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UNITED STATES
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 March 28, 2003
Commission File Number 1-14182
TB WOOD'S CORPORATION
(Exact Name of registrant as specified in its charter)
DELAWARE 25-1771145
(State of Incorporation) (IRS Employer Identification Number)
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 March 28, 2003
Common Stock, $.01 par value 5,243,997
Table of Contents
Part I. - Financial Information Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 28, 2003 and December 27, 2002 3
Condensed Consolidated Statements of Operations -
For the Three Months Ended
March 28, 2003 and March 29, 2002 4
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended
March 28, 2003 and March 29, 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II. - Other information 15
Item 6. Exhibits and Reports on Form 8-K 16
2
Part I. -Financial Information
Item 1. Financial Statements
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 28, December 27,
(in thousands of dollars, except share amounts) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 580 $ 335
Accounts receivable, less allowances for doubtful accounts, discounts,
and claims of $611 at March 28, 2003 and $645 at December 27, 2002 .... 13,988 14,219
Inventories............................................................. 20,469 19,957
Other current assets.................................................... 2,912 2,801
--------------------------
Total current assets................................................. 37,949 37,312
--------------------------
Property, plant, and equipment............................................ 80,901 80,563
Less accumulated depreciation........................................... 51,517 50,393
--------------------------
Net property, plant and equipment..................................... 29,384 30,170
--------------------------
Other Assets:
Deferred income taxes................................................... 3,119 3,298
Goodwill, net of accumulated amortization of $1,558 at
March 28, 2003 and at December 27, 2002.............................. 5,340 5,172
Other................................................................... 1,536 1,624
--------------------------
Total other assets................................................... 9,995 10,094
--------------------------
TOTAL ASSETS $77,328 $77,576
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.................................... $ 238 $18,363
Accounts payable........................................................ 6,308 6,277
Checks outstanding...................................................... 1,644 2,142
Accrued expenses........................................................ 6,068 6,937
Deferred income taxes................................................... 898 1,001
--------------------------
Total current liabilities............................................ 15,156 34,720
--------------------------
Long-term debt, less current maturities................................... 25,030 5,436
--------------------------
Postretirement benefit obligation, less current portion................... 10,693 11,007
--------------------------
Shareholders' Equity:
Preferred stock, $.01 par value; 100 shares authorized, at March 28,
2003 and December 27, 2002, and no shares issued or outstanding........ -- --
Common stock, $.01 par value; 10,000,000 shares authorized; 5,639,798
issued; and 5,243,997 and 5,240,869 outstanding at March 28, 2003 and
December 27, 2002, respectively........................................ 57 57
Treasury stock, at cost................................................. (4,164) (4,188)
Additional paid-in capital.............................................. 26,770 26,726
Retained earnings....................................................... 5,768 6,029
Other accumulated comprehensive income.................................. (1,982) (2,211)
--------------------------
Total shareholders' equity........................................... 26,449 26,413
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $77,328 $77,576
==========================
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)
First Quarter Ended
March 28, March 29,
(in thousands of dollars, except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net sales................................................................................. $22,554 $26,922
Cost of sales............................................................................. 15,623 18,248
--------------------
Gross profit............................................................................ 6,931 8,674
Selling, general and administrative expenses.............................................. 6,137 7,607
--------------------
Operating income, before minority interest............................................. 794 1,067
Minority interest in loss (income)........................................................ 1 (162)
--------------------
Operating income.......................................................................... 795 905
--------------------
Other (expense) income:
Interest expense and other finance charges............................................. (217) (216)
Other, net............................................................................. 11 (5)
--------------------
Other expense, net..................................................................... (206) (221)
--------------------
Income before provision for income taxes and cumulative effect of change in accounting
principle............................................................................... 589 684
Provision for income taxes................................................................ 375 261
--------------------
Income before cumulative effect of change in accounting
principle............................................................................... 214 423
Cumulative effect of change in accounting principle, net of income
tax..................................................................................... -- (2,846)
--------------------
Net income (loss)......................................................................... $ 214 $(2,423)
====================
Per share amounts-Basic and Diluted:
Basic and Diluted Income before cumulative effect of change in accounting principle per
common share............................................................................ $ 0.04 $ 0.08
Basic and Diluted Cumulative effect of change in accounting principle per common
share................................................................................... -- $ (0.54)
--------------------
Basic and Diluted net income (loss) per common share...................................... $ 0.04 $ (0.46)
====================
Basic and Diluted Weighted average shares of common stock and equivalents
outstanding............................................................................. 5,245 5,226
====================
The accompanying notes are an integral part of these consolidated financial
statements.
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
First Quarter Ended
March 28, March 29,
(in thousands of dollars) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss)............................................................... $ 214 $(2,423)
Cumulative effect of change in accounting principle............................. -- 2,846
----------------------
Income before cumulative effect of change in accounting principle............... 214 423
----------------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.............................................. 1,392 1,368
Change in deferred income taxes, net....................................... 76 --
Stock option compensation and employee stock benefit expense............... 67 40
Minority interest.......................................................... (1) 162
Other...................................................................... (15) --
Net gain on sale of assets................................................. (7) (5)
Changes in operating assets and liabilities:
Accounts receivable................................................... 231 876
Inventories........................................................... (512) 2,303
Other current assets.................................................. (111) (152)
Accounts payable...................................................... 31 (645)
Accrued and other liabilities......................................... (1,184) (49)
----------------------
Total adjustments................................................ (33) 3,898
----------------------
Net cash provided by operating activities........................ 181 4,321
----------------------
Cash Flows from Investing Activities:
Capital expenditures............................................................ (465) (401)
Proceeds from sale of fixed assets.............................................. 24 11
Other........................................................................... (221) (119)
----------------------
Net cash used in investing activities...................................... (662) (509)
----------------------
Cash Flows from Financing Activities:
Change in checks outstanding.................................................... (498) 465
Distribution of earnings to minority partner.................................... -- (28)
Repayments of other long-term debt, net......................................... (53) (23)
Proceeds from revolving credit facility......................................... 13,022 7,800
Repayments of revolving credit facility......................................... (11,500) (10,977)
Payment of dividends............................................................ (472) (470)
Treasury Stock.................................................................. (2) 23
----------------------
Net cash used in financing activities...................................... 497 (3,210)
----------------------
Effect of changes in foreign exchange rates..................................... 229 (66)
----------------------
Net increase in cash and cash equivalents....................................... 245 536
Cash and cash equivalents at beginning of period................................ 335 581
----------------------
Cash and cash equivalents at end of period...................................... $ 580 $ 1,117
======================
Income taxes paid............................................................... $ 235 $ 6
======================
Interest paid................................................................... $ 226 $ 216
======================
The accompanying notes are an integral part of these consolidated financial
statements.
5
TB Wood's Corporation and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited; in thousands of dollars, except per share amounts)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring 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 periods
presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted. These financial statements should be read together
with the audited financial statements and notes included in the
Company's 2002 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 January 2, 2004.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Inventories
The major classes of inventories (valued principally using the "last in
first out" method) at March 28, 2003 and December 27, 2002 consisted of
the following:
March 28, December 27,
(in thousands of dollars) 2003 2002
------------------------------------------------------------------------
Raw materials and supplies.............. $ 8,908 $ 8,146
Work in process......................... 3,780 4,519
Finished goods.......................... 13,043 12,446
-------------------------
Total at FIFO value..................... 25,731 25,111
Adjustment to LIFO basis................ (5,262) (5,154)
-------------------------
Inventory value at LIFO................. $20,469 $19,957
=========================
3. Shareholders' Equity
Dividends
On April 2, 2003, the Board of Directors declared quarterly cash
dividends of $0.09 per share payable on April 30, 2003 to stockholders
of record on April 15, 2003.
Preferred and Common Stock
On April 23, 2002, the shareholders approved an amendment of the
Company's 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
Since 1996, the Board of Directors has authorized the Company to
purchase up to a total of 500,000 of the Company's common shares subject
to certain business and market conditions. In January 2003 the Board of
Directors authorized an additional 25,000 shares for purchase and in
April 2003 authorized an additional 100,000 share purchase for a total
of 625,000 shares to date. These purchases are subject to certain
business and market conditions. At March 28, 2003 the cumulative number
of treasury shares purchased under the Board's authorization was
500,636. Year to date, the number of treasury shares issued to employees
under the stock purchase plans was 2,382 and under the 401(K) retirement
plan was 3,446. As of March 28, 2003, 395,801 shares were held in
treasury at cost.
6
Stock Options
On January 31, 2003, the Company granted options for the purchase of
145,050 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 with options for 96,700 shares expiring on January
31, 2008 and the remaining options expiring on January 31, 2013.
4. Other Comprehensive Income
Total comprehensive income (loss) for the quarters ended March 28, 2003
and March 29, 2002 was as follows:
Mar. 28, Mar. 29,
(in thousands of dollars) 2003 2002
------------------------------------------------------------------------
Net Income (Loss)....................... $214 $(2,423)
Other comprehensive income (loss)
Foreign currency translation
adjustments......................... 229 (66)
--------------------
Total Comprehensive Income (Loss)....... $443 $(2,489)
====================
The components of accumulated other comprehensive income, net of related
tax at March 28, 2003 and December 27, 2002 are as follows:
2003 2002
---- ----
Aggregate foreign currency translation adjustment $(1.982) $(2,211)
==================
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:
First Quarter
Mar. 28, Mar. 29,
(in thousands) 2003 2002
------------------------------------------------------------------------
Basic weighted average number of common shares
outstanding.................................. 5,245 5,226
Shares issueable upon assumed exercise of
outstanding stock options.................... -- --
----------------
Diluted weighted average number of common and
common equivalent shares outstanding......... 5,245 5,226
================
Total outstanding options to purchase 858,550 and 893,700 shares of
common stock as of March 28, 2003 and March 29, 2002, respectively, are
not included in the above calculation as their effect would be
antidilutive.
7
6. Stock Based Compensation
The Company adopted Financial Accounting Standards Board (FASB)
Statement of Accounting Financial Standard (SFAS) No. 123, as amended by
SFAS No. 14, as of December 28, 2002 (beginning of Fiscal 2003) to
account for stock-based compensation cost using the fair value method.
The Company selected the modified prospective method of accounting for
this cost. For Fiscal 2002 the Company used the intrinsic value method
as defined by Accounting Principles Board Opinion No. 25 to account for
the cost of stock options.
The following table illustrates the effect on net income (loss) and net
income (loss) per share had compensation costs for the stock based
compensation plan been determined based on the grant date fair values of
awards under the provisions of Statement of Financial Accounting
Standards No. 123 for both fiscal periods presented.
First Quarter
Mar. 28, Mar. 29,
(in thousands of dollars except per share amounts) 2003 2002
----------------------------------------------------------------------------------------------
Net Income (loss) as reported $ 214 $(2,423)
Add:
Stock-based employee compensation costs, net of income tax,
included in net income (loss) 27 --
Less:
Stock-based employee compensation costs, net of tax, as if
fair value method had been applied (27) (39)
------------------
Pro forma net income (loss) $ 214 $(2,462)
==================
Net income (loss) per share:
As reported - basic and diluted $0.04 $ (0.46)
Pro forma - basic and diluted $0.04 $ (0.47)
7. 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.
8
The following table summarizes revenues, operating income, depreciation
and amortization, total assets and expenditures for long-lived assets by
business segment for the periods ended March 28, 2003 and March 29,
2002.
First Quarter
------------------
Mar. 28, Mar. 29,
(in thousands of dollars) 2003 2002
-----------------------------------------------------------------------
External Sales:
Mechanical Segment $13,904 $16,907
Electronics Segment 8,650 10,015
------------------
$22,554 $26,922
==================
Operating Income (loss) after minority interest:
Mechanical Segment $ 1,130 $ 1,003
Electronics Segment (335) (98)
------------------
$ 795 $ 905
==================
Depreciation and amortization:
Mechanical Segment $ 745 $ 737
Electronics Segment 435 414
Corporate 212 217
------------------
$ 1,392 $ 1,368
==================
Assets:
Mechanical Segment $44,224 $44,713
Electronics Segment 26,206 30,879
Corporate 6,898 6,143
------------------
$77,328 $81,735
==================
Expenditures for long-lived assets:
Mechanical Segment $ 212 $ 216
Electronics Segment 41 103
Corporate 212 82
------------------
$ 465 $ 401
==================
The following table reconciles segment-operating income to consolidated
income before income taxes and cumulative effect of change in accounting
principle as of March 28, 2003 and March 29, 2002 as follows:
First Quarter
------------------
Mar. 28, Mar. 29,
(in thousands of dollars) 2003 2002
-----------------------------------------------------------------------
Segment operating income after minority interest $ 795 $ 905
Interest, net (217) (216)
Other, net 11 (5)
------------------
Income before provision for income taxes and
cumulative effect of change in accounting
principle $ 589 $ 684
==================
9
8. Goodwill
FASB issued SFAS No. 141 "Business Combinations" effective July 2001 and
No. 142, "Goodwill and Other Intangible Assets" which were 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 no longer records goodwill amortization.
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), was recognized as a cumulative effect of a change in accounting
principle as of the beginning of fiscal 2002 as prescribed by SFAS 142.
The Company performed its annual impairment test at the beginning of
fiscal 2003 and determined that no impairment of the remaining goodwill
had occurred.
9. 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 were
recorded as an expense during the first quarter of 2002.
10. Acquisition of Minority Interest
In April 2002 the Company reached an agreement to purchase The Electron
Corp.'s ("Electron") minority interest in a joint venture between the
Company and Electron, including the patterns, tooling and intellectual
property that Electron used to manufacture castings for the joint
venture 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 did 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 United States revolving
credit facility to finance this transaction.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The lower net sales in the first quarter of 2003 were the result of
North American industrial distribution customers' activities to reduce inventory
and political turmoil in Venezuela. 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 selection of component vendors
offering lower costs.
RESULTS OF OPERATIONS (in thousands, except per share amounts)
The Company posted net sales for the first quarter of 2003 of $22,554
compared to $26,922 for the first quarter of 2002, a decrease of 16.2%.
Mechanical Business net sales for the first quarter of 2003 of $13,904 were
$3,003 lower than net sales of $16,907 for the first quarter of 2002. The sales
decline mainly occurred in the belted drive product lines, driven by the North
American industrial distribution customers' activities to reduce inventory.
Electronics Business net sales for the first quarter of 2003 were $8,650, a
$1,365 decrease from net sales of $10,015 for the first quarter of 2002. The
reasons for the sales shortfall were North American industrial distribution
customers' activities to reduce inventory and political turmoil in Venezuela.
Company cost of sales ("COS") in the first quarter of 2003 was $15,623
compared to $18,248 for the same period last year. As a percent of sales, COS
was 69.3% for the first quarter of 2003, an increase of 1.5 percentage points
from 2002's first quarter COS of 67.8%. The primary reasons for the increased
COS percentage were reduced fixed expense absorption caused by lower sales
volume, unfavorable customer and product sales mix, and additional start up
expenses for new product introductions. These higher costs were partially offset
by one-time adjustments of health care spending and lower customer rebates from
the reduced sales volume.
Mechanical Business COS of $9,609 in the first quarter of 2003 was
$2,070 lower than COS of $11,679 in the first quarter of 2002. As a percent of
sales for the first quarter of 2003, Mechanical Business reported COS of 69.1%,
the same as the prior year. Electronics Business COS for the first quarter of
2003 was $6,014, a $555 decrease from COS of $6,569 for the same quarter of
2002. As a percent of sales for the first quarter 2003 versus the first quarter
2002, Electronics Business reported COS of 69.5% for 2003, up 3.9 percentage
points from 65.6% in the prior year. The principal reasons for the increased COS
percentage were the reduced fixed expense absorption from lower sales volume,
unfavorable customer and product sales mix and additional start up expenses for
new product introductions. These higher costs were partially offset by one-time
adjustments of health care spending and lower customer rebates from the reduced
sales volume.
Selling, general and administrative ("SG&A") expenses for the first
quarter of 2003 were $6,137 compared to $ 7,607 for the first quarter of 2002, a
decrease of $1,470 or 19.3%. SG&A, as a percent of sales, was 27.2% for the
first quarter of 2003 compared to 28.3% for the first quarter of 2002. The major
reasons for the change in absolute dollars were the termination of the
supplemental retirement plan for key employees in the amount of $435, the
reduced variable costs caused by the lower sales volume, and lower headcount.
Operating income for the Company was $795 for the first quarter of
2003, or 3.5% as a percent of sales, and $110 lower than the first quarter of
2002 operating income of $905, which was 3.4% of sales. This reduction was
caused primarily by the lower sales volume, unfavorable customer and product
sales mix. Offsetting these items were the one-time adjustments for health care
spending and the termination of the supplemental employee retirement plan.
11
Other expense, net for the first quarter of 2003 was $206, compared to
other expense of $221 for the same period last year. Interest expense, a
component of other expense, for the Company was $217 in the first quarter of
2003 as compared to $216 of interest expense in the first quarter of 2002.
The effective income tax rate increased for the first quarter of 2003
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 and the effect
of certain foreign income tax rates. It is anticipated that the Mexican loss
will be carried forward and offset against future income at which point an
income tax benefit will be realized.
Income before the cumulative effect of a change in accounting principle
for the impairment of goodwill in the first quarter of 2003 was $214, or $0.04
per basic and diluted share, $209 lower than the $423 or $0.08 per basic and
diluted share a year ago.
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 2003. As a result of the impairment charge for goodwill in the first
quarter of 2002, the net loss realized for the first quarter of 2002 was
$(2,423) or $(0.46) per basic and diluted share as compared to net income for
the first quarter of 2003 that was $214 or $0.04 per share
LIQUIDITY AND CAPITAL RESOURCES (in thousands)
Working capital at March 28, 2003 was $22,793 as compared to $2,592 at
December 27, 2002. The increase was primarily due to the reclassification of the
Company's United States revolving credit facility (the "Facility") as long-term
debt at March 28, 2003 as compared to its classification as a current liability
at December 27, 2002 due to an amendment of the Facility which, among other
things, extended the stated maturity date to October 10, 2004. Current ratio was
2.5:1 at March 28, 2003 and 1.1:1 at December 27, 2002.
Outstanding long-term debt increased $19,594 to $25,030, at March 28,
2003 compared to $5,436 at year-end 2002 primarily as a result of the
reclassification of the Facility. Debt was comprised of $5,290 in tax-exempt
revenue bonds, $19,600 in debt under the Facility, and $140 of equipment
financing. As part of the recent changes the Facility was amended to provide
additional flexibility under certain of the financial covenants, to grant to the
lenders security over substantially all of the Company's United States assets
(other than real property), and to reduce the maximum amount of the Facility
from $52,500 to $46,000. At March 28, 2003, after taking into consideration
$5,955 of outstanding standby letters of credit, the Company had a maximum of
approximately $20,445 of available borrowing capacity under the Facility, which
borrowings are subject to the satisfaction of certain financial covenants. The
Company's annual interest rate as of March 28, 2003 on the Facility was 3.0%.
The Company's net cash flow for the first three months of 2003 was
$245, a $291 decrease from the first three months of 2002 primarily as a result
of the decrease in income before cumulative effect of change in accounting
principle. 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.
12
ACCOUNTING POLICIES:
Management's discussion and analysis of the Company's financial
condition and results of operations are based upon the Company's Condensed
Consolidated Financial Statements, which have been prepared in accordance with
the rules and regulations of the United States Securities and Exchange
Commission. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, the Company evaluates these estimates,
including those related to bad debts, inventories, intangible assets,
post-retirement benefits, income taxes, and contingencies and litigation. The
Company bases these estimates on historical experiences and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
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 2 in the December
27, 2002 Consolidated Financial Statements included in the Company's 2002 annual
report on Form 10-K.
Revenue Recognition: The Company's revenue recognition policies are in
compliance with Securities and Exchange Commission Staff Accounting Bulletin No
101 " Revenue Recognition in Financial Statements." Revenue is recognized at the
time product is shipped and title passes pursuant to the terms of the agreement
with the customer, the amount due from the customer is fixed and collectibility
of the related receivable is reasonably assured. The Company establishes
allowances to cover anticipated doubtful accounts, sales discounts, product
warranty, and returns based upon historical experience. Shipping and handling
costs charged to customers are included as a component of net sales.
Product Warranty: In the ordinary course of business, the Company warrants its
products against defect in design, materials and workmanship over various time
periods. Warranty reserve and allowance for product returns is established based
upon management's best estimates of amounts necessary to settle future and
existing claims on product sold as of the balance sheet date. The warranty
reserve and allowance for product returns is immaterial to the financial
position of the Company for all periods presented, and the change in reserve and
allowance for each period is immaterial to the Company's results and cash flow.
Inventories: 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 reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the expected
future net cash flows generated by the assets. If the assets are considered to
be impaired, the impairment is recognized by the amount by which the carrying
amount of the asset exceeds its fair value.
Acquired Intangibles: The Company's past business acquisitions resulted in the
recognition of goodwill and other intangible assets, which may result in future
impairment expense. The determination of the value of such intangible assets
requires management to make estimates and assumptions that affect the Company's
Consolidated Financial Statements.
13
NEW ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS 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 adopted this statement effective December 28,
2002 (beginning of fiscal 2003). The adoption of this SFAS did not have a
material impact on its Consolidated Financial Statements.
In April 2002, FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No 13, and Technical
Corrections." SFAS No. 145 rescinds previous accounting guidance, which required
all gains and losses from the extinguishment of debt be classified as an
extraordinary item. Under SFAS No. 145 classification of debt extinguishment
depends on the facts and circumstances of the transaction. The Company adopted
this statement effective December 28, 2002. The adoption of this SFAS did not
have a material impact upon its Consolidated Financial Statements
In July 2002, FASB issued SFAS No.146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for the costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." This statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company adopted this
statement effective January 1, 2003; however, the Company has had no
transactions to which this statement would be applicable during the first
quarter of Fiscal 2003.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure" which requires certain pro form
disclosures that are included in Note 6. This statement also amended the
transition provisions of SFAS No. 123. The Company adopted SFAS 123 as amended
by SFAS 148 effective December 28, 2002 and the effects of adoption are
disclosed in Note 6 of the financial statements.
In November 2002, FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" which requires the guarantor to recognize
at inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing a guarantee. The Company has not guaranteed the
indebtedness or obligations of others so that the adoption of this
Interpretation will not have a material impact upon its Consolidated Financial
Statements.
In January 2003, FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" which addresses the consolidation and disclosures of
these entities by business enterprises. As the Company does not have any
interests in such types of entities the adoption of this Interpretation will not
have a material impact upon its Consolidated Financial Statements.
14
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,"
"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, the ability to obtain financing, 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 2002
Annual Report to Shareholders.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Within 90 days
prior to the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of the Company's Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on this
evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information required to be disclosed in the
Company's periodic reports filed with the SEC. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect the Company's disclosure controls and procedures subsequent to the date
of their evaluation.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
15
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.62 Eighth 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 March 31, 2003 effective as of March 28,
2003.
99 Statement of Michael L. Hurt, President (Principal Executive
Officer) of TB Wood's Corporation and Thomas F. Tatarczuch,
Vice President Finance (Principal Financial Officer) of TB
Wood's Corporation, as required by Section 906 of the
Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
Date of Report Item Financial Statements
-------------- ---- --------------------
January 24, 2003 5 None
March 17, 2003 9 None
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 May 2, 2003
TB WOOD'S CORPORATION
By: /s/ Thomas F. Tatarczuch
--------------------------------
THOMAS F. TATARCZUCH
Vice President-Finance
(Principal Financial Officer and
Principal Accounting Officer)
16
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Michael L. Hurt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TB Wood's
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based upon
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 2, 2003
/s/ Michael L. Hurt
- -------------------------------------
President and Chief Executive Officer
17
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Thomas F. Tatarczuch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TB Wood's
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based upon
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 2, 2003
/s/ Thomas F. Tatarczuch
- ---------------------------------------
Vice President Finance (Principal Financial Officer and Principal Accounting
Officer)
18