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 June 30, 2003

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 o No ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes o No ý

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 June 22, 2004
Common stock, par value $.01 per share		9,432,121

Part I—Financial Information

Item 1—Financial Statements

LANCER CORPORATION

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

ASSETS

				June 30, 2003			December 31, 2002
				(Unaudited)
Current assets:
	Cash			$	2,137		$	3,241
	Receivables:
		Trade accounts and notes			17,313			17,265
		Other			1,141			1,039

					18,454			18,304
		Less allowance for doubtful accounts			(770	)		(979	)

			Net receivables		17,684			17,325
	Inventories				28,019			29,094
	Prepaid expenses				1,028			264
	Tax refund receivable				955			—
	Deferred tax asset				226			285

			Total current assets		50,049			50,209

Property, plant and equipment, at cost:
	Land				1,432			1,432
	Buildings				21,850			21,837
	Machinery and equipment				22,616			22,073
	Tools and dies				12,384			12,137
	Leaseholds, office equipment and vehicles				10,992			10,165
	Assets in progress				2,239			1,455

					71,513			69,099
	Less accumulated depreciation and amortization				(36,715	)		(34,224	)

		Net property, plant and equipment			34,798			34,875

Long-term receivables ($35 and $106 due from officers, respectively)					51			127
Long-term investments					1,647			2,303
Intangibles and other assets, at cost, less accumulated amortization					5,311			5,241

				$	91,856		$	92,755

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

			June 30, 2003			December 31, 2002
			(Unaudited)
Current liabilities:
	Accounts payable		$	8,640		$	10,141
	Current installments of long-term debt			2,731			2,726
	Line of credit with bank			7,000			5,000
	Deferred licensing and maintenance fees			1,418			1,449
	Accrued expenses and other liabilities			7,250			7,977
	Taxes payable			—			182

		Total current liabilities		27,039			27,475
Deferred tax liability				1,571			2,342
Long-term debt, excluding current installments				9,039			9,808
Deferred licensing and maintenance fees				2,382			2,686
Other long-term liabilities				220			293

		Total liabilities		40,251			42,604

Commitments and contingencies
Minority interest				—			—
Shareholders' equity:
	Preferred stock, without par value
	5,000,000 shares authorized; none issued			—			—
	Common stock, $.01 par value:
		50,000,000 shares authorized; 9,425,121 issued and 9,360,895 outstanding in 2003, and 9,396,121 issued and 9,336,931 outstanding in 2002		94			93
	Additional paid-in capital			12,845			12,710
	Accumulated other comprehensive loss			(994	)		(2,389	)
	Deferred compensation			(127	)		(169	)
	Retained earnings			40,147			40,234
	Less common stock in treasury, at cost; 64,226 shares in 2003 and 59,190 shares in 2002			(360	)		(328	)

		Total shareholders' equity		51,605			50,151

			$	91,856		$	92,755

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share data)

			Three Months Ended						Six Months Ended
			June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net sales			$	29,370		$	37,306		$	56,244		$	67,556
Cost of sales				21,680			27,574			42,760			50,616

	Gross profit			7,690			9,732			13,484			16,940
Selling, general and administrative expenses				6,692			6,585			13,274			12,454

	Operating income			998			3,147			210			4,486

Other (income) expense:
	Interest expense			156			382			324			842
	Loss from joint ventures			261			46			487			138
	Minority interest			—			(11	)		—			(55	)
	Other income, net			(25	)		(224	)		(226	)		(307	)

				392			193			585			618

		Income (loss) from continuing operations before income taxes		606			2,954			(375	)		3,868
Income tax expense (benefit):
	Current			1,020			938			881			1,269
	Deferred			(694	)		101			(526	)		105

				326			1,039			355			1,374

		Income (loss) from continuing operations		280			1,915			(730	)		2,494
Discontinued operations:
	Loss from operations of discontinued Brazilian subsidiary			76			2,020			120			2,138
	Income tax benefit			(26	)		(687	)		(763	)		(727	)

(Income) loss from discontinued operations				50			1,333			(643	)		1,411

	Net earnings (loss)		$	230		$	582		$	(87	)	$	1,083

Common Shares Outstanding:
Basic				9,353,706			9,332,135			9,349,542			9,318,031
Diluted				9,449,974			9,408,263			9,349,542			9,398,304
Earnings Per Share:
Basic
	Earnings (loss) from continuing operations		$	0.03		$	0.20		$	(0.08	)	$	0.27
	Earnings (loss) from discontinued operations		$	(0.01	)	$	(0.14	)	$	0.07		$	(0.15	)

Net earnings (loss)			$	0.02		$	0.06		$	(0.01	)	$	0.12

Diluted
	Earnings (loss) from continuing operations		$	0.03		$	0.20		$	(0.08	)	$	0.27
	Earnings (loss) from discontinued operations		$	(0.01	)	$	(0.14	)	$	0.07		$	(0.15	)

Net earnings (loss)			$	0.02		$	0.06		$	(0.01	)	$	0.12

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)

				Six Months Ended
				June 30, 2003			June 30, 2002
Cash flow from operating activities:
	Net (loss) earnings			$	(87	)	$	1,083
	Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
		Depreciation and amortization			2,797			2,480
		Deferred licensing and maintenance fees			(335	)		(898	)
		Deferred income taxes			(685	)		105
		Loss (gain) on sale and disposal of assets			55			(11	)
		Gain on sale of long-term investment			(220	)
		Minority interest			—			(55	)
		Loss from joint ventures			487			138
		Loss on disposal of discontinued Brazilian subsidiary, net of taxes			—			1,162
		Stock-based compensation expense			42			—
		Changes in assets and liabilities:
			Receivables		467			(5,657	)
			Prepaid expenses		(548	)		(139	)
			Income taxes receivable		(955	)		—
			Inventories		1,789			2,373
			Other assets		(310	)		(387	)
			Accounts payable		(2,201	)		3,583
			Accrued expenses		(1,097	)		1,500
			Income taxes payable		(168	)		503

	Net cash (used in) provided by operating activities				(969	)		5,780

Cash flow from investing activities:
		Proceeds from sale of assets			15			18
		Acquisition of property, plant and equipment			(2,104	)		(1,507	)
		Acquisition of subsidiary company			—			(252	)
		Proceeds from sale (purchase) of long-term investments			318			(360	)

	Net cash used in investing activities				(1,771	)		(2,101	)

Cash flow from financing activities:
		Net borrowings under line of credit agreements			2,000			(2,400	)
		Retirement of long-term debt, net of proceeds			(764	)		(1,294	)
		Net proceeds from exercise of stock options			135			34

	Net cash provided by (used in) financing activities				1,371			(3,660	)

Effect of exchange rate changes on cash					265			27

Net (decrease) increase in cash					(1,104	)		46
Cash at beginning of period					3,241			1,849

Cash at end of period				$	2,137		$	1,895

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Lancer Corporation (the "Company") designs, engineers, manufactures and markets fountain soft drink and other beverage dispensing systems and related equipment for use in the food service and beverage industry. The Company sells its products through Company personnel, and through independent distributors and agents, principally to major soft drink companies (primarily The Coca-Cola Company), bottlers, equipment distributors, beer breweries and food service chains for use in various food and beverage operations. Lancer is a vertically integrated manufacturer, fabricating a significant portion of the components used in Company products. Lancer was incorporated in Texas in 1967.

Management believes 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, 2002 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

SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," issued in December 2002, amends SFAS No. 123 "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial statements for interim periods beginning after December 15, 2002. The Company will continue to account for stock-based compensation using the intrinsic value method under APB Opinion No. 25. The disclosure modifications required for interim periods ending after December 15, 2002 are included in the notes to these financial statements.

Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," issued in January 2003, addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. Interpretation No. 46 applies immediately to variable interests in variable interest entities created and/or obtained after January 31, 2003. The application of this Interpretation did not have an impact on the Company's financial statements.

SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," issued in April 2003, amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement is generally effective for contracts entered into or modified after June 30, 2003. The Company believes the adoption of SFAS No. 149 will not have a material impact on the Company's financial statements.

SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," issued in May 2003, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company believes the adoption of SFAS No. 150 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. Accordingly, the Company has reported the results of operations of the Brazilian subsidiary as discontinued operations in the Consolidated Statements of Operations.

Certain information with respect to the discontinued Brazilian operation for the three months and six months ended June 30, 2003 and 2002 is as follows (amounts in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net sales	$	—		$	87		$	—		$	216

Pretax loss from discontinued operations		76			260			120			378
Pretax loss on disposal of discontinued operations, net of tax		—			1,760			—			1,760
Income tax benefit		(26	)		(687	)		(763	)		(727	)

(Income) loss from discontinued operations	$	50		$	1,333		$	(643	)	$	1,411

During the first quarter of 2003, the Internal Revenue Service completed its audit of the Company's deduction of its investment in the Brazilian operations, and other matters. As a result, the Company reversed certain tax accruals resulting in a tax benefit of $0.7 million from discontinued operations.

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

		June 30, 2003			December 31, 2002
Current assets		$	17		$	293
Property, plant and equipment, net			—			29
Current liabilities			(1,230	)		(1,499	)

	Net liabilities of discontinued operation	$	(1,213	)	$	(1,177	)

Current liabilities as of June 30, 2003 include a $1.2 million note payable to the seller of the Company's Brazilian operation. The note payable is more fully described in the Liquidity and Capital Resources section of Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations.

4. Inventory Components

Inventories are stated at the lower of cost or market on a first-in, first-out basis (average cost as to raw materials and supplies) or market (net realizable value). Inventory components are as follows (amounts in thousands):

	June 30, 2003		December 31, 2002
Finished goods	$	10,111	$	10,893
Work in process		7,621		7,647
Raw material and supplies		10,287		10,554

	$	28,019	$	29,094

5. Earnings Per Share

Basic earnings per share is calculated using the weighted average number of common shares outstanding and 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 96,268 and 76,128 for the three months ended June 30, 2003 and 2002. Basic and diluted earnings per share are the same for the six months ended June 30, 2003. The dilutive effect of stock options approximated 80,273 shares for the six months ended June 30, 2002.

6. Stock Compensation Plans

The Company utilizes the intrinsic value method required under provisions of APB Opinion No. 25 and related interpretations in measuring stock-based compensation for employees. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated in the table below (amounts in thousands, except share data):

		Three Months Ended						Six Months Ended
		June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net earnings (loss)—as reported		$	230		$	582		$	(87	)	$	1,083
	Add: Total stock-based compensation expense determined under intrinsic value method, net of tax		10			—			28			—
	Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax		(31	)		(21	)		(58	)		(44	)

Net earnings (loss)—pro forma		$	209		$	561		$	(117	)	$	1,039

Net earnings (loss) per basic share—as reported		$	0.02		$	0.06		$	(0.01	)	$	0.12
Net earnings (loss) per basic share—pro forma		$	0.02		$	0.06		$	(0.01	)	$	0.11
Net earnings (loss) per diluted share—as reported		$	0.02		$	0.06		$	(0.01	)	$