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UNITED STATES
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 July 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
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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
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(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 July 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)
SECOND QUARTER ENDED FIRST HALF ENDED
----------------------------------------- -----------------------------------------
2003 2002 2003 2002
-------------------- ------------------- -------------------- -------------------
NET SALES $87,072 100.0% $89,198 100.0% $166,517 100.0% $157,281 100.0%
Cost of products sold 71,016 81.6% 69,699 78.1% 137,190 82.4% 126,303 80.3%
------- ------- -------- --------
GROSS PROFIT 16,056 18.4% 19,499 21.9% 29,327 17.6% 30,978 19.7%
Operating expenses 11,043 12.7% 12,527 14.1% 21,720 13.0% 22,951 14.6%
------- ------- -------- --------
OPERATING INCOME 5,013 5.7% 6,972 7.8% 7,607 4.6% 8,027 5.1%
Interest expense, net 2,125 2.4% 2,596 2.9% 4,338 2.6% 5,007 3.2%
------- ------- -------- --------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 2,888 3.3% 4,376 4.9% 3,269 2.0% 3,020 1.9%
Income tax provision 1,185 1.3% 1,968 2.2% 1,340 0.8% 1,368 0.9%
------- ------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 1,703 2.0% 2,408 2.7% 1,929 1.2% 1,652 1.0%
Cumulative effect of change in accounting
principle, net of income tax of $13,750 - 0.0% - 0.0% - 0.0% (46,250) -29.4%
------- ------- -------- --------
NET INCOME (LOSS) $ 1,703 2.0% $ 2,408 2.7% $ 1,929 1.2% $(44,598) -28.4%
======= ======= ======== ========
BASIC EARNINGS (LOSS) PER
COMMON SHARE:
Earnings before cumulative effect of
change in accounting principle $ 0.12 $ 0.17 $ 0.14 $ 0.12
Cumulative effect of change in accounting
principle, net of tax - - - (3.36)
------- ------- -------- --------
NET EARNINGS (LOSS) $ 0.12 $ 0.17 $ 0.14 $ (3.24)
======= ======= ======== ========
DILUTED EARNINGS (LOSS) PER
COMMON SHARE:
Earnings before cumulative effect of
change in accounting principle $ 0.12 $ 0.17 $ 0.14 $ 0.12
Cumulative effect of change in accounting
principle, net of tax - - - (3.36)
------- ------- -------- --------
NET EARNINGS (LOSS) $ 0.12 $ 0.17 $ 0.14 $ (3.24)
======= ======= ======== ========
See notes to Consolidated Financial Statements (Unaudited).
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands) SECOND QUARTER SECOND QUARTER
ENDED YEAR ENDED ENDED
-------------- ---------- --------------
2003 2002 2002
-------------- ---------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,318 $ 1,496 $ 3,733
Accounts receivable, net of allowances of
$1,946, $1,924 and $2,701, respectively 48,240 36,686 46,585
Inventories, net
Finished goods and work-in-process 39,247 28,881 30,630
Raw materials 3,480 3,349 3,634
--------- --------- ---------
42,727 32,230 34,264
Deferred tax assets 9,979 9,979 6,500
Prepaid expenses and other 4,323 4,373 4,202
--------- --------- ---------
TOTAL CURRENT ASSETS 106,587 84,764 95,284
PROPERTY, PLANT AND EQUIPMENT
Land 3,537 3,537 3,537
Buildings 25,119 24,910 24,730
Machinery and equipment 119,296 116,595 115,149
--------- --------- ---------
147,952 145,042 143,416
Less allowances for depreciation and amortization 96,987 93,293 88,820
--------- --------- ---------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 50,965 51,749 54,596
GOODWILL 21,558 21,558 21,666
PENSION ASSETS 30,449 30,882 23,982
DEFERRED TAX ASSETS 15,629 16,879 21,478
OTHER ASSETS 6,714 7,873 8,317
--------- --------- ---------
TOTAL ASSETS $ 231,902 $ 213,705 $ 225,323
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,390 $ 21,209 $ 24,119
Accrued compensation and benefits 9,049 11,660 8,855
Other accrued expenses 15,020 15,617 16,721
Taxes 3,751 3,854 4,415
Current maturities of long-term debt 11,755 11,772 12,112
--------- --------- ---------
TOTAL CURRENT LIABILITIES 72,965 64,112 66,222
LONG-TERM DEBT 91,443 84,350 98,378
POST RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 29,088 29,067 24,210
SHAREHOLDERS' EQUITY
Common shares 1,379 1,378 1,378
Other capital 75,525 75,499 75,499
Retained earnings (deficit) (32,902) (34,831) (38,205)
Accumulated other comprehensive income (loss) (5,596) (5,870) (2,159)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 38,406 36,176 36,513
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 231,902 $ 213,705 $ 225,323
========= ========= =========
See notes to Consolidated Financial Statements (Unaudited).
3
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
FIRST HALF ENDED
---------------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 1,929 $(44,598)
Adjustments to reconcile net income (loss) to cash (used) provided
by operating activities:
Cumulative effect of change in accounting principle - 46,250
Depreciation 4,553 5,185
Amortization 800 800
Deferred income taxes 1,111 1,177
Net change in working capital accounts:
Accounts receivable (11,554) (7,381)
Inventories (10,497) 7,819
Prepaid expenses and other 50 781
Accounts payable 12,181 2,144
Accrued expenses and other current liabilities (2,955) 1,221
Other long-term items 1,233 (1,551)
-------- --------
CASH (USED) PROVIDED BY OPERATING ACTIVITIES (3,149) 11,847
INVESTING ACTIVITIES
Net additions to property, plant and equipment (3,605) (1,910)
Acquisitions and related items (500) (500)
-------- --------
CASH USED IN INVESTING ACTIVITIES (4,105) (2,410)
FINANCING ACTIVITIES
Net borrowings (payments) under secured credit agreement 7,300 (5,500)
Payment on other long-term borrowings (224) (369)
-------- --------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7,076 (5,869)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (178) 3,568
Cash and cash equivalents at beginning of year 1,496 165
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,318 $ 3,733
======== ========
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 (beginning of
fiscal 2002). 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 $60.0
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.
NOTE C - INCOME TAXES
The year-to-date 2003 income tax provision was calculated based on management's
estimate of the annual effective tax rate of 41.0% for the year. The provisions
for 2003 and 2002 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.
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, power utility and sewer 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)
SECOND QUARTER ENDED FIRST HALF ENDED
----------------------- ------------------------
2003 2002 2003 2002
-------- --------- --------- ---------
NET SALES
Carlon $ 39,145 $ 41,937 $ 73,124 $ 76,928
Lamson Home Products 19,011 17,511 37,575 33,803
PVC Pipe 28,916 29,750 55,818 46,550
-------- --------- --------- ---------
$ 87,072 $ 89,198 $ 166,517 $ 157,281
======== ========= ========= =========
OPERATING INCOME (LOSS)
Carlon $ 3,675 $ 5,099 $ 5,681 $ 8,256
Lamson Home Products 3,225 2,541 5,848 4,534
PVC Pipe (8) 1,257 (709) (1,507)
Corporate Office (1,879) (1,925) (3,213) (3,256)
-------- --------- --------- ---------
$ 5,013 $ 6,972 $ 7,607 $ 8,027
======== ========= ========= =========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,721 $ 1,895 $ 3,448 $ 3,841
Lamson Home Products 420 492 853 1,016
PVC Pipe 523 558 1,052 1,128
-------- --------- --------- ---------
$ 2,664 $ 2,945 $ 5,353 $ 5,985
======== ========= ========= =========
Total assets by business segment at July 5, 2003, December 28, 2002 and June 29,
2002 are as follows:
(Dollars in thousands)
JULY 5, DECEMBER 28, JUNE 29,
2003 2002 2002
-------- ------------ --------
IDENTIFIABLE ASSETS
Carlon $ 89,534 $ 83,750 $ 92,889
Lamson Home Products 31,172 27,222 28,453
PVC Pipe 46,596 35,862 41,179
Corporate Office (includes deferred tax and
pension assets) 64,600 66,871 62,802
-------- -------- --------
$231,902 $213,705 $225,323
======== ======== ========
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E - COMPREHENSIVE INCOME
The components of comprehensive income (loss) for the second quarter and the
first half of 2003 and 2002 are as follows:
(Dollars in thousands)
SECOND QUARTER ENDED FIRST HALF ENDED
------------------- --------------------
JULY 5, JUNE 29, JULY 5, JUNE 29,
2003 2002 2003 2002
------ -------- ------ --------
Net income (loss) $1,703 $ 2,408 $1,929 $(44,598)
Foreign currency translation
adjustments 47 40 57 15
Interest rate swaps, net of tax 99 (454) 217 (128)
------ ------- ------ --------
Comprehensive income (loss) $1,849 $ 1,994 $2,203 $(44,711)
====== ======= ====== ========
The components of accumulated other comprehensive income (loss), at July 5,
2003, December 28, 2002 and June 29, 2002 are as follows:
(Dollars in thousands)
JULY 5, DECEMBER 28, JUNE 29,
2003 2002 2002
------- ------------ --------
Foreign currency translation
adjustments $ (557) $ (614) $ (576)
Minimum pension liability adjustments,
net of tax (3,706) (3,706) (421)
Interest rate swaps, net of tax (1,333) (1,550) (1,162)
------- ------- -------
Accumulated other comprehensive
income (loss) $(5,596) $(5,870) $(2,159)
======= ======= =======
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:
(Dollars in thousands, except per share amounts)
SECOND QUARTER ENDED FIRST HALF ENDED
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- --------
Basic Earnings-Per-Share Computation
Net Income (Loss) $ 1,703 $ 2,408 $ 1,929 $(44,598)
======= ======= ======= ========
Average Common Shares Outstanding 13,786 13,778 13,784 13,778
======= ======= ======= ========
Basic Earnings (Loss) Per Share $ 0.12 $ 0.17 $ 0.14 $ (3.24)
======= ======= ======= ========
DILUTED EARNINGS-PER-SHARE COMPUTATION
Net Income (Loss) $ 1,703 $ 2,408 $ 1,929 $(44,598)
======= ======= ======= ========
Basic Shares Outstanding 13,786 13,778 13,784 13,778
Stock Options Calculated Under
the Treasury Stock Method 83 45 45 -
------- ------- ------- --------
Total Shares 13,869 13,823 13,829 13,778
======= ======= ======= ========
Diluted Earnings (Loss) Per Share $ 0.12 $ 0.17 $ 0.14 $ (3.24)
======= ======= ======= ========
In 2002, the weighted average shares issuable upon the exercise of stock options
were excluded from the computation of the year-to-date 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.
8
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE G - DERIVATIVES AND HEDGING - CONTINUED
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 $36.5
million was outstanding at July 5, 2003. The swap agreements effectively fix the
interest rate 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 second
quarter 2003 of a $1,333,000 (net of $852,000 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 $1,528,000 loss on the fair value of the hedges is classified in
current accrued liabilities, with the remaining $657,000 loss classified as a
long-term liability.
The Company has no derivative instruments that are classified as fair value
hedges.
NOTE H - CONTINGENCY
The Company is contingently liable for certain post-retirement benefits of a
business previously sold in 1988. The business is being impacted unfavorably by
the poor economic outlook in their markets and may be unable to continue funding
these benefits. The Company continues to monitor the situation and is in the
process of determining the potential liability to the Company in the event the
business is not able to meet its obligation.
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.
(Dollars in thousands, except per share data)
SECOND QUARTER ENDED FIRST HALF ENDED
-------------------- -------------------
2003 2002 2003 2002
-------- -------- ------- ---------
Net income (loss) As reported $ 1,703 $ 2,408 $ 1,929 $ (44,598)
Total stock-based employee
compensation, net of tax (148) (191) (302) (371)
------- ------- ------- ---------
Net income (loss) Pro forma $ 1,555 $ 2,217 $ 1,627 $ (44,969)
======= ======= ======= =========
Basic earnings per share As reported $ 0.12 $ 0.17 $ 0.14 $ (3.24)
Pro forma 0.11 0.16 0.12 (3.26)
Diluted earnings per share As reported $ 0.12 $ 0.17 $ 0.14 $ (3.24)
Pro forma 0.11 0.16 0.12 (3.26)
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales decreased by 2.4%, or $2.1 million, in the second quarter 2003
compared with the second quarter of 2002. The Carlon segment declined by $2.8
million, or 6.7%, compared with the same quarter of the prior year. There has
been a decline in telecom raceway system spending for inside plant projects.
This slow down correlates to the generally soft commercial construction spending
that continues as businesses defer or scale back infrastructure investments. The
remainder of telecom products sales held steady with the prior year. The Lamson
Home Products business segment had net sales increase by $1.5 million, or 8.6%,
in the second quarter of 2003 compared with the second quarter of 2002. This
segment continues to realize the benefits of market share gains made during the
second half of 2002 with several customers, while the home improvement market
remained strong overall. This activity is supported by low mortgage rates and
active existing home sales. Finally, the PVC Pipe business segment experienced a
net sales decline of $0.8 million, or 2.8%, in the current quarter compared with
the prior year. The selling prices for PVC Pipe were up 22.0% in the current
quarter compared with the same period last year as resin costs remained at very
high levels, however, pipe pounds sold were down almost 30.0% for the same
periods. This sales volume is in line with the first quarter of 2003, and was
affected by the poor weather in much of the country this spring and the
continued weak demand in the commercial and industrial construction market.
For the first half of 2003, net sales increased by 5.9%, or $9.2 million,
compared with the first half of 2002. About $5.0 million of this increase was a
result of an extra week occurring in the first fiscal quarter compared with the
prior year. The Carlon business segment's net sales declined by $3.8 million, or
4.9%, in the first half of 2003 which was offset by an 11.2% increase in Lamson
Home Products net sales during the same period. The Carlon net sales shortfall
was almost entirely from telecommunications-related product lines, primarily
premise raceway projects as described above. The Lamson Home Products net sales
increases, as in the second quarter, were primarily attributable to market share
gains. The PVC Pipe business segment accounted for the largest increase in
year-to-date net sales increasing by $9.3 million, or 19.9%, over the prior year
first half period. Although the volume of pipe shipments is down 9.0%, the
average selling price is 22.0% higher in the first half of 2003 compared with
the first half of 2002.
The gross margin percentage in the second quarter of 2003 declined to 18.4% from
the 21.9% gross margin that was realized in the second quarter of 2002. The
primary reason for this decline is the relatively unfavorable product mix
occurring in the Carlon business segment. In addition, the PVC Pipe business
segment is experiencing narrower margins compared with the prior year as resin
costs have increased almost 50.0%. Due to softness in the commercial and
industrial construction demand in the current quarter only about half of this
material cost increase has been recovered through increased selling prices.
Lamson Home Products business segment gross margin has increased from the prior
year due to the additional sales generated and fixed nature of the business
support costs. Manufacturing costs so far this year have been unfavorably
impacted by higher medical benefits and general insurance costs. The overall
percent of capacity utilization in the manufacturing facilities improved to the
high 70's in the current quarter compared with the mid 70's in the prior-year
period. Lower utilization of the PVC Pipe extrusion facilities was more than
offset by the higher capacity utilization in the injection molding and HDPE
conduit production facilities.
Operating income for the second quarter of 2003 totaled $5.0 million, or 5.7% of
net sales, compared with the $7.0 million, or 7.8% of net sales, in the prior
year's second quarter. The entire decline in operating income is due to the
lower gross profit as previously discussed. Operating expenses are lower by $1.5
million, or 11.8%, in the second quarter 2003 compared with the same quarter in
the prior year. Higher pension and medical costs, both current employee and
retiree, were offset by lower variable selling and marketing expenses and
reduced legal, incentive compensation and bad debt expenses.
Year-to-date operating income is $7.6 million, or 4.6% of net sales, in 2003
compared with $8.0 million, or 5.1% of net sales, for the first half of 2002.
Operating expenses for the current year-to-date are $1.2 million lower than
10
the prior year. Higher variable selling and marketing expense, pension and
overall medical costs were incurred. However, the Company experienced lower
legal, consulting, compensation and bad debt expense.
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 $60.0 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) as of the beginning of fiscal 2002.
Net interest expense declined by approximately $0.7 million for the first half
of 2003 compared with the first half of 2002. Over the last 12 months, debt has
been paid down by almost $7.3 million and average borrowing rates have declined
to 6.2% in the second quarter 2003 (6.3% in the first half of 2003) from 7.0% in
the second quarter of 2002.
The income tax provision was recorded using an annualized estimated effective
rate of 41.0% for 2003, while the 2002 year-to-date income tax provision
reflects an estimated tax rate of 42.0%.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) were $7.7 million for the second quarter of 2003, and $13.0 million for
the first half of 2003 compared with $9.9 million, and $14.0 million for the
respective periods in 2002.
The components of this calculation are as follows:
(Dollars in thousands)
SECOND QUARTER FIRST HALF
----------------- -------------------
2003 2002 2003 2002
------ ------ ------- -------
Operating income $5,013 $6,972 $ 7,607 $ 8,027
Depreciation 2,264 2,545 4,553 5,185
Amortization 400 400 800 800
------ ------ ------- -------
EBITDA $7,677 $9,917 $12,960 $14,012
====== ====== ======= =======
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 cash flows from operating activities as a measure of liquidity.
FINANCIAL CONDITION
Working capital (current assets less current liabilities) was $33.6 million at
the end of the second quarter of 2003, an increase of $4.5 million from last
year's second quarter, but $12.9 million higher than from the 2002 year-end.
During the first half of the year, the Company usually builds inventory and
incurs higher accounts receivable balances which reduce operating cash flow.
Accounts receivable were $48.2 million at the end of the second quarter of 2003.
This represents an increase of 3.6%, or $1.7 million, from the prior year's
second quarter. This increase is directly attributed to the higher sales late in
the current quarter compared with the prior year. Days sales outstanding
calculated using a 3-month rolling average, were approximately 48.1 days in the
second quarter of 2003, which is virtually the same as the second quarter of
2002. The quality of accounts receivable has been maintained through close
monitoring and diligent collection efforts.
11
At the end of the first half of 2003, the Company had approximately $42.7
million in inventory. The inventory level is up $10.5 million, or 32.6%, from
year-end 2002, and higher by $8.5 million, or 24.7%, from the end of the first
half of 2002. The cost per pound of the primary raw material, PVC resin, has
continued to increase steadily during the first half of 2003, and is
approximately 22.9% higher at the end of the first half of 2003 compared with
the same quarter of 2002 and 16.3% higher than at year-end 2002. In addition,
pounds of PVC resin in inventory at the end of the second quarter of 2003 were
almost 34.0% more than at year-end 2002, and 16.0% more than the second quarter
of 2002. The Company has built inventories of PVC resin products to support the
start up of new blend operations in the fourth quarter of 2003. On an overall
basis, inventory turns, based on a 3-month rolling average, were 6.1 times at
July 5, 2003 versus 6.8 times at June 29, 2002.
Accounts payable has increased from year-end 2002 by $12.2 million and is $9.3
million higher than the prior year first half which primarily reflects the
higher inventory levels. The reduction in expense accruals from year-end 2002
during the first half of 2003 reflects the routine payments of annual incentive
compensation and customer sales and marketing programs.
Capital expenditures totaled $3.6 million in the first half 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.
The Company has credit availability of over $25.0 million, which is adequate for
its current operational expenses and the capital spending plans described above.
On July 29, 2003 the Company entered into a fifth amendment to its secured
credit agreement which resets its financial covenants consistent with
management's expectations of future results considering the continued delay in
the economic recovery. Based on the Company's second quarter leverage ratio, the
interest rate spread pursuant to the Company's secured credit agreement remained
unchanged.
The Company continues to operate under a Business Plan (the "Plan") accepted by
the New York Stock Exchange (the "Exchange") in December 2002. The Company
submitted its 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 $50.0 million over a 30-day trading period and shareholders'
equity of not less than $50.0 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 $5.15 on July 29, 2003 was $71.0
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 the
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 second quarter 2003, the
Company's shareholder equity was $38.4 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 reasonable and that are 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
12
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 $6.0 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 or discount rates during the next year will increase the
future 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.
Likewise, actual litigation costs can vary from estimates based on the facts and
circumstance and application of laws in individual cases.
As of July 5, 2003, the Company had approximately $25.6 million of net deferred
tax assets primarily related to loss carryforwards that expire through 2022 and
other timing differences. 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.
As disclosed in the Company's consolidated financial statements, the Company has
goodwill of $21.6 million, the majority of which relates to the telecom
reporting unit in the Carlon business segment. An annual impairment test of
goodwill is performed by an independent third party as of the first day of the
fourth quarter (or as conditions warrant). The test as of September 29, 2002
resulted in no additional impairment being identified from the impairment
recorded as of the first day of fiscal 2002 in connection with the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets." However, the process of
evaluating goodwill for additional impairment involves the determination of
the fair value of the telecom reporting unit. Inherent in such fair value
determinations are certain judgments and estimates, including the interpretation
of economic indicators and market valuations and assumptions about our strategic
plans. To the extent that our strategic plans change, or that economic and
market conditions worsen, it is possible that our conclusion regarding goodwill
impairment could change and result in a material effect on our financial
position or results of operations.
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 continued poor weather conditions in most of the country during this
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. The non-residential construction market 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 Company believes that while the telecommunications infrastructure market has
continued to decline, we have experienced stable demand for our products in the
first half and believes overall that demand will be flat through the remainder
of 2003 for these products. We believe that the Regional Bell Operating
Companies are acquiring existing network assets from insolvent owners instead of
spending capital on new infrastructure. Therefore, investments have been delayed
or scaled back until the economics improve. Due to the increased use of the
internet for a variety of applications, we continue to anticipate that the
build-out of the metropolitan area fiber optic networks, the
13
expansion of the corporate and institutional high-speed networks and the
expansion of broadband services to the home remain long-term growth
opportunities.
As expected, PVC resin costs increased in response to higher oil and natural gas
prices and capacity restrictions on some feedstocks. We anticipate that these
costs will level off and decline only slightly throughout the remainder of 2003.
Due to weakness in end market demand, especially commercial construction, we
were unable to pass on to customers some part of these increases, resulting in
lower margins and breakeven results in the PVC Pipe business segment. These
margins are expected to improve modestly in the second half.
On a positive note, operationally the Company has performed very well throughout
the first half of 2003 with fill rates and on-time shipments at record levels.
Due in a large part to this performance, Lamson Home Products, as in 2002, has
been able to secure additional market share with several of its customers. We
anticipate that this business will improve Lamson Home Products sales growth in
the second half of 2003 and operating performance in 2004.
In summary, management continues to expect that net sales for 2003 will increase
by 8-10% over 2002. This comes primarily from higher price levels in the PVC
Pipe business 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
bank 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.
ITEM 4 - CONTROLS AND PROCEDURES
Within 90 days before the filing date of this Quarterly Report on Form 10-Q for
the quarter ended July 5, 2003, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and the 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 the 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.
14
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 $3.0 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 2003, the Company held its Annual Meeting of Shareholders. At the
meeting 12,583,064 Common Shares (91.33% of the Common Shares outstanding) were
voted.
The following three directors were elected to Class II and received the votes
indicated next to their names.
CLASS II FOR WITHHELD AUTHORITY
- ------------------------------- -------------- ------------------
John C. Dannemiller 12,450,513 132,551
George R. Hill 12,452,113 130,951
William H. Coquillette 12,452,453 130,611
In addition, the following director was elected to Class I and received the
votes indicated next to his name.
CLASS I FOR WITHHELD AUTHORITY
- ------------------------------- -------------- ------------------
D. Van Skilling 12,448,253 134,811
15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(a) Fifth Amendment to the Amended and Restated Credit
Agreement, entered into as of July 29, 2003, 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.
99(a) Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1. The Company's Current Report on Form 8-K, dated April 30,
2003, 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 April 5, 2003 pursuant to Section 906 of
the Sarbanes-Oxley Act.
2. The Company's Current Report on Form 8-K, dated April 30,
2003, relating to the Company's earnings for first quarter
2003.
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)
July 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;
17
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.
July 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
18
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 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.
July 30, 2003 /s/ James J. Abel
-------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
19