Exhibit 13
Federal
Screw Works
1996
Annual Report [ LOGO ]
Board
of Directors
Thomas W. Butler, Jr.**+
President, Thomas
W. Butler and
Associates, Inc.,
Business Consultants
Hugh G. Harness*
Business Consultant,
Retired President and Chief
Operating Officer of the
Company
John J. Slavin**+
President of Professional
Corporation law firm since
1969. Since April 1992, of
Counsel to the Dykema Gossett
law firm which provides
legal services to the Company.
F. D. Tennent**+
Business Consultant;
Retired Senior Vice
President -- Finance,
Secretary & Treasurer
of the Company
Robert F. ZurSchmiede*
Vice President of the
Company -- Romulus Divisions
Thomas ZurSchmiede*
President and Chief
Operating Officer of the
Company
W. T. ZurSchmiede, Jr.*+
Chairman of the Board &
Chief Executive Officer;
Chief Financial Officer;
Secretary & Treasurer of the
Company
*Member of
Executive Committee
**Member of Audit
and Restricted
Stock Bonus Committees
+Member of Salary Compensation Committee
Executive
Officers
W. T. ZurSchmiede, Jr.
Chairman of the Board &
Chief Executive Officer;
Chief Financial Officer;
Secretary & Treasurer
Thomas ZurSchmiede
President and Chief
Operating Officer
John M. O'Brien
Vice President -- Sales
and Marketing
Robert F. ZurSchmiede
Vice President -- Romulus
Divisions
Jeffrey M. Harness
Vice President -- Chelsea and
Brighton Divisions
2
Financial Highlights
Federal Screw Works
(Dollars in thousands, except per share data)
Years Ended June 30 1996 1995 1994
---- ---- ----
Net sales $92,794 $90,503 $80,713
Earnings before federal
income taxes 6,560 6,388 4,030
Federal income taxes 2,169 2,147 1,308
Net earnings 4,391 4,241 2,722
Depreciation and
amortization 3,553 3,135 2,709
Capital expenditures 5,682 7,443 6,169
Working capital 13,613 12,538 9,141
Cash dividends declared 1,195 870 653
Stockholders' equity 33,901 30,957 27,464
Per Share Data
Net earnings $ 4.04 $ 3.90 $ 2.50
Cash dividends declared 1.10 .80 .60
Average number of shares outstanding:
1996 -- 1,086,662; 1995 -- 1,086,954; 1994 -- 1,087,955
Annual Meeting
October 24, 1996, 10 a.m.
Federal Screw Works
535 Griswold Street, Ste. 2400
Detroit, Michigan 48226
Transfer Agent
State Street Bank & Trust Company
Registrar
State Street Bank & Trust Company
Federal Screw Works
Corporate Offices:
535 Griswold Street, Ste. 2400
Detroit, Michigan 48226
Telephone: 313/963-2323
Division locations: Big Rapids,
Brighton, Chelsea, Romulus, Michigan
10-K Available:
Copies of the 1996 Form 10-K including the financial statements and schedules
as filed with the Securities and Exchange Commission may be obtained without
charge by the Stockholders from the Company upon written request to the
Secretary. Exhibits will likewise be supplied upon payment of a reasonable
fee.
Federal Screw Works shares are traded on the National Over-The-Counter Market.
The Company's NASDAQ symbol is FSCR.
3
To Our
Shareholders:
The Company reports net earnings for the fiscal year ended June 30, 1996, of
$4,391,000, or $4.04 per share, on sales of $92,794,000. For the year ended
June 30, 1995, the Company reported net earnings of $4,241,000, or $3.90 per
share, on sales of $90,503,000. Net earnings for the fourth quarter ended June
30, 1996, were $1,924,000, or $1.77 per share, on sales of $25,869,000. Net
earnings for the fourth quarter ended June 30, 1995, were $1,716,000, or $1.58
per share, on sales of $24,017,000. The reported earnings for each year are
after non-cash FAS 106 post-retirement health benefit charges of $994,000 and
$1,231,000, respectively ($199,000 and $314,000, respectively, for the fourth
quarter).
The Company was pleased to record another year of substantial achievement.
Continued process improvement as well as the production of new, higher margin
parts enabled us to counter a variety of adverse circumstances. In the first
instance, demand from our two largest customers was softer than expected. In
the second, these two customers still insist on price concessions. Finally,
the Company experienced two labor strikes, one at its Chelsea Division, the
other at one of its largest customers, for respective periods of approximately
six and three weeks. We believe the Company's ability to effectively manage
these difficulties demonstrates its fundamental competitiveness.
We look forward to the new fiscal year confidently even as we acknowledge what
analysts view as the strong possibility of a labor strike in the automobile
industry. The Company continues to invest heavily. In fiscal 1996,
expenditures for capital equipment amounted to $5.7 million, compared to last
year's $7.4 million. Nonautomotive business grew again in 1996. Overall, we
expect business to be strong.
At its August 16th meeting, the Board of Directors declared a regular
quarterly cash dividend of $.10 per share, and an extra cash dividend of $.80
per share, both payable October 1, 1996, to shareholders of record September
6, 1996.
/s/ Thomas ZurSchmiede
Thomas ZurSchmiede
President
/s/ W. T. ZurSchmiede, Jr.
W. T. ZurSchmiede, Jr.
Chairman
4
The Company
Industry Information
Federal Screw Works is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single business segment.
The Company's products are manufactured at several plants and are fabricated
from metal rod and bar, which are generally available at competitive prices
from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Operating Divisions
The Company's industrial component parts are manufactured in six plants
located throughout lower Michigan. The Company presently employs approximately
505 hourly-rated and salaried personnel. A brief description of each division
follows.
The Big Rapids Division in Big Rapids, Michigan, manufactures special
high-strength bolts and other cold formed products using boltmakers and
headers as primary equipment. Among the items manufactured to both inch and
metric specifications are hex head bolts, connecting rod bolts, studs and
flange bolts. The 160,000 square foot plant is situated on 25 acres of land,
and contains heat treat facilities for hardening in-process parts. The
annealing and pickling of the steel used at Big Rapids is generally performed
at the Romulus Steel Processing Division.
The Romulus Division is housed in a 100,000 square foot plant, on 22 acres of
land, in Romulus, Michigan. This division uses nutformers as primary equipment
to manufacture special prevailing torque locknuts. Products include locknuts,
connecting rod nuts, and other special nut products, in both metric and inch
sizes. The plant has its own furnace for heat treating in-process parts.
Annealing and pickling of the steel coils used in manufacturing nut products
are performed by the adjacent Romulus Steel Processing Division.
The parts produced at the above divisions are sold principally to the
automotive market. These parts are mass produced, and most are shipped
directly to car assembly plants.
Steel rod annealing, pickling and drawing facilities are provided at the
38,000 square foot Romulus Steel Processing Division plant on a tract of land
it shares with the Romulus Division. A significant amount of the output of
this facility is converted to finished products by Federal Screw Works' bolt
and nut making operations. Excess capacity is used to process steel rod
belonging to other companies, mainly in the cold heading industry.
5
The Company
Continued
The Brighton Division occupies a 19,000 square foot leased facility in
Brighton, Michigan. The lease expires in December, 1998. The Division
manufactures perishable tooling, primarily for the cold heading industry. More
than one-half of its output is consumed by the Company's Romulus and Big
Rapids Divisions.
The Chelsea Division is located in Chelsea, Michigan, in a plant having
approximately 86,000 square feet. Primary equipment consists of automatic
screw machines and rotary index machines capable of making products from 1/16
inch to 2-3/4 inches in diameter. Chelsea Division fabricates a wide variety
of precision parts including piston pins, bushings, fittings, special
fasteners, valve components, sleeves, shafts, gear blanks and the like. These
parts are generally produced in large volume lots and delivered direct to
manufacturers of products such as compressors, automobiles, transmissions and
small engines.
In August, 1994, the Company leased a 16,000 square foot facility in Romulus
to conduct engineering and manufacturing development activities. This
facility, known as the Technical Center, gives us sufficient room to try out
new primary and secondary equipment, tooling, and parts feeding and automation
devices, as well as permitting us to rebuild recently purchased used
equipment. This facility has been of major assistance during the fiscal year
just concluded.
The Company's corporate offices are located in the Buhl Building in downtown
Detroit, where the Company occupies 12,000 square feet of space under a five
year lease expiring in 1999 (renewable for an additional 5 years).
The Company owns outright all of the above described buildings, land, and
production facilities except as specifically noted to the contrary. The
Company utilizes all of the floor space of these structures. Present
facilities are adequate to meet the needs of each respective division.
6
Financial Review
Federal Screw Works
Quarterly Operating Results (Dollars in thousands, except per share data)
1st 2nd 3rd 4th For the
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
1996
Net sales $20,904 $22,504 $23,517 $25,869 $92,794
Gross profit 2,059 2,520 3,381 4,041 12,001
Net earnings 502 802 1,163 1,924 4,391
Net earnings per share $ .46 $ .74 $ 1.07 $ 1.77 $ 4.04
Cash dividends per share .80 .10 .10 .10 1.10
1995
Net sales $19,838 $21,734 $24,914 $24,017 $90,503
Gross profit 1,977 2,541 3,386 3,959 11,863
Net earnings 532 852 1,141 1,716 4,241
Net earnings per share $ .49 $ .78 $ 1.05 $ 1.58 $ 3.90
Cash dividends per share .50 .10 .10 .10 .80
<FN>
Net earnings for the fourth quarter of 1996 and 1995 were favorably affected
by year end adjustments, principally inventory ($959,945 or $.88 per share and
$841,284 or $.77 per share, respectively).
Stock Prices
These are the quarterly high and low bid quotations as reported by the
National Association of Securities Dealers for the Company's common stock,
which is traded over the counter (under the NASDAQ symbol FSCR).
1996 1995
----------------- ----------------
High Low High Low
---- --- ---- ---
1st Quarter $26-1/4 $22-1/4 $20 $16-3/4
2nd Quarter 24-1/2 20-1/2 20-1/2 18-3/4
3rd Quarter 26-1/2 20-1/4 21 18-3/4
4th Quarter 28-3/4 23 23-1/2 17-1/8
7
Financial Review
Continued
Federal Screw Works
Selected Financial Data
Years Ended June 30 (Dollars in thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales $ 92,794 $ 90,503 $ 80,713 $ 73,050 $ 67,618
Cost of products sold 80,793 78,640 71,657 65,669 59,824
Interest expense 848 559 470 494 510
Earnings before federal income
taxes 6,560 6,388 4,030 2,918 2,984
Federal income taxes 2,169 2,147 1,308 912 964
Net earnings 4,391 4,241 2,722 2,006 2,020
---------- ---------- ---------- ---------- ----------
Average number of shares of
common stock outstanding 1,086,662 1,086,954 1,087,955 1,089,306 1,103,610
---------- ---------- ---------- ---------- ----------
Per share of common stock:
Net earnings $ 4.04 $ 3.90 $ 2.50 $ 1.84 $ 1.83
Cash dividends 1.10 .80 .60 .60 .40
---------- ---------- ---------- ---------- ----------
Total assets $ 64,360 $ 62,008 $ 52,925 $ 49,205 $ 46,952
Long-term debt 7,960 8,700 6,020 6,385 6,880
---------- ---------- ---------- ---------- ----------
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Federal Screw Works reported net sales of $92.8 million in fiscal 1996, which
represented a 2.5% increase from fiscal 1995 sales of $90.5 million. Net sales
for fiscal 1995 increased 12.1% from fiscal 1994 sales of $80.7 million. Like
1995, the increase in fiscal 1996 sales resulted from new automotive parts
programs and an increase in non-automotive business. The number of parts
shipped decreased slightly in 1996 following an increase in 1995.
Gross profits increased 0.8% to $12 million in fiscal 1996, a $100,000
increase from fiscal 1995. Fiscal 1995 gross profits increased 31% to $11.9
million compared to the $9.1 million level realized in 1994. The 1996 increase
resulted primarily from greater sales and increased manufacturing efficiency,
offset in part by heavy price concessions which continued to be required by
our customers. These concessions are a part of the competitive environment and
will be with us for the foreseeable future. Also, the Company experienced two
critical work stoppages which occurred in our third quarter against a large
customer and at our Chelsea Division in the fourth quarter. Other factors
negatively impacting our gross profits in 1996 included higher labor,
aluminum, plating and packaging costs.
Our Shareholders are aware of the Company's dependence upon sales to the two
largest U.S. automobile manufacturers, a condition that has existed for at
least fifty years. The impact of new parts programs was particularly helpful
in fiscal 1996. We have also increased our shipments to the refrigeration
compressor and small engine markets to approximately ten percent of our total
sales. These markets have been growing at a faster rate than our automotive
business in recent years. Sales to customers outside North America are
increasing, but still are not material.
Three major competitors were acquired by other fastener companies in 1996. We
do not believe these acquisitions will result in a significant change in the
Company's competitive position; although we believe that there will be
continuing reductions in the number of U.S. owned competitors. Over the longer
term we can expect increasing competition from the so-called "transplant"
fastener suppliers who supply the Japanese owned automobile manufacturers with
whom our Company presently enjoys little business. Although it seems clear
that these suppliers desire to increase their business with U.S. owned
automobile manufacturers, we do not believe that competition from these
companies will impact the Company in the near term. In 1996 the Company did
secure two significant business programs through Tier I suppliers to the
Japanese owned automotive manufacturers. We will begin shipment on these
programs in the new fiscal year.
9
Financial Review
Continued
Federal Screw Works
As a percentage of net sales, selling, general and administrative expenses
decreased to 4.9% in fiscal 1996. In fiscal 1995 and fiscal 1994 these
expenses were 5.4% and 5.6% of net sales, respectively.
Interest expense increased in fiscal 1996 by 52% from fiscal 1995 levels.
Average borrowings under the Company's bank credit agreement were up, and
average interest rates were higher. Interest expense in fiscal 1995 increased
by 19.0% from fiscal 1994 levels because average interest rates and average
bank borrowings were up.
The Company has been designated by the federal Environmental Protection Agency
("EPA") as a Potentially Responsible Party ("PRP") with respect to three
related dump sites. The sites are related in that the PRPs engaged a single
transporter who illegally disposed of toxic and hazardous waste materials
there in the late 1960s. The sites are located in Oakland County, Michigan,
and are referred to as the Springfield Township, the Rose Township and
Cemetery Dump Sites. While the Company denies it has engaged in disposing of
any materials at any of the sites, the Company together with eleven other PRPs
has actively participated in negotiations directed toward settlement of the
EPA's claims. The Rose Township Site was the first site selected by the EPA
for remediation. The participating PRPs were successful in negotiating a
Consent Decree which was approved by the United States District Court for the
Eastern District of Michigan under which the Company has agreed to participate
in the cost of the clean up. These costs are not expected to have a material
effect on the Company's financial statements. The State of Michigan appealed
the Consent Decree to the United States Court of Appeals for the Sixth Circuit
which affirmed entry of the Decree.
The same PRPs have actively been engaged in negotiations with the EPA and the
Michigan Department of Natural Resources in an effort to agree upon mutually
acceptable remediation parameters for the Springfield Township site. While
agreement has not yet been reached upon an overall remediation method,
remediation is occurring on an interim basis. Remediation costs for which the
Company may become liable are not expected to have a material effect on the
Company's financial statements. With respect to the Cemetery site, the EPA has
performed a site cleanup but has not asserted claims against any of the
identified PRPs which suggests that the evidence of involvement by such
parties is weak. The Company received a notice letter from a representative of
the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating that
"empty" drums from the Company were shipped to the site. The waste allegedly
shipped by the Company is 3520 gallons which is equal to approximately 0.02
percent of the total waste at the site. Since the total site costs for all
parties are not expected to exceed $10 million, the Company's share of the
costs
10
Financial Review
Continued
Federal Screw Works
are not expected to be material. No investigation has been undertaken to
the Company's knowledge which would identify any costs to be incurred by the
Company which might have a material effect on the Company's financial
statements.
Dividends
Cash dividends declared in fiscal year 1996 were $1.10 per share, $.30 more
than that declared in fiscal 1995 and $.50 more than that declared in fiscal
1994. The Board of Directors in August, 1996, declared a $.10 per share
quarterly dividend, and an extra dividend of $.80 per share.
Liquidity and Capital Resources
On October 24, 1995, the Company converted its commitment letter into a new
Revolving Credit and Term Loan Agreement with a three year duration, renewable
annually for an additional year. Borrowings up to $25 million and capital
expenditures of $10 million annually are permitted. The Company has the option
to convert borrowings under the facility to a term note through October 31,
1998, the expiration date of the agreement. Payments under the term note, if
the conversion option were exercised, would be made quarterly and could extend
to October 31, 2000. Therefore borrowings under the Revolving Credit and Term
Loan Agreement, which amounted to $6,960,000 at June 30, 1996 ($7,300,000 at
June 30, 1995) are classified as long-term debt.
Working capital at June 30, 1996 amounted to $13,613,000 as compared to
working capital of $12,538,000 at June 30, 1995.
The balance sheet at June 30, 1996 includes a long-term liability of
$2,977,000 representing the unfunded accumulated benefit obligations of
certain employee pension plans. The excess of this liability over the
unrecognized prior service cost at the date of transition is included as a
reduction of stockholders' equity. The funding policies of these plans, which
are based on actuarial calculations, continue to comply with applicable laws
and regulations.
As discussed in Note 6 to the financial statements, effective July 1, 1993,
the Company adopted FASB No. 106. The Statement requires that the projected
future cost of providing benefits, such as health care and life insurance, be
recognized as an expense as employees render service instead of when the
benefits are paid. The Statement provides two alternatives for recognizing the
cumulative effect of the accounting change. The first alternative is to
recognize the cumulative effect as a charge against income in the year of
adoption or, alternatively, to recognize the cumulative effect on a
prospective basis as a part of future annual benefit cost. The Company elected
the prospective approach and is amortizing the present value of future
benefits related to employees past service ($17,967,000 at July 1, 1993) over
a period of 20 years. The implementation of this accounting pronouncement has
no impact on the Company's cash flows.
11
Financial Review
Continued
Federal Screw Works
Cash flows from operating activities approximated $7.9 million in fiscal 1996.
This compares to $4.4 million in 1995 and $7.0 million in 1994. One hundred
percent of operating cash flow in fiscal 1996 was generated from earnings and
depreciation.
Capital expenditures for fiscal 1996 were $5.7 million primarily related to
the purchase and modernization of equipment in order to improve production
efficiencies, maintain existing business and enable the Company to address new
opportunities. Capital expenditures in fiscal years 1995 and 1994 were $7.4
million and $6.2 million, respectively. Expenditures for additional equipment
during fiscal 1997 are presently expected to approximate $5.4 million, of
which $0.7 million had been committed as of June 30, 1996. These future
capital expenditures are expected to be financed from cash generated from
operations and additional borrowing capacity under the bank credit agreement.
Net cash used in financing activities was $1.9 million in fiscal 1996,
compared with $1.8 million provided by financing activities in fiscal 1995. In
fiscal 1994 $1.0 million was used in financing activities. Fluctuations in
these activities have been influenced principally by borrowings and repayments
under the Company's Revolving Credit and Term Loan Agreement.
Impact of Inflation and Changing Prices
The Company passes increased costs on to customers, to the extent permitted by
competition, by increasing sales prices whenever possible. In fiscal 1996,
1995 and 1994 the Company was generally unable to pass on cost increases
incurred due to competitive pressures. Sales price increases in each of these
years were insignificant.
12
Statements of Operations
Federal Screw Works
Year Ended June 30
------------------------------------------
1996 1995 1994
---- ---- ----
Net sales $ 92,794,306 $ 90,502,562 $ 80,712,542
Costs and expenses:
Cost of products sold 80,792,936 78,639,970 71,657,160
Selling, general and administrative 4,593,135 4,915,987 4,555,136
Interest 847,736 559,092 470,199
------------ ------------ ------------
86,233,807 84,115,049 76,682,495
------------ ------------ ------------
EARNINGS BEFORE FEDERAL INCOME TAXES 6,560,499 6,387,513 4,030,047
Federal income taxes--Note 4:
Current 1,845,000 1,846,000 1,571,000
Deferred (credit) 324,000 301,000 (263,000)
------------ ------------ ------------
2,169,000 2,147,000 1,308,000
------------ ------------ ------------
NET EARNINGS $ 4,391,499 $ 4,240,513 $ 2,722,047
============ ============ ============
Average number of shares outstanding 1,086,662 1,086,954 1,087,955
============ ============ ============
Net earnings per share $ 4.04 $ 3.90 $ 2.50
============ ============ ============
<FN>
See accompanying notes.
13
Balance Sheets
Federal Screw Works
June 30
------------------------
1996 1995
---- ----
Assets
Current Assets
Cash $ 781,544 $ 394,902
Accounts receivable 10,881,702 10,237,968
Inventories -- Note 1:
Finished products 4,731,203 3,635,783
In-process products 5,387,252 6,163,400
Raw materials and supplies 2,122,131 3,336,734
----------- -----------
12,240,586 13,135,917
Prepaid expenses and other current accounts 472,771 502,380
Deferred income taxes -- Note 4 752,000 797,000
----------- -----------
TOTAL CURRENT ASSETS 25,128,603 25,068,167
Other Assets
Intangible pension asset -- Note 5 2,548,403 2,623,494
Cash value of life insurance 4,888,887 4,730,368
Miscellaneous 1,129,429 972,898
----------- -----------
8,566,719 8,326,760
Property, Plant and Equipment-- Notes 2 and 3
Land 337,934 337,934
Buildings and improvements 8,781,232 8,684,213
Machinery and equipment 64,300,532 59,551,880
----------- -----------
73,419,698 68,574,027
Less accumulated depreciation 42,754,992 39,960,749
----------- -----------
30,664,706 28,613,278
----------- -----------
$64,360,028 $62,008,205
=========== ===========
14
June 30
---------------------------
1996 1995
---- ----
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,976,916 $ 4,607,066
Payroll and employee benefits 5,262,521 4,856,601
Dividend payable 108,666 108,666
Federal income taxes 414,739 349,455
Taxes, other than income taxes 1,317,832 1,283,709
Accrued pension contributions 664,308 481,410
Other accrued liabilities 371,114 443,072
Current maturities of long-term debt 400,000 400,000
----------- -----------
TOTAL CURRENT LIABILITIES 11,516,096 12,529,979
Long-Term Liabilities
Long-term debt -- Note 2 7,960,000 8,700,000
Unfunded pension obligation -- Note 5 2,977,374 3,399,530
Deferred income taxes -- Note 4 1,122,000 1,047,000
Employee benefits 1,193,524 1,323,899
Postretirement benefits -- Note 6 5,250,496 3,744,665
Other liabilities 439,754 306,000
----------- -----------
18,943,148 18,521,094
Stockholders' Equity -- Notes 2 and 8
Common stock, $1 par value, authorized 2,000,000 shares,
1,086,662 shares outstanding 1,086,662 1,086,662
Additional capital 2,917,759 2,772,628
Retained earnings 31,560,814 28,364,643
Unfunded pension costs (1,664,451) (1,266,801)
----------- -----------
33,900,784 (30,957,132)
----------- -----------
$64,360,028 $62,008,205
=========== ===========
<FN>
See accompanying notes.
15
Statements of
Stockholders' Equity
Federal Screw Works
Years ended June 30, 1996, 1995 and 1994
- ----------------------------------------
Unfunded
Common Additional Retained Pension
Stock Capital Earnings Costs Total
----------- ----------- ----------- ----------- -----------
BALANCES AT JULY 1, 1993 $ 1,088,739 $2,395,616 $22,945,826 $ (557,956) $25,872,225
Net earnings for the year 2,722,047 2,722,047
Purchase of 564 shares (564) (8,652) (9,216)
Transactions under restricted
stock bonus plans-- net (563) 183,859 183,296
Unfunded pension costs,
net of taxes (651,181) (651,181)
Cash dividends declared--
$.60 per share (652,812) (652,812)
---------- ---------- ----------- ----------- -----------
BALANCES AT JUNE 30, 1994 1,087,612 2,579,475 25,006,409 (1,209,137) 27,464,359
Net earnings for the year 4,240,513 4,240,513
Purchase of 700 shares (700) (12,600) (13,300)
Transactions under restricted
stock bonus plans-- net (250) 193,153 192,903
Unfunded pension costs,
net of taxes (57,664) (57,664)
Cash dividends declared--
$.80 per share (869,679) (869,679)
---------- ---------- ----------- ----------- -----------
BALANCES AT JUNE 30, 1995 1,086,662 2,772,628 28,364,643 (1,266,801) 30,957,132
Net earnings for the year 4,391,499 4,391,499
Transactions under restricted
stock bonus plans-- net 145,131 145,131
Unfunded pension costs,
net of taxes (397,650) (397,650)
Cash dividends declared--
$1.10 per share (1,195,328) (1,195,328)
---------- ---------- ----------- ----------- -----------
BALANCES AT JUNE 30, 1996 $1,086,662 $2,917,759 $31,560,814 $(1,664,451) $33,900,784
========== ========== =========== =========== ===========
<FN>
( ) Denotes deduction.
See accompanying notes.
16
Statements of
Cash Flows
Federal Screw Works
Year Ended June 30
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings $ 4,391,499 $ 4,240,513 $ 2,722,047
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,553,461 3,134,940 2,709,245
Increase in cash value of life insurance (158,519) (108,338) (129,788)
Change in deferred income taxes 324,000 301,000 (263,000)
Employee benefits 1,375,456 1,771,238 1,882,819
Amortization of restricted stock 47,132 76,904 107,296
Other (873,493) (1,163,807) (962,249)
Changes in operating assets and liabilities:
Accounts receivable (643,734) (918,340) (26,672)
Inventories and prepaid expenses 924,940 (4,436,530) (717,295)
Accounts payable and accrued expenses (1,013,883) 1,456,849 1,628,423
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,926,859 4,354,429 6,950,826
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,682,326) (7,443,353) (6,168,569)
Proceeds from sale of property,
plant and equipment 77,437 313,304 401,722
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (5,604,889) (7,130,049) (5,766,847)
FINANCING ACTIVITIES
Additional borrowings (principal repayments)
under bank credit agreement (340,000) 3,080,000 35,000
Principal payments on lease-purchase obligation (400,000) (400,000) (400,000)
Purchases of common stock (13,300) (9,216)
Dividends paid (1,195,328) (869,680) (652,943)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,935,328) 1,797,020 (1,027,159)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 386,642 (978,600) 156,820
Cash at beginning of year 394,902 1,373,502 1,216,682
----------- ----------- -----------
CASH AT END OF YEAR $ 781,544 $ 394,902 $ 1,373,502
=========== =========== ===========
<FN>
See accompanying notes.
17
Notes to
Financial Statements
Federal Screw Works
Note 1 -- Significant Accounting Policies
Inventories: Inventories are stated at the lower of cost or market. Cost
determined by the last-in, first-out (LIFO) method was used for certain raw
material inventories, $1,530,113 and $2,617,090 at June 30, 1996 and 1995,
respectively. The remaining inventories are costed using the first-in,
first-out (FIFO) method. If inventories had been valued at current cost,
amounts reported at June 30 would have been increased by $675,000 in 1996 and
$763,000 in 1995.
Property, Plant and Equipment: Property, plant and equipment is stated at
cost, which includes the cost of interest which is capitalized during
construction of significant additions. Provisions for depreciation are based
upon the estimated useful lives of the respective assets and are computed by
the straight-line method for financial reporting purposes and by accelerated
methods for income tax purposes.
Income Taxes: Income taxes have been provided using the liability method.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Actual results could differ from those
estimates.
Reclassifications: Reclassifications were made to the 1995 financial
statements to conform with the current year's presentation.
18
Notes to
Financial Statements
Continued
Federal Screw Works
Note 2 -- Debt
Long-term debt at June 30 consists of the following:
1996 1995
---------- ----------
Revolving credit note payable to bank $6,960,000 $7,300,000
Lease-purchase obligation (see Note 3),
payable $200,000 semiannually, plus
interest at 7-3/4% 1,400,000 1,800,000
---------- ----------
8,360,000 9,100,000
Less current maturities 400,000 400,000
---------- ----------
$7,960,000 $8,700,000
========== ==========
The Company has a $25,000,000 revolving credit and term loan agreement with a
bank. The Company has the option to convert borrowings thereunder (classified
as long-term debt) to a term note through October 31, 1998, the expiration
date of the agreement. Payments under the term note, if the conversion option
is exercised, would be made quarterly commencing three months following
conversion until maturity of the term note on October 31, 2000. Interest
(6.75% at June 30, 1996) on outstanding borrowings is determined based on the
prime rate, or at the Company's option, an alternative variable market rate.
The Company also pays a commitment fee of 3/8% on the unused portion of the
revolving credit. The aggregate fair value of the Company's revolving credit
note payable and lease-purchase obligation approximates their recorded amounts
at June 30, 1996.
The Company is in compliance with covenants of the revolving credit and
term loan agreement and the lease-purchase obligation including restrictions
on payment of cash dividends. Retained earnings of $7,467,000 are free of
restriction at June 30, 1996.
Interest paid by the Company during fiscal 1996, fiscal 1995 and fiscal 1994
aggregated $945,000, $735,000, and $591,000, respectively.
19
Notes To
Financial Statements
Continued
Federal Screw Works
Note 3 -- Leases and Other Commitments
The Company acquired one of its manufacturing facilities under a
lease-purchase agreement with a municipality, and $1,400,000 of remaining
outstanding Industrial Revenue Bond financing is guaranteed by the Company at
June 30, 1996.
At June 30, 1996, the aggregate minimm rental commitments for the Industrial
Revenue Bond lease-purchase obligation and various noncancelable operating
leases with initial terms of one year or more are as follows:
Lease-
Purchase Operating
Year ending June 30 Obligation Leases
- ------------------- ---------- ---------
1997 $ 500,750 $ 661,000
1998 469,750 368,000
1999 438,750 293,000
2000 207,750 222,000
2001 6,000
---------- ----------
Total minimum lease payments $1,617,000 $1,550,000
==========
Amounts representing interest 217,000
----------
Present value of net minimum lease payments $1,400,000
==========
Total rent expense (exclusive of the lease-purchase obligation) was $866,000
in fiscal 1996, $731,000 in fiscal 1995, and $786,000 in fiscal 1994.
Commitments to purchase machinery and equipment approximated $700,000 at June
30, 1996.
20
Notes To
Financial Statements
Continued
Federal Screw Works
Note 4 -- Federal Income Taxes
A reconciliation of the federal income tax provision to the amount computed by
applying the applicable statutory federal income tax rate (34%) to earnings
before federal income taxes follows:
1996 1995 1994
--------- --------- ----------
Computed amount $2,231,000 $2,172,000 $1,370,000
Life insurance policies (90,000) (67,000) (72,000)
Other 28,000 42,000 10,000
---------- ---------- ----------
Total federal income tax provision $2,169,000 $2,147,000 $1,308,000
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of June 30, 1996 and
1995 are as follows:
1996 1995
---------- ----------
Deferred tax liabilities:
Accelerated tax depreciation $3,390,000 $2,964,000
---------- ----------
Total deferred tax liabilities 3,390,000 2,964,000
---------- ----------
Deferred tax assets:
Employee benefits 2,813,000 2,510,000
Inventory 175,000 131,000
Other 32,000 73,000
---------- ----------
Total deferred tax assets 3,020,000 2,714,000
---------- ----------
Net deferred tax liabilities $ 370,000 $ 250,000
========== ==========
Income taxes paid by the Company during fiscal 1996, fiscal 1995, and fiscal
1994 totalled $1,685,000, $2,065,000, and $1,287,000, respectively.
21
Notes To
Financial Statements
Continued
Federal Screw Works
Note 5 -- Employee Benefits
The Company sponsors four defined benefit pension plans covering substantially
all employees. Benefits under three of the plans are based on negotiated rates
times years of service. Under the remaining plan, benefits are based on
compensation during the years immediately preceding retirement and years of
service. It is the Company's policy to make contributions to these plans
sufficient to meet minimum funding requirements of the applicable laws and
regulations, plus such additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate. Plan assets for these plans consist
principally of fixed income instruments, equity securities and participation
in insurance company contracts.
A summary of the components of net pension expense for these plans is as
follows:
1996 1995 1994
---- ---- ----
Service cost $ 408,000 $ 465,000 $ 463,000
Interest cost 1,328,000 1,356,000 1,316,000
Actual return on plan assets (2,415,000) (793,000) (549,000)
Net amortization and deferral 1,494,000 (14,000) (234,000)
----------- ----------- -----------
$ 815,000 $ 1,014,000 $ 996,000
=========== =========== ===========
In accounting for pension plans, the Company used a discount rate of 7.75% in
1996 and 8% in 1995 and 1994, a 5% rate of increase in compensation, and an 8%
expected rate of return on assets. The following table sets forth the plans'
funded status at the March 31, 1996 and 1995 measurement dates:
22
Notes To
Financial Statements
Continued
Federal Screw Works
Plans for Which Plans for Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Actuarial present value of
vested benefit obligations $ 4,642,000 $ 5,300,000 $ 12,271,000 $ 11,071,000
============ ============ ============ ============
Acturial present value of
accumulated benefit obligations $ 4,712,000 $ 5,479,000 $ 12,612,000 $ 11,282,000
============ ============ ============ ============
Plan assets at fair value $ 8,010,000 $ 8,195,000 $ 8,844,000 $ 7,024,000
Projected benefit obligations 5,808,000 6,477,000 12,612,000 11,282,000
------------ ------------ ------------ ------------
Excess (deficiency) of assets
over projected benefit obligations 2,202,000 1,718,000 (3,768,000) (4,258,000)
Unrecognized net (gain)/loss (12,000) 358,000 2,521,000 2,302,000
Unrecognized prior service cost (132,000) (141,000) 758,000 538,000
Unrecognized net (asset)
liability at transition (1,021,000) (1,047,000) 2,120,000 2,492,000
Additional liability
recognized under the
minimum liability provisions (5,273,000) (4,955,000)
------------ ------------ ------------ ------------
Net pension asset (liability) $ 1,037,000 $ 888,000 $ (3,642,000) $ (3,881,000)
============ ============ ============ ============
The change in the discount rate, coupled with changes in other actuarial
assumptions and certain plan amendments, had the effect of increasing the
projected benefit obligations for the under-funded plans by approximately
$1,300,000.
In 1995, the Company established a retirement plan for directors who are not
employees of the Company. The net periodic pension expense for the plan was
$150,000 and $290,000 in 1996 and 1995, respectively. The actuarial present
value of vested benefit obligations approximated $560,000 at June 30, 1996 and
$518,000 at June 30, 1995. The plan is currently unfunded.
23
Notes To
Financial Statements
Continued
Federal Screw Works
Note 6 -- Other Postretirement Benefits
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. Substantially all of
the Company's employees may become eligible for those benefits if they reach
normal retirement age while working for the Company. The benefits are provided
through certain insurance companies.
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's financial statements:
June 30
-----------------------------
1996 1995
---- ----
Accumulated postretirement benefit obligation:
Retirees $ (8,975,000) $ (9,538,000)
Fully eligible active plan participants (2,821,000) (2,488,000)
Other active plan participants (5,232,000) (5,796,000)
------------ ------------
(17,028,000) (17,822,000)
Unrecognized net gain (3,494,000) (2,093,000)
Unrecognized transition obligation 15,272,000 16,170,000
------------ ------------
Accrued postretirement benefit cost $ (5,250,000) $ (3,745,000)
============ ============
1996 1995 1994
---- ---- ----
Net periodic postretirement benefit cost
includes the following components:
Service cost $ 344,000 $ 432,000 $ 409,000
Interest cost 1,315,000 1,420,000 1,438,000
Amortization of transition obligation
over 20 years 898,000 898,000 898,000
Amortization of unrecognized gain (123,000)
----------- ----------- -----------
Net periodic postretirement benefit cost $ 2,434,000 $ 2,750,000 $ 2,745,000
=========== =========== ===========
During 1996, the Company made adjustments to the healh care cost trend rate
and the early retirement rates for employees to more accurately reflect actual
experience. These adjustments resulted in a net reduction in the accumulated
projected benefit obligation of approximately $1,388,000 and a net reduction
in the net periodic postretirement benefit cost of $258,000.
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 9 percent for fiscal
1997 and 9.5 percent for fiscal year 1996 and is assumed to decrease gradually
to 5.5 percent for 2004 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of June 30, 1996 and 1995, by $2,104,000 and $2,199,000,
respectively, and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year ended June 30, 1996, by
$205,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8% at June 30, 1996 and 1995,
respectively.
24
Notes To
Financial Statements
Continued
Federal Screw Works
Note 7 -- Industry Information
Federal Screw Works is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single business segment.
The Company's products are manufactured at several plants and are fabricated
from metal rod and bar, which are generally available at competitive prices
from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Approximately 88% of the Company's net sales in fiscal 1996 (89% and 90% in
both fiscal 1995 and fiscal 1994, respectively) were made either directly or
indirectly to automotive companies. The Company generally does not require
collateral from its customers.
Customers comprising 10% or greater of the Company's net sales are summarized
as follows:
1996 1995 1994
---- ---- ----
Ford Motor Company 48% 46% 45%
General Motors Corporation 22% 22% 26%
All Others 30% 32% 29%
--- --- ---
100% 100% 100%
=== === ===
Sales to customers outside the United States are not significant.
Note 8 -- Restricted Stock Bonus Plan
The Company maintains a restricted stock bonus plan for certain key employees.
Shares issued under the plan are subject to certain restrictions which lapse
generally over a period of six to ten years from date of grant. The market
value of shares issued, considered to be compensation, is being charged to
operations over the periods during which the restrictions lapse and the
unamortized compensation related to the outstanding restricted shares ($24,718
and $71,850 as of June 30, 1996 and 1995, respectively) has been deducted from
additional capital.
Note 9 -- Litigation
The Company is involved in various legal actions arising in the normal course
of business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that their outcome will not have
a significant effect on the Company's financial statements.
25
Report of
Ernst & Young
Independent Auditors
Board of Directors
Federal Screw Works
We have audited the accompanying balance sheets of Federal Screw Works as of
June 30, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Federal Screw Works at June
30, 1996 and 1995, and the results of its operations and cash flows for each
of the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
August 9, 1996
26
Five Year Summary
Federal Screw Works
Five Years Ended June 30 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
Operations (in thousands)
Net sales $ 92,794 $ 90,503 $ 80,713 $ 73,050 $ 67,618
Earnings before federal income
taxes 6,560 6,388 4,030 2,918 2,984
Federal income taxes 2,169 2,147 1,308 912 964
Net earnings 4,391 4,241 2,722 2,006 2,020
Depreciation and amortization 3,553 3,135 2,709 2,435 2,380
Capital expenditures 5,682 7,443 6,169 4,393 5,011
Cash dividends declared 1,195 870 653 654 439
---------- ---------- ---------- ---------- ----------
Per share data
Net earnings $ 4.04 $ 3.90 $ 2.50 $ 1.84 $ 1.83
Cash dividends declared 1.10 .80 .60 .60 .40
Book value 31.20 28.49 25.25 23.76 22.44
Market price range (OTC)
High 28-3/4 23-1/2 18-1/2 16-1/2 14-1/4
Low 20-1/4 16-3/4 15-1/4 11-1/4 8-1/2
---------- ---------- ---------- ---------- ----------
Return data
Net earnings on net sales 4.7% 4.7% 3.4% 2.7% 3.0%
Net earnings on stockholders' equity 14.2% 15.4% 10.5% 8.2% 8.6%
---------- ---------- ---------- ---------- ----------
Financial position at June 30 (in thousands)
Working capital (net current assets) $ 13,613 $ 12,538 $ 9,141 $ 9,923 $ 10,247
Other assets 8,566 8,327 8,038 8,375 8,288
Property, plant and equipment (net) 30,665 28,613 24,367 21,156 19,609
---------- ---------- ---------- ---------- ----------
Total assets less current liabilities 52,844 49,478 41,546 39,454 38,144
Less:
Long-term debt 7,960 8,700 6,020 6,385 6,880
Unfunded pension obligation 2,977 3,400 4,049 4,367 4,010
Deferred taxes 1,122 1,047 604 1,257 999
Employee benefits 1,194 1,324 1,418 1,415 1,554
Postretirement benefits 5,250 3,744 1,880
Other liabilities 440 306 111 158 240
---------- ---------- ---------- ---------- ----------
Stockholders' equity (net assets) $ 33,901 $ 30,957 $ 27,464 $ 25,872 $ 24,461
========== ========== ========== ========== ==========
Other
Number of employees 505 502 507 510 498
Approximate number of stockholders 611 644 671 722 760
Average shares outstanding 1,086,662 1,086,954 1,087,955 1,089,306 1,103,610
---------- ---------- ---------- ---------- ----------
27
Federal Screw Works
535 Griswold Street, Ste. 2400
Detroit, Michigan 48226