UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
Commission File No. 0-25390
SMC CORPORATION
(Exact name of Registrant as specified in its charter)
Oregon 93-0939076
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
30725 Diamond Hill Road
Harrisburg, Oregon 97446
(Address of principal executive offices) (Zip Code)
(541) 995-8214
(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 report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of outstanding shares of Common Stock at August 14, 1996:
6,563,064
SMC CORPORATION
INDEX TO FORM 10-Q
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1996 and
December 31, 1995.......................................... 3
Consolidated Statement of Income - Three Months
Ended June 30, 1996 and June 30, 1995...................... 4
Consolidated Statement of Income - Six Months
Ended June 30, 1996 and June 30, 1995...................... 5
Consolidated Statement of Changes in Shareholders'
Equity - Year Ended December 31, 1995 and Six
Months Ended June 30, 1996................................. 6
Consolidated Statement of Cash Flows - Six Months
Ended June 30, 1996 and June 30, 1995...................... 7
Notes to Consolidated Financial Statements................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders........ 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
Signatures ........................................................... 15
Exhibit Index.......................................................... 16
2
PART I - Financial Information
Item 1. Financial Statements
SMC Corporation
Consolidated Balance Sheet
(in thousands)
December 31, June 30,
1995 1996
------------ --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 69 $ 1,661
Accounts receivable, net 8,445 7,488
Claims receivable 120 104
Inventories (Note 2) 16,311 18,341
Prepaid expenses and other 412 434
Deferred tax asset 752 752
------- -------
Total current assets 26,109 28,780
Property, plant and equipment, net 12,061 14,896
Intangible assets, net 2,328 2,441
Other assets 700 662
------- -------
Total assets $41,198 $46,779
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 1,671 $ --
Current portion of long-term debt 1,401 1,386
Accounts payable 11,053 14,106
Income taxes payable -- 399
Royalties payable 542 542
Product warranty liabilities 1,165 1,508
Accrued liabilities 2,422 4,048
------- -------
Total current liabilities 18,254 21,989
Long-term debt, net of current portion 4,676 3,984
Noncurrent royalties 480 110
Deferred income taxes 377 377
------- -------
Total liabilities 23,787 26,460
------- -------
Shareholders' equity:
Preferred stock, 5,000 shares authorized, none issued or outstanding -- --
Common stock, 30,000 shares authorized, 6,563 shares issued
and outstanding 10,914 10,914
Additional paid-in capital (Note 4) 1,556 1,556
Retained earnings (Note 4) 4,941 7,849
------- -------
Total shareholders' equity 17,411 20,319
------- -------
Total liabilities and shareholders' equity $41,198 $46,779
======= =======
The accompanying notes are an integral part of this financial statement.
3
SMC Corporation
Consolidated Statement of Income
(in thousands, except per share amounts)
Three Months Ended
June 30,
-------------------------
1995 1996
-------- --------
(unaudited)
Sales $ 33,885 $ 48,731
Cost of sales 29,766 41,790
-------- --------
Gross profit 4,119 6,941
Selling, general and administrative expenses 2,790 4,128
-------- --------
Income from operations 1,329 2,813
Interest expense 207 141
Other income (99) (13)
-------- --------
Income before provision for taxes 1,221 2,685
Provision for income taxes 425 1,072
-------- --------
Net income $ 796 $ 1,613
======== ========
Net income per share (Note 6) $ .12 $ .24
======== ========
Weighted average number of shares 6,771 6,661
======== ========
The accompanying notes are an integral part of this financial statement.
4
SMC Corporation
Consolidated Statement of Income
(in thousands, except per share amounts)
Six Months Ended
June 30,
1995 1996
-------- --------
(unaudited)
Sales $ 67,930 $ 91,833
Cost of sales 58,654 78,919
-------- --------
Gross profit 9,276 12,914
Selling, general and administrative expenses 5,435 7,816
-------- --------
Income from operations 3,841 5,098
Interest expense 456 299
Other income (50) (49)
-------- --------
Income before provision for taxes 3,435 4,848
Provision for income taxes (Note 3) 602 1,940
-------- --------
Net income $ 2,833 $ 2,908
======== ========
Net income per share (Note 6) $ .43 $ .44
======== ========
Weighted average number of shares 6,636 6,612
======== ========
Pro forma data (Note 3):
Income before provision for income taxes $ 3,435
Pro forma provision for income taxes 1,288
--------
Pro forma net income $ 2,147
========
Pro forma net income per share $ .32
========
The accompanying notes are an integral part of this financial statement.
5
SMC Corporation
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
(in thousands)
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
------ ------ ------- -------- -----
Balance, December 31, 1994 5,000 $ 707 $ -- $ 1,556 $ 2,263
Common stock issued in
public offering 1,553 12,032 -- -- 12,032
Common stock issued upon
exercise of options 10 82 -- -- 82
Equity issuance costs related
to public offering -- (1,907) -- -- (1,907)
Reclassification of retained
earnings to additional paid-in
capital (Note 4) -- -- 1,556 (1,556) --
Net income -- -- -- 4,941 4,941
----- -------- ----- ------- -------
Balance, December 31, 1995 6,563 $ 10,914 $ 1,556 $ 4,941 $17,411
----- -------- ----- ------- -------
Net Income -- -- -- 2,908 2,908
----- -------- ----- ------- -------
Balance, June 30, 1996 6,563 $ 10,914 $ 1,556 $ 7,849 $20,319
===== ======== ===== ======= =======
The accompanying notes are an integral part of this financial statement.
6
SMC Corporation
Consolidated Statement of Cash Flows
(in thousands)
Six Months Ended
June 30,
1995 1996
-------- --------
(unaudited)
Cash flows from operating activities:
Net income $ 2,833 $ 2,908
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 519 779
Changes in current assets and liabilities (excluding acquisition
of a business (Note 5)):
Accounts receivable (3,985) 973
Inventories (3,244) (1,703)
Prepaid expenses and other (225) (22)
Deferred tax asset (731) --
Other assets -- 138
Accounts payable 1,145 3,053
Income taxes payable -- 399
Accrued liabilities and other obligations (321) 1,599
-------- --------
Net cash (used in) provided by operating activities (4,009) 8,124
-------- --------
Cash flows from investing activities:
Capital expenditures (1,624) (3,095)
Acquisition of a business, (Note 5) -- (1,059)
-------- --------
Net cash used in investing activities (1,624) (4,154)
-------- --------
Cash flows from financing activities:
Net borrowings on notes payable 130 (1,671)
Proceeds from issuance of long-term debt 600 --
Repayments of long-term debt (836) (707)
Payments of notes payable to shareholders (5,133) --
Proceeds from issuance of common stock (Note 4) 11,069 --
Public offering costs (322) --
-------- --------
Net cash provided by (used in) financing activities 5,508 (2,378)
-------- --------
Net (decrease) increase in cash and cash equivalents (125) 1,592
Cash and cash equivalents, beginning of period 180 69
-------- --------
Cash and cash equivalents, end of period $ 55 $ 1,661
======== ========
The accompanying notes are an integral part of this financial statement.
7
SMC Corporation
Form 10-Q
For the Second Quarter Ended June 30, 1996 (Unaudited)
Notes to Financial Statements
1. Basis of Presentation of Interim Period Statements
The accompanying financial statements are unaudited and have been
prepared by SMC Corporation (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures typically included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements
include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the
interim periods reported. The financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's 1995 Annual Report on Form 10-K filed with
the Securities and Exchange Commission. Certain financial entries for
1995 have been reclassified to conform to current year presentation.
These changes had no impact on previously reported results of
operations or shareholders' equity. The results of operations for an
interim period are not necessarily indicative of the results of
operations for a full year.
2. Inventories
Inventories by major classification are as follows (in thousands):
Dec. 31, 1995 June 30, 1996
Raw materials $ 8,961 $ 8,841
Work-in-progress 5,097 6,281
Finished goods 2,253 3,219
--------- ---------
Total $ 16,311 $ 18,341
========= =========
3. Provision for Income Taxes and Pro Forma Provision for Income Taxes
The provision for income taxes for the six months ended June 30, 1995
is partially offset by recognition of a cumulative net deferred tax
asset of $686,000 associated with the change of the Company's
S corporation status to C corporation status on January 1, 1995, in
accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." A pro forma provision for income
taxes that would have been recorded if the Company had been a C
corporation for all periods presented is provided for comparative
purposes.
4. Recapitalization and Initial Public Offering
On January 20, 1995, the Company sold 1,552,500 shares of common stock
of SMC Corporation at an offering price of $7.75 per share pursuant to
an initial public offering (the
8
"Offering"). The proceeds of the Offering (net of underwriting
discounts and commissions and offering expenses) of $10.1 million were
used to repay borrowings in the amount of approximately $3 million,
$2.6 million of which were outstanding at December 31, 1994, and to
repay $5.1 million due under promissory notes issued to shareholders.
The remaining proceeds were used for working capital.
As discussed in Note 3, the Company terminated its S corporation
status effective January 1, 1995 in conjunction with the Offering and,
accordingly, the remaining undistributed S corporation retained
earnings at December 31, 1994 were reclassified as additional paid-in
capital.
5. Acquisition of the Assets of Honorbuilt Industries, Inc.
Effective June 14, 1996, the Company acquired certain assets of
Honorbuilt Industries, Inc. ("Honorbuilt"). Honorbuilt was primarily
engaged in the design, manufacture, distribution and sale of Class C
motor coaches (under the brand name of El Dorado) from its facility in
Minneapolis, Kansas.
Cash consideration of $959,000 paid by the Company for assets acquired
from Honorbuilt has been allocated as follows:
Inventory $327,000
Equipment 432,000
Goodwill, amortized over 15 years 200,000
In addition, the Company paid approximately $100,000 in legal,
accounting, and organizational expenses related to the acquisition.
6. Net Income Per Share
Net income per share is computed based on the weighted average number
of shares outstanding during the period after giving effect to stock
options and warrants which are considered to be common stock
equivalents because such options and warrants constitute more than 3%
of shares outstanding and thus are considered dilutive.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of sales.
Three months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
1995 1996 1995 1996
---- ---- ---- ----
Sales ..................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............. 87.9 85.8 86.3 85.9
----- ----- ----- -----
Gross profit .............. 12.1 14.2 13.7 14.1
Selling, general and
administrative expenses .. 8.2 8.4 8.0 8.5
----- ----- ----- -----
Income from operations .... 3.9 5.8 5.7 5.6
Interest expense .......... .6 .3 .7 .3
Other (income) and expense (.3) -- (.1) --
----- ----- ----- -----
Pretax income ............. 3.6 5.5 5.1 5.3
Provision for Income taxes 1.3 2.2 .9 2.1
----- ----- ----- -----
Net income ................ 2.3% 3.3% 4.2% 3.2%
===== ===== ===== =====
Pro forma provision
for income taxes ......... 1.9% N/A
Pro forma net income ...... 3.2% N/A
Sales increased 43.8% to $48.7 million for the second quarter of 1996
from $33.9 million for the comparable period in 1995. The increase was
primarily the result of a 37.9% increase in unit sales to 455 units, up
from 330 units in the prior year. For the six months ended June 30, 1996,
sales increased 35.2% to $91.8 million from $67.9 million for the
comparable period in 1995. This was the result of a 30.8 % unit sales
increase to 857 units during the six-months ended June 30, 1996, compared
to 655 units during the comparable period in 1995. The increased unit sales
for both periods resulted primarily from sales of Beaver products. Beaver's
Monterey model was introduced in June 1995 and was priced lower than
Beaver's other models to expand the brand's offerings to the market. In the
process of introducing the Monterey model, Beaver increased its dealer
distribution network by 16 dealers, some of which also carry Beaver's
higher priced Patriot and Marquis models. Sales of Safari products were
consistent with the prior year because production levels remained
relatively constant.
Gross profit margin increased 68.5% to $6.9 million for the second
quarter of 1996 from $4.1 million for the comparable period in 1995, and
increased as a percentage of sales from 12.1% to 14.2 %. For the six months
ended June 30, 1996, gross profit margin increased 39.2% to $12.9 million
from $9.3 million for the comparable period of 1995, and increased as a
percentage of sales from 13.7% to 14.1%. The increased gross margin
percentage performance for each of the referenced periods was partly
attributable to the increased sales of Beaver product as previously
described. Generally, Beaver models are sold at higher prices than Safari
brand models, and the Company's products generally achieve higher margins
for products with higher selling prices. Because Beaver sales have
represented a higher percentage of consolidated sales during the first half
10
of 1996 than in 1995, the Company's overall gross margin percentage also
increased. Improvements in material utilization and reductions in overtime
labor costs have also improved gross margin performance between 1995 and
1996. An additional factor that impacted the second quarter 1995 gross
margin was a promotional program initiated to close out sales of 1995
model-year products. During the second quarter of 1996, the Company did not
conduct a comparable program.
Selling, general and administrative expenses increased 48.0% to
$4.1 million for the quarter ended June 30, 1996 from $2.8 million for the
comparable period in 1995, and 43.8% to $7.8 million for the six-month
period ended June 30, 1996 from $5.4 million for the comparable period of
1995. Proportionately, these costs increased more than sales due to higher
legal and accounting costs associated with the change to public company
status, increase in staffing required to handle the increased sales volume,
and the commencement of operations at the Company's newly formed
subsidiaries, Electronic Design and Assembly, Inc. and Composite
Technologies, Inc., and the Company's new customer service center.
Given the factors affecting gross margin and selling, general, and
administrative expenses, operating income increased 111.7% to $2.8 million
for the quarter ended June 30, 1996 from $1.3 million for the comparable
period of 1995. Operating income increased 32.7% to $5.1 million for the
six months ended June 30, 1996 from $3.8 million for the comparable period
during 1995.
Interest expense decreased to $141,000 for the quarter ended June 30,
1996 from $207,000 for the comparable period in 1995, and decreased to
$299,000 for the six-month period ended June 30, 1996 compared to $456,000
for the comparable period during 1995. The decreases for both periods were
due to lower borrowings on the Company's revolving lines of credit.
Positive cash flows created by profits from operations and reductions in
inventory levels were used to reduce revolving indebtedness.
Other income was $13,000 for the second quarter of 1996 compared to
$99,000 for the second quarter of 1995, and $49,000 for the six-month
period ended June 30, 1996 compared to $50,000 for the comparable period in
1995.
For the second quarter of 1996, the Company's effective tax rate was
39.9%, resulting in an income tax provision of $1.1 million compared to the
effective tax rate of 34.8% resulting in an income tax provision of
$425,000 for the comparable period in 1995. For the six-month period ended
June 30, 1996, the Company's effective tax rate was 40.0% resulting in an
income tax provision of $1.9 million, compared to the effective tax rate of
17.5% resulting in an income tax provision of $602,000 for the comparable
period in 1995. The increase in effective rate for the six-month period
ended June 30, 1996 compared to the same period in 1995 is due to the
Company's termination of its S corporation tax status and resultant
commencement of its tax-paying C corporation status effective January 1,
1995. Upon conversion to C corporation status, the Company recorded a
transition deferred tax asset of $686,000. This reduced the income tax
provision recorded during the six-month period ended June 30, 1995, in
accordance with SFAS No. 109, "Accounting for Income Taxes." If the Company
had been a C corporation during the
11
relevant period, its effective tax rate would have been 37.5%, resulting in
an income tax provision of $1.3 million for the six-month period ended
June 30, 1995.
Net income after tax increased 102.6% to $1.6 million for the quarter
ended June 30, 1996 from $796,000 for the comparable period of 1995. Net
income after taxes for the six-month period ended June 30, 1996 increased
35.4% to $2.9 million compared to 1995's pro forma net income for the
comparable period of $2.2 million. Comparison of net income for the six
months ended June 30, 1996 is made to 1995 pro forma net income for the six
months ended June 30, 1995 to compare earnings after tax on a normal basis
without the effect of the one-time recognition of the deferred tax asset of
$686,000 in January of 1995.
Historically, the Company's revenues have been subject to some
seasonal fluctuation. Sales demand for high line Class A motor coaches
tends to increase with the beginning of new model years, which occur during
the Company's third quarter ending September 30, while decreases in sales
demand have typically occurred during the second quarter as dealers delay
purchases in anticipation of the new model year.
Liquidity and Capital Resources
During the first six months of 1996, the Company generated $8.1
million in cash flows from operations while its net working capital
position decreased from $7.9 million at December 31, 1995 to $6.8 million
at June 30, 1996 (including cash and cash equivalents of $1.7 million).
Cash generated from operations during the first six months of 1996 was
used to finance capital expenditures of approximately $3.1 million, to pay
down the line of credit facility by approximately $1.7 million, to acquire
a business for approximately $1.1 million, and to service term debt
payments of approximately $707,000.
The Company anticipates that its aggregate capital expenditures for
1996 will be approximately $7 million, including $3 million for the
acquisition and outfitting of its new Hines, Oregon production plant. Other
major planned expenditures include a $1.2 million project to automate and
computerize cabinet shop production at both Safari and Beaver and a $1.0
million production operation upgrade at Beaver. In addition, the Company
plans to acquire equipment and upgrade facilities at the new Minneapolis,
Kansas site at a cost of approximately $1 million. The Company plans to use
cash generated from operations and issuance of long-term debt to fund these
expenditures.
The Company has lines of credit of $10.0 million (all available at
June 30, 1996), plus an additional $5.5 million equipment financing line of
credit, of which $4.9 million is available. Amounts outstanding under these
lines of credit bear interest at prime (8.25% at June 30, 1996) and are
secured by all assets not specifically identified in other financing
obligations. The terms of the revolving credit and equipment financing
agreements require compliance with certain financial covenants and other
covenants, which provide that the Company receive consent from the lender
to declare or pay dividends in cash, stock, or other property. The
covenants also include restrictions
12
relating to (1) mergers, consolidations and sale of assets, (2) guarantees
by the Company of debts or obligations of other persons or entities, and
(3) acquisition of the Company's own stock. The Plan of Reorganization
pursuant to which the Company completed the acquisition of Beaver also
prohibits the Company from paying dividends if Beaver defaults on payment
obligations under the Plan. The Company was in compliance with all
covenants and agreements at June 30, 1996. The Company does not believe any
of these covenants will have a material impact on the Company's ability to
meet its cash obligations.
Most dealer purchases of motor coaches from the Company are financed
under flooring financing arrangements between the dealer and a bank or
finance company. Under these flooring arrangements, the financing
institution lends the dealer all or substantially all of the wholesale
purchase price of a motor coach and retains a security interest in the
coach purchased. These financing arrangements provide that, for a period of
time after a coach is financed (generally 12 to 18 months), if the dealer
defaults on its payment or other obligations to the lender, the Company is
obligated to repurchase the dealer's inventory for the amount then due from
the dealer plus, in certain circumstances, costs incurred by the lender in
connection with repossession of the inventory. The repurchase price may be
more than the resale value of the coach. The Company's contingent liability
under its repurchase obligations varies from time to time. As of June 30,
1996, the Company estimates its total contingent liability under repurchase
obligations was approximately $48.5 million. To date, losses incurred by
the Company pursuant to repurchase obligations have been minimal. The
Company cannot predict with certainty its future losses, if any, pursuant
to repurchase obligations, and these amounts may vary materially from the
expenditures historically made by the Company. Furthermore, even in
circumstances where losses in connection with repurchase obligations are
not material, a repurchase obligation can represent a significant cash
requirement for the Company.
13
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On June 20, 1996 at the Company's Annual Meeting of shareholders, the
holders of the Company's outstanding Common Stock elected directors of the
Company as described below. As of the record date for the Annual Meeting,
6,563,064 shares of Common Stock were issued and outstanding.
The shareholders elected each of Mathew M. Perlot, Curtis W. Lawler,
Connie M. Perlot, Jim L. Traughber, Lawrence S. Black, Milton L. Ray, and
L. Michael Cary, by the votes indicated below, to serve on the board of
directors for the ensuing year.
Shares Against
Shares in Favor or Withheld Abstentions
Mathew M. Perlot 6,106,148 92,900 0
Curtis W. Lawler 6,110,048 89,000 0
Connie M. Perlot 6,110,248 88,800 0
Jim L. Traughber 6,109,648 89,400 0
Lawrence S. Black 6,110,248 88,800 0
Milton L. Ray 6,110,248 88,800 0
L. Michael Cary 6,110,248 88,800 0
Total Shares Voting 6,199,048
Total Shares Outstanding 6,563,064
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement of Calculation of Average Common Shares Outstanding
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the period
ended June 30, 1996.
14
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.
SMC CORPORATION
(Registrant)
Date: August 14, 1996 By: /s/ PAUL M. BROWN, JR.
-----------------------------------------
Paul M. Brown, Jr.
Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
15
Exhibit Index
Exhibit
No. Description
- ------- -----------
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
16