10-Q 1 j9927201e10vq.txt FORM 10-Q JLG INDUSTRIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended January 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: 0-8454 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 (Zip Code) offices)
Registrant's telephone number, including area code: (7l7) 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 / / The number of shares of capital stock outstanding as of February 27, 2003 was 42,992,910. 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.................... 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 30 Item 4. Controls and Procedures................................. 30 Independent Accountants' Review Report............................ 31 PART II Item 6. Exhibits and Reports on Form 8-K........................ 32 Signatures........................................................ 33
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JLG INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) January 31, July 31, 2003 2002 --------- --------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 9,565 $ 6,205 Accounts receivable - net 210,192 227,809 Finance receivables - net 18,031 27,529 Pledged finance receivables 39,685 34,985 Inventories 168,612 165,536 Other current assets 24,404 31,042 --------- --------- Total current assets 470,489 493,106 Property, plant and equipment - net 81,165 84,370 Equipment held for rental - net 20,288 20,979 Finance receivables, less current portion 61,427 45,412 Pledged finance receivables, less current portion 73,971 53,703 Goodwill - net 29,509 28,791 Other assets 59,231 51,880 --------- --------- $ 796,080 $ 778,241 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt and current portion of long-term debt $ 23,436 $ 14,427 Current portion of limited recourse debt 36,511 34,850 Accounts payable 70,162 129,317 Accrued expenses 62,949 83,309 --------- --------- Total current liabilities 193,058 261,903 Long-term debt, less current portion 242,207 177,331 Limited recourse debt, less current portion 70,151 52,721 Accrued post-retirement benefits 25,833 24,989 Other long-term liabilities 11,317 10,807 Provisions for contingencies 11,754 14,448 Shareholders' equity Capital stock: Authorized shares: 100,000 at $.20 par Issued and outstanding shares: 42,969; fiscal 2002 - 42,728 8,594 8,546 Additional paid-in capital 20,508 18,846 Retained earnings 221,083 216,957 Unearned compensation (2,938) (1,649) Accumulated other comprehensive income (loss) (5,487) (6,658) --------- --------- Total shareholders' equity 241,760 236,042 --------- --------- $ 796,080 $ 778,241 ========= =========
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 Six Months Ended January 31, January 31, 2003 2002 2003 2002 --------- --------- --------- --------- Revenues Net sales $ 143,961 $ 150,617 $ 298,349 $ 300,823 Financial products 4,836 2,958 9,226 6,107 Rentals 2,516 2,777 4,225 5,584 --------- --------- --------- --------- 151,313 156,352 311,800 312,514 Cost of sales 125,215 131,822 256,586 257,924 --------- --------- --------- --------- Gross profit 26,098 24,530 55,214 54,590 Selling and administrative expenses 16,377 15,756 33,862 34,861 Product development expenses 3,889 3,664 7,790 7,667 Restructuring charges 1,183 -- 1,183 -- --------- --------- --------- --------- Income from operations 4,649 5,110 12,379 12,062 Interest expense (6,072) (4,027) (11,576) (8,365) Miscellaneous, net 7,638 909 5,896 1,826 --------- --------- --------- --------- Income before taxes and cumulative effect of change in accounting principle 6,215 1,992 6,699 5,523 Income tax provision 1,989 658 2,144 1,823 --------- --------- --------- --------- Income before cumulative effect of change in accounting principle 4,226 1,334 4,555 3,700 Cumulative effect of change in accounting principle -- -- -- (114,470) --------- --------- --------- --------- Net income (loss) $ 4,226 $ 1,334 $ 4,555 $(110,770) ========= ========= ========= ========= Earnings (loss) per common share: Earnings per common share before cumulative effect of change in accounting principle $ .10 $ .03 $ .11 $ .09 Cumulative effect of change in accounting principle -- -- -- (2.74) --------- --------- --------- --------- Earnings (loss) per common share $ .10 $ .03 $ .11 $ (2.65) ========= ========= ========= ========= Earnings (loss) per common share - assuming dilution: Earnings per common share - assuming dilution before cumulative effect of change in accounting principle $ .10 $ .03 $ .11 $ .09 Cumulative effect of change in accounting principle -- -- -- (2.70) --------- --------- --------- --------- Earnings (loss) per common share - assuming dilution $ .10 $ .03 $ .11 $ (2.61) ========= ========= ========= ========= Cash dividends per share $ .005 $ .005 $ .01 $ .015 ========= ========= ========= ========= Weighted average shares outstanding 42,570 41,813 42,568 41,816 ========= ========= ========= ========= Weighted average shares outstanding - assuming dilution 42,867 42,399 42,873 42,409 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 2 JLG INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended January 31, 2003 2002 --------- --------- OPERATIONS Net income (loss) $ 4,555 $(110,770) Adjustments to reconcile net income to cash flow from operating activities: Loss (gain) on sale of property, plant and equipment 92 (63) Gain on sale of equipment held for rental (3,851) (102) Non-cash charges and credits: Cumulative effect of change in accounting principle -- 114,470 Depreciation and amortization 10,415 11,119 Other 8,282 3,552 Changes in selected working capital items: Accounts receivable 15,329 48,230 Inventories (3,571) 39,920 Accounts payable (59,479) (22,949) Other operating assets and liabilities (18,088) (16,862) Changes in finance receivables (7,108) (7,662) Changes in pledged finance receivables (35,345) -- Changes in other assets and liabilities (3,873) 1,392 --------- --------- Cash flow from operating activities (92,642) 60,275 INVESTMENTS Purchases of property, plant and equipment (4,936) (6,571) Proceeds from the sale of property, plant and equipment 124 137 Purchases of equipment held for rental (11,337) (15,881) Proceeds from the sale of equipment held for rental 12,604 5,840 Other (1,193) -- --------- --------- Cash flow from investing activities (4,738) (16,475) FINANCING Net increase in short-term debt 9,049 816 Issuance of long-term debt 220,000 221,459 Repayment of long-term debt (159,261) (272,157) Issuance of limited recourse debt 29,468 -- Payment of dividends (429) (631) Exercise of stock options and issuance of restricted awards 478 570 --------- --------- Cash flow from financing activities 99,305 (49,943) CURRENCY ADJUSTMENTS Effect of exchange rate changes on cash 1,435 461 --------- --------- CASH Net change in cash and cash equivalents 3,360 (5,682) Beginning balance 6,205 9,254 --------- --------- Ending balance $ 9,565 $ 3,572 ========= =========
The accompanying notes are an integral part of these financial statements. 3 JLG INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JANUARY 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 six-month period ended January 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 for the fiscal year ended July 31, 2002. Where appropriate, we have reclassified certain amounts in fiscal 2002 to conform to the fiscal 2003 presentation. NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS Effective August 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations," which establishes the accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 did not have an impact on our consolidated financial position or results of operations. Effective August 1, 2002, we adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 144 did not have a significant impact on our consolidated financial position or results of operations. Effective June 1, 2002, we adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement requires, among other things, that gains and losses on the early extinguishment of debt be classified as extraordinary only if they meet the criteria for extraordinary treatment set forth in Accounting Principles Board Opinion No. 30. The adoption of SFAS No. 145 did not have a significant impact on our consolidated financial position or results of operations. Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and is effective for exit or disposal activities initiated after December 31, 2002. As more fully described in Note 11 of the Notes to Condensed Consolidated Financial Statements, the adoption of SFAS No. 146 required that since some employees terminated under our second quarter 2003 restructuring plan are required to render service until they are terminated in order to receive the termination benefit, we will recognize this liability ratably over the future periods of service. Under previous accounting treatment, we would have immediately recognized the entire obligation for this severance at the time of approval of the restructuring plan. Effective January 1, 2003 we adopted the provisions of FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The implementation of this interpretation requires certain disclosures regarding guarantees of the indebtedness of 4 others as provided in Note 12 of the Notes to Condensed Consolidated Financial Statements. In addition, FIN 45 requires that we recognize at inception of a guarantee a liability for the fair value of the obligation undertaken in issuing the guarantee. The requirements of FIN 45 did not have a significant impact on our results of operations or financial position at January 31, 2003. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123 and Accounting Principles Board ("APB") No. 28, "Interim Financial Reporting." The transition provisions of this Statement are effective for fiscal years ending after December 15, 2002, and the disclosure requirements of the Statement are effective for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 will not have an impact on us as we have elected to continue to follow APB No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. In addition, pro forma disclosure of stock based compensation, as measured under the fair value requirements of SFAS No. 123, "Accounting for Stock Based Compensation," will be provided quarterly and annually commencing with the effective dates of SFAS No. 148 for our third quarter ended April 30, 2003. NOTE 3 - INVENTORIES AND COST OF SALES 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 January 31, 2003, must necessarily be based on our estimate of expected fiscal year-end inventory levels and costs. Inventories consist of the following:
January 31, July 31, 2003 2002 -------- -------- Finished goods $110,117 $104,680 Raw materials and work in process 63,717 65,579 -------- -------- 173,834 170,259 Less LIFO provision 5,222 4,723 -------- -------- $168,612 $165,536 ======== ========
NOTE 4 - FINANCE RECEIVABLES Finance receivables represent sales-type leases resulting from the sale of our products. Our net investment in finance receivables was as follows at:
January 31, July 31, 2003 2002 --------- --------- Gross finance receivables $ 184,921 $ 155,786 Estimated residual value 50,259 44,608 --------- --------- 235,180 200,394 Unearned income (39,076) (36,384) --------- --------- Net finance receivables 196,104 164,010 Provision for losses (2,990) (2,381) --------- --------- $ 193,114 $ 161,629 ========= =========
Of the finance receivables balances at January 31, 2003 and July 31, 2002, $113.7 million and $88.7 million, respectively, are pledged finance receivables resulting from the sale of finance receivables through limited recourse and non-recourse monetization transactions during fiscal 2002 and the first six months of fiscal 2003. 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 5 maximum loss exposure associated with these limited recourse agreements is $8.5 million as of January 31, 2003. Based on our estimates, we believe that no losses are probable and have not recorded any reserves. The following table displays the contractual maturity of our 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 January 31: 2003 $ 41,705 2004 41,076 2005 39,410 2006 35,486 2007 19,409 Thereafter 7,835 Residual value in equipment at lease end 50,259 Less: unearned finance income (39,076) -------- Net investment in leases $196,104 ========
Provisions for losses on 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 5 - GOODWILL In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," establishing new financial reporting standards for acquired goodwill and other intangible assets. On August 1, 2001, we elected early adoption of SFAS No. 142. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. Accordingly, we ceased amortization of all goodwill. During the second quarter of fiscal 2002, we concluded that goodwill was impaired and during the fourth quarter of fiscal 2002 recorded an impairment charge of $114.5 million, or $2.65 per diluted share, as a cumulative effect of change in accounting principle. As required, we have restated the fiscal 2002 interim statements to reflect the transitional impairment loss as if the accounting change had occurred during the first quarter of fiscal 2002. There was no income tax effect on this change in accounting principle. The circumstances leading to the impairment of goodwill primarily resulted from changing business conditions including consolidation of the telehandler market, unplanned excess manufacturing capacity costs and eroded margins due to competitive pricing pressures. We calculated the fair value of our Gradall and foreign reporting units, which are part of our Machinery segment, using third party appraisals and expected future discounted cash flows. This table presents our reconciliation of the recorded goodwill during the period from July 31, 2002 to January 31, 2003: Balance as of August 1, 2002 $28,791 Additions 718 Impairment charge recorded -- ------- Balance as of January 31, 2003 $29,509 =======
During the second quarter of fiscal 2003, we purchased the assets of a trailer manufacturer, which caused the increase in the recorded goodwill. These trailers feature a unique hydraulic system that allows the operator to lower the trailer deck to ground level. This product series is complementary to our aerial work platform product lines and is offered in 20 models with three styles: flat bed, utility or enclosed. 6 NOTE 6 - CHANGES IN ACCOUNTING ESTIMATES During the second quarter of fiscal 2003, we determined that we would not make a discretionary profit sharing contribution for calendar year 2002. This change resulted in an increase in net income of $1.8 million, or $.04 per diluted share, for the second quarter of fiscal 2003 and $1.3 million, or $.03 per diluted share, for the first six months of fiscal 2003. During the second quarter of fiscal 2002, we determined that certain volume-related customer incentives would not be achieved and that we would not make a discretionary profit sharing contribution for calendar year 2001. The reversal of the accrual related to volume-related customer incentives resulted in an increase in net income of $2.6 million, or $.06 per diluted share, for the second quarter of fiscal 2002 and $2.3 million, or $.06 per diluted share, for the first six months of fiscal 2002. The reversal of the accrual related to the discretionary profit sharing contribution for calendar year 2001 resulted in an increase in net income of $2.2 million, or $.05 per diluted share, for the second quarter of fiscal 2002 and $1.8 million, or $.04 per diluted share, for the first six months of fiscal 2002. NOTE 7 - BASIC AND DILUTED EARNINGS PER SHARE This table presents our computation of basic and diluted earnings per share for each of the periods ended January 31:
Three Months Ended Six Months Ended January 31, January 31, 2003 2002 2003 2002 ------- ------- ------- --------- Income before cumulative effect of change in accounting principle $ 4,226 $ 1,334 $ 4,555 $ 3,700 Cumulative effect of change in accounting principle -- -- -- (114,470) ------- ------- ------- --------- Net income (loss) $ 4,226 $ 1,334 $ 4,555 $(110,770) ======= ======= ======= ========= Denominator for basic earnings per share -- weighted average shares 42,570 41,813 42,568 41,816 Effect of dilutive securities - employee stock options and unvested restricted shares 297 586 305 593 ------- ------- ------- --------- Denominator for diluted earnings per share -- weighted average shares adjusted for dilutive securities 42,867 42,399 42,873 42,409 ======= ======= ======= ========= Earnings per common share before cumulative effect of change in accounting principle $ .10 $ .03 $ .11 $ .09 Cumulative effect of change in accounting principle -- -- -- (2.74) ------- ------- ------- --------- Earnings (loss) per common share $ .10 $ .03 $ .11 $ (2.65) ======= ======= ======= ========= Earnings per common share - assuming dilution before cumulative effect of change in accounting principle $ .10 $ .03 $ .11 $ .09 Cumulative effect of change in accounting principle -- -- -- (2.70) ------- ------- ------- --------- Earnings (loss) per common share - assuming dilution $ .10 $ .03 $ .11 $ (2.61) ======= ======= ======= =========
7 During the quarter ended January 31, 2003, options to purchase 4.1 million shares of capital stock at a range of $8.10 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 8 - SEGMENT INFORMATION 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 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. 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 each of the periods ended January 31:
Three Months Ended Six Months Ended January 31, January 31, 2003 2002 2003 2002 --------- --------- --------- --------- Revenues: Machinery $ 109,550 $ 122,925 $ 234,096 $ 251,963 Equipment Services 36,676 29,963 68,047 53,430 Access Financial Solutions 5,087 3,464 9,657 7,121 --------- --------- --------- --------- $ 151,313 $ 156,352 $ 311,800 $ 312,514 ========= ========= ========= ========= Segment profit (loss): Machinery $ 168 $ 465 $ 5,147 $ 3,486 Equipment Services 6,632 8,352 11,886 16,062 Access Financial Solutions 1,881 1,175 2,979 2,595 General corporate (6,475) (5,889) (12,211) (12,189) --------- --------- --------- --------- Segment profit 2,206 4,103 7,801 9,954 Add Access Financial Solutions' interest expense 2,443 1,007 4,578 2,108 --------- --------- --------- --------- Operating income $ 4,649 $ 5,110 $ 12,379 $ 12,062 ========= ========= ========= =========
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 each of the periods ended January 31:
Three Months Ended Six Months Ended January 31, January 31, 2003 2002 2003 2002 -------- -------- -------- -------- United States $107,920 $112,643 $225,270 $220,065 Europe 32,816 33,923 64,064 73,009 Other 10,577 9,786 22,466 19,440 --------- --------- --------- --------- $ 151,313 $ 156,352 $ 311,800 $ 312,514 ========= ========= ========= =========
NOTE 9 - SUPPLEMENTAL INFORMATION The following supplemental consolidated data submitted with the condensed consolidated financial statements is presented for the sole purpose of facilitating the analysis of the results of our Equipment Operations and Financial Services businesses as included in the condensed consolidated financial statements. These two operations are engaged in fundamentally different businesses and cannot be easily analyzed on a consolidated basis. Equipment 8 Operations includes the operations of our Machinery and Equipment Services segments with Financial Services reflected on the equity basis. Access Financial Solutions consists of our financial services business. In addition to the monthly amortization of monetization transactions, Access Financial Solutions recognizes an allocation of interest expense. The amount of interest expense that is transferred from Equipment Operations is based upon the monthly weighted cost of debt multiplied by Access Financial Solutions' portfolio balance less the initial investment in Access Financial Solutions of $30.0 million. Condensed Statements of Income Equipment Operations with Access Financial Solutions on the Equity Basis
Three Months Ended Six Months Ended January 31, January 31, 2003 2002 2003 2002 --------- --------- --------- --------- Revenues: Net sales $ 143,961 $ 150,617 $ 298,349 $ 300,823 Rentals 2,265 2,271 3,794 4,570 --------- --------- --------- --------- 146,226 152,888 302,143 305,393 Costs of sales 125,060 131,526 256,254 257,365 --------- --------- --------- --------- Gross profit 21,166 21,362 45,889 48,028 Selling, administrative and product development expenses 19,659 18,434 39,884 40,669 Restructuring charges 1,183 -- 1,183 -- --------- --------- --------- --------- Income from operations 324 2,928 4,822 7,359 Interest expense (3,628) (3,020) (6,998) (6,257) Miscellaneous, net 7,625 909 5,883 1,826 --------- --------- --------- --------- Income before taxes and cumulative effect of change in accounting principle 4,321 817 3,707 2,928 Income tax provision (1,383) (270) (1,187) (966) Equity in income of Access Financial Solutions 1,288 787 2,035 1,738 --------- --------- --------- --------- Income before cumulative effect of change in accounting principle 4,226 1,334 4,555 3,700 Cumulative effect of change in accounting principle -- -- -- (114,470) --------- --------- --------- --------- Net income (loss) $ 4,226 $ 1,334 $ 4,555 $(110,770) ========= ========= ========= =========
9 Condensed Statements of Income Financial Services Access Financial Solutions
Three Months Ended Six Months Ended January 31, January 31, 2003 2002 2003 2002 ------ ------ ------ ------ Revenues: Financial products $4,836 $2,958 $9,226 $6,107 Rentals 251 506 431 1,014 ------ ------ ------ ------ 5,087 3,464 9,657 7,121 Operating expenses: Administrative and other expense 762 1,282 2,100 2,418 Interest expense 2,444 1,007 4,578 2,108 ------ ------ ------ ------ Total operating expenses 3,206 2,289 6,678 4,526 ------ ------ ------ ------ Income from operations 1,881 1,175 2,979 2,595 Miscellaneous, net 13 -- 13 -- ------ ------ ------ ------ Income before taxes 1,894 1,175 2,992 2,595 Income tax provision 606 388 957 857 ------ ------ ------ ------ Net income $1,288 $ 787 $2,035 $1,738 ====== ====== ====== ======
10 Condensed Balance Sheets Equipment Operations with Access Financial Solutions on the Equity Basis
January 31, July 31, 2003 2002 -------- -------- ASSETS Current Assets Cash and cash equivalents $ 9,565 $ 6,205 Accounts receivable, net 182,280 204,779 Inventories 168,612 165,536 Other current assets 24,404 31,042 -------- -------- Total current assets 384,861 407,562 Property, plant and equipment, net 81,165 84,354 Equipment held for rental, net 17,777 17,576 Goodwill, net 29,509 28,791 Investment in Access Financial Solutions 35,438 33,403 Receivable from Access Financial Solutions 78,715 64,106 Other assets 58,973 52,805 -------- -------- $686,438 $688,597 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt and current portion of long-term debt $ 23,436 $ 14,427 Accounts payable 70,162 129,317 Accrued expenses 59,969 81,236 -------- -------- Total current liabilities 153,567 224,980 Long-term debt, less current portion 242,207 177,331 Accrued post-retirement benefits 25,833 24,989 Other long-term liabilities 11,317 10,807 Provisions for contingencies 11,754 14,448 Shareholders' equity 241,760 236,042 -------- -------- $686,438 $688,597 ======== ========
11 Condensed Balance Sheets Financial Services Access Financial Solutions
January 31, July 31, 2003 2002 -------- -------- ASSETS Current Assets Accounts receivable, net $ 27,912 $ 23,030 Finance receivables, net 18,031 27,529 Pledged finance receivables 39,685 34,985 -------- -------- Total current assets 85,628 85,544 Property, plant and equipment, net -- 16 Finance receivables, less current portion 61,427 45,412 Pledged finance receivables, less current portion 73,971 53,703 Other assets 2,769 2,478 -------- -------- $223,795 $187,153 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of limited recourse debt $ 36,511 $ 34,850 Accrued expenses 2,980 2,073 -------- -------- Total current liabilities 39,491 36,923 Limited recourse debt, less current portion 70,151 52,721 Payable to JLG Industries, Inc. 78,715 64,106 Shareholders' equity 35,438 33,403 -------- -------- $223,795 $187,153 ======== ========
Condensed Statements of Cash Flows Equipment Operations with Access Financial Solutions on the Equity Basis
Six Months Ended January 31, 2003 2002 -------- -------- Cash flow from operating activities $(47,026) $ 69,101 Cash flow from investing activities (6,277) (15,778) Cash flow from financing activities 55,228 (59,466) Effect of exchange rate changes on cash 1,435 461 -------- -------- Net change in cash and cash equivalents 3,360 (5,682) Beginning balance 6,205 9,254 -------- -------- Ending balance $ 9,565 $ 3,572 ======== ========
12 Condensed Statements of Cash Flows Financial Services Access Financial Solutions
Six Months Ended January 31, 2003 2002 -------- -------- Cash flow from operating activities $(43,581) $ (7,088) Cash flow from investing activities (496) (2,435) Cash flow from financing activities 44,077 9,523 -------- -------- Net change in cash and cash equivalents -- -- Beginning balance -- -- -------- -------- Ending balance $ -- $ -- ======== ========
NOTE 10 - COMPREHENSIVE INCOME 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 each of the periods ended January 31:
Three Months Ended Six Months Ended January 31, January 31, 2003 2002 2003 2002 --------- --------- --------- --------- Net income (loss) $ 4,226 $ 1,334 $ 4,555 $(110,770) Aggregate translation adjustment 1,718 63 1,171 159 --------- --------- --------- --------- $ 5,944 $ 1,397 $ 5,726 $(110,611) ========= ========= ========= =========
NOTE 11 - 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 commenced in early 2001, the 130,000-square foot Sunnyside facility in Bedford, Pennsylvania, which currently produces selected scissor lift models, will be temporarily idled and production integrated into our Shippensburg, Pennsylvania facility. Additionally, reductions in selling, administrative and product development costs will result from changes in the global organizational and process consolidations. When these changes are fully implemented, we expect to generate approximately $20 million in annualized savings at a cost of $9.4 million representing a payback of approximately six months. We will be reducing a total of 189 people globally and transferring 99 production jobs from the Bedford Sunnyside operation to the Shippensburg facility. Production of scissor lifts, which are now assembled at the Sunnyside facility, will be integrated into our newer and more flexible 300,000-square foot facility in Shippensburg by fiscal year end. As a result, we anticipate incurring a pre-tax charge of $5.9 million, consisting of $3.5 million in restructuring costs associated with personnel reductions and relocation and lease and contract terminations and $2.4 million in 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. In addition, we will spend approximately $3.5 million on capital requirements. Almost all of these expenses will be cash charges, which will be recorded over the next three quarters. 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. In accordance with new accounting requirements, during the second quarter of fiscal 2003, we recognized approximately $1.2 million of the pre-tax charge, consisting of an accrual for termination benefit costs, which were reported as restructuring costs. We anticipate recording $1.5 million and $0.8 13 million of restructuring costs in our third and fourth quarters of fiscal 2003, respectively, with employee termination dates staggered throughout these quarters. 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 $ 1,183 $ -- $ 1,183 $ 2,402 Fiscal 2003 utilization of reserves - cash (114) (114) (19) ------- ------- ------- ------- Balance at January 31, 2003 $ 1,069 $ -- $ 1,069 $ 2,383 ======= ======= ======= =======
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 this facility have been integrated into our McConnellsburg, Pennsylvania facility. As a result, we anticipated incurring a pre-tax charge of $7.7 million, consisting of $6.1 million in restructuring costs associated with approximately 170 personnel reductions and the write-down of idle facilities and $1.6 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. 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 Restructuring Termination Impairment Restructuring Related Benefits of Assets Costs Total 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 (852) -- 5 (847) (217) ------- ------- ------- ------- ------- Balance at January 31, 2003 $ 133 $ -- $ 277 $ 410 $ 817 ======= ======= ======= ======= =======
At January 31, 2003, we included $5.3 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. NOTE 12 - 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 year 2003 is comprised of a self-insured retention of $7 million for 14 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 $17.7 million and $18.8 million at January 31, 2003 and July 31, 2002, respectively. These amounts are included in other current liabilities 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 January 31, 2003 and July 31, 2002, there were $0 and $0.1 million of insurance recoverables or offset implications, respectively, and there were no claims by us being contested by insurers. At January 31, 2003, we are a party to multiple agreements whereby we guarantee $107.5 million in indebtedness of others. As of January 31, 2003, approximately 50% of the guaranteed indebtedness was owed by three customers. 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 January 31, 2003, we had a $2.2 million reserve related to these 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 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. NOTE 13 - BANK CREDIT LINES AND LONG-TERM DEBT Our credit facilities contain customary affirmative and negative covenants including financial covenants requiring the maintenance of specified consolidated interest coverage, leverage ratios and a minimum net worth. For the quarter ended January 31, 2003, we received waivers from compliance with our Limitations on Investments negative covenant. On February 21, 2003, we entered amendments to the credit agreements, which principally added JLG Europe BV and JLG Manufacturing Europe BVBA as borrowers and modified our Limitations on Investments negative covenant. Based on the amendments to the credit facilities and our forecasted ability to comply with the revised covenant, we continue to classify this debt as long-term. NOTE 14 - LIMITED RECOURSE DEBT As a result of the sale of finance receivables through limited recourse and non-recourse monetization transactions, we have $106.7 million of limited recourse debt outstanding as of January 31, 2003. The aggregate amounts of limited recourse debt outstanding at January 31, 2003 which will become due in 2004 through 2008 are: $36.5 million, $20.5 million, $21.6 million, $18.4 million and $6.8 million, respectively. 15 NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES 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 subordination provisions and 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 January 31, 2003
Guarantor Non-Guarantor Other and Consolidated Parent Subsidiaries Subsidiaries Eliminations Total ------ ------------ ------------ ------------ ----- ASSETS Accounts receivable - net $ 136,017 $ 30,502 $ 40,357 $ 3,316 $ 210,192 Finance receivables - net -- 76,087 -- 3,371 79,458 Pledged finance receivables -- 113,656 -- -- 113,656 Inventories 64,716 104,235 4,790 (5,129) 168,612 Property, plant and equipment - net 25,216 53,939 2,494 (484) 81,165 Equipment held for rental - net 1,110 16,340 2,838 -- 20,288 Investment in subsidiaries 244,238 28 2,650 (246,916) -- Other assets 71,477 44,515 6,708 9 122,709 --------- --------- --------- --------- --------- $ 542,774 $ 439,302 $ 59,837 $(245,833) $ 796,080 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 74,391 $ 38,493 $ 24,876 $ (4,649) $ 133,111 Long-term debt, less current portion 242,207 -- -- -- 242,207 Limited recourse debt, less current portion -- 70,151 -- -- 70,151 Other liabilities (257,004) 341,394 12,436 12,025 108,851 --------- --------- --------- --------- --------- Total liabilities 59,594 450,038 37,312 7,376 554,320 --------- --------- --------- --------- --------- Shareholders' equity 483,180 (10,736) 22,525 (253,209) 241,760 --------- --------- --------- --------- --------- $ 542,774 $ 439,302 $ 59,837 $(245,833) $ 796,080 ========= ========= ========= ========= =========
16 Condensed Consolidated Balance Sheet As of July 31, 2002
Guarantor Non-Guarantor Other and Consolidated Parent Subsidiaries Subsidiaries Eliminations Total ------ ------------ ------------ ------------ ----- ASSETS Accounts receivable - net $ 204,161 $ 19,215 $ 37,857 $ (33,424) $ 227,809 Finance receivables - net -- 73,138 -- (197) 72,941 Pledged finance receivables -- 88,688 -- -- 88,688 Inventories 91,649 49,107 25,432 (652) 165,536 Property, plant and equipment - net 31,376 46,874 6,548 (428) 84,370 Equipment held for rental - net 4,263 16,373 488 (145) 20,979 Investment in subsidiaries 248,114 -- 2,659 (250,773) -- Other assets 88,456 15,851 13,809 (198) 117,918 --------- --------- --------- --------- --------- $ 668,019 $ 309,246 $ 86,793 $(285,817) $ 778,241 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 158,046 $ 31,035 $ 44,902 $ (21,357) $ 212,626 Long-term debt, less current portion 177,309 22 -- -- 177,331 Limited recourse debt, less current portion -- 52,721 -- -- 52,721 Other liabilities (108,932) 221,240 (1,492) (11,295) 99,521 --------- --------- --------- --------- --------- Total liabilities 226,423 305,018 43,410 (32,652) 542,199 --------- --------- --------- --------- --------- Shareholders' equity 441,596 4,228 43,383 (253,165) 236,042 --------- --------- --------- --------- --------- $ 668,019 $ 309,246 $ 86,793 $(285,817) $ 778,241 ========= ========= ========= ========= =========
Condensed Consolidated Statement of Income For the Six Months Ended January 31, 2003
Guarantor Non-Guarantor Other and Consolidated Parent Subsidiaries Subsidiaries Eliminations Total ------ ------------ ------------ ------------ ----- Revenues $ 216,394 $ 79,683 $ 43,408 $ (27,685) $ 311,800 Gross profit (loss) 56,587 (1,659) 3,837 (3,551) 55,214 Other expenses (income) 33,377 12,493 3,378 1,411 50,659 Net income (loss) $ 23,210 $ (14,152) $ 459 $ (4,962) $ 4,555
17 Condensed Consolidated Statement of Income For the Six Months Ended January 31, 2002
Guarantor Non-Guarantor Other and Consolidated Parent Subsidiaries Subsidiaries Eliminations Total ------ ------------ ------------ ------------ ----- Revenues $212,005 $97,170 $30,833 $(27,494) $312,514 Gross profit (loss) 52,692 (150) 2,277 (229) 54,590 Other expenses (income) 42,994 120,759 1,619 (12) 165,360 Net income (loss) $9,698 $(120,909) $658 $(217) $(110,770)
Condensed Consolidated Statement of Cash Flows For the Six Months Ended January 31, 2003
Guarantor Non-Guarantor Other and Consolidated Parent Subsidiaries Subsidiaries Eliminations Total ------ ------------ ------------ ------------ ----- Cash flow from operating activities $(83,033) $(11,349) $2,412 $(672) $(92,642) Cash flow from investing activities (3,295) 57 (1,429) (71) (4,738) Cash flow from financing activities 69,933 29,372 16 (16) 99,305 Effect of exchange rate changes on cash 422 1,199 (1,244) 1,058 1,435 -------- -------- ------ ----- -------- Net change in cash and cash equivalents (15,973) 19,279 (245) 299 3,360 Beginning balance 22,949 (19,197) 2,745 (292) 6,205 -------- -------- ------ ----- -------- Ending balance $6,976 $82 $2,500 $7 $9,565 ======== ======== ====== ===== ========
Condensed Consolidated Statements of Cash Flows For the Six Months Ended January 31, 2002
Guarantor Non-Guarantor Other and Consolidated Parent Subsidiaries Subsidiaries Eliminations Total ------ ------------ ------------ ------------ ----- Cash flow from operating activities $ 87,841 $(29,393) $ 2,020 $ (193) $ 60,275 Cash flow from investing activities (32,037) (11,856) (3,372) 30,790 (16,475) Cash flow from financing activities (48,255) 29,847 (785) (30,750) (49,943) Effect of exchange rate changes on cash 278 -- 261 (78) 461 -------- -------- ------- -------- --------- Net change in cash and cash equivalents 7,827 (11,402) (1,876) (231) (5,682) Beginning balance 6,034 (1,714) 4,636 298 9,254 -------- -------- ------- -------- --------- Ending balance $ 13,861 $(13,116) $ 2,760 $ 67 $ 3,572 ======== ======== ======= ======== =========
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We reported net income of $4.2 million, or $.10 per share on a diluted basis, for the second quarter of fiscal 2003, compared to net income of $1.3 million, or $.03 per share on a diluted basis, for the second quarter of fiscal 2002. As discussed below and more fully described in Note 11 of the Notes to Condensed Consolidated Financial Statements, earnings for the second quarter of fiscal 2003 included charges of $1.3 million ($0.9 million net of tax) related to repositioning our operations to more appropriately align our costs with our business activity. In addition, earnings for the second quarter of fiscal 2003 included favorable currency adjustments of $7.6 million ($5.2 million net of tax). We reported net income of $4.6 million, or $.11 per share on a diluted basis, for the first six months of fiscal 2003, compared to net income, before the cumulative effect of change in accounting principle related to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," of $3.7 million, or $.09 per share on a diluted basis, for the first six months of fiscal 2002. Earnings for the first six months of fiscal 2003 included restructuring and restructuring-related charges of $1.4 million ($1.0 million net of tax). In addition, earnings for the first six months of fiscal 2003 included favorable currency adjustments of $5.1 million ($3.5 million net of tax). 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 SECOND QUARTERS OF FISCAL 2003 AND 2002 Our revenues for the second quarter of fiscal 2003 were $151.3 million, down 3% from the $156.4 million in the comparable year-ago period. The following tables outline our revenues by segment, products and geography (in thousands) for the quarter ended:
January 31, 2003 2002 ---- ---- Segment: Machinery $109,550 $122,925 Equipment Services 36,676 29,963 Access Financial Solutions (a) 5,087 3,464 -------- -------- $151,313 $156,352 ======== ======== Product: Aerial work platforms $79,615 $89,693 Telehandlers 19,417 18,624 Excavators 10,518 14,608 After-sales service and support, including parts sales, and used and reconditioned equipment sales 34,411 27,692 Financial products (a) 4,836 2,958 Rentals 2,516 2,777 -------- -------- $151,313 $156,352 ======== ======== Geographic: United States $107,920 $112,643 Europe 32,816 33,923 Other 10,577 9,786 -------- -------- $151,313 $156,352 ======== ========
19 (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. The decrease in Machinery segment revenues from $122.9 million to $109.6 million, or 11%, was principally attributable to reduced sales of aerial work platforms primarily due to the continued economic pressures in North America and economic pressures and tightened credit conditions in Europe partially offset by stronger sales in Australia. In addition, sales of our excavator product line declined due to the softness in the United States construction market and reduced state and municipal budgets. The decrease in sales of aerial work platforms and excavators was partially offset by increased telehandler sales reflecting share gains from new products, including the European-design product offerings. The second quarter of fiscal 2002 Machinery segment revenues also included the elimination of previously recorded volume-related customer incentives. The increase in Equipment Services segment revenues from $30 million to $36.7 million, or 22%, was principally attributable to increased sales of used equipment and parts. The increase in Access Financial Solutions segment revenues from $3.5 million to $5.1 million, or 47%, was principally attributable to income received on pledged finance receivables. While we have increased interest income attributable to our pledged finance receivables, a corresponding increase in our limited recourse debt results in this increased revenue being passed on to syndication purchasers in the form of interest expense on limited recourse debt. In accordance with the required accounting treatment, payments to syndication purchasers are reflected as interest expense in our Condensed Consolidated Statements of Income.. Our domestic revenues for the second quarter of fiscal 2003 were $107.9 million, down 4% from the comparable year-ago period revenues of $112.6 million. The decrease in our domestic revenues is primarily attributable to lower aerial work platform and excavator sales partially offset by higher sales of used equipment and parts, and increased revenues from financial products. Revenues generated from sales outside the United States for the second quarter of fiscal 2003 were $43.4 million, down 1% from the comparable year-ago period revenues of $43.7 million. The slight decrease in our revenues generated from sales outside the United States is primarily attributable to lower aerial work platform sales in Europe due to economic pressures and customer credit constraints partially offset by increased sales of aerial work platforms in Australia and increased telehandler sales in Europe. Our gross profit margin was 17.2% for the second quarter of fiscal 2003 compared to the prior year quarter's 15.7%. The increase was primarily attributable to higher margins in our Machinery and Access Financial Solutions segments offset in part by lower margins in our Equipment Services segment. The gross profit margin of our Machinery segment was 12.6% for the second quarter of fiscal 2003 compared to 9.8% for the second quarter of fiscal 2002. The increase is principally due to a more profitable product mix mainly as a result of new product introductions and 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 20.2% for the second quarter of fiscal 2003 compared to 31.1% for the corresponding period in the prior year. The decrease is primarily attributable to deferred profit recognized during the second quarter of fiscal 2002 from a one-time rental fleet sale-leaseback transaction and the write-down during the second quarter of fiscal 2003 of used equipment, primarily trade-ins, to the lower of cost or market. The gross profit margin of our Access Financial Solutions segment was 97% for the second quarter of fiscal 2003 compared to 91.5% for the corresponding period in the prior year. The increase is primarily because of increased financial product revenues during the second quarter of fiscal 2003 compared to the prior year period. 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 as a percent of revenues were 13.4% for the current year second quarter compared to 12.4% for the prior year second quarter. In dollar terms, these expenses were $0.8 million higher in the second quarter of fiscal 2003 than in the second quarter of fiscal 2002. Our Machinery segment's selling, administrative and product development expenses increased $0.8 million due primarily to increased bad debt provisions for specific reserves related to certain customers, higher contract services expenses and an increase in outside commissions, which were partially offset by lower payroll and related costs due to our cost reduction initiatives. Our Equipment Services segment's selling and administrative expenses decreased $0.2 million 20 due primarily to lower payroll and related costs. Our Access Financial Solutions segment's selling and administrative expenses decreased $0.4 million due primarily to a decrease in bad debt expense reflecting lower origination activity and the reduced non-monetized portfolio exposure and lower payroll and related costs, which were partially offset by increases in contract services and legal costs. Our general corporate selling, administrative and product development expenses increased $0.6 million primarily due to higher payroll and related costs, which was partially offset by reductions in bad debt provisions and employee benefit 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 commenced in early 2001, the 130,000-square foot Sunnyside facility in Bedford, Pennsylvania, which currently produces selected scissor lift models, will be temporarily idled and production integrated into our Shippensburg, Pennsylvania facility. Additionally, reductions in selling, administrative and product development costs will result from changes in the global organizational and process consolidations. When these changes are fully implemented, we expect to generate approximately $20 million in annualized savings at a cost of $9.4 million representing a payback of approximately six months. We will be reducing a total of 189 people globally and transferring 99 production jobs from the Bedford Sunnyside operation to the Shippensburg facility. Production of scissor lifts, which are now assembled at the Sunnyside facility, will be integrated into our newer and more flexible 300,000-square foot facility in Shippensburg by fiscal year end. As a result, we anticipate incurring a pre-tax charge of $5.9 million, consisting of $3.5 million in restructuring costs associated with personnel reductions and relocation and lease and contract terminations and $2.4 million in 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. In addition, we will spend approximately $3.5 million on capital requirements. Almost all of these expenses will be cash charges, which will be recorded over the next three quarters. During the second quarter of fiscal 2003, we incurred approximately $1.2 million of the pre-tax charge discussed above, consisting of an accrual for termination benefit costs, which were reported as restructuring costs. During the second quarter of fiscal 2003, we paid and charged $0.1 million of termination benefits against the accrued liability. 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 this facility have been integrated into our McConnellsburg, Pennsylvania facility. As a result, we anticipated incurring a pre-tax charge of $7.7 million, consisting of $6.1 million in restructuring costs associated with approximately 170 personnel reductions and the write-down of idle facilities and $1.6 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. During the second quarter of fiscal 2003, we incurred $0.1 million of the pre-tax charge discussed above, consisting of production relocation costs. We reported $0.1 million in cost of sales during the second quarter of fiscal 2003. During the second quarter of fiscal 2003, we paid and charged $0.2 million of termination benefits and lease termination costs against the accrued liability. The increase in interest expense of $2.0 million for the second quarter of fiscal 2003 was primarily due to the interest expense associated with our limited recourse and non-recourse monetizations and increased rates on our senior subordinated debt partially offset by lower debt levels and short-term rates. Our miscellaneous income (deductions) category included currency gains of $7.6 million in the second quarter of fiscal 2003 compared to gains of $0.7 million in the corresponding prior year period. The increase in currency gains is primarily attributable to the significant weakening of the U.S. dollar against the Euro, British pound and Australian dollar during the second quarter of fiscal 2003. 21 RESULTS FOR THE FIRST SIX MONTHS OF FISCAL 2003 AND 2002 Our revenues for the first six months of fiscal 2003 were $311.8 million, down .2% from the $312.5 million in the comparable year-ago period. The following tables outline our revenues by segment, products and geography (in thousands) for the six months ended:
January 31, 2003 2002 ---- ---- Segment: Machinery $234,096 $251,963 Equipment Services 68,047 53,430 Access Financial Solutions (a) 9,657 7,121 -------- -------- $311,800 $312,514 ======== ======== Product: Aerial work platforms $170,928 $192,060 Telehandlers 47,019 32,728 Excavators 16,149 27,175 After-sales service and support, including parts sales, and used and reconditioned equipment sales 64,253 48,860 Financial products (a) 9,226 6,107 Rentals 4,225 5,584 -------- -------- $311,800 $312,514 ======== ======== Geographic: United States $225,270 $220,065 Europe 64,064 73,009 Other 22,466 19,440 -------- -------- $311,800 $312,514 ======== ========
(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. The decrease in Machinery segment revenues from $252 million to $234.1 million, or 7%, was principally attributable to reduced sales of aerial work platforms primarily due to the economic pressures in North America and economic pressures and tightened credit conditions in Europe partially offset by stronger sales in Australia. In addition, sales of our excavator product line declined due to the softness in the United States construction market and reduced state and municipal budgets. The decrease in sales of aerial work platforms and excavators was partially offset by increased telehandler sales reflecting share gains from new products, including the European-design product offerings. The first six months of fiscal 2002 Machinery segment revenues also included the elimination of previously recorded volume-related customer incentives. The increase in Equipment Services segment revenues from $53.4 million to $68 million, or 27%, was principally attributable to increased sales of used equipment and parts. The increase in Access Financial Solutions segment revenues from $7.1 million to $9.7 million, or 36%, was principally attributable to income received on pledged finance receivables. While we have increased interest income attributable to our pledged finance receivables, a corresponding increase in our limited recourse debt results in this increased revenue being passed on to syndication purchasers in the form of interest expense on limited recourse debt. In accordance with the required accounting treatment, payments to syndication purchasers are reflected as interest expense in our Condensed Consolidated Statements of Income. 22 Our domestic revenues for the first six months of fiscal 2003 were $225.3 million, up 2% from the comparable year-ago period revenues of $220.1 million. The increase in our domestic revenues is primarily attributable to higher telehandler sales, reflecting share gains from new products, sales of used equipment and parts, and increased revenues from financial products. Revenues generated from sales outside the United States for the first six months of fiscal 2003 were $86.5 million, down 6% from the comparable year-ago period revenues of $92.4 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 economic pressures and customer credit constraints partially offset by increased sales of aerial work platforms in Australia and increased telehandler sales in Europe. Our gross profit margin was 17.7% for the first six months of fiscal 2003 compared to the prior year period's 17.5%. The increase was primarily attributable to higher margins in our Machinery and Access Financial Solutions segments offset in part by lower margins in our Equipment Services segment. The gross profit margin of our Machinery segment was 13.8% for the first six months of fiscal 2003 compared to 11.8% for the first six months of fiscal 2002. The increase is principally due to a more profitable product mix mainly as a result of new product introductions and the weakening of the U.S. dollar against the Euro, British pound and Australian dollar, partially offset by higher product costs as a result of production variances consisting mainly of under-absorbed overhead and higher labor costs associated with the startup of our Maasmechelen facility and the transfer of the telehandler product line to our McConnellsburg facility. The gross profit margin of our Equipment Services segment was 20% for the first six months of fiscal 2003 compared to 34.1% for the corresponding period in the prior year. The decrease is primarily attributable to higher used equipment sales in the auction channel, primarily former trade-ins of older non-JLG brand machines, which have lower margins, the deferred profit recognized during the first six months of fiscal 2002 from a one-time rental fleet sale-leaseback transaction and the write-down of used equipment, primarily trade-ins, to the lower of cost or market during the second quarter of fiscal 2003. The gross profit margin of our Access Financial Solutions segment was 96.6% for the first six months of fiscal 2003 compared to 92.1% for the corresponding period in the prior year. The increase is primarily because of increased financial product revenues during the first six months of fiscal 2003 compared to the prior year period. 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 as a percent of revenues were 13.4% for the first six months of fiscal 2003 compared to 13.6% for the first six months of fiscal 2002. In dollar terms, these expenses were $0.9 million lower in the first six months of fiscal 2003 than in the corresponding period of the previous year. Our Machinery segment's selling, administrative and product development expenses decreased $0.4 million due primarily to lower payroll and related costs due to our cost reduction initiatives, which was partially offset by increased bad debt provisions for specific reserves related to certain customers, higher contract services expenses and an increase in outside commissions. Our Equipment Services segment's selling and administrative expenses decreased $0.4 million due primarily to lower payroll and related costs. Our Access Financial Solutions segment's selling and administrative expenses decreased $0.1 million due primarily to lower payroll and related costs, and decreases in bad debt provisions reflecting lower origination activity and the reduced non-monetized portfolio exposure and travel expenses, which were partially offset by increases in contract services and legal costs. Our general corporate selling, administrative and product development expenses were flat year over year. Higher payroll and related costs were offset by reductions in bad debt provisions, computer software costs and employee benefit costs. During the first six months of fiscal 2003, we incurred approximately $1.2 million of the pre-tax charge related to the temporarily idling of our Bedford, Pennsylvania facility, discussed above, consisting of an accrual for termination benefit costs, which was reported as restructuring costs. During the first six months of fiscal 2003, we paid and charged $0.1 million of termination benefits against the accrued liability. During the first six months of fiscal 2003, we incurred $0.2 of the pre-tax charge related to our closure of the Orrville, Ohio facility, discussed above, consisting of production relocation costs, which were reported in cost of sales. In addition, during the first six months of fiscal 2003, we paid and charged $0.8 million of termination 23 benefits and lease termination costs against the accrued liability. Through the first six months of fiscal 2003, we incurred $6.9 million of the pre-tax charge consisting of an accrual of $1.2 million for termination benefit costs and a $4.9 million asset write-down and $0.8 million of production relocation costs. The increase in interest expense of $3.2 million for the first six months of fiscal 2003 was primarily due to the interest expense associated with our limited recourse and non-recourse monetizations and increased rates on our senior subordinated debt partially offset by lower debt levels and short-term rates. Our miscellaneous income (deductions) category included currency gains of $5.1 million in the first six months of fiscal 2003 compared to gains of $0.5 million in the corresponding prior year period. The increase in currency gains is primarily attributable to the significant weakening of the U.S. dollar against the Euro, British pound and Australian dollar during the first six of fiscal 2003. During the fourth quarter of fiscal 2002, we completed our review of our goodwill impairment as required by SFAS No. 142. As a result, we recorded a transitional impairment loss, in accordance with the transition rules of SFAS No. 142, of $114.5 million, primarily associated with our Gradall Industries, Inc. acquisition. Pursuant to the requirements of SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," we have restated the fiscal 2002 interim statements to reflect the transitional impairment loss as if the accounting change had occurred during the first quarter of fiscal 2002. 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. 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 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 operations. 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. 24 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 $29.5 million at January 31, 2003 and $28.8 million at July 31, 2002. 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. 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 generally 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. 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 therefrom are reflected in current earnings. If these estimates and related assumptions change, we may be required to record additional reserves. Revenue Recognition: Sales of equipment and service parts are generally unconditional sales that are recorded when product is shipped and invoiced to independently owned and operated distributors and customers. Normally our 25 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. During the first six months of fiscal 2003, approximately 2% of our European 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 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 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 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 the note entitled "Summary of Significant Accounting Policies" to the Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the fiscal year ended July 31, 2002. FINANCIAL CONDITION Cash flow used in operating activities was $92.6 million for the first six months of fiscal 2003 compared to cash generated of $60.3 million in the comparable period of fiscal 2002. The decrease in cash generated from operations for fiscal 2003 primarily resulted from lower trade account payables as days in accounts payable outstanding decreased to 36 days at January 31, 2003 compared to 67 days at July 31, 2002 and increased finance receivables resulting from $39.1 million of monetization transactions that were completed during the first six months of fiscal 2003. Investing activities during the first six months of fiscal 2003 used $4.7 million of cash compared to $16.5 million used for the first six months of fiscal 2002. The decrease in cash usage was principally due to an increase in sales of equipment held for rental during the first six months of fiscal 2003 and lower expenditures for equipment held for rental during the first six months of fiscal 2003 compared to the corresponding prior year period. Financing activities provided cash of $99.3 million for the first six months of fiscal 2003 compared to $49.9 million used for the first six months of fiscal 2002. The increase in cash provided by financing activities was largely attributable to increased debt used to finance working capital requirements as discussed above. 26 The following table provides a summary of our contractual obligations (in thousands) at January 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) $265,643 $23,436 $ 61,274 $ 278 $180,655 Limited recourse debt 106,662 36,511 42,078 25,220 2,853 Operating leases (b) 28,577 5,803 12,147 8,033 2,594 -------- ------- -------- ------- -------- Total contractual obligations $400,882 $65,750 $115,499 $33,531 $186,102 ======== ======= ======== ======= ========
(a) Included in long-term debt is our secured revolving credit facility with a group of financial institutions that provide an aggregate commitment of $250 million. We also have a $25 million secured bank revolving line of credit with a term of one year, renewable annually. The credit facilities contain customary affirmative and negative covenants including financial covenants requiring the maintenance of specified consolidated interest coverage, leverage ratios and a minimum net worth. 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. The following table provides a summary of our other commercial commitments (in thousands) at January 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 $ 6,054 $6,054 $ -- $ -- $ -- Guarantees (a) 107,474 84 35,937 57,095 14,358 -------- ------ ------- ------- ------- Total commercial commitments $113,528 $6,138 $35,937 $57,095 $14,358 ======== ====== ======= ======= =======
(a) We discuss our guarantee agreements in Note 12 of Notes to Condensed Consolidated Financial Statements of this report. We also monitor our net debt, which is a non-GAAP measure. Net debt reflects the sum of total debt and other off-balance sheet financing, minus cash and limited and non-recourse debt arising from our monetizations of customer finance receivables. The following presents net debt (in thousands) as of:
January 31, July 31, 2003 2002 ---- ---- Total debt $372,304 $279,329 Rental fleet sale/leaseback 3,858 5,582 Equipment sale/leaseback 6,977 7,749 -------- -------- Gross debt 383,139 292,660 Less cash 9,565 6,205 Less limited and non-recourse debt 106,661 87,571 -------- -------- Net debt $266,913 $198,884 ======== ========
As of January 31, 2003, we had unused credit lines totaling $190.9 million. In order to meet our future cash requirements, we intend to use internally generated funds and to borrow under our credit facilities. Availability of these credit lines depends upon our continued compliance with certain covenants, including certain financial ratios. Although we are currently in compliance with all financial covenants, including negative covenants, in our senior credit facilities, we received waivers to allow us to be in compliance at January 31, 2003 and the senior credit 27 facilities were amended during February 2003 to include JLG Europe BV and JLG Manufacturing Europe BVBA as borrowers and to modify our Limitations on Investments negative covenant. We also borrow under our credit lines to fund originations of customer finance receivables in our Access Financial Solutions segment. Our senior lenders have agreed to permit Access Financial Solutions to originate and have outstanding no more than $150 million in finance receivables, other than pledged receivables that secure on-balance sheet, limited recourse and non-recourse monetization transactions. As of January 31, 2003, we had outstanding finance receivables of $79.5 million. Our business plan anticipates that we will originate substantially more than $150 million in finance receivables. Accordingly, our plan requires that we be able to monetize our finance receivables through various means, including syndications, securitizations or other limited or non-recourse transactions. We do not have in place any guaranteed facility to monetize all of our finance receivables, and there can be no assurance that we will be able to monetize sufficient finance receivables to avoid being constrained by the $150 million limit imposed in our senior credit facilities. However, during the first six months of fiscal 2003 and during all of fiscal 2002, we monetized $39.1 million and $101.9 million, respectively, in finance receivables through syndications, and we are continuing to examine other alternatives for Access Financial Solutions. In addition to measuring our cash flow generation and usage based upon the operating, investing, and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow. Our measure of free cash flow may not be comparable to similarly titled measures being disclosed by other companies and is not a measure of financial performance that is in accordance with GAAP. With the commencement of reporting Access Financial Solutions as a separate segment, we modified our definition of free cash flow during the third quarter of fiscal 2002 to include in cash flow proceeds from on-balance sheet, limited and non-recourse monetization transactions in our Access Financial Solutions segment. We define free cash flow, a non-GAAP measure commonly employed by the financial community, as: (1) cash flow from operating activities plus (2) cash flow from investing activities, less (3) (a) unrealized currency gains or losses, (b) proceeds from the disposal and monetization of assets and (c) changes in accounts receivable securitization and off-balance sheet debt. During the first six months of fiscal 2003, we had negative free cash flow of $74.4 million compared to free cash flow of $85.9 million for the corresponding period in fiscal 2002. The change in free cash flow was attributable principally to the same factors impacting cash flow described above. The following table provides a reconciliation of our cash flow from operating activities to our free cash flow (in thousands) for the six months ended:
January 31, 2003 2002 ---- ---- Cash flow from operating activities $(92,642) $ 60,275 Cash flow from investing activities (4,738) (16,475) Unrealized currency (gains) losses (4,440) (745) Changes in accounts receivable securitization, pledged receivables monetization and off-balance sheet debt (a) 27,464 42,885 -------- -------- Free cash flow $(74,356) $ 85,940 ======== ========
(a) Pledged receivables monetization reflects the proceeds of our sales, on a non-recourse or limited recourse basis, of finance receivables and related assets to third parties in transactions that are treated as debt for purposes of GAAP but that are excluded from the definition of total debt under our senior credit facilities, except to the extent of any expected recourse liability. 28 As discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements of this report, we are a party to multiple agreements whereby we guarantee $107.5 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 12 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. 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 which include, but are not limited to, the following: (i) general economic and market conditions; (ii) varying and seasonal levels of demand for our products and services; (iii) competition and a consolidating customer base; (iv) risks from our customer activities and limits on our abilities to finance customer purchases; (v) interest and foreign currency exchange rates; (vi) costs of raw materials and energy; and (vii) product liability and other litigation, as well as other risks as described in "Cautionary Statements Pursuant to the Securities Litigation Reform Act" which is an exhibit to this report. Actual future results could differ materially from those projected herein. We undertake no obligation to publicly update or revise any forward-looking statements. Although forward visibility is problematic, there continue to be positive signs. According to a recent study by CIT Equipment Rental and Finance, North American contractors surveyed expect construction activity to increase by roughly one-third and bidding activity to increase by more than 40 percent from year-ago levels. In addition, ten percent of the contractors surveyed expect to purchase an aerial work platform in 2003 compared to one percent in the 2002 survey. Yengst & Associates, an industry market research and consulting firm, predicts that North American shipments of aerial work platforms and telehandlers would improve by 15 percent and nine percent, respectively, in calendar 2003. Yengst bases this forecast on the continued `graying' of the fleet and building need for refreshment. Supporting this position, according to industry sources, the projected 2003 capital expenditure plans of the top ten domestic rental companies is increasing 16 percent to $1.4 billion from $1.2 billion with increases offsetting some of the more publicized decreases. However, challenges remain and we continue to emphasize that fleet refreshment depends on three factors both in North America and Europe; positive indications of stronger non-residential construction, a healthy used equipment market and available customer credit. While the economic recovery remains uncertain, we continue to focus on reducing fixed costs and increasing revenues through our unique growth opportunities, which include increased service parts and used equipment sales, additional market share gains from new telehandler products, and expanding applications for aerial work platforms and accessories. We expect our revenues for the balance of the year to remain comparable with year ago levels, roughly $800 million with earnings per share in the $0.37 to $0.40 range for the full year. In the short-term, the market is indeed characterized by uncertainty due to the prevailing economic and geopolitical conditions, but we remain optimistic in the longer term. Throughout the recession, we have remained profitable and focused on generating free cash flow and reducing working capital and expenses. 29 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 2002, we entered into an $87.5 million notional 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 2.76%. Total interest bearing liabilities at January 31, 2003 consisted of $176.6 million in variable-rate borrowing and $195.7 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 $0.7 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 for the fiscal year ended July 31, 2002. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. INTERNAL CONTROLS Our Chief Executive Officer and Chief Financial Officer determined that there were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were undertaken. 30 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 January 31, 2003, and the related condensed consolidated statements of income and cash flows for the three-month and six-month periods ended January 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, 2002, 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 16, 2002, 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, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Baltimore, Maryland February 21, 2003 31 PART II OTHER INFORMATION ITEMS 1 - 5 None/not applicable. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 3 By-laws of JLG Industries, Inc. 10 Amendment number two and waiver under Amended and Restated Credit Agreement, dated February 21, 2003, by and among, JLG Industries, Inc., JLG Equipment Services, Inc., JLG Manufacturing, LLC, Fulton International, Inc., Gradall Industries, Inc., The Gradall Company, Access Financial Solutions, Inc., JLG Europe BV, JLG Manufacturing Europe BVBA as Borrowers, the Lenders (as defined herein), Wachovia Bank, National Association, as Administrative Agent and Documentation Agent, and Bank One, Michigan, as Syndication Agent. 12 Statement Regarding Computation of Ratios 15 Letter re: Unaudited Interim Financial Information 99.1 Cautionary Statements Pursuant to the Securities Litigation Reform Act 99.2 Certification of the Chief Executive Officer 99.3 Certification of the Chief Financial Officer (b) We filed a Current Report on Form 8-K on November 22, 2002, which included our Press Release dated November 21, 2002. The items reported on such Form 8-K were Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits). We filed a Current Report on Form 8-K on January 7, 2003, which included our Press Release dated January 6, 2003. The items reported on such Form 8-K were Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits). 32 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 4, 2003 /s/ James H. Woodward, Jr. ----------------------------------- James H. Woodward, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 4, 2003 /s/ John W. Cook ----------------------------------- John W. Cook Chief Accounting Officer (Chief Accounting Officer) 33 SARBANES-OXLEY SECTION 302 CERTIFICATION I, William M. Lasky, certify that: 1. I have reviewed this quarterly report on Form 10-Q of JLG Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 4, 2003 /s/ William M. Lasky -------------------- William M. Lasky Chairman, President and Chief Executive Officer 34 SARBANES-OXLEY SECTION 302 CERTIFICATION I, James H. Woodward, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of JLG Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 4, 2003 /s/ James H. Woodward, Jr. -------------------------- James H. Woodward, Jr. Executive Vice President and Chief Financial Officer 35