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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 quarterly period ended April 30, 2003
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: 0-8454
JLG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1199382
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1 JLG Drive, McConnellsburg, PA 17233-9533
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(7l7) 485-5161
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 [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of capital stock outstanding as of May 27, 2003 was
43,007,203.
TABLE OF CONTENTS
PART 1
Item 1. Financial Information.......................................... 1
Condensed Consolidated Balance Sheets........................ 1
Condensed Consolidated Statements of Income.................. 2
Condensed Consolidated Statements of Cash Flows.............. 3
Notes to Condensed Consolidated Financial Statements......... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.................................................. 28
Item 4. Controls and Procedures........................................ 28
Independent Accountants' Review Report.................................. 29
PART II
Item 6. Exhibits and Reports on Form 8-K............................... 30
Signatures.............................................................. 31
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JLG INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
April 30, July 31,
2003 2002
--------- ---------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 16,529 $ 6,205
Accounts receivable - net 252,200 227,809
Finance receivables - net 1,570 27,529
Pledged finance receivables 50,741 34,985
Inventories 154,168 165,536
Other current assets 23,061 31,042
--------- ---------
Total current assets 498,269 493,106
Property, plant and equipment - net 80,366 84,370
Equipment held for rental - net 20,509 20,979
Finance receivables, less current portion 27,366 45,412
Pledged finance receivables, less current portion 116,348 53,703
Goodwill - net 29,509 28,791
Other assets 53,396 51,880
--------- ---------
$ 825,763 $ 778,241
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt $ 912 $ 14,427
Current portion of limited recourse debt from finance receivables
monetizations 50,980 34,850
Accounts payable 83,059 129,317
Accrued expenses 70,820 83,309
--------- ---------
Total current liabilities 205,771 261,903
Long-term debt, less current portion 212,006 177,331
Limited recourse debt from finance receivables monetizations,
less current portion 113,673 52,721
Accrued post-retirement benefits 26,255 24,989
Other long-term liabilities 11,118 10,807
Provisions for contingencies 11,906 14,448
Shareholders' equity
Capital stock:
Authorized shares: 100,000 at $.20 par
Issued and outstanding shares: 43,007; fiscal 2002 - 42,728 8,601 8,546
Additional paid-in capital 20,514 18,846
Retained earnings 223,033 216,957
Unearned compensation (2,749) (1,649)
Accumulated other comprehensive income (loss) (4,365) (6,658)
--------- ---------
Total shareholders' equity 245,034 236,042
--------- ---------
$ 825,763 $ 778,241
========= =========
The accompanying notes are an integral part of these financial statements.
1
JLG INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
--------- --------- --------- ----------
Revenues
Net sales $ 199,282 $ 203,147 $ 497,631 $ 503,970
Financial products 5,152 3,279 14,378 9,386
Rentals 1,336 2,306 5,561 7,890
--------- --------- --------- ----------
205,770 208,732 517,570 521,246
Cost of sales 171,125 174,465 427,711 432,389
--------- --------- --------- ----------
Gross profit 34,645 34,267 89,859 88,857
Selling and administrative expenses 20,087 19,188 53,949 54,049
Product development expenses 4,561 3,736 12,351 11,403
Restructuring charges 1,433 6,091 2,616 6,091
--------- --------- --------- ----------
Income from operations 8,564 5,252 20,943 17,314
Interest expense (6,764) (3,345) (18,340) (11,710)
Miscellaneous, net 1,383 (659) 7,279 1,167
--------- --------- --------- ----------
Income before taxes and cumulative effect of change in
accounting principle 3,183 1,248 9,882 6,771
Income tax provision 1,018 412 3,162 2,235
--------- --------- --------- ----------
Income before cumulative effect of change in accounting
principle 2,165 836 6,720 4,536
Cumulative effect of change in accounting principle -- -- -- (114,470)
--------- --------- --------- ----------
Net income (loss) $ 2,165 $ 836 $ 6,720 $ (109,934)
========= ========= ========= ==========
Earnings (loss) per common share:
Earnings per common share before cumulative effect of
change in accounting principle $ .05 $ .02 $ .16 $ .11
Cumulative effect of change in accounting principle -- -- -- (2.73)
--------- --------- --------- ----------
Earnings (loss) per common share $ .05 $ .02 $ .16 $ (2.62)
========= ========= ========= ==========
Earnings (loss) per common share - assuming dilution:
Earnings per common share - assuming dilution before cumulative effect of
change in accounting principle $ .05 $ .02 $ .16 $ .11
Cumulative effect of change in accounting principle -- -- -- (2.67)
--------- --------- --------- ----------
Earnings (loss) per common share - assuming dilution $ .05 $ .02 $ .16 $ (2.56)
========= ========= ========= ==========
Cash dividends per share $ .005 $ .005 $ .015 $ .02
========= ========= ========= ==========
Weighted average shares outstanding 42,598 42,107 42,587 41,931
========= ========= ========= ==========
Weighted average shares outstanding - assuming
dilution 42,775 43,816 42,849 42,896
========= ========= ========= ==========
The accompanying notes are an integral part of these financial statements.
2
JLG INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
April 30,
2003 2002
---------- ----------
OPERATIONS
Net income (loss) $ 6,720 $ (109,934)
Adjustments to reconcile net income to cash flow from
operating activities:
Loss on sale of property, plant and equipment 117 372
Gain on sale of equipment held for rental (5,703) (7,475)
Non-cash charges and credits:
Cumulative effect of change in accounting principle -- 114,470
Depreciation and amortization 15,346 15,813
Other 12,599 6,753
Changes in selected working capital items:
Accounts receivable (26,334) (16,994)
Inventories 10,973 26,455
Accounts payable (46,647) 45,759
Other operating assets and liabilities (10,654) (7,689)
Changes in finance receivables 43,131 27,216
Changes in pledged finance receivables (99,644) (42,114)
Changes in other assets and liabilities 97 3
---------- ----------
Cash flow from operating activities (99,999) 52,635
INVESTMENTS
Purchases of property, plant and equipment (7,995) (10,246)
Proceeds from the sale of property, plant and equipment 216 150
Purchases of equipment held for rental (14,351) (20,777)
Proceeds from the sale of equipment held for rental 16,181 21,214
Other (664) --
---------- ----------
Cash flow from investing activities (6,613) (9,659)
FINANCING
Net decrease in short-term debt (14,065) (7,087)
Issuance of long-term debt 277,288 333,954
Repayment of long-term debt (247,311) (419,446)
Issuance of limited recourse debt 98,443 42,114
Repayment of limited recourse debt (118) --
Payment of dividends (644) (843)
Exercise of stock options and issuance of restricted awards 738 3,276
---------- ----------
Cash flow from financing activities 114,331 (48,032)
CURRENCY ADJUSTMENTS
Effect of exchange rate changes on cash 2,605 (907)
---------- ----------
CASH
Net change in cash and cash equivalents 10,324 (5,963)
Beginning balance 6,205 9,254
---------- ----------
Ending balance $ 16,529 $ 3,291
========== ==========
The accompanying notes are an integral part of these financial statements.
3
JLG INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2003
(in thousands, except per share data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. In our opinion, we have included all normal recurring adjustments
necessary for a fair presentation of results for the unaudited interim periods.
Interim results for the nine-month period ended April 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
as a whole. For further information, refer to the consolidated financial
statements and notes thereto included in our annual report on Form 10-K for the
fiscal year ended July 31, 2002.
Where appropriate, we have reclassified certain amounts in fiscal 2002 to
conform to the fiscal 2003 presentation.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Effective August 1, 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 143 "Accounting for Asset Retirement Obligations," which
establishes the accounting and reporting standards for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The adoption of SFAS No. 143 did not have an impact on our
consolidated financial position or results of operations.
Effective August 1, 2002, we adopted SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 144 did not have
a significant impact on our consolidated financial position or results of
operations.
Effective June 1, 2002, we adopted SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement requires, among other things, that gains and losses
on the early extinguishment of debt be classified as extraordinary only if they
meet the criteria for extraordinary treatment set forth in Accounting Principles
Board ("APB") Opinion No. 30. The adoption of SFAS No. 145 did not have a
significant impact on our consolidated financial position or results of
operations.
Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. This statement nullifies Emerging Issue Task Force No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and
is effective for exit or disposal activities initiated after December 31, 2002.
As more fully described in Note 11 of the Notes to Condensed Consolidated
Financial Statements, the adoption of SFAS No. 146 required that since some
employees terminated under our second quarter of fiscal 2003 restructuring plan
are required to render service until they are terminated in order to receive the
termination benefit, we will recognize this liability ratably over the future
periods of service. Under previous accounting treatment, we would have
immediately recognized the entire obligation for this severance at the time of
approval of the restructuring plan.
Effective January 1, 2003 we adopted the provisions of FASB Interpretation No.
45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." The
implementation of this interpretation requires certain disclosures regarding
guarantees of the indebtedness of
4
others as provided in Note 12 of the Notes to Condensed Consolidated Financial
Statements. In addition, FIN 45 requires that we recognize at the inception of a
guarantee a liability for the fair value of the obligation undertaken in issuing
the guarantee. The requirements of FIN 45 did not have a significant impact on
our results of operations or financial position at April 30, 2003.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements of SFAS No. 123 and APB
Opinion No. 28, "Interim Financial Reporting." The transition provisions of this
Statement are effective for fiscal years ending after December 15, 2002, and the
disclosure requirements of the Statement are effective for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 will not have an
impact on us as we have elected to continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. In
addition, pro forma disclosure of stock based compensation, as measured under
the fair value requirements of SFAS No. 123, "Accounting for Stock Based
Compensation," has been provided in Note 7 of the Notes to Condensed
Consolidated Financial Statements.
In April 2003, the FASB released SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the
accounting for derivatives, amending the previously issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a financing
component in order to increase the comparability of accounting practices under
SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. As we currently mark all of our derivative financial
instruments and hedging contracts to market under SFAS No. 133, the adoption of
SFAS No. 149 is not expected to have a material impact on our consolidated
financial statements.
NOTE 3 - INVENTORIES AND COST OF SALES
A precise inventory valuation under the LIFO (last-in, first-out) method can
only be made at the end of each fiscal year; therefore, interim LIFO inventory
valuation determinations, including the determination at April 30, 2003, must
necessarily be based on our estimate of expected fiscal year-end inventory
levels and costs.
Inventories consist of the following:
April 30, July 31,
2003 2002
--------- ---------
Finished goods $ 99,980 $ 104,680
Raw materials and work in process 59,901 65,579
--------- ---------
159,881 170,259
Less LIFO provision 5,713 4,723
--------- ---------
$ 154,168 $ 165,536
========= =========
5
NOTE 4 - FINANCE RECEIVABLES
Finance receivables represent sales-type leases resulting from the sale of our
products. Our net investment in finance receivables was as follows at:
April 30, July 31,
2003 2002
--------- ---------
Gross finance receivables $ 190,191 $ 155,786
Estimated residual value 45,149 44,608
--------- ---------
235,340 200,394
Unearned income (36,043) (36,384)
--------- ---------
Net finance receivables 199,297 164,010
Provision for losses (3,272) (2,381)
--------- ---------
$ 196,025 $ 161,629
========= =========
Of the finance receivables balances at April 30, 2003 and July 31, 2002, $167.1
million and $88.7 million, respectively, are pledged finance receivables
resulting from the sale of finance receivables through limited recourse and
non-recourse monetization transactions during fiscal 2002 and the first nine
months of fiscal 2003. In compliance with SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
these transactions are accounted for as debt on our Condensed Consolidated
Balance Sheets. The maximum loss exposure associated with these limited recourse
agreements was $18.9 million as of April 30, 2003. As of April 30, 2003, our
provision for losses related to these limited recourse agreements was $2.7
million.
The following table displays the contractual maturity of our finance
receivables. It does not necessarily reflect future cash collections because of
various factors including the possible refinancing or sale of finance
receivables and repayments prior to maturity.
For the twelve-month periods ended April 30:
2003 $ 49,438
2004 43,759
2005 42,074
2006 34,884
2007 14,375
Thereafter 5,661
Residual value in equipment at lease end 45,149
Less: unearned finance income (36,043)
---------
Net investment in leases $ 199,297
=========
Provisions for losses on finance receivables are charged to income in amounts
sufficient to maintain the allowance at a level considered adequate to cover
potential losses in the existing receivable portfolio.
NOTE 5 - GOODWILL
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," establishing new financial reporting standards for acquired goodwill
and other intangible assets. On August 1, 2001, we elected early adoption of
SFAS No. 142. Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. Accordingly, we ceased amortization of all goodwill.
During the second quarter of fiscal 2002, we concluded that goodwill was
impaired and during the fourth quarter of fiscal 2002 recorded an impairment
charge of $114.5 million, or $2.65 per diluted share, as a cumulative effect of
change in accounting principle. As required, we have restated the fiscal 2002
interim statements to reflect the
6
transitional impairment loss as if the accounting change had occurred during the
first quarter of fiscal 2002. There was no income tax effect on this change in
accounting principle. The circumstances leading to the impairment of goodwill
primarily resulted from changing business conditions including consolidation of
the telehandler market, unplanned excess manufacturing capacity costs and eroded
margins due to competitive pricing pressures. We calculated the fair value of
our Gradall and foreign reporting units, which are part of our Machinery
segment, using third party appraisals and expected future discounted cash flows.
This table presents our reconciliation of the recorded goodwill during the
period from July 31, 2002 to April 30, 2003:
Balance as of August 1, 2002 $ 28,791
Additions 718
Impairment charge recorded --
--------
Balance as of April 30, 2003 $ 29,509
========
During the second quarter of fiscal 2003, we purchased the assets of a trailer
manufacturer for $1.1 million, which caused the increase in the recorded
goodwill. These trailers feature a specialized hydraulic system that allows the
operator to lower the trailer deck to ground level. This product series is
complementary to our aerial work platform product lines and is offered in 20
models with three styles: flat bed, utility or enclosed.
NOTE 6 - CHANGES IN ACCOUNTING ESTIMATES
During the second quarter of fiscal 2003, we determined that we would not make a
discretionary profit sharing contribution for calendar year 2002. This change
resulted in an increase in net income of $1.3 million, or $.03 per diluted
share, for the first nine months of fiscal 2003.
During the second quarter of fiscal 2002, we determined that certain
volume-related customer incentives would not be achieved and that we would not
make a discretionary profit sharing contribution for calendar year 2001. The
reversal of the accrual related to volume-related customer incentives resulted
in an increase in net income of $2.3 million, or $.06 per diluted share, for the
first nine months of fiscal 2002. The reversal of the accrual related to the
discretionary profit sharing contribution for calendar year 2001 resulted in an
increase in net income of $1.8 million, or $.04 per diluted share, for the first
nine months of fiscal 2002.
7
NOTE 7 - STOCK BASED INCENTIVE PLANS
At April 30, 2003, we have two stock-based compensation plans covering employees
and directors. We account for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Under this opinion, we do not recognize
compensation expense arising from the grant of stock options because the
exercise price of our stock options equals the market price of the underlying
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for each
of the periods ended April 30:
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
------- ----- ------- ----------
Net income (loss), as reported $ 2,165 $ 836 $ 6,720 $ (109,934)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (642) (713) (1,920) (2,150)
------- ----- ------- ----------
Pro forma net income (loss) $ 1,523 $ 123 $ 4,800 $ (112,084)
======= ===== ======= ==========
Earnings per share:
Earnings (loss) per common share - as reported $ .05 $ .02 $ .16 $ (2.62)
======= ===== ======= ==========
Earnings (loss) per common share - pro forma $ .04 $ -- $ .11 $ (2.67)
======= ===== ======= ==========
Earnings (loss) per common share - assuming dilution -
as reported $ .05 $ .02 $ .16 $ (2.56)
======= ===== ======= ==========
Earnings (loss) per common share - assuming dilution $ .04 $ -- $ .11 $ (2.61)
======= ===== ======= ==========
8
NOTE 8 - BASIC AND DILUTED EARNINGS PER SHARE
This table presents our computation of basic and diluted earnings per share for
each of the periods ended April 30:
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
------- ------- -------- ---------
Income before cumulative effect of change in
accounting principle $ 2,165 $ 836 $ 6,720 $ 4,536
Cumulative effect of change in accounting principle -- -- -- (114,470)
------- ------- -------- ---------
Net income (loss) $ 2,165 $ 836 $ 6,720 $(109,934)
======= ======= ======== =========
Denominator for basic earnings per share --
weighted average shares 42,598 42,107 42,587 41,931
Effect of dilutive securities - employee stock options
and unvested restricted shares 177 1,709 262 965
------- ------- -------- ---------
Denominator for diluted earnings per share --
weighted average shares adjusted for
dilutive securities 42,775 43,816 42,849 42,896
======= ======= ======== =========
Earnings per common share before cumulative effect of
change in accounting principle $ .05 $ .02 $ .16 $ .11
Cumulative effect of change in accounting principle -- -- -- (2.73)
------- ------- -------- ---------
Earnings (loss) per common share $ .05 $ .02 $ .16 $ (2.62)
======= ======= ======== =========
Earnings per common share - assuming dilution before
cumulative effect of change in accounting principle $ .05 $ .02 $ .16 $ .11
Cumulative effect of change in accounting principle -- -- -- (2.67)
------- ------- -------- ----------
Earnings (loss) per common share - assuming dilution $ .05 $ .02 $ .16 $ (2.56)
======= ======= ======== ==========
During the quarter ended April 30, 2003, options to purchase 4.1 million shares
of capital stock at a range of $5.64 to $21.94 per share were not included in
the computation of diluted earnings per share because exercise prices for the
options were more than the average market price of the capital stock.
9
NOTE 9 - SEGMENT INFORMATION
We have organized our business into three segments - Machinery, Equipment
Services and Access Financial Solutions. The Machinery segment contains the
design, manufacture and sale of new equipment. The Equipment Services segment
contains after-sales service and support, including parts sales, equipment
rentals, and used and reconditioned equipment sales. The Access Financial
Solutions segment contains financing and leasing activities. We evaluate
performance of the Machinery and Equipment Services segments and allocate
resources based on operating profit. We evaluate performance of the Access
Financial Solutions segment and allocate resources based on its operating profit
less interest expense. Intersegment sales and transfers are not significant. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
Our business segment information consisted of the following for each of the
periods ended April 30:
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues:
Machinery $ 167,630 $ 162,054 $ 401,726 $ 414,017
Equipment Services 32,835 43,164 100,882 96,594
Access Financial Solutions 5,305 3,514 14,962 10,635
--------- --------- --------- ---------
$ 205,770 $ 208,732 $ 517,570 $ 521,246
========= ========= ========= =========
Segment profit (loss):
Machinery $ 6,665 $ 4,708 $ 11,812 $ 8,194
Equipment Services 6,998 6,656 18,884 22,718
Access Financial Solutions 716 877 3,695 3,472
General corporate (9,434) (8,059) (21,645) (20,248)
--------- --------- --------- ---------
Segment profit 4,945 4,182 12,746 14,136
Add Access Financial Solutions' interest expense 3,619 1,070 8,197 3,178
--------- --------- --------- ---------
Operating income $ 8,564 $ 5,252 $ 20,943 $ 17,314
========= ========= ========= =========
We manufacture our products in the United States and Belgium and sell these
products globally, but principally in North America, Europe, Australia and South
America. No single foreign country is significant to the consolidated
operations. Our revenues by geographic area consisted of the following for each
of the periods ended April 30:
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
--------- --------- --------- ---------
United States $ 155,852 $ 158,153 $ 381,122 $ 378,218
Europe 33,830 37,521 97,894 110,530
Other 16,088 13,058 38,554 32,498
--------- --------- --------- ---------
$ 205,770 $ 208,732 $ 517,570 $ 521,246
========= ========= ========= =========
10
NOTE 10 - COMPREHENSIVE INCOME
On an annual basis, comprehensive income is disclosed in the Statement of
Shareholders' Equity. This statement is not presented on a quarterly basis. The
following table presents the components of comprehensive income for each of the
periods ended April 30:
Three Months Ended Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
------- ------- ------- ---------
Net income (loss) $ 2,165 $ 836 $ 6,720 $(109,934)
Aggregate translation adjustment 1,122 (1,431) 2,293 (1,272)
------- ------- ------- ---------
3,287 $ (595) 9,013 $(111,206)
======= ======= ======= =========
NOTE 11 - RESTRUCTURING COSTS
During the second quarter of fiscal 2003, we announced further actions related
to our ongoing longer-term strategy to streamline operations and reduce fixed
and variable costs. As part of our capacity rationalization plan commenced in
early 2001, the 130,000-square foot Sunnyside facility in Bedford, Pennsylvania,
which currently produces selected scissor lift models, will be temporarily idled
and production integrated into our Shippensburg, Pennsylvania facility.
Additionally, reductions in selling, administrative and product development
costs will result from changes in our global organization and from process
consolidations. When these changes and consolidations are fully implemented, we
expect to generate approximately $20 million in annualized savings at a cost of
$9.4 million, representing a payback of approximately six months.
The announced plan contemplates that we will reduce a total of 189 people
globally and transferring 99 production jobs from the Sunnyside facility in
Bedford to the Shippensburg facility. Production of scissor lifts will be
relocated from our Sunnyside facility and integrated into our newer and more
flexible 300,000-square foot facility in Shippensburg by fiscal year end. As a
result, pursuant to the plan we anticipate incurring a pre-tax charge of $5.9
million, consisting of $3.5 million in restructuring costs associated with
personnel reductions and employee relocation and lease and contract terminations
and $2.4 million in charges related to relocating certain plant assets and
start-up costs. In addition, we will spend approximately $3.5 million on capital
requirements. Almost all of these expenses will be cash charges, which will be
recorded over the three quarters following the quarter ended January 31, 2003.
As noted above, the continuing streamlining of our operations will result in
$3.5 million in personnel reductions and relocation and lease and contract
terminations and will be recorded as a restructuring cost. In accordance with
new accounting requirements, during the second and third quarters of fiscal
2003, we recognized approximately $1.2 million and $1.4 million, respectively,
of the pre-tax restructuring charge, consisting of an accrual for termination
benefit costs and employee relocation costs. In addition, we incurred $0.3
million of costs related to relocating certain plant assets and start-up costs,
which was recorded as a cost of sales. In addition, during the third quarter of
fiscal 2003 we spent approximately $0.6 million on capital requirements. We
anticipate recording $1.9 million and $1.1 million of restructuring and
restructuring-related costs in our fourth quarter of fiscal 2003 and first
quarter of fiscal 2004, respectively, with employee termination dates staggered
throughout these quarters.
11
The following table presents a rollforward of our activity in the restructuring
accrual and our charges related to relocating certain plant assets and start-up
costs associated with the move of the Bedford operations to the Shippensburg
facility and costs related to our process consolidations:
Other Restructuring
Termination Restructuring Related
Benefits Costs Total Charges
----------------------------------------------------------
Restructuring charge recorded
during second quarter of
fiscal 2003 $ 1,183 $ -- $ 1,183 $ 2,402
Utilization of reserves
during the second
quarter of fiscal 2003 -
cash (114) (114) (19)
----------------------------------------------------------
Balance at January 31, 2003 1,069 -- 1,069 2,383
Restructuring charge
recorded during the third
quarter of fiscal 2003 1,175 258 1,433 --
Utilization of reserves during
the third quarter of fiscal
2003 - cash (626) (38) (664) (318)
----------------------------------------------------------
Balance at April 30, 2003 $ 1,618 $ 220 $ 1,838 $ 2,065
==========================================================
During the third quarter of fiscal 2002, we announced the closure of our
manufacturing facility in Orrville, Ohio as part of our capacity rationalization
plan for our Machinery segment. Operations at that facility have been integrated
into our McConnellsburg, Pennsylvania facility. As a result, we anticipated
incurring a pre-tax charge of $7.7 million, consisting of $6.1 million in
restructuring costs associated with approximately 170 personnel reductions and
the write-down of idle facilities and $1.6 million in charges related to
relocating certain plant assets and start-up costs associated with the move of
the Orrville operations to the McConnellsburg facility.
The following table presents a rollforward of our activity in the restructuring
accrual and our charges related to relocating certain plant assets and start-up
costs associated with the move of the Orrville operations to McConnellsburg:
Other Restructuring
Termination Impairment Restructuring Related
Benefits of Assets Costs Total Charges
--------------------------------------------------------------------------
Total restructuring charge $ 1,120 $ 4,613 $ 358 $ 6,091 $ 1,658
Fiscal 2002 utilization of
reserves - cash (135) -- (86) (221) (399)
Fiscal 2002 utilization of
reserves - non-cash -- (4,613) -- (4,613) (225)
--------------------------------------------------------------------------
Balance at July 31, 2002 985 -- 272 1,257 1,034
Fiscal 2003 utilization of
reserves - cash
(961) -- (23) (984) (228)
--------------------------------------------------------------------------
Balance at April 30, 2003 $ 24 $ -- $ 249 $ 273 $ 806
==========================================================================
At April 30, 2003, we included $5.2 million of assets held for sale on the
Condensed Consolidated Balance Sheets in other current assets and ceased
depreciating these assets during the third quarter of fiscal 2002.
12
NOTE 12 - COMMITMENTS AND CONTINGENCIES
We are a party to personal injury and property damage litigation arising out of
incidents involving the use of our products. Our insurance program for fiscal
2003 is comprised of a self-insured retention of $7 million for domestic claims,
insurance coverage of $2 million for international claims and catastrophic
coverage for domestic and international claims of $100 million in excess of the
retention and international primary coverage. We contract with an independent
firm to provide claims handling and adjustment services. Our estimates with
respect to claims are based on internal evaluations of the merits of individual
claims and the reserves assigned by our independent insurance claims adjustment
firm. We frequently review the methods of making such estimates and establishing
the resulting accrued liability, and any resulting adjustments are reflected in
current earnings. Claims are paid over varying periods, which generally do not
exceed five years. Accrued liabilities for future claims are not discounted.
With respect to all product liability claims of which we are aware, we
established accrued liabilities of $17.9 million and $18.8 million at April 30,
2003 and July 31, 2002, respectively. These amounts are included in other
current liabilities and provisions for contingencies on our Condensed
Consolidated Balance Sheets. While our ultimate liability may exceed or be less
than the amounts accrued, we believe that it is unlikely that we would
experience losses that are materially in excess of such reserve amounts. The
provisions for self-insured losses are included within cost of sales in our
Condensed Consolidated Statements of Income. As of April 30, 2003 and July 31,
2002, there were $0 million and $0.1 million of insurance recoverables or offset
implications, respectively, and there were no claims by us being contested by
insurers.
At April 30, 2003, we are a party to multiple agreements whereby we guarantee
$115.7 million in indebtedness of others, including the $18.9 million maximum
loss exposure associated with our limited recourse agreements. As of April 30,
2003, approximately 45% of the guaranteed indebtedness was owed by three
customers. Under the terms of these and various related agreements and upon the
occurrence of certain events, we generally have the ability, among other things,
to take possession of the underlying collateral and/or make demand for
reimbursement from other parties for any payments made by us under these
agreements. At April 30, 2003, we had $6.5 million reserved related to these
agreements, including a provision for losses of $2.7 million related to our
limited recourse agreements. If the financial condition of our customers were to
deteriorate resulting in an impairment of their ability to make payments,
additional allowances may be required. While we believe it is unlikely that we
would experience losses under these agreements that are materially in excess of
the amounts reserved, we can provide no assurance that the financial condition
of the third parties will not deteriorate resulting in the customers inability
to meet its obligation and, in the event that occurs, we can not guarantee that
the collateral underlying the agreement will not result in losses materially in
excess of those reserved.
NOTE 13 - BANK CREDIT LINES AND LONG-TERM DEBT
Subsequent to the third quarter, in May 2003, we sold $125 million principal
amount of our 8 1/4% senior unsecured notes due 2008. To allow the issuance of
the senior unsecured notes, we entered into amendments on April 28, 2003, which
became effective concurrently with the closing of the senior unsecured notes, to
our $250 million revolving credit facility and $25 million overdraft facility
that give us greater flexibility with respect to certain financial ratios and
reduces the maximum borrowings available under the $250 million facility to $150
million. The net proceeds of the offering were used to repay outstanding debt
under our $150 million revolving credit facility with the balance to be used for
general corporate purposes. Interest will accrue from May 5, 2003, and we will
pay interest twice a year, beginning November 1, 2003. The notes will be
guaranteed on a senior unsecured basis by all of our existing and any future
material domestic restricted subsidiaries.
Our credit facilities contain customary affirmative and negative covenants
including financial covenants requiring the maintenance of specified
consolidated interest coverage, leverage ratios and a minimum net worth. We are
currently in compliance with all financial covenants, including negative
covenants, in our senior credit facilities.
13
Our bank credit lines and long-term debt were as follows at:
April 30, July 31,
2003 2002
--------- ---------
8 3/8% senior subordinated notes due 2012 $ 175,000 $ 175,000
$250 million revolving credit facility 30,288 --
$25 million overdraft credit facility -- 13,934
Fair value of hedging adjustment 6,162 914
Other 1,468 1,910
--------- ---------
212,918 191,758
Less current portion 912 14,427
--------- ---------
$ 212,006 $ 177,331
========= =========
NOTE 14 - LIMITED RECOURSE DEBT FROM FINANCE RECEIVABLES MONETIZATIONS
As a result of the sale of finance receivables through limited recourse and
non-recourse monetization transactions, we have $164.7 million of limited
recourse debt outstanding as of April 30, 2003. The aggregate amounts of limited
recourse debt outstanding at April 30, 2003 which will become due in 2004
through 2008 are: $51 million, $33.4 million, $34.9 million, $27.9 million and
$12.5 million, respectively.
14
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR
SUBSIDIARIES
Certain of our indebtedness is guaranteed by our significant subsidiaries (the
"guarantor subsidiaries"), but is not guaranteed by our other subsidiaries (the
"non-guarantor subsidiaries"). The guarantor subsidiaries are all wholly owned,
and the guarantees are made on a joint and several basis and are full and
unconditional subject to a standard limitation which provides that the maximum
amount guaranteed by each guarantor will not exceed the maximum amount
guaranteed without making the guarantee void under fraudulent conveyance laws.
Separate financial statements of the guarantor subsidiaries have not been
presented because management believes it would not be material to investors. The
principal elimination entries eliminate investment in subsidiaries, intercompany
balances and transactions and certain other eliminations to properly eliminate
significant transactions in accordance with our accounting policy for the
principles of consolidated and statement presentation. The condensed
consolidating financial information of the Company and its subsidiaries are as
follows:
Condensed Consolidated Balance Sheet
As of April 30, 2003
---------------------------------------------------------------------
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------------------------------------------------------------------
ASSETS
Accounts receivable - net $ 145,248 $ 60,253 $ 55,812 $ (9,113) $ 252,200
Finance receivables - net -- 24,815 -- 4,121 28,936
Pledged finance receivables -- 167,089 -- -- 167,089
Inventories 65,842 40,676 53,408 (5,758) 154,168
Property, plant and equipment - net 25,210 43,957 11,683 (484) 80,366
Equipment held for rental - net 965 16,747 2,797 -- 20,509
Investment in subsidiaries 244,238 -- 2,679 (246,917) --
Other assets 65,160 37,225 20,962 (852) 122,495
---------------------------------------------------------------------
$ 546,663 $ 390,762 $ 147,341 $ (259,003) $ 825,763
=====================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 107,371 $ 26,502 $ 37,095 $ (17,089) $ 153,879
Long-term debt, less current portion 212,006 -- -- -- 212,006
Limited recourse debt from finance
receivables monetizations,
less current portion -- 113,673 -- -- 113,673
Other liabilities (265,460) 268,675 86,804 11,152 101,171
--------------------------------------------------------------------
Total liabilities 53,917 408,850 123,899 (5,937) 580,729
--------------------------------------------------------------------
Shareholders' equity 492,746 (18,088) 23,442 (253,066) 245,034
--------------------------------------------------------------------
$ 546,663 $ 390,762 $ 147,341 $ (259,003) $ 825,763
====================================================================
15
Condensed Consolidated Balance Sheet
As of July 31, 2002
---------------------------------------------------------------------
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Accounts receivable - net $ 204,161 $ 19,215 $ 37,857 $ (33,424) $ 227,809
Finance receivables - net -- 73,138 -- (197) 72,941
Pledged finance receivables -- 88,688 -- -- 88,688
Inventories 91,649 49,107 25,432 (652) 165,536
Property, plant and equipment - net 31,376 46,874 6,548 (428) 84,370
Equipment held for rental - net 4,263 16,373 488 (145) 20,979
Investment in subsidiaries 248,114 -- 2,659 (250,773) --
Other assets 88,456 15,851 13,809 (198) 117,918
--------------------------------------------------------------------
$ 668,019 $ 309,246 $ 86,793 $ (285,817) $ 778,241
====================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 158,046 $ 31,035 $ 44,902 $ (21,357) $ 212,626
Long-term debt, less current portion 177,309 22 -- -- 177,331
Limited recourse debt from finance
receivables monetizations,
less current portion -- 52,721 -- -- 52,721
Other liabilities (108,932) 221,240 (1,492) (11,295) 99,521
--------------------------------------------------------------------
Total liabilities 226,423 305,018 43,410 (32,652) 542,199
--------------------------------------------------------------------
Shareholders' equity 441,596 4,228 43,383 (253,165) 236,042
--------------------------------------------------------------------
$ 668,019 $ 309,246 $ 86,793 $ (285,817) $ 778,241
====================================================================
Condensed Consolidated Statement of Income
For the Nine Months Ended April 30, 2003
---------------------------------------------------------------------
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 346,175 $ 110,189 $ 88,406 $ (27,200) $ 517,570
Gross profit (loss) 89,690 (6,878) 9,850 (2,803) 89,859
Other expenses (income) 57,398 15,444 8,887 1,410 83,139
Net income (loss) $ 32,292 $ (22,322) $ 963 $ (4,213) $ 6,720
16
Condensed Consolidated Statement of Income
For the Nine Months Ended April 30, 2002
---------------------------------------------------------------------
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 348,350 $ 168,761 $ 62,328 $ (58,193) $ 521,246
Gross profit (loss) 81,632 1,977 5,333 (85) 88,857
Other expenses (income) 64,498 130,499 4,017 (223) 198,791
Net income (loss) $ 17,134 $(128,522) $ 1,316 $ 138 $(109,934)
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended April 30, 2003
---------------------------------------------------------------------
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities $ (29,401) $ (80,111) $ 10,459 $ (946) $ (99,999)
Cash flow from investing activities (3,622) 1,507 (4,427) (71) (6,613)
Cash flow from financing activities 16,159 98,172 17 (17) 114,331
Effect of exchange rate changes on cash 1,109 -- 1,043 453 2,605
--------------------------------------------------------------------
Net change in cash and cash equivalents (15,755) 19,568 7,092 (581) 10,324
Beginning balance 22,949 (19,545) 3,093 (292) 6,205
--------------------------------------------------------------------
Ending balance $ 7,194 $ 23 $ 10,185 $ (873) $ 16,529
====================================================================
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended April 30, 2002
---------------------------------------------------------------------
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities $ 132,224 $ (82,128) $ 3,969 $ (1,430) $ 52,635
Cash flow from investing activities (34,341) (2,076) (3,785) 30,543 (9,659)
Cash flow from financing activities (88,158) 71,881 (1,493) (30,262) (48,032)
Effect of exchange rate changes on cash 191 -- (347) (751) (907)
--------------------------------------------------------------------
Net change in cash and cash equivalents 9,916 (12,323) (1,656) (1,900) (5,963)
Beginning balance 6,034 (1,714) 4,636 298 9,254
--------------------------------------------------------------------
Ending balance $ 15,950 $ (14,037) $ 2,980 $ (1,602) $ 3,291
====================================================================
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We reported net income of $2.2 million, or $.05 per share on a diluted basis,
for the third quarter of fiscal 2003, compared to net income of $0.8 million, or
$.02 per share on a diluted basis, for the third quarter of fiscal 2002. As
discussed below and more fully described in Note 11 of the Notes to Condensed
Consolidated Financial Statements, earnings for the third quarter of fiscal 2003
included charges of $1.8 million ($1.2 million net of tax) related to
repositioning our operations to more appropriately align our costs with our
business activity. Earnings for the third quarter of fiscal 2002 included
restructuring and restructuring-related charges of $6.6 million ($4.4 million
net of tax). In addition, earnings for the third quarter of fiscal 2003 included
favorable currency adjustments of $1.0 million ($0.7 million net of tax).
We reported net income of $6.7 million, or $.16 per share on a diluted basis,
for the first nine months of fiscal 2003, compared to income before the
cumulative effect of change in accounting principle related to the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," of $4.5 million, or $.11 per share on a diluted basis,
for the first nine months of fiscal 2002. Earnings for the first nine months of
fiscal 2003 included restructuring and restructuring-related charges of $3.2
million ($2.2 million net of tax). Earnings for the first nine months of fiscal
2002 included restructuring and restructuring-related charges of $6.6 million
($4.4 million net of tax). In addition, earnings for the first nine months of
fiscal 2003 included favorable currency adjustments of $6.1 million ($4.2
million net of tax).
In the discussion and analysis of financial condition and results of operations
that follows, we attempt to list contributing factors in order of significance
to the point being addressed.
RESULTS FOR THE THIRD QUARTERS OF FISCAL 2003 AND 2002
Our revenues for the third quarter of fiscal 2003 were $205.8 million, down 1.4%
from the $208.7 million in the comparable year-ago period. The following tables
outline our revenues by segment, products and geography (in thousands) for the
quarter ended:
April 30,
2003 2002
--------- ---------
Segment:
Machinery $ 167,630 $ 162,054
Equipment Services 32,835 43,164
Access Financial Solutions (a) 5,305 3,514
--------- ---------
$ 205,770 $ 208,732
========= =========
Product:
Aerial work platforms $ 116,092 $ 124,514
Telehandlers 34,843 20,600
Excavators 16,695 16,940
After-sales service and support, including parts sales, and used and
reconditioned equipment sales 31,652 41,093
Financial products (a) 5,152 3,279
Rentals 1,336 2,306
--------- ---------
$ 205,770 $ 208,732
========= =========
18
Geographic:
United States $ 155,852 $ 158,153
Europe 33,830 37,521
Other 16,088 13,058
--------- ---------
$ 205,770 $ 208,732
========= =========
(a) Revenues for Access Financial Solutions and for financial products are
not the same because Access Financial Solutions also receives revenues
from rental purchase agreements that are recorded for accounting
purposes as rental revenues from operating leases.
The increase in Machinery segment revenues from $162.1 million to $167.6
million, or 3.4%, was principally attributable to increased telehandler sales
from new product introductions, including European-design product offerings. The
increase in telehandler sales was partially offset by decreased sales of aerial
work platforms. The resulting decrease in aerial work platforms was primarily
due to the continued economic pressures in North America and economic pressures
and tightened credit conditions in Europe partially offset by increased sales of
aerial work platforms in the Pacific Rim and Australia. The decrease in
Equipment Services segment revenues from $43.2 million to $32.8 million, or
23.9%, was principally attributable to decreased sales of rental fleet
equipment, partially offset by an increase in used equipment sales. The increase
in Access Financial Solutions segment revenues from $3.5 million to $5.3
million, or 51%, was principally attributable to income received on pledged
finance receivables. While we have increased interest income attributable to our
pledged finance receivables, a corresponding increase in our limited recourse
debt results in this increased interest income being passed on to syndication
purchasers in the form of interest expense on limited recourse debt. In
accordance with the required accounting treatment, payments to syndication
purchasers are reflected as interest expense in our Condensed Consolidated
Statements of Income.
Our domestic revenues for the third quarter of fiscal 2003 were $155.9 million,
down 1.5% from the comparable year-ago period revenues of $158.2 million. The
decrease in our domestic revenues is primarily attributable to lower aerial work
platform and used rental fleet equipment sales partially offset by higher
telehandler sales. Revenues generated from sales outside the United States for
the third quarter of fiscal 2003 were $49.9 million, down 1.3% from the
comparable year-ago period revenues of $50.6 million. The slight decrease in our
revenues generated from sales outside the United States is primarily
attributable to lower aerial work platform sales in Europe due to economic
pressures and customer credit constraints partially offset by increased sales of
aerial work platforms in the Pacific Rim and Australia and increased telehandler
sales in Europe.
Our gross profit margin was 16.8% for the third quarter of fiscal 2003 compared
to the prior year quarter's 16.4%. The increase was primarily attributable to
higher margins in our Equipment Services and Access Financial Solutions
segments, offset in part by lower margins in our Machinery segment. The gross
profit margin of our Machinery segment was 12.9% for the third quarter of fiscal
2003 compared to 14.2% for the third quarter of fiscal 2002. The decrease is
principally due to an increase in inventory reserves, higher warranty costs
associated with extended warranty periods and a less profitable product mix,
partially offset by the weakening of the U.S. dollar against the Euro, British
pound and Australian dollar and pricing stabilization. The gross profit margin
of our Equipment Services segment was 23.8% for the third quarter of fiscal 2003
compared to 18.3% for the corresponding period in the prior year. The increase
is primarily attributable to improved pricing of used equipment, partially
offset by lower sales of rental fleet equipment. The gross profit margin of our
Access Financial Solutions segment was 97.2% for the third quarter of fiscal
2003 compared to 93.7% for the corresponding period in the prior year. The
increase is primarily because of increased financial product revenues during the
third quarter of fiscal 2003 compared to the prior year period. Because the
costs associated with these revenues are principally selling and administrative
expenses and interest expense, gross margins are typically higher in this
segment.
Our selling, administrative and product development expenses as a percent of
revenues were 12% for the current year third quarter compared to 11% for the
prior year third quarter. In dollar terms, these expenses were $1.7 million
19
higher in the third quarter of fiscal 2003 than in the third quarter of fiscal
2002. Our Machinery segment's selling, administrative and product development
expenses increased $1.3 million due primarily to increased bad debt provisions
for specific reserves related to certain customers, higher payroll and related
costs and higher contract services expenses. Our Equipment Services segment's
selling and administrative expenses decreased $0.5 million due primarily to
lower payroll and related costs. Our Access Financial Solutions segment's
selling and administrative expenses decreased $0.5 million due primarily to a
decrease in bad debt expense reflecting lower origination activity and the
reduced non-monetized portfolio exposure. Our general corporate selling,
administrative and product development expenses increased $1.4 million primarily
due to incentive-related accruals, which was partially offset by reductions in
bad debt provisions.
During the second quarter of fiscal 2003, we announced further actions related
to our ongoing longer-term strategy to streamline operations and reduce fixed
and variable costs. As part of our capacity rationalization plan commenced in
early 2001, the 130,000-square foot Sunnyside facility in Bedford, Pennsylvania,
which currently produces selected scissor lift models, will be temporarily idled
and production integrated into our Shippensburg, Pennsylvania facility.
Additionally, reductions in selling, administrative and product development
costs will result from changes in our global organizational and from process
consolidations. When these changes and consolidations are fully implemented, we
expect to generate approximately $20 million in annualized savings at a cost of
$9.4 million, representing a payback of approximately six months.
The announced plan contemplates that we will reduce a total of 189 people
globally and transferring 99 production jobs from the Sunnyside facility in
Bedford to the Shippensburg facility. Production of scissor lifts will be
relocated from our Sunnyside facility and integrated into our newer and more
flexible 300,000-square foot facility in Shippensburg by fiscal year end. As a
result, pursuant to the plan we anticipate incurring a pre-tax charge of $5.9
million, consisting of $3.5 million in restructuring costs associated with
personnel reductions and employee relocation and lease and contract terminations
and $2.4 million in charges related to relocating certain plant assets and
start-up costs. In addition, we will spend approximately $3.5 million on capital
requirements. Almost all of these expenses will be cash charges, which will be
recorded over the three quarters following the quarter ended January 31, 2003.
During the third quarter of fiscal 2003, we incurred approximately $1.8 million
of the pre-tax charge discussed above, consisting of accruals for termination
benefit costs and relocation costs and charges related to relocating certain
plant assets and start-up costs. We reported $1.4 million in restructuring costs
and $0.3 million in cost of sales. During the third quarter of fiscal 2003, we
paid and charged $0.7 million of termination benefits and relocation costs
against the accrued liability.
During the third quarter of fiscal 2002, we announced the closure of our
manufacturing facility in Orrville, Ohio as part of our capacity rationalization
plan for our Machinery segment. Operations at this facility have been integrated
into our McConnellsburg, Pennsylvania facility. As a result, we anticipated
incurring a pre-tax charge of $7.7 million, consisting of $6.1 million in
restructuring costs associated with approximately 170 personnel reductions and
the write-down of idle facilities and $1.6 million in charges related to
relocating certain plant assets and start-up costs associated with the move of
the Orrville operations to the McConnellsburg facility. During the third quarter
of fiscal 2003, we paid and charged $0.1 million of termination benefits and
lease termination costs against the accrued liability.
The increase in interest expense of $3.4 million for the third quarter of fiscal
2003 was primarily due to the interest expense associated with our limited
recourse and non-recourse monetizations, increased rates on our senior
subordinated debt and higher short-term rates on our senior credit facilities.
Our miscellaneous income (deductions) category included currency gains of $1.0
million in the third quarter of fiscal 2003 compared to losses of $0.9 million
in the corresponding prior year period. The increase in currency gains is
primarily attributable to the weakening of the U.S. dollar against the Euro,
British pound and Australian dollar during the third quarter of fiscal 2003.
20
RESULTS FOR THE FIRST NINE MONTHS OF FISCAL 2003 AND 2002
Our revenues for the first nine months of fiscal 2003 were $517.6 million, down
0.7% from the $521.2 million in the comparable year-ago period. The following
tables outline our revenues by segment, products and geography (in thousands)
for the nine months ended:
April 30,
2003 2002
--------- ---------
Segment:
Machinery $ 401,726 $ 414,017
Equipment Services 100,882 96,594
Access Financial Solutions (a) 14,962 10,635
--------- ---------
$ 517,570 $ 521,246
========= =========
Product:
Aerial work platforms $ 287,020 $ 316,574
Telehandlers 81,862 53,328
Excavators 32,844 44,115
After-sales service and support, including parts sales, and used and
reconditioned equipment sales 95,905 89,953
Financial products (a) 14,378 9,386
Rentals 5,561 7,890
--------- ---------
$ 517,570 $ 521,246
========= =========
Geographic:
United States $ 381,122 $ 378,218
Europe 97,894 110,530
Other 38,554 32,498
--------- ---------
$ 517,570 $ 521,246
========= =========
(a) Revenues for Access Financial Solutions and for financial products are
not the same because Access Financial Solutions also receives revenues
from rental purchase agreements that are recorded for accounting
purposes as rental revenues from operating leases.
The decrease in Machinery segment revenues from $414 million to $401.7 million,
or 3%, was principally attributable to reduced sales of aerial work platforms
primarily due to the economic pressures in North America and economic pressures
and tightened credit conditions in Europe partially offset by stronger sales in
Australia. In addition, sales of our excavator product line declined due to the
softness in the United States construction market and reduced state and
municipal budgets. The decrease in sales of aerial work platforms and excavators
was partially offset by increased telehandler sales from new product
introductions, including European-design product offerings. The first nine
months of fiscal 2002 Machinery segment revenues also included the elimination
of previously recorded volume-related customer incentives. The increase in
Equipment Services segment revenues from $96.6 million to $100.9 million, or
4.4%, was principally attributable to increased parts sales and sales of used
equipment, partially offset by decreased sales of rental fleet equipment. The
increase in Access Financial Solutions segment revenues from $10.6 million to
$15 million, or 40.7%, was principally attributable to income received on
pledged finance receivables. While we have increased interest income
attributable to our pledged finance receivables, a corresponding increase in our
limited recourse debt results in this increased interest income being passed on
to syndication purchasers in the form of interest expense on limited recourse
debt. In accordance with the required accounting treatment, payments to
syndication purchasers are reflected as interest expense in our Condensed
Consolidated Statements of Income.
21
Our domestic revenues for the first nine months of fiscal 2003 were $381.1
million, up 0.8% from the comparable year-ago period revenues of $378.2 million.
The increase in our domestic revenues is primarily attributable to higher sales
of telehandlers and parts, and increased revenues from financial products,
partially offset by reduced sales of aerial work platforms primarily due to the
economic pressures in North America and our excavator product line due to the
softness in the United States construction market and reduced state and
municipal budgets. Revenues generated from sales outside the United States for
the first nine months of fiscal 2003 were $136.4 million, down 4.6% from the
comparable year-ago period revenues of $143 million. The decrease in our
revenues generated from sales outside the United States is primarily
attributable to lower aerial work platform sales in Europe due to economic
pressures and customer credit constraints partially offset by increased sales of
aerial work platforms in Australia and increased telehandler sales in Europe.
Our gross profit margin was 17.4% for the first nine months of fiscal 2003
compared to the prior year period's 17%. The increase was primarily attributable
to higher margins in our Machinery and Access Financial Solutions segments,
offset in part by lower margins in our Equipment Services segment. The gross
profit margin of our Machinery segment was 13.4% for the first nine months of
fiscal 2003 compared to 12.8% for the first nine months of fiscal 2002. The
increase is principally due to the weakening of the U.S. dollar against the
Euro, British pound and Australian dollar, pricing stabilization and a more
profitable product mix mainly as a result of new product introductions,
partially offset by an increase in inventory reserves, higher warranty costs
associated with extended warranty periods and higher product costs as a result
of production variances consisting mainly of under-absorbed overhead and higher
labor costs associated with the startup of our Maasmechelen facility and the
transfer of the telehandler product line to our McConnellsburg facility. The
gross profit margin of our Equipment Services segment was 21.2% for the first
nine months of fiscal 2003 compared to 27% for the corresponding period in the
prior year. The decrease is primarily attributable to higher used equipment
sales and the deferred profit recognized during the first nine months of fiscal
2002 from a one-time rental fleet sale-leaseback transaction. The gross profit
margin of our Access Financial Solutions segment was 96.8% for the first nine
months of fiscal 2003 compared to 92.7% for the corresponding period in the
prior year. The increase is primarily because of increased financial product
revenues during the first nine months of fiscal 2003 compared to the prior year
period. Because the costs associated with these revenues are principally selling
and administrative expenses and interest expense, gross margins are typically
higher in this segment.
Our selling, administrative and product development expenses as a percent of
revenues were 12.8% for the first nine months of fiscal 2003 compared to 12.6%
for the first nine months of fiscal 2002. In dollar terms, these expenses were
$0.8 million higher in the first nine months of fiscal 2003 than in the
corresponding period of the previous year. Our Machinery segment's selling,
administrative and product development expenses increased $0.9 million due
primarily to increased bad debt provisions for specific reserves related to
certain customers and higher contract services expenses, which were partially
offset by lower payroll and related costs due to our cost reduction initiatives.
Our Equipment Services segment's selling and administrative expenses decreased
$0.8 million due primarily to lower payroll and related costs. Our Access
Financial Solutions segment's selling and administrative expenses decreased $0.6
million due primarily to decreases in bad debt provisions reflecting lower
origination activity and the reduced non-monetized portfolio exposure, which was
partially offset by an increase in contract services expenses. Our general
corporate selling, administrative and product development expenses increased
$1.4 million primarily due to incentive-based accruals and higher payroll and
related costs, which were partially offset by reductions in bad debt provisions,
depreciation expense and computer software costs.
During the first nine months of fiscal 2003, we incurred approximately $3.0
million of the pre-tax charge related to the temporarily idling of our Bedford,
Pennsylvania facility, discussed above, consisting of an accrual for termination
benefit costs and relocation costs and charges related to relocating certain
plant assets and start-up costs. We reported $2.6 million in restructuring costs
and $0.3 million in cost of sales. During the first nine months of fiscal 2003,
we paid and charged $0.8 million of termination benefits and relocation costs
against the accrued liability.
22
During the first nine months of fiscal 2003, we incurred $0.2 million of the
pre-tax charge related to our closure of the Orrville, Ohio facility, discussed
above, consisting of production relocation costs, which were reported in cost of
sales. In addition, during the first nine months of fiscal 2003, we paid and
charged $1.0 million of termination benefits and lease termination costs against
the accrued liability. Through the first nine months of fiscal 2003, we incurred
$6.9 million of the pre-tax charge consisting of an accrual of $1.2 million for
termination benefit costs and a $4.9 million asset write-down and $0.9 million
of production relocation costs.
The increase in interest expense of $6.6 million for the first nine months of
fiscal 2003 was primarily due to the interest expense associated with our
limited recourse and non-recourse monetizations, increased rates on our senior
subordinated debt and higher short-term rates on our senior credit facilities.
Our miscellaneous income (deductions) category included currency gains of $6.1
million in the first nine months of fiscal 2003 compared to losses of $0.5
million in the corresponding prior year period. The increase in currency gains
is primarily attributable to the significant weakening of the U.S. dollar
against the Euro, British pound and Australian dollar during the first nine of
fiscal 2003.
During the fourth quarter of fiscal 2002, we completed our review of our
goodwill impairment as required by SFAS No. 142. As a result, we recorded a
transitional impairment loss, in accordance with the transition rules of SFAS
No. 142, of $114.5 million, primarily associated with our Gradall Industries,
Inc. acquisition. Pursuant to the requirements of SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements," we have restated the fiscal
2002 interim statements to reflect the transitional impairment loss as if the
accounting change had occurred during the first quarter of fiscal 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires our management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and related notes. Future events and their effects cannot
be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.
We believe that of our significant accounting policies, the following may
involve a higher degree of judgment, estimation, or complexity than other
accounting policies.
Allowance for Doubtful Accounts and Reserves for Finance Receivables: We
evaluate the collectibility of accounts and finance receivables based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations, a specific reserve is
recorded against amounts due to reduce the net recognized receivable to the
amount reasonably expected to be collected. Additional reserves are established
based upon our perception of the quality of the current receivables, the current
financial position of our customers and past experience of collectibility. If
the financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances would be
required.
Income Taxes: We record the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and amounts reported
in the accompanying consolidated balance sheets, as well as operating loss and
tax credit carry-forwards. We evaluate the recoverability of any tax assets
recorded on the balance sheet and provide any necessary allowances as required.
The carrying value of the net deferred tax assets assumes that we will be able
to generate sufficient future taxable income in certain tax jurisdictions, based
on estimates and assumptions. If these estimates and related assumptions change
in the future, we may be required to record additional valuation allowances
against our deferred tax assets resulting in additional income tax expense in
our consolidated statement of operations. In assessing the realizability of
deferred tax assets, we consider whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable income,
carry back opportunities, and tax planning strategies in making the assessment.
We
23
evaluate the ability to realize the deferred tax assets and assess the need for
additional valuation allowances quarterly.
Inventory Valuation: Inventories are valued at the lower of cost or market.
Certain items in inventory may be considered impaired, obsolete or excess, and
as such, we may establish an allowance to reduce the carrying value of these
items to their net realizable value. Based on certain estimates, assumptions and
judgments made from the information available at that time, we determine the
amounts in these inventory allowances. If these estimates and related
assumptions or the market change, we may be required to record additional
reserves.
Goodwill: We perform a goodwill impairment test on at least an annual basis and
more frequently in certain circumstances. We cannot predict the occurrence of
certain events that might adversely affect the reported value of goodwill that
totaled $29.5 million at April 30, 2003 and $28.8 million at July 31, 2002. Such
events may include, but are not limited to, strategic decisions made in response
to economic and competitive conditions, the impact of the economic environment
on our customer base, or a material negative change in a relationship with a
significant customer.
Guarantees of the Indebtedness of Others: We enter into agreements with finance
companies whereby our equipment is sold to a finance company which, in turn,
sells or leases it to a customer. In some instances we retain a liability in the
event the customer defaults on the financing. Under certain terms and conditions
where we are aware of a customer's inability to meet its financial obligations,
we establish a specific reserve against the liability. Additional reserves have
been established related to these guarantees based upon the current financial
position of these customers and based on estimates and judgments made from
information available at that time. If the financial condition of our customers
were to deteriorate resulting in an impairment of their ability to make
payments, additional allowances would be required. Although we are liable for
the entire amount under guarantees, our losses would be mitigated by the value
of the underlying collateral.
Long-Lived Assets: We evaluate the recoverability of property, plant and
equipment and intangible assets other than goodwill whenever events or changes
in circumstances indicate the carrying amount of any such assets may not be
fully recoverable. Changes in circumstances include technological advances,
changes in our business model, capital strategy, economic conditions or
operating performance. Our evaluation is based upon, among other things,
assumptions about the estimated future undiscounted cash flows these assets are
expected to generate. When the sum of the undiscounted cash flows is less than
the carrying value, we would recognize an impairment loss. We continually apply
our best judgment when performing these valuations to determine the timing of
the testing, the undiscounted cash flows used to assess recoverability and the
fair value of the asset.
Pension and Postretirement Benefits: Pension and postretirement benefit costs
and obligations are dependent on assumptions used in calculation of these
amounts. These assumptions, used by actuaries, include discount rates, expected
return on plan assets for funded plans, rate of salary increases, health care
cost trend rates, mortality rates and other factors. In accordance with
accounting principles generally accepted in the United States, actual results
that differ from the actuarial assumptions are accumulated and amortized to
future periods and therefore generally affect recognized expense and recorded
obligations in future periods. While we believe that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may
materially effect our financial position or results of operations.
Product liability: Our business exposes us to possible claims for personal
injury or death and property damage resulting from the use of equipment that we
rent or sell. We maintain insurance through a combination of self-insurance
retentions, primary insurance and excess insurance coverage. We monitor claims
and potential claims of which we become aware and establish liability reserves
for the self-insurance amounts based on our liability estimates for such claims.
Our liability estimates with respect to claims are based on internal evaluations
of the merits of individual claims and the reserves assigned by our independent
insurance claims adjustment firm. The methods of making such estimates and
establishing the resulting accrued liability are reviewed frequently, and
24
adjustments resulting therefrom are reflected in current earnings. If these
estimates and related assumptions change, we may be required to record
additional reserves.
Revenue Recognition: Sales of equipment and service parts are generally
unconditional sales that are recorded when product is shipped and invoiced to
independently owned and operated distributors and customers. Normally our sales
terms are "free-on-board" shipping point (FOB shipping point). However, certain
sales may be invoiced prior to the time customers take physical possession. In
such cases, revenue is recognized only when the customer has a fixed commitment
to purchase the equipment, the equipment has been completed and made available
to the customer for pickup or delivery, and the customer has requested that we
hold the equipment for pickup or delivery at a time specified by the customer.
In such cases, the equipment is invoiced under our customary billing terms,
title to the units and risks of ownership passes to the customer upon invoicing,
the equipment is segregated from our inventory and identified as belonging to
the customer and we have no further obligations under the order. During the
first nine months of fiscal 2003, approximately 2% of our sales were invoiced
and the revenue recognized prior to customers taking physical possession.
Revenue from certain equipment lease contracts is accounted for as sales-type
leases. The present value of all payments, net of executory costs (such as legal
fees), is recorded as revenue and the related cost of the equipment is charged
to cost of sales. The associated interest is recorded over the term of the lease
using the interest method. In addition, net revenues include rental revenues
earned on the lease of equipment held for rental. Rental revenues are recognized
in the period earned over the lease term.
Warranty: We establish reserves related to warranties we provide on our
products. Specific reserves are maintained for programs related to machine
safety and reliability issues. Estimates are made regarding the size of the
population, the type of program, costs incurred by us and estimated
participation. Additional reserves are maintained based on the historical
percentage relationships of such costs to machine sales and applied to current
equipment sales. If these estimates and related assumptions change, we may be
required to record additional reserves.
Additional information regarding our critical accounting policies is in the note
entitled "Summary of Significant Accounting Policies" to the Notes to
Consolidated Financial Statements included in our annual report on Form 10-K for
the fiscal year ended July 31, 2002.
FINANCIAL CONDITION
Cash flow used in operating activities was $100 million for the first nine
months of fiscal 2003 compared to cash generated of $52.6 million in the
comparable period of fiscal 2002. The decrease in cash generated from operations
for fiscal 2003 primarily resulted from lower trade account payables largely
resulting from the timing of payments and increased finance receivables
resulting from new originations. During the first nine months of fiscal 2003, we
monetized $95.1 million in finance receivables through syndications. In
addition, the first nine months of fiscal 2003 includes $6.2 million received
from the early termination of our $87.5 million notional interest rate swap
agreement. See the discussion below.
Investing activities during the first nine months of fiscal 2003 used $6.6
million of cash compared to $9.7 million used for the first nine months of
fiscal 2002. The decrease in cash usage was principally due to lower
expenditures for equipment held for rental and property, plant and equipment
during the first nine months of fiscal 2003 partially offset by a decrease in
sales of equipment held for rental during the first nine months of fiscal 2003
compared to the corresponding prior year period.
Financing activities provided cash of $114.3 million for the first nine months
of fiscal 2003 compared to $48 million used for the first nine months of fiscal
2002. The increase in cash provided by financing activities was largely
attributable to increased debt used to finance working capital requirements as
discussed above.
25
The following table provides a summary of our contractual obligations (in
thousands) at April 30, 2003:
Payments Due by Period
--------------------------------------------------
Less than After 5
Total 1 Year 1-3 Years 4-5 Years Years
--------- -------- --------- --------- ---------
Short and long-term debt (a) $ 212,918 $ 912 $ 31,911 $ 1,635 $ 178,460
Limited recourse debt 164,653 50,980 68,223 40,352 5,098
Operating leases (b) 26,527 5,656 10,819 7,561 2,491
--------- -------- --------- -------- ---------
Total contractual obligations $ 404,098 $ 57,548 $ 110,953 $ 49,548 $ 186,049
========= ======== ========= ======== =========
(a) Included in long-term debt is our secured revolving credit facility with a
group of financial institutions that provide an aggregate commitment of
$250 million. We also have a $25 million secured bank revolving line of
credit with a term of one year, renewable annually. The credit facilities
contain customary affirmative and negative covenants including financial
covenants requiring the maintenance of specified consolidated interest
coverage, leverage ratios and a minimum net worth. If we were to become in
default of these covenants, the financial institutions could call the
loans. In connection with the sale of $125 million of senior unsecured
notes, our revolving credit facilities were amended to, among other things,
reduce the commitment under our $250 million revolving credit facility to
$150 million. See discussion below.
(b) In accordance with SFAS No. 13, "Accounting for Leases," operating lease
obligations are not reflected in the balance sheet.
The following table provides a summary of our other commercial commitments (in
thousands) at April 30, 2003:
Amount of Commitment Expiration Per Period
--------------------------------------------------
Total
Amounts Less than Over 5
Committed 1 Year 1-3 Years 4-5 Years Years
--------- --------- --------- --------- --------
Standby letters of credit $ 4,132 $ 4,132 $ -- $ -- $ --
Guarantees (a) 115,711 84 36,325 61,398 17,904
--------- ------- --------- --------- --------
Total commercial commitments $ 119,843 $ 4,216 $ 36,325 $ 61,398 $ 17,904
========= ======= ========= ========= ========
(a) We discuss our guarantee agreements in Note 12 of Notes to Condensed
Consolidated Financial Statements of this report.
Our principle sources of liquidity are cash generated from operations,
borrowings under our credit facilities and monetizations of finance receivables.
Subsequent to the third quarter, in May 2003, we sold $125 million principal
amount of our 8 1/4% senior unsecured notes due 2008. To allow the issuance of
the senior unsecured notes, we entered into amendments, which became effective
concurrently with the closing of the senior unsecured notes, to our $250 million
revolving credit facility and $25 million overdraft facility that give us
greater flexibility with respect to certain financial ratios and reduce the
maximum borrowings available under the $250 million facility to $150 million.
The net proceeds of the offering were used to repay outstanding debt under our
$150 million revolving credit facility with the balance to be used for general
corporate purposes. As of April 30, 2003, we had unused credit lines totaling
$244.7 million, which does not take into consideration the $100 million
reduction to the revolving credit facility that became effective in May 2003. In
order to meet our future cash requirements, we intend to borrow under our credit
facilities and to use internally generated funds and unallocated proceeds from
the sale of the senior unsecured notes. Availability of these credit lines
depends upon our continued compliance with certain covenants, including certain
financial ratios. We are currently in compliance with all financial covenants,
including negative covenants, in our senior credit facilities.
26
We also borrow under our credit lines to fund originations of customer finance
receivables in our Access Financial Solutions segment. Our senior lenders have
agreed to permit Access Financial Solutions to originate and have outstanding no
more than $150 million in finance receivables, other than pledged receivables
that secure on-balance sheet, limited recourse and non-recourse monetization
transactions. As of April 30, 2003, we had finance receivables outstanding of
$28.9 million. Our business plan anticipates that we will originate
substantially more than $150 million in finance receivables. Accordingly, our
plan requires that we be able to monetize our finance receivables through
various means, including syndications, securitizations or other limited or
non-recourse transactions. We do not have in place any guaranteed facility to
monetize all of our finance receivables, and there can be no assurance that we
will be able to monetize sufficient finance receivables to avoid being
constrained by the $150 million limit imposed in our senior credit facilities.
However, during the first nine months of fiscal 2003 and during all of fiscal
2002, we monetized $95.1 million and $101.7 million, respectively, in finance
receivables through syndications. And, we are continuing to examine other
alternatives for Access Financial Solutions, including programs with third-party
commercial finance providers which would offer a consistent source of financing
to our customers that meet agreed upon credit criteria and thereby reduce the
amount of finance receivables that we would generate.
As discussed in Note 12 of the Notes to Condensed Consolidated Financial
Statements of this report, we are a party to multiple agreements whereby we
guarantee $115.7 million in indebtedness of others. If the financial condition
of our customers were to deteriorate resulting in an impairment of their ability
to make payments, additional allowances would be required.
Our exposure to product liability claims is discussed in Note 12 of the Notes to
Condensed Consolidated Financial Statements of this report. Future results of
operations, financial condition and liquidity may be affected to the extent that
our ultimate exposure with respect to product liability varies from current
estimates.
There can be no assurance, that unanticipated events will not require us to
increase the amount we have accrued for any matter or accrue for a matter that
has not been previously accrued because it was not considered probable.
OUTLOOK
This Outlook section and other parts of this Management's Discussion and
Analysis contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
identified by words such as "may," "believes," "expects," "plans" and similar
terminology. These statements are not guarantees of future performance, and
involve a number of risks and uncertainties that could cause actual results to
differ materially from those indicated by the forward-looking statements.
Important factors that could cause actual results to differ materially from
those suggested by the forward-looking statements which include, but are not
limited to, the following: (i) general economic and market conditions; (ii)
varying and seasonal levels of demand for our products and services; (iii)
competition and a consolidating customer base; (iv) risks from our customer
activities and limits on our abilities to finance customer purchases; (v)
interest and foreign currency exchange rates; (vi) costs of raw materials and
energy; and (vii) product liability and other litigation, as well as other risks
as described in "Cautionary Statements Pursuant to the Securities Litigation
Reform Act" which is an exhibit to this report. Actual future results could
differ materially from those projected herein. We undertake no obligation to
publicly update or revise any forward-looking statements.
Manufacturers Alliance/MAPI reports that the overhang of excess capacity in most
industries, coupled with the loss of confidence by business leaders due to
external factors such as war, is restraining the strength of capital spending
recovery in this cycle. In addition, as we have said throughout this
recessionary period, our customers' ability to refresh their fleets continues to
depend on recovery in non-residential construction, available financing and used
equipment pricing.
While non-residential construction, one of our leading indicators, remains
sluggish, we are encouraged by recent reports that calendar 2003 is expected to
be a transition year for non-residential construction with relatively stable
levels anticipated in 2004. We are encouraged by recent reports of increasing
activity in non-residential projects.
27
According to a recent report by the Chief Economist with the American Institute
of Architects, commercial and industrial sectors are going through some changes
that will ensure better performance next year with the institutional sector
seeing relatively stable levels in construction for the remainder of 2003 and
through 2004.
Of key importance, is our ongoing ability to supply our customers not only with
premium products, but also with value-added services, including ongoing
successful monetization transactions from Access Financial Solutions. We will
continue to focus on strengthening our relationships with some of our key
funding sources to enhance our ability to consistently satisfy our customers'
needs for equipment financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates, which could affect our future results of operations and
financial condition. We manage exposure to these risks principally through our
regular operating and financing activities.
We are exposed to changes in interest rates as a result of our outstanding debt.
In June 2002, we entered into an $87.5 million notional fixed-to-variable
interest rate swap agreement with a fixed rate receipt of 8 3/8% in order to
mitigate our interest rate exposure. The basis of the variable rate paid was the
London Interbank Offered Rate (LIBOR) plus 2.76%. During the third quarter of
fiscal 2003, we terminated this $87.5 million notional interest rate swap
agreement, which resulted in a deferred gain of $6.2 million. This $6.2 million
deferred gain will offset interest expense over the remaining life of the debt.
At April 30, 2003, we had no interest rate swap agreements outstanding. Total
interest bearing liabilities at April 30, 2003 consisted of $30.3 million in
variable-rate borrowing and $347.3 million in fixed-rate borrowing. At the
current level of variable rate borrowing, a hypothetical 10% increase in
interest rates would decrease pre-tax current year earnings by approximately
$0.1 million on an annual basis. A hypothetical 10% change in interest rates
would not result in a material change in the fair value of our fixed-rate debt.
We do not have a material exposure to financial risk from using derivative
financial instruments to manage our foreign currency exposures. For additional
information, we refer you to Item 7 in our annual report on Form 10-K for the
fiscal year ended July 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934). Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are, to the best of their knowledge, effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
INTERNAL CONTROLS
Our Chief Executive Officer and Chief Financial Officer determined that there
were no significant changes in our internal controls or in other factors that
could significantly affect our disclosure controls and procedures subsequent to
the date of their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls. As a result, no corrective actions
were undertaken.
28
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
JLG Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of JLG
Industries, Inc. as of April 30, 2003, and the related condensed consolidated
statements of income and cash flows for the three-month and nine-month periods
ended April 30, 2003 and 2002. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of JLG Industries,
Inc. as of July 31, 2002, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein), and in our report dated September 16, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of July 31, 2002, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Baltimore, Maryland
May 14, 2003
29
PART II OTHER INFORMATION
ITEMS 1 - 5
None/not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
4 Indenture dated as of May 5, 2003, by and among JLG
Industries, Inc., the Note Guarantors party thereto, and The
Bank of New York, as Trustee.
10 Amendment number three under Amended and Restated Credit
Agreement, dated April 28, 2003, by and among, JLG Industries,
Inc., JLG Equipment Services, Inc., JLG Manufacturing, LLC,
Fulton International, Inc., Gradall Industries, Inc., The
Gradall Company, Access Financial Solutions, Inc., JLG Europe
BV, JLG Manufacturing Europe BVBA as Borrowers, the Lenders
(as defined herein), Wachovia Bank, National Association, as
Administrative Agent and Documentation Agent, and Bank One,
Michigan, as Syndication Agent.
12 Statement Regarding Computation of Ratios
15 Letter re: Unaudited Interim Financial Information
99.1 Cautionary Statements Pursuant to the Securities Litigation
Reform Act
99.2 Certification of the Chief Executive Officer
99.3 Certification of the Chief Financial Officer
(b) We filed a Current Report on Form 8-K on February 26, which included our
Press Release dated February 24, 2003. The items reported on such Form 8-K
were Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits).
We filed a Current Report on Form 8-K on April 25, 2003, which included our
Press Release dated April 25, 2003. The items reported on such Form 8-K were
Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits). We
filed a Current Report on Form 8-K on April 29, 2003, which included our
Press Release dated April 29, 2003. The items reported on such Form 8-K were
Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits). We
filed a Current Report on Form 8-K on April 29, 2003. The item reported on
such Form 8-K was Item 5. (Other Events).
30
SIGNATURES
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.
JLG INDUSTRIES, INC.
(Registrant)
Date: May 29, 2003 /s/ James H. Woodward, Jr.
---------------------------------
James H. Woodward, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 29, 2003 /s/ John W. Cook
---------------------------------
John W. Cook
Chief Accounting Officer
(Chief Accounting Officer)
31
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, William M. Lasky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of JLG Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 29, 2003
/s/ William M. Lasky
--------------------
William M. Lasky
Chairman, President and Chief Executive Officer
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, James H. Woodward, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of JLG Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 29, 2003
/s/ James H. Woodward, Jr.
--------------------------
James H. Woodward, Jr.
Executive Vice President and Chief Financial Officer