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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 2004
--------------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________ to ________________________
Commission File Number: O-1837
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FEDERAL SCREW WORKS
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(Exact name of registrant as specified in its charter)
Michigan 38-0533740
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20229 Nine Mile Road, St. Clair Shores, Michigan 48080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (586) 443-4200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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At May 10,2004, the registrant had one class of common stock outstanding, $1.00
par value common stock. There were 1,421,595 shares of such common stock
outstanding at that time.
Part I FINANCIAL INFORMATION
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FEDERAL SCREW WORKS
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
March 31 June 30
2004 2003
------ ------
(unaudited)
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 150 $ 416
Accounts Receivable, Less Allowance of $50 . . . 16,291 14,096
Inventories:
Finished Products. . . . . . . . . . . . . . . 6,952 6,619
In-Process Products. . . . . . . . . . . . . . 6,176 6,777
Raw Materials And Supplies . . . . . . . . . . 1,930 1,176
------ ------
15,058 14,572
Prepaid Expenses And Other . . . . . . . . . . . 691 566
Deferred Income Taxes . . . . . . . . . . . . . 966 859
------ -----
Total Current Assets. . . . . . . . . . . . . 33,156 30,509
------ ------
Other Assets:
Intangible Pension Asset . . . . . . . . . . . . 1,702 1,702
Cash Value Of Life Insurance . . . . . . . . . . 5,922 5,825
Prepaid Pension Cost . . . . . . . . . . . . . . 267 832
Miscellaneous. . . . . . . . . . . . . . . . . . 4,261 3,700
------ ------
Total Other Assets 12,152 12,059
------ ------
Property, Plant And Equipment. . . . . . . . . . . 126,472 122,069
Less Accumulated Depreciation. . . . . . . . . . 74,052 70,176
------ ------
Net Properties . . . . . . . . . . . . . . . . . 52,420 51,893
------ ------
Total Assets . . . . . . . . . . . . . . . . . . . $97,728 $94,461
====== ======
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Part I FINANCIAL INFORMATION (Continued)
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March 31 June 30
2004 2003
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable . . . . . . . . . . . . . . . . . . $ 4,684 $ 4,318
Payroll And Employee Benefits . . . . . . . . . . . 3,591 5,447
Dividends Payable . . . . . . . . . . . . . . . . . 143 146
Federal Income Taxes . . . . . . . . . . . . . . . . 449 --
Taxes, Other Than Income Taxes . . . . . . . . . . . 1,398 1,600
Other Accrued Liabilities . . . . . . . . . . . . . 138 94
------ ------
Total Current Liabilities . . . . . . . . . . . . 10,403 11,605
------ ------
Long-Term Liabilities:
Long-Term Debt . . . . . . . . . . . . . . . . . . . 9,675 5,680
Deferred Employee Compensation . . . . . . . . . . . 3,725 3,208
Postretirement Benefits Other Than Pensions. . . . . 17,683 16,347
Deferred Income Taxes. . . . . . . . . . . . . . . . 307 544
Employee Benefits . . . . . . . . . . . . . . . . . 946 1,035
Other Liabilities . . . . . . . . . . . . . . . . . 1,006 927
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Total Long-Term Liabilities . . . . . . . . . . . 33,342 27,741
------ ------
Stockholders' Equity:
Common Stock, $1.00 Par Value: Authorized
2,000,000 Shares; 1,421,595 Shares Outstanding
at March 31, 2004, and 1,450,465 at June 30, 2003. . 1,421 1,451
Additional Capital . . . . . . . . . . . . . . . . . 3,270 3,270
Retained Earnings . . . . . . . . . . . . . . . . . 54,287 55,515
Accumulated Other Comprehensive Loss . . . . . . . . (4,995) (5,121)
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Total Stockholders' Equity. . . . . . . . . . . . 53,983 55,115
------ ------
Total Liabilities and Stockholders' Equity . . . . . . $97,728 $94,461
====== ======
See Accompanying Notes.
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FEDERAL SCREW WORKS
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Thousands of Dollars, Except Per Share)
Three Months Ended Nine Months Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net Sales.....................................................$ 24,371 $ 25,146 $ 66,600 $ 71,316
--------- ---------- --------- ---------
Costs And Expenses:
Cost of Products Sold...................................... 21,943 21,999 60,728 64,007
Selling And Administrative Expenses........................ 1,549 1,682 4,649 4,703
Interest Expense .......................................... 32 46 101 178
Other Expenses ............................................ 56 64 159 204
------ ---------- --------- ---------
Total Costs and Expenses................................ 23,580 23,791 65,637 69,092
--------- ---------- --------- ---------
Earnings Before Federal
Income Taxes............................................... 791 1,355 963 2,224
Federal Income Taxes ......................................... 260 447 317 733
--------- ---------- --------- ---------
Net Earnings..................................................$ 531 $ 908 $ 646 $ 1,491
========= ========== ========= =========
Per Share Of Common Stock:
Basic and Diluted Earnings Per Share..........................$ 0.37 $ 0.61 $ 0.45 $ 1.00
========= ========== $ ====== =========
Cash Dividends Declared Per Share.............................$ 0.10 $ 0.10 $ 0.60 $ 0.82
========= ========== $========= =========
Weighted Average Shares Outstanding........................... 1,430,316 1,477,910 1,439,396 1,496,420
See Accompanying Notes.
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FEDERAL SCREW WORKS
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of Dollars)
Nine Months
Ended
March 31
2004 2003
----- -----
Operating Activities
Net Earnings.................................................................... $646 $1,491
Adjustments to Reconcile Net Earnings to Net Cash
Provided By (Used In) Operating Activities:
Depreciation ............................................................... 4,923 4,873
Increase In Cash Value of Life Insurance.................................... (98) (98)
Change In Deferred Income Taxes............................................. (344) 84
Employee Benefits........................................................... (89) (63)
Other....................................................................... 2,060 665
Changes In Operating Assets And Liabilities:
Accounts Receivable......................................................... (2,195) (287)
Inventories And Prepaid Expenses............................................ (611) 2,508
Accounts Payable And Accrued Expenses....................................... (1,199) (1,507)
----- -----
Net Cash Provided By Operating Activities......................................... 3,093 7,666
----- -----
Investing Activities
Purchases of Property, Plant And Equipment-Net.................................. (5,450) (4,750)
----- -----
Net Cash Used In Investing Activities............................................. (5,450) (4,750)
----- -----
Financing Activities
Additional Borrowings Under Credit Agreement.................................... 3,995 480
Purchase of Common Stock........................................................ (1,034) (2,199)
Dividends Paid.................................................................. (870) (1,217)
----- -----
Net Cash Provided By (Used In) Financing Activities............................... 2,091 (2,936)
----- -----
(Decrease) In Cash................................................................ (266) (20)
Cash At Beginning Of Period....................................................... 416 199
----- -----
Cash At End Of Period............................................................. $ 150 $ 179
====== ======
See Accompanying Notes.
- 5 -
FEDERAL SCREW WORKS
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial reporting. Application of these accounting
principles requires the Company's management to make estimates about the future
resolution of existing uncertainties. As a result, actual results could differ
from these estimates. In preparing these interim financial statements,
management has made its best estimates and judgements of the amounts and
disclosures included in the financial statements, giving due regard to
materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions pertaining to the accounting policies described
below. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for the nine months ended March 31, 2004,
are not necessarily indicative of the results to be expected for the fiscal year
ending June 30, 2004.
NOTE B -- DEBT
On October 17, 2003, Comerica Bank approved a one-year extension of the
Company's $25,000,000 Revolving Credit and Term Loan Agreement. Under the
agreement, the Company has the option to convert borrowings thereunder
(classified as long-term debt) to a term note through October 31, 2006, the
expiration date of the agreement. Payments under the term note, if the
conversion option is exercised, would be made quarterly and could extend to
October 31, 2008. As of March 31, 2004, there was $9,675,000 in outstanding
borrowings under the Revolving Credit and Term Loan Agreement.
NOTE C -- DIVIDENDS
Cash dividends per share are based on the number of shares outstanding at the
respective dates of declaration. The Board of Directors, in February 2003,
declared a 5 for 4 split of the common stock of the Company to be distributed
April 1, 2003, to shareholders of record on March 3, 2003. The stock split
resulted in the distribution of one share of common stock for each four shares
of common stock held on the record date.
The stock split has been retroactively reflected in the accompanying financial
statements.
NOTE D -- INVESTMENTS
The Company has invested approximately $4,112,000 and $3,532,000 as of March 31,
2004, and June 30, 2003, respectively, which has been designated for payment of
certain liabilities related to deferred compensation plans. These amounts were
recorded in miscellaneous assets within the balance sheets. In accordance with
Statement of Financial Accounting Standards No. 115 ("FASB 115"), the Company
has classified all investments as "available-for-sale" because they are freely
tradable. The Company recorded an unrealized gain of $126,000, net of tax, for
the nine-month period ended March 31, 2004, from its investments, which is
reflected in Accumulated Other Comprehensive Loss.
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NOTE E -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Three Mo. Ended Nine Mo. Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net earnings $531 $908 $646 $1,491
Unrealized gains (losses) on
securities available-for-sale,net of tax 21 (24) 126 (91)
--- --- --- ---
Total comprehensive income $552 $884 $772 $1,400
==== ==== ==== ======
The components of accumulated other comprehensive loss are as follows:
March 31 June 30
2004 2003
---- ----
Unrealized gains (losses) on securities
available-for-sale, net of tax $ 85 $ (41)
Minimum pension liability, net of tax (5,080) (5,080)
------ ------
Accumulated other comprehensive loss $(4,995) $(5,121)
====== ======
NOTE F-- EMPLOYEE BENEFIT PLANS
The Company sponsors three defined benefit plans covering substantially all
employees. Benefits under two of the plans are based on negotiated rates times
years of service. Under the remaining plan, benefits are based on compensation
during the years immediately preceding retirement and years of service. It is
the Company's policy to make contributions to these plans sufficient to meet
minimum funding requirements of the applicable laws and regulations, plus such
additional amounts, if any, as the Company's actuarial consultants advise to be
appropriate.
The components of new periodic benefit cost are as follows:
Three Mo. Ended Nine Mo. Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Service cost $207 $186 $622 $559
Interest cost 472 461 1,417 1,383
Expected return on plan assets (533) (526) (1,600) (1,578)
Amortization of transition asset (30) (29) (89) (86)
Amortization of prior service cost 57 60 169 181
Amortization of unrecognized loss 156 47 468 139
--- --- --- ---
Net periodic benefit cost $329 $199 $987 $598
==== ==== ==== ====
The Company contributed $600,000 to the plans in the quarter ended March 31,
2004. No additional contributions were made or are expected to be made in fiscal
2004.
- 7 -
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis sets forth information for the three and
nine months ended March 31, 2004, compared to the three and nine months ended
March 31, 2003. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003.
OVERVIEW: The Company is a domestic manufacturer of machined, cold formed,
hardened and/or ground metal industrial component parts fabricated from metal
rod and bar. The Company's products consist of many different parts, such as
locknuts, bolts, piston pins, studs, bushings and shafts, which have sales
volumes that range from a few hundred pieces per month to over one million
pieces per month. Historically, over 85% of the Company's sales are to
manufacturers of automobiles and trucks, with the balance of its sales to
manufacturers of nonautomotive durable goods. Due to its focus on sales to
automotive manufacturers, the Company's financial performance is dependent upon
the overall strength of consumer demand for light trucks and passenger cars.
When there is an increase in production of vehicles for which the Company
supplies parts, the Company's sales generally increase, while decreased vehicle
production reduces the demand for the Company's products. Customer requirements
for the Company's parts may vary on a weekly basis depending on their production
schedules.
The Company saw material increases in several of its cost components during the
quarter, including increased steel prices and professional fees related to
recently enacted securities legislation. The Company's management believes that
it may continue to face challenges in controlling costs in these areas in the
future, as well as in other large cost components, such as health care and
energy. The Company strives to manage these costs in a methodical and persistent
manner, and to offset cost increases by expansion of its range of technical
capabilities through production of more sophisticated, complex parts, yielding
higher, more durable margins.
RESULTS OF OPERATIONS: The following table sets forth the percent relationship
of certain items to net sales for the periods indicated:
Three Months Ended Nine Months Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net Sales 100% 100% 100% 100%
Gross Profit 9.9 12.5 8.8 10.2
Selling & Administrative Expenses 6.4 6.7 7.0 6.6
Interest Expense 0.1 0.2 0.2 0.2
Other Expenses 0.2 0.3 0.2 0.3
Earnings Before Federal Income Taxes 3.2 5.3 1.4 3.1
Net Earnings 2.2 3.6 1.0 2.1
REVENUE: Net sales for the Company's third quarter ended March 31, 2004,
decreased $775,000, or (3.1)%, compared with net sales for the third quarter of
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the prior year. Net sales for the nine-month period ended March 31, 2004,
decreased $4,716,000, or (6.6)%, compared with the nine-month period of the
prior year. The decrease is attributable to the decreased demand from U.S. based
automobile manufacturers due to their decreased production during the period.
Even though the net sales decreased 3.1% in the current quarter, the period
ended with slightly higher sales of $705,000 in March 2004 compared to March
2003. The Company is unable to predict, at this time, if this increase will
continue throughout the fourth quarter of fiscal 2004. The Company's customers
are primarily U.S. based automobile manufacturers and their suppliers.
Gross profit for the three-month period ended March 31, 2004, decreased
$719,000, or (22.8)%, as compared with the third quarter of the prior year.
Gross profit for the nine-month period ended March 31, 2004, decreased
$1,437,000, or (19.7)%, as compared with the nine-month period of the prior
year. The decrease is attributable to higher steel prices, combined with the
decrease in net sales during the relevant period, as noted above. As mentioned
in the Company's Form 10-Q for the second quarter of fiscal 2004, the Company
began to experience raw material cost increases in the third quarter of this
year. Those increases are largely caused by higher scrap charges incurred by
steel suppliers and passed on to the Company in the form of surcharges. The
material cost increases approximated $400,000 in the third quarter ended March
31, 2004. The surcharges have varied from 9% to 28% of the base price of steel.
The Company has been unable to pass the increases on to its customers. The
Company expects to pay steel surcharges throughout the fourth quarter of fiscal
2004. The future impact of these surcharges on material costs cannot be
quantified at this time, however, because of the market volatility in steel
surcharges.
Selling and administrative expenses decreased $133,000, or (7.9%), for the third
quarter ended March 31, 2004, as compared with the third quarter of the prior
year. Selling and administrative expenses decreased $54,000, or (1.1%), as
compared with the nine-month period ended March 31, 2003. Professional fees have
increased $37,000 due to compliance with new regulations enacted in response to
the Sarbanes-Oxley Act of 2002. Insurance costs have also increased $70,000 due
to an overall increase in premiums in the insurance market. These increases have
been offset by a reduction of $227,000 in the bonus accruals due to the decrease
in earnings.
Interest expense decreased by 30% and 43% in the three and nine-month periods,
respectively, ended March 31, 2004, due to lower interest rates and an increase
in interest capitalized as part of Plant, Property and Equipment due to
increased time required to manufacture and prepare equipment to be capitalized.
Other expenses decreased $8,000, or (12.5)%, for the three-month period ended
March 31, 2004, as compared with the third quarter of the prior year. Other
expenses for the nine months ended March 31, 2004, decreased $45,000, or
(22.1)%, as compared with the nine-month period ended March 31, 2003. The
decrease is the result of declines of $21,000 in value judged to be other than
temporary on available-for-sale investment securities in the prior fiscal year
and increases of $22,000 in investment income in the current fiscal year.
The Company is dependent upon sales to the two largest U.S. based automobile
manufacturers, a condition that has existed for over fifty years. Although the
Company has purchase orders from such customers, such purchase orders generally
provide for supplying the customers' requirements for a particular model or
model year rather than for manufacturing a specific quantity of products. The
loss of any one of such customers or significant purchase orders could have a
material adverse effect on the Company. These customers are also able to exert
considerable pressure on component suppliers to reduce costs, improve quality
and provide additional design and engineering capabilities. There can be no
assurance that the additional costs of increased quality standards, price
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reductions or additional capabilities required by such customers will not have a
material adverse effect on the financial condition or results of operations of
the Company. Due to recent competitive pressures, the Company has been unable to
pass increased costs on to its customers.
DIVIDENDS: Dividends paid decreased $347,000 in the nine months ended March 31,
2004, compared to the same period last year. In addition to quarterly dividends
of $.10 per share in fiscal 2003, the Company paid a dividend of $.30 per share
on October 1, 2003, compared to a dividend of $.56 on October 1, 2002. The
decrease was attributable to lower earnings in fiscal 2003. The Board of
Directors, in February, 2004, declared a $.10 per share quarterly dividend,
which was paid April 1, 2004, to shareholders of record March 5, 2004.
LIQUIDITY AND CAPITAL RESOURCES: Working capital increased by $3,849,000 from
$18,904,000 at June 30, 2003, to $22,753,000 at March 31, 2004. The increase is
attributable to the reduction in payroll and employee benefits resulting from
payments made under the Company's bonus and profit sharing programs for the
prior year and a reduction in the current year accruals. Accounts receivable
increased $2,195,000 due to increased sales in March, 2004, compared to March,
2003. Also, one large customer extended its payment terms from paying on the
28th of every month to paying on the 2nd of the following month. This increased
accounts receivable $1,026,000 at March 31, 2004. Inventories increased by
$486,000 from $14,572,000 at June 30, 2003, to $15,050,000 at March 31, 2004.
This increase is due to the increased steel prices, previously discussed.
In the condensed statements of cash flows, other adjustments to reconcile net
earnings to net cash provided by operating activities increased $1,395,000
during the nine months ended March 31, 2004, compared with the same period in
the prior year. This was due to $455,000 paid under the Company's Supplemental
Employee Retirement Plan in the nine-months ended March 31, 2003. The balance is
primarily a reclassification of accrued expenses previously included in accounts
payable and accrued expenses.
Borrowings under the Revolving Credit and Term Loan Agreement were $9,675,000 at
March 31, 2004. As of that date, the Company had available an additional
$15,325,000 under the agreement and was in compliance with all financial
covenants.
Capital expenditures for the nine-month period ended March 31, 2004, were
approximately $5.4 million and, for the year, are expected to approximate $8.9
million, of which approximately $8.6 million has been committed as of March 31,
2004.
On December 3, 2003, the Board of Directors authorized the Company to repurchase
up to 185,000 shares, or approximately 12.9%, of the Company's then outstanding
common stock. Under the repurchase program, the Company has the authority to
repurchase stock through the open market, block purchases, or in negotiated
private transactions on an ongoing basis. The repurchases will be subject to the
availability of stock, general market conditions, the trading price of the
stock, alternative uses for capital, and the Company's financial performance.
The Board of Directors believes that the repurchase program will allow the
Company to be in technical compliance with the Controlled Company exemption from
certain new director independence and board committee requirements for companies
traded on the Nasdaq Stock Market, Inc. The purchases are expected to be
financed from cash generated from operations and additional borrowing capacity
under the Revolving Credit and Term Loan Agreement. For information regarding
shares purchased under this repurchase
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program during the quarter ended March 31, 2004, see "Changes in Securities, Use
of Proceeds and Issuer Purchases of Equity Securities".
CRITICAL ACCOUNTING POLICIES: The accompanying financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America. Application of these accounting principles requires
the Company's management to make estimates about the future resolution of
existing uncertainties. As a result, actual results could differ from these
estimates. In preparing these financial statements, management has made its best
estimates and judgments of the amounts and disclosures included in the financial
statements, giving due regard to materiality. The Company bases its estimates on
historical experience and on various assumptions that are believed to be
reasonable under the circumstances. On an on-going basis, the Company evaluates
its estimates and underlying assumptions. In the event estimates or underlying
assumptions prove to be different from actual amounts, adjustments are made in
the subsequent period to reflect more current information. The Company believes
that the following significant accounting policies involve management's most
difficult, subjective judgments or involve the greatest uncertainty.
INVESTMENTS AND MARKETABLE SECURITIES -- The Company accounts for certain of its
investments under SFAS No. 115 as securities available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in investment income or
loss. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. The fair value of marketable securities is
based on quoted market value. The Company reviews its investments to determine
if the value shows a decline that has been deemed other than temporary. The use
of different judgments could negatively affect the Company's results of
operations for the period.
REVENUE RECOGNITION -- The Company recognizes revenue from product sales when
goods are shipped and title has transferred to the customer. For one of its
customers, product is shipped to the customer's warehouse and title transfers
and revenue is recognized when this customer consumes the goods from its
warehouse and notifies us. The annual revenue from this customer represents 1.3%
of total sales. An estimated reserve is recorded for anticipated returns and
credit memos which will be issued on sales recognized to date. The use of
different estimates could negatively affect the Company's results of operations.
The Company has several product lines, but only one reportable segment.
Providing revenues from each product line or each group of product lines is
impracticable. The SEC's Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," provides guidance on the application of accounting principles
generally accepted in the United States of America to selected revenue
recognition issues. The Company has concluded its revenue recognition policy is
appropriate and in accordance with accounting principles generally accepted in
the United States of America and SAB No. 101.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE -- Accounts receivable have been
reduced by an allowance for amounts that may become uncollectible in the future.
This estimated allowance is based primarily on management's evaluation of the
financial condition of the customer and historical experience. Also, the Company
monitors its accounts receivable and charges to expense an amount equal to its
estimate of potential credit losses. The Company considers a number of factors
in determining its estimates, including the length of time
- 11 -
its trade accounts receivable are past due, the Company's previous loss history,
the customer's current ability to pay its obligation and the condition of the
general economy and the industry as a whole. The use of different estimates
could negatively affect the Company's results of operations for the period.
INVENTORIES -- Inventories area stated at the lower of cost or market. Cost,
determined by the last-in, first-out method, is used for certain raw material
inventories; the remaining inventories are costed using the first-in, first-out
method. Provision is made to reduce inventories to net realizable value for
excess and/or obsolete material. The Company periodically reviews its inventory
levels in order to identify obsolete and slow-moving inventory. The Company
estimates excess or obsolete inventory based principally upon contemplated
future customer demand for the Company's products. The use of different
assumptions in determining slow-moving and obsolete inventories would result in
different charges to cost of sales in each period presented and could negatively
affect the Company's results of operations.
WORKERS' COMPENSATION RESERVE -- The Company is self-insured for workers'
compensation claims for up to $350,000 per claim. The Company has excess
liability insurance with an outside insurance carrier to minimize its risks to
catastrophic claims. Losses are accrued based on an estimate of the ultimate
aggregate liability for claims incurred, using certain assumptions based on the
Company's experience under this program. Factors considered in estimating our
reserves are the nature of outstanding claims, estimated costs to settle
existing claims and loss history. Significant changes in the factors described
above could have a material adverse impact on future operating results.
FORWARD LOOKING STATEMENTS: Certain information in this Form 10-Q contains
"forward looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934, both as amended, with respect to
expectations for future periods which are subject to various uncertainties,
which could cause actual results to differ materially from those in the forward
looking statements. These uncertainties include, but are not limited to:
o increased costs for steel used to manufacture the Company's products;
o diversion of business from our customers to overseas manufacturers;
o increased costs incurred due to recently enacted and proposed changes in
securities laws and regulations, as well as recently enacted rules of The
Nasdaq Stock Market;
o increased healthcare, energy and other costs;
o increased competition;
o inability of the Company to expand its range of technical capabilities
through the production of more sophisticated, complex parts, yielding
higher, more durable margins;
o the loss of, or reduction in business with, the Company's principal
customers;
o fluctuations in demand for the Company's products;
o the impact of additional costs of increased quality standards, price
reductions or additional capabilities required by the Company's principal
customers;
o the ability of the Company to pass cost increases on to its customers;
o changes in expected capital expenditures;
o work stoppages, strikes and slowdowns at the Company's facilities and
those of its customers; and
- 12 -
o adverse changes in economic conditions generally and those of the
automotive industry, specifically.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk is limited to interest rate risk on its Revolving
Credit and Term Loan Agreement. At March 31, 2004, the carrying amounts reported
in the balance sheet for cash, accounts receivable, accounts payable, debt and
investments approximate fair value. Accordingly, management believes this risk
is not material. Borrowings under the Revolving Credit and Term Loan Agreement
are subject to variable interest rates. A one hundred basis point increase in
interest rates would have resulted in additional interest expense of $13,000 for
the quarter ended March 31, 2004.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that, as of March 31,
2004, the Company's disclosure controls and procedures were effective in timely
alerting them to material information relating to the Company required to be
disclosed in the Company's periodic reports filed with the SEC. There have been
no changes in the Company's internal controls over financial reporting during
the quarter ended March 31, 2004 identified in connection with the Company's
evaluation that has materially affected, or is reasonably likely to materially
affect, the Company's internal controls over financial reporting.
PART II OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table summarizes the Company's stock repurchases for the three-
months ended March 31, 2004:
MAXIMUM NUMBER
TOTAL NUMBER OF SHARES THAT
OF SHARES MAY YET BE
PURCHASED AS PURCHASED
TOTAL NUMBER PART OF UNDER THE
OF SHARES AVERAGE PRICE PUBLICLY PROGRAM
PERIOD PURCHASED PAID PER SHARE ANNOUNCED
(a) PROGRAM
January 2004 0 0 0 181,030
February 2004 8,100 $38.34 8,100 172,930
March 2004 4,000 $38.15 4,000 168,930
Total 12,100 $38.28 12,100 168,930
(a) All shares repurchased during the third quarter of fiscal 2004 were
purchased through a publicly announced stock repurchase program. For a
description of the program, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits included with this Form 10-Q are set forth on the
Index to Exhibits.
(b) Current Reports on Form 8-K.
(1) On February 5, 2004, the Company furnished information regarding
its financial results for the quarter and six-month period ended
December 31, 2003, under Items 7 and 12 of Form 8-K.
(2) On March 29, 2004, the Company furnished information regarding
its change in certifying accountants from Ernst & Young LLP to
Crowe Chizek and Company LLC, under Items 4 and 7 of Form 8-K.
SIGNATURES
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Pursuant to the requirements 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.
FEDERAL SCREW WORKS
-------------------
Date May 14, 2004 /s/ W. T. ZurSchmiede, Jr.
-------------- ------------------------------------
W. T. ZurSchmiede, Jr.
Chairman of the Board and
Chief Financial Officer
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Exhibit Index:
Exhibit 31.1 Certification of the Chief Executive Officer of the Company
dated May 14, 2004, relating to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 2004.
Exhibit 31.2 Certification of the Chief Financial Officer of the Company
dated May 14, 2004, relating to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 2004.
Exhibit 32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.