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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 2, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 1-313
T H E L A M S O N & S E S S I O N S C O.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-0349210
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25701 Science Park Drive
Cleveland, Ohio 44122-7313
- --------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
216/464-3400
--------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes[ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 2, 2005 the Registrant had outstanding 14,060,997 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)
FIRST QUARTER ENDED
--------------------------------------
2005 2004
---------------- ----------------
NET SALES $ 98,792 100.0% $ 82,995 100.0%
Cost of products sold 81,815 82.8% 69,677 84.0%
-------- --------
GROSS PROFIT 16,977 17.2% 13,318 16.0%
Selling and marketing expenses 7,074 7.1% 5,801 7.0%
General and administrative expenses 3,812 3.9% 3,793 4.6%
Research and development expenses 476 0.5% 528 0.6%
-------- --------
Total operating expenses 11,362 11.5% 10,122 12.2%
Other (income), net - 0.0% (924) -1.2%
-------- --------
OPERATING INCOME 5,615 5.7% 4,120 5.0%
Interest expense, net 2,002 2.0% 1,955 2.4%
-------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 3,613 3.7% 2,165 2.6%
Income tax provision 1,409 1.5% 866 1.0%
-------- --------
INCOME FROM CONTINUING OPERATIONS 2,204 2.2% 1,299 1.6%
Income from discontinued operations,
net of income tax of $256 - 0.0% 401 0.4%
-------- --------
NET INCOME $ 2,204 2.2% $ 1,700 2.0%
======== ========
BASIC EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.16 $ 0.09
Earnings from discontinued operations,
net of tax - 0.03
-------- --------
NET EARNINGS $ 0.16 $ 0.12
======== ========
DILUTED EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.15 $ 0.09
Earnings from discontinued operations,
net of tax - 0.03
-------- --------
NET EARNINGS $ 0.15 $ 0.12
======== ========
See notes to Consolidated Financial Statements (Unaudited).
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
FIRST FIRST
QUARTER QUARTER
ENDED YEAR ENDED ENDED
-------------------------------
2005 2004 2004
---------- ---------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 743 $ 683 $ 370
Accounts receivable, net of allowances of
$1,730, $1,522 and $1,847, respectively 53,020 48,391 50,612
Inventories, net
Raw materials 4,185 3,504 3,836
Work-in-process 5,624 5,160 3,594
Finished goods 34,929 28,196 28,967
--------- --------- ---------
44,738 36,860 36,397
Deferred tax assets 8,171 9,683 7,996
Prepaid expenses and other 4,557 5,128 5,981
--------- --------- ---------
TOTAL CURRENT ASSETS 111,229 100,745 101,356
PROPERTY, PLANT AND EQUIPMENT
Land 3,320 3,320 3,336
Buildings 25,182 25,130 24,895
Machinery and equipment 121,592 119,622 120,612
--------- --------- ---------
150,094 148,072 148,843
Less allowances for depreciation and
amortization 102,259 100,111 100,335
--------- --------- ---------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 47,835 47,961 48,508
GOODWILL 21,480 21,480 21,519
PENSION ASSETS 30,693 30,513 30,140
DEFERRED TAX ASSETS 13,223 12,255 16,592
OTHER ASSETS 5,047 5,548 5,828
--------- --------- ---------
TOTAL ASSETS $ 229,507 $ 218,502 $ 223,943
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 31,598 $ 24,213 $ 31,258
Accrued compensation and benefits 9,734 12,595 11,683
Customer volume & promotional accrued
expenses 3,704 6,648 3,011
Other accrued expenses 7,527 8,509 9,098
Taxes 4,252 3,272 3,777
Secured credit agreement - current 80,795 75,000 10,764
Current maturities of long-term debt 875 875 760
--------- --------- ---------
TOTAL CURRENT LIABILITIES 138,485 131,112 70,351
LONG-TERM DEBT 11,682 11,876 84,104
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 30,322 30,138 29,181
SHAREHOLDERS' EQUITY
Common shares 1,406 1,389 1,379
Other capital 77,473 76,130 75,534
Retained earnings (deficit) (25,076) (27,280) (32,129)
Accumulated other comprehensive income (loss) (4,785) (4,863) (4,477)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 49,018 45,376 40,307
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 229,507 $ 218,502 $ 223,943
========= ========= =========
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
--------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net income $ 2,204 $ 1,700
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation 2,270 2,328
Amortization 403 400
Gain on sale of property, plant and equipment - (924)
Deferred income taxes 723 957
Net change in working capital accounts:
Accounts receivable (4,629) (12,416)
Inventories (7,878) (6,254)
Prepaid expenses and other 571 (1,553)
Accounts payable 7,385 14,330
Accrued expenses and other current liabilities (5,546) (660)
Pension plan contributions (315) (81)
Other long-term items 406 (222)
-------- --------
CASH USED IN OPERATING ACTIVITIES (4,406) (2,395)
INVESTING ACTIVITIES
Net additions to property, plant and equipment (2,144) (55)
Proceeds from sale of property, plant and equipment - 1,536
Acquisitions and related items (62) (62)
-------- --------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES (2,206) 1,419
FINANCING ACTIVITIES
Net borrowings under secured credit agreement 5,795 1,064
Payments on other long-term borrowings (194) (186)
Exercise of stock options (168,750 shares issued) 1,071 -
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 6,672 878
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 60 (98)
Cash and cash equivalents at beginning of year 683 468
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 743 $ 370
======== ========
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 2004 amounts have been reclassified to conform with
2005 classifications.In particular, the Company has reclassified certain
co-operative advertising allowances and service commissions in the Lamson Home
Products business segment, reducing net sales and selling and marketing expenses
by $1.3 million in the first quarter of 2004.
NOTE B - INCOME TAXES
The year-to-date 2005 income tax provision was calculated based on management's
estimate of the annual effective tax rate of 39.0% for the year.The provision
for 2004 is primarily non-cash charges, while the Company anticipates having to
pay approximately 40.0% of the 2005 provision due to alternative minimum tax
requirements.
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" (DIY) 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
---------------------
2005 2004
-------- ---------
NET SALES
Carlon $ 47,203 $ 38,163
Lamson Home Products 23,971 19,754
PVC Pipe 27,618 25,078
-------- --------
$ 98,792 $ 82,995
======== ========
OPERATING INCOME (LOSS)
Carlon $ 3,624 $ 3,639
Lamson Home Products 3,543 2,384
PVC Pipe 13 (1,187)
Corporate Office (1,565) (1,640)
Other Income (see Note I) - 924
-------- --------
$ 5,615 $ 4,120
======== ========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,269 $ 1,397
Lamson Home Products 462 470
PVC Pipe 942 861
-------- --------
$ 2,673 $ 2,728
======== ========
Total assets by business segment at April 2, 2005 and January 1, 2005 are as
follows:
APRIL 2, JANUARY 1,
(Dollars in thousands) 2005 2005
-------- --------
IDENTIFIABLE ASSETS
Carlon $ 81,897 $ 77,473
Lamson Home Products 35,217 34,190
PVC Pipe 51,177 44,650
Corporate Office (includes deferred tax and
pension assets) 61,216 62,189
-------- --------
$229,507 $218,502
======== ========
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - COMPREHENSIVE INCOME
The components of comprehensive income for the first quarters of 2005 and 2004
are as follows:
(Dollars in thousands)
FIRST QUARTER ENDED
--------------------------
APRIL 2, APRIL 3,
2005 2004
-------- --------
Net income $2,204 $1,700
Foreign currency translation adjustments (11) (25)
Interest rate swaps, net of tax 89 117
------ ------
Comprehensive income $2,282 $1,792
====== ======
The components of accumulated other comprehensive income (loss), at April 2,
2005, January 1, 2005 and April 3, 2004 are as follows:
APRIL 2, JANUARY 1, APRIL 3,
(Dollars in thousands) 2005 2005 2004
------- ---------- --------
Foreign currency translation adjustments $ (382) $ (371) $ (466)
Minimum pension liability adjustments,
net of tax (4,323) (4,323) (3,289)
Interest rate swaps, net of tax (80) (169) (722)
------- ------- -------
Accumulated other comprehensive income (loss) $(4,785) $(4,863) $(4,477)
======= ======= =======
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
-------------------
2005 2004
------- -------
BASIC EARNINGS-PER-SHARE COMPUTATION
Net Income $ 2,204 $ 1,700
======= =======
Average Common Shares Outstanding 13,999 13,787
======= =======
Basic Earnings Per Share $ 0.16 $ 0.12
======= =======
DILUTED EARNINGS-PER-SHARE COMPUTATION
Net Income $ 2,204 $ 1,700
======= =======
Basic Shares Outstanding 13,999 13,787
Stock Options Calculated Under
the Treasury Stock Method 558 171
------- -------
Total Shares 14,557 13,958
======= =======
Diluted Earnings Per Share $ 0.15 $ 0.12
======= =======
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, $16.5 million of
which is outstanding at April 2, 2005.The agreements are coterminous with the
Company's secured credit facility and expire in August 2005.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 of 2005 of an $80,000 (net of $51,000 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.The entire $131,000 of loss on the fair value of the hedges is
classified in current accrued liabilities.
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. ("YSDI"), a business which the Company sold in 1988, was selling
the assets of the business and would be unable to fund (defaulted on its
obligations) 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) in 2003 reflecting the actuarial calculation of this estimated
liability for payments to certain eligible participants through February 2011
when the Company's obligation will end and to write-off notes (cash advances) to
YSDI in 2003. As a result of YSDI's asset sale in 2004, the Company was able to
realize payment of $668,000 for these 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
---------------------
2005 2004
------ ------
Net income As reported $2,204 $1,700
Total stock-based employee
compensation, net of tax (116) (120)
------ ------
Net income Pro forma $2,088 $1,580
====== ======
Basic earnings per share As reported $ 0.16 $ 0.12
Pro forma 0.15 0.11
Diluted earnings per share As reported $ 0.15 $ 0.12
Pro forma 0.14 0.11
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, "Accounting for Stock-Based Compensation," Statement
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends FASB Statement No. 95, "Statement of Cash
Flows. "Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. Statement 123(R) must be adopted no
later than fiscal year 2006. Early adoption will be permitted in periods in
which financial statements have not yet been issued. The Company will adopt
Statement 123(R) on January 1, 2006 and is still in the process of determining
the impact on operating results.
9
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE H - STOCK COMPENSATION PLANS - CONTINUED
The impact of adoption of Statement 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the
future. Statement 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those
amounts will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions was not material.
NOTE I - SALE OF ASSETS
At the end of 2003, the Company intended to vacate one of its manufacturing
facilities and proceed with its efforts to sell the property during 2004. The
asset had been written down in 2001 to its then estimated fair value. In the
first quarter of 2004, the Company sold the manufacturing facility located in
Pasadena, Texas for net proceeds of $1.5 million, realizing a gain on the sale
of $924,000 included as other income in the Consolidated Income Statement. The
Company relocated production equipment at this facility to other Lamson &
Sessions facilities, incurring in the remainder of 2004 approximately $1.1
million in severance, training, moving and other costs as detailed below. At
April 2, 2005 a $124,000 liability remained for severance payments to be
completed in the second quarter of 2005. This plant sale affected 40 employees,
all of whom left the Company by December 31, 2004.
(Dollars in thousands)
TRAINING, MOVING
SEVERANCE AND OTHER COSTS TOTAL
--------- ---------------- -------
2004 charges $ 587 $ 550 $ 1,137
Payments in 2004 (151) (550) (701)
------- ------- -------
Balance at January 1, 2005 $ 436 $ - $ 436
Payments in first quarter 2005 312 - 312
------- ------- -------
Balance at April 2, 2005 $ 124 $ - $ 124
======= ======= =======
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.
10
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
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
Service cost $ 374 $ 298 $ 2 $ 3
Interest cost 1,212 1,219 310 321
Expected return on assets (1,563) (1,486) - -
Net amortization and deferral 479 388 (100) 51
Defined contribution plans 231 285 - -
------- ------- ------- -------
$ 733 $ 704 $ 212 $ 375
======= ======= ======= =======
The above information includes the effect of YSDI's other post-retirement
benefit costs which were assumed in April 2004.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. In accordance with
FSP No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," the effects of
the subsidy resulted in a $0.6 million reduction in 2004 of the accumulated
post-retirement benefit obligation with an annual reduction in other benefit
costs of approximately $0.1 million.
NOTE K - DEBT CLASSIFICATION
The Company's secured credit agreement matures in August 2005. As a result, the
debt is reclassified as current since the end of the third quarter of 2004. The
Company intends to refinance this obligation in the first half of 2005.
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
In the first quarter 2005, the Company had record net sales, which includes a
35.0% expansion of telecom product sales, as major telecom service providers
continue to increase their investment in Fiber-to-the-Premise networks.
Rising material costs, especially the petroleum based PVC and HDPE resins,
continued to challenge the Company. In response to this continued trend of cost
increases, all business segments implemented price increases in the first
quarter to help offset this effect. Transportation costs also continue to rise
as higher fuel costs and driver and equipment shortages impact freight carriers.
11
The Company's Secured Credit Agreement is classified as current debt as of
April 2, 2005 as its maturity date is August 2005. At the end of the first
quarter of 2005 the Company was in compliance with all financial covenants. As
announced on April 13, 2005, the Company concluded its review of various
strategic alternatives and is proceeding with refinancing of its senior secured
debt. It is anticipated that the Company will refinance this obligation by the
end of the second quarter of 2005.
2005 COMPARED WITH 2004
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, items from the
Consolidated Income Statements as a percentage of net sales for the first
quarter of 2005 and 2004 ended:
(Dollars in thousands)
FIRST QUARTER ENDED
---------------------------------------
2005 2004
---------------- -----------------
Net Sales $98,792 100.0% $82,995 100.0%
Cost of products sold 81,815 82.8% 69,677 84.0%
------- -------
Gross profit 16,977 17.2% 13,318 16.0%
Total operating expenses 11,362 11.5% 10,122 12.2%
Other (income) - 0.0% (924) -1.2%
------- -------
Operating income 5,615 5.7% 4,120 5.0%
Interest expense, net 2,002 2.0% 1,955 2.4%
------- -------
Income from continuing operations
before income taxes 3,613 3.7% 2,165 2.6%
Income tax provision 1,409 1.5% 866 1.0%
------- -------
Income from continuing operations $ 2,204 2.2% $ 1,299 1.6%
======= =======
Net sales for the first quarter of 2005 rose 19.0%, or $15.8 million, to $98.8
million from $83.0 million in the first quarter of 2004. All business segments
continued their upward sales growth trends driven by solid telecom
infrastructure demand for HDPE conduit and related products. Shipments of plant
products used for outside construction (such as PVC Pipe) began the quarter
slowly due to inclement weather conditions, but volume increased in March as
anticipated.
Gross profit in the first quarter 2005 rose to $17.0 million, 17.2% of net
sales, from $13.3 million, or 16.0% of net sales, in the first quarter of 2004,
a 7.5% margin improvement over first quarter 2004. The higher net sales levels
in both Carlon and Lamson Home Products resulted in a favorable product mix. The
cost of PVC resin continued to rise during the first quarter 2005, approximately
30.0% higher than the first quarter in 2004 and 8.0% higher than the fourth
quarter of 2004. These cost increases were offset by higher sales prices and
productivity improvements in the plants and distribution centers.
Operating income for the first quarter 2005 was $5.6 million, or 5.7% of net
sales, an increase of $1.5 million, or 36.3%, over the $4.1 million, or 5.0% of
net sales, earned in the first quarter of 2004. Operating expenses at $11.4
million were $1.2 million higher in the first quarter 2005 than the first
quarter 2004. The entire increase is in selling and marketing expense from
higher variable selling expenses ($500,000) and incentive compensation
expectations in 2005 ($300,000). In addition, the 2004 operating expenses were
favorably impacted by a $300,000 recovery of a previous bankruptcy claim. The
first quarter of 2004's operating income of $4.1 million
12
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 in the first quarter 2005 stayed approximately the same as
the first quarter of 2004. Average borrowing during the first quarter 2005 was
$2.3 million lower than the first quarter 2004 while average interest rates were
6.00% first quarter 2005 compared with 5.78% for the first quarter 2004, as
LIBOR rates have increased.
The income tax provision for the first quarter 2005 reflects an effective tax
rate of 39.0% compared with 40.0% in the first quarter of 2004.
BUSINESS SEGMENTS
CARLON
Strong growth continued in Carlon, the Company's largest business segment,
resulting in $47.2 million in net sales in the first quarter of 2005, $9.0
million, or 23.7%, higher than the $38.2 million in net sales recorded in the
prior year first quarter. About $6.6 million of this increase came from 35.0%
higher telecom product sales primarily to support the industry's rollout of
Fiber-to-the-Premise projects. Telecom product sales are now approximately half
of the business segment's total net sales. The remainder of the net sales
represent traditional electric products and rose about 12.0% first quarter 2005
over the prior year first quarter primarily from the realization of price
increases to offset the effect of PVC and other material cost increases.
Gross margin in the Carlon business segment for first quarter 2005 is about two
basis points lower compared with the first quarter 2004. Telecom products, which
have slightly lower gross margins, have become a higher proportion of this
segment's net sales. The higher sales of HDPE telecom products has led to better
utilization of the HDPE extrusion facilities, which was partially offset by
transition and expansion costs ($300,000) to support increased demand for
corrugated flexible conduit, which is becoming more accepted in
Fiber-to-the-Premise projects.
Operating income for Carlon was $3.6 million in both 2005 and 2004 first
quarters, which reflects 7.7% of net sales in 2005 and 9.5% of net sales in
2004. The major reasons for the lower operating margins in 2005 are lower gross
margins due to the product mix described above, higher variable selling and
marketing expenses ($400,000) and increased incentive compensation expectations
($200,000). In addition, Carlon's 2004 operating expenses were favorably
impacted by the partial recovery ($300,000) of an accounts receivable that was
written off in 2002 relating to the Adelphia bankruptcy.
LAMSON HOME PRODUCTS
Net sales in the Lamson Home Products business segment increased by $4.2
million, a 21.3% increase, to $24.0 million in the first quarter of 2005
compared with $19.8 million in the first quarter of 2004. Due to the significant
cost increases in PVC and other raw materials, Lamson Home Products increased
selling prices for most of its products during the first quarter of 2005, which
represents approximately $1.0 million of the increase. The remainder of the net
sales gains came from product line expansions ($1.3 million) at several major
retail customers and general market expansion as its customers continue to grow.
This segment's gross profit was improved in the first quarter 2005 over the same
quarter in 2004 despite PVC raw material compound costs being up around
20.0%. These results were supported by an increase in selling prices being
realized, better product mix and the restrained growth in distribution costs.
Operating income was $3.5 million, 14.8% of net sales in the first quarter 2005,
compared with $2.4 million, 12.1% of net sales in the first quarter of 2004.
This improvement was driven by the higher gross profit levels as operating
expenses were relatively flat.
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PVC PIPE
The PVC Pipe business segment experienced net sales growth of $2.5 million, or
10.1%, to $27.6 million in the first quarter 2005 from $25.1 million in the
first quarter 2004. Rigid pipe sales were seasonally slow in January and
February, as much of the country was experiencing inclement weather. Shipments
picked up in March, however, pipe pounds shipped in the first quarter 2005 were
lower by 21.9% from the first quarter 2004 and also down by 8.9% from the fourth
quarter of 2004. Given the rising PVC cost environment, the Company was able to
stay firm on pricing with the strength of the overall underlying construction
markets, resulting in 32.0% higher prices than the first quarter of 2004 and
6.7% increases from the fourth quarter 2004. Also supporting the quarterly
increase is higher large diameter sewer pipe shipments of $0.3 million to
support several sewer infrastructure projects.
Gross margins in the PVC Pipe business segment improved from the first quarter
of 2004 as net sales price increases essentially offset the PVC resin cost
increases of approximately 30.0% over the same timeframe. In addition, the
business segment is realizing some savings from the sale and consolidation of
the Pasadena, Texas facility in 2004 and productivity improvements from the
capital investments made over the last several years, which is lowering
conversion costs.
Operating income in this business segment was essentially breakeven for the
first quarter of 2005 compared with a loss of $1.2 million in the first quarter
2004. Much of this improvement comes from the higher gross profit as operating
expenses were the same in first quarter 2005 as they were in first quarter 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity and capital resources is cash
generated from operating activities and availability under its Secured Credit
Agreement.
Cash used by operating activities was $4.4 million in the first quarter 2005
compared with a use of $2.4 million in the first quarter of 2004. As is typical
in all first quarters, accounts receivable grew from the end of the year on
increasing sales volume going into the spring construction season. At the end of
the first quarter 2005, accounts receivable totaled $53.0 million, 46.9 days
sales outstanding, compared with $50.6 million, 45.8 days sales outstanding, at
the end of the first quarter 2004.
Inventory investment also increased throughout the first quarter 2005 primarily
to support forecasted demand in the second quarter 2005. At the end of the first
quarter 2005, total inventories were $44.7 million, 6.6 turns, up by $8.3
million, compared with $36.4 million, 6.8 turns, at the end of the first quarter
of 2004.
The pounds of PVC resin at April 2, 2005 (the end of first quarter 2005) were
approximately 14.0% higher than at April 3, 2004 (the end of first quarter 2004)
due to the lower sales volumes in the respective quarters. In addition, the
average costs of PVC resin in inventory have increased by about 26.0% from the
end of the first quarter 2004. In addition, the Company is investing in more
inventory this year, especially HDPE resins and chimes to support the increase
in demand for telecom products and the rollout of additional chimes' business to
several retail customers.
Much of the inventory increases in both 2005 and 2004 were offset by higher
accounts payable balances. Accrued expenses declined by $5.5 million in the
first quarter 2005 primarily from the payment of incentive compensation, $4.0
million, and the final cash payment of $1.0 million related to a 2004 litigation
settlement.
The Company's cash used in investing activities totaled $2.2 million in the
first quarter 2005 compared with cash provided by investing activities in the
first quarter 2004. Capital expenditures in the current year of $2.1 million
were mainly to increase productivity in the PVC extrusion facilities, replace
and upgrade molds and to provide tooling for new products. In 2004, the Company
received $1.5 million proceeds from the sale of its Pasadena, Texas plant.
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The Company's cash provided by financing activities was $6.7 million and $0.9
million in the first quarter 2005 and 2004, respectively. In the first quarter
2005, the Company borrowed $5.8 million on its Secured Credit Agreement to
support the use of funds for operating and investing activities described above.
The Company met all its debt covenants at the end of the first quarter 2005 and
continues to have adequate credit capacity to fund the needs of the business.
The Company's Secured Credit Agreement matures in 2005 and, thus is classified
as current liability. The Company is in the process of refinancing this debt and
expects to complete its refinancing efforts by the end of the second quarter of
2005. Lastly, in the first quarter 2005 the Company received $1.1 million as
168,750 shares were issued from the exercise of stock options.
CRITICAL ACCOUNTING ESTIMATES
We have no material changes to the disclosure on this matter since the end of
our most recent fiscal year, January 1, 2005.
OUTLOOK FOR 2005
To date in 2005, we have experienced continued expansion of telecom spending to
support Fiber-to-the-Premise projects by the telecommunication service
providers. This is supported primarily by the Verizon rollout; however, other
customers (including SBC) have also announced major anticipated investments
which are expected to commence this year. Carlon continues to be the largest
supplier of HDPE conduit in North America for this market segment and is
developing other related product applications to further support the build out
of this last mile access network.
Residential construction has remained relatively strong throughout the first
quarter of 2005 with the expectation that rates will moderate this year to
around the 1.8 million unit level. Existing home sales is a key driver for the
Lamson Home Products business segment and is anticipated to remain at healthy
levels in 2005 as unemployment declines and interest rates stay reasonably low.
With the improving economy, there are some signs that commercial and industrial
construction activity is picking up in early 2005 after hitting its low point in
2004. We anticipate slow growth in this market segment throughout 2005.
High oil and gas prices in the first quarter 2005 have kept PVC and HDPE resin
prices on the rise despite resin producer operating rates of approximately 90
percent in the first part of 2005. Heading into the spring construction season,
it is expected that resin producer operating rates will rise to the mid 90
percent range, which will support the forecast of continued resin cost increases
throughout the second and third quarters. The strength of our end markets will
determine how much of these costs are recovered in price increases.
With the closure of the Pasadena, Texas plant in 2004, the Company anticipates
realizing about $1.2 million to $1.5 million in cost improvements in 2005. These
savings were somewhat mitigated by transitional and expansion costs in the first
quarter as we ramp up to meet higher customer demand.
Cash flow from operating activities will continue to improve in 2005 from
expected higher operating results and the leveling off of working capital
requirements. Capital spending in 2005 is expected to be $7.0 million to $9.0
million, focused primarily on equipment additions and upgrades, incremental
tooling to support telecom growth and new products.
The Company's Secured Credit Agreement is scheduled to expire in August 2005. It
is management's intent to replace the facility by the end of second quarter
2005. The Company does not anticipate any issues in obtaining this refinancing.
In summary, based on the encouraging activity in our key markets experienced in
the first quarter 2005, we expect further growth for the rest of the year, since
the remaining quarters are typically stronger seasonally than the first quarter.
As a result, the Company is anticipating net sales for the second quarter of
between $112 million and $115 million, 9-12 percent over the second quarter
2004, which is expected to result in net income of $4.1-$4.4 million, or 28-30
cents per diluted share, for the second quarter. This earnings range represents
a 47-58 percent increase over the 19 cents per diluted share reported for the
second quarter of 2004. For the full year 2005, we expect net sales to increase
10-12 percent to a range of between $425 million and $435 million, reflecting
the strengthening conditions in the telecom, commercial and industrial
construction markets. If this net sales level is achieved, along with higher
expected margins and operating capacity utilization, the Company projects net
income of $11.5-$13.0 million, or $0.80 to $0.90 per diluted share in 2005, up
from its previous estimate of 79-80 cents. The new estimated earnings represent
an increase of 75-100 percent over the $6.5 million, or 46 cents per diluted
share, reported for 2004.
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 the outcome and effects of the Company's refinancing efforts
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 1, 2005.
ITEM 4 - CONTROLS AND PROCEDURES
As of April 2, 2005, 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. During the Company's first quarter 2005, 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 17, 2004, the Company announced the settlement of litigation
regarding the Company's alleged infringement of a patent held by Intermatic
Incorporated of Spring Grove, Illinois. The settlement was arrived at through a
mediation process. The net effect of that settlement ($1.7 million) has been
reflected in the 2004 operating results. A final cash payment of $1.0 million
was made in the first quarter 2005.
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.
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ITEM 6 - EXHIBITS
(a) Exhibits:
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.
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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)
April 29, 2005 By: /s/ James J. Abel
------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
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