Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended June 29, 2002
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 0-22053
GENERAL BEARING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2796245
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 High Street, West Nyack, New York 10994
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 358-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
(Title of class)
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. |X| Yes |_| No
At August 5, 2002, the Registrant had issued 7,100,950 shares of common stock,
$.01 par value per share, and had outstanding 3,886,130 shares.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
FOR THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements, which are statements other than those of
historical fact, including, without limitation, ones identified by the use of
the words: "anticipates," "estimates," "believes," "expects," "intends,"
"plans," "predicts," and similar expressions. In this Quarterly Report such
statements may relate, among other things, to the recoverability of deferred
taxes, likely industry trends, the continued availability of credit lines, the
suitability of facilities, access to suppliers and implementation of joint
ventures and marketing programs. Such forward looking statements involve
important risks and uncertainties that could cause actual results to differ
materially from those expected by the Company, and such statements should be
read along with the cautionary statements accompanying them and mindful of the
following additional risks and uncertainties possibly affecting the Company: the
possibility of a general economic downturn, which is likely to have an important
impact on historically cyclical industries such as manufacturing; significant
price, quality or marketing efforts from domestic or overseas competitors; the
loss of, or substantial reduction in, orders from a major customer; the loss of,
or failure to attain additional quality certifications; changes in U.S. or
foreign government regulations and policies, including the imposition of
antidumping orders on the Company or any of its suppliers; a significant
judgment or order against the Company in a legal or administrative proceeding;
and potential delays in implementing planned sales and marketing expansion
efforts and the failure of their effectiveness upon implementation.
GENERAL BEARING CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 29, 2002
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Financial Statements .......................................2 - 11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.........................12 - 17
PART II
Item 1. Legal Proceedings...............................................18
Item 6. Exhibits and Reports on Form 8-K................................18
Certification and Signature...................................................19
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
Item 1. CONSOLIDATED BALANCE SHEETS
(In Thousands - Except for Shares and Per Share Data)
June 29, Dec. 29,
2002 2001
-------- --------
ASSETS (Unaudited)
Current:
Cash and cash equivalents $ 3,216 $ 1,847
Accounts receivable - net of allowance for doubtful
accounts of $537 and $874 13,146 13,355
Inventories 28,582 30,116
Prepaid expenses and other current assets 5,366 4,756
Advances to affiliates 174 114
Deferred tax assets 631 631
-------- --------
Total current assets 51,115 50,819
Fixed assets, net of accumulated depreciation 22,072 22,049
Investment in and advances to joint ventures
and affiliates 3,201 2,841
Other assets 930 915
-------- --------
Total Assets $ 77,318 $ 76,624
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Bank - revolving line of credit 12,962 --
Note payable - banks 6,316 5,415
Accounts payable:
Trade 7,810 9,781
Affiliates 176 306
Accrued expenses and other current liabilities 6,104 4,660
Current maturities of long-term debt 391 381
-------- --------
Total current liabilities 33,759 20,543
-------- --------
Long-term debt, net of current maturities 7,995 20,580
Other long-term liabilities - affiliate 405 491
Deferred taxes 294 320
Minority interests 9,923 10,119
Commitments and contingencies
Stockholders' equity:
Preferred stock par value $.01 per share - shares
authorized 1,000,000 none issued and outstanding -- --
Common stock par value $.01 per share - shares
authorized 19,000,000, issued 7,100,950 and
7,088,950 shares 71 71
Additional paid-in capital 40,128 40,094
Accumulated other comprehensive loss (836) (737)
Treasury stock at cost, 3,208,070 and 3,040,270 shares (904) (276)
Deficit (13,517) (14,581)
-------- --------
Total stockholders' equity 24,942 24,571
-------- --------
Total liabilities and stockholder's equity $ 77,318 $ 76,624
======== ========
See accompanying notes to condensed consolidated financial statements
2
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands - Except for Shares and Per Share Data)
(Unaudited)
Twenty-six weeks ended Thirteen weeks ended
-------------------------- -----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- ----------- -----------
Sales $ 34,341 $ 28,502 $ 16,294 $ 14,937
Cost of sales 23,937 19,052 11,377 10,046
---------- ---------- ----------- -----------
Gross profit 10,404 9,450 4,917 4,891
Selling, general and administrative expenses 7,644 6,978 4,052 3,433
---------- ---------- ----------- -----------
Operating income 2,760 2,472 865 1,458
Other expense, net 1,040 1,318 524 1,349
---------- ---------- ----------- -----------
Income before income taxes 1,720 1,154 341 109
Income taxes 591 233 286 (132)
---------- ---------- ----------- -----------
Income before minority interests 1,129 921 55 241
Minority interests 66 426 (152) 270
---------- ---------- ----------- -----------
Net income / (loss) $ 1,063 $ 495 $ 207 $ (29)
========== ========== =========== ===========
Net income / (loss) per common share:
Basic $ 0.27 $ 0.12 $ 0.05 $ (0.01)
---------- ---------- ----------- -----------
Diluted $ 0.27 $ 0.12 $ 0.05 $ (0.01)
---------- ---------- ----------- -----------
Weighted average number of common shares:
Basic 4,001,759 4,121,529 3,968,036 4,128,650
---------- ---------- ----------- -----------
Diluted 4,010,854 4,121,735 3,983,859 4,128,650
---------- ---------- ----------- -----------
See accompanying notes to condensed consolidated financial statements
3
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Twenty-six weeks ended Thirteen weeks ended
------------------------ -----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- -------- -------- --------
Net income $ 1,063 $ 495 $ 207 $ (29)
Foreign currency translation adjustment 0 0 0 0
Derivative fair market value adjustment (99) (56) (193) 127
--------- -------- -------- --------
Comprehensive income $ 964 $ 439 $ 14 $ 98
========= ======== ======== ========
See accompanying notes to condensed consolidated financial statements
4
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Twenty-six weeks ended
------------------------------
June 29, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net income $ 1,063 $ 495
Adjustments to reconcile net income to cash provided
by operating activities:
Minority interests 66 426
Depreciation and amortization 925 380
Deferred income taxes (26) (36)
Equity in income of joint ventures and affiliates (68) (27)
Other non-cash items charged to income 34 100
(Gain) / loss on sales of fixed assets (4) 88
Changes in:
Accounts receivable 209 (1,138)
Inventories 1,534 4,694
Prepaid expenses and other assets (859) (79)
Due to (from) affiliates (266) 95
Accounts payable and accrued expenses (871) (2,732)
------- -------
Net cash provided by operating activities 1,737 2,266
------- -------
Cash flows from investing activities:
Investment in affiliate (101) --
Advances to affiliates, net -- (1,326)
Fixed asset purchases (901) (527)
Net proceeds from sale of fixed assets 10 46
------- -------
Net cash used in investing activities: (992) (1,807)
------- -------
Cash flows from financing activities:
Purchase of treasury stock (628) --
Net proceeds from (repayment of) note payable - banks 1,089 (53)
Repayment of other long-term debt (52) (89)
Net proceeds from (repayment of) revolving credit facility 215 13
------- -------
Net cash provided by (used in) financing activities 624 (129)
------- -------
Net increase in cash and cash equivalents 1,369 330
Cash and cash equivalents, beginning of period 1,847 497
------- -------
Cash and cash equivalents, end of period $ 3,216 $ 827
======= =======
Cash paid during the period for:
Interest $ 806 $ 389
======= =======
Income taxes $ 72 $ 306
======= =======
5
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of The accompanying unaudited condensed consolidated
Presentation financial statements for General Bearing Corporation and
subsidiaries ("the Company") have been prepared in
accordance with generally accepted accounting principles
for interim financial information and with the
instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered
necessary for a fair presentation have been included.
Operating results for the twenty-six weeks ended June
29, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 28,
2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year
ended December 29, 2001.
The Company uses an interest rate swap agreement as a
derivative to modify the interest characteristics of its
outstanding floating rate debt, to reduce its exposure
to fluctuations in interest rates. The Company's
accounting policies for these instruments are based on
its designation of such instruments as hedging
transactions. The Company does not enter into such
contracts for speculative purposes. The Company records
all derivatives on the balance sheet at fair value.
For derivative instruments that are designated and
qualify as a fair value hedge (i.e. hedging the exposure
to changes in the fair value of an asset or a liability
or an identified portion thereof that is attributable to
a particular risk), the gain or loss on the derivative
instrument as well as the offsetting gain or loss on the
hedged item attributable to the hedged risk are
recognized in earnings in the current period. For
derivative instruments that are designated and qualify
as a cash flow hedge (i.e. hedging the exposure of
variability of expected future cash flows that is
attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument
is reported as a component of Accumulated Comprehensive
Income (a component of stockholders' equity) and
reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument,
if any (i.e. the ineffective portion of any portion of
the derivative excluded from the assessment of
effectiveness) is recognized in earnings in the current
period. For derivative instruments not designated as
hedged instruments, changes in their fair values are
recognized in earnings in the current period.
6
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Investment Ningbo General Bearing Company, Ltd. ("NGBC"),
in Equity established in 1998 for an initial term of sixteen
Holdings years, is a joint venture with China Ningbo Genda
Bearing Company, Ltd. Located in Yuyao City, Peoples
Republic of China ("PRC"), this venture manufactures
ball and roller bearings and their components. Initially
a 33% owned joint venture of General Bearing Corporation
("General"), General increased its ownership to 42% in
2000 by contributing an additional $650,000 in cash. In
July 2001, General increased its ownership to 50% by
contributing $1.2 million in cash and General assumed
control of management of the operations. Operations
since July 2001 have been fully consolidated in the
financial statements.
NN General, LLC ("NNG") was established in March 2000 to
hold as its primary asset, a 60% interest in Jiangsu
General Ball & Roller Company, Ltd. ("JGBR"). Initially,
NNG was a 50% owned joint venture with an unrelated
party. General's initial cash investment in NNG was
$100,000. General also advanced NNG loans amounting to
approximately $2,440,000. On December 27, 2001, the
owners of NNG contributed all loans and accrued interest
advanced to NNG to NNG's capital and General purchased
the partner's 50% interest for cash and notes valued at
approximately $3.9 million (book value), increasing
General's underlying interest in JGBR back to 60%.
JGBR, established in 1999 in Rugao City, China, is a
joint venture with Jiangsu Lixing Steel Ball Factory
("JSBF"), an unrelated party. JGBR manufactures rolling
elements for bearings. Effective with General's
acquisition of its partner's interest in NNG, the
Company has consolidated the balance sheet of JGBR at
December 29, 2001. The Company has recorded income from
its investment in JGBR at December 29, 2001 on the
equity method. Effective December 30, 2001 operations of
JGBR have been fully consolidated.
3. Inventories Inventories consist of the following: (In Thousands)
June 29, 2002 December 29, 2001
------------------------------------------------------------------------
Finished Goods $10,447 $ 9,096
Bearing raw materials, purchased
parts and work in process 13,509 16,824
Machines and machine tools 1,956 2,457
Machine service parts and
accessories 2,670 1,739
------------------------------------------------------------------------
$28,582 $30,116
========================================================================
7
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Earnings per Basic earnings per share includes no dilution and is
Share computed by dividing net income by the weighted average
number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which
they have a dilutive effect, the dilution which would
occur upon the exercise of stock options. A
reconciliation of the shares used in calculating basic
and diluted earnings per share follows:
Twenty-six Weeks Ended
--------------------------------
June 29, 2002 June 30, 2001
----------------------------------------------------------------------------------
Diluted earnings per share
computation:
Basic weighted average common
shares outstanding 4,001,759 4,121,529
Incremental shares from assumed
exercise of dilutive options 9,095 206
----------------------------------------------------------------------------------
4,010,854 4,121,735
==================================================================================
Thirteen Weeks Ended
--------------------------------
June 29, 2002 June 30, 2001
----------------------------------------------------------------------------------
Diluted earnings per share
computation:
Basic weighted average common
shares outstanding 3,968,036 4,128,650
Incremental shares from assumed
exercise of dilutive options 15,823 -
----------------------------------------------------------------------------------
3,983,859 4,128,650
==================================================================================
For the twenty-six weeks ended June 29, 2002 and June
30, 2001, 287,800 and 332,800 options and warrants
outstanding, respectively, were anti-dilutive. For the
thirteen weeks ended June 29, 2002 and June 30, 2001,
197,800 and 427,800 options and warrants outstanding,
respectively, were anti-dilutive.
8
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Derivative On December 30, 2000, the Company adopted Statement of
Financial Financial Accounting Standards No. 133 ("SFAS 133")
Instruments "Accounting for Derivative Instruments and Hedging
Activities", as amended, and interpreted, which requires
that all derivative instruments be recorded on the
balance sheet at their fair value. The impact of
adopting SFAS 133 on the Company's Statement of
Operations and Balance Sheet was not material.
In addition, to manage it's exposure to changes in
interest rates, the Company has entered into an interest
rate swap agreement to hedge a portion of its total debt
that is subject to variable interest rates. These
contracts are considered to be a hedge against changes
in the amount of future cash flows associated with the
interest payments on variable rate debt obligations.
Expenses recognized in earnings during the period
relating to the interest rate swap totaled $213,000 for
the twenty-six weeks ended June 29, 2002 and are
included in the Statement of Operations in Other
expenses, net. Any values reported in Comprehensive
Income will be reclassified to earnings over the term of
the agreement, through 2007.
6. Litigation There has been no material change in litigation since
the events reported in the Company's 10-Q for the fiscal
quarter ended March 30, 2002.
7. Segment Statement of Financial Accounting Standards No. 131
Information ("SFAS 131"), Disclosures about Segments of an
Enterprise and Related Information. FAS 131 supersedes
FAS 14, Financial Reporting for Segments of a Business
Enterprise replacing the "industry segment" approach
with the "management" approach. The management approach
designates the internal reporting that is used by
management for making operating decisions and assessing
performance as the source of the Company's reportable
segments.
During 2001, the Company redefined its operating
segments to more accurately reflect those used by
management. Prior period information has been restated.
The Company operates in two segments: Bearings, which
manufactures bearings and bearing components for
Original Equipment Manufacturers (OEMs) and
distributors; and Machine Tools, which manufactures and
distributes machine tools for dealers and manufacturers.
The accounting policies of the segments are the same as
those described in the summary of significant accounting
policies outlined in the Company's 10-K for the fiscal
year ended December 29, 2001. The Company evaluates
segment performance based on operating income.
9
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents information about the Company's business segments. (In
Thousands)
Year to Date June 29, 2002
MACHINE
BEARINGS TOOLS TOTAL
-------------------------------------
Net sales to external customers $30,512 $ 3,829 $34,341
Gross Profit 8,941 1,463 10,404
Operating income / (loss) 3,336 (576) 2,760
Depreciation / amortization 889 36 925
Capital expenditures 622 279 901
Total Assets $64,480 $ 12,838 $77,318
Year to Date June 30, 2001
MACHINE
BEARINGS TOOLS TOTAL
-------------------------------------
Net sales to external customers $23,177 $ 5,325 $28,502
Gross Profit 7,000 2,450 9,450
Operating income 2,120 352 2,472
Depreciation / amortization 303 77 380
Capital expenditures 506 21 527
Total Assets $40,892 $ 13,314 $54,206
10
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended June 29, 2002
MACHINE
BEARINGS TOOLS TOTAL
--------------------------------------
Net sales to external customers $15,135 $ 1,159 $16,294
Gross Profit 4,459 458 4,917
Operating income / (loss) 1,548 (683) 865
Depreciation / amortization 461 18 479
Capital expenditures 500 123 623
Total Assets $64,480 $ 12,838 $77,318
Quarter Ended June 30, 2001
MACHINE
BEARINGS TOOLS TOTAL
--------------------------------------
Net sales to external customers $11,858 $ 3,079 $14,937
Gross Profit 3,334 1,557 4,891
Operating income 958 500 1,458
Depreciation / amortization 154 41 195
Capital expenditures 405 21 426
Total Assets $40,892 $ 13,314 $54,206
11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Business Overview
General Bearing Corporation and subsidiaries (collectively, the "Company") is
actively engaged in two business segments: Bearings and Machine Tools.
In the Bearings segment, the Company manufactures and distributes a variety of
bearings and bearing components under the Hyatt(R) and The General(R)
trademarks. The Company supplies original equipment manufacturers ("OEMs") and
distributors. The Company's products, sold principally in the United States
("U.S.") and Asia, are used in a broad range of applications, including
automobiles, railroad cars, locomotives, trucks, heavy duty trailers, office
equipment, machinery and appliances. General has entered into six joint ventures
with manufacturers in the Peoples Republic of China ("PRC") to enable it to
manufacture high quality, low cost bearings and bearing components. General
obtains a majority of its bearing and component requirements from its
manufacturing plants in the PRC.
In July 2001, General Bearing Corporation ("General") increased its ownership in
Ningbo General Bearing Company, Ltd. ("NGBC"), one of its joint ventures in
China, from 42% to 50%. Due to this increased ownership, which includes
management control, the financial statements of NGBC have been fully
consolidated beginning with the start of the third fiscal quarter of 2001. The
majority of NGBC's sales are eliminated in consolidation as the majority of its
production is sold to General for sale in the U.S.
In December 2001, General increased its ownership in NN General, LLC ("NNG"), a
holding company that holds as its primary asset, a 60% investment in Jiangsu
General Ball and Roller Company, Ltd. ("JGBR"), another Chinese joint venture,
from 50% to 100%. Due to this increased ownership, the Statements of Operations
of NNG and JGBR have been fully consolidated since the beginning of the first
quarter of 2002.
In the Machine Tools segment, the Company produces and distributes a variety of
machine tools used for boring, turning, milling and grinding metal work pieces.
The Company's product lines include horizontal boring mills, bridge and gantry
mills, vertical turning lathes, heavy duty lathes, roll grinders, belt grinders
and vertical grinders.
See Note # 7 of the Consolidated Financial Statements for details of segment
performance.
Results of Operations
Sales. Sales for the second fiscal quarter ended June 29, 2002 ("Q-2
2002") of $16,294,000 represents a 9.1% increase compared to the second fiscal
quarter ended June 30, 2001 ("Q-2 2001"). Bearing sales of $15,135,000 increased
27.6% from Q-2 2001 primarily due to the consolidation of JGBR's sales.
Increased sales of drive line components to the automotive industry were
partially offset by lower sales volume to distributors. Machine Tool
12
sales of $1,159,000 were 62.4% lower than Q-2 2001 mainly due to lower export
sales from Romania due to irregularity in demand for the Company's products.
Sales for the twenty-six weeks ended June 29, 2002 ("2002") of $34,341,000
represents a 20.5% increase compared to the twenty-six weeks ended June 30, 2001
("2001"). Bearing sales of $30,512,000 increased 31.6% from 2001 primarily due
to the consolidation of JGBR's sales. Increased sales of drive line components
to the automotive industry were partially offset by lower sales volume in the
heavy duty aftermarket as well as lower sales volume to distributors. Both of
these decreases are believed to be related to the U.S. economy. Machine Tool
sales of $3,829,000 were 28.1% lower than 2001 due primarily to lower export
sales from Romania due to irregularity in demand for the Company's products.
Gross Profit. Gross profit for Q-2 2002 of $4,917,000 represents a 0.5%
increase compared to Q-2 2001. As a percentage of sales, gross profit (GP%) was
30.2% for Q-2 2002 compared to 32.7% for Q-2 2001. GP% for the Bearing segment
was 29.5% in Q-2 2002 compared to 28.1% in Q-2 2001. This increase was mainly
due to product mix partially offset by the consolidation of JGBR and NGBC's
sales to the Chinese domestic market, which have lower GP% than General's sales
in the U.S. GP% for Machine Tools was 39.5% in Q-2 2002 compared to 50.6% in Q-2
2001. This decrease is mainly due to the lower sales volume and product mix.
Gross profit for 2002 of $10,404,000 represents a 10.1% increase compared
to 2001. As a percentage of sales, GP% was 30.3% for 2002 compared to 33.2% for
2001. GP% for Bearings was 29.3% in 2002 compared to 30.2% in 2001. This
decrease was mainly due to the consolidation of JGBR and NGBC's sales to the
Chinese domestic market, which have a lower GP% than General's sales in the U.S.
There was also a decrease in GP% on sales in the U.S. due mainly to increased
sales to OEM's coupled with decreased higher margin sales to distributors. GP%
for Machine Tools was 38.2% in 2002 compared to 46.0% in 2001. This decrease is
mainly due to lower sales volume and product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (S,G&A) as a percentage of sales were 24.9% in Q-2 2002
compared to 23.0% in Q-2 2001. S,G&A increased by $619,000. S,G&A in the
Bearings segment increased by $535,000 mainly due to the consolidation of S,G&A
incurred at NGBC (100% of NGBC's sales are eliminated in consolidation) and
JGBR, as well as increases in salaries, legal fees and promotion expenses. S,G&A
for Machine Tools increased by $84,000.
S,G&A as a percentage of sales were 22.3% in 2002 compared to 24.5% in
2001. This decrease is primarily due to the increased sales volume. S,G&A
increased by $666,000. S,G&A increased in the Bearings segment by $725,000
mainly due to the consolidation of S,G&A incurred at NGBC (97.9% of NGBC's sales
are eliminated in consolidation) and JGBR, as well as increases in salaries,
legal fees, insurance and depreciation expenses. S,G&A for Machine Tools
decreased by $59,000 mainly due to cost reduction programs implemented during
the third quarter of 2001.
13
Operating Income. Operating income for Q-2 2002 of $865,000 represents a
40.7% decrease compared to Q-2 2001. Operating income for the Bearing segment
increased 61.5% compared to Q-2 2001 to $1,548,000 primarily due to higher sales
volume and higher GP%, partially offset by higher S,G&A. Operating income /
(loss) for Machine Tools was ($683,000) in Q-2 2002 compared to $500,000 in Q-2
2001 primarily due to lower sales volume, lower GP% and higher S,G&A.
Operating income for 2002 of $2,760,000 represents an 11.7% increase
compared to 2001. Operating income for Bearings of $3,336,000, increased 57.4%
compared to 2001 primarily due to higher sales volume, partially offset by lower
GP% and higher S,G&A. Operating income / (loss) of ($576,000) for Machine Tools
decreased 263.7% compared to 2001 primarily due to lower sales volume and lower
GP% partially offset by reduced S,G&A.
Other Expense, net. Other expense, net was $524,000 in Q-2 2002 compared
to $1,349,000 in Q-2 2001 and is comprised of miscellaneous non-operating income
and expenses, interest expense and equity in income of affiliates ("equity
income") as follows:
Second Quarter
2002 2001
-----------------
Litigation settlement $ -- $ 763
Foreign exchange losses in
hyperinflationary economies 87 235
Other non-operating expenses, net 20 69
Interest expense, net 463 264
Equity (income) loss in affiliates (46) 18
------ ------
$ 524 $1,349
Q2 - 2001 included a one-time charge of $763,000 for an agreement reached
between the Company and Gussack Realty Company ("GRC"), allocating the proceeds
and litigation costs from the previously reported litigation with Xerox. The
reimbursement will be paid to GRC in the form of additional rent payments by the
Company of $18,780.17 per month for 48 months beginning in June 2001. Also
included in other expenses are losses on net monetary positions, reflecting the
effect of changes in foreign exchange rates and accounting rules for financial
reporting in hyperinflationary economies (Romania). Net interest expense
increased mainly due to the consolidation of interest expense incurred at JGBR.
Other expense, net was $1,040,000 in 2002 compared to $1,318,000 in 2001
as follows:
Six Months
2002 2001
-----------------
Litigation settlement $ -- $ 763
Foreign exchange losses in
hyperinflationary economies 110 --
Other non-operating expenses, net 53 24
Interest expense, net 945 558
Equity (income) loss in affiliates (68) (27)
------ ------
$1,040 $1,318
14
Included in the 2002 other expense is a loss on net monetary position reflecting
the effect of changes in foreign exchange rates and accounting rules for
financial reporting in hyperinflationary economies. The 2001 expense is
comprised mainly of the settlement with GRC. Net interest expense increased
mainly due to the consolidation of interest expense incurred at JGBR. Equity
income was $68,000 in 2002 compared to $27,000 in 2001.
Income Tax. The Company recorded income tax expense of $286,000 in Q-2
2002 compared to an income tax benefit of $132,000 in Q-2 2001. The Q-2 2002
income tax expense reflects certain foreign losses for which there is no
benefit. The income tax benefit in Q-2 2001 is mainly due to certain foreign
income that is not taxable. The Company's effective income tax rate was 34.3% in
2002 compared to 20.2% in 2001 mainly due to the factors affecting the quarterly
income taxes.
Net Income / (Loss). Net income for Q-2 2002 increased to $207,000 or $.05
per basic and diluted share, from ($29,000) or ($.01) per basic and diluted
share in Q-2 2001. The increase is primarily due to the higher sales volume and
lower other expenses, partially offset by higher S,G&A. Net income for 2002
increased 114.9% from 2001 to $1,063,000 or $.27 per basic and diluted share,
from $495,000 or $.12 per basic and diluted share in 2001, also primarily due to
the higher sales volume and lower other expenses, partially offset by higher
S,G&A.
Financial Condition, Liquidity and Capital Resources
During the periods presented, the Company's primary sources of capital
have been short term loans and a revolving credit facility that expires on April
30, 2003 ("Revolving Credit Facility"). At June 29, 2002 and December 29, 2001,
the Company had working capital of $17,356,000 and $30,276,000, respectively.
The reduction in working capital is attributable to the revolving line of credit
which has been classified as short term since the agreement expires on April 30,
2003.
Cash provided by operating activities in 2002 was $1,737,000. Cash
provided by net income before depreciation and amortization, inventory
reductions, and lower accounts receivable was partially offset by increased
prepaid expenses and other assets and reduced accounts payable and accrued
expenses. The increase in prepaid expenses and other assets is due primarily to
the consolidation of NGBC and JGBR. The decrease in accounts payable and accrued
expenses is primarily due to lower inventory in-transit.
Cash used in investing activities in 2002 was $992,000. The Company
invested $101,000 in Shanghai General Bearing Company, Ltd., one of it's
existing unconsolidated joint ventures in China. Cash used in investing
activities in 2002 also includes $901,000 for capital expenditures compared to
$527,000 in 2001. The increase in capital expenditures is related to the
consolidation of NGBC and JGBR.
Cash provided by financing activities in 2002 was $624,000. During 2002,
net increases in debt under its Revolving Credit Facility of $215,000, and Notes
Payable - Banks of $1,089,000, were partially offset by stock repurchases under
the Company's Stock Repurchase Program ("the Program"). The majority of the
increase in Notes Payable - Banks was used for advance
15
payments for capital equipment.
At June 29, 2002, the Company had outstanding debt of $12,962,000 under
its Revolving Credit Facility and had further availability of approximately $6.6
million. The Company expects to enter into a new Revolving Credit Facility upon
its expiration. The Company is in compliance with all of its loan covenants.
Additionally, the Company had outstanding debt of $1,094,000 against a
$1,120,000 line of credit of which $800,000 expires in October 2002 and $320,000
expires in October 2004. The Company expects to refinance this credit line with
a new credit line in 2002.
During 2002, the Company repurchased 167,800 shares of its common stock
for a cost of $628,000 under its Program. The Company has purchased 258,070
shares for a cost of $904,000 since the inception of the Program on January 11,
2000 and is authorized to purchase an additional $596,000.
The Company believes that funds generated from continuing operations,
capital lease financing and borrowing under the existing and any future
revolving credit facilities will be sufficient to finance the anticipated
working capital and capital expenditure requirements as well as the Company's
stock buyback program and investment commitments for at least the next 24
months. The Company's operating cash flow could be adversely affected if there
was a decrease in demand for the Company's products or if the Company was unable
to continue to reduce its inventory. Also, a decrease in demand could adversely
affect the Company's liquidity if General was unable to agree to terms on a
revolving credit facility when the current Revolving Credit Facility expires on
April 30, 2003.
The table and notes below describe the Company's contractual obligations related
to its liquidity.
(In Thousands)
Payments Due by Period
------------------------------------------------------------------
Less
than 1 1 - 3 4 - 5 After 5
Total year years years years
------- ------- ------ ------ -------
Contractual Obligations:
Bank revolving line of credit $12,962 $12,962 $ -- $ -- $ --
Capital lease obligations 611 191 420 -- --
Operating leases 5,770 1,067 3,482 1,221 --
Notes payable 6,673 200 3,418 2,505 550
Equity investment obligations 4,320 3,320 1,000 -- --
------- ------- ------ ------ ----
Total contractual cash obligations $30,336 $17,740 $8,320 $3,726 $550
======= ======= ====== ====== ====
16
The Company also has a net payable to General-IKL Corp. ("IKL"), an affiliate of
the Company, in the amount of $609,000. IKL is an inactive joint venture with a
company located in the former Republic of Yugoslavia in which General holds a
50% interest. The Company cannot estimate when this amount will be due as
amounts receivable from and payable to General-IKL Corp., are subject to
collection and repayment restrictions due to sanctions imposed by the U.S.
government on the countries comprising the former Republic of Yugoslavia.
General accrues interest on the balances due to and from this affiliate.
The Company uses letters of credit to support certain of its purchases and
certain advance payments received from customers in the normal course of
business.
JGBR has guaranteed certain obligations of an unrelated third party totaling
$5,377,000 at June 29, 2002.
Inflation
The effect of inflation on the Company has not been significant during the
last two fiscal years.
Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
The Company's primary market risks are fluctuations in interest rates and
variability in interest rate spread relationships (i.e., prime to LIBOR spreads)
on its bank debt. As of June 29, 2002, the Company had $7,650,000 subject to an
interest rate swap. This swap is used to convert floating rate debt relating to
the Company's revolving credit agreement to fixed rate debt to reduce the
Company's exposure to interest rate fluctuations. The net result was to
substitute a fixed interest rate of 9.17% for the variable rate. The swap
amortizes by $75,000 per month and terminates in December 2007. Under the
interest rate environment during the twenty-six weeks ended June 29, 2002, the
Company's interest rate swap agreement resulted in additional expense of
approximately $213,000.
The Company's management believes that fluctuations in interest rates in
the near term will not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
Foreign Currency Risk
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements from domestic companies with international
customers are denominated in U.S. dollars. Only a small fraction of the
Company's purchases are denominated in foreign currency. Due to this limited
activity, the Company does not expect any material loss with respect to foreign
currency risk.
17
PART II
Item 1. Legal Proceedings
There have been no material developments in any of the Company's legal
matters subsequent to the events reported in the Company's 10-Q filed May
14, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.21 Amendment No. 1 to the Credit Agreement between General Bearing
Corporation and Keybank National Association.
10.22 Amendment No. 2 to the Credit Agreement between General Bearing
Corporation and Keybank National Association.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter ended
June 29, 2002.
18
CERTIFICATION
The undersigned hereby certify that (i) the within report fully complies with
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the
information contained in the within report fairly presents, in all material
respects, the financial condition and results of operations of the company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 2002.
GENERAL BEARING CORPORATION
(Registrant)
/s/ David L. Gussack
- ------------------------------
David L. Gussack
President
/s/ Rocky Cambrea
- ------------------------------
Rocky Cambrea
Controller
19