SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [ X ]
For the quarterly period ended: September 30, 2002
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Commission File Number 1-5426.
------------------------------
THOMAS INDUSTRIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-0505332
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4360 Brownsboro Road, Louisville, Kentucky 40207
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 502/893-4600
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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 twelve 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 [ ]
The number of shares outstanding of issuer's Common Stock, $1 par value, as of
October 26, 2002, was 17,100,695 shares.
Page 1 of 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except Amounts Per Share)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 59,241 $ 44,008 $155,226 $140,619
Cost of products sold 38,065 28,613 99,146 90,170
-------- -------- -------- --------
Gross profit 21,176 15,395 56,080 50,449
Selling, general, and
administrative expenses 15,036 10,733 37,283 32,720
Equity income from GTG 7,498 6,508 21,022 17,681
-------- -------- -------- --------
Operating income 13,638 11,170 39,819 35,410
Interest expense 912 914 2,091 2,800
Interest income and other (128) 312 157 1,331
-------- -------- -------- --------
Income before income taxes 12,598 10,568 37,885 33,941
Income taxes 4,599 3,963 13,829 12,728
-------- -------- -------- --------
Net income before minority interest 7,999 6,605 24,056 21,213
Minority interest, net of tax 14 -- 14 _-
-------- -------- -------- --------
Net income $ 7,985 $ 6,605 $ 24,042 $ 21,213
======== ======== ======== ========
Net income per share:
Basic $ .50 $ .43 $ 1.55 $ 1.40
Diluted $ .49 $ .42 $ 1.50 $ 1.35
Dividends declared per share: $ .085 $ .085 $ .255 $ .255
Weighted average number of shares outstanding:
Basic 15,894 15,184 15,471 15,155
Diluted 16,375 15,721 16,005 15,674
See notes to condensed consolidated financial statements.
2
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30 December 31
2002 2001*
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 16,150 $ 29,500
Accounts receivable, less allowance
(2002--$2,485; 2001--$1,103) 50,261 21,026
Inventories:
Finished products 24,189 6,311
Raw materials 16,498 10,882
Work in process 10,859 3,503
------- -------
51,546 20,696
Deferred income taxes 2,876 2,497
Other current assets 5,856 2,442
------- -------
Total current assets 126,689 76,161
Investment in GTG 194,046 179,219
Property, plant, and equipment 148,599 92,378
Less accumulated depreciation and amortization (60,725) (52,608)
87,874 39,770
-------- --------
Goodwill 46,759 9,244
Other intangible assets--less accumulated
amortization 22,916 427
Other assets 4,118 1,893
------- -------
Total assets $482,402 $306,714
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 3,046 $ --
Accounts payable 16,796 6,861
Accrued Expenses and other current liabilities 20,227 11,738
Dividends payable 1,452 1,295
Income taxes payable 31 2,501
Current portion of long-term debt 8,686 7,788
------- -------
Total current liabilities 50,238 30,183
Deferred income taxes 5,851 5,349
Long-term debt (less current portion) 104,336 24,938
Other long-term liabilities 13,660 8,531
------- -------
Total liabilities 174,085 69,001
Minority Interest 742 --
Shareholders' equity
Preferred Stock, $1 par value,
3,000,000 shares authorized--none issued -- --
Common Stock, $1 par value, shares authorized:
60,000,000; Shares issued: 2002--17,904,661
2001--17,855,511 17,905 17,856
Capital surplus 133,548 114,342
Deferred compensation 823 739
Treasury stock held for deferred compensation (823) (739)
Retained earnings 178,157 158,161
Accumulated other comprehensive income (loss) (9,976) (14,189)
Less cost of treasury shares:
(2002 - 822,339; 2001 - 2,622,339) (12,059) (38,457)
------- -------
Total shareholders' equity 307,575 237,713
------- -------
Total liabilities and shareholders' equity $482,402 $306,714
======= =======
*Derived from the audited December 31, 2001, consolidated balance sheet. See
notes to condensed consolidated financial statements.
3
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Nine Months Ended
September 30
------------
2002 2001
---- ----
Operating activities:
Net income $24,042 $21,213
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Depreciation 6,813 5,937
Amortization - 363
Deferred income taxes 448 (221)
Equity income from GTG (21,022) (19,268)
Amortization of excess investment in GTG - 1,587
Distributions from GTG 6,485 6,092
Other items 500 81
Changes in operating assets and liabilities:
Accounts receivable (3,287) (1,349)
Inventories 940 12
Accounts payable 417 (810)
Income taxes payable (1,780) 1,706
Accrued expenses and other liabilities 708 (2,799)
Other 22 (200)
------ -------
Net cash provided by operating activities 14,286 12,344
Investing activities:
Purchases of property, plant and equipment (4,910) (7,033)
Sale of property, plant and equipment 163 26
Purchase of company (net of cash acquired) (83,533) -
-------- -------
Net cash used in investing activities (88,280) (7,007)
Financing activities:
Proceeds from notes payable to banks, net 1,369 350
Payments on long-term debt (18,630) (7,772)
Proceeds from long-term debt 80,000 2,000
Treasury stock purchased - (67)
Dividends paid (3,889) (3,706)
Stock options exercised 478 1,220
------- ------
Net cash provided by (used in) financing activities 59,328 (7,975)
Effect of exchange rate change 1,316 (341)
------ ------
Net decrease in cash and cash equivalents (13,350) (2,979)
Cash and cash equivalents at beginning of period 29,500 13,941
------ ------
Cash and cash equivalents at end of period $16,150 $10,962
====== ======
Supplemental disclosures of cash flow information:
Non-cash items: Issuance of treasury shares $44,755 $ -
======= ========
See notes to condensed consolidated financial statements.
4
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
The results of operations for the nine-month period ended September 30, 2002,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
Note B - Acquisition
--------------------
On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. Rietschle has been a world leader in
vacuum and pressure technology, which includes dry-running and oil-lubricated
pumps, blowers, compressors, and pressure/vacuum pumps utilizing rotary vane,
screw, roots and claw technologies. With the strong Rietschle brand, Thomas
wants to pursue further opportunities through cross branding of products, and
through growth in markets such as printing, packaging, woodworking and many
other applications that fit Rietschle technologies, including fuel cells. The
purchase price consisted of $83.3 million in cash and 1,800,000 treasury shares
of the Company's common stock. The Company negotiated a $120.0 million revolving
credit facility with a group of banks to finance the cash portion of the
purchase price, of which $80.0 million was used and outstanding as of September
30, 2002. Results of Rietschle for the period after August 29, 2002 through
September 30, 2002 are included in the Company's third quarter and nine-month
year-to-date periods.
A tentative purchase price allocation was made and reflected in the September
30, 2002 financial statements. This allocation is preliminary as the Company
gathers additional information about the fair value of assets and liabilities
acquired, including appraisals. Accordingly, the amounts recorded will change as
the allocation is finalized.
Supplemental pro forma information below is presented as though the business
combination had been completed as of the beginning of the period being reported
on.
5
Three months Nine Months
(In Thousands) Ended Ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $83,975 $93,657 $247,995 $261,587
Net income $ 8,993 $ 9,445 $ 26,931 $ 28,733
Earnings per share-diluted $ .51 $ .54 $ 1.53 $ 1.64
Note C - Contingencies
----------------------
In the normal course of business, the Company is a party to legal proceedings
and claims. When costs can be reasonably estimated, appropriate liabilities for
such matters are recorded. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of the
Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
Note D - Comprehensive Income
-----------------------------
Reconciliation of net income to comprehensive income for the periods indicated
follows.
(In Thousands)
For the three months ended September 30: 2002 2001
---- ----
Net income $7,985 $6,605
Foreign currency translation (931) 1,177
------ -----
Comprehensive income $7,054 $7,782
====== =====
For the nine months ended September 30:
Net income $24,042 $21,213
Foreign currency translation 4,213 (2,086)
----- -------
Comprehensive income $28,255 $19,127
====== ======
Note E - Net Income Per Share
-----------------------------
The computation of the numerator and denominator in computing basic and diluted
net income per share follows:
(In Thousands) Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $ 7,985 $ 6,605 $24,042 $21,213
====== ====== ====== ======
6
Denominator:
Weighted average shares outstanding 15,894 15,184 15,471 15,155
Effect of dilutive securities:
Director and employee stock options 443 513 496 494
Employee performance shares 38 24 38 25
------ ------ ------ ------
Dilutive potential common shares 481 537 534 519
------ ------ ------ ------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 16,375 15,721 16,005 15,674
====== ====== ====== ======
Note F - Segment Disclosures
Three Months Nine Months
(In Thousands) Ended Sept. 30 Ended Sept. 30
-------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
Total net sales including
intercompany sales
Pump and Compressor $69,640 $49,878 $177,858 $158,783
Intercompany sales
Pump and Compressor $(10,399) $(5,870) $(22,632)$(18,164)
------ ------ ------- -------
Net sales to unaffiliated customers
Pump and Compressor $59,241 $44,008 $155,226 $140,619
====== ====== ======= =======
Operating income
Pump and Compressor $ 7,742 $ 5,909 $23,303 $22,018
Lighting* 7,498 6,508 21,022 17,681
Corporate (1,602) (1,247) (4,506) (4,289)
------ ------ ------ ------
$13,638 $11,170 $39,819 $35,410
====== ====== ====== ======
*Three months ended September 30 consists of equity income of $7,547 in 2002 and
$7,090 in 2001 from our 32% interest in the joint venture, Genlyte Thomas Group
LLC (GTG), less $529 of amortization in 2001 of Thomas' excess investment and
less $49 in 2002 and $53 in 2001, related to expense recorded for Thomas
Industries stock options issued to GTG employees. Nine months ended September 30
consists of equity income of $21,172 in 2002 and $19,424 in 2001 from our 32%
interest in GTG, less $1,587 of amortization in 2001 of Thomas' excess
investment and less $150 in 2002 and $156 in 2001, related to expense recorded
for Thomas Industries stock options issued to GTG employees.
Note G - Goodwill and Other Intangible Assets
---------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These
statements established new accounting and reporting standards for business
combinations and associated goodwill and intangible assets. SFAS 141, effective
July 1, 2001, eliminates the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS 142, effective January
1, 2002, requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually. During the first phase of implementing SFAS 142, the Company was
required to identify its reporting units and to determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
7
existing goodwill and intangible assets, to those reporting units as of December
31, 2001. Based upon a discounted cash flow analysis, the Company concluded that
the fair value of its reporting units containing goodwill exceeded the carrying
value. As a result, no impairment loss was recorded or recognized as a
cumulative effect of a change in accounting principle. The Company is required
to perform additional impairment tests on an annual basis prior to the issuance
of the annual financial statements.
The following table provides comparative earnings and earnings per share had the
non-amortization provisions of SFAS 142 been adopted for all periods presented:
For Three Months For Nine Months
Ended Ended
Sept. 30 Sept. 30
-------- --------
(Thousands of dollars, except per share data) 2002 2001 2002 2001
---- ---- ---- ----
Reported net income $7,985 $6,605 $24,042 $21,213
Add back: Pump and Compressor (P & C)
goodwill amortization, net of tax -- 95 -- 284
Add back: Amortization of excess
investment in GTG, net of tax -- 415 -- 1,246
Add back: Amortization for GTG, net of tax -- 327 -- 981
----- ------ ------- -------
Adjusted net income $7,985 $7,442 $24,042 $23,724
====== ====== ======= =======
Basic earnings per share:
Reported net income $.50 $.43 $1.55 $1.40
P & C goodwill amortization -- .01 -- .02
Amortization of excess investment in GTG -- .03 -- .08
GTG amortization -- .02 -- .07
---- ------ ----- -----
Adjusted net income $.50 $.49 $1.55 $1.57
==== ==== ===== =====
Diluted earnings per share:
Reported net income $.49 $.42 $1.50 $1.35
P & C goodwill amortization -- .01 -- .02
Amortization of excess investment in GTG -- .03 -- .08
GTG amortization -- .02 -- .06
---- ----- ----- -----
Adjusted net income $.49 $.47 $1.50 $1.51
==== ==== ===== =====
Certain intangible assets have definite lives and are being amortized. In
accordance with SFAS 142, the Company evaluated the remaining useful lives of
intangible assets as of January 1, 2002, and where appropriate, revisions to the
remaining period of amortization were made. Balances at September 30, 2002 and
December 31, 2001 are stated in thousands of dollars on the following table. The
September 30, 2002 gross carrying amount includes $8.8 million related to the
Rietschle acquisition, which was the portion of the estimated purchase price
allocated to patents. The accumulated amortization balance at September 30, 2002
includes $71,000 related to the Rietschle patents.
8
September 30, 2002 December 31, 2001
------------------------------ ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Life Amount Amortization Life Amount Amortization
Licenses 18-19 $454 $ 57 5-20 $437 $38
Patents 10-20 8,910 146 5-20 23 16
Other 10 35 14 40 31 10
---- --- ---- ---
Total $9,399 $217 $491 $64
====== ==== ==== ===
The total intangible amortization expense for the quarters ended September 30,
2002 and 2001 was $129 and $2, respectively. The total amortization expense for
the nine months ended September 30, 2002 and 2001 was $141 and $18,
respectively.
The estimated amortization expense stated in thousands of dollars for the next
five fiscal years beginning January 1, 2002 is as follows:
For the year ended December 31, 2002: $276
For the year ended December 31, 2003: $756
For the year ended December 31, 2004: $756
For the year ended December 31, 2005: $756
For the year ended December 31, 2006: $756
Approximately $13.7 million of Rietschle purchase price was tentatively
allocated to non-amortizable intangible in the form of trademarks, as a result
of the estimated purchase price allocation.
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment. Goodwill increased by $37.3 million due to the estimated
purchase price allocation of the Rietschle acquisition. Any other change in
goodwill from December 31, 2001 to September 30, 2002, was related to exchange
rate fluctuation.
Note H - Genlyte Thomas Group LLC
---------------------------------
The following table contains certain unaudited financial information for the
Joint Venture.
Genlyte Thomas Group LLC
Condensed Financial Information
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2002 2001
---- ----
GTG balance sheets:
Current assets $406,033 $343,044
Long-term assets 271,249 276,077
Current liabilities 187,342 170,545
Long-term liabilities 57,607 62,573
9
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
2002 2001 2002 2001
---- ---- ---- ----
GTG income statements (unaudited):
Net sales $248,268 $252,631 $728,061 $753,856
Gross profit 86,325 89,808 254,114 264,398
Earnings before interest and taxes 26,332 24,976 73,202 68,591
Net income(1) $ 23,583 $ 22,153 $ 66,163 $ 60,699
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG(2) $7,547 $7,090 $21,172 $19,424
Stock option expense (49) (53) (150) (156)
Amortization of excess investment(3) - (529) - (1,587)
------ ------ ------ ------
Equity income reported by Thomas $7,498 $6,508 $21,022 $17,681
====== ====== ====== =======
(1) The quarter and nine months ended September 30, 2002 include a favorable
impact from the non-amortization provisions of SFAS 142 of $1.3 million
and $3.9 million, respectively.
(2) The quarter and nine months ended September 30, 2002 include a favorable
impact from the non-amortization provisions of SFAS 142 of $.4 million
and $1.2 million, respectively.
(3) The quarter and nine months ended September 30, 2002 include a favorable
impact from the non-amortization provisions of SFAS 142 of $.5 million
and $1.6 million, respectively.
Note I - New Accounting Pronouncements
--------------------------------------
FASB No. 141 and 142 are discussed in Note G above.
--
The SFAS issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144), dated August 2001. This statement supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and it
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted the provisions of SFAS 144, as of January 1,
2002, which did not have an impact on our financial position and results of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies and Estimates
------------------------------------------
Thomas' discussion and analysis of its financial condition and results of
operations are based upon Thomas' consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. When preparing these consolidated financial statements, the
Company is required to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. The Company
10
Item 2. Management's Discussion and Analysis - Continued
evaluates its estimates, including, but not limited to, those related to product
warranties, bad debts, inventories, equity investments, income taxes, pensions
and other post-retirement benefits, contingencies, and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
In response to the Securities and Exchange Commission's (SEC) Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies", the Company identified the following critical accounting policies
which affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Based on the SEC's
suggestions, included with the accounting policies are potential adverse results
which could occur if different assumptions or conditions were to prevail.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of Thomas' customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Thomas provides for the estimated cost of product warranties. While
the Company engages in extensive product quality programs and processes, should
actual product failure rates differ from estimates, revisions to the estimated
warranty liability would be required. Thomas writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Thomas holds a 32 percent minority interest in the Genlyte Thomas Group LLC
(GTG) joint venture, which comprises Thomas' lighting segment and is accounted
for using the equity method. If future adverse changes in market conditions or
poor operating results of GTG occurred, it could result in losses or an
inability to recover the carrying value of the Company's investment, thereby
possibly requiring an impairment charge in the future. GTG's critical accounting
policies are determined separately by The Genlyte Group Incorporated, which owns
68 percent of GTG and consolidates the GTG results.
Results of Operations
---------------------
On August 29, 2002, the Company purchased substantially all the assets and
liabilities of Werner Rietschle Holding GmbH ("Rietschle"), a privately held
company based in Schopfheim, Germany. See Note B in the notes to condensed
consolidated financial statements. Results of Rietschle for the period after
August 29, 2002 through September 30, 2002 are included in the Company's third
quarter and nine-month year-to-date periods.
The Company's net income was $8.0 million in the third quarter ended September
30, 2002, compared to $6.6 million in the third quarter ended September 30,
2001. The third quarter of 2002 was positively impacted by the change in
accounting for goodwill required by SFAS No. 142, which was effective January 1,
2002, and eliminated the recording of goodwill
11
Item 2. Management's Discussion and Analysis - Continued
amortization. Compared to the previous year's third quarter, this change in
accounting increased net income by $.8 million, or 5 cents per share. Excluding
this impact for the accounting change, net income in the quarter ended September
30, 2002, would have increased 7.3% from the previous year's third quarter,
primarily due to improvements in both operating Segments.
Nine month year-to-date net income was $24.0 million for the period ended
September 30, 2002, compared to $21.2 million in the comparable 2001 period. The
change in accounting increased net income by $2.5 million, or 16 cents per share
in the nine months ended September 30, 2002. Excluding this impact for the
accounting change, net income in the nine months ended September 30, 2002 would
have increased 1.3% from the 2001 comparable period.
PUMP AND COMPRESSOR SEGMENT
Net sales during the third quarter ended September 30, 2002, increased 34.6% to
$59.2 million compared to $44.0 million for the third quarter of 2001. Included
in the 2002 third quarter were $11.6 million related to Rietschle net sales
after August 29, 2002. Excluding the Rietschle net sales, the third quarter net
sales would have increased 8.3%. The North American, European and Asia Pacific
operations reported increases for the third quarter of 2002 compared to 2001,
when excluding Rietschle net sales. Overall, the third quarter sales increase of
8.3%, excluding the impact of Rietschle, would have been reduced to 5.8%, if
measured in constant exchange rates. This exchange rate impact on net sales was
primarily related to the European operation due to the strengthening of the euro
and British pound sterling. Year-to-date net sales for the nine-month period
ended September 30, 2002, increased 10.4% to $155.2 million compared to $140.6
million for the comparable period in 2001. Included in the 2002 nine-month
period were $11.6 million of Rietschle net sales. Excluding Rietschle, net sales
for the nine-month period would have increased 2.1%. Excluding the impact of
Rietschle, the Asia Pacific and European operations reported increases of 21.1%
and 4.6%, respectively. The North American operations reported a slight decrease
in net sales, primarily due to a very weak start early in the first quarter of
2002. Overall, the nine-month period net sales increase of 2.1%, excluding the
impact of Rietschle, would have been reduced to 1.5%, if measured in constant
exchange rates.
Operating income for the third quarter ended September 30, 2002, was $7.7
million or 31.0% higher than the prior year amount of $5.9 million. Included in
the 2002 third quarter were $.5 million related to Rietschle operating income
from activity after August 29, 2002, which included estimated purchase
accounting adjustments. Excluding Rietschle, the third quarter operating income
would have increased 21.8%. The 2002 results were positively impacted by $.1
million, due to the accounting change for goodwill amortization. The increase in
operating income was primarily due to the sales volume increases, favorable
sales mix and favorable exchange rate impacts. Excluding the impact of the
accounting change for goodwill amortization, gross margins increased to 35.5%
compared to 35.0%, for the third quarter 2002 versus 2001. Excluding the impact
of Rietschle and purchase price adjustments, gross margins in the 2002 third
quarter would have increased to 35.6%. SG&A expenses increased to 22.7% of net
sales for the third quarter of 2002, compared to 21.6% for the comparable period
in 2001. Excluding Rietschle and purchase price related adjustments, SG&A
expenses would have decreased to 20.7% of net sales. Year-to-date operating
income for the Pump and Compressor Segment for the nine months ended September
30, 2002, was $23.3 million or 5.8% higher than the prior year amount of $22.0
million. Rietschle's operating income of $.5 million was included in the
nine-month
12
Item 2. Management's Discussion and Analysis - Continued
2002 period. Excluding Rietschle, the nine-month period operating income would
have increased 3.4%. The 2002 results were positively impacted by $.4 million,
due to the accounting change for goodwill amortization. The increase was
primarily due to sales volume increases. Excluding the impact of the accounting
change for goodwill amortization, gross margins were constant at 35.9% for the
nine-month periods in 2002 and 2001. Excluding the impact of Rietschle and
purchase price allocation adjustments, gross margins in the 2002 nine-month
period would have stayed at 35.9%. SG&A expenses increased to 21.1% of net sales
for the nine-month period in 2002, compared to 20.2% for the comparable period
in 2001. Excluding Rietschle and purchase price related adjustments, SG&A
expenses would have decreased to 20.4% of net sales in 2002.
LIGHTING SEGMENT
The Lighting Segment (GTG Joint Venture) earnings increased 15.2% to $7.5
million in the third quarter of 2002, compared to $6.5 million in the same
period in 2001. The 2002 results were positively impacted by $.9 million, due to
the accounting change for goodwill amortization. This $.9 million impact
includes $.5 million related to amortization of Thomas' excess investment and
$.4 million, which represents Thomas' 32% interest in GTG's $1.3 million of
goodwill amortization in 2001. Therefore, excluding the impact from the
accounting change, GTG's earnings increased .7% in 2002 compared to the 2001
third quarter. GTG's sales during the 2002 third quarter decreased 1.7% compared
to the third quarter of 2001. The sales shortfall was primarily due to softness
in the commercial and industrial markets while earnings improved due to
aggressive cost control measures in the SG&A area. Year-to-date GTG earnings for
the nine months ended September 30, 2002, increased 18.9% to $21.0 million,
compared to $17.7 million in the 2001 first nine months. The 2002 results were
positively impacted by $2.8 million, due to the accounting change for goodwill
amortization. This $2.8 million impact includes $1.6 million related to
amortization of Thomas' excess investment and $1.2 million, which represents
Thomas' 32% interest in GTG's $3.9 million of goodwill amortization in 2001.
Therefore, excluding the impact from the accounting change, GTG's earnings
increased 2.8% in 2002 compared to the 2001 first nine months. GTG's sales
during the 2002 first nine months decreased 3.4% compared to the first nine
months of 2001.
At any time on or after January 31, 2002, Thomas has the right (a "put right"),
but not the obligation, to require the Joint Venture (GTG) to purchase all, but
not less than all, of Thomas' ownership interest in GTG at the applicable
purchase price. The purchase price shall be equal to the "Fair Market Value" of
GTG multiplied by Thomas' ownership percentage in GTG. The "Fair Market Value"
means the value of the total interests in GTG computed as a going concern,
including the control premium. Further explanation can be found in our Joint
Proxy Statement dated July 23, 1998, which is on file with the Securities and
Exchange Commission. The Company will continue to review alternatives with
respect to the GTG put right.
CORPORATE
As noted in the Segment Disclosure footnote, consolidated operating income
includes corporate expenses. Corporate expenses were $1.6 million for the third
quarter of 2002, compared to $1.2 million for the comparable period in 2001. The
2002 amount included some increases for incentive and professional fee accruals,
which were partially offset by savings from cost reductions implemented during
the second half of 2001. Year-to-date corporate expenses for the nine month
period ended September 30, 2002, were $4.5 million compared to $4.3 million in
the comparable 2001 period.
13
Item 2. Management's Discussion and Analysis - Continued
Interest expense for the 2002 third quarter was $.9 million compared to $.9
million for the third quarter of 2001. Year-to-date interest expense for the
nine month period ended September 30, 2002 was $2.1 million compared to $2.8
million for comparable 2001 period. The 2002 third quarter and nine month
year-to-date interest expense amounts included $.2 million of interest expense
associated with the Rietschle acquisition. The reduction in 2002 was primarily
related to the $7.7 million payment of long-term debt on January 31, 2002, which
carried a 9.36% annual interest rate, as well as higher short-term and other
long-term borrowing levels in 2001.
Interest income and other for the 2002 third quarter was an expense of $.1
compared to income of $.3 million for the third quarter of 2001. The nine month
total for 2002 was $.2 million compared to $1.3 million for the comparable 2001
period. The 2002 third quarter and nine month year-to-date included charges of
$.2 million associated with Rietschle foreign currency losses. The decrease for
the third quarter and September year-to-date periods also related to a $22.3
million note receivable with GTG, from which the Company received interest
income during 2001. GTG paid off this $22.3 million note in November 2001 and
the Company used some of these proceeds to partially pay down long-term debt.
Income tax provisions were $4.6 million and $4.0 million for the third quarter
2002 and 2001, respectively. The September year-to-date income tax provisions
were $13.8 million and $12.7 million for 2002 and 2001, respectively. Effective
tax rates were 36.5% in the 2002 periods and 37.5% for the 2001 periods. The
decline in the effective tax rate was primarily due to the accounting change
related to goodwill amortization.
Liquidity and Sources of Capital
--------------------------------
Cash and cash equivalents decreased $13.3 million to $16.2 million at September
30, 2002, compared to $29.5 million at December 31, 2001. This decrease was
primarily related to the $7.7 million long-term debt payment on January 31,
2002, as well as $10.9 million used to pay down Rietschle bank debt on August
29, 2002. Cash flows provided by operations in the first nine months of 2002
were $14.3 million compared to $12.3 million provided by operations in the same
period of 2001.
Dividends paid in the first nine months of 2002 were $3.9 million or $.255 per
share. The 2001 dividends paid in the first nine months were $3.7 million or
$.245 per share. The Company increased its quarterly dividend per share from
$.075 to $.085, effective with the April 1, 2001 dividend.
As of September 30, 2002, the Company had standby letters of credit totaling
$4.5 million with expiration dates during 2002. The Company anticipates that
these letters of credit will be renewed at their expiration dates.
The Company announced in December 1999 that it planned to repurchase, from time
to time depending on market conditions and other factors, up to 15 percent, or
2,373,000 shares, of its outstanding Common Stock in the open market or through
privately negotiated transactions at the prevailing market prices. During the
first nine months of 2002, no purchases were made. Through September 30, 2002,
the Company has purchased, on a cumulative basis, 879,189 shares at a cost of
$17.3 million under this plan, or an average cost of $19.72 per share. The
Company plans to fund any purchase of Company common stock through a combination
of cash flows generated from operating activities and uncommitted borrowing
arrangements.
14
Item 2. Management's Discussion and Analysis - Continued
Working capital increased from $46.0 million at December 31, 2001, to $76.5
million at September 30, 2002, primarily due to the Rietschle acquisition on
August 29, 2002.
Sept. 30 December 31
------------------------------
Dollars in Thousands
2002 2001
------------------------------
Working capital $ 76,451 $45,978
Current ratio 2.52 2.52
Long-term debt, less current portion $104,336 $24,938
Long-term debt to total capital 25.3% 9.5%
Certain loan agreements of the Company include restrictions on working capital,
operating leases, tangible net worth, and the payment of cash dividends and
stock distributions. Under the most restrictive of these arrangements, retained
earnings of $97.2 million are not restricted at September 30, 2002. Thomas is in
compliance with all covenants or other requirements set forth in its borrowing
agreements. In the event of non-compliance or if Thomas prepays the debt, then
Thomas would incur a penalty. At September 30, 2002, the prepayment penalty
would have been approximately $2.1 million on a pre-tax basis.
As of September 30, 2002, the Company had short-term borrowing arrangements.
Thomas currently expects to fund expenditures for capital requirements as well
as liquidity needs from a combination of available cash balances, internally
generated funds, and, if necessary, short-term financing arrangements. As of
September 30, 2002, the Company had available credit of $120.0 million with
banks under a revolving credit facility, of which $40.0 million was unused. Cash
in excess of operating requirements will continue to be invested in high grade,
short-term securities.
As disclosed in the footnotes to the consolidated financial statements, the
Company does have a 32 percent interest in the GTG joint venture, which is
accounted for using the equity method, and therefore, is an unconsolidated
entity. At September 30, 2002 and December 31, 2001, except as described above,
management was aware of no relationships with any other unconsolidated entities,
financial partnerships, structured finance entities, or special purpose entities
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Forward-Looking Statements
--------------------------
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations," as well as other statements
contained in this Form 10-Q and statements contained in future filings with the
Securities and Exchange Commission and publicly disseminated press releases, and
statements which may be made from time to time in the future by management of
the Company in presentations to shareholders, prospective investors, and others
interested in the business and financial
15
Item 2. Management's Discussion and Analysis - Continued
affairs of the Company, which are not historical facts, are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those set forth in the forward-looking statements. Any
projections of financial performances or statements concerning expectations as
to future developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no assurance
that any forward-looking statement will be realized or that actual results will
not be significantly different from that set forth in such forward-looking
statement. In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company referred to above are
also subject to the following risks and uncertainties:
o The Company operates in a highly competitive business environment, and its
sales could be negatively affected by its inability to maintain or increase
prices, changes in geographic or product mix, or the decision of its
customers to purchase competitive products instead of the Company's
products. Sales could also be affected by pricing, purchasing, financing,
operational, advertising, or promotional decisions made by purchasers of
the Company's products.
o The Pump and Compressor Segment operates in a market where technology
improvements and the introduction of products for new applications are
necessary for future growth. The Company could experience difficulties or
delays in the development, production, testing, and marketing of new
products. As an original equipment supplier, the Company's results of
operations are directly affected by the success of its customers' products.
o The Pump and Compressor Segment has several key customers, none of which
are 10% or more of our consolidated sales. However, the loss of any of
these key customers could have a negative affect on the Company's results.
o On an annual basis, the Company negotiates renewals for property, casualty,
workers compensation, general liability, product liability, and health
insurance coverages. Due to conditions within these insurance markets and
other factors beyond the Company's control, future coverages and the amount
of the related premiums could have a negative affect on the Company's
results.
o The Pump and Compressor Segment has the leading market share in the oxygen
concentrator Original Equipment Manufacturers (OEM) market worldwide. The
Company's market share could be reduced significantly due to a competitor,
the vertical integration by our customers, or new technology replacing
compressed air in oxygen concentrators. The loss of market share in the
oxygen concentrator OEM market could have a significant affect on the
Company's results.
o GTG, which comprises the Company's Lighting Segment, participates in a
highly competitive market that is dependent on the level of residential,
commercial, and industrial construction activity in North America. Changes
in interest rates, consumer preferences, office and plant occupancy rates,
and acceptance of new products affect the Lighting Segment.
16
Item 2. Management's Discussion and Analysis - Continued
o As the Company's business continues to expand outside the United States,
the Company could experience changes in its ability to obtain or hedge
against currency exchange rates and fluctuations in those rates. The
Company could also be affected by nationalizations; unstable governments,
economies, or legal systems; terrorist attacks; tariffs; or
inter-governmental disputes. These currency, economic, and political
uncertainties may affect the Company's results.
o With the August 29, 2002 acquisition of Rietschle, the Company is in the
process of integrating the Rietschle business. There can be no assurance
that the integration will occur in a timely fashion or in a manner which
will allow the Company to realize the full benefit of its strategies. As
part of the integration process, the Company plans on achieving certain
synergies. There can be no assurance that the synergies will be realized in
a timely manner, if at all.
o With the August 29, 2002 acquisition of Rietschle, the Company has a larger
percentage of its net assets exposed to foreign currency risks, when these
foreign currency risks may adversely affect the Company's results.
The forward-looking statements made by the Company are based on estimates that
the Company believes are reasonable. This means that the Company's actual
results could differ materially from such estimates and expectations as a result
of being positively or negatively affected by the factors as described above, as
well as other unexpected, unanticipated, or unforeseen factors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's long-term debt bears interest at fixed rates, with the exception
of the $1.25 million Industrial Revenue Bond and the $80.0 million revolving
credit facility that accrue interest at variable rates. Short-term borrowings
are priced at variable interest rates. The Company's results of operations and
cash flows, therefore, would only be affected by interest rate changes to the
extent of variable rate debt. At September 30, 2002, $81.25 million was
outstanding. A 100 basis point movement in the interest rate on the variable
rate debt of $81.25 million would result in an $812,500 annualized effect on
interest expense and cash flows.
The Company also has short-term investments, included in cash equivalents, of
$8.9 million as of September 30, 2002 that bear interest at variable rates.
Therefore, a 100 basis point movement in the interest rate would result in an
approximate $89,000 annualized effect on interest income and cash flows.
The fair value of the Company's long-term debt is estimated based on current
interest rates offered to the Company for similar instruments. A 100 basis point
movement in the interest rate would result in an approximate $320,000 annualized
effect on the fair value of long-term debt.
The Company has significant operations consisting of sales and manufacturing
activities in foreign countries. As a result, the Company's financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or changing economic conditions in the foreign markets in which
the Company manufactures or distributes its products. Currency exposures for our
Pump and Compressor Segment are concentrated in
17
Item 3. Quantitative and Qualitative Disclosures - Continued
Germany but exist to a lesser extent in other parts of Europe, Asia and South
America. The Lighting Segment currency exposure is primarily in Canada.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing
date of this report, that our disclosure controls and procedures
are effective in ensuring that information required to be
disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the
date of the previous mentioned evaluation.
PART II. OTHER INFORMATION
------- -----------------
Item 2. Changes in Securities and Use of Proceeds
In connection with the Rietschle acquisition, described in Note B
to the financial statements, on August 29, 2002, the Company issued
1,800,000 treasury shares of its common stock to Werner Rietschle
Holding GmbH. This issuance was made in reliance on Regulation S,
promulgated under the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(a) Restated Certificate of Incorporation, as amended.
10.1 Credit Agreement dated August 28, 2002 among Thomas
Industries Inc., Bank One, Kentucky, N.A., National City Bank
of Kentucky, Sun Trust Bank, HVB Banque Luxembourg Societe
Anonyme, and Wells Fargo Bank, N.A., as Lenders (the
"Lenders"); Bank One, Kentucky, N.A., as Administrative Agent
for itself and the other Lenders; National City Bank of
Kentucky as Syndication Agent; Sun Trust Bank and HVB Banque
Luxembourg Societe Anonyme as Co-Documentation Agents; and
Banc One Capital Markets, Inc., as Lead Arranger and Sole Book
Runner.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, filed herewith.
18
(b) A Form 8-K was filed on August 29, 2002, announcing the
acquisition of Werner Rietschle GmbH & Co. KG ("Rietschle").
A Form 8-K was filed September 12, 2002, related to the
Rietschle acquisition, which included the purchase agreement
and credit agreement as exhibits.
A form 8-K/A was filed November 12, 2002 related to the
Rietschle acquisition, which amended the Form 8-K filed
September 12, 2002 to include financial statements of
Rietschle and certain pro forma financial information.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THOMAS INDUSTRIES INC.
-----------------------------------
Registrant
/s/ Phillip J. Stuecker
-----------------------------------
Phillip J. Stuecker, Vice President
and Chief Financial Officer
Date November 12, 2002
-------------------------
20
CERTIFICATIONS
--------------
I, Timothy C. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thomas
Industries Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Timothy C. Brown
---------------------------
Timothy C. Brown, Chairman,
President and CEO
21
CERTIFICATIONS
--------------
I, Phillip J. Stuecker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thomas
Industries Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Phillip J. Stuecker
-----------------------------------
Phillip J. Stuecker, Vice President
and Chief Financial Officer
22