UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington DC 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended DECEMBER 31, 2002 --------------------------------------------------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------- ------------------------- Commission File Number: O-1837 ------------------------------------------------------ FEDERAL SCREW WORKS - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-0533740 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 20229 Nine Mile Road, St. Clair Shores, Michigan 48080 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, and area code (586) 443-4200 ----------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing require- ments for the past 90 days. YES X NO ----- ----- At December 31, 2002, the Company had one class of common stock outstanding, $1.00 par value common stock. There were 1,185,493 shares of such common stock outstanding at that time. (continued) Part I FINANCIAL INFORMATION FEDERAL SCREW WORKS CONDENSED BALANCE SHEETS (UNAUDITED) (Thousands of Dollars) Dec. 31 June 30 2002 2002 ------- ------- ASSETS Current Assets: Cash............................................ $ 176 $ 199 Accounts Receivable, Less Allowance of $50...... 13,007 14,970 Inventories: Finished Products............................. 8,134 9,266 In-Process Products........................... 6,288 6,754 Raw Materials And Supplies.................... 1,546 1,507 ------- ------- 15,968 17,527 Prepaid Expenses And Other Current Accounts..... 390 434 Deferred Income Taxes........................... 847 815 ------- ------- Total Current Assets......................... 30,388 33,945 Other Assets: Intangible Asset................................ 96 96 Cash Value Of Life Insurance.................... 5,761 5,696 Prepaid Pension Cost............................ 7,138 7,210 Miscellaneous................................... 2,825 3,005 ------- ------- Total Other Assets........................... 15,820 16,007 Property, Plant And Equipment..................... 118,983 116,725 Less Accumulated Depreciation................... 67,009 63,997 ------- ------- Net Properties.................................. 51,974 52,728 ------- ------- Total Assets...................................... $98,182 $102,680 ======= ======== - 2 - Part I FINANCIAL INFORMATION (Continued) Dec. 31 June 30 2002 2002 ------ ------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable....................................... $ 3,836 $ 5,287 Payroll And Employee Benefits.......................... 3,717 5,770 Dividends Payable...................................... 119 124 Federal Income Taxes................................... 99 479 Taxes, Other Than Income Taxes......................... 1,701 1,804 Accrued Pension Contributions.......................... 168 0 Other Accrued Liabilities.............................. 99 70 ------- -------- Total Current Liabilities........................... 9,739 13,534 Long Term Liabilities: Long-Term Debt......................................... 7,885 6,340 Deferred Employee Compensation......................... 2,353 2,808 Postretirement Benefits Other Than Pensions............ 15,673 14,834 Deferred Income Taxes.................................. 1,854 1,867 Employee Benefits...................................... 1,030 1,100 Other Liabilities...................................... 909 892 ------- -------- Total Long-Term Liabilities......................... 29,704 27,841 Stockholders' Equity: Common Stock, $1.00 Par Value, Authorized 2,000,000 Shares; 1,185,493 Shares Outstanding at December 31, 2002 and 1,234,093 at June 30, 2002.... 1,185 1,234 Additional Capital..................................... 3,270 3,270 Retained Earnings...................................... 54,452 56,903 Accumulated Other Comprehensive Loss................... (168) (102) ------- -------- Total Stockholders' Equity.......................... 58,739 61,305 ------- -------- Total Liabilities and Stockholders' Equity............... $98,182 $102,680 ======= ======== See Accompanying Notes. - 3 - FEDERAL SCREW WORKS CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (Thousands of Dollars, Except Per Share) Three Months Ended Six Months Ended December 31 December 31 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales..................................................... $22,990 $22,243 $46,170 $43,761 Costs And Expenses: Cost of Products Sold...................................... 21,190 21,216 42,008 41,257 Selling And Administrative Expenses........................ 1,479 1,641 3,021 2,970 Interest Expense .......................................... 68 72 132 109 Other Expenses (Income).................................... 72 (1,357) 140 (1,301) ------- ------- ------- ------- Total Costs and Expenses................................ 22,809 21,572 45,301 43,035 ------- ------- ------- ------- Earnings Before Federal Income Taxes............................................... 181 671 869 726 Federal Income Taxes ......................................... 59 229 286 247 ------- ------- ------- ------- Net Earnings.................................................. $ 122 $ 442 $ 583 $ 479 ======= ======= ======= ======= Per Share Of Common Stock: Basic and Diluted Earnings Per Share.......................... $ 0.10 $ 0.34 $ 0.48 $ 0.37 ======= ======= ======= ======= Cash Dividends Declared Per Share............................. $ 0.10 $ 0.10 $ 0.90 $ 0.90 ======= ======= ======= ======= See Accompanying Notes. - 4 - FEDERAL SCREW WORKS CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Thousands of Dollars) Six Months Ended December 31 2002 2001 ---- ---- Operating Activities Net Earnings.................................................................... $ 583 $ 479 Adjustments to Reconcile Net Earnings to Net Cash Provided By (Used In) Operating Activities: Depreciation ............................................................... 3,228 2,808 Increase In Cash Value of Life Insurance.................................... (65) (64) Change In Deferred Income Taxes............................................. (45) (123) Employee Benefits........................................................... (70) 93 Other....................................................................... 586 861 Changes In Operating Assets And Liabilities: Accounts Receivable......................................................... 1,963 206 Inventories And Prepaid Expenses............................................ 1,603 1,075 Accounts Payable And Accrued Expenses....................................... (3,791) (2,858) ------- ------- Net Cash Provided By Operating Activities......................................... 3,992 2,477 Investing Activities Purchases of Property, Plant And Equipment-Net.................................. (2,474) (4,795) ------- ------- Net Cash Used In Investing Activities............................................. (2,474) (4,795) Financing Activities Additional Borrowings Under Credit Agreement.................................... 1,545 4,645 Purchase of Common Stock........................................................ (1,988) (1,159) Dividends Paid.................................................................. (1,098) (1,157) ------- ------- Net Cash Provided By (Used In) Financing Activities............................... (1,541) 2,329 ------- ------- Increase (Decrease) In Cash....................................................... (23) 11 Cash At Beginning Of Period....................................................... 199 98 ------- ------- Cash At End Of Period............................................................. $ 176 $ 109 ======= ======= See Accompanying Notes. - 5 - FEDERAL SCREW WORKS NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting. Application of these accounting principles requires the Company's management to make estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgements of the amounts and disclosures included in the financial statements, giving due regard to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the six months ended December 31, 2002, are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2003. NOTE B - DEBT On October 7, 2002, Comerica Bank approved a one year extension of the Company's $25,000,000 Revolving Credit and Term Loan Agreement. Under the agreement the Company has the option to convert borrowings thereunder (classified as long-term debt) to a term note through October 31, 2005, the expiration date of the agreement. Payments under the term note, if the conversion option is exercised, would be made quarterly and could extend to October 31, 2007. As of December 31, 2002, there was $7,885,000 in outstanding borrowings under the Revolving Credit and Term Loan Agreement. NOTE C - DIVIDENDS Cash dividends per share are based on the number of shares outstanding at the respective dates of declaration. NOTE D - INVESTMENTS The Company has invested approximately $2,660,000 and $2,850,000 as of December 31, 2002, and June 30, 2002, respectively, which has been designated for payment of certain liabilities related to deferred compensation plans. These amounts were recorded in miscellaneous assets within the balance sheets. In accordance with Statement of Financial Accounting Standards No. 115 ("FASB 115"), the Company has classified all investments as "available-for-sale" because they are freely tradable. As of December 31, 2002, the Company recorded an increase in unrealized loss of $66,000, net of tax, from its investments, which is reflected in the statements of shareholders' equity. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS: Net sales for the Company's second quarter ended December 31, 2002, increased $747,000, or 3.4%, compared with net sales for the second quarter of the prior year. Net sales for the six month period ended December 31, 2002, increased $2,409,000 or 5.5%, compared with the six month period of the prior year. The increase is attributable mainly to the increase in North American automotive production. - 6 - Gross profit for the three month period ended December 31, 2002, increased $773,000, or 75.3%, as compared with the second quarter of the prior year. Gross profit for the six month period ended December 31, 2002, increased $1,658,000, or 66.2%, as compared with the six month period of the prior year. The increase is attributable mainly to the increase in North American automotive sales and production. Selling and administrative expenses decreased $162,000, or (9.9%), for the second quarter ended December 31, 2002, as compared with the second quarter of the prior year. Selling and administrative expenses increased $51,000, or 1.7%, as compared with the six month period ended December 31, 2001. The increase is attributable mainly to increases in compensation and related expenses. Other Expenses and Income in the second quarter of last year includes $1,450,000 ($950,000 net of tax) received from the sale of stock acquired by the Registrant in connection with the demutualization of an insurance company. The Registrant has insurance with the company which was a mutual insurance company. The insurance company converted from a mutual insurance company to a stock insurance company and, in the conversion, the Registrant received stock of the insurance company which it was entitled to sell. The Registrant sold all of the stock resulting in the income. The Registrant is dependent upon sales to the two largest U.S. automobile manufacturers, a condition that has existed for at least fifty years. Although the Registrant has purchase orders from such customers, such purchase orders generally provide for supplying the customer's requirements for a particular model or model year rather than for manufacturing a specific quantity of products. The loss of any one of such customers or significant purchase orders could have a material adverse effect on the Registrant. These customers are also able to exert considerable pressure on component suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. There can be no assurance that the additional costs of increased quality standards, price reductions or additional capabilities required by such customers will not have a material adverse effect on the financial condition or results of operations of the Registrant. DIVIDENDS: The Board of Directors, in October, 2002, declared a $0.10 per share quarterly dividend paid January 3, 2003, to shareholders of record December 3, 2002. LIQUIDITY AND CAPITAL RESOURCES: Working capital increased by $225,000 from $20,410,000 at June 30, 2002, to $20,635,000 at December 31, 2002. The increase is mainly attributable to the reduction in accounts payable, payroll and employee benefits. At December 31, 2002, the Company had available $17,115,000 under its bank credit agreement. Capital expenditures for the six month period ended December 31, 2002, were approximately $2.5 million, and, for the year, are expected to approximate $6.8 million, of which approximately $4.5 million has been committed as of December 31, 2002. There have been no material changes concerning environmental matters since those reported in the Registrant's Report on Form 10-K for the fiscal year ended June 30, 2002. FORWARD LOOKING STATEMENTS: The foregoing discussion and analysis with regard to the Registrant's expected capital expenditures contains a "forward looking statement" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended, with respect to expectations for future - 7 - periods which are subject to various uncertainties, including the loss of, or reduction in business with, the Company's principal customers, work stoppages, strikes and slowdowns at the Company's facilities and those of its customers; adverse changes in economic conditions generally and those of the automotive industry, specifically. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk is limited to interest rate risk on its revolving credit and term loan agreement. At December 31, 2002, the carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, debt and investments approximate fair value. Accordingly, management believes this risk is not material. Item 4. Controls and Procedures Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be disclosed in the Company's periodic SEC reports. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. PART II OTHER INFORMATION Item 1. Legal Proceedings The information set forth at the conclusion of the Liquidity and Capital Resources discussion in Item 2 of Part I concerning environmental matters is incorporated by reference. Item 6. Exhibits and Reports on Form 8-K (a) A Form 8-K Report was filed November 14, 2002, to furnish the SEC the Certifications of the Company's Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 relating to the Company's Quarterly Report on Form 10-Q filed the same day. (b) There were no unusual charges or credits to income, nor a change in independent accountants. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FEDERAL SCREW WORKS ------------------------------ Date February 14, 2003 /s/ W. T. ZurSchmiede, Jr. ------------------- ------------------------------ W. T. ZurSchmiede, Jr. Chairman of the Board and Chief Financial Officer CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Thomas ZurSchmiede, certify that: 1) I have reviewed this Quarterly Report on Form 10-Q of Federal Screw Works. 2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. 3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operation and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report. 4) The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant, and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant is made known to us by others within the Registrant particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report; and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. 5) The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6) The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Thomas ZurSchmiede ---------------------- Thomas ZurSchmiede President and Chief Executive Officer - Principal Executive Officer Dated: February 6, 2003 ---------------- CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, W. Tom ZurSchmiede, Jr., certify that: 1) I have reviewed this Quarterly Report on Form 10-Q of Federal Screw Works. 2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. 3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operation and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report. 4) The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant is made known to us by others within the Registrant particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report; and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. 5) The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6) The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ W. T. ZurSchmiede, Jr. --------------------------- W. T. ZurSchmiede, Jr. Chairman of the Board, Chief Financial Officer - Principal Financial Officer Dated: February 6, 2003 ---------------- 10-Q EXHIBIT INDEX EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002