SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2003 |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Transition period from _______________ to ________________ |
| Commission file number | 0-20328 | ||
AMTROL Inc.
| Rhode Island | 05-0246955 | |
|
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| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) |
1400 Division Road, West Warwick, RI 02893-1008
Registrant’s telephone number, including area code: (401) 884-6300
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: $.01 Par Value: 100 shares of Common stock as of August 13, 2003.
AMTROL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
| PAGE | ||||||||
| PART I. | Financial Information |
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| Item 1. | Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 |
3 | ||||||
Condensed Consolidated Statements of Operations -
For the Quarter and Six Months Ended June 30, 2003
and June 30, 2002 |
4 | |||||||
Condensed Consolidated Statements of Shareholders’ Equity -
For the Six Months Ended June 30, 2003 and June 30, 2002 |
5 | |||||||
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 2003 and June 30, 2002 |
6 | |||||||
Notes to Condensed Consolidated Financial Statements |
7 | |||||||
| Item 2. | Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
15 | ||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
21 | ||||||
| Item 4. | Controls and Procedures |
21 | ||||||
| PART II. | Other Information |
|||||||
| Item 1. | Legal Proceedings |
22 | ||||||
| Item 2. | Changes in Securities and Use of Proceeds |
22 | ||||||
| Item 3. | Defaults Upon Senior Securities |
22 | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders |
22 | ||||||
| Item 5. | Other Information |
22 | ||||||
| Item 6. | Exhibits and Reports on Form 8-K |
22 | ||||||
Signatures |
23 | |||||||
Certifications |
24 | |||||||
2
AMTROL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
| Unaudited | |||||||||||
| June 30, 2003 | December 31, 2002 | ||||||||||
Current Assets: |
|||||||||||
Cash and cash equivalents |
$ | 592 | $ | 1,797 | |||||||
Accounts receivable, less allowance for doubtful
accounts |
33,069 | 29,765 | |||||||||
Inventories |
23,538 | 22,445 | |||||||||
Tax refund receivable |
2,979 | 2,233 | |||||||||
Deferred income taxes — short-term |
1,681 | 1,681 | |||||||||
Prepaid expenses and other |
1,762 | 1,357 | |||||||||
Total current assets |
63,621 | 59,278 | |||||||||
Property, Plant and Equipment, Net |
36,529 | 38,501 | |||||||||
Other Assets: |
|||||||||||
Goodwill |
119,205 | 119,205 | |||||||||
Deferred financing costs |
3,687 | 4,186 | |||||||||
Deferred income taxes — long-term |
7,267 | 7,267 | |||||||||
Other |
1,463 | 1,227 | |||||||||
Total other assets |
131,622 | 131,885 | |||||||||
| $ | 231,772 | $ | 229,664 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
Current Liabilities: |
|||||||||||
Current maturities of long-term debt |
$ | 2,957 | $ | 2,957 | |||||||
Notes payable to banks |
7,468 | 6,923 | |||||||||
Accounts payable |
27,727 | 23,826 | |||||||||
Accrued expenses |
11,591 | 16,773 | |||||||||
Accrued interest |
90 | 203 | |||||||||
Accrued income taxes |
1,316 | 719 | |||||||||
Total current liabilities |
51,149 | 51,401 | |||||||||
Other Noncurrent Liabilities |
3,744 | 4,023 | |||||||||
Long Term Debt, Less Current Maturities |
160,912 | 158,391 | |||||||||
Shareholders’ Equity: |
|||||||||||
Capital stock $.01 par value — authorized 1,000 shares,
100 shares issued |
— | — | |||||||||
Additional paid-in capital |
99,273 | 99,273 | |||||||||
Retained deficit |
(82,890 | ) | (81,393 | ) | |||||||
Accumulated other comprehensive loss |
(416 | ) | (2,031 | ) | |||||||
Total shareholders’ equity |
15,967 | 15,849 | |||||||||
| $ | 231,772 | $ | 229,664 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AMTROL INC. AND SUBSIDIARIES
| QUARTER ENDED | SIX MONTHS ENDED | |||||||||||||||
| June 30, 2003 | June 30, 2002 | June 30, 2003 | June 30, 2002 | |||||||||||||
Net sales |
$ | 50,162 | $ | 51,123 | $ | 101,277 | $ | 93,665 | ||||||||
Cost of goods sold |
38,953 | 39,464 | 79,803 | 72,086 | ||||||||||||
Gross profit |
11,209 | 11,659 | 21,474 | 21,579 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and
administrative |
6,686 | 7,309 | 13,821 | 14,034 | ||||||||||||
Income from operations |
4,523 | 4,350 | 7,653 | 7,545 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(4,960 | ) | (5,115 | ) | (9,686 | ) | (9,923 | ) | ||||||||
Interest income |
7 | 8 | 34 | 29 | ||||||||||||
Other, net |
(8 | ) | (649 | ) | 1,442 | (636 | ) | |||||||||
Loss before provision
for income taxes |
(438 | ) | (1,406 | ) | (557 | ) | (2,985 | ) | ||||||||
Provision for income taxes |
277 | 348 | 940 | 809 | ||||||||||||
Loss before cumulative
effect of a change in
accounting principle |
(715 | ) | (1,754 | ) | (1,497 | ) | (3,794 | ) | ||||||||
Cumulative effect of a
change in accounting
principle |
— | — | — | (38,087 | ) | |||||||||||
Net loss |
($715 | ) | ($1,754 | ) | ($1,497 | ) | ($41,881 | ) | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AMTROL INC. AND SUBSIDIARIES
Six Months Ended June 30, 2003
| Accumulated Other | |||||||||||||||||||||
| Additional Paid- | Comprehensive | Comprehensive | |||||||||||||||||||
| Common Stock | in Capital | Retained Deficit | Income (Loss) | Income (Loss) | |||||||||||||||||
Balance, December 31, 2002 |
$ | — | $ | 99,273 | $ | (81,393 | ) | $ | (2,031 | ) | $ | — | |||||||||
Net loss |
— | — | (782 | ) | — | (782 | ) | ||||||||||||||
Derivative instrument valuation adjustment |
— | — | — | 73 | 73 | ||||||||||||||||
Currency translation adjustment |
— | — | — | 185 | 185 | ||||||||||||||||
Balance, March 31, 2003 |
— | 99,273 | (82,175 | ) | (1,773 | ) | (524 | ) | |||||||||||||
Net loss |
— | — | (715 | ) | — | (715 | ) | ||||||||||||||
Derivative instrument valuation adjustment |
— | — | — | 78 | 78 | ||||||||||||||||
Currency translation adjustment |
— | — | — | 1,279 | 1,279 | ||||||||||||||||
Balance, June 30, 2003 |
$ | — | $ | 99,273 | $ | (82,890 | ) | $ | (416 | ) | $ | 118 | |||||||||
Six Months Ended June 30, 2002
| Accumulated Other | |||||||||||||||||||||
| Additional Paid- | Comprehensive | Comprehensive | |||||||||||||||||||
| Common Stock | in Capital | Retained Deficit | Income (Loss) | Income (Loss) | |||||||||||||||||
Balance, December 31, 2001 |
$ | — | $ | 99,273 | $ | (36,064 | ) | $ | (4,990 | ) | $ | — | |||||||||
Net loss |
— | — | (40,127 | ) | — | (40,127 | ) | ||||||||||||||
Derivative instrument valuation adjustment |
— | — | — | 304 | 304 | ||||||||||||||||
Currency translation adjustment |
— | — | — | (262 | ) | (262 | ) | ||||||||||||||
Balance, March 31, 2002 |
— | 99,273 | (76,191 | ) | (4,948 | ) | (40,085 | ) | |||||||||||||
Net loss |
— | — | (1,754 | ) | — | (1,754 | ) | ||||||||||||||
Derivative instrument valuation adjustment |
— | — | — | 204 | 204 | ||||||||||||||||
Currency translation adjustment |
— | — | — | 2,394 | 2,394 | ||||||||||||||||
Balance, June 30, 2002 |
$ | — | $ | 99,273 | $ | (77,945 | ) | $ | (2,350 | ) | $ | (39,241 | ) | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
AMTROL INC. AND SUBSIDIARIES
| SIX MONTHS ENDED | ||||||||||
| June 30, 2003 | June 30, 2002 | |||||||||
Cash Flows Provided by (Used in) Operating Activities: |
||||||||||
Net loss |
$ | (1,497 | ) | $ | (41,881 | ) | ||||
Cumulative effect of a change in accounting principle |
— | 38,087 | ||||||||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities - |
||||||||||
Depreciation and amortization |
4,637 | 4,450 | ||||||||
Provision for losses on accounts receivable |
36 | 32 | ||||||||
Gain on purchase of senior subordinated notes |
(1,513 | ) | — | |||||||
Changes in operating assets and liabilities |
(5,619 | ) | (5,597 | ) | ||||||
Net cash used in operating activities |
(3,956 | ) | (4,909 | ) | ||||||
Cash Flows Provided by (Used in) Investing Activities: |
||||||||||
Capital expenditures |
(1,020 | ) | (1,006 | ) | ||||||
Net cash used in investing activities |
(1,020 | ) | (1,006 | ) | ||||||
Cash Flows Provided by (Used in) Financing Activities: |
||||||||||
Repayment of debt |
(73,640 | ) | (72,218 | ) | ||||||
Issuance of debt |
77,267 | 78,064 | ||||||||
Net cash provided by financing activities |
3,627 | 5,846 | ||||||||
Net Decrease in Cash and Cash Equivalents |
(1,349 | ) | (69 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
144 | 107 | ||||||||
Cash and Cash Equivalents, beginning of period |
1,797 | 983 | ||||||||
Cash and Cash Equivalents, end of period |
$ | 592 | $ | 1,021 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly, in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows of AMTROL Inc. and its subsidiaries (the “Company”) for the interim periods presented. Such adjustments consisted of only normal recurring items. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire year. These condensed consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and accordingly should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K.
2. Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. Significant Accounting Policies
Revenue Recognition and Related Costs
In accordance with Staff Accounting Bulletin (“SAB”) No. 101, the Company recognizes revenue only when there is a valid contract or purchase order, which includes a fixed price; the goods have been delivered in accordance with the shipping terms; and there is an expectation that the collection of the revenue is reasonably assured.
The Company generally recognizes revenue upon shipment of its products to customers net of applicable provisions for discounts and allowances. Allowances for cash discounts and volume rebates, among others, are recorded as a reduction to revenue at the time of sale based upon the estimated future outcome. Cash discounts and volume rebates are based upon certain percentages and sales targets agreed to with the Company’s customers, which are typically earned by the customers over an annual period. At June 30, 2003 and 2002, the Company had accrued $2.1 million and $2.1 million, respectively, for such volume allowances. These amounts are included in accrued expenses in the accompanying condensed consolidated balance sheets.
Inventories
The Company’s inventories are stated at the lower of cost or market including material, labor and manufacturing overhead (see Note 6). The Company records provisions, as appropriate, to write-
7
down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause the actual results to differ from the estimates at the time such inventory is disposed or sold. The Company believes that its procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to the actual amounts.
Warranty
The Company extends various warranties covering most of its products ranging from a limited one-year warranty to a limited lifetime warranty against defects in materials and workmanship. The specific terms and conditions of the warranties depend on the type of product that is sold. The Company’s warranties are generally limited to the replacement of the defective parts or products at the Company’s option. The Company estimates the costs that may be incurred under its warranty program and records a liability at the time of sale. Factors that influence the Company’s warranty liability include the amount of production, manufactured cost of the product, historical warranty returns and anticipated returns based upon engineering and material improvements. The Company periodically assesses the adequacy of its warranty reserve through a detailed analysis and adjusts the reserve accordingly.
The following chart illustrates the changes in the Company’s warranty reserve during the latest six month period:
| (in thousands) | ||||