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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 July 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 (Zip Code)
offices)
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 July 3, 2004 the Registrant had outstanding 13,775,439 common shares.
PART I
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
SECOND QUARTER ENDED FIRST HALF ENDED
------------------------------------------- --------------------------------------------
2004 2003 2004 2003
-------------------- ------------------- ------------------- ---------------------
NET SALES $ 103,464 100.0% $ 87,072 100.0% $ 187,750 100.0% $ 166,517 100.0%
Cost of products sold 84,048 81.2% 71,016 81.6% 153,759 81.9% 137,190 82.4%
--------- --------- --------- ---------
GROSS PROFIT 19,416 18.8% 16,056 18.4% 33,991 18.1% 29,327 17.6%
Operating expenses 12,597 12.2% 11,043 12.7% 23,976 12.8% 21,720 13.0%
Other expense (income) 298 0.3% -- 0.0% (626) -0.4% -- 0.0%
--------- --------- --------- ---------
OPERATING INCOME 6,521 6.3% 5,013 5.7% 10,641 5.7% 7,607 4.6%
Interest expense, net 1,950 1.9% 2,125 2.4% 3,905 2.1% 4,338 2.6%
--------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 4,571 4.4% 2,888 3.3% 6,736 3.6% 3,269 2.0%
Income tax provision 1,826 1.7% 1,185 1.3% 2,692 1.4% 1,340 0.8%
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 2,745 2.7% 1,703 2.0% 4,044 2.2% 1,929 1.2%
Income from discontinued
operations, net of income
tax of $256 -- 0.0% -- 0.0% 401 0.2% -- 0.0%
--------- --------- --------- ---------
NET INCOME $ 2,745 2.7% $ 1,703 2.0% $ 4,445 2.4% $ 1,929 1.2%
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.20 $ 0.12 $ 0.29 $ 0.14
Earnings from discontinued
operations, net of tax -- -- 0.03 --
--------- --------- --------- ---------
NET EARNINGS $ 0.20 $ 0.12 $ 0.32 $ 0.14
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.19 $ 0.12 $ 0.29 $ 0.14
Earnings from discontinued operations,
net of tax -- -- 0.03 --
--------- --------- --------- ---------
NET EARNINGS $ 0.19 $ 0.12 $ 0.32 $ 0.14
========= ========= ========= =========
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
-------------- ---------- --------------
2004 2003 2003
-------------- ---------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,032 $ 468 $ 1,318
Accounts receivable, net of allowances of
$1,772, $1,532 and $1,946, respectively 57,232 38,196 48,240
Inventories, net
Raw materials 3,753 2,560 3,480
Work-in-process 4,616 3,266 8,241
Finished goods 32,384 24,317 31,006
----------- --------- -----------
40,753 30,143 42,727
Deferred tax assets 8,961 7,996 9,979
Prepaid expenses and other 5,576 4,574 4,323
----------- --------- -----------
TOTAL CURRENT ASSETS 113,554 81,377 106,587
PROPERTY, PLANT AND EQUIPMENT
Land 3,320 3,537 3,537
Buildings 24,884 25,776 25,119
Machinery and equipment 117,271 121,887 119,296
----------- --------- -----------
145,475 151,200 147,952
Less allowances for depreciation and amortization 98,089 99,874 96,987
----------- --------- -----------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 47,386 51,326 50,965
GOODWILL 21,519 21,519 21,558
PENSION ASSETS 30,264 30,016 30,449
DEFERRED TAX ASSETS 13,848 17,612 15,629
OTHER ASSETS 6,109 6,463 6,714
----------- --------- -----------
TOTAL ASSETS $ 232,680 $ 208,313 $ 231,902
=========== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 35,528 $ 16,928 $ 33,390
Accrued compensation and benefits 13,147 10,633 9,049
Customer volume & promotional accrued expenses 6,254 6,024 2,963
Other accrued expenses 9,729 8,273 12,057
Taxes 3,772 3,408 3,751
Current maturities of long-term debt 9,465 11,760 11,755
----------- --------- -----------
TOTAL CURRENT LIABILITIES 77,895 57,026 72,965
LONG-TERM DEBT 84,066 82,990 91,443
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 27,507 29,782 29,088
SHAREHOLDERS' EQUITY
Common shares 1,378 1,379 1,379
Other capital 75,400 75,534 75,525
Retained earnings (deficit) (29,384) (33,829) (32,902)
Accumulated other comprehensive income (loss) (4,182) (4,569) (5,596)
----------- --------- -----------
TOTAL SHAREHOLDERS' EQUITY 43,212 38,515 38,406
----------- --------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 232,680 $ 208,313 $ 231,902
=========== ========= ===========
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
--------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net income $ 4,445 $ 1,929
Adjustments to reconcile net income to cash provided (used) by
operating activities:
Depreciation 4,638 4,553
Amortization 800 800
Gain on sale of property, plant and equipment (933) --
Deferred income taxes 2,548 1,111
Net change in working capital accounts:
Accounts receivable (19,036) (11,554)
Inventories (10,610) (10,497)
Prepaid expenses and other (599) 50
Accounts payable 18,600 12,181
Accrued expenses and other current liabilities 3,303 (2,955)
Other long-term items (1,402) 1,233
-------- --------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,754 (3,149)
INVESTING ACTIVITIES
Net additions to property, plant and equipment (1,873) (3,605)
Refund of deposits on equipment operating leases 580 --
Proceeds from sale of property, plant and equipment 1,595 --
Acquisitions and related items (125) (500)
-------- --------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES 177 (4,105)
FINANCING ACTIVITIES
Net (payments) borrowings under secured credit agreement (1,009) 7,300
Payments on other long-term borrowings (210) (224)
Purchase and retirement of treasury stock (205) --
Exercise of stock options 57 --
-------- --------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,367) 7,076
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 564 (178)
Cash and cash equivalents at beginning of year 468 1,496
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,032 $ 1,318
======== ========
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)
SECOND QUARTER ENDED FIRST HALF ENDED
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
NET SALES
Carlon $ 49,467 $ 39,145 $ 87,630 $ 73,124
Lamson Home Products 21,989 19,011 43,034 37,575
PVC Pipe 32,008 28,916 57,086 55,818
--------- --------- --------- ---------
$ 103,464 $ 87,072 $ 187,750 $ 166,517
========= ========= ========= =========
OPERATING INCOME (LOSS)
Carlon $ 4,608 $ 3,675 $ 8,247 $ 5,681
Lamson Home Products 2,468 3,225 4,852 5,848
PVC Pipe 1,019 (8) (168) (709)
Corporate Office (1,276) (1,879) (2,916) (3,213)
Other (Expense) Income
(see Note I) (298) -- 626 --
--------- --------- --------- ---------
$ 6,521 $ 5,013 $ 10,641 $ 7,607
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,368 $ 1,721 $ 2,765 $ 3,448
Lamson Home Products 465 420 935 853
PVC Pipe 877 523 1,738 1,052
--------- --------- --------- ---------
$ 2,710 $ 2,664 $ 5,438 $ 5,353
========= ========= ========= =========
Total assets by business segment at July 3, 2004, January 3, 2004 and July 5,
2003 are as follows:
(Dollars in thousands)
JULY 3, JANUARY 3, JULY 5,
2004 2004 2003
-------------- ----------- -----------
IDENTIFIABLE ASSETS
Carlon $ 84,703 $ 79,900 $ 89,534
Lamson Home Products 33,806 30,065 31,172
PVC Pipe 50,595 34,232 46,596
Corporate Office (includes deferred tax and
pension assets) 63,576 64,116 64,600
-------------- ----------- -----------
$ 232,680 $ 208,313 $ 231,902
============== =========== ===========
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - COMPREHENSIVE INCOME
The components of comprehensive income for the second quarter and the first half
of 2004 and 2003 are as follows:
(Dollars in thousands)
SECOND QUARTER ENDED FIRST HALF ENDED
---------------------- -----------------------
JULY 3, JULY 5, JULY 3, JULY 5,
2004 2003 2004 2003
------- ------- ------- -------
Net income $ 2,745 $ 1,703 $ 4,445 $ 1,929
Foreign currency translation adjustments 3 47 (22) 57
Interest rate swaps, net of tax 292 99 409 217
------- ------- ------- -------
Comprehensive income $ 3,040 $ 1,849 $ 4,832 $ 2,203
======= ======= ======= =======
The components of accumulated other comprehensive income (loss), at July 3,
2004, January 3, 2004 and July 5, 2003 are as follows:
(Dollars in thousands)
JULY 3, JANUARY 3, JULY 5,
2004 2004 2003
-------- ---------- --------
Foreign currency translation adjustments $ (463) $ (441) $ (557)
Minimum pension liability adjustments,
net of tax (3,289) (3,289) (3,706)
Interest rate swaps, net of tax (430) (839) (1,333)
------- ------- -------
Accumulated other comprehensive
income (loss) $(4,182) $(4,569) $(5,596)
======= ======= =======
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)
SECOND QUARTER ENDED FIRST HALF ENDED
------------------------ ------------------------
2004 2003 2004 2003
------ ------- ------- -------
BASIC EARNINGS-PER-SHARE COMPUTATION
Net Income $ 2,745 $ 1,703 $ 4,445 $ 1,929
======= ======= ======= =======
Average Common Shares Outstanding 13,784 13,786 13,786 13,784
======= ======= ======= =======
Basic Earnings Per Share $ 0.20 $ 0.12 $ 0.32 $ 0.14
======= ======= ======= =======
DILUTED EARNINGS-PER-SHARE COMPUTATION
Net Income $ 2,745 $ 1,703 $ 4,445 $ 1,929
======= ======= ======= =======
Basic Shares Outstanding 13,784 13,786 13,786 13,784
Stock Options Calculated Under
the Treasury Stock Method 315 83 242 45
------- ------- ------- -------
Total Shares 14,099 13,869 14,028 13,829
======= ======= ======= =======
Diluted Earnings Per Share $ 0.19 $ 0.12 $ 0.32 $ 0.14
======= ======= ======= =======
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 $25.5
million was outstanding at July 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 second
quarter of 2004 of a $430,000 (net of $274,000 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 $685,000 of loss on the fair value of the hedges is classified in
current accrued liabilities, with the remaining $19,000 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)
SECOND QUARTER ENDED FIRST HALF ENDED
------------------------ -------------------------
2004 2003 2004 2003
--------- --------- ---------- ---------
Net income As reported $ 2,745 $ 1,703 $ 4,445 $ 1,929
Total stock-based employee
compensation, net of tax (119) (148) (239) (302)
--------- --------- ---------- ---------
Net income Pro forma $ 2,626 $ 1,555 $ 4,206 $ 1,627
========= ========= ========== =========
Basic earnings per share As reported $ 0.20 $ 0.12 $ 0.32 $ 0.14
Pro forma 0.19 0.11 0.31 0.12
Diluted earnings per share As reported $ 0.19 $ 0.12 $ 0.32 $ 0.14
Pro forma 0.19 0.11 0.30 0.12
NOTE I - SALE OF ASSETS
In the first quarter of 2004, the Company sold a manufacturing facility located
in Pasadena, Texas for net proceeds of $1.5 million. The remaining production
equipment is being relocated to other Lamson & Sessions facilities over the next
six 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." During the second quarter the Company incurred a charge of $0.3
million, primarily the accrual of severance costs. For the first half ended July
3, 2004, a gain on the sale of the facility, net of severance and other costs
associated with the closure of the facility, was incurred totaling $0.6 million.
9
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
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.
The components of net periodic benefit cost (income) are as follows:
(Dollars in thousands)
SECOND QUARTER ENDED FIRST HALF ENDED
------------------------------------------- -----------------------------------------
PENSION BENEFITS OTHER BENEFITS PENSION BENEFITS OTHER BENEFITS
------------------- ------------------- ------------------- ------------------
2004 2003 2004 2003 2004 2003 2004 2003
------- ------- ------- ------- ------- ------- ------- -------
Service cost $ 298 $ 268 $ 1 $ 2 $ 596 $ 535 $ 4 $ 4
Interest cost 1,219 1,261 130 370 2,438 2,522 451 584
Expected return on assets (1,486) (1,351) -- -- (2,972) (2,701) -- --
Net amortization
and deferral 388 603 (165) 59 776 1,206 (114) 93
Defined contribution plans 280 251 -- -- 565 523 -- --
------- ------- ------- ------- ------- ------- ------- -------
$ 699 $ 1,032 $ (34) $ 431 $ 1,403 $ 2,085 $ 341 $ 681
======= ======= ======= ======= ======= ======= ======= =======
The Company expects to contribute $1.5 million to its defined benefit pension
plans in 2004. A contribution of $647,000 was made in the second quarter of
2004.
The above information includes the effect of YSD's other post-retirement benefit
costs which were assumed in April 2004.
At 2003 year-end, the Company elected to defer recognition of the potential
effect of the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the "Act") until authorization guidance on the accounting for the federal
subsidy is issued. In May 2004, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP) No. 106-2 which requires measurement of the
accumulated post-retirement benefit obligation and net periodic post-retirement
benefit cost to reflect the effects of the subsidy for interim or annual periods
beginning after June 15, 2004. The Company has not yet determined the effect of
the Act on its results of operations, financial condition or liquidity.
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 positive momentum that was experienced in the latter stages of the first
quarter of 2004 continued through the second quarter. Net sales for the current
quarter exceeded $100 million for the first time since mid-1988.
The Company was challenged throughout the second quarter with increasing costs,
primarily related to resin and freight. PVC resin producers are operating at
greater than 95.0% to support the growing demand and, therefore, were able to
implement increases each month this quarter. In response, both the Carlon and
PVC Pipe segments have increased selling prices this quarter. Transportation
availability, especially flatbeds, is also being strained by the increased
economic activity, a reduction in equipment, an environment of regulatory
changes and higher fuel costs. The Company is managing this situation and
looking at strategic logistic alternatives to ensure customer service.
The telecom infrastructure and utility project business, in particular, began to
expand during the second quarter. This has driven up the demand for HDPE conduit
and favorably impacted the utilization of our extrusion facilities. Management
is closely monitoring this increased business and the related ramping up of
production capacity to ensure quality and customer service are maximized while
inefficiencies from headcount increases are minimized.
Finally, the Company continues to implement its consolidation plan for its
Pasadena, Texas facility. Investment is being made in selective inventory builds
and the Clinton, Iowa plant is being prepared to take on the relocated
production. The project is still on schedule to be completed in the fourth
quarter of 2004.
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 the
second quarters and first halves ended:
SECOND QUARTER ENDED FIRST HALF ENDED
-------------------- -------------------
2004 2003 2004 2003
-------- ------- ------- -------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products sold 81.2 81.6 81.9 82.4
----- ----- ----- -----
Gross profit 18.8 18.4 18.1 17.6
Operating expenses 12.2 12.7 12.8 13.0
Other expense (income) 0.3 -- (0.4) --
----- ----- ----- -----
Operating income 6.3 5.7 5.7 4.6
Interest expense 1.9 2.4 2.1 2.6
----- ----- ----- -----
Income from continuing operations
before income taxes 4.4 3.3 3.6 2.0
Income tax provision 1.7 1.3 1.4 0.8
----- ----- ----- -----
Income from continuing operations 2.7 % 2.0 % 2.2 % 1.2 %
===== ===== ===== =====
11
Net sales for the second quarter of 2004 reached $103.5 million up by $16.4
million, or 18.8%, over the second quarter of 2003. This growth was felt in all
three business segments, as shipping continued at the strong levels seen
in March, and price increases in both the Carlon and PVC Pipe segments were
generally successful. In addition, there has been an increase in telecom
construction-related activity this quarter. Meanwhile, Lamson Home Products' net
sales continue to reflect the market share gains from mid-2003. With the results
in this second quarter, the Company experienced net sales of $187.8 million for
the first half of 2004, a $21.2 million, or 12.8% increase, over the $166.5
million in net sales for the first half of 2003.
Gross profit continued to improve in the second quarter of 2004 rising to $19.4
million, 18.8% of net sales, compared with $16.1 million, 18.4% of net sales, in
the prior year second quarter. For the first half of 2004, gross profit was
$34.0 million, 18.1% of net sales, a 15.9% improvement over the $29.3 million,
17.6% of net sales, earned in the first half of 2003. The underlying cost of
PVC, the primary raw material, continued to rise this quarter and exceeded last
year's second quarter cost by approximately 13.0%. Year-to-date PVC costs are
also up by around 13.0%, compared with the prior year first half. These
increases have been partially offset by price increases, higher utilization of
the manufacturing facilities and continuous productivity improvements.
Operating expenses increased to $12.6 million, or 12.2% of net sales, and $24.0
million, or 12.8% of net sales for the second quarter and first half of 2004,
respectively. Both periods reflect higher variable selling expenses compared
with the prior year period. In the second quarter of 2004 operating expenses are
$1.6 million higher than the prior year quarter. Higher incentive compensation
estimates ($900,000) and professional fees ($250,000) driven mostly by
Sarbanes-Oxley compliance efforts, were offset by a reduction in pension
($350,000) and retiree medical costs ($470,000). The first half of 2004
operating expenses were $2.3 million higher than the prior year. In addition to
the higher variable selling costs mentioned above, the Company incurred higher
medical costs ($850,000) for active employees along with the incentive
compensation and legal and professional expense increases, while lower pension
and retiree medical expenses were recorded along with the recovery of customer
bankruptcy claims in the first quarter. Operating income was $6.5 million for
the second quarter of 2004 and $10.6 million for the first half of 2004.
Included in these results is the impact of the sale of the Company's Pasadena,
Texas facility during the first quarter of 2004. In the current quarter $0.3
million of expenses were incurred primarily for severance costs, reducing the
gain on the sale net of closure costs to $0.6 million year-to-date.
Net interest expense declined to $3.9 million for the first half of 2004 from
$4.3 million in the same period last year. Average borrowings are down about
$3.0 million over the first half of 2004 compared with the first half of 2003,
while average interest rates were lower at 5.62% compared with 6.33%,
respectively.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) was $9.2 million for the second quarter of 2004 and $16.1 million for
the first half of 2004 compared with $7.7 million, and $13.0 million for the
respective periods in 2003.
The components of this calculation are as follows:
(Dollars in thousands)
SECOND QUARTER ENDED FIRST HALF ENDED
-------------------- ------------------
2004 2003 2004 2003
------- ------- ------- -------
Operating income $ 6,521 $ 5,013 $10,641 $ 7,607
Depreciation 2,310 2,264 4,638 4,553
Amortization 400 400 800 800
------- ------- ------- -------
EBITDA $ 9,231 $ 7,677 $16,079 $12,960
======= ======= ======= =======
EBITDA Margin (EBITDA/Net Sales) 8.9% 8.8% 8.6% 7.8%
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.
12
The following is a reconciliation of EBITDA to cash provided (used) by operating
activities:
(Dollars in thousands)
SECOND QUARTER ENDED FIRST HALF ENDED
--------------------- --------------------
2004 2003 2004 2003
-------- --------- -------- --------
EBITDA $ 9,231 $ 7,677 $ 16,079 $ 12,960
Gain on sale of property, plant and
equipment (investing activities) (9) -- (933) --
Interest expense (1,950) (2,125) (3,905) (4,338)
Increase in operating assets
and liabilities (3,123) (1,599) (9,487) (11,771)
-------- -------- -------- --------
Cash provided (used) by
operating activities $ 4,149 $ 3,953 $ 1,754 $ (3,149)
======== ======== ======== ========
BUSINESS SEGMENTS
CARLON
This segment continues its strong growth trend this quarter which began in the
first quarter. Net sales for the second quarter of 2004 climbed to $49.5
million, a 26.4% increase over the $39.1 million of net sales from the second
quarter of 2003. Telecom wireline product sales continued to rebound from the
depressed market conditions exceeding prior year second quarter net sales by
over 35.0%. The business has begun to see activity by its customers suggesting
that some fiber-to-the-home rollout is starting. HDPE conduit sales volume
increased by over 50.0% compared with the prior year quarter. Electrical product
sales also experienced strong demand, and price increases were realized in the
current quarter to offset some of the cost increases. Year-to-date, Carlon's net
sales have increased by $14.5 million, or 19.8%, to $87.6 million from $73.1
million in the first half of 2003.
Gross margin in the Carlon business segment are approximately the same as the
prior year. The higher sales volume has improved, especially HDPE extrusion
facility utilization. However, higher raw material and freight costs were
incurred along with inefficiencies from start up costs, as some manufacturing
plants doubled their workforce to support increased demand.
Operating income for this business segment rose by $0.9 million and $2.6
million, to $4.6 million (9.3% of net sales) and $8.2 million (9.4% of net
sales) in the second quarter and first half of 2004, respectively. Operating
expenses are up this quarter compared with the prior year second quarter by $1.0
million reflecting increased variable selling expenses and legal and other costs
supporting new product development efforts. Year-to-date operating expenses are
only up by $0.8 million compared with the prior year as the above-mentioned cost
increases were somewhat offset by the partial recovery ($300,000) of an account
receivable that was written off with the Adelphia bankruptcy in 2002.
LAMSON HOME PRODUCTS
Lamson Home Products had a challenging second quarter as its customers' order
patterns were somewhat erratic after a strong finish to the first quarter. The
business segment continued its growth with $22.0 million of net sales in the
second quarter of 2004, a $3.0 million, or 15.7%, increase over the $19.0
million of net sales level recorded in the second quarter of 2003. This
expansion has been primarily from the realization of market share gains, steady
growth by its major customers in the home improvement retail market and some
product line expansions. Unfortunately, although significant cost increases have
been incurred, they have not been able to be recovered so far in 2004.
13
The lack of price increases and rising cost of PVC resin has unfavorably
impacted Lamson Home Products' gross margin. Some of this impact has been
mitigated by productivity improvements from investments made in new molds and
savings realized from outsourcing programs.
Operating income was $2.5 million, 11.2% of net sales, in the second quarter of
2004 compared with $3.2 million, 17.0% of net sales, in the second quarter of
2003. Year-to-date 2004 operating income totaled $4.9 million, 11.3% of net
sales, a $1.0 million decline from the $5.9 million, 15.6% of net sales,
recorded in the first half of 2003. The reduction in operating income levels in
2004 was caused by higher variable selling and marketing expenses, new product
development costs and continued merchandising investments.
PVC PIPE
The PVC Pipe segment was supported by solid residential construction activity,
improved utility spending and more municipal investment in sewer infrastructures
during the second quarter of 2004. Net sales rose to $32.0 million, a $3.1
million or 10.7% improvement, over the second quarter of 2003. Volume was very
strong early in the quarter and moderated only slightly in May and June
resulting in pipe pounds sold exceeding last year's second quarter by over 9.0%
and bringing the year-to-date volume even with the prior year. The overall
economic recovery and tight resin supplies helped to sustain price increases
implemented in the current quarter allowing average selling prices this quarter
to be 6.0% higher than the second quarter of 2003. The Vylon large diameter
sewer pipe product line saw shipments rise this quarter and backlog grow to its
highest level in several years.
Gross margin was impacted by PVC resin cost increases as previously discussed,
however, in the current quarter these increases were absorbed by selling price
improvement which expanded the gross margin spread to the best levels in over a
year.
The operating income for the PVC Pipe segment totaled $1.0 million in the second
quarter of 2004 compared with breakeven results in the second quarter of 2003
resulting from the improved gross profit levels. Operating expenses were
slightly higher than the prior year due to variable selling expense increases
and new product line expansion of Vylon sewer pipe to meet customer needs. For
the first half of 2004, the PVC Pipe segment lost $0.2 million compared with
$0.7 million in the first half of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity and capital resources is cash from
operating activities and availability under its secured credit facility.
Cash provided by operating activities was $1.8 million in the first half of 2004
compared with a $3.1 million use of cash in the first half of 2003. About $3.1
million of this $4.9 million improvement was directly attributable to the
increase in earnings and the remainder from working capital. Accounts receivable
grew to $57.2 million almost a 50.0% increase from year-end 2003 and $9.0
million, 18.6% higher than the $48.2 million balance at the end of the second
quarter of 2003 reflecting the comparatively higher sales levels in the current
quarter. Days sales outstanding, calculated using a 3-month rolling average,
stayed fairly steady at 48.6 days at the end of the second quarter of 2004
compared with 48.1 days in the prior year second quarter.
The Company continued to build inventory during the second quarter in order to
support the growing demand by customers. Inventory levels are up $10.6 million
(35.0%) from year-end reaching $40.8 million at the end of the first half of
2004. This is a $2.0 million improvement over the prior year first half balance
of $42.7 million reflecting the savings from the blend tower relocation
completed during the second half of 2003. Inventory turns rose to 7.6 times at
the end of the current period compared with 6.1 times at the second quarter end
of 2003 and 6.3 times at the prior year-end. The pounds of PVC resin in
inventory at July 3, 2004 were 25.0% higher than year-end; however, pounds were
25.0% on hand lower than July 5, 2003. The cost per pound of PVC resin inventory
at the end of the second quarter of 2004 is approximately 24.0% higher than
year-end 2003 and 12.0% higher than the end of the second quarter of 2003.
14
Accounts payable at July 3, 2004 was $35.5 million, an increase of $18.6 million
from year-end 2003 but only $2.1 million higher than July 5, 2003. This increase
primarily corresponds to the inventory increase this quarter and the timing of
year-end payments which lowered the payables balance at year-end. The current
accruals reflect higher anticipated pension contributions, incentive
compensation estimates and sales and marketing program liabilities.
Capital expenditures remain at lower levels, $1.9 million year-to-date, compared
with $3.6 million invested at this time last year. Investments made during the
second quarter of 2004 are primarily to improve productivity in the Company's
molding and PVC extrusion facilities and to support new product offerings.
The Company has adequate credit capacity and expects to continue to pay down its
bank debt throughout the second half of 2004. The Company is in the process of
evaluating refinancing or debt extension options as the current bank debt
matures in August 2005. The leverage ratio was reduced this quarter which will
keep the current interest rate spread in effect through the third quarter.
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 July 3, 2004 the Company had approximately $22.8 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. The
realization of these net assets is based primarily upon estimates of future
taxable income. Current expectations of operating results are sufficient to
sustain realization of these net assets. However, should taxable income
estimates for the carryforward period be significantly reduced, the full
realization of net deferred tax assets may not occur.
OUTLOOK FOR 2004
Throughout the second quarter of 2004 the Company experienced solid sales order
and shipping rates with overall backlog at the end of the second quarter of 2004
exceeding the prior year second quarter backlog by 70.0%. The steady economic
recovery did support price increases in the Carlon and PVC Pipe segments during
the last quarter which helped to offset cost increases in raw materials and
freight.
The residential construction market has leveled off and we expect a slight
decline over the second half of 2004. No substantial growth has occurred yet in
the commercial or industrial construction markets and is not expected until
2005. The telecom infrastructure project level this quarter has been encouraging
and we anticipate this to continue as key customers begin to execute on
announced fiber-to-the-home programs.
Resin costs, both HDPE and PVC, are expected to remain at their current high
levels through the third quarter, falling only slightly in the fourth quarter.
Resin producers continue to run in excess of 90.0% of capacity and petroleum
based feedstocks along with natural gas prices are expected to stay high.
The Company continues its efforts to manage working capital once again
highlighted by inventory turns reaching 7.6 turns compared with 6.1 turns a year
ago and 6.8 turns in the first quarter of 2004. In addition, account receivable
days sales outstanding remained around 48 days and has been consistently under
50 days since 2002. We expect to generate positive cash from operating
activities in the remaining quarters of 2004, despite a scheduled pension
contribution in the third quarter.
15
Based on the results obtained in the second quarter and expectation that the
markets for residential, utility and telecom construction will remain consistent
with the second quarter, we anticipate our net sales growth will be 10.0% to
12.0% for 2004.
These higher sales levels should translate to increased earnings, however, we
also will be incurring the remaining shutdown costs for the Pasadena facility,
which will likely result in margins slowly declining in the PVC Pipe segment as
the construction season ends and are anticipating increased freight costs as the
transportation environment is difficult. Based on these factors we now believe
projected earnings for the year will be between 43 to 48 cents per diluted
share, up from 39 to 43 cents per diluted share estimate made last quarter.
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, they 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 July 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 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.
16
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 is currently working through a
mediation process to try to resolve this matter without further litigation.
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, 2004, the Company held its Annual Meeting of Shareholders. At the
meeting 12,732,202 Common Shares (92.35% of the Common Shares outstanding) were
voted.
The following four directors were elected to Class I and received the votes
indicated next to their names.
CLASS I FOR WITHHELD AUTHORITY
- -------------------- ---------- ------------------
James T. Bartlett 11,514,065 1,218,137
Francis H. Beam, Jr. 11,465,716 1,266,486
Martin J. Cleary 11,466,516 1,265,686
D. Van Skilling 11,474,940 1,257,262
An Amendment to the Lamson & Sessions Co. 1998 Incentive Equity Plan was
approved: For 7,311,814, Against 1,910,282, Abstain 80,462.
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 April 30, 2004).
10(b) Form of one-year, non-qualified Stock Option Agreement
for Non-Employee Directors under the Company's 1998
Incentive Equity Plan (As Amended and Restated as of
April 30, 2004).
10(c) Form of Restricted Stock Agreement for Non-Employee
Directors under the Company's 1998 Incentive Equity Plan
(As Amended and Restated as of April 30, 2004).
17
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 April 6,
2004, relating to the Company's revised earnings
estimates for the first quarter and full year of 2004.
2. The Company's current report on Form 8-K, dated April
30, 2004, relating to the Company's earnings for the
first quarter of 2004.
18
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 29, 2004 By:/s/ James J. Abel
-------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
19