EXHIBIT 99.1
Condensed Combined Financial Statements
FASCO Motors Group
Six months ended September 30, 2002 and 2001
FASCO Motors Group
Condensed Combined Financial Statements
Six months ended September 30, 2002 and 2001
CONTENTS
Condensed Combined Financial Statements (Unaudited)
Independent Accountants' Review Report ..................................... 1
Condensed Combined Balance Sheets at September 30, 2002 and
March 31, 2002 .......................................................... 2
Condensed Combined Statements of Operations for the six months
ended September 30, 2002 and 2001 ....................................... 3
Condensed Combined Statement of Invested Capital for the six
months ended September 30, 2002 ......................................... 4
Condensed Combined Statements of Cash Flows for the six
months ended September 30, 2002 and 2001 ................................ 5
Notes to Condensed Combined Financial Statements -
September 30, 2002 ...................................................... 6
Independent Accountants' Review Report
The Board of Directors
Invensys plc
We have reviewed the accompanying condensed combined balance sheet of FASCO
Motors Group as of September 30, 2002, and the related condensed combined
statements of operations and cash flows for the six month periods ended
September 30, 2002 and 2001 and the related statement of invested capital for
the six months ended September 30, 2002. These 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 auditing standards generally accepted in the United States, 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 combined financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the combined balance sheet of FASCO Motors Group
as of March 31, 2002, and the related combined statements of operations,
invested capital, and cash flows for the year then ended (not presented herein)
and in our report dated July 11, 2002, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the information set forth
in the accompanying condensed combined balance sheet as of March 31, 2002, is
fairly stated, in all material respects, in relation to the combined balance
sheet from which it has been derived.
December 20, 2002
Ernst & Young LLP
1
FASCO Motors Group
Condensed Combined Balance Sheets
(In Millions of Dollars)
SEPTEMBER 30 MARCH 31
2002 2002
-------------------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 8.9 $ 31.7
Accounts receivable:
Trade, net of allowances for doubtful
accounts of $0.7 at September 30, 2002
and $0.5 at March 31, 2002 29.5 35.7
From affiliates 7.8 7.7
Other 5.6 4.9
Inventories, net 37.6 40.9
Prepayments and other current assets 6.0 5.6
Deferred income taxes 13.6 13.6
----------------------
Total current assets 109.0 140.1
Property, plant, and equipment, net 132.4 138.0
Intangible assets, net 409.3 409.9
Long-term receivables from affiliates 227.3 74.9
----------------------
Total assets $ 878.0 $ 762.9
======================
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Accounts payable:
Trade $ 46.8 $ 49.7
To affiliates 35.9 6.9
Other 1.1 0.9
Short-term portion of debt 13.8 15.3
Income taxes payable 10.2 17.8
Accruals and other current liabilities 16.2 14.4
----------------------
Total current liabilities 124.0 105.0
Long-term payables to affiliates 316.2 231.1
Long-term portion of debt 1.6 1.4
Pensions and other postretirement benefits 19.0 17.8
Deferred income taxes 24.3 25.3
Other long-term liabilities 0.5 0.6
----------------------
Total liabilities 485.6 381.2
Total invested capital 392.4 381.7
----------------------
Total liabilities and invested capital $ 878.0 $ 762.9
======================
See notes to condensed combined financial statements.
2
FASCO Motors Group
Condensed Combined Statements of Operations
(Unaudited, in Millions of Dollars)
SIX MONTHS ENDED
SEPTEMBER 30
2002 2001
------------------------
Net sales:
To third parties $ 234.5 $ 246.0
To affiliates -- 0.2
------------------------
234.5 246.2
Cost of sales 185.4 192.4
------------------------
Gross profit 49.1 53.8
Selling, general, and administrative expenses 23.1 19.3
Restructuring and other similar costs 4.0 5.4
Amortization of intangible assets 0.6 6.2
Other operating expenses, net 0.3 1.1
------------------------
Operating income 21.1 21.8
Nonoperating income (expense):
Interest expense (4.6) (8.6)
------------------------
Income before income taxes 16.5 13.2
Provision for income taxes (5.5) (8.0)
------------------------
Net income $ 11.0 $ 5.2
========================
See notes to condensed combined financial statements.
3
FASCO Motors Group
Condensed Combined Statement of Invested Capital
(Unaudited, in Millions of Dollars)
OTHER
INVESTED COMPREHENSIVE TOTAL
CAPITAL INCOME EQUITY
----------------------------------------
Balance at March 31, 2002 $ 386.9 $ (5.2) $ 381.7
Other comprehensive income:
Net income 11.0 -- 11.0
Foreign currency translation adjustments -- (0.3) (0.3)
----------------------------------------
Total comprehensive income 11.0 (0.3) 10.7
----------------------------------------
Balance at September 30, 2002 $ 397.9 $ (5.5) $ 392.4
========================================
See notes to condensed combined financial statements.
4
FASCO Motors Group
Condensed Combined Statements of Cash Flows
(Unaudited, in Millions of Dollars)
SIX MONTHS ENDED
SEPTEMBER 30
2002 2001
----------------------------
OPERATING ACTIVITIES
Net income $ 11.0 $ 5.2
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 7.4 7.4
Amortization 0.6 6.2
Impairment provisions 1.0 0.4
Deferred income taxes (1.0) (2.6)
Net loss on dispositions of property,
plant, and equipment -- 0.7
Noncash restructuring charges 1.5 --
Changes in operating assets and liabilities:
Receivables 4.1 1.7
Inventories 3.3 3.3
Payables (2.6) (10.5)
Trade to/from affiliates 29.0 (10.0)
Income taxes (7.6) 9.2
Pensions and other postretirement benefits 1.2 1.1
----------------------------
Cash provided by operating activities 47.9 12.1
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (2.7) (3.3)
Proceeds from the dispositions of property, plant,
and equipment 0.3 0.5
----------------------------
Cash used for investing activities (2.4) (2.8)
FINANCING ACTIVITIES
Increase (decrease) in debt (1.3) 1.5
Net change in amounts due to affiliates (67.3) (8.9)
----------------------------
Net cash used in financing activities (68.6) (7.4)
Effect of exchange rate changes on cash 0.3 --
----------------------------
Increase (decrease) in cash and cash equivalents (22.8) 1.9
Cash and cash equivalents at beginning of year 31.7 23.2
----------------------------
Cash and cash equivalents at end of year $ 8.9 $ 25.1
============================
See notes to condensed combined financial statements.
5
FASCO Motors Group
Notes to Condensed Combined Financial Statements
September 30, 2002
1. BASIS OF PRESENTATION
The unaudited condensed combined financial statements of FASCO Motors Group (the
Company) included herein have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed combined financial statements
be read in conjunction with the audited combined financial statements of the
Company including the notes thereto.
In the opinion of management, the aforementioned combined financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results for the interim periods.
Results for the six months ended September 30, 2002 are not necessarily
indicative of results that may be expected for the year ending March 31, 2003.
2. GOODWILL
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 addresses financial accounting and
reporting for business combinations and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Under SFAS 142, goodwill and certain other intangible assets will no longer be
systematically amortized but instead will be reviewed for impairment and written
down and charged to results of operations when their carrying amount exceeds
their estimated fair value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001, with early adoption permitted for entities with fiscal
years beginning after March 15, 2001.
The Company adopted SFAS 142 effective April 1, 2002. The effect of ceasing
amortization of goodwill increased net income approximately $5.5 million in the
six months to September 30, 2002 and is expected to increase net income by
approximately $11.1 million in the year ending March 31, 2003.
6
FASCO Motors Group
Notes to Condensed Combined Financial Statements (continued)
2. GOODWILL (CONTINUED)
In connection with the adoption of SFAS 142, the Company completed the first
step of the transitional impairment test, which required the Company to compare
the fair value of its reporting units to the carrying value of the net assets of
the respective reporting units, as of April 1, 2002. Based on this analysis, the
Company has concluded that there will be an impairment to the carrying value of
goodwill existing at the time of the adoption of SFAS 142. Although this has not
been fully quantified, management believes that the impairment is likely to
exceed $120 million. The Company expects to complete the analysis during the
second half of fiscal 2003, and, therefore no impairment charge has been
recorded in the six months ended September 30, 2002.
3. INVENTORIES
Inventories are summarized as follows (in millions):
SEPTEMBER 30 MARCH 31
2002 2002
---------------------------
Finished goods $ 12.5 $ 16.5
Work-in-process 11.5 10.2
Raw materials, parts, and supplies 13.6 14.2
---------------------------
Total $ 37.6 $ 40.9
===========================
4. PROVISION FOR INCOME TAXES
In each of the six months ended September 30, 2002 and 2001, there are
provisions for income taxes of $5.5 million and $7.9 million, respectively. In
the six months ended September 30, 2001 the provision reflects the add back of
$6.2 million of goodwill amortization which is not reflected in six months ended
September 30, 2002 (following the adoption of SFAS 142 as explained in Note 2).
In addition, in the six months ended September 30, 2002 the provision reflects
permanent adjustments of $2.3 million from March 31, 2002 provision to return
differences.
7
FASCO Motors Group
Notes to Condensed Combined Financial Statements (continued)
5. SUBSEQUENT EVENT
FASCO Motors is part of, and wholly-owned by, Invensys plc. On November 27, 2002
Invensys plc entered into a Stock Purchase Agreement with Tecumseh Products
Company pursuant to which the Company will be acquired by Tecumseh Products
Company for cash of $415.0 million. The consideration for the acquisition is
subject to certain closing date adjustments.
8
Combined Financial Statements
FASCO Motors Group
Years ended March 31, 2002, 2001, and 2000
with Report of Independent Auditors
FASCO Motors Group
Combined Financial Statements
Years ended March 31, 2002, 2001, and 2000
CONTENTS
Report of Independent Auditors........................................... 1
Combined Financial Statements
Combined Balance Sheets.................................................. 2
Combined Statements of Operations........................................ 3
Combined Statement of Invested Capital................................... 4
Combined Statements of Cash Flows........................................ 5
Notes to Combined Financial Statements................................... 6
Report of Independent Auditors
The Board of Directors
Invensys plc
We have audited the accompanying combined balance sheets of FASCO Motors Group
including the entities listed in Note 2 (collectively, referred to as the
Company) as of March 31, 2002 and 2001, and the related combined statements of
operations, invested capital and cash flows for each of the three years in the
period ended March 31, 2002. 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 auditing standards generally accepted
in the United States. 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 combined financial position of the Company at March
31, 2002 and 2001, and the combined results of their operations and their cash
flows for each of the years in the period ended March 31, 2002, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
July 11, 2002, (except for Note 18),
and November 27, 2002 (Note 18)
1
FASCO Motors Group
Combined Balance Sheets
(In Millions of Dollars)
MARCH 31
2002 2001
--------------------
ASSETS
Current assets:
Cash and cash equivalents $ 31.7 $ 23.2
Accounts receivable:
Trade, net of allowances for doubtful
accounts of $0.5 in 2002 and $1.3 in 2001 35.7 34.4
From affiliates 7.7 --
Other 4.9 4.5
Inventories, net 40.9 54.1
Prepayments and other current assets 5.6 5.3
Deferred income taxes 13.6 13.2
--------------------
Total current assets 140.1 134.7
Property, plant, and equipment, net 138.0 148.9
Intangible assets, net 409.9 421.1
Long-term receivables from affiliates 74.9 61.4
--------------------
Total assets $ 762.9 $ 766.1
====================
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Accounts payable:
Trade $ 49.7 $ 68.5
To affiliates 6.9 19.5
Other 0.9 1.2
Short-term portion of debt 15.3 9.0
Income taxes payable 17.8 18.8
Accruals and other current liabilities 14.4 15.6
--------------------
Total current liabilities 105.0 132.6
Long-term payables to affiliates 231.1 235.1
Long-term portion of debt 1.4 2.3
Pensions and other postretirement benefits 17.8 16.1
Deferred income taxes 25.3 22.4
Other long-term liabilities 0.6 0.3
--------------------
Total liabilities 381.2 408.8
Total invested capital 381.7 357.3
--------------------
Total liabilities and invested capital $ 762.9 $ 766.1
====================
See notes to combined financial statements.
2
FASCO Motors Group
Combined Statements of Operations
(In Millions of Dollars)
YEARS ENDED MARCH 31
2002 2001 2000
-----------------------------------
Net sales:
To third parties $ 478.6 $ 535.6 $ 573.9
To affiliates 0.3 0.5 0.5
-----------------------------------
478.9 536.1 574.4
Cost of sales 372.0 406.9 431.4
-----------------------------------
Gross profit 106.9 129.2 143.0
Selling, general, and administrative
expenses 38.8 43.0 45.2
Restructuring and other similar costs 9.2 17.6 17.3
Amortization of intangible assets 12.3 12.3 12.3
Other operating expenses, net 2.6 1.3 2.1
-----------------------------------
Operating income 44.0 55.0 66.1
Nonoperating income (expense):
Interest expense:
To third parties (2.1) (1.5) (1.O)
To affiliates (12.2) (20.5) (18.3)
Other, net 0.9 -- (0.2)
-----------------------------------
Income before income taxes 30.6 33.0 46.6
Provision for income taxes (16.5) (18.5) (24.1)
-----------------------------------
Net income $ 14.1 $ 14.5 $ 22.5
===================================
See notes to combined financial statements.
3
FASCO Motors Group
Combined Statement of Invested Capital
(In Millions of Dollars)
OTHER
INVESTED COMPREHENSIVE TOTAL
CAPITAL INCOME EQUITY
--------------------------------
Balance at March 31, 1999 $428.4 $ -- $428.4
Other comprehensive income:
Net income 22.5 -- 22.5
Foreign currency translation adjustments (0.5) (0.3) (0.8)
Other activity with affiliates (0.5) -- (0.5)
--------------------------------
Total comprehensive income 21.5 (0.3) 21.2
Cash dividends (71.8) -- (71.8)
Capital contributions 1.9 -- 1.9
--------------------------------
Balance at March 31, 2000 380.0 (0.3) 379.7
Other comprehensive income:
Net income 14.5 -- 14.5
Foreign currency translation adjustments (3.5) (5.5) (9.0)
--------------------------------
Total comprehensive income 11.0 (5.5) 5.5
Cash dividends (28.4) -- (28.4)
Capital contributions 0.5 -- 0.5
--------------------------------
Balance at March 31, 2001 363.1 (5.8) 357.3
Other comprehensive income:
Net income 14.1 -- 14.1
Foreign currency translation adjustments 1.1 0.6 1.7
Other activity with affiliates 0.9 -- 0.9
--------------------------------
Total comprehensive income 16.1 0.6 16.7
Capital contributions 7.7 -- 7.7
--------------------------------
Balance at March 31, 2002 $386.9 $ (5.2) $381.7
================================
See notes to combined financial statements.
4
FASCO Motors Group
Combined Statements of Cash Flows
(In Millions of Dollars)
YEARS ENDED MARCH 31
2002 2001 2000
-----------------------------------
OPERATING ACTIVITIES
Net income $ 14.1 $ 14.5 $ 22.5
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 15.4 15.4 13.2
Amortization 12.3 12.3 12.3
Impairment provisions 0.8 0.4 1.9
Deferred income taxes 2.5 3.9 (8.5)
Net loss (gain) on dispositions of
property, plant, and equipment 1.7 0.7 (0.1)
Noncash restructuring charges -- -- 0.6
Changes in operating assets and liabilities:
Receivables (1.8) 21.2 22.8
Inventories 13.4 1.4 5.9
Payables (20.4) 1.3 --
Trade to/from affiliates (20.3) 13.4 2.4
Income taxes (1.0) (13.4) 21.5
Pensions and other postretirement
benefits 1.6 2.5 5.3
-----------------------------------
Cash provided by operating activities 18.3 73.6 99.8
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (7.1) (21.2) (17.7)
Proceeds from the dispositions of property,
plant, and equipment 1.1 0.9 0.2
-----------------------------------
Cash used for investing activities (6.0) (20.3) (17.5)
FINANCING ACTIVITIES
Cash dividends -- (28.4) (71.8)
Capital contributions from Parent 7.7 0.5 1.9
Increase (decrease) in debt 5.4 (2.6) 13.9
Net change in amounts due to affiliates (16.7) (27.9) (13.1)
-----------------------------------
Net cash used in financing activities (3.6) (58.4) (69.1)
Effect of exchange rate changes on cash (0.2) (1.1) (0.1)
-----------------------------------
Increase (decrease) in cash and cash equivalents 8.5 (6.2) 13.1
Cash and cash equivalents at beginning of year 23.2 29.4 16.3
-----------------------------------
Cash and cash equivalents at end of year $ 31.7 $ 23.2 $ 29.4
===================================
SUPPLEMENTAL INFORMATION
Income taxes paid $ 0.8 $ 2.4 $ 2.9
Interest paid $ 9.4 $ 14.8 $ 12.0
See notes to combined financial statements.
5
FASCO Motors Group
Notes to Combined Financial Statements
March 31, 2002, 2001, and 2000
1. ACCOUNTING POLICIES
BASIS OF PREPARATION AND DESCRIPTION OF BUSINESS
FASCO Motors Group (the Company), which includes the entities listed in Note 2
to combined financial statements, is part of and wholly owned by Invensys plc
(the Parent), a publicly held corporation based in the United Kingdom.
The Company is headquartered in Eaton Rapids, Michigan, and is a custom designer
and manufacturer of AC motors, DC motors, blowers, gearmotors, and linear
actuators, with design and manufacturing facilities in the United States,
Mexico, Canada, Australia, and Thailand.
The Company's products are used in a wide variety of applications within the
HVAC, automotive, healthcare, and appliance industries among others and are
typically sold to OEM manufacturers and aftermarket channels within North
America and the Asia Pacific regions.
All inter-company accounts and transactions, including profits as a result of
those transactions, within the FASCO Motors Group are eliminated on combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the financial statements. Actual results could
differ from those estimates.
THIRD-PARTY RECEIVABLES
The Company regularly factors certain third-party trade receivables to unrelated
financial institutions on a nonrecourse basis pursuant to two separate
agreements. The Company accounts for the transfer of receivables pursuant to
these agreements as a sale of financial assets. The agreements, which are
negotiated and administered by the Parent or its affiliates, require the Company
to collect funds with respect to the factored receivables and remit the funds to
the financial institutions. At March 31, 2002 and 2001, the amount of
outstanding receivables transferred under the factoring agreement totaled $28.2
million and $39.8 million, respectively.
6
FASCO Motors Group
Notes to Combined Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
For the years ended March 31, 2002, 2001, and 2000, costs incurred relating to
these agreements amounted to $1.5 million, $0.7 million, and $0.4 million,
respectively.
INVENTORIES
Inventories are stated at the lower of cost or market, using the first in, first
out (FIFO) method. Cost is determined based on standard cost with appropriate
adjustments to approximate FIFO cost. Market is determined on the basis of
estimated realizable values.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation of property,
plant, and equipment is provided using the straight-line method over the
estimated useful life of the asset, as follows:
Land None
Buildings and improvements 40 to 50 years
Plant and machinery 3 to 15 years
Furniture and fixtures 5 to 14 years
Computer equipment 4 to 10 years
Improvements and replacements are capitalized to the extent that they increase
the useful economic life or increase the expected economic benefit of the
underlying asset. Repairs and maintenance expenditures are charged to expense as
incurred.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and patents. Goodwill represents the
excess of the purchase price paid by the Parent for the Company over the fair
value of the net assets acquired. Patents are stated at fair value on the date
of acquisition of the Company by the Parent as determined by an independent
valuation firm. Goodwill and patents are amortized using the straight-line
method over 40 years and 8 years, respectively.
7
FASCO Motors Group
Notes to Combined Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including goodwill and other intangible assets such as
patents, are reviewed for impairment when events or circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable and for all
assets to be disposed of. Long-lived assets held for use are reviewed for
impairment by comparing the carrying amount of an asset to the undiscounted
future cash flows expected to be generated by the asset over its remaining
useful life. If an asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell. Management determines fair
value using discounted future cash flow analysis or other accepted valuation
techniques.
In each of the three years ended March 31, 2002, 2001, and 2000, the Company
identified certain assets that were considered impaired following changes in
business activity. Impairment charges for the three years ended March 31, 2002,
2001, and 2000, were $0.8 million, $0.4 million, and $1.9 million, respectively.
INCOME TAXES
The Company, along with certain affiliates and its Parent, are included in a
consolidated federal income tax return in the United States. The Company's tax
provisions and related liabilities are reflected in the combined financial
statements as if they were on a separate-return basis.
DEFERRED TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
basis and the tax basis of the Company's assets and liabilities using enacted
statutory tax rates applicable to future years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries operating outside of the United States
with a functional currency other than the U.S. dollar are translated into U.S.
dollars using exchange rates at the end of the respective period. Sales, costs,
and expenses are translated at average exchange rates effective during the
respective period.
8
FASCO Motors Group
Notes to Combined Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation adjustments are included in accumulated other
comprehensive loss as a separate component of invested capital. Currency
transaction gains (losses) are included in the results of operations in the
period incurred and were $0.9 million, $nil, and $(0.2) million in the years
ended March 31, 2002, 2001, and 2000, respectively.
REVENUE RECOGNITION
Sales and related cost of sales are generally recorded upon shipment of products
to the customer, which is generally when title passes.
ADVERTISING COSTS
Advertising costs are charged to selling, general, and administrative expenses
as incurred and amounted to $1.1 million, $1.5 million, and $1.3 million in the
years ended March 31, 2002, 2001, and 2000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to selling, general, and
administrative expenses as incurred and amounted to $4.7 million, $5.9 million,
and $4.8 million in the years ended March 31, 2002, 2001, and 2000,
respectively.
SIGNIFICANT CUSTOMER
The Company has one customer, which accounted for 10.1%, 7.4%, and 7.4% of sales
for the years ended March 31, 2002, 2001, and 2000, respectively. Trade
receivables related to this customer at March 31, 2002 and 2001, were $6.3
million and $7.0 million, respectively.
CONCENTRATION OF CREDIT RISK
Credit is extended by the Company based upon an evaluation of the customer's
financial position, and generally advance payment is not required. Credit losses
are provided for in the combined financial statements and consistently have been
within management's expectations.
9
FASCO Motors Group
Notes to Combined Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
SHIPPING AND HANDLING COSTS
The Company classifies costs associated with shipping and handling activities
within cost of sales in the combined statements of operations. Shipping and
handling costs were $6.3 million, $7.7 million, and $5.6 million in the years
ended March 31, 2002, 2001, and 2000, respectively.
LEASES
Assets held under capital leases are included in fixed assets. Each asset is
depreciated over the shorter of the lease term or its useful life. Obligations
related to finance leases, net of finance charges in respect of future periods,
are included as appropriate within accounts payable. The interest element of the
rental obligation is allocated to accounting periods during the lease term to
reflect a constant rate of interest on the remaining balance of the obligation
for each accounting period.
Rentals under operating leases are charged to income on a straight-line basis
over the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, trade receivables, and trade payables approximated
fair values as of March 31, 2002 and 2001.
DERIVATIVE FINANCIAL INSTRUMENTS
Effective April 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 requires the Company to record all derivatives
on the balance sheet at fair value regardless of the purpose or intent for
holding them. Derivatives that are not hedges are adjusted to fair value through
earnings. For derivatives that are hedges, depending on the nature of the hedge,
changes in fair value are either offset by changes in the fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The effect of adopting SFAS 133 was not material.
10
FASCO Motors Group
Notes to Combined Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 addresses financial accounting and
reporting for business combinations and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Under SFAS 142, goodwill and certain other intangible assets will no longer be
systematically amortized but instead will be reviewed for impairment and written
down and charged to results of operations when their carrying amount exceeds
their estimated fair value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001, with early adoption permitted for entities with fiscal
years beginning after March 15, 2001.
The Company expects to adopt SFAS 142 effective April 1, 2002. Management
expects that the effect of ceasing amortization of goodwill will increase net
income by approximately $11.1 million in the year ending March 31, 2003. The
Company has not completed its assessment of the additional effects of adopting
SFAS 142; however, a preliminary review indicates that may be an impairment of
goodwill upon adopting SFAS 142.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
which addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with early
adoption permitted. Management is currently evaluating the provisions of SFAS
144 but believes there will be no significant effect on the Company's financial
position, results of operations, or invested capital resulting from the
adoption.
11
FASCO Motors Group
Notes to Combined Financial Statements (continued)
2. ENTITIES INCLUDED WITHIN COMBINED FINANCIAL STATEMENTS
Amounts reflected in the combined financial statements or the notes thereto
relate to the continuing operations of the Company:
FASCO Industries Inc (USA)
ECM Motor Company (USA)
Brinkley Motor Products Company (USA)
Von Weise Gear Company (USA)
Motores FASCO de Mexico de RL de CV (Mexico)
Eaton Technologies Inc (USA)
FASCO Motors Ltd (Canada)
FASCO Australia Pty Ltd
FASCO Australia Services Pty Ltd
Invensys (Thailand) Ltd
FASCO Motors (Thailand) Ltd
FASCO Yamabishi Co. Ltd (Thailand)
3. RESTRUCTURING AND OTHER SIMILAR COSTS
Restructuring and other similar costs are summarized as follows (in millions):
YEARS ENDED MARCH 31
2002 2001 2000
--------------------------
Plant closure, relocation, and related costs $3.5 $ 4.5 $11.1
Severance and other termination
related costs 1.4 7.5 1.6
Other restructuring and similar costs 4.3 5.6 4.6
------------------------
9.2 17.6 17.3
========================
Cash payments 9.8 17.3 22.2
Noncash restructuring charges - - 0.6
------------------------
$9.8 $17.3 $22.8
========================
12
FASCO Motors Group
Notes to Combined Financial Statements (continued)
3. RESTRUCTURING AND OTHER SIMILAR COSTS (CONTINUED)
PLANT CLOSURE, RELOCATION, AND RELATED COSTS
In the year ended March 31, 1999, management decided to close its Russellville,
Parsons, and LaGrange facilities and move production into other existing plants
in order to streamline manufacturing operations. The total costs of exiting
these facilities were $11.1 million, of which $3.2 million was incurred in the
year ended March 31, 1999. An additional $0.6 million and $7.3 million was
incurred for the costs of exiting these facilities in the years ended March 31,
2001 and 2000, respectively. Management also consolidated its Australian
operations and relocated production into the Company's Thailand facility,
incurring $0.3 million, $0.2 million, and $3.3 million during the years ended
March 31, 2002, 2001, and 2000, respectively.
In the years ended March 31, 2002 and 2001, management further relocated
several production lines from U.S. operations to its Mexico facilities at a cost
of $1.1 million and $3.0 million, respectively. In the year ended March 31,
2002, management commenced the consolidation of its ECM facility, the
incremental cost, of which was $1.7 million.
Other costs incurred during the years ended March 31, 2002, 2001, and 2000, in
respect of plant closures, relocation, and other related costs amounted to $0.4
million, $0.7 million, and $0.5 million, respectively.
SEVERANCE AND OTHER TERMINATION RELATED COSTS
In addition to plant closures and relocations, management reduced headcount to
streamline manufacturing operations to eliminate duplicate administrative,
selling, and marketing operations and to respond to declining demand and
increasing costs. The number of employees terminated was 203 in the year ended
March 31, 2002, 412 in the year ended March 31, 2001, and 440 in the year ended
March 31, 2000.
OTHER RESTRUCTURING AND SIMILAR COSTS
Management also responded to the changing economic environment of declining
demand and increasing costs by implementing other restructuring projects
throughout the three-year period. These included reorganizing factory layouts
and implementing lean manufacturing and six sigma principles in order to reduce
costs and maximize production efficiency. The costs include fees paid to
external advisors, as well as incremental costs incurred by the operations.
There were no individually significant projects.
13
FASCO Motors Group
Notes to Combined Financial Statements (continued)
3. RESTRUCTURING AND OTHER SIMILAR COSTS (CONTINUED)
Restructuring accruals are summarized as follows (in millions):
YEARS ENDED MARCH 31
2002 2001 2000
---------------------------
Restructuring accrual at beginning of year $0.7 $0.4 $ 5.9
Provisions charged to income 0.1 0.3 -
Utilized (0.7) - (5.5)
---------------------------
Restructuring accrual at end of year $0.1 $0.7 $ 0.4
===========================
In addition to the provisions charged to income, the Company has expensed other
costs arising from the restructuring projects as they are incurred. These amount
to $9.1 million, $17.4 million, and $17.3 million in the years ended March 31,
2002, 2001, and 2000, respectively.
4. INVENTORIES
Inventories are summarized as follows (in millions):
MARCH 31
2002 2001
--------------
Finished goods $16.5 $18.7
Work-in-process 10.2 14.3
Raw materials, parts, and supplies 14.2 21.1
--------------
Total $40.9 $54.1
==============
14
FASCO Motors Group
Notes to Combined Financial Statements (continued)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is summarized as follows (in millions):
MARCH 31
2002 2001
--------------------
Land $ 1.9 $ 1.9
Buildings and improvements 49.5 45.6
Machinery and equipment 234.3 227.0
Construction in progress 5.0 14.7
--------------------
Total property, plant, and equipment 290.7 289.2
Less: Accumulated depreciation 152.7 140.3
--------------------
Property, plant, and equipment, net $138.0 $148.9
====================
6. INTANGIBLE ASSETS
Intangible assets are summarized as follows (in millions):
MARCH 31
2002 2001
---------------------
Goodwill $439.5 $438.4
Trademarks, patents, and other intangibles 9.1 9.1
---------------------
Total intangibles 448.6 447.5
Less: Accumulated amortization 38.7 26.4
---------------------
Intangible assets, net $409.9 $421.1
=====================
15
FASCO Motors Group
Notes to Combined Financial Statements (continued)
7. ACCRUALS AND OTHER CURRENT LIABILITIES
Accruals and other current liabilities are summarized as follows (in millions):
MARCH 31
2002 2001
-------------------
Accrued vacation $ 4.4 $ 4.9
Accrued healthcare claims 2.1 2.1
Payroll costs 1.4 1.4
Workers compensation claims 1.2 0.8
Other 5.3 6.4
-------------------
Accruals and other current liabilities $14.4 $15.6
===================
8. LONG-TERM PAYABLES TO AFFILIATES
The Company's Parent and its affiliates maintain various banking and credit
facilities, which provide the Company's principal source of financing. The
Company's borrowing rates have been adjusted to reflect the U.S. "Prime" lending
rate, and the interest expense thereon is recorded as interest expense to
affiliates. Excess balances in the Company's cash accounts are generally
transferred to the Parent company and its affiliates on a daily basis as a
repayment of financing. Although there is no formal credit agreement between the
Company and its Parent, it has been the practice of the Parent to make such
funds available as are necessary for the continued operation of the Company. The
debt owed to the Parent and its affiliates is therefore classified as "Long-term
payables to affiliates." Management believes that cash flow provided by the
Company's operations together with financing provided by the Parent and its
affiliates will continue to be adequate to fund the Company's future operating
requirements.
16
FASCO Motors Group
Notes to Combined Financial Statements (continued)
9. OPERATING LEASES
Rent expense for operating leases was $2.2 million, $2.2 million, and $1.4
million in 2002, 2001, and 2000, respectively. Future minimum rental payments
for operating leases consist of the following as of March 31, 2002 (in
millions):
MINIMUM
PAYMENTS
------------
YEAR ENDING MARCH 31
2003 $2.0
2004 1.5
2005 2.0
2006 1.2
2007 0.5
Thereafter 0.2
------------
Total $7.4
============
10. STOCK OPTIONS
The Parent operates two stock option plans in which certain of the Company's
senior management participate.
EXECUTIVE STOCK OPTION SCHEME (THE 1998 SCHEME)
The Parent maintains a discretionary stock option scheme under which options to
purchase the Parent's stock may be granted each year to senior management at
multiples of salary, which reflect the prevailing market practice in the
relevant country. When options were granted during 2002, 2001, and 2000, the
Parent concluded that the salary multiple, which is appropriate for the
Company's senior management, is between 0.5 and 2.1 times annual salary.
No options are granted at a discount, and all options are subject to stretching
performance conditions on exercise as determined at the time of grant. The
performance condition for the year under review was for the Parent's earnings
per share to out-perform the Retail Price Index by at least 12% in the three
years after the grant of the option, or by 16% in the four years after the grant
of the option, or by 20% in the five years after the grant of the option,
failing which the option will lapse. The Remuneration Committee will continue to
set appropriate and stretching performance targets depending on the specific
demands of the business and the operating environment. It is the Parent's policy
to extend participation in the 1998 Scheme to overseas executives on terms as
close as practicable to those applicable in the United Kingdom.
17
FASCO Motors Group
Notes to Combined Financial Statements (continued)
10. STOCK OPTIONS (CONTINUED)
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Stock compensation expense recognized in 2002, 2001, and 2000 was not
significant. Information relative to stock options granted to Company senior
management pursuant to the aforementioned plan for each of the three years ended
March 31 is as follows (weighted average exercise prices are in pounds sterling
since all stock options are issued and exercisable in such currency):
YEARS ENDED MARCH 31
2002 2001 2000
------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------------------------------------------------------------------------------
Number of shares under option:
Outstanding at beginning of
year 1,469,770 (pound) 2.52 961,326 (pound) 2.89 397,883 (pound) 2.95
Granted:
Time-vesting 839,828 (pound) 1.41 603,044 (pound) l.96 563,443 (pound) 2.85
Adjustments:
Canceled or expired (24,400) (pound) 2.79 (94,600) (pound) 2.82 -- --
----------- ---------- ---------
Outstanding at end of year 2,285,198 (pound) 2.11 1,469,770 (pound) 2.52 961,326 (pound) 2.89
=========== ========== =========
Exercisable at end of year 352,883 (pound) 2.98 64,578 (pound) 5.19 42,640 (pound) 6.06
=========== ========== =========
The range of exercise prices for options outstanding at March 31, 2002, is
(pound)0.90 to (pound)6.26.
The range of exercise prices for options exercisable at March 31, 2002, is
(pound)1.80 to (pound)6.26.
The range of remaining contractual life for options outstanding at March 31,
2002, is one to nine years.
18
FASCO Motors Group
Notes to Combined Financial Statements (continued)
10. STOCK OPTIONS (CONTINUED)
The Company's net income would not have been significantly different had the
Company accounted for stock-based compensation using the fair value method
provided by SFAS No. 123, "Accounting for Stock-Based Compensation". The Company
determines the fair value of options granted using the Black-Scholes option
pricing model. Fair value was determined using the following weighted-average
assumptions:
YEARS ENDED MARCH 31
2002 2001 2000
--------------------------------------------------
Average risk-free interest rate 4.3% 5.2% 5.0%
Expected dividend yield 2.2% 5.6% 2.7%
Expected volatility 62.3% 48.9% 35.8%
Expected life 3-7 YEARS 3-7 years 3-7 years
11. RETIREMENT BENEFITS
The Company and its Parent sponsor defined-benefit pension plans and other
postretirement benefit plans for their employees. The pension plans cover most
of the Company's employees in the United States and Canada and provide for
monthly pension payments to eligible employees upon retirement. The Company's
eligible employees are covered by the Parent's various pension plans, which are
different for the United States and Canadian employees. Pension benefits for
salaried employees generally are based on years of credited service and average
earnings. Pension benefits for hourly employees generally are based on specified
benefit amounts and years of service. The Company's policy is to fund its
pension obligations in conformity with the funding requirements of laws and
governmental regulations applicable in the respective country. Other
postretirement benefits are in the form of retirement medical plans and cover
most of the Company's United States employees and provide for the payment of
certain medical costs of eligible employees and dependents upon retirement. The
Company's eligible United States employees and dependents are covered by the
Parent's retiree medical and life insurance plans.
19
FASCO Motors Group
Notes to Combined Financial Statements (continued)
11. RETIREMENT BENEFITS (CONTINUED)
The components of net periodic benefit cost for active participants are as
follows (in millions):
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
YEARS ENDED MARCH 31
2002 2001 2000 2002 2001 2000
--------------------------------------------------------------------------------
Service cost 3.1 3.2 3.0 0.1 0.1 0.1
Interest cost 2.3 2.0 1.8 0.6 0.6 0.6
Expected return on plan
assets (3.2) (3.0) (2.7) -- -- --
Amortization:
Prior service cost -- -- -- (0.4) -- --
Net actuarial loss (0.3) (0.1) -- (0.1) (0.1) (0.1)
--------------------------------------------------------------------------------
Net periodic benefit cost 1.9 2.1 2.1 0.2 0.6 0.6
================================================================================
Benefit obligation, plan asset, funded status, and net liability information for
active participants is summarized as follows (in millions):
PENSION OTHER POSTRETIREMENT
BENEFITS BENEFITS
YEARS ENDED MARCH 31
2002 2001 2002 2001
-------------------------------------------------
Benefit obligation at beginning of year 30.4 30.0 11.9 11.5
Service cost 3.1 3.2 0.1 0.1
Interest cost 2.3 2.0 0.6 0.6
Actuarial (gains) losses (0.9) (4.5) (0.1) (0.1)
Plan amendments 1.6 -- -- --
Benefits paid (0.2) (0.2) (0.4) (0.2)
Other (including currency translation) (0.1) (0.1) (0.4) --
-------------------------------------------------
Benefit obligation at end of year 36.2 30.4 11.7 11.9
Fair value of plan assets at beginning of year 32.9 30.0 -- --
Actual return on plan assets 3.0 3.0 -- --
Company contributions 0.3 0.3 0.4 0.2
Benefits paid (0.2) (0.2) (0.4) (0.2)
Other (including currency translation) (0.1) (0.2) -- --
-------------------------------------------------
Fair value of plan assets at end of year 35.9 32.9 -- --
Funded status of plans (0.3) 2.5 (11.7) (11.9)
Unrecognized prior service cost 1 7 0.1 0.3 --
Deferred net actuarial gains (7.5) (6.8) (0.3) --
-------------------------------------------------
Net amount recognized at year end (6.1) (4.2) (11.7) (11.9)
Net liability on balance sheet consists of:
Prepaid benefit cost 0.3 0.2 -- --
Accrued benefit liability (6.4) (4.4) (11.7) (11.9)
Deferred tax asset -- -- -- --
Intangible asset -- -- -- --
Accumulated other comprehensive loss -- -- -- --
-------------------------------------------------
Net liability on balance sheet (6.1) (4.2) (11.7) (11.9)
=================================================
20
FASCO Motors Group
Notes to Combined Financial Statements (continued)
11. RETIREMENT BENEFITS (CONTINUED)
The Company uses an actuarial measurement date of December 31 to measure its
benefit obligations. Significant assumptions used in determining these benefit
obligations and net periodic benefit cost for active participants are summarized
as follows (in weighted averages):
PENSION OTHER POSTRETIREMENT
BENEFITS BENEFITS
YEARS ENDED MARCH 31
2002 2001 2002 2001
-----------------------------------------------------
Discount rate 7.5% 7.7% 7.5% 7.7%
Compensation increase rate 4.0% 4.0% N/A N/A
Expected return on plan assets 10.0% 10.0% N/A N/A
Heath care cost trend rate N/A N/A 9.0% 6.58%
The other postretirement benefit obligation was determined using an assumed
healthcare cost trend rate of 10.0% in 2002, grading down to 5.0% in 2006 and
thereafter.
The discount rate, compensation increase rate, and health care cost trend rate
assumptions are determined as of the measurement date. The expected return on
plan assets assumption is determined as of the previous measurement date.
OTHER POSTRETIREMENT BENEFITS
Assumed health care cost trend rates have a significant effect on amounts
reported for the retiree medical plans. A one-percentage point change in assumed
health care cost trend rates would have the following effect (in millions):
ONE PERCENTAGE POINT ONE PERCENTAGE POINT
INCREASE DECREASE
YEARS ENDED MARCH 31
2002 2001 2002 2001
--------------------------------------------------
Increase (decrease) to total of service
and interest cost components $0.1 $0.1 $(0.1) $(0.1)
==================================================
Increase (decrease) to postretirement
benefit obligation $1.0 $1.1 $(0.9) $(1.0)
==================================================
21
FASCO Motors Group
Notes to Combined Financial Statements (continued)
11. RETIREMENT BENEFITS (CONTINUED)
DEFINED-CONTRIBUTION SAVINGS PLANS
The Company sponsors certain defined-contribution savings plans for eligible
employees. Expense related to these plans was $1.4 million in each of the three
years ended March 31, 2002, 2001, and 2000.
12. OTHER OPERATING EXPENSES, NET
The components of other operating expenses, net are as follows (in millions):
MARCH 31
2002 2001 2000
------------------------------------------------
Net gain (loss) on dispositions of
property, plant, and equipment $(1.7) $(0.7) $ 0.1
Impairment write-offs (0.8) (0.4) (1.9)
Other (0.1) (0.2) (0.3)
------------------------------------------------
Other operating expenses, net $(2.6) $(1.3) $(2.1)
================================================
13. INCOME TAXES
The components of the income tax provision are as follows (in millions):
MARCH 31
2002 2001 2000
------------------------------------------------
Current:
United States $12.7 $11.1 $28.5
Non-United States -- 2.3 3.5
State and local 1.3 0.2 0.2
------------------------------------------------
Total current 14.0 13.6 32.2
Deferred:
United States 1.2 3.2 (6.7)
Non-United States 1.1 1.2 (0.3)
State and local 0.2 0.5 (1.1)
------------------------------------------------
Total deferred 2.5 4.9 (8.1)
------------------------------------------------
Income tax provision $16.5 $18.5 $24.1
================================================
22
FASCO Motors Group
Notes to Combined Financial Statements (continued)
13. INCOME TAXES (CONTINUED)
The provision for income taxes was calculated based upon the following
components of income (loss) before income taxes (in millions):
YEARS ENDED MARCH 31
2002 2001 2000
------------------------------------------------
United States $27.4 $33.7 $41.4
Non-United States 3.2 (0.7) 5.2
------------------------------------------------
Income before income taxes $30.6 $33.0 $46.6
================================================
Net current deferred income tax assets (liabilities) are as follows (in
millions):
MARCH 31
2002 2001
-------------------------------------
Compensation and benefits $(0.6) $(0.7)
Inventory 3.4 3.8
Interest 6.6 5.3
Other 4.2 4.8
-------------------------------------
Total current deferred income tax assets $13.6 $13.2
=====================================
Net long-term deferred income taxation assets (liabilities) are as follows (in
millions):
MARCH 31
2002 2001
-------------------------------
Retirement benefits $ 7.5 $ 7.3
Property (20.6) (20.0)
Intangible assets (8.6) (6.2)
Start-up costs/reorganization costs (2.3) (2.1)
Non-United States net operating loss carryforwards 1.2 2.6
Other (1.3) (1.4)
-------------------------------
Total long-term deferred income taxes (24.1) (19.8)
Total current deferred income taxes 13.6 13.2
-------------------------------
Subtotal (10.5) (6.6)
Valuation allowance (1.2) (2.6)
-------------------------------
Net deferred income tax liabilities $(11.7) $ (9.2)
===============================
23
FASCO Motors Group
Notes to Combined Financial Statements (continued)
13. INCOME TAXES (CONTINUED)
These deferred tax assets and liabilities are classified in the combined balance
sheet based on the balance sheet classification of the related assets and
liabilities.
Management believes it is more likely than not that current and long-term
deferred tax assets will be realized through the reduction of future taxable
income. Significant factors considered by management in this determination
include the historical operating results of the Company and the expectation of
future earnings, including anticipated reversals of future taxable temporary
differences. A valuation allowance was established at March 31, 2002 and 2001,
for deferred tax assets related to non-United States net operating loss
carryforwards for which utilization is uncertain.
The provision for income taxes differs from the United States statutory tax rate
due to the following items:
YEARS ENDED MARCH 31
2002 2001 2000
----------------------------------------------
United States statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.2 1.5 (1.4)
Non-United States taxes (0.3) 2.5 4.5
Non-United States net operating losses for
which tax benefit was not provided 4.0 7 9 2.3
Nondeductible goodwill 14.2 13.0 9.3
Other (2.2) (3.8) 2.0
----------------------------------------------
Effective income tax rate 53.9% 56.1% 51.7%
==============================================
No provision has been made for United States or foreign income taxes related to
approximately $10.1 million of undistributed earnings of foreign subsidiaries,
which are considered to be permanently reinvested. It is not practical to
determine the income tax liability, if any, which would be payable if such
earnings were not permanently reinvested.
Various United States and foreign subsidiaries of the Company are included in
consolidated tax filings with other affiliated companies of the Parent. The
methodology applied for allocating taxes between affiliates that participate in
consolidated tax filings is as follows: to the extent that a company generates
taxable income, the company remits taxes to its affiliated parent company based
upon the applicable statutory effective tax rate. If a taxable loss is generated
by a company, the affiliated parent company does not provide any current or
future cash benefit.
24
FASCO Motors Group
Notes to Combined Financial Statements (continued)
13. INCOME TAXES (CONTINUED)
The income tax provision for the Company has been calculated as if the entities
included in the combined financial statements file separately from their
non-FASCO Motors Group affiliates.
14. RELATED PARTY TRANSACTIONS
MANAGEMENT CHARGES
Included within selling, general, and administrative expenses are charges for
administrative expenses incurred by the Parent and its affiliates that are
directly attributed to, or reasonably allocated to, the stand-alone operations
of the Company. These charges are primarily for insurance coverage, accounting,
legal, and data transmission services. These charges totaled $2.8 million, $2.8
million, and $2.8 million for the years ended March 31, 2002, 2001, and 2000,
respectively.
The expenses allocated have been determined on a basis that the Company, the
Parent, and its affiliates considered to be reasonable estimates of the
utilization of services provided or the benefit received by the Company. The
financial information included herein may not reflect the combined financial
position, operating results, and cash flows of the Company in the future or what
they would have been had the Company been a separate, independent entity during
the periods presented.
TRADING ACTIVITY
The Company sells to and purchases from affiliates various products in the
normal course of business. Pricing is generally negotiated on an arm's-length
basis based on standard pricing schedules. Purchases from affiliates were $0.9
million, $0.6 million, and $0.6 million in 2002, 2001, and 2000, respectively.
FUNDING ACTIVITY
The Company participates in the Parent's treasury function whereby funds are
loaned to and borrowed from affiliates in the normal course of business.
At March 31, 2002 and 2001, the long-term payables to affiliates and all
long-term receivables from affiliates are not evidenced by underlying Notes.
These are classified as long-term in the combined balance sheets as current, as
past funding practice has been that repayments are made on a long-term basis.
Management does not believe the amounts outstanding at March 31, 2002 and 2001,
are indicative of the Company's financing needs on a stand-alone basis.
25
FASCO Motors Group
Notes to Combined Financial Statements (continued)
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is also involved in various unresolved legal actions, administrative
proceedings, and claims in the ordinary course of its business involving product
liability, product warranty, property damage, insurance coverage, patents, and
environmental matters. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss or
recovery, based upon current information, management believes these unresolved
legal actions will not have a material effect on the financial position or
results of operations of the Company.
16. BUSINESS SEGMENT INFORMATION
The Company operates in a single business segment. Net sales to third parties
and property, plant, and equipment by geographic region are as follows (in
millions):
NET SALES PROPERTY, PLANT,
TO THIRD PARTIES AND EQUIPMENT
--------------------------------------- ----------------------
YEARS ENDED MARCH 31 MARCH 31
2002 2001 2000 2002 2001
--------------------------------------- ----------------------
North America $431.4 $482.2 $513.8 $106.3 $116.0
Rest of World 47.2 53.4 60.1 31.7 32.9
--------------------------------------- ----------------------
$478.6 $535.6 $573.9 $138.0 $148.9
======================================= ======================
Net sales to third parties are attributed to the geographic regions based on the
country in which the shipment originates. Amounts attributed to the geographic
regions for property, plant, and equipment are based on the location of the
entity, which holds such assets.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED, IN MILLIONS OF DOLLARS)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
-----------------------------------------------------------------------------------
Net sales $122.4 $136.1 $123.8 $139.3 $115.2 $132.1 $117.5 $128.6
Gross profit 24.7 31.7 29.1 36.0 26.8 31.8 26.3 29.7
Net income 2.7 3.5 2.5 3.9 4.0 4.6 4.9 2.4
26
FASCO Motors Group
Notes to Combined Financial Statements (continued)
18. SUBSEQUENT EVENTS
Subsequent to March 31, 2002, management has approved plans to restructure
certain operations by transferring production to Mexico. In particular, the
closure of the Ozark, Missouri, site was announced on June 18, 2002. Management
estimates the total cost of these restructuring projects will amount to
approximately $7.3 million.
On November 27, 2002, the Parent entered into a Stock Purchase Agreement with
Tecumseh Products Company pursuant to which the Company will be acquired by
Tecumseh Products Company for cash of $415.0 million. The consideration for the
acquisition is subject to certain closing date adjustments.
27