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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 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 3, 2004
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
THE LAMSON & SESSIONS CO.
--------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-0349210
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25701 Science Park Drive
Cleveland, Ohio 44122-7313
------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
216/464-3400
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
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 3, 2004 the Registrant had outstanding 13,787,145 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
-------------------------------------------------
2004 2003
---------------------- ---------------------
NET SALES $ 84,286 100.0% $ 79,445 100.0%
Cost of products sold 69,711 82.7% 66,174 83.3%
-------- --------
GROSS PROFIT 14,575 17.3% 13,271 16.7%
Operating expenses 11,379 13.5% 10,677 13.4%
Other (income) (924) -1.1% -- 0.0%
-------- --------
OPERATING INCOME 4,120 4.9% 2,594 3.3%
Interest expense, net 1,955 2.3% 2,213 2.8%
-------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 2,165 2.6% 381 0.5%
Income tax provision 866 1.1% 155 0.2%
-------- --------
INCOME FROM CONTINUING OPERATIONS 1,299 1.5% 226 0.3%
Income from discontinued operations, net of
income tax of $256 401 0.5% -- 0.0%
-------- --------
NET INCOME $ 1,700 2.0% $ 226 0.3%
======== ========
BASIC EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.09 $ 0.02
Earnings from discontinued operations, net of tax 0.03 --
-------- --------
NET EARNINGS $ 0.12 $ 0.02
======== ========
DILUTED EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.09 $ 0.02
Earnings from discontinued operations, net of tax 0.03 --
-------- --------
NET EARNINGS $ 0.12 $ 0.02
======== ========
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
-------------------------------------------
2004 2003 2003
---- ---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 370 $ 468 $ 598
Accounts receivable, net of allowances of
$1,847, $1,532 and $2,061, respectively 50,612 38,196 42,458
Inventories, net
Raw materials 3,836 2,560 3,541
Work-in-process 3,594 3,266 5,325
Finished goods 28,967 24,317 28,361
--------- --------- ---------
36,397 30,143 37,227
Deferred tax assets 7,996 7,996 9,979
Prepaid expenses and other 5,981 4,574 4,123
--------- --------- ---------
TOTAL CURRENT ASSETS 101,356 81,377 94,385
PROPERTY, PLANT AND EQUIPMENT
Land 3,336 3,537 3,537
Buildings 24,895 25,776 25,119
Machinery and equipment 120,612 121,887 116,469
--------- --------- ---------
148,843 151,200 145,125
Less allowances for depreciation and amortization 100,335 99,874 94,717
--------- --------- ---------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 48,508 51,326 50,408
GOODWILL 21,519 21,519 21,558
PENSION ASSETS 30,140 30,016 30,665
DEFERRED TAX ASSETS 16,592 17,612 16,695
OTHER ASSETS 5,828 6,463 7,251
--------- --------- ---------
TOTAL ASSETS $ 223,943 $ 208,313 $ 220,962
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 31,258 $ 16,928 $ 28,142
Accrued compensation and benefits 11,683 10,633 8,673
Customer volume & promotional accrued expenses 3,011 6,024 2,236
Other accrued expenses 9,098 8,273 9,629
Taxes 3,777 3,408 3,274
Current maturities of long-term debt 11,524 11,760 11,758
--------- --------- ---------
TOTAL CURRENT LIABILITIES 70,351 57,026 63,712
LONG-TERM DEBT 84,104 82,990 91,766
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 29,181 29,782 28,927
SHAREHOLDERS' EQUITY
Common shares 1,379 1,379 1,379
Other capital 75,534 75,534 75,525
Retained earnings (deficit) (32,129) (33,829) (34,605)
Accumulated other comprehensive income (loss) (4,477) (4,569) (5,742)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 40,307 38,515 36,557
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 223,943 $ 208,313 $ 220,962
========= ========= =========
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
---------------------
2004 2003
---- ----
OPERATING ACTIVITIES
Net income $ 1,700 $ 226
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation 2,328 2,289
Amortization 400 400
Gain on sale of property, plant and equipment (924) --
Deferred income taxes 957 109
Net change in working capital accounts:
Accounts receivable (12,416) (5,772)
Inventories (6,254) (4,997)
Prepaid expenses and other (1,553) 250
Accounts payable 14,330 6,933
Accrued expenses and other current liabilities (660) (7,050)
Other long-term items (303) 510
-------- --------
CASH USED IN OPERATING ACTIVITIES (2,395) (7,102)
INVESTING ACTIVITIES
Net additions to property, plant and equipment (635) (948)
Refund of deposits on equipment operating lease 580 --
Proceeds from sale of property, plant and equipment 1,536 --
Acquisitions and related items (62) (250)
-------- --------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,419 (1,198)
FINANCING ACTIVITIES
Net borrowings under secured credit agreement 1,064 7,600
Payments on other long-term borrowings (186) (198)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 878 7,402
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (98) (898)
Cash and cash equivalents at beginning of year 468 1,496
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 370 $ 598
======== ========
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 accounting principles generally
accepted in the United States 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 2003 amounts have been reclassified to conform with
2004 classifications.
NOTE B - INCOME TAXES
The year-to-date 2004 income tax provision was calculated based on management's
estimate of the annual effective tax rate of 40% for the year. The provisions
for 2004 and 2003 are primarily non-cash charges.
NOTE C - 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 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.
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.
5
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE C - BUSINESS SEGMENTS - CONTINUED
(Dollars in thousands)
FIRST QUARTER ENDED
-------------------
2004 2003
---- ----
NET SALES
Carlon $ 38,163 $ 33,979
Lamson Home Products 21,045 18,564
PVC Pipe 25,078 26,902
-------- --------
$ 84,286 $ 79,445
======== ========
OPERATING INCOME (LOSS)
Carlon $ 3,639 $ 2,006
Lamson Home Products 2,384 2,623
PVC Pipe (1,187) (701)
Corporate Office (1,640) (1,334)
Other Income (see Note I) 924 --
-------- --------
$ 4,120 $ 2,594
======== ========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,397 $ 1,727
Lamson Home Products 470 433
PVC Pipe 861 529
-------- --------
$ 2,728 $ 2,689
======== ========
Total assets by business segment at April 3, 2004 and January 3, 2004 are as
follows:
(Dollars in thousands)
APRIL 3, JANUARY 3,
2004 2004
-------- ----------
IDENTIFIABLE ASSETS
Carlon $ 79,833 $ 79,900
Lamson Home Products 32,954 30,065
PVC Pipe 46,862 34,232
Corporate Office (includes deferred tax and
pension assets) 64,294 64,116
-------- --------
$223,943 $208,313
======== ========
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - COMPREHENSIVE INCOME
The components of comprehensive income for the first quarters of 2004 and 2003
are as follows:
(Dollars in thousands)
FIRST QUARTER ENDED
-------------------
APRIL 3, APRIL 5,
2004 2003
---- ----
Net income $ 1,700 $ 226
Foreign currency translation adjustments (25) 10
Interest rate swaps, net of tax 117 118
------- -------
Comprehensive income $ 1,792 $ 354
======= =======
The components of accumulated other comprehensive income (loss), at April 3,
2004, January 3, 2004 and April 5, 2003 are as follows:
(Dollars in thousands)
APRIL 3, JANUARY 3, APRIL 5,
2004 2004 2003
-------- ---------- --------
Foreign currency translation
adjustments $ (466) $ (441) $ (604)
Minimum pension liability adjustments,
net of tax (3,289) (3,289) (3,706)
Interest rate swaps, net of tax (722) (839) (1,432)
------- ------- -------
Accumulated other comprehensive
income (loss) $(4,477) $(4,569) $(5,742)
======= ======= =======
7
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E - EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
(Dollars and shares in thousands, except per share amounts)
FIRST QUARTER ENDED
-------------------------
2004 2003
---- ----
BASIC EARNINGS-PER-SHARE COMPUTATION
- ------------------------------------
Net Income $ 1,700 $ 226
========== ==========
Average Common Shares Outstanding 13,787 13,783
========== ==========
Basic Earnings Per Share $ 0.12 $ 0.02
========== ==========
DILUTED EARNINGS-PER-SHARE COMPUTATION
- --------------------------------------
Net Income $ 1,700 $ 226
========== ==========
Basic Shares Outstanding 13,787 13,783
Stock Options Calculated Under the Treasury Stock Method 171 6
---------- ----------
Total Shares 13,958 13,789
========== ==========
Diluted Earnings Per Share $ 0.12 $ 0.02
========== ==========
NOTE F - 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 $27.5
million was outstanding at April 3, 2004. 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 first quarter 2004 of a $722,000 (net of $462,000 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 $1,049,000 of loss on the fair value of the
hedges is classified in current accrued liabilities, with the remaining $135,000
loss classified as a long-term liability.
The Company has no derivative instruments that are classified as fair value
hedges.
8
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE G - DISCONTINUED OPERATIONS
As of the end of the first quarter of 2004 the Company was informed that YSD
Industries Inc. ("YSD"), a business which the Company sold in 1988, was selling
the assets of the business and would be unable to fund certain post-retirement
medical and life insurance benefits, for which the Company was contingently
liable. The Company had recorded a net charge ($2.7 million) at the 2003
year-end reflecting the actuarial calculation of this estimated liability for
payments to eligible participants through February 2011 when the Company's
obligation will end. As a result of YSD's asset sale, the Company was able to
realize payment of $668,000 for notes receivable that had been previously
written off as uncollectible in 2003. The net impact of this recovery, $401,000
(net of tax), has been recorded as income from discontinued operations in the
first quarter of 2004.
NOTE H - STOCK COMPENSATION PLANS
The Company currently has three stock 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)
FIRST QUARTER ENDED
--------------------------
2004 2003
---- ----
Net income As reported $ 1,700 $ 226
Total stock-based employee compensation, net of tax (120) (187)
------- -------
Net income Pro forma $ 1,580 $ 39
======= =======
Basic earnings per share As reported $ 0.12 $ 0.02
Pro forma 0.11 0.00
Diluted earnings per share As reported $ 0.12 $ 0.02
Pro forma 0.11 0.00
NOTE I - SALE OF ASSETS
In the first quarter of 2004, the Company sold the manufacturing facility
located in Pasadena, Texas for net proceeds of $1.5 million. The remaining
production equipment will be relocated to other Lamson & Sessions facilities
over the next 6 to 9 months. The Company anticipates incurring severance,
training and other moving costs of $800,000 to $1,000,000 over this time period.
These costs will be charged against other income as required under Financial
Accounting Standard (FAS) No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." For the quarter ended April 3, 2004 a gain on the sale of
$924,000 has been recorded.
NOTE J - PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company sponsors several qualified and non-qualified pension plans and other
post-retirement benefit plans for its current and former employees. As of
January 1, 2003 the Company eliminated the salary defined benefit pension plan
for future employees. This action makes all defined benefit pension and other
post-retirement benefit plans closed to new entrants and will reduce future
service costs.
9
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE J - PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS - CONTINUED
The components of net periodic benefit cost (income) are as follows:
(Dollars in thousands)
FIRST QUARTER ENDED
---------------------------------------------
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2004 2003 2004 2003
---------------- --------------
Service cost $ 298 $ 267 $ 3 $ 2
Interest cost 1,219 1,261 321 214
Expected return on assets (1,486) (1,350) -- --
Net amortization and deferral 388 603 51 34
Defined contribution plans 285 272 -- --
------- ------- ------- -------
$ 704 $ 1,053 $ 375 $ 250
======= ======= ======= =======
The Company expects to contribute $2.8 million to its defined benefit pension
plans in 2004. No payments were made in the first quarter of 2004.
The above information excludes the effect of YSD's other post-retirement benefit
costs which were assumed in April 2004.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Financial Statements.
EXECUTIVE OVERVIEW
The year 2004 began very slowly and picked up momentum as the weather improved,
strong residential construction activity continued and sales of telecom related
products strengthened going into the spring construction season.
Although overall inflation remains at around 2.0%, the Company was impacted by
the sharply increasing oil prices. The cost of PVC and HDPE resins began to rise
in the first quarter of 2004, and supply remains constrained. A stronger export
market for these resins, on top of limited supplies and a good domestic market,
are supporting higher prices in the foreseeable future.
During this quarter, the Company was able to rationalize some of its capacity in
its extrusion operations by selling the Pasadena, Texas facility. This
location's blend operations had been closed in 2003 and the remaining
manufacturing equipment will be consolidated into other Lamson facilities over
the next 6 to 9 months.
Late in the first quarter of 2004, the Company was notified that YSD, a business
the Company sold in 1988, was selling the assets of the business and would be
unable to fund certain post-retirement medical and life insurance benefits, for
which the Company was contingently liable. This obligation extends through
February 2011, and the estimated liability of $2.7 million (net of tax) was
recorded in 2003 as a charge from discontinued operations. As part of the asset
sale by YSD in the first quarter of 2004, the Company was able to recover
$668,000 of notes receivable that had been previously written off. The net
impact of $401,000 (net of tax) has been recorded as income from discontinued
operations in the current quarter.
Finally, the Company has been operating under a compliance plan with the New
York Stock Exchange since November 2002 which called for the Company to be in
compliance with continued listing standards by the end of the first quarter of
2004. The Company was notified by the New York Stock Exchange in April 2004
that it is considered in good standing and in compliance with the Exchange's
continued listing standards.
11
2004 COMPARED WITH 2003
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, items from the
Consolidated Statements of Operations as a percentage of net sales for first
quarters ended:
FIRST QUARTER ENDED
-------------------
2004 2003
---- ----
Net sales 100.0% 100.0%
Cost of products sold 82.7 83.3
------ ------
Gross profit 17.3 16.7
Operating expenses 13.5 13.4
Other (income) (1.1) --
------ ------
Operating income 4.9 3.3
Interest expense 2.3 2.8
------ ------
Income from continuing operations before income taxes 2.6 0.5
Income tax provision 1.1 0.2
------ ------
Income from continuing operations 1.5% 0.3%
====== ======
Overall net sales in the first quarter of 2004 are higher by $4.8 million, or
6.1%, at $84.3 million compared with $79.4 million in the first quarter of 2003.
This increase occurred with one less week in the first quarter of 2004 compared
with the first quarter of 2003. Shipments in the current quarter began slowly as
the weather in January and February curtailed many construction projects
nationwide. March shipments, however, were very strong as construction activity
picked up and market price increases were broadly announced heading into the
spring construction season.
Gross profit also improved in the first quarter of 2004 to $14.6 million (17.3%
of net sales) compared with $13.3 million (16.7% of net sales) in the first
quarter of 2003. This was primarily due to the higher sales volume experienced
in the Carlon and Lamson Home Products business segments. Costs of the
underlying raw materials, PVC and HDPE were approximately 13.0% higher than the
prior year first quarter. These cost increases are being partially mitigated by
continuous productivity improvements at the Company's manufacturing facilities
and other supply chain cost reduction programs.
Operating expenses increased to $11.4 million (13.5% of net sales) during the
first quarter of 2004 which is in line with the increased net sales levels
compared with the first quarter of 2003. In addition to higher variable selling
expenses, the Company incurred higher medical costs ($700,000) for active
employees along with incentive compensation estimates ($300,000) which were
partially offset by lower pension costs ($350,000) and the recovery of a
previous bankruptcy claim ($300,000) which had been written off in 2002. The
first quarter of 2004's operating income of $4.1 million was also favorably
impacted by the sale of the Company's Pasadena, Texas facility. The net gain on
this sale was $924,000.
Net interest expense was approximately $2.0 million in the first quarter of 2004
compared with $2.2 million in the first quarter of 2003. Average debt
outstanding in the first quarter of 2004 was approximately the same as in the
first quarter of 2003, while average interest rates were lower at 5.78% compared
with 6.46%, respectively.
The income tax provision for 2004 reflects an effective tax rate of 40.0%.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) was $6.8 million for the
12
first quarter of 2004 compared with $5.3 million for the first quarter of 2003.
The components of this calculation are as follows:
(Dollars in thousands)
FIRST QUARTER ENDED
-------------------
2004 2003
---- ----
Operating income $4,120 $2,594
Depreciation 2,328 2,289
Amortization 400 400
------ ------
EBITDA $6,848 $5,283
====== ======
EBITDA is a calculation used by management to measure liquidity. 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.
The following is a reconciliation of EBITDA to cash provided by operating
activities:
(Dollars in thousands)
FIRST QUARTER ENDED
-------------------
2004 2003
---- ----
EBITDA $ 6,848 $ 5,283
Gain on sale of property, plant and equipment
(investing activities) (924) --
Interest expense (1,955) (2,213)
Increase in operating assets and liabilities (6,364) (10,172)
-------- --------
Cash (used) by operating activities $ (2,395) $ (7,102)
======== ========
BUSINESS SEGMENTS
CARLON
The Company's largest business segment, Carlon, began the year with broad-based
growth in net sales over 2003. The segment had very strong first quarter 2004
net sales of $38.2 million, a $4.2 million, or 12.3% increase, over the first
quarter 2003. This is the highest first quarter net sales levels experienced by
this segment since 2001. The segment's sales of electrical products benefited
from continued strong residential construction activity and growth in some of
its key accounts. Most significantly, telecom product sales were nearly 10.0%
higher than the prior year period as Carlon gained some market share. New
product sales targeting the structured cabling of new homes expanded, and HDPE
conduit sales increased by approximately 30.0% over the first quarter of 2003.
Gross margin continues to be negatively impacted by higher PVC and HDPE costs
which have not been recovered by selling price increases during this quarter.
However, these were offset by the molding facilities running almost at capacity,
better utilization of the HDPE extrusion facilities and cost reduction programs
through investment in new molds and tooling and outsourcing programs.
The operating income for this business segment rose by $1.6 million to $3.6
million in the first quarter of 2004 (9.5% of net sales) compared with $2.0
million (5.9% of net sales) in the first quarter of 2003. This increase is
primarily from the gross margin generated by the higher net sales level as
operating expenses were impacted by higher variable selling expenses. Carlon
results were favorably impacted by the partial recovery ($300,000) of an account
receivable that was written off with the Adelphia bankruptcy in 2002.
13
LAMSON HOME PRODUCTS
After a slow start to the quarter, Lamson Home Products rebounded to post net
sales of $21.0 million, an increase of 13.3% over the $18.6 million in net sales
in the first quarter of 2003. Continued high customer order fill rates (the
number of line items filled with the first shipment), good market strength for
new and existing homes sales and the realization of the additional market share
gains awarded in mid-2003 all contributed to the higher net sales levels this
quarter.
Lamson Home Products was unfavorably impacted by the rising cost of PVC resin as
material cost increases have not been passed on to their retail customers. These
higher raw material costs, along with a higher representation of less profitable
products in the sales mix this quarter, lowered the segment's gross margin.
Operating expenses for Lamson Home Products reflect higher variable selling and
marketing expenses, investments in new product development and merchandising
improvements. Overall, the business segment realized $2.4 million (11.3% of net
sales) in operating income in the first quarter of 2004 compared with $2.6
million (14.1% of net sales) in the first quarter of 2003.
PVC PIPE
The PVC Pipe segment was significantly impacted by the poor weather during
January and February. Stronger volume in March resulted in pipe pounds sold
being down by only about 8.0% from the prior year first quarter. Selling prices
were higher by only about 2.0% as demand was weak early in the quarter. Several
price increases were announced in March, and are expected to continue in the
second quarter, which helped to spur volume late in the quarter.
As mentioned earlier, PVC resin costs are up an average of 13.0% compared with
the prior year first quarter resulting in narrower gross margin spreads. Also,
with the lower sales volume, slightly more manufacturing variances were incurred
by this business segment in the current quarter. These factors combined to lower
this segment's gross margin in the first quarter of 2004 compared with the first
quarter of 2003.
The operating loss for the PVC Pipe segment, driven by lower gross margin, was
$1.2 million in the current quarter compared with $0.7 million in the prior year
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company's primary source of liquidity and capital resources is
cash from operating activities and availability under its secured credit
facility. However, in the first quarter of 2004, the Company benefited also from
proceeds of approximately $1.5 million from the sale of its Pasadena, Texas
facility.
Cash used by operating activities was $2.4 million in the first quarter of 2004
compared with $7.1 million used in the first quarter of 2003. Cash generated
from earnings contributed an incremental $800,000 to this improvement while the
remainder came from working capital. Higher sales levels in the final month of
the quarter caused accounts receivable to grow to $50.6 million at April 3, 2004
compared with $42.5 million at April 5, 2003. Days sales outstanding, however,
calculated using a 3-month rolling average, declined to 45.1 days at the end of
the current quarter from 46.6 days in the prior year first quarter.
The Company generally experiences an inventory build in the first quarter of the
year to support the spring construction season. In the first quarter,
inventories increased by $6.3 million and totaled $36.4 million at April 3,
2004. This compares favorably with the inventory balance at April 5, 2003 of
$37.2 million as the Company has improved inventory turns from 6.3 times in
prior year quarter-end to 6.8 times at the end of the first quarter of 2004. The
decline of almost $2.0 million in work-in-process from the prior year is a
direct result of blend operation logistics improvements. In addition, the pounds
of PVC resin in inventory at April 3, 2004 were 17.0% more than year-end but
almost 20.0% less than April 5, 2003. The cost per pound of PVC resin inventory
at the end of the first quarter of 2004 is approximately 11.0% higher compared
with the end of the first quarter of 2003
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and 8.0% higher than the year-end 2003.
Accounts payable at the end of the first quarter of 2004 were $31.3 million, an
increase of $14.3 million from year-end 2003 but up only $3.1 million from the
first quarter 2003. This is primarily caused by increased inventory this quarter
and the timing of payments at the end of the year that reduced the payables
balance. Current year accruals reflect a higher defined benefit pension
contribution anticipated in 2004 and the payment of annual customer sales and
marketing programs that occur in the first quarter.
Cash was provided by investing activities in the quarter as the Company received
net proceeds of $1.5 million for the sale of the Pasadena, Texas facility.
Capital additions were $0.6 million in the first quarter of 2004 and were
primarily molds and tooling to support cost reductions and new product
introductions.
The Company has adequate credit capacity with availability of around $8.5
million as the first quarter of 2004 ended. The leverage ratio has remained
approximately the same as year-end and, therefore, the current interest rate
spread should be maintained through the second quarter.
Since December 2002, the Company has been operating under a Business Plan (the
"Plan") accepted by the New York Stock Exchange Inc. ("NYSE"). The NYSE
notified the Company in October 2002 that the Company was, at that time, below
the NYSE's continued listing criteria consisting of total market capitalization
of not less than $50 million over a 30-day trading period and shareholder
equity of not less than $50 million. The Company was notified by the NYSE in
April 2004 that the Company is in compliance with the NYSE's continued listing
criteria as a result of consistent positive performance with respect to the
Plan. The Company achieved $75.2 million of market capitalization based on the
30 trading days ended April 11, 2004 and its shareholder equity was $40.3
million as of April 3, 2004. In accordance with NYSE confirmed listing
requirements, there will be a twelve month follow-up period within which the
NYSE will review the Company in order to ensure that the Company does not fall
below any of the NYSE's continued listing standards.
CRITICAL ACCOUNTING ESTIMATES
We have no material changes to the disclosure on this matter since the end of
our most recent fiscal year, January 3, 2004 except as follows.
DEFERRED TAX ASSETS
As of April 3, 2004 the Company had approximately $24.6 million of net deferred
tax assets including loss carryforwards that expire through 2022 and other
temporary differences. The valuation of these deferred tax assets would be
negatively impacted if corporate statutory income tax rates decline which is
currently being considered by Congress. 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.
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OUTLOOK FOR 2004
The Company experienced significantly higher sales order and shipment rates in
March compared with earlier months in this quarter. This increase in business
activity has continued into April which reflects strengthening sales prices as
the spring construction season begins across most areas of the country.
While this increased business activity bodes well in supporting our net sales
growth expectations of 6.0% to 8.0% for 2004, it is premature to evaluate the
success of increased selling prices and their effect on relieving the squeeze on
margins that the Company has experienced for the past three years. While it is
encouraging to see renewed project activity, particularly in the residential and
telecom construction markets, the product mix to date has not reflected
improvement in more profitable product lines. As the second quarter proceeds,
the trends on pricing strength, market recovery and product mix will become
better known.
During the first quarter of 2004, the Company's efforts to improve working
capital efficiency were highlighted by inventory turns rising to 6.8 turns
compared with 6.3 turns and 4.6 turns in the first quarters of 2003 and 2002,
respectively. This positive trend is expected to continue with all three
remaining quarters in 2004 and is expected to exceed the first quarter's
inventory turn level. In addition, the Company's accounts receivable days sales
outstanding fell to 45.1 days which compares favorably with 46.6 days and 49.7
days in the first quarters of 2003 and 2002, respectively.
Earlier this month, the Company raised its range of projected earnings for the
year to 39 to 43 cents per diluted share for 2004. This revised earnings range
could improve if present sales order trends continue and improved pricing levels
are realized. The Company reported net earnings of 27 cents per diluted share
from continuing operations for 2003. While overall business activity is clearly
on the rise over the past six weeks, the Company has not yet experienced any
improvement from the commercial and industrial construction markets. Office
vacancy rates remain very high. Our sense is that it will be mid-to-late 2004
before improvement begins in these key markets.
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.
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 RISK
We have no material changes to the disclosure on this matter since the end of
our most recent fiscal year, January 3, 2004.
ITEM 4 - CONTROLS AND PROCEDURES
As of April 3, 2004, an evaluation was performed under the supervision and with
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 disclosure controls and procedures. Based on that
evaluation, the
16
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
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 $3.0 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 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 2004.
The Company is also a party to various other claims and matters of litigation
incidental to the normal course of its business. Management believes that the
final resolution of these matters will not have a material adverse effect on the
Company's financial position, cash flows or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(a) Deferred Compensation Plan for Non-Employee Directors (As
Amended and Restated as of February 19, 2004).
31.1 Certification of John B. Schulze, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of James J. Abel, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of John B. Schulze, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of James J. Abel, Chief Financial Officer,
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 February 19,
2004, relating to the Company's earnings for fourth quarter
and full year 2003.
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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)
May 5, 2004 By:/s/ James J. Abel
-----------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
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