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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 September 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 November 3, 2004, 17,655,893 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2004 2003 2004 2003
----------------------- -----------------------
Net Sales $ 97,697 $ 88,985 $ 309,871 $ 277,141
Cost of products sold 62,264 59,472 198,492 180,753
----------------------- -----------------------
Gross profit 35,433 29,513 111,379 96,388
Selling, general and administrative
expenses 29,447 24,222 87,815 73,994
Equity income from GTG 3,189 10,615 18,608 23,645
Gain on sale of GTG 160,771 -- 160,771 --
----------------------- -----------------------
Operating income 169,946 15,906 202,943 46,039
Interest expense 435 951 2,396 3,063
Interest income 885 58 1,134 204
Other income (expense) (194) 222 (9) 131
----------------------- -----------------------
Income before income taxes and minority interest 170,202 15,235 201,672 43,311
Income taxes 79,934 4,647 90,949 14,468
----------------------- -----------------------
Income before minority interest 90,268 10,588 110,723 28,843
Minority interest, net of tax -- 5 -- 22
----------------------- -----------------------
Net income $ 90,268 $ 10,583 $ 110,723 $ 28,821
======================= =======================
Net income per share:
Basic $ 5.16 $ 0.61 $ 6.36 $ 1.68
Diluted $ 5.07 $ 0.60 $ 6.25 $ 1.64
Dividends declared per share: $ 0.095 $ 0.095 $ 0.285 $ 0.275
Weighted average number of shares outstanding:
Basic 17,509 17,217 17,406 17,179
Diluted 17,800 17,594 17,722 17,527
See notes to condensed consolidated financial statements
2
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
September 30 December 31
2004 2003 *
---------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 68,837 $ 23,933
Short-term investments 203,356 -
Accounts receivable, less allowance
(2004--$2,234; 2003--$2,270) 57,084 52,819
Inventories:
Finished products 32,946 29,004
Raw materials 30,221 28,250
Work in process 8,583 8,641
---------------------------------------------
71,750 65,895
Deferred income taxes 4,659 6,688
Other current assets 8,087 6,287
---------------------------------------------
Total current assets 413,773 155,622
Investment in GTG - 214,405
Property, plant and equipment 193,235 185,123
Less accumulated depreciation and amortization (86,456) (76,773)
---------------------------------------------
106,779 108,350
Goodwill 62,991 70,164
Other intangible assets, net 21,036 21,788
Other assets 4,424 4,715
---------------------------------------------
Total assets $ 609,003 $ 575,044
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 107 $ 3,088
Accounts payable 15,038 14,312
Accrued expense and other current liabilities 35,498 30,519
Dividends payable 1,665 1,642
Income taxes payable 24,825 595
Current portion of long-term debt 2,098 9,885
---------------------------------------------
Total current liabilities 79,231 60,041
Deferred income taxes 3,327 6,177
Long-term debt, less current portion 7,135 102,673
Long-term pension liability 13,189 13,189
Other long-term liabilities 8,404 9,609
---------------------------------------------
Total liabilities 111,286 191,689
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 - 18,419,390; 2003 - 18,108,664 18,419 18,109
Capital surplus 144,072 137,041
Deferred compensation 1,535 1,211
Treasury stock held for deferred compensation (1,535) (1,211)
Retained earnings 322,057 216,296
Accumulated other comprehensive income 25,228 23,968
Less cost of 822,339 treasury shares (12,059) (12,059)
---------------------------------------------
Total shareholders' equity 497,717 383,355
---------------------------------------------
Total liabilities and shareholders' equity $ 609,003 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2004 2003
----------------------------
OPERATING ACTIVITIES
Net income $ 110,723 $ 28,821
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and intangible amortization 12,273 11,608
Deferred income taxes (789) (3,695)
Equity income from GTG (18,608) (23,645)
Distributions from GTG 4,350 6,999
Gain on sale of GTG (160,771) -
Other items 356 338
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (5,131) (1,514)
Inventories (6,644) (3,436)
Accounts payable 813 (3,259)
Income taxes payable 25,541 4,234
Accrued expenses and other current liabilities 1,326 6,495
Other (4,983) (4,541)
--------------------------
Net cash (used in) provided by operating activities (41,544) 18,405
INVESTING ACTIVITIES
Purchases of property, plant and equipment (11,099) (13,382)
Proceeds from sale of property, plant and equipment 114 606
Proceeds from sale of GTG 400,350 -
Purchases of short-term investments, net (203,356) -
Adjustments (payments) for purchases of companies, net of cash acquired 6,154 (3,174)
--------------------------
Net cash provided by (used in) investing activities 192,163 (15,950)
FINANCING ACTIVITIES
(Payment on) proceeds from short-term debt, net (2,792) 3,528
Payments on long-term debt (121,765) (16,203)
Proceeds from long-term debt 18,621 15,247
Dividends paid (4,939) (4,546)
Other 4,694 1,375
--------------------------
Net cash used in financing activities (106,181) (599)
Effect of exchange rate changes 466 765
--------------------------
Net increase in cash and cash equivalents 44,904 2,621
Cash and cash equivalents at beginning of period 23,933 18,879
--------------------------
Cash and cash equivalents at end of period $ 68,837 $ 21,500
==========================
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 nine-month periods ended
September 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 approximately $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. Other adjustments could occur in the future
related to representations and warranties per the purchase agreement.
In estimating the fair values of the assets acquired and liabilities assumed in
the Rietschle transaction, management considered a number of factors, including
collectibility of accounts receivable, net realizable value and replacement cost
of inventory, and the values of liabilities. In addition, an independent
appraiser was used to assist in determining the value of property, plant and
equipment and other intangible assets; however, management is ultimately
responsible for the values recorded.
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.
5
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.
Note C - Sale of 32% Interest in GTG
- ------------------------------------
On July 31, 2004, the Company sold its 32% joint venture interest in the Genlyte
Thomas Group LLC (GTG), which the Company accounted for using the equity method
of accounting, to The Genlyte Group Incorporated (Nasdaq: GLYT) for
approximately $400.9 million. The Company received $400.4 million in cash and
has a receivable of $.5 million in Other Current Assets as of September 30,
2004. Approximately $102.7 million of the proceeds were used to pay down
long-term debt (both current and long-term portions) on August 2, 2004.
Approximately $55.4 million of the proceeds were used to pay a portion of the
income taxes (due on the gain) and transaction costs during the third quarter.
Income taxes of approximately $21.1 million remain as an Income Taxes Payable as
of September 30, 2004, the majority of which is expected to be paid in the
fourth quarter.
The Company's adjusted book basis in GTG as of July 31, 2004 was as follows (in
millions):
Investment in GTG at July 31, 2004 $227.8
Other comprehensive loss items:
Minimum pension liability 7.9
Foreign currency translation .5
------
Adjusted GTG book basis at July 31, 2004 $236.2
======
The gain on sale of GTG, which the Company recorded in the third quarter of
2004, was calculated as follows (in millions):
Total Sale Price $400.9
Transaction costs (3.9)
------
Net Proceeds 397.0
Adjusted book basis at July 31 (236.2)
------
Pre-tax book gain 160.8
Estimated taxes @ 47.55% (76.5)
-------
Estimated net after-tax gain $ 84.3
=======
Earnings per share - diluted $ 4.74
This gain calculation is an estimate subject to final determination of tax
ramifications of the transaction.
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 was 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
6
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. On September 29, 2004, the case was
remanded to state court in Jefferson County and the stay is no longer in place.
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 this
proceeding will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
In the normal course of business, the Company is a party to other 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.
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 subject to various federal, state and local environmental laws
and regulations that require remediation efforts at several locations including
both current and former operating facilities. One of the most significant sites
was a former manufacturing facility, which is located in Beaver Dam, Kentucky.
Since 1992, the Company has been working under an Agreed Order with the Kentucky
Natural Resources and Environmental Protection Cabinet to remediate this site.
The Company has completed all closure activities and has received approval for
implementation of a post-closure plan.
In 2004, a letter was received from the Wisconsin Department of Natural
Resources (WDNR) indicating that the Company was solely responsible for
remediation of a former manufacturing facility located in Fort Atkinson,
Wisconsin, which was sold by the Company in 1985. In response to WDNR's demand,
the Company has engaged a consultant to perform an initial hydrogeologic site
investigation. This initial site investigation is scheduled to be complete later
this year. The Company provided a reserve of $900,000 in the third quarter of
2004 for anticipated future costs associated with remediation of this site.
The Company's policy is to provide for environmental reserves on a present value
basis, when appropriate. Environmental reserves are subject to numerous inherent
uncertainties that affect the ability to estimate future costs of required
remediation efforts. Such uncertainties involve the nature and extent of
contamination, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of continuing
improvements in remediation technology and the financial strength of other
potentially responsible parties at multiparty sites. Reserves are reviewed for
adequacy on a quarterly basis and adjusted, if necessary, as environmental
assessment and remediation efforts proceed.
Changes in the Company's environmental reserves for September 30, 2004 are as
follows (in thousands):
Nine Months Ended
September 30, 2004
------------------
Balance at beginning of period $1,321
Environmental accruals 900
Expenditures (153)
------
Balance at end of period $2,068
======
7
Note E - Comprehensive Income
- -----------------------------
The reconciliation of net income to comprehensive income follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPT. 30 ENDED SEPT. 30
--------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $90,268 $10,583 $110,723 $28,821
Other comprehensive income (loss):
Minimum pension liability (increase) 7,966 2 7,976 (61)
Related tax (benefit) expense (3,027) (1) (3,031) 21
Derivative adjustment 70 - (84) -
Related tax (benefit) expense (27) - 31 -
Foreign currency translation 1,368 886 (3,632) 11,976
----- --- ------ ------
Total change in other comprehensive income 6,350 887 1,260 11,936
----- --- ------ ------
Total comprehensive income $96,618 $11,470 $111,983 $40,757
======= ======= ======== =======
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 NINE MONTHS
ENDED SEPT. 30 ENDED SEPT. 30
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Net income $90,268 $10,583 $110,723 $28,821
======= ======= ======== =======
Denominator:
Weighted average shares outstanding 17,509 17,217 17,406 17,179
Effect of dilutive securities:
Director and employee stock options 291 365 314 334
Employee performance shares - 12 2 14
------- ------- -------- -------
Dilutive potential common shares 291 377 316 348
------- ------- -------- -------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 17,800 17,594 17,722 17,527
====== ====== ====== ======
Note G - Segment Disclosures THREE MONTHS NINE MONTHS
- ----------------------------- ENDED SEPT. 30 ENDED SEPT. 30
(In thousands) --------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Total net sales including intercompany sales
Pump and Compressor $121,759 $110,631 $385,471 $340,571
Intercompany sales
Pump and Compressor (24,062) (21,646) (75,600) (63,430)
-------- -------- -------- --------
Net sales to unaffiliated customers
Pump and Compressor $97,697 $ 88,985 $309,871 $277,141
======= ======== ======== ========
Operating income
Pump and Compressor $ 9,104 $ 7,247 $31,620 $ 27,906
Lighting* 3,189 10,615 18,608 23,645
Gain on sale of GTG 160,771 - 160,771 -
Corporate (3,118) (1,956) (8,056) (5,512)
-------- -------- -------- --------
$169,946 $15,906 $202,943 $ 46,039
======== ======== ======== ========
8
*Three months ended September 30 consists of equity income of $3,207,000 in 2004
and $10,679,000 in 2003 from our 32% interest in the joint venture, Genlyte
Thomas Group LLC (GTG), less $18,000 in 2004 and $64,000 in 2003 related to
expense recorded for Thomas stock options issued to GTG employees. Nine months
ended September 30 consists of equity income of $18,752,000 in 2004 and
$23,853,000 in 2003 from our 32% interest in GTG, less $144,000 in 2004 and
$208,000 in 2003 related to expense recorded for Thomas stock options issued to
GTG employees. The 2004 amounts for the quarter and nine month periods are not
comparable to 2003 since the Company sold its 32% interest in GTG on July 31,
2004.
Note H - Goodwill and Other Intangible Assets
- ---------------------------------------------
Beginning in 2002 with the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," goodwill and
indefinite lived intangible assets are no longer amortized, but instead are
tested for impairment by applying a fair-value-based test at least annually, and
more frequently if circumstances indicate a possible impairment.
The statement requires a two-step process for impairment testing. The first
step, used to identify potential impairment only, compares the fair value of the
reporting unit, which is a level below the reportable segments disclosed in Note
G - "Segment Disclosures", with its net carrying amount on the financial
statements. Fair value of the reporting unit is estimated based on the present
value of estimated future cash flows of the reporting unit. If the fair value of
the reporting unit exceeds its carrying amount, goodwill is not considered
impaired; thus the second step of the process is not necessary. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test shall be performed to measure the amount of impairment
loss, if any. If the carrying value of goodwill on the financial statements
exceeds the implied fair value of goodwill, the difference must be recognized as
an impairment loss. Implied fair value of goodwill shall be determined in the
same manner as the amount of goodwill recognized in a business combination is
determined.
If the carrying amount of an intangible asset with an indefinite life exceeds
its fair value, an impairment loss is recognized in an amount equal to the
excess. Separate intangible assets that are not deemed to have an indefinite
life continue to be amortized over their useful lives.
The Company tested the goodwill of all its reporting units for impairment during
the fourth quarter of 2003. This assessment did not indicate any impairment.
Goodwill will be tested in the fourth quarter of 2004. There have been no
indicators of impairment noted during the nine months ended September 30, 2004.
The changes in net carrying amount of goodwill for the nine months ended
September 30, 2004 were as follows (in thousands):
NINE MONTHS ENDED
SEPT. 30, 2004
--------------
Balance at beginning of period $ 70,164
Adjustments to Rietschle acquisition (6,240)
Translation adjustments and other (933)
--------
Balance at end of period $ 62,991
========
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):
9
SEPT. 30, 2004 DECEMBER 31, 2003
----------------------------------------- ----------------------------------------------
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
---- ---- ------------ ---- ---- ------------
Licenses 18-19 $ 499 $ 219 18-19 $ 503 $ 207
Patents 5-20 5,825 1,124 5-20 5,917 771
Other 1-15 3,810 1,172 1-10 3,619 890
------------ ------------------- ------------- -------------------
Total $ 10,134 $ 2,515 $ 10,039 $ 1,868
============ =================== ============= ===================
The total intangible amortization expense for the nine months ended September
30, 2004 and 2003 was $663,000 and $632,000, respectively.
The estimated amortization expense for the next five years beginning January 1,
2004 through December 31, 2008 is as follows (in thousands):
2004 $897
2005 904
2006 904
2007 897
2008 848
The Company has various trademarks totaling $12,631,000 at September 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 September 30, 2004 and December 31, 2003.
Note I - Long-lived Assets
- --------------------------
Consistent with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company periodically evaluates the recoverability of the
carrying amount of long-lived assets (including property, plant and equipment,
and intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. We also continually evaluate the estimated useful
lives of all long-lived assets and periodically revise such estimates based on
current events. There were no significant impairment charges recorded in the
three months or nine months ended September 30 for 2004 and 2003.
Note J - Genlyte Thomas Group LLC (GTG)
- ---------------------------------------
The following table contains certain unaudited financial information related to
our joint venture interest in GTG.
10
Genlyte Thomas Group LLC
Condensed Unaudited Financial Information
(Dollars in Thousands)
THREE MONTHS NINE MONTHS
ENDED SEPT. 30 ENDED SEPT. 30
----------------- -----------------
2004(1) 2003 2004(2) 2003
------- ---- ------- ----
GTG income statements (unaudited):
Net Sales $ 93,559 $272,769 $672,358 $764,795
Gross Profit 34,589 96,623 237,254 267,182
Earnings before interest and taxes 11,003 36,659 63,742 81,081
Net income 10,022 33,373 58,600 74,542
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG $ 3,207 $ 10,679 $ 18,752 $ 23,853
Stock option expense (18) (64) (144) (208)
-------- -------- -------- --------
Equity income reported by Thomas $ 3,189 $ 10,615 $ 18,608 $ 23,645
======== ======== ======== ========
Gain on sale of GTG $160,771 - $160,771 -
======== ======== ======== ========
Changes in the Company's investment in GTG for September 30, 2004 are as follows
(in thousands):
NINE MONTHS ENDED
SEPT. 30, 2004
--------------
Balance at beginning of period $214,405
GTG gross equity earnings 18,752
GTG cash distributions (4,350)
GTG currency translation adjustment (1,082)
GTG minimum pension adjustment & other 78
--------
Balance before sale transaction (3) 227,803
To record sale of GTG (227,803)
---------
Balance at end of period $ 0
=========
(1) 2004 activity only includes the month of July, due to the Company's
sale of its joint venture interest in GTG on July 31, 2004.
(2) 2004 activity only includes the period January through July, due to
the Company's sale of its joint venture interest in GTG on July 31,
2004.
(3) See computation of Company's adjusted book basis in GTG as of July 31,
2004, included in "Note C - Sale of 32% Interest in GTG" in the Notes
to Condensed Consolidated Financial Statements (Unaudited).
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
11
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. With the Company's sale of its 32% joint venture interest
in GTG on July 31, 2004, the Company was required to accelerate the recording of
the unamortized expense as of July 31, 2004. 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 NINE MONTHS ENDED
SEPT. 30 SEPT. 30
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------------------------- -------------------------------------
Net income (as reported) $ 90,268 $ 10,583 $ 110,723 $ 28,821
Add: Stock-based compensation expense for GTG employees
included in reported net income, net of related tax
effect 489 59 603 190
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effect (601) (209) (942) (639)
--------------------------------- -------------------------------------
Net income (pro forma) $ 90,156 $ 10,433 $ 110,384 $ 28,372
================================= =====================================
Net income per share (Basic) - As reported $ 5.16 $ .61 $6.36 $ 1.68
Pro forma 5.15 .61 6.34 1.65
Net income per share (Diluted) - As reported 5.07 .60 6.25 1.64
Pro forma 5.06 .59 6.23 1.62
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
warranties 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 September 30, 2004 are as
follows (in thousands):
NINE MONTHS ENDED
SEPT. 30, 2004
--------------
Balance at beginning of period $5,382
Warranty accruals 2,970
Settlements made and other (2,444)
------
Balance at end of period $5,908
======
12
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).
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 Sept. 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
Nine months ended Sept. 30: PENSION BENEFITS POSTRETIREMENT
- --------------------------- ----------------- BENEFITS
--------
FOREIGN PLANS U.S. PLANS U.S. PLANS
--------------------------------------------------- ---------------------
2004 2003 2004 2003 2004 2003
------------ ------------ ------------ ------------ ----------- ---------
Service cost $ 186 $ 216 $ 243 $ 214 $ 63 $ 51
Interest cost 421 445 395 385 69 63
Expected return on plan assets - - (467) (407) - -
Other amortization and deferral 13 - 141 153 30 24
------ ----- ----- ------ ----- -----
Net Periodic Benefit cost $ 620 $ 661 $ 312 $ 345 $ 162 $ 138
====== ===== ===== ====== ===== =====
13
As of September 30, 2004, no contributions have been made, but the Company
anticipates contributions to the plans of $670,000 for 2004.
Note O - Short-Term Investments
- -------------------------------
Short-term investments are classified as available-for-sale securities and
include tax advantaged debt securities with original maturities ranging from
four to 38 years. These debt securities are callable at par value (cost) based
on seven to 35 days notification to the bondholders. The Company has the option
to either sell or put these securities every seven to 35 days and these
securities will normally be held for less than one year. The securities are
carried on the balance sheet at fair market value, which is equivalent to cost.
Current period adjustments to the carrying value of available-for-sale
securities would be included in accumulated other comprehensive income within
stockholder's equity. Because of the nature of all these investments, cost does
not differ from fair market value, so there are no such adjustments to the
carrying value.
Note P - Exit Costs for Wuppertal, Germany Facility
- ---------------------------------------------------
In accordance with Statement of Financial Accounting Standards (SFAS) No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", the Company
has been recording certain costs and liabilities related to its Wuppertal,
Germany manufacturing facility. In February 2004, the Company announced the
closing of this facility in an effort to further consolidate its European
manufacturing operations and strengthen its market position by concentrating its
product, logistics, and engineering capacity. The exit activities are expected
to be complete by December 31, 2004. The costs associated with this exit
activity are being recorded in selling, general and administrative expenses of
the Pump and Compressor Segment. The following table describes the 2004 activity
and the exit liability as of September 30, 2004 (in thousands):
Beginning Balance Ending Balance
Exit Costs: at Jan. 1, 2004 Accruals Expenditures at Sept. 30, 2004
--------------- -------- ------------ -----------------
Severance - $1,628 $(1,551) $77
Contract termination - 5 (5) -
--------- ------ -------- ---
Total FAS 146 exit costs - $1,633 $(1,556) $77
========= ====== ======== ===
In addition to the $1,633,000 exit charge noted above, the Company has recorded
$847,000 of additional charges in the nine months ended September 30, 2004 which
include costs to coordinate the facility shutdown ($193,000), fixed asset
disposal and write down to fair value charges ($455,000) and training & other
costs related to the transfer of production from the Wuppertal facility
($199,000). The carrying value of assets held for sale related to the Wuppertal
facility is not significant.
No additional exit costs charges are expected but an additional $713,000 of
other shutdown related expenses are expected in the fourth quarter, which will
bring the total estimated costs to $3,193,000.
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, automotive, printing, packaging and many others. An important
market to the Company
14
ITEM 2. Management's Discussion and Analysis - Continued
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 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. The Company plans to produce a portion
of the annual volume of certain products in this new facility in China beginning
in fiscal 2005. We have no plans in fiscal 2004 or 2005 to incur any
restructuring or exit costs at existing facilities in connection with this
production transfer. We also anticipate no asset impairment charges or reduction
in expected service lives of assets at existing facilities in fiscal 2004 or
2005. During 2003, we closed our manufacturing facility in Fleurier,
Switzerland, and relocated this production to other facilities. In 2003, we also
built and opened a new facility in Memmingen, Germany and relocated our
operations from the older leased facility late in 2003. 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 $.7 million and $2.5 million of
pre-tax charges in the third quarter and the first nine 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 third quarter and
nine month periods ended September 30, 2004, the Company recorded approximately
$654,000 and $1,100,000, respectively, of pre-tax charges related to internal
control documentation and testing for Sarbanes-Oxley compliance and expects an
additional $300,000 to $500,000 in the fourth 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 $401
million, which generated an $84.3 million net after-tax gain.
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
15
ITEM 2. Management's Discussion and Analysis - Continued
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.
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.
Allowance for Doubtful Accounts Receivable: The Company maintains allowances for
doubtful accounts for uncollectible invoices resulting from the customer's
inability or refusal to pay. Management's estimated allowances are established
based on an aging of accounts receivable and applying percentages based on
historical experience to age categories. In addition, where the Company is aware
of a customer's inability to pay, it specifically reserves for the potential bad
debt to reduce the receivable to the amount it reasonably believes will be
collected. If the financial conditions of Thomas' customers deteriorates,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Reserve for Slow Moving and Obsolete Inventory: The Company records inventory at
the lower of cost or market. The Company estimates and reserves for excess
quantities of slow moving or obsolete inventory. These reserves are primarily
based upon management's assessment of the salability of the inventory,
historical usage of raw materials and historical demand for finished goods, and
estimated future usage and demand. An improper assessment of salability or
improper estimate of future usage or demand, or significant changes in usage or
demand could result in significant changes in the reserves and a positive or
negative impact on the Company's results of operations in the period the change
occurs.
Revenue Recognition: Revenue from product sales is recognized upon title
transfer, which occurs upon shipment, based on our customary terms of sale,
which are FOB shipping point. We do have exceptions to this general policy which
are described as follows:
1) Revenues from service and repair activities are approximately 6%
of our total sales. Most of these service and repair revenues do
not involve a shipment of product, but instead, relate to the
performance of a service or repair. Billings for these activities
are not made until the service activity has occurred. There are
other instances where we offer customers an annual service
contract, which we invoice in twelve monthly billings.
2) There are instances where we have consignment inventory
arrangements and in these instances, revenue is not recorded upon
shipment to the original customer. Revenue is only recorded when
the original customer ships the inventory to their customer or
uses it for other purposes. These consignment inventory
arrangements are insignificant in amount.
3) There are instances where our terms of sale are FOB destination.
We record accounting entries at the end of reporting periods, to
make sure these revenues are deferred to the subsequent period.
These instances are insignificant in amount.
Credit is extended based on local business customs and practices, and collateral
is not required. We estimate and record provisions for warranties in the period
the related products are sold. The warranty liabilities are established based
upon management's assessment of the various product warranty periods, historical
data and trends of warranty claims paid, and any current information regarding
specific warranty issues. While the Company engages in extensive product quality
programs and processes,
16
ITEM 2. Management's Discussion and Analysis - Continued
should actual product failure rates differ from estimates, revisions to the
estimated warranty liability would be required.
Impairment of Goodwill: Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), was issued in July 2001
and became effective for the Company on January 1, 2002. Goodwill is now subject
to an assessment for impairment on a reporting unit basis by applying a
fair-value-based test annually, and more frequently if circumstances indicate a
possible impairment. If a reporting unit's carrying value exceeds its fair
value, and the reporting unit's carrying value of its goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The evaluation of goodwill for impairment requires
management to use significant estimates and assumptions including, but not
limited to, projecting future revenue, operating results, and cash flow of each
of the Company's reporting units. Although management believes the estimates and
assumptions used in the evaluation of goodwill are reasonable, differences
between actual and projected revenue, operating results, and cash flow could
cause some of the Company's goodwill to be deemed impaired. If this were to
occur, the company would be required to write down the goodwill, which could
have a material negative impact on the Company's results of operations and
financial condition.
Long-Lived Assets: The Company evaluates the recoverability of the carrying
amount on long-lived assets (including property, plant and equipment and
intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. To the extent actual cash flows differ from these
estimated amounts, results could be adversely affected.
Retirement Plans and Post-Retirement Benefit Plans: Assets and liabilities of
the Company's defined benefit plans are determined on an actuarial basis and are
affected by the estimated market value of plan assets, estimates of the expected
return on plan assets, and discount rates. Actual changes in the fair market
value of plan assets and differences between the actual return on plan assets
and the expected return on plan assets as well as changes in the discount rate,
will affect the amount of pension expense recognized, impacting the Company's
results of operations. The liability for post-retirement medical and life
insurance benefits is also determined on an actuarial basis and is affected by
assumptions including the discount rate and expected trends in health care
costs. Changes in the discount rate and difference between actual and expected
health care costs will affect the recorded amount of post-retirement benefits
expense, impacting the Company's results of operations.
Self-Insurance Medical Claims: The Company is self-insured for the medical
benefit plans covering approximately 75% of its U.S. employees. The Company
estimates its liability for claims incurred by applying a lag factor to the
Company's historical claims and administrative cost experience. The validity of
the lag factor is evaluated periodically and revised if necessary. Although
management believes the current estimated liabilities for medical claims are
reasonable, changes in the lag in reporting claims, changes in claims
experience, unusually large claims, and other factors could materially affect
the recorded liabilities and expense, impacting financial condition and results
of operations.
Income Taxes: Significant management judgment is required in developing the
Company's income tax provision, including the determination of deferred tax
assets and liabilities and any valuation allowances that might be required
against deferred tax assets. The Company operates in multiple taxing
jurisdictions and is subject to audit in those jurisdictions. Because of the
complex issues involved, any assessments can take an extended period of time to
be resolved. In management's opinion, adequate income tax
17
ITEM 2. Management's Discussion and Analysis - Continued
provisions have been made and adequate tax reserves exist to cover probable
risks. However, results of Internal Revenue Service or other jurisdictional
audits, closing of past years' tax returns no longer subject to audit, and
future tax law changes could have a material impact on the Company's future tax
liabilities and provisions, impacting financial condition and results of
operations.
Contingencies and Litigation: As discussed in "Note D - Contingencies " in the
Notes to Condensed Consolidated Financial Statements (Unaudited), the Company is
a party to legal proceedings and claims, as well as environmental rules and
regulations. 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 these matters is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
RESULTS OF OPERATIONS
The Company's net income was $90.3 million in the third quarter ended September
30, 2004, compared to $10.6 million in the same period in 2003. Year-to-date net
income was $110.7 million for the nine months ended September 30, 2004, compared
to $28.8 million for the 2003 nine month period. As noted previously, the 2004
third quarter and nine month periods include an $84.3 million net gain from the
sale of our 32% joint venture interest in GTG.
PUMP AND COMPRESSOR SEGMENT
Net sales for the Pump and Compressor Segment increased 9.8% to $97.7 million
for the third quarter ended September 30, 2004, compared to $89.0 million in the
third quarter of 2003. This $8.7 million increase included an estimated $4.1
million related to the effects of exchange rate fluctuations. The remaining $4.6
million increase was primarily due to strength in the food and beverage market
(+ $1.3 million) and the printing and paper handling market (+ $1.1 million).
The North American operations reported a $2.5 million, or 6.9% increase in 2004
third quarter net sales compared to 2003, primarily due to increased sales in
the industrial market. The European operations had a $5.8 million, or 13.0% net
sales increase for the 2004 third quarter compared to 2003. Approximately $3.8
million of the European net sales increase was due to exchange rate
fluctuations. The remaining $2.0 million of the increase in European net sales
came primarily from stronger sales in the printing/paper handling (+ $1.3
million) and food/beverage (+ $1.1 million) markets, offset by weaker sales in
the automotive market (- $.6 million). Asia Pacific reported a $.5 million, or
5.2% increase in net sales compared to the third quarter of 2003. We estimate
that $.3 million of this increase in Asia Pacific net sales was due to exchange
rate fluctuations.
Net sales for the nine months ended September 30, 2004, increased 11.8% to
$309.9 million compared to $277.1 million for the comparable 2003 period. This
net sales increase of $32.7 million included an estimated $17.2 million related
to the effects of exchange rate fluctuations. The remaining $15.5 million
increase was primarily due to strength in the food and beverage market (+ $3.0
million), the printing and paper handling market (+ $3.0 million) and the
environmental market (+ $2.7 million). Net sales for the North American
operations had a $4.5 million, or 3.9% increase in 2004 compared to the 2003
nine month period. The European operations posted a $23.4 million, or 17.1%
increase over the 2003 nine month period. Approximately $15.4 million of the
European increase was due to exchange rate fluctuations. The remaining increase
of $8.0 million was primarily due to higher sales in the printing/paper handling
market (+ $2.8 million) and the food and beverage market (+ $2.6 million). Asia
Pacific net sales increased $4.9 million for the 2004 nine month period compared
to 2003. Approximately $1.8 million of this increase was due to exchange rate
fluctuations. The remaining increase of $3.1 million came from higher sales in a
variety of markets including environmental (+ $.6 million), industrial (+ $1.0
million), laboratory (+ $.2 million) and plastic technology (+ $.2 million).
18
ITEM 2. Management's Discussion and Analysis - Continued
Gross profit for the Pump and Compressor Segment in the third quarter of 2004
was $35.4 million, or 36.3% of net sales, compared to $29.5 million, or 33.2% of
net sales in the third quarter of 2003. Gross profit for the nine months ended
September 30, 2004 was $111.4 million, or 35.9% of net sales, compared to $96.4
million, or 34.8% for the same period in 2003. The improvement in gross margin
percentage for the third quarter and nine month periods in 2004 is primarily due
to favorable sales mix. We are also beginning to see favorable impacts from
factory rationalization and cost reduction projects undertaken in 2003 and early
2004.
The Pump and Compressor Segment's selling, general and administrative (SG&A)
expenses were $26.3 million, or 26.9% of net sales, in the third quarter of
2004, compared to $22.3 million, or 25.0% of net sales for the same period in
2003. The 2004 third quarter included expenses for the Wuppertal facility
shutdown ($.7 million), higher professional fees related to internal control
documentation and testing for Sarbanes-Oxley Act compliance (SOX compliance)
($.6 million) and higher incentive compensation expenses ($.4 million). The SG&A
expenses for the nine months ended September 30, 2004 were $79.8 million, or
25.7% of net sales, compared to $68.5 million, or 24.7% of net sales for the
comparable 2003 period. The 2004 nine month period included expenses for the
Wuppertal shutdown ($2.5 million), SOX compliance ($.8 million) and higher
incentive compensation expenses ($1.1 million).
Pump and Compressor Segment operating income for the third quarter ended
September 30, 2004, was $9.1 million, or 9.3% of net sales, compared to $7.2
million, or 8.1%, in the third quarter of 2003. The third quarter of 2004
included charges of $.7 million for the Wuppertal shutdown and $.6 million for
higher professional fees related to internal control documentation and testing
for SOX compliance. Our North American, European and Asia Pacific operations all
posted improvements in operating income for the third quarter of 2004 compared
to 2003, primarily due to favorable sales mix. For the nine months ended
September 30, 2004, operating income was $31.6 million, or 10.2% of net sales,
compared to $27.9 million, or 10.1% of net sales for the 2003 third quarter.
Included in the nine month period in 2004 were charges of $2.5 million for
Wuppertal shutdown and $.8 million for SOX compliance. For the nine month
period, the North American operations showed a slight improvement over 2003
levels. Both the European and Asia Pacific operations reported increases in
operating income for the first nine months of 2004. The European operations
benefited from factory rationalization plans and Asia Pacific's improvement was
primarily due to sales volume increases.
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 $401 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 expenses
related to Thomas 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 third quarter of 2004, which included
only the month of July, was $3.2 million compared to $10.6 million in the
comparable 2003 period. For the nine months ended September 30, 2004, which
included GTG activity only through July 31, 2004, operating income for the
Lighting Segment was $18.6 million compared to $23.6 million in 2003. Included
in the earnings for the third quarter and nine month periods for 2003 was a
previously announced non-recurring pre-tax gain of $2.3 million related to the
settlement of GTG's patent infringement lawsuit.
19
ITEM 2. Management's Discussion and Analysis - Continued
As noted above and in "Note C - Sale of 32% Interest in GTG" in the Notes to
Consolidated Financial Statements (Unaudited), the Company sold its 32% interest
in GTG for approximately $400.9 million on July 31, 2004. The Company received
$400.4 million in cash and has a receivable of $.5 million as of September 30,
2004. The calculation of the Company's adjusted book basis as of July 31, 2004
and gain on sale calculation are in the tables that follow.
The Company's adjusted book basis in GTG as of July 31, 2004 was as follows (in
millions):
Investment in GTG at July 31, 2004 $227.8
Other comprehensive loss items:
Minimum pension liability 7.9
Foreign currency translation .5
-------
Adjusted GTG book basis at July 31, 2004 $236.2
=======
The gain on sale of GTG, which the Company recorded in the third quarter of
2004, was calculated as follows (in millions):
Total Sale Price $400.9
Transaction costs (3.9)
-------
Net Proceeds 397.0
Adjusted book basis at July 31 (236.2)
-------
Pre-tax book gain 160.8
Estimated taxes @ 47.55% (76.5)
-------
Estimated net after-tax gain $ 84.3
========
Earnings per share - diluted $ 4.74
This gain calculation is an estimate subject to final determination of tax
ramifications of the transaction.
CORPORATE
As disclosed in Note G (Segment Disclosures) in the consolidated financial
statements, consolidated operating income includes corporate expenses. Corporate
expenses were $3.1 million for the three months ended September 30, 2004,
compared to $2.0 million for 2003. The increase in the 2004 third quarter
relates to charges for environmental matters ($.9 million), higher personnel
related costs ($.3 million), and expenses related to SOX compliance ($.1
million). For the nine months ended September 30, 2004, corporate expenses were
$8.1 million, compared to $5.5 million in 2003. The increases in the 2004 nine
month period relates to charges for environmental matters ($.9 million), higher
personnel related costs ($.6 million), higher legal expenses related to the
Rietschle Thomas integration ($.4 million), expense related to the SOX
compliance ($.3 million) and additional costs related to expanding our presence
in China ($.1 million).
Interest expense for the three months ended September 30, 2004 was $.4 million
compared to $1.0 million for 2003. For the nine months ended September 30, 2004,
interest expense was $2.4 million, compared to $3.1 million for 2003. The
reduction in interest expense in 2004 for the third quarter and nine month
periods is primarily related to the $7.7 million payment of long-term debt on
January 31, 2004, and an additional $7.7 million payment on August 2, 2004,
which carried a 9.36% annual interest rate. Also on August 2, 2004, the Company
paid down its outstanding revolving line of credit balance of $95.0 million,
using a portion of the proceeds from the sale of its GTG joint venture interest.
This revolving line of credit had a variable interest rate.
20
ITEM 2. Management's Discussion and Analysis - Continued
Interest income for the three months ended September 30, 2004 was $.9 million,
compared to $.1 million for the 2003 third quarter. For the nine months ended
September 30, 2004, interest income was $1.1 million, compared to $.2 million
for the comparable 2003 period. Interest income has increased in the 2004 third
quarter and nine month periods due to the investment of the net amount received
on August 2, 2004 from the sale of our 32% interest in GTG.
Other income (expense) for the three months ended September 30, 2004 was an
expense of $194 thousand, compared to income of $222 thousand for the same
period in 2003. For the nine months ended September 30, 2004, other income
(expense) was an expense of $9 thousand, compared to income of $131 thousand for
the 2003 nine month period. The amounts included in other income (expense) are
primarily related to foreign exchange transaction gains and losses.
For the three months ended September 30, 2004, the provision for income taxes
increased to $79.9 million from $4.6 million in 2003. This increase was
primarily due to the income taxes accrued on the gain on sale of GTG as
described above. The effective tax rate in 2004 increased to 47.6% from 30.5% in
2003 due to the basis difference for financial reporting and tax purposes in the
partnership interest of GTG and the effect of the reduction of GTG foreign
equity earnings recorded net of tax.
For the nine months ended September 30, 2004, the provision for income taxes
increased to $90.9 million from $14.5 million in 2003. This increase was
primarily due to the income taxes accrued on the gain on sale of GTG as
described above. The effective tax rate in 2004 increased to 45.1% from 33.4% in
2003 due to the basis difference for financial reporting and tax purposes in the
partnership interest of GTG and the effect of the reduction of GTG foreign
equity earnings recorded net of tax.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows used in operations in the nine months ended September 30, 2004 were
$41.5 million compared to cash flows provided by operations of $18.4 million in
the 2003 nine month period. The decrease in 2004 was primarily related to
changes associated with the GTG sale transaction, as well as changes in
accounts receivable and inventories.
Cash provided by investing activities was $192.2 million for the first nine
months of 2004 compared to cash used in investing activities of $16.0 million in
the comparable 2003 period. The 2004 amount includes cash received from the sale
of our GTG joint venture interest of $400.4 million and cash received of $6.2
million related to an adjustment to the Rietschle purchase price, which were
partially offset by capital expenditures of $11.1 million and the $203.4 million
purchase of short-term investments. The 2003 amount includes capital
expenditures of $13.4 million and $3.2 million paid by the Company for
acquisitions in 2003.
Financing activities used cash of $106.2 million in the first nine months of
2004 and $.6 million in the first nine months of 2003. The increase in 2004 of
cash used in investing activities relates primarily to additional long-term debt
payments of $102.7 million in 2004, which were paid using a portion of the
proceeds received from the sale of GTG.
Dividends paid in the first nine months of 2004 and 2003 were $4.9 million and
$4.5 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 September 30, 2004, the Company had standby letters of credit totaling
$3,080,000 with expiration dates during 2005. The Company anticipates that these
letters of credit will be renewed at their expiration dates.
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ITEM 2. Management's Discussion and Analysis - Continued
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 nine months of 2004 or in
2003. Under the December 1999 repurchase plan, the Company has purchased, on a
cumulative basis through September 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 its current cash position.
Working capital increased from $95.6 million at December 31, 2003, to $334.5
million at September 30, 2004, primarily due to an increase of approximately
$242 million of cash, which remained after receiving cash of $400.4 million on
the sale of GTG and then paying out $158 million for long-term debt payments
($102.7 million), income tax payments ($52.8 million), and transaction cost
payments ($2.6 million). With additional cash, the Company is actively pursuing
several internal growth initiatives and external acquisition opportunities, and
is considering other uses for the proceeds including the payment of a special
dividend and share repurchases.
Sept. 30, December 31,
(Dollars in thousands) 2004 2003
---- ----
Working capital $334,542 $ 95,581
Current ratio 5.22 2.59
Long-term debt, less current portion $ 7,135 $102,673
Long-term debt to total capital 1.4% 21.1%
As of September 30, 2004, the Company had $203.4 million of short-term
investments on the balance sheet. Short-term investments are classified as
available-for-sale securities and include tax advantaged debt securities with
original maturities ranging from four to 38 years. These debt securities are
callable at par value (cost) based on seven to 35 days notification to the
bondholders. The Company has the option to either sell or put these securities
every seven to 35 days and these securities will normally be held for less than
one year. The securities are carried on the balance sheet at fair market value,
which is equivalent to cost. Current period adjustments to the carrying value of
available-for-sale securities would be included in accumulated other
comprehensive income within stockholder's equity. Because of the nature of all
these investments, cost does not differ from fair market value, so there are no
such adjustments to the carrying value.
The Company has no loan agreements that include restrictions on working capital,
operating leases, tangible net worth, and the payment of cash dividends and
stock distributions.
As of September 30, 2004, the Company had no line of credit facilities with its
banks. As of September 30, 2004, the Company's long-term debt consisted of only
capitalized lease obligations. As of September 30, 2004 and 2003, 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.
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
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ITEM 2. Management's Discussion and Analysis - Continued
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 short-term borrowings of $.1 million at September 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 September 30, 2004, $.1 million of variable rate debt was
outstanding. A 100 basis point movement in the interest rate on the variable
rate debt of $.1 million would result in a $1,000 annualized effect on interest
expense and cash flows.
The Company also has short-term investments, including cash equivalents, of
$256.2 million as of September 30, 2004, that bear interest at variable rates. A
100 basis point movement in the interest rate would result in an approximate
$2,562,000 annualized effect on interest income and cash flows.
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. 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 September
30, 2004, the Company held forward contracts expiring through September 2005 to
hedge a portion of 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 September 30, 2004, the
foreign currency forward contracts had a notional amount of Euro 6,000,000 and
fair value of approximately $94,000. 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
September 30, 2004, was approximately $94,000.
23
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 of Form 8-K
A Form 8-K was filed on July 20, 2004, attaching a
press release announcing second quarter 2004 results.
A Form 8-K was filed on August 2, 2004, attaching a
press release announcing sale of its interest in
Genlyte Thomas Group LLC (GTG).
A Form 8-K/A was filed on August 13, 2004, to file pro
forma financial information related to the sale of its
interest in GTG.
24
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: November 9, 2004
25