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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 Commission file number:
December 29, 2002 1-5761
LaBARGE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 73-0574586
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
9900A Clayton Road,
St. Louis, Missouri 63124
(Address) (Zip Code)
(314) 997-0800
(Registrant's telephone number, including Area Code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No __.
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of December 29, 2002. 15,773,253 shares of common stock.
LaBARGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per-share data)
Three Months Ended Six Months Ended
December December December December
29, 30, 29, 30,
2002 2001 2002 2001
--------------------- -------- -------- ------- --------
Net sales $24,405 $30,781 $47,547 $61,857
--------------------- -------- -------- ------- --------
Costs and expenses:
Cost of sales 19,694 24,490 38,239 49,939
Selling and administrative
expense 4,272 4,170 8,530 8,195
Interest expense 202 336 425 652
Other income, net (581) (102) (629) (198)
--------------------- -------- -------- ------- --------
Income before income taxes 818 1,887 982 3,269
Income tax expense 237 732 301 1,242
Net earnings from 581 1,155 681 2,027
continuing operations
--------------------- -------- -------- ------- --------
Discontinued operations:
Income (loss) from
discontinued operations,
(less applicable income
taxes of $10, $28, ($2),
$127, respectively)
Income on disposal of 14 45 (4) 208
discontinued operations of
$2,222 (less applicable
income tax expense of
$2,434) (212) - (212) -
--------------------- -------- -------- ------- --------
Net earnings $ 383 $1,200 $ 465 $2,235
======================= ===== ===== ===== ======
Basic net earnings per
share:
Net income from continuing $ 0.04 $ 0.08 $ 0.04 $ 0.14
operations
Net income from (0.01) - (0.01) 0.01
discontinued operations
Basic net earnings $ 0.03 $ 0.08 $ 0.03 $ 0.15
--------------------- -------- -------- ------- --------
Average common shares
outstanding 15,017 14,961 15,016 14,971
======================= ===== ===== ===== ======
Diluted net earnings per
share: $ 0.04 $ 0.08 $ 0.04 $ 0.14
Net income from continuing
operations
Net income from (0.01) - (0.01) 0.01
discontinued operations
Diluted net earnings $ 0.03 $ 0.08 $ 0.03 $ 0.15
--------------------- -------- -------- ------- --------
Average diluted common
shares outstanding 15,199 15,364 15,227 15,254
======================= ===== ===== ===== ======
See accompanying notes to consolidated financial statements.
LaBARGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
December June 30,
29,
2002 2002
- ------------------------------------ ------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,364 $ 2,533
Accounts and notes receivable, net 14,176 16,683
Inventories 23,219 22,390
Prepaid expenses 634 555
Deferred tax assets, net 718 627
Current assets of discontinued operations - 460
- ------------------------------------ ------- --------
Total current assets $47,111 $43,248
- ------------------------------------ ------- --------
Property, plant and equipment, net 14,072 13,956
Deferred tax assets, net 246 937
Intangible assets, net 769 801
Other assets, net 6,300 4,989
Non-current assets of discontinued
operations - 4,275
- ------------------------------------ ------- --------
$68,498 $68,206
========================================= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - $2,583
Current maturities of subordinated debt 5,621 5,621
Current maturities of long-term debt 328 278
Trade accounts payable 6,988 6,516
Accrued employee compensation 5,175 5,470
Other accrued liabilities 7,083 3,491
Current liabilities of discontinued
operations - 52
- ------------------------------------ ------- --------
Total current liabilities $25,195 $24,011
- ------------------------------------ ------- --------
Customer advances 2,325 2,103
Other long-term liabilities of discontinued
operations - 1,361
Long-term debt 6,869 7,047
- ------------------------------------ ------- --------
Stockholders' equity:
Common stock, $.01 par value. Authorized
40,000,000 shares; issued 15,773,253 at
December 29, 2002 and 15,773,253 shares at
June 30, 2002 including shares in treasury 158 158
Additional paid-in capital 13,510 13,515
Retained earnings 23,201 22,736
Accumulated other comprehensive loss (80) (131)
Less cost of common stock in treasury, shares
of 814,333 at December 29, 2002
and 806,956 at June 30, 2002 (2,680) (2,594)
- ------------------------------------ ------- --------
Total stockholders' equity 34,109 33,684
- ------------------------------------ ------- --------
$68,498 $68,206
===================================== ======== ========
See accompanying notes to consolidated financial statements.
LaBARGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six Months Ended
December 29, December 30,
2002 2001
- ------------------------------------ ------------ ----------
Cash flows from operating activities:
Net earnings $ 465 $2,235
Adjustments to reconcile net cash
provided by
operating activities:
(Gain) on disposal of discontinued
operations (2,222) -
Taxes payable on gain from discontinued
operations (included in other accrued
liabilities) 2,434 -
Net (earnings) loss from discontinued
operations 4 (208)
Depreciation and amortization 1,237 1,104
Loss on disposal of property, plant 13 23
and equipment
Deferred taxes 600 1,033
Changes in assets and liabilities, net
of acquisitions:
Accounts and notes receivable, net 2,507 5,057
Inventories (829) 546
Prepaid expenses (79) 32
Trade accounts payable 472 (1,895)
Accrued liabilities and other 988 (3,458)
- ------------------------------------ ------------ ----------
Net cash provided by continuing
activities 5,590 4,469
- ------------------------------------ ------------ ----------
Net cash provided by discontinued
operations 388 631
- ------------------------------------ ------------ ----------
Net cash provided by operating
activities 5,978 5,100
- ------------------------------------ ------------ ----------
Cash flows from investing activities:
Additions to property, plant and (1,221) (481)
equipment
Additions to other assets (1,424) (1,135)
Proceeds from disposal of discontinued
operations 5,300 -
- ------------------------------------ ------------ ----------
Net cash provided (used) by investing
activities 2,655 (1,616)
- ------------------------------------ ------------ ----------
Cash flows from financing activities:
Additions to long-term debt 20 -
Repayments of long-term senior debt (148) (1,900)
Issuance of stock to employee benefit
plan 164 153
Purchase of treasury stock (255) (231)
Net change in short-term borrowings (2,583) 150
- ------------------------------------ ------------ ----------
Net cash used by financing activities (2,802) (1,828)
- ------------------------------------ ------------ ----------
Net increase in cash and cash
equivalents 5,831 1,656
Cash and cash equivalents at beginning
of year 2,533 666
- ------------------------------------ ------------ ----------
Cash and cash equivalents at end of
period $8,364 $2,322
=================================== ============= ==========
See accompanying notes to consolidated financial statements.
LaBARGE, INC.
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The consolidated balance sheets at December 29, 2002 and June 30, 2002, the
related consolidated statements of operations for the three and six months ended
December 29, 2002 and December 30, 2001 and the consolidated statements of cash
flows for the six months ended December 29, 2002 and
December 30, 2001, have been
prepared by LaBarge, Inc. (the "Company") without audit. In the opinion of
management, adjustments, all of a normal and recurring nature, necessary to
present fairly the financial position and the results of operations and cash
flows for the aforementioned periods, have been made.
Certain prior year amounts
have been reclassified to conform with the current year's presentation.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
2. GROSS AND NET SALES
Gross and net sales consist of the following:
(dollars in thousands)
Three Months Ended Six Months Ended
December December December December
29, 30, 29, 30,
2002 2001 2002 2001
------------- ---------- -------- --------- ---------
Gross sales $24,697 $31,209 $48,069 $63,295
Less sales
discounts 292 428 522 1,438
- ------------- ---------- -------- --------- ---------
Net sales $24,405 $30,781 $47,547 $61,857
================ ========= ========= ======== ========
The Company accepts sales discounts from a number of customers in the normal
course of business.
3. ACCOUNTS AND OTHER RECEIVABLES
Accounts and other receivables consist of the following:
(dollars in thousands)
December 29, June 30,
2002 2002
------------------------------ ---------- ----------
Billed shipments, net of progress $13,236 $15,347
payments
Less allowance for doubtful 158 114
accounts
- ------------------------------ ---------- ----------
Trade receivables, net 13,078 15,233
Other current receivables 1,098 1,450
- ------------------------------ ---------- ----------
$14,176 $16,683
=============================== ========== ===========
Progress payments are payments from customers in accordance with contractual
terms for contract costs incurred to date. Such payments are credited to the
customer at the time of shipment.
At December 29, 2002 and June 30, 2002, other current receivables include
$510,000 and $318,000 of customer payments, expected to be received as
settlement for a prior claim for material under a long-term contract.
At December 29, 2002, the amounts due from the three largest accounts receivable
debtors and the percentage of total accounts receivable those amounts
represented were $2.0 million (14.1%), $1.8 million (12.7%) and $1.6 million
(11.3%), respectively. This compares with $3.3 million (19.7%), $2.0 million
(12.0%) and $1.6 million (9.6%) at June 30, 2002, respectively. The Company
does not believe that concentration of accounts receivable is a significant
credit risk due to the financial strength of the account debtors and collection
experience. See "Results of Operations," under "Management's Discussion and
Analysis."
4. INVENTORIES
Inventories consist of the following:
(dollars in thousands)
December 29, June 30,
2002 2002
--------------------------- ---------- -------------
Raw materials $15,552 $13,883
Work in progress 9,602 9,936
Less reserve for obsolescence 612 318
- --------------------------- ---------- -------------
24,542 23,501
Less progress payments 1,323 1,111
--------------------------- ---------- -------------
$23,219 $22,390
=========================== =========== ===========
In accordance with contractual agreements, the U.S. Government has a security
interest in inventories identified with related contracts for which progress
payments have been received.
5. INTANGIBLE ASSETS, NET
Intangible assets, net, is summarized as follows:
(dollars in thousands)
December 29, June 30,
2002 2002
------------------- ------------- ---------------
Goodwill $ 406 $ 406
Less amortization 200 200
- ------------------- ------------- ---------------
Net goodwill 206 206
Software 2,080 1,981
Less amortization 1,605 1,465
- ------------------- ------------- ---------------
Net software 475 516
Other, net 88 79
- ------------------- ------------- ---------------
Total intangible assets,
net $ 769 $ 801
=================== ============== ==============
The Company adopted the provisions of Statement 142, "Goodwill and Other
Intangible Assets," in the first quarter ended September 30, 2001. Goodwill
amortization expense was $0 for the three and six months ended December 29, 2002
and December 30, 2001, respectively. The net present value of the cash flow of
the operation to which the goodwill relates generates sufficient cash flow to
substantiate there is no impairment to the value of goodwill.
Software amortization expense was $71,000 and $45,000 for the three months ended
December 29, 2002 and December 30, 2001, respectively. Software amortization
expense was $140,000 and $84,000 for the six months ended December 29, 2002 and
December 30, 2001, respectively. Software is amortized over a three-year
period.
6. OTHER ASSETS
Other assets is summarized as follows:
(dollars in thousands)
December 29, June 30,
2002 2002
------------------- ------------- ---------
Cash value of life insurance $4,605 $4,039
Deposits, licenses and other, 1,029 814
net $ 769 $ 801
Restricted cash 530 -
Investments in businesses 136 136
------------------- ------------- -----------
$6,300 $4,989
========================= ============= ===========
Investments in businesses primarily refers to the Company's securities in
Norwood Abbey, Ltd. Please see Note 2, "Notes to Consolidated
Financial Statements," for additional
information.
Restricted cash refers to cash in an escrow account which is related to the sale
of the railroad industry portion of its ScadaNET Network(Trade Mark) remote
equipment monitoring business to GE Transportation Systems Global Signaling,
LLC. See Note 8, "Discontinued Operations."
7. SHORT- AND LONG-TERM OBLIGATIONS
Short-term borrowings, long-term debt and the current maturities of long-term
debt consist of the following:
(dollars in thousands)
December 29, June 30,
2002 2002
------------------------------ -------- --------
Short-term borrowings:
Revolving credit agreement:
Balance at period-end $ - $2,583
Interest rate at period-end -% 2.90%
Average amount of short-term borrowings
outstanding during period $ 512 $2,548
Average interest rate for period 3.38% 3.96%
Maximum short-term borrowings at any $2,389 $6,320
month-end
=================================== ========= ==========
Senior long-term debt:
Senior lender:
Term loan $6,316 $6,400
Other 881 925
Total senior long-term debt 7,197 7,325
Less current maturities 328 278
Long-term debt, less current maturities $6,869 $7,047
=================================== ========= ==========
Subordinated debt:
Current maturities of subordinated debt $5,621 $5,621
=================================== ========= ==========
The average interest rate was computed by dividing the sum of daily interest
costs by the sum of the daily borrowings for the respective periods.
Senior Lender:
The Company has a senior, secured loan agreement with a bank.
The following is a summary of the agreement:
* A revolving credit facility up to $15.0 million, secured by substantially
all the assets of the Company other than real estate,
based on a borrowing base
formula equal to the sum of 80% of eligible receivables and 40% of eligible
inventories, less outstanding letters of credit. As of
December 29, 2002, the
maximum allowable was $10.9 million, net of letters of
credit outstanding of
$4.1 million. The revolver borrowing at December 29, 2002 was $0. Unused
revolving credit available at December 29, 2002 was
$10.9 million. This credit
facility matures on September 30, 2004.
* A $6.4 million term loan secured by the Company's
headquarters building in
St. Louis, Missouri. The loan payment schedule is based on a 25-year
amortization and began in December 2002 with a final balloon payment due in
October 2009. The balance at December 29, 2002 was $6.3 million.
* Interest on the loans is at a percentage of prime or a stated rate over
LIBOR based on certain ratios. For the period, the average rate was
approximately 3.38%.
* Covenants and performance criteria consist of Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") in relation to
debt, EBITDA in
relation to interest, minimum levels of EBITDA and
tangible net worth. The
Company is in compliance with its borrowing agreement
covenants as of December
29, 2002.
Subordinated Convertible Notes:
In March 1999, the Company, through its subsidiary LaBarge-OCS, Inc.,
issued its Subordinated Convertible Notes ("Notes") due June 2003 in the
aggregate principal amount of $5.6 million for the acquisition of OCS. The
Notes bear interest at 7.5% per annum payable quarterly, and noteholders
are entitled to participation payments if LaBarge-OCS, Inc., operating as
the Network Technologies Group, achieves certain levels of net earnings.
No participation payments were earned in the second quarter or first six
months of fiscal 2003. The Notes are convertible by the holders into
LaBarge, Inc. Common Stock at $8.00 per share at any time up to their
maturity date.
In December 2002, the Company offered to repay the subordinated notes at a
1% premium. In January 2003, $1.3 million of the subordinated notes were
tendered and repaid.
Other long-term debt:
Industrial Revenue Bonds:
In July 1998, the Company acquired tax-exempt Industrial Revenue Bond
financing in the amount of $1.3 million. The debt is payable over 10 years
with an interest rate of 5.28%. This funding was used to expand the
Berryville, Arkansas facility. The outstanding balance at December 29, 2002
was $861,000.
The remaining $20,000 represents a long-term auto loan
with a financial institution.
The loan is payable over five years with an interest rate of 0%.
To mitigate the exposure to changes in interest rates, the Company entered
into an interest rate swap agreement. This agreement, designated as a cash
flow hedge, swaps a portion of the Company's exposure to three-month LIBOR
rates with a fixed rate of 5.95%. The notional amount of the agreement is
$3.5 million and it expires in June 2003. In accordance with SFAS 133, as
amended by SFAS 138, the change in fair value of the swap amounting to
approximately $34,000 and $51,000 for the three and six months ended
December 29, 2002, respectively, was recorded to other comprehensive loss.
Other Long-Term Liabilities:
Other long-term liabilities consist of customer advances in the amount of
$2.3 million.
The aggregate maturities of long-term obligations are as follows:
(dollars in thousands)
Fiscal Year
-------------------------------------
2003 $5,754
2004 395
2005 403
2006 410
2007 418
8. DISCONTINUED OPERATIONS
On November 1, 2002, LaBarge, Inc. sold the railroad industry portion of its
ScadaNET Network(Trade Mark) remote equipment monitoring business to GE
Transportation Systems Global Signaling, LLC ("GETS Global Signaling"), Grain
Valley, Missouri.
The sale is valued at approximately $6.8 million, including $5.3 million in cash
and GETS Global Signaling's assumption of approximately $1.5 million in certain
liabilities. The $5.3 million of cash includes $795,000 held in an escrow
account against any claims GETS Global Signaling has for breaches of
representations and warranties. The unclaimed balance will be released in equal
increments over the next three years on the anniversary date of the sale.
LaBarge and GETS Global Signaling have entered into a manufacturing agreement
under which LaBarge will continue to produce the ScadaNET hardware. The pricing
and other terms of the manufacturing agreement were negotiated as an arms-length
contract at market terms. Under a separate service agreement, LaBarge will also
provide back-end network services to GETS Global Signaling through the earlier
of June 2003 or such date as GETS Global Signaling integrates the service. The
Company recognized a pre-tax gain of $2.2 million and a book tax expense of
($2.4 million), netting to a loss of $212,000.
The Company has recorded a deferred tax asset of $1.8 million related to the
disposition of assets of the railroad business. Due to
the uncertainty of
realization of this asset, a reserve of $1.8 million has also been established.
9. CASH FLOWS
Total cash payments for interest for the three and six months ended December 29,
2002 were $317,000 and $446,000, respectively, compared with $237,000 and
$569,000, for the three and six months ended December 30, 2001, respectively.
Cash receipts for federal and state income taxes were ($56,000) and ($738,000)
for the three and six months ended December 29, 2002, respectively, compared
with cash payments of $880,000 and $1.2 million for the three and six months
ended December 30, 2001, respectively. The cash receipts represent a refund of
overpayments of estimated taxes in prior periods.
10. EARNINGS PER COMMON SHARE
Basic and diluted earnings per share are computed as follows:
Three Months Ended Six Months Ended
December December December December
29, 30, 29, 30,
2002 2001 2002 2001
----------------------- -------- ------- ------- -------
Numerator:
Net earnings (loss) from
continuing operations $ 581 $1,155 $ 681 $2,027
- ----------------------- -------- ------- ------- -------
Net (loss) from discontinued
operations (198) 45 (216) 208
- ----------------------- -------- ------- ------- -------
Net earnings $ 383 $1,200 $ 465 $2,235
- ----------------------- -------- ------- ------- -------
Denominator:
Denominator for basic net earnings
per share 15,017 14,961 15,016 14,971
- ----------------------- -------- ------- ------- -------
Potential common shares:
Denominator for diluted net
earnings per share - adjusted
weighted-average shares and
assumed conversions 15,199 15,364 15,227 15,254
- ----------------------- -------- ------- ------- -------
Basic net earnings per share:
Net income from continuing $ 0.04 $ 0.08 $ 0.04 $ 0.14
operations
Net (loss) income from
discontinued operations (0.01) - (0.01) 0.01
Basic net earnings $ 0.03 $ 0.08 $ 0.03 $ 0.15
- ----------------------- -------- ------- ------- -------
Average common shares outstanding 15,017 14,961 15,016 14,971
========================== ======== ======== ======= ======
Diluted net earnings per share:
Net income from continuing
operations $ 0.04 $ 0.08 $ 0.04 $ 0.14
Net (loss) income from
discontinued operations (0.01) - (0.01) 0.01
Diluted net earnings $ 0.03 $ 0.08 $ 0.03 $ 0.15
- ----------------------- -------- ------- ------- -------
Average diluted common shares
outstanding 15,199 15,364 15,227 15,254
======================== ========= ======= ======= ======
Basic earnings per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
calculated using the weighted average number of common shares outstanding during
the period plus shares issuable upon the assumed exercise of dilutive common
share options by using the treasury stock method.
The number of shares used in the calculation of earnings per share for each
period presented is as follows:
Three Months Ended Six Months Ended
December December December December
29, 30, 29, 30,
2002 2001 2002 2001
----------------------- --------- -------- -------- -------
Average common shares
outstanding - Basic 15,017 14,961 15,016 14,971
Dilutive options 182 403 211 283
----------------------- --------- -------- -------- -------
Adjusted average common
shares
outstanding - Diluted 15,199 15,364 15,227 15,254
========================= ======= ======== ======== ======
Options to purchase 260,000 shares (at a per-share price of $7.24 - $3.03) and
178,000 shares (at a per-share price of $7.24 - $4.38) were outstanding during
the three months ended December 29, 2002 and December 30, 2001, respectively.
Options to purchase 183,000 shares (at a per-share price of $7.24 - $3.43) and
242,000 shares (at per-share prices of $7.24 - $3.43) were outstanding during
the six months ended December 29, 2002 and December 30, 2001, respectively.
These options amounts were not included in the respective computations of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares. These options expire in various
periods through 2011. In addition, there are 703,000 shares reserved for
issuance upon conversion of the Company's Subordinated Convertible Notes, at a
conversion price of $8.00 per share, where not included because the conversion
price was greater than the average market price of the common shares.
11. LITIGATION AND CONTINGENCIES
In June 2000, the Company entered into a contract with McDonnell Douglas
Corporation ("MDC"), a wholly-owned subsidiary of The Boeing Company to supply
aircraft wire harnesses. The Company has alleged that MDC supplied a defective
bid package in its request for proposal. To date, attempts to negotiate a
settlement of the claim arising from this defective bid package have not been
successful. If a negotiated settlement is not reached, the Company anticipates
filing an action in circuit court to seek an equitable adjustment.
Under the contract through December 29, 2002, the Company has delivered 126 sets
of the wire harnesses with a sales value of $3.0 million. Included in the
Accounts Receivable balance at December 29, 2002 is $510,000 representing a
portion of the Company's claim against MDC on these shipments. Included in the
Company's work-in-process balance at December 29, 2002 is $150,000, which will
not be recovered at the current contract price and will be added to the
Company's claim, plus lost profits.
In addition, MDC has exercised options under the contract, for an additional 52
sets of wire harnesses with a sales value of $1.2 million. Based on current
cost estimates, the Company would have an additional claim of $290,000, plus
lost profits, on these units. Sales taken on this contract are being recognized
at zero gross profit.
MDC has options to purchase up to 150 additional sets of wire harnesses per year
through calendar year 2006. Management's estimate, based upon forecasted
information from MDC, is that the potential additional sales are 248 sets
through fiscal year 2006. If these additional orders are placed at the current
contract price, the additional sales would total $5.6 million and the Company
would incur an additional loss of $1.5 million which would be added to the
claim, plus lost profits.
The Company has consulted with legal counsel, and believes that it will recover
these contract costs.
Geographic Information
The Company has no sales offices or facilities outside of the United States.
Sales for exports did not exceed 10% of total sales for the three months and six
months ended December 29, 2002.
For the three and six months ended December 29, 2002, the Company's three
largest customers were L-3 Communications, Schlumberger and Lockheed Martin.
LaBARGE, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that relate to future events or
our future financial performance. We have attempted to
identify these statements
by terminology including "believe," "anticipate," "plan," "expect," "estimate,"
"intend," "seek," "goal," "may," "will," "should," "can," "continue," or the
negative of these terms or other comparable terminology. These statements
include statements about our market opportunity, our growth strategy,
competition, expected activities, and the adequacy of our available cash
resources. These statements may be found in the
sections of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Readers are cautioned that matters subject to
forward-looking statements involve known and unknown risks and uncertainties,
including economic, regulatory, competitive and other factors that may cause our
or our industry's actual results, levels of activity, performance
or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements. These statements are not guarantees of future performance and are
subject to the risks, uncertainties and assumptions.
LaBarge, Inc. ("LaBarge" or the "Company") is a Delaware Corporation. The
Company is engaged in the following business activities:
The Company's electronics manufacturing services business has been its principal
business since 1985. The Company designs, engineers and produces sophisticated
electronic systems and devices, and complex interconnect systems on a contract
basis for its customers.
The Company markets its services to companies in technology-driven industries
desiring an engineering and manufacturing partner capable of developing and
providing high-reliability electronic equipment, including products capable of
performing in harsh environmental conditions, such as high and low temperature,
severe shock and vibration. Customers are served in a variety of markets with
significant revenues from customers in the government systems, defense,
aerospace, oil and gas, and other commercial markets. Engineering and
manufacturing facilities are located in Arkansas, Missouri, Oklahoma and Texas.
The sales backlog increased to $104.4 million at December 29, 2002, compared
with $98.0 million at December 30, 2001. The growth in backlog is the result
of an improved and reorganized sales and marketing effort that concentrates on
the Company's core competencies and the application of those competencies to
targeted large customers in a variety of industries. The diversification of
the Company's customer base helps to protect it from volatility in any one
market segment.
SIGNIFICANT EVENTS
Recent significant events include:
* On November 1, 2002, LaBarge, Inc. sold the railroad industry portion of
its ScadaNET Network(Trade Mark) remote equipment monitoring business to GE
Transportation System Global Signaling, LLC
("GETS Global Signaling"), Grain Valley, Missouri.
* The sale is valued at approximately $6.8 million,
including $5.3 million in
cash and GETS Global Signaling's assumption of
approximately $1.5 million in
certain liabilities. The $5.3 million of cash includes $795,000 held in an
escrow account against any claims GETS Global Signaling has for breaches of
representations and warranties. The unclaimed balance will be
released in equal
increments over the next three years on the anniversary date of the sale.
LaBarge and GETS Global Signaling have entered into a manufacturing
agreement
under which LaBarge will continue to produce the ScadaNET hardware.
The pricing
and other terms of the manufacturing agreement were negotiated as
an arms-length
contract at market terms. Under a separate service agreement,
LaBarge will also
provide back-end network services to GETS Global Signaling
through the earlier
of June 2003 or such date as GETS Global Signaling integrates the
service. The
Company recognized a pre-tax gain of $2.2 million and a book tax expense of
($2.4 million), netting to a loss of $212,000.
* As a result of the November 2002 sale of the railroad portion of the
Company's ScadaNET Network(Trade Mark) business, the Network
Technologies Group
will no longer be reported as a segment, since the remaining business
accounts
for less than one-half percent of total sales. See Note 8, "Discontinued
Operations," and "Significant Events," below.
* In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 142
requires that goodwill and intangible assets with indefinite
useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and
reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
The Company has adopted the provisions of Statement 142 with the first
fiscal quarter ended September 30, 2001. At that time, an independent
appraisal of the value of the assets of the former Network Technologies
Group of the Company was obtained. That independent appraisal indicated
that the fair market value of the assets exceeded book value; therefore,
there was no impairment at that date. As discussed above, a portion of
these assets, including all the goodwill, was sold in November 2002 for a
pretax gain of $2.2 million.
RESULTS OF OPERATIONS - Three and Six Months Ended December 29, 2002
Net Sales
(dollars in thousands)
Three Months Ended Six Months Ended
December 29, December December December 30,
2002 30, 29, 2001
2001 2002
Net sales $24,405 $30,781 $47,547 $61,857
============ ======== ======== ========= =========
For the fiscal 2003 second quarter ended December 29, 2002, net sales were $24.4
million compared with $30.8 million for the same period of fiscal 2002. Prior
year sales included $8.8 million of postal sorting equipment. This contract has
been completed. Partially offsetting this was a $4.0 million increase in sales
of airport security equipment. Customer-requested delays in shipment schedules
also contributed to the sales decline.
Sales to the Company's 10 largest customers represented 83.4% of total revenue
in the second quarter of fiscal 2003 versus 80.5% for the same period of fiscal
2002. The Company's top three customers and the portion of total second-quarter
sales they represented were as follows: Schlumberger, 19%; L-3 Communications,
16%; and Lockheed Martin, 13%.
Gross Profit
(dollars in thousands)
Three Months Ended Six Months Ended
December 29, December December December 30,
2002 30, 29, 2001
2001 2002
Gross profit $4,711 $6,291 $9,308 $11,918
Gross margin 19.3% 20.4% 19.6% 19.3%
============ ======== ======== ========= =========
The lower product margin in the fiscal 2003 second quarter, compared with the
year-ago period is primarily a result of product mix. The margins are
comparable for the first six months of fiscal years 2003 and 2002.
Selling and Administrative Expenses
(dollars in thousands)
Three Months Ended Six Months Ended
December 29, December December December
2002 30, 29, 30,
2001 2002 2001
Selling and
administrative
expenses $4,272 $4,170 $8,530 $8,195
Percent of sales 17.5% 13.5% 17.9% 13.2%
============ ======== ======== ========= =========
Selling and administrative expenses as a percent of sales increased in the
fiscal 2003 periods due to the relatively fixed component of these costs as a
percentage of reduced sales volume. Higher medical costs of
approximately $275,000 also
contributed to the higher selling and administrative expenses.
Interest Expense
(dollars in thousands)
Three Months Ended Six Months Ended
December 29, December December December 30,
2002 30, 29, 2001
2001 2002
Interest
expense $202 $336 $425 $652
============ ======== ======== ========= =========
Interest expense decreased for the quarter ended December 29, 2002, primarily
due to lower debt levels. Average short-term borrowings for the three- and six-
month period ended December 29, 2002 were $1.5 million and $2.0 million lower
than the same periods of fiscal 2002, respectively. Average interest rates
declined 159 basis points for the three months ended December 29, 2002, as
compared with the previous year.
Pretax Earnings from Continuing Operations
(dollars in thousands)
Three Months Ended Six Months Ended
December 29, December December December
2002 30, 29, 30,
2001 2002 2001
Pretax earnings
from continuing
operations $818 $1,887 $982 $3,269
============ ======== ======== ========= =========
The decrease in pretax earnings for the quarter ended December 29, 2002,
compared with the same period of fiscal 2002, is primarily attributable to lower
gross profit ($1.6 million) on a sales decrease of $6.4 million, an increase in
selling and administration of $102,000, offset by a $134,000 reduction in
interest expense. In addition, the Company recorded other income of $436,000 in
the quarter ended December 29, 2002, representing a return of premiums under a
split-dollar insurance benefit program.
Tax Expense from Continuing Operations
(dollars in thousands)
Three Months Ended Six Months Ended
December 29, December December December
2002 30, 29, 30,
2001 2002 2001
Tax expense
from continuing
operations $237 $732 $301 $1,242
============ ======== ======== ========= =========
The effective income tax rate for the three months ended December 29, 2002 was
29%, compared with 39% for the three months ended December 30, 2001. The
decrease in the effective income tax rate is primarily due to the non-taxable
$436,000 of other income received in the quarter. See "Pretax Earnings from
Continuing Operations," above.
Discontinued Operations, Net of Tax
(dollars in thousands)
Three Months Ended Six Months Ended
December December December December
29, 30, 29, 30,
2002 2001 2002 2001
----------------- ---------- -------- -------- -------
Income (loss) from
discontinued
operations,(less
applicable income
taxes of $10, $28,
($2), $127,
respectively $ 14 $ 45 $ (4) $ 208
Income on disposal
of discontinued
operations of $2,222
(less applicable
income tax expense
of $2,434) $ (212) $ - $ (212) $ -
================== ======= ======== ======== ========
Discontinued operations arose from the sale of the railroad industry portion of
the Company's ScadaNET Network(Trade Mark) remote equipment monitoring business.
See Note 8, "Discontinued Operations."
FINANCIAL CONDITION AND LIQUIDITY
The following table shows LaBarge's equity and total debt positions:
Stockholders' Equity and Debt
(dollars in thousands)
December 29, June 30,
2002 2002
Stockholders'
equity $34,109 $33,684
Debt $12,818 $15,529
================ ============ ==========
The Company's continuing operations provided $5.6 million of net cash for the
six months ended December 29, 2002.
A revolving credit facility up to $15.0 million, secured by substantially all
the assets of the Company other than real estate, based on a borrowing base
formula equal to the sum of 80% of eligible receivables and 40% of eligible
inventories, less outstanding letters of credit. As of December 29, 2002, the
maximum allowable was $10.9 million, net of letters of credit outstanding of
$4.1 million. The revolver borrowing at December 29, 2002 was $0. Unused
revolving credit available at December 29, 2002 was $10.9 million. This
credit facility matures on September 30, 2004.
The aggregate maturities of long-term obligations are as follows:
(dollars in thousands)
Fiscal Year
2003 $5,754
2004 395
2005 403
2006 410
2007 418
Current cash balances will be sufficient to retire the remainder of the
Subordinated Conversion Notes outstanding on their maturity date, June 29, 2003.
Overall, management believes our availability of funds going forward from cash
generated from operations and available bank credit should be sufficient to
support the planned operations and capital expenditures of the Company's
business for the next two fiscal years.
Currently, the total debt-to-equity ratio for the Company is .38 to 1, versus
..46 to 1 at the end of fiscal 2002.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, management has made its best estimates and judgment of
certain amounts included in the financial statements. The Company believes
there is a likelihood that materially different amounts would be reported under
different conditions or using different assumptions related to the accounting
policies described below. Application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. The Company's senior
management discusses the accounting policies described below with the audit
committee of the Company's board of directors on a periodic basis.
The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies that we believe are critical
to our consolidated financial statements and other financial disclosures.
Revenue Recognition and Cost of Sales
Revenue on production contracts is recorded when specific contract terms are
fulfilled, usually upon delivery (the delivery method). Under long-term
contracts for which the delivery method is an inappropriate measure of
performance, revenue is recognized on the percentage-of-completion method based
upon incurred costs compared to total estimated costs under the contract. The
percentage-of-completion method gives effect to the most recent contract value
and estimates of cost at completion. When appropriate, contract prices are
adjusted for increased scope and other changes ordered or caused by the
customer.
Since some contracts extend over a long period of time, revisions in cost and
contract price during the progress of work have the effect of adjusting current
period earnings applicable to performance in prior periods. When the current
contract cost estimate indicates a loss, provision is made for the total
anticipated loss.
The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition,"
provides guidance on the application of generally accepted accounting principles
to selected revenue recognition issues. The Company's revenue recognition
policy is in accordance with generally accepted accounting principles and SAB
No. 101.
Accounts Receivable
Accounts receivables have been reduced by an allowance for amounts that may
become uncollectable in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the Company's
customers.
The Company does not believe that concentration of accounts receivable is a
significant credit risk due to the financial strength of the account debtors and
collection experience.
Inventory
Inventories are valued at the lower of cost or market and have been reduced by a
reserve for excess and obsolete inventories. The Company adjusts the value of
its reserve based upon assumptions for future usage and market conditions.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying
amounts of existing assets and liabilities and their respective tax bases. The
Company has considered future taxable income analyses and feasible tax planning
strategies in assessing the need for the valuation allowance. Should the Company
determine that it would not be able to recognize all or part of its net deferred
tax assets in the future, an adjustment to the carrying value of the
deferred tax
assets would be charged to income in the period in which such determination is
made.
Goodwill and Other Long-Lived Assets
The Company has adopted the provisions of SFAS No. 142 on July 2, 2001, and has
reassessed the useful lives and residual values of all recorded intangible
assets. Goodwill is reviewed by management for impairment annually or whenever
events or changes in circumstance indicate the carrying amount may not be
recoverable. If indicators of impairment are present, the determination of the
amount of impairment is based on the Company's judgment as to the future
operating cash flows to be generated from these assets throughout their
estimated useful lives.
Net Accounting Standards
In June 2002, the financial accounting standards board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities."
This Statement requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.
The provisions of this statement are effective for exit or disposal
activities that are inititated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123," that provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for interim periods beginning after December 15, 2002.
PART I
ITEM 4 Controls and Procedures
The Company's President and Chief Executive Officer, Craig E. LaBarge,
and the Company's Vice President, Chief Financial Officer and
Secretary, Donald H. Nonnenkamp, have evaluated the Company's internal
controls and disclosure controls systems within 90 days of the filing
of this report.
Messrs. LaBarge and Nonnenkamp have concluded that the Company's
disclosure controls systems are functioning effectively to provide
reasonable assurance that the Company can meet its disclosure
obligations. The Company's disclosure controls system is based upon a
chain of financial and general business reporting lines that converge
in the headquarters of the Company in St. Louis, Missouri. The
reporting process is designed to ensure that information required to
be disclosed by the Company in the reports that it files or submits
with the Commission is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms.
Since Messrs. LaBarge's and Nonnenkamp's most recent review of the
Company's internal controls systems, there have been no significant
changes in internal controls or in other factors that could
significantly affect these controls.
PART II
ITEM 4. Submission of Matter to a Vote of Security Holders
On November 20, 2002, at the Company's Annual Meeting of Stockholders,
stockholders took the following actions:
a) We conducted the election for directors, received the
votes of the
stockholders, canvassed the votes cast, and the following
persons received the
number of votes set opposite their respective names:
Name Number of Votes FOR Withheld Authority to
Vote
Class A:
Craig E. LaBarge 13,756,665 112,534
James P. Shanahan,
Jr. 13,806,654 62,545
Jack E. Thomas, Jr. 13,804,554 64,645
b) We conducted the balloting upon the proposed ratification of
the selection
of KPMG LLP as independent accountants for the fiscal year
ending June 29, 2003,
received the votes of the stockholders, canvassed the votes
cast, and said
proposal received 13,718,710 FOR votes, 115,666 AGAINST votes,
and 34,823 votes
ABSTAINED. Said proposal was therefore adopted.
ITEM 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Reports on Form 8-K: Current reports on Form 8-K were filed:
(a) on November 12, 2002, reporting the disposition of the
railroad industry
portion of its ScadaNET Network(Trade Mark) remote
equipment monitoring
business
to GE Transportation Systems Global Signaling, LLC
("GETS Global Signaling"),
Grain Valley, Missouri; and
(b) on November 13, 2002, in accordance with Regulation FD to report certain
information the Registrant intended to present to certain institutional
investors.
SIGNATURE
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.
LaBARGE, INC.
Date: February 11, 2003
/S/Donald H. Nonnenkamp
Donald H. Nonnenkamp
Vice President
and Chief Financial Officer
I, Craig E. LaBarge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LaBarge, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue
statement of a material fact or omit to state a material fact
necessary to make
the statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by this
quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material
information relating to the registrant, including
its consolidated
subsidiaries,
is made known to us by others within those entities,
particularly
during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on
our most recent evaluation, to the registrant's auditors and the
audit committee
of registrant's board of directors (or persons performing the
equivalent
function):
a) all significant deficiencies in the design or operation
of internal
controls which could adversely affect the registrant's ability
to record,
process, summarize and report financial data and have identified
for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes
in internal
controls or in other factors that could significantly affect internal
controls
subsequent to the date of our most recent evaluation, including
any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/Craig E. LaBarge
President and Chief Executive Officer
Date: February 11, 2003
I, Donald H. Nonnenkamp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LaBarge, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue
statement of a material fact or omit to state a
material fact necessary
to make
the statements made, in light of the circumstances under which
such statements
were made, not misleading with respect to the period covered by this
quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material
information relating to the registrant, including its
consolidated
subsidiaries,
is made known to us by others within those entities,
particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on
our most recent evaluation, to the registrant's auditors and the
audit committee
of registrant's board of directors (or persons performing the
equivalent
function):
a) all significant deficiencies in the design or operation
of internal
controls which could adversely affect the registrant's ability
to record,
process, summarize and report financial data and have identified
for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes
in internal
controls or in other factors that could significantly affect
internal controls
subsequent to the date of our most recent evaluation, including
any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/Donald H. Nonnenkamp
Vice President, Chief Financial
Officer and Secretary
Date: February 11, 2003