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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended
December 27, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
________ to __________.
Commission file number: 1-14182
TB Wood's Corporation
---------------------
(Exact name of registrant as specified in its charter)
Delaware 25-1771145
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
440 North Fifth Avenue, Chambersburg, PA 17201
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(717) 264-7161
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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. [ ]
As of February 18, 2003, there were 5,245,492 shares of the registrant's common
stock outstanding and the aggregate market value of voting stock held by
non-affiliates of the registrant on that date was $17,745,191.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are
incorporated by reference into Part III hereof.
1
TB WOOD'S CORPORATION
FISCAL YEAR 2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I........................................................................................................ 3
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 7
Item 3. Legal Proceedings............................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 7
PART II....................................................................................................... 7
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........................ 7
Item 6. Selected Financial Data...................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation......... 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 15
Item 8. Financial Statements and Supplementary Data.................................................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 35
PART III...................................................................................................... 35
Item 10. Directors and Executive Officers of the Registrant............................................ 35
Item 11. Executive Compensation........................................................................ 36
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 36
Item 13. Certain Relationships and Related Transactions................................................ 36
Item 14. Controls and Procedures....................................................................... 36
PART IV....................................................................................................... 36
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 36
SIGNATURES.................................................................................................... 39
Certification of Principal Executive Officer.................................................................. 40
Certification of Principal Financial Officer.................................................................. 41
Exhibits...................................................................................................... 42
2
PART I
Item 1. Business
General
TB Wood's Corporation (the "Company" or "TB Wood's") is an established designer,
manufacturer and marketer of electronic and mechanical industrial power
transmission products. The Company's products are sold to North American and
international manufacturers and users of industrial equipment. Headquartered in
Chambersburg, Pennsylvania, the 146 year-old business operates eleven
manufacturing facilities with approximately 950 employees in the United States,
Mexico, Germany, Italy, and India. The Company has a network of more than 1,000
select independent and multi-branch distributors with over 3,000 locations in
North America.
History
TB Wood's Incorporated ("TBW"), the Company's principal operating subsidiary
which was founded in 1857, entered the power transmission industry in 1900 and
was incorporated in 1906 in Pennsylvania as T.B. Wood's Sons Company. TB Wood's
Corporation was incorporated in 1995 to acquire the outstanding common stock of
TB Wood's Incorporated. The Company classifies its industrial power transmission
business into two segments, mechanical and electronics.
Since entering the electronics industrial power transmission business segment in
1968 the Company has introduced and launched several new electronic products and
product line extensions bringing the total number of active electronic product
families to 16. Seven of these introductions have occurred within the last three
years. These include extensions to our line of full-featured electronic variable
frequency drives ("VFD") for controlling the speed of alternating current ("AC")
induction motors, a new micro sized VFD family, a new heating, ventilation and
air conditioning ("HVAC") family of packaged drives, and a new electronic soft
starter for electric motors for 2003. In 2001, the Company introduced a National
Sanitation Foundation certified drive for use in Food Area Splash zone
applications. The Company has continued its focus on cost-effective VFDs for
industrial Original Equipment Manufacturer ("OEM") applications. Since 1992, the
Company has introduced ten new mechanical products and product line extensions,
including three mechanical belted drive products and four new coupling products
and began the introduction of gearboxes as a component of its mechanical
business segment.
The Company uses acquisitions and strategic alliances to enhance product
offerings, gain access to technology and products, leverage fixed costs, and
extend the Company's global reach. Since 1993 the Company has completed eight
acquisitions. In the electronics industrial power transmission business segment
the Company acquired Plant Engineering Consultants, Inc. (PEC), an established
supplier of integrated electronic control systems for the fibers industry;
Graseby Controls Inc., a supplier of high-frequency VFDs for machine tool
applications; and certain assets of Ambi-Tech Industries, Inc., a leading
manufacturer of electronic motor brakes. In December 1997, the Company acquired
Berges electronic GmbH in Germany, and its subsidiary Berges electronic S.r.l.
in Italy. The Berges companies are well-established VFD developers,
manufacturers and marketers, and are located in two of the most important
machinery markets in Europe. The Company's mechanical industrial power
transmission business acquisitions include several lines of flexible couplings
and variable speed drives from Dana Corporation; certain assets of Deck
Manufacturing, a producer of gear couplings; and Grupo Blaju S.A. de C.V., the
leading Mexican manufacturer and marketer of belted drives. During July 1999,
the Company entered into a joint venture with The Electron Corp., located in
Littleton, Colorado covering belted drive products to leverage fixed costs,
provide additional foundry capacity, and open new customer opportunities. This
joint venture was terminated in 2002 when the Company purchased Electron's joint
venture interest. The Company retained the new customers developed by the
venture. The Company has strategic alliances with companies in Finland, France,
Switzerland, and Japan.
Industry Overview
The industrial power transmission industry provides electronic and mechanical
products used in manufacturing and material processing activities that transfer
controlled power from an electric motor or internal combustion engine to a
machine. The industrial power transmission industry consists of three product
categories: mechanical power transmission components, gearboxes and electronic
drives. The Company competes in the mechanical power transmission components and
electronic drive categories and began competing in the gearbox category in 2002,
as a component of its mechanical business segment.
3
The markets for some of the Company's products are cyclical, generally following
changes in the overall economy. Consequently, during periods of economic
expansion, the Company has experienced increased demand for its products, and
during periods of economic contraction, the Company has experienced decreased
demand for its products. Such changes in the general economy affect the
Company's results of operations in relevant fiscal periods.
Products
The products manufactured by the Company are classified into two segments for
financial reporting purposes, mechanical and electronics industrial power
transmission businesses. The mechanical business segment includes belted drives,
couplings and gearboxes. The electronics business segment includes electronic
drives and electronic drive systems. Products of these segments are sold to
distributors, original equipment manufacturers, and end users for manufacturing
and commercial applications.
For further information on the Company's operating segments, refer to the
consolidated financial statements and footnote No. 9 included in this Form 10-K.
Sales amounts in the following table are in millions of dollars.
2002 2001 2000
Net Sales % Net Sales % Net Sales %
------------------------------------------------------------------------------------
Electronics Industrial $ 38.9 37.3% $38.7 35.6% $51.4 38.2%
Power Transmission
Business
Mechanical Industrial 65.5 62.7% 70.1 64.4% 83.0 61.8%
Power Transmission
Business
Totals $104.4 100.0% $108.8 100.0% $134.4 100.0%
Electronic Product Offering
The Company designs and manufactures AC electronic VFDs and motor starters,
Direct Current ("DC") electronic VFDs, and integrated electronic drive systems
that are marketed throughout North America and internationally. The Company also
manufactures electronic motor brakes for AC induction motors. These products are
used to control the speed, acceleration and other operating characteristics of
electric motors in manufacturing processes. The Company's standard AC electronic
VFD products, which represent most of its net sales of electronic drive product
offering, are programmable to meet the needs of specific applications with
particular strengths in food processing, materials handling, HVAC, oil
production, textile/fibers, packaging, furniture, and general machinery
applications. The Company's electronic products are designed to meet both North
American and European electrical standards. The Company's integrated electronic
drive systems consist of uniquely configured AC and/or DC electronic VFDs,
programmable logic controllers, in-house designed custom printed circuit boards
and software. These systems are packaged in custom enclosures to meet the
requirements of specific applications.
Mechanical Product Offering
The Company's mechanical product offering includes a full line of stock and
made-to-order products including V-belt drives, synchronous drives, open belted
variable speed drives, and a broad line of flexible couplings, as well as
hydrostatic drives, clutches, brakes and gearboxes. These products are used in a
variety of industrial applications to transmit power from electric motors and
internal combustion engines to machines. The primary markets for these products
are the construction, oilfield, specialized industrial machinery, food
processing, material handling, pumps, compressors, mining, pulp and paper, and
agricultural equipment industries.
Marketing and Distribution
The Company's products are sold principally throughout North America and to a
lesser extent internationally. In North America, the Company sells to more than
1,000 authorized independent and multi-branch industrial distributors with over
3,000 locations that resell the Company's products to industrial consumers and
OEMs. The Company also sells directly to over 300 OEMs. The Company's marketing
alliances include licensing agreements and distribution agreements with
distributors and manufacturers who, in some cases, market the Company's products
under private label agreements. In North America, the Company has its own
technical sales force of more than 40 people and several specialized
manufacturers' representatives.
The Company operates central distribution centers in Chambersburg, Pennsylvania;
Reno, Nevada; Stratford, Ontario; and Mexico City, Mexico and regional
distribution centers in Atlanta, Georgia; Orlando, Florida; Montreal, Quebec;
Edmonton, Alberta; Marienheide, Germany; Naturns, Italy; and Bangalore, India.
4
The Company's products are manufactured to maintain stock inventories and to
meet forecasts from specific customers. On-time delivery is important. Order
backlogs are generally less than one month's customer shipments and are not
considered to be material in amount.
Customers
The Company's products are consumed principally by industrial users through
industrial distributors. The Company's OEM customers include a number of Fortune
500 companies. The Company's distributor partners include, among others, Motion
Industries and Kaman Industrial Technologies, who are among the largest
distributors in the industrial power transmission industry. In addition, the
Company's distributors sell to OEMs. Management believes that the Company is one
of the leading suppliers of power transmission products, based on sales volume,
to its distributors. The Company's five largest customers accounted for
approximately 40%, 36% and 31% of the Company's consolidated revenue for fiscal
years 2002, 2001 and 2000, respectively. Motion Industries, an industrial
distributor with a large diversified customer base, accounted for approximately
25% of the Company's consolidated revenue for fiscal 2002.
Competition
The industrial power transmission industry is highly competitive. Competition in
the AC and DC electronic drive product categories is based on product
performance, physical size of the product, tolerance for hostile environments,
application support, availability and price. The Company's competitors in these
electronic product categories include large multi-national companies in North
America, Europe, and Asia, as well as many small, domestic niche manufacturers.
The integrated electronic drive system market is driven by increased demand from
end users for greater speed and process control. This market includes sales of
products used in the maintenance and replacement of existing systems, upgrades
to existing systems and new capacity expansion. Competition is based on process
knowledge and engineering, software design, product durability and price. Major
systems competitors include Asea Brown Boveri, Allen Bradley, and Siemens Corp.
The Company competes with several divisions of large industrial companies as
well as many small to mid-sized independent companies in the mechanical product
category. Competition in the mechanical product offering is based on
availability, quality, price, size capability, engineering and customer support.
The Company's most significant competitors in the mechanical product category
include Rockwell Automation, Inc., Emerson Electric Co., Martin Sprocket & Gear,
Inc., Rexnord Industries, Inc., and Lovejoy, Inc. Management believes that there
are no significant foreign competitors in the North American mechanical product
market because of a fragmented customer base, prohibitive freight costs as
compared to selling price, and difficult access to existing distribution
channels.
Research and Development
The Company's research and development efforts include the development of new
products, the testing of products, and the enhancement of manufacturing
techniques and processes. The Company's annual expenditures for research and
development (including royalties and payments to third parties) were $2.9
million for 2002, $3.1 million for 2001, and $3.1 million for 2000 which as a
percent of net sales during the last three fiscal years have been 2.8% for 2002,
2.8% for 2001, and 2.3% for 2000. The Company completed a new Technology Center
in 2000 at its Chambersburg facility that is designed to make the research and
development investment more productive by making it easier for engineers to
share insights and collaborate on projects. Electronic drive system research is
also conducted in Chattanooga, TN.
Raw Materials
The Company uses standard purchased components in all of its electronics
products. The Company also purchases specialized components designed by its
engineers. Purchased components include power transistors, capacitors, printed
circuit boards, microprocessors and associated semiconductor integrated
circuits, aluminum heat sinks, plastic enclosures and sheet metal stampings.
These electronic parts and components are purchased from a number of suppliers
and management has taken steps to qualify multiple sources for key items. The
principal raw materials used in the Company's mechanical manufacturing
operations are various types of steel, including pig iron, metal stampings,
castings, forging and powdered metal components. The Company also designs, tools
and out-sources special components made of aluminum, powdered metal and
polymers. The Company purchases the materials used in its mechanical
manufacturing operations from a number of suppliers and management believes that
the availability of its materials is adequate and not significantly dependent on
any one supplier.
5
Patents and Trademarks
The Company owns patents relating to its coupling, composite, synchronous drive,
open belted variable speed drive electronic drive, and clutch/brake product
lines. The Company also owns several patents relating to the design of its
products. From time to time, the Company will grant licenses to others to use
certain of its patents and will obtain licenses under the patents of others. In
addition, the Company owns or has the right to use registered United States
trademarks for the following principal products: Sure-Flex(R), Formflex(R),
Ultra-V(R), Roto-Cone(R), Var-A-ConeTM, True TubeTM, AmbiTech(TM), E-trAC(R),
Ultracon(R), FiberlinkTM, Dura-Flex(R), Disc-O-Torque(R), E-FLOW(R), E-Trol,
IMD(R), NLS, Petro-trAC(R), Roto-Cam, S-trAC(R), Sure-Grip(R), Volkman(R),
All-Pro(R), Superstart(R), Truetube(R), Wood's @ Work(R), and QT Power Chain(R).
Employees
As of December 27, 2002 the Company employed approximately 950 people. At its
Stratford, Ontario facility five employees are represented by the United
Steelworkers of America pursuant to a collective bargaining agreement that
expires on January 19, 2004. On January 31, 2002, 27 employees at the Stratford,
Ontario facility represented by the United Steelworkers of America were
permanently laid-off as the Company decided to discontinue manufacturing
operations at that location. The National Metal Workers' Union of Mexico
represents approximately 115 production employees in the Company's Mexican
facilities pursuant to collective bargaining agreements that expire on January
31, 2004. The Company has created the TB Wood's Institute, which offers training
programs to improve employees' operating, management and team-building skills.
Environmental Matters
As with most industrial companies, the Company's operations and properties are
required to comply with, and are subject to liability under federal, state,
local, and foreign laws, regulations, and ordinances relating to the use,
storage, handling, generation, treatment, emission, release, discharge, and
disposal of certain materials, substances, and wastes. The nature of the
Company's operations exposes it to the risk of claims with respect to
environmental matters and there can be no assurance that material costs will not
be incurred in connection with such liabilities or claims.
When the Company acquired the Mt. Pleasant Facility from Dana Corporation, the
Asset Purchase Agreement dated March 31, 1993 (the "Asset Purchase Agreement")
included an environmental indemnity provision. Pursuant to this provision, Dana
Corporation agreed to indemnify the Company with respect to any environmental
liabilities to the extent they arose out of environmental conditions first
occurring on or before the closing date, including the presence or release of
any hazardous substances at, in, or under the Mt. Pleasant Facility and with
respect to the identification of the Mt. Pleasant Facility on the Michigan list
of inactive hazardous waste sites. The Dana Corporation is conducting a limited
remediation with respect to volatile organic compounds found in soils and
groundwater. The Company has not been notified by the Michigan Department of
Natural Resources or any other governmental agency or person that it has any
responsibility for investigating or remediating such environmental conditions.
Although the Company has no reason to believe Dana Corporation cannot fulfill
its remediation and indemnification obligations under the Asset Purchase
Agreement, if Dana Corporation is unable to fulfill such commitments, the
Company may incur additional costs.
The Company believes that its facilities are in substantial compliance with
current regulatory standards applicable to air emissions under the Clean Air Act
Amendments of 1990 ("CAAA"). At this time, the Company cannot estimate when
other new air standards will be imposed or what technologies or changes in
processes the Company may have to install or undertake to achieve compliance
with any applicable new requirements at its facilities. The Company has no
reason to believe that such expenditures are likely to be material. Similarly,
based upon the Company's experience to date, the Company believes that the
future cost of currently anticipated compliance with existing environmental laws
relating to wastewater, hazardous waste, and employee and community
right-to-know should not have a material adverse effect on the Company's
financial condition.
Geographical Information
See footnote 9 "Business Segment Information" to the consolidated financial
statements for information on sales and long lived assets by geographical area.
Recent Developments
In November 2001 The Electron Corp., a partner in a joint venture for belted
drive products filed for reorganization under Chapter 11 (Reorganization) of the
U.S. Bankruptcy Code. Subsequently in March of 2002 this filing was converted
into a filing under Chapter 7 (Liquidation) of the Code. In July 2002, the
Company purchased The Electron's Corp.'s interest in the joint venture from the
receiver that succeeded to that interest as a secured creditor. The Company did
not suffer any losses as a result of this event.
6
As part of the Company's ongoing efforts to reduce costs in the current business
environment, the Company closed its manufacturing operations located in
Stratford, Ontario, Canada, effective January 31, 2002, which affected 27
employees. The Company continues to maintain its distribution facility at that
location to service the Canadian marketplace. The Company recorded $275,000 of
restructuring charges, including severance, related to this closing during the
First Quarter of fiscal 2002.
Item 2. Properties
The Company owns and operates the following facilities:
- ----------------------------------------------------------------------------------------------------------------------
Location Operations Sq. Feet
- ----------------------------------------------------------------------------------------------------------------------
Chambersburg, Pennsylvania Foundry production of iron, and manufacturing and 440,000
engineering of mechanical and electronic products.
Central distribution, administrative offices and
corporate headquarters.
- ----------------------------------------------------------------------------------------------------------------------
Scotland, Pennsylvania Manufacturing of electronic products. 51,300
- ----------------------------------------------------------------------------------------------------------------------
Trenton, Tennessee Manufacturing of mechanical products. 60,000
- ----------------------------------------------------------------------------------------------------------------------
Stratford, Ontario, Canada Central distribution and administrative offices for 46,000
Canada.
- ----------------------------------------------------------------------------------------------------------------------
San Marcos, Texas Manufacturing and engineering of mechanical products. 51,000
- ----------------------------------------------------------------------------------------------------------------------
Mt. Pleasant, Michigan Manufacturing of mechanical products. 30,000
- ----------------------------------------------------------------------------------------------------------------------
Chattanooga, Tennessee Manufacturing, engineering and sales of integrated 60,000
electronic drive systems. Headquarters of PEC.
- ----------------------------------------------------------------------------------------------------------------------
In addition, the Company leases manufacturing facilities in Mexico City, Mexico
(53,700 sq. ft.); San Luis Potosi, Mexico (36,300 sq. ft.); Marienheide, Germany
(9,800 sq. ft.); Naturns, Italy (19,500 sq. ft.); and Bangalore, India (4,500
sq. ft.). The Company leases distribution facilities in Reno, Nevada; Montreal,
Quebec; and Edmonton, Alberta in Canada. The Company uses contract warehouses in
Orlando, Florida and Atlanta, Georgia. We believe that our facilities are
adequate for our current needs.
Item 3. Legal Proceedings
The Company is a party to various legal actions arising in the ordinary course
of business. The Company does not believe that the outcome of any of these
actions will have a materially adverse affect on the consolidated financial
position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted for a vote of the security holders during the fiscal
quarter ended December 27, 2002.
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company consummated its Initial Public Offering ("IPO") on February 8, 1996
and, effective February 21, 2001, its Common Stock began trading on NASDAQ under
the symbol "TBWC". From the time of the IPO until February 21, 2001, the
Company's common stock was listed on the NYSE. The high and low prices for the
Common Stock, and dividends paid on Common Stock, during the period from
December 29, 2000 through December 27, 2002 were as follows:
Sales Price Dividends
--------------------- -----------------------
High Low Declared Paid
---- ----- -------- -----
Fiscal Year 2001 1st quarter $8.94 $6.75 $.09 $.09
2nd quarter 9.25 7.51 .09 .09
3rd quarter 9.95 7.96 .09 .09
4th quarter 8.66 6.27 .09 .09
Fiscal Year 2002 1st quarter $9.45 $ 6.95 $.09 $.09
2nd quarter 8.74 7.51 .09 .09
3rd quarter 8.59 6.51 .09 .09
4th quarter 8.68 5.40 .09 .09
7
On February 18, 2003, there were 166 shareholders of record of the Company's
Common Stock. The closing sales price was $6.03. The Company declared a $.09
dividend on January 3, 2003 and paid it on January 31, 2003. The declaration of
any dividend, including the amount thereof, is at the discretion of the Board of
Directors of the Company, and will depend on the Company's then current
financial condition, results of operations and capital requirements and such
other factors, as the Board of Directors deems relevant.
There were no sales of unregistered securities during the period of December 29,
2001 through December 27, 2002, except for sales of shares to key employees and
directors upon exercise of options issued in a non-public offering pursuant to
an exemption from the registration requirements of the 1933 Act, under Section
4(2) of the 1933 Act.
In August and September 2001, the Company accepted for payment 200,003 shares of
Common Stock at $11.00 per share as part of a self-tender offer to its
shareholders.
On April 23, 2002, the shareholders approved an amendment of the corporate
charter reducing the number of shares of preferred stock the Company is
authorized to issue from 5,000,000 to 100 and reducing the number of shares of
common stock the Company is authorized to issue from 40,000,000 to 10,000,000.
On April 23, 2002, the shareholders approved an increase of 500,000 shares of
common stock available for use under the 1996 Stock Based Incentive Compensation
plan.
Listed below is information on the Company's equity compensation plans as of
February 17, 2003.
- ----------------------------------------------------------------------------------------------------------------------
Number of Securities
remaining available for
future issuance under
Number of Securities equity compensation
to be issued upon plans (excluding
exercise of Weighted Average Exercise securities reflected in
outstanding options price of outstanding options Column (a))
Plan Category (a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security Holders 858,550 $10.69 141,500
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans not
Approved by Security Holders -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Totals 858,550 $10.69 141,500
- ----------------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data
The following tables set forth selected historical financial and operating data
for the Company for each of the five years through fiscal year 2002 and have
been derived from the Company's financial statements which have been audited by
the Company's independent public accountants. The information set forth below
should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
The Company's 52/53-week fiscal year ends on the Friday closest to the last day
of December. Fiscal year-ends were as follows:
2002 December 27, 2002
2001 December 28, 2001
2000 December 29, 2000
1999 December 31, 1999
1998 January 1, 1999
8
Selected Financial Data
(in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
Fiscal Year 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Net sales $104,383 $108,805 $134,357 $125,334 $135,415
Gross profit 33,145 37,037 48,500 45,954 49,055
Operating income before minority interest 3,967 6,027 14,200 12,108 15,566
Minority interest 151 1,147 1,554 808 0
Operating income 3,816 4,880 12,646 11,300 15,566
Net (loss) income (1,050) 2,906 6,145 5,367 7,890
----------------------------------------------------------------------
Cash Flow
Cash provided by operations $8,758 $ 12,825 $ 13,758 $ 10,050 $ 6,228
Capital expenditures 3,481 4,110 7,712 8,316 7,481
----------------------------------------------------------------------
Adjusted working capital(1) $23,763 $28,571 $ 33,378 $ 34,245 $34,644
Total assets 77,576 87,632 102,660 102,866 96,025
Total debt 23,799 28,645 33,919 36,924 32,469
Shareholders' equity 26,413 28,445 30,092 27,692 28,515
----------------------------------------------------------------------
Per Share Data
Net (loss) income $(0.20) $0.54 $1.12 $0.91 $1.33
Cash dividends paid .36 .36 .36 .36 .35
Book value(2) 5.05 5.31 5.50 4.69 4.81
----------------------------------------------------------------------
Weighted average shares outstanding 5,232 5,355 5,473 5,910 5,932
----------------------------------------------------------------------
(1) Adjusted working capital is defined as the sum of accounts receivable,
inventory, and other current assets, less accounts payable and accrued
expenses.
(2) Book value per share is computed by dividing Shareholders' Equity by
weighted average shares outstanding.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year Ended December 27, 2002 Compared to Year Ended December 28, 2001
Net Sales for fiscal 2002 were $104.4 million compared to $108.8 million in
2001; a reduction of $4.4 million or 4.0%. The principal reason for this
reduction has been the length and severity of the US industrial slowdown. Based
on data received from industry trade associations, management believes its main
competitors have experienced similar reductions in sales. Mechanical Business
net sales for 2002 were $65.5 million, $4.6 million lower than net sales of
$70.1 million for 2001. The sales decline mainly occurred in the belted drive
product lines, driven by the general industrial slowdown. Electronic Business
net sales for 2002 were $38.9 million, a $0.2 million increase from net sales of
$38.7 million for 2001. The sales increase was the result of the target
marketing for the application specific OEM AC VFD product line.
Cost of sales ("COS") in 2002 were $71.2 million compared to $71.8 million for
2001. As a percent of sales, COS was 68.2% for 2002 an increase of 2.2
percentage points from 2001's COS of 66.0%. Gross profit for 2002 declined to
$33.1 million from $37.0 million in 2001, a reduction of $3.9 million or 10.5%.
Gross profit as a percent of net sales decreased to 31.7% from 34.0% due
primarily to the lower absorption of fixed manufacturing expenses as a result of
the lower level of manufacturing operations caused by lower sales volume, a
reduction of inventory, closure of the Canadian manufacturing operations, and
start up of the new Mexican manufacturing operations.
As indicated earlier the Company closed its Canadian mechanical manufacturing
operations and transferred certain operations to its new Mexican plant during
the first quarter of 2002. As a result of the closure of its Canadian
manufacturing operations, restructuring charges related to severance and closure
costs in the amount of $0.3 million were recorded as a COS expense during the
first quarter of 2002. The Company has increased production at the new plant in
Mexico, but the costs associated with the start up have negatively impacted cost
of goods sold through the end of fiscal 2002. The Company believes that the
start up period for its new Mexican plant is completed and that productivity
levels for that plant will improve during 2003.
A continuing initiative of the Company during 2002 was the reduction of
inventory. The reduction realized during 2002 totaled $3.8 million. This
reduction came about by better matching of manufacturing operational levels to
customer demands and the reduction of manufacturing lead and operational times.
This was the second year of a program that will be ongoing as a result of which
the Company anticipates a further reduction of inventory during 2003.
9
Mechanical COS of $45.3 million for 2002 was $1.1 million lower than COS of
$46.4 million for 2001. As a percent of sales the 2002 Mechanical Business
reported COS of 69.1%, an increase of 2.9 percentage points from 66.2% for 2001.
The increased COS percentage of sales resulted from reduced fixed expense
absorption from lower sales volume, restructuring charges related to the closing
of the Canadian manufacturing operation, and costs of starting up manufacturing
operations in the new Mexican plant.
Electronics Business COS for 2002 was $25.9 million, a $0.6 million increase
from COS of $25.4 million for 2001. As a percent of sales 2002 versus 2001,
Electronics Business reported COS of 66.8% for 2002 up 1.3 percentage points
from 65.5% for 2001. The principal reasons for the higher COS percentage were
wage inflation and market pressure on pricing.
Selling, general, and administrative ("SG&A") expense for fiscal 2002 decreased
to $29.2 million from $31.0 million in 2001, a reduction of $1.8 million or
5.8%. SG&A expense as a percent of net sales decreased to 28.0% from 28.5%. The
major reasons for the change in absolute dollars were the reduced variable costs
caused by lower sales volume and lower headcount. The continuing challenge in
2003 will be the executing of tight control of discretionary expenses and head
count while continuing to work on new product development for projects that will
benefit the future.
Operating income after Minority Interest was $3.8 million for 2002 compared to
$4.9 million for 2001. As a percentage of sales operating income after Minority
Interest was 3.7% for 2002 and 4.5% for 2001. This reduction was primarily
caused by the lower sales volume leading to the decreased absorption of fixed
expenses from lower inventory and production levels, costs associated with
closing of the Canadian manufacturing operations and start up costs of the new
Mexican plant. Offsetting the above reductions was the cessation of the
Company's joint venture with The Electron Corp. as of the end of the first
quarter of 2002. This had the effect of eliminating Electron's participation in
the joint venture that in turn increased the Company's interest in the joint
venture operation. Additionally, effective December 29, 2001 (beginning of
fiscal 2002), in connection with the adoption of Statement of Financial
Accounting Standard (SFAS) No. 142 "Goodwill and other Intangible Assets", the
Company ceased the amortization of goodwill. During 2001 the Company recognized
$180 of goodwill amortization net of income tax.
Operating income after Minority Interest in fiscal 2002 and 2001 includes a
benefit of $0.6 million and $2.4 million, respectively, from the amortization of
unrecognized prior service benefit and unrecognized net actuarial gain in the
Company's defined benefit postretirement medical plan. The higher benefit in
fiscal 2001 (above the $0.6 million benefit also recorded in fiscal 2002) was a
result of the following items: 1) The Company terminated the postretirement
medical plan benefits for all employees retiring subsequent to December 31, 2001
which resulted in a $0.5 million gain being realized in 2001 that did not
reoccur in 2002; 2) in 2001 the last year of amortization in the amount of $1
million of an actuarial gain resulted from a prior year plan change was
recorded; and 3) a small gain was recorded in 2001 as a result of revised
actuarial estimates as compared to prior years; however, there was no similar
gain during 2002.
Other expense for 2002 was $0.9 million, compared to other expense of $1.0
million for 2001. Interest expense, a component of other expenses, for the
Company was $0.9 million for 2002, which was lower than 2001 by $0.7 million.
The reduction in interest expense is consistent with the reduction of debt
levels during 2002 and lower interest rates. Included in Other Income for 2002
was a gain of $0.1 million from the sale of a plant in Greensboro, NC while 2001
included a gain of $0.6 million on the sale of the Elk Grove, IL warehouse.
The effective tax rate for 2002 was 38%, an increase from 25% in 2001. The
increase in the effective tax rate was primarily due to the recognition during
2001 of a tax benefit related to revised estimates of the Company's income tax
liability and the realization during 2001 of certain state refunds of
approximately $0.5 million as well as certain tax credits. Additionally during
2002 a loss was realized in Mexico from the start up of the new factory for
which no income tax benefit was recognized. It is anticipated that this loss
will be carried forward and offset future income in Mexico at which point an
income tax benefit will be realized.
Income before the cumulative effect of a change in accounting principle for the
impairment of goodwill was $1.8 million for 2002 or $0.34 per share, which was
$1.1 million lower than the $2.9 million for 2001. The principal reasons for the
reduction were reduced sales volume and lower fixed expense absorption.
As a result of the adoption of Statement on Financial Accounting Standards
(SFAS) 142 "Goodwill and Other Intangible Assets" the Company recognized an
impairment charge in the amount of $4.5 million ($2.8 million net of income
taxes) related to the goodwill associated with its North American Electronics
reporting unit during 2002. This charge is reflected as a cumulative effect of
accounting principle as described by SFAS 142. No similar charges were recorded
during 2001. As a result of the impairment charge for goodwill in 2002, the net
loss realized for 2002 was ($1.1) million or ($0.20) per share as compared to
net income for 2001 of $2.9 million or $0.54 per share.
10
Year Ended December 28, 2001 Compared to Year Ended December 29, 2000
Net Sales for fiscal 2001 were $108.8 million compared to $134.4 million in
2000; a reduction of $25.6 million or 19.0%. The principal reason for this
reduction was the length and severity of the US industrial slowdown. Based on
data received from industry trade associations, management believes its main
competitors had similar reductions in sales.
Gross profit for 2001 declined to $37.0 million from $48.5 million in 2000, a
reduction of $11.5 million or 23.6%. Gross profit as a percent of net sales
decreased to 34.0% from 36.1% due primarily to the lower absorption of fixed
manufacturing expenses as a result of the lower level of manufacturing
operations caused by lower sales volume and a reduction of inventory. A major
initiative of the Company during 2001 was the reduction of inventory. The
reduction realized during 2001 totaled $8.4 million. This reduction came about
by better matching of manufacturing operational levels to customer demands and
reduction of manufacturing lead and operational times. This was the first year
of a program that will be ongoing.
Selling, general, and administrative ("SG&A") expense for fiscal 2001 decreased
to $31.0 million from $34.3 million in 2000, a reduction of $3.3 million or
9.6%. SG&A expense as a percent of net sales increased to 28.5% from 25.5%
because the Company was unable to reduce the fixed costs that are part of SG&A
expense. The major challenge in 2001 continued to be executing tight control of
discretionary expenses and head count while continuing to work on new product
development for projects that will benefit the future.
Operating income in fiscal 2001 and 2000 includes a benefit of $2.4 million and
$0.9 million, respectively, from the amortization of unrecognized prior service
benefit and unrecognized net actuarial gain in the Company's defined benefit
postretirement medical plan. The increased benefit in fiscal 2001 relates to
revised actuarial estimates for fiscal 2001. The Company also terminated
postretirement medical plan benefits for all employees retiring subsequent to
December 31, 2001. As a result of the curtailment of postretirement benefits,
the Company realized a gain in fiscal 2001 in the amount of $0.5 million.
Interest expense for fiscal 2001 of $1.6 million was lower than fiscal 2000 by
$1.4 million. This was due to the consistent reduction of debt levels during
2001and lower interest rates.
Other (expense), net for fiscal 2001 was a net of $0.6 million as compared to
$0.3 million for 2000, an improvement of $0.3 million. This was due primarily to
the gain of $.6 million on the selling of a warehouse in 2001.
The effective tax rate for 2001 was 25% down from 38% in 2000. The decrease in
the effective tax rate was primarily due to a tax benefit related to revised
estimates of the Company's income tax liability and the realization of certain
state refunds of approximately $0.5 million as well as certain tax credits.
Critical Accounting Policies
Management's discussion and analysis of the Company's financial statements and
results of operations are based upon the Company's Consolidated Financial
Statement included as part of this document. The preparation of these
Consolidated Financial Statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis, the Company evaluates these estimates, including those related to
bad debts, inventories, intangible assets, post-retirement benefits, income
taxes, and contingencies and litigation. The Company bases these estimates on
historical experiences and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements. For a detailed discussion on the
application of these and other accounting policies see Note 2 to the attached
Consolidated Financial Statements. Certain of our accounting policies require
the application of significant judgement by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty and actual
results could differ from these estimates. These judgements are based on our
historical experience, terms of existing contracts, current economic trends in
the industry, information provided by our customers, and information available
from outside sources, as appropriate. Our critical accounting policies include:
11
Product Warranty: In the ordinary course of business, the Company warrants its
products against defect in design, materials and workmanship over various time
periods. Warranty reserve and allowance for product returns is established based
upon management's best estimates of amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. The warranty
reserve and allowance for product returns is immaterial to the financial
position of the Company for all periods presented and the change in the reserve
and allowance for each period is immaterial to the Company's results and cash
flow.
Inventory: Inventories are valued at the lower of market or cost. Cost is
determined on the last-in first-out basis for a majority of US inventories and
the first-in first-out method for all remaining inventories. The Company has
recorded a reserve for obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Impairment of Goodwill and Long Lived Assets: The Company periodically evaluates
the realizable value of long-lived assets including property, plant and
equipment, relying on a number of factors including operating results, budgets,
economic projections and anticipated future cash flows. The Company's past
business acquisitions resulted in the recognition of goodwill, which may result
in future impairment expenses. The Company's other intangible assets which
primarily consist of product application software, affects the amount of future
period amortization expense. The determination of the value of such intangible
assets requires management to make estimates and assumptions that affect the
Company's Consolidated Financial Statements.
Revenue Recognition: The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" issued by the Securities and Exchange Commission. Revenue
is recognized at the time product is shipped and title passes pursuant to the
terms of the agreement with the customer, the amount due from the customer is
fixed and collectibility of the related receivable is reasonably assured. The
Company establishes allowances to cover anticipated doubtful accounts, sales
discounts, product warranty, and returns based upon historical experience.
Shipping and handling costs charged to customers are included as a component of
net sales.
Postretirement Benefit Obligation: The Company in consultation with an actuarial
firm specializing in the valuation of postretirement benefit obligations selects
certain actuarial assumptions to base the actuarial valuation of such obligation
on such as the discount rate (interest rate used to determine present value of
obligations payable in the future), initial health care cost trend rate, the
ultimate cost care trend rate and mortality tables to determine the expected
future mortality of plan participants. To the extent that the actual rates and
mortality vary from the assumptions used to determine the present actuarial
valuation of these postretirement benefits, additional provision for expense may
be necessary.
Liquidity and Capital Resources
The Company experienced a significant reduction in its working capital at
December 27, 2002 when compared to December 28, 2001. The reduction was due
primarily to the reclassification of the Company's unsecured United States
revolving credit facility in the amount of $18.1 million (the "Facility) as a
short-term liability because of its maturity date of October 2003, and to a
lesser extent because of the decreases of inventory and accounts receivable
offset by an increase in accrued expenses. The Company is currently in
negotiations with its banks to extend the term of this agreement. The Company
believes, based upon current information, that the Facility will be renewed for
an extended term, and as a result will again be classified as a long-term
liability in the future.
The Company's current ratio (defined as the ratio of current assets to current
liabilities) was 1.1 to 1 at December 27, 2002, a reduction from the current
ratio of 2.5 to 1 at December 28, 2001, again due primarily to the
reclassification of the Facility as a short-term liability. Had the Facility
been classified, as a long-term liability at December 27, 2002 the current ratio
would have been 2.2:1 compared to 2.5:1 at December 28, 2001 at which date the
Facility was classified as a long-term liability.
Total outstanding debt decreased by $4.8 million from $28.6 million at December
28, 2001 to $23.7 million at December 27, 2002. Debt consisted of the following
at December 28, 2002 and December 27, 2001.
(in millions) 2002 2001
---- ----
Facility $18.3 $23.2
Tax-exempt revenue bonds 5.3 5.3
Equipment loans 0.1 0.1
------------------------
Total debt $23.7 28.6
========================
12
At December 27, 2002 taking into consideration $6.0 million of outstanding
standby letters of credit, the Company had approximately $28.4 million of
available borrowing capacity under the Facility. The Company's annual interest
rate as of December 27, 2002 under the Facility was 2.83%. The standby letters
of credit are used to secure the $5.3 million tax-exempt revenue bonds
outstanding as of December 27, 2002 plus accrued interest and $0.2 million of
accrued liability under minimum premium workers' compensation insurance
policies.
The Company's principal sources of funds are cash flows from operations and
borrowings under the Company's Facility for up to $52.5 million. Cash provided
from operations in 2002 was $ 8.8 million, $12.8 million in 2001 and $13.8
million in 2000. Net cash used in investing activities during fiscal years 2002,
2001, and 2000 was $3.6 million, $2.9 million, and $7.6 million, respectively.
The Company's investing activities in 2002, 2001 and 2000 were primarily for
capital expenditures. The Company's US revolving credit agreement, which matures
in October 2003, was amended during 2002 to provide additional flexibility under
certain of the financial covenants. Because the maturity date of the US
revolving credit agreement is October 2003, the classification of the debt
outstanding under this agreement has changed from long-term to short-term as of
October 31, 2002. The Company is currently in negotiations with its banks to
extend the term of this agreement.
Capital expenditures for fiscal years 2002, 2001, and 2000 were $3.5 million,
$4.1 million, and $7.7 million, respectively. During the last three years, the
Company's capital investments have been to support new product introductions,
improve product quality, reduce costs, and provide capacity for meeting growth
objectives. The amount of commitments for capital expenditures at December 27,
2002 was immaterial.
The Company paid $1.9 million in dividends during 2002, $1.9 million in 2001,
and $2.0 million in 2000. The Company declared a $0.09 dividend ($0.5 million)
on January 3, 2003 and paid it on January 31, 2003.
The Company believes that the combination of cash generated by operations,
available borrowing capacity and the Company's ability to obtain additional
long-term indebtedness is adequate to finance the Company's operations for the
foreseeable future.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business
Combinations" that was effective July 2001, and No. 142, "Goodwill and Other
Intangible Assets" effective for the Company at the beginning of its fiscal year
2002. SFAS No. 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. SFAS No. 142 requires that
goodwill and intangible assets deemed to have an indefinite life not be
amortized. Instead of amortizing goodwill and intangible assets deemed to have
an indefinite life, the statement requires an annual test for impairment, or
immediately if conditions indicate that such an impairment could exist. The
Company adopted this statement effective December 29, 2001 (beginning of Fiscal
2002). As a result of adopting SFAS No. 142, the Company will no longer record
goodwill amortization of approximately $226 ($177 after income tax) per year.
The following table provides the comparable effects of adoption of SFAS 142 for
2002 and 2001
(in thousands, except per share data) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Reported Income before cumulative effect of change in accounting principle.............. $1,796 $2,906
Add Back: Goodwill amortization (net of tax)............................................ -- 180
------------------------------
Pro Forma Income before cumulative effect of change in accounting principle............ $1,796 $3,086
==============================
Basic and Diluted Income Per Share:
- -----------------------------------------------------------------------------------------------------------------------
Reported Income per share before cumulative effect of a change in accounting principle.. $0.34 $0.54
Add back: Goodwill amortization (net of tax) per share.................................. -- 0.03
------------------------------
Pro Forma income per share before cumulative effect of change in accounting principle... $0.34 $0.57
==============================
Using the fair value approach, the Company performed the first annual impairment
tests required by SFAS No. 142. Based upon results of the first phase of these
tests, it appeared that goodwill related to the Company's North American
Electronics reporting unit may be impaired. As a result the second phase of the
tests required by SFAS No. 142 on a fair value approach for the North American
Electronics reporting unit was performed. In accordance with SFAS No. 142, once
an indication of possible impairment is evident at a reporting unit, the amount
13
of goodwill impairment is determined based upon what the balance of goodwill
would have been if the purchase accounting method prescribed by SFAS No. 141
were applied at the date of impairment. Under SFAS No. 142, if the carrying
amount of goodwill exceeds its fair value, an impairment loss must be recognized
in an amount equal to that excess. Once the impairment loss is recognized, the
adjusted carrying amount of the goodwill will be its new accounting basis. This
second phase of the impairment evaluation determined that impairment had
occurred, as a result of which an impairment loss of $4,453 ($2,846 net of
income taxes), was recognized as a cumulative effect of a change in accounting
principle as of the beginning of fiscal 2002 as prescribed by SFAS No. 142.
In June 2001 FASB issued Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement is
effective for fiscal years beginning after June 15, 2002. The Company adopted
this statement effective December 28, 2002 (beginning of the Company's fiscal
2003). The Company does not believe that implementation of this SFAS will have a
material impact on its Consolidated Financial Statements.
In October 2001, FASB issued Statement of Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets," which
supercedes SFAS No. 121. Though it retains the basic requirements of SFAS No.
121 regarding when and how to measure impairment loss, SFAS No. 144 provides
additional implementation guidance. SFAS No. 144 applies to long-lived assets to
be held and used or to be disposed of, including assets under capital leases of
lessees; assets subject to operating leases of lessors; and prepaid assets. This
statement is effective for fiscal years beginning after December 15, 2001. The
Company's adoption of this SFAS during fiscal 2002 has not had a material impact
on its Consolidated Financial Statements.
In April 2002, FASB issued Statement of Accounting Standards No. 145 "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No 13, and
Technical Corrections." SFAS No. 145 rescinds previous accounting guidance,
which required all gains and losses from the extinguishment of debt be
classified as an extraordinary item. Under SFAS No. 145 classification of debt
extinguishment depends on the facts and circumstances of the transaction. This
statement is effective for fiscal years beginning after May 15, 2002. The
Company's does not expect this SFAS to have a material impact upon the
Consolidated Financial Statements upon its adoption during fiscal 2003.
In July 2002, FASB issued Statement of Accounting Standards No.146 "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for the costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." This statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not believe that the adoption of this SFAS during fiscal 2003 will
have a material impact upon the Consolidated Financial Statements.
In December 2002 FASB issued Statement of Accounting Standards No. 148
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123. The Company intends to adopt SFAS No. 123
as amended by SFAS No. 148 to account for options granted under its 1996 Stock
Based Incentive Compensation Plan. The Company is evaluating the transition
methods allowed under this statement. Accordingly the Company cannot determine
the impact of adoption of this statement at this time.
Safe Harbor Statement
Certain information included or incorporated by reference in this document may
be deemed to be "forward looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. All statements, other
than statements of historical facts, that address activities, events or
developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future are forward looking statements. Such
statements are characterized by terminology such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expects," "estimates," "projects,"
"positioned," "strategy," and similar expressions. These statements are based on
assumptions and assessments made by the Company's management in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. These
forward looking statements are subject to a number of risks and uncertainties,
including but not limited to continuation of the Company's longstanding
relationships with major customers, the Company's ability to integrate acquired
businesses into its operations and realize planned synergies, the extent to
which acquired businesses are able to meet the Company's expectations and
operate profitably, ability to obtain financing, changes in regulations that
could affect demand for products, and unanticipated developments that could
occur with respect to contingencies such as environmental matters and
litigation. In addition the Company is subject to risks and uncertainties that
affect the manufacturing sector generally, including, but not limited to,
economic, competitive, governmental and technological factors affecting the
14
Company's operations, markets, products, services and prices. Any such forward
looking statements are not guarantees of future performances and actual results,
developments and business decisions may differ from those envisaged by such
forward looking statements. The Company disclaims any duty to update any
forward-looking statements, all of which are expressly qualified by the
foregoing.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential change in an instrument's value caused, for
example, by fluctuations in interest and currency exchange rates. The Company's
primary market risk exposures are interest rate and unfavorable movements in
exchange rates between the U.S. dollar and each of the Mexican peso, Canadian
dollar, Euro, and Indian rupee. Monitoring and managing these risks is a
continual process carried out by senior management. Market risk is managed based
on an ongoing assessment of trends in interest rates, foreign exchange rates,
and economic developments, giving consideration to possible effects on both
total return and reported earnings. The Company's financial advisors, both
internal and external, provide ongoing advice regarding trends that affect
management's assessment.
Exchange Rate Sensitivity
The Company has operations in several foreign countries, and approximately $23.7
million of the Company's revenue from continuing operations was derived from the
Company's operations outside the United States. Accordingly, exposure exists to
potentially adverse movements in foreign currency rates. The Company does not
use foreign exchange forward contracts to hedge the risk of change in foreign
currency exchange rates.
The Company's consolidated financial statements are denominated in U.S. dollars
and accordingly, changes in the exchange rates between Company subsidiaries'
local currency and the U.S. dollar will affect the translation of such
subsidiaries financial results into U.S. dollars for the purposes of reporting
the consolidated financial results. The Company does not hedge these matters
because cash flows from international operations are generally re-invested
locally. It is estimated that a 10% change in foreign exchange rates would
impact report net earnings (loss) by approximately $33,000.
Interest Rate Sensitivity
The effective interest rate payable on the Company's Facility is influenced by
the actions of the Federal Reserve Bank Board in establishing from time to time
the Federal Funds Interest Rate which is the rate banks borrow from the Federal
Reserve Bank. During 2002 and 2001 the Federal Reserve implemented a number of
reductions in the Federal Funds Interest Rate in an effort to stimulate the U.S.
economy. As a result the effective interest rate that the Company paid on its
borrowings under the Facility declined leading to a corresponding reduction in
interest expense. To the extent that the Federal Reserve increases the Federal
Funds Interest Rate in the future, the effective interest rate on the Company's
Facility will increase. The Company's interest expense will increase accordingly
if borrowing levels remain constant. Based on the balance outstanding under our
Facility at year-end, a 1% change in the effective interest rate would have
changed interest expense by $181,000.
15
Item 8. Financial Statements and Supplementary Data
Page
----
Report of Certified Independent Public Accountants................................................ 17
Report of Predecessor Independent Public Accountants.............................................. 18
Consolidated Balance Sheets as of December 27, 2002 and December 28, 2001......................... 19
Consolidated Statements of Operations for the Years Ended December 27, 2002,
December 28, 2001, and December 29, 2000..................................................... 20
Consolidated Statements of Comprehensive Income for the Years Ended December 27, 2002,
December 28, 2001, and December 29, 2000..................................................... 20
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 27, 2002,
December 28, 2001, and December 29, 2000..................................................... 21
Consolidated Statements of Cash Flows for the Years Ended December 27, 2002,
December 28, 2001, and December 29, 2000 .................................................... 22
Notes to Consolidated Financial Statements........................................................ 23
16
REPORT OF CERTIFIED INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of TB Wood's Corporation:
We have audited the consolidated balance sheet of TB Wood's Corporation and
subsidiaries ("the Company") as of December 27, 2002 and the related
consolidated statements of operations, comprehensive income, stockholder's
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of TB Wood's Corporation as of December 28, 2001 and for
the two years then ended were audited by other auditors who have ceased
operations. These auditors expressed an unqualified opinion on those financial
statements in their report dated February 8, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TB Wood's
Corporation and subsidiaries as of December 27, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of TB Wood's
Corporation and subsidiaries as of December 28, 2001 and for the two years then
ended were audited by other auditors, who have ceased operation. As described in
Note 2, these consolidated financial statements have been revised to include
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company
as of December 29, 2001 (beginning of 52/53 week fiscal year ending December 27,
2002). Our audit procedures with respect to the disclosures in Note 2 with
respect to fiscal 2001 and 2000 included (a) agreeing the previously reported
net income to the previously issued consolidated financial statements and the
adjustments to reported net income representing amortization expense (including
any related income tax effects) recognized in those periods related to goodwill,
intangible assets that are no longer being amortized, deferred credits related
to an excess over cost, equity method goodwill, and changes in amortization
periods for intangible assets that continue to be amortized as a result of
initially applying SFAS No. 142 (including related income tax effects) to the
Company's underlying records obtained from management, and (b) testing the
mathematical accuracy of the reconciliation of adjusted net income to reported
net income, and the related earnings-per-share amounts. In our opinion, the
disclosures for fiscal 2001 and 2000 in Note 2 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the fiscal 2001 and
2000 consolidated financial statements of the Company other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
forms of assurance on the fiscal 2001 and 2000 consolidated financial statements
as a whole.
We have also audited schedule II for the year ended December 27, 2002. In our
opinion, this schedule when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information therein.
Grant Thornton LLP
Baltimore, Maryland
January 31, 2003
17
This report set forth below is a copy of a previously issued audit report by
Arthur Andersen LLP. This report has not been reissued by Arthur Andersen LLP in
connection with its inclusion in this Form 10-K. The consolidated balance sheet
as of December 29, 2000, the consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for the
year ended December 31, 1999 and the information in the Schedule for 1999
referred to in this report have not been included in the accompany consolidated
financial statements or schedule.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TB Wood's Corporation:
We have audited the accompanying consolidated balance sheets of TB Wood's
Corporation (a Delaware corporation) and Subsidiaries as of December 28, 2001
and December 29, 2000 and the related consolidated statements of operations,
comprehensive income, changes in shareholders' equity, and cash flows for each
of the three fiscal years in the period ended December 28, 2001. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TB Wood's Corporation and
subsidiaries as of December 28, 2001 and December 29, 2000 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 28, 2001 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts listed in Item 14(a) (2) of this Form 10-K is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 8, 2002
18
TB Wood's Corporation And Subsidiaries
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share and share amounts) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 335 $ 581
Accounts receivable, less allowances for doubtful accounts, discounts, and
claims of $645 and $472 in 2002 and 2001, respectively 14,219 15,706
Inventories:
Finished goods 12,446 16,234
Work in process 4,519 4,698
Raw materials 8,146 8,302
LIFO reserve (5,154) (5,432)
--------------------------------------
19,957 23,802
Other Current Assets 2,801 1,849
--------------------------------------
Total Current Assets 37,312 41,938
--------------------------------------
Property, Plant, and Equipment:
Machinery and equipment 47,594 48,750
Land, buildings, and improvements 16,371 16,216
--------------------------------------
63,965 64,966
Less accumulated depreciation 33,795 32,025
--------------------------------------
Total Property, Plant and Equipment 30,170 32,941
--------------------------------------
Other Assets:
Deferred income taxes 3,298 2,265
Goodwill, net of accumulated amortization of $1,558 and $2,085
in 2002 and 2001, respectively 5,172 8,865
Other 1,624 1,623
--------------------------------------
Total Other Assets 10,094 12,753
--------------------------------------
$77,576 $87,632
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $18,363 $ 843
Accounts payable 6,277 7,469
Checks outstanding 2,142 1,635
Accrued expenses 6,937 5,317
Deferred income taxes 1,001 1,202
--------------------------------------
Total current liabilities 34,720 16,466
--------------------------------------
Long-term debt, less current maturities 5,436 27,802
--------------------------------------
Postretirement benefit obligation, less current portion 11,007 11,857
--------------------------------------
Minority interest - 3,062
--------------------------------------
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Preferred stock, $.01 par value; 100 and 5,000,000 shares authorized in
2002 and 2001, no shares issued or outstanding - -
Common stock, $.01 par value; 10,000,000 and 40,000,000 shares authorized;
5,639,798 issued; and 5,240,869 and 5,219,447 outstanding at December 27,
2002 and December 28, 2001, respectively 57 57
Common stock in treasury at cost; 398,929 and 420,351 shares at December
27, 2002 and December 28, 2001, respectively (4,188) (4,338)
Additional paid-in capital 26,726 26,720
Retained earnings 6,029 8,968
Accumulated other comprehensive loss (2,211) (2,962)
--------------------------------------
Total shareholders' equity 26,413 28,445
--------------------------------------
$77,576 $87,632
======================================
The accompanying notes are an integral part of these consolidated financial
statements.
19
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Operations
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Net sales $104,383 $108,805 $134,357
Cost of sales 71,238 71,768 85,857
------------------------------------------
Gross profit 33,145 37,037 48,500
Selling, general, and administrative expenses 29,178 31,010 34,300
------------------------------------------
Operating income, before minority interest 3,967 6,027 14,200
Minority interest in joint ventures 151 1,147 1,554
------------------------------------------
Operating income after minority interest 3,816 4,880 12,646
------------------------------------------
Other (expense) income:
Interest expense and other finance charges (861) (1,579) (3,025)
Other, net (39) 576 291
------------------------------------------
Other expense, net (900) (1,003) (2,734)
------------------------------------------
Income before provision for income taxes and cumulative effect of
change in accounting principle 2,916 3,877 9,912
Provision for income taxes 1,120 971 3,767
------------------------------------------
Income before cumulative effect of change in accounting principle 1,796 2,906 6,145
Cumulative effect of change in accounting principle, net of income tax (2,846) -- --
------------------------------------------
Net (loss) income $(1,050) $ 2,906 $ 6,145
==========================================
Per share of common stock
Basic:
Income before cumulative effective of change in accounting principle
per common share $0.34 $0.55 $1.12
Cumulative effect of change in accounting principle
per common share (0.54) -- --
------------------------------------------
Net (loss) income per common share $(0.20) $0.55 $1.12
------------------------------------------
Weighted average shares of common stock and equivalents outstanding 5,232 5,332 5,468
------------------------------------------
Diluted:
Income before cumulative effective of change in accounting principle
per common share $0.34 $0.54 $1.12
Cumulative effect of change in accounting principle
per common share (0.54) -- --
------------------------------------------
Net (loss) income per common share $(0.20) $0.54 $1.12
==========================================
Weighted average shares of common stock and equivalents outstanding 5,232 5,355 5,473
==========================================
Consolidated Statements of Comprehensive Income
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Net (loss) income $(1,050) $2,906 $6,145
Other comprehensive income:
Foreign currency translation adjustment 751 (328) (991)
-------------------------------------------
Comprehensive (loss) income $ (299) $2,578 $5,154
===========================================
The accompanying notes are an integral part of these consolidated financial
statements.
20
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands) Accumulated
Additional Other
Common Treasury Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income (Loss)
-----------------------------------------------------------------
Balance at January 1, 2000 $59 $(3,811) $29,086 $4,001 $(1,643)
Net Income - - - 6,145 -
Stock issuance for employee benefit plans - 372 - 21 -
Dividends declared - - - (1,976) -
Proceeds from options exercised - 45 - (44) -
Treasury stock, net - (1,172) - - -
Foreign currency translation adjustment - - - - (991)
-----------------------------------------------------------------
Balance at December 29, 2000 59 (4,566) 29,086 8,147 (2,634)
Net Income - - - 2,906 -
Stock issuance for employee benefit plans - 358 36 (88) -
Dividends declared - - - (1,938) -
Proceeds from options exercised - 18 - (59) -
Retirement of Common Stock, 200,003 shares (2) 2,404 (2,402) - -
Treasury stock, net - (2,552) - - -
Foreign currency translation adjustment - - - - (328)
-----------------------------------------------------------------
Balance at December 28, 2001 57 (4,338) 26,720 8,968 (2,962)
Net (Loss) - - - (1,050) -
Stock issuance for employee benefit plans - 145 6 (6) -
Dividends declared - - - (1,883) -
Treasury stock, net - 5 - - -
Foreign currency translation adjustment - - - - 751
-----------------------------------------------------------------
Balance at December 27, 2002 $57 $(4,188) $26,726 $6,029 $(2,211)
=================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
21
TB Wood's Corporation And Subsidiaries
Consolidated Statements Of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (Loss) income $(1,050) $ 2,906 $ 6,145
Cumulative effect of change in accounting principle 2,846 0 0
-------------------------------------------------
Income before cumulative effect of change in accounting principle
1,796 $ 2,906 $ 6,145
-------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,671 5,631 5,498
Change in deferred income taxes 373 1,081 276
Stock option compensation and employee stock benefit expense 81 265 392
Net (gain) loss on sale of assets (19) (537) 27
Minority interest (3,034) 1,147 1,554
Other, net (68) (130) 0
Changes in operating assets and liabilities:
Accounts receivable 1,487 3,206 (319)
Inventories 3,845 8,414 1,944
Other current assets (952) 59 (74)
Accounts payable (1,192) (1,194) (3,744)
Accrued and other liabilities 770 (8,023) 2,059
-------------------------------------------------
Total adjustments 6,962 9,919 7,613
-------------------------------------------------
Net cash provided by operating activities 8,758 12,825 13,758
-------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (3,481) (4,110) (7,712)
Proceeds from sales of fixed assets 695 745 10
Other, net (787) 504 68
-------------------------------------------------
Net cash used in investing activities (3,573) (2,861) (7,634)
-------------------------------------------------
Cash Flows from Financing Activities:
Change in checks outstanding 507 466 166
Distribution of earnings to minority partner (28) (376) 0
Proceeds from (repayments of) long-term debt, net (446) (231) (515)
Proceeds from (repayments of) revolving credit facilities, net (4,400) (5,144) (2,490)
Payment of dividends (1,883) (1,938) (1,976)
Purchase of treasury stock, net 68 (2,552) (1,126)
Other -- 101 182
-------------------------------------------------
Net cash used in financing activities (6,182) (9,674) (5,759)
-------------------------------------------------
Effect of changes in foreign exchange rates 751 (328) (991)
-------------------------------------------------
Decrease in cash and cash equivalents (246) (38) (626)
Cash and cash equivalents at beginning of year 581 619 1,245
---------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 335 $ 581 $ 619
-------------------------------------------------
Income taxes paid, net of refunds during the year $ 979 $1,714 $1,368
=================================================
Interest paid during the year $ 905 $1,419 $2,880
=================================================
The accompanying notes are an integral part of these consolidated financial
statements.
22
TB Wood's Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(in thousands, except per share amounts)
1. Nature of Business and Principles of Consolidation
TB Wood's Corporation and subsidiaries (collectively, "Wood's" or the "Company")
is an established designer, manufacturer, and marketer of electronic and
mechanical industrial power transmission products which are sold to
distributors, domestic and international manufacturers, and users of industrial
equipment. Principal products of the Company include electronic drives,
integrated electronic drive systems, mechanical belted drives, and flexible
couplings. The Company has operations throughout the United States, Canada,
Mexico, Germany, Italy and India. The accompanying consolidated financial
statements include the accounts of TB Wood's Corporation, its wholly owned
subsidiaries, and its majority-owned joint ventures. All intercompany accounts
and transactions have been eliminated in consolidation.
Year-End
The Company's 52/53-week fiscal year ends on the Friday closest to the last day
of December. The Company's fiscal year ends were as follows:
2002...........................December 27, 2002
2001...........................December 28, 2001
2000...........................December 29, 2000
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Product Warranty
In the ordinary course of business, the Company warrants its products against
defect in design, materials, and workmanship over various time periods. Warranty
reserve and allowance for product returns is established based upon management's
best estimates of amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. The warranty reserve and allowance
for product returns is immaterial to the financial position of the Company for
all periods presented and the change in reserve and allowance for each period is
immaterial to the Company's results and cash flow.
Inventories
Inventories are stated at the lower of cost or market primarily using the
last-in, first-out ("LIFO") method. Market is defined as net realizable value.
Cost includes raw materials, direct labor, and manufacturing overhead.
Approximately 66% and 72% of total inventories at December 27, 2002 and December
28, 2001, respectively, were valued using the LIFO method. In 2001, the Company
changed its method for determining LIFO values from the double-extension method
to the link-chain method. This change did not have a material impact upon the
financial statements. Due to the decline in inventories valued using the LIFO
method, the LIFO reserve decreased $278 and $451 during the years ended December
27, 2002 and December 28, 2001 respectively, which reduced the Cost of Goods
Sold by the same amount. Inventories for foreign operations are stated at the
lower of cost or market using the first-in, first-out ("FIFO") method.
The Company writes down inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of the inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
23
Property, Plant and Equipment
The Company depreciates its property, plant, and equipment principally using the
straight-line method over the estimated useful lives of the assets. Equipment
under capital leases is depreciated over the asset's estimated useful life and
is included in machinery and equipment. Maintenance and repair costs are charged
to expense as incurred, while major renewals and improvements are capitalized.
When property and equipment are retired or otherwise disposed of, the related
carrying value and accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in income. The depreciable lives of the
major classes of property, plant and equipment are summarized as follows:
--------------------------------------------------------------------
Asset Type Lives
--------------------------------------------------------------------
Machinery and equipment 3 - 15 years
Buildings and improvements 10 - 40 years
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the expected future net cash
flows generated by the assets. If the assets are considered to be impaired, the
impairment is recognized by the amount by which the carrying amount of the asset
exceeds its fair value.
Post Retirement Benefits Obligation
The Company in consultation with an actuarial firm specializing in the valuation
of postretirement benefit obligations selects certain actuarial assumptions to
base the actuarial valuation of such obligation on, such as the discount rate
(interest rate used to determine present value of obligations payable in the
future), initial health care cost trend rate, the ultimate cost care trend rate
and mortality tables to determine the expected future mortality of plan
participants. To the extent that the actual rates and mortality vary from the
assumptions used to determine the present actuarial valuation of these
postretirement benefits, additional provision for expense may be necessary.
Stock Based Compensation
For fiscal 2002 and prior years the Company used the intrinsic value method as
defined by Accounting Principles Board Opinion No. 25 to account for stock-based
employee compensation in each period presented. The Company intends to adopt
SFAS No. 123 as amended by SFAS No. 148 during fiscal 2003 but has not yet made
a determination as to the transition method to use or completed the valuation of
the options granted during January 2003.
The following table illustrates the effect on net income (loss) and net income
(loss) per share had compensation costs for the stock-based compensation plan
been determined based on the grant date fair values of awards under the
provisions of SFAS No. 123, for the fiscal years:
2002 2001 2000
---- ---- ----
Net (loss) income as reported $(1,050) $2,906 $6,145
Less: Total stock-based compensation expense determined under the fair
value-based method for all awards, net of related tax effects (157) (36) (42)
---------------------------------------
Pro forma net (loss) income $(1,207) $2,870 $6,103
=======================================
Net (loss) income per share - basic
As reported $(0.20) $0.55 $1.12
Pro forma $(0.23) $0.54 $1.12
Net (loss) income per share - diluted
As reported $(0.20) $0.54 $1.12
Pro forma $(0.23) $0.54 $1.12
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" issued
by the Securities and Exchange Commission. Revenue is recognized at the time
product is shipped and title passes pursuant to the terms of the agreement with
the customer, the amount due from the customer is fixed and collectibility of
the related receivable is reasonably assured. The Company establishes allowances
to cover anticipated doubtful accounts, sales discounts, product warranty, and
returns based upon historical experience. Shipping and handling costs charged to
customers are included as a component of net sales.
24
Self-Insurance
For a portion of fiscal 2000 and prior fiscal years the Company's workers'
compensation insurance policies had the potential for retrospective premium
adjustments. In fiscal 2000 the Company changed to a fully insured workers'
compensation insurance type of policy. For fiscal 2001 and prior years the
Company maintained a partially self-insured group health insurance policy that
is subject to specific retention levels. During fiscal 2002 the Company changed
to a fully insured group health insurance policy. Insurance administrators
assist the Company in estimating the fully developed workers' compensation
liability and group health insurance reserves that are accrued by the Company.
In the opinion of management, adequate provision has been made for all incurred
claims. At December 27, 2002, the Company's bank had issued letters of credit
totaling $577 to cover incurred but unpaid claims and other costs related to its
workers' compensation liability.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation."
Translation adjustments, which result from the process of translating financial
statements into U.S. dollars, are accumulated as a separate component of other
comprehensive income. Exchange gains and losses resulting from foreign currency
transactions, primarily intercompany sales of products, are included in other
expense in the accompanying statements of operations.
Goodwill
For fiscal 2001 and prior years the excess of cost over the net assets acquired
("Goodwill") was amortized on a straight-line basis over a period of 40 years.
Goodwill amortization before income taxes for 2001 and 2000 was $226 and $259
respectively.
Effective at the beginning of its fiscal year 2002 the Company adopted Statement
of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets" which requires that goodwill and intangible assets deemed to have an
indefinite life will no longer be amortized but will be subject to an annual
impairment test. As a result of adopting SFAS No. 142, the Company will no
longer record goodwill amortization of approximately $226 ($180 after income
tax) per year.
The following table provides the comparable effects of the adoption of SFAS No.
142 for the fiscal years 2002, 2001 and 2000.
(in thousands, except per share data) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Reported Income before cumulative effect of change in accounting
principle $1,796 $2,906 $6,145
Add Back: Goodwill amortization (net of income tax) -- 180 160
--------------------------------------
Adjusted Net Income before cumulative effect of change in accounting
principle