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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended May 1, 2004, or [  ] 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 333-38223 ARGO-TECH CORPORATION (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    31-1521125
(I.R.S. employer
identification no.)
 23555 Euclid Avenue
Cleveland, Ohio
(Address of principal executive offices)
    
    44117
(Zip code)
 (216) 692-6000
(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 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. [X] YES [  ] NO Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [  ] YES [X] NO All of the outstanding capital stock of the registrant is held by
AT Holdings Corporation. As of May 15, 2004, 1 share of the registrants common stock, $.01
par value, was outstanding.




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INDEX Page No.PART I  FINANCIAL INFORMATIONItem 1  Condensed Financial StatementsConsolidated Balance Sheets as of May 1, 2004 and October 25, 2003
    
    
    3Consolidated Statements of Net Income for the 27 week period
and 13 week period ended May 1, 2004 and the 26 week period and
13 week period ended April 26, 2003
    
    
    4Consolidated Statements of Cash Flows for the 27 week period ended
May 1, 2004 and the 26 week period ended April 26, 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6 - 11Item 2 - Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    11 - 17Item 3 - Quantitative and Qualitative Disclosure about Market Risk
    
    
    17Item 4  Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 6 - Exhibits and Reports on Form 8-K
    
    
    18Signature
    
    
    19Certifications
    
    
    20-22Exhibit 31.1 Certification of Pres and CEOExhibit 31.2 Certification of Vice Pres and CFOExhibit 32 Cert of CEO and CFO
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1.
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of AT Holdings Corporation)
 
 CONSOLIDATED BALANCE SHEETS
MAY 1, 2004 AND OCTOBER 25, 2003
(In thousands, except share data) 2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    15,383
    
    
    $
    14,057Receivables, net
    
    
    28,701
    
    
    
    28,335Income tax receivable
    
    
    3,281
    
    
    
    3,500Inventories
    
    
    26,385
    
    
    
    25,701Deferred income taxes and prepaid expenses
    
    
    6,021
    
    
    
    5,352Total current assets
    
    
    79,771
    
    
    
    76,945PROPERTY AND EQUIPMENT, net of
accumulated depreciation
    
    
    22,718
    
    
    
    23,956GOODWILL
    
    
    110,059
    
    
    
    110,059INTANGIBLE ASSETS, net of accumulated amortization
    
    
    33,209
    
    
    
    34,916DEFERRED FINANCING AND OTHER ASSETS
    
    
    8,767
    
    
    
    9,921Total Assets
    
    $
    254,524
    
    
    $
    255,797LIABILITIES AND SHAREHOLDERS EQUITY/(DEFICIENCY)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    13,000
    
    
    $
    12,000Accounts payable
    
    
    5,220
    
    
    
    7,254Accrued liabilities
    
    
    24,321
    
    
    
    22,757Total current liabilities
    
    
    42,541
    
    
    
    42,011LONG-TERM DEBT, net of current maturities
    
    
    200,512
    
    
    
    207,349OTHER NONCURRENT LIABILITIES
    
    
    21,701
    
    
    
    21,753Total Liabilities
    
    
    264,754
    
    
    
    271,113REDEEMABLE ESOP STOCK
    
    
    14,887
    
    
    
    15,452Unearned ESOP stock
    
    
    (420
    )
    
    
    (840
    )14,467
    
    
    
    14,612SHAREHOLDERS EQUITY/(DEFICIENCY):Common Stock, $.01 par value, authorized 3,000 shares;
1 share issued and outstanding
    
    
    
    
    
    
    Paid-in capital
    
    
    
    
    
    
    Accumulated comprehensive loss
    
    
    (2,067
    )
    
    
    (2,143
    )Accumulated deficit
    
    
    (22,630
    )
    
    
    (27,785
    )Total shareholders equity/(deficiency)
    
    
    (24,697
    )
    
    
    (29,928
    )Total Liabilities and Shareholders Equity/(Deficiency)
    
    $
    254,524
    
    
    $
    255,797
 The accompanying notes to consolidated financial statements are an integral
part of these statements. 3




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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of AT Holdings Corporation) 
 CONSOLIDATED STATEMENTS OF NET INCOME (In thousands)
UNAUDITED 27 WeekPeriod Ended
    
    26 WeekPeriod Ended
    
    13 Week Periods EndedMay 1, 2004
    
    April 26, 2003
    
    May 1, 2004
    
    April 26, 2003Net revenues
    
    $
    91,836
    
    
    $
    75,956
    
    
    $
    47,399
    
    
    $
    41,708Cost of revenues
    
    
    53,558
    
    
    
    45,141
    
    
    
    26,725
    
    
    
    25,718Gross profit
    
    
    38,278
    
    
    
    30,815
    
    
    
    20,674
    
    
    
    15,990Selling, general and administrative
    
    
    13,980
    
    
    
    13,156
    
    
    
    7,331
    
    
    
    6,778Research and development
    
    
    5,715
    
    
    
    4,775
    
    
    
    3,332
    
    
    
    2,267Amortization of intangible assets
    
    
    1,707
    
    
    
    1,707
    
    
    
    853
    
    
    
    853Operating expenses
    
    
    21,402
    
    
    
    19,638
    
    
    
    11,516
    
    
    
    9,898Income from operations
    
    
    16,876
    
    
    
    11,177
    
    
    
    9,158
    
    
    
    6,092Interest expense
    
    
    10,505
    
    
    
    10,620
    
    
    
    5,082
    
    
    
    5,323Other, net
    
    
    (12
    )
    
    
    (76
    )
    
    
    (8
    )
    
    
    (36
    )Income before income taxes
    
    
    6,383
    
    
    
    633
    
    
    
    4,084
    
    
    
    805Income tax provision
    
    
    2,070
    
    
    
    141
    
    
    
    1,395
    
    
    
    198Net income
    
    $
    4,313
    
    
    $
    492
    
    
    $
    2,689
    
    
    $
    607
 The accompanying notes to the consolidated financial statements are an integral
part of these statements. 4




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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of AT Holdings Corporation) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 27 WEEK PERIOD ENDED MAY 1, 2004 AND THE 26 WEEK PERIOD ENDED APRIL 26, 2003 (In thousands)
UNAUDITED 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,313
    
    
    $
    492Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,924
    
    
    
    2,105Amortization of intangible assets and deferred financing costs
    
    
    2,903
    
    
    
    2,852Accretion of bond discount
    
    
    163
    
    
    
    148Compensation expense recognized in connection with
employee stock ownership plan
    
    
    1,260
    
    
    
    1,260Deferred income taxes
    
    
    (970
    )
    
    
    (1,085
    )Changes in operating assets and liabilities:Receivables
    
    
    (147
    )
    
    
    1,593Inventories
    
    
    (684
    )
    
    
    (775
    )Prepaid expenses
    
    
    (600
    )
    
    
    (593
    )Accounts payable
    
    
    (2,034
    )
    
    
    (1,149
    )Accrued and other liabilities
    
    
    2,366
    
    
    
    (595
    )Other, net
    
    
    84
    
    
    
    15Net cash provided by operating activities
    
    
    8,578
    
    
    
    4,268CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (686
    )
    
    
    (848
    )Net cash used in investing activities
    
    
    (686
    )
    
    
    (848
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long-term debt
    
    
    (6,000
    )
    
    
    (12,000
    )Payment of financing related fees
    
    
    
    
    
    
    (1,224
    )Purchase of AT Holdings stock from former ESOP participants
    
    
    (566
    )
    
    
    (235
    )Other, net
    
    
    
    
    
    
    60Net cash used in financing activities
    
    
    (6,566
    )
    
    
    (13,399
    )CASH AND CASH EQUIVALENTS:Net increase (decrease) for the period
    
    
    1,326
    
    
    
    (9,979
    )Balance, Beginning of period
    
    
    14,057
    
    
    
    17,769Balance, End of period
    
    $
    15,383
    
    
    $
    7,790
 The accompanying notes to consolidated financial statements are an
integral part of these statements. 5




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ARGO-TECH CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of AT Holdings Corporation) 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 27 WEEK PERIOD ENDED MAY 1, 2004 AND THE 26 WEEK PERIOD ENDED
APRIL 26, 2003 (Unaudited)  1.
    
    BASIS OF PRESENTATIONThe principal operations of Argo-Tech Corporation (a wholly-owned subsidiary
of AT Holdings Corporation) and its subsidiaries include the design,
manufacture and distribution of aviation products, primarily aircraft fuel
pumps. In addition, Argo-Tech leases a portion of its Cleveland, Ohio
manufacturing facility to other parties. Argo-Techs fiscal year ends on the
last Saturday in October. Argo-Tech is required to fulfill the obligation of
AT Holdings Corporation to purchase AT Holdings common stock in accordance
with the provisions of the Argo-Tech Corporation Employee Stock Ownership
Plan. As a result, that obligation has been reflected in its financial
statements. Certain reclassifications have been made in the prior years
financial statements to conform to the current year presentation.Argo-Tech Corporation is a parent holding company and all of its subsidiaries
guarantee Argo-Techs senior subordinated notes. Argo-Tech has no outside
assets, liabilities or operations apart from its wholly-owned subsidiaries.
The senior subordinated notes are fully, unconditionally, jointly and
severally guaranteed by the guarantor subsidiaries, and therefore, separate
financial statements of the guarantor subsidiaries will not be presented.
Management has determined that the information presented by such separate
financial statements is not material to investors.2.
    
    UNAUDITED FINANCIAL INFORMATIONThe financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of Argo-Techs financial position, results of operations and
cash flows for the interim periods presented. These financial statements and
notes should be read in conjunction with the financial statements and related
notes included in Argo-Techs Annual Report on Form 10-K for the year ended
October 25, 2003. The results of operations for the 13 and 27 week periods
ended May 1, 2004 are not necessarily indicative of the results to be
expected for the full year.3.
    
    INVENTORIESInventories are stated at standard cost which approximates the costs which
would be determined using the first-in, first-out (FIFO) method. The
recorded value of inventories is not in excess of market value. Inventories
consist of the following (in thousands): May 1,
    
    October 25,2004
    
    2003Finished goods
    
    $
    2,642
    
    
    $
    1,481Work-in-process and purchased parts
    
    
    16,686
    
    
    
    16,938Raw materials and supplies
    
    
    11,956
    
    
    
    12,385Total
    
    
    31,284
    
    
    
    30,804Reserve for excess and obsolete inventory
    
    
    (4,899
    )
    
    
    (5,103
    )Inventories  net
    
    $
    26,385
    
    
    $
    25,701
 6




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4.
    
    INTANGIBLE ASSETSThe following is a summary of intangible assets, other than goodwill (in
thousands): May 1, 2004
    
    October 25, 2003Gross
    
    Accumulated
    
    Gross
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationIntangible assets:Contracts
    
    $
    17,100
    
    
    $
    11,259
    
    
    $
    17,100
    
    
    $
    10,404Spare parts annuity
    
    
    38,200
    
    
    
    11,057
    
    
    
    38,200
    
    
    
    10,217Patents
    
    
    387
    
    
    
    162
    
    
    
    387
    
    
    
    150Total
    
    $
    55,687
    
    
    $
    22,478
    
    
    $
    55,687
    
    
    $
    20,771
  Amortization expense recorded on the intangible assets for the 13 week
periods ended May 1, 2004 and April 26, 2003 was $0.9 million and for the 27
week period ended May 1, 2004 and the 26 week period ended April 26, 2003 was
$1.7 million. The estimated amortization expense for each of the three
succeeding fiscal years 2004 through 2006 is $3.4 million, fiscal year 2007
is $3.2 million and fiscal year 2008 is $1.7 million. The weighted-average
amortization period for contracts is 10 years, spare parts annuity is 26
years and patents is 15 years.5.
    
    PRODUCT WARRANTYArgo-Tech accrues for warranty obligations for products sold based on
management estimates of the amount that may be required to settle such
potential obligations. These estimates are prepared with support from our
sales, engineering, quality and legal functions. This accrual, which is
reviewed in detail on a regular basis, is based on several factors: past
experience, current claims, production changes and various other
considerations. The following table presents a reconciliation of changes in
the product warranty liability for the 27 week period ended May 1, 2004 and
the 26 week period ended April 26, 2003 (in thousands): 2004
    
    2003Beginning balance
    
    $
    2,130
    
    
    $
    2,064Accruals for warranties issued
    
    
    160
    
    
    
    39Accruals for pre-existing warranties
(including changes in estimate)
    
    
    553
    
    
    
    512Warranty claims settled
    
    
    (462
    )
    
    
    (324
    )Ending balance
    
    $
    2,381
    
    
    $
    2,291
  6.
    
    EMPLOYEE BENEFIT PLANSThe Company has two noncontributory defined benefit pension plans for
qualifying hourly and salary employees. A plan covering salaried employees
provides pension benefits that are based on the employees compensation and
years of service. The future accrual of benefits was terminated in
connection with the formation of the Employee Stock Ownership Plan (ESOP).
A plan covering hourly employees provides benefits of stated amounts for
each year of service. The Companys funding policy is to contribute
actuarially determined amounts allowable under Internal Revenue Service
regulations. 7




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##### Table of Contents



A summary of the components of net periodic benefit cost for the pension
plans is as follows (in thousands): 27 week
    
    26 week
    
    13 week
    
    13 weekperiod ended
    
    period ended
    
    period ended
    
    period endedMay 1, 2004
    
    April 26, 2003
    
    May 1, 2004
    
    April 26, 2003Service cost
    
    $
    140
    
    
    $
    139
    
    
    $
    70
    
    
    $
    69Interest cost
    
    
    662
    
    
    
    649
    
    
    
    331
    
    
    
    325Expected return on plan
assets
    
    
    (878
    )
    
    
    (746
    )
    
    
    (439
    )
    
    
    (373
    )Net amortization and
deferral
    
    
    174
    
    
    
    192
    
    
    
    87
    
    
    
    96Net periodic pension cost
    
    $
    98
    
    
    $
    234
    
    
    $
    49
    
    
    $
    117
  Argo-Tech is expecting to contribute $185,000 to the hourly pension plan in
2004. As of May 1, 2004, no contributions have been made.The Company also provides certain postretirement health care benefits to
qualifying hourly retirees and their dependents. This benefit is not
funded.A summary of the components of net periodic benefit cost for the
postretirement benefit is as follows (in thousands): 27 week
    
    26 week
    
    13 week
    
    13 weekperiod ended
    
    period ended
    
    period ended
    
    period endedMay 1, 2004
    
    April 26, 2003
    
    May 1, 2004
    
    April 26, 2003Service cost
    
    $
    93
    
    
    $
    94
    
    
    $
    43
    
    
    $
    47Interest cost
    
    
    455
    
    
    
    402
    
    
    
    213
    
    
    
    201Net amortization and deferral
    
    
    88
    
    
    
    11
    
    
    
    23
    
    
    
    5Net periodic postretirement
benefit cost
    
    $
    636
    
    
    $
    507
    
    
    $
    279
    
    
    $
    253
  7.
    
    CONTINGENCIESEnvironmental Matters  The soil and groundwater at Argo-Techs Euclid, Ohio
facility and Costa Mesa, California facility contain elevated levels of
certain contaminants which are currently in the process of being removed
and/or remediated. Because Argo-Tech has certain indemnification rights from
former owners of the facilities for liabilities arising from these or other
environmental matters, in the opinion of Argo-Techs management, the ultimate
outcome is not expected to materially affect its financial condition, results
of operations or liquidity.Other Matters  Argo-Tech is subject to various legal actions and other
contingencies arising in the ordinary course of business. In the opinion of
Argo-Techs management, after reviewing the information
which is currently available with respect to such matters and consulting with
Argo-Techs legal counsel, any liability which may ultimately be incurred
with respect to these matters is not expected to materially affect
Argo-Techs financial condition, results of operations or liquidity. 8




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##### Table of Contents



8.
    
    SEGMENT INFORMATIONArgo-Tech operates in two business segments: Aerospace and Industrial. The
Aerospace segment includes the design, manufacture, distribution, repair and
overhaul of aviation products, consisting of aircraft fuel pumps, fuel flow
related products found on a planes airframe, and aerial refueling pumps and
related equipment. The Industrial segment includes the design, manufacture
and distribution of industrial pumps, ground fueling valves and related
components, specialty industrial hose, cryogenic pumps and nozzles for
transferring liquefied natural gas and operation of a business park in
Cleveland, Ohio where we maintain our headquarters and one of our production
facilities.Argo-Tech evaluates the performance of its segments based primarily on
operating profit before amortization of deferred financing fees and other
identified intangibles, interest expense, interest income, other
miscellaneous fees and income taxes.The following table presents revenues and other financial information by
business segment (in thousands): 13 Week Period Ended May 1, 2004 Aerospace
    
    Industrial
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    35,076
    
    
    $
    12,323
    
    
    $
    
    
    
    $
    47,399Operating profit (loss)
    
    
    9,932
    
    
    
    156
    
    
    
    (77
    )
    
    
    10,011Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    853Income from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,158Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,082Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,084Capital expenditures
    
    
    140
    
    
    
    142
    
    
    
    
    
    
    
    282Depreciation
    
    
    544
    
    
    
    307
    
    
    
    100
    
    
    
    951Compensation expense recognized
in connection with employee
stock ownership plan
    
    
    879
    
    
    
    119
    
    
    
    
    
    
    
    998
 13 Week Period Ended April 26, 2003 Aerospace
    
    Industrial
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    32,203
    
    
    $
    9,505
    
    
    $
    
    
    
    $
    41,708Operating profit (loss)
    
    
    6,975
    
    
    
    71
    
    
    
    (101
    )
    
    
    6,945Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    853Income from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,092Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,323Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    805Capital expenditures
    
    
    283
    
    
    
    100
    
    
    
    
    
    
    
    383Depreciation
    
    
    634
    
    
    
    318
    
    
    
    101
    
    
    
    1,053Compensation expense recognized
in connection with employee
stock ownership plan
    
    
    559
    
    
    
    71
    
    
    
    
    
    
    
    630
 9




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27 Week Period Ended May 1, 2004 Aerospace
    
    Industrial
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    65,942
    
    
    $
    25,894
    
    
    $
    
    
    
    $
    91,836Operating profit (loss)
    
    
    18,113
    
    
    
    631
    
    
    
    (161
    )
    
    
    18,583Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,707Income from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,876Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,505Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,383Capital expenditures
    
    
    498
    
    
    
    188
    
    
    
    
    
    
    
    686Depreciation
    
    
    1,108
    
    
    
    616
    
    
    
    200
    
    
    
    1,924Compensation expense recognized
in connection with employee
stock ownership plan
    
    
    1,110
    
    
    
    150
    
    
    
    
    
    
    
    1,260
 26 Week Period Ended April 26, 2003 Aerospace
    
    Industrial
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    58,995
    
    
    $
    16,961
    
    
    $
    
    
    
    $
    75,956Operating profit (loss)
    
    
    13,305
    
    
    
    (227
    )
    
    
    (194
    )
    
    
    12,884Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,707Income from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,177Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,620Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    633Capital expenditures
    
    
    589
    
    
    
    259
    
    
    
    
    
    
    
    848Depreciation
    
    
    1,262
    
    
    
    638
    
    
    
    205
    
    
    
    2,105Compensation expense recognized
in connection with employee
stock ownership plan
    
    
    1,120
    
    
    
    140
    
    
    
    
    
    
    
    1,260
  9.
    
    OTHER COMPREHENSIVE INCOMEThe following table presents other comprehensive income, which includes
foreign currency translation adjustments (in thousands): 27 week
    
    26 week
    
    13 week
    
    13 weekperiod ended
    
    period ended
    
    period ended
    
    period endedMay 1, 2004
    
    April 26, 2003
    
    May 1, 2004
    
    April 26, 2003Net income
    
    $
    4,313
    
    
    $
    492
    
    
    $
    2,689
    
    
    $
    607Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    76
    
    
    
    17
    
    
    
    (5
    )
    
    
    (45
    )Other comprehensive income (loss)
before tax
    
    
    76
    
    
    
    17
    
    
    
    (5
    )
    
    
    (45
    )Income tax benefit related to other
comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income (loss), net
of tax
    
    
    76
    
    
    
    17
    
    
    
    (5
    )
    
    
    (45
    )Comprehensive income
    
    $
    4,389
    
    
    $
    509
    
    
    $
    2,684
    
    
    $
    562
 10




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10.
    
    NEW ACCOUNTING PRONOUNCEMENTSIn December 2003, the Financial Accounting Standards Board (FASB) issued a
revised FASB Interpretation No. (FIN) 46, Consolidation of Variable
Interest Entities. FIN 46 requires existing, unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the parties involved.
Argo-Tech is not associated with variable interest entities; therefore, the
adoption of this statement did not have any effect on Argo-Techs
consolidated financial position or results of operations.In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act was enacted, which introduced a Medicare prescription drug
benefit and a federal subsidy to sponsors of retiree health-care plans that
provide a benefit at least actuarially equivalent to the Medicare benefit.
In accordance with FASB Staff Position (FSP) Statement of Financial
Accounting Standards (SFAS) No. 106-2, Argo-Tech has elected to defer
recognition of the effects of the new Medicare Act. The accumulated
postretirement benefit obligation and net periodic postretirement benefit
cost do not reflect the provisions of the Act. Specific authoritative
guidance on accounting for the federal subsidy is pending and may require
changes to previously reported information.In December 2003, the FASB issued a revision to SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits, which expands
the disclosure requirements regarding plan assets and benefit obligations
for Argo-Techs two noncontributory defined benefit pension plans and its
postretirement benefit plan. Argo-Tech adopted the provisions of this
statement effective with the period beginning February 1, 2004 (see Note 6).11.
    
    RECENT EVENTSArgo-Tech Corporation established an Employee Stock Ownership Plan (ESOP) in
1994 to provide retirement benefits to qualifying, salaried employees.
Shares of AT Holdings common stock were purchased by the ESOP from the
proceeds of a loan made by Argo-Tech to the ESOP and are held in a suspense
account and released to eligible participants on a pro rata basis as loan
principal payments are made. Based on the loan payment schedule, the
release of the final 21,000 shares of stock, representing a halfyear
allocation of common stock from the suspense account, will be made in
October 2004. Argo-Tech has decided to continue this employee benefit by
contributing to the ESOP another 21,000 shares of AT Holdings common stock
in fiscal year 2004 and 42,000 shares in fiscal year 2005. These shares of
stock are being contributed from shares that have been repurchased from
former ESOP participants and are currently being held in treasury stock.All hourly employees at the Cleveland facility are represented by the United
Auto Workers union under a collective bargaining agreement that expired on
March 31, 2004. Argo-Tech is currently negotiating a new collective
bargaining agreement with the UAW and continues to operate under the
existing agreement, which is renewed on a daily basis until negotiations are
completed.12.
    
    SUBSEQUENT EVENTIn May 2004, Argo-Tech launched a tender offer and consent solicitation to
purchase all of its outstanding 8 5/8% senior subordinated notes due 2007. 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Argo-Tech is a global designer, manufacturer and servicer of high
performance fuel flow devices and systems. We operate in two business
segments, Aerospace and Industrial. The Aerospace segment
consists of aircraft engine fuel pumps and other engine products, commercial
and military products and systems found on a planes airframe, and aerial
refueling pumps and related equipment. The Industrial segment includes
ground fueling nozzles, hoses and other ground fueling components, an
automated fuel management system, cryogenic pumps and nozzles and the
operation of a business park in Cleveland, Ohio. The following is managements discussion and analysis of certain significant
factors which have affected Argo-Techs financial position and operating
results during the periods presented in the accompanying condensed
consolidated financial statements. Argo-Techs fiscal year ends on the last
Saturday of October and is identified according to the calendar year in
which it ends. Export Sales Substantially all of our export sales are denominated in U. S. dollars.
Export sales for the 27 week period ended May 1, 2004 were $35.1 million.
Sales to Europe were $23.3 million and sales to all other regions,
individually less that 10%, were $11.8 million for the 27 week period ended
May 1, 2004. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which enable the fair
presentation of our financial position and results of operations. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies
reflect its more significant estimates and assumptions used in the
preparation of its consolidated financial statements. Revenue Recognition.Revenues are generally recognized when goods are
shipped or services provided, at which time title and risk of loss passes to
the customer. Substantially all sales are made pursuant to firm,
fixed-price purchase orders received from customers. We have executed
long-term supply agreements with certain of our OEM customers. These
agreements require Argo-Tech to supply all the amounts ordered by the
customers during the term of the agreements (generally three to five years)
at specified prices. Under certain of these agreements, we expect to incur
losses. Provisions for estimating losses on these contracts are made in the
period in which such losses are identified based on cost and pricing
information and estimated future shipment quantities provided by the
customer. The cumulative effect of revisions to estimated losses on
contracts is recorded in the accounting period in which the amounts become
known and can be reasonably estimated. Such revisions could occur at any
time there are changes to estimated future revenues or costs. Revenue from
certain fixed price engineering contracts for which costs can be reliably
estimated are recognized based on milestone billings. Variations in actual
labor performance, changes to estimated profitability and final contract
settlements may result in revisions to the cost estimates. Revisions in
cost estimates as contracts progress have the effect of increasing or
decreasing profits in the period of revision. We record estimated reductions
to revenue for volume-based incentives based on expected customer activity
for the applicable period. Revisions for 12




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volume-based incentives are
recorded in the accounting period in which such estimates can be reasonably
determined. Valuation of Accounts Receivable and Allowance for Doubtful Accounts.We
evaluate the collectibility of our trade receivables based on a combination
of factors. We regularly analyze our customer accounts, and when we become
aware of a specific customers inability to meet its financial obligation to
us, such as in the case of bankruptcy filings, we immediately record a bad
debt expense and reduce the related receivable to the amount we reasonably
believe is collectible. We estimate the allowance for doubtful accounts
based on the aging of the accounts receivable, customer creditworthiness and
historical experience. Our estimate of the allowance amounts includes
amounts for specifically identified losses
and a general amount for estimated losses. If circumstances change or
economic conditions deteriorate, our estimates of the recoverability of
receivables could be further adjusted. Valuation of Inventories.Our inventory purchases and commitments are made
in order to build inventory to meet future shipment schedules based on
forecasted demand for our products. Inventories are stated at the lower of
cost or market, with cost being determined on the first-in, first-out, or
FIFO, method. Periodically, we perform a detailed assessment of inventory,
which includes a review of, among other factors, historical sales activity,
future demand requirements, product life cycle and development plans and
quality issues. Based on this analysis, we record provisions for
potentially obsolete or slow-moving inventory to reflect inventory at net
realizable value. These provisions could vary significantly, either
favorably or unfavorably, from actual requirements based upon future
economic conditions, customer inventory levels or competitive factors that
were not foreseen, or did not exist, when the valuation allowances were
established. Valuation of Goodwill and Intangible Assets.Goodwill and identified
intangible assets are recorded at fair value on the date of acquisition.
Intangible assets other than goodwill are recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or
if the intangible asset can be sold, transferred, licensed or exchanged,
regardless of our intent to do so. Intangible assets, such as goodwill,
that have an indefinite useful life are not amortized. All other intangible
assets are amortized over their estimated useful lives. We review goodwill
and purchased intangible assets for impairment annually, or whenever events
or changes in circumstances indicate the carrying value of an asset may not
be recoverable. Our asset impairment review assesses the fair value of the
assets based on the future cash flows the assets are expected to generate.
This approach uses our estimates of future market growth, forecasted revenue
and costs and appropriate discount rates. When impairment is identified,
the carrying amount of the asset is reduced to its estimated fair value. Fluctuations of Operating Results; Limitation of Quarterly Comparisons Argo-Techs results of operations are subject to fluctuations from quarter
to quarter due to changes in demand for its products, changes in product mix
and other factors. Demand for its products can vary from quarter to quarter
due to changes in demand for, and timing of deliveries of, OEM, aftermarket
and military products and services. In particular, the timing of
Argo-Techs aftermarket sales tends not to occur on a predictable schedule
and, furthermore, the sales tend to occur in large quantities that can
significantly impact quarterly comparisons. Accordingly, year-to-year and
quarter-to-quarter comparisons of quarterly results may not be meaningful,
and quarterly results during the year are not necessarily indicative of the
results that may be expected for any future period or for the entire year. Results of Operations for the 13 Week Period Ended May 1, 2004 Compared With
the 13 Week Period Ended April 26, 2003 Net revenues for the 13 week period ended May 1, 2004 increased $5.7
million, or 13.7%, to $47.4 million from $41.7 million for the 13 week
period ended April 26, 2003. This increase was primarily due to an increase
in aerospace revenues of $2.9 million and an increase of $2.8 million in
industrial revenues. The increase in aerospace revenues was attributable to
an increase of $1.9 million of commercial aerospace revenues and $1.0
million of military revenues. Commercial OEM revenues 13




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increased $0.6
million, or 10.5%, to $6.3 million and commercial aftermarket revenues
increased $1.3 million, or 8.8%, to $16.0 million in the 13 week period
ended May 1, 2004. Commercial OEM revenues increased primarily as a result
of an increase in pump requirements from our customers. Commercial
aftermarket revenues were higher primarily due to an increase in repair and
overhaul activities along with a slight increase in the demand for spare
part sales. Military revenues increased primarily due to revenue related to
increased sales on a variety of OEM and aftermarket main engine pumps and
components as well as an increase in revenues related to airframe components
on various OEM development programs. The $2.8 million increase in
industrial revenues was primarily attributable to an increase of $3.9
million in military ground fueling revenues offset by a decrease of $1.1
million in industrial gas turbine and cryogenic pump revenues. Aerospace gross profit for the 13 week period ended May 1, 2004 increased
$3.4 million, or 25.6%, to $16.6 million from $13.2 million in the 13 week
period ended April 26, 2003. Gross margin increased to 47.4% for the 13
week period ended May 1, 2004 from 41.0% in the 13 week period ended April
26, 2003. The increase in gross profit and gross margin is primarily
attributable to the increase in military revenues and higher margin
commercial aerospace aftermarket revenues along with an increase in
operating efficiencies at both our Cleveland and Costa Mesa facilities.
Industrial gross profit for the 13 week period ended May 1, 2004 increased
$1.3 million, or 46.4%, to $4.1 million from $2.8 million in the 13 week
period ended April 26, 2003. Gross margin increased to 33.3% in the 13 week
period ended May 1, 2004 from 29.5% in the 13 week period ended April 26,
2003. The increase in gross profit and gross margin was primarily
attributable to an increase in military ground fueling revenues and reduced
operating expenses of our business park partially offset by an increase in
manufacturing costs for our cryogenic pump products. Operating expenses for the 13 week period ended May 1, 2004 increased $1.6
million, or 16.2%, to $11.5 million from $9.9 million in the 13 week period
ended April 26, 2003. This increase is primarily attributable to an
increase of $1.0 million in research and development expenses and $0.6
million in selling, general and administrative expenses related to increased
marketing costs, including commissions and royalties. The increase in
research and development expenses is due to a decrease in customer paid
development expenses. Operating expenses as a percent of revenues increased
to 24.3% for the 13 week period ended May 1, 2004 as compared to 23.7% for
the 13 week period ended April 26, 2003. Income from operations for the 13 week period ended May 1, 2004 increased
$3.1 million, or 50.8%, to $9.2 million from $6.1 million in the 13 week
period ended April 26, 2003. As a percent of revenues, income from
operations for the 13 week period ended May 1, 2004 increased to 19.4% from
14.6% for the 13 week period ended April 26, 2003. These increases were
primarily due to increased military revenues, increased sales of higher
margin commercial aerospace aftermarket revenues and the increase in
military ground fueling revenues, partially offset by an increase in
cryogenic pump manufacturing costs and higher operating expenses. Interest expense for the 13 week period ended May 1, 2004 decreased $0.2
million, or 3.8%, to $5.1 million from $5.3 million in the 13 week period
ended April 26, 2003 due to a lower interest rate applied to lower
outstanding borrowings. The income tax provision was $1.4 million for the 13 week period ended May
1, 2004 as compared to $0.2 million for the 13 week period ended April 26,
2003. This increase is primarily due to an increase in pre-tax income. Net income for the 13 week period ended May 1, 2004 increased $2.1 million
to $2.7 million from $0.6 million for the 13 week period ended April 26,
2003, primarily due to the revenue and expense factors discussed above. 14




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Results of Operations for the 27 Week Period Ended May 1, 2004 Compared With
the 26 Week Period Ended April 26, 2003 Net revenues for the 27 week period ended May 1, 2004 increased $15.9
million, or 20.9%, to $91.8 million from $75.9 million for the 26 week
period ended April 26, 2003. This increase was primarily due to an increase
in aerospace revenues of $7.0 million and an $8.9 million increase in
industrial revenues. The increase in aerospace revenues was attributable to
an increase of $1.6 million of commercial aerospace revenues and an increase
of $5.4 million in military revenues. Commercial OEM revenues increased
$1.1 million, or 11.1%, to $11.0 million and commercial aftermarket revenues
increased $0.5 million, or 1.8%, to $28.8 million in the 27 week period
ended May 1, 2004. Commercial OEM revenues increased primarily as a result of an increase in pump
requirements from our customers. Commercial aftermarket revenues increased
slightly primarily due to an increase in repair and overhaul services offset
by a decrease in demand for spare part sales. The lower demand for spare
part sales is a result of the availability of spare parts taken from parked
aircraft and the deferral of maintenance. Military revenues increased
primarily due to revenue related to increased sales on a variety of OEM and
aftermarket main engine fuel pump and airframe components as well as an
increase in revenues related to airframe components on various OEM
development programs. Industrial revenues increased $8.9 million, primarily
attributable to an increase of $6.8 million in ground fueling revenues, of
which $6.1 million was attributable to military sales, and $2.5 million in
cryogenic pump revenues, offset by slight decreases in industrial gas
turbine and business park revenues. Aerospace gross profit for the 27 week period ended May 1, 2004 increased
$4.6 million, or 17.8%, to $30.5 million from $25.9 million in the 26 week
period ended April 26, 2003. Gross margin increased to 46.3% for the 27
week period ended May 1, 2004 from 43.9% in the 26 week period ended April
26, 2003. The increase in gross profit and gross margin is primarily
attributable to an increase in military revenues and an increase in
operating efficiencies at both our Cleveland and Costa Mesa facilities.
Industrial gross profit for the 27 week period ended May 1, 2004 increased
$2.8 million, or 54.9%, to $7.9 million from $5.1 million in the 26 week
period ended April 26, 2003. Gross margin increased to 30.5% in the 27 week
period ended May 1, 2004 from 30.0% in the 26 week period ended April 26,
2003. The increase in gross profit and gross margin is primarily
attributable to an increase in military ground fueling revenues partially
offset by the increase in lower margin cryogenic pump revenues. Operating expenses for the 27 week period ended May 1, 2004 increased $1.8
million, or 9.2%, to $21.4 million from $19.6 million in the 26 week period
ended April 26, 2003. This increase is primarily due to an increase in
selling, general and administrative expenses of $0.9 million and research
and development expenses of $0.9 million. The increase in selling, general
and administrative expenses of $0.9 million was related to an increase in
marketing expenses, including commissions and royalties. The increase in
research and development expenses is due to a decrease in customer paid
development expenses. Operating expenses as a percent of revenues decreased
to 23.3% for the 27 week period ended May 1, 2004 as compared to 25.8% for
the 26 week period ended April 26, 2003. Income from operations for the 27 week period ended May 1, 2004 increased
$5.7 million, or 50.9%, to $16.9 million from $11.2 million in the 26 week
period ended April 26, 2003. As a percent of revenues, income from
operations for the 27 week period ended May 1, 2004 increased to 18.4% from
14.8% for the 26 week period ended April 26, 2003. These increases were
primarily due to the increase in military and industrial revenues and
increased operating efficiencies in Cleveland and Costa Mesa, partially
offset by increased operating expenses. Interest expense for the 27 week period ended May 1, 2004 decreased $0.1
million, or 0.9%, to $10.5 million from $10.6 million for the 26 week period
ended April 26, 2003 due to lower outstanding borrowings and interest rates
on the term loans partially offset by an increase in amortization of
deferred financing fees resulting from the amendment to our existing credit
facility in January 2003. 15




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The income tax provision was $2.1 million for the 27 week period ended May
1, 2004 as compared to $0.1 million for the 26 week period ended April 26,
2003. This increase is primarily due to an increase in pre-tax income. Net income for the 27 week period ended May 1, 2004 increased $3.8 million
to $4.3 million from $0.5 million for the 26 week period ended April 26,
2003 primarily due to the revenue and expense factors discussed above. Liquidity and Capital Resources Argo-Tech is a holding company that receives all of its operating income
from its subsidiaries. As a result, Argo-Techs primary source of liquidity
for conducting business activities and servicing its indebtedness has been
cash flows from operating activities. Cash and cash equivalents for the 27 week period ended May 1, 2004 increased
$1.3 million to $15.4 million. This was primarily due to an increase in net
income partially offset by an increase in working capital and the scheduled
repayment of term loans. Capital expenditures for the 27 week period ended May 1, 2004 totaled $0.7
million compared to $0.8 million for the 26 week period ended April 26,
2003. Argo-Tech expects to incur capital expenditures of approximately $2.3
million for the remainder of fiscal year 2004, related to the continued
maintenance of facilities, equipment and systems to support current
operating activities. Long-term debt at May 1, 2004 consisted of $19.9 million principal amount of
term loans and $193.7 million principal amount of senior subordinated notes.
Scheduled payments of $6.0 million were made on the term loans in the 27
week period ended May 1, 2004. At May 1, 2004, Argo-Tech has available,
after $2.9 million in letters of credit, a $17.1 million revolving credit
facility. As of May 1, 2004, there were no outstanding borrowings on the
revolving credit facility. The credit facility contains no restrictions on
the ability of Argo-Techs subsidiaries to make distributions to Argo-Tech. Our expected future contractual cash obligations and other commercial
commitments for the next five years are as follows (in millions): 2004(1)
    
    2005
    
    2006
    
    2007
    
    2008Contractual Obligations:Term Loan Facility
    
    $
    12.0
    
    
    $
    13.8
    
    
    $
    
    
    
    $
    
    
    
    $
    8.625% Senior Subordinated Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195.0
    
    
    
    Operating Leases
    
    
    0.9
    
    
    
    0.7
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.1Other Long-Term Obligations (2)
    
    
    17.0
    
    
    
    16.8
    
    
    
    16.8
    
    
    
    16.8
    
    
    
    Total Contractual Cash Obligations
    
    $
    29.9
    
    
    $
    31.3
    
    
    $
    17.2
    
    
    $
    211.9
    
    
    $
    0.1
 (1)  Of the $29.9 million of total contractual cash obligations, $14.8
million has been paid to date. (2)  Represents interest payments on the senior subordinated notes.
Interest on the term loan facility is excluded as it is not fixed and
determinable. Funding for retirement and other post-employment benefits is
estimated to be $0.2 million. We believe that cash flow from operations will provide adequate funds for
our working capital needs, planned capital expenditures and near term debt
service obligations. Our ability to fund our operations, make planned
capital expenditures, and to make scheduled payments on our indebtedness
depends on our future operating performance and cash flow. We may need to
refinance all or a portion of our indebtedness on or before maturity. There
can be no assurance that Argo-Tech will be able to refinance any of its
indebtedness on commercially reasonable terms or at all. These items are
subject to prevailing conditions and to financial, business, and other
factors, some of which are beyond our control. 16




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##### Table of Contents



Certain Factors That May Affect Future Results From time to time, information provided by Argo-Tech, statements by its
employees or information included in its filings with the Securities and
Exchange Commission (including those portions of the Managements Discussion
and Analysis that refer to the future) may contain forward-looking
statements that are not historical facts. Those statements are
forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements, and Argo-Techs future
performance, operating results, financial position and liquidity, are
subject to a variety of factors that could materially affect results. Some, but not necessarily all, of these
factors include: Argo-Techs dependence on the aerospace industry,
especially as the industry is affected by commercial airlines operating
schedules, terrorism alert and health warnings and losses in the airline
industry; government regulation and oversight; defense spending;
competition; product and environmental liabilities; risks associated with
its workforce, suppliers, and indebtedness; and other factors included in
Argo-Techs annual report on Form 10-K for the year ended October 25, 2003. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In the ordinary course of operations, Argo-Techs major market risk exposure
is to changing interest rates, primarily with respect to its long-term debt
obligations. At May 1, 2004, Argo-Tech had fixed rate debt totaling $195
million, including $1.3 million of accretion, at 8.625% and variable rate
debt under its existing credit facility of $19.9 million calculated at
Argo-Techs choice using an alternate base rate (ABR) or LIBOR, plus a
supplemental percentage determined by the ratio of debt to EBITDA. The
variable rate is not to exceed ABR plus 2.50% or LIBOR plus 3.50%.
Argo-Tech currently has no derivative contracts and does not enter into
derivative contracts for trading or speculative purposes. A 10% fluctuation
in interest rates would not materially affect Argo-Techs financial
condition, results of operations or cash flows. 
 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The term
disclosure controls and procedures is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act).
These rules refer to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed
by the company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the required time
periods. Argo-Techs Chief Executive Officer and Chief Financial
Officer have evaluated the design, operation and effectiveness of
Argo-Techs disclosure controls and procedures and have concluded,
based on such evaluation, that such controls and procedures were
effective at ensuring that required information will be disclosed in
Argo-Techs reports filed under the Exchange Act as of May 1, 2004. (b) Changes in internal controls. There were no changes in Argo-Techs
internal control over financial reporting or in other factors during
the quarter ended May 1, 2004 that have materially affected, or are
reasonably likely to materially affect, Argo-Techs internal control
over financial reporting. 17




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 6  Exhibits and Reports on Form 8-K  (a)
    
    Exhibit 31.1  Certification by Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(b)
    
    Exhibit 31.2  Certification by Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(c)
    
    Exhibit 32  Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. Reports on Form 8-K  On May 18, 2004, the Company furnished a report on
Form 8-K announcing a tender offer and consent solicitation for any
and all of its outstanding 8 5/8% Senior Subordinated Notes due
2007. 18




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##### Table of Contents



SIGNATURE 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. Date: May 28, 2004
    
    ARGO-TECH CORPORATIONBy: /s/
    Frances S. St. ClairFrances S. St. ClairVice President and Chief Financial Officer(Duly Authorized Officer)By: /s/
    Paul A. SkladPaul A. SkladController(Principal Accounting Officer)
 19