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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 12/28/2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-5971
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WOODHEAD INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-1982580
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(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_____.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes ___X___ No_____.
The number of common shares outstanding as of February 6, 2003 was 11,890,138
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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
ITEM 4 - CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION 17
ITEM 1 - LEGAL PROCEEDINGS 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 18
Certificate Pursuant to Section 302 - Philippe Lemaitre 19
Certificate Pursuant to Section 302 - Robert H. Fisher 20
2
Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 28, 2002 and September 28, 2002
(Amounts in Thousands)
--------------
unaudited
------------------------------
ASSETS 12/28/2002 9/28/2002
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CURRENT ASSETS
Cash and short-term investments $ 22,634 $ 13,152
Accounts receivable 28,105 30,770
Inventories 15,093 14,825
Prepaid expenses 2,632 2,870
Refundable income taxes 1,927 1,971
Deferred income taxes 3,119 3,119
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 73,510 66,707
Property, plant and equipment, net 62,264 64,053
Other Intangible assets, net 818 798
Goodwill, net 29,505 28,757
Deferred income taxes 3,263 3,339
Other Assets 1,598 2,997
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TOTAL ASSETS $ 170,958 $ 166,651
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LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Accounts payable $ 9,066 $ 9,119
Accrued expenses 13,733 12,785
Income taxes payable 1,681 1,640
Current portion of long-term debt 4,200 4,200
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TOTAL CURRENT LIABILITIES 28,680 27,744
Long-term debt 36,600 36,600
Deferred income taxes 1,915 1,771
Other liabilities 3,216 3,191
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TOTAL LIABILITIES 70,411 69,306
STOCKHOLDERS' INVESTMENT:
Common stock at par (shares issued: 11,890 at 12/28/2002
and 11,817 at 9/28/02) 11,890 11,817
Additional paid-in capital 17,294 16,526
Deferred stock compensation (1,013) (218)
Accumulated other comprehensive loss (2,228) (4,292)
Retained earnings 74,604 73,512
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Total stockholders' investment 100,547 97,345
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TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 170,958 $ 166,651
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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 Months ended December 28, 2002 and December 29, 2001
(Amounts in Thousands, except per share data, unaudited)
THREE MONTHS ENDED
-------------------------
12/28/2002 12/29/2001
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NET SALES $ 42,232 $ 38,621
Cost of Sales 26,504 24,136
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GROSS PROFIT 15,728 14,485
OPERATING EXPENSES 13,768 13,149
INCOME FROM OPERATIONS 1,960 1,336
OTHER EXPENSES
Interest Expense 700 778
Interest Income (39) (12)
Other (Income)/Expenses, Net (508) 248
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INCOME BEFORE TAXES 1,807 322
PROVISION FOR INCOME TAXES 381 186
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INCOME FROM CONTINUING OPERATIONS $ 1,426 $ 136
DISCONTINUED OPERATIONS:
Income From Discontinued AKAPP Operations
(Including Gain on Disposal of $725) 733 --
Income Tax Expense 3 --
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Income From Discontinued Operations 730 --
-------------------------
NET INCOME $ 2,156 $ 136
EARNINGS PER SHARE, BASIC
From Continuing Operations $ 0.12 $ 0.01
From Discontinued Operations $ 0.06 --
As Reported $ 0.18 $ 0.01
EARNINGS PER SHARE, DILUTED
From Continuing Operations $ 0.12 $ 0.01
From Discontinued Operations $ 0.06 --
As Reported $ 0.18 $ 0.01
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic 11,835 11,580
Diluted 11,881 11,838
DIVIDENDS PER SHARE $ 0.09 $ 0.09
The accompanying notes are an integral part of these statements.
4
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months ended December 28, 2002 and December 29, 2001
(Amounts in Thousands, unaudited)
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Three Months ended
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12/28/2002 12/29/2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 2,156 $ 136
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 2,630 2,394
Income from discontinued operations (730) --
Deferred tax expense 220 101
(Increase) Decrease in:
Accounts receivable 2,060 2,850
Inventories (512) 46
Prepaid expenses 126 1,187
Other assets 175 (275)
(Decrease) Increase in:
Accounts payable 87 (2,138)
Accrued expenses 1,076 (1,131)
Income taxes payable (30) (231)
Other liabilities 35 (22)
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Net cash flows provided by operating activities 7,293 2,917
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant & equipment (930) (2,859)
Dispositions of property, plant & equipment 5 71
Proceeds from sales of AKAPP, net of cash given of $485 4,187 --
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Net cash provided by (used for) investing activities 3,262 (2,788)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt -- 606
Sales of stock -- 267
Dividend payments (1,064) (1,042)
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Net cash used for financing activities (1,064) (169)
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EFFECT OF EXCHANGE RATES (9) 470
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NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 9,482 430
Cash and short-term investments at beginning of period 13,152 4,156
Cash and short-term investments at end of period $ 22,634 $ 4,586
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SUPPLEMENTAL CASH FLOW DATA
Cash paid during the period for:
Interest $ -- $ 19
Income taxes $ 129 $ 612
The accompanying notes are an integral part of these statements.
5
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months ended December 28, 2002 and December 29, 2001
(Amounts in Thousands, unaudited)
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THREE MONTHS ENDED
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12/28/2002 12/29/2001
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Net Income $ 2,156 $ 136
Other comprehensive income (loss):
Accumulated foreign currency translation
adjustment, before tax 3,220 (1,310)
Unrealized gain/(loss) on cash flow hedging
instrument (1,156) (119)
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Comprehensive income (loss), net of tax $ 4,220 $ (1,293)
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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. 2002 Annual Report on Form 10-K and Form 10-K/A.
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 December 28, 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:
12/28/02 9/28/02
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Inventories valued using FIFO $ 9,305 $ 9,576
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Inventories valued using LIFO:
At FIFO cost 9,331 8,965
Less: Reserve to reduce to LIFO (3,543) (3,716)
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LIFO Inventories 5,788 5,249
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Total Inventories 15,093 14,825
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Inventory composition using FIFO
Raw materials 10,436 10,340
Work-in-process and finished goods 8,200 8,201
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Total Inventories at FIFO $ 18,636 $ 18,541
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7
Had we used the FIFO method for all inventories, Net Income would have been $0.1
million less for the three months ended December 28,2002. The LIFO impact for
the three months ended December 29, 2001 increased Net Income by $0.2 million.
4. PROPERTY, PLANT AND EQUIPMENT
12/28/02 9/28/02
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Property, plant and equipment, at cost $ 137,912 $ 138,373
Less: Accumulated depreciation and amortization (75,648) (74,320)
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Property, plant and equipment, net $ 62,264 $ 64,053
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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
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12/28/02 12/29/01
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Income from Continuing Operations $ 1,426 $ 136
Income from Discontinued Operations $ 730 $ --
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Net Income $ 2,156 $ 136
=====================
Earnings per share, basic
From continuing operations $ 0.12 $ 0.01
From discontinued operations $ 0.06 --
As reported $ 0.18 $ 0.01
Earnings per share, diluted
From continued operations $ 0.12 $ 0.01
From discontinued operations $ 0.06 --
As reported $ 0.18 $ 0.01
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Weighted-average number of shares outstanding 11,835 11,580
Dilutive common stock options 46 258
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Weighted-average number of shares outstanding
plus dilutive common stock options 11,881 11,838
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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 11,890,000 and 11,817,000 on December 28, 2002
and September 28, 2002, 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.
In fiscal 2002 we changed our segment reporting to include our Asian operations
in the Connectivity Segment to recognize the change in that operations business
mix. Asian operations had been part of our Electrical Segment. The amounts for
fiscal 2002 have been reclassified to reflect this change.
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.
9
THREE MONTHS
(Amounts in Thousands, unaudited)
A. Segment data
Net Sales Income from Operations
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Three Months Ended Three Months Ended
---------------------------------------- ----------------------------------------
12/28/02 12/29/01 12/28/02 12/29/01
---------------------------------------- ----------------------------------------
Connectivity $28,399 $24,727 $ 399 $ 195
Electrical 13,833 13,894 1,853 1,079
Corporate and other -- -- (292) 62
- ------------------------------------------------------------------ ----------------------------------------
Total $42,232 $38,621 $1,960 $1,336
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Additions to long-lived assets Depreciation and Amortization
---------------------------------------- ----------------------------------------
Three Months Ended Three Months Ended
---------------------------------------- ----------------------------------------
12/28/02 12/29/01 12/28/02 12/29/01
---------------------------------------- ----------------------------------------
Connectivity $635 $ 1,564 $1,980 $1,725
Electrical 270 1,282 599 607
Corporate and other 25 13 51 62
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Total $930 $2,859 $2,630 $2,394
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Total Assets
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12/28/02 9/28/02
---------------------------------------
Connectivity $121,307 $119,915
Electrical 26,516 31,652
Corporate and other 23,135 15,084
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Total $170,958 $166,651
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Three Months Ended
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Reconciliation of Income from Operations to Net Income 12/28/02 12/29/01
- ----------------------------------------------------------------------------------------------------------------------
Income from operations $1,960 $1,336
Less: Interest income (expense), net (661) (766)
Other income (expense), net 508 (248)
Income taxes (381) (186)
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Income from continuing operations 1,426 136
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Discontinued Operations
Income from discontinued AKAPP operations
(Including gain on disposal of $725) 733 --
Income tax expense (3) --
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Income from discontinued operations 730 --
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Net Income $2,156 $136
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Geographic Data
Net Sales Total Assets
--------------------------------------- --------------------------------
Three Months Ended 12/28/02 09/28/02
--------------------------------------- ---------------------------------------------------
12/28/02 12/29/01 United States 57,058 $51,553
- ------------------------------------------------------------------------------- Canada 23,783 24,848
United States $26,521 $24,076 Italy 30,165 29,303
All other countries 15,711 14,545 Mexico 20,306 20,035
- ------------------------------------------------------------------------------- France 21,576 19,752
Total $42,232 $38,621 All other countries 18,070 21,160
- ------------------------------------------------------------------------------- --------------------------------------------------
Total $170,958 $166,651
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10
8. SALE OF AKAPP OPERATIONS
On September 29, 2002 the company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 states that the
results of operations of a component of an entity that has either been disposed
of or is classified as held for sale shall be reported in discontinued
operations if both the following conditions are met: (a) the operations and cash
flows of the component have been (or will be) eliminated from the ongoing
operations of the entity as a result of the disposal transaction and (b) the
entity will not have any significant continuing involvement in the operations of
the component after the disposal transaction.
In November 2002 we sold our Dutch subsidiary, AKAPP to a third party. We sold
the AKAPP operation for $4.9 million in cash, which included the payment of a
$2.6 million inter-company loan and the receipt of $2.3 million in cash. As a
result of this transaction we recorded a $0.7 million gain on disposal, which in
accordance with SFAS No. 144 has been reported as Income from Discontinued
Operations. The results of operations related to AKAPP for fiscal 2003 have also
been recorded as Income from Discontinued Operations. The results of operations
for AKAPP in the first quarter of fiscal 2002 have not been reclassified to
discontinued operations, as the amounts (as shown below) are not material.
-----------------------
Three Months Ended
-----------------------
12/29/01
- ---------------------------------------------------
Sales 1,194
Income Before Taxes 1
Net Income 3
- ---------------------------------------------------
9. INCOME TAX EXPENSE
Our effective tax rate was 21% and 58% for the first quarters of 2003 and 2002,
respectively. The decrease in our effective tax rate for the first quarter of
2003 was due mainly to the effects of utilizing $0.3 million of excess foreign
tax credits. The increase in the effective tax rate for the first quarter of
2002 was due mainly to the effects of not utilizing tax benefits related to net
operating losses of certain foreign entities.
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 additions were subsequently built. 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 remedial alternatives for the
off-site groundwater contamination and are reviewing these alternatives with the
DEQ.
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
11
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 three of them filed a declaratory judgment action to
that effect against us in federal district court.
Our consultant estimated that a minimum of approximately $1.4 million of
investigation and remediation expenses, both on-site and off-site, remain to be
incurred over the next 15 years. 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.
12
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
Connectivity Segment 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
Segment 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 nine countries outside the United States, and fluctuations
in foreign currency exchange rates can impact our results of operations and
financial condition.
FIRST QUARTER FISCAL 2003 RESULTS COMPARED WITH FIRST QUARTER FISCAL 2002
RESULTS
SALES
Sales in the first quarter of 2003 increased by 9.3% year over year, due mainly
to the increase in our Connectivity Segment. Sales from Continuing Operations
increased 13.1% in the first quarter of 2003. The change in foreign exchange
rates during the quarter, primarily the Euro, increased sales by $1.3 million or
3% compared to the prior year. This was about equal to the elimination of AKAPP
sales, which were $1.2 million in the first quarter of 2002. Overall unit
volumes increased, while selling prices declined by approximately one percent,
primarily due to competitive pressure. New products introduced during the last
three years accounted for $5.5 million of revenue in the first quarter of fiscal
year 2003 and compare to $7.7 million recorded last year. Sales in our
Connectivity Segment increased 14.9% while Electrical Segment sales declined by
0.4%. Sales from Continuing Operations in our Electrical Segment increased 9.7%
when compared to the same period last year. Measured in constant 2001 Dollars,
overall sales increased 10.0%.
SALES BY REGION
In the United States, sales were $26.5 million in the first quarter of fiscal
2003 and $24.1 million last year, a 10.0% increase. The positive movement in
economic indicators that directly affect our business point to improved economic
conditions. We recorded 37% and 38% of our revenues in foreign currencies during
the first quarters of fiscal 2003 and 2002, respectively. Our international
revenue was up 8.0% in the first quarter of 2003 compared to last year.
BACKLOG
The backlog of unfilled orders stood at $12.9 million at the end of the first
quarter of fiscal 2003 as compared to $14.6 million a year ago, which translates
to 18 and 23 average days of sales for the first quarters of 2003 and 2002,
respectively. This decrease in backlog was due mainly to the reduction in the
Connectivity Segment caused by lower orders and shorter lead times, primarily in
the datacom/telecom business.
GROSS PROFIT
Gross profit as a percent of sales was 37.2% in the first quarter of fiscal 2003
and 37.5% last year. The lower gross margin was due mainly to lower pricing,
adverse product mix and the non-recurrence of a favorable LIFO adjustment last
year because of the significant reduction in inventory offset partially by
improved productivity. Decreases in our LIFO reserve requirement increased our
gross profit by $0.2 million in the first quarter of fiscal year 2003, compared
to an increase in gross profit of $0.4 million in the first quarter of 2002.
13
OPERATING EXPENSES
Operating expenses, including expenses for Research and Development, were 32.6%
of sales in the first quarter of 2003 compared to last year's 34.0%. This
decrease as a percentage of sales was due mainly to the increased sales volume.
SEGMENT OPERATING INCOME
Income from operations in the first quarter of 2003 was $0.4 million for the
Connectivity Segment, a 104.6% increase compared to last year, and $1.9 million
for the Electrical Segment, a 71.7% increase compared to last year. The increase
in profitability in the Connectivity Segment was due mainly to the increase in
sales volumes, which was partially offset by unfavorable pricing, product mix
and added cost to strengthen the management team for future growth. The increase
in the Electrical Segment is attributable mainly to increased productivity and
the savings associated with the migration of product from our Northbrook,
Illinois plant to our new facility in Juarez, Mexico.
MISCELLANEOUS INCOME
Other Income and Expenses were favorably affected by the change in foreign
exchange rates during the quarter, primarily the Euro. During the first quarter
2003 foreign exchange gains were $0.5 million as compared to an expense of $0.2
million for the first quarter 2002.
DISCONTINUED OPERATIONS
In the first quarter of 2003 we sold our AKAPP operations for $4.9 million in
cash. This sale resulted in a gain on disposal of $0.7 million and was recorded
as Income From Discontinued Operations. The results of operations related to
AKAPP for fiscal 2003 have also been recorded as Income from Discontinued
Operations.
NET INCOME
Net income in the first quarter of 2003 was $2.2 million and compares to $0.1
million last year. The effective tax rates were 21.1% and 57.8% in the first
quarters of 2003 and 2002, respectively. The decrease in our effective tax rate
for the first quarter 2003 was due mainly to the impact of utilizing excess
foreign tax credits. Since most of the product costs and operating expenses in
our foreign subsidiaries are recorded 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. In 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 project is now complete and
there was no spending in the first quarter of 2003 compared to $1.2 million
spent in the first quarter of 2002.
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 2003.
At December 28, 2002 we had $40.8 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.
We do not have any exposure to off-balance sheet arrangements, including special
purpose entities, or activities that include non-exchange-traded contracts
accounted for at fair value.
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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.
We recorded the difference between the carrying values and fair values of
related hedged assets and liabilities of $1.2 million for the first quarter 2003
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 $1.2 million for the first quarter.
15
We base the fair value for our cross-currency swap on the cost estimate to
terminate the agreement.
Our long-term debt is denominated in U.S. Dollars 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.
ITEM 4 - CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
periods specified in the rules and forms of the Securities and Exchange
Commission. This information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosures. Our
management, including our principal executive officer and our principal
financial officer, recognizes that any set of controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures within 90 days of the
filing date of this report. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in alerting them on a timely basis to material
information required to be disclosed in our periodic filings.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation referenced in the foregoing paragraph.
16
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 additions were subsequently built. 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 remedial alternatives for the
off-site groundwater contamination and are reviewing these alternatives with the
DEQ.
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 three of them filed a declaratory judgment action to
that effect against us in federal district court.
Our consultant estimated that a minimum of approximately $1.4 million of
investigation and remediation expenses, both on-site and off-site, remain to be
incurred over the next 15 years. 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.
17
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: February 10, 2003
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)
18
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Philippe Lemaitre, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ending
December 28, 2002;
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 officers 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 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the 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 weakness 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 officers 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
weakness.
/s/ Philippe Lemaitre President and C.E.O. 02-10-03
- ---------------------------
Philippe Lemaitre
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert H. Fisher, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ending
December 28, 2002;
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 officers 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 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the 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 weakness 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 officers 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
weakness.
/s/ Robert H. Fisher Vice President, Finance and 02-10-03
- ---------------------------
Robert H. Fisher Chief Financial Officer
20