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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 March 31, 2004
Commission File Number 1-5426
THOMAS INDUSTRIES INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
DELAWARE 61-0505332
- ----------------------- --------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
4360 BROWNSBORO ROAD, SUITE 300, LOUISVILLE, KENTUCKY 40207
- ----------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
502/893-4600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 Exchange Act Rule 12b-2) Yes X No __
As of May 6, 2004, 17,371,539 shares of the registrant's Common Stock were
outstanding (net of treasury shares).
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT AMOUNTS PER SHARE)
THREE MONTHS ENDED
MARCH 31
-----------------------------
2004 2003
-----------------------------
Net sales $ 109,518 $ 92,346
Cost of products sold 71,135 59,231
-----------------------------
Gross profit 38,383 33,115
Selling, general and administrative
expenses 29,000 24,578
Equity income from GTG 7,422 6,143
-----------------------------
Operating income 16,805 14,680
Interest expense 1,026 1,086
Interest income and other income (expense) 606 (39)
-----------------------------
Income before income taxes and minority interest 16,385 13,555
Income taxes 5,735 4,742
-----------------------------
Income before minority interest 10,650 8,813
Minority interest, net of tax - 7
-----------------------------
$ 10,650 $ 8,806
=============================
Net income per share:
Basic $ 0.61 $ 0.51
Diluted $ 0.60 $ 0.50
Dividends declared per share: $ 0.095 $ 0.085
Weighted average number of
shares outstanding:
Basic 17,318 17,139
Diluted 17,779 17,507
See notes to condensed consolidated financial statements.
2
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
March 31 December 31
2004 2003 *
---------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 31,229 $ 23,933
Accounts receivable, less allowance
(2004--$2,136; 2003--$2,270) 58,621 52,819
Inventories:
Finished products 31,266 29,004
Raw materials 27,863 28,250
Work in process 8,040 8,641
---------------------------------------------
67,169 65,895
Deferred income taxes 7,047 6,688
Other current assets 6,533 6,287
---------------------------------------------
Total current assets 170,599 155,622
Investment in GTG 221,353 214,405
Property, plant and equipment 185,084 185,123
Less accumulated depreciation and amortization (79,304) (76,773)
---------------------------------------------
105,780 108,350
Goodwill 67,749 70,164
Other intangible assets, net 21,008 21,788
Other assets 4,696 4,715
---------------------------------------------
Total assets $ 591,185 $ 575,044
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,092 $ 3,088
Accounts payable 16,384 14,312
Accrued expense and other current liabilities 31,297 30,519
Dividends payable 1,646 1,642
Income taxes payable 5,726 595
Current portion of long-term debt 9,739 9,885
---------------------------------------------
Total current liabilities 67,884 60,041
Deferred income taxes 5,873 6,177
Long-term debt, less current portion 108,187 102,673
Long-term pension liability 13,189 13,189
Other long-term liabilities 9,446 9,609
---------------------------------------------
Total liabilities 204,579 191,689
Shareholders' equity:
Preferred stock, $1 par value, 3,000,000 shares authorized - none issued - -
Common stock, $1 par value, shares authorized: 60,000,000; shares
issued: 2004 - 18,181,078; 2003 - 18,108,664 18,181 18,109
Capital surplus 138,852 137,041
Deferred compensation 1,506 1,211
Treasury stock held for deferred compensation (1,506) (1,211)
Retained earnings 225,300 216,296
Accumulated other comprehensive income (loss) 16,332 23,968
Less cost of 822,339 treasury shares (12,059) (12,059)
---------------------------------------------
Total shareholders' equity 386,606 383,355
---------------------------------------------
Total liabilities and shareholders' equity $ 591,185 $ 575,044
=============================================
* Derived from the audited December 31, 2003 consolidated balance sheet.
See notes to condensed consolidated financial statements.
3
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
---------------------------------
2004 2003
---------------------------------
OPERATING ACTIVITIES
Net income $ 10,650 $ 8,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and intangible amortization 4,017 3,869
Deferred income taxes (515) 124
Equity income from GTG
Other items 158 36
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (6,865) (5,140)
Inventories (2,674) (3,459)
Accounts payable 2,707 (2,081)
Income taxes payable
Accrued expenses and other current liabilities 1,355 2,309
Other (1,309) (446)
-------------------------------
Net cash provided by operating activities 5,541 721
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,740) (1,952)
Sales of property, plant and equipment 2 13
-------------------------------
Net cash used in investing activities (3,738) (1,939)
FINANCING ACTIVITIES
Proceeds (payments) on short-term debt, net Proceeds from long-term debt
Payments from long-term debt
Dividends paid (1,642) (1,455)
Other 1,082 356
-------------------------------
Net cash provided by financing activities 5,376 1,631
Effect of exchange rate changes 117 26
-------------------------------
Net increase in cash and cash equivalents 7,296 439
Cash and cash equivalents at beginning of period 23,933 18,879
-------------------------------
Cash and cash equivalents at end of period $ 31,229 $ 19,318
===============================
See notes to condensed consolidated financial statements.
4
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements of Thomas
Industries Inc. ("Thomas" or the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial reporting and with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
The results of operations for the three-month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. In the opinion of the Company's management, the
unaudited consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
of the financial position and the results of operations. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
Note B - Acquisitions
- ---------------------
On November 20, 2003, the Company purchased the remaining 25% minority interests
in the Company's New Zealand subsidiary for $244,000. All of the purchase price
was allocated to goodwill. The Company now owns 100% of the New Zealand
subsidiary.
On July 31, 2003, the Company purchased all of the outstanding equity interests
of Aldax AB, of Stockholm, Sweden for $2.6 million, of which $1.7 million was
paid in cash at the acquisition date, while $900,000 was recorded as a long-term
liability to be paid on July 31, 2005 in accordance with the purchase agreement.
Approximately $2.0 million of the purchase price was allocated to goodwill.
On April 11, 2003, the Company purchased the remaining 20% minority interests in
the Company's Italian subsidiary for $1.5 million. All of the purchase price was
allocated to goodwill. The Company now owns 100% of the Italian subsidiary.
Note C - Contingencies
- ----------------------
On August 13, 2002, a petition was filed in the District Court of Jefferson
County, Texas, adding Thomas Industries Inc. as a third party defendant in a
lawsuit captioned Hydro Action, Inc. v. Jesse James, individually and d/b/a
James Backhoe Service of Dietrich, Illinois, Inc. and Original Septic Solutions,
Inc. (the "Third Party Plaintiffs") (the "Original Lawsuit"). The Original
Lawsuit alleged that the Company violated the Texas Deceptive Trade Practices
Act and breached warranties of merchantability and fitness for a particular
purpose with respect to pumps sold by the Company and used in septic tanks
manufactured or sold by the plaintiffs. The Original Lawsuit has been stayed as
a result of the bankruptcy filing by Hydro Action, Inc. On October 8, 2003, a
lawsuit was filed against the Company, Gig Drewery, Yasunaga Corporation and
Aqua-Partners, Ltd. in the District Court of Jefferson County, Texas, making the
same allegations set forth in the Original Lawsuit and requesting class-action
certification. No class has been certified. The Third Party Plaintiffs are
plaintiffs in this action. This complaint has been amended to include
approximately 28 plaintiffs. The complaint currently seeks $3 million per
plaintiff and punitive and exemplary damages. The total sales related to these
products were approximately $900,000. Although this litigation is in the
preliminary stages, the Company believes it has meritorious defenses to the
claims and intends to vigorously defend this matter. Litigation is subject to
5
many uncertainties and the Company cannot guarantee the outcome of these
proceedings. However, based upon information currently available, the Company
does not believe that the outcome of these proceedings will have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
The Company, like other similar manufacturers, is subject to environmental rules
and regulations regarding the use, disposal and cleanup of substances regulated
under environmental protection laws. It is the Company's policy to comply with
these rules and regulations, and the Company believes that its practices and
procedures are designed to meet this compliance. The Company is involved in
remedial efforts at certain of its present and former locations; and when costs
can be reasonably estimated, the Company records appropriate liabilities for
such matters. Management does not believe that the ultimate resolution of
environmental matters will have a material adverse effect on its financial
position, results of operations or liquidity.
In the normal course of business, the Company is a party to legal proceedings
and claims. When costs can be reasonably estimated, appropriate liabilities for
such matters are recorded. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of the
Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
Note D - Comprehensive Income
- -----------------------------
The reconciliation of net income to comprehensive income follows (in thousands):
THREE MONTHS ENDED
MARCH 31
------------------------
2004 2003
---- ----
Net income $10,650 $ 8,806
Other comprehensive income (loss):
Minimum pension liability (increase) 7 (27)
Related tax expense (credit) (3) 9
Derivative adjustment (293) -
Related tax expense 111 -
Foreign currency translation (7,458) 3,835
------- -------
Total change in other comprehensive income (loss) (7,636) 3,817
------- -------
Total comprehensive income $ 3,014 $12,623
========= =======
Note E - Net Income Per Share
- -----------------------------
The computation of the numerator and denominator in computing basic and diluted
net income per share follows (in thousands):
THREE MONTHS ENDED
MARCH 31
----------------------
2004 2003
---- ----
Numerator:
Net income $10,650 $8,806
======= ======
Denominator:
Weighted average shares outstanding 17,318 17,139
Effect of dilutive securities:
Director and employee stock options 445 322
Employee performance shares
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions 17,779 17,507
======= ======
6
Note F - Segment Disclosures
- ----------------------------
(In thousands) THREE MONTHS ENDED
MARCH 31
--------------------------
2004 2003
---- ----
Total net sales including intercompany sales
Pump and Compressor $135,716 $ 112,127
Intercompany sales
Pump and Compressor (26,198) (19,781)
-------- -----------
Net sales to unaffiliated customers
Pump and Compressor $109,518 $ 92,346
======== ==========
Operating income
Pump and Compressor $11,643 $ 10,325
Lighting* 7,422 6,143
Corporate (2,260) (1,788)
--------- ----------
$16,805 $ 14,680
======= ==========
*Three months ended March 31 consists of equity income of $7,512,000 in 2004 and
$6,222,000 in 2003 from our 32% interest in the joint venture, Genlyte Thomas
Group LLC (GTG), less $90,000 in 2004 and $79,000 in 2003 related to expense
recorded for Thomas Industries stock options issued to GTG employees.
Note G - Goodwill and Other Intangible Assets
- ---------------------------------------------
The changes in net carrying amount of goodwill for the three months ended March
31, 2004 were as follows (in thousands):
THREE MONTHS ENDED
MARCH 31, 2004
--------------
Balance at beginning of period $ 70,164
Translation adjustments and other (2,415)
----------
Balance at end of period $ 67,749
========
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment.
Certain intangible assets have definite lives and are being amortized.
Amortizable intangible assets consist of the following (in thousands):
March 31, 2004 December 31, 2003
----------------------------------------- ----------------------------------------------
Accumulated Accumulated
Life Cost Amortization Life Cost Amortization
---- ---- ------------ ---- ---- ------------
Licenses 18-19 $ 494 $ 209 18-19 $ 503 $ 207
Patents 5-20 5,688 860 5-20 5,917 771
Other 1-15 3,721 946 1-10 3,619 890
------------ ------------------- ------------- -------------------
Total $ 9,903 $ 2,015 $ 10,039 $1,868
============ =================== ============= ===================
The total intangible amortization expense for the three months ended March 31,
2004 and 2003 was $219,000 and $291,000, respectively.
7
The estimated amortization expense for the next five years beginning January 1,
2004 through December 31, 2008 is as follows (in thousands):
2004 $873
2005 874
2006 874
2007 867
2008 819
The Company has various trademarks totaling $12,334,000 at March 31, 2004 and
$12,831,000 at December 31, 2003, that are not amortized. Also included in other
intangible assets is an intangible asset associated with the minimum pension
liability of $786,000 as of March 31, 2004 and December 31, 2003.
Note H - Long-lived Assets
- --------------------------
Consistent with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company evaluates long-lived assets for impairment and
assesses their recoverability based upon anticipated future cash flows. If facts
and circumstances lead the Company's management to believe that the cost of one
of its assets may be impaired, the Company will evaluate the extent to which
that cost is recoverable by comparing the future undiscounted cash flows
estimated to be associated with that asset to the asset's carrying amount and
write down that carrying amount to market value to the extent necessary.
Note I - Genlyte Thomas Group LLC (GTG)
- ---------------------------------------
The following table contains certain unaudited financial information for GTG.
Genlyte Thomas Group LLC
Condensed Financial Information
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2004 2003
---- ----
GTG balance sheets:
Current assets $471,149 $444,272
Long-term assets 287,014 288,499
Current liabilities 188,741 185,809
Long-term liabilities 51,750 51,003
Three Months
Ended March 31
--------------
2004 2003
---- ----
GTG income statements (unaudited):
Net sales $277,362 $ 237,913
Gross profit 95,116 81,830
Earnings before interest and taxes 25,219 21,163
Net income 23,474 19,445
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG $ 7,512 $ 6,222
Stock option expense (90) (79)
--------- ----------
Equity income reported by Thomas $ 7,422 $ 6,143
========= ==========
8
Note J - Stock-Based Compensation
- ---------------------------------
Stock options are granted under various stock compensation programs to employees
and independent directors. In December 2003, the Company adopted the fair value
recognition provisions of accounting for stock-based compensation under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) which required the Company to expense the fair value
of employee stock options prospectively for all employee awards granted,
modified or settled after January 1, 2003. Awards under the Company's plan vest
over a period of five years. For employee stock options granted prior to 2003,
the Company continues to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Included in stock option activity, but accounted for in accordance with SFAS No.
123, are options granted to GTG employees, for which the Company has recorded
compensation expense. This compensation expense, shown net of tax, is also
included in the pro forma information below.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
Three Months Ended
March 31
------------------------
2004 2003
------------------------
Net income (as reported) $ 10,650 $ 8,806
Add: Stock-based compensation expense for GTG employees
included in reported net income, net of related tax
effect. 81 46
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effect. (195) (194)
------------------------
Net income (pro forma) $ 10,536 $ 8,658
========================
Net income per share (Basic) - As reported $ .61 $ .51
Pro forma .61 .51
Net income per share (Diluted) - As reported .60 .50
Pro forma .59 .50
Note K - Product Warranty Costs
- -------------------------------
The Company generally offers warranties for most of its products for periods
from one to five years. The specific terms and conditions of these warranties
vary depending on the product sold and country in which the Company does
business. The Company estimates the costs that may be incurred under its
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability
include that number of units sold, historical and anticipated rates of warranty
claims, and cost per claim. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the amount as necessary.
Changes in the Company's warranty liability for March 31, 2004 are as follows
(in thousands):
9
THREE MONTHS ENDED
MARCH 31, 2004
--------------
Balance at beginning of period $5,382
Warranties accrued 970
Settlements made and other (835)
Balance at end of period $5,517
======
Note L - Currency Risk Management
- ---------------------------------
All derivative instruments are recorded at fair value on the balance sheet and
all changes in fair value are recorded to earnings or to shareholders' equity
through other comprehensive income in accordance with SFAS No. 133, as amended,
"Accounting for Derivatives and Hedging Activity" (SFAS 133).
The Company uses forward currency exchange contracts to manage its exposures to
the variability of cash flows primarily related to the purchase of inventory
manufactured in Europe but inventoried and sold in non Euro-denominated
countries. These contracts are designated as cash flow hedges.
The Company does not use derivative instruments for trading or speculative
purposes.
All of the Company's derivative contracts are adjusted to current market values
each period and qualify for hedge accounting under SFAS 133. The periodic gains
and losses of the contracts designated as cash flows are deferred in other
comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in operations as an adjustment
to the carrying amounts of the underlying transactions in the period in which
these transactions are recognized. The carrying values of derivative contracts
are included in other current assets.
The Company's policy requires that contracts used as hedges must be effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. Hedging effectiveness is
assessed periodically. Any contract that is either not designated as a hedge, or
is so designated but is ineffective, is marked to market and recognized in
earnings immediately. If a cash flow hedge ceases to qualify for hedge
accounting or is terminated, the contract would continue to be carried on the
balance sheet at fair value until settled and future adjustments to the
contract's fair value would be recognized in earnings immediately. If a
forecasted transaction were no longer probable to occur, amounts previously
deferred in other comprehensive income would be recognized immediately in
earnings.
Note M - Pension and Other Postretirement Benefit Costs
- -------------------------------------------------------
The components of net periodic benefit cost consisted of the following:
OTHER
PENSION BENEFITS POSTRETIREMENT
BENEFITS
FOREIGN PLANS U.S. PLANS (U.S. PLANS)
--------------------------------------------------- -----------------------
2004 2003 2004 2003 2004 2003
--------------------------------------------------- -----------------------
Service cost $ 62 $ 72 $ 84 $ 71 $ 21 $ 17
Interest cost 141 148 131 128 23 21
Expected return on plan assets - - (144) (135) - -
Other amortization and deferral 4 - 60 51 10 8
-------- ------- ------- ------- ------ -----
Net Periodic Benefit cost $ 207 $ 220 $ 131 $ 115 $ 54 $ 46
====== ====== ====== ====== ===== =====
10
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $570,000 to its pension plans
in 2004. As of March 31, 2004, no contributions have been made. The Company
continues to anticipate contributions to the plans of $570,000 for 2004.
In January 2004, the FASB issued FASB Staff Position No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP FAS 106-1"). FSP FAS 106-1 allows companies
to assess the effect of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("MMA") on their postretirement benefit obligations
and costs and reflect the effects in the 2003 financial statements, pursuant to
SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions." Companies are also allowed to make a one-time election to defer
accounting for the effects of MMA until authoritative guidance is issued. The
guidance in FSP FAS 106-1 is effective for years ending after December 7, 2003.
In accordance with FSP FAS 106-1, the Company made the one-time election to
defer accounting for the effects of MMA and, therefore, the accumulated
postretirement benefit obligation and postretirement net periodic benefit costs
in the Company's consolidated financial statements and disclosed in this note do
not reflect the effects of MMA on the Company's plans. In addition, specific
authoritative guidance on the accounting for the federal subsidy, one of the
provisions of MMA, is pending, and that guidance, when issued, could require the
Company to change previously reported information. However, in the Company's
opinion, any change due to the accounting for the federal subsidy would be
immaterial.
Note N - Recent Accounting Pronouncements
- -----------------------------------------
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate
a variable interest entity if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns, or both. The Company has adopted
the provisions of FIN 46, which did not have an impact on the Company's
financial statements or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets, and certain obligations that can be
settled with shares of stock. Although certain portions of SFAS No. 150 have
been deferred indefinitely, certain portions of the statement became effective
during the third quarter of 2003. The provisions of this statement did not have
and are not expected to have an impact on the Company's statement of financial
position.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company operates in two segments: Pump and Compressor Segment and Lighting
Segment. The Pump and Compressor Segment designs, manufactures, markets, sells
and services pump and compressor products through worldwide operations. In
August 2002, we significantly increased the size of our pump and compressor
business by acquiring substantially all the assets and liabilities of Werner
Rietschle Holding GmbH ("Rietschle"), a privately held company based in
Schopfheim, Germany. Rietschle's operating results are included in the Company's
operating results since the August 29, 2002 acquisition date. The Pump and
Compressor Segment supplies products to the original equipment manufacturer
(OEM) market in such applications as medical equipment, environmental, mobile,
printing, packaging and many others. An important market to the Company is the
medical equipment market, which includes compressors used in oxygen
concentrators, nebulizers, aspirators, and other devices. As previously
announced, we expect our sales to the oxygen concentrator OEM market to be
reduced in 2004 by $4 million to $6 million as a result of the loss of one of
our customer's oxygen concentrator product lines to
11
ITEM 2. Management's Discussion and Analysis (Continued)
a competitor beginning in the third quarter of 2004. Even with the loss of these
sales, the Company has a leading market share in the oxygen concentrator OEM
market worldwide. In order to reduce our cost structure and remain price
competitive, we are in the process of constructing a manufacturing facility in
China, which should be in production in the first half of 2005. We continue to
rationalize our existing production facilities around the world to achieve
efficient high quality production capabilities. During 2003, we closed our
manufacturing facility in Fleurier, Switzerland, and relocated this production
to other facilities. We incurred moving related costs for this shutdown. As this
was a former Rietschle facility, all other shutdown costs were recorded as
goodwill as part of the opening balance sheet adjustments contemplated in the
transaction. In 2003, we also built and opened a new facility in Memmingen,
Germany and relocated from the older leased facility late in 2003, incurring
approximately $400,000 in relocation costs. This new building will allow the
Company to produce in a more efficient manner and consolidate production. In
February 2004, the Company announced the closing of its Wuppertal, Germany
manufacturing facility which will generate approximately $3.2 million of
one-time costs in 2004. The Company has recorded $818,000 of expense in the
first three months of 2004, related to this closure. Production from the
Wuppertal facility will be transferred to the new Memmingen facility. We believe
these steps were necessary to better position the Company for future growth
opportunities given the current competitive environment. We have been notified
of certain commodity cost increases which will impact our costs in future
periods, although we will attempt to offset these with price increases of our
own.
The Company also operates in the Lighting Segment through its 32% interest in
the Genlyte Thomas Group LLC (GTG) joint venture. The Company's investment in
GTG is accounted for using the equity method of accounting. GTG designs,
manufacturers, markets, and sells lighting fixtures for a wide variety of
applications in the commercial, industrial and residential markets for both
indoor and outdoor fixtures. Terms of the LLC Agreement can be found in our
Joint Proxy Statement dated July 23, 1998, which is on file with the Securities
and Exchange Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Thomas' discussion and analysis of its financial condition and results of
operations are based upon Thomas' consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. When preparing these consolidated financial statements, the
Company is required to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. The Company evaluates its estimates
including, but not limited to, those related to product warranties, bad debts,
inventories, equity investments, income taxes, pensions and other postretirement
benefits, contingencies, and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
In response to the Securities and Exchange Commission's (SEC) Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies", the Company identified the following critical accounting policies
which affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Included with the
accounting policies are potential adverse results which could occur if different
assumptions or conditions were to prevail.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial conditions of Thomas' customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
12
ITEM 2. Management's Discussion and Analysis - Continued
Thomas provides for the estimated cost of product warranties. While the Company
engages in extensive product quality programs and processes, should actual
product failure rates differ from estimates, revisions to the estimated warranty
liability would be required. Thomas writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. For the Rietschle acquisition which occurred in 2002, the Company
utilized an independent appraiser in determining the fair value of assets and
liabilities acquired. If actual market conditions or other factors are different
than those used by the independent appraiser, then additional asset write-downs
may be required.
Thomas holds a 32 percent interest in GTG, which comprises Thomas' lighting
segment and is accounted for using the equity method. If future adverse changes
in market conditions or poor operating results of GTG occurred, it could result
in losses or an inability to recover the carrying value of the Company's
investment, thereby possibly requiring an impairment charge in the future. GTG's
critical accounting policies are determined separately by The Genlyte Group
Incorporated, which owns 68 percent of GTG and consolidates the GTG results.
RESULTS OF OPERATIONS
The Company's net income was $10.7 million in the first quarter ended March 31,
2004, compared to $8.8 million in the first quarter ended March 31, 2003. This
20.9% increase was primarily due to higher sales volume and increased earnings
from GTG. The Company benefited slightly in the 2004 first quarter from foreign
currency transaction gains. The first quarter of 2004 also included after-tax
charges of $.5 million from costs associated with the closure of the Wuppertal,
Germany facility.
PUMP AND COMPRESSOR SEGMENT
Net sales for the Pump and Compressor Segment increased 18.6% to $109.5 million
for the first quarter ended March 31, 2004, compared to $92.3 million in the
first quarter of 2003. This sales increase of $17.2 million included an
estimated $8.6 million related to the effects of exchange rate fluctuations. The
North American operations reported a 5.8% increase in 2004 sales compared to
2003 due to strength in the medical and environmental markets. Sales from our
European operations increased 27.5% for the first quarter 2004 versus 2003. We
estimate that approximately 60% of this increase in Europe came from the
favorable effect of exchange rates. Europe reported increased sales in the
printing and environmental markets. Asia Pacific reported a 33.9% improvement in
sales for the first quarter of 2004 versus 2003. We estimate that approximately
37% of this increase in Asia Pacific net sales was due to favorable exchange
rates. Asia Pacific had additional sales increases from the medical market.
Gross profit for the Pump and Compressor Segment was $38.4 million, or 35.0% of
sales in the first quarter of 2004, compared to $33.1 million, or 35.9% in the
first quarter of 2003. The decrease in the percent to sales in 2004 is primarily
related to the effect of exchange rates on intercompany purchases of inventory
from our German factories.
The Pump and Compressor Segment's selling, general and administrative (SG&A)
expenses were $26.7 million, or 24.4% of sales, in the first quarter of 2004,
compared to $22.8 million, or 24.7%, in the same period in 2003. The increase in
the 2004 SG&A amount is primarily related to the sales volume increase, exchange
rate impact, higher costs associated with our new ERP system and to the $.8
million expense in 2004 for the Wuppertal facility closure.
Pump and Compressor Segment operating income for the first quarter ended March
31, 2004, was $11.6 million, or 10.6% of sales, compared to $10.3 million, or
11.2% of sales in the first quarter of 2003. The 2004 increase in operating
income is primarily related to the sales volume increase. North America,
13
ITEM 2. Management's Discussion and Analysis - Continued
Europe and Asia Pacific operations all posted increases in the first quarter
operating income for 2004 versus 2003. Exchange rates had only a slight
unfavorable impact in 2004 to the Pump and Compressor operating income, while
the Wuppertal shutdown reduced 2004 operating income by $.8 million.
LIGHTING SEGMENT
The Genlyte Group Incorporated (Genlyte) and Thomas formed the Genlyte Thomas
Group LLC (GTG) on August 30, 1998. Thomas' investment in GTG is accounted for
using the equity method of accounting. The Lighting Segment's operating income
includes our 32% interest in GTG, as well as expenses related to Thomas
Industries stock options issued to GTG employees and our amortization of Thomas'
excess investment in GTG for periods prior to January 1, 2002. The Lighting
Segment operating income for the first quarter of 2004 was $7.4 million compared
to $6.1 million in the comparable 2003 period. This increase is due primarily to
a 16.6% increase in GTG sales.
Under the terms of the LLC Agreement, Thomas currently has the right (a "Put
Right"), but not the obligation, to require the Joint Venture (GTG) to purchase
all, but not less than all, of Thomas' ownership interest in GTG at the
applicable purchase price. The purchase price shall be equal to the "Fair Market
Value" of GTG multiplied by Thomas' ownership percentage in GTG. The "Fair
Market Value" means the value of the total interest in GTG computed as a going
concern, including the control premium.
At any time after Thomas exercises its Put Right, Genlyte has the right, in its
sole discretion and without the need of approval from Thomas, to cause GTG to be
sold by giving notice to the GTG Management Board, and the Management Board must
then proceed to sell GTG subject to a fairness opinion from a recognized
investment banking firm.
Also under the terms of the LLC Agreement, on or after the final settlement or
disposition of Genlyte's case related to the Keene Creditors Trust lawsuit
against Genlyte and others, either Thomas or Genlyte has the right, but not the
obligation to buy the other party's interest in GTG (the "Offer Right"). If
Thomas and Genlyte cannot agree on the terms, then GTG or the business of GTG
shall be sold to the highest bidder. Either party may participate in bidding for
the purchase of GTG or the business of GTG. On March 17, 2003, the Southern
District of New York Federal District Court entered a summary judgment in favor
of Genlyte and the other defendants in the case. As a result, the case against
all defendants, including Genlyte, was dismissed in its entirety. On April 14,
2003, the Creditors Trust filed a Notice of Appeal to the United States Court of
Appeals for the Second Circuit from the final judgment entered on March 17,
2003. Argument on appeal was heard on March 24, 2004 before a three-judge Panel
of the Second Circuit. On April 9, 2004, the Panel affirmed by Summary Order the
judgment of the lower Court which had dismissed the case. On April 23, 2004, the
Trust filed a Petition for Panel Rehearing of its own Summary Order; however,
the Petition requested the Panel to reconsider only a single issue relative to
another party, which does not bear on any claim against Genlyte. Since the Trust
still has the ability to appeal, no final settlement or disposition has occurred
and neither party has the ability to exercise the offer right.
In the event of a Change of Control (i) of Thomas, GTG has the right, but not
the obligation, to purchase Thomas' interest for a purchase price equal to Fair
Market Value of GTG multiplied by Thomas' ownership interest or (ii) of Genlyte,
Thomas has the right, but not the obligation, to sell its interest to the Joint
Venture for a purchase price equal to Fair Market Value of GTG multiplied by
Thomas' ownership interest. The definition of "Change of Control" includes the
acquisition by any person of 25% or more of Thomas' outstanding common stock.
14
ITEM 2. Management's Discussion and Analysis - Continued
In the event of a Deadlock (as defined below), Thomas may exercise its Put Right
in accordance with the LLC Agreement or Genlyte may, in its sole discretion,
cause the entire Joint Venture or business of GTG to be sold. A "Deadlock" shall
be deemed to exist if (i) the Management Board of GTG fails to agree on a matter
for which Special Approval is required in accordance with the LLC Agreement and
(ii) such disagreement continues for 90 days. The definition of "Special
Approval" includes the approval of at least a majority of the management board
representatives, including, in all instances, approval by at least one
representative appointed by Thomas.
CORPORATE
As disclosed in Note F (Segment Disclosures) in the consolidated financial
statements, consolidated operating income includes corporate expenses. Corporate
expenses were $2.3 million for the three months ended March 31, 2004, compared
to $1.8 million for 2003. The increase in 2004 relates to higher personnel
costs, higher costs associated with compliance with the Sarbanes-Oxley Act,
higher Kentucky license taxes due to tax law changes, and additional costs
related to expanding our presence in China.
Interest expense for the three months ended March 31, 2004 was $1.0 million
compared to $1.1 million for 2003. The slight reduction in interest expense in
2004 is primarily related to the $7.7 million payment of long-term debt on
January 31, 2004, which carried a 9.36% annual interest rate. This was partially
offset by higher short-term borrowing levels during the first quarter of 2004.
Interest income and other for the three months ended March 31, 2004 was income
of $606 thousand compared to charge of $39 thousand in the first quarter of
2003. The 2004 first quarter includes positive impacts from foreign currency
transaction gains, while 2003 includes negative impacts from foreign currency
transaction losses.
Income tax provisions were $5.7 million and $4.7 million in the three months
ended March 31, 2004 and 2003, respectively. The effective income tax rate was
35% in the first quarters of 2004 and 2003.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided by operations in the first quarter of 2004 were $5.5 million
compared to $.7 million in the 2003 first quarter. The increase in 2004 was
primarily related to changes in accounts payable and income taxes payable, as
well as increases in net income.
Cash used in investing activities was $3.7 million for the three months of 2004
compared to $1.9 million in the comparable 2003 period. The increase in 2004 was
related to increases in capital expenditures of property, plant and equipment in
2004 for purposes of improving manufacturing processes and efficiencies, as well
as replacement of old equipment.
Financing activities provided cash of $5.4 million and $1.6 million in the first
three months of 2004 and 2003, respectively. The increase in 2004 relates
primarily to additional net borrowings of short-term and long-term debt in 2004
of $3.2 million.
Dividends paid in the first quarter of 2004 and 2003 were $1.6 million and $1.5
million, respectively. The increase in 2004 primarily relates to an increase in
the quarterly dividend per share from $.085 to $.095, effective with the April
1, 2003 dividend.
As of March 31, 2004, the Company had standby letters of credit totaling
$4,410,000 with expiration dates during 2004. The Company anticipates that these
letters of credit will be renewed at their expiration dates.
15
ITEM 2. Management's Discussion and Analysis - Continued
The Company announced in December 1999 that it planned to repurchase, from time
to time depending on market conditions and other factors, up to 15 percent, or
2,373,000 shares, of its outstanding Common Stock in the open market or through
privately negotiated transactions at the prevailing market prices. No purchases
were made under this repurchase plan during the first quarter of 2004. Under the
December 1999 repurchase plan, the Company has purchased, on a cumulative basis
through March 31, 2004, 879,189 shares at a cost of $17.3 million, or an average
cost of $19.72 per share. The Company plans to fund any purchase of Company
stock through a combination of cash flows generated from operating activities
and our revolving line of credit.
Working capital increased from $95.6 million at December 31, 2003, to $102.7
million at March 31, 2004, primarily due to increases in accounts receivable and
inventories to support business activities.
(Dollars in thousands) March 31, December 31,
2004 2003
---- ----
Working capital $102,715 $95,581
Current ratio 2.51 2.59
Long-term debt, less current portion $108,187 $102,673
Long-term debt to total capital 21.9% 21.1%
Certain loan agreements of the Company include restrictions on working capital,
operating leases, tangible net worth, and the payment of cash dividends and
stock distributions. Under the most restrictive of these arrangements, retained
earnings of $130.2 million are not restricted at March 31, 2004. Thomas is
currently in compliance with all covenants or other requirements set forth in
its borrowing agreements. In the event of non-compliance or if Thomas prepays
the debt, then Thomas would incur a penalty. At March 31, 2004, the prepayment
penalty would have been approximately $.6 million on a pre-tax basis.
As of March 31, 2004, the Company had a $120 million revolving line of credit
with its banks through August 28, 2005, $99 million of which was outstanding.
This line of credit was used to fund the cash payment of $83 million for the
Rietschle acquisition and to support the short-term needs of the business for
working capital changes, fixed asset additions, and general business use. As of
March 31, 2004, the Company had uncommitted short-term borrowing arrangements
being used by some of its foreign offices which totaled $3.1 million. As of
March 31, 2004 and 2003, except as described above related to the GTG joint
venture, management was aware of no relationships with any other unconsolidated
entities, financial partnerships, structured finance entities, or special
purpose entities which were established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations," as well as other statements
contained in this Form 10-Q Report and statements contained in future filings
with the Securities and Exchange Commission and publicly disseminated press
releases, and statements which may be made from time to time in the future by
management of the Company in presentations to shareholders, prospective
investors, and others interested in the business and financial affairs of the
Company, which are not historical facts, are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
16
ITEM 2. Management's Discussion and Analysis - Continued
materially from those set forth in the forward-looking statements. Any
projections of financial performance or statements concerning expectations as to
future developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no assurance
that any forward-looking statement will be realized or that actual results will
not be significantly different from that set forth in such forward-looking
statement. In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company referred to above are
also subject to the risks and uncertainties set forth in our annual report on
Form 10-K for the year ended December 31, 2003.
The forward-looking statements made by the Company are based on estimates that
the Company believes are reasonable. However, the Company's actual results could
differ materially from such estimates and expectations as a result of being
positively or negatively affected by the factors as described above, as well as
other unexpected, unanticipated, or unforeseen factors.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's long-term debt bears interest at variable rates, with the
exception of the $7.7 million senior notes that accrue interest at a 9.36% fixed
rate. Short-term borrowings of $3.1 million at March 31, 2004, are priced at
variable interest rates. The Company's results of operations and cash flows,
therefore, would be affected by interest rate changes to its variable rate debt.
At March 31, 2004, $113.3 million was outstanding. A 100 basis point movement in
the interest rate on the variable rate debt of $113.3 million would result in an
$1,133,000 annualized effect on interest expense and cash flows ($736,000 net of
tax).
The Company also has short-term investments, including cash equivalents, of
$13.5 million as of March 31, 2004, that bear interest at variable rates. A 100
basis point movement in the interest rate would result in an approximate
$135,000 annualized effect on interest income and cash flows ($88,000 net of
tax).
The fair value of the Company's long-term debt is estimated based on current
interest rates offered to the Company for similar instruments. A 100 basis point
movement in the interest rate would result in an approximate $67,000 annualized
effect on the fair value of long-term debt ($44,000 net of tax).
The Company has significant operations consisting of sales and manufacturing
activities in foreign countries. As a result, the Company's financial results
could be significantly affected by factors such as changes in currency exchange
rates or changing economic conditions in the foreign markets in which the
Company manufactures or distributes its products. Currency exposures for our
Pump and Compressor Segment are concentrated in Germany but exist to a lesser
extent in other parts of Europe, Asia, and South America. Our Lighting Segment
currency exposure is primarily in Canada. There is a risk associated with
changing foreign exchange rates. The Company's objective is to reduce earnings
and cash flow volatility associated with foreign exchange rates to allow
management to focus its attention on its core business issues and challenges.
Accordingly, the Company enters into foreign currency forward contracts that
change in value as foreign exchange rates change to protect the value of
anticipated foreign currency revenues and expenses. The gains and losses on
these contracts offset changes in the value of the underlying transactions as
they occur. The Euro is the only currency hedged. At March 31, 2004, the Company
held forward contracts expiring through March 2005 to hedge probable, but not
firmly committed, intercompany inventory purchases. These hedging contracts are
classified as cash flow hedges and accordingly, are adjusted to current market
values through other comprehensive income until the underlying transactions are
recognized. Upon recognition, such gains and losses are recorded in operations
as an adjustment to the carrying amounts of the underlying transactions in the
period in which these transactions are recognized. At March 31, 2004, the
foreign currency forward contracts had a notional amount of Euro 6,000,000 and
fair value of approximately $115,000. The fair value of the
17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk - Continued
foreign currency forward contracts, which represents a liability, is included in
accrued expenses and other current liabilities. The amount of net loss deferred
through other comprehensive income as of March 31, 2004, was approximately
$71,000. There was no gain or loss recognized through other income/expense
during the fiscal first three months of 2004. A 100 basis point movement in
foreign currency rates on the Company's open foreign exchange contracts at March
31, 2004 would not materially affect the Company's financial statements.
ITEM 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that the Company's disclosure controls and procedures are effective in
all material respects to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previous mentioned evaluation.
PART II. OTHER INFORMATION
- ------- -----------------
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(b) and Section 302 of
the Sarbanes-Oxley Act of 2002, filed
herewith
31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(b) and Section 302 of
the Sarbanes-Oxley Act of 2002, filed
herewith
32.1 Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant Section 906 of the
Sarbanes - Oxley Act of 2002, filed herewith.
(b) Reports of Form 8-K
A Form 8-K was filed on February 10, 2004, attaching a
press release announcing fourth quarter 2003 and fiscal
year 2003 sales and earnings.
A Form 8-K was filed on February 12, 2004, attaching a
press release announcing the resignation of Dieter W.
Rietschle from Thomas Industries Inc.'s Board of
Directors.
18
SIGNATURE
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.
THOMAS INDUSTRIES INC.
-----------------------------------
Registrant
/s/ Phillip J. Stuecker
-----------------------------------
Phillip J. Stuecker, Vice President
& Chief Financial Officer
Date: May 10, 2004
19