UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 1-313
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T H E L A M S O N & S E S S I O N S C O.
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(Exact name of Registrant as specified in its charter)
Ohio 34-0349210
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25701 Science Park Drive
Cleveland, Ohio 44122-7313
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(Address of principal executive offices) (Zip Code)
216/464-3400
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(Registrant's telephone number, including area code)
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(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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 4, 2003 the Registrant had outstanding 13,786,020 common shares.
PART I
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Third Quarter Ended Nine Months Ended
------------------------------------- -------------------------------------
2003 2002 2003 2002
--------------- -------------- ---------------- --------------
NET SALES $95,251 100.0% $82,381 100.0% $261,768 100.0% $239,662 100.0%
Cost of products sold 79,968 84.0% 64,155 77.9% 217,158 83.0% 190,458 79.5%
------- ------- -------- --------
GROSS PROFIT 15,283 16.0% 18,226 22.1% 44,610 17.0% 49,204 20.5%
Operating expenses 10,713 11.2% 10,998 13.3% 32,433 12.3% 33,949 14.1%
------- ------- -------- --------
OPERATING INCOME 4,570 4.8% 7,228 8.8% 12,177 4.7% 15,255 6.4%
Interest expense, net 2,094 2.2% 2,860 3.5% 6,432 2.5% 7,867 3.3%
------- ------- -------- --------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 2,476 2.6% 4,368 5.3% 5,745 2.2% 7,388 3.1%
Income tax provision 958 1.0% 1,774 2.2% 2,298 0.9% 3,142 1.3%
------- ------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 1,518 1.6% 2,594 3.1% 3,447 1.3% 4,246 1.8%
Cumulative effect of change in accounting
principle, net of income tax of $13,750 - 0.0% - 0.0% - 0.0% (46,250) -19.3%
------- ------- -------- --------
NET INCOME (LOSS) $ 1,518 1.6% $ 2,594 3.1% $ 3,447 1.3% $(42,004) -17.5%
======= ======= ======== ========
BASIC EARNINGS (LOSS) PER
COMMON SHARE:
Earnings before cumulative effect of
change in accounting principle $ 0.11 $ 0.19 $ 0.25 $ 0.31
Cumulative effect of change in accounting
principle, net of tax - - - (3.36)
------- ------- -------- --------
NET EARNINGS (LOSS) $ 0.11 $ 0.19 $ 0.25 $ (3.05)
======= ======= ======== ========
DILUTED EARNINGS (LOSS) PER
COMMON SHARE:
Earnings before cumulative effect of
change in accounting principle $ 0.11 $ 0.19 $ 0.25 $ 0.31
Cumulative effect of change in accounting
principle, net of tax - - - (3.36)
------- ------- -------- --------
NET EARNINGS (LOSS) $ 0.11 $ 0.19 $ 0.25 $ (3.05)
======= ======= ======== ========
See notes to Consolidated Financial Statements (Unaudited).
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands) THIRD QUARTER THIRD QUARTER
ENDED YEAR ENDED ENDED
------------- ---------- -------------
2003 2002 2002
--------- --------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 553 $ 1,496 $ 525
Accounts receivable, net of allowances of
$2,152, $1,924 and $2,882, respectively 52,467 36,686 47,610
Inventories, net
Finished goods and work-in-process 31,414 28,881 30,658
Raw materials 3,105 3,349 3,917
--------- --------- ---------
34,519 32,230 34,575
Deferred tax assets 9,979 9,979 7,500
Prepaid expenses and other 4,477 4,373 4,221
--------- --------- ---------
TOTAL CURRENT ASSETS 101,995 84,764 94,431
PROPERTY, PLANT AND EQUIPMENT
Land 3,537 3,537 3,537
Buildings 25,221 24,910 24,829
Machinery and equipment 120,658 116,595 115,696
--------- --------- ---------
149,416 145,042 144,062
Less allowances for depreciation and amortization 98,560 93,293 91,292
--------- --------- ---------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 50,856 51,749 52,770
GOODWILL 21,558 21,558 21,597
PENSION ASSETS 30,232 30,882 23,982
DEFERRED TAX ASSETS 14,477 16,879 19,383
OTHER ASSETS 6,442 7,873 7,284
--------- --------- ---------
TOTAL ASSETS $ 225,560 $ 213,705 $ 219,447
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,654 $ 21,209 $ 21,047
Accrued compensation and benefits 8,721 11,660 9,958
Other accrued expenses 16,059 15,617 18,159
Taxes 3,890 3,854 4,731
Current maturities of long-term debt 11,755 11,772 12,101
--------- --------- ---------
TOTAL CURRENT LIABILITIES 67,079 64,112 65,996
LONG-TERM DEBT 89,619 84,350 90,778
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 28,627 29,067 24,074
SHAREHOLDERS' EQUITY
Common shares 1,379 1,378 1,378
Other capital 75,527 75,499 75,499
Retained earnings (deficit) (31,384) (34,831) (35,611)
Accumulated other comprehensive income (loss) (5,287) (5,870) (2,667)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 40,235 36,176 38,599
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 225,560 $ 213,705 $ 219,447
========= ========= =========
See notes to Consolidated Financial Statements (Unaudited).
3
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
NINE MONTHS ENDED
-------------------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 3,447 $(42,004)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Cumulative effect of change in accounting principle - 46,250
Depreciation 6,890 7,680
Amortization 1,199 1,199
Deferred income taxes 2,102 2,578
Net change in working capital accounts:
Accounts receivable (15,781) (8,406)
Inventories (2,335) 7,508
Prepaid expenses and other (104) 762
Accounts payable 5,445 (928)
Accrued expenses and other current liabilities (1,741) 3,909
Other long-term items 1,218 (1,379)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 340 17,169
INVESTING ACTIVITIES
Net additions to property, plant and equipment (5,787) (2,579)
Acquisitions and related items (750) (750)
-------- --------
CASH USED IN INVESTING ACTIVITIES (6,537) (3,329)
FINANCING ACTIVITIES
Net borrowings (payments) under secured credit agreement 6,000 (12,500)
Payments on other long-term borrowings (748) (980)
Exercise of stock options 2 -
-------- --------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,254 (13,480)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (943) 360
Cash and cash equivalents at beginning of year 1,496 165
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 553 $ 525
======== ========
See notes to Consolidated Financial Statements (Unaudited).
4
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and changes in accounting
estimates) considered necessary for a fair presentation have been included.
Certain 2002 amounts have been reclassified to conform with 2003
classifications.
NOTE B - GOODWILL AND INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 142,
"Goodwill and Other Intangible Assets," on December 30, 2001 (beginning of
fiscal 2002). Goodwill and intangible assets deemed to have indefinite lives are
no longer amortized but are subject to impairment tests at least annually. Other
intangible assets continue to be amortized over their useful lives.
Pursuant to the adoption of this Standard, Lamson completed a transitional
impairment review for goodwill during the second quarter of 2002 for each of its
reporting units. It was determined that the carrying value of the telecom
reporting unit (component of the Carlon business segment) exceeded its estimated
fair value as determined by utilizing various valuation techniques including
discounted cash flows. Given the indication of a potential impairment, the
Company completed the assessment of the implied fair value of the goodwill for
the telecom reporting unit, which resulted in an impairment loss of $60.0
million ($46.3 million after tax). This transitional impairment loss was
recognized as a cumulative effect of a change in accounting principle as of the
beginning of fiscal 2002. The transitional impairment loss is a one-time,
non-cash charge. No reclasses were required between intangible assets and
goodwill pursuant to the adoption of this Standard. Of the $21.6 million of
goodwill remaining on the balance sheet approximately $20.1 million relates to
the telecom reporting unit in the Carlon business segment and the remainder is
included in the Lamson Home Product business segment.
NOTE C - INCOME TAXES
The year-to-date 2003 income tax provision was calculated based on management's
estimate of the annual effective tax rate of 40.0% for the year. The provisions
for 2003 and 2002 are primarily non-cash charges.
NOTE D - BUSINESS SEGMENTS
The Company's reportable segments are as follows:
Carlon - Industrial, Residential, Commercial, Telecommunications and Utility
Construction: The major customers served are electrical contractors and
distributors, original equipment manufacturers, electric power utilities, cable
television (CATV), telephone and telecommunications companies. The principal
products sold by this segment include electrical and telecommunications raceway
systems and a broad line of nonmetallic enclosures, electrical outlet boxes and
fittings. Examples of the applications for the products included in this segment
are multi-cell duct systems and High Density Polyethylene (HDPE) conduit
designed to protect underground fiber optic cables, allowing future cabling
expansion and flexible conduit used inside buildings to protect communications
cable.
Lamson Home Products - Consumer: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" home improvement market. The
products included in this segment are electrical outlet boxes, liquidtight
conduit, electrical fittings, door chimes and lighting controls.
5
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - BUSINESS SEGMENTS - CONTINUED
PVC Pipe: This business segment primarily supplies electrical, power and
communications conduit to the electrical distribution, telecommunications,
consumer, power utility and sewer markets. The electrical and telecommunications
conduit is made from polyvinyl chloride (PVC) resin and is used to protect wire
or fiber optic cables supporting the infrastructure of power or
telecommunications systems.
(Dollars in thousands)
THIRD QUARTER ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
2003 2002 2003 2002
-------- -------- -------- --------
NET SALES
Carlon $ 43,755 $ 38,174 $116,879 $115,102
Lamson Home Products 22,259 18,166 59,834 51,969
PVC Pipe 29,237 26,041 85,055 72,591
-------- -------- -------- --------
$ 95,251 $ 82,381 $261,768 $239,662
======== ======== ======== ========
OPERATING INCOME (LOSS)
Carlon $ 4,204 $ 3,405 $ 9,885 $ 11,661
Lamson Home Products 3,696 2,448 9,544 6,982
PVC Pipe (2,115) 2,225 (2,824) 718
Corporate Office (1,215) (850) (4,428) (4,106)
-------- -------- -------- --------
$ 4,570 $ 7,228 $ 12,177 $ 15,255
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Carlon $ 1,688 $ 1,868 $ 5,136 $ 5,709
Lamson Home Products 433 479 1,286 1,495
PVC Pipe 615 547 1,667 1,675
-------- -------- -------- --------
$ 2,736 $ 2,894 $ 8,089 $ 8,879
======== ======== ======== ========
Total assets by business segment at October 4, 2003, December 28, 2002 and
September 28, 2002 are as follows:
(Dollars in thousands)
OCTOBER 4, DECEMBER 28, SEPTEMBER 28,
2003 2002 2002
-------- -------- --------
IDENTIFIABLE ASSETS
Carlon $ 89,470 $ 83,750 $ 92,851
Lamson Home Products 31,674 27,222 27,961
PVC Pipe 41,667 35,862 40,752
Corporate Office (includes deferred tax and
pension assets) 62,749 66,871 57,883
-------- -------- --------
$225,560 $213,705 $219,447
======== ======== ========
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E - COMPREHENSIVE INCOME
The components of comprehensive income (loss) for the third quarter and the
first nine months of 2003 and 2002 are as follows:
(Dollars in thousands)
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------------- -------------------------------
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
2003 2002 2003 2002
---------- -------------- ---------- -------------
Net income (loss) $ 1,518 $ 2,594 $ 3,447 $(42,004)
Foreign currency translation
adjustments 57 (29) 114 (14)
Interest rate swaps, net of tax 252 (479) 469 (607)
------- ------- ------- --------
Comprehensive income (loss) $ 1,827 $ 2,086 $ 4,030 $(42,625)
======= ======= ======= ========
The components of accumulated other comprehensive income (loss), at October 4,
2003, December 28, 2002 and September 28, 2002 are as follows:
(Dollars in thousands)
OCTOBER 4, DECEMBER 28, SEPTEMBER 28,
2003 2002 2002
---------- ------------ -------------
Foreign currency translation
adjustments $ (500) $ (614) $ (605)
Minimum pension liability adjustments,
net of tax (3,706) (3,706) (421)
Interest rate swaps, net of tax (1,081) (1,550) (1,641)
-------- -------- --------
Accumulated other comprehensive
income (loss) $ (5,287) $ (5,870) $ (2,667)
======== ======== ========
7
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F - EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
(Dollars in thousands, except per share amounts)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------ -----------------------
2003 2002 2003 2002
------- ------- ------- --------
BASIC EARNINGS-PER-SHARE COMPUTATION
Net Income (Loss) $ 1,518 $ 2,594 $ 3,447 $(42,004)
======= ======= ======= ========
Average Common Shares Outstanding 13,786 13,778 13,785 13,778
======= ======= ======= ========
Basic Earnings (Loss) Per Share $ 0.11 $ 0.19 $ 0.25 $ (3.05)
======= ======= ======= ========
DILUTED EARNINGS-PER-SHARE COMPUTATION
Net Income (Loss) $ 1,518 $ 2,594 $ 3,447 $(42,004)
======= ======= ======= ========
Basic Shares Outstanding 13,786 13,778 13,785 13,778
Stock Options Calculated Under
the Treasury Stock Method 140 - 76 -
------- ------- ------- --------
Total Shares 13,926 13,778 13,861 13,778
======= ======= ======= ========
Diluted Earnings (Loss) Per Share $ 0.11 $ 0.19 $ 0.25 $ (3.05)
======= ======= ======= ========
In 2002, the weighted average shares issuable upon the exercise of stock options
were excluded from the computation of the year-to-date diluted earnings per
share due to their antidilutive effect.
NOTE G - DERIVATIVES AND HEDGING
The Company recognizes all derivative financial instruments as either assets or
liabilities at fair value. Derivative instruments that are not hedges are
adjusted to fair value through net income. Changes in the fair value of
derivative instruments that are classified as fair value hedges are offset
against changes in the fair value of the hedged assets, liabilities, or firm
commitments, through net income. Changes in the fair value of derivative
instruments that are classified as cash flow hedges are recognized in other
comprehensive income until such time as the hedged items are recognized in net
income.
8
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE G - DERIVATIVES AND HEDGING - CONTINUED
During the first quarter of 2001, the Company entered into two interest rate
swap agreements for a total notional amount of $58.5 million, of which $33.0
million was outstanding at October 4, 2003. The swap agreements effectively fix
the interest rate on its variable rate debt at 5.41% and 5.48% plus the
Company's risk premium of 1.5% to 4.0%, respectively. These transactions are
considered cash flow hedges and, therefore, the fair market value at the end of
the third quarter 2003 of a $1,081,000 (net of $691,000 in tax) loss, has been
recognized in other comprehensive income (loss). There is no ineffectiveness on
the cash flow hedges, therefore, all changes in the fair value of these
derivatives are recorded in equity and not included in the current period's
income statement. Approximately $1,351,000 loss on the fair value of the hedges
is classified in current accrued liabilities, with the remaining $421,000 loss
classified as a long-term liability.
The Company has no derivative instruments that are classified as fair value
hedges.
NOTE H - CONTINGENCY
The Company is contingently liable for certain post-retirement benefits of a
business previously sold in 1988. The business is being impacted unfavorably by
the poor economic outlook in their markets and may be unable to continue funding
these benefits. The Company continues to monitor the situation and is in the
process of determining the potential liability to the Company in the event the
business is not able to meet its obligation.
NOTE I - STOCK COMPENSATION PLANS
The Company currently has 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)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------ ------------------------
2003 2002 2003 2002
------- ------- ------- --------
Net income (loss) As reported $ 1,518 $ 2,594 $ 3,447 $(42,004)
Total stock-based employee
compensation, net of tax (156) (191) (491) (572)
------- ------- ------- --------
Net income (loss) Pro forma $ 1,362 $ 2,403 $ 2,956 $(42,576)
======= ======= ======= ========
Basic earnings (loss) per share As reported $ 0.11 $ 0.19 $ 0.25 $ (3.05)
Pro forma 0.10 0.17 0.21 (3.09)
Diluted earnings (loss) per share As reported $ 0.11 $ 0.19 $ 0.25 $ (3.05)
Pro forma 0.10 0.17 0.21 (3.09)
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the third quarter of 2003 were $95.3 million representing an
increase of $12.9 million, or 15.6%, over the third quarter of 2002. All three
business segments experienced higher sales levels this quarter compared with the
prior year period. The Carlon segment net sales increased by $5.6 million, or
14.6%, compared with the same quarter of the prior year. The majority of this
increase comes from an improvement in HDPE sales of telecommunications conduit
and gas collection pipe while electrical products sales continued to grow
slowly. Lamson Home Products had net sales growth of $4.1 million, or 22.5%,
during the third quarter of 2003 compared with the third quarter of 2002. The
existing and new home sales and home improvement markets continue to be strong
as interest rates remain relatively low. In addition, some of the market share
gains made late in 2002 are beginning to be realized. Finally, the PVC Pipe
business segment saw net sales increase by $3.2 million, or 12.3%, in the third
quarter compared with the prior year. The PVC Pipe sales volume was up 27.0%
this quarter compared with a slow third quarter in 2002. Volume is also up 15.6%
from the second quarter of 2003, which had been adversely affected by the poor
weather this spring. Competition to hold market share also increased in this
quarter, after the weak start of the construction season, lowering pricing by
almost 11.7% in the third quarter of 2003 compared with the third quarter of
2002 and lower by 6.2% compared with the second quarter of 2003.
For the first three quarters of 2003, net sales increased by 9.2%, or $22.1
million, compared with the first three quarters of 2002. About $5.0 million of
this increase was a result of an extra week occurring in the first fiscal
quarter this year compared with the prior year. The Carlon business segment's
net sales in the first three quarters of 2003 slightly exceeded the prior year
period by $1.8 million, or 1.5%, as the demand levels began to increase in the
third quarter. The Lamson Home Products' segment experienced net sales growth of
$7.9 million, or 15.1%, for the first three quarters of 2003 compared with the
first three quarters of 2002. This segment continues to benefit from a stable
home improvement market, the introduction of product line extensions and market
share gains. The PVC Pipe segment also had an increase in net sales of $12.5
million, or 17.2%, for the first three quarters of 2003 compared with the same
period in 2002. The volume of PVC Pipe shipments was up approximately 1.3% while
the average selling price was higher by 9.7% in the first three quarters of 2003
compared with the first three quarters of 2002.
The gross margin percentage in the third quarter of 2003 declined to 16.0% from
the 22.1% gross margin that was realized in the third quarter of 2002. A major
reason for this decline is the relatively unfavorable product mix occurring in
the Carlon business segment. In addition, the PVC Pipe business segment
experienced narrower margins compared with the prior year as resin costs
increased in the third quarter 2003 by approximately 3.2% over the third quarter
2002, while the year-to-date costs in 2003 are about 34.2% higher than the first
three quarters of 2002. These increases were not able to be recovered with price
increases due to the continued softness in commercial and industrial
construction demand. Manufacturing costs so far this year have been unfavorably
impacted by higher medical benefits and utility costs. The overall percent of
capacity utilization in the manufacturing facilities improved to over 70.0% in
the current quarter compared with slightly over 60.0% in the prior-year period.
This improvement came primarily from increased utilization of the PVC and HDPE
extrusion facilities. Capacity utilization in the injection molding plants
remained at high levels.
Operating income for the third quarter of 2003 totaled $4.6 million, or 4.8% of
net sales, compared with the $7.2 million, or 8.8% of net sales, in the prior
year's third quarter. The entire decline in operating income is due to the lower
gross profit as previously discussed. Operating expenses are lower by $0.3
million, or 2.6%, in the third quarter 2003, despite the higher net sales
levels, compared with the same quarter in the prior year. Higher pension and
medical costs, both current employee and retiree, and higher variable selling
and marketing expenses were offset by reduced incentive compensation and bad
debt expenses.
Year-to-date operating income is $12.2 million, or 4.7% of net sales, in 2003
compared with $15.3 million, or 6.4% of net sales, for the first three quarters
of 2002. Operating expenses for the current year-to-date are $1.5 million lower
than the prior year. Higher variable selling and marketing expense, pension and
overall medical
10
costs were incurred. However, the Company experienced lower legal, consulting,
incentive compensation and bad debt expense.
During the second quarter of 2002, the Company completed the transitional review
for goodwill impairment required under SFAS No. 142, "Goodwill and Other
Intangible Assets." The review indicated that goodwill recorded in the telecom
reporting unit of the Carlon business segment was impaired as of the beginning
of fiscal 2002. Accordingly, the Company measured and recognized a transitional
goodwill impairment loss of $60.0 million ($46.3 million after tax). This has
been recorded as a cumulative effect of a change in accounting principle in the
statement of operations (see Note B) as of the beginning of fiscal 2002.
Net interest expense declined by approximately $1.4 million for the first three
quarters of 2003 compared with the first three quarters of 2002. Over the last
12 months, debt has been paid down by about $1.5 million and average borrowing
rates have declined to 6.0% in the third quarter 2003 (6.2% in the first three
quarters of 2003) from 7.0% in the third quarter of 2002.
The income tax provision was recorded using an annualized estimated effective
rate of 40.0% for 2003, while the 2002 year-to-date income tax provision
reflects an estimated tax rate of 42.0% and net changes in the deferred tax
valuation allowance against certain of the Company's general business tax
credits.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) were $7.3 million for the third quarter of 2003, and $20.3 million for
the first three quarters of 2003 compared with $10.1 million, and $24.1 million
for the respective periods in 2002.
The components of this calculation are as follows:
(Dollars in thousands)
THIRD QUARTER NINE MONTHS
--------------------------- ----------------------------
2003 2002 2003 2002
------- -------- -------- --------
Operating income $ 4,570 $ 7,228 $ 12,177 $ 15,255
Depreciation 2,337 2,495 6,890 7,680
Amortization 399 399 1,199 1,199
------- -------- -------- --------
EBITDA $ 7,306 $ 10,122 $ 20,266 $ 24,134
======= ======== ======== ========
EBITDA is a calculation used by management to measure operating performance.
EBITDA is not a recognized term under accounting principles generally accepted
in the United States and does not purport to be an alternative to operating
income or cash flows from operating activities as a measure of liquidity.
The following is a reconciliation of EBITDA to cash provided by operating
activities:
(Dollars in thousands)
THIRD QUARTER NINE MONTHS
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
EBITDA $ 7,306 $ 10,122 $ 20,266 $ 24,134
Current portion of income tax provision 33 (373) (196) (564)
Interest expense (2,094) (2,860) (6,432) (7,867)
Change in operating assets and liabilities (1,756) (1,567) (13,298) 1,466
-------- -------- -------- --------
Cash provided by operating activity $ 3,489 $ 5,322 $ 340 $ 17,169
======== ======== ======== ========
FINANCIAL CONDITION
Working capital (current assets less current liabilities) was $34.9 million at
the end of the third quarter of 2003, an increase of $6.5 million from last
year's third quarter and $14.2 million higher than the 2002 year-end. The
majority of this working capital increase is caused by higher accounts
receivable balances generated by the strong net sales achieved in the current
quarter.
Accounts receivable were $52.5 million at the end of the third quarter of 2003.
This represents an increase of 10.2%, or $4.9 million, from the prior year's
third quarter. This increase is directly attributed to the higher sales in the
current quarter compared with the prior year comparable period. Days sales
outstanding calculated using a 3-month rolling average, were approximately 47.3
days in the third quarter of 2003, which is almost 5 days better than the third
quarter of 2002. The quality of accounts receivable continues to increase as the
economic outlook improves.
At the end of the third quarter of 2003, the Company had approximately $34.5
million in inventory. The inventory level is up $2.3 million, or 7.1%, from
year-end 2002, almost the same as the end of the third quarter
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2002 balance, but $8.2 million, or 19.0% lower than the second quarter of 2003.
The cost per pound of the primary raw material, PVC resin, has fallen slightly
in the third quarter after steadily increasing during the first half of 2003,
and is approximately 7.0% lower at the end of the third quarter of 2003 compared
with the same quarter of 2002; yet still 4.9% higher than at year-end 2002.
Pounds of PVC resin in inventory at the end of the third quarter of 2003 were
lower by approximately 17.6% compared with year-end 2002, and 25.7% lower than
the third quarter of 2002. As the Company has been able to start up the first of
its two new blend operations this quarter, these lower inventory levels should
be sustained. Other finished goods inventory areas remain up slightly from
year-end and the prior year quarter in order to support the increase in sales
activity. On an overall basis, inventory turns, based on a 3-month rolling
average, were 7.3 times at October 4, 2003 versus 6.0 times at September 28,
2002.
Accounts payable has increased from year-end 2002 by $5.4 million and is $5.6
million higher than the prior year third quarter, which primarily reflects the
timing of quarter-end payments. The reduction in other accruals from year-end
2002 during the first three quarters of 2003 reflects the routine payments of
annual incentive compensation and customer sales and marketing programs.
Accruals are also lower than the prior year third quarter primarily due to the
timing of quarterly interest payments and the reduced expectations for incentive
compensation in 2003.
Overall, operating cash flow for year-to-date 2003 is $340 thousand, compared
with $17.2 million in operating cash flow through the first three quarters of
2002. The decline in cash flow is caused by the increase in accounts receivable
from the significant increase in sales experienced this quarter and higher
inventory costs. Both of these working capital items should decline in the
fourth quarter due to the routine seasonal slowdown. The fourth quarter is
generally the best cash flow quarter for the Company.
Capital expenditures totaled $5.8 million in the first three quarters of 2003
primarily for production improvements and critical tooling to support new
product introductions. The Company plans to spend a total of approximately $8-9
million on these programs and enhanced business system capabilities during 2003.
The Company has credit availability of approximately $20.0 million, which is
adequate for its current operational expenses and the capital spending plans
described above. Based on the Company's third quarter leverage ratio, the
interest rate spread pursuant to the Company's secured credit agreement will
increase by 0.5% during the fourth quarter of 2003. The Company expects this
higher rate will last for only one quarter as the Company anticipates its
leverage ratio will return to its lower level by year-end.
The Company continues to operate under a Business Plan (the "Plan") accepted by
the New York Stock Exchange (the "Exchange") in December 2002. The Company
submitted its Plan to the Exchange in October 2002 in order to comply with the
listing requirements of the Exchange. This effort follows a formal notice from
the Exchange that the Company was, at the time of the notice, below the
Exchange's continued listing criteria of a total market capitalization of not
less than $50.0 million over a 30-day trading period and shareholders' equity of
not less than $50.0 million. The Company's Plan will be reviewed quarterly for
ongoing compliance with its goals and objectives. The Company believes the Plan,
when fully implemented, should achieve the requirements of the Exchange for
market capitalization and shareholders' equity by the end of the plan period in
March 2004. At the end of the third quarter 2003, the Company's shareholders'
equity was $40.2 million.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Inherent in the Company's results of operations are certain estimates,
assumptions and judgments including reserves against accounts receivable for
doubtful collections, inventory costing and valuation allowances and an assumed
rate of return on invested pension assets. The Company maintains allowances
against accounts receivable and inventory obsolescence and valuation reserves
that are reasonable and that are based on the Company's historical experience
and current expectations for future performance of operations.
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A sudden and prolonged deterioration in the economy could adversely affect the
Company's customers (especially related to the telecom or retail market)
requiring the Company to increase its allowances for doubtful accounts. A sudden
or unexpected decline in PVC resin costs coupled with a slow-down in sales
volume could result in write downs of inventory valuations. If such adverse
conditions would occur, the Company cannot readily predict the effect on its
financial condition or results of operations as any such effect depends on both
future results of operations and the magnitude and timing of the adverse
conditions.
The Company's policy of amortizing unrecognized gains or losses in accordance
with SFAS No. 87, the significant deterioration in the stock market and
resulting reduction in defined benefit pension plan assets has caused an
increase of approximately $2.4 million in the reported pension expense to be
included in the Company's results of operations in 2003. The Company made a
voluntary contribution of $6.0 million to the Company's defined benefit plans in
the fourth quarter of 2002. Plan investment returns have improved so far in
2003, but no calculation of potential additional contributions has been
completed for the 2003 year-end. Any decline in defined benefit pension plan
assets or discount rates during the remainder of this year will increase the
future contribution levels required for the Company's defined benefit pension
plans.
Management also makes judgments and estimates in recording liabilities for
environmental cleanup and litigation. Liabilities for environmental remediation
are subject to change because of matters such as changes in laws, regulations
and their interpretation; the determination of additional information on the
extent and nature of site contamination; and improvements in technology.
Likewise, actual litigation costs can vary from estimates based on the facts and
circumstance and application of laws in individual cases.
As of October 4, 2003, the Company had approximately $24.5 million of net
deferred tax assets primarily related to loss carryforwards that expire through
2022 and other timing differences. The realization of these net assets is based
primarily upon estimates of future taxable income. Current expectations of
operating results are sufficient to sustain realization of these net assets.
However, should taxable income estimates for the carryforward period be
significantly reduced, the full realization of net deferred tax assets may not
occur.
As disclosed in the Company's consolidated financial statements, the Company has
goodwill of $21.6 million, the majority of which relates to the telecom
reporting unit in the Carlon business segment. An annual impairment test of
goodwill is performed by an independent third party as of the first day of the
fourth quarter (or as conditions warrant). The test as of September 29, 2002
resulted in no additional impairment being identified from the impairment
recorded as of the first day of fiscal 2002 in connection with the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets." However, the process of
evaluating goodwill for impairment involves the determination of the fair value
of the telecom reporting unit. Inherent in such fair value determinations are
certain judgments and estimates, including the interpretation of economic
indicators and market valuations and assumptions about our strategic plans. To
the extent that our strategic plans change, or that economic and market
conditions worsen, it is possible that our conclusion regarding goodwill
impairment could change and result in a material effect on our financial
position or results of operations.
OUTLOOK
Certain sections of this Quarterly Report on Form 10-Q, including this Outlook
Section, contain forward-looking comments. The comments are subject to, and the
actual future results may be impacted by, the cautionary limitations and factors
outlined in the following narrative comments.
The Company experienced stronger sales order demand in key markets in the third
quarter due to seasonal strength and improved weather conditions. The
residential construction market remained very resilient during the third
quarter and we concur with the consensus of economists that project this market
will remain strong for the rest of 2003 and only expect modest decline for 2004
at this time. Commercial and industrial construction markets remain weak and we
anticipate that little improvement will occur before mid 2004. Utility
construction has been stable throughout 2003 and we expect it to remain so
while telecommunication infrastructure activity seems to have leveled off after
a decline in the first half of 2003. Any significant growth in the telecom
market remains unlikely before late 2004.
As anticipated, the cost of our primary raw material, PVC resin, stabilized
during the third quarter. With higher oil and natural gas prices expected in the
winter months, several resin manufacturers have announced price increases. We
expect that resin costs in the fourth quarter will most likely mirror the
average cost experienced in the third quarter with only modest decline due to
the normal seasonal activity. This should help to support the current selling
prices in the PVC Pipe business, barring any more than typical drop off in
demand. Margins had begun to improve slightly at the end of the third quarter
and they should be stable to modestly higher in the fourth quarter.
The Carlon business segment anticipates similar net sales and operating income
in the fourth quarter of 2003 to that reported in last year's fourth quarter due
to existing market conditions. The fourth quarter is seasonably strong for
Lamson Home Products and we anticipate better than seasonal net sales and
operating income growth due to improved product mix and realizing some market
share gains. We also expect that the PVC Pipe segment will experience higher net
sales and a lower operating loss than that reported in 2002's fourth quarter.
Overall, the fourth quarter should compare favorably to the fourth quarter of
2002 with net sales growth of 7% to 8% and net earnings of 10 to 12 cents per
diluted share. Operating cash flow will strengthen in the fourth quarter
allowing us to reduce our debt and lower our borrowing ratio as anticipated.
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In summary, management reconfirms its expectations that net sales for 2003 will
increase by 8% to 10% over 2002. However, due to the competitive environment and
high raw material costs incurred in the third quarter we now anticipate that net
income for the 2003 year should be 35 to 37 cents per diluted share,
approximately the same level as 2002, prior to the change in accounting for SFAS
No. 142, "Goodwill and Other Intangible Assets."
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain expectations that are forward-looking statements that involve
risks and uncertainties within the meaning of the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those expected as
a result of a variety of factors, such as: (i) the volatility of resin pricing,
(ii) the ability of the Company to pass through raw material cost increases to
its customers, (iii) maintaining a stable level of housing starts,
telecommunications infrastructure spending, consumer confidence and general
construction trends, (iv) the continued availability and reasonable terms of
bank financing and (v) any adverse change in the recovery trend of the country's
general economic condition affecting the markets for the Company's products.
Because forward-looking statements are based on a number of beliefs, estimates
and assumptions by management that could ultimately prove to be inaccurate,
there is no assurance that any forward-looking statement will prove to be
accurate.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have no material changes to the disclosure on this matter since the end of
our most recent fiscal year, December 28, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
As of October 4, 2003, a review was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"), of the effectiveness of the
design and operation of the Company's internal control over financial reporting.
Based on that review, the Company's management, including the CEO and CFO,
concluded that the Company's internal control over financial reporting was
effective as of October 4, 2003.
During the third quarter ended October 4, 2003, there were no significant
changes in the internal control over financial reporting that have materially
affected, or are likely to materially affect, the Company's internal control
over financial reporting.
PART II
ITEM 1 - LEGAL PROCEEDINGS
On September 23, 1999, the Company announced that a United States District Court
jury in the Northern District of Illinois found that the Company willfully
infringed on a patent held by Intermatic Incorporated ("Intermatic") of Spring
Grove, Illinois, relating to the design of an in-use weatherproof electrical
outlet cover, and awarded Intermatic $12.5 million in damages plus pre-judgment
interest of approximately $1.5 million. The Company pursued a vigorous appeal
and on December 17, 2001, the United States Court of Appeals ruled that, as a
matter of law, Lamson & Sessions' products did not infringe Intermatic's patent
and that the Company has no liability to Intermatic. The trial jury's earlier
verdict in favor of Intermatic in the amount of $12.5 million, plus pre-judgment
and post-judgment interest estimated to be in excess of $3.0 million, was
reversed. Intermatic filed for a rehearing of the ruling to the Court of Appeals
en banc, which was denied. Intermatic then filed a petition for certiorari with
the United States Supreme Court. The United States Supreme Court has reversed
the decision of the Court of Appeals and remanded the case back to it. In March
2003, the Court of Appeals remanded this litigation back to the United States
District Court for reconsideration. The Company does not expect this matter to
be finally determined in 2003.
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The Company is also a party to various other claims and matters of litigation
incidental to the normal course of its business. Management believes that the
final resolution of these matters will not have a material adverse effect on the
Company's financial position, cash flows or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of John B. Schulze, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of James J. Abel, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of John B. Schulze, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of James J. Abel, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
1. The Company's current report on Form 8-K, dated July
30, 2003 relating to the Company's earnings for second
quarter 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE LAMSON & SESSIONS CO.
-------------------------
(Registrant)
October 30, 2003 By: /s/ James J. Abel
------------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
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