UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 1, 2005
GARDNER DENVER, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 1-13215 76-0419383
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
1800 GARDNER EXPRESSWAY, QUINCY, ILLINOIS 62305
(Address of Principal Executive Offices and Zip Code)
(217) 222-5400
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
1
EXPLANATORY NOTE
On July 1, 2005, Gardner Denver, Inc. (the "Company") announced that it had
completed the acquisition of Thomas Industries, Inc. ("Thomas"). This Amendment
No. 1 on Form 8-K/A amends the Company's Current Report on Form 8-K filed on
July 1, 2005 to provide Thomas historical financial statements and pro forma
financial information relating to the acquisition.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
See the Index to Financial Statements and Pro Forma Financial Information
(b) Pro forma financial information
See the Index to Financial Statements and Pro Forma Financial Information
(c) Exhibits
23.1 Consent of Ernst & Young LLP
99.1 Press Release dated July 1, 2005, filed as Exhibit 99.1 to Gardner
Denver's Form 8-K dated July 1, 2005, and incorporated herein by
reference.
2
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA
FINANCIAL INFORMATION
PAGE*
-----
HISTORICAL FINANCIAL INFORMATION
Thomas Unaudited Condensed Consolidated Statements of Income for the
Three and Six Month Periods Ended June 30, 2005 and 2004 4
Thomas Unaudited Condensed Consolidated Balance Sheets as of June 30,
2005 and December 31, 2004 5
Thomas Unaudited Condensed Consolidated Statements of Cash Flow for the
Six Month Periods Ended June 30, 2005 and 2004 6
Notes to Thomas Unaudited Condensed Consolidated Interim Financial
Statements 7
Report of Independent Registered Public Accounting Firm 18
Thomas Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003 and 2002 19
Thomas Consolidated Balance Sheets as of December 31, 2004 and 2003 20
Thomas Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2004, 2003 and 2002 21
Thomas Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 23
Notes to Thomas Consolidated Financial Statements 24
PRO FORMA FINANCIAL INFORMATION
Discussion of Unaudited Pro Forma Consolidated Statements of Operations 51
Unaudited Pro Forma Consolidated Statement of Operations for the Six
Months ended June 30, 2005 53
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 2005 54
Notes to Unaudited Pro Forma Consolidated Financial Statements as of and
for the Six Months ended June 30, 2005 55
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 2004 58
Notes to Unaudited Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 2004 59
* Financial statements and pro forma financial information appear
following the signature page and exhibit index
3
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net sales $110,950 $102,656 $220,919 $212,174
Cost of products sold 71,419 65,093 141,737 136,228
-------- -------- -------- --------
Gross profit 39,531 37,563 79,182 75,946
Selling, general and administrative expenses 30,862 29,368 61,531 58,368
Equity income from GTG -- 7,997 -- 15,419
-------- -------- -------- --------
Operating income 8,669 16,192 17,651 32,997
Interest expense 151 935 277 1,961
Interest income 1,725 141 3,051 434
Other income (expense) 651 (313) 1,255
-------- -------- -------- --------
Income before income taxes 10,894 15,085 21,680 31,470
Income taxes 3,388 5,280 6,742 11,015
-------- -------- -------- --------
Net income $ 7,506 $ 9,805 $ 14,938 $ 20,455
======== ======== ======== ========
Net income per share:
Basic $ 0.42 $ 0.56 $ .84 $ 1.18
Diluted $ 0.41 $ 0.55 $ .82 $ 1.15
Dividends declared per share: $ 0.095 $ 0.095 $ 0.190 $ 0.190
Weighted average number of shares outstanding:
Basic 17,854 17,391 17,847 17,355
Diluted 18,179 17,781 18,178 17,743
See notes to condensed consolidated financial statements.
4
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30 DECEMBER 31
2005 2004 *
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $265,188 $133,472
Short-term investments 122 133,627
Accounts receivable, less allowance
(2005--$2,354; 2004--$2,303) 61,334 58,305
Inventories:
Finished products 32,304 36,331
Raw materials 28,323 31,674
Work in process 8,397 7,202
-------- --------
69,024 75,207
Deferred income taxes 5,275 5,101
Other current assets 6,287 7,514
-------- --------
Total current assets 407,230 413,226
Property, plant and equipment 195,171 202,993
Less accumulated depreciation and amortization (90,000) (88,125)
-------- --------
105,171 114,868
Goodwill 66,164 68,639
Other intangible assets, net 24,111 22,659
Other assets 3,094 2,544
-------- --------
Total assets $605,770 $621,936
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,571 $ 17,999
Accrued expense and other current liabilities 34,923 34,204
Dividends payable -- 1,689
Income taxes payable 6,632 1,758
Current portion of long-term debt 1,629 1,797
-------- --------
Total current liabilities 61,755 57,447
Deferred income taxes 8,806 8,978
Long-term debt, less current portion 5,930 7,751
Long-term pension liability 12,170 12,170
Other long-term liabilities 8,241 8,657
-------- --------
Total liabilities 96,902 95,003
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: 2005 - 18,676,014; 2004 - 18,648,723 18,676 18,649
Capital surplus 150,315 149,586
Deferred compensation 1,960 1,558
Treasury stock held for deferred compensation (1,960) (1,558)
Retained earnings 335,344 323,799
Accumulated other comprehensive income 16,592 46,958
Less cost of 822,339 treasury shares (12,059) (12,059)
-------- --------
Total shareholders' equity 508,868 526,933
-------- --------
Total liabilities and shareholders' equity $605,770 $621,936
======== ========
* Derived from the audited December 31, 2004 consolidated balance sheet.
See notes to condensed consolidated financial statements.
5
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30
--------------------
2005 2004
--------- --------
OPERATING ACTIVITIES
Net income $ 14,938 $ 20,455
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and intangible amortization 8,546 8,147
Deferred income taxes 471 (458)
Equity income from GTG -- (15,419)
Distributions from GTG -- 4,350
Other items 339 241
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (7,967) (7,520)
Inventories 146 (5,145)
Accounts payable (1,624) 1,233
Income taxes payable 4,742 4,194
Accrued expenses and other current liabilities 3,113 2,882
Other (10,054) 126
--------- --------
Net cash provided by operating activities 12,650 13,086
INVESTING ACTIVITIES
Purchases of property, plant and equipment (9,027) (7,577)
Proceeds from sale of property, plant and equipment 1,848 47
Purchases of marketable securities (219,633) --
Proceeds from sale of marketable securities 353,138 --
Purchase of companies, net of cash acquired (8,532) 6,154
--------- --------
Net cash provided by (used in) investing activities 117,794 (1,376)
FINANCING ACTIVITIES
Proceeds from short-term debt, net -- 2,091
Payments on long-term debt (1,033) (17,288)
Proceeds from long-term debt 119 18,563
Dividends paid (5,081) (3,288)
Other 255 1,569
--------- --------
Net cash (used in) provided by financing activities (5,740) 1,647
Effect of exchange rate changes 7,012 89
--------- --------
Net increase in cash and cash equivalents 131,716 13,446
Cash and cash equivalents at beginning of period 133,472 23,933
--------- --------
Cash and cash equivalents at end of period $ 265,188 $ 37,379
========= ========
See notes to condensed consolidated financial statements.
6
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM 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 June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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 elsewhere in
this Current Report on Form 8-K/A.
NOTE B - ACQUISITIONS
On January 10, 2005, the Company acquired certain assets of the side channel
blower business of Ruey Chaang Electric Co., Ltd. of Taipei, Taiwan for
approximately $12 million. A partial payment of $8.4 million in cash was paid in
January 2005, with the balance payable in the third quarter of 2005. A
preliminary purchase price allocation was made and reflected in the June 30,
2005 financial statements. This allocation is preliminary as the Company gathers
additional information regarding the fair value of assets acquired. Accordingly,
the amounts recorded will change as the allocation is finalized.
The aggregate purchase price consists of (in thousands):
Cash $12,000
Transaction costs 185
-------
Total aggregate purchase price $12,185
=======
The following summarizes the preliminary fair values of the assets acquired at
the date of acquisition (in thousands):
Cash $ 53
Inventory 674
Property, plant and equipment 885
Other intangibles 4,476
-------
6,088
Goodwill 6,097
-------
Aggregate purchase price $12,185
=======
The other intangible assets are being amortized on a straight line basis over a
useful life range of three to ten years. The goodwill is allocated to the Pump
and Compressor Segment.
7
On June 3, 2004, the Company received approximately $6.2 million in cash, which
represents an adjustment to the Company's purchase price of Werner Rietschle
Holding GmbH ("Rietschle"). Rietschle was acquired on August 29, 2002. The
original purchase price consisted of $83.3 million in cash and 1.8 million
treasury shares of the Company's common stock. The purchase agreement specified
the negotiation process to be followed for various items in dispute, so that an
adjustment to the purchase price could occur at a subsequent time. In June 2004,
negotiations on certain disputed items were completed and this adjustment
reduced goodwill by $6.2 million. Other adjustments could occur in the future
related to representations and warranties per the purchase agreement.
In estimating the fair values of the assets acquired and liabilities assumed in
the Rietschle transaction, management considered a number of factors, including
collectibility of accounts receivable, net realizable value and replacement cost
of inventory, and the values of liabilities. In addition, an independent
appraiser was used to assist in determining the value of property, plant and
equipment and other intangible assets; however, management is ultimately
responsible for the values recorded.
The adjusted aggregate purchase price for Rietschle consists of (in thousands):
Initial cash paid by the Company $ 83,288
Fair value of Thomas common stock 44,754
Transaction costs 5,931
Purchase price adjustment received in cash (6,154)
--------
Total adjusted aggregate purchase price $127,819
========
NOTE C - SALE OF 32% INTEREST IN GTG
Effective with the close of business on July 31, 2004, the Company sold its 32%
joint venture interest in the Genlyte Thomas Group LLC (GTG), which the Company
accounted for using the equity method of accounting, to The Genlyte Group
Incorporated (Nasdaq: GLYT) for approximately $400.9 million in cash.
Approximately $102.7 million of the proceeds were used to pay down long-term
debt on August 2, 2004. Approximately $80.5 million of the proceeds were used to
pay a portion of the income taxes (due on the gain) and transaction costs during
the third and fourth quarters of 2004.
The Company's adjusted book basis in GTG as of July 31, 2004 was as follows (in
millions):
Investment in GTG at July 31, 2004 $230.5
Thomas' adjustment for accelerated option expense
treated as a transaction cost (0.2)
Other comprehensive loss items:
Minimum pension liability 5.5
Foreign currency translation 0.5
------
Adjusted GTG book basis at July 31, 2004 $236.3
======
8
The gain on the sale of GTG, which the Company recorded in the third quarter of
2004, was calculated as follows (in millions, except per share amount):
Total sale price $ 400.9
Transaction costs (4.2)
-------
Net proceeds 396.7
Adjusted book basis at July 31, 2004 (236.3)
-------
Pre-tax book gain 160.4
Income taxes (76.3)
-------
Net after-tax gain $ 84.1
=======
Earnings per share - diluted $ 4.74
=======
This gain calculation is an estimate subject to final determination of taxes of
the transaction when tax returns are filed in 2005. The effective income tax
rate recorded on the gain of 47.6% is primarily due to the basis differences for
financial reporting and tax purposes in the partnership interest in GTG.
NOTE D - 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 was 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 32
plaintiffs as of June 30, 2005. The complaint currently seeks $3 million per
plaintiff and punitive and exemplary damages. The total sales related to these
products were approximately $900,000. On September 29, 2004, the case was
remanded to state court in Jefferson County and the stay is no longer in place.
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 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 this
proceeding will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
In the normal course of business, the Company is a party to other 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 consolidated 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.
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.
9
The Company is subject to various federal, state and local environmental laws
and regulations that require remediation efforts at several locations including
both current and former operating facilities. One of the most significant sites
was a former manufacturing facility, which is located in Beaver Dam, Kentucky.
Since 1992, the Company has been working under an Agreed Order with the Kentucky
Natural Resources and Environmental Protection Cabinet to remediate this site.
The Company has completed all closure activities and has received approval for
implementation of a post-closure plan.
In 2004, a letter was received from the Wisconsin Department of Natural
Resources (WDNR) indicating that the Company was solely responsible for
remediation of a former manufacturing facility located in Fort Atkinson,
Wisconsin, which was sold by the Company in 1985. In response to WDNR's demand,
the Company has engaged a consultant to perform an initial hydrogeologic site
investigation. This initial site investigation found elevated levels of volatile
organic compounds including tetrachlorothene and its daughter products. This
site investigation will be expanded to determine the extent of the contamination
and to develop a remediation work plan. The Company provided a reserve of
$900,000 and $200,000 in the third and fourth quarters of 2004, respectively,
for anticipated future costs associated with remediation of this site.
The Company's policy is to provide for environmental reserves on a discounted
basis, when appropriate. Environmental reserves are subject to numerous inherent
uncertainties that affect the ability to estimate future costs of required
remediation efforts. Such uncertainties involve the nature and extent of
contamination, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of continuing
improvements in remediation technology and the financial strength of other
potentially responsible parties at multiparty sites. Reserves are reviewed for
adequacy on a quarterly basis and adjusted, if necessary, as environmental
assessment and remediation efforts proceed.
Changes in the Company's environmental reserve at June 30, 2005 and 2004 are as
follows (in thousands):
2005 2004
------ ------
Balance at beginning of period $2,182 $1,321
Environmental accruals -- --
Expenditures 125 125
------ ------
Balance at end of period $2,057 $1,196
====== ======
NOTE E - COMPREHENSIVE INCOME
The reconciliation of net income to comprehensive income follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------ ------------------
2005 2004 2005 2004
-------- ------- -------- -------
Net income $ 7,506 $ 9,805 $ 14,938 $20,455
Other comprehensive income (loss):
Minimum pension liability -- 3 -- 10
Related tax benefit -- (1) -- (4)
Derivative adjustment (581) 139 (1,266) (154)
Related tax (benefit) expense -- (53) 260 58
Foreign currency translation (18,669) 2,458 (29,360) (5,000)
-------- ------- -------- -------
Total change in other comprehensive
income (19,250) 2,546 (30,366) (5,090)
-------- ------- -------- -------
Total comprehensive income (loss) $(11,744) $12,351 $(15,428) $15,365
======== ======= ======== =======
10
NOTE F - 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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
Numerator:
Net income $ 7,506 $ 9,805 $14,938 $20,455
======= ======= ======= =======
Denominator:
Weighted average shares outstanding 17,854 17,391 17,847 17,355
Effect of dilutive securities:
Director and employee stock options 282 379 285 375
Employee performance shares 43 11 46 13
------- ------- ------- -------
Dilutive potential common shares 325 390 331 388
------- ------- ------- -------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 18,179 17,781 18,178 17,743
======= ======= ======= =======
Note G - Segment Disclosures
(In thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net sales
Pump and Compressor $110,950 $102,656 $220,919 $212,174
Lighting -- -- -- --
-------- -------- -------- --------
$110,950 $102,656 $220,919 $212,174
======== ======== ======== ========
Operating income
Pump and Compressor $ 11,325 $ 10,873 $ 23,526 $ 22,516
Lighting* -- 7,997 -- 15,419
Corporate (2,656) (2,678) (5,875) (4,938)
-------- -------- -------- --------
$ 8,669 $ 16,192 $ 17,651 $ 32,997
======== ======== ======== ========
* Three months ended June 30 consists of equity income of $8,033,000 in 2004
from a previous 32% interest in the joint venture, Genlyte Thomas Group LLC
(GTG), less $36,000 in 2004 related to expense recorded for Thomas stock
options issued to GTG employees. Six months ended June 30 consists of
equity income of $15,545,000 in 2004 from a 32% interest in GTG, less
$126,000 in 2004 related to expense recorded for Thomas Industries stock
options issued to GTG employees. The 2005 amount for the three and six
month periods is not comparable to 2004 since the Company sold its 32%
interest in GTG on July 31, 2004.
11
NOTE H - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in net carrying amount of goodwill for the six months ended June 30,
2005 were as follows (in thousands):
SIX MONTHS
ENDED JUNE 30, 2005
-------------------
Balance at beginning of period $ 68,639
Adjustments to Ruey Chaang acquisition 6,099
Adjustments to Rietschle acquisition (997)
Translation adjustments and other (7,577)
--------
Balance at end of period $ 66,164
========
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment. There have been no indicators of impairment noted during the
six months ended June 30, 2005.
Certain intangible assets have definite lives and are being amortized.
Amortizable intangible assets consist of the following (in thousands):
JUNE 30, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
----- ------- ------------ ----- ------- ------------
Licenses 18-19 $ 462 $ 220 18-19 $ 487 $ 218
Patents 5-20 5,595 1,375 5-20 6,320 1,295
Other 1-10 8,625 1,847 1-10 4,267 1,470
------- ------ ------- ------
Total $14,682 $3,442 $11,074 $2,983
======= ====== ======= ======
The total intangible amortization expense for the six months ended June 30, 2005
and 2004 was $828,000 and $442,000, respectively.
The estimated amortization expense for the next five years beginning January 1,
2005 through December 31, 2009 is as follows (in thousands):
2005 $1,631
2006 1,651
2007 1,624
2008 1,215
2009 1,157
The Company has various trademarks, totaling $12,179,000 at June 30, 2005 and
$13,876,000 at December 31, 2004, that are not amortized. Also included in other
intangible assets is an intangible asset associated with the minimum pension
liability of $692,000 as of June 30, 2005 and December 31, 2004.
NOTE I - LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of the carrying amount of
long-lived assets (including property, plant and equipment, and intangible
assets with determinable lives) whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. The
Company evaluates events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and economic projections and anticipated
12
cash flows. An impairment is assessed when the undiscounted expected future cash
flows derived from an asset are less than its carrying amount. Impairment losses
are measured as the amount by which the carrying value of an asset exceeds its
fair value and are recognized in earnings. The Company also continually
evaluates the estimated useful lives of all long-lived assets and when warranted
revise such estimates based on current events. There were no significant
impairment charges recorded in the six months ended June 30, 2005 and 2004.
NOTE J - GENLYTE THOMAS GROUP LLC (GTG)
The following table contains certain unaudited financial information related to
the joint venture interest in GTG. As discussed in Note C - Sale of 32% Interest
in GTG, the Company sold its interest in GTG effective with the close of
business on July 31, 2004.
GENLYTE THOMAS GROUP LLC
CONDENSED UNAUDITED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
JUNE 30, 2004
-------------
GTG balance sheets:
Current assets $511,876
Long-term assets 285,949
Current liabilities 217,684
Long-term liabilities 51,802
THREE MONTHS SIX MONTHS
ENDED JUNE 30, 2004 ENDED JUNE 30, 2004
------------------- -------------------
GTG income statements (unaudited):
Net sales $301,437 $578,799
Gross Profit 107,549 202,665
Earnings before interest and taxes 27,520 52,739
Net income 25,104 48,578
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG $ 8,033 $ 15,545
Stock option expense (36) (126)
-------- --------
Equity income reported by Thomas $ 7,997 $ 15,419
======== ========
Changes in the Company's investment in GTG for June 30, 2004 are as follows (in
thousands):
SIX MONTHS
ENDED JUNE 30, 2004
-------------------
Balance at beginning of period $214,405
GTG gross equity earnings 15,545
GTG cash distributions (4,350)
GTG currency translation adjustment (901)
GTG minimum pension adjustment & other 68
--------
Balance at end of period $224,767
========
13
NOTE K - 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 granted prior to 2003 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 for only the 2004 period, since the
Company sold its 32% joint venture interest in GTG on July 31, 2004.
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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------- -----------------
2005 2004 2005 2004
------ ------ ------- -------
Net income (as reported) $7,506 $9,805 $14,938 $20,455
Add: Stock-based compensation expense for GTG employees included
in reported net income, net of related tax effect -- 33 -- 115
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effect 77 -- 146 --
Deduct: Total stock-based employee compensation determined under
fair value based method for all awards, net of related tax
effect (164) (146) (321) (341)
------ ------ ------- -------
Net income (pro forma) $7,419 $9,692 $14,763 $20,229
====== ====== ======= =======
Net income per share (Basic) - As reported $ 0.42 $ 0.56 $ 0.84 $ 1.18
Pro forma 0.42 0.56 0.83 1.17
Net income per share (Diluted) - As reported 0.41 0.55 0.82 1.15
Pro forma 0.41 0.55 0.81 1.14
Note L - 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
warranties and records a liability in the amount of such costs at the time
product revenue is recognized.
14
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 the six months ended June 30,
2005 and 2004 are as follows (in thousands):
SIX MONTHS
ENDED JUNE 30
-----------------
2005 2004
------- -------
Balance at beginning of period $ 5,338 $ 5,382
Warranty accruals 2,021 2,017
Settlements made and other (2,427) (1,617)
------- -------
Balance at end of period $ 4,932 $ 5,782
======= =======
NOTE M - 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.
15
NOTE N - PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
The components of net periodic benefit cost consisted of the following
(in thousands):
THREE MONTHS ENDED JUNE 30:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------------ --------------
FOREIGN PLANS U.S. PLANS U.S. PLANS
------------- -------------- --------------
2005 2004 2005 2004 2005 2004
---- ---- ----- ----- ---- ----
Service cost $ 66 $ 62 $ 44 $ 81 $28 $21
Interest cost 159 141 137 132 29 23
Expected return on plan assets -- -- (186) (156) -- --
Other amortization and deferral 11 4 43 47 14 10
---- ---- ----- ----- --- ---
Net periodic benefit cost $236 $207 $ 38 $ 104 $71 $54
==== ==== ===== ===== === ===
SIX MONTHS ENDED JUNE 30:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------------ --------------
FOREIGN PLANS U.S. PLANS U.S. PLANS
------------- -------------- --------------
2005 2004 2005 2004 2005 2004
---- ---- ----- ----- ----- -----
Service cost $132 $124 $ 132 $ 162 $ 56 $ 42
Interest cost 318 282 274 264 58 46
Expected return on plan assets -- -- (350) (312) -- --
Other amortization and deferral 22 8 100 94 28 20
---- ---- ----- ----- ---- ----
Net periodic benefit cost $472 $414 $ 156 $ 208 $142 $108
==== ==== ===== ===== ==== ====
As of June 30, 2005, no contributions have been made, but the Company
anticipates contributions to the plans of $670,000 for 2005.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"), which introduces a Medicare prescription
drug benefit, as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to
the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", ("FSP
106-2") to discuss certain accounting and disclosure issues raised by the Act.
FSP 106-2 addresses accounting for the federal subsidy for the sponsors of
single employer defined benefit postretirement healthcare plans and disclosure
requirements for plans for which the employer has not yet been able to determine
actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 is
effective for the first interim or annual period beginning after June 15, 2004.
The Company has not yet concluded whether the prescription drug benefits
provided under its postretirement plan are actuarially equivalent to the
Medicare benefit as necessary to qualify for the subsidy. The reported net
periodic benefit costs of the postretirement plan in the table above do not
reflect the effects of the Act. Adoption of FSP 106-2 could require revisions to
previously reported information. While we may be eligible for benefits under the
Act based on the prescription drug benefits provided in our postretirement plan,
the Company does not believe such benefits will have a material impact on its
consolidated financial statements.
16
NOTE O - SHORT-TERM INVESTMENTS
Short-term investments are classified as available-for-sale securities and
include tax advantaged debt securities with original maturities ranging from
four to 38 years. These debt securities are callable at par value (cost) based
on seven to 35 days notification to the bondholders. The Company has the option
to either sell or put these securities every seven to 35 days and these
securities will normally be held for less than one year. The securities are
carried on the balance sheet at fair market value, which is equivalent to cost.
Current period adjustments to the carrying value of available-for-sale
securities would be included in accumulated other comprehensive income within
stockholder's equity. Because of the nature of all these investments, cost does
not differ from fair market value, so there are no such adjustments to the
carrying value.
NOTE P - EXIT COSTS FOR WUPPERTAL, GERMANY FACILITY
In February 2004, the Company announced the closing of its Wuppertal, Germany
manufacturing facility in an effort to further consolidate its European
manufacturing operations and strengthen its market position by concentrating its
product, logistics, and engineering capacity. The exit activities were completed
by December 31, 2004, with the exception of some minor severance which could be
paid in 2005. The following table describes the 2004 activity and the exit
liability as of December 31, 2004 (in thousands):
BEGINNING BALANCE ENDING BALANCE
AT JAN. 1, 2004 ACCRUALS EXPENDITURES AT DEC. 31, 2004
----------------- -------- ------------ ----------------
Exit Costs:
Severance -- $1,642 $(1,622) $20
Contract termination -- 8 (8) --
--- ------ ------- ---
Total exit costs -- $1,650 $(1,630) $20
=== ====== ======= ===
In addition to the $1,650,000 exit charge noted above, the Company has recorded
$1,186,000 of additional charges in the twelve months ended December 31, 2004
which include costs to coordinate the facility shutdown ($488,000), fixed asset
disposal and other charges to write down assets to net realizable value
($455,000) and training and other costs related to the transfer of production
from the Wuppertal facility ($243,000). The carrying value of assets held for
sale related to the Wuppertal facility is not significant.
Approximately $2.7 million of the costs associated with this exit activity were
recorded in selling, general and administrative (SG&A) expenses of the Pump and
Compressor Segment for the twelve months ended December 31, 2004, while $0.1
million of expense related to loss on asset disposal was recorded in Other
Income (Expense) for the twelve months ended December 31, 2004. The first
quarter of 2004 included expenses of $0.8 million, which were recorded in SG&A
expenses.
The following table describes the 2005 activity and the exit liability as of
June 30, 2005 (in thousands):
BEGINNING BALANCE ENDING BALANCE
AT JAN. 1, 2005 ACCRUALS EXPENDITURES AT JUNE 30, 2005
----------------- -------- ------------ ----------------
Exit Costs:
Severance $20 -- $(4) $16
Contract termination -- -- -- --
--- --- --- ---
Total exit costs $20 -- $(4) $16
=== === === ===
No additional exit cost charges or other shutdown related expenses are expected
related to the Wuppertal facility.
NOTE Q - SUBSEQUENT EVENT
On July 1, 2005, Gardner Denver, Inc. acquired all of the outstanding share and
share equivalents of the Company for an agreed-upon purchase price of $40.00
per share. The total purchase price of approximately $734.2 million was paid in
the form of cash and the assumption of $7.6 million of long-term capitalized
lease obligations. There are no additional contingent payments or commitments
related to this acquisition.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Thomas Industries Inc:
We have audited the accompanying consolidated balance sheets of Thomas
Industries Inc. (a Delaware corporation) as of December 31, 2004 and 2003, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Thomas Industries
Inc. at December 31, 2004 and 2003, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 10, 2005
18
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales ............................. $410,114 $376,774 $240,602
Cost of products sold ................. 262,654 246,832 154,904
-------- -------- --------
Gross profit .......................... 147,460 129,942 85,698
Selling, general and administrative
expenses ........................... 117,728 101,943 59,989
Equity income from GTG ................ 18,608 32,138 28,804
-------- -------- --------
Operating income ...................... 48,340 60,137 54,513
Gain on sale of GTG ................... 160,410 -- --
Interest expense ...................... 2,691 4,237 3,370
Interest income ....................... 2,335 312 456
Other income .......................... (724) (533) (434)
-------- -------- --------
Income before income taxes and minority
interest ........................... 207,670 55,679 51,165
Income taxes .......................... 93,516 18,340 18,452
-------- -------- --------
Income before minority interest ....... 114,154 37,339 32,713
Minority interest, net of tax ......... -- 25 21
-------- -------- --------
Net income ............................ $114,154 $ 37,314 $ 32,692
======== ======== ========
Net income per share
--Basic ............................ $ 6.53 $ 2.17 $ 2.06
--Diluted .......................... $ 6.44 $ 2.12 $ 2.00
Dividends declared per share .......... $ 0.38 $ 0.37 $ 0.34
See accompanying notes.
19
THOMAS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ....................... $133,472 $ 23,933
Short-term investments .......................... 133,627 --
Accounts receivable, net ........................ 58,305 52,819
Inventories ..................................... 75,207 65,895
Deferred income taxes ........................... 5,101 6,688
Other current assets ............................ 7,514 6,287
-------- --------
Total current assets ............................... 413,226 155,622
Property, plant and equipment, net ................. 114,868 108,350
Investment in GTG .................................. -- 214,405
Goodwill ........................................... 68,639 70,164
Other intangible assets, net ....................... 22,659 21,788
Other assets ....................................... 2,544 2,805
-------- --------
Total assets ....................................... $621,936 $573,134
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ -- $ 3,088
Accounts payable ................................ 17,999 14,312
Accrued expenses and other current liabilities .. 34,204 30,519
Dividends payable ............................... 1,689 1,642
Income taxes payable ............................ 1,758 595
Current portion of long-term debt ............... 1,797 9,885
-------- --------
Total current liabilities .......................... 57,447 60,041
Deferred income taxes .............................. 8,978 6,177
Long-term debt, less current portion ............... 7,751 102,673
Long-term pension liability ........................ 12,170 11,279
Other long-term liabilities ........................ 8,657 9,609
-------- --------
Total liabilities .................................. 95,003 189,779
Shareholders' equity:
Preferred stock, $1 par value, shares authorized:
3,000,000, none issued ....................... -- --
Common stock, $1 par value, shares authorized:
60,000,000, shares issued: 2004-18,648,723;
2003-18,108,664 .............................. 18,649 18,109
Capital surplus ................................. 149,586 137,041
Deferred compensation ........................... 1,558 1,211
Treasury stock held for deferred compensation ... (1,558) (1,211)
Retained earnings ............................... 323,799 216,296
Accumulated other comprehensive income .......... 46,958 23,968
Less cost of 822,339 treasury shares ............ (12,059) (12,059)
-------- --------
Total shareholders' equity ......................... 526,933 383,355
-------- --------
Total liabilities and shareholders' equity ......... $621,936 $573,134
======== ========
See accompanying notes.
20
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Common stock:
Beginning of year .......................................... $ 18,109 $ 17,948 $ 17,856
Stock options exercised .................................... 528 147 89
Shares issued to deferred share trust ...................... 11 14 3
Other ...................................................... 1 -- --
-------- -------- --------
End of year ................................................... 18,649 18,109 17,948
-------- -------- --------
Capital surplus:
Beginning of year .......................................... 137,041 133,964 114,342
Treasury shares issued in connection with acquisition ...... -- -- 18,356
Stock options exercised .................................... 8,384 1,703 657
Tax benefit from options exercised and other ............... 3,818 1,039 517
Shares issued to deferred share trust ...................... 343 335 92
-------- -------- --------
End of year ................................................... 149,586 137,041 133,964
-------- -------- --------
Deferred compensation:
Beginning of year .......................................... 1,211 846 739
Deferred compensation ...................................... 347 365 107
-------- -------- --------
End of year ................................................... 1,558 1,211 846
-------- -------- --------
Treasury stock held for deferred compensation:
Beginning of year .......................................... (1,211) (846) (739)
Increase in treasury stock held for deferred compensation .. (347) (365) (107)
-------- -------- --------
End of year ................................................... (1,558) (1,211) (846)
-------- -------- --------
Retained earnings:
Beginning of year .......................................... 216,296 185,351 158,161
Net income ................................................. 114,154 37,314 32,692
Cash dividends declared .................................... (6,651) (6,369) (5,502)
-------- -------- --------
End of year ................................................... 323,799 216,296 185,351
-------- -------- --------
Accumulated other comprehensive income (loss):
Beginning of year .......................................... 23,968 (10,837) (14,189)
Other comprehensive income (loss)(1) ....................... 22,990 34,805 3,352
-------- -------- --------
End of year ................................................... 46,958 23,968 (10,837)
-------- -------- --------
Treasury stock:
Beginning of year .......................................... (12,059) (12,059) (38,457)
Treasury shares issued in connection with acquisition ...... -- -- 26,398
-------- -------- --------
End of year ................................................... (12,059) (12,059) (12,059)
-------- -------- --------
Total shareholders' equity .................................... $526,933 $383,355 $314,367
======== ======== ========
(1) A reconciliation of net income to total comprehensive income follows.
YEARS ENDED DECEMBER 31
----------------------------
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
Net income .................................. $114,154 $37,314 $32,692
Other comprehensive income (loss):
Minimum pension liability (increase) ..... 7,942 (225) (6,783)
Related tax expense ................... (3,012) 196 2,476
Derivative adjustment .................... 454 178 --
Related tax expense (benefit) ......... (173) (67) --
Foreign currency translation ............. 17,779 34,723 7,659
-------- ------- -------
Total change in other comprehensive income .. 22,990 34,805 3,352
-------- ------- -------
Total comprehensive income .................. $137,144 $72,119 $36,044
======== ======= =======
21
Accumulated other comprehensive income (loss) was comprised of foreign currency
translation gains (losses) of $47,922,000, $30,143,000 and ($4,580,000), and
minimum pension liabilities, net of tax, of ($1,356,000), ($6,286,000) and
($6,257,000), at December 31, 2004, 2003, and 2002, respectively. The change in
the minimum pension liabilities was primarily due to the GTG sale transaction.
Additionally, accumulated other comprehensive income (loss) included gains of
$392,000 and $111,000, net of tax, from derivative adjustments, at December 31,
2004 and 2003.
See accompanying notes.
22
THOMAS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31
-------------------------------
2004 2003 2002
--------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income .............................................................. $ 114,154 $ 37,314 $ 32,692
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and intangible amortization ............................. 16,340 15,207 10,468
Deferred income taxes ................................................ 1,376 1,326 621
Equity income from GTG ............................................... (18,608) (32,138) (28,804)
Gain on sale of GTG .................................................. (160,410) -- --
Distributions from GTG ............................................... 4,350 13,299 13,785
Other items .......................................................... 966 462 1,291
Changes in operating assets and liabilities net of effect of
acquisitions:
Accounts receivable ............................................... (3,312) 2,927 (2,344)
Inventories ....................................................... (4,905) (3,970) 555
Accounts payable .................................................. 2,827 (2,512) (1,379)
Income taxes payable .............................................. 4,086 758 (1,663)
Accrued expenses and other current liabilities .................... (2,007) 6,598 1,523
Other ............................................................. (6,768) (6,918) 828
--------- -------- --------
Net cash (used in) provided by operating activities ..................... (51,911) 32,353 27,573
INVESTING ACTIVITIES
Purchases of property, plant and equipment .............................. (16,403) (20,108) (8,358)
Proceeds from sale of property, plant and equipment ..................... 268 327 828
Proceeds from sale of GTG ............................................... 400,902 -- --
Purchases of short-term investments ..................................... (431,322) -- --
Proceeds from sale of short-term investments ............................ 297,695 -- --
Adjustments (payments) for purchase of companies, net of cash acquired .. 6,154 (3,418) (84,898)
--------- -------- --------
Net cash provided by (used in) investing activities ..................... 257,294 (23,199) (92,428)
FINANCING ACTIVITIES
Proceeds from (payments on) short-term debt, net ........................ (2,904) 1,334 (642)
Payments on long-term debt .............................................. (122,356) (19,672) (22,173)
Proceeds from long-term debt ............................................ 18,638 16,247 80,000
Dividends paid .......................................................... (6,604) (6,182) (5,342)
Proceeds from stock options exercised ................................... 8,912 1,850 745
--------- -------- --------
Net cash (used in) provided by financing activities ..................... (104,314) (6,423) 52,588
Effect of exchange rate changes on cash ................................. 8,470 2,323 1,646
--------- -------- --------
Net increase (decrease) in cash and cash equivalents .................... 109,539 5,054 (10,621)
Cash and cash equivalents at beginning of year .......................... 23,933 18,879 29,500
--------- -------- --------
Cash and cash equivalents at end of year ................................ $ 133,472 $ 23,933 $ 18,879
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash items:
Issuance of treasury shares in connection with acquisition ........ $ -- $ -- $ 44,754
Capital lease arrangements ........................................ $ -- $ -- $ 1,292
See accompanying notes.
23
THOMAS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. DESCRIPTION OF BUSINESS
Thomas Industries Inc. and subsidiaries (the Company or Thomas) and
affiliates operates in the Pump and Compressor Segment which designs,
manufactures and sells pumps and compressors for use in global original
equipment manufacturing (OEM) applications as well as construction equipment,
systems and laboratory equipment. The Company also provides aftermarket service
and spare parts to support OEM and end-user customers around the world.
Manufacturing facilities and sales and distribution operations are located in
North America and Europe, with additional sales and distribution operations
located in Asia, Australia and South America. A new manufacturing facility in
Asia will begin operations in 2005. Through July 31, 2004, the Company also
operated in the Lighting Segment through its 32% interest in Genlyte Thomas
Group LLC (GTG). GTG, which was formed August 30, 1998, designs, manufactures,
markets and sells lighting products principally in North America for commercial,
industrial and residential applications.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective August 30, 1998, the Company and The Genlyte Group Incorporated
(Genlyte) formed GTG, combining Thomas' and Genlyte's lighting businesses.
Effective with the close of business on July 31, 2004, the Company sold its
interest in GTG. Genlyte had a 68% interest in GTG, and Thomas held a 32%
interest, which was accounted for using the equity method of accounting.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
Affiliates not required to be consolidated are accounted for using the equity
method, under which the Company's share of earnings of these affiliates is
included in income as earned. Intercompany accounts and transactions are
eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid investments with initial
maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are classified as available-for-sale securities and
include tax advantaged debt securities with original maturities ranging from
four to 38 years. These debt securities are callable at par value (cost) based
on seven to 35 days notification to the bondholders. The Company has the option
to either sell or put these securities every seven to 35 days and these
securities will normally be held for less than one year. The securities are
carried on the balance sheet at fair market value, which is equivalent to cost.
Current period adjustments to the carrying value of available-for-sale
securities would be included in accumulated other comprehensive income within
shareholders' equity. Because of the nature of all these investments, cost does
not differ from fair market value, so there are no such adjustments to the
carrying value.
24
FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and cash equivalents,
short-term investments, trade receivables and payables. The carrying amounts for
these instruments approximate fair value due to their short maturities. The
Company also uses forward currency exchange contracts which are recorded at fair
value on the balance sheet. See further discussion of these forward currency
exchange contracts under "Currency Risk Management" included in footnote 2.
CONCENTRATION OF CREDIT RISK
Assets that potentially subject the Company to concentration of credit risk
are cash and cash equivalents, short-term investments, and accounts receivable.
Cash and cash equivalents consist of liquid investments in investment grade,
short-term instruments which limits the amount of credit exposure. Investment
policies have been implemented which limit short-term investments to investment
grade securities with multiple financial institutions which limits credit
exposure. The Company sells products and services to customers in diversified
industries and geographic regions and provides credit to most of these
customers. The Company continuously evaluates the creditworthiness of its
customers and generally does not require collateral. No single customer accounts
for more than 10% of annual sales. Based on the Company's wide variety of
customers and markets, concentration of credit risk in accounts receivable is
not considered significant.
INVENTORIES
Inventories are valued at the lower of cost or market. Inventories valued
using the last-in, first-out (LIFO) method represented approximately 21% and 23%
of consolidated inventories at December 31, 2004 and 2003, respectively.
Inventories not on LIFO are valued using the first-in, first-out (FIFO) method.
Inventories at December 31 consist of the following:
2004 2003
------- -------
(IN THOUSANDS)
Finished goods ...... $36,331 $29,004
Raw materials ....... 31,674 28,250
Work in process ..... 7,202 8,641
------- -------
Total inventories ... $75,207 $65,895
======= =======
On a current cost basis, inventories would have been $4,957,000 and
$4,639,000 higher than reported at December 31, 2004 and 2003, respectively.
PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment is depreciated principally by the
straight-line method over their estimated useful lives ranging from 3 to 31.5
years. Expenditures for maintenance, repairs and renewals of minor items are
expensed as incurred. Major renewals and improvements are capitalized. Property,
plant and equipment at December 31 consisted of the following:
2004 2003
--------- ---------
(IN THOUSANDS)
Land ........................................ $ 10,299 $ 8,171
Buildings ................................... 52,348 48,143
Leasehold improvements ...................... 6,985 6,291
Machinery and equipment ..................... 133,361 122,518
--------- ---------
202,993 185,123
Accumulated depreciation and amortization ... (88,125) (76,773)
--------- ---------
Total property, plant and equipment, net .... $ 114,868 $ 108,350
========= =========
Depreciation expense relating to property, plant and equipment, which
includes capital lease items, was approximately $15,410,000, $14,361,000 and
$9,772,000 during 2004, 2003 and 2002, respectively.
25
Capital leases for land, building, machinery and equipment, autos and
software included above were $14,418,000 and $13,337,000 at December 31, 2004
and 2003, respectively. Accumulated depreciation on capital leases was
$3,355,000 and $2,039,000 at December 31, 2004 and 2003, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Beginning in 2002 with the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," goodwill and
indefinite lived intangible assets are no longer amortized, but instead are
tested for impairment by applying a fair-value based test at least annually, and
more frequently if circumstances indicate a possible impairment.
The statement requires a two-step process for impairment testing. The first
step, used to identify potential impairment only, compares the fair value of the
reporting unit, which is a level below the reportable segments disclosed in Note
13 - "Industry Segment Information", with its net carrying amount on the
financial statements. Fair value of the reporting unit is estimated based on the
present value of estimated future cash flows of the reporting unit. If the fair
value of the reporting unit exceeds its carrying amount, goodwill is not
considered impaired; thus the second step of the process is not necessary. If
the carrying amount of a reporting unit exceeds its fair value, the second step
of the goodwill impairment test shall be performed to measure the amount of
impairment loss, if any. If the carrying value of goodwill on the financial
statements exceeds the implied fair value of goodwill, the difference must be
recognized as an impairment loss. Implied fair value of goodwill shall be
determined in the same manner as the amount of goodwill recognized in a business
combination is determined.
If the carrying amount of an intangible asset with an indefinite life
exceeds its fair value, an impairment loss is recognized in an amount equal to
the excess. Separate intangible assets that are not deemed to have an indefinite
life continue to be amortized over their useful lives.
The Company tested the goodwill of all its reporting units for impairment
during the fourth quarter of 2004. This assessment did not indicate any
impairment.
The changes in net carrying amounts of goodwill for the years ended
December 31, 2004 and 2003 were as follows (in thousands):
2004 2003
-------- -------
Balance at beginning of year ........... $ 70,164 $55,669
Adjustments to Rietschle acquisition ... (6,154) 5,593
Minority interest acquisitions ......... -- 1,778
Aldax acquisition ...................... (86) 2,175
Translation adjustments and other ...... 4,715 4,949
-------- -------
Balance at end of year ................. $ 68,639 $70,164
======== =======
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 at December 31 consist of the following (in
thousands):
2004 2003
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
----- ------- ------------ ----- ------- ------------
Licenses ... 18-19 $ 487 $ 218 18-19 $ 503 $ 207
Patents .... 5-20 6,320 1,295 5-20 5,917 771
Other ...... 1-10 4,267 1,470 1-10 3,619 890
------- ------ ------- ------
Total ...... $11,074 $2,983 $10,039 $1,868
======= ====== ======= ======
The total intangible amortization expense for the years ended December 31,
2004, 2003 and 2002 was $930,000, $846,000 and $696,000, respectively.
26
The estimated amortization expense for the next five years consists of the
following (in thousands):
2005 ... $1,002
2006 ... 1,002
2007 ... 991
2008 ... 938
2009 ... 829
The Company has various trademarks totaling $13,876,000 and $12,831,000 at
December 31, 2004 and 2003, respectively, that are not amortized. Also included
in other intangible assets is an intangible asset associated with the minimum
pension liability of $692,000 and $786,000 as of December 31, 2004 and 2003,
respectively.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of the carrying
amount of long-lived assets (including property, plant and equipment, and
intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. We also continually evaluate the estimated useful
lives of all long-lived assets and when warranted revise such estimates based on
current events. There were no significant impairment charges recorded in 2004
and 2003, but during the fourth quarter of 2002, the Company recorded a $594,000
change in the Pump and Compressor Segment's cost of sales to write-down certain
assets to market value.
EXIT COSTS FOR WUPPERTAL, GERMANY FACILITY
In February 2004, the Company announced the closing of its Wuppertal,
Germany manufacturing facility in an effort to further consolidate its European
manufacturing operations and strengthen its market position by concentrating its
product, logistics, and engineering capacity. The exit activities were completed
by December 31, 2004, with the exception of some minor severance which could be
paid in 2005. The following table describes the 2004 activity and the exit
liability as of December 31, 2004 (in thousands):
BEGINNING BALANCE ENDING BALANCE
AT JAN. 1, 2004 ACCRUALS EXPENDITURES AT DEC. 31, 2004
----------------- -------- ------------ ----------------
Exit Costs:
Severance .............. -- $ 1,642 $(1,622) $20
Contract termination ... -- 8 (8) --
--- ------- ------- ---
Total exit costs ....... -- $ 1,650 $(1,630) $20
=== ======= ======= ===
In addition to the $1,650,000 exit charge noted above, the Company has
recorded $1,186,000 of additional charges in the twelve months ended December
31, 2004 which include costs to coordinate the facility shutdown ($488,000),
fixed asset disposal and other charges to write down assets to net realizable
value ($455,000) and training and other costs related to the transfer of
production from the Wuppertal facility ($243,000). The carrying value of assets
held for sale related to the Wuppertal facility is not significant.
Approximately $2.7 million of the costs associated with this exit activity
were recorded in selling, general and administrative expenses of the Pump and
Compressor Segment, while $0.1 million of expense related to loss on asset
disposal was recorded in Other Income.
No additional exit cost charges or other shutdown related expenses are
expected related to the Wuppertal facility.
27
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency for the Company's foreign
subsidiaries. Operating results are translated into U.S. dollars using monthly
average exchange rates, while balance sheet accounts are translated using
year-end exchange rates. The resulting translation adjustments are included as a
component of accumulated other comprehensive income (loss) in shareholders'
equity.
COLLECTIVE BARGAINING AGREEMENTS
As of December 31, 2004, the Company had approximately 14.3% of its
workforce represented by labor unions. Union contracts have varying expiration
dates beginning with June 30, 2005 and ending with March 7, 2008. Management
does not expect the expiration and renegotiation of these agreements to have a
significant impact on 2004 or 2005 results of operations.
REVENUE RECOGNITION
Revenue from product sales is recognized upon title transfer, which occurs
upon shipment, based on customary terms of sale, which are FOB shipping point.
The Company does have exceptions to this general policy which are described as
follows:
1) Revenues from service and repair activities have been equal to or
below 6% of total sales in 2004, 2003 and 2002. Most of these service
and repair revenues do not involve a shipment of product, but instead,
relate to the performance of a service or repair. Billings for these
activities are not made until the service activity has occurred. There
are other instances where the Company offers customers an annual
service contract, which is invoiced in twelve monthly billings.
2) There are instances where the Company has consignment inventory
arrangements and in these instances, revenue is not recorded upon
shipment to the original customer. Revenue is only recorded when the
original customer ships the inventory to their customer or uses it for
other purposes. These consignment inventory arrangements are
insignificant in amount in all periods presented.
3) There are instances where the terms of sale are FOB destination. The
Company records accounting entries at the end of reporting periods, to
make sure these revenues are deferred to the subsequent period. These
instances are insignificant in amount in all periods presented.
Credit is extended based on local business customs and practices, and
collateral is not required. The Company estimates and records provisions for
warranties in the period the related products are sold. The warranty liabilities
are established based upon management's assessment of the various product
warranty periods, historical data and trends of warranty claims paid, and any
current information regarding specific warranty issues. 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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which include costs of product improvements
and design, are expensed as incurred ($22,131,000 in 2004, $19,736,000 in 2003,
and $11,789,000 in 2002).
SHIPPING AND HANDLING COSTS
All shipping and handling amounts billed to a customer in a sale
transaction are classified as revenue. In addition to shipping and handling
costs included in cost of products sold, the Company also has shipping and
handling costs included in selling, general and administrative expenses totaling
$5,817,000, $4,765,000 and $1,736,000 for 2004, 2003 and 2002, respectively.
28
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 the 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 December 31 are as follows
(in thousands):
2004 2003
------- -------
Balance at beginning of year ............................ $ 5,382 $ 2,674
Warranties issued during the year ....................... 2,908 4,045
Settlements made during the year ........................ (3,357) (2,856)
Warranty liability assumed in acquisition of business ... -- 956
Foreign currency translation adjustment ................. 405 563
------- -------
Balance at end of year .................................. $ 5,338 $ 5,382
======= =======
ADVERTISING COSTS
Advertising costs consist of expenses related to promoting the Company's
products, including trade shows, web development, advertising and collateral
material, and are charged to expense when incurred. Advertising expense was
$3,234,000, $3,306,000, and $2,142,000 in 2004, 2003 and 2002, respectively.
STOCK BASED COMPENSATION
Stock options are granted under various stock compensation programs to
employees and independent directors (see Note 9, "Shareholders' Equity"). 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
requires 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. Therefore, the cost related to stock-based employee compensation included
in the determination of net income for 2003 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of Statement 123. 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 granted prior to 2003 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 on the following table.
29
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.
2004 2003 2002
-------- ------- -------
(IN THOUSANDS, EXCEPT SHARE
DATA)
Net income (as reported) ....................... $114,154 $37,314 $32,692
Add: Stock-based compensation expense for GTG
employees included in reported net income,
net of related tax effects .................. 603 249 190
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects ......................... 11 101 --
Deduct: Total stock-based employee compensation
determined under fair value based method
for all awards, net of related tax effects .. (1,059) (931) (966)
-------- ------- -------
Net income (pro forma) ......................... $113,709 $36,733 $31,916
======== ======= =======
Net income per share (Basic)--As reported ...... $ 6.53 $ 2.17 $ 2.06
Pro forma ................................... 6.50 2.14 2.01
Net income per share (Diluted)--As reported .... 6.44 2.12 2.00
Pro forma ................................... 6.41 2.09 1.95
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 (FASB 151), Inventory Costs. The Company is required to adopt
the provisions of FASB 151, on a prospective basis, as of January 1, 2006. FASB
151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. FASB 151 requires that those items
- if abnormal - be recognized as expenses in the period incurred. In addition,
FASB 151 requires the allocation of fixed production overheads to the costs of
conversions based upon the normal capacity of the production facilities. The
Company has not yet determined what effect FASB 151 will have on its earnings
and financial position.
In December 2004, FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004) (FASB 123R), Share-Based Payment. FASB 123R will require
the Company to expense share-based payments, including employee stock options,
based on their fair value. The Company is required to adopt the provisions of
FASB 123R effective as of the beginning of its third quarter in 2005, however,
earlier adoption in 2005 is allowed. FASB 123R provides alternative methods of
adoption which include prospective application and a modified retroactive
application. The Company adopted the fair-value method of accounting for
share-based payments effective January 1, 2003 using the prospective method
described in FASB Statement No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. Currently, the Company uses the Black-Scholes-Merton
formula to estimate the value of stock options granted to employees and expects
to continue to use this acceptable option valuation model upon the required
adoption of Statement 123R on July 1, 2005. Because Statement 123R must be
applied not only to new awards, but to previously granted awards that are not
fully vested on the effective date, and because the Company adopted Statement
123 using the prospective transition method (which applied only to awards
granted, modified or settled after the adoption date), compensation cost for
some previously granted awards that were not recognized under Statement 123 will
be recognized under Statement 123R. However, had we adopted Statement 123R in
prior periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share noted above. Statement 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While the Company
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when those employees exercise stock options), the amount
of operating cash flows recognized in prior periods for such excess tax
deductions were $2,805,000, $464,000, and $221,000 in 2004, 2003 and 2002,
respectively. The 2004 amount was significantly higher than 2003 and 2002 due
primarily to the increased options exercised by GTG employees. The vesting of
options to GTG employees was accelerated and the options became 100% vested as
of December 31, 2004. As part of the GTG sale agreement, the GTG employees had
until December 31, 2004 to exercise or forfeit their options.
30
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" and FSP 109-2, "Accounting for Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004." FSP 109-1 provides a tax deduction on qualified production activities,
while FSP 109-2 introduces a special one-time dividends-received deduction on
the repatriation of certain foreign earnings to a U.S. taxpayer, provided
certain criteria are met. The Company has adopted both of these staff positions
in 2004 (See Note 7).
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 flow hedges 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. Additional disclosure related to the Company's hedging contracts is
provided in Note 14.
OTHER
Accounts receivable at December 31, 2004 and 2003 was net of an allowance
for doubtful accounts of $2,303,000 and $2,270,000, respectively.
RECLASSIFICATIONS
The gain on sale of GTG included in the 2004 Consolidated Statement of
Income has been reclassified from operating income to nonoperating income.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. 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 $944,000 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.
31
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.
On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle is a world leader in vacuum and
pressure technology, which includes dry-running and oil-lubricated pumps,
blowers, compressors, and pressure/vacuum pumps utilizing rotary vane, screw,
roots and claw technologies. With the Rietschle product line, the Company wants
to pursue further opportunities through growth in markets such as printing,
packaging, woodworking and many other applications that fit Rietschle
technologies. The purchase price consisted of $83.3 million in cash and
1,800,000 treasury shares of the Company's common stock, for which fair value
was calculated by using a six-day average stock price, determined three days
before and after the acquisition date. The Company negotiated a $120.0 million
revolving credit facility with a group of banks to finance the cash portion of
the purchase price. Rietschle's operating results are included in the Company's
results since the date of acquisition.
On June 3, 2004, the Company received approximately $6.2 million in cash,
which represents an adjustment to the Company's purchase price of Rietschle. The
purchase agreement specified the negotiation process to be followed for various
items in dispute, so that an adjustment to the purchase price could occur at a
subsequent time. In June 2004, negotiations on certain disputed items were
completed and this adjustment reduced goodwill by $6.2 million. Other
adjustments could occur in the future related to representations and warranties
per the purchase agreement.
In estimating the fair values of the assets acquired and liabilities
assumed in the Rietschle transaction, management considered a number of factors,
including collectibility of accounts receivable, net realizable value and
replacement cost of inventory, and the values of liabilities. In addition, an
independent appraiser was used to assist in determining the value of property,
plant and equipment and other intangible assets; however, management is
ultimately responsible for the values recorded.
Supplemental pro forma information below is presented as though the
business combination had been completed as of the beginning of the period being
reported on. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred if the Company and Rietschle
constituted a single entity during such period.
YEAR ENDED
DECEMBER 31, 2002
------------------------------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS, UNAUDITED)
Net sales.................... $333,371
Net income................... 35,581
Earnings per share-diluted... $ 2.03
The adjusted aggregate purchase price for Rietschle consists of (in
thousands):
Initial cash paid by the Company $ 83,288
Fair value of Thomas common stock 44,754
Transaction costs 5,931
Purchase price adjustment received in cash (6,154)
--------
Total adjusted aggregate purchase price $127,819
========
32
The following summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in thousands):
Cash $ 3,487
Accounts receivable 24,913
Inventories 30,477
Other current assets 7,105
Property, plant and equipment 44,404
Other intangibles 16,849
Other assets 2,999
Current liabilities (29,221)
Long-term debt (17,116)
Other long-term liabilities (6,569)
--------
77,328
Goodwill 50,491
--------
Aggregate purchase price $127,819
========
The goodwill associated with the Rietschle acquisition is all allocated to
the Pump and Compressor Segment.
4. SALE OF INTEREST IN GTG
Effective with the close of business on July 31, 2004, the Company sold its
32% joint venture interest in the Genlyte Thomas Group LLC (GTG), which the
Company accounted for using the equity method of accounting, to The Genlyte
Group Incorporated (Nasdaq: GLYT) for approximately $400.9 million in cash.
Approximately $102.7 million of the proceeds were used to pay down long-term
debt on August 2, 2004. Approximately $80.5 million of the proceeds were used to
pay a portion of the income taxes (due on the gain) and transaction costs during
the third and fourth quarters.
The Company's adjusted book basis in GTG as of July 31, 2004 was as follows
(in millions):
Investment in GTG at July 31, 2004 $230.5
Thomas' adjustment for accelerated option expense
treated as a transaction cost (0.2)
Other comprehensive loss items:
Minimum pension liability 5.5
Foreign currency translation 0.5
------
Adjusted GTG book basis at July 31, 2004 $236.3
======
The gain on the sale of GTG, which the Company recorded in 2004, was
calculated as follows (in millions except per share amount):
Total sale price $ 400.9
Transaction costs (4.2)
-------
Net proceeds 396.7
Adjusted book basis at July 31, 2004 (236.3)
-------
Pre-tax book gain 160.4
Income taxes (76.3)
-------
Net after-tax gain $ 84.1
=======
Earnings per share - diluted $ 4.74
=======
This gain calculation is an estimate subject to final determination of
taxes of the transaction when tax returns are filed in 2005. The effective
income tax rate recorded on the gain of 47.6% is primarily due to the basis
differences for financial reporting and tax purposes in the partnership interest
in GTG.
33
5. NET INCOME PER SHARE
The computation of the numerator and denominator in computing basic and
diluted net income per share follows:
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
Numerator:
Net income ......................................... $114,154 $37,314 $32,692
======== ======= =======
Denominator:
Weighted average shares outstanding ................ 17,483 17,200 15,879
Effect of dilutive securities:
Director and employee stock options ................ 237 331 459
Employee performance shares ........................ 13 39 37
-------- ------- -------
Dilutive potential common shares ...................... 250 370 496
-------- ------- -------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions .... 17,733 17,570 16,375
======== ======= =======
The deferred compensation obligation discussed in Note 9, "Shareholders'
Equity," is funded with shares of the Company's common stock, which are included
in the calculation of basic and diluted earnings per share.
6. EQUITY INVESTMENT
Through July 31, 2004, Genlyte Thomas Group LLC (GTG) was an affiliated
company accounted for on the equity method. As described in Notes 1 and 2,
Thomas and Genlyte formed GTG in August 1998.
Summarized financial information reported by the affiliate and a summary of
the amounts recorded in Thomas' consolidated financial statements follow. GTG is
organized as a limited liability corporation (LLC) that has elected to be taxed
as a partnership for U.S. income tax purposes. Therefore, Thomas and Genlyte are
responsible for income taxes applicable to their share of GTG's taxable income.
The net income reflected below for GTG does not include any provision for U.S.
income taxes, which will be incurred by Thomas and Genlyte; however, amounts
have been provided for foreign income taxes and certain U.S. franchise taxes.
34
AS OF
-----------------------
JULY 31, DECEMBER 31,
2004 2003
-------- ------------
(IN THOUSANDS)
GTG BALANCE SHEETS
Cash and short-term investments ............. $116,284 $130,442
Accounts receivable ......................... 200,367 160,111
Inventories ................................. 151,498 143,898
Other current assets ........................ 9,543 9,821
-------- --------
Total current assets ........................ 477,692 444,272
Property, plant and equipment ............... 112,270 111,624
Goodwill .................................... 156,623 150,532
Other intangible assets ..................... 11,360 21,315
Other assets ................................ 5,236 5,028
-------- --------
Total assets ................................ $763,181 $732,771
======== ========
Current maturities of long-term debt ........ $ 250 $ 284
Accounts payable ............................ 98,321 98,035
Payable to Genlyte Inc. ..................... 279 16,534
Accrued expenses and other .................. 73,564 70,956
-------- --------
Total current liabilities ................... 172,414 185,809
Long-term debt, less current portion ........ 11,072 11,190
Accrued pension ............................. 21,739 27,567
Other liabilities ........................... 11,776 12,246
Shareholders' equity ........................ 546,180 495,959
-------- --------
Total liabilities and shareholders' equity .. $763,181 $732,771
======== ========
SEVEN MONTHS
ENDED YEAR ENDED
JULY 31, 2004 DECEMBER 31, 2003
------------- -----------------
(In thousands)
GTG INCOME STATEMENTS
Net sales ................................ $672,358 $1,033,899
Cost of products sold .................... 431,939 671,322
-------- ----------
Gross profit ............................. 240,419 362,577
SG&A expense ............................. 176,143 260,381
Gain on settlement of patent litigation .. -- (8,000)
Amortization ............................. 541 1,079
-------- ----------
Operating profit ......................... 63,735 109,117
Interest expense, net .................... 56 238
Minority interest ........................ (66) 185
-------- ----------
Income before taxes ...................... 63,745 108,694
Income taxes(1) .......................... 5,145 7,416
-------- ----------
Net income ............................... $ 58,600 $ 101,278
======== ==========
Amounts recorded by Thomas:
Investment ............................ -- $ 214,405
Equity income ......................... $ 18,608(2) 32,138(3)
Distributions received ................ 4,350 13,299
35
Changes in the Company's investment in GTG for the years ended December 31,
2004 and 2003 were as follows (in thousands):
2004 2003
--------- --------
Balance at the beginning of period ...... $ 214,405 $188,810
GTG gross equity earnings ............... 18,752 32,409
GTG cash distributions .................. (4,350) (13,299)
GTG currency translation adjustment ..... (1,082) 6,457
GTG minimum pension adjustment & other .. 2,751 28
--------- --------
Balance before sale transaction (4) ..... 230,476 214,405
To record sale of GTG ................... (230,476) --
--------- --------
Balance at end of period ................ $ -- $214,405
========= ========
(1) GTG is organized as a limited liability corporation (LLC) that has elected
to be taxed as a partnership for U.S. income tax purposes. GTG is subject
to foreign income taxes and certain U.S. franchise taxes.
(2) Consists of $18,752 of equity income from GTG for the period January 1
through July 31, less $144 of expense for Thomas Industries stock options
issued to GTG employees.
(3) Consists of $32,409 of equity income from GTG less $271 of expense for
Thomas Industries stock options issued to GTG employees.
(4) See computation of Company's adjusted book basis in GTG as of July 31,
2004, included in "Note 4 - Sale of Interest in GTG" in the Notes to
Consolidated Financial Statements.
The Company in the normal course of business has transactions with GTG.
These transactions consist primarily of reimbursement for other shared corporate
expenses.
Payables due to GTG as of December 31, 2004 and 2003 were $1,075,000 and
$175,000, respectively.
For the years ended December 31, 2004, 2003 and 2002, the Company recorded
$4,000, $4,000, and $230,000, respectively, related to the reimbursement of
shared corporate expenses. For the seven months ended July 31, 2004, the Company
recorded $2,000 related to these items.
7. INCOME TAXES
A summary of the provision for income taxes follows:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Current:
Federal ........................ $71,756 $12,205 $10,988
State .......................... 15,981 1,883 1,681
Foreign ........................ 4,403 2,926 5,162
------- ------- -------
92,140 17,014 17,831
Deferred:
Federal and state (benefit) ... (2,687) 236 1,780
Foreign (benefit) ............. 4,063 1,090 (1,159)
------- ------- -------
1,376 1,326 621
------- ------- -------
Total provision for income taxes .. $93,516 $18,340 $18,452
======= ======= =======
36
The U.S. and foreign components of income before income taxes follow:
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
United States ................ $188,070 $42,160 $42,709
Foreign ...................... 19,600 13,519 8,456
-------- ------- -------
Income before income taxes ... $207,670 $55,679 $51,165
======== ======= =======
A reconciliation of the normal statutory federal income tax rate to the
Company's effective income tax rate follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
U.S. statutory rate ................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits .................... 4.9 2.2 2.4
Gain on sale of investment in GTG joint venture .................... 5.2 -- --
Effect of foreign tax rates ........................................ 0.1 (1.3) 0.5
GTG foreign equity earnings recorded net of tax .................... (0.5) (2.9) (2.9)
Change in valuation allowance ...................................... (0.1) -- 1.6
Other .............................................................. 0.4 (0.1) (0.5)
---- ---- ----
Effective income tax rate .......................................... 45.0% 32.9% 36.1%
==== ==== ====
Deferred income taxes are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes.
Temporary differences which gave rise to significant deferred tax assets and
liabilities follow:
AS OF DECEMBER 31,
------------------
2004 2003
------- -------
(IN THOUSANDS)
Deferred tax assets:
Employee benefit obligations ................. $ 2,266 $ 4,885
Net operating loss carryforwards ............. 3,238 819
Allowance for doubtful accounts receivable ... 318 269
Inventory reserves ........................... 703 617
Compensation accruals ........................ 1,448 1,367
Miscellaneous foreign ........................ 5,399 4,479
Accrued liabilities and other ................ 1,633 1,565
------- -------
15,005 14,001
Less valuation allowance ........................ (2,814) (1,320)
------- -------
Net deferred tax asset .......................... 12,191 12,681
Deferred tax liabilities:
Accelerated depreciation ..................... 4,851 4,689
Investment in GTG ............................ -- 2,530
German goodwill .............................. 4,222 --
Miscellaneous foreign ........................ 5,185 3,513
Other ........................................ 1,810 1,438
------- -------
16,068 12,170
------- -------
Net deferred tax (liability)/asset .............. $(3,877) $ 511
======= =======
Classification:
Net current assets ........................... $ 5,101 $ 6,688
Net long-term liabilities .................... 8,978 6,177
------- -------
Net deferred tax (liability)/asset .............. $(3,877) $ 511
======= =======
Deferred tax assets and liabilities are classified according to the related
asset and liability classification on the consolidated balance sheets.
37
Management believes it is more likely than not the Company will realize the
benefits of its deferred tax assets, net of the valuation allowance of
$2,814,000. $1,224,000 of this valuation allowance is provided for income tax
loss carryforward benefits for certain foreign jurisdictions (NOL's). The
foreign tax NOL's (in the amount of $12,417,000) can be carried forward from
five to seven years and some portion indefinitely. Management believes that,
based on a number of factors, the available evidence creates sufficient
uncertainty regarding the realizability of a portion of these NOL's. The
remaining valuation allowance of $1,590,000 is provided for various foreign
deferred tax assets. Management believes that, based on a number of factors, the
available evidence creates sufficient uncertainty regarding the realizability of
these foreign assets.
Deferred income taxes have not been provided on $58,000,000 of foreign
undistributed earnings as of December 31, 2004. It is management's intent that
such undistributed earnings be permanently reinvested in the foreign countries.
It is not practicable to determine the amount of unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries that are essentially permanent in duration.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 (the Act). The Act provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase out of the existing
Extra-Territorial Income (ETI) exclusion for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. The
Company expects the net effect of the phase-out of the ETI and the phase-in of
this new deduction will not result in a significant change to the effective tax
rate for fiscal year 2005 and future years based on current earning levels.
Another provision of the Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of limitations and, as of
today, uncertainty remains as to how to interpret numerous provisions in the
Act. As such, the Company is not yet in a position to decide on whether, and to
what extent, it might repatriate foreign earnings that have not been remitted to
the U.S.
The Company made federal, state and foreign income tax payments of
$88,847,000 in 2004, $17,084,000 in 2003 and $21,035,000 in 2002.
8. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt at December 31 consisted of the following:
2004 2003
------ --------
(IN THOUSANDS)
Revolving credit notes ..... $ -- $ 85,000
Senior notes ............... -- 15,430
Capital leases ............. 9,548 10,878
Industrial revenue bonds ... -- 1,250
------ --------
9,548 112,558
Less: current maturities ... 1,797 9,885
------ --------
Total long-term debt ....... $7,751 $102,673
====== ========
The revolving credit notes were paid down in full on August 2, 2004, with
proceeds from the sale of GTG.
The senior notes had a 9.36% fixed interest rate and were paid down in full
on August 2, 2004, with the proceeds from the sale of GTG.
The capital leases have terms ranging from 2.5 to 18.5 years, and are
payable primarily in monthly installments with interest at rates ranging from
4.8% to 11.3%.
The Industrial Revenue Bonds had a variable interest rate and were paid
down in July 2004.
The fair value of the Company's long-term debt, including the current
portion, at December 31, 2003 was $113,790,000.
38
Maturities of capital lease obligations are as follows (in thousands):
2005 ............ $1,797
2006 ............ 234
2007 ............ 261
2008 ............ 259
2009 ............ 247
Thereafter ...... 6,750
------
$9,548
======
The Company has no loan agreements which include restrictions on working
capital, operating leases, tangible net worth and the payment of cash dividends
and stock distributions.
Cash paid for interest was $3,458,000 in 2004, $4,739,000 in 2003, and
$3,447,000 in 2002.
9. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
Thomas' Board of Directors in 1999 authorized the purchase of up to
2,373,000 shares of Thomas common stock in the open market. Through December 31,
2004, Thomas had repurchased 879,189 shares at a cost of $17,334,000. No
purchases were made during 2004 and 2003.
STOCK INCENTIVE PLANS
At the April 20, 1995 Annual Meeting, the Company's shareholders approved
the Company's 1995 Incentive Stock Plan. An aggregate of 900,000 shares of
common stock, plus all shares remaining under the Company's 1987 Incentive Stock
Plan, were reserved for issuance under this Plan. At the April 15, 1999 Annual
Meeting, the Company's shareholders approved a 750,000 share increase in the
number of shares reserved for issuance under the 1995 Incentive Stock Plan. At
the April 22, 2004 Annual Meeting, the Company's shareholders approved the
Company's Amended and Restated 1995 Incentive Stock Plan which increased the
number of shares of common stock reserved for issuance by 550,000 shares and
added non-employee directors as participants under the Plan. Under this Plan,
options may be granted to employees and non-employee directors at not less than
market value at date of grant. All options granted have ten-year terms, and vest
and become fully exercisable at the end of five years of continued employment.
Under the terms of the Company's sale agreement with Genlyte, all stock options
granted to GTG employees became fully vested as of July 31, 2004 and expired as
of December 31, 2004.
At the April 21, 1994 Annual Meeting, the Company's shareholders approved
the Non-Employee Director Stock Option Plan. This Plan expired on April 21,
2004, except with respect to outstanding options which may be exercised through
2013. Under this Plan, each continuing non-employee director in office on the
date of each annual meeting was awarded options to purchase 3,000 shares of
common stock at not less than market value at date of grant. All options granted
have 10-year terms, and vest and become fully exercisable as of the date
granted. At December 31, 2004, there were seven non-employee directors in
office, and 225,000 options had been awarded under this Plan. A total of 131,017
shares reserved for this Plan, but not needed to satisfy awards outstanding
under the Non-employee Director Stock Option Plan, were made available under the
Company's Amended and Restated 1995 Incentive Stock Plan.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" (SFAS 148), as an amendment to SFAS
123, "Accounting for Stock-Based Compensation." Prior to the year ended December
31, 2003, the Company followed SFAS 123 but elected to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by APB 25, "Accounting for Stock Issued to Employees" and related
interpretations.
Effective December 2003, the Company elected to adopt the fair value method
of accounting for stock-based compensation under SFAS 123 which requires the
Company to expense the fair value of employee stock options granted, modified or
settled after January 1, 2003. The three transition methods provided by SFAS 148
are the prospective method, the modified prospective method and the retroactive
restatement method. The Company has
39
elected to apply the prospective method whereby recognition provisions of SFAS
123 apply to all employee awards granted, modified or settled after January 1,
2003. The Company has recorded expense related to the stock options of $17,000
and $163,000 in 2004 and 2003, respectively.
For awards granted prior to 2003, the Company continues to follow SFAS No.
123 and uses the intrinsic value based method of accounting prescribed by APB
25. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized for options granted to employees and
non-employee directors.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123 (see Note 2,
"Accounting Policies--Stock Based Compensation"). The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
2004 2003 2002
----- ----- -----
Risk-free interest rate ... 3.93% 3.14% 3.0%
Expected life, in years ... 6.5 6.5 6.5
Expected volatility ....... 0.293 0.340 0.321
Expected dividend yield ... 1.0% 1.4% 1.4%
A summary of stock option activity for all plans follows:
2004 2003 2002
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE PRICE
OPTIONS PRICE OPTIONS PRICE OPTIONS AVERAGE
--------- -------- --------- -------- --------- --------
Beginning of year ............ 1,526,271 $18.08 1,616,359 $19.34 1,527,414 $17.86
Granted ...................... 77,915 38.99 88,000 24.91 212,800 26.31
Exercised .................... (599,446) 19.04 (166,438) 14.60 (105,957) 11.71
Forfeited or expired ......... (10,800) 22.12 (11,650) 21.59 (17,898) 21.16
--------- ------ --------- ------ --------- ------
End of year .................. 993,940 $22.27 1,526,271 $20.16 1,616,359 $19.34
========= ====== ========= ====== ========= ======
Exercisable at end of year ... 739,480 $19.69 1,024,882 $18.08 985,028 $16.22
The weighted average fair value of options granted was $7.47 in 2004, $6.61
in 2003 and $6.67 in 2002. Options outstanding at December 31, 2004 had option
prices ranging from $10.67 to $38.99 and expire at various dates between April
20, 2005 and December 6, 2014 (with a weighted-average remaining contractual
life of 5.2 years). There are 808,891 shares reserved for future grant.
Included in the summary of stock option activity above, are options granted
to GTG employees, which in accordance with SFAS 123, the Company has recorded
compensation expense based on using a Black-Scholes option pricing model. This
expense was $144,000 for the seven months ended July 31, 2004, $271,000 and
$201,000 for the twelve months ended December 31, 2003 and 2002, respectively,
and is netted with the Company's equity income from GTG (see Note 6, "Equity
Investment"). Under the terms of the Company's sale agreement with Genlyte, all
outstanding stock options previously granted to GTG employees became fully
vested as of July 31, 2004 and expired as of December 31, 2004. The Company
recognized $759,000 of expense in 2004 related to these options. This amount was
recorded against the gain on the sale of GTG.
40
The following table summarizes the status of stock options outstanding as of
December 31, 2004:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
Range of Exercise Prices SHARES LIFE PRICE SHARES PRICE
------------------------ ------- --------- -------- ------- --------
$10.67 to $14.58 179,063 1.5 $14.20 179,063 $14.20
$16.44 to $25.00 469,249 4.5 20.10 440,141 20.02
$25.87 to $38.99 345,628 8.1 29.40 120,276 26.64
------- --- ------ ------- ------
993,940 5.2 $22.27 739,480 $19.69
======= === ====== ======= ======
The Company also issued cash only stock appreciation rights (SAR's) in
2004 and 2003. All SAR's granted have ten year terms. SAR's granted to employees
vest and become fully exercisable at the end of four years of continued
employment. Under the terms of the Company's sale agreement with Genlyte, SAR's
granted to GTG employees became fully vested as of July 31, 2004 and expired as
of December 31, 2004. SAR's granted to non-employee directors vest and become
fully exercisable as of the date granted. The Company has recorded expense of
$244,000 and $1,000 in 2004 and 2003, respectively, related to SAR's for Thomas
employees and non-employee directors. For SAR's previously granted to GTG
employees in 2004, the Company recognized $177,000 of expense, which was
recorded against the gain on the sale of GTG.
A summary of SAR's activity follows:
2004 2003
------------------ -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SAR'S PRICE SAR'S PRICE
------- -------- ------ --------
Beginning of year............ 99,230 $34.35 -- --
Granted...................... 88,000 32.89 99,230 $34.35
Exercised.................... (61,020) 32.28 -- --
Forfeited or expired......... (7,480) 32.79 -- --
------- ------ ------ ------
End of year.................. 118,730 $34.43 99,230 $34.35
======= ====== ====== ======
Exercisable at end of year... 21,000 $34.82 -- --
In addition to the options and SAR's listed above, 20,000 performance
share awards were granted in both December 2004 and December 2003, and 14,000
performance share awards were granted in December 2002. Performance share awards
may be earned based on the total shareholder return of the Company during the
three-year periods commencing January 1 following the grant date. A total of
11,526 shares were earned in 2004 from performance share awards granted in
December 2001, 10,550 shares were earned in 2003 from awards granted in December
2000, and 11,639 shares were earned in 2002 from awards granted in December
1999. The Company has recorded compensation expense related to performance
shares of $199,000, $482,000 and $323,000 for 2004, 2003 and 2002, respectively.
DEFERRED SHARE TRUST
Employees who earn performance share awards as discussed above may
elect to defer receipt of such shares until termination of employment.
Non-Employee Directors are permitted to receive part or all of their director
fees in the form of common stock of the Company and to defer receipt of such
shares until retirement or other termination of service. In April 2000, the
Company established a deferred share trust (the "Trust") to maintain the shares
deferred for these obligations. The Trust qualifies as a rabbi trust for income
tax purposes as the assets of the Trust are subject to the claims of general
creditors of the Company. Dividends payable on the shares held by the Trust are
reinvested in additional shares of common stock of the Company on behalf of the
participants. Since there is no provision for diversification of the Trust's
assets and settlement can only be made with a fixed number of shares of the
Company's common stock, the deferred compensation obligation is classified as a
component of shareholders' equity and the common stock held by the Trust is
classified as treasury stock. Subsequent changes in the fair value of the common
stock are not reflected in earnings or shareholders' equity of the Company.
41
SHAREHOLDER RIGHTS PLAN
On December 10, 1997, the Board of Directors of the Company adopted a
shareholder rights plan (the Rights Plan) pursuant to which preferred stock
purchase rights (the Rights) were declared and distributed to the holders of the
Company's common stock. These Rights are due to expire on January 5, 2008. The
Rights Plan generally provides that the Rights separate from the common stock
and become exercisable if a person or group of persons working together acquires
at least 20% of the common stock (a 20% Acquisition) or announces a tender offer
which would result in ownership by that person or group of at least 20% of the
common stock (a 20% Tender Offer). Upon a 20% Acquisition, the holders of Rights
may purchase the common stock at half-price. If, following the separation of the
Rights from the common stock, the Company is acquired in a merger or sale of
assets, holders of Rights may purchase the acquiring company's stock at
half-price.
Notwithstanding the foregoing discussion, under the Rights Plan, the
Board of Directors has flexibility in certain events. In order to provide
maximum flexibility, the Board of Directors may delay the date upon which the
Rights become exercisable in the event of a 20% Tender Offer. In addition, the
Board of Directors has the option to exchange one share of common stock for each
outstanding Right at any time after a 20% Acquisition, but before the acquirer
has purchased 50% of the outstanding common stock. The Rights may also be
redeemed at two cents per Right at any time prior to a 20% Acquisition or a 20%
Tender Offer.
10. EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension plans and
contributory defined contribution plans covering its hourly union employees in
the U.S. The defined benefit plans in the U.S. primarily provide flat benefits
of stated amounts for each year of service. The Company's policy is to fund
pension costs deductible for income tax purposes for these plans.
The Company also has noncontributory defined benefit pension plans
covering certain employees of its foreign locations. These plans provide
benefits to employees based on rate of pay and years of service. The foreign
defined benefit plans are not funded.
The Company also sponsors defined contribution pension plans covering
substantially all U.S. employees whose compensation is not determined by
collective bargaining. Annual contributions are determined by the Board of
Directors.
PENSION BENEFITS
------------------------------------- OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------ ---------------- ---------------------
2004 2003 2004 2003 2004 2003
-------- ------- ------- ------ ------ -------
(IN THOUSANDS) (IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of
year ............................... $10,550 $ 8,056 $ 8,749 $7,967 $1,523 $1,307
Foreign exchange impact ............... 859 1,667 -- -- -- --
Service cost .......................... 255 288 325 285 96 67
Interest cost ......................... 643 592 526 513 106 85
Plan amendments ....................... -- 355 -- 163 (44) --
Benefits paid ......................... (373) (314) (351) (764) (40) (39)
Actuarial (gain) loss ................. (120) (94) (8) 585 329 103
------- ------- ------- ------ ------ ------
Benefit obligations at end of year .... $11,814 $10,550 $ 9,241 $8,749 $1,970 $1,523
======= ======= ======= ====== ====== ======
CHANGE IN PLAN ASSETS
Value of plan assets at beginning of
year ............................... $ -- $ -- $ 8,189 $7,226 $ -- $ --
Actual return on plan assets .......... -- -- 592 1,157 -- --
Employer contributions ................ 373 314 670 570 40 39
Benefits paid ......................... (373) (314) (351) (764) (40) (39)
------- ------- ------- ------ ------ ------
Value of plan assets at end of year ... $ -- $ -- $ 9,100 $8,189 $ -- $ --
======= ======= ======= ====== ====== ======
42
PENSION BENEFITS
------------------------------------- OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------- --------------- ----------------------
2004 2003 2004 2003 2004 2003
-------- -------- ------ ------ ------- --------
(IN THOUSANDS) (IN THOUSANDS)
FUNDED STATUS OF THE PLANS
Assets less projected obligations ..... $(11,814) $(10,550) $ (141) $ (560) $(1,970) $(1,523)
Unrecognized actuarial loss ........... 297 404 1,790 1,861 947 560
Unrecognized transition obligations ... -- -- 2 4 110 168
Unrecognized prior service cost ....... -- -- 690 782 -- --
-------- -------- ------ ------ ------- -------
Net asset (liability) recognized at
end of year ........................ $(11,517) $(10,146) $2,341 $2,087 $ (913) $ (795)
======== ======== ====== ====== ======= =======
PENSION BENEFITS
------------------------------------- OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------- --------------- ---------------------
2004 2003 2004 2003 2004 2003
-------- -------- ------ ------ ----- -----
(IN THOUSANDS) (IN THOUSANDS)
BALANCE SHEET ASSETS (LIABILITIES)
Prepaid benefit costs .................... $ -- $ -- $ 114 $ 107 $ -- $ --
Accrued benefit liabilities .............. (12,012) (10,707) (158) (572) (913) (795)
Intangible assets ........................ -- -- 692 786 -- --
Accumulated other comprehensive income ... 495 561 1,693 1,766 -- --
-------- -------- ------ ------ ----- -----
Net asset (liability) recognized at end
of year ............................... $(11,517) $(10,146) $2,341 $2,087 $(913) $(795)
======== ======== ====== ====== ===== =====
Increase in minimum liability included
in other comprehensive income ......... $ (67) $ 387 $ (73) $ (262) $ -- $ --
======== ======== ====== ====== ===== =====
The Company uses a December 31 measurement date for all U.S. and
foreign plans.
The accumulated benefit obligation for all defined benefit pension
plans was $20,685,000 and $18,942,000 at December 31, 2004 and 2003,
respectively.
PENSION BENEFITS
-----------------------------------
FOREIGN PLANS U.S. PLANS
----------------- ---------------
2004 2003 2004 2003
------- ------- ------ ------
(IN THOUSANDS)
INFORMATION FOR PENSION PLANS WITH AN
ACCUMULATED BENEFIT OBLIGATION IN
EXCESS OF PLAN ASSETS:
Projected benefit obligation.............. $11,814 $10,550 $8,786 $8,315
Accumulated benefit obligation............ 11,444 10,194 8,786 8,315
Fair value of plan assets................. -- -- 8,628 7,743
43
PENSION BENEFITS
-------------------------------- OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------ ----------- ---------------------
2004 2003 2004 2003 2004 2003
---- ----------- ---- ---- ----- -----
Discount rate used to determine benefit
obligations at December 31 ................... 6.00% 6.00% 6.00% 6.25% 6.00% 6.25%
Weighted-average assumptions used to determine
net periodic benefit cost for years ended
December 31:
Discount rate ................................ 6.00% 6.00%-7.00% 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets ............... -- -- 8.00% 8.00% -- --
Initial health care cost trend rate .......... -- -- -- -- 11.00% 12.00%
Ultimate health care cost trend rate ......... -- -- -- -- 5.50% 5.50%
Year ultimate rate is achieved ............... 2013 2012
To develop the expected long-term rate of return on assets assumption, the
Company considered historical returns and future expectations. Over the 10-year
period ending December 31, 2003, the compound annual returns on the portfolio
have averaged 10.34%. Considering this information and the potential for lower
future returns due to a generally lower interest rate environment, the Company
selected an 8.00% long-term rate of return on asset assumptions.
The effect of a one-percentage-point change in assumed health care cost
trend rates consisted of the following:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
Increase (decrease) in total postretirement service and interest cost components ... $ 30 $ (25)
Increase (decrease) to postretirement benefit obligation ........................... $254 $(217)
The following table details the components of pension and other
postretirement benefit costs.
PENSION BENEFITS
------------------------------------------ OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------------ --------------------- ---------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
---- ---- ---- ----- ----- ----- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Service cost ...................... $255 $288 $137 $ 325 $ 285 $ 289 $ 96 $ 67 $ 52
Interest cost ..................... 643 593 243 526 513 490 106 86 75
Expected return on plan assets .... -- -- -- (623) (542) (610) -- -- --
Other amortization and deferral ... -- -- -- 188 204 91 54 31 24
---- ---- ---- ----- ----- ----- ---- ---- ----
$898 $881 $380 $ 416 $ 460 $ 260 $256 $184 $151
==== ==== ==== ===== ===== ===== ==== ==== ====
44
The Company's pension plan weighted-average asset allocations at December 31,
2004, and 2003, by asset category are as follows:
% OF PLAN ASSETS
AT DECEMBER 31
----------------
ASSET CATEGORY 2004 2003
-------------- ---- ----
Equity securities ........ 65% 57%
Debt securities .......... 34% 34%
Short-term investments ... 1% 9%
--- ---
100% 100%
=== ===
Equity securities include 14,430 shares of Company common stock with a
market value of $576,000 (6 percent of total plan assets) at December 31, 2004
and $500,000 (6 percent of total plan assets) at December 31, 2003.
Short-term investments include contributions to plans of $570,000 in
December 2003 that had not yet been invested by the investment manager.
The Company's investment objective for plan assets includes exceeding the
return generated by an unmanaged index composed of the S&P 500 Stock Index and
the Lehman Brothers Government/Corporate Bond Index in proportion to the target
portfolio, while achieving a rate of return greater than the actuarially assumed
interest rate. The targeted asset mix was 60 percent equities and 40 percent
fixed income as of December 31, 2004 and 55 percent equities and 45 percent
fixed income as of December 31, 2003. The targeted allocation provides
reasonable assurance that the investment objectives can be achieved based on
historical performance.
The Company expects to contribute $670,000 to its pension plans and
$100,000 to its postretirement benefit plans in 2005.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
PENSION BENEFITS
-------------------------- OTHER POSTRETIREMENT
FOREIGN PLANS U.S. PLANS BENEFITS (U.S. PLANS)
------------- ---------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)
2005 $ 373 $ 486 $100
2006 386 479 99
2007 394 535 102
2008 443 468 117
2009 493 464 103
2010-2014 $3,804 $2,822 $808
Thomas sponsors various defined contribution plans to assist eligible
employees in providing for retirement or other future needs. Company
contributions to these plans amounted to $2,920,000 in 2004, $2,591,000 in 2003
and $1,364,000 in 2002.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"), which introduces a Medicare prescription
drug benefit, as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to
the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", ("FSP
106-2") to discuss certain accounting and disclosure issues raised by the Act.
FSP 106-2 addresses accounting for the federal subsidy for the sponsors of
single employer defined benefit postretirement health care plans and disclosure
requirements for plans for which the employer has not yet been able to determine
actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 is
effective for the first interim or annual period beginning after June 15, 2004
(the quarter ending September 30, 2004 for the Company). The Company has not yet
concluded whether the prescription drug benefits provided under its
postretirement plan are actuarially equivalent to the
45
Medicare benefit as necessary to qualify for the subsidy. The reported net
periodic benefit costs of the Company's postretirement plan in the accompanying
Financial Statements and included in Note 10 to the Financial Statements do not
reflect the effects of the Act. Adoption of FSP 106-2 could require revisions to
previously reported information. While the Company may be eligible for benefits
under the Act based on the prescription drug benefits provided in its
postretirement plan, it does not believe such benefits will have a material
impact on our Financial Statements.
11. LEASES, COMMITMENTS AND CONTINGENCIES
Rental expense for building, machinery and equipment was $7,374,000 in
2004, $6,810,000 in 2003, and $3,875,000 in 2002. Future minimum rentals under
non-cancelable operating leases are as follows: 2005--$5,630,000;
2006--$4,481,000; 2007--$3,818,000; 2008--$3,416,000; 2009--$2,429,000; and
thereafter--$1,647,000.
The Company had letters of credit outstanding in the amount of $3,080,000
at December 31, 2004.
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 was 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 by the Company
related to these products were approximately $900,000. On September 29, 2004,
the case was remanded to state court in Jefferson County and the stay is no
longer in place. 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 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 this proceeding will have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
In the normal course of business, the Company is a party to other 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 consolidated 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.
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 subject to various federal, state and local environmental
laws and regulations that require remediation efforts at several locations
including both current and former operating facilities. One of the most
significant sites is a former manufacturing facility located in Beaver Dam,
Kentucky. Since 1992, the Company has been working under an Agreed Order with
the Kentucky Natural Resources and Environmental Protection Cabinet to remediate
this site. The Company has completed all closure activities and has received
approval for implementation of a post-closure plan.
In 2004, a letter was received from the Wisconsin Department of Natural
Resources (WDNR) indicating that the Company was solely responsible for
remediation of a former manufacturing facility located in Fort Atkinson,
Wisconsin, which was sold by the Company in 1985. In response to WDNR's demand,
the Company engaged a consultant to perform an initial hydrogeologic site
investigation. This initial site investigation found
46
elevated levels of volatile organic compounds including tetrachlorothene and its
daughter products. The site investigation will be expanded to determine the
extent of the contamination and to develop a remediation work plan. The Company
provided a reserve of $900,000 in the third quarter and an additional $200,000
in the fourth quarter of 2004 for anticipated future costs associated with
remediation of this site.
The Company's policy is to provide for environmental reserves on a
discounted basis, when appropriate. Environmental reserves are subject to
numerous inherent uncertainties that affect the ability to estimate future costs
of required remediation efforts. Such uncertainties involve the nature and
extent of contamination, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of continuing
improvements in remediation technology and the financial strength of other
potentially responsible parties at multiparty sites. Reserves are reviewed for
adequacy on a quarterly basis and adjusted, if necessary, as environmental
assessment and remediation efforts proceed.
Changes in the Company's environmental reserve at December 31, 2004 and
2003 is as follows (in thousands):
FOR THE TWELVE MONTHS ENDED
DECEMBER 31,
---------------------------
2004 2003
------ ------
Balance at beginning of period $1,321 $1,350
Environmental accruals 1,100 315
Expenditures (239) (344)
------ ------
Balance at end of period $2,182 $1,321
====== ======
Related to the $2,182,000 reserve at December 31, 2004, approximately
$1,276,000 of this amount was determined on a discounted basis using a 4.9%
discount rate. The $1,276,000 discounted amount is $1,977,000 on an undiscounted
basis. No recoveries are expected or assumed. Expected payments of the
$1,977,000 are as follows:
2005 $ 163,000
2006 154,000
2007 162,000
2008 137,000
2009 78,000
Thereafter $1,283,000
----------
Total $1,977,000
==========
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities follows:
2004 2003
------- -------
(IN THOUSANDS)
Accrued wages, taxes and withholdings ................. $14,314 $10,875
Accrued insurance ..................................... 1,680 1,878
Accrued interest ...................................... 3 769
Accrued warranty expense .............................. 5,338 5,382
Other current liabilities ............................. 12,869 11,615
------- -------
Total accrued expenses and other current liabilities .. $34,204 $30,519
======= =======
13. INDUSTRY SEGMENT INFORMATION
Operating segments are defined as components of an enterprise engaging
in business activities about which separate financial information is available
that is evaluated regularly by the chief decision maker or group in deciding how
to allocate resources and assessing performance.
The Company has historically been organized into two business
segments, the Pump and Compressor Segment and Lighting Segment through its 32%
interest in GTG. The segments have been managed separately based on the
fundamental differences in their respective operations. The Pump and Compressor
Segment designs,
47
manufacturers, and sells pumps and compressors for use in global original
equipment manufacturing applications as well as construction equipment, systems
and laboratory equipment. The Lighting Segment designs, manufactures, markets
and sells lighting products principally in North America for commercial,
industrial and residential applications. See Note 4 which describes in further
detail the sale of the Company's interest in GTG.
Industry segment information follows:
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
SALES AND OPERATING REVENUES
Pump and Compressor (1)
Total net sales including inter-area sales .. $462,151 $420,473 $266,285
Inter-area sales (2) ........................ (52,037) (43,699) (25,683)
-------- -------- --------
Net sales to unaffiliated customers ......... $410,114 $376,774 $240,602
======== ======== ========
OPERATING INCOME (LOSS)
Pump and Compressor (1) ........................ $ 40,936 $ 36,742 $ 31,675
Lighting (GTG) (3) ............................. 18,608 32,138 28,804
Gain on Sale of GTG (3) ........................ 160,410 -- --
Corporate ...................................... (11,204) (8,743) (5,966)
-------- -------- --------
$208,750 $ 60,137 $ 54,513
======== ======== ========
ASSETS
Pump and Compressor (1) ........................ $382,102 $344,384 $287,167
Lighting (GTG) (3) ............................. -- 214,405 188,810
Corporate ...................................... 239,834 14,345 15,039
-------- -------- --------
$621,936 $573,134 $491,016
======== ======== ========
INVESTMENT IN EQUITY AFFILIATES
Lighting (GTG) (3) ............................. -- $214,405 $188,810
======== ======== ========
EXPENSES NOT AFFECTING CASH
Depreciation and amortization
Pump and Compressor (1) ........................ $ 16,200 $ 15,072 $ 10,312
Corporate ...................................... 140 135 156
-------- -------- --------
$ 16,340 $ 15,207 $ 10,468
======== ======== ========
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Pump and Compressor (1) ........................ $ 16,303 $ 19,805 $ 8,208
Corporate ...................................... 100 303 150
-------- -------- --------
$ 16,403 $ 20,108 $ 8,358
======== ======== ========
(1) Includes Rietschle after the August 29, 2002 acquisition date.
(2) Inter-area sales represent intercompany sales between geographic regions
(North America, Europe and Asia Pacific).
(3) The Company sold its joint venture interest in Lighting (GTG) on July 31,
2004.
Intra-area sales, which represent intercompany sales between locations
within a geographic region, have been eliminated from the above tabulation.
Operating income by segment is gross profit less operating expenses, excluding
interest, general corporate expenses, other income and income taxes.
48
Information by geographic area follows:
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
REVENUES (1)(2)
(Total net sales including inter-area sales)
United States ........................... $171,063 $165,899 $144,481
Germany ................................. 209,720 180,568 85,227
Other Europe ............................ 84,381 75,194 28,588
Asia Pacific ............................ 40,034 34,512 18,568
-------- -------- --------
$505,198 $456,173 $276,864
======== ======== ========
INTER-AREA SALES (3)
United States ........................... $(14,829) $(12,712) $(13,139)
Germany ................................. (78,660) (62,243) (21,969)
Other Europe ............................ (1,451) (4,262) (1,135)
Asia Pacific ............................ (144) (182) (19)
-------- -------- --------
$(95,084) $(79,399) $(36,262)
======== ======== ========
NET SALES TO UNAFFILIATED CUSTOMERS
United States ........................... $156,234 $153,187 $131,342
Germany ................................. 131,060 118,325 63,258
Other Europe ............................ 82,930 70,932 27,453
Asia Pacific ............................ 39,890 34,330 18,549
-------- -------- --------
$410,114 $376,774 $240,602
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT
United States ........................... 29,219 $ 31,673 $ 32,069
Germany ................................. 65,329 64,859 48,061
Other Europe ............................ 17,564 10,864 10,840
Asia Pacific ............................ 2,756 954 621
-------- -------- --------
$114,868 $108,350 $ 91,591
======== ======== ========
----------
(1) Revenues are attributed to geographic areas based on the location of the
selling entity.
(2) Includes Rietschle after the August 29, 2002 acquisition date.
(3) Inter-area sales represent intercompany sales between countries/geographic
areas (United States, Germany, other Europe, and Asia Pacific).
Intra-area sales, which represent intercompany sales between locations within a
country/geographic area, have been eliminated from the above tabulation.
Net exposed assets, which represents assets less liabilities for
geographic operations outside of North America that are exposed to foreign
currency risk, at December 31, 2004 are $239,065,000 and $19,416,000 for Europe
and Asia Pacific, respectively.
14. CURRENCY RISK MANAGEMENT
The Company conducts business in several major international
currencies (primarily the European Euro, British Pound, Japanese Yen, Swiss
Franc, and Australian Dollar) and is subject to risks associated with changing
foreign exchange rates. The Company's objective is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes to allow
management to focus its attention on its core business issues and challenges.
Accordingly, the Company enters into 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 December 31, 2004, the Company held forward contracts expiring
through December 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.
49
At December 31, 2004, the foreign currency forward contracts had a
notional amount of Euro 6,000,000 and a fair value of approximately $657,700.
The fair value of the foreign currency forward contracts, which represents an
asset, is included in other current assets. The amount of the pre-tax net gain
deferred through other comprehensive income as of December 31, 2004 was
approximately $631,900. There was $25,800 of gain recognized in fiscal 2004.
There was no gain or loss recognized during 2003.
15. RELATED PARTY TRANSACTIONS
The Company had an accounts receivable of approximately $500,000 as of
December 31, 2004 and $900,000 as of December 31, 2003, from Werner Rietschle
Holding GmbH, a shareholder and the entity which sold the Company assets in the
Rietschle transaction. This amount primarily related to taxes paid by the
Company on behalf of Werner Rietschle Holding GmbH. Dieter Rietschle, who is the
Company's general manager of its TIWR Holding GmbH & Co. KG subsidiary and a
former director, has a 49% ownership and 51% voting control of Werner Rietschle
Holding GmbH. The $500,000 amount as of December 31, 2004 was subsequently
collected in 2005.
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations follow:
NET SALES GROSS PROFIT NET INCOME
------------------- ------------------- --------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
1st Qtr.... $109,518 $ 92,346 $ 38,383 $ 33,115 $ 10,650 $ 8,806
2nd Qtr.... 102,656 95,810 37,563 33,760 9,805 9,432
3rd Qtr.... 97,697 88,985 35,433 29,513 90,268(1) 10,583
4th Qtr.... 100,243 99,633 36,081 33,554 3,431 8,493
-------- -------- -------- -------- -------- -------
$410,114 $376,774 $147,460 $129,942 $114,154 $37,314
======== ======== ======== ======== ======== =======
BASIC NET INCOME DILUTED NET INCOME
PER SHARE PER SHARE
---------------- ------------------
2004 2003 2004 2003
----- ----- ----- -----
1st Qtr.... $0.61 $0.51 $0.60 $0.50
2nd Qtr.... 0.56 0.55 0.55 0.54
3rd Qtr.... 5.16(1) 0.61 5.07(1) 0.60
4th Qtr.... 0.19 0.49 0.19 0.48
----- ----- ----- -----
$6.53 $2.17 $6.44 $2.12
===== ===== ===== =====
(1) Includes a gain of $84,135,000 (pre-tax gain of $160,410,000) from the sale
of the Company's joint venture interest in GTG. Net income per share
related to this gain was $4.81 (basic) and $4.74 (diluted).
17. SUBSEQUENT EVENT
On January 10, 2005 the Company acquired certain assets of the side
channel blower business of Ruey Chaang Electric Co, Ltd. of Taipei, Taiwan for
approximately $12 million. A partial payment of $8.4 million in cash was paid in
January 2005, with the balance payable in the third quarter of 2005.
50
DISCUSSION OF UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
GENERAL DESCRIPTION
The following unaudited pro forma consolidated statements of operations are
based on the historical consolidated statement of operations of Gardner Denver,
Inc. ("Gardner Denver" or the "Company") and the historical consolidated
statement of operations of Thomas Industries Inc. ("Thomas") and nash_elmo
Holdings, LLC ("Nash Elmo") adjusted to give effect to Thomas (acquired July 1,
2005) and Nash Elmo (acquired September 1, 2004) acquisitions and the financing
for the Thomas and Nash Elmo acquisitions as if each had occurred on January 1,
2004. The historical statement of operations of Thomas is included in this Form
8-K/A. The historical consolidated statement of operations of Nash Elmo and
related pro forma financial information were included in a previous Form 8-K/A
filing dated September 2, 2004 and filed on November 17, 2004.
THOMAS ACQUISITION FINANCING AND PURCHASE PRICE ALLOCATION
Pursuant to its previously filed shelf registration with the Securities and
Exchange Commission, the Company completed an offering of 5,658,000 shares of
its common stock (including shares purchased by underwriters to cover
over-allotments) for proceeds of approximately $199.4 million (net of direct
costs associated with the offering) during May 2005. The Company also completed
an offering of $125.0 million of its 8% Senior Subordinated Notes (the "Notes")
in a private placement on May 4, 2005. The Company used the proceeds from the
shares and Notes, plus funds available under an amended and restated senior
secured bank facility, to finance its acquisition of Thomas (consummated on July
1, 2005) and to repay certain indebtedness.
The Notes have a fixed annual interest rate of 8% and are guaranteed by
certain of the Company's domestic subsidiaries. At any time prior to May 1,
2009, the Company may redeem all or part of the Notes issued under the Indenture
at a redemption price equal to 100% of the principal amount of the Notes
redeemed plus an applicable "make-whole" premium, and accrued and unpaid
interest and liquidated damages, if any. In addition, at any time prior to May
1, 2008, the Company may, on one or more occasions, redeem up to 35% of the
aggregate principal amount of the Notes at a redemption price of 108% of the
principal amount, plus accrued and unpaid interest and liquidated damages, if
any, with the net cash proceeds of one or more equity offerings, subject to
certain conditions. On or after May 1, 2009, the Company may redeem all or a
part of the Notes at varying redemption prices, plus accrued and unpaid interest
and liquidated damages, if any. Upon a change of control, as defined in the
Indenture, the Company is required to offer to purchase all of the Notes then
outstanding for cash at 101% of the principal amount thereof plus accrued and
unpaid interest and liquidated damages, if any. The Indenture contains events of
default and affirmative, negative and financial covenants customary for such
financings, including, among other things, limits on incurring additional debt
and restricted payments.
On May 13, 2005, the Company entered into a $605.0 million amended and
restated credit agreement (the "2005 Credit Agreement"). Contingent on the
completion of the Thomas acquisition (consummated on July 1, 2005), the 2005
Credit Agreement provided the Company with access to senior secured credit
facilities including a $380.0 million Term Loan and restated the $225.0 million
Revolving Line of Credit, in addition to superceding the 2004 Credit Agreement.
Proceeds from the 2005 Credit Agreement were used to fund the Thomas acquisition
and retire $144.4 million of debt outstanding under the previously existing Term
Loan.
The Revolving Line of Credit matures on September 1, 2009. Loans under this
facility may be denominated in U.S. Dollars or several foreign currencies. On
June 30, 2005, the Revolving Line of Credit had no outstanding principal
balance, leaving $225.0 million available for letters of credit or for future
use, subject to the terms of the Revolving Line of Credit.
The new Term Loan has a final maturity of July 1, 2010 and requires
quarterly principal payments. These payments total $19 million, $38 million, $57
million, $95 million and $171 million in years one through five, respectively.
The interest rates applicable to loans under the 2005 Credit Agreement are
variable and will be, at the Company's option, either the prime rate plus an
applicable margin or LIBOR plus an applicable margin. The applicable margin
percentages are adjustable at the end of each quarter, based upon financial
ratio guidelines defined in 2005 Credit Agreement.
51
The Company's obligations under the 2005 Credit Agreement are guaranteed by
the Company's existing and future domestic subsidiaries, and are secured by a
pledge of certain subsidiaries' capital stock. The Company is subject to
customary covenants regarding certain earnings, liquidity and capital ratios.
The aggregate purchase price for the Thomas acquisition of $483.5 million
(net of $265.3 million cash acquired and including $7.6 million of capital lease
obligations assumed and $7.0 million of direct acquisition costs) has been
allocated primarily to receivables ($59.8 million); inventory ($76.3 million);
property, plant and equipment ($126.5 million); intangible assets ($336.5
million); other assets ($9.4 million); accounts payable and accrued liabilities
($60.1 million); net deferred income tax liabilities ($41.0 million) and other
long-term liabilities ($23.9 million), based on their estimated fair values at
the date of acquisition. This allocation reflects the Company's preliminary
estimates of the purchase price allocation and is subject to change upon
completion of appraisals. Further, other assets and liabilities may be
identified to which a portion of the purchase price could be allocated. The
Company has not yet performed a detailed analysis to identify and measure
additional adjustments that may be necessary to conform Thomas' accounting
policies with the Company's accounting policies.
The following table summarizes the preliminary fair values of the intangible
assets acquired in the Thomas acquisition (in millions):
Amortized intangible assets:
Customer lists and relationships $ 50.0
Technology 9.5
Other 3.5
Unamortized intangible assets:
Goodwill 228.5
Trademarks 45.0
------
Total intangible assets $336.5
======
The preliminary weighted average amortization period for customer lists and
relationships and other amortized intangible assets is 20 years and 5 years,
respectively.
PRO FORMA ADJUSTMENTS
The unaudited pro forma consolidated statements of operations reflect pro
forma adjustments that are described in the accompanying notes and are based on
available information and certain assumptions the Company believes are
reasonable but are subject to change. In the Company's opinion, all adjustments
that are necessary to fairly present the pro forma information have been made.
The unaudited pro forma consolidated statements of operations do not purport to
represent what the Company's results of operations would actually have been if
the Thomas acquisition and the financing for the Thomas acquisition had occurred
on such dates or to project the Company's results of operations for any future
date or period.
The unaudited pro forma consolidated statements of operations reflect the
Company's preliminary estimates of the allocation of the purchase price for the
Thomas acquisition and are subject to change. The unaudited pro forma
consolidated statements of operations do not reflect any operating efficiencies
or cost savings that the Company may achieve with respect to the combined
entities nor any expense associated with achieving these benefits.
THOMAS AND GARDNER DENVER HISTORICAL FINANCIAL STATEMENTS
The historical consolidated statement of operations of Thomas in the pro
forma consolidated statement of operations is based on Thomas' consolidated
financial statements. You should read the following unaudited pro forma
consolidated statements of operations in conjunction with the Company's
historical audited consolidated financial statements, the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which were included in Gardner Denver's Form 10-K for the year
ended December 31, 2004 and incorporated herein by reference, the Company's
unaudited condensed financial statements, the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
were included in Gardner Denver's Form 10-Q for the quarterly period ended June
30, 2005 and incorporated herein by reference, Thomas' historical audited
consolidated financial statements and the related notes, included in this Form
8-K/A.
52
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THOMAS AND PRO FORMA
RELATED GARDNER DENVER,
GARDNER FINANCING THOMAS AND
DENVER THOMAS PRO FORMA RELATED
HISTORICAL HISTORICAL ADJUSTMENTS FINANCING
---------- ---------- ----------- ---------------
Revenues.................................... $489,170 $220,919 $ -- $710,089
Costs and expenses:
Cost of sales............................ 328,914 136,242 -- 465,156
Depreciation and amortization............ 14,481 8,966 1,637(A) 25,084
Selling and administrative expenses ..... 104,163 58,060 -- 162,223
Interest expense......................... 9,284 277 10,215(B) 19,776
Other income, net........................ (3,322) (4,306) 2,473(C) (5,155)
-------- -------- -------- --------
Total costs and expenses.................... 453,520 199,239 14,325 667,084
Income before income
taxes.................................... 35,650 21,680 (14,325) 43,005
Provision for income taxes ................. 10,695 6,742 (4,535)(D) 12,902
-------- -------- -------- --------
Net income.................................. $ 24,955 $ 14,938 $ (9,790) $ 30,103
======== ======== ======== ========
Basic earnings per share.................... $ 1.14 $ 1.17
======== ========
Diluted earnings per share.................. $ 1.11 $ 1.14
======== ========
Basic weighted average number of shares
outstanding.............................. 21,872 3,876 25,748
======== ======== ========
Diluted weighted average number of shares
outstanding.............................. 22,433 3,876 26,309
======== ======== ========
See accompanying notes to unaudited pro forma
consolidated statement of operations
53
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2005
(IN THOUSANDS)
PRO FORMA
GARDNER GARDNER
DENVER THOMAS PRO FORMA DENVER AND
HISTORICAL HISTORICAL ADJUSTMENTS THOMAS
---------- ---------- ----------- ----------
ASSETS
Current assets:
Cash and equivalents ...................... $ 246,335 $265,188 $(393,105) (E) $ 118,418
Short-term investments .................... -- 122 -- 122
Receivables, net .......................... 162,466 61,334 (1,500) (E) 222,300
Inventories, net .......................... 137,939 69,024 3,800 (E),(F) 214,216
4,953 (E)
(1,500) (E)
Deferred income taxes ..................... 6,836 5,275 2,244 (E) 14,355
Other current assets ...................... 11,003 6,287 -- 17,290
---------- -------- --------- ----------
Total current assets ................... 564,579 407,230 (385,108) 586,701
---------- -------- --------- ----------
Property, plant and equipment, net ........... 145,546 105,171 28,000 (E),(G) 272,085
(6,632) (H)
Goodwill ..................................... 370,090 66,164 162,313 (E) 598,567
Other intangibles, net ....................... 107,038 24,111 6,632 (H) 215,038
(30,743) (E)
108,000 (E)
Other assets ................................. 15,730 3,094 4,480 (I) 23,304
---------- -------- --------- ----------
Total assets ........................ $1,202,983 $605,770 $(113,058) $1,695,695
========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt ........... $ 22,758 $ 1,629 $ -- $ 24,387
Accounts payable and accrued liabilities .. 182,121 60,126 -- 242,247
---------- -------- --------- ----------
Total current liabilities .............. 204,879 61,755 -- 266,634
---------- -------- --------- ----------
Long-term debt, less current maturities ...... 274,028 5,930 352,625 (E) 632,583
Postretirement benefits other than pensions .. 30,092 -- -- 30,092
Deferred income taxes ........................ 22,948 8,806 39,685 (E) 71,439
Other liabilities ............................ 52,171 20,411 3,500 (E) 76,082
---------- -------- --------- ----------
Total liabilities ...................... 584,118 96,902 395,810 1,076,830
---------- -------- --------- ----------
Stockholders' equity
Common stock .............................. 276 18,676 (18,676) (J) 276
Capital in excess of par value ............ 466,365 150,315 (150,315) (J) 466,365
Retained earnings ......................... 164,385 335,344 (335,344) (J) 164,385
Accumulated other comprehensive income .... 15,121 16,592 (16,592) (J) 15,121
Treasury Stock ............................ (27,282) (12,059) 12,059 (J) (27,282)
---------- -------- --------- ----------
Total stockholders' equity ............. 618,865 508,868 (508,868) 618,865
---------- -------- --------- ----------
Total liabilities and
stockholders' equity ............. $1,202,983 $605,770 $(113,058) $1,695,695
========== ======== ========= ==========
See accompanying notes to unaudited pro forma consolidated financial statements
54
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2005
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Reflects the change in Thomas' depreciation and amortization expense due to
the depreciation of the step-up in its property, plant and equipment to
fair value over estimated average useful lives ranging from 3 to 25 years,
and the amortization of the separately identifiable intangible assets with
finite lives at estimated fair values over estimated useful lives ranging
from 5 to 20 years. This adjustment is based on the Company's estimated
allocation of the purchase price for the Thomas acquisition. We will base
the final allocation on appraisals that have not yet been completed.
(B) Reflects the following interest expense on the estimated incremental
borrowings necessary to finance the Thomas acquisition:
Interest on new senior subordinated notes ($125,000 at 8.00% for
January 1, 2005 - May 4, 2005) ............................................. $ 3,389
Interest on incremental term loan and revolving line of credit borrowings
($352,625 at 4.85%) ........................................................ 8,481
Interest saved on average revolving credit line of $124,000 assuming retired
with proceeds from the stock offering (January 2005 - May 2005) ............ (1,669)
Interest saved on average term loan balance of $147,000 from January 2005 -
May 2005 due to lower leverage from retired revolving line of credit ....... (326)
Net impact on amortization of debt issue costs related to the financing for
the Thomas acquisition ..................................................... 659
Prepayment penalty on other borrowings repaid in 2005 ......................... (319)
-------
Total interest expense adjustment .......................................... $10,215
=======
For purposes of determining the adjustment for the credit line and the term loan
borrowings, the applicable LIBOR rate plus the applicable margin per the
Company's credit agreement was used.
(C) Reflects the elimination of interest income earned at an average rate of
2.3% on the $215,000 excess cash at Thomas which was used to fund the
acquisition.
(D) Reflects the income tax effects of the pro forma adjustments to provide for
a combined effective income tax rate for Gardner Denver and Thomas of
30.0%.
55
(E) Reflects the following estimated sources and uses of cash, purchase price
allocation and net fair value adjustments to Thomas' assets and
liabilities, including goodwill:
SOURCES AND USES OF CASH:
Consideration paid at closing for the shares of Thomas .............. $ 734,224
Cash paid for direct acquisition costs, including financial
advisory, legal, accounting, auditing and other costs ............ 7,026
---------
Aggregate purchase price ............................................ 741,250
=========
Available cash at Gardner Denver .................................... 178,105
Available cash and short-term investments at Thomas ................. 215,000
---------
Total existing cash used for the acquisition ........................ 393,105
=========
Borrowings available under new credit line .......................... 117,000
Borrowings available under new term loan ............................ 380,000
Existing Gardner Denver debt to be repaid ........................... (144,375)
---------
Total new borrowings ................................................ 352,625
Less debt issuance costs related to new borrowings .................. (4,480)(I)
---------
Net borrowings directly related to the acquisition purchase price ... $ 348,145
=========
ESTIMATED PURCHASE PRICE ALLOCATION:
Aggregate purchase price ............................................... $ 741,250
Book value of Thomas' net assets ....................................... (508,868)
Capitalized estimated manufacturing profit in inventory acquired ....... (3,800)(F)
Elimination of LIFO reserve ............................................ (4,953)
Step-up in property, plant and equipment to fair value ................. (28,000)(G)
Elimination of Thomas' historical intangible assets (other than
goodwill) ........................................................... 30,743
Separately identifiable intangible assets (other than goodwill) ........ (108,000)
Adjustment of pension liabilities (equal to excess of the projected
benefit obligation over the fair value of plan assets less Thomas'
existing liability) ................................................. 3,500
Additional deferred tax liabilities, net (on fair value changes to
assets and liabilities) ............................................. 37,441
Other asset and liability fair value adjustments, net .................. 3,000
---------
Net adjustment to goodwill ............................................. $ 162,313
=========
This reflects our preliminary estimates of the purchase price allocation
for the Thomas acquisition, which may change upon completion of appraisals.
Further, we may identify other assets and liabilities to which a portion of
the purchase price will be allocated. The purchase price allocation also
does not include an accrual for any anticipated restructuring activities in
connection with the Thomas acquisition. The Company has not yet performed a
detailed analysis to identify and measure additional adjustments that may
be necessary to conform Thomas' accounting policies with the Company's
accounting policies.
56
The adjusted pro forma balance of Thomas' other separately identifiable
intangible assets is estimated to be comprised of the following:
Other Intangible Assets:
Customer lists and relationships, to be amortized over 20 years ..... $ 50,000
Trademarks and trade names, indefinite lives ........................ 45,000
Technology (primarily software and patents), to be amortized over
5-10 years ....................................................... 9,500
Other, to be amortized over 5 years ................................. 3,500
--------
Total other intangible assets ....................................... $108,000
========
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the pro forma statement of operations does not include amortization of
goodwill and other intangible assets with indefinite useful lives acquired
in the Thomas acquisition.
(F) Reflects the estimated purchase accounting adjustment for capitalization of
manufacturing profit in inventory acquired with Thomas. The pro forma
statement of operations does not reflect the one time adjustment on cost of
sales during the period this inventory is sold.
(G) Reflects the estimated purchase accounting adjustment to Thomas' property,
plant and equipment to step-up the basis to estimated fair value. This
adjustment is based on the estimated allocation of the purchase price for
the Thomas acquisition.
(H) Reflects the reclassification of Thomas' deferred software costs from
property, plant and equipment to other intangible assets.
(I) Reflects the estimated additional debt issuance costs related to the new
borrowings which will be capitalized and amortized through maturity.
(J) Reflects the elimination of Thomas' historical consolidated equity.
57
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NASH ELMO
HISTORICAL FOR
EIGHT MONTHS NASH ELMO PRO FORMA
GARDNER ENDED PRO FORMA GARDNER
DENVER AUGUST 31, 2004 ADJUSTMENTS DENVER AND
HISTORICAL (B) (B) NASH ELMO
---------- --------------- ----------- ----------
Revenues ................................... $739,539 $156,317 $ -- $895,856
Costs and expenses:
Cost of sales ........................... 498,435 (A) 97,066 -- 595,501
Depreciation and amortization ........... 21,901 4,817 2,000 (C) 28,718
Selling and administrative expenses ..... 157,453 40,952 -- 198,405
Interest expense ........................ 10,102 3,160 2,918 (D) 16,180
Other income, net ....................... (638) (63) -- (701)
-------- -------- ------- --------
Total costs and expenses ................... 687,253 145,932 4,918 838,103
Equity Income from GTG ..................... -- -- -- --
Gain on sale of GTG ........................ -- -- -- --
-------- -------- ------- --------
Income before income taxes ................. 52,286 10,385 (4,918) 57,753
Provision for income taxes ................. 15,163 3,028 (865) (E) 17,326
-------- -------- ------- --------
Net income ................................. $ 37,123 $ 7,357 $(4,053) $ 40,427
======== ======== ======= ========
Basic earnings per share ................... $ 1.96 $ 2.13
======== ========
Diluted earnings per share ................. $ 1.92 $ 2.09
======== ========
Basic weighted average number of shares
outstanding ............................. 18,955 18,955
======== ========
Diluted weighted average number of shares
outstanding ............................. 19,377 19,377
======== ========
PRO FORMA
THOMAS GARDNER
PRO FORMA AND RELATED DENVER, NASH
GARDNER THOMAS FINANCING ELMO, THOMAS
DENVER AND HISTORICAL PRO FORMA AND RELATED
NASH ELMO (F) ADJUSTMENTS FINANCING
---------- ---------- ----------- ------------
Revenues ................................... $895,856 $410,114 $ -- $1,305,970
Costs and expenses:
Cost of sales ........................... 595,501 252,768 -- 848,269
Depreciation and amortization ........... 28,718 16,340 3,276 (G) 48,334
Selling and administrative expenses ..... 198,405 111,274 -- 309,679
Interest expense ........................ 16,180 2,691 20,260 (H) 39,131
Other income, net ....................... (701) (1,611) 1,433 (I) (879)
-------- -------- -------- ----------
Total costs and expenses ................... 838,103 381,462 24,969 1,244,534
Equity Income from GTG ..................... -- 18,608 -- 18,608
Gain on sale of GTG ........................ -- 160,410 -- 160,410
-------- -------- -------- ----------
Income before income taxes ................. 57,753 207,670 (24,969) 240,454
Provision for income taxes ................. 17,326 93,516 (8,138) (J) 102,704
-------- -------- -------- ----------
Net income ................................. $ 40,427 $114,154 $(16,831) $ 137,750
======== ======== ======== ==========
Basic earnings per share ................... $ 2.13 $ 5.60
======== ==========
Diluted earnings per share ................. $ 2.09 $ 5.50
======== ==========
Basic weighted average number of shares
outstanding ............................. 18,955 5,658 24,613
======== ======== ==========
Diluted weighted average number of shares
outstanding ............................. 19,377 5,658 25,035
======== ======== ==========
NOTE: THE ABOVE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDES EQUITY INCOME FROM THOMAS' 32% INVESTMENT IN GTG. GENLYTE AND
THOMAS FORMED GTG ON AUGUST 30, 1998. EFFECTIVE WITH THOMAS' INVESTMENT IN
GTG, ITS INTEREST IN GTG WAS ACCOUNTED FOR USING THE EQUITY METHOD OF
ACCOUNTING. EFFECTIVE WITH THE CLOSE OF BUSINESS ON JULY 1, 2004, THOMAS
SOLD ITS 32% INTEREST IN GTG, TO GENLYTE FOR APPROXIMATELY $400,900. AS
REQUIRED BY ARTICLE 11 OF REGULATION S-X, THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS INCLUDES EQUITY INCOME FROM GTG, AS
WELL AS A GAIN FROM THE SALE OF THOMAS' INTEREST IN GTG. IN TOTAL, THE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS INCLUDES $176,954
OF PRETAX INCOME AND $95,054 OF NET INCOME AND $3.79 OF DILUTED EARNINGS
PER SHARE FROM THE EFFECTS OF GTG. FOR MORE INFORMATION THAT EXCLUDES THE
EFFECTS OF GTG, SEE NOTE F BELOW.
See accompanying notes to unaudited pro forma consolidated
statement of operations
58
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Includes a $3,735 non-recurring unfavorable impact related to recording the
acquired inventory of Syltone and Nash Elmo at fair value.
(B) The Company acquired Nash Elmo on September 1, 2004. The unaudited pro
forma consolidated statement of operations therefore includes Nash Elmo's
historical results for the eight months ended August 31, 2004, which were
included in the Company's 8-K/A filing dated September 2, 2004 and filed on
November 17, 2004, and the pro forma adjustments for the Nash Elmo
acquisition.
(C) Reflects the change in Nash Elmo's depreciation and amortization expense
due to the depreciation of the step-up in its property, plant and equipment
to fair value over estimated average useful lives ranging from 3 to 25
years, and the amortization of the separately identifiable intangible
assets with finite lives at estimated fair values over estimated useful
lives ranging from 5 to 20 years. This adjustment is based on our estimated
allocation of the purchase price for the Nash Elmo acquisition. We will
base the final allocation on appraisals that have not yet been completed.
(D) Reflects the following interest expense on the estimated incremental
borrowings necessary to finance the Nash Elmo acquisition:
Interest on the incremental Credit Line borrowing ($117,480 at 3.75%) ... $ 2,937
Interest on the incremental Term Loan borrowing ($108,750 at 3.75%) ..... 2,719
Incremental interest on our previously existing average borrowings
(excluding the Nash Elmo acquisition related borrowings) due to
an increase in rates on borrowings and commitments resulting from
the increased leverage from the Nash Elmo acquisition ................ 213
Net impact on amortization of debt issue costs related to the financing
for the Nash Elmo acquisition ........................................ (117)
Elimination of historical interest expense on Nash Elmo's debt repaid in
conjunction with the Nash Elmo acquisition ........................... (2,834)
-------
Total interest expense adjustment .................................. $ 2,918
=======
For purposes of determining the adjustment for the credit line and the term
loan borrowings, the applicable LIBOR rate plus the applicable margin per
our credit agreement was used.
(E) Reflects the income tax effects of the pro forma adjustments to provide for
a combined effective income tax rate for Gardner Denver and Nash Elmo of
30.0%.
(F) As noted above, effective with the close of business on July 31, 2004,
Thomas sold its 32% interest in GTG to Genlyte for approximately $400,900.
The information set forth below adjusts the information presented under the
title "Pro Forma Gardner Denver, Nash Elmo, Thomas and Related Financing"
to exclude the effects of GTG, assuming Thomas had sold its interest in GTG
at the beginning of the period presented and used a portion of the net
proceeds from the sale to repay all of Thomas' existing debt other than its
capitalized lease obligations:
59
PRO FORMA
PRO FORMA GARDNER DENVER,
GARDNER DENVER, NASH ELMO,
NASH ELMO, THOMAS AND
THOMAS AND PRO FORMA RELATED FINANCING,
RELATED FINANCING ADJUSTMENTS AS ADJUSTED
----------------- ----------- ------------------
Revenues $1,305,970 $ -- $1,305,970
Costs and expenses:
Cost of sales 848,269 -- 848,269
Depreciation and amortization 48,334 -- 48,334
Selling and administrative expenses 309,679 (353)(1) 309,326
Interest expense 39,131 (1,711)(2) 37,420
Other (income) expense, net (879) -- (879)
---------- --------- ----------
Total costs and expenses 1,244,534 (2,064) 1,242,470
Equity income from GTG 18,608 (18,608)(3) --
Gain on sale of GTG 160,410 (160,410)(4) --
---------- --------- ----------
Income before income taxes 240,454 (176,954) 63,500
Provision for income taxes 102,704 (82,067)(5) 20,637
---------- --------- ----------
Net income $ 137,750 $ (94,887) $ 42,863
========== ========= ==========
Basic earnings per share $ 5.60 $ 1.74
========== ==========
Diluted earnings per share $ 5.50 $ 1.71
========== ==========
Basic weighted average number of shares
outstanding 24,613 24,613
========== ==========
Diluted weighted average number of shares
outstanding 25,035 25,035
========== ==========
(1) The adjustment reflects the reduced bank fees and deferred loan
amortization due to applying a portion of the proceeds from the sale of
Thomas' interest in GTG to pay down previously existing bank debt, except
capitalized lease obligations, as of the beginning of the period.
(2) The adjustment reflects the reduced interest expense due to applying a
portion of the proceeds from the sale of Thomas' interest in GTG to pay
down debt as of the beginning of the period.
(3) The adjustment reflects the elimination of Thomas' equity income from GTG
due to the sale of GTG as of the beginning of the period.
(4) The adjustment reflects the elimination of the pretax gain on the sale of
Thomas' interest in GTG as of the beginning of the period.
(5) The adjustment reflects the income tax effects of adjustments (1), (2), (3)
and (4) to reflect an overall effective tax rate of 32.5% excluding the
impact of the gain on Thomas' sale of its interest in GTG or its equity
income prior to the sale.
Financial information for Thomas includes $5,245 of non-recurring charges
related to plant shutdown, legal and environmental costs.
(G) Reflects the change in Thomas' depreciation and amortization expense due to
the depreciation of the step-up in its property, plant and equipment to
fair value over estimated average useful lives ranging from 3 to 25 years,
and the amortization of the separately identifiable intangible assets with
finite lives at estimated fair values over estimated useful lives ranging
from 5 to 20 years. This adjustment is based on our estimated allocation of
the purchase price for the Thomas acquisition. We will base the final
allocation on appraisals that have not yet been completed.
60
(H) Reflects the following interest expense on the notes and other estimated
incremental borrowings necessary to finance the Thomas acquisition (as
discussed above under "--Thomas Acquisition Financing and Purchase Price
Allocation").
Interest on the Notes ($125,000 at 8.00%) .................... $10,000
Interest on incremental term loan and revolving line of credit
borrowings ($233,365 at 3.90%) ............................ 9,101
Incremental interest on existing borrowings due to increased
leverage .................................................. 114
Elimination of historical interest expense on other borrowings
to be repaid ($26,900 at 5.25%) ........................... (1,412)
Net impact on amortization of debt issue costs related to the
financing for the Thomas acquisition ...................... 1,183
Prepayment penalty on other borrowings to be repaid .......... 1,274
-------
Total interest expense adjustment ......................... $20,260
=======
The prepayment penalty on other borrowings to be repaid of $1,274 was based
upon interest rates in effect as of January 1, 2004. The actual prepayment
penalty incurred in 2005 was $319.
(I) Reflects the elimination of interest income earned at an average rate of
1.6% on the $215,000 excess cash at Thomas, which was used to fund the
acquisition. This income was earned by Thomas subsequent to the sale of GTG
on July 31, 2004.
(J) Reflects the income tax effects of the pro forma adjustments to provide for
the combined effective income tax rate for Gardner Denver, Nash Elmo and
Thomas Industries (excluding the effect of GTG) of 32.5%
61
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.
GARDNER DENVER, INC.
Date: September 16, 2005 By: /s/ Helen W. Cornell
------------------------------------
Helen W. Cornell
Vice President, Finance and
Chief Financial Officer
62
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
23.1 Consent of Ernst & Young LLP
99.1 Press Release dated July 1, 2005, filed as Exhibit 99.1 to Gardner
Denver's Form 8-K dated July 1, 2005, and incorporated herein by
reference.
63