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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21803
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AFTERMARKET TECHNOLOGY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4486486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE OAK HILL CENTER, SUITE 400
WESTMONT, IL 60559
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 455-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$.01 PAR VALUE
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by
non-affiliates of the Registrant (based on the closing price of such stock, as
reported by The Nasdaq National Market, on March 2, 2000) was $88.5 million.
The number of shares outstanding of the Registrant's Common
Stock, as of March 2, 2000, was 20,566,812 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE
ITEM 1. BUSINESS.......................................................1
ITEM 2. PROPERTIES.....................................................12
ITEM 3. LEGAL PROCEEDINGS..............................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................13
ITEM 6. SELECTED FINANCIAL DATA........................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............53
ITEM 11. EXECUTIVE COMPENSATION.........................................56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................62
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................64
FORWARD-LOOKING STATEMENT NOTICE
Certain statements contained in this Annual Report that are not related
to historical results are forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under Item 1. "Business--Certain Factors Affecting
the Company" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Further, certain forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate.
PART I
ITEM 1. BUSINESS
BACKGROUND
Aftermarket Technology Corp. ("ATC") was incorporated under the laws
of Delaware in July 1994 at the direction of Aurora Capital Group to acquire
Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P., Inc. ("HTP"), Mamco
Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM"). Aaron's, HTP, Mamco
and RPM as they existed prior to their acquisition by ATC are hereinafter
collectively referred to as the "Predecessor Companies." Subsequent to these
initial acquisitions, the Company acquired Component Remanufacturing
Specialists, Inc., Mascot Truck Parts Inc. ("Mascot") and King-O-Matic
Industries Limited in 1995, Tranzparts, Inc. ("Tranzparts") and Diverco, Inc.
("Diverco") in 1996, Replacement and Exchange Parts Co., Inc. ("REPCO"), ATS
Remanufacturing ("ATS"), Trans Mart, Inc. ("Trans Mart") and the Metran
companies (Metran Automatic Transmission Parts Corp., Metran Boston, Inc. and
Metran Parts of Pennsylvania, Inc.) ("Metran") in 1997, and the OEM Division
("Autocraft") of The Fred Jones Companies, Inc. (formerly known as Autocraft
Industries, Inc.) in March 1998. At the end of 1997, Diverco, HTP, Mamco,
Metran, REPCO, Trans Mart and Tranzparts were merged together to form ATC
Distribution Group, Inc. RPM was merged into ATC Distribution Group, Inc. at
the end of 1998. In February 1999, ATC sold Mascot. During the fourth quarter
of 1999, ATC Distribution Group acquired substantially all the assets of All
Transmission Parts, Inc. and its affiliate, All Automatic Transmission Parts,
Inc. (collectively "All Trans"). ATC conducts all of its operations through
its wholly-owned subsidiaries and each of their respective subsidiaries.
Throughout this Annual Report, except where the context otherwise requires,
the "Company" refers collectively to ATC and its subsidiaries and the
Predecessor Companies.
On December 20, 1996, ATC consummated an initial public offering of its
Common Stock (the "IPO"). Simultaneous with the consummation of the IPO,
Aftermarket Technology Holdings Corp. ("Holdings"), the sole stockholder of ATC
prior to the IPO, was merged into ATC (the "Reorganization"). Upon the
effectiveness of the Reorganization, each outstanding share of Holdings Common
Stock was converted into one share of ATC Common Stock, and each outstanding
share of Holdings Redeemable Exchangeable Cumulative Preferred Stock was
converted into one share of ATC Redeemable Exchangeable Cumulative Preferred
Stock, which was immediately thereafter redeemed for an amount in cash equal to
$100.00 plus an amount in cash equal to accrued and unpaid dividends on the
Holdings Preferred Stock to the date of the Reorganization.
GENERAL
The Company is a leading remanufacturer and distributor of drivetrain
products used in the repair of vehicles in the automotive aftermarket. The
Company's principal products include remanufactured transmissions, torque
converters, engines, electronic control modules, instrument and display clusters
and radios, as well as remanufactured and new parts for the repair of automotive
drivetrain assemblies. The Company also provides logistics and material recovery
services. The Company has two reportable segments: the Original Equipment
Manufacturer ("OEM") segment and the Independent Aftermarket segment.
The first of these segments consists of four operating units (Aaron's,
Autocraft Industries, Autocraft UK and CRS/ATS) that principally sell
factory-approved remanufactured transmissions directly to OEMs primarily for use
as
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replacement parts by their domestic dealers during the warranty and
post-warranty periods following the sale of a vehicle. The principal customers
for these transmissions are DaimlerChrysler Corporation, Ford Motor Company,
General Motors Corporation and certain foreign OEMs. In addition, the OEM
segment sells select remanufactured engines to DaimlerChrysler and certain
European OEMs (including Ford's European operations), as well as remanufactured
foreign and domestic engines to general repair shops and retail automotive parts
stores.
The Company's Independent Aftermarket segment (the ATC Distribution
Group) primarily sells transmission repair kits, soft parts, remanufactured
torque converters and transmissions and both new and remanufactured hard parts
used in drivetrain repairs to independent transmission rebuilders for repairs
generally during the period following the expiration of the vehicle warranty. To
a lesser extent, the Distribution Group also sells its products to general
repair shops, wholesale distributors and retail automotive parts stores.
In addition to the OEM and Independent Aftermarket segments, the
Company has three "other" operating units. These operating units were acquired
in the Autocraft acquisition: Autocraft Electronics, an automotive electronic
parts remanufacturing and distribution business; Logistics Services, a
warehouse, distribution and turnkey order fulfillment and information services
business for AT&T Wireless Services (the cellular telephone subsidiary of AT&T);
and Material Recovery, a material recovery parts processing and Internet-based
auction business primarily for Ford. None of these operating units meet the
quantitative thresholds for determining reportable segments.
Since its formation, the Company has grown both internally and through
a series of acquisitions at a compound annual revenue growth rate of
approximately 29.1%. The Company believes the key elements of its success are
the quality and breadth of its product offerings and its strong technical
support, rapid delivery time, innovative product development and competitive
pricing. In addition, the Company has benefited from the increasing use of
remanufactured products as the industry recognizes that remanufacturing provides
a higher quality, lower cost alternative to rebuilding the assembly or replacing
it with a new assembly manufactured by an OEM.
The Company's strategy is to continue to grow both internally and
through strategic acquisitions. The Company intends to expand its business by:
(i) increasing penetration of its current customer base; (ii) gaining new OEM
and Independent Aftermarket customers; and (iii) introducing new products to
both existing and new customers. The Company plans to continue to support these
growth strategies through strategic acquisitions in the future.
See "Certain Factors Affecting the Company."
REMANUFACTURING
Remanufacturing is a process through which used assemblies are returned
to a central facility where they are disassembled and their component parts
cleaned, refurbished and tested. The usable component parts are then combined
with new parts in a high volume, precision assembly line or cellular
manufacturing process to create remanufactured assemblies.
When an assembly such as a transmission or engine fails, there are
generally three alternatives available to return the vehicle to operating
condition. The dealer or independent repair shop may: (i) remove the assembly,
disassemble it into its component pieces, replace worn or broken parts with
remanufactured or new components, and reinstall the assembly in the vehicle
("rebuild"); (ii) replace the assembly with an assembly from a remanufacturer
such as the Company; or (iii) in rare instances, replace the assembly with a new
assembly manufactured by the OEM.
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted by vehicle make and model and either placed into
immediate production or stored until needed. In the remanufacturing process, the
cores are evaluated and disassembled into their component parts and the
components that can be incorporated into the remanufactured product are cleaned,
refurbished and tested. All components determined not reusable or repairable are
replaced by other remanufactured or new components. Inspection and testing are
conducted at various stages of the remanufacturing process, and each finished
assembly is tested on equipment designed to simulate performance under operating
conditions. After testing, completed products are then packaged for immediate
delivery or shipped to one of the Company's distribution centers.
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The cores used in the Company's remanufacturing process for sale to its
OEM customers are provided primarily by the OEMs. In the case of OEMs other than
DaimlerChrysler, the dealers return cores to the OEM, which then ships them to
the Company. Chrysler cores are sent to the Company through its central core
return center. See "OEM Customers."
The majority of the cores used in the Company's remanufacturing process
for sale to its non-OEM customers are obtained from customers as trade-ins. The
Company encourages these customers to return cores on a timely basis and charges
customers a supplemental core charge in connection with purchases of engines and
critical hard parts. The customer can satisfy this charge by returning a usable
core or making a cash payment equal to the amount of the supplemental core
charge. If cores are not returned in a timely manner, the Company then must
procure cores through its network of independent core brokers. While core prices
are subject to supply and demand price volatility, the Company believes its
procurement network for cores will provide cores as needed at reasonable prices.
There are three primary benefits of using remanufactured components
rather than rebuilt or new components in repair of vehicles:
- First, costs to the OEM associated with remanufactured assemblies
generally are 50% less than new or dealer-rebuilt assemblies due to the
remanufacturer's use of high volume manufacturing techniques and
salvage methods that enable the remanufacturer to refurbish and reuse a
high percentage of original components.
- Second, remanufactured assemblies are generally of consistent high
quality due to the precision manufacturing techniques, technical
upgrades and rigorous inspection and testing procedures employed in
remanufacturing. The quality of a rebuilt assembly is heavily dependent
on the skill level of the particular mechanic. In addition, the
proliferation of transmission and engine designs, the increasing
complexity of transmissions and engines that incorporate electronic
components and the shortage of highly trained mechanics qualified to
rebuild assemblies are leading to what management believes is a trend
toward the use of remanufactured assemblies for aftermarket repairs.
For warranty repairs, consistent quality is important to the OEM
providing the applicable warranty, because once installed, the
remanufactured product is usually covered by the OEM's warranty for the
balance of the original warranty period.
- Third, replacement of a component with a remanufactured component
generally takes considerably less time than the time needed to rebuild
the component, thereby significantly reducing the time the vehicle is
at the dealer or repair shop and allows the dealer and repair shops to
increase their volume of business.
The Company believes that because of this combination of high quality,
low cost and efficiency, the use of remanufactured assemblies for aftermarket
repairs is growing compared to the use of new or rebuilt assemblies. Although
the primary customers for the Company's remanufactured components have
historically been OEMs, the Company expects the Independent Aftermarket to
increase its use of remanufactured components in the future.
ORIGINAL EQUIPMENT MANUFACTURER SEGMENT
The Company's OEM segment consists of four operating units that
remanufacture and sell transmissions directly to automobile manufacturers. In
addition, the OEM segment sells select remanufactured engines to DaimlerChrysler
and certain European OEMs, including Ford's European operations, as well as
remanufactured foreign and domestic engines to general repair shops and retail
automotive parts stores.
REMANUFACTURED TRANSMISSIONS
The Company remanufactures factory-approved transmissions for warranty
and post-warranty replacement of transmissions for DaimlerChrysler, Ford,
General Motors and several foreign OEMs, including Hyundai, Mitsubishi, Isuzu,
Subaru and Kia, primarily for their United States dealer networks. The number of
transmission models remanufactured by the Company has been increasing to
accommodate the greater number of models currently used in vehicles manufactured
by the Company's OEM customers.
3
REMANUFACTURED ENGINES
The Company remanufactures select factory-approved engine models for
Chrysler vehicles and through the Autocraft Acquisition also operates a facility
in England that remanufactures factory-approved engines for several European
OEMs, including Jaguar and the European divisions of Ford and General Motors.
These engines are used for warranty and post-warranty replacement. The facility
in England also does assembly and modification of new production engines for
certain of its OEM customers.
The Company also remanufactures engines for use as post-warranty
replacements in many domestic and foreign passenger cars and light trucks. In
addition, the Company sources remanufactured engines for other foreign passenger
cars and light trucks from independent suppliers. The Company distributes these
engines through a network of 16 local distribution centers located throughout
the eastern half of the United States. Principal customers include general
repair garages and wholesale distributors.
OEM CUSTOMERS
The Company's largest OEM segment customer is DaimlerChrysler, to whom
the Company supplies remanufactured transmissions and certain remanufactured
engines for use in Chrysler automobiles and light trucks. As a result of the
Autocraft Acquisition, the Company also provides remanufactured components to
several other OEMs including transmissions to Ford and engines to Jaguar, Land
Rover, Aston Martin and the European divisions of Ford and General Motors. The
Company added General Motors as a transmission customer in July 1997 with the
purchase of ATS and expanded its General Motors business with the Autocraft
Acquisition. Products are sold to each OEM pursuant to supply arrangements for
individual transmission or engine models, which supply arrangements typically
may be terminated by the OEM at any time.
OEM segment sales accounted for 52.1%, 52.0% and 54.0% of the Company's
1997, 1998 and 1999 revenues, respectively. Sales to DaimlerChrysler accounted
for 32.0%, 18.2% and 20.5% of the Company's revenues in 1997, 1998 and 1999,
respectively, and sales to Ford accounted for 17.1% and 19.2% of the Company's
revenues in 1998 and 1999, respectively. On a pro forma basis, as if the sale of
Mascot and the acquisitions of Autocraft and All Trans had occurred on January
1, 1998, OEM segment sales would have accounted for approximately 51.7% and
52.5% of pro forma 1998 and 1999 revenues, respectively. Sales to
DaimlerChrysler would have accounted for 16.8% and 19.9% of the total pro forma
revenues in 1998 and 1999, respectively, and sales to Ford would have accounted
for 19.0% and 18.6% of the total pro forma revenues in 1998 and 1999,
respectively.
Over the past 15 years, the Company has developed and maintained strong
relationships at many levels of both the corporate and the factory organizations
of Chrysler (which was merged with Daimler Benz in 1998 to form
DaimlerChrysler). In recognition of the Company's consistently high level of
service and product quality throughout its relationship with DaimlerChrysler, in
each of the seven years prior to and including 1999, the Company has received
the highest award bestowed by Chrysler to its suppliers for which the Company
was eligible. The Company is one of a select group of Chrysler's suppliers to
receive such awards for the seven-year period.
The Company's facilities that remanufacture transmissions for
DaimlerChrysler, Ford and General Motors, as well as certain of its other OEM
segment facilities, have QS-9000 certification, a complete quality management
system developed for DaimlerChrysler, Ford, General Motors and truck
manufacturers who subscribe to the ISO 9002 quality standards. The system is
designed to help suppliers, such as the Company, develop a quality system that
emphasizes defect prevention and continuous improvement in manufacturing
processes. Certain of the Autocraft facilities have also received Ford's Q1
quality certification.
DaimlerChrysler began implementing remanufacturing programs for its
Chrysler transmission models in 1986 and selected the Company as its sole
supplier of remanufactured transmissions in 1989. DaimlerChrysler has advised
the Company that, by implementing a remanufacturing program for Chrysler
vehicles, DaimlerChrysler has realized substantial warranty cost savings,
standardized the quality of its dealers' aftermarket repairs and reduced its own
inventory of replacement parts. Currently, the Company provides all
remanufactured front-wheel-drive transmissions purchased by DaimlerChrysler for
use in Chrysler vehicles. In late 1998, the Company commenced production of
4
remanufactured Chrysler rear-wheel-drive transmissions. The Company presently
does not provide remanufactured transmissions or other components to
DaimlerChrysler's Mercedes Benz division.
Autocraft began remanufacturing transmissions for Ford in 1989 and for
General Motors in 1985. The Company believes that as a result of the acquisition
of Autocraft, the Company provides approximately 85% of the remanufactured
transmissions purchased by Ford and approximately 30% of the remanufactured
transmissions purchased by General Motors.
INDEPENDENT AFTERMARKET SEGMENT
The Company's Independent Aftermarket segment primarily sells
transmission repair kits, soft parts, remanufactured torque converters and
transmissions and both new and remanufactured hard parts used in drivetrain
repairs to independent transmission rebuilders throughout the United States
and Canada. To a lesser extent, these products are also sold to general
repair shops, wholesale distributors and retail automotive parts stores.
The market for parts sales and services for vehicles after their
original purchase has been non-cyclical and has generally experienced steady
growth over the past several years, unlike the market for new vehicle sales.
According to the Automotive Parts & Accessories Association, between 1989 and
1998 (the most recent period for which data is available), estimated
industry-wide revenue for the automobile aftermarket increased from
approximately $104.8 billion to $152.2 billion. This consistent growth is due
principally to the increase in the number of vehicles in operation, the increase
in the average age of vehicles, and the increase in the average number of miles
driven annually per vehicle. The Company competes primarily in the aftermarket
segment for automotive transmissions, engines and other drivetrain related
products, which represents more than $8 billion of the entire automotive
aftermarket.
PRODUCTS
Repair kits sold by the Company consist of gaskets, friction plates,
seals, bands, filters, clutch components and other "soft" parts that are used in
rebuilding transmissions for substantially all domestic and most imported
passenger cars and light trucks. Each kit is designed to include substantially
all of the soft parts necessary for rebuilding a particular transmission model.
Due to its high volume of kit sales, the Company maintains a variety of
strategic supply relationships that enable the Company to purchase components
for its kits at prices that the Company believes are more favorable than those
available to its lower volume competitors. The Company also believes that its
remanufacturing capability provides a cost advantage over some of its
competitors who purchase all their parts from suppliers.
The Company remanufactures torque converters (the coupler between the
transmission and engine) and certain "hard" parts such as planetary gears (speed
regulating devices inside the transmission) and transmission fluid pumps. Many
of the Company's competitors do not distribute as broad a line of hard parts or
remanufacture the hard parts that they distribute. The Company believes these
factors provide it both an availability and cost advantage over many of its
competitors.
The Company's Independent Aftermarket customers typically require
repair kits, torque converters and hard parts in order to complete a vehicle
repair. For this reason, the Company believes that the breadth of its product
line, which enables a customer to obtain all the parts for a repair job from a
single source, gives the Company a competitive advantage. The Company is one of
the few full-line transmission parts suppliers in the industry.
INDEPENDENT AFTERMARKET CUSTOMERS
The Company, through its ATC Distribution Group, supplies transmission
repair kits, soft parts, torque converters and hard parts used in automatic and
manual drive train repairs to independent transmission rebuilders throughout the
United States and Canada. To a lesser extent, the Company also sells to general
repair shops and wholesale distributors. These products are used in the
Independent Aftermarket to rebuild transmissions and other assemblies using
remanufactured and new component parts purchased from a variety of suppliers. In
addition, the Company supplies transmission filter kits to less than 2,000 of
the approximately 40,000 retail automotive parts stores located in the United
States and Canada, which principally sell to "do-it-yourself" customers and
general repair shops.
5
As the number of vehicle models has proliferated and repairs have
become increasingly complex, independent transmission rebuilders and general
repair shops have grown more dependent on their suppliers for technical support
and assistance in managing inventory by delivering product on a just-in-time
basis at competitive prices. To address these needs, the Company maintains more
than 50 distribution centers located in metropolitan areas throughout the United
States and Canada from which the Company provides technical support and a wide
range of drivetrain related products that are delivered on a same-day basis by
trucks or delivery service to customers in and around metropolitan areas and on
a next-day basis by overnight carrier to customers in more remote areas. The
Company believes that its distribution system is the most extensive in the
drivetrain segment of the automotive aftermarket and represents a competitive
advantage for the Company relative to its typically smaller, local competitors.
The Company believes there are opportunities for further geographic penetration
in this relatively fragmented market. See "Business Strategy."
The Company conducts telemarketing that, when coupled with the
Company's next-day delivery strategy to more remote areas, enables the Company
to establish customer relationships in areas that cannot support the costs
associated with setting up and maintaining a distribution center. Additionally,
new customers are developed by the Company's direct sales force operating from
its distribution centers, by advertising in national and local trade
publications, and by participating in various trade shows.
The Company believes it is well positioned within the highly fragmented
aftermarket for drivetrain products as a result of its extensive product line,
diverse customer base and broad geographic presence, with over 50 local
distribution centers throughout the United States and Canada. The Independent
Aftermarket segment accounted for 45.8%, 38.4% and 35.4% of the Company's
revenues in 1997, 1998 and 1999, respectively.
OTHER OPERATING UNITS
The Company's other operating units, acquired as part of the Autocraft
acquisition, were determined not to be reportable segments. The other operating
units consist of an automotive electronic parts remanufacturing and distribution
business, a warehouse, distribution and turnkey order fulfillment and
information services business and a material recovery parts processing and
Internet-based auction business.
Prior to the Autocraft acquisition, the Company's "other" operating
units consisted solely of Mascot, which remanufactured heavy-duty and
medium-duty truck transmissions, differentials and air compressors primarily for
sales to truck dealers in Canada. However, during 1998 the Company decided to
concentrate on the remanufacturing of automobile and light truck drivetrain
components rather than on heavy-duty truck components. For that reason, in
February 1999 the Company sold Mascot to a third party buyer.
AUTOMOTIVE ELECTRONIC COMPONENTS
The automotive electronic components operating unit remanufactures
automotive electronic control modules (which manage various engine functions)
for General Motors, remanufactures and distributes radios and instrument and
display clusters for General Motors and Ford, and remanufactures and distributes
cellular telephones and other cellular products (E.G., navigation systems) for
Ford, General Motors, Audi, Jaguar and Volkswagen.
LOGISTICS SERVICES
The logistics services operating unit provides centralized warehouse,
distribution and turnkey order fulfillment and information services for AT&T
Wireless Services, the cellular telephone subsidiary of AT&T. As part of this
service, the Company handles all warranty-service exchanges and inventory
tracking for AT&T Wireless Services.
MATERIAL RECOVERY
As part of its relationship with Ford, the Company also provides
material recovery services to assist Ford with the management of its dealer
parts inventory. Under this program, Ford dealers send their excess parts
inventory to the Company. The parts are then sorted and disposed of in one of
three ways: useful parts that are needed by other dealers are redistributed;
useful parts that are not needed by other dealers are sold to remanufacturers,
wholesale distributors and
6
other third parties through an innovative on-line Internet auction process; and
useless parts are scrapped. As a result of the introduction of the materials
recovery program, the number of parts that are scrapped has been significantly
reduced to less than 2%.
BUSINESS STRATEGY
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its business by: (i)
increasing penetration of its current customer base; (ii) gaining new OEM and
Independent Aftermarket customers; and (iii) introducing new products to both
existing and new customers.
INCREASING SALES TO EXISTING CUSTOMERS
OEM CUSTOMERS. The Company intends to increase its business with its
existing OEM customers by working with OEMs to increase dealer utilization of
remanufactured transmissions in both the warranty and post-warranty periods. The
Company is working in tandem with OEMs to highlight to dealers the quality and
cost advantages of using remanufactured assemblies versus rebuilding. In
addition, the post-warranty repair market, which the Company believes is
significantly larger than the OEM dealer warranty repair market, presents a
growth opportunity. Currently, the vast majority of post-warranty repairs are
performed in the Independent Aftermarket rather than at OEM dealers. Given the
relatively low cost and high quality of remanufactured components, OEM dealers
can enhance their cost competitiveness compared to independent service centers
through the increased use of remanufactured components as well as providing end
customers with a high quality product. To the extent that OEM dealers increase
their level of post-warranty repairs, the Company is well positioned to
capitalize on this market growth. The Company has introduced a number of new
transmission models and related drivetrain products in the last several years
for its OEM customers.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that it
currently supplies approximately 15% of the remanufactured or new drivetrain
component requirements of its independent transmission rebuilder and general
repair shop customers. The Company believes it is well positioned to expand
sales to these customers through common product identification and numbering in
conjunction with a computer network that electronically links its distribution
centers, enabling the Company to offer its full line of products throughout the
entire Distribution Group.
INTRODUCING NEW PRODUCTS
OEM CUSTOMERS. The Company believes that OEMs recognize that the use of
remanufactured assemblies provide a high quality, lower cost alternative to
rebuilding damaged assemblies or replacing them with new assemblies. For this
reason, the Company believes that OEMs are interested in working with large,
high quality remanufacturers to reduce the OEMs' warranty costs and increase
their parts sales into the post-warranty aftermarket. The Company continues to
work with its OEM customers to identify additional remanufactured products and
services where the Company can provide value to the OEM. In this way, the
Company believes that it will be able to leverage its customer relationships and
remanufacturing competency. In early 2000, the Company was selected by Ford to
supply remanufactured transmissions for use in Ford's new Focus, which is a
global platform, and to supply a new line of Motorcraft-branded remanufactured
transmissions.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
reputation for high quality products and customer service enables it to leverage
its relationships with existing customers to sell additional products. The
Company monitors sales trends and is in frequent communication with customers
regarding potential new products. The Company has begun to offer complete
remanufactured transmissions for sale to its independent transmission rebuilder
customers. In addition, the Company has begun offering new hard parts such as
planetary gears, sun gears and oversized pump gears. In introducing new
products, the Company focuses on components that are difficult to find and
typically require a high rate of replacement. The acquisition of All Trans in
the fourth quarter of 1999 substantially increased the Company's manual
transmission parts product offering, enabling it for the first time to offer
manual transmission parts throughout the Distribution Group.
OTHER. The Company also intends to leverage the capability of its
electronics remanufacturing and distribution business by introducing
remanufactured electronic components to some of its other OEM customers.
7
ESTABLISHING NEW CUSTOMER RELATIONSHIPS
OEM CUSTOMERS. The Company believes that opportunities for growth exist
with several foreign OEMs regarding their United States-based remanufacturing
programs. The Company believes that this represents an opportunity for growth
and is currently working to develop programs with certain of these OEMs.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
product mix and distribution network position it to expand its Independent
Aftermarket customer base in two ways. First, through its telemarketing
capability, the Company expects to reach new Independent Aftermarket customers
in non-metropolitan areas. Second, the Company expects to attract additional
Independent Aftermarket customers with its extensive product offering and
technical support capability.
OTHER. The Company believes that its logistics services business should
be attractive to new customers who recognize that outsourcing this function will
enable them to both focus on their core competencies and have an efficient
product distribution system. The Company also believes that the ability to sell
product via Internet auctions, cost savings and environmental benefits provided
by its material recovery business, will be attractive to other OEMs.
The foregoing discussion of the Company's business strategy contains
forward-looking statements. See "Forward-Looking Statement Notice."
COMPETITION
The Company competes in the highly fragmented automobile aftermarket
for transmissions, engines and other drivetrain components, in which the
majority of industry supply comes from small local or regional participants.
Competition is based primarily on product quality, service, delivery, technical
support and price. Many of the Company's competitors operate only in certain
geographic regions with a limited product line. The Company is the largest
participant in the aftermarket for remanufactured drivetrain components, offers
a more complete line of products across a diverse customer base and has a much
broader geographic presence than many of its competitors. As a result, the
Company believes that it is well positioned to enhance its competitive position
by expanding its product line through the development of new products or
acquisition of new businesses as well as by expanding its distribution network
into new geographic markets. Nevertheless, the aftermarket for remanufactured
drivetrain components remains highly competitive.
EMPLOYEES
As of December 31, 1999, the Company had approximately 5,100 full-time
employees. The Company believes its employee and labor relations are good. The
Company has never experienced any work stoppage and none of its employees are
members of any labor union.
ENVIRONMENTAL
The Company is subject to various evolving Federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
nonhazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances.
In connection with its acquisitions, the Company conducted certain
investigations of the acquired companies' facilities and their compliance with
applicable environmental laws. The investigations, which included "Phase I"
assessments by independent consultants of all manufacturing and certain
distribution facilities, found that certain facilities have had or may have had
releases of hazardous materials that may require remediation and also may be
subject to potential liabilities for contamination from off-site disposal of
substances or wastes. These assessments also found that certain reporting and
other regulatory requirements, including certain waste management procedures,
were not or may not have been satisfied. Although there can be no assurance, the
Company believes that, based in part on the
8
investigations conducted, in part on certain remediation completed prior to the
acquisitions, and in part on the indemnification provisions of the agreements
entered into in connection with the Company's acquisitions, the Company will not
incur any material liabilities relating to these matters.
The company from which RPM acquired its assets (the "Prior RPM
Company") has been identified by the United States Environmental Protection
Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from potentially responsible parties ("PRPs").
PRPs are broadly defined under CERCLA, and generally include present owners and
operators of a site and certain past owners and operators. As a general rule,
courts have interpreted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the PRPs according to a volumetric or other standard. The EPA
has preliminarily estimated that it will cost approximately $47 million to
construct and approximately $4 million per year for an indefinite period to
operate an interim remedial groundwater pumping and treatment system for the
part of the Superfund site within which RPM's former manufacturing facilities
and current distribution facility, as well as those of many other potentially
responsible parties, are located. The actual cost of this remedial action could
vary substantially from this estimate, and additional costs associated with the
Superfund site are likely to be assessed. The Company has significantly reduced
its presence at the site and has moved all manufacturing operations off-site.
Since July 1995, the Company's only real property interest in this site has been
the lease of a 6,000 square-foot storage and distribution facility. The RPM
acquisition agreement and the leases pursuant to which the Company leased RPM's
facilities after the Company acquired the assets of RPM (the "RPM Acquisition")
expressly provide that the Company did not assume any liabilities for
environmental conditions existing on or before the RPM Acquisition, although the
Company could become responsible for these liabilities under various legal
theories. The Company is indemnified against any such liabilities by the seller
of RPM as well as the Prior RPM Company shareholders. There can be no assurance,
however, that the Company would be able to make any recovery under any
indemnification provisions. Since the RPM Acquisition, the Company has been
engaged in negotiations with the EPA to settle any liability that it may have
for this site. Although there can be no assurance, the Company believes that it
will not incur any material liability as a result of these environmental
conditions.
CERTAIN FACTORS AFFECTING THE COMPANY
Set forth below are certain factors that may affect the Company's
business:
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company's largest customer, DaimlerChrysler, accounted for
approximately 32.0%, 18.2% and 20.5% of the Company's net sales for 1997, 1998
and 1999, respectively. Ford accounted for 17.1% and 19.2% of net sales in 1998
and 1999, respectively. No other customer accounted for more than 10% of the
Company's net sales during any of these years.
DaimlerChrysler and Ford, like other North American OEMs, generally
require their dealers using remanufactured products to use only those from
approved suppliers. Although the Company is currently the only factory-approved
supplier of remanufactured transmissions for Chrysler vehicles and one of two
suppliers to Ford, DaimlerChrysler and Ford (like the Company's other OEM
customers) are not obligated to continue to purchase the Company's products and
there can be no assurance that the Company will be able to maintain or increase
the level of its sales to them or that they will not approve other suppliers in
the future. In addition, within the last four years the standard new vehicle
warranty for Chrysler vehicles was reduced from seven years/70,000 miles to
three years/36,000 miles and a shorter warranty could be implemented in the
future. Any such action could have the effect of reducing the amount of warranty
work performed by Chrysler dealers. An extended, substantial decrease in orders
from DaimlerChrysler or Ford would have a material adverse effect on the
Company. See "Customers--OEM Customers."
9
SHORTAGE OF TRANSMISSION CORES AND COMPONENT PARTS
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted and either placed into immediate production or stored
until needed. The majority of the cores remanufactured by the Company are
obtained from OEMs or from Independent Aftermarket customers as trade-ins. The
ability to obtain cores of the types and in the quantities required by the
Company is critical to the Company's ability to meet demand and expand
production. With the increased acceptance in the aftermarket of remanufactured
assemblies, the demand for cores has increased. The Company periodically has
experienced situations in which the inability to obtain sufficient cores has
limited its ability to accept all of the orders available to it. There can be no
assurance that the Company will not experience core shortages in the future. If
the Company were to experience such a shortage for an extended period of time,
it could have a material adverse effect on the Company.
Certain component parts required in the Company's OEM transmission
remanufacturing process are manufactured by the Company's OEM customers. The
Company has experienced shortages of such component parts from time to time in
the past, and future shortages could have a material adverse effect on the
Company.
ABILITY TO ACHIEVE AND MANAGE GROWTH
An important element in the Company's growth strategy is the
acquisition and integration of complementary businesses in order to broaden
product offerings, capture market share and improve profitability. There can be
no assurance that the Company will be able to identify or reach mutually
agreeable terms with acquisition candidates, or that the Company will be able to
manage additional businesses profitably or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems. Acquisitions may involve a number of special risks, including:
initial reductions in the Company's reported operating results; diversion of
management's attention; unanticipated problems or legal liabilities; and a
possible reduction in reported earnings due to amortization of acquired
intangible assets in the event that such acquisitions are made at levels that
exceed the fair market value of net tangible assets. Some or all of these items
could have a material adverse effect on the Company. There can be no assurance
that businesses acquired in the future will achieve sales and profitability that
justify the investment therein. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive acquisition
candidates may increase to unacceptable levels. See "Business Strategy."
The Company's Distribution Group, which serves the Independent
Aftermarket, is composed of what were ten separate businesses, each with its own
independent distribution, planning and accounting system that did not work with
the systems of the other Distribution Group businesses. In furtherance of the
Company's business strategy to integrate these ten businesses into the ATC
Distribution Group, the Company began replacing these systems with an
enterprise-wide information system. However, as a result of system complexities
and unanticipated issues relating to the conversion of data from the old systems
to the new system, the business disruption experienced by the Distribution Group
was greater than originally anticipated. As a result of these problems, the cost
and the timing of the system implementation exceeded the Company's plan. The
Company resolved the majority of these problems by the end of 1999.
INDEBTEDNESS AND LIQUIDITY
The Company had outstanding long-term indebtedness of $308.5 million at
December 31, 1999. The level of the Company's consolidated indebtedness could
have important consequences, including the following: (i) a substantial portion
of the Company's cash flow from operations must be dedicated to the payment of
principal of, and interest on, its indebtedness and will not be available for
other purposes; (ii) the ability of the Company to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; (iii) the Company's level of indebtedness may reduce its
flexibility to respond to changing business and economic conditions or take
advantage of business opportunities that may arise; and (iv) the ability of the
Company to pay dividends is restricted. See Item 5. "Market for Registrant's
Common Equity and Related Stockholder Matters." In addition, the Company's bank
credit agreement contains covenants that (i) require the Company to meet certain
financial ratios and (ii) limit the Company's ability to, among other things,
incur indebtedness,
10
make capital expenditures, make investments, engage in mergers and dispose of
assets. The indenture that governs the Company's 12% Senior Subordinated Notes
due 2004 (the "Senior Notes") contains, among other things, a covenant that
limits the Company's ability to incur additional indebtedness. Any default by
the Company with respect to such covenants, or any inability on the part of the
Company to obtain necessary liquidity, could have a material adverse effect on
the Company. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances. In connection with its
acquisitions, the Company conducted certain investigations of the acquired
companies' facilities and their compliance with applicable environmental laws.
These investigations found various environmental matters and conditions that
could, under certain circumstances, expose the Company to liability.
Furthermore, the company from which RPM acquired its assets has been identified
by the United States Environmental Protection Agency as one of the many
potentially responsible parties for environmental liabilities associated with a
"Superfund" site located in the area of RPM's former manufacturing facilities
and one of its current distribution facilities. Although no assurances can be
given, the Company believes that it will not incur any material liabilities
relating to these matters. See "Environmental Matters."
COMPETITION
The automotive aftermarket for transmissions, engines and other
drivetrain products is highly fragmented and highly competitive. There can be no
assurance that the Company will compete successfully with other companies in its
industry segment, some of which are larger than the Company and have greater
financial and other resources available to them than does the Company. See
"Competition."
CONTROL OF THE COMPANY; ANTI-TAKEOVER MATTERS
The Company is controlled by Aurora Equity Partners L.P. and Aurora
Overseas Equity Partners I, L.P. (collectively, the "Aurora Partnerships"),
which hold approximately 63% of the voting power in the Company (through direct
ownership and certain voting arrangements). Therefore, the Aurora Partnerships
will be able to elect all of the directors of the Company and approve or
disapprove any matter submitted to a vote of the Company's stockholders. As a
result of the Aurora Partnerships' substantial ownership interest in the Common
Stock, it may be more difficult for a third party to acquire the Company. A
potential buyer would likely be deterred from any effort to acquire the Company
absent the consent of the Aurora Partnerships or their participation in the
transaction. The general partner of each of the Aurora Partnerships is
controlled by Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder, each
of whom is a director of the Company. The Indentures governing the Senior Notes
contain provisions that would allow a holder to require the Company to
repurchase such holder's Senior Notes at a cash price equal to 101% of the
principal amount thereof, together with accrued interest, upon the occurrence of
a "change of control" of the Company (as defined therein), which could also have
the effect of discouraging a third party from acquiring the Company. See Item
12. "Security Ownership of Certain Beneficial Owners and Management."
In addition, the Company's Board of Directors is authorized, subject to
certain limitations prescribed by law, to issue up to 2,000,000 shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences, rights, qualifications, limitations or restrictions,
including voting rights, of those shares without any further vote or action by
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of preferred stock.
11
ITEM 2. PROPERTIES
The Company conducts its remanufacturing and other non-distribution
operations at the following facilities:
LEASE
APPROXIMATE EXPIRATION
LOCATION SQ. FEET DATE PRODUCTS PRODUCED/SERVICES PROVIDED
- ------------------------------ ------------ ---------- -----------------------------------------------------
Rancho Cucamonga, CA 153,000 2002 torque converters
Joplin, MO 264,000 2008 transmissions
Springfield, MO 280,800 2004 transmissions
Springfield, MO 200,000 2006 engines
Springfield, MO 30,900 2001 torque converters
Springfield, MO 34,000 2001 cleaning and testing equipment
Gastonia, NC 130,000 2000 transmissions and valve bodies
Mahwah, NJ 160,000 2003 transmissions, transfer cases and assorted components
Dayton, OH 42,000 2004 torque converters
Oklahoma City, OK 98,000 owned material recovery
Oklahoma City, OK 207,000 owned transmissions
Portland, OR 7,600 2004 manual transmission components
Carrollton, TX 39,000 2006 radios and instrument and display clusters
Houston, TX 50,000 2002 engine control modules and radios
Grantham, England 120,000 owned engines and related components
Mexicali, Mexico 43,800 2007 torque converters
The Company distributes transmission repair kits, soft parts, torque
converters and drive train hard parts and/or engines to non-OEM customers
through 61 local and six regional distribution centers in the United States and
Canada, all of which are leased. The local distribution centers generally range
in size from 5,000 to 20,000 square feet and are typically leased for five-year
terms with a portion of the leases expiring every year. The regional
distribution centers range in size from 14,000 to 168,000 square feet and have
lease expiration dates at various times through 2012. The Company also leases
two facilities for its All Trans operations, which leases expire in 2004 and
2005.
The Company leases a 220,000 square foot facility and a 108,000 square
foot facility in Fort Worth, Texas from which it distributes cellular telephones
and accessories for AT&T Wireless Services. These leases expire in 2008 and
2005, respectively.
The Company also leases assorted warehouses and space for its corporate
offices and computer services.
The Company believes that its current manufacturing facilities and
distribution centers are adequate for the current level of the Company's
activities. The Company's manufacturing sites have the flexibility to add both
additional shifts and production workers needed to accommodate additional demand
for products and services. However, in the event the Company were to experience
a material increase in sales, the Company may require additional manufacturing
facilities. The Company believes such additional facilities are readily
available on a timely basis on commercially reasonable terms. Further, the
Company believes that the leased space housing its existing manufacturing and
distribution facilities is not unique and could be readily replaced, if
necessary, at the end of the terms of its existing leases on commercially
reasonable terms. Historically, the Company has been able to renew leases or
find alternate space upon the expiration of its leases without material
interruption in the subject facilities' operations. Many of the Company's leases
are renewable at the option of the Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various
legal proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "ATAC" since the IPO in December 1996. As of February
29, 2000, there were approximately 94 record holders of its Common Stock. The
following table sets forth for the periods indicated the range of high and low
sale prices of the Common Stock as reported by Nasdaq:
HIGH LOW
------- -------
1998
First quarter.............................. 27 1/4 17
Second quarter............................. 23 7/16 16 1/4
Third quarter.............................. 18 1/2 9 1/8
Fourth quarter............................. 11 1/2 3 7/8
1999
First quarter.............................. 9 7/8 4 1/2
Second quarter............................. 12 3/8 6 7/8
Third quarter.............................. 11 7/8 8 1/32
Fourth quarter............................. 12 5/8 7 3/4
On February 29, 2000, the last sale price of the Common Stock, as
reported by Nasdaq, was 11 3/4 per share.
The Company has not paid cash dividends on its Common Stock to date.
Because the Company currently intends to retain any earnings to provide funds
for the operation and expansion of its business and for the servicing and
repayment of indebtedness, the Company does not intend to pay cash dividends
on its Common Stock in the foreseeable future. Furthermore, as a holding
company with no independent operations, the ability of the Company to pay
cash dividends is dependent upon the receipt of dividends or other payments
from its subsidiaries. Under the terms of the Indentures governing the Senior
Notes, the Company is not permitted to pay any dividends on its Common Stock
unless certain financial ratio tests are satisfied. In addition, the
agreement for the Company's bank credit facility contains certain covenants
that, among other things, prohibit the payment of dividends by the Company.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Any determination to
pay cash dividends on the Common Stock in the future will be at the sole
discretion of the Company's Board of Directors.
During 1999, the Company did not issue any securities that were not
registered under the Securities Act of 1933, as amended.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the
statements of operations data for the years ended December 31, 1997, 1998 and
1999 and the balance sheet data at December 31, 1998 and 1999 are derived from
the Consolidated Financial Statements of the Company that have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere herein, and
are qualified by reference to such financial statements and notes related
thereto. The selected financial data with respect to the statement of operations
data for the years ended December 31, 1995 and 1996 and the balance sheet data
at December 31, 1995, 1996 and 1997, are derived from the Consolidated Financial
Statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, but are not included herein. The data provided should be
read in conjunction with the Consolidated Financial Statements, related notes
and other financial information included in this Annual Report.
CONSOLIDATED
--------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................... $190,659 $272,878 $346,110 $486,773 $564,965
Cost of sales............................... 115,499 166,810 212,416 348,443 382,899
Special charges............................. -- -- -- 1,347 4,895
---------- ---------- ---------- ---------- ----------
Gross profit................................ 75,160 106,068 133,694 136,983 177,171
Selling, general and administrative
expenses.................................. 38,971 55,510 73,768 109,357 123,429
Amortization of intangible
assets.................................... 3,308 3,738 4,501 6,806 7,420
Special charges............................. -- -- -- 7,397 8,868
---------- ---------- ---------- --------- ---------
Income from operations...................... 32,881 46,820 55,425 13,423 37,454
Interest expense (income), net.............. 16,915 19,106 16,910 23,714 26,502
Income tax expense (benefit) ............... 6,467 11,415 15,512 (3,176) 4,145
---------- ---------- ---------- --------- ---------
Income (loss) before extraordinary 9,499 16,299 23,003 (7,115) 6,807
items (1)(2)................................
Preferred stock dividends................... 2,093 2,222 -- -- --
---------- ---------- ---------- --------- ---------
Income (loss) before extraordinary items
available to common stockholders.......... $ 7,406 $ 14,077 $ 23,003 $ (7,115) $ 6,807
========== ========== ========== ========= =========
Earnings (loss) per share before
extraordinary items (3)................... $ 0.65 $ 1.02 $ 1.19 $ (0.36) $ 0.32
Shares used in computation of earnings
per share before extraordinary items (3).. 14,616 15,918 19,335 19,986 21,164
OTHER DATA:
Capital expenditures (4)................. $ 5,187 $ 7,843 $ 8,682 $ 23,986 $ 23,162
14
CONSOLIDATED
---------------------------------------------
DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
---------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................. $ 60,012 $103,371 $ 98,523 $ 87,934 $101,938
Property, plant and equipment, net.......... 10,784 17,482 24,414 63,903 75,369
Total assets................................ 247,932 320,747 368,677 531,905 596,646
Long-term liabilities (5)................... 165,724 167,233 152,571 258,042 302,535
Preferred stock............................. 22,946 -- -- -- --
Common stockholders' equity................. 30,188 105,832 175,429 168,011 176,144
- ---------------
(1) Income before extraordinary item for the year ended December 31, 1997
excludes an extraordinary item in the amount of $3,749 ($6,269 less
related income tax benefit of $2,520). This amount consisted of (i) a
$3,425 charge resulting from the early redemption of $40,000 in
principal amount of the Senior Notes in February 1997, which included
the payment of a 12.0% early redemption premium and the write-off of
related debt issuance costs and (ii) a charge of $324 for the write-off
of previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility.
(2) Loss before extraordinary item for the year ended December 31, 1998
excludes an extraordinary item in the amount of $703 ($1,172 less
related income tax benefit of $469). This amount consisted of (i) a
$340 charge resulting from the early redemption of $9,615 in principal
amount of the Senior Notes in September and October of 1998, which
included the payment of a 4.0% early redemption premium and the
write-off of related debt issuance costs and (ii) a charge of $363 for
the write-off of previously capitalized debt issuance costs in
connection with the termination of the Company's previous revolving
credit facility.
(3) See Item 8. "Consolidated Financial Statements and Supplementary
Data-Note 14" for a description of the computation of earnings per
share.
(4) Excludes capital expenditures made by certain of the Company's
subsidiaries prior to such subsidiaries' respective acquisitions and
any capital expenditures made in connection with such acquisitions.
(5) Includes deferred tax liabilities of $3,478, $5,252, $8,044, $11,492
and $15,112 at December 31, 1995, 1996, 1997, 1998 and 1999,
respectively.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. See Item 8. "Consolidated Financial Statements
and Supplementary Data."
Readers are cautioned that the following discussion contains certain
forward-looking statements and should be read in conjunction with the
"Forward-Looking Statement Notice" appearing at the beginning of this Annual
Report.
OVERVIEW
The Company's revenues are generated primarily through the sale of
drivetrain products used in the repair of vehicles in the automotive
aftermarket. Since its formation, the Company has benefited from a combination
of internal and acquisition-related revenue growth, achieving compounded annual
growth in revenue of approximately 31.2% from 1995 through 1999.
From 1995 through 1999, the Company's revenues in the OEM segment
increased by 29.8% compounded annually from $107.6 million to $305.1 million due
primarily to increased sales to existing customers, including DaimlerChrysler,
combined with new customers, including Ford and General Motors, added through
acquisitions. During the same period, revenues in the Independent Aftermarket
segment increased by 26.0% compounded annually from $79.5 million to $200.1
million. This growth was due to a combination of acquisitions, geographic
expansion, an expanded product offering, effective sales efforts and the
development of new customers.
The Company regularly evaluates strategic acquisition opportunities and
expects it will continue to do so in the future. During the first quarter of
1998, the Company acquired substantially all of the assets of Autocraft, the OEM
Division of The Fred Jones Companies, Inc. During the fourth quarter of 1999,
the Company acquired substantially all of the assets All Trans. See Item 1.
"Business."
During 1998 and 1999 the Company recorded special charges of $8.7
million and $13.8 million, respectively, primarily related to certain
initiatives designed to improve operating efficiencies and reduce costs. See
"Results of Operations" for a complete discussion of these charges. In addition,
in 1998 the Company recorded charges for non-recurring costs totaling $21.4
million. As previously disclosed, the Company believes that these charges were
one-time in nature due to the application of new information and estimation
methodologies.
Income from operations before special charges and nonrecurring expenses
was $42.4 million and $51.2 million for the years ended December 31, 1998 and
1999, respectively. Excluding special charges, nonrecurring expenses and
extraordinary items, net income was $11.0 million or $0.52 per diluted share in
1998 compared to $14.8 million or $0.70 per diluted share in 1999.
The primary components of the Company's cost of goods sold are the cost
of cores and component parts, labor costs and overhead. While certain of these
costs have fluctuated as a percentage of sales over time, cost of goods sold as
a percentage of sales remained relatively constant from 1995 through 1997, at
approximately 61.0%. In 1998, cost of goods sold as a percentage of net sales,
before $12.7 million of non-recurring costs and $1.3 million of special charges,
increased to 69.0% and in 1999 was 67.8% before $4.9 million of special charges.
The change in cost of goods sold as a percentage of net sales from 1995 to 1999
is due primarily to changes in mix within the OEM segment and costs related to
the Independent Aftermarket segment's enterprise-wide information system.
Selling, general and administrative ("SG&A") expenses consist primarily
of salaries, commissions, rent, marketing expenses and other management
infrastructure expenses. SG&A expenses as a percentage of net sales increased
from 20.4% in 1995 to 21.8% in 1999. This increase was principally
16
due to growth in the Logistics Services business unit and to growth in the OEM
segment's remanufactured engine program, primarily due to the expansion of its
branch sales channel, combined with enhancements to the Company's management and
systems infrastructure.
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data
expressed in millions of dollars and as a percentage of net sales.
For the Years Ended December 31,
--------------------------------------------------------
1997 1998 1999
------------------ -------------------- ----------------
Net sales.............................. $346.1 100.0% $486.8 100.0% $565.0 100.0%
Cost of sales.......................... 212.4 61.4 348.5 71.6 382.9 67.8
Special charges........................ - - 1.3 0.3 4.9 0.9
------ ----- ------- ----- ------ -----
Gross profit........................... 133.7 38.6 137.0 28.1 177.2 31.3
SG&A expenses.......................... 73.8 21.3 109.4 22.5 123.4 21.8
Amortization of intangible assets...... 4.5 1.3 6.8 1.3 7.4 1.3
Special charges........................ - - 7.4 1.5 8.9 1.6
------ ----- ------- ----- ------ -----
Income from operations................. 55.4 16.0 13.4 2.8 37.5 6.6
Interest expense, net and other........ 16.9 4.9 23.7 4.9 26.5 4.7
------ ----- ------- ----- ------ -----
Income (loss) before income taxes
and extraordinary items.............. 38.5 11.1 (10.3) (2.1) 11.0 1.9
Income tax expense (benefit)........... 15.5 4.5 (3.2) (0.7) 4.2 0.7
------ ----- ------- ----- ------ -----
Income (loss) before extraordinary items $ 23.0 6.6% $( 7.1) (1.4)% $ 6.8 1.2%
====== ===== ======= ===== ====== =====
The Company has two reportable segments: the OEM segment and the
Independent Aftermarket segment. The OEM segment consists of four operating
units that sell remanufactured transmissions directly to automobile
manufacturers, principally DaimlerChrysler, Ford, General Motors and several
foreign OEMs, primarily for use as replacement parts by their domestic dealers
during the warranty and post-warranty periods following the sale of a vehicle.
In addition, the OEM segment sells select remanufactured engines to
DaimlerChrysler and certain European OEMs, including Ford's European operation,
as well as remanufactured domestic and foreign engines to general repair shops
and retail automotive parts stores. The Company's Independent Aftermarket
segment primarily sells transmission repair kits, soft parts, remanufactured
torque converters and new and remanufactured hard parts used in drivetrain
repairs to independent transmission rebuilders for repairs generally during the
period following the expiration of the vehicle warranty. To a lesser extent, the
Independent Aftermarket segment also sells its products to general repair shops,
wholesale distributors and retail automotive parts stores. In addition to the
OEM and Independent Aftermarket segments, the Company has three other operating
units reflected as "Other" due to their relative size, all of which were
acquired in the Autocraft acquisition: an automotive electronic parts
remanufacturing and distribution business; warehouse, distribution and turnkey
order fulfillment and information services for AT&T Wireless Services; and a
material recovery parts processing and Internet-based auction business primarily
for Ford. None of these operating units meet the quantitative thresholds for
determining reportable segments. See Item 8. "Consolidated Financial Statements
and Supplementary Data-Note 17."
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Income (loss) before extraordinary items increased $13.9 million, from
a loss of $7.1 million for the year ended December 31, 1998, to income of $6.8
million for the year ended December 31, 1999. During 1998 and 1999, the Company
recorded pre-tax special charges of $8.7 million and $13.8 million,
respectively, related to certain initiatives designed to improve operating
efficiencies and reduce costs (see "Special Charges" below). In addition, during
1998, the Company recorded pre-tax charges for non-recurring costs totaling
$21.4 million. Excluding these non-recurring costs and special charges, income
17
before extraordinary items would have increased $3.8 million, or 34.5%, from
$11.0 million for the year ended December 31, 1998, to $14.8 million for the
year ended December 31, 1999. This increase was primarily attributable to
increases in profitability in the Company's OEM segment and "Other" business
units, partially offset by a decline in profitability in the Company's
Independent Aftermarket segment during 1999 as compared to 1998. On a per share
basis, income (loss) before extraordinary items increased from a loss of $0.36
per share in 1998 to net income per diluted share of $0.32 in 1999. Excluding
special charges and non-recurring expense, income before extraordinary items per
diluted share increased from $0.52 for the year ended December 31, 1998 to $0.70
for the year ended December 31, 1999.
NET SALES. Net sales increased $78.2 million, or 16.1%, from $486.8
million in 1998 to $565.0 million in 1999. This increase is partially
attributable to the full-year benefit of sales from Autocraft, which was
acquired in March 1998, and to the acquisition of All Trans, completed during
the fourth quarter of 1999. On a pro forma basis, as if the February 1999 sale
of Mascot, and the acquisitions of Autocraft and All Trans had all taken place
on January 1, 1998, net sales would have increased $54.5 million, or 10.3%, from
$526.8 million in 1998 to $581.3 million in 1999. This increase in sales, on a
pro forma basis, was primarily attributable to increased sales in the Company's
OEM and Independent Aftermarket segments combined with increased sales in its
Logistics Services and Material Recovery business units.
GROSS PROFIT. Gross profit increased $40.2 million, or 29.3%, from
$137.0 million in 1998 to $177.2 million in 1999. Excluding non-recurring costs
of $12.7 million recorded in 1998 and special charges of $1.3 million and $4.9
million recorded in 1998 and 1999, respectively, gross profit increased $31.1
million during 1999 as compared to 1998. As a percentage of net sales, gross
profit before non-recurring costs and special charges increased from 31.0% to
32.2% between the two periods. The increase in gross profit was principally due
to the increased sales in the OEM segment and Logistics Services business unit,
partially offset by a decline in gross profit experienced in the Independent
Aftermarket segment.
SG&A EXPENSES. SG&A expenses increased $14.0 million, or 12.8%, from
$109.4 million in 1998 to $123.4 million in 1999. Excluding non-recurring costs
of $7.5 million recorded in 1998, SG&A expenses increased $21.5 million during
1999 as compared to 1998 and as a percentage of net sales increased from 20.9%
to 21.8% between the two periods. This increase was due primarily to (i) $7.7
million related to the OEM segment's remanufactured engine program primarily
associated with the expansion of its branch sales channel and increased warranty
costs, (ii) $6.2 million of additional infrastructure costs related to the
Independent Aftermarket segment's enterprise-wide information system, (iii) $4.2
million in the Logistics Services business unit primarily related to sales
volume growth and systems enhancements, (iv) $4.2 million primarily associated
with the Company's business improvement initiatives, including travel,
recruitment and professional service costs and (v) $2.9 million of additional
cost due to a full year of SG&A cost from Autocraft, partially offset by an SG&A
cost reduction of $1.9 million as a result of the sale of Mascot.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.6 million, or 8.8%, from $6.8 million in 1998 to $7.4 million in
1999. The increase is primarily attributable to a full year of amortization for
the Autocraft acquisition and the acquisition of All Trans during the fourth
quarter of 1999.
SPECIAL CHARGES. During 1999, the Company recorded $13.8 million of
special charges, of which $4.9 million was included as a component of cost of
sales. These charges consisted of (i) $6.1 million of costs primarily related to
distribution center, distribution branch and manufacturing plant consolidations
within the Independent Aftermarket segment, (ii) $3.3 million of costs
associated with the narrowing of the remanufactured engine product offering,
(iii) $2.8 million of severance and other costs related to the reorganization of
certain management functions and (iv) $1.6 million of severance, plant exit and
other costs.
18
During 1998, the Company recorded $8.7 million of special charges, of
which $1.3 million was included as a component of cost of sales. These charges
consisted of (i) $3.8 million of restructuring charges consisting principally of
employee severance costs and certain other exit costs, (ii) $2.5 million of
costs relating principally to idle facility costs and (iii) $2.4 million related
to a state's interpretation of its tax law that subjected a portion of the OEM
segment's operations over the past four years to a state tax for the first time.
The Company, as an ongoing part of its planning process, continues to
identify and evaluate areas where cost efficiencies can be achieved through
consolidation of redundant facilities, outsourcing functions or changing
processes or systems. Implementation of any of these could require the Company
to incur special charges, which would be offset over time by the projected cost
savings.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased $24.1 million, or 179.9%, from
$13.4 million in 1998 to $37.5 million in 1999. As a percentage of net sales,
income from operations increased from 2.8% to 6.6%, between the two periods.
Excluding non-recurring costs of $20.2 million recorded in 1998 and special
charges of $8.7 million and $13.8 million recorded in 1998 and 1999,
respectively, income from operations increased $9.0 million during 1999 as
compared to 1998. As a percentage of net sales, income from operations before
non-recurring costs and special charges increased from 8.7% to 9.1% between the
two periods.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $2.8 million, or 11.8%, from $23.7 million in 1998 to $26.5 million in
1999. The increase primarily resulted from a full year of borrowing under the
Company's $120.0 million term loan credit facility in March 1998 to finance the
Autocraft acquisition and increased borrowings under the Company's $100.0
million revolving credit facility in the fourth quarter of 1999 to finance the
All Trans acquisition. These term loan and revolving facilities are referred to
as the "Credit Facility."
EXTRAORDINARY ITEMS. In 1998, an extraordinary item in the amount of
$0.7 million ($1.2 million before related income tax benefit of $0.5 million)
was recorded. This amount consisted of (i) a $0.4 million charge for the
write-off of previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility and (ii) a $0.3
million charge resulting from the repurchase of $9.6 million in principal amount
of the Senior Notes in open market transactions.
OEM SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1998 1999
--------------- ---------------
Net sales....................$253.0 100.0% $305.1 100.0%
Special charges..............$ 5.0 2.0% $ 4.3 1.4%
Segment profit...............$ 23.9 9.4% $ 50.4 16.5%
NET SALES. Net sales increased $52.1 million, or 20.6%, from $253.0
million in 1998 to $305.1 million in 1999. On a pro forma basis, as if the
Autocraft acquisition had taken place on January 1, 1998, net sales would have
increased $32.7 million, or 12.0%, from $272.4 million in 1998 to $305.1 million
in 1999. The increase was primarily due to increased sales of remanufactured
transmissions to DaimlerChrysler and Ford and increased sales of remanufactured
engines through the Company's branch sales channel, partially offset by a
decrease in sales volume of engines and related parts in the segment's European
operations. Sales to DaimlerChrysler accounted for 18.2% and 20.5% of the
Company's revenues (34.9% and
19
37.9% of segment revenues) in 1998 and 1999, respectively. Sales to Ford
accounted for 17.1% and 19.2% of the Company's revenues (30.5% and 32.5% of
segment revenues) in 1998 and 1999, respectively.
SPECIAL CHARGES. The OEM segment recorded $4.3 million of special
charges in 1999. These charges consisted of (i) $3.3 million in connection with
the narrowing of its remanufactured engine product offering and (ii) $1.0
million relating to severance and plant exit costs.
The OEM segment recorded $5.0 million of special charges in 1998. These
charges consisted of (i) $2.6 million in connection with the consolidation of
certain manufacturing plants and (ii) $2.4 million relating to a state's
interpretation of its tax law that subjected a portion of the segment's
operations over the past four years to a state tax for the first time.
SEGMENT PROFIT. Segment profit increased $26.5 million, or 110.9%, from
$23.9 million (9.4% of OEM net sales) in 1998 to $50.4 million (16.5% of OEM net
sales) in 1999. Excluding special charges of $5.0 million and $4.3 million in
1998 and 1999, respectively, and non-recurring costs of $10.0 million recorded
in 1998, segment profit would have increased $15.8 million, or 40.6%, from $38.9
million (15.4% of segment net sales) in 1998 to $54.7 million (17.9% of segment
net sales) in 1999. The increase was primarily the result of increased sales.
INDEPENDENT AFTERMARKET SEGMENT
The following table presents net sales, special charges and segment
loss expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1998 1999
--------------- ---------------
Net sales....................$186.7 100.0% $200.1 100.0%
Special charges..............$ 2.1 1.1% $ 6.5 3.2%
Segment loss.................$(11.6) (6.2)% $(15.0) (7.5)%
NET SALES. Net sales increased $13.4 million, or 7.2%, from $186.7
million in 1998 to $200.1 million in 1999. On a pro forma basis, as if the All
Trans acquisition had taken place on January 1, 1998, net sales would have
increased $10.6 million, or 5.1%, from $206.5 million in 1998 to $217.1 million
in 1999. This increase was largely attributable to sales from a new line of hard
parts that were introduced after the third quarter of 1998 and to an improvement
from the lower sales volumes experienced during the second half of 1998, which
were caused by customer service and fill rate shortfalls related to
implementation issues associated with the segment's enterprise-wide information
system.
SPECIAL CHARGES. The Independent Aftermarket segment recorded $6.5
million of special charges in 1999. These charges consisted of (i) $6.1 million
primarily related to distribution center, distribution branch and manufacturing
plant consolidations and (ii) $0.4 million of severance and other costs related
to the reorganization of certain management functions.
During 1998 the Independent Aftermarket segment recorded $2.1 million
of special charges. These charges consisted of (i) $1.6 million for
restructuring charges, which included severance and certain other exit costs and
(ii) $0.5 million relating to facility consolidation.
SEGMENT LOSS. Segment loss increased $3.4 million from $11.6 million in
1998 to $15.0 million in 1999. Excluding special charges of $2.1 million and
$6.5 million in 1998 and 1999, respectively, and non-recurring costs of $9.3
million recorded during 1998, segment loss would have increased $8.3 million
from $0.2 million in 1998 to $8.5 million in 1999. This increase in segment loss
was primarily attributable to $6.2 million of additional infrastructure costs
related to the segment's enterprise-wide information system, and $2.4 million of
costs related to the Company's aftermarket remanufactured transmission program.
20
OTHER OPERATING UNITS
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1998 1999
--------------- ---------------
Net sales....................$ 47.1 100.0% $ 59.8 100.0%
Special charges..............$ - - % $ 0.6 1.0%
Segment profit...............$ 4.7 10.0% $ 8.7 14.5%
NET SALES. Net sales increased $12.7 million, or 27.0%, from $47.1
million in 1998 to $59.8 million in 1999. On a pro forma basis, as if the
Autocraft acquisition and the sale of Mascot had taken place on January 1, 1998,
net sales would have increased $11.1 million, or 23.1%, from $48.0 million in
1998 to $59.1 million in 1999. This increase was primarily attributable to
increased sales in the Logistics Services business unit due to growth in AT&T's
wireless service business.
SPECIAL CHARGES. Special charges recorded during 1999 of $0.6 million
relate to exit and other costs in the Electronics business unit.
SEGMENT PROFIT. Segment profit increased $4.0 million, or 85.1%, from
$4.7 million in 1998 to $8.7 million in 1999. Excluding special charges of $0.6
million in 1999, segment profit in 1999 would have increased $4.6 million, or
97.9%, from $4.7 million in 1998 to $9.3 million in 1999. The increase was
primarily the result of the additional sales volume described above, partially
offset by an increase in costs in the Logistics Services business unit
associated with enhancements to its information systems to support future
growth.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Income (loss) before extraordinary items decreased $30.1 million from
$23.0 million in 1997 to a $7.1 million loss in 1998. Excluding the
non-recurring costs and other special charges, income before extraordinary items
would have been $11.0 million. This decrease was primarily attributable to (i) a
decline in demand for remanufactured Chrysler transmissions and related
reduction of inventory at DaimlerChrysler and (ii) problems related to the
Company's implementation of the enterprise-wide information system in the
Independent Aftermarket segment. On a per share basis, income (loss) before
extraordinary items decreased from $1.19 per diluted share in 1997 to a loss of
$0.36 per share in 1998.
NET SALES. Net sales increased $140.7 million, or 40.7%, from $346.1
million in 1997 to $486.8 million in 1998. Of this increase, $131.8 million
related to the March 1998 Autocraft acquisition and $32.3 million related to a
full year's net sales for the businesses acquired in 1997, partially offset by a
$23.4 million decline in sales by the Company's other businesses.
GROSS PROFIT. Gross profit increased $3.3 million, or 2.5%, from $133.7
in 1997 to $137.0 million in 1998. As a percentage of net sales, gross profit
decreased from 38.6% to 28.1% between the two periods. The decrease in gross
profit margins was primarily related to (1) changes in OEM segment sales mix and
(2) system complexities and problems with data conversion encountered during the
implementation of the Independent Aftermarket segment's enterprise-wide
information system, which resulted in an internalization of management's focus
and hampered inventory management functions, pricing initiatives and sales
growth efforts. In addition, the Company incurred $12.7 million of non-recurring
costs in 1998 primarily consisting of (i) $6.7 million for increased inventory
reserves and (ii) $5.2 million for a
21
liability related to the purchase of excess cores. Also during 1998, the Company
recorded $1.3 million of special charges relating to idle facility costs.
Excluding these costs, gross profit in 1998 would have been $151.0 million or
31.0% of net sales.
SG&A EXPENSES. SG&A expenses increased $35.6 million, or 48.2%, from
$73.8 million in 1997 to $109.4 million in 1998. As a percentage of net sales,
SG&A expenses increased from 21.3% to 22.5% between the two periods. During
1998, the Company recorded $7.5 million of non-recurring costs including (i)
$3.0 million related to changes in estimates and other reserves, (ii) $2.7
million related to start-up costs and internal use software and (iii) $1.8
million related to changes in employee benefits and warranty policies. Excluding
these costs, SG&A expenses in 1998 would have been $101.9 million or 20.9% of
net sales as compared to 21.3% in 1997. On an absolute dollar basis, the
increase was primarily attributable to additional SG&A expenses for the
Autocraft businesses acquired in March 1998 and a full year's expense for the
acquisitions made in 1997.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $2.3 million, or 51.1%, from $4.5 million in 1997 to $6.8 million in
1998. The increase was primarily attributable to the March 1998 Autocraft
acquisition.
SPECIAL CHARGES. During 1998, the Company recorded $8.7 million of
special charges, of which $1.3 million was included as a component of cost of
sales. These charges consisted of (i) $3.8 million of restructuring charges that
primarily included employee severance costs and certain other exit costs, (ii)
$2.5 million of costs that primarily included idle facility costs and (iii) $2.4
million that related to a state's interpretation of its tax law that subjected a
portion of the OEM segment's operations over the past four years to a state tax
for the first time.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations decreased $42.0 million, or 75.8%, from
$55.4 million in 1997 to $13.4 million in 1998.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $6.8 million, or 40.2%, from $16.9 million in 1997 to $23.7 million in
1998. The increase primarily resulted from borrowing under the term loan portion
of the Credit Facility in March 1998 to finance the Autocraft acquisition and
increased borrowings under the revolving portion of the Credit Facility
partially offset by the early redemption in September and October 1998 of $9.6
million in principal amount of Senior Notes. In addition, the Company recorded a
$1.2 million net loss on the sale of Mascot during 1998.
EXTRAORDINARY ITEMS. In 1997, an extraordinary item in the amount of
$3.8 million ($6.3 million before related income tax benefit of $2.5 million)
was recorded. This amount consisted of (i) a $3.4 million charge resulting from
the early redemption of $40.0 million of the Senior Notes in February 1997,
which included the payment of a 12.0% early redemption premium and the write-off
of related debt issuance costs and (ii) a $0.4 million charge for the write-off
of previously capitalized debt issuance costs in connection with the termination
of the Company's previous revolving credit facility.
In 1998, an extraordinary item in the amount of $0.7 million ($1.2
million before related income tax benefit of $0.5 million) was recorded. This
amount consisted of (i) a $0.4 million charge for the write-off of previously
capitalized debt issuance costs in connection with the termination of the
Company's previous revolving credit facility and (ii) a $0.3 million charge
resulting from the repurchase of $9.6 million in principal amount of the Senior
Notes in open market transactions.
22
OEM SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
Net sales....................$180.3 100.0% $253.0 100.0%
Special charges..............$ - - $ 5.0 2.0%
Segment profit...............$ 47.0 26.1% $ 23.9 9.4%
NET SALES. Net sales increased $72.7 million, or 40.3%, from $180.3
million in 1997 to $253.0 million in 1998. This increase was due to the March
1998 Autocraft acquisition, which accounted for approximately $91.5 million in
incremental net sales, partially offset by an $18.8 million decline in sales to
existing customers, particularly DaimlerChrysler. As previously reported, the
demand for DaimlerChrysler transmissions declined in 1998 primarily due to (i)
moderate weather during the winter of 1997-1998 and (ii) improved quality of
late model original equipment front wheel drive transmissions. The decline in
demand led to reduced inventory requirements at DaimlerChrysler. In order to
assist DaimlerChrysler in meeting these inventory requirements by the end of
1998, the Company significantly reduced its shipments to DaimlerChrysler during
the second half of the year. The Company believes that reduced demand for front
wheel drive transmissions due to improved quality will be mostly offset by
demand for rear wheel drive transmissions, which the Company began
remanufacturing for DaimlerChrysler during the third quarter of 1998. Sales to
DaimlerChrysler accounted for 32.0% and 18.2% of the Company's revenues (61.4%
and 34.9% of segment revenues) in 1997 and 1998, respectively. Sales to Ford,
(which became a customer in March 1998) accounted for 17.1% of the Company's
revenues (30.5% of segment revenues) in 1998.
SPECIAL CHARGES. The OEM segment recorded $5.0 million of special
charges in 1998. These charges consisted of (i) $2.6 million in connection with
the consolidation of certain manufacturing plants and (ii) $2.4 million relating
to a state's interpretation of its tax law that subjected a portion of the
segment's operations over the past four years to a state tax for the first time.
SEGMENT PROFIT. Segment profit decreased $23.1 million, or 49.1%, from
$47.0 million (26.1% of OEM net sales) in 1997 to $23.9 million (9.4% of OEM net
sales) in 1998. Excluding the special charges of $5.0 million and non-recurring
costs of $10.0 million, segment profit in 1998 would have been $38.9 million
(15.4% of segment net sales). The decline was primarily the result of changes in
the sales mix in the OEM segment and to the lower fixed cost absorption as a
result of decreased DaimlerChrysler sales in 1998.
23
INDEPENDENT AFTERMARKET SEGMENT
The following table presents net sales, special charges and segment
profit (loss) expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
Net sales....................$158.4 100.0% $186.7 100.0%
Special charges..............$ - - % $ 2.1 1.1%
Segment profit (loss)........$ 10.7 6.8% $(11.6) (6.2)%
NET SALES. Net sales increased $28.3 million, or 17.9%, from $158.4
million in 1997 to $186.7 million in 1998. The increase related to a full year's
net sales of $32.3 million from the three Independent Aftermarket companies
acquired in 1997. Sales for the remainder of the segment were relatively flat
year over year.
SPECIAL CHARGES. The Independent Aftermarket segment recorded $2.1
million of special charges in 1998. These charges consisted of (i) $1.6 million
for restructuring charges, which included severance and certain other exit
costs, and (ii) $0.5 million related to facility consolidation.
SEGMENT PROFIT (LOSS). Segment profit decreased $22.3 million from
$10.7 million (6.8% of segment net sales) in 1997 to an $11.6 million loss in
1998. Excluding the special charges of $2.1 million and non-recurring costs of
$9.3 million, segment loss would have been $0.2 million in 1998. The decline was
primarily the result of problems relating to the enterprise-wide information
systems implementation and the continued operational consolidation from nine
separate entities into one during 1998.
OTHER OPERATING UNITS
The following table presents net sales and segment profit expressed in
millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
Net sales....................$ 7.4 100.0% $ 47.1 100.0%
Segment profit...............$ 0.1 1.4% $ 4.7 10.0%
NET SALES. Net sales increased $39.7 million, or 536.5%, from $7.4
million in 1997 to $47.1 million in 1998. The increase was attributable to sales
by the Electronics, Logistics Services and Material Recovery business units,
which were acquired in March 1998 as part of the Autocraft acquisition. Prior to
the Autocraft acquisition, revenue in this segment was entirely attributable to
Mascot, which was sold in February 1999.
SEGMENT PROFIT. Segment profit increased $4.6 million from $0.1 million
in 1997 to $4.7 million in 1998. The increase was primarily the result of sales
volume from the Autocraft acquisition.
24
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW & CAPITAL EXPENDITURES
The Company had total cash and cash equivalents on hand of $8.5 million
at December 31, 1999, representing a net increase in cash and cash equivalents
of $7.9 million in 1999. Net cash provided by operating activities was $29.9
million for 1999. Net cash used in investing activities was $60.1 million for
the year, including $41.2 million for the All Trans acquisition and $23.2
million in capital expenditures, primarily for equipment purchases, software and
related implementation costs and leasehold improvements. Net cash provided by
financing activities was $37.9 million, including net borrowings of $48.2
million under the Credit Facility partially offset by $8.1 million in payment of
amounts due to previously acquired companies.
The Company's capital expenditures in 1999 were $23.2 million,
consisting of (i) $15.5 million for additional transmission and engine
remanufacturing equipment and other improvements to support planned increases in
production capacity and efficiencies in certain of the Company's remanufacturing
plants, (ii) $5.2 million in connection with the ongoing implementation of the
Distribution Group's enterprise-wide information system and (iii) $2.5 million
primarily related to investments in the Company's other operating units. The
Company has $20.0 million budgeted for capital expenditures during 2000,
primarily for remanufacturing equipment replacements and additions to support
planned increases in production capacity and efficiencies in the Company's
various facilities.
Under the terms of the Company's 1997 acquisition of ATS
Remanufacturing (which remanufactures transmissions for General Motors), the
Company is required to make payments to the seller on each of the first eight
anniversaries of the closing date. As of December 31, 1999, the Company had made
$2.1 million of these payments. Substantially all of the remaining six payments,
which aggregate to approximately $16.8 million (present value of $13.6 million
as of December 31, 1999), are contingent upon the attainment of certain sales
levels by ATS, which the Company believes are more likely than not to be
attained.
FINANCING
The Company raised total net proceeds of $61.6 million in its initial
public offering and concurrent private placement of common stock in December
1996 and an additional $47.9 million in a secondary offering in October 1997.
From the Company's inception in July 1994 to December 1996, the Company funded
its operations and investments in property and equipment, including
acquisitions, through the issuance of Senior Notes totaling $162.4 million, the
private sale of preferred stock of $20.0 million and common stock of $20.0
million, and to a lesser extent through cash provided by operating activities
and revolving bank lines. In December 1996, the preferred stock and $40.0
million in principal amount of the Senior Notes were redeemed with proceeds from
the initial public offering. The net proceeds from the secondary offering were
used to repay borrowings under the Credit Facility. In September and October
1998, the Company redeemed $2.2 million and $7.4 million, respectively, in
principal amount of the Senior Notes, with borrowings under the Credit Facility.
In February 1997, the Company terminated its $30.0 million revolving
credit facility with a bank syndicate led by The Chase Manhattan Bank ("Chase")
that had been scheduled to mature in July 1999 and replaced it with the $100.0
million revolving portion of the Credit Facility, which is also with Chase. The
Credit Facility is available to finance the Company's working capital
requirements, future acquisitions and other general corporate needs, and will
expire in December 2003.
In March 1998, the Credit Facility was amended and restated to provide
the $120.0 million term loan facility in addition to the existing revolving
facility. The Company borrowed $120.0 million under this term loan facility on
March 6, 1998 to purchase Autocraft and pay related transaction expenses. The
term loan is payable in quarterly installments through December 31, 2003.
25
On December 20, 1999, the borrowing capacity under the term loan
portion of the Credit Facility was increased by $10.0 million. On December 24,
1999, the Company borrowed this $10.0 million and used the proceeds to reduce
the outstanding borrowings under the revolving portion of the Credit Facility.
These additional borrowings are payable in quarterly installments through
December 31, 2003.
The Credit Facility's rate of interest is determined at either (i) the
Alternate Base Rate plus a specified margin or (ii) the Eurodollar Rate plus a
specified margin. The "Alternate Base Rate" is equal to the highest of (a)
Chase's prime rate, (b) the secondary market rate for three-month certificates
of deposit plus 1.0% and (c) the federal funds rate plus 0.5%, in each case as
in effect from time to time. The "Eurodollar Rate" is the rate offered by Chase
for eurodollar deposits for one, two, three, six or, if available by all
lenders, nine months (as selected by the Company) in the interbank eurodollar
market. The applicable margins for both Alternate Base Rate and Eurodollar Rate
loans are subject to a quarterly adjustment based on the Company's leverage
ratio as of the end of the four fiscal quarters then completed. At December 31,
1999 the Alternate Base Rate margin was 1.25% and the Eurodollar margin was
2.25%.
Amounts advanced under the Credit Facility are secured by substantially
all the assets of the Company. The Credit Facility contains several covenants,
including ones that require the Company to maintain certain levels of net worth,
leverage and cash flow coverage and others that limit the Company's ability to
incur indebtedness, make capital expenditures, create liens, engage in mergers
and consolidations, make restricted payments (including dividends), sell assets,
make investments, issue stock and engage in transactions with affiliates of the
Company and its subsidiaries.
In addition to the Credit Facility, the Company has an agreement with
the Bank of Montreal for a revolving credit facility to accommodate the working
capital needs of the Company's Canadian subsidiary. Borrowings under the
agreement are limited to certain advance rates based upon the eligible accounts
receivable and inventory of the Canadian subsidiary up to an aggregate maximum
of C$3.0 million.
Based on its operating results during 1998, the Company was in
technical default of the leverage and cash flow covenants of the Credit Facility
and the Company's interest rate swap agreement as of December 31, 1998. This
resulted in a cross default under the line of credit for the Company's Canadian
subsidiaries. Due to the defaults, the Company was prohibited from further
borrowings under the Credit Facility and the Canadian line of credit. In March
1999, the Company obtained from its lenders waivers of the various defaults and
certain amendments to the Credit Facility and the interest rate swap agreement.
In December 1999, in conjunction with the $10.0 million increase in the Credit
Facility, the leverage ratio and interest coverage covenants in the credit
agreement were amended to be consistent with the Company's current financial
projections. As of December 31, 1999, the Company was in compliance with its
covenants and believes that it will be able to comply with these covenants in
the future.
Additionally, the Company has approximately $110.0 million of the
Senior Notes outstanding. The indentures under which the Senior Notes were
issued contain certain covenants that, among other things, limit the Company's
ability to incur additional indebtedness. As of December 31, 1999, the Company
was in compliance with such covenants and believes that it will be able to
comply with these covenants in the future.
As of December 31, 1999, the Company's borrowing capacity under the
Credit Facility and the Canadian line of credit were $14.9 million and C$2.2
million, respectively. In addition, the Company had cash and cash equivalents on
hand of $8.5 million at December 31, 1999.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect that any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company may
need to seek additional capital through borrowings or equity financing.
26
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by
Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 issued June 1999),
effective for periods beginning after June 15, 2000. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated a part of a hedge and, if it is, the type of hedge transaction. The
Company anticipates that the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its financial
position.
YEAR 2000 COMPLIANCE
During 1999 the Company assembled an internal project team that
addressed the issue of computer programs and embedded computer chips being
unable to distinguish between the Year 1900 and the Year 2000. The project team
developed and implemented a three-step plan intended to result in the Company's
operations continuing with no or minimal interruption through the Year 2000. The
plan was designed to comply with guidelines established by the Automotive
Industry Action Group (an industry association supported by several of the major
OEMs).
The project team inventoried all of the Company's computer hardware and
software and all of its devices having imbedded computer technology, focusing on
five areas: (i) business systems; (ii) production (E.G., desktop computers and
remanufacturing machinery); (iii) financial management (E.G., banking software,
postage equipment and time clocks); (iv) facilities (E.G., heating and air
conditioning systems, elevators, telephones, and fire and security systems); and
(v) significant vendors and customers. The project team then determined whether
each inventoried system, device, customer or vendor was Year 2000 compatible and
those systems and devices that were not compatible were upgraded or replaced.
As a result of these efforts, the Company did not experience any
significant disruption in the function of any of its computer hardware or
software or devices with embedded computer technology during the Year 2000 date
change. The Company also did not experience any significant problems due to Year
2000 compliance issues of any of the Company's significant customers or vendors.
The Company will continue to monitor the functions of its computer
hardware and software and devices with embedded computer technology, as well as
the Year 2000 compliance of its significant customers and vendors, to discover
and promptly correct any latent Year 2