EX-13 2 0002.txt [Page 11 of the Annual Report] Reports of Management and Independant Accountants Report of Management The management of Gehl Company is responsible for the preparation and integrity of all financial statements and other information contained in this annual report. The financial statements have been prepared by the Company in conformity with generally accepted accounting principles appropriate in the circumstances. Such statements necessarily include amounts based on the best estimates and judgments of management after giving due consideration to materiality. The Company maintains an internal control system designed to provide reasonable assurance that transactions are properly recorded and executed in accordance with management's authorization and that assets are safeguarded from loss or unauthorized use. The internal control system is augmented by careful selection and training of qualified employees, proper division of responsibilities, and the development and dissemination of written policies and procedures. The Board of Directors elects, from among its members, an Audit Committee, consisting entirely of outside directors, which is responsible for reviewing and evaluating the overall performance of the Company's financial reporting and accounting practices and for recommending appointment of the independent accountants. The Audit Committee meets periodically with management and the independent accountants to discuss any and all matters within the Committee's responsibilities. The independent accountants have free access to the Committee, without the presence of management if so requested. The Company's financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, whose report also appears on this page. Included in the audit process was a review of the Company's system of internal controls. PricewaterhouseCoopers LLP annually provides to management and the Audit Committee recommendations to improve internal controls or enhance administrative procedures. William D. Gehl Chairman of the Board of Directors, President and Chief Executive Officer Kenneth P. Hahn Vice President of Finance, Treasurer and Chief Financial Officer Report of Independent Accountants To the Board of Directors and Shareholders of Gehl Company In our opinion, the statements appearing on pages 18 through 27 of this report present fairly, in all material respects, the financial position of Gehl Company and its subsidiaries at December 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin February 12, 2001 [Pages 12 through 17 of the Annual Report] Management's Discussion and Analysis Overview The Company's net income in 2000 was $9.7 million, or $1.72 per diluted share, compared with $20.2 million, or $3.17 per diluted share, in 1999. The 2000 net income included an after-tax gain of $.5 million, or $.10 per diluted share, recognized on the disposal of a former branch service center. Basic earnings per share for 2000 were $1.76 versus $3.29 reported in 1999. Net sales in 2000 of $258.1 million were 11.5% below the $291.4 million in 1999. The reduced sales levels were due primarily to the slowing U.S. economy, the weak Euro abroad, effects of increased interest rates on domestic housing starts, low milk prices and high fuel costs. Construction equipment sales in 2000 of $151.1 million were 13% below 1999 levels, while agriculture equipment sales in 2000 of $107.0 million were 9% below 1999 levels. Construction equipment comprised 59% of Company net sales in 2000 versus 60% in 1999. Agriculture equipment sales were 41% of Company net sales in 2000, versus 40% in 1999. Income from operations in 2000 was $22.0 million, with construction equipment accounting for $14.0 million, while agriculture equipment contributed the balance of $8.0 million. Interest expense in 2000 increased $1.6 million, to $4.7 million. Other expense, net, consisting primarily of the costs of selling finance contracts receivable, which was $2.2 million in 1999, increased in 2000 to $4.1 million. The Company's total debt increased to $61.1 million at December 31, 2000 from $31.6 million at December 31, 1999. The increase was primarily due to the funding of capital expenditure projects, the repurchase of $5.9 million of the Company's stock during 2000 and an increase in working capital, primarily inventories and finance contracts receivables. The Company's ratio of debt to total capital was 37.2% at December 31, 2000, as compared with 24.5% at December 31, 1999. After seven consecutive years of progressively increasing sales and earnings, the slowdown of the U.S. economy, which began in the second half of 2000, negatively impacted the Company's business. The Company's management continues to adjust to the rapidly changing economic environment by reducing headcount and decreasing production levels to meet lowered demand. The Company also continues to position itself and make investments for long-term growth, all as part of the ongoing efforts to enhance shareholder value. The Company has adopted the Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs", which is effective for the year ended December 31, 2000. In conjunction with such adoption, the Company has reclassified shipping and handling fees and costs for both current and prior periods into net sales and cost of sales in the accompanying statements of income. Prior to the adoption, the Company recorded such fees and costs on a net basis as a component of selling, general and administrative expenses. Results of Operations 2000 vs. 1999 Net Sales: ($ millions) 2000 1999 1998 1997 1996 Construction Equipment $151.1 $173.6 $159.2 $103.7 $72.3 Agriculture Equipment 107.0 117.8 108.4 97.3 90.6 ------ ------ ------ ------ ------ Total $258.1 $291.4 $267.6 $201.0 $162.9 (% of total) Construction Equipment 58.5% 59.6% 59.5% 51.6% 44.4% Agriculture Equipment 41.5% 40.4% 40.5% 48.4% 55.6% Net sales for 2000 of $258.1 million were 11.5% below the $291.4 million of net sales in 1999. Construction equipment net sales in 2000 were $151.1 million, 13% below the $173.6 million in 1999. The decline in construction equipment net sales from the 1999 levels reflected lower shipments and retail sales of telescopic handlers consistent with an industry-wide reduced demand for telescopic handler equipment. Industry-wide retail sales of telescopic handlers in North America in 2000 were reported to be 15% to 20% below last year's levels. The industry-wide reduced demand for telescopic handlers is primarily a result of: a) a decline in residential construction activity, especially within the U.S. housing sector, which was adversely impacted by increased interest rates, and b) reduced demand for new units by rental customers due to low equipment rental rates and adequate levels of units in rental fleet inventory. In addition, a reduction in overseas demand for skid loaders, resulting in part from the continued weakness of the Euro, further contributed to the reduction from 1999 sales levels. Offsetting these negative demand factors, the Company realized a positive contribution in 2000 from shipments of new equipment, including compact excavators and mini- loaders, introduced within the past eighteen months. Agriculture equipment net sales in 2000 were $107.0 million, 9% below the $117.8 million in 1999 due primarily to reduced shipments of forage harvesting equipment, skid loaders and manure handling equipment. Partially offsetting this reduction were increased sales of disc mower conditioners as a result of new product offerings in 2000. The continuation of record low milk prices throughout 2000 and the effect of higher interest rates and fuel costs contributed to the overall decline in demand for agricultural equipment by farmers. Of the Company's total net sales reported for 2000, $34.4 million represented sales made outside the United States compared with $39.8 million in 1999. The decrease in international sales was due, in part, to decreased orders from Europe due to the decline in the value of the Euro versus the U.S. dollar and to the economic slowdown in Latin America and Australia. Gross Profit: Gross profit in 2000 was $68.0 million as compared to $80.6 million in 1999. Gross profit as a percent of net sales decreased in 2000 to 26.4% from 27.6% in 1999. Construction equipment gross profit as a percent of net sales for 2000 decreased to 24.3% from 26.8% in 1999. The decrease in construction equipment gross margin was a function of: a) decreased telescopic handler sales, which sales are generally at higher gross margins than other construction equipment, b) increased industry competition which has resulted in overall gross margin compression, c) increased compact excavator shipments, which sales are generally at lower gross margins than other construction equipment, d) reduced production levels, and e) lower gross margins on product shipped into Europe due to the weakening of the Euro. Gross profit as a percent of net sales for agriculture equipment increased to 29.2% for 2000 from 28.9% for 1999. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $.5 million, or 1%, to $46.0 million in 2000 as compared with $45.5 million in 1999 reflecting increased sales related costs incurred, in part, in response to competitive market conditions, and continued investments in longer range revenue enhancing projects such as new product development, improved parts distribution, e- commerce initiatives and enterprise resource planning (ERP) systems. As a percent of net sales, selling, general and administrative expenses in 2000 increased to 17.8% from 15.6% in 1999. Income from Operations: ($ millions) 2000 1999 1998 1997 1996 Construction Equipment $14.0 $23.7 $19.4 $16.3 $12.9 Agriculture Equipment 8.0 11.4 7.9 5.5 2.6 ----- ----- ----- ----- ----- Total $22.0 $35.1 $27.3 $21.8 $15.5 Due primarily to lower net sales volume combined with gross margin compression and a slight increase in operating expenses, income from operations in 2000 declined from 1999 levels. Construction equipment income from operations decreased in 2000 to $14.0 million from $23.7 million in 1999. The reduction was primarily due to the impact of reduced construction equipment sales volume and a contraction in gross margin levels. Agriculture equipment income from operations decreased in 2000 to $8.0 million from $11.4 million in 1999 due primarily to lower agriculture equipment sales volume coupled with a slight increase in selling, general and administrative expenses. Interest Expense: Interest expense increased $1.6 million, to $4.7 million, in 2000 compared to $3.1 million in 1999. The increase was a result of an increase in average debt outstanding to $55.1 million for 2000 from $34.6 million in 1999, combined with an increase in the average rate of interest paid by the Company in 2000 to 8.7% from 7.9% in 1999. The increase in debt was primarily due to the funding of capital expenditure projects, the repurchase of $5.9 million of the Company's stock during 2000 and an increase in working capital, primarily inventories and finance contracts receivable. Other (expense) income, net: Other expense, net increased $1.9 million to $4.1 million in 2000 from $2.2 million in 1999. This was primarily a result of selling $21.4 million more retail finance contracts to third parties during 2000 than in 1999, combined with lower finance rates offered to Gehl finance customers and increasing discount rates used in selling finance contracts to third parties resulting from the general trend of overall interest rates. In addition, increased foreign currency exchange transaction expenses were incurred in 2000, as a result of the weak Euro and Canadian dollar. Offsetting these items, was a pre-tax $.8 million gain on the disposal of a former branch service center. Provision for Income Taxes: The Company's effective income tax rate of 35.0% for 2000 was reduced from 35.5% for 1999. Net Income: Net income in 2000 of $9.7 million compared to $20.2 million of net income in 1999. Diluted earnings per share were $1.72 in 2000 compared to $3.17 in 1999. Basic earnings per share were $1.76 in 2000 versus $3.29 in 1999. No dividends were declared in 2000 on the Company's common stock. 1999 vs. 1998 Net Sales: Net sales for 1999 of $291.4 million were 9% greater than the $267.6 million of net sales in 1998. Construction equipment net sales in 1999 were $173.6 million, 9% higher than net sales of $159.2 million in 1998. Construction equipment net sales in 1999 benefited from increased shipments of telescopic handler sales and shipments of the new compact excavator product line introduced in mid-1999. Shipments of construction skid loaders declined slightly from 1998 levels due primarily to certain large customers deferring fourth quarter purchases until the new year. Agriculture equipment net sales in 1999 increased 9% to $117.8 million from $108.4 million in 1998. The increase was due primarily to higher skid loader and forage harvesting equipment shipments which more than offset reduced levels of shipments of haytools and feedmaking equipment. Of the Company's total net sales reported for 1999, $39.8 million represented sales made outside the United States compared with $41.4 million in 1998. The decrease in international sales was due to the economic slowdown in the Far East and Australia. Gross Profit: Gross profit in 1999 of $80.6 million was 13% higher than 1998's $71.4 million. Gross profit as a percent of net sales increased in 1999 to 27.6% from 26.7% in 1998. Construction equipment gross profit as a percent of net sales for 1999 increased to 26.8% from 25.4% in 1998. This increase was due primarily to: a) increased telescopic handler sales, which sales are at higher gross margins than other construction equipment; b) improved efficiencies at the manufacturing plants; and c) export sales, typically made at lower gross margins than domestic sales, constituting a smaller percentage of sales in 1999 than in 1998. Agriculture equipment 1999 gross profit as a percent of net sales increased to 28.9% from 28.5% in 1998. This increase was due primarily to: a) the favorable impact of a change in the mix of products shipped in 1999 versus products shipped in 1998; b) higher production levels in 1999 over 1998 generating increased absorption of factory overhead; and c) improved efficiencies realized at the manufacturing plants. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $1.4 million, or 3%, to $45.5 million in 1999 as compared with $44.1 million in 1998 due to continued investment in engineering and sales related activities, as well as sales volume increases. As a percent of net sales, however, selling, general and administrative expenses in 1999 decreased to 15.6% from 16.5% in 1998. Income from Operations: Due primarily to higher net sales volume combined with controlled operating expense spending, income from operations in 1999 increased 29% from 1998 to $35.1 million. Construction equipment income from operations increased 22% in 1999 to $23.7 million from $19.4 million in 1998. The improvement was primarily due to the impact of increased construction equipment sales volume and improved gross margin levels which were offset, in part, by increased expenditures in selling, general and administrative costs. Agriculture equipment income from operations increased 44% in 1999 to $11.4 million from $7.9 million in 1998. Increased agriculture equipment sales volume coupled with an improved gross margin percentage and slightly reduced selling, general and administrative expense levels were the primary factors in generating this increase. Interest Expense: Interest expense decreased $943,000, to $3.1 million, due to a lower level of average debt outstanding during 1999 than 1998 combined with a decrease in the average rate of interest paid by the Company in 1999 to 7.9% from 8.0% in 1998. Other (expense) income, net: Other expense, net increased $1.0 million to $2.2 million in 1999 from $1.2 million in 1998. This was primarily a result of selling $21.7 million more retail finance contracts to third parties during 1999 than in 1998, combined with lower finance rates offered to Gehl finance customers and increasing discount rates used in selling finance contracts to third parties resulting from the general trend of overall interest rates. Provision for Income Taxes: The Company's effective income tax rate of 35.5% for 1999 was consistent with 1998. Net Income: Net income in 1999 of $20.2 million was 32% higher than 1998's $15.3 million of net income. Diluted earnings per share were $3.17 in 1999 compared to $2.29 in 1998. Basic earnings per share were $3.29 in 1999 versus $2.39 in 1998. No dividends were declared in 1999 on the Company's common stock. Liquidity and Capital Resources Working Capital: The Company's working capital increased to $93.0 million at December 31, 2000 from $69.5 million twelve months earlier. The increase was primarily the result of an increase in retail finance contracts receivables and inventories, combined with a reduction in current liabilities. The Company's current ratio at December 31, 2000 increased to 2.9 to 1 from 2.2 to 1 at the same time a year ago. Cash on hand at December 31, 2000 was $2.6 million as compared to $1.0 million a year earlier. Cash Flow (Used for) Provided by Operating Activities: In 2000, cash flow used for operating activities was $7.1 million as compared to $25.0 million of cash flow provided by operating activities in 1999. The primary differences between the results in 2000 and 1999 include: a) net income in 2000 of $9.7 million compared to $20.2 million in 1999, b) an aggregate increase in accounts receivables, finance contracts receivables and inventories of $18.5 million in 2000 compared to $4.7 million in 1999, and c) a reduction in accrued liabilities of $5.2 million in 2000 compared to an increase of $2.9 million in 1999. Accounts Receivable: The Company's net accounts receivable increased $1.0 million during 2000. Agriculture equipment accounts receivable at year-end 2000 decreased $.4 million from a year earlier, while construction equipment accounts receivables increased $1.4 million over the same period. The increase results from a general slowdown of retail sales levels at the dealers, combined with a shift away from dealers paying earlier, in better economic times, in order to take advantage of cash discount programs. Finance Contracts Receivable: Finance contracts receivable increased $7.1 million to $26.5 million at December 31, 2000. The combined portfolio of owned and sold-but-serviced finance contracts receivable was $150.0 million at December 31, 2000 as compared to $110.6 million at year-end 1999. (See "Sales of Finance Contracts Receivable" following). Inventories: The increase in inventories at December 31, 2000 compared to the prior year reflects the impacts of new products offered since mid-1999 combined with an inventory build-up resulting from the slowing sales trend. The Company has adjusted production levels in an attempt to reduce inventory in accordance with current market demand. Capital Expenditures: ($ thousands) 2000 1999 1998 1997 1996 Capital Expenditures $12,577 $7,281 $3,051 $8,718 $3,837 Depreciation $4,885 $4,329 $3,941 $2,955 $2,438 The Company expended $12.6 million for property, plant and equipment in 2000. Approximately $8.6 million was spent to complete the expansion of the Company's South Dakota skid loader manufacturing facility and add certain equipment to improve the manufacturing process and to increase production capacity for skid loaders. The majority of the remaining 2000 expenditures were incurred to upgrade and maintain machinery and equipment, to enhance capability, to improve productivity, to improve product quality and to install the Company's enterprise resource planning (ERP) system. There were no significant outstanding commitments for capital items at December 31, 2000. The Company plans to make up to $4.0 million in capital expenditures in 2001, including approximately $1.1 million to complete implementation of the ERP system. The Company believes its present facilities will be sufficient to provide adequate capacity for its operations in 2001. Debt and Equity: December 31, 2000 1999 1998 1997 1996 ($ millions) Total Debt $61.1 $31.6 $29.5 $49.7 $19.4 Shareholders' Equity $103.0 $97.4 $94.1 $77.6 $64.8 % Total Debt to Total Capitalization 37.2% 24.5% 23.9% 39.1% 23.0% At December 31, 2000, shareholders' equity had increased $5.6 million to $103.0 million from $97.4 million a year earlier. This increase primarily reflected the impact of the year's net income of $9.7 million partially offset by the $5.9 million expended to repurchase Company stock. As a result of the $29.5 million increase in outstanding debt, the Company's capitalization ratio increased to 37.2% at December 31, 2000. In March 2000, the Company's Board of Directors authorized a repurchase plan providing for the repurchase of up to an additional 325,000 shares of the Company's outstanding common stock. As of December 31, 2000, 271,900 shares had been repurchased in the open market under this authorization at an aggregate cost of $3.8 million. In March 1999, a repurchase plan relating to up to 325,000 shares of the Company's outstanding common stock was authorized. As of April 1, 2000, all of the authorized shares under that plan had been repurchased at an aggregate cost of $5.8 million. Borrowing Arrangements (See also Note 5 of Notes to Consolidated Financial Statements): The Company maintains a $75 million line of credit facility (the "Facility") which expires December 31, 2002, and is subject to a borrowing base related to the Company's accounts receivable, finance contracts receivable and inventories. The interest rate paid on loans denominated in U.S. dollars is 2.00% above the London Interbank Offered Rate for one-month deposits ("LIBOR"). In Canada, where the Company may borrow up to $5.5 million, the interest rate is 2.50% above the Canadian one-month bankers' acceptance rates ("BA Rate"). At December 31, 2000, the Company had unused borrowing capacity of $20.2 million under the Facility, versus $49.8 million a year earlier. Management believes the Facility provides sufficient borrowing capacity for the Company to finance its operations for the foreseeable future. The Company also has outstanding $8.4 million of 9% industrial development bonds with a 2010 final maturity; repayments commence in 2005. Sales of Finance Contracts Receivable: The sale of finance contracts is an important component of the Company's overall liquidity. The Company has arrangements with several financial institutions and financial service companies to sell, with recourse, its finance contracts receivable. The Company continues to service substantially all contracts whether or not sold. At December 31, 2000, the Company serviced $150.0 million of such contracts, of which $121.5 million were owned by third parties. Losses on finance contracts due to customer nonperformance were $245,000 in 2000 as compared to $296,000 in 1999. As a percentage of outstanding serviced contracts, the loss ratios were .2% and .3% in 2000 and 1999, respectively. The Company incurred $5.0 million of costs in selling $98.5 million of its finance contracts in 2000, as compared to $2.9 million of costs in selling $77.0 million of such contracts in 1999. The costs arise primarily from the difference between the weighted-average interest rate on the contracts being sold and the interest rate negotiated with the purchaser of the contracts. The Company believes that it will be able to arrange sufficient capacity to sell its finance contracts for the foreseeable future. Accounting Pronouncements: The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Investments and Hedging Activities" which was originally effective for fiscal quarters of fiscal years beginning after June 15, 1999. The statement, as amended by SFAS No. 137 and 138, will be effective January 1, 2001 for the Company. Due to the Company s current limited use of derivative instruments, the adoption of this statement will not materially effect the Company's financial condition or results of operations. Market Risk The Company is exposed to market risk from changes in interest rates as well as fluctuations in currency. See further disclosure relating to variable rate debt under "Liquidity and Capital Resources - Borrowing Arrangements" above. Interest Rate Risk: The Company's line-of-credit facility is primarily LIBOR-based and is subject to interest rate movements. A 10% increase or decrease in the average cost of the Company's variable rate debt would result in a change in pre-tax interest expense of approximately $446,000 based upon borrowings outstanding at December 31, 2000. Commodity Risk: The Company is exposed to fluctuations in market prices for commodities, especially steel. Each one of the Company's business segments is subject to commodity price risk as the prices for raw materials change with movements in underlying commodity prices. Therefore, the Company has established various programs to manage the negotiations of commodity prices. In general, the Company enters into contracts with its vendors to lock in commodity prices at various times and for various periods in order to limit near-term exposure to fluctuations in raw material prices. Currency Risk: The Company has limited exposure to foreign currency exchange fluctuations. Certain sales are made in Canadian dollars and Euros; however, to minimize this exposure, the Company borrows in Canadian dollars under its line-of-credit facility and, in limited circumstances, enters into currency hedge transactions relative to Euro billings. Outlook Markets: The Company believes that, in general, the overall economics of its markets will continue to be soft, especially through the first half of 2001. Additionally, the Company expects that the general economic environment, for at least the first half of 2001, will not differ substantially from that of the second half of 2000, due to the interest rate increases experienced from mid-1999 through 2000, relatively high fuel costs and an upward trend in unemployment. Although the Company anticipates that the current interest rate environment should assist in stimulating economic growth, the Company does not foresee significant improvement occurring in the construction equipment or agricultural equipment markets until the second half of 2001, at the earliest. In the North American construction equipment sector, the Company expects the skid loader market, which has enjoyed double-digit growth in recent years, to continue to grow in 2001 but at a slower pace. The Company expects the telescopic handler market to decline for the second straight year, perhaps in the range of 10% to 15%, due primarily to the continued downturn in residential and non-residential construction markets as the result of high interest rates in 1999 and 2000. The North American compact excavator market, the growth of which the Company believes remains substantially behind the similar European market, shows prospects of increasing by 10% to 15% in 2001. In the North American agricultural equipment market, the industry faces an estimated 3% to 5% reduction in the number of dairy farms, as well as a continuation of low milk prices for a substantial portion of 2001. Internationally, the Company expects business in 2001 to remain at levels similar to those achieved in 2000. The Company believes an opportunity exists for skid loader sales in Europe to increase, if the Euro continues to strengthen against the U.S. dollar. Financial Guidance: Gehl Company is forecasting net sales to reach between $272 million and $280 million in 2001, an increase of approximately 5% to 8% over 2000 net sales levels. Diluted earnings per share (EPS) for 2001 is forecast to be in the $1.52 to $1.62 range. In general, the Company does not foresee any significant improvement in the overall economic environment until the second half of 2001, at the earliest. It is anticipated that a general improvement in economic conditions will assist in bolstering the sales of new products introduced in 2001 and second half shipments in general. However, the Company anticipates the full impact of certain strategic actions it is currently undertaking will not be fully realized until 2002, and beyond, due to the anticipated timing of the improvement in the economy and the natural time lag associated with implementation of the strategic initiatives. In the construction equipment segment, the Company is forecasting 2001 net sales to be between $156 million and $160 million, an increase of approximately 3% to 6% over the net sales levels realized in 2000. The increase is anticipated to occur primarily as the result of new model skid loader shipments, e-commerce initiatives and increased shipments of compact excavators and mini-loaders. Offsetting these developments, the Company expects a decrease in its telescopic handler shipments in similar proportion to the anticipated overall market decline. In the agricultural equipment segment, the Company is forecasting 2001 net sales to be between $116 million and $120 million, an increase of approximately 8% to 12% over the 2000 net sales levels. The increase is anticipated to occur primarily as the result of the new model round baler and skid loader shipments, and an increase in shipments of compact equipment (telescopic handlers, compact excavator and mini-loader products) to rural equipment dealers which serve areas not currently covered by Gehl construction dealers. Consolidated gross profit margin for 2001 is forecasted in the range of 26.1% to 26.6%, compared to the 2000 consolidated gross margin percentage of 26.4%. The primary factors that could adversely affect margin include: a) anticipated limited price increases as a result of competitive market conditions; b) a decrease in the percentage of shipments comprised of telescopic handlers, typically a higher gross margin product; c) increased shipment levels of compact excavators and mini-loaders, which have lower than average gross margins due to the purchased finished goods nature of the product; and d) reduced production levels at a number of construction equipment manufacturing facilities in 2001 versus 2000. Offsetting these items are anticipated increased agricultural equipment production levels (primarily round balers), and improved efficiencies expected at a number of Company manufacturing facilities. Operating expenses are expected to rise slightly, as a percentage of net sales, to the range of 18.0% to 18.4% for 2001. Certain ongoing spending in support of revenue enhancing projects, including e-commerce, distribution and product development, service and parts consolidations, and the implementation of enterprise resource planning (ERP) systems, are expected to continue. In addition, the very competitive market forces in both segments are expected to result in higher requirements for certain sales-related expenses. Regarding 2002, the Company expects continued economic improvement and continued rewards for the strategic initiatives implemented throughout 2001. Specifically, the Company is expecting: Improved North American skid loader and telescopic handler markets; Better European markets for the skid loader product line; Continued acceptance, and full year impact, of products introduced during 2001; Continued success of rural equipment dealers and Mustang dealers in selling compact equipment first available to these distribution channels in 2001; Continued growth of the compact excavator market at above average growth rates; Continued growth in sales of attachments; and Expanded web-based e-commerce business. The Company expects slightly improved gross margins and a lower percentage of operating expenses to net sales for 2002, which should result in EPS ranging from $2.10 to $2.30 per diluted share. Forward-Looking Statements The Company intends that certain matters discussed in this Annual Report (including in this section and the Chairman's letter) are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding the Company's future financial position, business strategy, targets, projected sales, costs, earnings and capital spending, and the plans and objectives of management for future operations, are forward-looking statements. When used in this Annual Report, words such as the Company "believes," "anticipates," "expects" or "estimates" or words of similar meaning are generally intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, some of which are beyond the Company's control, that could cause actual results to differ materially from those anticipated as of the date this Annual Report was printed. Factors that could cause such a variance include, but are not limited to, unanticipated changes in general economic and capital market conditions, the Company's ability to implement successfully its strategic initiatives, market acceptance of newly introduced products, the cyclical nature of the Company's business, the Company's and its customers' access to credit, competitive pricing, product initiatives and other actions taken by competitors, disruptions in production capacity, excess inventory levels, the effect of changes in laws and regulations (including government subsidies and international trade regulations), technological difficulties, changes in environmental laws, the impact of any acquisition effected by the Company, and employee and labor relations. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report are only made as of the date of its printing, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. In addition, the Company's expectations for fiscal years 2001 and 2002 are based in part on certain assumptions made by the Company, including those relating to commodity prices, which are strongly affected by weather and other factors and can fluctuate significantly, housing starts and other construction activities, which are sensitive to, among other things, interest rates and government spending, and the performance of the U.S. economy generally. The accuracy of these or other assumptions could have a material effect on the Company's ability to achieve its expectations. [Pages 18 through 28 of the Annual Report] GEHL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets In Thousands, Except Share Data - December 31, 2000 1999 Cash $ 2,590 $ 1,010 Accounts receivable - net 69,546 68,551 Finance contracts receivable - net 16,549 12,074 Inventories 45,598 35,206 Prepaid income taxes 8,078 8,431 Prepaid expenses and other current assets 636 511 -------- -------- Total current assets 142,997 125,783 -------- -------- Property, plant and equipment - net 46,172 37,028 Finance contracts receivable - net, non-current 9,967 7,311 Intangible assets 13,086 15,706 Other assets 10,496 8,332 -------- -------- Total assets $222,718 $194,160 ======== ======== Liabilities and Shareholders' Equity Current portion of long-term debt obligations $ 187 $ 519 Accounts payable 26,645 25,077 Accrued liabilities 23,195 30,703 -------- -------- Total current liabilities 50,027 56,299 -------- -------- Line of credit facility 51,608 22,038 Long-term debt obligations 9,277 9,059 Deferred income taxes 5,096 3,949 Other long-term liabilities 3,692 5,391 -------- -------- Total long-term liabilities 69,673 40,437 -------- -------- Common stock, $.10 par value, 25,000,000 shares authorized, 5,330,500 and 5,645,620 shares outstanding at December 31, 2000 and 1999, respectively 533 565 Preferred stock, $.10 par value, 2,000,000 shares authorized, 250,000 shares designated -- -- as Series A preferred stock, no shares issued Capital in excess of par 6,495 11,294 Retained earnings 96,124 86,468 Accumulated other comprehensive loss (134) (903) -------- -------- Total shareholders' equity 103,018 97,424 -------- -------- Total liabilities and shareholders' equity $222,718 $194,160 ======== ======== Contingencies (Notes 2 and 11) The accompanying notes are an integral part of the financial statements. GEHL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME In Thousands, Except Per Share Data - Year Ended December 31, 2000 1999 1998 Net sales $258,118 $291,398 $267,646 Cost of goods sold 190,093 210,851 196,260 -------- -------- -------- Gross profit 68,025 80,547 71,386 Selling, general and administrative expenses 46,040 45,490 44,108 -------- -------- -------- Income from operations 21,985 35,057 27,278 Interest expense (4,741) (3,083) (4,026) Interest income 1,760 1,555 1,655 Other (expense) income, net (4,148) (2,235) (1,235) -------- -------- -------- Income before income taxes 14,856 31,294 23,672 Provision for income taxes 5,200 11,109 8,404 -------- -------- -------- Net income $9,956 $20,185 $15,268 ======== ======== ======== Diluted net income per common share $ 1.72 $ 3.17 $ 2.29 ======== ======== ======== Basic net income per common share $ 1.76 $ 3.29 $ 2.39 ======== ======== ======== The accompanying notes are an integral part of the financial statements. GEHL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY In Thousands Total Comprehensive Retained Accumulated Common Capital Income Earnings Other Stock in Comprehensive Excess Loss of Par Balance at December 31, 1997 $ 77,573 $ 51,015 $ (382) $ 621 $ 26,319 Comprehensive Income: Net income 15,268 15,268 15,268 Minimum pension liability adjustments, net of $415 of taxes (770) (770) (770) ------- Comprehensive Income $14,498 ======= Exercise of stock options/ warrant 1,652 23 1,629 Other 382 382 ------ ------- ------- ----- ------- Balance at December 31, 1998 94,105 66,283 (1,152) 644 28,330 Comprehensive Income: Net income 20,185 20,185 20,185 Minimum pension liability adjustments, net of $134 of taxes 249 249 249 ------ $20,434 ======= Exercise of stock options 1,070 14 1,056 Treasury stock purchase/ cancellation (18,523) (93) (18,430) Other 338 338 ------ ------- ------- ----- ------- Balance at December 31, 1999 97,424 $86,468 (903) 565 11,294 Comprehensive Income: Net income 9,656 9,656 9,656 Minimum pension liability adjustments, net of $134 of taxes 769 769 769 ------- Comprehensive Income $10,425 ======= Exercise of 7 519 stock options 526 Treasury stock purchase/ cancellation (5,924) (39) (5,885) Other 567 567 ------ ------- ------- ----- ------- Balance at December 31, 2000 $103,018 $96,124 $ (134) $533 $6,495 ======= ======= ======== ===== ======= The accompanying notes are an integral part of the financial statements. GEHL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS In Thousands - Year Ended December 31, 2000 1999 1998 Cash Flows from Operating Activities Net income $ 9,656 $ 20,185 $ 15,268 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,885 4,329 3,941 Amortization 849 782 807 (Gain) loss on sale of equipment (863) (46) 2 Cost of sales of finance contracts 4,990 2,911 1,088 Deferred income taxes 121 (1,421) (177) Proceeds from sales of finance contracts 93,485 74,128 54,267 Increase (decrease) in cash due to changes in: Accounts receivable - net (995) 2,255 1,384 Finance contracts receivable - net (105,606) (80,834) (59,704) Inventories (10,392) (3,113) (1,808) Prepaid expenses and other current assets (125) 843 70 Other assets 520 542 377 Accounts payable 1,568 1,515 1,350 Accrued liabilities (5,225) 2,888 4,502 ------- ------- -------- Net cash provided by operating activities (7,132) 24,964 21,367 ------- ------- -------- Cash Flows from Investing Activities Property, plant and equipment additions (12,577) (7,281) (3,051) Proceeds from sale of equipment 942 112 13 (Increase) decrease in other assets (4,189) (2,713) (663) ------- ------- -------- Net cash (used for) investing activities (15,824) (9,882) (3,701) ------- ------- -------- Cash Flows from Financing Activities Proceeds from(repayment of) revolving credit loans 29,570 2,679 (19,998) Decrease in other long-term obligations (274) (607) (176) Increase in other long- term liabilities 638 422 504 Proceeds from issuance of common stock 526 1,070 1,652 Purchase of stock warrant - - - Treasury stock purchase (5,924) (18,523) - ------- ------- -------- Net cash (used for) provided by financing activities 24,536 (14,959) (18,018) ------- ------- -------- Net increase (decrease) in cash 1,580 123 (352) Cash, beginning of year 1,010 887 1,239 ------- ------- -------- Cash, end of year $ 2,590 $ 1,010 $ 887 ======== ======== ======== The accompanying notes are an integral part of the financial statements. Note 1 - Significant Accounting Policies Consolidation: Gehl Company is engaged in the manufacture and distribution of equipment and machinery for the construction market, and in the manufacture and distribution of equipment and machinery primarily for the dairy, livestock and poultry agricultural sector. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Hedlund Martin, Inc.; Gehl Power Products, Inc.; Mustang Manufacturing Company, Inc. (Mustang); and Gehl International, Inc., a foreign sales corporation. All significant intercompany transactions and balances are eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, in certain circumstances, that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Ultimate realization of assets and settlement of liabilities in the future could differ from those estimates. Revenue Recognition: Revenue is recorded upon the shipment of products to dealers and distributors; these dealers and distributors have no right of return, except as provided by law. Shipping and Handling Fees and Costs: During the fourth quarter of 2000, the Company adopted the provisions of the Emerging Issues Task Force ("EITF") Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs." In accordance with the provisions of EITF 00-10, certain shipping and handling fees and costs which the Company had previously recorded on a net basis as a component of selling, general and administrative expenses are reflected in net sales and cost of goods sold, as appropriate. Accounts Receivable: The Company provides financing for its dealers in both the construction and agricultural markets. The financing agreements provide for, in certain instances, interest-free periods which generally range from 4 to 9 months. Finance Contracts Receivable: The Company offers financing for its products to retail customers and to its dealers. Finance contracts require periodic installments of principal and interest over periods of up to 60 months. Unearned interest is recognized over the life of the contracts using the sum of the digits method. Principal expected to be collected within twelve months of the balance sheet date is classified as a current asset; the remainder is classified as a non-current asset. Inventories: Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for substantially all of the Company's inventories. Properties and Depreciation: Properties are stated at cost. When properties are sold or otherwise disposed of, cost and accumulated depreciation are removed from the respective accounts and any gain or loss is included in income. The Company provides for depreciation of assets generally using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Depreciation is generally recorded using the following estimated useful lives for financial statement purposes: Years Buildings 25-31.5 Machinery and equipment 7-12 Autos and trucks 3-5 Office furniture and fixtures 3-5 Expenditures which substantially increase value or extend asset lives are capitalized. Expenditures for maintenance and repairs are charged against income as incurred. Debt Issue Costs: Costs incurred in conjunction with incurrence of indebtedness are capitalized and subsequently amortized over the related periods of the obligations. Intangible Assets: The cost in excess of the fair market value of net assets acquired (goodwill) is being amortized on the straight-line basis over 30 years. A five year non-compete agreement with the former owners of Mustang is being amortized on the straight-line basis over the life of the agreement. Accumulated amortization of intangible assets at December 31, 2000 and 1999 is $2.5 million and $1.7 million, respectively. Unamortized goodwill, as well as other long-lived assets, are reviewed periodically for potential impairment. Foreign Currency Transactions: Foreign currency transaction gains and losses are included in the determination of income. Foreign currency losses were $252,000, $15,000 and $130,000 in 2000, 1999 and 1998, respectively. Income Taxes: The Company follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities be recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Product Liability Costs: The Company directly assumes all liability for costs associated with claims up to specified limits in any policy year. Known incidents involving the Company's products are investigated and reserves are established for any estimated liability. Product Warranty Costs: In general, the Company provides warranty on equipment for a period of up to twelve months or for a specified period of use after sale or rental by the dealer. Reserves for estimated warranty costs are established at the time of sale. Environmental Costs: Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and that do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Research and Development Costs: Costs for research activities relating to product development and improvement are charged against income as incurred. Such costs amounted to approximately $3.1 million, $3.0 million and $2.8 million in 2000, 1999 and 1998, respectively. Other (Expense) Income: Other (expense) income is comprised primarily of foreign currency transaction gains (losses), cost of sales of finance contracts, and other nonoperating items. Accounting Pronouncements: The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was originally effective for fiscal quarters of fiscal years beginning after June 15, 1999. The statement, as amended by SFAS No. 137 and 138, will be effective January 1, 2001 for the Company. Due to the Company's current limited use of derivative instruments, the adoption of this statement will not materially effect the Company's financial condition or results of operations. Reclassification: As a result of adopting EITF 00-10, the Company has restated previous quarters of 2000 and previous year's financial information to reflect comparable reporting of shipping and handling fees and costs. Note 2 - Accounts Receivable and Finance Contracts Receivable Accounts receivable and finance contracts receivable were comprised of the following (in thousands): December 31, 2000 1999 Accounts receivable $74,069 $72,999 Less allowances for: doubtful accounts (1,864) (1,687) returns and dealer discounts (2,659) (2,761) ------- ------- $69,546 $68,551 ======= ======= Finance contracts receivable $31,417 $23,285 Less: unearned interest (2,940) (2,396) allowance for doubtful accounts (1,961) (1,504) ------ ------ 26,516 19,385 Less: non-current portion (9,967) (7,311) ------ ------ Current portion $ 16,549 $ 12,074 ======= ======= The finance contracts receivable at December 31, 2000 have a weighted-average interest rate of approximately 7.3%. The Company has entered into various agreements with third parties to sell with recourse certain finance contracts receivable. The finance contracts require periodic installments of principal and interest over periods of up to 60 months; interest rates are based on market conditions. The Company has retained the servicing of substantially all of these contracts which generally have maturities of 12 to 60 months. Amounts to cover potential losses on these sold receivables are included in the allowance for doubtful accounts. The following summarizes the Company's sales of retail finance contracts receivable during 2000 and 1999 (in thousands): 2000 1999 Value of contracts sold - net of $8.3 million and $6.1 million, respectively, of unearned interest $98,475 $77,039 Cash received on sales of contracts 93,485 74,128 ------- ------- Cost of sales of finance contracts $ 4,990 $ 2,911 ======= ======= Net receivables outstanding at December 31 relating to finance contracts sold $121,649 $90,331 ======= ======= The Company retains as collateral a security interest in the equipment associated with accounts receivable and unsold finance contracts receivable. The Company also maintains certain levels of dealer recourse deposits as additional security associated with finance contracts receivable. Note 3 - Inventories If all of the Company's inventories had been valued on a current cost basis, which approximates FIFO value, estimated inventories by major classification would have been as follows (in thousands): December 31, 2000 1999 Raw materials and supplies $ 17,689 $ 17,371 Work-in-process 4,995 5,767 Finished machines and parts 42,525 31,263 -------- -------- Total current cost value 65,209 54,401 Adjustment to LIFO basis (19,611) (19,195) -------- -------- $ 45,598 $ 35,206 ======== ======== Note 4 - Property, Plant and Equipment - Net Property, plant and equipment consisted of the following (in thousands): December 31, 2000 1999 Land $ 1,831 $ 1,838 Buildings 31,921 28,202 Machinery and equipment 48,198 42,389 Autos and trucks 360 256 Office furniture and fixtures 11,821 9,282 -------- -------- 94,131 81,967 Less: accumulated depreciation (47,959) (44,939) -------- -------- Property, plant and equipment - net $ 46,172 $ 37,028 ======== ======== Note 5 - Debt Obligations A summary of the Company's debt obligations, and related current maturities, is as follows (in thousands): December 31, 2000 1999 Line of credit facility $51,608 $22,038 9.0% industrial development bonds 8,400 8,400 Other debt obligations 1,064 1,178 ------- ------- 61,072 31,616 Less: current portion (187) (519) ------- ------- Long-term debt obligations $60,885 $31,097 ======= ======= The Company maintains a $75 million line of credit facility (the "Facility") which expires December 31, 2002. Interest is paid monthly on outstanding borrowings under the Facility as follows: borrowings in Canadian denominated dollars up to a $5.5 million credit line are at 2.5% above the Canadian one- month bankers' acceptance rates; the remainder of the borrowings are in U.S. dollars and are at 2.0% above the London Interbank Offered Rate for one-month deposits (LIBOR). Under the Facility, $25 million is tied to a borrowing base related to the Company's finance contracts receivable and inventories. The remaining availability is tied to a borrowing base related to the Company's accounts receivable. Borrowings under the Facility are secured by finance contracts receivable, inventories and accounts receivable. At December 31, 2000, the Company had unused borrowing capacity of approximately $20.2 million under the Facility. The Facility also includes financial covenants requiring the maintenance of a minimum tangible net worth level and a maximum debt to equity ratio. The 9% industrial development bonds are secured by the Company's Lebanon, Pennsylvania manufacturing facility and require principal repayment in six equal annual installments of $1.4 million commencing in 2005. The Company has established a debt reserve fund of approximately $595,000 until the first mandatory bond redemption period in 2003. The debt reserve fund was established with remaining funds in the trustee-controlled unexpended plant construction fund and interest subsequently earned. Financial covenants related to the industrial development bonds require the maintenance of a minimum tangible net worth level and a maximum debt to equity ratio. Annual maturities of debt obligations are as follows (in thousands): 2001 $ 187 2002 51,761 2003 534 2004 122 2005 1,468 Later years 7,000 ------- $61,072 ======= Interest paid on total debt obligations was $4.5 million, $3.0 million and $4.1 million in 2000, 1999 and 1998, respectively. Note 6 - Accrued Liabilities Accrued liabilities were comprised of the following (in thousands): December 31, 2000 1999 Accrued salaries and wages $ 4,095 $ 6,728 Dealer recourse deposits 2,648 2,418 Accrued warranty costs 4,787 5,796 Accrued product liability costs 3,409 3,760 Accrued income taxes 1,165 3,225 Other 7,091 8,776 ------- ------- $23,195 $30,703 ======= ======= Note 7 - Income Taxes The income tax provision recorded for the years ended December 31, 2000, 1999 and 1998 consisted of the following (in thousands): Year Ended December 31, Federal State Total 2000 Current $ 4,577 $ 502 $ 5,079 Deferred 121 - 121 ------- ----- ------- Total $ 4,698 $ 502 $ 5,200 ======= ====== ======= 1999 Current $12,080 $ 450 $12,530 Deferred (1,421) - (1,421) ------- ------ ------- Total $10,659 $ 450 $11,109 ======= ====== ======= 1998 Current $ 8,232 $ 349 $ 8,581 Deferred (177) - (177) ------- ------ ------- Total $ 8,055 $ 349 $ 8,404 ======= ====== ======= A reconciliation between the reported income tax provision and the federal statutory rate follows (as a percent of pre-tax income): Year Ended December 31, 2000 1999 1998 Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of Federal income tax effect 2.2 .9 1.0 Other, net (2.2) (.4) (.5) ------ ----- ----- 35.0% 35.5% 35.5% ====== ===== ===== The Company's temporary differences and carryforwards which give rise to deferred tax assets and liabilities consisted of the following (in thousands): The net asset is included in the consolidated balance sheet in the following captions (in thousands): December 31, 2000 1999 Accrued expenses and reserves $7,103 $8,237 Asset valuation reserves 1,960 1,693 Operating loss carryforwards 229 251 Tax credit carryforwards 343 309 Installment sales (945) (1,417) Property, plant and equipment (3,009) (2,936) Pension benefits (2,006) (933) Other, net (121) (176) Valuation allowance (572) (546) -------- -------- Net deferred tax asset $ 2,982 $ 4,482 ======== ======== The net asset is included in the consolidated balance sheet in the following captions (in thousands): December 31, 2000 1999 Prepaid income taxes $8,078 $8,431 Deferred income taxes (5,096) (3,949) ------ ------ $ 2,982 $ 4,482 ====== ====== At December 31, 2000, the Company had state net operating loss carryforwards of $4.4 million which will be available for the reduction of future income tax liabilities. A valuation allowance has been recorded against these carryforwards for which utilization is uncertain. Cash paid related to income taxes during 2000, 1999 and 1998 was $6.6 million, $11.9 million and $7.0 million, respectively. Note 8 - Employee Retirement Plans The Company sponsors two qualified defined benefit pension plans for certain of its employees. The following schedules set forth a reconciliation of the changes in the plans' benefit obligation and fair value of plan assets and a statement of the funded status (in thousands): Reconciliation of benefit obligation: 2000 1999 Obligation at beginning of year $ 30,429 $ 29,953 Service cost 573 573 Interest cost 2,430 2,107 Actuarial (gain) (207) (392) Benefit payments (1,931) (1,812) -------- -------- Obligation $ 31,294 $ 30,429 Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year $ 28,073 $ 27,087 Actual return on plan asset 4,793 2,210 Employer contributions 2,401 588 Benefit payments (1,931) (1,812) ------- ------- Fair value of plan assets $ 33,336 $ 28,073 Funded Status: Funded status at end of year $ 2,042 $(2,356) Unrecognized prior service cost 949 1,099 Unrecognized loss 2,378 4,746 -------- -------- Net amount recognized at December 31 $ 5,369 $ 3,489 The following table provides the amounts recognized in the statement of financial position (in thousands): December 31, 2000 1999 Prepaid benefit cost $ 5,369 $ 3,489 Accrued benefit liability - (1,028) Intangible asset - 26 Accumulated other comprehensive loss - 1,002 ------- ------- Net amount recognized at December 31 $ 5,369 $ 3,489 The following table provides disclosure of Net Periodic Benefit Cost (in thousands): Year Ended December 31, 2000 1999 1998 Service cost $ 573 $ 573 $ 525 Interest cost 2,430 2,107 2,037 Expected return on plan assets (2,631) (2,398) (2,244) Amortization of transition - - (272) assets Amortization of prior service cost 149 149 149 Amortization of net loss - 154 126 ------- ------- ------- Net periodic benefit cost $ 521 $ 585 $ 321 The assumptions used in the measurement of the Company's benefit obligation are shown in the following table: 2000 1999 Weighted-average assumption as of September 30: Discount rate 8.25% 8.25% Expected return on plan assets 9.00% 9.00% Rate of compensation increases 4.00% 4.00% The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the plan having accumulated benefit obligations in excess of plan assets were $16.0 million, $14.2 million and $13.4 million, respectively, as of December 31, 1999. The measurement date used for each of the actuarial calculations was September 30. Plan assets consist principally of common stocks and fixed income investments. Funding for the plans equals or exceeds the minimum requirements of the Employee Retirement Income Security Act of 1974. In addition, the Company maintains a non-qualified supplemental retirement benefit plan for certain management employees. The accumulated benefit obligation for this plan was $2.1 million and $1.8 million at December 31, 2000 and 1999, respectively, using a discount rate of 7.75% in 2000 and 8.25% in 1999. During 2000, the Company established a Rabbi Trust and contributed $1.6 million into the Trust with the assets designated for the above plan. The Company maintains a savings and profit sharing plan. The Company matches 50% of non-bargaining unit employee contributions to the plan not to exceed 6% of the employees annual compensation. Vesting of Company contributions occur at the rate of 20% per year. Contributions approximated $639,000, $632,000 and $577,000 in 2000, 1999 and 1998, respectively. The Company maintains a defined contribution plan that covers certain employees not covered by a defined benefit plan. The Company contributes various percentages of eligible employee compensation (as defined therein); the plan does not allow employee contributions. The Company contributed approximately $346,000, $407,000 and $329,000 in connection with this plan in 2000, 1999 and 1998, respectively. The Company provides postretirement benefits to certain retirees in two areas: a $2,500 life insurance policy for retired office employees and subsidized health insurance benefits for early retirees prior to their attaining age 65. The number of retirees associated with postretirement benefit costs is approximately 200. The following schedules set forth a reconciliation of the changes in the postretirement plan's benefit obligation and funded status (in thousands): December 31, 2000 1999 Reconciliation of benefit obligation: Obligation at beginning of year $1,717 $1,507 Service cost 59 59 Interest cost 129 127 Actuarial loss 5 181 Benefit payments (168) (157) ------ ------- Obligation $1,742 $1,717 Funded status: Funded status at end of year $(1,742) $(1,717) Unrecognized transition obligation 271 293 Unrecognized loss 809 842 ------- ------- Net amount recognized $ (662) $ (582) The following table provides disclosure of the net periodic benefit cost (in thousands): Year ended December 31, 2000 1999 1998 Service cost $ 59 $ 59 $ 40 Interest cost 129 127 110 Amortization of transition obligation 23 23 23 Amortization of net loss 37 50 37 ---- ---- ---- Net periodic benefit cost $ 248 $259 $210 The assumed health care cost rate trend used in measuring the accumulated postretirement benefit obligation at December 31, 2000 was 6% decreasing to 5% over four years and at December 31, 1999 was 7% decreasing to 5% over four years. The discount rate used in determining the accumulated postretirement obligation was 7.75% in 2000, 8.25% in 1999 and 7.25% in 1998. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects (in thousands): December 31, 1% Increase 1% Decrease Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 19 $ (16) Effect on the health care component of the accumulated postretirement benefit obligation $ 120 $ (98) Note 9 - Shareholders' Equity During April 2000, the 2000 Equity Incentive Plan was adopted, which authorized the granting of awards for up to 600,000 shares of the Company's common stock. An award is defined within the 2000 Equity Incentive Plan as a stock option, stock appreciation right, restricted stock or performance share. In April 1996, the 1995 Stock Option Plan was adopted, which authorized the granting of options for up to 600,000 shares of the Company's common stock. The Plans provide that options be granted at an exercise price not less than fair market value on the date the options are granted and that the options generally vest ratably over a period not exceeding three years after the grant date. The option period shall not be more than ten years after the grant date. Following is a summary of activity in the Plans for 1998, 1999 and 2000: Shares Weighted Subject Average to Option Option Price Outstanding, January 1, 1998 643,405 $9.58 Granted 117,750 14.54 Exercised (92,359) 7.67 Cancelled (13,002) 8.61 -------- ------ Outstanding, December 31, 1998 655,794 $10.76 Granted 119,500 18.71 Exercised (135,992) 7.72 Cancelled (31,668) 16.73 -------- ------ Outstanding, December 31, 1999 607,634 $12.69 Granted 268,500 12.60 Exercised (76,222) 7.38 Cancelled (18,835) 18.83 -------- ------ Outstanding, December 31, 2000 781,077 $13.03 ======== ====== Exercisable, December 31, 2000 407,316 $12.15 ======== ====== The exercise price for options outstanding at December 31, 2000 range from $6.25 to $22.50 per share. The weighted- average remaining contractual life of these options approximates seven years. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for options granted under the stock option plans. Had compensation cost been determined based on the fair value at the grant date for awards in 1998, 1999 and 2000 consistent with the provisions of SFAS No. 123, the Company's pro-forma net income and earnings per share would have been as presented below (in thousands, except per share data): For the year ended December 31, 2000 1999 1998 Net income $9,241 $19,820 $14,831 Diluted net income per share 1.65 3.12 2.23 Basic net income per share 1.69 3.24 2.33 The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998: For the year ended December 31, 2000 1999 1998 Expected stock price volatility 34.1% 25.9% 19.7% Risk-free interest rate 5.3% 6.3% 4.8% Expected life of options - years 7 7 7 The weighted-average grant-date fair value of options granted during 2000, 1999 and 1998 was $5.95, $8.21 and $5.13, respectively. In March 2000, the Company's Board of Directors authorized a repurchase plan providing for the repurchase of up to 325,000 shares of the Company's outstanding common stock. As of December 31, 2000, 271,900 shares had been repurchased in the open market under this authorization at an aggregate cost of $3.8 million. In March 1999, a repurchase plan relating to up to 325,000 shares of the Company's outstanding common stock was authorized. All of the authorized shares under that plan have been repurchased at an aggregate cost of $5.8 million. In addition, in July 1999, the Board authorized a specific repurchase from an individual shareholder. During 1999 pursuant to these authorizations, the Company repurchased an aggregate of 930,500 shares of its common stock at a cost of approximately $18.5 million. All treasury stock acquired by the Company has been cancelled and returned to the status of authorized but unissued shares. On May 28, 1997, the Board of Directors of the Company adopted a Shareholder Rights Plan and declared a rights dividend of one preferred share purchase right ("Right") for each share of common stock outstanding on June 16, 1997, and provided that one Right would be issued with each share of common stock thereafter issued. The Shareholder Rights Plan provides that in the event a person or group acquires or seeks to acquire 15% or more of the outstanding common stock of the Company, the Rights, subject to certain limitations, will become exercisable. Each Right once exercisable initially entitles the holder thereof (other than the acquiring person whose rights are cancelled) to purchase from the Company one one-hundredth of a share of Series A preferred stock at an initial exercise price of $55 per one one-hundredth of a share (subject to adjustment), or, upon the occurrence of certain events, common stock of the Company or common stock of an "acquiring company" having a market value equivalent to two times the exercise price. Subject to certain conditions, the Rights are redeemable by the Board of Directors for $.01 per Right and are exchangeable for shares of common stock. The Rights have no voting power and expire on May 28, 2007. Note 10 - Earnings Per Share Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares and, if applicable, common stock equivalents which would arise from the exercise of stock options and warrants. A reconciliation of the shares used in the computation follows (in thousands): Year Ended December 31, 2000 1999 1998 Basic shares 5,475 6,126 6,376 Effect of warrants and options 132 233 286 ----- ----- ----- Diluted shares 5,607 6,359 6,662 Note 11 - Contingencies The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, is not presently determinable. Management believes, based in part on the advice of counsel, that final disposition of such litigation will not have a material impact on the Company's results of operations or financial position. Note 12 - Segment Information The Company has two segments, construction equipment and agriculture equipment, as the long-term financial performance of these segments is affected by separate economic conditions and cycles. Segment net sales and income from operations tend to be aligned with the distribution networks of the Company, and correlate with the manner in which the Company evaluates performance. Construction equipment is manufactured and distributed for customers in the construction market. Products include a diversified offering of skid loaders, telescopic handlers, compact excavators, mini-loaders and paving equipment. As of December 31, 2000, 50% of the Company's accounts receivable were from customers in the construction market. Agriculture equipment is manufactured and distributed for customers in the dairy, livestock and poultry agricultural sectors. The products are comprised primarily of skid loaders and equipment for haymaking, forage harvesting, feed making and manure handling. As of December 31, 2000, 50% of the Company's accounts receivable were from customers in the agricultural sector. Unallocated assets are cash, deferred income taxes and other assets not identified with the Company's segments. Year Ended December 31, 2000 1999 1998 Net Sales Construction $151,130 $173,607 $159,228 Agriculture 106,988 117,791 108,418 -------- -------- -------- Consolidated $258,118 $291,398 $267,646 ======== ======== ======== Income from Operations Construction $ 14,028 $ 23,661 $ 19,384 Agriculture 7,957 11,396 7,894 -------- -------- -------- Consolidated $ 21,985 $ 35,057 $ 27,278 ======== ======== ======== Assets Construction $ 119,822 $ 102,298 $ 92,472 Agriculture 83,283 76,803 77,766 Unallocated 19,613 15,059 14,309 -------- -------- -------- Consolidated $222,718 $194,160 $184,547 ======== ======== ======== Depreciation/ Amortization Construction $ 3,155 $ 2,992 $ 2,687 Agriculture 2,552 2,092 2,033 Unallocated 27 27 28 -------- -------- -------- Consolidated $ 5,734 $ 5,111 $ 4,748 ======== ======== ======== Capital Expenditures Construction $ 6,523 $ 3,852 $ 1,827 Agriculture 6,054 3,429 1,224 -------- -------- -------- Consolidated $ 12,577 $ 7,281 $ 3,051 ======== ======== ======== Exports of U.S. produced products were approximately $34.4 million, $39.8 million and $41.4 million in 2000, 1999 and 1998, respectively. Note 13 Quarterly Financial Data (unaudited) In Thousands, Except Per First Second Third Fourth Share Data Quarter Quarter Quarter Quarter Total 2000 Net sales $72,054 $79,080 $54,837 $52,147 $258,118 Gross profit 19,282 21,396 14,569 12,778 68,025 Net income 4,069 5,129 188 270 9,656 Diluted net income per common share .70 .90 .03 .05 1.72 Basic net income per common share (1) .73 .93 .03 .5 1.76 1999 Net sales $70,341 $85,348 $71,351 $64,358 $291,398 Gross profit 18,903 24,169 20,581 16,894 80,547 Net income 3,504 6,772 6,101 3,808 20,185 Diluted net income per common share .52 1.01 1.00 .64 3.17 Basic net income per common share (1) .54 1.05 1.04 .67 3.29 (1) Due to the use of the weighted-average shares outstanding each quarter for computing net income per share, the sum of the quarterly per share amounts does not equal the per share amounts for the year. Dollars in 2000 1999 1998 1997 1996 Thousands, Except Per Share Data Summary of Operations Net sales (1) $258,118 $291,398 $267,646 $200,996 $162,855 Gross profit (1) 68,025 80,547 71,386 57,903 47,810 Income from operations 21,985 35,057 27,278 21,848 15,547 Interest expense 4,741 3,083 4,026 2,325 3,443 Income before income taxes 14,856 31,294 23,672 20,060 12,494 Net income 9,656 20,185 15,268 12,761 9,565 Financial Position at December 31 Current assets $142,997 $125,783 $121,894 $117,841 $89,748 Current liabilities 50,027 56,299 52,152 44,328 32,136 Working capital 92,970 69,484 69,742 73,513 57,612 Accounts receivable 69,546 68,551 70,806 72,190 55,141 Finance contracts receivable 26,516 19,385 15,590 11,241 8,161 Inventories 45,598 35,206 32,093 30,340 18,642 Property, plant and equipment, net 46,172 37,028 34,142 35,082 21,678 Total assets 222,718 194,160 184,547 176,223 120,125 Long-term debt 60,885 31,097 28,947 49,046 19,194 Total debt 61,072 31,616 29,544 49,718 19,372 Shareholders' equity 103,018 97,424 94,105 77,573 64,832 Common Share Summary Diluted net income per share $1.72 $3.17 $2.29 $1.95 $1.54 Basic net income per share 1.76 3.29 2.39 2.06 1.56 Dividends per share -- -- -- -- -- Book value per share 19.33 17.26 14.61 12.49 10.53 Shares outstanding at year-end 5,330,500 5,645,620 6,438,945 6,212,686 6,158,720 Other Financial Statistics Capital expenditures 12,577 7,281 3,051 8,718 3,837 Depreciation 4,885 4,329 3,941 2,955 2,438 Current ratio 2.9 to 1 2.2 to 1 2.3 to 1 2.7 to 1 2.8 to 1 Percent total debt to total capitalization 37.2% 24.5% 23.9% 39.1% 23.0% Net income as a percent of net sales 3.7% 6.9% 5.7% 6.4% 5.9% After-tax return on average shareholders' equity 9.6% 21.1% 17.8% 17.9% 15.9% Employees at year-end 976 1,118 1,127 1,192 832 Common stock price range 20-8 7/8 23-1/2-14 22-1/2-11 24-15/16-9-3/8 12-6-7/8 (1) Amounts have been reclassified to reflect the adoption of Emerging Issue Task Force No. 00-10, "Accounting for Shipping and Handling Fees and Costs". Investor Information Stock Prices and Dividends Price Range Dividends 2000 1999 2000 1999 First Quarter $20 - 15 3/8 $18-1/8 - 14 $ -- $ -- Second Quarter 20 - 13 1/2 23 - 14 1/8 -- -- Third Quarter 15-1/2 - 9 1/2 23-1/2 - 17 1/8 -- -- Fourth Quarter 16-7/8 - 8-7/8 19-11/16 - 16-5/8 -- -- --------------- ------------------ ---- ---- Year $20 - 8 7/8 $23-1/2 - 14 $ -- $ -- ================ ================== ==== ====