets 73,111 67,449 73,111
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 50,635 45,687 50,635
OTHER ASSETS:
Goodwill 174,453 169,784 174,453
Financing costs 7,240 7,762 7,240
Deferred income taxes 3,611 419 3,611
Other 642 1,899 642
-------- -------- --------
185,946 179,864 185,946
-------- -------- --------
$309,692 $293,000 $309,692
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,380 $ 3,498 $ 1,711
Notes payable to banks 6,327 4,397 6,327
Accounts payable 23,121 15,718 23,121
Accrued expenses 15,132 15,779 15,132
Accrued interest 1,101 608 1,101
Accrued income taxes 1,276 3,073 1,276
-------- -------- --------
Total current liabilities 50,337 43,073 48,668
-------- -------- --------
LONG TERM DEBT, LESS CURRENT MATURITIES 202,002 184,164 183,171
OTHER NONCURRENT LIABILITIES 9,031 6,659 9,031
SHAREHOLDERS' EQUITY
Capital stock $.01 par value - authorized
1,000 shares, 100 shares issued -- -- --
Additional paid-in capital 69,326 69,326 89,826
Retained deficit (20,449) (9,937) (20,449)
Accumulated other comprehensive loss (555) (285) (555)
-------- -------- --------
Total shareholders' equity 48,322 59,104 68,822
-------- -------- --------
$309,692 $293,000 $309,692
======== ======== ========
(a) The pro forma balance sheet gives retroactive effect to a July 31, 1998
capital contribution and repayment of long term debt of $20.5 million as
though these transactions had occurred on July 4, 1998 (See Note 6). This
pro forma balance sheet is presented for informational purposes only.
The accompanying notes are an integral part of these consolidated
financial statements.
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS)
QUARTER ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 4, JULY 5, JULY 4, JULY 5,
1998 1997 1998 1997
-------- ------- -------- -------
NET SALES $ 50,935 $43,510 $ 99,351 $88,545
Cost of goods sold 40,148 32,524 76,922 65,883
Provision for abnormal warranty costs 4,500 -- 4,500 --
-------- ------- -------- -------
TOTAL COST OF GOODS SOLD 44,648 32,524 81,422 65,883
GROSS PROFIT 6,287 10,986 17,929 22,662
OPERATING EXPENSES
Selling, general and
administrative 6,933 6,257 13,364 12,675
Plant closing and
reorganization costs 4,450 -- 4,450 --
Management restructuring 3,500 -- 3,500 --
Amortization of goodwill 1,223 937 2,319 1,875
-------- ------- -------- -------
(Loss) income from operations (9,819) 3,792 (5,704) 8,112
OTHER INCOME (EXPENSE):
Interest expense (5,267) (4,418) (10,466) (8,947)
Interest income 42 56 74 290
License and distributorship fees 68 60 98 110
Other, net 323 (184) 524 (11)
-------- ------- -------- -------
Loss before (benefit)
provision for income taxes (14,653) (694) (15,474) (446)
(BENEFIT) PROVISION FOR
INCOME TAXES (5,100) 209 (4,962) 797
======== ======= ======== =======
NET LOSS $ (9,553) $ (903) $(10,512) $(1,243)
======== ======= ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS )
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID - IN RETAINED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS
------ ---------- --------- -------------
BALANCE, December 31, 1997 -- $69,326 $( 9,937) $(285)
Net Loss -- -- (10,512) --
Currency Translation Adjustment -- -- -- (270)
==== ======= ======== =====
BALANCE, July 4, 1998 -- $69,326 $(20,449) $(555)
==== ======= ======== =====
The accompanying notes are an integral part of these consolidated
financial statements.
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED
-----------------------
JULY 4, JULY 5,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(10,512) $ (1,243)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation 3,516 2,854
Amortization 2,892 2,316
Provision for losses on accounts receivable 94 105
Non-cash charges 11,600 --
(Gain) loss on sale of fixed assets (142) 2
Changes in operating assets and liabilities (11,872) (6,203)
-------- --------
Net cash used in operating activities (4,424) (2,169)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of NOVA, net of cash acquired (5,855) --
Acquisition of Alfa, net of cash acquired -- (25,500)
Proceeds from sale of fixed assets 642 681
Capital expenditures (7,342) (4,041)
-------- --------
Net cash used in investing activities (12,555) (28,860)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (10,689) (298)
Issuance of debt 27,829 20,000
Deferred installment finance and acquisition costs -- 7,000
-------- --------
Net cash provided by financing activities 17,140 26,702
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
161 (4,327)
Effect of exchange rate changes on cash and cash equivalents (3) --
CASH AND CASH EQUIVALENTS, beginning of period 544 6,383
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 702 $ 2,056
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
1. BASIS OF PRESENTATION
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 10-K.
2. 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.
3. SIGNIFICANT ACCOUNTING POLICIES
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired in connection with the 1996 acquisition of the
Company by affiliates of the Cypress Group L.L.C. (approximately $145
million), the 1997 acquisition of Petroleo Mecanica Alfa, S.A. ("Alfa")
(approximately $22 million) and the 1998 acquisition of NOVA
Wassererwarmer GmbH ("NOVA") (approximately $7 million) and is included
in other assets. Goodwill is being amortized up to 40 years.
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other
assets and are amortized over the life of the related debt using the
effective interest method. Amortization of deferred financing costs is
included in interest expense.
4. INVENTORIES
Inventories are stated at the lower of cost or market and were as
follows:
July 4, 1998 December 31, 1997
------------ -----------------
(in thousands)
Raw Materials and Work in Process $17,333 $13,670
Finished Goods 10,953 17,615
------- -------
$28,286 $31,285
======= =======
Inventories valued under the last-in, first-out (LIFO) cost method
comprised approximately 51.1% of the July 4, 1998 totals and 68.2% of
the December 31, 1997 totals.
5. LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
The Bank Credit Agreement (the "Agreement") between the Company and a
syndicate of lenders provides for secured borrowings 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 consisting of a five and one-half year Tranche A Term
Loan and a seven and one-half year Tranche B Term Loan (collectively,
the Term Loans). In addition, the Company has 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.
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
On July 31, 1998, the Company amended the Agreement to allow for an
early repayment of a portion of the principal outstanding and to modify
certain loan agreement covenants to be more in line with the Company's
business plans. In connection with this amendment, the Company repaid
borrowings of $20.5 million. The following table gives pro forma effect
to the repayment as if it occurred on July 4 1998:
Pro Forma
July 4,1998 Repayment July 4, 1998
----------- --------- ------------
Revolving Credit Facility $ 20,700 $11,800 $ 8,900
Tranche A Term Loan 18,900 8,700 10,200
Tranche B Term Loan 44,468 -- 44,468
Senior Subordinated Notes 115,000 -- 115,000
Other 6,314 -- 6,314
-------- ------- --------
Total 205,382 20,500 184,882
Less current maturities 3,380 -- 1,711
-------- ------- --------
Total long term debt $202,002 $20,500 $183,171
======== ======= ========
Under the terms of the Agreement, as amended on July 31, AMTROL is
required to comply, and is in compliance, with certain financial
covenants and restrictions as of July 4, 1998.
6. SHAREHOLDERS' EQUITY
On July 31, 1998, the Cypress Group L.L.C. and members of senior
management contributed an additional $20.5 million of new equity into
the Company. The additional capital contribution primarily was used to
pay down Revolving Loans and outstanding Term A Loans under the Credit
Agreement. The pro forma balance sheet gives effect to this capital
contribution and debt repayment as if these transactions had occurred
on July 4, 1998.
7. PLANT CLOSING, REORGANIZATION AND RESTRUCTURING CHARGES
The Company closed its Nashville, Tennessee production facility in
December 1997 and transferred certain production lines to its West
Warwick, Rhode Island facility. Costs involved in closing the Nashville
facility and starting production in West Warwick have been higher than
anticipated due to unexpected retrofitting and reconditioning required
for the relocated equipment, damage to equipment during shipment, and
delays in preparing the Nashville building for sale. During the second
quarter of 1998, the Company recorded charges relating to the
incremental costs associated with the Nashville closure and production
relocation approximating $6.0 million (including $1.5 million of
production inefficiencies included in cost of goods sold). In addition,
the Company recorded management restructuring charges of $3.5 million
in connection with
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
the discontinuation and reduction of certain product lines and a
reorganization of its management group.
The Company has been experiencing an unusually high level of product
returns for a particular product relating to a 1995-1996 manufacturing
design problem. Actions taken by the Company to mitigate the level of
returns have not reduced the return rate to the extent expected.
Accordingly, the Company recorded an additional loss provision of $4.5
million for abnormal warranty costs relating to this product.
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 1998 between
the provision computed using the 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.
9. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Statement
130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of this Statement
had no impact on the Company's net loss or shareholders' equity.
Statement 130 requires certain items which previously had been reported
separately in shareholders' equity to be included in other
comprehensive income. For the Company, the only such item was the
foreign currency cumulative translation adjustment. Prior year
financial statements have been reclassified to conform to the
requirements of Statement 130. The total comprehensive loss, which is
comprised of the net loss and the foreign currency translation
adjustment, was as follows:
QUARTER ENDED SIX MONTHS ENDED
----------------- -----------------
JULY 4, JULY 5, JULY 4, JULY 5,
1998 1997 1998 1997
------ ------- ------ ------
Total Comprehensive Loss $9,635 $903 $10,782 $1,243
10. 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. Net sales of $2.9 million and $7.6 million are included
in the quarter and six month periods ended July 5, 1997, respectively.
American Granby did not
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONT.
(UNAUDITED)
generate operating income during these periods. 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.
11. ACQUISITIONS
On June 9, 1998, the Company acquired NOVA Wassererwarmer GmbH ("NOVA")
located in Donaueschingen, Germany for approximately $6.0 million
(United States Dollars) plus assumed debt of $2.0 million. NOVA, which
has annual sales of approximately $15 million, manufactures high-end
residential and commercial water heaters which are marketed primarily
in Germany, Switzerland and Austria. This acquisition provides AMTROL
with expanded manufacturing and distribution capabilities in central
Europe, in addition to the opportunity to offer many of AMTROL's
complementary hydronic heating and water systems products in the
European market. AMTROL assumed immediate management control of NOVA
and, accordingly, the operating results and financial position of NOVA
are included in the consolidated results of operations and consolidated
balance sheets of AMTROL from the acquisition date. The net sales and
operating income of NOVA included in second quarter and year-to-date
1998 operating results amounted to $1.4 million and $0.1 million,
respectively.
On June 30, 1997, the Company acquired all the outstanding capital
shares of Petroleo Mecanica Alfa, S.A. ("Alfa"), a corporation
organized under the laws of Portugal, for $25.5 million (United States
Dollars) plus assumed debt of $8.7 million (the "Acquisition"). Alfa is
a leading designer and manufacturer of reusable steel cylinders used
for the storage and transportation of heating and refrigerant gases and
maintains a production facility in Guimaraes, Portugal. Alfa provides
AMTROL with a significant low cost manufacturing base from which to
serve Europe and the Far East. AMTROL assumed immediate management
control of Alfa and, accordingly, the operating results and financial
position of Alfa are included in the consolidated results of operations
and consolidated balance sheets of AMTROL from July 1, 1997. The
operating results of Alfa included in second quarter and year-to-date
1998 net sales and operating loss in the accompanying consolidated
statement of operations are as follows:
NET OPERATING
SALES INCOME
----- ---------
Quarter ended July 4, 1998 $12.8 $1.5
Six months ended July 4, 1998 $24.0 $3.0
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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 1933 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 NOVA and Alfa Acquisitions; 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.
PLAN OF RESTRUCTURING AND REORGANIZATION
During the second quarter of 1998, the Company adopted a plan of restructuring
and reorganization (the "Plan") to address several adverse developments in its
North American operations. The Plan addresses necessary changes in the Company's
West Warwick, Rhode Island facility to improve the productivity of the
production lines transferred from its Nashville, Tennessee facility in 1997,
discontinuance of certain product lines and recognition of the resulting decline
in inventory value for the products impacted, and replacement of certain senior
executives and others on the management team. The Company also determined that
mitigating actions intended to reduce the level of warranty returns for a
product defect associated with a 1995/1996 manufacturing design flaw have not
reduced returns of this product to the extent expected and that an additional
warranty provision is required. Costs associated with the Plan, manufacturing
inefficiencies related to the relocated production lines, and the additional
warranty provision aggregate $14.5 million and have been reflected in the
accompanying financial statements. These costs are discussed in more detail in
the remainder of this section.
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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.
QUARTER ENDED SIX MONTHS ENDED
---------------- -----------------
JULY 4, JULY 5, JULY 4, JULY 5,
1998 1997 1998 1997
------ ------ ------ ------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 78.9 74.8 77.4 74.4
Provision for Abnormal Warranty Costs 8.8 -- 4.5 --
----- ----- ----- -----
Total Cost of Goods Sold 87.7 74.8 81.9 74.4
Gross Profit 12.3 25.2 18.1 25.6
Selling, General and
Administrative Expenses 13.6 14.4 13.5 14.3
Plant Closing and Reorganization Costs 8.7 -- 4.5 --
Management Restructuring 6.9 -- 3.5 --
Amortization of Goodwill 2.4 2.1 2.3 2.1
----- ----- ----- -----
(Loss) Income from Operations (19.3) 8.7 (5.7) 9.2
Interest Expense (10.3) (10.0) (10.6) (10.1)
Interest Income 0.1 0.1 0.1 0.1
Other Income, net 0.7 (0.3) 0.6 0.1
----- ----- ----- -----
Loss before (Benefit) Provision
for Income Taxes (28.8) (1.5) (15.6) (0.7)
(Benefit) Provision for Income
Taxes (10.0) 0.5 (5.0) 0.9
===== ===== ===== =====
Net Loss (18.8)% (2.0)% (10.6)% (1.6)%
===== ===== ===== =====
Results for the quarter and year-to-date periods were impacted by: (i) the
recognition of various charges (see Plan of Restructuring and Reorganization
above); (ii) the acquisition of Alfa on June 30, 1997 (see Note 11) as operating
results from this subsidiary are included in the quarter and six months ended
July 4, 1998, but are not included in the comparable periods in 1997; (iii) the
acquisition of NOVA on June 9, 1998 (see Note 11) as operating results of this
subsidiary are included in the quarter and six months ended July 4, 1998, but
are not included in the comparable periods in 1997; and (iv) the divestiture of
the American Granby accessory business in May 1997 (see Note 10) as 1998 does
not include the accessory business operating results which are included in the
comparable periods in 1997.
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER ENDED JULY 4, 1998
Net sales for the second quarter increased $7.4 million or 17.1% compared to the
same period in 1997. The quarter-to-quarter comparison is favorably impacted by
the acquisitions of Alfa and NOVA. The impact of these acquisitions was
partially offset by the sale of American Granby, as well as the sale of the
Company's pump business in Peru, Indiana. Excluding the impact of these
transactions, second quarter 1998 net sales would have declined approximately
9.3%. The unseasonably warm winter negatively impacted sales of products to the
plumbing and heating industry while the wet weather delayed the installation of
new water wells. In addition, sales of certain products were adversely impacted
by a manufacturing process problem, which has since been corrected, and by a
supply problem resulting from the relocation of certain production lines from
the Company's Nashville, Tennessee production facility to its West Warwick, R.I.
facility.
The gross profit for the second quarter of 1998, excluding the provision for
abnormal warranty costs, declined from the second quarter of 1997 by $0.2
million or 1.8% with the margin percentage declining to 21.1% from 25.2%. The
decline in the gross margin percentage is mainly attributable to increased
production costs of approximately $1.7 million resulting from difficulties in
achieving efficient production levels on the production lines relocated to West
Warwick from Nashville, the inclusion of Alfa sales in 1998 which generate lower
average margins than other Company products, and competitive pressures in the
gas container market. Increased production costs include higher labor,
maintenance and scrap, as well as factory overhead. Significant efforts are
underway to increase productivity and decrease costs on the relocated lines;
however, the Company does not expect to completely eliminate these
inefficiencies until early 1999.
During the second quarter of 1998, the Company recorded a provision for abnormal
warranty costs of $4.5 million to reflect the incremental warranty costs
associated with a 1995/1996 production problem. The problem has since been
corrected but mitigating actions initiated by the Company have not reduced the
rate of return for these products as expected. Accordingly, the Company
reassessed its potential future liability associated with this product and
determined that an additional warranty provision of $4.5 million was required.
As noted above, the Company transferred certain production lines from its
Nashville facility to its West Warwick, Rhode Island facility in December 1997.
In connection with the relocation, the Company incurred incremental plant
closing costs in the 1998 second quarter of $4.5 million resulting from
unexpected retrofitting and reconditioning required for the relocated equipment,
damage to equipment during shipment, and delays in preparing the Nashville
building for sale. This amount has been reflected in the accompanying financial
statements.
Also as noted above, the Company, in connection with its Plan of Restructuring
and Reorganization, has discontinued certain product lines and has taken actions
to reduce the number of variations offered on many of its products, thereby
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
reducing inventory levels. Certain members of senior management have left the
Company in connection with the Plan. The unrecoverable cost of discontinued
inventory and the cost of programs to reduce the number of product offerings,
combined with the cost of post employment benefits for departing executives,
aggregates $3.5 million and has been reflected in the accompanying financial
statements.
Selling, General and Administrative expenses for the 1998 second quarter
increased approximately $0.7 million from 1997 mainly due to $0.4 million of
expenses incurred in 1998 relating to an acquisition which was not completed;
and the inclusion of Alfa and NOVA in 1998 but not 1997, offset by the inclusion
of American Granby in 1997 but not 1998. As a percentage of net sales (excluding
the cost of the abandoned acquisition), second quarter 1998 selling, general and
administrative expenses declined to 12.8% from 14.4% in 1997.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
in the second quarter of 1998, before costs associated with the restructuring
and reorganization plan, incremental production inefficiencies and the abnormal
warranty provision, amounted to $8.1 million, compared to $6.0 million in the
1997 second quarter, an increase of $2.1 million or 35.0%.
Goodwill amortization expense of $1.2 million for the second quarter of 1998
increased approximately $0.3 million over the second quarter of 1997, and
interest expense of $5.3 million for the second quarter increased $0.8 million
over the comparable 1997 period. The increase in both amortization and interest
expense primarily relates to the acquisition and financing of Alfa.
The pretax loss for the second quarter was $14.6 million, an increase of
approximately $13.9 million over the second quarter 1997 pretax loss. The
increase was largely the result of the costs of the restructuring and
reorganization plan, abnormal warranty provision and manufacturing
inefficiencies associated with the relocated production lines.
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED JULY 4, 1998
Net sales for the six months ended July 4, 1998 increased $10.8 million or 12.2%
compared to the same period in 1997. The year-to-year comparison is favorably
impacted by the acquisitions of Alfa and NOVA which is partially offset by the
sale of American Granby as well as the sale of the Company's pump business in
Peru, Indiana. Excluding the impact of these transactions, net sales would have
declined approximately 8.7%.
The gross profit and margin percentage for the six months ended July 4, 1998,
excluding the provision for abnormal warranty costs, were impacted by the same
factors as those affecting the second quarter. Gross profit declined by $0.2
million or 1.0% in comparison to the same period in 1997. The gross profit
percentage decreased to 22.6% in 1998 from 25.6% in 1997, primarily due to the
inclusion of sales by Alfa and the production inefficiencies associated with the
relocated production lines.
Selling, General and Administrative expenses for the six months ended July 4,
1998 increased approximately $0.7 million from 1997 mainly due to $0.4 million
of expenses incurred in 1998 relating to an acquisition which was not completed;
and the inclusion of Alfa and NOVA in 1998 but not 1997 offset by the inclusion
of American Granby in 1997 but not 1998. As a percentage of net sales (excluding
the cost of the abandoned acquisition), selling, general and administrative
expenses declined to 13.0% year-to-date July 4, 1998 from 14.3% for the same
period in 1997.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the six months ended July 4, 1998, before costs associated with the
restructuring and reorganization plan, incremental production inefficiencies and
the abnormal warranty provision, amounted to $15.2 million, compared to $13.1
million for the six months ended July 5, 1997, an increase of $2.1 million or
16.4%.
For the six months ended July 4, 1998 goodwill amortization expense increased
$0.4 million over the comparable period in 1997 to $2.3 million and interest
expense increased $1.5 million over 1997 to $10.5 million. The increase in both
amortization and interest expense primarily relates to the acquisition and
financing of Alfa.
The year-to-date pretax loss is $15.5 million, an increase of approximately
$15.0 million over the year-to-date 1997 pretax loss. The increase was largely
the result of the costs of the restructuring and reorganization plan, abnormal
warranty provision and manufacturing inefficiencies associated with the
relocated production lines.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working Capital at July 4, 1998 was $22.8 million and the ratio of current
assets to current liabilities was 1.45 to 1.0. This compares with working
capital of $24.4 million and a current ratio of 1.57 to 1.0 at December 31,
1997.
The Company's accounts receivable increased $7.6 million since December 31,
1997, reflecting seasonal demand and the inclusion of Nova, while inventory
declined approximately $3.0 million. Inventory levels, particularly water
systems, were temporarily increased at the end of 1997 in order to assure
uninterrupted supply to customers during the relocation of the Company's
Nashville production lines to its West Warwick, R.I. facility. Accounts payable
and accrued expenses combined increased from the previous year-end by
approximately $6.8 million primarily due to the accrual for the reorganization
and restructuring charge, the addition of NOVA, and the timing of payments.
The Company's cash balance increased $0.2 million to $0.7 million as compared to
the end of 1997. During the quarter ended July 4, 1998, operating activities
used cash of $4.4 million. During this same period, the Company invested $7.3
million in capital assets and increased net borrowings by $17.1 million. In
addition, the Company acquired NOVA on June 9 for approximately $6.0 million in
cash, plus assumed debt of $2.0 million.
The Company's total capital expenditures for 1998 are projected to approximate
$10.5 million. The projection reflects planned capital investments at the Alfa
facility intended to improve productivity at that location.
On July 31, 1998, the Cypress Group L.L.C. and members of senior management
contributed an additional $20.5 million of new equity into the Company. The
additional capital contribution primarily was used to repay borrowings under the
Company's Bank Credit Agreement.
The Bank Credit Agreement (the "Agreement") between the Company and a syndicate
of lenders was amended on July 31, 1998 to allow for the early repayment of a
portion of the principal outstanding and to modify certain loan agreement
covenants to be more in line with the Company's business plans. The Agreement,
as amended, provides for senior term loans (the "Term Loans") and a Revolving
Credit Facility. In connection with the amendment to the Agreement, the company
repaid $20.5 million on August 3, 1998. The term loans outstanding at July 4,
1998 (on a pro forma basis after giving effect to the August 3 repayment) amount
to $54.7 million. A portion ($10.2 million) of the Term Loans (the "Tranche A
Term Loans") will mature five and one-half years after the effective date,
November 13, 1996, with quarterly amortization payments during the term of such
loans. As a result of the August 3, 1998 repayment, no further amortization
payments on Tranche A term loans will be required in 1998. The remainder ($44.5
million) of the Term Loans (the "Tranche B Term Loans") will mature seven and
one-half years after the effective date, with nominal quarterly amortization
prior to the
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
maturity of the Tranche A Term Loans and with the remaining amounts amortizing
on a quarterly basis thereafter. The Revolving Credit Facility of $30.0 million
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. The Revolving Credit Facility will mature five and one-half
years after the effective date. The Bank Credit Agreement is secured by
substantially all assets of the Company and its domestic subsidiaries.
The Company issued $115.0 million of Senior Subordinated Notes due 2006 (the
"Notes") 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 which is 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 Company intends to fund its future working capital expenditures and debt
service requirements through cash flows generated from operations, borrowings
under the revolving credit facility (the "Revolving Credit Facility") provided
under the Bank Credit Agreement and through the use of available cash balances
($0.7 million at July 4, 1998).
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.
INFLATION
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations,
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company is in the process of implementing a new Enterprise Resource Planning
System which, in addition to providing the Company with a wide-range of
operational and administrative efficiencies, will assure that virtually all of
the Company's core business systems are year 2000 compliant. The Company
anticipates the completion of significant portions of this project before the
end of 1998.
The Company will begin to initiate formal communications with all of its
significant suppliers and large customers by the end of 1998 to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues. While there can be no
guarantee that the systems of other companies on which the Company's system rely
will be timely converted and would not have an adverse effect on the Company's
systems, the Company does not believe that its operations are materially
vulnerable to the failure of any vendor or customer to properly address the Year
2000 Issue. The Company has determined it has no exposure to contingencies
related to the Year 2000 issue for the products it has sold.
The date on which the Company believes it will complete the ERP Project are
based on management's best estimates. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated.
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AMTROL INC. AND SUBSIDIARIES
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 13, the Company filed a report on Form 8-K announcing a capital
contribution by its majority shareholder, Cypress Group LLC, and management of
$20.5 million, an amendment to its bank credit agreement, the appointment of
Albert Indelicato as President, Chief Executive Officer and Director, the
appointment of Mr. Andrew Massimilla as Director, and the Company's expectation
of a second quarter charge.
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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: August 17, 1998 By: /s/ Albert D. Indelicato
--------------- -------------------------------
Albert D. Indelicato
President,
Chief Executive Officer and
Director
Date: August 17, 1998 By: /s/ Donald W. Reilly
--------------- -------------------------------
Donald W. Reilly,
Vice President,
Chief Financial Officer and
Treasurer
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