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Previous: HARTFORD LIFE INSURANCE CO, 10-Q, EX-27, 2000-08-11 |
Next: HASTINGS MANUFACTURING CO, 10-Q, EX-15, 2000-08-11 |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended |
Commission File Number |
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June 30, 2000 |
1-3574 |
HASTINGS MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
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Michigan |
38-0633740 |
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325 North Hanover Street |
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Registrant's telephone number, including area code: 616-945-2491
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Outstanding at |
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Common stock, $2 par value |
760,766 shares |
Hastings Manufacturing Company and Subsidiaries
Contents
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Part I - Financial Information |
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Item 1 - Financial Statements: |
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Report on Review by Independent Certified Public Accountants |
3 |
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Condensed Consolidated Balance Sheets - |
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June 30, 2000 and December 31, 1999 |
4-5 |
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Condensed Consolidated Statements of Income - |
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Three Months and Six Months Ended June 30, 2000 and 1999 |
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Condensed Consolidated Statements of Cash Flows - |
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Six Months Ended June 30, 2000 and 1999 |
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Notes to Condensed Consolidated Financial Statements |
8-9 |
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Review by Independent Certified Public Accountants |
10 |
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Item 2 - Management's Discussion and Analysis of Financial |
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Condition and Results of Operations |
11-16 |
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Item 3 - Quantitative and Qualitative Disclosures About |
17 |
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Market Risk |
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Part II - Other Information |
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Item 1 - Legal Proceedings |
18 |
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Item 4 - Submission of Matters to a Vote of Security Holders |
18 |
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Item 6 - Exhibits and Reports on Form 8-K |
19-20 |
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Report on Review by Independent Certified Public Accountants
Board of Directors
Hastings Manufacturing Company
Hastings, Michigan
We have reviewed the accompanying condensed consolidated balance sheets of Hastings Manufacturing Company and subsidiaries as of June 30, 2000, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2000 and 1999, and cash flows for the six-month periods ended June 30, 2000 and 1999, included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended June 30, 2000. These condensed consolidated financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
As described in Note 4, on January 24, 2000, a class action lawsuit was filed against the Company by its retirees with respect to the early 1997 amendment of the Company's postretirement benefit plans. The outcome of the lawsuit is uncertain at this time.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein). In our report dated February 29, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
July 17, 2000
PART I - FINANCIAL INFORMATION
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
Item 1. Financial Statements
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June 30, |
December 31, |
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Current Assets |
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Cash |
$ 230,820 |
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$ 1,011,630 |
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Accounts receivable, less allowance |
5,593,361 |
4,836,969 |
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Refundable income taxes |
- |
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30,000 |
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Inventories: |
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Finished products |
9,000,714 |
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9,264,412 |
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Work in process |
351,229 |
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456,960 |
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Raw materials |
1,603,252 |
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1,727,445 |
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Prepaid expenses and other assets |
92,594 |
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67,690 |
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Future income tax benefits |
1,899,566 |
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2,124,962 |
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Total Current Assets |
18,771,536 |
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19,520,068 |
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Property and Equipment |
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Land and improvements |
646,717 |
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654,871 |
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Buildings |
5,344,640 |
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5,369,345 |
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Machinery and equipment |
20,532,675 |
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20,273,718 |
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26,524,032 |
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26,297,934 |
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Less accumulated depreciation |
18,502,070 |
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17,762,201 |
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Net Property and Equipment |
8,021,962 |
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8,535,733 |
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Prepaid Pension Asset |
2,254,580 |
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2,359,980 |
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Intangible Pension Asset |
376,632 |
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376,632 |
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Future Income Tax Benefits |
4,843,611 |
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4,854,383 |
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Other Assets |
123,279 |
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16,021 |
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$ 34,391,600 |
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$ 35,662,817 |
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
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Liabilities and Stockholders' Equity |
June 30, |
December 31, |
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Current Liabilities |
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Notes payable to banks |
$ 4,100,000 |
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$ 4,000,000 |
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Accounts payable |
1,373,470 |
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1,727,611 |
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Accruals: |
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Compensation |
523,292 |
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268,543 |
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Income taxes |
19,030 |
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61,673 |
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Taxes other than income |
182,914 |
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142,239 |
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Miscellaneous |
70,332 |
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425,000 |
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Current portion of postretirement benefit obligation |
1,045,756 |
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1,045,756 |
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Current maturities of long-term debt |
1,030,000 |
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960,000 |
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Total Current Liabilities |
8,344,794 |
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8,630,822 |
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Long-Term Debt, less current maturities |
3,110,000 |
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3,660,000 |
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Pension and Deferred Compensation Obligations, less current |
2,378,068 |
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2,394,036 |
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Postretirement Benefit Obligation, less current portion |
13,224,861 |
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13,715,222 |
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Total Liabilities |
27,057,723 |
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28,400,080 |
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Contingency (Note 4) |
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Stockholders' Equity |
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Preferred stock, $2 par value, authorized and |
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Common stock, $2 par value, 1,750,000 shares authorized; |
1,521,532 |
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1,581,532 |
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Additional paid-in capital |
313,907 |
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313,907 |
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Retained earnings |
7,566,542 |
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7,347,532 |
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Accumulated other comprehensive income (Note 3): |
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Cumulative foreign currency translation adjustment |
(868,549 |
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(780,679 |
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Pension liability adjustment |
(1,199,555 |
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(1,199,555 |
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Total accumulated other comprehensive income |
(2,068,104 |
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(1,980,234 |
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Total Stockholders' Equity |
7,333,877 |
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7,262,737 |
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$ 34,391,600 |
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$ 35,662,817 |
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See accompanying independent accountants' review report and notes to condensed consolidated financial statements.
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Income
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Three months ended |
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Six months ended |
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June 30, |
2000 |
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1999 |
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2000 |
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1999 |
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Net Sales |
$ 9,610,963 |
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$ 9,738,166 |
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$ 18,513,186 |
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$ 18,697,297 |
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Cost of Sales |
6,651,316 |
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6,870,929 |
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12,770,053 |
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13,468,483 |
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Gross profit |
2,959,647 |
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2,867,237 |
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5,743,133 |
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5,228,814 |
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Operating Expenses |
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Advertising |
64,143 |
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84,306 |
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126,853 |
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154,607 |
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Selling |
798,531 |
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781,863 |
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1,584,270 |
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1,518,573 |
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General and administrative |
1,538,703 |
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1,425,072 |
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2,865,877 |
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2,785,112 |
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2,401,377 |
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2,291,241 |
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4,577,000 |
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4,458,292 |
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Operating income |
558,270 |
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575,996 |
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1,166,133 |
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770,522 |
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Other Expense (Income) |
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Interest expense |
179,227 |
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153,705 |
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330,999 |
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300,792 |
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Other, net |
(4,768 |
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(4,281 |
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(23,228 |
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(41,485 |
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174,459 |
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149,424 |
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307,771 |
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259,307 |
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Income before income tax expense |
383,811 |
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426,572 |
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858,362 |
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511,215 |
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Income Tax Expense |
155,000 |
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171,000 |
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347,000 |
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210,000 |
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Net Income |
$ 228,811 |
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$ 255,572 |
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$ 511,362 |
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$ 301,215 |
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Basic and Diluted Net Income |
$.31 |
$.33 |
$.68 |
$.39 |
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Dividends Per Share of |
$.08 |
$.08 |
$.16 |
$.16 |
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See accompanying independent accountants' review report and notes to condensed consolidated financial statements.
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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Six months ended June 30, |
2000 |
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1999 |
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Operating Activities |
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Net income |
$ 511,362 |
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$ 301,215 |
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Adjustments to reconcile net income to net cash from (for) |
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operating activities: |
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Depreciation |
768,517 |
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732,779 |
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Deferred income taxes |
241,000 |
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151,000 |
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Gain on sale of property and equipment |
- |
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(42,300 |
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Change in postretirement benefit obligation |
(490,361 |
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(346,766 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
(777,694 |
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(102,984 |
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Refundable income taxes |
30,000 |
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- |
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Inventories |
450,441 |
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(201,969 |
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Prepaid expenses and other current assets |
(24,948 |
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17,712 |
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Other assets |
72,768 |
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176,347 |
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Accounts payable and accruals |
(459,691 |
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(787,811 |
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Net cash from (for) operating activities |
321,394 |
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(102,777 |
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Investing Activities |
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Capital expenditures |
(287,028 |
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(510,996 |
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Proceeds from sale of property and equipment |
- |
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42,300 |
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Investment in joint venture |
(75,000 |
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- |
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Net cash for investing activities |
(362,028 |
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(468,696 |
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Financing Activities |
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Proceeds from issuance of notes payable to banks |
3,400,000 |
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4,400,000 |
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Principal payments on notes payable to banks |
(3,300,000 |
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(3,600,000 |
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Principal payments on long-term debt |
(480,000 |
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(660,000 |
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Repurchase of common stock |
(230,629 |
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- |
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Dividends paid |
(121,723 |
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(126,324 |
) |
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Net cash from (for) financing activities |
(732,352 |
) |
13,676 |
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Effect of Exchange Rate Changes on Cash |
(7,824 |
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6,522 |
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Net Decrease in Cash |
(780,810 |
) |
(551,275 |
) |
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Cash, beginning of period |
1,011,630 |
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635,773 |
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Cash, end of period |
$ 230,820 |
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$ 84,498 |
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Supplemental Disclosures of Cash Flow Information |
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Cash paid during the period for: |
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Interest |
$359,776 |
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$315,262 |
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Income taxes, net of refunds |
123,091 |
|
40,102 |
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See accompanying independent accountants' review report and notes to condensed consolidated financial statements.
Hastings Manufacturing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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Note 1 |
Basis of Presentation In the opinion of the management of Hastings Manufacturing Company and subsidiaries (the "Company"), the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position as of June 30, 2000, and the results of operations for the three months and six months ended June 30, 2000 and 1999, and cash flows for the six months ended June 30, 2000 and 1999. |
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The results of operations for the six months ended June 30, 2000, are not necessarily indicative of the expected results for all of 2000. |
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The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated. |
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The accompanying consolidated financial statements are condensed and do not contain all of the information and footnote disclosures required by generally accepted accounting principles in a complete set of financial statements. |
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Note 2 |
Earnings Per Share A reconciliation of the numerators and denominators used in the "basic" and "diluted" earnings per share (EPS) calculations follows: |
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Three months ended |
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Six months ended |
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June 30, |
2000 |
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1999 |
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2000 |
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1999 |
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Numerator: |
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Net income used for both basic |
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Denominator: |
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Weighted average shares outstanding |
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Dilutive effect of stock options and |
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Weighted average shares outstanding |
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Hastings Manufacturing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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Note 3 |
Comprehensive Income Comprehensive income and its components consist of the following: |
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Three months ended |
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Six months ended |
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June 30, |
2000 |
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1999 |
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2000 |
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1999 |
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Net income |
$228,811 |
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$255,572 |
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$511,362 |
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$301,215 |
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Other comprehensive income, |
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net of tax: |
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Foreign currency |
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translation adjustments |
(68,823 |
) |
105,084 |
|
(87,870 |
) |
153,317 |
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Minimum pension |
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liability adjustment |
- |
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- |
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- |
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- |
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Other comprehensive income |
(68,823 |
) |
105,084 |
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(87,870 |
) |
153,317 |
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Comprehensive income |
$159,988 |
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$360,656 |
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$423,492 |
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$454,532 |
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Accumulated comprehensive income totaled $2,068,104 and $1,980,234 at June 30, 2000 and December 31, 1999, respectively. |
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Note 4 |
Contingency In early April 1997, the Company announced the amendment of its postretirement benefit plans, principally to adjust the cost-sharing provisions. As a result of the amendment, the Company's retirees filed a class action lawsuit in the Western District of Michigan on January 24, 2000, under the Employee Retirement Income Security Act of 1974 (ERISA) and the Labor Management Relations Act of 1947 (LMRA). The suit alleges that the Company denied retirees and their dependents certain health insurance benefits to which the retirees have "vested" rights pursuant to the terms of the Company's collective bargaining agreements (1964 to the present). Specifically, the retiree class disputes the increase in their health insurance deductibles, the elimination of their prescription drug card and the requirement that they pay a portion of their health insurance premiums. The Company has denied any wrongdoing in this suit, and intends to defend it and any related class certification vigorously. However, because the lawsuit is in its very early stages, the Company's ultimate chances of success are uncertain. If the retirees prevail, the Company anticipates that a requirement to provide postretirement benefits at the pre-amendment level would have a material adverse effect on the future financial position, results of operations and cash flows of the Company. The case is scheduled for trial on June 18, 2001. |
Hastings Manufacturing Company and Subsidiaries
Review by Independent Certified Public Accountants
The June 30, 2000 and 1999 condensed consolidated financial statements included in Quarterly Report on Form 10-Q have been reviewed by BDO Seidman, LLP, Independent Certified Public Accountants, in accordance with established professional standards and procedures for such a review.
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
RESULTS OF OPERATIONS
NET SALES
2000 Compared to 1999
Net sales in the second quarter of 2000 decreased $127,203, or 1.3%, from $9,738,166 in the second quarter of 1999 to $9,610,963. Net sales for the first half of 2000 have decreased $184,111, or 1.0%, from $18,697,297 in the first half of 1999 to $18,513,186. The overall net sales decrease widened slightly in the second quarter of 2000, reflecting year-to-date sales declines in the private brand and original equipment markets and Canadian aftermarket, offset by a sales increase in the export market. The volume in the domestic aftermarket has been relatively flat throughout the first half of 2000. The decreases in the private brand and original equipment markets are primarily due to the loss of certain customers through market consolidations. The improvement in the export market reflects a continued sales recovery by one of the Company's primary export customers.
1999 Compared to 1998
Net sales in the second quarter of 1999 decreased $890,004, or 8.4%, from the second quarter of 1998. For the first half of 1999, net sales decreased $1,876,891, or 9.1%, from the first half of 1998. The decrease in the Company's net sales reflected declines in the domestic aftermarket and export markets, combined with relatively flat volume observed in the private brand and original equipment areas. The decline in the domestic aftermarket reflected an industry-wide softness in the replacement parts market through the first half of 1999. The export volume decline reflected the adverse effect of specific political and economic factors in the foreign countries where the Company conducts business, combined with the effects of realigning the distribution channel within one of the Company's major foreign markets.
COST OF SALES AND GROSS PROFIT
2000 Compared to 1999
Cost of sales in the second quarter of 2000 decreased $219,613, or 3.2%, from the second quarter of 1999. For the first half of 2000, cost of sales decreased $698,430, or 5.2%, from the first half of 1999. The gross profit margin on net sales
increased for the second quarter of 2000, from 29.4% for the second quarter of 1999, to 30.8%. For the first half of 2000, the gross profit margin on net sales also increased, from 28.0% in the first half of 1999, to 31.0%. The gross profit margin on net
sales for the second quarter of 2000 narrowed slightly from the first quarter level of 31.3% due to the increase in the export sales volume. The export piston ring market has traditionally generated a lower gross profit margin than domestic sales as a
result of the lower pricing offered due to the lower level of operating expenses that are required to service its sales volume. The overall decrease in cost of sales and the improved gross profit margin on net sales in the first half of 2000 are primarily
the result of non-recurring costs that negatively affected the 1999 figures. These 1999 costs were associated with the conversion and start-up of various production processes. As a result of this conversion, productivity levels were not at their
anticipated needs. In order to cover these production deficiencies and further improve production levels, the Company incurred additional labor and overhead costs throughout 1999. The Company believes that these issues
1999 Compared to 1998
Cost of sales in the second quarter of 1999 decreased $392,292, or 5.4%, from the second quarter of 1998. For the first half of 1999, cost of sales decreased $566,718, or 4.0%, from the first half of 1998. The gross profit margin on sales declined for the second quarter of 1999, from 31.7% for the second quarter of 1998, to 29.4%. For the first half of 1999, the gross profit margin on net sales also declined, from 31.8% in the first half of 1998, to 28.0%. Given the net sales decline noted above, a larger cost of sales decline, with a higher relative gross profit margin, would have been anticipated. However, the 1999 cost of sales and gross profit margin on sales were negatively affected by the non-recurring costs and the additional labor and overhead costs discussed above. Had these costs not occurred, the gross profit margin for the second quarter of 1999 would have approached the 31.7% from the same period in 1998.
OPERATING EXPENSES
2000 Compared to 1999
Total operating expenses for the second quarter of 2000 increased $110,136, or 4.8%, from the second quarter of 1999. For the first half of 2000, total operating expenses increased $118,708, or 2.7%, from the first half of 1999. Advertising costs for the second quarter of 2000 decreased $20,163, or 23.9%, from the second quarter of 1999. For the first half of 2000, advertising costs decreased $27,754, or 18.0%, from the first half of 1999. These decreases reflect a decline in co-op advertising and printed material costs, offset slightly by increases in various advertising support costs. Selling costs for the second quarter of 2000 increased $16,668, or 2.1%, from the second quarter of 1999. For the first half of 2000, selling costs increased $65,697, or 4.3%, from the first half of 1999. These increases reflect a slight decrease in volume-driven agents commissions, offset by increases in various sales personnel and selling support costs. General and administrative costs for the second quarter of 2000 increased $113,631, or 8.0%, from the second quarter of 1999. For the first half of 2000, general and administrative costs increased $80,765, or 2.9%, from the first half of 1999. These increases reflect a decrease in general personnel support costs, offset by increases in performance based personnel costs, employee training, legal and professional fees and insurance costs. The increase in legal and professional fees is related to the Company's retirees class-action lawsuit described in Note 4 to the accompanying Condensed Consolidated Financial Statements. The increased insurance cost represents the deductible portion of an insured fire loss that took place in the second quarter of 2000, within the finished goods storage area of the Company's production facility. The effect of this event on the Company's ability to service its customers, and its effect on current and future earnings, is minimal.
1999 Compared to 1998
Total operating expenses for the second quarter of 1999 decreased $79,137, or 3.3%, from the second quarter of 1998. For the first half of 1999, total operating expenses decreased $273,812, or 5.8%, from the first half of 1998. Advertising expenses
for the second quarter of 1999 decreased $8,182, or 8.8%, from the second quarter of 1998. For the first half of 1999, advertising expenses decreased $35,447, or 18.7%, from the first half of 1998. These decreases reflected a reduction in advertising
support costs in 1999, combined with the inclusion, in 1998, of a biannual customer service tips manual. Selling expenses for the second quarter of 1999 declined $51,919, or 6.2%, from the second quarter of 1998. Selling expenses for the first half of
1999 declined $75,245, or 4.7%, from the first half of 1998. These decreases reflected a
OTHER EXPENSES
2000 Compared to 1999
Other expenses netted to $174,459 for the second quarter of 2000, compared to $149,424 for the second quarter of 1999. For the first half of 2000, these expenses netted to $307,771, versus a net expense of $259,307 for the first half of 1999. These increases reflect a higher interest expense in 2000 related to increased utilization of the Company's short-term lines of credit, combined with a decrease in "other, net" income. The other, net income in 2000 primarily reflects the income derived from the Company's investment in a joint venture, in February 2000, related to the "Casite" brand additives products. Details of this joint venture were described in Note 1 to the Company's December 31, 1999 Consolidated Financial Statements. There was no income or expense generated by this joint venture in 1999. The other, net income for 1999 primarily reflects a gain on the sale of obsolete equipment.
1999 Compared to 1998
Other expenses netted to $149,424 for the second quarter of 1999, compared to $100,555 for the second quarter of 1998. For the first half of 1999, these expenses netted to $259,307, compared to a net expense of $202,592, for the first half of 1998. These increases reflected a higher interest expense on the Company's long-term debt associated with the restructuring of its debt obligations in late August of 1998. As indicated above, the other, net expense for the first half of 1999 primarily reflected the gain on sale of obsolete plant equipment.
TAXES ON INCOME
The 2000 and 1999 year-to-date effective tax rates of 40.4% and 41.1%, respectively, are higher than the domestic statutory federal tax rate of 34.0% due primarily to the impact of various state income taxes and the impact of a higher statutory rate applicable to the earnings of the Canadian subsidiary.
As of June 30, 2000, the Company recorded net deferred income tax assets of $6,743,177. The major components of those assets are the tax effects of the net operating loss carryforwards and net accrued retirement and postretirement benefit obligations. The realization of these recorded benefits is dependent upon the generation of future taxable income. Management believes that it is more likely than not that adequate levels of future taxable income will be generated to absorb the net operating loss carryforwards, the deductible amounts related to the retirement and postretirement benefit obligations and the remaining net deductible temporary differences. In addition, based upon projected foreign source income, management believes that is more likely than not that the foreign tax credits, net of a valuation allowance at June 30, 2000, will be utilized prior to their expiration.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements continue to be for operating expenses such as labor costs, and for funding accounts receivable, capital expenditures and long-term debt service. Historically, the Company's primary sources of cash have been from operations and from bank borrowings. In late March 2000, the Company entered into an agreement with its primary lender to amend the terms of its short- and long-term debt obligations. The amendment increased the short-term line available to the Company from $3,000,000 to $3,500,000. The amendment also modified the payment schedule of the Company's long-term debt obligation, and provides the primary lender with a security position in certain assets of the Company. Complete details of this amendment were described in Note 12 to the Company's December 31, 1999 Consolidated Financial Statements. As a result of this amendment, and based on an anticipated improvement in profitability, the Company expects to generate sufficient future funds from operations and bank borrowings to fund its growth and operating needs. Total short-term lines available to the Company as of June 30, 2000 totaled $5,700,000, of which $1,600,000 was unused.
During the first half of 2000, the Company generated $321,394 of net cash from operating activities. The realized net income, depreciation and decreases in deferred income taxes and inventories were offset by an increase in accounts receivable, and decreases in accounts payable and accruals and the postretirement benefit obligation. The decrease in deferred income taxes primarily reflects the utilization of a portion of the tax net operating loss carryforward based on earnings for the first half of the year. The decrease in inventories reflects a slight reduction in inventory requirements in relation to customer demand. The increase in accounts receivable reflects the timing of customer sales and the related payment terms associated with those sales. The decrease in accounts payable and accruals is due to several large payments being made in the first half of 2000 related to workers' compensation insurance and general accounts payable. The decrease in the postretirement benefit obligation reflects the excess of actual postretirement benefit claims paid over the actuarially determined annual expense. The investing activities for the first half of 2000 reflect a lower requirement for new capital equipment, as the Company completes its transition into a "lean manufacturing" environment. (Lean manufacturing refers to a discipline of arranging the workflow in such a manner as to minimize or eliminate any waste of materials or labor.) The investing activities also reflect the Company's investment in a joint venture, in February 2000, related to the "Casite" brand additives products. This joint venture was described in Note 1 to the Company's December 31, 1999 Consolidated Financial Statements. The financing activities for the first half of 2000 reflect the working capital requirements that were primarily needed to fund the operating activity items noted above. The financing activities also reflect the amortization of the Company's long-term debt obligation that was amended effective March 30, 2000. Details of this amendment were described in Note 12 to the Company's December 31, 1999 Consolidated Financial Statements. The financing activities also reflect the purchase and retirement of 30,000 shares of the Company's common stock. This stock repurchase was part of the common stock repurchase program that the Company announced in February 2000. This program was described in Note 8 to the Company's December 31, 1999 Consolidated Financial Statements.
During the first half of 1999, the Company used $102,777 of net cash for operating activities. The realized net income, depreciation and decreases in other assets and deferred income taxes were offset by increases in accounts receivable and
inventories and decreases in accounts payable and accruals and the postretirement benefit obligation. The explanations for most of these cash items are consistent with the detail noted above relating to the first half of 2000. The decrease in other assets
was due to the reduction of the prepaid pension asset through the recognition of the expected pension expense for 1999. The decrease in the deferred income taxes resulted from the partial utilization of the tax net operating loss carryforward based on
earnings for the first half of 1999. The increase in accounts receivable reflected the timing of customer
As noted throughout the above discussion, the Company is in the final stages of its transition into a lean manufacturing environment. The final implementation of lean manufacturing principles, combined with the absence of the various production issues that negatively affected the Company's financial results in 1999, should result in improved cash flow for the remainder of 2000. At this time, the Company anticipates that operations (which will be subject to minimal current cash outflows for U.S. income taxes due to the utilization of the net operating loss carryforwards), in combination with the balancing of available short-term lines of credit with our operations, will generate cash flows sufficient to fund its working capital, capital outlays and dividend requirements through 2000.
LITIGATION CONTINGENCY
As disclosed in Note 4 to the accompanying Condensed Consolidated Financial Statements, on January 24, 2000, the Company's retirees filed a class-action lawsuit against the Company as a result of the April 1997 amendment of the Company's postretirement benefit plans. The plans were amended principally to adjust the cost-sharing provisions. The suit alleges that the Company denied class retirees and their dependents certain health insurance benefits to which the retirees had a "vested" right pursuant to the terms of the Company's collective bargaining agreements (1964 to the present). The Company has denied any wrongdoing in this suit, and intends to defend it and any related class certification vigorously. However, due to the fact that this lawsuit is in its early stages, the Company's ultimate success in prevailing against the retirees' charges is uncertain at this time. If the retirees' position prevails, it is anticipated that a requirement to provide postretirement benefits at the pre-amendment level would have a material adverse effect on the future financial position, results of operations and cash flows of the Company. The case is scheduled for trial in June 2001.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (1) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (2) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts for speculative purposes. The Company does periodically enter into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate borrowings. However, the fair value of such derivatives are not significant. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001 to materially affect its Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in this commentary include forward-looking statements that describe the Company's plans, objectives, goals, expectations or projections. These forward-looking statements are identifiable by words or phrases indicating that the Company or management "expects," "anticipates," "projects," "plans" or "believes" that a particular event "may occur" or "will likely occur" in the future, or similar statements. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this commentary, there were many important factors that could cause actual results to be materially different from the Company's current expectations.
Anticipated future sales are subject to competitive pressures from many sources. As an example, future sales could be affected by consolidation within the automotive replacement parts industry, whereby the Company could lose sales due to a competitor purchasing a current customer of the Company. Future sales could also be affected by current and future political and economic factors in the foreign markets where the Company conducts business.
Cost of sales and operating expenses may be adversely affected by unexpected costs associated with various issues. For example, future cost of sales could be affected by unexpected expenses related to the final transition into, and future maintenance of, a lean manufacturing environment. Future operating expenses could be adversely affected, for example, by such items as unexpected large claims within the Company's self-funded group health insurance plan, increased retiree health insurance claim exposure as a result of an adverse court ruling on the current retiree health issue, or bad debt expenses related to deterioration in the credit worthiness of a customer.
The foregoing is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The foregoing should not be construed as an exhaustive list of all economic, competitive, governmental and technological factors that could adversely affect the Company's expected consolidated financial position, results of operations or liquidity. The Company disclaims any obligation to update its forward-looking statements to reflect subsequent events or circumstances.
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
The Company is exposed to potential market risks on interest rates relating to an interest swap agreement transacted with its primary lender in connection with its long-term debt agreement. Management believes that the fluctuation in interest rates in the near future will not have a material impact on the consolidated financial statements taken as a whole. The Company does not use derivative financial instruments for trading purposes.
PART II - OTHER INFORMATION
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Item 1. |
Legal Proceedings For a discussion of pending litigation involving the Company, see Note 4 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q, which is here incorporated by reference. |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
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The Company's 2000 annual meeting of shareholders was held on May 9, 2000. The purposes of the meeting were to (1) elect directors and (2) transact any other business that may have properly come before the meeting: |
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The name of each director elected at the meeting (along with the number of votes cast for, against or authority withheld) and the name of each other director whose term of office as a director continued after the meeting follows: |
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Authority |
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Mark R.S. Johnson |
670,064 |
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- |
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8,218 |
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Dale W. Koop |
670,064 |
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- |
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8,218 |
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Douglas A. DeCamp |
670,064 |
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- |
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8,218 |
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Directors who continue to serve |
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Andrew F. Johnson |
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Neil A. Gardner |
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Monty C. Bennett |
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William R. Cook |
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Richard L. Foster |
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Item 6. |
Exhibits and Reports on Form 8-K |
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(a) |
Exhibits |
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Exhibit |
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3(a) |
Amended Articles of Incorporation of Hastings Manufacturing Company, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended June 30, 1998, are here incorporated by reference. |
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3(b) |
Bylaws of Hastings Manufacturing Company, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended March 31, 1999, are here incorporated by reference. |
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4(a) |
NBD Bank Amended and Restated Letter Agreement for $6,600,000 Term Loan and $3,000,000 Credit Authorization to Make Revolving Credit Loans and Issue Letters of Credit dated August 28, 1998, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. |
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4(b) |
First Amendment to Amended and Restated Letter Agreement, dated November 11, 1999 between Hastings Manufacturing Company and Bank One, Michigan (formerly NBD Bank), filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1999, is here incorporated by reference. |
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4(c) |
Second Amendment to Amended and Restated Letter Agreement, dated March 30, 2000, between Hastings Manufacturing Company and Bank One (formerly NBD Bank), filed as an exhibit to Form 10-Q Quarterly Report for the period ended March 31, 2000, is here incorporated by reference. |
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4(d) |
Restated Master Agreement dated August 10, 1998, regarding an interest rate swap transaction between Hastings Manufacturing Company and NBD Bank, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. |
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4(e) |
Business Loan Agreement, dated as of January 24, 2000, between Hastings Manufacturing Company and Hastings City Bank, filed as an exhibit to Form 10-Q Quarterly Report for the period ended March 31, 2000, is here incorporated by reference. |
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4(f) |
Preferred Stock Purchase Rights Plan, filed as an exhibit to Form 8-K filed with the Securities and Exchange Commission on February 15, 1996, is here incorporated by reference. |
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15 |
Letter Regarding Unaudited Interim Financial Information. |
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27 |
Financial Data Schedule |
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(b) |
Reports on Form 8-K. The Company did not file any reports on Form 8-K during the second quarter of 2000. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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HASTINGS MANUFACTURING COMPANY |
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Date: August 11, 2000 |
/s/Monty C. Bennett Monty C. Bennett Its Vice-President, Employee Relations, Secretary and Director |
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Date: August 11, 2000 |
/s/Thomas J. Bellgraph Thomas J. Bellgraph Its Vice-President, Finance |
EXHIBIT INDEX
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Exhibit |
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3(a) |
Amended Articles of Incorporation of Hastings Manufacturing Company, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended June 30, 1998, are here incorporated by reference. |
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3(b) |
Bylaws of Hastings Manufacturing Company, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended March 31, 1999, are here incorporated by reference. |
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4(a) |
NBD Bank Amended and Restated Letter Agreement for $6,600,000 Term Loan and $3,000,000 Credit Authorization to Make Revolving Credit Loans and Issue Letters of Credit dated August 28, 1998, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. |
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4(b) |
First Amendment to Amended and Restated Letter Agreement, dated November 11, 1999 between Hastings Manufacturing Company and Bank One, Michigan (formerly NBD Bank), filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1999, is here incorporated by reference. |
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4(c) |
Second Amendment to Amended and Restated Letter Agreement, dated March 30, 2000, between Hastings Manufacturing Company and Bank One (formerly NBD Bank), filed as an exhibit to Form 10-Q Quarterly Report for the period ended March 31, 2000, is here incorporated by reference. |
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4(d) |
Restated Master Agreement dated August 10, 1998, regarding an interest rate swap transaction between Hastings Manufacturing Company and NBD Bank, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. |
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4(e) |
Business Loan Agreement, dated as of January 24, 2000, between Hastings Manufacturing Company and Hastings City Bank, filed as an exhibit to Form 10-Q Quarterly Report for the period ended March 31, 2000, is here incorporated by reference. |
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4(f) |
Preferred Stock Purchase Rights Plan, filed as an exhibit to Form 8-K filed with the Securities and Exchange Commission on February 15, 1996, is here incorporated by reference. |
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15 |
Letter Regarding Unaudited Interim Financial Information. |
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27 |
Financial Data Schedule |
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