UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-Q
For the period ended December 31, 1997
Commission file number 1-3940
National-Standard Company
(Exact name of registrant as specified in its charter)
Indiana 38-1493458
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1618 Terminal Road, Niles, Michigan 49120
(Address of principal executive offices) (Zip Code)
(616) 683-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Shares Outstanding at January 30, 1998
Common Stock, $ .01 par value 5,230,892
Part I. FINANCIAL INFORMATION
<TABLE>
National-Standard Company and Subsidiaries
Consolidated Statements of Operations (Unaudited)
($000, Except Per Share Amounts)
<CAPTION> Three Months Ended
December 31
1997 1996
<S> <C> <C>
Net Sales $ 56,941 $ 59,874
Cost of sales 50,488 52,851
Gross profit 6,453 7,023
Selling and administrative expenses 5,528 5,378
Operating profit 925 1,645
Interest expense (1,004) (1,049)
Other income 359 39
Income before income taxes 280 635
Income taxes 74 (102)
Net income $ 206 $ 737
Basic earnings per share $ .04 $ .14
Diluted earnings per share $ .04 $ .14
Dividends per share $ 0.00 $ 0.00
Average shares outstanding 5,228,644 5,313,080
See accompanying notes to financial statements.
</TABLE>
<TABLE>
National-Standard Company and Subsidiaries
Consolidated Balance Sheets
($000)
<CAPTION>
Assets December 31, 1997 September 30, 1997
Current assets: (Unaudited)
<S> <C> <C> <C> <C>
Cash $ 774 $ 729
Receivables, net 26,198 24,653
Inventories:
Raw material $ 10,285 $ 9,929
Work-in-process 10,310 11,174
Finished goods 1,080 21,675 810 21,913
Prepaid expenses 3,031 2,943
Deferred tax asset 1,547 1,547
Total current assets $ 53,225 $ 51,785
Property, plant and equipment $ 165,466 $ 161,941
Less accumulated depreciation 117,442 48,024 114,946 46,995
Other assets 15,758 14,405
$ 117,007 $ 113,185
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 24,061 $ 22,859
Employee compensation and benefits 3,498 2,580
Accrued pension 1,623 1,623
Other accrued expenses 9,897 10,739
Current accrued postretirement benefit cost 2,400 2,400\
Notes payable to banks and current portion of
long-term debt 28,513 25,398
Total current liabilities $ 69,992 $ 65,599
Long-term debt 11,388 12,219
Other long-term liabilities 9,198 9,001
Accrued postretirement benefit cost 49,529 49,529
Stockholders' equity:
Common stock $ .01 par value. Authorized
25,000,000 shares; issued 5,413,644 shares $ 27,822 $ 27,720
Retained deficit (45,781) (45,987)
$ (17,959) $ (18,267)
Less: Foreign currency translation adjustments 2,059 1,846
Unamortized value of restricted stock 174 53
Treasury stock, at cost, 179,452 and 189,676
shares, respectively 1,353 1,442
Excess of additional pension liability over
unrecognized prior service cost 1,555 (23,100) 1,555 (23,163)
$ 117,007 $ 113,185
See accompanying notes to financial statements.
</TABLE>
<TABLE>
National-Standard Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($000)
<CAPTION>
Three Months Ended
December 31
1997 1996
<S> <C> <C>
Net cash provided by operating activities $ 981 $ 3,406
Investing Activities:
Capital expenditures (3,039) (2,196)
Net cash used for investing activities (3,039) (2,196)
Financing Activities:
Net borrowings (reduction) under revolving credit agreements 2,970 (1,150)
Principal payments under term loans (827) (935)
Other (40) (225)
Net cash provided by (used for) financing activities 2,103 (2,310)
Net increase (decrease) in cash 45 (1,100)
Beginning cash 729 2,423
Ending cash $ 774 $ 1,323
Supplemental Disclosures:
Interest paid $ 1,032 $ 977
Income taxes paid $ -0- $ 22
See accompanying notes to financial statements.
</TABLE>
National-Standard Company and Subsidiaries
Notes to Consolidated Financial Statements
1. In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the financial
statements for the interim periods included herein have been made.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the 1997 National-Standard
Company Form 10-K, Annual Report, and this report should be read in
conjunction therewith.
2. The results of operations for the three-month period ended December 31,
1997 are not necessarily indicative of the results to be expected for the
full year.
National-Standard Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net sales for the three months ended December 31, 1997 decreased 5% over the
same period last year. Gross margin percentages were 11.3% for the current
three-month period compared to 11.7% for the same period last year.
Sales of air bag inflator filtration products decreased approximately 9% from
the first quarter last year due to a decision to discontinue the sales of
certain unprofitable wire cloth mesh products. Sales for fabricated filters
for air bag inflators, however, increased 18% over last year. Weld wire
product sales increased 13% over last year, while rubber reinforcement
products decreased 7% over the same period last year due to lower selling
prices.
Net income for the quarter was $ .2 million or 4 cents per share versus $ .7
million or 14 cents per share for last year. This year's net income was $ .5
million lower than last year as rubber reinforcement products' margins
declined due to continued pricing pressure pushing selling prices down as the
current market supply of bead wire exceeds demand in the tire industry.
Operations in the United Kingdom had a net income of $ .2 million in the
current three-month period compared to a loss of $ .3 million for the same
period last year on sales that were $1.9 million below last year. The
improvement is a result of the restructuring taken in Fiscal Year 1997 and is
expected to continue for the remainder of 1998.
Interest expense of $1.0 million in the current three-month period was the
same as the three-month period last year.
Other income in the current period of $359 is primarily the gain on
disposition of idle assets and foreign exchange gains.
The Company remains in an operating loss carryforward position in the United
States, Canada, and the United Kingdom. Income tax expense on current income
was substantially offset by a portion of these carryforwards, as well as a
decrease in the net deferred tax asset valuation reserve.
Liquidity and Capital Resources
Total borrowings increased $2.1 million during the quarter, due primarily to
fund an increase in capital spending.
During 1994, the Company entered into a long-term financing arrangement,
which was modified in September 1997, to provide up to $55.0 million in
revolving credit facilities, term loans and a line of credit for future
capital expenditures. The loans mature in October 2000 and are fully secured
by the Company's assets.
The Company believes adequate funding is in place to fund future growth and
meet the market demand for our products.
"SAFE HARBOR" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The statements under Management's Discussion and Analysis of Financial
Condition and Results of Operations, and the other statements in this Form
10-Q which are not historical facts, are forward looking statements. These
forward looking statements involve risks and uncertainties that could render
them materially different, including, but not limited to, changes in economic
conditions, the impact of competitive pricing and products, industry
overcapacity, and availability and costs of raw materials. The Company does
not intend to update these forward looking statements.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts
(i) National-Standard Company Bonus Plan
(27) Financial Data Schedule
(b) A Form 8-K (Item-5) was filed on December 29, 1997 announcing
the award of a weld wire contract by Magna International.
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.
NATIONAL-STANDARD COMPANY
Registrant
Date February 12, 1998 /s/ M. B. Savitske
M. B. Savitske
President and Chief Executive Officer
Date February 12, 1998 /s/ W. D. Grafer
W. D. Grafer
Vice President, Finance
[Logo] NATIONAL-STANDARD COMPANY
BONUS PLAN
PLAN DESCRIPTION
1. WHAT IS ECONOMIC VALUE MANAGEMENT?
Economic Value Management (EVM) is an integrated approach to managing a
business, with the primary goal of maximizing its economic value by
maximizing its generation of Economic Profit (EP). This integrated
approach includes:
MEASURING ECONOMIC PROFIT. Economic Profit is not the same as net
income as defined by Generally Accepted Accounting Principles (GAAP).
It is a better measure of value creation than traditional accounting
measures of financial performance because it incorporates the full
cost of capital; i.e., the cost of both debt and equity.
STRATEGIC ASSESSMENT AND PLANNING. EVM begins with an assessment of
business strategies and financial performance from a value
perspective. It focuses on the development of new strategies and
plans intended to maximize economic profit.
CHANGING MANAGEMENT PROCESSES. Financial reporting, cost, and capital
reporting and other systems need to be aligned to support management's
abilities to make decisions that create value.
EP is a measure of net operating profit after-tax that takes into account
all economic costs. The principal cost that is not considered in
calculating GAAP net income is the cost of equity. The "cost" of equity is
a reasonable return to shareholders given the risks of their investment.
EP = net operating profit after tax (NOPAT) less a capital
charge
-- or --
NOPAT - (invested capital x cost of capital(1))
_______________
(1) It should be noted that calculating capital for the purposes of this plan
requires balance sheet adjustments, including adjustments to inventory (LIFO
reserve), interest expense for operating leases, and RD&E.
The focus of Plan participants should be to increase EP. Increasing EP can
be accomplished in several ways:
o increasing NOPAT without increasing Capital
o decreasing Capital without decreasing NOPAT
o increasing NOPAT at a greater rate than Capital increases
EP can also be increased by investing in new products or markets that
provide the incremental return on capital in excess of the cost of capital.
Finally, business units and activities which will never earn enough NOPAT
to cover the cost of capital employed should be divested or outsourced.
2. INTRODUCTION TO THE PLAN
This Bonus Plan (the "Plan") is part of the Company's strategy to approach
business operations from an Economic Value Management (EVM) perspective.
The primary performance measure of EVM is Economic Profit, or EP.
Shareholder value is created when EP is positive or when the trend in EP is
positive. The Plan rewards participants for creating this shareholder
value by linking bonus awards with the actual EP generated by the Company.
In each year of the Plan, a target level of EP will be established based on
the prior year EP result and an Expected Improvement in EP. The Expected
Improvement (EI) factor will be set at the beginning of the Plan and will
be in effect for the life of the Plan, which is three years initially.
Target bonus amounts will be directly linked with target EP performance.
Actual bonus accruals by participants will vary up or down with actual EP
results relative to target EP performance.
3. PLAN OBJECTIVES AND CORE CONCEPTS
The objectives of the Bonus Plan are to:
o link the interests of management and shareholders,
o encourage participants to invest in projects /activities which exceed
the cost of capital,
o allow participants to share in the increase in the value of the Company,
and
o reward participants for achieving, or beating, EP targets which meet
investor expectations.
The core concepts/key features of the Bonus Plan are:
o SUSTAINED PERFORMANCE OVER TIME. The EP goals are in effect for a
multi-year period and tied to a bonus bank concept which accrues
individual awards below threshold or above the annual payout maximum for
the life of the Plan. This feature ensures that participants are
motivated to sustain superior performance over time. Each participant's
account balance in the bank may increase or decrease depending on EP
results in each year of the Plan.
o IMPROVEMENT GOAL DERIVED FROM SHAREHOLDER EXPECTATIONS. The Expected
Improvement in EP is based on shareholder expectations and the Company's
strategic plan. Once the Expected Improvement goal is established at
the beginning of the Plan, it is added to the year-end EP result of the
prior year to obtain the goal for the current year.
o UNLIMITED UPSIDE. There is no limit, or cap, to the amount of bonus
participants may earn in the Plan.
The features above represent the core concepts of the Bonus Plan.
Similarities between this EP-based Bonus Plan and the previous Bonus Plan
include eligibility and the size of award opportunities at target
performance. Differences include the performance goal setting process, as
the EP performance goals are set automatically based on the EP improvement
target for the life of the Plan, while the previous plan used an annual
budgeting process. Also, the initial performance objective will be overall
Company performance for all participants, whereas the previous approach
focused a portion of bonuses on business unit performance for some
participants. The third major difference is the bonus bank concept.
4. PARTICIPATION
Selected key employees of the Company shall be participants in the Plan
provided they have been employed by the Company for three (3) or more
months of the fiscal year and are employed in an eligible position. The
bonus groups and eligible positions include:
Bonus Eligible Persons
Group
1 President and CEO
2 Officers
3 Directors or Managers of major corporate
staff functions and Business Unit General
Managers as designated by the Chief
Executive Officer. Also, Plant Managers,
major functional department heads of
business units and plants as designated by
the Chief Executive Officer.
Changes in positions that qualify as eligible positions must be approved by
the Compensation Committee of the Board of Directors.
5. SIZE OF AWARD OPPORTUNITIES
Plan participants are assigned target bonus award opportunities based on
the Bonus Group to which they are assigned. Bonus Groups and their
corresponding target award opportunities are as follows:
Bonus Target
Group Award
1 30%
2 25%
3 20%
The actual bonus award accrued for a given year is not capped, but may be
less than $0, depending upon the Company's EP performance relative to the
goals which have been established.
6. GOAL SETTING AND PAY FOR PERFORMANCE FORMULA
Performance goals for the Bonus Plan are essentially established at Plan
implementation for all years under the Plan. The target EP goal for each
year of the Plan is determined based on the actual EP achieved in the
preceding year plus an Expected Improvement amount. The Expected
Improvement level is set for the duration of the Plan.
Current Year Last Year's Expected Improvement
Target EP = Actual EP + in EP for Each Year
The Expected Improvement target is derived from an analysis of shareholder
expectations, strategic plan projections, and stretch performance goals for
the Plan, and is approved by the Board of Directors. When the Company
achieves the target EP, participants accrue a target bonus.
The EP Interval is another important feature related to the current year
target EP and determining bonus accrual amounts. This interval has been
set at $4 million. The interval extends below and above the current year
target EP, and is associated with a range of zero to two times target
bonus. This means that no bonus is accrued when actual EP is exactly $4
million below the current year target EP goal. If actual EP is more than
$4 million below the EP goal, a negative bonus accrual will occur and will
need to be made up by any amounts remaining in the bonus bank or
performance in subsequent years. On the other hand, actual EP of exactly
$4 million greater than the EP goal will be associated with a bonus accrual
equal to two times the target bonus.
The performance target automatically resets each year based on the annual
expected EP improvement figure, which is the same for all years in the
Plan. For the initial three years of the Plan, the expected improvement
target is $1.602 million per year. The expected improvement target will
then be reset for the next Plan period.
EXAMPLE OF TARGET SETTING ($ MILLIONS)
Year
Item 1 2 3
Last Year's Actual EP $ 1.200 $ 3.100$ 2.100
Expected Improvement 1.602 1.602 1.602
Current Year Target EP 2.802 4.702 3.702
Current Year Actual EP 3.100 2.100
7. AWARD DISTRIBUTION AND BANKING
Awards distributed for the first year's performance under the Plan may be
up to 1.5 times the target bonus level plus one-third of the amount in
excess of 1.5 times target. Any bonus accrual not distributed will be
placed in an individual bonus bank and distributed based upon performance
in subsequent years of the Plan.
In years two and three, awards indicated by the accrual formula for the
year, if any, will be added to the beginning balance in the individual
bonus bank. If the bonus bank is positive, then a distribution will be
made up to a total of 1.5 times the target bonus level for the position.
In addition, one-third of the net positive bank balance in excess of 1.5
times target, if any, will also be distributed to the Plan participant,
while the remaining two-thirds of the excess remains in the bank and is
distributed based on performance in subsequent years.
Any negative accruals determined by the bonus award accrual formula for a
given year's performance will be added to the individual bonus bank. If
the net of this transaction results in a positive balance, then an award
distribution will occur in the current year as in the previous example up
to the Target Bonus Award amount. If the balance is negative, no award
distribution will occur in the current year, and the negative amount must
be made up by positive accruals in future years of the Plan.
BANKING CONCEPT EXAMPLE ($ THOUSANDS)
<TABLE>
<CAPTION>
Year
Item 1 2 3 Description
<S> <C> <C> <C> <C>
(1)Target Bonus Award $15.00 $15.00 $15.00 Example
(2)Actual EP/Target EP 1.80 (0.40) 2.50 Example
(3)Bonus Accrual 27.00 (6.00) 37.50 = (1) x (2)
(4)Starting Bank Balance - 3.00 (3.00) Zero in First Year
(5)Net 27.00 (3.00) 34.50 = (3) + (4)
(6)1.5 x Target Bonus 22.50 22.50 22.50 = 1.5 x (1)
(7)Positive Excess 4.50 - 12.00 = (5) - (6)
(8)Pay Out .33 of Excess 1.50 - 4.00 = .33 x (7), if (7) is Positive
(9)Total Payout 24.00 - 26.50 = (6) + (8)
(10)Ending Bank Balance $ 3.00 $ (3.00) $ 8.00 = (5) - (9)
</TABLE>
8. AWARD DISTRIBUTION ADMINISTRATION
A participant's bonus, if any, for each fiscal year shall be paid as soon
as possible after the close of the fiscal year provided the participant is
employed by the Company on the last working day of the fiscal year. A pro
rata bonus shall be paid to those participants who terminate due to
retirement, a reduction in force, death or a disability leave of absence
during the fiscal year.
The bonus of those participants assigned to more than one bonus group
during the fiscal year shall be:
o based upon the bonus group to which the participant was assigned for the
greatest portion (more than six (6) months) of the fiscal year, or
o if recommended by the participant's supervisor and approved by the Chief
Executive Officer, based upon the bonus group to which the participant
is assigned as of September 30 of the bonus year, providing the
participant has been assigned to that group for at least three (3)
months.
No bonus shall be paid a participant who resigns, is discharged, or is
released because of inability to satisfactorily perform his/her job.
BONUS AS ESSP CONTRIBUTION
Subject to the limitations of Subsection 3.1 of the Employees' Stock
Savings Plan (referred to hereinafter as the "ESSP"), eligible ESSP
participants may, under Subsection 3.4 of the ESSP, elect that a portion of
their ESSP contributions be made by a reduction of (before-tax basis) or
deduction from (after-tax basis) their bonus. Such election must be made
prior to the payment of the bonus on a form provided by the Company.
Deferral of bonus payments may be made in accordance with the provisions of
any other approved Company plan permitting the deferral of such
compensation.
9. COMPANY VERSUS BUSINESS UNIT PERFORMANCE
This Bonus Plan will initially be used to determine EP at the overall
Company level, and overall Company performance will be used to determine
bonus accruals. However, National-Standard reserves the right to
incorporate business unit results in combination with, or in lieu of,
overall Company results when parameters for the Plan are reset.
10. PLAN DURATION AND REMAINING BANK BALANCES
The duration of the Plan is three years. The Company reserves the right to
extend the current Plan, create a new Plan, or terminate the existing Plan
at the end of the three-year period. The Company will also decide whether
any bank balances remaining at the end of the Plan period will either be
paid in full if the current Plan is terminated, or be vested in a new Plan.
11. GENERAL PROVISIONS
LIMITATION ON VESTED INTEREST
It is understood that the awarding of a bonus hereunder is within the sole
discretion of the Company and that no participant has any vested interest
in an award under this Plan prior to his/her actually receiving such award
except as provided under the first and last paragraphs of Section 8.
EMPLOYMENT RIGHTS
The Plan shall not be construed to give any employee the right to be
retained in the employ of the Company.
ADMINISTRATION
The Chief Executive Officer shall have full power and authority, subject to
such orders or resolutions not consistent with the provisions of the Plan
as may from time to time be issued or adopted by the Board of Directors, to
interpret the provisions and to direct the administration of the Plan. All
decisions made by the Chief Executive Officer pursuant to the provisions of
the Plan and related orders and resolutions of the Board of Directors shall
be final and conclusive. The Human Resources Department shall carry out
the administrative procedures of the Plan as directed by the Chief
Executive Officer.
NON-ASSIGNMENT
Bonus payments may not be pledged, assigned or transferred for any reason,
except to the heirs or estate of any eligible deceased participant.
FACILITY OF PAYMENT
If, in the judgment of the Chief Executive Officer, any person entitled to
payments under the Plan is unable to apply such payments for his own
welfare or is under legal disability when a payment is due him hereunder,
the Chief Executive Officer may direct that all or any portion of such
payment be made in one or more of the following ways: to the legally
appointed guardian or conservator of such person; to a relative or friend
for the care and support of such person; directly to or for the benefit of
such person and/or for the benefit of those whom such person has a legal
obligation to support. The determination of the Chief Executive Officer as
to the method of payment shall be conclusive and binding upon all persons
in interest.
WITHHOLDING
There shall be deducted from all payments hereunder any taxes required to
be withheld by the federal or any state or local government.
PREDETERMINED AWARDS
No specific bonus award may be committed to a participant prior to the end
of the fiscal year.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains first quarter summary financial information extracted
from National-Standard Company 1998 first quarter Form 10-Q and is qualified in
its entirety by reference to such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 774
<SECURITIES> 0
<RECEIVABLES> 26,597
<ALLOWANCES> 399
<INVENTORY> 21,675
<CURRENT-ASSETS> 53,225
<PP&E> 165,466
<DEPRECIATION> 117,442
<TOTAL-ASSETS> 117,007
<CURRENT-LIABILITIES> 69,992
<BONDS> 0
0
0
<COMMON> 27,822
<OTHER-SE> (50,922)
<TOTAL-LIABILITY-AND-EQUITY> 117,007
<SALES> 56,941
<TOTAL-REVENUES> 56,941
<CGS> 50,488
<TOTAL-COSTS> 50,488
<OTHER-EXPENSES> (359)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,004
<INCOME-PRETAX> 280
<INCOME-TAX> 74
<INCOME-CONTINUING> 206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
