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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2003
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 000-00822
------------------------------------------------
THE OILGEAR COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin 39-0514580
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 South 51st Street,
Post Office Box 343924,
Milwaukee, Wisconsin 53234-3924
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 327-1700
--------------------------------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ___X___ NO_____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES ______ NO__X___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2003
- --------------------------------------------------------------------------------
Common Stock, $1.00 Par Value 1,955,398
PAGE 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS SEPTEMBER 30, 2003 December 31, 2002
==================================================================================================================================
Current assets:
Cash and cash equivalents $ 5,035,796 4,126,006
Trade accounts receivable, less allowance for doubtful
receivables of $184,000 and $259,000 in 2003 and 2002, respectively 14,602,930 14,948,015
Costs and estimated earnings in excess of billings on uncompleted contracts 2,826,079 1,963,655
Inventories 22,160,617 21,555,858
Prepaid expenses 1,372,989 670,132
Other current assets 1,185,602 853,532
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 47,184,013 44,117,198
- ----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost
Land 1,082,656 1,001,932
Buildings 12,228,586 11,770,132
Machinery and equipment 49,917,049 50,403,018
Drawings, patterns and patents 5,786,061 5,505,539
- ----------------------------------------------------------------------------------------------------------------------------------
69,014,352 68,680,621
Less accumulated depreciation and amortization 48,981,567 47,532,145
- ----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 20,032,785 21,148,476
Other assets 2,023,107 1,760,858
- ----------------------------------------------------------------------------------------------------------------------------------
$ 69,239,905 67,026,532
- ------------------------------------------------------------------------------------------========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
==================================================================================================================================
Current liabilities:
Short-term borrowings $ 2,113,835 454,091
Current installments of long-term debt 2,608,871 1,754,576
Accounts payable 7,363,844 5,909,813
Billings in excess of costs and estimated earnings on uncompleted contracts 216,003 282,052
Customer deposits 1,138,380 2,564,181
Accrued compensation and employee benefits 3,528,052 2,557,508
Other accrued expenses and income taxes 4,124,672 3,906,164
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 21,093,657 17,428,385
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 20,322,496 20,985,913
Unfunded employee retirement plan costs 13,871,711 13,767,971
Unfunded post-retirement health care costs 8,795,000 9,100,000
Other noncurrent liabilities 831,904 1,026,699
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 64,914,768 62,308,968
- ----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 886,095 858,192
Shareholders' equity:
Common stock, par value $1 per share, authorized 4,000,000 shares;
issued 1,990,783 shares 1,990,783 1,990,783
Capital in excess of par value 9,497,906 9,497,906
Retained earnings 14,776,270 16,505,044
- ----------------------------------------------------------------------------------------------------------------------------------
26,264,959 27,993,733
Deduct:
Treasury stock, 35,385 shares (305,192) (305,192)
Notes receivable from employees for purchase of Company
common stock (109,020) (161,055)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (1,051,867) (2,412,015)
Minimum pension liablility adjustment (21,359,838) (21,256,099)
- ----------------------------------------------------------------------------------------------------------------------------------
(22,825,917) (24,134,361)
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,439,042 3,859,372
- ----------------------------------------------------------------------------------------------------------------------------------
$ 69,239,905 67,026,532
- ------------------------------------------------------------------------------------------========================================
See accompanying notes to consolidated financial statements.
PAGE 3
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THREE MONTHS ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
===============================================================================================================
Net sales $18,785,487 18,091,498 $ 59,608,864 57,425,249
Cost of sales 14,301,499 14,873,811 45,795,831 45,645,629
- --------------------------------------------------------------------------------------------------------------
Gross profit 4,483,988 3,217,687 13,813,033 11,779,620
Selling, general and administrative expenses 4,562,849 4,377,557 14,351,077 13,322,940
- --------------------------------------------------------------------------------------------------------------
Operating loss (78,861) (1,159,870) (538,044) (1,543,320)
Interest expense 323,875 358,071 986,427 985,882
Other non-operating income (loss), net (10,778) 93,233 212,710 251,516
- --------------------------------------------------------------------------------------------------------------
Loss before income taxes and minority interest (413,514) (1,424,708) (1,311,761) (2,277,686)
Income tax expense 177,214 9,070 389,112 208,299
- --------------------------------------------------------------------------------------------------------------
Minority interest in net earnings (loss) (7,397) (154,496) 27,903 (45,341)
- --------------------------------------------------------------------------------------------------------------
Net loss $ (583,331) (1,279,282) $ (1,728,776) (2,440,644)
- ----------------------------------------------================================================================
Basic weighted-average outstanding shares 1,955,398 1,953,061 1,955,398 1,949,699
- ----------------------------------------------================================================================
Diluted weighted-average outstanding shares 1,955,398 1,953,061 1,955,398 1,949,699
- ----------------------------------------------================================================================
Basic loss per share of common stock $ (0.30) (0.66) $ (0.88) (1.25)
- ----------------------------------------------================================================================
Diluted loss per share of common stock $ (0.30) (0.66) $ (0.88) (1.25)
- ----------------------------------------------================================================================
See accompanying notes to consolidated financial statements.
PAGE 4
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,728,776) (2,440,644)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 2,341,450 2,738,603
Common and treasury stock issued in connection with
compensation element of sales to employees
and employee savings plan 24,379 38,725
Minority interest in consolidated subsidiaries 27,903 (45,341)
Change in assets and liabilities:
Trade accounts receivable 1,064,982 2,626,969
Inventories (35,952) 1,695,764
Billings, costs and estimated earnings on uncompleted contracts (819,869) (3,794,640)
Prepaid expenses (651,248) (188,088)
Accounts payable 1,212,574 (416,433)
Customer deposits (1,590,782) 365,142
Accrued compensation 789,123 (519,797)
Other, net (955,015) 606,219
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities $ (321,231) 666,479
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (782,921) (981,724)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities $ (782,921) (981,724)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements 1,591,022 (487,512)
Repayment of long-term debt (1,664,948) (1,248,733)
Proceeds from issuance of long-term debt 1,813,846 743,202
Payments received on notes receivable from employees 27,659 25,635
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities $ 1,767,579 (967,408)
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 246,363 (31,155)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 909,790 (1,313,808)
Cash and cash equivalents:
At beginning of period 4,126,006 4,996,723
- -----------------------------------------------------------------------------------------------------------------------------
At end of period 5,035,796 3,682,915
- --------------------------------------------------------------------------------------=======================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 928,798 908,098
Income taxes 100,717 97,060
=======================================
PAGE 5
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
FOR THREE MONTHS ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (583,331) (1,279,282) $ (1,728,776) (2,440,644)
Other comprehensive income (loss):
Foreign currency translation adjustment 222,089 863 1,360,148 1,322,214
Minimum pension liability adjustment (16,149) - (103,739)
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (377,391) (1,278,419) $ (472,367) (1,118,430)
- -----------------------------------------------========================================================================
See accompanying notes to consolidated financial statements.
PAGE 6
THE OILGEAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation
These unaudited interim financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods in accordance with accounting principles generally accepted
in the United States of America. All such adjustments are of a normal recurring
nature. Management assumes the reader will have access to the December 31, 2002
Annual Report on Form 10-K, a copy of which is available upon request and these
notes should be read in conjunction with the Consolidated Financial Statements
and the related notes on Form 10-K.
Business Description and Operations
The Company manages its operations in three reportable segments based upon
geographic area. Domestic includes the United States and Canada, European
includes Europe and International includes Asia, Latin America, Australia and
most of Africa.
The individual subsidiaries of the Company operate predominantly in the fluid
power industry. The Company provides advanced technology in the design and
production of unique fluid power components. Products include piston pumps,
motors, valves, controls, manifolds, electrohydraulic components, cylinders,
reservoirs, skids and meters. Industries that use these products are primary
metals, machine tool, automobile, aerospace, petroleum, construction equipment,
chemical, plastic, glass, lumber, rubber and food. The products are sold as
individual components or integrated into high performance applications.
Segment information is as follows:
FOR THREE MONTHS ENDED FOR NINE MONTHS ENDED
SALES TO UNAFFILIATED CUSTOMERS SEPTEMBER 30, 2003 September 30, 2002 SEPTEMBER 30, 2003 September 30, 2002
===============================================================================================================================
Domestic $ 10,812,443 9,647,677 31,225,141 32,265,112
European 5,516,767 6,030,212 21,033,074 17,920,683
International 2,456,277 2,413,609 7,350,649 7,239,454
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 18,785,487 18,091,498 59,608,864 57,425,249
- -------------------------------------------------------------------------------------------------------------------------------
INTERSEGMENT SALES
===============================================================================================================================
Domestic $ 1,759,940 1,506,271 5,448,635 4,695,941
European 111,643 122,896 598,259 307,444
OPERATING INCOME (LOSS)
===============================================================================================================================
Domestic $ 152,702 (358,928) (300,620) (174,501)
European 211,797 125,344 897,142 297,419
International 84,093 (408,587) 483,502 (58,465)
Corporate expenses, including R&D (527,455) (517,699) (1,618,068) (1,607,773)
- -------------------------------------------------------------------------------------------------------------------------------
Total $ (78,861) (1,159,870) (538,044) (1,543,320)
- -------------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
===============================================================================================================================
Domestic $ - - 33,628,017 35,830,477
European - - 26,416,507 25,100,966
International - - 7,355,607 6,076,173
Corporate - - 1,839,774 1,877,157
- -------------------------------------------------------------------------------------------------------------------------------
Total $ - - 69,239,905 68,884,773
- -------------------------------------------------------------------------------------------------------------------------------
PAGE 7
Inventories
Inventories at September 30, 2003 and December 31, 2002 consist of the
following:
SEPTEMBER 30, 2003 December 31, 2002
=================================================
Raw materials $ 2,752,183 3,177,375
Work in process 15,983,682 16,003,824
Finished goods 4,693,752 3,880,659
- -----------------------------------------------------------------------------
23,429,617 23,061,858
LIFO reserve (1,269,000) (1,506,000)
- -----------------------------------------------------------------------------
Total $ 22,160,617 21,555,858
=============================================================================
Inventories stated on the last-in, first-out (LIFO) basis, including amounts
allocated to contracts that have not been completed, are valued at $13,853,000
and $12,567,000 at September 30, 2003 and December 31, 2002, respectively. The
remaining inventory is stated on the first-in, first-out (FIFO) or average cost
basis.
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
common share:
FOR THREE MONTHS ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, 2003 September 30, 2002 SEPTEMBER 30, 2003 September 30, 2002
------------------------------------------------------------------------------------
Net loss for basic and diluted earnings $ (583,331) (1,279,282) (1,728,776) (2,440,644)
Weighted average common shares outstanding 1,955,398 1,953,061 1,955,398 1,949,699
Dilutive stock options - - - -
Dilutive average common shares outstanding 1,955,398 1,953,061 1,955,398 1,949,699
Basic loss per common share $ (0.30) (0.66) (0.88) (1.25)
Diluted loss per common share $ (0.30) (0.66) (0.88) (1.25)
Options to purchase 125,485 shares of common stock with a weighted average
exercise price of $5.67 per share were outstanding at September 30, 2003.
Options to purchase 88,453 shares of common stock with a weighted average
exercise price of $9.29 per share were outstanding at September 30, 2002.
Options to purchase 99,788 and 88,453 shares of common stock were not included
in the computations of diluted earnings per share for the three month and nine
month periods ended September 30, 2003 and 2002, respectively because the
options' exercise prices were greater than the average market price of common
stock during the periods then ended.
Had compensation cost for the Company's stock options been recognized using the
fair value method, the Company's pro forma operating results would have been as
follows:
FOR THREE MONTHS ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
Net loss reported (583,331) (1,279,282) (1,728,776) (2,440,644)
Pro forma net loss (591,873) (1,288,467) (1,750,579) (2,468,198)
Pro forma basic net loss per share (0.30) (0.66) (0.90) (1.27)
Pro forma diluted net loss per share (0.30) (0.66) (0.90) (1.27)
The fair value of the Company's stock options used to compute pro forma net
earnings (loss) and earnings (loss) per share disclosures is the estimated fair
value at grant date using the Black-Scholes option pricing model with a
risk-free interest rate equivalent to 3 year Treasury securities and an expected
life of 3.5 years. The Black-Scholes option pricing model also used the
following weighted- average assumptions: September 30, 2003- expected volatility
of 38% and expected dividend yield of 0%; September 30, 2002- expected
volatility of 24% and expected dividend yield of 0%. Option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's options have characteristics
significantly different from traded options, and because changes in the
subjective input can materially affect the fair value estimates, in the opinion
of management, the existing models do not necessarily provide a reliable single
value of its options and may not be representative of the future effects on
reported net earnings or the future stock price of the Company's common stock.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period.
PAGE 8
Other
During the fourth quarter of 2002, the Company recorded charges related
to: (i) a downsizing of the corporate staff, (ii) the closing of the Longview,
TX facility and (iii) a write-off of non-strategic assets. The amount recorded
includes $298,000 of employee termination benefits for 28 notified employees,
$85,000 for moving expenses and $456,000 of asset write-offs.
During the first nine months of 2003, the Company continued its restructuring
started in 2001 and recorded additional charges related to: (i) a
downsizing of the corporate staff and (ii) additional costs to move the
manufacturing formerly performed in Longview, TX to Milwaukee, WI. The amount
recorded includes $235,000 of employee termination benefits for 15 notified
employees, and $61,000 for moving expenses.
EMPLOYEE
TERMINATION
BENEFITS OTHER COSTS TOTAL
Expenses accrued $ 298,000 541,000 839,000
Non-cash charges - (456,000) (456,000)
Cash expenditures (87,000) (85,000) (172,000)
- -------------------------------------------------------------------------------------------
Balance December 31, 2002 211,000 - 211,000
Expenses accrued 235,000 61,000 296,000
Cash expenditures (446,000) (61,000) (507,000)
------------------------------------------------
Balance September 30, 2003 $ - - -
================================================
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's sources of capital historically have been cash generated from
operations and bank borrowings. The fluctuations in working capital requirements
are covered by bank lines of credit at the Company's subsidiaries in England and
India and a bank revolving line of credit in the United States.
For the nine months ended September 30, 2003 approximately $321,000 of cash was
used by operations compared to approximately $666,000 of cash provided from
operations during the same period in 2002. The increase in custom engineered
construction contracts using percentage-of-completion accounting was the
principal reason for the changes in working capital that resulted in the use of
cash during the first nine months of 2003. Days sales outstanding in receivables
were 65 and 72 at September 30, 2003 and September 30, 2002, respectively.
Inventory turns were 2.2 and 2.0 at September 30, 2003 and September 30, 2002,
respectively.
Property, plant and equipment additions consisting primarily of purchases of
machinery and equipment were approximately $783,000 in the first nine months of
2003 compared to approximately $982,000 in the first nine months of 2002.
Property, plant and equipment additions are expected to be approximately
$1,000,000 for 2003.
Based on the potential sale of our land and buildings in Leeds, England,
Barclays Bank plc provided us with a twelve month loan for 750,000 British
pounds in May 2003 and a commitment for another 750,000 British pounds to be
drawn when the contingencies are removed from our contract with the buyer of the
facility. The interest rate on the loan is LIBOR plus 2.25% and the loan is
secured by the Leeds facility.
The Company has entered into the Sixth Amended and Restated Credit Agreement
with M&I Marshall and Ilsley Bank ("M&I Bank") dated as of August 14, 2003 (the
"Restated Credit Agreement") to extend our revolving line of credit to October
2004. In addition to extending the date of the line of credit, the Restated
Credit Agreement changes the Company's existing financial covenants and extends
the covenants until the termination date of the Restated Credit Agreement. The
Restated Credit Agreement also required that the Company prepay not less than
$1,600,000 of principal on an amended and restated term note under the Restated
Credit Agreement on or before September 30, 2003. For business reasons and with
M&I Bank's consent, the Company made $800,000 of the prepayment in September
2003 and the remaining $800,000 of the prepayment in October 2003. The Company
has classified the October payment as a current installment of long-term debt on
its September 30, 2003 Balance Sheet.
The Company believes its cash on hand, anticipated cash flows from operations
and available borrowings under short-term and long-term bank credit facilities
will continue to be sufficient to meet its operating needs for at least the next
twelve months. The Company is currently in compliance with all bank covenants in
the Restated Credit Agreement. Despite the difficult economy and competitive
environment in the Company's markets and the manufacturing challenges associated
with some of the Company's
products, management currently believes that the Company will be able to
continue to satisfy these covenants.
RESULTS OF OPERATIONS
Orders decreased by approximately $10,662,000, or 37.%, in the third quarter and
by approximately $5,129,000, or 17%, in the first nine months of 2003 when
compared to the same periods in 2002. In the third quarter of 2002 our European
segment received a large order for approximately $11,000,000 to supply equipment
on a new forging press being installed in central France. This single order
distorts the comparisons of orders between periods. Backlog of orders at
September 30, 2003 has increased by approximately 10.5% to approximately
$32,665,000 from approximately $29,562,000 at December 31, 2002.
When the orders for 2003 are compared to the same periods of 2002, Domestic
segment orders increased by approximately $2,537,000, or 7.0%, for the first
nine months of 2003 and approximately $1,181,000, or 11.7%, for the third
quarter of 2003, International segment orders increased by approximately
$781,000, or 2.7%, for the first nine months of 2003 and approximately $25,000,
or 1.3%, for the third quarter of 2003, and European segment orders decreased by
approximately $8,447,000, or 43.8%, for the first nine months of 2003 and
approximately $11,868,000, or 71.5%, for the third quarter of 2003. However, the
$11,000,000 order discussed above distorts the comparisons of European segment
orders. The decrease in orders in the European segment was further affected by
the result of the currency exchange difference from a weaker dollar against the
British Pound and Euro.
The increase in orders in the Domestic segment came primarily from an increase
in contracts for highly engineered construction projects. Orders decreased in
the European segment due to a difficult European economy.
When backlog by segments at September 30, 2003 is compared to the 2002 year end,
the Domestic segment increased by 24.7% to approximately $12,665,000, the
European segment decreased by 0.5% to approximately $17,411,000 and the
International segment increased by 35.9% to approximately $2,589,000.
Consolidated net sales increased in the third quarter and the first nine months
of 2003 by 3.8% when compared to the same periods in 2002. An increase in
engineered construction contracts in the Domestic segment in 2003, the
approximately $11,000,000 contract received in the third quarter of 2002 in the
European segment which we are accounting for under the percentage-of-completion
method and the increase from converting net sales denominated in the British
Pound and Euros to U.S. dollars were the primary reasons for the consolidated
net sales increase.
In the Domestic segment, the low amount of custom engineered construction
contracts in the backlog at January 1, 2003 compared to January 1, 2002 and the
continued sluggish demand for hydraulic products were the primary reasons for
the approximately 3.2% decrease in net sales for the nine months of 2003
compared to the same period of 2002. The increase in domestic construction
contracts during the first nine months of 2003 and the catch-up of delayed
shipments at the Company's Fremont, NE plant due to production problems in the
first and second quarters of 2003 caused the domestic net sales to increase by
12.1% during the third quarter compared to the third quarter of 2002. The
European segment's net sales in the first nine months of 2003 increased by
approximately 17.4% and decreased by 8.5% in the third quarter compared to the
same periods in 2002. After excluding the effect of the currency exchange, the
European segment increase in net sales was approximately 0.1% for the first nine
months of 2003 compared to the same period in 2002. The British pound average
exchange rate during the third quarter did not change and the Euro exchange rate
increased only slightly by 0.6%. The primary reason for the flat net sales in
the European segment was the sluggish European economy. The International
segment's net sales were relatively flat in the first nine months and the third
quarter of 2003 compared to the same periods of 2002 with increases of 1.5% and
1.8%, respectively.
Our gross profit margin increased in the third quarter of 2003 to approximately
23.9% and increased in the first nine months of 2003 to approximately 23.2%
compared to approximately 17.8% and 20.5%, respectively, in the same periods of
2002. An increase in net sales, moving the manufacturing processes formerly
performed in Longview, TX to Milwaukee, better utilization of our engineering
resources and improvement of the manufacturing challenges at our Fremont, NE
plant that adversely affected pump deliveries and decreased gross profit in the
first and second quarters were the primary reasons for the improvement.
We are in the process of negotiating a contract with the International
Association of Machinists and Aerospace Workers which represents our shop
employees at our Fremont, NE location. We are unable to estimate the impact of
that negotiation at this time.
The effects of translating stronger foreign currencies into U.S. dollars,
together with increased health care expenses, increased insurance expenses,
increased retirement benefit expenses and expenses related to employee
reductions were the primary reasons for the increase in selling, general and
administrative expenses in the third quarter of 2003 of 4.2% and the first nine
months of 2003 of 6.1% when compared to the same periods in 2002.
Non-operating income (loss) consists of the following:
For Three Months Ended For Nine Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
=================================================================================================================
Interest income $ 10,467 38,110 26,886 82,940
Foreign currency
exchange gain (loss) (25,775) 18,574 59,321 59,732
Miscellaneous, net 4,530 36,549 126,503 108,844
- -----------------------------------------------------------------------------------------------------------------
Non-operating
income (loss) $ (10,778) 93,233 212,710 251,516
=================================================================================================================
The primary reason for the increase in miscellaneous income in the first nine
months of 2003 compared to the same period in 2002 was from the gain on the sale
of machinery and equipment at our closed Longview, TX plant. The Company and a
third party have signed a
lease contract on October 1, 2003 for the Longview plant and building. The lease
has a five year term and obligates the lessee to purchase the property by the
end of the term. As discussed above, we are also in the process of selling our
facility in Leeds, England. We have received a contingent contract from a
developer in England to acquire our Leeds' facility for 4,050,000 British
Pounds. The contract is contingent upon receiving government authorization to
convert the property to residential use and upon our ability to find a suitable
site to which we would relocate. It is unlikely that this transaction would be
consummated before 2004. The property is recorded at a zero value and, as a
result, the transaction has the potential to provide us with a significant
capital gain.
We had income tax expense of $177,214 and $9,070 for the three months ended
September 30, 2003 and 2002, respectively, on losses before income taxes and
minority interest of $413,514 and $1,424,708, respectively, for such periods. We
had income tax expense of $389,112 and $208,299 for the nine months ended
September 30, 2003 and 2002, respectively, on losses before income taxes and
minority interest of $1,311,761 and $2,277,686, respectively, for such periods.
This is a result of significant losses in the Domestic segment that are not
being benefited for this purpose and income tax expense related to the European
and International segments that are generating income.
The primary reason for the decrease in the net loss of approximately $.66 per
share in the third quarter of 2002 to a net loss of approximately $.30 per share
in the third quarter of 2003 and the decrease in the net loss of approximately
$1.25 per share in the first nine months of 2002 to a net loss of approximately
$.88 per share in the first nine months of 2003 was the increase in gross profit
described above.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in our critical accounting policies since
the filing of our Annual Report on Form 10-K for the year ended December 31,
2002. As discussed in our Annual Report on Form 10-K, the preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions for the reporting period
and as of the financial statement date. These estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent
liabilities and the reported amounts of revenues and expenses. Actual results
could differ from those amounts.
Critical accounting policies are those that are important to the portrayal of
the Company's financial condition and results, and which require management to
make difficult, subjective and/or complex judgments. Critical accounting
policies cover accounting matters that are inherently uncertain because the
future resolution of such matters is unknown. The Company believes that critical
accounting policies include accounting for percentage-of-completion contracts,
accounting for allowances for doubtful accounts receivable, accounting for
pensions and accounting for inventory obsolescence. Various assumptions and
other factors underlie the determination of these estimates. The process of
determining estimates is fact specific and takes into account factors such as
historical experience, current and expected economic conditions, product mix
and, as appropriate, actuarial techniques. We continually evaluate our
assumptions and estimates as the circumstances in which they were made and the
facts underlying such assumptions change.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that results from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company adopted SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on
the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified
after December 31, 2002 and have not had a material effect on the Company's
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," in an effort to expand upon and strengthen existing
accounting guidance as to when a company should consolidate the financial
results of another entity. Interpretation 46 requires "variable interest
entities" as defined to be consolidated by a company if that company is subject
to a majority of expected losses of the entity or is entitled to receive a
majority of expected residual returns of the entity, or both. The company that
is required to consolidate a variable interest entity is referred to as the
entity's primary beneficiary. The interpretation also requires certain
disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. The
consolidation and disclosure requirements apply immediately to variable interest
entities created after January 31, 2003. The Company is not the primary
beneficiary of any variable interest entity created after January 31, 2003 nor
does the company have a significant variable interest in a variable interest
entity created after January 31, 2003. For variable interest entities that
existed prior to February 1, 2003, the consolidation requirements were initially
effective for reporting periods beginning after June 15, 2003. On October 9,
2003, the FASB Staff issued Position No. FIN46-6 which delayed the effective
date of consolidation provisions of Interpretation 46 for variable interest
entities created before February 1, 2003 if the reporting entity had not yet
issued financial statements reporting the variable interest entities in
accordance with the consolidation provisions of Interpretation 46. The new
effective date is for reporting periods ending after December 15, 2003. The
Company will apply the provisions of FIN 46 to variable interest entities
created before February 1, 2003 as of December 31, 2003. Despite the deferral
provisions, the Company has substantially completed its evaluation of variable
interest entities created before February 1, 2003. Although this evaluation is
not complete, based on the available information that the Company has to date,
the Company does not believe that the adoption of FIN 46 will have a material
impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of SFAS 149 did not have a material effect on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires an issuer to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). An issuer previously
classified many of those instruments as equity. The Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for interim periods beginning after June 15, 2003. The adoption of
SFAS 150 did not have a material effect on the Company's financial statements.
CAUTIONARY FACTORS
The discussions in this section and elsewhere contain various forward-looking
statements concerning the Company's prospects that are based on the current
expectations and beliefs of management. Forward-looking statements may also be
made by the Company from time to time in other reports and documents as well as
oral presentations. When used in written documents or oral statements, the words
"anticipate", "believe", "estimate", "expect", "objective", and similar
expressions are intended to identify forward-looking statements. The statements
contained herein and such future statements involve or may involve certain
assumptions, risks and uncertainties, many of which are beyond the Company's
control, that could cause the Company's actual results
and performance to differ materially from what is expected. In addition to the
assumptions and other factors referenced specifically in connection with such
statements, the following factors could impact the business and financial
prospects of the Company:
* Factors affecting the Company's international operations, including
relevant foreign currency exchange rates, which can affect the cost to
produce the Company's products or the ability to sell the Company's
products in foreign markets, and the value in U.S. dollars of sales
made in foreign currencies. Other factors include foreign trade,
monetary and fiscal policies, laws, regulations and other activities of
foreign governments, agencies and similar organizations, and risks
associated with having major facilities located in countries which have
historically been less stable than the U.S. in several respects,
including fiscal and political stability;
* Factors affecting the Company's ability to hire and retain competent
employees, including unionization of the Company's non-union employees
and changes in relationships with the Company's unionized employees;
* The risk of strikes or other labor disputes at those locations that are
unionized which could affect the Company's operations;
* Factors affecting the world and U.S. economy generally, including the
financial and business conditions of the Company's customers, the
demand for customers' products and services that utilize the Company's
products, national and international events such as those of September
11, 2001, hostilities in the Middle East, and other threats or acts of
terrorism;
* Factors affecting the fair market value of the Company's common stock
or other factors that would negatively impact the funding of the
employee benefit plans;
* Factors affecting the Company's financial performance or condition,
including restrictions or conditions imposed by its lenders, tax
legislation, unanticipated restrictions on the Company's ability to
transfer funds from its subsidiaries and changes in applicable
accounting principles or environmental laws and regulations;
* The cost and other effects of claims involving the Company's products
and other legal and administrative proceedings, including the expense
of investigating, litigating and settling any claims;
* Factors affecting the Company's ability to produce products on a
competitive basis, including the availability of raw materials at
reasonable prices and financing with acceptable terms; and
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing
assets.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk stemming from changes in foreign exchange
rates and interest rates. Changes in these factors could cause fluctuations in
earnings and cash flows. The Company has significant foreign operations, for
which the functional currencies are denominated primarily in the Euro and
British Pound. As the values of the currencies utilized by the foreign countries
in which the Company has operations increase or decrease relative to the U.S.
dollar, the sales, expenses, profits, assets and liabilities of the Company's
foreign operations, as reported in the Company's Consolidated Financial
Statements, decrease or increase accordingly.
INTEREST RATE RISK
The Company's debt structure and interest rate risk are managed through the use
of fixed and floating rate debt. The Company's primary exposure is to U.S.
interest rates on the approximately $25,000,000 of floating rate debt
outstanding at September 30, 2003. A 100 basis point movement in interest rates
on floating rate debt outstanding at September 30, 2003 would result in a change
in earnings or loss before income taxes of approximately $250,000 per year.
FOREIGN EXCHANGE RATE RISK
If foreign exchange rates would have been collectively 10% weaker against the
U.S. dollar in the third quarter of 2003, the net loss would have increased by
approximately $130,000.
The Company occasionally uses forward contracts to reduce fluctuations in
foreign currency cash flows related to third party material purchases,
intercompany product shipments and intercompany loans. At September 30, 2003,
the Company had one forward exchange contract outstanding with Barclays Bank plc
for 826,994 Euros against 571,760 British Pounds at a rate of 1.4464 for
delivery between December 1, 2003 and December 19, 2003.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
CHANGE IN INTERNAL CONTROLS
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index following the last page of this Form 10-Q
which Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K filed during the quarter for which this
report is filed:
None.
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.
THE OILGEAR COMPANY
Registrant
/s/ David A. Zuege
------------------------------------
David A. Zuege
President and CEO
(Principal Executive Officer)
/s/ Thomas J. Price
------------------------------------
Thomas J. Price
VP-CFO and Secretary
(Principal Financial and Chief
Accounting Officer)
Date: November 14, 2003
THE OILGEAR COMPANY
COMMISSION FILE NUMBER 000-00822
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Exhibit Exhibit Description
- ------- -------------------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act).
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002