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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 June 27, 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 June 27, 2003
----- ----------------------------
Common Stock, $.01 par value 5,146,277
Table of Contents
Part I. - Financial Information Page No.
- --------------------------------- --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 27, 2003 and December 27, 2002 3
Condensed Consolidated Statements of Operations -
For the Second Quarter and Six Months Ended
June 27, 2003 and June 28, 2002 4
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 27, 2003 and June 28, 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 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
2
Part I. - Financial Information
- -------------------------------
Item 1. Financial Statements
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
June 27, December 27,
(in thousands of dollars, except share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $ 632 $ 335
Accounts receivable, less allowances for doubtful accounts, discounts,
and claims of $688 at June 27, 2003 and $645 at December 27, 2002............. 15,818 14,219
Inventories...................................................................... 20,139 19,957
Other current assets............................................................. 3,516 2,801
------------------------------
Total current assets ....................................................... 40,105 37,312
------------------------------
Property, plant, and equipment .................................................. 81,168 80,563
Less accumulated depreciation ................................................. 52,339 50,393
------------------------------
Net property, plant and equipment ........................................... 28,829 30,170
------------------------------
Other Assets:
Deferred income taxes ......................................................... 2,883 3,298
Goodwill, net of accumulated amortization of $1,558 at
June 27, 2003 and at December 27, 2002...................................... 5,464 5,172
Other ......................................................................... 1,585 1,624
------------------------------
Total other assets ......................................................... 9,932 10,094
------------------------------
TOTAL ASSETS .................................................................... $78,866 $77,576
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt .......................................... $ 61 $18,363
Accounts payable .............................................................. 6,949 6,277
Checks outstanding ............................................................ 2,664 2,142
Accrued expenses .............................................................. 7,649 6,937
Deferred income taxes ......................................................... 796 1,001
------------------------------
Total current liabilities .................................................. 18,119 34,720
------------------------------
Long-term debt, less current maturities ......................................... 23,714 5,436
------------------------------
Postretirement benefit obligation, less current portion ......................... 10,572 11,007
------------------------------
Shareholders' Equity:
Preferred stock, $.01 par value; 100 shares authorized,
at June 27, 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 5,146,277 and 5,240,869 outstanding at
June 27, 2003 and December 27, 2002, respectively............................. 57 57
Treasury stock, at cost ....................................................... (4,763) (4,188)
Additional paid-in capital .................................................... 26,813 26,726
Retained earnings.............................................................. 5,634 6,029
Other accumulated comprehensive income......................................... (1,280) (2,211)
------------------------------
Total shareholders' equity ................................................. 26,461 26,413
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $78,866 $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)
Second Quarter Six Months
Ended Ended
June 27, June 28, June 27, June 28,
(in thousands of dollars, except per share amounts) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net sales............................................................ $25,103 $27,936 $47,657 $54,858
Cost of sales........................................................ 17,081 19,033 32,704 37,281
---------------------------------------------
Gross profit....................................................... 8,022 8,903 14,953 17,577
Selling, general and administrative expenses......................... 7,366 7,659 13,503 15,266
---------------------------------------------
Operating income, before minority interest........................ 656 1,244 1,450 2,311
Minority interest in loss (income)................................... -- 10 1 (152)
---------------------------------------------
Operating income..................................................... 656 1,254 1,451 2,159
---------------------------------------------
Other (expense) income:
Interest expense and other finance charges........................ (231) (217) (448) (433)
Other, net........................................................ 158 20 169 15
---------------------------------------------
Other expense, net................................................ (73) (197) (279) (418)
---------------------------------------------
Income before provision for income taxes and cumulative effect of
change in accounting principle....................................... 583 1,057 1,172 1,741
Provision for income taxes........................................... 234 484 609 745
---------------------------------------------
Income before cumulative effect of change in accounting
principle............................................................ 349 573 563 996
Cumulative effect of change in accounting principle, net of
income tax........................................................... -- -- -- (2,846)
---------------------------------------------
Net income (loss).................................................... $ 349 $ 573 $ 563 $(1,850)
=============================================
Per share amounts-Basic and Diluted:
Basic and Diluted income before cumulative effect of change in
accounting principle per common share................................ $0.07 $0.11 $0.11 $ 0.19
Basic and Diluted cumulative effect of change in accounting
principle per common share........................................... -- -- -- $(0.54)
---------------------------------------------
Basic and Diluted net income (loss) per common share................. $0.07 $0.11 $0.11 $(0.35)
=============================================
Basic and Diluted weighted average shares of common stock
and equivalents outstanding.......................................... 5,176 5,231 5,176 5,230
=============================================
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)
Six Months Ended
June 27, June 28,
(in thousands of dollars) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss)................................................................ $ 563 $ (1,850)
Cumulative effect of change in accounting principle.............................. -- 2,846
--------------------------------
Income before cumulative effect of change in accounting principle................ 563 996
--------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................... 2,773 2,780
Change in deferred income taxes, net........................................ 210 --
Stock option compensation and employee stock benefit expense................ 108 40
Minority interest........................................................... -- (3,034)
Other....................................................................... (18) (39)
Net loss on sale of assets.................................................. 20 3
Changes in operating assets and liabilities:
Accounts receivable ................................................... (1,599) (1,760)
Inventories ........................................................... (182) 3,603
Other current assets................................................... (715) (848)
Accounts payable ...................................................... 672 4,012
Accrued and other liabilities ......................................... 277 1,271
--------------------------------
Total adjustments ................................................ 1,546 6,028
--------------------------------
Net cash provided by operating activities......................... 2,109 7,024
--------------------------------
Cash Flows from Investing Activities:
Capital expenditures ............................................................ (1,166) (1,794)
Proceeds from sale of fixed assets............................................... 91 68
Other............................................................................ (613) (929)
--------------------------------
Net cash used in investing activities....................................... (1,688) (2,655)
--------------------------------
Cash Flows from Financing Activities:
Change in checks outstanding..................................................... 522 653
Distribution of earnings to minority partner..................................... -- (28)
Repayments of other long-term debt, net.......................................... (59) (32)
Proceeds from long term debt borrowing........................................... 335 --
Proceeds from revolving credit facility.......................................... 21,200 16,300
Repayments of revolving credit facility.......................................... (21,500) (20,904)
Payment of dividends ............................................................ (943) (942)
Treasury Stock .................................................................. (610) 40
--------------------------------
Net cash used in financing activities....................................... (1,055) (4,913)
--------------------------------
Effect of changes in foreign exchange rates...................................... 931 497
--------------------------------
Net increase in cash and cash equivalents........................................ 297 (47)
Cash and cash equivalents at beginning of period................................. 335 581
--------------------------------
Cash and cash equivalents at end of period....................................... $ 632 $ 534
================================
Income taxes paid................................................................ $ 175 $ 584
================================
Interest paid.................................................................... $ 466 $ 504
================================
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
consolidated 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 June 27, 2003 and December 27, 2002 consisted of
the following:
June 27, December 27,
(in thousands of dollars) 2003 2002
----------------------------------------------------------------------
Raw materials and supplies............... $ 8,662 $ 8,146
Work in process.......................... 4,263 4,519
Finished goods........................... 12,428 12,446
---------------------------
Total at FIFO value...................... 25,353 25,111
Adjustment to LIFO basis................. (5,214) (5,154)
---------------------------
Inventory value at LIFO.................. $20,139 $19,957
===========================
3. Shareholders' Equity
Dividends
On April 2 and July 2, 2003, the Board of Directors declared quarterly
cash dividends of $0.09 per share payable on April 30 and July 31, 2003
to stockholders of record on April 15 and July 17, 2003.
Treasury Stock
Since 1996 through 2002, 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 shares for
purchase. Additionally in July 2003 the Board of Directors authorized an
additional 50,000 shares for purchase for a total of 675,000 shares
authorized for purchase to date. These purchases are subject to certain
business and market conditions. At June 27, 2003 the cumulative number
of treasury shares purchased under the Board's authorization was
601,636. Year to date, the number of treasury shares issued to employees
under the stock purchase plan was 5,599 and under the 401(K) retirement
plan was 3,509. As of June 27, 2003, 493,521 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 six months ended June 27, 2003
and June 28, 2002 was as follows:
(in thousands of dollars) June 27, 2003 June 28, 2002
------------------------------------------------------------------------
Net Income (Loss)........................... $ 563 $(1,850)
Other comprehensive income (loss)
Foreign currency translation adjustments.. 931 497
--------------------------
Total Comprehensive Income (Loss)........... $1,494 $(1,353)
==========================
The components of accumulated other comprehensive income, net of related
tax at June 27, 2003 and December 27, 2002 are as follows:
2003 2002
---- ----
Aggregate foreign currency translation adjustment $(1,280) $(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.
Total outstanding options to purchase 858,550 and 718,400 shares of
common stock as of June 27, 2003 and June 28, 2002, respectively, are
not included in the calculation as their effect would be antidilutive.
The impact of options on the weighted average number of shares
outstanding is immaterial since their impact is less than 3%.
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. 148, 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.
7
Second Quarter Six Months
Ended Ended
June 27, June 28, June 27, June 28,
(in thousands of dollars except per share amounts) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------
Net Income (loss) as reported................................. $349 $ 573 $563 $(1,850)
Add:
Stock-based employee compensation costs, net of
income tax, included in net income (loss)..................... 27 -- 54 --
Less:
Stock-based employee compensation costs, net of
tax, as if fair value method had been applied................. (27) (39) (54) (78)
-----------------------------------------------
Pro forma net income (loss)................................... $349 $ 534 $563 $(1,928)
===============================================
Net income (loss) per share:
As reported - basic and diluted............................... $0.07 $0.11 $0.11 $(0.35)
Pro forma - basic and diluted................................. $0.07 $0.10 $0.11 $(0.37)
7. Income Taxes
At the end of each interim reporting period, the Company estimates the
effective tax rate expected to be applicable for the full fiscal year.
The rate determined is used in providing for income taxes on a
year-to-date basis, excluding the effect of significant unusual items or
items that are reported net of their related income tax effects. The
income tax effect of significant unusual items are reflected in the
period in which they occur.
8
8. 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, depreciation
and amortization, total assets and expenditures for long-lived assets by
business segment for the periods ended June 27, 2003 and June 28, 2002.
Second Quarter Six Months
-----------------------------------------------
June 27, June 28, June 27, June 28,
(in thousands of dollars) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
External Sales:
Mechanical Segment.................................... $15,490 $18,176 $29,394 $35,083
Electronics Segment................................... 9,613 9,760 18,263 19,775
-----------------------------------------------
$25,103 $27,936 $47,657 $54,858
===============================================
Operating Income (Loss):
Mechanical Segment.................................... $992 $1,562 $2,122 $2,565
Electronics Segment................................... (336) (308) (671) (406)
-----------------------------------------------
$656 $1,254 $1,451 $2,159
===============================================
Depreciation and Amortization:
Mechanical Segment.................................... $ 733 $ 740 $1,478 $1,477
Electronics Segment................................... 438 451 873 865
Corporate............................................. 210 220 422 438
-----------------------------------------------
$1,381 $1,411 $2,773 $2,780
===============================================
Assets:
Mechanical Segment.................................... $44,519 $47,450 $44,519 $47,450
Electronics Segment................................... 27,822 25,356 27,822 25,356
Corporate ............................................ 6,525 10,856 6,525 10,856
-----------------------------------------------
$78,866 $83,662 $78,866 $83,662
===============================================
Expenditures for Long-Lived Assets:
Mechanical Segment.................................... $367 $ 604 $ 579 $ 931
Electronics Segment................................... 71 326 112 511
Corporate............................................. 263 270 475 352
-----------------------------------------------
$701 $1,200 $1,166 $1,794
===============================================
The following table reconciles segment-operating income to consolidated
income before income taxes and cumulative effect of change in accounting
principle as of June 27, 2003 and June 28, 2002 as follows:
Second Quarter Six Months
-----------------------------------------------
June 27, June 28, June 27, June 28,
(in thousands of dollars) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
Segment operating income after minority interest........... $656 $1,254 $1,451 $2,159
Interest, net.............................................. (231) (217) (448) (433)
Other, net................................................. 158 20 169 15
-----------------------------------------------
Income before provision for income taxes and cumulative
effect of change in accounting principle................... $583 $1,057 $1,172 $1,741
===============================================
9
9. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The lower net sales in the second quarter of 2003 as compared to the
second quarter of 2002 were the result of North American industrial distribution
customers' activities to reduce inventory. 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 work weeks 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 second quarter of 2003 of $25,103
compared to $27,936 for the second quarter of 2002, a decrease of 10.1%.
Mechanical Business net sales for the second quarter of 2003 of $15,490 were
$2,686 lower than net sales of $18,176 for the second 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 second quarter of 2003 were $9,613, a
$147 decrease from net sales of $9,760 for the second quarter of 2002. Again,
10
the primary reason for the sales shortfall was North American industrial
distribution customers' activities to reduce inventory. Partially offsetting
this volume reduction was the favorable effect of foreign currency fluctuations
on sales of $891.
Year to date net sales of the Company for 2003 were $47,657, which is
$7,201 lower than net sales for the same period of 2002, a decrease of 13.1%.
For the first six months of 2003, Mechanical Business net sales were $29,394
compared to $35,083 for the same period of 2002 or a reduction of 16.2%.
Electronic Business net sales for the first six months of 2003 were $18,263
compared to $19,775 for the same period of 2002 or a reduction of 7.6%. The
reasons for the sales decline during the first six months of 2003 as compared to
the same period of 2002 were primarily those listed above for the second quarter
comparisons.
Company cost of sales ("COS") in the second quarter of 2003 was $17,081
compared to $19,033 for the same period last year. As a percent of sales, COS
was 68.0% for the second quarter of 2003, a decrease of 0.1% from 2002's second
quarter COS of 68.1%. COS for the Company was $32,704 or 68.6% for the year to
date compared to $37,281 or 68.0% of sales for the same period of 2002. The
primary reasons for the increased year to date COS percentage were reduced fixed
expense absorption caused by lower sales volume, and unfavorable customer and
product sales mix. These higher costs were partially offset by lower rebates
earned by our customers from the reduced sales volume and impact of foreign
currency fluctuations on purchases.
Mechanical Business COS of $10,684 in the second quarter of 2003 was
$1,754 lower than COS of $12,438 in the second quarter of 2002. As a percent of
sales for the second quarter of 2003, Mechanical Business reported COS of 69.0%,
compared to 68.4% for the same period in the prior year. Year to date, 2003 COS
for Mechanical Business was $20,293 or 69.0% of sales compared to $24,116 or
68.7% of sales for the same period in 2002. The principal reasons for the year
to date COS percentage deterioration were reduced fixed expense absorption
caused by lower sales volume and unfavorable customer sales mix which were
partially offset by the impact of foreign currency fluctuations on purchases by
the Canadian location and lower rebates earned by our customers.
Electronics Business COS for the second quarter of 2003 was $6,397, a
$198 decrease from COS of $6,595 for the same quarter of 2002. As a percent of
sales for the second quarter 2003 versus the second quarter 2002, Electronics
Business reported COS of 66.5% for 2003, down 1.1% from 67.6% in the prior
year's second quarter. The principal reasons for the second quarter improvement
in COS were additional fixed expense absorption caused by higher production
levels and impact of favorable foreign currency fluctuations on purchase by the
Canadian and European locations. Year to date 2003, COS for Electronics Business
was $12,411 or 68.0% of sales compared to $13,164 or 66.6% of sales for the same
period in 2002. The principal reasons for the year to date COS percentage
deterioration were reduced fixed expense absorption caused by lower sales volume
and unfavorable customer and product sales mix. Partially offsetting these items
were the impact of foreign currency fluctuations on purchases by the Canadian
and European locations and lower rebates earned by our customers.
Selling, general and administrative ("SG&A") expenses for the second
quarter of 2003 were $7,366 compared to $7,659 for the second quarter of 2002, a
decrease of $293, or 3.8%. SG&A, as a percent of sales, was 29.3% for the second
quarter of 2003 compared to 27.4% for the second quarter of 2002. Year to date
2003, SG&A was $13,503 or 28.3% of sales compared to $15,266 or 27.8% of sales
for the same period in 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 $473, the reduced variable costs caused by the lower
sales volume, and lower headcount.
11
Operating income for the Company was $656 for the second quarter of
2003, or 2.6% as a percent of sales, and $598 lower than the second quarter of
2002 operating income of $1,254, which was 4.5% of sales. After six months of
2003, operating income was $1,451 or 3.0% of sales compared to $2,159 or 3.9% of
sales for the same period of 2002. Primarily the lower sales volume, unfavorable
customer and product sales mix caused this reduction. Offsetting these items
were the termination of the supplemental employee retirement plan, lower rebates
earned by our customers and the impact of foreign currency fluctuations on
purchases.
Other expense, net for the second quarter of 2003 was $73, compared to
other expense of $197 for the same period last year, and year to date was $279
compared to $418 for the same period of 2002. Interest expense, a component of
other expense, net for the Company was $231 in the second quarter of 2003 as
compared to $217 of interest expense in the second quarter of 2002. Year to date
2003, interest expense was $448 compared to $433 for the same period of 2002.
Other, net was $158 of income for the second quarter of 2003 compared to $20 of
income for the same period in 2002, and year to date was $169 of income compared
to $15 of income for the same period of 2002. The primary reason for the
increase in Other, net (income) in 2003 was a realized foreign exchange gain.
The effective income tax rate decreased for the second quarter of 2003
due to decreases in foreign income tax rates. The effective income tax rate for
the year to date increased 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 second quarter of 2003 was $349, or $0.07
per basic and diluted share, $224 lower than the $573 or $0.11 per basic and
diluted share a year ago. Year to date 2003, income before the cumulative effect
of a change in accounting principle for the impairment of goodwill was $563,
$0.11 per basic and diluted share, $433 lower than the $996 or $0.19 per basic
and diluted share for the same period last year.
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 second
quarter or first six months of 2003.
Net income for the second quarter of 2003 was $349 or $0.07 per basic
and diluted share compared to $573 or $0.11 per basic and diluted share for the
second quarter of 2002. Net income for the first six months of 2003 was $563 or
$0.11 per basic and diluted share compared to a net loss of ($1,850) or ($0.35)
per basic and diluted share for the first six months of 2002.
LIQUIDITY AND CAPITAL RESOURCES (in thousands)
Working capital at June 27, 2003 was $21,986 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 June 27, 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
2.2:1 at June 27, 2003 and 1.1:1 at December 27, 2002.
Outstanding long-term debt increased $18,278 to $23,714 at June 27,
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, $17,800 in debt under the Facility, and $624 of other long-term
12
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 June 27, 2003, after taking into consideration
$5,955 of outstanding standby letters of credit, the Company had a maximum of
approximately $22,245 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 June 27, 2003 on the Facility was 3.46%.
The Company's net cash flow for the first six months of 2003 was $297,
a $344 increase from the first six months of 2002 primarily as a result of the
decrease in capital expenditures. 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:
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.
13
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.
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.
14
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.
In April 2003, FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133. As
the Company does not currently have any derivative instrument activities the
adoption of this statement will not have a material impact upon its Consolidated
Financial Statements. The Company began hedging expected future transfers of
Canadian dollars to the US from its Canadian subsidiary in the second quarter of
2003; however, these amounts are not material.
In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity which changes
the accounting for mandatorily redeemable shares, put options, forward purchase
contracts and obligations that can be settled with shares. As the Company does
not have any interests in such types of instruments the adoption of this
statement will not have a material impact upon its Consolidated Financial
Statements.
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
15
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 control over financial reporting that occurred during the
period covered by this report that have materially affected, or are likely to
materially affect, the Company's internal control over financial reporting
subsequent to the date of their last evaluation.
Part II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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,
2003.
b) The following individuals were nominated and elected to serve as
directors of TB Wood's Corporation: Michael L. Hurt and Rick
Lazio.
c) The Shareholders voted as follows on the following matters:
1. Election of Directors. The voting result for each nominee is as
follows:
Name Votes for Votes Withheld
---- --------- --------------
Michael L. Hurt 4,488,695 629,291
Rick Lazio 5,110,650 7,336
2. To ratify the Audit Committee and Board of Directors selection
of Grant Thornton LLP as the Company's independent public
accountants was approved by a count of 5,112,516 votes for,
3,405 votes against, 2,065 votes abstaining, and zero broker
non-vote.
Item 5. Other Information
None
16
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
99.1 Certification of Principal Executive Officer Pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002.
99.2 Certification of Principal Financial Officer Pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002.
99.3 Statement of Michael L. Hurt, President (Principal Executive
Officer) of TB Wood's Corporation, as required by Section 906
of the Sarbanes-Oxley Act of 2002
99.4 Statement of 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
-------------- ---- --------------------
April 22, 2003 7&9 Earnings Release of Company
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 July 28, 2003
TB WOOD'S CORPORATION
By: Thomas F. Tatarczuch
------------------------------------
THOMAS F. TATARCZUCH
Vice President-Finance
(Principal Financial Officer and
Principal Accounting Officer)
17