REPORT OF MANAGEMENT
The management of Gehl Company is responsible for the preparation and integrity
of all financial statements and other information contained in this annual
report. The financial statements have been prepared by the Company in conformity
with generally accepted accounting principles appropriate in the circumstances.
Such statements necessarily include amounts based on the best estimates and
judgments of management after giving due consideration to materiality.
The Company maintains an internal control system designed to provide reasonable
assurance that transactions are properly recorded and executed in accordance
with management's authorization and that assets are safeguarded from loss or
unauthorized use. The internal control system is augmented by careful selection
and training of qualified employees, proper division of responsibilities, and
the development and dissemination of written policies and procedures.
The Board of Directors elects, from among its members, an Audit Committee,
consisting entirely of outside directors, which is responsible for reviewing and
evaluating the overall performance of the Company's financial reporting and
accounting practices and for involvement in the appointment of the independent
accountants. The Audit Committee meets periodically with management and the
independent accountants to discuss any and all matters within the Committee's
responsibilities. The independent accountants have free access to the Committee,
without the presence of management if so requested.
The Company's financial statements have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report also appears on this page. Included
in the audit process was a review of the Company's system of internal controls.
PricewaterhouseCoopers LLP annually provides to management and the Audit
Committee recommendations to improve internal controls or enhance administrative
procedures.
/s/ William D. Gehl
William D. Gehl
Chairman of the Board of Directors,
President and Chief Executive Officer
/s/ Kenneth P. Hahn
Kenneth P. Hahn
Vice President of Finance and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS [GRAPHIC OMITTED][PRICEWATERHOUSECOOPERS LOGO]
To the Board of Directors and
Shareholders of Gehl Company
In our opinion, the statements appearing on pages 18 through 31 of this report
present fairly, in all material respects, the financial position of Gehl Company
and its subsidiaries at December 31, 2002 and December 31, 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 5 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 14, 2003
9
MANAGEMENT'S DISCUSSION & ANALYSIS
OVERVIEW
The Company's net income in 2002 was $1.0 million, or $.19 per diluted share,
compared with $2.3 million, or $.42 per diluted share, in 2001. The 2002 net
income included non-recurring after-tax restructuring charges of $.6 million, or
$.11 per diluted share, related to restructuring and plant rationalization
initiatives approved and commenced in 2001. The 2001 net income included
non-recurring after-tax charges for plant rationalization initiatives of $2.8
million, or $.51 per diluted share, and strategic review process expenses of $.3
million, or $.06 per diluted share. Exclusive of such non-recurring charges, the
Company's net income in 2002 was $1.7 million, or $.30 per diluted share, and in
2001 was $5.4 million, or $.99 per diluted share. Results for the full year 2001
included approximately $476,000 of goodwill amortization expense, or $.09 per
diluted share. Net sales in 2002 of $232.6 million were 3% below the $240.4
million in 2001. Construction equipment sales in 2002 of $135.1 million were 10%
above 2001 levels, while agriculture equipment sales in 2002 of $97.5 million
were 17% below 2001 levels. Construction equipment comprised 58% of the Company
net sales in 2002 versus 51% in 2001. Agriculture equipment sales were 42% of
Company net sales in 2002, versus 49% in 2001.
Income from operations in 2002 was $5.2 million, with construction equipment
accounting for $4.3 million, while agriculture equipment contributed the balance
of $.9 million. Exclusive of the non-recurring restructuring charges, the
Company realized income from operations of $6.1 million, with construction
equipment accounting for $4.8 million, while agriculture equipment contributed
the balance of $1.3 million. Interest expense in 2002 decreased $.2 million, to
$4.1 million. Other expense, net, consisting primarily of the costs of selling
finance contracts receivable, which was $3.1 million in 2001, decreased in 2002
to $1.5 million.
The Company's total debt was reduced to $57.9 million at December 31, 2002 from
$64.4 million at December 31, 2001. The reduction was primarily due to a
reduction in working capital. The working capital reduction was primarily due to
the significant decline in factory inventories attained during 2002. The
Company's ratio of debt to total capital was 37.6% at December 31, 2002, as
compared with 39.2% at December 31, 2001.
CONSOLIDATION OF GEHL EUROPE
Effective January 1, 2002, the Company began accounting for its investment in a
German distribution operation ("Gehl Europe") as a consolidated subsidiary, as a
result of the Company's controlling influence on the operations of Gehl Europe
as of such date. Prior to January 1, 2002, the Company accounted for its
investment in Gehl Europe under the equity method. The impact of the Gehl Europe
consolidation is discussed below.
RESTRUCTURING AND OTHER CHARGES
On September 26, 2001, the Company adopted several major plant rationalization
initiatives to improve the Company's profitability by consolidating certain
operations. Under these initiatives, the Company announced it would close its
manufacturing facility in Lebanon, Pennsylvania and transfer production to other
locations. The Company also indicated it would transfer the manufacturing of its
Mustang line of skid steer loaders from its facility in Owatonna, Minnesota to
its skid steer facility in Madison, South Dakota. In implementing these actions,
the Company expected that it would ultimately incur total restructuring and
other non-recurring charges of approximately $5.5 to $6.5 million; a $4.3
million charge related to the plant rationalization initiatives was recorded in
the third quarter of 2001 in accordance with accounting principles generally
accepted in the United States of America. Of the $4.3 million charge recorded in
the third quarter of 2001, $1.5 million and $2.8 million related to the
Agricultural and Construction equipment segments, respectively.
Details of the restructuring charge and related activity are as follows (in
thousands):
- -----------------------------------------------------------------------
Employee Write-down
Severence of
and Long-Lived Other
Termination and Other Exit
Benefits Assets Costs Totals
- -----------------------------------------------------------------------
Original Reserve $ 1,635 $ 1,754 $ 911 $ 4,300
2001 Utilization - (1,754) - (1,754)
- -----------------------------------------------------------------------
Balance at
December 31, 2001 1,635 - 911 2,546
2002 Utilization (1,351) - (430) (1,781)
- -----------------------------------------------------------------------
Balance at
December 31, 2002 $ 284 $ - $481 $ 765
=======================================================================
As a result of the plant rationalizations, the Company expected to reduce its
workforce by 249, consisting of hourly and salaried employees at the Lebanon and
Owatonna locations. During the year ended December 31, 2002, workforce reduction
of 235 employees occurred, which included 211 employees who were terminated with
severance payments. Termination benefits commenced in April 2002 and will
continue into the first quarter of 2003.
The manufacturing consolidations announced on September 26, 2001 have been
completed. Production of Mustang skid loaders has been transferred to the
Madison plant. The Lebanon plant was closed in the first quarter of 2002 and the
production of certain products formerly manufactured at that facility has been
outsourced. Both the Lebanon and Owatonna manufacturing facilities are expected
to be sold and, accordingly, the tangible assets to be disposed of are recorded
at their estimated fair value, less cost of disposal.
10
Other exit costs primarily consist of non-recurring charges that will not
benefit activities that will be continued, will not be incurred to generate
future revenue, and are incremental to other costs incurred by the Company prior
to the adoption of the above initiatives.
During 2002, the Company expensed $1.0 million of other charges related to the
plant rationalization initiatives. These charges were required to be expensed
when incurred and were not included in the original reserve.
ACCOUNTING FOR GOODWILL
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142 ("SFAS No.142"), "Goodwill and Other
Intangible Assets," which states that goodwill and intangible assets deemed to
have indefinite lives are no longer subject to amortization; however, must be
tested for impairment at least annually. Upon adoption, the Company discontinued
the amortization of goodwill. The 2001 and 2000 results included approximately
$476,000 of goodwill amortization expense.
RESULTS OF OPERATIONS
2002 VS. 2001
Net Sales:
- -----------------------------------------------------------------------
($ millions) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------
Construction Equipment $135.1 $122.3 $148.6 $172.2 $157.4
Agriculture Equipment 97.5 118.1 101.4 112.6 101.5
- -----------------------------------------------------------------------
Total $232.6 $240.4 $250.0 $284.8 $258.9
(% of total)
Construction Equipment 58.1% 50.9% 59.4% 60.5% 60.8%
Agriculture Equipment 41.9% 49.1% 40.6% 39.5% 39.2%
=======================================================================
Net sales for 2002 were $232.6 million compared to $240.4 million in 2001, a
decrease of 3%. Excluding $10 million of net sales resulting from the
consolidation of Gehl Europe, net sales decreased 7% from 2001 levels.
Construction equipment segment net sales were $135.1 million in 2002 compared to
$122.3 million in 2001, an increase of 10%. Excluding $10 million of net sales
resulting from the consolidation of Gehl Europe, net sales increased 2% from
2001 levels. Sales of the new compact track loaders have been strong since their
introduction in the second quarter of 2002. In addition, construction equipment
segment net sales in 2002 benefited from the introduction of new all-wheel-steer
loaders in the 2002 third quarter, contributions from telescopic handlers and
compact excavator models sold through the Mustang distribution channel and net
sales from the Company's new attachment business. These increases in
construction equipment segment net sales more than offset the reduction in
telescopic handler shipments resulting from the continuing downward trend in
that market.
Agricultural equipment segment net sales were $97.5 million in 2002, compared to
$118.1 million in 2001, a decrease of 17%. Agricultural implement net sales were
adversely impacted by the significant decline in milk prices as well as drought
conditions in certain regions of the United States. Sales of the new compact
track loaders introduced in the 2002 second quarter, the introduction of new
all-wheel-steer loaders in the 2002 third quarter, increased shipments of
compact excavators to select rural equipment dealers, and increased sales from
the Company's new attachment business partially offset reduced implement and
skid loader net sales in the agricultural segment.
Of the Company's total net sales reported for 2002, $43.9 million were made
outside of the United States compared with $33.9 million in 2001. The increase
in exports was due primarily to the consolidation of Gehl Europe.
Gross Profit: Gross profit in 2002 was $48.8 million compared to $53.3 million
in 2001. Gross profit as a percent of net sales decreased in 2002 to 21.0% from
22.2% in 2001.
Construction equipment gross profit as a percent of net sales for 2002 increased
to 21.3% from 20.6% in 2001. The increase in the construction equipment gross
margin was primarily due to lower levels of discounts and sales incentives
associated with the mix of products shipped as well as improved manufacturing
efficiencies. Gross profit as a percent of net sales for agriculture equipment
decreased to 20.5% for 2002 from 23.8% for 2001. The decrease in the
agricultural equipment segment gross margin was due to significant competitive
pressure resulting in higher sales discounts and sales incentives, reduced
production volume and a less favorable mix of product shipments.
Operating Expenses: Selling, general and administrative expenses were $42.7
million, or 18.4% of net sales, in 2002, an increase from $39.6 million, or
16.5% of net sales, in 2001. The increase was primarily due to the consolidation
of Gehl Europe effective January 1, 2002 and expenses associated with the
Company's attachment business that was launched in July 2001. These costs,
combined with a lower level of net sales during 2002, contributed to the
Company's increased selling, general and administrative expenses as a percentage
of net sales. Assuming the Company had adopted SFAS No. 142 on January 1, 2001,
selling, general and administrative expenses for 2001 would have been $39.1
million.
11
RESULTS OF OPERATIONS (CONTINUED)
Income from Operations:
- -----------------------------------------------------------------
($ millions) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------
Construction Equipment $4.3 $2.2 $14.0 $23.7 $19.4
Agriculture Equipment .9 6.7 8.0 11.4 7.9
- -----------------------------------------------------------------
Total $5.2 $8.9 $22.0 $35.1 $27.3
=================================================================
Due to lower net sales volume, decreased gross margin, and increased selling,
general and administrative expenses, income from operations in 2002 declined
from 2001 levels. Construction equipment income from operations increased in
2002 to $4.3 million from $2.2 million in 2001. The increase was primarily due
to a reduction in non-recurring charges from $3.0 million in 2001 to $.5 million
in 2002. Agriculture equipment income from operations decreased in 2002 to $.9
million from $6.7 million in 2001 due primarily to the impact of reduced
agriculture sales volume and a reduction in gross margin resulting from
competitive market conditions and decreased production levels.
Interest Expense: Interest expense decreased $.2 million, to $4.1 million in
2002 compared to $4.3 million in 2001. Average debt outstanding was $71.5
million during 2002 versus $61.0 million in 2001. The increase in average debt
was due to increased working capital requirements and the consolidation of Gehl
Europe during 2002. The average interest rate paid by the Company declined to
approximately 5.6% during 2002 versus 6.5% in 2001.
Other (expense) income, net: Other expense, net decreased $1.6 million to $1.5
million in 2002 from $3.1 million in 2001. This decrease was primarily the
result of a $1.5 million decline in the costs of selling finance contracts due
to lower discount rates required by third party purchasers of such contracts, in
light of the general downward trend of overall interest rates, as well as a
reduction in the amount of contracts sold compared to 2001.
Provision for Income Taxes: The Company's effective income tax rate of 35.0% for
2002 was unchanged from 2001.
Net Income: Net income in 2002 of $1.0 million compared to $2.3 million of net
income in 2001. Diluted earnings per share were $.19 in 2002 compared to $.42 in
2001. Assuming the Company had adopted SFAS No. 142 on January 1, 2001, net
income for 2001 would have been $2.8 million. Excluding the restructuring and
other charges, net of tax, incurred in 2002, net income was $1.7 million, or
$.30 per diluted share. Exclusive of the non-recurring charges for plant
rationalization initiatives and the strategic review process completed during
2001, the Company realized net income of $5.4 million in 2001, or $.99 per
diluted share. No dividends were declared in either 2002 or 2001 on the
Company's common stock.
2001 VS. 2000
Net Sales: Net sales for 2001 of $240.4 million were 4% below the $250.0 million
of net sales in 2000. Construction equipment net sales in 2001 were $122.3
million, 18% below the $148.6 million in 2000. Construction equipment sales were
down in 2001 as dealers remained cautious about adding to or replacing fleet
units and adding stock units in light of unfavorable economic conditions. Lower
industry-wide rental rates for compact construction equipment, particularly
telescopic handlers, also dampened demand for the Company's construction
equipment products. Industry-wide telescopic handler retail demand in North
America in 2001 was down approximately 27% below 2000's levels. Partially
offsetting these unfavorable industry-wide conditions were some early successes
for the Company in selling telescopic handlers through its Mustang distribution
channel and the continued favorable market acceptance of the four new skid
loader models introduced earlier in 2001 for Gehl and Mustang dealers. The
Company also introduced new mid-sized models of compact excavators in the second
half of 2001.
Agricultural equipment net sales in 2001 were $118.1 million, 16% above the
$101.4 million in 2000. The Company continued to successfully leverage its rural
equipment distribution network by shipping compact construction equipment,
including telescopic handlers, compact excavators and compact loaders, to select
rural dealers in the agricultural equipment market. Additionally, several new
products, including a line of round balers and new skid loader models,
significantly contributed to the increase in agricultural equipment revenues.
Favorable domestic milk prices also contributed to the positive performance of
the Company's agricultural equipment business.
Of the Company's total net sales reported for 2001, $33.9 million represented
sales made outside the United States, unchanged from 2000.
Gross Profit: Gross profit in 2001 was $53.3 million compared to $59.9 million
in 2000. Gross profit as a percent of net sales decreased in 2001 to 22.2% from
24.0% in 2000.
Construction equipment gross profit as a percent of net sales for 2001 decreased
to 20.6% from 23.0% in 2000. The decrease in construction equipment gross margin
was a result of competitive market conditions that resulted in downward pressure
on pricing, lower production levels, and a less favorable mix of product
shipments. Gross profit as a percent of net sales for agriculture equipment
decreased to 23.8% for 2001 from 25.3% for 2000.
Operating Expenses: Selling, general and administrative expenses were $39.6
million, or 16.5% of net sales, in 2001, an increase from $38.0 million, or
15.2% of net sales, in 2000. The Company continued to invest in
revenue-enhancing projects to position the Company for future
12
growth and market share expansion, which included its attachment business,
Compact Equipment Attachments, Inc., launched in 2001, new product development,
implementation of its enterprise resource planning (ERP) system, and the
centralization of service parts distribution. Such investments, combined with
increased professional fees associated with various matters incurred during
2001, and a lower level of sales, contributed to the Company's increased
operating expenses in the aggregate as well as a percentage of net sales.
During the third quarter of 2001, the Company began several major plant
rationalization initiatives as part of a previously announced program to
increase profitability. In conjunction with this announcement, the Company
recorded a $4.3 million restructuring charge in the third quarter of 2001 (see
"Restructuring and Other Charges" for further discussion). In addition, the
Company incurred non-recurring charges of $513,000 during the third quarter for
legal and financial advisory fees related to the strategic review process
undertaken and subsequently completed by the Company's Board of Directors.
Income from Operations: Due to lower net sales volume and decreased gross
margin, an increase in operating expenses, and non-recurring charges for plant
rationalization initiatives and the strategic review process, income from
operations in 2001 declined from 2000 levels. Construction equipment income from
operations decreased in 2001 to $2.2 million from $14.0 million in 2000. The
reduction was primarily due to the impact of reduced construction equipment
sales volume, a reduction in gross margin, increased selling related costs
resulting from competitive market conditions, and $3.0 million of costs related
to the plant rationalization initiatives and the strategic review process.
Agriculture equipment income from operations decreased in 2001 to $6.7 million
from $8.0 million in 2000 due primarily to $1.8 million of costs related to the
plant rationalization initiatives and the strategic review process.
Interest Expense: Interest expense decreased $.4 million, to $4.3 million in
2001 compared to $4.7 million in 2000. Average debt outstanding was $61.0
million during 2001 versus $55.1 million in 2000. The increase in average debt
was due to increased working capital requirements. The average interest rate
paid by the Company declined to approximately 6.5% during 2001 versus 8.7% in
2000.
Other (expense) income, net: Other expense, net decreased $1.0 million to $3.1
million in 2001 from $4.1 million in 2000. This decrease was primarily the
result of a $1.8 million decline in the costs of selling finance contracts due
to lower discount rates required by third party purchasers of such contracts, in
light of the general downward trend of overall interest rates. Other expense,
net was positively impacted by a pre-tax $.8 million gain on the disposal of a
former branch service center in 2000. No comparable transaction occurred in
2001.
Provision for Income Taxes: The Company's effective income tax rate of 35.0% for
2001 was consistent with 2000.
Net Income: Net income in 2001 of $2.3 million compared to $9.7 million of net
income in 2000. Diluted earnings per share were $.42 in 2001 compared to $1.72
in 2000. Exclusive of the non-recurring charges for plant rationalization
initiatives and the strategic review process completed during the third quarter
of 2001, the Company realized net income of $5.4 million in 2001, or $.99 per
diluted share. The 2000 net income included a gain of $.5 million, or $.10 per
diluted share, recognized on the disposal of a former branch service center. No
dividends were declared in either 2001 or 2000 on the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital: The Company's working capital decreased to $103.4 million at
December 31, 2002 from $107.5 million twelve months earlier. The decrease was
primarily the result of a decrease in inventories, partially offset by an
increase in accounts receivable and a decrease in current liabilities. The
Company's current ratio at December 31, 2002 increased to 3.1 to 1 from 2.9 to 1
at the same time a year ago. Cash on hand at December 31, 2002 of $2.2 million
was consistent with the level a year earlier.
Accounts Receivable: The Company's net accounts receivable increased $6.9
million during 2002. Agriculture equipment accounts receivable at year-end 2002
decreased $2.7 million from a year earlier, while construction equipment
accounts receivables increased $9.6 million over the same period. The increased
construction equipment accounts receivable balances are due in part to new
products introduced or offered during 2002, which were not previously available
to the same extent in 2001, such as compact track loaders and all-wheel-steer
loaders, and the introduction of the Company's attachment business, which was
launched in July 2001. The construction equipment accounts receivable balance
was also impacted by the consolidation of Gehl Europe as of January 1, 2002.
Finance Contracts Receivable: Finance contracts receivable, net of reserves,
decreased $5.6 million to $7.0 million at December 31, 2002. The combined
portfolio of owned and sold-but-serviced finance contracts receivable was $161.7
million at December 31, 2002 as compared to $159.5 million at year-end 2001.
(See "Sales of Finance Contracts Receivable" following).
13
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Inventories: Inventories at December 31, 2002 were $15.4 million lower than at
December 31, 2001, notwithstanding the consolidation of the Gehl Europe
inventories. The Company continually adjusts production and purchase levels in
an attempt to maintain inventory levels to meet current market demand. In light
of the reduced demand levels during 2002, numerous plant shut down periods were
implemented to achieve a more appropriate level of inventories at the plants.
Further, continued improvements in inventory flow management at the plants,
combined with positive effects from the Company's plant rationalization
initiatives, have resulted in reduced inventory levels.
Capital Expenditures:
- ----------------------------------------------------------------
($ thousands) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------
Capital Expenditures $6,790 $4,135 $12,577 $7,281 $3,051
Depreciation $4,630 $4,687 $ 4,885 $4,329 $3,941
================================================================
The Company expended $6.8 million for property, plant and equipment in 2002, the
majority of which was incurred to complete an expansion of the Madison, South
Dakota plant necessary to accommodate the transfer of Mustang skid loader
production from the Owatonna, Minnesota facility. The Company plans to make up
to $3.6 million in capital expenditures in 2003, primarily to upgrade and
maintain machinery and equipment. The Company had no significant outstanding
commitments for capital items at December 31, 2002. The Company believes its
present facilities will be sufficient to provide adequate capacity for its
operations in 2003.
Debt and Equity:
- -----------------------------------------------------------------
December 31, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------
($ millions)
Total Debt $57.9 $ 64.4 $ 61.1 $31.6 $29.5
Shareholders' Equity $96.1 $100.0 $103.0 $97.4 $94.1
% Total Debt to
Total Capitalization 37.6% 39.2% 37.2% 24.5% 23.9%
=================================================================
At December 31, 2002, shareholders' equity had decreased $3.9 million to $96.1
million from $100.0 million a year earlier. This decrease primarily reflected
the impact of the year's net income of $1.0 million, which was more than offset
by a $5.3 million reduction in other comprehensive income which related to a
minimum pension liability adjustment, net of tax.
In September 2001, the Company's Board of Directors authorized a repurchase plan
providing for the repurchase of up to 500,000 shares of the Company's
outstanding common stock. As of December 31, 2002, 78,200 shares had been
repurchased in the open market under this authorization at an aggregate cost of
$937,000. All treasury stock acquired by the Company has been cancelled and
returned to the status of authorized but unissued shares.
Borrowing Arrangements (See also Note 7 of Notes to Consolidated Financial
Statements): The Company maintains a $75 million line of credit facility (the
"Facility") which expires December 31, 2004, and is subject to a borrowing base
related to the Company's accounts receivable, finance contracts receivable and
inventories. The interest rate paid on borrowings denominated in U.S. dollars is
2.5% to 2.65% above the London Interbank Offered Rate for one-month deposits
("LIBOR"). In Canada, where the Company may borrow up to $5.5 million, the
interest rate is 2.5% above the Canadian one-month bankers' acceptance rates. At
December 31, 2002, the Company had unused borrowing capacity of $24.5 million
under the Facility, versus $18.2 million a year earlier. In addition, the
Company had short-term letters of credit totaling $1.3 million outstanding at
December 31, 2002 due to the factoring of receivables by a supplier. The Company
believes its capital resources and liquidity position at December 31, 2002 were
adequate to meet projected needs. Requirements for working capital, capital
expenditures, pension fund contributions and debt maturities in fiscal 2003 will
continue to be funded by operations and the Company's Facility.
The Company also has outstanding $8.4 million of 9% industrial development bonds
related to the Lebanon, Pennsylvania facility with a 2010 final maturity;
repayments commence in 2005.
Contractual Obligations:
A summary of the Company's significant contractual obligations and other
commercial commitments as of December 31, 2002 are as follows (in thousands):
2004- 2006- After
Total 2003 2005 2007 2007
- ----------------------------------------------------------------
Contractual
Obligations:
Debt Obligations $57,914 $1,779 $49,037 $2,898 $4,200
Opeating Leases 1,887 821 950 116 -
- ----------------------------------------------------------------
Total Contractual
Cash Obligations $59,801 $2,600 $49,987 $3,014 $4,200
================================================================
Other Commercial
Commitments:
Letters of Credit $1,274 $1,274 - - -
===============================================================
Sales of Finance Contracts Receivable:
The sale of finance contracts is an important component of the Company's overall
liquidity. The Company has arrangements with several financial institutions and
financial service companies to sell with recourse its finance contracts
receivable. The Company continues to service substantially all contracts whether
or not sold. At December 31, 2002, the Company serviced $161.7 million of such
contracts, of which $152.4 million were owned by third parties. Losses on
finance contracts due to customer nonperformance were $547,000 in 2002 as
compared to $133,000 in 2001. As a percentage of outstanding serviced contracts,
the loss ratios were .3% and .1% in 2002 and 2001, respectively.
14
The Company incurred $1.8 million of costs in selling $103.9 million of its
finance contracts in 2002, as compared to $3.2 million of costs in selling
$113.0 million of such contracts in 2001. The costs arise primarily from the
difference between the weighted average interest rate on the contracts being
sold and the interest rate negotiated with the purchaser of the contracts. The
Company believes that it will be able to arrange sufficient capacity to sell its
finance contracts for the foreseeable future.
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted the provisions of Emerging Issues
Task Force ("EITF") 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Retailer of the Vendor's Products." As a result of
adopting EITF 00-25, the Company now classifies the costs associated with sales
incentives provided to dealers as a reduction of net sales. Prior to January 1,
2002, these costs were included in selling, general and administrative expenses.
Net sales and selling, general and administrative expenses for the years ended
December 31, 2001 and 2000 have been restated to conform to the current year
presentation. This reclassification had no impact on reported income before
income taxes or net income.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. The statement will be effective for years beginning after June
30, 2002. The impact of this statement upon adoption is not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." This Statement also amends SFAS No. 13, "Accounting
for Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of this
statement related to the rescission of SFAS No. 4 shall be applied in fiscal
years beginning after May 15, 2002. The provisions of this statement related to
SFAS No. 13 shall be effective for transactions occurring after May 15, 2002.
All other provisions of this statement are effective for financial statements
issued on or after May 15, 2002. The adoption of SFAS No. 145 had no impact on
the Company's financial position at December 31, 2002 or the results of
operations and cash flows for the year then ended.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement nullifies EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
which allowed companies engaged in exit and disposal activities to record
liabilities for certain costs when the company committed to the exit or disposal
plan. SFAS No. 146 requires costs associated with an exit or disposal plan to be
recognized and measured initially at fair value only when the liability has been
incurred as defined by FASB Concepts Statement 6. The provisions of SFAS No. 146
are effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of this statement did not impact the accounting for the
plant rationalization initiatives adopted by the Company on September 26, 2001
(see Note 9 of Notes to Consolidated Financial Statements).
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," ("SFAS No. 148"), which amends SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements of
the effects of stock-based compensation. The Company adopted the disclosure
provisions of SFAS No. 148 on December 31, 2002 and continues to account for
stock-based compensation under APB Opinion No. 25.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also include more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and requires the
additional disclosures for the period ended December 31, 2002. The Company does
not expect
15
ACCOUNTING PRONOUNCEMENTS (CONTINUED)
that the provisions of FIN 45 will have a material impact on the Company's
financial position, results of operations or cash flows. The Company has
provided additional disclosure with respect to product warranties in Note 8 of
Notes to Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
FIN 46 clarifies the application of ARB No. 51 to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
This interpretation applies immediately to variable interest entities created
after January 31, 2003, and applies in the first year or interim period
beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
As of December 31, 2002, the Company is not a party to any variable interest
entities.
MARKET RISK
The Company is exposed to market risk from changes in interest rates as well as
fluctuations in currency. See further disclosure relating to variable rate debt
under "Liquidity and Capital Resources - Borrowing Arrangements" above.
Interest Rate Risk: The Company's Facility is primarily LIBOR-based and is
subject to interest rate movements. A 10% increase or decrease in the average
cost of the Company's variable rate debt would result in a change in pre-tax
interest expense of approximately $218,000 based upon borrowings outstanding at
December 31, 2002.
Commodity Risk: The Company is exposed to fluctuations in market prices for
commodities, especially steel. Each one of the Company's business segments is
subject to commodity price risk as the prices for raw materials change with
movements in underlying commodity prices. Therefore, the Company has established
various programs to manage the negotiations of commodity prices. In general, the
Company enters into contracts with selected vendors to lock in commodity prices
at various times and for various periods in order to limit near-term exposure to
fluctuations in raw material prices.
Currency Risk: The Company has limited exposure to foreign currency exchange
fluctuations. Certain sales are made in Canadian dollars and Euros; however, to
minimize this exposure, the Company borrows in Canadian dollars under the
Facility and, in limited circumstances, enters into currency hedge transactions
relative to Euro billings.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's consolidated financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, net sales and expenses. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions and materially impact the
carrying value of the assets and liabilities. The Company believes the following
accounting policies are critical to the Company's business operations and the
understanding of the Company's results of operations and financial condition.
Allowance for Doubtful Accounts - The Company's accounts receivable are reduced
by an allowance for amounts that may be uncollectible in the future. The Company
estimates the uncollectibility of accounts receivable by specifically analyzing
accounts receivable where the Company has information indicating that the
customer may be unable to meet its financial obligation to the Company as well
as analyzing the age of unpaid amounts and historical write-off percentages.
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for substantially all of
the Company's inventories. Adjustments to slow moving and obsolete inventory to
the lower of cost or market are determined based on historical experience and
the Company's best estimates of current product demand.
Product Warranty - In general, the Company provides warranty coverage on
equipment for a period of up to twelve months or for a specified period of use
after sale or rental by a dealer. The Company's reserve for warranty claims is
established based on the best estimate of the amounts necessary to settle future
and existing claims on products sold as of the balance sheet date.
Product Liability - The Company directly assumes all liability for costs
associated with claims up to specified limits in any policy year and, as such,
records an estimated reserve for product liability. The Company's reserve for
product liability is based on the best estimate of the amounts necessary to
resolve future and existing claims.
Goodwill and Intangible Assets - Effective January 1, 2002, the Company adopted
the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Under
SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized; however, must be tested for impairment at least
annually. Other intangible assets will continue to be amortized over their
useful lives. The Company is subject to financial statement risk to the extent
that goodwill becomes impaired.
16
2003 OUTLOOK
Demand for construction equipment in the North American market during 2003 is
expected to be flat compared to 2002 levels, while demand for agricultural
equipment in the North American market is expected to be flat to slightly down.
Based on the current market outlook, the Company's net sales are expected to
range between being flat to up approximately 4% in 2003. Any growth in net sales
is expected to result primarily from the sales of recently introduced products
and new products to be introduced in 2003. Growth in net sales is more likely to
occur in the construction equipment segment as compared with the agricultural
equipment segment. Overall, any anticipated sales growth would likely occur in
the latter portion of 2003 based on the Company's expectation of a gradually
improving economy. Operating margins are expected to improve as the result of
further initiatives to reduce costs, the effect of factory rationalizations
completed in 2002 and a more favorable product mix. While it is difficult to
predict results in these unsettled economic times, if the economy experiences
some gradual improvement and the Company's sales levels meet projected
forecasts, the Company expects to earn in the range of $.60 to $.75 per diluted
share in 2003.
FORWARD-LOOKING STATEMENTS
The Company intends that certain matters discussed in this Annual Report
(including in this section and the Letter to Shareholders) are "forward-looking
statements" intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact, including statements regarding future market
conditions, projected capital expenditures, and the Company's future sales and
earnings, are forward-looking statements. When used in this Annual Report, words
such as the Company "believes," "anticipates," "expects" or "estimates" or words
of similar meaning are generally intended to identify forward-looking
statements. These forward-looking statements are not guarantees of future
performance and are subject to certain risks, uncertainties, assumptions and
other factors, some of which are beyond the Company's control, that could cause
actual results to differ materially from those anticipated as of the date this
Annual Report was printed. Factors that could cause such a variance include, but
are not limited to, a delay in the expected general economic recovery,
unanticipated changes in capital market conditions, the Company's ability to
implement successfully its strategic initiatives, market acceptance of newly
introduced products, the cyclical nature of the Company's business, the
Company's and its customers' access to credit, competitive pricing, product
initiatives and other actions taken by competitors, disruptions in production
capacity, excess inventory levels, the effect of changes in laws and regulations
(including government subsidies and international trade regulations),
technological difficulties, changes in currency exchange rates, the Company's
ability to secure sources of liquidity necessary to fund its operation, changes
in environmental laws, the impact of any acquisition effected by the Company,
and employee and labor relations. Shareholders, potential investors, and other
readers are urged to consider these factors in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included in this Annual Report are
only made as of the date of its printing, and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances. In addition, the Company's expectations for
fiscal year 2003 are based in part on certain assumptions made by the Company,
including those relating to commodities prices, which are strongly affected by
weather and other factors and can fluctuate significantly, housing starts and
other construction activities, which are sensitive to, among other things,
interest rates and government spending, and the performance of the U.S. economy
generally. The accuracy of these or other assumptions could have a material
effect on the Company's ability to achieve its expectations.
17
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Assets
- -------------------------------------------------------------------------------------------------------
In Thousands, Except Share Data - December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------
Cash $ 2,243 $ 2,248
Accounts receivable-net 97,627 90,714
Finance contracts receivable-net 4,701 7,511
Inventories 36,771 52,161
Deferred income tax assets 8,469 10,171
Prepaid expenses and other current assets 3,203 1,119
- -------------------------------------------------------------------------------------------------------
Total current assets 153,014 163,924
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment-net 46,697 43,431
Finance contracts receivable-net, non-current 2,334 5,147
Goodwill 11,696 12,248
Other assets 12,328 12,659
- -------------------------------------------------------------------------------------------------------
Total assets $226,069 $237,409
=======================================================================================================
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------
Current portion of debt obligations $ 1,779 $ 161
Accounts payable 27,540 30,644
Accrued liabilities 20,315 25,661
- -------------------------------------------------------------------------------------------------------
Total current liabilities 49,634 56,466
- -------------------------------------------------------------------------------------------------------
Line of credit facility 47,377 55,188
Long-term debt obligations 8,758 9,049
Deferred income tax liabilities 1,644 2,460
Other long-term liabilities 22,518 14,225
- -------------------------------------------------------------------------------------------------------
Total long-term liabilities 80,297 80,922
- -------------------------------------------------------------------------------------------------------
Common stock, $.10 par value, 25,000,000 shares authorized, 5,373,650 and
5,359,721 shares outstanding at December 31, 2002 and 2001, respectively 537 536
Preferred stock, $.10 par value, 2,000,000 shares authorized, 250,000 shares
designated as Series A preferred stock, no shares issued -- --
Capital in excess of par 7,030 6,980
Retained earnings 99,472 98,429
Accumulated other comprehensive loss (10,901) (5,924)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 96,138 100,021
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $226,069 $237,409
=======================================================================================================
Contingencies (Notes 2 and 15)
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
18
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------
In Thousands, Except Per Share Data - Year Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Net sales $ 232,565 $ 240,394 $ 250,037
Cost of goods sold 183,720 187,069 190,093
- ------------------------------------------------------------------------------------------------------------
Gross profit 48,845 53,325 59,944
Selling, general and administrative expenses 42,733 39,569 37,959
Strategic review process costs -- 513 --
Restructuring and other charges 955 4,300 --
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 43,688 44,382 37,959
============================================================================================================
Income from operations 5,157 8,943 21,985
Interest expense (4,052) (4,299) (4,741)
Interest income 1,986 2,024 1,760
Other (expense) income, net (1,486) (3,122) (4,148)
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 1,605 3,546 14,856
Provision for income taxes 562 1,241 5,200
- ------------------------------------------------------------------------------------------------------------
Net income $ 1,043 $ 2,305 $ 9,656
============================================================================================================
Diluted net income per common share $ .19 $ .42 $ 1.72
============================================================================================================
Basic net income per common share $ .19 $ .43 $ 1.76
============================================================================================================
The accompanying notes are an integral part of the financial statements.
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Capital
Comprehensive Retained Comprehensive Common In Excess
In Thousands Total Income (Loss) Earnings Loss Stock of Par
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 97,424 $86,468 $ (903) $ 565 $11,294
Comprehensive income:
Net income 9,656 $ 9,656 9,656
Minimum pension liability adjustments,
net of $415 of taxes 769 769 769
--------
Comprehensive income 10,425
========
Exercise of stock options 526 7 519
Treasury stock purchases/cancellations (5,924) (39) (5,885)
Other 567 567
- ----------------------------------------------------------- ---------------------------------------------
Balance at December 31, 2000 103,018 96,124 (134) 533 6,495
Comprehensive income:
Net income 2,305 2,305 2,305
Minimum pension liability adjustments,
net of $3,087 of taxes (5,732) (5,732) (5,732)
Unrealized gains (losses), net of $31 of taxes (58) (58) (58)
--------
Comprehensive loss (3,485)
========
Exercise of stock options 357 4 353
Treasury stock purchases/cancellations (245) (1) (244)
Other 376 376
- ----------------------------------------------------------- ---------------------------------------------
Balance at December 31, 2001 100,021 98,429 (5,924) 536 6,980
Comprehensive income:
Net income 1,043 1,043 1,043
Minimum pension liability adjustments,
net of $2,839 of taxes (5,272) (5,272) (5,272)
Currency translation adjustment 551 551 551
Unrealized gains (losses), net of $138 of taxes (256) (256) (256)
--------
Comprehensive loss $ (3,934)
========
Exercise of stock options 623 7 616
Treasury stock purchases/cancellations (692) (6) (686)
Other 120 120
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 96,138 $99,472 $(10,901) $537 $ 7,030
==============================================================================================================================
The accompanying notes are an integral part of the financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
In Thousands - Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,043 $ 2,305 $ 9,656
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation 4,630 4,687 4,885
Amortization 183 729 849
Gain on sale of property, plant and equipment -- -- (863)
Restructuring costs (non-cash) -- 1,754 --
Cost of sales of finance contracts 1,763 3,222 4,990
Deferred income taxes 2,750 (1,611) 121
Proceeds from sales of finance contracts 102,120 109,740 93,485
Increase (decrease) in cash, excluding the effects of
business acquisition, due to changes in:
Accounts receivable-net (5,662) (21,437) (995)
Finance contracts receivable-net (98,260) (99,104) (105,606)
Inventories 21,802 (7,103) (10,392)
Prepaid expenses and other current assets (434) (483) (125)
Other assets (1,741) 354 520
Accounts payable (6,164) 3,999 1,568
Other liabilities (5,262) 2,842 (5,225)
- --------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 16,768 (106) (7,132)
- --------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property, plant and equipment additions (6,790) (4,135) (12,577)
Proceeds from sale of property, plant and equipment 195 -- 942
Acquisition of business, net of cash required (505) -- --
Increase (decrease) in other assets 1,107 553 (4,189)
- --------------------------------------------------------------------------------------------------
Net cash used for investing activities (5,993) (3,582) (15,824)
- --------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
(Repayments of) proceeds from revolving credit loans (7,811) 3,580 29,570
(Repayments of) proceeds from other borrowings-net (2,900) (346) 364
Proceeds from issuance of common stock 623 357 526
Treasury stock purchases (692) (245) (5,924)
- --------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (10,780) 3,346 24,536
- --------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (5) (342) 1,580
Cash, beginning of year 2,248 2,590 1,010
- --------------------------------------------------------------------------------------------------
Cash, end of year $ 2,243 $ 2,248 $ 2,590
==================================================================================================
The accompanying notes are an integral part of the financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Consolidation: Gehl Company is engaged in the manufacture and distribution of
equipment and machinery for the construction market, and in the manufacture and
distribution of equipment and machinery primarily for the dairy, livestock and
poultry agricultural sector. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances are eliminated.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions, in certain circumstances,
that affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Ultimate realization of assets and settlement of
liabilities in the future could differ from those estimates.
Revenue Recognition: Revenue is recorded upon the shipment of products to
dealers and distributors; these dealers and distributors have no right of
return, except as provided by law.
Sales Incentives: Effective January 1, 2002, the Company adopted the provisions
of Emerging Issues Task Force ("EITF") 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Retailer of the Vendor's Products."
As a result of adopting EITF 00-25, the Company now classifies the costs
associated with sales incentives provided to dealers as a reduction of net
sales. Prior to January 1, 2002, these costs were included in selling, general
and administrative expenses. Net sales and selling, general and administrative
expenses for the years ended December 31, 2001 and 2000 have been restated to
conform to the current year presentation. This reclassification had no impact on
reported income before income taxes or net income.
Accounts Receivable: The Company provides financing for its dealers in both the
construction and agricultural markets. The financing agreements provide for, in
certain instances, interest-free periods which generally range from 4 to 9
months.
Finance Contracts Receivable: The Company offers financing for its products to
retail customers and to its dealers. Finance contracts require periodic
installments of principal and interest over periods of up to 60 months. Unearned
interest is recognized over the life of the contracts using the sum of the
digits method. Principal expected to be collected within twelve months of the
balance sheet date is classified as a current asset; the remainder is classified
as a non-current asset.
Inventories: Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for substantially all of the
Company's inventories.
Properties and Depreciation: Properties are stated at cost. When properties are
sold or otherwise disposed of, cost and accumulated depreciation are removed
from the respective accounts and any gain or loss is included in income. The
Company provides for depreciation of assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Depreciation is recorded using the following estimated useful lives for
financial statement purposes:
- -----------------------------------------------------------------
Years
- -----------------------------------------------------------------
Buildings 25-31.5
Machinery and equipment 7-12
Autos and trucks 3-5
Office furniture and fixtures 3-5
=================================================================
Expenditures which substantially increase value or extend asset lives are
capitalized. Expenditures for maintenance and repairs are charged against income
as incurred.
The Company reviews the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment would be determined based on a comparison
of the undiscounted future operating cash flows anticipated to be generated
during the remaining life of the long-lived assets to the carrying value.
Measurement of any impairment loss would be based on discounted operating cash
flows.
Debt Issue Costs: Costs incurred in conjunction with incurrence of indebtedness
are capitalized and subsequently amortized over the related periods of the
obligations.
Goodwill and Other Intangible Assets: The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Under SFAS No.142, goodwill is no longer amortized;
however, it must be tested for impairment at least annually. Amortization
continues to be recorded for other intangible assets with definite lives. The
Company is subject to financial statement risk in the event that goodwill
becomes impaired.
Foreign Currency Transactions: Foreign currency transaction gains and (losses)
are included in the determination of income. Foreign currency gains (losses)
were $85,000, ($113,000) and ($252,000) in 2002, 2001 and 2000, respectively.
Foreign Currency Translation: Assets and liabilities of the Company's foreign
subsidiary are translated at current exchange rates, and related revenues and
expenses are translated at the weighted-average exchange rates in effect for the
year. Net exchange gains or losses resulting from the translation of foreign
financial statements and the effect of
22
exchange rate changes on intercompany transactions of a long-term investment
nature are accumulated and credited or charged directly to a separate component
of shareholders' equity, titled "Accumulated Other Comprehensive Income (Loss)."
Income Taxes: The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and liabilities be
recorded based on the difference between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes.
Product Liability Costs: The Company directly assumes all liability for costs
associated with claims up to specified limits in any policy year. Known
incidents involving the Company's products are investigated and reserves are
established for any estimated liability.
Environmental Costs: Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and that do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable, and the
costs can be reasonably estimated.
Research and Development Costs: Costs for research activities relating to
product development and improvement are charged against income as incurred. Such
costs amounted to approximately $3.2 million, $3.0 million and $3.1 million in
2002, 2001 and 2000, respectively.
Other (Expense) Income: Other (expense) income is comprised primarily of foreign
currency transaction gains (losses), cost of sales of finance contracts, and
other nonoperating items.
Comprehensive Income: Comprehensive income is defined as the sum of net income
and all other non-owner changes in equity (or accumulated other comprehensive
loss). The components of accumulated other comprehensive loss were as follows
(net of tax) (in thousands):
- -------------------------------------------------------------------
December 31, 2002 2001
- -------------------------------------------------------------------
Minimum pension liability adjustments $(11,138) $(5,866)
Currency translation adjustment 551 --
Unrealized losses (314) (58)
- -------------------------------------------------------------------
Accumulated other comprehensive loss $(10,901) $(5,924)
===================================================================
Stock-Based Compensation: The Company maintains stock option plans for certain
of its directors, officers and key employees, which are described more fully
under Note 12-Shareholders' Equity. The Company accounts for these plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees." No compensation expense has been recognized for
options granted under these plans as the option price was equal to the market
value of the Company's common stock on the date of grant. The effect on net
income and earnings per share had the Company applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," is
presented below (in thousands, except per share data):
- ------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Net income, as reported $1,043 $2,305 $9,656
Less: stock-based compensation
expense determined based on
fair value method, net of tax (850) (634) (415)
- ------------------------------------------------------------------------
Pro forma net income $ 193 $1,671 $9,241
- ------------------------------------------------------------------------
Diluted net income per share:
As reported $ .19 $ .42 $ 1.72
Pro forma $ .04 $ .30 $ 1.65
Basic net income per share:
As reported $ .19 $ .43 $ 1.76
Pro forma $ .04 $ .31 $ 1.69
========================================================================
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000:
- -------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------
Expected stock price volatility 38.8% 35.1% 34.1%
Risk-free interest rate 4.0% 5.2% 5.3%
Expected life of options - years 7 7 7
- -------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted during 2002, 2001
and 2000 was $5.06, $7.09 and $5.95, respectively.
Accounting Pronouncements: In August 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset. The
statement will be effective for years beginning after June 30, 2002. The impact
of this statement upon adoption is not expected to have a material effect on the
Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." This Statement also amends SFAS No. 13, "Accounting
for Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other
23
NOTE 1 (CONTINUED)
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of this statement related to the rescission of SFAS No. 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
statement related to SFAS No. 13 shall be effective for transactions occurring
after May 15, 2002. All other provisions of this statement are effective for
financial statements issued on or after May 15, 2002. The adoption of SFAS No.
145 had no impact on the Company's financial position at December 31, 2002 or
the results of operations and cash flows for the year then ended.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement nullifies EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
which allowed companies engaged in exit and disposal activities to record
liabilities for certain costs when the company committed to the exit or disposal
plan. SFAS No. 146 requires costs associated with an exit or disposal plan to be
recognized and measured initially at fair value only when the liability has been
incurred as defined by FASB Concepts Statement 6. The provisions of SFAS No. 146
are effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of this statement did not impact the accounting for the
plant rationalization initiatives adopted by the Company on September 26, 2001
(see Note 9 - Restructuring Charge).
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," ("SFAS No. 148"), which amends SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements of
the effects of stock-based compensation. The Company adopted the disclosure
provisions of SFAS No. 148 on December 31, 2002 and continues to account for
stock-based compensation under APB Opinion No. 25.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also include more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and requires the
additional disclosures for the period ended December 31, 2002. The Company does
not expect that the provisions of FIN 45 will have a material impact on the
Company's financial position, results of operations or cash flows. The Company
has provided additional disclosure with respect to product warranties in Note 8
- - Accrued Liabilities.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
FIN 46 clarifies the application of ARB No. 51 to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
This interpretation applies immediately to variable interest entities created
after January 31, 2003, and applies in the first year or interim period
beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
As of December 31, 2002, the Company is not a party to any variable interest
entities.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current year presentation. Such reclassifications had no impact on
previously reported net income.
NOTE 2 - ACCOUNTS RECEIVABLE AND FINANCE CONTRACTS RECEIVABLE
Accounts receivable and finance contracts receivable were comprised of the
following (in thousands):
- ------------------------------------------------------------------------
December 31, 2002 2001
- ------------------------------------------------------------------------
Accounts receivable $102,483 $95,788
Less allowances for:
doubtful accounts (2,629) (2,235)
returns and dealer discounts (2,227) (2,839)
- ------------------------------------------------------------------------
$ 97,627 $90,714
========================================================================
Finance contracts receivable $ 9,842 $16,177
Less: unearned interest (505) (1,471)
allowance for doubtful accounts (2,302) (2,048)
- ------------------------------------------------------------------------
7,035 12,658
Less: non-current portion (2,334) (5,147)
- ------------------------------------------------------------------------
Current portion $ 4,701 $ 7,511
========================================================================
The finance contracts receivable at December 31, 2002 have a weighted-average
interest rate of approximately 5.8%.
The Company has entered into various agreements with third parties to sell with
recourse certain finance contracts receivable. The finance contracts require
periodic installments of principal and interest over periods of up to 60 months;
interest rates are based on market conditions. The Company has retained the
servicing of substantially all of these contracts which generally have
maturities of 12 to 60 months. Amounts to cover potential losses on these sold
receivables are included in the allowance for doubtful accounts.
24
The following summarizes the Company's sales of retail finance contracts
receivable during 2002, 2001 and 2000 (in thousands):
- -------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------
Value of contracts sold
- net of $7.5 million,
$8.4 million and $8.3 million,
respectively, of unearned
interest $103,883 $112,962 $ 98,475
Cash received on sales
of contracts 102,120 109,740 93,485
- -------------------------------------------------------------------------
Cost of sales of
finance contracts $ 1,763 $ 3,222 $ 4,990
=========================================================================
Net receivables outstanding at
December 31 relating to
finance contracts sold $152,435 $144,800 $121,649
=========================================================================
The Company retains as collateral a security interest in the equipment
associated with accounts receivable and unsold finance contracts receivable. The
Company also maintains certain levels of dealer recourse deposits as additional
security associated with finance contracts receivable.
NOTE 3 - INVENTORIES
If all of the Company's inventories had been valued on a current cost basis,
which approximates FIFO value, estimated inventories by major classification
would have been as follows (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Raw materials and supplies $12,891 $20,309
Work-in-process 3,006 6,414
Finished machines and parts 44,377 45,629
- ---------------------------------------------------------------
Total current cost value 60,274 72,352
Adjustment to LIFO basis (23,503) (20,191)
- ---------------------------------------------------------------
$36,771 $52,161
===============================================================
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consisted of the following (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Land $ 1,878 $ 1,831
Buildings 36,908 32,171
Machinery and equipment 49,957 48,642
Autos and trucks 352 362
Office furniture and fixtures 13,768 12,930
- ---------------------------------------------------------------
102,863 95,936
Less: accumulated depreciation (56,166) (52,505)
- ---------------------------------------------------------------
Property, plant and equipment-net $46,697 $43,431
===============================================================
NOTE 5 - GOODWILL
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill will no longer be amortized;
however, it must be tested for impairment at least annually. Amortization will
continue to be recorded for other intangible assets with determinable lives. The
following table presents the Company's net income and diluted and basic earnings
per share assuming the Company adopted SFAS No. 142 on January 1, 2000 and
excluded goodwill amortization of $.5 million from net income for the years
ended December 31, 2001 and 2000 (in thousands, except per share data):
- ---------------------------------------------------------------
Year ended December 31, 2001 2000
- ---------------------------------------------------------------
Net income $ 2,781 $10,132
Diluted net income per share $ .51 $ 1.81
Basic net income per share $ .52 $ 1.85
===============================================================
The changes in the carrying amount of goodwill, which is entirely allocated to
the construction equipment segment, for the years ended December 31, 2002 and
2001 were as follows (in thousands):
- ---------------------------------------------------------------
Balance at December 31, 2000 $12,724
Amortization (476)
- ---------------------------------------------------------------
Balance at December 31, 2001 12,248
- ---------------------------------------------------------------
Business acquisition (552)
- ---------------------------------------------------------------
Balance at December 31, 2002 $11,696
===============================================================
NOTE 6 - ACQUISITION
Effective January 1, 2002, the Company began accounting for its investment in a
German distributor of compact equipment throughout Europe ("Gehl Europe") as a
consolidated subsidiary, as a result of the Company's controlling influence on
the operations of Gehl Europe as of such date. Prior to January 1, 2002, the
Company accounted for its investment in Gehl Europe under the equity method.
In December 2002, the Company acquired the remaining two-thirds of the
outstanding shares of Gehl Europe for $.5 million, net of cash acquired, in
order to support the Company's strategy to expand distribution in the European
compact equipment markets. Because the net assets acquired exceeded the purchase
price, goodwill associated with the Company's previous investment in Gehl Europe
was reduced by $.6 million.
The fair value of the assets acquired and liabilities assumed and pro forma
information to reflect this acquisition as if it occurred on January 1, 2001
have not been disclosed as the impact on consolidated assets, liabilities and
net income is not material.
25
NOTE 7 - DEBT OBLIGATIONS
A summary of the Company's debt obligations, and related current maturities, is
as follows (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Line of credit facility $47,377 $55,188
9.0% industrial development bonds 8,400 8,400
Other debt obligations 2,137 810
- ---------------------------------------------------------------
57,914 64,398
Less: current portion (1,779) (161)
- ---------------------------------------------------------------
Long-term debt obligations $56,135 $64,237
===============================================================
The Company maintains a $75 million line of credit facility (the "Facility")
which expires December 31, 2004. Interest is paid monthly on outstanding
borrowings under the Facility as follows: borrowings in Canadian denominated
dollars up to a $5.5 million credit line are at 2.5% above the Canadian
one-month bankers' acceptance rates; the remainder of the borrowings are in U.S.
dollars and are at 2.5% to 2.65% above the London Interbank Offered Rate for
one-month deposits (LIBOR). Under the Facility, $25 million is tied to a
borrowing base related to the Company's finance contracts receivable and
inventories. The remaining availability is tied to a borrowing base related to
the Company's accounts receivable. Borrowings under the Facility are secured by
finance contracts receivable, inventories and accounts receivable.
The Company had short-term letters of credit totaling $1.3 million outstanding
at December 31, 2002 due to the factoring of receivables by a supplier.
At December 31, 2002, the Company had unused borrowing capacity of approximately
$24.5 million under the Facility. The Facility also includes financial covenants
requiring the maintenance of a minimum tangible net worth level and a maximum
debt to equity ratio.
The 9% industrial development bonds are secured by the Company's Lebanon,
Pennsylvania manufacturing facility and require principal repayment in six equal
annual installments of $1.4 million commencing in 2005. The Company has
established a debt reserve fund of approximately $650,000 until the first
mandatory bond redemption period in 2005. The debt reserve fund was established
with remaining funds in the trustee-controlled unexpended plant construction
fund and interest subsequently earned. Financial covenants related to the
industrial development bonds require the maintenance of a minimum tangible net
worth level and a maximum debt to equity ratio.
Annual maturities of debt obligations are as follows (in thousands):
- -----------------------------------------------------
2003 $ 1,779
2004 47,529
2005 1,508
2006 1,439
2007 1,459
Later years 4,200
- -----------------------------------------------------
$57,914
=====================================================
Interest paid on total debt obligations was $4.0 million, $4.5 million and $4.5
million in 2002, 2001 and 2000, respectively.
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities were comprised of the following (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Accrued salaries and wages $ 3,844 $ 4,571
Dealer recourse deposits 2,796 2,873
Accrued warranty costs 4,437 4,296
Accrued product liability costs 3,723 3,543
Restructuring reserve 765 2,546
Other 4,750 7,832
- ---------------------------------------------------------------
$20,315 $25,661
===============================================================
In general, the Company provides warranty coverage on equipment for a period of
up to twelve months or for a specified period of use after sale or rental by a
dealer. The Company's reserve for warranty claims is established based on the
best estimate of the amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While the Company's warranty costs
have historically been within its calculated estimates, it is possible that
future warranty costs could exceed those estimates.
The changes in the carrying amount of the Company's total product warranty
liability for the year ended December 31, 2002 were as follows (in thousands):
- ---------------------------------------------------------------
Balance as of December 31, 2001 $ 4,296
Accruals for warranties issued during the period 4,010
Accruals related to pre-existing warranties
(including changes in estimates) (4)
Settlements made (in cash or in kind)
during the period (3,865)
- ---------------------------------------------------------------
Balance as of December 31, 2002 $4,437
===============================================================
NOTE 9 - RESTRUCTURING CHARGE
On September 26, 2001, the Company adopted several major plant rationalization
initiatives to improve the Company's profitability by consolidating certain
operations. Under these initiatives, the Company announced it would close its
manufacturing facility in Lebanon, Pennsylvania and transfer production to other
locations. The Company also indicated it would transfer the manufacturing of its
Mustang
26
line of skid steer loaders from its facility in Owatonna, Minnesota to its skid
steer facility in Madison, South Dakota. In implementing these actions, the
Company expected that it would ultimately incur total restructuring and other
non-recurring charges of approximately $5.5 to $6.5 million; a $4.3 million
charge related to the plant rationalization initiatives was recorded in the
third quarter of 2001 in accordance with accounting principles generally
accepted in the United States of America. Of the $4.3 million charge recorded in
the third quarter of 2001, $1.5 million and $2.8 million related to the
Agricultural and Construction equipment segments, respectively.
Details of the restructuring charge and related activity are as follows (in
thousands):
- -------------------------------------------------------------------------------------
Employee Write-down
severance and of long-lived
termination and other Other exit
benefits assets costs Totals
- -------------------------------------------------------------------------------------
Original Reserve $ 1,635 $ 1,754 $911 $4,300
2001 Utilization -- (1,754) -- (1,754)
- -------------------------------------------------------------------------------------
Balance at
December 31, 2001 1,635 -- 911 2,546
2002 Utilization (1,351) -- (430) (1,781)
- -------------------------------------------------------------------------------------
Balance at
December 31, 2002 $ 284 $ -- $481 $ 765
=====================================================================================
As a result of the plant rationalizations, the Company expected to reduce its
workforce by 249, consisting of hourly and salaried employees at the Lebanon and
Owatonna locations. During the year ended December 31, 2002, workforce
reductions of 235 employees occurred, which included 211 employees who were
terminated with severance payments. Termination benefits commenced in April 2002
and will continue into the first quarter of 2003.
The manufacturing consolidations announced on September 26, 2001 have been
completed. Production of Mustang skid loaders has been transferred to the
Madison plant. The Lebanon plant was closed in the first quarter of 2002 and the
production of certain products formerly manufactured at that facility has been
outsourced. Both the Lebanon and Owatonna manufacturing facilities are expected
to be sold and, accordingly, the tangible assets to be disposed of are recorded
at their estimated fair value, less cost of disposal.
Other exit costs primarily consist of non-recurring charges that will not
benefit activities that will be continued, will not be incurred to generate
future revenue, and are incremental to other costs incurred by the Company prior
to the adoption of the above initiatives.
During 2002, the Company expensed $1.0 million of other charges related to the
plant rationalization initiatives. These charges were required to be expensed
when incurred and were not included in the original reserve.
NOTE 10 - INCOME TAXES
The income tax provision recorded for the years ended December 31, 2002, 2001
and 2000 consisted of the following (in thousands):
- ----------------------------------------------------------------
Year Ended December 31, Federal State Foreign Total
- ----------------------------------------------------------------
2002 Current $(2,246) $ 58 $ -- $(2,188)
Deferred 2,509 76 165 2,750
- ----------------------------------------------------------------
Total $ 263 $134 $165 $ 562
================================================================
2001 Current $ 2,513 $339 $ -- $ 2,852
Deferred (1,611) -- -- (1,611)
- ----------------------------------------------------------------
Total $ 902 $339 $ -- $ 1,241
================================================================
2000 Current $ 4,577 $502 $ -- $ 5,079
Deferred 121 -- -- 121
- ----------------------------------------------------------------
Total $ 4,698 $502 $ -- $ 5,200
================================================================
Consolidated domestic and foreign income before income taxes in 2002 was $1.2
million and $.4 million, respectively. There was no foreign income before income
taxes in 2001 and 2000.
A reconciliation between the reported income tax provision and the federal
statutory rate follows (as a percent of pre-tax income):
- -------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------
Federal statutory rate 34.0% 34.0% 35.0%
State income taxes, net of
Federal income tax effect 7.1 6.3 2.2
Goodwill -- 4.7 4.2
Foreign sales corporation and other
tax credits (8.7) (6.3) (2.2)
Other, net 2.6 (3.7) (4.2)
- -------------------------------------------------------------------------
35.0% 35.0% 35.0%
=========================================================================
The Company's temporary differences and carryforwards which give rise to
deferred tax assets and liabilities consisted of the following (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Accrued expenses and reserves $ 6,379 $ 8,237
Asset valuation reserves 1,931 2,433
Pension benefits 3,101 907
Operating loss carryforwards 890 301
Tax credit carryforwards 389 323
Installment sales -- (472)
Property, plant and equipment (4,793) (3,285)
Other, net (78) (109)
Valuation allowance (994) (624)
- ---------------------------------------------------------------
Net deferred tax asset $ 6,825 $ 7,711
===============================================================
27
NOTE 10 (CONTINUED)
The net deferred tax asset is included in the consolidated balance sheet in the
following captions (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Deferred income tax assets $ 8,469 $10,171
Deferred income tax liabilities (1,644) (2,460)
- ---------------------------------------------------------------
$ 6,825 $ 7,711
===============================================================
At December 31, 2002, the Company had state net operating loss carryforwards of
$12.7 million which will be available for the reduction of future income tax
liabilities. A valuation allowance has been recorded against these carryforwards
for which utilization is uncertain. The Company also has a foreign net operating
loss carryforward of approximately $.5 million which does not have an expiration
date.
Cash paid related to income taxes during 2002, 2001 and 2000 was $.1 million,
$1.1 million and $6.6 million, respectively.
NOTE 11 - EMPLOYEE RETIREMENT PLANS
The Company sponsors two qualified defined benefit pension plans for certain of
its employees. The following schedules set forth a reconciliation of the changes
in the plans' benefit obligation and fair value of plan assets and a statement
of the funded status (in thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Reconciliation of benefit obligation:
Obligation at beginning of year $ 34,127 $ 31,294
Service cost 632 538
Interest cost 2,536 2,506
Plan amendments -- 909
Actuarial loss 4,118 1,035
Benefit payments (2,400) (2,155)
- ---------------------------------------------------------------
Obligation $ 39,013 $ 34,127
===============================================================
Reconciliation of fair value of plan assets:
Fair value of plan assets
at beginning of year $ 28,274 $ 33,336
Actual return on plan assets (1,728) (3,846)
Employer contributions 2,646 939
Benefit payments (2,400) (2,155)
- ---------------------------------------------------------------
Fair value of plan assets $ 26,792 $ 28,274
===============================================================
Funded Status:
Funded status at end of year $(12,221) $ (5,853)
Unrecognized prior service cost 1,409 1,633
Unrecognized loss 18,891 10,174
- ---------------------------------------------------------------
Net amount recognized at December 31 $ 8,079 $ 5,954
===============================================================
The following table provides the amounts recognized in the balance sheet (in
thousands):
- ---------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------
Prepaid benefit cost $ 8,079 $ 5,954
Intangible asset 1,409 1,633
Minimum pension liability (18,339) (10,452)
Accumulated other comprehensive loss 16,930 8,819
- ---------------------------------------------------------------
Net amount recognized at December 31 $ 8,079 $ 5,954
===============================================================
The prepaid benefit cost and the intangible asset amounts are included in
non-current other assets. The minimum pension liability amount is included in
other long-term liabilities.
The following table provides disclosure of the net periodic benefit cost (in
thousands):
- -----------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------
Service cost $ 632 $ 538 $ 573
Interest cost 2,536 2,506 2,430
Expected return on plan assets (3,004) (2,915) (2,631)
Amortization of prior service cost 224 225 149
Amortization of net loss 133 -- --
- -----------------------------------------------------------------
Net periodic benefit cost $ 521 $ 354 $ 521
=================================================================
The assumptions used in the measurement of the Company's benefit obligation are
shown in the following table:
- -------------------------------------------------------
2002 2001
- -------------------------------------------------------
Weighted-average assumptions
as of September 30:
Discount rate 6.75% 7.50%
Expected return on plan assets 8.75% 9.00%
Rate of compensation increase 4.00% 4.00%
- -------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the plans having accumulated benefit obligations in excess of
plan assets were $39.0 million, $37.1 million and $26.8 million and $34.1
million, $32.8 million and $28.3 million as of December 31, 2002 and 2001,
respectively.
The measurement date used for each of the actuarial calculations was September
30. Plan assets consist principally of common stocks and fixed income
investments. Funding for the plans equals or exceeds the minimum requirements of
the Employee Retirement Income Security Act of 1974.
In addition, the Company maintains a non-qualified supplemental retirement
benefit plan for certain management employees. The accumulated benefit
obligation for this plan was $3.1 million and $2.7 million at December 31, 2002
and 2001, respectively, using a discount rate of 6.75% in 2002 and 7.25% in
2001. The Company maintains a Rabbi Trust containing $1.0 million of assets
designated for the above plan. The net periodic benefit cost was $510,000,
$431,000 and $593,000 in 2002, 2001 and 2000, respectively.
The Company maintains a savings and profit sharing plan. The Company matches 50%
of non-bargaining unit employee contributions to the plan not to exceed 6% of an
employee's
28
annual compensation. Vesting of Company contributions occur at the rate of 20%
per year. Contributions approximated $580,000, $606,000 and $639,000 in 2002,
2001 and 2000, respectively.
The Company maintains a defined contribution plan that covers certain employees
not covered by a defined benefit plan. The Company contributes various
percentages of eligible employee compensation (as defined) and the plan does not
allow employee contributions. The Company contributed approximately $347,000,
$337,000 and $346,000 in connection with this plan in 2002, 2001 and 2000,
respectively.
The Company provides postemployment benefits to certain retirees in two areas: a
$2,500 life insurance policy for retired office employees and subsidized health
insurance benefits for early retirees prior to their attaining age 65. The
number of retirees associated with postemployment benefit costs is approximately
255.
The following schedules set forth a reconciliation of the changes in the
postemployment plan's benefit obligation and funded status (in thousands):
- -------------------------------------------------------
December 31, 2002 2001
- -------------------------------------------------------
Reconciliation of benefit obligation:
Obligation at beginning of year $ 2,236 $ 1,742
Service cost 71 83
Interest cost 105 145
Actuarial (gain) loss (465) 329
Benefit payments (308) (63)
- -------------------------------------------------------
Obligation $ 1,639 $ 2,236
=======================================================
Funded Status:
Funded status at end of year $(1,639) $(2,236)
Unrecognized transition obligation 226 248
Unrecognized loss 608 1,087
- -------------------------------------------------------
Net amount recognized $ (805) $ (901)
=======================================================
The following table provides disclosure of the net periodic benefit cost (in
thousands):
- -----------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------
Service cost $ 71 $ 83 $ 59
Interest cost 105 145 129
Amortization of transition
obligation 22 23 23
Amortization of net loss 14 51 37
- -----------------------------------------------------------------
Net periodic benefit cost $212 $302 $248
=================================================================
The assumed health care cost rate trend used in measuring the accumulated
postemployment benefit obligation at December 31, 2002 was 7.5% decreasing to 5%
over five years and at December 31, 2001 was 8% decreasing to 5% in subsequent
years. The discount rate used in determining the accumulated postemployment
obligation was 6.75% in 2002, 7.25% in 2001 and 7.75% in 2000.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects (in thousands):
- --------------------------------------------------------------------------------
1% Increase 1% Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest
cost components of net periodic
postemployment health care benefit cost $ 17 $ (15)
Effect on the health care component
of the accumulated postemployment
benefit obligation $105 $ (92)
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY
During April 2000, the 2000 Equity Incentive Plan was adopted, which authorizes
the granting of awards for up to 600,000 shares of the Company's common stock.
An award is defined within the 2000 Equity Incentive Plan as a stock option,
stock appreciation right, restricted stock or performance share. In April 1996,
the 1995 Stock Option Plan was adopted, which authorizes the granting of options
for up to 600,000 shares of the Company's common stock. The Plans provide that
options be granted at an exercise price not less than fair market value on the
date the options are granted and that the options generally vest ratably over a
period not exceeding three years after the grant date.The option period shall
not be more than ten years after the grant date.
Following is a summary of activity in the Plans for 2000, 2001 and 2002:
- ------------------------------------------------------------------------
Shares Weighted
Subject Average
to Option Option Price
- ------------------------------------------------------------------------
Outstanding, January 1, 2000 607,634 $12.69
Granted 268,500 12.60
Exercised (76,222) 7.38
Cancelled (18,835) 18.83
- ------------------------------------------------------------------------
Outstanding, December 31, 2000 781,077 $13.03
- ------------------------------------------------------------------------
Granted 215,250 14.90
Exercised (41,533) 7.65
Cancelled (24,102) 15.52
- ------------------------------------------------------------------------
Outstanding, December 31, 2001 930,692 $13.64
- ------------------------------------------------------------------------
Granted 155,000 10.53
Exercised (85,570) 8.31
Cancelled (22,185) 15.23
- ------------------------------------------------------------------------
Outstanding, December 31, 2002 977,937 $13.58
========================================================================
Exercisable,
December 31, 2002 598,167 $14.18
========================================================================
29
NOTE 12 (CONTINUED)
The exercise price for options outstanding at December 31, 2002 range from $7.31
to $22.50 per share. The weighted- average remaining contractual life of these
options approximates seven years.
In September 2001, the Company's Board of Directors authorized a repurchase plan
providing for the repurchase of up to 500,000 shares of the Company's
outstanding common stock. The Company repurchased 63,200 and 15,000 shares in
the open market under this authorization at a cost of $692,000 and $245,000
during 2002 and 2001, respectively. Under a similar authorized repurchase plan
392,300 shares of the Company's common stock were repurchased during 2000. All
treasury stock acquired by the Company has been cancelled and returned to the
status of authorized but unissued shares.
On May 28, 1997, the Board of Directors of the Company adopted a Shareholder
Rights Plan and declared a rights dividend of one preferred share purchase right
("Right") for each share of common stock outstanding on June 16, 1997, and
provided that one Right would be issued with each share of common stock
thereafter issued. The Shareholder Rights Plan provides that in the event a
person or group acquires or seeks to acquire 15% or more of the outstanding
common stock of the Company, the Rights, subject to certain limitations, will
become exercisable. Each Right once exercisable initially entitles the holder
thereof (other than the acquiring person whose rights are cancelled) to purchase
from the Company one one-hundredth of a share of Series A preferred stock at an
initial exercise price of $55 per one one-hundredth of a share (subject to
adjustment), or, upon the occurrence of certain events, common stock of the
Company or common stock of an "acquiring company" having a market value
equivalent to two times the exercise price. Subject to certain conditions, the
Rights are redeemable by the Board of Directors for $.01 per Right and are
exchangeable for shares of common stock. The Rights have no voting power and
expire on May 28, 2007.
NOTE 13 - EARNINGS PER SHARE
Basic net income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted net
income per common share is computed by dividing net income by the
weighted-average number of common shares and, if applicable, common stock
equivalents which would arise from the exercise of stock options and warrants. A
reconciliation of the shares used in the computation is as follows (in
thousands):
- ----------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- ----------------------------------------------------------
Basic shares 5,390 5,345 5,475
Effect of options 76 162 132
- ----------------------------------------------------------
Diluted shares 5,466 5,507 5,607
==========================================================
NOTE 14 - LEASES
The Company uses certain equipment under operating lease arrangements. Rent
expense under such arrangements amounted to $1,285,000, $1,193,000 and $878,000
in 2002, 2001 and 2000, respectively.
The Company maintains non-cancelable operating leases for certain equipment.
Future minimum lease payments under such leases at December 31, 2002 are as
follows (in thousands):
- --------------------------------------
2003 $ 821
2004 584
2005 366
2006 112
2007 4
- --------------------------------------
Total $ 1,887
- --------------------------------------
NOTE 15 - CONTINGENCIES
The Company is involved in litigation of which the ultimate outcome and
liability to the Company, if any, is not presently determinable. Management
believes that final disposition of such litigation will not have a material
impact on the Company's results of operations or financial position.
NOTE 16 - SEGMENT INFORMATION
The Company has two segments, construction equipment and agriculture equipment,
as the long-term financial performance of these segments is affected by separate
economic conditions and cycles. Segment net sales and income from operations
tend to be aligned with the distribution networks of the Company, and correlate
with the manner in which the Company evaluates performance.
Construction equipment is manufactured and distributed for customers in the
construction market. Products include a diversified offering of skid loaders,
telescopic handlers, compact excavators, compact track loaders, all-wheel-steer
loaders, compact loaders and paving equipment. As of December 31, 2002, 51% of
the Company's accounts receivable were from customers in the construction
market.
Agriculture equipment is manufactured and distributed for customers in the
dairy, livestock and poultry agricultural sectors. The products are comprised
primarily of skid loaders and equipment for haymaking, forage harvesting, feed
making and manure handling. As of December 31, 2002, 49% of the Company's
accounts receivable were from customers in the agricultural sector.
Unallocated assets are cash, deferred income taxes and other assets not
identified with the Company's segments.
30
Segments of business are presented below (in thousands):
- ---------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------
Net Sales Construction $135,080 $122,344 $148,611
Agriculture 97,485 118,050 101,426
--------------------------------------------------
Consolidated $232,565 $240,394 $250,037
===========================================================================
Income from Construction $ 4,306 $ 2,270 $ 14,028
Operations Agriculture 851 6,673 7,957
--------------------------------------------------
Consolidated $ 5,157 $ 8,943 $ 21,985
===========================================================================
Assets (year-end) Construction $105,293 $117,589 $119,822
Agriculture 95,615 95,719 83,283
Unallocated 25,161 24,101 19,613
--------------------------------------------------
Consolidated $226,069 $237,409 $222,718
===========================================================================
Depreciation/ Construction $ 2,451 $ 2,931 $ 3,155
Amortization Agriculture 2,335 2,458 2,552
Unallocated 27 27 27
--------------------------------------------------
Consolidated $ 4,813 $ 5,416 $ 5,734
===========================================================================
Capital Expenditures Construction $ 3,984 $ 2,444 $ 6,523
Agriculture 2,806 1,691 6,054
--------------------------------------------------
Consolidated $ 6,790 $ 4,135 $ 12,577
===========================================================================
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
In Thousands, Except Per Share Data - Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------------------------------
2002
Net sales $60,068 $66,689 $54,575 $51,233 $232,565
Gross profit 13,359 14,227 11,708 9,551 48,845
Net income (loss) 229 895 223 (304) 1,043
Diluted net income (loss) per common share1 .04 .16 .04 (.06) .19
Basic net income (loss) per common share .04 .17 .04 (.06) .19
- --------------------------------------------------------------------------------------------------------
2001
Net sales $61,239 $73,622 $58,161 $47,372 $240,394
Gross profit 13,750 15,943 13,780 9,852 53,325
Net income (loss) 1,025 3,190 (1,480) (430) 2,305
Diluted net income (loss) per common share1 .19 .58 (.28) (.08) .42
Basic net income (loss) per common share .19 .60 (.28) (.08) .43
- --------------------------------------------------------------------------------------------------------
(1) Due to the use of the weighted-average shares outstanding each quarter for
computing net income per share, the sum of the quarterly per share amounts does
not equal the per share amount for the year.
31
FIVE YEAR FINANCIAL SUMMARY
SUMMARY OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Per Share Data 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $232,565 $240,394 $250,037 $284,838 $258,948
Gross profit 48,845 53,325 59,944 73,987 62,688
Strategic review process costs -- 513 -- -- --
Restructuring and other charges 955 4,300 -- -- --
Income from operations 5,157 8,943 21,985 35,057 27,278
Interest expense 4,052 4,299 4,741 3,083 4,026
Income before income taxes 1,605 3,546 14,856 31,294 23,672
Net income 1,043 2,305 9,656 20,185 15,268
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Position at December 31
Current assets $153,014 $163,924 $142,997 $125,783 $121,894
Current liabilities 49,634 56,466 50,027 56,299 52,152
Working capital 103,380 107,458 92,970 69,484 69,742
Accounts receivable - net 97,627 90,714 69,546 68,551 70,806
Finance contracts receivable - net 7,035 12,658 26,516 19,385 15,590
Inventories 36,771 52,161 45,598 35,206 32,093
Property, plant and equipment - net 46,697 43,431 46,172 37,028 34,142
Total assets 226,069 237,409 222,718 194,160 184,547
Long-term debt 56,135 64,237 60,885 31,097 28,947
Total debt 57,914 64,398 61,072 31,616 29,544
Shareholders' equity 96,138 100,021 103,018 97,424 94,105
- ----------------------------------------------------------------------------------------------------------------------------------
Common Share Summary
Diluted net income per share $ .19 $ .42 $ 1.72 $ 3.17 $ 2.29
Basic net income per share .19 .43 1.76 3.29 2.39
Dividends per share -- -- -- -- --
Book value per share 17.89 18.66 19.33 17.26 14.61
Shares outstanding at year-end 5,373,650 5,359,721 5,330,500 5,645,620 6,438,945
- ----------------------------------------------------------------------------------------------------------------------------------
Other Financial Statistics
Capital expenditures $ 6,790 $ 4,135 $ 12,577 $ 7,281 $ 3,051
Depreciation 4,630 4,687 4,885 4,329 3,941
Current ratio 3.1 to 1 2.9 to 1 2.9 to 1 2.2 to 1 2.3 to 1
Percent total debt to total capitalization 37.6% 39.2% 37.2% 24.5% 23.9%
Net income as a percent of net sales .4% 1.0% 3.9% 7.1% 5.9%
After-tax return on average shareholders' equity 1.1% 2.3% 9.6% 21.1% 17.8%
Employees at year-end 716 987 976 1,118 1,127
Common stock price range 8.21 - 16.45 10.010 - 18.810 8.875 - 20.0 14.0 - 23.5 11.0 - 22.5
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTOR INFORMATION
Stock Prices and Dividends
- ----------------------------------------------------------------------------
Price Range Dividends
---------------------------------- -------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------
First Quarter $14.46 - 16.45 $12.500 - 16.625 $ - $ -
Second Quarter 13.64 - 15.50 13.625 - 18.810 - -
Third Quarter 9.50 - 14.77 10.010 - 18.350 - -
Fourth Quarter 8.21 - 10.38 11.590 - 17.050 - -
- ----------------------------------------------------------------------------
Year $ 8.21 - 16.45 $10.010 - 18.810 $ - $ -
============================================================================
32