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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 6/28/2003
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.
------------------------
(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
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (847)-236-9300
--------------
-----------------------------------------------------------------------------
(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 July 23, 2003 was 11,932,121.
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
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 16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 20
Item 4 - Internal Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
As of June 28, 2003 and September 28, 2002
(Amounts in Thousands)
Unaudited
ASSETS 6/28/2003 9/28/2002
----------------------
CURRENT ASSETS
Cash and short-term investments $ 25,127 $ 13,152
Accounts receivable, net 31,871 30,770
Inventories 13,962 14,825
Prepaid expenses 4,362 2,870
Refundable income taxes 1,426 1,971
Deferred income taxes 4,204 3,119
- -----------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 80,952 66,707
Property, plant and equipment, net 62,135 64,053
Other Intangible assets, net 813 798
Goodwill, net 32,163 28,757
Deferred income taxes 2,767 3,339
Other Assets 677 2,997
- -----------------------------------------------------------------------------------
TOTAL ASSETS $ 179,507 $ 166,651
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Accounts payable $ 9,187 $ 9,119
Accrued expenses 16,198 12,785
Income taxes payable 1,105 1,640
Current portion of long-term debt 4,200 4,200
- -----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 30,690 27,744
Long-term debt 36,600 36,600
Deferred income taxes 2,362 1,771
Other liabilities 3,519 3,191
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES 73,171 69,306
STOCKHOLDERS' INVESTMENT:
Common stock at par (shares issued: 11,905 at 6/28/2003
and 11,817 at 9/28/02) 11,905 11,817
Additional paid-in capital 17,419 16,526
Deferred stock compensation (851) (218)
Accumulated other comprehensive loss 1,825 (4,292)
Retained earnings 76,038 73,512
- -----------------------------------------------------------------------------------
Total stockholders' investment 106,336 97,345
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 179,507 $ 166,651
- -----------------------------------------------------------------------------------
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 28, 2003 and June 29, 2002
(Amounts in Thousands, except per share data, unaudited)
------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------
6/28/2003 6/29/2002 6/28/2003 6/29/2002
- ----------------------------------------------------------------------------------------------
NET SALES $ 46,694 $ 45,603 $ 134,736 $ 126,803
Cost of Sales 30,065 28,174 85,469 79,296
- ----------------------------------------------------------------------------------------------
GROSS PROFIT 16,629 17,429 49,267 47,507
OPERATING EXPENSES 13,152 14,110 41,254 40,544
RESTRUCTURING AND OTHER RELATED CHARGES 1,155 -- 1,155 1,015
- ----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 14,307 14,110 42,409 41,559
INCOME FROM OPERATIONS 2,322 3,319 6,858 5,948
OTHER EXPENSES
Interest Expense 1,048 782 2,449 2,361
Interest Income (57) (23) (147) (56)
Other (Income) / Expenses, Net (1,523) (96) (2,610) 253
- ----------------------------------------------------------------------------------------------
INCOME BEFORE TAXES 2,854 2,656 7,166 3,390
PROVISION FOR INCOME TAXES 810 1,130 2,165 1,576
- ----------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS $ 2,044 $ 1,526 $ 5,001 $ 1,814
DISCONTINUED OPERATIONS:
Income From Discontinued AKAPP Operations
(Including Gain on Disposal of $725) -- -- 733 --
Income Tax Expense -- -- 3 --
- ----------------------------------------------------------------------------------------------
Income From Discontinued Operations -- -- 730 --
- ----------------------------------------------------------------------------------------------
NET INCOME $ 2,044 $ 1,526 $ 5,731 $ 1,814
EARNINGS PER SHARE, BASIC
From Continuing Operations $ 0.17 $ 0.13 $ 0.42 $ 0.16
From Discontinued Operations $ -- $ -- $ 0.06 $ --
As Reported $ 0.17 $ 0.13 $ 0.48 $ 0.16
EARNINGS PER SHARE, DILUTED
From Continuing Operations $ 0.17 $ 0.13 $ 0.42 $ 0.15
From Discontinued Operations $ -- $ -- $ 0.06 $ --
As Reported $ 0.17 $ 0.13 $ 0.48 $ 0.15
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic 11,901 11,718 11,874 11,633
Diluted 12,000 11,970 11,962 11,821
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 28, 2003 and June 29, 2002
(Amounts in Thousands, unaudited)
----------------------
Nine Months ended
----------------------
06/28/2003 06/29/2002
- ----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 5,731 $ 1,814
Adjustments to reconcile net income to net
cash flows from operating activities:
Income from discontinued operations (730) --
Depreciation and amortization 8,429 7,687
Deferred tax expense 78 192
(Increase) Decrease in:
Accounts receivable (287) 107
Inventories 1,353 6,273
Prepaid expenses (1,540) 598
Deferred income taxes and other assets 664 (430)
(Decrease) Increase in:
Accounts payable (227) (1,155)
Accrued expenses 3,119 72
Income taxes payable (625) (513)
Deferred income taxes and other liabilities 393 5
- ----------------------------------------------------------------------------------
Net cash flows provided by operating activities 16,358 14,650
- ----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant & equipment (3,338) (5,766)
Dispositions of property, plant & equipment 118 152
Proceeds from sale of AKAPP, net of cash given $485 4,187 --
- ----------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 967 (5,614)
- ----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt -- (235)
Sales of stock 349 1,659
Dividend payments (3,205) (3,143)
- ----------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (2,856) (1,719)
- ----------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES (2,494) 1,354
- ----------------------------------------------------------------------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 11,975 8,671
Cash and short-term investments at beginning of period 13,152 4,156
Cash and short-term investments at end of period $ 25,127 $ 12,827
- ----------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DATA
Cash paid during the period for:
Interest $ 1,375 $ 1,564
Income taxes $ 1,851 $ 1,622
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 28, 2003 and June 29, 2002
(Amounts in Thousands, unaudited)
---------------------- ---------------------
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ---------------------
6/28/2003 6/29/2002 6/28/2003 6/29/2002
- ----------------------------------------------------------------------- ---------------------
Net income $ 2,044 $ 1,526 $ 5,731 $ 1,814
Other comprehensive income:
Accumulated foreign currency translation
Adjustment 3,005 7,395 8,520 5,079
Unrealized loss on cash flow hedging
Instrument (833) (336) (2,403) (88)
- ----------------------------------------------------------------------- --------------------
Comprehensive income, net $ 4,216 $ 8,585 $ 11,848 $ 6,805
- ----------------------------------------------------------------------- --------------------
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 Form 10-K and Forms 10-K/A.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002 the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 provides guidance on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued and
also clarifies that the guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. We have adopted the requirements of FIN 45 and made the
appropriate disclosures in the Financial Statements and Notes included in this
Form 10-Q. We believe that the amount of our warranty settlements and reserve
are not material and are not therefore included as a disclosure to these interim
financial statements.
In December 2002 the FASB issued SFAS No. 148 ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE (SFAS 148), which amends SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 148 provides alternative
methods of transition for companies that voluntarily change to the fair
value-based method of accounting for stock-based employee compensation, and also
requires expanded disclosures in both interim and annual financial statements.
We are required to adopt the expanded disclosure requirements of SFAS No. 148
for the quarter ending June 28, 2003. Our expanded disclosure regarding pro
forma amounts for the effects of not recording FAS 123 expense is included in
Footnote No. 7.
In January 2003 we adopted FASB Statement No. 146 ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which generally requires that a
liability for costs associated with an exit or disposal activity be expensed as
incurred. Exit costs primarily consist of future minimum lease payments on
vacated facilities, facility closure costs and facility consolidation costs.
Employee separation costs consist primarily of severance costs. At each
reporting date, we will evaluate our accruals for exit costs and employee
separation costs to ensure that the accruals are still appropriate. In certain
circumstances, accruals are no longer required because of efficiencies in
carrying out the plans or because employees previously identified for separation
resigned unexpectedly and did not receive severance or were redeployed due to
circumstances not foreseen when the original plans were initiated. For the
quarter ending June 28, 2003 our expanded disclosure regarding restructuring and
other related charges is included in Footnote No. 10.
7
3. INVENTORIES
Inventories at the balance sheet dates were comprised of the following:
6/28/03 9/28/02
- ----------------------------------------------------------------------
Inventories valued using FIFO $ 8,835 $ 9,576
- ----------------------------------------------------------------------
Inventories valued using LIFO:
At FIFO cost 8,485 8,965
Less: Reserve to reduce to LIFO (3,358) (3,716)
---------------------------------------------------------
LIFO Inventories 5,127 5,249
- ----------------------------------------------------------------------
Total Inventories $ 13,962 $ 14,825
- ----------------------------------------------------------------------
Inventory composition using FIFO
Raw materials 9,659 10,340
Work-in-process and finished goods 7,661 8,201
- ----------------------------------------------------------------------
Total Inventories at FIFO $ 17,320 $ 18,541
- ----------------------------------------------------------------------
Had we used the FIFO method for all inventories, net income would have been $0.1
million and $0.2 million lower in the three months and nine months ended
6/28/2003. Net income would have been $0.1 million and $0.6 million lower in the
three and nine months ended 6/29/2002.
4. PROPERTY, PLANT AND EQUIPMENT
6/28/03 9/28/02
- -----------------------------------------------------------------------------
Property, plant and equipment, at cost $ 146,755 $ 138,373
Less: Accumulated depreciation and amortization (84,620) (74,320)
- -----------------------------------------------------------------------------
Property, plant and equipment, net $ 62,135 $ 64,053
- -----------------------------------------------------------------------------
During the nine-month period just ended we disposed of approximately $0.6
million of unused, fully depreciated fixed assets, and the accompanying
accumulated depreciation. We did not record any material gain or loss on these
disposals. In addition we disposed of $1.0 million of net property plant and
equipment in the sale of AKAPP (see Footnote No.9).
5. 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 expired on March 29, 2003, when the maximum debt to EBITDA ratio
reverted back to 2.5 and the minimum interest coverage ratio reverted back to
3.0. We are in compliance with all provisions of our funding arrangements. At
June 28, 2003 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.
Included in our financial statements is a 6.64% senior guaranteed note, which is
held by a subsidiary and has a parental guarantee. In addition, there is a 6.81%
senior guaranteed note held by the parent company, which is guaranteed by our
U.S. subsidiaries.
8
6. 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
------------------ --------------------
06/28/03 06/29/02 06/28/03 06/29/02
- ----------------------------------------------------------------------------------------
Income from Continuing Operations $ 2,044 $ 1,526 $ 5,001 $ 1,814
Income from Discontinued Operations $ -- $ -- 730 $ --
----------------- --------------------
Net Income $ 2,044 $ 1,526 $ 5,731 $ 1,814
----------------- --------------------
Earnings per share, basic
From continuing operations $ 0.17 $ 0.13 $ 0.42 $ 0.16
From discontinued operations $ -- $ -- $ 0.06 $ --
----------------- --------------------
As reported $ 0.17 $ 0.13 $ 0.48 $ 0.16
----------------- --------------------
Earnings per share, diluted
From continuing operations $ 0.17 $ 0.13 $ 0.42 $ 0.15
From discontinued operations $ -- $ -- $ 0.06 $ --
----------------- --------------------
As reported $ 0.17 $ 0.13 $ 0.48 $ 0.15
----------------- --------------------
Weighted-average number of shares outstanding 11,901 11,718 11,874 11,633
Dilutive common stock options 99 252 88 188
----------------- --------------------
Weighted-average number of shares outstanding
Plus dilutive common stock options 12,000 11,970 11,962 11,821
- ----------------------------------------------------------------------------------------
7. CAPITAL 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 11,905,000 and 11,817,000 on June 28, 2003 and
September 28, 2002, respectively.
We apply Accounting Principles Board Opinion No. 25: Accounting for Stock Issued
to Employees, and related interpretations, including FASB Interpretation (FIN)
44: Accounting for Certain Transactions Involving Stock Compensation in
accounting for the plans. Accordingly, we did not recognize compensation expense
related to option grants. We adopted SFAS No. 148: Accounting for Stock Based
Compensation, which amended SFAS No. 123 Accounting for Stock Based
Compensation. The following table, per SFAS 148, summarizes results as if we had
recorded compensation expense for option grants during the nine months ended
June 28, 2003 and June 29, 2002:
06/28/2003 06/29/2002
- -----------------------------------------------------------------
Net Income
As reported $ 5,731 $ 1,814
Stock based employee compensation cost
(884) (452)
----------------------
Pro forma $ 4,847 $ 1,362
Basic earnings per share
As reported $ 0.48 $ 0.16
Stock based employee compensation cost (0.07) (0.04)
----------------------
Pro forma $ 0.41 $ 0.12
Diluted earnings per share
As reported $ 0.48 $ 0.15
Stock based employee compensation cost (0.07) (0.04)
----------------------
Pro forma $ 0.41 $ 0.11
- -----------------------------------------------------------------
9
The pro forma effect of stock option grants on results of operations may not be
representative of the pro forma effect on results of operations for future
years.
8. 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 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.
10
THREE MONTHS
(Amounts in Thousands, unaudited)
Segment Data
Net Sales Income from Operations
---------------------------- --------------------------------
Three Months Ended Three Months Ended
---------------------------- --------------------------------
06/28/03 06/29/02 06/28/03 06/29/02
---------------------------- --------------------------------
Connectivity $33,867 $31,705 $1,669 $2,459
Electrical 12,827 13,898 25 1,299
Corporate and other 628 (439)
- -------------------------------------------------------------- --------------------------------
Total $46,694 $45,603 $2,322 $3,319
- -------------------------------------------------------------- --------------------------------
Additions to long-lived assets Depreciation and Amortization
------------------------------ --------------------------------
Three Months Ended Three Months Ended
---------------------------- --------------------------------
06/28/03 06/29/02 06/28/03 06/29/02
---------------------------- --------------------------------
Connectivity $751 $889 $2,138 $1,972
Electrical 338 579 957 666
Corporate and other 11 3 35 50
- -------------------------------------------------------------- --------------------------------
Total $1,100 $1,471 $3,130 $2,688
- -------------------------------------------------------------- --------------------------------
Total Assets
----------------------------
06/28/03 09/28/02
----------------------------
Connectivity $134,572 $119,916
Electrical 25,483 31,651
Corporate and other 19,452 15,084
- --------------------------------------------------------------
Total $179,507 $166,651
- --------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------
Reconciliation of Income from Operations to Net Income 06/28/03 06/29/02
- -------------------------------------------------------------------------------------------------
Income from operations $2,322 $3,319
Less: Interest income (expense), net (991) (759)
Other income (expense), net 1,523 96
Income taxes (810) (1,130)
- -------------------------------------------------------------------------------------------------
Net Income $2,044 $1,526
- -------------------------------------------------------------------------------------------------
Geographic Data
Net Sales Total Assets
--------------------------- ----------------------
Three Months Ended 06/28/03 09/28/02
--------------------------- ------------------------------------------
06/28/03 06/29/02 United States $52,047 $51,553
- -------------------------------------------------------------- Canada 28,155 24,848
United States $26,552 $28,292 Italy 33,155 29,303
All other countries 20,142 17,311 Mexico 20,627 20,035
- -------------------------------------------------------------- France 21,837 19,752
Total $46,694 $45,603 All other countries 23,686 21,160
- -------------------------------------------------------------- ------------------------------------------
Total $179,507 $166,651
------------------------------------------
11
NINE MONTHS
(Amounts in Thousands, unaudited)
Segment Data
Net Sales Income from Operations
---------------------------- --------------------------------
Nine Months Ended Nine Months Ended
---------------------------- --------------------------------
06/28/03 06/29/02 06/28/03 06/29/02
---------------------------- --------------------------------
Connectivity $94,255 $83,785 $3,198 $2,820
Electrical 40,481 43,018 3,505 3,740
Corporate and other 155 (612)
- -------------------------------------------------------------- --------------------------------
Total $134,736 $126,803 $6,858 $5,948
- -------------------------------------------------------------- --------------------------------
Additions to long-lived assets Depreciation and Amortization
------------------------------ --------------------------------
Nine Months Ended Nine Months Ended
---------------------------- --------------------------------
06/28/03 06/29/02 06/28/03 06/29/02
---------------------------- --------------------------------
Connectivity $2,236 $3,252 $6,142 $5,625
Electrical 1,050 2,491 2,151 1,883
Corporate and other 52 23 136 179
- -------------------------------------------------------------- --------------------------------
Total $3,338 $5,766 $8,429 $7,687
- -------------------------------------------------------------- --------------------------------
Total Assets
----------------------------
06/28/03 09/28/02
----------------------------
Connectivity $134,572 $119,916
Electrical 25,483 31,651
Corporate and other 19,452 15,084
- --------------------------------------------------------------
Total $179,507 $166,651
- --------------------------------------------------------------
Nine Months Ended
- -------------------------------------------------------------------------------------------------
Reconciliation of Income from Operations to Net Income 06/28/03 06/29/02
- -------------------------------------------------------------------------------------------------
Income from operations $6,858 $5,948
Less: Interest income (expense), net (2,302) (2,305)
Other income (expense), net 2,610 (253)
Income taxes (2,165) (1,576)
--------------------------
Income from continuing operations 5,001 1,814
--------------------------
Discontinued operations
Income from discontinued AKAPP operations
(including gain on disposal of $725) 733 --
Income tax expense (3) --
--------------------------
Income from discontinued operations 730 --
- -------------------------------------------------------------------------------------------------
Net Income $5,731 $1,814
- -------------------------------------------------------------------------------------------------
Geographic Data
Net Sales Total Assets
--------------------------- ----------------------
Nine Months Ended 06/28/03 09/28/02
--------------------------- ------------------------------------------
06/28/03 06/29/02 United States $52,047 $51,553
- -------------------------------------------------------------- Canada 28,155 24,848
United States $81,241 $80,356 Italy 33,155 29,303
All other countries 53,495 46,447 Mexico 20,627 20,035
- -------------------------------------------------------------- France 21,837 19,752
Total $134,736 $126,803 All other countries 23,686 21,160
- -------------------------------------------------------------- ------------------------------------------
Total $179,507 $166,651
------------------------------------------
12
9. SALE OF AKAPP OPERATIONS
On September 29, 2002 we 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 fiscal 2002 have not been reclassified to discontinued operations
because (as shown below) they are not material.
----------------------------------------
Three Months Ended Nine Months Ended
- -----------------------------------------------------------------------------
06/29/02 06/29/02
- -----------------------------------------------------------------------------
Sales 1,295 3,791
Income Before Taxes (104) (56)
Net Income (71) (39)
- -----------------------------------------------------------------------------
10. 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 of
eliminating about 10% of our salaried positions worldwide. Additionally we
identified 31 positions in our manufacturing plant in Northbrook, Illinois,
which were eliminated with the continued migration of product to our new
manufacturing plant in Juarez, Mexico. This workforce reduction represented an
acceleration of initiatives that we started over the previous six months to
improve our efficiencies and reduce expenses. We anticipated that the salaried
personnel reduction would produce annual savings of about $3 million. The
restructuring resulted in the layoffs of 93 people, of which 70 people were
severed as of March 30, 2002. The restructuring was completed during fiscal 2002
and there is currently no reserve left for any of these restructuring charges.
The following table details the activity in the Restructuring Accrual Accounts
at June 29, 2002:
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
================
In January 2003 we adopted FASB Statement No. 146 ACCOUNTING FOR COSTS
ASSOCIATED WITH OR DISPOSAL ACTIVITIES, which generally requires that a
liability for costs associated with an exit or disposal activity be expenses as
incurred. Exit costs primarily consist of future minimum lease payments on
vacated facilities, facility closure costs and facility consolidation costs.
Employee separation costs consist primarily of severance costs. At each
reporting date, we will evaluate our accruals for exit costs and employee
separation to ensure that the accruals are still appropriate.
13
In the quarter ending June 28, 2003 we announced the closing of our Aero-Motive
facility in Kalamazoo, Michigan. In addition to selling several small product
lines that do not align strategically with our current operations we will
consolidate and integrate the remaining manufacturing operations into our
facility in Juarez, Mexico, which will improve our overall operating
efficiencies. The office operations will be integrated with our Northbrook,
Illinois facility consolidating administrative functions. The closing of this
facility will terminate the employment of 111 total employees, which includes
sixty-four plant employees and forty-seven office employees. As of the quarter
ended June 28, 2003 three employees have left the company. The sale and
integration process will take several quarters to complete and it is estimated
that the Kalamazoo, Michigan facility will remain open until early in calendar
year 2004.
For the third quarter 2003 we recorded restructuring and other related charges
of $1,155, which related to the closing of our Aero-Motive facility. This
restructuring charge is composed of the following:
------------------------------------------------------------------
Costs expensed quarter Cumulative costs Total anticipated
ended 6/28/03 through 6/28/03 costs
- -------------------------------------------------------------------------------------------------------------------
One Time Termination Benefit 600 600 1,517
Other Associated Costs 555 555 3,005
- -------------------------------------------------------------------------------------------------------------------
Total Restructuring and Other Charges 1,155 1,155 4,522
- -------------------------------------------------------------------------------------------------------------------
The costs included as a one-time termination benefit are the estimates of
severance benefits that will be incurred as the Kalamazoo facility is closed. In
accordance with SFAS No. 144 we have accelerated the depreciation on those
assets that are expected to be excess when the facility is closed. We have
included $0.4 million of accelerated depreciation in other associated costs for
the quarter ending June 28, 2003. Legal fees, divesture fees and travel expense
represent the balance of other associated costs. There are no anticipated
contract termination costs related to this project.
At June 28, 2003 we have recorded an accrual of $0.6 million, which represents
the severance benefits included in the one time termination benefit.
11. INCOME TAX EXPENSE
Our effective tax rate was 30.2% and 46.5% for the first nine months of 2003 and
2002, respectively. The decrease in our effective tax rate for the first nine
months of 2003 was due mainly to the effects of utilizing $0.3 million of
foreign tax credits and the $0.5 million in favorable tax treatment received on
capital gains in Canada. The increase in the effective tax rate for the first
six months of 2002 was due mainly to the effects of not benefiting net operating
losses of certain foreign entities for which realizability is considered
uncertain.
12 BENEFIT PLANS
We provide an optional retiree medical program to a majority of our U.S.
salaried and non-union retirees and all participants are required to contribute
to the cost. These postretirement benefits are unfunded and at September 28,
2002 we had an accumulated post retirement benefit obligation of $4.9 million.
Beginning in April 2003, the plan was modified to require participants to fund
the total cost of the medical program. At September 28, 2002 we had accrued
postretirement benefit cost, which is included in our consolidated balance sheet
of $2.2 million. Starting in January of 2004 we will have no liability for any
of these postretirement benefit costs and the reduction of this $2.2 million
liability is being amortized over the period from April 1, 2003 to January 1,
2004. During the quarter ended June 28, 2003 we lowered our benefits liability
account $0.7 million and we will continue to reduce this liability account in
each of the next two quarters by $0.7 million.
13. 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
14
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.
We have 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. We have remediated the soils in this area but we
believe that it is a source of contamination of groundwater, both on-site and
off-site. Our 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.
We have a reserve for the $1.4 million of investigation and remediation expenses
we have estimated to be incurred over the next 15 years to address the
environmental issue at our site in Michigan. We based our estimate on the future
costs expected to be incurred to investigate, monitor and remediate the site.
Our 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 the state's Department of Environmental Quality feedback. Funding this
activity will come from operating cash flows and only changes to the reserve
estimate will affect the results of operations.
We indemnify certain customers with regard to product liability. We have
insurance policies to cover this exposure, which includes a minimal deductible
to be paid by us.
15
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 five industry-leading brands, SST(TM), Brad Harrison(R), mPm(TM), RJ
Lnxx(R) and applicom(R) 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 nine countries outside the United States, and fluctuations
in foreign currency exchange rates can impact our results of operations and
financial condition.
RESULTS OF OPERATIONS
- ---------------------
Third quarter fiscal 2003 results compared with third quarter fiscal
- ---------------------------------------------------------------------
2002 results
- ------------
SALES
Sales in the third quarter of fiscal 2003 were $46.7 million, an increase of
2.4% compared to third quarter 2002 sales revenue of $45.6 million. The increase
was mainly due to higher sales in our Connectivity Segment primarily due to the
continued strengthening of foreign exchange rates, which accounted for $2.9
million of the increase compared to last year, partially offset by the loss of
$1.3 million of AKAPP sales, a subsidiary that was sold in the first quarter of
2003. New products introduced during the last three years accounted for $7.1
million of revenue in the third quarter of fiscal year 2003 compared to $10.7
million in revenue in the third quarter last year. Sales in our Connectivity
Segment increased 6.8% while sales in our Electrical Segment declined by 7.7%.
The decline in Electrical sales was primarily due to the elimination of revenue
from AKAPP operations.
SALES BY REGION
In the United States, sales were $26.6 million in the third quarter of fiscal
2003 and $28.3 million last year, a 6.2% decrease. The United States
manufacturing sector continues to be a difficult environment to operate in as
various economic indicators showed a continued contraction in this sector during
the quarter. We recorded 43% and 38% of our revenues in foreign currencies
during the third quarters of fiscal 2003 and 2002, respectively. Our
international revenue was up 16.3% in the third quarter of fiscal 2003 when
compared to last year. This increase was mainly due to the strong results from
our remaining business in Europe and the favorable impact of foreign exchange
rate changes.
BACKLOG
The backlog of unfilled orders stood at $15.3 million at the end of this quarter
as compared to $16.2 million a year ago, which translates to 21 and 22 average
days of sales for the third quarters of 2003 and 2002, respectively. This
decrease in backlog was primarily due to decrease in orders for the Electrical
Segment.
GROSS PROFIT
Gross profit as a percent of sales was 35.6% in the third quarter of fiscal 2003
and 38.2% last year. This decline was primarily due to the mix shift in sales by
location (margins in Europe are lower due to the competitive environment), lower
plant utilization in the North America plants and lower margins in the
telecommunications market due to the overall market conditions and specific cost
reduction programs initiated by one of our major customers.
16
OPERATING EXPENSES
Operating expenses were $14.3 million in the third quarter 2003 compared to
$14.1 million in the third quarter 2002. Including expenses for Research and
Development these expenses were 30.6% of sales in 2003 compared to last year's
30.9%. Operating expenses in the third quarter of 2003 included a restructuring
charge of $1.2 million related to the consolidation of our Aero-Motive
subsidiary operations into our plant in Juarez, Mexico. Before the restructuring
and other related charges of $1.2 million, expenses decreased $1.0 million when
compared to the third quarter of 2002. This decrease was due mainly to the
reduction in our liability for retiree medical benefits, which resulted in a
$0.7 million credit to general and administrative expense and the impact of not
having $0.4 million in operating expense from the AKAPP operations. These
expense reductions were partially offset by increases from foreign exchange
rates of $0.8 million.
SEGMENT OPERATING INCOME
Income from operations in the third quarter of 2003 was $1.7 million in the
Connectivity Segment compared to $2.5 million in 2002. This decline was due to
the sales mix shift, lower plant utilization and the weak telecommunications
market. The Electrical Segment recorded no income from operations in the third
quarter of 2003 compared to $1.3 million in 2002. This decrease was due mainly
to the $1.2 million restructuring charges and the income lost from the sale of
our AKAPP operations.
MISCELLANEOUS INCOME
Other income in the third quarter of 2003 was $1.5 million and consisted mainly
of a $2.4 million gain realized from exchange rate changes on a U.S. dollar loan
that a Canadian subsidiary used to acquire SST in early 1998. Partially
offsetting this gain was $0.3 million for a penalty associated with a value
added tax ruling in Mexico and a $0.4 million loss due to foreign exchange in
our Canadian operations.
NET INCOME
Net income in the third quarter of 2003 was $2.0 million compared to $1.5
million in 2002. The effective tax rates were 28.4% and 42.5% in the third
quarters of 2003 and 2002. The high effective rate in 2002 was primarily the
result of not benefiting certain net operating losses of foreign operations for
which realizability is considered uncertain. The relatively low effective tax
rate for the third quarter of 2003 was due mainly to the favorable tax treatment
of the capital gain in Canada. 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.
Nine months fiscal 2003 results compared with nine months fiscal 2002 results
- -----------------------------------------------------------------------------
SALES
Sales for the first nine months of fiscal 2003 were $134.7 million compared to
$126.8 million for 2002, a 6.3% increase. This increase is due mainly to the
increased sales levels at our Connectivity Segment. Favorable foreign exchange
rates accounted for $6.8 million or 86.1% of the increase when compared to last
year. The increase from exchange rate changes was partially offset by the
elimination of AKAPP sales, which were $4.1 million for the first nine months of
2002. Year-over-year volume was also negatively impacted by slightly lower
selling prices, which resulted from competitive pressure. New products
introduced during the last three years accounted for $21.3 million of revenue
for the first nine months of fiscal 2003 compared to $28.0 million for the first
nine months of 2002. Sales in our Connectivity Segment increased 12.5% due
mainly to favorable exchange rate changes and improved performance in our
European operations. Sales in the Electrical Segment declined 5.9%, primarily
due to the sale of AKAPP.
SALES BY REGION
In the United States, sales were $81.2 million for the first mine months of
fiscal 2003 and $80.4 million last year, a 1.1% increase. We recorded 40% and
37% of our revenues in foreign currencies for the first nine months of 2003 and
2002, respectively. For the nine months of 2003 our international revenue
increased 15.2% due mainly to the strong performance in Europe and the effect of
foreign currency rate changes.
17
GROSS PROFIT
Gross profit as a percent of sales was 36.6% for the first nine months of 2003
and 37.5% for the first nine months of 2002. The decrease was due partially to
changes in our LIFO reserve requirement, which increased our gross profit by
$0.4 million for the first nine months of 2003 compared to an increase in gross
profit of $0.9 million in the first nine months of 2002. Also contributing to
the decrease was the mix shift in sales by location. lower plant utilization in
the North America plants and lower margins in the telecommunications market due
to the overall market conditions.
OPERATING EXPENSE
Operating expenses were $42.4 million for the first nine months of 2003 compared
to $41.6 million for the same period in 2002. Operating expenses, including
expenses for Research and Development, were 31.5% of sales for the first nine
months of 2003 compared to last year's 32.8%. This decrease as a percentage of
sales is due mainly to increased sales revenue in the first nine months of 2003.
Before any restructuring and related charges operating expenses were up $0.7
when compared to the same period in 2002. The change in foreign currency
contributed to an increase of $1.9 million when compared to the first nine
months of 2002. Operating expenses in 2003 included the $1.2 million
restructuring charge for the consolidation of operations from our Aero-Motive
subsidiary to Juarez, Mexico. Operating expenses in 2002 included a $1.0 million
restructuring charge for the elimination of approximately 10% of our salaried
positions worldwide and AKAPP operating expenses of $1.3 million.
SEGMENT INCOME
Income from operations for the first nine months of 2003 was $3.2 million for
the Connectivity Segment compared to $2.8 million in 2002 and $3.5 million for
the Electrical Segment compared to $3.7 million in 2002. The increase in our
Connectivity Segment was due mainly to higher volumes and favorable exchange
rates, which was partially offset by a shift in sales mix and the weak
telecommunications market. The decrease in our Electrical Segment was due mainly
to the $1.2 million restructuring charge for the Aero-Motive actions.
MISCELLANEOUS (INCOME) / EXPENSE
Other income for the first nine months of 2003 was $2.6 million and consisted
mainly of a $3.1 million gain realized from exchange rate changes on a U.S.
dollar loan that a Canadian subsidiary used to acquire the assets of SST in
early 1998. Partially offsetting this gain was a $0.3 million penalty for a
value added tax ruling in Mexico and a $0.6 million loss from foreign exchange
in our Canadian operations.
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 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 for the first nine months of 2003 was $5.7 million compared to $1.8
million in 2002. The effective tax rates were 30.2% and 46.5% for the first nine
months of 2003 and 2002. The low effective rate in 2003 was due mainly to the
impact of utilizing foreign tax credits in the first quarter of 2003 and the
favorable tax treatment of capital gains in Canada. The high effective rate in
2002 was primarily the result of not benefiting from certain net operating
losses of 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. 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. Both Juarez plants are manufacturing resources for all our
North America subsidiaries. This project was completed in the second half of
fiscal 2002 and there was no spending in the first nine months of 2003 compared
to $1.7 million spent in the first nine months 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 through the
current fiscal year.
18
At June 28, 2003 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 expired on March 29, 2003, when the maximum debt to EBITDA
ratio reverted back to 2.5, and the minimum interest coverage ratio has reverted
back to 3.0. We are in compliance with all provisions of our funding
arrangements. We believe, that we will continue to be in compliance with all
provisions of our funding arrangements.
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, currency fluctuations,
and competition.
International-based revenues and substantial international assets result in our
exposure to currency exchange rate fluctuations. We continue to evaluate the
economic and operational impact of all foreign currencies, including its impact
on competition, pricing, and foreign currency exchange risks. There is no
guarantee, however, that all problems have been foreseen and corrected, or that
no material disruption will occur in our businesses.
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
19
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 $0.8 million in accumulated other
comprehensive loss to recognize deferred net income on derivatives designated as
cash flow hedges, and a net increase in other liabilities of approximately $0.3
million during the quarter just ended. We base the fair value for our
cross-currency swap on the cost estimate to terminate the agreement.
$40.8 million of 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 - INTERNAL 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.
20
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.
We have 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. We have remediated the soils in this area but we
believe that it is a source of contamination of groundwater, both on-site and
off-site. Our 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.
We have a reserve for the $1.4 million of investigation and remediation expenses
we have estimated to be incurred over the next 15 years to address the
environmental issue at our site in Michigan. We based our estimate on the future
costs expected to be incurred to investigate, monitor and remediate the site.
Our 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 the state's Department of Environmental Quality feedback. Funding this
activity will come from operating cash flows and only changes to the reserve
estimate will affect the results of operations.
21
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 signed by Philippe Lemaitre - President and
C.E.O.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 signed by Robert H. Fisher - Vice President,
Finance and Chief Financial Officer.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 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 filed an 8-K on April 9, 2003 relating
to the future of our Aero-Motive subsidiary, a wholly owned subsidiary
of the company.
During the quarter just ended we filed an 8-K on April 23, 2003
releasing our second quarter 2003 earnings.
22
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 11, 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)
23