1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bearings, Inc. and Subsidiaries
YEAR ENDED JUNE 30, 1994 VS 1993
Sales in 1994 increased 13% to a record $936.3 million from 1993 sales of
$831.4 million. The increase in sales was principally due to volume increases
and the acquisition of Mainline Industrial Distributors, Inc. (Mainline).
Further, net income for the fiscal year ended June 30, 1994 improved 42% over
the prior year.
Gross margin (net sales less cost of sales) as a percent of sales was
26.9% in 1994 and 26.2% in 1993. The gross margin percentage improved in
fiscal 1994 due to more focused purchasing strategies and favorable LIFO cost
adjustments. During 1994, the Company liquidated LIFO inventory quantities
carried at lower costs prevailing in prior years. The effect of the liquidation
included the effect of a change in the application of the LIFO method of
calculating inventory. This new method determines the Company's LIFO inventory
pools by class of product rather than the operating company. (See Note 3 to the
Consolidated Financial Statements).
Selling, distribution and administrative expenses as a percent of sales
were 23.9% in 1994 and 23.8% in 1993. During fiscal 1994, the Company incurred
increased expenses due to a new sales commission program for account
representatives and a new incentive program for sales management, increased
advertising costs due to additional marketing programs, costs associated with
the acquisition of Mainline and the accelerated vesting of performance
accelerated restricted stock (PARS) based upon the price performance of the
Company's common stock during the year.
The number of associates rose to 4,066 at June 30, 1994 from 3,986 at
June 30, 1993.
Interest expense for 1994 increased by 15% as a result of the issuance
of $80 million of long-term debt in December of 1992 and repayment of
previously existing short-term debt. As long-term interest rates are higher
than short-term interest rates, interest expense has increased. The increased
expense was partially offset by net interest earned under interest rate swap
agreements and lower average borrowings during the year.
Income tax expense as a percentage of income before income taxes was
41.4% in 1994. The effective tax rate was greater than the federal statutory
rate primarily due to state and local income taxes and non-deductible expenses.
YEAR ENDED JUNE 30, 1993 VS 1992
Results for the fiscal year ended June 30, 1993 were significantly improved
over the prior year. The Company returned to profitability after reporting a
loss in the previous year which included a restructuring charge of $7.8
million. (See Note 9 to the Consolidated Financial Statements).
Sales in 1993 of $831.4 million increased 1.7% from 1992 levels
primarily due to price increases. Gross margin (net sales less cost of sales)
as a percent of sales was 26.2% in 1993 and 25.7% in 1992. The gross margin
percentage in fiscal 1993 was higher due to favorable LIFO cost adjustments
resulting from lower inventory levels and a strengthening of selling prices
coupled with minimal increases in costs. (See Note 3 to the Consolidated
Financial Statements).
Selling, distribution and administrative expenses as a percent of sales
were 23.8% in 1993 and 24.2% in 1992. During fiscal 1993, the Company incurred
increased expenses for incentive programs due to improved performance and for
associate training. Salaries and other compensation expense decreased as a
result of a reduction in the number of associates to 3,986 at June 30, 1993
from 4,050 at June 30, 1992. Also, during 1993 consulting fees decreased due
to completion of data processing enhancements and health care expenses declined
due to lower claims and implementation of new managed health care programs.
Interest expense for 1993 decreased by 21% due to lower short-term
interest rates, lower average indebtedness, and favorable interest rate swap
agreements. These were offset in part by higher fixed interest costs incurred
- - --------------------------------------10---------------------------------------
2
Bearings, Inc. and Subsidiaries
from borrowings under Senior Unsecured Term Notes.
Incomes tax expense as a percentage of income before income taxes was
41.9% in 1993. The effective tax rate was greater than the federal statutory
rate primarily due to state and local income taxes and non-deductible expenses.
LIQUIDITY AND WORKING CAPITAL
The Company continued to provide significant amounts of cash by generating
$30.5 million and $18.9 million from operating activities in 1994 and 1993,
respectively.
Cash flow from operations depends primarily upon generating operating
income and controlling the investment in inventory and receivables. The
Company's growth in accounts receivable and inventory in 1994 was necessary to
service the increased sales volume. Further, in 1994 the Company had a
substantial increase in net income.
Investments in property totaled $16.6 million and $13.6 million in 1994
and 1993, respectively. These capital expenditures were primarily made for
upgrading branch facilities, acquisition of data processing equipment, vehicles
and real estate.
Working capital at June 30, 1994, was $144.6 million compared to $130.9
million at June 30, 1993. The current ratio was 2.4 at June 30, 1994 and 1993.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business,
indebtedness under the Company's lines of credit and long-term debt and, to a
lesser extent, from operating lease arrangements. Average combined short-term
and long-term borrowing was $103.0 million in 1994 and $107.7 million in 1993.
Effective interest rates on short-term borrowings were 4.0% in both 1994 and
1993. The Company has short-term lines of credit totaling $95 million. The
Company had $19.8 million of borrowings under these short-term lines of credit
at June 30, 1994.
The Company is obligated for rental payments for operating leases on
165 of its 352 branch, distribution center and other operating locations. See
Note 8 to the Consolidated Financial Statements for annual rental commmitments.
As of June 30, 1994, the Company has Board authorization to acquire up
to 263,000 shares of its common stock in open market or negotiated transactions
depending on market conditions.
Management expects that capital resources provided from operations,
available lines of credit, and long-term debt will be sufficient to finance
normal working capital needs, capital expenditure programs, and the purchase of
additional Bearings, Inc. common stock. Management also believes that
additional long-term debt and line of credit financing could be obtained if
desired.
OTHER MATTERS
The 1990 agreement for the acquisition of King Bearing included specific
indemnification of Bearings, Inc. and King for any financial damages or losses
related to a lawsuit pending against King in the Superior Court of Orange
County, California. The indemnification was also guaranteed by the ultimate
parent of King's former owner, a Fortune 100 company with stockholders' equity
exceeding three billion dollars at June 30, 1994. A $32.4 million judgement
relating to this lawsuit was rendered against King in June 1992. As further
explained in Note 10 to the Consolidated Financial Statements, management
believes that the outcome of this matter will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company due to the indemnification and guarantee.
- - -------------------------------------11----------------------------------------
3
STATEMENTS OF
CONSOLIDATED INCOME
(Thousands, except per share amounts) Bearings, Inc and Subsidiaries
Year Ended June 30
----------------------------------------
1994 1993 1992
-------- -------- --------
NET SALES $936,254 $831,432 $817,813
-------- -------- --------
COST AND EXPENSES
Cost of Sales 684,213 613,246 607,443
Selling, Distribution and administrative 224,224 197,665 197,835
Restructuring charge 7,832
-------- -------- --------
908,437 810,911 813,110
-------- -------- --------
OPERATING INCOME 27,817 20,521 4,703
-------- -------- --------
INTEREST EXPENSE 6,385 5,546 6,985
INTEREST INCOME (225) (382) (407)
-------- -------- --------
6,160 5,164 6,578
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 21,657 15,357 (1,875)
-------- -------- --------
INCOME TAX EXPENSE (BENEFIT)
Federal 7,172 5,365 (178)
State and Local 1,798 1,065 (31)
-------- -------- --------
8,970 6,430 (209)
-------- -------- --------
NET INCOME (LOSS) $ 12,687 $ 8,927 $ (1,666)
======== ======== ========
NET INCOME (LOSS) PER SHARE $ 1.68 $ 1.23 $ (.24)
======== ======== ========
See notes to consolidated Financial Statements.
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CONSOLIDATED
BALANCE SHEETS
(Amounts in thousands) Bearings, Inc. and Subsidiaries
June 30
---------------------------------------------------
1994 1993
------------ -------------
ASSETS
Current assets
Cash and temporary investments $ 10,935 $ 4,634
Accounts receivable, less allowance of
$1,900 and $2,000 129,798 112,971
Inventories 106,233 95,015
Other current assets 2,278 8,613
---------- ------------
Total current assets 249,244 221,233
---------- ------------
Property - at cost
Land 11,642 11,265
Buildings 54,889 52,001
Equipment 66,906 66,479
---------- ------------
133,437 129,745
Less accumulated depreciation 53,318 49,695
---------- ------------
Property - net 80,119 80,050
---------- ------------
Other assets 14,156 14,652
---------- -------------
TOTAL ASSETS $ 343,519 $ 315,935
=========== =============
LIABILITIES
Current Liabilities
Notes payable $ 19,805 $ 22,678
Accounts payable 50,937 37,678
Compensation and related benefits 21,508 18,770
Other accrued liabilities 12,389 11,247
----------- -------------
Total current liabilities 104,639 90,373
Long-term debt 80,000 80,000
Deferred income taxes 3,370 5,706
Other liabilities 5,019 4,916
------------ --------------
TOTAL LIABILITES 193,028 180,995
------------ --------------
SHAREHOLDERS' EQUITY
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 30,000 shares
authorized; 9,303 shares issued 10,000 10,000
Additional paid-in capital 6,962 6,710
Income retained for use
in the business 165,807 155,908
Less 1,757 and 1,984 treasury shares -
at cost (32,278) (35,489)
Less unearned restricted common stock
compensation (2,189)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 150,491 134,940
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 343,519 $ 315,935
============ ============
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED
CASH FLOWS
(Amounts in thousands) Bearings, Inc. and Subsidiaries
Year Ended June 30
-------------------------------------------------------
1994 1993 1992
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 12,687 $ 8,927 $ (1,666)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 13,586 12,766 12,586
Deferred income taxes 2,448 3,507 (1,504)
Provision for losses on accounts receivable 1,418 2,190 2,496
(Gain)/loss on sale of property (775) 225 688
Amortization of restricted common stock
compensation and goodwill 2,779 580 267
Treasury shares contributed to employee benefit plans 1,510 856 733
Changes in current assets and liabilities:
Accounts receivable (14,344) (5,207) (8,270)
Inventories (2,042) 6,676 9,488
Other current assets 885 1,049 609
Accounts payable and accrued expenses 9,810 (14,273) 15,573
Other-net 2,547 1,611 269
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30,509 18,907 31,269
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property purchases (16,585) (13,600) (20,444)
Proceeds from property sales 4,901 3,160 2,680
Other (519) (1,170) (3,998)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (12,203) (11,610) (21,762)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) under:
Line-of-credit agreements:
Maturities three months or less-net (5,321) (87,322) 22,884
Maturities greater than three months:
Borrowings 60,000 125,000
Repayments (60,000) (152,000)
Long-term debt 80,000
Dividends paid (4,739) (4,640) (4,533)
Purchase of treasury shares (1,945)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (12,005) (11,962) (8,649)
-------- -------- --------
Increase (decrease) in cash and temporary investments 6,301 (4,665) 858
Cash and temporary investments at beginning of year 4,634 9,299 8,441
-------- -------- --------
CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 10,935 $ 4,634 $ 9,299
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 3,697 $ 2,288 $ 539
Interest $ 5,928 $ 4,935 $ 6,988
<FN>
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED
SHAREHOLDERS' EQUITY
For the Years Ended June 30, 1994, 1993, and 1992
(Amounts in thousands)
Shares of Income Unearned
Common Additional Retained Treasury Restricted Total
Stock Common Paid-in for Use in Shares- Common Stock Shareholders'
Outstanding Stock Capital the Business at Cost Compensation Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 1, 1991 7,057 $10,000 $6,483 $157,906 $(40,186) $134,203
Net Loss (1,666) (1,666)
Cash dividends-
$.64 per share (4,533) (4,533)
Treasury shares issued for:
401(k) Savings Plan
contribution 34 124 609 733
Exercise of stock options 13 29 241 270
Other (177) (177)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1992 7,104 10,000 6,636 151,530 (39,336) 128,830
Net income 8,927 8,927
Cash dividends-
$.64 per share (4,640) (4,640)
Treasury shares issued for:
401(k) Savings Plan
contribution 44 86 770 856
Exercise of stock options 30 (19) 543 524
Restricted common stock
awards 140 (2) 2,505 $(2,503)
Other 1 9 29 38
Amortization of restricted
common stock compensation 314 314
Other 91 91
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1993
As previously reported 7,319 10,000 6,710 155,908 (35,489) (2,189) 134,940
Pooling of interests with
Mainline Industrial
Distributors 196 (1,353) 1,876 3,542 4,065
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS RESTATED 7,515 10,000 5,357 157,784 (31,947) (2,189) 139,005
Net income 12,687 12,687
Cash dividends-
$.64 per share (4,739) (4,739)
Purchase of common
stock for treasury (59) (1,945) (1,945)
Treasury shares issued for:
401(k) Savings Plan
contribution 56 503 1,007 1,510
Exercise of stock options 13 74 237 311
Restricted common stock
awards 13 53 233 (286)
Other 8 64 137 201
Amortization of restricted
common stock compensation 911 2,475 3,386
Other 75 75
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 7,546 $10,000 $6,962 $165,807 $(32,278) $ 0 $150,491
====================================================================================================================================
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Years Ended June 30, 1994, 1993, and 1992
(Dollar amounts in thousands,
except per share amounts) Bearings, Inc. and Subsidiaries
1. BUSINESS AND ACCOUNTING POLICIES
BUSINESS. The Company's principal business is the sale and distribution of
bearings, mechanical and electrical drive systems, industrial rubber products,
fluid power transmission components, and specialty maintenance and repair
products. The Company does not manufacture the products it sells.
CASH EQUIVALENTS. The Company considers all temporary investments with
maturities of three months or less to be cash equivalents for purposes of the
statements of consolidated cash flows.
CONSOLIDATION. The consolidated financial statements include the accounts of
Bearings, Inc. and its wholly-owned subsidiaries Bruening Bearings, Inc., Dixie
Bearings, Incorporated, King Bearing, Inc. and for the year ended June 30,
1994, Mainline Industrial Distributors, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
GOODWILL is recorded for the purchase price of acquired operations in excess of
the fair value of identifiable net assets. Goodwill, net of accumulated
amortization, of $4,752 and $4,524 at June 30, 1994 and 1993, respectively, is
included in other assets in the accompanying consolidated balance sheets and is
being amortized on a straight-line basis over periods ranging from 15 to 20
years.
INVENTORIES are valued at the lower of cost or market, using the last-in,
first-out (LIFO) method.
DEPRECIATION of buildings and equipment is computed using the straight-line
method over the estimated useful lives of the assets.
NET INCOME PER SHARE is computed using the weighted average number of common
shares outstanding for the period. Net income per share has not been adjusted
for the effect of stock options as the dilutive effect would be less than 3%
for each year.
CONSOLIDATED CASH FLOWS PRESENTATION. The statement of consolidated cash flows
for the year ended June 30, 1994 is presented using the indirect method of
reporting cash flows from operating activities. The presentation of the
statements of consolidated cash flows for fiscal years 1993 and 1992 have been
changed to the indirect method to be consistent with fiscal 1994.
ACCOUNTING CHANGES. For the year ended June 30, 1994, the Company changed its
method of accounting for income taxes to conform with Statement of Financial
Accounting Standards (SFAS) No. 109 (see Note 5) and its application of the
LIFO method used to determine inventory amounts for financial reporting
purposes (see Note 3).
2. BUSINESS COMBINATION
On March 10, 1994, the Company exchanged 196,000 shares of Bearings, Inc.
common stock for Mainline Industrial Distributors, Inc., a high quality applied
technology distributor of drive systems, rubber products and bearings. The
business combination was accounted for as a pooling of interests. The Company's
1994 consolidated financial statements include Mainline's results of operations
for the entire fiscal year. The prior years' consolidated financial statements
have not been restated because the effects are not material.
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Net sales and net income for the separate companies prior to the acquisition
are as follows:
Nine Months Ended
March 31, 1994
(Unaudited)
--------------------------
Bearings Mainline
-------- --------
Net Sales $663,841 $24,899
Net Income 7,369 229
Acquisition costs of $700 were charged to expense in 1994 and included legal
and accounting fees, consulting fees and benefit-related costs.
3. INVENTORIES
For the year ended June 30, 1994, the Company changed its application of the
last-in, first-out (LIFO) method used to determine inventory amounts for
financial reporting purposes. This change revised the Company's LIFO pools to
establish Company-wide inventory pools for each of the major classes of
products. Previously, the LIFO inventory pools were established by legal
entity, rather than by class of product. Management believes that using
inventory pools grouped by product is more consistent with how the Company
currently manages its operations and will more accurately measure the effects
of changes in inventory levels and costs.
The cumulative effect on previous years from this change in LIFO
pools is not determinable. This change in LIFO pools reduced cost of sales and
increased net income and net income per share by $3,344, $1,894, and $.25,
respectively, for the year ended June 30, 1994. These effects are incorporated
in the LIFO liquidation effects discussed below.
CURRENT COST. At the end of the last two fiscal years, the current cost
of inventories exceeded the LIFO cost as follows:
June 30,
------------------------------
1994 1993
---- ----
LIFO cost $106,233 $ 95,015
Excess of current cost over
LIFO cost 86,429 96,718
-------- --------
Current cost $192,662 $191,733
======== ========
LIFO LIQUIDATION. During the years ended June 30, 1994 and 1993, the Company
liquidated LIFO inventory quantities carried at lower costs prevailing in prior
years. The effect of these liquidations, including the effect of the accounting
change discussed above, reduced cost of sales and increased net income and net
income per share by $6,784, $3,841, and $.51 per share, respectively, during
1994 and $4,714, $2,749 and $.38 per share, respectively, during 1993. The
effects of LIFO liquidations during 1992 were not material.
4. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE. The Company has $95,000 of short-term lines of credit which
provide for payment of interest at various interest rate options, none of which
are in excess of the banks' prime rate at interest determination dates.
Borrowings under these lines of credit totaled $19,805 at June 30, 1994. The
remaining unused lines available for short-term borrowings at June 30, 1994
were $75,195.
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LONG-TERM DEBT. The Company has $80,000 of long-term Senior Unsecured Term
Notes at a fixed interest rate of 7.82%. Interst is payable quarterly. The
principal amount is to be paid in fourteen equal semi-annual installments
beginning in June 1996. These notes contain certain restrictive covenants
regarding liquidity, tangible net worth, financial ratios and other covenants.
At June 30, 1994, the most restrictive of these covenants required that the
Company maintain a minimum tangible net worth of $104,646. Based upon current
market rates for debt of similar maturities, the Company estimates that the
fair value of its long-term debt is less than its carrying value at June 30,
1994 by $1,100.
During 1994, the Company received net proceeds from termination of
its three year interest rate swap agreements previously held. The Company also
entered into a new two year interest rate swap agreement with a major bank that
effectively converts $40,000 of its fixed rate borrowings into variable rate
obligations. Under this agreement the Company makes payments at variable rates
based on LIBOR, as determined at quarterly intervals, and receives payments at
fixed interest rates. Net interest earned under these agreements reduced
interest expense. The interest rate swap agreement has no carrying value. The
Company's estimated cost to terminate the agreement as of June 30, 1994 was
$300.
5. INCOME TAXES
For the year ended June 30, 1994, the Company changed its method of accounting
for income taxes from the deferred method used in prior years to the liability
method, as required by SFAS No. 109, "Accounting for Income Taxes." As
permitted by SFAS No. 109, the Company has elected not to restate the financial
statements of any prior year. There was no significant cumulative effect on the
Statements of Consolidated Income for adopting SFAS No. 109.
PROVISION. The provision (benefit) for income taxes consists of:
LIABILITY METHOD Deferred Method Deferred Method
Year ended June 30 1994 1993 1992
----------------------------------------------------------------------------
Current $6,522 $2,923 $ 1,295
Deferred 2,448 3,507 (1,504)
------ ------ ------
Total $8,970 $6,430 $ (209)
====== ====== ======
Prior to the change in accounting methods, the net tax effects giving rise to
deferred amounts were:
Year Ended June 30,
1993 1992
-----------------------------------
Accrued restructuring charge $1,238 $(1,159)
Accrued vacation (146) 44
Inventory obsolescence 1,448 (859)
Depreciation 144 222
Allowance for doubtful accounts 343 (304)
Other 480 552
------ -------
Total $3,507 $(1,504)
====== =======
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EFFECTIVE TAX RATES. A reconciliation between the federal statutory income tax
rate (benefit) and the Company's effective tax rate is:
LIABILITY METHOD Deferred Method Deferred Method
Years ended June 30 1994 1993 1992
------------------------------------------------------
Statutory tax rate 35.0% 34.0% (34.0)%
Effects of:
State and local income taxes 5.4 4.6 (1.1)
Non-deductible expenses 1.8 2.1 18.2
Alternative minimum tax 0.4 5.6
Other, net (0.8) 0.8 0.2
----- ----- -----
Effective tax rate 41.4% 41.9% (11.1)%
===== ===== =====
BALANCE SHEET. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
significant components of the Company's deferred tax assets (liabilities) as of
June 30, 1994 are as follows:
June 30, 1994
-------------
Depreciation and differences in property bases $(5,443)
Inventory (8,394)
Compensation liabilities not currently deductible 3,791
Reserves not currently deductible 1,968
Goodwill 1,389
Tax loss/credit carryforwards 393
Other 686
Valuation allowance (211)
-------
Net deferred tax liability $(5,821)
=======
Net deferred tax liabilities associated with current items of $2,451 at
June 30, 1994 are included in other accrued liabilities in the Consolidated
Balance Sheets.
The valuation allowance was established due to the Company's estimation that
certain state income tax loss carryforwards may expire unused.
6. STOCK INCENTIVE PLANS
The Company may grant stock options under the 1990 Long-Term Performance Plan
(the "1990 Plan"). Outstanding options issued under the Company's 1982 Stock
Option Plan continue to be exercisable until expiration. Options become
exercisable at times determined by the Executive Organization and Compensation
Committee of the Board of Directors (the "Committee") at the date of grant.
Options may include stock appreciation rights that entitle the holder to
receive shares of stock or cash, at the discretion of the Committee, equal to
the difference between the value of the shares covered by the option on the
date of exercise less the option price for such shares. The 1990 Plan also
provides for granting of stock awards, cash awards, and such
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other awards or combination thereof as the Committee may determine. The number
of shares of Common Stock which may be awarded in each fiscal year under the
1990 Plan is two percent (2%) of the total number of shares of Common Stock
outstanding on the first day of each year for which the plan is in effect.
Common Stock available for distribution under the 1990 Plan, but not
distributed, may be carried over to the following year.
During fiscal 1994 accelerated vesting occurred for all 153,000 shares of
Performance Accelerated Restricted Stock (PARS) awarded to officers and other
key associates during fiscal 1994 and 1993 under the 1990 Plan. Pursuant to
the PARS agreements, recipients were entitled to receive dividends and have
voting rights on their respective shares prior to vesting. The PARS vested
either after a period of six years or earlier upon achievement of certain
return on asset objectives or minimum stock price levels. The aggregate fair
market value of the restricted stock was considered unearned compensation at
the time of grant. Unearned common stock compensation reduced consolidated
shareholders' equity and was amortized over the vesting period or upon
acceleration of vesting. With the accelerated vesting of all outstanding PARS
during 1994, all remaining unearned compensation was recorded as an expense.
The expense recorded in 1994 exceeded by $2,010 the annual expense which would
have been recorded on the basis of six-year amortization.
The following is a summary of transactions with respect to the stock
incentive plans:
Number of Shares
-------------------------------------------------
Available for
Option Price Per Share Outstanding Exercisable Future Grants
---------------------------------------------------------------------------
Balance at July 1, 1991 482,662 189,082 189,305
Additional available from 1990 Plan 141,132
Became exercisable 112,332
Canceled upon exercise $14.19-$16.89 (75,946) (75,946)
Granted $20.56 141,700 (141,700)
- - -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1992 548,416 225,468 188,737
Additional available from 1990 Plan 142,082
Became exercisable 130,030
Canceled upon exercise $14.19-$20.56 (40,828) (40,828)
Expired/canceled $20.56-$30.00 (25,634) (24,250) (188,645)
PARS common stock awards (140,000)
- - -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 481,954 290,420 2,174
Additional available from 1990 Plan 146,382
Became exercisable 115,050
Cancelled upon exercise $14.19-$30.00 (98,795) (98,795)
Expired/canceled $14.19-$30.00 (20,325) (16,475)
Granted $21.94-$32.31 119,450 (119,450)
PARS common stock awards (13,000)
- - -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 482,284 290,200 16,106
======= ======= ======
At June 30, 1994 option prices related to the balance outstanding ranged from
$14.19 to $32.31 per share.
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7. BENEFIT PLANS
QUALIFIED RETIREMENT PLANS. Substantially all associates of the Company are
covered by the following defined contribution retirement plans. The Company
makes a discretionary contribution to the Employees' Profit-Sharing Trust
generally based upon a percentage of the Company's income before income taxes
and before the amount of the contribution. The 401(k) Savings Plan allows
participants to contribute up to ten percent of their compensation.
The Company partially matches the participants' contributions. The matching
contribution is made with the Company's Common Stock and is determined
quarterly using rates based on the Company achieving certain quarterly net
income amounts.
The Company's expense for contributions to the above plans was $2,602,
$1,496 and $678 for the years ended June 30, 1994, 1993, and 1992,
respectively.
RETIREE MEDICAL BENEFITS. The Company provides health care benefits to
eligible retired associates who elect to pay the Company a specified monthly
premium. Premium payments are based upon current insurance rates for the type
of coverage provided and are adjusted annually. Certain monthly health care
premium payments are partially subsidized by the Company.
In fiscal 1993, the Company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual of such post-retirement benefits over the years the associate
provides services and becomes eligible to receive benefits upon retirement. In
1993 the Company accrued an expense of $588 (which, net of income taxes,
reduced net income by $352, or $.05 per share) for the accumulated
post-retirement benefit obligation. At June 30, 1994 the accumulated
post-retirement benefit obligation was $630. The costs recognized for
post-retirement benefits under SFAS No. 106 for fiscal 1994 and 1993, and
under the previous pay-as-you-go accounting method during 1992, were not
material.
SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFIT PLAN (SERP). The Company has a
non-qualified pension plan to provide supplemental retirement benefits to
certain officers. Benefits are payable at retirement based upon a percentage
of the participant's compensation. The plan specifies minimum annual
retirement benefits for certain participants.
The funded status of the SERP plan is:
June 30
-----------------------------
1994 1993
--------- ---------
Projected benefit obligation $ 4,446 $ 4,376
Unrecognized net transition obligation (536) (980)
Unrecognized net loss (801) (893)
Unrecognized prior service cost
minimum liability 886 1,520
-------- ---------
Accrued pension liability, included in
other liabilities on the Consolidated
Balance Sheets $ 3,727 $ 3,641
======== =========
Accumulated benefit obligation, fully vested $ 3,727 $ 3,641
======== =========
21
13
Periodic pension cost for the SERP consists of:
Year ended June 30
---------------------------------------------------
1994 1993 1992
---- ---- ----
Service cost - benefits earned $ 91 $ 64 $ 24
Interest cost on projected benefit obligation 347 334 406
Net amortization and deferral 483 388 370
---- ---- ----
Total $ 921 $ 786 $ 800
===== ===== =====
Pension cost and benefit obligations shown above were determined using a
discount rate of 8.0% and a rate of increase in compensation levels of 5.5%. At
June 30, 1994 there were no assets under the plan. The Company funds the
benefits when payments are made to participants.
8. LEASE COMMITMENTS AND RENT EXPENSE
The Company leases certain branch and distribution center facilities and
computer equipment under non-cancelable lease agreements. The minimum annual
rental commitment under operating leases is $7,517 in 1995; $6,056 in 1996;
$4,576 in 1997; $3,832 in 1998; $2,071 in 1999, and $2,950 after 2000.
Rental cost, principally from leases for real property, vehicles and
computer equipment was $10,013 in 1994, $8,527 in 1993, and $11,596 in 1992.
9. RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1992, the Company adopted a restructuring
plan which critically evaluated the performance of all facilities and
administrative functions to enhance the Company's long-term profitability. The
actions related to this plan, which were substantially completed in fiscal 1993,
included the reorganization and consolidation of certain branch, distribution
center, shop facilities and administrative functions. A restructuring charge of
$7,832 was recorded in 1992 for the costs of these actions, including lease
termination costs, write-off of property and other assets associated with
reorganization or consolidation of facilities, relocation costs and separation
costs of terminated associates.
10. LITIGATION
The 1990 agreement for the acquisition of King Bearing included specific
indemnification of Bearings, Inc. and King for any financial damages or losses
related to a lawsuit pending against King in the Superior Court of Orange
County, California. The indemnification was also guaranteed by the ultimate
parent of King's former owner, a Fortune 100 company with stockholders' equity
exceeding three billion dollars at June 30, 1994. A $32,400 judgment relating
to this lawsuit was rendered against King in June 1992. The judgment is being
strongly contested by counsel retained by the indemnitor on behalf of King, and
in September 1992 the trial court granted the motion of King for a new trial as
to all but $219 in damages returned by the jury. A notice of appeal was filed
by the cross-complainants, and the case is now pending in the California Court
of Appeal, Fourth Appellate District. All alleged events relevant to the
judgment occurred prior to the Company's purchase of King and the jury found no
liability on the part of Bearings, Inc. Due to the indemnification and
guarantee, management believes that the outcome of this matter will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
22
14
INDEPENDENT
AUDITORS' REPORT
Bearings, Inc. and Subsidiaries
[ DELOITTE & TOUCHE LLP - LOGO ]
Shareholders and Board of Directors
Bearings, Inc.
We have audited the accompanying consolidated balance sheets of Bearings, Inc.
and its subsidiaries (the "Company") as of June 30, 1994 and 1993 and the
related statements of consolidated income, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company at June 30,
1994 and 1993 and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 5 and 3 to the consolidated financial statements,
in the year ended June 30, 1994, the Company changed its method of accounting
for income taxes to conform with Statement of Financial Accounting Standards
No. 109 and its application of the last-in, first-out (LIFO) method for valuing
inventories.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
August 5, 1994
23
15
QUARTERLY OPERATING RESULTS
AND MARKET DATA
Bearings, Inc. and Subsidiaries
(UNAUDITED)
(Dollar amounts in thousands, except per share amounts)
Per Common Share
-----------------------------------------------
Net Net
Net Gross Income Income Cash Price Range
Sales Profit (Loss) (Loss) Dividend High Low
- - ---------------------------------------------------------------------------------------------------------------------
1994
FIRST QUARTER(C) $222,712 $ 56,672 $ 2,398 $ .32 $.16 $25.25 $21.13
SECOND QUARTER(C) 226,285 61,528 2,314 .31 .16 31.13 25.38
THIRD QUARTER 239,743 65,498 2,886 .38 .16 37.50 27.75
FOURTH QUARTER 247,514 68,343 5,089 .68 .16 34.00 30.00
-------- -------- ------- ----- ----
$936,254 $252,041 $12,687 $1.68 $.64
======== ======== ======= ===== ====
1993
First Quarter $204,175 $ 50,603 $ 1,505 $ .21 $.16 $18.75 $16.75
Second Quarter 198,535 51,587 1,755 .24 .16 23.25 16.88
Third Quarter 210,789 54,673 2,378 .33 .16 23.50 20.50
Fourth Quarter 217,933 61,323 3,289 .45 .16 24.75 21.38
-------- -------- ------- ----- ----
$831,432 $218,186 $ 8,927 $1.23 $.64
======== ======== ======= ===== ====
1992
First Quarter $202,038 $ 51,621 $ 1,037 $ .15 $.16 $23.63 $19.88
Second Quarter 198,639 52,132 381 .05 .16 21.13 18.00
Third Quarter 208,144 52,081 392 .06 .16 23.25 19.38
Fourth Quarter(B) 208,992 54,536 (3,476) (.49) .16 22.63 17.63
-------- -------- ------- ----- ----
$817,813 $210,370 $(1,666) $(.24) $.64
======== ======== ======= ===== ====
<FN>
(A) Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the year
based upon avalilable information. Adjustments to actual cost are made based
upon the annual physical inventory and the effect of year-end inventory
quantities on LIFO costs. The physical inventory adjustments in 1994 and
1993 were not material. The physical inventory adjustment in 1992 increased
gross profit, net income and net income per share by $1,806; $1,084; and
$.15, respectively. Reductions in inventories during the fiscal years ended
June 30, 1994 and 1993 resulted in liquidations of LIFO inventory quantities
carried at lower costs prevailing in prior years. The effect of these
liquidations for the years ended June 30, 1994 and 1993 increased annual
gross profit by $6,784 and $4,714; annual net income by $3,841 and $2,749
and net income per share by $.51 and $.38, respectively. The effects of LIFO
liquidations during 1992 were not material. (See Note 3 of Notes to
Consolidated Financial Statements).
(B) Includes a restructuring charge of $7,832 for costs of reorganization
and consolidation of certain branch, distribution center and other
facilities and administrative functions. Net of applicable income
taxes, this charge decreased net income by $4,700 or $.66 per share. (See
Note 9 of Notes to Consolidated Financial Statements.)
(C) The first two quarters of 1994 have been restated to relect the acquisition
of Mainline. (See Note 2 of Notes to Consolidated Financial Statements.)
(D) On September 1, 1994 there were 1,469 shareholders of record. Additionally
at June 30, 1994 there were 2,994 participants in the Bearings, Inc. 401(k)
Savings Plan. The Company's common stock is listed on the New York Stock
Exchange. The closing price on September 1, 1994 was $32.25 per share.
25
16
10 YEAR
SUMMARY
(Thousands, except per share data and statistics)
1994 1993 1992 1991
- - ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS-
YEAR ENDED JUNE 30
Net sales $ 936,254 $ 831,432 $ 817,813 $ 814,000
Operating income 27,817 20,521 4,703 17,115
Net income (loss) 12,687 8,927 (1,666) 4,282
Per share data
Net income (loss) 1.68 1.23 (.24) 61
Cash dividend .64 .64 .64 .64
YEAR-END POSITION - JUNE 30
Working capital $ 144,605 $ 130,860 $ 41,967 $ 54,695
Long-term debt 80,000 80,000
Total assets 343,519 315,935 330,619 327,939
Shareholders' equity 150,491 134,940 128,830 134,203
YEAR-END STATISTICS - JUNE 30
Current ratio 2.4 2.4 1.2 1.3
Branches 339 323 333 341
Shareholders of record 1,484(A) 1,543 1,617 1,679
<FN>
(A) In addition there were 2,994 employee participants in the Bearings, Inc. 401(k) Savings Plan.
26
17
Bearings, Inc. and Subsidiaries
1990 1989 1988 1987 1986 1985
- - --------------------------------------------------------------------------------------------------
$ 651,271 $ 630,281 $ 542,883 $ 490,995 $ 490,249 $ 495,529
25,281 33,463 25,000 13,964 7,591 24,934
12,201 18,313 14,948 6,247 2,244 11,011
1.70 2.45 1.89 .71 .25 1.22
.64 .56 .489 .445 .445 .445
$ 64,091 $ 75,134 $ 77,606 $ 121,068 $ 129,288 $ 131,690
44,750 44,750 44,750
380,224 251,376 222,957 223,202 231,894 225,082
135,338 134,848 128,919 125,419 133,912 135,126
1.3 1.7 1.9 3.5 3.7 4.2
363 267 266 269 274 275
1,694 1,358 1,318 1,361 1,476 1,613
27