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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18083
Williams Controls, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 84-1099587
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- --------------------------------------- ----------
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of March
31, 1999: 18,373,064
Williams Controls, Inc.
Index
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 1999 (unaudited)
and September 30, 1998 1
Unaudited Consolidated Statements of Operations,
three and six months ended March 31, 1999 and 1998 2
Unaudited Consolidated Statements of Cash Flows,
six months ended March 31, 1999 and 1998 3
Notes to Unaudited Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Part I
Item 1.
Williams Controls Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
March 31, September 30,
1999 1998
(unaudited)
-------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,290 $ 1,281
Trade and other accounts receivable, less allowance of $328 and
$325 at March 31, 1999 and September 30, 1998, respectively 11,334 11,765
Inventories 10,004 10,693
Deferred taxes and other 2,640 2,231
Net assets held for disposition 5,411 5,117
-------------------- --------------------
Total current assets 30,679 31,087
Property plant and equipment, net 20,820 20,013
Investment in and note receivable from affiliate 5,887 6,140
Note receivable - 3,200
Net assets held for disposition 1,829 1,847
Other assets 4,043 4,072
==================== ====================
Total assets $ 63,258 $ 66,359
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,411 $ 4,771
Accrued expenses 2,733 3,399
Current portion of long-term debt and capital leases 2,111 1,181
Estimated loss on disposal 1,824 2,550
-------------------- -------------------
Total current liabilities 11,079 11,901
Long-term debt and capital lease obligations 22,773 27,846
Other liabilities 2,555 2,201
Commitments and contingencies
Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 authorized; 79,650
and 80,000 issued at March 31, 1999 and September 30, 1998,
respectively) 1 1
Common stock ($.01 par value, 50,000,000 authorized;
18,503,264 and 18,311,288 issued at March 31,
1999 and September 30, 1998, respectively) 185 183
Additional paid-in capital 18,147 17,917
Retained earnings 9,652 7,444
Unearned ESOP shares (73) (73)
Treasury stock (130,200 shares at March 31, 1999 and
September 30, 1998) (377) (377)
Note receivable (500) (500)
Pension liability adjustment (184) (184)
-------------------- -------------------
Total shareholders' equity 26,851 24,411
==================== ===================
Total liabilities and shareholders' equity $ 63,258 $ 66,359
==================== ===================
The accompanying notes are an integral part of these balance sheets.
1
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(unaudited)
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
--------------- --------------- -------------- --------------
Sales $ 16,641 $ 15,613 $ 31,566 $ 28,310
Cost of sales 11,780 10,748 22,006 19,573
--------------- --------------- -------------- --------------
Gross margin 4,861 4,865 9,560 8,737
Operating expenses:
Research and development 893 726 1,666 1,284
Selling 511 488 1,008 976
Administration 769 989 1,874 1,812
--------------- --------------- -------------- --------------
Total operating expenses 2,173 2,203 4,548 4,072
--------------- --------------- -------------- --------------
Earnings from continuing operations 2,688 2,662 5,012 4,665
Other (income) expenses:
Interest income (97) (50) (222) (101)
Interest expense 325 380 798 700
Other expense - 9 112 3
Equity interest in loss of affiliate 63 40 253 398
--------------- --------------- -------------- --------------
Total other expenses 291 379 941 1,000
--------------- --------------- -------------- --------------
Earnings from continuing operations before
income tax expense 2,397 2,283 4,071 3,665
Income tax expense 920 890 1,563 1,421
--------------- --------------- -------------- --------------
Net earnings from continuing operations 1,477 1,393 2,508 2,244
Discontinued operations:
Net loss from operations of automotive
accessories segment - (160) - (160)
Net loss from operations of the agricultural
equipment segment - (146) - (302)
--------------- --------------- -------------- --------------
Net loss from discontinued operations - (306) - (462)
--------------- --------------- -------------- --------------
Net earnings 1,477 1,087 2,508 1,782
Dividends on preferred stock 150 - 300 -
--------------- --------------- -------------- --------------
Net earnings allocable to common shareholders $ 1,327 $ 1,087 $ 2,208 $ 1,782
=============== =============== ============== ==============
Basic and diluted earnings per common share from
continuing operations $ 0.07 $ 0.08 $ 0.12 $ 0.13
Basic and diluted loss per common share from
discontinued operations - (0.02) - (0.03)
--------------- --------------- -------------- --------------
Basic and diluted net earnings per common share $ 0.07 $ 0.06 $ 0.12 $ 0.10
=============== =============== ============== ==============
The accompanying notes are an integral part of these statements.
2
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six months Six months
Ended Ended
March 31, 1999 March 31, 1998
------------------ ------------------
Cash flows from operating activities:
Net earnings $ 2,508 $ 1,782
Adjustments to reconcile net earnings to net cash from continuing
operations:
Loss from discontinued operations - 462
Depreciation and amortization 898 552
Equity interest in loss of affiliate 253 398
Changes in working capital of continuing operations:
Receivables 565 (2,188)
Inventories 689 (864)
Accounts payable and accrued expenses (1,026) 1,884
Other (90) (545)
------------------ ------------------
Net cash provided by operating activities of continuing operations 3,797 1,481
Cash flows from investing activities:
Payments for property, plant and equipment (1,308) (387)
------------------ ------------------
Net cash used in investing activities of continuing operations (1,308) (387)
Cash flows from financing activities:
Proceeds (repayments) of long-term debt and capital lease obligations (3,797) 765
Borrowing under term notes 2,500 -
Preferred dividends (300) -
Proceeds from issuance of common stock 119 62
------------------ ------------------
Net cash provided by (used in) financing activities of continuing
operations (1,478) 827
Cash flows from discontinued operations:
Proceeds from sale of Automotive Accessories segment - 1,124
Net cash used in operations (1,002) (2,681)
------------------ ------------------
Net cash used in discontinued operations (1,002) (1,557)
Net increase in cash and cash equivalents 9 364
Cash and cash equivalents at beginning of period 1,281 700
================== ==================
Cash and cash equivalents at end of period $ 1,290 $ 1,064
================== ==================
Supplemental disclosure of cash flow information:
Interest paid $ 737 $ 432
Income taxes paid $ 495 $ -
Income tax refunds $ 328 $ 5
================== ==================
Supplemental disclosure of non-cash investing and financing activities:
Note receivable for capital lease obligation $ 3,200 $ -
================== ==================
Tax benefits related to stock options $ 113 $ -
================== ==================
Capital lease obligations incurred $ 354 $ -
================== ==================
Disposition of Kenco:
Net assets and liabilities, sold $ - $ 2,374
Allowances - 1,376
Preferred stock - (2,000)
Other receivable - (250)
Receivable for inventory sold - (430)
Net gain on disposition - 54
------------------ ------------------
Cash received $ - $ 1,124
================== ==================
The accompanying notes are an integral part of these statements.
3
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Six Months ended March 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
acquires, disposition of any current business of the Company, including its
Agricultural segment. These forward-looking statements are subject to the
business and economic risks faced by the Company. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of the factors described above and other factors
described elsewhere in this report.
1. Organization
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek");
Premier Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.;
GeoFocus, Inc. ("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams
Technologies, Inc. ("Technologies"); Williams World Trade, Inc. ("WWT");
Kenco/Williams, Inc. ("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec
Williams, Inc. ("Agrotec") and its 80% owned subsidiaries Hardee Williams,
Inc. ("Hardee") and Waccamaw Wheel Williams, Inc. ("Waccamaw") is
hereinafter referred to as the "Company" or "Registrant."
2. Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements have been prepared
by the Company and, in the opinion of management, reflect all material
adjustments which are necessary to a fair statement of results for the
interim periods presented. The interim results are not necessarily
indicative of the results expected for the entire fiscal year. Certain
information and footnote disclosure made in the last annual report on Form
10-K have been condensed or omitted for the interim consolidated
statements. Certain costs are estimated for the full year and allocated to
interim periods based on activity associated with the interim period.
Accordingly, such costs are subject to year-end adjustment. It is the
Company's opinion that, when the interim consolidated statements are read
in conjunction with the September 30, 1998 annual report on Form 10-K, the
disclosures are adequate to make the information presented not misleading.
The interim consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
3. Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", which requires companies to report a measure of all
changes in equity except those resulting from investments by owners and
distributions to owners. Total comprehensive income for the three and six
months ended March 31, 1999 and 1998 was $1,477 and $1,087, and $2,508 and
$1,782 respectively, and consisted solely of net earnings. As of March 31,
1999, accumulated other comprehensive loss was $184 and consisted of
pension liability adjustment.
4. Earnings (loss) per Share
Effective in its fiscal year ended September 30, 1998, the Company adopted
SFAS 128, "Earnings Per Share". SFAS 128 prescribes new Basic and Diluted
Earnings Per Share (EPS) calculations that replace the former calculations
for Primary and Fully Diluted EPS. Prior periods have been restated to
conform to the requirements of SFAS 128. Basic EPS is calculated using the
weighted average number of common shares outstanding for the period and
diluted EPS is calculated using the weighted average number of common
shares and dilutive common equivalent shares outstanding.
4
Following is a reconciliation of basic EPS and diluted EPS from continuing
operations:
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------------------- --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Income from continuing
operations $1,477 $1,393
Less-Preferred stock dividends (150) -
------ ------
Basic EPS-
Income from continuing
operations available to
common shareholders 1,327 18,327,711 $ 0.07 1,393 17,874,989 $ 0.08
Effect of dilutive securities - ------ ------
Stock options and warrants - 453,278 - 231,541
Convertible preferred stock 150 2,903,010 - -
Shares expected to be issued - - - 400,000
------ ---------- ------ ----------
Diluted EPS -
Income from continuing
operations available to
common shareholders $1,477 21,683,999 $ 0.07 $1,393 18,506,530 $ 0.08
====== ========== ====== ====== ========== ======
Six Months Ended Six Months Ended
March 31, 1999 March 31, 1998
------------------------------- --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Income from continuing
operations $2,508 $2,244
Less-Preferred stock dividends (300) -
------ ------
Basic EPS-
Income from continuing
operations available to
common shareholders 2,208 18,288,667 $ 0.12 2,244 17,845,319 $ 0.13
Effect of dilutive securities - ------ ------
Stock options and warrants - 303,365 - 204,154
Convertible preferred stock 300 2,899,650 - -
Shares expected to be issued - - - 400,000
------ ---------- ------ ----------
Diluted EPS -
Income from continuing
operations available to
common shareholders $2,508 21,491,682 $ 0.12 $2,244 18,449,473 $ 0.13
====== ========== ====== ====== ========== ======
At March 31, 1999 and 1998, the Company had options and warrants covering
893,236 and 1,001,161 shares, respectively of the Company's common stock
outstanding that were not considered in the respective dilutive EPS
calculations since they would have been antidilutive.
5. Inventories
Inventories consisted of the following:
March 31, September 30,
1999 1998
------------------- ---------------------
Raw material $ 4,794 $ 5,152
Work in process 2,139 1,333
Finished goods 3,071 4,208
------------------- ---------------------
$ 10,004 $ 10,693
=================== =====================
Finished goods include component parts and finished product ready for
shipment.
5
6. Sale Leaseback and Financing
In April 1997 the Company sold its Portland, Oregon manufacturing facility
in a sale-leaseback transaction for approximately $4,600. The transaction
was accounted for as a financing and the capitalized lease obligations of
approximately $4,600 were recorded as long term liabilities. In April 1998,
under the terms of the agreement, the Company provided a mortgage note to
the purchaser in the amount of $3,200 which was reported as a note
receivable at September 30, 1998. In December 1998, the Company exercised
an option to repurchase the building for $4,700, consisting of cash of
$1,500 and the note receivable of $3,200. Accordingly, the note receivable
of $3,200 and the capital lease obligation of $4,600 have been eliminated
from the balance sheet at March 31, 1999. The costs associated with the
building repurchase are reported in other expenses during the six months
ended March 31, 1999.
The Company borrowed $2,500 from its bank under amended term loans to
finance the repurchase transaction and for working capital purposes.
Approximately $1,222 of the additional financing was borrowed under an
amendment to the Company's existing Term Loan I which increased the Term
Loan I balance to $4,105. Term Loan I is payable in equal monthly
installments of $60 with the remaining balance of $2,897 due at maturity on
July 1, 2001. Approximately $1,278 of the additional financing was provided
under an amended Term Loan II payable in 18 equal monthly installments of
$71, plus variable interest (8.5% at March 31, 1999).
7. Reclassifications
Certain amounts previously reported in the statements of operations for the
three and six months ended March 31, 1998 have been reclassified to conform
to current fiscal year presentation.
6
8. Segment Information
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March, 31 March 31, March 31,
1999 1998 1999 1998
-------------- --------------- --------------- --------------
Sales by classes of similar products from continuing
operations
Vehicle components $ 15,928 $ 14,530 $ 30,225 $ 26,227
Electrical components and GPS 713 1,083 1,341 2,083
-------------- --------------- --------------- --------------
$ 16,641 $ 15,613 $ 31,566 $ 28,310
============== =============== =============== ==============
Earnings (loss) from continuing operations
Vehicle components $ 3,301 $ 3,090 $ 6,443 $ 5,483
Electrical components and GPS (613) (428) (1,431) (818)
-------------- --------------- --------------- --------------
$ 2,688 $ 2,662 $ 5,012 $ 4,665
============== =============== =============== ==============
Capital expenditures
Vehicle components $ 445 $ 191 $ 1,100 $ 238
Electrical components and GPS 168 64 208 149
-------------- --------------- --------------- --------------
Total capital expenditures - continuing operations 613 255 1,308 387
Agricultural equipment - discontinued operations 31 - 31 104
-------------- --------------- --------------- --------------
Total capital expenditures $ 644 $ 255 $ 1,339 $ 491
============== =============== =============== ==============
Depreciation and amortization
Vehicle components $ 400 $ 156 $ 700 $ 387
Electrical components and GPS 114 85 198 165
-------------- --------------- --------------- --------------
Total depreciation and amortization - continuing 514 241 898 552
operations
Automotive accessories - discontinued operations - 60 - 109
Agricultural equipment - discontinued operations 88 82 176 163
-------------- --------------- --------------- --------------
Total depreciation and amortization $ 602 $ 383 $ 1,074 $ 824
============== =============== =============== ==============
Identifiable assets
Vehicle components $ 41,791 $ 33,105
Electrical components and GPS 8,340 8,584
Corporate 5,887 3,795
--------------- --------------
Total assets - continuing operations 56,018 45,484
Agricultural equipment - discontinued operations 7,240 6,958
--------------- --------------
Total assets $ 63,258 $ 52,442
=============== ==============
The Company has classified the investment in and note receivable from affiliate
as a corporate asset under identifiable assets. Identifiable assets for
discontinued segments reflect the net assets held for disposition.
7
Item 2.
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Financial Position and Capital Resources
Financial Condition, Liquidity and Capital Resources
The Company's principal sources of liquidity are funds generated from
operations, borrowings under its credit facilities and leases for equipment
purchases from various leasing companies. The Company anticipates that cash
generated from operations, bank borrowings and leases will be sufficient to
satisfy working capital and capital expenditure requirements for current
operations for the next twelve months. At March 31, 1999, the Company's working
capital improved to $19,600 compared to $19,186 at September 30, 1998 and the
current ratio was 2.8 compared to 2.6 at September 30, 1998. Cash flows from
continuing operations were $3,797 for the first six months ended March 31, 1999
compared to $1,481 for the first six months of fiscal 1998. In the six months
ended March 31, 1999, increased earnings and funds provided by lower inventory
and accounts receivable levels were used to reduce accounts payable and accrued
expenses. Excluding proceeds from the sale of assets of the Automotive
Accessories segment, the Company's discontinued operations used cash of $1,002
and $2,681 for the six months ended March 31, 1999 and 1998, respectively. Cash
used by discontinued operations declined primarily because the discontinued
Automotive Accessories segment, which was discontinued in 1998, used cash of
$1,396 in the first six months of fiscal 1998.
During the six months ended March 31, 1999 the note receivable decreased $3,200
and total long term debt and capital leases decreased $4,143 due primarily to
the repurchase of the Portland, Oregon manufacturing facility. In April 1997 the
Company sold the facility in a sale-leaseback transaction for $4,600. The
transaction was accounted for as a financing and the capitalized lease
obligations of $4,600 were recorded as long term liabilities. In April 1998,
under the terms of the agreement, the Company provided a mortgage note to the
purchaser in the amount of $3,200 which was reported as a note receivable at
September 30, 1998. In December 1998, the Company exercised a repurchase option
on the property and repurchased the building for $4,700 consisting of cash of
$1,500 and the note receivable of $3,200. Accordingly, the note receivable of
$3,200 and the capital lease obligation of $4,600 have been eliminated from the
balance sheet at March 31, 1999. The costs associated with the building
repurchase is reported in other expenses during the six months ended March 31,
1998.
The Company borrowed $2,500 from its bank under amended term loans to finance
the repurchase transaction and for working capital purposes. Approximately
$1,222 of the additional financing was borrowed under an amendment to the
Company's existing Term Loan I, the increased principal amount of which is
payable in equal monthly installments of $60 with the remaining balance of
$2,897 due at maturity on July 1, 2001. Approximately $1,278 of the additional
financing was provided under an amended Term Loan II which is payable in 18
equal monthly installments of $71, plus variable interest (8.5% at March 31,
1999).
Market Risk - The Company has not entered into derivative financial instruments.
The Company may be exposed to future interest rate changes on its debt. The
Company does not believe that a hypothetical 10 percent change in interest rates
would have a material effect on the Company's cashflow.
Recent FASB Pronouncements - The Financial Accounting Standards Board ("FASB")
recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131")". This statement is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 revises existing standards for
reporting information about operating segments and requires the reporting of
selected information in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes that implementation of SFAS No. 131
(which has not been adopted with this quarterly report) will not materially
affect the Company's financial statements.
In June 1998 the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and accordingly, the
adoption of SFAS 133 will have no impact on the Company's financial position or
results of operations.
8
Year 2000 Conversion. The Company recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures. Software failures
due to processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of the
operational systems. The Company has established processes for evaluating and
managing the risks and costs associated with this problem, including
communicating with suppliers, dealers and others with which it does business to
coordinate Year 2000 conversion. During 1998, the Company began implementing the
installation of new financial software that is Year 2000 compliant for the
purpose of improving operations and service to its existing and prospective
truck and automotive customers. The decision to upgrade the Company's software
was made irrespective of Year 2000 compliance issues. The system is expected to
be fully operational in the summer of 1999. The Company has contingency plans in
place in the event that the software implementation is delayed.
Since January 1998 the Company has been engaged in achieving Year 2000
compliance. The Company's Year 2000 project is divided into several phases and
is progressing with corrective actions for major systems well under way. All
hardware, software, services and business relationships with trading partners
which could be affected by Year 2000 issues are being audited for Year 2000
compliance.
The Company relies on computer systems and software to operate its business,
including applications used in sales, purchasing, inventory management, finance
and various administrative functions. The Company has determined that certain of
its software applications will be unable to interpret appropriately the calendar
Year 2000 and subsequent years. As of March 31, 1999, 80% of the Company's
systems which may have a material Year 2000 liability are Year 2000 compliant.
The target date for full compliance is September 30, 1999.
The Company's total budget for its Year 2000 project is $150, approximately $82
of which had been spent through March 1999. The Year 2000 budget represents
approximately 17 percent of total information technology ("IT") expenditures
budgeted for the period from October 1998 through September 1999. The Company
continues to manage total IT expenses by re-prioritizing or curtailing less
critical investments, incorporating Year 2000 readiness into previously planned
system enhancements and by using existing staff to implement its Year 2000
program. The Company has hired outside consultants for its Year 2000 project,
and it may need to purchase additional hardware or software.
The Company acquires a majority of its inventory from approximately 22 vendors.
If these vendors have unresolved Year 2000 issues which affect their ability to
supply merchandise, the Company could be adversely affected. The Company has
conducted an initial assessment of vendors whose potential Year 2000 liability
could materially affect operations. Based on this assessment the Company
believes that it is not materially at risk from a Year 2000 liability posed by
its vendors. The Company plans to complete a more detailed Year 2000 readiness
survey of its top vendors by August 1999. In the event that it appears a vendor
will be adversely affected by Year 2000 issues, the Company believes that it
will be able to find alternative suppliers.
Should the Company not achieve full compliance in a timely manner or complete
its Year 2000 project within its current cost estimates, the Company's business,
financial condition and results of operations could be adversely affected.
However, in the event that the Company fails to meet the deadlines above, the
Company believes that the financial impact will not be material since all
systems believed by the Company to be critical are expected to be Year 2000
compliant.
9
Williams Controls, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations
Three months ended March 31, 1999 compared to the three months ended March 31,
1998
Overview
- --------
Sales from continuing operations increased $1,028, or 7%, to $16,641 in the
second quarter of fiscal 1999 from $15,613 in the second quarter of fiscal 1998
due to higher unit sales volumes in the Company's Vehicle Components segment.
Earnings from continuing operations increased $26, or 1%, to $2,688 in the
second quarter of fiscal 1999 from $2,662 in the second quarter of fiscal 1998.
The increase was due to increased earnings of $211 in the Company's Vehicle
Components segment due to higher unit sales of electronic throttle and air
controls. The increase in earnings from electronic throttle and air control
sales in the Vehicle Components segment was partially offset by increased losses
of $249 at the plastic injection molding facility. In addition, increased losses
of $185 in the Electrical Components and GPS segment, due primarily to lower
unit sales of electrical components as a result of excess dealer inventory,
partially offset increases at the Company's vehicle components segment.
Net earnings from continuing operations increased 6%, or $84 to $1,477 in the
second quarter of fiscal 1999. Net earnings allocable to common shareholders
were $1,327 in the second quarter of fiscal 1999 compared to $1,087 in the prior
fiscal year due to increased net earnings from continuing operations offset by
preferred dividends of $150 in the second quarter of fiscal 1999. No preferred
dividends were payable in the second quarter of fiscal 1998. Net earnings in the
second quarter of fiscal 1998 were affected by losses of $146 in the Company's
discontinued Agricultural Equipment segment and $160 in the Company's
discontinued Automotive Accessories segment.
The Company's plastic injection molding and tooling subsidiary, the operating
results of which are included in the Vehicle Components segment, reported an
increased loss from operations in the second quarter ended March 31, 1999 of
$249. The 1998 second quarter benefited from a large tooling order which did not
recur in the 1999 fiscal second quarter. Sales, gross margin (loss) and
operating (losses) for the quarter ended March 31, 1999 were $1,377, ($74) and
($320), respectively compared to $1,464, $147 and ($71) in the prior fiscal
period. The operation moved to a new facility in the fourth quarter of fiscal
1998 which has a higher break-even sales level and plant capacity than the prior
facility. The operation has not achieved break-even sales to date and is not
expected to achieve break-even results until at least the first quarter of
fiscal 2000.
The effective income tax rate was 38.4% and 39.0% for the quarters ended March
31, 1999 and 1998, respectively.
Sales
- -----
Sales from continuing operations in the Vehicle Components segment increased
$1,398, or 10%, to $15,928 in the second quarter of fiscal 1999 over levels
achieved in the second quarter of fiscal 1998 due to higher electronic throttle
control ("ETC") unit sales. Sales from continuing operations in the Company's
Electrical Components and GPS segments decreased $370, or 34%, due to lower unit
sales of electrical components.
Gross margin
- ------------
Gross margin from continuing operations was relatively unchanged at $4,861 in
the second quarter of fiscal 1999 compared to $4,865 in the second quarter of
fiscal 1998. Gross margin increased $178 or 4%, in the second quarter of fiscal
1999 in the Vehicle Components segment due to higher unit sales volumes of ETC
products offset by reduced gross margins of $221 at the plastic injection
molding operation. Increases in the vehicle components segment were offset by a
decrease in gross margin of $182 in the Electrical Components and GPS segment.
Decreased gross margin in this segment is attributed to lower unit sales
volumes. Gross margins as a percent of sales decreased to 29.2% in the second
quarter of fiscal 1999 compared to 31.2% in the second quarter of fiscal 1998
primarily as a result of lower gross margins at the plastic injection molding
operation and the Electrical Component and GPS segment.
10
Operating expenses
- ------------------
Operating expenses for continuing operations decreased $30, or 1%, to $2,173 in
the second quarter of fiscal 1999 compared to $2,203 in the second quarter of
fiscal 1998. Operating expenses as a percentage of net sales from continuing
operations decreased to 13.1% in the second quarter of fiscal 1999 compared to
14.1% in the second quarter of fiscal 1998.
Research and development expenses for continuing operations increased $167, or
23%, to $893 during the second quarter of fiscal 1999 compared to $726 in the
second quarter of fiscal 1998. As a percentage of sales from continuing
operations, research and development expenses increased from 4.7% to 5.4%.
Research and development expenses were increased to support new product
development for existing customers, for development of the automotive ETC
product and for development of sensor-related products.
Administration expenses for continuing operations decreased $220, or 22%, in the
second quarter of fiscal 1999 to $769 compared to $989 in the second quarter of
fiscal 1998. Administration expenses as a percent of sales from continuing
operations decreased to 4.6% in the second quarter of fiscal 1999 compared to
6.3% in the second quarter of fiscal 1998. Administration costs decreased
primarily as a result of software consulting expenses incurred in 1998 that did
not recur in fiscal 1999. Selling expenses increased $23, or 4.7% in the second
quarter of fiscal 1999 compared to fiscal 1998. As a percent of sales, selling
expenses were 3.1% in the second quarter of both fiscal 1998 and 1999.
Interest and Other Expenses
- ---------------------------
Interest expense decreased $55, or 15%, to $325 in the second quarter of fiscal
1999 from $380 in the second quarter of fiscal 1998. Allocated interest expense
included in discontinued operations for the quarters ended March 31, 1999 and
1998 was $107 and $145, respectively. Interest income increased $47, or 94% in
the second quarter of fiscal 1999 due primarily to interest on a state tax
refund.
Discontinued operations
- -----------------------
The Company reported a net loss from discontinued operations of $306 in the
second quarter of fiscal 1998. The Company adopted a plan of disposal for the
Agriculture Equipment segment in late fiscal 1998, and a plan of disposal for
the Automotive Accessories segment in the third quarter of fiscal 1997, and
accordingly, the estimated future operating losses of the segments were expensed
in the fourth quarter of fiscal 1998 and third quarter of fiscal 1997,
respectively.
Net sales from the Agriculture Equipment segment declined $251, or 11% to $2,027
in the second quarter of fiscal 1999 compared to $2,278 in the second quarter of
fiscal 1998. The decline in sales was due to lower unit sales attributable
primarily to a poor farm economy. The loss from operations for the Agriculture
Equipment segment increased $149 to $318 due to lower gross margins of $304 and
lower operating expenses of $155. The net loss for the Agriculture Equipment
segment, net of income tax benefit of $167, increased $122 to $268.
Net loss from the discontinued Automotive Accessories segment was $160 net of a
tax benefit of $109 for the second quarter ended March 31, 1998. Estimated
future losses from discontinued Automotive Accessories operations were accrued
in fiscal 1997. The second quarter fiscal 1998 loss reflects additional loss
incurred on the sale of this business segment. Net sales from the discontinued
segment were $1,346 and allocated interest expenses were $84 in the second
quarter of fiscal 1998.
11
Results of Operations
Six months ended March 31, 1999 compared to the six months ended March 31, 1998
Overview
- --------
Sales from continuing operations increased $3,256, or 12%, to $31,566 in the six
months ended March 31, 1999 from $28,310 in the six months ended March 31, 1998
due to higher unit sales volumes in the Company's Vehicle Components segment
offset by lower unit sales volumes in the Electrical Components and GPS segment.
Earnings from continuing operations increased $347, or 7%, to $5,012 in fiscal
1999 from $4,665 in fiscal 1998. Earnings from continuing operations increased
$960 in the Company's Vehicle Components segment due to higher unit sales.
Losses from continuing operations increased $613 in the Electrical Components
and GPS segment due to lower gross margins of $406 due to lower unit sales and
to $242 of increased operating expenses primarily for research and development
and administration incurred for sensor development. The electrical component
operations were affected by excess dealer inventory, which contributed to the
decreased unit sales. Net earnings from continuing operations increased 12%, or
$264 in the six months ended March 31, 1999, primarily as a result of increased
earnings from continuing operations of $347.
The Company's plastic injection molding and tooling subsidiary, the operating
results of which are included in the Vehicle Components segment, reported an
increased loss from operations in the six months ended March 31, 1999 of $205.
The first six months of 1998 benefited from a large tooling order which did not
recur in the same period in 1999. Sales, gross margin (loss) and operating loss
for the six months ended March 31, 1999 were $2,814, ($12), and ($509)
respectively compared to $2,510, $134 and ($304) in the prior fiscal period. As
noted previously, the operation moved to a new facility in the fourth quarter of
fiscal 1998 which has a higher break-even sales level and plant capacity than
the prior facility. The operation has not achieved break-even sales to date and
is not expected to achieve break-even results until at least the first quarter
of fiscal 2000.
Net earnings allocable to common shareholders were $2,208 in the six months
ended March 31, 1999 compared to $1,782 in the prior fiscal year due to
increased net earnings from continuing operations offset by preferred dividends
of $300 in the six months ended March 31, 1999. No preferred dividends were
payable in the six months ended March 31, 1998. Net earnings in the six months
ended March 31, 1998 were affected by losses of $302 in the Company's
discontinued Agricultural Equipment segment and $160 in the Company's
discontinued Automotive Accessories segment.
The effective income tax rate was 38.4 % and 38.8% for the six months ended
March 31, 1999 and 1998, respectively.
Sales
- -----
Sales from continuing operations in the Vehicle Components segment increased
$3,998, or 15%, to $30,225 in the six months ended March 31, 1999 over levels
achieved in the six months ended March 31, 1998 due to higher ETC unit sales.
Sales from continuing operations in the Company's Electrical Components and GPS
segment decreased $742, or 36%, due to lower unit sales of electrical
components.
Gross margin
- ------------
Gross margin from continuing operations increased $823, or 9%, to $9,560
compared to $8,737 in the six months ended March 31, 1998. Gross margin
increased $1,229 or 15%, in the six months ended March 31, 1999 in the Vehicle
Components segment due to higher unit sales volumes of ETC products. Increases
in this segment were offset by a decrease in gross margin of $406 in the
Electrical Components and GPS segment attributable to lower unit sales volumes.
Gross margins as a percent of sales decreased to 30.3% in the six months ended
March 31, 1999 compared to 30.9% in the six months ended March 31, 1998.
12
Operating expenses
- ------------------
Operating expenses increased $476, or 12%, to $4,548 in the six months ended
March 31, 1999 compared to $4,072 in the six months ended March 31, 1998
primarily as a result of increased research and development costs of $382.
Operating expenses as a percentage of sales was 14.4% in the six months ended
March 31, 1999 and 1998. Operating expenses increased $269, or 10%, in the six
months ended March 31, 1999 in the Vehicle Components segment and $208, or 16%,
in the Electrical Components and GPS segment compared to the prior year period.
Research and development expenses increased $382, or 30%, to $1,666 during the
six months ended March 31, 1999 compared to $1,284 in the six months ended March
31, 1998. As a percentage of sales, research and development expenses increased
from 4.5% to 5.3%. Research and development expenses were increased to support
new product development for existing customers, for development of the
automotive ETC product and for development of sensor-related products.
Selling and administration expenses remained relatively stable for the six
months ended March 31, 1999 and 1998. Selling and administration expenses as a
percent of sales decreased to 3.2% and 5.9%, respectively, in the six months
ended March 31, 1999 compared to 3.4% and 6.4%, respectively in the prior year
period.
Interest and Other Expenses
- ---------------------------
Interest expense increased $98, or 14% to $798 in the six months ended March 31,
1999 from $700 in the six months ended March 31, 1998. Interest expense
increased primarily because of allocations of interest expense to the Automotive
Accessories discontinued operations in the prior year period. Allocated interest
expense included in discontinued operations for the six months ended March 31,
1999 and 1998 was $194 and $307, respectively. Equity interest in loss of
affiliate decreased $145, or 36% to $253 in the six months ended March 31, 1999
from $398 in the six months ended March 31, 1998 due to decreased losses of Ajay
Sports, Inc. Interest income increased $121, or 120% in the six months ended
March 31, 1999 primarily due to interest on a state tax refund of $85.
Discontinued operations
- -----------------------
The Company reported a net loss from discontinued operations of $462 in the six
months ended March 31, 1998. The Company adopted a plan of disposal for the
Agriculture Equipment segment in late fiscal 1998 and a plan of disposal for the
Automotive Accessories segment in the third quarter of fiscal 1997, and
accordingly, the estimated future operating losses of these segments were
expensed in the fourth quarter of fiscal 1998 and third quarter of fiscal 1997,
respectively.
Net sales from the Agriculture Equipment segment declined $721, or 16% to $3,803
in the six months ended March 31, 1999 compared to $4,524 in the six months
ended March 31, 1998. The decline in sales was due to lower unit sales
attributable primarily to a poor farm economy. The loss from operations for the
Agriculture Equipment segment increased $600 to $947 as a result of a decrease
in gross margin of $422 and increased operating expenses of $178. The net loss
for the Agriculture Equipment segment, net of income tax benefit of $453,
increased $424 to $726.
Net losses from the discontinued Automotive Accessories segment were $160 net of
tax benefits of $109 for the six months ended March 31, 1998. Estimated future
losses from discontinued operations were accrued in fiscal 1997. The Automotive
Accessories segment was sold in the six months ended March 31, 1998, and an
additional loss of $160 was incurred on the sale of this business segment. Net
sales from the discontinued segment in the six months ended March 31, 1998 were
$2,928.
13
Part II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On February 26, 1999 the Company held its annual meeting of
stockholders. The stockholders elected two directors and approved an
amendment to increase the number of shares available for grant under
the Company's 1993 Stock Option Plan from 3,000,000 to 4,500,000
shares.
The tabulation of votes cast for the election of the directors and
amendment to the Company's 1993 Stock Option Plan are as follows:
Proposal Number One - Election of Directors
For Withheld
--- --------
Anthony B. Cashen 18,453,986 431,972
Charles G. McClure 18,458,641 427,317
Proposal Number Two - Amendment to the 1993 Stock Option Plan
Increased Shares from For Against Abstentions Not Voted
3,000,000 to 4,500,000 --- ------- ----------- ---------
12,122,341 1,005,867 140,620 5,617,130
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
14
Williams Controls, Inc.
Signature
Pursuant to the requirements 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.
WILLIAMS CONTROLS, INC.
/s/ Gerard A. Herlihy
------------------------------------------
Gerard A. Herlihy, Chief Financial Officer
/s/ Kim L. Childs
------------------------------------------
Kim L. Childs, Corporate Controller
and Principal Accounting Officer
Date: May 10, 1999
15
Williams Controls, Inc.
Signature
Pursuant to the requirements 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.
WILLIAMS CONTROLS, INC.
By:
---------------------------------------
Gerard A. Herlihy, Chief Financial Officer
By:
---------------------------------------
Kim L. Childs, Corporate Controller
and Principal Accounting Officer
Date: May 10, 1999
15