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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 6/29/2002
---------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 0-5971
WOODHEAD INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-1982580
- ---------------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
THREE PARKWAY NORTH #550, Deerfield, IL 60015
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (847)-236-9300
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- --------------------------------------------------------------------------------
(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 _____.
The number of common shares outstanding as of July 2, 2002 was 11,754,632
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1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION 3
ITEM 1 - FINANCIAL STATEMENTS 3
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Comprehensive Income 6
Notes to Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 15
PART II - OTHER INFORMATION 16
ITEM 1 - LEGAL PROCEEDINGS 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
As of June 29, 2002 and September 29, 2001
(Amounts in Thousands)
------------
unaudited
------------ ------------
ASSETS 6/29/2002 9/29/2001
------------ ------------
CURRENT ASSETS
Cash and short-term investments $ 12,827 $ 4,156
Accounts receivable 32,093 31,150
Inventories 18,074 23,743
Prepaid expenses 3,264 2,726
Refundable income taxes 222 781
Deferred income taxes 4,016 3,892
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 70,496 66,448
Property, plant and equipment, net 65,910 65,599
Other Intangible assets, net 842 1,314
Goodwill, net 29,045 27,002
Deferred income taxes 3,332 3,283
Other Assets 2,580 3,222
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 172,205 $ 166,868
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Accounts payable $ 8,679 $ 9,544
Accrued expenses 15,068 13,719
Income taxes payable 985 1,468
Current portion of long-term debt 4,479 279
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 29,211 25,010
Long-term debt 41,021 45,400
Deferred income taxes 1,657 1,292
Other liabilities 2,044 2,447
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 73,933 74,149
STOCKHOLDERS' INVESTMENT:
Common stock at par (shares issued: 11,755 at 6/29/2002
and 11,568 at 9/29/01) 11,755 11,568
Additional paid-in capital 15,565 13,979
Deferred stock compensation (246) (352)
Accumulated other comprehensive loss (2,654) (7,645)
Retained earnings 73,852 75,169
- -------------------------------------------------------------------------------------------
Total stockholders' investment 98,272 92,719
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TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 172,205 $ 166,868
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The accompanying notes are an integral part of these statements.
3
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months ended June 29, 2002 and June 30, 2001
(Amounts in Thousands, except per share data, unaudited)
------------------------------ ------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
6/29/2002 6/30/2001 6/29/2002 6/30/2001
------------------------------ ------------------------------
NET SALES $ 45,603 $ 47,455 $ 126,803 $ 148,111
Cost of Sales 28,174 28,977 79,296 89,060
------------------------------ ------------------------------
GROSS PROFIT 17,429 18,478 47,507 59,051
OPERATING EXPENSES 14,110 14,782 40,544 43,189
RESTRUCTURING CHARGE -- -- 1,015 --
------------------------------ ------------------------------
TOTAL OPERATING EXPENSES 14,110 14,782 41,559 43,189
INCOME FROM OPERATIONS 3,319 3,696 5,948 15,862
OTHER EXPENSES
Interest Expense 782 908 2,361 2,559
Interest Income (23) (44) (56) (239)
Other Expenses, Net (96) 423 253 765
------------------------------ ------------------------------
INCOME BEFORE TAXES 2,656 2,409 3,390 12,777
PROVISION FOR INCOME TAXES 1,130 872 1,576 4,747
------------------------------ ------------------------------
NET INCOME $ 1,526 $ 1,537 $ 1,814 $ 8,030
Add back: amortization of goodwill -- 310 -- 869
------------------------------ ------------------------------
ADJUSTED NET INCOME $ 1,526 $ 1,847 $ 1,814 $ 8,899
EARNINGS PER SHARE, BASIC
As reported $ 0.13 $ 0.13 $ 0.16 $ 0.70
Adjusted $ 0.13 $ 0.16 $ 0.16 $ 0.78
EARNINGS PER SHARE, DILUTED
As reported $ 0.13 $ 0.13 $ 0.15 $ 0.68
Adjusted $ 0.13 $ 0.16 $ 0.15 $ 0.75
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic 11,718 11,501 11,633 11,465
Diluted 11,970 11,811 11,821 11,808
DIVIDENDS PER SHARE $ 0.09 $ 0.09 $ 0.27 $ 0.27
The accompanying notes are an integral part of these statements.
4
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended June 29, 2002 and June 30, 2001
(Amounts in Thousands, unaudited)
------------------------------
Nine Months ended
------------------------------
06/29/02 06/30/01
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 1,814 $ 8,030
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 7,687 8,199
(Increase) Decrease in:
Accounts receivable 107 1,800
Inventories 6,273 (1,257)
Prepaid expenses 598 177
Deferred income taxes and other assets (238) (420)
(Decrease) Increase in:
Accounts payable (1,155) 286
Accrued expenses 72 (1,716)
Income taxes payable (513) 276
Deferred income taxes and other liabilities (214) (156)
Tax benefit from employee stock options 219 246
- --------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 14,650 15,465
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant & equipment (5,766) (7,428)
Dispositions of property, plant & equipment 152 81
Acquisition of Applicom (less cash acquired) -- (15,475)
- --------------------------------------------------------------------------------------------
Net cash used for investing activities (5,614) (22,822)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt -- --
(Decrease) Increase in long-term debt (235) 4,704
Sales of stock 1,659 1,074
Dividend payments (3,143) (3,099)
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Net cash (used for) provided by financing activities (1,719) 2,679
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EFFECT OF EXCHANGE RATES 1,354 (571)
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NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 8,671 (5,249)
Cash and short-term investments at beginning of period 4,156 8,702
Cash and short-term investments at end of period $ 12,827 $ 3,453
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DATA
Cash paid during the period for:
Interest $ 1,564 $ 1,565
Income taxes $ 1,622 $ 1,803
The accompanying notes are an integral part of these statements.
5
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months ended June 29, 2002 and June 30, 2001
(Amounts in Thousands, unaudited)
-------------------------- --------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
6/29/2002 6/30/2001 6/29/2002 6/30/2001
- ----------------------------------------------------------------------------------------- --------------------------
Net Income $ 1,526 $ 1,537 $ 1,814 $ 8,030
Other comprehensive income (loss):
Accumulated foreign currency translation
adjustment, before tax 7,395 701 5,079 (2,601)
Unrealized gain/(loss) on cash flow hedging instrument (336) 98 (88) 548
Income tax (expense) benefit related to
other comprehensive income -- -- -- --
- ----------------------------------------------------------------------------------------- --------------------------
Comprehensive income (loss), net of tax $ 8,585 $ 2,336 $ 6,805 $ 5,977
- ----------------------------------------------------------------------------------------- --------------------------
The accompanying notes are an integral part of these statements.
6
WOODHEAD INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts in Thousands, except per share data, unaudited)
1. BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of all subsidiaries,
including those operating outside the United States, each of which is wholly
owned. All material intercompany transactions have been eliminated in
consolidation. We prepare our financial statements in conformity with United
States Generally Accepted Accounting Principles. In preparing the financial
statements, we must use some estimates and assumptions that may affect reported
amounts and disclosures. Among others, we use estimates when accounting for
depreciation, amortization, employee benefits, asset valuation allowances, and
loss contingencies. We are also subject to risks and uncertainties that may
cause actual results to differ from those estimates. Interim results are not
necessarily indicative of results for a full year. Certain amounts in the prior
period financial statements have been reclassified to conform to the current
period presentation.
The accompanying unaudited, consolidated financial statements have been prepared
pursuant to rules and regulations of the Securities and Exchange Commission and,
therefore, do not include all information and footnote disclosures normally
included in audited financial statements. In the opinion of management, all
normal and necessary adjustments have been made to ensure a fair statement of
the results for the interim period.
The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Financial Statements and Notes thereto included in the Woodhead
Industries, Inc. 2001 Form 10-K.
2. LONG TERM DEBT
Effective March 30, 2002 we amended our revolving credit agreement with a bank
to increase the maximum ratio of debt to EBITDA, as defined, from 2.5 to 2.9,
and reduce the minimum interest coverage ratio, as defined, from 3.0 to 2.0.
This amendment will expire on March 29, 2003, when the maximum debt to EBITDA
ratio will revert back to 2.5, and the minimum interest coverage ratio will
revert back to 3.0. We are in compliance with all provisions of our funding
arrangements. At June 29, 2002 we had unused revolving credit agreements with a
bank that provide for borrowings of up to $25.0 million at the bank's prime or
offered rate.
3. INVENTORIES
Inventories at the balance sheet dates were comprised of the following:
6/29/02 9/29/01
- ----------------------------------------------------------------------------------------
Inventories valued using FIFO $ 11,986 $ 16,223
- ----------------------------------------------------------------------------------------
Inventories valued using LIFO:
At FIFO cost 9,854 12,200
Less: Reserve to reduce to LIFO (3,766) (4,680)
-------------------------------------------------------------------
LIFO Inventories 6,088 7,520
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Total Inventories 18,074 23,743
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Inventory composition using FIFO
Raw materials 13,104 17,143
Work-in-process and finished goods 8,736 11,280
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Total Inventories at FIFO $ 21,840 $ 28,423
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7
Had we used the FIFO method for all inventories, Net Income would have been $0.1
million and $0.6 million lower in the three and nine months ended 6/29/2002,
respectively. There was no LIFO impact on Net Income in the three and nine
months ended 6/30/2001.
4. PROPERTY, PLANT AND EQUIPMENT
6/29/02 9/29/01
- -------------------------------------------------------------------------------------------
Property, plant and equipment, at cost $ 138,308 $ 137,156
Less: Accumulated depreciation and amortization (72,398) (71,557)
- -------------------------------------------------------------------------------------------
Property, plant and equipment, net $ 65,910 $ 65,599
- -------------------------------------------------------------------------------------------
During the nine-month period just ended we disposed of approximately $7.8
million of unused, fully depreciated fixed assets, and the accompanying
accumulated depreciation. We did not record any material loss on these
disposals.
5. EARNINGS PER SHARE
Basic earnings per share exclude dilution, and diluted earnings per share
reflect the potential dilution that could occur if stock options were exercised.
The reconciliation between basic and diluted earnings per share is as follows:
Three Months Ended Nine Months Ended
------------------------- -------------------------
06/29/02 06/30/01 06/29/02 06/30/01
- -----------------------------------------------------------------------------------------------------
Net Income $ 1,526 $ 1,537 $ 1,814 $ 8,030
Add back: amortization of goodwill $ -- $ 310 $ -- $ 869
------------------------- -------------------------
Adjusted Net Income $ 1,526 $ 1,847 $ 1,814 $ 8,899
========================= =========================
Earnings per share, basic
As reported $ 0.13 $ 0.13 $ 0.16 $ 0.70
Adjusted $ 0.13 $ 0.16 $ 0.16 $ 0.78
Earnings per share, diluted
As reported $ 0.13 $ 0.13 $ 0.15 $ 0.68
Adjusted $ 0.13 $ 0.16 $ 0.15 $ 0.75
------------------------- -------------------------
Weighted-average number of shares outstanding 11,718 11,501 11,633 11,465
Dilutive common stock options 252 310 188 343
------------------------- -------------------------
Weighted-average number of shares outstanding
plus dilutive common stock options 11,970 11,811 11,821 11,808
- -----------------------------------------------------------------------------------------------------
6. COMMON STOCK
Our total authorized stock is 40,000,000 shares, consisting of 10,000,000 shares
of preferred stock, par value $0.01 per share, and 30,000,000 shares of common
stock, par value $1.00 per share. No shares of preferred stock have been issued
to date. Common stock issued was 11,755,000 and 11,568,000 on June 29, 2002 and
September 29, 2001, respectively.
8
7. SEGMENT AND GEOGRAPHIC DATA
Segment information is presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131: Disclosure about Segments of an Enterprise
and Related Information. This statement requires us to report certain financial
information in a similar manner as we report it to the chief operating decision
maker for the purpose of evaluating performance and allocating resources to the
various business segments. We identified the Chief Executive Officer as the
chief operating decision maker.
Our operating segments are based on the organization of business groups
comprised of similar products and services. Revenues in our Industrial
Communications and Connectivity Products Segment (Connectivity Segment, or
Connectivity) are primarily derived from sales of system components used with
devices in open networks for automated manufacturing and distribution
applications. Revenues in our Electrical Safety & Specialty Products Segment
(Electrical Segment, or Electrical) are primarily derived from sales of
specialized products to support enhanced safety and productivity on the factory
floor.
Sales between segments were not significant. Sales in geographic areas were
determined by customer location. No single customer accounted for 10 percent or
more of our total revenue. Sales in foreign countries did not meet minimum
disclosure requirements. We did not allocate certain corporate expenses,
primarily those related to the overall management of the corporation, to the
segments or geographic areas. Both segments share certain production facilities
and equipment (PP&E). These assets, and related additions and depreciation, were
allocated based on unit production. Geographic data on assets is based on the
physical location of those assets. Corporate assets were primarily investments
in subsidiaries and cash.
THREE MONTHS
Segment data
Net Sales Income from Operations
------------------------------ -----------------------------
Three Months Ended Three Months Ended
------------------------------ -----------------------------
06/29/02 06/30/01 06/29/02 06/30/01
------------------------------ -----------------------------
Connectivity $ 31,093 $ 32,297 $ 2,525 $ 2,859
Electrical 14,510 15,158 1,233 1,340
Corporate and other (439) (503)
- -------------------------------------------------------- -----------------------------
Total $ 45,603 $ 47,455 $ 3,319 $ 3,696
- -------------------------------------------------------- -----------------------------
Additions to long-lived assets Depreciation and Amortization
------------------------------ -----------------------------
Three Months Ended Three Months Ended
------------------------------ -----------------------------
06/29/02 06/30/01 06/29/02 06/30/01
------------------------------ -----------------------------
Connectivity $ 880 $ 1,617 $ 1,966 $ 2,199
Electrical 588 928 672 759
Corporate and other 3 3 50 59
- -------------------------------------------------------- -----------------------------
Total $ 1,471 $ 2,548 $ 2,688 $ 3,017
- -------------------------------------------------------- -----------------------------
9
Total Assets
------------------------------
06/29/02 09/29/01
------------------------------
Connectivity $128,805 $125,275
Electrical 31,179 31,613
Corporate and other 12,221 9,980
- --------------------------------------------------------
Total $172,205 $166,868
- --------------------------------------------------------
Three Months Ended
- ---------------------------------------------------------------------------------------------
Reconciliation of Income from Operations to Net Income 06/29/02 06/30/01
- -------------------------------------------------------- -----------------------------
Income from operations $ 3,319 $ 3,696
Less: Interest income (expense), net (759) (864)
Other income (expense), net 96 (423)
Income taxes (1,130) (872)
- ---------------------------------------------------------------------------------------------
Net Income $ 1,526 $ 1,537
- ---------------------------------------------------------------------------------------------
Geographic Data
Net Sales Total Assets
------------------------------ ---------------------------
Three Months Ended 06/29/02 09/29/01
------------------------------ ----------------------------------------------------
06/29/02 06/30/01 United States 49,481 $ 48,913
- --------------------------------------------------------
United States $ 28,292 $ 30,965 Canada 28,346 28,534
All other countries 17,311 16,490 Italy 29,757 28,051
- --------------------------------------------------------
Total $ 45,603 $ 47,455 Mexico 20,799 19,968
- --------------------------------------------------------
France 22,108 19,826
All other countries 21,714 21,576
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Total $172,205 $166,868
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NINE MONTHS
Segment data
Net Sales Income from Operations
------------------------------ -----------------------------
Nine Months Ended Nine Months Ended
------------------------------ -----------------------------
06/29/02 06/30/01 06/29/02 06/30/01
------------------------------ -----------------------------
Connectivity $ 82,453 $ 99,167 $ 3,163 $ 11,588
Electrical 44,350 48,944 3,397 5,161
Corporate and other (612) (887)
- -------------------------------------------------------- -----------------------------
Total $126,803 $148,111 $ 5,948 $ 15,862
- -------------------------------------------------------- -----------------------------
Additions to long-lived assets Depreciation and Amortization
------------------------------ -----------------------------
Nine Months Ended Nine Months Ended
------------------------------ -----------------------------
06/29/02 06/30/01 06/29/02 06/30/01
------------------------------ -----------------------------
Connectivity $ 3,224 $ 4,484 $ 5,605 $ 6,010
Electrical 2,519 2,917 1,903 2,002
Corporate and other 23 27 179 187
- -------------------------------------------------------- -----------------------------
Total $ 5,766 $ 7,428 $ 7,687 $ 8,199
- -------------------------------------------------------- -----------------------------
10
Total Assets
------------------------------
06/29/02 09/29/01
------------------------------
Connectivity $128,805 $125,275
Electrical 31,179 31,613
Corporate and other 12,221 9,980
- --------------------------------------------------------
Total $172,205 $166,868
- --------------------------------------------------------
Nine Months Ended
- ---------------------------------------------------------------------------------------------
Reconciliation of Income from Operations to Net Income 06/29/02 06/30/01
- -------------------------------------------------------- -----------------------------
Income from operations $ 5,948 $ 15,862
Less: Interest income (expense), net (2,305) (2,320)
Other income (expense), net (253) (765)
Income taxes (1,576) (4,747)
- ---------------------------------------------------------------------------------------------
Net Income $ 1,814 $ 8,030
- ---------------------------------------------------------------------------------------------
Geographic Data
Net Sales Total Assets
------------------------------ ---------------------------
Nine Months Ended 06/29/02 09/29/01
------------------------------ ----------------------------------------------------
06/29/02 06/30/01 United States $ 49,481 $ 48,913
- --------------------------------------------------------
United States $ 80,356 $ 87,518 Canada 28,346 28,534
All other countries 46,447 60,593 Italy 29,757 28,051
- --------------------------------------------------------
Total $126,803 $148,111 Mexico 20,799 19,968
- --------------------------------------------------------
France 22,108 19,826
All other countries 21,714 21,576
----------------------------------------------------
Total $172,205 $166,868
----------------------------------------------------
8. RESTRUCTURING CHARGES
During the second quarter of 2002 we recorded a restructuring charge in the
amount of $1.0 million to primarily account for severance and related costs to
eliminate about 10% of our salaried positions worldwide. Additionally we
identified 31 positions in our manufacturing plant in Northbrook, Illinois, that
will be eliminated with the continued migration of product to our new
manufacturing plant in Juarez, Mexico. This workforce reduction represents an
acceleration of initiatives that we started over the last six months to improve
our efficiencies and reduce expenses. We anticipate that the salaried personnel
reduction will produce annual savings of about $3 million. The restructuring
will result in layoffs of 93 people, of which 74 people were severed as of June
29, 2002. The following table details the activity in the Restructuring Accrual
Accounts:
Restructuring
Reserve
-------------
Balance at 9/29/2001 $ --
Charged to expense in Q2 2002 1,015
Cash paid in 2002 771
-------------
Remaining balance at 6/29/2002 $ 244
=============
11
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. SFAS No.
142 requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under the non-amortization approach, goodwill
and certain intangibles will not be amortized into operating expenses, but
instead will be reviewed for impairment and written down and charged to
operating expenses only in the periods in which the recorded value of goodwill
and certain intangibles exceeds its fair value.
We adopted the provisions of these statements at the beginning of our fiscal
year 2002. As a result, we no longer amortize goodwill, which reduced our
operating expenses by $0.4 million in the third quarter of 2002 compared to the
same period last year. During the second quarter of 2002, we completed with the
help of outside consultants a comprehensive study of the fair value of goodwill.
We found that the fair values of our reporting unit assets exceed their carrying
values. Consequently, we concluded that there was no impairment of goodwill. We
will continue to assess the fair values of our reporting unit assets. If in
future periods the carrying values of our reporting unit assets exceed their
fair values, we will charge the difference to operating income in the period in
which the impairment becomes evident.
In 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. We are currently in the process of evaluating the impact, if
any, of those pronouncements on our financial statements.
10. CONTINGENT LIABILITIES
We are subject to federal and state hazardous substance cleanup laws that impose
liability for the costs of cleaning up contamination resulting from past spills,
disposal or other releases of hazardous substances. In this regard, we have
incurred, and expect to incur, assessment, remediation and related costs at one
of our facilities. In 1991, we reported to state regulators a release at that
site from an underground storage tank ("UST"). The UST and certain contaminated
soil subsequently were removed and disposed of at an off-site disposal facility.
Our independent environmental consultant has been conducting an investigation of
soil and groundwater at the site with oversight by the state Department of
Environmental Quality ("DEQ"). The investigation indicates that, unrelated to
the UST release, additional soil and groundwater at the site have been impaired
by chlorinated solvents, including tetrachloroethane and trichloroethylene, and
other compounds. Also, our investigation revealed that the previous owners of
the site had used a portion of the site as a disposal area. Our consultant has
remediated the soils in this area but believes that it is a source of
contamination of groundwater, both on-site and off-site. Our consultant's
investigation indicates that there were releases by the previous owners in areas
over which they subsequently built additions. These releases have impacted
groundwater that has migrated off-site. We have implemented a groundwater
remediation system for the on-site contamination. We continue to monitor and
analyze conditions to determine the continued efficacy of the system. We also
have implemented a groundwater remediation system for the off-site
contamination. We continue to analyze other alternatives for the off-site
groundwater contamination and are reviewing these alternatives with the DEQ. We
continue to investigate the extent of other sources of contamination in addition
to the removed UST, the above-referenced disposal area and the areas under
building additions, including possible evidence of past or current releases by
others in the vicinity around our facilities.
We previously filed a complaint in federal district court seeking contribution
from the previous owners of the site for the cost of the investigation and
remediation of the site. We settled that litigation through a consent judgment
against the former owners. Also, we have asserted claims against insurers of the
former owners for the amounts specified in the consent judgment. The insurers
have denied coverage and two of them filed a declaratory judgment action to that
effect against us in federal district court. The third insurer has now joined in
this action.
12
Our consultant estimates that a minimum of approximately $1.5 million of
investigation and remediation expenses, both on-site and off-site, remain to be
incurred. We have a reserve for such purposes. The consultant's cost estimate
was based on a review of currently available data and assumptions concerning the
extent of contamination, geological conditions, and the costs and effectiveness
of certain treatment technologies. The cost estimate continues to be subject to
substantial uncertainty because of the extent of the contamination area, the
variety and nature of geological conditions throughout the contamination area,
changes in remediation technology, and ongoing DEQ feedback. We are continuing
to monitor the conditions at the site and will adjust our reserve if necessary.
We may incur significant additional assessment, remediation and related costs at
the site, and such costs could materially and adversely affect our consolidated
net income for the period in which such costs are incurred. At this time,
however, we cannot estimate the time or potential magnitude of such costs, if
any.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market electronic and industrial communications
products, primarily serving the global automation and control markets with
connectivity solutions and specialty electrical products. Through our Industrial
Communications and Connectivity Segment (Connectivity Segment, or Connectivity)
we provide the industrial automation industry with a single, worldwide source
for industrial communications and connectivity solutions. Our product lines,
comprising six industry-leading brands, SST(TM), Brad Harrison(R), mPm(TM), RJ
Lnxx(R), applicom(R), and NetAlert(TM) make us the premier supplier of
application-specific connectivity solutions. Our Electrical Safety & Specialty
Segment (Electrical Segment, or Electrical) manufactures highly customized
products to support enhanced safety and productivity on the factory floor. We
sell our products to stocking distributors, original equipment manufacturers
(OEM) and system integrators. Our direct sales force, as well as manufacturers'
agencies, service our customers and promote our products to end-customers.
We have operations in ten countries outside the United States, and fluctuations
in foreign currency exchange rates can impact our results of operations and
financial condition.
THIRD QUARTER FISCAL 2002 RESULTS COMPARED WITH THIRD QUARTER FISCAL 2001
RESULTS
SALES
Sales in the third quarter of 2002 declined by 3.9% year over year, primarily
due to adverse economic conditions in the U.S. and international manufacturing
environments. Overall unit volumes declined, while selling prices declined by
less than one percent, primarily due to competitive pressure. New products
introduced during the last three years accounted for $10.7 million of revenue in
the third quarter of fiscal year 2002 and compare to $15.9 million recorded last
year. Sales in our Connectivity Segment declined 3.7% while Electrical Segment
sales declined by 4.3%. Measured in constant 2001 Dollars, overall sales
declined 5.9%.
SALES BY REGION
In the United States, sales were $28.3 million in the third quarter of fiscal
2002 and $31.0 million last year, a 8.7% decline. Unfavorable economic
conditions primarily drove this decline. We recorded approximately 38% and 36%
of our revenues in foreign currencies during the third quarters of fiscal 2002
and 2001, respectively. While our international revenue was up 2.4% in the third
quarter of 2002 compared to last year helped by the stronger Euro, these sales
were down 3% in constant 2001 Dollars primarily due to market conditions.
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BACKLOG
The backlog of unfilled orders stood at $16.2 million at the end of this quarter
as compared to $15.1 million a year ago, which translates to 22 and 21 average
days of sales for the third quarters of 2002 and 2001, respectively. The
increase was largely due to a $1.0 million project order at the Aero-Motive
company, with shipment beginning in the fourth quarter of 2002.
GROSS PROFIT
Gross profit as a percent of sales was 38.2% in the third quarter of fiscal 2002
and 38.9% last year. The lower gross margin was caused primarily by lower
capacity utilization in all of our plants, startup costs for new products,
reductions in inventories and product mix shifts. A decrease in our LIFO reserve
requirement increased our gross profit by $0.2 million or one half of one
percentage point of sales in the third quarter of fiscal year 2002. There was no
impact from LIFO in the third quarter of last year.
OPERATING EXPENSES
Operating expenses, including expenses for Research and Development, were 30.9%
of sales in the third quarter of 2002 compared to last year's 31.1%. During the
first quarter of 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets, which requires us to stop amortizing goodwill. Last year's third quarter
operating expenses included a $0.4 million charge for amortization of goodwill.
SEGMENT OPERATING INCOME
Income from operations in the third quarter of 2002 was $2.5 million for the
Connectivity Segment, a 11.7% decline compared to last year, and $1.2 million
for the Electrical Segment, a 8.0% decline compared to last year. The decline in
profitability in both the Connectivity and Electrical Segments was due primarily
to the decline in volumes and lower levels of utilization and product mix.
NET INCOME
Net income in the third quarter of 2002 was $1.5 million and compares to $1.5
million last year. The effective tax rates were 42.5% and 36.2% in the third
quarters of 2002 and 2001, respectively. The increased rate in the third quarter
of 2002 is primarily a result of not tax-effecting certain expenses and losses
from foreign operations. Since most of the product costs and operating expenses
in our foreign subsidiaries are incurred in local currencies, the impact of
exchange rates on reported net income was partially mitigated.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We continue to invest in property and equipment, including new machinery,
computer systems and facilities. On October 10, 2000, we announced plans to
build a second manufacturing facility in Juarez, Mexico to migrate U.S.
production to a lower cost labor market. The current and new Juarez plants are
manufacturing resources for all of our North American subsidiaries. This
investment required approximately $0.4 million of cash in the third quarter of
fiscal 2002 and was financed through cash internally generated by operations. We
estimate an additional $0.8 million will be required during the fourth quarter
of fiscal year 2002 to finish this project.
Our cash and short-term investments are available for strategic investments,
acquisitions, and other potential cash needs that may arise. We believe that
existing cash and short-term investments, together with funds generated from
operations, will be sufficient to meet our operating requirements in 2002.
At June 29, 2002 we had $45.5 million of long-term debt outstanding and we had
unused credit facilities that provide for additional borrowings of up to $25.0
million. Effective March 30, 2002 we amended our revolving credit agreement with
a bank to increase the maximum ratio of debt to EBITDA, as defined, from 2.5 to
2.9, and reduce the minimum interest coverage ratio, as defined, from 3.0 to
2.0. This amendment will expire on March 29, 2003, when the maximum debt to
EBITDA ratio will revert back to 2.5, and the minimum interest coverage ratio
will revert back to 3.0. We are in compliance with all provisions of our funding
arrangements. We believe, that we will be in compliance with all provisions of
our funding arrangements for the next fiscal year.
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We do not have any exposures to off-balance sheet arrangements, including
special purpose entities, or activities that include non-exchange-traded
contracts accounted for at fair value.
CONTINGENT LIABILITIES AND ENVIRONMENTAL MATTERS
Our operations are subject to international, federal, state and local
environmental laws and regulations. We are party to an environmental matter,
which obligates us to investigate, remediate or mitigate the effects on the
environment of the release of certain substances at one of our manufacturing
facilities. It is possible that this matter could affect cash flows and results
of operations. For additional details on the environmental exposure, see PART II
- - OTHER INFORMATION: ITEM 1 - LEGAL PROCEEDINGS.
FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information, so that investors can better understand a company's
future prospects, and make informed investment decisions. This report, and other
written and oral statements that we make from time to time, contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements set out anticipated results based
on management's plans and assumptions. We have tried, wherever possible, to
identify such statements by using words such as "anticipate", "estimate",
"expect", "plan", "believe", and words and terms of similar substance, in
connection with any discussion of future operating or financial performance.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties, and inaccurate
assumptions.
In particular, such risks include statements relating to future actions,
prospective products, future performance or results of current or anticipated
products, sales efforts, expenses, the outcome of contingencies such as legal
proceedings, general economic and business conditions, and competition.
International-based revenues and substantial international assets result in our
exposure to currency exchange rate fluctuations.
Growth in costs and expenses, changes in product mix, and the impact of
acquisitions, restructuring, divestitures and other unusual items, that could
result from evolving business strategies, could affect future results. Changes
in the U.S. tax code and the tax laws in other countries can affect our net
earnings. Claims have been brought against us and our subsidiaries for various
legal, environmental, and tax matters, and additional claims arise from time to
time. It is possible that our cash flows and results of operations could be
affected by the resolution of these matters.
Should known or unknown risks or uncertainties materialize, or should underlying
assumptions prove inaccurate, actual results could vary materially from those
anticipated, estimated or projected. Investors should bear this in mind as they
consider forward-looking statements.
This discussion of potential risks and uncertainties is by no means complete but
is designed to highlight important factors that may impact our outlook. We
undertake no obligation to publicly update forward-looking statements, whether
as a result of new information, future events, or otherwise.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In our global operating activities and in the normal course of our business, we
are exposed to changes in foreign currency exchange rates, which may adversely
affect our results of operations and financial condition. We seek to minimize
those risks through our regular operating activities and, when deemed
appropriate, through the use of derivative financial instruments. We use
financial instruments to selectively hedge our foreign currency risk and do not
use financial instruments for speculative purposes.
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We recorded the difference between the carrying values and fair values of
related hedged assets and liabilities of $0.3 million and $0.1 million, for the
third quarter and year-to-date, respectively, in accumulated other comprehensive
loss to recognize deferred net loss on derivatives designated as cash flow
hedges, and a net decrease in other assets of $0.3 million, and $0.1 million,
for the third quarter and year-to-date, respectively. We base the fair value for
our cross-currency swap on the cost estimate to terminate the agreement.
$45.0 million of our long-term debt is denominated in U.S. Dollars, the
remainder is denominated in Euros, and carries fixed interest. We base the fair
value of our long-term debt on market, or dealer quotes. The difference between
fair and carrying values of our financial instruments, other than the swap, were
not material at the balance sheet dates.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are subject to federal and state hazardous substance cleanup laws that impose
liability for the costs of cleaning up contamination resulting from past spills,
disposal or other releases of hazardous substances. In this regard, we have
incurred, and expect to incur, assessment, remediation and related costs at one
of our facilities. In 1991, we reported to state regulators a release at that
site from an underground storage tank ("UST"). The UST and certain contaminated
soil subsequently were removed and disposed of at an off-site disposal facility.
Our independent environmental consultant has been conducting an investigation of
soil and groundwater at the site with oversight by the state Department of
Environmental Quality ("DEQ"). The investigation indicates that, unrelated to
the UST release, additional soil and groundwater at the site have been impaired
by chlorinated solvents, including tetrachloroethane and trichloroethylene, and
other compounds. Also, our investigation revealed that the previous owners of
the site had used a portion of the site as a disposal area. Our consultant has
remediated the soils in this area but believes that it is a source of
contamination of groundwater, both on-site and off-site. Our consultant's
investigation indicates that there were releases by the previous owners in areas
over which they subsequently built additions. These releases have impacted
groundwater that has migrated off-site. We have implemented a groundwater
remediation system for the on-site contamination. We continue to monitor and
analyze conditions to determine the continued efficacy of the system. We also
have implemented a groundwater remediation system for the off-site
contamination. We continue to analyze other alternatives for the off-site
groundwater contamination and are reviewing these alternatives with the DEQ. We
continue to investigate the extent of other sources of contamination in addition
to the removed UST, the above-referenced disposal area and the areas under
building additions, including possible evidence of past or current releases by
others in the vicinity around our facilities.
We previously filed a complaint in federal district court seeking contribution
from the previous owners of the site for the cost of the investigation and
remediation of the site. We settled that litigation through a consent judgment
against the former owners. Also, we have asserted claims against insurers of the
former owners for the amounts specified in the consent judgment. The insurers
have denied coverage and two of them filed a declaratory judgment action to that
effect against us in federal district court. The third insurer has now joined in
this action.
Our consultant estimates that a minimum of approximately $1.5 million of
investigation and remediation expenses, both on-site and off-site, remain to be
incurred. We have a reserve for such purposes. The consultant's cost estimate
was based on a review of currently available data and assumptions concerning the
extent of contamination, geological conditions, and the costs and effectiveness
of certain treatment technologies. The cost estimate continues to be subject to
substantial uncertainty because of the extent of the contamination area, the
variety and nature of geological conditions throughout the contamination area,
changes in remediation technology, and ongoing DEQ feedback. We are continuing
to monitor the conditions at the site and will adjust our reserve if necessary.
We may incur significant additional assessment, remediation and related costs at
the site, and such costs could materially and adversely affect our consolidated
net income for the period in which such costs are incurred. At this time,
however, we cannot estimate the time or potential magnitude of such costs, if
any.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
During the quarter just ended we did not file any report on Form 8-K.
SIGNATURES
Under the requirements of Section 13 or 15(d) of the Securities and Exchange Act
of 1934, this report was signed on behalf of the Registrant by the authorized
persons below.
WOODHEAD INDUSTRIES, INC.
Date: August 12, 2002
BY: /s/ Robert H. Fisher BY: /s/ Joseph P. Nogal
- ---------------------------------- ------------------------------
Robert H. Fisher Joseph P. Nogal
Vice President, Finance and C.F.O. Vice President,
(Principal Financial Officer) Treasurer/Controller
(Principal Accounting Officer)
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