November 14, 1997
ADVANCED TECHNICAL PRODUCTS INC (ATPX)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The company continues to report profitable operating results for the third quarter ended September 30, 1997. Consolidated net income for the quarter ended September 30, 1997 rose to $819 thousand, or $.06 a share, up from $176 thousand, or $.01 per share, an increase of 366% over the same period last year. Consolidated net income for the first nine months of 1997 was $1,466 thousand, or $.11 per share, an increase of 212%, compared to $471 thousand or $ .05 per share during the first nine months of 1996.
Consolidated sales during the third quarter of 1997 were $6.1 million compared to $4.5 million in the third quarter of 1996, an increase of 36%. Consolidated sales for the first nine months of 1997 were $16.8 million compared to $13.4 million in 1996, an increase of 26%. Quarterly and nine months sales increases were reflected across the aluminum honeycomb and bonding segments with a slight decrease in the composite segment. This is due primarily to increase demand for commercial and military aircraft and aerospace materials and assemblies and a flatness in the demand for military composites.
Sales for the aluminum honeycomb segment for the third quarter and first nine months of 1997 increased to $4.4 and $11.5 million, respectively, compared to $2.8 and $8.9 million, respectively during similar periods in 1996. Increased honeycomb sales continued, due to results from a number of factors, including startup and full production rate on engine nacelle honeycomb assemblies for the C-17 program and honeycomb control surfaces for the 767 and 757 Boeing programs. General overall aircraft build rate increases further added to the increased sales volume.
Sales for the bonding/composite segments for the third quarter and first nine months of 1997 were $1.7 million and $ 5.3 million, respectively, compared to $1.7 and $ 4.5 million for 1996. Improved bonding/composite sales resulted primarily from bonded assemblies for military and commercial aircraft, space and other aerospace applications.
The backlog of customer orders as of September 30, 1997 increased to approximately $32 million, an increase of $12.4 million or 63% compared to a backlog of $19.6 million at the end of the third quarter of 1996.
Consolidated operating income for the third quarter 1997 was $595 thousand compared to $315 thousand in the third quarter of 1997, an increase of 89%. Consolidated operating income for the first nine months of 1997 was approximately $1.5 million compared to $833 thousand in 1996, an increase of 75%. Operating income for the aluminum honeycomb segment for the third quarter and first nine months of 1997 increased to $524 thousand and $1.2 million, respectively, compared to $175 thousand and $663 thousand respectively during similar periods in 1996. Operating income for the bonding/composite segment for the third quarter of 1997 decreased to $71 thousand compared to $140 thousand during similar period in 1996. Operating income for the bonding/composite segment for the first nine months of 1997 increased to $300 thousand, compared to $170 thousand during similar period in 1996. The overall improvement in consolidated operating income for 1997
resulted from higher sales and increased productivity from larger long-term contracts and improved gross margin (24.6% vs. 22.1%).
Interest expense for the third quarter 1997 was $147 thousand compared to $126 thousand in the third quarter of 1996. Interest expense for the first nine months of 1997 was $380 thousand on $7.7 million loans outstanding, compared to $374 thousand on $4.0 million loans outstanding in 1996. The interest rate in 1996 was prime plus 2-1/2% (10-1/2%) vs. 8.65% in 1997.
The expansion and rehabilitation of the Belcamp, Maryland facility are scheduled for completion during the fourth quarter of 1997 and will support expanding production requirements for engine nacelle honeycomb for the military C-17 aircraft program and honeycomb control surfaces for Boeing 767 and 757 aircraft programs.
On August 1, 1997, the Company's wholly-owned subsidiary, Alcore, entered into a technology license agreement with Showa Aircraft Industry Co., Ltd. of Japan ("Showa") for an initial term of ten years with an additional five year term upon the consent of Alcore and Showa. The agreement calls for Alcore to supply Showa all appropriate and necessary technical documentation, processes and production know-how to enable Showa to manufacture and sell PAA (phosphoric acid anodized) aluminum honeycomb exclusively in Japan, Asia and the Pacific Rim countries. The agreement also provides that Cytec Engineered Materials, Inc. ("Cytec"), Alcore's exclusive supplier of certain proprietary primer and adhesive materials for PAA honeycomb, to offer the same primer and adhesive materials to Showa for the duration of the term of the exclusive agreement between Alcore and Cytec. In the interim, period before Showa establishes full PAA honeycomb manufacturing capability, including the capability to PAA anodize and prime aluminum foil, the agreement calls for the Alcore to supply Showa PAA anodized and primed foil for use by Showa in the manufacture of PAA honeycomb. Additionally, the agreement called for Alcore to support Showa's efforts to secure full PAA honeycomb qualification by Boeing and other aircraft manufacturers on an expedited basis. In return for the technology transfer, Showa paid Alcore $500 thousand plus $100 thousand additional to be paid at the time Showa begins full PAA honeycomb production utilizing Showa PAA anodized and primed aluminum foil. Additionally, Showa will pay royalties of 4% for a period of five years on sales of all Showa produced PAA honeycomb utilizing Showa PAA anodized and primed aluminum foil.
FINANCIAL CONDITION
Net cash provided from operations during the first nine months of 1997 was $1,225 thousand, compared to $505 thousand cash used in operations during the same period in 1996. Net cash provided during the first nine months of 1997 was comprised of $1,466 thousand net income plus $1,067 thousand in non-cash items, primarily depreciation, offset by $1,308 thousand in changes in assets and liabilities. Net cash used in operations during the first nine months of 1996 consisted of $504 thousand net income, plus $1,103 thousand in non-cash items, again primarily depreciation, offset by $2,078 thousand in changes in assets and liabilities.
Net cash used in investing activities during the first nine months of 1997 was $4.6 million. This was primarily comprised of $2.4 million utilized for the purchase of the Company's aluminum
honeycomb manufacturing facility located in Belcamp, MD, $.6 million for the purchase of new machinery and equipment and $1.6 million for construction in progress at the Company's facilities located in Belcamp, Maryland and Glen Cove, New York.
Net cash provided by financing activities was approximately $3.4 million, comprised primarily of $2.7 million proceeds from the State of Maryland Industrial Development Bonds, $.2 million proceeds from the exercise of warrants and options, and $.5 million in increased borrowing against the Company's revolving credit facility.
On May 14, 1997, the Company entered into a financing agreement with the State of Maryland to provide $2.6 million in 15 year tax-exempt industrial development bonds bearing interest at a variable rate adjusted weekly to finance the purchase of the Company's Belcamp, Maryland honeycomb manufacturing facility and an adjacent 3.2 acre parcel of land. Previously, on April 17, 1997, the Company entered into an interest rate hedge agreement with First Union Bank of Maryland to fix the interest rate on the tax exempt bonds at 5.07% through the year 2012.
Additionally, on July 7, 1997, in conjunction with the tax exempt bond financing noted above, the Company entered into a ten-year $810 thousand Maryland Industrial and Commercial Redevelopment Fund (MICRF) loan agreement with interest set at a fixed rate of 5.1% annually, plus a five-year $60 thousand loan from Harford County, Maryland with interest set at a fixed rate of 5.5% and a $30 thousand Harford County, Maryland three year tax credit. The proceeds of these loans are intended to finance the expansion and rehabilitation of the Belcamp, Maryland honeycomb facility.
The Company believes it has sufficient capital resources to operate successfully over the next twelve months. Capital expenditure projects are being implemented in accordance with the Company's 1997 capital plan to ensure adequate capacity, facilities and support are available to meet anticipated increased demand for the Company's products. The Company believes that, based on current quarter and nine-month results, operating cash flow together with credit availability under the Company's revolving credit line will be sufficient to support its working capital needs. However, should circumstances arise affecting cash flow or requiring additional capital expenditures beyond those anticipated, there can be no assurances that such funds will be available. (See "Forward-Looking Statements - Cautionary Factors.")
SUBSEQUENT EVENTS
On October 31, 1997, TPG Holdings, Inc., a privately held Delaware corporation headquartered in Atlanta, Georgia ("TPG"), merged with and into the Company, with the Company being the surviving corporation under the name "Advanced Technical Products, Inc.," in accordance with the terms of an Acquisition Agreement and Plan of Merger dated June 6, 1997 by and between TPG and the Company, as amended on August 22, 1997. TPG was formed in 1995 to acquire the assets of three operating units of the Brunswick Technical Group of Brunswick Corporation. TPG has been a major supplier of advanced composite material products to the aerospace, defense and commercial markets. TPG's products include radomes, aircraft components, engine components, rocket motor cases, missile and satellite composite structures, pressure vessels, relocatable shelters, missile launch tubes, torque shafts and fuel tanks, as well as a wide range of integrated defense systems, including electro-optical systems, chemical detection systems, ordinance delivery systems and lightweight camouflage systems.
Upon consummation of the merger, each outstanding share of the common stock of the Company was converted into 0.1 share of the common stock of the combined company and each outstanding share of the common stock of TPG was converted into 8.3028 shares of the common stock of the combined company. The combined company succeeded to and assumed all of the rights and obligations of TPG and the Company. In addition, the combined company assumed all TPG options, the Company options and the Company warrants, each such option and warrant to become exercisable for the number of whole shares of the combined company's common stock equal to the number of shares of TPG common stock or Company common stock covered thereby immediately prior to the merger multiplied by 0.1 and 8.3028, respectively.
On June 25, 1997 the Company filed a Registration Statement on Form S-4 with the Securities and Exchange Commission covering the securities issuable by the combined company pursuant to the merger, which was declared effective on September 26, 1997. The merger was approved at the Annual Meeting of the Stockholders of the Company on October 30, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Statements of an Enterprise and Related Information" (Statement 131). Statement 131 establishes standards to report information about operating segments and related discussions about products and services, geographic areas and major customers. Statement 131 is effective for financial statements for the period beginning after December 15, 1997. The statement permits early application and requires restatements of all prior periods. The Company is currently evaluating the requirements of Statement 131, but does not believe that the adoption of Statement 131 will have a material effect on previously reported segment information.
FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS
Except for the historical information and statements contained in this Report, the matters and items set forth in this Report are forward looking statements that involve uncertainties and risks, some of which are discussed at appropriate points in the Report and are also summarized as follows:
The U.S. Government is a significant customer of the Company. Prime contracts represent 7% of its revenues for the nine months ended September 30, 1997. With the continuing pressure to reduce government spending, in addition to the worldwide political climate creating an environment of less visible military threats to the United States, the de-emphasis in military spending is expected to continue. This could potentially have a material adverse effect on future projects upon which the Company's backlog is based and upon programs the Company is pursuing.
Vendor prices for production materials such as aluminum foil, resins, liquid and film adhesives, reinforcing fiber materials and other materials and supplies could increase as demand for aircraft parts and assemblies increase to match higher build rates for commercial aircraft. Higher material prices and demand for lower aircraft part and assembly prices could place increasing pressure on the Company's operating margins and net income.
The Company currently sells honeycomb and bonded panel products to the commercial aircraft industry. Future planning for the Company anticipates continuing increases in demand for these products over the next several years. To the extent these increases fail to materialize or fall significantly below projections, the Company's business could be materially affected. |
