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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 03/27/2004
--------------------
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 April 26, 2004 was 12,109,248.
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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 21
Item 4 - Internal Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 4 - Submission of matters to a vote of security holders 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
As of March 27, 2004 and September 27, 2003
(Amounts in Thousands)
Unaudited
ASSETS 03/27/2004 9/27/2003
---------------------
CURRENT ASSETS
Cash and short-term investments $ 25,071 $ 22,547
Accounts receivable, net 36,150 31,017
Inventories 15,501 13,020
Prepaid expenses 4,360 4,816
Refundable income taxes 2,476 2,479
Deferred income taxes 3,174 3,390
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 86,732 77,269
Property, plant and equipment, net 59,452 60,391
Other Intangible assets, net 670 706
Goodwill, net 34,004 32,290
Deferred income taxes 2,622 2,584
Other Assets 542 616
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 184,022 $ 173,856
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Accounts payable $ 11,465 $ 8,343
Accrued expenses 15,141 13,586
Income taxes payable 1,109 1,393
Current portion of long-term debt 5,700 5,700
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 33,415 29,022
Long-term debt 30,900 30,900
Deferred income taxes 3,238 3,049
Other liabilities 2,788 2,435
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 70,341 65,406
STOCKHOLDERS' INVESTMENT:
Common stock at par (shares issued: 12,110 at 3/27/04
and 12,011 at 9/27/03) 12,110 12,011
Additional paid-in capital 19,784 18,578
Deferred stock compensation (702) (773)
Accumulated other comprehensive loss 6,087 2,832
Retained earnings 76,402 75,802
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' INVESTMENT 113,681 108,450
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 184,022 $ 173,856
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months ended March 27, 2004 and March 29, 2003
(Amounts in Thousands, except per share data, unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
3/27/2004 3/29/2003 3/27/2004 3/29/2003
-------------------- --------------------
NET SALES $ 50,841 $ 45,810 $ 95,985 $ 88,042
Cost of Sales 31,513 28,900 60,136 55,404
-------------------- --------------------
GROSS PROFIT 19,328 16,910 35,849 32,638
OPERATING EXPENSES 16,316 14,334 31,317 28,102
RESTRUCTURING AND OTHER RELATED CHARGES 531 -- 1,092 --
-------------------- --------------------
TOTAL OPERATING EXPENSES 16,847 14,334 32,409 28,102
INCOME FROM OPERATIONS 2,481 2,576 3,440 4,536
OTHER EXPENSES
Interest Expense 616 701 1,249 1,401
Interest Income (27) (51) (88) (90)
Other (Income) / Expenses, Net 379 (579) (1,551) (1,087)
-------------------- --------------------
INCOME BEFORE TAXES 1,513 2,505 3,830 4,312
PROVISION FOR INCOME TAXES 558 974 816 1,355
-------------------- --------------------
INCOME FROM CONTINUING OPERATIONS $ 955 $ 1,531 $ 3,014 $ 2,957
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 $ 955 $ 1,531 $ 3,014 $ 3,687
EARNINGS PER SHARE, BASIC
From Continuing Operations $ 0.08 $ 0.13 $ 0.25 $ 0.25
From Discontinued Operations $ -- $ -- $ -- $ 0.06
As Reported $ 0.08 $ 0.13 $ 0.25 $ 0.31
EARNINGS PER SHARE, DILUTED
From Continuing Operations $ 0.08 $ 0.13 $ 0.25 $ 0.25
From Discontinued Operations $ -- $ -- $ -- $ 0.06
As Reported $ 0.08 $ 0.13 $ 0.25 $ 0.31
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic 11,982 11,897 11,949 11,862
Diluted 12,239 12,020 12,185 11,947
DIVIDENDS PER SHARE $ 0.10 $ 0.09 $ 0.20 $ 0.18
The accompanying notes are an integral part of these statements.
4
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended March, 27 2004 and March 29, 2003
(Amounts in Thousands, unaudited)
-----------------------------
Six Months ended
-----------------------------
03/27/2004 03/29/2003
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME FOR THE PERIOD $ 3,014 $ 3,687
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 6,251 5,299
Income from discontinued operations -- (730)
Deferred tax expense 507 194
(Increase) Decrease in:
Accounts receivable (4,116) (688)
Inventories (2,002) 294
Prepaid expenses 535 372
Other assets (42) 283
(Decrease) Increase in:
Accounts payable 2,818 653
Accrued expenses 1,315 680
Income taxes payable (307) 188
Other liabilities 716 (73)
- -----------------------------------------------------------------------------------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 8,689 10,159
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant & equipment (3,856) (2,238)
Dispositions of property, plant & equipment -- 8
Retirements or sale of property, plant & equipment 46 --
Cash from sale of AKAPP operations (less cash sold) -- 4,187
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (3,810) 1,957
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,376 242
Dividend payments (2,414) (2,134)
- -----------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (1,038) (1,892)
- -----------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES (1,317) (354)
- -----------------------------------------------------------------------------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 2,524 9,870
Cash and short-term investments at beginning of period 22,547 13,152
Cash and short-term investments at end of period $ 25,071 $ 23,022
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DATA
Cash paid during the period for:
Interest $ -- $ 1,367
Income taxes $ 781 $ 871
The accompanying notes are an integral part of these statements.
5
WOODHEAD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Six Months ended March 27, 2004 and March 29, 2003
(Amounts in Thousands, unaudited)
---------------------------- ----------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
3/27/2004 3/29/2003 3/27/2004 3/29/2003
- -----------------------------------------------------------------------------------------------------------
Net income $ 955 $ 1,531 $ 3,014 $ 3,687
Other comprehensive income:
Accumulated foreign currency translation
Adjustment (841) 2,295 3,257 5,515
Unrealized loss on cash flow hedging
Instrument (17) (414) (2) (1,570)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income, net $ 97 $ 3,412 $ 6,269 $ 7,632
- -----------------------------------------------------------------------------------------------------------
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 our wholly
owned subsidiaries, including those operating outside the United States. 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. 2003 Form 10-K.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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 were 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 March 27, 2004 our expanded disclosure regarding restructuring
and other related charges is included in Footnote No. 10.
In January 2003 the FASB issued FASB Interpretation No. 46 ("FIN 46")
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, which requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 was effective immediately for all new
variable interest entities created or acquired after January 31, 2003. We do not
have any variable interest entities that require consolidation under FIN 46.
7
3. INVENTORIES
Inventories at the balance sheet dates were comprised of the following:
3/27/04 9/27/03
- -------------------------------------------------------------------------------
Inventories valued using FIFO $ 9,730 $ 8,463
- -------------------------------------------------------------------------------
Inventories valued using LIFO:
At FIFO cost 8,508 7,636
Less: Reserve to reduce to LIFO (2,737) (3,079)
- -------------------------------------------------------------------------------
LIFO Inventories 5,771 4,557
- -------------------------------------------------------------------------------
Total Inventories $ 15,501 $ 13,020
- -------------------------------------------------------------------------------
Inventory composition using FIFO
Raw materials 10,171 8,978
Work-in-process and finished goods 8,067 7,121
- -------------------------------------------------------------------------------
Total Inventories at FIFO $ 18,238 $ 16,099
- -------------------------------------------------------------------------------
There was $0.2 million LIFO impact on net income for the six months ended March
27, 2004 compared to $0.1 million for the six months ended March 29, 2003. Had
we used the FIFO method for all inventories, net income would have been $0.2
million lower for the six months ended March 27, 2004 with the entire income
effect occurring in the second quarter of 2004.
4. PROPERTY, PLANT AND EQUIPMENT
03/27/04 9/27/03
- -----------------------------------------------------------------------------
Property, plant and equipment, at cost $ 153,453 $ 147,451
Less: Accumulated depreciation and amortization (94,001) (87,060)
- -----------------------------------------------------------------------------
Property, plant and equipment, net $ 59,452 $ 60,391
- -----------------------------------------------------------------------------
During the first six months of fiscal 2004 we purchased $3.9 million of
property, plant and equipment compared to $2.2 million in the first six months
of fiscal 2003. For the quarter ended March 27, 2004 we purchased $2.0 million
of property plant and equipment compared to $1.3 million for the quarter ended
March 29, 2003.
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
March 27, 2004 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. At March 27, 2004 and September 27, 2003 we had no short-term borrowings.
The credit agreement was set to expire on April 30, 2004. On April 28, 2004 we
entered into a new three-year revolving credit agreement with our existing bank
that will continue to 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 Six Months Ended
------------------------- --------------------------
03/27/04 03/29/03 03/27/04 03/29/03
- ----------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 955 $ 1,531 $ 3,014 $ 2,957
Income from Discontinued Operations $ -- $ -- -- $ 730
------------------------- --------------------------
Net Income $ 955 $ 1,531 $ 3,014 $ 3,687
========================= ==========================
Earnings per share, basic
From continuing operations $ 0.08 $ 0.13 $ 0.25 $ 0.25
From discontinued operations $ -- $ -- $ -- $ 0.06
------------------------- --------------------------
As reported $ 0.08 $ 0.13 $ 0.25 $ 0.31
------------------------- --------------------------
Earnings per share, diluted
From continuing operations $ 0.08 $ 0.13 $ 0.25 $ 0.25
From discontinued operations $ -- $ -- $ -- $ 0.06
------------------------- --------------------------
As reported $ 0.08 $ 0.13 $ 0.25 $ 0.31
------------------------- --------------------------
Weighted-average number of shares outstanding 11,982 11,897 11,949 11,862
Dilutive common stock options 257 123 236 85
------------------------- --------------------------
Weighted-average number of shares outstanding
Plus dilutive common stock options 12,239 12,020 12,185 11,947
- ----------------------------------------------------------------------------------------------------------
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 12,110,000 and 12,011,000 on March 27, 2004 and
September 27, 2003, 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 do 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 six months ended
March 27, 2004 and March 29, 2003:
03/27/2004 03/29/2003
- ------------------------------------------------------------------------------
Net Income
As reported $ 3,014 $ 3,687
Stock based employee compensation cost (769) (492)
-------------------------------
Pro forma $ 2,245 $ 3,195
Basic earnings per share
As reported $ 0.25 $ 0.31
Stock based employee compensation cost (0.06) (0.04)
-------------------------------
Pro forma $ 0.19 $ 0.27
Diluted earnings per share
As reported $ 0.25 $ 0.31
Stock based employee compensation cost (0.06) (0.04)
-------------------------------
Pro forma $ 0.19 $ 0.27
- ------------------------------------------------------------------------------
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 reporting 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 manner similar to the way 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) are
primarily derived from sales of system components to devices in open networks
for automated manufacturing and distribution applications. Revenues in our
ELECTRICAL SAFETY & SPECIALTY PRODUCTS Segment (ELECTRICAL Segment) are
primarily derived from sales of specialized products to support enhanced safety
and productivity on the factory floor.
Sales between segments were not significant. Sales in geographic areas were
determined by customer location. No single customer accounted for 10 percent or
more of our total revenue. Sales in foreign countries did not meet minimum
disclosure requirements. We did not allocate certain corporate expenses,
primarily those related to the overall management of the corporation, to the
segments or geographic areas. Both segments share certain production facilities
and equipment (PP&E). These assets, and related additions and depreciation, were
allocated based on unit production. Geographic data on assets is based on the
physical location of those assets. Corporate assets were primarily investments
in subsidiaries and cash.
10
THREE MONTHS
(Amounts in Thousands, unaudited)
Segment data
Net Sales Income from Operations
----------------------------------------- ----------------------------------------------
Three Months Ended Three Months Ended
----------------------------------------- ----------------------------------------------
03/27/04 03/29/03 03/27/04 03/29/03
----------------------------------------- ----------------------------------------------
Connectivity $36,444 $31,989 $752 $1,130
Electrical 14,397 13,821 1,780 1,627
Corporate and other (51) (181)
- ------------------------------------------------------------------- ----------------------------------------------
Total $50,841 $45,810 $2,481 $2,576
- ------------------------------------------------------------------- ----------------------------------------------
Additions to long-lived assets Depreciation and Amortization
----------------------------------------- ----------------------------------------------
Three Months Ended Three Months Ended
----------------------------------------- ----------------------------------------------
03/27/04 03/29/03 03/27/04 03/29/03
----------------------------------------- ----------------------------------------------
Connectivity $1,152 $850 $2,355 $2,024
Electrical 493 442 784 595
Corporate and other 372 16 35 50
- ------------------------------------------------------------------- ----------------------------------------------
Total $2,017 $1,308 $3,174 $2,669
- ------------------------------------------------------------------- ----------------------------------------------
Total Assets
-----------------------------------------
03/27/04 09/27/03
-----------------------------------------
Connectivity $137,439 $125,167
Electrical 26,541 24,590
Corporate and other 20,042 24,099
- -------------------------------------------------------------------
Total $184,022 $173,856
- -------------------------------------------------------------------
Three Months Ended
- --------------------------------------------------------------------------------------------------------------------
Reconciliation of Income from Operations to Net Income 03/27/04 03/29/03
- --------------------------------------------------------------------------------------------------------------------
Income from operations $2,481 $2,576
Less: Interest income (expense), net (589) (650)
Other income (expense), net (379) 579
Income taxes (558) (974)
----------------------------------------------
Net Income 955 1,531
----------------------------------------------
Geographic Data
Net Sales Total Assets
----------------------------------------- ------------------------------------------
Three Months Ended 03/27/04 09/27/03
----------------------------------------- --------------------------------------------------------------
03/27/04 03/29/03 United States $53,632 $56,693
- ------------------------------------------------------------------- Canada 28,243 24,182
United States $28,187 $28,168 Italy 34,937 32,739
All other countries 22,654 17,642 France 23,946 20,633
- ------------------------------------------------------------------- Mexico 20,376 19,275
Total $50,841 $45,810 All other countries 22,888 20,334
- ------------------------------------------------------------------- --------------------------------------------------------------
Total $184,022 $173,856
--------------------------------------------------------------
11
SIX MONTHS
(Amounts in Thousands, unaudited)
Segment data
Net Sales Income from Operations
----------------------------------------- ----------------------------------------------
Six Months Ended Six Months Ended
----------------------------------------- ----------------------------------------------
03/27/04 03/29/03 03/27/04 03/29/03
----------------------------------------- ----------------------------------------------
Connectivity $69,553 $60,388 $1,015 $1,529
Electrical 26,432 27,654 2,689 3,480
Corporate and other (264) (473)
- ------------------------------------------------------------------- ----------------------------------------------
Total $95,985 $88,042 $3,440 $4,536
- ------------------------------------------------------------------- ----------------------------------------------
Additions to long-lived assets Depreciation and Amortization
----------------------------------------- ----------------------------------------------
Six Months Ended Six Months Ended
----------------------------------------- ----------------------------------------------
03/27/04 03/29/03 03/27/04 03/29/03
----------------------------------------- ----------------------------------------------
Connectivity $2,037 $1,485 $4,634 $4,004
Electrical 1,107 712 1,545 1,194
Corporate and other 712 41 72 101
- ------------------------------------------------------------------- ----------------------------------------------
Total $3,856 $2,238 $6,251 $5,299
- ------------------------------------------------------------------- ----------------------------------------------
Total Assets
-----------------------------------------
03/27/04 09/27/03
-----------------------------------------
Connectivity $137,439 $125,167
Electrical 26,541 24,590
Corporate and other 20,042 24,099
- -------------------------------------------------------------------
Total $184,022 $173,856
- -------------------------------------------------------------------
Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
Reconciliation of Income from Operations to Net Income 03/27/04 03/29/03
- -------------------------------------------------------------------------------------------------------------------
Income from operations $3,440 $4,536
Less: Interest income (expense), net (1,161) (1,311)
Other income (expense), net 1,551 1,087
Income taxes (816) (1,355)
----------------------------------------------
Income from continuing operations 3,014 2,957
----------------------------------------------
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 $3,014 $3,687
- -------------------------------------------------------------------------------------------------------------------
Geographic Data
Net Sales Total Assets
----------------------------------------- -------------------------------------------
Six Months Ended 03/27/04 09/27/03
----------------------------------------- ---------------------------------------------------------------
03/27/04 03/29/03 United States $53,632 $56,693
- ------------------------------------------------------------------- Canada 28,243 24,182
United States $53,774 $54,689 Italy 34,937 32,739
All other countries 42,211 33,353 France 23,946 20,633
- ------------------------------------------------------------------- Mexico 20,376 19,275
Total $95,985 $88,042 All other countries 22,888 20,334
- ------------------------------------------------------------------- --------------------------------------------------------------
Total $184,022 $173,856
--------------------------------------------------------------
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.
10. RESTRUCTURING CHARGES
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 anticipated restructuring and other charges
and accruals for employee separation costs to ensure that the amounts are still
appropriate.
In the quarter ending June 28, 2003 we announced the closing of our Aero-Motive
facility in Kalamazoo, Michigan. During the first quarter of fiscal 2004 we
completed the sale of the Aero-Motive government hose reel product line and
recorded a gain of $1.2 million. In addition to having sold two small product
lines (including the hose reel product line) that did 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. 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 March 27,
2004 thirty-nine employees have left the company and it is estimated that the
Kalamazoo, Michigan facility will remain open until the third quarter of fiscal
year 2004.
For the six months ending March 27, 2004 we recorded restructuring and other
related charges of $1.1 million, which related to the closing of our Aero-Motive
facility. This restructuring charge is composed of the following:
----------------------------------------------------------------------
Costs expensed six Cumulative costs Total anticipated
months ended 03/27/04 through 03/27/04 costs
- ----------------------------------------------------------------------------------------------------------------------
One Time Termination Benefit 271 1,205 1,390
Other Associated Costs 821 1,952 2,246
- ----------------------------------------------------------------------------------------------------------------------
Total Restructuring and Other Charges 1,092 3,157 3,636
- ----------------------------------------------------------------------------------------------------------------------
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 $0.6 million of accelerated depreciation in other associated costs for
the six months ending March 27, 2004. Legal fees, system conversion costs,
incidental salaries and travel expense represent the balance of other associated
costs. There are no anticipated contract termination costs related to this
project.
13
In addition, related to the Aero-Motive restructuring, we anticipate pension
settlement charges over the balance of our fiscal year estimated to be 0.8
triggered by reduced employment levels that require us to recognize past gains
and losses in our pension accounts.
The following table details the activity in the Aero-Motive restructuring
accrual accounts for the six months ending March 27, 2004:
Restructuring
Reserve
- -----------------------------------------------------------
Balance at September 27, 2003 $859
- -----------------------------------------------------------
Charged to expense six months 2004 1,092
Less: depreciation non cash expense 560
Cash paid in fiscal 2004 469
- -----------------------------------------------------------
Remaining balance March 27, 2004 $922
- -----------------------------------------------------------
11. INCOME TAX EXPENSE
Our effective rate for the quarter ending March 27, 2004 was 36.9% compared to
38.9% for the quarter ending March 29, 2003. Our effective tax rate for
continuing operations was 21.3% and 31.4% for the first six months of 2004 and
2003, respectively. The decrease in our effective tax rate for the first six
months of 2004 was due mainly to the utilization in the first quarter of 2004 of
capital loss carryforwards (which previously had a valuation allowance reported
against them) to offset $0.4 million in tax on capital gains from the
Aero-Motive product line sale, the tax treatment on the exchange gain on the
U.S. dollar loan held by our Canadian subsidiary and the change in the effective
Canadian tax rate (due to a change in tax legislation) on deferred tax assets,
which resulted in a tax benefit of $0.1 million.
12. BENEFIT PLANS
Beginning in April 2003, our post retirement benefit plan was modified to
require participants to fund the total cost of the retiree medical program. At
September 28, 2002 we had accrued postretirement benefit cost, which was
included in our consolidated balance sheet in the amount of $2.2 million. At
December 27, 2003 we had no liability for any of these post retirement benefit
costs and the reduction of this $2.2 million liability was amortized over the
period from April 1, 2003 to December 27, 2003. During the quarter ended
December 27, 2003 we lowered our benefits liability account $0.8 million, which
represents the last of the amortization of the $2.2 million liability.
The following table provides the components of net periodic benefit cost for our
non-union plans for the three and six months ended March 27, 2004 and March 29,
2003:
Pension Benefits
--------------------------------------------------------------
Three Months Ended Six Months Ended
--------------------------------------------------------------
03/27/04 03/29/03 03/27/04 03/29/03
----------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COSTS:
Service Cost $151 $124 $302 $248
Interest Cost 149 127 298 254
Recognized actuarial loss 54 13 108 25
Expected return on plan assets (154) (122) (307) (243)
Amortization of prior service costs 7 7 14 14
----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $207 $149 $415 $298
----------------------------------------------------------------------------------------------------------------------
It has been our policy to fund our pension costs by making annual contributions
based upon minimum funding provisions of the EMPLOYEE RETIREMENT SECURITY ACT OF
1974. During 2003 we contributed an additional $2.0 million to increase the
funded status of our plan. We did not make any contributions to our pension
plans in the three or six months ended March 27, 2004. Related to the
Aero-Motive restructuring we anticipate a pension settlement charge estimated to
be approximately $0.8 million over the final two quarters of fiscal 2004
triggered by reduced employment levels that require us to recognize past gains
and losses to our pension plan accounts.
14
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 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 $1.2 million of investigation and remediation expenses
we have estimated to be incurred over the next 14 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
- --------
Woodhead Industries develops, manufactures and markets network and electrical
infrastructure products engineered for performance in demanding, harsh, or
hazardous environments. We are known in the global industrial market by our
recognized brands which include Brad Harrison(R), SST(TM), Daniel Woodhead(R),
mPm(R), applicom(R), Aero-Motive(R) and RJ-Lnxx(R). Our expertise extends from
mechanical, electrical and electronics products to communication software
products and technologies.
Woodhead operates from twenty-one locations in ten countries spanning North
America, Europe and Asia/Pacific.
RESULTS OF OPERATIONS
- ---------------------
Second quarter fiscal 2004 results compared with Second quarter fiscal 2003
- ---------------------------------------------------------------------------
results
- -------
SALES
Sales in the quarter ended March 27, 2004 were $50.8 million, an increase of
11.0% compared to sales of $45.8 million for the quarter ended March 29, 2003.
This increase was due mainly to the increased sales volume at our European and
Asian subsidiaries and the positive effects resulting from changes in exchange
rates. These were partially offset by the lost revenue from the divesture of the
two Aero-Motive product lines. Recent economic reports indicate the continued
expansion in the manufacturing sector and we are continuing to see our
customer's willingness to initiate new projects, which should increase sales
levels. For the second quarter 2004 Connectivity sales were $36.4 million, a
13.9% increase over the $32.0 million in sales reported for the second quarter
2003. Favorable foreign exchange rates accounted for $2.7 million of this
increase but we also experienced solid growth in our Europe and Asia businesses
due mainly to continued economic recovery and increased market successes. These
gains in the Connectivity segment were partially offset by $2.5 million in lower
revenue from an OEM account in the data communication industry. Connectivity
sales represented 71.7% of our total second quarter sales, which reflects our
continued focus on the growth of this segment. Electrical sales were $14.4
million in the quarter ended March 27, 2004 and $13.8 million last year, a 4.2%
increase. This increase was due mainly to the strong performance of our U.S.
Electrical business, which was partially offset by $1.3 million of lost revenue
from the divestiture of two Aero-Motive product lines.
SALES BY REGION
In the United States, sales were $28.2 million in the second quarter of both
fiscal 2004 and 2003. We recorded 45% and 39% of our revenues in foreign
currencies during the second quarters of fiscal 2004 and 2003, respectively. Our
international revenue was up 28.4% in the second quarter of fiscal 2004 when
compared to last year. This increase was mainly due to the strong operating
performance of our businesses in Europe and Asia and the favorable impact from
foreign exchange rate changes. In constant dollars, sales in Asia and Europe
increased 50.5% and 13.5%, respectively, when compared to the second quarter of
2003. In constant dollars North America sales were the same as the second
quarter of 2003 even with the divestiture of the two Aero-Motive product lines
and the lower revenue from the data communication industry.
BACKLOG
The backlog of unfilled orders stood at $22.4 million at the end of this quarter
as compared to $17.0 million a year ago, which translates to 28 and 24 average
days of sales for the second quarters of 2004 and 2003, respectively. This 31.8%
increase in backlog is consistent with our improved business trends.
16
GROSS PROFIT
Gross profit as a percent of sales was 38.0% in the second quarter of fiscal
2004 and 36.9% last year. We are starting to show improvements in our gross
margins as our efficiencies and sourcing programs gain traction and our product
mix improves. The increased sales volume also contributed to the operating
efficiencies at our manufacturing facilities. Decreases in our LIFO reserve
requirement increased our gross profit by $0.3 million in the second quarter of
fiscal 2004 and there was no corresponding impact in the second quarter of 2003.
OPERATING EXPENSES
Operating expenses were $16.8 million in the second quarter 2004 compared to
$14.3 million in the second quarter of 2003. These expenses were 33.1% of sales
in the second quarter of 2004 compared to last year's 31.3%. Operating expenses
in the second quarter of 2004 included a restructuring charge of $0.5 million
related to the migration of our operations from our Aero-Motive subsidiary to
Juarez, Mexico. The Aero-Motive restructuring will continue through the third
quarter of 2004 with anticipated costs of $1.6 million for the year. In addition
we anticipate an expense of $0.8 million for pension settlement charges over the
last two quarters of fiscal 2004. Exchange rate changes increased operating
expenses by $0.9 million when compared to the second quarter of 2003. Also
contributing to the year over year increase was the planned investment in sales
and marketing initiatives, which includes the hiring of additional experienced
sales professionals in North America. This investment also includes a branding
study to maximize the Woodhead name, the implementation of a new E-Catalog and
the improvement of our marketing tools and programs to increase customer
awareness.
SEGMENT OPERATING INCOME
Income from operations in the second quarter of 2004 was $0.8 million in the
Connectivity segment compared to $1.1 million in 2003. This decline was due to
higher operating expenses, which includes the investment in the new marketing
initiatives and an increased sales force. The Electrical segment recorded income
from operations in the second quarter of 2004 of $1.8 million compared to $1.6
million in 2003. This increase was due mainly to the increased volume, which was
partially offset by the $0.5 million of restructuring charges and the $1.3
million of lost revenue from the divesture of the two Aero-Motive product lines.
MISCELLANEOUS INCOME
Other expense in the second quarter of 2004 was $0.4 million compared to other
income of $0.6 million in the second quarter of 2003. This year over year change
was due mainly to exchange rate changes on a U.S. dollar loan that our Canadian
subsidiary used to acquire the assets of SST in early 1998.
NET INCOME
Net income in the second quarter of 2004 was $1.0 million compared to $1.5
million in 2003. Our effective tax rate was 36.9% and 38.9% for the quarters
ending March 27, 2004 and March 29, 2003.
Six Months fiscal 2004 results compared with six months fiscal 2003 results
- ---------------------------------------------------------------------------
SALES
Sales for the six months ended March 27, 2004 were $96.0 million, an increase of
9.0% compared to sales of $88.0 million for the six months ended March 29, 2003.
This increase was due mainly to the strengthening business climate that started
to occur in the first quarter and the positive effects resulting from changes in
exchange rates, which was partially offset by the lost revenue from the
divesture of the two Aero-Motive product lines. During the first six months of
2004 we lost a portion of an OEM account in the data communication industry,
which represented a $3.1 million year over year reduction of our Connectivity
revenue. For the first six months of 2004 Connectivity sales were $69.6 million,
a 15.2% increase over the $60.4 million in sales reported for the first six
months of 2003. Favorable foreign exchange rates accounted for $5.6 million of
this increase but we also experienced solid growth in the United Kingdom,
Germany, Italy and Japan. Connectivity sales represented 72.5% of our total
sales for the first six months of 2004 compared to 68.6% for the same period
last year, which reflects our increased focus on the continued growth of this
segment. Electrical sales were $26.4 million the six months ended March 27, 2004
and $27.7 million last year, a 4.4% decrease. This decrease was due to the $2.6
million of lost revenue from the divestiture of the two Aero-Motive product
lines.
17
SALES BY REGION
In the United States, sales were $53.8 million for the six months ended March
27, 2004 compared to $54.7 million for the six months ended March 29, 2003. We
recorded 44% and 38% of our revenues in foreign currencies during the first six
months of 2004 and 2003, respectively. Our international revenue was up 26.6% in
the first six months of fiscal 2004 when compared to last year. This increase
was mainly due to the strong operating performance of our businesses in Europe
and Asia and the favorable impact from foreign exchange rate changes. In
constant dollars, sales in Europe and Asia increased 11.5% and 24.0%,
respectively, while North American sales decreased 1.6% due mainly to reduced
data communications business and the divestiture of the two Aero-Motive product
lines.
GROSS PROFIT
Gross profit as a percent of sales was 37.3% for the first six months of fiscal
2004 and 37.1% last year. We are starting to show improvements in our gross
margins as our efficiencies and sourcing programs gain traction and our product
mix improves. Increased sales volume also contributed to the operating
efficiencies at our manufacturing facilities. These improvements in operation
efficiencies were partially offset by a warranty provision that was recorded in
the first quarter of 2004 to cover a component failure in one of our Aero-Motive
products lines, which has been identified and corrective actions have been
implemented. Decreases in our LIFO reserve requirement increased our gross
profit by $0.3 million in the first six months of fiscal 2004 compared to an
increased gross margin due to LIFO of $0.1 million last year.
OPERATING EXPENSES
Operating expenses were $32.4 million in the first six months of 2004 compared
to $28.1 million in the first six months of 2003. These expenses were 33.8% of
sales in 2004 compared to last year's 31.9%. Operating expenses in the first six
months of 2004 included a restructuring charge of $1.1 million related to the
migration of our operations from our Aero-Motive subsidiary to Juarez, Mexico.
Exchange rate changes increased operating expenses by $1.9 million when compared
to the first six months of 2003. Also contributing to this increase was the
planned investment in sales and marketing initiatives, which includes the hiring
of additional experienced sales professionals in North America. This investment
also includes a branding study to maximize the Woodhead name, the implementation
of a new E-Catalog and the improvement of our marketing tools and programs to
increase customer awareness. Partially offsetting these increases was the $0.8
million credit to operating expense due to the modification of our retiree
medical program that occurred in the first quarter of 2004.
SEGMENT OPERATING INCOME
Income from operations for the six months ended March 27, 2004 was $1.0 million
in the Connectivity segment compared to $1.5 million in 2003. This decline was
due to the mix shifts and higher operating expenses, which includes the
investment in the new marketing initiatives and an increased sales force. The
Electrical segment recorded income from operations in the first six months of
2004 of $2.7 million compared to $3.5 million in 2003. This decrease was due
mainly to the Aero-Motive restructuring charge in 2004 and the lost revenue from
the divesting of two Aero-Motive product lines.
MISCELLANEOUS INCOME
Other income in the first six months of 2004 was $1.6 million and consisted
mainly of the $1.2 million gain on the sale of the Aero-Motive government hose
reel product line and a $0.5 million gain realized from exchange rate changes
mainly on a U.S. dollar loan that our Canadian subsidiary used to acquire the
assets of SST in early 1998.
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 in the first six months of 2004 was $3.0 million compared to $3.7
million in 2003. Our effective tax rate on continuing operations was 21.3% and
31.4% for the first six months of 2004 and 2003, respectively. The decrease in
our effective tax rate for the first six months of 2004 was due mainly to the
first quarter utilization of capital loss carryforwards (which previously had a
valuation allowance reported against them) to offset $0.4 million in tax on
capital gains from the Aero-Motive product line sale, the tax treatment on the
exchange gain on the U.S. dollar loan held by our Canadian subsidiary and the
change in the effective Canadian tax rate (due to a change in tax legislation)
on deferred tax assets, which resulted in a tax benefit of $0.1 million.
18
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
At March 27, 2004 we had $25.1 million in cash and short-term investments, up
from $22.5 million at fiscal year end September 27, 2003. This increase in cash
is due mainly to our strong operating cash flow of $8.7 million, which includes
the impact from the sale of our Aero-Motive product line. This was partially
offset by increased spending in property, plant and equipment and the increase
in our quarterly dividend.
Working capital in the first six months of 2004 increased to $53.3 million
compared to $48.2 million at September 27, 2003. This increase in working
capital was due mainly to the increase in accounts receivable, which were the
result of increased sales levels, increased inventory levels to meet these
increased sales and the favorable exchange rate effects on our foreign assets.
We continue to invest in property and equipment, including new machinery,
computer systems and facilities. For the first six months of 2004 we invested
$3.9 million in property, plant and equipment compared to $2.2 million in the
first six months of 2003.
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.
At March 27, 2004 we had $36.6 million of long-term debt outstanding ($5.7
million shown as current debt) 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. On April 28, 2004 we entered
into a new three-year revolving credit agreement with our existing bank that
will continue to provide borrowings up to $25.0 million at the bank's prime or
offered rate. At March 27, 2004 and September 27, 2003 we had no short-term
borrowings.
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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of this Quarterly Report requires management's judgment to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
Our significant accounting policies are described in the Management's Discussion
and Analysis of Financial Condition and Results of Operation in our Form 10-K
for the year ended September 27, 2003. There have been no significant changes to
those accounting policies subsequent to September 27, 2003.
19
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 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.
20
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.
In 1998 we entered into a foreign currency swap agreement with an AA- rated
counter-party to hedge a portion of our cash flows from our Italian subsidiary.
We base the fair value for our cross-currency swap on the total cost estimate to
terminate the agreement. The fair value of the swap at March 27, 2003 was
recorded as a $0.8 million liability.
$36.6 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.
21
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 $1.2 million of investigation and remediation expenses
we have estimated to be incurred over the next 14 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.
22
PART II OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on January 30, 2004. The following
proposals were adopted by the margins indicated:
1. To vote for the election of the following nominees to the Board of Directors:
For Authority Withheld Against Abstain
--- ------------------ ------- -------
William K. Hall 11,048,633 291,391 0 0
Linda L. C. Lim 10,976,354 363,670 0 0
G. Thomas McKane 10,980,197 359,827 0 0
Daniel T. Carroll, Charles W. Denny, Philippe Lemaitre, Ann F. Hackett, Eugene
P. Nesbeda and Sarilee Norton continued their terms as directors after the
Annual Meeting of Stockholders.
2. Ratification of the appointment of Ernst & Young LLP as Woodhead Industries,
Inc.'s independent public accountants:
For Authority Withheld Against Abstain
--- ------------------ ------- -------
11,179,887 0 146,820 13,317
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 January 22, 2004
releasing our first quarter 2004 earnings.
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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: May 10, 2004
BY: /s/ Robert H. Fisher BY: /s/Joseph P. Nogal
- ---------------------------------- ----------------------------------
Robert H. Fisher Joseph P. Nogal
Vice President, Finance and C.F.O. Vice President,
(Principal Financial Officer) Treasurer/Controller
(Principal Accounting Officer)
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