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 Quarter Ended |
Commission File Number |
HASTINGS MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
|
Michigan |
38-0633740 |
|
325 North Hanover Street |
|
Registrant's telephone number, including area code: 269-945-2491
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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
|
|
Outstanding at |
|
Common stock, $2 par value |
761,726 shares |
Hastings Manufacturing Company and Subsidiaries
Contents
|
Part I - Financial Information |
||||
|
Page |
||||
|
Item 1 - Financial Statements: |
||||
|
Report on Review by Independent Certified Public Accountants |
3 |
|||
|
Condensed Consolidated Balance Sheets - |
||||
|
June 30, 2002 and December 31, 2001 |
4-5 |
|||
|
Condensed Consolidated Statements of Income - |
||||
|
Three Months and Six Months Ended June 30, 2002 and 2001 |
6 |
|||
|
Condensed Consolidated Statements of Cash Flows - |
||||
|
Six Months Ended June 30, 2002 and 2001 |
7 |
|||
|
Notes to Condensed Consolidated Financial Statements |
8-10 |
|||
|
Review by Independent Certified Public Accountants |
11 |
|||
|
Item 2 - Management's Discussion and Analysis of Financial |
||||
|
Condition and Results of Operations |
12-19 |
|||
|
Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
19 |
|||
|
Part II - Other Information |
||||
|
Item 1 - Legal Proceedings |
20 |
|||
|
Item 4 - Submission of Matters to a Vote of Security Holders |
20 |
|||
|
Item 6 - Exhibits and Reports on Form 8-K |
21-22 |
|||
Report on Review by Independent Certified Public Accountants
Board of Directors
Hastings Manufacturing Company
Hastings, Michigan
We have reviewed the accompanying condensed consolidated balance sheets of Hastings Manufacturing Company and subsidiaries as of June 30, 2002, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2002 and 2001, and cash flows for the six-month periods ended June 30, 2002 and 2001, included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended June 30, 2002. These condensed consolidated financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
As described in Note 5, on January 24, 2000, a class action lawsuit was filed against the Company by its retirees with respect to the 1997 amendment of the Company's postretirement benefit plans. The outcome of the lawsuit is pending at this time.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein). In our report dated March 1, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
July 24, 2002
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
|
June 30, |
|
December 31, |
||
|
Current Assets |
||||||
|
Cash |
$ |
434,471 |
$ |
578,695 |
||
|
Accounts receivable, less allowance |
|
|
||||
|
Refundable income taxes |
46,404 |
6,562 |
||||
|
Inventories: |
||||||
|
Finished products |
7,770,111 |
7,674,158 |
||||
|
Work in process |
481,562 |
510,156 |
||||
|
Raw materials |
1,745,363 |
1,214,020 |
||||
|
Prepaid expenses and other assets |
116,447 |
173,316 |
||||
|
Future income tax benefits |
|
1,338,146 |
|
1,746,146 |
||
|
Total Current Assets |
|
18,801,533 |
|
17,102,534 |
||
|
Property and Equipment |
||||||
|
Land and improvements |
619,291 |
605,442 |
||||
|
Buildings |
5,411,159 |
5,260,541 |
||||
|
Machinery and equipment |
|
21,719,914 |
|
21,534,183 |
||
|
27,750,364 |
27,400,166 |
|||||
|
Less accumulated depreciation |
|
21,103,584 |
|
20,407,093 |
||
|
Net Property and Equipment |
|
6,646,780 |
|
6,993,073 |
||
|
Prepaid Pension Asset |
2,169,196 |
2,264,446 |
||||
|
Future Income Tax Benefits |
5,559,429 |
5,576,186 |
||||
|
Other Assets |
|
144,194 |
|
134,731 |
||
|
$ |
33,321,132 |
$ |
32,070,970 |
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
|
Liabilities and Stockholders' Equity |
|
June 30, |
|
December 31, |
||
|
Current Liabilities |
||||||
|
Notes payable to banks (Note 2) |
$ |
3,600,000 |
$ |
3,700,000 |
||
|
Accounts payable |
2,821,796 |
1,537,500 |
||||
|
Accruals: |
||||||
|
Compensation |
594,598 |
439,008 |
||||
|
Income taxes |
73,635 |
10,000 |
||||
|
Taxes other than income |
229,129 |
147,420 |
||||
|
Miscellaneous |
103,622 |
248,632 |
||||
|
Current portion of postretirement benefit obligation |
959,431 |
959,431 |
||||
|
Current maturities of long-term debt (Note 2) |
|
800,000 |
|
3,060,000 |
||
|
Total Current Liabilities |
9,182,211 |
10,101,991 |
||||
|
Long-Term Debt, less current maturities (Note 2) |
1,535,000 |
-- |
||||
|
Pension and Deferred Compensation Obligations, less current portion |
5,091,124 |
5,109,851 |
||||
|
Postretirement Benefit Obligation, less current portion |
|
11,789,925 |
|
11,942,100 |
||
|
Other Liabilities |
-- |
59,740 |
||||
|
Total Liabilities |
|
27,598,260 |
|
27,213,682 |
||
|
Contingency (Note 5) |
||||||
|
Stockholders' Equity |
||||||
|
Preferred stock, $2 par value, authorized and |
|
|
||||
|
Common stock, $2 par value, 1,750,000 shares authorized; |
|
|
||||
|
Additional paid-in capital |
217,757 |
217,757 |
||||
|
Retained earnings |
8,240,365 |
7,544,670 |
||||
|
Accumulated other comprehensive income (Note 4): |
||||||
|
Cumulative foreign currency translation adjustment |
(948,276 |
) |
(1,100,093 |
) |
||
|
Derivative adjustment |
(21,356 |
) |
(39,428 |
) |
||
|
Pension liability adjustment |
|
(3,289,070 |
) |
|
(3,289,070 |
) |
|
Total accumulated other comprehensive income |
|
(4,258,702 |
) |
|
(4,428,591 |
) |
|
Total Stockholders' Equity |
|
5,722,872 |
|
4,857,288 |
||
|
$ |
33,321,132 |
$ |
32,070,970 |
See accompanying independent accountants' review report and notes to condensed consolidated financial statements.
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Income
|
Three months ended |
Six months ended |
|||||||||||
|
June 30, |
2002 |
2001 |
2002 |
2001 |
||||||||
|
Net Sales |
$ |
9,891,351 |
$ |
9,912,120 |
$ |
19,223,180 |
$ |
18,567,017 |
||||
|
Cost of Sales |
|
6,680,920 |
|
6,722,492 |
|
13,060,221 |
|
12,889,347 |
||||
|
Gross profit |
|
3,210,431 |
|
3,189,628 |
|
6,162,959 |
|
5,677,670 |
||||
|
Operating Expenses |
||||||||||||
|
Advertising |
51,138 |
44,551 |
109,327 |
105,034 |
||||||||
|
Selling |
754,944 |
814,977 |
1,511,228 |
1,603,867 |
||||||||
|
General and administrative |
|
1,660,826 |
|
1,365,242 |
|
3,184,227 |
|
2,778,472 |
||||
|
|
2,466,908 |
|
2,224,770 |
|
4,804,782 |
|
4,487,373 |
|||||
|
Operating income |
|
743,523 |
|
964,858 |
|
1,358,177 |
|
1,190,297 |
||||
|
Other Expense (Income) |
||||||||||||
|
Interest expense |
95,443 |
182,147 |
208,769 |
352,645 |
||||||||
|
Other, net |
|
(13,972 |
) |
|
2,600 |
|
(10,287 |
) |
|
(56,080 |
) |
|
|
|
81,471 |
|
184,747 |
|
198,482 |
|
296,565 |
|||||
|
Income before income tax expense |
662,052 |
780,111 |
1,159,695 |
893,732 |
||||||||
|
Income Tax Expense |
|
262,000 |
|
330,000 |
|
464,000 |
|
376,000 |
||||
|
Net Income |
$ |
400,052 |
$ |
450,111 |
$ |
695,695 |
$ |
517,732 |
||||
|
Basic Earnings Per Share of |
|
|
|
|
||||||||
|
Diluted Earnings Per Share of |
|
|
|
|
||||||||
See accompanying independent accountants' review report and notes to condensed consolidated financial statements.
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
Six months ended June 30, |
|
2002 |
|
2001 |
||
|
Operating Activities |
||||||
|
Net income |
$ |
695,695 |
$ |
517,732 |
||
|
Adjustments to reconcile net income to net cash from |
||||||
|
operating activities: |
||||||
|
Depreciation |
683,061 |
725,451 |
||||
|
Deferred income taxes |
408,000 |
260,000 |
||||
|
Change in postretirement benefit obligation |
(152,175 |
) |
(250,659 |
) |
||
|
Changes in operating assets and liabilities: |
||||||
|
Accounts receivable |
(1,623,247 |
) |
(849,367 |
) |
||
|
Refundable income taxes |
(38,227 |
) |
65,121 |
|||
|
Inventories |
(526,726 |
) |
1,181,335 |
|||
|
Prepaid expenses and other current assets |
57,477 |
26,782 |
||||
|
Other assets |
85,787 |
43,453 |
||||
|
Accounts payable and accruals |
|
1,363,384 |
|
(93,721 |
) |
|
|
Net cash from operating activities |
|
953,029 |
|
1,626,127 |
||
|
Investing Activities |
||||||
|
Capital expenditures |
(346,734 |
) |
(354,216 |
) |
||
|
Proceeds from sale of property and equipment |
|
59,228 |
|
-- |
||
|
Net cash for investing activities |
|
(287,506 |
) |
|
(354,216 |
) |
|
Financing Activities |
||||||
|
Proceeds from issuance of notes payable to banks |
4,000,000 |
3,100,000 |
||||
|
Principal payments on notes payable to banks |
(4,100,000 |
) |
(4,050,000 |
) |
||
|
Principal payments on long-term debt |
|
(725,000 |
) |
|
(200,000 |
) |
|
Net cash for financing activities |
|
(825,000 |
) |
|
(1,150,000 |
) |
|
Effect of Exchange Rate Changes on Cash |
|
15,253 |
|
(3,341 |
) |
|
|
Net Increase (Decrease) in Cash |
(144,224 |
) |
118,570 |
|||
|
Cash, beginning of period |
|
578,695 |
|
593,763 |
||
|
Cash, end of period |
$ |
434,471 |
$ |
712,333 |
||
|
Supplemental Disclosures of Cash Flow Information |
||||||
|
Cash paid during the period for: |
||||||
|
Interest |
$ |
201,118 |
$ |
553,783 |
||
|
Income taxes, net of refunds |
38,134 |
46,544 |
See accompanying independent accountants' review report and notes to condensed consolidated financial statements.
Hastings Manufacturing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
In the opinion of the management of Hastings Manufacturing Company and subsidiaries (the "Company"), the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position as of June 30, 2002, and the results of operations for the three months and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001.
The results of operations for the six months ended June 30, 2002 are not necessarily indicative of the expected results for all of 2002.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated.
The accompanying consolidated financial statements are condensed and do not contain all of the information and footnote disclosures required by generally accepted accounting principles in a complete set of financial statements.
In accordance with Emerging Issues Task Force (EITF) 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, the Company records co-op advertising as a reduction of net sales. In previous years, co-op advertising expenditures were included in advertising costs. For the three months and six months ended June 30, 2001, $14,564 and $64,029, respectively, have been reclassified to reduce net sales and advertising costs over the amounts previously reported to conform with the current year presentation.
Note 2 - Short-Term and Long-Term Debt
In late May 2002, the Company's loan agreement with its primary lender relating to its short-term and long-term borrowings was amended. The changes to the loan agreement are summarized as follows: (1) an increase in the short-term line to $4,250,000 from $4,000,000, (2) a revision of the maturity date on the short-term line from May 30, 2002 to May 31, 2003, (3) a revision of the maturity date and payment terms on the outstanding long-term portion of the loan, as described in detail below, (4) authorization to pay dividends in an amount not to exceed $250,000 in any twelve-month period, (5) an increase in the capital expenditure limitation to $750,000 per year from $600,000, and (6) a change to one of the restrictive covenants contained in the agreement. As noted above, a revision was made to the maturity date and payment terms on the Company's outstanding long-term loan balance ($2,535,000) as of the amendment date. Under the terms of the amendment, the maturity date of the long-term debt was extended from May 30, 2002 to May 31, 2005, with required quarterly payments of $200,000 plus interest, and a final payment of $135,000 plus interest on the maturity date of the loan.
Interest for both the short-term and long-term borrowings is based on three different pricing options: a negotiated rate, a Eurodollar rate plus a factor, and a floating rate (greater of the federal funds rate plus/less a factor or the prime rate less a factor). The effective Eurodollar rate on the short-term line is increased by a margin rate ranging from 2.25% to 2.50%. The effective floating rate on the short-term line is the prime rate less a margin rate of .125% to .25%. The effective Eurodollar rate on the long-term borrowings is increased by a margin rate ranging from 2.35% to 2.65%. The effective floating rate on the long-term borrowings is
the prime rate, or the prime rate less .125%. All of the above margin rates are based upon certain Company performance parameters.
Note 3 - Earnings Per Share
A reconciliation of the numerators and denominators used in the "basic" and "diluted" earnings per share (EPS) calculations follows:
|
Three months ended |
Six months ended |
|||||||||||
|
June 30, |
|
2002 |
|
2001 |
|
2002 |
|
2001 |
||||
|
Numerator: |
||||||||||||
|
Net income used for both basic and diluted |
|
|
|
|
|
|
|
|
||||
|
Denominator: |
||||||||||||
|
Weighted average shares outstanding |
|
|
|
|
||||||||
|
Dilutive effect of stock options and contingently |
|
|
|
|
|
|
|
|
||||
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
||||
Note 4 - Comprehensive Income
Comprehensive income and its components consist of the following:
|
Three months ended |
Six months ended |
|||||||||||
|
June 30, |
|
2002 |
|
2001 |
|
2002 |
|
2001 |
||||
|
Net income |
$ |
400,052 |
$ |
450,111 |
$ |
695,695 |
$ |
517,732 |
||||
|
Other comprehensive income, net of tax: |
||||||||||||
|
Foreign currency translation adjustments |
158,346 |
121,733 |
151,817 |
(38,646 |
) |
|||||||
|
Derivative adjustment |
3,963 |
74 |
18,072 |
(30,827 |
) |
|||||||
|
Minimum pension liability adjustment |
|
-- |
|
-- |
|
-- |
|
-- |
||||
|
Other comprehensive income (loss) |
|
162,309 |
|
121,807 |
|
169,889 |
|
(69,473 |
) |
|||
|
Comprehensive income |
$ |
562,361 |
$ |
571,918 |
$ |
865,584 |
$ |
448,259 |
||||
The above $3,963 and $ 18,072 other comprehensive income, net of tax related to the derivative adjustment for the three months and six months ended June 30, 2002, are made up of the following components:
|
Three months ended |
Six months ended |
|||||||||||
|
June 30, 2002 |
|
Before Tax |
|
Net of Tax |
|
Before Tax |
|
Net of Tax |
||||
|
Change in fair value of derivative |
$ |
(10,452 |
) |
$ |
(6,898 |
) |
$ |
(8,411 |
) |
$ |
(5,551 |
) |
|
Reclassification adjustment to expense |
|
16,456 |
|
10,861 |
|
35,793 |
|
23,623 |
||||
|
Other comprehensive income |
$ |
6,004 |
$ |
3,963 |
$ |
27,382 |
$ |
18,072 |
||||
The above $74 and $(30,827) other comprehensive income (loss), net of tax related to the derivative adjustment for the three months and six months ended June 30, 2001, are made up of the following components:
|
Three months ended |
Six months ended |
|||||||||||
|
June 30, 2001 |
|
Before Tax |
|
Net of Tax |
|
Before Tax |
|
Net of Tax |
||||
|
Cumulative effect of a change in accounting |
||||||||||||
|
principle, as of January 1, 2001 |
$ |
-- |
$ |
-- |
$ |
(6,569 |
) |
$ |
(4,336 |
) |
||
|
Change in fair value of derivative |
(7,752 |
) |
(5,116 |
) |
(43,931 |
) |
(28,994 |
) |
||||
|
Reclassification adjustment to expense |
|
7,864 |
|
5,190 |
|
3,792 |
|
2,503 |
||||
|
Other comprehensive income (loss) |
$ |
112 |
$ |
74 |
$ |
(46,708 |
) |
$ |
(30,827 |
) |
||
Note 5 - Contingency
In April 1997, the Company announced the amendment of its postretirement health benefit plans, principally to adjust the cost-sharing provisions. As a result of these changes, the Company's retirees filed a class-action suit in the United States District Court for the Western District of Michigan on January 24, 2000. 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. Specifically, the retirees dispute the increase in their health insurance deductibles, the increase in required co-pay obligations with respect to their prescription drug cards, and the requirement that they pay a portion of their health insurance premiums. The Company has denied any wrongdoing in this suit, and has defended it vigorously. Minimal discovery has taken place in this lawsuit because the parties have been attempting to reach a settlement. Re cently, the Company and the retirees have reached an agreement in principle that may resolve the litigation. A number of contingencies must be satisfied before any settlement can be finalized, however, and ultimately any settlement must be approved by the court. Therefore, although the Company is hopeful that a settlement will be concluded, there is still the possibility that the case will not be settled, and that this lawsuit will be tried. If this case is tried, 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 Company's future financial position, results of operations and cash flows.
Hastings Manufacturing Company and Subsidiaries
Review by Independent Certified Public Accountants
The June 30, 2002 and 2001 condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been reviewed by BDO Seidman, LLP, Independent Certified Public Accountants, in accordance with established professional standards and procedures for such a review.
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
RESULTS OF OPERATIONS
NET SALES
2002 Compared to 2001
Net sales in the second quarter of 2002 decreased $20,769, or 0.2%, from $9,912,120 in the second quarter of 2001, to $9,891,351. Included in these net sales were commission revenues of $436,227 in the second quarter of 2002 and $121,353 in the second quarter of 2001, which the Company earns in exchange for providing marketing and distribution services for various engine and component manufacturers. Net of these commission revenues, net sales of product manufactured by the Company decreased $335,643, or 3.4%, from $9,790,767 in the second quarter of 2001, to $9,455,124. Net sales for the first half of 2002 increased $656,163, or 3.5%, from $18,567,017 in the first half of 2001, to $19,223,180. Included in these net sales were commission revenues of $191,067 and $775,945, respectively. Net of these commission revenues, net sales of product manufactured by the Company increased $71,285, or 0.4%, from $18,375,950 in the first half of 2001, to $18,447,235.
The net sales decrease on manufactured products in the second quarter of 2002 reflects volume decreases in the domestic and Canadian aftermarkets, partially offset by volume increases in the original equipment and export markets. Net sales in the private brand market were relatively flat in the second quarter of 2002 in comparison to the same period in 2001. The net sales decrease in the domestic and Canadian aftermarkets reflects continued industry-wide softness in the automotive replacement parts industry. In addition, net sales volume in the second quarter of 2001 included significant sales of products to a major customer when that customer built inventory to expand the line of products that it offers. The increase in the original equipment volume reflects the improved production volume experienced by domestic automotive and light-duty manufacturers. The increase in the export volume reflects the continued broadening of the Company's customer base into new export markets. The increase in commissi on revenues reflects the volume growth observed in marketing and distributing engine component products for other companies. The Company has signed distribution agreements with sev