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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2005.
[ ] 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 [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 1, 2005
---------------------------- ----------------------------
Common Stock, $.01 par value 5,179,634
TB WOOD'S CORPORATION
FORM 10-Q - INDEX
APRIL 1, 2005
Page No.
--------
Part 1. - Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations - for the
Three Months ended April 1, 2005 and April 2, 2004 3
Condensed Consolidated Balance Sheets -
April 1, 2005 and December 31, 2004 4
Condensed Consolidated Statements of Cash Flows - for the
Three Months ended April 1, 2005 and April 2, 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
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
Item 6 Exhibits
Signatures 16
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Exhibit 32 Statement Pursuant to 18 U.S.C. Section 1350 as required by Section 906
of the Sarbanes Oxley Act of 2002
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 1, April 2,
(in thousands, except per share amounts) 2005 2004
- -------------------------------------------------- ---------- ----------
Net Sales $ 27,711 $ 26,081
Cost of Goods Sold 19,558 18,567
---------- ----------
Gross profit 8,153 7,514
Selling, general and administrative expense 6,860 6,790
---------- ----------
Operating income 1,293 724
Interest expense and other finance charges 616 369
---------- ----------
Income before provision for income taxes 677 355
Provision for income taxes 305 221
---------- ----------
Net income $ 372 $ 134
========== ==========
PER SHARE AMOUNTS - BASIC AND DILUTED:
Basic net income per common share $ 0.07 $ 0.03
========== ==========
Diluted net income per common share $ 0.07 $ 0.03
========== ==========
Basic weighted average shares of common stock
and equivalents outstanding 5,177 5,157
========== ==========
Diluted weighted average shares of common stock
and equivalents outstanding 5,177 5,167
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
April 1, December 31,
(in thousands, except per share amounts) 2005 2004
- -------------------------------------------------- ---------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,346 $ 556
Accounts receivable less allowances of $904 at
April 1, 2005 and $880 at December 31, 2004 15,820 13,353
Inventories--Note 2 19,332 20,418
Other current assets 3,273 3,742
---------- ------------
Total current assets 39,771 38,069
Property, plant and equipment 81,967 82,125
Less accumulated depreciation 58,182 57,666
---------- ------------
Net property, plant and equipment 23,785 24,459
Other Assets:
Goodwill 5,795 5,902
Other 1,287 940
---------- ------------
Total other assets 7,082 6,842
---------- ------------
TOTAL ASSETS $ 70,638 $ 69,370
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 8,883 $ 7,605
Accounts payable 8,524 7,803
Accrued expenses 6,404 6,343
Deferred income taxes 101 134
---------- ------------
Total current liabilities 23,912 21,885
Long-term debt, less current maturities 15,742 16,708
Postretirement benefit obligation, less current
portion 235 235
Deferred income taxes 675 807
Shareholders' Equity:
Preferred stock, $.01 par value, 100 shares
authorized at April 1, 2005 and December 31,
2004, and no shares issued or outstanding -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 5,639,798 issued; 5,179,634 and
5,172,690 outstanding at April 1, 2005 and
December 31, 2004 57 57
Additional paid-in-capital 27,150 27,095
Retained earnings 7,289 6,943
Accumulated other comprehensive loss 29 158
Treasury stock at cost (4,451) (4,518)
---------- ------------
Total shareholders' equity 30,074 29,735
---------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 70,638 $ 69,370
========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
TB Wood's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
First Quarter Ended
-----------------------
April 1 April 2,
(in thousands) 2005 2004
- --------------------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 372 $ 134
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,259 1,351
Change in deferred income taxes, net (165) (55)
Other 85 67
Changes in operating assets and liabilities:
Accounts receivable (2,467) (2,543)
Inventories 1,086 (280)
Other current assets 469 (209)
Accounts payable 721 827
Accrued and other liabilities 61 (38)
---------- ----------
Total adjustments 1,049 (880)
---------- ----------
Net cash provided by (used in) operating activities 1,421 (746)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (451) (373)
Other (377) (176)
---------- ----------
Net cash used in investing activities (828) (549)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities 19,739 11,000
Repayments of revolving credit facilities (19,408) (8,815)
Repayments of other long-term debt, net (18) (11)
Payments of dividends -- (464)
Issuance of treasury stock 13 13
---------- ----------
Net cash provided by financing activities 326 1,723
Effect of changes in foreign exchange rates (129) (92)
---------- ----------
Net increase in cash and cash equivalents 790 336
Cash and cash equivalents at beginning of period 556 781
---------- ----------
Cash and cash equivalents at end of period $ 1,346 $ 1,117
========== ==========
Income taxes paid (refunded) $ 110 $ (339)
========== ==========
Interest paid $ 554 $ 380
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
TB Wood's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except per share amounts)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments 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 2004 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.
Effective January 1, 2005 the Company adopted a calendar year as the
annual period for reporting its financial results. Interim periods
consist of four quarters of 13 weeks each, except for the fourth quarter
that ends on December 31. Previously, the Company reported on a 52/53
week fiscal year ending on the Friday nearest December 31. Fiscal 2004
was a 52-week year that ended on December 31, 2004, and this change is
not expected to have any material impact on comparability between fiscal
reporting periods.
2. Inventories and Cost of Goods Sold
The Company uses the last-in, first-out ("LIFO") method for inventories
located in the United States, which represents approximately 70% and 74%
of inventories at April 1, 2005 and December 31, 2004 respectively.
Inventories for foreign operations are stated at the lower of cost or
market using the first-in, first-out ("FIFO") method. An actual
valuation of inventory under the LIFO method can only be made at the end
of each year based upon the inventory levels and costs at that time.
Accordingly, interim LIFO inventory determinations must necessarily be
based on management's estimates of expected year-end inventory levels
and costs. Because these are subject to many forces beyond management's
control, interim results are subject to final year-end LIFO inventory
valuation adjustments. The major classes of inventories are valued
principally using the "last in first out" (LIFO) method consisted of the
following:
April 1 December 31
2005 2004
---------- ------------
Finished goods $ 12,795 $ 14,296
Work in process 4,026 3,714
Raw materials 8,423 8,490
LIFO reserve (5,912) (6,082)
---------- ------------
Inventory value at LIFO $ 19,332 $ 20,418
========== ============
During the first quarter of 2005, the LIFO reserve was decreased by
$170, while in the first quarter of 2004 the LIFO reserve increased by
$37. Had the Company utilized the FIFO method of accounting for all of
its inventories, costs of goods sold would have been higher in 2005 and
lower in 2004 by the respective amounts of the aforementioned changes in
LIFO reserve.
6
Shipping and handling costs incurred by the Company to deliver
manufactured goods to its customers are not included in costs of goods
sold but are presented as an element of selling, general and
administrative expense. The Company incurred $1,637 and $1,626 of
shipping and handling costs in the first quarters ended April 1, 2005
and April 2, 2004, respectively.
3. Shareholders' Equity
During the first quarter of 2005 the company issued 6,944 treasury
shares to participants in Company sponsored employee stock purchase and
401(k) retirement plans.
On February 11, 2005, the Company granted options for the purchase of
146,500 shares of the common stock to employees and directors 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 date and
expire on February 11, 2015. The Company adopted Financial Accounting
Standards Board (FASB) Statement of Accounting Financial Standard (SFAS)
No. 123, as amended by SFAS No. 148, 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 $34
and $24 for 2005 and 2004 respectively.
4. Other Comprehensive Income
Total comprehensive income (loss) was as follows:
Quarter Ended
-----------------------
April 1, April 2,
2005 2004
---------- ----------
Net income $ 372 $ 134
Other comprehensive (loss):
Foreign currency translation adjustments (129) (92)
---------- ----------
Total comprehensive income $ 243 $ 42
========== ==========
The components of accumulated other comprehensive income, net of income
tax are as follows at the dates indicated:
April 1 December 31,
2005 2004
---------- ------------
Aggregate currency translation adjustment $ 29 $ 158
========== ============
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 1, April 2,
2005 2004
---------- ----------
Basic weighted average number of common
shares outstanding 5,177 5,157
Shares issueable upon assumed exercise of
outstanding stock options -- 10
---------- ----------
Diluted weighted average number of common
and common equivalent shares outstanding 5,177 5,167
========== ==========
7
Total outstanding options to purchase 726,951 and 597,051 shares of
common stock as of April 1, 2005 and April 2, 2004, respectively, are
not included in the above calculation as their effect would be
anti-dilutive.
6. Postretirement Benefit
In 2004, the Company terminated its post-retirement healthcare benefit
program. Accordingly, amounts associated with post-retirement benefit
obligations are not material in 2005. In the first quarter of 2004, the
Company recognized a net periodic benefit of $194 principally as a
result of amortization of prior service benefit and actuarial gains.
Future contributions to post-retirement benefit programs are not
expected to be material.
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 1, April 2,
2005 2004
---------- ----------
Sales:
Mechanical Segment $ 18,153 $ 16,262
Electronics Segment 9,558 9,819
---------- ----------
$ 27,711 $ 26,081
========== ==========
Operating income (loss):
Mechanical Segment $ 961 $ 793
Electronics Segment 332 (69)
---------- ----------
$ 1,293 $ 724
========== ==========
Depreciation and amortization:
Mechanical Segment $ 677 $ 724
Electronics Segment 306 360
Corporate 276 267
---------- ----------
$ 1,259 $ 1,351
========== ==========
Assets:
Mechanical Segment $ 44,071 $ 46,304
Electronics Segment 22,452 27,288
Corporate 4,115 5,376
---------- ----------
$ 70,638 $ 78,968
========== ==========
Expenditures for long-lived assets:
Mechanical Segment $ 168 $ 321
Electronics Segment 221 28
Corporate 62 24
---------- ----------
$ 451 $ 373
========== ==========
The Company measures its business segments at the operating income
level, and therefore does not allocate interest and other finance costs
to determine pre-tax income on an operating segment basis.
8
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 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.
2005 2004 Dollar Change % Change
---------- ---------- ------------- --------
Sales
Mechanical Segment $ 18,153 $ 16,262 $ 1,891 11.6%
Electronics Segment 9,558 9,819 (261) -2.7%
---------- ---------- -------------
Total Sales $ 27,711 $ 26,081 $ 1,630 6.2%
========== ========== =============
Cost of Sales
Mechanical Segment $ 13,373 $ 11,983 $ 1,390 11.6%
Electronics Segment 6,185 6,584 (399) -6.1%
---------- ---------- -------------
Total Cost of Sales $ 19,558 $ 18,567 $ 991 5.3%
========== ========== =============
Gross Profit
Mechanical Segment $ 4,780 $ 4,279 $ 501 11.7%
Electronics Segment 3,373 3,235 138 4.3%
---------- ---------- -------------
Total Gross Profit $ 8,153 $ 7,514 $ 639 8.5%
========== ========== =============
Selling, General and Administrative Expense $ 6,859 $ 6,790 $ 69 1.0%
========== ========== =============
Sales
Mechanical Segment 65.5% 62.4%
Electronics Segment 34.5% 37.6%
---------- ----------
Total Sales 100.0% 100.0%
========== ==========
Cost of Sales as a Percentage of Sales
Mechanical Segment 73.7% 73.7%
Electronics Segment 64.7% 67.1%
Total Cost of Sales 70.6% 71.2%
Gross Profit as a Percentage of Sales
Mechanical Segment 26.3% 26.3%
Electronics Segment 35.3% 32.9%
Total Gross Profit 29.4% 28.8%
SG&A Expenses as a Percentage of Sales 24.8% 26.0%
First quarter 2005 revenues continued to reflect the improved economy, as
revenues grew $1.6 million, or 6.2% over the prior year's first quarter.
Contributing significantly to this increase was marked volume increases with the
Company's largest distributor, where first quarter sales increased year over
year by $0.7 million, or 18.6%. We believe that inventory levels at this
customer have been reduced to near targeted levels, and that this improvement
should continue throughout 2005 if the overall economy sustains its current
pace.
Mechanical Business sales grew $1.9 million, or 11.6% over the prior year's
first quarter. Increased volume accounted for approximately one-half of this
gain, while increased pricing and product mix changes principally
9
accounted for the remaining growth. Electronic Business sales volume declined by
almost 5%, however this was offset by favorable currency translations equivalent
to 2% of sales.
Total company gross profit increased by $0.6 million to $8.2 million. Stated as
a percent of net sales, gross profit margins increased to 29.4% of sales from
28.8% in the prior year's first quarter. The Company's Mechanical Division
contributed $4.8 million of gross profit in the first quarter of 2005, or 59% of
the Company's gross profit. Mechanical Business margins remained steady at 26.3%
of sales in the first quarter of 2005. Increased pricing helped offset continued
metal cost increases, which remained up 30% over the previous year but showed
signs of moderating compared to the doubling of costs experienced throughout
2004. Volume gains approximating 2% of sales provided incremental margin that
was offset by less fixed cost absorption on slightly lower production levels as
the Company better utilized working capital through inventory reduction.
The Company's Electronics Division contributed $3.4 million of gross profit, or
41% of consolidated gross profit. Despite a revenue decline of 2.6%, the
Electronics business was able to increase gross margin dollars by 4%. The
primary reason for this improvement was better overhead cost control resulting
from a workforce reduction at the Company's North American manufacturing
facility in the second half of 2004. In addition, favorable currency
translations contributed one percentage point to improved margins.
Selling, general and administrative expenses declined to 24.8% of sales in 2005
compared to 26.0% in 2004 principally due to the fixed nature of such costs
relative to the increased revenue levels. Actual selling, general and
administrative expenses declined approximately $0.1 million, or 1% in the
quarter ended April 1, 2005 after taking into consideration the elimination of a
$0.2 million quarterly amortization benefit associated with the company's
post-retirement healthcare plan that was terminated in the fourth quarter of
2004.
Interest expense is the primary component of other expenses and was $0.6 million
in the first quarter of 2005 compared to $0.4 million for the same period in
2003. This increase was caused by higher interest rates incurred by the Company
under the terms of its new borrowing agreement, including amortization of the
related costs, together with increasing interest rates experienced in capital
markets throughout 2004 and continuing in 2005. 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.
As a result of the above, net income in the first quarter of 2005 compared to
the same quarter in the preceding year increased to $0.4 million from $0.1
million. Net income per share in the first quarter of 2005 was $0.07 per share,
compared to a net income per share of $0.03 in 2004.
Liquidity and Capital Resources:
At April 1, 2005 current and long-term debt of the Company totaled $24.6
million, compared to $24.3 million at December 31, 2004. Borrowings at April 1,
2005 include $6.0 million of revolving credit and $12.4 million of term debt
under the terms of a $31.3 million secured revolving credit and term loan
facility (the "Facility"). In addition, the Company owes $5.3 million of revenue
bonds and approximately $0.9 million of other revolving and term borrowings.
On January 7, 2005, the Company entered into a Loan and Security Agreement (the
"Agreement") that provides for up to an $18.3 million revolving line of credit
and two term loans (Term Loan A and Term Loan B) totaling $13.0 million. The
proceeds were used to retire amounts outstanding under the Company's previous
credit agreement, as well as fund existing letters of credit that support $5.3
million of industrial revenue bonds and certain obligations under various
self-insured workers compensation insurance policies. The term of the Facility
is two years and the loans are secured by substantially all of the Company's
domestic assets and pledges of 65% of the outstanding stock of the Company's
Canadian, German and Mexican subsidiaries. The revolving credit portion of the
Agreement is governed by a borrowing base formula and bears a variable interest
of LIBOR plus
10
3.5%. The Term Loans, which are repayable in monthly principal installments
totaling $0.2 million, bear interest at a variable rate of LIBOR plus 4.5%.
The amounts owed under the revenue bonds, together with $1.7 million of
obligations for workers compensation coverage, are secured by letters of credit
backed by the Facility. At April 1, 2005, the Company had approximately $5.3
million of unused borrowing capacity under the terms of the Facility. Had the
Facility been in place at December 31, 2004, the remaining borrowing capacity
available to the Company would have been approximately $2.4 million, after
taking into consideration the costs of the transaction.
The Facility contains restrictive financial covenants that require the Company
to comply with certain financial tests including, among other things,
maintaining minimum tangible net worth, having a minimum earnings before
interest, taxes and depreciation and amortization ("EBITDA"), and meeting
certain specified leverage and operating ratios, all as defined in the
Agreement. The Agreement also contains other restrictive covenants that restrict
outside investments, capital expenditures, and dividends. While the Company was
in compliance with the debt covenants at April 1, 2005, the limitation on
dividends is such that the third quarter dividend for 2005 would be the earliest
dividend that could be declared unless otherwise agreed to by the lenders.
The Company generated net cash flow of $790 for the three months ended April 1,
2005 compared to $336 for the same period in fiscal 2004. Operating activities
generated $1.4 million of cash during the first quarter of 2005 compared to
using $0.7 million for the same quarter in 2004. The principal reasons for this
change were $0.2 million of additional funds from improved operating results,
$1.4 million related to a reduction of inventories in 2005 compared to the 2004
inventory build, and collections of certain foreign tax deposits. The Company's
working capital, exclusive of funded debt, improved to $24.7 million at April 1,
2005, compared to $23.8 million at December 31, 2004.
Total non-operating investments approximated $0.8 million in the first quarter
of 2005, compared to $0.5 million in 2004. Capital expenditures in 2005 were
$0.5 million in quarter one 2005 compared to $0.4 million in 2004.The cash flows
from operating activities were sufficient to fund the slightly increased capital
expenditure needs, while the Company utilized its borrowing facility principally
to fund the costs of its new borrowing agreement.
The Company did not pay any dividends in the first quarter of 2005 compared to
the prior period when it paid a dividend of $0.5 million. As stated above, the
Company's ongoing ability to declare and pay dividends is dependent upon its
ability to continue to operate at profitable levels and demonstrate compliance
with the terms of its revolving and term loan credit agreement.
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.
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
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
11
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 December
31, 2004 Consolidated Financial Statements included in the Company's 2004 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.
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.
12
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, including recognition of amounts related to changes
in 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 2004, the FASB issued Staff Position (FSP) FAS 109-1 "Application of
FASB Statement 109, Accounting for Income Taxes, to the Tax Deduction on
Qualifying Production Activities Provided by the American Job Creations Act of
2004" effective upon issuance. This FSP provides guidance on the application of
FASB Statement No. 109 to the provision within the American Job Creations Act of
2004 (the "Act") that provides tax relief to eligible U.S. domestic
manufacturers. The FSP states that the manufacturers' deduction provided for
under the Act should be accounted for as a special deduction in accordance with
Statement 109 and not as a tax rate reduction. This FSP had no effect upon the
Company's condensed consolidated financial statements in the first quarter of
2005 and the Company is not yet able to determine the effect it will have in
future periods because the effect is dependent upon the Company qualifying for
this deduction.
In December 2004, the FASB issued Staff Position (FS) FAS 109-2 "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Job Creations Act of 2004" effective upon issuance. This FSP provides
guidance on the application of a special limited-time dividends received
deduction on the repatriation of certain foreign earnings to a U.S. taxpayer.
Because of the effective foreign income tax rates of countries from which
foreign earnings might be repatriated, this provision is not expected to provide
any benefit to the Company and as a result the Company does not believe it will
have any effect upon its consolidated financial statements.
In December 2004, the FASB issued Statement of Accounting Standards No. 123R
(revised 2004) "Share-Based Payment" a revision of FASB Statement No. 123
"Accounting for Stock Based Compensation." The effective date of this revised
accounting standard is for the first annual reporting period that begins after
June 15, 2005. In fiscal 2003 the Company adopted FASB Statement No. 123 to
account for stock-based compensation cost using the fair value method and
therefore believes the only effects of the revised Statement No. 123 upon the
Company will be expanded disclosure related to its stock based compensation
plan. The Company intends to adopt the revised Statement No. 123 effective for
its 2006 financial statements.
In November 2004, the FASB issued Statement of Accounting Standards No. 151
"Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter
4" to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). This Statement is
effective for inventory cost incurred during fiscal years beginning after June
15, 2005 with earlier application permitted for costs incurred during fiscal
years beginning after the date of the issuance of this Statement. The Statement
introduces the concept of "normal capacity" and requires the allocation of fixed
production overheads to inventory based upon the normal capacity of the
production facilities. Unallocated overheads must be recognized as an expense in
the period in which they are incurred. The Company is not yet able to determine
the effect of this Statement upon its consolidated financial statements because
the impact is dependent upon production levels attained during a given financial
reporting period compared to the normal production levels
13
that could have been attained if there was sufficient customer demand. The
Company intends to adopt this statement in fiscal 2006.
In January 2004, the FASB issued Staff Position (FSP) FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (the "Act"). As the Company terminated its
post-retirement healthcare benefit plan in December 2004, the Company does not
believe that the Act will have any impact on its 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 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 2004 Annual Report
to Shareholders.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures: As of April 1, 2005, 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.
14
(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
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
15
Signatures
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, 2005
Date May 10, 2005 TB WOOD'S CORPORATION
By: /s/Joseph C. Horvath
------------------------------------------
JOSEPH C. HORVATH
Vice-President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16