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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [ X ]
For the quarterly period ended: June 30, 2002
-------------------------------------------------
Commission File Number 1-5426.
------------------------------
THOMAS INDUSTRIES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-0505332
- ------------------------------------------ ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4360 Brownsboro Road, Louisville, Kentucky 40207
- ------------------------------------------ -------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 502/893-4600
-------------------------
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of issuer's Common Stock, $1 par value, as of
July 26, 2002, was 15,279,716 shares.
Page 1 of 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except Amounts Per Share)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $49,928 $46,915 $95,985 $96,611
Cost of products sold 31,919 30,162 61,081 61,557
------- ------- ------- -------
Gross profit 18,009 16,753 34,904 35,054
Selling, general, and
administrative expenses 11,414 10,603 22,247 21,987
Equity income from GTG 7,522 6,112 13,524 11,173
------- ------- ------- -------
Operating income 14,117 12,262 26,181 24,240
Interest expense 560 944 1,179 1,886
Interest income and other 43 407 285 1,019
------- ------- ------- -------
Income before income taxes 13,600 11,725 25,287 23,373
Income taxes 4,964 4,397 9,230 8,765
------- ------- ------- -------
Net income $ 8,636 $ 7,328 $16,057 $14,608
======= ======= ======= =======
Net income per share:
Basic $.57 $.48 $1.05 $ .96
Diluted $.54 $.47 $1.02 $ .93
Dividends declared per share: $.085 $.085 $.17 $ .17
Weighted average number of shares outstanding:
Basic 15,276 15,163 15,260 15,140
Diluted 15,883 15,722 15,817 15,678
See notes to condensed consolidated financial statements.
2
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30 December 31
2002 2001*
---- -----
ASSETS
Current assets
Cash and cash equivalents $ 21,148 $ 29,500
Accounts receivable, less allowance
(2002--$1,597; 2001--$1,103) 25,918 21,026
Inventories:
Finished products 7,393 6,311
Raw materials 11,454 10,882
Work in process 3,753 3,503
--------- ---------
22,600 20,696
Deferred income taxes 2,689 2,497
Other current assets 2,044 2,442
--------- ---------
Total current assets 74,399 76,161
Investment in GTG 191,133 179,219
Property, plant, and equipment 97,418 92,378
Less accumulated depreciation and amortization (58,179) (52,608)
--------- ---------
39,239 39,770
Goodwill 9,920 9,244
Other intangible assets--less accumulated
amortization 500 427
Other assets 3,319 1,893
--------- ---------
Total assets $ 318,510 $ 306,714
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,629 $ 6,861
Accrued Expenses and other current liabilities 12,019 11,738
Dividends payable 1,299 1,295
Income taxes payable 1,423 2,501
Current portion of long-term debt 7,788 7,788
--------- ---------
Total current liabilities 30,158 30,183
Deferred income taxes 5,572 5,349
Long-term debt (less current portion) 17,180 24,938
Other long-term liabilities 8,511 8,531
--------- ---------
Total liabilities 61,421 69,001
Shareholders' equity
Preferred Stock, $1 par value,
3,000,000 shares authorized--none issued -- --
Common Stock, $1 par value, shares authorized:
60,000,000; Shares issued: 2002--17,901,939
2001--17,855,511 17,902 17,856
Capital surplus 115,066 114,342
Deferred compensation 802 739
Treasury stock held for deferred compensation (802) (739)
Retained earnings 171,623 158,161
Accumulated other comprehensive income (loss) (9,045) (14,189)
Less cost of treasury shares: 2,622,339 shares (38,457) (38,457)
--------- ---------
Total shareholders' equity 257,089 237,713
--------- ---------
Total liabilities and shareholders' equity $ 318,510 $ 306,714
========= =========
*Derived from the audited December 31, 2001, consolidated balance sheet. See
notes to condensed consolidated financial statements.
3
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Six Months Ended
June 30
------------------------
2002 2001
---- ----
Operating activities:
Net income $ 16,057 $ 14,608
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Depreciation 4,080 4,006
Amortization -- 242
Deferred income taxes (79) (334)
Equity income from GTG (13,524) (12,231)
Amortization of excess investment in GTG -- 1,058
Distributions from GTG 2,860 3,092
Other items 446 24
Changes in operating assets and liabilities:
Accounts receivable (4,509) (2,317)
Inventories (615) (401)
Accounts payable 556 (801)
Income taxes payable (1,082) (385)
Accrued expenses and other liabilities (90) (1,956)
Other (1,147) 158
-------- --------
Net cash provided by operating activities 2,953 4,763
Investing activities:
Purchases of property, plant and equipment (2,951) (5,244)
Sale of property, plant and equipment 111 11
-------- --------
Net cash used in investing activities (2,840) (5,233)
Financing activities:
Proceeds from notes payable to banks -- 4,050
Payments on long-term debt (7,758) (7,758)
Proceeds from long-term debt -- 2,000
Treasury stock purchased -- (67)
Dividends paid (2,591) (2,417)
Stock options exercised 452 1,049
-------- --------
Net cash used in financing activities (9,897) (3,143)
Effect of exchange rate change 1,432 (1,010)
-------- --------
Net decrease in cash and cash equivalents (8,352) (4,623)
Cash and cash equivalents at beginning of period 29,500 13,941
-------- --------
Cash and cash equivalents at end of period $ 21,148 $ 9,318
======== ========
See notes to condensed consolidated financial statements.
4
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The results of operations for the six-month period ended June 30, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Note B - Contingencies
- ----------------------
In the normal course of business, the Company is a party to legal proceedings
and claims. When costs can be reasonably estimated, appropriate liabilities for
such matters are recorded. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of the
Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
Note C - Comprehensive Income
- -----------------------------
Reconciliation of net income to comprehensive income for the periods indicated
follows.
(In Thousands)
For the three months ended June 30: 2002 2001
---- ----
Net income $ 8,636 $7,328
Foreign currency translation 5,667 (130)
------- ------
Comprehensive income $14,303 $7,198
======= ======
For the six months ended June 30:
Net income $16,057 $14,608
Foreign currency translation 5,144 (3,263)
------- ------
Comprehensive income $21,201 $11,345
======= =======
5
Note D - Net Income Per Share
- -----------------------------
The computation of the numerator and denominator in computing basic and diluted
net income per share follows:
(In Thousands) Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $ 8,636 $ 7,328 $16,057 $14,608
======= ======= ======= =======
Denominator:
Weighted average shares outstanding 15,276 15,163 15,260 15,140
Effect of dilutive securities:
Director and employee stock options 570 518 521 494
Employee performance shares 37 41 36 44
------- ------- ------- -------
Dilutive potential common shares 607 559 557 538
------- ------- ------- -------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 15,883 15,722 15,817 15,678
======= ======= ======= =======
Note E - Segment Disclosures
- ----------------------------
Three Months Six Months
(In Thousands) Ended June 30 Ended June 30
-------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Total net sales including
intercompany sales
Pump and Compressor $56,261 $52,423 $108,218 $108,905
Intercompany sales
Pump and Compressor $(6,333) $(5,508) $(12,233) (12,294)
------- ------- -------- --------
Net sales to unaffiliated customers
Pump and Compressor $49,928 $46,915 $95,985 $96,611
======= ======= ======= =======
Operating income
Pump and Compressor $ 8,014 $ 7,566 $15,561 $16,109
Lighting* 7,522 6,112 13,524 11,173
Corporate (1,419) (1,416) (2,904) (3,042)
------- ------- -------- --------
$14,117 $12,262 $26,181 $24,240
======= ======= ======= =======
*Three months ended June 30 consists of equity income of $7,572 in 2002 and
$6,692 in 2001 from our 32% interest in the joint venture, Genlyte Thomas Group
LLC (GTG), less $529 of amortization in 2001 of Thomas' excess investment and
less $50 in 2002 and $51 in 2001, related to expense recorded for Thomas
Industries stock options issued to GTG employees. Six months ended June 30
consists of equity income of $13,625 in 2002 and $12,334 in 2001 from our 32%
interest in GTG, less $1,058 of amortization in 2001 of Thomas' excess
investment and less $101 in 2002 and $103 in 2001, related to expense recorded
for Thomas Industries stock options issued to GTG employees.
6
Note F - Goodwill and Other Intangible Assets
- ---------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These
statements established new accounting and reporting standards for business
combinations and associated goodwill and intangible assets. SFAS 141, effective
July 1, 2001, eliminates the pooling of interest method of accounting and
amortization of goodwill for business combinations initiated after June 30,
2001. SFAS 142, effective January 1, 2002, requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. During the first phase of implementing
SFAS 142, the Company was required to identify its reporting units and to
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of December 31, 2001. Based upon a discounted cash flow
analysis, the Company concluded that the fair value of its reporting units
containing goodwill exceeded the carrying value. As a result, no impairment loss
was recorded or recognized as a cumulative effect of a change in accounting
principle. The Company is required to perform additional impairment tests on an
annual basis prior to the issuance of the annual financial statements.
The following table provides comparative earnings and earnings per share had the
non-amortization provisions of SFAS 142 been adopted for all periods presented:
For Three Months For Six Months
Ended Ended
June 30 June 30
------- -------
(Thousands of dollars, except per share data) 2002 2001 2002 2001
---- ---- ---- ----
Reported net income $8,636 $7,328 $16,057 $14,608
Add back: Pump and Compressor (P & C)
goodwill amortization, net of tax -- 93 -- 189
Add back: Amortization of excess
investment in GTG, net of tax -- 415 -- 829
Add back: Amortization for GTG, net of tax -- 327 -- 654
Adjust: Intangible amortization, net of tax -- 1 -- 2
------ ------ ------- -------
Adjusted net income $8,636 $8,164 $16,057 $16,282
====== ====== ======= =======
Basic earnings per share:
Reported net income $.57 $.4 $1.05 $ .96
P & C goodwill amortization -- .01 -- .01
Amortization of excess investment in GTG -- .03 -- .06
GTG amortization -- .02 -- .04
Intangible amortization -- -- -- --
------ ------ ------- -------
Adjusted net income $.57 $.54 $1.05 $1.08
====== ====== ======= =======
Diluted earnings per share:
Reported net income $.54 $.47 $1.02 $.93
P & C goodwill amortization -- .01 -- .01
Amortization of excess investment in GTG -- .02 -- .06
GTG amortization -- .02 -- .04
Intangible amortization -- -- -- --
------ ------ ------- -------
Adjusted net income $.54 $.52 $1.02 $1.04
====== ====== ======= =======
7
All other intangible assets have definite lives and are being amortized. In
accordance with FASB 142, the Company evaluated the remaining useful lives of
intangible assets as of January 1, 2002, and where appropriate, revisions to the
remaining period of amortization were made. Balances at June 30, 2002 and
December 31, 2001 are stated in thousands of dollars on the following table.
June 30, 2002 December 31, 2001
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Life Amount Amortization Life Amount Amortization
---- ------ ------------ ---- ------ ------------
Licenses 18-19 $456 $52 5-20 $437 $38
Patents 10-20 92 18 5-20 23 16
Other 10 35 13 40 31 10
---- --- ---- ---
Total $583 $83 $491 $64
==== === ==== ===
The total intangible amortization expense for the quarters ended June 30, 2002
and 2001 was $6 and $8, respectively. The total amortization expense for the six
months ended June 30, 2002 and 2001 was $12 and $16, respectively.
The estimated amortization expense stated in thousands of dollars for the next
five fiscal years beginning January 1, 2002 is as follows:
For the year ended December 31, 2002: $26
For the year ended December 31, 2003: $29
For the year ended December 31, 2004: $29
For the year ended December 31, 2005: $29
For the year ended December 31, 2006: $29
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment. The total change in goodwill from December 31, 2001 to June
30, 2002, was related to exchange rate fluctuation.
Note G - Genlyte Thomas Group LLC
- ---------------------------------
The following table contains certain unaudited financial information for the
Joint Venture.
Genlyte Thomas Group LLC
Condensed Financial Information
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2002 2001
---- ----
GTG balance sheets:
Current assets $385,244 $343,044
Long-term assets 273,746 276,077
Current liabilities 172,965 170,545
Long-term liabilities 62,796 62,573
8
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
GTG income statements (unaudited):
Net sales $247,767 $257,124 $479,793 $501,225
Gross profit 87,569 89,937 167,789 174,590
Earnings before interest and taxes 25,787 23,686 46,870 43,615
Net income(1) 23,664 20,914 42,579 38,546
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG(2) $7,572 $6,692 $13,625 $12,334
Stock option expense (50) (51) (101) (103)
Amortization of excess investment(3) - (529) - (1,058)
------ ------ ------- -------
Equity income reported by Thomas $7,522 $6,112 $13,524 $11,173
====== ====== ======= =======
(1) The quarter and six months ended June 30, 2002 include a favorable
impact from the non-amortization provisions of FASB 142 of $1.3 million
and $2.6 million, respectively.
(2) The quarter and six months ended June 30, 2002 include a favorable
impact from the non-amortization provisions of FASB 142 of $.4 million
and $.8 million, respectively.
(3) The quarter and six months ended June 30, 2002 include a favorable
impact from the non-amortization provisions of FASB 142 of $.5 million
and $1.1 million, respectively.
Note H - New Accounting Pronouncements
- --------------------------------------
FASB No. 141 and 142 are discussed in Note F above.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144), dated August 2001. This statement supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and it
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted the provisions of SFAS 144, as of January 1,
2002, which did not have an impact on our financial position and results of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies and Estimates
- ------------------------------------------
Thomas' discussion and analysis of its financial condition and results of
operations are based upon Thomas' consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. When preparing these consolidated financial statements, the
Company is required to make estimates and judgments that
9
Item 2. Management's Discussion and Analysis - Continued
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Company evaluates
its estimates, including, but not limited to, those related to product
warranties, bad debts, inventories, equity investments, income taxes, pensions
and other post-retirement benefits, contingencies, and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
In response to the Securities and Exchange Commission's (SEC) Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies", the Company identified the following critical accounting policies
which affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Based on the SEC's
suggestions, included with the accounting policies are potential adverse results
which could occur if different assumptions or conditions were to prevail.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of Thomas' customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Thomas provides for the estimated cost of product warranties. While
the Company engages in extensive product quality programs and processes, should
actual product failure rates differ from estimates, revisions to the estimated
warranty liability would be required. Thomas writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Thomas holds a 32 percent minority interest in the Genlyte Thomas Group LLC
(GTG) joint venture, which comprises Thomas' lighting segment and is accounted
for using the equity method. If future adverse changes in market conditions or
poor operating results of GTG occurred, it could result in losses or an
inability to recover the carrying value of the Company's investment, thereby
possibly requiring an impairment charge in the future. GTG's critical accounting
policies are determined separately by The Genlyte Group Incorporated, which owns
68 percent of GTG and consolidates the GTG results.
Results of Operations
- ---------------------
The Company's net income was $8.6 million in the second quarter ended June 30,
2002, compared to $7.3 million in the second quarter ended June 30, 2001. The
second quarter of 2002 was positively impacted by the change in accounting for
goodwill required by SFAS No. 142, which was effective January 1, 2002, and
eliminated the recording of goodwill amortization. Compared to the previous
year's second quarter, this change in accounting increased net income by $.8
million, or 5 cents per share. Excluding this impact for the accounting change,
net income in the quarter ended June 30, 2002, would have increased 6.5% from
the previous year's second quarter, primarily due to improvements in both
operating Segments. Six month year-to-date net income
10
Item 2. Management's Discussion and Analysis - Continued
was $16.1 million for the period ended June 30, 2002, compared to $14.6 million
in the comparable 2001 period. The change in accounting increased net income by
$1.7 million, or 11 cents per share in the six months ended June 30, 2002.
Excluding this impact for the accounting change, net income in the six months
ended June 30, 2002 would have decreased 1.5% from the 2001 first half period.
PUMP AND COMPRESSOR SEGMENT
Net sales during the second quarter ended June 30, 2002, increased 6.4% to $49.9
million compared to $46.9 million for the second quarter of 2001. The North
American, European and Asia Pacific operations reported increases for the second
quarter of 2002 compared to 2001. Overall, the second quarter sales increase of
6.4% would have been reduced to 5.2%, if measured in constant exchange rates.
This exchange rate impact on net sales was primarily related to the European
operation due to the strengthening of the euro. Year-to-date net sales for the
six-month period ended June 30, 2002, decreased .6% to $96.0 million compared to
$96.6 million for the comparable period in 2001. On a year-to-date basis, the
North American operations had a decrease in sales, primarily due to a very weak
start early in the first quarter of 2002. The European operations had a slight
increase in sales for the six month period in 2002. The Asia Pacific operations
posted very strong sales due to increased shipments for the environmental,
medical and industrial markets. Overall, the first half sales would have been
increased an additional .2% if measured in constant exchange rates.
Operating income for the second quarter ended June 30, 2002, was $8.0 million or
5.9% higher than the prior year amount of $7.6 million. The 2002 results were
positively impacted by $.1 million, due to the accounting change for goodwill
amortization. The increase in operating income was primarily due to the sales
volume increase. Excluding the impact of the accounting change for goodwill
amortization, gross margins increased slightly to 35.8% compared to 35.7%, for
the second quarter 2002 versus 2001. SG&A expenses increased to 20% as a percent
of net sales for second quarter of 2002, compared to 19.6% for the comparable
period in 2001. The 2002 second quarter SG&A expenses included an additional
charge for potential collectibility issues in our account receivable. Excluding
this charge, the 2002 second quarter SG&A expenses would be at 19.4% of net
sales. Year-to-date operating income for the Pump and Compressor Segment for the
six months ended June 30, 2002, was $15.6 million or 3.4% lower than the 2001
first half amount of $16.1 million. The 2002 results were positively impacted by
$.2 million, due to the accounting change for goodwill amortization. The
reduction in the 2002 first half results were primarily due to a weak first
quarter which was negatively impacted by several factors including sales volume
shortfall, unfavorable manufacturing variances, and unfavorable exchange rate
effects. Excluding the impact of the accounting change for goodwill
amortization, gross margins for the six month period in 2002 were 36.1% compared
to 36.3% in 2001. Excluding the additional charge in the second quarter of 2002
for potential collectibility issues, SG&A expense in the 2002 first half would
be at 19.8% of net sales, compared to 19.6% in 2001.
LIGHTING SEGMENT
The Lighting Segment (GTG Joint Venture) results increased 23.1% to $7.5 million
in the second quarter of 2002, compared to $6.1 million in the same period in
2001. The 2002 results were positively impacted by $.9 million, due to the
accounting change for goodwill amortization. This $.9 million impact includes
$.5 million related to amortization of Thomas' excess investment and $.4
million, which represents Thomas' 32% interest in GTG's
11
Item 2. Management's Discussion and Analysis - Continued
$1.3 million of goodwill amortization in 2001. Therefore, excluding the impact
from the accounting change, GTG's earnings increased 7.6% in 2002 compared to
the 2001 second quarter. GTG's sales during the 2002 second quarter decreased
3.6% compared to the second quarter of 2001. The sales shortfall was primarily
due to softness in the commercial and industrial markets while earnings improved
due to favorable sales mix and aggressive cost control measures. Year-to-date
GTG results for the six months ended June 30, 2002, increased 21.0% to $13.5
million, compared to $11.2 million in the 2001 first half. The 2002 results were
positively impacted by $1.9 million, due to the accounting change for goodwill
amortization. This $1.9 million impact includes $1.1 million related to
amortization of Thomas' excess investment and $.8 million, which represents
Thomas' 32% interest in GTG's $2.6 million of goodwill amortization in 2001.
Therefore, excluding the impact from the accounting change, GTG's earnings
increased 4.1% in 2002 compared to the 2001 first six months. GTG's sales during
the 2002 first half decreased 4.3% compared to the first half of 2001.
At any time on or after January 31, 2002, Thomas has the right (a "put right"),
but not the obligation, to require the Joint Venture (GTG) to purchase all, but
not less than all, of Thomas' ownership interest in GTG at the applicable
purchase price. The purchase price shall be equal to the "Fair Market Value" of
GTG multiplied by Thomas' ownership percentage in GTG. The "Fair Market Value"
means the value of the total interests in GTG computed as a going concern,
including the control premium. Further explanation can be found in our Joint
Proxy Statement dated July 23, 1998, which is on file with the Securities and
Exchange Commission. The Company will continue to review alternatives with
respect to the GTG put right.
CORPORATE
As noted in the Segment Disclosure footnote, consolidated operating income
includes corporate expenses. Corporate expenses were $1.4 million for the second
quarter of 2002 and 2001. The 2002 amount included some increases for incentive
and professional fee accruals, which were offset by savings from cost reductions
implemented during the second half of 2001. Year-to-date corporate expenses for
the six month period ended June 30, 2002, were $2.9 million compared to $3.0
million in the comparable 2001 period.
Interest expense for the 2002 second quarter was $.6 million compared to $.9
million for the second quarter of 2001. Year-to-date interest expense for the
six month period ended June 30, 2002 was $1.2 million compared to $1.9 million
for comparable 2001 period. The reduction in 2002 was primarily related to the
$7.7 million payment of long-term debt on January 31, 2002, which carried a
9.36% annual interest rate, as well as higher short-term and other long-term
borrowing levels in 2001.
Interest income and other for the 2002 second quarter was $43,000 compared to
$.4 million for the second quarter of 2001. The six month total for 2002 was $.3
million compared to $1.0 million for the comparable 2001 period. The decrease
for the second quarter and June year-to-date periods primarily related to a
$22.3 million note receivable with GTG, from which the Company received interest
income during 2001. GTG paid off this $22.3 million note in November 2001 and
the Company used some of these proceeds to partially pay down long-term debt.
Additionally, in the second quarter of 2002, the Company recorded transaction
losses due to the weakening of the U.S. dollar versus the euro, British pound
sterling, and Japanese yen.
12
Item 2. Management's Discussion and Analysis - Continued
Income tax provisions were $5.0 million and $4.4 million for the second quarter
2002 and 2001, respectively. The June year-to-date income tax provisions were
$9.2 million and $8.8 million for 2002 and 2001, respectively. Effective tax
rates were 36.5% in the 2002 periods and 37.5% for the 2001 periods. The decline
in the effective tax rate was primarily due to the accounting change related to
goodwill amortization.
Liquidity and Sources of Capital
- --------------------------------
Cash and cash equivalents decreased $8.4 million to $21.1 million at June 30,
2002, compared to $29.5 million at December 31, 2001. This decrease was
primarily related to the $7.7 million long-term debt payment on January 31,
2002. Cash flows provided by operations in the first half of 2002 were $3.0
million compared to $4.8 million provided by operations in the first half of
2001. The decrease in cash flows were primarily related to an increase in
accounts receivable due to increased sales volume in the second quarter 2002
versus 2001. The timing of our 2002 shipments also contributed to the increase
in accounts receivable, since there was a larger amount of shipments in the last
three weeks of June 2002 compared to June 2001.
Dividends paid in the first half of 2002 were $2.6 million or $.17 per share.
The 2001 first half dividends paid were $2.4 million or $.16 per share. The
Company increased its quarterly dividend per share from $.075 to $.085,
effective with the April 1, 2001 dividend.
As of June 30, 2002, the Company had standby letters of credit totaling $4.5
million with expiration dates during 2002. The Company anticipates that these
letters of credit will be renewed at their expiration dates.
The Company announced in December 1999 that it planned to repurchase, from time
to time depending on market conditions and other factors, up to 15 percent, or
2,373,000 shares, of its outstanding Common Stock in the open market or through
privately negotiated transactions at the prevailing market prices. During the
first half of 2002, no purchases were made. Through June 30, 2002, the Company
has purchased, on a cumulative basis, 879,189 shares at a cost of $17.3 million,
or an average cost of $19.72 per share. The Company plans to fund any purchase
of Company common stock through a combination of cash flows generated from
operating activities and uncommitted borrowing arrangements.
Working capital decreased from $46.0 million at December 31, 2001, to $44.2
million at June 30, 2002, primarily due to the $7.7 million long-term debt
payment.
June 30 December 31
----------------------------------
Dollars in Thousands
2002 2001
----------------------------------
Working capital $44,241 $45,978
Current ratio 2.47 2.52
Long-term debt, less current portion $17,180 $24,938
Long-term debt to total capital 6.3% 9.5%
Certain loan agreements of the Company include restrictions on working capital,
operating leases, tangible net worth, and the payment of cash dividends and
stock distributions. Under the most restrictive of these arrangements, retained
earnings of $92.8 million are not restricted at June
13
Item 2. Management's Discussion and Analysis - Continued
30, 2002. Thomas is in compliance with all covenants or other requirements set
forth in its borrowing agreements. In the event of non-compliance or if Thomas
prepays the debt, then Thomas would incur a penalty. At June 30, 2002, the
prepayment penalty would have been approximately $2.1 million on a pre-tax
basis.
As of June 30, 2002, the Company had no short-term borrowing arrangements.
Thomas currently expects to fund expenditures for capital requirements as well
as liquidity needs from a combination of available cash balances, internally
generated funds, and, if necessary, short-term financing arrangements. The
Company does not have any bank committed lines of credit and management
believes, if short-term borrowings were needed to support the sales growth of
the business, that competitive financing could be obtained given the current
financial position of the Company. Cash in excess of operating requirements will
continue to be invested in high grade, short-term securities.
As disclosed in the footnotes to the consolidated financial statements, the
Company does have a 32 percent interest in the GTG joint venture, which is
accounted for using the equity method, and therefore, is an unconsolidated
entity. At June 30, 2002 and December 31, 2001, except as described above,
management was aware of no relationships with any other unconsolidated entities,
financial partnerships, structured finance entities, or special purpose entities
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Proposed Acquisition Financing
- ------------------------------
The Company is currently in negotiation with a group of banks with respect to
obtaining a $120.0 million three-year revolving credit facility. The credit
facility would primarily be used for acquisitions. Thomas is in the process of
negotiating the possible acquisition of a company, which is proposed to be
financed through borrowings under the revolving credit facility and the issuance
of Thomas common stock. The Company has not executed definitive agreements with
respect to the proposed financing or the possible acquisition and is
contractually prohibited from disclosing any additional information. There can
be no assurance that the Company will complete the proposed financing or the
possible acquisition.
Forward-Looking Statements
- --------------------------
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations," as well as other statements
contained in this Form 10-Q and statements contained in future filings with the
Securities and Exchange Commission and publicly disseminated press releases, and
statements which may be made from time to time in the future by management of
the Company in presentations to shareholders, prospective investors, and others
interested in the business and financial affairs of the Company, which are not
historical facts, are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking
14
Item 2. Management's Discussion and Analysis - Continued
statements. Any projections of financial performances or statements concerning
expectations as to future developments should not be construed in any manner as
a guarantee that such results or developments will, in fact, occur. There can be
no assurance that any forward-looking statement will be realized or that actual
results will not be significantly different from that set forth in such
forward-looking statement. In addition to the risks and uncertainties of
ordinary business operations, the forward-looking statements of the Company
referred to above are also subject to the following risks and uncertainties:
o The Company operates in a highly competitive business environment, and its
sales could be negatively affected by its inability to maintain or increase
prices, changes in geographic or product mix, or the decision of its
customers to purchase competitive products instead of the Company's
products. Sales could also be affected by pricing, purchasing, financing,
operational, advertising, or promotional decisions made by purchasers of
the Company's products.
o The Pump and Compressor Segment operates in a market where technology
improvements and the introduction of products for new applications are
necessary for future growth. The Company could experience difficulties or
delays in the development, production, testing, and marketing of new
products. As an original equipment supplier, the Company's results of
operations are directly affected by the success of its customers' products.
o The Pump and Compressor Segment has several key customers, none of which
are 10% or more of our consolidated sales. However, the loss of any of
these key customers could have a negative affect on the Company's results.
o On an annual basis, the Company negotiates renewals for property, casualty,
workers compensation, general liability, product liability, and health
insurance coverages. Due to conditions within these insurance markets and
other factors beyond the Company's control, future coverages and the amount
of the related premiums could have a negative affect on the Company's
results.
o The Pump and Compressor Segment has the leading market share in the oxygen
concentrator Original Equipment Manufacturers (OEM) market worldwide. The
Company's market share could be reduced significantly due to a competitor,
the vertical integration by our customers, or new technology replacing
compressed air in oxygen concentrators. The loss of market share in the
oxygen concentrator OEM market could have a significant affect on the
Company's results.
o GTG, which comprises the Company's Lighting Segment, participates in a
highly competitive market that is dependent on the level of residential,
commercial, and industrial construction activity in North America. Changes
in interest rates, consumer preferences, office and plant occupancy rates,
and acceptance of new products affect the Lighting Segment.
o As the Company's business continues to expand outside the United States,
the Company could experience changes in its ability to obtain or hedge
against currency exchange rates and fluctuations in those rates. The
Company could also be affected by nationalizations; unstable governments,
economies, or legal systems; terrorist attacks; or inter-governmental
disputes. These currency, economic, and political uncertainties may affect
the Company's results.
15
The forward-looking statements made by the Company are based on estimates that
the Company believes are reasonable. This means that the Company's actual
results could differ materially from such estimates and expectations as a result
of being positively or negatively affected by the factors as described above, as
well as other unexpected, unanticipated, or unforeseen factors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's long-term debt bears interest at fixed rates, with the exception
of the $1.25 million Industrial Revenue Bond that accrues interest at a variable
rate. Short-term borrowings are priced at variable interest rates. The Company's
results of operations and cash flows, therefore, would only be affected by
interest rate changes to the extent of variable rate debt. At June 30, 2002,
only the $1.25 million Industrial Revenue Bond was outstanding. A 100 basis
point movement in the interest rate on the $1.25 million bond would result in an
$12,500 annualized effect on interest expense and cash flows.
The Company also has short-term investments, included in cash equivalents, of
$19.3 million as of June 30, 2002 that bear interest at variable rates.
Therefore, a 100 basis point movement in the interest rate would result in an
approximate $193,000 annualized effect on interest income and cash flows.
The fair value of the Company's long-term debt is estimated based on current
interest rates offered to the Company for similar instruments. A 100 basis point
movement in the interest rate would result in an approximate $375,000 annualized
effect on the fair value of long-term debt.
The Company has significant operations consisting of sales and manufacturing
activities in foreign countries. As a result, the Company's financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or changing economic conditions in the foreign markets in which
the Company manufactures or distributes its products. Currency exposures for our
Pump and Compressor Segment are concentrated in Germany but exist to a lesser
extent in other parts of Europe and Asia. The Lighting Segment currency exposure
is primarily in Canada.
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
(a) A regular Annual Meeting of Shareholders was held on April 18,
2002.
(b) Class I Directors elected at the Annual Meeting of Shareholders
were Wallace H. Dunbar, Lawrence E. Gloyd, and William M. Jordan.
Directors whose term of office as a director continued after the
meeting were Timothy C. Brown, Joseph Ferguson, Anthony A.
Massaro and Franklin J. Lunding, Jr. Gene P. Gardner retired as a
director effective with the April 18, 2002 meeting.
(c) The voting at the Annual Meeting of Shareholders was as follows:
16
Proposal No. 1 - Election of Directors
For Withheld
--- --------
Wallace H. Dunbar 13,954,326 80,088
Lawrence E. Gloyd 13,906,505 127,909
William M. Jordan 13,916,087 118,327
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002,
filed herewith.
(b) A Form 8-K was filed on May 21, 2002, announcing the appointment
of Ernst & Young LLP as the registrant's independent auditors for
2002 and the termination of Arthur Andersen LLP as the previous
independent auditors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THOMAS INDUSTRIES INC.
----------------------
Registrant
/s/ Phillip J. Stuecker
-----------------------------------
Phillip J. Stuecker, Vice President
and Chief Financial Officer
Date August 14, 2002
-------------------