Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 28, 2002
Commission File Number 1-14182
TB WOOD'S CORPORATION
------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 25-1771145
- ------------------------------- ------------------------------------
(State or other Jurisdiction of (IRS Employer Identification Number)
Incorporation of Organization)
440 North Fifth Avenue, Chambersburg, PA 17201
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(717) 264-7161
----------------------------------------------------
(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.
Yes _X_ No ____
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at June 28, 2002
----- ----------------------------
Common Stock, $.01 par value 5,231,338
Table of Contents
Part I. - Financial Information Page No.
- ------------------------------- --------
Condensed Consolidated Balance Sheets -
June 28, 2002 and December 28, 2001 3
Condensed Consolidated Statements of Operations -
For the Second Quarter and Six Months Ended June 28, 2002
and June 29, 2001 4
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 28, 2002
and June 29, 2001 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. - Other information 15
- ----------------------------
2
Part I.-Financial Information
Item 1. Financial Statements
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
June 28, December 28, 2001
(in thousands, except share amounts) 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $ 534 $ 581
Accounts receivable, less allowances for doubtful accounts, discounts,
and claims of $570 at June 28, 2002 and $472 at December 28, 2001........... 17,466 15,706
Inventories................................................................... 20,199 23,802
Other current assets.......................................................... 2,697 1,849
---------------------------
Total current assets....................................................... 40,896 41,938
---------------------------
Property, plant, and equipment.................................................. 64,906 64,966
Less accumulated depreciation................................................. 32,930 32,025
---------------------------
Net property, plant and equipment........................................... 31,976 32,941
---------------------------
Other Assets:
Deferred income taxes......................................................... 3,872 2,265
Goodwill, net of accumulated amortization of $2,157 at
June 28, 2002 and at December 28, 2001..................................... 5,089 8,865
Other......................................................................... 1,829 1,623
---------------------------
Total other assets......................................................... 10,790 12,753
---------------------------
TOTAL ASSETS.................................................................... $83,662 $87,632
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.......................................... $ 619 $ 843
Accounts payable.............................................................. 11,481 7,469
Checks outstanding............................................................ 2,288 1,635
Accrued expenses.............................................................. 6,971 5,317
Deferred income taxes......................................................... 1,202 1,202
---------------------------
Total current liabilities.................................................. 22,561 16,466
---------------------------
Long-term debt, less current maturities......................................... 23,390 27,802
---------------------------
Postretirement benefit obligation, less current portion......................... 11,474 11,857
---------------------------
Equity of minority shareholders................................................. -- 3,062
---------------------------
Shareholders' Equity:
Preferred stock, $.01 par value; 100 and 5,000,000 shares authorized,
at June 28, 2002 and December 28, 2001, and no shares issued or
outstanding................................................................ -- --
Common stock, $.01 par value; 10,000,000 and 40,000,000 shares authorized at
June 28, 2002 and December 28, 2001; 5,639,798 issued; and 5,231,338 and
5,219,447 outstanding at June 28, 2002 and December 28, 2001................. 57 57
Treasury stock, at cost....................................................... (4,253) (4,338)
Additional paid-in capital.................................................... 26,725 26,720
Retained earnings............................................................. 6,173 8,968
Other accumulated comprehensive income........................................ (2,465) (2,962)
---------------------------
Total shareholders' equity................................................. 26,237 28,445
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $83,662 $87,632
===========================
The accompanying notes are an integral part of these
consolidated financial statements.
3
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited Unaudited
Second Quarter Ended Year to Date
June 28, June 29, June 28, June 29,
(in thousands, except per share amounts) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net sales........................................................... $27,936 $28,338 $54,858 $58,286
Cost of sales....................................................... 19,033 18,742 37,281 38,095
--------------------------------------------
Gross profit...................................................... 8,903 9,596 17,577 20,191
Selling, general and administrative expenses........................ 7,659 7,751 15,266 16,341
--------------------------------------------
Operating income, before minority interest....................... 1,244 1,845 2,311 3,850
Minority interest in loss (income).................................. 10 (315) (152) (671)
--------------------------------------------
Operating income.................................................... 1,254 1,530 2,159 3,179
--------------------------------------------
Other (expense) income:
Interest expense and other finance charges....................... (217) (400) (433) (837)
Other, net....................................................... 20 599 15 560
--------------------------------------------
Other income (expense), net...................................... (197) 199 (418) (277)
--------------------------------------------
Income before provision for income taxes and cumulative effect of
change in accounting principle...................................... 1,057 1,729 1,741 2,902
Provision for income taxes.......................................... 484 657 745 1,103
--------------------------------------------
Income before cumulative effect of change in accounting
principle........................................................... 573 1,072 996 1,799
Cumulative effect of change in accounting principle, net of
income tax.......................................................... -- -- (2,846) --
--------------------------------------------
Net income (loss)................................................... $ 573 $ 1,072 $ (1,850) $1,799
============================================
Per share amounts-Basic and Diluted:
Basic and Diluted Income before cumulative effect of change in
accounting principle per common share............................... $ 0.11 $ 0.20 $ 0.19 $ 0.33
Basic and Diluted Cumulative effect of change in accounting
principle per common share.......................................... -- -- (0.54) --
--------------------------------------------
Basic and Diluted net income (loss) per common share................ $ 0.11 $ 0.20 $ (0.35) $ 0.33
============================================
Basic and Diluted Weighted average shares of common stock and
equivalents outstanding............................................. 5,234 5,475 5,233 5,466
============================================
The accompanying notes are an integral part of these
consolidated financial statements.
4
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
Year to Date
June 28, June 29,
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (loss) income .......................................................... $ (1,850) $ 1,799
Cumulative effect of change in accounting principle ........................ 2,846 --
--------------------------
Income before cumulative effect of change in accounting principle .......... 996 1,799
--------------------------
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 2,780 2,780
Other ................................................................. (39) 23
Stock option compensation and employee stock benefit expense .......... 40 254
Minority interest ..................................................... (3,034) 671
Net loss (gain) on sale of assets ..................................... 3 (612)
Changes in working capital:
Accounts receivable .............................................. (1,760) 2,127
Inventories ...................................................... 3,603 2,634
Other current assets ............................................. (848) (629)
Accounts payable ................................................. 4,012 (916)
Accrued and other liabilities .................................... 1,271 (2,000)
--------------------------
Total adjustments ........................................... 6,028 4,332
--------------------------
Net cash provided by operating activities ................... 7,024 6,131
--------------------------
Cash Flows from Investing Activities:
Capital expenditures ....................................................... (1,794) (2,032)
Proceeds from sale of fixed assets ......................................... 68 742
Other ...................................................................... (929) (71)
--------------------------
Net cash used in investing activities ................................. (2,655) (1,361)
--------------------------
Cash Flows from Financing Activities:
Change in checks outstanding ............................................... 653 501
Distribution of Earnings to Minority Partner ............................... (28) --
Repayments of other long-term debt, net .................................... (32) (177)
Proceeds from revolving credit facility .................................... 16,300 17,814
Repayments of revolving credit facility .................................... (20,904) (21,600)
Payment of dividends ....................................................... (942) (979)
Treasury Stock ............................................................. 40 (141)
Other ...................................................................... -- (112)
--------------------------
Net cash used in financing activities ................................. (4,913) (4,694)
--------------------------
Effect of changes in foreign exchange rates ................................ 497 430
--------------------------
Net increase in cash and cash equivalents .................................. (47) 506
Cash and cash equivalents at beginning of period ........................... 581 619
--------------------------
Cash and cash equivalents at end of period ................................. $ 534 $ 1,125
==========================
Income taxes paid .......................................................... $ 584 $ 1,315
==========================
Interest paid .............................................................. $ 504 $ 837
==========================
The accompanying notes are an integral part of these consolidated statements.
5
TB Wood's Corporation and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited; in thousands, except per share amounts)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of TB Wood's Corporation and
Subsidiaries (the "Company") and the results of their operations and
cash flows for the interim periods presented. Certain information and
footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be
read together with the audited financial statements and notes included
in the Company's 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Operating results for the interim
periods presented are not necessarily indicative of the results that may
be expected for the fiscal year ending December 27, 2002.
2. Inventories
The major classes of inventories at June 28, 2002 and December 28, 2001
consisted of the following:
Unaudited
----------------------------------------
June 28, December 28,
(in thousands) 2002 2001
--------------------------------------------------------------------------------------------------------
Raw materials and supplies.................................... $ 4,923 $ 5,566
Work in process............................................... 7,370 7,298
Finished goods................................................ 13,338 16,370
----------------------------------------
Total at FIFO cost............................................ 25,631 29,234
Excess of FIFO cost over LIFO cost............................ (5,432) (5,432)
----------------------------------------
Total at LIFO cost............................................ $20,199 $23,802
========================================
3. Shareholders' Equity
Dividends
On April 3 and July 2, 2002, the Board of Directors declared quarterly
cash dividends of $0.09 per share payable on April 30 and July 31, 2002
to stockholders of record on April 16 and July 17, 2002, respectfully.
Preferred and Common Stock
On April 23, 2002, the shareholders approved an amendment of the
corporate charter reducing the number of shares of preferred stock the
Company is authorized to issue from 5,000,000 to 100 and reducing the
number of shares of common stock the Company is authorized to issue from
40,000,000 to 10,000,000.
Treasury Stock
In 1996, the Board of Directors authorized the Company to purchase up to
200,000 of the Company's common shares. At the July 2000 and January
2001 Board of Director's meetings, the directors of TB Wood's expanded
this share repurchase program by authorizing the repurchase of up to an
additional 100,000 and 200,000 shares, respectively, of TB Wood's stock.
These purchases are subject to certain business and market conditions.
At June 28, 2002 the cumulative number of treasury shares purchased
under this authorization was 497,936. Year to date, the number of
treasury shares issued to employees under the stock purchase plans was
5,288 and under the 401-K retirement plan was 6,603. As of June 28,
2002, 408,460 shares were held in treasury at cost.
6
Stock Options
On January 31, 2002, the Company granted options for the purchase of
145,650 shares of its common stock to employees at exercise prices equal
to or in excess of market price on the date of the grant. These options
vest over three years and options for 97,100 shares expire on January
31, 2007 and options for 48,550 shares expire on January 2012.
4. Other Comprehensive Income
Total comprehensive (loss) income for the year-to-date periods ended
June 28, 2002 and June 29, 2001 was as follows:
Unaudited Unaudited
-----------------------------------
(in thousands) June 28, 2002 June 29, 2001
----------------------------------------------------------------------------------------------
Net (Loss) Income.......................................... $(1,850) $1,799
Other comprehensive income,
Change in the fair value of derivative instrument...... -- (32)
Foreign currency translation adjustments............... 497 430
-----------------------------------
Total Comprehensive (Loss) Income.......................... $(1,353) $2,197
===================================
The components of accumulated other comprehensive income, net of related
tax at June 28, 2002 and December 28, 2001 are as follows:
2002 2001
---- ----
Aggregate currency translation adjustment $2,465 $2,962
====== ======
5. Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by
the weighted average shares outstanding. Diluted earnings per share is
computed by dividing net income (loss) by the weighted average shares
and common equivalent shares if dilutive. The computation of weighted
average shares outstanding is as follows:
Quarter Ended Year to Date
June 28, June 29, June 28, June 29,
(in thousands) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Basic weighted average number of common shares
outstanding.................................................... 5,231 5,473 5,230 5,466
Shares issueable upon assumed exercise of
outstanding stock options...................................... 3 2 3 --
--------------------------------------------
Diluted weighted average number of common and
common equivalent shares outstanding........................... 5,234 5,475 5,233 5,466
============================================
Total outstanding options to purchase 718,400 and 755,000 shares of
common stock as of June 28, 2002 and June 29, 2001, respectively, are
not included in the above calculation as their effect would be
antidilutive.
7
6. Business Segment Information
The Company's reportable segments are business units that manufacture
and market separate and distinct products and are managed separately
because each business requires different processes, technologies and
marketing strategies.
The following table summarizes revenues, operating income, total assets
and expenditures for long-lived assets by business segment for the
periods ended June 28, 2002 and June 29, 2001.
Quarter Ended Year to Date
------------------------------------------------
June 28, June 29, June 28, June 29,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
External Sales:
Mechanical Segment $18,176 $18,543 $35,083 $38,134
Electronics Segment 9,760 9,795 19,775 20,152
------------------------------------------------
$27,936 28,338 54,858 58,286
================================================
Operating Income (loss) after minority interest:
Mechanical Segment $1,562 $1,751 $2,565 $3,732
Electronics Segment (308) (221) (406) (553)
------------------------------------------------
$1,254 $1,530 $2,159 $3,179
================================================
Depreciation and amortization:
Mechanical Segment $ 740 $ 774 $1,477 $1,570
Electronics Segment 451 417 865 840
Corporate 220 194 438 370
------------------------------------------------
$1,411 $1,385 $2,780 $2,780
================================================
Assets:
Mechanical Segment $47,450 $54,282 $47,450 $54,282
Electronics Segment 25,356 34,821 25,356 34,821
Corporate 10,856 9,273 10,856 9,273
------------------------------------------------
$83,662 $98,376 $83,662 $98,376
================================================
Expenditures for long-lived assets:
Mechanical Segment $ 604 $ 803 $ 931 $ 991
Electronics Segment 326 326 511 516
Corporate 270 234 352 525
------------------------------------------------
$1,200 $1,363 $1,794 $2,032
================================================
The following table reconciles segment-operating income to consolidated
income before income taxes and cumulative effect of change in accounting
principle as of June 28, 2002 and June 29, 2001 as follows:
Quarter Ended Year to Date
----------------------------------------------
June 28, June 29, June 28, June 29,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Segment operating income after minority interest $1,254 $1,530 $2,159 $3,179
Interest, net (217) (400) (433) (837)
Other, net 20 599 15 560
----------------------------------------------
Income before provision for income taxes and
cumulative effect of change in accounting principle $1,057 $1,729 $1,741 $2,902
==============================================
8
7. Goodwill
The Financial Accounting Standards Board issued SFAS No. 141 Business
Combinations, that was effective July 2001 and No. 142, "Goodwill and
Other Intangible Assets" effective the beginning of fiscal year 2002. SFAS
No. 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. SFAS No. 142 requires that
goodwill and intangible assets deemed to have an indefinite life not be
amortized. Instead of amortizing goodwill and intangible assets deemed to
have an indefinite life, the statement requires a test for impairment to
be performed annually, or immediately if conditions indicate that such an
impairment could exist. The Company adopted this statement effective
December 29, 2001 (beginning of Fiscal 2002). As a result of adopting SFAS
No. 142, the Company will no longer record goodwill amortization of
approximately $226 ($177 after income tax) per year.
Using the fair value approach, the Company performed the first annual
impairment tests required by SFAS 142 during the first quarter of fiscal
2002. Based upon results of the first phase of these tests, it appeared
that goodwill related to the Company's North American Electronics
reporting unit may be impaired. As a result, the second phase of the tests
required by SFAS 142 on a fair value approach for the North American
Electronics reporting unit was performed. In accordance with SFAS 142,
once impairment is determined at a reporting unit, the amount of goodwill
impairment is determined based upon what the balance of goodwill would
have been if the purchase accounting method prescribed by SFAS 141 were
applied at the date of impairment. Under SFAS 142, if the carrying amount
of goodwill exceeds its fair value, an impairment loss must be recognized
in an amount equal to that excess. Once the impairment loss is recognized,
the adjusted carrying amount of the goodwill will be its new accounting
basis. This second phase of the impairment evaluation determined that
impairment had occurred, as a result of which an impairment loss of $4,453
($2,846 net of the income taxes), has been recognized as a cumulative
effect of a change in accounting principle as of the beginning of fiscal
2002 as prescribed by SFAS 142.
8. Restructuring
As part of its ongoing efforts to reduce costs in the current business
environment, the Company closed its Canadian manufacturing operations
effective January 31, 2002, and transferred certain of its operations to
its new Mexican plant opened in 2001. As a result of the closure of its
Canadian manufacturing operations affecting 28 people, restructuring
charges related to severance and closure in the amount of $275 was
recorded as an expense during the first quarter 2002.
9. Acquisition of Minority Interest
As reported in the Company's 10-K filed for fiscal 2001, The Electron Corp
("Electron"), the minority partner in a joint venture established to
manufacture and market belted drive products filed for bankruptcy in late
2001 under Chapter 11 (Reorganization) of the US Bankruptcy Code. In
February 2002 Electron abandoned certain non-cash assets that included
Electron's minority interest in the joint venture to a bank which was a
secured creditor. Subsequently Electron's reorganization proceeding was
converted to Chapter 7 (Liquidation). In April 2002 the Company reached an
agreement to purchase Electron's minority interest in the joint venture,
including the patterns, tooling and intellectual property that Electron
used to manufacture castings for the joint venture from the bank for the
sum of $3,230,000 plus the assumption of income tax liabilities of
$20,000. The Company did not recognize any gain or loss from this purchase
and the transaction will not have a material impact upon its business
operations. This purchase closed on July 8, 2002; on which date the
Company used borrowings under its US revolving credit facility to finance
this transaction. At June 28, 2002, the $3,230,000 purchase price is
included in accounts payable.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The general slowdown in the worldwide manufacturing sector continued in
the second quarter of 2002. The Company continued its efforts to reduce costs
that it believes will enable it to more successfully operate in the current
environment. These cost reduction measures include, but are not limited to,
continued strict cost controls on all discretionary spending, the reduction or
elimination of certain employee positions, shorter workweeks in specific areas
to match output to customer demands, and selecting component vendors offering
lower costs.
RESULTS OF OPERATIONS (in thousands, except per share amounts)
The Company posted net sales for the second quarter 2002 of $27,936,
compared to $28,338 for the second quarter 2001, a decrease of 1.4 %. Year to
date net sales of the Company for 2002 were $54,858 which is $3,428 lower than
net sales for the same period in 2001.
Mechanical Business net sales for the second quarter of $18,176 were
$367 lower than net sales of $18,543 for the second quarter of 2001. For the
first six months of 2002, Mechanical Business net sales were $35,083 compared to
$38,134 for same period in 2001 or a reduction of 8%. The sales decline mainly
occurred in the belted drive product lines, driven by the general industrial
slowdown.
Electronics Business net sales for the second quarter of 2002 were
$9,760, a $35 decrease from net sales of $9,795 for the second quarter of 2001.
For the first six months of 2002, Electronics Business net sales were $19,775
compared to $20,152 for same period in 2001, or a reduction of 1.9%. The
continued low level of capital expenditures by the man-made fibers industry was
the principal reason for the sales decline.
Company cost of sales ("COS") in the second quarter 2002 was $19,033
compared to $18,742 for the same period last year. As a percent of sales, COS
was 68.1% for the second quarter 2002, an increase of two percentage points from
2001's second quarter COS of 66.1%. Year to date, COS for the Company was
$37,281 or 68.0% of sales compared to $38,095 or 65.4% of sales for same period
in 2001.
During the first quarter 2002, the Company closed its Canadian
mechanical manufacturing operations and transferred certain operations to its
new Mexican plant that opened in 2001. As a result of the closure of its
Canadian manufacturing operations, restructuring charges related to severance
and closure costs in the amount of $275 were recorded as a COS expense during
the first quarter 2002. The Company has increased production at the plant in
Mexico, but the costs associated with the start up have negatively impacted cost
of goods sold.
Mechanical Business COS of $12,438 in the second quarter 2002 was $174
higher than COS of $12,264 in the second quarter 2001. As a percent of sales for
the second quarter 2002, Mechanical Business reported COS of 68.4%, an increase
of 2.3 percentage points from 66.1% in the prior year. Year to date, 2002 COS
for Mechanical Business was $24,116 or 68.7% of sales compared to $24,702 or
64.8% of sales for same period in 2001. The increased COS percentage to sales
resulted from reduced fixed expense absorption from inventory reduction and
continued costs of starting up the Mexican plant.
Electronics Business COS for the second quarter 2002 was $6,595, a $117
increase from COS of $6,478 for the same quarter of 2001. As a percent of sales
for the second quarter 2002 versus the second quarter 2001, Electronics Business
reported COS of 67.6% for 2002, up 1.5 percentage points from 66.1% in the prior
year. Year to date, 2002, COS for Electronics Business was $13,164 or 66.6% of
sales compared to $13,393 or 66.5% of sales for same period in 2001. The
principal reason for the higher COS percentage was reduced fixed expense
absorption from inventory reduction.
10
Selling, general and administrative ("SG&A") expenses for the second
quarter 2002 were $7,659 compared to $7,751 for the second quarter 2001, a
decrease of $92, or 1.2%. SG&A, as a percent of sales, was 27.4% for both the
second quarter of 2002 and 2001. Year to date, 2002, SG&A was $15,266 or 27.8%
of sales compared to $16,341 or 28.0% of sales for same period in 2001. The
major reasons for the change in absolute dollars were the reduced variable costs
caused by the lower sales volume and lower headcount.
Operating income after Minority Interest for the Company was $1,254 for
the second quarter 2002, or 4.5% as a percent of sales, and $276 lower than
second quarter 2001 income from operations of $1,530, which was 5.4% of sales.
This reduction was caused primarily by the lower sales volume leading to the
decreased absorption of fixed expenses from lower inventory and production, and
costs associated with the start up of the new Mexican plant. Offsetting the
above reduction was the cessation of the Company's joint venture with The
Electron Corp as of the end of the Company's first quarter that had the effect
of eliminating Electron's participation in the joint venture which in turn
increased operating income attributable to the Company's interest in the joint
venture operations. Further, effective December 29, 2001 (beginning of fiscal
2002), the Company adopted SFAS 142 "Goodwill and Other Intangible Assets." As a
result of the adoption the Company ceased the amortization of goodwill. During
the second quarter of 2001 the Company recognized $45 of goodwill amortization
net of income tax.
After six months of 2002, operating income was $2,159 or 3.9% of sales,
compared to $3,179 or 5.5% of sales for same period of 2001. The principal
reasons for the period change were lower sales volume leading to reduced
absorption of fixed expenses, closure of the Canadian manufacturing operation
and start up of the new plant in Mexico, offset by the discontinuance of the
Company's joint venture with The Electron Corp, which resulted in a year to date
expense of $152 as compared to $671 for the first six months of 2001, and the
discontinuance of the amortization of goodwill in 2002, while amortization of
goodwill was $90 net of income tax for the first six months of 2001.
Other expense for the second quarter 2002 was $197, compared to other
income of $199 for the same period last year. Interest expense, a component of
other expense, for the Company was $217 in the second quarter of 2002, a $183
decrease from $400 of interest expense in the second quarter of 2001. The
Company's lower debt levels and the reduction of interest rates since the second
quarter of 2001 were the primary reasons for this lower interest expense to the
Company. Other income for the second quarter of 2001 included a $617 gain on the
sale of the Elk Grove Village warehouse. Year to date 2002, other expense was
$418 compared to $277 for same period of 2001. The principal reason for the $141
increase was the nonreoccurance of the gain from the sale of the Elk Grove
Village warehouse in 2001.
Income before the cumulative effect of a change in accounting principle
for the impairment of goodwill in the second quarter 2002 was $573, or $0.11 per
diluted share, $499 lower than the $1,072 or $0.20 per diluted share a year ago.
Year to date 2002, income before the cumulative effect of a change in accounting
principle for the impairment of goodwill was $996 or $0.19 per diluted share,
$803 lower than the $1,799, or $0.33 per diluted share, for same period last
year.
The effective income tax rate increased for second quarter and year to
date for fiscal 2002 due to the fact that no income tax benefit was recognized
for the loss being incurred in Mexico as a result of the start up of a new
factory. It is anticipated that this loss will be carried forward and offset
against future income at which point an income tax benefit will be realized.
11
As a result of the adoption of SFAS 142 "Goodwill and Other Intangible
Assets" the Company recognized an impairment charge in the amount of $4,453
($2,846 net of income taxes) related to the goodwill associated with its North
American Electronics reporting unit during the first quarter of 2002. This
charge is reflected as a cumulative effect of a change of accounting principle
as directed by SFAS 142. No similar charges were recorded during the first
quarter of 2001 or during the second quarters of 2002 or 2001. As a result of
the impairment charge for goodwill in the first quarter of 2002, the net loss
realized for 2002 to date was $(1,850) or $(0.35) per diluted share as compared
to net income for the same period of 2001 that was $1,799 or $0.33 per share.
Net Income for the second quarter of 2002 was $573, or $0.11 per share compared
to $1,072 or $0.20 per share for the second quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES (in thousands)
Working Capital at June 28, 2002 was $18,335, 28% below the $25,472 at
December 28, 2001. The decrease was due primarily to decreases in inventory and
an increase in accounts payable resulting from the acquisition of the minority
interest in the Company's former joint venture. Current ratio was 1.8:1 at June
28, 2002 and 2.5:1 at December 28, 2001.
Outstanding long-term debt decreased $4,412, to $23,390 at June 28,
2002 compared to $27,802 at year-end 2001. Debt was comprised of $5,285 in
tax-exempt revenue bonds, $18,100 in debt under the Company's $52,500 unsecured
United States revolving credit facility (the "Facility"), and $5 in capitalized
leases. The Company's revolving credit agreement, which matures in October 2003,
was recently amended to provide additional flexibility under certain of the
financial covenants. At June 28, 2002, after taking into consideration $6,195 of
outstanding standby letters of credit, the Company had approximately $28,205 of
available borrowing capacity under the Facility. The Company's annual interest
rate as of June 28, 2002 on the Facility was 3.22%. On July 8, 2002, the Company
borrowed $3,230,000 under this Facility to effect its purchase of The Electron's
Corp.'s minority interest in a joint venture with the Company from a receiver
that was the holder in due course of this interest.
The Company's cash flows from operations in year to date 2002 were
$7,024, a $893, increase from the year to date 2001. The Company believes that
the combination of cash generated by operations, available borrowing capacity
and the Company's ability to obtain additional long-term indebtedness is
adequate to finance the Company's operations for the foreseeable future.
ACCOUNTING POLICIES:
The Company believes the following critical accounting policies affect
management's more significant judgements and estimates used in the preparation
of its Consolidated Financial Statements. For a detailed discussion on the
application of these and other accounting policies, see Note 1 in the 2001
Consolidated Financial Statements.
Accounts receivables: The Company maintains allowances for doubtful accounts,
discounts and claims resulting from the inability of customers to make required
payments, projected cash discounts to be taken in the month following the end of
the accounting period, and any claims customers may have for merchandise. If the
financial condition of customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
Product Warranty: Warranty reserve and allowance for product returns is
established based upon management's best estimate of the amounts necessary to
settle future and existing claims on products sold as of the balance sheet date.
12
While management believes the warranty reserve and allowance for product returns
is adequate and that judgement applied is appropriate based upon historical
experience for these items, actual amounts determined to be due and payable
would differ and additional allowances may be required.
Inventory: The Company writes down inventory for estimated obsolescence or
unmarketable inventory equal to the differences between the cost of the
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
Long-Lived Assets: The Company periodically evaluates the realizable value of
long-lived assets, including property, plant and equipment, relying on a number
of factors including operating results, budgets, economic projections and
anticipated future cash flows.
Acquired Intangibles: The Company's past business acquisitions resulted in the
recognition of goodwill and other intangible assets, which effect the amount of
future period amortization expense and possible impairment expenses that the
Company will incur. The determination of the value of such intangible assets
requires management to make estimates and assumptions that affect the Company's
Consolidated Financial Statements.
IMPACT OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board Issued SFAS No. 141 "Business
Combinations" that was effective July 2001, and No. 142, "Goodwill and Other
Intangible Assets" effective for the Company at the beginning of its fiscal year
2002. SFAS No. 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. SFAS No. 142 requires that
goodwill and intangible assets deemed to have an indefinite life not be
amortized. Instead of amortizing goodwill and intangible assets deemed to have
an indefinite life, the statement requires an annual test for impairment, or
immediately if conditions indicate that such an impairment could exist. The
Company adopted this statement effective December 29, 2001 (beginning of Fiscal
2002). As a result of adopting SFAS No. 142, the Company will no longer record
goodwill amortization of approximately $226 ($177 after income tax) per year.
The following table provides the comparable effects of adoption of SFAS
142 for the six-month periods ended June 28, 2002 and June 29, 2001.
June 28 June 29
(in thousands, except per share data) 2002 2001
- -----------------------------------------------------------------------------------------------------------
Reported Income before cumulative effect of change in accounting principle... $996 $1,799
Add Back: Goodwill amortization (net of tax)................................. -- 90
----------------------------
Pro Forma Income before cumulative effect of change in accounting principle $996 $1,899
============================
Basic and Diluted Income Per Share:
- ------------------------------------------------------------------------------ ---------------------------
Reported Income per share before cumulative effect of a change in accounting
principle.................................................................... $0.19 $0.33
Add back: Goodwill amortization (net of tax) per share...................... -- 0.02
---------------------------
Pro Forma income per share before cumulative effect of change in accounting
principle.................................................................... $0.19 $0.35
===========================
Using the fair value approach, the Company performed the first annual
impairment tests required by SFAS 142. Based upon results of the first phase of
these tests, it appeared that goodwill related to the Company's North American
Electronics reporting unit may be impaired. As a result the second phase of the
tests required by SFAS 142 on a fair value approach for the North American
Electronics reporting unit was performed. In accordance with SFAS 142, once
13
impairment is determined at a reporting unit, the amount of goodwill impairment
is determined based upon what the balance of goodwill would have been if the
purchase accounting method prescribed by SFAS 141 were applied at the date of
impairment. Under SFAS 142, if the carrying amount of goodwill exceeds its fair
value, an impairment loss must be recognized in an amount equal to that excess.
Once the impairment loss is recognized, the adjusted carrying amount of the
goodwill will be its new accounting basis. This second phase of the impairment
evaluation determined that impairment had occurred, as a result of which an
impairment loss of $4,453 ($2,846 net of income taxes), was recognized as a
cumulative effect of a change in accounting principle as of the beginning of
fiscal 2002 as prescribed by SFAS 142.
In June 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, " Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company intends to adopt this statement effective
December 28, 2002 (beginning of the Company's fiscal 2003). The Company does not
believe that implementation of this SFAS will have a material impact on its
Consolidated Financial Statements.
In October 2001, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supercedes SFAS No. 121. Though it retains
the basic requirements of SFAS No. 121 regarding when and how to measure
impairment loss, SFAS No. 144 provides additional implementation guidance. SFAS
144 applies to long-lived assets to be held and used or to be disposed of,
including assets under capital leases of lessees; assets subject to operating
leases of lessors; and prepaid assets. This statement is effective for fiscal
years beginning after December 15, 2001. The Company's adoption of this SFAS
during fiscal 2002 has not had a material impact on its Consolidated Financial
Statements.
RECENT DEVELOPMENTS
As reported in the Company's 10-K filed for fiscal 2001, The Electron
Corp ("Electron"), the minority partner in a joint venture established to
manufacture and market belted drive products filed for bankruptcy in late 2001
under Chapter 11 (Reorganization) of the US Bankruptcy Code. In February 2002
Electron abandoned certain non-cash assets that included Electron's minority
interest in the joint venture to a bank which was a secured creditor.
Subsequently Electron's reorganization proceeding was converted to Chapter 7
(Liquidation). In April 2002 the Company reached an agreement to purchase
Electron's minority interest in the joint venture, including the patterns,
tooling and intellectual property that Electron used to manufacture castings for
the joint venture from the bank for the sum of $3,230,000 plus the assumption of
income tax liabilities of $20,000. The Company did not recognize any gain or
loss from this purchase and the transaction will not have a material impact upon
its business operations. This purchase closed on July 8, 2002; on which date the
Company used borrowings under its US revolving credit facility to finance this
transaction. At June 28, 2002, the $3,230,000 purchase price is included in
accounts payable.
SAFE HARBOR STATEMENT
Certain information included or incorporated by reference in this
document may be deemed to be "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, that address activities,
events or developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future are forward looking statements. Such
statements are characterized by terminology such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expects," "estimates," "projects,"
14
"positioned," "strategy," "and similar expressions. These statements are based
on assumptions and assessments made by the Company's management in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. These
forward looking statements are subject to a number of risks and uncertainties,
including but not limited to continuation of the Company's longstanding
relationships with major customers, the Company's ability to integrate acquired
businesses into its operations and realize planned synergies, the extent to
which acquired businesses are able to meet the Company's expectations and
operate profitably, changes in regulations that could affect demand for products
and unanticipated developments that could occur with respect to contingencies
such as environmental matters and litigation. In addition, the Company is
subject to risks and uncertainties that affect the manufacturing sector
generally, including, but not limited to, economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices. Any such forward looking statements are not guarantees of
future performances and actual results, developments, and business decisions may
differ from those envisaged by such forward looking statements. The Company
disclaims any duty to update any forward-looking statements, all of which are
expressly qualified by the foregoing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risks since the 2001
Annual Report to Shareholders.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
At the Annual Meeting held on April 23, 2002, shareholders approved an
amendment of the corporate charter reducing the number of shares of
preferred stock that the Company is authorized to issue from 5,000,000
shares to 100 shares and reducing the number of shares of Common Stock
that the Company is authorized to issue from 40,000,000 to 10,000,000
shares. An amendment to the corporate charter to effect these
reductions was filed with and accepted by the Secretary of State of
Delaware. These reductions did not affect any other rights of the
shareholders.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its Annual Meeting of Shareholders on April 23, 2002.
b) The following individuals were nominated and elected to serve as
directors of TB Wood's Corporation: Thomas C. Foley and
Frank D. Osborn.
c) The Shareholders voted as follows on the following matters:
15
1. Election of directors. The voting result for each nominee is as
follows:
Name Votes for Votes Withheld
Thomas C. Foley 4,923,841 128,021
Frank D. Osborn 4,921,936 129,926
2. The amendment of the corporate charter to reduce the number of shares
of preferred stock that the Company is authorized to issue from
5,000,000 to 100 shares and to reduce the number of shares of common
stock that the Company is authorized to issue from 40,000,000 shares to
10,000,000 shares was approved by a count of 4,651,906 votes for, 6,723
votes against, 2,409 votes abstaining, and 390,824 broker non-votes.
3. To increase the number of shares of common stock available for use
under the 1996 Stock Based Incentive Compensation Plan by 500,000
shares was approved by a count of 3,288,421 votes for, 1,368,571 votes
against, 4,045 votes abstaining, and 390,825 broker non-votes.
4. To ratify the Board of Directors selection of Arthur Andersen LLP as
the Company's independent public accountants was approved by a count of
4,870,915 votes for, 171,674 votes against, 9,272 votes abstaining, and
1 broker non-vote.
Subsequent to this ratification Arthur Andersen LLP advised the Company
that it was withdrawing from practice before the Securities and
Exchange Commission as a result of which the firm would no longer be
able to provide services required by the Company. Accordingly the
Company terminated Arthur Andersen LLP and appointed Grant Thornton LLP
to serve as the Company's independent public accountants for fiscal
2002.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1 Amended Restated Certificate of Incorporation of the Company.
10.61 Seventh Amendment to Loan Documents by and among TB Wood's
Incorporated Individually and as Agent under Borrower Agency
Agreement and PNC Bank, National Association as Agent, PNC
Bank, National Association, Fleet Bank (as successor to
Summit Bank), First Union National Bank and National City
Bank of Pennsylvania dated April 30, 2002 effective as of
March 29,2002 (Incorporated by reference to Form 10-Q for the
quarter ended March 29, 2002).
16 Letter from Arthur Andersen to the Securities and Exchange
Commission dated June 27, 2002 (Incorporated by reference
to Form 8-K filed on June 24,2002).
b) Reports on Form 8-K
June 24, 2002 to report termination of Arthur Andersen LLP as
Company's independent public accountant and appointment of Grant
Thornton LLP as the Company's new independent public accountant.
16
Pursuant to the requirements of Section 13 or 15(d) 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, in the Borough of
Chambersburg and Commonwealth of Pennsylvania, on August , 2002
TB WOOD'S CORPORATION
By: /s/Thomas F. Tatarczuch
-----------------------------------
THOMAS F. TATARCZUCH
Vice President-Finance
(Principal Financial Officer and
Principal Accounting Officer)
17