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Results of Operations
For the Three Months
Ended October 31,
---------------------------------------------------------
1999 1998
------------------------ -------------------------
(Thousands of Dollars) Amount % Amount %
------------------------ -------------------------
Net Sales $277,189 100.0% $232,785 100.0%
Cost of Sales 216,764 78.2% 191,013 82.1%
-------- -------- -------- -------
Gross Profit 60,425 21.8% 41,772 17.9%
Selling, Engineering and Administrative Expense 30,870 11.1% 22,164 9.5%
Amortization of Goodwill and Intangibles 1,640 0.6% 1,060 0.5%
-------- -------- -------- -------
Operating Income 27,915 10.1% 18,548 8.0%
Interest Expense (12,124) (4.4%) (10,403) (4.5%)
Provision for Income Taxes 6,000 2.2% 3,177 1.4%
Minority Interest (1,811) (0.7%) (761) (0.3%)
Income from Unconsolidated Joint Ventures (6) 0.0% 1,181 0.5%
-------- -------- -------- -------
Net Income $ 7,974 2.9% $ 5,388 2.3%
======== ======== ======== =======
Three Months Ended October 31, 1999 Compared to Three Months Ended October 31,
Net Sales Net sales of $277.2 million in the first quarter of fiscal year 2000 increased $44.4 million, or 19.1%, from the first quarter of fiscal year 1999. This increase was due to higher demand for automotive electrical products in the OEM market, the effect of the acquisitions of Williams Technologies in the second quarter of fiscal year 1999 and Engine Master in the first quarter of fiscal year 2000 and increased demand for both electrical and powertrain/drivetrain remanufactured products in the aftermarket.
Gross Profit Gross profit of $60.4 million increased $18.7 million, or 44.7%, and as a percentage of sales improved from 17.9% in the first quarter of 1999 to 21.8% in the first quarter of 2000. The growth in gross profit dollars reflects the sales growth discussed above. The improvement in margin was due to the realization of cost efficiencies generated by the OEM restructuring, the benefits of lean manufacturing initiatives, leveraging of fixed manufacturing costs and the effect of certain aftermarket and foreign acquisitions which generate higher gross profit margins.
Selling, Engineering and Administrative Expenses Selling, engineering and administrative (SE&A) expenses increased $8.7 million, or 39.3%, and as a percentage of sales increased from 9.5% to 11.1% due primarily to the effect of acquisition related activities and aftermarket marketing initiatives.
Operating Income Operating income of $27.9 million increased $9.4 million, or 50.5%, and as a percentage of sales improved from 8.0% in the first quarter of fiscal year 1999 to 10.1% in the first quarter of fiscal year 2000. This improvement reflects the sales and gross margin issues discussed above, partially offset by higher SE&A expense.
Interest Expense Interest expense of $12.1 million increased $1.7 million, or 16.5%, from the first quarter of fiscal 1999 due primarily to a higher average level of debt incurred to finance acquisitions and capital expenditures.
Income Taxes Income tax expense in the first quarter of fiscal year 2000 was $6.0 million compared to $3.2 million in the comparable period last year. The Company's consolidated effective income tax rate of 38.0% was down from 39.0% due to the implementation of various tax planning initiatives and the effect of the acquisition of certain foreign subsidiaries.
Income (Loss) From Unconsolidated Joint Ventures The Company's share of the earnings of its unconsolidated joint ventures of $1.2 million in the first quarter of fiscal year 1999 were primarily attributable to Remy Korea Ltd., which was consolidated effective June 25, 1999.
Liquidity and Capital Resources
The Company's short-term liquidity needs include required debt service, including capital lease payments, day to day operating expenses, working capital requirements and the funding of capital expenditures. Long-term liquidity requirements include principal payments of long-term debt and the funding of acquisitions. The Company's principal sources of cash to fund its short-term liquidity needs consist of cash generated by operations and borrowing under the Senior Credit Facility. As of December 1, 1999, borrowings under the Senior Credit Facility were $114.7 million, leaving $185.3 million available under the $300 million facility, net of letters of credit.
In the first quarter of fiscal year 2000, cash provided by operating activities was $.5 million compared to cash used of $24.5 million in the first quarter of fiscal year 1999. This improvement reflects increased earnings, depreciation, amortization and a smaller increase in net working capital from year-end. Accounts receivable increased $37.7 from July 31 due to strong shipments during the quarter to both OEM and aftermarket customers. Accounts payable increased $14.5 million due to first quarter production levels and the timing of payments. The Company's net trade cycle, including accounts receivable, inventory and accounts payable days, declined compared with both year-end and first quarter 1999.
Capital expenditures of $13.1 million in the first quarter were in line with planned spending and included investments in machinery and equipment in certain foreign operations. In the first quarter, the Company completed the acquisition of Engine Master, a remanufacturer of engines.
Net borrowings under the Company's revolving line of credit and other debt increased $14.8 million in the first quarter compared to a $30.7 million increase in the first quarter of fiscal year 1999. This improvement reflects the increase in cash generated by operating activities discussed above partially offset by higher capital spending and the acquisition.
The Company believes that cash generated from operations, together with the amounts available under the Senior Credit Facility, will be adequate to meet its debt service requirements, capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard. The Company's future operating performance and ability to service, extend, or refinance its indebtedness will be subject to future economic conditions and to financial, business and other factors that are beyond the Company's control.
Seasonality
The Company's business is moderately seasonal, as its major OEM customers historically have one- to two-week summer shutdowns of operations during the fourth fiscal quarter. In addition, the Company typically has shut down its own operations for one week each July, depending on backlog, scheduled maintenance and inventory buffers, as well as an additional week during the December holidays. Consequently, the Company's second and fourth quarter results reflect the effects of these shutdowns.
Year 2000 Readiness Disclosure
The Company has established remediation plans for all major information technology based systems potentially affected by the Year 2000 issue. The primary phases and current status of the plans for internal systems are summarized as follows:
Enterprise awareness and planning. This phase involved the establishment of project teams and plans for each subsidiary and joint venture. This phase has been completed for all subsidiaries and the Company is in the process of determining the status of the joint ventures. Inventory of all hardware and software. This phase has been completed. Impact analysis/assessment. This phase has been completed. Planning and scheduling. Plans have been implemented for all mission- critical applications. Conversion. Each material mission-critical system has been converted to a tested Year 2000 environment. Testing. Testing will continue until December 31, 1999 on all mission-critical systems to mitigate any exposure. Implementation. All material mission-critical systems have been implemented.
Assessment of the Company's third-party risk involves the identification of critical vendors, Year 2000 confirmation correspondence, evaluations and selected vendor reviews. Remediation plans are being developed for identified areas of third-party risk.
Foreign Sales
A portion of the Company's sales are derived from sales made to customers in foreign countries. Because of these foreign sales, the Company's business is subject to the risks of doing business abroad, including currency exchange rate fluctuations, limits on repatriation of funds, compliance with foreign laws and other economic and political uncertainties.