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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended October 2, 2004
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from .................. to ....................
Commission file Number 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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |_| Yes |X| No
At November 10, 2004, the Registrant had issued 7,124,450 shares of common
stock, $.01 par value per share, and had outstanding 3,790,222 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 OCTOBER 2, 2004
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Financial Statements ..................................... 2 - 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................... 9 - 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 15 - 16
Item 4. Controls and Procedures................................... 16
PART II
Item 1. Legal Proceedings ........................................ 17
Item 5. Other Events.............................................. 17
Item 6. Exhibits.................................................. 17
Signature ................................................. 18
Certifications ................................................. 45 - 47
1
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands - Except for Shares and Per Share Data)
Oct. 2, January 3,
2004 2004
-------- ----------
ASSETS (Unaudited)
Current:
Cash and cash equivalents $ 5,115 $ 1,701
Accounts receivable - net of allowance for doubtful
accounts of $586 and $330 17,361 12,378
Inventories 23,080 22,637
Prepaid taxes and taxes recoverable 895 3,729
Prepaid expenses and other current assets 1,335 1,864
Advances to affiliates 57 95
Deferred tax assets 1,652 1,652
-------- --------
Total current assets 49,495 44,056
Fixed assets, net of accumulated depreciation 24,281 21,482
Investment in and advances to joint ventures
and affiliates 582 3,362
Other assets 1,931 1,347
-------- --------
Total Assets $ 76,289 $ 70,247
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Notes payable - banks $ 9,078 $ 9,021
Accounts payable:
Trade 9,060 6,387
Affiliates 146 1,683
Accrued expenses and other current liabilities 6,297 4,844
Current maturities of long-term debt 297 412
-------- --------
Total current liabilities 24,878 22,347
-------- --------
Long-term debt, net of current maturities 13,649 15,266
Other long-term liabilities - affiliate -- 124
Deferred taxes 886 886
Minority interests 12,592 9,153
Commitments and contingencies
Stockholders' equity:
Preferred stock par value $.01 per share - 1,000,000
shares authorized, none issued and outstanding -- --
Common stock par value $.01 per share - 19,000,000
shares authorized, 7,124,450 and 7,102,200
shares issued 71 71
Additional paid-in capital 40,202 40,133
Accumulated other comprehensive loss (557) (792)
Treasury stock at cost, 3,334,228 and 3,348,228 shares (1,395) (1,438)
Accumulated deficit (14,037) (15,503)
-------- --------
Total stockholders' equity 24,284 22,471
-------- --------
Total liabilities and stockholder's equity $ 76,289 $ 70,247
======== ========
See accompanying notes to condensed consolidated financial statements
2
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands - Except for Shares and Per Share Data)
(Unaudited)
Thirty-nine weeks ended Thirteen weeks ended
-------------------------- ---------------------------
Oct. 2, Sept. 27, Oct. 2, Sept. 27,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales $ 60,609 $ 46,855 $ 20,778 $ 14,582
Cost of sales 45,014 33,225 15,938 10,798
----------- ----------- ----------- -----------
Gross profit 15,595 13,630 4,840 3,784
Selling, general and administrative expenses 11,462 9,463 3,993 3,132
----------- ----------- ----------- -----------
Operating income 4,133 4,167 847 652
Other expenses, net 1,266 600 485 264
----------- ----------- ----------- -----------
Income from continuing operations before income taxes and
minority interests 2,867 3,567 362 388
Income taxes / (benefit) 786 1,242 (4) 143
----------- ----------- ----------- -----------
Income from continuing operations before minority interests 2,081 2,325 366 245
Minority interests 615 470 278 14
----------- ----------- ----------- -----------
Income from continuing operations 1,466 1,855 88 231
----------- ----------- ----------- -----------
Income / (loss) from discontinued operations -- (29) -- 8
Income (taxes) / benefit -- 10 -- (3)
----------- ----------- ----------- -----------
Income (loss) from discontinued operations -- (19) -- 5
----------- ----------- ----------- -----------
Net income $ 1,466 $ 1,836 $ 88 $ 236
=========== =========== =========== ===========
Income per common share from continuing operations:
Basic $ 0.39 $ 0.48 $ 0.02 $ 0.06
----------- ----------- ----------- -----------
Diluted $ 0.39 $ 0.48 $ 0.02 $ 0.06
----------- ----------- ----------- -----------
Loss per common share from discontinued operations:
Basic $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Diluted $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Income per common share from net income:
Basic $ 0.39 $ 0.48 $ 0.02 $ 0.06
----------- ----------- ----------- -----------
Diluted $ 0.39 $ 0.48 $ 0.02 $ 0.06
----------- ----------- ----------- -----------
Weighted average number of common shares:
Basic 3,766,129 3,847,021 3,772,288 3,809,969
----------- ----------- ----------- -----------
Diluted 3,776,458 3,853,967 3,796,789 3,824,512
----------- ----------- ----------- -----------
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)
Thirty-nine weeks ended Thirteen weeks ended
----------------------- -----------------------
Oct. 2, Sept. 27, Oct. 2, Sept. 27,
2004 2003 2004 2003
-------- --------- -------- ---------
Net income $ 1,466 $ 1,836 $ 88 $ 236
Derivative fair market value adjustment 235 168 6 148
-------- -------- -------- --------
Comprehensive income $ 1,701 $ 2,004 $ 94 $ 384
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
4
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Thirty-nine weeks ended
----------------------------
Oct. 2, 2004 Sept. 27, 2003
------------ --------------
Cash flows from operating activities:
Net income $ 1,466 $ 1,836
Adjustments to reconcile net income to cash provided
by operating activities:
Minority interests 615 (477)
Depreciation and amortization 2,175 1,803
Equity in income of joint ventures and affiliates (114) (321)
Other non-cash items charged to income 6 34
(Gain) / loss on sales of fixed assets (2) --
Changes in:
Accounts receivable (2,961) (637)
Inventories 2,383 2,228
Prepaid expenses and other assets 3,986 458
Due from affiliates (1,364) (1,268)
Accounts payable and accrued expenses 850 124
------- -------
Net cash provided by operating activities 7,040 3,780
------- -------
Cash flows from investing activities:
Investment in affiliate -- (281)
Acquisition of business, net of cash acquired 871 --
Fixed asset purchases (913) (2,063)
Net proceeds from sale of fixed assets 5 --
------- -------
Net cash used in investing activities (37) (2,344)
------- -------
Cash flows from financing activities:
Purchase of treasury stock -- (476)
Proceeds from exercise of common stock options 70 --
Proceeds from partner contributions in a joint venture 370 --
Net proceeds from (repayment of) note payable - banks (2,358) 597
Repayment of other long-term debt (172) (158)
Repayment of revolving credit facility (1,499) (2,374)
------- -------
Net cash used in financing activities (3,589) (2,411)
------- -------
Net increase (decrease) in cash and cash equivalents 3,414 (975)
Cash and cash equivalents, beginning of period 1,701 3,158
------- -------
Cash and cash equivalents, end of period $ 5,115 $ 2,183
======= =======
Cash paid during the period for:
Interest $ 1,288 $ 1,141
======= =======
Income taxes $ 475 $ 441
======= =======
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 thirty-nine weeks ended
October 2, 2004 are not necessarily indicative of the
results that may be expected for the year ending January
1, 2005. 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 January 3, 2004.
2. Change in Ownership In April 2004, General Bearing Corporation ("General")
in Joint Venture invested $1,000,000 in Shanghai General Bearing Co. Ltd.
("SGBC"), effectively increasing its ownership in SGBC
from 43.55% to 50% and assumed control of operations.
SGBC is a partnership between General and Shanghai
Roller Bearing Factory of Shanghai, China ("SRBF").
Beginning in the second quarter of 2004, the results of
SGBC have been fully consolidated and General's
investment in SGBC has been eliminated from "investments
in affiliates" accordingly.
In November 2001, General and SRBF agreed to a new joint
venture contract whereby ownership in SGBC would be
increased to 50% by virtue of General contributing an
additional $3,000,000 between 2002-2004. "Other assets"
includes $684,000 of goodwill relating to General's
increased ownership in SGBC which has not been allocated
to specific assets.
3. Discontinued The Company's Board of Directors and management adopted
Operations a plan in December 2002 to discontinue the operations of
the machine tool segment by sale of the assets during
2003. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets", prior year
statements of operations of the Company have been
reclassified to segregate discontinued operations from
continuing operations.
In December 2003, the Company completed management's
previously adopted plan and disposed of the assets and
liabilities of General Ball & Roller, Inc. (formerly
known as WMW Machinery Company) and World Machinery
Group's ("WMG") interest in World Machinery Works, S.A.,
to two separate entities that are majority owned by an
officer of General Bearing Corporation ("General").
The other assets of WMG were not successfully disposed
of during 2003 and management currently does not
anticipate disposing of them in the foreseeable future.
While collectively immaterial, the remaining assets and
liabilities of WMG, have been reclassified back to
continuing operations in 2003.
6
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Inventories Inventories consist of the following: (In Thousands)
October 2, 2004 September 27, 2003
-----------------------------------------------------------------------------------------------------
Finished bearings $13,486 $10,895
Bearing raw materials, purchased parts and work
in process 9,594 14,846
------- -------
$23,080 $25,741
=====================================================================================================
5. Earnings per Share Basic earnings per share includes no dilution and is
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:
Thirty-nine weeks ended
---------------------------------------
Oct. 2, 2004 Sept. 27, 2003
-----------------------------------------------------------------------------------------------------
Diluted earnings per share computation:
Basic weighted average common shares outstanding 3,766,129 3,847,021
Incremental shares from assumed exercise of
dilutive options 10,329 6,946
-----------------------------------------------------------------------------------------------------
3,776,458 3,853,967
=====================================================================================================
Thirteen weeks ended
---------------------------------------
Oct. 2, 2004 Sept. 27, 2003
-----------------------------------------------------------------------------------------------------
Diluted earnings per share computation:
Basic weighted average common shares outstanding 3,772,288 3,809,969
Incremental shares from assumed exercise of
dilutive options 24,501 14,543
-----------------------------------------------------------------------------------------------------
3,796,789 3,824,512
=====================================================================================================
7
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the thirty-nine weeks ended October 2, 2004 and
September 27, 2003, 243,550 and 245,800 options
outstanding, respectively, were anti-dilutive. For the
thirteen weeks ended October 2, 2004 and September 27,
2003, 160,800 and 245,800 options outstanding,
respectively, were anti-dilutive.
6. Derivative The Company follows Statement of Financial Accounting
Financial Standards No. 133 ("SFAS 133") "Accounting for
Instruments 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.
In order 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 long-term
debt that is subject to variable interest rates. This
agreement is considered to be a hedge against changes in
the amount of future cash flows associated with the
interest payments on variable rate debt obligations. For
the thirty-nine weeks ended October 2, 2004 and
September 27, 2003, expenses recognized in earnings
relating to the interest rate swap totaled $270,000 and
$311,000, respectively and are included in the Statement
of Operations in "Other expenses, net". Any amounts
reported in "Comprehensive Income" will be reclassified
to earnings over the term of the agreement, through
2007.
7. Litigation Except as explained in Part II of this report, there
have been no material changes in litigation since the
events reported in the Company's 10-Q for the fiscal
quarter ended July 3, 2004.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
There are no non - GAAP financial measures provided in this report.
Business Overview
Prior to 2004, General Bearing Corporation ("General") and subsidiaries
(collectively, the "Company") operated in two business segments: Bearings
("Continuing Operations") and Machine Tools ("Discontinued Operations"). Based
on several years of disappointing performance of the machine tools segment and
the Company's desire to focus its resources on its core business, the Company's
Board of Directors and management adopted a plan in December 2002 to discontinue
the operations of the machine tool segment by sale of the assets during 2003.
Accordingly, pursuant to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", the Company's
prior period financial statements have been reclassified to segregate
discontinued operations from continuing operations.
In December 2003, the Company completed management's previously adopted plan and
disposed of the assets and liabilities of General Ball & Roller, Inc. (formerly
known as WMW Machinery Company) and its interest in World Machinery Works, S.A.,
to two separate entities that are majority owned by an officer of General.
Currently, the entities owned by the officer are not current with regard to
their purchase payments under the agreement of sale.
In April 2004, General increased its ownership in Shanghai General Bearing Co.
Ltd. ("SGBC") from 43.55% to 50% and assumed control of operations. Due to this
increased ownership, the financial statements of SGBC have been consolidated for
the first time beginning in April 2004.
Continuing Operations
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 (5 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.
Trends and Uncertainties
General's business model is based on providing low-cost, high-precision bearing
products to predominantly North American customers. The continued cost
consciousness of this customer base is a positive trend for the Company, which
the Company believes has resulted in increased sales in 2003 - 2004 and the
increased sales volume to the transportation market over the past three years.
The Company's low-cost Chinese operations provide a competitive advantage for
high-precision bearing products. The Company believes this competitive advantage
has created opportunities for the Company to grow in 2004 and the future. The
Company has attributed the decline in sales to distributors over the past
several years to the downturn in U.S. manufacturing. The Company has seen some
improvement in 2004 and sees this as an indication that there will be a recovery
in U.S. manufacturing and that its sales will grow as a result of such recovery.
9
The major competition for the Company's lower cost products comes from three
evolving trends:
1. Established higher cost competitors also moving their production to low-cost
areas, such as China,
2. Customers establishing "buying" functions in China to pursue lower cost
direct purchases, and
3. Customers moving their complete assembly processes from North America to
China or other low-cost regions.
Other trends, events and areas of uncertainty which could materially affect the
Company include the following:
1. The increased global cost of steel has significantly increased the cost of
materials for manufacturing bearings. Additionally, the high demand for steel in
China has created a price increase in China that is even greater than the price
increase in North America. While the Company has been able to collect material
surcharges to offset a portion of this increased cost, the inability to collect
such material surcharges or any significant limitation on it's ability to
collect such surcharges could materially and adversely affect the Company's
operating income and liquidity.
2. The Company's business is based on low-cost, high-quality products from its
Chinese operations. The Company's cost of goods is based in part on the
valuation of the Chinese RMB versus the U.S. Dollar. Should there be an adverse
change in the exchange rate of the RMB against the U.S. Dollar, GBC's
competitive position, operating income and cash flow will be adversely impacted.
3. Several major North American customers have slowed their payments over the
past year or two. Should a significant portion of the Company's current customer
base also move to slow payments, there could be a material adverse impact on the
Company's liquidity.
4. The Company's dependence on Chinese products for the supply of bearings and
bearing components creates an uncertainty and concentration risk. If for any
reason the Company was unable, or limited in its ability to continue to ship
products from China, it could experience a material disruption in supply, which
would materially adversely affect the Company's operations and liquidity.
5. Expected increases in sales volume may not result in a proportional increase
in cash flow as the Company may be required to use cash for working capital
associated with the growth in sales.
Results of Operations
Sales. Sales for the thirteen weeks ended October 2, 2004 ("Q-3 2004") of
$20,778,000 represents a 42.5% increase compared to $14,582,000 for the thirteen
weeks ended September 27, 2003 ("Q-3 2003"). A large portion of the sales
increase ($2,677,000) is due to the consolidation of SGBC's sales into the
Company's financial statements. Additionally, the Company experienced increases
in sales of tapered roller bearings for heavy duty truck trailers, drive line
components to the automotive industry, precision balls, tapered journal bearings
to the railroad industry, heavy duty aftermarket, and distribution.
10
Sales for the thirty-nine weeks ended October 2, 2004 ("2004") of
$60,609,000 represents a 29.4% increase compared to $46,855,000 for the
thirty-nine weeks ended September 27, 2003 ("2003"). A large portion of the
sales increase ($5,153,000) is due to the consolidation of SGBC's sales into the
Company's financial statements. Additionally, the Company experienced increases
in sales of drive line components to the automotive industry, tapered roller
bearings for heavy duty truck trailers, precision balls, distribution, heavy
duty aftermarket, and tapered journal bearings to the railroad industry.
Gross Profit. Gross profit for Q-3 2004 of $4,840,000 represents a 27.9%
increase compared to $3,784,000 for Q-3 2003. As a percentage of sales, gross
profit (GP%) was 23.3% for Q-3 2004 compared to 25.9% for Q-3 2003. The decrease
in GP% was mainly due to material cost increases as a result of higher steel
costs, $910,000 in increased inventory provisions, the effect of the Chinese
government reducing the Value Added Tax credit for exports by 4%, and changes in
product mix.
Gross profit for 2004 of $15,595,000 represents a 14.4% increase compared
to $13,630,000 for 2003. As a percentage of sales, GP% was 25.7% for 2004
compared to 29.1% for 2003. The decrease in GP% was mainly due to material cost
increases as a result of higher steel costs, $1,317,000 in increased inventory
provisions, the effect of the Chinese government reducing the Value Added Tax
credit for exports by 4%, and changes in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (S,G&A) as a percentage of sales were 19.2% in Q-3 2004
compared to 21.5% in Q-3 2003. S,G&A increased by $861,000 mainly due to the
consolidation of SGBC's expenses ($433,000) into the Company's financial
statements, increases in salaries, bad debts, travel and entertainment,
professional fees, as well as increases in variable expenses such as freight and
sales commissions.
S,G&A as a percentage of sales were 18.9% in 2004 compared to 20.2% in
2003. S,G&A increased by $1,999,000 mainly due to the consolidation of SGBC's
expenses ($802,000) into the Company's financial statements, increases in
salaries, professional fees, travel and entertainment, bad debts, insurance, and
sales commissions, partially offset by reduced promotion expense and real estate
taxes as a result of a reduced assessment.
Operating Income. Operating income for Q-3 2004 of $847,000 represents a
29.9% increase compared to $652,000 for Q-3 2003 due to the higher sales volume,
partially offset by lower GP% and higher S,G&A.
Operating income for 2004 of $4,133,000 represents a 0.8% decrease
compared to $4,167,000 for 2003 due to higher S,G&A and lower GP%, partially
offset by increased sales.
Other Expense, net. Other expense, net was $485,000 in Q-3 2004 compared
to $264,000 in Q-3 2003 and is comprised of miscellaneous non-operating income
and expenses, interest expense and equity in income of affiliates ("equity
income") as follows: (In thousands)
Third Quarter
2004 2003
------------------
Other non-operating (income) expenses, net $ 5 $ 8
Interest expense, net 472 392
Equity loss / (income) in affiliates 8 (136)
----- -----
$ 485 $ 264
===== =====
11
Other expense, net was $1,266,000 in 2004 compared to $600,000 in 2003 as
follows: (in thousands)
Nine Months
2004 2003
---------------------
Other non-operating (income) expenses, net $ 49 $ (33)
Interest expense, net 1,331 954
Equity (income) in affiliates (114) (321)
------- -------
$ 1,266 $ 600
======= =======
Pursuant to requirements imposed in 1993 by the United States Office of Foreign
Assets Control ("OFAC"), at the end of 2002 the Company carried a net payable
("IKL payable") to General IKL Corp., an affiliate. The requirement arose out of
sanctions imposed by the U.S. government on the countries comprising the former
Republic of Yugoslavia, "freezing" certain assets in the United States. In
February 2003, OFAC "unfroze" assets affected by the sanctions and the Company
reduced a significant portion of the IKL payable which the Company disputed,
resulting in a $238,000 reduction in interest expense as of March 29, 2003.
Income Tax. The Company recorded an income tax benefit of $4,000 in Q-3
2004 compared to income tax expense of $143,000 in Q-3 2003. The income tax
benefit in Q-3 2004 was the result of a reversal of a previously recorded tax
accrual in the amount of $154,000 at one of the Company's joint ventures.
Income tax. The Company recorded income tax expense of $786,000 in 2004
compared to $1,242,000 in 2003. The Company's effective income tax rate was
27.4% in 2004 compared to 34.8% in 2003.
Net Income. Net income for Q-3 2004 decreased by 62.7% to $88,000 or $.02
per basic and diluted share, from $236,000 or $.06 per basic and diluted share
in Q-3 2003. The decrease is primarily due to higher S,G&A, lower GP% and higher
Other expenses, net, partially offset by higher sales volume. Net income for
2004 decreased 20.2% from 2003 to $1,466,000 or $.39 per basic and diluted
share, from $1,836,000 or $.48 per basic and diluted share in 2003 mainly due to
the factors affecting the quarterly net income.
Financial Condition, Liquidity and Capital Resources
During the periods presented, the Company's primary sources of capital
have been net cash provided by operating activities and a Revolving Credit
Facility with KeyBank National Association ("Revolving Credit Facility"). The
primary demands on the Company's capital resources have been investments in, and
advances to, affiliates (joint ventures) and fixed asset purchases made to
increase capacity and broaden the Company's product offering and improve
operations. At October 2, 2004 and January 3, 2004, the Company had working
capital of $24,617,000 and $21,709,000, respectively.
Cash provided by operating activities in 2004 was $7,040,000. Cash
provided by net income before depreciation and amortization, inventory
reductions, reduced prepaid expenses and other assets primarily due to the
collection of taxes, and higher accounts payable and accrued expenses was
partially offset by increased accounts receivable and due from affiliates.
Cash used in investing activities in 2004 was $37,000. During the nine
months ended October 2, 2004, the Company used cash of $913,000 for capital
expenditures. The Company invested cash of $807,000 in SGBC as part of the
investment required to increase General's ownership from 43.55% to 50%. As a
result, $1,678,000 of cash was added to the Company's consolidated Balance
Sheet.
12
Cash used in financing activities in 2004 was $3,589,000. During 2004, the
Company had net decreases in Notes payable - banks of $2,358,000, net decreases
in debt under its Revolving Credit Facility of $1,499,000, and made $172,000 in
payments under its capital lease facility.
On October 2, 2004, the Company had outstanding debt of $7,682,000 under
its Revolving Credit Facility, which expires on July 31, 2006, and had further
availability of approximately $11.9 million. The Company is in compliance with
all of its loan covenants.
The Company has not repurchased any shares of it's common stock in 2004.
The Company has purchased 410,228 shares of it's common stock for a cost of
$1,472,000 since the inception of the Company's Stock Repurchase Program ("the
Program") on January 11, 2000. Of the 410,228 shares repurchased, 26,000 have
been reissued, primarily to the Board of Directors as part of their annual
compensation.
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 Company's
investment commitments, anticipated working capital and capital expenditure
requirements for at least the next twenty four months. The Company's operating
cash flow could be adversely affected if there was a decrease in demand for the
Company's products.
13
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 $ 7,682 $ -- $ 7,682 $ -- $ --
Notes payable - banks 12,135 9,078 3,057 -- --
Capital lease obligations 124 97 17 10 --
Other long - term liabilities - affiliate 178 -- 178 -- --
Note payable - other 2,905 200 2,705 -- --
------- ------- ------- ------- -------
Total obligations - per Balance Sheet 23,024 9,375 13,639 10 --
Off Balance Sheet items:
Operating leases 11,958 1,290 3,686 1,281 5,701
Equity investment obligations 250 250 -- -- --
------- ------- ------- ------- -------
Total contractual cash obligations $35,232 $10,915 $17,325 $ 1,291 $ 5,701
======= ======= ======= ======= =======
The amount outstanding under General's revolving line of credit increased by
$863,000 to $7,682,000 during the third quarter primarily as a result of cash
invested in the China operations to increase capacity.
During the thirteen weeks ended October 2, 2004, Notes payable - banks decreased
by $318,000 to $12,135,000 and represents debts of the Company's joint ventures,
for which General is not liable. It is anticipated that these debts will be paid
by the joint ventures, to the extent possible, from funds generated from their
operations and the balance, if any, refinanced with new bank debt.
Off Balance Sheet Arrangements
The Company believes that all material off balance sheet arrangements have been
included in the tabular disclosure of contractual obligations.
14
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is subject to market risk primarily associated with changes in
interest rates and foreign currency exchange rates. In order to manage the
volatility relating to interest rates, the Company has entered into an interest
rate swap agreement. In order to manage the volatility relating to foreign
currency exchange rates the Company denominates substantially all purchase and
sale transactions in U.S. dollars. The Company does not anticipate any material
changes in its primary market risk exposures in the near future.
The Company does not execute transactions or hold derivative financial
instruments for trading purposes.
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 and interest rate swap. As of October 2, 2004, the Company had
$5,625,000 outstanding 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 thirty-nine weeks
ended October 2, 2004, the Company's interest rate swap agreement resulted in
additional expense of approximately $270,000.
The following table provides information about the Company's interest rate
swap agreement that is sensitive to changes in interest rates. The table
presents average notional amounts and weighted average interest rates by fiscal
year. Notional amounts are used to calculate the contractual cash flows to be
exchanged under the swap contract.
Fair
2004 2005 2006 2007 Total Value
In Thousands
Interest Rate Swaps
Variable to Fixed (US$) 5,812 4,912 4,012 3,112 5,625 557
Average Pay Rate 9.17% 9.17% 9.17% 9.17% 9.17%
Average Receive Rate 3.85% 4.25% 4.75% 5.25%
The following table provides information about the Company's variable rate debt.
Fair
2004 2005 2006 2007 Total Value
In Thousands
Debt:
Variable Rate (US$) 10,000 9,850 9,750 9,500 7,682 7,682
Average Interest Rate 3.70% 4.10% 4.60% 5.10% 3.61%
The Company's management believes that fluctuations in interest rates in the
near term would 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.
15
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. The Company purchases
approximately $2,500,000 of product monthly from its Chinese joint ventures,
which use proceeds thereof, to satisfy locally incurred liabilities in Renminbi
(RMB). Had there been an adverse 10% fluctuation between the exchange rate of
the U.S. dollar and the RMB, it would have resulted in a potential loss of
earnings of approximately $2,250,000 for the thirty-nine weeks ended October 2,
2004.
Item 4. Controls and Procedures
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls") as of the end of
the period covered by this Report. This evaluation ("Controls Evaluation") was
done under the supervision and with the participation of management, including
the Chief Executive Officer ("CEO") and Controller. The Company's management,
including the CEO and Controller, does not expect that its Disclosure Controls
or its "internal control over financial reporting" ("Internal Controls") will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and not be detected. The Company
conducts periodic evaluations of its Internal Controls to enhance, where
necessary, its procedures and controls.
Conclusions: Based upon the Controls Evaluation, the CEO and Controller have
concluded that, subject to the limitations noted above, the Disclosure Controls
are effective in reaching a reasonable level of assurance that management is
timely alerted to material information relating to the Company during the period
when its periodic reports are being prepared. In accordance with SEC
requirements, the CEO and Controller note that, since the date of the Controls
Evaluation to the date of this report, there have been no significant changes in
Internal Controls or in other factors that could significantly affect Internal
Controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
16
PART II
Item 1. Legal Proceedings
Trustee for Integrated Legal and Financial Problem Solvers, Inc., Defined
Benefit Pension Plan and Trust vs. General Bearing Corporation, et al.
The plaintiff in the above entitled action (disclosed in the Company's
Report on form 8-K dated August 12, 2004), voluntarily dismissed the
action on August 30, 2004.
Item 5. Other Events
The Company has entered into an amendment, filed herewith as exhibit
10.26, with KeyBank National Association permitting additional investment
in its foreign subsidiaries.
Item 6. Exhibits
(a) Exhibits
10.26 Amendment number 4 to the Credit Agreement between KeyBank National
Association and the Company.
31.1 Certification of the Chief Executive Officer required by Rule 13a -
14(a) or 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
31.2 Certification of the Controller required by Rule 13a - 14(a) or 15d -
14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002.
17
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: November 16, 2004.
GENERAL BEARING CORPORATION
(Registrant)
/s/ David L. Gussack
- ---------------------------
David L. Gussack
Chief Executive Officer
/s/ Rocky Cambrea
- ---------------------------
Rocky Cambrea
Controller
18