UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 2003
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: 1-12123
JLG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1199382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 JLG Drive, McConnellsburg, PA 17233-9533
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(717) 485-5161
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No | |
The number of shares of capital stock outstanding as of November 21, 2003 was
43,415,731.
Explanatory Note
We have restated our financial statements for the fiscal quarter ended October
31, 2003 and related disclosures in this report to correct our premature
recognition of revenues from one transaction with a single customer that we
originally recorded in July 2003. We have also restated our financial statements
for the fiscal year ended July 31, 2003 and related disclosures in our annual
report on Form 10-K. Upon re-examination of the transaction terms and subsequent
history we concluded that the transaction was incorrectly reported as a sale,
rather than a consignment sale, which under generally accepted accounting
principles, allows recognition of the revenues only upon final sale of the
equipment by the consignee. We notified both the Audit Committee of the Board of
Directors and Ernst & Young LLP, the Company's independent auditors regarding
this matter and have conducted an internal review of our revenue recognition
practices for all periods for which financial statements are included in this
report. In addition, Ernst & Young has performed agreed-upon procedures with
respect to such financial statements for the same periods. As a result of our
internal review and the procedures performed by Ernst & Young we have not
identified any other transactions or circumstances that would require us to
alter the scope of the restatement beyond what we disclosed in our current
report on Form 8-K dated February 18, 2004. The restatement of our fiscal 2003
financial statements resulted in an $8.7 million reduction of revenue and $1.8
million reduction in net income in the fourth quarter of fiscal 2003. Prior to
the date of this amended report, all of the equipment had been sold by the
consignee. Accordingly, the reclassification of this transaction will result in
an increase in revenue and profit recognized over the first three quarters of
fiscal 2004, with an increase of $1.4 million in revenue and $300,000 in net
income for the first quarter ended October 31, 2003 covered by this report.
Generally, no attempt has been made in this Amendment No. 1 to modify or update
other disclosures presented in the original report on Form 10-Q except as
required to reflect the effects of the restatement. This Form 10-Q/A generally
does not reflect events occurring after the filing of the Form 10-Q or modify or
update those disclosures affected by subsequent events. Accordingly, this Form
10-Q/A should be read in conjunction with our filings made subsequent to the
filing of the original Form 10-Q. Consequently, all other information not
affected by the restatement is unchanged and reflects the disclosures made at
the time of the original filing of the Form 10-Q on November 26, 2003. The
following items have been amended as a result of the restatement:
- Item 1, Financial Information;
- Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations;
- Item 4, Controls and Procedures; and
- Item 6, Exhibits and Reports on Form 8-K.
Our Chief Executive Officer and Chief Financial Officer have also reissued their
certifications required by Sections 302 and 906 of the Sarbanes Oxley Act.
TABLE OF CONTENTS
PART 1
Item 1. Financial Information.......................................... 1
Condensed Consolidated Balance Sheets......................... 1
Condensed Consolidated Statements of Income................... 2
Condensed Consolidated Statements of Cash
Flows......................................................... 3
Notes to Condensed Consolidated Financial
Statements.................................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................ 26
Item 4. Controls and Procedures........................................ 26
Independent Accountants' Review Report................................... 28
PART II
Item 4. Submission of Matters to a Vote of Security Holders............ 29
Item 6. Exhibits and Reports on Form 8-K............................... 29
Signatures .............................................................. 31
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JLG INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) October 31, July 31,
2003 Restated 2003 Restated
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets
Cash and cash equivalents $ 11,288 $ 132,809
Accounts receivable - net 289,729 257,519
Finance receivables - net 2,573 3,168
Pledged finance receivables - net 39,380 41,334
Inventories 153,200 122,675
Other current assets 54,252 46,474
------------- -------------
Total current assets 550,422 603,979
Property, plant and equipment - net 92,525 79,699
Equipment held for rental - net 18,236 19,651
Finance receivables, less current portion 30,484 31,156
Pledged finance receivables, less current portion 114,382 119,073
Goodwill - net 66,450 29,509
Intangible assets - net 34,448 --
Other assets 66,002 53,135
------------- -------------
$ 972,949 $ 936,202
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Short-term debt and current portion of long-term debt $ 2,278 $ 1,472
Current portion of limited recourse debt from finance receivables
monetizations 40,153 45,279
Accounts payable 68,197 83,408
Accrued expenses 117,844 91,057
------------- -------------
Total current liabilities 228,472 221,216
Long-term debt, less current portion 311,603 294,158
Limited recourse debt from finance receivables monetizations,
less current portion 113,388 119,661
Accrued post-retirement benefits 27,199 26,179
Other long-term liabilities 29,790 15,160
Provisions for contingencies 13,586 12,114
Shareholders' equity
Capital stock:
Authorized shares: 100,000 at $.20 par
Issued and outstanding shares: 43,416; fiscal 2003 - 43,367 8,683 8,673
Additional paid-in capital 23,789 23,597
Retained earnings 228,806 228,490
Unearned compensation (5,145) (5,428)
Accumulated other comprehensive loss (7,222) (7,618)
------------- -------------
Total shareholders' equity 248,911 247,714
------------- -------------
$ 972,949 $ 936,202
============= =============
The accompanying notes are an integral part of these financial statements.
1
JLG INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited) Three Months Ended
October 31,
2003 Restated 2002
------------- -------------
Revenues
Net sales $ 208,392 $ 154,388
Financial products 3,676 4,390
Rentals 1,517 1,709
------------- -------------
213,585 160,487
Cost of sales 175,319 131,371
------------- -------------
Gross profit 38,266 29,116
Selling and administrative expenses 23,716 17,485
Product development expenses 4,773 3,901
Restructuring charges 11 --
------------- -------------
Income from operations 9,766 7,730
Interest expense (9,876) (5,504)
Miscellaneous, net 940 (1,742)
------------- -------------
Income before taxes 830 484
Income tax provision 297 155
------------- -------------
Net income $ 533 $ 329
============= =============
Earnings per common share $ .01 $ .01
============= =============
Earnings per common share - assuming dilution $ .01 $ .01
============= =============
Cash dividends per share $ .005 $ .005
============= =============
Weighted average shares outstanding 42,656 42,541
============= =============
Weighted average shares outstanding - assuming dilution 43,575 42,853
============= =============
The accompanying notes are an integral part of these financial statements.
2
JLG INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Three Months Ended
October 31,
2003
Restated 2002
-------- ---------
OPERATIONS
Net income $ 533 $ 329
Adjustments to reconcile net income to cash flow from
operating activities:
Loss on sale of property, plant and equipment 293 3
Loss (gain) on sale of equipment held for rental 1,320 (697)
Non-cash charges and credits:
Depreciation and amortization 6,486 5,268
Other 3,319 2,599
Changes in selected working capital items:
Accounts receivable 1,020 27,274
Inventories 6,885 (12,266)
Accounts payable (34,954) (33,010)
Other operating assets and liabilities 44 (9,692)
Changes in finance receivables 1,055 (27,352)
Changes in pledged finance receivables (15,452) (2,395)
Changes in other assets and liabilities (3,899) (3,592)
--------- ---------
Cash flow from operating activities (33,350) (53,531)
INVESTMENTS
Purchases of property, plant and equipment (3,811) (1,650)
Proceeds from the sale of property, plant and equipment 89 3
Purchases of equipment held for rental (2,209) (3,624)
Proceeds from the sale of equipment held for rental 1,141 2,505
Cash portion of OmniQuip acquisition (95,371) --
Other (46) (57)
--------- ---------
Cash flow from investing activities (100,207) (2,823)
FINANCING
Net increase in short-term debt 594 11,024
Issuance of long-term debt 22,000 93,000
Repayment of long-term debt (22,086) (43,202)
Issuance of limited recourse debt 10,871 --
Repayment of limited recourse debt (253) --
Payment of dividends (216) (214)
Exercise of stock options and issuance of restricted awards 485 275
--------- ---------
Cash flow from financing activities 11,395 60,883
CURRENCY ADJUSTMENTS
Effect of exchange rate changes on cash 641 (553)
CASH
Net change in cash and cash equivalents (121,521) 3,976
Beginning balance 132,809 6,205
--------- ---------
Ending balance $ 11,288 $ 10,181
========= =========
The accompanying notes are an integral part of these financial statements.
3
JLG INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
(in thousands, except per share data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. In our opinion, we have included all normal recurring adjustments
necessary for a fair presentation of results for the unaudited interim periods.
Interim results for the three-month period ended October 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
as a whole. For further information, refer to the consolidated financial
statements and notes thereto included in our annual report on Form 10-K/A for
the fiscal year ended July 31, 2003.
Where appropriate, we have reclassified certain amounts in fiscal 2003 to
conform to the fiscal 2004 presentation.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation of variable interest entities. FIN 46 requires certain variable
interest entities ("VIE's") to be consolidated by the primary beneficiary if the
entity does not effectively disperse risks among the parties involved. The
provisions of FIN 46 are effective immediately for those variable interest
entities created after January 31, 2003. The provisions are effective for the
first annual or interim period beginning after December 15, 2003. While we
believe FIN 46 will not have a material effect on our financial position or
results of operations, we are continuing to evaluate the effect of adoption of
FIN 46, which will occur in the second quarter of fiscal 2004.
NOTE 3 - ACQUISITION
On August 1, 2003, we acquired the OmniQuip business unit ("OmniQuip") of
Textron Inc., which includes all operations relating to the Sky Trak(R) and
Lull(R) brand commercial telehandler products and the All-Terrain Lifter, Army
System and the Millennia Military Vehicle military telehandler products, for
$105.4 million, which included transaction expenses of $5.4 million, with $90
million paid in cash at closing and $10 million paid in the form of an unsecured
subordinated promissory note due on the second anniversary of the closing date.
In addition, we will incur estimated expenditures totaling $37.9 million over a
four-year period related to our integration plan. The integration plan
expenditures are associated with personnel reductions, facility closings, plant
start-up costs and facility operating expenses. We funded the cash portion of
the purchase price and the transaction expenses with the remaining unallocated
proceeds from the sale of our $125 million senior notes due 2008 and anticipate
funding integration expenses with cash generated from operations and borrowings
under our credit facilities.
We made this acquisition because of its strategic fit and adherence to our
growth strategy and acquisition criteria. This acquisition was an addition to
our Machinery segment and has been accounted for as a purchase. Goodwill arising
from the purchase price reflects a number of factors including the future
earnings and cash flow potential of the acquired business and the complementary
strategic fit and resulting synergies this acquisition brings to existing
operations.
4
The following table summarizes our estimated fair values of the OmniQuip assets
acquired and liabilities assumed on August 1, 2003:
Accounts receivable $ 33,940
Inventory 37,438
Property, plant and equipment 13,929
Goodwill 36,941
Other intangible assets, primarily trademarks and patents 34,210
Accounts payable (19,565)
Other assets and liabilities, net (27,892)
Assumed debt (3,630)
---------
Net cash consideration $ 105,371
=========
Of the $34.2 million of acquired intangible assets, $23.6 million was assigned
to registered trademarks that are not subject to amortization. The remaining
$10.6 million of acquired intangible assets has a weighted-average useful life
of approximately 8 years. The intangible assets that make up that amount include
distributor and customer relations of $1.0 million (20-year weighted-average
useful life), patents of $5.8 million (9-year weighted-average useful life), and
contracts of $3.8 million (2-year weighted-average useful life). The entire
amount of goodwill is expected to be deductible for tax purposes.
We continue to evaluate the initial purchase price allocation for the OmniQuip
acquisition and will adjust the allocations as additional information relative
to the estimated integration costs of the acquired businesses and the fair
market values of the assets and liabilities of the businesses become known.
Examples of factors and information that we use to refine the allocations
include: tangible and intangible asset appraisals; cost data related to
redundant facilities; employee/personnel data related to redundant functions;
product line integration and rationalization information; and management
capabilities. In addition, we will accrue the estimated cost of integration
activities when such amounts are determined, but in no event beyond one year
from the date of acquisition.
The operating results of OmniQuip are included in our consolidated results from
operations beginning August 1, 2003.
The following unaudited pro forma financial information for the three months
ended October 31, 2002 reflects our consolidated results of operations as if the
OmniQuip acquisition had taken place on August 1, 2002. The unaudited pro forma
financial information is not necessarily indicative of the results of operations
had the transaction been effected on the assumed date.
JLG OmniQuip Total
-------- -------- --------
Revenues $160,487 $ 60,061 $220,548
Net income (loss) 329 (14,849) (14,520)
Net income (loss) per common share .01 (.35) (.34)
Net income (loss) per common share - assuming dilution .01 (.35) (.34)
In connection with our acquisitions, we assess and formulate plans related to
their future integration. This process begins during the due diligence process
and is concluded within twelve months of the acquisition. We accrue estimates
for certain costs, related primarily to personnel reductions and facility
closures or restructurings, anticipated at the date of acquisition, in
accordance with Emerging Issues Task Force Issue No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." Adjustments to
these estimates are made up to 12 months from the acquisition date as plans are
finalized. To the extent these accruals are not utilized for the intended
purpose, the excess is recorded as a reduction of the purchase price, typically
by reducing recorded goodwill balances. Costs incurred in excess of the recorded
accruals are expensed as incurred.
5
Accrued liabilities associated with these integration activities include the
following (in thousands, except headcount):
Planned Headcount Reduction:
Number of employees related to OmniQuip acquisition 350
Reductions (91)
--------
Balance at October 31, 2003 259
========
Involuntary Employee Termination Benefits:
Accrual related to OmniQuip acquisition $ 10,030
Costs incurred (279)
--------
Balance at October 31, 2003 $ 9,751
========
Facility Closure and Restructuring Costs:
Accrual related to OmniQuip acquisition $ 13,601
Costs incurred (84)
--------
Balance at October 31, 2003 $ 13,517
========
NOTE 4 - GOODWILL
The following table presents the rollforward of goodwill for the period from
July 31, 2003 to October 31, 2003:
Balance as of August 1, 2003 $ 29,509
Acquisition 36,941
--------
Balance as of October 31, 2003 $ 66,450
========
There were no dispositions of businesses with related goodwill during the three
months ended October 31, 2003. On August 1, 2003, we acquired OmniQuip for
$105.4 million which caused the increase in the recorded goodwill. The acquired
goodwill change in the period related to our Machinery segment.
We assess goodwill for impairment at least annually at the beginning of the
fourth quarter of each fiscal year or as "triggering" events occur. In making
this assessment, we rely on a number of factors including operating results,
business plans, economic projections, anticipated future cash flows, and
transactions and market place data. There are inherent uncertainties related to
these factors and management's judgment in applying them to the analysis of
goodwill impairment which may affect the carrying value of goodwill.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of the following at October 31, 2003:
Gross Net
Carrying Accumulated Carrying
Value Amortization Value
-------- ------------ --------
Finite Lived
Patents $ 5,810 $ 171 $ 5,639
Contracts 3,800 475 3,325
Other 2,114 230 1,884
-------- ------------ --------
11,724 876 10,848
Indefinite Lived
Trademarks 23,600 -- 23,600
-------- ------------ --------
Total Intangible Assets $ 35,324 $ 876 $ 34,448
======== ============ ========
6
NOTE 6 - INVENTORIES AND COST OF SALES (RESTATED)
A precise inventory valuation under the LIFO (last-in, first-out) method can
only be made at the end of each fiscal year; therefore, interim LIFO inventory
valuation determinations, including the determination at October 31, 2003, must
necessarily be based on our estimate of expected fiscal year-end inventory
levels and costs. The cost of United States inventories is based primarily on
the LIFO (last-in, first-out) method. All other inventories are based on the
FIFO (first-in, first-out) method.
Inventories consist of the following:
October 31, July 31,
2003 2003
----------- --------
Finished goods $ 86,436 $ 77,852
Raw materials and work in process 73,432 51,267
----------- --------
159,868 129,119
Less LIFO provision 6,668 6,444
----------- --------
$ 153,200 $122,675
=========== ========
The cost of United States inventories stated under the LIFO method was 44% and
51% at October 31, 2003 and July 31, 2003, respectively, of our total inventory.
NOTE 7 - FINANCE AND PLEDGED FINANCE RECEIVABLES
Finance receivables represent sales-type leases resulting from the sale of our
products. Our net investment in finance and pledged finance receivables was as
follows at:
October 31, July 31,
2003 2003
----------- ---------
Gross finance and pledged finance receivables $ 207,383 $ 205,390
Estimated residual value 22,514 35,337
----------- ---------
229,897 240,727
Unearned income (39,924) (42,811)
----------- ---------
Net finance and pledged finance receivables 189,973 197,916
Provision for losses (3,154) (3,185)
----------- ---------
$ 186,819 $ 194,731
=========== =========
Of the finance receivables balances at October 31, 2003 and July 31, 2003,
$153.8 million and $160.4 million, respectively, are pledged finance receivables
resulting from the sale of finance receivables through monetization
transactions. In compliance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," these
transactions are accounted for as debt on our Condensed Consolidated Balance
Sheets. The maximum loss exposure associated with these transactions was $23.4
million as of October 31, 2003. As of October 31, 2003, our provision for losses
related to these transactions was $2.7 million.
7
The following table displays the contractual maturity of our finance and pledged
finance receivables. It does not necessarily reflect future cash collections
because of various factors including the possible refinancing or sale of finance
receivables and repayments prior to maturity.
For the twelve-month periods ended October 31:
2004 $ 56,486
2005 47,921
2006 44,340
2007 32,032
2008 14,463
Thereafter 12,141
Residual value in equipment at lease end 22,514
Less: unearned finance income (39,924)
--------
Net investment in leases $189,973
========
Provisions for losses on finance and pledged finance receivables are charged to
income in amounts sufficient to maintain the allowance at a level considered
adequate to cover potential losses in the existing receivable portfolio.
NOTE 8 - STOCK BASED INCENTIVE PLANS (RESTATED)
At October 31, 2003, we have two stock-based compensation plans covering
employees and directors. We account for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Under this opinion, we do not recognize
compensation expense arising from the grant of stock options because the
exercise price of our stock options equals the market price of the underlying
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for the
three months ended October 31:
2003 2002
-------- --------
Net income, as reported $ 533 $ 329
Less: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects 741 852
-------- --------
Pro forma net income (loss) $ (208) $ (523)
======== ========
Earnings per share:
Earnings per common share - as reported $ .01 $ .01
======== ========
Earnings (loss) per common share - pro forma $ -- ($ .01)
======== ========
Earnings per common share - assuming dilution - as reported $ .01 $ .01
======== ========
Earnings (loss) per common share - assuming dilution - pro forma $ -- ($ .01)
======== ========
8
NOTE 9 - BASIC AND DILUTED EARNINGS PER SHARE (RESTATED)
This table presents our computation of basic and diluted earnings per share for
the three months ended October 31:
2003 2002
-------- --------
Net income $ 533 $ 329
======== ========
Denominator for basic earnings per share - weighted average shares 42,656 42,541
Effect of dilutive securities - employee stock options and
unvested restricted shares 919 312
-------- --------
Denominator for diluted earnings per share - weighted average
Shares adjusted for dilutive securities 43,575 42,853
======== ========
Earnings per common share $ .01 $ .01
======== ========
Earnings per common share - assuming dilution $ .01 $ .01
======== ========
During the quarter ended October 31, 2003, options to purchase 2.2 million
shares of capital stock at a range of $10.91 to $21.94 per share were not
included in the computation of diluted earnings per share because exercise
prices for the options were more than the average market price of the capital
stock.
NOTE 10 - SEGMENT INFORMATION (RESTATED)
We have organized our business into three segments - Machinery, Equipment
Services and Access Financial Solutions. The Machinery segment contains the
design, manufacture and sale of new equipment. The Equipment Services segment
contains after-sales service and support, including parts sales, equipment
rentals, and used and remanufactured or reconditioned equipment sales. The
Access Financial Solutions segment contains financing and leasing activities. We
evaluate performance of the Machinery and Equipment Services segments and
allocate resources based on operating profit before interest, miscellaneous
income/expense and income taxes. We evaluate performance of the Access Financial
Solutions segment and allocate resources based on its operating profit less
interest expense. Intersegment sales and transfers are not significant. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
Our business segment information consisted of the following for the three months
ended October 31:
2003 2002
---------- ----------
Revenues:
Machinery $ 168,958 $ 124,546
Equipment Services 40,815 31,371
Access Financial Solutions 3,812 4,570
---------- ----------
$ 213,585 $ 160,487
========== ==========
Segment profit (loss):
Machinery $ 6,593 $ 4,979
Equipment Services 11,068 5,254
Access Financial Solutions 284 1,098
General corporate (11,093) (5,736)
---------- ----------
Segment profit 6,852 5,595
Add Access Financial Solutions' interest expense 2,914 2,135
---------- ----------
Operating income $ 9,766 $ 7,730
========== ==========
9
This table presents our business segment assets at:
October 31, July 31,
2003 2003
----------- --------
Machinery $ 647,439 $563,929
Equipment Services 40,164 36,574
Access Financial Solutions 208,061 237,632
General corporate 77,285 98,067
----------- --------
$ 972,949 $936,202
=========== ========
We manufacture our products in the United States and Belgium and sell these
products globally, but principally in North America, Europe, Australia and South
America. No single foreign country is significant to the consolidated
operations. Our revenues by geographic area consisted of the following for the
three months ended October 31:
2003 2002
-------- --------
United States $171,671 $117,350
Europe 23,951 31,248
Other 17,963 11,889
-------- --------
$213,585 $160,487
======== ========
NOTE 11 - COMPREHENSIVE INCOME (RESTATED)
On an annual basis, comprehensive income is disclosed in the Statement of
Shareholders' Equity. This statement is not presented on a quarterly basis. The
following table presents the components of comprehensive income for the three
months ended October 31:
2003 2002
------ ------
Net income $ 533 $ 329
Aggregate translation adjustment 396 (548)
------ ------
$ 929 $ (219)
====== ======
NOTE 12 - PRODUCT WARRANTY
This table presents our reconciliation of accrued product warranty during the
period from July 31, 2003 to October 31, 2003:
Balance as of August 1, 2003 $ 8,585
Additions due to acquisition of OmniQuip 5,683
Payments (1,702)
Accruals 1,540
Changes in the liability for accruals (531)
--------
Balance as of October 31, 2003 $ 13,575
========
NOTE 13 - RESTRUCTURING COSTS
During the second quarter of fiscal 2003, we announced further actions related
to our ongoing longer-term strategy to streamline operations and reduce fixed
and variable costs. As part of our capacity rationalization plan for our
Machinery segment that commenced in early 2001, the 130,000-square foot
Sunnyside facility in Bedford, Pennsylvania, which produced selected scissor
lift models, was temporarily idled and production integrated into our
Shippensburg, Pennsylvania facility. Additionally, reductions in selling,
administrative and product development costs resulted from changes in our global
organization and from process consolidations.
The announced plan contemplates that we will reduce a total of 189 people
globally and transfer 99 production jobs from the Sunnyside facility to the
Shippensburg facility. As a result, pursuant to the plan we anticipate incurring
a pre-
10
tax charge of $5.9 million, consisting of $3.5 million in restructuring costs
associated with personnel reductions and employee relocation and lease and
contract terminations and $2.4 million in charges related to relocating certain
plant assets and start-up costs. In addition, we will spend approximately $3.5
million on capital requirements. Almost all of these expenses will be cash
charges.
As noted above, the continuing streamlining of our operations will result in
$3.5 million in personnel reductions and relocation and lease and contract
terminations and will be recorded as a restructuring cost. In accordance with
new accounting requirements, through the first quarter of fiscal 2004, we
recognized $2.8 million of the pre-tax restructuring charge, consisting of an
accrual for termination benefit costs and employee relocation costs. In
addition, we incurred $1.1 million of costs related to relocating certain plant
assets and start-up costs, which was recorded as a cost of sales. Also, through
the first quarter of fiscal 2004, we spent approximately $3.4 million on capital
requirements. We anticipate recording the remaining restructuring and
restructuring-related costs in our second quarter of fiscal 2004.
The following table presents a rollforward of our activity in the restructuring
accrual and our charges related to relocating certain plant assets and start-up
costs associated with the move of the Bedford operations to the Shippensburg
facility and costs related to our process consolidations:
Other Restructuring
Termination Restructuring Related
Benefits Costs Total Charges
----------- ------------- ------- -------------
Restructuring charge recorded during second
quarter of fiscal 2003 $ 1,183 $ -- $ 1,183 $ 2,402
Utilization of reserves during the
second quarter of fiscal 2003 - cash (114) -- (114) (19)
----------- ------------- ------- -------------
Balance at January 31, 2003 1,069 -- 1,069 2,383
Restructuring charge recorded during the
third quarter of fiscal 2003 1,175 258 1,433 --
Utilization of reserves during the third
quarter of fiscal 2003 - cash (626) (38) (664) (318)
----------- ------------- ------- -------------
Balance at April 30, 2003 1,618 220 1,838 2,065
Restructuring charge recorded during the
fourth quarter of fiscal 2003 45 93 138 --
Utilization of reserves during the fourth
quarter of fiscal 2003 - cash (1,316) (89) (1,405) (721)
----------- ------------- ------- -------------
Balance at July 31, 2003 347 224 571 1,344
Restructuring charge recorded during the
first quarter of fiscal 2004 3 8 11 --
Utilization of reserves during the first
quarter of fiscal 2004 - cash (127) -- (127) (52)
----------- ------------- ------- -------------
Balance at October 31, 2003 $ 223 $ 232 $ 455 $ 1,292
=========== ============= ======= =============
During the third quarter of fiscal 2002, we announced the closure of our
manufacturing facility in Orrville, Ohio as part of our capacity rationalization
plan for our Machinery segment. Operations at that facility have been integrated
into our McConnellsburg, Pennsylvania facility. As a result, through October 31,
2003, we have incurred a pre-tax charge of $6.9 million, consisting of $1.2
million for termination benefits and lease termination costs, a $4.9 million
asset write-down and $0.9 million in charges related to relocating certain plant
assets and start-up costs associated with the move of the Orrville operations to
the McConnellsburg facility.
11
The following table presents a rollforward of our activity in the restructuring
accrual and our charges related to relocating certain plant assets and start-up
costs associated with the move of the Orrville operations to McConnellsburg:
Other
Termination Impairment Restructuring Restructuring
Benefits of Assets Costs Total Related Charges
----------- ---------- ------------- ------- ---------------
Total restructuring charge $ 1,120 $ 4,613 $ 358 $ 6,091 $ 1,658
Fiscal 2002 utilization of
reserves - cash (135) -- (86) (221) (399)
Fiscal 2002 utilization of
reserves - non-cash -- (4,613) -- (4,613) (225)
----------- ---------- ------------- ------- ---------------
Balance at July 31, 2002 985 -- 272 1,257 1,034
Fiscal 2003 utilization of
reserves - cash (985) -- (88) (1,073) (228)
----------- ---------- ------------- ------- ---------------
Balance at July 31, 2003 -- -- 184 184 806
Fiscal 2004 utilization of
reserves - cash -- -- (56) (56) --
----------- ---------- ------------- ------- ---------------
Balance at October 31, 2003 $ -- $ -- $ 128 $ 128 $ 806
=========== ========== ============= ======= ===============
At October 31, 2003, we included $6.3 million of assets held for sale on the
Condensed Consolidated Balance Sheets in other current assets and ceased
depreciating these assets during the third quarter of fiscal 2002 and the fourth
quarter of fiscal 2001.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
We are a party to personal injury and property damage litigation arising out of
incidents involving the use of our products. Our insurance program for fiscal
2004 is comprised of a self-insured retention of $3 million per occurrence for
domestic claims, insurance coverage of $2 million for international claims and
catastrophic coverage for domestic and international claims of $100 million in
excess of the retention and international primary coverage. We contract with an
independent firm to provide claims handling and adjustment services. Our
estimates with respect to claims are based on internal evaluations of the merits
of individual claims and the reserves assigned by our independent insurance
claims adjustment firm. We frequently review the methods of making such
estimates and establishing the resulting accrued liability, and any resulting
adjustments are reflected in current earnings. Claims are paid over varying
periods, which generally do not exceed five years. Accrued liabilities for
future claims are not discounted.
With respect to all product liability claims of which we are aware, we
established accrued liabilities of $20.2 million and $19.0 million at October
31, 2003 and July 31, 2003, respectively. These amounts are included in accrued
expenses and provisions for contingencies on our Condensed Consolidated Balance
Sheets. While our ultimate liability may exceed or be less than the amounts
accrued, we believe that it is unlikely that we would experience losses that are
materially in excess of such reserve amounts. The provisions for self-insured
losses are included within cost of sales in our Condensed Consolidated
Statements of Income. As of October 31, 2003 and July 31, 2003, there were no
insurance recoverables or offset implications and there were no claims by us
being contested by insurers.
At October 31, 2003, we are a party to multiple agreements whereby we guarantee
$111.6 million in indebtedness of others, including the $23.4 million maximum
loss exposure associated with our limited recourse agreements. As of October 31,
2003, four customers owed approximately 47% of the guaranteed indebtedness.
Under the terms of these and various related agreements and upon the occurrence
of certain events, we generally have the ability, among other things, to take
possession of the underlying collateral and/or make demand for reimbursement
from other parties for any payments made by us under these agreements. At
October 31, 2003, we had $7.3 million reserved related to these agreements,
including a provision for losses of $2.7 million related to our limited recourse
agreements. If the financial condition of our customers were to deteriorate
resulting in an impairment of their ability to make payments, additional
allowances may be required. While we believe it is unlikely that we would
experience losses under these
12
agreements that are materially in excess of the amounts reserved, we can provide
no assurance that the financial condition of the third parties will not
deteriorate resulting in the customers' inability to meet its obligation and, in
the event that occurs, we can not guarantee that the collateral underlying the
agreement will not result in losses materially in excess of those reserved.
We have received notices of proposed adjustments from the Pennsylvania
Department of Revenue ("PA") in connection with settlements and audits of the
tax years 1998 through 2001. The principal adjustments proposed by PA consist
of the disallowance of a royalty deduction taken in our income tax returns and
the denial of the manufacturing exemption taken in our capital stock tax
returns. We believe that the state has acted contrary to applicable law and we
are vigorously disputing their position. Should PA prevail in its disallowance
of the royalty deduction and denial of the manufacturing exemption, it would
result in a cash outflow by us of approximately $7 million. Although unlikely,
we believe that any such cash outflow would not occur until some time after
2004.
NOTE 15 - BANK CREDIT LINES AND LONG-TERM DEBT
Our long-term debt was as follows at:
October 31, July 31,
2003 2003
----------- ---------
8 3/8% senior subordinated notes due 2012 $ 175,000 $ 175,000
8 1/4% senior notes due 2008 125,000 125,000
Fair value of hedging adjustment (2,240) (6,353)
Other 14,878 1,348
----------- ---------
312,638 294,995
Less current portion 1,035 837
----------- ---------
$ 311,603 $ 294,158
=========== =========
The aggregate amounts of long-term debt outstanding at October 31, 2003 which
will become due in 2004 through 2008 are: $1.0 million, $11.1 million, $1.1
million, $1.1 million and $123.9 million, respectively.
At October 31, 2003, the fair value of our $175 million 8 3/8% senior
subordinated notes due 2012 and our $125 million 8 1/4% senior unsecured notes
due 2008 was $173.3 million and $128.8 million, respectively, based on quoted
market values. At July 31, 2003, the fair value of our $175 million 8 3/8%
senior subordinated notes due 2012 and our $125 million 8 1/4% senior unsecured
notes due 2008 was $158.5 million and $126.3 million, respectively, based on
quoted market values. The fair value of our remaining long-term debt at October
31, 2003 and at July 31, 2003 is estimated to approximate the carrying amount
reported in the Condensed Consolidated Balance Sheets based on current interest
rates for similar types of borrowings.
NOTE 16 - LIMITED RECOURSE DEBT
As a result of the sale of finance receivables through limited recourse
monetization transactions, we have $153.5 million of limited recourse debt
outstanding as of October 31, 2003. The aggregate amounts of limited recourse
debt outstanding at October 31, 2003 which will become due in 2004 through 2008
are: $40.2 million, $35.4 million, $34.8 million, $25.4 million and $9.6
million, respectively.
NOTE 17 - PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment consists of the following at:
October 31, July 31,
2003 2003
----------- ---------
Land and improvements $ 7,167 $ 7,119
Buildings and improvements 56,917 51,420
Machinery and equipment 128,712 117,564
----------- ---------
192,796 176,103
Less allowance for depreciation and amortization (100,271) (96,404)
----------- ---------
$ 92,525 $ 79,699
=========== =========
13
At October 31, 2003, assets under capital leases totaled approximately $3.9
million. Accumulated amortization of assets held under capital leases totaled
approximately $0.1 million at October 31, 2003.
NOTE 18 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR
SUBSIDIARIES (RESTATED)
Certain of our indebtedness is guaranteed by our significant subsidiaries (the
"guarantor subsidiaries"), but is not guaranteed by our other subsidiaries (the
"non-guarantor subsidiaries"). The guarantor subsidiaries are all wholly owned,
and the guarantees are made on a joint and several basis and are full and
unconditional subject to a standard limitation which provides that the maximum
amount guaranteed by each guarantor will not exceed the maximum amount
guaranteed without making the guarantee void under fraudulent conveyance laws.
Separate financial statements of the guarantor subsidiaries have not been
presented because management believes it would not be material to investors. The
principal elimination entries eliminate investment in subsidiaries, intercompany
balances and transactions and certain other eliminations to properly eliminate
significant transactions in accordance with our accounting policy for the
principles of consolidated and statement presentation. The condensed
consolidating financial information of the Company and its subsidiaries are as
follows:
CONDENSED CONSOLIDATED BALANCE SHEET
As of October 31, 2003
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ ------------
ASSETS
- ------
Accounts receivable - net $ 163,311 $ 52,854 $ 76,119 $ (2,555) $ 289,729
Finance receivables - net 5,992 24,480 (1,454) 4,039 33,057
Pledged finance receivables - net -- 153,762 -- -- 153,762
Inventories 52,781 54,107 45,989 323 153,200
Property, plant and equipment - net 49,621 28,419 14,969 (484) 92,525
Equipment held for rental - net 869 14,821 2,546 -- 18,236
Investment in subsidiaries 350,121 -- 5,014 (355,135) --
Other assets 85,410 111,679 35,337 14 232,440
--------- ------------ ------------- ------------ ------------
$ 708,105 $ 440,122 $ 178,520 $ (353,798) $ 972,949
========= ============ ============= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 111,255 $ 59,296 $ 36,236 $ (20,746) $ 186,041
Long-term debt, less current portion 298,230 13,373 -- -- 311,603
Limited recourse debt from finance
receivables monetizations, less
current portion -- 113,388 -- -- 113,388
Other liabilities 24,768 (81,808) 148,748 21,298 113,006
--------- ------------ ------------- ------------ ------------
Total liabilities 434,253 104,249 184,984 552 724,038
--------- ------------ ------------- ------------ ------------
Shareholders' equity 273,852 335,873 (6,464) (354,350) 248,911
--------- ------------ ------------- ------------ ------------
$ 708,105 $ 440,122 $ 178,520 $ (353,798) $ 972,949
========= ============ ============= ============ ============
14
CONDENSED CONSOLIDATED BALANCE SHEET
As of July 31, 2003
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ ------------
ASSETS
- ------
Accounts receivable - net $ 142,552 $ 40,059 $ 74,977 $ (69) $ 257,519
Finance receivables - net 5,992 24,956 (1,596) 4,972 34,324
Pledged finance receivables - net -- 160,411 (4) -- 160,407
Inventories 52,091 31,326 39,651 (393) 122,675
Property, plant and equipment - net 24,749 42,234 13,152 (436) 79,699
Equipment held for rental - net 919 16,130 2,602 -- 19,651
Investment in subsidiaries 244,788 -- 4,977 (249,765) --
Other assets 197,275 30,357 34,234 61 261,927
--------- ------------ ------------- ------------ ------------
$ 668,366 $ 345,473 $ 167,993 $ (245,630) $ 936,202
========= ============ ============= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 118,539 $ 24,497 $ 50,580 $ (19,151) $ 174,465
Long-term debt, less current portion 294,158 -- -- -- 294,158
Limited recourse debt from finance
receivables monetizations, less
current portion -- 119,661 -- -- 119,661
Other liabilities (250,124) 232,883 95,583 21,862 100,204
--------- ------------ ------------- ------------ ------------
Total liabilities 162,573 377,041 146,163 2,711 688,488
--------- ------------ ------------- ------------ ------------
Shareholders' equity 505,793 (31,568) 21,830 (248,341) 247,714
--------- ------------ ------------- ------------ ------------
$ 668,366 $ 345,473 $ 167,993 $ (245,630) $ 936,202
========= ============ ============= ============ ============
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended October 31, 2003
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ ------------
Revenues $ 117,189 $ 74,582 $ 23,145 $ (1,331) $ 213,585
Gross profit (loss) 27,337 8,025 3,837 (933) 38,266
Other expenses (income) (2,838) 9,669 6,039 24,863 37,733
Net income (loss) $ 30,175 $ (1,644) $ (2,202) $ (25,796) $ 533
15
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended October 31, 2002
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ ------------
Revenues $138,255 $ 27,940 $ 22,305 $ (28,013) $ 160,487
Gross profit (loss) 38,145 (4,167) (552) (4,310) 29,116
Other expenses 21,688 5,020 669 1,410 28,787
Net income (loss) $ 16,457 $ (9,187) $ (1,221) $ (5,720) $ 329
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended October 31, 2003
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ ------------
Cash flow from operating activities $ (25,647) $ (9,527) $ 1,920 $ (96) $ (33,350)
Cash flow from investing activities (96,663) (1,012) (2,530) (2) (100,207)
Cash flow from financing activities 787 10,566 40 2 11,395
Effect of exchange rate changes on cash 1,566 -- (1,017) 92 641
--------- ------------ ------------- ------------ ------------
Net change in cash and cash equivalents (119,957) 27 (1,587) (4) (121,521)
Beginning balance 127,197 26 5,570 16 132,809
--------- ------------ ------------- ------------ ------------
Ending balance $ 7,240 $ 53 $ 3,983 $ 12 $ 11,288
========= ============ ============= ============ ============
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended October 31, 2002
Guarantor Non-Guarantor Other and Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ ------------
Cash flow from operating activities $(75,772) $ 20,685 $ 768 $ 788 $ (53,531)
Cash flow from investing activities (986) (1,052) (667) (118) (2,823)
Cash flow from financing activities 60,936 (53) 15 (15) 60,883
Effect of exchange rate changes on cash (311) -- (443) 201 (553)
-------- ------------ ------------- ------------ ------------
Net change in cash and cash equivalents (16,133) 19,580 (327) 856 3,976
Beginning balance 22,949 (19,545) 3,093 (292) 6,205
-------- ------------ ------------- ------------ ------------
Ending balance $ 6,816 $ 35 $ 2,766 $ 564 $ 10,181
======== ============ ============= ============ ============
NOTE 19 - RESTATEMENT
In March 2004, we restated our unaudited financial statements for the first
quarter ended October 31, 2003. We determined that one transaction with $8.7
million in revenues, $1.8 million in net profit and $.04 per diluted share for
the fiscal year and fourth quarter ended July 31, 2003 was recognized
prematurely. The restatement resulted in a reduction of revenue and profit in
the fourth quarter of fiscal 2003 and will result in a greater increase in
revenue and profit recognized over the first three quarters of fiscal 2004. In
addition, professional services expenses associated with the financial
restatement and related activity incurred in the third quarter of fiscal 2004
will offset the incremental profit that we will be recognizing during the first
three quarters of fiscal 2004.
The transaction, with a single customer, was originally recorded in July 2003.
We re-examined the transaction terms and subsequent history and concluded that
the transaction was incorrectly reported as a sale, rather than a consignment
sale, which under generally accepted accounting principles, allows recognition
of the revenues only
16
upon final sale of the equipment by the consignee. The results of this
restatement are reflected in the condensed consolidated financial statements,
notes to condensed consolidated financial statements and management's discussion
and analysis for the first quarter ended October 31, 2003 included in this
report. The impact of this restatement on the first quarter ended October 31,
2003 was an increase in revenues of $1.4 million, an increase in gross profit of
$0.4 million and an increase in net income of $0.3 million. The following tables
detail the effects of the restatement:
FOR THE THREE MONTHS ENDED OCTOBER 31, 2003
AS PREVIOUSLY REPORTED AS RESTATED
-------------------------- ----------------
Condensed Statement of Income Data:
Net sales $207,002 $208,392
Revenues 212,195 213,585
Costs of sales 174,333 175,319
Gross profit 37,862 38,266
Income from operations 9,362 9,766
Income before taxes 426 830
Income tax provision 149 297
Net income 277 533
Condensed Statement of Cash Flows Data:
Net income $277 $533
Non-cash charges and credits-Other 3,171 3,319
Accounts receivable 2,409 1,020
Inventories 5,900 6,885
AT OCTOBER 31, 2003
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
Balance Sheet Data:
Accounts receivable - net $297,001 $289,729
Inventories 148,397 153,200
Other current assets(a) 53,311 54,252
Total current assets 551,950 550,422
Total assets 974,477 972,949
Retained earnings 230,334 228,806
Total shareholders' equity 250,439 248,911
Total liabilities and shareholders' equity 974,477 972,949
AT JULY 31, 2003
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
Balance Sheet Data:
Accounts receivable - net $266,180 $257,519
Inventories 116,886 122,675
Other current assets(a) 45,385 46,474
Total current assets 605,762 603,979
Total assets 937,985 936,202
Retained earnings 230,273 228,490
Total shareholders' equity 249,497 247,714
Total liabilities and shareholders' equity 937,985 936,202
(a) Deferred tax assets.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We reported net income of $0.5 million, or $.01 per share on a diluted basis,
for the first quarter of fiscal 2004, compared to net income of $0.3 million, or
$.01 per share on a diluted basis, for the first quarter of fiscal 2003. As
discussed below and more fully described in Note 13 of the Notes to Condensed
Consolidated Financial Statements, earnings for the first quarter of fiscal 2004
and fiscal 2003 included charges of $0.1 million ($40 thousand net of tax) and
$0.2 million ($0.1 million net of tax), respectively, related to repositioning
our operations to more appropriately align our costs with our business activity.
In addition, earnings for the first quarter of fiscal 2004 included $3.9 million
($2.5 million net of tax) of integration expenses related to our acquisition of
the OmniQuip business unit ("OmniQuip") of Textron Inc. Also, earnings for the
first quarter of fiscal 2004 included favorable currency adjustments of $0.1
million ($0.1 million net of tax) compared to unfavorable currency adjustments
of $2.4 million ($1.7 million net of tax) for the first quarter of fiscal 2003.
In the discussion and analysis of financial condition and results of operations
that follows, we attempt to list contributing factors in order of significance
to the point being addressed.
RESULTS FOR THE FIRST QUARTERS OF FISCAL 2004 AND 2003
Our revenues for the first quarter of fiscal 2004 were $213.6 million, up 33.1%
from the $160.5 million in the comparable year-ago period. Our revenues for the
first quarter of fiscal 2004 included OmniQuip revenues of $53.4 million. The
following tables outline our revenues by segment, products and geography (in
thousands) for the quarter ended:
October 31,
2003
Restated 2002
--------- --------
Segment:
Machinery $168,958 $124,546
Equipment Services 40,815 31,371
Access Financial Solutions (a) 3,812 4,570
-------- --------
$213,585 $160,487
======== ========
Product:
Aerial work platforms $ 89,260 $ 91,313
Telehandlers 72,008 27,602
Excavators 7,690 5,631
After-sales service and support, including parts sales, and used and
reconditioned equipment sales 39,434 29,842
Financial products (a) 3,676 4,390
Rentals 1,517 1,709
-------- --------
$213,585 $160,487
======== ========
Geographic:
United States $171,671 $117,350
Europe 23,951 31,248
Other 17,963 11,889
-------- --------
$213,585 $160,487
======== ========
(a) Revenues for Access Financial Solutions and for financial products are not
the same because Access Financial Solutions also receives revenues from
rental purchase agreements that are recorded for accounting purposes as
rental revenues from operating leases.
18
The increase in Machinery segment revenues from $124.5 million to $169 million,
or 35.7%, was principally attributable to the additional sales from OmniQuip
products, higher telehandler sales from new products, principally the new North
America all-wheel-steer machines, increased sales of aerial work platforms in
Australia and increased sales of our excavator product line. The increase in
Machinery segment revenues was partially offset by reduced sales of aerial work
platforms in Europe due to economic pressures and tightened credit conditions.
The increase in Equipment Services segment revenues from $31.4 million to $40.8
million, or 30.1%, was principally attributable to additional OmniQuip revenues
and increased service parts sales partially offset by lower rebuild and rental
fleet sales. The decrease in Access Financial Solutions segment revenues from
$4.6 million to $3.8 million, or 16.6%, was principally attributable to an early
payoff of a financed receivable, partially offset by income received on a larger
portfolio of pledged finance receivables from accumulated monetization
transactions. While we have increased interest income attributable to our
pledged finance receivables, a corresponding increase in our limited recourse
debt results in $2.7 million of interest income being passed on to monetization
purchasers in the form of interest expense on limited recourse debt. In
accordance with the required accounting treatment, payments to monetization
purchasers are reflected as interest expense in our Condensed Consolidated
Statements of Income.
Our domestic revenues for the first quarter of fiscal 2004 were $171.7 million,
up 46.3% from the comparable year-ago period revenues of $117.4 million. The
increase in our domestic revenues is primarily attributable to the additional
sales from OmniQuip products and increased sales of telehandlers, parts and
excavators, partially offset by lower sales of used equipment. Revenues
generated from sales outside the United States for the first quarter of fiscal
2004 were $41.9 million, down 2.8% from the comparable year-ago period revenues
of $43.1 million. The decrease in our revenues generated from sales outside the
United States is primarily attributable to lower aerial work platform sales in
Europe due to the economic pressures and customer credit constraints, partially
offset by increased sales of aerial work platforms in Australia.
Our gross profit margin was 17.9% for the first quarter of fiscal 2004 compared
to the prior year quarter's 18.1%. The decrease was primarily attributable to
lower margins in our Machinery and Access Financial Solutions segments, offset
in part by higher margins in our Equipment Services segment. The gross profit
margin of our Machinery segment was 13.2% for the first quarter of fiscal 2004
compared to 14.9% for the first quarter of fiscal 2003. The decrease is
principally due to OmniQuip integration expenses of $2.7 million, partially
offset by the weakening of the U.S. dollar against the Euro, British pound and
Australian dollar. The gross profit margin of our Equipment Services segment was
30% for the first quarter of fiscal 2004 compared to 19.8% for the corresponding
period in the prior year. The increase is primarily attributable to an increase
in higher margin service parts sales as a percentage of total segment revenues
due primarily to the additional sales from OmniQuip and fewer rebuild and rental
fleet sales, which historically have lower margins. The gross profit margin of
our Access Financial Solutions segment was 95.9% for the first quarter of fiscal
2004 compared to 96.1% for the corresponding period in the prior year. The
decrease is primarily attributable to an early payoff of a financed receivable.
Because the costs associated with these revenues are principally selling and
administrative expenses and interest expense, gross margins are typically higher
in this segment.
Our selling, administrative and product development expenses increased $7.1
million in the first quarter of fiscal 2004 compared to the prior year first
quarter and as a percent of revenues were 13.3% for the current year first
quarter compared to 13.3% for the prior year first quarter. Of the $7.1 million
increase in our selling, administrative and product development expenses, $4.7
million is associated with the addition of OmniQuip and integration expenses.
Our Machinery segment's selling, administrative and product development expenses
increased $2.2 million due primarily to the addition of OmniQuip, amortization
expense associated with the acquired OmniQuip intangible assets and an increase
in pension and other postretirement benefits costs, partially offset by a
decrease in bad debt provisions for specific reserves related to certain
customers. Our Equipment Services segment's selling and administrative expenses
increased $0.2 million due primarily to the addition of OmniQuip. Our Access
Financial Solutions segment's selling and administrative expenses decreased $0.7
million due primarily to a reduction in bad debt provisions. Our general
corporate selling, administrative and product development expenses increased
$5.4 million primarily due to an increase in bad debt provisions, OmniQuip
integration expenses of $1.2 million, the addition of OmniQuip and higher
payroll and related costs.
During the second quarter of fiscal 2003, we announced further actions related
to our ongoing longer-term strategy to streamline operations and reduce fixed
and variable costs. As part of our capacity rationalization plan
19
commenced in early 2001, the 130,000-square foot Sunnyside facility in Bedford,
Pennsylvania, which produced selected scissor lift models, was temporarily idled
and production integrated into our Shippensburg, Pennsylvania facility.
Additionally, reductions in selling, administrative and product development
costs resulted from changes in our global organization and from process
consolidations. As a result, pursuant to the plan we anticipate incurring a
pre-tax charge of $5.9 million. In addition, we will spend approximately $3.5
million on capital requirements. For additional information related to our
capacity rationalization plan, see Note 13 of the Notes to Condensed
Consolidated Financial Statements of this report.
During the first quarter of fiscal 2004, we incurred approximately $0.1 million
of the pre-tax charge discussed above, consisting of accruals for termination
benefit costs and relocation costs and charges related to relocating certain
plant assets and start-up costs, which were reported in cost of sales. In
addition, during the first quarter of fiscal 2004, we paid and charged $0.1
million of termination benefits against the accrued liability.
During fiscal 2002, we announced the closure of our manufacturing facility in
Orrville, Ohio as part of our capacity rationalization plan for our Machinery
segment. Operations at this facility have been integrated into our
McConnellsburg, Pennsylvania facility. As a result, pursuant to the plan we
anticipate incurring a pre-tax charge of $7.7 million.
During the first quarter of fiscal 2004 and 2003, we incurred $0 and $0.2
million, respectively, of the pre-tax charge related to our closure of the
Orrville facility, consisting of production relocation costs, which were
reported in cost of sales. Additionally, during the first quarter of fiscal
2004, we paid and charged $0.1 million of lease termination costs against the
accrued liability.
For additional information related to our capacity rationalization plans, see
Note 13 of the Notes to Condensed Consolidated Financial Statements of this
report.
The increase in interest expense of $4.4 million for the first quarter of fiscal
2004 was primarily due to interest associated with our 8 1/4% senior unsecured
notes due 2008 that were sold during the fourth quarter of fiscal 2003 and
increased interest expense associated with our limited recourse and non-recourse
monetizations. Interest expense associated with our limited recourse and
non-recourse monetizations was $2.7 million and $1.4 million for the first
quarter of fiscal 2004 and 2003, respectively.
Our miscellaneous income (deductions) category included currency gains of $0.1
million in the first quarter of fiscal 2004 compared to losses of $2.4 million
in the corresponding prior year period primarily attributable to the weakening
of the U.S. dollar against the Euro, British pound and Australian dollar
compared to the strengthening of the U.S. dollar against the Euro during the
first quarter of fiscal 2003 and increased hedge positions relative to
exposures.
Our provision for income taxes in the first quarter of fiscal 2004 reflects an
estimated annual tax rate of 36% compared to 32% for the first quarter of fiscal
2003. The increase in the rate is primarily due to lower estimated benefits
related to export sales and the geographic mix of profits. The income tax
provision is based on estimated annual amounts. If these estimates and related
assumptions change in the future, we may be required to adjust our effective
rate which could change income tax expense.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires our management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and related notes. Future events and their effects cannot
be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.
We believe that of our significant accounting policies, the following may
involve a higher degree of judgment, estimation, or complexity than other
accounting policies.
20
Allowance for Doubtful Accounts and Reserves for Finance Receivables: We
evaluate the collectibility of accounts and finance receivables based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations, a specific reserve is
recorded against amounts due to reduce the net recognized receivable to the
amount reasonably expected to be collected. Additional reserves are established
based upon our perception of the quality of the current receivables, the current
financial position of our customers and past experience of collectibility. If
the financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances would be
required.
Income Taxes: We record the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and amounts reported
in the accompanying Condensed Consolidated Balance Sheets, as well as operating
loss and tax credit carry-forwards. We evaluate the recoverability of any tax
assets recorded on the balance sheet and provide any necessary allowances as
required. The carrying value of the net deferred tax assets assumes that we will
be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, we may be required to record
additional valuation allowances against our deferred tax assets resulting in
additional income tax expense in our consolidated statement of income. In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income, carry back opportunities, and tax planning
strategies in making the assessment. We evaluate the ability to realize the
deferred tax assets and assess the need for additional valuation allowances
quarterly. In addition, we are subject to income tax laws in many countries and
judgment is required in assessing the future tax consequences of events that
have been recognized in our financial statements or tax returns. The final
outcome of these future tax consequences, tax audits, and changes in regulatory
tax laws and rates could materially impact our financial statements.
Inventory Valuation: Inventories are valued at the lower of cost or market.
Certain items in inventory may be considered impaired, obsolete or excess, and
as such, we may establish an allowance to reduce the carrying value of these
items to their net realizable value. Based on certain estimates, assumptions and
judgments made from the information available at that time, we determine the
amounts in these inventory allowances. If these estimates and related
assumptions or the market change, we may be required to record additional
reserves.
Goodwill: We perform a goodwill impairment test on at least an annual basis and
more frequently in certain circumstances. We cannot predict the occurrence of
certain events that might adversely affect the reported value of goodwill that
totaled $66.5 million at October 31, 2003 and $29.5 million at July 31, 2003.
Such events may include, but are not limited to, strategic decisions made in
response to economic and competitive conditions, the impact of the economic
environment on our customer base, or a material negative change in a
relationship with a significant customer.
Guarantees of the Indebtedness of Others: We enter into agreements with finance
companies whereby our equipment is sold to a finance company, which, in turn,
sells or leases it to a customer. In some instances, we retain a liability in
the event the customer defaults on the financing. Under certain terms and
conditions where we are aware of a customer's inability to meet its financial
obligations, we establish a specific reserve against the liability. Additional
reserves have been established related to these guarantees based upon the
current financial position of these customers and based on estimates and
judgments made from information available at that time. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, additional allowances would be required.
Although we are liable for the entire amount under guarantees, our losses would
be mitigated by the value of the underlying collateral, JLG equipment.
In addition, we monetize a substantial portion of the receivables originated by
AFS through an ongoing program of syndications, limited recourse financings and
other monetization transactions. In connection with some of these monetization
transactions, we have limited recourse obligations of $23.4 million as of
October 31, 2003 related to possible defaults by the obligors under the terms of
the contacts, which comprise these finance receivables. Allowances have been
established related to these monetization transactions based upon the current
financial position of these customers and based on estimates and judgments made
from information available at that time. If the financial condition of these
obligors were to deteriorate resulting in an impairment of their ability to make
payments, additional allowances would be required.
21
Long-Lived Assets: We evaluate the recoverability of property, plant and
equipment and intangible assets other than goodwill whenever events or changes
in circumstances indicate the carrying amount of any such assets may not be
fully recoverable. Changes in circumstances include technological advances,
changes in our business model, capital strategy, economic conditions or
operating performance. Our evaluation is based upon, among other things,
assumptions about the estimated future undiscounted cash flows these assets are
expected to generate. When the sum of the undiscounted cash flows is less than
the carrying value, we would recognize an impairment loss. We continually apply
our best judgment when performing these valuations to determine the timing of
the testing, the undiscounted cash flows used to assess recoverability and the
fair value of the asset.
Pension and Postretirement Benefits: Pension and postretirement benefit costs
and obligations are dependent on assumptions used in calculation of these
amounts. These assumptions, used by actuaries, include discount rates, expected
return on plan assets for funded plans, rate of salary increases, health care
cost trend rates, mortality rates and other factors. In accordance with
accounting principles generally accepted in the United States, actual results
that differ from the actuarial assumptions are accumulated and amortized to
future periods and therefore affect recognized expense and recorded obligations
in future periods. While we believe that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may materially effect
our financial position or results of operations. We expect that our pension and
other postretirement benefits costs in fiscal 2004 will exceed the costs
recognized in fiscal 2003 by approximately $3.8 million. This increase is
principally attributable to the change in various assumptions, including the
expected long-term rate of return, discount rate, and health care cost trend
rate.
Product Liability: Our business exposes us to possible claims for personal
injury or death and property damage resulting from the use of equipment that we
rent or sell. We maintain insurance through a combination of self-insurance
retentions, primary insurance and excess insurance coverage. We monitor claims
and potential claims of which we become aware and establish liability reserves
for the self-insurance amounts based on our liability estimates for such claims.
Our liability estimates with respect to claims are based on internal evaluations
of the merits of individual claims and the reserves assigned by our independent
insurance claims adjustment firm. The methods of making such estimates and
establishing the resulting accrued liability are reviewed frequently, and
adjustments resulting from our reviews are reflected in current earnings. If
these estimates and related assumptions change, we may be required to record
additional reserves.
Restructuring, Restructuring-Related and Integration: As more fully described in
Note 13 of the Notes to Consolidated Financial Statements, we recognized pre-tax
restructuring and restructuring-related charges of $0.1 million, $4.0 million
and $6.7 million during the first quarter of fiscal 2004, fiscal 2003 and fiscal
2002, respectively. The related reserves reflect estimates, including those
pertaining to separation costs, settlements of contractual obligations, and
asset valuations. We reassess the reserve requirements to complete each
individual plan within the program at the end of each reporting period or as
conditions change. Actual experience has been and may continue to be different
from the estimates used to establish the reserves. At October 31, 2003, we had
liabilities established in conjunction with these activities of $24.3 million,
including the accrued liabilities associated with the integration of OmniQuip,
and assets held for sale of $6.3 million.
Revenue Recognition: Sales of equipment and service parts are unconditional
sales that are recorded when product is shipped and invoiced to independently
owned and operated distributors and customers. Normally our sales terms are
"free-on-board" shipping point (FOB shipping point). However, certain sales may
be invoiced prior to the time customers take physical possession. In such cases,
revenue is recognized only when the customer has a fixed commitment to purchase
the equipment, the equipment has been completed and made available to the
customer for pickup or delivery, and the customer has requested that we hold the
equipment for pickup or delivery at a time specified by the customer. In such
cases, the equipment is invoiced under our customary billing terms, title to the
units and risks of ownership passes to the customer upon invoicing, the
equipment is segregated from our inventory and identified as belonging to the
customer and we have no further obligations under the order other than customary
post-sales support activities. During the first three months of fiscal 2004,
approximately 2% of our sales were invoiced and the revenue recognized prior to
customers taking physical possession.
Revenue from certain equipment lease contracts is accounted for as sales-type
leases. The present value of all payments, net of executory costs (such as legal
fees), is recorded as revenue and the related cost of the equipment is
22
charged to cost of sales. The associated interest is recorded over the term of
the lease using the interest method. In addition, net revenues include rental
revenues earned on the lease of equipment held for rental. Rental revenues are
recognized in the period earned over the lease term.
Warranty: We establish reserves related to the warranties we provide on our
products. Specific reserves are maintained for programs related to machine
safety and reliability issues. Estimates are made regarding the size of the
population, the type of program, costs to be incurred by us and estimated
participation. Additional reserves are maintained based on the historical
percentage relationships of such costs to machine sales and applied to current
equipment sales. If these estimates and related assumptions change, we may be
required to record additional reserves.
Additional information regarding our critical accounting policies is in Note 1
of the Notes to Consolidated Financial Statements included in our annual report
on Form 10-K/A for the fiscal year ended July 31, 2003.
FINANCIAL CONDITION
Cash used in operating activities was $33.4 million for the first three months
of fiscal 2004 compared to $53.5 million in the comparable period of fiscal
2003. The decrease in cash usage primarily resulted from a decrease in
inventories and fewer originations of finance receivables during the first
quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Partially
offsetting these effects was an increase in our trade receivables resulting
primarily from an increase in European receivables.
Investing activities during the first three months of fiscal 2004 used $100.2
million of cash compared to $2.8 million used for the first three months of
fiscal 2003. The increase in cash usage was principally due to the acquisition
of OmniQuip that was completed during the first quarter of fiscal 2004.
Financing activities provided cash of $11.4 million for the first three months
of fiscal 2004 compared to $60.9 million for the first three months of fiscal
2003. The decrease in cash provided by financing activities was largely
attributable to lower borrowings under our credit facilities due to working
capital reductions discussed above. Partially offsetting the decrease in cash
provided by financing activities was the proceeds from the monetization of our
finance receivables.
The following table provides a summary of our contractual obligations (in
thousands) at October 31, 2003:
Payments Due by Period
---------------------------------------------
Less than After 5
Total 1 Year 1-3 Years 4-5 Years Years
--------- --------- --------- --------- ---------
Short and long-term debt (a) $ 313,881 $ 2,278 $ 12,176 $ 124,962 $ 174,465
Limited recourse debt 153,541 40,153 70,218 35,021 8,149
Operating leases (b) 29,478 7,201 12,190 7,299 2,788
--------- --------- --------- --------- ---------
Total contractual obligations $ 496,900 $ 49,632 $ 94,584 $ 167,282 $ 185,402
========= ========= ========= ========= =========
(a) Included in long-term debt is our senior secured revolving credit facility
with a group of financial institutions that provide an aggregate
commitment of $175 million. We also have a $15 million cash management
facility with a term of one year, renewable annually. Both facilities are
secured by a lien on substantially all of our assets. Availability of
credit requires compliance with financial and other covenants. If we were
to become in default of these covenants, the financial institutions could
call the loans.
(b) In accordance with SFAS No. 13, "Accounting for Leases," operating lease
obligations are not reflected in the balance sheet.
23
The following table provides a summary of our other commercial commitments (in
thousands) at October 31, 2003:
Amount of Commitment Expiration Per Period
---------------------------------------------
Total
Amounts Less than Over 5
Committed 1 Year 1-3 Years 4-5 Years Years
--------- --------- --------- --------- ---------
Standby letters of credit $ 10,210 $ 10,210 $ -- $ -- $ --
Guarantees (a) 111,636 1,687 45,472 47,415 17,062
--------- --------- --------- --------- ---------
Total commercial commitments $ 121,846 $ 11,897 $ 45,472 $ 47,415 $ 17,062
========= ========= ========= ========= =========
(a) We discuss our guarantee agreements in Note 14 of Notes to Condensed
Consolidated Financial Statements of this report.
On August 1, 2003, we completed our acquisition of OmniQuip, which includes all
operations relating to the Sky Trak and Lull brand telehandler products. See
Note 3 of the Notes to Condensed Consolidated Financial Statements of this
report. The purchase price was $100 million, with $90 million paid in cash at
closing and $10 million paid in the form of an unsecured subordinated promissory
note due on the second anniversary of the closing date. In addition, we incurred
$5.4 million in transaction expenses. We funded the cash portion of the purchase
price and the transaction expenses with remaining unallocated proceeds from the
sale of our $125 million senior notes due 2008 and anticipate funding
approximately $37.9 million in integration expenses over a four-year period with
cash generated from operations and borrowings under our credit facilities.
Our principle sources of liquidity for the next twelve months will be cash
generated from operations, borrowings under our credit facilities and
monetizations of finance receivables originated by our Access Financial
Solutions segment. Availability of funds under our credit facilities and
monetizations of finance receivables depend on a variety of factors described
below. As of October 31, 2003, we had an unused credit commitment totaling
$189.4 million.
On September 23, 2003, we entered into a new three-year $175 million senior
secured revolving credit facility that replaced our previous $150 million
revolving credit facility and a pari passu, one-year $15 million cash management
facility to replace our previous $25 million secured bank revolving line of
credit facility. Both facilities are secured by a lien on substantially all of
our assets. Availability of credit requires compliance with financial and other
covenants, including during fiscal 2004 a requirement that we maintain leverage
ratios of Net Funded Debt to EBITDA measured on a rolling four quarters and Net
Funded Senior Debt to EBITDA measured on a rolling four quarters not to exceed
6.00 to 1.00 and 2.00 to 1.00, respectively, a fixed charge coverage ratio of
not less than 1.25 to 1.00, and a Tangible Net Worth of at least $194 million,
plus 50% of Consolidated Net Income on a cumulative basis for each preceding
fiscal quarter, commencing with the quarter ended July 31, 2003. Availability of
credit also will be limited by a borrowing base determined on a monthly basis by
reference to 85% of eligible domestic accounts receivable and percentages
ranging between 25% and 70% of various categories of domestic inventory.
Accordingly, credit available to us under these facilities will vary with
seasonal and other changes in the borrowing base and leverage ratios, including
changes resulting from completion of the accounting for the OmniQuip transaction
and inclusion of OmniQuip financial performance into our results of operations.
We do not expect to have full availability of the stated maximum amount of
credit at all times. However, based on our current business plan, we expect to
have sufficient credit availability that combined with cash to be generated from
operations will meet our expected seasonal requirements for working capital and
planned capital and integration expenditures for the next twelve months.
With the commencement of our Access Financial Solutions segment in fiscal 2002,
we initially relied on cash generated from operations and borrowings under our
credit facilities to fund our origination of customer finance receivables.
Through this approach, we generated a diverse portfolio of financial assets
which we seasoned and began to monetize principally through limited recourse
syndications. Our ability to continue originations of finance receivables to be
held by us as financial assets depends on the availability of monetizations,
which, in turn, depends on the credit quality of our customers, the degree of
credit enhancement or recourse that we are able to offer, and market demand
among third-party financial institutions for our finance receivables. During the
first three months of
24
fiscal 2004 and all of fiscal 2003, we monetized $10.4 million and $112.8
million, respectively, in finance receivables through syndications. Although
monetizations generate cash, under SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," the monetized
portion of our finance receivables portfolio remains recorded on our balance
sheet as limited recourse debt.
Beginning with fiscal 2004, we expect that our originations and monetizations of
finance receivables will continue, but at lower levels than in prior years, and
that our limited recourse debt balance will begin to decline. In September 2003
we entered into a program agreement with GE Dealer Finance ("GE"), a division of
General Electric Capital Corporation, to provide "private label" financing
solutions for our customers. Under this agreement, our customers will continue
to have direct interaction with our Access Financial Solutions personnel, but
with GE having the right to provide direct funding for transactions that meet
agreed credit criteria subject to limited recourse to us. Transactions funded by
GE will not be held by us as financial assets, and therefore their subsequent
monetization will not be recorded on our balance sheet as limited recourse debt.
Transactions not funded by GE may still be funded by us to the extent of our
liquidity sources and subsequently monetized or maybe funded directly by other
credit providers.
As discussed in Note 14 of the Notes to Condensed Consolidated Financial
Statements of this report, we are a party to multiple agreements whereby we
guarantee $111.6 million in indebtedness of others. If the financial condition
of our customers were to deteriorate resulting in an impairment of their ability
to make payments, additional allowances would be required.
Our exposure to product liability claims is discussed in Note 14 of the Notes to
Condensed Consolidated Financial Statements of this report. Future results of
operations, financial condition and liquidity may be affected to the extent that
our ultimate exposure with respect to product liability varies from current
estimates.
We have received notices of proposed adjustments from the Pennsylvania
Department of Revenue ("PA") in connection with settlements and audits of the
tax years 1998 through 2001. The principal adjustments proposed by PA consist of
the disallowance of a royalty deduction taken in our income tax returns and the
denial of the manufacturing exemption taken in our capital stock tax returns. We
believe that the state has acted contrary to applicable law and we are
vigorously disputing their position. Should PA prevail in its disallowance of
the royalty deduction and denial of the manufacturing exemption, it would result
in a cash outflow by us of approximately $7 million. Although unlikely, we
believe that any such cash outflow would not occur until some time after 2004.
There can be no assurance that unanticipated events will not require us to
increase the amount we have accrued for any matter or accrue for a matter that
has not been previously accrued because it was not considered probable.
OUTLOOK
This Outlook section and other parts of this Management's Discussion and
Analysis contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
identified by words such as "may," "believes," "expects," "plans" and similar
terminology. These statements are not guarantees of future performance and
involve a number of risks and uncertainties that could cause actual results to
differ materially from those indicated by the forward-looking statements.
Important factors that could cause actual results to differ materially from
those suggested by the forward-looking statements include, but are not limited
to, the following: (i) general economic and market conditions, including
political and economic uncertainty in areas of the world where we do business;
(ii) varying and seasonal levels of demand for our products and services; (iii)
limitations on customer access to credit for purchases; (iv) credit risks from
our financing of customer purchases; (v) interest and foreign currency exchange
rates; and (vi) costs of raw materials and energy, as well as other risks as
described in "Cautionary Statements Pursuant to the Securities Litigation Reform
Act" which is an exhibit to this report. We undertake no obligation to publicly
update or revise any forward-looking statements.
In addition to realizing the expected synergies of the OmniQuip acquisition, we
will continue our drive to improve margins through a continued aggressive
approach to cost reductions with focus on efficiency and productivity
improvements. In addition, new products will continue to offer features and
benefits which end-users desire while standardizing design and streamlining the
manufacturing process. Examples include the new innovative Pro-Fit(TM) scissor
lift series and the 10,000 and 12,000 pound capacity JLG telehandlers introduced
during the quarter.
25
Rental fleets are aging and pent-up replacement demand continues to grow. By the
end of 2003, the average age of rental fleets is expected to be between 42 and
56 months. Among the top ten rental companies, estimated aggregate rental fleet
capital spending for calendar 2004 is expected to be up significantly over 2003.
The overall economic indicators in North America are encouraging. The backlog is
improving, and we are cautiously optimistic that spring order patterns will
continue to exhibit increased confidence and fleet refreshment activity. In
Europe, although there are pockets of positive growth, we expect that a broader
European recovery will lag North America by at least a year. In the rest of the
world we are experiencing stronger results in Australia and Asia-Pacific.
As we have said many times in the past, our customers' willingness and ability
to refresh their fleets depend on three factors. The first factor - the economy
is looking better but there still is weakness in non-residential construction.
The second factor - the used equipment marketplace is starting to see a firming
of prices. This becomes very important and necessary for our customers to move
their used fleet without incurring losses. But, the third factor - the ability
and/or willingness of rental companies to finance significant new equipment
purchases is still not fully resolved.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding recent accounting pronouncements is included in Note 2 of
the Notes to Condensed Consolidated Financial Statements of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates, which could affect our future results of operations and
financial condition. We manage exposure to these risks principally through our
regular operating and financing activities.
We are exposed to changes in interest rates as a result of our outstanding debt.
In June 2003, we entered into a $70 million fixed-to-variable interest rate swap
agreement with a fixed-rate receipt of 8 3/8% in order to mitigate our interest
rate exposure. The basis of the variable rate paid is the London Interbank
Offered Rate (LIBOR) plus 4.51%. In July 2003, we entered into a $62.5 million
fixed-to-variable interest rate swap agreement with a fixed-rate receipt of 8
1/4% in order to mitigate our interest rate exposure. The basis of the variable
rate paid is the London Interbank Offered Rate (LIBOR) plus 5.15%. These swap
agreements are designated as hedges of the fixed-rate borrowings which are
outstanding and are structured as perfect hedges in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." During
fiscal 2003, we terminated our $87.5 million notional fixed-to-variable interest
rate swap agreement with a fixed-rate receipt of 8 3/8% that we entered into
during June 2002, which resulted in a deferred gain of $6.2 million. This $6.2
million deferred gain will offset interest expense over the remaining life of
the debt. At October 31, 2003, we had $132.5 million of interest rate swap
agreements outstanding. Total interest bearing liabilities at October 31, 2003
consisted of $125.0 million in variable-rate borrowing and $342.4 million in
fixed-rate borrowing. At the current level of variable-rate borrowing, a
hypothetical 10% increase in interest rates would decrease pre-tax current year
earnings by approximately $0.9 million on an annual basis. A hypothetical 10%
change in interest rates would not result in a material change in the fair value
of our fixed-rate debt.
We do not have a material exposure to financial risk from using derivative
financial instruments to manage our foreign currency exposures. For additional
information, we refer you to Item 7 in our annual report on Form 10-K/A for the
fiscal year ended July 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In connection with restating our financial statements as provided in this
report, our Chief Executive Officer and Chief Financial Officer, with the
participation of other management, re-evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 (c))
as of the end of the period covered by this report and as of the date of this
report. Prior to such evaluation, Ernst & Young LLP advised management and the
Audit Committee that our improper accounting of a consignment sale transaction
that led to our financial restatement reflects a material weakness in internal
controls. Based on the re-evaluation by our Chief Executive Officer and
26
Chief Financial Officer, they concluded that our disclosure controls and
procedures were not effective as of the end of the period covered by this
report, but are effective as of the date of this report, to ensure that
information required to be disclosed by us in our reports filed or submitted
under the Securities Exchange Act of 1934 were recorded, processed, summarized,
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
(b) CHANGES IN INTERNAL CONTROLS
Specifically, our disclosure controls and procedures were found to be
ineffective in identifying an accounting error related to the timing of the
recording of revenue in conformity with generally accepted accounting
principles. We have conducted an internal review of our revenue recognition
practices for all periods for which financial statements are included in this
report. In addition, Ernst & Young has performed agreed-upon procedures with
respect to such financial statements for the same periods. As a result of our
internal review and the procedures performed by Ernst & Young, we have not
identified any other transactions or circumstances that would require us to
alter the scope of the restatement beyond what we disclosed in our Current
Report on Form 8-K dated February 18, 2004.
In response to the matter identified, we have taken significant steps to
strengthen control processes and procedures in order to identify and rectify the
accounting error and prevent the recurrence of the circumstances that resulted
in the need to restate prior period financial statements. In March 2004, we
corrected the identified weaknesses in our disclosure controls and procedures
that led to the above error by taking the following steps, among others:
- Strengthening our documentation and formal process to review and
approve proposed revenue transactions prior to their occurrence.
- Supplementing our revenue recognition policy to include a clearly
understandable summary of key elements of the policy to better
ensure broader understanding of the policy among our personnel.
- Conducting training sessions for affected employees on applicable
policies and procedures.
- Implementing additional detection controls to identify and correct
accounting errors on a timely basis before such errors reach our
financial statements.
While we believe that our system of internal controls and our disclosure
controls and procedures are now adequate to provide reasonable assurance that
the objectives of these control systems have been and will be met, we intend
during the current quarter to further improve these controls principally through
additional modifications to our information systems to automate and provide
redundancies for some of these processes. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
27
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
JLG Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of JLG
Industries, Inc. as of October 31, 2003, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended October
31, 2003 and 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,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements 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 consolidated balance sheet of JLG Industries,
Inc. as of July 31, 2003, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein), and in our report dated September 12, 2003, except for Note 2 as to
which the date is September 23, 2003 and Note 24 as to which the date is March
11, 2004, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of July 31, 2003, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from which
it has been derived.
As discussed in Note 19 of the Notes to Condensed Consolidated Financial
Statements, the Company has restated previously issued first quarter ended
October 31, 2003 condensed consolidated financial statements.
/s/ Ernst & Young LLP
Baltimore, Maryland
November 12, 2003, except for Note 19 as to which the date is March 11, 2004.
28
PART II OTHER INFORMATION
ITEMS 1 - 3 AND 5
None/not applicable.
ITEM 4
We held our Annual Meeting of Shareholders on November 20, 2003. We solicited
proxies for the election of eight directors, for the approval of our 2003
Long-Term Incentive Plan and for ratification of the appointment of Ernst &
Young LLP as our independent auditors for the 2004 fiscal year. Of the
43,372,432 shares of capital stock outstanding on the record date, 38,109,003,
or 87.9%, were voted in person or by proxy at the meeting date.
The tabulated results are set forth below:
Election of directors
For Against
---------- ----------
R. V. Armes 27,318,319 10,790,684
G. R. Kempton 36,542,387 1,566,616
W. M. Lasky 37,207,504 901,499
J. A. Mezera 36,481,615 1,627,388
S. Rabinowitz 36,531,289 1,577,714
R. C. Stark 36,542,436 1,566,567
T. C. Wajnert 36,583,989 1,525,014
C. O. Wood, III 36,510,675 1,598,328
Approval of our 2003 Long-Term Incentive Plan.
For Against Abstain Broker non-votes
---------- --------- ------- ----------------
23,844,510 4,949,382 963,306 8,351,805
Ratification of the appointment of Ernst & Young LLP as independent auditors for
the 2004 fiscal year.
For Against Abstain
---------- --------- ------
36,032,285 2,019,225 57,493
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
12 Statement Regarding Computation of Ratios
15 Letter re: Unaudited Interim Financial Information
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
99 Cautionary Statements Pursuant to the Securities Litigation Reform
Act
29
(b) We filed a Current Report on Form 8-K on August 15, 2003, which included
our Press Releases dated July 8, 2003, and August 4, 2003. The items
reported on such Form 8-K were Item 2. (Acquisition or Disposition of
Assets), Item 5. (Other Events and Regulation FD Disclosure and Item 7.
(Financial Statements, Pro Forma Financial Information and Exhibits). We
filed a Current Report on Form 8-K on September 23, 2003, which included
our Press Release dated September 22, 2003. The items reported on such
Form 8-K were Item 5. (Other Events), Item 7. (Financial Statements, Pro
Forma Financial Information and Exhibits) and Item 12. (Results of
Operations and Financial Condition). We filed a Current Report on Form 8-K
on October 9, 2003. The items reported on such Form 8-K were Item 7.
(Financial Statements, Pro Forma Financial Information and Exhibits) and
Item 12. (Results of Operations and Financial Condition). We filed a
Current Report on Form 8-K/A on October 14, 2003. The items reported on
such Form 8-K/A were (Acquisition or Disposition of Assets), Item 5.
(Other Events and Regulation FD Disclosure and Item 7. (Financial
Statements, Pro Forma Financial Information and Exhibits).
30
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.
JLG INDUSTRIES, INC.
(Registrant)
Date: March 16, 2004 /s/ James H. Woodward, Jr.
----------------------------------------
James H. Woodward, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 16, 2004 /s/ John W. Cook
----------------------------------------
John W. Cook
Chief Accounting Officer
(Chief Accounting Officer)
31