SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1998 Commission File Number 0-6611 SIMPSON INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Michigan 38-1225111 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 47603 Halyard Drive, Plymouth, Michigan 48170-2429 (Address of principal executive offices) (Zip Code) (734)207-6200 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No At July 31, 1998 there were 18,339,120 outstanding shares of the registrant's common stock, $1.00 par value each. Consolidated Balance Sheets (In thousands) June 30, 1998 and December 31, 1997 June 30 Dec. 31 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 3,553 $ 8,235 Accounts receivable 73,257 66,055 Inventories 20,894 19,827 Customer tooling in process 3,844 7,888 Prepaid expenses and other current assets 11,597 12,689 Total Current Assets 113,145 114,694 Property, Plant and Equipment Cost 321,374 313,499 Less Allowance 149,258 139,353 Total Property, Plant and Equipment 172,116 174,146 Intangible Assets - net 52,864 49,951 Other Assets 3,325 2,757 $341,450 $341,548 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current installment of long-term debt 2,829 $ 3,579 Accounts payable 46,745 45,803 Compensation and amounts withheld 10,995 11,350 Taxes, other than income taxes 2,305 3,072 Other current liabilities 5,902 14,524 Total Current Liabilities 68,776 78,328 Long-term debt, excluding current installment 117,573 118,564 Accrued Retirement Benefits and Other 16,413 14,663 Deferred Income Taxes 12,686 12,121 Shareholders' Equity 126,002 117,872 $341,450 $341,548 See accompanying notes to consolidated financial statements. Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) Periods Ended June 30, 1998 and 1997 Six Months Three Months 1998 1997 1998 1997 Net sales $254,260 $216,148 $128,704 $110,274 Costs and expenses: Cost of products sold 225,781 192,292 113,848 97,234 Administrative and selling 6,462 6,223 3,417 3,191 Amortization 940 - 482 - 233,183 198,515 117,747 100,425 Operating Earnings 21,077 17,633 10,957 9,849 Investment and other income, net (325) 526 (252) 107 Interest expense (4,945) (2,717) (2,502) (1,424) Earnings Before Income Taxes 15,807 15,442 8,203 8,532 Income taxes 5,216 5,637 2,517 3,114 Net Earnings $10,591 $ 9,805 $ 5,686 $ 5,418 Comprehensive Income - net $ 9,273 $ 9,327 $ 4,764 $ 5,081 Basic Earnings Per Share $0.58 $0.54 $0.31 $0.30 Diluted Earnings Per Share $0.58 $0.54 $0.31 $0.30 Cash dividends per share $0.20 $0.20 $0.10 $0.10 Average number of common equivalent shares: Basic 18,297,418 18,116,990 18,415,792 18,133,025 Diluted 18,418,755 18,173,434 18,549,620 18,183,959 See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 1998 and 1997 1998 1997 OPERATING ACTIVITIES Net earnings $10,591 $ 9,805 Depreciation 13,072 10,556 Provision for deferred income taxes 565 598 Amortization of restricted stock 250 163 (Gain) loss on disposition of assets 158 (85) Changes in operating assets and liabilities, net of effects of acquisition of business (11,039) (11,370) Cash Provided By Operating Activities 13,597 9,667 INVESTING ACTIVITIES Acquisition of business, net of cash acquired - (74,388) Capital expenditures (9,291) (17,699) Proceeds from disposal of property and equipment 375 206 Cash Used In Investing Activities (8,916) (91,881) FINANCING ACTIVITIES Cash dividends paid (3,664) (3,626) Notes Payable, net (1,212) Proceeds (repayments) of long-term debt, net (2,751) 58,211 Cash provided by stock transactions, net (745) - Cash Provided From (Used In) Financing Activities (8,372) 54,585 Effect of foreign currency exchange rate changes (991) (353) Increase (Decrease)In Cash and Cash Equivalents (4,682) (27,982) Cash and cash equivalents at beginning of period 8,235 28,902 Cash and Cash Equivalents at End of Period $ 3,553 $ 920 Supplemental Disclosures Cash paid during the year for: Interest $ 4,803 $ 2,590 Income Taxes 5,992 4,207 See accompanying notes to consolidated financial statements. ITEM 2: NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Principles The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the period ended June 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. Note 2. Stahl International, Inc. Acquisition On April 1, 1998, the Company purchased Stahl International, Inc. ("Stahl") for $3.7 million. Stahl, located in Memphis, Tennessee, manufactures torsional vibration dampers and flywheels for all types of diesel engines. The acquisition was accounted for as a purchase transaction. The purchase cost of $3.7 million has been allocated to assets and liabilities acquired based upon their estimated fair values at the acquisition date. The excess of purchase price over assets acquired (Goodwill) of $2.9 million is being amortized over 40 years. Note 3. Lines of Credit As discussed in Simpson's 1997 Annual Report on Form 10-K, the Company maintains credit lines that allow for borrowings of up to $25 million under a five-year agreement and up to $25 million under a 364-day agreement. At June 30, 1998 there were no borrowings outstanding under the 364-day agreement and there was $15 million outstanding under the five-year agreement. In June of 1998 the 364-day line of credit was renewed. In addition, the restrictive covenants for both the 364-day and the five-year agreements were renegotiated during June 1998. The borrowings under the five-year agreement are classified as long-term based on management's intent and ability to maintain this level of borrowing for a period in excess of one year. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net sales reached a record high in the second quarter of 1998, increasing 16.7% or $18,430,000 from the second quarter of 1997. Year-to-date sales increased 17.6% or $38,112,000 from the first half of 1997. The increased sales for both periods are primarily attributable to the inclusion of the VA Business acquisition in the third quarter of 1997. In addition, the General Motors strike reduced sales in both periods by approximately $3,500,000. The strike effect was offset by increased sales to heavy-duty customers. Cost of products sold as a percent of sales for the second quarter of 1998 compared to the second quarter of 1997 increased marginally to 88.5% from 88.2%. Cost of products sold as a percent of sales for the first six months of 1998 compared to the first half of 1997 decreased marginally to 88.8% from 89.0%. Administrative and selling costs remained at a relatively constant level for the second quarter, decreasing slightly from 2.9% of sales in the 1997 second quarter to 2.7% of sales in the 1998 second quarter. The decrease from 2.9% for the six months ending June 30, 1997 to 2.5% for the six months ending June 30, 1998 is partially due to the timing of expenses and partially due to increased efficiencies due to volume leveraging. Interest expense for the six- and three-month periods ending June 30, 1998 increased over the same periods in 1997 due to the additional debt used to fund the Holset VA acquisition which occurred in June of 1997. As discussed in Simpson's 1997 Annual Report on Form 10-K, the Company maintains credit lines that allow for borrowings of up to $25 million under a five-year agreement and up to $25 million under a 364-day agreement. At June 30, 1998 there were no borrowings outstanding under the 364-day agreement and there was $15 million outstanding under the five-year agreement. In June of 1998 the 364-day line of credit was renewed. In addition, the restrictive covenants for both the 364-day and the five-year agreements were renegotiated during June 1998. The borrowings under the five-year agreement are classified as long-term based on management's intent and ability to maintain this level of borrowing for a period in excess of one year. Cash flow from operations was $13.6 million for the first half of 1998 up from $9.7 million in 1997. Net cash used in investing activities was $8.9 million and $91.9 million for the six months ending June 30, 1997 and 1996, respectively. The primary reason for the decrease in investing activities was the Holset VA acquisition that occurred during the second quarter of 1997. The Company's investment in production capacity for new automotive, light truck and diesel engine programs also decreased from $17.7 million in 1997 to $9.3 million in 1998. The decrease was primarily due to the new program launches occurring in 1997. Net cash used in investing activities and dividends paid during the six months ended June 30, 1998, exceeded cash flows from operations and net proceeds from borrowings, discussed above, resulting in a reduction of $4.7 million in cash and cash equivalents. The Company believes that cash flows from operations and available credit facilities will be sufficient to meet its debt service requirements, projected capital expenditures and working capital requirements. The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities which becomes effective for fiscal quarters of fiscal years beginning after June 15, 1999. The Company expects to adopt this Standard during 1999, but does not believe that it will have a material impact upon future financial statements. Certain statements in this report may be "forward-looking statements" under the Securities Exchange Act of 1934. Statements regarding future operating performance, new programs expected to be launched and other future prospects and developments are based on current expectations and involve certain risks and uncertainties that could cause the actual results and developments to differ materially from the forward-looking statements. Potential risks and uncertainties include such factors as demand for the Company's products, pricing and other actions taken by competitors, and general economic conditions affecting the markets served by the Company. The Company will be required to modify or replace substantially all of the computer systems that it uses to prepare for the year 2000. The Company has completed an assessment of the costs of making its computer systems Year 2000 compliant and has determined that such costs will not be material. The Company expects to complete the required changes by January 1, 1999. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report. Exhibit No. Description 10.24 Amendment to Credit Agreement, dated June 16, 1998, among Simpson Industries Inc. and certain other Borrowers, certain Commercial Lending Institutions, ABN AMRO Bank N.V. and Comerica Bank 10.25 Amendment to Credit Agreement, dated June 16, 1998, among Simpson Industries Inc. and certain other Borrowers, certain Commercial Lending Institutions, ABN AMRO Bank N.V. and Comerica Bank 11 Computation of Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1998. 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. SIMPSON INDUSTRIES, INC. Registrant August 10, 1998 By: /S/VINOD M. KHILNANI Vinod M. Khilnani Vice President and Chief Financial Officer INDEX TO EXHIBITS Exhibit No. Description 10.24 Amendment to Credit Agreement, dated June 16, 1998, among Simpson Industries Inc. and certain other Borrowers, certain Commercial Lending Institutions, ABN AMRO Bank N.V. and Comerica Bank 10.25 Amendment to Credit Agreement, dated June 16, 1998, among Simpson Industries Inc. and certain other Borrowers, certain Commercial Lending Institutions, ABN AMRO Bank N.V. and Comerica Bank 11 Computation of Earnings Per Share 27 Financial Data Schedule