<PAGE>
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 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 July 28, 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>
July 1 January 1
2000 2000
(Unaudited)
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 2,237 $ -
Trade accounts receivable, less allowance of $415 and $448 50,431 38,698
Inventories, net 36,968 36,322
Deferred income taxes 3,166 3,166
Prepaid expenses and other current assets 1,746 1,654
--------------------------------
Total current assets 94,548 79,840
Property, plant, and equipment:
Land 705 882
Buildings 11,971 11,328
Machinery and equipment 29,442 29,151
Office furniture, fixtures, and equipment 9,873 9,093
--------------------------------
51,991 50,454
Less: accumulated depreciation 18,455 17,181
--------------------------------
33,536 33,273
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $7,779, and $5,704 respectively 74,706 76,552
Other assets, net 8,552 9,244
--------------------------------
$211,342 $198,909
================================
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term obligations $ 510 $ 529
Accounts payable 12,818 12,071
Accrued expenses 12,634 16,049
--------------------------------
Total current liabilities 25,962 28,649
Long-term obligations, less current maturities 188,908 176,241
Deferred income taxes 3,166 3,166
Other long-term liabilities 62 62
Redeemable preferred stock and accrued dividends 53,253 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 22,228 22,202
Retained earnings (accumulated deficit) (81,598) (81,792)
Treasury stock, at cost (11,650 shares in 2000, and 10,999 in 1999) (187) (177)
Notes receivable from stockholders (463) (594)
--------------------------------
(60,009) (60,350)
--------------------------------
$211,342 $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 Six Months Ended
-------------------- --------------------
July 1 July 3 July 1 July 3
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 73,286 $ 43,837 $141,935 $ 85,797
Cost of sales 52,460 31,178 101,335 61,588
-------- -------- -------- --------
Gross profit 20,826 12,659 40,600 24,209
Operating Expenses:
Selling 7,713 3,480 16,046 7,100
General and administrative 3,070 1,867 5,874 3,852
Special charges -- -- 38 1,138
Engineering 1,037 806 2,083 1,672
Management fee paid to affiliate 75 (75) 150 --
Amortization 1,286 640 2,601 1,269
Other operating income, net (197) (154) (201) (155)
-------- -------- -------- --------
12,984 6,564 26,591 14,876
-------- -------- -------- --------
Operating income 7,842 6,095 $ 14,009 9,333
Interest expense, including amortization
of deferred financing costs 5,908 2,752 $ 11,748 5,585
-------- -------- -------- --------
Income before tax provision 1,934 3,343 2,261 3,748
Income tax provision -- 1,455 -- 1,826
-------- -------- -------- --------
Net income $ 1,934 $ 1,888 $ 2,261 $ 1,922
======== ======== ======== ========
</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 131 131
Purchase of common stock (651) (10) (10)
Net income 2,261 2,261
Preferred stock dividends accrued (2,067) (2,067)
--------- --- ------- -------- ----- ----- --------
Balance at July 1, 2000 1,106,845 $11 $22,228 $(81,598) $(187) $(463) $(60,009)
========= === ======= ======== ===== ===== ========
</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>
Six Months Ended
--------------------
July 1 July 3
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,261 $ 1,922
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 2,066 1,997
Amortization 2,951 1,548
Noncash interest expense - Debenture accretion 2,059 --
Bad debt write-offs, net 85 19
Equity in earnings of joint venture (149) (101)
(Gain) loss on sale of property, plant and equipment 23 (20)
Changes in operating assets and liabilities; net of effects
of acquisitions:
Trade accounts receivables (11,818) (5,595)
Inventories (646) 2,852
Prepaid expenses and other assets (355) 74
Accounts payable 747 2,948
Accrued expenses (3,415) --
-------- --------
Net cash (used in) provided by operating activities (6,191) 5,644
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,308) (2,620)
Proceeds from sale of property, plant and equipment 956 --
-------- --------
Net cash used in investing activities (2,352) (2,620)
FINANCING ACTIVITIES
Payments on old term loans and other notes (1,210) (573)
Proceeds from new revolver, net 11,800 (3,750)
Proceeds from sale of common stock 26 40
Proceeds from sale of preferred stock 74 --
Redemption of common stock (10) (67)
Redemption of preferred stock (31) (29)
Net change in notes receivable from stockholders 131 3
-------- --------
Net cash provided by financing activities 10,780 (4,376)
-------- --------
Net increase (decrease) in cash 2,237 (1,352)
Cash at beginning of period -- 1,352
-------- --------
Cash at end of period $ 2,237 $ --
======== ========
Supplemental cash flow information
Cash paid for interest $ 8,931 $ 3,909
Cash paid for income taxes 86 (481)
</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 six months ended, July 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 six months ended July 1, 2000, and July 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.
July 1 July 3
2000 1999
-------- --------
Net Sales $141,935 $137,066
Operating Income 14,009 13,258
Net Income 2,261 1,239
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 six month periods ended July 1, 2000,
and July 3, 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 $2.9 million for each of the six month
periods ended July 1, 2000, and July 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 and
six-month periods ended July 1, 2000 and July 3, 1999, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- -----------------------------
July 1 July 3 July 1 July 3
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Net sales ---- ---- ---- ----
Grounds maintenance $54,099 $31,867 $106,289 $64,949
Construction 17,736 9,304 32,805 17,751
Other 1,451 2,666 2,841 3,097
-------------------------------- -----------------------------
Total net sales $73,286 $43,837 $141,935 $85,797
=============================== =============================
Operating income
Grounds maintenance $ 8,625 $ 5,030 $ 16,129 $11,110
Construction 1,330 1,097 2,319 2,639
Other 152 269 284 295
Corporate (2,265) (301) (4,723) (4,711)
-------------------------------- -----------------------------
Total operating income 7,842 6,095 14,009 9,333
Interest expense 5,908 2,752 11,748 5,585
-------------------------------- -----------------------------
Income before income taxes $ 1,934 $ 3,343 $ 2,261 $ 3,748
=============================== =============================
</TABLE>
July 1 January 1
2000 2000
---- ----
Assets
Grounds maintenance $100,097 $ 86,216
Construction 21,328 19,758
Other 1,446 1,442
Corporate 88,471 91,493
------------------------
Total assets $211,342 $198,909
========================
The investment in joint venture is included in the other segment for all years
presented.
July 1 July 3
2000 1999
------ ------
Additions to long-lived assets
Grounds maintenance $2,760 $2,178
Construction 529 304
Corporate 19 138
------------------------
Total additions to long-lived assets $3,308 $2,620
========================
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>
July 1 January 1
2000 2000
-------- ---------
<S> <C> <C>
Raw Materials $ 7,644 $ 6,642
Work in Process 2,971 3,036
Finished goods 27,786 28,078
-------------------
Total inventories at FIFO $38,401 $37,756
LIFO adjustment (1,433) (1,434)
-------------------
Total inventories at LIFO $36,968 $36,322
====================
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
July 1 January 1
2000 2000
---------------------
<S> <C> <C>
Salaries, wages and employee benefits $ 3,249 $ 5,179
Interest 7,242 6,725
Warranty 874 849
Restructuring costs 65 690
Property, payroll, and other taxes 271 200
Contingent consideration - 1,134
Other 933 1,272
-------------------
$12,634 $16,049
===================
</TABLE>
6. WEC Company Condensed Financial Information
Summary balance sheet information for WEC Company is as follows:
<TABLE>
<CAPTION>
July 1 January 1
2000 2000
-------- ---------
<S> <C> <C>
Current assets $ 94,548 $ 79,840
Non current assets 116,794 119,069
--------------------
Total assets $211,342 $198,909
====================
Current liabilities 25,962 28,649
Non current liabilities 164,178 153,570
--------------------
Total liabilities $190,140 $182,219
====================
</TABLE>
9
<PAGE>
Summary results of operations for WEC Company is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 1 July 3 July 1 July 3
2000 1999 2000 1999
------- ------- --------- --------
<S> <C> <C> <C> <C>
Net Sales $73,286 $43,837 $141,935 $85,797
Gross profit 20,826 12,659 40,600 24,209
Operating income 7,842 6,095 14,009 9,333
Income before tax provision 2,973 3,343 4,320 3,748
Net income $ 2,973 $ 1,888 $ 4,320 $ 1,922
</TABLE>
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:
<TABLE>
<CAPTION>
July 1 January 1
Rates 2000 2000
-------------------------------------------------------------
<S> <C> <C> <C>
Revolver 10.25% to 11.00% $ 26,800 $ 15,000
Senior discount debentures 15.00% 27,958 25,899
Senior notes 12.00% 130,000 130,000
Seller promissory note 7.50% 3,719 4,705
Other obligations 7.50% to 9.00% 941 1,166
---------------------------------------
189,418 176,770
---------------------------------------
Less: Current maturities 510 529
---------------------------------------
Total long-term obligations $188,908 $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 July 1, 2000, the Company had $26.8 million outstanding and
$11.6 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
10
<PAGE>
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 July 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 July 1, 2000 ($3,689). 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.
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 July 1, 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
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 road construction projects.
However, excavators and tractor loader backhoes demand has declined during the
first six months of 2000, compared to the first six month of 1999. The grounds
maintenance market is continuing to grow as 40 horsepower tractors experienced a
double-digit increase in the first six months of 2000 compared to first six
months of 1999.
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>
Three Months Ended Six Months Ended
July 1 July 3 July 1 July 3
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $73,286 100.0% $43,837 100.0% $141,935 100.0% $85,797 100.0%
Cost of Sales 52,460 71.6% 31,178 71.1% 101,335 71.4% 61,588 71.8%
------- ------- -------- -------
Gross Profit 20,826 28.4% 12,659 28.9% 40,600 28.6% 24,209 28.2%
Operating expenses:
Selling 7,713 10.5% 3,480 7.9% 16,046 11.3% 7,100 8.3%
General and administrative 3,070 4.2% 1,867 4.3% 5,874 4.1% 3,852 4.5%
Special charges - 0.0% - 0.0% 38 0.0% 1,138 1.3%
Engineering 1,037 1.4% 806 1.8% 2,083 1.5% 1,672 1.9%
Management fee paid to
affiliate 75 0.1% (75) (0.2%) 150 0.1% - 0.0%
Amortization 1,286 1.8% 640 1.5% 2,601 1.8% 1,269 1.5%
Other operating income, net (197) (0.3%) (154) (0.4%) (201) (0.1%) (155) (0.2%)
------- ------- -------- -------
12,984 17.7% 6,564 15.0% 26,591 18.7% 14,876 17.3%
Operating income 7,842 10.7% 6,095 13.9% 14,009 9.9% 9,333 10.9%
Interest expense, including
amortization of deferred
financing costs 5,908 8.1% 2,752 6.3% 11,748 8.3% 5,585 6.5%
------- ------- -------- -------
Income before tax provision 1,934 2.6% 3,343 7.6% 2,261 1.6% 3,748 4.4%
Income tax provision - 0.0% 1,455 3.3% - 0.0% 1,826 2.1%
------- ------- -------- -------
Net income $ 1,934 2.6% $ 1,888 4.3% $ 2,261 1.6% $ 1,922 2.2%
======= ======= ======== =======
</TABLE>
Three Months Ended July 1, 2000, Compared to Three Months Ended July 3, 1999.
Net sales for the three months ended July 1, 2000, ("second quarter")
were $73.3 million, an increase of $29.5 million or 67.4%, from $43.8 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). Woods' core business, which the Company defines as those businesses
that the Company has owned for two years, was flat with prior year during the
second quarter. Net sales for each of the Company's segments (and the primary
reasons for the increase or decrease) were as follows, in thousands:
<TABLE>
Segment 2000 1999 % Change
-------------- ---- ---- --------
<S> <C> <C> <C>
Grounds Maintenance $54,099 $31,867 69.8%
Construction 17,736 9,304 90.6%
Other 1,451 2,666 -45.6%
------- -------
Total Net Sales $73,286 $43,837 67.4%
======= =======
</TABLE>
The 69.8% increase in the grounds maintenance segment was primarily due to
the acquisition of TISCO. Woods' core business in this segment increased by
approximately 9.6% or $3.4 million (due primarily to increased sales of
batwings, backhoes and landscape rakes and blades). The 90.6% 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. This decrease is due primarily to a decline in construction bucket sales,
as a result of an OEM customer deciding to manufacture buckets internally. The
balance of Woods' core construction business was consistent with the prior
comparable period. The other category decreased -45.6% or $1.2 million, from the
prior year same period due to the timing of shipments between first quarter and
second quarter.
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<PAGE>
Gross profit as a percentage of net sales in the second quarter of 2000 was
28.4%, or $20.8 million, compared to 28.9%, or $12.7 million, in the comparable
quarter of 1999. The decline in gross margin percent is the result of increased
costs associated with the production of Central Fabricators (Schofield, WI)
excavator buckets and Alitec (Brownsburg, IN) skid steer attachments for
Caterpillar. Each of these factories are near capacity and the Company is
utilizing other manufacturing facilities to meet demand until we install
additional production equipment and implement continuous flow manufacturing at
Schofield and Brownsburg in the second half of 2000.
Operating expenses in the second quarter of 2000 were 17.7% of net sales,
or $13.0 million, compared to 15.0%, or $6.6 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 $6.8 million,
and increased goodwill amortization expense of approximately $0.7 million. The
increases were offset by a $0.9 million reduction due to successful
implementation of "day 1" synergies.
Operating income in the second quarter of 2000 was $7.8 million, or 10.7%
of net sales, compared to $6.1 million, or 13.9% of net sales, in the comparable
quarter of 1999.
Interest expense was $5.9 million for the second quarter of 2000, an
increase of $3.1 million, or 90.2%, 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.
Six Months Ended July 1, 2000, compared to Six Months Ended July 3, 1999.
Net sales for the six months ended July 1, 2000, ("first half") were $141.9
million, an increase of $56.1 million or 65.4%, from $85.8 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). Net sales for each of the Company's segments (and the primary reasons
for the increase or decrease) were as follows, in thousands:
<TABLE>
Segment 2000 1999 % Change
------------ ---- ---- --------
<S> <C> <C> <C>
Grounds Maintenance $106,289 $64,949 63.6%
Construction 32,805 17,751 84.8%
Other 2,841 3,097 -8.2%
-------- -------
Total Net Sales $141,935 $85,797 65.4%
======== =======
</TABLE>
The 63.6% increase in the grounds maintenance segment was primarily due to
the acquisition of TISCO. Woods' core business in this segment increased by
approximately 6.4% or $4.4 million. The 84.8% 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 23.4%,
or $3.3 million from the comparable period in the prior year. This decline is
due primarily to a decline in construction bucket sales as a result of an OEM
customer deciding to manufacture buckets internally. The balance of Woods' core
construction business was flat with the prior comparable period. The other
category decreased 8.2%, or $0.3, million from the prior year due to the
stabilization in the upper plains states of the sugar beet market.
Gross profit as a percentage of net sales in the first half of 2000 was
28.6%, or $40.6 million compared to 28.2%, or $24.2 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, partially offset by increased costs in our construction manufacturing
locations.
Operating expenses in the first half of 2000 were 18.7% of net sales, or
$26.6 million, compared to 17.3% or $14.9 million, in the comparable quarter of
1999. The increase in operating expenses is primarily due to normal operating
expenses related to the newly acquired companies in 2000 of approximately $11.2
million, and increased goodwill amortization expense of approximately $1.4
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 $11.7 million for the first half of 2000, an
increase of $6.1 million, or 108.9%, from $5.6 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.
13
<PAGE>
Operating income in the first half of 2000 was $14.0 million, or 9.9% of
net sales, compared to $9.3 million, or 10.9% of net sales in the comparable
period of 1999.
Liquidity and Capital Resources
Cash used in operating activities during the six months ended July 1, 2000,
was $6.2 million and cash provided by operations for the prior six months ended
July 3, 1999, was $5.6 million. The use of cash in 2000 is due to the seasonal
working capital needs of the first six months, coupled with the additional
interest cost. 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 July 1, 2000, and July 3,
1999, were approximately $3.3 and $2.6 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 $8.7 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 had $26.8 million drawn as of July 1, 2000. 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 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 covenants contained in our senior credit facility, we
would be in default under our 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 through
the end of 2000. Based upon our current projections, we anticipate additional
financing requirements of approximately $10 million to satisfy our peak working
capital needs due to pre-season dealer accounts receivables increases during
the first quarter of 2001. Woods is currently exploring possible funding
sources for this additional working capital. Woods cannot make any assurances
that it will be successful in obtaining such financing. To the extent that
Woods is not successful in obtaining such additional financing, its capital
expenditures could be constrained longer term. 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.
14
<PAGE>
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
(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 July 1, 2000, we had fixed rate debt of
$162.1 million and variable rate debt of $26.8 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 July 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.
15
<PAGE>
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.
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: August 9, 2000
--------------------------------------------------------------------------------
Thomas J. Laird
President and Chief Executive Officer
Date: August 9, 2000
--------------------------------------------------------------------------------
D. Stephen Crider
Chief Financial Officer
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