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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 April 5, 2003
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
T H E L A M S O N & S E S S I O N S C O.
------------------------------------------------------
(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
------- -------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
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 April 5, 2003 the Registrant had outstanding 13,785,520 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)
FIRST QUARTER ENDED
-------------------------------------------------------------
2003 2002
----------------------------- -----------------------------
NET SALES $ 79,445 100.0% $ 68,083 100.0%
Cost of products sold 66,174 83.3% 56,604 83.1%
------------ ------------
GROSS PROFIT 13,271 16.7% 11,479 16.9%
Operating expenses 10,677 13.4% 10,424 15.4%
------------ ------------
OPERATING INCOME 2,594 3.3% 1,055 1.5%
Interest expense, net 2,213 2.8% 2,411 3.5%
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 381 0.5% (1,356) -2.0%
Income tax provision (benefit) 155 0.2% (600) -0.9%
------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 226 0.3% (756) -1.1%
Cumulative effect of change in accounting principle,
net of income tax of $13,750 - (46,250) -67.9%
------------ ------------
NET INCOME (LOSS) $ 226 0.3% $(47,006) -69.0%
============ =============
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before cumulative effect of change in
accounting principle $ 0.02 $ (0.05)
Cumulative effect of change in accounting principle,
net of tax - $ (3.36)
------------ ------------
NET EARNINGS (LOSS) $ 0.02 $ (3.41)
============ =============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before cumulative effect of change in
accounting principle $ 0.02 $ (0.05)
Cumulative effect of change in accounting principle,
net of tax - $ (3.36)
------------ ------------
NET EARNINGS (LOSS) $ 0.02 $ (3.41)
============ =============
See notes to Consolidated Financial Statements (Unaudited).
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands) FIRST QUARTER FIRST QUARTER
ENDED YEAR ENDED ENDED
-----------------------------------------
2003 2002 2002
-----------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 598 $ 1,496 $ 726
Accounts receivable, net of allowances of
$2,061, $1,924 and $2,559, respectively 42,458 36,686 37,071
Inventories, net
Finished goods and work-in-process 33,686 28,881 35,620
Raw materials 3,541 3,349 4,430
--------- --------- ---------
37,227 32,230 40,050
Deferred tax assets 9,979 9,979 6,500
Prepaid expenses and other 4,123 4,373 4,709
--------- --------- ---------
TOTAL CURRENT ASSETS 94,385 84,764 89,056
PROPERTY, PLANT AND EQUIPMENT
Land 3,537 3,537 3,537
Buildings 25,119 24,910 25,108
Machinery and equipment 116,469 116,595 115,581
--------- --------- ---------
145,125 145,042 144,226
Less allowances for depreciation and amortization 94,717 93,293 88,443
--------- --------- ---------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 50,408 51,749 55,783
GOODWILL 21,558 21,558 21,666
PENSION ASSETS 30,665 30,882 24,026
DEFERRED TAX ASSETS 16,695 16,879 22,965
OTHER ASSETS 7,251 7,873 8,913
--------- --------- ---------
TOTAL ASSETS $ 220,962 $ 213,705 $ 222,409
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,142 $ 21,209 $ 19,110
Accrued compensation and benefits 8,673 11,660 7,439
Other accrued expenses 11,865 15,617 13,900
Taxes 3,274 3,854 4,127
Current maturities of long-term debt 11,758 11,772 12,098
--------- --------- ---------
TOTAL CURRENT LIABILITIES 63,712 64,112 56,674
LONG-TERM DEBT 91,766 84,350 106,100
POST RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 28,927 29,067 25,116
SHAREHOLDERS' EQUITY
Common shares 1,379 1,378 1,378
Other capital 75,525 75,499 75,499
Retained earnings (deficit) (34,605) (34,831) (40,613)
Accumulated other comprehensive income (loss) (5,742) (5,870) (1,745)
--------- --------- ---------
Total Shareholders' Equity 36,557 36,176 34,519
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 220,962 $ 213,705 $ 222,409
========= ========= =========
See notes to Consolidated Financial Statements (Unaudited).
3
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
FIRST QUARTER ENDED
--------------------------------
2003 2002
--------------- ---------------
OPERATING ACTIVITIES
Net income (loss) $ 226 $(47,006)
Adjustments to reconcile net income (loss) to cash used
in operating activities:
Cumulative effect of change in accounting principle -- 46,250
Depreciation 2,289 2,640
Amortization 400 400
Deferred income taxes 109 (600)
Net change in working capital accounts:
Accounts receivable (5,772) 2,133
Inventories (4,997) 2,033
Prepaid expenses and other 250 274
Accounts payable 6,933 (2,865)
Accrued expenses and other current liabilities (7,050) (2,981)
Other long-term items 510 (754)
-------- --------
CASH USED IN OPERATING ACTIVITIES (7,102) (476)
INVESTING ACTIVITIES
Net additions to property, plant and equipment (948) (552)
Acquisitions and related items (250) (250)
-------- --------
CASH USED IN INVESTING ACTIVITIES (1,198) (802)
FINANCING ACTIVITIES
Net borrowings under secured credit agreement 7,600 2,000
Payment on other long-term borrowings (198) (161)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 7,402 1,839
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (898) 561
Cash and cash equivalents at beginning of year 1,496 165
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 598 $ 726
======== ========
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.
Certain 2002 amounts have been reclassified to conform with 2003
classifications.
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 are no longer amortized but
are 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 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.
NOTE C - INCOME TAXES
The first quarter 2003 income tax provision was calculated based on management's
estimate of the annual effective tax rate of 41% for the year. The majority of
the provisions for 2003 and 2002 are 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.
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, door chimes and lighting controls.
5
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - BUSINESS SEGMENTS - CONTINUED
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 our power or
telecommunications systems.
(Dollars in thousands)
FIRST QUARTER ENDED
----------------------------------------
2003 2002
------------ -----------
NET SALES
Carlon $ 33,979 $ 34,991
Lamson Home Products 18,564 16,292
PVC Pipe 26,902 16,800
-------- --------
$ 79,445 $ 68,083
======== ========
OPERATING INCOME (LOSS)
Carlon $ 2,006 $ 3,157
Lamson Home Products 2,623 1,993
PVC Pipe (701) (2,764)
Corporate Office (1,334) (1,331)
-------- --------
$ 2,594 $ 1,055
======== ========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,727 $ 1,946
Lamson Home Products 433 524
PVC Pipe 529 570
-------- --------
$ 2,689 $ 3,040
======== ========
Total assets by business segment at April 5, 2003 and December 28, 2002.
(Dollars in thousands)
APRIL 5, DECEMBER 28,
2003 2002
----------- ------------
IDENTIFIABLE ASSETS
Carlon $ 84,803 $ 83,750
Lamson Home Products 29,322 27,222
PVC Pipe 41,738 35,862
Corporate Office (includes deferred taxes and
pension assets) 65,099 66,871
-------- --------
$220,962 $213,705
======== ========
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E - COMPREHENSIVE INCOME
The components of comprehensive income (loss) for the first quarters of 2003 and
2002 are as follows:
(Dollars in thousands)
FIRST QUARTER ENDED
---------------------------
APRIL 5, MARCH 30,
2003 2002
-------- ---------
Net income (loss) $ 226 $(47,006)
Foreign currency translation adjustments 10 (25)
Interest rate swaps, net of tax 118 326
-------- --------
Comprehensive income (loss) $ 354 $(46,705)
======== ========
The components of accumulated other comprehensive loss, at April 5, 2003,
December 28, 2002 and March 30, 2002 are as follows:
(Dollars in thousands)
APRIL 5, DECEMBER 28, MARCH 30,
2003 2002 2002
------- ------------ ---------
Foreign currency translation
adjustments $ (604) $ (614) $ (616)
Minimum pension liability adjustments,
net of tax (3,706) (3,706) (421)
Interest rate swaps, net of tax (1,432) (1,550) (708)
------- ------- -------
Accumulated other comprehensive loss $(5,742) $(5,870) $(1,745)
======= ======= =======
7
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
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)
FIRST QUARTER ENDED
----------------------------------------
2003 2002
----------- -------------
Basic Earnings-Per-Share Computation
Net Income (Loss) $ 226 $(47,006)
======== ========
Average Common Shares Outstanding 13,783 13,778
======== ========
Basic Earnings (Loss) Per Share $ 0.02 $ (3.41)
======== ========
DILUTED EARNINGS-PER-SHARE COMPUTATION
Net Income (Loss) $ 226 $(47,006)
======== ========
Basic Shares Outstanding 13,783 13,778
Stock Options Calculated Under the Treasury Stock Method 6 34
-------- --------
Total Shares 13,789 13,812
======== ========
Diluted Earnings (Loss) Per Share $ 0.02 $ (3.41)
======== ========
In 2002, the weighted average shares issuable upon the exercise of stock options
were excluded from the computation of diluted earnings per share due to their
antidilutive effect.
NOTE G - DERIVATIVES AND HEDGING
The Company recognizes all derivative financial instruments as either assets or
liabilities at fair value. Derivative instruments that are not hedges are
adjusted to fair value through net income. 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.
During the first quarter of 2001, the Company entered into two interest rate
swap agreements for a total notional amount of $58.5 million, of which $38.5
million was outstanding at April 5, 2003, 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 4.0%, respectively. These transactions are considered cash flow hedges
and, therefore, the fair market value at the end of the first quarter 2003 of a
$1,432,000 (net of $915,000 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 $1,591,000 of the loss on the fair value of the hedges is
classified in current accrued liabilities, with the remaining $756,000 loss
classified as a long-term liability.
8
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE G - DERIVATIVES AND HEDGING - CONTINUED
The Company has no derivative instruments that are classified as fair value
hedges.
NOTE H - CONTINGENCY
The Company remains contingently liable for certain post-retirement benefits of
a business previously sold. No liability has been accrued as the Company's
liability is not probable or cannot be reasonably estimated. This contingency
expires in 2008, twenty years after the sale of the related business.
NOTE I - STOCK COMPENSATION PLANS
The Company currently has two stock-based employee compensation plans. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. In accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
FIRST QUARTER ENDED
---------------------------------
(Dollars in thousands, except per share data) 2003 2002
---------------------------------
Net income (loss) As reported $ 226 $ (47,006)
Total stock-based employee compensation, net of tax (23) (180)
-------- ---------
Net income (loss) Pro forma $ 203 $ (47,186)
======== =========
Basic earnings per share As reported $ 0.02 $ (3.41)
Pro forma 0.01 (3.42)
Diluted earnings per share As reported $ 0.02 $ (3.41)
Pro forma 0.01 (3.42)
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales increased by 16.7%, or $11.4 million, during the first quarter of 2003
compared with the first quarter of 2002. About $5 million of this increase is a
result of an extra week occurring in this fiscal quarter compared with the prior
year. The Carlon business segment experienced a decline of $1 million in net
sales, or 2.9%, compared with the prior year quarter. Although the decline in
net sales trends has slowed, the segment recognized about $1 million in lower
net sales from telecommunications-related product lines. Electrical product
sales were also disappointing, showing no growth from the prior year first
quarter. Much of this sales shortfall is attributable to very slow shipments in
January and February as the weather in much of the country was not conducive to
outdoor construction activity. Lamson Home Products' net sales increased by $2.3
million, or 13.9% during the first quarter of 2003 compared with the first
quarter of 2002. Approximately half of this increase is a result of the extra
week included in this year's first quarter and the remainder is from the
realization of market share gains made during the second half of 2002 with
several customers. The largest increase in net sales this quarter came in the
PVC Pipe business segment where net sales grew by $10.1 million, or 60.1% over
the $16.8 million reflected in the first quarter of 2002. Both volume of
shipments and selling prices were up in the current quarter compared with the
first quarter of 2002. The PVC Pipe business segment experienced an increase of
21% in pipe pounds sold and an increase in selling price per pound of
approximately 25% compared with the prior year first quarter. The volume
increases are primarily from market share gains from telecom and utility
customers while the average selling price increases are a reflection of the cost
increases on PVC resin which have been passed on to our customers.
Our gross margin percentage in the first quarter of 2003 was 16.7% ($13.3
million in gross profit), which is slightly less than the 16.9% gross margin
($11.5 million in gross profit) realized in the prior year first quarter. The
Company experienced an unfavorable product mix in the current quarter as the PVC
Pipe business segment was a higher percentage of total net sales, while Carlon
sales were off from last year. In addition, higher benefit costs, especially
pension expense related to qualified and non-qualified pension plans and other
post-retirement benefit plans the Company sponsors for current and former
employees, were partially offset by continued cost containment across the
operating locations. Finally, due to the lower PVC resin inventories and higher
PVC Pipe sales volume this quarter, the utilization of the extrusion plants rose
to approximately 75% for the current quarter compared with slightly over 60% in
the first quarter of 2002.
Operating income for the first quarter of 2003 totaled $2.6 million, or 3.3% of
net sales, which is more than double the first quarter of 2002 operating income
of $1.1 million, or 1.5% of net sales. Despite a net sales increase of 16.7%,
operating expenses have only risen by about $250 thousand this quarter, or 2.4%
over the prior year quarter. Higher variable selling, pension and retiree
medical expenses were offset by lower legal, consulting and bad debt charges.
During the second quarter of 2002, the Company completed the transitional review
for goodwill impairment 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 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) as of the beginning of fiscal 2002.
Net interest expense declined by approximately $0.2 million compared with the
prior year, as debt has been paid down by approximately $15 million from the
first quarter 2002, and average borrowing rates (inclusive of the interest rate
swaps) declined to 6.46% in the first quarter 2003 compared with 6.64% in the
first quarter of 2002.
The income tax provision was recorded using an annualized estimated effective
rate of 41% for 2003 compared with a 44% estimated rate in the first quarter of
2002.
10
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) were $5.3 million for the first quarter of 2003 compared with $4.1
million for the first quarter of 2002, a 29% improvement.
The components of this calculation are as follows:
(Dollars in thousands)
First Quarter
-----------------------------------
2003 2002
--------- ----------
Operating income $ 2,594 $ 1,055
Depreciation 2,289 2,640
Amortization 400 400
------- -------
EBITDA $ 5,283 $ 4,095
======= =======
EBITDA is a calculation used by management to measure operating performance.
EBITDA is not a recognized term under accounting principles generally accepted
in the United States and does not purport to be an alternative to operating
income or to cash flows from operating activities as a measure of liquidity.
FINANCIAL CONDITION
Working capital (current assets less current liabilities) was $30.7 million at
the end of the first quarter of 2003, a reduction of $1.7 million from last
year's first quarter, but $10 million higher than the 2002 year-end. Heading
into the spring construction season, the Company usually builds inventory and
incurs higher accounts receivable balances which utilize operating cash flow.
Accounts receivable were $42.5 million at the end of the first quarter of 2003.
This represents an increase of 14.6%, or $5.4 million, from the prior year's
first quarter. This increase is directly attributed to the improved sales level
experienced in the current year compared with the prior year. Days sales
outstanding, calculated using a 3-month rolling average, were approximately 46.6
days in the first quarter of 2003 compared with 49.7 days in the first quarter
2002. The quality of accounts receivable has improved as numerous
telecommunications account collections were resolved throughout 2002.
At the end of the first quarter of 2003, the Company had approximately $37.2
million in inventory. The inventory level is up $5 million, or 15.5%, from
year-end 2002, but down by $2.8 million, or 7%, from the first quarter of 2002.
The cost per pound of the primary raw material, PVC resin, has gone up steadily
during the first quarter of 2003 and is approximately 37.6% higher at the end of
the first quarter 2003 compared with the same quarter of 2002, and 2.3% higher
than the year-end 2002. In addition, pounds of PVC resin in inventory at April
5, 2003 were 16% more than year-end, but 31% less than March 30, 2002. On an
overall basis, inventory turns, based on a 3-month rolling average, were 6.3
times at April 5, 2003 versus 4.6 times at March 30, 2002.
Accounts payable has increased from year-end 2002 by $6.9 million and is $10
million higher than the prior year first quarter which primarily reflects the
higher inventory levels. The reduction in expense accruals from year-end 2002
during the first quarter of 2003 reflects the routine payments of annual
incentive compensation and customer sales and marketing programs.
Capital expenditures totaled $0.9 million in the first quarter of 2003 primarily
for production improvements and critical tooling. The Company plans to spend
approximately $8-10 million on selective plant capacity increases, equipment
upgrades, enhanced business system capabilities and tooling to support new
product introductions during 2003.
11
The Company has credit availability of over $20 million which is adequate for
its current operational expenses and the capital spending plans described above.
Based on the Company's first quarter-end leverage ratio, the interest rates on
the Company's secured credit agreement remains unchanged.
The Company continues to operate under a business plan accepted by the New York
Stock Exchange (the "Exchange") in December 2002. The Company submitted its
business plan to the Exchange in October 2002 in order to comply with the
listing requirements of the Exchange. This effort follows a formal notice from
the Exchange that the Company was, at the time of the notice, 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's plan will be reviewed quarterly for
ongoing compliance with its goals and objectives. The Company's total market
capitalization, based on 13.786 million shares of common stock outstanding at a
closing price of $4.51 on April 25, 2003 was $62.2 million. The market
capitalization was above $50 million over a 30-day trading period, as required
by the Exchange's listing criteria. The Company believes its business plan, when
implemented, should continue to achieve the requirements of the Exchange for
market capitalization and to achieve the requirements of the Exchange for
shareholders' equity. At the end of the first quarter 2003, the Company's
shareholder equity was $36.6 million.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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 or prolonged deterioration in the economy could adversely affect the
Company's customers (especially related to the residential housing construction,
telecom infrastructure or retail markets) 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 has caused an
increase of approximately $2.4 million in the reported pension expense to be
included in the Company's results of operations in 2003. The Company made a
voluntary contribution of $6 million to the Company's defined benefit plans in
the fourth quarter of 2002. In addition, any further decline in defined benefit
pension plan assets during the next year will increase the contribution levels
required for the Company's defined benefit pension plans.
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 April 5, 2003, the Company had approximately $26.7 million of net deferred
tax assets, of which approximately $12.0 million relate to loss carryforwards
that expire through 2022. 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 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
Certain sections of this Quarterly Report on Form 10-Q, including this Outlook
Section, 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.
Despite severe weather conditions in most of the country during the first part
of the quarter, housing starts and building permits both remained at very high
levels. This activity has continued to support electrical related sales in all
three business segments. It is anticipated that housing starts will slow down
modestly in the second half of 2003. Conversely, the non-residential
construction market has stabilized but remains very soft with no improvement in
volume anticipated until late 2003 or into 2004 as both industrial and
commercial property markets have excess capacity. The only current bright spot
in these markets appears to be some potential growth in institutional and public
construction projects.
12
The Company continues to believe the telecommunications infrastructure market
has essentially bottomed out and overall demand will be flat through 2003 for
these products. We have seen some increased project quoting activity as
customers evaluate making investments on incremental capacity additions,
especially related to the build-out of the metropolitan area fiber optic
networks, the expansion of the corporate and institutional high-speed networks
and the expansion of broadband services to the home. This is the area of the
market that we believe still has long-term growth opportunities.
As expected, PVC resin costs are increasing in response to higher oil and
natural gas prices and capacity restrictions on some feedstocks. We anticipate
that these increases will continue throughout the remainder of the first half of
2003 before leveling off. As our results indicate, these cost increases have,
for the most part, been passed on to customers resulting in improved margin
spreads and lower losses in the PVC Pipe segment. Pipe inventory continues to be
tightly monitored to limit our exposure to the possibility of a resin cost
decline later this year. The lower inventory levels have also allowed our
manufacturing plants to run at higher utilization rates than we experienced in
2002.
In summary, we reiterate our estimate that net sales for 2003 will increase by
8-10% over 2002. This comes primarily from higher price levels in the PVC Pipe
segment and market-share improvement in Lamson Home Products. We continue to
anticipate that net income will experience a 10-15% improvement over 2002, prior
to the change in accounting for SFAS No. 142, "Goodwill and Other Intangible
Assets," from a higher sales level, improved customer service and operational
efficiencies.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain 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) the continued availability and reasonable terms of
banking financing and (v) any adverse change in the recovery trend of the
country's general economic condition affecting the markets for the Company's
products. Because forward-looking statements are based on a number of beliefs,
estimates and assumptions by management that could ultimately prove to be
inaccurate, there is no assurance that any forward-looking statement will prove
to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have no material changes to the disclosure on this matter since the end of
our most recent fiscal year, December 28, 2002. Also see Form 10-K disclosure.
13
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days before the filing date of this Quarterly Report on Form 10-Q for
the quarter ended April 5, 2003, an evaluation was performed under the
supervision and within the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Company's controls and procedures. Based on
that evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, 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 of the Company subsequent to their evaluation.
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 then filed a petition for certiorari with
the United States Supreme Court. The United States Supreme Court has reversed
the decision of the Court of Appeals and remanded the case back to it. In March
2003, the Court of Appeals remanded this litigation back to the United States
District Court for reconsideration. The Company does not expect this matter to
be finally determined in 2003.
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:
None
(b) Reports on Form 8-K
1. The Company's Current Report on Form 8-K, dated February 27, 2003,
relating to the certifications made by the Company's Chief Executive
Officer and Chief Financial Officer with respect to the Company's
Annual Report on Form 10-K for the period ended December 28, 2002
pursuant to Section 906 of the Sarbanes-Oxley Act.
2. The Company's Current Report on Form 8-K, dated February 20, 2003,
relating to the Company's earnings for fourth quarter and full year
2002.
14
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)
April 30, 2003 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.;
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 Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant'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 Registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
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 Registrant'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;
15
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of the Registrant'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
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant'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
Registrant's internal controls; and
6. The Registrant'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.
April 30, 2003 /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 Registrant as of, and for,
the periods presented in this quarterly report;
4. The Registrant'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 Registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
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 Registrant'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;
16
5) The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of the Registrant'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
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant'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
Registrant's internal controls; and
6. The Registrant'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.
April 30, 2003 /s/ James J. Abel
-------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
17