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 144 year-old business operates 11 production facilities with over 1,100 employees in the United States, Canada, Mexico, Germany, India and Italy. 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 original Pennsylvania corporation that was founded in 1857, entered the power transmission industry at the turn of the century. The Company was incorporated in 1995. In January 1996, a subsidiary of the Company merged with TBW, with TBW as the surviving corporation in the merger. The end result of the merger is that TBW is a subsidiary of the Company.
The Company's core electronic product offer totaled 11 product families in 1996. Since that time, the Company has introduced and launched several new electronic products and product line extensions that bring the total number of active electronic product families to 34. Eight of these introductions have occurred within the last three years. These include a new line of full-featured drives, a high-performance vector drive, an integrated motor drive, and a sub-micro drive. In 2001, the Company will introduce a National Sanitation Foundation certified drive for use in Food Area Splash zone applications. In addition, the Company has continued its focus on cost-effective drives for industrial Original Equipment Manufacturer ("OEM") applications. Since 1992, the Company has introduced nine new mechanical products and product line extensions, including three mechanical belted drive products and four new coupling products.
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 business the Company acquired Plant Engineering Consultants, Inc., an established supplier of integrated drive systems for the fibers industry; Ambi-Tech Industries, Inc., a leading manufacturer of electronic brakes; and Graseby Controls Inc., a supplier of high-frequency drives for machine tool applications. 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 drive developers, manufacturers and marketers, and are located in the two most important machinery markets in Europe. The Company's mechanical business acquisitions include several lines of flexible couplings and variable speed drives from Dana Corporation; Grupo Blaju S.A. de C.V., the leading Mexican manufacturer and marketer of belted drives; and Deck Manufacturing, a producer of gear couplings. During July, 1999, the Company entered into a joint venture with Electron, located in Littleton, Colorado in the belted drive business to leverage fixed costs, provide additional foundry capacity, and open new customer opportunities. The Company has strategic alliances with companies in Finland, France, Switzerland, Australia, New Zealand and Japan.
Industry Overview
The power transmission industry provides electronic and mechanical products used in manufacturing and material processing activities that transfer controlled power from a motor or engine to a machine. The power transmission industry consists of three product categories: mechanical power transmission components, gear boxes and electronic drives. The Company competes in the electronic drives and mechanical power transmission component's product categories.
Products
The products manufactured by the Company are classified into two segments, mechanical business and electronics business. The mechanical business segment includes belted drives and couplings. 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 product information, refer to the consolidated financial statements and footnote No. 9 included in this Form 10-K.
Electronic Product Offering
The Company designs and manufactures Alternating Current ("AC") and Direct Current ("DC") electronic drives and integrated electronic drive systems that are marketed throughout North America and internationally. 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 drive 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, packaging and general machinery applications. The Company's electronic products are designed to meet both North American and European standards. The Company's integrated electronic drive systems consist of uniquely configured AC and/or DC electronic drives, programmable logic controllers and in-house designed custom 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 and brakes. These products are used in a variety of industrial applications to transmit power from motors and engines to machines. The primary markets for these products are the construction, oilfield and 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 selected, authorized, industrial distributors who resell the Company's products to industrial consumers and Original Equipment Manufacturers ("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; Stratford, Ontario and Mexico City, Mexico and regional distribution centers in Atlanta, Georgia; Dallas, Texas; Montreal, Quebec; Orlando, Florida; Reno, Nevada; Edmonton, Alberta; Marienheide, Germany; Bangalore, India; and Naturns, Italy.
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 customers include, among others, Motion Industries and Kaman Industrial Technologies who are among the largest distributors in the power transmission industry. In addition, the Company's distributors also 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 31% of the Company's net sales in 2000.
Competition
The 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, Emerson Electric Co. Inc., Martin Sprocket and Gear, Rexnord Corp. and Lovejoy Industries 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) as a percent of net sales during the last three fiscal years have been 2.3% for 2000, 2.9% for 1999, and 2.6% for 1998. The Company is completing a new Technology Center at the Chambersburg facility which is designed to make the research and development investment more productive by making it easier for engineers to share insights and collaborate on projects.
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, 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.
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-Cone(TM), True Tube(TM), E-trAC(R), Ultracon(R), Fiberlink(TM), Dura-Flex, Disc-O-Torque, DST, E-Trol, HST, IST, NLS, Roto-Cam, Softron, and Sure-Grip.
Employees
As of December 29, 2000, the Company employed over 1,100 people. Over 30 of the Company's hourly employees located at its Stratford, Ontario, Canada facility are represented by the United Steelworkers of Canada pursuant to a collective bargaining agreement dated January 19, 2001 that expires on January 19, 2004. Over 133 of the Company's employees located at its Mexico City, Mexico facility are represented by the National Metal Workers' Union of Mexico pursuant to a collective bargaining agreement that expires on January 31, 2002. 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.
Both the Mt. Pleasant, Michigan (the "Mt. Pleasant Facility") and the Chambersburg, Pennsylvania (the "Chambersburg Facility") facilities had been listed on the Comprehensive Environmental Response, Compensation, and Liability Information System ("CERCLIS") (a list of sites maintained by the United States Environmental Protection Agency ("USEPA") for which a determination was to be made concerning whether investigation or remediation under CERCLA would be required). Both have been designated by USEPA as requiring no further action under CERCLA; therefore, the Company does not believe that material expenditures for these sites will be incurred under the CERCLA program. However, this does not assure that such expenditures would not be required under other federal and/or state programs.
The Mt. Pleasant Facility is currently listed on Michigan's inactive hazardous waste site list pursuant to the Michigan version of CERCLA (formerly known as "Act 307", amended and recodified on June 5, 1995 as Part 201 of the Natural Resources and Environmental Protection Act ("Part 201")). The Mt. Pleasant Facility was first placed on the Michigan hazardous waste site list in 1991, when the Facility was owned by Dana Corporation. 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, then 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.
Recent Developments
On February 15, 2001 the Company announced that shares of its common stock would no longer be traded on the New York Stock Exchange ("NYSE"). Effective February 21, 2001, the Company's common stock began trading on The Nasdaq Stock Market ("Nasdaq") under the symbol TBWC.
The Company decided to list its common stock on the Nasdaq after the NYSE notified the Company in December 2000, that it did not meet certain of the NYSE's continued listing criteria. Following an analysis and recommendation by management, the Company's Board of Directors determined that moving to the Nasdaq was in the best interest of the Company. Nasdaq approved the Company's listing application on February 9, 2001.
Item 2.
Item 2. Properties.
The Company owns and operates the following facilities:
- --------------------- *Includes certain leased space
In addition, the Company leases manufacturing facilities in Mexico City, Mexico. The Company also has distribution facilities in: Atlanta, Georgia; Dallas, Texas; Montreal, Quebec; Edmonton, Alberta; Orlando, Florida; and Reno, Nevada.
Item 3.
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.
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 29, 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company consummated the Initial Public Offering ("IPO") of its common stock on February 8, 1996 and, effective February 21, 2001, its Common Stock is listed on the Nasdaq National Market. From the time of the IPO up until February 21, 2001, the Company's common stock was noted on the NYSE. The high and low prices for the Common Stock, and dividends paid on Common Stock, during the period from January 2, 1999 through December 29, 2000 were as follows:
On February 2, 2001 there were 163 registered shareholders of the Company's Common Stock, and the high and low sales prices for the Common Stock were $8.75 and $8.00, respectively. During fiscal year 2000, the Company declared and paid total dividends of $.36 on the shares of its Common Stock. The Company declared a $.09 dividend on January 8, 2001 and paid it on January 31, 2001. The declaration of any dividend, including the amount thereof, will be 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 31, 1999 through December 29, 2000.
Item 6.
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 2000 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."
Effective fiscal year 1995, the Company changed its year-end to the Friday closest to the last day of December. Fiscal year-ends are as follows:
2000 December 29, 2000 1999 December 31, 1999 1998 January 1, 1999 1997 January 2, 1998 1996 January 3, 1997 1995 December 29, 1995 1994 & prior December 31 of calendar year.
Selected Financial Data
* Working capital is defined as the sum of accounts receivable, inventory, and other current assets, less accounts payable and accrued expenses.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
Year Ended December 29, 2000 Compared to Year Ended December 31, 1999
Net sales for fiscal 2000 increased to $134.4 million from $125.3 million in 1999, an increase of $9.1 million, or 7.2%.
Sales and selling, general, and administrative expense data presented has been adjusted to comply with Emerging Issues Task Force Issue No. 00-10 for freight billed to customers being considered revenue, not expense. The sales
strength was negatively affected by the strong U.S. dollar. Principal areas of growth were mechanical belted drives, $6.6 million from market growth, and AC drives, $3.3 million from customer growth.
Gross profit for 2000 increased to $48.5 million from $46.0 million in 1999, an increase of $2.5 million, or 5.5%. Gross profit as a percent of net sales decreased to 36.1% from 36.7%, due primarily to wage inflation, higher health care costs, higher depreciation expense, effect of currency on U.S. dollar component purchases by our European locations, and customer mix change in Europe. These unfavorable items were partially offset by higher fixed cost absorption and direct labor and component cost reduction activities.
Selling, general, and administrative ("SG&A") expense for fiscal 2000 increased to $34.4 million from $33.8 million in 1999, an increase of $0.6 million or 1.8%. SG&A expense as a percent of net sales decreased to 25.6% from 27.0% primarily as a result of higher sales and relatively stable costs. As in 1999, the major challenge in 2000 was to execute tight control of discretionary expenses and head count while continuing to spend on new product projects for future years' benefit.
Other expense (excluding minority interest) for fiscal 2000 remained consistent at $2.6 million for 1999 and 2000. Interest expense, a component of total other expense, increased to $2.9 million in 2000 from $1.9 million in 1999. This increase was due primarily to higher interest rates and additional debt to finance the Self Tender "Dutch Auction". The effective tax rate for 2000 was 38.0%. Details of the provision for income taxes are discussed in Note 5 to the financial statements.
Net income for fiscal 2000 increased to $6.1 million from $5.4 million in 1999, an increase of $0.7 million, or 14.5%. The primarily reason for this improvement was higher sales volume.
Year Ended December 31, 1999 Compared to Year Ended January 1, 1999
Net sales for fiscal 1999 decreased to $125.3 million from $135.4 million in 1998, a decrease of $10.1 million, or 7.4%. Based on data received from industry trade associations, this reduction compares to, and management believes was caused by, changes in the marketplace caused by overall economic conditions.
Gross profit for 1999 decreased to $46.0 million from $49.1 million in 1998, a decrease of $3.1 million, or 6.3%. Gross profit as a percent of net sales increased to 36.7% from 36.2%, due primarily to activities to reduce raw materials and component costs, benefits from the belted drives joint venture, lower machine set-up costs, increased output per man hour of wage costs, and closing the Greensboro, North Carolina facility. These favorable results were partially offset by wage inflation and lower fixed cost absorption, which resulted in the decrease of gross profit.
Selling, general, and administrative ("SG&A") expense for fiscal 1999 increased to $33.8 million from $33.5 million in 1998, an increase of $0.3 million or 1.1%. SG&A expense as a percent of net sales increased to 27.0% from 24.7%, primarily as a result of lower sales. The major challenge in 1999 was to control SG&A expenses in absolute dollars while spending on new product projects which may generate benefits in future years.
Other expense (excluding minority interest) for fiscal 1999 increased to $2.6 million from $2.4 million in 1998, an increase of $0.2 million or 8.3%. Other expense for 1999 included $350 thousand of one-time charges to terminate the proposed acquisition of Lincoln Motors. Interest expense, a component of total other expense, decreased to $1.9 million in 1999 from $2.0 million in 1998. This decrease was due primarily to lower interest rates. The effective tax rate for 1999 was 38.5%. Details of the provision for income taxes are discussed in Note 5 to the financial statements.
Net income for fiscal 1999 decreased to $5.4 million from $7.9 million in 1998, a decrease of $2.5 million, or 31.6%. The primary reason for this reduction was the lower sales volume.
Year Ended January 1, 1999 Compared to Year Ended January 2, 1998
Net sales for fiscal 1998 increased to $135.4 million from $125.5 million in 1997, an increase of $9.9 million, or 7.9%. The increase in sales was primarily due to increased electronics business sales resulting from the acquisition of Berges electronic GmbH on December 1, 1997. The year 1998 started off with record sales in the first quarter, but beginning in the second quarter, a softening in our North American market resulted in lower sales levels for the remainder of the year.
Gross profit for 1998 increased to $49.1 million from $46.4 million in 1997, an increase of $2.7 million, or 5.6%. Gross profit as a percent of net sales decreased to 36.2% from 37.0%, due primarily to lower margins in the mechanical business resulting from expenditures for tooling and start-up costs related to new business, training of new employees, and consolidation of the gear coupling product line in our San Marcos facility.
Selling, general, and administrative expense for fiscal 1998 increased to $33.5 million from $29.5 million in 1997, an increase of $4.0 million or 13.5%. SG&A expense as a percent of net sales increased to 24.7% from 23.5%, primarily as a result of higher SG&A expense as a percent of sales at Berges electronic GmbH which was not included in 1997 operating results.
Other expense for fiscal 1998 decreased to $2.4 million from $2.5 million in 1997, a decrease of $0.1 million or 1.9%. Interest expense, a component of total other expense, increased to $2.0 million in 1998 from $1.7 million in 1997. This increase was due primarily to higher debt levels in 1998, offset by lower interest rates. The effective tax rate for 1998 was 40.0%. Details of the provision for income taxes are discussed in Note 5 to the financial statements.
Net income for fiscal 1998 decreased to $7.9 million from $8.7 million in 1997, a decrease of $.8 million, or 9.2%.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flows from operations and borrowings under the Company's revolving credit agreement. Cash provided from operations in 2000 was $13.8 million, an increase of $3.7 million from the prior year. Net cash used for investing activities during fiscal years 2000, 1999, and 1998 was $7.6 million, $7.8 million, and $7.7 million, respectively. The Company's investing activities in 2000 and 1999 were primarily capital expenditures.
Capital expenditures for fiscal years 2000, 1999, and 1998 were $7.7 million, $8.3 million, and $7.5 million, respectively. During the last three fiscal years, the Company has made significant capital investments in computer controlled surface mount production ("SMT") lines for populating semiconductors onto circuit boards, test and production equipment at the Company's foundry in Chambersburg, and other equipment to improve and modernize production facilities. In 2000, the Company continued the renovation of the advanced engineering center in Chambersburg, other equipment to upgrade a portion of machine tool base for mechanical product business, and tooling and equipment to support new product introductions for electronic product business. In 1999, the Company completed the new San Marcos, Texas facility and upgraded some of the machine tool equipment base for mechanical product business. In 1998, the Company initiated two major facility projects: 1) an engineering center in Chambersburg scheduled for completion in late 2000 and 2) a new plant in San Marcos, Texas to manufacture flexible couplings, which was operational in the first quarter of 1999. These capital expenditures are intended to reduce costs, improve product quality, and provide additional capacity for meeting the Company's growth objectives.
In March 1999, the Company borrowed $3.0 million by using Variable Rate Demand Revenue Bonds, under the authority of the Industrial Development Corporation City of San Marcos, Texas to finance a new facility for the mechanical products business.
The Company paid $2.0 million in dividends during 2000. The Company paid a $0.09 per share dividend in the first, second, third, and fourth quarters of 2000, and declared a $0.09 dividend on January 8, 2001 and paid it on January 31, 2001. The Company paid $2.1 million in dividends during 1999.
The Company believes that it will have sufficient cash flows from operations and available borrowings to meet its future short-term and long-term cash needs for interest, operating expenses, and capital expenditures.
Derivative Financial Instruments
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, German deutsche mark, Indian rupee, Italian lira, and the Euro. 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.
Interest Rate Derivatives at 1999 2000 2001 ----------------------------------------------------------------------- Interest Rate Swap: Variable to Fixed Fixed Rate U.S. $............. 10,000 10,000 10,000 Average Pay Rate.............. 5.75% 5.75% 5.75%
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. TB Wood's adopted the standards as of December 29, 2000, and the adoption did not materially impact our consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain of the SEC's views in applying accounting principles generally accepted in the U.S. to revenue recognition in financial statements. TB Wood's has adopted this standard as of fiscal year 2000, and there is no impact on the financial statements.
In December 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires all amounts billed to a customer in a sale transaction related to shipping and handling to be recorded as revenues earned for the goods provided. Costs incurred for shipping and handling are classified as costs of sales. The Company adopted EITF 00-10 in 2000, and all prior period amounts have been restated for the adoption of EITF 00-10.
Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995, except for the historical information contained herein, this annual report contains forward-looking statements about matters which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed in the Company's filings with the Securities and Exchange Commission.
Item 8.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of 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 29, 2000 and December 31, 1999 and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 29, 2000. 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 29, 2000 and December 31, 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2000 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 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 2, 2001
TB Wood's Corporation And Subsidiaries Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
TB Wood's Corporation And Subsidiaries Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
TB Wood's Corporation And Subsidiaries Consolidated Statements of Changes in Shareholders' Equity
The accompanying notes are an integral part of these consolidated financial statements.
TB Wood's Corporation And Subsidiaries Consolidated Statements Of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements
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 venture. All intercompany accounts have been eliminated in consolidation.
Year-End Fiscal year-ends are as follows:
2000........................................ December 29, 2000 1999........................................ December 31, 1999 1998........................................ January 1, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
At December 29, 2000, $136 of cash is restricted under the Variable Rate Demand Revenue Bonds (Note 4). This cash may be used for building renovations, improvements, or other capital expenditures related to new production facilities for the electronics systems business and a new production facility for the mechanical division.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
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
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff Accounting Bulleting No. 101 "Revenue Recognition in Financial Statements" issued by the Securities and Exchange Commission. Revenue is recognized at the time product is shipped or title passes pursuant to the terms of the agreement with the customer which include a standard right of return, the amount due from the customer is fixed and collectibility of the related receivable is reasonably assured.
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 77% and 79% of total inventories in years ending December 29, 2000 and December 31, 1999, respectively, were valued using the LIFO method. Inventories for foreign operations are stated at the lower of cost or market using the first-in, first-out ("FIFO") method.
Self-Insurance
The Company maintains workers' compensation insurance policies which have the potential for retrospective premium adjustments and a partially self-insured group health insurance policy which is subject to specific retention levels. Insurance administrators assist the Company in estimating the fully developed workers' compensation liability and group health insurance reserves which are accrued by the Company. In the opinion of management, adequate provision has been made for all incurred claims. At December 29, 2000 the Company has issued letters of credit totaling $540 to cover incurred claims and other costs related to the workers' compensation.
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 and are not material.
Goodwill
The excess of cost over the net assets acquired ("Goodwill") is being amortized on a straight-line basis over a period of 40 years. Goodwill relates to the acquisition of certain businesses and product lines in 1986, 1996, and 1997.
Long-Lived Assets and Intangible Assets
The Company reviews the carrying values assigned to long-lived assets and certain identifiable intangible assets based on expectations of undiscounted future cash flows and operating income generated by the long-lived assets or the tangible assets underlying certain identifiable intangible assets in determining whether the carrying amount of such assets is recoverable.
Shareholders' Equity
In 1996, the board of directors authorized the Company to purchase up to 200,000 of the Company's common shares. At the July 2000 and January 2001 Board of Directors meetings, the directors of TB Wood's expanded this share repurchase program by authorizing the repurchase of up to an additional 100,000 and 200,000 shares, respectively, of TB Wood's stock. These purchases are subject to certain business and market conditions. At December 29, 2000 the number of treasury shares purchased under this authorization was 279,848. The number of treasury shares issued to employees under option and purchase plans was 13,324 and under the 401(k) profit-sharing plan was 33,587 for 2000. In addition, the Board of Directors authorized a self-tender "Dutch Auction" for 400,000 of the Company's common shares at a price not to exceed $12.50 per share and not lower than $9.00 per share. On December 17, 1999, the Company accepted 400,000 shares at $9.00 per share and incurred related costs.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, and accounts payable, approximate carrying value due to the short-term maturity of the instruments. The fair value of short-term and long-term debt amounts approximate carrying value and are based on their effective interest rates compared to current market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cyclical Industry
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 the relevant fiscal periods.
Research and Development Costs
Research and development costs consist substantially of projects related to new product development within the electronics business and are expensed as incurred. Total research and development costs were $3,108 in 2000, $3,659 in 1999, and $3,482 in 1998.
Major Customers
The Company's five largest customers accounted for approximately 31%, 29%, and 25% of net sales for fiscal years 2000, 1999, and 1998, respectively. Of these customers, one accounted for close to 20% of net sales for the year ended December 29, 2000. The loss of one or more of these customers would have an adverse effect on the Company's performance and operations. Foreign and export sales accounted for 25% of total sales in fiscal years 2000 and 1999. In management's opinion, intercompany transactions are consummated on terms equivalent to those that prevail in arms-length transactions.
Supply of Electronic Raw Materials and Purchased Components
Historically, the electronics component industry, which supplies components for the Company's electronic products, has from time to time experienced heavy demand for certain components during periods of growth in the consumer electronic industry. The rapid growth of the AC electronic drive market has also created heavy demand for power control electronics. While certain of the Company's components are obtained from a single or limited number of sources, the Company has potential alternate suppliers for most of the specialty components used in its manufacturing operations. There can be no assurance, however, that the Company will not experience shortages of raw materials or components essential to the production of its products or be forced to seek alternative sources of supply, which may increase costs or adversely affect the Company's ability to obtain and fulfill orders for its products.
Employees
As of December 29, 2000, the Company employed over 1,000 people. Over 30 of the Company's hourly employees located at its Stratford, Ontario, Canada facility are represented by the United Steelworkers of Canada pursuant to a collective bargaining agreement dated January 19, 2001 that expires on January 19, 2004. Over 133 of the Company's employees located at its Mexico City, Mexico facility are represented by the National Metal Workers' Union of Mexico pursuant to a collective bargaining agreement that expires on January 31, 2002. The Company has created the TB Wood's Institute, which offers training programs to improve employees' operating management and team-building skills.
Net Income Per Share
Basic earnings per share ("EPS") is computed by dividing reported earnings available to common shareholders by weighted average shares outstanding. No dilution for any potentially dilutive securities is included in basic EPS. Diluted EPS is computed by dividing reported earnings available to common shareholders by weighted average shares and common equivalent shares outstanding. The difference between primary and fully diluted net income per share is not material for any of the periods presented and has therefore been excluded.
The computation of weighted average shares outstanding and net income per share is as follows for fiscal years 2000, 1999, and 1998:
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133. "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. TB Wood's adopted the standard as of December 30, 2000, and the adoption did not materially impact our consolidated financial statements.
Effective fiscal year 2000, the Company adopted Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Therefore, freight charged to customers is now included in sales ($1,707 in 2000) rather than as an offset to freight expense. All prior year amounts ($1,597 in 1999 and $1,466 in 1998) have been restated to conform to the current presentation.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
3. ACCRUED EXPENSES
Components of accrued expenses were as follows:
2000 1999 - --------------------------------------------------------------------------- Accrued payroll and other compensation $2,631 $2,311 Accrued taxes 2,084 (538) Accrued workers' compensation 264 404 Other accrued liabilities 6,016 5,758 ------------------------------ Total $10,995 $7,935 ==============================
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations as at the end of each fiscal period consist of the following:
2000 1999 - --------------------------------------------------------------------------- Unsecured Revolving Line of Credit $28,287 $30,777 Capital lease obligations 347 597 Industrial revenue bonds 5,285 5,550 -------------------------- 33,919 36,924 Less current maturities (258) (273) -------------------------- $33,661 $36,651 ==========================
Aggregate future maturities of long-term debt and capital lease obligations as of December 29, 2000 are as follows:
2001 258 2002 89 2003 27,660 2004 0 2005 0 Thereafter 5,912 -------------- $33,919 ==============
The Company has a $52,500 unsecured revolving credit facility, $10,000 of which is payable in German deutschemark. The amount available at December 29, 2000 was $18,928. The revolving credit was arranged by PNC Bank, N.A. ("PNC") bearing variable interest of LIBOR plus 125.0 basis points, maturing October 2003. The Company has $627 denominated in Italian Lire at December 29, 2000, maturing after 2005. The rate was 5.625% at December 29, 2000. The average rate of the revolving debt at December 29, 2000 was 7.68%. The credit facility contains numerous restrictive financial covenants which require the Company to comply with certain financial tests including, among other things, maintaining minimum tangible net worth, as defined, and maintaining certain specified ratios. The credit facility also contains other restrictive covenants that include, among other things, restrictions on outside investments and restrictions on capital expenditures.
In August 1998, the Company entered into an interest rate swap agreement that effectively converted $10,000 of the underlying variable rate debt in the unsecured revolving credit facility to fixed rate debt. The notional principal amount of the swap agreement is $10,000 with an effective fixed rate of 5.75%. The swap agreement is settled each month and will expire in July 2001. The fair value of the swap agreement at December 29, 2000 was $10,023.
In April 1997, the Company borrowed approximately $2.3 million by issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial Revenue Board of the City of Chattanooga, bearing variable interest as set by the Industrial Revenue Board of the City of Chattanooga (4.50% at December 29, 2000) maturing April 2022. The bonds were issued to finance the new production facility for the electronics systems business.
In February 1999, the Company borrowed approximately $3.0 million by issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial Development Corporation City of San Marcos, bearing variable interest as set by the Industrial Development Corporation City of San Marcos (5.65% at December 29, 2000), maturing April 2024. The bonds were issued to finance a new production facility for the mechanical division.
The gross proceeds from (repayments of) the revolving credit facilities are as follows:
2000 1999 1998 - --------------------------------------------------------------------------------
Proceeds from revolving credit facility 45,227 47,400 40,300
Repayments of revolving credit facility (47,717) (45,200) (34,013)
-----------------------------------
5. INCOME TAXES
The components of the provision for income taxes are shown below:
2000 1999 1998 - -------------------------------------------------------------------------------- Current: Federal and state $1,855 $2,105 $2,300 Foreign 1,636 817 1,064 ----------------------------------- 3,491 2,922 3,364 Deferred: 276 439 1,892 ----------------------------------- Provision for income taxes $3,767 $3,361 $5,256 ===================================
Under SFAS No. 109, deferred tax assets or liabilities at the end of each period are determined by applying the current tax rate to the difference between the financial reporting and income tax bases of assets and liabilities.
The deferred tax benefit is determined based on changes in deferred tax items exclusive of deferred tax implications of the early extinguishment of debt and reclassifications between deferred and current taxes.
The components of deferred income taxes are as follows:
2000 1999 - -------------------------------------------------------------------------------- Deferred income tax liabilities: Book basis in property over tax basis $(2,655) $(2,709) LIFO inventory basis differences (2,697) (2,680) Other (209) (604) --------------------------- Total deferred income tax liabilities (5,561) (5,993) --------------------------- Deferred income tax assets: Postretirement benefits not currently deductible 5,637 6,019 Accrued liabilities not currently deductible 930 821 Allowance for doubtful accounts and inventory reserves 641 861 Other 497 712 --------------------------- Total deferred income tax assets 7,705 8,413 Net deferred income tax asset $2,144 $2,420 ---------------------------
A reconciliation of the provision for income taxes at the statutory federal income tax rate to the Company's tax provision as reported in the accompanying statements of operations is shown below:
2000 1999 1998 - -------------------------------------------------------------------------------- Federal statutory income tax $3,347 $2,966 $4,470 State income taxes, net of federal income tax benefit 162 139 592 Foreign taxes and other, net 258 256 194 --------------------------------------------- $3,767 $3,361 $5,256 =============================================
In 2000, 1999, and 1998 earnings before income taxes included $3,096, $2,541, and $2,862, respectively, of earnings generated by the Company's foreign operations. No federal or state income taxes have been provided on such earnings, since undistributed earnings have been reinvested and are not expected to be remitted to the parent company.
In June 2000, the Internal Revenue Service completed its review of the Company's 1996 federal income tax return. The review did not have a material effect on the Company's operations.
6. BENEFIT PLANS
Compensation Plans
Wood's maintains a discretionary compensation plan for its salaried and hourly employees which provides for incentive awards based on certain levels of earnings, as defined. Amounts awarded under the plan and charged to expense in the accompanying statements of operations were $759, $709, and $1,238, for fiscal years 2000, 1999, and 1998 respectively.
Profit-Sharing Plans
Since January 1, 1988, the Company has maintained a separate defined contribution 401(k) profit-sharing plan covering all domestic employees. Under this plan, the Company matches a specified percentage of each eligible employee's contribution and 50% of the match is invested in funds designated by the employee. The Company contributed 33,587 shares of common stock held in treasury in 2000, 21,557 in 1999, and 35,990 in 1998. Cash contributed by the Company under this profit-sharing plan was approximately $452, $452, and $580 for fiscal years 2000, 1999, and 1998, respectively. In addition, the Company has a noncontributory profit-sharing plan covering its Canadian employees for which $12, $38, and $17 was charged to expense for the fiscal years 2000, 1999, and 1998, respectively.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") enables employees of the Company to subscribe for shares of common stock on quarterly offering dates, at a purchase price which is the lesser of 90% of the fair value of the shares on the first or last day of the quarterly period. Employee contributions to the ESPP were $103, $124, and $152 for 2000, 1999, and 1998 respectively. Pursuant to the ESPP, 13,324 shares were issued to employees during 2000, 12,456 during 1999, and 8,775 during 1998. At the annual meeting on April 11, 1997, the Company's shareholders approved the reservation of 500,000 shares to be issued under the ESPP. As of December 29, 2000, 461,009 shares are available for future issuance.
Stock Options
The Company has a 1996 stock-based incentive compensation plan (the "1996 Plan"), the purpose of which is to assist the Company in attracting and retaining valued personnel by offering them a greater stake in the Company's success and a closer identity with the Company, and to encourage ownership of the Company's common stock by such personnel.
The 1996 Plan is administered by a committee (the "Committee") designated by the board of directors. Awards under the 1996 Plan may be made to all officers and key employees of the Company. No awards can be made under the 1996 Plan after January 31, 2006.
The Committee may grant shares of common stock in the form of either deferred stock or restricted stock, as defined in the 1996 Plan. Options granted under the 1996 Plan may be either incentive stock options ("ISOs") or nonqualified stock options. ISOs are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code. Unless an option is specifically designated at the time of grant as an ISO, options under the 1996 Plan will be nonqualified. The exercise price of the options will be determined by the Committee. The maximum term of an option or Stock Appreciation Right ("SAR") granted under the 1996 Plan shall not exceed ten years from the date of grant or five years from the date of grant if the recipient on the date of grant owns, directly or indirectly, shares possessing more than 10% of the total combined voting power of all classes of stock of the Company. No option or SAR may be exercisable sooner than six months from the date the option or SAR is granted.
As of December 29, 2000, there were 623,100 options outstanding under the 1996 Plan, and 252,100 are fully vested.
In addition to options issued under the 1996 Plan, there are outstanding options to acquire 29,125 shares held by executives of the Company. These options have exercise prices of $3.87 - $7.75 and are fully vested.
Stock option activity for the years ended December 29, 2000, December 31, 1999, and January 1, 1999 is as follows:
Number of shares Weighted average subject to option exercise price - -------------------------------------------------------------------------------- Options outstanding at January 2, 1998 361,502 $ 9.88 Granted 226,650 25.67 Canceled (6,000) 25.67 Exercised (80,887) 3.18
Options outstanding at January 1, 1999 501,265 17.92 Granted 159,750 16.00 Canceled (43,977) 4.69 Exercised (78,227) 6.28
Options outstanding at December 31, 1999 538,811 20.20 Granted 236,250 12.67 Canceled (106,813) 23.39 Exercised (16,023) 6.28
Options outstanding at December 29, 2000 652,225 $ 16.08
The following table sets forth the range of exercise price, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date at December 29, 2000.
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- Weighted Weighted Weighted Range of average average Average exercise Number exercise contractual Number Exercise price of shares price life of shares Price - -------------------------------------------------------------------------------- $ 3.87 - $ 7.74 29,125 $ 5.86 2.2 years 29,125 $ 5.86 $ 14.00 - $ 21.00 623,100 $ 16.56 5.8 years 252,100 $ 19.63 ------- ------- 652,225 281,225 ======= =======
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation", for its stock options. SFAS No. 123 requires companies to estimate the value of all stock-based compensation using a recognized pricing model. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value-based method of accounting defined in the statement had been applied. The Company has elected to continue to account for options under APB No. 25.
The Company has calculated the value of its stock-based compensations plan under SFAS No. 123 using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999, and 1998:
2000 1999 1998 ---- ---- ---- Risk free interest rate 5.65% 5.5% 5.5% Expected lives 5 & 10 years 5 & 10 years 5 & 10 years Expected volatility 9.5% 9.5% 25.7% Dividend yield 4.9% 4.0% 2.4%
The fair value of options granted in 2000, 1999, and 1998 using the Black-Scholes method was $57, $50, and $78 respectively, which would be recognized as expense over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS No. 123, the Company's reported pro forma net income and pro forma net income per share for the fiscal years from 1998 to 2000 would have been as follows:
2000 1999 1998 ---- ---- ---- Net income as reported $6,145 $5,367 $7,890
Pro Forma 6,103 5,235 7,715
EPS as reported Basic 1.12 0.91 1.34 Diluted 1.12 0.91 1.33 Pro forma Basic 1.12 0.89 1.31 Diluted 1.12 0.89 1.30
Postretirement Benefits
The Company sponsors a defined benefit postretirement medical plan that provides coverage for retirees and their dependents. A portion of the plan is paid for by retiree cost sharing. The accounting for the plan anticipates future cost sharing increases to keep pace with health care inflation. The plan is unfunded. The Company adopted the provisions of SFAS No. 132, "Employers Disclosure About Pensions and Other Postretirement Benefits" effective January 3, 1998.
The following table summarizes the Company's postretirement benefit obligations and the assumptions used in determining postretirement benefit cost:
2000 1999 1998 - -------------------------------------------------------------------------------- Benefit obligation at beginning of year $15,633 $16,992 $18,031 Service cost 127 138 205 Interest cost 315 343 503 Amortization (886) (1,535) (1,501) Retiree benefits (356) (305) (246) -------------------------------------- Benefit obligation at end of year $14,833 $15,633 $16,992 ====================================== Discount rate 7.75% 7.75% 7.75% -------------------------------------- Initial health care cost trend 6.50% 6.50% 8.00% -------------------------------------- Ultimate health care cost trend rate 5.00% 5.00% 5.00% -------------------------------------- Year ultimate health care cost trend rate reached 2004 2004 2004 --------------------------------------
Net periodic postretirement benefit includes the following components:
2000 1999 1998 - -------------------------------------------------------------------------------- Service cost $ 127 $ 138 $ 205 Interest cost 315 343 503 Amortization (886) (1,535) (1,501) ------------------------------------- Net benefit $(444) $(1,054) $ (793) =====================================
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to a number of legal actions arising in the ordinary course of business. In management's opinion, the ultimate resolution of these actions will not materially affect the Company's financial position or results of operations.
Environmental Risks
The Company's operations and properties are subject to federal, state, and local laws, regulations, and ordinances relating to certain materials, substances, and wastes. The nature of the Company's operations exposes it to the risk of claims with respect to environmental matters. Based on the Company's experience to date, management believes that the future cost of compliance with existing environmental requirements will not have a material adverse effect on the Company's operations or financial position.
Operating Lease Commitments
The Company leases office space, office equipment, and other items under non-cancelable operating leases. The expense for non-cancelable operating leases was approximately $457, $520, and $385, for fiscal years 2000, 1999, and 1998, respectively. At December 29, 2000, future minimum lease payments under non-cancelable operating leases are as follows:
2001 $390 2002 341 2003 282 2004 273 2005 and thereafter 160 ---------- $1,446 ==========
8. JOINT VENTURES
In December 1997, the Company purchased a 65% ownership in a joint venture with TB Wood's (India) Private Limited ("TBWI") for $91. In November 1999, the Company increased its ownership percentage to 85.5% for $71. TBWI distributes domestically manufactured electrical components and performs system integration design in the India market. TBWI was not included in the 1997 financial statements as its impact was immaterial.
In July 1999, the Company entered into a joint venture agreement with Electron Corporation ("Electron"), forming a Pennsylvania limited partnership under the name TBWE Belt Drive Components LP (the "Joint Venture"). The parties also formed a Pennsylvania limited liability company under the name TBWE Belt Drive Systems LLC which serves as the general partner of the Joint Venture. The Company and Electron hold a limited partner interest in the Joint Venture of 75.35% and 24.15%, respectively. The general partner holds a 0.5% interest in the Joint Venture. The Company and Electron hold an interest in the general partnership of 75.6% and 24.4%, respectively. The operations of the Joint Venture have been consolidated with the Company as the Company has a controlling interest in the Joint Venture.
In July 2000, the Joint Venture agreement with Electron Corporation was amended to reflect changes in the ownership and profit-split percentages. According to the amendment, the Company and Electron hold a limited partner interest in the Joint Venture of 76.18% and 23.32%, respectively. The Company and Electron hold an interest in the general partnership of 76.56% and 23.44%, in the Joint Venture.
The sole purpose of the Joint Venture is to manufacture, machine, market, distribute and engineer belted drive components and such other products having similar uses which may be developed by either the Company or Electron in the future.
Operating income attributed to the Joint Venture for the year ending December 29, 2000 and from its inception through the year ending December 31, 1999 was $6,506 and $3,246, respectively. The minority partner's share of these amounts was $1,554 and $808, respectively.
9. BUSINESS SEGMENT INFORMATION
Description of the Types of Products from which Each Segment Derives its Revenues
The Company is engaged principally in the design, manufacture and sale of power transmission products. The products manufactured by the Company are classified into two segments, mechanical business and electronics business. The mechanical business segment includes belted drives and couplings. The electronics business segment includes electronic drives and electric drive systems. Products of these segments are sold to distributors, original equipment manufacturers and end users for manufacturing and commercial applications.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as described in the summary of significant accounting policies. Inter-segment sales are not material.
Factors Management Used to Identify the Company's Reportable Segments
The Company's reportable segments are business units that manufacture and market separate and distinct products and are managed separately because each business requires different processes, technologies, and market strategies.
The following table summarizes revenues, operating income, total assets and expenditures for long-lived assets by business segment for fiscal years 2000, 1999, and 1998:
The following table reconciles segment profit to consolidated income before income taxes and extraordinary items for fiscal years 2000, 1999, and 1998:
2000 1999 1998 - -------------------------------------------------------------------------------- Total operating profit for reportable segments $12,501 $ 11,300 $ 15,566 Interest, net (2,880) (1,915) (2,040) Other unallocated amounts 291 (657) (380) --------------------------------- Income before income taxes $ 9,912 $ 8,728 $ 13,146 ---------------------------------
The following table reconciles segment assets to consolidated total assets as of December 29, 2000 and December 31, 1999:
2000 1999 - -------------------------------------------------------------------------------- Total assets for reportable segments $93,740 $ 95,081 Cash 619 1,245 Corporate fixed assets 4,683 2,948 Deferred tax 3,542 3,454 Other unallocated assets 76 138 ---------------------------------- Consolidated total $102,660 $102,866 ==================================
Information regarding the Company's domestic and foreign operations is as follows:
Net Long-Lived Sales Assets - ---------------------------------------------------------------------- 2000: United States $102,051 $ 38,885 Canada 10,105 922 Germany 5,746 1,998 Italy 11,651 378 Mexico 4,012 993 India 792 87 ------------------------------------------- Consolidated $134,357 $43,263 ===========================================
1999: United States $ 96,344 $36,703 Canada 9,148 1,111 Germany 6,679 1,998 Italy 8,885 512 Mexico 3,690 990 India 588 98 ------------------------------------------- Consolidated $125,334 $41,412 ===========================================
1998: United States $105,336 $33,206 Canada 8,739 869 Germany 7,708 2,105 Italy 10,004 525 Mexico 3,493 966 India 135 84 ------------------------------------------- Consolidated $135,415 $37,755 ===========================================
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information called for by this Item regarding directors and executive officers is set forth in the Company's definitive Proxy Statement for the 2001 Annual Meeting in the Sections entitled "Election of Directors," "Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation.
The information called for by this Item is set forth in the Company's definitive Proxy Statement for the 2001 Annual Meeting in the Section entitled "Executive Compensation" and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this Item is set forth in the Company's definitive Proxy Statement for the 2001 Annual Meeting in the Section entitled "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information called for by this Item is set forth in the Company's definitive Proxy Statement for the 2001 Annual Meeting in the Section entitled "Certain Relationships and Related Transactions" and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) All financial statements;
The consolidated financial statements of the Company and its subsidiaries on pages 17 through 37 hereof and the report thereon of Arthur Andersen LLP appearing on page 18 hereof.
(2) Financial Statement Schedule
Schedule II for the fiscal year ended December 29, 2000 and the report thereon of Arthur Andersen LLP appearing on page 18 hereof. All other schedules have been omitted because they are not applicable or are not required. All other required schedules are included in the Consolidated Financial Statements or notes therein.
(3) Exhibits
Number Description - ------ ----------- 3.1 Amended Certificate of Incorporation of the Company (incorporated by reference to TB Wood's Corporation Registration Statement filed on Form S-1, as amended, File No. 33-96498 ("Form S-1") Exhibit 3.1).
3.2 Amended and Restated By-laws of the Company (incorporated by reference to Form S-1 Exhibit 3.2).
10.1 Stock Purchase Agreement dated January 7, 1994 by and among T. B. Wood's Sons Company, Plant Engineering Consultants, Inc. and John Morris, Jesse Batten, Ralph Pedigo, Ronald Bingham, Walter Taeubel and Cook Family Trust (incorporated by reference to Form S-1 Exhibit 10.1).
10.2 Asset Purchase Agreement dated May 12, 1994 by and between T. B. Wood's Sons Company and Magnetic Power Systems, Inc. (incorporated by reference to Form S-1 Exhibit 10.2).
10.3 Non-Qualified Stock Option Agreements between T. B. Wood's Sons Company and Joseph S. Augustine, Michael H. Iversen, David H. Halleen, Stanley L. Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III and James E. Williams (incorporated by reference to Form S-1 Exhibit 10.36).
10.4 Non-Qualified Stock Option Agreement dated as of March 15, 1991 between T. B. Wood's Sons Company and Michael L. Hurt, together with Addendum dated as of March 30, 1992 (incorporated by reference to Form S-1 Exhibit 10.37).
10.5 Asset Purchase Agreement between T. B. Wood's Sons Company and Dana Corporation dated March 31, 1993 (includes Schedule 7.11 On-Site Environmental Procedures) (incorporated by reference to Form S-1 Exhibit 10.38).
10.6 TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan (the "1996 Plan") (incorporated by reference to Form S-1 Exhibit 10.39).
10.7 Amendments to the Non-Qualified Stock Option Agreements between TB Wood's Incorporated (formerly known as "T. B. Wood's Sons Company") and Joseph S. Augustine, Michael H. Iversen, David H. Halleen, Stanley L. Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III and James E. Williams (incorporated by reference to Form S-1 Exhibit 10.40).
10.8 Second Addendum dated July 1, 1995 to the Non-Qualified Stock Option Agreement dated as of March 15, 1991 between TB Wood's Incorporated (formerly known as "T. B. Wood's Sons Company") and Michael L. Hurt (incorporated by reference to Form S-1 Exhibit 10.41).
10.9 Stock Purchase Agreement by and among TB Wood's Incorporated and Grupo Blaju, S.A. de C.V. and Jorge R. Kiewek, Ninfa D. de Callejas and Marcela Kiewek G., dated February 14, 1996 (incorporated by reference to Form 10-K, for fiscal year 1995, Exhibit 10.43).
10.10 Revolving Credit Agreement by and among TB Wood's Incorporated, Plant Engineering Consultants, Inc., Grupo Blaju, S.A., de C.V., TB Wood's Canada, Ltd. and the Banks Party thereto and PNC Bank, National Association, as Agent, dated October 10, 1996 (incorporated by reference to Form 10-K, for fiscal year 1996, Exhibit 10.44).
10.11 TB Wood's Employee Stock Purchase Plan, dated March 1, 1997 (incorporated by reference to Form 10-K, for fiscal year 1996, Exhibit 10.45).
10.12 Stock Purchase Agreement by and between TB Wood's Incorporated and Graseby Electro-Optics Inc. dated May 8, 1997 (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.46).
10.13 Translated Stock Purchase Agreement by and among TB Wood's Incorporated and Berges Antriebstechnic GmbH and Karen Sarstedt, dated October 23, 1997 (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.47).
10.14 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees dated June 17, 1997 and between TB Wood's Corporation and Robert J. Dole dated July 29, 1997 (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.48).
10.15 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees dated January 29, 1998 (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.49).
10.16 Employment Agreement between TB Wood's Incorporated and Michael L. Hurt dated April 14, 1998 (incorporated by reference to Form 10-K, for fiscal year 1998, Exhibit 10.16.
10.17 Supplemental Executive Retirement Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen and other key employees dated May 7, 1998 (incorporated by reference to Form 10-K, for fiscal year 1998).
10.18 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees dated January 26, 1999 (incorporated by reference to Form 10-K, for fiscal year 1998 Exhibit 10.18).
10.19 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees dated January 26, 1999 (incorporated by reference to Form 10-K, for fiscal year 1998 Exhibit 10.19).
10.20 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated February 8, 2000.
10.21 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated February 8, 2000.
10.22 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Thomas F. Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated January 25, 2001.
10.23 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Thomas F. Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated January 25, 2001.
10.24 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Preben H. Petersen dated February 26, 2001.
10.25 Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB Wood's Corporation and Preben H. Petersen dated February 26, 2001.
10.50 Joint Venture Agreement dated July 3, 1999 by and between TB Wood's Incorporated and The Electron Corp. (incorporated by reference to Form 10-K, for fiscal year 1999).
10.51 Operating Agreement of TBWE Belt Drive Systems LLC dated July 3, 1999 by and between TB Wood's Incorporated and The Electron Corp. (incorporated by reference to Form 10-K, for fiscal year 1999, Exhibit 10.51).
11.1 Statement regarding Computation of Per Share Earnings.
20.1 Consent of Independent Public Accountants.
(b) Reports on Form 8-K.
There were no reports on Form 8-K by the Registrant during the fourth quarter of fiscal year 2000.
21.2 Subsidiaries and Joint Ventures of Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chambersburg and Commonwealth of Pennsylvania, on March 12, 2001.
TB WOOD'S CORPORATION
By: /s/ MICHAEL L. HURT ------------------- Michael L. Hurt President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TB Wood's Corporation And Subsidiaries Schedule II Valuation and Qualifying Accounts
- ------------- Note: (1) Represents write-off of accounts determined to be uncollectible, less recoveries of amounts previously written off.