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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 2004
COMMISSION FILE NUMBER 1-313
THE LAMSON & SESSIONS CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-0349210
------------------------ ------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
25701 SCIENCE PARK DRIVE, CLEVELAND, OHIO 44122
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
216-464-3400
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held as of July 3, 2003
(the last trading day of the Company's fiscal 2003 second quarter) by
non-affiliates of the Registrant was $55,237,331, based on the close price of
$4.65 on the New York Stock Exchange.
As of February 6, 2004 the Registrant had outstanding 13,787,145 common
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2004 are incorporated by reference into
Part III of this report.
THE LAMSON & SESSIONS CO.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 2004
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9(a). Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
2
PART I
ITEM 1. BUSINESS
The Lamson & Sessions Co., an Ohio corporation, (the "Company" or "Lamson &
Sessions"), founded in 1866, is a diversified manufacturer and distributor of a
broad line of thermoplastic electrical, consumer, telecommunications and
engineered sewer products for major domestic markets. The markets for
thermoplastic electrical conduit, related fittings and accessories, wiring
devices and sewer pipe include: the construction, utility and telecommunications
industries, municipalities, other government agencies, and contractors; and
"do-it-yourself" home remodelers.
PRINCIPAL PRODUCTS AND MARKETS
The Company is engaged in the manufacture and distribution of a broad line of
thermoplastic electrical, telecommunications and engineered sewer products. In
addition, the Company distributes a wide variety of consumer electrical wiring
devices, home security devices, wireless electrical and other wireless products.
All of the Company's thermoplastic electrical products compete with and serve as
substitutes for similar metallic products. The Company's thermoplastic
electrical products offer several advantages over these other products.
Specifically, nonmetallic electrical and telecommunications conduit and related
fittings and accessories are generally less expensive, lighter and easier to
install than metallic products. They do not rust, corrode or conduct
electricity. Thermoplastics, either polyvinyl chloride (PVC) or high density
polyethylene (HDPE), are the materials of choice to protect fiber optic cable.
Three business segments are served, each of which has unique product and
marketing requirements. These markets are:
Carlon - Industrial, Residential, Commercial, Telecommunications and Utility
Construction: The major customers served are electrical contractors and
distributors, original equipment manufacturers, electric power utilities, cable
television (CATV), telephone and telecommunications companies. The principal
products sold by this segment include electrical and telecommunications raceway
systems and a broad line of nonmetallic enclosures, electrical outlet boxes and
fittings. Examples of the applications for the products included in this segment
are multi-cell duct systems and HDPE conduit designed to protect underground
fiber optic cables, allowing future cabling expansion and flexible conduit used
inside buildings to protect communications cable.
Lamson Home Products - Consumer: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" home improvement market. The
products included in this segment are electrical outlet boxes, liquidtight
conduit, electrical fittings, door chimes and lighting controls.
PVC Pipe: This business segment primarily supplies electrical, power and
communications conduit to the electrical distribution, telecommunications,
consumer, power utility and sewer markets. The electrical and telecommunications
conduit is made from PVC resin and is used to protect wire or fiber optic cables
supporting the infrastructure of power or telecommunications systems.
A breakdown of net sales as a percent of total net sales by major business
segments for 2003, 2002 and 2001 is as follows:
(Dollars in thousands) 2003 2002 2001
----------------------- ----------------------- -----------------------
Carlon $154,090 45% $149,037 47% $188,161 53%
Lamson Home Products 84,862 25% 71,486 23% 62,128 18%
PVC Pipe 104,883 30% 93,952 30% 102,383 29%
-------- -------- -------- -------- -------- --------
$343,835 100% $314,475 100% $352,672 100%
======== ======== ======== ======== ======== ========
See discussion of segments' products in Note L to the consolidated financial
statements.
3
COMPETITION
Each of the three segments in which the Company presently operates is highly
competitive based on service, price and quality. Most of the competitors are
either national or smaller regional manufacturers who compete with limited
product offerings. Unlike a majority of the Company's competitors, the Company
manufactures a broad line of thermoplastic products, complementary fittings and
accessories. The Company believes that with its products and investment in
information technology infrastructure, it will continue to compete favorably.
However, certain of the Company's competitors have greater financial resources
than the Company, which occasionally can adversely affect the Company through
price competition strategies in selected products and markets.
DISTRIBUTION
The Company distributes its products through a nationwide network of more than
108 manufacturers' representatives and a direct field sales force of
approximately 21.
RAW MATERIALS
The Company is a large purchaser of pipe grade PVC and HDPE resins. The Company
has entered into supply contracts for PVC which should stabilize its
availability for the next several years. HDPE is purchased by the Company from
various sources and has historically been readily available.
PATENTS AND TRADEMARKS
The Company owns various patents, patent applications, licenses, trademarks and
trademark applications relating to its products and processes. While the Company
considers that, in the aggregate, its patents, licenses and trademarks are of
importance in the operation of its business, it does not consider that any
individual patent, license or trademark, or any technically-related group, is of
such importance that termination would materially affect its business.
SEASONAL FACTORS
Two of the Company's three business segments experience moderate seasonality
caused principally by a decrease in construction activity during the winter
months. They are subject also to the economic cycles affecting the residential,
commercial, industrial and telecommunications construction markets. The
Company's consumer products business segment is affected by existing home sales,
consumer spending and consumer confidence.
MAJOR CUSTOMERS
Sales to Affiliated Distributors, a cooperative buying group reported within the
Carlon and PVC Pipe segments not otherwise affiliated with the Company, totaled
approximately 14.0% of consolidated net sales in 2003, 15.0% of consolidated net
sales in 2002, and 14.0% of consolidated net sales in 2001. Sales to Home Depot,
a customer of the Lamson Home Products segment not otherwise affiliated with the
Company, totaled approximately 11.0% of consolidated net sales in 2003, 10.0% of
consolidated net sales in 2002, prior to that they were less than 10.0% of
consolidated net sales.
BACKLOG
In the Company's three business segments, the order-to-delivery cycle ranges
from several days to a few weeks. Therefore, the measurement of backlog is not a
significant factor in the evaluation of the Company's prospects.
RESEARCH AND DEVELOPMENT
The Company is engaged in product development programs, which concentrate on
identifying, creating and introducing innovative applications for thermoplastic
and wireless electrical products. The Company maintains a material testing lab
and development center in its Cleveland, Ohio headquarters to facilitate this
effort and improve manufacturing processes. The Company's research and
development expenditures totaled $1.9 million, $2.2 million and $2.8 million in
2003, 2002 and 2001, respectively.
ENVIRONMENTAL REGULATIONS
The Company believes that its current operations and its use of property, plant
and equipment conform in all material respects to applicable environmental laws
and regulations presently in effect. The Company has facilities at numerous
geographic locations, which are subject to a range of federal, state and local
environmental laws and regulations. Compliance with these laws has, and will,
require expenditures on a continuing basis.
4
ASSOCIATES
At January 3, 2004, the Company had 1,122 associates, 941 of whom were employed
at the Company's manufacturing facilities and distribution centers. The
remainder of associates were primarily employed at the Company's corporate
headquarters.
FOREIGN OPERATIONS
The net sales, operating earnings and assets employed outside the United States
are not significant. Export sales were approximately 3.0% of consolidated net
sales in 2003 and 2002, and 2.0% of consolidated net sales in 2001,
respectively, and were made principally to customers in Canada and the
Caribbean.
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, amendments to those reports and other information
with the Securities and Exchange Commission ("SEC"). The public can obtain
copies of these materials by visiting the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330,
or by accessing the SEC's Web site at http://www.sec.gov. In addition, as soon
as reasonably practicable, after such materials are filed with or furnished to
the SEC, the Company makes copies available to the public, free of charge, on or
through its Web site at http://www.lamson-sessions.com.
ITEM 2. PROPERTIES
The Company owns (O) or leases (L) manufacturing and distribution facilities,
which are suitable and adequate for the production and marketing of its
products. The Company owns executive and administrative offices, which are
located in Cleveland, Ohio, and occupy 68,000 square feet in a suburban office
complex. The following is a list of the Company's manufacturing and distribution
center locations:
APPROXIMATE
MANUFACTURING FACILITIES SQUARE FEET
- ------------------------ -----------
Woodland, California (O) 71,000
High Springs, Florida (O) 110,000
Tennille, Georgia (O) 41,000
Clinton, Iowa (O) 124,000
Mountain Grove, Missouri (O) 36,000
Bowling Green, Ohio (O) 67,000
Oklahoma City, Oklahoma (O) 172,000
Nazareth, Pennsylvania (O) 61,000
Erie, Pennsylvania (L) 56,000
Cranesville, Pennsylvania (L) 10,000
Pasadena, Texas (O) 52,000
DISTRIBUTION CENTERS
- --------------------
Columbia, South Carolina (L) 350,000
Woodland, California (L) 127,000
Fort Myers, Florida (O) 4,000
The above manufacturing facilities were operated at approximately 68.0% of their
productive capacity during 2003.
5
ITEM 3. LEGAL PROCEEDINGS
On September 23, 1999, the Company announced that a United States District Court
jury in the Northern District of Illinois found that the Company willfully
infringed on a patent held by Intermatic Incorporated ("Intermatic") of Spring
Grove, Illinois, relating to the design of an in-use weatherproof electrical
outlet cover, and awarded Intermatic $12.5 million in damages plus pre-judgment
interest of approximately $1.5 million. The Company pursued a vigorous appeal
and on December 17, 2001 the United States Court of Appeals ruled that, as a
matter of law, Lamson & Sessions' products did not infringe Intermatic's patent
and that the Company has no liability to Intermatic. The trial jury's earlier
verdict in favor of Intermatic in the amount of $12.5 million, plus pre-judgment
and post-judgment interest estimated to be in excess of $3.0 million, was
reversed. Intermatic filed for a rehearing of the ruling to the Court of Appeals
en banc, which was denied. Intermatic then filed a petition for certiorari with
the United States Supreme Court. The United States Supreme Court reversed the
decision of the Court of Appeals and remanded the case back to it. In March
2003, the Court of Appeals remanded this litigation back to the United States
District Court for reconsideration. The Company does not expect this matter to
be finally determined in 2004.
During the first quarter of 2001, the Company settled its litigation against PW
Eagle and received a payment of $2.05 million, representing a partial recovery
of costs incurred in current and previous quarters, arising out of the failed
sale of the PVC Pipe segment in 1999, which resulted in a net gain of $1.6
million in 2001.
The Company is also a party to various other claims and matters of litigation
incidental to the normal course of its business. Management believes that the
final resolution of these matters will not have a material adverse effect on the
Company's financial position, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
EXECUTIVE OFFICERS OF THE REGISTRANT
JOHN B. SCHULZE DONALD A. GUTIERREZ
Chairman, President and Chief Executive Officer Senior Vice President
Executive Officer since January 1988. Age 66. Executive Officer since February 26, 1998. Senior Vice
President since February 21, 2001. Vice President, Carlon
since March 1998. Age 46.
JAMES J. ABEL
Executive Vice President, Secretary, Treasurer and Chief
Financial Officer CHARLES W. HENNON
Vice President
Executive Officer since December 1990. Age 57.
Executive Officer since February 25, 1999. Vice President
and Chief Information Officer since April 1998. Manager,
Business Support Services with Ferro
NORMAN E. AMOS Corporation, 1993 - April 1998. Age 58.
Vice President
Executive Officer since February 21, 2001. Vice President
Supply Chain Management since August 1, 2000. Manager, LORI L. SPENCER
Transportation and Logistics with Xerox Corporation July 1995 - Vice President
July 2000. Age 58.
Executive Officer since February 27, 1997. Vice
President and Controller since August 1997. Age 44.
ALBERT J. CATANI, II
Vice President
NORMAN P. SUTTERER
Executive Officer since February 27, 1997. Vice President, Senior Vice President
Manufacturing since August 1995. Age 56.
Executive Officer since February 29, 1996. Senior Vice
President since February 18, 2003. Vice President, Lamson
EILEEN E. CLANCY Home Products since March 1998. Age 54.
Vice President
Executive Officer since January 2, 2002. Vice President,
Human Resources since January 2, 2002. Director of Human
Resource Development, December 1995 - December 2001. Age 53.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SECURITY HOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is traded on the New York Stock Exchange and the
Pacific Stock Exchange. High and low close prices for the Common Stock are
included in Note N to the Consolidated Financial Statements. No dividends were
paid in 2003, 2002 or 2001. The approximate number of shareholders of record of
the Company's Common Stock at January 3, 2004 was 1,290.
7
ITEM 6. - SELECTED FINANCIAL DATA
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY
FISCAL YEARS ENDED
-------------------------------------------------------------
(Dollars in thousands except per share data, shareholders,
associates and percentages) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
NET SALES $ 343,835 $ 314,475 $ 352,672 $ 348,733 $ 291,381
Cost of products sold 286,300 252,499 291,272 260,114 229,981
--------- --------- --------- --------- ---------
GROSS PROFIT 57,535 61,976 61,400 88,619 61,400
Operating expenses (1) 42,877 43,467 52,962 54,132 48,054
Net gain - - (4,550) - -
Restructuring and impairment charge - - 6,805 - -
--------- --------- --------- --------- ---------
OPERATING INCOME 14,658 18,509 6,183 34,487 13,346
Interest expense, net 8,527 9,583 11,626 4,539 3,558
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 6,131 8,926 (5,443) 29,948 9,788
Income tax provision (benefit) 2,391 3,900 (1,600) 8,500 (9,000)
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,740 5,026 (3,843) 21,448 18,788
Net loss from discontinued operations (2,738) - - - -
Net cumulative effect of change in accounting principle - (46,250) - - -
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 1,002 $ (41,224) $ (3,843) $ 21,448 $ 18,788
========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current Assets $ 81,377 $ 84,764 $ 94,085 $ 134,906 $ 94,704
Property, Plant and Equipment 51,326 51,749 57,871 65,297 48,093
Total Assets 208,313 213,705 273,821 320,293 183,319
Current Liabilities 57,026 64,112 62,890 76,656 56,223
Long-Term Debt 82,990 84,350 104,266 130,276 36,919
Other Long-Term Liabilities 29,782 29,067 25,441 27,332 26,808
Shareholders' Equity 38,515 36,176 81,224 86,029 63,369
Working Capital 24,351 20,652 31,195 58,250 38,481
Capital Expenditures 8,562 3,952 7,980 11,085 7,563
- -----------------------------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION:
Average number of dilutive common shares outstanding 13,894 13,778 13,757 13,989 13,482
Number of shareholders of record 1,290 1,305 1,336 1,377 1,558
Number of associates 1,122 1,116 1,115 1,345 963
Book value per share $ 2.77 $ 2.63 $ 5.90 $ 6.15 $ 4.70
Market price per share $ 5.50 $ 3.40 $ 5.24 $ 10.50 $ 4.88
Market capitalization $ 75,829 $ 46,844 $ 72,195 $ 143,819 $ 65,584
Gross margin as a % of net sales 16.7% 19.7% 17.4% 25.4% 21.1%
Operating expenses as a % of net sales 12.5% 13.8% 15.0% 15.5% 16.5%
Operating margin as a % of net sales 4.3% 5.9% 1.8% 9.9% 4.6%
-------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities $ 9,711 $ 26,520 $ 30,076 $ 27,521 $ 12,198
Interest expense 8,527 9,583 11,626 4,539 3,558
Increase (decrease) in operating assets and liabilities 7,214 (5,921) (17,500) 13,656 7,726
--------- --------- --------- --------- ---------
EBITDA (earnings before interest, taxes, depreciation
and amortization)(2) $ 25,452 $ 30,182 $ 24,202 $ 45,716 $ 23,482
Less: Depreciation and amortization 10,794 11,673 18,019 11,229 10,136
--------- --------- --------- --------- ---------
Operating income $ 14,658 $ 18,509 $ 6,183 $ 34,487 $ 13,346
========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings (Loss) from continuing operations before change in
accounting principle $ 0.27 $ 0.36 $ (0.28) $ 1.58 $ 1.40
(Loss) from discontinued operations, net of tax $ (0.20) - - - -
Cumulative effect of change in accounting principle, net of tax $ - (3.36) - - -
NET EARNINGS (LOSS) $ (0.20) $ (2.99) $ (0.28) $ 1.58 $ 1.40
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (Loss) from continuing operations
before change in accounting principle $ 0.27 $ 0.36 $ (0.28) $ 1.53 $ 1.39
(Loss) from discontinued operations, net of tax $ (0.20) - - - -
Cumulative effect of change in accounting principle, net of tax $ - (3.36) - - -
NET EARNINGS (LOSS) $ 0.07 $ (2.99) $ (0.28) $ 1.53 $ 1.39
(1) In 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which eliminated the amortization of goodwill. Operating expenses
in 2001, 2000 and 1999 include $4,605, $971 and $313 in goodwill
amortization, respectively.
(2) EBITDA is a calculation used by management to measure liquidity and is
defined as operating income plus depreciation and amortization. EBITDA is
not a recognized term under accounting principles generally accepted in the
United States and does not purport to be an alternative to operating income
or to cash flows from operating activities as a measure of liquidity.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Financial Statements and
footnotes.
EXECUTIVE OVERVIEW
The year 2003 was a year of mixed results. Several of the economic trends that
underlie the Company's prospects remained very strong including residential
construction, sales of existing homes and rising consumer confidence. In
addition, the low interest rate environment led to the highest home ownership
rate in history. Although telecom construction appears to have bottomed out
during 2003, commercial and industrial construction activity continued to
decrease as recessionary conditions continued to affect many businesses which
have not begun to add space due to low utilization rates.
Raw material costs are another area focused on by management. The cost of PVC
and HDPE resins, the primary raw material of the Company's products, have
increased strongly through the year up over 20.0% at their peak, before falling
slightly during the fourth quarter of 2003. There has been little, if any,
additional supply of these materials. The costs of feedstocks to produce these
resins have also remained at historically high price levels, especially the cost
of natural gas, ethylene and electricity. The resin producers have successfully
passed on most of these higher costs in the current year as they have been
running at capacity utilization of close to 90.0%. Only limited reductions in
resin costs were experienced in the fourth quarter, when seasonal adjustments
typically take place. The Company was able to achieve some higher pricing, an
average of 8.0% increase in the PVC Pipe business segment, but, due to continued
weakness in some of the Company's end markets, the material spread, the
difference between the price and cost of a pound of resin, narrowed and the
business incurred operating losses. One of the Company's key initiatives in 2003
was aimed at limiting its exposure to the volatility of PVC resin costs. The
Company added east and west coast blend operations, eliminating much of the
work-in-process inventory and simplifying the supply chain. The goal is to keep
no more than one month's supply of PVC products on hand lowering the risk of
cost volatility.
The Company's performance was also impacted this year by significantly higher
employee and retiree benefit costs. As a result of the significant deterioration
in the stock market valuation during 2002, the defined benefit pension plan
assets were reduced which caused an increase in the reported pension expense of
$2.4 million; from $0.7 million in 2002 to $3.1 million in 2003. Healthcare
costs also climbed as expense for current employees was up $1.0 million compared
with 2002 and historical retiree medical expenses rose about $0.9 million. The
Company has put cost containment changes into its healthcare plans for
employees; however, there are limited options for additional changes to retiree
plans. The primary driver for the retiree medical expense increase is the
proportionately higher rates of prescription drug use and their rapidly rising
costs.
Also, the Company is contingently liable for certain post-retirement medical and
life insurance benefits of YSD Industries Inc. ("YSD"), a business which the
Company sold in 1988. Based on the deteriorating financial condition of YSD, the
Company concluded that it is unlikely that this business will be able to
continue funding these benefits. Therefore, the Company has recorded a charge
for $2.7 million (net of $1.8 million in income tax) in discontinued operations
which reflects the actuarial computed liability through February 2011 when the
Company's obligation will end.
9
2003 COMPARED WITH 2002
Results of Continuing Operations
The following table sets forth for the periods indicated items from the
Consolidated Statements of Operations as percentage of net sales for years
ended:
-----------------
2003 2002
-----------------
Net sales 100.0% 100.0%
Cost of products sold 83.3 80.3
----- -----
Gross profit 16.7 19.7
Operating expenses 12.4 13.8
----- -----
Operating income 4.3 5.9
Interest expense 2.5 3.1
----- -----
Income from continuing operations before income
taxes and cumulative effect of change in
accounting principle 1.8 2.8
Income tax provision 0.7 1.2
----- -----
Income from continuing operations before
cumulative effect of change in accounting principle 1.1 % 1.6 %
===== =====
Net sales for 2003 were $343.8 million, or 9.3% higher than the $314.5 million
net sales reported in 2002. Each of the business segments increased their net
sales primarily through price increases, introduction of product line expansions
or the expansion of market share. Much of the Company's underlying markets,
especially commercial, industrial and telecom construction, trended lower this
year compared with 2002.
Operationally, the Company continues to focus on a key strategic objective of
on-time, in-full, error-free delivery of products and services to our customers.
This objective is tracked daily to limit the amount of backorders and time to
ship. There has been continuous improvement in the Company's operational
performance allowing it to obtain opportunities for market share expansion,
especially with its electrical distributors and retail customers.
Gross profit in 2003 was $57.5 million compared with the $62.0 million gross
profit in 2002. Gross margins were unfavorably impacted by higher raw material
costs that were not able to be completely recovered with price increases and
higher employee benefit costs as previously discussed. The manufacturing
facilities experienced higher capacity utilization this year going from 61.0% in
2002 to 68.0% in 2003. The increase was primarily in the PVC and HDPE pipe
extrusion facilities as the molding facilities have continuously run at
consistently higher rates the last several years. The overall cost of the
Company's supply chain, including distribution and freight costs, were higher in
the current year by only 4.0%, while the increased shipping activity rose in
excess of 10%. This was caused by the distribution operation successfully
focusing on improving bin accuracy, therefore, raising their productivity
throughout the year. Meanwhile, freight costs are trending upward slightly due
to the rising fuel costs and carrier consolidations. The Company monitors key
transportation metrics to attempt to control freight costs while still serving
the customers.
Operating expenses were lower in 2003 by $0.6 million to $42.9 million from
$43.5 million in 2002. Variable selling and marketing costs tracked upward with
the increased sales levels adding approximately $1.7 million in costs in 2003.
These higher costs were offset primarily by favorable bad debt experience ($1.0
million) this year and a significant decline in incentive compensation awards
($2.2 million) as operating goals were, for the most part, not met. As a result,
operating income for 2003 was $14.7 million (4.3% of net sales) compared with
$18.5 million (5.9% of net sales) in 2002.
10
Net interest expense of $8.5 million in 2003 decreased by $1.1 million compared
with 2002. The decline was primarily due to lower average interest rates of
6.21% in 2003 compared with 6.86% in 2002, while the average outstanding debt
was $102.5 million in 2003 compared with $110.0 million in 2002.
The income tax provision for 2003 reflects an effective tax rate of 39.0%.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) was $25.5 million for 2003 and $30.2 million for 2002.
The components of this calculation are as follows:
(Dollars in thousands)
2003 2002
-------------- ---------------
Operating income $ 14,658 $ 18,509
Depreciation 9,195 10,074
Amortization 1,599 1,599
-------------- ---------------
EBITDA $ 25,452 $ 30,182
============== ===============
EBITDA is a calculation used by management to measure liquidity. EBITDA is not a
recognized term under accounting principles generally accepted in the United
States and does not purport to be an alternative to operating income or cash
flows from operating activities as a measure of liquidity.
The following is a reconciliation of cash provided by operating activities to
EBITDA:
(Dollars in thousands)
2003 2002
-------------- ---------------
Cash provided by operating activities $ 9,711 $ 26,520
Interest expense 8,527 9,583
Increase (Decrease) in operating
assets and liabilities 7,214 (5,921)
-------- --------
EBITDA (earnings before interest, taxes,
depreciation and amortization) (2) $ 25,452 $ 30,182
======== ========
BUSINESS SEGMENTS
Carlon
Net sales in the Company's largest business segment increased by $5.1 million (a
3.4% increase) to $154.1 million in 2003 from $149.0 million in 2002. The entire
increase came from higher sales of electrical products as the telecom product
sales remained relatively flat. In 2003 Carlon introduced a Key Account
Management Program. Its objectives are to focus selling and marketing, along
with other support services, and growth opportunities on strategic accounts that
have higher long-term growth potential. This effort, along with selective
product line expansions, supported the net sales growth in 2003. Other than
residential construction, which continued its double digit growth, the markets
serviced by Carlon including commercial, industrial and telecom construction
continued their contraction in 2003 as businesses put off new investments.
Gross margins were adversely affected in this business segment as raw material
cost increases, primarily PVC and HDPE resins, were not able to be fully passed
on as higher selling prices. This business segment is impacted by capacity
utilization primarily in the molding and HDPE extrusion facilities. The molding
facilities continued to experience good utilization, exceeding an average of
90.0% for 2003. The HDPE extrusion facilities, while recording better
utilization in 2003, still are using less than 50.0% of their available
capacity. The Company continues to look for alternative markets, such as gas
collection pipe, to help improve utilization rates in these plants and is
considering additional rationalization of capacity.
The operating income for this business segment fell in 2003 to $11.8 million
from $14.4 million in 2002, a decline of $2.6 million, or 18.1%. Actual
operating expenses were lower than the prior year as the business segment
implemented cost containment programs during the year. The entire decline in
margins came from higher cost of sales as described above.
Lamson Home Products
This business segment, which serves primarily the "do-it-yourself" home
improvement market, was favorably impacted by continued strong existing home
sales, low interest rates and rising consumer confidence. In addition, the
various supply chain initiatives undertaken over the last several years,
including leveraging the Company's enterprise resource planning system, have
resulted in fill rates (the number of order line items filled with the first
shipment) that average above 98.0% for the entire year. This operational
performance, along with continuous innovation on new products and product line
expansions, has resulted in this business segment gaining additional market
share with various customers. In particular, Lamson Home Products was named sole
source for all of Home Depot's non-metallic electrical box business in mid-2003.
The rollout of this additional business was substantially complete at the 2003
year-end. In summary, for 2003, this business segment increased its net sales to
$84.9 million, a $13.4 million, or 18.7% increase, over the $71.5 million in net
sales in 2002.
Lamson Home Products, like Carlon, was unable to pass on the higher raw material
costs realized this year. However, through the evolution of sales mix to higher
margin products, the continued favorable utilization of the molding facilities
that support this business segment and the spreading of relatively fixed
distribution expenses over higher volume, Lamson Home Products was able to
maintain gross margins at approximately the same rate as the prior year.
Operating expenses for Lamson Home Products rose about 11.0% over 2002 primarily
as a result of higher variable selling expenses with the increased net sales
levels. Overall, the business segment realized $13.8 million in operating income
in 2003, an increase of $3.4 million, or 33.3% over the 2002 operating income of
$10.3 million.
PVC Pipe
The year 2003 was another difficult one for the PVC Pipe business segment, as
the commercial, industrial and telecom construction markets, as previously
discussed, continued their downward trend. The majority of the Company's pipe
pounds are sold into these markets while the strong residential construction
market consumes smaller pipe sizes and thus, a lower percentage of volume. Total
PVC resin pounds sold in 2003 was down approximately 1.0% from 2002 while
pricing was up an average of 8.4% over the prior year. Overall, the PVC Pipe
business increased net sales in 2003 to $104.9 million from $94.0 million, a
rise
11
of $10.9 million, or 11.6%. As part of the PVC Pipe business, Lamson Vylon Pipe,
a unit that markets large diameter sewer pipe, was able to produce additional
sales this year by introducing small diameter sizes of sewer pipe.
Gross margins in the business segment eroded in 2003 as resin costs averaged
25.0% higher than the prior year while only about a third of this cost increase
(8.4%) was able to be passed on to customers. On a positive note, the PVC Pipe
extrusion facilities increased their capacity utilization by almost 5 basis
points due to the reduction of PVC inventory during 2002.
Operating expenses for the PVC Pipe business segment remained fairly consistent
with the prior year while the operating loss for 2003 totaled $5.1 million
versus a $0.8 million loss in 2002.
Liquidity and Capital Resources
The Company's primary source of liquidity and capital resources is cash
generated from operating activities and availability under its credit facility.
Cash provided by operating activities in 2003 was $9.7 million compared with
$26.5 million in 2002 and $30.1 million in 2001. Cash generated from earnings
was down this year by approximately $4.5 million from 2002. Cash generated by
working capital was lower by approximately $21.0 million this year. The higher
sales levels did generate higher customer cash receipts as there was only an
increase of $1.5 million in accounts receivable to a balance of $38.2 million at
January 3, 2004. Days sales outstanding also improved at 2003 year-end to 49.8
days from 52.7 and 56.9 days at 2002 and 2001 year-end, respectively.
In the prior year, the Company aggressively drove inventories down by
approximately $10.0 million as sales activity declined due to weak market
conditions. Inventories in 2003 decreased further by approximately $2.0 million
despite the higher sales levels, and inventory turns improved to 7.4 times from
6.5 times in 2002. Both raw material and work-in-process inventories have
declined due to key initiatives of increasing consigned inventory and the
improved blend plant logistics. The Company invested more in finished goods
inventory to support sales order fill rates for market share gains realized in
the second half of 2003. In addition, the year-end average cost of key raw
materials, primarily PVC and HDPE resins, have risen by over 12.0% compared with
year-end 2002.
The Company's operating cash flow was lower than anticipated due to a timing
difference between fiscal year periods. Due to the year-end cut-off of January
3, 2004, several cash payments were made at the end of fiscal year 2003, which
were not paid in the fiscal year ending December 28, 2002. These include items
such as resin vendor and lease payments, which are due at calendar months-end.
The year-end interest payments of $1.8 million also effectively lowered other
accrued expenses. During the first quarter of 2003 approximately $2.8 million in
bonuses were paid that were earned in 2002 while very minimal levels of payments
for incentive compensation were made in 2002.
Due to improved pension asset returns in 2003, no additional voluntary
contributions were made in 2003 compared with the discretionary $6.0 million
voluntary contribution made in the prior year.
Cash invested in capital expenditures more than doubled this year to $8.6
million compared with $4.0 million in 2002. Approximately $3.5 million was spent
improving the supply chain by adding blend facilities at two extrusion
facilities, which eliminated over $2.0 million in work-in-process inventory,
reduced interplant freight charges and improved customer service. The remaining
capital expenditures were primarily spent to enhance factory automation, tooling
for product line expansions and the replacement and upgrading of various molds
and other equipment.
The Company continues to have adequate credit capacity; however, availability
has declined to around $9.0 million at the 2003 year-end in line with the
seasonal needs of the business. The Company was able to lower its leverage
ratio, which will, in turn, be reflected as a 50 basis point decline in the
secured bank facility interest rate beginning in the first quarter of 2004.
The Company continues to operate under a Business Plan (the "Plan") accepted by
the New York Stock Exchange Inc. ("NYSE") in December 2002. The Company
submitted its Plan to the NYSE in October 2002 in order to comply with the
listing requirements of the NYSE. This effort followed a formal notice from the
NYSE that the Company was, at the time of the notice, below the NYSE's continued
listing criteria of a total market capitalization of not less than $50.0 million
over a 30-day trading period and shareholder equity of not less than $50.0
million. The Company's plan has been reviewed quarterly by the NYSE to monitor
progress towards achieving the prescribed listing criteria levels. At the end of
2003, the Company's market capitalization was $75.8 million and its
shareholders' equity was $38.5 million.
12
On January 30, 2004, the NYSE received approval from the Securities and Exchange
Commission ("SEC") to amend its new and continued listing criteria. While the
SEC approved a six-month pilot program to allow time for comments on the
amendments, permanent approval is expected once the comment process is
completed. The transition rules provided for in the pilot program will allow the
Company to first complete its existing plan period and, secondly, then be
evaluated in relation to the new standards. The amended NYSE listing criteria
will provide that a listed company, such as the Company, will be below continued
listing compliance standards if either (1) its average global market
capitalization over a 30 trading-day period is below $75.0 million and, at the
same time, its shareholder equity is less than $75.0 million; (2) its average
market capitalization is less than $25.0 million over a 30 trading-day period,
or (3) the average closing price of a security is less than $1.00 over a 30
trading-day period. The Company is currently in compliance with these enhanced
listing requirements of the NYSE and while there is no guarantee of prospective
market valuations, the Company is confident that it will remain so during the
remainder of its Plan period which expires in April 2004. The Company's global
market capitalization on February 18, 2004 is $77.2 million.
OUTLOOK FOR 2004
Housing starts reached levels in 2003 of approximately 2.0 million units, which
is the highest activity level in nearly 20 years. This growth, along with strong
existing home sales, was fueled by continued low interest rates. It is
anticipated that interest rates will remain relatively stable at this level
until at least mid-year 2004 when modest increases are expected. Therefore,
management believes residential construction, although decreasing from near
record levels, will still remain in the 1.7 to 1.8 million unit range in 2004.
In addition, it is estimated that the median age of homes is over 30 years,
which is fueling increased rehabilitation and remodeling expenditures.
Conversely, commercial, industrial and telecom construction activity is thought
to have hit their low points during 2003. Given the current excess space and
infrastructure capacity that remains underutilized, management does not
anticipate an increase in commercial and industrial construction until the
second half of 2004 after the economic recovery is more stable and sustained,
particularly in the manufacturing sector. Telecom projects are expected to be
about the same as 2003, as companies are still acquiring already existing
network assets rather than building new ones and new technology applications,
such as fiber to the home, are progressing slowly and awaiting more signs of
consumer acceptance and enhanced paybacks. The one possibility of growth in
telecom sales for Carlon comes from market share gains with existing customers
through its Key Account Management program and the emergence of Carlon as one of
the stronger national suppliers remaining for the major telecom customers
(telephone and cable TV companies).
PVC and HDPE resin costs are beginning 2004 at higher levels than in early 2003
and are expected to increase further through the second quarter, before leveling
off, fueled by high natural gas, feedstock costs and industry capacity
restraints. The weaker dollar and increased economic activity globally have
caused the export of resin to become more attractive and support continued
higher costs domestically. The Company has announced price increases in its
Carlon business segment and expects the PVC Pipe segment to also have higher
selling prices in order to recoup these higher costs.
During 2003, the Company has implemented cost savings and containment measures
that should benefit 2004 results. Improvements made in the supply chain, namely
the investment in blend facilities at two extrusion facilities, the increased
use of automation and improvements made to tooling and molds will allow the
Company to be more efficient and lower product costs. Structural changes were
made to existing medical plans with the goal of limiting this benefit cost
growth in 2004. Finally, management continues to review opportunities for
capacity rationalization in its extrusion operations in order to lower its
investment and improve profitability.
Cash flow from operating activities in 2004 is expected to improve from 2003 as
operating results become more profitable and through the absence of the doubling
up of various trade and accrual payments made in 2003. Capital expenditures
should be $7.0 million to $9.0 million as the Company plans to invest in
projects to improve productivity, quality and the rollout of new products.
The Company's secured credit agreement is scheduled to expire in August 2005. It
is management's intent to replace this facility prior to August 2004 with other
long-term debt. During 2003 the financial covenants were adjusted to reflect the
current estimated operating levels. Based on the expected results for 2004,
management does not anticipate any covenant issues for the remaining term of the
agreement.
In summary, we estimate that net sales in 2004 will increase 6.0% to 8.0%,
coming primarily from higher pricing expected in the PVC Pipe business segment
and the rationalization of market share gains made by Lamson Home Products in
the latter part of 2003. Given consideration of the higher cost of raw materials
and offsetting savings from the implementation of operational improvement
initiatives, we believe that earnings per diluted share for continuing
operations in 2004 should increase 25.0% to 30.0% over 2003 results, excluding
the discontinued operations charge, to .34 to .38 cents per diluted share.
13
CRITICAL ACCOUNTING ESTIMATES
Inherent in the Company's results of operations are certain estimates,
assumptions and judgments including reserves against accounts receivable for
doubtful collections, inventory costing and valuation allowances and an assumed
rate of return on invested pension assets. The Company maintains allowances
against accounts receivable and inventory obsolescence and valuation reserves
that are reasonable and that are based on the Company's historical experience
and current expectations for future performance of operations.
ACCOUNTS RECEIVABLE ALLOWANCES
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. A sudden and prolonged deterioration in the
economy could adversely affect the Company's customers (especially related to
the telecom or retail market) requiring the Company to increase these
allowances.
INVENTORY VALUATION
A sudden or unexpected decline in PVC resin costs, coupled with a slow-down in
sales volume, could result in write downs of inventory valuations. If such
adverse conditions would occur, the Company cannot readily predict the effect on
its financial condition or results of operations as any such effect depends on
both future results of operations and the magnitude and timing of the adverse
conditions.
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The measurement of liabilities related to pension plans and other
post-retirement benefits is impacted by management's assumptions related to
interest rates, return on plan assets, rate of compensation increases and
healthcare trend rates. Actual pension plan asset performance will either
increase or decrease the unamortized actuarial gains or losses, which affects
future pension expense. Likewise, variations between actual and estimated
healthcare trend rates will affect retiree medical expense in the future. See
Note D to the Consolidated Financial Statements. For 2004, certain key
assumptions have been adjusted, including the lowering of both the assumed
return on plan assets from 9.0% to 8.50% and the discount rate from 6.8% to
6.25%.
ENVIRONMENTAL AND LEGAL OBLIGATIONS
Management also makes judgments and estimates in recording liabilities for
environmental cleanup and litigation. Liabilities for environmental remediation
are subject to change because of matters such as changes in laws, regulations
and their interpretation; the determination of additional information on the
extent and nature of site contamination; and improvements in technology.
Likewise, actual litigation costs can vary from estimates based on the facts and
circumstance and application of laws in individual cases.
DEFERRED TAX ASSETS
As of January 3, 2004, the Company had approximately $25.6 million of net
deferred tax assets including loss carryforwards that expire through 2022 and
other temporary differences. The realization of these net assets is based
primarily upon estimates of future taxable income. Current expectations of
operating results are sufficient to sustain realization of these net assets.
However, should taxable income estimates for the carryforward period be
significantly reduced, the full realization of net deferred tax assets may not
occur.
GOODWILL VALUATION
As disclosed in the Company's consolidated financial statements, the Company has
goodwill of $21.5 million, the majority of which relates to the telecom
reporting unit in the Carlon business segment. An annual impairment test of
goodwill is performed by an independent third party as of the first day of the
fourth quarter (or as conditions warrant). The test as of October 5, 2003
resulted in no additional impairment being identified. However, the process of
evaluating goodwill for impairment involves the determination of the fair value
of the telecom reporting unit. Inherent in such fair value determinations are
certain judgments and estimates, including the interpretation of economic
indicators and market valuations and assumptions about our strategic plans. To
the extent that our strategic plans change, or that economic and market
conditions worsen, it is possible that our conclusion regarding goodwill
impairment could change and result in a material effect on our financial
position or results of operations.
STOCK OPTION ACCOUNTING
As allowed by SFAS No. 123 and No. 148, the Company has adopted the disclosure -
only provisions of the Standard and does not recognize expense for stock options
granted to employees. See Note A to the Consolidated Financial Statements for
the impact on earnings if the Company was required to reflect this expense in
operating results.
14
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities known as "special purpose entities"
(SPEs). In the ordinary course of business, the Company leases certain real
properties and equipment as disclosed in Note C to the Consolidated Financial
Statements.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of
January 3, 2004:
(Dollars in thousands) PAYMENT DUE BY PERIOD
------------------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
-------- --------- -------- -------- ---------
CONTRACTUAL OBLIGATIONS:
Long-Term Debt Obligations $ 94,750 $ 11,760 $ 72,031 $ 1,359 $ 9,600
Capital Lease Obligations - - - - -
Operating Lease Obligations 20,839 4,745 7,849 4,104 4,141
Purchase Obligations - - - - -
Other Long-Term Liabilities - - - - -
-------- -------- -------- -------- --------
Total $115,589 $ 16,505 $ 79,880 $ 5,463 $ 13,741
======== ======== ======== ======== ========
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain expectations that are forward-looking statements that involve
risks and uncertainties within the meaning of the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those expected as
a result of a variety of factors, such as: (i) the volatility of resin pricing,
(ii) the ability of the Company to pass through raw material cost increases to
its customers, (iii) maintaining a stable level of housing starts,
telecommunications infrastructure spending, consumer confidence and general
construction trends, (iv) the continued availability and reasonable terms of
bank financing and (v) any adverse change in the recovery trend of the
country's general economic condition affecting the markets for the Company's
products. Because forward-looking statements are based on a number of beliefs,
estimates and assumptions by management that could ultimately prove to be
inaccurate, there is no assurance that any forward-looking statement will prove
to be accurate.
2002 COMPARED WITH 2001
Results of Continuing Operations
Net sales declined in 2002 by $38.2 million or 10.8% compared with 2001. The
greatest reduction was experienced in the Carlon business segment, as net sales
were $39.1 million or 20.8% lower in 2002 compared with 2001. Almost the entire
shortfall was due to the significant decline of over 30.0% in telecommunications
infrastructure related sales. The electrical product sales in this segment
declined only nominally in 2002 from 2001, as strong residential and utility
markets offset declines in commercial and industrial construction. Favorable
existing home sales activity, driven by low interest rates, the introduction of
innovative new products and the expansion of market share with its largest
customers all led to the $9.4 million increase in net sales in the Lamson Home
Products business segment. This represents a 15.1% improvement over the $62.1
million in net sales in 2001. Overall, net sales for the PVC Pipe business
segment fell by $8.4 million or 8.2% to $94.0 million in 2002 compared with
$102.4 million in 2001. Pipe volume shipped in 2002 was 7.7% lower than 2001
while average pricing for the current year was approximately the same as the
prior year. The volume decline primarily reflects the soft market conditions for
both telecommunications and commercial construction projects.
Gross margin in 2002 was 19.7%, an increase of 13.0% over the 17.4% realized in
2001. The largest improvement was generated in the PVC Pipe business as selling
prices stayed fairly level with the prior year, while operating costs and net
material costs per pound declined slightly. The overall manufacturing
utilization rates in 2002 were at 61.0% compared with 73.0% experienced in 2001
and was almost entirely offset by cost savings from the restructuring efforts at
the end of 2001 and disciplined cost controls employed throughout the year.
Finally, the significant increase in Lamson Home Products sales in 2002 helped
the Company to leverage their largely fixed cost base, improving the segment's
gross margin. This helped to offset the lower margins in the Carlon business
segment, which resulted from the continued downturn in telecom related products.
15
Operating expenses were reduced to $43.5 million, or 13.8% of sales, in 2002, a
$9.5 million, or 17.9%, decrease from the $53.0 million, or 15.0% of net sales,
incurred in 2001. Approximately half of the 2002 reduction in expenses is a
direct result of the elimination of goodwill amortization as required by SFAS
No. 142 (see Note B). The remainder of the decline is a combination of cost
savings from the full year effect of reductions in the salary workforce
implemented in the fourth quarter of 2001, lower variable selling expenses from
the reduced sales levels and tight control over discretionary spending primarily
involving marketing programs and travel-related expenditures. These savings were
partially offset by increased employee benefit costs including pensions, medical
programs, incentive compensation plans, professional fees and higher bad debt
expense driven by telecom market bankruptcy activity. Operating income for 2002
was $18.5 million, or 5.9% of net sales, compared with $6.2 million, or 1.8%, of
net sales in 2001. This improvement of almost 200% is a result of the operating
expense net reduction in the current year as described above.
Interest expense has declined by over $2.0 million in 2002 compared with 2001 as
the Company paid down over $20.0 million in debt during the year, with
outstanding debt averaging $110 million in 2002 versus $139 million in 2001. The
Company had an average borrowing rate during 2002 of 6.46% compared with 6.81%
in 2001.
During the second quarter of 2002, the Company completed the transitional review
for goodwill impairments required under SFAS No. 142 "Goodwill and Other
Intangible Assets." The review indicated that goodwill recorded in the telecom
reporting unit of the Carlon business segment was impaired as of the beginning
of fiscal 2002. Accordingly, the Company measured and recognized a transitional
goodwill impairment loss of $60.0 million ($46.3 million after tax). This has
been recorded as a cumulative effect of a change in accounting principle in the
statement of operations (see Note B).
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and commodity prices for PVC and HDPE
resins. The Company does not use derivative financial instruments for
speculative or trading purposes.
Almost all of the Company's long-term debt obligations bear interest at a
variable rate. In order to mitigate the risk associated with interest rate
fluctuations, in the first quarter of 2001, the Company entered into two
interest rate swap agreements for a total notional amount of $58.5 million,
$29.5 million outstanding at January 3, 2004, and effectively fixed the variable
rate debt at 5.41% and 5.48% plus the Company's risk premium of 1.5% to 5.0%.
The average rate at January 3, 2004 is 9.94%. The notional amount is used to
calculate the contractual cash flow to be exchanged and does not represent
exposure to credit loss.
These risks and others that are detailed in this Form 10-K must be considered by
any investor or potential investor in the Company.
16
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS:
Report of Independent Auditors................................................................................. 18
Statement of Management's Responsibility....................................................................... 19
Consolidated Statements of Operations for Fiscal Years Ended 2003, 2002, 2001.................................. 20
Consolidated Statements of Cash Flows for Fiscal Years Ended 2003, 2002, 2001.................................. 21
Consolidated Balance Sheets at January 3, 2004 and December 28, 2002........................................... 22
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended 2003, 2002, 2001........................ 24
Notes to Consolidated Financial Statements..................................................................... 25
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts and Reserves................................................... 42
17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Lamson & Sessions Co.
We have audited the accompanying consolidated balance sheets of The Lamson &
Sessions Co. and Subsidiaries as of January 3, 2004 and December 28, 2002, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years in the period ended January 3, 2004.
Our audits also included the financial statement schedule listed in the Index at
Item 15 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Lamson & Sessions Co. and Subsidiaries at January 3, 2004 and December 28, 2002,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended January 3, 2004, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note B to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 13, 2004
18
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
We have prepared the financial statements and other financial information
contained in this Annual Report.
The management of Lamson & Sessions is responsible for the integrity of this
financial information. The financial statements were prepared in accordance with
accounting principles generally accepted in the United States and necessarily
include certain amounts based on management's reasonable best estimates and
judgments, giving due consideration to materiality. Financial information
contained elsewhere in this Annual Report is consistent with that contained in
the financial statements.
Management is responsible for establishing and maintaining a system of internal
control designed to provide reasonable assurance as to the integrity and
reliability of financial reporting. The concept of reasonable assurance is based
on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits to be derived therefrom.
To meet management's responsibility for financial reporting, we have established
internal control systems that we believe are adequate to provide reasonable
assurance that our assets are protected from loss. These systems produce data
used for the preparation of published financial information and provide for
appropriate reporting relationships and division of responsibility. All
significant systems and controls are reviewed periodically by management and the
internal audit function in order to ensure compliance and by our independent
auditors to support their audit work. It is management's policy to implement
recommendations resulting from this review.
The Audit Committee of the Board of Directors, composed solely of independent
directors, meets regularly with management, the internal audit group and our
independent auditors to review accounting, auditing and financial matters. The
independent auditors and the internal audit group have free access to the Audit
Committee, with or without management, to discuss the scope and results of their
audits and the adequacy of the system of internal controls.
/s/ John B. Schulze
- -------------------------------------
John B. Schulze
Chairman of the Board, President and
Chief Executive Officer
/s/ James J. Abel
- -------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
/s/ Lori L. Spencer
- -------------------------------------
Lori L. Spencer
Vice President and Controller
19
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS
---------------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001
---------------------------------------------
NET SALES $ 343,835 $ 314,475 $ 352,672
Cost of products sold 286,300 252,499 291,272
--------- --------- ---------
GROSS PROFIT 57,535 61,976 61,400
Operating expenses 42,877 43,467 52,962
Net gain - - (4,550)
Restructuring and impairment charge - - 6,805
--------- --------- ---------
OPERATING INCOME 14,658 18,509 6,183
Interest expense, net 8,527 9,583 11,626
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 6,131 8,926 (5,443)
Income tax provision (benefit) 2,391 3,900 (1,600)
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,740 5,026 (3,843)
Loss from discontinued operations, net of income tax
benefit of $1,750 (Note G) $ (2,738) $ - $ -
--------- --------- ---------
Income (loss) before cumulative effect of change in accounting principle 1,002 5,026 (3,843)
Cumulative effect of change in accounting
principle, net of income tax benefit of $13,750 - (46,250) -
--------- --------- ---------
NET INCOME (LOSS) $ 1,002 $ (41,224) $ (3,843)
========= ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) from continuing operations before cumulative effect
of change in accounting principle $ 0.27 $ 0.36 $ (0.28)
Loss from discontinued operations, net of tax (0.20) - -
Cumulative effect of change in accounting
principle, net of tax - (3.36) -
--------- --------- ---------
NET EARNINGS (LOSS) $ 0.07 $ (2.99) $ (0.28)
========= ========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) from continuing operations before cumulative effect
of change in accounting principle $ 0.27 $ 0.36 $ (0.28)
Loss from discontinued operations, net of tax (0.20) - -
Cumulative effect of change in accounting
principle, net of tax - (3.36) -
--------- --------- ---------
NET EARNINGS (LOSS) $ 0.07 $ (2.99) $ (0.28)
========= ========= =========
See notes to consolidated financial statements.
20
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS
------------------------------------------
(Dollars in thousands) 2003 2002 2001
------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 1,002 $(41,224) $ (3,843)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Loss from discontinued operations 2,738 - -
Cumulative effect of change in accounting principle - 46,250 -
Depreciation 9,195 10,074 11,848
Amortization 1,599 1,599 6,171
Net gains - - (2,950)
Restructuring and impairment charge - - 7,672
Deferred income taxes 2,280 4,645 (1,934)
Net change in working capital accounts:
Accounts receivable (1,510) 2,518 14,581
Inventories 2,087 9,853 15,914
Prepaid expenses and other (689) 610 (909)
Accounts payable (4,281) (766) (6,534)
Accrued expenses and other current liabilities (2,041) 2,441 (3,768)
Pension plan contributions (1,126) (6,477) (310)
Other long-term items 457 (3,003) (5,862)
-------- -------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 9,711 26,520 30,076
INVESTING ACTIVITIES
Net additions to property, plant and equipment (8,562) (3,952) (7,980)
Proceeds from sale of business - - 1,411
Acquisitions and related items (813) (1,000) (2,987)
-------- -------- --------
CASH USED IN INVESTING ACTIVITIES (9,375) (4,952) (9,556)
FINANCING ACTIVITIES
Net payments under secured credit agreement (600) (23,000) (20,900)
Proceeds from refinancing - 4,250 -
Payments on other long-term borrowings (772) (1,487) (1,185)
Exercise of stock options 8 - 278
-------- -------- --------
CASH USED IN FINANCING ACTIVITIES (1,364) (20,237) (21,807)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,028) 1,331 (1,287)
Cash and cash equivalents at beginning of year 1,496 165 1,452
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 468 $ 1,496 $ 165
======== ======== ========
See notes to consolidated financial statements.
21
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 2004 and December 28, 2002
(Dollars in thousands) 2003 2002
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 468 $ 1,496
Accounts receivable, net of allowances of
$1,532 and $1,924, respectively 38,196 36,686
Inventories, net
Raw materials 2,560 3,349
Work-in-process 3,266 5,932
Finished goods 24,317 22,949
-------- --------
30,143 32,230
Deferred tax assets 7,996 9,979
Prepaid expenses and other 4,574 4,373
-------- --------
TOTAL CURRENT ASSETS 81,377 84,764
PROPERTY, PLANT AND EQUIPMENT
Land 3,537 3,537
Buildings 25,776 24,910
Machinery and equipment 121,887 116,595
-------- --------
151,200 145,042
Less allowances for depreciation and amortization 99,874 93,293
-------- --------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 51,326 51,749
GOODWILL 21,519 21,558
PENSION ASSETS 30,016 30,882
DEFERRED TAX ASSETS 17,612 16,879
OTHER ASSETS 6,463 7,873
-------- --------
TOTAL ASSETS $208,313 $213,705
======== ========
See notes to consolidated financial statements.
22
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 2004 and December 28, 2002
(Dollars in thousands, except per share data) 2003 2002
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,928 $ 21,209
Accrued compensation and benefits 10,633 11,660
Customer volume & promotional accrued expenses 6,024 4,593
Other accrued expenses 8,273 11,024
Taxes 3,408 3,854
Current maturities of long-term debt 11,760 11,772
--------- ---------
TOTAL CURRENT LIABILITIES 57,026 64,112
LONG-TERM DEBT 82,990 84,350
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 29,782 29,067
SHAREHOLDERS' EQUITY
Common shares, without par value, stated value of $0.10 per share,
authorized 20,000,000 shares; outstanding, 13,787,145 shares in 2003
and 13,777,608 shares in 2002 1,379 1,378
Other capital 75,534 75,499
Retained earnings (deficit) (33,829) (34,831)
Accumulated other comprehensive income (loss) (4,569) (5,870)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 38,515 36,176
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 208,313 $ 213,705
========= =========
See notes to consolidated financial statements.
23
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative Other
Comprehensive Income (Loss)
------------------------------------
Retained Interest Foreign Minimum Total
Common Other Earnings Rate Currency Pension Shareholders'
(Dollars in thousands) Shares Capital (Deficit) Swaps Translation Liability Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 2000 $ 1,369 $ 74,997 $ 10,236 $ - $ (530) $ (43) $ 86,029
Net loss - - (3,843) - - - (3,843)
Other comprehensive income (loss):
Foreign currency translation - - - - (61) - (61)
Minimum pension liability - - - - - (378) (378)
Interest rate swaps - - - (1,034) - - (1,034)
--------
Total comprehensive income (loss) - - - - - - (5,316)
Issuance of 80,331 shares
under employee benefit plans 9 502 - - - - 511
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 29, 2001 $ 1,378 $ 75,499 $ 6,393 $ (1,034) $ (591) $ (421) $ 81,224
Net loss - - (41,224) - - - (41,224)
Other comprehensive income (loss):
Foreign currency translation - - - - (23) - (23)
Minimum pension liability,
net of $2,100 tax - - - - - (3,285) (3,285)
Interest rate swaps - - - (516) - - (516)
--------
Total comprehensive income (loss) - - - - - - (45,048)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 2002 $ 1,378 $ 75,499 $(34,831) $ (1,550) $ (614) $ (3,706) $ 36,176
Net income - - 1,002 - - - 1,002
Other comprehensive income:
Foreign currency translation - - - - 173 - 173
Minimum pension liability,
net of $266 tax - - - - - 417 417
Interest rate swaps, net of $454 tax - - - 711 - - 711
--------
Total comprehensive income 2,303
Issuance of 9,537 shares - - - - - - -
under employee benefit plans 1 35 - - - - 36
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 3, 2004 $ 1,379 $ 75,534 $(33,829) $ (839) $ (441) $ (3,289) $ 38,515
================================================================================================================================
See notes to consolidated financial statements.
24
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three fiscal years ended January 3, 2004
NOTE A--ACCOUNTING POLICIES
Fiscal Year: The Company's fiscal year end is the Saturday closest to December
31.
Principles of Consolidation and Presentation: The consolidated financial
statements include the accounts of the Company and all domestic and foreign
subsidiaries after elimination of intercompany items. Certain 2002 and 2001
items have been reclassified to conform with the 2003 financial statement
presentation.
Use of Estimates: The preparation of 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 and accompanying notes. Actual results could differ
from those estimates.
Cash and Cash Equivalents: The Company considers all investments with an
original maturity of three months or less on their acquisition date to be cash
equivalents.
Inventories: Inventories are valued at the lower of first-in, first-out (FIFO)
cost or market.
Financial Instruments: The Company's carrying value of its financial instruments
approximates fair value. The Company recognizes all derivative financial
instruments as either assets or liabilities at fair value. Derivative
instruments that are not hedges must be adjusted to fair value through net
income. Changes in the fair value of derivative instruments that are classified
as fair value hedges are offset against changes in the fair value of the hedged
assets, liabilities, or firm commitments through net income. Changes in the fair
value of derivative instruments that are classified as cash flow hedges are
recognized in other comprehensive income until such time as the hedged items are
recognized in net income.
Property and Depreciation: Property, plant and equipment are recorded at cost.
For financial reporting purposes, depreciation and amortization are computed
principally by the straight-line method over the estimated useful lives of the
assets. Buildings are depreciated over periods up to 31.5 years. Machinery and
equipment is depreciated over periods ranging from 3 years to 15 years.
Accelerated methods of depreciation are used for federal income tax purposes.
Impairment of Long-Lived Assets: During 2002, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, the Company evaluates the
recoverability of long-lived assets and the related estimated remaining lives at
each balance sheet date. The Company would record an impairment charge or change
in useful life whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable, measured using undiscounted cash flows,
or the useful life has changed. During 2003, the Company adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." The
Statement is effective for disposal activities initiated after December 31,
2002. The adoption of this Standard did not have a material effect on the
Company's results of operations, financial condition or liquidity.
Goodwill: Goodwill represents the cost in excess of fair value of net assets
acquired in business combinations accounted for by the purchase method. Goodwill
is no longer amortized, but instead is tested for impairment at least annually
(see Note B).
Stock Compensation Plans: At January 3, 2004, the Company has three stock-based
employee compensation plans, which are described more fully in Note I. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. In accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
25
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
NOTE A--ACCOUNTING POLICIES--CONTINUED
FISCAL YEARS
-----------------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001
-----------------------------------------------
Net income (loss) As reported $ 1,002 $ (41,224) $ (3,843)
Total stock-based employee
compensation, net of tax (646) (761) (664)
---------- ---------- ----------
Net income (loss) Pro forma $ 356 $ (41,985) $ (4,507)
========== ========== ==========
Basic earnings (loss) per share As reported $ 0.07 $ (2.99) $ (0.28)
Pro forma 0.03 (3.05) (0.33)
Diluted earnings (loss) per share As reported $ 0.07 $ (2.99) $ (0.28)
Pro forma 0.03 (3.05) (0.33)
For pro forma calculations, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants:
2003 2002 2001
------------------------------------------------
Expected volatility 58.6% 56.8% 57.2%
Risk-free interest rates 2.98% 4.56% 4.87%
Average expected life 5 years 5 years 5 years
Income Taxes: The Company accounts for income taxes using the provisions of SFAS
No. 109, "Accounting for Income Taxes." Investment tax credits are recorded
using the flow-through method.
Revenue Recognition: Revenues are derived from sales to unaffiliated customers
and are recognized when products are shipped and title has transferred. Sales
discounts, volume and price rebates, allowances and promotional costs are
estimated based on contractual commitments and experience and are recorded in
the period in which the sale is recognized. Management analyzes historical
write-offs, current economic trends and specific customer circumstances when
evaluating the adequacy of accounts receivable related reserves and accruals.
Shipping and Handling Costs: All shipping and handling costs are included in the
cost of products sold in the Consolidated Statements of Operations.
Research and Development Costs: Research and Development (R&D) costs consist of
Company-sponsored activities to develop new value-added products. R&D costs are
expensed as incurred and expenditures were $1.9 million, $2.2 million and $2.8
million in 2003, 2002 and 2001, respectively. R&D costs are included in
operating expenses in the Consolidated Statements of Operations.
Advertising Costs: Advertising costs are expensed as incurred and totaled $3.2
million, $2.8 million and $3.0 million in 2003, 2002 and 2001, respectively.
NOTE B--GOODWILL AND INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on
December 30, 2001 (beginning of fiscal 2002). Goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
impairment tests at least annually. Other intangible assets continue to be
amortized over their useful lives.
26
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE B--GOODWILL AND INTANGIBLE ASSETS--CONTINUED
Pursuant to the adoption of this Standard, Lamson completed a transitional
impairment review for goodwill during the second quarter of 2002 for each of its
reporting units. It was determined that the carrying value of the telecom
reporting unit (component of the Carlon business segment) exceeded its estimated
fair value as determined by utilizing various valuation techniques including
discounted cash flows. Given the indication of a potential impairment, the
Company completed the assessment of the implied fair value of the goodwill for
the telecom reporting unit, which resulted in an impairment loss of $60.0
million ($46.3 million after tax). This transitional impairment loss was
recognized as a cumulative effect of a change in accounting principle as of the
beginning of fiscal 2002. The transitional impairment loss is a one-time,
non-cash charge. No reclassifications were required between intangible assets
and goodwill pursuant to the adoption of this Standard. The impairment test
conducted as of October 5, 2003 resulted in no additional impairment being
recorded. Of the $21.5 million of goodwill remaining on the balance sheet at
January 3, 2004 approximately $20.0 million relates to the telecom reporting
unit in the Carlon business segment and the remainder is included in the Lamson
Home Product business segment.
The Company's other intangible assets and related accumulated amortization is as
follows:
(Dollars in thousands)
NON-COMPETE
AGREEMENTS PATENTS TOTAL
------------ ------- -------
JANUARY 3, 2004
- ---------------
Gross $ 6,500 $ 2,150 $ 8,650
Accumulated amortization (4,252) (1,386) (5,638)
------- ------- -------
Net value $ 2,248 $ 764 $ 3,012
======= ======= =======
DECEMBER 28, 2002
- -----------------
Gross $ 6,500 $ 2,150 $ 8,650
Accumulated amortization (2,952) (1,087) (4,039)
------- ------- -------
Net value $ 3,548 $ 1,063 $ 4,611
======= ======= =======
All non-compete agreements are included in the Carlon business segment and all
patents are included in the Lamson Home Products business segment. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the three succeeding years will be $1.6
million, $1.2 million and $0.2 million for 2004 through 2006, respectively.
27
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE B--GOODWILL AND INTANGIBLE ASSETS--CONTINUED
Prior to the adoption of SFAS No. 142 in fiscal 2002, amortization expense was
recorded for goodwill. For comparison purposes, supplemental net income and
earnings per common share for the year ended 2001 are provided as follows:
(Dollars in thousands, except per share amounts) FISCAL YEAR
-----------
2001
-----------
Net (loss) income as previously reported $(3,843)
Goodwill amortization, net of tax 3,646
-------
Net (loss) income, excluding goodwill amortization $ (197)
=======
(Loss) earnings per common share,
excluding goodwill amortization
Basic $ (0.01)
Diluted $ (0.01)
NOTE C--LONG-TERM DEBT AND COMMITMENTS
Long-term debt consists of the following:
FISCAL YEARS
----------------------
(Dollars in thousands) 2003 2002
----------------------
Secured Credit Agreement:
Term $14,300 $28,800
Revolver 67,100 53,200
------- -------
81,400 82,000
Industrial Revenue Bonds 9,195 9,855
Mortgage 4,155 4,267
------- -------
94,750 96,122
Less amounts classified as current 11,760 11,772
------- -------
$82,990 $84,350
======= =======
In August 2000, the Company completed the refinancing of its previously secured
credit agreement by entering into a new five-year, $125 million revolving credit
agreement with a consortium of banks led by Harris Trust of Chicago. In December
2000, in conjunction with the acquisition of Ameriduct, the agreement was
amended and increased to a $194 million facility, consisting of $48.5 million in
term debt and $145.5 million in a revolver. As of March 27, 2002 the agreement
was amended reducing the credit commitments of the lenders to an aggregate $150
million of which $110 million represents a revolving credit facility with the
remainder representing term debt. In addition, this amendment provided for a 1%
term loan fee and an increase of 1% in the term loan interest rate if the term
loan was not paid in full by September 30, 2002. Since the term loan was not
paid off, the increase in interest rate and additional fee were realized. The
term portion of this agreement requires principal payments of $2.0 million on
March 31 and June 30 and $3.5 million on September 30 and December 31 of each
year with a balloon payment in August 2005. This agreement is
28
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE C--LONG-TERM DEBT AND COMMITMENTS--CONTINUED
secured by substantially all of the Company's assets. Interest on the revolver
portion of the facility is at LIBOR plus 1.5% to 4.0% and LIBOR plus 2.5% to
5.0% for the term portion. The specific rate is determined based on the ratio of
indebtedness to adjusted earnings before interest, taxes, depreciation and
amortization and is calculated quarterly. The average rate at January 3, 2004 is
5.36%. In addition to amounts borrowed, letters of credit related to Industrial
Revenue Bond financings and other contractual obligations total approximately
$14.8 million under the agreement. Total availability at January 3, 2004, under
the secured credit agreement, approximates $9.0 million. The Company's credit
agreement contains various restrictive covenants pertaining to maintenance of
net worth, certain financial ratios and prohibits stock repurchases and dividend
payments. In February 2004, the credit agreement was amended to address the
impact of the discontinued operations charge recognized in 2003.
The Company's Industrial Revenue Bond financings include several issues due in
annual installments from 2004 through 2023 with interest at variable rates. The
weighted average rate for these bonds at January 3, 2004 was 1.41%. When
consideration is given to the cost of related letters of credit, the effective
weighted-average interest rate is 5.41% at January 3, 2004.
The mortgage on the Company's headquarters is payable in equal monthly
installments of $24,000 through 2012 with interest at prime rate plus .25%
(4.25% at January 3, 2004).
The aggregate minimum combined maturities of long-term debt for the year 2005
through 2008 are approximately $71,260,000, $771,000, $877,000 and $482,000,
respectively, with $9,600,000 due thereafter.
During the first quarter of 2001, the Company entered into two interest rate
swap agreements for a total notional amount of $58.5 million, $29.5 million
outstanding at January 3, 2004, which effectively fixes interest rates on its
variable rate debt at 5.41% and 5.48%, plus the Company's risk premium of 1.5%
to 4.0%, respectively. These transactions are considered cash flow hedges and,
therefore, the fair market value at the end of 2003 of an $839,000 (net of
$536,000 in tax) loss has been recognized in other comprehensive income (loss).
There is no ineffectiveness on the cash flow hedges, therefore, all changes in
the fair value of these derivatives are recorded in equity and not included in
the current period's income statement. Approximately $1,158,000 loss on the fair
value of the hedges is classified in current accrued liabilities, with the
remaining $217,000 loss classified as a long-term liability.
Interest paid was $8,609,000, $8,752,000 and $9,573,000 in 2003, 2002 and 2001,
respectively.
Rental expense was $5,620,000, $5,777,000 and $6,268,000 in 2003, 2002 and 2001,
respectively. Aggregate future minimum payments related to non-cancelable
operating leases with initial or remaining terms of one year or more for the
years 2004 through 2008 are approximately $4,745,000, $4,152,000, $3,697,000,
$2,115,000 and $1,989,000, respectively, with $4,141,000 due thereafter.
NOTE D--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company sponsors several qualified and non-qualified pension plans and other
post-retirement benefit plans for its current and former employees. As of
January 1, 2003 the Company eliminated the salary defined benefit plan for
future employees. This action makes all pension and other post-retirement
benefit plans closed to new entrants and will reduce future service costs. The
following table provides a reconciliation of the changes in the benefit
obligations and fair value of plan assets over each of the two years in the
period ended January 3, 2004 and December 28, 2002, respectively, and a
statement of the funded status at both years' end:
29
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE D--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS--CONTINUED
PENSION BENEFITS OTHER BENEFITS
(Dollars in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
CHANGE IN B