10-Q 1 h91979e10-q.txt AMERICAN PLUMBING & MECHANICAL, INC. - 9/30/01 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 333-81139 American Plumbing & Mechanical, Inc. (Exact name of Registrant as Specified in Its Charter) DELAWARE 76-0577626 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) 1950 LOUIS HENNA BLVD. 78664 ROUND ROCK, TEXAS (ZIP Code) (Address of Principal Executive Offices) (512) 246-5260 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 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 [ ] As of November 9, 2001, there were outstanding 13,211,383 shares of common stock and 331,116 shares of Class B common stock of the Registrant. ================================================================================ AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS PART I - Financial Information.......................................................................... 2 ITEM 1. - Financial Statements....................................................................... 2 ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8 ITEM 3. - Quantitative and Qualitative Disclosures About Market Risks................................ 12 PART II - Other Information............................................................................. 13 ITEM 1. - Legal Proceedings.......................................................................... 13 ITEM 2. - Changes in Securities and Use of Proceeds.................................................. 13 ITEM 3. - Defaults Upon Senior Securities............................................................ 13 ITEM 4. - Submission of Matters to a Vote of Security Holders........................................ 13 ITEM 5. - Other Information.......................................................................... 13 ITEM 6. - Exhibits and Reports on Form 8-K........................................................... 13 SIGNATURES.............................................................................................. 14

1 PART I - FINANCIAL INFORMATION ITEM 1. - Financial Statements AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands, Except Share Data)

The accompanying notes are an integral part of these consolidated financial statements. 2 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands)

The accompanying notes are an integral part of these consolidated financial statements. 3 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)

The accompanying notes are an integral part of these consolidated financial statements. 4 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION: American Plumbing & Mechanical, Inc. ("AMPAM" or the "Company") is the largest company in the United States focused primarily on the plumbing contracting services industry. AMPAM also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services to single family residential, multifamily residential and commercial/institutional customers. AMPAM (a Delaware corporation) was organized in June 1998, and acquired ten U.S. businesses (the "Founding Companies") on April 1, 1999. The acquisitions were accounted for using the purchase method of accounting with Christianson Enterprises, Inc. and affiliates ("Christianson") being reflected as the accounting acquiror. Subsequently, the Company acquired the outstanding stock of three additional companies and the assets of a fourth company. The "Subsequent Acquisitions," collectively with the Founding Companies are referred to as the "Acquired Companies." These unaudited interim statements should be read in conjunction with the Company's historical consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for reporting interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The Company believes all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full fiscal year. Certain reclassifications have been made to the prior-year financial statements to conform to the current-year presentation. 2. COMMITMENTS AND CONTINGENCIES: The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company's financial position or results of operations. As of January 1, 2000, the Company became self insured for health care, workers' compensation, and general, property and auto liability up to predetermined amounts above which third party insurance applies. The Company is fully insured through third party insurance for all other types of exposures including an umbrella policy. 3. ACQUISITION: On March 1, 2000, the Company acquired the stock of Lindy Dennis Industries and related affiliates (collectively "LDI"), headquartered in Corona, California. LDI operates primarily as a heating, 5 ventilation and air conditioning ("HVAC") contractor specializing in the multifamily residential market. The consideration paid by the Company for LDI consisted of 1,346,154 shares of the Company's common stock and approximately $12 million in cash. The cash portion of the consideration was funded through borrowings under the Company's existing $95 million Credit Facility. The Company accounted for the acquisition of LDI using the purchase method of accounting, and the results of operations of LDI are included in the accompanying financial statements from the date of acquisition forward. The accompanying consolidated balance sheet as of September 30, 2001, includes a final allocation of the purchase price to the assets acquired and liabilities assumed, as well as the amount of goodwill generated by the transaction. The unaudited pro forma data presented below consists of the income statement data presented in the accompanying consolidated financial statements plus pro forma income statement data for LDI as if the acquisition and related financing were effective on January 1, 2000 (in thousands):

4. COMPREHENSIVE INCOME ($ IN THOUSANDS): Comprehensive income is a measure of all changes in stockholders' equity that result from recognized transactions and other economic events of a particular period, other than transactions with owners in their capacity as owners. Total comprehensive income for the three months ended September 30, 2000 and September 30, 2001 is $4,642 and $2,027, respectively. Total comprehensive income for the nine months ended September 30, 2000 and September 30, 2001 is $12,102 and $6,801, respectively. 6 5. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Statement of Financial Accounting Standards No. 141 ("SFAS 141"), requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, and reclassification of certain intangibles out of previously reported goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. The ultimate impact of the new accounting standards has yet to be determined. The Company has $156.2 million of goodwill on the balance sheet at September 30, 2001, and has recognized $4.2 million of goodwill amortization expense for nine months ended September 30, 2001. Effective January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which requires the Company to measure all derivative instruments at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. On January 2, 2001, the Company entered into an interest rate swap agreement, which effectively converted $30 million of its variable rate debt under its bank agreement to fixed rate debt. The Company's risk management policy related to this swap agreement is to hedge the exposure to interest rate movements on a portion of its long-term debt. Under the swap agreement, payments are made based on a fixed rate of 6.34% and received on a LIBOR based variable rate (2.59% at September 28, 2001). Differentials to be paid or received under the agreement are recognized as interest expense and settled quarterly. The agreement matures on December 31, 2001. The Company has designated the interest rate swap agreement as a cash flow hedge of future interest payments on its variable rate long-term debt. On September 30, 2001, the Company has a derivative liability of $292,000 included in the accounts payable and accrued liabilities section of the balance sheet. A corresponding amount, net of income tax benefit of $114,000, was recorded as a component of stockholders' equity as accumulated other comprehensive loss. 7 ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q, THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER DETAILED INFORMATION REGARDING THE COMPANY INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 AND OTHER REPORTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Exchange Act to be covered by safe harbors created thereby. Such forward-looking statements are made only as of the date of this report and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned that such information involves risks and uncertainties, including those created by general market conditions, competition and the possibility that events may occur which limit the ability of American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM" or the "Company") to maintain or improve its operating results. Such risks, uncertainties and other important factors include, among others, retention of key management, a national economic downturn or one or more regional downturns in construction, shortages of labor and specialty building materials, difficulty in obtaining or increased costs associated with debt financing, seasonal fluctuations in the demand for Plumbing and HVAC systems, and the use of incorrect estimates for bidding a fixed price contract. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success, as well as other statements which include words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. GENERAL American Plumbing and Mechanical, Inc., a Delaware corporation, is the largest company in the United States focused primarily on the plumbing contracting services industry. The Company provides plumbing, heating, ventilation and air conditioning ("HVAC") and mechanical contracting services to single family residential, multifamily residential and commercial/institutional customers. On April 1, 1999, AMPAM acquired ten U.S. companies (the "Founding Companies"), which, individually, were leading regional providers of plumbing and mechanical contracting services, and commenced operations as one company. AMPAM believes that by combining these regional leaders into one organization, it has created a national provider capable of strengthening and broadening relationships with its consolidating customer base and enhancing its operating efficiency. Prior to being acquired by AMPAM, the Founding Companies performed plumbing and mechanical contracting services for an average of approximately 31 years in 25 states. AMPAM subsequently acquired all of the outstanding stock of three companies and the assets of a fourth company (the "Subsequent Acquisitions," and collectively with the Founding Companies, the "Acquired Companies"). 8 During the first nine months of this year, AMPAM incorporated four new operating subsidiaries. The Company commenced single family plumbing operations in Dallas, Texas, in Charlotte, North Carolina and in Sacramento, California. The Company also commenced commercial and multi-family plumbing operations in Sacramento, California. In addition, operations were expanded in Houston, Texas to provide single family plumbing, and in Tampa, Florida, Baltimore, Maryland, and Denver, Colorado to provide multi-family HVAC. RESULTS OF OPERATIONS Three months ended September 30, 2000 compared to three months ended September 30, 2001 Revenue increased $12.2 million, or 8%, from $145.5 million for the three months ended September 30, 2000, to $157.7 million for the three months ended September 30, 2001. Increases were noted in single family and multi-family operations, offset by a decrease in commercial operations. The decrease in commercial operations is the result of a focus on higher margin work. During this period, revenue from start-ups increased $4.6 million from $1.7 million for the three months ended September 30, 2000, to $6.3 million for the three months ended September 30, 2001. Gross profit decreased $0.2 million, from $26.5 million for the three months ended September 30, 2000, to $26.3 million for the three months ended September 30, 2001. The decline in gross profit was primarily attributable to decreased margins and lower volume at commercial operations, offset by increased volume at single family operations and start-ups. Gross profit from start-ups increased $0.4 million from $0.3 million for the three months ended September 30, 2000, to $0.7 million for the three months ended September 30, 2001. Gross margins decreased from 18.2% for the three months ended September 30, 2000, to 16.7% for the three months ended September 30, 2001. The decline in gross margin reflects increased competition and higher labor costs. The Company expects continued margin pressure, particularly in single family markets, given the current state of the U.S. economy. Selling, general and administrative expenses increased $4.4 million, from $11.4 million , or 8% of revenue, for the three months ended September 30, 2000 to $15.8 million, or 10% of revenue, for the three months ended September 30, 2001. The increase in selling, general and administrative expenses was primarily due to higher health and business insurance costs of $3.5 million, or 2% of revenue, and increased volume. Additionally, the Company incurred costs of $1.5 million on certain previously announced strategic initiatives, primarily start-ups, branding and warranty programs. Interest expense of $4.6 million is comparable for the periods reported. This is a result of higher levels of debt, offset by lower interest rates. The decrease in the provision for income taxes of $1.9 million results from lower taxable income. Net income decreased $2.4 million, from $4.6 million for the three months ended September 30, 2000, to $2.2 million for the three months ended September 30, 2001. The decrease is primarily due to decreased margins, higher selling, general and administrative expenses, and losses from the start-ups. AMPAM's backlog at the end of the third quarter was $232 million (excluding single family). Nine months ended September 30, 2000 compared to nine months ended September 30, 2001 Revenue increased $49.4 million, or 12%, from $412.3 million for the nine months ended September 30, 2000, to $461.7 million for the nine months ended September 30, 2001. Increases were noted in single family and multi-family operations, offset by a decrease in commercial operations. The decrease in commercial operations is the result of a focus on higher margin work. During this period, 9 revenue from start-ups increased $11.2 million from $1.7 million for the nine months ended September 30, 2000, to $12.9 million for the nine months ended September 30, 2001. Gross profit increased $1.8 million, from $75.2 million for the nine months ended September 30, 2000, to $77.0 million for the nine months ended September 30, 2001. The increase in gross profit was primarily attributable to increased volume at single family operations and start-ups, offset by margin declines in all markets, with the most significant margin decline in multi-family operations. Gross profit from start-ups increased $0.5 million from $0.3 million for the nine months ended September 30, 2000, to $0.8 million for the nine months ended September 30, 2001. Gross margin decreased from 18.2% for the nine months ended September 30, 2000, to 16.7% for the nine months ended September 30, 2001. The decline in gross margin reflects increased competition and higher material costs. The Company expects continued margin pressure, particularly in single family markets, given the current state of the U.S. economy. Selling, general and administrative expenses increased $10.3 million, from $34.6 million, or 8% of revenue, for the nine months ended September 30, 2000 to $44.9 million, or 10% of revenue, for the nine months ended September 30, 2001. The increase in selling, general and administrative expenses was primarily due to higher health and business insurance costs of $6.0 million, or 1% of revenue, and increased volume. Additionally, the Company incurred costs of approximately $3.7 million on certain previously announced strategic initiatives, primarily start-ups, branding and warranty programs. Interest expense increased $0.3 million for the nine months ended September 30, 2001 as compared to the same period in 2000. This is a result of higher levels of debt, offset by lower interest rates. The decrease in the provision for income taxes of $3.5 million results from lower taxable income. Net income decreased $5.1 million, from $12.1 million for the nine months ended September 30, 2000, to $7.0 million for the nine months ended September 30, 2001. The decrease is primarily due to decreased margins, higher selling, general and administrative expenses, and losses from the start-ups. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, the Company had $66.6 million in working capital and $166.8 million of outstanding long-term indebtedness, including capital lease obligations totaling $1.7 million. For the nine months ended September 30, 2001, net cash provided by operating activities of $10.1 million was partially offset by cash used in investing activities of $7.8 million, which was primarily capital expenditures of $6.2 million and earnout payments of $2.2 million. Cash used in financing activities for the nine months ended September 30, 2001 was $1.1 million and was primarily due to distributions to stockholders, offset by borrowings. The Company's Credit Facility, with a total commitment of $95 million, matures on March 31, 2004. The Credit Facility bears interest, at the option of the Company, at the base rate of the arranging bank plus an applicable margin, or at LIBOR plus an applicable margin. As of September 30, 2001, the company had borrowings of $71.5 million and letters of credit outstanding in the amount of $0.8 million, leaving $22.7 million available under the Credit Facility. The Company anticipates that its cash flow from operations and borrowings under the Credit Facility will provide sufficient cash to enable the Company to meet its working capital needs, debt service requirements, and planned capital expenditures for property and equipment through the foreseeable future. 10 SEASONALITY The plumbing and mechanical contracting services industry is influenced by seasonal factors, which generally result in lower activity during winter months than in other periods. As a result, the Company expects that its revenues and profits will generally be lower in the first and fourth quarters of each fiscal year, and higher in the second and third quarters. 11 ITEM 3. - Quantitative and Qualitative Disclosures About Market Risks The Company is exposed to various market risks primarily related to potential adverse changes in interest rates. In the normal course of business, the Company employs established policies and procedures to manage this risk. The Company is not exposed to any other significant market risks, such as foreign currency exchange risk. The Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The Company's debt with fixed interest rates consists of Senior Subordinated Notes and capital leases. AMPAM's debt with variable interest rates consists primarily of the Credit Facility. Effective January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which requires the company to measure all derivative instruments at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. AMPAM utilizes certain "derivative instruments" to manage its exposure to market risk. During the first quarter, the Company entered into an interest rate swap agreement, which effectively converted $30 million of its variable rate debt under the Credit Facility to fixed rate debt. The Company's risk management policy related to this swap agreement is to hedge the exposure to interest rate movements on a portion of its long-term debt. On September 30, 2001, the Company has a derivative liability of $292,000 included in the accounts payable and accrued liabilities section of the balance sheet. A corresponding amount, net of income tax benefit of $114,000 was recorded as a component of stockholders' equity as accumulated other comprehensive income. Any change in value of this contract, real or hypothetical, would be significantly offset by an inverse change in the value of the variable rate (LIBOR) on the Credit Facility. Other than the items mentioned above, there were no other material quantitative or qualitative changes during the first nine months of fiscal 2001 in the Company's market risk sensitive instruments. 12 PART II - OTHER INFORMATION ITEM 1. - Legal Proceedings From time to time the Company is involved in litigation relating to claims arising out of operations in the normal course of business. The Company maintains insurance coverage against potential claims in an amount which management believes to be adequate. Currently, the Company is not aware of any legal proceedings or pending claims that management believes will have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. ITEM 2. - Changes in Securities and Use of Proceeds None ITEM 3. - Defaults Upon Senior Securities None ITEM 4. - Submission of Matters to a Vote of Security Holders None ITEM 5. - Other Information None ITEM 6. - Exhibits and Reports on Form 8-K (a) The exhibits to this report are listed below *3.1 Amended and Restated Certificate of Incorporation (American Plumbing& Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.1). *3.2 Amended and Restated Bylaws (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.2). *3.3 Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.3). *4.1 Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc., State Street Bank and Trust Company and the other parties named therein with respect to $125,000,000 11 5/8% Senior Subordinated Notes due 2008 (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 4.1). *Incorporated by reference (b) The registrant filed no reports on Form 8-K during the period covered by this quarterly report on Form 10-Q. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN PLUMBING AND MECHANICAL, INC. Date: November 9, 2001 By: /s/ David C. Baggett -------------------- David C. Baggett President and Chief Financial Officer 14

AMERICAN PLUMBING & MECHANICAL INC 10-Q