TB WOODS CORP - 10-Q Quarterly Report

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 October 1, 2004.

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

(Exact Name of Registrant as Specified in its charter)

Delaware			25-1771145
(State of incorporation)			(IRS Employer I.D. No)

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 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 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

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 October 1, 2004

Common Stock, $.01 par value			5,166,678

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TB WOOD’S CORPORATION
FORM 10-Q – INDEX
October 1, 2004

Part I. – Financial Information		Page No.


Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Statements of Operations – for the
	three month and nine month periods ended October 1, 2004 and September 26, 2003	3

	Condensed Consolidated Balance Sheets –
	October 1, 2004 and January 2, 2004	4

	Condensed Consolidated Statements of Cash Flows – for the
	nine months ended October 1, 2004 and September 26, 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	16

Item 4.	Controls and Procedures	17

Part II. – Other Information		17

Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity 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

Signatures		18

Exhibit 31.1	Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002	19
Exhibit 31.2	Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002	20
Exhibit 32	Statement Pursuant to 18 U.S.C. Section 1350 as required by Section 906
	of the Sarbanes Oxley Act of 2002	21

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Part I. – Financial Information
Item 1. Financial Statements

TB Wood’s Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months Ended					Nine Months Ended

		October 1,			September 26,		October 1,			September 26,
(in thousands of dollars, except per share amounts)		2004			2003		2004			2003


Net Sales	$	25,279		$	23,101	$	76,819		$	70,758
Cost of Sales		19,050			15,967		54,828			48,671


Gross profit		6,229			7,134		21,991			22,087

Selling, general and administrative expense		7,392			6,823		21,782			20,326


Operating (loss) income		(1,163	)		311		209			1,761


Other (income) expense:
Interest expense and other finance charges		460			232		1,207			680
Other (income) expense		—			1		—			(169	)

Other expense, net		460			233		1,207			511


(Loss) income before provision for income taxes		(1,623	)		78		(998	)		1,250

(Benefit) provision for income taxes		(277	)		22		119			631


Net (loss) income	$	(1,346	)	$	56	$	(1,117	)	$	619


Per share amounts – Basic and Diluted:

Basic net (loss) income per common share	$	(0.26	)	$	0.01	$	(0.22	)	$	0.12


Diluted net (loss) income per common share	$	(0.26	)	$	0.01	$	(0.22	)	$	0.12


Basic weighted average shares of common
stock and equivalent outstanding		5,166			5,156		5,166			5,156


Diluted weighted average shares of common
stock and equivalent outstanding		5,166			5,156		5,166			5,156

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TB Wood’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

		October 1,			January 2,
(in thousands of dollars, except per share amounts)		2004			2004

ASSETS
Current Assets:
Cash and cash equivalents	$	761		$	781
Accounts receivable less allowances of $928 at October 1, 2004
and $1,124 at January 2, 2004		15,381			14,067
Inventories		22,381			21,634
Other current assets		3,895			3,590

Total current assets		42,418			40,072


Property, plant and equipment		82,848			82,050
Less accumulated depreciation		57,492			54,848

Net property, plant and equipment		25,356			27,202

Other Assets:
Deferred income taxes		2,604			2,364
Goodwill		5,729			5,654
Other		955			1,115

Total other assets		9,288			9,133

TOTAL ASSETS	$	77,062		$	76,407


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	21,652		$	53
Accounts payable		8,093			7,169
Accrued expenses		6,851			6,519
Deferred income taxes		1,625			1,550

Total current liabilities		38,221			15,291


Long-term debt, less current maturities		5,932			25,371


Postretirement benefit obligation, less current portion		9,622			10,327


Shareholders’ Equity:
Preferred stock, $.01 par value, 100 shares authorized at October 1, 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
5,166,678 and 5,153,553 outstanding at October 1, 2004 and January 2, 2004,
Respectively		57			57
Additional paid-in-capital		27,046			26,910
Retained earnings		1,232			3,764
Accumulated other comprehensive loss		(472	)		(610	)
Treasury stock at cost		(4,576	)		(4,703	)

Total shareholders’ equity		23,287			25,418

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	77,062		$	76,407

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TB Wood’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended

		October 1,			September 26,
(in thousands of dollars)		2004			2003

Cash flows from Operating Activities:
Net (loss) income	$	(1,117	)	$	619


Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		4,007			4,135
Change in deferred income taxes, net		(165	)		841
Other		228			149
Changes in operating assets and liabilities:
Accounts receivable		(1,314	)		65
Inventories		(747	)		(2,085	)
Other current assets		(305	)		(264	)
Accounts payable		924			257
Accrued and other liabilities		(373	)		(152	)

Total adjustments		2,255			2,946

Net cash provided by operating activities		1,138			3,565

Cash Flows from Investing Activities:
Capital expenditures		(1,750	)		(1,655	)
Other		(354	)		(439	)

Net cash used in investing activities		(2,104	)		(2,094	)

Cash Flows from Financing Activities:
Proceeds from revolving credit facilities		30,084			34,494
Repayments of revolving credit facilities		(27,900	)		(34,700	)
Repayments of other long-term debt, net		(24	)		(65	)
Payments of dividends		(1,393	)		(1,407	)
Issuance (purchase) of treasury stock, net		41			(619	)

Net cash provided by (used in) financing activities		808			(2,297	)

Effect of changes in foreign exchange rates		138			994

Net (decrease) increase in cash and cash equivalents		(20	)		168
Cash and cash equivalents at beginning of period		781			335

Cash and cash equivalents at end of period	$	761		$	503


Supplement Disclosure of Cash Flow Information:
Income taxes (refunded)	$	(175	)	$	(282	)


Interest paid	$	1,190		$	710

The accompanying notes are an integral part of these condensed consolidated financial statements.

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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 condensed 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 Company uses the last-in, first-out (“LIFO”) method of inventory valuation for approximately 73% percent of its inventories. Remaining inventories are accounted for using the first-in, first-out (“FIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management’s estimates of the expected year-end inventory levels and costs. Because these are subject to many forces beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation. The major classes of inventory consisted of the following:

		October 1,			January 2,
		2004			2004

Finished goods	$	15,263		$	14,152
Work in process		3,462			4,028
Raw materials		8,817			8,787
LIFO reserve		(5,161	)		(5,333	)

Inventory value at LIFO	$	22,381		$	21,634

3.	Shareholders’ Equity

	Treasury Stock:

	During the nine months ended October 1, 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 5,920 shares and the number of shares issued to the Company’s 401(k) retirement plan was 7,205 shares.

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	Stock Options:

On February 5, 2004, the Company granted options for the purchase of 103,800 shares of common stock to employees and directors at exercise prices equal to or in excess of market price on the date of grant. On April 27, 2004 the Company granted options for the purchase of 84,000 shares of 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 following the grant and expire on February 5, 2014, and April 27, 2014 respectively.

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 fair value after tax cost of stock based compensation cost was $31 and $27 for the third quarter of 2004 and 2003 respectively, and $84 and $81 for the 2004 and 2003 year to date periods, respectively.

4.	Other Comprehensive Income

	Total comprehensive income (loss) for the year to date periods ended October 1, 2004 and September 26, 2003 was as follows:

		Nine Months Ended

		October 1,			September 26,
		2004			2003

Net (loss) income	$	(1,117	)	$	619
Other comprehensive income
Foreign currency translation adjustments		138			994

Total comprehensive (loss) income	$	(979	)	$	1,613


The components of accumulated other comprehensive loss, net of income tax are as follows at the dates indicated:
		October 1,			September 26,
		2004			2003


Aggregate currency translation adjustment	$	(472	)	$	(1,217	)

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	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:

	Third Quarter Ended

	October 1,	September 26,
	2004	2003

Basic weighted average number of common shares outstanding	5,166	5,156
Shares issueable upon assumed exercise of outstanding stock options	—	—

Diluted weighted average number of common and common equivalent
shares outstanding	5,166	5,156

	Outstanding options to purchase 771,001 and 707,660 shares of common stock as of October 1, 2004 and September 26, 2003, respectively, are not included in the above calculation as their effect would be anti-dilutive.

5.	Postretirement Benefit

	The components of the net periodic post retirement benefit recognized are as follows:

		Nine Months Ended

		October 1,			September 26,
		2004			2003

Service Cost	$	6		$	4
Interest Cost		27			120
Amortization of prior service benefit and actuarial gain		(622	)		(488	)

Net periodic benefit	$	(589	)	$	(364	)

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.

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6.	Business Segment Information

	The Company’s reportable segments are business units that manufacture and market separate and distinct products and are managed separately because each business requires different processes, technologies and marketing strategies.

		Third Quarter Ended						Nine Months Ended

		Oct 1,			Sep 26,			Oct 1,			Sep 26,
		2004			2003			2004			2003

Sales:
Mechanical Segment	$	15,619		$	13,155		$	48,144		$	42,549
Electronics Segment		9,660			9,946			28,675			28,209

	$	25,279		$	23,101		$	76,819		$	70,758


Operating (loss) income:
Mechanical Segment	$	(375	)	$	419		$	1,663		$	2,541
Electronics Segment		(788	)		(108	)		(1,454	)		(780	)

	$	(1,163	)	$	311		$	209		$	1,761


Depreciation and Amortization:
Mechanical Segment	$	725		$	738		$	2,171		$	2,216
Electronics Segment		329			397			1,033			1,270
Corporate		273			227			803			649

	$	1,327		$	1,362		$	4,007		$	4,135


Assets:
Mechanical Segment	$	46,492		$	43,823		$	46,492		$	43,823
Electronics Segment		24,287			26,684			24,287			26,684
Corporate		6,283			6,932			6,283			6,932

	$	77,062		$	77,439		$	77,062		$	77,439


Expenditures for long-lived assets:
Mechanical Segment	$	469		$	240		$	1,506		$	819
Electronics Segment		55			112			173			224
Corporate		19			137			71			612

	$	543		$	489		$	1,750		$	1,655

	The following table reconciles segment operating income to consolidated income before income taxes for the following periods:

		Third Quarter Ended					Nine Months Ended

		Oct 1,			Sep 26,		Oct 1,			Sep 26,
		2004			2003		2004			2003

Segment operating (loss) income	$	(1,163	)	$	311	$	209		$	1,761
Interest expense		460			232		1,207			680
Other (income) expense, net		—			1		—			(169	)

(Loss) income before provision for income taxes	$	(1,623	)	$	78	$	(998	)	$	1,250

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 third quarter of the current and the immediately preceding year. Amounts presented in Item 2 are in thousands of dollars, unless otherwise indicated.

		Third Quarter Ended

		Oct 1, 2004			Sep 26, 2003			Dollar Change		% Change

Sales
Mechanical Segment	$	15,619		$	13,155		$	2,464		18.7	%
Electronics Segment		9,660			9,946			(286	)	(2.9	)%

Total Sales	$	25,279		$	23,101		$	2,178		9.4	%


Cost of Sales
Mechanical Segment	$	12,176		$	9,290		$	2,886		31.1	%
Electronics Segment		6,874			6,677			197		3.0	%

Total Cost of Sales	$	19,050		$	15,967		$	3,083		19.3	%


Gross Profit
Mechanical Segment	$	3,443		$	3,865		$	(422	)	(10.9	)%
Electronics Segment		2,786			3,269			(483	)	(14.8	)%

Total Gross Profit	$	6,229		$	7,134		$	(905	)	(12.7	)%


Selling, General and Administrative (SG&A) Expense	$	7,392		$	6,823		$	569		8.3	%


Sales
Mechanical Segment		61.8	%		56.9	%
Electronics Segment		38.2	%		43.1	%

Total Sales		100.0	%		100.0	%


Cost of Sales as a Percentage of Sales
Mechanical Segment		78.0	%		70.6	%
Electronics Segment		71.2	%		67.1	%
Total Cost of Sales		75.4	%		69.1	%

Gross Profit as a Percentage of Sales
Mechanical Segment		22.0	%		29.4	%
Electronics Segment		28.8	%		32.9	%
Total Gross Profit		24.6	%		30.9	%

SG&A Expense as a Percentage of Sales		29.2	%		29.5	%

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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 nine months of the current and the immediately preceding year.

		Nine Months Ended

		Oct 1, 2004			Sep 26, 2003			Dollar Change		% Change

Sales
Mechanical Segment	$	48,144		$	42,549		$	5,595		13.1	%
Electronics Segment		28,675			28,209			466		1.6	%

Total Sales	$	76,819		$	70,758		$	6,061		8.6	%


Cost of Sales
Mechanical Segment	$	35,298		$	29,583		$	5,715		19.3	%
Electronics Segment		19,530			19,088			442		2.3	%

Total Cost of Sales	$	54,828		$	48,671		$	6,157		12.7	%


Gross Profit
Mechanical Segment	$	12,846		$	12,966		$	(120	)	(0.9	)%
Electronics Segment		9.145			9,121			24		0.3	%

Total Gross Profit	$	21,991		$	22,087		$	(96	)	(0.4	)%


Selling, General and Administrative (SG&A) Expense	$	21,782		$	20,326		$	1,456		7.2	%


Sales
Mechanical Segment		62.7	%		60.1	%
Electronics Segment		37.3	%		39.9	%

Total Sales		100.0	%		100.0	%


Cost of Sales as a Percentage of Sales
Mechanical Segment		73.3	%		69.5	%
Electronics Segment		68.1	%		67.7	%
Total Cost of Sales		71.4	%		68.8	%

Gross Profit as a Percentage of Sales
Mechanical Segment		26.7	%		30.5	%
Electronics Segment		31.9	%		32.3	%
Total Gross Profit		28.6	%		31.2	%

SG&A Expense as a Percentage of Sales		28.3	%		28.7	%

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 through the third 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. Year to date 2003 revenues were adversely affected when significant 2002 year-end purchases by the Company’s largest customer were followed by reduced buying in the first nine months of 2003. While a similar buying pattern by this customer occurred at the end of fiscal 2003 and during the first nine months of 2004, the general 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 and nine months ended October 1, 2004.

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Mechanical Business sales increased $2,464, or 18.7% over the prior year’s third quarter. Increased volume accounted for approximately 14.0% of this increase, with the remainder of the increase attributable to higher pricing. Electronics Business sales decreased $(286) or (2.9%), primarily from lower volumes (7.6%), offset by increased pricing of 1.8% and favorable currency translations of 2.9%. Overall, consolidated revenue increased by 9.4% of which 4.6% was due to increased volumes, 3.3% was due to increased pricing, and 1.5% was due to favorable currency translation. The Company announced an average 3.0% price increase at the beginning of the year, and followed up with another increase in mid-second quarter to partially offset escalating material costs, particularly for scrap metal and steel-related products.

Year to date sales rose at the rate of 8.6% through the third quarter. Of this increase 3.5% was due to increased volume, 3.1% to increased prices, and 2.0% to favorable currency translation.

Total Company gross profit as a percent of net sales for the third quarter declined to 24.6% from 30.9% in the third quarter of 2003. The major reasons for this decline were non-recurring costs associated with the Trenton, TN plant closure (3.0%); higher raw material costs (2.0%); the unfavorable impact of lower fixed cost absorption (3.0%); and a provision for obsolescence (1.0%) offset by the effect of price increases 3.0%. The Company’s Mechanical Division reported gross profits of $3.4 million, or 55.3% of total gross profit, while the Electronics Division contributed $2.8 million of gross profit, or 44.7% of total gross profit. The gross profit margin for the Mechanical Division declined due to the non-recurring costs associated with the Trenton, TN plant closure, higher raw material costs and lower absorption of fixed costs due to lower production levels. The Electronic gross profit margin declined primarily due to lower fixed cost absorption and provision for obsolescence.

Year to date gross profit margins declined from 31.2% a year ago to 28.6%. Mechanical Products margins decreased from 30.5% to 26.7%, largely because of higher material costs and $1.4 million of expenses and productivity losses related to the closing of the Trenton, TN plant offset in part by margin gains associated with price increases. While moderating downward slightly in the second quarter, scrap metal prices and other steel-based material costs escalated to new highs in the third quarter of 2004. In addition, 2003 results reflected savings associated with temporary work furloughs and benefit costs reductions, principally in the first quarter of 2003 when production was at a much lower rate than current operating levels. Electronics Products margins declined slightly from 32.3% to 31.9% when compared to the first nine months of 2003 due primarily to a provision for obsolescence offset by improved product pricing and favorable currency translation.

Selling, general and administrative (SG&A) expenses declined to 29.2% of sales in the third quarter of 2004 as compared to 29.5% in the third quarter of 2003. In the first nine months of 2004, SG&A expenses declined to 28.3% of sales compared to 28.7% in 2003 principally due to the fixed nature of such costs relative to the increased revenue levels. Actual SG&A expenses increased by $569 in the third quarter of 2004, largely due to costs related to the restructuring of the marketing and sales organization principally serving the Electronics Division, and increased by $1,456 in the first nine months of 2004, as compared to the same period of 2003 primarily as a result of the aforementioned restructuring costs and increased costs related to higher volumes, notably freight costs. 2003 year to date SG&A benefited from $473 of non-recurring savings associated with the termination of a supplemental retirement plan for senior executives and $272 of savings related to reduced costs from employees foregoing salaries during March 2003. SG&A expenses reflect a benefit of $194 and $589 for the quarter and nine months ended October 1, 2004 compared to $30 and $91 for the corresponding periods of the prior year in connection with the deferred recognition of gains associated with changes to post-employment healthcare obligations (see Note 5).

Significant material cost increases and additional planned spending in 2004 related to the closure of the Trenton plant, along with other costs mentioned above, resulted in a loss as compared to income in the corresponding prior periods. 2004 results were affected by these items, and on a comparative basis, 2003 results reflect non-recurring savings attributable to benefit reductions and work furloughs.

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Interest expense is the primary component of other expenses and was $460 in the third quarter of 2004 compared to $232 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 Mexican operations that do not currently yield any Mexican income tax benefits. Higher interest expense contributed to the decline in net income in the third quarter of 2004 compared to the same quarter in the preceding year. Net loss in the third quarter of 2004 was $(1,346), or $(0.26) per share, compared to net income of $56 or $0.01 per share in the third quarter of 2003. Net loss for the nine months ended October 1, 2004 was $(1,117), or $(0.22) per share, compared to net income of $619, or $0.12 per share for the comparable period of 2003.

Liquidity and Capital Resources:

At October 1, 2004 the Company’s debt obligations totaled $27.6 million, compared to $25.4 million at January 2, 2004. Borrowings at October 1, 2004 include $21.4 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 $0.9 million for other borrowings. The revenue bonds are supported by letters of credit issued under the terms of the Facility that expire in April 2005. At January 2, 2004 the Company had borrowed $19.4 million in revolving term debt under the Facility, owed $5.3 million in tax-exempt revenue bonds, and had $0.7 million of other borrowings. 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 $7.6 million of available borrowing capacity under the Facility at October 1, 2004.

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 stated borrowing rates approximately 0.5% (the Company’s effective borrowing rate under the Facility was approximately 4.77% on October 1, 2004).

In addition, borrowings are subject to the satisfaction of certain financial covenants. As a result of the Company’s performance in the third quarter of 2004, the Company is in non-compliance with certain of the Facility’s financial covenants. Given the fact that the Facility expires in January 2005 and the Company is continuing discussions with its current lenders and other sources of debt financing to secure long-term financing commitments beyond January 2005, the Company has not obtained a waiver of covenant non-compliance or an amendment of the Facility at this time. Any modification to the Company’s principal borrowing arrangement is expected to lead to higher borrowing costs, a reduction in credit available under the facility, and accelerated repayment terms for a portion of the Company’s indebtedness.

The Company has generated positive cash flows from operations in each of the last five years ended January 2, 2004 as well as during the first nine months of fiscal 2004 during which the Company generated $1.1 million from its operating activities. Cash from operations in 2004 is primarily attributable to non-cash charges for depreciation and amortization exceeding cash used by an operating loss, reduced by increases in working capital including $1.3 million of increased trade receivables and $0.7 million of increased inventory. The increase in trade receivables arose in part from increased sales in the first nine months of 2004, as well as a lower than normal level of trade credit outstanding at the beginning of the period due to a $2.2 million accelerated payment on trade receivables just prior to the beginning of the current fiscal year. The investment in inventories has occurred to support expanded revenue levels and the transition of production from the Company’s Trenton, Tennessee facility to other operating locations. The Company also used approximately $1.7 million for capital expenditures during the first nine months of 2004 and 2003, levels that management considers sufficient to maintain existing operations 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.

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The Company paid $1.4 million of dividends in each of the first nine months of 2004 and 2003. The Company did not declare a dividend for the third quarter of 2004. 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.

The Company’s working capital at October 1, 2004 as compared to January 2, 2004 was significantly lower primarily due to the classification of $21.4 million of United States revolving credit obligations at October 1, 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 October 1, 2004 balance sheet. By comparison at January 2, 2004, $19.4 million of the Facility and $5.3 million of industrial revenue bonds were classified as long-term liabilities because of maturity dates extending one year beyond the balance sheet date. The Company’s ability to make scheduled payments of principal and interest on, or refinance, its indebtedness and fund planned capital expenditures will depend on its 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 and anticipated levels of operating performance, 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.

Accounting Policies:

Management’s discussion and analysis of the Company’s financial position and results of operations are based upon the Company’s Condensed Consolidated Financial Statements included as part of this document. The preparation of these Condensed 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.

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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. Shipping and handling costs incurred totaling $4,981 and $4,342 for the nine months ended October 1, 2004 and September 26, 2003, respectively, are included as a component of selling, general and administrative expenses.

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 estimate of the actuarial valuation of such obligations, 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,” the Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement 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 currently being incurred by its Mexican subsidiary 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.

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Recent Accounting Pronouncements

In January 2004, 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. In May 2004 the FASB issued FSP FAS 106-2 that defines how and when to recognize the effect of the Act upon the Company’s accumulated post-retirement benefit obligation and net periodic postretirement benefit cost during 2004. The Company’s actuarial consultant has advised that the Medicare prescription benefit will have not have a material 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 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, except for the significant volatility and the increase in the costs of scrap steel and certain other steel based raw materials used by the Company in its mechanical segment manufacturing operations during 2004. Management has taken steps to offset the effect of these cost increases through announced price increases for its mechanical products in the marketplace, and is continuing to monitor the need for additional price increases or surcharges in the future. However, there can be no assurance that the Company will be able to raise prices sufficiently to offset future cost increases due to competitive conditions in the marketplace for its mechanical products.

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Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As of October 1, 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.	Unregistered Sales of Equity Securities and Use of Funds

	None

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

	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

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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 November 12, 2004

Date November 15, 2004	TB WOOD’S CORPORATION

	By:	/s/Joseph C. Horvath
		JOSEPH C. HORVATH Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)