SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: March 31, 2002
Commission file number: 1-448
MESTEK, INC.
Pennsylvania Corporation
I.R.S. Employer Identification No.
25-0661650
260 North Elm Street
Westfield, Massachusetts 01085
Telephone: (413) 568-9571
The Registrant 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 and has
been subject to such filing requirements for the past 90 days.
The number of shares of Common Stock outstanding as of May 15, 2002,
was 8,721,603.
MESTEK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2002
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Condensed consolidated balance sheets at March 31, 2002
and December 31, 2001 3 - 4
Condensed consolidated statements of income for the three
months ended March 31, 2002 and 2001 5
Condensed consolidated statements of cash flows for the three
months ended March 31, 2002 and 2001 6
Condensed consolidated statement of changes in shareholders' equity
for the period from January 1, 2001 through March 31, 2002 7
Notes to the condensed consolidated financial statements 8-17
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
PART II - OTHER INFORMATION
Legal Proceedings/Exhibits and Reports on Form 8K 22
Statement of Computation of Per share Earnings 23
SIGNATURE 23
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, Dec. 31,
2002 2001
------- --------
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $2,710 $2,315
Accounts Receivable - less allowances of,
$4,675 and $4,239 respectively 54,333 57,944
Unbilled Accounts Receivable 106 537
Inventories 61,019 64,588
Deferred Tax Benefit 3,131 3,131
Other Current Assets 10,452 7,072
------- -------
Total Current Assets 131,751 135,587
Property and Equipment - net 58,284 58,334
Other Assets and Deferred Charges - net 8,387 8,158
Excess of Cost over Net Assets of Acquired Companies 57,432 57,432
------- -------
Total Assets $255,854 $259,511
======== ========
See the Notes to Condensed Consolidated Financial Statements.
Continued on next page
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
March 31, Dec. 31,
2002 2001
------ ------
(Dollars in thousands)
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $27,535 $30,002
Accounts Payable 17,057 17,687
Accrued Compensation 3,405 5,585
Accrued Commissions 1,674 2,307
Reserve for Equity Investment Losses 6,000 6,000
Progress Billings 294 286
Customer Deposits 5,465 5,177
Other Accrued Liabilities 21,680 21,343
------- ------
Total Current Liabilities 83,110 88,387
Long-Term Debt 180 180
Other Liabilities --- 14
------- ------
Total Liabilities 83,290 88,581
------- ------
Minority Interests 1,109 1,085
------- ------
Shareholders' Equity
Common Stock - no par, stated value $0.05 per share,
9,610,135 shares issued 479 479
Paid in Capital 15,434 15,434
Retained Earnings 167,033 165,423
Treasury Shares, at cost, (888,532 common shares) (10,101) (10,101)
Cumulative Translation Adjustment (1,390) (1,390)
-------- --------
Total Shareholders' Equity 171,455 169,845
-------- --------
Total Liabilities, and Shareholders' Equity $255,854 $259,511
======== ========
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2002 2001
------- --------
(In thousands,
except for share amounts)
Net Sales $88,945 $96,118
Net Service Revenues 116 176
------- -------
Total Revenues 89,061 96,294
Cost of Goods Sold 64,022 71,040
Cost of Service Revenues 72 142
-------- -------
Gross Profit 24,967 25,112
Selling Expense 13,299 12,632
General and Administrative Expense 5,081 4,905
Engineering Expense 3,474 3,113
Restructuring Charges --- 774
-------- -------
Operating Profit 3,113 3,688
Interest Income (Expense) (275) (193)
Other Income (Expense) - net (205) (113)
--------- --------
Income from Continuing Operations Before Income Taxes 2,633 3,382
Income Taxes 1,023 1,284
--------- -------
Income from Continuing Operations 1,610 2,098
Discontinued Operations:
Gain on Sale of Discontinued Operations --- 16,572
Applicable Income Tax Expense --- 7,482
--------- -------
Net Gain on Sale of Discontinued Operations --- 9,090
Net Income $1,610 $11,188
========= =======
Basic Earnings Per Common Share
Continuing Operations $0.18 $0.24
Discontinued Operations 0.00 1.04
----- ----
Net Income $0.18 $1.28
===== =====
Basic Weighted Average Shares Outstanding 8,722 8,729
===== =====
Diluted Earnings Per Common Share
Continuing Operations $0.18 $0.24
Discontinued Operations 0.00 1.04
----- -----
Net Income $0.18 $1.28
===== =====
Diluted Weighted Average Shares Outstanding 8,767 8,749
===== =====
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2002 2001
------ ------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income $1,610 $11,188
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,602 2,135
Provision for Losses on Accounts Receivable 436 408
Gain on Sale of National Northeast --- (16,446)
Change in Assets & Liabilities:
Cash Flows Provided by (Used in) Changes In:
Accounts Receivable 3,175 (159)
Unbilled Accounts Receivable 431 15
Inventory 3,569 (1,076)
Other Assets (3,634) (196)
Accounts Payable (630) 2,052
Accrued Expenses (2,188) 5,798
Progress Billings 8 (16)
Other Long Term Liabilities (14) (80)
------- --------
Net Cash Provided by Operating Activities 4,365 3,623
------- --------
Cash Flows from Investing Activities:
Capital Expenditures (1,527) (419)
Disposition of National Northeast --- 44,619
------- --------
Net Cash (Used in) Provided by Investing Activities (1,527) 44,200
------- --------
Cash Flows from Financing Activities:
Net Repayments
Under Line of Credit Agreements (2,467) (45,937)
Increase in Minority Interests 24 13
Repurchase of Common Stock --- (368)
Cumulative Translation Adjustments --- (70)
------- --------
Net Cash Used in Financing Activities (2,443) (46,362)
------- --------
Net Increase in Cash and Cash Equivalents 395 1,461
Cash and Cash Equivalents - Beginning of Period 2,315 2,417
------- --------
Cash and Cash Equivalents - End of Period $2,710 $3,878
======= ========
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the period January 1, 2001 through March 31, 2002
Cumulative
Common Paid In Retained Treasury Translation
Stock Capital Earnings Shares Adjustment Total
Balance - January 1, 2001 $479 $15,434 $158,697 ($9,733) ($1,195) $163,682
Net Income 6,726 6,726
Common Stock Repurchased (368) (368)
Cumulative Translation Adjustment (195) (195)
----- ------- -------- -------- -------- --------
Balance -December 31, 2001 479 15,434 165,423 (10,101) (1,390) 169,845
Net Income 1,610 1,610
----- ------- -------- -------- -------- ---------
Balance - March 31, 2002 $479 $15,434 $167,033 ($10,101) ($1,390) $171,455
===== ======= ======== ========= ======== =========
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Mestek,
Inc. (Mestek) and its wholly owned subsidiaries (collectively the "Company").
In the opinion of management, the financial statements include all material
adjustments, consisting solely of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows. The results of this interim period are not necessarily indicative
of results for the entire year. Certain financial information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principle have been condensed or omitted.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto as of December 31, 2001 appearing in the
Company's Report on Form 10-K for the year ended December 31, 2001.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition and Unbilled Receivables
Revenue from product sales is recognized at the time of shipment.
Unbilled receivables represent revenue earned in the current period but
not billed to the customer until future dates, usually within one month.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of 90 days or less at the time of purchase to be cash equivalents. Cash
equivalents include investments in an institutional money market fund, which
invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements,
backed by such obligations.
Inventories
Inventories are valued at the lower of cost or market. Cost of
inventories is principally determined by the last-in, first-out (LIFO) method.
Property and Equipment
Property and equipment are carried at cost. Depreciation and
amortization are computed using the straight-line and accelerated methods over
the estimated useful lives of the assets or the life of the lease, if shorter.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income for the period. The cost of maintenance and repairs
is charged to income as incurred; significant improvements are capitalized.
Excess of Cost Over Net Assets of Acquired Companies (Goodwill)
Through December 31, 2001, the Company amortized Goodwill on the
straight-line basis over the estimated period to be benefited, typically 25
years. The Company continually evaluated the carrying value of Goodwill in
accordance with FAS 121 prior to January 1, 2002 and continues to do so in 2002
in accordance with FAS 142. Any impairments are recognized in accordance with
the appropriate accounting standards. Accumulated amortization of goodwill and
other intangibles was $8,122,000 and $8,098,000 at March 31, 2002 and December
31, 2001, respectively. See Note 7.
Treasury Shares
Common stock held in the Company's treasury have been recorded at cost.
Earnings per Common Share
Basic earnings per share have been computed using the weighted average
number of common shares outstanding. Common stock options are considered in the
computation of diluted earnings per share.
Currency Translation
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at exchange rates prevailing on the balance sheet date. Net
foreign currency transactions are reported in the results of operations in U.S.
dollars at average exchange rates. Adjustments resulting from balance sheet
translations are excluded from the determination of income and are accumulated
in a separate component of shareholders' equity.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Comprehensive Income
For the three months ended March 31, 2002 and 2001, respectively, the
components of other comprehensive income were immaterial and consisted solely of
foreign currency translation adjustments. Comprehensive income was $1,610,000
and $11,118,000 for the three months ended March 31, 2002 and 2001,
respectively.
Reclassification
Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
Adoption of SFAS 141, SFAS 142 and SFAS 144
The Financial Accounting Standards Board (FASB) issued FAS 141,
Business Combinations and FAS 142, Goodwill and Intangible Assets in 2001. FAS
141 was effective for all business combinations completed after June 30, 2001.
FAS 142 was effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement applied also to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of FAS
142. Major provisions of these Statements and their effective dates for the
Company are as follows: (i) all business combinations initiated after June 30,
2001 must use the purchase method of accounting. The pooling of interest method
of accounting is prohibited except for transactions initiated before July 1,
2001, (ii) intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset
or liability, (iii) goodwill and intangible assets with indefinite lives
acquired after June 30, 2001, will not be amortized (iv) effective January 1,
2002, all previously recognized goodwill and intangible assets with indefinite
lives are no longer subject to amortization, (v) effective January 1, 2002,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator and (vi) all
acquired goodwill must be assigned to reporting units for purposes of impairment
testing and segment reporting.
Accordingly, the Company ceased recording amortization of goodwill and
intangible assets with indefinite lives effective January 1, 2002. In addition,
the Company is currently conducting the impairment tests required under FAS 142.
On October 3, 2001, FASB issued FAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that replaced FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
The primary objectives of this pronouncement were to develop one accounting
model based on the framework established in FAS 121 for long-lived assets to be
disposed of by sales and to address significant implementation issues. The
accounting model for long-lived assets to be disposed of by sale applies to all
long-lived assets, including discontinued operations, and replaces the
provisions of Account Principles Board (APB) Opinion no. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, for
the disposal of segments of a business. FAS 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. The
provisions of FAS 144 became effective January 1, 2002 and did not have a
material effect upon the Company's Financial Statement.
Note 2 - Inventories
March 31, December 31,
2002 2001
---- ----
(in thousands)
Finished Goods $20,373 $18,664
Work-in-progress 16,832 17,910
Raw materials 30,575 34,790
------- ------
67,779 71,364
Less provision for LIFO
method of valuation (6,760) (6,776)
-------- --------
$61,019 $64,588
======== ========
Note 3 - Property and Equipment
March 31, December 31,
2002 2001
---- ----
(in thousands)
Land $4,437 $4,437
Building 27,210 27,044
Leasehold Improvements 4,843 4,843
Equipment 91,646 90,285
-------- --------
128,136 126,609
Accumulated Depreciation (69,852) (68,275)
-------- --------
$58,284 $58,334
======== ========
Note 4 - Long-Term Debt
March 31, December 31,
2002 2001
---- ----
(in thousands)
Revolving Loan Agreement $21,475 $23,510
Note Payable 6,000 6,000
Other Bonds and Notes Payable 240 672
-------- -------
27,715 30,182
Less Current Maturities (27,535) (30,002)
-------- --------
$180 $180
======== ========
Revolving Loan Agreement - The Company has a Revolving Loan Agreement
and Letter of Credit Facility (the Agreement) with a commercial bank. The
Agreement has been amended and extended through April 30, 2004. The Agreement as
amended provides $50 million of unsecured revolving credit including $10 million
of standby letter of credit capacity. Borrowings under the Agreement bear
interest at a floating rate based on the bank's prime rate less one and three
quarters percent (1.75%) or, at the discretion of the borrower, LIBOR plus a
quoted market factor or, alternatively, in lieu of the prime based rate, a rate
based on the overnight Federal Funds Rate. The Revolving Loan Agreement contains
financial covenants, which require that the Company maintain ratios, relating to
interest coverage and leverage. This Agreement also contains restrictions
regarding the creation of indebtedness, the occurrence of mergers or
consolidations, the sale of subsidiary stock and the payment of dividends in
excess of 50 percent (50%) of net income. The Company has outstanding at March
31, 2002, $5,424,000 in standby letters of credit issued principally in
connection with its commercial insurance programs.
Note Payable - The Company has an unsecured uncommitted Demand Loan
Facility with a second commercial bank under which the Company can borrow up to
$25,000,000 on a LIBOR basis. $6,000,000 was outstanding under the Demand Loan
facility as of March 31, 2002 which bears interest at 2.69% and matures on June
17, 2002. The facility has been renewed through June 30, 2002. The Company
expects to renew the facility on substantially equivalent terms before its
expiration.
Other Bond and Note Payable - Certain of the Company's owned properties
are pledged as security for certain of these bonds and Notes Payable.
The fair value of the Company's long-term debt is estimated based on
the current interest rates offered to the Company for debt of the same remaining
maturities. Management believes the carrying value of debt and the contractual
values of the outstanding letters of credit approximate their fair values as of
March 31, 2002
Note 5 - Interim Segment Information
Description of the types of products and services from which each reportable
segment derives its revenues:
As described in the Company's Form 10-K for 2001, the Company completed the sale
of National Northeast Corporation, (National) on January 9, 2001. National
historically represented the largest division in the Company's Metal Products
segment. The Company elected to incorporate the Metal Products segment's
remaining units, Omega-Flex, Inc. and Boyertown Foundry Company into the
Heating, Ventilating, and Air Conditioning segment (HVAC) January 1, 2001.
Effective January 1, 2001, therefore, the Company has two reportable segments:
the manufacture of heating, ventilating and air-conditioning equipment (HVAC)
and the manufacture of metal handling and metal forming machinery (Metal
Forming).
The Company's HVAC segment manufactures and sells a wide variety of
residential, commercial and industrial heating, cooling, and air distribution
products to independent wholesale supply warehouses, to mechanical, sheet metal
and other contractors, and in some cases to other HVAC manufacturers under
original equipment manufacture (OEM) contracts. The products include finned tube
and baseboard radiation equipment gas fired heating and ventilating equipment,
air damper equipment and related air distribution products and commercial and
residential boilers. The products are marketed under a number of franchise names
including Sterling, Beacon Morris, Smith, Hydrotherm, RBI, Vulcan, Applied Air,
Wing, AWV, ABI, Arrow, CESCO, Louvers & Dampers, Airtherm, Koldwave, Anemostat,
Omega Flex, King National, King and Spacepak.
The Company's Metal Forming Segment designs, manufactures and sells a
variety of metal forming equipment and related machinery and repair parts under
names such as Cooper-Weymouth, Peterson, Dahlstrom, B & K, Lockformer, Iowa
Precision (IPI), Hill Engineering, Coilmate/Dickerman, Yoder, Krasny-Kaplan,
Mentor AGVS and Rowe. The products are sold directly and through independent
dealers to end-users and to original equipment manufacturers. The products
include roll formers, wing benders, duct forming systems, plasma and water-jet
cutting equipment, coil feeds, straighteners, cradles, cut-to-length lines,
specialty dies, rotary punching equipment, tube feed and cut-off and flying
cut-off saws, tube mills, pipe mills, and roll forming systems.
Measurement of segment profit or loss and segment assets:
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest expense and income taxes (EBIT),
not including non-operating gains and losses. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Inter-segment sales and transfers are recorded
at prices substantially equivalent to the Company's cost; inter-company profits
on such inter-segment sales or transfers are not material.
Factors management used to identify the enterprise's reportable segments:
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed separately because
they manufacture and distribute distinct products using distinct production
processes intended for distinct marketplaces.
Three Months ended
March 31, 2002:
----------------------
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $72,732 $16,213 $116 $89,061
Segment Operating Profit (Loss) $3,918 ($680) ($125) $3,113
Three Months ended
March 31, 2001:
----------------------
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $76,123 $19,995 $176 $96,294
Segment Operating Profit (Loss) $3,303 $485 ($100) $3,688
Note 6 - Stock Option Plans
On March 20, 1996 the Company adopted a stock option plan, the Mestek,
Inc. 1996 Stock Option Plan, (the Plan), which provides for the granting of
incentive and non-qualified stock options of up to 500,000 shares of stock to
certain employees of the Company and other persons, including directors, for the
purchase of the Company's common stock at fair market value at the date of
grant. The Plan was approved by the Company's shareholders on May 22, 1996.
Options granted under the plan vest over a five-year period and expire at the
end of ten years. All options granted under the Plan total 200,000 shares, none
of which have been exercised at March 31, 2002. No options were granted in the
first quarter of 2002.
Note 7 - Goodwill and Other Intangible Assets - Adoption of Statement 142
As explained more fully in Note 1, the Company ceased amortization of
goodwill and intangible assets with indefinite lives effective January 1, 2002.
The following table presents net income on a comparable basis by adding back
goodwill amortization, net of related tax effects, for both periods.
For the Three Months Ended
March 31, March 31,
2002 2001
---- ----
(dollars in thousands, except for
earnings per share amounts)
Reported Net Income $1,610 $11,188
Add back: Goodwill Amortization --- 746
---------- ---------
Adjusted Net Income $1,610 $11,934
====== =======
Basic and Diluted Earning per Share $0.18 $1.28
Add back: Goodwill Amortization --- 0.08
------ ------
Adjusted Net Income $0.18 $1.36
====== =====
Note 8 - Commitments & Contingencies
As previously disclosed, the Company is obligated as guarantor with
respect to the debt of MacKeeber Associates Limited Partnership, a Connecticut
Limited Partnership, a related party, under an Industrial Development Bond
issued in 1984 by the Connecticut Development Authority. The balance outstanding
under the bond as of March 31, 2002 was $368,323.
As previously disclosed, the Company is obligated as a guarantor with
respect to certain debt of CareCentric, Inc. (formerly Simione Central Holdings,
Inc.) to its primary commercial bank, Wainwright Bank & Trust Company, in the
amount of $6 million. The $6 million Wainwright credit line is secured by
substantially all of CareCentric's assets. The balance outstanding under
CareCentric's credit line with Wainwright Bank & Trust Company as of March 31,
2002 was $5,967,000.
The Company is subject to several legal actions and proceedings in
which various monetary claims are asserted.
As previously disclosed, residents of the neighborhood to the south of
a manufacturing facility site in Lisle, Illinois owned by a second-tier
subsidiary of Mestek ("the Lockformer facility") have been certified as a
class in an action against Mestek and its subsidiary Met-Coil Systems
Corporation ("Met-Coil") for alleged contamination of their drinking water
wells, allegedly due to migration off-site of historic TCE contamination of soil
at the Lockformer facility. This class action case is entitled LeClercq, et
al. v. The Lockformer Company et al., a division of Met-Coil Systems
Corporation, Mestek, Inc, and Honeywell International, Inc." (the "LeClercq
Class Action").
Mestek sought to be dismissed as a defendant in this action by way
of a Motion for Summary Judgment, which was denied on April 29, 2002. Mestek
has filed a motion for reconsideration of this motion and intends to appeal this
determination if necessary.
On May 8, 2002 Mestek and its subsidiary Met-Coil commenced a jury
trial in the United States District Court for the Northern District of Illinois
in the LeClercq Class Action. Prior to the commencement of the trial the
presiding judge entered an order of Partial Summary Judgment determining as a
matter of fact that the source of contamination of the class of residents in the
LeClercq Class Action (the "LeClercq Class") was from releases of TCE at the
Lockformer facility. Mestek and Met-Coil intend to seek reconsideration of
this finding or to appeal this Partial Summary Judgment. Accordingly, the trial
is now focused on the issues of the extent of compensatory property damages
which the LeClerq Class has sustained and the amount of any punitive damages
which should be awarded against Mestek, its subsidiary Met-Coil, and/or
co-defendant Honeywell International, Inc. ("Honeywell").
Plaintiffs are seeking compensatory damages equal to (i) the cost of
hooking up to the public water supply (ii) the amount of temporary loss in value
to their property and stigma to them as property owners during the period prior
to their being hooked up to the public water supply, (iii) the permanent damage
to their property by reason of their homes being located over an aquifer or area
contaminated by TCE, (iv) the damages to their property associated with any
vapors arising through the ground and entering the air in their houses or on
their property, and (v) the damages associated with the trespass and nuisance
suffered by them during the time that they had to use bottled water and were
concerned about the effects of having ingested and otherwise having been exposed
to contaminated water and vapors. The Plaintiffs have made claims for property
damages in categories (i) through (iv) above which could be significant in and
of themselves.
In addition, the Plaintiffs have alleged that Mestek and its
subsidiary Met-Coil have acted recklessly without due regard for the health and
safety of the public and consequently are seeking punitive damages as a multiple
of compensatory damages. Mestek and its subsidiary are contesting the
amount of compensatory damages the LeClercq Class has indicated it will seek, as
well as the applicability of any punitive damages.
Management is unable at this time to predict with any degree of
certainty the outcome of this ongoing trial or of any settlement discussions
that have occurred or may occur in this case or in the action entitled Mejdrech,
et al. v. The Lockformer Company, et al., alleging the same kinds of damages on
the same grounds as the LeClercq Class, for residents in two neighborhoods
further south of the LeClercq Class represented by the same counsel. The
Mejdrech matter has not been certified as a class action. The involvement of
Honeywell as a defendant, together with the involvement of MetCoil's historic
insurers, further complicates any attempts at this time to predict the outcome
of either action. A judgment assessing significant damages, whether compensatory
or punitive, in either action, would materially adversely affect the Company's
results of operations.
In a separate action entitled People of the State of Illinois, et al.
v. The Lockformer Company, et al., Met-Coil, pursuant to a consent agreement in
January 2001, has investigated the same site for the same contamination and
provided an interim supply of bottled water to the LeClercq Class and the
Mejdrech residents. In this action, on May 6, 2002, Met-Coil agreed to an
Interim Order to reimburse the Village of Lisle for the installation of certain
water mains, to connect certain residents to the public water supply, and to
reimburse the reasonable costs of such a connection to those residents who have
connected to the public water supply since November 30, 1994. The Company
estimates the cost of compliance with this agreed order to be approximately
$1,300,000, which would mitigate one component of the damages sought by the
Plaintiffs in the above-described LeClercq Class action. The Company believes it
is probable that this cost will be reimbursed to Met-Coil by its insurers and
hence the Company has accrued as of March 31, 2002 both the liability and the
related recovery. Mestek and Met-Coil continue to negotiate coverage with
Met-Coil's historic insurers as to all of the above claims.
The Company's subsidiary has tendered all of the claims related to the
above-described litigation to its historic insurance carriers, and five carriers
are reimbursing the Company's subsidiary for a substantial portion of the
subsidiary's defense costs, including the costs incurred by the subsidiary under
the consent agreement. However, the subsidiary's insurers have contested their
liability, and Mestek and its subsidiary remain in litigation with the
insurers regarding coverage. The insurers are seeking a declaratory judgment
that they have no liability and a reimbursement of the defense costs paid by the
insurers. Moreover, if any punitive damages were to be awarded to the plaintiffs
in any of these suits, those punitive damages, would not in any event be covered
by insurance.
See also in the Company's Form 10-K for the period ending December 31,
2001 Item 3, Legal Proceedings, and the paragraph entitled "Environmental
Disclosure" under Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations which is updated by the information
contained in this Note 8.
Note 9 -Investments
In March of 2002, the Company made an offer proposing to make available
to CareCentric, Inc. (CareCentric) approximately $1.1 million of short-term
financing to assist CareCentric with its near term working capital needs. If
CareCentric meets the terms and conditions proposed by the Company in this
regard, the funds will be advanced, and subsequently, this and other debt of
CareCentric to Mestek will be refinanced on a long-term basis, in conjunction
with the re-pricing and restructuring of the Company's equity investments in
CareCentric.
Coincident with Mestek's offer, John E. Reed, the Company's Chairman
and CEO, made an offer proposing to make available to CareCentric approximately
$900,000 of short-term financing as well. If CareCentric meets the terms and
conditions proposed by Mr. Reed in this regard, the funds will be advanced, and
subsequently, this and other debt of CareCentric to Mr. Reed will be refinanced
on a long-term basis, in conjunction with the re-pricing and restructuring of
preferred stock investments in CareCentric held by Mr. Reed.
A formal vote of the CareCentric shareholders addressing the financing
offers made by the Company and John E. Reed is scheduled for June 6, 2002. In
connection with these offers the Company transferred to John E. Reed, effective
March 29, 2002, certain of its voting rights associated with the Series B
Preferred Stock of CareCentric held by the Company.
Note 10 -Subsequent Events
As described more fully in Note 8, Commitments and Contingencies, and
in the Company's Form 10-K for 2001, the Company and one of its subsidiaries are
defendants in several legal actions related to environmental exposures at a
manufacturing facility owned by the subsidiary in Lisle, Illinois. Recent
developments in these cases, including events subsequent to March 31, 2002, are
described in greater detail in Note 8.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operation
Excluding revenues from the King Company which was acquired on December
31, 2001, Total Revenues in the Company's HVAC segment decreased by 8.8% during
the first quarter of 2002 relative to the first quarter of 2001 due primarily to
weakness in the segment's industrial products and air distribution products
divisions. Weak demand in the marketplace for these products, together with
operational problems stemming from product redesign and manufacturing process
reorganization efforts in the air distribution products division account for the
largest part of the drop in revenues. Operating income for this segment
increased, however, from $3,303,000 in the first quarter of 2001 to $3,918,000
in the first quarter of 2002, reflecting the fact that the 2001 period included
a $750,000 restructuring charge related to the shutdown and relocation of the
Cesco Products manufacturing operations which were moved from Brooklyn Park,
Minnesota to Florence, Kentucky in 2001.
Excluding revenues from Formtek Cleveland, Inc. (formerly SNS
Properties Ltd) which was acquired on July 2, 2001, Total Revenues in the
Company's Metal Forming segment decreased 26.1% during the first quarter of
2002, owing to a cyclical decline in demand for this segment's products.
Management believes that the events of September 11, 2001 have exacerbated the
effects of an otherwise normal industry-wide cyclical downturn in the demand for
machine tools. The Company believes however, that the mutually reinforcing
franchises it has acquired under the Formtek name, including Cooper Weymouth
Peterson, Rowe, CoilMate, Dickerman, Yoder, Krasny-Kaplan, Mentor AGVS,
Lockformer, Iowa Precision, Hill Engineering, B&K, and Dahlstrom, will allow it
to maintain and expand its core competencies, positioning this segment very well
for the next cyclical upturn in the machine tool industry. Operating profits for
the quarter dropped from $485,000 profit in the quarter ended March 31, 2001 to
($680,000) loss in the quarter ended March 31, 2002 owing principally to the
drop-off in sales.
For the Company as a whole, Sales, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, increased
from 21.4% to 24.5% due principally to the drop off in revenues described above.
Operating income for the first quarter of 2002 for the Company as a
whole decreased by $575,000 or 15.6% reflecting the various factors mentioned
above.
The Company's total debt (long-term debt plus current portion of
long-term debt) was reduced in the first quarter of 2002 from $30,182,000 to
$27,715,000, as a result of reduced investments in accounts receivable and
inventory owing to reduced levels of business as described above. Management
regards the Company's current capital structure and banking relationships as
fully adequate to meet foreseeable future needs. The Company has not paid
dividends on its common stock since 1979.
The Company's Annual Meeting of Shareholders will be held 11 a. m., May
28, 2002 at the Reed Institute adjacent to the Company's headquarters in
Westfield, Massachusetts.
Commitments and Contingencies
As previously disclosed, the Company is obligated as guarantor with
respect to the debt of MacKeeber Associates Limited Partnership, a Connecticut
Limited Partnership, a related party, under an Industrial Development Bond
issued in 1984 by the Connecticut Development Authority. The balance outstanding
under the bond as of March 31, 2002 was $368,323.
As previously disclosed, the Company is obligated as a guarantor with
respect to certain debt of CareCentric, Inc. (formerly Simione Central Holdings,
Inc.) to its primary commercial bank, Wainwright Bank & Trust Company, in the
amount of $6 million. The $6 million Wainwright credit line is secured by
substantially all of CareCentric's assets. The balance outstanding under
CareCentric's credit line with Wainwright Bank & Trust Company as of March 31,
2002 was $5,967,000.
The Company is subject to several legal actions and proceedings in which
various monetary claims are asserted.
As previously disclosed, residents of the neighborhood to the south of
a manufacturing facility site in Lisle, Illinois owned by a second-tier
subsidiary of the Company ("the Lockformer facility") have been certified as a
class in an action against the Company and its subsidiary Met-Coil Systems
Corporation ("Met-Coil") for alleged contamination of their drinking water
wells, allegedly due to migration off-site of historic TCE contamination of soil
at the Lockformer facility. This class action case is entitled LeClercq, et
al. v. The Lockformer Company et al., a division of Met-Coil Systems
Corporation, Mestek, Inc, and Honeywell International, Inc." (the "LeClercq
Class Action").
The Company sought to be dismissed as a defendant in this action by way
of a Motion for Summary Judgment, which was denied on April 29, 2002. The
Company has filed a motion for reconsideration of this motion and intends to
appeal this determination if necessary.
On May 8, 2002 the Company and its subsidiary Met-Coil commenced a jury
trial in the United States District Court for the Northern District of Illinois
in the LeClercq Class Action. Prior to the commencement of the trial the
presiding judge entered an order of Partial Summary Judgment determining as a
matter of fact that the source of contamination of the class of residents in the
LeClercq Class Action (the "LeClercq Class") was from releases of TCE at the
Lockformer facility. The Company and Met-Coil intend to seek reconsideration of
this finding or to appeal this Partial Summary Judgment. Accordingly, the trial
is now focused on the issues of the extent of compensatory property damages
which the LeClerq Class has sustained and the amount of any punitive damages
which should be awarded against the Company, its subsidiary Met-Coil, and/or
co-defendant Honeywell International, Inc. ("Honeywell").
Plaintiffs are seeking compensatory damages equal to (i) the cost of
hooking up to the public water supply (ii) the amount of temporary loss in value
to their property and stigma to them as property owners during the period prior
to their being hooked up to the public water supply, (iii) the permanent damage
to their property by reason of their homes being located over an aquifer or area
contaminated by TCE, (iv) the damages to their property associated with any
vapors arising through the ground and entering the air in their houses or on
their property, and (v) the damages associated with the trespass and nuisance
suffered by them during the time that they had to use bottled water and were
concerned about the effects of having ingested and otherwise having been exposed
to contaminated water and vapors. The Plaintiffs' experts have identified claims
for the property damages for all of the above categories, other than trespass
and nuisance, which could be significant in and of themselves.
In addition, the Plaintiffs have alleged that Mestek and its
subsidiary Met-Coil have acted recklessly without due regard for the health and
safety of the public and consequently are seeking punitive damages as a multiple
of compensatory damages. Mestek and its subsidiary are contesting the
amount of compensatory damages the LeClercq Class has indicated it will seek, as
well as the applicability of any punitive damages.
Management is unable at this time to predict with any degree of
certainty the outcome of this ongoing trial or of any settlement discussions
that have occurred or may occur in this case or in the action entitled Mejdrech,
et al. v. The Lockformer Company, et al., alleging the same kinds of damages on
the same grounds as the LeClercq Class, for residents in two neighborhoods
further south of the LeClercq Class represented by the same counsel. The
Mejdrech matter has not been certified as a class action. . The involvement of
Honeywell International, Inc. as a defendant, together with the involvement of
MetCoil's historic insurers, further complicates any attempts at this time to
predict the outcome of either action. A judgment assessing significant damages,
whether compensatory, punitive, or both, in either action would materially
adversely affect the Company's results of operations.
In a separate action entitled People of the State of Illinois, et al.
v. The Lockformer Company, et al., Met-Coil, pursuant to a consent agreement in
January 2001, has investigated the same site for the same contamination and
provided an interim supply of bottled water to the LeClercq Class and the
Mejdrech residents. In this action, on May 6, 2002, Met-Coil agreed to an
Interim Order to reimburse the Village of Lisle for the installation of certain
water mains, to connect certain residents to the public water supply, and to
reimburse the reasonable costs of such a connection to those residents who have
connected to the public water supply since November 30, 1994. The Company
estimates the cost of compliance with this agreed order to be approximately
$1,300,000, which would mitigate one component of the damages sought by the
Plaintiffs in the above-described LeClercq Class action. The Company believes it
is probable that this cost will be reimbursed to Met-Coil by its insurers and
hence the Company has accrued as of March 31, 2002 both the liability and the
related recovery. The Company and Met-Coil continue to negotiate coverage with
Met-Coil's historic insurers as to all of the above claims.
The Company's subsidiary has tendered all of the claims related to
Lisle, Illinois, to its historic insurance carriers, and five carriers are
reimbursing the Company's subsidiary for a substantial portion of the
subsidiary's defense costs, including the costs incurred by the subsidiary under
the consent agreement. However, the subsidiary's insurers have contested their
liability, and Mestek and its subsidiary are in litigation with the
insurers regarding coverage. The insurers are seeking a declaratory judgment
that they have no liability and a reimbursement of the defense costs paid by the
insurers. Moreover, if any punitive damages were to be awarded to the plaintiffs
in any of these suits, those punitive damages, would not in any event be covered
by insurance.
See also in the Company's Form 10-K for the period ending December 31,
2001 Item 3, Legal Proceedings, and the paragraph entitled "Environmental
Disclosure" under Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations
Market Risks
The Company's operations are sensitive to a number of market factors,
any one of which could materially adversely effect its results of operations in
any given year:
Construction activity--the Company's largest segment, its Heating,
Ventilating, and Air Conditioning (HVAC) segment, is directly affected and its
other segment, Metal Forming, is indirectly affected by commercial construction
projects and residential housing starts. Relatively lower interest rates in
2001, and 2002 to date, and strong institutional activity helped prevent what
might otherwise have been a more pronounced recessionary effect. Significant
increases in interest rates or reductions in construction activity in future
periods, however, could be expected to adversely effect the Company's revenues,
possibly materially.
Manufacturing Activity-- The Company's Metal Forming segment, as a
manufacturer of capital goods used in other manufacturing processes, is subject
to significant cyclicality. The Company's Metal Forming segment provides
equipment used to hold, uncoil, straighten, form, bend and otherwise handle
metal used in manufacturing operations; all activities likely to be adversely
effected in recessionary periods. The level of manufacturing activity in the
automotive, steel processing, metal furniture, and stamping industries, are
particularly relevant to this segment since its products are typically purchased
to upgrade or expand existing equipment or facilities. Expectations of future
business activity are also particularly relevant. Activity in this segment was
significantly effected by events of September 11, 2001.
Credit Availability--Although interest rates trended lower in 2001, and
2002 to date, reflecting the Federal Reserve's monetary policy during this
period, credit availability has, reportedly, somewhat tightened for marginal
business borrowers. As the Company's customer base includes many small to medium
sized business, a further credit tightening through the commercial banking
system could be expected, at some point, to adversely effect the Company's
sales, as was the case in the "credit crunch" of 1990-1991.
Technological changes--Although the HVAC industry has historically been
impacted by technology changes in a relatively incremental manner, it cannot be
discounted that radical changes--such as might be suggested by fuel cell
technology, burner technology and/or other developing technologies--could
materially adversely effect the Company's results of operations and/or financial
position in the future.
Environmental Laws Affecting Operations and Product Design--The
Company's operations and its HVAC products that involve combustion as currently
designed and applied entail the risk of future noncompliance with the evolving
landscape of Environmental Laws. The cost of complying with the various
Environmental Laws is likely to increase over time, and there can be no
assurance that the cost of compliance, including changes to manufacturing
processes and design changes to current HVAC product offerings that involve the
creation of carbon dioxide or other currently unregulated compounds emitted in
atmospheric combustion, will not over the long-term and in the future have a
material adverse effect on the Company's results of operations.
Weather Conditions--The Company's core HVAC segment manufactures
heating, ventilating and air conditioning equipment with heating products
representing the bulk of the segment's revenues. As such, the demand for its
products depends upon colder weather and benefits from extreme cold. Severe
climatic changes, such as those suggested by the "global warming" phenomenon,
could over time adversely effect the Company's results of operation and
financial position.
Purchasing Practices--It has been the Company's policy in recent years
for high value commodities to aggregate volumes with a sole source to achieve
maximum cost reductions while maintaining quality and service. This policy has
been effective in reducing costs but has introduced additional risk which could
potentially result in short-term supply disruptions or cost increases from time
to time in the future.
Interest Rate Sensitivity--The Company's borrowings are largely Libor
or Prime Rate based. The Company believes that a 100 basis-point increase in its
cost of funds would not have a material affect on the Company's financial
statements taken as a whole.
Investments
In March of 2002, the Company made an offer proposing to make available
to CareCentric, Inc. (CareCentric) approximately $1.1 million of short-term
financing to assist CareCentric with its near term working capital needs. If
CareCentric meets the terms and conditions proposed by the Company in this
regard, the funds will be advanced, and subsequently, this and other debt of
CareCentric to Mestek will be refinanced on a long-term basis, in conjunction
with the re-pricing and restructuring of the Company's equity investments in
CareCentric.
Coincident with Mestek's offer, John E. Reed, the Company's Chairman
and CEO, made an offer proposing to make available to CareCentric approximately
$900,000 of short-term financing as well. If CareCentric meets the terms and
conditions proposed by Mr. Reed in this regard, the funds will be advanced, and
subsequently, this and other debt of CareCentric to Mr. Reed will be refinanced
on a long-term basis, in conjunction with the re-pricing and restructuring of
preferred stock investments in CareCentric held by Mr. Reed.
A formal vote of the CareCentric shareholders addressing the financing
offers made by the Company and John E. Reed is scheduled for June 6, 2002. In
connection with these offers the Company transferred to John E. Reed, effective
March 29, 2002, certain of its voting rights associated with the Series B
Preferred Stock of CareCentric held by the Company.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Except for the following proceedings which relate to the same matter,
which are discussed in Item 2 Part I to this Form 10 Q, Management Discussion
and Analysis and in Note 8 to the Notes to the Consolidated Financial
Statements, the Company is not presently involved in any litigation that it
believes could materially and adversely affect its financial condition or
results of operations. The following proceedings involve claims related to the
discharge of trichloroethylene (TCE) onto the soil of The Lockformer Company
site in Lisle, Illinois:
LeClercq, et al. v. The Lockformer Company - Case No. 00 C 7164
(U.S.D.C. for N.D. Ill.)
Filed November 14, 2000
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc., Allied Signal, Inc. and
Honeywell International, Inc.
Mejdrech, et al. v. The Lockformer Company - Case No. 01 C 6107
(U.S.D.C. for N.D. Ill.)
Filed August 9, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc., Allied Signal, Inc. and
Honeywell International, Inc.
DeVane, et al. v. The Lockformer Company - Case No. 01 L 377
(18th Judicial Circuit Court, Dupage County, Ill.)
Filed April 12, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Allied Signal, Inc. and Honeywell
International, Inc.
Daniel Pelzer, et al. v. Lockformer - Case No. 01 C 6485
(U.S.D.C. for N.D. Ill.)
Filed August 21, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and Honeywell
International, Inc.
People of the State of Illinois, et al. v. The Lockformer Company -
Case No. 00 CH 62
(18th Judicial Circuit Court, Dupage County, Ill.)
Filed January 19, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation and Honeywell International, Inc.
In the Matter of: Lockformer Site, Docket No. V-W-02-C-665.
Administrative Order issued by the United States Environmental Protection
Agency, Region 5 on October 4, 2002.
Respondents: The Lockformer Company, division of Met-Coil Systems Corporation
Item 6 - Exhibits and Reports on Form 8-K
(a) Statement of Computation of Per Share Earnings ... Page 23
MESTEK, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended March 31,
2002 2001
--------- ----------
Income from Continuing Operations $1,610 $2,098
Income from Discontinued Operations --- 9,090
------ --------
Net Income $1,610 $11,188
Basic Earnings per Common Share:
Continuing Operations $0.18 $0.24
Discontinued Operations --- 1.04
------ -------
Net Income $0.18 $1.28
====== ========
Basic Weighted Average Shares Outstanding 8,722 8,729
====== ========
Diluted Earnings Per Common Share:
Continuing Operations $0.18 $0.24
Discontinued Operations --- 1.04
------ --------
Net Income $0.18 $1.28
====== ========
Diluted Weighted Average Shares Outstanding 8,767 8,749
====== ========
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.
MESTEK, INC.
------------
(Registrant)
Date: May 15, 2002 By: /S/ Stephen M. Shea
------------------------------------------------
Stephen M. Shea, Senior Vice President - Finance
and CFO (Chief Financial Officer)