LANCER CORP /TX/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
Quarterly report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934

For the quarter ended September 30, 2002

Commission file number 0-13875

LANCER CORPORATION
(Exact name of registrant as specified in its charter)

Texas (State or other jurisdiction of incorporation or organization)		74-1591073 (IRS employer identification no.)
6655 Lancer Blvd., San Antonio, Texas (Address of principal executive offices)		78219 (Zip Code)

Registrant's telephone number, including area code: (210) 310-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 14(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 the number of shares outstanding of each of the issuers of classes of common stock, as of the latest practicable date.

Title		Shares outstanding as of October 31, 2002
Common stock, par value $.01 per share		9,336,181

Part I—Financial Information

Item 1—Financial Statements

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

ASSETS

				September 30, 2002			December 31, 2001
				(Unaudited)
Current assets:
	Cash			$	1,679		$	1,849
	Receivables:
		Trade accounts and notes			20,954			17,477
		Other			968			850

					21,922			18,327
		Less allowance for doubtful accounts			(682	)		(467	)

			Net receivables		21,240			17,860

	Inventories				29,796			32,160
	Prepaid expenses				877			655
	Deferred tax asset				267			211

			Total current assets		53,859			52,735

Property, plant and equipment, at cost:
	Land				1,432			1,260
	Buildings				21,885			21,906
	Machinery and equipment				23,223			23,028
	Tools and dies				13,492			12,884
	Leaseholds, office equipment and vehicles				11,363			10,402
	Assets in progress				1,437			1,194

					72,832			70,674
	Less accumulated depreciation and amortization				(37,621	)		(34,673	)

		Net property, plant and equipment			35,211			36,001

Long-term receivables ($308 and $407 due from officers, respectively)					418			612
Long-term investments					2,579			2,278
Intangibles and other assets, at cost, less accumulated amortization					5,140			4,674

				$	97,207		$	96,300

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)

(Amounts in thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

			September 30, 2002			December 31, 2001
			(Unaudited)
Current liabilities:
	Accounts payable		$	11,823		$	7,911
	Current installments of long-term debt			2,724			2,718
	Line of credit with bank			8,800			15,600
	Deferred licensing and maintenance fees			1,611			1,295
	Accrued expenses and other liabilities			7,309			4,754
	Taxes payable			1,069			896

		Total current liabilities		33,336			33,174

Deferred tax liability				1,612			2,032
Long-term debt, excluding current installments				10,192			11,872
Deferred licensing and maintenance fees				2,994			4,478
Other long-term liabilities				326			403

		Total liabilities		48,460			51,959

Commitments and contingencies				—			—
Minority interest				—			55
Shareholders' equity:
	Preferred stock, without par value 5,000,000 shares authorized; none issued			—			—
Common stock, $.01 par value:
	50,000,000 shares authorized; 9,389,319 issued and 9,333,115 outstanding in 2002, and 9,127,757 issued and outstanding in 2001			94			91
	Additional paid-in capital			12,509			11,943
	Accumulated other comprehensive loss			(2,725	)		(3,976	)
	Retained earnings			39,187			36,228
Less common stock in treasury, at cost;
56,204 shares in 2002				(318	)		—

		Total shareholders' equity		48,747			44,286

			$	97,207		$	96,300

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share data)

			Three Months Ended						Nine Months Ended
			September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Net sales			$	37,298		$	31,166		$	104,854		$	92,043
Cost of sales				26,267			23,949			76,883			70,468

	Gross profit			11,031			7,217			27,971			21,575
Selling, general and administrative expenses				7,563			5,431			20,017			16,768

	Operating income			3,468			1,786			7,954			4,807

Other (income) expense:
	Interest expense			299			788			1,112			2,664
	Loss from joint venture			232			173			370			228
	Minority interest			—			(59	)		(55	)		(179	)
	Other income, net			(1	)		(59	)		(279	)		(1,195	)

				530			843			1,148			1,518

		Income from continuing operations before income taxes		2,938			943			6,806			3,289
Income tax expense:
	Current			972			291			2,241			1,212
	Deferred			28			40			133			57

				1,000			331			2,374			1,269

		Income from continuing operations		1,938			612			4,432			2,020
Discontinued operations
	Loss from operations of discontinued Brazilian subsidiary (including loss on disposal of $1,760)			85			78			2,223			161
	Income tax benefit			(23	)		(27	)		(750	)		(55	)

Loss from discontinued operations				62			51			1,473			106

	Net earnings		$	1,876		$	561		$	2,959		$	1,914

Common Shares Outstanding:
Basic				9,333,115			9,127,378			9,323,114			9,126,850
Diluted				9,416,381			9,328,026			9,412,172			9,327,306
Earnings Per Share:
Basic
	Earnings from continuing operations		$	0.21		$	0.07		$	0.48		$	0.22
	Loss from discontinued operations		$	(0.01	)	$	(0.01	)	$	(0.16	)	$	(0.01	)

Net earnings			$	0.20		$	0.06		$	0.32		$	0.21

Diluted
	Earnings from continuing operations		$	0.21		$	0.07		$	0.47		$	0.21
	Loss from discontinued operations		$	(0.01	)	$	(0.01	)	$	(0.16	)	$	(0.01	)

Net earnings			$	0.20		$	0.06		$	0.31		$	0.20

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Amounts in thousands)

				Nine Months Ended
				September 30, 2002			September 30, 2001
Cash flow from operating activities:
	Net earnings			$	2,959		$	1,914
	Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
		Depreciation and amortization			3,649			3,473
		Deferred licensing and maintenance fees			(1,168	)		602
		Deferred income taxes			133			57
		Gain on sale and disposal of assets			(11	)		(15	)
		Minority interest			(55	)		(179	)
		Loss from joint venture			370			228
		Impairment of investment			30			—
		Stock-based compensation			217			—
		Loss on disposal of discontinued Brazilian subsidiary, net of taxes			1,162			—
		Changes in assets and liabilities:
			Receivables		(3,219	)		(2,585	)
			Prepaid expenses		(222	)		(155	)
			Inventories		2,197			2,532
			Other assets		(535	)		(542	)
			Accounts payable		3,713			(910	)
			Accrued expenses		2,156			516
			Income taxes payable		143			843

	Net cash provided by operating activities				11,519			5,779

Cash flow from investing activities:
		Proceeds from sale of assets			18			51
		Acquisition of property, plant and equipment			(2,563	)		(2,415	)
		Acquisition of assets of service company			(252	)		—
		Acquisition of long-term investments, net			(501	)		(14	)

	Net cash used in investing activities				(3,298	)		(2,378	)

Cash flow from financing activities:
		Net payments under line of credit agreements			(6,800	)		(1,100	)
		Retirement of long-term debt			(1,674	)		(1,583	)
		Proceeds from exercise of stock options			34			10

	Net cash used in financing activities				(8,440	)		(2,673	)

Effect of exchange rate changes on cash					49			(346	)

Net (decrease) increase in cash					(170	)		382
Cash at beginning of period					1,849			771

Cash at end of period				$	1,679		$	1,153

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

All adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair presentation of financial position and results of operations. All intercompany balances and transactions have been eliminated in consolidation. It is suggested that the consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the December 31, 2001 Annual Report on Form 10-K.

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current year's presentation.

2. New Accounting Pronouncements

Effective January 1, 2002 the Company adopted Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and other Intangible Assets." SFAS No. 142 provides guidance on how goodwill and other intangible assets that are acquired or have already been recognized in the financial statements should be accounted for. Under SFAS No. 142 goodwill and certain other intangible assets will no longer be amortized, but will be required to be reviewed periodically for impairment of value. The Company tested goodwill for impairment using the two-step process described in SFAS No. 142. The first step is to screen for potential impairment, if any, while the second step measures the amount of impairment, if any. The Company has performed an impairment analysis and concluded that the value of its goodwill is not impaired. With the adoption of SFAS No. 142, the Company ceased the amortization of goodwill with a book value of $1.6 million as of January 1, 2002. Had amortization of goodwill not been recorded during the quarter ended September 30, 2001, the net earnings would have been increased by approximately $21,000, net of taxes, basic and diluted earnings per share would have remained unchanged. For the nine months ended September 30, 2001, the net earnings would have been increased by approximately $75,000, net of taxes; basic earnings per share would have increased to $0.22 and diluted earnings per share would have increased to $0.21.

SFAS No. 143, "Accounting for Asset Retirement Obligations," issued in June 2001, establishes financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. The Company is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The Company believes the adoption of SFAS No. 143 will not have a material impact on the Company's financial statements.

Effective January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed of." However, it retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical

Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to lease-back transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for transactions occurring after May 15, 2002. The Company adopted SFAS No. 145 on May 16, 2002 with no material impact on the Company's financial statements.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," issued in July 2002, addresses financial accounting and reporting for costs associated with exit or disposal activities. It nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability be recognized for the cost associated with an exit or disposal activity only when the liability is incurred, that is, when it meets the definition of a liability in the FASB conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes the adoption of SFAS No. 146 will not have a material impact on the Company's financial statements.

3. Discontinued Operations

During the quarter ended June 30, 2002, the Company decided to close its Brazilian subsidiary. The Company expects the closure will be completed by December 31, 2002, through liquidation. In connection with the closure of the Brazilian subsidiary, the Company recorded an estimated loss from disposal of discontinued operations of $1.8 million in the quarter ended June 30, 2002 related to the write-down of the Brazilian subsidiary assets net of expected proceeds, foreign currency translation losses, and an accrual for estimated exit costs. Accordingly, the Company has reported the results of operations of the Brazilian subsidiary as discontinued operations for the three and nine months ended September 30, 2002 and 2001 in the Consolidated Statements of Operations. For business segment reporting purposes, the Brazil operation was previously classified as the segment "Brazil."

Certain information with respect to the discontinued Brazilian operation for the three and nine months ended September 30, 2002 and 2001 is as follows (amounts in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Net sales	$	91		$	222		$	307		$	801

Pretax loss from discontinued operations		85			78			463			161
Pretax loss on disposal of discontinued operations, net of tax		—			—			1,760			—
Income tax benefit		(23	)		(27	)		(750	)		(55	)

Net loss from discontinued operations	$	62		$	51		$	1,473		$	106

Assets and liabilities of the discontinued operation are as follows (amounts in thousands):

		September 30, 2002			December 31, 2001
Current assets		$	493		$	1,436
Property, plant and equipment, net			456			363
Current liabilities			(1,750	)		(1,649	)

	Net (liabilities) assets of discontinued operation	$	(801	)	$	150

4. Inventory Components

Inventories are stated at the lower of cost or market on a first-in, first-out basis. Inventory components are as follows (amounts in thousands):

	September 30, 2002		December 31, 2001
Finished goods	$	11,522	$	14,350
Work in process		7,854		8,199
Raw material and supplies		10,420		9,611

	$	29,796	$	32,160

5. Earnings Per Share

Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is calculated assuming the issuance of common shares for all potential dilutive common shares outstanding during the reporting period. The dilutive effect of stock options approximated 83,266 shares and 200,648 shares for the three months ended September 30, 2002 and 2001, and 89,058 shares and 200,456 shares for the nine months ended September 30, 2002 and 2001, respectively.

6. Comprehensive Income

The following are the components of comprehensive income (amounts in thousands):

			Three Months Ended						Nine Months Ended
			September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Net earnings			$	1,876		$	561		$	2,959		$	1,914
Foreign currency translation gain (loss):
	Foreign currency gain (loss) arising during the period			(277	)		(384	)		346			(1,211	)
	Reclassification adjustment for losses included in discontinued operations			—			—			892			—

		Net foreign currency translation gain (loss)		(277	)		(384	)		1,238			(1,211	)
Unrealized gain (loss) on investment, net of tax				—			(25	)		(3	)		15
Reclassification adjustment for realized loss included in net income, net of tax				3			—			3			—
Unrealized loss on derivative instruments:
	Initial loss upon adoption of SFAS No. 133			—			—			—			(51	)
	Reclassification adjustment for loss included in interest expense			3