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 September 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 November 13, 1996:
6,563,064
SMC CORPORATION
INDEX TO FORM 10-Q
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1996 and
December 31, 1995......................................... 3
Consolidated Statement of Income - Three Months
Ended September 30, 1996 and September 30, 1995........... 4
Consolidated Statement of Income - Nine Months
Ended September 30, 1996 and September 30, 1995........... 5
Consolidated Statement of Changes in Shareholders'
Equity - Year Ended December 31, 1995 and Nine
Months Ended September 30, 1996........................... 6
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1996 and September 30, 1995........... 7
Notes to Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K..................... 15
Signatures........................................................... 16
Exhibit Index........................................................ 17
2
PART I - Financial Information
Item 1. Financial Statements
SMC Corporation
Consolidated Balance Sheet
(dollars in thousands)
- -------------------------------------------------------------------------------
December 31, September 30,
1995 1996
------------ -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 69 $ 249
Accounts receivable, net 8,445 13,330
Claims receivable 120 104
Inventories (Note 2) 16,311 19,967
Prepaid expenses and other 412 508
Deferred tax asset 752 752
------- -------
Total current assets 26,109 34,910
Property, plant and equipment, net 12,061 16,412
Intangible assets, net 2,328 2,757
Other assets 700 749
------- -------
Total assets $41,198 $54,828
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 1,671 $ 4,835
Current portion of long-term debt 1,401 1,331
Accounts payable 11,053 15,625
Income taxes payable -- 341
Royalties payable 542 542
Product warranty liabilities 1,165 1,692
Accrued liabilities 2,422 4,142
------- -------
Total current liabilities 18,254 28,508
Long-term debt, net of current portion 4,676 3,700
Noncurrent royalties 480 110
Deferred income taxes 377 377
------- -------
Total liabilities 23,787 32,695
------- -------
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 9,663
------- -------
Total shareholders' equity 17,411 22,133
------- -------
Total liabilities and shareholders' equity $41,198 $54,828
======= =======
The accompanying notes are an integral part of this financial statement
3
SMC Corporation
Consolidated Statement of Income
(dollars in thousands, except share and per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------------
1995 1996
---- ----
(unaudited)
Sales $ 38,906 $ 56,016
Cost of sales 34,280 47,904
--------- --------
Gross profit 4,626 8,112
Selling, general and administrative expenses 2,966 4,806
-------- --------
Income from operations 1,660 3,306
Interest expense 244 194
Other (income) expense (73) 88
--------- --------
Income before provision for taxes 1,489 3,024
Provision for income taxes 573 1,210
-------- -------
Net income $ 916 $ 1,814
======== =======
Net income per share (Note 6) $ .14 $ .27
======== =======
Weighted average number of shares 6,707 6,742
======== ========
The accompanying notes are an integral part of this financial statement.
4
SMC Corporation
Consolidated Statement of Income
(dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------
1995 1996
---- ----
(unaudited)
Sales $ 106,836 $ 147,849
Cost of sales 92,934 126,823
--------- ---------
Gross profit 13,902 21,026
Selling, general and administrative expenses 8,401 12,622
--------- ---------
Income from operations 5,501 8,404
Interest expense 700 493
Other (income) expense (123) 39
--------- ---------
Income before provision for taxes 4,924 7,872
Provision for income taxes (Note 3) 1,175 3,150
--------- ---------
Net income $ 3,749 $ 4,722
========= =========
Net income per share (Note 6) $ .56 $ .71
========= =========
Weighted average number of shares 6,659 6,655
========= =========
Pro forma data (Note 3):
Income before provision for income taxes $ 4,924
Pro forma provision for income taxes 1,861
---------
Pro forma net income $ 3,063
=========
Pro forma net income per share $ .46
=========
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 -- -- -- 4,722 4,722
----- --------- -------- -------- ---------
Balance, September 30, 1996 6,563 $ 10,914 $ 1,556 $ 9,663 $ 22,133
===== ========= ======== ======== =========
The accompanying notes are an integral part of this financial statement.
6
SMC Corporation
Consolidated Statement of Cash Flows
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
1995 1996
(unaudited)
Cash flows from operating activities:
Net income $ 3,749 $ 4,722
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 767 1,196
Changes in current assets and liabilities (excluding acquisition
of a business (Note 5)):
Accounts receivable (3,935) (4,869)
Inventories (3,981) (3,329)
Prepaid expenses and other 44 (96)
Deferred tax asset (731) --
Other assets 44 51
Accounts payable (54) 4,572
Income taxes payable -- 341
Accrued liabilities and other obligations 229 1,877
-------- --------
Net cash (used in) provided by operating activities (3,868) 4,465
-------- --------
Cash flows from investing activities:
Capital expenditures (3,092) (4,983)
Acquisition of a business, (Note 5) -- (1,420)
-------- --------
Net cash used in investing activities (3,092) (6,403)
-------- --------
Cash flows from financing activities:
Net borrowings on notes payable 1,777 3,164
Proceeds from issuance of long-term debt 600 --
Repayments of long-term debt (1,182) (1,046)
Payments of notes payable to shareholders (5,133) --
Proceeds from issuance of common stock (Note 4) 11,108 --
Public offering costs (321) --
-------- --------
Net cash provided by financing activities 6,849 2,118
-------- --------
Net (decrease) increase in cash and cash equivalents (111) 180
Cash and cash equivalents, beginning of period 180 69
-------- --------
Cash and cash equivalents, end of period $ 69 $ 249
======== ========
The accompanying notes are an integral part of this financial statement.
7
SMC Corporation
Form 10-Q
For the Third Quarter Ended September 30, 1996 (Unaudited)
Notes to Consolidated 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 have 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 Sept. 30, 1996
------------ ---------------
Raw materials $ 8,961 $ 10,081
Work-in-progress 5,097 7,212
Finished goods 2,253 2,674
------------ -----------
Total $ 16,311 $ 19,967
------------ -----------
3. Provision for Income Taxes and Pro Forma Provision for Income Taxes
The provision for income taxes for the nine months ended September 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 on the Consolidated Statement of Income for the nine-month
period ended September 30, 1995.
8
SMC Corporation
Form 10-Q
For the Third Quarter Ended September 30, 1996 (Unaudited)
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
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 "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. The Company has formed a new subsidiary, SMC
Midwest, Inc., to operate this facility.
The acquisition has been accounted for by the purchase method.
Accordingly, the purchase price was allocated to the assets acquired
based on their estimated values as of the date of acquisition. The
excess of the consideration paid over the estimated fair value of
assets acquired, totaling $561,000, has been recorded as goodwill and
is being amortized on a straight line basis over 15 years.
The estimated fair values of assets acquired are summarized as
follows:
Inventory $327,000
Equipment 432,000
Goodwill 561,000
Other Assets 100,000
----------
Total Purchase Price $1,420,000
==========
9
SMC Corporation
Form 10-Q
For the Third Quarter Ended September 30, 1996 (Unaudited)
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Commencing June 14, 1996, results of operations of Honorbuilt are
included in the Consolidated Statement of Income for the nine months
ended September 30, 1996. The following unaudited pro forma summary
presents information as if the acquisition of Honorbuilt had occurred
at the beginning of each of the Company's 1995 and 1996 fiscal years.
The pro forma information is provided for informational purposes only.
It is based on historical information and includes adjustments for
interest expense that would have been incurred to finance the
purchase, depreciation adjustments related to asset valuations, and
amortization of intangibles. The pro forma information is not
necessarily indicative of future results of operations of the combined
companies.
Pro Forma Information
(in thousands, except per share amounts)
Nine Months ended September 30,
1995 1996
Net Sales............................. $119,320 $154,777
Net Income............................ 2,112 4,179
Earnings per common share............. $ .32 $ .62
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.
10
SMC Corporation
Form 10-Q
For the Third Quarter Ended September 30, 1996 (Unaudited)
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
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 September 30, Nine Months ended September 30,
1995 1996 1995 1996
Sales.................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 88.1 85.5 87.0 85.8
---- ---- ----- -----
Gross profit............................. 11.9 14.5 13.0 14.2
Selling, general and
administrative expenses................. 7.6 8.6 7.9 8.5
---- ----- ----- ----
Income from operations................... 4.3 5.9 5.1 5.7
Interest expense......................... .6 .3 .6 .4
Other (income) and expense............... (.1) .2 (.1) --
----- ----- ------ -----
Pretax income............................ 3.8 5.4 4.6 5.3
Provision for Income taxes............... 1.4 2.2 1.1 2.1
---- ----- ----- -----
Net income............................... 2.4% 3.2% 3.5% 3.2%
===== ===== ===== =====
Pro forma provision
for income taxes........................ 1.7% N/A
Pro forma net income..................... 2.9% N/A
Sales increased 44.0% to $56.0 million for the third quarter of 1996
from $38.9 million for the comparable period in 1995. The increase was
primarily the result of a 35.9% increase in unit sales to 496 units, up
from 365 units in the prior year. For the nine months ended September 30,
1996, sales increased 38.4% to $147.9 million from $106.8 million for the
comparable period in 1995. This was the result of a 32.8% unit sales
increase to 1,353 units during the nine months ended September 30, 1996,
compared to 1,019 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. Sales of Safari products were consistent with the prior year.
SMC Midwest's El Dorado production commenced during the third quarter of
1996, with 24 units produced.
Gross profit margin increased 75.4% to $8.1 million for the third
quarter of 1996 from $4.6 million for the comparable period in 1995, and
increased as a percentage of sales from 11.9% to 14.5%. For the nine months
ended September 30, 1996, gross profit margin increased 51.2% to $21.0
million from $13.9 million for the comparable period of 1995, and increased
as a percentage of sales from 13.0% to 14.2%. 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
11
consolidated sales during the first nine months of 1996 and during the
third quarter of 1996 as compared to 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.
Selling, general and administrative expenses increased 62.0% to $4.8
million for the quarter ended September 30, 1996 from $3.0 million for the
comparable period in 1995, and 50.2% to $12.6 million for the nine-month
period ended September 30, 1996 from $8.4 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., Composite Technologies,
Inc., and SMC Midwest Inc., and the Company's customer service center.
Given the factors affecting gross margin and selling, general, and
administrative expenses, operating income increased 99.2% to $3.3 million
for the quarter ended September 30, 1996 from $1.7 million for the
comparable period of 1995. Operating income increased 52.8% to $8.4 million
for the nine months ended September 30, 1996 from $5.5 million for the
comparable period during 1995.
Interest expense decreased to $194,000 for the quarter ended September
30, 1996 from $244,000 for the comparable period in 1995, and decreased to
$493,000 for the nine-month period ended September 30, 1996 compared to
$700,000 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.
For the third quarter of 1996, the Company's effective tax rate was
40.0%, resulting in an income tax provision of $1.2 million compared to the
effective tax rate of 38.5% resulting in an income tax provision of
$573,000 for the comparable period in 1995. For the nine-month period ended
September 30, 1996, the Company's effective tax rate was 40.0% resulting in
an income tax provision of $3.2 million, compared to the effective tax rate
of 23.9% resulting in an income tax provision of $1.2 million for the
comparable period in 1995. The increase in effective rate for the
nine-month period ended September 30, 1996 compared to the same period in
1995 is due to the Company's termination of its S corporation tax status
and resulting 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 nine-month period ended September
30, 1995, in accordance with SFAS No. 109, "Accounting for Income Taxes."
If the Company had been a C corporation during the relevant period, its
effective tax rate would have been 37.8%, resulting in an income tax
provision of $1.9 million for the nine-month period ended September 30,
1995.
12
Net income after tax increased 98.0% to $1.8 million for the quarter
ended September 30, 1996 from $916,000 for the comparable period of 1995.
Net income after taxes for the nine-month period ended September 30, 1996
increased 54.2% to $4.7 million compared to 1995's pro forma net income for
the comparable period of $3.1 million. Comparison of net income for the
nine months ended September 30, 1996 is made to 1995 pro forma net income
for the nine months ended September 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 nine months of 1996, the Company generated $4.5
million in cash flows from operations while its net working capital
position decreased from $7.9 million at December 31, 1995 to $6.4 million
at September 30, 1996 (including cash and cash equivalents of $249,000).
Cash generated from operations during the first nine months of 1996
along with $3.2 million drawn on available lines of credit was used to
finance capital expenditures of approximately $5.0 million, to acquire a
business for approximately $1.4 million and to service term debt payments
of approximately $1.0 million.
The Company anticipates that its aggregate capital expenditures for
1996 will be approximately $10 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 and purchase
transportation equipment totaling $3.6 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 ($5.2 million which
was available at September 30, 1996), plus an additional $5.5 million
equipment financing line of credit, of which $4.9 million was available.
Amounts outstanding under these lines of credit bear interest at prime
(8.25% at September 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
relating to (1) mergers,
13
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 (the "Plan") 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 September 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 September
30, 1996, the Company estimates its total contingent liability under
repurchase obligations was approximately $49.0 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.
14
Part II - Other Information
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 one Current Report on Form 8-K during the three
months ended September 30, 1996. The Form 8-K was filed on July 1,
1996 and reported the Company's acquisition of certain assets of
Honorbuilt Industries, Inc. On August 30, 1996 the Company filed a
Form 8-K/A , which amended the July 1, 1996 Form 8-K to include
financial statements relating to the acquisition.
15
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: November 13, 1996 By: PAUL M. BROWN, JR.
------------------------------------
Paul M. Brown, Jr.
Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
16
Exhibit Index
Exhibit
No. Description
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
17