<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 2, 1998
Commission File Number 1-14182
TB WOOD'S CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 25-1771145
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(State or other Jurisdiction of (IRS Employer Identification Number)
Incorporation of Organization)
440 North Fifth Avenue, Chambersburg, PA 17201
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(Address of principal executive offices) (Zip Code)
(717) 264-7161
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(Registrant's telephone number, including area code)
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
----- -----
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at November 6, 1998
----- -------------------------------
Common Stock, $.01 par value 5,851,278
<PAGE>
Table of Contents
Part I. - Financial Information Page No.
- ------------------------------- -------
Consolidated Balance Sheets -
October 2, 1998 and January 2, 1998 3
Consolidated Statements of Operations -
For the Third Quarters Ended October 2, 1998
and October 3, 1997 4
Consolidated Statements of Cash Flows -
For the Year to Date Periods Ended October 2, 1998
and October 3, 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. - Other information 10
- ----------------------------
<PAGE>
Part I.-Financial Information
Item 1. Financial Statements
TB Wood's Corporation And Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Unaudited
October 2, January 2,
(in thousands, except per share and share amounts) 1998 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $1,777 $2,552
Accounts receivable, less allowances for doubtful accounts, discounts, and claims
of $410 at October 2, 1998 and $476 at January 2, 1998............................. 20,471 20,174
Inventories........................................................................ 30,796 26,138
Other current assets............................................................... 1,261 967
-------------------------------
Total current assets.......................................................... 54,305 49,831
-------------------------------
Property, plant, and equipment..................................................... 53,567 47,882
Less accumulated depreciation...................................................... 28,210 23,794
-------------------------------
Net property, plant and equipment.............................................. 25,357 24,088
-------------------------------
Other Assets:
Deferred income taxes.............................................................. 4,513 4,602
Goodwill, net of accumulated amortization of $1,313 at
October 2, 1998 and $1,123 at January 2, 1998................................. 9,322 9,122
Other.............................................................................. 2,497 1,974
-------------------------------
Total other assets............................................................ 16,332 15,698
-------------------------------
TOTAL ASSETS ...................................................................... $95,994 $89,617
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............................................... $278 $611
Accounts payable................................................................... 8,200 8,610
Checks outstanding................................................................. 632 1,615
Accrued expenses................................................................... 9,773 10,987
Deferred income taxes.............................................................. 729 729
-------------------------------
Total current liabilities..................................................... 19,612 22,552
-------------------------------
Long-term debt, less current maturities............................................ 32,326 25,928
-------------------------------
Postretirement benefit obligation, less current portion........................... 16,690 17,531
-------------------------------
Minority Interest.................................................................. (16) --
-------------------------------
Shareholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued or outstanding............................................... -- --
Common stock, $.01 par value; 40,000,000 shares authorized, 5,887,698 and
5,859,286 shares issued and 5,855,463 and 5,849,772 shares outstanding at
October 2, 1998 and January 2, 1998, respectively ................................ 59 58
Treasury Stock, at cost............................................................ (590) (181)
Additional paid-in capital......................................................... 27,913 28,340
Retained Earnings (accumulated deficit)............................................ 310 (4,408)
Foreign currency translation adjustment............................................ (310) (203)
-------------------------------
Total shareholders' equity.................................................... 27,382 23,606
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $95,994 $89,617
===============================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Unaudited Unaudited
Third Quarter Ended Year to Date
October 2, October 3, October 2, October 3,
(in thousands, except per share amounts) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales.................................................................... $34,150 $31,257 $104,362 $93,485
Cost of sales................................................................ 22,312 19,770 66,896 59,540
-------------------------------------------------------
Gross profit............................................................ 11,838 11,487 37,466 33,945
Selling, general, and administrative expenses................................ 8,401 7,259 25,132 21,190
-------------------------------------------------------
Operating income........................................................ 3,437 4,228 12,334 12,755
-------------------------------------------------------
Other expense:
Interest expense and other finance charges.............................. (399) (371) (1,476) (1,297)
Other, net.............................................................. (99) (193) (183) (657)
-------------------------------------------------------
Other expense, net................................................. (498) (564) (1,659) (1,954)
-------------------------------------------------------
Income before provision for income taxes..................................... 2,939 3,664 10,675 10,801
-------------------------------------------------------
Provision for income taxes................................................... 1,180 1,465 4,274 4,320
-------------------------------------------------------
Net income................................................................... $1,759 $2,199 $6,401 $6,481
=======================================================
Per share of common stock:
Basic net income per common share............................................ $0.30 $0.38 $1.09 $1.11
=======================================================
Weighted average shares of common stock...................................... 5,862 5,832 5,870 5,830
=======================================================
Diluted net income per common share.......................................... $0.30 $0.37 $1.08 $1.10
=======================================================
Weighted average shares of common stock
and equivalents outstanding............................................. 5,907 5,926 5,931 5,916
=======================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TB Wood's Corporation And Subsidiaries
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
Unaudited
Year to Date
October 2, October 3,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................................. $6,401 $6,481
-------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 3,757 3,036
Change in deferred income taxes, net.................................. 89 (113)
Stock option compensation expense..................................... 21 76
Profit sharing compensation expense................................... 240 --
Minority interest..................................................... (16) --
Net gain on sale of assets............................................ (17) --
Changes in working capital, net of effects of acquisitions:
Accounts receivable, net......................................... (297) (1,480)
Inventories, net................................................. (4,658) 1,808
Prepaid expenses and other current assets........................ (684) 85
Accounts payable................................................. (410) 980
Accrued and other liabilities.................................... (2,058) 266
-------------------------
Total adjustments........................................... (4,033) 4,658
-------------------------
Net cash provided by operating activities................... 2,368 11,139
-------------------------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired.......................................... -- (4,749)
Capital expenditures........................................................ (4,537) (4,375)
Proceeds from sale of fixed assets.......................................... 246 --
Other, net.................................................................. (1,048) (598)
-------------------------
Net cash used in investing activities.................................. (5,339) (9,722)
-------------------------
Cash Flows from Financing Activities:
Change in checks outstanding................................................ (983) 279
(Repayments)/proceeds of other long-term debt, net.......................... (533) 2,237
Proceeds from new revolving credit facility................................. 32,700 29,600
Repayments of new revolving credit facility................................. (26,113) (31,800)
Payment of dividends........................................................ (1,526) (1,399)
Treasury Stock.............................................................. (745) (31)
Other........................................................................ (497) 17
-------------------------
Net cash provided by (used in) financing activities................... 2,303 (1,097)
-------------------------
Effect of changes in foreign exchange rates................................ (107) 15
-------------------------
Net (decrease) increase in cash and cash equivalents....................... (775) 335
Cash and cash equivalents at beginning of period........................... 2,552 306
-------------------------
Cash and cash equivalents at end of period................................. $1,777 $641
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
TB Wood's Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(in thousands, except per share amounts)
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of TB Wood's Corporation and Subsidiaries (the "Company")
as of October 2, 1998 and January 2, 1998, and the results of operations and
cash flows for the Third Quarter and Year to Date ended October 2, 1998 and
October 3, 1997. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the fiscal
year ending January 1, 1999.
2. The major classes of inventories at October 2, 1998 and January 2, 1998
consisted of the following:
Unaudited
--------------------------
October 2, January 2,
1998 1998
----------------------------------------------------------------------------
Raw materials and supplies........................ $5,792 $6,073
Work in process................................... 9,021 8,467
Finished goods.................................... 19,802 15,417
------------------------
Total at FIFO cost................................ 34,615 29,957
Excess of FIFO cost over LIFO cost................ (3,819) (3,819)
------------------------
Total at LIFO cost................................ $30,796 $26,138
========================
3. On October 27, 1998, the Board of Directors declared a quarterly cash
dividend of $0.09 per share payable on October 30, 1998 to stockholders of
record on October 16, 1998.
4. In 1996, the Board of Directors authorized, subject to certain business and
market conditions, the Company to purchase of up to 200,000 of the Company's
common shares. Through October 2, 1998 the number of shares purchased under
this authorization was 93,797. At October 2, 1998, the number of treasury
shares issued to employees under employee option and stock purchase plans
was 29,293 and the number of shares issued for the Retirement Savings and
Investment plan was 32,269. As of October 2, 1998, 32,235 shares were held
in treasury, at cost.
5. Effective January 3, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires companies to disclose components of comprehensive income, defined
as the total of net income and all other nonowner changes in equity.
Total comprehensive income for the third quarters ended October 2, 1998
and October 3, 1997 was as follows:
Unaudited Unaudited
--------------------------
October 2, October 3,
1998 1997
----------------------------------------------------------------------------
Net Income........................................ $6,401 $6,481
Other comprehensive income, net of tax:
Foreign currency translation adjustments........ (107) 15
--------------------------
Total comprehensive income........................ $6,294 $6,496
==========================
6
<PAGE>
6. Basic net EPS is computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding. No dilution for any
potentially dilutive securities is included in basic EPS. Diluted EPS is
computed by dividing reported earnings available to common shareholders by
weighted average shares and common equivalent shares outstanding. All prior
year EPS amounts have been restated to conform to the provisions of SFAS
128. The computation of weighted average shares outstanding and net income
per share are as follows:
<TABLE>
<CAPTION>
Third Quarter Year to date
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October 2, October 3, October 2, October 3,
(in thousands, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding...... 5,862 5,832 5,870 5,830
Shares issued upon assumed exercise of outstanding
stock options............................................. 45 94 61 86
------- ------- ------- -------
Weighted average number of common and common equivalent
shares outstanding........................................ 5,907 5,926 5,931 5,916
======= ======= ======= =======
Net Income................................................ $1,759 $2,199 $6,401 $6,481
======= ======= ======= =======
Basic net income per common share......................... $0.30 $0.38 $1.09 $1.11
======= ======= ======= =======
Diluted net income per common share ...................... $0.30 $0.37 $1.08 $1.10
======= ======= ======= =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS (in thousands, except per share amounts)
TB Wood's Corporation and Subsidiaries (the "Company") posted net sales
for the third quarter 1998 of $34,150, compared to $31,257 for the third quarter
1997, an increase of 9.3 %. Year to date 1998 sales were $104,362 compared to
year to date 1997 sales of $93,485, an increase of $10,877 or 11.6%. The
increase in net sales in the third quarter and year to date was primarily due to
the addition of revenues from Berges Electronics, acquired in December 1997 and
the inclusion of Berges September financials in the third quarter. Prior to the
third quarter, there was a one month lag in reporting Berges financials. Berges
September 1998 net sales were $1,590.
Cost of sales ("COS") in the third quarter 1998 were $22,312 compared
to $19,770 for the same period last year, an increase of 12.9%. COS as a percent
of sales in the third quarter 1998 was 65.3% compared to 63.2% for the third
quarter 1997. Year to date 1998 COS was $66,896 or 64.1% of sales compared to
year to date 1997 COS of $59,540 or 63.7% of sales. The increase as a percent of
sales in the second quarter was primarily due to higher manufacturing costs
associated with the integration of the gear couplings product line into the San
Marcos facility, a shift to lower margin products in the mechanical business,
increased manufacturing expenses in the foundry and lower margins at the
Canadian subsidiary due to the weaker Canadian currency.
7
<PAGE>
Selling, general and administrative ("SG&A") expenses for the third
quarter 1998 were $8,401, compared to $7,259 for the third quarter 1997, an
increase of $1,142 or 15.7%. SG&A as a percent of sales increased to 24.6% in
the third quarter 1998 from 23.2% in the third quarter 1997. Year to date 1998
SG&A was $25,132 or 24.1% of sales compared to year to date 1997 SG&A of $21,190
or 22.7% of sales. SG&A expense for the third quarter and year to date 1998
excluding direct SG&A expense at Berges of $6,892 and $21,006 respectively were
below the prior year periods.
Operating income was $3,437 for the third quarter 1998 compared to
$4,228 for the third quarter 1997, a decrease of $791 or 18.7%. Operating income
as a percent of sales decreased to 10.1% in the third quarter 1998 from 13.5% in
the third quarter 1997. Year to date 1998 operating income was $12,334 or 11.8%
of sales compared to year to date 1997 operating income of $12,755 or 13.6% of
sales, a decrease of $421 or 3.3%.
Other expense for the third quarter 1998 was $99, compared to other
expense of $193 for the same period last year. Year to date 1998 other expense
was $183 compared to year to date 1997 other expense of $657. 1997 other expense
included charges related to the consolidation of the New Jersey and North
Carolina facilities, one time charges related to 1996 acquisitions and foreign
currency adjustments.
Net income for the third quarter 1998 was $1,759 or 5.2% of sales
compared to $2,199 or 7.0% of sales for the same period in the prior year, a
decrease of $440 or 20.0%. Year to date 1998 net income was $6,401 or 6.1% of
sales, compared to year to date 1997 net income of $6,481 or 6.9% of net sales,
a decrease of 1.2%.
LIQUIDITY AND CAPITAL RESOURCES (in thousands, except per share amounts)
The Company's principal sources of funds are cash flows from operations
and borrowings under the Company's revolving credit agreement. Net cash flows
provided by operating activities were $2,368 and $11,139 for the year to date
periods ended October 2, 1998 and October 3, 1997, respectively. This decrease
was primarily the result of increased investments in inventory, and payments for
accrued expenses.
The Company used $5,339 for investment purposes for year to date 1998
compared to $9,722 for the year to date 1997, a decrease of $4,383. Capital
expenditures were $4,537 in 1998 compared to $4,375 in 1997. In May 1997, the
Company acquired Graseby Controls, Inc. for $4,749, net of cash acquired. There
have been no such acquisitions in 1998.
Net cash provided by financing activities for year to date 1998 was
$2.3 million, an increase of $3.4 million compared to cash used in financing
activities of $1.1 million in the year to date 1997. Net proceeds from the
revolving credit facility for year to date 1998 were $6.6 million, which were
used to fund operating activities and capital expenditures. This was offset by
the payment of dividends of $1.5 million and a decrease in bank overdrafts of
$1.0 million. In 1997, the net repayments on the revolving credit facility were
$2.2 million, which included borrowing $5.0 million to finance the purchase of
Graseby Controls, Inc. The Company also borrowed $2.6 million in 1997 by issuing
Variable Rate Demand Revenue Bonds, under the authority of The Industrial
Revenue Board of the City of Chattanooga, to finance the new production facility
for the electronics systems business.
8
<PAGE>
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
Year 2000 approaches and thereafter, such systems may be unable to accurately
process certain date-based information. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in a variety of business
activities. The Company is undertaking a five step process to evaluate the
impact of the Year 2000 compliance issue. These steps involve an inventory of
Company systems, an evaluation and analysis of systems regarding the Year 2000
compliance impact, implementation of modifications to specified systems, unit
testing, and finally systems or integration testing to validate compliance. The
Company relies upon third party vendors which supply goods and services to the
Company and, although the Company has consulted with various vendors in order to
minimize the risk of the Year 2000 compliance issue, such third parties may be
affected by the Year 2000 compliance issue. While the Company believes its
actions shall have the effect of ameliorating year 2000 risk, there can be no
assurance that the Company's internal systems or equipment or those of third
parties on which the Company relies will be Year 2000 compliant in a timely
manner or that the Company's or third parties' contingency plans will mitigate
the effects of noncompliance. The failure of the systems or equipment of the
Company or third parties could result in the reduction or suspension of the
Company's operations and could have a material adverse effect on the Company.
Subject to the final results of the evaluation and analysis of the Year 2000
compliance issue, the Company believes that its Year 2000 compliance costs will
not be material to its operations, liquidity or capital resources. There is
still uncertainty regarding the scope of the Year 2000 compliance issue and, at
this time, the Company is unable to quantify the impact of potential Year 2000
compliance failures. The Company's Year 2000 compliance program and possible
contingency plans are still being developed and assessed in order to attempt to
minimize the effect of failures within the Company's reasonable control.
EURO CURRENCY
The Company has recognized that effective January 1, 1999 eleven of the
fifteen countries of the European Union will begin the transition to the single
monetary unit, the "euro". The Company has both operating divisions and
customers located in countries that are a part of the European Union. The
Company does not believe that there will be any material cost involved in order
to comply with these requirements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in values of derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting. The
Company is completing an analysis of SFAS No. 133 which is not expected to have
a material impact on the Company's results of operations or financial position.
9
<PAGE>
SAFE HARBOR STATEMENT
This quarterly report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results and
prospects. These forward-looking statements are based on current expectations
and are subject to risk and uncertainties. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary statement identifying important economic,
political and technology factors which, among others, could cause the actual
results or events to differ materially from those set forth in or implied by the
forward-looking statements and related assumptions.
Such factors include the following: (i) changes in the current and
future business environment, including interest rates and capital and consumer
spending; (ii) competitive factors and competitor responses to the Company's
initiatives; (iii) successful development and market introductions of
anticipated new products; (iv) changes in government laws and regulations,
including taxes; and (v) favorable environment to make acquisitions, domestic
and foreign, including regulatory requirements and market value of candidates.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K - There were no reports on Form 8-K filed for the
quarter ended October 2, 1998.
10
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Chambersburg and Commonwealth of Pennsylvania, on November 16, 1998.
TB WOOD'S CORPORATION
By: /s/ David H. Halleen
-----------------------------------------------
DAVID H. HALLEEN
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR TO DATE PERIOD ENDED OCTOBER 2, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-END> OCT-02-1998
<CASH> 1,777
<SECURITIES> 0
<RECEIVABLES> 20,471
<ALLOWANCES> 410
<INVENTORY> 30,796
<CURRENT-ASSETS> 54,305
<PP&E> 53,567
<DEPRECIATION> (28,210)
<TOTAL-ASSETS> 95,994
<CURRENT-LIABILITIES> 19,612
<BONDS> 32,326
0
0
<COMMON> 59
<OTHER-SE> 27,382
<TOTAL-LIABILITY-AND-EQUITY> 95,994
<SALES> 104,362
<TOTAL-REVENUES> 105,273<F1>
<CGS> 66,896
<TOTAL-COSTS> 25,132
<OTHER-EXPENSES> 183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,476
<INCOME-PRETAX> 10,675
<INCOME-TAX> 4,274
<INCOME-CONTINUING> 6,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,401
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.08
<FN>
<F1>Revenues are reported net of credits in the Statement of Operations
</FN>
</TABLE>
