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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 1-313
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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
- --------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
216/464-3400
------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 28, 2002 the Registrant had outstanding 13,777,608 common
shares.
PART I
- ------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------------------- ------------------------------------------
2002 2001 2002 2001
------------------ -------------------- -------------------- --------------------
NET SALES $ 82,381 100.0% $ 90,554 100.0% $239,662 100.0% $275,946 100.0%
Cost of products sold 64,155 77.9% 76,952 85.0% 190,458 79.5% 228,329 82.7%
--------- ----------- ----------- -----------
GROSS PROFIT 18,226 22.1% 13,602 15.0% 49,204 20.5% 47,617 17.3%
Operating expenses 10,998 13.3% 13,010 14.3% 33,949 14.1% 40,838 14.8%
Net gain - 0.0% - 0.0% - 0.0% (1,600) -0.5%
--------- ----------- ----------- -----------
OPERATING INCOME 7,228 8.8% 592 0.7% 15,255 6.4% 8,379 3.0%
Interest expense, net 2,860 3.5% 2,763 3.1% 7,867 3.3% 7,995 2.9%
--------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 4,368 5.3% (2,171) -2.4% 7,388 3.1% 384 0.1%
Income tax provision (benefit) 1,774 2.2% (250) -0.3% 3,142 1.3% 908 0.3%
--------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,594 3.1% (1,921) -2.1% 4,246 1.8% (524) -0.2%
Cumulative effect of change in accounting
principle, net of income tax of $13,750 - 0.0% - 0.0% (46,250) -19.3% - 0.0%
--------- ----------- ----------- -----------
NET INCOME (LOSS) $ 2,594 3.1% $(1,921) -2.1% $(42,004) -17.5% $ (524) -0.2%
========= =========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before cumulative effect of
change in accounting principle $ 0.19 $ (0.14) $ 0.31 $ (0.04)
Cumulative effect of change in accounting
principle, net of tax - - (3.36) -
--------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 0.19 $ (0.14) $ (3.05) $ (0.04)
========= =========== =========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before cumulative effect of
change in accounting principle $ 0.19 $ (0.14) $ 0.31 $ (0.04)
Cumulative effect of change in accounting
principle, net of tax - - (3.36) -
--------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 0.19 $ (0.14) $ (3.05) $ (0.04)
========= =========== =========== ===========
See notes to Consolidated Financial Statements (Unaudited).
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands) THIRD QUARTER THIRD QUARTER
ENDED YEAR ENDED ENDED
---------------------------------------------
2002 2001 2001
---------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 525 $ 165 $ 7,458
Accounts receivable, net of allowances of
$2,882, $2,122 and $2,128, respectively 47,610 39,204 51,692
Inventories, net
Finished goods and work-in-process 30,658 36,623 39,816
Raw materials 3,917 5,460 5,104
--------- --------- ---------
34,575 42,083 44,920
Deferred tax assets 7,500 7,650 10,710
Prepaid expenses and other 4,221 4,983 5,439
--------- --------- ---------
TOTAL CURRENT ASSETS 94,431 94,085 120,219
PROPERTY, PLANT AND EQUIPMENT
Land 3,537 3,537 3,998
Buildings 24,829 24,775 25,706
Machinery and equipment 115,696 116,484 121,364
--------- --------- ---------
144,062 144,796 151,068
Less allowances for depreciation and amortization 91,292 86,925 86,029
--------- --------- ---------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 52,770 57,871 65,039
GOODWILL 21,597 81,666 82,854
PENSION ASSETS 23,982 24,071 23,408
DEFERRED TAX ASSETS 19,383 7,673 2,853
OTHER ASSETS 7,284 8,455 9,418
--------- --------- ---------
TOTAL ASSETS $ 219,447 $ 273,821 $ 303,791
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 21,047 $ 21,975 $ 27,995
Accrued compensation and benefits 9,958 7,311 6,655
Other accrued expenses 18,159 17,237 20,204
Taxes 4,731 4,274 3,299
Current maturities of long-term debt 12,101 12,093 12,060
--------- --------- ---------
TOTAL CURRENT LIABILITIES 65,996 62,890 70,213
LONG-TERM DEBT 90,778 104,266 122,903
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 24,074 25,441 26,031
SHAREHOLDERS' EQUITY
Common shares 1,378 1,378 1,378
Other capital 75,499 75,499 75,494
Retained (deficit) earnings (35,611) 6,393 9,712
Accumulated other comprehensive (loss) income (2,667) (2,046) (1,940)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 38,599 81,224 84,644
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 219,447 $ 273,821 $ 303,791
========= ========= =========
See notes to Consolidated Financial Statements (Unaudited).
3
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
NINE MONTHS ENDED
-------------------------------
2002 2001
-------------- ---------------
OPERATING ACTIVITIES
Net loss $(42,004) $ (524)
Adjustments to reconcile net loss to cash provided
by operating activities:
Cumulative effect of change in accounting principle 46,250 -
Depreciation 7,680 8,879
Amortization 1,199 4,619
Deferred income taxes 2,578 (352)
Net change in working capital accounts:
Accounts receivable (8,406) 2,871
Inventories 7,508 14,653
Prepaid expenses and other 762 (1,428)
Accounts payable (928) (577)
Accrued expenses and other current liabilities 3,909 (5,270)
Other long-term items (1,379) (4,833)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 17,169 18,038
INVESTING ACTIVITIES
Net additions to property, plant and equipment (2,579) (6,092)
Acquisitions and related items (750) (2,737)
-------- --------
CASH USED IN INVESTING ACTIVITIES (3,329) (8,829)
FINANCING ACTIVITIES
Net payments under secured credit agreement (12,500) (2,400)
Payment on other long-term borrowings (980) (1,081)
Exercise of stock options - 278
-------- --------
CASH USED IN FINANCING ACTIVITIES (13,480) (3,203)
INCREASE IN CASH AND CASH EQUIVALENTS 360 6,006
Cash and cash equivalents at beginning of year 165 1,452
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 525 $ 7,458
======== ========
See notes to Consolidated Financial Statements (Unaudited).
4
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and changes in accounting
estimates) considered necessary for a fair presentation have been included.
NOTE B - GOODWILL AND INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 142,
"Goodwill and Other Intangible Assets," on December 30, 2001. Goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to impairment tests at least annually. Other intangible
assets will continue to be amortized over their useful lives.
Pursuant to the adoption of this Standard, Lamson completed a transitional
impairment review for goodwill during the second quarter of 2002 for each of its
reporting units. It was determined that the carrying value of the telecom
reporting unit (component of the Carlon business segment) exceeded its estimated
fair value as determined by utilizing various valuation techniques including
discounted cash flows. Given the indication of a potential impairment, the
Company completed the assessment of the implied fair value of the goodwill for
the telecom reporting unit, which resulted in an impairment loss of $60.0
million ($46.3 million after tax). This transitional impairment loss was
recognized as a cumulative effect of a change in accounting principle as of the
beginning of fiscal 2002. The transitional impairment loss is a one-time,
non-cash charge. No reclasses were required between intangible assets and
goodwill pursuant to the adoption of this Standard. Of the $21.6 million of
goodwill remaining on the balance sheet approximately $20.1 million relates to
the telecom reporting unit in the Carlon business segment and the remainder is
included in the Lamson Home Product business segment.
Prior to the adoption of SFAS No. 142 in fiscal 2002, amortization expense was
recorded for goodwill. For comparison purposes, supplemental net income and
earnings per common share for the third quarter and nine months ended 2001 are
provided as follows:
(Dollars in thousands, except per share amounts)
THIRD QUARTER NINE MONTHS
ENDED 2001 ENDED 2001
------------- -----------
Net loss as previously reported $(1,921) $ (524)
Goodwill amortization, net of tax 930 2,734
------- -------
Net (loss) income, excluding goodwill amortization $ (991) $ 2,210
======= =======
(Loss) earnings per common share, excluding goodwill amortization
Basic $ (0.07) $ 0.16
Diluted $ (0.07) $ 0.16
5
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE B - GOODWILL AND INTANGIBLE ASSETS - CONTINUED
The Company's other intangible assets and related accumulated amortization is as
follows:
(Dollars in thousands)
NON-COMPETE
AGREEMENTS PATENTS TOTAL
------------ ----------- -----------
SEPTEMBER 28, 2002
- ------------------
Gross $ 6,500 $ 2,150 $ 8,650
Accumulated amortization (2,627) (1,012) (3,639)
------- ------- -------
Net value $ 3,873 $ 1,138 $ 5,011
DECEMBER 29, 2001
- -----------------
Gross $ 6,500 $ 2,150 $ 8,650
Accumulated amortization (1,652) (788) (2,440)
------- ------- -------
Net value $ 4,848 $ 1,362 $ 6,210
SEPTEMBER 29, 2001
- ------------------
Gross $ 6,500 $ 2,150 $ 8,650
Accumulated amortization (1,327) (713) (2,040)
------- ------- -------
Net value $ 5,173 $ 1,437 $ 6,610
All non-compete agreements are included in the Carlon business segment and all
patents are included in the Lamson Home Products business segment. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the five succeeding years would be $1.6
million, $1.6 million, $1.6 million, $1.2 million and $0.2 million for 2002
through 2006, respectively.
NOTE C - INCOME TAXES
The third quarter 2002 income tax provision was calculated based on management's
estimate of the annual effective tax rate of approximately 42% for the year and
the recording of a valuation allowance during the second quarter against certain
of the Company's business tax credits. The provisions for 2002 and 2001 are
primarily non-cash charges.
NOTE D - 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 High Density Polyethylene (HDPE) conduit
designed to protect underground fiber optic cables, allowing future cabling
expansion and flexible conduit used inside buildings to protect communications
cable.
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - BUSINESS SEGMENTS - CONTINUED
LAMSON HOME PRODUCTS - CONSUMER: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" home improvement 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 electrical and telecommunications
conduit is made from polyvinyl chloride (PVC) resin and is used to protect wire
or fiber optic cables supporting the infrastructure of power or
telecommunications systems.
(Dollars in thousands)
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES
Carlon $ 38,174 $ 49,052 $ 115,102 $ 147,421
Lamson Home Products 18,166 15,835 51,969 45,419
PVC Pipe 26,041 25,667 72,591 83,106
--------- --------- --------- ---------
$ 82,381 $ 90,554 $ 239,662 $ 275,946
========= ========= ========= =========
OPERATING INCOME (LOSS)
Carlon $ 3,405 $ 4,618 $ 11,661 $ 14,811
Lamson Home Products 2,448 1,162 6,982 3,301
PVC Pipe 2,225 (4,094) 718 (7,150)
Corporate Office (850) (1,094) (4,106) (2,583)
--------- --------- --------- ---------
$ 7,228 $ 592 $ 15,255 $ 8,379
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,868 $ 3,017 $ 5,709 $ 9,081
Lamson Home Products 479 635 1,495 1,862
PVC Pipe 547 920 1,675 2,555
--------- --------- --------- ---------
$ 2,894 $ 4,572 $ 8,879 $ 13,498
========= ========= ========= =========
The third quarter and nine months ended 2002 operating income in the Carlon and
Lamson Home Products business segments exclude the amortization of goodwill
whereas the third quarter and nine months ended 2001 operating income includes
the amortization of goodwill. (See Note B).
The nine months ended 2001 operating loss in the PVC Pipe segment includes a net
gain of $1.6 million from a litigation settlement.
7
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - BUSINESS SEGMENTS - CONTINUED
Total assets by business segment at September 28, 2002, December 29, 2001 and
September 29, 2001 are as follows:
(Dollars in thousands)
SEPTEMBER 28, DECEMBER 29, SEPTEMBER 29,
2002 2001 2001
------------- ------------ -------------
IDENTIFIABLE ASSETS
Carlon $ 92,851 $153,194 $168,792
Lamson Home Products 27,961 28,157 30,294
PVC Pipe 40,752 45,684 52,030
Corporate Office (includes deferred tax
and pension assets) 57,883 46,786 52,675
-------- -------- --------
$219,447 $273,821 $303,791
======== ======== ========
The reduction in Carlon identifiable assets includes the write-off of $60.0
million in goodwill (see Note B) while the Corporate Office assets increased by
the related $13.7 million of deferred tax assets.
NOTE E - COMPREHENSIVE INCOME
The components of comprehensive income (loss) for the third quarter and the
first nine months of 2002 and 2001 are as follows:
(Dollars in thousands)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) $ 2,594 $ (1,921) $(42,004) $ (524)
Foreign currency translation
adjustments (29) 6 (14) (10)
Loss on derivative
instruments, net of tax (479) (1,093) (607) (1,357)
-------- -------- -------- --------
Comprehensive income (loss) $ 2,086 $ (3,008) $(42,625) $ (1,891)
======== ======== ======== ========
8
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E - COMPREHENSIVE INCOME - CONTINUED
The components of accumulated other comprehensive income (loss), at September
28, 2002, December 29, 2001 and September 29, 2001 are as follows:
(Dollars in thousands)
SEPTEMBER 28, DECEMBER 29, SEPTEMBER 29,
2002 2001 2001
------------- ------------ -------------
Foreign currency translation
adjustments $ (605) $ (591) $ (540)
Minimum pension liability adjustment (421) (421) (43)
Accumulated derivative losses, net of tax (1,641) (1,034) (1,357)
------- ------- -------
Accumulated other comprehensive
income (loss) $(2,667) $(2,046) $(1,940)
======= ======= =======
NOTE F - EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share amounts)
THIRD QUARTER ENDED NINE MONTHS ENDED
----------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Basic Earnings-Per-Share Computation
Net Income (Loss) $ 2,594 $ (1,921) $(42,004) $ (524)
======== ======== ======== ========
Average Common Shares Outstanding 13,778 13,776 13,778 13,751
======== ======== ======== ========
Basic Earnings (Loss) Per Share $ 0.19 $ (0.14) $ (3.05) $ (0.04)
======== ======== ======== ========
DILUTED EARNINGS-PER-SHARE COMPUTATION
Net Income (Loss) $ 2,594 $ (1,921) $(42,004) $ (524)
======== ======== ======== ========
Basic Shares Outstanding 13,778 13,776 13,778 13,751
Stock Options Calculated Under
the Treasury Stock Method - - - -
-------- -------- -------- --------
Total Shares 13,778 13,776 13,778 13,751
======== ======== ======== ========
Diluted Earnings (Loss) Per Share $ 0.19 $ (0.14) $ (3.05) $ (0.04)
======== ======== ======== ========
9
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE G - DERIVATIVES AND HEDGING
Effective as of the beginning of fiscal 2001, the Company adopted Statement of
Financial Accounting Standard 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.
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 4%, respectively. These transactions are considered cash
flow hedges and, therefore, the fair market value at the end of the third
quarter 2002 of a $1,641,000 (net of $1,049,000 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 $1,668,000 loss on the fair value of the hedges is classified in
current accrued liabilities, with the remaining $1,022,000 loss classified as a
long-term liability.
The Company has no derivative instruments that are classified as fair value
hedges.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
- ---------------------
Net sales were $82.4 million in the third quarter of 2002 or a 9% ($8.2 million)
decline from the third quarter of 2001. The entire reduction in net sales
occurred in the Carlon business segment, which experienced a reduction in net
sales of $10.9 million. Electrical products in this business segment experienced
minor growth as sales order levels for the residential and utility construction
markets remained firm. However, telecommunications market related sales in this
segment continue to run at least 30% below the same period last year resulting
in the entire shortfall. Lamson Home Products' net sales grew by 14.7% ($2.3
million), during the third quarter of 2002 compared with the third quarter of
2001. Continuing high levels of existing home sales and low interest rates
helped the home improvement market remain strong. In addition, our market share
improved as some large customers added Lamson Home Products' chimes and lighting
control products in their stores and ran Christmas promotions of seasonal
products. PVC Pipe segment net sales grew slightly, by approximately $400,000,
in 2002 compared with the same period in the prior year. After a very strong
second quarter 2002, volume of electrical conduit shipments was down in the
third quarter 2002 by 17.9% compared with the same period in the prior year.
However, overall pipe pricing rose sharply in the third quarter 2002, up 27%
from the third quarter of 2001, recovering raw material cost increases that had
occurred due to the tight resin supply, but, then, trended lower in the latter
weeks of the quarter.
For the first three quarters of 2002, net sales declined by $36.3 million, or
13.1%, from the first three quarters of 2001. The Carlon business segment's net
sales fell $32.3 million, or 21.9%, during this period compared with the same
period in the prior year. The entire decline comes from lower sales in the
telecom infrastructure market as capital spending by these customers has dropped
dramatically. Conversely, Lamson Home Products' net sales for the first three
quarters of 2002 are up $6.6 million, or 14.4%, over the first three quarters of
2001. This segment has experienced the benefit of a strong home improvement
market and the addition of several new products and product line extensions in
its existing customer base. Finally, the PVC Pipe business segment has
experienced a net sales decline of $10.5 million, or 12.7%, through the first
three quarters of 2002 compared with the same period in the prior year. On
average, PVC Pipe shipment volume is down 9.7% from the first three quarters of
2001 while average pricing year-to-date is almost the same as last year.
Customers early in 2002 were working off inventories and recently there has been
hesitancy on their part to purchase additional inventory going into the
seasonally-weaker portion of the construction season.
Our gross margin percentage in the third quarter of 2002 increased by
approximately 47% to 22.1% from the 15.0% gross margin achieved in the same
quarter of 2001. The reduction of telecom product sales in the Carlon business
segment and increased material costs caused a slight decline in its gross margin
in the third quarter and year-to-date 2002 compared with the same periods of
2001. The HDPE conduit production capacity utilization was approximately 30% in
the current quarter, which was down by over 40% from the same period in 2001.
Lamson Home Products continued to improve its gross margin as higher sales
volumes have contributed to higher utilization of our molding facilities.
Finally, the PVC Pipe segment gross margin was significantly better in the third
quarter 2002 reflecting higher average selling prices and an end of the raw
material cost increases. The capacity utilization of the PVC Pipe manufacturing
facilities declined throughout the third quarter, but averaged in the 60% to 70%
range, which is comparable to the prior year period.
Operating income for the third quarter of 2002 totaled $7.2 million, or 8.8% of
net sales, a $6.6 million improvement from the prior year's third quarter
operating income of $0.6 million, or 0.7% of net sales. The increased operating
income is a direct result of the higher gross profit aided by a reduction in
operating expenses during the quarter from the elimination of $1.2 million in
goodwill amortization (see Note B).
In addition, operating expenses in the third quarter of 2002 were favorably
affected by reductions in the Company's salaried workforce implemented during
the fourth quarter of 2001, continued control of
11
discretionary spending, especially travel related items and changes in estimates
for litigation costs. These favorable items were offset by higher employee
benefit costs and increased allowances for doubtful accounts related to the
telecom market.
Year-to-date operating income is $15.3 million, or 6.4% of net sales in 2002,
compared with $8.4 million, or 3% of net sales, for the same period in 2001.
Operating expenses during the first three quarters of 2001 included a $1.6
million gain from a litigation settlement. Excluding this net gain and $3.5
million in goodwill amortization included in the 2001 year-to-date operating
expense, the Company lowered operating expenses by $3.4 million in the first
three quarters of 2002 compared with the same period in 2001. This reduction is
reflective of the lower sales levels in 2002, items mentioned in the previous
paragraph that affected the third quarter comparisons and higher professional
fees incurred in the first half of 2002 evaluating the Company's operations and
financial structure.
Net interest expense was consistent with the prior year as approximately $32.0
million in debt has been paid down in the last twelve months, which offset
higher average borrowing rates of 7% and increased amortization of loan costs in
the third quarter and first nine months of 2002 compared with the third quarter
and first nine months of 2001.
The income tax provision for the first three quarters of 2002 reflects an
estimated tax rate of 42%, and net changes in the deferred tax valuation
allowance against certain of the Company's general business tax credits.
During the second quarter of 2002, the Company completed the transitional review
for goodwill impairments required under SFAS No. 142 "Goodwill and Other
Intangible Assets." The review indicated that goodwill recorded in the telecom
reporting unit of the Carlon business segment was impaired as of the beginning
of fiscal 2002. Accordingly, the Company measured and recognized a transitional
goodwill impairment loss of $60.0 million ($46.3 million after tax). This has
been recorded as a cumulative effect of a change in accounting principle in the
statement of operations (see Note B).
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) was $10.1 million for the third quarter of 2002, and $24.1 million for
the first three quarters of 2002, compared with $5.1 million and $21.9 million
for the respective periods in 2001.
FINANCIAL CONDITION
- -------------------
Working capital was reduced to $28.4 million at the end of the current quarter,
which is $21.6 million lower than last year's third quarter and $2.8 million
lower than year-end 2001. During the first three quarters of 2002, the Company
generated $17.2 million of cash flows from operating activities compared to
$18.0 million for the first three quarters of 2001. The Company has continued to
generate positive cash flow from working capital management while also improving
operating results in the current year.
Accounts receivable were $47.6 million at the end of the third quarter of 2002
compared to $39.2 million at year-end 2001 and $51.7 million outstanding at the
end of third quarter 2001. Days sales outstanding were approximately 52 days
this quarter, which is improved by two days from the prior year's third quarter
performance levels.
At the end of the third quarter 2002, the Company had $34.6 million in
inventory. The inventory level is down $7.5 million or 17.8% from year-end 2001
and $10.3 million, or 22.9% from third quarter of 2001. This decrease was the
result of an across-the-board inventory reduction effort in 2002. The cost per
pound of the primary raw material, PVC resin, in inventory has risen
significantly throughout 2002 and is approximately 25% higher at the end of the
third quarter 2002 as compared with the same quarter of 2001 and 40% higher than
year-end 2001. However, pounds of PVC resin inventory at the end of the third
quarter of 2002 have also declined by nearly 24% and 38% compared with the end
of the third quarter of 2001 and year-end 2001,
12
respectively. On an overall basis, inventory turns improved to 6.0 times at the
end of the third quarter versus 5.5 times in the prior year third quarter
despite the lower sales levels in the current year. The Company's exposure to
resin price volatility is reduced with the improved inventory turns.
Accounts payable have remained about the same as year-end 2001, but are lower
than the prior year third quarter by $6.9 million due to inventory reductions,
which lowered the purchases of PVC and HDPE resins in the third quarter of 2002.
The increase in accrued expenses during the first three quarters of 2002
reflects expectations for compensation and benefit costs and annual customer
sales and marketing programs.
Capital expenditures totaled $2.6 million during the first three quarters of
2002. The Company anticipates spending approximately $4 million to $5 million
for the full year of 2002 including additional plant equipment and system
upgrades.
During the first three quarters of 2002 the Company has reduced its outstanding
debt by over $13 million. Based on current projected operating results for the
year, the Company believes cash flow from operations provides adequate financing
for all of its operating needs, planned capital expenditures and scheduled debt
payments. In addition, the Company anticipates making a voluntary cash
contribution to its defined benefit pension plans in the fourth quarter to
alleviate the underfunded status, which has been created by the decline in
equity market investments, primarily over the last six months. The Company
continues to evaluate changes to its capital structure in order to ensure an
appropriate degree of future financial flexibility.
The Company is in the process of submitting a business plan in order to comply
with listing requirements of the New York Stock Exchange (the "Exchange") as
part of its effort to qualify for continued listing. The Company's plan, if
accepted, will be reviewed for ongoing compliance with its goals and
objectives. This effort follows a formal notice from the Exchange that the
Company is below the Exchange's continued listing criteria of a total market
capitalization of not less than $50 million over a 30-day trading period and
shareholders' equity of not less than $50 million. The Company believes its
business plan, when implemented, should achieve the requirements of the
Exchange for shareholder equity and market capitalization. The Exchange requires
that the Company be in compliance with these requirements within 18 months of
notice from the Exchange. At the end of the third quarter of 2002, the
Company's shareholder equity was $38.6 million. The Company's total market
capitalization, based on 13.8 million shares of common stock outstanding at a
closing price of $3.05 on October 30, 2002 was $42.1 million.
SIGNIFICANT ACCOUNTING POLICIES AND MANAGEMENT JUDGMENTS
- --------------------------------------------------------
Inherent in the Company's results of operations are certain estimates,
assumptions and judgments including reserves against accounts receivable for
doubtful collections, inventory costing and valuation allowances and an assumed
rate of return on invested pension assets. The Company maintains allowances
against accounts receivable and inventory obsolescence and valuation reserves
that are believed to be reasonable based on the Company's historical experience
and current expectations for future performance of operations.
A sudden and prolonged deterioration in the economy could adversely affect the
Company's customers (especially related to the telecom or retail market)
requiring the Company to increase its allowances for doubtful accounts. A sudden
or unexpected decline in PVC resin costs coupled with a slow-down in sales
volume could result in write downs of inventory valuations. If such adverse
conditions would occur, the Company cannot readily predict the effect on its
financial condition or results of operations as any such effect depends on both
future results of operations and the magnitude and timing of the adverse
conditions.
The Company's policy of amortizing unrecognized gains or losses in accordance
with SFAS No. 87, the significant deterioration in the stock market and
resulting reduction in defined benefit pension plan assets could have a
significant impact in the near term on the reported pension income (expense) to
be included in the Company's results of operations beginning in 2003. In
addition, the substantial decline in defined benefit pension plan assets over
the past six months may increase the contribution level required for the
Company's defined benefit pension plans to remain appropriately funded in the
fourth quarter of 2002 and possibly in 2003.
Management also makes judgments and estimates in recording liabilities for
environmental cleanup and litigation. Liabilities for environmental remediation
are subject to change because of matters such as changes in laws, regulations
and their interpretation; the determination of additional information on the
extent and nature of site contamination; and improvements in technology. Actual
litigation costs can vary from estimates based on the facts and circumstance and
application of laws in individual cases.
As of September 28, 2002, the Company had approximately $26.9 million of net
deferred tax assets primarily related to loss carryforwards that expire through
2021. The realization of these net assets is based primarily upon estimates of
future taxable income. Current expectations of operating results are sufficient
to sustain realization
13
of these net assets. However, should taxable income estimates for the
carryforward period be significantly reduced, the full realization of net
deferred tax assets may not occur.
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.
Both the residential construction and home improvement markets remained stable
in the third quarter of 2002 providing the Company with a firm operating base in
the quarter. Spending on utility projects also continued steadily in the current
quarter. It is expected that these markets will soften in the fourth quarter of
2002 and first quarter 2003 due to seasonal factors and reduced consumer
spending.
The capital spending levels in the industrial and commercial construction
markets have not improved from the first half of 2002 and have worsened as
spending in these markets in the third quarter fell approximately 21% from the
third quarter of 2001. All indications are that cost increases on PVC resin
peaked during the third quarter 2002, and these costs are expected to decline
for the remainder of 2002. The Company will attempt to maintain reasonable
margin spreads in the PVC Pipe business during the fourth quarter as we continue
to reduce inventory and production rates heading into the seasonally-weaker
portion of the construction season.
We continue to monitor the telecommunications infrastructure market closely and
remain skeptical that we will see any growth in this area prior to 2004. Market
participants continue to struggle with credit issues, system over-capacity and
lower revenue projections. In the long term, we expect this market to stabilize
and provide annual growth of 5% or more when the build out of metropolitan rings
and inner city grids is realized.
As indicated by our strong cash flow in the third quarter and year-to-date, we
continue to concentrate on cash management and the reduction of debt and
leverage. We expect to generate enough cash from operating activities in the
fourth quarter of 2002 to cover any operating needs, planned capital
expenditures and scheduled debt payments during the period. A substantial
contribution to our defined benefit pension plans may become necessary at
year-end to keep them adequately funded if plan asset values do not otherwise
improve.
At this time, we anticipate net sales for the year will be between $310 million
- - $320 million reflecting the normal fourth quarter slowdown. Earning results
for the fourth quarter will be breakeven to marginally profitable resulting in
2002 diluted earnings per share of 30 to 35 cents.
The Company continues to review possible changes in its capital structure to
ensure that appropriate financial flexibility is maintained.
For 2003, we anticipate that the residential construction and retail markets
will remain stable. Net sales growth will be dependent upon maintaining the
current pricing level for PVC Pipe products and the beginning of a recovery in
industrial and commercial construction markets.
Net income should be 10% to 15% above the 2002 performance after consideration
of higher pension and interest expense. Diluted earnings per share should be 35
to 40 cents for 2003 compared with the projected range of 30 to 35 cents for
2002. We expect all three business segments to be profitable for the year,
although volatility should be expected in the performance of our PVC Pipe
business segment. It is still premature to consider quarterly comparisons to
2002, but we anticipate being profitable in the first quarter of 2003, compared
to a loss in the same period in 2002.
Discretionary spending control and working capital management will
continue the progress realized in 2002. The deleveraging of our balance sheet
will be progressively realized throughout each quarter's performance.
14
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, and (iv) any adverse change in the recovery trend of the
country's general economic condition affecting the markets for the Company's
products.
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
Within 90 days before the filing date of this quarterly report on Form 10-Q for
the quarter ended September 28, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to their evaluation.
15
PART II
- -------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
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 ("Intermatic") 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 $12.5 million, plus pre-judgment
and post-judgment interest estimated to be in excess of $3 million, was
reversed. Intermatic filed for a rehearing of the ruling to the Court of Appeals
en banc, which was denied. Intermatic has filed a petition for certiorari with
the United States Supreme Court. The Company has filed, with the United States
Supreme Court, a brief in opposition to Intermatic's petition.
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 and resulted in a net gain of $1.6 million.
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 effect on the
Company's financial position, cash flows or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
10(a) Fourth Amendment to the Amended and Restated Credit Agreement,
entered into as of September 30, 2002, among The Lamson &
Sessions Co., the Guarantors party thereto, the Lenders party
thereto, and Harris Trust and Savings Bank, as Administrative
Agent for the Lenders.
(b) The following reports on Form 8-K were filed during the quarter ended
September 28, 2002:
1. The Company's Current Report on Form 8-K, dated July 31, 2002,
relating to the Company's second quarter earnings and adoption
of Financial Accounting Standard No. 142.
2. The Company's Current Report on Form 8-K, dated August 9,
2002, relating to the certifications made by the Company's
Chief Executive Officer and Chief Financial Officer with
respect to the Company's Quarterly Report on Form 10-Q for the
period ended June 29, 2002 pursuant to Section 906 of the
Sarbanes-Oxley Act.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE LAMSON & SESSIONS CO.
-------------------------
(Registrant)
October 31, 2002 By /s/ James J. Abel
--------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
I, John B. Schulze, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Lamson & Sessions Co. ("the Company");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this quarterly
report;
4. The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Company and we have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the Company,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Company's
disclosure controls and procedures as of a
date within 90 days prior to the filing date
of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of the Company's board of directors
(or persons performing the equivalent function):
17
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the Company's ability
to record, process, summarize and report
financial data and have identified for the
Company's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
October 31, 2002 /s/ John B. Schulze
-----------------------------------
John B. Schulze
Chairman of the Board, President
and Chief Executive Officer
I, James J. Abel, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Lamson & Sessions Co.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this quarterly
report;
4. The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Company and we have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the Company,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Company's
disclosure controls and procedures as of a
date within 90 days prior to the filing date
of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
18
5) The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of the Company's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the Company's ability
to record, process, summarize and report
financial data and have identified for the
Company's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
October 31, 2002 /s/ James J. Abel
-----------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
19