| [X] | ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1999 |
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| [ ] | TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________. |
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49058 |
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Title of each class |
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes [X] | No [ ] |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock of Registrant held by non-affiliates as of March 20, 2000 was $2,667,552.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 20, 2000:
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Common Stock - $2 par value
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760,766 Shares |
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| Item 1. | Business. |
Hastings Manufacturing Company (the "Company") is a Michigan corporation organized in 1929 with its headquarters and U.S. manufacturing facilities in Hastings, Michigan.
The Company is primarily a manufacturer of piston rings for automotive and light duty truck applications for the replacement market. In addition, some of the Company's piston ring products are produced for original equipment applications. To a lesser extent, the Company packages and sells automotive mechanics' specialty tools and additives for engines, transmissions and cooling systems. Prior to October 4, 1999, the Company directly administered and sold those additives. Effective that day, the Company entered into a joint venture agreement for the marketing of those additive products worldwide. In addition, all of the Company's products are currently sold in Canada where they are produced and/or packaged and distributed by the Company's Canadian subsidiary, Hastings, Inc., located in Barrie, Ontario. Effective in early 1999, that facility became responsible for all specialty tool packaging and distribution throughout the Canadian, U.S. and other foreign markets reflecting the most efficient management of that product offering.
The Company distributes its replacement products through numerous auto parts jobbers and warehouse distributors in the U.S. and Canada. These products are also distributed nationally and internationally through numerous large-scale engine rebuilders and various retailer outlets. The Company now distributes the majority of its export sales on a country direct basis. Prior to early 1997, international sales had been primarily distributed through one U.S. based customer.
Fiscal 1997 was a critical year for the Company as it returned to profitability for the first full year period since 1994. The Company built upon that success through the 1998 fiscal year, fueled by added sales growth and a continued commitment to control its operating costs. The Company made several significant operating changes in its way of conducting business through that period. During 1997, for instance, the Company made substantial progress in expanding its overseas distribution channels on a country direct basis. By the close of 1997, the Company had contracted new distribution in Australia, South Africa, the Middle East, Israel, Puerto Rico, and South America. The maturity of several of those markets contributed to the overall sales gain that the Company achieved in 1998. Conversely, a softening in some of those markets in 1999 contributed to the net sales decline reported for 1999. Indications through early 2000 are favorable that those markets will approach their 1998 levels.
The manufacturing demands required to support the 1998 sales increase revealed certain operating constraints within the Company's manufacturing capabilities. As a result, the Company experienced a period of product shortages through the latter half of 1998. In response to those pressures, the Company began the implementation of lean manufacturing principles, including the conversion to a cellular approach for some manufacturing processes. (Lean manufacturing refers to a discipline of arranging the workflow in such a manner as to minimize or eliminate any waste of materials or labor.) This conversion is expected to result in production efficiencies through both reduced product lead times and capacity improvements. While this conversion process will continue through mid-2000, early results from this conversion are encouraging.
During 1999, the Company faced multiple challenges as it began the lean
manufacturing implementation. That conversion did not proceed without some
costs in time and efficiencies. Despite
Beginning in 1996, and carrying over to 1997, the Company made substantial strides in its quality and business control operations. The Company's commitment to these initiatives was rewarded with QS-9000 and ISO-9002 quality registrations in July 1997. In February 1999, following several successful follow-up audits, the Company was recommended for upgrade to ISO-9001, thus giving recognition to its product design capabilities.
The market for the Company's products is highly competitive. The Company has two principal competitors in the piston ring market. The principal methods of competition in the industry are price, service, product performance and product availability. The Company ranks among the three largest domestic producers of replacement piston rings.
Among the Company's trade names used in marketing its products are "Hastings" and "Flex-Vent," which are registered trademarks in the United States and many foreign countries. The "Casite" trademark, used by the Company in the past for its additives line, has been transferred to the joint venture described above for use in its operations. The Company also holds a number of patents and licenses. In the opinion of management, the Company's business generally is not dependent upon patent protections.
The Company ships orders to customers within a short period, ordinarily one week or less from the time orders are received. Accordingly, backlog is not significant in the Company's business and the Company does not keep separate figures of backlog. The Company's sales have limited seasonal fluctuations.
None of the practices of the Company or the industries in which it operates create any unusual working capital requirements that would be material to an understanding of the Company's business taken as a whole.
The Company's sales are made to many customers and are not dependent upon a single customer or a few customers. As stated in Note 11 to the Consolidated Financial Statements (included in Item 8), net sales to one customer (Chrysler Corporation), however, represented approximately $4,242,000, $3,874,000 and $3,180,000 of the Company's consolidated sales for 1999, 1998, and 1997 respectively.
Raw materials essential to the production of the Company's products are
standard items obtainable in the open market and are purchased from many
vendors. The Company maintains its own
Research and development are performed by the Company's engineering staff relating to improvements in products and production as well as the design and testing of new products. The Company's expenditures for research and development are not material.
The Company has no material governmental contracts.
Compliance with federal, state, and local environmental laws and regulations governing discharges into the environment is not expected to have a material effect upon the capital expenditures, earnings, or competitive position of the Company.
The Company and its subsidiaries have a total employment of 442 employees. Employee relations at all of the Company's plant locations are considered to be satisfactory.
While the Company maintains operations in Canada, there are no unusual risks attendant to the Company's foreign operations. The Company's products are sold worldwide. Financial information regarding the Company's geographic sales and long-lived assets is included in Note 11 to the Consolidated Financial Statements contained in Item 8 below.
| Item 2. | Properties. |
The general offices and manufacturing and distribution plant, which produces and distributes piston rings, are owned by the Company and are located at 325 North Hanover Street, Hastings, Michigan. This facility consists of approximately 260,000 square feet of production space, 154,000 square feet of available warehouse area, and 35,000 square feet of office area.
The Company's wholly owned Canadian subsidiary, Hastings, Inc., located in Barrie, Ontario, owns and operates manufacturing and warehouse facilities for piston rings, additives, and mechanics' specialty tools and for the distribution of products for other U.S. based suppliers into the Canadian market. This facility includes approximately 65,000 square feet of production and warehouse space and 4,000 square feet of office space.
As of year-end, production levels within the Company's Hastings, Michigan facility were near 70% of capacity.
| Item 3. | Legal Proceedings. |
As a result of the Company's amendment of its postretirement benefit plans,
as discussed in Note 6 to the Consolidated Financial Statements (included in
Item 8), the Company's retirees filed a class action lawsuit in the Western
District of Michigan on January 24, 2000, under the Employee Retirement Income
Security Act of 1974 (ERISA) and the Labor Management Relations Act of 1947
(LMRA). The suit alleges that the Company denied retirees and their dependents
certain health insurance benefits to which the retirees have "vested" rights
pursuant to the terms of the Company's collective bargaining agreements (1964
to the present). Specifically, the retiree class disputes the increase in their
health insurance deductibles, the elimination of their prescription drug card
and the requirement that they pay a portion of their health insurance premiums.
The Company has denied any wrongdoing in this suit, and intends to defend it
and any related class certification vigorously. However, because the lawsuit
is in
its very early stages, the Company's ultimate chances of success
are uncertain. If the retirees prevail, the Company anticipates that a requirement
to provide postretirement benefits at the pre-amendment level would have a material
adverse effect on the future financial position, results of operations and cash
flows of the Company. The case is scheduled for trial on June 18, 2001.
In the normal course of business, the Company is a named party in various environmental matters, as well as routine litigation incidental to its business. In the opinion of management, disposition of these items will not have a material impact on the results of operations or financial condition of the Company.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matter was submitted during the fourth quarter of 1999 to a vote of the Company's shareholders through the solicitation of proxies or otherwise.
| Item 5. | Market for the Registrant's Common Equity and Related Shareholder Matters. |
The Company's common stock is traded on the American Stock Exchange (ticker symbol HMF). On March 20, 2000, there were 760,766 outstanding shares and the approximate number of record shareholders was 271.
High and low sales prices and cash dividends, per quarter, are as set forth below. All results have been adjusted to reflect the two-for-one stock split as discussed in Note 8 to the Consolidated Financial Statements in Item 8 below.
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| First Quarter | $21 | $16 |
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$24-1/2 |
$19-7/8
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$.075
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| Second Quarter | 16-1/8 | 13 |
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24-3/4 |
22-3/4
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.08
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| Third Quarter | 13-5/8 | 11-13/16 |
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23 |
20-3/4
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.08
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| Fourth Quarter | 11-7/8 | 8 |
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20-3/4 |
16-1/2
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.08
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The Company expects to continue its policy of paying regular quarterly dividends, although this policy is dependent upon future earnings, capital requirements, and financial condition. In addition, cash dividends are restricted in accordance with the Company's loan agreements as described in Note 4 to the Consolidated Financial Statements included in Item 8 below. Unrestricted retained earnings under the agreements amounted to $2,529,014 at December 31, 1999.
The Company made no unregistered sales of any of its securities during
1999.
| Item 6. | Selected Financial Data. |
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| Net Sales |
$
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36,596,260
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$
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38,752,104
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$
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35,574,954
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$
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39,408,610
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$
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63,228,312
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| Net Income (Loss) |
326,770
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1,730,427
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955,233
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(884,843
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(3,023,180
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| Basic and Diluted | |||||||||||||||
| Earnings (Loss) per Share(1) |
.42
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2.24
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1.24
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(1.15
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(3.93
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| Long-Term Debt |
3,660,000
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4,620,000
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565,625
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2,028,125
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3,490,625
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| Total Assets |
35,662,817
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36,188,500
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33,390,331
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34,454,989
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37,547,568
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| Dividends per Share(1) |
.32
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.315
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.25
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.20
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.20
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| Average Shares Outstanding:(1) | |||||||||||||||
| Basic |
775,046
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771,496
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768,516
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768,516
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768,516
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| Diluted |
775,046
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772,694
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768,680
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768,516
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768,516
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(1) |
Average shares outstanding and the related per share results have been adjusted to reflect the two-for-one stock split discussed in Note 8 to the Consolidated Financial Statements included in Item 8 below. |
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(2) |
Reference is made to Note 7 to the Consolidated Financial Statements included in Item 8 below for disclosure of an uncertainty regarding the outcome of a lawsuit filed on January 24, 2000. |
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(3) |
The 1996 data includes non-recurring restructuring and relocation costs totaling $819,900. |
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(4) |
The 1995 data includes the effects of the sale of filter operations and the subsequent realignment of the organizational structure to a smaller size. |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
For the year ended December 31, 1999, the Company generated net income of $326,770 compared to net income of $1,730,427 in 1998. This decreased profitability was the result of various factors, each of which is more fully described below. These factors include a decrease in net sales in 1999 of 5.6%; a decrease in the gross profit margin, which was primarily impacted by non-recurring costs associated with the conversion and start-up of various production processes; and an increase in other expenses, which was driven by higher interest costs associated with the 1998 restructuring of long-term debt. These negative factors were offset slightly by a reduction in total operating expenses, reflecting the Company's continued efforts to control these expenses.
While, as discussed below, net sales, operating expenses and other expenses were relatively comparable between fourth quarter 1999 and 1998, fourth quarter 1999 cost of sales increased by $805,893, or 14.5%. The increase in cost of sales was primarily due to increased workers' compensation costs combined with an increase in cast iron costs. The cost of sales increase is the primary cause of the fourth quarter pre-tax loss of $38,010 compared to 1998 fourth quarter pre-tax income of $706,598, a change of $744,608. The 1999 fourth quarter net loss was $37,010 compared to net income of $531,598 for the comparable period in 1998.
As disclosed in Note 1 to the Consolidated Financial Statements, in October
1999 the Company formed a 50/50 joint venture company for the purpose of
expanding its additives offerings through both increased global market
penetration and an expansion of the product offerings under the "Casite"
name. The additional product offerings are expected to become available
in mid-2000. While the Company is optimistic regarding the future opportunities
relative to the expansion of the additives business, it is not expected
to have a significant impact on 2000 operations.
RESULTS OF OPERATIONS
NET SALES
1999 Compared to 1998
Net sales for 1999 decreased $2,155,844, or 5.6%, from $38,752,104 in 1998 to $36,596,260. The decrease in net sales primarily reflects a decline in the Company's export volume. The export volume was negatively affected by specific political and economic factors in the foreign countries where the Company conducts business, combined with the effects of realigning the distribution channel within one of the Company's major foreign markets. The net sales decrease also reflects slight reductions in volume in the Company's domestic aftermarket and private brand and original equipment markets, offset by a sales increase in the Canadian aftermarket.
Net sales were relatively flat in the fourth quarter of 1999 in comparison to the same period in 1998.
1998 Compared to 1997
Net sales for 1998 increased $3,177,150, or 8.9%, from 1997. The increase reflected growth in the Company's domestic aftermarket, private brand and export markets. Growth in the domestic aftermarket reflected the Company's increased focus on that aspect of the piston ring market. Growth in the private brand area was the result of increased volume to several major customers. The increase in the export area reflected the success of the on-going development of the Company's country direct export efforts.
COST OF SALES AND GROSS PROFIT
1999 Compared to 1998
Cost of sales for 1999 increased $341,351, or 1.3%, from $26,094,399 in
1998 to $26,435,750. This increase, along with the noted decrease in net
sales, resulted in a gross profit margin decrease to 27.8% in 1999 from
32.7% in 1998. The increase in cost of sales and decrease in the gross
profit margin are the result of several factors. During 1999, the Company's
cost of sales was negatively impacted by non-recurring costs associated
with the conversion and start-up of various production processes. As a
result of this conversion, productivity levels were not at their anticipated
needs. In order to cover these production deficiencies and further improve
production levels, additional labor and overhead costs were incurred throughout
1999. These additional costs were necessary in order to raise production
levels up to the point where customer order fill performance could be,
and was, improved in 1999. In addition, due to the tight labor market in
the local area, the Company experienced unplanned employee turnover in
1999, which also negatively affected the production efficiency issue. The
Company aggressively addressed these issues throughout 1999, and is now
focusing on further elevating its production capabilities as it continues
the implementation of lean manufacturing methods. Lean manufacturing refers
to a discipline of arranging the workflow in such a manner as to minimize
or eliminate any waste of materials or labor. The Company is likewise evaluating
the changes necessary to support and sustain an efficient workforce. These
issues had an effect on several of the individual production cost factors
for 1999. Material costs remained relatively unchanged from the prior year
average with increases in cast iron costs, primarily in the fourth quarter,
being offset by reductions in rolled steel costs. Labor costs increased
slightly as a result of the collective bargaining agreement, but
As previously noted, cost of sales for the fourth quarter of 1999 increased by $805,893, or 14.5%, over the fourth quarter of 1998. The increase was primarily due to an increase in workers' compensation costs combined with an increase in cast iron costs which, by being on the LIFO method of costing for raw materials inventory, were recognized currently in cost of sales. In spite of the increased fourth quarter cost of sales compared to the prior year, the gross profit margin generated in the fourth quarter (28.7%) was higher than the margin reported through the third quarter of 1999 (27.5%), reflecting the Company's initial success in aggressively addressing the above noted production issues.
1998 Compared to 1997
Cost of sales for 1998 increased $1,809,202, or 7.4%, from 1997. The increase in cost of sales reflected the corresponding increase in net sales. The gross profit margin increased to 32.7% in 1998 from 31.7% in 1997. This increase was primarily due to a decrease in certain raw material costs with overhead costs increasing at a rate lower than the sales increase, given the fixed nature of a large portion of those costs. These decreases were partially offset by increased labor costs. Labor costs increased in 1998 as a result of the collective bargaining agreement, additional overtime required to support increased customer demand and the Company's efforts to significantly reduce the cycle time from customer order to product shipment.
OPERATING EXPENSES
1999 Compared to 1998
Total operating expenses for 1999 decreased $396,444, or 4.2%, from $9,341,138 in 1998 to $8,944,694. Advertising expenses decreased $49,028, or 15.1%, from the 1998 total. This decrease reflects a reduction in advertising support costs in 1999, combined with the inclusion, in 1998, of a biannual customer service tips manual. Selling expenses increased $135,574, or 4.6%, from the 1998 total. This increase reflects increases in agent-based commissions, salesmen's travel and sales promotion costs, offset by a slight decrease in sales support costs. General and administrative expenses decreased $482,990, or 7.9%, from the 1998 total. This decrease is due to reductions in the provision for doubtful accounts receivable, as discussed below, and salaried personnel costs, offset by slight increases in various administrative support costs. The decrease also reflects the inclusion, in 1998, of approximately $50,000 of severance costs related to staffing reductions.
Fourth quarter 1999 operating expenses were 2.3% lower than the 1998 total
primarily due to increased 1999 agent-based commissions, sales bonuses
and workers' compensation costs, as
1998 Compared to 1997
Total operating expenses for 1998 increased $154,767, or 1.7%, from 1997. Advertising expenses decreased $47,911, or 12.8%, from the 1997 total. This decrease reflected the cost of a biannual product catalog expense in 1997, combined with minor 1998 reductions in cooperative advertising, printed material and various other advertising costs. These reductions were offset slightly by an increase in advertising support staff salaries and the inclusion of the biannual customer service tips manual in 1998. Selling expenses decreased $179,737, or 5.8%, from the 1997 total. This decrease was primarily due to a reduction in various sales personnel expenses, offset slightly by a sales driven increase in agency commissions. General and administrative expenses increased $382,415, or 6.7%, from the 1997 total. This increase was primarily due to an increase in the provision for doubtful accounts receivable, offset by a number of insignificant account decreases. The provision increase, which amounted to $422,500, related primarily to two customer accounts.
OTHER EXPENSES
1999 Compared to 1998
Other expenses, net for 1999 increased $106,906 over the 1998 net total. This increase primarily reflects the higher interest expense associated with the restructuring of the Company's long-term debt obligations in late August of 1998. Other expenses also reflects the 1998 interest income derived from the funds generated by the filter operations sale held in escrow through September 1998 and the 1999 gain on sale of obsolete plant equipment, which is included in the other, net expense.
Other expenses, net for the fourth quarters of 1999 and 1998 were comparable.
1998 Compared to 1997
Other expenses, net for 1998 increased by $5,987 over the 1997 total. Interest expense for 1998 was significantly impacted by the restructuring of the Company's short- and long-term debt obligations in late August of that year. Increased short-term borrowings through late August of 1998 reflected the increased working capital requirements as driven by the net sales increase. The restructuring of the short- and long-term debt resulted in increased long-term debt obligations which resulted in increased interest expense for the fourth quarter, and year end, of 1998. The interest income reflects the income derived from the escrowed filter sale funds.
TAXES ON INCOME
The impact of income taxes on the reported results of the Company is detailed
in Note 9 to the Consolidated Financial Statements. The 1999, 1998 and
1997 effective tax rates of 43.3%, 37.9% and 39.4%, respectively, are higher
than the statutory federal tax rate of 34.0% due primarily to the impact
of state income taxes and certain nondeductible expenses. The 1999 effective
tax rate was also affected by the increase in the valuation allowance related
to foreign tax credits that are expected to expire unutilized in 2000.
As of December 31, 1999, the Company recorded net deferred income tax assets of $6,979,345. The major components include the tax effect of net operating loss carryforwards of $1,392,619 and net accrued retirement and postretirement benefit obligations totaling $4,849,520. The realization of these recorded benefits is dependent upon the generation of future taxable income.
The net operating loss carryforwards fully expire in 2010, 2011, 2012 and 2019, if not previously utilized. Management has prepared projections of taxable income for future years indicating that the cumulative net operating loss is expected to be fully utilized by late 2001.
The Company further expects to be able to realize the deferred tax assets related to the retirement and postretirement benefit obligations as it pays these benefits. Such payments will constitute an expense that is deductible for tax reporting purposes over many future years. During each of the ten years prior to when the recent net operating loss carryforwards arose, the Company has been able to deduct these benefits for tax reporting purposes and reduce its tax liability accordingly. As a result of the 1997 plan amendment to the retiree medical plan as discussed in Note 6 to the Consolidated Financial Statements, current tax deductible payments are expected to exceed the annual expense recognition for financial reporting purposes, thus accelerating the absorption of the future periods' tax benefit.
Management believes that it is more likely than not that adequate levels of future income will be generated to absorb the net operating loss carryforwards, the deductible amounts related to the retirement and postretirement benefit obligations and the remaining net deductible temporary differences. In addition, based upon projected foreign source income, management believes that it is more likely than not that the foreign tax credits, net of the valuation allowance at December 31, 1999, will be utilized prior to their expiration.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements continue to be for operating expenses such as labor costs and raw materials, and for funding capital expenditures and long-term debt service. Historically, the Company's primary sources of cash have been from operations and from bank borrowings. Subsequent to December 31, 1999, the Company entered into an agreement with its primary lender to amend the terms of its short- and long-term debt obligations. The amendment increases the short-term line available to the Company from $3,000,000 to $3,500,000. The amendment also modifies the payment schedule of the Company's long-term debt obligation, and provides the primary lender with a security position in certain assets of the Company, as detailed in Note 12 to the Consolidated Financial Statements. As a result of this amendment, and based on an anticipated improvement in profitability, the Company expects to generate sufficient future funds from operations and bank borrowings to fund its growth and operating needs. Total short-term lines available to the Company as of December 31, 1999 totaled $5,200,000, of which $1,200,000 was unused. This increased to $5,700,000 and $1,700,000, respectively, with the amended loan agreement. In an effort to minimize its floating rate debt exposure, the Company is a party to an interest rate swap agreement essentially fixing the interest rate on that debt within a small range. The rate will fluctuate within 7.45% to 7.95% depending upon certain Company performance parameters. As of December 31, 1999, the "fixed" rate on those borrowings was 7.95%.
During 1999, the Company generated $1,112,546 of net cash from operating
activities. The realized net income and depreciation, combined with decreases
in accounts receivable, prepaid pension cost and deferred income taxes,
were partially offset by increases in inventories and decreases in accounts
payable and accruals and the postretirement benefit obligation. The decrease
in accounts receivable reflects the timing of customer sales and related
payment terms associated with those sales.
On February 10, 2000, the Company announced a common stock repurchase program. The program calls for the repurchase of up to 100,000 shares in the open market. The repurchased stock will be retired. On February 14, 2000, the Company repurchased 30,000 shares. Funds for the repurchase, amounting to approximately $231,000, were borrowed on the Company's short-term line of credit. The Company intends to purchase additional shares of its stock under this program throughout 2000, subject to acceptable levels of cash flows and favorable market conditions.
In late August 1998, the Company entered into a $6,600,000 long-term debt agreement with its primary lender. This new agreement allowed the Company to take advantage of favorable interest rate conditions. Borrowings under this new long-term debt agreement were used for several purposes including: raising the Company's defined benefit plans to funding levels that would alleviate the payment of the variable rate Pension Benefit Guaranty Corporation (PBGC) premiums; consolidating the remaining long-term debt obligations; and paying down certain short-term notes payable. As a result of this new agreement, the Company's short-term line with its primary lender was reduced from $5,000,000 to $3,000,000. (This amount has subsequently been raised to $3,500,000 per the amended short- and long-term debt agreement as described above).
During 1998, the Company used $1,192,259 of net cash for operating activities.
The realized net income, depreciation and decrease in deferred income taxes,
were offset by increases in accounts receivable, inventories, prepaid pension
cost and a decrease in the postretirement benefit obligation. The decline
in the deferred income tax asset was primarily the result of the additional
funding of the Company's defined benefit pension plans, and the partial
utilization of the net operating loss carryforwards. The increase in accounts
receivable and inventories reflect the additional working capital requirements
that were necessary to support the higher sales level. The increase in
the prepaid pension cost of $2,675,688 reflects the funding of the Company's
defined benefit plans to specified limits. As such, it did not have a direct
effect on operations during 1998. Excluding this item, net cash generated
from operating activities amounted to $1,483,429. The investing activities
for 1998 reflect the Company's commitment to enhancing its production capabilities
through the implementation of lean manufacturing principles. Investing
activities also reflect the September 1998 release of escrowed funds relating
to the 1995 sale of filter operations. These funds were subsequently used
to reduce short-term notes payable. Financing activities reflect the increased
reliance on short-term borrowings to help satisfy increased working capital
needs. Financing activities also reflect the proceeds from the new long-term
debt agreement and subsequent utilization of a portion of the proceeds
to pay down short- and long-term debt. Dividends paid increased in 1998
due to the improved operating results.
During 1997, the Company generated net cash of $2,129,643 from operating activities. The realized net income, depreciation and decrease in deferred income taxes were only partially countered by increases in accounts receivable and a reduction in the postretirement benefit obligation. The decline in the deferred income tax asset is the result of the partial utilization of the net operating loss carryforwards, while the postretirement benefit factor reflects, in part, the impact from the modification of the retiree health plan that was effective in April 1997. The majority of the Company's 1997 investing activities reflect capital equipment purchases that the Company utilized to enhance its production capabilities. The financing activities for 1997 reflect a modest decrease in reliance on short-term borrowings combined with the reduction of long-term debt levels through normally scheduled quarterly payments.
As noted throughout the above discussion, the Company is aggressively addressing the production issues that negatively affected its earnings in 1999. As the Company completes its move toward the adoption of a lean manufacturing environment, it should enhance its ability to further its growth and to generate sufficient cash flow to sustain this growth. The Company will continue to monitor its working capital needs in order to balance its cash and growth demands. At this time, the Company anticipates that operations (which will be subject to minimal current cash outflows for U.S. income taxes due to the utilization of the net operating loss carryforwards), in combination with the balancing of available short-term lines with operations, will generate cash flows that will be sufficient to funds its working capital, capital outlays and dividend requirements through 2000.
LITIGATION CONTINGENCY
As disclosed in Note 7 to the Consolidated Financial Statements, on January 24, 2000, the Company's retirees filed a class-action lawsuit against the Company as a result of the April 1997 amendment of the Company's postretirement benefit plans. The plans were amended principally to adjust the cost-sharing provisions. The suit alleges that the Company denied class retirees and their dependents certain health insurance benefits to which the retirees had a "vested" right pursuant to the terms of the Company's collective bargaining agreements (1964 to the present). The Company has denied any wrongdoing in this suit, and intends to defend it and any related class certification vigorously. However, due to the fact that this lawsuit is in its early stages, the Company's ultimate success in prevailing against the retirees' charges is uncertain at this time. If the retirees' position prevails, it is anticipated that a requirement to provide postretirement benefits at the pre-amendment level would have a material adverse effect on the future financial position, results of operations and cash flows of the Company. The case is scheduled for trial June 18, 2001.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
issued in June 1998, requires companies to recognize all derivative contracts
as either assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives contracts for speculative purposes. The Company does periodically enter into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate borrowings. However, the fair value of such derivatives are not significant. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001 to materially affect its consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE
The Company experienced no Y2K problems on or after January 1, 2000 and does not anticipate any future material problems related to Y2K. Incremental costs relating to the Company's Y2K readiness project, primarily consisting of expenses related to use of an outside consultant, approximated $120,000 through 1998 with $10,000, $80,000 and $30,000 charged to operating expenses as incurred in 1998, 1997 and 1996, respectively (none in 1999).
FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in this commentary include forward-looking statements that describe the Company's plans, objectives, goals, expectations or projections. These forward-looking statements are identifiable by words or phrases indicating that the Company or management "expects," "anticipates," "projects," "plans" or "believes" that a particular event "may occur" or "will likely occur" in the future, or similar statements. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this commentary, there are many important factors that could cause actual results to be materially different from the Company's current expectations.
Anticipated future sales are subject to competitive pressures from many sources. As an example, future sales could be affected by consolidation within the automotive replacement parts industry, whereby the Company could lose sales due to a competitor purchasing all of the assets of a current customer of the Company. Future sales could also be affected by current and future political and economic factors in the foreign markets where the Company conducts business.
Cost of sales and operating expenses may be adversely affected by unexpected costs associated with various issues. For example, future cost of sales could be affected by unexpected expenses related to the future maintenance of a lean manufacturing environment. Future operating expenses could also be affected, for example, by such items as unexpected large claims within the Company's self-funded group health insurance plan, increased retiree health insurance claim exposure as a result of an adverse court ruling on the current retiree health issue, or bad debt expenses related to deterioration in the credit worthiness of a customer.
The foregoing is intended to provide meaningful cautionary statements of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The foregoing should not be construed as an exhaustive list of all economic, competitive, governmental and technological factors that could adversely affect the Company's expected consolidated financial position, results of operations or liquidity. The Company disclaims any obligation to update its forward-looking statements to reflect subsequent events or circumstances.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company is exposed to potential market risks on interest rates relating to a swap agreement transacted with its primary lender in connection with its long-term debt agreement. Management believes that the fluctuation in interest rates in the near future will not have a material impact on its consolidated financial statements taken as a whole. The Company does not use derivative financial instruments for trading purposes.
| Item 8. | Financial Statements and Supplementary Data. |
| Consolidated Balance Sheets - | |||
| December 31, 1999 and 1998 |
15-16
|
||
| Consolidated Statements of Income - - | |||
| Years Ended December 31, 1999, 1998 and 1997 |
17
|
||
| Consolidated Statements of Stockholders' Equity - | |||
| Years Ended December 31, 1999, 1998 and 1997 |
18-19
|
||
| Consolidated Statements of Cash Flows - | |||
| Years Ended December 31, 1999, 1998 and 1997 |
20-21
|
||
| Notes to Consolidated Financial Statements |
22-37
|
||
| Report of Independent Certified Public Accountants |
38
|
|
|
|||||||
|
|
|
||||||
| Assets | |||||||
| Current Assets | |||||||
| Cash |
$ 1,011,630
|
$ 635,773
|
|||||
| Accounts receivable, less allowance for | |||||||
| possible losses of $230,000 and $210,000 | |||||||
| (Note 12) |
4,836,969
|
5,489,165
|
|||||
| Refundable income taxes |
30,000
|
-
|
|||||
| Inventories (Notes 2 and 12): | |||||||
| Finished products |
9,264,412
|
8,317,084
|
|||||
| Work in process |
456,960
|
660,534
|
|||||
| Raw materials |
1,727,445
|
1,620,604
|
|||||
| Prepaid expenses and other assets |
67,690
|
75,655
|
|||||
| Future income tax benefits (Note 9) |
2,124,962
|
2,395,856
|
|||||
| Total Current Assets |
19,520,068
|
19,194,671
|
|||||
| Property and Equipment | |||||||
| Land and improvements |
654,871
|
635,692
|
|||||
| Buildings |
5,369,345
|
5,275,207
|
|||||
| Machinery and equipment (Note 12) |
20,273,718
|
19,503,267
|
|||||
|
26,297,934
|
25,414,166
|
||||||
| Less accumulated depreciation |
17,762,201
|
16,411,078
|
|||||
| Net Property and Equipment |
8,535,733
|
9,003,088
|
|||||
| Prepaid Pension Asset (Notes 4 and 5) |
2,359,980
|
2,675,688
|
|||||
| Intangible Pension Asset (Note 5) |
376,632
|
564,949
|
|||||
| Future Income Tax Benefits (Note 9) |
4,854,383
|
4,719,637
|
|||||
| Other Assets |
16,021
|
30,467
|
|||||
|
$35,662,817
|
$36,188,500
|
||||||
|
|
|||||||
|
|
|
||||||
| Liabilities and Stockholders' Equity | |||||||
| Current Liabilities | |||||||
| Notes payable to banks (Notes 3 and 12) |
$ 4,000,000
|
$ 2,300,000
|
|||||
| Accounts payable |
1,727,611
|
1,536,612
|
|||||
| Accruals: | |||||||
| Compensation |
268,543
|
600,599
|
|||||
| Income taxes |
61,673
|
41,294
|
|||||
| Taxes other than income |
142,239
|
152,932
|
|||||
| Miscellaneous |
425,000
|
300,780
|
|||||
| Current portion of postretirement | |||||||
| benefit obligation (Notes 6 and 7) |
1,045,756
|
1,044,175
|
|||||
| Current maturities of long-term | |||||||
| debt (Notes 4 and 12) |
960,000
|
1,320,000
|
|||||
| Total Current Liabilities |
8,630,822
|
7,296,392
|
|||||
| Long-Term Debt, less current | |||||||
| maturities (Notes 4 and 12) |
3,660,000
|
4,620,000
|
|||||
| Pension and Deferred Compensation | |||||||
| Obligations, less current portion | |||||||
| (Note 5) |
2,394,036
|
2,604,111
|
|||||
| Postretirement Benefit Obligation, | |||||||
| less current portion (Notes 6 and 7) |
13,715,222
|
14,650,755
|
|||||
| Total Liabilities |
28,400,080
|
29,171,258
|
|||||
| Commitments and Contingencies | |||||||
| (Notes 4, 5, 6 and 7) | |||||||
| Stockholders' Equity (Notes 4, 5 and 8) | |||||||
| Preferred stock, $2 par value, | |||||||
| authorized and unissued 500,000 shares |
-
|
-
|
|||||
| Common stock, $2 par value, 1,750,000 | |||||||
| shares authorized; 790,766 and | |||||||
| 789,526 shares issued and | |||||||
| outstanding |
1,581,532
|
1,579,052
|
|||||
| Additional paid-in capital |
313,907
|
338,272
|
|||||
| Retained earnings |
7,347,532
|
7,273,410
|
|||||
| Accumulated other comprehensive income: | |||||||
| Cumulative foreign currency | |||||||
| translation adjustment |
(780,679
|
) |
(981,073
|
) | |||
| Pension liability adjustment | |||||||
| ($1,817,507 and $1,806,695, net of | |||||||
| tax of $617,952 and $614,276, | |||||||
| respectively) (Note 5) |
(1,199,555 |
) |
(1,192,419 |
) | |||
| Total accumulated other comprehensive | |||||||
| income |
(1,980,234
|
) |
(2,173,492
|
) | |||
| Total Stockholders' Equity |
7,262,737
|
7,017,242
|
|||||
|
$35,662,817
|
$36,188,500
|
||||||
|
|
|||||||
|
|
|
|
|||||
| Net Sales |
$36,596,260
|
$38,752,104
|
$35,574,954
|
||||||
| Cost of Sales |
26,435,750
|
26,094,399
|
24,285,197
|
||||||
| Gross profit |
10,160,510
|
12,657,705
|
11,289,757
|
||||||
| Operating Expenses | |||||||||
| Advertising |
276,042
|
325,070
|
372,981
|
||||||
| Selling |
3,076,052
|
2,940,478
|
3,120,215
|
||||||
| General and administrative |
5,592,600
|
6,075,590
|
5,693,175
|
||||||
|
8,944,694
|
9,341,138
|
9,186,371
|
|||||||
| Operating income |
1,215,816
|
3,316,567
|
2,103,386
|
||||||