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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from
----------------------
Commission File Number 1-5426
-----------------------------
THOMAS INDUSTRIES INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
DELAWARE 61-0505332
- ----------------------- ----------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
4360 BROWNSBORO ROAD, LOUISVILLE, KENTUCKY 40207
- ------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
502/893-4600
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(Registrant's telephone number, including area code)
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 Exchange Act Rule 12b-2) Yes X No __
As of May 5, 2003, 17,168,442 shares of the registrant's Common Stock were
outstanding (net of treasury share).
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
March 31
----------------------------
2003 2002
----------------------------
Net sales $ 92,346 $ 46,057
Cost of products sold 59,231 29,162
----------------------------
Gross profit 33,115 16,895
Selling, general and administrative
expenses 24,578 10,833
Equity income from GTG 6,143 6,002
----------------------------
Operating income 14,680 12,064
Interest expense 1,086 619
Interest income and other income (expense) (39) 242
----------------------------
Income before income taxes and minority interest 13,555 11,687
Income taxes 4,742 4,266
----------------------------
Income before minority interest 8,813 7,421
Minority interest, net of tax 7 --
----------------------------
Net income $ 8,806 $ 7,421
============================
Net income per share:
Basic $ 0.51 $ 0.49
Diluted $ 0.50 $ 0.47
Dividends declared per share: $ 0.085 $ 0.085
Weighted average shares outstanding:
Basic 17,139 15,243
Diluted 17,507 15,762
See notes to condensed consolidated financial statements.
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31 December31
2003 2002 *
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,318 $ 18,879
Accounts receivable, less allowance
(2003--$2,617; 2002--$2,270) 55,873 50,067
Inventories:
Finished products 25,745 23,108
Raw materials 18,176 17,722
Work in process 13,362 11,970
---------------------------
57,283 52,800
Deferred income taxes 4,194 4,407
Other current assets 6,016 5,325
---------------------------
Total current assets 142,684 131,478
Investment in GTG 197,005 188,810
Property, plant and equipment 157,903 153,751
Less accumulated depreciation and amortization (66,235) (62,160)
---------------------------
91,668 91,591
Goodwill 55,263 55,669
Other intangible assets, net 19,610 19,299
Other assets 3,612 4,169
---------------------------
Total assets $ 509,842 $ 491,016
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 58 $ 1,460
Accounts payable 13,636 15,496
Accrued expenses and other current liabilities 24,379 21,442
Dividends payable 1,457 1,455
Income taxes payable 3,065 233
Current portion of long-term debt 9,413 9,362
---------------------------
Total current liabilities 52,008 49,448
Deferred income taxes 5,129 5,163
Long-term debt, less current portion 108,491 104,047
Long-term pension liability 10,621 10,621
Other long-term liabilities 7,143 7,336
---------------------------
Total liabilities 183,392 176,615
Minority interest 46 34
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: 2003 - 17,985,087; 2002 - 17,947,630 17,985 17,948
Capital surplus 134,798 133,964
Deferred compensation 1,135 846
Treasury stock held for deferred compensation (1,135) (846)
Retained earnings 192,700 185,351
Accumulated other comprehensive loss (7,020) (10,837)
Less cost of 822,339 treasury shares (12,059) (12,059)
---------------------------
Total shareholders' equity 326,404 314,367
---------------------------
Total liabilities and shareholders' equity $ 509,842 $ 491,016
===========================
* Derived from the audited December 31, 2002, consolidated balance sheet.
See notes to condensed consolidated financial statements.
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands)
THREE MONTHS ENDED
MARCH 31
-----------------------------
2003 2002
-----------------------------
OPERATING ACTIVITIES
Net income $ 8,806 $ 7,421
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and intangible amortization 3,869 2,023
Deferred income taxes 124 (78)
Equity income from GTG (6,143) (6,002)
Distributions from GTG - -
Other items 36 27
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (5,140) (2,456)
Inventories (3,459) (616)
Accounts payable (2,081) (307)
Income taxes payable 2,846 3,207
Accrued expenses and other current liabilities 2,309 (890)
Other (446) (612)
-----------------------------
Net cash provided by operating activities 721 1,717
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,952) (1,275)
Sales of property, plant and equipment 13 86
-----------------------------
Net cash used in investing activities (1,939) (1,189)
FINANCING ACTIVITIES
Payments on short-term debt (1,421) -
Payments on long-term debt (7,849) (7,744)
Proceeds from long-term debt 12,000 -
Dividends paid (1,455) (1,295)
Other 356 304
-----------------------------
Net cash provided by (used in) financing activities 1,631 (8,735)
Effect of exchange rate changes 26 (199)
-----------------------------
Net increase (decrease) in cash and cash equivalents 439 (8,406)
Cash and cash equivalents at beginning of period 18,879 29,500
-----------------------------
Cash and cash equivalents at end of period $ 19,318 $ 21,094
=============================
See notes to condensed consolidated financial statements.
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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States for complete financial statements.
The results of operations for the three-month period ended March 31, 2003, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. 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, 2002.
Note B - Acquisition
- --------------------
On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle has been a world leader in
vacuum and pressure technology, which includes dry-running and oil-lubricated
pumps, blowers, compressors, and pressure/vacuum pumps utilizing rotary vane,
screw, roots and claw technologies. With the strong Rietschle brand, Thomas will
continue to pursue further opportunities through cross branding of products, and
through growth in markets such as printing, packaging, woodworking and many
other applications that fit Rietschle technologies, including fuel cells. The
purchase price consisted of $83.3 million in cash and 1,800,000 treasury shares
of the Company's common stock. The Company negotiated a $120.0 million revolving
credit facility with a group of banks to finance the cash portion of the
purchase price, of which $90.0 million was outstanding as of March 31, 2003.
Rietschle's operating results are included in the Company's results since the
date of acquisition.
A tentative purchase price allocation was made and reflected in the March 31,
2003 financial statements. This allocation is preliminary as the Company
finalizes information, including appraisals, about the fair value of assets and
liabilities acquired. Accordingly, the amounts recorded will change as the
allocation is finalized.
Supplemental pro forma information below for the three months ended March
31,2002, is presented as though the business combination had been completed as
of the beginning of the period being reported on. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred if the Company and Rietschle constituted a single entity during
such period.
(In thousands, except per share data) Three Months Ended
March 31, 2002
--------------
Net sales $79,034
Net income $ 8,307
Earnings per share - diluted $ .47
The aggregate purchase price consists of (in thousands):
Cash $83,288
Fair value of Thomas common stock 44,754
Transaction costs 5,097
---------------
Total aggregate purchase price $133,139
===============
The following summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (in thousands):
Cash $ 3,487
Accounts receivable 25,121
Inventories 29,228
Other current assets 4,638
Property, plant and equipment 47,976
Other intangibles 17,558
Other assets 3,113
Current liabilities (21,977)
Long-term debt (19,536)
Other long-term liabilities (5,629)
---------------
83,979
Goodwill 49,160
---------------
Aggregate purchase price $133,139
===============
Certain allocations above are based on management's preliminary estimate of
assets acquired and liabilities assumed. The valuations of property, plant and
equipment and other intangible assets are based on preliminary results of
independent appraisals, which are still being reviewed. The property, plant and
equipment is being depreciated on a straight-line basis over an estimated useful
life ranging from three to thirty years. The other intangible assets are being
amortized on a straight-line basis over a useful life range of five to twelve
years, except for $11,525,000 of trademarks, which are not being amortized.
The goodwill associated with the Rietschle acquisition is all allocated to the
Pump and Compressor Segment.
Note C - 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 D - Comprehensive Income
- -----------------------------
The reconciliation of net income to comprehensive income follows:
(In thousands) Three Months
Ended March 31
2003 2002
---- ----
Net income $8,806 $7,421
Other comprehensive income (loss):
Minimum pension liability (27) -
Related tax expense 9 -
Foreign currency translation 3,835 (523)
------ ------
Total change in other comprehensive
income (loss) 3,817 (523)
----- ------
Total comprehensive income $12,623 $6,898
======= ======
Note E - 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
Ended March 31
2003 2002
---- ----
Numerator:
Net income $8,806 $7,421
===== =====
Denominator:
Weighted average shares outstanding 17,139 15,243
Effect of dilutive securities:
Director and employee stock options 322 482
Employee performance shares 46 37
------ ------
Dilutive potential common shares 368 519
------ ------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 17,507 15,762
====== ======
Note F - Segment Disclosures
- ----------------------------
Three Months
(In thousands) Ended March 31
---------------
2003 2002
---- ----
Total net sales including intercompany sales
Pump and Compressor $112,127 $51,957
Intercompany sales
Pump and Compressor (19,781) (5,900)
------- -------
Net sales to unaffiliated customers
Pump and Compressor $ 92,346 $46,057
======= ======
Operating income
Pump and Compressor $10,325 $ 7,547
Lighting* 6,143 6,002
Corporate (1,788) (1,485)
------ ------
$14,680 $12,064
*Three months ended March 31 consists of equity income of $6,222,000 in 2003 and
$6,053,000 in 2002 from our 32% interest in the joint venture, Genlyte Thomas
Group LLC (GTG), less $79,000 in 2003 and $51,000 in 2002, related to expense
recorded for Thomas Industries stock options issued to GTG employees.
Note G - Goodwill and Other Intangible Assets
- ---------------------------------------------
The changes in net carrying amount of goodwill for the three months ended March
31, 2003 were as follows (in thousands):
Balance as of December 31, 2002 $ 55,669
Translation adjustment and other (406)
--------------
Balance as of March 31, 2003 $ 55,263
==============
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment.
Certain intangible assets have definite lives and are being amortized. In
accordance with SFAS No. 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. Amortizable intangible assets
consist of the following (in thousands):
March 31, 2003 December 31, 2002
----------------------------------------- ----------------------------------------------
Accumulated Accumulated
Life Cost Amortization Life Cost Amortization
---- ---- ------------ ---- ---- ------------
Licenses 18-19 $ 471 $ 187 18-19 $ 466 $ 65
Patents 5-20 5,306 351 5-20 5,137 230
Other 1-10 2,720 565 1-10 2,633 491
------------ ------------------- ------------- -------------------
Total $8,497 $1,103 $8,236 $786
============ =================== ============= ===================
The March 31, 2003 cost amount includes $7.9 million related to the Rietschle
acquisition allocated to patents and other intangibles. The total intangible
amortization expense for the three months ended March 31, 2003 and 2002 was
$291,000 and $6,000, respectively.
The estimated amortization expense stated in thousands of dollars for the next
five years beginning January 1, 2003 through December 31, 2007 is as follows:
2003 $809
2004 692
2005 692
2006 692
2007 684
As of March 31, 2003, $11,525,000 has been preliminarily allocated to
non-amortizable trademarks, in connection with the Rietschle acquisition.
Also included in other intangible assets is an intangible asset associated with
the minimum pension liability of $691,000 as of March 31, 2003 and December 31,
2002.
Note H - Long-lived Assets
- --------------------------
Consistent with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company evaluates long-lived assets for impairment and
assesses their recoverability based upon anticipated future cash flows. If facts
and circumstances lead the Company's management to believe that the cost of one
of its assets may be impaired, the Company will evaluate the extent to which
that cost is recoverable by comparing the future undiscounted cash flows
estimated to be associated with that asset to the asset's carrying amount and
write down that carrying amount to market value to the extent necessary.
Note I - 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)
March 31, December 31,
2003 2002
---- ----
GTG balance sheets:
Current assets $412,500 $405,138
Long-term assets 270,192 267,843
Current liabilities 174,245 187,211
Long-term liabilities 66,860 69,795
Three Months
Ended March 31
2003 2002
---- ----
GTG income statements (unaudited):
Net sales $237,913 $232,026
Gross profit 81,830 80,220
Earnings before interest and taxes 21,163 21,083
Net income 19,445 18,916
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG $6,222 $6,053
Stock option expense (79) (51)
------ ---------
Equity income reported by Thomas $6,143 $ 6,002
====== ========
Note J - Stock-Based Compensation
- ---------------------------------
Stock options are granted under various stock compensation programs to employees
and independent directors. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period.
Included in stock option activity, but accounted for in accordance with SFAS No.
123, are options granted to GTG employees, for which the Company has recorded
compensation expense. This compensation expense, shown net of tax, is also
included in the pro forma information below.
The Company's pro forma information in accordance with SFAS No. 123 is as
follows:
Three Months Ended
March 31
----------------------------------
2003 2002
---------------------------------
Net income (as reported) $ 8,806 $ 7,421
Add: Stock-based compensation expense for GTG employees
included in reported net income, net of related tax
effects. 46 42
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effects.
(194) (211)
---------------------------------
Net income (pro forma) $ 8,658 $ 7,252
=================================
Net income per share (Basic) - As reported $ .51 $ .49
Pro forma .51 .48
Net income per share (Diluted) - As reported .50 .47
Pro forma .50 .46
Note K - Product Warranty Costs
- -------------------------------
The Company generally offers warranties for most of its products for periods
from one to five years. The specific terms and conditions of these warranties
vary depending on the product sold and country in which the Company does
business. The Company estimates the costs that may be incurred under its
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability
include that number of units sold, historical and anticipated rates of warranty
claims, and cost per claim. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the amount as necessary.
Changes in the Company's warranty liability for the three months ended March 31,
2003 are as follows (in thousands):
Balance as of December 31, 2002 $ 2,674
Warranties issued during the quarter 755
Settlements made during the quarter (497)
------------
Balance as of March 31, 2003 $ 2,932
============
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 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
Item 2. Management's Discussion and Analysis - Continued
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required. With respect to
the Rietschle acquisition in 2002, the Company utilized an independent appraisal
in determining the fair value of assets and liabilities acquired. The purchase
price allocation has not yet been finalized, and as a result, the amounts
recorded could change as the allocation is finalized. If actual market
conditions or other factors differ in the future from those used by the
independent appraiser, then additional asset write-downs may be required. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," Thomas tests at least annually for
impairment of goodwill and indefinite lived intangible assets. If facts and
circumstances lead the Company's management to believe that the cost of one of
these assets may be impaired, then further evaluations would be performed and
possible write-downs could occur. In accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," the Company evaluates
long-lived assets for impairment and assesses their recoverability based upon
anticipated future cash flows. If facts and circumstances lead the Company's
management to believe that the cost of one of its long-lived assets may be
impaired, then further evaluations would be performed and possible write-downs
could occur.
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
On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. See Note B in the notes to condensed
consolidated financial statements. Rietschle's operating results are included in
the Company's operating results since the date of acquisition.
The Company's net income was $8.8 million in the first quarter ended March 31,
2003, compared to $7.4 million in the first quarter ended March 31, 2002.
Included in this amount was approximately $1.0 million related to Rietschle's
operating results after netting interest expense on acquisition debt and other
transaction related expenses. Excluding the impact of Rietschle's operating
results, net income for the 2003 first quarter would have been $7.8 million or
4.7% higher than the comparable 2002 period, primarily due to higher sales
volume in both the Pump and Compressor Segment and Lighting Segment.
PUMP AND COMPRESSOR SEGMENT
Net sales during the first quarter ended March 31, 2003, increased 100.5% to
$92.3 million compared to $46.1 million for the first quarter of 2002. Included
in 2003 was $39.9 million related to Rietschle net sales. Excluding the
Rietschle net sales, 2003 net sales would have increased 13.9%. Also favorably
impacting the 2003 net sales were the effects of exchange rates. If measured in
constant exchange rates and when excluding the Rietschle net sales, 2003 net
sales would have increased 7.5%. The following comments regarding net sales are
based on comparisons of the 2003 and 2002 first quarters when excluding the
Rietschle net sales and the effects of exchange rates. North American operations
reported increases in 2003 sales compared to 2002 due to continued strength in
the automotive market. Europe also reported higher net sales due to increases
from the automotive, medical, and certain industrial markets. Net sales
decreased in the Asia Pacific operations due to softness in the environmental
and medical markets.
Item 2. Management's Discussion and Analysis - Continued
Gross profit for the Pump and Compressor Segment was $33.1 million, or 35.9% of
sales in the first quarter of 2003, compared to $16.9 million, or 36.7% in the
first quarter of 2002. Excluding Rietschle's operating results in 2003, the
Company's gross profit percent would have been 35.4%. The reduction in the gross
profit percentage was primarily due to the negative impact from a new product in
North America, which is in the process of being transferred to China for lower
cost production. The impact in the first quarter of 2003 related to this was $.5
million.
The Pump and Compressor Segment's selling, general and administrative (SG&A)
expenses were $22.8 million, or 24.7% of sales, in the first quarter of 2003,
compared to $9.3 million, or 20.3%, in the same period in 2002. These exclude
corporate expenses which are discussed in a separate section below. The higher
percent of sales in 2003 for SG&A expenses, when including Rietschle, is due to
the increased number of Rietschle sales and service offices throughout the
world, which require a higher level of SG&A costs to operate. Excluding
Rietschle's SG&A expenses, the 2003 SG&A expenses would be at 19.9% of sales,
which is down slightly from the 2002 percentage.
Operating income for the first quarter ended March 31, 2003, was $10.3 million
or 36.8% higher than the $7.5 million in the first quarter of 2002. Included in
the 2003 first quarter were $2.6 million related to Rietschle operating income.
Excluding Rietschle, the first quarter operating income would have increased
2.7%. Also favorably impacting the 2003 operating income were the effects of
exchange rates. If measured in constant exchange rates and when excluding the
Rietschle operating income, the 2003 operating income would have decreased 2.7%.
The following comments regarding operating income are based on comparisons of
the 2003 and 2002 first quarters when excluding the Rietschle operating income
and the effects of exchange rates. The North American operations posted improved
operating income results primarily due to increased sales volume. These improved
results were partially offset by lower margins on a new product, which is in the
process of being transferred to China for lower cost production. The European
operations reported lower operating income in the first quarter of 2003 versus
2002, primarily due to unfavorable product mix. The Asia Pacific operating
income was lower than the comparable 2002 periods due to lower sales volume.
LIGHTING SEGMENT
The Genlyte Group (Genlyte) and Thomas formed the Genlyte Thomas Group LLC (GTG)
on August 30, 1998. The Lighting Segment's operating income includes our 32%
interest in the GTG joint venture, as well as expenses related to Thomas
Industries stock options issued to GTG employees. The Lighting Segment earnings
increased 2.3% to $6.1 million in the first quarter of 2003, compared to $6.0
million in the same period in 2002. This increase is due primarily to a 2.5%
increase in sales.
Thomas' investment in GTG is accounted for using the equity method of
accounting. Under the terms of the LLC Agreement, 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 interest in GTG computed as a going concern, including the control
premium.
Also under the terms of the LLC Agreement, on or after the final settlement or
disposition of Genlyte's case related to the Keene Creditors Trust lawsuit
against Genlyte and others, either Thomas or Genlyte has the right, but not the
obligation to buy the other parties' interest in GTG (the "Offer Right"). If
Item 2. Management's Discussion and Analysis - Continued
Thomas and Genlyte cannot agree on the terms, then GTG or the business of GTG
shall be sold to the highest bidder. Either party may participate in bidding for
the purchase of GTG or the business of GTG. On March 14, 2003, the Southern
District of New York Federal District Court dismissed the Genlyte case noted
above. On April 14, 2003, the Creditors Trust filed a Notice of Appeal to the
United States Court of Appeals for the Second Circuit from the final judgement
entered on March 17, 2003. The Notice claims to bring up for review all orders,
opinions, and decisions previously entered in the action. Therefore, as of May
12, 2003, no final settlement or disposition has occurred and neither party has
the ability to exercise this right.
In the event of a Change of Control (i) of Thomas, GTG has the right, but not
the obligation, to purchase Thomas' interest for a purchase price equal to Fair
Market Value of GTG multiplied by Thomas' ownership interest or (ii) of Genlyte,
Thomas has the right, but not the obligation, to sell its interest to the Joint
Venture for a purchase price equal to Fair Market Value of GTG multiplied by
Thomas' ownership interest. The definition of "Change of Control" includes the
acquisition by any person of 25% or more of Thomas' outstanding common stock.
In the event of a Deadlock (as defined below), Thomas may exercise its Put Right
in accordance with the LLC Agreement or Genlyte may, in its sole discretion,
cause the entire Joint Venture or business of GTG to be sold. A "Deadlock" shall
be deemed to exist if (i) the Management Board of GTG fails to agree on a matter
for which Special Approval is required in accordance with the LLC Agreement and
(ii) such disagreement continues for 90 days. The definition of "Special
Approval"includes the approval of at least a majority of the management board
representatives, including, in all instances, approval by at least one
representative appointed by Thomas.
CORPORATE
As disclosed in Note F (Segment Disclosures) in the consolidated financial
statements, consolidated operating income includes corporate expenses. Corporate
expenses were $1.8 million for the three months ended March 31, 2003, compared
to $1.5 million for 2002. The increase in 2003 relates to higher banking, audit,
and tax fees as a result of the Rietschle acquisition.
Interest expense for the three months ended March 31, 2003 was $1.1 million
compared to $.6 million for 2002. The 2003 amount includes $.8 million related
to the Rietschle acquisition. Excluding Rietschle related amounts, the 2003
interest expense was $.3 million. The reduction in 2003, when excluding the
Rietschle acquisition, was primarily related to the $7.7 million payment of
long-term debt on January 31, 2003, which carried a 9.36% annual interest rate.
Interest rates were also lower in 2003 compared to 2002.
Interest income and other for the three months ended March 31, 2003 was a charge
of $39 thousand compared to $242 thousand of income in the comparable period in
2002. The decrease from 2002, relates to lower amounts of invested cash in 2003
and lower interest rates versus 2002. The 2003 first quarter charge also
includes negative impact from foreign currency transaction losses, compared to
favorable impacts in the first quarter of 2002.
Income tax provisions were $4.7 million and $4.3 million in the three months
ended March 31, 2003 and 2002, respectively. The effective income tax rate was
35.0% in 2003, compared to 36.5% in 2002. The decline in the effective tax rate
in 2003 was primarily due to the tax benefits to be achieved through the
Rietschle acquisition.
Item 2. Management's Discussion and Analysis - Continued
LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents increased $.4 million to $19.3 million at March 31,
2003, compared to $18.9 million at December 31, 2002. This increase was
primarily related to the $7.7 million long-term debt payment on January 31,
2003, which was offset by proceeds from additional long-term debt borrowings of
$12.0 million, at lower interest rates. These additional proceeds were also used
for working capital needs during the three months ended March 31, 2003.
Cash flows provided by operations in the first quarter of 2003 were $.8 million
compared to cash flows provided by operations of $1.7 million in the first
quarter of 2002. The decrease in cash flows were primarily related to increases
in accounts receivable and inventory in the first quarter of 2003 compared to
2002. Our first quarter net cash from operating activities has historically been
relatively low since the formation of the GTG joint venture. The Company
receives no distributions from GTG until after the first quarter of each year.
In accordance with the joint venture agreement, the Company does receive
periodic reimbursements of income taxes beginning in the second quarter and also
receives contractually a minimum of a $3.0 million dividend in the fourth
quarter of each year.
Dividends paid in 2003 were $1.5 million compared with $1.3 million in 2002. The
2003 dividends increased primarily due to the issuance of 1.8 million shares in
connection with the acquisition of Rietschle.
As of March 31, 2003, the Company had standby letters of credit totaling
$4,410,000 with expiration dates during 2003. 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 2003,
no purchases were made. Through March 31, 2003, 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 stock
through a combination of cash flows generated from operating activities and our
revolving line of credit.
Working capital increased from $82.0 million at December 31, 2002, to $90.7
million at March 31, 2003, primarily due to increases in accounts receivable and
inventories to support business activities.
March 31, December 31,
Dollars in Thousands 2003 2002
---- ----
Working capital $ 90,676 $82,030
Current ratio 2.74 2.66
Long-term debt, less current portion $108,491 $104,047
Long-term debt to total capital 24.9% 24.9%
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 $107.4 million are not restricted at March 31, 2003. Thomas is in
compliance with all covenants or other requirements set forth in its borrowing
agreements. In the
Item 2. Management's Discussion and Analysis - Continued
event of non-compliance or if Thomas prepays the debt, then Thomas would incur a
penalty. At March 31, 2003, the prepayment penalty would have been approximately
$1.9 million on a pre-tax basis.
As of March 31, 2003, the Company had a $120 million revolving line of credit
with its banks through August 28, 2005, $90.0 million of which was outstanding.
This line of credit was used to fund the cash payment of $83 million for the
Rietschle acquisition and to support the short-term needs of the business for
working capital changes, fixed asset additions, and general business use. As of
March 31, 2003, the Company had uncommitted short-term borrowing arrangements
being used by some of its foreign offices which totaled $58 thousand. As of
March 31, 2003 and December 31, 2002, except as described above related to the
GTG joint venture, 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.
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 Quarterly Report 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 statements. Any
projections of financial performance 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.
Item 2. Management's Discussion and Analysis - Continued
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 highly
competitive markets that are 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 currency exchange rate fluctuations. 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.
o With the Rietschle acquisition, the Company is in the process of
integrating the Rietschle business. There can be no assurance that the
integration will occur in a timely fashion or in a manner which will allow
the Company to realize the full benefit of its strategies. As part of the
integration process, the Company plans on achieving certain synergies.
There can be no assurance that the synergies will be realized in a timely
manner, if at all.
o With the Rietschle acquisition, the Company has a larger percentage of its
net assets exposed to foreign currency risks. As a result, this increased
exposure to foreign currency risks may adversely affect the Company's
results.
o With the Rietschle acquisition, the Company has a leading market share in
supplying compressors and systems to the printing industry worldwide. The
Company's market share could be reduced significantly due to competition or
technology. The loss of market share in the printing industry could have a
significant adverse affect on the Company's results.
The forward-looking statements made by the Company are based on estimates that
the Company believes are reasonable. However, 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 both fixed and variable rates.
Variable rate long-term debt includes the $1.25 million Industrial Revenue Bond
and the $90.0 million outstanding from the revolving line of credit facility
that accrue interest at variable rates, but which can be fixed for six month
intervals. Short-term borrowings of $58 thousand at March 31, 2003, 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 its variable rate
debt. At March 31, 2003, $91.3 million was outstanding. A 100 basis point
movement in the interest rate on the variable rate debt of $91.3 million would
result in an $913,000 annualized effect on interest expense and cash flows
($593,000 net of tax).
The Company also has short-term investments, including cash equivalents, of
$14.0 million as of March 31, 2003 that bear interest at variable rates. A 100
basis point movement in the interest rate would result in an approximate
$140,000 annualized effect on interest income and cash flows ($91,000 net of
tax).
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 $217,000 annualized
effect on the fair value of long-term debt ($141,000 net of tax).
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 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, Asia, and South America. Our Lighting Segment
currency exposure is primarily in Canada.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing
date of this report, that our disclosure controls and procedures
are effective in ensuring that information required to be
disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the
date of the previous mentioned evaluation.
PART II. OTHER INFORMATION
- ------- -----------------
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 Section 906 of the
Sarbanes - Oxley Act of 2002, filed herewith.
(b) No reports on Form 8-K were filed during the quarter.
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 May 12, 2003
CERTIFICATIONS
I, Timothy C. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thomas
Industries Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Timothy C. Brown
-----------------------------
Timothy C. Brown, Chairman,
President and CEO
CERTIFICATIONS
--------------
I, Phillip J. Stuecker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thomas
Industries Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Phillip J. Stuecker
-------------------------
Phillip J. Stuecker, Vice
President and Chief
Financial Officer