SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-18198
DeVlieg-Bullard, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1270573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Gorham Island, Westport, CT 06880
(Address of principal executive offices) (Zip Code)
203-221-8201
(Registrant's telephone number, including area code)
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 of common stock outstanding as of December 1, 1998 was
12,334,900.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DeVlieg-Bullard, Inc.
Balance Sheets
(in thousands, except share data)
October 31, July 31,
1998 1998
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 767 $ 365
Accounts receivable, net 22,518 24,895
Inventories, net 49,088 45,459
Other current assets 1,501 1,418
--------- ---------
Total current assets 73,874 72,137
Property, plant and equipment, net 8,469 8,781
Assets held for sale 1,692 1,692
Engineering drawings, net 16,200 16,393
Goodwill, net 10,900 11,025
Other assets, net 14,440 13,887
--------- ---------
Total assets $ 125,575 $ 123,915
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,577 $ 17,625
Accrued expenses and other current liabilities 7,203 10,007
Revolving credit agreement 29,153 25,670
Current portion of long-term debt 4,874 5,201
--------- ---------
Total current liabilities 61,807 58,503
Long-term debt (related party $4,375) 13,142 13,528
Postretirement benefit obligation 21,562 21,357
Other noncurrent liabilities 10,816 11,121
--------- ---------
Total liabilities 107,327 104,509
Stockholders' equity:
Common stock, $0.01 par value; authorized
30,000 shares; issued and outstanding
12,334,900 shares 123 123
Additional paid-in capital 34,230 34,230
Excess purchase price over net assets acquired from
related parties (16,242) (16,242)
Retained earnings 252 1,438
Cumulative translation adjustment (115) (143)
--------- ---------
Total stockholders' equity 18,248 19,406
--------- ---------
Total liabilities and stockholders' equity $ 125,575 $ 123,915
========= =========
The accompanying notes are an integral part of these financial statements.
2
DeVlieg-Bullard, Inc.
Statement of Operations
(unaudited - in thousands, except per share data)
Three Months Ended
October 31,
1998 1997
-------- --------
Net sales $ 26,600 $ 26,483
Cost of sales 20,338 18,495
-------- --------
Gross profit 6,262 7,988
E S G & A expenses:
Engineering 609 496
Selling 2,985 2,744
General and administrative 3,409 2,968
-------- --------
Total E S G & A expenses 7,003 6,208
Other income, net 241 11
-------- --------
Operating (loss)/income (500) 1,791
Interest expense (including related party interest
of $176 and $171) 1,385 1,320
-------- --------
(Loss)/income before income taxes (1,885) 471
Income tax (benefit)/provision (699) 199
-------- --------
Net (loss)/income $ (1,186) $ 272
======== ========
(Loss)/income per common share:
Basic $ (0.08) $ 0.02
======== ========
Diluted $ (0.08) $ 0.02
======== ========
Average common shares and equivalents outstanding
Basic 14,107 14,060
======== ========
Diluted 14,107 15,465
======== ========
The accompanying notes are an integral part of these financial statements.
3
DeVlieg-Bullard, Inc.
Statements of Cash Flows
(unaudited - in thousands)
Three Months Ended
October 31,
Cash flows from operating activities: 1998 1997
-------- --------
Net (loss)/income $ (1,186) $ 272
Adjustments to reconcile net (loss)/income to net cash provided by
operating activities:
Depreciation and amortization 1,265 1,221
Deferred income taxes (762) --
Provision for losses on accounts receivable 151 47
Net gain on sale of assets (241) --
Changes in assets and liabilities, net of effects from acquisitions
Accounts receivable 2,226 3,103
Inventories (3,629) (1,578)
Other current assets (83) (74)
Accounts payable 2,952 882
Accrued expenses and other current liabilities (2,804) (2,690)
Other, net (103) (497)
-------- --------
Net cash (used for)/provided by operating activities (2,214) 686
Cash flows from investing activities:
Capital expenditures (149) (534)
Proceeds from sale of assets 241
-------- --------
Net cash provided by/(used for) investing activities 92 (534)
Cash flows from financing activities:
Borrowings under revolving credit agreement 30,378 30,302
Repayments under revolving credit agreement (26,895) (29,245)
Payments of long-term debt (987) (768)
-------- --------
Net cash provided by financing activities 2,496 289
Effect of exchange rate changes on cash 28 (59)
-------- --------
Net increase in cash and cash equivalents 402 382
Cash and cash equivalents at beginning of period 365 637
-------- --------
Cash and cash equivalents at end of period $ 767 $ 1,019
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,175 $ 1,166
Income taxes, net of refunds 27 13
During the three months ended October 31, 1998 and 1997, the Company entered
into capital leases for computer equipment totaling $102 and $448, respectively,
which were financed by capital lease obligations.
The accompanying notes are an integral part of these financial statements.
4
DeVlieg-Bullard, Inc.
Notes to Unaudited Financial Statements
NOTE 1: Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange Commission
for Form 10-Q, the financial statements, footnote disclosures and other
information normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed. The financial
statements contained in this report are unaudited but, in the opinion of the
management of DeVlieg-Bullard, Inc. (the "Company"), reflect all adjustments,
consisting of only normal recurring adjustments, necessary to fairly present the
financial position as of October 31, 1998 and the results of operations and cash
flows for the interim periods of the fiscal year ending July 31, 1999 ("fiscal
1999") and the fiscal year ended July 31, 1998 ("fiscal 1998") presented herein.
The results of operations for any interim period are not necessarily indicative
of results for the full year. These financial statements, footnote disclosures
and other information should be read in conjunction with the financial
statements and the notes thereto included in the Company's annual report on Form
10-K for the year ended July 31, 1998. Certain amounts in the fiscal 1998
financial statements have been reclassified to conform to the fiscal 1999
presentation.
The financial statements include all accounts of the Company after elimination
of all significant interdivision transactions and balances. Amounts in these
notes, except per share data, are expressed in thousands.
NOTE 2: Inventories
October 31, July 31,
Inventories consisted of: 1998 1998
------- -------
(unaudited)
Raw materials $ 1,453 $ 1,620
Work-in-process 14,609 14,671
Finished goods 33,026 29,168
------- -------
$49,088 $45,459
======= =======
Valuation reserves for obsolete, excess and slow-moving inventory aggregated
$9,205 and $10,556 at October 31, 1998 and July 31, 1998, respectively.
Inventories valued using LIFO were $20,747 and $19,298 at October 31, 1998 and
July 31, 1998, respectively. There was no LIFO reserve against those
inventories. The financial accounting basis for the inventories of acquired
companies exceeds the tax basis of $12,224 at October 31, 1998 and July 31,
1998.
5
NOTE 3: Segment Reporting
Financial information for each of the Company's segments is summarized below:
Machine Tooling
Services Tool Systems Industrial
Group Group Group Group Corporate Total(a)
--------- --------- --------- --------- --------- ---------
Three months ended October 31, 1998
Sales $ 9,691 $ 6,659 $ 4,424 $ 5,890 $ -- $ 26,664
Intersegment sales -- -- (64) -- -- (64)
Net sales 9,691 6,659 4,360 5,890 -- 26,600
Operating income (a) 1,209 (1,001) 220 (41) (887) (500)
Identifiable assets 52,089 31,668 18,063 8,495 15,260 125,575
Three months ended October 31, 1997
Net sales $ 9,509 $ 5,584 $ 5,322 $ 6,068 $ -- $ 26,483
Operating income 2,954 (1,540) 813 400 (836) 1,791
Identifiable assets 44,440 35,525 18,820 7,970 13,420 120,175
(a) Interest expense and income taxes are primarily allocated as Corporate
expenses.
NOTE 4: Earnings per Share
The table below sets forth the computation of the weighted average number of
shares used for basic and diluted earnings per share:
Three months ended October 31,
1998 1997(c)
------ -------
Average common shares outstanding 12,335 12,275
Stock purchase warrants (a) 1,772 1,785
------ ------
Average common shares outstanding - basic 14,107 14,060
Effect of dilutive securities:
Contingently issuable stock purchase warrants (b) 748
Stock options -- (b) 657
------ ------
Average common shares outstanding - diluted 14,107 15,465
====== ======
(a) Class A and Class B Stock Purchase Warrants are included in the computation
of basic earnings per share.
(b) When a net loss is recorded, additional shares for stock options and
contingent stock purchase warrants are not included because their inclusion
would be antidilutive. Because the first quarter fiscal 1999 results
reflect a net loss, basic and diluted earnings per share are calculated
based on the same weighted average number of shares outstanding.
(c) Fiscal 1998 has been restated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 "Earnings per Share."
6
DeVlieg-Bullard, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Summarized below is a discussion of the results of operations of the Company,
including its Services, Machine Tool, Tooling Systems and Industrial operating
groups. Amounts, except per share data, are expressed in thousands.
Three months ended October 31, 1998 compared to three months ended October 31,
1997.
Net sales for the first quarter of fiscal 1999 were $26,600, basically the same
as the $26,483 reported in the first quarter of fiscal 1998. First quarter
fiscal 1999 sales as compared to the first quarter of fiscal 1998 increased
19.3% for the Machine Tool Group and 1.9% for the Services Group, while the
Industrial Group declined 2.9% and the Tooling Systems Group declined 18.1%.
Gross profit for the first quarter of fiscal 1999 was $6,262 compared to $7,988
for the first quarter of fiscal 1998, a decrease of $1,726, or 21.6%.
Improvements at the Machine Tool Group were offset by declines at the other
operating groups.
E S G & A expenses were $7,003, or 26.3% of net sales in the first quarter of
fiscal 1999, and $6,208, or 23.4% of net sales, in the first quarter of fiscal
1998. The increase in operating expenses was primarily at the Services and
Machine Tool Groups for increased engineering expenses related to the
outsourcing efforts and at Powermatic for increased computer related costs.
Interest expense was $1,385 in the first quarter of fiscal 1999 compared to
$1,320 in the first quarter of fiscal 1998.
An income tax benefit of $699 was recorded for the first three months of fiscal
1999 reflecting the loss recorded for the period, compared to expense of $199
for the first three months of fiscal 1998 reflecting the income reported in the
prior year period.
Operating Results by Business Segment
Services Group sales were $9,691 for the first quarter of fiscal 1999 compared
to $9,509 for the same period in the prior year. The improvement was primarily
in the aftermarket parts business of National Acme, offset by declines in the
other aftermarket product lines and field services. Operating profit for the
first quarter of fiscal 1999 was $1,209, a decline of $1,745 from the $2,954
reported during the first quarter of the prior year. Operating expenses
increased as a result of engineering costs related to the outsourcing project
and gross profit was adversely effected by unfavorable purchase price variances
related to small quantity rush orders to fill immediate needs.
Machine Tool Group sales were $6,659 for the first three months of fiscal 1999,
an increase of $1,075, or 19.3%, over the $5,584 reported in the first three
months of the prior fiscal year. The Machine Tool Group reported an operating
loss of $1,001 for the first quarter of fiscal 1999, compared to a loss of
$1,540 in the same period a year ago. Although gross profit increased,
reflecting the additional sales volume and increased productivity, engineering
costs related to the outsourcing project were higher during the quarter compared
to the prior year.
Tooling Systems Group sales were $4,360 in the first quarter of fiscal 1999,
compared to $5,322 in the first quarter of the prior year, a decrease of $962,
or 18.1%, as a result of the GM strike during the summer and deteriorating world
business conditions. Operating income for the first quarter of fiscal 1999 was
$220, compared with $813 in the first quarter of the prior year. The decline in
operating income is the result of the decreased volume.
Industrial Group sales were $5,890 in the first quarter of fiscal 1999, compared
to $6,068 in the first quarter of the prior year, a decrease of $178, or 2.9%.
Operating income was a loss of $41 for the first quarter of
7
fiscal 1999, compared to income of $400 in the same period a year ago. The
decline in operating income is due to additional depreciation related to a
computer upgrade and repairs and maintenance expense.
Liquidity and Capital Resources
Cash Flows
Historically, the Company's continuing operations have been financed by
internally generated funds. Acquisitions have been funded with increases in
indebtedness, while funds from divestitures have generally been used to reduce
indebtedness. As the operating difficulties the Company reported in fiscal 1998
continued into the first quarter of fiscal 1999, operating activities were
financed by increasing indebtedness.
The Company experienced a lack of availability of parts from venders during the
first quarter of fiscal 1999 due in part to a lack of availability under the
senior credit facility. The Company's liquidity position improved following the
end of the first quarter as a result of increases in term loans and in the
amount available under the revolving credit agreement. Liquidity further
improved from the shipment of certain large machine orders from the Machine Tool
Group following the end of the first quarter. Total accounts payable have been
reduced from $20.6 million at October 31, 1998 to $16.8 million at November 30,
1998, a 19% reduction. Normal seasonal issues with sales and orders and a low,
but improving, vendor on-time delivery performance continue to hold down overall
performance.
Net cash used by operations was $2,214 for the three months ended October 31,
1998 as compared to net cash provided by operating activities of $686 for the
three months ended October 31, 1997.
Cash used for capital expenditures was $149 and $534 for the first quarter of
fiscal 1999 and 1998, respectively. The first quarter of fiscal 1999 includes
$241 of proceeds from the sale of excess machinery and equipment.
Financing and Investing
The balance outstanding under the Company's revolving credit agreement was
$29,153 at October 31, 1998, compared to $25,670 at July 31, 1998. Long-term
debt, including current maturities, at October 31, 1998, was $18,016, compared
to $18,729 at July 31, 1998, a decrease of $713. The Company's total
indebtedness was $47,169 and $44,399 at October 31, 1998 and July 31, 1998,
respectively, an increase of $2,770. The increase in debt was used to finance
working capital needs. Cash and equivalents at October 31, 1998 were $767, an
increase of $402 compared to July 31, 1998. Net cash provided by financing
activities was $2,496 in the first quarter of fiscal 1999 compared to a use of
$289 in the first quarter of the prior year.
The senior credit facility aggregating $40,000 is comprised of $6,000 in term
loans and a revolving credit agreement, which provides for borrowings up to
$30,000. Interest on the outstanding borrowings under the revolving credit
agreement is payable monthly in arrears at 1% above the prime rate or, at the
Company's option, at alternative rates based on LIBOR. The effective rate based
on LIBOR was 8.41% at October 31, 1998. The amount the Company may borrow under
the revolving credit agreement is based upon a formula related to the Company's
eligible accounts receivable and inventories, reduced by outstanding letters of
credit. The Company has no unused borrowings available under its revolving
credit
8
agreement at October 31, 1998. However, with changes negotiated to the agreement
subsequent to the quarter (see below), availability is estimated at
approximately $1,000 on December 11, 1998.
The term loans require monthly principal payments of $200. Interest on the term
loans is payable monthly at 1.25% above prime rate or, at the Company's option,
at alternative rates based on LIBOR. The effective rate based on LIBOR was 8.66%
at October 31, 1998.
On November 6, 1998, the Company and its lenders agreed to certain amendments to
the senior credit agreement to provide, among other changes, for an increase in
the total available under the revolving credit facility from $30,000 to $31,500;
a change in the financial statement covenants effective from August 1, 1998; and
an increase in the pricing on the revolving credit agreement from 1% above prime
to 1.25% above prime.
The lenders on the senior credit agreement also agreed to provide the Company
with a new term loan of $2,500. In connection with this new term loan, principal
repayments on all term loans were kept at $200 per month, however, the effective
interest rate was increased effective November 1, 1998 to 1.5% above prime. As a
result of the increase in the principal amount, but keeping the amortization the
same, the Company has a balloon payment of $1,600 on the term loans at the final
maturity in fiscal 2001. The terms of the amended credit agreement provide that
proceeds from the sale or disposition of fixed assets are to be applied to the
term loans in reverse order of maturity. Since the Company is planning to
dispose of certain fixed assets during fiscal year 1999, it is likely that the
proceeds from these dispositions will substantially reduce the balloon payment
on these term loans. The fixed assets being disposed of are principally the
excess facilities associated with the special charge recorded by the Company in
fiscal 1998.
Pursuant to the subordinated debt facility, the Company has Subordinated
Debentures in the principal amount of $8,000 and Junior Subordinated Debentures
in the principal amount of $4,000 plus accrued interest of $375. Interest
payments on the Subordinated Debentures of 11.5% per annum are payable quarterly
in arrears commencing July 1, 1994. The Subordinated Debentures provide for the
repayment of principal of $2,000 in fiscal 1999 and fiscal 2000 and $4,000 in
fiscal 2001. Interest on the Junior Subordinated Debentures accrues at 14.5%,
and the cash interest of 11% per annum is payable quarterly in arrears
commencing January 1, 1996. The Junior Subordinated Debentures provide for the
repayment of principal of $4,000 and unpaid interest in June 2001 or thirty days
after the payment of the Subordinated Debentures.
The Subordinated Debenture Holders have agreed to the amendment of certain
provisions in the senior credit agreement, and in connection with these changes,
certain other changes have been negotiated in the subordinated debt facility,
including a change in the financial statement covenants effective August 1, 1998
and a deferral in the payment date for the $2,000 principal payment due in May
1999.
The Company continues to make progress in implementing its outsourcing program.
Normal seasonal issues affecting sales and orders in November and December and a
still low, although improving, vendor on-time delivery performance, however,
continue to strain the Company's liquidity position. The Company is discussing
with both external and internal sources obtaining up to $1.0 million of
additional financing. The Company believes such financing, together with cash
flows from operations and amounts available under the revolving credit facility,
will be sufficient to fund the Company's operations during the remainder of
fiscal 1999. The Company's failure to obtain such financing on acceptable terms,
however, would likely adversely affect the Company's results of operations.
9
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. These systems and products
will need to be able to accept four digit entries to distinguish years beginning
with 2000 from prior years. As a result, systems and products that do not accept
four digit year entries will need to be upgraded or replaced to comply with such
"Year 2000" requirements.
The Company believes that its internal systems are Year 2000 compliant or will
be replaced in connection with previously planned upgrades to information
systems prior to the need to comply with Year 2000 requirements. The Company
believes that, with modifications to existing software and conversions to new
systems, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or not completed timely, the Year 2000 issue could have a material impact
on the operations of the Company. In order to assure that this does not occur,
the Company plans to devote all resources required to resolve any significant
year 2000 issues in a timely manner. A number of the Company's customers and
suppliers may also be affected by the Year 2000 issue that require that they
expend significant resources to modify or replace their existing systems; their
failure to properly address the Year 2000 issue could have significant impact on
the Company's operations.
The Services and Machine Tool Groups (which operate off one computer system)
will be upgrading to a new system that will provide substantially greater
functionality, particularly in the area of materials requirement planning. The
Tooling Systems Group is installing the same system, while the Industrial Group
has completed their installation of the same software. The total expected costs
for these upgrades is approximately $2,800, of which approximately $500 has
already been spent. A significant amount of fiscal 1999 capital expenditures
will be devoted to upgrading current hardware and software to add capabilities
and comply with Year 2000 issues.
The Company expects to complete the system upgrades by the summer of 1999.
However, if there is a delay in new system installation, management believes the
existing systems can be upgraded to Year 2000 compliance in a relatively short
period of time.
Cautionary Factors
The discussions in this document may include certain forward-looking statements.
Actual results could differ materially from those reflected by the
forward-looking statements contained in this document and a number of factors
may affect future results, liquidity and capital resources. These factors
include: the ability of the Company to obtain sufficient parts from its vendors;
the ability of the Company to obtain trade credit from those vendors on
favorable terms; the fact that the Company derives a substantial portion of its
sales from cyclical industries, including the automotive, aerospace and housing
industries; the ability to introduce new products in a timely fashion; the pace
of technological changes affecting the products manufactured and services
provided by the Company; the Company's substantial debt service requirements,
much of which are based on variable rates; the dependence of the Company's
growth on acquisitions and the Company's ability to finance such acquisitions
and to profitably integrate the acquired operations; the level of margins
achievable in the markets served by the Company; and the ability to continue to
minimize operating expenses. Although the Company believes it has the business
strategy and resources needed for improved operations, future sales and margin
trends cannot be reliably predicted.
10
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Fifth Amendment to Amended and Restated Financing and Security Agreement
dated November 10, 1998 among DeVlieg-Bullard, Inc., the CIT Group/Business
Credit, Inc. and BNY Financial Corporation.
10.2 Agreement dated November 5, 1998 among BancOne Capital Partners
Corporation, PNC Capital Corporation and DeVlieg-Bullard, Inc. concerning
amendments to the Investment Agreement.
27 Financial Data Schedules (SEC use only)
(b) Reports on Form 8-K
During the quarter ended October 31, 1998, the Company did not file any reports
on Form 8-K.
11
SIGNATURES
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.
DeVlieg-Bullard, Inc.
-----------------------------------------
(Registrant)
Date: December 15, 1998 By: /s/ W. O. Thomas
-------------------------------------
President and Chief Executive Officer
(Acting Chief Accounting Officer
12