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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 29, 2001
Commission File Number 1-313
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
THE LAMSON & SESSIONS CO.
(Exact name of Registrant as specified in its charter)
Ohio 34-0349210
---- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25701 Science Park Drive
Cleveland, Ohio 44122-7313
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 216/464-3400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Shares, without par value New York Stock Exchange
Pacific 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. [ ]
The aggregate market value of the voting stock held as of February 8,
2002 by non-affiliates of the Registrant: $52,801,571.
As of February 8, 2002 the Registrant had outstanding 13,777,608 common
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
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ITEM 1. - BUSINESS
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The Lamson & Sessions Co., an Ohio corporation, (the "Company" or "Lamson &
Sessions"), founded in 1866, is a diversified manufacturer and distributor of a
broad line of thermoplastic electrical, consumer, telecommunications and
engineered sewer products for major domestic markets. The markets for
thermoplastic electrical conduit, related fittings and accessories, wiring
devices and sewer pipe include: the construction, utility and telecommunications
industries, municipalities, other government agencies, and contractors; and
"do-it-yourself" home remodelers.
PRINCIPAL PRODUCTS AND MARKETS
The Company is engaged in the manufacture and distribution of a broad line of
thermoplastic electrical, telecommunications and engineered sewer products. In
addition, the Company distributes a wide variety of consumer electrical wiring
devices, home security devices, wireless electrical and other wireless products.
All of the Company's thermoplastic electrical products compete with and serve as
substitutes for similar metallic products. The Company's engineered sewer pipe
products compete with and serve as substitutes for clay, concrete, ductile iron,
asbestos cement and polyethylene products. The Company's thermoplastic
electrical products offer several advantages over these other products.
Specifically, nonmetallic electrical and telecommunications conduit and related
fittings and accessories are generally less expensive, lighter and easier to
install than metallic products. They do not rust, corrode or conduct
electricity. Thermoplastics, either polyvinyl chloride (PVC) or high density
polyethylene (HDPE), are the materials of choice to protect fiber optic cable.
Thermoplastic sewer pipe weighs less than alternative products, is easier and
more economical to install, does not degenerate due to chemical attack as do
some competing products, and eliminates avoidable problems which can be caused
by infiltration and exfiltration.
Three markets are served, each of which has unique product and marketing
requirements. These markets are:
CARLON - INDUSTRIAL, RESIDENTIAL, COMMERCIAL, TELECOMMUNICATIONS AND UTILITY
CONSTRUCTION: The major customers served are electrical contractors and
distributors, original equipment manufacturers, electric power utilities, cable
television (CATV), telephone and telecommunications companies. The principal
products sold by this segment include electrical and telecommunications raceway
systems and a broad line of nonmetallic enclosures, electrical outlet boxes and
fittings. Examples of the applications for the products included in this segment
are multi-cell duct systems and HDPE conduit designed to protect underground
fiber optic cables, allowing future cabling expansion and flexible conduit used
inside buildings to protect communications cable. The 2000 acquisitions of
Pyramid Industries, Inc. ("Pyramid") and Ameriduct Worldwide, Inc. ("Ameriduct")
are included as part of the Carlon segment.
LAMSON HOME PRODUCTS - CONSUMER: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" home repair market. The products
included in this segment are electrical outlet boxes, liquidtight conduit,
electrical fittings, chimes and lighting controls.
PVC PIPE: This business segment primarily supplies electrical, power and
communications conduit to the electrical distribution, telecommunications,
consumer and power utility markets. The 1/2-inch to 6-inch electrical and
telecommunications conduit is made from PVC and is used to protect wire or fiber
optic cables supporting the infrastructure of our power or telecommunications
systems.
A breakdown of net sales as a percent of total net sales by major business
segment for 2001, 2000 and 1999, is as follows:
(Dollars in thousands) 2001 2000 1999
--------------------- --------------------- ---------------------
Carlon $188,161 53% $142,979 41% $120,975 42%
Lamson Home Products 62,128 18% 63,351 18% 53,401 18%
PVC Pipe 102,383 29% 142,403 41% 117,005 40%
---------- --------- ----------- -------- ----------- -------
$352,672 100% $348,733 100% $291,381 100%
========== ========= =========== ======== =========== =======
See discussion of segment products in Note L of financial statements.
2
COMPETITION
Each of the three segments in which the Company presently operates is highly
competitive based on service, price and quality. Most of the competitors are
either national or smaller regional manufacturers who compete with limited
product offerings. Unlike a majority of the Company's competitors, the Company
manufactures a broad line of thermoplastic products, complementary fittings and
accessories. The Company believes that its products will continue to compete
favorably. However, certain of the Company's competitors have greater financial
resources than the Company, which could adversely affect the Company through
price competition strategies.
DISTRIBUTION
The Company distributes its products through a nationwide network of more than
100 manufacturers' representatives and a direct field sales force of
approximately 15.
RAW MATERIALS
The Company is a large purchaser of pipe grade PVC and HDPE resins. The Company
has entered into supply contracts for PVC which should stabilize its
availability for the next several years. HDPE is purchased by the Company from
various sources and is readily available.
PATENTS AND TRADEMARKS
The Company owns various patents, patent applications, licenses, trademarks and
trademark applications relating to its products and processes. While the Company
considers that, in the aggregate, its patents, licenses and trademarks are of
importance in the operation of its business, it does not consider that any
individual patent, license or trademark, or any technically related group, is of
such importance that termination would materially affect its business.
SEASONAL FACTORS
Two of the Company's three business segments experience moderate seasonality
caused principally by a decrease in construction activity during the winter
months. They are subject also to the economic cycles affecting the residential,
commercial and industrial construction industries. The Company's consumer
products business unit is affected by consumer spending and consumer confidence.
MAJOR CUSTOMERS
Sales to Affiliated Distributors, a buying group within the Carlon and PVC Pipe
segments not otherwise affiliated with the Company, totaled approximately 14% of
consolidated net sales in 2001, and 17% of consolidated net sales in 2000 and
1999.
BACKLOG
In the Company's three business segments, the order-to-delivery cycle ranges
from several days to a few weeks. Therefore, the measurement of backlog is not a
significant factor in the evaluation of the Company's prospects.
RESEARCH AND DEVELOPMENT
The Company is engaged in product development programs which concentrate on
identifying, creating and introducing innovative applications for thermoplastic
and wireless electrical products. The Company maintains a separate product
development center in Cleveland, Ohio, to facilitate this effort and improve
manufacturing processes. The Company's research and development expenditures
totaled $2.8 million, $3.3 million and $3.8 million in 2001, 2000 and 1999,
respectively.
ENVIRONMENTAL REGULATIONS
The Company believes that its current operations and its use of property, plant
and equipment conform in all material respects to applicable environmental laws
and regulations presently in effect. The Company has facilities at numerous
geographic locations, which are subject to a range of federal, state and local
environmental laws and regulations. Compliance with these laws has, and will,
require expenditures on a continuing basis.
3
During the second quarter of 1999, the Company reached a settlement on
litigation involving environmental matters at a property sold by the Company in
1981 whereby the Company agreed to incur costs of certain remediation activities
which will occur over several years. The settlement did not have a material
impact on the Company's financial position or results of operations.
ASSOCIATES
At December 29, 2001, the Company had 1,115 associates, 902 of whom were
employed at the Company's manufacturing facilities and distribution centers. The
remainder of associates were primarily employed at the Company's corporate
headquarters and product development facilities.
FOREIGN OPERATIONS
The net sales, operating earnings and assets employed outside the United States
are not significant. Export sales were approximately 2% of consolidated net
sales in 2001, 2000 and 1999, and were made principally to countries in North
America.
ITEM 2. - PROPERTIES
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The Company owns (O) or leases (L) manufacturing and distribution facilities,
which are suitable and adequate for the production and marketing of its
products. The Company owns executive and administrative offices, which are
located in Cleveland, Ohio, and occupy 68,000 square feet in a suburban office
complex. The Company also has research and development offices, located in
Cleveland, Ohio, which occupy leased space of 27,000 square feet. The following
is a list of the Company's manufacturing and distribution center locations:
APPROXIMATE
MANUFACTURING FACILITIES SQUARE FEET
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Woodland, California (O) 66,000
High Springs, Florida (O) 110,000
Tennille, Georgia (O) 41,000
Clinton, Iowa (O) 124,000
Mountain Grove and Seymour, Missouri (O) 36,000
Bowling Green, Ohio (O) 67,000
Oklahoma City, Oklahoma (O) 172,000
Nazareth, Pennsylvania (O) 59,000
Erie, Pennsylvania (L) 56,000
Cranesville, Pennsylvania (L) 10,000
Pasadena, Texas (O) 52,000
DISTRIBUTION CENTERS
--------------------
Columbia, South Carolina (L) 350,000
Woodland, California (L) 105,000
Fort Myers, Florida (O) 4,000
The Company operated the above manufacturing facilities at approximately 73% of
their productive capacity in 2001.
ITEM 3. - LEGAL PROCEEDINGS
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On September 23, 1999, the Company announced that a United States District Court
jury in the Northern District of Illinois found that the Company willfully
infringed on a patent held by Intermatic Incorporated of Spring Grove, Illinois,
relating to the design of an in-use weatherproof electrical outlet cover, and
awarded Intermatic $12.5 million in damages plus pre-judgment interest of
approximately $1.5 million. The Company pursued a vigorous appeal and on
December 17, 2001 the United States Court of Appeals ruled that, as a matter of
law, Lamson & Sessions' products did not infringe Intermatic's
4
patent and that the Company has no liability to Intermatic. The trial jury's
earlier verdict in favor of Intermatic in the amount of $12,500,000, plus
pre-judgment and post-judgment interest estimated to be in excess of $3,000,000,
was reversed. Intermatic filed for a rehearing of the ruling to the Court of
Appeals en banc, which was denied. Management has no knowledge of Intermatic's
intention with respect to any further appeals.
During the first quarter of 2001, the Company settled its litigation against PW
Eagle and received a payment of $2.05 million, representing a partial recovery
of costs incurred in current and previous quarters, arising out of the failed
sale of the PVC Pipe segment in 1999.
The Company is also a party to various other claims and matters of litigation
incidental to the normal course of its business. Management believes that the
final resolution of these matters will not have a material adverse affect on the
Company's financial position, cash flows or results of operations.
ITEM 4. - SUBMISSION OF MATTERS TO SECURITY HOLDERS
- ---------------------------------------------------
None.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
JOHN B. SCHULZE
Chairman, President and Chief Executive Officer
Chairman, President and Chief Executive Officer since January 1990. Age 64.
JAMES J. ABEL
Executive Vice President, Secretary, Treasurer and Chief Financial Officer
Executive Vice President, Secretary, Treasurer and Chief Financial Officer since
September 1994. Age 56.
CHARLES E. ALLEN
Senior Vice President
Senior Vice President since September 1989.
Age 61.
NORMAN E. AMOS
Vice President
Vice President, Supply Chain Management since February 21, 2001. Previously was
Vice President, Supply Chain Management, August 1, 2000 - February 21, 2001.
Previously was Manager, Transportation and Logistics with Xerox Corporation,
1973-2000. Age 56
ALBERT J. CATANI, II
Vice President
Vice President, Manufacturing since August 1995. Age 54.
EILEEN E. CLANCY
Vice President
Vice President, Human Resources since January 2, 2002. Previously was Director
of Human Resource Development, December 1995 - December 2001. Previously was
Director of Skills Development, July 1995 - December 1995. Age 51
DONALD A. GUTIERREZ
Senior Vice President
Senior Vice President since February 21, 2001. Previously was Vice President
since March 1998. Previously was Vice President, Carlon Electrical Products
since July 1997. Previously was National Sales Manager since January 1997.
Previously was Manager, Distributor Sales August 1996 - January 1997. Previously
was in Marketing and Sales with General Electric 1979 - August 1996. Age 44.
CHARLES W. HENNON
Vice President
Vice President and Chief Information Officer since April 1998. Previously was
Manager, Business Support Services with Ferro Corporation 1993 - April 1998. Age
56.
LORI L. SPENCER
Vice President
Vice President and Controller since August 1997. Previously was Vice President,
Strategic Planning since February 1997. Previously was Director, Financial
Planning & Internal Audit, September 1994 - February 1997. Age 43.
NORMAN P. SUTTERER
Vice President
Vice President since March 1998. Previously was Vice President Lamson Home
Products and Carlon Telecom Systems since January 1994. Age 52.
6
PART II
ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- ------------------------------------------------------------------------------
MATTERS
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The Company's Common Stock is traded on the New York Stock Exchange and the
Pacific Stock Exchange. High and low sales prices for the common stock are
included in Note N to the Consolidated Financial Statements. No dividends were
paid in 2001, 2000 or 1999. The approximate number of shareholders of record of
the Company's Common Stock at December 29, 2001 was 1,336.
7
ITEM 6. - SELECTED FINANCIAL DATA
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY
FISCAL YEARS ENDED
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(Dollars in thousands except per share data,
shareholders, associates and percentages) 2001 2000 1999 1998 1997
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OPERATIONS:
NET SALES $ 352,672 $ 348,733 $ 291,381 $ 270,914 $ 271,780
Cost of products sold 291,272 260,114 229,981 214,410 221,898
GROSS PROFIT 61,400 88,619 61,400 56,504 49,882
Operating expenses 52,962 54,132 48,054 47,584 52,377
Net gains (4,550) - - - -
Restructuring and impairment charge 6,805 - - - -
OPERATING INCOME (LOSS) 6,183 34,487 13,346 8,920 (2,495)
Interest 11,626 4,539 3,558 4,341 3,768
(LOSS) INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (5,443) 29,948 9,788 4,579 (6,263)
Income tax (benefit) provision (1,600) 8,500 (9,000) (2,100) (1,550)
(LOSS) INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (3,843) 21,448 18,788 6,679 (4,713)
Cumulative effect of accounting change (4,940)
NET (LOSS) INCOME (3,843) 21,448 18,788 6,679 (9,653)
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current Assets $ 94,085 $ 134,906 $ 94,704 $ 83,975 $ 91,567
Other Assets 121,865 120,090 40,522 25,957 21,079
Property, Plant and Equipment 57,871 65,297 48,093 50,735 56,329
Total Assets 273,821 320,293 183,319 160,667 168,975
Current Liabilities 62,890 76,656 56,223 47,278 57,580
Long-Term Debt 104,266 130,276 36,919 40,807 44,712
Other Long-Term Liabilities 25,441 27,332 26,808 28,451 29,702
Shareholders' Equity 81,224 86,029 63,369 44,131 36,981
Working Capital 31,195 58,250 38,481 36,697 33,987
- -----------------------------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION:
Average number of dilutive common shares outstanding 13,757 13,989 13,482 13,488 13,349
Number of shareholders of record 1,336 1,377 1,558 1,687 1,832
Number of associates 1,115 1,345 963 983 1,044
Book value per share $ 5.90 $ 6.15 $ 4.70 $ 3.27 $ 2.77
Market price per share $ 5.24 $ 10.50 $ 4.88 $ 5.13 $ 5.81
Market capitalization $ 72,195 $ 143,819 $ 65,584 $ 68,903 $ 77,970
Gross margin as a % of net sales 17.4% 25.4% 21.1% 20.9% 18.4%
Operating expenses as a % of net sales 15.0% 15.5% 16.5% 17.6% 19.3%
Operating margin as a % of net sales 1.8% 9.9% 4.6% 3.3% (0.9%)
Operating cash flow as a % of total debt 25.8% 19.9% 29.9% 19.5% 6.2%
Capital Expenditures $ 7,980 $ 11,085 $ 7,563 $ 4,546 $ 11,584
EBITDA (earnings before interest, taxes,
depreciation and amoritzation) $ 24,202 $ 45,716 $ 23,482 $ 18,877 $ 6,224
EBITDA Margin 6.9% 13.1% 8.1% 7.0% 2.3%
Long-term debt as a % of equity 128.4% 151.4% 58.3% 92.5% 120.9%
Return on average equity from operations (4.6%) 28.7% 35.0% 16.5% (11.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC (LOSS) EARNINGS PER COMMON SHARE:
(Loss) Earnings before change in accounting principle $ (0.28) $ 1.58 $ 1.40 $ 0.50 $ (0.35)
Cumulative effect of accounting change $ (0.37)
NET (LOSS) EARNINGS $ (0.28) $ 1.58 $ 1.40 $ 0.50 $ (0.72)
DILUTED (LOSS) EARNINGS PER COMMON SHARE:
(Loss) Earnings before change in accounting principle $ (0.28) $ 1.53 $ 1.39 $ 0.50 $ (0.35)
Cumulative effect of accounting change $ (0.37)
NET (LOSS) EARNINGS $ (0.28) $ 1.53 $ 1.39 $ 0.50 $ (0.72)
8
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
DISCUSSION OF THE CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------
THE CONSOLIDATED STATEMENTS OF OPERATIONS present Lamson & Sessions' operating
performance over the last three years.
RESULTS OF OPERATIONS
Net sales increased by 1.1% or $3.9 million in 2001 compared with 2000. Overall,
Carlon experienced a growth rate of 31.6% or $45.2 million for the year 2001
over 2000. Incremental HDPE conduit sales totaled approximately $53 million
primarily from the Pyramid and Ameriduct acquisitions, which were completed in
the latter part of 2000. The remainder of Carlon's product sales declined from
2000 levels by approximately 6.3%. This decrease was caused by a general
economic slowdown, which persisted throughout the year, and continued
contraction in telecommunications infrastructure capital spending. Lamson Home
Products had a net sales decline of $1.2 million or 1.9% in 2001 compared with
2000, as home improvement retailers reduced their inventories during the year in
response to softness in sales and inconsistent consumer confidence levels.
Lastly, the PVC Pipe business segment net sales dropped 28.1% or $40 million in
2001 compared with 2000. Pipe volume shipped was up 6.1% while average pricing
declined by approximately 31% from 2000. Mix has also shifted this year in the
PVC Pipe business as telecommunications-related conduit is down 20% in units
shipped, which has been offset by increased electrical conduit shipments,
primarily in the first three quarters of the year.
Net sales increased in 2000 to $348.7 million from $291.4 million in 1999,
representing a 19.7% growth rate. Excluding the two acquisitions made by the
Company during the year, net sales would have increased by 14.6%, or $42.7
million. All three business segments experienced healthy growth during this
year. Carlon grew by $22 million, or 18.2%, primarily from the Pyramid and
Ameriduct acquisitions, which added $14.7 million in combined net sales. This
business unit generated a 6% growth from its core electrical and
telecommunications products, reflecting price increases early in the year and
modest market growth. Lamson Home Products increased its net sales level by $10
million, or 18.6%, over 1999 to $63.4 million. This improvement in the top line
is almost entirely from additional business at this business segment's second
largest customer, as price increases were negligible. The PVC Pipe business had
an outstanding year as sales increased by 21.7%, or $25.4 million, to $142.4
million. These results reflect a 50% increase in selling price per unit as resin
costs were up by an average of 30% during 2000 versus 1999. The Company gave up
market share to maintain material spreads as the construction market was very
strong throughout the first half of this year. Telecommunications duct volume
was up by 12% this year, the mix improving from predominantly electrical conduit
to a more balanced product distribution.
Gross margin in 2001 was 17.4%, down from the 25.4% margin realized in 2000.
This drop was primarily caused by the margin squeeze experienced in the PVC Pipe
business, as a continued oversupply of PVC resin in the domestic market has
caused PVC Pipe selling prices to be down over 30% from a year ago, while PVC
resin costs have declined on average 18% for the year. In addition, the
significant mix shift in PVC pipe from telecommunications duct to electrical
conduit has had a negative impact on its gross margin. Finally, the Company
utilized its manufacturing facilities at a much reduced rate, 73% in 2001 vs.
91% in 2000, generating approximately $7 million more in unfavorable
manufacturing variances during the current year.
Gross margin grew by over 20% to 25.4% in 2000, compared with 21.1% in 1999.
This improvement was a result of better margins in both the Carlon and the PVC
Pipe businesses from price increases and product mix improvements. Overall
distribution and freight costs were around $5 million less on a comparable basis
to 1999, primarily due to the consolidation of distribution operations completed
last year and effective management of freight surcharges incurred in 2000.
Operating expenses in 2001 totaled $53.0 million or 15% of net sales compared
with $54.1 million or 15.5% of net sales in 2000. During the year the Company
consolidated the selling, general and administrative processes of the two
acquisitions to reduce any redundant costs. In addition, discretionary spending
was reduced, as it became evident economic conditions were declining. During
2001, the Company also recorded net gains of $4.6 million relating to the
resolution of the PW Eagle litigation, changes in estimates for certain other
litigation and environmental liabilities and a gain on the sale of a
non-strategic business. The Company also incurred a restructuring and impairment
charge of $7.7 million to reduce excess capacity, eliminate under-performing
product lines and reduce salaried staff of which $.9 million was included in
cost of products sold. In summary, the Company earned $6.2 million in operating
income, or 1.8% of net sales, in 2001 ($9.4 million, or 2.7%, excluding the
restructuring and impairment charge and net gains) vs. $34.5 million, or 9.9%,
of net sales in 2000.
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Operating expenses were $54.1 million in 2000 ($6.1 million higher than 1999),
or 15.5%, of net sales compared with 16.5% of net sales in 1999. Continued
productivity improvements in general administrative activities offset increases
in sales commission and legal, professional and acquisition related expenses.
The result was more than a two-and-a-half times increase in operating income to
$34.5 million (9.9% of net sales) in 2000 versus $13.3 million (4.6% of net
sales) in 1999.
Interest expense increased by $7 million in 2001 due to the acquisition debt of
approximately $113 million added late in 2000. The Company had an average
borrowing rate during 2001 of 6.81% compared with 7.85% in 2000.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) was $24.2 million for 2001, compared with the $45.7 million EBITDA
earned in 2000.
FINANCIAL CONDITION
Despite the lower operating income in 2001, the Company focused on generating
cash flow from working capital reductions. Working capital was $31.2 million at
the end of 2001 compared with $58.3 million at the end of 2000. The current
ratio decreased to 1.50 in 2001 from 1.76 in 2000 as accounts receivable and
inventory declined by a combined $34.9 million from lower economic activity and
improved inventory control, while payables and accruals declined by $17.7
million. Cash flow generated from operating activities was a strong $30.1
million in 2001 versus $27.5 million in 2000.
Accounts receivable were $39.2 million at the end of 2001, compared with $56.6
million at the end of 2000. Days sales outstanding in 2001 were about 49.5 and
approximately the same as the 50.8 days for 2000.
Inventory levels at the end of 2001 were $42.1 million compared with $59.6
million at the end of 2000. As a result, annual inventory turns increased from
3.9 times in 2000 to 4.9 times in 2001. All inventory categories have been
reduced, however, the largest reduction came in PVC resin and related products
for which pounds in inventory were lower and average unit cost at year-end was
more than 30% lower than the 2000 year-end levels.
Accounts payable decreased by $6.6 million in 2001 from the prior year-end,
primarily from the purchasing of raw material inventory and lower unit costs for
these items.
The current balance in deferred tax assets decreased due to lower than expected
2002 operating results limiting the short term utilization of net operating
losses. Accrued liabilities at 2001 year-end were approximately $11 million less
than the prior year, as the final purchase price adjustment for Ameriduct was
paid in 2001; incentive compensation is lower in the current year; and legal and
environmental liabilities have been adjusted to reflect current evaluations of
these items. The current portion of long-term debt has increased to reflect the
amortization schedule of term debt provided in our credit agreement. The strong
operating cash flow experienced in the fourth quarter of the year allowed the
Company to pay down debt by over $22 million during 2001, a 15.9% reduction.
Capital expenditures totaled approximately $8.0 million in 2001, compared with
$11.1 million in 2000. The current year spending was primarily for distribution
center productivity, new product tooling and quality enhancements.
The Company has adequate credit capacity available to support its current
operational expense and capital spending needs as well as those anticipated for
the remainder of 2002. However, the Company has been experiencing lower earnings
levels in its PVC Pipe business, reflecting an oversupply of raw materials
available to support existing market demand as well as extremely low demand
levels in the telecommunications infrastructure market, which is expected to
continue through 2002. Unless the EBITDA level improves sufficiently, the
Company will seek a further amendment to its secured credit agreement in order
to prevent a covenant violation and, concurrently, evaluate changes to its
capital structure in order to ensure an appropriate degree of financial
flexibility. The Company has commenced negotiations of such an amendment so that
it can be entered into before a covenant violation occurs.
OUTLOOK
The following paragraphs contain forward-looking comments. The comments are
subject to, and the actual future results may be impacted by, the cautionary
limitations and factors outlined in the following narrative comments.
10
The Company's sales have been supported by a very steady residential
construction base throughout 2000 and 2001. Housing starts are expected to
decline modestly during the first half of 2002 from the 1.5 million unit level
to closer to a 1.4 million unit level before trending back up in the second half
of 2002. These levels are still fairly strong compared with previous economic
downturns. Interest rate cuts should help maintain the level of existing home
sales, which contributes to home improvement product sales of Lamson Home
Products. Construction spending in the industrial and commercial markets are
expected to be weaker than the general market, which may cause a lag in the
recovery of our PVC Pipe business segment.
The telecommunications infrastructure market spending remains weak as telephone
and cable TV companies capital spending plans continue to be reduced. This
situation is not expected to improve appreciably until no earlier than the
fourth quarter of 2002, or the first half of 2003. Spending in this market is
required long term, we believe, to build out the metropolitan rings, expand
corporate and institutional high-speed data and communications networks and to
provide broadband services to the home. As part of the restructuring charge
taken in 2001, the Company has reduced the capacity of its HDPE assets servicing
this market by eliminating excess equipment and consolidating operations. The
Company is also exploring other market opportunities such as gas collection,
water drainage and sewer markets to better utilize its manufacturing capacity
while the telecommunications market remains soft.
We believe that the cost of PVC resin may be near a cyclical floor during the
fourth quarter of 2001, as PVC resin manufacturing companies are expressing that
they are selling resin for almost their cash cost, and several have announced
price increases in the first quarter of 2002. This, along with reduced
inventories channel-wide and increased feed stock costs, should cause a
stabilization of pricing in the market. Additional PVC resin manufacturing
capacity scheduled to be brought up the first part of 2002 along with the lower
projected U.S. construction activity the first half of next year, however, will
keep the pricing environment competitive. Improvement in the PVC Pipe segment
will require further substantial improvement in the PVC export market,
particularly in the Pacific rim to absorb the current supply imbalance in the
domestic market and stabilize these costs. Should the supply/demand imbalance be
resolved by a strengthened export market, price levels in the PVC Pipe business
segment could improve quickly and more than offset a modest softening of demand
in the industrial/commercial market in 2002.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains expectations that are forward-looking statements that
involve risks and uncertainties within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
expected as a result of a variety of factors, such as: (i) the volatility of
resin pricing, (ii) the ability of the Company to pass through raw material cost
increases to its customers, (iii) maintaining a stable level of housing starts,
telecommunications infrastructure spending, consumer confidence and general
construction trends, (iv) further deterioration in the country's general
economic condition affecting the markets for the Company's products and (v) the
ability of the Company to obtain an amendment to its secured credit agreement.
ITEM 7(a). - MARKET RISK DISCLOSURES
- ------------------------------------
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and commodity prices for PVC and HDPE
resins. The Company does not use derivative financial instruments for
speculative or trading purposes.
Almost all of the Company's long-term debt obligations bear interest at a
variable rate. In order to mitigate the risk associated with interest rate
fluctuations, in the first quarter of 2001, the Company entered into two
interest rate swap agreements for a total notional amount of $58.5 million and
effectively fixed the variable rate debt at 5.41% and 5.48% plus the Company's
risk premium of 1.5% to 3.5%. The notional amount is used to calculate the
contractual cash flow to be exchanged and does not represent exposure to credit
loss.
These risks and others that are detailed in this Form 10-K must be considered by
any investor or potential investor in the Company.
11
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
FISCAL YEARS
----------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999
----------------------------------------
NET SALES $ 352,672 $ 348,733 $ 291,381
Cost of products sold 291,272 260,114 229,981
--------- --------- ---------
GROSS PROFIT 61,400 88,619 61,400
Operating expenses 52,962 54,132 48,054
Net gains (4,550) - -
Restructuring and impairment charge 6,805 - -
--------- --------- ---------
OPERATING INCOME 6,183 34,487 13,346
Interest expense 11,626 4,539 3,558
--------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAXES (5,443) 29,948 9,788
Income tax (benefit) provision (1,600) 8,500 (9,000)
--------- --------- ---------
NET (LOSS) INCOME $ (3,843) $ 21,448 $ 18,788
========= ========= =========
BASIC (LOSS) EARNINGS PER COMMON SHARE $ (0.28) $ 1.58 $ 1.40
========= ========= =========
DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (0.28) $ 1.53 $ 1.39
========= ========= =========
See notes to consolidated financial statements.
12
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
-------------------------------------------
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
OPERATING ACTIVITIES
Net (loss) income $ (3,843) $ 21,448 $ 18,788
Adjustments to reconcile net (loss) income to cash provided
by operating activities:
Depreciation 11,848 9,801 9,688
Amortization 6,171 1,428 448
Net gains (2,950) -- --
Restructuring and impairment charge 7,672 -- 516
Deferred income taxes (1,934) 6,903 (9,000)
Net change in working capital accounts (excluding effect
of acquired businesses):
Accounts receivable 14,581 1,574 (5,596)
Inventories 15,914 (9,531) (3,399)
Prepaid expenses and other (909) 1,217 (2,041)
Accounts payable (6,534) (9,314) 8,160
Accrued expenses and other current liabilities (3,768) 11,238 2,469
Other long-term items (6,172) (7,243) (7,835)
--------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 30,076 27,521 12,198
INVESTING ACTIVITIES
Net additions to property, plant and equipment (7,980) (11,085) (7,563)
Proceeds from sale of business 1,411 -- --
Acquisitions, net of cash acquired (2,987) (112,839) --
--------- --------- ---------
CASH USED IN INVESTING ACTIVITIES (9,556) (123,924) (7,563)
FINANCING ACTIVITIES
Net (payments) borrowings under secured credit agreement (20,900) 161,387 --
Retirement of previous credit agreement -- (42,296) --
Payments on long-term borrowings and capital lease obligations (1,185) (25,330) (3,848)
Exercise of stock options 278 1,370 --
--------- --------- ---------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES (21,807) 95,131 (3,848)
--------- --------- ---------
(DECREASE) INCREASE IN CASH (1,287) (1,272) 787
Cash at beginning of year 1,452 2,724 1,937
--------- --------- ---------
CASH AT END OF YEAR $ 165 $ 1,452 $ 2,724
========= ========= =========
See notes to consolidated financial statements.
13
CONSOLIDATED BALANCE SHEETS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
December 29, 2001 and December 30, 2000
(Dollars in thousands) 2001 2000
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 165 $ 1,452
Accounts receivable, net 39,204 56,659
Inventories, net
Finished goods and work-in-process 36,623 51,195
Raw materials 5,460 8,378
-------- --------
42,083 59,573
Deferred tax assets 7,650 13,211
Prepaid expenses and other 4,983 4,011
-------- --------
TOTAL CURRENT ASSETS 94,085 134,906
PROPERTY, PLANT AND EQUIPMENT
Land 3,537 3,998
Buildings 24,775 24,702
Machinery and equipment 116,484 116,154
-------- --------
144,796 144,854
Less allowances for depreciation and amortization 86,925 79,557
-------- --------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 57,871 65,297
GOODWILL 81,666 88,868
PENSION ASSETS 24,071 21,555
DEFERRED TAX ASSETS 7,673 --
OTHER ASSETS 8,455 9,667
-------- --------
TOTAL ASSETS $273,821 $320,293
======== ========
See notes to consolidated financial statements.
14
CONSOLIDATED BALANCE SHEETS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
December 29, 2001 and December 30, 2000
(Dollars in thousands, except per share data) 2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 21,975 $ 28,572
Accrued compensation and benefits 7,311 10,034
Other accrued expenses 17,237 25,499
Taxes 4,274 4,383
Current maturities of long-term debt 12,093 8,168
--------- ---------
TOTAL CURRENT LIABILITIES 62,890 76,656
LONG-TERM DEBT 104,266 130,276
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 25,441 27,332
SHAREHOLDERS' EQUITY
Common shares, without par value, stated
value of $.10 per share, authorized 20,000,000
shares; outstanding 13,777,608 shares in 2001
and 13,697,277 shares in 2000 1,378 1,369
Other capital 75,499 74,997
Retained earnings 6,393 10,236
Cumulative other comprehensive income (loss) (2,046) (573)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 81,224 86,029
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 273,821 $ 320,293
========= =========
See notes to consolidated financial statements.
15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
Cumulative Other
Comprehensive Income (Loss)
(Dollars in thousands) Retained --------------------------------------------- Total
Common Other Earnings Interest Foreign Currency Minimum Pension Shareholders'
Shares Capital (Deficit) Rate Swaps Translation Liability Equity
-----------------------------------------------------------------------------------------------
BALANCE AT JANUARY 2, 1999 $ 1,344 $ 73,574 $(30,000) $ (351) $ (436) $ 44,131
Net income 18,788 18,788
Other comprehensive income:
Foreign currency translation 28 28
Minimum pension liability 379 379
--------
Total comprehensive income 19,195
Issuance of 8,717 shares
under employee benefit plans 1 42 43
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2000 $ 1,345 $ 73,616 $(11,212) $ -- $ (323) $ (57) $ 63,369
Net income 21,448 21,448
Other comprehensive income:
Foreign currency translation (207) (207)
Minimum pension liability 14 14
--------
Total comprehensive income 21,255
Issuance of 244,026 shares
under employee benefit plans 24 1,381 1,405
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 2000 $ 1,369 $ 74,997 $ 10,236 $ -- $ (530) $ (43) $ 86,029
Net loss (3,843) (3,843)
Other comprehensive loss:
Foreign currency translation (61) (61
Minimum pension liability (378) (378)
Interest rate swaps (1,034) (1,034)
--------
Total comprehensive loss (5,316)
Issuance of 80,331 shares
under employee benefit plans 9 502 511
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 29, 2001 $ 1,378 $ 75,499 $ 6,393 $ (1,034) $ (591) $ (421) $ 81,224
==================================================================================================================================
16
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
Three fiscal years ended December 29, 2001
NOTE A--ACCOUNTING POLICIES
FISCAL YEAR: The Company's fiscal year end is the Saturday closest to December
31.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The consolidated financial
statements include the accounts of the Company and all domestic and foreign
subsidiaries after elimination of intercompany items. Certain 2000 and 1999
items have been reclassified to conform with the 2001 financial statement
presentation.
RECENT ACCOUNTING STANDARD CHANGES: During 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 142, "Goodwill and Other Intangible Assets," which supersedes Accounting
Principles Board Opinion (APBO) No. 17, "Intangible Assets." Goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to impairment tests in accordance with SFAS No. 142. Other
intangible assets will continue to be amortized over their useful lives. This
statement is effective for fiscal years beginning after December 15, 2001 for
goodwill and intangible assets acquired before July 1, 2001. However, this
statement was effective July 1, 2001 for all goodwill and intangible assets
acquired after June 30, 2001. The Company has adopted or will adopt SFAS No. 142
in the required periods. Application of the non-amortization provisions of the
statement is expected to improve net results by approximately $3.6 million for
the full year 2002. Prior to the end of the second quarter of 2002, the Company
will perform the first step of the required impairment tests of goodwill and
intangible assets deemed to have indefinite lives as of December 30, 2001.
Management has not yet determined the effect on the Company's results of
operations or financial condition of any potential impairment resulting from
such tests. Also during 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121 and
parts of APBO No. 30. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. This statement retains many of the fundamental provisions of
SFAS No. 121 relating to assets to be held and used, but excludes goodwill and
intangible assets that are not amortized. This statement also supercedes the
accounting and reporting provisions for the disposal of a segment of a business
found in APBO No. 30. The Company will adopt this statement as required, and
management does not believe the adoption will have a material effect on the
Company's results of operations, financial condition or liquidity.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: The Company considers all investments with an
original maturity of three months or less on their acquisition date to be cash
equivalents.
INVENTORIES: Inventories are valued at the lower of first-in, first-out (FIFO)
cost or market.
FINANCIAL INSTRUMENTS: The Company's carrying value of its financial instruments
approximates fair value.
PROPERTY AND DEPRECIATION: Property, plant and equipment are recorded at cost.
For financial reporting purposes, depreciation and amortization are computed
principally by the straight-line method over the estimated useful lives of the
assets. Buildings are depreciated over periods up to 31.5 years. Machinery and
equipment is depreciated over periods ranging from 3 years to 15 years.
Accelerated methods of depreciation are used for federal income tax purposes.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates the recoverability of
long-lived assets and the related estimated remaining lives at each balance
sheet date. The Company would record an impairment charge or change in useful
life whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable, measured using undiscounted cash flows, or the
useful life has changed.
GOODWILL: Goodwill represents the cost in excess of fair value of net assets
acquired in business combinations accounted for by the purchase method and is
amortized on a straight line basis over the expected period of benefit ranging
from 5 to 20 years. Accumulated amortization of goodwill was $5,923,000 and
$1,318,000 at December 29, 2001 and December 30, 2000, respectively.
INCOME TAXES: The Company accounts for income taxes using the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Investment tax credits are recorded using the flow-through
method.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE A--ACCOUNTING POLICIES--CONTINUED
REVENUE RECOGNITION: Revenues are derived from sales to unaffiliated customers
and are recognized when products are shipped and title has transferred.
RESEARCH AND DEVELOPMENT COSTS: Research and Development (R&D) costs consist of
Company-sponsored activities to develop new value-added products. R&D costs are
expensed as incurred and expenditures were $2,800,000, $3,300,000 and $3,800,000
in 2001, 2000 and 1999, respectively. R&D costs are included in operating
expenses in the Consolidated Statements of Operations.
ADVERTISING COSTS: Advertising costs are expensed as incurred and totaled
$3,000,000 per year in both 2001 and 2000 and $2,300,000 for 1999.
NOTE B--ACQUISITIONS
On September 22, 2000 and December 15, 2000, the Company acquired Pyramid for
$45.4 million and Ameriduct for $63.8 million plus assumed debt of $3.9 million
plus transaction costs. In addition, pursuant to terms of non-competition
agreements, Lamson will pay three former Pyramid shareholders $6.5 million over
a five-year period, including $1.5 million, which was paid at closing. The
acquisitions were funded through the Company's secured credit agreement. Both
Pyramid and Ameriduct are leading manufacturers of HDPE conduit used in building
telecommunications and utility infrastructure.
The acquisitions have been accounted for by the purchase method and,
accordingly, the operating results have been included in the Company's
consolidated financial statements and the Carlon business segment since the
respective dates of acquisition. The assets acquired and liabilities assumed
were recorded at estimated fair values. For financial statement purposes,
goodwill relating to these acquisitions is being amortized by the straight-line
method over 20 years and the non-compete agreements will be amortized over their
five-year term.
In 2001, the Company finalized the purchase price of Ameriduct and completed the
allocation of the purchase price allocation of both acquisitions, the result
being a net reduction in goodwill of $2.3 million. A summary of the assets
acquired and liabilities assumed after these final purchase price adjustments
are as follows:
(Dollars in thousands)
Estimated fair values
Assets acquired $ 48,381
Liabilities assumed (22,845)
Goodwill 85,273
------------------
Purchase price paid 110,809
Less cash acquired (128)
------------------
Net cash paid $ 110,681
==================
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE B--ACQUISITIONS--CONTINUED
Unaudited pro forma results of operations as if the acquisitions occurred as of
January 2, 2000 follows. The pro forma results include estimates and
assumptions, which the Company's management believes are reasonable. However,
the pro forma results do not include any cost savings, revenue enhancements or
other effects of the planned integration of the Company, Pyramid and Ameriduct
and are not necessarily indicative of the results which would have occurred if
the business combination had been in effect at the beginning of the year
presented, or which may result in the future.
(UNAUDITED)
PRO FORMA
YEAR ENDED
---------------------
(Dollars in thousands) 2000
---------------------
Net Sales $ 437,206
Net Income $ 22,106
Basic Earnings Per Share $ 1.63
====================
Diluted Earnings Per Share $ 1.58
====================
NOTE C--LONG-TERM DEBT AND COMMITMENTS
Long-term debt consists of the following:
FISCAL YEARS
------------------------
(Dollars in thousands) 2001 2000
-------- --------
Secured Credit Agreement:
Term $ 43,500 $ 48,500
Revolver 61,500 77,400
-------- --------
105,000 125,900
Industrial Revenue Bonds 10,510 11,315
Other 849 1,229
-------- --------
116,359 138,444
Less amounts classified as current 12,093 8,168
-------- --------
$104,266 $130,276
======== ========
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE C--LONG-TERM DEBT AND COMMITMENTS--CONTINUED
In August 2000, the Company completed the refinancing of its previous secured
credit agreement by entering into a new five-year, $125 million revolving credit
agreement with a consortium of banks led by Harris Trust of Chicago. In December
2000, in conjunction with the acquisition of Ameriduct, the agreement was
amended and increased to a $194 million facility, consisting of $48.5 million in
term debt and $145.5 million in a revolver. As of September 30, 2001 the
agreement was amended reducing the revolving credit commitments of the lenders
to an aggregate $170 million of which $38.5 million is available for the
issuance of letters of credit. Beginning in the third quarter of 2001, the term
portion of this agreement requires principal payments of $2 million on March 31
and June 30 and $3.5 million on September 30 and December 31 of each year with a
balloon payment in August 2005. This agreement is secured by substantially all
of the Company's assets. Interest on this credit facility is at LIBOR plus 1.5%
to 3.5%. The specific rate is determined based on the ratio of indebtedness to
earnings before interest, taxes, depreciation and amortization and is adjusted
quarterly. The rate at December 29, 2001 is 7.24%. In addition to amounts
borrowed, letters of credit related to Industrial Revenue Bond financings and
other contractual obligations total approximately $15.8 million under the
agreement. The Company's credit agreement contains various restrictive covenants
pertaining to maintenance of net worth, certain financial ratios and limits the
amount of stock repurchases and dividend payments.
The Company's Industrial Revenue Bond financings include several issues due in
annual installments from 2000 through 2023 with interest at variable rates. The
weighted average rate for these bonds at December 29, 2001 was 1.78%.
The Company's headquarters is subject to a mortgage payable in equal monthly
installments through 2003 with interest at 8.625%.
The aggregate minimum combined maturities of long-term debt for the years 2003
through 2006 are approximately $12,070,811, $11,660,000, $72,760,000 and
$665,000 respectively, with $7,110,000 due thereafter.
Interest paid was $9,573,000, $4,026,000 and $3,679,000 in 2001, 2000 and 1999,
respectively.
Rental expense was $6,268,000, $5,861,000 and $4,908,000 in 2001, 2000 and 1999,
respectively. Aggregate future minimum payments related to non-cancelable
operating leases with initial or remaining terms of one year or more for the
years 2002 through 2006 are approximately $3,637,000, $3,129,000, $2,699,000,
$1,964,000 and $1,578,000, respectively, with $5,139,000 due thereafter.
NOTE D--DERIVATIVES AND HEDGING
Effective as of December 31, 2000, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities" which was issued in June, 1998 by the Financial Accounting
Standards Board (FASB), as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of SFAS 133" and
SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities."
As a result of the adoption of SFAS 133, the Company is required to recognize
all derivative financial instruments as either assets or liabilities at fair
value. Derivative instruments that are not hedges must be adjusted to fair value
through net income. Under the provisions of SFAS 133, changes in the fair value
of derivative instruments that are classified as fair value hedges are offset
against changes in the fair value of the hedged assets, liabilities, or firm
commitments, through net income. Changes in the fair value of derivative
instruments that are classified as cash flow hedges are recognized in other
comprehensive income until such time as the hedged items are recognized in net
income.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D--DERIVATIVES AND HEDGING--CONTINUED
The adoption of SFAS 133 did not result in any transition adjustment as the
Company had no derivative instruments outstanding at December 31, 2000. During
the first quarter of 2001, the Company entered into two interest rate swap
agreements for a total notional amount of $58.5 million which effectively fixes
interest rates on its variable rate debt at 5.41% and 5.48% plus the Company's
risk premium of 1.5% to 3.5%, respectively. These transactions are considered
cash flow hedges and, thus, the fair market value at the end of the year
$1,034,000 (net of $661,000 in tax) loss, has been recognized in other
comprehensive income (loss). There is no ineffectiveness on the cash flow
hedges, therefore, all changes in the fair value of these derivatives are
recorded in equity and not included in the current period's income statement.
Approximately $1,482,000 loss on the fair value of the hedges is classified in
current accrued liabilities, with the remaining $212,000 loss classified as a
long-term liability.
The Company has no derivative instruments that are classified as fair value
hedges.
NOTE E--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company sponsors several qualified and nonqualified pension plans and other
post-retirement benefit plans for its current and former employees. The
following table provides a reconciliation of the changes in the benefit
obligations and fair value of plan assets over each of the two years in the
period ended December 29, 2001 and a statement of the funded status at both
years end:
PENSION BENEFITS OTHER BENEFITS
(Dollars in thousands) 2001 2000 2001 2000
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Obligation at beginning of year $ 73,799 $ 74,079 $ 13,094 $ 14,040
Service cost 1,054 886 14 13
Interest cost 5,280 5,300 911 980
Plan participants' contribution -- -- 98 96
Plan amendment 223 76 -- --
Actuarial loss (gain) 2,077 163 695 (23)
Benefits paid (6,616) (6,705) (2,080) (2,012)
-------- -------- -------- --------
Obligation at end of year $ 75,817 $ 73,799 $ 12,732 $ 13,094
======== ======== ======== ========
Effective January 1, 2000, the Company amended its salaried associates
retirement benefits program by phasing out certain medical benefits.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS--CONTINUED
PENSION BENEFITS OTHER BENEFITS
(Dollars in thousands) 2001 2000 2001 2000
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 89,975 $ 88,679
Actual return on plan assets (11,158) 7,684
Employer contributions 310 317 $ 1,982 $ 1,916
Plan participants' contributions -- -- 98 96
Benefits paid (6,616) (6,705) (2,080) (2,012)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 72,511 $ 89,975 $ -- $ --
======== ======== ======== ========
Plan assets include 860,856 shares of the Company's common stock with a fair
market value at December 29, 2001 of $4.5 million and 760,856 common shares with
a fair value of $8.0 million at December 30, 2000.
PENSION BENEFITS OTHER BENEFITS
(Dollars in thousands) 2001 2000 2001 2000
-------- -------- -------- --------
FUNDED STATUS
Fund status at end of year $ (3,306) $ 16,176 $(12,732) $(13,094)
Unrecognized actuarial loss (gain) 23,702 2,219 (1,425) (2,342)
Unrecognized transition (asset) (1,164) (1,252) -- --
Unrecognized prior service cost (gain) 448 246 (2,236) (2,433)
-------- -------- -------- --------
Net amount recognized at end of year $ 19,680 $ 17,389 $(16,393) $(17,869)
======== ======== ======== ========
The pension benefits table above provides information relating to the funded
status of all defined benefit pension plans on an aggregated basis. The
projected benefit obligation, accumulated benefit obligation, and fair value of
plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets were $5.3 million, $4.9 million and $0, respectively, as of
December 29, 2001 and $4.4 million, $4.1 million and $0, respectively, as of
December 30, 2000.
The following table provides the amounts recognized in the consolidated balance
sheets for both years:
PENSION BENEFITS OTHER BENEFITS
(Dollars in thousands) 2001 2000 2001 2000
-------- -------- -------- --------
Prepaid benefit cost $ 24,071 $ 21,555
Accrued benefit liability (5,081) (4,280) $(16,393) $(17,869)
Intangible asset -- 71 -- --
Accumulated other comprehensive income 690 43 -- --
-------- -------- -------- --------
$ 19,680 $ 17,389 $(16,393) $(17,869)
======== ======== ======== ========
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS--CONTINUED
The assumptions used in the measurement of the Company's benefit obligations at
December 29, 2001 and December 30, 2000 were:
PENSION BENEFITS OTHER BENEFITS
2001 2000 2001 2000
-------- -------- -------- --------
Discount rate 7.2% 7.5% 7.25% 7.5%
Expected return on plan assets 9.5% 9.5%
Rate of salary increase 5.0% 5.0%
For measurement purposes, a 8.5% average health care cost trend rate was used
for 2002 (8.8% in 2001). The rate is assumed to decline gradually each year to
an ultimate rate of 5.5% in 2008 and thereafter. A 1% change in assumed health
care cost trend rates would have the following effects:
(Dollars in thousands) 1% INCREASE 1% DECREASE
----------- -------------
Net periodic benefit cost $ 74 $ (67)
Accumulated post-retirement benefit obligation $ 932 $ (839)
The components of net periodic benefit cost (income) are as follows:
PENSION BENEFITS OTHER BENEFITS
(Dollars in thousands) 2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
Service cost $ 1,054 $ 886 $ 1,277 $ 14 $ 13 $ 329
Interest cost 5,280 5,300 5,179 911 980 1,132
Expected return on assets (8,241) (8,111) (7,660) -- -- --
Net amortization and deferral (72) (93) 193 (420) (394) (115)
Defined contribution plans 965 1,147 709 -- -- --
------- ------- ------- ------- ------- -------
$(1,014) $ (871) $ (302) $ 505 $ 599 $ 1,346
======= ======= ======= ======= ======= =======
In addition to the defined benefit plans described above, the Company also
sponsors a defined contribution plan, which covers substantially all full-time
associates. The Company's matching contribution is a minimum of 50% of voluntary
employee contributions of up to 6% of wages.
The Company remains contingently liable for certain post-retirement benefits of
certain businesses previously sold.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F--LITIGATION
On September 23, 1999, the Company announced that a United States District Court
jury in the Northern District of Illinois found that the Company willfully
infringed on a patent held by Intermatic Incorporated of Spring Grove, Illinois,
relating to the design of an in-use weatherproof electrical outlet cover, and
awarded Intermatic $12.5 million in damages plus pre-judgment interest of
approximately $1.5 million. The Company pursued a vigorous appeal and on
December 17, 2001 the United States Court of Appeals ruled that, as a matter of
law, Lamson & Sessions' products did not infringe Intermatic's patent and that
the Company has no liability to Intermatic. The trial jury's earlier verdict in
favor of Intermatic in the amount of $12,500,000, plus pre-judgment and
post-judgment interest estimated to be in excess of $3,000,000, was reversed.
Intermatic filed for a rehearing of the ruling to the Court of Appeals en banc,
which was denied. Management has no knowledge of Intermatic's intention with
respect to any further appeals.
During the first quarter of 2001, the Company settled its litigation against PW
Eagle and received a payment of $2.05 million, (net gain of $1.6 million)
representing a partial recovery of costs incurred in current and previous
quarters, arising out of the failed sale of the PVC Pipe segment in 1999.
The Company is also a party to various other claims and matters of litigation
incidental to the normal course of its business. Management believes that the
final resolution of these matters will not have a material adverse affect on the
Company's financial position, cash flows or results of operations.
NOTE G--ENVIRONMENTAL
The Company believes that its current operations and its use of property, plant
and equipment conform in all material respects to applicable environmental laws
and regulations presently in effect. The Company has facilities at numerous
geographic locations, which are subject to a range of federal, state and local
environmental laws and regulations. Compliance with these laws has, and will,
require expenditures on a continuing basis.
During the second quarter of 1999, the Company reached a settlement on
litigation involving environmental matters at a property sold by the Company in
1981 whereby the Company agreed to incur costs of certain remediation activities
which will occur over several years. The settlement did not have a material
impact on the Company's financial position or results of operations.
NOTE H--COMMON, PREFERRED, PREFERENCE STOCK
The Company has authorized 1,200,000 and 3,000,000 shares of Serial Preferred
and Preference Stock, respectively, none of which is issued or outstanding at
December 29, 2001 or December 30, 2000. The Company has reserved for issuance
200,000 shares of Cumulative Redeemable Serial Preference Stock, Series II,
without par value ("Series II Preference Stock"), which relates to the Rights
Agreement, dated as of September 8, 1998, between the Company and National City
Bank (the "Rights Agreement").
Under the Company's Rights Agreement, each shareholder has the right to purchase
from the Company one one-hundredth of a share of the Series II Preference Stock,
subject to adjustment, upon payment of an exercise price of $44.75. The Rights
will become exercisable only after a person or group acquires beneficial
ownership of or commences a tender or exchange offer for 15% or more of the
Company's Common Shares. Rights held by persons who exceed that threshold will
be void. In the event that a person or group acquires beneficial ownership of
15% or more of the Company's Common Shares, or a 15% shareholder merges into or
with the Company or engages in one of a number of self-dealing transactions,
each Right would entitle its holder to purchase a number of the Company's Common
Shares (or, in certain cases, common stock of an acquirer) having a market value
of twice the Right's exercise price.
The Company's Board of Directors may, at its option, redeem all Rights for $0.01
per Right, generally at any time prior to the Rights becoming exercisable. The
Rights will expire on September 20, 2008, unless earlier redeemed, exchanged or
amended by the Board of Directors.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE I--STOCK COMPENSATION PLANS
Under the 1994 Nonemployee Directors Stock Option Plan, the Company is
authorized to issue 160,000 common shares in non-qualified stock options. The
stock options become exercisable one year after date of grant and expire at the
end of ten years. At December 29, 2001, a total of 69,000 shares were available
for future grant of stock options under this Plan.
On May 5, 1998, the Company's 1988 Incentive Equity Performance Plan expired. At
December 29, 2001, there were options outstanding under the Plan representing
994,950 shares of the Company's Common Stock. The options outstanding under the
Plan may be exercised, pursuant to the terms of the stock option agreements,
through April 20, 2008.
Under the 1998 Incentive Equity Plan, the Company is authorized to issue
1,950,000 incentive stock options (ISOs), non-qualified stock options, stock
appreciation rights (SARs) and restricted or deferred stock. Stock options
generally become exercisable, in part, one year after date of grant and expire
at the end of ten years. At December 29, 2001, under this Plan, a total of
935,655 shares were available for future grant.
A summary of the status of the Company's three stock compensation plans as of
December 29, 2001, December 30, 2000 and January 1, 2000, and changes during the
respective years then ended, is presented below:
2001 2000 1999
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(Shares in thousands) SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
Outstanding at beginning of year 1,874 $ 6.69 1,712 $ 6.34 1,475 $ 6.73
Granted 370 9.77 454 7.60 341 5.00
Exercised (128) 5.25 (243) 5.97 -- --
Forfeited (84) 10.19 (49) 6.39 (104) 7.66
------ --------- ------ --------- ------ ---------
Outstanding at end of year 2,032 $ 7.20 1,874 $ 6.69 1,712 $ 6.34
====== ========= ====== ========= ====== =========
Options exercisable at year-end 1,410 1,197 1,118
Weighted-average fair value of options
granted during the year $ 5.28 $ 4.01 $ 1.85
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE I--STOCK COMPENSATION PLANS--CONTINUED
The following table summarizes information about options outstanding at December
29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE
RANGE OF SHARES REMAINING WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/29/01 CONTRACTUAL LIFE (YRS) EXERCISE PRICE AT 12/29/01 EXERCISE PRICE
--------------- ----------- ---------------------- -------------- ----------- --------------
$ 0-5 265,250 7.07 $ 4.97 197,250 $ 4.97
5-10 1,718,550 5.72 7.39 1,188,683 6.86
10-15 38,500 7.70 10.88 20,667 10.65
15-20 10,000 8.65 17.94 3,333 17.94
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based plans. Accordingly, compensation cost has not been recognized for
the fixed stock-based compensation plans. Had compensation expense been
recognized following SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's pro forma net income and earnings per share would have been as
follows:
FISCAL YEARS
------------------------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999
------------------------------------------------------------
Net income As reported $ (3,843) $ 21,448 $ 18,788
Pro forma (4,507) 20,941 18,322
Basic earnings per share As reported $ (0.28) $ 1.58 $ 1.40
Pro forma (0.33) 1.54 1.36
Diluted earnings per share As reported $ (0.28) $ 1.53 $ 1.39
Pro forma (0.33) 1.50 1.36
For pro forma calculations, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants:
2001 2000 1999
------------------------------------------------------------
Expected volatility 57.2% 52.2% 29.8%
Risk-free interest rates 4.87% 6.05% 5.74%
Average expected life 5 years 5 years 5 years
The Company has a deferred compensation plan that provides certain executive
officers and directors of the Company with the opportunity to defer receipt of
bonus compensation and director's fees. The Company funds these deferred
compensation liabilities by making contributions to a Rabbi Trust which invests
exclusively in the Company's common shares. In accordance with Emerging Issues
Task Force (EITF) 97-14 "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested," both the trust assets
and the related obligation are recorded in equity at cost and offset each other.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE J--EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
FISCAL YEARS
---------------------------------------------------
(Dollars and shares in thousands, except per share data) 2001 2000 1999
-------- ------- -------
BASIC EARNINGS PER SHARE COMPUTATION
Net (Loss) Income $ (3,843) $21,448 $18,788
======== ======= =======
Average Common Shares Outstanding 13,757 13,570 13,448
======== ======= =======
Basic (Loss) Earnings Per Share $ (0.28) $ 1.58 $ 1.40
======== ======= =======
DILUTED EARNINGS PER SHARE COMPUTATION
Net (Loss) Income $ (3,843) $21,448 $18,788
======== ======= =======
Basic Shares Outstanding 13,757 13,570 13,448
Stock Options Calculated Under
the Treasury Stock Method -- 419 34
-------- ------- -------
Total Shares 13,757 13,989 13,482
======== ======= =======
Diluted (Loss) Earnings Per Share $ (0.28) $ 1.53 $ 1.39
======== ======= =======
NOTE K--INCOME TAXES
Components of income tax provision (benefit) reflected in the consolidated
statements of income are as follows:
(Dollars in thousands) 2001 2000 1999
------- ------- -------
Current:
Federal $ (53) $ 983 $ --
State and local 164 614 --
------- ------- -------
111 1,597 --
Deferred:
Federal (1,379) 6,156 (7,799)
State and local (332) 747 (1,201)
------- ------- -------
(1,711) 6,903 (9,000)
------- ------- -------
Total $(1,600) $ 8,500 $(9,000)
======= ======= =======
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE K--INCOME TAXES--CONTINUED
The components of deferred taxes included in the balance sheets as of December
29, 2001 and December 30, 2000 are as follows:
FISCAL YEARS
--------------------------
(Dollars in thousands) 2001 2000
------- -------
Deferred tax assets:
Net operating loss carryforwards (Federal & State) $10,094 $ 7,760
Other accruals, credits and reserves 8,499 8,062
General business and alternative minimum tax credits 3,078 3,485
Post-retirement benefits other than pensions 5,738 6,254
------- -------
Total deferred assets 27,409 25,561
Deferred tax liabilities:
Tax in excess of book depreciation 5,437 7,232
Pensions 6,649 6,070
------- -------
Total deferred tax liabilities 12,086 13,302
------- -------
Total net deferred tax assets $15,323 $12,259
======= =======
The Company has available federal net operating loss carryforwards totaling
approximately $27.2 million, which expire in the years 2008 to 2021. The Company
also has available general business tax credit carryforwards of $1.4 million,
which expire through 2018 and alternative minimum tax credit carryforwards of
approximately $1.7 million, which may be carried forward indefinitely.
The provision for income taxes is different than the amount computed using the
applicable statutory federal income tax rate with the differences summarized
below:
FISCAL YEARS
----------------------------------------------------
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Tax expense at statutory rates $ (1,905) $ 10,482 $ 3,426
Adjustment due to:
Change in valuation allowance -- (2,600) (11,900)
State and local income taxes (225) 1,146 (1,201)
Non deductible goodwill 734 268 93
Other (204) (796) 582
-------- -------- --------
$ (1,600) $ 8,500 $ (9,000)
======== ======== ========
Income taxes paid in 2001 and 2000 were $1,256,000 and $904,000, respectively.
In 1999 the Company received an income tax refund of $78,000.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE L--BUSINESS SEGMENTS
The Company's reportable segments are as follows:
CARLON - INDUSTRIAL, RESIDENTIAL, COMMERCIAL, TELECOMMUNICATIONS AND UTILITY
CONSTRUCTION: The major customers served are electrical contractors and
distributors, original equipment manufacturers, electric power utilities, cable
television (CATV), telephone and telecommunications companies. The principal
products sold by this segment include electrical and telecommunications raceway
systems and a broad line of nonmetallic enclosures, electrical outlet boxes and
fittings. Examples of the applications for the products included in this segment
are multi-cell duct systems and HDPE conduit designed to protect underground
fiber optic cables, allowing future cabling expansion and flexible conduit used
inside buildings to protect communications cable. The 2000 acquisitions of
Pyramid and Ameriduct are included as part of the Carlon segment.
LAMSON HOME PRODUCTS - Consumer: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" home repair market. The products
included in this segment are electrical outlet boxes, liquidtight conduit,
electrical fittings, chimes and lighting controls.
PVC PIPE: This business segment primarily supplies electrical, power and
communications conduit to the electrical distribution, telecommunications,
consumer and power utility markets. The 1/2-inch to 6-inch electrical and
telecommunications conduit is made from PVC and is used to protect wire or fiber
optic cables supporting the infrastructure of our power or telecommunications
systems.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE L--BUSINESS SEGMENTS--CONTINUED
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
NET SALES
Carlon $ 188,161 $ 142,979 $ 120,975
Lamson Home Products 62,128 63,351 53,401
PVC Pipe 102,383 142,403 117,005
--------- --------- ---------
$ 352,672 $ 348,733 $ 291,381
========= ========= =========
OPERATING INCOME (LOSS)
Carlon $ 14,585 $ 21,687 $ 15,065
Lamson Home Products 3,724 1,856 1,135
PVC Pipe (11,220) 20,224 5,814
Corporate Office (906) (9,280) (8,668)
--------- --------- ---------
$ 6,183 $ 34,487 $ 13,346
========= ========= =========
DEPRECIATION AND AMORTIZATION
Carlon $ 12,080 $ 5,187 $ 3,737
Lamson Home Products 2,508 2,520 2,792
PVC Pipe 3,431 3,522 3,607
--------- --------- ---------
$ 18,019 $ 11,229 $ 10,136
========= ========= =========
IDENTIFIABLE ASSETS
Carlon $ 153,194 $ 184,527 $ 52,326
Lamson Home Products 28,157 31,720 30,658
PVC Pipe 45,684 61,449 51,393
Corporate Office (includes deferred tax and pension assets) 46,786 42,597 48,942
--------- --------- ---------
$ 273,821 $ 320,293 $ 183,319
========= ========= =========
Substantially all sales are made within North America. Net sales to a single
customer within the Carlon and PVC Pipe segments totaled approximately 14% in
2001, and 17% in 2000 and 1999 of consolidated net sales.
2001 OPERATING
2001 NET INCOME (LOSS)
OPERATING CHARGE EXCLUDING NET
INCOME (LOSS) (GAIN) CHARGE (GAINS)
------------- ----------- -------------
Carlon $ 14,585 $ 3,762 $ 18,347
Lamson Home Products 3,724 1,149 4,873
PVC Pipe (11,220) 661 (10,559)
Corporate Office (includes deferred tax and pension assets) (906) (2,400) (3,306)
--------- --------- ---------
$ 6,183 $ 3,172 $ 9,355
========= ========= =========
The above schedule shows the operating results by segment excluding the
restructuring and impairment charge of $7.7 million and net gains of $4.6
million recorded in 2001.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE M--RESTRUCTURING, IMPAIRMENT CHARGE AND NET GAINS
Due to the dramatic downturn in the economy in 2001, especially in the
telecommunications infrastructure market the Company evaluated all of the
Company's facilities and equipment to reduce excess capacity by eliminating or
consolidating assets to more efficiently service its markets and lower its fixed
cost base. As a result of this evaluation the Company has recognized a $7.7
million restructuring and impairment charge in the fourth quarter of 2001.
Included in this charge is approximately $3.5 million related to the elimination
of approximately 15% of the Company's HDPE capacity through disposal of several
excess extrusion lines. The Company had also approved the shutdown and sale of
one of its facilities. The facility (asset held for sale at December 29, 2001)
was written down by $1.7 million (included in the $3.5 million charge) to its
estimated fair value. In addition, several under performing product lines in the
Carlon and PVC Pipe segments have been eliminated during the fourth quarter of
2001 resulting in a $2.9 million charge. Approximately $.9 million of this
charge is for obsolete inventory which is included in cost of products sold
while the remainder is primarily the write-off and disposal of related
manufacturing assets. Also included in the charge is $.9 million for the
write-off of Corporate fixed assets that are obsolete. Finally, the Company
reduced its salary workforce by approximately 17% in 2001 of which approximately
10% occurred in the fourth quarter resulting in a $.4 million charge,
representing severance payments which will be paid in the first half of 2002.
The Company recognized net gains of $4.6 million in 2001 relating to the
resolution of litigation ($1.6 million), changes in accounting estimates for
legal and environmental liabilities ($2.3 million) and the sale of a
non-strategic business ($.7 million).
31
NOTE N--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--(UNAUDITED)
(Dollars in thousands, except per share data)
CLOSING
BASIC (LOSS) DILUTED (LOSS) MARKET PRICE
EARNINGS PER EARNINGS PER PER SHARE
NET GROSS NET COMMON COMMON ----------------------
SALES PROFIT INCOME SHARE SHARE HIGH LOW
-------- -------- -------- ------ ------ ----------------------
FISCAL 2001:
First quarter $ 88,641 $ 16,336 $ 696 $ 0.05 $ 0.05 $12.13 $ 7.32
Second quarter 96,751 17,679 701 0.05 0.05 12.10 6.64
Third quarter 90,554 13,602 (1,921) (0.14) (0.14) 8.45 4.00
Fourth quarter 76,726 13,783 (3,319) (0.24) (0.24) 5.24 3.31
-------- -------- -------- ------ -------
TOTAL $352,672 $ 61,400 $ (3,843) $(0.28) $(0.28)
FISCAL 2000:
First quarter $ 80,355 $ 21,320 $ 4,698 $0.35 $0.35 $ 8.25 $ 4.75
Second quarter 91,284 26,908 7,131 0.53 0.52 15.31 7.25
Third quarter 88,291 22,867 6,976 0.51 0.48 24.88 11.75
Fourth quarter 88,803 17,524 2,643 0.19 0.19 12.44 8.63
-------- -------- -------- ----- -----
TOTAL $348,733 $ 88,619 $ 21,448 $1.58 $1.53 *
* Earnings per share were computed on a stand-alone quarterly basis for each
respective quarter. Therefore, the sum of the quarters in 2000 for Diluted
Earnings Per Common Share do not equal the year's total due to rounding.
32
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
Board of Directors and Shareholders
The Lamson & Sessions Co.
We have audited the accompanying consolidated balance sheets of The Lamson &
Sessions Co. and Subsidiaries as of December 29, 2001 and December 30, 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years in the period ended December 29, 2001.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (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 auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Lamson & Sessions Co. and Subsidiaries at December 29, 2001 and December 30,
2000, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended December 29, 2001, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 5, 2002
33
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
- ----------------------------------------
We have prepared the financial statements and other financial information
contained in this Annual Report.
The management of Lamson & Sessions is primarily responsible for the integrity
of this financial information. The financial statements were prepared in
accordance with accounting principles generally accepted in the United States
and necessarily include certain amounts based on management's reasonable best
estimates and judgments, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that
contained in the financial statements.
Management is responsible for establishing and maintaining a system of internal
control designed to provide reasonable assurance as to the integrity and
reliability of financial reporting. The concept of reasonable assurance is based
on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits to be derived therefrom.
To meet management's responsibility for financial reporting, we have established
internal control systems that we believe are adequate to provide reasonable
assurance that our assets are protected from loss. These systems produce data
used for the preparation of published financial information and provide for
appropriate reporting relationships and division of responsibility. All
significant systems and controls are reviewed periodically by management in
order to ensure compliance and by our independent auditors to support their
audit work. It is management's policy to implement a high proportion of
recommendations resulting from this review.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets regularly with management and our independent auditors to
review accounting, auditing and financial matters. The independent auditors have
free access to the Audit Committee, with or without management, to discuss the
scope and results of their audits and the adequacy of the system of internal
controls.
/s/ John B. Schulze
- ---------------------------------------
John B. Schulze
Chairman of the Board, President and
Chief Executive Officer
/s/ James J. Abel
- ---------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
/s/ Lori L. Spencer
- ----------------------------------------
Lori L. Spencer
Vice President and Controller
34
PART II
- -------
ITEM 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------
None
PART III
- --------
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
(a) Directors
The information set forth under the caption "Election of Directors"
in the Company's definitive proxy statement for its Annual Meeting
of Shareholders to be held April 26, 2002 is hereby incorporated by
reference.
(b) Executive Officers - See Part I
(c) Compliance with Section 16 (a) of the Exchange Act.
The information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders
to be held April 26, 2002 is hereby incorporated by reference.
ITEM 11. - EXECUTIVE COMPENSATION
- ---------------------------------
The information set forth under the caption "Executive Compensation" in the
Company's definitive proxy statement for its Annual Meeting of Shareholders to
be held April 26, 2002 is hereby incorporated by reference.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
The information set forth under the captions "Ownership of the Company's Common
Shares," "Election of Directors" and "Security Ownership of Management" in the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held April 26, 2002 is hereby incorporated by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
During the past fiscal year, the Company, in the normal course of business,
utilized the services of the law firm of Jones, Day, Reavis & Pogue, in which
Mr. Coquillette, a director of the Company, is a partner. The Company plans to
continue using the services of the firm in 2002.
35
PART IV
- -------
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
Consolidated financial statements of The Lamson & Sessions Co. and
Subsidiaries are included in Item 8 of this report:
1. Financial Statements
Consolidated Statements of Operations for Fiscal Years Ended
2001, 2000 and 1999.
Consolidated Statements of Cash Flows for Fiscal Years Ended
2001, 2000 and 1999.
Consolidated Balance Sheets at December 29, 2001 and December
30, 2000.
Consolidated Statements of Shareholders' Equity for Fiscal Years
Ended 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and, therefore, have been omitted.
3. The exhibits listed in the accompanying Exhibit Index and
required by Item 601 of Regulation S-K (numbered in accordance
with Item 601 of Regulation S-K) are filed or incorporated by
reference as part of this Report.
(b) Reports on Form 8-K
None.
(c) Exhibits - See 14(a) 3.
36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES AND OTHER PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 29, 2001
Allowances deducted from assets:
Trade receivable allowances $ 2,394 $ 422 $ 694 (A) $ 2,122
Inventory obsolescence reserve 1,039 2,043 1,328 (B) 1,754
Other current and long-term assets 800 492 303 989
Accounts and loss reserves included in
current and long-term liabilities 3,968 1,750 344 (C) 5,374
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 30, 2000
Allowances deducted from assets:
Trade receivable allowances $ 2,078 $ 817 $ 501 (A) $ 2,394
Inventory obsolescence reserve 1,030 1,396 1,387 (B) 1,039
Other current and long-term assets 450 (350) 800
Accounts and loss reserves included in
current and long-term liabilities 3,680 500 212 (C) 3,968
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 1, 2000
Allowances deducted from assets:
Trade receivable allowances $ 2,924 $ 574 $ 1,420 (A) $ 2,078
Inventory obsolescence reserve 1,189 1,369 1,528 (B) 1,030
Other current and long-term assets 450 450
Accounts and loss reserves included in
current and long-term liabilities 5,404 1,724 (C) 3,680
- ------------------------------------------------------------------------------------------------------------------------------
Note A - Principally write-off of uncollectible accounts and disputed items, net
of recoveries.
Note B - Principally the disposal of obsolete inventory.
Note C - Principally payments on contractual obligations for previously-owned
businesses.
37
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, on this March 5, 2002.
THE LAMSON & SESSIONS CO.
By /s/ James J. Abel
-----------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
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 indicated as of February 20, 2002.
Signature Title
--------- -----
/s/ John B. Schulze Chairman of the Board, President
- ---------------------------- and Chief Executive Officer
John B. Schulze (Principal Executive Officer)
/s/ James J. Abel Executive Vice President, Secretary,
- ---------------------------- Treasurer and Chief Financial Officer
James J. Abel (Principal Financial Officer)
/s/ Lori L. Spencer Vice President and Controller
- ---------------------------- (Principal Accounting Officer)
Lori L. Spencer
/s/ James T. Bartlett* Director
- ----------------------------
James T. Bartlett
/s/ Francis H. Beam, Jr.* Director
- -------------------------
Francis H. Beam, Jr.
/s/ Martin J. Cleary* Director
- -------------------------
Martin J. Cleary
38
/s/ William H. Coquillette* Director
- ---------------------------
William H. Coquillette
/s/ John C. Dannemiller* Director
- -------------------------
John C. Dannemiller
/s/ George R. Hill* Director
- -------------------------
George R. Hill
/s/ A. Malachi Mixon, III* Director
- --------------------------
A. Malachi Mixon, III
/s/ John C. Morley* Director
- ------------------------
John C. Morley
/s/ D. Van Skilling* Director
- -------------------------
D. Van Skilling
* The undersigned, by signing his name hereto, does sign and execute
this Annual Report on Form 10-K pursuant to a Power of Attorney
executed on behalf of the above-named directors of The Lamson &
Sessions Co. and filed herewith as Exhibit 24 on behalf of The
Lamson & Sessions Co. and each such person.
March 5, 2002
By /s/ James J. Abel
----------------------------------------
James J. Abel, Attorney-in-fact
39
EXHIBIT INDEX
EXHIBIT NO.
Management Contracts and Compensatory Plans required to be filed pursuant to
Item 14 of Form 10-K are identified with an asterisk (*).
3(a) Amended Articles of Incorporation of the Company (incorporated by
reference to Exhibit 4(a) to the Company's Registration Statement on
Form S-8 (Registration No. 333-32875) filed with the Securities and
Exchange Commission on August 5, 1997).
3(b) Amended Code of Regulations of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2001 (the "first quarter 2001
Form 10-Q")).
4(a) Form of Rights Certificate (incorporated by reference to Exhibit
4-1 to the Company's Registration Statement on Form 8-A filed with
the Securities and Exchange Commission on September 9, 1998).
4(b) Rights Agreement, dated as of September 8, 1998, by and between the
Company and National City Bank (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form 8-A filed with
the Securities and Exchange Commission on September 9, 1998).
*10(a) Form of Three-Year Executive Change-in-Control Agreement between the
Company and certain executive officers (incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the
year ended January 1, 2000).
*10(b) Form of Two-Year Executive Change-in-Control Agreement between the
Company and certain executive officers (incorporated by reference to
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the
year ended January 1, 2000).
*10(c) Form of Indemnification Agreement between the Company and the
Directors and certain officers (incorporated by reference to Exhibit
10(g) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10(d) Asset Purchase Agreement between Iochpe-Maxion Ohio, Inc. and The
Lamson & Sessions Co. dated as of May 4, 1994 (incorporated by
reference to Exhibit 10 to the Company's Current Report on Form 8-K
dated as of May 27, 1994).
10(e) Share Purchase Agreement, dated as of August 20, 2000, by and among
the Company, Pyramid Industries, Inc. and the shareholders of
Pyramid Industries, Inc. (incorporated by reference to Exhibit 2 of
the Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on October 6, 2000).
10(f) Share Purchase Agreement, dated as of December 6, 2000, by and among
the Company, Ameriduct Worldwide, Inc. and the shareholders of
Ameriduct Worldwide, Inc. (incorporated by reference to Exhibit 2 of
the Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on January 2, 2001).
40
10(g) Amended and Restated Credit Agreement, dated as of December 15,
2000, among the Company, the Guarantors party thereto, the Lenders
party thereto, National City Bank, as Syndication Agent, Bank of
America, N.A., as Documentation Agent and Harris Trust and Savings
Bank as Administrative Agent (incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 29, 2001 (the "third quarter 2001
Form 10-Q")).
10(h) First Amendment to the Amended and Restated Credit Agreement,
entered into as of August 1, 2001, among the Company, the Guarantors
party thereto, the Lenders party thereto and Harris Trust and
Savings Bank, as Administrative Agent for the Lenders (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2001).
10(i) Second Amendment to the Amended and Restated Credit Agreement,
entered into as of October 31, 2001, among the Company, the
Guarantors party thereto, the Lenders party thereto and Harris Trust
and Savings Bank, as Administrative Agent for the Lenders
(incorporated by reference to Exhibit 10(b) to the third quarter
2001 Form 10-Q).
10(j) Mortgage and Security Agreement, dated October 29, 1993, between The
Lamson & Sessions Co. and PFL Life Insurance Company (incorporated
by reference to Exhibit 10(j) to the Company's Annual Report on Form
10-K for the year ended January 1, 1994).
*10(k) Form of Amended and Restated Supplemental Executive Retirement
Agreement dated as of March 20, 1990 between the Company and certain
of its executive officers (incorporated by reference to Exhibit
10(e) to the Company's Annual Report on Form 10-K for the year ended
December 30, 1995).
*10(l) First Amendment to The Lamson & Sessions Co. Amended and Restated
Supplemental Retirement Agreement, effective January 1, 2000
(incorporated by reference to Exhibit 10(ak) to the Company's Annual
Report on Form 10-K for the year ended January 1, 2000).
*10(m) 1988 Incentive Equity Performance Plan (as amended and restated as
of February 26, 1998) (incorporated by reference to Exhibit 4(c) of
the Company's Registration Statement on Form S-3 (Registration No.
333-65795) filed with the Securities and Exchange Commission on
October 16, 1998).
*10(n) Amendment No. 3 to The Lamson & Sessions Co. 1988 Incentive Equity
Performance Plan (as amended and restated as of February 26, 1998)
(incorporated by reference to Exhibit 10(am) to the Company's Annual
Report on Form 10-K for the year ended January 1, 2000).
*10(o) Amendment No. 4 to The Lamson & Sessions Co. 1988 Incentive Equity
Performance Plan (as amended and restated as of February 26, 1998),
dated as of October 19, 2000 (incorporated by reference to Exhibit
10(d) to the first quarter 2001 Form 10-Q).
*10(p) Form of two-year non-qualified stock option agreement under the
Company's 1988 Incentive Equity Performance Plan (incorporated by
reference to Exhibit 10(e) to the third quarter 2001 Form 10-Q).
*10(q) Form of three-year non-qualified stock option agreement under the
Company's 1988 Incentive Equity Performance Plan (incorporated by
reference to Exhibit 10(f) to the third quarter 2001 Form 10-Q).
*10(r) 1998 Incentive Equity Plan (as amended and restated as of April 27,
2001) (incorporated by reference to Appendix A of the Company's
Proxy Statement dated March 23, 2001).
41
*10(s) Form of two-year non-qualified stock option agreement under the
Company's 1998 Incentive Equity Plan (incorporated by reference to
Exhibit 10(c) to the third quarter 2001 Form 10-Q).
*10(t) Form of three-year non-qualified stock option agreement under the
Company's 1998 Incentive Equity Plan (incorporated by reference to
Exhibit 10(d) to the third quarter 2001 Form 10-Q).
*10(u) The Company's Long-Term Incentive Plan (incorporated by reference to
Exhibit 10(h) to the Company's Annual Report on Form 10-K for the
year ended December 28, 1996).
*10(v) Amendment No. 1 to The Lamson & Sessions Co. Long-Term Incentive
Plan, effective January 1, 2000 (incorporated by reference to
Exhibit 10(an) to the Company's Annual Report on Form 10-K for the
year ended January 1, 2000).
*10(w) The Lamson & Sessions Co. Deferred Savings Plan (as amended and
restated as of February 17, 1998 by Amendments 1-6) (incorporated by
reference to Exhibit 4(c) to the Company's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on
February 26, 1998 (Registration No. 333-46953).
*10(x) Amendment No. 7 to The Lamson & Sessions Co. Deferred Savings Plan
(incorporated by reference to Exhibit 10(a) to the first quarter
2001 Form 10-Q).
*10(y) Amendment No. 8 to The Lamson & Sessions Co. Deferred Savings Plan
(incorporated by reference to Exhibit 10(b) to the first quarter
2001 Form 10-Q).
*10(z) Amendment No. 9 to The Lamson & Sessions Co. Deferred Savings Plan
(incorporated by reference to Exhibit 10(c) to the first quarter
2001 Form 10-Q).
*10(aa) The Lamson & Sessions Co. Nonemployee Directors Stock Option Plan,
as amended and restated as of July 19, 2001 (incorporated by
reference to Exhibit 10(g) to the third quarter 2001 Form 10-Q).
*10(bb) Form of non-qualified stock option agreement under the Company's
Nonemployee Directors Stock Option Plan (incorporated by reference
to Exhibit 10(h) to the third quarter 2001 Form
10-Q).
*10(cc) The Lamson & Sessions Co. Deferred Compensation Plan for Nonemployee
Directors, as amended and restated as of October 18, 2001
(incorporated by reference to Exhibit 10(i) to the third quarter
2001 Form 10-Q).
*10(dd) The Lamson & Sessions Co. Deferred Compensation Plan for Executive
Officers, as amended and restated as of October 18, 2001
(incorporated by reference to Exhibit 10(j) to the third quarter
2001 Form 10-Q).
21 Subsidiaries of the Registrant, filed herewith.
23 Consent of Independent Auditors, filed herewith.
24 Powers of Attorney, filed herewith.
42