<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 July 31, 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 September 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 Nine Months Ended
---------------------- -----------------------------
7/31/98 7/31/97 7/31/98 7/31/97
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales $57,963 $32,385 $143,466 $94,949
Cost of sales 48,018 26,920 119,498 77,615
------- ------- -------- -------
Gross margin 9,945 5,465 23,968 17,334
SG&A expenses 5,545 3,720 15,306 11,156
Amortization expense 1,134 226 2,370 639
Nonrecurring gain - (1,008) (362) (297)
------- ------- -------- -------
Operating income 3,266 2,527 6,654 5,836
Other income (expense):
Interest expense (3,538) (553) (7,201) (1,539)
Other expense, net (105) (194) (226) (208)
------- ------- -------- -------
Income (loss) before income taxes (377) 1,780 (773) 4,089
Income tax expense (benefit) (145) 558 (261) 1,419
------- ------- -------- -------
Net income (loss) $ (232) $ 1,222 $ (512) $ 2,670
======= ======= ======== =======
Amounts per share of common stock:
Net income (loss) - Basic and Diluted (1) $ (0.05) $ 0.25 $ (0.10) $ 0.54
Dividends $ - $ 0.05 $ 0.05 $ 0.14
Weighted average common shares outstanding (1) 4,942 4,942 4,942 4,937
</TABLE>
(1) Per share amounts and shares outstanding have been adjusted to reflect
the 5% stock dividend distributed 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>
7/31/98 10/31/97
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,110 $ 34
Accounts receivable 27,636 22,523
Inventories 15,746 8,084
Other current assets 13,014 8,672
-------- --------
Total current assets 62,506 39,313
Property, plant and equipment, net of
accumulated depreciation of $17,913
at 7/31/98 and $14,544 at 10/31/97 51,443 28,119
Cost in excess of assigned value of acquired companies, net 85,699 16,080
Other long-term assets 9,597 7,371
-------- --------
Total assets $209,245 $ 90,883
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,000 833
Accounts payable 19,914 14,874
Other accrued liabilities 10,920 5,668
-------- --------
Total current liabilities 32,834 21,375
Long-term debt 138,767 32,267
Postretirement benefits and other 10,987 9,826
-------- --------
Total liabilities 182,588 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 19,556 20,314
-------- --------
Total shareholders' equity 26,657 27,415
-------- --------
Total liabilities and shareholders' equity $209,245 $ 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>
Nine months Ended
---------------------
7/31/98 7/31/97
--------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (512) $ 2,670
Depreciation and amortization 6,373 3,153
Gain on sale of capital assets (362) (711)
Other (652) 226
Changes in operating assets
and liabilities, net 2,489 (620)
--------- --------
Net cash provided by operations 7,336 4,718
--------- --------
Investing Activities:
Capital expenditures (3,732) (2,050)
Acquisitions, net of cash acquired (101,816) (12,081)
Proceeds from sale of business - 1,500
Proceeds from sale of fixed assets 1,367 2,301
--------- --------
Net cash used by investing activities (104,181) (10,330)
--------- --------
Financing Activities:
Net borrowings (repayments) on revolving credit line (17,000) 6,300
Repayment of term loan (333) -
Proceeds from issuance of subordinated notes 125,000 -
Subordinated notes issuance costs (4,500) -
Cash dividends (246) (705)
Shares issued under stock option plans - 82
--------- --------
Net cash from financing activities 102,921 5,677
--------- --------
Increase in cash and cash equivalents 6,076 65
Cash and cash equivalents, beginning of period 34 34
--------- --------
Cash and cash equivalents, end of period $ 6,110 $ 99
========= ========
</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. Certain
amounts from the prior period have been reclassified to
conform with the current period presentation.
Note B. 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. 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,
which were subsequently exchanged for a substantially
identical series of notes issued under the same indenture and
registered under the Securities Act of 1933 (either series,
the Notes) as described in Note C. 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 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. 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 C. 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.
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 as described in
Note C. 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.
On January 10, 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.
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:
<PAGE> 6
<TABLE>
<CAPTION>
Nine months Ended
-----------------
7/31/98 7/31/97
--------- ----------
<S> <C> <C>
Sales $178,900 $180,300
======== ========
Net income (loss) $ (500) $ 3,800
======== ========
Per share - Basic and Diluted $ (0.10) $ .77
======== ========
</TABLE>
These pro-forma results do not purport to be indicative of the
results that would actually have occurred had the acquisitions
been made at the beginning of fiscal 1997 or which may occur
in the future.
Note C. The Company completed the private placement of the Notes on
March 4, 1998 as described in Note B. 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 were 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 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>
7/31/98 10/31/97
--------- --------
<S> <C> <C>
Current assets $ 25,600 $11,400
========= =======
Total assets $ 107,000 $30,800
========= =======
Current liabilities $ 13,700 $ 6,200
========= =======
Long-term debt $ 6,100 $ 6,100
========= =======
Nine months Ended
-----------------
7/31/98 7/31/97
------- -------
Sales $61,100 $20,800
======= =======
Operating income $ 7,200 $ 2,000
======= =======
</TABLE>
<PAGE> 7
Note D. 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.
Note E. 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 gain associated with
this sale was approximately $362,000.
Note F. Inventories are summarized as follows:
<TABLE>
<CAPTION>
7/31/98 10/31/97
------- --------
<S> <C> <C>
Cost and estimated earnings of uncompleted
contracts in excess of related billings of $578
at 7/31/98 and $1,066 at 10/31/97 $ 4,163 $2,379
Raw materials 2,684 3,752
Work in process and finished goods 8,899 1,953
------- ------
$15,746 $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 G. 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 C, the Company has suspended future cash
dividend payments.
Note H. The Company has been notified by one of its largest customers
that the customer has settled 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
determine the extent of obligation, if any, related to this
claim, or the extent to which any such obligation 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 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> 8
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 third quarter of 1998 and nine months
ended July 31, 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>
Third quarter 1997 sales $15,133 $11,969 $ 5,283 $ 32,385
Acquisitions 28,223 - - 28,223
Change from existing business (1,092) (1,621) 68 (2,645)
------- ------- ------- --------
Third quarter 1998 sales $42,264 $10,348 $ 5,351 $ 57,963
======= ======= ======= ========
Nine months ended 1997 sales $44,563 $35,513 $14,873 $ 94,949
Acquisitions 53,358 2,553 - 55,911
Change from existing business (2,887) (2,001) (2,506) ( 7,394)
------- ------- ------- --------
Nine months ended 1998 sales $95,034 $36,065 $12,367 $143,466
======= ======= ======= ========
</TABLE>
Consolidated sales were $58.0 million for the third quarter of 1998, an increase
of $25.6 million, or 79.0%, compared with sales of $32.4 million for the third
quarter of 1997. Sales for the Precision Machined Products segment increased
$27.1 million, or 179.3%, to $42.3 million, sales for the Rubber and Plastic
segment decreased $1.6 million, or 13.5%, to $10.3 million, while sales for the
Special Machines segment increased $.1 million, or 1.3%, to $5.4 million. The
increase in sales for the Precision Machined Products segment
<PAGE> 9
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. The Rubber and Plastic sales decline was
primarily due to the effect of the General Motors strike during the third
quarter of 1998. The Special Machines segment sales for the third quarter of
1997 were comparable to the third quarter of 1998.
Consolidated sales for the nine month period ended July 31, 1998 increased by
$48.5 million to $143.5 million compared with sales of $94.9 million for the
same period of 1997. The sales increase was primarily due to the Acquisitions as
well as the Company's Rubber and Plastic segment acquisition of Plastronics that
occurred in January 1997. This was partially offset by the effect of the General
Motors strike, reduced shipment of certain products due to customer schedule
reductions, and lower Special Machines segment sales due to the slow rate of new
orders booked since the third quarter of fiscal 1997.
Consolidated gross margin was $9.9 million, or 17.2% of sales, for the third
quarter of 1998 compared with $5.5 million, or 16.9% of sales, for the third
quarter of 1997. The gross margin increase of $4.4 million was due to $6.1
million of incremental gross margin from the Acquisitions, which was partially
offset by lower gross margin from the Company's Rubber and Plastic and Special
Machines segments compared with the third quarter of 1997. Rubber and Plastic
segment gross margin was down due to lower sales associated with the General
Motors strike. Special Machines segment gross margin was down due primarily to
the stage of contracts-in-progress within its business mix.
Consolidated gross margin for the nine month period ended July 31, 1998 was
$24.0 million or 16.7% of sales compared with $17.3 million or 18.3% of sales
for the same period one year ago. Factors that affected the nine month period
ended July 31, 1998 in addition to those which affected the third quarter of
1998 included: (i) high hourly labor turnover which particularly affected Rubber
and Plastic segment production efficiency during the first quarter of 1998, (ii)
the Special Machines segment's low level of sales during the first half of
fiscal 1998, (iii) a vehicle assembly line changeover at a customer which
resulted in a temporary loss of gross margin, and (iv) pricing issues on certain
coated metal parts produced by the Rubber and Plastic segment. Hourly labor
turnover remained relatively high due to full employment, but actions taken to
mitigate turnover have resulted in significant improvement since the first
quarter of fiscal 1998. Although the Special Machines segment rate of new orders
did improve during the third quarter of fiscal 1998, Special Machines segment
sales and gross margin will not benefit from this business until the first half
of fiscal 1999 due to the relatively long lead time required to complete the
orders. The customer assembly line changeover was completed, and gross margin
was near normal levels during the second quarter of 1998. Pricing issues on
certain coated metal parts which reduced gross margin during the first quarter
were resolved during the second quarter of 1998.
Selling, general and administrative expenses (SG&A) increased to $15.3 million,
or 10.7% of sales, for the nine month period ended July 31, 1998 from $11.2
million, or 11.7% of sales, for the nine month period ended July 31, 1997. The
increase in SG&A was due to the following factors: SG&A of approximately $4.0
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 which were partially offset
by lower employee related costs.
Amortization expense increased to $1.1 million in the third quarter of 1998 from
$0.2 million in the third quarter of 1997 due to the Acquisitions. The nine
month period increase from $0.6 million in 1997 to $2.4 million in 1998 was also
due to the Acquisitions.
<TABLE>
<CAPTION>
Operating income (loss) by segment was as follows (in thousands):
Three Months Ended Nine months Ended
-------------------------- -----------------------
7/31/98 7/31/97 7/31/98 7/31/97
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Precision Machined Products $ 4,743 $ 1,476 $ 10,491 $ 4,622
Rubber and Plastic 23 543 835 2,819
Special Machines (15) 455 (454) 1,155
Corporate (351) (729) (2,210) (2,418)
Amortization expense (1,134) (226) (2,370) (639)
Nonrecurring gain - 1,008 362 297
-------- -------- -------- --------
Total operating income $ 3,266 $ 2,527 $ 6,654 $ 5,836
======== ======== ======== =======
</TABLE>
<PAGE> 10
Consolidated operating income for the third quarter of 1998 was $3.3 million, or
5.6% of sales, compared with $2.5 million, or 7.8% of sales, for the third
quarter of 1997. Consolidated operating income for the nine month period ended
July 31, 1998 was $6.7 million, or 4.6% of sales, compared with $5.8 million, or
6.1% of sales, for the nine month period ended July 31, 1997. The decline in
operating income for the third quarter of fiscal 1998 compared with the same
period one year ago was due primarily to the lower sales and related loss of
gross margin and fixed overhead absorption caused by the General Motors strike.
The decline in operating income as a percent of sales for the nine month period
ended July 31, 1998 compared with the same period one year ago was due
principally to the strike as well as 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 increased $3.2
million to $4.7 million in the third quarter of 1998 from $1.5 million in the
third quarter of 1997. Operating margin increased to 11.2% of segment sales in
the third quarter of 1998 from 9.8% of segment sales in the third 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
were down when compared with 1997 primarily due to the effect of lower sales
caused by customer schedule reductions in particular for the Company's
agricultural industry machined components.
Operating income for the Rubber and Plastic segment decreased $0.5 million to
zero in the third quarter of 1998 from operating income of $0.5 million in the
third quarter of 1997. Operating margin decreased to 0.2% of segment sales in
the third quarter of 1998 from 4.5% of segment sales in the third quarter of
1997. The decrease in operating income was primarily due to the loss of gross
margin associated with the General Motors strike. Operational inefficiencies
during the first half of fiscal 1998 that were mainly the result of high labor
turnover caused by full employment in local economies continued to improve
during the third quarter of fiscal 1998.
Operating income for the Special Machines segment decreased $0.5 million to zero
in the third quarter of 1998 from income of $0.5 million in the third quarter of
1997. Operating margin decreased to (0.3%) of segment sales in the third quarter
of 1998 from 8.6% in the third quarter of 1997. The decrease in operating income
and operating margin was primarily due to the stage of contracts-in-progress
within the segment. Nine month results compared with one year ago were down
primarily due to the impact of lower sales, down $2.5 million, or 16.8%.
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 third quarter of fiscal
1997 included a $1.0 million nonrecurring gain from the sale of capital assets
which for the nine month period ended July 31, 1997 was partially offset by a
$0.7 million nonrecurring loss related to the Company's Eonic division recorded
in March 1997.
Interest expense increased $3.0 million to $3.5 million in the third quarter of
fiscal 1998 from $0.5 million in the third quarter of 1997. The increase in
interest expense was due to additional debt related to the issuance of the Notes
which was incurred to finance the Acquisitions.
The Company's Acquisitions are generally meeting management's expectations
related to operating performance with one exception. Machine Tool & Gear's
start-up with respect to a significant new program launch has gone well, but a
customer initiated slow down in the program's ramp-up is expected to delay full
production until the first calendar quarter of 1999 compared with the customer's
initial plan to achieve full production during the third quarter of fiscal 1998.
The Company's near term outlook will also be negatively impacted by a sharp
reduction in demand for agricultural industry, machined components due to
significant schedule reductions by an important customer. Incoming orders for
the Company's Special Machines segment have begun to improve, but due to the
lead time involved in engineering and assembling these orders, sales for this
segment are expected to remain below the fourth quarter of fiscal 1997. Demand
for the Company's automotive and medium and heavy duty truck industry components
and assemblies remains strong.
LIQUIDITY AND CAPITAL RESOURCES
Cash outflows during the first nine months of 1998 were primarily used to
complete the Acquisitions of approximately $101.8 million, $17.3 million to pay
down the Company's bank revolving credit facility and term loan, and $3.7
million to purchase capital equipment
<PAGE> 11
were financed by $120.5 million of net proceeds from the Notes, $1.4 million
from the sale of property, and $7.3 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 July 31, 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 $25.6 million at
July 31, 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.
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 and third quarters
of 1998. Total dividends paid during the first nine 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 three and twelve months ended
July 31, 1998 would have been as follows:
Period Ended July 31, 1998
Three Months Twelve Months
------------ -------------
Sales $58,000 $241,100
Operating income 3,300 15,200
Interest expense 3,500 14,300
Depreciation 1,600 6,500
Amortization 1,100 4,600
Capital expenditures 1,300 7,500
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
<PAGE> 12
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
continue to be successful and cost-effective; the duration of the ramp-up phase
to full production 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 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 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 4 - Form of 9 7/8% Series B Senior Subordinated Notes due
2008 (incorporated herein by reference from Exhibit 4.1.3 to
Registration Statement on Form S-4 filed on April 30, 1998 (Reg.
No. 333-51415)).
Exhibit 10 - Form of Exchange Agent Agreement dated as of June 10,
1998 between the Company and U.S. Bank Trust National Association
(incorporated herein by reference from Exhibit 99.3 to Amendment
No. 1 to Registration Statement on Form S-4 filed on June 10, 1998
(Reg. No. 333-51415)).
Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
None
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: September 14, 1998 /s/ John Garber
---------------------- ----------------------------
John Garber
Vice President-Finance
Principal Financial and
Accounting Officer
<PAGE> 13
EXHIBIT INDEX
-------------
EX-27 FINANCIAL DATA SCHEDULE
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<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> MAY-01-1998
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