<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 1-5881
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BROWN & SHARPE MANUFACTURING COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 050113140
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(State or Other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Precision Park, 200 Frenchtown Road, North Kingstown, Rhode Island 02852
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(Address of principal executive offices and zip code)
(401) 886-2000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date; 12,918,671 shares of Class A
common stock, 508,773 shares of Class B common stock, par value $1 per share,
outstanding as of September 30, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS*
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Dollars in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPT. 30, FOR THE NINE MONTHS ENDED SEPT. 30,
-------------------------------- ------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $74,879 $78,555 $247,388 $227,451
Cost of sales 49,816 52,882 165,564 150,589
Research and development expense 2,917 2,937 8,570 7,499
Selling, general and
administrative expense 19,077 19,830 61,296 61,682
------- ------- -------- --------
Operating profit 3,069 2,906 11,958 7,681
Interest expense 1,484 1,353 4,410 4,286
(Loss) on disposal of subsidiary -- (1,346) -- (1,346)
Other income, net 63 155 605 771
------- ------- -------- --------
Income before income taxes 1,648 362 8,153 2,820
Income tax provision 379 72 1,875 564
------- ------- -------- --------
Net income $ 1,269 $ 290 $ 6,278 $ 2,256
======= ======= ======== ========
Net income per common share:
Basic $ .09 $ .02 $ .47 $ .17
======= ======= ======== ========
Diluted $ .09 $ .02 $ .46 $ .17
======= ======= ======== ========
Weighted average shares
outstanding 13,427,444 13,522,795 13,380,206 13,489,843
Weighted average shares
outstanding and dilutive options 13,584,347 13,522,795 13,634,688 13,489,843
</TABLE>
* The accompanying notes are an integral part of the financial statements.
2
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Sept. 30, 1998 December 31, 1997
--------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,812 $ 20,458
Accounts receivable, net of allowances for
doubtful accounts of $3,130 and $3,456 109,542 106,072
Inventories 84,607 73,430
Deferred income taxes 1,274 1,274
Prepaid expenses and other current assets 3,880 5,176
-------- --------
Total current assets 217,115 206,410
Property, plant and equipment:
Land 6,873 6,627
Buildings and improvements 43,770 41,211
Machinery and equipment 94,487 85,405
-------- --------
145,130 133,243
Less-accumulated depreciation 92,331 82,470
-------- --------
52,799 50,773
Goodwill, net 8,689 9,211
Other assets 37,579 33,680
-------- --------
$316,182 $300,074
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Notes payable and current
installments of long-term debt $ 9,462 $ 3,995
Accounts payable 42,079 44,532
Accrued expenses and income taxes 51,021 44,699
-------- --------
Total current liabilities 102,562 93,226
Long-term debt 65,201 72,067
Long-term liabilities 19,462 18,283
SHAREOWNERS' EQUITY:
Preferred stock, $1 par value;
authorized 1,000,000 shares
Common stock:
Class A, par value $1; authorized 30,000,000
shares; issued and outstanding 12,918,671 shares
in 1998 and 12,821,867 shares in 1997 12,919 12,822
Class B, par value $1; authorized 2,000,000 shares;
issued and outstanding 508,773 shares in 1998
and 513,065 shares in 1997 509 513
Additional paid in capital 112,468 111,772
(Deficit) Earnings employed in business (4,479) (10,757)
Accumulated other comprehensive income 7,995 2,603
Treasury stock: 42,592 shares in 1998 and
in 1997 at cost (455) (455)
-------- --------
Total shareowners' equity 128,957 116,498
-------- --------
$316,182 $300,074
======== ========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
3
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Months Ended Sept. 30,
-----------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS:
Net income $ 6,278 $ 2,256
Adjustment for Noncash Items:
Depreciation and amortization 8,219 7,367
Unfunded pension 272 291
Deferred compensation -- 34
Termination indemnities 60 706
Changes in Working Capital:
Decrease in accounts receivable 710 12,628
Increase in inventories (6,885) (8,625)
Decrease in prepaid expenses
and other current assets 603 1,162
Increase (Decrease) in accounts payable
and accrued expenses 201 (2,299)
-------- --------
Net Cash Provided by Operations 9,458 13,520
-------- --------
INVESTMENT TRANSACTIONS:
Acquisition of equity investee, net of cash acquired -- (3,000)
Capital expenditures (6,846) (6,096)
Sale of an investment 891 --
Investment in other assets (5,853) (519)
-------- --------
Cash (Used in) Investment Transactions (11,808) (9,615)
-------- --------
FINANCING TRANSACTIONS:
Increase in short-term debt -- 24,420
Principal payments of long-term debt (2,374) (27,001)
Exercise of stock options 696 --
Other financing activities (157) 148
-------- --------
Cash (Used in) Financing Transactions (1,835) (2,433)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,539 (5,117)
-------- --------
CASH AND CASH EQUIVALENTS:
(Decrease) during the period (2,646) (3,645)
Beginning balance 20,458 20,158
-------- --------
Ending balance $ 17,812 $ 16,513
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 2,978 $ 3,453
======== ========
Taxes paid $ 1,290 $ 1,298
======== ========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
4
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollars in Thousands)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations 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 of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Brown & Sharpe
Manufacturing Company's annual report on Form 10-K for the year ended
December 31, 1997.
2. Cash and cash equivalents are comprised of cash-on-hand, deposits in banks
and short-term marketable securities with a maturity at acquisition of
three months or less.
3. The composition of inventory is as follows:
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
<S> <C> <C>
Parts, raw materials, and supplies $35,261 $29,760
Work in process 18,559 17,341
Finished goods 30,787 26,329
------- -------
$84,607 $73,430
======= =======
</TABLE>
4. Other assets at September 30, 1998 includes $4.6 million of costs related
to the installation of Enterprise Resource Planning software ("ERP")
system. The installation of the ERP system began in 1998 and is expected
to continue until the year 2000.
5. The composition of long-term liabilities is as follows:
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
<S> <C> <C>
Other long-term liabilities $ 2,137 $ 2,270
Deferred income taxes 2,069 2,001
Unfunded accrued pension cost 5,995 5,297
Termination indemnities 9,261 8,715
------- -------
$19,462 $18,283
======= =======
</TABLE>
6. Income taxes include provisions for federal, foreign and state income taxes
and are based on the Company's estimate of effective income tax rates for
the full year. The tax provision for the first nine months of 1998 and
1997 is $1,875 and $564, respectively.
5
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7. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine Months Ended Sept. 30,
------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,269 $ 290 $ 6,278 $ 2,256
Denominator:
Denominator for basic
earnings per share:
Weighted average shares 13,427 13,523 13,380 13,490
Effect of dilutive securities:
Employee stock options 157 -- 255 --
------- ------- ------- -------
Denominator for diluted
earnings per share:
Weighted average shares and
assumed conversions 13,584 13,523 13,635 13,490
======= ======= ======= =======
Basic Earnings Per Share $ .09 $ .02 $ .47 $ .17
======= ======= ======= =======
Diluted Earnings Per Share $ .09 $ .02 $ .46 $ .17
======= ======= ======= =======
</TABLE>
8. As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included
in other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
Accumulated other comprehensive (loss) income, net of related tax, at
September 30, 1998 and December 31, 1997 is composed of foreign currency
translation adjustments amounting to $7,995 and $2,603, respectively.
Components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine Months Ended Sept. 30,
------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $1,269 $ 290 $ 6,278 $ 2,256
Other comprehensive income
(loss), net of tax:
Foreign currency
translation adjustments 8,509 (5,972) 5,392 (15,921)
------ ------- ------- --------
Comprehensive income (loss) $9,778 $(5,682) $11,670 $(13,665)
====== ======= ======= ========
</TABLE>
6
<PAGE>
9. Contingencies.
Labor Relations. The registrant references its earlier filed report
on Form 10-Q for the quarter ending March 30, 1998 furnishing information
concerning litigation brought against the Company by the International
Association of Machinists and Aerospace Workers ("IAM") which arose out of a
strike by approximately 1,800 production employees represented by the IAM at the
Company's Rhode Island operations which began in October of 1981. On June 15,
1998, the Supreme Court of the United States entered an order denying the IAM's
petition for a writ of certiorari and declined to review a December 1997
decision of the National Labor Relations Board dismissing unfair labor practice
charges brought by the IAM against the Company following commencement of the
strike. As a result of the Supreme Court's ruling, the litigation brought
against the Company by the IAM, which has been pending for seventeen years, is
now concluded.
Environmental. On March 1, 1995, the Company received a notice from
the State of New York asserting a claim against it, along with a group of
approximately ten other companies, to recover costs incurred by the New York
State Department of Environmental Conservation to clean up a waste disposal site
in Poughkeepsie, New York. The State has alleged that the Company's former
subsidiary, Standard Gage Company, Poughkeepsie, New York, acquired in 1987 and
merged with and into the Company in 1991, contributed hazardous waste to the
site for disposal and that the Company is a PRP as the surviving corporation to
the merger. The total claim asserted by the State against all parties is
approximately $500,000, with no volumetric assignment of responsibility having
yet been determined; however, the State has expressed a willingness to settle
its claim with all PRPs receiving the notice. The Company is continuing efforts
to settle this claim and believes that any potential loss it might incur as a
result of any involvement or settlement at this site would not be material.
On April 20, 1998, the Company received a notice of responsibility letter from
the Rhode Island Department of Environmental Management informing it that the
Company is one of a group of at least twenty-five other companies similarly
notified that have responsibility under State environmental laws and RIDEM
regulations to perform investigation and remedial clean-up action at the closed
Sanitary Landfill site in Cranston, RI. The RIDEM has indicated it believes the
total cost of remediation of the Site to be in the range of $3 to $4 million,
and that there are numerous other responsible parties who were not notified of
their responsibility. The Company has joined the working group of notified
responsible parties to propose a remedy to the State for the Site. At this
time, the Company does not believe it was a major contributor of industrial
waste to the site or that its potential liability at the site is material.
On May 8, 1998, the Company received a notice from the United States
Environmental Protection Agency, Region II, informing it that the Company is,
along with numerous other PRPs, most of whom have settled their liability, a
potentially responsible party ("PRP") having liability under Federal
Environmental law for past and future clean-up costs incurred and to be incurred
by the government at the Hertel Landfill Superfund Site, Plattekill, New York.
The Company's former subsidiary Standard Gage Company, Inc. of Poughkeepsie, NY,
which was acquired in 1987 and merged with and into the Company in 1991,
generated certain wastes which were disposed of at the Site in the mid-1970's.
On July 24, 1998, the EPA made an offer of settlement to the Company to resolve
its liability at the Site for a cash payment of $87,600 which the Company has
accepted and which includes a release and covenant not to sue from the EPA and
contribution protection from claims for response costs incurred by any other
parties. The EPA settlement offer does not however include a release of
liability for costs incurred by the EPA for future groundwater remediation at
the Site. Groundwater remediation is not presently being conducted at the Site
but is provided for in the Record of Decision for the Site, and the EPA will
consider whether to eliminate or modify the groundwater component of the
remedial action plan based on the test results of future groundwater monitoring.
Product Liability and Other Litigation Incidental to the Business. The Company
is involved in a number of product liability claims and lawsuits by plaintiffs
seeking monetary damages for personal injury which arose out of and were
incidental to the sale of products manufactured by the Company in its
discontinued metal cutting machine tool and fluid power businesses and certain
other litigation and claims incidental to the conduct of its business. The
potential liability of the Company for these claims and suits is adequately
7
<PAGE>
covered by insurance or reserves established for such contingencies. The
Company is contesting or defending these claims and suits and management
believes that the ultimate liability, if any, resulting from these matters will
not have a material effect on the Company's financial position.
8
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
(Quarter Ended September 30, 1998 compared to Quarter Ended September 30, 1997)
Sales.
Sales for the third quarter of 1998 were $74.9 million compared with the third
quarter of 1997 sales of $78.6 million, and were 4.7% below the 1997 level.
Third quarter sales for 1998 would have been $0.3 million lower than reported in
1998, if foreign denominated sales had been translated at the foreign exchange
rates used for the third quarter of 1997. When 1998 third quarter sales are
translated at the third quarter of 1997 exchange rates, 1998 sales amount to
$74.6 million, a $4.0 million decrease from 1997. The $4.0 million reduction in
sales was due to a decrease in sales of $2.8 million in the Measuring Systems
Division ("MS"), $2.0 million in the Precision Measuring Instruments Division
("PMI"), and $0.5 million from Technicomp, which was sold in the third quarter
of 1997, offset by a $1.3 million increase in 1998 sales in the Custom Metrology
Division ("CM").
The $2.8 million reduction in MS sales was primarily due to a decrease of
approximately $3.3 million in machine shipments and an increase of approximately
$0.5 million of aftermarket services revenue. Of the $3.3 million decrease in
machine sales, approximately $4.0 million was due to lower sales of larger, more
fully configured coordinated measuring machines ("CMM") , offset by increased
sales of $0.7 million for the smaller CMMs.
Sales for PMI were down $2.0 million due to decreased sales in the United States
arising from customers consolidating operations and reducing inventories, offset
by increased sales volume in the European market. Sales for CM were up
$1.3 million due to increased sales of can gauging equipment.
Earnings.
The Company's net income for the third quarter of 1998 was $1.3 million, which
compared with $0.3 million for the same period in 1997.
The Company had an operating profit of $3.1 million in the third quarter of 1998
compared to $2.9 million for the same period in 1997. Gross profit for the third
quarter of 1998 was $25.1 million, or 33.5%, of sales. This compares with a 1997
gross profit of $25.7 million, or 32.7% of sales. The $0.6 million decrease in
1998 gross profit comes from reduced MS sales in 1998 and the disposition of
Technicomp in 1997 offset by increased gross profit from PMI and CM. The 0.8%
increase in gross profit as a percentage of net sales is due to PMI's increased
gross margin resulting from improvement in production efficiencies, which offset
the impact of reduced PMI sales noted above. CM's gross margin in 1998 was also
higher than 1997, while MS gross margin remained approximately the same bringing
the overall gross margin in 1998 to 33.5% of net sales.
Selling, general and administrative expenses ("SG&A") in the third quarter of
1998 were $0.8 million lower than 1997, but higher than the comparable period
1997 SG&A, as a percentage of sales, by 0.3%. SG&A expenses for 1998 translated
at 1997 exchange rates were approximately the same as the actual amount reported
for the quarter ended September 30, 1998. SG&A expenses in 1998 included foreign
exchange losses amounting to $0.3 million, which was $1.1 million lower than
foreign exchange losses in 1997, which contributed to most of the $0.8 million
improvement in SG&A expenses in 1998.
Results for the third quarter of 1998 included a $0.4 million tax provision as
compared to $0.1 million in the third quarter of 1997. The effective tax rate
in the third quarter of 1998 was 23% as compared to 20% in the same period in
1997. The increase is due primarily to a change in the tax law in a foreign
jurisdiction in 1998.
9
<PAGE>
RESULTS OF OPERATIONS
(Nine Months Ended September 30, 1998 compared to Nine Months Ended
September 30, 1997)
Sales.
Sales for the first nine months of 1998 were $247.4 million compared with the
first nine months of 1997 sales of $227.5 million, and were 8.8% above the 1997
level. The first nine months sales for 1998 would have been $2.0 million higher
than reported in 1998, if foreign denominated sales had been translated at 1997
foreign exchange rates. The reduced U.S. Dollar value of 1998 foreign sales,
which results from translating the 1998 foreign denominated sales using lower
exchange rates, is due to the strength of the U.S. Dollar during 1998. When 1998
first nine months sales are translated at the first nine months of 1997 exchange
rates, the first nine months of 1998 sales amount to $249.4 million, a $21.9
million increase over 1997. The $21.9 million sales increase resulted from a
$23.9 million increase in MS sales and a $1.5 million increase from CM which was
offset by a decrease in PMI sales of $2.1 million and a decrease of $1.4 million
due to the sale of Technicomp during the third quarter of 1997.
The $23.9 million increase in MS sales was primarily due to an increase of
approximately $17.9 million in machine shipments and an increase of $6.0 million
of aftermarket services revenue. Of the $17.9 million increase, approximately
$14.9 million was from additional sales of the larger, more fully configured,
CMMs, and increased sales of $3.0 million for smaller CMMs. Approximately
$3.7 million of the $6.0 million increase in aftermarket services revenue is due
to the inclusion of the sales of ASI which were not included in 1997 prior to
its acquisition in July 1997.
Sales for PMI were down $2.1 million due to decreased sales in Japan and the
United Kingdom, which were partially offset by increased sales volumes in
Germany and Switzerland. Sales for CM were up $1.5 million due to increased
sales volume of can gauging and profile machines which was partially offset by
reduced sales of calibration equipment.
Earnings.
The Company's net income for the first nine months of 1998 was $6.3 million,
which compared with $2.3 million for the same period in 1997.
The Company had an operating profit of $12.0 million in the first nine months of
1998 compared to $7.7 million for the same period in 1997. Gross profit for the
first nine months of 1998 was $81.8 million, or 33.1%, of sales. This compares
with a 1997 gross profit of $76.9 million, or 33.8% of sales. The $4.9 million
increase in 1998 gross profit comes primarily from MS due to higher sales
volumes. The 0.7% decrease in gross profit as a percentage of net sales is due
to lower margins for MS, which was offset by improved margins for PMI and CM.
MS's lower gross margin was due to decreased margins for the smaller CMMs and
aftermarket services that were partially offset by improved margins for the
larger, more fully configured CMMs that benefited, in part, from the
restructuring that occurred in 1997. PMI's gross margin in 1998 was higher than
1997 due to an increase in production efficiencies, and CM's gross margin in
1998 was higher than 1997 due to an improved product mix, bringing the overall
gross margin in 1998 to 33.1% of net sales.
Research and development expenses were $1.1 million higher in 1998 due to
increased spending of approximately $4.2 million in software development and
$0.5 million for non-contact sensing technology offset by decreased expenditures
of $3.8 million in other product development areas, where common design efforts
are reducing duplicative development efforts at our various operations.
Selling, general and administrative expenses ("SG&A") in the first nine months
of 1998 were 24.8% of sales as compared to 27.1% for the period in 1997. SG&A
expenses were $0.4 million lower in 1998. SG&A expenses for 1998 translated at
1997 exchange rates were $0.6 million higher than the $61.3 million reported for
the nine months ended September 30, 1998. After adjustment for 1997 foreign
exchange rates, 1998 SG&A expenses were $0.2 million higher than 1997 SG&A
expenses. The major reasons for the $0.2 million difference was due to the
inclusion of $0.7 million of realized foreign exchange losses in 1997 SG&A
expenses, which were not included in 1998 SG&A expenses; in addition to lower
payroll and payroll related expenses and travel and entertainment expenses
substantially offset
10
<PAGE>
by increased agents' commissions and ASI expenses that were not included in 1997
operating results prior to its acquisition in July 1997.
Results in the first nine months of 1998 included a $1.9 million tax provision
as compared to $0.6 million in the first nine months of 1997. The effective tax
rate in the first nine months of 1998 was 23% as compared to 20% in the same
period in 1997. The increase is due primarily to a change in the tax law in a
foreign jurisdiction in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Over the last several years, prior to the 1996 equity offering, the Company had
funded its working capital, capital expenditure, research and development and
other cash needs from operating cash flows, sales proceeds from discontinued
businesses, borrowings under short-term credit facilities, and an aggregate of
$33.5 million of term and mortgage indebtedness incurred in 1994. In October
1996, the Company completed a $48 million public equity offering of 4.4 million
new shares of common stock. In November 1997, the final phase of the planned
restructuring of the Company's balance sheet was completed when the Company
entered into two financing arrangements to refinance certain existing debt
obligations of about $45.0 million and provide additional financing for future
needs of the Company. One of the borrowings was a $50.0 million private
placement of senior notes with a 10 year maturity and an interest rate of 7.29%.
The other arrangement was a $30.0 million three year syndicated multi-currency
revolving credit facility with four banks. 65% of the shares of certain of the
Company's foreign subsidiaries are pledged as security under the 1997
financings.
$11.7 million of the private placement was used to repay a bridge loan incurred
two months earlier to pay a portion of the $25.0 million notes payable due
September 28, 1997, the balance of which was paid with internally generated
funds. $13.0 million of the private placement was used to retire the 9 1/4%
convertible subordinated debentures, and the remaining balance is cash available
for payment of the $6.8 million mortgage when it matures in 1999 and to fund
certain of the Company's development plans and for other general corporate
purposes. As of September 30, 1998, the Company has not borrowed any amount
under the revolving credit facility described above. At September 30, 1998, the
Company's outstanding indebtedness was $74.7 million (including the current
portion) of long-term debt. There was no short-term debt outstanding at
September 30, 1998. The Company's cash and cash equivalents at September 30,
1998 were $17.8 million.
At December 31, 1997, the annual maturities of the Company's long-term debt were
$4.0 million, $9.0 million, $3.8 million, $12.1 million, and $7.8 million for
1998, 1999, 2000, 2001, and 2002, respectively, and $39.4 million thereafter.
Management believes that the two 1997 financing arrangements and the 1996 public
equity offering and the further additional borrowing capacity the offering
allows along with the available existing short- and long-term borrowings, cash
on hand and future cash flow from operations will be sufficient to meet
foreseeable cash requirements of the Company for the next three to four years.
Significant acquisitions or strategic partnerings could, however, increase the
Company's capital requirements, and in such event the Company might seek to
raise additional debt or equity.
CASH FLOW. Net cash provided by operations in the first nine months of 1998 was
$9.5 million, as compared to net cash provided by operations of $13.5 million in
1997. For the nine months ended September 30, 1998, cash flow included, net
income of $6.3 million increased by depreciation and other non-cash items of
$8.6 million, offset by decreases in working capital of $5.4 million. For the
nine months ended September 30, 1997, cash flow included, net income of $2.3
million, increased by depreciation and other non-cash items of $8.4 million and
decreases in working capital of $2.8 million.
Net cash used in investment transactions in 1998 was $11.8 million as compared
to net cash used in investment transactions during 1997 of $9.6 million. During
the first nine months of 1998, investment transactions included capital
expenditures of $6.8 million and $5.4 million for a continuing upgrade of its
management information systems. Also during the first nine months of 1998, the
Company sold an
11
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investment for $0.9 million which was offset partially by investing in other
assets $0.5 million. During the first nine months of 1997, investment
transactions included capital expenditures of $6.1 million and $1.6 million for
certain information systems. In addition, in 1997 the Company paid $3.0 million
to acquire the remaining 50% interest of its 50% owned equity investee,
Automation Software, Inc.
Cash used in financing transactions was $1.8 million during the first nine
months of 1998 compared with $2.4 million used by financing transactions for the
same period in 1997. Financing transactions during 1998 consisted of principal
payments of long-term debt of $2.4 million, offset by $0.7 million received from
the exercise of stock options. Financing transactions during the same period in
1997 consisted of a $24.4 million increase in short-term borrowings, offset by
principal payments of $27 million of long-term debt.
WORKING CAPITAL. Working capital of $114.6 million at September 30, 1998
increased from $113.2 million at December 31, 1997 principally due to an
increase in receivables and inventory partially offset by an increase of accrued
expenses and current portion of long-term debt. Inventories increased to
$84.6 million at September 30, 1998, an increase of $11.2 million from the end
of 1997, and accounts receivable increased $3.5 million from December 31, 1997.
In addition, total short- and long-term borrowing of $74.7 million at
September 30, 1998 compared to $76.1 million at December 31, 1997.
PRODUCT DESIGN AND MANUFACTURING ENGINEERING. The Company invested
$13.3 million, or 5.4% of sales, and $11.4 million, or 5.0% of sales,
respectively, for product design and manufacturing engineering for the first
nine months of 1998 and 1997.
FORWARD-LOOKING INFORMATION
This section and other portions of this report include certain forward-looking
statements about the Company's sales, expenditures, and various risks and
uncertainties, including those set forth in "Risk Factors". Such statements are
subject to risks that could cause the actual results or needs to vary materially
from those currently anticipated by the Company. These risks are discussed in
"Risk Factors" in the Company's Report on Form 10-K for the year 1997.
Effective January 1, 1999, eleven of fifteen member countries of the European
Union ("EU") are scheduled to establish fixed conversion rates between their
existing sovereign currencies and a common currency, the "Euro". During a
transition period from January 1, 1999 to June 20, 2002, non-cash transactions
may be denominated in either Euros or the existing currencies of the EU
participants from January 1, 1999 to January 1, 2002. After January 1, 2002,
all non-cash transactions must be denominated in Euro. Euro currency will not
be issued until January 1, 2002, and on June 30, 2002, all national currencies
of the EU participating countries will become obsolete.
The Company has significant operations in several of the EU countries that will
convert, or that may convert, to the Euro. The introduction of the Euro on
January 1, 1999 may present substantial risk to the Company for its operations
located in the EU participating countries. These risks include competitive
implications of conversion resulting from harmonization of pricing policies and
practices in our European operations; possible increased costs associated with
the conversion; and the ability to modify existing information systems on a
timely basis, if at all, as well as the ability to absorb the costs associated
with the systems modifications, if required.
The Company has formed a committee to review the impact of the Euro conversion
on those business units operating in EU countries that are participating in the
Euro conversion described above. However, the Company does not know at this
time what impact, if any, the Euro conversion will have on its financial
condition and results of operations or what additional costs may be incurred by
the Company to convert to the new currency. The Company is presently focusing
on three areas:
. Pricing Policies a review of the implications of various pricing
alternatives.
. Accounting for transactions in Euro during the transition period.
12
<PAGE>
. Banking the ability of the Company's banks to receive and make payments in
Euro. Also to provide the Company with bank statements in both Euro and
legacy currency.
At this time, a number of issues have been reviewed and resolved. However, a
number of issues appear to require action. After the review is completed on
these areas, the remainder of the items identified as requiring attention will
be addressed. The Company expects to have this analysis completed by late 1998,
but there can be no assurance that this analysis will be fully completed on a
timely basis or issues identified in this analysis will be properly addressed on
a timely basis.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer equipment and
software and devices with embedded technology that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company believes that Year 2000 disruptions could affect it in three areas:
(i) disruptions to the Company's internal systems; (ii) disruptions to the
Company's suppliers and customers; and (iii) problems within the Company's
products sold to customers.
Internal Systems. The Company has undertaken various initiatives intended to
- ----------------
ensure that its internal computer equipment and software will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "internal computer equipment and software" includes systems that are
commonly thought of as IT systems, including accounting, data processing,
telephone/PBX systems, servers and mainframes, and other miscellaneous systems,
as well as systems that are not commonly thought of as IT systems, such as
equipment at facilities, fixtures, alarm systems, fax machines, or other
miscellaneous systems. Both IT and non-IT systems may contain embedded
technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. Based upon its identification and
assessment efforts to date, the Company believes that certain of the internal
computer equipment and software it currently uses will require replacement or
modification. The Company currently anticipates that its Year 2000
identification, risk assessment, remediation and testing efforts with respect to
internal systems will be completed by mid-1999, and that such efforts will be
completed prior to any currently anticipated impact on its internal computer
equipment and software. The Company estimates that as of November 12, 1998, it
had completed greater than 75% of the initiatives that it believes will be
necessary to address potential Year 2000 issues relating to its internal
computer equipment and software. The Company currently estimates that the cost
for remediation of its internal computer equipment and software, including the
inspection costs at its facilities, will not exceed $2 million. Should the
Company's remediation efforts regarding its internal computer equipment and
software prove not to be fully adequate, the Company would have to operate
manually or outsource their internal operation until proper remediation efforts
gave way to renewed automation. The cost associated with any such outsourcing of
finance and accounting efforts has not been determined at this time. In the
event that there exists Company facilities and shop floor Year 2000 issues which
remain unresolved and the Company is required to shut down certain facilities,
the loss accrued as a result of a facilities shutdown could have a material
adverse effect on the business and results of operations of the Company.
Suppliers and Customers. The Company has created and distributed two waves
- -----------------------
of Year 2000 supplier readiness surveys, and is creating a Year 2000 Readiness
survey to be distributed to all of its known customers. The surveys have four
purposes: (i) to assure the Company that its customers and suppliers are fully
aware of the Year 2000 issues and their ramifications; (ii) to determine the
extent to which interfaces with suppliers are vulnerable to Year 2000 issues and
whether the products and services purchased from such suppliers are Year 2000
compliant; (iii) to assure the Company that the flow of new equipment orders, as
well as service and warranty orders will be substantially uninterrupted by the
Year 2000 problem; and (iv) to assure the Company that the Year 2000 problem
will not create an inability on the customer's part to pay invoices in a timely
manner. Although the Company recently completed a major supplier consolidation
effort, there still exist various sole sources of supply for certain components
used by the Company as well as a sole source supplier for
13
<PAGE>
low to medium accuracy electronic touch trigger sensor probes and heads. The
Company will initially focus on critical, single source suppliers and is
presently compiling a list of such suppliers for the purpose of scheduling
meetings and supplier audits. In the event that these single source, critical
suppliers are not compliant in advance of the turn of the century, and in the
event that the areas of non-compliance will affect the Company, the supplier re-
sourcing process will commence. The Company currently estimates that the cost
and time to benchmark and re-source a supplier, if a single source supplier,
could materially affect the business. Should a customer be in a non-compliant
situation with regard to only their internal systems, aside from the cost of
inconvenience, the Company believes there would be minimal additional costs to
transacting normal business with them. In the event that the non-compliance
issues were customer shop floor and/or facilities related, the ramifications
could be materially greater.
Products. Software in some of the Company's products is date sensitive and
- --------
therefore subject to Year 2000 issues. There are no date sensitivities known in
any other facet of the Company's products. The Company believes that the
software in its products currently being shipped is Year 2000 compliant. Older
products, however, that have date sensitivities in the software are not or may
not be Year 2000 compliant, and the Year 2000 compliance of such products must
also be evaluated by the customer in light of the Year 2000 compliance status of
the customer's specific computer and operating system that are being used by the
customer to obtain the benefits of the Company's products in the customer's
manufacturing/assembly operations. The Company has not completed its
investigation of the status, with respect to Year 2000 compliance, of its
products that are not currently offered and expects to have its definitive
policy on this aspect available by March 31, 1999. In the meantime, the Company
has begun discussions with customers regarding the cost of updating or upgrading
the Company's software to ensure its Year 2000 compliance with respect to
certain older equipment.
Contingency Plan. The Company has not developed a contingency plan for dealing
- ----------------
with the most reasonably likely worst case scenario resulting from the failure
by the Company and certain third parties to complete efforts necessary to
achieve Year 2000 compliance on a timely basis. The Company currently plans to
complete a contingency plan by March 31, 1999 that would permit the Company to
continue close to normal business operations and recognize only minimal losses.
The costs of the Company's Year 2000 identification, assessment, remediation and
testing efforts and the dates on which the Company believes it will complete
such efforts are based upon management's best estimates, which were derived
using numerous assumptions regarding future events, including the continued
availability of certain resources, third-party remediation plans, and other
factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in Year 2000 issues, the ability to identify, assess, remediate and test all
relevant computer codes and embedded technology, and similar uncertainties. In
addition, variability of definitions of "compliance with Year 2000" and the
myriad of different products and services, and combinations thereof, sold by the
Company may lead to claims whose impact on the Company is not currently
estimable. No assurance can be given that the aggregate cost of defending and
resolving such claims, if any, will not materially adversely affect the
Company's results of operations. Although some of the Company's agreements with
suppliers and others from whom it purchases products contain provisions
requiring such parties to indemnify the Company under some circumstances, there
can be no assurance that such indemnifications arrangements will cover all of
the Company's potential liabilities and costs related to claims by third parties
related to the Year 2000 issue.
14
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
- ------ -----------------
Refers to footnote 8 under contingencies for further details.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
A. See Exhibit Index annexed.
B. No Form 8-K was filed during the quarter ended September 30, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN & SHARPE MANUFACTURING COMPANY
By: /s/ Charles A. Junkunc
------------------------------------------
Charles A. Junkunc
Vice President and Chief Financial Officer
(Principal Financial Officer)
November 12, 1998
15
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
EXHIBIT INDEX
-------------
27. Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 17,812
<SECURITIES> 0
<RECEIVABLES> 112,672
<ALLOWANCES> 3,130
<INVENTORY> 84,607
<CURRENT-ASSETS> 217,115
<PP&E> 145,130
<DEPRECIATION> 92,331
<TOTAL-ASSETS> 316,182
<CURRENT-LIABILITIES> 102,562
<BONDS> 0
0
0
<COMMON> 13,428
<OTHER-SE> 115,529
<TOTAL-LIABILITY-AND-EQUITY> 128,957
<SALES> 247,388
<TOTAL-REVENUES> 247,388
<CGS> 165,564
<TOTAL-COSTS> 235,430
<OTHER-EXPENSES> (605)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,410
<INCOME-PRETAX> 8,153
<INCOME-TAX> 1,875
<INCOME-CONTINUING> 6,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,278
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
