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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 1, 2005
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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
216-464-3400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [X] No [ ]
The aggregate market value of the voting stock held as of July 3, 2004 (the
last trading day of the Company's fiscal 2004 second quarter) by non-affiliates
of the Registrant was $113,647,372, based on the close price of $8.25 on the New
York Stock Exchange.
As of February 4, 2005 the Registrant had outstanding 13,894,213 common
shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2005 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 1, 2005
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 and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
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
Item 9(b). Other Information
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 and Financial Statement Schedules
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, non-metallic 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 serve specific markets, 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 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" (DIY) 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 2004, 2003 and 2002 is as follows:
2004 2003 2002
(Dollars in thousands) --------------- --------------- ---------------
Carlon $183,800 48% $154,090 45% $149,037 48%
Lamson Home Products 86,510 22% 81,514 24% 69,440 22%
PVC Pipe 116,829 30% 104,883 31% 93,952 30%
-------- ---- -------- ---- -------- ----
$387,139 100% $340,487 100% $312,429 100%
======== ==== ======== ==== ======== ====
See discussion of business segments' results 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 breadth of product line 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 23.
RAW MATERIALS
The Company is a large purchaser of pipe grade PVC and HDPE resins. The Company
has entered into long-term supply contracts for PVC resin. PVC resin producers
are operating at near capacity with no substantial net capacity additions
planned in the next couple of years. Sustained demand and high energy costs are
expected to support historically high resin costs for the foreseeable future.
The Company is generally able to pass through these raw material cost increases,
in its Carlon and PVC Pipe Business Segments, depending on the end-market
strength. 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 11.0% of consolidated net sales in 2004, 14.0% of consolidated net
sales in 2003, and 15.0% of consolidated net sales in 2002. Sales to Home Depot,
a customer of the Lamson Home Products segment not otherwise affiliated with the
Company, totaled approximately 10.2% of consolidated net sales in 2003.
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
4
to improve manufacturing processes. The Company's research and development
expenditures totaled $2.2 million, $1.9 million and $2.2 million in 2004, 2003
and 2002, 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. See also Note F to the Consolidated
Financial Statements.
ASSOCIATES
At January 1, 2005, the Company had 1,189 associates, 1,004 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 4.6% of consolidated net
sales in 2004, and 3.0% of consolidated net sales in 2003 and 2002,
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 a building which houses its executive and
administrative offices (located in Cleveland, Ohio), which 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
DISTRIBUTION CENTERS
Columbia, South Carolina(L) 350,000
Woodland, California(L) 127,000
Fort Myers, Florida(O) 4,000
5
The above manufacturing facilities were operated at approximately 72.0% of their
productive capacity during 2004.
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. On September 17, 2004, the Company announced
the settlement of this litigation arrived at through a mediation process. The
net effect ($1.7 million) of that settlement has been reflected in the 2004
operating results.
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
Chairman, President and Chief Executive Officer
Executive Officer since January 1988. Age 67.
JAMES J. ABEL
Executive Vice President, Secretary, Treasurer and Chief Financial Officer
Executive Officer since December 1990. Age 58.
NORMAN E. AMOS
Vice President
Executive Officer since February 21, 2001. Vice President Supply Chain
Management since August 1, 2000. Manager, Transportation and Logistics with
Xerox Corporation July 1995 - July 2000. Age 59.
ALBERT J. CATANI, II
Vice President
Executive Officer since February 27, 1997. Vice President, Manufacturing since
August 1995. Age 57.
EILEEN E. CLANCY
Vice President
Executive Officer since January 2, 2002. Vice President, Human Resources since
January 2, 2002. Director of Human Resources Development, December 1995 -
December 2001. Age 54.
DONALD A. GUTIERREZ
Senior Vice President
Executive Officer since February 26, 1998. Senior Vice President since February
21, 2001. Vice President, Carlon since March 1998. Age 47.
CHARLES W. HENNON
Vice President
Executive Officer since February 25, 1999. Vice President and Chief Information
Officer since April 1998. Manager, Business Support Services with Ferro
Corporation, 1993 - April 1998. Age 59.
LORI L. SPENCER
Vice President
Executive Officer since February 27, 1997. Vice President and Controller since
August 1997. Age 46.
NORMAN P. SUTTERER
Senior Vice President
Executive Officer since February 29, 1996. Senior Vice President since February
18, 2003. Vice President, Lamson Home Products since March 1998. Age 55.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 2004, 2003 or 2002. The approximate number of shareholders of record of
the Company's Common Stock at January 1, 2005 was 1,224.
7
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY
FISCAL YEARS ENDED
----------------------------------------------------
(Dollars in thousands except per share data, 2004 2003 2002 2001 2000
associates and percentages) -------- -------- -------- -------- --------
--------------------------------------------------------------------------------------------------------------
OPERATIONS:
NET SALES(3) $387,139 $340,487 $312,429 $350,914 $347,292
OPERATING INCOME(1) 17,669 14,658 18,509 6,183 34,487
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 9,744 6,131 8,926 (5,443) 29,948
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 6,148 3,740 5,026 (3,843) 21,448
Income (loss) from discontinued operations, net of
income taxes 401 (2,738) -- -- --
Cumulative effect of change in accounting principle,
net of income taxes -- -- (46,250) -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 6,549 $ 1,002 $(41,224) $ (3,843) $ 21,448
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings (Loss) from continuing operations before
change in accounting principle $ 0.45 $ 0.27 $ 0.36 $ (0.28) $ 1.58
Earnings (Loss) from discontinued operations, net of
tax $ 0.03 $ (0.20) -- -- --
Cumulative effect of change in accounting principle,
net of tax -- -- $ (3.36) -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) $ 0.47 $ 0.07 $ (2.99) $ (0.28) $ 1.58
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (Loss) from continuing operations before
change in accounting principle $ 0.43 $ 0.27 $ 0.36 $ (0.28) $ 1.53
Earnings (Loss) from discontinued operations, net of
tax $ 0.03 $ (0.20) -- -- --
Cumulative effect of change in accounting principle,
net of tax -- -- $ (3.36) -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) $ 0.46 $ 0.07 $ (2.99) $ (0.28) $ 1.53
--------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current Assets $100,745 $ 81,377 $ 84,764 $ 94,085 $134,906
Total Assets 218,502 208,313 213,705 273,821 320,293
Current Liabilities(2) 131,112 57,026 64,112 62,890 76,656
Long-Term Debt(2) 11,876 82,990 84,350 104,266 130,276
Other Long-Term Liabilities 30,138 29,782 29,067 25,441 27,332
Shareholders' Equity 45,376 38,515 36,176 81,224 86,029
--------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION:
Number of associates 1,189 1,122 1,116 1,115 1,345
Market price per share $ 9.10 $ 5.50 $ 3.40 $ 5.24 $ 10.50
Market capitalization $126,371 $ 75,829 $ 46,844 $ 72,195 $143,819
Gross profit as a % of net sales 16.4% 15.9% 19.2% 17.0% 25.1%
Total operating expenses as a % of net sales 11.4% 11.6% 13.3% 14.6% 15.2%
Operating income as a % of net sales 4.5% 4.3% 5.9% 1.8% 9.9%
---------------
(1) In 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which eliminated the amortization of goodwill. Operating expenses
in 2001 and 2000 include $4,605 and $971 in goodwill amortization,
respectively.
(2) In 2004, the Company's Secured Credit Agreement of $75 million was
classified as current as it matures in August 2005. (See Note C to the
Consolidated Financial Statements.)
(3) Net sales were reduced for the reclassification of service commissions and
co-operative advertising paid to certain retail customers in accordance with
Emerging Issues Task Force (EITF) 01-9. There was no impact on net income
(see Note A to the Consolidated Financial Statements.)
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 2004 was characterized by revenue growth across all segments of the
business. The most encouraging of these increases came in the 25.0% growth in
net sales of the Company's telecom products. After three years of declining
demand, there are signs that the major telecommunications companies are
beginning to reinvest to support Fiber-to-the-Premise projects. This activity
was strong all year even through the typically slower fourth quarter of 2004.
The Company's foremost challenge in 2004 came from rising resin costs, both PVC
and HDPE, which were supported by high oil and gas prices, restrained supplies
and a robust global and domestic end-market. Both the Carlon and PVC Pipe
business segments were able to partially offset these higher costs with price
increases throughout 2004, however, Lamson Home Products was unable, in 2004, to
obtain any price increases from its retail customers.
Transportation costs and availability, especially flatbeds, have become a
significant concern in 2004 with the increased economic activity, higher fuel
costs, regulatory changes, driver shortages and the lack of investment in new
equipment by carriers. The Company has worked throughout 2004 to develop
tactical logistic alternatives to ensure customer service, but has also
experienced higher freight rates that are not expected to ease anytime soon.
In September 2004 the Company settled its patent infringement litigation as a
result of a mediation process. In connection with the settlement, the Company
recorded a net charge of $1.7 million (see also Note E).
During 2004 the Company was able to rationalize some of its manufacturing
capacity by selling its Pasadena, Texas facility. Most of the production
equipment was moved to the Clinton, Iowa facility. The net expense for the sale
of this facility and relocation of production equipment and termination of
employees ($213,000) are included in other expenses (see also Note M).
Late in the first quarter of 2004, the Company was notified that YSD Industries,
Inc. ("YSDI"), a business the Company sold in 1988, was selling the assets of
the business and would be unable to fund certain post-retirement medical and
life insurance benefits, for which the Company was contingently liable. This
obligation extends through February 2011, and the estimated liability of $2.7
million (net of tax) was recorded in 2003, based on the deteriorating financial
condition of YSDI, as a charge from discontinued operations. As part of the
asset sale by YSDI in the first quarter of 2004, the Company was able to recover
$668,000 of notes receivable that had been previously written off. The Company
assumed this post-retirement obligation and the funding of benefits at the end
of the first quarter of 2004. The net impact of $401,000 (net of tax) has been
recorded as income from discontinued operations in the current year.
The Company's Secured Credit Agreement is classified as a current debt as of
January 1, 2005 as its maturity date is August 2005. At the end of 2004 the
Company was in violation of its leverage ratio covenant. A waiver of this
covenant has been obtained along with an amendment that adjusts the covenant for
the first quarter of 2005. It is anticipated that the Company will refinance
this obligation in the first half of 2005, subject to the conclusion of the
evaluation of various strategic alternatives pursued by management and the
Company's investment bankers. As announced in October 2004, the Company is
reviewing various strategic alternatives to enhance shareholder value, including
the possible sale of part or all of the Company. This process is continuing.
(Also see Note C).
Finally, at the end of 2003, the Company had been operating under a compliance
plan with the New York Stock Exchange since November 2002, which called for the
Company to be in compliance with continued listing standards by the end of the
first quarter of 2004. The Company was notified by the New York Stock Exchange
in April 2004 that it is considered in good standing and in compliance with the
Exchange's continued listing standards.
9
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated certain items from the
Consolidated Statements of Operations as a percentage of net sales for years
ended:
2004 2003 2002
(Dollars in thousands) ----------------- ----------------- -----------------
Net Sales $387,139 100.0% $340,487 100.0% $312,429 100.0%
Cost of products sold 323,455 83.6% 286,300 84.1% 252,499 80.8%
-------- -------- --------
Gross profit 63,684 16.4% 54,187 15.9% 59,930 19.2%
Total operating expenses 44,074 11.4% 39,529 11.6% 41,421 13.3%
Litigation settlement 1,728 0.4% -- 0.0% -- 0.0%
Other expense 213 0.1% -- 0.0% -- 0.0%
-------- -------- --------
Operating income 17,669 4.6% 14,658 4.3% 18,509 5.9%
Interest expense, net 7,925 2.0% 8,527 2.5% 9,583 3.1%
-------- -------- --------
Income from continuing
operations before
income taxes 9,744 2.5% 6,131 1.8% 8,926 2.9%
Income tax provision 3,596 0.5% 2,391 0.7% 3,900 1.2%
-------- -------- --------
Income from continuing
operations $ 6,148 1.6% $ 3,740 1.1% $ 5,026 1.6%
======== ======== ========
Net sales for 2004 were $387.1 million compared with $340.5 million in 2003, an
increase of 13.7% or $46.6 million. Carlon, which experienced the highest
segment net sales growth rate, was favorably impacted by the increased rollouts
of telecom customers' Fiber-to-the-Premise projects. Additional market share
growth resulted in the increased net sales in the Lamson Home Products business
segment. Price increases instituted to offset rising resin costs were the
primary reason for net sales increases in the PVC Pipe segment. 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
a sustained high level of performance in the Company's delivery metrics allowing
it to obtain opportunities for market share expansion, especially with its
electrical distributors and retail customers.
Net sales for 2003 were $340.5 million, or 9.0% higher than the $312.4 million
net sales reported in 2002. Much of the Company's underlying markets, especially
commercial, industrial and telecom construction, trended lower in 2003 compared
with 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. Lamson Home Products had the largest increase in net
sales of $12.1 million, which primarily reflects additional market share in
non-metallic electrical boxes at its major customer. Carlon introduced a Key
Account Management Program, which helped to grow market share at strategic
accounts. While the PVC Pipe business segment grew primarily from price
increases that represented partial pass through of resin cost increases and
growth in demand for its large diameter sewer pipe.
Gross profit increased to $63.7 million, or 16.4% of net sales, in 2004 from
$54.2 million, or 15.9% of net sales, in 2003. Raw material costs including PVC
resin and compounds, HDPE resin and steel components climbed by more than
double-digit percentages in 2004. Many of these increases were passed on during
the year as sales price increases, except in the Lamson Home Products business
segment. Freight costs also escalated throughout 2004 due to fuel cost increases
and driver and equipment shortages, lowering gross margin by 0.2%. The Company
was able as a whole to maintain, and slightly improve gross margins in 2004
compared with 2003 due to higher capacity utilization (72.0% in 2004 versus
68.0% in 2003) of the manufacturing facilities. This occurred primarily in the
HDPE extrusion plants as lines were run to keep up with the improving telecom
demand. Lastly, the Company continued to see favorable leveraging of its
predominately fixed cost distribution operations where costs rose by
approximately 6.0% while shipping activity increased by almost 10.0%.
10
Gross profit in 2003 was $54.2 million compared with $59.9 million gross profit
in 2002. Gross margins were unfavorably impacted by higher raw material costs,
of approximately $3.0 million, that were not able to be completely recovered
with price increases and higher employee benefit costs of $1.0 million. 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 operations successfully
focusing on improving bin accuracy, therefore, raising their productivity
throughout the year. Meanwhile, freight costs are trending upward slightly, $0.4
million, due to the rising fuel costs and carrier consolidations. The Company
monitors key transportation metrics to attempt to control freight costs while
still serving our customers.
Operating income for 2004 was $17.7 million, or 4.6% of net sales, an increase
of $3.0 million, or 20.5% over the $14.7 million, or 4.3% of net sales, earned
in 2003. This improvement was primarily driven by the growing gross profit.
Selling and marketing expenses reflect higher variable selling expenses
generated in 2004 by the higher net sales levels. In addition, incentive
compensation is approximately $4.0 million higher due to the significantly
improved results this year, legal and professional fees exceeded 2003 levels by
about $700 thousand from incremental Sarbanes-Oxley compliance efforts and
expenditures made to support our announced strategic alternatives review.
Partially offsetting these increases were reductions in pension and retiree
medical expense totaling $2.0 million and the collection of a previously written
off account receivable of $0.3 million. Overall, operating expenses have
declined to 11.4% of net sales ($44.1 million) in 2004 from 11.6% of net sales
($39.5 million) in 2003. Included in operating results in 2004 were the net
effects of a litigation settlement of $1.7 million (see Note E) and the sale and
closure of the Company's Pasadena, Texas facility (see Note M).
Operating income in 2003 was $14.7 million, or 4.3% of net sales, compared with
$18.5 million, or 5.9% of net sales, in 2002. This lower level of operating
income was the result of the reduced gross profit in 2003 as operating expenses
were down by $1.9 million to $39.5 million from $41.4 million in 2002. Selling
and marketing costs declined primarily by favorable bad debt experience ($1.0
million) in 2003. General and administrative costs were impacted by higher
pension and retiree medical expense of $3.3 million in 2003. These higher costs
were offset by a significant decline in incentive compensation awards ($2.2
million) as operating financial goals were, for the most part, not met in 2003.
Interest expense continued its downward trend in 2004, declining to $7.9 million
from $8.5 million in 2003 and $9.6 million in 2002. Both the average borrowings
and interest rates that the Company is paying have declined. Average borrowings
were $99.5 million, $102.5 million and $110.0 million in 2004, 2003 and 2002,
respectively. The average interest rates were 5.70%, 6.21% and 6.86% in 2004,
2003 and 2002, respectively. While variable LIBOR rates have increased, the
Company's average rate has improved as higher interest bearing term debt is
being paid down and the Company's interest rate spread under its Secured Credit
Agreement has declined in recent quarters as a result of improved leverage
ratios.
The income tax provision for 2004 reflects an effective tax rate of 36.9%
compared with 39.0% in 2003 and 43.7% in 2002. The provision is primarily a
non-cash charge due to the Company's net operating loss carry-forward position.
During 2004 the Company settled certain state tax matters which resulted in a
reduction of the current state and local income tax expense by approximately
$200 thousand.
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). No impairment was noted in subsequent
tests in 2002, 2003 or 2004 due to improved operating conditions and projected
telecom market activity in the telecom reporting unit of the Carlon business
segment.
11
BUSINESS SEGMENTS
CARLON
Net sales in 2004 were $183.8 million, an increase of $29.7 million, or 19.3%,
over the $154.1 million net sales level in 2003. Approximately $18.0 million of
the increase came from the strong rebound in telecom product sales. This market
demand expansion of almost 25.0% over 2003 is primarily due to the increased
rollout of Fiber-to-the-Premise projects, which utilize HDPE conduit. Carlon was
able to raise pricing in 2004 in response to the higher raw material resin costs
being incurred, which resulted in approximately $6.0 million higher net sales
than 2003. Finally, the Carlon business segment net sales were supported by a
steady residential construction market and a slow upturn in non-residential
construction activity late in 2004.
Net sales in the Carlon 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 in 2003 with the objectives of focusing on selling and
marketing, along with other support services, on strategic accounts that have
higher long-term growth potential. This effort increased net sales by
approximately $0.8 million while selective product line expansions added $4.0
million in net sales 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 margin has expanded throughout 2004 with the higher telecom sales volume
and the price increases on electrical products that were realized this year.
Plant utilization of the HDPE conduit facilities was about five points higher
than 2003. The sales volume increase also helped Carlon realize benefits from
leveraging fixed costs, especially in the Company's distribution centers.
Gross margins in 2003 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.
Operating income for Carlon was $16.8 million, 9.2% of net sales, in 2004
compared with $11.8 million, 7.7% of net sales in 2003, an increase of $5.0
million or 42.2%. Included in operating income in 2004 is a charge of
approximately $864,000 for this business segment's share of a litigation
settlement (see Notes E and L). The growth in operating income comes primarily
from the higher net sales and resultant higher gross margins, which were offset
slightly by increased variable selling expenses of $1.4 million.
The operating income for this business segment fell in 2003 to $11.8 million, or
7.7% of net sales, from $14.4 million, or 9.7% of net sales, in 2002. Actual
operating expenses were lower by $2.9 million in 2003 as the business segment
implemented cost containment programs and had $1.0 million less in bad debt
expenses during the year. The entire decline in 2003 operating margins came from
higher cost of sales as described above.
LAMSON HOME PRODUCTS
Net sales in the Lamson Home Products business segment continued its steady rise
reaching $86.5 million in 2004, a $5.0 million or 6.1% increase over the $81.5
million in net sales level in 2003. The underlying economics of the
"do-it-yourself" home improvement market remains very solid; supported by strong
existing and new home sales and low interest rates. In addition, the Company has
maintained its high level of operational performance this year. The net sales in
2004 include the full year impact of the additional market share obtained in
mid-2003 of approximately $2.0 million. Lamson Home Products has added its door
chimes product line to a couple of major retail customers in the second half of
2004 impacting net sales by $3.0 million. None of the net sales growth in 2004
is attributable to price increases despite the significant cost increases
absorbed in 2004.
12
Net sales in 2003 for Lamson Home Products was favorably impacted by strong
existing home sales, low interest rates and rising consumer confidence,
increasing its net sales to $81.5 million, a $12.1 million, or 17.4% increase,
over the $69.4 million in net sales in 2002. Various supply chain initiatives
were 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. The operational performance, along with innovation on new
products and product line expansions, resulted in this business segment gaining
additional market share totaling $7.0 million with various customers. In
particular, Lamson Home Products was named sole source for all of Home Depot's
non-metallic electric box business in mid-2003. The rollout of this additional
business was substantially complete at the 2003 year-end.
Lamson Home Products' segment gross margins were affected unfavorably by the
over 15.0% increase in PVC compound cost during 2004. As indicated above, no
selling price increases were obtained from the retail customer base to offset
these cost increases causing an erosion of over 400 basis points of gross
margin. In addition, higher distribution expenses were incurred in 2004, $1.9
million, from the substantial increased volume of shipments. Lamson Home
Products was unable to pass through the higher raw material costs realized in
2003. 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 costs over
higher volume, Lamson Home Products was able to maintain gross margins at
approximately the same rate as 2002.
Operating income was $8.8 million, 10.1% of net sales in 2004, compared with
$13.8 million, 16.9% of net sales, in 2003. The $5.0 million decline in
operating income comes primarily from reduced gross margins. In addition, like
Carlon, this business segment was charged with $864,000 for its share of a
litigation settlement in 2004 (see Notes E and L). Lamson Home Products also
incurred higher variable selling expenses, $0.4 million, and product development
costs, $0.3 million, to support, the expansion of the chimes and lighting
control product lines.
The business segment realized $13.8 million, or 16.9% of net sales, in operating
income in 2003, an increase of $3.4 million, or 33.3% over the 2002 operating
income of $10.3 million, or 14.9% of net sales. Operating expenses for this
segment remained fairly steady with 2002 as higher variable selling and
marketing expenses were offset by lower incentive compensation expense.
PVC PIPE
The PVC Pipe business segment experienced net sales growth of $11.9 million, or
11.4%, to $116.8 million in 2004 from $104.9 million in 2003. Rigid pipe sales
volume was very strong in the fourth quarter of 2004 exceeding the fourth
quarter 2003 by 16.7% and bringing total year volume of pounds sold in 2004
approximately even with 2003. Non-residential and telecom infrastructure
construction spending began rebounding late in the year while residential
construction activity was healthy throughout 2004. This business segment was
able to raise pricing by around 12.2% in 2004, which helped to offset PVC resin
cost increases. Finally, this segment experienced higher sales, $2.3 million, of
the Vylon large diameter sewer pipe products to support several sewer
infrastructure projects.
The year 2003 was a difficult one for the PVC Pipe business segment, as the
commercial, industrial and telecom construction markets 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 segment increased net sales in 2003
to $104.9 million from $94.0 million, a rise of $10.9 million, or 11.6%. As part
of the PVC Pipe business, Lamson Vylon Pipe, was able to produce additional net
sales of $4.8 million in 2003 by introducing small diameter sizes of sewer pipe.
Gross margins in the PVC Pipe business segment improved in 2004 as net sales
prices increased to offset much of the approximate 19.0% increase in resin
costs. In addition, the segment experienced favorable product mix, with Vylon
pipe and telecommunication duct becoming a higher percentage of sales. Finally,
the segment
13
has begun to realize some of the cost savings from capital investments made to
increase productivity and reduce costs, such as the blend plant additions and
automation projects completed in 2003.
Gross margins in 2003 eroded in this business segment as resin costs averaged
25.0% higher than in 2002, while only about a third of this cost increase was
able to be recovered as a price increase from customers. On a positive note, the
PVC Pipe extrusion facilities increased their capacity utilization by almost
five basis points due to the reduction of PVC inventory in 2002.
Operating results for the PVC Pipe business were greatly improved in 2004. The
operating loss was narrowed from a $5.1 million loss, 4.9% of net sales, in 2003
to $1.5 million loss, 1.3% of net sales, in 2004. This improvement comes
primarily from better gross margins as operating expenses have increased this
year as a result of higher variable selling expenses.
Operating expenses in 2003 for the PVC Pipe segment remained fairly constant
with the prior year while the operating loss for 2003 totaled $5.1 million
versus a $0.8 million loss in 2002 due to lower gross profit levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity and capital resources is cash
generated from operating activities and availability under its Secured Credit
Agreement.
Cash provided by operating activities in 2004 was $11.8 million compared with
$9.7 million in 2003 and $26.5 million in 2002. Despite improved operating
results in 2004, cash flow from operations was negatively impacted by a $10.2
million increase in accounts receivable primarily from exceptionally high fourth
quarter net sales in 2004. Accounts receivable at the end of 2004 totaled $48.4
million compared with $38.2 million at the end of 2003. Days sales outstanding
improved at 2004 year-end representing 51.1 days down from 52.5 days and 53.0
days at 2003 and 2002 year-end, respectively.
Inventories at the end of 2004 were higher by $6.7 million, at $36.9 million, up
from the $30.1 million 2003 year-end balance. In both 2003 and 2002 inventory
balances declined by $2.1 million and $9.9 million, respectively. Due to the
higher sales levels in 2004, inventory turns continued to improve to 7.5 times
from 7.4 times in 2003 and 6.5 times in 2002.
The pounds of PVC resin inventory at January 1, 2005 are approximately the same
as the prior year; however, the cost per pound is 30.0% higher than such costs
at January 3, 2004 which itself had risen by over 12.0% compared with the cost
per pound at 2002 year-end. HDPE per pound resin costs in inventory at January
1, 2005 have also increased by over 35.0% since the beginning of the year. The
Company is investing more in inventory this year to support the dramatic
increase in telecom product sales and for the rollout of additional chimes and
lighting control sales to several retail customers.
The inventory increase in 2004 was offset by higher accounts payable balances.
Due to the timing of the 2002 year-end (December 28, 2002), a number of payments
of certain vendor liabilities were made in 2003, primarily resin and lease
payments, compared with 2002 or 2004.
The Company made cash contributions of $4.1 million to support pension and other
post-retirement benefit plans in 2004 ($3.0 million in 2003), primarily either
into pension plan trust funds or for retiree medical payments. In 2002,
contributions totaled $8.6 million as the Company made a discretionary $6.0
million voluntary contribution to its defined benefit pension plans in order to
more fully fund the plans after the significant decline in pension asset market
values.
The Company's cash used in investing activities totaled $5.0 million, $9.4
million and $5.0 million in 2004, 2003 and 2002, respectively. Capital
expenditures declined slightly this year to $6.4 million after investing $8.6
million in addition in 2003, of which $3.5 million was spent improving the
supply chain by adding blend plants at two extrusion facilities. The current
year's capital expenditures were spent on replacement and upgrading of molds and
extrusion equipment, continued factory automation and tooling and molds for
product line expansions. In 2004, the Company also received $1.6 million
proceeds from the sale of fixed assets, primarily the Pasadena, Texas plant.
14
The Company's cash used in financing activities was $6.6 million, $1.4 million
and $20.2 million in 2004, 2003 and 2002, respectively. In 2002, the Company was
able to pay down $23.0 million on the Secured Credit Agreement as the Company
refinanced its corporate headquarters and reduced the investment in accounts
receivable and inventories with the decline in business volume. In the last two
years, a total of $7.0 million was paid to reduce the outstanding debt on the
Secured Credit Agreement, a slower pay-down rate from 2002, as the Company has
increased the amount invested in working capital to support the growth in
business. The Company continues to have adequate credit capacity with
availability of $14.0 million at January 1, 2005, which is adequate to fund the
seasonal needs of the business. At the end of 2004, the Company's leverage ratio
of 2.9 did not meet the required covenant level of 2.75. The Company has
received a waiver for this deficiency and an amendment to increase the leverage
ratio to 3.1, which reflects current and future working capital requirements.
The Company was in compliance with all other debt covenants at January 1, 2005
and is expected to maintain compliance throughout the remainder of the term of
the agreement. Despite not meeting the covenant requirement, the Company did
lower its leverage ratio, which will, in turn, be reflected as a 50 basis point
decline in the Secured Credit Agreement interest rate during the first quarter
2005. As noted earlier, the Company's Secured Credit Agreement matures in August
2005. The Company does not expect any difficulty in refinancing this obligation
in the first half of 2005, subject to the outcome of the strategic review. Cash
from operating activities, along with the current and planned refinancing of
credit facilities, will be adequate to fund future cash-flow requirements.
Lastly, in 2004, due to rising stock prices, the Company received $0.6 million
as 121,000 shares were issued from the exercise of stock options.
OUTLOOK FOR 2005
In 2004, particularly during the second half of the year, the telecom spending
on Fiber-to-the-Premise projects grew rapidly. Verizon announced that they were
connecting a million homes with fiber optic cable in 2004 and at least 2 million
homes in 2005. Meanwhile, SBC has also announced major anticipated investments
in their Fiber-to-the-Premise project initiatives for the next several years.
Carlon, as the largest supplier of HDPE conduit in North America for the major
telecom customers (telephone and cable companies), is poised to benefit, as we
did in 2004, from this build-out of the last mile of the telecom network.
Despite increasing telecom sales by 25.0% in 2004, the Company still has about
40.0% of the capacity in its HDPE plants available to meet this forecasted
growth in demand.
Residential construction remained unexpectedly strong in 2004 with housing
starts reaching almost 2.0 million units added for the year, a 9.5% increase in
construction value over 2003. Projections for 2005 are for a slight downturn in
the number of units started to 1.8 million, which is still a solid level.
Existing home sales, a key driver in sales activity in the Lamson Home Products
business segment, climbed to nearly 7.0 million units sold in 2004, up 8.8% from
the 2003 levels. It is anticipated that home sales will remain at healthy levels
in 2005 as unemployment rates decline and interest rates increase modestly.
Commercial and industrial construction, as expected, improved only slightly in
2004. Some increase in net sales was realized by the Company through Carlon's
key account program. We anticipate that commercial and industrial construction
will begin to experience a recovery in 2005 as corporate profits and, therefore,
investments rise and the unemployment rates drop. In addition, the broad growth
in residential construction over the last few years should spur the need for
additional commercial construction. Any increase in commercial or industrial
construction will benefit the Carlon and PVC Pipe segments.
Due to increased global and domestic demand, along with tight supply of
feedstocks and high oil and gas prices, PVC and HDPE resins ended 2004 on
average 20.0% to 30.0% higher than the end of 2003. With a strong outlook for
the general economy in 2005 and resin producer operating rates over 90.0% with
no significant capacity net additions planned, the cost of resin is forecasted
to be another 10.0% to 15.0% higher in 2005. All three business segments,
including Lamson Home Products for the first time, have announced price
increases going into 2005 in order to mitigate these continuing rising costs.
With the closure of the Pasadena, Texas plant in 2004, the Company anticipates
realizing about $1.2 million to $1.5 million in cost improvements in 2005.
Management continues to look for productivity improvements in order to reduce
the Company's cost structure. Capital spending in 2005 is expected to be $7.0 to
$9.0 million,
15
focused primarily on equipment additions and upgrades, incremental tooling to
support telecom growth and new products.
Cash flow from operating activities will continue to improve in 2005 from
expected higher operating results and the leveling off of working capital
requirements.
The Company's Secured Credit Agreement is scheduled to expire in August 2005. It
is management's intent to replace the facility in the first half of 2005,
subject to the conclusion of the review of strategic alternatives to enhance
shareholder value, which may include the sale of part or all of the Company.
This evaluation is expected to conclude by the end of the first quarter of 2005.
The Company does not anticipate any further covenant violations through the term
of the debt.
In summary, we estimate that net sales in 2005 will increase 8.0% to 11.0% to a
range of $420.0 million to $430.0 million, reflecting the strengthening
conditions in the telecom, commercial and industrial construction markets. Based
on this projected net sales growth and higher operating capacity utilization,
the Company anticipates that net income will rise to a range of $10.0 to $11.5
million, or $0.70 to $0.80 per diluted share in 2005, a 55.0% to 70.0%
improvement over 2004 results. For the first quarter of 2005, the Company
estimates that net sales should grow to a range of $94.0 million to $96.0
million, an increase of 13.0% to 16.0% over the first quarter of 2004. This
improved level of net sales may result in net income of $1.1 million to $1.4
million, or $0.08 cents to $0.10 cents per diluted share in the first quarter of
2005.
CRITICAL ACCOUNTING POLICIES
The Company is required to make estimates and judgments in the preparation of
its financial statements. These estimates and judgments affect the asset and
liability amounts reported, as well as revenues and expenses and other
disclosures. The Company routinely reviews these estimates and the underlying
assumptions to ensure they are appropriate for the circumstances. Changes in
estimates or judgments by management could have a significant impact on the
Company's financial results. The Company believes the following are the most
significant accounting polices, which utilize estimates that are inherently
uncertain and, therefore, based on management's judgment.
ACCOUNTS RECEIVABLE ALLOWANCES
The Company maintains allowances against accounts receivable for amounts that
may come uncollectible in the future. The Company records reserves for bad debt
based on a variety of factors including customer's operating results and
financial condition, the length of time receivables are past due and historical
collection experience. If the financial condition of the Company's customers
were to deteriorate, the Company may be required to record additional bad debt
allowances. The Company also has a significant volume of customer deductions, as
is customary in the retail and electrical product markets.
These deductions primarily relate to pricing, freight and shipment quantity
discrepancies. The Company strives to resolve these discrepancies on a timely
basis to limit the accounts receivable collectibility issues. Estimates are made
by management, based primarily on historical experience, as to the
collectibility of deductions. Historically, except for the recovery of accounts
receivables written off due to bankruptcies, there have not been material
changes in estimates to the accounts receivable allowance.
INVENTORY VALUATION
The Company routinely evaluates its inventories to ensure they are carried at
lower cost or market value and to identify obsolete or excess inventory. A
sudden decline in PVC or HDPE resin costs, coupled with a slow-down in sales
volume, could result in the write-down of inventory valuations. In recent years,
resin prices and end markets have improved resulting in no inventory valuation
write-downs. In addition, with some of the supply chain improvements made in the
last couple of years, the Company carries less than two months worth of resin in
inventory, which helps to mitigate the risk of write-downs.
Reserves are provided for obsolete and excess inventory by comparing future
expected inventory usage to actual quantities on hand. The total reserve at
January 1, 2005 is $0.7 million and has remained fairly consistent from year to
year. Much of the Company's products, when scrapped, can be re-ground and the
16
material put back into the manufacturing process. There has not been a
significant change in estimates relating to this inventory reserve in the last
several years.
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
discount rates, expected return on plan assets, rate of compensation increases
and healthcare trend rates. Variations in the pension plan assumptions including
changes in discount rates, actual pension plan asset performance and actual
compensation rate increases will either increase or decrease the unamortized
actuarial gains or losses, which affects future pension expense. The Company
currently has a $36.7 million unrecognized actuarial loss for its defined
benefit pension plans. This is primarily the result of lower discount rates,
going from 7.5% in 2000 to 5.7% in 2004, which impacted the funded status by
approximately $12.0 million in this time period. The current discount rate was
selected by management based on an analysis of expected future interest rates
that would be incurred to settle this liability. The remainder of the
unrecognized loss is caused by net asset actuarial loss (actual return was less
than the assumed rate of return) of about $24.0 million since 2000. The plans
incurred actuarial loss of $35.5 million in 2001 and 2002 reflecting the
reduction in stock market equity values. In 2003 and 2004, the Company has
experienced $11.7 million of actuarial asset gains as the stock market has
rebounded and exceeded management's expected rate of return. As of January 1,
2005, the expected rate of return on plan assets is 8.5%, down from 9.5% in
2000. This is the rate of return anticipated by management in the long-term,
based on plan asset mix.
The salary rate of increase is estimated to be 4.0% and has over the past few
years, been representative of actual results. 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).
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. At
January 1, 2005 the Company has $4.3 million accrued for environmental matters
at a property sold by the Company in 1981. The liability is re-estimated
periodically and includes the costs of certain remediation activities which are
anticipated to take place over an extended period of time. Based on the current
year updated study, the Company recognized a $0.2 million change in estimate,
reducing this reserve. Historically, there have not been any material changes in
estimates (see Note F to the Consolidated Financial Statements). Actual
litigation costs can vary from estimates, based on the facts and circumstances
and application of laws in individual cases. At January 1, 2005 the Company did
not have any unsettled litigation that required accrual. During 2004, the
Company settled a patent infringement case with the net effect of the settlement
of $1.7 million reflected in the 2004 operating results (see Note E to the
Consolidated Financial Statements).
DEFERRED TAX ASSETS
As of January 1, 2005, the Company had approximately $21.9 million of net
deferred tax assets, including loss carryforwards that expire through 2022 and
other temporary differences. Significant factors considered by management in the
determination of the probability of the realization of deferred tax assets
include historical operating results, estimates of future taxable income, and
the extended period of time over which tax deductible goodwill is amortized and
other post-retirement medical benefits will be paid. The Company would need to
generate approximately $27.0 million in taxable income prior to the expiration
of the net operating loss carryforward (2012 to 2022) in order to realize the
benefits on its tax return. The Company has never had a net operating loss
carryforward expire without being used. 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. At
January 1, 2005 and January 3, 2004 the Company had a valuation allowance of
$0.4 million against its
17
deferred tax assets to reflect management's assessment that a portion of the
Company's $1.3 million general business tax credits, which expire in 2005 and
2006, have a low probability of being realized.
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 as of the first day of the fourth quarter, or more
frequently as conditions warrant. The latest test as of October 3, 2004 resulted
in no impairment. 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, which use both discontinued cash flow and market
multiple methodologies, 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 write-down
of goodwill.
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 with unrelated third parties as disclosed in Note C to
the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of
January 1, 2005:
PAYMENT DUE BY PERIOD
----------------------------------------------------------
TOTAL 2005 2006 TO 2007 2008 TO 2009 AFTER
(Dollars in thousands) -------- ------- ------------ ------------ -------
Contractual Obligations:
Long-Term Debt Obligations $ 87,751 $75,875 $1,753 $1,004 $ 9,119
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations 17,117 4,458 6,221 3,810 2,628
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities -- 1,000 -- -- --
-------- ------- ------ ------ -------
Total $104,868 $81,333 $7,974 $4,814 $11,747
======== ======= ====== ====== =======
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains 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 impact, outcome and effects of the
Company's exploration of strategic alternatives, (ii) the volatility of resin
pricing, (iii) the ability of the Company to pass through raw material cost
increases to its customers, (iv) maintaining a stable level of housing starts,
telecommunications infrastructure spending, consumer confidence and general
construction trends, (v) the continued availability and reasonable terms of bank
financing and (vi) any adverse change in the recovery trend of the country's
general economic condition affecting the markets for the Company's products.
Because forward-looking statements are based on a number of beliefs, estimates
and assumptions by management that could ultimately prove to be inaccurate,
there is no assurance that any forward-looking statement will prove to be
accurate.
ITEM 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
18
exposed to market risk related to commodity prices for PVC and HDPE resins and
changes in interest rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
Raw materials used in the manufacture of the Company's products include PVC and
HDPE resins and compounds. The Company's financial results could be affected by
the availability and changes in prices of these materials. The Company closely
monitors its inventory levels and requirements for these materials and utilizes
multiple suppliers where possible. The Company does not actively hedge or use
derivative instruments in the management of its inventories.
The Company's Secured Credit Agreement obligation bears 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. The notional amount is used to calculate the contractual cash flow
to be exchanged and does not represent exposure to credit loss.
A summary of these instruments outstanding at January 1, 2005 follows:
(Dollars in thousands)
INTEREST RATES
INTEREST HEDGE NOTIONAL --------------- VARIABLE INTEREST
RATE SWAPS TYPE AMOUNT RECEIVED PAID RATE BASIS
----------------- --------- -------- -------- ---- -----------------
Variable to Fixed Cash Flow $48,500 1.98% 5.48% 3-month LIBOR
Variable to Fixed Cash Flow $10,000 1.91% 5.41% 3-month LIBOR
These risks and others that are detailed in this Form 10-K must be considered by
any investor or potential investor in the Company.
19
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 Registered Public Accounting Firm..... 21
Consolidated Statements of Operations for Fiscal Years Ended 22
2004, 2003, 2002..........................................
Consolidated Statements of Cash Flows for Fiscal Years Ended 23
2004, 2003, 2002..........................................
Consolidated Balance Sheets at January 1, 2005 and January 24
3, 2004...................................................
Consolidated Statements of Shareholders' Equity for Fiscal 26
Years Ended 2004, 2003, 2002..............................
Notes to Consolidated Financial Statements.................. 27
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts and
Reserves.................................................. 42
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 1, 2005 and January 3, 2004, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years in the period ended January 1, 2005.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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 1, 2005 and January 3, 2004,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended January 1, 2005, in conformity
with U.S. generally accepted accounting principles. 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of January 1, 2005, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 25, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 25, 2005
21
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS
------------------------------
2004 2003 2002
(Dollars in thousands, except per share data) -------- -------- --------
NET SALES $387,139 $340,487 $312,429
Cost of products sold 323,455 286,300 252,499
-------- -------- --------
GROSS PROFIT 63,684 54,187 59,930
Selling and marketing expenses 26,527 23,787 24,963
General and administrative expenses 15,349 13,831 14,274
Research and development 2,198 1,911 2,184
-------- -------- --------
TOTAL OPERATING EXPENSES 44,074 39,529 41,421
Litigation settlement 1,728 -- --
Other, net 213 -- --
-------- -------- --------
OPERATING INCOME 17,669 14,658 18,509
Interest expense, net 7,925 8,527 9,583
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 9,744 6,131 8,926
Income tax provision 3,596 2,391 3,900
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 6,148 3,740 5,026
Income (loss) from discontinued operations, net of income
tax of $256 in 2004 and benefit of $1,750 in 2003 (Note G) 401 (2,738) --
-------- -------- --------
Income before cumulative effect of change in accounting
principle 6,549 1,002 5,026
Cumulative effect of change in accounting principle, net of
income tax benefit of $13,750 -- -- (46,250)
-------- -------- --------
NET INCOME (LOSS) $ 6,549 $ 1,002 $(41,224)
======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings from continuing operations before cumulative effect
of change in accounting principle $ 0.45 $ 0.27 $ 0.36
Income (loss) from discontinued operations, net of tax 0.03 (0.20) --
Cumulative effect of change in accounting principle, net of
tax -- -- (3.36)
-------- -------- --------
NET EARNINGS (LOSS) $ 0.47* $ 0.07 $ (2.99)*
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings from continuing operations before cumulative effect
of change in accounting principle $ 0.43 $ 0.27 $ 0.36
Income (loss) from discontinued operations, net of tax 0.03 (0.20) --
Cumulative effect of change in accounting principle, net of
tax -- -- (3.36)
-------- -------- --------
NET EARNINGS (LOSS) $ 0.46 $ 0.07 $ (2.99)*
======== ======== ========
---------------
* Earnings per share do not sum to total, due to rounding.
See notes to consolidated financial statements.
22
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS
-----------------------------
2004 2003 2002
(Dollars in thousands) -------- ------- --------
OPERATING ACTIVITIES
Net income (loss) $ 6,549 $ 1,002 $(41,224)
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 9,140 9,195 10,074
Amortization 1,599 1,599 1,599
Net gain on sale of fixed assets (933) -- --
Deferred income taxes 3,913 2,280 4,645
Net change in working capital accounts:
Accounts receivable (10,195) (1,510) 2,518
Inventories (6,717) 2,087 9,853
Prepaid expenses and other 313 (689) 610
Accounts payable 7,285 (4,281) (766)
Accrued expenses and other current liabilities 926 (2,041) 2,441
Pension plan contributions (1,866) (1,126) (6,477)
Other long-term items 1,821 457 (3,003)
-------- ------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 11,835 9,711 26,520
INVESTING ACTIVITIES
Net additions to property, plant and equipment (6,370) (8,562) (3,952)
Proceeds from sale of fixed assets 1,595 -- --
Acquisitions and related items (250) (813) (1,000)
-------- ------- --------
CASH USED IN INVESTING ACTIVITIES (5,025) (9,375) (4,952)
FINANCING ACTIVITIES
Net payments under secured credit agreement (6,400) (600) (23,000)
Proceeds from refinancing -- -- 4,250
Payments on other long-term borrowings (599) (772) (1,487)
Purchase and retirement of treasury stock (205) -- --
Exercise of stock options 609 8 --
-------- ------- --------
CASH USED IN FINANCING ACTIVITIES (6,595) (1,364) (20,237)
-------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 215 (1,028) 1,331
Cash and cash equivalents at beginning of year 468 1,496 165
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 683 $ 468 $ 1,496
======== ======= ========
See notes to consolidated financial statements.
23
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2005 and January 3, 2004
2004 2003
(Dollars in thousands) -------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 683 $ 468
Accounts receivable, net of allowances of $1,522 and
$1,532, respectively 48,391 38,196
Inventories, net
Raw materials 3,504 2,560
Work-in-process 5,160 3,266
Finished goods 28,196 24,317
-------- --------
36,860 30,143
Deferred tax assets 9,683 7,996
Prepaid expenses and other 5,128 4,574
-------- --------
TOTAL CURRENT ASSETS 100,745 81,377
PROPERTY, PLANT AND EQUIPMENT
Land 3,320 3,537
Buildings 25,130 25,776
Machinery and equipment 119,622 121,887
-------- --------
148,072 151,200
Less allowances for depreciation and amortization 100,111 99,874
-------- --------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 47,961 51,326
GOODWILL 21,480 21,519
PENSION ASSETS 30,513 30,016
DEFERRED TAX ASSETS 12,255 17,612
OTHER ASSETS 5,548 6,463
-------- --------
TOTAL ASSETS $218,502 $208,313
======== ========
See notes to consolidated financial statements.
24
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2005 and January 3, 2004
2004 2003
(Dollars in thousands, except per share data) -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 24,213 $ 16,928
Accrued compensation and benefits 12,595 10,633
Customer volume & promotional accrued expenses 6,648 6,024
Other accrued expenses 8,509 8,273
Taxes 3,272 3,408
Secured Credit Agreement - current 75,000 11,000
Current maturities of long-term debt 875 760
-------- --------
TOTAL CURRENT LIABILITIES 131,112 57,026
LONG-TERM DEBT 11,876 82,990
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 30,138 29,782
SHAREHOLDERS' EQUITY
Common shares, without par value, stated value of $0.10
per share, authorized 20,000,000 shares; outstanding,
13,886,963 shares in 2004 and 13,787,145 shares in 2003 1,389 1,379
Other capital 76,130 75,534
Retained earnings (deficit) (27,280) (33,829)
Accumulated other comprehensive income (loss) (4,863) (4,569)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 45,376 38,515
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $218,502 $208,313
======== ========
See notes to consolidated financial statements.
25
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATIVE OTHER
COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands) ----------------------------------
RETAINED INTEREST FOREIGN MINIMUM TOTAL
COMMON OTHER EARNINGS RATE CURRENCY PENSION SHAREHOLDERS'
SHARES CAPITAL (DEFICIT) SWAPS TRANSLATION LIABILITY EQUITY
------- -------- --------- -------- ----------- --------- -------------
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
Net income -- -- 6,549 -- -- -- 6,549
Other comprehensive income (loss):
Foreign currency translation -- -- -- -- 70 -- 70
Minimum pension liability,
net of $661 tax -- -- -- -- -- (1,034) (1,034)
Interest rate swaps, net of $429
tax -- -- -- 670 -- -- 670
---------
Total comprehensive income 6,255
Issuance of 125,897 shares under
employee benefit plans 12 799 811
Purchase and retirement of 26,079
shares of treasury stock (2) (203) -- -- -- -- (205)
------- -------- -------- ------- ------ -------- ---------
BALANCE AT JANUARY 1, 2005 $1,389 $ 76,130 $(27,280) $ (169) $ (371) $ (4,323) $ 45,376
======= ======== ======== ======= ====== ======== =========
See notes to consolidated financial statements.
26
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three fiscal years ended January 1, 2005
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 2003 and 2002
items have been reclassified to conform with the 2004 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. The Company provides a reserve for obsolete or excess inventory
(less than 2.0% of gross inventory) based on historical and estimated future
usage.
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 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.
Repair and maintenance costs are expensed as incurred and amounted to $7.8
million, $7.9 million and $8.0 million in 2004, 2003 and 2002, respectively.
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, using undiscounted cash flows, or the
useful life has changed. Any impairment would be recognized based on its then
fair value. No impairments were incurred in 2002 through 2004. 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 1, 2005, the Company has three stock-based
employee (and non-employee directors) 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
27
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ACCOUNTING POLICIES - CONTINUED
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.
FISCAL YEARS
--------------------------
2004 2003 2002
(Dollars in thousands, except per share data) ------ ------ --------
Net income (loss) As reported $6,549 $1,002 $(41,224)
Total stock-based employee
compensation, net of tax (504) (646) (761)
------ ------ --------
Net income (loss) Pro forma $6,045 $ 356 $(41,985)
====== ====== ========
Basic earnings (loss) per share As reported $ 0.47 $ 0.07 $ (2.99)
Pro forma 0.44 0.03 (3.05)
Diluted earnings (loss) per
share As reported $ 0.46 $ 0.07 $ (2.99)
Pro forma 0.43 0.03 (3.05)
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:
2004 2003 2002
------- ------- -------
Expected volatility 57.2% 58.6% 56.8%
Risk-free interest rates 3.79% 2.98% 4.56%
Average expected life 5 years 5 years 5 years
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, "Accounting for Stock-Based Compensation," Statement
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends FASB Statement No. 95, "Statement of Cash Flows."
Generally, the approach in Statement 123(R) is similar to the approach described
in Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. Statement 123(R) must be adopted no later than July 3, 2005.
Early adoption will be permitted in periods in which financial statements have
not yet been issued. The Company will adopt Statement 123(R) on July 3, 2005 and
is still in the process of determining the impact on operating results.
The impact of adoption of Statement 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those
amounts will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions was not material.
Revenue Recognition: Revenues are derived from sales to unaffiliated customers
and are recognized when products are shipped and title has transferred. Cash
discounts, volume and price rebates, allowances and promotional costs are
estimated based on contractual commitments and experience and are recorded as a
reduction in net sales in the period in which the sale is recognized. In 2003,
the Company began paying certain
28
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ACCOUNTING POLICIES - CONTINUED
retail customers service commissions directly replacing third party agencies.
These commission allowances of $2.5 million in 2004 and $1.0 million in 2003
have been recorded as reductions in net sales in accordance with Emerging Issues
Task Force (EITF) 01-9. Previous reporting periods reflect this reclassification
from selling and marketing expenses. 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.
Advertising: The majority of the Company's advertising activities are funded by
co-operative advertising allowances provided to customers which are accounted
for in compliance with EITF 01-9 as a reduction of net sales, and totaled $2.8
million, $2.4 million and $2.0 million in 2004, 2003 and 2002, respectively.
Previous reporting periods reflect a reclassification for these allowances
lowering both net sales and selling and marketing expenses. The remaining
advertising costs of $0.7 million in 2004 and $0.8 million in 2003 and 2002, are
expensed as incurred.
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 $2.2 million, $1.9 million and $2.2
million in 2004, 2003 and 2002, respectively.
Income Taxes: The Company accounts for income taxes using the provisions of SFAS
No. 109, "Accounting for Income Taxes."
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.
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. Given the
indication of a potential impairment, primarily caused by the significant
decline in demand for telecom products, which drove pricing and margins down and
resulted in low capacity utilization, 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). The
fair value was determined using discounted cash flow and market multiple
approaches. 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. Subsequent annual impairment tests have
resulted in no additional impairment being recorded. Of the $21.5 million of
goodwill remaining on the balance sheet at January 1, 2005, approximately $20.0
million relates to the telecom reporting unit in the Carlon business segment and
the remainder is included in the Lamson Home Products business segment.
29
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - GOODWILL AND INTANGIBLE ASSETS - CONTINUED
The Company's other intangible assets and related accumulated amortization is as
follows:
NON-COMPETE
AGREEMENTS PATENTS TOTAL
(Dollars in thousands) ----------- ------- -------
JANUARY 1, 2005
Gross $ 6,500 $ 2,358 $ 8,858
Accumulated amortization (5,552) (1,686) (7,238)
------- ------- -------
Net value $ 948 $ 672 $ 1,620
======= ======= =======
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
======= ======= =======
All non-compete agreements are included in the Carlon business segment and the
majority of 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
$1.3 million, $0.2 million and $0.01 million for 2005 through 2007,
respectively. The change in goodwill in 2004 is due to the timing of realization
of certain tax deductible goodwill.
NOTE C - LONG-TERM DEBT AND COMMITMENTS
Long-term debt consists of the following:
FISCAL YEARS
-----------------
2004 2003
(Dollars in thousands) ------- -------
Secured Credit Agreement:
Term $ 1,705 $14,300
Revolver 73,295 67,100
------- -------
75,000 81,400
Industrial Revenue Bonds 8,685 9,195
Mortgage 4,066 4,155
------- -------
87,751 94,750
Less amounts classified as current 75,875 11,760
------- -------
$11,876 $82,990
======= =======
In August 2000, the Company completed the refinancing of its previous 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
1.0% term loan fee and an increase of 1.0% 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 in full by September 2002, the increase in interest rate and additional
fee were realized. The term portion of this agreement requires a final principal
payment of $1.7 million on
30
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - LONG-TERM DEBT AND COMMITMENTS - CONTINUED
March 31, 2005. This agreement is 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 (leverage ratio) and is
calculated quarterly. The average interest rate at January 1, 2005 is 5.95%. In
addition to amounts borrowed, letters of credit related to Industrial Revenue
Bond financings and other contractual obligations total approximately $14.4
million under the agreement. Total availability at January 1, 2005, under the
Secured Credit Agreement, approximates $14.0 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. At the end of 2004 the Company's leverage ratio of 2.9 did not meet
the required covenant level of 2.75. In February 2005, the Company received a
waiver and amendment for this deficiency and an increase in the future leverage
covenant to 3.1 which reflects current and future working capital requirements.
The Company was in compliance with all other debt covenants at January 1, 2005
and is expected to maintain compliance throughout the remainder of the term of
the credit agreement. The Company did lower its leverage ratio at the 2004
year-end, which will, in turn, be reflected as a 50 basis point decline in the
Secured Credit Agreement interest rate during the first quarter 2005.
The Company's Industrial Revenue Bond financings include several issues due in
annual installments from 2005 through 2023 with interest at variable rates. The
weighted average rate for these bonds at January 1, 2005 was 2.01%. When
consideration is given to the cost of related letters of credit, the effective
weighted-average interest rate is 5.51% at January 1, 2005.
The mortgage on the Company's headquarters is payable in equal monthly
installments of $26,000 through 2012 with interest at prime rate plus 0.25%
(5.50% at January 1, 2005).
The aggregate minimum combined maturities of long-term debt for the year 2006
through 2009 are approximately $786,000, $967,000, $497,000 and $507,000,
respectively, with $9,119,000 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, $18.5 million of
which is outstanding at January 1, 2005, 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 2004 of a $169,000 (net of
$107,000 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 $276,000 loss on the fair
value of the hedges is classified in current other accrued expenses.
Interest paid was $6,468,000, $8,609,000 and $8,752,000 in 2004, 2003 and 2002,
respectively.
Rental expense was $5,848,000, $5,620,000 and $5,777,000 in 2004, 2003 and 2002,
respectively. Aggregate future minimum payments related to non-cancelable
operating leases with initial or remaining terms of one year or more for the
years 2005 through 2009 are approximately $4,458,000, $3,421,000, $2,800,000,
$2,480,000 and $1,330,000, respectively, with $2,628,000 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 and
non-employee directors. 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. As of April 2004 the
31
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS - CONTINUED
Company assumed certain post-retirement medical and life insurance benefits of
YSD Industries, Inc. ("YSDI"), a business which the Company sold in 1988 (see
Note G).
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 1, 2005 and January 3, 2004, respectively, and a statement
of the funded status at both years' end:
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2004 2003 2004 2003
(Dollars in thousands) ------- ------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Obligation at beginning of year $81,242 $77,504 $18,800 $13,488
Service cost 1,192 1,069 7 9
Interest cost 4,874 5,044 917 1,168
Plan participants' contribution -- -- 613 129
Plan amendment -- -- (3,174) 1,487
Actuarial loss (gain) 7,451 4,243 (1,604) 4,511
Assumption of YSDI benefits (see Note G) -- -- 3,521 --
Benefits paid (6,449) (6,618) (2,876) (1,992)
------- ------- ------- -------
Obligation at end of year $88,310 $81,242 $16,204 $18,800
======= ======= ======= =======
The actuarial losses reflected for pension benefits in 2004 and 2003 related
primarily to lower discount rates in each year. Other benefits were reduced in
2004 by $3.2 million for plan amendments that capped the Company's payments for
all current and future salaried retiree medical reimbursements.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. In accordance with
FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,"
the effects of the subsidy resulted in a $0.6 million reduction of the
accumulated post-retirement benefit obligation and is reflected as an actuarial
gain in 2004 in the table above, while other benefit costs were reduced by $0.1
million in 2004.
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2004 2003 2004 2003
(Dollars in thousands) ------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $72,362 $62,877 $ -- $ --
Actual return on plan assets 8,011 14,977 -- --
Employer contributions 1,866 1,126 2,263 1,863
Plan participants' contributions -- -- 613 129
Benefits paid (6,449) (6,618) (2,876) (1,992)
------- ------- ------- -------
Fair value of plan assets at end of year $75,790 $72,362 $ -- $ --
======= ======= ======= =======
Plan assets include 860,856 shares of the Company's common stock with a fair
market value at January 1, 2005 of $7.8 million and $5.0 million at January 3,
2004.
32
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS - CONTINUED
The pension plan weighted-average asset allocation at year ended 2004 and 2003
and target allocation for 2005 are as follows:
PLAN ASSETS
TARGET -------------
ASSET CATEGORY 2005 2004 2003
-------------- ------ ----- -----
Equity securities 70.0% 72.3% 75.0%
Debt securities 29.0% 26.8% 22.2%
Other 1.0% 0.9% 2.8%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The Company's defined benefit plan assets are managed by institutional
investment managers who have been selected based upon their respective
investment discipline and historical performance. The asset allocation has a
strong bias towards equities because of their higher investment return potential
compared with fixed income alternatives. The participants in the defined benefit
plans total approximately 3,500 at the beginning of 2004 of which approximately
46.0% are retired and receiving benefit payments. In order to maintain an
appropriate funding level, the Company believes that it is necessary and prudent
to accept the higher risk associated with equities in order to achieve higher
return levels over the long-term.
The Company expects to contribute $1.7 to $2.0 million to its defined benefit
pension plans in 2005.
The expected benefit payments for the Company's benefits plans are as follows:
PENSION OTHER
PLANS BENEFITS
(Dollars in thousands) ------- --------
2005 $6,476 $2,155
2006 6,345 1,997
2007 6,190 1,941
2008 6,095 1,875
2009 6,056 1,791
2010 through 2014 30,697 5,747
The other benefit payments are net of approximately $100,000 in anticipated
Medicare Part-D subsidies per year beginning in 2006.
PENSION BENEFITS OTHER BENEFITS
------------------ -------------------
2004 2003 2004 2003
(Dollars in thousands) -------- ------- -------- --------
FUNDED STATUS
Fund status at end of year $(12,520) $(8,880) $(16,204) $(18,800)
Unrecognized actuarial loss 36,739 32,958 3,257 4,993
Unrecognized transition (asset) (900) (988) -- --
Unrecognized prior service cost (gain) 330 369 (3,237) (491)
-------- ------- -------- --------
Net amount recognized at end of year $ 23,649 $23,459 $(16,184) $(14,298)
======== ======= ======== ========
The pension benefits table above provides information relating to the funded
status of all defined benefit pension plans on an aggregated basis. The
projected benefit obligation, accumulated benefit obligation, and fair value of
plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets
33
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS - CONTINUED
were $38.8 million, $33.8 million and $19.7 million, respectively, as of January
1, 2005 and $31.9 million, $28.9 million and $16.9 million, respectively, as of
January 3, 2004.
The following table provides the amounts recognized in the consolidated balance
sheets for both years:
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
2004 2003 2004 2003
(Dollars in thousands) -------- -------- -------- --------
Prepaid benefit cost $ 30,513 $ 30,016 $ -- $ --
Accrued benefit liability (14,111) (12,121) (16,184) (14,298)
Intangible asset 160 172 -- --
Accumulated other comprehensive income, before tax 7,087 5,392 -- --
-------- -------- -------- --------
$ 23,649 $ 23,459 $(16,184) $(14,298)
======== ======== ======== ========
The assumptions used in the calculation of amounts recognized for the Company's
benefit plans at January 1, 2005 and January 3, 2004 were:
PENSION OTHER
BENEFITS BENEFITS
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Discount rate 5.70% 6.25% 5.40% 6.25%
Expected return on plan assets 8.5% 9.0% -- --
Rate of salary increase 4.0% 4.0% -- --
The return on pension plan assets for 2005 will remain at 8.5%. The expected
long-term rate of return on assets is determined by considering historical rates
of return, the weighting of plan assets by investment group, targeted weighting
of assets and the current return trends.
For measurement purposes, a 10.0% average healthcare cost trend rate was used
for 2005 (11.0% in 2004). The rate is assumed to decline gradually each year to
an ultimate rate of 5.0% in 2010 and thereafter. A 1.0% change in assumed
healthcare cost trend rates would have the following effects:
1% INCREASE 1% DECREASE
(Dollars in thousands) ----------- -----------
Net periodic benefit cost $ 46 $ (41)
Accumulated post-retirement benefit obligation $881 $(625)
The components of net periodic benefit cost are as follows:
PENSION BENEFITS OTHER BENEFITS
--------------------------- ----------------------
2004 2003 2002 2004 2003 2002
(Dollars in thousands) ------- ------- ------- ----- ------ -----
Service cost $ 1,192 $ 1,069 $ 1,104 $ 7 $ 9 $ 15
Interest cost 4,874 5,044 5,219 917 1,168 851
Expected return on assets (5,945) (5,402) (6,593) -- -- --
Net amortization and deferral 1,555 2,412 971 (297) 186 (387)
Defined contribution plans 1,080 938 987 -- -- --
------- ------- ------- ----- ------ -----
$ 2,756 $ 4,061 $ 1,688 $ 627 $1,363 $ 479
======= ======= ======= ===== ====== =====
34
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS - CONTINUED
In addition to the defined benefit plans described above, the Company also
sponsors a defined contribution plan, which covers substantially all full-time
associates. The Company's matching contribution is a minimum of 50.0% of
voluntary employee contributions of up to 6.0% of wages.
NOTE E - LITIGATION
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. On September 17, 2004, the Company announced
the settlement of this litigation which was arrived at through a mediation
process. The net effect of that settlement ($1.7 million) has been reflected in
the 2004 operating results. A final cash payment of $1.0 million is due in 2005.
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.
NOTE F - ENVIRONMENTAL
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.
During 1999, the Company reached a settlement on litigation involving
environmental matters at a property sold by the Company in 1981 whereby the
Company agreed to incur costs of certain remediation activities, which will
occur over the next seven years. Management's current estimates (undiscounted)
of the costs, $4.3 million, are accrued primarily in other long-term
liabilities. This estimate is based on an updated study performed in 2004 and
resulted in a change in estimate of a $200 thousand reduction in the liability
in the current year. Environmental remediation estimates are subject to change
because of changes in laws, regulations and their interpretations; additional
information on the extent and nature of site contamination; and improvements in
technology. Management anticipates about $0.7 million will be spent in 2005 for
containment projects. The majority of the remaining costs, $2.5 million, is
expected to be spent to demolish the current building and remove and replace
portions of the soil as scheduled in 2010 and 2011.
NOTE G - DISCONTINUED OPERATIONS
As of the end of the first quarter of 2004 the Company was informed that YSD
Industries Inc. ("YSDI"), a business which the Company sold in 1988, was selling
the assets of the business and would be unable to fund (defaulted on its
obligations) certain post-retirement medical and life insurance benefits, for
which the
35
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - DISCONTINUED OPERATIONS - CONTINUED
Company was contingently liable. The Company had recorded a net charge ($2.7
million) at the 2003 year-end reflecting the actuarial calculation of this
estimated liability for payments to certain eligible participants through
February 2011 when the Company's obligation will end and to write-off notes
(cash advances) to YSDI in 2003. As a result of YSDI's asset sale in 2004, the
Company was able to realize payment of $668,000 for these notes receivable that
had been previously written off as uncollectible in 2003. The net impact of this
recovery, $401,000 (net of tax), has been recorded as income from discontinued
operations in 2004.
NOTE H - COMMON, PREFERRED, PREFERENCE STOCK
The Company has authorized 1,200,000 and 3,000,000 shares of Serial Preferred
and Preference Stock, respectively, none of which is issued or outstanding at
January 1, 2005 or January 3, 2004. The Company has reserved for issuance
200,000 shares of Cumulative Redeemable Serial Preference Stock, Series II,
without par value ("Series II Preference Stock"), which relates to the Rights
Agreement, dated as of September 8, 1998, between the Company and National City
Bank (the "Rights Agreement").
Under the Company's Rights Agreement, each shareholder has the right to purchase
from the Company one one-hundredth of a share of the Series II Preference Stock,
subject to adjustment, upon payment of an exercise price of $44.75. The Rights
will become exercisable only after a person or group acquires beneficial
ownership of or commences a tender or exchange offer for 15.0% or more of the
Company's Common Shares. Rights held by persons who exceed that threshold will
be void. In the event that a person or group acquires beneficial ownership of
15.0% or more of the Company's Common Shares, or a 15.0% shareholder merges into
or with the Company or engages in one of a number of self-dealing transactions,
each Right would entitle its holder to purchase a number of the Company's Common
Shares (or, in certain cases, common stock of an acquirer) having a market value
of twice the Right's exercise price. The Company's Board of Directors may, at
its option, redeem all Rights for $0.01 per Right, generally at any time prior
to the Rights becoming exercisable. The Rights will expire on September 20,
2008, unless earlier redeemed, exchanged or amended by the Board of Directors.
NOTE I - STOCK COMPENSATION PLANS
The Company's Non-Employee Directors Stock Option Plan expired on April 22,
2004. At January 1, 2005, there were options outstanding under the Plan
representing 113,000 shares of the Company's Common Stock. The options
outstanding under the Plan may be exercised, pursuant to the terms of the stock
option agreements, through May 5, 2013.
On May 5, 1998, the Company's 1988 Incentive Equity Performance Plan expired. At
January 1, 2005, there were options outstanding under the Plan representing
653,450 shares of the Company's Common Stock. The options outstanding under the
Plan may be exercised, pursuant to the terms of the stock option agreements,
through April 20, 2008.
Under the 1998 Incentive Equity Plan, the Company is authorized to issue
2,570,000 incentive stock options (ISOs), non-qualified stock options; stock
appreciation rights (SARs) and restricted or deferred stock. Stock options
generally become exercisable, in part, one year after date of grant and expire
at the end of ten years. At January 1, 2005, under this Plan, a total of 449,021
shares were available for future grant.
36
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCK COMPENSATION PLANS - CONTINUED
A summary of the status of the Company's three stock compensation plans as of
January 1, 2005, January 3, 2004 and December 28, 2002, and changes during the
respective years then ended, is presented below:
2004 2003 2002
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
(Shares in thousands) ------ -------------- ------ -------------- ------ --------------
Outstanding at
beginning of year 2,613 $6.21 2,359 $6.68 2,032 $7.20
Granted 322 6.48 417 3.47 416 4.17
Exercised (121) 5.06 (2) 4.63 -- --
Forfeited (144) 6.87 (161) 6.00 (89) 6.67
----- ----- ----- ----- ----- -----
Outstanding at end of
year 2,670 $6.26 2,613 $6.21 2,359 $6.68
===== ===== ===== ===== ===== =====
Options exercisable
at year-end 2,028 $6.64 1,904 $6.93 1,694 $6.92
Weighted-average fair
value of options
granted during the
year $3.40 $1.83 $2.21
The following table summarizes information about options outstanding at January
1, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF SHARES REMAINING WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
EXERCISE PRICES AT 01/01/05 CONTRACTUAL LIFE (YRS) EXERCISE PRICE AT 01/01/05 EXERCISE PRICE
--------------- ----------- ---------------------- ---------------- ----------- ----------------
$ 3-5 975,475 6.78 $ 4.06 658,460 $ 4.28
5-8 1,223,700 4.89 $ 6.71 898,367 $ 6.79
8-11 461,000 4.37 $ 9.47 461,000 $ 9.47
12-18 10,000 5.58 $17.94 10,000 $17.94
The Company has deferred compensation plans that provide both certain executive
officers and directors of the Company with the opportunity to defer receipt of
bonus compensation and director fees, respectively. The Company funds these
deferred compensation liabilities by making contributions to certain Rabbi
Trusts which invest exclusively in the Company's common shares. In accordance
with Emerging Issues Task Force (EITF) 97-14 "Accounting for Deferred
Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and
Invested," both the trust assets and the related obligation are recorded in
equity at cost and offset each other. There was a total of 282,000 common shares
at January 1, 2005 (427,500 at January 3, 2004) with a cost of $1.5 million
($2.4 million at January 3, 2004). Fair market value of the shares was $2.6
million at January 1, 2005 ($2.5 million at January 3, 2004).
37
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
FISCAL YEARS
--------------------------
2004 2003 2002
(Dollars and shares in thousands, except per share data) ------ ------ --------
BASIC EARNINGS PER SHARE COMPUTATION
Net Income (Loss) $6,549 $1,002 $(41,224)
====== ====== ========
Average Common Shares Outstanding 13,815 13,785 13,778
====== ====== ========
Basic Earnings (Loss) Per Share $ 0.47 $ 0.07 $ (2.99)
====== ====== ========
DILUTED EARNINGS PER SHARE COMPUTATION
Net Income (Loss) $6,549 $1,002 $(41,224)
====== ====== ========
Basic Shares Outstanding 13,815 13,785 13,778
Stock Options Calculated Under the Treasury Stock Method 349 109 --
------ ------ --------
Total Shares 14,164 13,894 13,778
====== ====== ========
Diluted Earnings (Loss) Per Share $ 0.46 $ 0.07 $ (2.99)
====== ====== ========
There were approximately 392,000, 1,893,000 and 2,369,000 stock options,
respectively, excluded from the diluted earnings per share computations due to
the anti-dilutive effect of such options.
NOTE K - INCOME TAXES
Components of the income tax provision reflected in the consolidated statements
of operations are as follows:
FISCAL YEARS
------------------------
2004 2003 2002
(Dollars in thousands) ------ ------ ------
Current:
Federal $ 92 $ 22 $ 70
State and local (142) 89 34
------ ------ ------
(50) 111 104
Deferred:
Federal 3,233 1,988 3,561
State and local 413 292 235
------ ------ ------
3,646 2,280 3,796
------ ------ ------
Total $3,596 $2,391 $3,900
====== ====== ======
During 2004, the Company settled certain state tax matters which resulted in a
reduction of the current state and local income tax expense by approximately
$0.2 million.
38
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - INCOME TAXES - CONTINUED
The components of deferred taxes included in the consolidated balance sheets as
of January 1, 2005 and January 3, 2004 are as follows:
FISCAL YEARS
-----------------
2004 2003
(Dollars in thousands) ------- -------
Deferred tax assets:
Net operating loss carryforwards (Federal & State) $ 9,710 $11,361
Goodwill 9,788 10,976
Other accruals, credits and reserves 7,265 7,194
General business and alternative minimum tax credits 2,267 2,191
Post-retirement benefits other than pensions 5,664 6,505
------- -------
Total deferred tax assets 34,694 38,227
Less valuation allowance (370) (370)
------- -------
Total deferred tax assets 34,324 37,857
Deferred tax liabilities:
Tax in excess of book depreciation 6,579 5,908
Pensions 5,807 6,341
------- -------
Total deferred tax liabilities 12,386 12,249
------- -------
Total net deferred tax assets $21,938 $25,608
======= =======
The Company has available federal net operating loss carryforwards totaling
approximately $26.7 million, which expire primarily from 2012 to 2022. The
Company also has available general business tax credit carryforwards of $1.3
million, which expire through 2018 and alternative minimum tax credit
carryforwards of approximately $0.9 million, which may be carried forward
indefinitely. The valuation allowance was established in 2002 against available
general business credits and is based upon projected earnings and the ability to
use these credits.
The provision for income taxes for continuing operations is different than the
amount computed using the applicable statutory federal income tax rate with the
differences summarized below:
FISCAL YEARS
------------------------
2004 2003 2002
(Dollars in thousands) ------ ------ ------
Tax expense at statutory rates................. $3,410 $2,146 $3,124
Adjustment due to:
Change in valuation allowance................ -- -- 370
State and local income taxes................. (142) 89 22
Other........................................ 328 156 384
------ ------ ------
$3,596 $2,391 $3,900
====== ====== ======
Income tax paid in 2004 and 2003 was $559,000 and $121,000, respectively. In
2002 the Company received an income tax refund of $1,385,000.
39
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - BUSINESS SEGMENTS
The Company's reportable segments are as follows:
Carlon - Industrial, Residential, Commercial, Telecommunications and Utility
Construction: The major customers served are electrical contractors and
distributors, original equipment manufacturers, electric power utilities, cable
television (CATV), telephone and telecommunications companies. The principal
products sold by this segment include electrical and telecommunications raceway
systems and a broad line of enclosures, electrical outlet boxes and fittings.
Examples of the applications for the products included in this segment are
multi-cell duct systems and high density polyethylene (HDPE) conduit designed to
protect underground fiber optic cables, allowing future cabling expansion and
flexible conduit used inside buildings to protect communications cable.
Lamson Home Products - Consumer: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" (DIY) 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 polyvinyl chloride (PVC) resin and is used to protect wire
or fiber optic cables supporting the infrastructure of power or
telecommunications systems.
2004 2003 2002
(Dollars in thousands) -------- -------- --------
NET SALES
Carlon $183,800 $154,090 $149,037
Lamson Home Products 86,510 81,514 69,440
PVC Pipe 116,829 104,883 93,952
-------- -------- --------
$387,139 $340,487 $312,429
======== ======== ========
OPERATING INCOME (LOSS)
Carlon $ 16,836 $ 11,840 $ 14,395
Lamson Home Products 8,776 13,766 10,324
PVC Pipe (1,502) (5,119) (784)
Corporate Office (6,228) (5,829) (5,426)
Other Expense (see Note M) (213) -- --
-------- -------- --------
$ 17,669 $ 14,658 $ 18,509
======== ======== ========
DEPRECIATION AND AMORTIZATION
Carlon $ 5,342 $ 6,801 $ 7,507
Lamson Home Products 1,881 1,722 1,954
PVC Pipe 3,516 2,271 2,212
-------- -------- --------
$ 10,739 $ 10,794 $ 11,673
======== ======== ========
IDENTIFIABLE ASSETS
Carlon $ 77,473 $ 79,900 $ 83,750
Lamson Home Products 34,190 30,065 27,222
PVC Pipe 44,650 34,232 35,862
Corporate Office (includes deferred taxes and pension
assets) 62,189 64,116 66,871
-------- -------- --------
$218,502 $208,313 $213,705
======== ======== ========
40
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - BUSINESS SEGMENTS - CONTINUED
The net effect of a litigation settlement of $1.7 million has been charged in
equal amounts to the operating income of the Carlon and Lamson Home Products
segments in 2004 (see Note E).
Substantially all sales are made within North America. Net sales to a single
customer within the Carlon and PVC Pipe segments totaled approximately 11.0% in
2004, 14.0% in 2003 and 15.0% in 2002 of consolidated net sales. Net sales to a
single customer within the Lamson Home Products segment totaled approximately
10.2% in 2003 of consolidated net sales.
NOTE M - SALE OF ASSETS
As of January 3, 2004, the Company intended to vacate one of its manufacturing
facilities and proceed with its efforts to sell the property during 2004. The
asset had been written down in 2001 to its then estimated fair value. In the
first quarter of 2004, the Company sold the manufacturing facility located in
Pasadena, Texas for net proceeds of $1.5 million, realizing a gain on the sale
of $924,000. The Company relocated production equipment at this facility to
other Lamson & Sessions facilities, incurring approximately $1.1 million in
severance, training, moving and other costs as detailed below. The net expense
for this facility rationalization of $213,000 is classified as other expense. At
January 1, 2005 a $436,000 liability remained for severance payments to be made
primarily in the first quarter of 2005. This plant sale affected 40 employees,
all of whom left the Company by December 31, 2004.
TRAINING, MOVING
SEVERANCE AND OTHER COSTS TOTAL
(Dollars in thousands) --------- ---------------- ------
2004 charges $ 587 $ 550 $1,137
Utilized in 2004 (151) (550) (701)
----- ----- ------
Balance at January 1, 2005 $ 436 $ -- $ 436
===== ===== ======
NOTE N - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
BASIC EARNINGS (LOSS) DILUTED EARNINGS (LOSS)
PER COMMON SHARE PER COMMON SHARE CLOSING
---------------------- ------------------------ MARKET PRICE
INCOME FROM NET INCOME FROM NET INCOME FROM NET PER SHARE
NET GROSS CONTINUING INCOME CONTINUING INCOME CONTINUING INCOME --------------
SALES (1) PROFIT OPERATIONS (LOSS) OPERATIONS (LOSS) OPERATIONS (LOSS) HIGH LOW
--------- ------- ----------- ------ ------------ ------- -------------- ------- ------ -----
FISCAL 2004:
First quarter(2) $ 82,995 $13,318 $1,299 $1,700 $ 0.09 $0.12 $0.09 $ 0.12 $ 5.93 $4.91
Second quarter 102,148 18,278 2,745 2,745 0.20 0.20 0.19 0.19 8.30 5.95
Third quarter 104,919 17,099 833 833 0.06 0.06 0.06 0.06 9.59 6.80
Fourth quarter(3) 97,077 14,989 1,271 1,271 0.09 0.09 0.09 0.09 10.48 8.68
-------- ------- ------ ------ ------ ----- ----- ------
TOTAL $387,139 $63,684 $6,148 $6,549 $0.45* $0.47 $0.43 $ 0.46
FISCAL 2003:
First quarter $ 78,912 $12,738 $ 226 $ 226 $ 0.02 $0.02 $0.02 $ 0.02 $ 5.60 $3.11
Second quarter 86,389 15,373 1,703 1,703 0.12 0.12 0.12 0.12 5.57 4.00
Third quarter 94,457 14,489 1,518 1,518 0.11 0.11 0.11 0.11 5.80 4.82
Fourth quarter(2) 80,729 11,587 293 (2,445) 0.02 (0.18) 0.02 (0.18) 6.42 5.50
-------- ------- ------ ------ ------ ----- ----- ------
TOTAL $340,487 $54,187 $3,740 $1,002 $ 0.27 $0.07 $0.27 $ 0.07
======== ======= ====== ====== ====== ===== ===== ======
---------------
* Earnings per share were computed on a stand-alone quarterly basis for each
respective quarter. Therefore, the sum of the Basic Earnings Per Common
Share From Continuing Operations in 2004 does not equal the year's total due
to rounding.
(1) In the fourth quarter of 2004, the Company reclassed certain co-operative
advertising and service commission arrangements reducing net sales and gross
profit with no impact on income from continuing operations. All previous
quarters have been restated to reflect this reclass (see Note A).
(2) The Company recorded a charge from discontinued operations of $2,738, net of
tax, during the fourth quarter of 2003 and income from discontinued
operations of $401, net of tax, during the first quarter of 2004 (see Note
G).
(3) Net income in the fourth quarter of 2004 was increased by $0.4 million due
to certain year-end adjustments affecting selling and marketing and general
and administrative expenses.
41
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND AND END OF
DESCRIPTION PERIOD EXPENSES OTHER PERIOD
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 1, 2005
Allowances deducted from assets:
Trade receivable allowances $1,532 $ (232) $ (222)(A) $1,522
Inventory obsolescence reserve 582 1,063 897 (B) 748
Other current and long-term assets 520 -- 70 450
Accounts and loss reserves included in current
and long-term liabilities 4,747 (200) 217 (C) 4,330
------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 3, 2004
Allowances deducted from assets:
Trade receivable allowances $1,924 $ (290) $ 102(A) $1,532
Inventory obsolescence reserve 747 596 761(B) 582
Other current and long-term assets 466 -- (54) 520
Accounts and loss reserves included in current
and long-term liabilities 4,962 -- 215(C) 4,747
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 28, 2002
Allowances deducted from assets:
Trade receivable allowances $2,122 $ 676 $ 874(A) $1,924
Inventory obsolescence reserve 1,754 782 1,789(B) 747
Other current and long-term assets 989 -- 523(D) 466
Accounts and loss reserves included in current
and long-term liabilities 5,374 -- 412(C) 4,962
------------------------------------------------------------------------------------------------------
Note A - Principally write-off of uncollectible accounts and disputed items, net
of recoveries.
Note B - Principally the disposal of obsolete inventory.
Note C - Principally payments on environmental obligations for previously-owned
businesses (see Note F).
Note D - Principally the disposal of fixed assets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9(a). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of January 1, 2005, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of January 1, 2005 based on the
framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on that
evaluation, our management concluded that our internal control over financial
reporting was effective as of January 1, 2005.
42
Management's assessment of the effectiveness of our internal control over
financial reporting as of January 1, 2005 has been audited by Ernst & Young LLP,
an independent registered public accounting firm, as stated in their report
which is included elsewhere herein.
/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
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
their evaluation.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDERS
THE LAMSON & SESSIONS CO.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that The
Lamson & Sessions Co. and Subsidiaries maintained effective internal control
over financial reporting as of January 1, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Lamson &
Sessions Co. management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that The Lamson & Sessions Co. and
Subsidiaries maintained effective internal control over financial reporting as
of January 1, 2005, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, The Lamson & Sessions Co. and Subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of January 1, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
The Lamson & Sessions Co. and Subsidiaries as of January 1, 2005 and January 3,
2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
January 1, 2005 and our report dated February 25, 2005 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 25, 2005
43
ITEM 9(b). OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors.
The information set forth under the caption "Election of
Directors," "Audit Committee Financial Expert" and "Standing
Committees of the Board of Directors - The Audit Committee" in the
Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held April 29, 2005 is hereby incorporated by
reference.
(b) Executive Officers - See Part I.
(c) Compliance with Section 16(a) of the Exchange Act.
The information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement for its Annual Meeting of Shareholders to
be held April 29, 2005 is hereby incorporated by reference.
(d) Code of Ethics.
The information set forth under the caption "Code of Ethics" in the
Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held April 29, 2005 is hereby incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held April 29, 2005 is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the captions "Ownership of the Company's Common
Shares," "Election of Directors" and "Security Ownership of Management" in the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held April 29, 2005 is hereby incorporated by reference.
The table below sets forth certain information regarding the following equity
compensation plans of the Company as of January 1, 2005: 1988 Incentive Equity
Performance Plan (As Amended as of October 19, 2000) (the "1988 Plan"), 1998
Incentive Equity Plan (As Amended and Restated as of April 30, 2004) (the "1998
Plan"), Non-Employee Directors Stock Option Plan (As Amended and Restated as of
July 19, 2001) (the "Directors Option Plan"), Deferred Compensation Plan for
Non-Employee Directors (As Amended and Restated as of April 30, 2004) (the
"Directors Deferred Plan") and Deferred Compensation Plan for Executive Officers
(As Amended and Restated as of October 18, 2001) (the "Executive Officers
Deferred Plan"). All of those plans have been approved by shareholders, except
the Directors Deferred Plan and the Executive Officers Deferred Plan.
NUMBER OF SECURITIES
WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
NUMBER OF SECURITIES EXERCISE PRICE OF FUTURE ISSUANCE UNDER
TO BE ISSUED UPON OUTSTANDING EQUITY COMPENSATION
EXERCISE OF OUT- OPTIONS, PLANS (EXCLUDING
STANDING OPTIONS, WARRANTS SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS IN COLUMN(a))
------------- -------------------- ----------------- -----------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 2,670,175 $ 6.26 449,021(1)
Equity compensation
plans not approved
by security holders 0 N/A 0(2)
Total 2,670,175 $ 6.26 449,021
44
(1) Reflects 449,021 Common Shares remaining available under the 1998 Plan,
which authorizes the Governance, Nominating and Compensation Committee to
make awards of Option Rights, Appreciation Rights, Restricted Shares,
Deferred Shares, Performance Shares and Performance Units.
(2) The Directors Deferred Plan and the Executive Officers Deferred Plan provide
for the issuance of Common Shares, but do not provide for a specific amount
available under the plans. Descriptions of those plans are set forth below.
DIRECTORS DEFERRED PLAN
The Directors Deferred Plan provides Directors the opportunity to defer their
annual retainers and meeting fees. Such deferred fees may be invested, at each
Director's election, in either a money market fund or in Common Shares of the
Company. If a Director elects to have this deferred compensation invested in
Common Shares, the director will receive restricted shares, issued from the 1998
Plan equivalent to 25% of the dollar amount deferred by the director. The number
of restricted shares issued is governed by the price of each restricted share,
which is based on the market value of the shares on the date the retainer or fee
is deferred.
EXECUTIVE OFFICERS DEFERRED PLAN
The Executive Officers Deferred Plan provides designated executive officers and
other key employees of the Company the opportunity to defer bonus compensation
payable to them under the Company's annual incentive compensation program. Such
deferred compensation is invested in deferred Common Shares of the Company. If a
participant elects to have his or her bonus deferred, the Company will issue
Restricted Shares under the 1998 Plan to such participant in the amount of 20%
of the deferred annual incentive compensation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past fiscal year, the Company, in the normal course of business,
utilized the services of the law firm of Jones Day, in which Mr. Coquillette, a
director of the Company, is a partner. The Company plans to continue using the
services of the firm in 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Independent Registered Public
Accounting Firm" in the Company's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held April 29, 2005 is hereby incorporated by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
Consolidated financial statements of The Lamson & Sessions Co. and
Subsidiaries are included in Item 8 of this report:
1. Financial Statements
Consolidated Statements of Operations for Fiscal Years Ended 2004,
2003 and 2002.
Consolidated Statements of Cash Flows for Fiscal Years Ended 2004,
2003 and 2002.
Consolidated Balance Sheets at January 1, 2005 and January 3,
2004.
Consolidated Statements of Shareholders' Equity for Fiscal Years
Ended 2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
3. The exhibits listed in the accompanying Exhibit Index and required
by Item 601 of Regulation S-K (numbered in accordance with Item
601 of Regulation S-K) are filed or incorporated by reference as
part of this Report.
(b) Exhibits - See 15(a) 3.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 4, 2005.
THE LAMSON & SESSIONS CO.
By /s/ James J. Abel
------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated as of March 4, 2005.
SIGNATURE TITLE
--------- -----
/s/ JOHN B. SCHULZE Chairman of the Board, President and
------------------------------------------------ Chief Executive Officer (Principal
John B. Schulze Executive Officer)
/s/ JAMES J. ABEL Executive Vice President, Secretary,
------------------------------------------------ Treasurer and Chief Financial Officer
James J. Abel (Principal Financial Officer)
/s/ LORI L. SPENCER Vice President and Controller (Principal
------------------------------------------------ Accounting Officer)
Lori L. Spencer
/s/ JAMES T. BARTLETT* Director
------------------------------------------------
James T. Bartlett
/s/ FRANCIS H. BEAM, JR.* Director
------------------------------------------------
Francis H. Beam, Jr.
/s/ MARTIN J. CLEARY* Director
------------------------------------------------
Martin J. Cleary
/s/ WILLIAM H. COQUILLETTE* Director
------------------------------------------------
William H. Coquillette
/s/ JOHN C. DANNEMILLER* Director
------------------------------------------------
John C. Dannemiller
/s/ GEORGE R. HILL* Director
------------------------------------------------
George R. Hill
/s/ A. MALACHI MIXON, III* Director
------------------------------------------------
A. Malachi Mixon, III
/s/ D. VAN SKILLING* Director
------------------------------------------------
D. Van Skilling
---------------
* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K pursuant to a Power of Attorney executed on behalf of the
above-named directors of The Lamson & Sessions Co. and filed herewith as
Exhibit 24 on behalf of The Lamson & Sessions Co. and each such person.
March 4, 2005
By /s/ James J. Abel
------------------------------------
James J. Abel
Attorney-in-fact
46
EXHIBIT INDEX
Management Contracts and Compensatory Plans required to be filed pursuant to
Item 15 of Form 10-K are identified with an asterisk (*).
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
3(a) Amended Articles of Incorporation of the Company
(incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement on Form S-8 (Registration No.
333-32875) filed with the Securities and Exchange Commission
on August 5, 1997).
3(b) Amended Code of Regulations of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001 (the
"First Quarter 2001 Form 10-Q")).
4(a) Form of Rights Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
8-A filed with the Securities and Exchange Commission on
September 9, 1998).
4(b) Rights Agreement, dated as of September 8, 1998, by and
between the Company and National City Bank (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A filed with the Securities and Exchange
Commission on September 9, 1998).
*10(a) Form of Three-Year Executive Change-in-Control Agreement
between the Company and certain executive officers
(incorporated by reference to Exhibit 10(b) to the Company's
Annual Report on Form 10-K for the year ended January 1,
2000).
*10(b) Form of Two-Year Executive Change-in-Control Agreement
between the Company and certain executive officers
(incorporated by reference to Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the year ended January 1,
2000).
*10(c) Form of Amendment to two-year and three-year Executive
Change-in-Control Agreements between the Company and certain
executive officers (incorporated by reference to Exhibit
10(c) to the Company's Annual Report on Form 10-K for the
year ended January 3, 2004).
*10(d) Form of One-Year Change-in-Control Agreement between the
Company and certain key employees.
*10(e) Form of Amendment to One-Year Change-in-Control Agreement
between the Company and certain key employees.
*10(f) Form of Indemnification Agreement between the Company and
each of the directors and certain officers (incorporated by
reference to Exhibit 10(g) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10(g) Amended and Restated Credit Agreement, dated as of December
15, 2000, among the Company, the Guarantors party thereto,
the Lenders party thereto, National City Bank, as
Syndication Agent, Bank of America, N.A., as Documentation
Agent and Harris Trust and Savings Bank as Administrative
Agent (incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 29, 2001 (the "Third Quarter 2001
Form 10-Q")).
10(h) First Amendment to the Amended and Restated Credit
Agreement, entered into as of August 1, 2001, among the
Company, the Guarantors party thereto, the Lenders party
thereto and Harris Trust and Savings Bank, as Administrative
Agent for the Lenders (incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001).
10(i) Second Amendment to the Amended and Restated Credit
Agreement, entered into as of October 31, 2001, among the
Company, the Guarantors party thereto, the Lenders party
thereto and Harris Trust and Savings Bank, as Administrative
Agent for the Lenders (incorporated by reference to Exhibit
10(b) to the Third Quarter 2001 Form 10-Q).
10(j) Third Amendment to the Amended and Restated Credit
Agreement, entered into as of March 27, 2002, among The
Lamson & Sessions Co., the Guarantors party thereto, the
Lenders party thereto, and Harris Trust and Savings Bank, as
Administrative Agent for the Lenders (incorporated by
reference to Exhibit 10(a) to the Company's quarterly report
on Form 10-Q for the quarterly period ended March 30, 2002).
47
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10(k) Fourth Amendment to the Amended and Restated Credit
Agreement, entered into as of September 30, 2002, among The
Lamson & Sessions Co., the Guarantors party thereto, the
Lenders party thereto, and Harris Trust and Savings Bank, as
Administrative Agent for the Lenders (incorporated by
reference to Exhibit 10(a) to the Company's quarterly report
on Form 10-Q for the quarterly period ended September 28,
2002).
10(l) Fifth Amendment to the Amended and Restated Credit
Agreement, entered into as of July 29, 2003, among The
Lamson & Sessions Co., the Guarantors party thereto, the
Lenders party thereto, and Harris Trust and Savings Bank, as
Administrative Agent for the Lenders (incorporated by
reference to Exhibit 10(a) to the Company's quarterly report
on Form 10-Q for the quarterly period ended July 5, 2003).
10(m) Sixth Amendment to the Amended and Restated Credit
Agreement, entered into as of February 6, 2004, among The
Lamson & Sessions Co., the Guarantors party thereto, the
Lenders party thereto, and Harris Trust and Savings Bank, as
Administrative Agent for the Lenders (incorporated by
reference to Exhibit 10(c) to the Company's Annual Report on
Form 10-K for the year ended January 3, 2004).
10(n) Seventh Amendment and Waiver to the Amended and Restated
Credit Agreement, entered into as of February 16, 2005,
among The Lamson & Sessions Co., the Guarantors party
thereto, the Lenders party thereto, and Harris Trust and
Savings Bank, as Administrative Agent for the Lenders.
*10(o) Form of Amended and restated Supplemental Executive
Retirement Agreement dated as of March 20, 1990 between the
Company and certain of its executive officers (incorporated
by reference to Exhibit 10(e) to the Company's Annual Report
on Form 10-K for the year ended December 30, 1995).
*10(p) First Amendment to The Lamson & Sessions Co. Amended and
Restated Supplemental Retirement Agreement, effective
January 1, 2000 (incorporated by reference to Exhibit 10(ak)
to the Company's Annual Report on Form 10-K for the year
ended January 1, 2000).
*10(q) The Lamson & Sessions Co. Supplemental Pension Plan,
effective February 23, 2000.
*10(r) 1988 Incentive Equity Performance Plan (as amended and
restated as of February 26, 1998) (incorporated by reference
to Exhibit 4(c) of the Company's Registration Statement on
Form S-3 (Registration No. 333-65795) filed with the
Securities and Exchange Commission on October 16, 1998).
*10(s) Amendment No. 3 to The Lamson & Sessions Co. 1988 Incentive
Equity Performance Plan (as amended and restated as of
February 26, 1998) (incorporated by reference to Exhibit
10(am) to the Company's Annual Report on Form 10-K for the
year ended January 1, 2000).
*10(t) Amendment No. 4 to The Lamson & Sessions Co. 1988 Incentive
Equity Performance Plan (as amended and restated as of
February 26, 1998), dated as of October 19, 2000
(incorporated by reference to Exhibit 10(d) to the First
Quarter 2001 Form 10-Q).
*10(u) Form of two-year non-qualified stock option agreement under
the Company's 1988 Incentive Equity Performance Plan
(incorporated by reference to Exhibit 10(e) to the Third
Quarter 2001 Form 10-Q).
*10(v) Form of three-year non-qualified stock option agreement
under the Company's 1988 Incentive Equity Performance Plan
(incorporated by reference to Exhibit 10(f) to the Third
Quarter 2001 Form 10-Q).
*10(w) 1998 Incentive Equity Plan (as amended and restated as of
April 30, 2004) (incorporated by reference to Appendix B of
the Company's Proxy Statement dated March 29, 2004).
*10(x) Form of two-year non-qualified stock option agreement under
the Company's 1998 Incentive Equity Plan (incorporated by
reference to Exhibit 10(c) to the Third Quarter 2001 Form
10-Q).
*10(y) Form of three-year non-qualified stock option agreement
under the Company's 1998 Incentive Equity Plan (incorporated
by reference to Exhibit 10(d) to the Third Quarter 2001 Form
10-Q).
48
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
*10(z) Form of one-year non-qualified stock option agreement for
non-employee directors under the Company's 1998 Incentive
Equity Plan (incorporated by reference as Exhibit 10(b) to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended July 3, 2004 (the "Second Quarter
2004 Form 10-Q")).
*10(aa) Form of restricted stock agreement for non-employee
directors under the Company's 1998 Incentive Equity Plan
(incorporated by reference as Exhibit 10(c) to the Second
Quarter 2004 Form 10-Q).
*10(bb) The Company's Long-Term Incentive Plan (incorporated by
reference to Exhibit 10(h) to the Company's Annual Report on
Form 10-K for the year ended December 28, 1996).
*10(cc) Amendment No. 1 to The Lamson & Sessions Co. Long-Term
Incentive Plan, effective January 1, 2000 (incorporated by
reference to Exhibit 10(an) to the Company's Annual Report
on Form 10-K for the year ended January 1, 2000).
*10(dd) The Lamson & Sessions Co. Non-Employee Directors Stock
Option Plan, as amended and restated as of July 19, 2001
(incorporated by reference to Exhibit 10(g) to the Third
Quarter 2001 Form 10-Q).
*10(ee) Form of non-qualified stock option agreement under the
Company's Non-Employee Directors Stock Option Plan
(incorporated by reference to Exhibit 10(h) to the Third
Quarter 2001 Form 10-Q).
*10(ff) The Lamson & Sessions Co. Deferred Compensation Plan for
Non-Employee Directors, as amended and restated as of April
30, 2004 (incorporated by reference to Exhibit 10(a) to the
Second Quarter 2004 Form 10-Q).
*10(gg) The Lamson & Sessions Co. Deferred Compensation Plan for
Executive Officers, as amended and restated as of October
18, 2001 (incorporated by reference to Exhibit 10(j) to the
Third Quarter 2001 Form 10-Q).
*10(hh) The Lamson & Sessions Co. Outside Directors Benefit Program,
as amended and restated as of February 19, 2004.
21 Subsidiaries of the Registrant, filed herewith.
23 Consent of Independent Registered Public Accounting Firm.
24 Powers of Attorney, filed herewith.
31.1 Certification of John B. Schulze, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of James J. Abel, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of John B. Schulze, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of James J. Abel, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
49