No 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended January 2, 2004
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 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.
Indicate by check mark whether the
registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes No
As of February 17, 2004, there were 5,157,092 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 $26,021,071.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
1
TB WOOD’S CORPORATION
FISCAL YEAR 2003 FORM 10-K ANNUAL REPORT
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PART I
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 147 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, 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 several new electronic products and product line extensions bringing the total number of active electronic product families to 17. 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. 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, four new coupling products, and 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 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. With the introduction of a gearbox product line, the Company now competes in all three industrial power transmission product categories.
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.
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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. 10 included in this Form 10-K. Net sales amounts in the following table are in millions of dollars.
| 2003 |
2002 |
2001 |
|||||||||||||||||
| Net Sales | % | Net Sales | % | Net Sales | % | ||||||||||||||
| Electronics | $ | 38.1 | 39.5 | % | $ | 38.9 | 37.3 | % | $ | 38.7 | 35.6 | % | |||||||
| Mechanical | 58.3 | 60.5 | % | 65.5 | 62.7 | % | 70.1 | 64.4 | % | ||||||||||
| Totals | $ | 96.4 | 100.0 | % | $ | 104.4 | 100.0 | % | $ | 108.8 | 100.0 | % | |||||||
Electronic Product Offering
The Company designs and manufactures AC electronic VFDs and motor starters, Direct Current (“DC”) electronic motor controllers, 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 making, 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 built 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, 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 Austell, Georgia; Dade City, Florida; Montreal, Quebec; Edmonton, Alberta; Marienheide, Germany; Naturns, Italy; and Bangalore, India.
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.
4
Customers
The OEM market is served directly by the Company and through industrial distributors. The replacement market for the Company’s products is served primarily 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. 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 35%, 40% and 36% of the Company’s consolidated revenue for fiscal years 2003, 2002 and 2001, respectively. Motion Industries, an industrial distributor with a large diversified customer base, accounted for approximately 18% of the Company’s consolidated revenue for fiscal 2003.
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 productivity 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 (ABB), Rockwell Automation (Allen Bradley and Reliance Electric), Siemens Corp, and Yaskawa. 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, product line breath, engineering, and customer support. The Company’s most significant competitors in the mechanical product category include Rockwell Automation, Inc. (Dodge), 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 $2.4 million for 2003, $2.9 million for 2002, and $3.1 million for 2001 which as a percent of net sales during the last three fiscal years have been 2.5% for 2003, 2.8% for 2002, and 2.8% for 2001. 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 research is also conducted at its subsidiary in Italy, and electronic drive system research is conducted in Chattanooga, TN.
Raw Materials
The Company uses standard purchased components in all of its electronic 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 scrap steel, including pig iron, metal stampings, castings, forgings 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.
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®, Formflex®, Ultra-V®, Roto-Cone®, Var-A-ConeTM, True TubeTM, AmbiTech™, E-trAC®, Ultracon®, FiberlinkTM, Dura-Flex®, Disc-O-Torque®, E-FLOW®, E-Trol, IMD®, NLS®, Petro-trAC®, Roto-Cam®, S-trAC®, Sure-Grip®, Volkman®, All-Pro®, Superstart®, Truetube®, Wood’s@Work®, QT Power Chain®, Win-Trac® and PDA-Trac®.
5
Employees
As of January 2, 2004 the Company employed approximately 950 people. The National Metal Workers’ Union of Mexico represents approximately 100 production employees in the Company’s Mexican facilities pursuant to collective bargaining agreements that expire on February 5, 2005. 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 20, 2007. 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 Company 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 10 Business Segment Information to the consolidated financial statements for information on sales and long lived assets by geographical area.
Recent Developments
In September 2003, Thomas F. Tatarczuch, the Company’s former Vice President, Finance retired from the Company and Joseph C. Horvath was appointed as Vice President/Chief Financial Officer of the Company. In November 2003, Michael L. Hurt, the Company’s former President and Chief Executive Officer retired from the Company and James R. Swenson, a director of the Company was appointed Interim President and Chief Executive Officer.
During 2003 the Company relocated its manufacturing operations formerly conducted in Mexico City to San Luis Potosi, Mexico. It continues to maintain its finished goods warehouse, sales, and customer service operations for the Latin American market in Mexico City.
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.
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.
The Company’s Internet website address is www.tbwoods.com. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
The Company owns and operates the following facilities:
| Location | Operations | Sq. Feet | |||
| Chambersburg, Pennsylvania | Foundry production of iron, and manufacturing and engineering of mechanical and electronic products. Central distribution, administrative offices, and corporate headquarters. | 440,000 | |||
| 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 Canada. | 46,000 | |||
| 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 electronic drive systems. | 60,000 |
In addition, the Company leases manufacturing facilities in San Luis Potosi, Mexico (39,400 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; and Mexico City, Mexico. The Company uses contract warehouses in Dade City, Florida and Austell, Georgia. We believe that our facilities are adequate for our current needs.
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 January 2, 2004.
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Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company is traded on NASDAQ under the symbol “TBWC”. The high and low prices as reported by the NASDAQ National Market for the Common Stock, and dividends paid on Common Stock, during the period from December 29, 2001 through January 2, 2004 were as follows:
| Price | Dividends | |||||||||||||
| High | Low | Declared | Paid | |||||||||||
| 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 | ||||||||||
| Fiscal Year 2003 | 1st quarter | $ | 7.12 | $ | 4.00 | $ | .09 | $ | .09 | |||||
| 2nd quarter | 7.22 | 4.25 | .09 | .09 | ||||||||||
| 3rd quarter | 9.21 | 6.50 | .09 | .09 | ||||||||||
| 4th quarter | 9.23 | 7.60 | .09 | .09 | ||||||||||
On February 17, 2004, there were 161 shareholders of record of the Company’s Common Stock. The closing sales price was $8.70. The Company declared a $.09 dividend on January 12, 2004 and paid it on January 30, 2004. 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 28, 2002 through January 2, 2004.
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.
Information regarding our equity compensation plans is set forth in the Company’s Proxy Statement for the 2004 Annual Meeting in the Section entitled “Other Forms of Compensation” and is incorporated herein by reference.
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 2003 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:
| 2003 | January 2, 2004 | ||
| 2002 | December 27, 2002 | ||
| 2001 | December 28, 2001 | ||
| 2000 | December 29, 2000 | ||
| 1999 | December 31, 1999 |
Fiscal year end 2003 was a 53 week year.
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Selected Financial Data
(in thousands, except per share data)
Fiscal Year |
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||
| Net sales | $ | 96,415 | $ | 104,383 | $ | 108,805 | $ | 134,357 | $ | 125,334 | ||||||
| Gross profit | 29,397 | 33,145 | 37,037 | 48,500 | 45,954 | |||||||||||
| Operating income before minority interest | 762 | 3,967 | 6,027 | 14,200 | 12,108 | |||||||||||
| Minority interest | — | 151 | 1,147 | 1,554 | 808 | |||||||||||
| Operating income | 762 | 3,816 | 4,880 | 12,646 | 11,300 | |||||||||||
| Net (loss) income | (360 | ) | (1,050 | ) | 2,906 | 6,145 | 5,367 | |||||||||
| Cash Flow | ||||||||||||||||
| Cash provided by operations | $ | 2,589 | $ | 12,450 | $ | 13,291 | $ | 13,758 | $ | 10,050 | ||||||
| Capital expenditures | (2,227 | ) | (3,481 | ) | (4,110 | ) | (7,712 | ) | (8,316 | ) | ||||||
| Adjusted working capital(1) | $ | 24,834 | $ | 20,995 | $ | 27,517 | $ | 31,430 | $ | 33,453 | ||||||
| Total assets | 76,407 | 77,576 | 87,632 | 102,660 | 102,866 | |||||||||||
| Current portion of long-term debt | 53 | 18,363 | 843 | 258 | 273 | |||||||||||
| Long-term debt, less current portion | 25,371 | 5,436 | 27,802 | 33,661 | 36,651 | |||||||||||
| Total debt | 25,424 | 23,799 | 28,645 | 33,919 | 36,924 | |||||||||||
| Shareholders’ equity | 25,418 | 26,413 | 28,445 | 30,092 | 27,692 | |||||||||||
| Per Share Data | ||||||||||||||||
| Net (loss) income | $ | (0.07 | ) | $ | (0.20 | ) | $ | 0.54 | $ | 1.12 | $ | 0.91 | ||||
| Cash dividends paid | .36 | .36 | .36 | .36 | .36 | |||||||||||
| Weighted average shares outstanding | 5,180 | 5,232 | 5,355 | 5,473 | 5,910 | |||||||||||
(1) Adjusted working capital is total current assets less accounts payable, accrued expenses, and deferred income taxes excluding the current portion of long-term debt shown above.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company is a worldwide manufacturer of mechanical and electronic products used in the process of power transmission for industrial and other commercial applications. The Company, along with its competitors, has endured a significant economic downturn that began during the second half of 2000. During the fourth quarter of 2003, quarterly revenues increased, compared to the same quarter in the previous year, for the first time since 2000. However, the Company reported a net loss for the fourth quarter primarily due to approximately $1.6 million of charges for items related to retirement of the former CEO, certain credit losses, and other impairment charges.
The Company continues to face pressures to provide product at lower costs. As a result, management is focused on ways to better utilize the Company’s worldwide productive capacity as well as leverage its technical capabilities to add more value to the Company’s products and services. The Company continues to work at improving productivity and quality in products produced at its Mexican facility, and believes that in 2004 this facility will enhance the Company’s ability to be a low-cost producer of mechanical power transmission products. In addition, the Company continues to explore ways to take advantage of lower cost electronics components produced abroad.
The following tables, derived from the Company’s audited consolidated financial statements, present selected elements of the Company’s operating results, and the changes thereto, for the two most recent years compared to the results for the immediately preceding year. Fiscal 2003 represents a 53 week year, while fiscal 2002 and 2001 were 52 week years.
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Year Ended January 2, 2004 Compared to Year Ended December 27, 2002
(in thousands except per share
data)
| 2003 | 2002 | Dollar Change | % Change | ||||||||||
| Sales | |||||||||||||
| Mechanical Business | $ | 58,343 | $ | 65,522 | $ | (7,179 | ) | –11.0 | % | ||||
| Electronics Business | 38,072 | 38,861 | (789 | ) | –2.0 | % | |||||||
| Total Sales | 96,415 | 104,383 | (7,968 | ) | –7.6 | % | |||||||
| Cost of Sales | |||||||||||||
| Mechanical Business | 40,942 | 45,293 | (4,351 | ) | –9.6 | % | |||||||
| Electronics Business | 26,076 | 25,945 | 131 | 0.5 | % | ||||||||
| Total Cost of Sales | 67,018 | 71,238 | (4,220 | ) | –5.9 | % | |||||||
| Gross Profit | |||||||||||||
| Mechanical Business | 17,401 | 20,229 | (2,828 | ) | –14.0 | % | |||||||
| Electronics Business | 11,996 | 12,916 | (920 | ) | –7.1 | % | |||||||
| Total Gross Profit | 29,397 | 33,145 | (3,748 | ) | –11.3 | % | |||||||
| Selling General and Administrative Expenses | 28,635 | 29,178 | (543 | ) | –1.9 | % | |||||||
| Sales | |||||||||||||
| Mechanical Business | 60.5 | % | 62.7 | % | |||||||||
| Electronics Business | 39.5 | % | 37.3 | % | |||||||||
| Total Sales | 100.0 | % | 100.0 | % | |||||||||
| Cost of Sales as a Percentage of Sales | |||||||||||||
| Mechanical Business | 70.2 | % | 69.1 | % | |||||||||
| Electronics Business | 68.5 | % | 66.8 | % | |||||||||
| Total Cost of Sales | 69.5 | % | 68.2 | % | |||||||||
| Gross Profit as a Percentage of Sales | |||||||||||||
| Mechanical Business | 29.8 | % | 30.9 | % | |||||||||
| Electronics Business | 31.5 | % | 33.2 | % | |||||||||
| Total Gross Profit | 30.5 | % | 31.8 | % | |||||||||
| SG&A Expense as a percentage of sales | 29.7 | % | 28.0 | % |
The principal reason for the sales reduction the Company has experienced since 2000 has been the length and severity of the US industrial slowdown. In addition to the effect of general economic conditions on the Company’s revenues, the buying patterns and inventory management practices of the Company’s major customers have significantly influenced the timing of the Company’s revenues. Based on data received from industry trade associations, management believes its main competitors have experienced similar reductions in sales. With respect to the Company’s Electronics Business, recent significant fluctuations in foreign currencies, primarily the Euro, and technologically driven advances have also significantly affected pricing and overall revenue levels.
Mechanical Business sales decline of $7.2 million was driven by the continued general industrial slowdown. Sales volume declines resulted in a $7.7 million decline in mechanical revenues, principally as a result of a $6.9 million decline in sales to the Company’s largest customer. This was offset by $0.5 million of increased revenues associated with positive currency fluctuations. Electronic Business sales declined $0.8 million due to $3.3 million decline in volume and/or of pricing. Electronic revenues from its major customer decreased $3.4 million in 2003. These declines were largely offset by favorable currency fluctuations of $2.5 million, associated principally with the Company’s European operations.
Overall gross profit as a percent of net sales decreased to 30.5% from 31.8% 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. Gross profit as a percent of net sales decreased in both the Mechanical and Electronics businesses due to the changes in volume and pricing described above, together with the affect of lower absorption of fixed manufacturing expenses related to the lower level of manufacturing operations. This was particularly true in the Company’s Mechanical Business. Gross profits of the Mechanical Business declined approximately $2.1 million principally due to actual volume declines, while the Electronic Business gross profit declined $1.8 million, principally reflecting ongoing market pressure on pricing. The effects of foreign currency fluctuations favorably impacted Mechanical and Electronics business gross profits by approximately $0.2 million and $0.8 million, respectively. The remaining $0.9 million decline in gross profits was related to the unfavorable impact of fixed cost absorption attributable to lower sales volumes.
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Selling, general and administrative expenses declined in 2003 compared to 2002 due to the reduced selling costs associated with lower sales volume, lower headcount, and savings associated with the termination of the Company’s supplemental retirement program for senior management. These savings were partially offset by approximately $1.0 million of costs related to the retirements of the then serving CEO and CFO in the second half of 2003 and $0.5 million of credit losses related to business activities in Latin America.
Interest expense is the primary component of other expenses and was $1.0 million for 2003, an increase of $0.1 million compared to 2002. This reflects the stable and historically low interest rate levels experienced throughout 2003.
Despite recognizing a consolidated loss before income taxes, the Company incurred $0.3 million of income tax expense associated with the profitability of operations in Europe and Canada. As