SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
MARCH 31, 1997 1-3574
HASTINGS MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0633740
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
325 NORTH HANOVER STREET
HASTINGS, MICHIGAN 49058
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 616-945-2491
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No _______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS APRIL 25, 1997
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Common stock, $2 par value 388,958 shares
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Hastings Manufacturing Company and Subsidiaries
Contents
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PART I - FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements:
Report on Review by Independent Certified Public
Accountants 3
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 4-5
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 7-8
Notes to Condensed Consolidated Financial
Statements 9-11
Review by Independent Certified Public Accountants 12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-16
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
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Report on Review by Independent Certified Public Accountants
====================================================
Board of Directors
Hastings Manufacturing Company
Hastings, Michigan
We have reviewed the accompanying condensed consolidated balance sheets of
Hastings Manufacturing Company and subsidiaries as of March 31, 1997, and
the related condensed consolidated statements of operations and cash flows
for the three-month periods ended March 31, 1997 and 1996, included in the
accompanying Securities and Exchange Commission Form 10-Q for the period
ended March 31, 1997. These condensed consolidated financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein). In our report
dated February 28, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of
December 31, 1996, is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
April 25, 1997
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
===========================================
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 91,218 $ 1,457,783
Accounts receivable, less allowance
for possible losses of $262,000 and
$215,000 4,946,899 4,893,200
Refundable income taxes 64,634 66,667
Inventories:
Finished products 7,083,971 7,134,216
Work in process 431,530 415,581
Raw materials 1,683,274 1,751,323
Prepaid expenses and other assets 105,081 152,807
Future income tax benefits 2,294,872 2,413,877
----------- -----------
TOTAL CURRENT ASSETS 16,701,479 18,285,454
----------- -----------
PROPERTY AND EQUIPMENT
Land and improvements 657,617 660,168
Buildings 4,304,977 4,312,633
Machinery and equipment 17,819,573 17,035,465
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22,782,167 22,008,266
Less accumulated depreciation 14,408,973 14,071,826
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NET PROPERTY AND EQUIPMENT 8,373,194 7,936,440
----------- -----------
INTANGIBLE PENSION ASSET 941,583 941,583
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FUTURE INCOME TAX BENEFITS 6,236,118 6,234,623
OTHER ASSETS 1,135,976 1,056,889
----------- -----------
$33,388,350 $34,454,989
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Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
===========================================
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 2,700,000 $ 3,000,000
Accounts payable 1,243,759 1,479,361
Accruals:
Compensation 318,426 446,422
Pension plan contribution 502,041 359,441
Taxes other than income 155,935 283,347
Income taxes 11,738 -
Miscellaneous 110,724 240,737
Current portion of postretirement
benefit obligation 1,641,040 1,641,040
Current maturities of
long-term debt 1,462,500 1,462,500
----------- -----------
TOTAL CURRENT LIABILITIES 8,146,163 8,912,848
LONG-TERM DEBT,
less current maturities 1,662,500 2,028,125
PENSION AND DEFERRED COMPENSATION
OBLIGATIONS, less current portion 3,029,340 3,035,576
POSTRETIREMENT BENEFIT OBLIGATION,
less current portion 15,470,256 15,545,992
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TOTAL LIABILITIES 28,308,259 29,522,541
----------- -----------
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STOCKHOLDERS' EQUITY
Preferred stock, $2 par value,
authorized and unissued
500,000 shares - -
Common stock, $2 par value,
1,750,000 shares authorized;
390,138 shares issued
and outstanding 780,276 780,276
Additional paid-in capital 140,206 140,206
Retained earnings 5,986,592 5,813,827
Cumulative foreign currency
translation adjustment (636,577) (611,455)
Pension liability adjustment (1,190,406) (1,190,406)
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TOTAL STOCKHOLDERS' EQUITY 5,080,091 4,932,448
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$33,388,350 $34,454,989
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See accompanying independent accountants' review report and notes to
condensed consolidated financial statements.
-7-
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Operations
=========================================
Three months ended March 31, 1997 1996
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NET SALES $8,752,157 $11,364,412
COST OF SALES 5,929,257 8,302,914
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Gross profit 2,822,900 3,061,498
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OPERATING EXPENSES
Advertising 107,018 101,974
Selling 799,175 981,632
General and administrative 1,419,481 1,793,061
Non-recurring restructuring and
relocation costs - 81,030
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2,325,674 2,957,697
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Operating income 497,226 103,801
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OTHER EXPENSE (INCOME)
Interest expense 123,103 113,223
Interest income (9,121) (47,107)
Other, net 28,169 (205,478)
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142,151 (139,362)
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Income before income tax expense 355,075 243,163
INCOME TAX EXPENSE 142,000 84,000
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NET INCOME $ 213,075 $ 159,163
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NET INCOME PER SHARE
OF COMMON STOCK $ .55 $ .41
AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 390,138 388,813
DIVIDENDS PER SHARE OF COMMON STOCK $ .10 $ .10
See accompanying independent accountants' review report and notes to
condensed consolidated financial statements.
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Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
========================================
Three months ended March 31, 1997 1996
----------- -----------
OPERATING ACTIVITIES
Net income $ 213,075 $ 159,163
Adjustments to reconcile net
income to net cash from
(for) operating activities:
Depreciation 334,100 358,681
Deferred income taxes 117,500 75,000
Change in postretirement
benefit obligation (75,736) 69,455
Changes in operating
assets and liabilities:
Accounts receivable (58,985) 658,198
Refundable income taxes 1,537 6,718
Inventories 87,080 (359,902)
Prepaid expenses and other
current assets 47,535 52,345
Other assets (79,082) (25,833)
Accounts payable and accruals (470,814) (1,818,993)
----------- -----------
Net cash from (for) operating activities 116,210 (825,168)
----------- -----------
INVESTING ACTIVITY
Capital expenditures (779,735) (705,717)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of notes
payable to banks 1,700,000 2,700,000
Principal payments on notes
payable to banks (2,000,000) (1,800,000)
Principal payments on long-term debt (365,625) (365,625)
Dividends paid (39,090) (38,924)
----------- -----------
Net cash from (for) financing activities (704,715) 495,451
----------- -----------
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Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
========================================
Three months ended March 31, 1997 1996
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,675 787
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NET DECREASE IN CASH (1,366,565) (1,034,647)
CASH, beginning of period 1,457,783 1,909,506
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CASH, end of period $ 91,218 $ 874,859
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 123,103 $ 124,845
Income taxes, net of refunds 8,766 39
See accompanying independent accountants' review report and notes to
condensed consolidated financial statements.
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Hastings Manufacturing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
====================================
NOTE 1 In the opinion of the management of Hastings Manufacturing Company
and subsidiaries (Company), the accompanying unaudited condensed
consolidated financial statements include all normal recurring
adjustments considered necessary to present fairly the financial
position as of March 31, 1997, and the results of operations and
cash flows for the three months ended March 31, 1997 and 1996.
NOTE 2 The results of operations for the three months ended March 31,
1997, are not necessarily indicative of the results for all of
1997.
NOTE 3 Net income per share is determined based on the weighted average
number of shares of common stock outstanding during each period.
NOTE 4 The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances, transactions and stockholdings
have been eliminated.
The accompanying consolidated financial statements are condensed
and do not contain all of the information and footnote disclosures
required by generally accepted accounting principles in a complete
set of financial statements.
NOTE 5 Under the terms of a debt agreement, the Company is subject to
specific limitations and restrictions pertaining to working
capital, net worth, dividends, etc. The Company has obtained a
waiver from the bank for its noncompliance with certain of these
limitations and restrictions.
On March 13, 1996, the Company terminated its interest rate swap
agreement with a commercial bank. This agreement, having a
notional principal amount at the time of termination of $6,487,500,
effectively limited the Company's interest rate exposure to a fixed
rate of 6.92% on its floating rate borrowings. At termination, the
Company received $204,500 from the bank as a result of favorable
interest rates. This amount is included in "Other, net" in the
accompanying 1996 condensed consolidated statement of operations.
At the same time, in order to continue to limit its interest rate
exposure, the Company entered into an interest rate collar
agreement with a current notional principal amount of $3 million.
This agreement provides for a cap rate on floating rate borrowings
of 8.25% and a related floor rate of 6.75%.
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NOTE 6 As disclosed in Note 2 to the Company's consolidated financial
statements included in its 1996 Annual Report on Form 10-K,
effective on September 3, 1995, the Company entered into an
agreement and sold its filter product line assets to CLARCOR Inc.
(CLARCOR) of Rockford, Illinois. The Company and CLARCOR also
entered into a Transition Agreement on that date whereby the
Company continued to manufacture and supply certain filters and
filter component parts to CLARCOR through a transition period,
which was completed during the third quarter of 1996. The
Transition Agreement also provided for the reimbursement to the
Company of certain administrative costs directly related to the
manufacture and supply of filters and filter components to CLARCOR.
Filter-related assets amounted to approximately $1,910,000 at March
31, 1996, comprised of $800,000 of accounts receivable and
$1,110,000 of inventory. No amounts remained at December 31, 1996.
Of the total $720,400 employee severance benefits accrued and
expensed in September 1995, relating to the sale, $222,100 was paid
through March 31, 1996 ($75,200 was paid during the three months
ended March 31, 1996).
Expense reimbursement for the three months ended March 31, 1996,
included in net sales, amounted to $473,600.
Sales, exclusive of the above expense reimbursement, and estimated
operating profit amounts for filter operations were approximately
as follows:
THREE MONTHS ENDED MARCH 31, 1996
---------------------------- ----------
Sales $2,728,000
Estimated operating
profit $ 297,000
In conjunction with the sale of its filter operations, the Company
relocated its piston ring packaging operations from its former
Knoxville, Tennessee facility to its Hastings, Michigan facility in
1996. The relocation and associated training costs, all of which
were incurred during the first and second quarters of 1996, are
non-recurring in nature. While these costs are directly related to
the 1995 sale of filter operations and the restructuring of the
Company's remaining operations, they were expensed as incurred in
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1996 as required by recently issued accounting standards. Total
costs incurred during the first quarter of 1996 amounted to $81,030
and are included as "Non-recurring restructuring and relocation
costs" in the accompanying 1996 condensed consolidated statement of
operations.
NOTE 7 As disclosed in Note 3 to the Company's consolidated financial
statements included in its 1996 Annual Report on Form 10-K, in
December 1996, management and the Board of Directors approved a
restructuring plan. The plan was designed to significantly reduce
operating costs and provide a more streamlined and efficient
operating structure concentrating on piston ring manufacturing.
Total estimated restructuring costs, amounting to $351,500, were
accrued and expensed in the fourth quarter of 1996. Of the total,
$247,000 and $104,500 related to employee severance benefits and
consulting fees, respectively. All of the consulting fees were
paid prior to December 31, 1996. Of the $247,000 of employee
severance benefits, $110,900 was paid through March 31, 1997
($85,100 was paid during the three months ended March 31, 1997).
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Hastings Manufacturing Company and Subsidiaries
Review by Independent Certified Public Accountants
====================================
The March 31, 1997 and 1996, condensed consolidated financial statements
included in this filing on Form 10-Q have been reviewed by BDO Seidman,
LLP, Independent Certified Public Accountants, in accordance with
established professional standards and procedures for such a review.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following the sale of the Company's filter assets and operations in
September 1995, the quarterly and annual results were directly impacted by
the effect of that transaction. The Company was committed to a period of
transition out of the filter operations at both the parent level and
through our Canadian subsidiary, Hastings, Inc. Through the last half of
1996, those final commitments were fulfilled. In addition, in December
1996, the Company implemented a restructuring plan to reflect the expected
near-term operations level.
While direct filter operations are not expected to impact the 1997 results,
comparative operations from 1996 and 1995 continue to be reflected in
various relationships as indicated throughout the following analysis.
RESULTS OF OPERATIONS
NET SALES
Net sales in the first quarter of 1997 declined $2,612,255, or 23.0%, from
$11,364,412 in the first quarter of 1996 to $8,752,157. As disclosed in
Note 6, the net sales volume from filter operations was $2,728,000 in the
first quarter of 1996, while no filter volume is included in the 1997
results. As such, net sales from the remaining products generated an
increase of $116,000, or 1.3%. While the increase was not significant,
sales to the various customer market groups has changed. The Company
continues to experience higher volumes within the traditional piston ring
distributor market following its refocused efforts begun in early 1996.
New accounts obtained throughout 1996 are reflected in the current period's
results. New account activity has likewise remained strong through early
1997. The Company terminated the exclusive aspect of its relationship with
its primary export representative in late 1996. While numerous direct
export markets have been accessed, the time delay of developing those
markets has resulted in a decline in that piston ring sales category in
early 1997 compared to the first quarter of 1996.
Net sales in the first quarter of 1996 declined $4,970,311, or 30.4%, from
the first quarter of 1995. Excluding the filter operations impact, net
sales from the remaining product lines generated a net increase of
$644,000, or 8%. Increased piston ring volume in the distributor, original
equipment and private brand markets contributed to this net improvement.
Export volume was lower in the first quarter of 1996 compared to the first
quarter of 1995 as the Company's former export representative targeted an
internal inventory reduction program in 1996.
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COST OF SALES AND GROSS PROFIT
Cost of sales during the first quarter of 1996 decreased $2,373,657, or
28.6%, from $8,302,914 in the first quarter of 1996 to $5,929,257. A
primary contributor to the cost of sales reduction remains the filter
operations sale as 1996 continued to reflect some portion of those results.
The gross profit margin realized on net sales improved in 1997 to 32.3%
from the 26.9% level reported in the first quarter of 1996. This again is
a direct result of the filter sale as a minimal gross profit on filter
products was implemented under the terms of the Transition Agreement with
the acquirer of the filter operations. The cost factors on the remaining
product lines have, however, risen somewhat through the first quarter of
1997. Material costs have increased, reflecting an increased cost in the
piston ring base product costs. The labor cost factor reflects general
wage increases combined with the labor impact from relocating our packing
and shipping operations back to Hastings from the former Knoxville facility
in mid-1996. The overhead cost factor applied to cost of sales thus far in
1997 is higher than the rate applied through much of 1996. That year's
rate was lower, reflecting a favorable carryover from late 1995. In
addition, the current rate is higher, reflecting the added absorption of
certain overhead costs formerly absorbed in part by the filter operations.
Cost of sales during the first quarter of 1996 declined $4,201,117, or
33.6%, from the first quarter of 1995 to $8,302,914. The primary
contributor to that reduction was the noted filter volume decline following
the sale in September 1995. While the gross profit margin was limited
under the terms of the Transition Agreement, the 1996 early year results
were favorably impacted by a reduction in the LIFO inventory reserve as the
remaining filter inventory owned by the Company was reduced. In addition,
the 1996 results were favorably impacted by the absorption of a lower
product overhead factor as noted above.
OPERATING EXPENSES
Total operating expenses declined $632,023 from $2,957,697 in the first
quarter of 1996 to $2,325,674. This reduction reflects the full
elimination of any filter sensitive exposure by the Company in 1997, as
well as the initial results of the restructuring plan reported in the 1996
Annual Report. Advertising costs are up slightly in early 1997,
reflecting, in part, the timing impact of certain product promotions.
Selling expenses, down $182,457, or 18.6%, reflect the full phase-out of
filter support activities by the Company's Canadian subsidiary as of the
end of 1996, in addition to several aspects of the restructuring plan
within that expense group. General and administrative expenses declined
$373,580, or 20.8%, from the first quarter of 1996. This decline reflects
reduced staffing costs associated with the post-filter restructuring effort
and reduced group health care costs for both active and retired plan
participants. This also reflects the anticipated impact of pending changes
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to the retiree health care plan. In addition, many of the individual
office operating expenses have declined reflecting the general reduction in
both staffing and activity levels under the post-filter operating
environment. The 1996 operating expenses reflected $81,030 in the first
quarter associated with the inventory relocation out of the Company's
former Knoxville facility.
OTHER EXPENSES (INCOME)
Other expenses netted to $142,151 for the first quarter of 1997, compared
to a net income total of $139,362 for the fist quarter of 1996. The net
interest expense position, $113,982 for the first quarter of 1997 versus
$66,116 for the same period in 1996, reflects the reduction of cash on-hand
subsequent to the filter operations sale. The 1997 results reflect the
interest income primarily derived from the funds generated by the filter
operations sale held in escrow through September 1998. The interest
expense for 1997 reflects a slightly higher reliance upon short-term
borrowings in 1997 combined with a higher effective interest rate. The 1996
first quarter reflects the gain on the termination of an interest rate swap
agreement. That gain of some $205,000 was the primary contributor to the
Company's reported net income for that period.
TAXES ON INCOME
The 1997 effective tax rate of 40%, compared to 34.5% for 1996, is higher
than the domestic statutory rate due primarily to the impact of various
state income taxes and the impact of a higher statutory rate applied to
earnings of the Canadian subsidiary. The 1996 pre-tax earnings were
derived primarily from domestic sources as was the gain on the interest
rate swap agreement.
As of March 31, 1997, the Company recorded net deferred income tax assets
of $8,530,990. The major components include the tax effects of net
operating loss carryforwards and accrued retirement and postretirement
benefit obligations. The realization of this recorded benefit is dependent
upon the generation of future taxable income.
Management believes it is more likely than not that adequate levels of
future taxable income will be generated to absorb the net operating loss
carryforwards, the deductible amounts related to the retirement and
postretirement benefit obligations and the remaining net deductible
temporary differences.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirement continues to be for operating
expenses, including labor costs and raw materials, and for funding accounts
receivable, capital expenditures and long-term debt service. Historically,
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the Company's primary sources of cash have been from operations and from
bank borrowings. The sale of the filter operations in 1995 had a
significant impact upon the 1995 and 1996 cash flow activities. Now
reflecting the full transition out of that product line, and considering
the impact of the restructuring required to support the small organization,
the Company expects to generate sufficient future cash flows from
operations and bank borrowings to fund its growth and operating needs.
During the first quarter of 1997, the Company generated net cash of
$116,240 from operating activities. The reported net income and
depreciation, combined with reductions in the deferred income tax asset,
inventories and prepaid assets were sufficient to absorb the reported net
decline in accounts payable and accruals. The deferred income tax asset
reduction reflects the Company's favorable first quarter performance, while
the accounts payable and accruals decline reflects the normal liquidation
of various year-end liabilities and commitments. The investing activities
for the first quarter of 1997 reflect a significant portion of the full
year's anticipated outlays for capital equipment. The full year results
should be at or near the 1996 total outlay of $1,345,000 as the Company
attempts to balance its production capacities to its growth objectives.
The financing activities for the first quarter of 1997 reflect the
continued normal amortization of the Company's long-term debt position, as
well as a reduced volatility in its short-term debt usage.
The Company has now absorbed significant change during the past two-year
period. With its final transition out of all filter activities and the
benefits derived thus far from the restructuring effort, the Company fully
anticipates that operations (which will not be subject to current cash
outflows for U.S. income taxes due to utilization of the net operating loss
carryforwards), will generate adequate cash flow to fund its working
capital, capital outlays and dividend needs through 1997.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
With the exception of historical matters, the matters discussed in this
commentary include certain predictions and projections that may be
considered forward-looking statements under securities laws, including, but
not limited to, those statements under the captions "Taxes on Income" and
"Liquidity and Capital Resources." These statements are subject to a
number of important risks and uncertainties that could cause actual results
to differ materially including, but not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices. The Company undertakes no
obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events or otherwise.
-19-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT. The following document is filed as an exhibit to this
report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K have been filed
during the quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HASTINGS MANUFACTURING COMPANY
Date: May 15, 1997 By: /S/ MONTY C. BENNETT
Monty C. Bennett
Its Vice-President, Employee Relations,
Secretary and Director
Date: May 15, 1997 By: /S/ THOMAS J. BELLGRAPH
Thomas J. Bellgraph
Its Vice-President, Finance
-21-
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
27 Financial Data Schedule
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