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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
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 0-1837
FEDERAL SCREW WORKS
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0533740
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
535 Griswold, Suite 2400, Detroit, Michigan 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 313-963-2323
Securities registered pursuant to Section 12(b)
of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
(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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part 3 of this Form 10-K or any
amendment to this Form 10-K. |X|
As of September 1, 1999 the aggregate market value of the common stock of
Registrant held by non-affiliates was $33,344,688.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of September 1, 1999, is as follows:
Title of Class Number of Shares Outstanding
Common Stock, 1,075,912
$1 Par Value
DOCUMENT INCORPORATED BY REFERENCE
Certain information from the Proxy Statement of the Registrant dated
September 27, 1999 has been incorporated by reference in response or partial
response to Items 10, 11, 12 and 13 in this Report.
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PART I
ITEM 1. BUSINESS.
Federal Screw Works (the "Registrant"), originally incorporated in
Michigan in 1919, is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single industry segment.
The Registrant's products are manufactured at several plants and are
fabricated from metal rod and bar, which are generally available at
competitive prices from multiple sources. Production is in high-volume job
lots to the specification of original equipment manufacturers and sold to
them for incorporation into their assemblies. The majority of these sales are
to manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Approximately 86% of the Registrant's net sales in fiscal 1999 (89%
and 90% in fiscal 1998 and fiscal 1997, respectively) were made either
directly or indirectly to automotive companies. The Registrant generally does
not require collateral from its customers.
While the Registrant holds a number of patents, it believes that the
successful continuation of its business is not dependent on any single patent
or group of patents, trademarks, or licenses. (The Registrant retains the
rights to certain royalties related to an exclusive license agreement with
semiconductor manufacturer Silicon Systems incorporated (SSi), whereunder SSi
will produce and market certain phonetic speech synthesizer chips under the
SSi product name. The Registrant does not consider the royalty agreement to
be material to its business.)
The OEM supplier industry is highly cyclical and, in large part,
dependent upon the overall strength of consumer demand for light trucks and
passenger cars. There can be no assurance that the automotive industry, for
which the Company supplies components, will not experience downturns in the
future. A decrease in overall consumer demand for motor vehicles, in general,
or specific segments, could have a material adverse effect on the Company's
financial condition and results of operations.
There are no practices and conditions of the Registrant or known to
the Registrant relating to working capital items which are material to an
understanding of the Registrant's business in the industry in which it
competes.
The Registrant's Shareholders are aware of the Registrant's
dependence upon sales to the two largest U.S. automobile manufacturers, a
condition that has existed for at least fifty years. Although the Registrant
has purchase orders from such customers, such purchase orders generally
provide for supplying the customer's requirements for a particular model or
model year rather than for manufacturing a specific quantity of products. The
loss of any one of such customers or significant purchase orders could have a
material adverse effect on the Registrant. These customers are also able to
exert considerable pressure on component suppliers to reduce costs, improve
quality and provide additional design and engineering capabilities. There can
be no assurance that the additional costs of increased quality standards,
price reductions or additional capabilities required by such customers will
not have a material adverse effect on the financial condition or results of
operations of the Registrant.
1
Customers comprising 10% or greater of the Registrant's net sales are
summarized as follows:
1999 1998 1997
--- --- ---
Ford Motor Company ................. 43% 45% 47%
General Motors Corporation ......... 17% 20% 20%
All Others ......................... 40% 35% 33%
--- --- ---
100% 100% 100%
=== === ===
Many of the Registrant's customers, and other suppliers to the
Registrant's customers, are unionized, and work stoppages, slow-downs or
other labor disputes experienced by, and the labor relations policies of,
such customers and suppliers, could have an adverse effect on the
Registrant's results of operations.
As of August 31, 1999, the Registrant had an estimated backlog of
firm orders amounting to approximately $15,000,000, all of which are expected
to be filled within the 2000 fiscal year. The comparable backlog as of August
31, 1998 amounted to approximately $14,500,000.
No material portion of the business of the Registrant is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the Government.
The Registrant's products are manufactured at several plants and are
fabricated from metal rod and bar, which are generally available at
competitive prices from multiple sources.
The manufacture and sale of the Registrant's products is an extremely
competitive business. Because industry statistics are not available, the
Registrant is unable to accurately determine the number of its competitors,
nor to state its competitive position in its principal market as a supplier
of parts to automotive customers. However, the Registrant believes that it is
generally considered a leading producer of its principal type of product in
an estimated $650 million annual market served by approximately thirty major
domestic suppliers, no one of which, or no small number of which, are
dominant. The Registrant is aware, however, that there are companies making
similar products, with greater sales and resources than the Registrant. The
Registrant is aware that in recent years the activity of foreign competitors
manufacturing similar products has increased. The quality of the product, the
product's price and service to customers are the principal methods of
competition. There is no assurance that the Registrant will be able to
successfully compete in future periods.
Research and development activity expenses during each of the last
three fiscal years is not deemed material.
The Registrant has experienced no material effects in complying with
government environmental regulations.
The Registrant presently employs approximately 523 hourly-rated and
salaried personnel. The Registrant's hourly work forces at the Chelsea and
Romulus facilities are unionized. The Registrant's contracts with the unions
in Chelsea and Romulus expire in May of 2002 and January of 2000,
respectively.
Sales to customers outside the United States are not significant.
ITEM 2. DESCRIPTION OF PROPERTY.
The Registrant's industrial component parts are manufactured in seven
plants located throughout Michigan.
The Big Rapids Division in Big Rapids, Michigan, manufactures special
high-strength bolts and other cold formed products using boltmakers and
headers as primary equipment. Among the items manufactured to both inch and
2
metric specifications are hex head bolts, connecting rod bolts, studs and
flange bolts. The 200,000 square foot plant is situated on 25 acres of land,
and contains heat treat facilities for hardening in-process parts. The
annealing and pickling of the steel used at Big Rapids is generally performed
at the Romulus Steel Processing Division.
The Romulus Division is housed in a 100,000 square foot plant on 22
acres of land in Romulus, Michigan. This division uses nutformers as primary
equipment to manufacture special prevailing torque locknuts. Products include
locknuts, connecting rod nuts, and other special nut products, in both metric
and inch sizes. The plant has its own furnace for heat treating in-process
parts. Annealing and pickling of the steel coils used in manufacturing nut
products is performed by the adjacent Romulus Steel Processing Division.
The parts produced at the above divisions are sold principally to the
automotive market. These parts are mass produced, and most are shipped
directly to car assembly plants.
Steel rod annealing, pickling and drawing facilities are provided at
the 38,000 square foot Romulus Steel Processing Division plant on a tract of
land it shares with the Romulus Division. A significant amount of the output
of this facility is converted to finished products by the Registrant's bolt
and nut making operations. Excess capacity is used to process steel rod
belonging to other companies, mainly in the cold heading industry.
The Brighton Division occupies a 19,000 square foot leased facility
in Brighton, Michigan. The lease expires in December, 2001. The Division
manufactures perishable tooling, primarily for the cold heading industry.
More than one-half of its output is consumed by the Registrant's Romulus and
Big Rapids Divisions.
The Chelsea Division is located in Chelsea, Michigan, in a plant
having approximately 86,000 square feet. Primary equipment consists of
automatic screw machines and rotary index machines capable of making products
from 1/16 inch to 2-3/4 inches in diameter. The Chelsea Division fabricates a
wide variety of precision parts including piston pins, bushings, fittings,
special fasteners, valve components, sleeves, shafts, gear blanks and the
like. These parts are generally produced in large volume lots and delivered
direct to manufacturers of products such as compressors, automobiles,
transmissions and small engines.
In August, 1994, the Registrant leased a 16.000 square foot facility
in Romulus to conduct engineering and manufacturing development activities.
This facility, known as the Technical Center, gives the Registrant sufficient
room to try out new primary and secondary equipment, tooling, and parts
feeding and automation devices, as well as permitting the Registrant to
rebuild recently purchased used equipment.
In early February, the Company began operations in a new 35,000
square foot plant in Traverse City, Michigan. The Traverse City Division
manufacturers special assemblies for automotive customers.
The Registrant's corporate offices are located in the Buhl Building
in downtown Detroit, where the Registrant occupies 12,000 square feet of
space under a five year lease expiring in 1999 (renewable for an additional 5
years).
Except as specifically noted to the contrary, the Registrant owns
outright all of the above described buildings, land, and production
facilities. The Registrant utilizes all of the floor space of these
structures. Present facilities are adequate to meet the needs of each
division.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant has been designated by the Federal Environmental
Protection Agency (the "EPA") as a Potentially Responsible Party ("PRP") with
respect to three related dump sites. The sites are related in that the PRPs
engaged a single transporter who illegally disposed of toxic and hazardous
waste materials there in the late 1960s. The sites are located in Oakland
County, Michigan, and are referred to as the Springfield Township, the Rose
Township and the Cemetery Dump Sites. While the Registrant denies it has
engaged in disposing of any materials at any of the sites,
3
the Company together with eleven other PRPs has actively participated in
negotiations directed toward settling the EPA's claims.
The Rose Township Site was the first site selected by the EPA for
remediation. The participating PRPs were successful in negotiating a Consent
Decree which was approved by the United States District Court for the Eastern
District of Michigan under which the Registrant has agreed to participate in
the cost of the clean-up. These costs have been paid by the Company and no
additional costs are expected. The State of Michigan appealed the Consent
Decree to the United States Court of Appeals for the Sixth Circuit which
affirmed entry of the Decree.
The same PRPs have actively been engaged in negotiations with the EPA
and the Michigan Department of Environmental Quality ("MDEQ") in an effort to
agree upon mutually acceptable remediation parameters for the Springfield
Township site. An agreement has now been reached with the EPA and the MDEQ
and a Consent Decree embodying the settlement terms has been entered with the
United States District Court for the Eastern District of Michigan.
Remediation costs for which the Company is liable are not expected to have a
material effect on the Company's financial statements. With respect to the
Cemetery site, the EPA has performed a site clean-up but has not asserted
claims against any of the identified PRPs which suggests that the evidence of
involvement by such parties is weak. The Company received a notice letter
from a representative of the Barrels, Inc. site PRP Group located in Lansing,
Michigan indicating that "empty" drums from the Company were shipped to the
site. The waste allegedly shipped by the Company is 3520 gallons which is
equal to approximately 0.02 percent of the total waste at the site. Since the
total site costs for all parties are not expected to exceed $10 million, the
Company's share of the costs are not expected to be material. No
investigation has been undertaken to the Company's knowledge which would
identify any costs to be incurred by the Company which might have a material
effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Registrant's common stock is traded on the Nasdaq Small Cap
Market under the symbol FSCR.
The following table sets forth the quarterly high and low bid
quotations as reported by the NasdaqNational Market for periods prior to
March 17, 1998, and quarterly high and low sales prices as reported by the
Nasdaq Small Cap Market after such date. Quotations after March 18, 1998
reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
1999 1998
----------- --------------
High Low High Low
lst Quarter 55 46 61 45
2nd Quarter 50 44 62 46
3rd Quarter through 3/17/98 58 46 59 53 1/2
3rd Quarter from 3/18/98 57 57
4th Quarter 51 1/2 44 59 49 1/2
At September 1, 1999, the approximate number of beneficial holders
and shareholders of record of the Registrant's common stock was 1100, based
upon the securities position listings furnished to the Registrant.
4
Cash dividends were declared in each of the four quarters during
fiscal 1999 and fiscal 1998. Total cash dividends in fiscal 1999 were $2.20
per share and in fiscal 1998 were $2.00 per share. The Registrant is in
compliance with covenants of its revolving credit and term loan agreement and
its lease-purchase obligation including restrictions on the payment of cash
dividends.
5
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Five Years Ended June 30 1999 1998 1997 1996 1995
------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations (in thousands)
Net sales .............................. $ 118,610 $ 106,889 $ 102,683 $ 92,794 $ 90,503
Earnings before federal income
taxes ................................. 12,364 11,779 10,768 6,560 6,388
Federal income taxes ................... 4,158 3,952 3,593 2,169 2,147
Net earnings ........................... 8,206 7,827 7,175 4,391 4,241
Depreciation and amortization .......... 4,623 4,206 3,889 3,553 3,135
Capital expenditures ................... 7,779 8,367 6,872 5,682 7,443
Cash dividends declared ................ 2,390 2,173 1,304 1,195 870
Per share data
Net earnings ........................... $ 7.56 $ 7.20 $ 6.60 $ 4.04 $ 3.90
Cash dividends declared ................ 2.20 2.00 1.20 1.10 .80
Book value ............................. 48.44 43.06 36.88 31.20 28.49
Average shares outstanding ............. 1,085,289 1,086,475 1,086,646 1,086,662 1,086,954
---------- ---------- ---------- ---------- ----------
Return data
Net earnings on net sales .............. 6.9% 7.3% 7.0% 4.7% 4.7%
Net earnings on stockholders' equity ... 15.7% 16.7% 21.2% 14.2% 15.4%
Financial position at June 30 (in
thousands)
Working capital (net current assets) ... 16,657 11,981 9,436 13,613 12,538
Other assets ........................... 11,647 9,526 9,022 8,566 8,327
Property, plant and equipment (net) .... 40,920 37,782 33,642 30,665 28,613
---------- ---------- ---------- ---------- ----------
Total assets less current liabilities .. 69,224 59,289 52,100 52,844 49,478
Less:
Long-term debt ....................... 2,100 450 600 7,960 8,700
Unfunded pension obligation .......... 1,321 1,526 2,977 3,400
Deferred taxes ....................... 2,006 2,197 1,564 1,122 1,047
Employee benefits .................... 1,081 1,017 1,105 1,194 1,324
Postretirement benefits .............. 9,865 8,211 6,746 5,250 3,744
Other liabilities .................... 723 634 479 440 306
---------- ---------- ---------- ---------- ----------
Stockholders' equity (net assets) ...... $ 52,128 $ 46,780 $ 40,080 $ 33,901 $ 30,957
========== ========== ========== ========== ==========
</TABLE>
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
The following table sets forth the percent relationship of certain
items to net sales for the periods indicated:
For the Years Ended June 30,
----------------------------
1999 1998 1997
---- ---- ----
Net Sales 100% 100% 100%
Gross Profit 16.1 16.7 16.6
Selling, general and
administrative expenses 5.5 5.6 5.8
Interest .2 .1 .4
Earnings before federal
income taxes 10.4 11.0 10.5
Net earnings 6.9 7.3 7.0
Federal Screw Works reported net sales of $118.6 million in fiscal
1999, which represented a 10.9% increase from fiscal 1998 sales of $106.9
million. Net sales for fiscal 1998 increased 4.1% from fiscal 1997 sales of
$102.7 million. Sales in both 1999 and 1998 benefitted from new automotive
parts programs and the Registrant's continued expansion in non-automotive
related markets. The number of parts shipped increased in each of the last
two fiscal years.
Gross profits increased 7.3% to $19.1 million in fiscal 1999, a
$1.3 million increase from fiscal 1998. Fiscal 1998 gross profits increased
4.1% to $17.8 million compared to the $17.1 million level realized in 1997.
The increases resulted primarily from greater sales, heavily offset by price
concessions which continued to be required by our customers. These
concessions are a part of the competitive environment and will be with us for
the foreseeable future. Other negative factors affecting 1999 profits
included increased premium freight and production difficulties caused equally
be subsupplier overload and by a limited number of many new products.
Material, plating and packaging costs were again stable in 1999.
Our Shareholders are aware of the Company's dependence upon sales
to the two largest U.S. automobile manufacturers, a condition that has
existed for at least fifty years. Although the Registrant has purchase orders
from such customers, such purchase orders generally provide for supplying the
customer's requirements for a particular model or model year rather than for
manufacturing a specific quantity of products. The loss of any one of such
customers or significant purchase orders could have a material adverse effect
on the Registrant. These customers are also able to exert considerable
pressure on component suppliers to reduce costs, improve quality and provide
additional design and engineering capabilities. There can be no assurance
that the additional costs of increased quality standards, price reductions or
additional capabilities required by such customers will not have a material
adverse effect on the financial condition or results of operations of the
Registrant. The impact of new parts programs were again a major factor in
fiscal 1999.
The Registrant rejoined the Daimler Chrysler supply base after a
four-year absence. The short term effect will not be important, but the long
term effect could be significant.
Refrigeration sales were up in fiscal 1999, as the refrigeration
industry returned to its normal growth patterns in this fiscal year, probably
accented by the very hot weather last summer. As a percentage of growth,
refrigeration sales
7
growth historically has been greater than automotive sales growth. Sales to
customers outside North America are increasing, but still are not material.
As mentioned in our 1996 annual report, the Company began
production shipments through a Tier I supplier to a transplant automobile
manufacturer in 1997. These were joined by shipments through a Tier I
supplier to a second transplant manufacturer in fiscal 1998. Shipments to
Tier I automotive suppliers continue to increase. It is our expectation that
shipments to Tier I suppliers will grow steadily in the next few years. Also,
the Company believes that outsourcing by certain of its major customers will
continue to be a positive factor, although new outsourcing programs were not
important in fiscal 1999 or 1998. Significant consolidations again occurred
in the fastener industry in fiscal 1999, but the Company did not experience
any additional competitive pressure from these consolidations or from
transplant fastener suppliers.
As a percentage of net sales, selling, general and administrative
expenses were reduced to 5.5% in fiscal 1999. In fiscal 1998 and fiscal 1997
these expenses were 5.6% and 5.8% of net sales, respectively.
Interest expense increased in fiscal 1999 as a result of an
increase in average borrowings under the company's bank credit agreement.
The Registrant has been designated by the Federal Environmental
Protection Agency (the "EPA") as a Potentially Responsible Party ("PRP") with
respect to three related dump sites. The sites are related in that the PRPs
engaged a single transporter who illegally disposed of toxic and hazardous
waste materials there in the late 1960s. The sites are located in Oakland
County, Michigan, and are referred to as the Springfield Township, the Rose
Township and the Cemetery Dump Sites. While the Registrant denies it has
engaged in disposing of any materials at any of the sites, the Company
together with eleven other PRPs has actively participated in negotiations
directed toward settling the EPA's claims.
The Rose Township Site was the first site selected by the EPA for
remediation. The participating PRPs were successful in negotiating a Consent
Decree which was approved by the United States District Court for the Eastern
District of Michigan under which the Registrant has agreed to participate in
the cost of the clean-up. These costs have been paid by the Company and no
additional costs are expected. The State of Michigan appealed the Consent
Decree to the United States Court of Appeals for the Sixth Circuit which
affirmed entry of the Decree.
The same PRPs have actively been engaged in negotiations with the
EPA and the Michigan Department of Environmental Quality ("MDEQ") in an
effort to agree upon mutually acceptable remediation parameters for the
Springfield Township site. An agreement has now been reached with the EPA and
the MDEQ and a Consent Decree embodying the settlement terms has been entered
with the United States District Court for the Eastern District of Michigan.
Remediation costs for which the Company is liable are not expected to have a
material effect on the Company's financial statements. With respect to the
Cemetery site, the EPA has performed a site clean-up but has not asserted
claims against any of the identified PRPs which suggests that the evidence of
involvement by such parties is weak. The Company received a notice letter
from a representative of the Barrels, Inc. site PRP Group located in Lansing,
Michigan indicating that "empty" drums from the Company were shipped to the
site. The waste allegedly shipped by the Company is 3520 gallons which is
equal to approximately 0.02 percent of the total waste at the site. Since the
total site costs for all parties are not expected to exceed $10 million, the
Company's share of the costs are not expected to be material. No
investigation has been undertaken to the Company's knowledge which would
identify any costs to be incurred by the Company which might have a material
effect on the Company's financial statements.
Year 2000 Matters
The Company completed a comprehensive review of its operations
related to the "Year 2000" issue during fiscal 1998. This review included an
assessment of the Company's mainframe computer system, operating and
application systems, microcomputer and office systems, facilities, and
production equipment. This review also included
8
correspondence with major vendors and customers. Management believes it has
identified those systems that could be affected by the "Year 2000" issue. The
Company has implemented a plan to resolve these issues.
During the fiscal year ended June 30, 1998, the Company installed
a new mainframe computer system and operating system that are "Year 2000"
compliant. Implementation and testing of mainframe applications were
completed in fiscal 1999. The Company believes that, with modification of its
existing computer systems and updates by vendors in the ordinary course of
business, the "Year 2000" issue will not pose significant operational
problems of the Company's computer systems. However, if such modifications
are not made, or are not completed timely, the "Year 2000" issue could have a
material impact on the operations of the Company.
The Company has developed contingency plans for its significant
operations and is continuously monitoring the progress toward the established
"Year 2000" plan. These plans include preliminary discussions with the
Company's primary software vendors to replace critical applications that may
become inoperable as a result of the "Year 2000" issue. The Company may
increase inventory levels to insure that supplies are not interrupted.
The total "Year 2000" project cost is estimated at approximately
$400,000, which includes estimated costs to be incurred to acquire upgraded
software that will be capitalized. These costs have been paid for with cash
from operations.
Dividends
Cash dividends declared in fiscal year 1999 were $2.20 per share,
$.20 more than that declared in fiscal 1998 and $1.00 more than that declared
in fiscal 1997. The Board of directors in August, 1999, declared a $.10 per
share quarterly dividend, and an extra dividend of $1.90 per share.
Liquidity and Capital Resources
On October 20, 1998, the Company extended its Revolving Credit and
Term Loan Agreement by one year. The expiration date is October 31, 2000, and
is renewable annually for an additional year. Borrowings up to $25 million
and capital expenditures of $10 million annually are permitted. The Company
has the option to covert borrowings under the facility to a term note through
October 31, 2001. Payments under the term note, if the conversion option were
exercised, would be made quarterly and could extend to October 31, 2003.
Therefore, borrowings under the Revolving Credit and Term Loan Agreement,
which were $2,100,000 at June 30, 1999 and $250,000 at June 30, 1998, are
classified as long-term debt.
Working capital at June 30, 1999 amounted to $16,657,000 as
compared to working capital of $11,981,000 at June 30, 1998. The increase
resulted primarily from an increase in accounts receivable and inventories.
The increase in accounts receivable relates primarily to strong sales in the
fourth quarter of 1999 and the timing of customer payments near year end.
The balance sheet at June 30, 1999 includes a long-term liability
of $1,321,000, representing the unfunded accumulated benefit obligations of
certain employee pension plans. The excess of this liability over the
unrecognized prior service cost at the date of transition is included as a
reduction of stockholders' equity. The funding policies of these plans, which
are based on actuarial calculations, continue to comply with applicable laws
and regulations.
As discussed in Note 5 to the financial statements, effective
July 1, 1993, the Company adopted FASB Statement No. 106. As permitted by the
Statement, the Company is amortizing the present value of future health care
and life insurance benefits related to employees past service ($17,967,000 at
July 1, 1993) over a period of 20 years. The implementation of this
accounting pronouncement has no impact on the Company's cash flows.
9
Cash flows from operating activities approximated $8.5 million in
fiscal 1999. This compares to $10.5 million in 1998 and $15.9 million in
1997. The principal components of these activities are set forth on page 12.
Capital expenditures for fiscal 1999 were $7.8 million, primarily
related to the purchase of equipment and expansion of facilities in order to
improve production efficiencies and enable the Company to meet increased
future demand for its products. Capital expenditures in fiscal years 1998 and
1997 were $8.4 million and $6.9 million, respectively. Expenditures for
additional equipment during fiscal 2000 are presently expected to approximate
$7.1 million, of which $1.4 million had been committed as of June 30, 1999.
These future capital expenditures are expected to be financed from cash
generated from operations and additional borrowing capacity under the bank
credit agreement.
Net cash used in financing activities was $1.4 million in fiscal
1999. This compares to $2.3 million used in fiscal 1998 and $8.7 million used
in 1997. Fluctuations in these activities have been influenced principally by
borrowings and repayments under the Company's Revolving Credit and Term Loan
Agreement.
Impact of Inflation and Changing Prices
The Company passes increased costs on to customers, to the extent
permitted by competition, by increasing sales prices whenever possible. In
fiscal 1999, 1998 and 1997 the Company was generally unable to pass on cost
increases incurred due to competitive pressures. Sales price increases in
each of these years were insignificant.
Impact of New Accounting Standards
During 1999, the Financial Accounting Standards Board issued several new
accounting standards: "Statements of Financial Accounting Standards No. 132,
Employer's Disclosures about Pensions and Other Postretirement Benefits, and
No. 133, Accounting for Derivative Instruments and Hedging Activities." Both
statements were adopted by the Company in fiscal 1999 with no material effect
on the Company's financial statements.
Forward Looking Statements
The foregoing discussion and analysis contains a number of "forward looking
statements" within the meaning of the Securities Act of 1933 and the
Securities Exchange Act of 1934, both as amended, with respect to
expectations for future periods which are subject to various uncertainties,
including competition, the loss of, or reduction in business with, the
Company's principal customers, work stoppages, strikes and slowdowns at the
Company's facilities and those of its customers; adverse changes in economic
conditions generally and those of the automotive industry, specifically.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to interest rate risk on its revolving
credit and term loan agreement and its lease-purchase obligation. At June 30,
1999, the carrying amounts reported in the balance sheeets for cash, accounts
receivable, accounts payable, debt and investments approximate fair value.
The aggregate fair value of the Company's lease-purchase obligation
approximates its recorded amount at June 30, 1999. Accordingly, management
believes this risk is not material
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Statement of Operations
Year Ended June 30
-------------------------------------------
1999 1998 1997
---- ---- ----
Net Sales $118,610,185 $106,888,711 $102,682,635
Costs and Expenses:
Cost of products sold 99,486,786 89,051,350 85,595,893
Selling, general and
administrative 6,554,281 5,932,572 5,907,223
Interest 205,534 126,091 411,906
------------ ------------ ------------
106,246,601 95,110,013 91,915,022
------------ ------------ ------------
EARNINGS BEFORE FEDERAL
INCOME TAXES 12,363,584 11,778,698 10,767,613
Federal incomes taxes--Note 4:
Current 4,361,000 3,822,000 3,393,000
Deferred (credit) (203,000) 130,000 200,000
------------ ------------ ------------
4,158,000 3,952,000 3,593,000
------------ ------------ ------------
NET EARNINGS $ 8,205,584 $ 7,826,698 $ 7,174,613
============ ============ ============
Average number of shares
outstanding 1,085,289 1,086,475 1,086,646
============ ============ ============
Net earnings per share
See accompanying notes $ 7.56 $ 7.20 $ 6.60
============ ============ ============
11
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended June 30
-------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 8,205,584 $ 7,826,698 $ 7,174,613
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,622,864 4,206,219 3,889,199
Increase in cash value of life insurance (121,956) (124,773) (176,040)
Change in deferred income taxes (203,000) 130,000 200,000
Employee benefits 1,718,524 1,376,040 1,407,050
Amortization of restricted stock 24,717
Other (569,002) (231,542) (1,316,435)
Changes in operating assets and liabilities:
Accounts receivable (3,911,552) 77,088 (1,011,172)
Inventories and prepaid expenses (1,351,556) (2,305,571) 1,197,275
Accounts payable and accrued expenses 103,541 (479,726) 4,541,338
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,493,447 10,474,433 15,930,545
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,779,183) (8,366,821) (6,871,700)
Proceeds from sale of property, plant and
equipment 18,513 20,144 5,182
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (7,760,670) (8,346,677) (6,866,518)
FINANCING ACTIVITIES
Additional borrowings (principal
repayments) under bank credit agreement 1,850,000 250,000 (6,960,000)
Principal payments on lease-purchase
obligation (400,000) (400,000) (400,000)
Purchases of common stock (488,694) (5,450) (6,000)
Dividends paid (2,389,656) (2,173,004) (1,303,994)
------------ ------------ ------------
NET CASH USED IN FINANCING
ACTIVITIES (1,428,350) (2,328,454) (8,669,994)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (695,573) (200,698) 394,033
Cash at beginning of year 974,879 1,175,577 781,544
------------ ------------ ------------
CASH AT END OF YEAR $ 279,306 $ 974,879 $ 1,175,577
============ ============ ============
</TABLE>
12
BALANCE SHEETS
June 30
-------------------------
1999 1998
---- ----
Assets
Current Assets
Cash $ 279,306 $ 974,879
Accounts receivable 15,727,338 11,815,786
Inventories-Note 1:
Finished products 4,814,688 4,642,260
In-process products 7,210,378 6,065,010
Raw materials and supplies 2,850,877 2,377,014
----------- -----------
Total inventories 14,875,943 13,084,284
Prepaid expenses and other current accounts 297,266 737,369
Deferred income taxes - Note 4 958,000 946,000
----------- -----------
TOTAL CURRENT ASSETS 32,137,853 27,558,318
Other Assets
Intangible pension asset - Note 5 1,721,522 960,718
Cash value of life insurance 5,311,656 5,189,700
Prepaid pension costs 3,622,538 3,051,506
Miscellaneous 991,765 323,753
----------- -----------
11,647,481 9,525,677
Property, Plant and Equipment - Notes 2 and 3
Land 511,579 334,850
Buildings and improvements 12,771,671 11,105,493
Machinery and equipment 81,243,695 75,715,606
----------- -----------
94,526,945 87,155,949
Less accumlated depreciation 53,606,656 49,373,466
----------- -----------
40,920,289 37,782,483
----------- -----------
$84,705,623 $74,866,478
=========== ===========
13
June 30
-----------------------------
1999 1998
---- ----
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 4,143,363 $ 4,812,392
Payroll and employee benefits 8,611,738 7,558,926
Dividend payable 108,191 108,641
Federal income taxes 585,052 1,170,774
Taxes, other than income taxes 1,802,095 1,396,314
Accrued pension contributions -- 64,777
Other accrued liabilities 30,795 65,869
Current maturies of long-term debt 200,000 400,000
------------ ------------
TOTAL CURRENT LIABILITIES 15,481,234 15,577,693
Long-Term Liabilities
Long-term debt -- Note 2 2,100,000 450,000
Unfunded pension obligation -- Note 5 1,321,112 --
Deferred income taxes -- Note 4 2,006,000 2,197,000
Employee benefits 1,080,828 1,016,560
Postretirement benefits -- Note 5 9,864,806 8,210,550
Other liabilities 723,597 634,509
------------ ------------
17,096,343 12,508,619
Stockholders' Equity -- Notes 2 and 7
Common stock, $1 par value, authorized
2,000,000 shares, 1,076,162 shares
outstanding in 1999 (1,086,412 in 1998) 1,076,162 1,086,412
Additional capital 3,269,476 3,210,476
Retained earnings 48,411,426 43,073,942
Accumulated other comprehensive income (629,018) (590,664)
------------ ------------
52,128,046 46,780,166
------------ ------------
$ 84,705,623 $ 74,866,478
============ ============
See accompanying notes.
14
<TABLE>
<CAPTION>
Statements of Stockholders' Equity
Years ended June 30, 1999, 1998 and 1997
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income Total
------ ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1996 $1,086,662 $2,917,759 $31,560,814 $(1,664,451) $ 33,900,784
Net earnings for the year 7,174,613 7,174,613
Reduction of unrecognized pension
costs, net of taxes 166,143 166,143
------------
Total comprehensive income 7,340,756
Purchase of 150 shares (150) (5,850) (6,000)
Transactions under restricted stock
bonus plans -- net 148,717 148,717
Cash dividends declared --
$1.20 per share (1,303,979) (1,303,979)
---------- ---------- ----------- ----------- ------------
BALANCES AT JUNE 30, 1997 1,086,512 3,066,476 37,425,598 (1,498,308) 40,080,278
Net earnings for the year 7,826,698 7,826,698
Reduction of unrecognized pension
costs, net of taxes 907,644 907,644
------------
Total comprehensive income 8,734,342
Purchase of 100 shares (100) (5,350) (5,450)
Transactions under restricted stock
bonus plans -- net 144,000 144,000
Cash dividends declared --
$2.00 per share (2,173,004) (2,173,004)
---------- ---------- ----------- ----------- ------------
BALANCES AT JUNE 30, 1998 1,086,412 3,210,476 43,073,942 (590,664) 46,780,166
Net earnings for the year 8,205,584 8,205,584
Increase in unrecognized pension
costs, net of taxes (38,354) (38,354)
------------
Total comprehensive income 8,167,230
Purchase of 10,250 shares (10,250) (478,444) (488,694)
Transactions under restricted stock
bonus plans -- net 59,000 59,000
Cash dividends declared --
$2.20 per share (2,389,656) (2,389,656)
---------- ---------- ----------- ----------- ------------
BALANCES AT JUNE 30, 1999 $1,076,162 $3,269,476 $48,411,426 $ (629,018) $ 52,128,046
========== ========== =========== =========== ============
( ) denotes deduction
See accompanying notes.
</TABLE>
15
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Significant Accounting Policies
Inventories: Inventories are stated at the lower of cost or market. Cost,
determined by the last-in, first-out (LIFO) method, was used for certain raw
material inventories, $2,216,000 and $1,882,000 at June 30, 1999 and 1998,
respectively. The remaining inventories are costed using the first-in,
first-out (FIFO) method. If inventories had been valued at current cost,
amounts reported at June 30 would have been increased by $582,000 and
$633,000 in 1999 and 1998, respectively.
Property, Plant and Equipment: Property, plant and equipment is stated at
cost, which includes the cost of interest which is capitalized during
construction of significant additions. Provisions for depreciation are based
upon the estimated useful lives of the respective assets and are computed by
the straight-line method for financial reporting purposes and by accelerated
methods for income tax purposes.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
Fair Value of Financial Instruments: At June 30, 1999, the carrying amounts
reported in the balance sheets for cash, accounts receivable, accounts
payable, debt and investments approximate fair value.
Note 2 - Debt
Long-term debt at June 30 consists of the following:
1999 1998
---- ----
Revolving credit note payable to bank $2,100,000 $250,000
Lease-purchase obligation (see Note 3)
payable $200,000 semi-annually, plus
interest at 7 3/4% 200,000 600,000
----------- --------
2,300,000 850,000
Less current maturities 200,000 400,000
----------- --------
$ 2,100,000 $450,000
=========== ========
The Company has a $25,000,000 revolving credit and term loan agreement with a
bank. The Company has the option to convert borrowings thereunder (classified
as long-term debt) to a term note through October 31, 2001, the expiration
date of the agreement. Payments under the term note, if the conversion option
is exercised, would be made quarterly commencing three months following
conversion until maturity of the term note on October 31, 2003. Interest
(7.0% at June 30, 1999) on outstanding borrowings is determined based on the
prime rate, or at the Company's option, an alternative variable market rate.
The Company also pays a commitment fee of 3/8% on the unused portion of the
revolving credit. The aggregate fair value of the Company's lease-purchase
obligation approximates its recorded amount at June 30, 1999.
The Company is in compliance with covenants of the revolving credit and term
loan agreement and the lease-purchase obligation including restrictions on
payment of cash dividends. Retained earnings of $14,701,000 are free of
restriction at June 30, 1999.
16
Interest paid by the Company during fiscal 1999, fiscal 1998 and fiscal 1997
aggregated $320,000, $323,000, and $503,000, respectively.
Note 3 - Leases and Other Commitments
The Company acquired one of its manufacturing facilities under a
lease-purchase agreement with a municipality, and $200,000 of remaining
outstanding Industrial Revenue Bond financing is guaranteed by the Company at
June 30, 1999.
At June 30, 1999, the aggregate minimum rental commitments for the Industrial
Revenue Bond lease-purchase obligation and various noncancelable operating
leases with initial terms of one year or more are as follows:
Lease-Purchase Operating
Year ending June 30 Obligation Leases
- ------------------- -------------- -----------
2000 $207,750 $751,000
2001 415,000
2002 251,000
2003 85,000
2004 26,000
--------- ----------
Total minimum lease payments 207,750 $1,528,000
=========
Amounts representing interest 7,750
---------
Present value of net minimum lease payments $ 200,000
========
Total rent expense (exclusive of the lease-purchase obligation) was
$1,158,000 in fiscal 1999, $1,035,000 in fiscal 1998, and $911,000 in fiscal
1997.
Costs to complete the expansion of plant facilities and the purchase of
machinery and equipment approximated $1,371,000 at June 30, 1999.
Note 4 - Federal Income Taxes
A reconciliation of the federal income tax provision to the amount computed
by applying the applicable statutory federal income tax rate (35%) to
earnings before federal income taxes follows:
1999 1998 1997
---- ---- ----
Computed amount $4,327,000 $4,123,000 $3,769,000
Life insurance policies (79,000) (97,000) (94,000)
Other (90,000) (74,000) (82,000)
---------- ---------- ----------
Total federal income tax provision $4,158,000 $3,952,000 $3,593,000
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of
June 30, 1999 and 1998 are as follows:
17
1999 1998
---- ----
Deferred tax liabilities:
Accelerated tax depreciation $4,667,000 $4,231,000
---------- ----------
Total deferred tax liabilities 4,667,000 4,231,000
---------- ----------
Deferred tax assets:
Employee benefits 3,487,000 2,776,000
Inventory 93,000 152,000
Other 39,000 52,000
---------- ----------
Total deferred tax assets 3,619,000 2,980,000
---------- ----------
Net deferred tax liabilities $1,048,000 $1,251,000
========== ==========
Income taxes paid by the Company during fiscal 1999, fiscal 1998, and fiscal
1997 totaled $4,881,000, $3,358,000 and $2,835,000, respectively.
Note 5 - Employee Benefits
The Company sponsors three defined benefit pension plans covering
substantially all employees. Benefits under two of the plans are based on
negotiated rates times years of service. Under the remaining plan, benefits
are based on compensation during the years immediately preceding retirement
and years of service. It is the Company's policy to make contributions to
these plans sufficient to meet minimum funding requirements of the applicable
laws and regulations, plus such additional amounts, if any, as the Company's
actuarial consultants advise to be appropriate.
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all of the Company's employees may become eligible for those benefits if they
reach normal retirement age while working for the Company. The benefits are
provided through certain insurance companies.
The following tables set forth the plans' funded status at the March 31, 1999
and 1998 measurement dates:
Changes in benefit obligation are:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
---------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation
at beginning of year $21,439,000 $19,490,000 $ 8,211,000 $ 6,747,000
Service cost 878,000 523,000 467,000 373,000
Interest cost 1,786,000 1,460,000 1,444,000 1,367,000
Plan Amendments 3,323,000 -- -- --
Amortization of transition
(Asset)/obligation -- -- 898,000 898,000
Actuarial (gain)/loss 761,000 1,150,000 -- (100,000)
Benefits paid (1,417,000) (1,184,000) (1,155,000) (1,074,000)
----------- ----------- ----------- -----------
Benefit obligation at end of year $26,770,000 $21,439,000 $ 9,865,000 $ 8,211,000
=========== =========== =========== ===========
</TABLE>
18
Components of net periodic benefit cost are:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
----------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 878,000 $ 523,000 $ 478,000 $ 467,000 $ 373,000 $ 330,000
Interest cost 1,786,000 1,460,000 1,375,000 1,444,000 1,367,000 1,362,000
Expected return
on assets (1,966,000) (1,600,000) (1,386,000) -- -- --
Amortization of
transition obligation 166,000 167,000 166,000 898,000 898,000 898,000
Amortization of
prior service cost 321,000 83,000 72,000 -- -- --
Amortization of
unrecognized
net(gain)/loss 26,000 70,000 91,000 -- (100,000) (119,000)
----------- ----------- ----------- ----------- ----------- -----------
Net periodic
benefit cost $ 1,211,000 $ 703,000 $ 796,000 $ 2,809,000 $ 2,538,000 $ 2,471,000
=========== =========== =========== =========== =========== ===========
</TABLE>
Changes in plan assets are:
Pension Postretirement
Benefits Benefits
------------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Fair value of assets
at beginning of year $24,674,000 $19,334,000 $ -- $ --
Actual return on assets (216,000) 4,586,000 -- --
Employer contribution 679,000 1,938,000 -- --
Benefits paid (1,417,000) (1,184,000) -- --
----------- ----------- ----- -----
Fair value of assets at
end of year $23,720,000 $24,674,000 $ -- $ --
=========== =========== ===== =====
19
Funded status of the plans are:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status at end of
year (underfunded) $(3,049,000) $3,235,000 $(21,743,000) $(20,494,000)
Unrecognized transition obligation 266,000 432,000 12,577,000 13,475,000
Unrecognized prior service cost 3,873,000 871,000 -- --
Unrecognized net (gain)/loss 2,945,000 29,000 (699,000) (1,192,000)
Employer contributions 941,000 276,000 -- --
----------- ---------- ------------ ------------
Prepaid/(accrued) benefit cost $ 4,976,000 $4,843,000 $ (9,865,000) $ (8,211,000)
=========== ========== ============ ============
Amounts recognized in the statement of financial position of:
Prepaid benefit cost $ 3,622,000 $3,052,000 -- --
Accrued benefit liability (1,321,000) -- $ (9,865,000) $ (8,211,000)
Intangible asset 1,722,000 961,000 -- --
Accumulated other comprehensive
income (pre-tax) 953,000 830,000 -- --
----------- ---------- ------------ ------------
Net amount recognized $ 4,976,000 $4,843,000 $ (9,865,000) $ (8,211,000)
=========== ========== ============ ============
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $11,856,000, $10,045,000,
$8,382,000, respectively, as of June 30, 1999 and $5,294,000, $5,294,000 and
$5,102,000, respectively, as of June 30, 1998.
In accounting for pension plans, the Company used a discount rate of 7.0% in
1999, and 7.25% in 1998, a 5% rate of increase in compensation, and an 8%
expected rate of return on assets. Plan assets for these plans consist
principally of fixed income instruments, equity securities and participation
in insurance company contracts.
The weighted average discount rate used in determining the accumulated post
retirement benefit obligation at June 30, 1999 and 1998 was 7.0% and 7.25%,
respectively.
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal 2000. The rate
was assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter. Assumed health care cost trends have a significant effect on the
amounts reported for the health care plan. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of June
30, 1999 and 1998 by $2,523,000 and $2,303,000, respectively, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended June 30, 1999 and 1998 by
$259,000 and $226,000, respectively. Effective July 1, 1998, a supplemental
executive retirement plan which covers certain executives of the company was
adopted. The Company has invested $571,000 as of June 30, 1999 to cover
obligations of the plan.
The Company also sponsors a retirement plan for directors who are not
employees of the Company. The net periodic pension expense of the plan was
$89,000, $156,000 and $39,000 in fiscal 1999, 1998 and 1997, respectively.
The actuarial present value of vested benefit obligations approximated
$765,000 at June 30, 1999 and $676,000 at June 30, 1998. The plan is
currently not fully funded.
20
Note 6 - Industry Information
Federal Screw Works is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single business segment. The Company's products are manufactured
at several plants and are fabricated from metal rod and bar, which are
generally available at competitive prices from multiple sources. Production
is in high-volume job lots to the specification of original equipment
manufacturers and sold to them for incorporation into their assemblies. The
majority of these sales are to manufacturers of automobiles and trucks, with
the balance being mainly to manufacturers of nonautomotive durable goods.
Approximately 86% of the Company's net sales in fiscal 1999 (89% and 90% in
fiscal 1998 and fiscal 1997, respectively) were made either directly or
indirectly to automotive companies. The Company generally does not require
collateral from its customers. Customers comprising 10% or greater of the
Company's net sales are summarized as follows:
1999 1998 1997
---- ---- ----
Ford Motor Company 43% 45% 47%
General Motors Corporation 17% 20% 20%
All Others 40% 35% 33%
--- --- ---
100% 100% 100%
Sales to customers outside the United States are not significant.
Note 7 - Restricted Stock Bonus Plan
The Company maintains a restricted stock bonus plan for certain key
employees. Shares issued under the plan are subject to certain restrictions
which lapse generally over a period of six to ten years from date of grant.
The market value of shares issued, considered to be compensation, is being
charged to operations over the periods during which the restrictions lapse.
The additional capital accounts reflect the tax benefits of the compensation
deduction.
Note 8 - Litigation
The Company is involved in various legal actions arising in the normal course
of business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that their outcome will not
have a significant effect on the Company's financial statements.
Note 9 - Impact of New Accounting Standards
The Financial Accounting Standards Board issued several new accounting
standards: "Statements of Financial Accounting Standards No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, and No. 133,
Accounting for Derivative Instruments and Hedging Activities." Both
statements were adopted by the Company in fiscal 1999 with no material effect
on the Company's financial statements.
21
Report of Independent Auditors
Board of Directors
Federal Screw Works
We have audited the accompanying balance sheets of Federal Screw Works as of
June 30, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Federal Screw
Works at June 30, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
Ernst & Young LLP
Detroit, Michigan
August 10, 1999
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Election of
Directors," "Security Ownership of Management," and "Compliance with Section
16(a) of the Exchange Act" in the Registrant's Proxy Statement dated
September 27, 1999 and is incorporated herein by reference.
The following information supplements the information provided on
pages 1 through 3 in the Registrant's Proxy Statement dated September 27,
1999 which is incorporated herein by reference.
Name Position Age
- ---- -------- ---
John M. O'Brien........ Vice President-Sales and Marketing 49
since 1986; Vice President-General
Sales Manager, 1984 to 1986; General
Sales Manager, 1982 to 1984;
Sabbatical at Stanford University
Business School, 1981 to 1982; Sales
Representative, 1975 to 1981.
Jeffrey M. Harness..... Vice President and General Manager - 43
Chelsea Division and Brighton
Division since 1994; Vice President
and General Manager - Chelsea
Division, 1992 to 1994; General
Manager - Chelsea Division, 1985 to
1992; Sales Manager - Chelsea
Division, 1984 to 1985; Sales
Representative, 1982 to 1984;
Management Trainee, 1981 to 1982;
Chelsea Division Junior Buyer, 1980
to 1981.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the captions "Directors
Remuneration and Committees of the Board" and "Executive Compensation" in the
Registrant's Proxy Statement dated September 27, 1999 and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information is contained under the caption "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the
Registrant's Proxy Statement dated September 27, 1999 and is incorporated
herein by reference.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Certain Relationships
and Related Transactions" in the Registrant's Proxy Statement dated September
27, 1999 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. The following financial
statements of the Registrant and Report of Independent Public
Accounts are contained in "Item 8 Financial Statements and
Supplementary Data."
Financial Statements
- Statements of Operations for the years ended
June 30, 1999, 1998 and 1997
- Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997
- Balance sheets as of June 30, 1999 and 1998
- Statements of Stockholders' equity for the
years ended June 30, 1999, 1998 and 1997
Report of Independent Public Accountants
Notes to Financial Statements
(2) Financial Statement Schedules. The following financial
statement schedule is filed with this report, and appears on page 26.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Other financial statement schedules have been omitted because they
are not applicable or are not required, or the information required to be set
forth therein is included in the financial statements or notes thereto.
(3) Exhibits. The Exhibits filed in response to Item 601 of
Regulation S-K are listed in the Exhibit Index. Exhibits designated with a
"+" symbol represent the Registrant's management contracts or compensation
plans or arrangements for directors and executive officers.
(b) No reports on Form 8-K have been filed by Registrant during
the last quarter of the period covered by this Report.
The following documents are filed as a part of this report. Those
Exhibits previously filed and incorporated herein by reference are identified
below.
24
3.1 Registrant's Articles of Incorporation, were filed as an exhibit
to the Registrant's 1994 Form 10-K, and are incorporated herein by
reference.
3.2 Registrant's By-Laws were filed as an exhibit to Registrant's 1989
Form 10-K and are incorporated herein by reference.
4.1 The lease-purchase contract dated as of November 1, 1979 between
the City of Big Rapids, Michigan and Federal Screw Works was filed
as an exhibit to Registrant's 1993 Form 10-K and is incorporated
herein by reference.
4.2 The (municipal industrial revenue bond) guarantee agreement dated
as of November 1, 1979, as previously filed, was filed as an
exhibit to the Registrant's 1993 Form 10-K and is incorporated
herein by reference. All waivers, amendments and modifications
thereto, were filed as exhibits to the Registrant's 1989, 1993 and
1994 Forms 10-K and are incorporated herein by reference.
4.3 Revolving Credit and Term Loan Agreement by and between Registrant
and Comerica Bank, dated October 24, 1995, filed as an exhibit to
the Registrant's Form 10-Q for the period ended September 30,
1995, and incorporated herein by reference.
10.1+ Supplemental retirement agreement between the Registrant and W. T.
ZurSchmiede, Jr., present Chairman of the Registrant, dated
April 1, 1986 was filed as an exhibit to Registrant's 1993 Form
10-K and is incorporated by reference.
10.2+ Supplemental retirement agreement between the Registrant and Hugh
G. Harness, a director and past President of the Registrant, dated
December 21, 1978 and amended pursuant to an Amendment to
Agreement dated October 23, 1986, together with an Agreement
providing for the retirement and consultation of and by Mr.
Harness and the Registrant dated January 7, 1994, attached to
which as Exhibits B and C were agreements further amending the
supplemental retirement agreement, were filed as an exhibit to
Registrant's 1994 Form 10-K, and are incorporated herein by
reference.
10.3+ Indemnity agreement effective September 24, 1986, which exists
between the Registrant and each director, was filed as an exhibit
to Registrant's 1992 Form 10-K, and is incorporated herein by
reference.
10.4 Lease agreement between the Registrant and Equitable Life
Assurance Society of the United States for the lease of the 24th
floor of the Buhl Building, Detroit, Michigan, effective January
1, 1995, was previously filed as an exhibit to the Registrant's
Form 10-Q for the quarter ended March 31, 1995, and is
incorporated herein by reference.
10.5+ Retirement Plan for Outside Directors as amended and restated,
filed as an exhibit to the Registrant's 1995 Form 10-K and
incorporated herein by reference.
10.6+ Supplemental Executive Retirement Plan dated July, 1998, filed as
an exhibit to the Registrant's 1998 Form 10-K and incorporated
herein by reference.
27.* Financial Data Schedule.
99. Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A
and incorporated herein by reference.
* Filed with this report
25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------------------------ ---------- --------------------------- ------------ -------------
ADDITIONS
---------------------------
(1) (2)
Balance at Charged to Charged to
Beginning Costs and Other Accounts Deductions - Balance at
Description of Period Expenses - Describe Describe End of Period
- ------------------------ ---------- ---------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Valuation allowance for
accounts receivable:
Year ended June 30, 1999 $ 50,000 -- -- $ 50,000
Year ended June 30, 1998 50,000 -- -- 50,000
Year ended June 30, 1997 25,000 $ 25,000 -- 50,000
Valuation allowance for
inventories:
Year ended June 30, 1999 $ 226,000 $ 67,000(A) $ 126,000 $ 167,000
Year ended June 30, 1998 217,000 57,637(A) 48,637 226,000
Year ended June 30, 1997 284,000 178,586(A) 245,586 217,000
(A) Unsalable inventories charged off; corresponding reduction of allowance.
</TABLE>
26
SIGNATURES
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.
FEDERAL SCREW WORKS
(Registrant)
By: /s/ W T. ZURSCHMIEDE, JR
---------------------------------
W. T. ZurSchmiede, Jr.
Chairman and Chief Executive
Officer, Chief Financial Officer,
Secretary and Treasurer
Date: September 27, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Wade C. Plaskey September 27, 1999
- -------------------------------
Wade C. Plaskey
Corporate Controller
(Principal Accounting Officer)
/s/ Thomas W. Butler, Jr. September 27, 1999
- -------------------------------
Thomas W. Butler, Jr.
Director
/s/ Hugh G. Harness September 27, 1999
- -------------------------------
Hugh G. Harness
Director
/s/ F. D. Tennent September 27, 1999
- -------------------------------
F. D. Tennent
Director
/s/ W. T. ZurSchmiede, Jr. September 27, 1999
- -------------------------------
W. T. ZurSchmiede, Jr.
Director
/s/ Robert F. ZurSchmiede September 27, 1999
- -------------------------------
Robert F. ZurSchmiede
Director
/s/ Thomas ZurSchmiede September 27, 1999
- -------------------------------
Thomas ZurSchmiede
Director
27
Exhibit Index
3.1 Registrant's Articles of Incorporation, were filed as an exhibit
to the Registrant's 1994 Form 10-K, and are incorporated herein by
reference.
3.2 Registrant's By-Laws were filed as an exhibit to Registrant's 1989
Form 10-K and are incorporated herein by reference.
4.1 The lease-purchase contract dated as of November 1, 1979 between
the City of Big Rapids, Michigan and Federal Screw Works was filed
as an exhibit to Registrant's 1993 Form 10-K and is incorporated
herein by reference.
4.2 The (municipal industrial revenue bond) guarantee agreement dated
as of November 1, 1979, as previously filed, was filed as an
exhibit to the Registrant's 1993 Form 10-K and is incorporated
herein by reference. All waivers, amendments and modifications
thereto, were filed as exhibits to the Registrant's 1989, 1993 and
1994 Forms 10-K and are incorporated herein by reference.
4.3 Revolving Credit and Term Loan Agreement by and between Registrant
and Comerica Bank, dated October 24, 1995, filed as an exhibit to
the Registrant's Form 10-Q for the period ended September 30,
1995, and incorporated herein by reference.
10.1+ Supplemental retirement agreement between the Registrant and W. T.
ZurSchmiede, Jr., present Chairman of the Registrant, dated
April 1, 1986 was filed as an exhibit to Registrant's 1993 Form
10-K and is incorporated by reference.
10.2+ Supplemental retirement agreement between the Registrant and Hugh
G. Harness, a director and past President of the Registrant, dated
December 21, 1978 and amended pursuant to an Amendment to
Agreement dated October 23, 1986, together with an Agreement
providing for the retirement and consultation of and by Mr.
Harness and the Registrant dated January 7, 1994, attached to
which as Exhibits B and C were agreements further amending the
supplemental retirement agreement, were filed as an exhibit to
Registrant's 1994 Form 10-K, and are incorporated herein by
reference.
10.3+ Indemnity agreement effective September 24, 1986, which exists
between the Registrant and each director, was filed as an exhibit
to Registrant's 1992 Form 10-K, and is incorporated herein by
reference.
10.4 Lease agreement between the Registrant and Equitable Life
Assurance Society of the United States for the lease of the 24th
floor of the Buhl Building, Detroit, Michigan, effective January
1, 1995, was previously filed as an exhibit to the Registrant's
Form 10-Q for the quarter ended March 31, 1995, and is
incorporated herein by reference.
10.5+ Retirement Plan for Outside Directors as amended and restated,
filed as an exhibit to the Registrant's 1995 Form 10-K and
incorporated herein by reference.
10.6+ Supplemental Executive Retirement Plan dated July, 1998, filed as
an exhibit to the Registrant's 1998 Form 10-K and incorporated
herein by reference.
27.* Financial Data Schedule.
99. Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A
and incorporated herein by reference.
* Filed with this report
28
Federal
Screw Works [LOGO OMITTED]
1999
Annual Report
Board
of Directors
Thomas W. Butler, Jr.**+
President, Thomas
W. Butler and
Associates, Inc.,
Business Consultants
Hugh G. Harness*
Business Consultant,
Retired President and Chief
Operating Officer of the
Company
F. D. Tennent**+
Business Consultant;
Retired Senior Vice
President -- Finance,
Secretary & Treasurer
of the Company
Robert F. ZurSchmiede*
Vice President of the
Company -- Romulus Divisions
and Traverse City Division
Thomas ZurSchmiede*
President and Chief
Operating Officer of the
Company
W. T. ZurSchmiede, Jr.*+
Chairman of the Board &
Chief Executive Officer;
Chief Financial Officer;
Secretary & Treasurer of the
Company
Executive
Officers
W. T. ZurSchmiede, Jr.
Chairman of the Board &
Chief Executive Officer;
Chief Financial Officer;
Secretary & Treasurer
Thomas ZurSchmiede
President and Chief
Operating Officer
John M. O'Brien
Vice President -- Sales
and Marketing
Robert F. ZurSchmiede
Vice President -- Romulus
Divisions and Traverse City Division
Jeffrey M. Harness
Vice President -- Chelsea and
Brighton Divisions
*Member of
Executive Committee
**Member of Audit
and Restricted
Stock Bonus Committees
+Member of Salary Compensation Committee
2
Financial Highlights
Federal Screw Works
(Dollars in thousands, except per share data)
Years Ended June 30 1999 1998 1997
- ------------------- ---- ---- ----
Net sales $118,610 $106,889 $102,683
Earnings before federal
income taxes 12,364 11,779 10,768
Federal income taxes 4,158 3,952 3,593
Net earnings 8,206 7,827 7,175
Depreciation and
amortization 4,623 4,206 3,889
Capital expenditures 7,779 8,367 6,872
Working capital 16,657 11,981 9,436
Cash dividends declared 2,390 2,173 1,304
Stockholders' equity 52,128 46,780 40,080
Per Share Data
- --------------
Net earnings $ 7.56 $ 7.20 $ 6.60
Cash dividends declared 2.20 2.00 1.20
Average number of shares outstanding:
1999 -- 1,085,289; 1998 -- 1,086,475; 1997 -- 1,086,646
Annual Meeting
October 28, 1999, 10 a.m.
Federal Screw Works
535 Griswold Street, Ste. 2400
Detroit, Michigan 48226
Transfer Agent
State Street Bank & Trust Company
Registrar
State Street Bank & Trust Company
Federal Screw Works
Corporate Offices:
535 Griswold Street, Ste. 2400
Detroit, Michigan 48226
Telephone: 313/963-2323
Division locations: Big Rapids,
Brighton, Chelsea, Romulus,
Traverse City, Michigan
10-K Available: Copies of the 1999 Form 10-K including the financial
statements and schedules as filed with the Securities and Exchange Commission
may be obtained without charge by the Stockholders from the Company upon
written request to the Secretary. Exhibits will likewise be supplied upon
payment of a reasonable fee.
Federal Screw Works shares
are traded on the NASDAQ Small Cap Market. The Company's symbol is FSCR.
3
To Our
Shareholders:
The Company reports net earnings for the fiscal year ended June 30, 1999, of
$8,206,000, or $7.56 per share, on sales of $118,610,000. For the year ended
June 30, 1998, the Company reported net earnings of $7,827,000, or $7.20 per
share, on sales of $106,889,000. Net earnings for the fourth quarter ended
June 30, 1999, were $3,632,000, or $3.35 per share, on sales of $32,300,000.
Net earnings for the fourth quarter ended June 30, 1998, were $3,722,000, or
$3.42 per share, on sales of $28,253,000.
The Company is pleased to report its sixth consecutive year of increased
sales and earnings, both of which were records. Buoyed by strong demand from
our automotive customers and improvement in refrigeration sales, we were also
able to absorb the startup costs of our new Traverse City Division. Within a
climate of concern regarding interest rates, as well as labor negotiations at
our principal automotive customers, the Company's common stock price remains
strong at $53 per share on August 16, 1999. Further, the Company was proud to
declare its largest dividend ever, authorizing in addition to its regular
annual dividend of $.40 per share an extra dividend of $1.90 a share on
August 13, 1999, payable October 1st to shareholders of record September 3,
1999. We deeply appreciate the trust our shareholders have placed in us.
We are concerned by the persistence of rising health care costs as well as
customer requests for price concessions. However, the Company continues to be
awarded contracts for more complex, sophisticated parts. Capital spending for
the year was second only to fiscal 1998. As we look forward to the new year,
we also wish to express our admiration for the perseverance of our employees,
whose dedication and commitment are so inspiring.
/s/ Thomas ZurSchmiede
- ----------------------
Thomas ZurSchmiede
President
/s/ W. T. ZurSchmiede, Jr.
- --------------------------
W. T. ZurSchmiede, Jr.
Chairman
4
The Company
Industry Information
Federal Screw Works is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single business segment.
The Company's products are manufactured at several plants and are fabricated
from metal rod and bar, which are generally available at competitive prices
from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Operating Divisions
The Company's industrial component parts are manufactured in seven plants
located throughout Michigan. The Company presently employs approximately 523
hourly-rated and salaried personnel. A brief description of each division
follows.
The Big Rapids Division in Big Rapids, Michigan, manufactures special
high-strength bolts and other cold formed products using boltmakers and
headers as primary equipment. Among the items manufactured to both inch and
metric specifications are hex head bolts, connecting rod bolts, studs and
flange bolts. The 200,000 square foot plant is situated on 25 acres of land,
and contains heat treat facilities for hardening in-process parts. The
annealing and pickling of the steel used at Big Rapids is generally performed
at the Romulus Steel Processing Division.
The Romulus Division is housed in a 100,000 square foot plant, on 22 acres of
land, in Romulus, Michigan. This division uses nutformers as primary
equipment to manufacture special prevailing torque locknuts. Products include
locknuts, connecting rod nuts, and other special nut products, in both metric
and inch sizes. The plant has its own furnace for heat treating in-process
parts. Annealing and pickling of the steel coils used in manufacturing nut
products are performed by the adjacent Romulus Steel Processing Division.
The parts produced at the above divisions are sold principally to the
automotive market. These parts are mass produced, and most are shipped
directly to car assembly plants.
Steel rod annealing, pickling and drawing facilities are provided at the
38,000 square foot Romulus Steel Processing Division plant on a tract of land
it shares with the Romulus Division. A significant amount of the output of
this facility is converted to finished products by Federal Screw Works' bolt
and nut making operations. Excess capacity is used to process steel rod
belonging to other companies, mainly in the cold heading industry.
5
The Company
Continued
The Brighton Division occupies a 19,000 square foot leased facility in
Brighton, Michigan. The lease expires in December, 2001. The Division
manufactures perishable tooling, primarily for the cold heading industry.
More than one-half of its output is consumed by the Company's Romulus and Big
Rapids Divisions.
The Chelsea Division is located in Chelsea, Michigan, in a plant having
approximately 86,000 square feet. Primary equipment consists of automatic
screw machines and rotary index machines capable of making products from 1/16
inch to 2-3/4 inches in diameter. Chelsea Division fabricates a wide variety
of precision parts including piston pins, bushings, fittings, special
fasteners, valve components, sleeves, shafts, gear blanks and the like. These
parts are generally produced in large volume lots and delivered direct to
manufacturers of products such as compressors, automobiles, transmissions and
small engines.
In August, 1994, the Company leased a 16,000 square foot facility in Romulus
to conduct engineering and manufacturing development activities. This
facility, known as the Technical Center, gives the Company sufficient room to
try out new primary and secondary equipment, tooling, and parts feeding and
automation devices, as well as permitting the Company to rebuild recently
purchased used equipment. This facility has been of major assistance in
recent years.
In early February the Company began operations in a new 35,000 square foot
plant in Traverse City, Michigan. The Traverse City Division manufactures
special assemblies for our automotive customers.
The Company's corporate offices are located in the Buhl Building in downtown
Detroit, where the Company occupies 12,000 square feet of space under a five
year lease expiring in 1999 (renewable for an additional 5 years).
The Company owns outright all of the above described buildings, land, and
production facilities except as specifically noted to the contrary. The
Company utilizes all of the floor space of these structures. Present
facilities are adequate to meet the needs of each respective division.
6
Financial Review
Federal Screw Works
Quarterly Operating Results (Dollars in thousands, except per share data)
1st 2nd 3rd 4th For the
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1999
Net sales $25,468 $29,515 $31,327 $32,300 $118,610
Gross profit 3,229 4,323 4,748 6,823 19,123
Net earnings 1,033 1,637 1,904 3,632 8,206
Net earnings per share $ .95 $ 1.51 $ 1.75 $ 3.35 $ 7.56
Cash dividends per share 1.90 .10 .10 .10 2.20
1998
Net sales $24,716 $25,384 $28,536 $28,253 $106,889
Gross profit 3,122 3,454 4,585 6,677 17,838
Net earnings 952 1,343 1,810 3,722 7,827
Net earnings per share $ .88 $ 1.23 $ 1.67 $ 3.42 $ 7.20
Cash dividends per share 1.70 .10 .10 .10 2.00
Net earnings for the fourth quarter of 1999 and 1998 were favorably affected
by year end adjustments, principally inventory ($1,164,179 or $1.07 per share
and $1,084,732 or $1.00 per share, respectively).
Stock Prices
These are the quarterly high and low sales prices as reported by the National
Association of Securities Dealers for the Company's common stock, which is
traded on the NASDAQ Small Cap Market under the symbol FSCR.
1999 1998
High Low High Low
---- --- ---- ---
1st Quarter $55 $46 $61 $45
2nd Quarter 50 44 62 46
3rd Quarter 58 46 59 53-1/2
4th Quarter 51-1/2 44 59 49-1/2
7
Financial Review
Continued
Federal Screw Works
<TABLE>
<CAPTION>
Selected Financial Data
Years Ended June 30 (Dollars in thousands, except per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 118,610 $ 106,889 $ 102,683 $ 92,794 $ 90,503
Cost of products sold 99,487 89,051 85,596 80,793 78,640
Interest expense 206 126 412 848 559
Earnings before federal
income taxes 12,364 11,779 10,768 6,560 6,388
Federal income taxes 4,158 3,952 3,593 2,169 2,147
Net earnings 8,206 7,827 7,175 4,391 4,241
Average number of
shares of common
stock outstanding 1,085,289 1,086,475 1,086,646 1,086,662 1,086,954
Per share of common stock:
Net earnings $ 7.56 $ 7.20 $ 6.60 $ 4.04 $ 3.90
Cash dividends 2.20 2.00 1.20 1.10 .80
Total assets $ 84,706 $ 74,866 $ 68,158 $ 64,360 $ 62,008
Long-term debt 2,100 450 600 7,960 8,700
</TABLE>
8
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations
Results of Operations
Federal Screw Works reported net sales of $118.6 million in fiscal 1999,
which represented a 10.9% increase from fiscal 1998 sales of $106.9 million.
Net sales for fiscal 1998 increased 4.1% from fiscal 1997 sales of $102.7
million. Sales in both 1999 and 1998 benefited from new automotive parts
programs and the Company's continued expansion in non-automotive related
markets. The number of parts shipped increased in each of the last two fiscal
years.
Gross profits increased 7.3% to $19.1 million in fiscal 1999, a $1.3 million
increase from fiscal 1998. Fiscal 1998 gross profits increased 4.1% to $17.8
million compared to the $17.1 million level realized in 1997. The increases
resulted primarily from greater sales, heavily offset by price concessions
which continued to be required by our customers. These concessions are a part
of the competitive environment and will be with us for the foreseeable
future. Other negative factors affecting 1999 profits included increased
premium freight and production difficulties caused equally by subsupplier
overload and by a limited number of many new products.
Material, plating and packaging costs were again stable in 1999.
Our Shareholders are aware of the Company's dependence upon sales to the two
largest U.S. automobile manufacturers, a condition that has existed for at
least fifty years. The impact of new parts programs were again a major factor
in fiscal 1999.
The Company rejoined the Daimler-Chrysler supply base after a four year
absence. The short term effect will not be important, but the long term
effect could be significant.
Refrigeration sales were up in fiscal 1999, as the refrigeration industry
returned to its normal growth patterns in this fiscal year, probably accented
by the very hot weather last summer. As a percentage of growth, refrigeration
sales growth historically has been greater than automotive sales growth.
Sales to customers outside North America are increasing, but still are not
material.
As mentioned in our 1996 annual report, the Company began production
shipments through a Tier I supplier to a transplant automobile manufacturer
in 1997. These were joined by shipments through a Tier I supplier to a second
transplant manufacturer in fiscal 1998. The Company believes that outsourcing
by certain of its major customers will continue to be a positive factor,
although new outsourcing programs were not important either in fiscal 1999 or
1998. Significant consolidations again occurred in the fastener industry in
fiscal 1999, but the Company did not experience any additional competitive
pressure from these consolidations or from transplant fastener suppliers.
The Company entered into a new three year collective bargaining agreement
with the United Auto Workers covering the employees of its Chelsea Division.
This agreement will expire May, 2002.
As a percentage of net sales, selling, general and administrative expenses
were reduced to 5.5% in fiscal 1999. In fiscal 1998 and fiscal 1997 these
expenses were 5.6% and 5.8% of net sales, respectively.
Interest expense increased in
9
Financial Review
Continued
Federal Screw Works
fiscal 1999 as a result of an increase in average borrowings under the
Company's bank credit agreement.
The Company has been designated by the federal Environmental Protection
Agency ("EPA") as a Potentially Responsible Party ("PRP") with respect to
three related dump sites. The sites are related in that the PRPs engaged a
single transporter who illegally disposed of toxic and hazardous waste
materials there in the late 1960s. The sites are located in Oakland County,
Michigan, and are referred to as the Springfield Township, the Rose Township
and Cemetery Dump Sites. While the Company denies it has engaged in disposing
of any materials at any of the sites, the Company together with eleven other
PRPs has actively participated in negotiations directed toward settlement of
the EPA's claims. The Rose Township Site was the first site selected by the
EPA for remediation. The participating PRPs were successful in negotiating a
Consent Decree which was approved by the United States District Court for the
Eastern District of Michigan under which the Company has agreed to
participate in the cost of the clean up. These costs have been paid by the
Company and no additional costs are expected. The State of Michigan appealed
the Consent Decree to the United States Court of Appeals for the Sixth
Circuit which affirmed entry of the Decree.
The same PRPs have actively been engaged in negotiations with the EPA and the
Michigan Department of Environmental Quality ("MDEQ") in an effort to agree
upon mutually acceptable remediation parameters for the Springfield Township
site. An agreement has now been reached with EPA and the MDEQ and a Consent
Decree embodying the settlement terms has been entered with the U.S. District
Court for the Eastern District of Michigan. Remediation costs for which the
Company is liable are not expected to have a material effect on the Company's
financial statements. With respect to the Cemetery site, the EPA has
performed a site cleanup but has not asserted claims against any of the
identified PRPs which suggests that the evidence of involvement by such
parties is weak. The Company received a notice letter from a representative
of the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating
that "empty" drums from the Company were shipped to the site. The waste
allegedly shipped by the Company is 3520 gallons which is equal to
approximately 0.02 percent of the total waste at the site. Since the total
site costs for all parties are not expected to exceed $10 million, the
Company's share of the costs are not expected to be material. No
investigation has been undertaken to the Company's knowledge which would
identify any costs to be incurred by the Company which might have a material
effect on the Company's financial statements.
The Company completed a comprehensive review of its operations related to the
"Year 2000" issue during fiscal 1998. This review included an assessment of
the Company's mainframe computer system, operating and application systems,
microcomputer and office systems, facilities, and
10
production equipment. This review also included correspondence with major
vendors and customers. Management believes it has identified those systems
that could be affected by the "Year 2000" issue. The Company has implemented
a plan to resolve these issues.
During the fiscal year ended June 30, 1998, the company installed a new
mainframe computer system and operating system that are "Year 2000"
compliant. Implementation and testing of mainframe applications were
completed in fiscal 1999. The Company believes that, with modification of its
existing computer systems and updates by vendors in the ordinary course of
business, the "Year 2000" issue will not pose significant operational
problems for the Company's computer systems. However, if such modifications
are not made, or are not completed timely, the "Year 2000" issue could have a
material impact on the operations of the Company.
The Company has developed contingency plans for its significant operations
and is continuously monitoring the progress toward the established "Year
2000" plan. These plans include preliminary discussions with the Company's
primary software vendors to replace critical applications that may become
inoperable as a result of the "Year 2000" issue. The company may increase
inventory levels to insure that supplies are not interrupted.
The total "Year 2000" project cost is estimated at approximately $400,000,
which includes estimated costs to be incurred to acquire upgraded software
that has been capitalized. These costs have been paid for with cash from
operations.
Dividends
Cash dividends declared in fiscal year 1999 were $2.20 per share, $0.20 more
than that declared in fiscal 1998 and $1.00 more than that declared in fiscal
1997. The Board of Directors in August, 1999, declared a $.10 per share
quarterly dividend, and an extra dividend of $1.90 per share.
Liquidity and Capital Resources
On October 20, 1998, the Company extended its Revolving Credit and Term Loan
Agreement by one year. The expiration date is October 31, 2001, and is
renewable annually for an additional year. Borrowings up to $25 million and
capital expenditures of $10 million annually are permitted. The Company has
the option to convert borrowings under the facility to a term note through
October 31, 2001. Payments under the term note, if the conversion option were
exercised, would be made quarterly and could extend to October 31, 2003.
Therefore, borrowings under the Revolving Credit and Term Loan Agreement,
which were $2,100,000 at June 30, 1999, and $250,000 at June 30, 1998, are
classified as long-term debt.
Working capital at June 30, 1999 amounted to $16,657,000 as compared to
working capital of $11,981,000 at June 30, 1998. The increase resulted
primarily from an increase in accounts receivable and inventories. The
increase in accounts receivable relates primarily to strong sales in the
fourth quarter of 1999 and the timing of customer payments near year end.
The balance sheet at June 30, 1999 includes a long-term liability of
$1,321,000, representing the unfunded
11
Financial Review
Continued
Federal Screw Works
accumulated benefit obligations of certain employee pension plans. The excess
of this liability over the unrecognized prior service cost at the date of
transition is included as a reduction of stockholders' equity. The funding
policies of these plans, which are based on actuarial calculations, continue
to comply with applicable laws and regulations.
As discussed in Note 5 to the financial statements, effective July 1, 1993,
the Company adopted FASB Statement No. 106. As permitted by the Statement,
the Company is amortizing the present value of future health care and life
insurance benefits related to employees past service ($17,967,000 at July 1,
1993) over a period of 20 years. The implementation of this accounting
pronouncement has no impact on the Company's cash flows.
Cash flows from operating activities approximated $8.5 million in fiscal
1999. This compares to $10.5 million in 1998 and $15.9 million in 1997.
Capital expenditures for fiscal 1999 were $7.8 million, primarily related to
the purchase of equipment and expansion of facilities in order to improve
production efficiencies and enable the Company to meet increased future
demand for its products. Capital expenditures in fiscal years 1998 and 1997
were $8.4 million and $6.9 million, respectively. Expenditures for additional
equipment during fiscal 1999 are presently expected to approximate $7.1
million, of which $1.4 million had been committed as of June 30, 1999. These
future capital expenditures are expected to be financed from cash generated
from operations and additional borrowing capacity under the bank credit
agreement.
Net cash used in financing activities was $1.4 million in fiscal 1999. This
compares to $2.3 million used in fiscal 1998 and $8.7 million used in 1997.
Fluctuations in these activities have been influenced principally by
borrowings and repayments under the Company's Revolving Credit and Term Loan
Agreement.
Impact of Inflation and Changing Prices
The Company passes increased costs on to customers, to the extent permitted
by competition, by increasing sales prices whenever possible. In fiscal 1999,
1998 and 1997 the Company was generally unable to pass on cost increases
incurred due to competitive pressures. Sales price increases in each of these
years were insignificant.
12
<TABLE>
<CAPTION>
Statements of Operations
Federal Screw Works
Year Ended June 30
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $118,610,185 $106,888,711 $102,682,635
Costs and expenses:
Cost of products sold 99,486,786 89,051,350 85,595,893
Selling, general and administrative 6,554,281 5,932,572 5,907,223
Interest 205,534 126,091 411,906
------------ ------------ ------------
106,246,601 95,110,013 91,915,022
------------ ------------ ------------
EARNINGS BEFORE FEDERAL
INCOME TAXES 12,363,584 11,778,698 10,767,613
Federal income taxes--Note 4:
Current 4,361,000 3,822,000 3,393,000
Deferred (credit) (203,000) 130,000 200,000
------------ ------------ ------------
4,158,000 3,952,000 3,593,000
------------ ------------ ------------
NET EARNINGS $ 8,205,584 $ 7,826,698 $ 7,174,613
============ ============ ============
Average number of shares outstanding 1,085,289 1,086,475 1,086,646
============ ============ ============
Net earnings per share $ 7.56 $ 7.20 $ 6.60
============ ============ ============
<FN>
See accompanying notes.
</TABLE>
13
<TABLE>
<CAPTION>
Balance Sheets
Federal Screw Works
June 30
1999 1998
---- ----
Assets
<S> <C> <C>
Current Assets
Cash $ 279,306 $ 974,879
Accounts receivable 15,727,338 11,815,786
Inventories -- Note 1:
Finished products 4,814,688 4,642,260
In-process products 7,210,378 6,065,010
Raw materials and supplies 2,850,877 2,377,014
----------- -----------
Total inventories 14,875,943 13,084,284
Prepaid expenses and other current accounts 297,266 737,369
Deferred income taxes-- Note 4 958,000 946,000
----------- -----------
TOTAL CURRENT ASSETS 32,137,853 27,558,318
Other Assets
Intangible pension asset-- Note 5 1,721,522 960,718
Cash value of life insurance 5,311,656 5,189,700
Prepaid pension costs 3,622,538 3,051,506
Miscellaneous 991,765 323,753
----------- -----------
11,647,481 9,525,677
Property, Plant and Equipment -- Notes 2 and 3
Land 511,579 334,850
Buildings and improvements 12,771,671 11,105,493
Machinery and equipment 81,243,695 75,715,606
----------- -----------
94,526,945 87,155,949
Less accumulated depreciation (53,606,656) (49,373,466)
40,920,289 37,782,483
----------- -----------
$84,705,623 $74,866,478
=========== ===========
14
<CAPTION>
June 30
1999 1998
---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 4,143,363 $ 4,812,392
Payroll and employee benefits 8,611,738 7,558,926
Dividend payable 108,191 108,641
Federal income taxes 585,052 1,170,774
Taxes, other than income taxes 1,802,095 1,396,314
Accrued pension contributions -- 64,777
Other accrued liabilities 30,795 65,869
Current maturities of long-term debt 200,000 400,000
----------- -----------
TOTAL CURRENT LIABILITIES 15,481,234 15,577,693
Long-Term Liabilities
Long-term debt-- Note 2 2,100,000 450,000
Unfunded pension obligation-- Note 5 1,321,112 --
Deferred income taxes-- Note 4 2,006,000 2,197,000
Employee benefits 1,080,828 1,016,560
Postretirement benefits-- Note 5 9,864,806 8,210,550
Other liabilities 723,597 634,509
----------- -----------
17,096,343 12,508,619
Stockholders' Equity -- Notes 2 and 7
Common stock, $1 par value, authorized
2,000,000 shares,
1,076,162 shares outstanding in 1999
(1,086,412 in 1998) 1,076,162 1,086,412
Additional capital 3,269,476 3,210,476
Retained earnings 48,411,426 43,073,942
Accumulated other comprehensive income (629,018) (590,664)
----------- -----------
52,128,046 46,780,166
----------- -----------
$84,705,623 $74,866,478
=========== ===========
<FN>
See accompanying notes.
</TABLE>
15
<TABLE>
<CAPTION>
Statements of
Stockholders' Equity
Federal Screw Works
Years ended June 30, 1999, 1998 and 1997
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income Total
------ ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1996 $1,086,662 $2,917,759 $31,560,814 $(1,664,451) $33,900,784
Net earnings for the year 7,174,613 7,174,613
Reduction of unrecognized
pension costs, net of taxes 166,143 166,143
-----------
Total comprehensive income 7,340,756
Purchase of 150 shares (150) (5,850) (6,000)
Transactions under restricted
stock bonus plans-- net 148,717 148,717
Cash dividends declared--
$1.20 per share (1,303,979) (1,303,979)
---------- ---------- ----------- ----------- -----------
BALANCES AT JUNE 30, 1997 1,086,512 3,066,476 37,425,598 (1,498,308) 40,080,278
Net earnings for the year 7,826,698 7,826,698
Reduction of unrecognized
pension costs, net of taxes 907,644 907,644
-----------
Total comprehensive income 8,734,342
Purchase of 100 shares (100) (5,350) (5,450)
Transactions under restricted
stock bonus plans-- net 144,000 144,000
Cash dividends declared--
$2.00 per share (2,173,004) (2,173,004)
---------- ---------- ----------- ----------- -----------
BALANCES AT JUNE 30, 1998 1,086,412 3,210,476 43,073,942 (590,664) 46,780,166
Net earnings for the year 8,205,584 8,205,584
Increase in unrecognized
pension costs, net of taxes (38,354) (38,354)
-----------
Total comprehensive income 8,167,230
Purchase of 10,250 shares (10,250) (478,444) (488,694)
Transactions under restricted
stock bonus plans-- net 59,000 59,000
Cash dividends declared--
$2.20 per share (2,389,656) (2,389,656)
---------- ---------- ----------- ----------- -----------
BALANCES AT JUNE 30, 1999 $1,076,162 $3,269,476 $48,411,426 $ (629,018) $52,128,046
========== ========== =========== =========== ===========
<FN>
( ) Denotes deduction.
See accompanying notes.
</TABLE>
16
<TABLE>
<CAPTION>
Statements of
Cash Flows
Federal Screw Works
Year Ended June 30
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 8,205,584 $ 7,826,698 $ 7,174,613
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,622,864 4,206,219 3,889,199
Increase in cash value of life insurance (121,956) (124,773) (176,040)
Change in deferred income taxes (203,000) 130,000 200,000
Employee benefits 1,718,524 1,376,040 1,407,050
Amortization of restricted stock 24,717
Other (569,002) (231,542) (1,316,435)
Changes in operating assets and liabilities:
Accounts receivable (3,911,552) 77,088 (1,011,172)
Inventories and prepaid expenses (1,351,556) (2,305,571) 1,197,275
Accounts payable and accrued expenses 103,541 (479,726) 4,541,338
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,493,447 10,474,433 15,930,545
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,779,183) (8,366,821) (6,871,700)
Proceeds from sale of property,
plant and equipment 18,513 20,144 5,182
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (7,760,670) (8,346,677) (6,866,518)
FINANCING ACTIVITIES
Additional borrowings (principal repayments)
under bank credit agreement 1,850,000 250,000 (6,960,000)
Principal payments on lease-purchase obligation (400,000) (400,000) (400,000)
Purchases of common stock (488,694) (5,450) (6,000)
Dividends paid (2,389,656) (2,173,004) (1,303,994)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (1,428,350) (2,328,454) (8,669,994)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (695,573) (200,698) 394,033
Cash at beginning of year 974,879 1,175,577 781,544
------------ ------------ ------------
CASH AT END OF YEAR $ 279,306 $ 974,879 $ 1,175,577
============ ============ ============
<FN>
See accompanying notes.
</TABLE>
17
Notes to
Financial Statements
Federal Screw Works
Note 1 -- Significant Accounting Policies
Inventories: Inventories are stated at the lower of cost or market. Cost,
determined by the last-in, first-out (LIFO) method, was used for certain raw
material inventories, $2,216,000 and $1,882,000 at June 30, 1999 and 1998,
respectively. The remaining inventories are costed using the first-in,
first-out (FIFO) method. If inventories had been valued at current cost,
amounts reported at June 30 would have been increased by $582,000 and
$633,000 in 1999 and 1998, respectively.
Property, Plant and Equipment: Property, plant and equipment is stated at
cost, which includes the cost of interest which is capitalized during
construction of significant additions. Provisions for depreciation are based
upon the estimated useful lives of the respective assets and are computed by
the straight-line method for financial reporting purposes and by accelerated
methods for income tax purposes.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
Fair Value of Financial Instruments: At June 30, 1999, the carrying amounts
reported in the balance sheets for cash, accounts receivable, accounts
payable, debt and investments approximate fair value.
18
Note 2 -- Debt
Long-term debt at June 30 consists of the following:
1999 1998
---- ----
Revolving credit note payable to bank $2,100,000 $ 250,000
Lease-purchase obligation (see Note 3),
payable $200,000 semiannually, plus
interest at 7-3/4% 200,000 600,000
---------- ----------
2,300,000 850,000
Less current maturities 200,000 400,000
---------- ----------
$2,100,000 $ 450,000
========== ==========
The Company has a $25,000,000 revolving credit and term loan agreement with a
bank. The Company has the option to convert borrowings thereunder (classified
as long-term debt) to a term note through October 31, 2001, the expiration
date of the agreement. Payments under the term note, if the conversion option
is exercised, would be made quarterly commencing three months following
conversion until maturity of the term note on October 31, 2003. Interest
(7.0% at June 30, 1999) on outstanding borrowings is determined based on the
prime rate, or at the Company's option, an alternative variable market rate.
The Company also pays a commitment fee of 3/8% on the unused portion of
the revolving credit. The aggregate fair value of the Company's revolving
credit note payable and lease-purchase obligation approximates their recorded
amounts at June 30, 1999.
The Company is in compliance with covenants of the revolving credit and term
loan agreement and the lease-purchase obligation including restrictions on
payment of cash dividends. Retained earnings of $14,701,000 are free of
restriction at June 30, 1999.
Interest paid by the Company during fiscal 1999, fiscal 1998 and fiscal 1997
aggregated $320,000, $323,000, and $503,000, respectively.
19
Notes To
Financial Statements
Continued
Federal Screw Works
Note 3 -- Leases and Other Commitments
The Company acquired one of its manufacturing facilities under a
lease-purchase agreement with a municipality, and $200,000 of remaining
outstanding Industrial Revenue Bond financing is guaranteed by the Company at
June 30, 1999.
At June 30, 1999, the aggregate minimum rental commitments for the Industrial
Revenue Bond lease-purchase obligation and various noncancelable operating
leases with initial terms of one year or more are as follows:
Lease-
Purchase Operating
Year ending June 30 Obligation Leases
- ------------------- ---------- ---------
2000 $ 207,750 $ 751,000
2001 415,000
2002 251,000
2003 85,000
2004 26,000
---------- ----------
Total minimum lease payments $ 207,750 $1,528,000
==========
Amounts representing interest 7,750
----------
Present value of net minimum lease payments $ 200,000
==========
Total rent expense (exclusive of the lease-purchase obligation) was
$1,158,000 in fiscal 1999, $1,035,000 in fiscal 1998, and $911,000 in fiscal
1997.
Costs to complete the expansion of plant facilities and the purchase of
machinery and equipment approximated $1,371,000 at June 30, 1999.
20
Note 4 -- Federal Income Taxes
A reconciliation of the federal income tax provision to the amount computed
by applying the applicable statutory federal income tax rate (35%) to
earnings before federal income taxes follows:
1999 1998 1997
---- ---- ----
Computed amount $ 4,327,000 $ 4,123,000 $ 3,769,000
Life insurance policies (79,000) (97,000) (94,000)
Other (90,000) (74,000) (82,000)
----------- ----------- -----------
Total federal income tax provision $ 4,158,000 $ 3,952,000 $ 3,593,000
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of June
30, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax liabilities:
Accelerated tax depreciation $4,667,000 $4,231,000
---------- ----------
Total deferred tax liabilities 4,667,000 4,231,000
---------- ----------
Deferred tax assets:
Employee benefits 3,487,000 2,776,000
Inventory 93,000 152,000
Other 39,000 52,000
---------- ----------
Total deferred tax assets 3,619,000 2,980,000
---------- ----------
Net deferred tax liabilities $1,048,000 $1,251,000
========== ==========
Income taxes paid by the Company during fiscal 1999, fiscal 1998, and fiscal
1997 totalled $4,881,000, $3,358,000, and $2,835,000, respectively.
21
Notes To
Financial Statements
Continued
Federal Screw Works
Note 5 -- Employee Benefits
The Company sponsors three defined benefit pension plans covering
substantially all employees. Benefits under two of the plans are based on
negotiated rates times years of service. Under the remaining plan, benefits
are based on compensation during the years immediately preceding retirement
and years of service. It is the Company's policy to make contributions to
these plans sufficient to meet minimum funding requirements of the applicable
laws and regulations, plus such additional amounts, if any, as the Company's
actuarial consultants advise to be appropriate.
In addition, to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all of the Company's employees may become eligible for those benefits if they
reach normal retirement age while working for the Company. The benefits are
provided through certain insurance companies.
The following tables set forth the plans' funded status at the March 31, 1999
and 1998 measurement dates: Changes in benefit obligation are:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation
at beginning of year $ 21,439,000 $ 19,490,000 $ 8,211,000 $ 6,747,000
Service cost 878,000 523,000 467,000 373,000
Interest cost 1,786,000 1,460,000 1,444,000 1,367,000
Plan Amendments 3,323,000 -- -- --
Amortization of transition
(Asset) / obligation -- -- 898,000 898,000
Actuarial (gain) / loss 761,000 1,150,000 -- (100,000)
Benefits paid (1,417,000) (1,184,000) (1,155,000) (1,074,000)
------------ ------------ ------------ ------------
Benefit obligation at end of year $ 26,770,000 $ 21,439,000 $ 9,865,000 $ 8,211,000
============ ============ ============ ============
</TABLE>
22
<TABLE>
<CAPTION>
Components of net periodic benefit cost are:
Pension Postretirement
Benefits Benefits
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 878,000 $ 523,000 $ 478,000 $ 467,000 $ 373,000 $ 330,000
Interest cost 1,786,000 1,460,000 1,375,000 1,444,000 1,367,000 1,362,000
Expected return
on assets (1,966,000) (1,600,000) (1,386,000) -- -- --
Amortization of
transition
obligation 166,000 167,000 166,000 898,000 898,000 898,000
Amortization of
prior service
cost 321,000 83,000 72,000 -- -- --
Amortization of
unrecognized
net (gain) /
loss 26,000 70,000 91,000 -- (100,000) (119,000)
----------- ----------- ----------- ----------- ----------- -----------
Net periodic
benefit cost $ 1,211,000 $ 703,000 $ 796,000 $ 2,809,000 $ 2,538,000 $ 2,471,000
=========== =========== =========== =========== =========== ===========
<CAPTION>
Changes in plan assets are:
Pension Postretirement
Benefits Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fair value of assets
at beginning of year $ 24,674,000 $ 19,334,000 $ -- $ --
Actual return on assets (216,000) 4,586,000 -- --
Employer contribution 679,000 1,938,000 -- --
Benefits paid (1,417,000) (1,184,000) -- --
------------ ------------ ----- -----
Fair value of assets at end of year $ 23,720,000 $ 24,674,000 $ -- $ --
============ ============ ===== =====
</TABLE>
23
Notes To
Financial Statements
Continued
Federal Screw Works
<TABLE>
<CAPTION>
Funded status of the plans are:
Pension Postretirement
Benefits Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status at end of
year (underfunded) $ (3,049,000) $ 3,235,000 $(21,743,000) $(20,494,000)
Unrecognized transition obligation 266,000 432,000 12,577,000 13,475,000
Unrecognized prior service cost 3,873,000 871,000 -- --
Unrecognized net (gain) / loss 2,945,000 29,000 (699,000) (1,192,000)
Employer contributions 941,000 276,000 -- --
------------ ------------ ------------ ------------
Prepaid/(accrued) benefit cost $ 4,976,000 $ 4,843,000 $ (9,865,000) $ (8,211,000)
============ ============ ============ ============
Amounts recognized in the statement
of financial position of:
Prepaid benefit cost $ 3,622,000 $ 3,052,000 -- --
Accrued benefit liability (1,321,000) -- $ (9,865,000) $ (8,211,000)
Intangible asset 1,722,000 961,000 -- --
Accumulated other comprehensive
income (pre-tax) 953,000 830,000 -- --
------------ ------------ ------------ ------------
Net amount recognized $ 4,976,000 $ 4,843,000 $ (9,865,000) $ (8,211,000)
============ ============ ============ ============
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $11,856,000, $10,045,000,
$8,382,000, respectively, as of June 30, 1999 and $5,294,000, $5,294,000 and
$5,102,000, respectively, as of June 30, 1998.
In accounting for pension plans, the Company used a discount rate of 7.0% in
1999, and 7.25% in 1998, a 5% rate of increase in compensation, and an 8%
expected rate of return on assets. Plan assets for these plans consist
principally of fixed income instruments, equity securities and participation
in insurance company contracts.
The weighted average discount rate used in determining the accumulated post
retirement benefit obligation at June 30, 1999 and 1998 was 7.0% and 7.25%,
respectively.
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal 2000. The rate
was assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter. Assumed health care cost trends have a significant effect on the
amounts reported for the health care plan. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of June
30, 1999 and 1998 by $2,523,000 and $2,303,000, respectively, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended June 30, 1999 and 1998 by
$259,000 and $226,000, respectively. Effective July 1, 1998, a supplemental
executive retirement plan which covers certain executives of the company was
adopted. The Company has invested $571,000 as of June 30, 1999 to cover
obligations of the plan.
The Company also sponsors a retirement plan for directors who are not
employees of the Company. The net periodic pension expense for the plan was
$89,000, $156,000 and $39,000 in fiscal 1999, 1998 and 1997, respectively.
The actuarial present value of vested benefit obligations approximated
$765,000 at June 30, 1999 and $676,000 at June 30, 1998. The plan is
currently not fully funded.
24
Note 6 -- Industry Information
Federal Screw Works is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single business segment.
The Company's products are manufactured at several plants and are fabricated
from metal rod and bar, which are generally available at competitive prices
from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Approximately 86% of the Company's net sales in fiscal 1999 (89% and 90% in
fiscal 1998 and fiscal 1997, respectively) were made either directly or
indirectly to automotive companies. The Company generally does not require
collateral from its customers.
Customers comprising 10% or greater of the Company's net sales are summarized
as follows:
1999 1998 1997
---- ---- ----
Ford Motor Company 43% 45% 47%
General Motors Corporation 17% 20% 20%
All Others 40% 35% 33%
--- --- ---
100% 100% 100%
--- --- ---
Sales to customers outside the United States are not significant.
Note 7 -- Restricted Stock Bonus Plan
The Company maintains a restricted stock bonus plan for certain key
employees. Shares issued under the plan are subject to certain restrictions
which lapse generally over a period of six to ten years from date of grant.
The market value of shares issued, considered to be compensation, is being
charged to operations over the periods during which the restrictions lapse.
The additional capital accounts reflect the tax benefits of the compensation
deduction.
Note 8 -- Litigation
The Company is involved in various legal actions arising in the normal course
of business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that their outcome will not
have a significant effect on the Company's financial statements.
Note 9 -- Impact of New Accounting Standards
During 1999, the Financial Accounting Standards Board issued several new
accounting standards: "Statements of Financial Accounting Standards No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits, and
No. 133, Accounting for Derivative Instruments and Hedging Activities." Both
statements were adopted by the Company in fiscal 1999 with no material effect
on the Company's financial statements.
25
Report of
Ernst & Young, LLP
Independent Auditors
Board of Directors
Federal Screw Works
We have audited the accompanying balance sheets of Federal Screw Works as of
June 30, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Federal Screw
Works at June 30, 1999 and 1998, and the results of its operations and cash
flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
August 10, 1999
26
<TABLE>
<CAPTION>
Five Year Summary
Federal Screw Works
Five Years Ended June 30 1999 1998 1997 1996 1995
- ------------------------ ---- ---- ---- ---- ----
Operations (in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $118,610 $106,889 $102,683 $92,794 $90,503
Earnings before federal income
taxes 12,364 11,779 10,768 6,560 6,388
Federal income taxes 4,158 3,952 3,593 2,169 2,147
Net earnings 8,206 7,827 7,175 4,391 4,241
Depreciation and amortization 4,623 4,206 3,889 3,553 3,135
Capital expenditures 7,779 8,367 6,872 5,682 7,443
Cash dividends declared 2,390 2,173 1,304 1,195 870
-------- -------- -------- ------- -------
Per share data
Net earnings $ 7.56 7.20 $ 6.60 $ 4.04 $ 3.90
Cash dividends declared 2.20 2.00 1.20 1.10 .80
Book value 48.44 43.06 36.88 31.20 28.49
Market price range
High 58 62 47 28-3/4 23-1/2
Low 44 45 25-1/4 20-1/4 16-3/4
-------- -------- -------- -------- -------
Return data
Net earnings on net sales 6.9% 7.3% 7.0% 4.7% 4.7%
Net earnings on stockholders' equity 15.7% 16.7% 21.2% 14.2% 15.4%
-------- -------- -------- -------- -------
Financial position at June 30
(in thousands)
Working capital (net current assets) $16,657 $ 11,981 $ 9,436 $ 13,613 $12,538
Other assets 11,647 9,526 9,022 8,566 8,327
Property, plant and equipment (net) 40,920 37,782 33,642 30,665 28,613
-------- -------- -------- -------- -------
Total assets less current liabilities 69,224 59,289 52,100 52,844 49,478
Less:
Long-term debt 2,100 450 600 7,960 8,700
Unfunded pension obligation 1,321 1,526 2,977 3,400
Deferred taxes 2,006 2,197 1,564 1,122 1,047
Employee benefits 1,081 1,017 1,105 1,194 1,324
Postretirement benefits 9,865 8,211 6,746 5,250 3,744
Other liabilities 723 634 479 440 306
-------- -------- -------- -------- -------
Stockholders' equity (net assets) $ 52,128 $ 46,780 $ 40,080 $ 33,901 $30,957
======== ======== ======== ======== =======
Other
Number of employees 523 514 491 505 502
Approximate number of stockholders 410 441 472 611 644
Average shares outstanding 1,085,289 1,086,475 1,086,646 1,086,662 1,086,954
--------- --------- --------- --------- ---------
</TABLE>
27
Federal Screw Works
535 Griswold Street, Ste. 2400
Detroit, Michigan 48226
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S
AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE
PERIOD ENDING JUNE 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> $279
<SECURITIES> 0
<RECEIVABLES> 15,727
<ALLOWANCES> 0
<INVENTORY> 14,876
<CURRENT-ASSETS> 32,138
<PP&E> 94,527
<DEPRECIATION> 53,607
<TOTAL-ASSETS> 84,706
<CURRENT-LIABILITIES> 15,481
<BONDS> 0
<COMMON> 1,076
0
0
<OTHER-SE> 51,052
<TOTAL-LIABILITY-AND-EQUITY> 84,706
<SALES> 118,610
<TOTAL-REVENUES> 118,610
<CGS> 99,487
<TOTAL-COSTS> 106,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205
<INCOME-PRETAX> 12,364
<INCOME-TAX> 4,158
<INCOME-CONTINUING> 8,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,206
<EPS-BASIC> 7.56
<EPS-DILUTED> 7.56
</TABLE>
