<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 September 30, 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 October 18, 2000: 1,106,845
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Woods Equipment Company
Condensed Consolidated Balance Sheets
(In Thousands, Except Shares Information)
<TABLE>
<CAPTION>
September 30 January 1
2000 2000
(Unaudited)
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 8,483 $ -
Trade accounts receivable, less allowance of $413 40,601 38,698
and $448, respectively
Inventories, net 37,786 36,322
Deferred income taxes 3,166 3,166
Prepaid expenses and other current assets 1,637 1,654
-----------------------
Total current assets 91,673 79,840
Property, plant, and equipment:
Land 705 882
Buildings 10,364 11,328
Machinery and equipment 30,814 29,151
Office furniture, fixtures, and equipment 12,779 9,093
-----------------------
54,662 50,454
Less: accumulated depreciation 19,479 17,181
-----------------------
35,183 33,273
Excess cost over fair value of net assets acquired, less accumulated
amortization of $8,871 and $5,704, respectively. 73,943 76,552
Other assets, net 8,134 9,244
-----------------------
$208,933 $198,909
=======================
Liabilities and stockholders' deficit
Current liabilities:
Current maturities of long-term obligations $ 510 $ 529
Accounts payable 11,658 12,071
Accrued expenses 7,766 16,049
-----------------------
Total current liabilities 19,934 28,649
Long-term obligations, less current maturities 197,515 176,241
Deferred income taxes 3,166 3,166
Other long-term liabilities 62 62
Redeemable preferred stock and accrued dividends 54,352 51,141
Common stockholders' deficit:
Common stock, $.01 par value; authorized - 5,000,000 shares;
1,118,495 issued and 1,106,845 outstanding in 2000; 1,116,868 issued
and 1,105,869 outstanding in 1999 11 11
Additional paid-in capital 22,238 22,202
Retained earnings (accumulated deficit) (87,655) (81,792)
Treasury stock, at cost (11,650 shares in 2000, and 10,999 in 1999) (187) (177)
Notes receivable from stockholders (503) (594)
-----------------------
(66,096) (60,350)
-----------------------
$208,933 $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 Nine Months Ended
Sept 30 Oct 2 Sept 30 Oct 2
2000 1999 2000 1999
----------------- -------------------
<S> <C> <C> <C> <C>
Net sales $62,180 $49,274 $204,115 $135,071
Cost of sales 47,756 36,292 149,091 97,881
----------------- ------------------
Gross profit 14,424 12,982 55,024 37,190
Operating Expenses:
Selling 8,380 6,575 24,426 13,675
General and administrative 2,754 3,201 8,625 8,190
Special charges - - 38 -
Engineering 1,072 1,012 3,155 2,684
Management fee paid to affiliate 75 375 225 375
Amortization 1,279 1,112 3,880 2,382
Other operating income (loss), net 8 176 (193) 20
----------------- ------------------
13,568 12,451 40,156 27,326
----------------- ------------------
Operating income 856 531 14,868 9,864
Interest expense, including amortization
of deferred financing costs 5,844 4,685 17,592 10,269
----------------- ------------------
Loss before income taxes (4,988) (4,154) (2,724) (405)
Income tax provision (benefit) - (1,574) - 553
----------------- ------------------
Net loss before extraordinary item (4,988) (2,580) (2,724) (958)
Extraordinary loss: Early extinguishment
of debt (Net of tax benefit of $1,305) - 2,041 - 2,041
----------------- ------------------
Net loss $(4,988) $(4,621) $(2,724) $(2,999)
================= ==================
</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 (Accum- Receivable
Common Common Paid-in ulated 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 36 36
Payments by stockholders 91 91
Purchase of common stock (651) (10) (10)
Net loss (2,724) (2,724)
Preferred stock dividends accrued (3,139) (3,139)
-------------------------------------------------------------------------------------
Balance at September 30, 2000 1,106,845 $11 $22,238 $(87,655) $(187) $(503) $(66,096)
=====================================================================================
</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>
---------------------
Nine Months Ended
---------------------
Sept 30, Oct. 2,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before extraordinary items $ (2,724) $ (958)
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 3,091 3,110
Amortization 4,406 2,800
Noncash interest expense - Debenture accretion 3,151 -
Bad debt write-offs, net 85 21
Equity in loss/(income) of joint venture (138) 81
(Gain) loss on sale of property, plant and equipment 23 (17)
Changes in operating assets and liabilities; net of effects of acquisitions:
Trade accounts receivables (1,987) 1,799
Inventories (1,464) 624
Prepaid expenses and other assets (531) (2,024)
Accounts payable (413) 2,905
Accrued expenses (8,286) -
------- --------
Net cash (used in) provided by operating activities (4,787) 8,341
INVESTING ACTIVITIES
Acquisition of Tisco - (38,340)
Acquisition of Central Fabricators, net of cash acquired of $504 - (28,464)
Acquisition of Alitec, net of cash acquired of $18 - (10,862)
Purchases of property, plant and equipment (5,980) (4,760)
Proceeds from sale of property, plant and equipment 956 -
------- --------
Net cash used in investing activities (5,024) (82,426)
FINANCING ACTIVITIES
Payments for deferred financing costs - (5,417)
Proceeds from issuance of 12% senior notes - 130,000
Proceeds from issuance of 15% senior discount debentures - 24,269
Payments on old term loans and other notes (1,346) (85,199)
Proceeds from new revolver, net 19,450 8,250
Proceeds from sale of common stock 37 7,378
Proceeds from sale of preferred stock 103 18,649
Payment of promissory note to controlling stockholder (25,000)
Redemption of common stock (10) (33)
Redemption of preferred stock (31) (77)
Net change in notes receivable from stockholders 91 (87)
------- --------
Net cash provided by financing activities 18,294 72,733
------- --------
Net increase (decrease) in cash 8,483 (1,352)
Cash at beginning of period - 1,352
------- --------
Cash at end of period $ 8,483 $ -
======= ========
Supplemental cash flow information
Cash paid for interest $17,557 $ 7,351
Cash paid for (refunded) income taxes 157 (483)
</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 of excess cost over the fair value 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 purchase transactions were financed primarily from the sale of
$24,269 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 nine months ended, September
30, 2000, include the results of the acquisitions from their respective date of
acquisition. The following unaudited pro forma statements of operations data
for the nine months ended October 2, 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
fiscal 1999.
<TABLE>
<CAPTION>
Oct 2
1999
--------
<S> <C>
Net Sales $196,581
Operating Income 15,108
Net loss (2,483)
</TABLE>
6
<PAGE>
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 nine month periods ended September 30,
2000, and October 2, 1999, are not necessarily indicative of the results that
may be expected for the fiscal 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 $4.5 million, and $4.1 million for the
nine month periods ended September 30, 2000, and October 2, 1999, respectively.
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 (Original Equipment Manufacturers).
The Company distribution network includes dealers that have affiliations with
all of the principal OEMs of prime movers, such as CNH (Case/New Holland),
Deere, AGCO (manufacturer of the Massey Ferguson 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 and
nine-month periods ended September 30, 2000 and October 2, 1999, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ --------------------
Sept 30 Oct 2 Sept 30 Oct 2
Net sales 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Grounds maintenance $46,025 $37,218 $152,314 $102,167
Construction 14,125 11,250 46,930 29,001
Other 2,030 806 4,871 3,903
------------------ --------------------
Total net sales $62,180 $49,274 $204,115 $135,071
================== ====================
Operating income
Grounds maintenance $ 1,953 $ 2,960 $ 18,082 $14,070
Construction (616) 521 1,703 3,160
Other 203 77 487 371
Corporate (684) (3,027) (5,404) (7,737)
------------------ --------------------
Total operating income 856 531 14,868 9,864
Interest expense 5,844 4,685 17,592 10,269
------------------ --------------------
Loss before income taxes $(4,988) $(4,154) $ (2,724) $ (405)
================== ====================
</TABLE>
<TABLE>
<CAPTION>
Sept 30 Jan 1
2000 2000
---- ----
<S> <C> <C>
Assets
Grounds maintenance $ 99,173 $ 86,216
Construction 21,157 19,758
Other 1,341 1,442
Corporate 87,262 91,493
--------------------
Total assets $208,933 $198,909
====================
</TABLE>
The investment in joint venture is included in the other segment for all
years presented.
<TABLE>
<CAPTION>
Sept 30 Oct 2
2000 1999
---- ----
<S> <C> <C>
Additions to long-lived assets
Grounds maintenance $4,833 $3,682
Construction 1,123 1,013
Corporate 24 65
---------------
Total additions to long-lived assets $5,980 $4,760
===============
</TABLE>
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:
<TABLE>
<CAPTION>
Sept 30 January 1
2000 2000
-------- ---------
<S> <C> <C>
Raw Materials $ 6,971 $ 6,642
Work in Process 3,002 3,036
Finished goods 29,256 28,078
-------- --------
Total inventories at FIFO $ 39,220 $ 37,756
LIFO adjustment (1,434) (1,434)
-------- --------
Total inventories at LIFO $ 37,786 $ 36,322
======== ========
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
Sept 30 January 1
2000 2000
-------- ---------
<S> <C> <C>
Salaries, wages and employee benefits $ 1,869 $ 5,179
Interest 3,280 6,725
Product warranty 916 849
Restructuring costs 278 690
Property, payroll, and other taxes 403 200
Contingent consideration 39 1,134
Other 981 1,272
-------- --------
$ 7,766 $ 16,049
======== ========
</TABLE>
6. WEC Company Condensed Financial Information
Summary balance sheet information for WEC Company is as follows:
<TABLE>
<CAPTION>
Sept 30 January 1
2000 2000
-------- --------
<S> <C> <C>
Current assets $ 91,673 $ 79,840
Non current assets 117,260 119,069
-------- --------
Total assets $208,933 $198,909
======== ========
Current liabilities 19,934 28,649
Non current liabilities 171,693 153,570
-------- --------
Total liabilities $191,627 $182,219
======== ========
</TABLE>
9
<PAGE>
Summary results of operations for WEC Company is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
30-Sep Oct 2 Sept 30 Oct 2
2000 1999 2000 1999
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 62,180 $ 49,274 $ 204,155 $ 135,071
Gross profit 14,424 12,982 55,024 37,190
Operating income 856 531 14,865 9,864
Income (loss) before income taxes (3,896) (3,466) 424 283
Net income (loss) $ (3,896) $ (3,466) $ 424 $ (2,311)
</TABLE>
WEC Company, a wholly owned subsidiary of Woods Equipment Company, issued
$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:
<TABLE>
<CAPTION>
Sept 30 January 1
Rates 2000 2000
---------------------------------------------
<S> <C> <C> <C>
Revolver bank loan 10.25% to 11.00% $ 34,450 $ 15,000
Senior discount debentures 15.00% 29,050 25,899
Senior notes 12.00% 130,000 130,000
Seller promissory note 7.50% 3,684 4,705
Other obligations 7.50% to 9.00% 841 1,166
-------- --------
198,025 176,770
-------- --------
Less: Current maturities 510 529
-------- --------
Total long-term obligations $197,515 $176,241
======== ========
</TABLE>
Total borrowings under the revolving credit facility are not to exceed
$40.0 million, as permitted under the terms of the Company's revolving credit
facility. As of September 30, 2000, the Company had $34.4 million outstanding,
or $25.9 million (net) and $4.0 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 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 $1.6 million were outstanding at September 30, 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 September 30, 2000. 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 15th, April 15th,
July 15th, and October 15th of each year, commencing October 15, 2004.
10
<PAGE>
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 September 30, 2000, the
noncompete agreements require total remaining payments of $0.9 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.
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 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.
Outlook
During the last three months, we have experienced a significant decline in
demand for our attachments used with excavators and tractor loader backhoes. In
addition, during this same period we have experienced manufacturing cost
increases in areas of labor and material utilization. We anticipate that our
results for the fourth quarter of 2000 will continue to be negatively impacted
by these trends. As a result, we expect that our operating results for the
fourth quarter will be significantly below those reported in the comparable
period of 1999.
In response to these conditions, we have undertaken a plan to restructure
certain of our operations. The details of our restructuring plan are still being
developed, but are likely to include headcount reductions, and other operating
changes. We expect to implement the restructuring plan in the fourth quarter
and, in connection therewith, expect to record a one-time charge related
thereto. The specific amount of the charge is not determinable at this time.
11
<PAGE>
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>
Sept 30 Oct 2 Sept 30 Oct 2
2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 62,180 100.0% $ 49,274 100.0% $204,115 100.0% $135,071 100.0%
Cost of Sales 47,756 76.8% 36,292 73.7% 149,091 73.0% 97,881 72.5%
-------- -------- -------- --------
Gross Profit 14,424 23.2% 12,982 26.3% 55,024 27.0% 37,190 27.5%
Operating expenses:
Selling 8,380 13.5% 6,575 13.3% 24,426 12.0% 13,675 10.1%
General and administrative 2,754 4.4% 3,201 8.8% 8,625 4.2% 8,190 6.1%
Special charges - 0.0% - 0.0% 38 0.0% - 0.0%
Engineering 1,072 1.7% 1,012 2.1% 3,155 1.5% 2,684 2.0%
Management fee paid to affiliate 75 0.1% 375 0.8% 225 0.1% 375 0.3%
Amortization 1,279 2.1% 1,112 2.3% 3,880 1.9% 2,382 1.8%
Other operating income, net 8 0.0% 176 0.4% (193) (0.1%) 20 0.0%
-------- -------- -------- --------
Total Operating Expenses 13,568 21.8% 12,451 25.3% 40,156 21.8% 27,326 25.3%
-------- -------- -------- --------
Operating income 856 1.4% 531 1.1% 14,868 1.4% 9,864 1.1%
Interest expense, including
amortization of deferred
financing costs 5,844 9.4% 4,685 9.5% 17,592 8.6% 10,269 7.6%
-------- -------- -------- --------
Loss before tax provision (4,988) (8.0%) (4,154) (8.4%) (2,724) (8.0%) (405) (8.4%)
Income tax provision/(benefit) - 0.0% 1,574 (2.6%) - 0.0% 553 (2.6%)
-------- -------- -------- --------
Net loss before extraordinary $ (4,988) (8.0%) $ (2,580) (5.8%) $ (2,724) (8.0%) $ (958) (5.8%)
item
Early extinguishment of debt - 0.0% 2,041 (4.1%) - 0.0% 2,041 (4.1%)
-------- -------- -------- --------
Net loss (4,988) (8.0%) (4,621) (10.0%) (2,724) (8.0%) (2,999) (10.0%)
======== ======= ======== ========
</TABLE>
Three Months Ended September 30, 2000, Compared to Three Months Ended
October 2, 1999.
Net sales for the three months ended September 30, 2000, ("third quarter")
were $62.2 million, an increase of $12.9 million or 26.2%, from $49.3 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), and Alitec Attachments Division (acquired
July 30, 1999). Woods' core business, which the Company defines as those
businesses that the Company has owned for two years, increased during the third
quarter $3.2 million or 9.2%. Net sales for each of the Company's segments (and
the primary reasons for the increase or decrease) were as follows, in thousands:
<TABLE>
<CAPTION>
Segment 2000 1999 % Change
------- -------- -------- --------
<S> <C> <C> <C>
Grounds Maintenance $ 46,025 $ 37,218 23.7%
Construction 14,125 11,250 25.6%
Other 2,030 806 151.9%
-------- --------
Total Net Sales $ 62,180 $ 49,274 26.2%
======== ========
</TABLE>
The 23.7% increase in the grounds maintenance segment was driven by
increases in the core business of approximately 19.3% or $4.2 million. This
increase was due primarily to increased sales of batwings, backhoes and zero-
turn radius mowers. The acquisition of TISCO was responsible for the balance of
the increase in the grounds maintenance segment. The 25.6% increase in the
construction segment was due to the acquisitions of Central Fabricators and
Alitec
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<PAGE>
Attachments Division. Woods' core business in this segment decreased by
approximately 14.0% or $0.9 million, from the comparable period in the prior
year. This decrease was due primarily to the related 10% to 15% decline in the
market demand for tractor loader backhoes. The other category increased 151.9%
or $1.2 million from the prior year same period due to the impact of including
the shredder product line into the annual order period, whereas in past years
the shredder product line had a separate program in fourth quarter.
Gross profit as a percentage of sales in the third quarter was 23.2% or
$14.4 million, compared to 26.3%, or $13.0 million, in the comparable quarter of
1999. The decline in gross margin percent is the result of increased costs at
the LaMirada, California, Gardner, Massachusetts, and Schofield, Wisconsin,
facilities where training costs associated with new employees exceeded $1.0
million in material and labor inefficiencies. The additional decline in margins
is due to unfavorable product mix where sales of lower margin items such as
commercial mid-mount zero-turn radius mowers and skid steer augers increased in
2000 versus the comparable period in the prior year.
Operating expenses for the third quarter were 21.8%, or $13.6 million,
compared to 25.8%, or $12.5 million , in the comparable quarter of 1999. The
increase in operating expenses is due to normal operating expenses related to
the July 1999 acquisitions and wage inflation of approximately 4%. These
increases were offset by cost reductions due to successful execution of "day 1"
synergies.
Operating income in the third quarter was $0.9 million, or 1.4% of net
sales, compared to $0.5 million, or 1.1% of net sales, in the comparable quarter
of 1999.
Interest expense was $5.8 million for the third quarter of 2000, an
increase of $3.1 million, or 23.4%, from $4.7 million in the prior year
comparable quarter. The increase is the result of additional interest costs
relating to the increase in debt attributable to the July 1999 acquisitions.
Nine Months Ended September 30, 2000, compared to Nine Months Ended October 2,
1999.
Net sales for the nine months ended September 30, 2000, were $152.3
million, an increase of $50.1 million or 49.1%, from $102.2 million in the
comparable period 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), and Alitec Attachments Division (acquired
July 30, 1999). Woods' core business, which the Company defines as those
businesses that the Company has owned for two years, increased $4.0 million or
3.1%. 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 $152,314 $102,167 49.1%
Construction 46,930 29,001 61.8%
Other 4,871 3,903 24.8%
-------- --------
Total Net Sales $204,115 $135,071 51.1%
======== ========
The 49.1% increase in the grounds maintenance segment was driven by
increases in the core business of approximately 8.4 % or $8.6 million. This
increase was due primarily to increased sales of batwings, backhoes and zero-
turn radius mowers. The acquisition of TISCO was responsible for the balance of
the increase in the grounds maintenance segment. The 61.8% increase in the
construction segment was due to the acquisitions of Central Fabricators and
Alitec Attachments Division. Woods' core business in this segment decreased by
approximately 20.1% or $4.2 million, from the comparable period in the prior
year, as sales of tractor loader backhoe declined 15% to 20% during this period.
The other category increased 51.7% or $1.0 million from the prior year same
period due to an increase in shredder sales.
Gross profit as a percentage of sales for the nine month period ended
September 30, 2000 were 27.0% or $55.0 million, compared to 27.5%, or $37.2
million, in the comparable period of 1999. The decline in gross margin percent
is the result of increased costs at the LaMirada, Gardner and Schofield
facilities where training costs associated with new employees exceeded $1.0
million in material and labor inefficiencies. The additional decline in margins
is due to unfavorable product mix where sales of lower margin items such as
commercial mid-mount zero-turn radius mowers and skid steer augers increased in
2000 versus the comparable period in the prior year.
Operating expenses for the nine month period ended September 30, 2000 were
19.7%, or $40.2 million, compared to 20.2%, or $23.7 million , in the comparable
period of 1999. The increase in operating expenses is due to normal operating
expenses related to the July 1999 acquisitions and wage inflation of
approximately 4%. These increases were offset by cost reductions due to
successful execution of "day 1" synergies.
13
<PAGE>
Operating income for the nine month period ended September 30, 2000, was
$14.9 million, or 7.3% of net sales, compared to $9.9 million, or 7.3% of net
sales, in the comparable quarter of 1999.
Interest expense was $17.6 million for the nine month period ended
September 30, 2000, an increase of $7.3 million, or 70.9%, from $10.3 million in
the prior year comparable period. The increase is the result of additional
interest costs relating to the increase in debt attributable to the July 1999
acquisitions.
Liquidity and Capital Resources
Cash used in operating activities during the nine months ended September
30, 2000, was $4.8 million and cash provided by operations for the prior nine
months ended October 2, 1999, was $8.3 million. The use of cash in 2000 is due
to the increase in working capital the first nine months, coupled with the
additional interest costs.
Capital expenditures for the nine months ended September 30, 2000, and
October 2, 1999, were approximately $6.0 and $4.8 million, respectively. Capital
expenditures for these periods were used to purchase additional equipment,
tooling and information technology upgrades. Woods intends to make capital
expenditures of $1.5 million in the remainder of 2000 primarily for capacity
expansion at our Brownsburg, Indiana facility.
Woods' senior credit facility provides for a $40.0 million revolving line
of credit, which had $34.4 million drawn as of September 30, 2000, with cash on
hand of $8.5 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.
The senior credit facility requires Woods to meet on a quarterly basis
certain financial tests, including, without limitation, a maximum leverage
ratio, a minimum interest coverage ratio and a minimum fixed charge coverage
ratio. A failure on the part of Woods to comply with such covenants is an
immediate default thereunder. Due to Woods' recent operating results being below
previous expectations, Woods has been required to obtain waivers from its
lenders for its last two completed quarters with respect to its failure to meet
all of the ratios described above.
Based upon available information, Woods expects that it will need a similar
waiver for the fourth quarter. Woods is currently in discussions with its senior
lenders regarding such a waiver. In addition, in connection with such waiver,
Woods intends to seek to have the covenant levels for fiscal 2001 adjusted to
reflect its current operating levels. No assurance can be given that Woods will
obtain this waiver. If Woods does not receive this waiver, it would be in
default under the senior credit facility as of December 31, 2000 if at that time
it is not otherwise in compliance with such covenants. A default under the
senior credit facility could lead to, among other things, an acceleration of the
maturity of substantially all of Woods' long-term indebtedness.
The 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.
On November 2, 2000, Woods entered into a $10.0 million wholesale and
retail financing agreement with Equipment Dealer Credit Company ("EDCO") which
will provide Woods with an additional $7.0 million of liquidity. The agreement
enable Woods to transfer accounts with dating greater than 30 days to EDCO for
100% of the invoice amount, net of applicable cash discounts. This arrangement
will enable Woods to reduce its working capital borrowings during the peak
seasonal months of March and April. Under the agreement, Woods remains liable
for the greater of 30% of the outstanding invoices sold to EDCC or $0.5 million.
Woods' senior lenders have consented to this financing arrangement.
14
<PAGE>
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 and the EDCO agreement, will be adequate to meet its anticipated
requirements over the next twelve months. Woods liquidity position would be
materially adversely affected if it were unable to borrow under its senior
credit facility. In addition, 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 required capital expenditures, 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;
15
<PAGE>
(10) our inability to successfully complete acquisitions; and
(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 September 30, 2000, we had fixed rate debt
of $163.1 million and variable rate debt of $34.4 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 September 30, 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 $0.1 million.
Part II. OTHER INFORMATION
Item 5. On Monday, October 30, 2000. Mr. Crider, Vice-President and Chief
Financial Officer, resigned his position with Woods. Mr. Crider's last
day of employment is November 17, 2000. In the interim, Tatum CFO
partners, LLP has been retained to provide guidance on all financial
matters. A search for a permanent replacement is currently underway.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) On September 1, 2000, Woods filed a Form 8-K, announcing the
dismissal of Ernst & Young LLP ("E & Y"), the principal accountant
previously engaged to audit the Company's financial statements. At the
same time, the Board approved the engagement of PricewaterhouseCooper
LLP ("PWC") as the principal accountant to audit the Company's
financial statements. Furthermore, during the Company's most recent
fiscal years and the subsequent period, there were no disagreements
with E & Y on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of the former
accountant, would have caused it to make reference to the subject
matter of the disagreement in connection with its reports. For
additional information, please see 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.
WOODS EQUIPMENT COMPANY
Registrant
Date: November 14 , 2000 /s/ Thomas J. Laird
--------------------------------------------------------------------
Thomas J. Laird
President and Chief Executive Officer
Date: November 14 , 2000 /s/ D. Stephen Crider
--------------------------------------------------------------------
D. Stephen Crider
Chief Financial Officer
16
