<PAGE> 1
UNITED STATES
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
For the quarterly period ended April 30, 1998
Commission File number 1-5985
NEWCOR, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-0865770
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
1825 S. Woodward Ave., Suite 240
Bloomfield Hills, MI 48302 (248) 253-2400
- --------------------------------------- -------------------------------
(Address of principal executive office) (Registrant's telephone number)
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 ( ).
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 10, 1998, the Registrant has 4,942,034 outstanding shares of common
stock, $1.00 par value, the Registrant's only class of common stock.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEWCOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------------
4/30/98 4/30/97 4/30/98 4/30/97
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 55,369 $ 34,589 $ 85,503 $ 62,564
Cost of sales 45,057 28,050 71,480 50,695
-------- -------- -------- --------
Gross margin 10,312 6,539 14,023 11,869
SG&A expenses 5,658 3,925 9,822 7,436
Amortization expense 911 227 1,236 413
Nonrecurring (gain) loss (362) - (362) 711
-------- -------- -------- --------
Operating income 4,105 2,387 3,327 3,309
Other income (expense):
Interest expense (2,776) (554) (3,601) (986)
Other expense, net (110) (88) (121) (14)
-------- -------- -------- --------
Income (loss) before income taxes 1,219 1,745 (395) 2,309
Income tax expense (benefit) 466 663 (116) 861
-------- -------- -------- --------
Net income (loss) $ 753 $ 1,082 $ (279) $ 1,448
======== ======== ======== ========
Amounts per share of common stock:
Net income (loss) - Basic and Diluted (1) $ 0.15 $ 0.22 $ (0.06) $ 0.29
Dividends declared - Basic (1) $ - $ 0.05 $ 0.05 $ 0.10
Weighted average common shares outstanding (1) 4,942 4,938 4,942 4,935
</TABLE>
(1) Per share amounts and shares outstanding have been adjusted to reflect the
5% stock dividend declared and paid during fiscal 1997.
The accompanying notes are an integral part of
the condensed consolidated financial statements
<PAGE> 3
NEWCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
4/30/98 10/31/97
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,381 $ 34
Accounts receivable 33,305 22,523
Inventories 15,700 8,084
Other current assets 10,153 8,672
--------- --------
Total current assets 60,539 39,313
Property, plant and equipment, net of
accumulated depreciation of $15,496
at 4/30/98 and $14,544 at 10/31/97 51,747 28,119
Cost in excess of assigned value of acquired companies, net 88,147 16,080
Other long-term assets 7,993 7,371
--------- --------
Total assets $ 208,426 $ 90,883
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,833 833
Accounts payable 19,688 14,874
Other accrued liabilities 9,702 5,668
--------- --------
Total current liabilities 31,223 21,375
Long-term debt 139,267 32,267
Postretirement benefits and other 11,046 9,826
--------- --------
Total liabilities 181,536 63,468
Shareholders' equity:
Common stock 4,942 4,942
Capital in excess of par 2,258 2,258
Unfunded pension liability (99) (99)
Retained earnings 19,789 20,314
--------- --------
Total shareholders' equity 26,890 27,415
--------- --------
Total liabilities and shareholders' equity $ 208,426 $ 90,883
========= ========
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements
<PAGE> 4
NEWCOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
4/30/98 4/30/97
-------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (279) $ 1,448
Depreciation and amortization 3,632 2,033
Gain on sale of capital assets (362) -
Other (323) (298)
Changes in operating assets
and liabilities, net (383) 1,151
-------- --------
Net cash provided by operations 2,285 4,334
-------- --------
Investing Activities:
Capital expenditures (2,429) (902)
Acquisitions, net of cash acquired (103,130) (12,081)
Proceeds from sale of business - 1,500
Proceeds from sale of fixed assets 1,367 -
-------- --------
Net cash used by investing activities (104,192) (11,483)
-------- --------
Financing Activities:
Net borrowings (repayments)
on revolving credit (17,000) 7,600
Proceeds from issuance of subordinated notes 125,000 -
Subordinated notes issuance costs (4,500) -
Cash dividends (246) (471)
Shares issued under stock option plans - 82
-------- --------
Net cash from financing activities 103,254 7,211
-------- --------
Increase in cash 1,347 62
Cash, beginning of period 34 34
-------- --------
Cash, end of period $ 1,381 $ 96
======== ========
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements
<PAGE> 5
NEWCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been
included, and such adjustments are of a normal recurring
nature. Results for interim periods should not be considered
indicative of results for a full year. The year-end condensed
balance sheet data was derived from audited financial
statements, but does not include all disclosures required by
generally accepted accounting principles. For further
information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1997.
Note B. Interest of approximately $1,286,000 and $986,000 was paid
during the six months ended April 30, 1998 and 1997,
respectively. Income taxes of $0 and $380,000 were paid during
the six months ended April 30, 1998 and 1997, respectively.
Note C. On December 23, 1997, the Company purchased the assets and
business of Machine Tool & Gear, Inc. (MT&G) for $27.25
million plus the assumption of approximately $5.8 million of
debt, which was subsequently retired. MT&G manufactures
differential pinion and side gears, output shafts and rear
axle shafts for the automotive industry. For these assets, the
Company paid cash of $2.5 million in October 1997 and an
additional $3.1 million in December 1997. On December 5, 1997,
the Company's revolving credit agreement was increased from
$25.0 million to $37.0 million to pay off acquired bank debt
and make the down payment on the MT&G acquisition. A
promissory note for $21.65 million, paying interest at 8%, was
issued for the balance of the purchase price and was
subsequently paid off on March 11, 1998 using the proceeds
from the Company's private placement of $125 million of 9.875%
Senior Subordinated Notes (the Notes) as described in Note D.
The acquisition was recorded using the purchase method of
accounting. The cost in excess of net assets acquired of
approximately $24 million is being amortized on a
straight-line basis over twenty years.
On January 13, 1997, the Company purchased for cash the common
stock of Plastronics Plus, Inc. (Plastronics), a Wisconsin
corporation. Plastronics primarily manufactures custom
injection-molded components for the automotive industry. The
purchase price was approximately $8 million in cash plus the
assumption of approximately $4.1 million of Plastronics debt,
which was subsequently retired. The purchase was financed
through the Company's existing line of credit facility. The
acquisition was recorded using the purchase method of
accounting. The cost in excess of net assets acquired of
approximately $4 million is being amortized on a straight-line
basis over twenty years.
On March 4, 1998, the Company purchased the common stock of
Grand Machining Company, Deco Technologies, Inc. and Deco
International, Inc. (collectively, Deco) for $54.9 million in
cash, subject to certain net book value adjustments. Deco
manufactures high volume, precision machined components and
assemblies for the medium and heavy duty truck and automotive
industries. Deco's products include rocker arm components and
assemblies, transmission shafts, axle shafts and thrust
plates. The Company made a $5.0 million deposit to the Deco
shareholders in December 1997. The balance of the purchase
price was paid in March 1998, with the proceeds from the Notes
as described in Note D. The acquisition was recorded using the
purchase method of accounting. The cost in excess of net
assets acquired of approximately $40 million is being
amortized on a straight-line basis over twenty years.
On March 4, 1998, the Company purchased the stock of
Turn-Matic, Inc. (Turn-Matic) for $17.0 million in cash,
subject to certain net book value adjustments. Contingent
consideration of up to $3.5 million may be paid if
profitability achieves certain levels over the next five
years. Turn-Matic manufactures high volume precision machined
components and assemblies for the automotive industry.
Turn-Matic's products include oil filter adapters, main
bearing caps and intake and exhaust manifolds. The purchase
was financed with the proceeds from the Notes
<PAGE> 6
as described in Note D. The acquisition was recorded using the
purchase method of accounting. The cost in excess of net
assets acquired of approximately $9 million is being amortized
on a straight-line basis over twenty years.
The 1998 and 1997 unaudited pro-forma results of operations as
if the acquisitions of Machine Tool & Gear, Deco and
Turn-Matic had been acquired at the beginning of fiscal 1997
would have been as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------
4/30/98 4/30/97
------- -------
<S> <C> <C>
Sales $120,887 $118,411
======== ========
Net income (loss) $ (225) $ 2,175
======== ========
Per share $ (0.05) $ .44
======== ========
</TABLE>
These pro-forma results do not purport to be indicative of the
results that would have occurred had the acquisitions been
made at the beginning of fiscal 1997 or which may occur in the
future.
Note D. The Company completed the private placement of the Notes on
March 4, 1998. Interest on the Notes will be payable
semi-annually on March 1 and September 1 of each year,
commencing September 1, 1998. The Notes will mature on March
1, 2008. The Notes are unsecured and will be redeemable, in
whole or in part, at the option of the Company, on or after
March 1, 2003. Proceeds from the Notes have been used to
finance the Deco and Turn-Matic acquisitions, pay off the note
issued in connection with the MT&G acquisition and pay down
the Company's line of credit facility.
In conjunction with the Notes offering, the Company's
revolving credit agreement was amended to allow the Company to
increase total availability to $50.0 million. The revolving
credit agreement is collateralized by substantially all of the
Company's non-real estate assets and by Rochester Gear, Inc.
real estate. The current expiration date for the revolving
credit agreement is February 28, 2001.
The revolving credit agreement, the Company's $10 million term
note and the Notes require the Company to comply with certain
financial covenants including net worth, debt service coverage
and total debt. In addition, the terms of the Notes require
the Company to suspend its cash dividend.
The Company's domestic subsidiaries; Plastronics, Rochester
Gear, Deco, and Turn-Matic only, are full and unconditional
guarantors of obligations issued under the Notes. The
following summarized financial information is derived from the
consolidating financial statements of the Company for the
periods presented. No intercompany balances or transactions
occurred among the subsidiaries during the periods presented.
<TABLE>
<CAPTION>
4/30/98 10/31/97
------- --------
<S> <C> <C>
Current assets $ 27,718 $11,400
========= =======
Total assets $ 111,577 $30,800
========= =======
Current liabilities $ 12,767 $ 6,200
========= =======
Long-term debt $ 6,100 $ 6,100
========= =======
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Six Months Ended
----------------
4/30/98 4/30/97
------- -------
<S> <C> <C>
Sales $30,680 $13,697
======= =======
Operating income $ 2,107 $ 1,581
======= =======
</TABLE>
Note E. On March 6, 1997, the Company sold the business and
substantially all assets of its Eonic operation. Although
assets were sold at approximately net book value, reserves
were established for employee separation costs, costs
associated with the collection of accounts receivable and
pension plan costs, resulting in a $711,000 expense being
recorded during the quarter ended January 31, 1997. The
Company received cash of $1.5 million and a $1 million 8.25%
note due over five years. The proceeds were used to reduce
long-term debt.
Note F. The Company sold the land and building of Newcor Machine
Tool during the second quarter of 1998 for approximately $1.3
million, net of selling expenses. The after-tax gain
associated with this sale was approximately $240,000.
Note G. Inventories are summarized as follows:
<TABLE>
<CAPTION>
4/30/98 10/31/97
------- --------
<S> <C> <C>
Cost and estimated earnings of uncompleted
contracts in excess of related billings of $978
at 4/30/98 and $1,066 at 10/31/97 $ 4,191 $2,379
Raw materials 3,109 3,752
Work in process and finished goods 8,400 1,953
------- ------
$15,700 $8,084
======= ======
</TABLE>
Costs and estimated earnings of uncompleted contracts in
excess of related billings represents revenue recognized under
the percentage of completion method in excess of amounts
billed.
Note H. In addition to the quarterly cash dividend of $.05 per
share of common stock, a 5% stock dividend was approved by the
Board of Directors in the third quarter of 1997. The dividend
was distributed during the fourth quarter of 1997 to
shareholders' of record at the close of business on August 14,
1997. The effect of the stock dividend has been reflected in
these condensed consolidated financial statements. As
mentioned in Note D., the Company has suspended future cash
dividend payments.
Note I. The Company has been notified by one of its largest
customers that the customer is defending itself in a patent
infringement lawsuit involving certain processes/methods used
on manufacturing equipment supplied by numerous vendors
including one of the Company's former divisions within the
Special Machines segment. The Company retained responsibility
for this matter when it sold the related business. Certain
component suppliers of the Company have been notified of their
potential responsibility to the Company in connection with
this action. The Company does not possess sufficient
information to evaluate the validity of this claim and,
accordingly, is unable to determine whether it will ultimately
be required to make any payment related to this lawsuit, or
the extent to which any such payment could be offset or
mitigated by claims against suppliers.
The Company sold several of its businesses during fiscal 1997
and 1996, including the division that produced the equipment
described above. In each case the Company's agreement with the
purchaser requires it to indemnify the purchaser for various
claims including certain environmental, product liability,
warranty and other claims that may arise relating to the
conduct of the business before the date of sale, subject in
some cases to limits on the time within which an
indemnification claim may be brought or the maximum amount the
Company may be required to pay. The Company provided for its
estimated indemnification obligations when these businesses
were sold and has no reason
<PAGE> 8
to believe there are potential claims against it in excess of
this provision, although no specific amounts are included in
such reserve with respect to the patent infringement action
described above.
Various other legal matters arising during the normal course
of business are pending against the Company. Management does
not expect that the ultimate liability, if any, of these
matters will have a material effect on future financial
position and results of operations.
<PAGE> 9
NEWCOR, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Newcor, Inc. (the Company) is organized into three industry segments: the
Precision Machined Products segment, the Rubber and Plastic segment and the
Special Machines segment. The Precision Machined Products segment produces
transmission, powertrain and engine components and assemblies for the
automotive, medium and heavy duty truck, and agricultural vehicle industries.
The Rubber and Plastic segment produces cosmetic and functional seals and boots
and functional engine compartment products primarily for the automotive
industry. The Special Machines segment designs and manufactures welding,
assembly, forming, heat treating and testing machinery and equipment for the
automotive, appliance and other industries.
The Company's strategy to build the Precision Machined Products segment as a
high volume automotive supplier took a significant step forward as a result of
the following actions: On December 23, 1997, the Company purchased the assets of
Machine Tool & Gear, Inc. (MT&G) for $27.3 million, and assumed $5.8 million of
debt, which was subsequently retired. MT&G manufactures differential pinion and
side gears, output shafts and rear axle shafts for the automotive industry. On
March 4, 1998 the Company purchased the common stock of Grand Machining Company,
Deco Technologies, Inc. and Deco International, Inc. (collectively, Deco) for
$54.9 million and the common stock of Turn-Matic, Inc. (Turn-Matic) for $17.0
million. These transactions were financed concurrent with the completion on
March 4, 1998 of a private placement of $125 million of 9.875% Senior
Subordinated Notes due 2008 (the Notes). Deco manufactures high-volume,
precision-machined engine and powertrain components and assemblies for the
medium and heavy truck and automotive industries, while Turn-Matic manufactures
high volume, precision machined engine components and assemblies for the
automotive industry. These companies have product lines and capabilities that
management believes will complement Newcor's existing precision machining
businesses. In the twelve months ended September 30, 1997, sales for these three
companies aggregated $111.8 million. As a result of these acquisitions, the
Company's financial condition and results of operations for fiscal 1998 and
future years will differ substantially compared with those for fiscal 1997 and
prior years.
RESULTS OF OPERATIONS
The following tables summarize the principal factors causing the Company's
change in sales by segment, including the effect of acquisitions and change in
sales from existing operations, for the second quarter of 1998 and six months
ended April 30, 1998 compared with the same periods one year ago.
<TABLE>
<CAPTION>
Precision
Machined Rubber and Special
(In thousands) Products Plastic Machines Total
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Second quarter 1997 sales $16,343 $13,487 $4,759 $34,589
Acquisitions 23,094 - - 23,094
Change from existing business (1,293) 164 (1,185) (2,314)
------- ------- ------ -------
Second quarter 1998 sales $38,144 $13,651 $3,574 $55,369
======= ======= ====== =======
Six months ended 1997 sales $29,430 $23,544 $9,590 $62,564
Acquisitions 25,125 2,553 - 27,678
Change from existing business (1,785) (380) (2,574) (4,739)
------- ------- ------ -------
Six months 1998 sales $52,770 $25,717 $7,016 $85,503
======= ======= ====== =======
</TABLE>
Consolidated sales were $55.4 million for the second quarter of 1998, an
increase of $20.8 million, or 60.1%, compared with sales of $34.6 million for
the second quarter of 1997. Sales for the Precision Machined Products segment
increased $21.8 million, or 133.7%,
<PAGE> 10
to $38.1 million, sales for the Rubber and Plastic segment increased $.2
million, or 1.5%, to $13.7 million, while sales for the Special Machines segment
decreased $1.2 million, or 25.0%, to $3.6 million. The increase in sales for the
Precision Machined Products segment was due to sales from the recent
acquisitions; MT&G, Deco and Turn-Matic, referred to collectively as the
"Acquisitions" which were partially offset by reduced sales at existing
operations caused by lower customer orders compared with the same period one
year ago. Rubber and Plastic sales for the second quarter were comparable to the
second quarter of 1997. The sales decrease for the Special Machines segment was
primarily due to not receiving a significant new order that had been
anticipated, as well as the relatively slow rate of new orders booked since the
third quarter of fiscal 1997.
Consolidated sales for the six month period ended April 30, 1998 increased by
$22.9 million to $85.5 million compared with sales of $62.6 million for the same
period of 1997. The same factors that influenced sales for the second quarter
compared with one year ago also impacted the six month sales comparison. The
increase in sales for the Rubber and Plastic segment was due to a full six
months of results of the Company's Plastronics acquisition that occurred in
January 1997, partially offset by reduced shipment of certain products during
the first quarter of 1998 as a result of customer production schedules.
Consolidated gross profit was $10.3 million, or 18.6% of sales, for the second
quarter of 1998 compared with $6.5 million, or 18.8% of sales, for the second
quarter of 1997. The gross profit increase of $3.8 million was due to $4.5
million of incremental gross profit from the Acquisitions which was partially
offset by lower gross profit from the Company's Special Machines and Rubber and
Plastic segments compared with the second quarter of 1997. Special Machines
segment gross profit was down due to its sales decrease compared with 1997.
Rubber and Plastic segment gross profit was down due primarily to high hourly
labor turnover, which, although improved compared with the first quarter of
1998, continued to adversely affect production efficiency compared with 1997.
Consolidated gross profit for the six month period ended April 30, 1998 was
$14.0 million or 16.4% of sales compared with $11.9 million or 19.0% of sales
for the same period one year ago. Factors that affected the six month period
ended April 30, 1998 in addition to those which affected the second quarter of
1998 included: a vehicle assembly line changeover at a customer which resulted
in a temporary loss of gross profit and pricing issues on certain coated metal
parts produced by the Rubber and Plastic segment. The customer assembly line
changeover was completed, and gross profit was near normal levels during the
second quarter of 1998, and pricing issues on certain coated metal parts which
reduced gross profit during the first quarter were resolved during the second
quarter of 1998.
Selling, general and administrative expenses (SG&A) increased to $9.8 million,
or 11.5% of sales, for the six month period ended April 30, 1998 from $7.4
million, or 11.9% of sales, for the six month period ended April 30, 1997. The
increase in SG&A was due to the following factors: SG&A of approximately $1.7
million associated with the Acquisitions as well as the acquisition of
Plastronics in January 1997 and ongoing expenditures to complete the
implementation of a company-wide information system.
Amortization expense increased to $0.9 million in the second quarter of 1998
from $0.2 million in the second quarter of 1997 due to the Acquisitions.
Operating income (loss) by segment was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
4/30/98 4/30/97 4/30/98 4/30/97
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Precision Machined Products $ 4,812 $ 1,789 $ 5,748 $ 3,146
Rubber and Plastic 873 1,510 812 2,276
Special Machines (162) 78 (438) 700
Corporate (869) (763) (1,921) (1,689)
Amortization expense (911) (227) (1,236) (413)
Nonrecurring gain (loss) 362 - 362 (711)
-------- -------- ------- -------
Total operating income $ 4,105 $ 2,387 $ 3,327 $ 3,309
======== ======== ======= =======
</TABLE>
Consolidated operating income for the second quarter of 1998 was $4.1 million,
or 7.4% of sales, compared with $2.4 million, or 6.9% of sales, for the second
quarter of 1997. Consolidated operating income for the six month period ended
April 30, 1998 was $3.3
<PAGE> 11
million, or 3.3% of sales, compared with $3.3 million, or 5.3% of sales, for the
six month period ended April 30, 1997. The 1.6% decline in operating income as a
percent of sales for the six month period ended April 30, 1998 compared with the
same period one year ago was due principally to several reasons that occurred
during the first quarter of fiscal 1998 including: (i) lower than anticipated
sales by the Special Machines segment due to the slow rate of new orders; (ii)
lower than anticipated sales by the Precision Machined Products segment due to a
vehicle assembly line changeover at a customer; and (iii) operational
inefficiencies within the Rubber and Plastic segment that were mainly the result
of high labor turnover caused by full employment in the local economies.
Operating income for the Precision Machined Products segment before the
amortization of intangible costs related to the Acquisitions increased $3.0
million to $4.8 million in the second quarter of 1998 from $1.8 million in the
second quarter of 1997. Operating margin increased to 12.6% of segment sales in
the second quarter of 1998 from 10.9% of segment sales in the second quarter of
1997. The increase in operating income was primarily due to the Acquisitions.
Operating income and operating margins at existing divisions within this segment
improved slightly when compared with 1997 due to a favorable sales mix of higher
margin products.
Operating income for the Rubber and Plastic segment decreased $0.6 million to
$0.9 million in the second quarter of 1998 from operating income of $1.5 million
in the second quarter of 1997. Operating margin decreased to 6.4% of segment
sales in the second quarter of 1998 from 10.8% of segment sales in the second
quarter of 1997. The decrease in operating income was primarily due to
operational inefficiencies that resulted in increased scrap, high training costs
and productivity issues. These inefficiencies were mainly the result of high
labor turnover caused by full employment in local economies. Turnover did
improve compared with the first quarter of 1998, but it remained high compared
with the same period one year ago. Expansion of segment engineering and selling
resources to support customer requirements also reduced operating income
compared with the second quarter of 1997.
Operating income for the Special Machines segment decreased $0.2 million to a
loss of $0.1 million in the second quarter of 1998 from income of $0.1 million
in the second quarter of 1997. Operating margin decreased to (4.5%) of segment
sales in the second quarter of 1998 from 1.6% in the second quarter of 1997. The
decrease in operating income and operating margin was due to the decline in
sales in this segment.
The second quarter of 1998 included a nonrecurring gain of $0.4 million related
to the sale of the land and building where the Company's Machine Tool division
was located prior to its being sold in October 1996. The nonrecurring loss of
$0.7 million for the six months ended April 30, 1997 related to the sale of the
Company's Eonic division.
Interest expense increased $2.2 million to $2.8 million in the second quarter of
fiscal 1998 from $0.6 million in the second quarter of 1997. The increase in
interest expense was due to additional debt related to the private placement of
the Notes which was incurred to finance the Acquisitions.
Certain actions that management began to implement during the first and second
quarters of fiscal 1998 with respect to the Special Machines and Rubber and
Plastic segments are expected to continue to favorably impact those businesses
during the second half of fiscal 1998. In addition, MT&G's new program launch
remains on schedule with full production expected in the third quarter of the
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Cash outflows during the first six months of 1998 of approximately $103.1
million to complete the Acquisitions, $17.0 million to pay down the Company's
bank revolving credit facility, and $2.4 million to purchase capital equipment
were financed by $120.5 million of net proceeds from the Notes, $1.4 million
from the sale of property, and $2.3 million of cash provided by operations.
Effective January 15, 1998 the Company's revolving credit facility was amended
and restated to become the Senior Credit Facility and was increased to provide
total revolving credit availability of $50.0 million concurrent with completion
of the issuance of the Notes on March 4, 1998. Availability of funds under the
Senior Credit Facility is subject to satisfaction of certain financial ratios
and other conditions. At April 30, 1998 the Company had no borrowings
outstanding under its Senior Credit Facility. The Senior Credit Facility
covenant related to the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization would have limited the borrowing availability to
$41.3 at April 30, 1998. The Senior Credit Facility is collateralized by
substantially all of the Company's non-real estate assets and by Rochester Gear,
Inc.'s real estate. The current expiration of the Senior Credit Facility is
February 28, 2001.
<PAGE> 12
The Company is highly leveraged as a result of the Notes. The Company's ability
to make scheduled payments of principal of, or to pay the interest on, or to
refinance, its indebtedness (including the Notes) or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control.
The Company believes that, through a combination of cash flow from operations
and available credit under the Senior Credit Facility it will have adequate cash
available to service debt obligations, continue capital improvements and
maintain adequate working capital.
The Company paid a quarterly dividend of $.05 per share of common stock during
the first quarter of fiscal 1998 and during the first and second quarters of
1997. The terms of the Notes required the suspension of cash dividends, and as
result no dividends were declared or paid during the second quarter of 1998.
Total dividends paid during the first six months of 1998 and 1997 were $246,000
and $471,000, respectively.
OTHER FINANCIAL DATA/INFORMATION
On a pro-forma basis as if Newcor had completed the Acquisitions at November 1,
1996, Newcor's sales, operating income, interest expense, depreciation,
amortization, and capital expenditures for the quarter and twelve months ended
April 30, 1998 would have been as follows:
<TABLE>
<CAPTION>
Period Ended April 30, 1998
Three Months Twelve Months
------------ -------------
<S> <C> <C>
Sales $64,312 $245,085
Operating income 5,287 18,057
Interest expense 3,851 14,225
Depreciation 1,669 6,478
Amortization 1,134 4,560
Capital expenditures 794 8,071
</TABLE>
The Company is in the process of implementing a company-wide Enterprise Resource
Planning (ERP) computer system. One of the anticipated benefits of this system
is year 2000 date conversion without any adverse effect on customers or
disruption to business operations. Implementation of the system is underway with
projected completion during mid 1999. The Company is also communicating with all
of its significant suppliers and large customers to coordinate year 2000
conversion. The identifiable cost of year 2000 compliance and its effect on the
Company's future results of operations is not expected to be material.
CAUTIONARY STATEMENTS UNDER THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and, in particular, the information
in the second paragraph under "Overview" concerning the expected impact of the
Acquisitions, the last paragraph under "Results of Operations" concerning the
Company's performance for the remainder of fiscal 1998 and the paragraph
concerning year 2000 conversion constitute "forward-looking statements" within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. A number of factors could cause actual results to differ materially from
those included in or suggested by such forward-looking statements, including
without limitation: the cyclical nature of the industries served by the Company,
all of which have encountered significant downturns in the past; the level of
production by and demand from the Company's principal customers, upon which the
Company is substantially dependent, including the three major domestic
automobile manufacturers, American Axle, Inc., Deere & Company and Detroit
Diesel, Inc.; whether, when and to what extent expected orders materialize;
whether the Company will be able to successfully integrate the Acquisitions into
the Company's pre-existing operations and operate them profitability; whether
the Company's recent initiatives to improve upon the recent labor turnover
experienced in its Rubber and Plastic segment will be successful and
cost-effective; the duration of the start-up phase of MT&G's new program and the
extent to which it is successful; the impact on the Company of actions by its
competitors, some of which are significantly larger and have greater financial
and other resources than the Company; developments with respect to
contingencies, including environmental matters, litigation and retained
liabilities from businesses previously sold by the Company; and the extent to
which the Company's new ERP computer system performs as anticipated and the
accuracy of the information supplied by the Company's suppliers and customers
concerning their year 2000 readiness. All forward-looking statements in the
"Management's Discussion and Analysis of Financial
<PAGE> 13
Condition and Results of Operations" section are qualified by such factors. The
Company disclaims any obligation to update any such forward-looking statements.
NEWCOR, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
The Company issued the Notes on March 4, 1998. Restrictions in the
indenture under which the Notes were issued required the Company to
suspend payment of cash dividends on its common stock.
Item 4. Submission of matters to a vote of Security Holders:
(a) The Annual Meeting of Shareholders was held March 4, 1998 to elect
two Directors to serve until the year 2001 Annual Meeting of
Shareholders or until their successors have been duly elected and
qualified.
(b) Shirley E. Gofrank and W. John Weinhardt were elected to serve on
the Board of Directors until the year 2001 Annual Meeting of
Shareholders or until their respective successor shall be elected
and qualified.
The following directors' term of office continue until the 1999
Annual Meeting of Shareholders:
Jerry D. Campbell
William A. Lawson
The following directors' term of office continue until the 2000
Annual Meeting of Shareholders:
Jack R. Lousma
Richard A. Smith
Kurt O. Tech
(c) The following lists the matters voted on at the Annual Meeting of
Shareholders along with the results of the vote:
Election of Shirley E. Gofrank and W. John Weinhardt to serve on
the Board of Directors until the year 2001 Annual Meeting of
Shareholders or until their respective successor shall be elected
and qualified:
<TABLE>
<CAPTION>
Gofrank Weinhardt
------- ---------
<S> <C> <C>
Votes cast for 4,138,739 4,135,600
Votes against or withheld 26,205 29,344
Abstentions and broker non-votes 777,090 777,090
</TABLE>
(d) No settlements were needed to be reached to terminate any
solicitation.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 4 (a) - Indenture dated as of March 4, 1998 between the
Company, the subsidiary guarantors (as defined therein), and First
Trust National Association as trustee, relating to the Notes
(including forms of Notes) (incorporated herein by reference from
Exhibit 4 (a) to Form 8-K filed on March 13, 1998).
Exhibit 4 (b) - A/B Exchange Registration Rights Agreement dated
as of March 4, 1998 between the Company, the subsidiary guarantors
(as defined therein) , and the initial purchasers of the Notes
(incorporated herein by reference from Exhibit 4(b) to Form 8-K
filed on March 13, 1998).
Exhibit 4 (c) - First Amendment to Third Amended and Restated
Revolving Credit Agreement between Newcor, Inc. and Comerica Bank
dated February 12, 1998. (incorporated herein by reference from
Exhibit 4 (m) to Form 10-Q for quarter ended January 31, 1998).
Exhibit 10 (a) - Employment Agreement with Keith Hale dated March
4, 1998 (incorporated herein by reference from Exhibit 10.(d) to
Form 8-K filed on March 13, 1998).
<PAGE> 14
Exhibit 10 (b). - Purchase Agreement dated February 27, 1998 among
the Company, the subsidiary guarantors (as defined therein), and
the initial purchasers of the Notes incorporated herein by
reference from Exhibit 1 to Form 8-K filed on March 13, 1998.
Exhibit 10 (c) - Employment Agreement with Keith Hale, dated March
4, 1998 (incorporated herein by reference from Exhibit 4 (i) to
Form 10-Q for quarter ended January 31, 1998) (contract or
compensatory plan or arrangement with executive officer).
Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
1. On March 6, 1998, the Company filed a Form 8-K/A including the
required financial information for MT&G and the pro forma
effect of the acquisition.
2. On March 13, 1998, the Company filed a Form 8-K announcing the
acquisition of 100% of the common stock of Deco, the
acquisition of 100% of the common stock of Turn-Matic and the
private placement of the Notes. The required financial
information for Deco and Turn-Matic was included with this
filing, as well as the pro forma effect of MT&G, Deco and
Turn-Matic acquisitions and the Notes on the Company.
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.
NEWCOR, INC.
----------------------------
Registrant
Date: June 15, 1998 /s/ John Garber
------------------------- ----------------------------
John Garber
Vice President-Finance
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 1,381
<SECURITIES> 0
<RECEIVABLES> 33,305
<ALLOWANCES> 0
<INVENTORY> 15,700
<CURRENT-ASSETS> 60,539
<PP&E> 67,243
<DEPRECIATION> 15,496
<TOTAL-ASSETS> 208,426
<CURRENT-LIABILITIES> 31,223
<BONDS> 6,100
4,942
0
<COMMON> 0
<OTHER-SE> 21,948
<TOTAL-LIABILITY-AND-EQUITY> 208,426
<SALES> 55,369
<TOTAL-REVENUES> 55,369
<CGS> 45,057
<TOTAL-COSTS> 51,264
<OTHER-EXPENSES> 110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,776
<INCOME-PRETAX> 1,219
<INCOME-TAX> 466
<INCOME-CONTINUING> 753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 753
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
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