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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 June 30, 2004
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, SUITE 300, LOUISVILLE, KENTUCKY 40207
- ----------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
502/893-4600
- --------------------------------------------------------------------------------
(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 Rule 12b-2 of the Exchange Act) Yes X No __
As of July 28, 2004, 17,459,904 shares of the registrant's Common Stock were
outstanding (net of treasury shares).
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
----------------------- ---------------------
2004 2003 2004 2003
----------------------- ---------------------
Net sales ............................................... $ 102,656 $ 95,810 $ 212,174 $ 188,156
Cost of products sold ................................... 65,093 62,050 136,228 121,281
----------------------- ---------------------
Gross profit ............................................ 37,563 33,760 75,946 66,875
Selling, general and administrative
expenses .............................................. 29,368 25,194 58,368 49,772
Equity income from GTG...................................
7,997 6,887 15,419 13,030
----------------------- ---------------------
Operating income ........................................ 16,192 15,453 32,997 30,133
Interest expense ........................................ 935 1,026 1,961 2,112
Interest income and other income ........................ (172) 94 434 55
----------------------- ---------------------
Income before income taxes and minority interest ........ 15,085 14,521 31,470 28,076
Income taxes ............................................ 5,280 5,079 11,015 9,821
----------------------- ---------------------
Income before minority interest ......................... 9,805 9,442 20,455 18,255
Minority interest, net of tax ........................... -- 10 -- 17
----------------------- ---------------------
Net income .............................................. $ 9,805 $ 9,432 $ 20,455 $ 18,238
======================= =====================
Net income per share:
Basic ............................................... $ 0.56 $ 0.55 $ 1.18 $ 1.06
Diluted ............................................. $ 0.55 $ 0.54 $ 1.15 $ 1.04
Dividends declared per share: ........................... $ 0.095 $ 0.095 $ 0.19 $ 0.18
Weighted average number of shares outstanding:
Basic ............................................... 17,391 17,179 17,355 17,159
Diluted ............................................. 17,781 17,550 17,743 17,514
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
2004 2003 *
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 37,379 $ 23,933
Accounts receivable, less allowance
(2004--$2,149; 2003--$2,270) ........................................ 59,448 52,819
Inventories:
Finished products ............................................... 31,622 29,004
Raw materials ................................................... 30,342 28,250
Work in process ................................................. 8,057 8,641
-----------------------------
70,021 65,895
Deferred income taxes .................................................. 6,804 6,688
Other current assets ................................................... 5,806 6,287
-----------------------------
Total current assets ....................................................... 179,458 155,622
Investment in GTG .......................................................... 224,767 214,405
Property, plant and equipment .............................................. 189,569 185,123
Less accumulated depreciation and amortization ......................... (82,780) (76,773)
-----------------------------
106,789 108,350
Goodwill ................................................................... 62,545 70,164
Other intangible assets, net ............................................... 21,110 21,788
Other assets ............................................................... 4,828 4,715
-----------------------------
Total assets ............................................................... $ 599,497 $ 575,044
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .......................................................... $ 5,082 $ 3,088
Accounts payable ....................................................... 15,350 14,312
Accrued expense and other current liabilities .......................... 33,342 30,519
Dividends payable ...................................................... 1,651 1,642
Income taxes payable ................................................... 3,985 595
Current portion of long-term debt ...................................... 9,775 9,885
-----------------------------
Total current liabilities .................................................. 69,185 60,041
Deferred income taxes ...................................................... 5,788 6,177
Long-term debt, less current portion ....................................... 103,812 102,673
Long-term pension liability ................................................ 13,189 13,189
Other long-term liabilities ................................................ 9,184 9,609
-----------------------------
Total liabilities .......................................................... 201,158 191,689
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: 2004 - 18,274,960; 2003 - 18,108,664 ........................ 18,275 18,109
Capital surplus ........................................................ 139,791 137,041
Deferred compensation .................................................. 1,518 1,211
Treasury stock held for deferred compensation .......................... (1,518) (1,211)
Retained earnings ...................................................... 233,454 216,296
Accumulated other comprehensive income ................................. 18,878 23,968
Less cost of 822,339 treasury shares ................................... (12,059) (12,059)
-----------------------------
Total shareholders' equity ................................................. 398,339 383,355
-----------------------------
Total liabilities and shareholders' equity ................................. $ 599,497 $ 575,044
=============================
* Derived from the audited December 31, 2003 consolidated balance sheet. See
notes to condensed consolidated financial statements.
3
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
--------------------------
2004 2003
--------------------------
OPERATING ACTIVITIES
Net income ..................................................................... $ 20,455 $ 18,238
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and intangible amortization ................................. 8,147 7,609
Deferred income taxes .................................................... (458) (1,755)
Equity income from GTG ................................................... (15,419) (13,030)
Distributions from GTG ................................................... 4,350 3,250
Other items .............................................................. 241 151
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable ................................................ (7,520) (3,260)
Inventories ........................................................ (5,145) (5,929)
Accounts payable ................................................... 1,233 (4,192)
Income taxes payable ............................................... 4,194 3,275
Accrued expenses and other current liabilities ..................... 2,882 4,790
Other .............................................................. 126 (1,861)
--------------------------
Net cash provided by operating activities ...................................... 13,086 7,286
INVESTING ACTIVITIES
Purchases of property, plant and equipment ..................................... (7,577) (6,544)
Sales of property, plant and equipment ......................................... 47 80
Purchases of companies, net of cash acquired ................................... 6,154 (1,534)
--------------------------
Net cash used in investing activities .......................................... (1,376) (7,998)
FINANCING ACTIVITIES
Proceeds from short-term debt, net ............................................. 2,091 1,820
Payments on long-term debt ..................................................... (17,288) (12,990)
Proceeds from long-term debt ................................................... 18,563 12,000
Dividends paid ................................................................. (3,288) (2,912)
Other .......................................................................... 1,569 1,028
--------------------------
Net cash provided by (used in) financing activities............................. 1,647 (1,054)
Effect of exchange rate changes ................................................ 89 615
--------------------------
Net increase (decrease) in cash and cash equivalents ........................... 13,446 (1,151)
Cash and cash equivalents at beginning of period ............................... 23,933 18,879
--------------------------
Cash and cash equivalents at end of period ..................................... $ 37,379 $ 17,728
==========================
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 of Thomas
Industries Inc. ("Thomas" or the "Company") 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 and six-month periods ended June
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. In the opinion of the Company's management,
the unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation of the financial position and the results of operations. 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, 2003.
Note B - Acquisitions
- ---------------------
On June 3, 2004, the Company received $6.2 million in cash, which represents an
adjustment to the Company's purchase price of Werner Rietschle Holding GmbH
("Rietschle"). Rietschle was acquired on August 29, 2002. The original purchase
price consisted of $83.3 million in cash and 1.8 million treasury shares of the
Company's common stock. The purchase agreement specified the negotiation process
to be followed for various items in dispute, so that an adjustment to the
purchase price could occur at a subsequent time. In June 2004, negotiations on
certain disputed items were completed and this adjustment reduced goodwill by
$6.2 million.
The adjusted aggregate purchase price for Rietschle consists of (in thousands):
Initial cash paid by the Company $ 83,288
Fair value of Thomas common stock 44,754
Transaction costs 5,931
Purchase price adjustment received in cash (6,154)
-----------
Total adjusted aggregate purchase price $127,819
==========
On November 20, 2003, the Company purchased the remaining 25% minority interest
in the Company's New Zealand subsidiary for $244,000. All of the purchase price
was allocated to goodwill. The Company now owns 100% of the New Zealand
subsidiary.
On July 31, 2003, the Company purchased all of the outstanding equity interest
of Aldax AB of Stockholm, Sweden for $2.6 million, of which $1.7 million was
paid in cash at the acquisition date, while $900,000 was recorded as a long-term
liability to be paid on July 31, 2005 in accordance with the purchase agreement.
Approximately $2.0 million of the purchase price was allocated to goodwill.
On April 11, 2003, the Company purchased the remaining 20% minority interest in
the Company's Italian subsidiary for $1.5 million. All of the purchase price was
allocated to goodwill. The Company now owns 100% of the Italian subsidiary.
5
Note C - Subsequent Event
- -------------------------
On July 31, 2004, the Company sold its 32% interest in the Genlyte Thomas Group
LLC (GTG; see Note J) for approximately $400 million, which is an estimate that
will not be finalized until March 2005 due to tax considerations. Transaction
costs and taxes are estimated to be $83 million. Approximately $103 million of
the proceeds were used to pay down short-term and long-term debt. The only debt
remaining outstanding are capitalized leases. The remaining proceeds will be
invested in short-term investment grade instruments.
Note D - Contingencies
- ----------------------
On August 13, 2002, a petition was filed in the District Court of Jefferson
County, Texas, adding Thomas Industries Inc. as a third party defendant in a
lawsuit captioned Hydro Action, Inc. v. Jesse James, individually and d/b/a
James Backhoe Service of Dietrich, Illinois, Inc. and Original Septic Solutions,
Inc. (the "Third Party Plaintiffs") (the "Original Lawsuit"). The Original
Lawsuit alleged that the Company violated the Texas Deceptive Trade Practices
Act and breached warranties of merchantability and fitness for a particular
purpose with respect to pumps sold by the Company and used in septic tanks
manufactured or sold by the plaintiffs. The Original Lawsuit has been stayed as
a result of the bankruptcy filing by Hydro Action, Inc. On October 8, 2003, a
lawsuit was filed against the Company, Gig Drewery, Yasunaga Corporation and
Aqua-Partners, Ltd. in the District Court of Jefferson County, Texas, making the
same allegations set forth in the Original Lawsuit and requesting class-action
certification. No class has been certified. The Third Party Plaintiffs are
plaintiffs in this action. This complaint has been amended to include
approximately 28 plaintiffs. The complaint currently seeks $3 million per
plaintiff and punitive and exemplary damages. The total sales related to these
products were approximately $900,000. Although this litigation is in the
preliminary stages, the Company believes it has meritorious defenses to the
claims and intends to vigorously defend this matter. Litigation is subject to
many uncertainties and the Company cannot guarantee the outcome of these
proceedings. However, based upon information currently available, the Company
does not believe that the outcome of these proceedings will have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
The Company, like other similar manufacturers, is subject to environmental rules
and regulations regarding the use, disposal and cleanup of substances regulated
under environmental protection laws. It is the Company's policy to comply with
these rules and regulations, and the Company believes that its practices and
procedures are designed to meet this compliance. The Company is involved in
remedial efforts at certain of its present and former locations. The Company
records appropriate liabilities for such matters, when costs can be reasonably
estimated. Management does not believe that the ultimate resolution of
environmental matters will have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
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 consolidated 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.
6
Note E - Comprehensive Income
- -----------------------------
The reconciliation of net income to comprehensive income follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $9,805 $9,432 $20,455 $18,238
Other comprehensive income (loss):
Minimum pension liability (increase) 3 (36) 10 (63)
Related tax (benefit) expense (1) 13 (4) 22
Derivative adjustment 139 - (154) -
Related tax (benefit) expense (53) - 58 -
Foreign currency translation 2,458 7,255 (5,000) 11,090
----- ----- ------- ------
Total change in other comprehensive income 2,546 7,232 (5,090) 11,049
----- ----- ------- ------
Total comprehensive income $12,351 $16,664 $15,365 $29,287
======= ======= ======= =======
Note F - 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
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Net income $9,805 $9,432 $20,455 $18,238
====== ====== ======= =======
Denominator:
Weighted average shares outstanding 17,391 17,179 17,355 17,159
Effect of dilutive securities:
Director and employee stock options 379 349 375 330
Employee performance shares 11 22 13 25
------ ------ ------- -------
Dilutive potential common shares 390 371 388 355
------ ------ ------- -------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 17,781 17,550 17,743 17,514
====== ====== ====== ======
Note G - Segment Disclosures
- ----------------------------
(In thousands) THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------ ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Total net sales including intercompany sales
Pump and Compressor $127,996 $117,813 $263,712 $229,940
Intercompany sales
Pump and Compressor (25,340) (22,003) (51,538) (41,784)
-------- -------- -------- --------
Net sales to unaffiliated customers
Pump and Compressor $102,656 $ 95,810 $212,174 $188,156
======== ======== ======== ========
Operating income
Pump and Compressor $ 10,873 $10,334 $22,516 $ 20,659
Lighting* 7,997 6,887 15,419 13,030
Corporate (2,678) (1,768) (4,938) (3,556)
-------- -------- -------- --------
$ 16,192 $15,453 $ 32,997 $ 30,133
======== ======== ======== ========
7
*Three months ended June 30 consists of equity income of $8,033,000 in 2004 and
$6,952,000 in 2003 from our 32% interest in the joint venture, Genlyte Thomas
Group LLC (GTG), less $36,000 in 2004 and $65,000 in 2003 related to expense
recorded for Thomas Industries stock options issued to GTG employees. Six months
ended June 30 consists of equity income of $15,545,000 in 2004 and $13,174,000
in 2003 from our 32% interest in GTG, less $126,000 in 2004 and $144,000 in 2003
related to expense recorded for Thomas Industries stock options issued to GTG
employees.
Note H - Goodwill and Other Intangible Assets
- ---------------------------------------------
The changes in net carrying amount of goodwill for the six months ended June 30,
2004 were as follows (in thousands):
SIX MONTHS ENDED
JUNE 30, 2004
-------------
Balance at beginning of period $ 70,164
Adjustments to Rietschle acquisition (6,196)
Translation adjustments and other (1,423)
----------
Balance at end of period $ 62,545
==========
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.
Amortizable intangible assets consist of the following (in thousands):
JUNE 30, 2004 DECEMBER 31, 2003
----------------------------------------- ----------------------------------------------
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
---- ---- ------------ ---- ---- ------------
Licenses 18-19 $ 498 $ 215 18-19 $ 503 $ 207
Patents 5-20 5,781 995 5-20 5,917 771
Other 1-15 3,781 1,061 1-10 3,619 890
------------------------------- --------------------------------
Total $10,060 $ 2,271 $ 10,039 $1,868
=============================== ================================
The total intangible amortization expense for the six months ended June 30, 2004
and 2003 was $442,000 and $471,000, respectively.
The estimated amortization expense for the next five years beginning January 1,
2004 through December 31, 2008 is as follows (in thousands):
2004 $891
2005 898
2006 898
2007 890
2008 842
The Company has various trademarks totaling $12,535,000 at June 30, 2004 and
$12,831,000 at December 31, 2003, that are not amortized. Also included in other
intangible assets is an intangible asset associated with the minimum pension
liability of $786,000 as of June 30, 2004 and December 31, 2003.
8
Note I - 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 J - Genlyte Thomas Group LLC (GTG)
- ---------------------------------------
The following table contains certain unaudited financial information for GTG.
GENLYTE THOMAS GROUP LLC
CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
---- ----
GTG balance sheets:
Current assets $511,876 $444,272
Long-term assets 285,949 288,499
Current liabilities 217,684 185,809
Long-term liabilities 51,802 51,003
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
GTG income statements (unaudited):
Net sales $301,437 $254,113 $578,799 $492,026
Gross profit 107,549 88,729 202,665 170,559
Earnings before interest and taxes 27,520 23,259 52,739 44,422
Net income 25,104 21,724 48,578 41,169
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG $8,033 $6,952 $15,545 $13,174
Stock option expense (36) (65) (126) (144)
-------- -------- -------- --------
Equity income reported by Thomas $7,997 $6,887 $15,419 $13,030
======== ======== ======== ========
Note K - Stock-Based Compensation
- ---------------------------------
Stock options are granted under various stock compensation programs to employees
and independent directors. In December 2003, the Company adopted the fair value
recognition provisions of accounting for stock-based compensation under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which required the Company to expense the fair value
of employee stock options prospectively for all employee awards granted,
modified or settled after January 1, 2003. Awards under the Company's plan vest
over a period of five years. For employee stock options granted prior to 2003,
the Company continues to use the intrinsic value based method of accounting
prescribed by 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.
9
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 following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- -----------------
2004 2003 2004 2003
--------------------------------- -------------------------------------
Net income (as reported) $ 9,805 $ 9,432 $ 20,455 $ 18,238
Add: Stock-based compensation expense for GTG employees
included in reported net income, net of related tax
effect 33 59 115 131
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effect (146) (209) (341) (430)
--------------------------------- -------------------------------------
Net income (pro forma) $ 9,692 $ 9,282 $ 20,229 $ 17,939
================================= =====================================
Net income per share (Basic) - As reported $ .56 $ .55 $1.18 $ 1.06
Pro forma .56 .54 1.17 1.05
Net income per share (Diluted) - As reported .55 .54 1.15 1.04
Pro forma .55 .53 1.14 1.02
Note L - 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 June 30, 2004 are as follows (in
thousands):
SIX MONTHS ENDED
JUNE 30, 2004
Balance at beginning of period $5,382
Warranties accrued 2,017
Settlements made and other (1,617)
--------
Balance at end of period $5,782
========
Note M - Currency Risk Management
- ---------------------------------
All derivative instruments are recorded at fair value on the balance sheet and
all changes in fair value are recorded to earnings or to shareholders' equity
through other comprehensive income in accordance with SFAS No. 133, as amended,
"Accounting for Derivatives and Hedging Activity" (SFAS 133).
10
The Company uses forward currency exchange contracts to manage its exposures to
the variability of cash flows primarily related to the purchase of inventory
manufactured in Europe but inventoried and sold in non Euro-denominated
countries. These contracts are designated as cash flow hedges.
The Company does not use derivative instruments for trading or speculative
purposes.
All of the Company's derivative contracts are adjusted to current market values
each period and qualify for hedge accounting under SFAS 133. The periodic gains
and losses of the contracts designated as cash flows are deferred in other
comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in operations as an adjustment
to the carrying amounts of the underlying transactions in the period in which
these transactions are recognized. The carrying values of derivative contracts
are included in other current assets.
The Company's policy requires that contracts used as hedges must be effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. Hedging effectiveness is
assessed periodically. Any contract that is either not designated as a hedge, or
is so designated but is ineffective, is marked to market and recognized in
earnings immediately. If a cash flow hedge ceases to qualify for hedge
accounting or is terminated, the contract would continue to be carried on the
balance sheet at fair value until settled and future adjustments to the
contract's fair value would be recognized in earnings immediately. If a
forecasted transaction were no longer probable to occur, amounts previously
deferred in other comprehensive income would be recognized immediately in
earnings.
Note N - Pension and Other Postretirement Benefit Costs
- -------------------------------------------------------
The components of net periodic benefit cost consisted of the following:
OTHER
Three months ended June 30: PENSION BENEFITS POSTRETIREMENT
- --------------------------- ----------------- BENEFITS
--------
FOREIGN PLANS U.S. PLANS U.S. PLANS
--------------------------------------------------- -----------------------
2004 2003 2004 2003 2004 2003
------------ ------------ ------------ ------------ ----------- -----------
Service cost $ 62 $ 72 $ 81 $ 71 $ 21 $ 17
Interest cost 141 148 132 128 23 21
Expected return on plan assets - - (156) (135) - -
Other amortization and deferral 4 - 47 51 10 8
------ ------ ------ ------- ----- -----
Net Periodic Benefit cost $ 207 $ 220 $ 104 $ 115 $ 54 $ 46
====== ===== ====== ====== ===== =====
OTHER
Six months ended June 30: PENSION BENEFITS POSTRETIREMENT
- ------------------------- ----------------- BENEFITS
--------
FOREIGN PLANS U.S. PLANS U.S. PLANS
--------------------------------------------------- -----------------------
2004 2003 2004 2003 2004 2003
------------ ------------ ------------ ------------ ----------- -----------
Service cost $ 124 $ 144 $ 162 $ 142 $ 42 $ 34
Interest cost 282 296 264 256 46 42
Expected return on plan assets - - (312) (270) - -
Other amortization and deferral 8 - 94 102 20 16
----- ----- ----- ----- ----- -----
Net Periodic Benefit cost $ 414 $ 440 $ 208 $ 230 $ 108 $ 92
===== ===== ===== ===== ===== =====
As of June 30, 2004, no contributions have been made, but the Company
anticipates contributions to the plans of $570,000 for 2004.
11
Note O - Recent Accounting Pronouncements
- -----------------------------------------
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate
a variable interest entity if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns, or both. The Company has adopted
the provisions of FIN 46, which did not have an impact on the Company's
financial statements or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets, and certain
obligations that can be settled with shares of stock. Although certain portions
of SFAS No. 150 have been deferred indefinitely, certain portions of the
statement became effective during the third quarter of 2003. The provisions of
this statement did not have and are not expected to have an impact on the
Company's statement of financial position.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"), which introduces a Medicare prescription
drug benefit, as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to
the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", ("FSP
106-2") to discuss certain accounting and disclosure issues raised by the Act.
FSP 106-2 addresses accounting for the federal subsidy for the sponsors of
single employer defined benefit postretirement healthcare plans and disclosure
requirements for plans for which the employer has not yet been able to determine
actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 is
effective for the first interim or annual period beginning after June 15, 2004
(the quarter ending September 30, 2004 for the Company). We have not yet
concluded whether the prescription drug benefits provided under our
postretirement plan are actuarially equivalent to the Medicare benefit as
necessary to qualify for the subsidy. The reported net periodic benefit costs of
our postretirement plan in the accompanying Financial Statements and Note N to
the Financial Statements do not reflect the effects of the Act. Adoption of FSP
106-2 could require revisions to previously reported information. While we may
be eligible for benefits under the Act based on the prescription drug benefits
provided in our postretirement plan, we do not believe such benefits will have a
material impact on our Financial Statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company operates in the Pump and Compressor Segment and until July 31, 2004,
also operated in the Lighting Segment. The Pump and Compressor Segment designs,
manufactures, markets, sells and services pump and compressor products through
worldwide operations. In August 2002, we significantly increased the size of our
pump and compressor business by acquiring substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle's operating results are included
in the Company's operating results since the August 29, 2002 acquisition date.
The Pump and Compressor Segment supplies products to the original equipment
manufacturer (OEM) market in such applications as medical equipment,
environmental, mobile, printing, packaging and many others. An important market
to the Company is the medical equipment market, which includes compressors used
in oxygen concentrators, nebulizers, aspirators, and other devices. As
previously announced, we expect our sales to the oxygen concentrator OEM market
to be reduced in 2004 by $4 million to $6 million as a result of the loss of one
of our customer's oxygen concentrator product lines to a competitor beginning
late in the second quarter of
12
ITEM 2. Management's Discussion and Analysis - Continued
2004. Even with the loss of these sales, the Company believes it has the leading
market share in the oxygen concentrator OEM market worldwide. Pricing in this
market has continued to erode due to competition and threat of foreign
manufacturers. In order to reduce our cost structure and remain price
competitive, we are in the process of constructing a manufacturing facility in
China, which should be in production in the first half of 2005. We continue to
rationalize our existing production facilities around the world to achieve
efficient high quality production capabilities. During 2003, we closed our
manufacturing facility in Fleurier, Switzerland, and relocated this production
to other facilities. We incurred moving related costs for this shutdown. As this
was a former Rietschle facility, all other shutdown costs were recorded as
goodwill as part of the opening balance sheet adjustments contemplated in the
transaction. In 2003, we also built and opened a new facility in Memmingen,
Germany and relocated from the older leased facility late in 2003, incurring
approximately $400,000 in relocation costs. This new facility allows the Company
to produce in a more efficient manner and consolidate production. In February
2004, the Company announced the closing of its Wuppertal, Germany manufacturing
facility which will generate approximately $3.2 million of one-time costs in
2004. The Company has recorded $1.1 million and $1.9 million of pre-tax charges
in the second quarter and the first six months of 2004, respectively, related to
this closure. Production from the Wuppertal facility has now been transferred to
the new Memmingen facility. We believe these steps were necessary to better
position the Company for future growth opportunities given the current
competitive environment. We have received certain commodity cost increases which
will impact our costs in future periods, although we will attempt to offset
these with price increases of our own. The Company is also experiencing
increased costs related to requirements by Section 404 of the Sarbanes-Oxley
Act. In the second quarter and six month periods ended June 30, 2004, the
Company recorded approximately $370,000 of pre-tax charges related to
Sarbanes-Oxley and expects an additional $900,000 in the second half of 2004,
most of which will be in the third quarter.
Until July 31, 2004, the Company also operated in the Lighting Segment through
its 32% interest in the Genlyte Thomas Group LLC (GTG) joint venture. The
Company's investment in GTG was accounted for by using the equity method of
accounting. GTG designs, manufacturers, markets, and sells lighting fixtures for
a wide variety of applications in the commercial, industrial and residential
markets for both indoor and outdoor fixtures. On July 31, 2004, the Company sold
its 32% interest in GTG to The Genlyte Group Incorporated for approximately $400
million. Since this sale occurred after the current reporting period, the
Company's results for the three months and six months ended June 30, 2004,
include its 32% interest in GTG for those periods. Given the sale of GTG, the
Company is evaluating its segment reporting requirements for future filings.
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 postretirement
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.
13
ITEM 2. Management's Discussion and Analysis - Continued
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. 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 conditions of Thomas' customers deteriorates, 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.
For the Rietschle acquisition which occurred in 2002, the Company utilized an
independent appraiser in determining the fair value of assets and liabilities
acquired. If actual market conditions or other factors are different than those
used by the independent appraiser, then additional asset write-downs may be
required.
Prior to the sale of Thomas' interest in GTG, Thomas held a 32 percent interest
in GTG, which comprised Thomas' lighting segment and was accounted for using the
equity method. GTG's critical accounting policies are determined separately by
The Genlyte Group Incorporated, which consolidates the GTG results.
RESULTS OF OPERATIONS
The Company's net income was $9.8 million in the second quarter ended June 30,
2004, compared to $9.4 million in the same period in 2003. Year-to-date net
income was $20.5 million for the six months ended June 30, 2004, compared to
$18.2 million for the 2003 six month period. The second quarter and six month
increases of 4.0% and 12.2% respectively, were primarily due to higher sales
volume and increased earnings from GTG. The Company's 2004 net income was
negatively impacted in the second quarter and six month periods due to the
strengthening of the euro. Also negatively impacting the 2004 net income were
charges of $.7 million in the second quarter and $1.2 million in the six month
period for costs associated with the closure of the Wuppertal, Germany facility.
Costs related to Section 404 of the Sarbanes-Oxley Act was $240,000 in the
2004 second quarter and first six months.
PUMP AND COMPRESSOR SEGMENT
Net sales for the Pump and Compressor Segment increased 7.1% to $102.7 million
for the second quarter ended June 30, 2004, compared to $95.8 million in the
second quarter of 2003. This net sales increase of $6.9 million included an
estimated $4.5 million related to the effects of exchange rate fluctuations. The
North American operations reported an .8% decrease in 2004 second quarter net
sales compared to 2003 due to weakness in the automotive and medical markets.
Sales from our European operations increased 11.0% for the second quarter of
2004 versus 2003. We estimate that approximately two-thirds of this increase in
Europe came from the favorable effect of exchange rates. Sales increases in
Europe were primarily in the printing, environmental and food and beverage
markets. These net sales increases were partially offset by lower sales to the
automotive and medical markets in Europe. As previously
14
ITEM 2. Management's Discussion and Analysis - Continued
announced, our medical market sales for the 2004 second quarter were negatively
impacted by the loss of one of our oxygen concentrator customers beginning in
June. Asia Pacific reported a 23.8% increase in net sales compared to the second
quarter of 2003. We estimate that approximately one-third of this increase in
Asia Pacific net sales was due to exchange rate fluctuations. The Asia Pacific
sales increases came primarily from the printing and medical markets. Net sales
for the six months ended June 30, 2004, increased 12.8% to $212.2 million
compared to $188.2 million for the comparable 2003 period. This sales increase
of $24.0 million included an estimated $13.1 million related to the effects of
exchange rate fluctuations. Net sales for the North American operations had a
2.5% increase in 2004 net sales compared to the 2003 six month period. This
increase was primarily due to very strong first quarter sales in the medical
market, as well as improvements in the laboratory and industrial markets. These
increases were partially offset by lower sales in the automotive market. The
European operations reported a 19.0% increase in 2004 net sales compared to
2003. We estimate that approximately two-thirds of the European net sales
increase was due to exchange rate fluctuations. The European sales increases
were primarily in the printing, environmental, food and beverage and industrial
markets. Net sales in Asia Pacific increased 28.5% over the 2003 six month
period. We estimated that approximately one-third of this increase was due to
exchange rate impact. Asia Pacific reported increases in the printing,
environmental, medical and industrial markets.
Gross profit for the Pump and Compressor Segment in the second quarter of 2004
was $37.6 million, or 36.6% of net sales, compared to $33.8 million, or 35.2% in
the second quarter of 2003. Gross profit for the six months ended June 30, 2004
was $75.9 million, or 35.8% of net sales, compared to $66.9 million, or 35.5% in
the same period in 2003. During the second quarter of 2004, we began to see
favorable impacts from factory rationalization decisions made in 2003.
Aggressive cost reductions plans are also providing favorable impacts.
The Pump and Compressor Segment's selling, general and administrative (SG&A)
expenses were $26.7 million, or 26.0% of net sales, in the second quarter of
2004, compared to $23.4 million, or 24.5%, in the same period in 2003. SG&A
expenses for the six months ended June 30, 2004 were $53.4 million, or 25.2% of
net sales, compared to $46.2 million, or 24.6%, for 2003. The increase in the
2004 amounts for the second quarter and six month periods is primarily related
to the sales volume increase, exchange rate impact, higher costs associated with
our new ERP system and Sarbanes-Oxley costs. Additionally, we recorded expenses
of $1.1 million and $1.9 million in the 2004 second quarter and six month
periods, respectively, related to the 2004 Wuppertal facility closure.
Pump and Compressor Segment operating income for the second quarter ended June
30, 2004, was $10.9 million, or 10.6% of net sales, compared to $10.3 million,
or 10.8%, in the second quarter of 2003. The 2004 second quarter includes
Wuppertal shutdown expense of $1.1 million. While the Europe and Asia Pacific
operations had increases in operating income for the second quarter of 2004
compared to 2003, the North American operations reported a decrease due to
higher SG&A costs. For the six months ended June 30, 2004, operating income was
$22.5 million, or 10.6% of net sales, compared to $20.7 million, or 11.0%, in
2003. The 2004 six month period includes expense of $1.9 million related to the
Wuppertal shutdown. The North American operations were slightly below 2003
operating income levels due to weakness in the automotive market sales activity.
Both the European and Asia Pacific operations reported increases in operating
income for the 2004 six month period compared to 2003, primarily due to higher
sales volume.
LIGHTING SEGMENT
The Genlyte Group Incorporated (Genlyte) and Thomas formed the Genlyte Thomas
Group LLC (GTG) on August 30, 1998. On July 31, 2004, Thomas sold its 32%
interest in GTG to Genlyte for approximately $400 million. Thomas' investment in
GTG was accounted for using the equity method of accounting. The Lighting
Segment's operating income includes our 32% interest in GTG, as well as
15
ITEM 2. Management's Discussion and Analysis - Continued
expenses related to Thomas Industries stock options issued to GTG employees and
our amortization of Thomas' excess investment in GTG for periods prior to
January 1, 2002. The Lighting Segment operating income for the second quarter of
2004 was $8.0 million compared to $6.9 million in the comparable 2003 period.
This increase is due primarily to a 18.6% increase in GTG sales. For the six
months ended June 30, 2004, operating income for the Lighting Segment was $15.4
million compared to $13.0 million in 2003. This increase is due primarily to a
17.6% increase in GTG sales.
CORPORATE
As disclosed in Note F (Segment Disclosures) in the consolidated financial
statements, consolidated operating income includes corporate expenses. Corporate
expenses were $2.7 million for the three months ended June 30, 2004, compared to
$1.8 million for 2003. For the six months ended June 30, 2004, corporate
expenses were $4.9 million, compared to $3.6 million in 2003. The increase in
2004 for the second quarter and six month periods relates to higher personnel
costs, higher costs associated with compliance with the Sarbanes-Oxley Act,
higher Kentucky license taxes due to tax law changes, higher legal expenses
related to the Rietschle Thomas integration, and additional costs related to
expanding our presence in China.
Interest expense for the three months ended June 30, 2004 was $.9 million
compared to $1.0 million for 2003. For the six months ended June 30, 2004,
interest expense was $2.0 million, compared to $2.1 million for 2003. The slight
reduction in interest expense in 2004 for the second quarter and six month
periods is primarily related to the $7.7 million payment of long-term debt on
January 31, 2004, which carried a 9.36% annual interest rate. This was partially
offset by higher short-term borrowing levels during 2004.
Interest income and other for the three months ended June 30, 2004 was expense
of $172 thousand compared to income of $94 thousand in the second quarter of
2003. The 2004 second quarter includes negative impacts from foreign currency
transaction losses, while 2003 includes positive impacts from foreign currency
transaction gains. For the six months ended June 30, 2004, interest income and
other was income of $434 thousand compared to income of $55 thousand in the 2003
period. The 2004 six month period includes a slight positive impact from foreign
currency transaction gains. Interest income was also higher in 2004 compared to
2003 due to higher invested cash balances.
Income tax provisions were $5.3 million and $5.1 million in the three months
ended June 30, 2004 and 2003, respectively. For the six months ended June 30,
2004, income tax provisions were $11.0 million compared to $9.8 million in 2003.
The effective income tax rate was 35% in the second quarter and six month
periods of 2004 and 2003.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided by operations in the six months ended June 30, 2004 were
$13.1 million compared to $7.3 million in the 2003 six month period. The
increase in 2004 was primarily related to changes in accounts payable and income
taxes payable, as well as increases in net income and increased distributions
from GTG.
Cash used in investing activities was $1.4 million for the first six months of
2004 compared to $8.0 million in the comparable 2003 period. The 2004 amount
includes capital expenditures of $7.6 million, which are partially offset by
cash received of $6.2 million related to an adjustment to the Rietschle purchase
price. The 2003 amount includes capital expenditures of $6.5 million and $1.5
million paid by the Company for the remaining 20% minority interest in our
Italian subsidiary.
16
ITEM 2. Management's Discussion and Analysis - Continued
Financing activities provided cash of $1.6 million in the first six months of
2004 and used cash of $1.1 million in the first six months of 2003. The increase
in 2004 relates primarily to additional net borrowings of short-term and
long-term debt in 2004 of $2.5 million.
Dividends paid in the first six months of 2004 and 2003 were $3.3 million and
$2.9 million, respectively. The increase in 2004 primarily relates to an
increase in the quarterly dividend per share from $.085 to $.095, effective with
the April 1, 2003 dividend.
As of June 30, 2004, the Company had standby letters of credit totaling
$4,410,000 with expiration dates during 2004. 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. No purchases
were made under this repurchase plan during the first half of 2004. Under the
December 1999 repurchase plan, the Company has purchased, on a cumulative basis
through June 30, 2004, 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 $95.6 million at December 31, 2003, to $110.3
million at June 30, 2004, primarily due to increases in accounts receivable and
inventories to support business activities, as well as the $6.2 million cash
received for the Rietschle purchase price adjustment.
June 30, December 31,
(Dollars in thousands) 2004 2003
---- ----
Working capital $110,273 $95,581
Current ratio 2.59 2.59
Long-term debt, less current portion $103,812 $102,673
Long-term debt to total capital 20.7% 21.1%
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 $136.0 million are not restricted at June 30, 2004. Thomas is
currently 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, 2004, the prepayment
penalty would have been approximately $.3 million on a pre-tax basis.
As of June 30, 2004, the Company had a $120 million revolving line of credit
with its banks through August 28, 2005, $95 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
June 30, 2004, the Company had uncommitted short-term borrowing arrangements
being used by certain of its foreign offices which totaled $5.1 million. As of
June 30, 2004 and 2003, 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 were established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
17
ITEM 2. Management's Discussion and Analysis - Continued
As mentioned in Note C, on July 31, 2004, the Company sold its 32% interest in
GTG for approximately $400 million. This transaction will create significant
changes to our working capital and debt levels for our next 10-Q reporting
requirement at September 30, 2004. Net cash proceeds of approximately $317
million will initially increase working capital. Then this increase in working
capital will be reduced by approximately $103 million as debt is paid down
resulting in lower debt levels.
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 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 risks and uncertainties set forth in our annual report on
Form 10-K for the year ended December 31, 2003.
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 variable rates, with the
exception of the $7.7 million senior notes that accrue interest at a 9.36% fixed
rate. Short-term borrowings of $5.1 million at June 30, 2004, are priced at
variable interest rates. The Company's results of operations and cash flows,
therefore, would be affected by interest rate changes to its variable rate debt.
At June 30, 2004, $111.0 million of variable rate debt was outstanding. A 100
basis point movement in the interest rate on the variable rate debt of $111.0
million would result in an $1,110,000 annualized effect on interest expense and
cash flows. This interest rate risk on variable rate debt will be significantly
lower for our next 10-Q reporting requirement as of September 30, 2004, due to
the pay down of approximately $103 million of debt with proceeds from the sale
of GTG.
The Company also has short-term investments, including cash equivalents, of
$20.6 million as of June 30, 2004, that bear interest at variable rates. A 100
basis point movement in the interest rate would result in an approximate
$206,000 annualized effect on interest income and cash flows. This interest rate
risk on variable rate investments will be significantly higher for our next 10-Q
reporting requirement as of September 30, 2004, due to the invested proceeds
from the sale of GTG.
18
ITEM 3. Quantitative and Qualitative Disclosures - Continued
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 $47,000 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 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. There is a risk associated with
changing foreign exchange rates. The Company's objective is to reduce earnings
and cash flow volatility associated with foreign exchange rates to allow
management to focus its attention on its core business issues and challenges.
Accordingly, the Company enters into foreign currency forward contracts that
change in value as foreign exchange rates change to protect the value of
anticipated foreign currency revenues and expenses. The gains and losses on
these contracts offset changes in the value of the underlying transactions as
they occur. The Euro is the only currency hedged. At June 30, 2004, the Company
held forward contracts expiring through June 2005 to hedge probable, but not
firmly committed, intercompany inventory purchases. These hedging contracts are
classified as cash flow hedges and accordingly, are adjusted to current market
values through other comprehensive income until the underlying transactions are
recognized. Upon recognition, such gains and losses are recorded in operations
as an adjustment to the carrying amounts of the underlying transactions in the
period in which these transactions are recognized. At June 30, 2004, the foreign
currency forward contracts had a notional amount of Euro 6,000,000 and fair
value of approximately $24,000. The fair value of the foreign currency forward
contracts, which represents an asset, is included in other current assets. The
amount of net gain deferred through other comprehensive income as of June 30,
2004, was approximately $24,000.
ITEM 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that the Company's disclosure controls and procedures are effective in
all material respects to ensure 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 over financial reporting or in
other factors that could significantly affect these controls, during the period
covered by this report.
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 22, 2004.
(b) Class III Directors elected at the Annual Meeting of
Shareholders were H. Joseph Ferguson, Anthony A.
Massaro, and George H. Walls, Jr. Directors whose
terms of office as a director continued after the
meeting were Timothy C. Brown, Wallace H. Dunbar,
Lawrence E. Gloyd, William M. Jordan and Franklin J.
Lunding, Jr.
(c) The voting at the Annual Meeting of Shareholders was
as follows:
19
ITEM 4. Submission of Matters to a Vote of Security Holders - Continued
Proposal No. 1 - Election of Directors
For Withheld
--- --------
H. Joseph Ferguson 15,850,996 344,415
Anthony A. Massaro 15,815,383 380,028
George H. Walls, Jr. 15,568,145 627,265
Proposal No. 2 - Resolution to approve the Amended and
Restated Thomas Industries Inc. 1995 Incentive Stock
Plan
For 13,272,987
Against 1,297,400
Abstain 742,193
Proposal No. 3 - Resolution to redeem Preferred Stock
Purchase Rights
For 9,608,111
Against 5,536,655
Abstain 167,815
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Purchase Agreement filed May 21, 2004 among
Genlyte Thomas Group LLC, The Genlyte Group
Incorporated and the Company, filed as
Exhibit 2 to registrant's report on Form 8-K
filed May 21, 2004, hereby incorporated by
reference.
31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(b) and Section 302 of
the Sarbanes-Oxley Act of 2002, filed
herewith
31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(b) and Section 302 of
the Sarbanes-Oxley Act of 2002, filed
herewith
32.1 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) Reports on Form 8-K
A Form 8-K was filed on April 21, 2004, attaching a
press release announcing first quarter 2004 results.
A Form 8-K was filed on April 23, 2004, attaching a
press release declaring a quarterly cash dividend and
reporting on the results of the Annual Meeting of
Shareholders.
A Form 8-K was filed on May 21, 2004, attaching a press
release announcing the Corporation's agreement to sell
its joint venture interest in Genlyte Thomas Group LLC
and attaching purchase agreement.
20
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
& Chief Financial Officer
Date: August 9, 2004
21