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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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, LOUISVILLE, KENTUCKY 40207
(Address of principal executive offices) (Zip Code)
502/893-4600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
SECURITIES EXCHANGE ACT OF 1934:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $1 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
---------------
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at June 30, 2004, was approximately $502,350,000. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.)
As of March 10, 2005, 17,852,925 shares of the registrant's Common
Stock were outstanding (net of treasury shares and including directors' and
executive officers' shares).
PART I.
ITEM 1. BUSINESS
a. General Development of Business.
The Company that was eventually to become known as Thomas Industries Inc.
("Thomas" or the "Company") was founded in 1928 as the Electric Sprayit Company.
Electric Sprayit manufactured paint spraying machines, blowers, and air
compressors in Chicago, Illinois. In 1948, Mr. Lee B. Thomas and a group of
investors acquired Moe Brothers Manufacturing of Fort Atkinson, Wisconsin, a
manufacturer of residential lighting products. In 1953, Moe Lighting and The
Electric Sprayit Company merged to become Thomas Industries Inc. The Company was
incorporated in Delaware in 1928.
Although its roots were in lighting products and air compressors, Thomas began
to diversify in the 1960's and 1970's, acquiring companies that manufactured
consumer products along with tools, hardware, and specialty products. A new
strategic focus on lighting and pumps/compressors began in the 1980's and was
finalized in 1994 when the Company divested its last non-core business.
Significant additions to the Lighting business included the Lumec and Day-Brite
Lighting acquisitions in 1987 and 1989. On August 30, 1998, Thomas and The
Genlyte Group ("Genlyte") formed a lighting joint venture that combined
substantially all of the assets and liabilities of Genlyte and substantially all
of the lighting assets and related liabilities of Thomas to create Genlyte
Thomas Group LLC (GTG), estimated to be the third largest manufacturer of
lighting fixtures and controls in North America. Thomas owned a 32% interest in
the joint venture, and Genlyte owned a 68% interest. GTG made several
acquisitions from 1999 through 2003 to fill product voids, including Ledalite,
Translite, Chloride, Vari-Lite and Shakespeare. Effective with the close of
business on July 31, 2004, the Company sold its 32% joint venture interest in
GTG to The Genlyte Group Incorporated, thereby exiting the lighting business.
Significant additions to the Pump and Compressor business include ASF,
Pneumotive, Brey, WISA, Welch and Oberdorfer, which were made from 1987 through
1999. On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle is a world leader in vacuum and
pressure technology, which includes dry-running and oil-lubricated pumps,
blowers, compressors, and pressure/vacuum pumps utilizing rotary vane, screw,
roots and claw technologies. With the newly-launched Rietschle Thomas brand,
Thomas is pursuing further opportunities in markets such as printing, packaging,
woodworking and other applications that utilize these technologies.
On March 9, 2005, we announced that we have entered into an Agreement and Plan
of Merger ("Merger Agreement") with Gardner Denver, Inc. Under the terms of the
Merger Agreement, Gardner Denver will pay $40.00 per share in cash for all of
the issued and outstanding shares of common stock of Thomas. The transaction is
conditioned on obtaining requisite approval from the shareholders of Thomas,
necessary regulatory approvals and other customary closing conditions. Upon
closing of the acquisition, Thomas will become a subsidiary of Gardner Denver
and will no longer be a publicly traded company. The parties expect to close the
transaction during 2005.
b. Financial Information about Segments.
The information required by this item is set forth in Note 13 to the
consolidated financial statements.
c. Narrative Description of Business.
Pump and Compressor Segment
Thomas is a leading supplier of pumps and compressors to the original equipment
manufacturer (OEM) market in such applications as medical equipment, gasoline
vapor and refrigerant recovery, automotive and transportation applications,
printing, packaging, tape drives, and laboratory equipment.
The Company designs, manufactures, markets, sells and services these products
through worldwide operations. Pump and Compressor Group headquarters are as
follows: North American Group--Sheboygan, Wisconsin; European Group--Puchheim,
Germany; and Asia Pacific Group--Hong Kong, China.
The Company has four manufacturing operations in the United States which
manufacture rotary vane, linear, piston, and diaphragm pumps and compressors,
and various liquid pump technologies. These products are directly sold worldwide
to OEM's, as well as through fluid power and industrial distributors.
Three German operations manufacture a complementary line of rotary vane, piston,
linear, diaphragm, gear, side channel, radial, claw, screw, and rotary lobe
pumps and compressors, as well as various liquid pump technologies, air-centers
and centralized systems. These products are distributed worldwide. The German
operations also include a foundry which produces pump castings for internal use,
as well as automotive component castings.
A new manufacturing facility was constructed during late 2004 in Wuxi, China,
and production will start in the second quarter of 2005.
The Company also maintains sales and service facilities in Germany, U.S.A.,
England, Italy, Switzerland, Sweden, France, Denmark, the Netherlands, Hungary,
Austria, Slovakia, Czech Republic, China, Japan, Taiwan, Mexico, Korea, New
Zealand, Australia and Brazil. Systems sales and final assembly work is also
done in many of these facilities. The Corporate Office is in Louisville,
Kentucky.
The Company offers a wide selection of standard air compressors and vacuum pumps
and will modify or design its products to meet exacting OEM applications.
Products for the OEM market are now marketed under the Rietschle Thomas name
worldwide. Products for other users are marketed under the brand names Welch
(high vacuum pumps for laboratory and chemical markets), Air-Pac (pneumatic
construction equipment), Vakuumatic (leakage detection systems), Medi-Pump
(respiratory products), and Oberdorfer (bronze and high alloy liquid pumps).
The medical equipment market, which includes oxygen concentrators, nebulizers,
aspirators, and other devices, is important to the Company. Company sales to
medical equipment OEM's were approximately $96 million in 2004, $92 million in
2003, and $75 million in 2002. The 2002 amount only includes Rietschle for four
months. Oxygen concentrator OEM's represent a significant portion of the
Company's sales in the medical equipment market. The Company believes it has the
leading market share in compressors for the oxygen concentrator market
worldwide.
No single customer of the Company accounted for 10 percent or more of the
Company's net sales in 2004.
The backlog of unshipped orders was $89 million at December 31, 2004, and $80
million at December 31, 2003. The increase was primarily due to exchange rate
fluctuations. The Company believes substantially all of such orders are firm,
although some orders are subject to cancellation. Substantially all of these
orders are expected to be filled in 2005.
The Company believes that it has adequate sources of materials and supplies for
its business.
There is no significant seasonal impact on the business of the Company.
As of December 31, 2004, the Company had no line of credit facilities with its
banks and its long-term debt consisted of only capitalized lease obligations.
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. The Company expects to fund working capital requirements
from a combination of available cash balances and internally generated funds.
The Company has various patents and trademarks but does not consider its
business to be materially dependent upon any individual patent or trademark.
The Company competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign. Some competitors are publicly-held
companies and others are private companies. The Company competes on the basis of
quality, performance, service, and price. Thomas believes that it is able to
maintain its competitive position because of the quality and breadth of its
products and services and its global presence.
During 2004, the Company spent $22,131,000 on research activities relating to
the development of new products and the improvement of existing products.
Substantially all of this amount was Company-sponsored activity. During 2003 and
2002, the Company spent $19,736,000 and $11,789,000, respectively, on these
activities. Research and development expenses with respect to the Rietschle
acquisition were only included for four months in 2002.
The Company, like other 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 comply with these rules and regulations. The Company
is involved in remedial efforts at certain of its present and former locations,
and when costs can be reasonably estimated, the Company records appropriate
liabilities for such matters. The Company 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.
At December 31, 2004, the Company employed approximately 2,250 people.
Approximately 14.3% were represented by labor unions. Union contacts have
varying expiration dates beginning with June 30, 2005 and ending with March 7,
2008. Approximately 1.2% of employees were represented by labor unions with
contracts expiring within one year from December 31, 2004. The union agreements
have historically been renegotiated in a satisfactory manner.
Lighting Segment
On August 30, 1998, Thomas and Genlyte formed a lighting joint venture that
combined substantially all of the assets and liabilities of Genlyte and
substantially all of the lighting assets and related liabilities of Thomas to
create GTG, estimated to be the third largest manufacturer of lighting fixtures,
controls, and related products in North America. Thomas owned a 32% interest in
the joint venture and Genlyte owned a 68% interest. Effective with the close of
business on July 31, 2004, the Company sold its 32% joint venture interest in
Genlyte Thomas Group LLC (GTG) to The Genlyte Group Incorporated, thereby
exiting the lighting business.
Thomas' investment in GTG was accounted for using the equity method of
accounting
d. Financial Information about Geographic Areas.
See Note 13 to the consolidated financial statements.
e. Website Access to Company Reports and Corporate Governance Material
We make available free of charge through our website, www.thomasind.com, (1) our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with the Securities and Exchange
Commission and (2) the Audit Committee, Compensation Committee and Nominating
and Corporate Governance Committee charters, our Corporate Governance Guidelines
and our Corporate Compliance and Code of Ethics Policy. Our internet website and
the information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K.
f. Executive Officers of the Registrant
YEAR
FIRST ELECTED
NAME OFFICE OR POSITION WITH COMPANY AGE AS AN OFFICER
- ---- ------------------------------- --- -------------
Timothy C. Brown (A)............................ Chairman of the Board, President, Chief Executive 54 1984
Officer, and Director
Phillip J. Stuecker (B)......................... Vice President of Finance, Chief Financial Officer, 53 1984
and Secretary
Peter H. Bissinger (C).......................... Vice President; General Manager, European Pump and 59 1992
Compressor Group
Dieter W. Rietschle (D)......................... General Manager, TIWR Holding GmbH & Co. KG 58 2002
James J. Kregel (E)............................. Vice President; General Manager, North American 53 2003
Pump and Compressor Group
- ---------------
(A) Timothy C. Brown was elected Chairman of the Board on April 20, 1995, in
addition to his other duties of President and Chief Executive Officer. Prior to
this, Mr. Brown held various management positions in the Company including Chief
Operating Officer, Executive Vice President, and Vice President and Group
Manager of the Specialty Products Group.
(B) Phillip J. Stuecker was elected Vice President of Finance, Chief Financial
Officer, and Secretary on October 23, 1989. Prior to this, Mr. Stuecker held
various management positions in the Company including Vice President and
Treasurer.
(C) Peter H. Bissinger was elected an officer effective December 14, 1992, in
addition to his position of General Manager of the European Pump and Compressor
Group, which he has held since 1987.
(D) Dieter W. Rietschle was appointed a General Manager of TIWR Holding GmbH &
Co. KG, a wholly owned subsidiary of the Company, effective August 30, 2002.
This was the date Mr. Rietschle joined the Company as a result of the
acquisition of substantially all of the assets of Werner Rietschle Holding GmbH.
Prior to this date, Mr. Rietschle was General Manager of Werner Rietschle
Holding GmbH.
(E) James J. Kregel was elected an officer effective April 17, 2003, in addition
to his position of General Manager, Rietschle Thomas North American Pump and
Compressor Group, which he has held since March 1, 2003. Prior to this, Mr.
Kregel held the position of Assistant General Manager for the North American
Group from January 1, 2003, and the position of Director of Marketing and Sales
for the North American Group from January 1, 1991 to December 31, 2002.
ITEM 2. PROPERTIES
The Corporate offices of the Company are located in Louisville,
Kentucky. Due to the large number of individual locations and the diverse nature
of the operating facilities, specific description of the properties owned and
leased by the Company is not necessary to an understanding of the Company's
business. All of the buildings are of steel, masonry, and concrete construction,
are in generally good condition, provide adequate and suitable space for the
operations at each location, and are of sufficient capacity for present and
foreseeable future needs.
The following listing summarizes the Company's properties.
NUMBER
OF FACILITIES
-------------
COMBINED
SEGMENT OWNED LEASED SQUARE FEET NATURE OF FACILITIES
- ------- ----- ------ ----------- --------------------
Pump and Compressor............. 9 5 1,090,000 Manufacturing plants
7 53 424,000 Distribution and service centers
Corporate....................... -- 1 6,900 Corporate headquarters
2 -- 160,000 Leased to third parties
One owned manufacturing facility (50,000 sq. feet) in Wuxi, China, was
constructed during late 2004, but will not begin production until 2005.
ITEM 3. LEGAL PROCEEDINGS
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
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Prices and Dividends of Common Stock
The Company's common stock is traded on the New York Stock Exchange
(ticker symbol TII). On , March 10, 2005 there were 1,650 security holders of
record. High and low closing stock prices and dividends per share for the last
two years were:
2004 2003
---- ----
MARKET PRICE MARKET PRICE
------------ ------------
CASH CASH
DIVIDENDS DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED HIGH LOW DECLARED
- ------------- ---- --- -------- ---- --- --------
March 31.............................................. $35.30 $30.07 $0.095 $28.32 $24.26 $0.085
June 30............................................... 34.95 31.18 0.095 29.81 24.32 0.095
September 30.......................................... 33.57 29.73 0.095 28.65 26.40 0.095
December 31........................................... 39.92 33.00 0.095 34.66 27.88 0.095
Payment of future cash dividends will be at the discretion of the
Company's Board of Directors and will be dependent upon the earnings and
financial condition of the Company and any other factors deemed relevant by the
Board of Directors.
(b) The Company made no stock repurchases in 2004 or 2003.
(c) Equity Compensation Plan Information
The information set forth in the following table is as of December 31, 2004:
NUMBER OF SECURITIES TO NUMBER OF SECURITIES REMAINING
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE UNDER
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, WARRANTS AND EQUITY COMPENSATION PLANS (EXCLUDING
WARRANTS AND RIGHTS RIGHTS SECURITIES REFLECTED IN COLUMN (a))
------------------- ------ -----------------------------------
PLAN CATEGORY (a) (b) (c)
- ------------- --- --- ---
Equity compensation
plans approved by
security holders.. 993,940 $22.27 808,891
Equity compensation
plans not approved
by security holders -- -- --
------- ------ -------
Total............... 993,940 $22.27 808,891
------- ------ -------
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF OPERATIONS AND STATISTICS
YEARS ENDED DECEMBER 31
-----------------------
2004 2003 2002(A) 2001 2000
---- ---- ------- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
EARNINGS STATISTICS
Net sales.......................................... $410,114 $376,774 $240,602 $184,382 $188,824
Cost of products sold.............................. 262,654 246,832 154,904 118,625 120,835
Selling, general, and administrative expenses...... 117,728 101,943 59,989 43,411 44,070
Equity income from GTG............................. 18,608(B) 32,138(F) 28,804 24,835 24,575
Gain on sale of GTG................................ 160,410(C) - - - -
Interest expense................................... 2,691 4,237 3,370 3,630 3,995
Income before income taxes and minority interest... $207,670(C) $55,679(F) $51,165 $45,040 $48,298(H)
As a percentage of net sales....................... 50.6% 14.8% 21.3% 24.4% 25.6%
Income taxes....................................... $93,516(D) $18,340 $18,452 $16,870 $18,213
Effective tax rate................................. 45.0% 32.9% 36.1% 37.5% 37.7%
Net income......................................... $114,154(E) $37,314(G) $32,692 $28,170 $30,085(I)
FINANCIAL POSITION
Working capital.................................... $355,779 $95,581 $82,030 $45,978 $30,677
Current ratio...................................... 7.2 TO 1 2.6 to 1 2.7 to 1 2.5 to 1 1.9 to 1
Property, plant and equipment--net................. $114,868 $108,350 $91,591 $39,770 $39,521
Total assets....................................... $621,936 $573,134 $491,016 $306,714 $306,112
Return on ending assets............................ 18.4% 6.5% 6.7% 9.2% 9.8%
Long-term debt, less current portion............... $7,751 $102,673 $104,047 $24,938 $40,727
Long-term debt to equity........................... 1.5% 26.8% 33.1% 10.5% 18.7%
Long-term debt to capital.......................... 1.4% 21.1% 24.9% 9.5% 15.8%
Shareholders' equity............................... $526,933 $383,355 $314,367 $237,713 $217,402
Return on beginning shareholders' equity........... 29.8% 11.9% 13.8% 13.0% 14.4%
DATA PER COMMON SHARE
Net income--diluted................................ $6.44(E) $2.12(G) $2.00 $1.80 $1.91(I)
Cash dividends declared............................ $0.38 $0.37 $0.34 $0.34 $0.30
Shareholders' equity............................... $29.15 $21.71 $17.84 $15.16 $14.09
Price range........................................ $39.92 $34.66 $30.50 $29.50 $23.25
TO to to to to
$29.73 $24.26 $22.50 $20.19 $17.50
Closing price...................................... $39.92 $34.66 $26.06 $25.00 $23.25
Price/earnings ratio............................... 6.2 16.4 13.0 13.9 12.2
OTHER DATA
Cash dividends declared............................ $6,651 $6,369 $5,502 $5,162 $4,621
Expenditures for property, plant and equipment..... $16,403 $20,108 $8,358 $8,548 $10,888
Depreciation and intangible amortization........... $16,340 $15,207 $10,468 $7,913 $7,463
Goodwill amortization (J).......................... N/A n/a n/a $483 $460
Average number of employees........................ 2,258 2,263 1,447 1,110 1,085
Average sales per employee......................... $181.9 $166.5 $166.3 $166.1 $174.0
Number of shareholders of record................... 1,689 1,811 1,991 2,064 2,193
Average number of diluted common shares outstanding 17,733,000 17,570,000 16,375,000 15,621,000 15,777,492
Actual number common shares outstanding............ 17,826,384 17,286,325 17,125,291 15,233,172 15,051,303
Market capitalization.............................. $711,629 $599,144 $446,285 $380,829 $349,943
SEGMENT INFORMATION
Net Sales--Pumps and Compressors................... $410,114 $376,774 $240,602 $184,382 $188,824
======== ======== ======== ======== ========
Operating Income
Pumps and Compressors............................ $40,936 $36,742 $31,675 $28,488 $31,607
Lighting (K)..................................... 18,608(B) 32,138(F) 28,804 24,835 24,575
Gain on Sale of Lighting (GTG)................... 160,410(C) - - - -
Corporate expenses............................... (11,204) (8,743) (5,966) (6,142) (7,688)(H)
Total Operating Income............................. $208,750 $60,137 $54,513 $47,181 $48,494
Note: See accompanying Notes to Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations
- ---------------
(A) Includes Rietschle results since the acquisition date on August 29,
2002.
(B) Includes GTG equity earnings through the sale date on July 31, 2004.
(C) Includes $160,410,000 of pre-tax gains related to the sale of GTG
effective with the close of business on July 31, 2004.
(D) Includes $76,275,000 of income tax, calculated at an effective rate of
47.6%, related to the sale of GTG.
(E) Includes $84,135,000, or $4.74 per share, of after-tax gains related
to the sale of GTG.
(F) Includes $2,272,000 of pre-tax gains related to the settlement of a
patent infringement lawsuit.
(G) Includes $1,400,000, or $.08 per share, of after-tax gains related to
the settlement of GTG's patent infringement lawsuit.
(H) Includes $1,632,000 of pre-tax gains related to insurance proceeds and
sale of securities; also includes a $1,000,000 pre-tax charge related
to environmental costs.
(I) Includes $1,315,000, or $.09 per share, of after-tax gains related to
insurance proceeds and sale of securities; also includes a $623,000,
or $.04 per share, after-tax charge related to environmental costs.
(J) In accordance with SFAS No. 142, goodwill is no longer amortized,
effective January 1, 2002 (see Note 2 in the consolidated financial
statements).
(K) Represents the Company's earnings from its 32% interest in the GTG
joint venture.
ITEM 7. 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
original equipment manufacturers (OEMs) in such markets as medical equipment,
environmental, automotive, printing, packaging and many others. An important
market for the Company is medical equipment, which includes compressors used in
oxygen concentrators, nebulizers, aspirators, and other devices.
As previously announced, sales to the OEM oxygen concentrator market
were reduced in 2004 by $6.8 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 share in the oxygen concentrator market worldwide.
Pricing in this market has continued to decline due to competition and threat of
foreign manufacturers.
In order to reduce our cost structure and remain price competitive, the
Company constructed a manufacturing facility in China during late 2004, which
should be in production in the first half of 2005. The Company incurred no
restructuring or exit costs at existing facilities in connection with this
production transfer and have no plans for any of these costs in 2005. We also
had no asset impairment charges or reduction in expected service lives of assets
at existing facilities related to this production transfer in 2004 and expect
none in 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 an 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 generated approximately $2.8 million of one-time
costs in 2004. 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 and cost reductions.
We have received certain commodity cost increases, which have impacted
our costs, although we attempt to offset these with price increases and ongoing
cost reduction programs. The Company is also experiencing increased costs
related to requirements by Section 404 of the Sarbanes-Oxley Act. In 2004, the
Company recorded approximately $1.5 million of pre-tax charges related to
internal control documentation and testing for Sarbanes-Oxley compliance.
Until July 31, 2004, the Company also operated in the Lighting Segment
through its 32% interest in 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. Effective with the close of
business on July 31, 2004, the Company sold its 32% interest in GTG to The
Genlyte Group Incorporated for approximately $401 million, which generated an
$84.1 million net after-tax gain.
On March 9, 2005, we announced that we have entered into an Agreement
and Plan of Merger ("Merger Agreement") with Gardner Denver, Inc. Under the
terms of the Merger Agreement, Gardner Denver will pay $40.00 per share in cash
for all of the issued and outstanding shares of common stock of Thomas. The
transaction is conditioned on obtaining requisite approval from the shareholders
of Thomas, necessary regulatory approvals and other customary closing
conditions. Upon closing of the acquisition, Thomas will become a subsidiary of
Gardner Denver and will no longer be a publicly traded company. The parties
expect to close the transaction during 2005.
As discussed in Note 17 - Subsequent Event of the Notes to Consolidated
Financial Statements, on January 10, 2005, the Company acquired certain assets
of the side channel blower business of Ruey Chaang Electric Co, Ltd. of Taipei,
Taiwan for approximately $12.0 million. This acquisition will enhance the
Company's Asian presence and provide further opportunities for growth through
our global distribution network.
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 conformity with United States generally accepted
accounting principles. 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, pensions and other postretirement benefits,
income taxes, 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.
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 changes to 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 aging 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 would 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. Some 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 our customer. Revenue is only recorded when our
customer ships the inventory to their customer or uses it for
other purposes. These consignment inventory arrangements are
insignificant.
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.
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, 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
consolidated 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 the Company's consolidated
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 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 the Company's consolidated financial condition and results of
operations.
Contingencies and Litigation: As discussed in "Note 11 - Leases,
Commitments and Contingencies" in the Notes to Consolidated Financial
Statements, 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
On August 29, 2002, the Company purchased substantially all the assets
and liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. See Note 3 in the notes to consolidated
financial statements. Results of Rietschle are included in our operations
beginning August 29, 2002.
The Company's 2004 net income of $114.2 million was $76.9 million
higher than the $37.3 million for 2003. The 2004 net income included an $84.1
million, or $4.74 per share, net gain from the sale of our 32% joint venture
interest in GTG. Since the sale occurred effective with the close of business on
July 31, 2004, our 2004 results only included GTG equity earnings for seven
months versus twelve months in 2003. The 2003 net income included a
non-recurring gain of $1.4 million, or $.08 per share, related to the settlement
of GTG's patent infringement lawsuit. The 2003 net income of $37.3 million was
14.1% higher than the $32.7 million for 2002. The Rietschle operating results
were included for twelve months in 2003 versus four months in 2002.
PUMP AND COMPRESSOR SEGMENT
Net Sales
- ---------
Net sales for the Pump and Compressor Segment in 2004 increased $33.3
million, or 8.8%, to $410.1 million, compared to $376.8 million for 2003.
Approximately $22 million of the $33.3 million increase in 2004 net sales was
due to the effects of exchange rates. Net sales in the North American operations
increased $3.0 million, or 2.0%, to $156.2 million in 2004 compared to $153.2
million in 2003. This increase occurred even though our sales to the oxygen
concentrator OEM market were reduced in 2004 by $6.8 million as a result of the
loss of one of our customer's oxygen concentrator product lines to a competitor.
More than offsetting this $6.8 million decline in 2004 were increases of $4.3
million with other oxygen concentrator customers, as well as increases in other
medical market applications ($4.4 million), and industrial market applications
($1.5 million). European sales increased by $24.7 million, or 13.1%, to $214.0
million in 2004, compared to $189.3 million in 2003. Approximately $20.0 million
of the 2004 increase was due to foreign exchange rate fluctuations. Net sales in
the Asia Pacific operations increased $5.6 million, or 16.2%, to $39.9 million
in 2004, compared to $34.3 million in 2003. Approximately $2.0 million of the
2004 increase was due to foreign exchange rate fluctuations. Also contributing
to Asia Pacific's increase in 2004 were volume increases in the environmental
($.5 million) and industrial ($1.0 million) markets.
Net sales in 2003 increased $136.2 million, or 56.6%, to $376.8
million, compared to $240.6 million in 2002. Acquisitions accounted for $120.6
million of the 2003 increase in net sales, since the Rietschle acquisition was
only included for the last four months of 2002 versus twelve months in 2003.
Approximately $10.4 million of the 2003 sales increase was due to foreign
exchange fluctuations. The North American operations reported a $21.9 million,
or 16.6% increase over 2002 levels, as net sales increased from $131.3 million
in 2002 to $153.2 million in 2003. Acquisitions contributed $15.6 million to the
2003 increase. The remaining increase in North American sales related to
increased sales in the medical ($7.9 million) and automotive ($.9 million)
markets, which were partially offset by decreases in various other markets.
European operations posted a $98.6 million, or 108.6%, increase in net sales.
Net sales for Europe were $189.3 million for 2003, compared to $90.7 million in
2002. Acquisitions contributed $89.4 million of the 2003 increase, while foreign
exchange rate fluctuations increased 2003 net sales by approximately $8.8
million. Net sales in 2003 for the Asia Pacific operations increased $15.8
million, or 85.1%, to $34.3 million, compared to $18.5 million in 2002.
Approximately $15.6 million of the 2003 increase related to acquisitions, while
foreign exchange rate fluctuations increased 2003 sales by approximately $1.5
million. Asia Pacific 2003 net sales were negatively impacted by weaker sales in
the environmental ($.9 million) and medical ($.7 million) markets.
Gross Profit
- ------------
Gross profit for the Pump and Compressor Segment was $147.5 million or
36.0% of sales in 2004, compared to $129.9 million, or 34.5% of sales in 2003.
The improved gross profit percentage for 2004 is primarily related to favorable
sales mix and the improved efficiencies gained in 2004 from facility
rationalization plans implemented in 2003 and early 2004.
Gross profit was $129.9 million or 34.5% of sales in 2003, compared to
$85.7 million, or 35.6% of sales in 2002. The 2003 gross profit was negatively
impacted by costs incurred related to the 2003 facility rationalization plans.
Selling, General and Administrative Expenses
- --------------------------------------------
The Pump and Compressor Segment's 2004 selling, general and
administrative (SG&A) expenses were $106.5 million, or 26.0% of sales, compared
to $93.2 million, or 24.7% of sales in 2003. These exclude corporate expenses
which are discussed in a separate section below. The higher percent of sales in
2004 for SG&A expenses is primarily due to some expenses that were incurred in
2004, but not in 2003. These include expenses for the Wuppertal facility
shutdown ($2.7 million), higher professional fees related to internal control
documentation and testing for Sarbanes-Oxley Act compliance (SOX compliance)
($1.0 million) and higher incentive compensation expenses ($1.5 million).
The 2003 SG&A expenses were $93.2 million, or 24.7% of sales, compared
to $54.0 million, or 22.5% of sales in 2002. The higher percent of sales in 2003
for SG&A expenses is primarily due to having a full year of Rietschle sales and
service offices throughout the world, which require a higher level of SG&A costs
to operate, as well as increased personnel costs.
Operating Income
- ----------------
Operating income, excluding corporate expenses, in 2004 for the Pump
and Compressor Segment increased $4.2 million, or 11.4%, to $40.9 million,
compared to $36.7 million for 2003. As a percent to net sales, the 2004
operating income was 10% of net sales versus 9.8% in 2003. The North American
operations had a 2.3% decrease in operating income in 2004 versus 2003 due to
$.3 million of patent legal costs and general pricing pressures in certain
markets. The European and Asia Pacific operations posted double digit increases
in operating income for 2004 versus 2003. Europe benefited from the improved
efficiencies from facility rationalization changes. The Asia Pacific increase in
2004 was primarily due to volume gains.
Operating income in 2003 increased $5.0 million, or 16%, to $36.7
million, compared to $31.7 million for 2002. As a percent to net sales, the 2003
operating income was 9.8% of net sales versus 13.2% in 2002. Acquisitions
contributed $5.9 million of incremental operating income to 2003. Included in
2003 were relocation, moving and rearrangement expenses of $1.0 million which
lowered operating income. North American operations posted slightly lower
operating income in 2003 versus 2002, primarily due to competitive pricing
pressures in certain markets and applications. The European and Asia Pacific
operating income increased in 2003 compared to 2002, primarily due to
acquisitions.
LIGHTING SEGMENT
The Genlyte Group Incorporated (Genlyte) and Thomas formed Genlyte
Thomas Group LLC (GTG) on August 30, 1998. Effective with the close of business
on July 31, 2004, Thomas sold its 32% interest in GTG to Genlyte for
approximately $400.9 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. The Lighting Segment's operating income for the
seven months ended July 31, 2004, was $18.6 million, compared to $32.1 million
for the twelve months of 2003. Included in 2003 was a pre-tax gain of $2.3
million related to the settlement of GTG's patent infringement lawsuit. The
Lighting Segment's operating income was $32.1 million in 2003, compared to $28.8
million in 2002.
The calculation of the Company's adjusted book basis as of July 31,
2004 and gain on sale calculation are in the table 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 $230.5
Thomas' adjustment for accelerated option expense
treated as a transaction cost (.2)
Other comprehensive loss items:
Minimum pension liability 5.5
Foreign currency translation .5
------
Adjusted GTG book basis at July 31, 2004 $236.3
======
The gain on the sale of GTG, which the Company recorded in 2004, was
calculated as follows (in millions):
Total sale price $400.9
Transaction costs (4.2)
Net proceeds 396.7
Adjusted book basis at July 31, 2004 (236.3)
Pre-tax book gain 160.4
Income taxes (76.3)
Net after-tax gain $ 84.1
Earnings per share - diluted $ 4.74
This gain calculation is an estimate subject to final determination of
taxes of the transaction when tax returns are filed in 2005. The effective
income tax rate recorded on the gain of 47.6% is primarily due to the basis
differences for financial reporting and tax purposes in the joint venture
interest in GTG.
CORPORATE
Consolidated operating income includes corporate expenses. Corporate
expenses were $11.2 million for 2004, compared to $8.7 million for 2003. The
increase in 2004 corporate expenses relates to incremental environmental matters
($.8 million), higher personnel related costs ($.9 million), higher legal
expenses ($.6 million), expense related to the SOX compliance ($.5 million), and
additional costs related to expanding our presence in China ($.3 million).
Corporate expenses were $8.7 million for 2003, compared to $6.0 million for
2002. The increase in 2003 corporate expenses relates to higher professional
fees related to a reorganization of our legal structure ($.7 million), higher
accounting/tax fees ($.4 million), higher personnel related costs ($.5 million),
higher franchise taxes ($.3 million) and higher banking fees associated with the
Rietschle acquisition ($.4 million).
Interest expense for 2004 was $2.7 million compared to $4.2 million for
2003. The reduction in 2004 was primarily related to the pay down of long-term
debt that occurred with the proceeds from the July 31, 2004 sale of GTG. Senior
notes, which carried a 9.36% annual interest rate, in the amount of $7.7 million
were paid off on January 31, 2004. Industrial revenue bonds of $1.25 million
were paid off in July 2004. Then on August 2, 2004, the remaining $7.7 million
of senior notes, as well as our variable rate debt which included revolving
credit notes and short-term borrowing arrangements, were paid off. Interest
expense for 2003 was $4.2 million compared to $3.4 million for 2002. The
increase in 2003 was primarily related to having the Rietschle acquisition
related debt for the full year in 2003 versus four months in 2002. This was
partially offset due to the $7.7 million payment on January 31, 2003, of senior
notes carrying a 9.36% annual interest rate.
Interest income for 2004 was $2.3 million, compared to $.3 million for
2003. The increase in 2004 was due to the investment of the net amount received
on August 2, 2004 from the sale of our 32% interest in GTG. The net amount
represents proceeds received less long-term and short-term debt pay offs, as
well as associated income tax and transaction cost payments. The net amount was
invested in available-for-sale securities, which included tax advantaged debt
securities. Interest income for 2003 was $.3 million compared to $.5 million in
2002.
Other income (expense) for 2004 was an expense of $.7 million compared
to an expense of $.5 million in 2003. The 2004 and 2003 expenses include foreign
currency transaction losses of $.6 million. Other income (expense) for 2003 was
an expense of $.5 million compared to an expense of $.4 million in 2002. The
amounts include foreign currency transaction losses of $.6 million in 2003 and
$.5 million in 2002.
Income tax provisions were $93.5 million, $18.3 million, and $18.5
million in 2004, 2003, and 2002, respectively. The effective income tax rate was
45.0% in 2004, compared to 32.9% in 2003 and 36.1% in 2002. The increase in the
2004 provision and rate was due to the inclusion of $76.3 million of tax
provision, calculated at a 47.6% rate, related to the sale of the Company's
joint venture interest in GTG. The higher effective tax rate was due to the
basis difference for financial reporting and tax purposes in the joint venture
interest in GTG. The 2004 provision and rate, excluding the impact of the sale
of GTG, are $17.2 million and 36.5%, respectively. The decline in the effective
rate in 2003 versus 2002 was primarily due to the effect of foreign tax rates
and the realization of income tax loss carryforward benefits in certain foreign
jurisdictions.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows used in operations in 2004 were $51.9 million compared to
cash flows provided by operations in 2003 of $32.4 million. The decrease in 2004
was primarily related to the payment of $76.3 million of income tax due on the
gain from the GTG sale transaction. Cash flows provided by operations in 2003
were $32.4 million compared to $27.6 million in 2002. The increase in 2003
versus 2002 was primarily related to increases in net income.
Cash provided by investing activities in 2004 was $257.3 million
compared to cash used in investing activities in 2003 of $23.2 million. The
increase in 2004 was primarily related to the $400.9 million of proceeds
received from the sale of GTG, of which, $133.6 million was used to purchase
short-term investments. The Company also received proceeds of $6.2 million,
which represents an adjustment to the Company's purchase price of Rietschle.
Capital expenditures decreased from $20.1 million in 2003 to $16.4 million in
2004. The 2003 capital expenditures included $5.0 million for a new
manufacturing facility in Germany. Cash used in investing activities was $23.2
million in 2003 compared to $92.4 million in 2002. The decrease in cash used was
primarily related to the Rietschle acquisition in August 2002 for $83.3 million.
Capital expenditures were $20.1 million in 2003, compared to $8.4 million in
2002. As noted previously, 2003 capital expenditures included $5.0 million for a
new German manufacturing facility, as well as a full year impact for Rietschle
locations versus only four months in 2002.
Cash used in financing activities was $104.3 million in 2004 compared
to $6.4 million in 2003. The increase in cash used in 2004 was primarily related
to the debt payments made as a result of having cash proceeds from the GTG sale
transaction. Financing activities used cash of $6.4 million in 2003 compared
with providing cash of $52.6 million in 2002. The change between 2002 and 2003
primarily relates to the debt associated with the Rietschle acquisition. In
2002, the Company borrowed $80.0 million to partially finance the Rietschle
acquisition, and also made payments of $22.8 million related to short-term and
long-term debt.
Dividends paid in 2004 were $6.6 million compared with $6.2 million in
2003 and $5.3 million in 2002. The increase in 2004 was primarily related to a
higher number of outstanding shares due to a higher number of stock options
being exercised in 2004, which increased since GTG employees were required to
exercise their options by December 31, 2004 or forfeit them. The 2003 dividends
increased over 2002 primarily due to the issuance of 1.8 million shares in
August 2002 in connection with the acquisition of Rietschle. Also, effective
with the April 1, 2003 dividend, the Company increased its quarterly dividend
per share from $.085 to $.095.
The following summarizes the Company's contractual obligations at
December 31, 2004, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods.
LESS THAN 1-3 4-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- ------ ----- ----- -------
(IN THOUSANDS)
Contractual Obligations:
Capital lease obligations..................................... $9,548 $1,797 $495 $506 $6,750
Operating leases.............................................. 21,421 5,630 8,299 5,845 1,647
Purchase obligations.......................................... 34,879 34,719 122 38 --
Other long-term obligations................................... 658 209 337 112 --
------- ------- ------ ------ ------
Total contractual obligations................................. $66,506 $42,355 $9,253 $6,501 $8,397
======= ======= ====== ====== ======
Purchase obligations are defined as an agreement to purchase goods or
services that is enforceable and legally binding on the Company. These primarily
relate to normal ongoing inventory purchase obligations but also include other
items such as capital commitments and service agreements. The purchase
obligation amounts do not represent the entire anticipated purchases in the
future, but represent only those items for which the Company is contractually
obligated as of December 31, 2004. There also may be circumstances where goods
and services are purchased as needed, with no enforceable and legally binding
commitment. For this reason, these numbers will not provide a complete and
reliable indicator of the Company's expected future cash outflows.
As of December 31, 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.
The Company announced in December 1999 that it planned to repurchase,
from time to time depending on market conditions and other factors, up to 15
percent, or 2,373,000 shares, of its outstanding Common Stock in the open market
or through privately negotiated transactions at the prevailing market prices.
During 2004, no purchases were made. Through December 31, 2004, the Company has
purchased, on a cumulative basis, 879,189 shares at a cost of $17.3 million, or
an average cost of $19.72 per share. The Company plans to fund any purchase of
Company stock through its current cash position.
The Company has short-term investments and cash equivalents of $251.7
million as of December 31, 2004 that bear interest at variable rates. A 100
basis point movement in the interest rate would result in an approximate
$2,517,000 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
consolidated 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. The Company's objective is to reduce earnings and cash flow volatility
associated with foreign exchange rate changes 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 December 31, 2004, the Company held forward contracts
expiring through December 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 December 31, 2004, the foreign currency
forward contracts had a notional amount of Euro 6,000,000 and a fair value of
approximately $657,700. The fair value of the foreign currency forward
contracts, which represents an asset, is included in other current assets. The
amount of pre-tax net gain deferred through other comprehensive income as of
December 31, 2004 was approximately $631,900. There was $25,800 of gain
recognized in 2004. A 100 basis point movement in foreign currency rates on the
Company's open foreign exchange contracts at December 31, 2004 would not
materially affect the Company's consolidated financial statements.
Working capital increased from $95.6 million at December 31, 2003, to
$355.8 million at December 31, 2004, primarily due to the net proceeds from the
GTG sale transaction, which were invested after being reduced for payments for
long-term and short-term debt, income taxes, and transaction costs. Working
capital increased from $82.0 million at December 31, 2002, to $95.6 million at
December 31, 2003, primarily due to foreign currency exchange rate impacts.
DECEMBER 31
-----------
2004 2003 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
Working capital................................ $355,779 $95,581 $82,030
Current ratio.................................. 7.20 2.59 2.66
Long-term debt, less current portion........... 7,751 $102,673 $104,047
Long-term debt to total capital................ 1.4% 21.1% 24.9%
The Company has no loan agreements which include restrictions on
working capital, operating leases, tangible net worth, and the payment of cash
dividends and stock distributions.
As of December 31, 2004, the Company had no revolving line of credit
facilities with its banks. As of December 31, 2004, the Company had no
uncommitted short-term borrowing arrangements.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 (FASB 151), Inventory Costs. The Company is required to adopt
the provisions of FASB 151, on a prospective basis, as of January 1, 2006. FASB
151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. FASB 151 requires that those items
- - if abnormal - be recognized as expenses in the period incurred. In addition,
FASB 151 requires the allocation of fixed production overheads to the costs of
conversions based upon the normal capacity of the production facilities. The
Company has not yet determined what effect FASB 151 will have on its earnings
and financial position.
In December 2004, FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) (FASB 123R), Share-Based Payment. FASB 123R
will require the Company to expense share-based payments, including employee
stock options, based on their fair value. The Company is required to adopt the
provisions of FASB 123R effective as of the beginning of its third quarter in
2005, however, earlier adoption in 2005 is allowed. FASB 123R provides
alternative methods of adoption which include prospective application and a
modified retroactive application. The Company adopted the fair-value method of
accounting for share-based payments effective January 1, 2003 using the
prospective method described in FASB Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. Currently, the Company
uses the Black-Scholes-Merton formula to estimate the value of stock options
granted to employees and expects to continue to use this acceptable option
valuation model upon the required adoption of Statement 123R on July 1, 2005.
Because Statement 123R must be applied not only to new awards, but to previously
granted awards that are not fully vested on the effective date, and because the
Company adopted Statement 123 using the prospective transition method (which
applied only to awards granted, modified or settled after the adoption date),
compensation cost for some previously granted awards that were not recognized
under Statement 123 will be recognized under Statement 123R. However, had we
adopted Statement 123R in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share noted above. Statement 123R also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when those employees
exercise stock options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $2,805,000, $464,000, and $221,000
in 2004, 2003 and 2002, respectively. The 2004 amount was significantly higher
than 2003 and 2002 due primarily to the increased options exercised by GTG
employees. The vesting of options to GTG employees was accelerated and the
options became 100% vested as of July 31, 2004. As part of the GTG sale
agreement, the GTG employees had until December 31, 2004 to exercise or forfeit
their options.
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" and FSP 109-2, "Accounting for Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004." FSP 109-1 provides a tax deduction on qualified production activities,
while FSP 109-2 introduces a special one-time dividends-received deduction on
the repatriation of certain foreign earnings to a U.S. taxpayer, provided
certain criteria are met. The Company has adopted both of these staff positions
in 2004 (See Note 7).
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-K Report and statements contained in future
filings with the Securities and Exchange Commission and publicly disseminated
press releases, and statements which may be made from time to time in the future
by management of the Company in presentations to shareholders, prospective
investors, and others interested in the business and financial affairs of the
Company, which are not historical facts, are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements. Any
projections of financial performance or statements concerning expectations as to
future developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no assurance
that any forward-looking statement will be realized or that actual results will
not be significantly different from that set forth in such forward-looking
statement. In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company referred to above are
also subject to the following risks and uncertainties:
o The Company operates in a highly competitive business
environment, and its sales could be negatively affected by its
inability to maintain or increase prices, changes in geographic
or product mix, or the decision of its customers to purchase
competitive products instead of the Company's products. Sales
could also be affected by pricing, purchasing, financing,
operational, advertising, or promotional decisions made by
purchasers of the Company's products.
o The Pump and Compressor Segment operates in a market where
technology improvements and the introduction of products for new
applications are necessary for future growth. The Company could
experience difficulties or delays in the development, production,
testing, and marketing of new products. As an original equipment
supplier, the Company's results of operations are directly
affected by the success of its customers' products.
o The Pump and Compressor Segment has several key customers, none
of which are 10% or more of our consolidated sales. However, the
loss of any of these key customers could have a negative affect
on the Company's results.
o The Company believes that the Pump and Compressor Segment has a
leading market share in the oxygen concentrator Original
Equipment Manufacturers (OEM) market worldwide. The Company's
market share could be reduced significantly due to a competitor,
the vertical integration by our customers, or new technology
replacing compressed air in oxygen concentrators. As noted in the
overview section, the Company noted that in 2004 it lost $6.8
million in sales from this market beginning in the second quarter
of 2004. The further loss of significant market share in the
oxygen concentrator OEM market could have a significant adverse
affect on the Company's results.
o With the Rietschle acquisition, the Company has a larger
percentage of its net assets exposed to foreign currency risks.
As a result, this increased exposure to foreign currency risks
may adversely affect the Company's results.
o With the Rietschle acquisition, the Company has a leading market
share in supplying compressors and systems to the printing
industry worldwide. The Company's market share could be reduced
significantly due to competition or technology. The loss of
market share in the printing industry could have a significant
adverse affect on the Company's results.
o As the Company's business continues to expand outside the United
States, the Company could experience currency exchange rate
fluctuations. The Company could also be affected by
nationalizations; unstable governments, economies, or legal
systems; terrorist attacks; or inter-governmental disputes. These
currency, economic, and political uncertainties may affect the
Company's results.
o On an annual basis, the Company negotiates renewals for property,
casualty, workers compensation, general liability, product
liability, and health insurance coverages. Due to conditions
within these insurance markets and other factors beyond the
Company's control, future coverages and the amount of the related
premiums could have a negative affect on the Company's results.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has short-term investments and cash equivalents of $251.7
million as of December 31, 2004 that bear interest at variable rates. A 100
basis point movement in the interest rate would result in an approximate
$2,517,000 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. The
Company's objective is to reduce earnings and cash flow volatility associated
with foreign exchange rate changes 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 December 31, 2004, the Company held forward contracts expiring through
December 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 December 31, 2004, the foreign currency
forward contracts had a notional amount of Euro 6,000,000 and a fair value of
approximately $657,700. The fair value of the foreign currency forward
contracts, which represents an asset, is included in other current assets. The
amount of pre-tax net gain deferred through other comprehensive income as of
December 31, 2004 was approximately $631,900. There was $25,800 of gain
recognized in 2004. A 100 basis point movement in foreign currency rates on the
Company's open foreign exchange contracts at December 31, 2004 would not
materially affect the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In addition to the audited financial statements of Thomas Industries
Inc. which follow, the financial statements of GTG are included in this Form
10-K on pages F-1 to F-28.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal controls over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2004 based on
the framework in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on that
evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report which is included elsewhere herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders of Thomas Industries Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Thomas
Industries Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Thomas Industries
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Thomas Industries Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Thomas Industries Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2004 consolidated financial
statements of Thomas Industries Inc. and our report dated March 10, 2005
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 10, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Thomas Industries Inc:
We have audited the accompanying consolidated balance sheets of Thomas
Industries Inc. (a Delaware corporation) as of December 31, 2004 and 2003, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Thomas Industries
Inc. at December 31, 2004 and 2003, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Thomas
Industries Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2005 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Louisville, Kentucky
March 10, 2005
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
-----------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales............................................................................ $410,114 $376,774 $240,602
Cost of products sold................................................................ 262,654 246,832 154,904
-------- -------- --------
Gross profit......................................................................... 147,460 129,942 85,698
Selling, general and administrative expenses......................................... 117,728 101,943 59,989
Equity income from GTG............................................................... 18,608 32,138 28,804
Gain on sale of GTG.................................................................. 160,410 - -
-------- -------- --------
Operating income..................................................................... 208,750 60,137 54,513
Interest expense..................................................................... 2,691 4,237 3,370
Interest income...................................................................... 2,335 312 456
Other income (expense)............................................................... (724) (533) (434)
-------- -------- --------
Income before income taxes and minority interest..................................... 207,670 55,679 51,165
Income taxes......................................................................... 93,516 18,340 18,452
-------- -------- --------
Income before minority interest...................................................... 114,154 37,339 32,713
Minority interest, net of tax........................................................ - 25 21
-------- -------- --------
Net income........................................................................... $114,154 $37,314 $32,692
======== ======= =======
Net income per share
--Basic.......................................................................... $6.53 $2.17 $2.06
--Diluted........................................................................ $6.44 $2.12 $2.00
Dividends declared per share......................................................... $0.38 $0.37 $0.34
See accompanying notes.
THOMAS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------
2004 2003
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $133,472 $23,933
Short-term investments.......................................................................... 133,627 --
Accounts receivable, net........................................................................ 58,305 52,819
Inventories..................................................................................... 75,207 65,895
Deferred income taxes........................................................................... 5,101 6,688
Other current assets............................................................................ 7,514 6,287
-------- -------
Total current assets.............................................................................. 413,226 155,622
Property, plant and equipment, net................................................................ 114,868 108,350
Investment in GTG................................................................................. - 214,405
Goodwill.......................................................................................... 68,639 70,164
Other intangible assets, net...................................................................... 22,659 21,788
Other assets...................................................................................... 2,544 2,805
-------- -------
Total assets...................................................................................... $621,936 $573,134
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable................................................................................... $ -- $3,088
Accounts payable................................................................................ 17,999 14,312
Accrued expenses and other current liabilities.................................................. 34,204 30,519
Dividends payable............................................................................... 1,689 1,642
Income taxes payable............................................................................ 1,758 595
Current portion of long-term debt............................................................... 1,797 9,885
-------- -------
Total current liabilities......................................................................... 57,447 60,041
Deferred income taxes............................................................................. 8,978 6,177
Long-term debt, less current portion.............................................................. 7,751 102,673
Long-term pension liability....................................................................... 12,170 11,279
Other long-term liabilities....................................................................... 8,657 9,609
-------- -------
Total liabilities................................................................................. 95,003 189,779
Shareholders' equity:
Preferred stock, $1 par value, shares authorized: 3,000,000, none issued........................ -- --
Common stock, $1 par value, shares authorized: 60,000,000, shares issued: 2004-18,648,723;
2003-18,108,664............................................................................... 18,649 18,109
Capital surplus................................................................................. 149,586 137,041
Deferred compensation........................................................................... 1,558 1,211
Treasury stock held for deferred compensation................................................... (1,558) (1,211)
Retained earnings............................................................................... 323,799 216,296
Accumulated other comprehensive income ......................................................... 46,958 23,968
Less cost of 822,339 treasury shares............................................................ (12,059) (12,059)
-------- -------
Total shareholders' equity........................................................................ 526,933 383,355
-------- -------
Total liabilities and shareholders' equity........................................................ $621,936 $573,134
======== ========
See accompanying notes.
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
-----------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Common stock:
Beginning of year.................................................................. $18,109 $17,948 $17,856
Stock options exercised............................................................ 528 147 89
Shares issued to deferred share trust.............................................. 11 14 3
Other.............................................................................. 1 -- --
-------- -------- --------
End of year.......................................................................... 18,649 18,109 17,948
Capital surplus:
Beginning of year.................................................................. 137,041 133,964 114,342
Treasury shares issued in connection with acquisition.............................. -- -- 18,356
Stock options exercised............................................................ 8,384 1,703 657
Tax benefit from options exercised and other....................................... 3,818 1,039 517
Shares issued to deferred share trust.............................................. 343 335 92
-------- -------- --------
End of year.......................................................................... 149,586 137,041 133,964
-------- -------- --------
Deferred compensation:
Beginning of year.................................................................. 1,211 846 739
Deferred compensation.............................................................. 347 365 107
-------- -------- --------
End of year.......................................................................... 1,558 1,211 846
-------- -------- --------
Treasury stock held for deferred compensation:
Beginning of year.................................................................. (1,211) (846) (739)
Increase in treasury stock held for deferred compensation.......................... (347) (365) (107)
End of year.......................................................................... (1,558) (1,211) (846)
Retained earnings:
Beginning of year.................................................................. 216,296 185,351 158,161
Net income......................................................................... 114,154 37,314 32,692
Cash dividends declared............................................................ (6,651) (6,369) (5,502)
-------- -------- --------
End of year.......................................................................... 323,799 216,296 185,351
-------- -------- --------
Accumulated other comprehensive income (loss):
Beginning of year.................................................................. 23,968 (10,837) (14,189)
Other comprehensive income (loss)(1)............................................... 22,990 34,805 3,352
-------- -------- --------
End of year.......................................................................... 46,958 23,968 (10,837)
-------- -------- --------
Treasury stock:
Beginning of year.................................................................. (12,059) (12,059) (38,457)
Treasury shares issued in connection with acquisition.............................. -- -- 26,398
-------- -------- --------
End of year.......................................................................... (12,059) (12,059) (12,059)
-------- -------- --------
Total shareholders' equity........................................................... $526,933 $383,355 $314,367
======== ======== ========
(1) A reconciliation of net income to total comprehensive income follows.
YEARS ENDED DECEMBER 31
-----------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Net income........................................................................... $114,154 $37,314 $32,692
Other comprehensive income (loss):
Minimum pension liability (increase)............................................... 7,942 (225) (6,783)
Related tax expense.............................................................. (3,012) 196 2,476
Derivative adjustment.............................................................. 454 178 --
Related tax expense (credit)..................................................... (173) (67) --
Foreign currency translation....................................................... 17,779 34,723 7,659
-------- -------- --------
Total change in other comprehensive income (loss).................................... 22,990 34,805 3,352
-------- -------- --------
Total comprehensive income........................................................... $137,144 $72,119 $36,044
======== ======= =======
Accumulated other comprehensive income (loss) was comprised of foreign currency
translation gains (losses) of $47,922,000, $30,143,000 and ($4,580,000), and
minimum pension liabilities, net of tax, of ($1,356,000), ($6,286,000) and
($6,257,000), at December 31, 2004, 2003, and 2002, respectively. The change in
the minimum pension liabilities was primarily due to the GTG sale transaction.
Additionally, accumulated other comprehensive income (loss) included gains of
$392,000 and $111,000, net of tax, from derivative adjustments, at December 31,
2004 and 2003.
See accompanying notes.
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31
-----------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................................................. $114,154 $37,314 $32,692
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and intangible amortization.................................................. 16,340 15,207 10,468
Deferred income taxes..................................................................... 1,376 1,326 621
Equity income from GTG.................................................................... (18,608) (32,138) (28,804)
Gain on sale of GTG....................................................................... (160,410) -- --
Distributions from GTG.................................................................... 4,350 13,299 13,785
Other items............................................................................... 966 462 1,291
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable..................................................................... (3,312) 2,927 (2,344)
Inventories............................................................................. (4,905) (3,970) 555
Accounts payable........................................................................ 2,827 (2,512) (1,379)
Income taxes payable.................................................................... 4,086 758 (1,663)
Accrued expenses and other current liabilities.......................................... (2,007) 6,598 1,523
Other................................................................................... (6,768) (6,918) 828
-------- ------- -------
Net cash (used in) provided by operating activities......................................... (51,911) 32,353 27,573
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................................................. (16,403) (20,108) (8,358)
Proceeds from sale of property, plant and equipment......................................... 268 327 828
Proceeds from sale of GTG................................................................... 400,902 -- --
Purchases of short-term investments......................................................... (431,322) -- --
Proceeds from sale of short-term investments................................................ 297,695 -- --
Adjustments (payments) for purchase of companies, net of cash acquired...................... 6,154 (3,418) (84,898)
-------- ------- -------
Net cash provided by (used in) investing activities......................................... 257,294 (23,199) (92,428)
FINANCING ACTIVITIES
Proceeds from (payments on) short-term debt, net............................................ (2,904) 1,334 (642)
Payments on long-term debt.................................................................. (122,356) (19,672) (22,173)
Proceeds from long-term debt................................................................ 18,638 16,247 80,000
Dividends paid.............................................................................. (6,604) (6,182) (5,342)
Proceeds from stock options exercised....................................................... 8,912 1,850 745
-------- ------- -------
Net cash (used in) provided by financing activities......................................... (104,314) (6,423) 52,588
Effect of exchange rate changes on cash..................................................... 8,470 2,323 1,646
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........................................ 109,539 5,054 (10,621)
Cash and cash equivalents at beginning of year.............................................. 23,933 18,879 29,500
-------- ------- -------
Cash and cash equivalents at end of year.................................................... $133,472 $23,933 $18,879
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash items:
Issuance of treasury shares in connection with acquisition.............................. $-- $-- $44,754
Capital lease arrangements.............................................................. $-- $-- $1,292
See accompanying notes.
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. DESCRIPTION OF BUSINESS
Thomas Industries Inc. and subsidiaries (the Company or Thomas) and
affiliates operates in the Pump and Compressor Segment which designs,
manufactures and sells pumps and compressors for use in global original
equipment manufacturing (OEM) applications as well as construction equipment,
systems and laboratory equipment. The Company also provides aftermarket service
and spare parts to support OEM and end-user customers around the world.
Manufacturing facilities and sales and distribution operations are located in
North America and Europe, with additional sales and distribution operations
located in Asia, Australia and South America. A new manufacturing facility in
Asia will begin operations in 2005. Through July 31, 2004, the Company also
operated in the Lighting Segment through its 32% interest in Genlyte Thomas
Group LLC (GTG). GTG, which was formed August 30, 1998, designs, manufactures,
markets and sells lighting products principally in North America for commercial,
industrial and residential applications.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective August 30, 1998, the Company and The Genlyte Group
Incorporated (Genlyte) formed GTG, combining Thomas' and Genlyte's lighting
businesses. Effective with the close of business on July 31, 2004, the Company
sold its interest in GTG. Genlyte had a 68% interest in GTG, and Thomas held a
32% interest, which was accounted for using the equity method of accounting.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company. Affiliates not required to be consolidated are accounted for using the
equity method, under which the Company's share of earnings of these affiliates
is included in income as earned. Intercompany accounts and transactions are
eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid investments with initial
maturities of three months or less.
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.
FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and cash equivalents,
short-term investments, trade receivables and payables. The carrying amounts for
these instruments approximate fair value due to their short maturities. The
Company also uses forward currency exchange contracts which are recorded at fair
value on the balance sheet. See further discussion of these forward currency
exchange contracts under "Currency Risk Management" included in footnote 2.
CONCENTRATION OF CREDIT RISK
Assets that potentially subject the Company to concentration of credit
risk are cash and cash equivalents, short-term investments, and accounts
receivable. Cash and cash equivalents consist of liquid investments in
investment grade, short-term instruments which limits the amount of credit
exposure. Investment policies have been implemented which limit short-term
investments to investment grade securities with multiple financial institutions
which limits credit exposure. The Company sells products and services to
customers in diversified industries and geographic regions and provides credit
to most of these customers. The Company continuously evaluates the
creditworthiness of its customers and generally does not require collateral. No
single customer accounts for more than 10% of annual sales. Based on the
Company's wide variety of customers and markets, concentration of credit risk in
accounts receivable is not considered significant.
INVENTORIES
Inventories are valued at the lower of cost or market. Inventories
valued using the last-in, first-out (LIFO) method represented approximately 21%
and 23% of consolidated inventories at December 31, 2004 and 2003, respectively.
Inventories not on LIFO are valued using the first-in, first-out (FIFO) method.
Inventories at December 31 consist of the following:
2004 2003
---- ----
(IN THOUSANDS)
Finished goods................................. $36,331 $29,004
Raw materials.................................. 31,674 28,250
Work in process................................ 7,202 8,641
------- -------
Total inventories.............................. $75,207 $65,895
======= =======
On a current cost basis, inventories would have been $4,957,000 and
$4,639,000 higher than reported at December 31, 2004 and 2003, respectively.
PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment is depreciated principally by
the straight-line method over their estimated useful lives ranging from 3 to
31.5 years. Expenditures for maintenance, repairs and renewals of minor items
are expensed as incurred. Major renewals and improvements are capitalized.
Property, plant and equipment at December 31 consisted of the following:
2004 2003
---- ----
(IN THOUSANDS)
Land........................................... $10,299 $8,171
Buildings...................................... 52,348 48,143
Leasehold improvements......................... 6,985 6,291
Machinery and equipment........................ 133,361 122,518
------- -------
202,993 185,123
Accumulated depreciation and amortization...... (88,125) (76,773)
------- -------
Total property, plant and equipment, net....... $114,868 $108,350
======== ========
Depreciation expense relating to property, plant and equipment, which
includes capital lease items, was approximately $15,410,000, $14,361,000 and
$9,772,000 during 2004, 2003 and 2002, respectively.
Capital leases for land, building, machinery and equipment, autos and
software included above were $14,418,000 and $13,337,000 at December 31, 2004
and 2003, respectively. Accumulated depreciation on capital leases was
$3,355,000 and $2,039,000 at December 31, 2004 and 2003, respectively.
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 13 - "Industry Segment Information", 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 2004. This assessment did not indicate
any impairment.
The changes in net carrying amount of goodwill for the years ended
December 31, 2004 and 2003 were as follows (in thousands):
2004 2003
---- ----
Balance at beginning of year.................... $70,164 $55,669
Adjustments to Rietschle acquisition............ (6,154) 5,593
Minority interest acquisitions.................. - 1,778
Aldax acquisition............................... (86) 2,175
Translation adjustments and other .............. 4,715 4,949
------- -------
Balance at end of year.......................... $68,639 $70,164
======= =======
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 at December 31 consist of the following (in
thousands):
2004 2003
---- ----
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
---- ---- ------------ ---- ---- ------------
Licenses............................. 18-19 $487 $218 18-19 $503 $207
Patents.............................. 5-20 6,320 1,295 5-20 5,917 771
Other................................ 1-10 4,267 1,470 1-10 3,619 890
------- ------ ------- -------
Total................................ $11,074 $2,983 $10,039 $1,868
======= ====== ======= ======
The total intangible amortization expense for the years ended December
31, 2004, 2003 and 2002 was $930,000, $846,000 and $696,000, respectively.
The estimated amortization expense for the next five years consists of
the following (in thousands):
2005........................................................ $1,002
2006........................................................ 1,002
2007........................................................ 991
2008........................................................ 938
2009........................................................ 829
The Company has various trademarks totaling $13,876,000 and $12,831,000
at December 31, 2004 and 2003, respectively, that are not amortized. Also
included in other intangible assets is an intangible asset associated with the
minimum pension liability of $692,000 and $786,000 as of December 31, 2004 and
2003, respectively.
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 when warranted revise such estimates based on
current events. There were no significant impairment charges recorded in 2004
and 2003, but during the fourth quarter of 2002, the Company recorded a $594,000
change in the Pump and Compressor Segment's cost of sales to write-down certain
assets to market value.
EXIT COSTS FOR WUPPERTAL, GERMANY FACILITY
In February 2004, the Company announced the closing of its Wuppertal,
Germany manufacturing 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 were completed
by December 31, 2004, with the exception of some minor severance which could be
paid in 2005. The following table describes the 2004 activity and the exit
liability as of December 31, 2004 (in thousands):
Beginning Balance Ending Balance
at Jan. 1, 2004 Accruals Expenditures at Dec. 31, 2004
---------------- --------- ------------ ----------------
Exit Costs:
Severance - $1,642 $(1,622) $20
Contract termination - 8 (8) -
------ ------ ------- ---
Total exit costs - $1,650 $(1,630) $20
------ ------ ------- ---
In addition to the $1,650,000 exit charge noted above, the Company has
recorded $1,186,000 of additional charges in the twelve months ended December
31, 2004 which include costs to coordinate the facility shutdown ($488,000),
fixed asset disposal and other charges to write down assets to net realizable
value ($455,000) and training & other costs related to the transfer of
production from the Wuppertal facility ($243,000). The carrying value of assets
held for sale related to the Wuppertal facility is not significant.
Approximately $2.7 million of the costs associated with this exit
activity were recorded in selling, general and administrative expenses of the
Pump and Compressor Segment, while $.1 million of expense related to loss on
asset disposal was recorded in Other Income (Expense).
No additional exit cost charges or other shutdown related expenses are
expected related to
the Wuppertal facility.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency for the Company's foreign
subsidiaries. Operating results are translated into U.S. dollars using monthly
average exchange rates, while balance sheet accounts are translated using
year-end exchange rates. The resulting translation adjustments are included as a
component of accumulated other comprehensive income (loss) in shareholders'
equity.
COLLECTIVE BARGAINING AGREEMENTS
As of December 31, 2004, the Company had approximately 14.3% of its
workforce represented by labor unions. Union contracts have varying expiration
dates beginning with June 30, 2005 and ending with March 7, 2008. Management
does not expect the expiration and renegotiation of these agreements to have a
significant impact on 2004 or 2005 results of operations.
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 have been equal to or
below 6% of our total sales in 2004, 2003 and 2002. 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 in all periods
presented.
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 in all periods
presented.
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, should actual product failure
rates differ from estimates, revisions to the estimated warranty liability would
be required.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which include costs of product
improvements and design, are expensed as incurred ($22,131,000 in 2004,
$19,736,000 in 2003, and $11,789,000 in 2002).
SHIPPING AND HANDLING COSTS
All shipping and handling amounts billed to a customer in a sale
transaction are classified as revenue. In addition to shipping and handling
costs included in cost of products sold, the Company also has shipping and
handling costs included in selling, general and administrative expenses totaling
$5,817,000, $4,765,000 and $1,736,000 for 2004, 2003 and 2002, respectively.
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 the 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 December 31 are as
follows (in thousands):
2004 2003
---- ----
Balance at beginning of year.............................. $5,382 $2,674
Warranties issued during the year......................... 2,908 4,045
Settlements made during the year.......................... (3,357) (2,856)
Warranty liability assumed in acquisition of business..... - 956
Foreign currency translation adjustment................... 405 563
------ ------
Balance at end of year.................................... $5,338 $5,382
====== ======
ADVERTISING COSTS
Advertising costs consist of expenses related to promoting the
Company's products, including trade shows, web development, advertising and
collateral material and are charged to expense when incurred. Advertising
expense was $3,234,000, $3,306,000, and $2,142,000 in 2004, 2003 and 2002,
respectively.
STOCK BASED COMPENSATION
Stock options are granted under various stock compensation programs to
employees and independent directors (see Note 9, "Shareholders' Equity"). 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
requires 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. Therefore, the cost related to stock-based employee compensation included
in the determination of net income for 2003 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of Statement 123. 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 granted prior to 2003 is
amortized to expense over the options' vesting period.
Included in stock option activity, but accounted for in accordance with
SFAS No. 123, are options granted to GTG employees, for which the Company has
recorded compensation expense. This compensation expense, shown net of tax, is
also included in the pro forma information on the following table.
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.
2004 2003 2002
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE
DATA)
Net income (as reported).................................................................... $114,154 $37,314 $32,692
Add: Stock-based compensation expense for GTG employees included in reported net income, net
of related tax effects.................................................................... 603 249 190
Add: Stock-based employee compensation expense included in reported net income, net of
related tax effects....................................................................... 11 101 --
Deduct: Total stock-based employee compensation determined under fair value based method for
all awards, net of related tax effects.................................................... (1,059) (931) (966)
-------- ------- -------
Net income (pro forma)...................................................................... $113,709 $36,733 $31,916
======== ======= =======
Net income per share (Basic)--As reported.................................................... $6.53 $2.17 $2.06
Pro forma............................................................. 6.50 2.14 2.01
Net income per share (Diluted)--As reported.................................................. 6.44 2.12 2.00
Pro forma........................................................... 6.41 2.09 1.95
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 (FASB 151), Inventory Costs. The Company is required to adopt
the provisions of FASB 151, on a prospective basis, as of January 1, 2006. FASB
151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. FASB 151 requires that those items
- - if abnormal - be recognized as expenses in the period incurred. In addition,
FASB 151 requires the allocation of fixed production overheads to the costs of
conversions based upon the normal capacity of the production facilities. The
Company has not yet determined what effect FASB 151 will have on its earnings
and financial position.
In December 2004, FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) (FASB 123R), Share-Based Payment. FASB 123R
will require the Company to expense share-based payments, including employee
stock options, based on their fair value. The Company is required to adopt the
provisions of FASB 123R effective as of the beginning of its third quarter in
2005, however, earlier adoption in 2005 is allowed. FASB 123R provides
alternative methods of adoption which include prospective application and a
modified retroactive application. The Company adopted the fair-value method of
accounting for share-based payments effective January 1, 2003 using the
prospective method described in FASB Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. Currently, the Company
uses the Black-Scholes-Merton formula to estimate the value of stock options
granted to employees and expects to continue to use this acceptable option
valuation model upon the required adoption of Statement 123R on July 1, 2005.
Because Statement 123R must be applied not only to new awards, but to previously
granted awards that are not fully vested on the effective date, and because the
Company adopted Statement 123 using the prospective transition method (which
applied only to awards granted, modified or settled after the adoption date),
compensation cost for some previously granted awards that were not recognized
under Statement 123 will be recognized under Statement 123R. However, had we
adopted Statement 123R in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share noted above. Statement 123R also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when those employees
exercise stock options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $2,805,000, $464,000, and $221,000
in 2004, 2003 and 2002, respectively. The 2004 amount was significantly higher
than 2003 and 2002 due primarily to the increased options exercised by GTG
employees. The vesting of options to GTG employees was accelerated and the
options became 100% vested as of December 31, 2004. As part of the GTG sale
agreement, the GTG employees had until December 31, 2004 to exercise or forfeit
their options.
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" and FSP 109-2, "Accounting for Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004." FSP 109-1 provides a tax deduction on qualified production activities,
while FSP 109-2 introduces a special one-time dividends-received deduction on
the repatriation of certain foreign earnings to a U.S. taxpayer, provided
certain criteria are met. The Company has adopted both of these staff positions
in 2004 (See Note 7).
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 flow hedges 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. Additional disclosure related to the Company's hedging contracts is
provided in Note 14.
OTHER
Accounts receivable at December 31, 2004 and 2003 was net of an
allowance for doubtful accounts of $2,303,000 and $2,270,000, respectively.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. ACQUISITIONS
On November 20, 2003, the Company purchased the remaining 25% minority
interests 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
interests of Aldax AB, of Stockholm, Sweden for $2.6 million, of which $1.7
million was paid in cash at the acquisition date, while $944,000 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
interests 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.
On August 29, 2002, the Company purchased substantially all the assets
and liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle is a world leader in vacuum and
pressure technology, which includes dry-running and oil-lubricated pumps,
blowers, compressors, and pressure/vacuum pumps utilizing rotary vane, screw,
roots and claw technologies. With the Rietschle product line, the Company wants
to pursue further opportunities through growth in markets such as printing,
packaging, woodworking and many other applications that fit Rietschle
technologies. The purchase price consisted of $83.3 million in cash and
1,800,000 treasury shares of the Company's common stock, for which fair value
was calculated by using a six-day average stock price, determined three days
before and after the acquisition date. The Company negotiated a $120.0 million
revolving credit facility with a group of banks to finance the cash portion of
the purchase price. Rietschle's operating results are included in the Company's
results since the date of acquisition.
On June 3, 2004, the Company received approximately $6.2 million in
cash, which represents an adjustment to the Company's purchase price of
Rietschle. 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.
Supplemental pro forma information below is presented as though the
business combination had been completed as of the beginning of the period being
reported on. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred if the Company and Rietschle
constituted a single entity during such period.
YEAR ENDED DECEMBER 31
----------------------
2002
----
(IN THOUSANDS, UNAUDITED)
Net sales........................................................ $333,371
Net income....................................................... 35,581
Earnings per share-diluted....................................... 2.03
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
=========
The following summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
Cash $ 3,487
Accounts receivable 24,913
Inventories 30,477
Other current assets 7,105
Property, plant and equipment 44,404
Other intangibles 16,849
Other assets 2,999
Current liabilities (29,221)
Long-term debt (17,116)
Other long-term liabilities (6,569)
--------------
77,328
Goodwill 50,491
--------------
Aggregate purchase price $127,819
==============
The goodwill associated with the Rietschle acquisition is all allocated
to the Pump and Compressor Segment.
4. SALE OF INTEREST IN GTG
Effective with the close of business 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 in cash.
Approximately $102.7 million of the proceeds were used to pay down long-term
debt on August 2, 2004. Approximately $80.5 million of the proceeds were used to
pay a portion of the income taxes (due on the gain) and transaction costs during
the third and fourth quarters.
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 $230.5
Thomas' adjustment for accelerated option expense
treated as a transaction cost (.2)
Other comprehensive loss items:
Minimum pension liability 5.5
Foreign currency translation .5
------
Adjusted GTG book basis at July 31, 2004 $236.3
======
The gain on the sale of GTG, which the Company recorded in 2004, was
calculated as follows (in millions):
Total sale price $400.9
Transaction costs (4.2)
-------
Net Proceeds 396.7
Adjusted book basis at July 31, 2004 (236.3)
Pre-tax book gain 160.4
Income taxes (76.3)
-------
Net after-tax gain $ 84.1
=======
Earnings per share - diluted $ 4.74
This gain calculation is an estimate subject to final determination of
taxes of the transaction when tax returns are filed in 2005. The effective
income tax rate recorded on the gain of 47.6% is primarily due to the basis
differences for financial reporting and tax purposes in the partnership interest
in GTG.
5. NET INCOME PER SHARE
The computation of the numerator and denominator in computing basic and
diluted net income per share follows:
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Numerator:
Net income............................................................................. $114,154 $37,314 $32,692
Denominator:
Weighted average shares outstanding.................................................... 17,483 17,200 15,879
Effect of dilutive securities:
Director and employee stock options.................................................... 237 331 459
Employee performance shares............................................................ 13 39 37
-------- ------- -------
Dilutive potential common shares......................................................... 250 370 496
-------- ------- -------
Denominator for diluted earnings per share--adjusted weighted average shares and assumed
conversions............................................................................ 17,733 17,570 16,375
====== ====== ======
The deferred compensation obligation discussed in Note 9,
"Shareholders' Equity," is funded with shares of the Company's common stock,
which are included in the calculation of basic and diluted earnings per share.
6. EQUITY INVESTMENT
Through July 31, 2004, Genlyte Thomas Group LLC (GTG) was an affiliated
company accounted for on the equity method. As described in Notes 1 and 2,
Thomas and Genlyte formed GTG in August 1998.
Summarized financial information reported by the affiliate and a
summary of the amounts recorded in Thomas' consolidated financial statements
follow. GTG is organized as a limited liability corporation (LLC) that has
elected to be taxed as a partnership for U.S. income tax purposes. Therefore,
Thomas and Genlyte are responsible for income taxes applicable to their share of
GTG's taxable income. The net income reflected below for GTG does not include
any provision for U.S. income taxes, which will be incurred by Thomas and
Genlyte; however, amounts have been provided for foreign income taxes and
certain U.S. franchise taxes.
AS OF
JULY 31, DECEMBER 31,
2004 2003
---- ----
(IN THOUSANDS)
GTG BALANCE SHEETS
Cash and short-term investments.................. $116,284 $130,442
Accounts receivable.............................. 200,367 160,111
Inventories...................................... 151,498 143,898
Other current assets............................. 9,543 9,821
-------- --------
Total current assets............................. 477,692 444,272
Property, plant and equipment.................... 112,270 111,624
Goodwill......................................... 156,623 150,532
Other intangible assets.......................... 11,360 21,315
Other assets..................................... 5,236 5,028
-------- --------
Total assets..................................... $763,181 $732,771
======== ========
Current maturities of long-term debt............. $250 $284
Accounts payable................................. 98,321 98,035
Payable to Genlyte Inc........................... 279 16,534
Accrued expenses and other....................... 73,564 70,956
-------- --------
Total current liabilities........................ 172,414 185,809
Long-term debt, less current portion............. 11,072 11,190
Accrued pension.................................. 21,739 27,567
Other liabilities................................ 11,776 12,246
Shareholders' equity............................. 546,180 495,959
-------- --------
Total liabilities and shareholders' equity....... $763,181 $732,771
======== ========
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, 2004 2003
------------- ----
(IN THOUSANDS)
GTG INCOME STATEMENTS
Net sales....................................... $672,358 $1,033,899
Cost of products sold........................... 431,939 671,322
-------- ----------
Gross profit.................................... 240,419 362,577
SG&A expense.................................... 176,143 260,381
Gain on settlement of patent litigation......... - (8,000)
Amortization.................................... 541 1,079
-------- ----------
Operating profit................................ 63,735 109,117
Interest expense, net........................... 56 238
Minority interest............................... (66) 185
-------- ----------
Income before taxes............................. 63,745 108,694
Income taxes(1)................................. 5,145 7,416
-------- ----------
Net income...................................... $58,600 $101,278
======== ========
Amounts recorded by Thomas:
Investment.................................... - $214,405
Equity income................................. $18,608(2) 32,138(3)
Distributions received........................ 4,350 13,299
Changes in the Company's investment in GTG for the years ended December
31, 2004 and 2003 were as follows (in thousands):
2004 2003
---- ----
Balance at the beginning of period............ $214,405 $188,810
GTG gross equity earnings..................... 18,752 32,409
GTG cash distributions........................ (4,350) (13,299)
GTG currency translation adjustment........... (1,082) 6,457
GTG minimum pension adjustment & other........ 2,751 28
-------- --------
Balance before sale transaction (4)........... 230,476 214,405
To record sale of GTG........................ (230,476) -
-------- --------
Balance at end of period..................... $ - $214,405
======== ========
(1) GTG is organized as a limited liability corporation (LLC) that has elected
to be taxed as a partnership for U.S. income tax purposes. GTG is subject to
foreign income taxes and certain U.S. franchise taxes.
(2) Consists of $18,752 of equity income from GTG for the period January 1
through July 31, less $144 of expense for Thomas Industries stock options issued
to GTG employees.
(3) Consists of $32,409 of equity income from GTG less $271 of expense for
Thomas Industries stock options issued to GTG employees.
(4) See computation of Company's adjusted book basis in GTG as of July 31, 2004,
included in "Note 4 - Sale of Interest in GTG" in the Notes to Consolidated
Financial Statements.
The Company in the normal course of business has transactions with GTG.
These transactions consist primarily of reimbursement for other shared corporate
expenses.
Payables due to GTG as of December 31, 2004 and 2003 were $1,075,000
and $175,000, respectively.
For the years ended December 31, 2004, 2003 and 2002, the Company
recorded $4,000, $4,000, and $230,000, respectively, related to the
reimbursement of shared corporate expenses. For the seven months ended July 31,
2004, the Company recorded $2,000 related to these items.
7. INCOME TAXES
A summary of the provision for income taxes follows:
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Current:
Federal.................................... $71,756 $12,205 $10,988
State...................................... 15,981 1,883 1,681
Foreign.................................... 4,403 2,926 5,162
------- ------- -------
92,140 17,014 17,831
Deferred:
Federal and state (benefit)............... (2,687) 236 1,780
Foreign (benefit)......................... 4,063 1,090 (1,159)
------- ------- -------
1,376 1,326 621
------- ------- -------
Total provision for income taxes............. $93,516 $18,340 $18,452
======= ======= =======
The U.S. and foreign components of income before income taxes follow:
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
United States................................ $188,070 $42,160 $42,709
Foreign...................................... 19,600 13,519 8,456
-------- ------- -------
Income before income taxes................... $207,670 $55,679 $51,165
======== ======= =======
A reconciliation of the normal statutory federal income tax rate to the
Company's effective income tax rate follows:
2004 2003 2002
U.S. statutory rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits...... 4.9 2.2 2.4
Gain on sale of investment in GTG joint venture...... 5.2 -- --
Effect of foreign tax rates.......................... 0.1 (1.3) .5
GTG foreign equity earnings recorded net of tax...... (0.5) (2.9) (2.9)
Change in valuation allowance........................ (0.1) -- 1.6
Other................................................ 0.4 (.1) (.5)
---- ---- ----
Effective income tax rate............................ 45.0% 32.9% 36.1%
==== ==== ====
Deferred income taxes are provided for significant income and expense
items recognized in different years for tax and financial reporting purposes.
Temporary differences which gave rise to significant deferred tax assets and
liabilities follow:
2004 2003
---- ----
(IN THOUSANDS)
Deferred tax assets:
Employee benefit obligations...................... $2,266 $4,885
Net operating loss carryforwards.................. 3,238 819
Allowance for doubtful accounts receivable........ 318 269
Inventory reserves................................ 703 617
Compensation accruals............................. 1,448 1,367
Miscellaneous foreign............................. 5,399 4,479
Accrued liabilities and other..................... 1,633 1,565
-------- -----
15,005 14,001
Less valuation allowance............................ (2,814) (1,320)
-------- -----
Net deferred tax asset.............................. 12,191 12,681
Deferred tax liabilities:
Accelerated depreciation.......................... 4,851 4,689
Investment in GTG................................. -- 2,530
German Goodwill................................... 4,222 --
Miscellaneous foreign............................. 5,185 3,513
Other............................................. 1,810 1,438
-------- -----
16,068 12,170
-------- -----
Net deferred tax asset/(liability).................. $(3,877) $ 511
======== =====
2004 2003
---- ----
(IN THOUSANDS)
Classification:
Net current assets................................ $5,101 $6,688
Net long-term liabilities......................... 8,978 6,177
-------- -----
Net deferred tax asset/(liability).................. $(3,877) $ 511
======== =====
Deferred tax assets and liabilities are classified according to the
related asset and liability classification on the consolidated balance sheets.
Management believes it is more likely than not the Company will realize
the benefits of its deferred tax assets, net of the valuation allowance of
$2,814,000. $1,224,000 of this valuation allowance is provided for income tax
loss carryforward benefits for certain foreign jurisdictions (NOL's). The
foreign tax NOL's (in the amount of $12,417,000) can be carried forward from
five to seven years and some portion indefinitely. Management believes that,
based on a number of factors, the available evidence creates sufficient
uncertainty regarding the realizability of a portion of these NOL's. The
remaining valuation allowance of $1,590,000 is provided for various foreign
deferred tax assets. Management believes that, based on a number of factors, the
available evidence creates sufficient uncertainty regarding the realizability of
these foreign assets.
Deferred income taxes have not been provided on $58,000,000 of foreign
undistributed earnings as of December 31, 2004. It is management's intent that
such undistributed earnings be permanently reinvested in the foreign countries.
It is not practicable to determine the amount of unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries that are essentially permanent in duration.
On October 22, 2004, the President signed the American Jobs Creation
Act of 2004 (the Act). The Act provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through 2010.
In return, the Act also provides for a two-year phase out of the existing
Extra-Territorial Income (ETI) exclusion for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. The
Company expects the net effect of the phase-out of the ETI and the phase-in of
this new deduction will not result in a significant change to the effective tax
rate for fiscal year 2005 and future years based on current earning levels.
Another provision of the Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controller foreign
corporations. The deduction is subject to a number of limitations and, as of
today, uncertainty remains as to how to interpret numerous provisions in the
Act. As such, we are not yet in a position to decide on whether, and to what
extent, we might repatriate foreign earnings that have not been remitted to the
U.S.
The Company made federal, state and foreign income tax payments of
$88,847,000 in 2004, $17,084,000 in 2003 and $21,035,000 in 2002.
8. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt at December 31 consisted of the following:
2004 2003
---- ----
(IN THOUSANDS)
Revolving credit notes.................................. $ -- $85,000
Senior notes............................................ -- 15,430
Capital leases.......................................... 9,548 10,878
Industrial revenue bonds................................ -- 1,250
------ --------
9,548 112,558
Less: current maturities................................ 1,797 9,885
------ --------
Total long-term debt.................................... $7,751 $102,673
====== ========
The revolving credit notes were paid down in full on August 2, 2004,
with proceeds from the sale of GTG.
The senior notes had a 9.36% fixed interest rate and were paid down in
full on August 2, 2004, with the proceeds from the sale of GTG.
The capital leases have terms ranging from 2.5 to 18.5 years, and are
payable primarily in monthly installments with interest at rates ranging from
4.8% to 11.3%.
The Industrial Revenue Bonds had a variable interest rate and were paid
down in July 2004.
The fair value of the Company's long-term debt, including the current
portion, at December 31, 2003 was $113,790,000.
Maturities of capital lease obligations are as follows (in thousands):
2005............................................ $1,797
2006............................................ 234
2007............................................ 261
2008............................................ 259
2009............................................ 247
Thereafter...................................... 6,750
-------
$9,548
======
The Company has no loan agreements which include restrictions on
working capital, operating leases, tangible net worth and the payment of cash
dividends and stock distributions.
Cash paid for interest was $3,458,000 in 2004, $4,739,000 in 2003, and
$3,447,000 in 2002.
9. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
Thomas' Board of Directors in 1999 authorized the purchase of up to
2,373,000 shares of Thomas common stock in the open market. Through December 31,
2004, Thomas had repurchased 879,189 shares at a cost of $17,334,000. No
purchases were made during 2004 and 2003.
STOCK INCENTIVE PLANS
At the April 20, 1995 Annual Meeting, the Company's shareholders
approved the Company's 1995 Incentive Stock Plan. An aggregate of 900,000 shares
of common stock, plus all shares remaining under the Company's 1987 Incentive
Stock Plan, were reserved for issuance under this Plan. At the April 15, 1999
Annual Meeting, the Company's shareholders approved a 750,000 share increase in
the number of shares reserved for issuance under the 1995 Incentive Stock Plan.
At the April 22, 2004 Annual Meeting, the Company's shareholders approved the
Company's Amended and Restated 1995 Incentive Stock Plan which increased the
number of shares of common stock reserved for issuance by 550,000 shares and
added non-employee directors as participants under the Plan. Under this Plan,
options may be granted to employees and non-employee directors at not less than
market value at date of grant. All options granted have ten-year terms, and vest
and become fully exercisable at the end of five years of continued employment.
Under the terms of the Company's sale agreement with Genlyte, all stock options
granted to GTG employees became fully vested as of July 31, 2004 and expired as
of December 31, 2004.
At the April 21, 1994 Annual Meeting, the Company's shareholders
approved the Non-Employee Director Stock Option Plan. This Plan expired on April
21, 2004, except with respect to outstanding options which may be exercised
through 2013. Under this Plan, each continuing non-employee director in office
on the date of each annual meeting was awarded options to purchase 3,000 shares
of common stock at not less than market value at date of grant. All options
granted have 10-year terms, and vest and become fully exercisable as of the date
granted. At December 31, 2004, there were seven non-employee directors in
office, and 225,000 options had been awarded under this Plan. A total of 131,017
shares reserved for this Plan, but not needed to satisfy awards outstanding
under the Non-employee Director Stock Option Plan, were made available under the
Company's Amended and Restated 1995 Incentive Stock Plan.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" (SFAS 148), as an amendment
to SFAS 123, "Accounting for Stock-Based Compensation." Prior to the year ended
December 31, 2003, the Company followed SFAS 123 but elected to continue to
measure compensation cost using the intrinsic value based method of accounting
prescribed by APB 25, "Accounting for Stock Issued to Employees" and related
interpretations.
Effective December 2003, the Company elected to adopt the fair value
method of accounting for stock-based compensation under SFAS 123 which requires
the Company to expense the fair value of employee stock options granted,
modified or settled after January 1, 2003. The three transition methods provided
by SFAS 148 are the prospective method, the modified prospective method and the
retroactive restatement method. The Company has elected to apply the prospective
method whereby recognition provisions of SFAS 123 apply to all employee awards
granted, modified or settled after January 1, 2003.
The Company has recorded expense related to the stock options of $17,000 and
$163,000 in 2004 and 2003, respectively.
For awards granted prior to 2003, the Company continues to follow SFAS
No. 123 and uses the intrinsic value based method of accounting prescribed by
APB 25. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized for options granted to employees and
non-employee directors.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123 (see Note 2,
"Accounting Policies--Stock Based Compensation"). The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
2004 2003 2002
---- ---- ----
Risk-free interest rate........................ 3.93% 3.14% 3.0%
Expected life, in years........................ 6.5 6.5 6.5
Expected volatility............................ 0.293 0.340 0.321
Expected dividend yield........................ 1.0% 1.4% 1.4%
A summary of stock option activity for all plans follows:
2004 2003 2002
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE PRICE
OPTIONS PRICE OPTIONS PRICE OPTIONS AVERAGE
------- ----- ------- ----- ------- -------
Beginning of year......................... 1,526,271 $18.08 1,616,359 $19.34 1,527,414 $17.86
Granted................................... 77,915 38.99 88,000 24.91 212,800 26.31
Exercised................................. (599,446) 19.04 (166,438) 14.60 (105,957) 11.71
Forfeited or expired...................... (10,800) 22.12 (11,650) 21.59 (17,898) 21.16
--------- ------ --------- ------ --------- ------
End of year............................... 993,940 $22.27 1,526,271 $20.16 1,616,359 $19.34
========= ====== ========= ====== ========= ======
Exercisable at end of year................ 739,480 $19.69 1,024,882 $18.08 985,028 $16.22
The weighted average fair value of options granted was $7.47 in 2004,
$6.61 in 2003 and $6.67 in 2002. Options outstanding at December 31, 2004 had
option prices ranging from $10.67 to $38.99 and expire at various dates between
April 20, 2005 and December 6, 2014 (with a weighted-average remaining
contractual life of 5.2 years). There are 808,891 shares reserved for future
grant.
Included in the summary of stock option activity above, are options
granted to GTG employees, which in accordance with SFAS 123, the Company has
recorded compensation expense based on using a Black-Scholes option pricing
model. This expense was $144,000 for the seven months ended July 31, 2004,
$271,000 and $201,000 for the twelve months ended December 31, 2003 and 2002,
respectively, and is netted with the Company's equity income from GTG (see Note
6, "Equity Investment"). Under the terms of the Company's sale agreement with
Genlyte, all outstanding stock options previously granted to GTG employees
became fully vested as of July 31, 2004 and expired as of December 31, 2004. The
Company recognized $759,000 of expense in 2004 related to these options. This
amount was recorded against the gain on the sale of GTG.
The following table summarizes the status of stock options outstanding
as of December 31, 2004:
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
- ------------------------ ------ ---- ----- ------ -----
$10.67 to $14.58 179,063 1.5 $ 14.20 179,063 $ 14.20
$16.44 to $25.00 469,249 4.5 20.10 440,141 20.02
$25.87 to $38.99 345,628 8.1 29.40 120,276 26.64
---------------------------------------------------------------------------------------
993,940 5.2 $ 22.27 739,480 $ 19.69
=======================================================================================
The Company also issued cash only stock appreciation rights (SAR's) in
2004 and 2003. All SAR's granted have ten year terms. SAR's granted to employees
vest and become fully exercisable at the end of four years of continued
employment. Under the terms of the Company's sale agreement with Genlyte, SAR's
granted to GTG employees became fully vested as of July 31, 2004 and expired as
of December 31, 2004. SAR's granted to non-employee directors vest and become
fully exercisable as of the date granted. The Company has recorded expense of
$244,000 and $1,000 in 2004 and 2003, respectively, related to SAR's for Thomas
employees and non-employee directors. For SAR's previously granted to GTG
employees in 2004, the Company recognized $177,000 of expense, which was
recorded against the gain on the sale of GTG. A summary of SAR's activity
follows:
2004 2003
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SAR'S PRICE SAR'S PRICE
----- ----- ----- -----
Beginning of year......................... 99,230 $34.35 -- --
Granted................................... 88,000 32.89 99,230 $34.35
Exercised................................. (61,020) 32.28 -- --
Forfeited or expired...................... (7,480) 32.79 -- --
End of year............................... 118,730 $34.43 99,230 $34.35
Exercisable at end of year................ 21,000 $34.82 -- --
In addition to the options and SAR's listed above, 20,000 performance
share awards were granted in both December 2004 and December 2003, and 14,000
performance share awards were granted in December 2002. Performance share awards
may be earned based on the total shareholder return of the Company during the
three-year periods commencing January 1 following the grant date. A total of
11,526 shares were earned in 2004 from performance share awards granted in
December 2001, 10,550 shares were earned in 2003 from awards granted in December
2000, and 11,639 shares were earned in 2002 from awards granted in December
1999. The Company has recorded compensation expense related to performance
shares of $199,000, $482,000 and $323,000 for 2004, 2003 and 2002, respectively.
DEFERRED SHARE TRUST
Employees who earn performance share awards as discussed above may
elect to defer receipt of such shares until termination of employment.
Non-Employee Directors are permitted to receive part or all of their director
fees in the form of common stock of the Company and to defer receipt of such
shares until retirement or other termination of service. In April 2000, the
Company established a deferred share trust (the "Trust") to maintain the shares
deferred for these obligations. The Trust qualifies as a rabbi trust for income
tax purposes as the assets of the Trust are subject to the claims of general
creditors of the Company. Dividends payable on the shares held by the Trust are
reinvested in additional shares of common stock of the Company on behalf of the
participants. Since there is no provision for diversification of the Trust's
assets and settlement can only be made with a fixed number of shares of the
Company's common stock, the deferred compensation obligation is classified as a
component of shareholders' equity and the common stock held by the Trust is
classified as treasury stock. Subsequent changes in the fair value of the common
stock are not reflected in earnings or shareholders' equity of the Company.
SHAREHOLDER RIGHTS PLAN
On December 10, 1997, the Board of Directors of the Company adopted a
shareholder rights plan (the Rights Plan) pursuant to which preferred stock
purchase rights (the Rights) were declared and distributed to the holders of the
Company's common stock. These Rights are due to expire on January 5, 2008. The
Rights Plan generally provides that the Rights separate from the common stock
and become exercisable if a person or group of persons working together acquires
at least 20% of the common stock (a 20% Acquisition) or announces a tender offer
which would result in ownership by that person or group of at least 20% of the
common stock (a 20% Tender Offer). Upon a 20% Acquisition, the holders of Rights
may purchase the common stock at half-price. If, following the separation of the
Rights from the common stock, the Company is acquired in a merger or sale of
assets, holders of Rights may purchase the acquiring company's stock at
half-price.
Notwithstanding the foregoing discussion, under the Rights Plan, the
Board of Directors has flexibility in certain events. In order to provide
maximum flexibility, the Board of Directors may delay the date upon which the
Rights become exercisable in the event of a 20% Tender Offer. In addition, the
Board of Directors has the option to exchange one share of common stock for each
outstanding Right at any time after a 20% Acquisition, but before the acquirer
has purchased 50% of the outstanding common stock. The Rights may also be
redeemed at two cents per Right at any time prior to a 20% Acquisition or a 20%
Tender Offer.
10. EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension plans and
contributory defined contribution plans covering its hourly union employees in
the U.S. The defined benefit plans in the U.S. primarily provide flat benefits
of stated amounts for each year of service. The Company's policy is to fund
pension costs deductible for income tax purposes for these plans.
The Company also has noncontributory defined benefit pension plans
covering certain employees of its foreign locations. These plans provide
benefits to employees based on rate of pay and years of service. The foreign
defined benefit plans are not funded.
The Company also sponsors defined contribution pension plans covering
substantially all U.S. employees whose compensation is not determined by
collective bargaining. Annual contributions are determined by the Board of
Directors.
PENSION BENEFITS
----------------
OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year.... $10,550 $8,056 $8,749 $7,967 $1,523 $1,307
Foreign exchange impact..................... 859 1,667 -- -- -- --
Service cost................................ 255 288 325 285 96 67
Interest cost............................... 643 592 526 513 106 85
Plan amendments............................. -- 355 -- 163 (44) --
Benefits paid............................... (373) (314) (351) (764) (40) (39)
Actuarial (gain) loss....................... (120) (94) (8) 585 329 103
------- ------ ------ ------ ------ ------
Benefit obligations at end of year.......... $11,814 $10,550 $9,241 $8,749 $1,970 $1,523
======= ======= ====== ====== ====== ======
CHANGE IN PLAN ASSETS
Value of plan assets at beginning of year... $-- $-- $8,189 $7,226 $-- $--
Actual return on plan assets................ -- -- 592 1,157 -- --
Employer contributions...................... 373 314 670 570 40 39
Benefits paid............................... (373) (314) (351) (764) (40) (39)
------- ------ ------ ------ ------ ------
Value of plan assets at end of year......... $ -- $ -- $9,100 $8,189 $ -- $ --
------- ------ ------ ------ ------ ------
PENSION BENEFITS
----------------
OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
FUNDED STATUS OF THE PLANS
Assets less projected obligations........... $(11,814) $(10,550) $(141) $(560) $(1,970) $(1,523)
Unrecognized actuarial loss................. 297 404 1,790 1,861 947 560
Unrecognized transition obligations......... -- -- 2 4 110 168
Unrecognized prior service cost............. -- -- 690 782 -- --
Net asset (liability) recognized at end of
year...................................... $(11,517) $(10,146) $2,341 $2,087 $(913) $(795)
PENSION BENEFITS
----------------
OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
BALANCE SHEET ASSETS (LIABILITIES)
Prepaid benefit costs....................... $-- $-- $114 $107 $-- $--
Accrued benefit liabilities................. (12,012) (10,707) (158) (572) (913) (795)
Intangible assets........................... -- -- 692 786 -- --
Accumulated other comprehensive income...... 495 561 1,693 1,766 -- --
Net asset (liability) recognized at end of
year...................................... $(11,517) $(10,146) $2,341 $2,087 $(913) $(795)
Increase in minimum liability included in
other comprehensive income................ $(67) $387 $(73) $(262) $-- $--
The Company uses a December 31 measurement date for all U.S. and foreign plans.
The accumulated benefit obligation for all defined benefit pension
plans was $20,685,000 and $18,942,000 at December 31, 2004 and 2003,
respectively.
PENSION BENEFITS
----------------
FOREIGN PLANS U.S. PLANS
------------- ----------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
INFORMATION FOR PENSION PLANS WITH AN
ACCUMULATED BENEFIT OBLIGATION IN EXCESS
OF PLAN ASSETS:
Projected benefit obligation................ $11,814 $10,550 $8,786 $8,315
Accumulated benefit obligation.............. 11,444 10,194 8,786 8,315
Fair value of plan assets................... -- -- 8,628 7,743
PENSION BENEFITS
----------------
OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Discount rate used to determine benefit
obligations at December 31.......... 6.00% 6.00% 6.00% 6.25% 6.00% 6.25%
Weighted-average assumptions used to
determine net periodic benefit cost
for years ended December 31:
Discount rate..................... 6.00% 6.00%-7.00% 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets.... -- -- 8.00% 8.00% -- --
Initial health care cost trend rate -- -- -- -- 11.00% 12.00%
Ultimate health care cost trend rate -- -- -- -- 5.50% 5.50%
Year ultimate rate is achieved.... 2013 2012
To develop the expected long-term rate of return on assets assumption,
the Company considered historical returns and future expectations. Over the
10-year period ending December 31, 2003, the compound annual returns on the
portfolio have averaged 10.34%. Considering this information and the potential
for lower future returns due to a generally lower interest rate environment, the
Company selected an 8.00% long-term rate of return on asset assumptions.
The effect of a one-percentage-point change in assumed health care
cost trend rates consisted of the following:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
Increase (decrease) in total postretirement service and interest cost
components............................................................ $30 $ (25)
Increase (decrease) to postretirement benefit obligation............... $254 $(217)
The following table details the components of pension and other
postretirement benefit costs.
PENSION BENEFITS
----------------
OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Service cost........................ $255 $288 $137 $325 $285 $289 $96 $67 $52
Interest cost....................... 643 593 243 526 513 490 106 86 75
Expected return on plan assets...... -- -- -- (623) (542) (610) -- -- --
Other amortization and deferral..... -- -- -- 188 204 91 54 31 24
---- ---- ---- ---- ---- ---- --- --- ---
$898 $881 $380 $416 $460 $260 $256 $184 $151
==== ==== ==== ==== ==== ==== ==== ==== ====
The Company's pension plan weighted-average asset allocations at
December 31, 2004, and 2003, by asset category are as follows:
% OF PLAN ASSETS
AT DECEMBER 31
--------------
ASSET CATEGORY 2004 2003
- -------------- ---- ----
Equity securities................................... 65% 57%
Debt securities..................................... 34% 34%
Short-term investments.............................. 1% 9%
--- ---
100% 100%
=== ===
Equity securities include 14,430 shares of Company common stock with a
market value of $576,000 (6 percent of total plan assets) at December 31, 2004
and $500,000 (6 percent of total plan assets) at December 31, 2003.
Short-term investments include contributions to plans of $570,000 in
December 2003 that had not yet been invested by the investment manager.
The Company's investment objective for plan assets includes exceeding
the return generated by an unmanaged index composed of the S&P 500 Stock Index
and the Lehman Brothers Government/Corporate Bond Index in proportion to the
target portfolio, while achieving a rate of return greater than the actuarially
assumed interest rate. The targeted asset mix was 60 percent equities and 40
percent fixed income as of December 31, 2004 and 55 percent equities and 45
percent fixed income as of December 31, 2003. The targeted allocation provides
reasonable assurance that the investment objectives can be achieved based on
historical performance.
The Company expects to contribute $670,000 to its pension plans and
$100,000 to its postretirement benefit plans in 2005.
The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid:
PENSION BENEFITS OTHER POSTRETIREMENT
---------------- --------------------
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)
2005 $373 $486 $100
2006 386 479 99
2007 394 535 102
2008 443 468 117
2009 493 464 103
2010-2014 $3,804 $2,822 $808
Thomas sponsors various defined contribution plans to assist eligible
employees in providing for retirement or other future needs. Company
contributions to these plans amounted to $2,920,000 in 2004, $2,591,000 in 2003
and $1,364,000 in 2002.
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 included in
Note 10 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.
11. LEASES, COMMITMENTS AND CONTINGENCIES
Rental expense for building, machinery and equipment was $7,374,000 in
2004, $6,810,000 in 2003, and $3,875,000 in 2002. Future minimum rentals under
non-cancelable operating leases are as follows: 2005--$5,630,000;
2006--$4,481,000; 2007--$3,818,000; 2008--$3,416,000; 2009--$2,429,000; and
thereafter--$1,647,000.
The Company had letters of credit outstanding in the amount of
$3,080,000 at December 31, 2004.
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
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 by the Company
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 is a former manufacturing facility 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 engaged a consultant to perform an initial hydrogeologic site
investigation. This initial site investigation found elevated levels of volatile
organic compounds including tetrachlorothene and its daughter products. The site
investigation will be expanded to determine the extent of the contamination and
to develop a remediation work plan. The Company provided a reserve of $900,000
in the third quarter and an additional $200,000 in the fourth 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
discounted 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 reserve at December 31, 2004 and 2003
is as follows (in thousands):
For the twelve months ended
December 31,
------------
2004 2003
---- ----
Balance at beginning of period $1,321 $1,350
Environmental accruals 1,100 315
Expenditures (239) (344)
------ ------
Balance at end of period $2,182 $1,321
====== ======
Related to the $2,182,000 reserve at December 31, 2004, approximately
$1,276,000 of this amount was determined on a discounted basis using a 4.9%
discount rate. The $1,276,000 discounted amount is $1,977,000 on an undiscounted
basis. No recoveries are expected or assumed. Expected payments of the
$1,977,000 are as follows:
2005 $ 163,000
2006 154,000
2007 162,000
2008 137,000
2009 78,000
Thereafter $ 1,283,000
-----------
Total $ 1,977,000
===========
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities
follows:
2004 2003
---- ----
(IN THOUSANDS)
Accrued wages, taxes and withholdings...................... $14,314 $10,875
Accrued insurance.......................................... 1,680 1,878
Accrued interest........................................... 3 769
Accrued warranty expense................................... 5,338 5,382
Other current liabilities.................................. 12,869 11,615
------- -------
Total accrued expenses and other current liabilities....... $34,204 $30,519
======= =======
13. INDUSTRY SEGMENT INFORMATION
Operating segments are defined as components of an enterprise engaging
in business activities about which separate financial information is available
that is evaluated regularly by the chief decision maker or group in deciding how
to allocate resources and assessing performance.
The Company has historically been organized into two business segments,
the Pump and Compressor Segment and Lighting Segment through its 32% interest in
GTG. The segments have been managed separately based on the fundamental
differences in their respective operations. The Pump and Compressor Segment
designs, manufactures, and sells pumps and compressors for use in global
original equipment manufacturing applications as well as construction equipment,
systems and laboratory equipment. The Lighting Segment designs, manufactures,
markets and sells lighting products principally in North America for commercial,
industrial and residential applications. See Note 4 which describes in further
detail the sale of the Company's interest in GTG.
Industry segment information follows:
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
SALES AND OPERATING REVENUES
Pump and Compressor (1)............................................................
Total net sales including inter-area sales.................................... $462,151 $420,473 $266,285
Inter-area sales (2).......................................................... (52,037) (43,699) (25,683)
-------- -------- --------
Net sales to unaffiliated customers............................................ $410,114 $376,774 $240,602
======== ======== ========
OPERATING INCOME (LOSS)
Pump and Compressor (1)............................................................ $40,936 $36,742 $31,675
Lighting (GTG) (3)................................................................. 18,608 32,138 28,804
Gain on Sale of GTG (3)............................................................ 160,410 - -
Corporate.......................................................................... (11,204) (8,743) (5,966)
-------- -------- --------
$208,750 $60,137 $54,513
======== ======= =======
ASSETS
Pump and Compressor (1)............................................................ $382,102 $344,384 $287,167
Lighting (GTG) (3)................................................................. - 214,405 188,810
Corporate.......................................................................... 239,834 14,345 15,039
-------- -------- --------
$621,936 $573,134 $491,016
======== ======== ========
INVESTMENT IN EQUITY AFFILIATES
Lighting (GTG) (3)................................................................. - $214,405 $188,810
======== ======== ========
EXPENSES NOT AFFECTING CASH
Depreciation and amortization
Pump and Compressor (1)............................................................ $16,200 $15,072 $10,312
Corporate.......................................................................... 140 135 156
$16,340 $15,207 $10,468
======= ======= =======
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Pump and Compressor (1)............................................................ $16,303 $19,805 $8,208
Corporate.......................................................................... 100 303 150
------- ------- -------
$16,403 $20,108 $8,358
======= ======= ======
(1) Includes Rietschle after the August 29, 2002 acquisition date.
(2) Inter-area sales represent intercompany sales between geographic
regions (North America, Europe and Asia Pacific).
(3) The Company sold its joint venture interest in Lighting (GTG) on
July 31, 2004.
Intra-area sales, which represent intercompany sales between locations
within a geographic region, have been eliminated from the above tabulation.
Operating income by segment is gross profit less operating expenses, excluding
interest, general corporate expenses, other income and income taxes.
Information by geographic area follows:
2004 2003 2002
---- ---- ----
REVENUES (1)(2) (IN THOUSANDS)
Total net sales including inter-area sales
United States.................................................................. $171,063 $165,899 $144,481
Germany........................................................................ 209,720 180,568 85,227
Other Europe................................................................... 84,381 75,194 28,588
Asia Pacific................................................................... 40,034 34,512 18,568
-------- -------- --------
$505,198 $456,173 $276,864
======== ======== ========
Inter-area sales (3)
United States.................................................................. $(14,829) $(12,712) $(13,139)
Germany........................................................................ (78,660) (62,243) (21,969)
Other Europe................................................................... (1,451) (4,262) (1,135)
Asia Pacific................................................................... (144) (182) (19)
-------- -------- --------
$(95,084) $(79,399) $(36,262)
======== ======== ========
Net sales to unaffiliated customers
United States.................................................................. $156,234 $153,187 $131,342
Germany........................................................................ 131,060 118,325 63,258
Other Europe................................................................... 82,930 70,932 27,453
Asia Pacific................................................................... 39,890 34,330 18,549
-------- -------- --------
$410,114 $376,774 $240,602
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT
United States.................................................................. 29,219 $31,673 $32,069
Germany........................................................................ 65,329 64,859 48,061
Other Europe................................................................... 17,564 10,864 10,840
Asia Pacific................................................................... 2,756 954 621
-------- -------- --------
$114,868 $108,350 $91,591
======== ======== =======
- ---------------
(1) Revenues are attributed to geographic areas based on the location of the
selling entity.
(2) Includes Rietschle after the August 29, 2002 acquisition date.
(3) Inter-area sales represent intercompany sales between countries/geographic
areas (United States, Germany, other Europe, and Asia Pacific).
Intra-area sales, which represent intercompany sales between
locations within a country/geographic area, have been eliminated from the above
tabulation.
Net exposed assets, which represents assets less liabilities for
geographic operations outside of North America that are exposed to foreign
currency risk, at December 31, 2004 are $239,065,000 and $19,416,000 for Europe
and Asia Pacific, respectively.
14. CURRENCY RISK MANAGEMENT
The Company conducts business in several major international currencies
(primarily the European Euro, British Pound, Japanese Yen, Swiss Franc, and
Australian Dollar) and is subject to risks associated with changing foreign
exchange rates. The Company's objective is to reduce earnings and cash flow
volatility associated with foreign exchange rate changes to allow management to
focus its attention on its core business issues and challenges. Accordingly, the
Company enters into 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 December 31, 2004, the Company held forward contracts expiring
through December 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 December 31, 2004, the foreign currency forward contracts had a
notional amount of Euro 6,000,000 and a fair value of approximately $657,700.
The fair value of the foreign currency forward contracts, which represents an
asset, is included in other current assets. The amount of the pre-tax net gain
deferred through other comprehensive income as of December 31, 2004 was
approximately $631,900. There was $25,800 of gain recognized in fiscal 2004.
There was no gain or loss recognized during 2003.
15. RELATED PARTY TRANSACTIONS
The Company had an accounts receivable of approximately $500,000 as of
December 31, 2004 and $900,000 as of December 31, 2003, from Werner Rietschle
Holding GmbH, a shareholder and the entity which sold the Company assets in the
Rietschle transaction. This amount primarily related to taxes paid by the
Company on behalf of Werner Rietschle Holding GmbH. Dieter Rietschle, who is the
Company's general manager of its TIWR Holding GmbH & Co. KG subsidiary and a
former director, has a 49% ownership and 51% voting control of Werner Rietschle
Holding GmbH. The $500,000 amount as of December 31, 2004 was subsequently
collected in 2005.
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations follow:
NET SALES GROSS PROFIT NET INCOME
--------- ------------ ----------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
1st Qtr........................................... $109,518 $92,346 $38,383 $33,115 $10,650 $8,806
2nd Qtr........................................... 102,656 95,810 37,563 33,760 9,805 9,432
3rd Qtr........................................... 97,697 88,985 35,433 29,513 90,268(1) 10,583
4th Qtr........................................... 100,243 99,633 36,081 33,554 3,431 8,493
-------- ------- ------- ------- ------- ------
$410,114 $376,774 $147,460 $129,942 $114,154 $37,314
======== ======== ======== ======== ======== =======
BASIC NET INCOME DILUTED NET INCOME
PER SHARE PER SHARE
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
1st Qtr............................................ $0.61 $0.51 $0.60 $0.50
2nd Qtr............................................ 0.56 0.55 0.55 0.54
3rd Qtr............................................ 5.16(1) 0.61 5.07(1) 0.60
4th Qtr............................................ 0.19 0.49 0.19 0.48
----- ----- ----- -----
$6.53 $2.17 $6.44 $2.12
===== ===== ===== =====
(1) Includes a gain of $84,135,000 (pre-tax gain of $160,410,000) from the
sale of the Company's joint venture interest in GTG. Net income per
share related to this gain was $4.81 (basic) and $4.74 (diluted).
17. SUBSEQUENT EVENT
On January 10, 2005 the Company acquired certain assets of the side channel
blower business of Ruey Chaang Electric Co, Ltd. of Taipei, Taiwan for
approximately $12 million. A partial payment of $8.4 million in cash was paid in
January 2005, with the balance payable in the third quarter of 2005.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities and Exchange Commission Act of 1934,
as amended) as of the end of the period covered by this annual report on Form
10-K. Based on this evaluation, our principal executive officer and principal
financial officer have concluded that, as of the evaluation date, the Company
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that the Company files or submits 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..
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's Report on Internal Control over Financial Reporting, and
the related Report of the Independent Registered Public Accounting Firm, are set
forth at the beginning of Item 8 of this Form 10-K.
ITEM 9B. OTHER INFORMATION
The following tables present certain additional information concerning
stock options granted to the named executive officers during 2004.
STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
NUMBER OF SECURITIES EXERCISE OR
-------------------- -----------
UNDERLYING OPTIONS BASE PRICE EXPIRATION
------------------ ---------- ----------
NAME GRANTED(#)(1) ($/SH)(2) DATE
- ---- ------------- --------- ----
Timothy C. Brown....... -- -- --
Dieter W. Rietschle.... -- -- --
Peter H. Bissinger..... 3,500 $38.99/sh 12/6/14
Phillip J. Stuecker.... 7,500 $38.99/sh 12/6/14
James J. Kregel........ 5,100 $38.99/sh 12/6/14
[--------------
(1) All options were granted on December 6, 2004, one-fourth of each option
becoming exercisable each year beginning December 6, 2006. All options permit
the optionee to pay for exercise with Common Stock owned at least six months and
to use share withholding to pay taxes.
(2) The exercise price for all options granted is equal to the closing market
price of the Corporation's common stock on December 6, 2004.
The following table presents information concerning performance share
awards granted to the named executive officers on December 6, 2004 under the
Corporation's 1995 Amended and Restated Incentive Stock Plan.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE
PAYOUTS UNDER
NON-STOCK PRICE-
BASED PLANS
-----------
NUMBER OF PERFORMANCE
PERFORMANCE PERIOD UNTIL TARGET MAXIMUM
NAME SHARES (#) MATURATION (#) (#)
- ---- ---------- ---------- --- ---
Timothy C. Brown............................. 10,000 12/31/07 10,000 15,000
Dieter W. Rietschle.......................... -- -- -- --
Peter H. Bissinger........................... 400 12/31/07 400 600
Phillip J. Stuecker.......................... 2,500 12/31/07 2,500 3,750
James J. Kregel.............................. 2,000 12/31/07 2,000 3,000
Up to 150 percent of the target shares may be earned, depending on the
total shareholder return of the Corporation during the three-year period
commencing January 1, 2005, and ending December 31, 2007, as compared with the
total shareholder return for the Standard & Poor's Small Cap 600 Index. During
the performance period, dividend equivalents will be credited based on actual
shares earned. The performance share awards provide for pro rata vesting in the
event of death, disability, or retirement, and adjust for stock dividends or
splits. In the event of a change in control, the performance goals established
thereunder shall be deemed satisfied and 100 percent of the target shares will
be delivered. In the event of a merger, consolidation, or combination of the
Corporation with or into another corporation, the target shares shall be
converted into the acquisition consideration. Recipients of the performance
share awards may elect to defer receipt of any shares earned during the
performance period in accordance with the terms of the performance share awards.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Directors of the Company
The information required by this item will be included in an amendment to this
Annual Report, which amendment will be filed within 120 days after the close of
the Company's fiscal year.
b. Executive Officers of the Registrant
Reference is made to "Executive Officers of the Registrant" in Part 1, ITEM 1.f.
c. Audit Committee Financial Expert
The Company had determined that Wallace H. Dunbar, Chairman of the Audit
Committee of the Board of Directors, qualifies as an "audit committee financial
expert" as defined in Item 401(h) of Regulation S-K, and that Mr. Dunbar is
"independent" as the term is used in Item 7 (d) (3) (iv) of Schedule 14A under
the Securities Exchange Act.
d. Code of Business Conduct
The Company has adopted a Corporate Compliance and Code of Ethics Policy
applicable to all employees. This code is applicable to Senior Financial
Executives including the principal executive officer, principal financial
officer and principal accounting officer of the Company. The Company's Corporate
Compliance and Code of Ethics Policy is available on the Company's web site at
www.thomasind.com under "Corporate Governance." The Company intends to post on
its web site any amendments to, or waivers from its Corporate Governance
Guidelines and its Corporate Compliance and Code of Ethics Policy applicable to
Senior Financial Executives. The Company will provide shareholders with a copy
of its Corporate Compliance and Code of Ethics Policy upon written request
directed to the Company's Secretary at the Company's address.
e. NYSE Disclosures
The Company submitted to the New York Stock Exchange the previous year's
unqualified certification of the Company's chief executive officer as required
by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.
The Company filed with the Securities & Exchange Commission the CEO/CFO
certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 as
Exhibits 31.1 and 31.2 to its prior and most recent Form 10-Ks.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in an amendment
to this Annual Report, which amendment will be filed within 120 days after the
close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be included in an amendment
to this Annual Report, which amendment will be filed within 120 days after the
close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in an amendment
to this Annual Report, which amendment will be filed within 120 days after the
close of the Company's fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be included in an amendment
to this Annual Report, which amendment will be filed within 120 days after the
close of the Company's fiscal year.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. (1) Financial Statements
The following consolidated financial statements of Thomas Industries Inc. are
included in Part II, Item 8:
Consolidated Balance Sheets--December 31, 2004 and 2003
Consolidated Statements of Income--Years ended December 31, 2004, 2003, and 2002
Consolidated Statements of Shareholders' Equity--Years ended December 31,
2004,2003, and 2002
Consolidated Statements of Cash Flows--Years ended December 31, 2004, 2003, and
2002
Notes to Consolidated Financial Statements--December 31, 2004
(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(3) Listing of Exhibits
EXHIBIT NO. EXHIBIT
- ----------- -------
2(a) Agreement for Purchase of Equity Interests and Shares
(English translation) dated August 29, 2002, by and among
Thomas Industries Inc., Werner Rietschle Holding GmbH,
TIWR Holding GmbH & Co. KG, TIWR Netherlands Holdings
C.V., TIWR U.K. Limited, TI France SAS, Thomas Industries
Australia Pty. Ltd. and TI Luxembourg S.A.R.L., filed as
Exhibit 2.1 to Form 8-K filed September 12, 2002, hereby
incorporated by reference.
2(b) Purchase Agreement dated May 20, 2004 among Genlyte Thomas
Group LLC, The Genlyte Group Incorporated and Thomas
Industries, Inc. filed as Exhibit 2 to registrant's
Form 8-K dated March 20, 2004, hereby incorporated by
reference.
2(c) Agreement and Plan of Merger dated March 8, 2005 by and
between Gardner Denver, Inc. and Thomas Industries Inc.
filed as Exhibit 2.1 to registrant's Form 8-K dated March
8, 2005, hereby incorporated by reference.
3(a) Restated Certificate of Incorporation, as amended, filed
as Exhibit 3(a) to Form 10-Q filed November 13, 2002,
hereby incorporated by reference.
3(b) Bylaws, as amended, March 8, 2005 filed herewith.
4(b) Amended and Restated Rights Agreement filed as Exhibit
4(b) to registrant's report on Form 10-Q dated August 14,
2000, hereby incorporated by reference.
4(c) First Amendment to Rights Agreement filed as Exhibit 4(c)
to registrant's report on Form 10-K dated March 26, 2001,
hereby incorporated by reference.
4(d) Second amendment to Rights Agreement dated March 8, 2005
filed as Exhibit 4(d) to registrant's Form 8-K dated March
8, 2005, hereby incorporated by reference.
10(a) Employment Agreements with Timothy C. Brown and Phillip J.
Stuecker filed as Exhibit 3(j) to registrant's report on
Form 10-Q dated November 11, 1988, hereby incorporated by
reference.
10(b) Trust Agreement, filed as Exhibit 10(1) to registrant's
report on Form 10-Q dated November 11, 1988, hereby
incorporated by reference.
10(c) Form of Indemnity Agreement and Amendment thereto entered
into by the Company and each of its Executive Officers
filed as Exhibits 10 (g) and (h) to registrant's report on
Form 10-K dated March 23, 1988, hereby incorporated by
reference.
10(d) Severance pay policy of the Company, effective October 1,
1988, covering all Executive Officers, filed as Exhibit
10(d) to registrant's report on Form 10-K dated March 23,
1989, hereby incorporated by reference.
10(e) Nonemployee Director Stock Option Plan as Amended and
Restated as of February 5, 1997, filed as Exhibit 10(h) to
registrant's report on Form 10-K registrant's dated
March 20, 1997, hereby incorporated by reference.
10(f) Thomas Industries Inc. 1995 Incentive Stock Plan as
Amended and Restated as of April 22, 2004, as filed with
the registrant's Proxy Statement dated March 12, 2004,
hereby incorporated by reference.
10(g) Employment Agreement with Timothy C. Brown dated January
29, 1997, filed as Exhibit 10(j) to registrant's report on
Form 10-K dated March 20, 1997, hereby incorporated by
reference.
10(g)(1) Employment Agreement with Dieter Rietschle (English
translation) dated August 30, 2002, filed as Exhibit
10 (g) (1) to registrant's report on Form 10-K dated
March 28, 2003, hereby incorporated by reference.
10(g)(2) Services Agreement with Peter Bissinger (English
translation) dated January 1, 2003, filed as Exhibit 10
(g) (2) to registrant's report on Form 10-K dated March
28, 2003, hereby incorporated by reference.
10(g)(3) Amendment to Services Agreement with Peter Bissinger
(English translation) dated December 31, 2004, filed as
Exhibit 10.1 to registrant's report on Form 8-K dated
December 31, 2004, hereby incorporated by reference.
10(h) Master Transaction Agreement by and between Thomas
Industries Inc. and The Genlyte Group Incorporated
dated April 28, 1998, filed as Exhibit 2.1 to registrant's
report on Form 8-K dated July 24, 1998, hereby
incorporated by reference.
10(i) Limited Liability Company Agreement of GT Lighting, LLC,
dated April 28, 1998, filed as Exhibit 2.2 to registrant's
report on Form 8-K dated July 24, 1998, hereby
incorporated by reference.
10(j) Capitalization Agreement among GT Lighting, LLC, and
Thomas Industries Inc., Tupelo Holdings Inc., Thomas
Industries Holdings Inc., Gardco Manufacturing, Inc.,
Capri Lighting, inc., Thomas Imports, Inc., and TI
Industries Corporation dated April 28, 1998, filed as
Exhibit 2.3 to registrant's report on Form 8-K dated
July 24, 1998, hereby incorporated by reference.
10(k) Form of Performance Share Award, filed herewith.
10(l) Form of Cash Only Stock Appreciation Right for Directors
of Thomas Industries Inc., filed herewith.
10(m) Form of Non-qualified Stock Option for Thomas Industries
Employees, filed herewith.
10(n) Form of Non-qualified Stock Option for Officers of Thomas
Industries Inc., filed herewith.
21 Subsidiaries of the Registrant.
23(a) Consent of Ernst & Young LLP.
23(b) Consent of Ernst & Young LLP.
23(c) Consent of Pricewaterhouse Coopers LLP.
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 Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
b. Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are as specified
in Item 15(a)(3) herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: MARCH 14, 2005 BY:
/S/ TIMOTHY C. BROWN,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board;
/s/ Timothy C. Brown President; Chief Executive Officer;
Director (Principal Executive Officer) March 14, 2005
Vice President of Finance;
Chief Financial Officer;
/s/ Phillip J. Stuecker Secretary March 14, 2005
(Principal Financial Officer)
/s/ Roger P. Whitton Controller March 14, 2005
(Principal Accounting Officer)
/s/ Wallace H. Dunbar Director March 14, 2005
/s/ H. Joseph Ferguson Director March 14, 2005
/s/ William M. Jordan Director March 14, 2005
/s/ Franklin J. Lunding, Jr. Director March 14, 2005
/s/ Anthony A. Massaro Director March 14, 2005
/s/ George H. Walls, Jr. Director March 14, 2005
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
DECEMBER 31, 2004
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS OTHER ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- --------- ------------ -------- -------- ------
Year ended December 31, 2004
Allowance for doubtful accounts.. $2,270,000 $584,000 $(551,000) (2) $2,303,000
Allowance for obsolete and slow
moving inventory................. 8,385,000 1,603,000 - (912,000) (3) 9,076,000
---------- ---------- ---------- -------- -----------
$10,655,000 $2,187,000 - $(1,463,000) $11,379,000
=========== ========== ========== =========== ===========
Year ended December 31, 2003
Allowance for doubtful accounts.. $2,269,000 $435,000 $(96,000) (1) $(338,000) (2) $2,270,000
Allowance for obsolete and slow
moving inventory............... 4,821,000 1,654,000 2,003,000 (1) (93,000) (3) 8,385,000
$7,090,000 $2,089,000 $1,907,000 (431,000) $10,655,000
---------- ---------- ---------- -------- -----------
Year ended December 31, 2002
Allowance for doubtful accounts.. $1,103,000 $753,000 $1,208,000 (1) $(795,000) (2) $2,269,000
Allowance for obsolete and slow
moving inventory............... 1,985,000 488,000 2,980,000 (1) (632,000) (3) 4,821,000
---------- ---------- ---------- -------- -----------
$3,088,000 $1,241,000 $4,188,000 (1,427,000) $7,090,000
========== ========== ========== ========== ==========
- ---------------
(1) Due primarily to the August 29, 2002 Rietschle acquisition. With Rietschle
being a privately held company, it took longer to perform the necessary analysis
to finalize the opening balance sheet adjustments for this acquisition and
therefore, these adjustments were not complete as of December 31, 2002. The
Company did complete its analysis in 2003 and recorded the final adjustments in
the third quarter of 2003. These adjustments were not related to any changing
business conditions or management decisions occurring after August 29, 2002.
(2) Uncollectible accounts written off, less recoveries on accounts previously
written off and effect of translation in accordance with SFAS No. 52.
(3) Disposal of obsolete inventory and effect of translation in accordance with
SFAS No. 52.
On August 30, 1998, Thomas and Genlyte formed a lighting joint venture that
combined substantially all of the assets and liabilities of Genlyte and
substantially all of the lighting assets and related liabilities of Thomas to
create Genlyte Thomas Group LLC ("GTG"), estimated to be the third largest
manufacturer of lighting fixtures and controls in North America. Thomas owned a
32% interest in the joint venture, and Genlyte owned a 68% interest.
Effective at the close of business on July 31, 2004, Genlyte, through its
wholly-owned subsidiaries, acquired the 32% minority interest owned by Thomas in
GTG for a cash price of $386,500,000 plus 32% of GTG's earnings, less
distributions to Thomas, from January 1, 2004 through the closing at July 31,
2004. The transaction was structured as an asset purchase of various interests
owned by Thomas and certain of its subsidiary entities. The purchase price was
approximately $402,081,000 including $1,179,000 of acquisition related costs.
The purchase price was determined through arm's length negotiations between
Genlyte and Thomas. This transaction is not reflected in the following financial
statements and the accompanying notes.
Following are audited financial statements of GTG for the seven months ended
July 31, 2004 and the years ended December 31, 2003, and 2002.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE MEMBERS OF THE GENLYTE THOMAS GROUP LLC:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, statement of members' equity and statement of
cash flows present fairly, in all material respects, the financial position of
Genlyte Thomas Group LLC ("Company") and its subsidiaries at July 31, 2004 and
the consolidated results of their operations and their cash flows for the seven
months ended July 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
March 16, 2005
NOTE: THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ERNST & YOUNG LLP, THE
COMPANY'S FORMER INDEPENDENT ACCOUNTANTS. THE ERNST & YOUNG LLP REPORT REFERS TO
CERTAIN FINANCIAL INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002,
AND CERTAIN BALANCE SHEET INFORMATION AS OF DECEMBER 31, 2003 AND 2002.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE MEMBERS OF GENLYTE THOMAS GROUP LLC:
We have audited the accompanying consolidated balance sheets of Genlyte Thomas
Group LLC and Subsidiaries (the Company) as of December 31, 2003 and 2002 and
the related consolidated statements of income, members' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Genlyte Thomas
Group LLC and Subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
January 23, 2004
GENLYTE THOMAS GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
SEVEN MONTHS ENDED FOR THE YEARS ENDED
JULY 31, DECEMBER 31,
2004 2003 2002
---- ---- ----
Net sales.................................................................. $672,358 $1,033,899 $970,304
Cost of sales............................................................ 431,939 671,322 630,433
-------- ---------- --------
Gross profit............................................................... 240,419 362,577 339,871
Selling and administrative expenses...................................... 176,143 260,381 239,730
Amortization of other intangible assets................................. 541 1,079 851
Gain on settlement of patent litigation.................................. -- (8,000) --
-------- ---------- --------
Operating profit........................................................... 63,735 109,117 99,290
Interest expense, net of interest income................................. 56 238 606
Minority interest........................................................ (66) 185 240
-------- ---------- --------
Income before income taxes................................................. 63,745 108,694 98,444
Income tax provision..................................................... 5,145 7,416 7,804
-------- ---------- --------
Net income................................................................. $ 58,600 $101,278 $90,640
======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements.
GENLYTE THOMAS GROUP LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
AS OF
JULY 31, DECEMBER 31
2004 2003
---- ----
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $116,284 $59,963
Short-term investments....................................................................... - 70,479
Accounts receivable, less allowances for doubtful accounts of $14,319 and $13,456 as of
July 31, 2004 and December 31, 2003........................................................ 200,367 160,111
Related-party receivables.................................................................... 6 175
Inventories.................................................................................. 151,498 143,898
Other current assets......................................................................... 9,537 9,646
-------- --------
Total current assets........................................................................... 477,692 444,272
Property, plant and equipment, at cost:
Land and land improvements................................................................... 43,027 8,211
Buildings and leasehold improvements......................................................... 51,793 88,718
Machinery and equipment...................................................................... 288,073 290,331
-------- --------
Total property, plant and equipment............................................................ 382,893 387,260
Less: accumulated depreciation and amortization.............................................. 270,623 275,636
-------- --------
Net property, plant and equipment.............................................................. 112,270 111,624
Goodwill....................................................................................... 156,623 150,532
Other intangible assets, net of accumulated amortization....................................... 11,360 21,315
Other assets................................................................................... 5,236 5,028
-------- --------
TOTAL ASSETS................................................................................... $763,181 $732,771
======== ========
LIABILITIES & MEMBERS' EQUITY:
CURRENT LIABILITIES:
Current maturities of long-term debt......................................................... $250 $284
Accounts payable............................................................................. 98,321 98,035
Related-party payables....................................................................... 279 16,534
Accrued expenses............................................................................. 73,564 70,956
-------- --------
Total current liabilities...................................................................... 172,414 185,809
Long-term debt................................................................................. 11,072 11,190
Deferred income taxes.......................................................................... 4,928 5,005
Accrued pension................................................................................ 21,739 27,567
Minority interest.............................................................................. 835 924
Other long-term liabilities.................................................................... 6,013 6,317
-------- --------
Total liabilities.............................................................................. 217,001 236,812
Commitments and contingencies (See notes (15) and (16))
MEMBERS' EQUITY:
Accumulated other comprehensive income (loss)................................................ (2,856) (7,099)
Other members' equity........................................................................ 549,036 503,058
-------- --------
Total members' equity.......................................................................... 546,180 495,959
-------- --------
TOTAL LIABILITIES & MEMBERS' EQUITY............................................................ $763,181 $732,771
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
GENLYTE THOMAS GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR SEVEN MONTHS ENDED JULY 31, 2004
AND YEARS ENDED DECEMBER 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
ACCUMULATED
OTHER OTHER TOTAL
COMPREHENSIVE MEMBERS' MEMBERS'
INCOME (LOSS) EQUITY EQUITY
------------- ------ ------
Members' equity, December 31, 2001....................................... $(9,076) $395,079 $386,003
Net income............................................................... -- 90,640 90,640
Increase in minimum pension liability, before tax........................ (18,450) -- (18,450)
Related tax effect................................................... 541 -- 541
-------- -------- --------
Increase in minimum pension liability, after tax......................... (17,909) -- (17,909)
Foreign currency translation adjustments................................. 20 -- 20
Total comprehensive income............................................... 72,751
Contribution from Thomas................................................. -- 299 299
Distributions to members................................................. -- (43,078) (43,078)
Members' equity, December 31, 2002....................................... (26,965) 442,940 415,975
Net income............................................................... -- 101,278 101,278
Decrease in minimum pension liability, before tax........................ (422) -- (422)
Related tax effect..................................................... 112 -- 112
-------- -------- --------
Decrease in minimum pension liability, after tax......................... (310) -- (310)
Foreign currency translation adjustments................................. 20,176 -- 20,176
Total comprehensive income............................................... 121,144
Contribution from Thomas................................................. -- 399 399
Distributions to members................................................. -- (41,559) (41,559)
-------- -------- --------
Members' equity, December 31, 2003....................................... (7,099) 503,058 495,959
Net income............................................................... -- 58,600 58,600
Increase in minimum pension liability, before tax........................ 7,831 -- 7,831
Related tax effect..................................................... (206) -- (206)
-------- -------- --------
Increase in minimum pension liability, after tax......................... 7,625 -- 7,625
Foreign currency translation adjustments................................. (3,382) -- (3,382)
Total comprehensive income............................................... 62,843
Contribution from Thomas................................................. -- 972 972
Distributions to members................................................. -- (13,594) (13,594)
-------- -------- --------
Members' equity, July 31, 2004........................................... $(2,856) $549,036 $546,180
The accompanying notes are an integral part of these consolidated financial statements.
GENLYTE THOMAS GROUP LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE SEVEN
MONTHS ENDED FOR THE YEARS ENDED
JULY 31, DECEMBER 31,
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $58,600 $101,278 $90,640
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 15,302 24,207 23,169
Net loss (gain) from disposals of property, plant and equipment............... (1,564) 1,131 1,010
Provision (benefit) for deferred income taxes................................. -- 104 (134)
Minority interest............................................................. (66) 70 874
Changes in assets and liabilities, net of effect of acquisitions:
(Increase) decrease in:
Accounts receivable....................................................... (40,502) (3,261) (5,470)
Related-party receivables................................................. 169 (175) --
Inventories............................................................... (7,456) (663) 2,069
Other current assets...................................................... (38) (434) 24
Intangible and other assets............................................... 46 (2,778) 8,195
Increase (decrease) in:
Accounts payable.......................................................... 2,333 (1,372) 3,446
Related-party payables.................................................... (16,075) (13,987) 10,598
Accrued expenses.......................................................... 2,884 2,918 (560)
Deferred income taxes, long-term.......................................... -- (109) 581
Accrued pension and other long-term liabilities........................... 1,543 1,836 (8,059)
All other, net................................................................ 39 96 (977)
-------- ------- -------
Net cash provided by operating activities....................................... 15,215 108,861 125,406
======== ======= =======
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash received................................ (2,437) (20,350) (10,641)
Purchases of property, plant and equipment...................................... (14,700) (17,559) (18,912)
Proceeds from sales of property, plant and equipment............................ 4,540 31 1,807
Purchases of short-term investments............................................. (43,145) (126,998) (157,198)
Proceeds from sales of short-term investments................................... 112,852 103,775 123,062
-------- ------- -------
Net cash used in investing activities........................................... 57,110 (61,101) (61,882)
======== ======= =======
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt.................................................... (689) (27,410) (3,318)
Increase (decrease) in disbursements outstanding............................... (1,915) 7,903 815
Distributions to members........................................................ (13,594) (41,559) (43,078)
Contribution from Thomas Industries' stock options.............................. 972 399 299
-------- ------- -------
Net cash used in financing activities........................................... (15,226) (60,667) (45,282)
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents.................... (778) 6,218 (517)
-------- ------- -------
Net increase in cash and cash equivalents....................................... 56,321 (6,689) 17,725
Cash and cash equivalents at beginning of year.................................. 59,963 66,652 48,927
-------- ------- -------
Cash and cash equivalents at end of year........................................ $116,284 $59,963 $66,652
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest paid (received), net................................................ $(354) $627 $893
Income taxes, net of refunds of $257, $664, and $277, respectively........... $7,207 $8,482 $7,401
The accompanying notes are an integral part of these consolidated financial statements.
Genlyte Thomas Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(1) DESCRIPTION OF BUSINESS
Genlyte Thomas Group LLC ("GTG" or the "Company"), a Delaware limited liability
company, is a United States based multinational company. The Company designs,
manufactures, markets, and sells lighting fixtures, controls and related
products for a wide variety of applications in the commercial, residential, and
industrial markets in North America. The Company's products are marketed
primarily to distributors who resell the products for use in commercial,
residential, and industrial construction and remodeling. The Company is the
result of the business combination discussed in note (3) "Formation of Genlyte
Thomas Group LLC." At July 31, 2004, Thomas' minority interest in the Company
was acquired by The Genlyte Group Incorporated ("Genlyte") as discussed in note
(22) "Sale of 32% Minority Interest in GTG". This transaction is not reflected
in the financial statements presented herein.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
are presented in U.S. dollars and include the accounts of GTG and all
majority-owned subsidiaries, and also include other entities that are jointly
owned by Genlyte and Thomas Industries Inc. ("Thomas"), all of which entities,
in total, operationally comprise GTG. Intercompany accounts and transactions
have been eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from the
estimates.
REVENUE RECOGNITION: The Company manufactures and sells its products pursuant to
purchase orders received from customers and recognizes sales revenue when
products are shipped, which is when legal title passes to the customer and the
risks and rewards of ownership have transferred.
The Company has three types of post-shipment obligations to its customers:
incentive rebates, sales returns, and warranty obligations. The Company
recognizes incentive rebates as sales deductions and they are accrued as earned
by the customer based on a systematic allocation of the total estimated rebates
to be paid to the underlying sales that result in progress toward earning the
rebate. In addition, the Company provides for limited product return rights for
some products for some customers, which also are recorded as sales deductions
and are accrued based on estimated returns. The amount of future returns can be
reasonably estimated based on historical experience and specific notification of
pending returns. The Company also has certain warranty obligations, which are
discussed in note (10) "Product Warranties".
SHIPPING AND HANDLING FEES AND COSTS: Shipping and handling costs associated
with storage and handling of finished goods and handling of shipments to
customers are included in cost of sales. Outbound freight for shipments to
customers is included in selling and administrative expenses and totaled $32,378
for the seven months ended July 31, 2004 and totaled $49,017 and $45,724 for the
years 2003 and 2002, respectively. Sometimes outbound freight is billed to the
customer. Such fees are included in net sales and totaled $4,927 for the seven
months ended July 31, 2004 and totaled $8,228 and $7,372 for the years 2003 and
2002, respectively.
STOCK-BASED COMPENSATION COSTS: At July 31, 2004, Genlyte had two stock-based
compensation (stock option) plans, which are described more fully in note (17)
"Stock Options." Genlyte accounts for these plans using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), as permitted under Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123." As a consolidated subsidiary of Genlyte, GTG is also
required to apply APB 25 to stock-based compensation for stock options granted
by Genlyte to employees of GTG. Therefore, GTG also accounts for these plans
using the intrinsic value method. Because all options granted under these plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant, no stock-based compensation cost has been recognized in
the consolidated statements of income. Had stock-based compensation cost for the
plans been determined using the fair value recognition provisions of SFAS No.
123, the effect on the Company's net income for the seven months ended July 31,
2004 and for the years ended December 31, 2003 and 2002 would have been as
follows:
JULY 31, December 31,
2004 2003 2002
-------------- ------------ -------------
Net income, as reported $ 58,600 $ 101,278 $ 90,640
Stock-based compensation cost using
fair value method, net of tax effects 3,981 2,570 3,123
-------------- ------------ -------------
Net income, pro forma $ 54,619 $ 98,708 $ 87,517
============== ============ =============
ACCOUNTING FOR STOCK-BASED COMPENSATION INCURRED BY INVESTORS: Thomas has also
granted stock options to certain employees of GTG. According to Emerging Issues
Task Force issue 00-12, "Accounting by an Investor for Stock-Based Compensation
Granted to Employees of an Equity Method Investee," an investee should recognize
the costs of the stock-based compensation incurred by an investor on its behalf,
and a corresponding capital contribution. Therefore, in 2004 through July 31,
the Company (the investee) recorded $972 of stock-based compensation expense in
selling and administrative expenses and the same amount as a contribution from
Thomas (the investor) in the consolidated statement of members' equity. For the
years 2003 and 2002, the amount was $ 399 and $299, respectively.
ADVERTISING COSTS: The Company expenses advertising costs principally as
incurred. Certain catalog, literature, and display costs are amortized over
their useful lives, from 6 to 36 months. Total advertising expenses, classified
as selling and administrative expenses, were $8,236 for the seven months ended
July 31, 2004 and were $10,004 and $8,538 for the years 2003 and 2002,
respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. These expenses, classified as selling and administrative expenses,
were $6,581 for the seven months ended July 31, 2004 and were $10,343 and $8,521
for the years 2003 and 2002, respectively.
CASH EQUIVALENTS: The Company considers all highly liquid investments with a
maturity of three months or less from the date of purchase to be cash
equivalents.
SHORT-TERM INVESTMENTS: Short-term investments are classified as
available-for-sale securities and consisted of commercial paper with a maturity
of 120 days at December 31, 2004. As of December 31, 2003, short-term
investments consisted of commercial paper with a maturity of 120 days, term
deposits with a maturity of one year that could be cashed penalty free any time
after 30 days, and tax advantaged debt securities with original maturities
ranging from 11 to 32 years. Short-term investments 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 of these investments, cost does not differ from
fair market value, so there are no such adjustments to the carrying value.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: All accounts receivable
are trade related and are recorded at the invoiced amount and do not bear
interest. The Company maintains allowances for doubtful accounts receivable for
estimated uncollectible invoices resulting from the customer's inability to pay
(bankruptcy, out of business, etc., i.e. "bad debts" which result in write-offs)
as well as the customer's refusal to pay (returned products, billing errors,
disputed amounts, etc., which result in credit memos). Management's estimated
allowances are based on the aging of the invoices, historical collections,
customers' financial status, the overall ratio of "bad debt" allowances to
account receivable balances in comparison to relevant industry data, amounts
returned and disputed by customers, and estimated lag times for processing
credit memos. Account balances are charged off against the allowance when
management determines it is probable a receivable will not be recovered.
Balances charged off against the allowance totaled $24,637 for the seven months
ended July 31, 2004 and total $36,707 and $35,906 for the years ended December
31, 2003 and 2002, respectively. The Company does not have any off-balance sheet
credit exposure related to its customers.
CONCENTRATION OF CREDIT RISK: Assets that potentially subject the Company to
concentration of credit risk are cash and cash equivalents, short-term
investments, and accounts receivable. The Company invests its cash equivalents
primarily in high-quality institutional money market funds with maturities of
less than three months and limits the amount of credit exposure to any one
financial institution. Investment policies have been implemented that limit
short-term investments to investment grade securities in multiple funds with
multiple financial institutions which limits the Company's exposure. The Company
provides credit to most of its customers in the ordinary course of business, and
collateral or other security may be required in certain infrequent situations.
The Company conducts ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. Concentration of credit risk with
respect to accounts receivable is limited due to the wide variety of customers
and markets to which the Company sells. No single customer accounts for more
than 10% of annual sales. As of July 31, 2004, management does not consider the
Company to have any significant concentration of credit risk.
INVENTORIES: Inventories are stated at the lower of cost or market and include
materials, labor, and overhead. Inventories at July 31, 2004 and December 31,
2003 consisted of the following:
JULY 31, December 31,
2004 2003
----------------- -----------------
Raw materials $ 57,745 $ 54,371
Work in process 17,754 17,228
Finished goods 75,999 72,299
----------------- -----------------
Total inventories $ 151,498 $ 143,898
================= =================
Inventories valued using the last-in, first-out ("LIFO") method represented
approximately 81% of total inventories at July 31, 2004 and 80% at December 31,
2003. Inventories not valued at LIFO (primarily inventories of Canadian
operations) are valued using the first-in, first-out ("FIFO") method. On a FIFO
basis, which approximates current cost, inventories would have been $1,516
higher than reported at July 31, 2004 and $2,781 lower than reported at and
December 31, 2003, respectively. During the seven months ended July 31, 2004 and
the years ended December 31, 2003 and 2002, certain inventory quantity
reductions caused partial liquidations of LIFO inventory layers (in some cases
including the base), the effects of which increased pre-tax income by $(1,376)
for the seven months ended July 31, 2004 and by $114 for each of the years 2003
and 2002.
PROPERTY, PLANT AND EQUIPMENT: The Company provides for depreciation of
property, plant and equipment, which also includes amortization of assets
recorded under capital leases, on a straight-line basis over the estimated
useful lives of the assets. Useful lives vary among the items in each
classification, but generally fall within the following ranges:
Land improvements 10 - 25 years
Buildings and leasehold improvements 10 - 40 years
Machinery and equipment 3 - 10 years
Leasehold improvements are amortized over the terms of the respective leases, or
over their estimated useful lives, whichever is shorter. Depreciation and
amortization of property, plant and equipment, including assets recorded under
capital leases, was $14,761 for the seven months ended July 31, 2004 and was
$23,128 and $22,318 for the years 2003 and 2002, respectively. Accelerated
methods of depreciation are used for income tax purposes, and appropriate
provisions are made for the related deferred income taxes for the foreign
subsidiaries.
When the Company sells or otherwise disposes of property, plant and equipment,
the asset cost and accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recorded in selling and administrative expenses in
the consolidated statements of income.
Maintenance and repairs are expensed as incurred. Renewals and improvements that
extend the useful life of an asset are capitalized and depreciated or amortized
over the remaining useful lives of the respective assets.
GOODWILL: Goodwill is the excess of cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business combination.
Goodwill is not amortized. Goodwill is tested for impairment annually, and will
be tested for impairment between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be impaired.
Impairment testing for goodwill is done at a reporting unit level. Reporting
units are one level below the business segment level, but can be combined within
the same segment when reporting units have similar economic characteristics. The
majority of goodwill relates to and is assigned directly to a specific reporting
unit. An impairment loss generally would be recognized when the carrying amount
of the reporting unit's net assets exceeds the estimated fair value of the
reporting unit. The estimated fair value of a reporting unit is determined using
earnings for the reporting unit multiplied by a price/earnings ratio for
comparable industry groups, or by using a discounted cash flow analysis. The
Company completed its assessment of any potential impairment upon adoption of
this standard and performs annual assessments. No impairment of goodwill was
identified in the Company's most recent annual impairment analysis.
OTHER INTANGIBLE ASSETS: Intangible assets include patents, trademarks, trade
names, license agreements, non-competition agreements, customer relationships,
and other intangible assets acquired from an independent party. Intangible
assets with an indefinite life (Unamortized intangible assets), namely certain
trademarks and license agreements, are not amortized. Intangible assets with a
definite life (Amortized intangible assets) are amortized on a straight-line
basis, with estimated useful lives ranging from 2 to 15 years. Unamortized
intangible assets are tested for impairment annually, and will be tested for
impairment between annual tests if an event occurs or circumstances change that
would indicate that the carrying amount may be impaired. Intangible assets with
a definite life are tested for impairment whenever events or circumstances
indicate that a carrying amount of an asset (asset group) may not be
recoverable. The Company has determined that no material impairments existed in
its most recent impairment analysis. An impairment loss is recognized when the
carrying amount of an asset exceeds the estimated undiscounted cash flows used
in determining the fair value of the asset. The amount of the impairment loss to
be recorded is calculated by the excess of the asset's carrying value over its
fair value. Fair value is generally determined using a discounted cash flow
analysis. Costs related to internally developed intangible assets are expensed
as incurred.
TRANSLATION OF FOREIGN CURRENCIES: Balance sheet accounts of foreign
subsidiaries are translated into U.S. dollars at the rates of exchange in effect
as of the balance sheet date. The cumulative effects of such adjustments are
charged to the foreign currency translation adjustment component of accumulated
other comprehensive income (loss) in members' equity. Income and expenses are
translated at the weighted-average exchange rates prevailing during the period.
Net gains or (losses) resulting from the translation of foreign currency
transactions, of $620 for the seven months ended July 31, 2004 and $(3,405) and
$151 for the years 2003 and 2002, respectively, are included in selling and
administrative expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash equivalents
and long-term debt approximate fair value because of their short-term maturity
and/or variable market-driven interest rates.
SELF-INSURANCE FOR WORKERS' COMPENSATION AND MEDICAL CLAIMS: The Company is
insured for workers' compensation, however, the deductible, $250 thousand prior
to August 2002 and $500 thousand afterwards, exceeds the vast majority of
claims. The insurance provider and administrator, Travelers, provides the
Company with estimated losses and reserve requirements for each open claim based
on its expertise and experience. The Company records provisions for workers'
compensation claims based on the information received from Travelers. The
Company also provides reserves for estimated losses for claims incurred but not
reported and the future development of reported claims, based on actuarial and
claims trend analysis performed by the Company's casualty insurance broker and
consultant, Marsh & McLennan Company.
The Company is self-insured for the medical benefit plans covering most of its
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.
COLLECTIVE BARGAINING AGREEMENTS: As of July 31, 2004, the Company was party to
various collective bargaining agreements. Several of these collective bargaining
agreements will expire during the last five months of 2004 and during 2005.
Management does not expect the expiration and renegotiation of these agreements
to have a significant impact on 2004 or 2005 results of operations.
NEW ACCOUNTING STANDARDS: In December 2004, the FASB issued SFAS No. 123R
(Revised 2004), "Accounting for Stock Based Compensation" ("SFAS No. 123R").
SFAS No. 123R establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS No. 123R eliminates the alternative to use APB 25's intrinsic value method
of accounting that was provided in SFAS No. 123 as originally issued. SFAS No.
123R requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. A public
entity will initially measure the cost of liability based service awards based
on their current fair value; the fair value of those awards will be remeasured
subsequently at each reporting date through the settlement date. Changes in fair
value during the requisite service period will be recognized as compensation
cost over that period. The provisions of SFAS No. 123R shall become effective
for the Company in the third quarter of 2005 and will apply to all awards
granted after June 30, 2005 and to awards modified, repurchased, or cancelled
after that date. The Company is evaluating SFAS No. 123R and believes it may
have a material effect on financial results of operations to the extent that any
new stock options are granted after June 30, 2005.
In December 2003, the FASB issued revised Interpretation No. 46R, "Consolidation
of Variable Interest Entities" ("FIN 46R"). FIN 46R provides guidance on how to
identify a variable interest entity ("VIE") and determine when the assets,
liabilities, non-controlling interest, and results of operations of a VIE need
to be included in a company's consolidated financial statements. FIN 46R also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. Application of FIN 46R is required for interests in
variable interest entities for years ending after December 15, 2003. The Company
has determined that it has no variable interest entities. Application of FIN 46R
is required for all other types of VIE's for periods ending after March 15,
2004. The application of FIN 46R had no effect on the Company's financial
statements in 2004.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS No. 151 requires that items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" that was
previously stated in ARB No. 43, Chapter 4. In addition, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect SFAS No. 151 to
have a material impact on the Company's financial condition or results of
operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67." This
Statement amends SFAS No. 66, "Accounting for Sales of Real Estate," to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in American Institute of Certified
Public Accountants ("AICPA") Statement of Position 04-2 ("SOP 04-2"),
"Accounting for Real Estate Time-Sharing Transactions." This Statement also
amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects," to state that the guidance for (a) incidental operations and
(b) costs incurred to sell real estate projects does not apply to real estate
time-sharing transactions. The accounting for those operations and costs is
subject to the guidance in SOP 04-2. The Accounting Standards Executive
Committee of the AICPA issued SOP 04-2 to address the diversity in practice
caused by a lack of guidance specific to real estate time-sharing transactions.
SFAS No. 152 and SOP No. 04-2 will improve the accounting and reporting of those
transactions. The guidance is effective for financial statements for fiscal
years beginning after June 15, 2005, with earlier application encouraged. The
company currently does not participate in any real estate time-sharing
transactions.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The guidance is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect SFAS No. 153 to have a material impact on the company's financial
condition or results of operations.
In December 2004, the FASB issued two FASB Staff Positions ("FSP") regarding the
accounting implications of the American Jobs Creation Act of 2004 (the "Act").
The Act provides a deduction for income from qualified domestic production
activities, which will be phased in from 2005 through 2010. In return, the Act
also provides for a two-year phase-out of the existing extra-territorial income
exclusion ("ETI") for foreign sales. Under the guidance in FSP No. FAS 109-1,
"Application of FASB Statement 109, `Accounting for Income Taxes,' to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004," the deduction will be treated as a "special deduction" as
described in FASB Statement No. 109. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the enactment date and
is not expected to have an impact on the Company's effective tax rate until
fiscal year 2005. FSP No. FAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004," is effective for 2004 and is disclosed in Note (9) "Income Taxes."
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("MMA"), which introduced a Medicare prescription drug benefit, as
well as a federal subsidy to sponsors of retiree healthcare benefit plans that
provide a benefit that is at least actuarially equivalent to the Medicare
benefit, was enacted. In May 2004, the FASB issued FSP No. FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-2"), which
supersedes FSP FAS 106-1 with the same title, which was issued in January 2004.
FSP FAS 106-2 discusses certain accounting and disclosure issues raised by MMA
and is effective in the third quarter of 2004 for the Company.
The Company has concluded that the prescription drug benefits provided under its
postretirement plans are actuarially equivalent to the Medicare benefit as
necessary to qualify for the subsidy. FSP FAS 106-2 provides two alternative
methods of transition when adopted - retroactive to the date of enactment or
prospective from the date of adoption. In the third quarter of 2004, the Company
adopted FSP FAS 106-2 and elected the retroactive transition method. Application
of FSP FAS 106-2 resulted in a $472 reduction in the accumulated postretirement
benefit obligation and a $44 reduction in net periodic postretirement benefit
costs. The Company does not expect the issuance of the final regulations to have
a significant impact on these amounts.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the current year presentation. These changes had no impact on previously
reported net income or members' equity.
(3) FORMATION OF GENLYTE THOMAS GROUP LLC
On August 30, 1998, Genlyte and Thomas completed the combination of the business
of Genlyte with the lighting business of Thomas ("Thomas Lighting"), in the form
of a limited liability company named Genlyte Thomas Group LLC ("GTG"). GTG
manufactures, sells, markets, and distributes commercial, residential, and
industrial lighting fixtures and controls. Genlyte contributed substantially all
of its assets and liabilities to GTG and received a 68% interest in GTG. Thomas
contributed substantially all of the assets and certain related liabilities of
Thomas Lighting and received a 32% interest in GTG. The percentage interests in
GTG issued to Genlyte and Thomas were based on arms-length negotiations between
the parties with the assistance of their financial advisers.
(Subsequent to the periods reflected within the accompanying financial
statement, Genlyte, through its wholly-owned subsidiaries, acquired the 32%
minority interest owned by Thomas in GTG for a cash price of $386,500 plus 32%
of GTG's earnings, less distributions to Thomas, from January 1, 2004 through
the closing at July 31, 2004. The transaction was effective at the close of
business on July 31, 2004. Refer to note (22) "Subsequent Events" for more
information regarding this transaction. The accompanying financial statements do
not reflect any adjustments related to this transaction.)
Subject to the provisions in the Genlyte Thomas Group LLC Agreement (the "LLC
Agreement") regarding mandatory distributions described below, and the
requirement of special approval in certain instances, distributions to Genlyte
and Thomas (the "Members") will be made at such time and in such amounts as
determined by the GTG Management Board and shall be made in cash or other
property in proportion to the Members' respective percentage interests.
Notwithstanding anything to the contrary provided in the LLC Agreement, no
distribution under the LLC Agreement shall be permitted to the extent prohibited
by Delaware law.
The LLC Agreement requires that GTG make the following distributions to the
Members:
(i) a distribution to each Member, based on its percentage interest, for tax
liabilities attributable to its participation as a Member of GTG based upon
the effective tax rate of the Member having the highest tax rate; and
(ii) subject to the provisions of Delaware law and the terms of the primary
GTG credit facility, distributions (exclusive of the tax distributions set
forth above) to each of the Members so that Thomas received at least an
aggregate of $3,000 and Genlyte received at least an aggregate of $6,375 per
year. As a result of Genlyte's acquisition of Thomas' 32% minority interest
in GTG, there were no such distributions under the LLC Agreement in 2004.
During 2003, GTG made distributions of $3,000 to Thomas and $6,375 to
Genlyte. During 2002, GTG made distributions of $5,000 to Thomas and $10,625
to Genlyte.
Also under the terms of the LLC Agreement, at any time on or after January 31,
2002, Thomas has the right (a "Put Right"), but not the obligation, to require
GTG to purchase all, but not less than all, of Thomas's 32% interest at the
appraised value of such interest. The appraised value shall be the fair market
value of GTG as a going concern, taking into account a control premium, and
determined by an appraisal process to be undertaken by recognized investment
banking firms chosen initially by the Members. If GTG cannot secure the
necessary financing or consent with respect to Thomas's exercise of its Put
Right, then Thomas has the right to cause GTG to be sold.
At any time after Thomas exercises its Put Right, Genlyte has the right, in its
sole discretion and without the need of approval of Thomas, to cause GTG to be
sold by giving notice to the GTG Management Board, and the Management Board must
then proceed to sell GTG subject to a fairness opinion from a recognized
investment banking firm. Genlyte also has the right to cause GTG to assign the
rights to purchase Thomas's interest to Genlyte. Genlyte also has the right to
cause GTG to incur indebtedness or to undertake an initial public offering to
finance or effect financing of the payment of the purchase price.
Also under the terms of the LLC Agreement, on or after the later to occur of (1)
the final settlement or disposition of Genlyte's litigation with the Keene
Corporation's Creditors Trust or (2) January 31, 2002, either Member has the
right, but not the obligation, to offer to buy the other Member's interest (the
"Offer Right"). If the Members cannot agree on the terms, then GTG shall be sold
to the highest bidder. Either Member may participate in the bidding for the
purchase of GTG. On July 8, 2004, disposition of Genlyte's litigation with the
Keene Corporation's Creditors Trust was realized as the Trust informed Genlyte
that it would not further appeal the case.
Complete details of the Put Right, Offer Right, and appraisal process can be
found in the proxy statement pertaining to the formation of GTG, filed with the
Securities and Exchange Commission by Genlyte on July 23, 1998.
(4) ACQUISITION OF NEW OXFORD AND USS MANUFACTURING IN 2004
On January 15, 2004 the Company acquired the assets of New Oxford Aluminum
Company, a subsidiary of Lancaster Malleable Castings Company. The Company has
continued operating this foundry in the purchased facility located in new
Oxford, Pennsylvania. The New Oxford Aluminum Company had been a key supplier to
the Company's Hadco division. Approximately 27% of its 2003 sales were to other
divisions of the Company. The purchase price of $442 (including acquisition
costs of $78) was funded from cash on hand.
On May 12, 2004, the Company acquired USS Manufacturing Inc. located in Renfrew,
Ontario. USS Manufacturing is a specialist in tapered, fluted and round aluminum
poles, brackets, standard and decorative arms for street and traffic lights, and
flag poles. The purchase price of $3,099 was paid and recorded in the second
quarter. Pursuant to the purchase agreement, an additional $32 working capital
adjustment was paid and recorded in the third quarter. In addition, liabilities
of $429 were assumed.
The New Oxford and USS Manufacturing acquisitions were accounted for using the
purchase method of accounting. The determination of the excess of the purchase
price over the fair market value of net assets acquired (goodwill) was $1,239
for USS Manufacturing, which was based on the purchase price allocation. While
the company does not expect the amounts recorded as goodwill to change, the
amounts could change as the purchase price allocation is finalized. Goodwill was
not recorded for the New Oxford acquisition since the net assets acquired were
greater than the purchase price. The operating results of New Oxford and USS
Manufacturing have been included in the Company's consolidated financial
statements since the dates of acquisition. The pro forma results and other
disclosures required by SFAS No. 141, "Business Combinations," have not been
presented because New Oxford and USS Manufacturing are not considered material
acquisitions.
(5) ACQUISITION OF SHAKESPEARE IN 2003
- --------------------------------------
On May 27, 2003, the Company acquired certain light pole assets of the
Shakespeare Industrial Group with locations in Newberry, South Carolina and
Largo, Florida (Shakespeare), a subsidiary of K2 Inc. based in Carlsbad,
California. Shakespeare manufactures composite decorative, commercial, and
utility light poles; transmission and distribution poles; crossarms; and other
composite products. The purchase price of $20,350 (including costs of
acquisition), plus the assumption of $1,752 of liabilities, was funded from cash
on hand.
The Shakespeare acquisition was accounted for using the purchase method of
accounting. The preliminary determination in 2003 of the fair market value of
net assets acquired resulted in an indicated excess of the purchase price over
the fair value of net assets acquired (goodwill) of $8,309. Upon finalization in
2004 of its valuations of intangible assets and property, plant, and equipment
related to the acquisition, the Company reduced its previously recorded goodwill
by $8,309, increased intangible assets by $5,014 and increased property, plant,
and equipment by $3,295. The operating results of Shakespeare have been included
in the Company's consolidated financial statements since the date of
acquisition. The pro forma results and other disclosures required by SFAS No.
141, "Business Combinations," have not been presented because Shakespeare is not
considered a material acquisition.
(6) ACQUISITION OF VARI-LITE IN 2002
On November 18, 2002, the Company acquired the manufacturing assets,
intellectual property, and sales division of Vari-Lite Inc. ("Vari-Lite"), a
subsidiary of Dallas, Texas based Vari-Lite International Inc., a designer and
manufacturer of highly advanced automated lighting equipment for the
entertainment industry. The purchase price of $10,641, plus the assumption of
$2,510 of liabilities, was funded from cash on hand.
The Vari-Lite acquisition was accounted for using the purchase method of
accounting. The final determination of the excess of the purchase price over the
fair market value of net assets acquired (goodwill) was $5,543. As of December
31, 2002, the preliminary determination of goodwill was $2,891. Goodwill
adjustments in 2003 were primarily the result of increasing reserves for
obsolete inventory and warranty exposure. The operating results of Vari-Lite
have been included in the Company's consolidated financial statements since the
date of acquisition. The pro forma results and other disclosures required by
SFAS No. 141 have not been presented because the acquisition of Vari-Lite is not
considered a material acquisition.
(7) GAIN ON SETTLEMENT OF PATENT LITIGATION
On August 29, 2003, GTG settled a patent infringement lawsuit filed in March
2000 against Acuity Brands, Inc. and its Lithonia Lighting Division. The United
States District Court for the Western District of Kentucky in Louisville had
ruled in January 2003 that Lithonia's plastic Insta-Lite product infringes GTG's
Quicklight plastic recessed lighting fixture patent. Lithonia paid GTG $8,000
and also agreed to cease selling the infringing version of its plastic recessed
lighting product as of the end of 2003. The impact of the settlement on the
Company's 2003 operating profit was approximately $6,400, net of $1,600 of legal
expenses.
(8) INCOME TAXES
The results of operations are included in the tax return of the Members, and,
accordingly, no provision has been recognized by the Company for U.S. federal
income taxes payable by the Members. The Company's foreign subsidiaries are
taxable corporations, and current and deferred taxes are provided on their
income. Foreign income before taxes was $14,254 for the seven months ended July
31, 2004 and was $21,872 and $20,418 for the years ended December 31, 2003 and
2002, respectively. The income tax provision also includes U.S. income taxes
(primarily state income taxes) totaling $410 for the seven month ended July 31,
2004 and $680 and $781 for the years 2003 and 2002, respectively. Cash paid for
income taxes, net of refunds, was $7,207 for the seven months ended July 31,
2004 and was $8,482 and $7,401 for the years 2003 and 2002, respectively.
The Company, for its foreign subsidiaries, provides for deferred income tax
liabilities related to expense items recognized in different years for tax and
financial reporting purposes. These timing differences are primarily the result
of using the straight-line depreciation method for financial reporting versus
using the accelerated method for tax return purposes. All deferred income
liabilities are classified as non-current.
(9) GOODWILL AND OTHER INTANGIBLE ASSETS:
The changes in the net carrying amounts of goodwill by segment for the seven
months ended July 31, 2004 and the year ended December 31, 2003 were as follows:
Industrial
----------
Commercial Residential and Other Total
---------------- -------------- ----------- ------------
Balance as of January 1, 2003 $ 108,183 $ 21,718 $ 4,330 $ 134,231
Acquisition of business (a) 8,309 - - 8,309
Adjustments to goodwill acquired
previously (b) 1,723 (117) - 1,606
Effect of exchange rate change on
Canadian goodwill 6,295 26 65 6,386
---------------- -------------- ----------- ------------
Balance as of December 31, 2003 124,510 21,627 $ 4,395 $ 150,532
Acquisition of business (c) 1,239 - - 1,239
Adjustments to goodwill acquired
previously (d) 5,880 (135) (5) 5,740
Effect of exchange rate change on
Canadian goodwill (875) (4) (9) (888)
---------------- -------------- ----------- ------------
Balance as of July 31, 2004 $ 130,754 $21,488 $ 4,381 $ 156,623
================ ============== =========== ============
(a) The acquisition of Shakespeare Composite Structures added $8,309 to
goodwill. See note (5) "Acquisition of Shakespeare in 2003."
(b) The majority of the adjustments to goodwill in 2003 resulted from the
adjustment of the purchase price allocation of the acquisition of Vari-Lite
Inc. See note (6) "Acquisition of Vari-Lite in 2002."
(c) The USS Manufacturing acquisition in the second quarter of 2004 added
$1,239 to goodwill. See note (4) "Acquisition of New Oxford and USS
Manufacturing in 2004."
(d) Relates to the adjustment of the carrying amount of certain intangible
assets related to prior acquisitions offset somewhat by the finalization of
the Shakespeare Composite Structures purchase price allocation, the Company
adjusted the carrying amount of certain property, plant, and equipment,
intangible assets, and goodwill related to prior acquisitions.
Summarized information about the Company's other intangible assets follows:
AS OF JULY 31, 2004 As of December 31, 2003
--------------------------------- -------------------------------
GROSS Gross
CARRYING ACCUMULATED Carrying Accumulated
AMOUNT AMORTIZATION Amount Amortization
------------- ---------------- ------------ --------------
Amortized intangible assets:
License agreements $ 283 $ 199 $ 12,783 $1,515
Non-competition agreements 1,050 30 10,550 1,157
Patents and other 1,058 370 938 359
------------- ---------------- ------------ --------------
Total $2,391 $ 599 $ 24,271 $ 3,031
============= ================ ============ ==============
Unamortized intangible assets:
License Agreements $4,619
Trademarks 4,949 75
------------- ------------
Total $ 9,568 $ 75
============= ============
The decrease in amortized license agreements and non-competition agreements and
the increase in unamortized license agreements and trademarks relate to the
adjustment of the carrying amount of certain intangible assets related to prior
acquisitions.
The Company amortizes the license agreements over their contractual lives of 2
and 3 years, the non-competition agreements over their contractual lives of 2
and 3 years, and patents and other over 5 to 15 years. Amortization expense for
intangible assets (other than goodwill) was $541 for the seven months ended July
31, 2004 and was $1,079 and $851 for the years 2003 and 2002, respectively.
Estimated amortization expense for intangible assets for the last five months of
2004 is $284 and the next five full years is $652 for 2005, $371 for 2006, $83
for 2007, $83 for 2008, and $83 for 2009.
During the periods presented, the Company acquired the following other
intangible assets:
AS OF JULY 31, 2004 As of December 31, 2003
--------------------------------- -------------------------------
GROSS Gross
CARRYING WEIGHTED Carrying Weighted
AMOUNT AVERAGE LIFE Amount Average Life
------------- ---------------- ------------ --------------
Amortized intangible assets:
Profit in Backlog $ - - $137 0.3
(10) PRODUCT WARRANTIES
The Company offers a limited warranty that its products are free of defects in
workmanship and materials. The specific terms and conditions vary somewhat by
product line, but generally cover defects returned within one, two, three, or
five years from date of shipment. The Company records warranty liabilities to
cover the estimated future costs for repair or replacement of defective returned
products as well as products that need to be repaired or replaced in the field
after installation. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company's warranty liabilities, which are included in accrued
expenses in the accompanying consolidated balance sheets, during the seven
months ended July 31, 2004 and year ended December 31, 2003 were as follows:
JULY 31, December 31,
2004 2003
------------ -----------
Balance, beginning of year $4,034 $1,883
Additions applicable to businesses acquired - 1,571
Additions charged to expense 4,055 8,303
Deductions for repairs and replacements 5,337 7,723
------------ -----------
Balance, end of period $2,752 $ 4,034
============ ===========
(11) ACCRUED EXPENSES
Accrued expenses at July 31, 2004 and December 31, 2003 consisted of the
following:
JULY 31, December 31,
2004 2003
------------- ---------------
Employee related costs and benefits $30,776 $32,952
Advertising and sales promotion 9,213 8,869
Income and other taxes payable 3,545 3,773
Other accrued expenses 30,030 25,362
------------- ---------------
Total accrued expenses $73,564 $70,956
============= ===============
(12) LONG-TERM DEBT
Long-term debt at July 31, 2004 and December 31, 2003 consisted of the
following:
JULY 31, December 31,
2004 2003
------------- ---------------
Industrial revenue bonds $ 11,000 $ 11,000
Capital leases and other 322 474
------------- ---------------
Total debt 11,322 11,474
Less: current maturities 250 284
------------- ---------------
Total long-term debt $ 11,072 $ 11,190
============= ===============
On July 29, 2003, the Company entered into a $130,000 U.S. revolving credit
facility and a $20,000 Canadian revolving credit facility with a syndicate of
nine banks. These credit facilities, which mature on July 29, 2006, replaced a
$150,000 revolving credit facility that matured on August 30, 2003. There were
no borrowings under either credit facility as of July 31, 2004, however, the
Company had outstanding $19,200 of letters of credit, which reduce the amount
available to borrow under the facilities. Both facilities are unsecured.
The U.S. revolving credit facility bears interest at the election of the Company
based upon either (1) the higher of the National City Bank prime rate or the
federal funds rate plus 0.50%, or (2) the Eurodollar Rate (LIBOR) plus the
"Eurodollar Margin" (a margin as determined by the Company's "Leverage Ratio"
(total debt to EBITDA)). The Canadian revolving credit facility bears interest
at the cost of funds determined by Bank One plus the Eurodollar Margin. Based
upon the Company's Leverage Ratio as of July 31, 2004, the Eurodollar Margin
would be 0.40% and the commitment fee on the unused portion of the facility
would be 0.10%. Both facilities contain affirmative and negative covenants that
are usual and customary for facilities of this nature, including limitations on
the aggregate amount of additional indebtedness outstanding, a maximum Leverage
Ratio, and a minimum interest coverage ratio. As of July 31, 2004, the Company
was in compliance with all of the covenants. Under the most restrictive
covenant, which is the maximum total debt ratio, the Company could incur
approximately $437,000 in additional debt and still comply with the covenant.
The Company has $11,000 of variable rate demand Industrial Revenue Bonds that
mature between 2009 and 2016. As of July 31, 2004, the weighted average interest
rate on these bonds was 1.06%. These bonds are backed by the letters of credit
mentioned above.
Interest expense totaled $1,093 for the seven months ended July 31, 2004 and
totaled $1,485 and $1,869 for the years 2003 and 2002, respectively. These
amounts were offset in the consolidated statements of income by interest income
totaling $1,037 for the seven months ended July 31, 2004 and totaling $1,247 and
$1,263 for the years 2003 and 2002, respectively. Cash paid for interest on debt
was $88 for the seven months ended July 31, 2004 and was $433 and $1,406 for the
years 2003 and 2002, respectively.
The annual maturities of long-term debt are summarized as follows:
Five months ending 2004 $ 3
Year ending 2005 254
Year ending 2006 49
Year ending 2007 6
Year ending 2008 6
Thereafter 11,004
----------------
Total debt $ 11,322
================
On August 2, 2004, Genlyte and its subsidiaries amended and restated the former
three-year credit facilities entered into on July 29, 2003, providing additional
capacity that facilitated Genlyte's acquisition of Thomas' 32% investment in
GTG. The amended credit facilities are discussed more fully in note (22)
"Subsequent Events" .
(13) RETIREMENT PLANS
The Company has defined benefit plans that cover certain of its full-time
employees. The plans provide defined benefits based on "years of service" for
hourly employees and "years of service and final average salary" for salaried
employees. The Company's policy for funded plans is to make contributions equal
to or greater than the requirements prescribed by the Employee Retirement Income
Security Act. Pension costs for all Company defined benefit plans are
actuarially computed. The Company also has defined contribution plans, including
those covering certain former Genlyte and Thomas employees.
The amounts included in the accompanying consolidated balance sheets for the
U.S. and Canadian defined benefit plans, based on the funded status at July 31,
2004 and September 30, 2003 follow:
U.S. PLANS CANADIAN PLANS
---------- --------------
JULY 31 December 31 JULY 31 December 31
2004 2003 2004 2003
---------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations, beginning $ 108,227 $96,376 $8,626 $ 6,405
Service cost 1,814 2,218 351 293
Interest cost 5,208 6,180 433 480
Benefits paid (5,202) (5,433) (146) (707)
Plan amendments 22 - - -
Member contributions - - - 81
Actuarial (gain) loss (1,029) 8,886 (348) 625
Foreign currency exchange rate change - - (213) 1,449
---------------------------------------------------------
Benefit obligations, ending $ 109,040 $ 108,227 $8.703 $ 8,626
=========================================================
The accumulated benefit obligations for U.S. defined benefit plans as of July
31, 2004 and September 30, 2003 were $106,756 and $99,365, respectively. The
accumulated benefit obligations for Canadian defined benefit plans as of July
31, 2004 and September 30, 2003 were $8,462 and $6,539, respectively.
U.S. PLANS CANADIAN PLANS
---------- --------------
JULY 31 December 31 JULY 31 December 31
2004 2003 2004 2003
--------------------------------------------------------------
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning $ 79,282 $ 69,055 $7,701 $ 5,495
Actual gain on plan assets 10,372 12,002 293 825
Employer contributions 1,823 3,658 378 739
Member contributions - - - 81
Benefits paid (5,202) (5,433) (146) (707)
Foreign currency exchange rate - - (191) 1,268
change
--------------------------------------------------------------
Plan assets at fair value, ending $ 86,275 $ 79,282 $8,035 $ 7,701
==============================================================
The asset allocation for the Company's U.S. and Canadian defined benefit plans
as of July 31, 2004 and September 30, 2003, and the target allocation for 2005,
by asset category, follow:
U.S. PLANS
-----------------------------------------------
TARGET
ALLOCATION PERCENTAGE OF PLAN ASSETS
-----------------------------------------------
JULY 31 December 31
2005 2004 2003
-----------------------------------------------
ASSET CATEGORY
Equity securities 60% 61% 59.6%
Debt securities 40% 39% 40.2%
Cash 0% 0% 0.2%
-----------------------------------------------
Total 100% 100% 100.0%
===============================================
CANADIAN PLANS
-----------------------------------------------
TARGET
ALLOCATION PERCENTAGE OF PLAN ASSETS
-----------------------------------------------
JULY 31 December 31
2005 2004 2003
-----------------------------------------------
ASSET CATEGORY
Equity securities - Canadian 33% 32.1% 34.4%
Equity securities - foreign 25% 25.3% 23.1%
Debt securities 37% 36.9% 37.8%
Cash 5% 5.7% 4.7%
-----------------------------------------------
Total 100% 100.0% 100.0%
===============================================
Equity securities included no shares of Genlyte common stock at July 31, 2004 or
December 31, 2003. Equity securities included Thomas common stock, equating to
approximately 2% of total plan assets at July 31, 2004 and December 31, 2003.
The Company's investment philosophy is to earn a reasonable return without
subjecting plan assets to undue risk. Three institutional investment management
firms were engaged in the U.S. and one in Canada to manage plan assets, which
are invested in high quality equity and debt securities. The Company's
investment objective for U.S. plan assets is to exceed the return generated by
an unmanaged index composed of the S&P 500 Stock Index and the Lehman Brothers
Government/Corporate Bond Index in proportion to the target portfolio, while
achieving a rate of return greater than the actuarially assumed rate. The
Company's investment objective for Canadian plan assets is to provide superior
real rates of return through income and capital appreciation by investing in
equity securities of generally larger companies with above-average earnings
growth and a diversified portfolio of Canadian debt securities. The targeted
asset allocations provide reasonable assurance that the actuarially assumed
rates of return can be achieved over a long period of time.
The Company expects to contribute approximately $4,500 to its U.S. defined
benefit plans and $818 to its Canadian defined benefit plans during 2005.
Contributions are expected to at least meet the current law minimum funding
requirements.
The Company expects future benefit payments as follows:
Five months ended Years Ended
December 31,
2004 2005 2006 2007 2008 2009 2010-2014 Total
- --------------------------------------------------------------------------------------------------------------------------
US Plans expected future $ 376 $ 6,252 $ 6,457 $ 6,741 $ 7,033 $ 7,287 $ 40,245 $74,391
benefit payments
Canadian plans expected
benefit payments $ 334 $ 219 $ 220 $ 217 $ 252 $ 280 $ 2,892 $4,414
The funded status of the plans, reconciled to the amounts reported in the
accompanying consolidated balance sheets as of July 31, 2004 and December 31,
2003 follow:
U.S. PLANS CANADIAN PLANS
---------- --------------
JULY 31 December 31 JULY 31 December 31
2004 2003 2004 2003
---------------------------------------------------------------
FUNDED STATUS OF THE PLANS
Plan assets (less than) benefit obligations $ (22,765) $ (28,945) $(668) $ (925)
Unrecognized transition obligation (asset) - - (17) (19)
Unrecognized actuarial loss 20,277 27,626 2,043 2,302
Unrecognized prior service cost 1,931 2,181 530 278
Contributions subsequent to - 67 - 116
measurement date
Foreign currency exchange rate change - - 5 214
---------------------------------------------------------------
Net pension asset (liability) $ (557) $ 929 $ 1,893 $ 1,966
===============================================================
BALANCE SHEET ASSET (LIABILITY)
Accrued pension (liability) $ (21,254) $ (26,948) $ (485) $ (619)
Prepaid pension cost 2,267 2,199 280 -
Intangible asset 2,000 2,267 483 307
Accumulated other comprehensive income 16,430 23,411 1,615 2,278
---------------------------------------------------------------
Net asset recognized $ (557) $ 929 $ 1,893 $1,966
===============================================================
As of July 31, 2004 and September 30, 2003, the projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets for the U.S.
defined benefit plans and Canadian defined benefit plans with projected benefit
obligations or accumulated benefit obligations in excess of plan assets, were as
follows:
U.S. PLANS CANADIAN PLANS
---------- --------------
JULY 31 December 31 JULY 31 December 31
2004 2003 2004 2003
--------------------------------------------------------------
Projected benefit obligation $ 109,040 $ 101,544 $8,703 $ 8,626
Accumulated benefit obligation 106,756 99,365 8,462 6,539
Plan assets at fair value 86,275 72,350 8,035 7,701
U.S.PLANS
---------
JULY 31, December 31, December 31,
2004 2003 2002
-----------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost $ 1,814 $ 2,218 $ 1,783
Interest cost 5,208 6,180 6,066
Expected return on plan assets (5,310) (5,830) (6,424)
Amortization of transition amounts - - (8)
Amortization of prior service cost 272 370 370
Recognized actuarial loss (gain) 1,258 1,165 272
-----------------------------------------------
Net pension expense of defined benefit plans 3,242 4,103 2,059
Defined contribution plans 4,208 4,807 3,570
Multi-employer plans for certain union employees 169 222 180
-----------------------------------------------
Total benefit costs $ 7,619 $ 9,132 $ 5,809
===============================================
CANADIAN PLANS
--------------
JULY 31, December 31, December 31,
2004 2003 2002
-----------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost $ 351 $293 $185
Interest cost 433 480 403
Expected return on plan assets (474) (490) (448)
Amortization of transition amounts (3) (4) (3)
Amortization of prior service cost 18 21 19
Recognized actuarial loss (gain) 77 82 6
-----------------------------------------------
Net pension expense of defined benefit plans 402 382 162
Defined contribution plans 551 616 419
-----------------------------------------------
Total benefit costs $ 953 $998 $581
===============================================
U.S. PLANS CANADIAN PLANS
---------- --------------
JULY 31, December 31, JULY 31, December 31,
2004 2003 2004 2003
------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 6.10% 5.95% 6.10% 5.95%
Rate of compensation increase 3.00% 3.00% 3.00% 3.00%
Expected return on plan assets 8.50% 8.50% 8.50% 7.37%
To develop the expected long-term rate of return on plan assets assumptions, the
Company considered the historical returns and the future expectations for
returns for each asset class, as well as the target asset allocation of the
pension portfolios.
(14) POSTRETIREMENT BENEFIT PLANS
The Company provides postretirement medical and life insurance benefits for
certain retirees and employees, and accrues the cost of such benefits during the
remaining expected lives of such retirees and the service lives of such
employees.
The amounts included in the accompanying consolidated balance sheets for the
postretirement benefit plans, based on the funded status at July 31, 2004, and
September 30, 2003 follow:
JULY 31, December 31,
2004 2003
-------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations, beginning $ 6,218 $ 6,891
Service cost 36 51
Interest cost 256 380
Plan amendments - (530)
Benefits paid (436) (520)
Actuarial (gain) loss (768) (54)
-------------------------
Benefit obligations, ending $ 5,306 $ 6,218
=========================
JULY 31, December 31,
2004 2003
-------------------------
FUNDED STATUS OF THE PLANS
Plan assets (less than) benefit obligations $(5,306) $(6,218)
Unrecognized prior service cost (458) (491)
Unrecognized actuarial loss 2,162 3,033
-------------------------
Accrued liability $(3,602) $(3,676)
=========================
Employer contributions $ 436 $ 520
Benefits paid $ (436) $ (520)
JULY 31, December 31, December 31,
2004 2003 2002
--------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost $ 36 $ 51 $ 53
Interest cost 256 380 458
Recognized prior service cost (credit) (33) (39) -
Recognized actuarial loss 103 160 158
--------------------------------------------
Net expense of postretirement plans $ 362 $ 552 $ 669
============================================
The assumed discount rate used in measuring the obligations was 6.10% as of July
31, 2004 and 5.95% as of September 30, 2003. The assumed health care cost trend
rate for 2004 was 11%, declining to 5.5% in 2013. A one-percentage-point
increase (decrease) in the assumed health care cost trend rate for each year
would increase (decrease) the obligation at July 31, 2004 by approximately $359
$(323), and the 2004 postretirement benefit expense by approximately $29 $(26).
The Company expects to contribute approximately $568 to its postretirement
benefit plans during 2005.
The Company expects future benefit payments as follows:
Five months ended Years Ended
December 31,
2004 2005 2006 2007 2008 2009 2010-2014 Total
- -----------------------------------------------------------------------------------------------------------------------
Expected benefit payments $ 99 $ 568 $ 515 $ 522 $ 520 $ 510 $ 2,448 $5,182
(15) LEASE COMMITMENTS
The Company rents office space, equipment, and computers under non-cancelable
operating leases, some of which include renewal options and/or escalation
clauses. Rental expenses for operating leases totaled $4,647 for the seven
months ended July 31, 2004 and totaled $7,472 and $7,883 for the years 2003 and
2002, respectively. Offsetting the rental expenses were sublease rentals
totaling $159 for the seven months ended July 31, 2004 and totaling $294 and
$354 for the years 2003 and 2002, respectively. One division of the Company also
rents manufacturing and computer equipment and software under agreements that
are classified as capital leases. Future required minimum lease payments are as
follows:
Operating Capital
Leases Leases
-------------- --------------
Five months ending December 31, 2004 $ 3,093 $50
Year ending 2005 6,444 152
Year ending 2006 4,315 -
Year ending 2007 2,994 -
Year ending 2008 2,501 -
Thereafter 6,775 -
-------------- --------------
Total minimum lease payments $ 26,122 202
==============
Less amount representing interest 12
--------------
Present value of minimum lease payments $190
==============
Total minimum lease payments on operating leases have not been reduced by
minimum sublease rentals of $1,886 due in the future under non-cancelable
subleases.
(16) CONTINGENCIES
In the normal course of business, the Company is a plaintiff in various lawsuits
and is also subject to various legal claims which arise in the normal course of
business, including being a defendant and/or being a potentially responsible
party in, generally, patent, trademark, product liability, environmental and
contract claims and litigation. Based on information currently available, it is
the opinion of management that the ultimate resolution of pending and threatened
claims against the Company will not have a material adverse effect on the
financial condition or results of operations of the Company.
The Company records liabilities and establishes reserves for legal claims
against it when the costs or exposures associated with the claims become
probable and can be reasonably estimated. Because the ultimate outcome of legal
claims and litigation is uncertain, the actual costs of resolving legal claims
and litigation may be substantially higher than the amounts reserved for such
claims. In the event of unexpected future developments, it is possible that the
ultimate resolution of such matters, if unfavorable, could have a material
adverse effect on results of operations of the Company in future periods.
(17) STOCK OPTIONS
The purpose of the Genlyte 2003 Stock Option Plan is to enhance the
profitability and value of GTG and Genlyte. Eligibility under this Plan shall be
determined by the Compensation Committee of the Genlyte Board of Directors in
its sole discretion. The Plan replaced the 1998 stock option plan, options under
which are currently outstanding. The Plan provides that an aggregate of up to
2,000,000 shares of Genlyte common stock may be granted as incentive stock
options or non-qualified stock options, provided that no options may be granted
if the number of shares of Genlyte common stock that may be issued upon the
exercise of outstanding options would exceed the lesser of 2,000,000 shares of
Genlyte common stock or 10% of the issued and outstanding shares of Genlyte
common stock.
The option exercise prices are established by the Compensation Committee of the
Genlyte Board of Directors and cannot be less than the greater of the fair
market value of a share of Genlyte common stock on the date of grant, or the par
value of Genlyte common stock. The term of each option and the vesting schedule
(if any) shall be fixed by the Compensation Committee, but no option shall be
exercisable more than seven years after the date the option is granted.
Transactions under the 2003 and 1998 Stock Option Plans are summarized below:
Weighted
Average
Number of Exercise Price
Shares Per Share
--------------------------------------------------------------------
Outstanding December 31, 2001 665,635 $21.93
Granted 269,500 31.13
Exercised (228,860) 19.24
Canceled (27,050) 20.58
-------------------------------
Outstanding December 31, 2002 679,225 26.60
Granted 254,350 27.49
Exercised (110,620) 21.48
Canceled (26,275) 25.75
-------------------------------
Outstanding December 31, 2003 796,680 27.62
GRANTED 342,900 57.58
EXERCISED (104,025) 24.87
CANCELED (500) 27.20
-------------------------------
OUTSTANDING JULY 31, 2004 1,035,055 $ 37.73
===============================
Exercisable at End of Period
December 31, 2002 173,825 19.65
December 31, 2003 185,780 22.86
JULY 31, 2004 305,255 $ 27.53
Additional information about stock options outstanding as of July 31, 2004 is
summarized below:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Shares Life (Years) Price Shares Price
------------------------------------------------------------------------------------------------------
$17.13 - 20.38 77,005 2.00 $ 19.32 77,005 $ 19.32
24.95 - 31.00 364,900 4.92 27.33 107,750 28.10
31.13 - 37.10 247,750 4.59 31.26 115,500 31.13
40.51 - 60.29 345,400 6.65 57.45 5,000 56.61
-----------------------------------------------------------------------
1,035,055 5.20 $ 37.73 305,255 $ 27.53
=======================================================================
GTG accounts for these Genlyte stock options using the intrinsic value method of
APB 25 and related interpretations. Because all options granted have had an
exercise price equal to the market value of the underlying common stock on the
date of grant, no stock-based compensation has been recognized. Pro forma
information regarding net income, as if stock-based compensation cost had been
determined using the fair value recognition provisions of SFAS No. 123, is
provided in note (2) Summary of Significant Accounting Policies - Accounting for
Stock-Based Compensation Costs Incurred by Investors. The weighted average fair
values used in the calculations of stock-based compensation cost for options
granted in 2004 through July 31, 2004 and for the years ended December 31, 2003
and 2002 were $17.61, $10.85 and $12.33, respectively.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
JULY 31, December 31,
2004 2003 2002
-------------------------------------
Risk-free interest rate 3.1% 4.1% 4.1%
Expected life, in years 5.0 6.0 6.0
Expected volatility 28.1% 32.6% 32.6%
Expected dividends - - -
The Black-Scholes pricing model was developed for use in estimating the fair
value of traded options that have no vesting restriction and are fully
transferable. Option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because Genlyte's
stock options have characteristics different from those of traded options, and
changes in the subjective assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measurement of the fair value of Genlyte's stock
options.
(18) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) at July 31, 2004 and December 31,
2003 and 2002 consisted of the following:
JULY 31 December 31 December 31
2004 2003 2002
----------------------------------------------
Minimum pension liability, after tax $ (17,295) $ (24,920) $(24,610)
Foreign currency translation adjustments 14,439 17,821 (2,355)
----------------------------------------------
Total accumulated other comprehensive income (loss) $ (2,856) $ (7,099) $(26,965)
==============================================
(19) RELATED-PARTY TRANSACTIONS
The Company in the normal course of business has transactions with Genlyte and
Thomas. These transactions consist primarily of reimbursement for shared
corporate headquarters expenses such as rent, office services, professional
services, and shared personnel. In August 2002, Genlyte moved its corporate
headquarters to a new office building, which eliminated the majority of the
shared corporate headquarters expenses with Thomas. As of July 31, 2004, the
only corporate headquarters expense shared with Thomas related to the rent for a
shared warehouse. GTG and Genlyte continue to share corporate headquarters
expenses. Also, the Company pays royalties to the Schreder Group, which is the
minority interest holder in a joint venture with the Company's Lumec division.
In addition, while the distributions to Members discussed in note (3) "Formation
of Genlyte Thomas Group LLC" are paid to Thomas entirely in cash, such
distributions are not paid to Genlyte entirely in cash. Portions are still owed
and have been recorded as related-party payables to Genlyte or Genlyte Canadian
Holdings, LLC, a wholly-owned subsidiary of Genlyte. These payables bear
interest at a rate of 1.91% at July 31, 2004.
Related-party receivables and payables at July 31, 2004 and December 31, 2003
consisted of the following:
Related-party receivables: JULY 31 December 31
2004 2003
---------------------------
Receivable from Thomas $ 6 $ 175
Related-party payables: JULY 31 December 31
2004 2003
---------------------------
Payable to Genlyte $ 121 $ 6,108
Payable to Genlyte Canadian Holdings, LLC 65 10,221
Payable to the Schreder Group 93 205
---------------------------
Total related-party payables $ 279 $16,534
===========================
For the seven months ended July 31, 2004 and the years ended December 31, 2003
and 2002, the Company had the following related-party transactions:
JULY 31 December 31 December 31
2004 2003 2002
----------------------------------------------
Payments from Genlyte for:
Reimbursement of corporate headquarters expenses $ 111 $ 121 $ 110
Payments to Thomas for:
Reimbursement of corporate expenses 3 4 230
Royalties payable to the Schreder Group 93 205 181
(20) SEGMENT REPORTING
For management reporting and control, the Company's businesses are divided into
three operating segments: Commercial, Residential, and Industrial and Other.
Information regarding operating segments has been presented as required by SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information."
At July 31, 2004 the operating segments were comprised as follows:
The Commercial segment includes those products that are marketed and sold to
commercial construction lighting customers including: retail, office,
hospitality, school, institutional, healthcare, etc. These customers are similar
in that they follow similar market drivers and utilize similar lighting products
and distribution processes.
The Residential segment includes those products that are marketed and sold to
residential construction lighting customers including: single family homes,
multi-family homes, and apartment buildings. These customers are similar in that
they follow similar market drivers and utilize similar lighting products and
distribution processes. These customers are differentiated from the Commercial
segment, due to the type of products, the basic nature of the distribution
process, and their end-user markets.
The Industrial and Other segment includes those products that are marketed and
sold to industrial construction lighting customers including: factories,
warehouses, etc. These customers are similar in that they follow similar market
drivers and utilize similar lighting products and distribution processes. These
customers are differentiated from the Commercial and Residential segments, due
to the type of products and the basic nature of the distribution process.
Inter-segment sales are eliminated in consolidation and therefore not presented
in the table below. Corporate assets and expenses are allocated to the segments.
Information about the Company's operating segments as of and for the seven
months ended July 31, 2004 and the years ended December 31, 2003 and 2002
follows:
Industrial
SEVEN MONTHS ENDED JULY 31, 2004 Commercial Residential and Other Total
----------------------------------------------------------------
Net sales $ 503,869 $ 84,902 $ 83,587 $ 672,358
Operating profit 46,065 9,985 7,685 63,735
Assets 579,116 103,834 80,231 763,181
Depreciation and amortization 11,173 2,134 1,995 15,302
Expenditures for plant and equipment 10,678 2,184 1,838 14,700
Year Ended December 31, 2003
Net sales $772,888 $129,488 $ 131,523 $1,033,899
Operating profit 78,223 18,080 12,814 109,117
Assets 554,787 95,155 82,829 732,771
Depreciation and amortization 18,016 2,760 3,431 24,207
Expenditures for plant and equipment 13,103 2,220 2,236 17,559
Year Ended December 31, 2002
Net sales $710,168 $132,378 $ 127,758 $ 970,304
Operating profit 71,586 16,320 11,384 99,290
Assets 495,075 97,138 80,768 672,981
Depreciation and amortization 16,882 2,862 3,425 23,169
Expenditures for plant and equipment 13,396 1,787 3,729 18,912
(21) GEOGRAPHICAL INFORMATION
The Company has operations throughout North America. Foreign net sales are all
from Canadian operations. Foreign long-lived assets are primarily in Canada,
with a minor amount in Mexico. Information about the Company's operations by
geographical area as of for the seven months ended July 31, 2004 and the years
ended December 31, 2003 and 2002 follows:
Seven Months Ended July 31, 2004 U.S. Foreign Total
------------------------------------------------
Net sales $ 569,717 $ 102,641 $ 672,358
Operating profit 49,553 14,182 63,735
Long-lived assets 222,326 63,161 285,487
Year Ended December 31, 2003
Net sales $858,940 $174,959 $1,033,899
Operating profit 86,238 22,879 109,117
Long-lived assets 224,725 63,774 288,499
Year Ended December 31, 2002
Net sales $814,219 $156,085 $ 970,304
Operating profit 78,288 21,002 99,290
Long-lived assets 213,843 54,000 267,843
(22) SUBSEQUENT EVENTS
ACQUISITION OF 32% MINORITY INTEREST IN GTG IN 2004
At the close of business on July 31, 2004, Genlyte, through its wholly-owned
subsidiaries, acquired the 32% minority interest owned by Thomas in GTG for a
cash price of $386,500 plus 32% of GTG's earnings, less distributions to Thomas,
from January 1, 2004 through the closing at July 31, 2004. The transaction was
structured as an asset purchase of various interests owned by Thomas and certain
of its subsidiary entities. The purchase price was approximately $402,081,
including $1,179 of acquisition related costs. The purchase price was determined
through arm's length negotiations between Genlyte and Thomas.
LONG-TERM DEBT
On August 2, 2004, Genlyte and its subsidiaries amended and restated the former
three-year credit facilities entered into on July 29, 2003, providing additional
capacity that facilitated Genlyte's acquisition of Thomas' 32% investment in
GTG. The amended facilities consist of a $180,000 U.S. revolving credit facility
and a $20,000 Canadian revolving credit facility with a syndicate of eleven
banks and now mature on July 31, 2009. In addition, under the same agreement,
the Company entered into a $100,000 U.S. term loan that is payable in five equal
installments of $20,000, expiring on July 31, 2009. According to this agreement,
65% of the capital stock of certain foreign subsidiaries is pledged. As of
December 31, 2004, total borrowings were $45,000 under the U.S. credit facility,
zero under the Canadian credit facility, and $95,000 under the term loan. In
addition, as of December 31, 2004, the Company had outstanding $19,770 of
letters of credit, which are subject to a fee of 0.875% and reduce the amount
available to borrow under the U.S. facility. The letters of credit serve to
guarantee the industrial revenue bonds as well as insurance reserves.
On August 2, 2004, the Company and its newly formed, wholly-owned subsidiary,
Genlyte Receivables Corporation, entered into a U.S. asset backed securitization
("ABS") agreement for $100,000 "on balance sheet" financing, which matures on
July 31, 2005 and is renewable for two additional years. GTG trade accounts
receivable are sold to Genlyte Receivables Corporation, a bankruptcy-remote
entity.
On August 2, 2004, the Company entered into interest rate swap contracts
designated as cash flow hedges to provide fixed rate interest of approximately
3.0% on $100,000 for two years and 3.4% on $80,000 for three years.
FASB STAFF POSITION NO. FAS 106-2
On January 21, 2005, the Centers for Medicare and Medicaid Services released the
final regulations implementing the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 ("the Act"). To encourage employers to retain or
provide postretirement prescription-drug benefits for their Medicare-eligible
retirees, the Act federally subsidizes employers that sponsor postretirement
benefit plans under which retirees receive prescription-drug benefits that are
"actuarially equivalent" to the prescription-drug benefits provided under
Medicare.
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