<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 of 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended April 1, 2000
Commission File Number 333-88759
WOODS EQUIPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3868249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6944 Newburg Road
Rockford, IL 61108
(Address of principal executive offices)
(Zip Code)
(815) 732-2141
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares of Common Stock outstanding
as of April 26, 2000: 1,107,496
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Woods Equipment Company
Condensed Consolidated Balance Sheets
(In Thousands, Except Shares Information)
<TABLE>
<CAPTION>
April 1 January 1
2000 2000
(Unaudited)
-----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,779 $ -
Trade accounts receivable, less allowance of $396 and $ 448 66,317 38,698
Inventories, net 39,509 36,322
Deferred income taxes 3,166 3,166
Prepaid expenses and other current assets 1,549 1,654
-----------------------------------
Total current assets 112,320 79,840
Property, plant, and equipment:
Land 705 882
Buildings 9,952 11,328
Machinery and equipment 29,442 29,151
Office furniture, fixtures, and equipment 9,873 9,093
-----------------------------------
49,972 50,454
Less: accumulated depreciation 17,486 17,181
-----------------------------------
32,486 33,273
Excess of cost over fair value of net assets acquired, less accumulated
amortization of $6,741, and $5,704 respectively 76,552
Other assets, net 9,244
-----------------------------------
$ 229,262 $ 198,909
===================================
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term obligations $ 517 $ 529
Accounts payable 22,735 12,071
Accrued expenses 8,818 16,049
-----------------------------------
Total current liabilities 32,070 28,649
Long-term obligations, less current maturities 202,662 176,241
Deferred income taxes 3,166 3,166
Other long-term liabilities 62 62
Redeemable preferred stock and accrued dividends 52,236 51,141
Common stockholders' deficit:
Common stock, $.01 par value; authorized - 5,000,000 shares; 1,118,495
issued and 1,107,496 outstanding in 2000; 1,116,868 issued and
1,105,869 outstanding in 1999 11 11
Additional paid-in capital 22,228 22,202
Retained earnings (accumulated deficit) (82,483) (81,792)
Treasury stock, at cost (10,999 shares in 2000 and 1999) (177) (177)
Notes receivable from stockholders (513) (594)
-----------------------------------
(60,934) (60,350)
-----------------------------------
$ 229,262 $ 198,909
-----------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Woods Equipment Company
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 1 April 3
2000 1999
---- ----
<S> <C> <C>
Net sales $ 68,649 $ 41,960
Cost of sales 48,875 30,410
-------- --------
Gross profit 19,774 11,550
Operating Expenses:
Selling 8,333 3,620
General and administrative 2,804 1,985
Special charges 38 1,138
Engineering 1,046 866
Management fee paid to affiliate 75 75
Amortization 1,315 629
Other operating income, net (4) (1)
-------- --------
13,607 8,312
-------- --------
Operating income 6,167 3,238
Interest expense, including amortization of deferred financing costs 5,840 2,833
-------- --------
Income before tax provision 327 405
Income tax provision - 371
-------- --------
Net income $ 327 $ 34
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
Woods Equipment Company
Condensed Consolidated Statement of Changes in Stockholders' Equity
(In Thousands, Except Shares Information)
(Unaudited)
<TABLE>
<CAPTION>
Notes
Number of Additional Receivable
Common Common Paid-in (Accumulated Treasury From
Shares Stock Capital Deficit) Stock Stockholders Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 1,105,869 $ 11 $ 22,202 $ (81,792) $ (177) $ (594) $ (60,350)
Sale of common stock 1,627 26 26
Payments by stockholders 81 81
Net income 327 327
Preferred stock dividends accrued (1,018) (1,018)
-----------------------------------------------------------------------------------
Balance at April 1, 2000 1,107,496 $ 11 $ 22,228 $ (82,483) $ (177) $ (513) $ (60,934)
===================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
Woods Equipment Company
Condensed Consolidated Statements of Cash Flows
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
April 1 April 3
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 327 $ 34
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 1,074 972
Amortization 1,490 629
Noncash interest expense - Debenture accretion 1,020 -
Bad debt write-offs, net 85 16
Equity in earnings of joint venture (31) (41)
(Gain) loss on sale of property, plant and equipment 15 (11)
Changes in operating assets and liabilities; net of effects of acquisitions:
Trade accounts receivables (27,704) (14,813)
Inventories (3,187) 120
Prepaid expenses and other assets (11) (237)
Accounts payable 10,664 2,195
Accrued expenses (7,231) 304
------------ ------------
Net cash used in operating activities (23,489) (10,832)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,246) (1,226)
Proceeds from sale of property, plant and equipment 944 84
------------ ------------
Net cash used in investing activities (302) (1,142)
FINANCING ACTIVITIES
Proceeds from old revolving loans - 11,000
Payments on old term loans and other notes (1,061) (285)
Proceeds from new revolver, net 26,450 -
Proceeds from sale of common stock 26 -
Proceeds from sale of preferred stock 74 -
Redemption of common stock - (27)
Redemption of preferred stock - (69)
Net change in notes receivable from stockholders 81 3
------------ ------------
Net cash provided by financing activities 25,570 10,622
------------ ------------
Net increase (decrease) in cash 1,779 (1,352)
Cash at beginning of period - 1,352
------------ ------------
Cash at end of period $ 1,779 $ -
============ ============
Supplemental cash flow information
Cash paid for interest $ 8,058 $ 1,987
Cash paid for income taxes 14 17
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
Woods Equipment Company
Notes to Condensed Consolidated Financial Statements
(In Thousands, Except Shares Information)
(Unaudited)
1. Description of Business and Acquisitions
Woods Equipment Company (Woods or the Company) is a leading
manufacturer of attachments for a variety of mowing, cutting, clearing,
construction, material handling, landscaping, and grounds maintenance
applications. The Company's products include mowing attachments, front end
loaders, backhoes, coupler systems, buckets, scrapers, and other
implements, in addition to a full line of replacement parts. The average
lifespan of the products range from one to five years due to the severe and
wearing nature of the application for which they are used. The Company's
products are sold through approximately 3,900 dealers throughout the United
States, with no one dealer accounting form more than 2% of total sales.
In July 1999, the Company purchased substantially all the assets of
Tru-Part Manufacturing Corporation (TISCO), and all the outstanding stock
of Central Fabricators, Inc. (Central Fabricators) and the attachments
division of Alitec Corporation, (Alitec Attachments Division), for $38,532,
$28,361, and $10,862 in cash, respectively. In conjunction with the
acquisitions, the Company recorded $52,725 in cost in excess of net assets
acquired.
TISCO - one of the leading independent distributors of
replacement parts in the United States primarily for tractors
over ten years old;
Central Fabricators - one of the leading independent
manufacturers of pin-on excavator buckets for the U.S.
construction industry; and
Alitec Attachments Division- a manufacturer of patented hydraulic
powered attachments for the rapidly growing U.S. skid steer
market.
The transactions were financed primarily from proceeds of $24,269 from
the sale of 15% senior discount debentures and $130,000 from the sale of 12%
senior notes.
In related transactions, the Company entered into non-compete
agreements with former management of Central Fabricators and Alitec Attachments
Division. The three-year non-compete agreements, with an imputed interest rate
of 9%, had a collective net present value of $1,266 on date of acquisition.
In addition, the Company entered into lease agreements of nine
existing facilities with the former owners of TISCO, Central Fabricators, and
Alitec Attachments Division. The leases range from terms of two to seven years,
and have an initial annual rent expense of $1,320.
The acquisitions were accounted for as purchases and accordingly, the
condensed consolidated statement of operations for three months ended, April 1,
2000, includes the results of the acquisition from their respective date of
acquisition. The following unaudited pro forma statements of operations data for
the three months ended April 1, 2000, and April 3, 1999, are based on certain
amounts derived from the unaudited statements of operations of acquisitions for
the periods indicated, and assumes that the acquisition of the assets of TISCO,
Alitec Attachment Division, and Central Fabricators, occurred as of the
beginning of the periods presented.
Net Sales $68,649 $66,367
Operating Income 6,166 4,606
Income (Loss) before extraordinary item 327 28
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instruction to Form 10-Q and Article 10
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 (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month periods ended April 1,
2000, and April 3, 1999, are not necessarily indicative of the results that may
be expected for the fiscal
6
<PAGE>
year ending December 30, 2000. These financial statements should be read in
conjunction with the financial statements, including the notes thereto, for the
fiscal year ended January 1, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Related Party Expenses
The Company purchases manufactured finished goods at cost from its
joint venture investment, which amounted to $1.5 million for each of the three
month periods ended April 1, 2000, and April 3, 1999.
3. Segment and Related Information
The Company's products are sold primarily by construction, commercial,
agricultural, and outdoor power equipment dealers that sell prime movers and
other equipment produced by the major OEMs. The Company distribution network
includes dealers that have affiliations with all of the principal OEMs of prime
movers, such as New Holland, Deere, Case, AGCO (manufacturer of the Massey
Furguson brand of prime mover), Ingersoll (manufacturer of the Bobcat brand of
prime mover), Caterpillar, and Kubota. The Company also sells its products
through a substantial number of independent dealers that are not affiliated with
the major prime mover OEMs. Most dealers offer tractor and prime mover
attachments from independent manufacturers which complement or compete with
attachments sold by the major tractor and prime mover manufacturers.
Business units represent market segments in which they share certain
characteristics, such as technology, marketing, and product application, that
create long-term synergies. The principal activities of the Company's operating
segments are as follows:
Grounds Maintenance
This product category includes attachments used to maintain the
grounds surrounding industrial and office parks, large estates, resort
complexes, universities, golf courses, and individual homes. In general, the
demand for these products is dependent upon a variety of conditions, including
general economic conditions, consumer spending patterns, weather conditions, as
well as state and municipal government spending.
Construction
The end-users in this product category generally include construction
companies and utility contractors. Demand for these products is closely
correlated to the overall demand for construction equipment, which is driven by
several factors, including general economic conditions, interest rates, weather
conditions, and government spending.
Other
The end-users in this product category are farmers and ranchers, who
use these products principally in the planting, cultivating, and harvesting of
their crops. The demand for these products closely correlates to the demand for
agricultural equipment in general, which is influenced by a number of factors,
including total farm cash receipts, acreage under crop or livestock, crop
yields, government programs, general economic conditions, interest rates,
weather, and technological trends in agriculture.
Net sales by operating segment reflects sales of products and services
to external customers, as reported in the Company's consolidated statements of
operations. The Company evaluates performance based on operating income of the
respective segment. Operating income includes all revenues, costs, and expenses
directly related to the segment involved. In determining operating income,
neither corporate nor interest expenses are included. Operating segment
depreciation expense, identifiable assets, and capital expenditures relate to
those assets that are utilized by the respective operating segment. Corporate
assets consist principally of cash, other receivables, and fixed assets.
7
<PAGE>
A summary of the Company's operations by segment for the three-month
periods ended April 1, 2000 and April 3, 1999, is as follows:
Three Months Ended
----------------------------
April 1 April 3
Net sales 2000 1999
---- ----
Grounds maintenance $ 52,190 $ 33,082
Construction 15,069 8,447
Other 1,390 431
----------------------------
Total net sales $ 68,649 $ 41,960
============================
Operating income
Grounds maintenance $ 7,504 $ 4,903
Construction 989 1,260
Other 132 41
Corporate (2,458) (2,966)
----------------------------
Total operating income 6,167 3,238
Interest expense 5,840 2,833
----------------------------
Income before income taxes $ 327 $ 405
============================
April 1 January 1
2000 2000
---- ----
Assets
Grounds maintenance $ 117,224 $ 86,216
Construction 21,204 19,758
Other 1,184 1,442
Corporate 89,650 91,493
----------------------------
Total assets $ 229,262 $ 198,909
============================
The investment in joint venture is included in the other segment for all years
presented.
April 1 April 3
2000 1999
---- ----
Additions to long-lived assets
Grounds maintenance $ 1,095 $ 993
Construction 147 166
Other 0 0
Corporate 4 67
------- -------
Total additions to long-lived assets $ 1,246 $ 1,226
======= =======
The Company had no significant amounts of sales to or any long-lived assets
in an individual country outside the United States.
8
<PAGE>
4. Inventories
Inventories consist of the following:
April 1 January 1
2000 2000
---- ----
Raw Materials $ 7,612 $ 6,642
Work in Process 3,020 3,036
Finished goods 30,311 28,078
---------------------------
Total inventories at FIFO $ 40,943 $ 37,756
LIFO adjustment (1,434) (1,434)
---------------------------
Total inventories at LIFO $ 39,509 $ 36,322
===========================
5. Accrued Expenses
Accrued expenses consist of the following:
April 1 January 1
2000 2000
---- ----
Salaries, wages and employee benefits $ 2,365 $ 5,179
Interest 3,386 6,725
Warranty 848 849
Restructuring costs 65 690
Property, payroll, and other taxes 367 200
Contingent consideration 1,134 1,134
Other 653 1,272
---------------------------
$ 8,818 $ 16,049
===========================
6. WEC Company Condensed Financial Information
Summary balance sheet information for WEC Company is as follows:
April 1 January 1
2000 2000
---- ----
Current assets $ 112,320 $ 79,840
Non current assets 116,942 119,069
---------------------------
Total assets $ 229,262 $ 198,909
===========================
Current liabilities 32,070 28,649
Non current liabilities 178,971 153,570
---------------------------
Total liabilities $ 211,041 $ 182,219
===========================
9
<PAGE>
Summary results of operations for WEC Company is as follows:
April 1 April 3
2000 1999
---- ----
Net Sales 68,649 41,960
Gross profit 19,774 30,410
Operating income 6,167 3,238
Income before tax provision 1,347 405
Net income 1,347 34
WEC Company, a wholly owned subsidiary of Woods Equipment Company, issued a
$130.0 million in aggregate principal amount of 12.0% senior notes on July 28,
1999. Woods Equipment Company has fully and unconditionally guaranteed the 12.0%
senior notes. Complete financial statements and other disclosure concerning WEC
Company are not presented because management has determined they are not
meaningful to investors.
7. Revolving Loan and Other Long-Term Obligations
Long-term obligations consist of the following:
April 1 January 1
Rates 2000 2000
---------------------------------------
Revolver 8.71% to 10.25% 41,450 $ 15,000
Senior discount debentures 15.0% 26,919 25,899
Senior notes 12.0% 130,000 130,000
Seller promissory note 7.5% 3,753 4,705
Other obligations 7.5% to 9.0% 1,057 1,166
--------------------------------------
203,179 176,770
Less: Current maturities 517 529
-----------------------
Total long-term obligations $202,662 $176,241
-----------------------
Total borrowings under the revolving credit facility are not to exceed
$42.5 million, including a note of $2.5 million with the Company's bank, as
permitted under the terms of the Company's revolving credit facility. Additional
borrowing capacity under revolving credit facility was $0.02 million at April 1,
2000. The $2.5 million note was paid off on April 18, 2000. As of April 28,
2000, the Company had $31.1 million outstanding and $7.9 million available under
its facility.
WEC Company is subject to a fee of .50% per annum applied to the amount of
unused borrowings available on the revolving credit facility. The revolving
credit facility expires on July 28, 2004. Interest on the revolving credit
facility is payable
10
<PAGE>
quarterly and is determined at the Company's option of either a specified bank
base rate plus margins ranging from .50% to 1.50%, or a Eurodollar rate plus
Eurodollar margins ranging from 1.50% to 2.50%. Letters of credit of $1.1
million were outstanding at April 1, 2000. All borrowings under the revolving
credit facility are guaranteed by the Company.
The Company's revolving loan is subject to restrictive financial
covenants, including a minimum interest coverage and fixed charge coverage
ratio, a maximum leverage ratio, and limitations on capital expenditures and
dividends.
The senior discount debentures (debentures) consist of the initial
issuance amount ($24,269) plus accretion through April 1, 2000 ($2,650). The
debentures accrete at a rate of 15%, compounded quarterly, to an aggregate
amount of $51,927 on July 15, 2004. There after, the debentures will accrue
interest at a rate of 15% per annum, payable in cash quarterly on January
15/th/, April 15/th/, July 15/th/, and October 15/th/ of each year, commencing
October 15, 2004.
Beginning July 15, 2004, the debentures may be redeemed at the
Company's option at 107.5% of the accreted value, declining 2.5% annually to
100% in July 2007. In addition, before July 15, 2002, the Company may at its
option redeem all of the outstanding debentures with the proceeds of equity
offerings, at a redemption price of 115% of the accreted value.
WEC pays interest semiannually on the senior notes (notes) at a rate
of 12%, commencing January 15, 2000. Beginning July 15, 2004, the notes may be
redeemed in whole or in part, at WEC's option at 106.0% of the principal amount,
declining 2.0% annually to 100% in July 2007. In addition, before July 15, 2002,
the Company may at its option on one or more occasions, redeem up to 35% of the
original principal amount of the notes with the proceeds of equity offerings
that exceed $50 million, at a redemption price of 112% of the principal amount.
Indentures for both the debentures and the senior notes limit the
ability of both Woods and WEC Company to incur additional indebtedness, pay
dividends, make investments, or sell assets.
The seller promissory note was issued in connection with an
acquisition. The note is payable in monthly installments of principal and
interest of $0.04 million, with the final payment due in July 2009, and bears
annual interest at 7.5%.
Included in other obligations are three noncompete agreements with key
members of the management of acquired entities. At April 1, 2000, the noncompete
agreements require total remaining payments of $1.0 million net of imputed
interest, over two-to three-year periods, and have been discounted to their net
present value using a rate of 9.0%
Substantially all assets of the Company are collateralized by the
above debt.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Woods is a leading manufacturer of attachments for a variety of
mowing, cutting and clearing, construction, material handling, landscaping and
grounds maintenance applications. During July 1999, Woods acquired TISCO,
Central Fabricators and the Alitec Attachments Division. As a result of the
acquisitions, Woods enhanced its position as one of the largest independent
attachment manufacturers in the United States, as well as, gained a new platform
in the replacement parts business for tractors.
Outlook
While we believe our revenue base is reasonably diversified by
industry, geographic region, application and end-user, any weakness in one or
more of our end markets can impact our revenue and profitability. In recent
months, our revenue growth has been aided by strength in certain segments of the
construction market, particularly with the growth of skid steers and excavators.
In addition, the grounds maintenance market is continuing to grow as 40
horsepower tractors increase in the first quarter of 2000 compared to first
quarter 1999.
Working Capital Requirements
Our accounts receivables significantly increases throughout the first
quarter of each year to allow dealers to accumulate inventory for sale during
the warmer months of the year. These dealer inventories are non-returnable to
Woods and invoiced upon shipment. Our net average borrowings under our revolving
credit facility for the twelve months ended April 1, 2000, was approximately
$10.3 million.
The acquisitions were accounted for using the purchase method of
accounting. As a result, the acquisitions will prospectively affect our results
of operations in certain significant respects. The aggregate acquisitions costs
(including the
11
<PAGE>
assumption of liabilities and estimated transaction expenses) of approximately
$77.8 million has been allocated to the tangible and intangible assets acquired
and liabilities assumed by us based on their respective fair values as of the
date of the acquisitions. The allocation of the purchase price, to the assets
acquired in the acquisitions, resulted in a significant increase in our annual
depreciation and amortization expense. In addition, due to the effects of the
increased borrowings of Woods to finance the acquisitions, our interest expense
has increased significantly.
Results of Operations
The following table sets forth for the periods indicated items from
the Condensed Consolidated Statements of Operations as a percentage of sales, as
well as, in thousands.
<TABLE>
<CAPTION>
Three Months Ended
April 1 April 3
2000 1999
------- -------
<S> <C> <C> <C> <C>
Net Sales $ 68,649 100.0% $ 41,960 100.0%
Cost of Sales 48,875 71.2% 30,410 72.5%
---------- ----------
Gross Profit 19,774 28.8% 11,550 27.5%
Operating expenses:
Selling 8,333 12.2% 3,620 8.6%
General and administrative 2,804 4.1% 1,985 4.7%
Special charges 38 0.0% 1,138 2.7%
Engineering 1,046 1.5% 866 2.1%
Management fee paid to affiliate 75 0.1% 75 0.2%
Amortization 1,315 1.9% 629 1.5%
Other operating income, net (4) 0.0% (1) 0.0%
---------- ----------
13,607 19.8% 8,312 19.8%
Operating income 6,167 9.0% 3,238 7.7%
Interest expense, including amortization of deferred
financing costs 5,840 8.5% 2,833 6.8%
---------- -----------
Income before tax provision 327 0.5% 405 0.9%
Income tax provision - 0.0% 371 0.9%
---------- -----------
Net income $ 327 0.5% $ 34 0.0%
========== ===========
</TABLE>
Three Months Ended April 1, 2000, Compared to Three Months Ended April 3,
1999.
Net sales for the three months ended April 1, 2000, ("first quarter")
were $68.6 million, an increase of $26.7 million or 63.6%, from $41.9 million in
the comparable quarter of 1999. The overall increase in net sales was primarily
attributable to the acquisitions of TISCO (acquired July 28, 1999), Central
Fabricators (acquired July 28, 1999), Alitec Attachments Division (acquired July
30, 1999) partially offset by a 2.8 % decline in Woods' core business, which the
Company defines as those businesses that the Company has owned for two years.
Net sales for each of the Company's segments (and the primary reasons for the
increase or decrease) were as follows, in thousands:
Segment 2000 1999 % Change
--------------------- ----- ---- --------
Grounds Maintenance $ 52,190 $ 33,082 57.8%
Construction 15,069 8,447 78.4%
Other 1,390 431 222.5%
------------ ------------
Total Net Sales $ 68,649 $ 41,960 63.6%
============ ============
12
<PAGE>
The 57.8% increase in the grounds maintenance segment was primarily due
to the acquisition of TISCO. Woods' core business in this segment increased by
approximately 3% or $1.0 million. The 78.4% increase in the construction
segment was due to the acquisition of Central Fabricators and Alitec Attachments
Division. Woods' core business in this segment decreased by approximately 23.7%,
or $2.0 million from the comparable period in the prior year. The decline in
Woods' core construction business is due to the loss of the John Deere OEM
business in May 1999, as a result of John Deere deciding to manufacture buckets
in Mexico versus outsourcing. The balance of Woods' core business was consistent
with the prior comparable period. The other category increased 222.5% from the
prior year due to a recovery in the upper plains states of the sugar beet market
as sugar prices have stabilized.
Gross profit as a percentage of net sales in the first quarter of 2000
was 28.8%, or $19.8 million compared to 27.5%, or $11.5 million, in the
comparable quarter of 1999. The improvement in gross margins is the result of
favorable product mix with sales of higher margin Alitec and Central Fabricators
products, coupled with realized cost reductions in our core manufacturing plants
of $0.7 million.
Operating expenses in the first quarter of 2000 were 19.8% of net sales
or $13.6 million compared to 19.8% or $8.3 million, in the comparable quarter of
1999. The increase in operating expenses is due to normal operating expenses
related to the newly acquired companies in 2000 of approximately $5.3 million,
and increased goodwill amortization expense of approximately $0.7 million.
Special charges of $0.04 million in 2000 relate to the closing of the Seguin,
Texas facility and special charges of $1.1 million in 1999 relate to the failed
acquisition of Alamo Group.
Interest expense was $5.8 million for the first quarter of 2000, an
increase of $3.0 million, or 93.3%, from $2.8 million in the prior year. The
increase is the result of additional interest costs relating to the increase in
debt attributable to the July 1999 acquisitions.
Operating income in the first quarter of 2000 was 9.0% of net sales or
$6.2 million compared to $3.2 million or 7.6% in the comparable quarter of 1999.
Liquidity and Capital Resources
Cash used in operating activities during the three months ended April 1,
2000, and the prior three months ended April 3, 1999, was $23.5 million and
$10.8 million, respectively. The use of cash in each period is due to the
seasonal working capital needs of the first quarter. Woods' working capital
requirements reach their seasonal peak during the first quarter due primarily to
increased accounts receivable.
Capital expenditures for the three months ended April 1, 2000, and April
3, 1999, were approximately $1.2 million in each period. Capital expenditures
for these periods were used to purchase additional equipment, tooling and
information technology upgrades. Woods intends to make capital expenditures of
$10.0 million in the remainder of 2000 primarily for capacity expansion at
certain facilities and information technology upgrades.
Woods' senior credit facility provides for a $40.0 million revolving line
of credit, which was fully drawn as of April 1, 2000. In March 2000, Woods
borrowed an additional $2.5 million under a supplemental credit agreement with
its principal lenders. These borrowings were repaid on April 18, 2000. At May 1,
2000, the outstanding balance the of revolving credit facility was $31.1
million. The senior credit facility matures on July 28, 2004. Interest on
revolving loans under the senior credit facility will bear interest at rates
based upon federal of Eurodollar rates plus an applicable margin. All borrowings
under the senior revolving credit facility are guaranteed by Woods and are
secured by substantially all of the assets of WEC.
Our senior credit facility and the indentures under which the senior
discount debentures and senior notes were issued contain numerous restrictive
covenants, including, among other things, covenants that limit the ability of
Woods and WEC, as the case may be, to borrow money, make capital expenditures,
use assets as security in other transactions, pay dividends, incur contingent
obligations, sell assets and enter into leases and transactions with affiliates.
In particular, under the senior credit facility and the senior notes indenture
WEC is restricted in its ability to pay dividends to Woods. Under the senior
credit facility, WEC is prohibited from paying any dividends to Woods except for
certain limited exceptions, one of which is the payment of dividends to Woods to
permit Woods to make regularly scheduled interest payments on any subordinated
indebtedness incurred by Woods that it was permitted to incur under the senior
credit facility, which includes the senior discount debentures. Similarly, the
senior notes indenture restricts WEC's ability to pay dividends to Woods to an
amount equal to 50% of WEC's cumulative consolidated net income from July 3,
1999, to the end of the most recent fiscal quarter ending prior to the payment
date. Notwithstanding the foregoing, the senior notes indenture provides that
WEC can make cash payments to Woods from and after October 15, 2004, to enable
Woods to make required interest payments on the debentures provided that, among
other things, WEC's consolidated coverage ratio after giving effect to such
payments exceeds 2.5 to 1. In addition, the senior credit facility requires WEC
to meet specified financial ratios and tests. In the event that we fail to
comply with the various
13
<PAGE>
covenants contained in our senior credit facility, we would be in default under
out senior credit facility, and, in any such case, the maturity of substantially
all of our long-term indebtedness could be accelerated.
Woods anticipates that its principal use of cash will be working
capital requirements, debt service requirements and capital expenditures. Based
upon current and anticipated levels of operations, Woods believes that its cash
flow from operations, together with amounts available under the senior revolving
credit facility, will be adequate to meet its anticipated requirements. Woods
cannot make any assurances that its business will continue to generate
sufficient cash flow from operations in the future to service its debt, and
Woods may be required to refinance all or a portion of its existing debt or to
obtain additional financing. These increased borrowings may result in higher
interest payments. In addition, there can be no assurance that any such
refinancing would be possible or that any additional financing could be
obtained. The inability to obtain additional financing could have a negative
impact on Woods business.
Seasonality
The markets within which Woods operates are somewhat seasonal with
peak use for Woods' products coming in the prime moving, landscaping and
construction season during the spring and summer months. Woods has sales
programs which provide certain quarterly and cash discount incentives to Woods'
dealers to encourage pre-season orders. As a result of these programs, demand
for Woods' products is fairly constant over the entire year. However, greater
than 60% of Woods' EBITDA is generated during the first half of the year, in
part due to the holiday season in the fourth calendar quarter. Woods' working
capital requirements reach their seasonal peak during the first quarter due
primarily to increased accounts receivable.
Inflation
Woods believes that inflation generally has not had a material impact
on its operations or liquidity for the periods disclosed.
Forward Looking Statements
This report includes forward-looking statements, which relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified in this report by the
use of terms and phrases such as "believes," "anticipates," "expects," "intends"
and similar terms and phrases, including references to assumptions.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Woods, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among other things, the
following:
(1) changes in general economic conditions in the United States;
(2) decreases in the current or planned levels of governmental
spending for infrastructure improvements;
(3) increased competition in the attachments and replacement parts
markets;
(4) continued consolidation among attachment dealers;
(5) our inability to successfully integrate the operations of newly
acquired companies as planned or achieve the anticipated cost
savings from such integration;
(6) our inability to successfully introduce continuous flow
manufacturing and total quality management techniques at the
acquired facilities;
(7) adverse weather conditions during the spring and summer months;
(8) our failure to develop or successfully introduce new products;
(9) changes in the regulatory environment;
(10) our inability to successfully complete acquisitions; and
14
<PAGE>
(11) various other factors beyond our control.
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks relating to changes in interest rates.
We do not enter into derivatives or other financial instruments for trading or
speculative purposes. We enter into financial instruments to manage and reduce
the impact of changes in interest rates. The counter parties are major financial
institutions.
We manage our interest rate risk by balancing the amount of our fixed
and variable debt. For fixed rate debt, interest rate changes affect the fair
market value of such debt but do not impact earnings or cash flows. Conversely
for variable rate debt, interest rate changes generally do not affect the fair
market value of such debt but do impact future earnings and cash flows, assuming
other factors are held constant. At April 1, 2000, we had fixed rate debt of
$161.8 million and variable rate debt of $41.5 million. Holding other variables
constant (such as foreign exchange rates and debt levels), a one percentage
point increase in interest rates would have decreased the unrealized fair market
value of the fixed rate debt at April 1, 2000 by approximately $13.0 million and
would be expected to have an estimated impact on pre-tax earnings and cash flows
for the next year of approximately $.1 million.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<PAGE>
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.
WOODS EQUIPMENT COMPANY
Registrant
Date: May 9, 2000 /s/ Thomas J. Laird
- --------------------------------------------------------------------------------
Thomas J. Laird
President and Chief Executive Officer
Date: May 9, 2000 /s/ D. Stephen Crider
- --------------------------------------------------------------------------------
D. Stephen Crider
Chief Financial Officer
16
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