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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2004.
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSISTION PERIOD FROM _______ TO _________.
Commission File Number 1-14182
TB WOOD'S CORPORATION
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(Exact Name of Registrant as Specified in its charter)
Delaware 25-1771145
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(State of incorporation) (IRS Employer I.D. No)
440 North Fifth Avenue
Chambersburg, PA 17201
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(Address of principal executive offices, Zip Code)
717-264-7161
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(Registrant's Telephone Number, Including Area Code)
Indicate by checkmark 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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 2, 2004
---------------------------- ----------------------------
Common Stock, $.01 par value 5,157,881
TB WOOD'S CORPORATION
FORM 10-Q - INDEX
APRIL 2, 2004
Part 1. - Financial Information Page No.
- ------------------------------- --------
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations - for the
Three Months ended April 2, 2004 and March 28, 2003 3
Condensed Consolidated Balance Sheets -
April 2, 2004 and January 2, 2004 4
Condensed Consolidated Statements of Cash Flows - for the
Three Months ended April 2, 2004 and March 28, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information 15
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults on Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information - Forward-Looking Statements and Cautionary Factors
Item 6 Exhibits and Reports on Form 8-K
Signatures 16
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 17
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 18
Exhibit 32 Statement Pursuant to 18 U.S.C. Section 1350 as required by Section 906
of the Sarbanes Oxley Act of 2002 19
2
PART 1. - FINANCIAL INFORMATION
- -------------------------------
Item 1 Financial Statements
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
First Quarter Ended
------------------------------
April 2, March 28,
(in thousands of dollars, except per share amounts) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $26,081 $22,554
Cost of Sales 18,567 15,623
------------------------------
Gross profit 7,514 6,931
Selling, general and administrative expense 6,790 6,136
------------------------------
Operating income 724 795
------------------------------
Other (income) expense:
Interest expense and other finance charges 369 217
Other, net -- (11)
------------------------------
Other expense, net 369 206
------------------------------
Income before provision for income taxes 355 589
Provision for income taxes 221 375
------------------------------
Net income $ 134 $ 214
==============================
PER SHARE AMOUNTS - BASIC AND DILUTED:
Basic net income per common share $0.03 $0.04
==============================
Diluted net income per common share $0.03 $0.04
==============================
Basic weighted average shares of common stock and equivalents outstanding 5,157 5,245
==============================
Diluted weighted average shares of common stock and equivalents outstanding 5,167 5,245
==============================
The accompanying notes are an integral part of these consolidated financial statements.
3
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
April 2, January 2,
(in thousands of dollars, except per share amounts) 2004 2004
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,117 $ 781
Accounts receivable less allowances of $993 at April 2, 2004
and $1,124 at January 2, 2004 16,610 14,067
Inventories 21,914 21,634
Other current assets 3,799 3,590
----------------------------
Total current assets 43,440 40,072
----------------------------
Property, plant and equipment 81,814 82,050
Less accumulated depreciation 55,381 54,848
----------------------------
Net property, plant and equipment 26,433 27,202
----------------------------
Other Assets:
Deferred income taxes 2,444 2,364
Goodwill 5,621 5,654
Other 1,110 1,115
----------------------------
Total other assets 9,175 9,133
----------------------------
TOTAL ASSETS $79,048 $76,407
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $21,647 $ 53
Accounts payable 7,996 7,169
Accrued expenses 6,721 6,519
Deferred income taxes 1,575 1,550
----------------------------
Total current liabilities 37,939 15,291
----------------------------
Long-term debt, less current maturities 5,951 25,371
----------------------------
Postretirement benefit obligation, less current portion 10,087 10,327
----------------------------
Shareholders' Equity:
Preferred stock, $.01 par value, 100 shares authorized at April 2, 2004 and
January 2, 2004, and no shares issued or outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized; 5,639,798 issued; and
5,157,881 and 5,153,553 outstanding at April 2, 2004 and January 2, 2004,
Respectively 57 57
Additional paid-in-capital 26,950 26,910
Retained earnings 3,428 3,764
Accumulated other comprehensive loss (702) (610)
Treasury stock at cost (4,662) (4,703)
----------------------------
Total shareholders' equity 25,071 25,418
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $79,048 $76,407
============================
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)
First Quarter Ended
------------------------------
April 2, March 28,
(in thousands of dollars) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 134 $ 214
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,351 1,392
Change in deferred income taxes, net (55) 76
Other 67 44
Changes in operating assets and liabilities:
Accounts receivable (2,543) 231
Inventories (280) (512)
Other current assets (209) (111)
Accounts payable 827 (467)
Accrued and other liabilities (38) (1,184)
----------------------------
Total adjustments (880) (531)
----------------------------
Net cash used by operating activities (746) (317)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (373) (465)
Other (176) (197)
----------------------------
Net cash used in investing activities (549) (662)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities 11,000 13,022
Repayments of revolving credit facilities (8,815) (11,500)
Repayments of other long-term debt, net (11) (53)
Payments of dividends (464) (472)
Issuance (purchase) of treasury stock, net 13 (2)
----------------------------
Net cash provided in financing activities 1,723 995
Effect of changes in foreign exchange rates (92) 229
----------------------------
Net increase in cash and cash equivalents 336 245
Cash and cash equivalents at beginning of period 781 335
----------------------------
Cash and cash equivalents at end of period $ 1,117 $ 580
============================
Income taxes (refunded) paid $ (339) $ 235
============================
Interest paid $ 380 $ 226
============================
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. Certain prior period amounts
have been reclassified to conform to the current period presentation.
These financial statements should be read together with the audited
financial statements and notes in the Company's 2003 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 full fiscal
year.
The Company reports its financial results on a 52/53-week fiscal year,
consisting of four quarters of 13 weeks each, ending on the Friday
nearest December 31. Fiscal 2004 is a 52-week year ending on December
31, 2004. Fiscal 2003 was a 53-week year which ended on January 2,
2004.
2. Inventories
The major classes of inventories are valued principally using the "last
in first out" (LIFO) method consisted of the following:
April 2 January 2
2004 2004
----------------------------------------------------------------------
Finished good $14,326 $14,152
Work in process 4,328 4,028
Raw materials 8,630 8,787
LIFO reserve (5,370) (5,333)
-----------------------------
Inventory value at LIFO $21,914 $21,634
=============================
3. Shareholders' Equity
Dividends:
On April 14, 2004, the Board of Directors declared quarterly cash
dividends of $0.09 per share payable on April 30, 2004 to stockholders
of record on April 25, 2004.
Treasury Stock:
During the three months ended April 2, 2004 the company did not
purchase any shares for the treasury. Year to date, the number of
treasury shares sold to employees under the stock purchase plan was
1,883 shares and the number of shares issued to participants in the
Company's 401(k) retirement plan was 2,445 shares.
6
Stock Options:
On February 5, 2004, the Company granted options for the purchase
103,800 shares of the common stock to employees at exercise prices
equal to or in excess of market price on the date of grant. These
options vest over three years and expire on February 5, 2014.
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.
During each of the quarters presented the value of stock based
compensation cost has been accounted for using the fair value method at
an after tax cost of $24 and $28 for 2004 and 2003 respectively.
4. Other Comprehensive Income
Total comprehensive income (loss) for the year to date periods ended
April 2, 2004 and March 28, 2003 was as follows:
Quarter Ended
----------------------
April 2, March 28,
2004 2003
----------------------------------------------------------------------
Net income $134 $214
Other comprehensive income (loss)
Foreign currency translation adjustments (92) 229
---------------------
Total comprehensive income (loss) $ 42 $443
=====================
The components of accumulated other comprehensive income, net of
income tax are as follows at the dates indicated:
April 2, January 2,
2004 2004
-----------------------
Aggregate currency translation adjustment $(702) $(610)
=======================
5. Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by
the weighted average shares outstanding. Diluted earnings per share is
computed by dividing net income (loss) by the weighted average shares
and common equivalent shares if dilutive. The computation of weighted
average shares outstanding is as follows:
Quarter Ended
----------------------
April 2, March 28,
2004 2003
----------------------------------------------------------------------
Basic weighted average number of common shares
outstanding 5,157 5,245
Shares issueable upon assumed exercise of
outstanding stock options 10 --
---------------------
Diluted weighted average number of common and
common equivalent shares outstanding 5,167 5,245
=====================
7
Total outstanding options to purchase 597,051 and 858,550 shares of
common stock as of April 2, 2004 and March 28, 2003, respectively, are
not included in the above calculation as their effect would be
anti-dilutive.
6. Postretirement Benefit
The components of the net periodic post retirement benefit recognized
are as follows:
Quarter Ended
----------------------
April 2, March 28,
2004 2003
----------------------------------------------------------------------
Service Cost $ 2 $ 1
Interest Cost 9 40
Amortization of prior service benefit and
actuarial gain (205) (163)
----------------------
Net periodic benefit $(194) $(122)
======================
The Company expects to contribute $153 during fiscal 2004 to cover the
cost of group insurance premiums applicable to its retirees
participating in the postretirement benefit plan.
8
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.
Quarter Ended
------------------------
April 2, March 28,
2004 2003
----------------------------------------------------------------------
Sales:
Mechanical Segment $16,262 $13,904
Electronics Segment 9,819 8,650
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$26,081 $22,554
========================
Operating Income (loss):
Mechanical Segment $793 $1,130
Electronics Segment (69) (335)
------------------------
$724 $ 795
========================
Depreciation and Amortization:
Mechanical Segment $724 $ 745
Electronics Segment 360 435
Corporate 267 212
------------------------
$1,351 $1,392
========================
Assets:
Mechanical Segment $46,304 $44,224
Electronics Segment 27,288 26,206
Corporate 5,376 6,898
------------------------
$78,968 $77,328
========================
Expenditures for long-lived assets:
Mechanical Segment $321 $212
Electronics Segment 28 41
Corporate 24 212
------------------------
$373 $465
========================
The following table reconciles segment operating income to consolidated
income before income taxes as of April 2, 2004 and March 28, 2003 as
follows:
Quarter Ended
----------------------
April 2, March 28,
2004 2003
----------------------------------------------------------------------
Segment operating income after minority interest $ 724 $ 795
Interest, net (369) (217)
Other, net -- 11
----------------------
Income before provision for income taxes $ 355 $ 589
======================
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The Company is a worldwide manufacturer of mechanical and electronic products
used in the process of power transmission for industrial and other commercial
applications. The Company has endured a significant economic downturn that began
during the second half of 2000. During the fourth quarter of 2003, quarterly
revenues increased, compared to the same quarter in the previous year, for the
first time since 2000, and this year over year growth continued in the first
quarter of 2004 at an increasing rate. Although there has been a significant
increase in revenues, the Company, along with its competitors, has faced
considerable raw material cost increases that have to date limited the Company's
profitability associated with the recovery in the manufacturing sector of the
economy.
The following table, derived from the Company's condensed consolidated financial
statements, presents selected elements of the Company's operating results, and
the changes thereto, for the first quarter of the current and the immediately
preceding year. Amounts presented in Item 2 are in thousands of dollars, unless
otherwise indicated.
2004 2003 Dollar Change % Change
---- ---- ------------- --------
Sales
Mechanical Segment $16,262 $13,904 $2,358 17.0%
Electronics Segment 9,819 8,650 1,169 13.5%
--------------------------------------------
Total Sales $26,081 $22,554 $3,527 15.6%
============================================
Cost of Sales
Mechanical Segment $11,983 $9,609 $2,374 24.7%
Electronics Segment 6,584 6,014 570 9.5%
--------------------------------------------
Total Cost of Sales $18,567 $15,623 $2,944 18.8%
============================================
Gross Profit
Mechanical Segment $4,279 $4,295 $ (16) -0.4%
Electronics Segment 3,235 2,636 599 22.7%
--------------------------------------------
Total Gross Profit $7,514 $6,931 $583 8.4%
============================================
Selling, General and Administrative Expense $6,790 $6,136 $654 10.7%
============================================
Sales
Mechanical Segment 62.4% 61.6%
Electronics Segment 37.6% 38.4%
--------------------------
Total Sales 100.0% 100.0%
==========================
Cost of Sales as a Percentage of Sales
Mechanical Segment 73.7% 69.1%
Electronics Segment 67.1% 69.5%
Total Cost of Sales 71.2% 69.3%
Gross Profit as a Percentage of Sales
Mechanical Segment 26.3% 30.9%
Electronics Segment 32.9% 30.5%
Total Gross Profit 28.8% 30.7%
SG&A Expenses as a Percentage of Sales 26.0% 27.2%
10
The principal reason for the sales increase has been the effect of the economic
recovery that began in the second half of fiscal 2003 and has continued beyond
the first quarter of 2004. In addition to the effect of general economic
conditions on the Company's revenues, the buying patterns and inventory
management practices of one of the Company's major customers have significantly
influenced the timing of the Company's revenues. First quarter 2003 revenues
were adversely affected by significant 2002 year-end purchases by the Company's
major customer that was followed by reduced buying in the first half of 2003.
While a similar buying pattern occurred at the end of fiscal 2003, the strength
of the economic recovery, particularly its effect on demand for the Company's
mechanical products, has helped to avert a similar slowdown in shipments in the
current quarter.
Mechanical Business sales grew $2.4 million, or 17% over the prior year's first
quarter. Increased volume accounted for approximately 14% of this gain, while
the remaining 3% growth was due to higher product pricing and favorable currency
changes. Electronic Business sales growth of $1.2 million was caused by higher
volumes (6.9%) and favorable currency translations (6.5%). Overall, consolidated
revenue increased by 3.6% due to favorable currency fluctuations on the first
quarter of 2004 compared to the comparable period in 2003.
Total company gross profit as a percent of net sales decreased to 28.8% from
30.7% as the favorable impacts of increased sales and related production were
offset by changes in product mix and higher production costs. The Company's
Electronics Division contributed $3.2 million of gross profit, or 43% of
consolidated gross profit and the Mechanical Division reported gross profits of
$4.3 million, or 57%. A 2.4% profit margin increase in the Company's Electronics
Business, due to higher sales and production levels, and favorable currency
translations, was more than offset by the 4.6% decline in the Company's
Mechanical Business gross profit margin. The two primary causes for the lower
Mechanical Business gross profit margins were higher levels of raw material
costs, particularly scrap metal costs used to cast iron parts, and the fact that
2003 production costs were lowered due to temporary employee furloughs and
benefit cost adjustments.
Selling, general and administrative expenses declined to 26.0% of sales in 2004
compared to 27.2% in 2003 principally due to the fixed nature of such costs
relative to the increased revenue levels. Actual selling, general and
administrative expenses increased approximately $650 in the quarter ended April
2, 2004 as the first quarter of 2003 included $435 of non-recurring savings
associated with the termination of a supplemental retirement plan for senior
executives and $272 savings related to reduced costs from employees foregoing
salaries.
Interest expense is the primary component of other expenses and was $369 in the
first quarter of 2004 compared to $217 for the same period in 2003. This
increase was caused by higher interest rates incurred by the Company as a result
of amending its primary borrowing agreement, as well as higher borrowing levels
in 2004 necessary to fund increased working capital needs associated with
business growth. Income taxes remain at rates higher than statutory rates
primarily due to operating losses at the Company's Mexico operations that do not
yield any tax benefits. Higher interest and tax expense contributed to the
decline in net income in the first quarter of 2004 compared to the same quarter
in the preceding year. Net income in the first quarter of 2004 was $134, or
$0.03 per share, compared to a net income of $214 or $0.04 per share in 2003.
Liquidity and Capital Resources:
At April 2, 2004 current and long-term debt of the Company totaled $27.6
million, compared to $25.4 million at January 2, 2004. Borrowings at April 2,
2004 include $21.6 million of revolving credit under the terms of a $36 million
secured revolving credit facility (the "Facility"). In addition, the Company
owes $5.3 million of revenue bonds, and $0.7 million principally related to
borrowings under an unsecured foreign revolving credit facility. The revenue
bonds are supported by letters of credit issued and renewed under the terms of
the Facility to expire in April 2005. At January 2, 2004 the Company had
borrowed $19.4 million in revolving term debt and under the Facility, owed $5.3
million in tax-exempt revenue bonds, and had other $0.7 million of other
borrowings.
11
In February 2004, the Company amended the Facility to extend its maturity date
to January 10, 2005 and provide the Company additional flexibility under certain
of the financial covenants as the Company takes steps to negotiate a longer term
financing agreement. The amendment granted the lenders security over
substantially all of the Company's United States assets, reduced the maximum
amount of the Facility from $46 million to $36 million, and increased borrowing
rates approximately 0.5% (the Company's effective borrowing rate under the
Facility was approximately 4.1% on April 2, 2004). The Facility currently
provides significant financial support for the operating activities of the
Company, and the reduction in the facility better reflects the Company's working
capital needs over the remaining term of the agreement.
After taking into consideration approximately $1.7 million of additional letters
of credit that serve as collateral for long-term workers compensation risk
exposures, the Company had approximately $7.4 million of available borrowing
capacity under the Facility at April 2, 2004. In addition, borrowings are
subject to the satisfaction of certain financial covenants. Management expects
to continue discussions with its current lenders and other sources of debt
financing to secure long-term financing commitments beyond January 2005. This
could lead to additional assets, principally located at the Company's foreign
operations, being pledged to secure any such borrowings, as well as higher
borrowing costs.
The Company generated net cash flow of $336 for the three months ended April 2,
2004 compared to $245 for the same period in fiscal 2003. While the Company has
generated positive cash flows from operations in each of the last five years
ended January 2, 2004, during the first quarter of fiscal 2004 the Company used
$746 in its operating activities. This use of funds was primarily attributable
to approximately $2.5 million of increased trade credit principally associated
with increased sales in the quarter and a $2.2 million accelerated payment on
trade accounts received during the preceding quarter. The Company also used $549
for capital expenditures and other investments during the first quarter of 2004
compared to $662 in the preceding year. The Company continues to limit its
capital spending to levels necessary to maintain and support new product
introductions, improve product quality, and reduce operating costs. These uses
of cash were funded primarily through increases in the revolving line of credit.
The Company paid $464 and $472 of dividends in the first quarter of 2004 and
2003. The Company's ongoing ability to declare and pay dividends is ultimately
dependent upon its ability to operate at profitable levels, and demonstrate
compliance with its revolving credit agreement. On April 14, 2004 the Company
declared a dividend of $0.09 per share totaling $464 and payable on April 30,
2004, as permitted under the terms of its financing agreements.
The Company's working capital at April 2, 2004 as compared to January 2, 2004
was significantly lower primarily due to the classification of $21.6 million of
United States revolving credit obligations at April 2, 2004 as a current
liability. Because the Facility has a stated maturity date within twelve months
of the balance sheet date, the direct borrowings have been classified as current
obligations in the April 2, 2004 balance sheet. By comparison at January 2,
2004, $19.4 million of the Facility was classified as a long-term liability
because of its January 2005 maturity date. Our ability to make scheduled
payments of principal and interest on, or refinance, our indebtedness and fund
planned capital expenditures will depend on our ability to generate cash in the
future. This is subject to general economic, competitive, legislative,
regulatory and other factors that are beyond our control. Based upon our current
level of operations, 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 in the current state of the secured lending
markets, 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 statements and
results of operations are based upon the Company's Consolidated Financial
Statements included as part of this document. The preparation of these
Consolidated Financial Statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures 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 judgments 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 January 2,
2004 Consolidated Financial Statements included in the Company's 2003 annual
report on Form 10-K. Certain of our accounting policies require the application
of significant judgment by management in selecting the appropriate assumptions
for calculating financial estimates. By their nature, these judgments are
subject to an inherent degree of uncertainty and actual results could differ
from these estimates. These judgments are based on our historical experience,
terms of existing contracts, current economic trends in the industry,
information provided by our customers, and information available from outside
sources, as appropriate. Our critical accounting policies include:
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 products sold as of the balance sheet date. The warranty
reserve and allowance for product returns is not significant to the financial
position of the Company for all periods presented.
Inventory: Inventories are valued at the lower of cost or market. Cost is
determined on the last-in first-out basis for a majority of US inventories and
the first-in first-out method for all remaining inventories. The Company has
recorded a reserve for obsolescence or unmarketable inventory equal to the
difference between the cost of 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.
Impairment of Goodwill and Long Lived Assets: The Company periodically evaluates
the realizable value of long-lived assets including property, plant and
equipment, relying on a number of factors including operating results, budgets,
economic projections and anticipated future cash flows. The Company's past
business acquisitions resulted in the recognition of goodwill, which may result
in future impairment expenses. The Company's other intangible assets which
primarily consist of product application software, affects the amount of future
period amortization 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.
Revenue Recognition: The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 104 "Revenue Recognition in
Financial Statements" issued by the Securities and Exchange Commission. 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.
13
Postretirement Benefit Obligation: The Company, in consultation with an
actuarial firm specializing in the valuation of postretirement benefit
obligations, selects certain actuarial assumptions to base the actuarial
valuation of such obligations on, such as the discount rate (interest rate used
to determine present value of obligations payable in the future), initial health
care cost trend rate, the ultimate cost care trend rate, and mortality tables to
determine the expected future mortality of plan participants. To the extent that
the actual rates and mortality vary from the assumptions used to determine the
present actuarial valuation of these postretirement benefits, additional
provision for expense may be necessary.
Income Taxes: Under the requirements of SFAS No. 109, "Accounting for Income
Taxes," we record deferred tax assets and liabilities for the future tax
consequences attributable to differences between financial statements carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company has not
recognized any income tax benefit related to the income tax losses incurred by
its Mexican subsidiary currently because there is uncertainty as to whether that
subsidiary will realize those benefits in the future. As the Mexican subsidiary
realizes these income tax benefits in the future, a reduction of income taxes
will be recognized. Management judgment is required in determining the Company's
provision for income taxes, deferred tax assets and liabilities, which, if
actual experience varies, could result in material adjustments to deferred tax
assets and liabilities.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB) issued Staff
Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare and Prescription Drug, Improvement and Modernization Act of 2003" (the
"Act"). The Act expands Medicare primarily by adding a prescription drug benefit
for Medicare-eligibles starting in 2006. The Act provides employers currently
sponsoring prescription drug programs for Medicare-eligibles with a range of
options for coordinating with the new government-sponsored program to
potentially reduce program costs. The FSP concludes that companies will be
permitted to recognize that amount for year-end 2003 financial statements
pursuant to FAS 106 or to delay having to report the effects of the Act until
remaining questions are resolved. The FASB is currently working on a revision to
FSP FAS 106-1 that would provide the authoritative guidance on how to account
for the subsidy that employers might receive if the prescription drug benefit
provided under postretirement benefit plans is deemed to be actuarially
equivalent to the prescription benefit provide by Medicare beginning in 2006.
The Company's actuarial consultant has advised that the Medicare prescription
benefit will have no effect upon the Company's accumulated post-retirement
benefit obligation and net periodic postretirement benefit cost.
In December 2003, the FASB issued Statement of Accounting Standards No. 132
(revised 2003) "Employers' Disclosure about Pensions and Other Postretirement
Benefits", an amendment of FASB Statements No. 87, 88 and 106 effective for
fiscal years ending after December 15, 2003. The Company has adopted this
statement and the additional disclosure required for its postretirement benefit
plans are set forth in Footnote 6 Postretirement Benefits.
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
14
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 third party 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 2003 Annual Report
to Shareholders.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures: As of April 2, 2004, 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. "Disclosure controls and
procedures" are defined in Exchange Act Rule 13a-15. Based upon 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 the achieving the 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 reasonably
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
15
Item 3. Defaults Upon Senior Securities
None
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
31.1 Certification of Principal Executive Officer required by 13a-14(a)
31.2 Certification of Principal Financial Officer required by 13a-14(a)
32 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
b). Reports on Form 8-K
Form 8-K dated as of January 20, 2004 Item 5 "Election of new director"
Form 8-K dated as of February 10, 2004 Item 9 "Results of Operations"
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 10, 2004
Date May 10, 2004 TB WOOD'S CORPORATION
By: /s/Joseph C. Horvath
---------------------
JOSEPH C. HORVATH
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16