UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission File Number 1-5426
-----------------------------
THOMAS INDUSTRIES INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
DELAWARE 61-0505332
----------------------- --------------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
4360 BROWNSBORO ROAD, SUITE 300, LOUISVILLE, KENTUCKY 40207
----------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
502/893-4600
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes X No __
As of April 25, 2005, 17,853,675 shares of the registrant's Common Stock were
outstanding (net of treasury shares).
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
MARCH 31
---------------------
2005 2004
---------------------
Net sales $109,969 $109,518
Cost of products sold 70,318 71,135
---------------------
Gross profit 39,651 38,383
Selling, general and administrative expenses 30,669 29,000
Equity income from GTG -- 7,422
---------------------
Operating income 8,982 16,805
Interest expense 126 1,026
Interest income 1,326 108
Other income (expense) 604 498
---------------------
Income before income taxes 10,786 16,385
Income taxes 3,354 5,735
---------------------
Net income $ 7,432 $ 10,650
=====================
Net income per share:
Basic $ 0.42 $ 0.61
Diluted $ 0.41 $ 0.60
Dividends declared per share: $ 0.095 $ 0.095
Weighted average number of shares outstanding:
Basic 17,840 17,318
Diluted 18,172 17,779
See notes to condensed consolidated financial statements.
2
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
March 31 December 31
2005 2004 *
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,275 $ 133,472
Short-term investments 216,561 133,627
Accounts receivable, less allowance
(2005--$2,354; 2004--$2,303) 62,913 58,305
Inventories:
Finished products 29,211 36,331
Raw materials 33,804 31,674
Work in process 8,534 7,202
----------------------
71,549 75,207
Deferred income taxes 4,983 5,101
Other current assets 7,825 7,514
----------------------
Total current assets 410,106 413,226
Property, plant and equipment 202,293 202,993
Less accumulated depreciation and amortization (90,255) (88,125)
----------------------
112,038 114,868
Goodwill 70,821 68,639
Other intangible assets, net 25,761 22,659
Other assets 2,400 2,544
----------------------
Total assets $ 621,126 $ 621,936
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,825 $ 17,999
Accrued expense and other current liabilities 35,538 34,204
Dividends payable 1,696 1,689
Income taxes payable 2,696 1,758
Current portion of long-term debt 1,765 1,797
----------------------
Total current liabilities 62,520 57,447
Deferred income taxes 8,842 8,978
Long-term debt, less current portion 6,913 7,751
Long-term pension liability 12,170 12,170
Other long-term liabilities 8,484 8,657
----------------------
Total liabilities 98,929 95,003
Shareholders' equity:
referred stock, $1 par value, 3,000,000 shares authorized - none issued - -
P - -
Common stock, $1 par value, shares authorized: 60,000,000; shares
issued: 2005 - 18,676,014; 2004 - 18,648,723 18,676 18,649
Capital surplus 150,203 149,586
Deferred compensation 1,953 1,558
Treasury stock held for deferred compensation (1,953) (1,558)
Retained earnings 329,535 323,799
Accumulated other comprehensive income 35,842 46,958
Less cost of 822,339 treasury shares (12,059) (12,059)
----------------------
Total shareholders' equity 522,197 526,933
----------------------
Total liabilities and shareholders' equity $ 621,126 $ 621,936
======================
* Derived from the audited December 31, 2004 consolidated balance sheet.
See notes to condensed consolidated financial statements.
3
THOMAS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
----------------------
2005 2004
----------------------
OPERATING ACTIVITIES
Net income $ 7,432 $ 10,650
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and intangible amortization 4,578 4,017
Deferred income taxes 471 (515)
Equity income from GTG -- (7,422)
Other items 178 158
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (6,538) (6,865)
Inventories 1,913 (2,674)
Accounts payable (335) 2,707
Income taxes payable 706 5,439
Accrued expenses and other current liabilities (2,412) 1,355
Other 713 (1,309)
----------------------
Net cash provided by operating activities 6,706 5,541
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,209) (3,740)
Proceeds from sale of property, plant and equipment 87 2
Purchases of marketable securities (134,573) --
Proceeds from sale of marketable securities 51,639 --
Purchase of companies, net of cash acquired (8,532) --
----------------------
Net cash used in investing activities (95,588) (3,738)
FINANCING ACTIVITIES
Proceeds from short-term debt, net -- 171
Payments on long-term debt (547) (10,769)
Proceeds from long-term debt 119 16,534
Dividends paid (1,689) (1,642)
Other 255 1,082
----------------------
Net cash (used in) provided by financing activities (1,862) 5,376
Effect of exchange rate changes 3,547 117
----------------------
Net (decrease) increase in cash and cash equivalents (87,197) 7,296
Cash and cash equivalents at beginning of period 133,472 23,933
----------------------
Cash and cash equivalents at end of period $ 46,275 $ 31,229
======================
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 of Thomas
Industries Inc. ("Thomas" or the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States 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 three-month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2005. In the opinion of the Company's management, the
unaudited consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
of the financial position and the results of operations. 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, 2004.
Note B - Acquisitions
---------------------
On January 10, 2005, the Company acquired certain assets of the side channel
blower business of Ruey Chaang Electric Co., Ltd. of Taipei, Taiwan for
approximately $12 million. A partial payment of $8.4 million in cash was paid in
January 2005, with the balance payable in the third quarter of 2005. A tentative
purchase price allocation was made and reflected in the March 31, 2005 financial
statements. This allocation is preliminary as the Company gathers additional
information about the fair value of assets acquired. Accordingly, the amounts
recorded will change as the allocation is finalized.
The aggregate purchase price consists of (in thousands):
Cash $12,000
Transaction costs 185
-------
Total aggregate purchase price $12,185
=======
The following summarizes the estimated fair values of the assets acquired at the
date of acquisition (in thousands):
Cash $ 53
Inventory 674
Property, plant and equipment 885
Other intangibles 4,476
-------
6,088
Goodwill 6,097
-------
Aggregate purchase price $12,185
=======
The other intangible assets are being amortized on a straight line basis over a
useful life range of three to ten years. The goodwill is allocated to the Pump
and Compressor Segment.
On June 3, 2004, the Company received approximately $6.2 million in cash, which
represents an adjustment to the Company's purchase price of Werner Rietschle
Holding GmbH ("Rietschle"). Rietschle was acquired on August 29, 2002. The
original purchase price consisted of $83.3 million in cash and 1.8 million
treasury shares of the Company's common stock. The purchase agreement specified
5
the negotiation process to be followed for various items in dispute, so that an
adjustment to the purchase price could occur at a subsequent time. In June 2004,
negotiations on certain disputed items were completed and this adjustment
reduced goodwill by $6.2 million. Other adjustments could occur in the future
related to representations and warranties per the purchase agreement.
In estimating the fair values of the assets acquired and liabilities assumed in
the Rietschle transaction, management considered a number of factors, including
collectibility of accounts receivable, net realizable value and replacement cost
of inventory, and the values of liabilities. In addition, an independent
appraiser was used to assist in determining the value of property, plant and
equipment and other intangible assets; however, management is ultimately
responsible for the values recorded.
The adjusted aggregate purchase price for Rietschle consists of (in thousands):
Initial cash paid by the Company $ 83,288
Fair value of Thomas common stock 44,754
Transaction costs 5,931
Purchase price adjustment received in cash (6,154)
---------
Total adjusted aggregate purchase price $ 127,819
=========
Note C - Sale of 32% Interest in GTG
------------------------------------
Effective with the close of business on July 31, 2004, the Company sold its 32%
joint venture interest in the Genlyte Thomas Group LLC (GTG), which the Company
accounted for using the equity method of accounting, to The Genlyte Group
Incorporated (Nasdaq: GLYT) for approximately $400.9 million in cash.
Approximately $102.7 million of the proceeds were used to pay down long-term
debt on August 2, 2004. Approximately $80.5 million of the proceeds were used to
pay a portion of the income taxes (due on the gain) and transaction costs during
the third and fourth quarters.
The Company's adjusted book basis in GTG as of July 31, 2004 was as follows (in
millions):
Investment in GTG at July 31, 2004 $230.5
Thomas' adjustment for accelerated option expense
treated as a transaction cost (.2)
Other comprehensive loss items:
Minimum pension liability 5.5
Foreign currency translation .5
------
Adjusted GTG book basis at July 31, 2004 $236.3
======
The gain on the sale of GTG, which the Company recorded in the third quarter of
2004, was calculated as follows (in millions):
Total sale price $400.9
Transaction costs (4.2)
------
Net proceeds 396.7
Adjusted book basis at July 31, 2004 (236.3)
-------
Pre-tax book gain 160.4
Income taxes (76.3)
-------
Net after-tax gain $ 84.1
=======
Earnings per share - diluted $ 4.74
6
This gain calculation is an estimate subject to final determination of taxes of
the transaction when tax returns are filed in 2005. The effective income tax
rate recorded on the gain of 47.6% is primarily due to the basis differences for
financial reporting and tax purposes in the partnership interest in GTG.
Note D - Contingencies
----------------------
On August 13, 2002, a petition was filed in the District Court of Jefferson
County, Texas, adding Thomas Industries Inc. as a third party defendant in a
lawsuit captioned Hydro Action, Inc. v. Jesse James, individually and d/b/a
James Backhoe Service of Dietrich, Illinois, Inc. and Original Septic Solutions,
Inc. (the "Third Party Plaintiffs") (the "Original Lawsuit"). The Original
Lawsuit alleged that the Company violated the Texas Deceptive Trade Practices
Act and breached warranties of merchantability and fitness for a particular
purpose with respect to pumps sold by the Company and used in septic tanks
manufactured or sold by the plaintiffs. The Original Lawsuit was stayed as a
result of the bankruptcy filing by Hydro Action, Inc. On October 8, 2003, a
lawsuit was filed against the Company, Gig Drewery, Yasunaga Corporation and
Aqua-Partners, Ltd. in the District Court of Jefferson County, Texas, making the
same allegations set forth in the Original Lawsuit and requesting class-action
certification. No class has been certified. The Third Party Plaintiffs are
plaintiffs in this action. This complaint has been amended to include
approximately 28 plaintiffs. The complaint currently seeks $3 million per
plaintiff and punitive and exemplary damages. The total sales related to these
products were approximately $900,000. On September 29, 2004, the case was
remanded to state court in Jefferson County and the stay is no longer in place.
Although this litigation is in the preliminary stages, the Company believes it
has meritorious defenses to the claims and intends to vigorously defend this
matter. Litigation is subject to many uncertainties and the Company cannot
guarantee the outcome of these proceedings. However, based upon information
currently available, the Company does not believe that the outcome of this
proceeding will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
In the normal course of business, the Company is a party to other 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 consolidated 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.
The Company, like other similar manufacturers, is subject to environmental rules
and regulations regarding the use, disposal and cleanup of substances regulated
under environmental protection laws. It is the Company's policy to comply with
these rules and regulations, and the Company believes that its practices and
procedures are designed to meet this compliance.
The Company is subject to various federal, state and local environmental laws
and regulations that require remediation efforts at several locations including
both current and former operating facilities. One of the most significant sites
was a former manufacturing facility, which is located in Beaver Dam, Kentucky.
Since 1992, the Company has been working under an Agreed Order with the Kentucky
Natural Resources and Environmental Protection Cabinet to remediate this site.
The Company has completed all closure activities and has received approval for
implementation of a post-closure plan.
In 2004, a letter was received from the Wisconsin Department of Natural
Resources (WDNR) indicating that the Company was solely responsible for
remediation of a former manufacturing facility located in Fort Atkinson,
Wisconsin, which was sold by the Company in 1985. In response to WDNR's demand,
the Company has engaged a consultant to perform an initial hydrogeologic site
investigation. This initial site investigation found elevated levels of volatile
organic compounds including tetrachlorothene and its daughter products. This
site investigation will be expanded to determine the extent of the contamination
and to develop a remediation work plan. The Company provided a reserve of
$900,000 in the third quarter and an additional $200,000 in the fourth quarter
7
of 2004, respectively, for anticipated future costs associated with remediation
of this site.
The Company's policy is to provide for environmental reserves on a discounted
basis, when appropriate. Environmental reserves are subject to numerous inherent
uncertainties that affect the ability to estimate future costs of required
remediation efforts. Such uncertainties involve the nature and extent of
contamination, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of continuing
improvements in remediation technology and the financial strength of other
potentially responsible parties at multiparty sites. Reserves are reviewed for
adequacy on a quarterly basis and adjusted, if necessary, as environmental
assessment and remediation efforts proceed.
Changes in the Company's environmental reserve at March 31, 2005 and 2004 are as
follows (in thousands):
THREE MONTHS
ENDED MARCH 31
--------------
2005 2004
---- ----
Balance at beginning of period $2,182 $1,321
Environmental accruals - -
Expenditures (79) (76)
------ ------
Balance at end of period $2,103 $1,245
====== ======
Note E - Comprehensive Income
-----------------------------
The reconciliation of net income to comprehensive income follows (in thousands):
THREE MONTHS
ENDED MARCH 31
--------------
2005 2004
---- ----
Net income $ 7,432 $10,650
Other comprehensive income (loss):
Minimum pension liability (increase) - 7
Related tax (benefit) expense -
(3)
Derivative adjustment (685) (293)
Related tax (benefit) expense 260 111
Foreign currency translation (10,691) (7,458)
------- ------
Total change in other comprehensive income (11,116) (7,636)
------- ------
Total comprehensive (loss) income $ (3,684) $ 3,014
======== =======
Note F - 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
ENDED MARCH 31
--------------
2005 2004
---- ----
Numerator:
Net income $ 7,432 $10,650
======= =======
Denominator:
Weighted average shares outstanding 17,840 17,318
Effect of dilutive securities:
Director and employee stock options 282 445
Employee performance shares 50 16
------- -------
Dilutive potential common shares 332 461
------- -------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 18,172 17,779
======= ======
8
Note G - Segment Disclosures
----------------------------
THREE MONTHS
(In thousands) ENDED MARCH 31
-------------
2005 2004
---- ----
Net Sales
Pump and Compressor $109,969 $109,518
Lighting - -
-------- --------
$109,969 $109,518
======== ========
Operating income
Pump and Compressor $12,201 $ 11,643
Lighting* - 7,422
Corporate (3,219) (2,260)
-------- --------
$ 8,982 $ 16,805
======== ========
*Consists of equity income of $7,512,000 in 2004 from our previous 32% interest
in the joint venture, Genlyte Thomas Group LLC (GTG), less $ 90,000 in 2004
related to expense recorded for Thomas stock options issued to GTG employees.
The 2005 amount for the three month period is not comparable to 2004 since the
Company sold its 32% interest in GTG on July 31, 2004.
Note H - Goodwill and Other Intangible Assets
---------------------------------------------
The changes in net carrying amount of goodwill for the three months ended
March 31, 2005 were as follows (in thousands):
THREE MONTHS ENDED
MARCH 31, 2005
--------------
Balance at beginning of period $ 68,639
Adjustments to Ruey Chaang acquisition 6,097
Adjustments to Rietschle acquisition (997)
Translation adjustments and other (2,918)
--------
Balance at end of period $ 70,821
========
The goodwill included in the balance sheets is related to the Pump and
Compressor Segment. There have been no indicators of impairment noted during the
three months ended March 31, 2005.
Certain intangible assets have definite lives and are being amortized.
Amortizable intangible assets consist of the following (in thousands):
MARCH 31, 2005 DECEMBER 31, 2004
----------------------------------------- ----------------------------------------------
ACCUMULATED ACCUMULATED
LIFE COST AMORTIZATION LIFE COST AMORTIZATION
---- ---- ------------ ---- ---- ------------
Licenses 18-19 $ 477 $ 218 18-19 $ 487 $ 218
Patents 5-20 6,069 1,362 5-20 6,320 1,295
Other 1-10 8,567 1,674 1-10 4,267 1,470
-------------------------------- ---------------------------------
Total $15,113 $ 3,254 $11,074 $2,983
================================ =================================
The total intangible amortization expense for the three months ended March 31,
2005 and 2004 was $408,000 and $219,000, respectively.
The estimated amortization expense for the next five years beginning January 1,
2005 through December 31, 2009 is as follows (in thousands):
9
2005 $1,651
2006 1,651
2007 1,641
2008 1,256
2009 1,153
The Company has various trademarks totaling $13,210,000 at March 31, 2005 and
$13,876,000 at December 31, 2004, that are not amortized. Also included in other
intangible assets is an intangible asset associated with the minimum pension
liability of $692,000 as of March 31, 2005 and December 31, 2004.
Note I - Long-lived Assets
--------------------------
The Company periodically evaluates the recoverability of the carrying amount of
long-lived assets (including property, plant and equipment, and intangible
assets with determinable lives) whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. We
evaluate events or changes in circumstances based on a number of factors
including operating results, business plans and forecasts, general and industry
trends and economic projections and anticipated cash flows. An impairment is
assessed when the undiscounted expected future cash flows derived from an asset
are less than its carrying amount. Impairment losses are measured as the amount
by which the carrying value of an asset exceeds its fair value and are
recognized in earnings. We also continually evaluate the estimated useful lives
of all long-lived assets and when warranted revise such estimates based on
current events. There were no significant impairment charges recorded in the
three months ended March 31, 2005 and 2004.
Note J - Genlyte Thomas Group LLC (GTG)
---------------------------------------
The following table contains certain unaudited financial information related to
our joint venture interest in GTG. As discussed in Note C - Sale of 32% Interest
in GTG, the Company sold its interest in GTG effective with the close of
business on July 31, 2004.
Genlyte Thomas Group LLC
Condensed Unaudited Financial Information
(Dollars in Thousands)
MARCH 31, 2004
--------------
GTG balance sheets:
Current assets $471,149
Long-term assets 287,014
Current liabilities 188,741
Long-term liabilities 51,750
THREE MONTHS ENDED
MARCH 31, 2004
--------------
GTG income statements (unaudited):
Net sales $277,362
Gross Profit 95,116
Earnings before interest and taxes 25,219
Net income 23,474
Amounts recorded by Thomas Industries Inc.:
Equity income from GTG $ 7,512
Stock option expense (90)
--------
Equity income reported by Thomas $ 7,422
========
10
Changes in the Company's investment in GTG for March 31, 2004 are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31, 2004
--------------
Balance at beginning of period $214,405
GTG gross equity earnings 7,512
GTG cash distributions -
--------
GTG currency translation adjustment (612)
GTG minimum pension adjustment & other 48
--------
Balance at end of period $221,353
========
Note K - Stock-Based Compensation
---------------------------------
Stock options are granted under various stock compensation programs to employees
and independent directors. In December 2003, the Company adopted the fair value
recognition provisions of accounting for stock-based compensation under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which required the Company to expense the fair value
of employee stock options prospectively for all employee awards granted,
modified or settled after January 1, 2003. Awards under the Company's plan vest
over a period of five years. For employee stock options granted prior to 2003,
the Company continues to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). For purposes of pro forma disclosures, the
estimated fair value of the options granted prior to 2003 is amortized to
expense over the options' vesting period.
Included in stock option activity, but accounted for in accordance with SFAS No.
123, are options granted to GTG employees, for which the Company has recorded
compensation expense. This compensation expense, shown net of tax, is also
included in the pro forma information below for only the 2004 period, since the
Company sold its 32% joint venture interest in GTG on July 31, 2004.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
THREE MONTHS ENDED
MARCH 31
--------
2005 2004
---- ----
Net income (as reported) $7,432 $10,650
Add: Stock-based compensation expense for GTG employees
included in reported net income, net of related tax
effect - 81
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effect
69 -
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effect (157) (195)
--------- ----------
Net income (pro forma) $7,344 $10,536
======== =========
Net income per share (Basic) - As reported $ .42 $ .61
Pro forma .41 .61
Net income per share (Diluted) - As reported .41 .60
Pro forma .40 .59
11
Note L - Product Warranty Costs
-------------------------------
The Company generally offers warranties for most of its products for periods
from one to five years. The specific terms and conditions of these warranties
vary depending on the product sold and country in which the Company does
business. The Company estimates the costs that may be incurred under its
warranties and records a liability in the amount of such costs at the time
product revenue is recognized. Factors that affect the Company's warranty
liability include that number of units sold, historical and anticipated rates of
warranty claims, and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liability and adjusts the amount as necessary.
Changes in the Company's warranty liability for the three months ended March 31,
2005 and 2004 are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31
--------
2005 2004
---- ----
Balance at beginning of period $5,338 $5,382
Warranty accruals 840 970
Settlements made and other (1,098) (835)
------ ------
Balance at end of period $5,080 $5,517
====== ======
Note M - Currency Risk Management
---------------------------------
All derivative instruments are recorded at fair value on the balance sheet and
all changes in fair value are recorded to earnings or to shareholders' equity
through other comprehensive income in accordance with SFAS No. 133, as amended,
"Accounting for Derivatives and Hedging Activity" (SFAS 133).
The Company uses forward currency exchange contracts to manage its exposures to
the variability of cash flows primarily related to the purchase of inventory
manufactured in Europe but inventoried and sold in non Euro-denominated
countries. These contracts are designated as cash flow hedges.
The Company does not use derivative instruments for trading or speculative
purposes.
All of the Company's derivative contracts are adjusted to current market values
each period and qualify for hedge accounting under SFAS 133. The periodic gains
and losses of the contracts designated as cash flows are deferred in other
comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in operations as an adjustment
to the carrying amounts of the underlying transactions in the period in which
these transactions are recognized. The carrying values of derivative contracts
are included in other current assets.
The Company's policy requires that contracts used as hedges must be effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. Hedging effectiveness is
assessed periodically. Any contract that is either not designated as a hedge, or
is so designated but is ineffective, is marked to market and recognized in
earnings immediately. If a cash flow hedge ceases to qualify for hedge
accounting or is terminated, the contract would continue to be carried on the
balance sheet at fair value until settled and future adjustments to the
contract's fair value would be recognized in earnings immediately. If a
forecasted transaction were no longer probable to occur, amounts previously
deferred in other comprehensive income would be recognized immediately in
earnings.
12
Note N - Pension and Other Postretirement Benefit Costs
-------------------------------------------------------
The components of net periodic benefit cost consisted of the following:
OTHER
Three months ended March 31: PENSION BENEFITS POSTRETIREMENT
---------------------------- ----------------- BENEFITS
--------
FOREIGN PLANS U.S. PLANS U.S. PLANS
--------------------------------------------------- -----------------------
2005 2004 2005 2004 2005 2004
------------ ------------ ------------ ------------ ----------- -----------
Service cost $ 66 $ 62 $ 88 $ 84 $ 28 $ 21
Interest cost 159 141 137 131 29 23
Expected return on plan assets - - (164) (144) - -
Other amortization and deferral 11 4 57 60 14 10
------ ------ ------ ------ ---- ----
Net Periodic Benefit cost $ 236 $ 207 $ 118 $ 131 $ 71 $ 54
====== ====== ====== ====== ==== ====
As of March 31, 2005, no contributions have been made, but the Company
anticipates contributions to the plans of $670,000 for 2005.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"), which introduces a Medicare prescription
drug benefit, 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
the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", ("FSP
106-2") to discuss certain accounting and disclosure issues raised by the Act.
FSP 106-2 addresses accounting for the federal subsidy for the sponsors of
single employer defined benefit postretirement healthcare plans and disclosure
requirements for plans for which the employer has not yet been able to determine
actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 is
effective for the first interim or annual period beginning after June 15, 2004.
We have not yet concluded whether the prescription drug benefits provided under
our postretirement plan are actuarially equivalent to the Medicare benefit as
necessary to qualify for the subsidy. The reported net periodic benefit costs of
our postretirement plan in the table above do not reflect the effects of the
Act. Adoption of FSP 106-2 could require revisions to previously reported
information. While we may be eligible for benefits under the Act based on the
prescription drug benefits provided in our postretirement plan, we do not
believe such benefits will have a material impact on our consolidated financial
statements.
Note O - Short-Term Investments
-------------------------------
Short-term investments are classified as available-for-sale securities and
include tax advantaged debt securities with original maturities ranging from
four to 38 years. These debt securities are callable at par value (cost) based
on seven to 35 days notification to the bondholders. The Company has the option
to either sell or put these securities every seven to 35 days and these
securities will normally be held for less than one year. The securities are
carried on the balance sheet at fair market value, which is equivalent to cost.
Current period adjustments to the carrying value of available-for-sale
securities would be included in accumulated other comprehensive income within
stockholder's equity. Because of the nature of all these investments, cost does
not differ from fair market value, so there are no such adjustments to the
carrying value.
Note P - Exit Costs for Wuppertal, Germany Facility
---------------------------------------------------
In February 2004, the Company announced the closing of its Wuppertal, Germany
manufacturing facility in an effort to further consolidate its European
manufacturing operations and strengthen its market position by concentrating its
product, logistics, and engineering capacity. The exit activities were completed
by December 31, 2004, with the exception of some minor severance which could be
13
paid in 2005. The following table describes the 2004 activity and the exit
liability as of December 31, 2004 (in thousands):
Beginning Balance Ending Balance
Exit Costs: at Jan. 1, 2004 Accruals Expenditures at Dec. 31, 2004
--------------- -------- ------------ ----------------
Severance - $1,642 $(1,622) $20
Contract termination - 8 (8) -
--------- ------ ------- ---
Total exit costs - $1,650 $(1,630) $20
========= ====== ======= ===
In addition to the $1,650,000 exit charge noted above, the Company has recorded
$1,186,000 of additional charges in the twelve months ended December 31, 2004
which include costs to coordinate the facility shutdown ($488,000), fixed asset
disposal and other charges to write down assets to net realizable value
($455,000) and training & other costs related to the transfer of production from
the Wuppertal facility ($243,000). The carrying value of assets held for sale
related to the Wuppertal facility is not significant.
Approximately $2.7 million of the costs associated with this exit activity were
recorded in selling, general and administrative (SG&A) expenses of the Pump and
Compressor Segment for the twelve months ended December 31, 2004, while $.1
million of expense related to loss on asset disposal was recorded in Other
Income (Expense) for the twelve months ended December 31, 2004. The first
quarter of 2004 included expenses of $.8 million, which were recorded in SG&A
expenses.
The following table describes the 2005 activity and the exit liability as of
March 31, 2005 (in thousands):
Beginning Balance Ending Balance
Exit Costs: at Jan. 1, 2005 Accruals Expenditures at March 31, 2005
--------------- -------- ------------ -----------------
Severance $20 - $ (4) $16
Contract termination - - - -
--- --- ----- ---
Total exit costs $20 - $ (4) $16
=== === ====== ===
No additional exit cost charges or other shutdown related expenses are expected
related to the Wuppertal facility.
Note Q - Recent Accounting Pronouncements
-----------------------------------------
In December 2004, FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004) (FASB 123R), Share-Based Payment. FASB 123R will require the
Company to expense share-based payments, including employee stock options, based
on their fair value. The Company is required to adopt the provisions of FASB
123R effective as of the beginning of its first quarter in 2006; however,
earlier adoption in 2005 is allowed. FASB 123R provides alternative methods of
adoption which include prospective application and a modified retroactive
application. The Company adopted the fair-value method of accounting for
share-based payments effective January 1, 2003 using the prospective method
described in FASB Statement No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. Currently, the Company uses the Black-Scholes-Merton
formula to estimate the value of stock options granted to employees and expects
to continue to use this acceptable option valuation model upon the required
adoption of Statement 123R in 2006. Because Statement 123R must be applied not
only to new awards, but to previously granted awards that are not fully vested
on the effective date, and because the Company adopted Statement 123 using the
prospective transition method (which applied only to awards granted, modified or
settled after the adoption date), compensation cost for some previously granted
awards that were not recognized under Statement 123 will be recognized under
Statement 123R. However, had we adopted Statement 123R in prior periods, the
impact of that standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings per share noted
above. Statement 123R 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
14
amounts will be in the future (because they depend on, among other things, when
those employees exercise stock options), the amount of operating cash flows
recognized in the three months ended March 31 for such excess tax deductions
were $127,000, and $328,000, in 2004 and 2003, respectively.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company operates in the Pump and Compressor Segment. The Pump and Compressor
Segment designs, manufactures, markets, sells and services pump and compressor
products through worldwide operations. In August 2002, we significantly
increased the size of our pump and compressor business by acquiring
substantially all the assets and liabilities of Werner Rietschle Holding GmbH
("Rietschle"), a privately held company based in Schopfheim, Germany. On January
10, 2005, the Company acquired certain assets of the side channel blower
business of Ruey Chaang Electric Co., Ltd of Taipei, Taiwan for approximately
$12.0 million. This acquisition will enhance the Company's Asian presence and
provide further opportunities for growth through our global distribution
network. The Pump and Compressor Segment supplies products to original equipment
manufacturers (OEMs) in such markets as medical equipment, environmental,
automotive, printing, packaging and many others. An important market for the
Company is medical equipment, which includes compressors used in oxygen
concentrators, nebulizers, aspirators, and other devices.
As previously announced, sales to the OEM oxygen concentrator market were
reduced in 2004 by $6.8 million as a result of the loss of one of our customer's
oxygen concentrator product lines to a competitor beginning late in the second
quarter of 2004. Net sales were $2.9 million lower in the first quarter of 2005
versus the first quarter of 2004, as a result of this customer loss. Even with
the loss of these sales, the Company believes it has the leading share in the
oxygen concentrator market worldwide. Pricing in this market has continued to
decline due to competition and threat of lower cost foreign manufacturers.
In order to reduce our cost structure and remain price competitive, the Company
constructed a manufacturing facility in China during late 2004, which should be
in production in the first half of 2005. The Company incurred no restructuring
or exit costs in 2004 at existing facilities in connection with this production
transfer and have no plans for any of these costs in 2005. We also had no asset
impairment charges or reduction in expected service lives of assets at existing
facilities related to this production transfer in 2004 and expect none in 2005.
During 2003, we closed our manufacturing facility in Fleurier, Switzerland, and
relocated this production to other facilities. In 2003, we also built and opened
a new facility in Memmingen, Germany and relocated our operations from an older
leased facility late in 2003. This new facility allows the Company to produce in
a more efficient manner and consolidate production. In February 2004, the
Company announced the closing of its Wuppertal, Germany manufacturing facility,
which generated approximately $.8 million of one-time costs in the first quarter
of 2004 and a total of $2.8 million for the full year for 2004. Production from
the Wuppertal facility was transferred to the new Memmingen facility. We believe
these steps were necessary to better position the Company for future growth
opportunities and cost reductions.
We have received certain commodity cost increases, which have impacted our
costs, although we attempt to offset these with price increases and ongoing cost
reduction programs. The Company is also experiencing increased costs related to
requirements of Section 404 of the Sarbanes-Oxley Act. During the second, third
and fourth quarters of 2004, the Company recorded approximately $1.5 million in
the aggregate of pre-tax charges related to internal control documentation and
testing for Sarbanes-Oxley compliance. We expect to have continued
Sarbanes-Oxley compliance related costs in 2005 and have recorded $.4 million of
expense during the first quarter of 2005.
Until July 31, 2004, the Company also operated in the Lighting Segment through
its 32% interest in Genlyte Thomas Group LLC (GTG) joint venture. The Company's
15
ITEM 2. Management's Discussion and Analysis - Continued
investment in GTG was accounted for by using the equity method of accounting.
GTG designs, manufacturers, markets, and sells lighting fixtures for a wide
variety of applications in the commercial, industrial and residential markets
for both indoor and outdoor fixtures. Effective with the close of business on
July 31, 2004, the Company sold its 32% interest in GTG to The Genlyte Group
Incorporated for approximately $401 million, which generated an $84.1 million
net after-tax gain.
On March 9, 2005, we announced that we have entered into an Agreement and Plan
of Merger ("Merger Agreement") with Gardner Denver, Inc. Under the terms of the
Merger Agreement, Gardner Denver will pay $40.00 per share in cash for all of
the issued and outstanding shares of common stock of Thomas. The transaction is
conditioned on obtaining requisite approval from the shareholders of Thomas,
necessary regulatory approvals and other customary closing conditions. Early
termination of the Hart-Scott-Rodino Act waiting period was granted on April 14,
2005 and the transaction was cleared by the Norwegian competition authorities
earlier this month. The transaction is still under review by the German
antitrust authorities. Upon closing of the acquisition, Thomas will become a
subsidiary of Gardner Denver and will no longer be a publicly traded company.
The parties expect to close the transaction during 2005.
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 conformity with United States generally accepted accounting
principles. 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 evaluates its estimates including, but not
limited to, those related to product warranties, bad debts, inventories, equity
investments, pensions and other postretirement benefits, income taxes,
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.
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. Included with the accounting policies are
potential changes to results, which could occur if different assumptions or
conditions were to prevail.
Allowance for Doubtful Accounts Receivable: The Company maintains allowances for
doubtful accounts for uncollectible invoices resulting from the customer's
inability or refusal to pay. Management's estimated allowances are established
based on an aging of accounts receivable and applying percentages based on
historical experience to aging categories. In addition, where the Company is
aware of a customer's inability to pay, it specifically reserves for the
potential bad debt to reduce the receivable to the amount it reasonably believes
will be collected. If the financial conditions of Thomas' customers
deteriorates, resulting in an impairment of their ability to make payments,
additional allowances would be required.
Reserve for Slow Moving and Obsolete Inventory: The Company records inventory at
the lower of cost or market. The Company estimates and reserves for excess
quantities of slow moving or obsolete inventory. These reserves are primarily
based upon management's assessment of the salability of the inventory,
historical usage of raw materials and historical demand for finished goods, and
estimated future usage and demand. An improper assessment of salability or
improper estimate of future usage or demand, or significant changes in usage or
demand could result in significant changes in the reserves and a positive or
negative impact on the Company's results of operations in the period the change
occurs.
16
ITEM 2. Management's Discussion and Analysis - Continued
Revenue Recognition: Revenue from product sales is recognized upon title
transfer, which occurs upon shipment, based on our customary terms of sale,
which are FOB shipping point. We do have exceptions to this general policy which
are described as follows:
1) Revenues from service and repair activities are less than 10% of our
total sales. Some of these service and repair revenues do not involve
a shipment of product, but instead, relate to the performance of a
service or repair. Billings for these activities are not made until
the service activity has occurred. There are other instances where we
offer customers an annual service contract, which we invoice in twelve
monthly billings.
2) There are instances where we have consignment inventory arrangements
and in these instances, revenue is not recorded upon shipment to our
customer. Revenue is only recorded when our customer ships the
inventory to their customer or uses it for other purposes. These
consignment inventory arrangements are insignificant.
3) There are instances where our terms of sale are FOB destination. We
record accounting entries at the end of reporting periods, to make
sure these revenues are deferred to the subsequent period. These
instances are insignificant.
Credit is extended based on local business customs and practices, and collateral
is not required. We estimate and record provisions for warranties in the period
the related products are sold. The warranty liabilities are established based
upon management's assessment of the various product warranty periods, historical
data and trends of warranty claims paid, and any current information regarding
specific warranty issues. 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.
Impairment of Goodwill: Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), was issued in July 2001
and became effective for the Company on January 1, 2002. Goodwill is now subject
to an assessment for impairment on a reporting unit basis by applying a
fair-value-based test annually, and more frequently if circumstances indicate a
possible impairment. If a reporting unit's carrying value exceeds its fair
value, and the reporting unit's carrying value of its goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The evaluation of goodwill for impairment requires
management to use significant estimates and assumptions including, but not
limited to, projecting future revenue, operating results, and cash flow of each
of the Company's reporting units. Although management believes the estimates and
assumptions used in the evaluation of goodwill are reasonable, differences
between actual and projected revenue, operating results, and cash flow could
cause some of the Company's goodwill to be deemed impaired. If this were to
occur, the Company would be required to write down the goodwill, which could
have a material negative impact on the Company's results of operations and
financial condition.
Long-Lived Assets: The Company evaluates the recoverability of the carrying
amount on long-lived assets (including property, plant and equipment and
intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. To the extent actual cash flows differ from these
estimated amounts, results could be adversely affected.
17
ITEM 2. Management's Discussion and Analysis - Continued
Retirement Plans and Post-Retirement Benefit Plans: Assets and liabilities of
the Company's defined benefit plans are determined on an actuarial basis and are
affected by the estimated market value of plan assets, estimates of the expected
return on plan assets, and discount rates. Actual changes in the fair market
value of plan assets and differences between the actual return on plan assets
and the expected return on plan assets as well as changes in the discount rate,
will affect the amount of pension expense recognized, impacting the Company's
results of operations. The liability for post-retirement medical and life
insurance benefits is also determined on an actuarial basis and is affected by
assumptions including the discount rate and expected trends in health care
costs. Changes in the discount rate and difference between actual and expected
health care costs will affect the recorded amount of post-retirement benefits
expense, impacting the Company's consolidated results of operations.
Self-Insurance Medical Claims: The Company is self-insured for the medical
benefit plans covering approximately 75% of its U.S. employees. The Company
estimates its liability for claims incurred by applying a lag factor to the
Company's historical claims and administrative cost experience. The validity of
the lag factor is evaluated periodically and revised if necessary. Although
management believes the current estimated liabilities for medical claims are
reasonable, changes in the lag in reporting claims, changes in claims
experience, unusually large claims, and other factors could materially affect
the recorded liabilities and expense, impacting the Company's consolidated
financial condition and results of operations.
Income Taxes: Significant management judgment is required in developing the
Company's income tax provision, including the determination of deferred tax
assets and liabilities and any valuation allowances that might be required
against deferred tax assets. The Company operates in multiple taxing
jurisdictions and is subject to audit in those jurisdictions. Because of the
complex issues involved, any assessments can take an extended period of time to
be resolved. In management's opinion, adequate income tax provisions have been
made and adequate tax reserves exist to cover probable risks. However, results
of Internal Revenue Service or other jurisdictional audits, closing of past
years' tax returns no longer subject to audit, and future tax law changes could
have a material impact on the Company's future tax liabilities and provisions,
impacting the Company's consolidated financial condition and results of
operations.
Contingencies and Litigation: As discussed in "Note D - Contingencies" in the
notes to condensed consolidated financial statements, the Company is a party to
legal proceedings and claims, as well as environmental rules and regulations.
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
consolidated financial position, results of operations, or liquidity of the
Company, the ultimate outcome of these matters is uncertain. Were an unfavorable
outcome to occur, the impact could be material to the Company.
RESULTS OF OPERATIONS
The Company's net income was $7.4 million in the first quarter of 2005, compared
to $10.7 million in the same period in 2004. The 2004 first quarter included
after-tax income from the GTG joint venture interest, while the 2005 first
quarter net income included no GTG earnings, since the joint venture interest
was sold effective July 31, 2004.
PUMP AND COMPRESSOR SEGMENT
Net sales for the Pump and Compressor Segment increased .4% to $110.0 million in
the first quarter of 2005, compared to $109.5 million in the 2004 first quarter.
The 2005 first quarter net sales included an estimated $3.9 million related to
the effects of exchange rate fluctuations and approximately $1.6 million related
to the Ruey Chaang acquisition. Excluding these items, 2005 net sales were down
$5.0 million from 2004 first quarter levels. Approximately $2.9 million of the
$5.0 million shortfall relates to lower oxygen concentrator sales from one
ITEM 2. Management's Discussion and Analysis - Continued
customer lost to a competitor beginning late in the second quarter of 2004. The
North American operations net sales were down $2.8 million, or 6.7%, from last
year's first quarter levels, due primarily to the oxygen concentrator customer
mentioned above. The European operations had a $1.1 million, or 1.9% net sales
increase for the 2005 first quarter compared to 2004. The European operations
2005 net sales included approximately $3.5 million related to exchange rate
fluctuations. Excluding the exchange rate impact, the European operations had a
$2.4 million net sales decrease in the first quarter of 2005 versus 2004, which
was primarily due to lower sales in the environmental ($.7 million) and
industrial ($.8 million) markets. Asia Pacific reported a $2.2 million, or 22.5%
increase in net sales compared to the first quarter of 2004. This increase was
primarily related to the Ruey Chaang acquisition ($1.6 million) and an estimated
$.4 million related to exchange rate fluctuation.
Gross profit for the Pump and Compressor Segment in the first quarter of 2005
was $39.7 million, or 36.1% of net sales, compared to $38.4 million, or 35.0% of
net sales in the first quarter of 2004. The improvement in gross margin
percentage is primarily due to sales mix, as well as factory rationalization
projects initiated prior to 2005 and ongoing cost reductions programs.
The Pump and Compressor Segment's selling, general and administrative (SG&A)
expenses were $27.4 million, or 25.0% of net sales, in the first quarter of
2005, compared to $26.7 million, or 24.4% of net sales for the same period in
2004. The 2005 SG&A expenses include patent litigation expenses of $.6 million,
China manufacturing facility start up costs of $.3 million, and additional
engineering expenses of $.3 million due to ongoing projects. The 2004 SG&A
expenses include Wuppertal shutdown expenses of $.8 million.
Pump and Compressor Segment operating income for the first quarter of 2005 was
$12.2 million, or 11.1% of net sales, compared to $11.6 million, or 10.6% of net
sales in the first quarter of 2004. The increase in operating income is
primarily related to improvements in gross profit margins noted in an earlier
paragraph. The North American operations reported a decrease in operating income
by 19.5% from 2004 levels. This decrease was primarily related to the loss of an
oxygen concentrator customer and the $.6 million of patent litigation costs. The
European operations posted a 49.4% increase in operating income over the
comparable 2004 period. This increase was primarily due to favorable sales mix,
as well as cost reduction programs and the 2004 Wuppertal shutdown expense of
$.8 million included in the results for the first quarter of 2004. Asia Pacific
reported a 17.7% decrease in operating income from 2004 levels, due primarily to
the China start up expenses of $.3 million recorded in the first quarter of
2005.
LIGHTING SEGMENT
The Genlyte Group Incorporated (Genlyte) and Thomas formed the Genlyte Thomas
Group LLC (GTG) on August 30, 1998. Effective with the close of business on July
31, 2004, Thomas sold its 32% interest in GTG to Genlyte for approximately
$400.9 million. Thomas' investment in GTG was accounted for using the equity
method of accounting. The Lighting Segment's operating income for the first
quarter of 2004 includes the Company's 32% interest in GTG, as well as expenses
related to Thomas stock options issued to GTG employees. The Lighting Segment
operating income for the first quarter of 2004 was $7.4 million, compared to no
operating income in the first quarter of 2005, due to the sale of GTG on July
31, 2004.
CORPORATE
As disclosed in "Note G - Segment Disclosures" in the notes to condensed
consolidated financial statements, consolidated operating income includes
corporate expenses. Corporate expenses were $3.2 million for the first quarter
of 2005, compared to $2.3 million for the comparable period in 2004. The
increase in the 2005 first quarter relates to additional expenses of $1.6
million for legal and professional fees related to the proposed Gardner Denver
transaction, which were partially offset by a favorable adjustment of $.7
million due to a change in the Kentucky license tax regulations.
19
ITEM 2. Management's Discussion and Analysis - Continued
Interest expense for the three months ended March 31, 2005 was $.1 million
compared to $1.0 million for 2004. The reduction in 2005 was primarily related
to the pay down of long-term debt that occurred with the application of the
proceeds from the July 31, 2004 sale of GTG.
Interest income for the first quarter of 2005 was $1.3 million, compared to $.1
million for the 2004 first quarter. The increase in 2005 was due to the
investment of the net amount received on August 2, 2004 from the sale of GTG.
The net amount represents proceeds received less long-term and short-term debt
pay offs, as well as associated income tax and transaction cost payments. The
net amount was invested in available-for-sale securities, which included tax
advantaged debt securities.
Other income (expense) for the three months ended March 31, 2005 was income of
$.6 million, compared to income of $.5 million in the comparable 2004 period.
The amounts were primarily related to foreign currency transaction gains.
Income tax provisions were $3.4 million for the first quarter of 2005 and $5.7
million for the comparable period in 2004. The effective income tax rate was
31.1% in 2005, compared to 35.0% for 2004. The decrease in the effective tax
rates was primarily related to the impact of interest income from tax advantaged
debt securities, which are tax exempt for federal purposes and in certain
states.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided by operations in the quarter ended March 31, 2005 were $6.7
million compared to cash flows provided by operations of $5.5 million in the
2004 three month period. The increase in 2005 primarily relates to better
working capital management of inventory.
Cash used in investing activities was $95.6 million for the first three months
of 2005 compared to cash used in investing activities of $3.7 million in the
comparable 2004 period. The 2005 amount includes capital expenditures of $4.2
million, the net $82.9 million purchase of short-term investments, and $8.5
million paid by the Company for the Ruey Chaang acquisition. The 2004 amount
includes capital expenditures of $3.7 million.
Financing activities used cash of $1.9 million in the first three months of 2005
and provided cash of $5.4 million in the first three months of 2004. The
increase in 2005 of cash used in investing activities relates primarily to
additional net long-term debt proceeds of $5.8 million in 2004.
Dividends paid in the first quarter of 2005 and 2004 were $1.7 million and $1.6
million, respectively.
As of March 31, 2005, the Company had standby letters of credit totaling
$3,080,000 with expiration dates during 2005. 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. No purchases
were made under this repurchase plan during the first three months of 2005 or in
2004. Under the December 1999 repurchase plan, the Company has purchased, on a
cumulative basis through March 31, 2005, 879,189 shares at a cost of $17.3
million, or an average cost of $19.72 per share. The Company plans to fund any
purchase of Company stock through its current cash position.
Working capital decreased from $355.8 million at December 31, 2004, to $347.6
million at March 31, 2005, primarily due to an increase of approximately $7.5
million of accruals which relate to the additional payments due for the January
2005 Ruey Chaang acquisition of $3.6 million and the July 2003
20
ITEM 2. Management's Discussion and Analysis - Continued
Aldax acquisition of $1.1 million, as well as higher legal fees for the proposed
Gardner Denver transaction.
March 31, December 31,
(Dollars in thousands) 2005 2004
---- ----
Working capital $ 347,586 $ 355,779
Current ratio 6.56 7.20
Long-term debt, less current portion $ 6,913 $ 7,751
Long-term debt to total capital 1.3% 1.4%
As of March 31, 2005, the Company had $216.6 million of short-term investments
on the balance sheet. Short-term investments are classified as
available-for-sale securities and include tax advantaged debt securities with
original maturities ranging from four to 38 years. These debt securities are
callable at par value (cost) based on seven to 35 days notification to the
bondholders. The Company has the option to either sell or put these securities
every seven to 35 days and these securities will normally be held for less than
one year. The securities are carried on the balance sheet at fair market value,
which is equivalent to cost. Current period adjustments to the carrying value of
available-for-sale securities would be included in accumulated other
comprehensive income within stockholder's equity. Because of the nature of all
these investments, cost does not differ from fair market value, so there are no
such adjustments to the carrying value.
The Company has no loan agreements that include restrictions on working capital,
operating leases, tangible net worth, and the payment of cash dividends and
stock distributions.
As of March 31, 2005, the Company had no line of credit facilities with its
banks. As of March 31, 2005, the Company's long-term debt consisted of only
capitalized lease obligations. As of March 31, 2005 and 2004, management was
aware of no relationships with any other unconsolidated entities, financial
partnerships, structured finance entities, or special purpose entities which
were 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 Report 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 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 performance 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 risks and uncertainties set forth in our annual report on
Form 10-K for the year ended December 31, 2004.
21
ITEM 2. Management's Discussion and Analysis - Continued
The forward-looking statements made by the Company are based on estimates that
the Company believes are reasonable. However, 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 has short-term investments, including cash equivalents, of $242.7
million as of March 31, 2005, that bear interest at variable rates. A 100 basis
point movement in the interest rate would result in an approximate $2,427,000
annualized effect on interest income and cash flows.
The Company has significant operations consisting of sales and manufacturing
activities in foreign countries. As a result, the Company's consolidated
financial results could be significantly affected by factors such as changes in
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 Germany but
exist to a lesser extent in other parts of Europe, Asia and South America. The
Company's objective is to reduce earnings and cash flow volatility associated
with foreign exchange rate changes to allow management to focus its attention on
its core business issues and challenges. Accordingly, the Company enters into
foreign currency forward contracts that change in value as foreign exchange
rates change to protect the value of anticipated foreign currency revenues and
expenses. The gains and losses on these contracts offset changes in the value of
the underlying transactions as they occur. The Euro is the only currency hedged.
At March 31, 2005, the Company held forward contracts expiring through March
2006 to hedge probable, but not firmly committed, intercompany inventory
purchases. These hedging contracts are classified as cash flow hedges and
accordingly, are adjusted to current market values through other comprehensive
income until the underlying transactions are recognized. Upon recognition, such
gains and losses are recorded in operations as an adjustment to the carrying
amounts of the underlying transactions in the period in which these transactions
are recognized. At March 31, 2005, the foreign currency forward contracts had a
notional amount of Euro 6,000,000 and a fair value of approximately $101,050.
The fair value of the foreign currency forward contracts, which represents an
asset, is included in other current assets. The amount of pre-tax net gain
deferred through other comprehensive income as of March 31, 2005 was
approximately $53,000. There was $128,000 of gain recognized in the three months
ended March 31, 2005. A 100 basis point movement in foreign currency rates on
the Company's open foreign exchange contracts at March 31, 2005 would not
materially affect the Company's consolidated financial statements.
ITEM 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities and Exchange Commission Act of 1934,
as amended) as of the end of the period covered by this report on Form 10-Q.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that, as of the evaluation date, the Company
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure and that the information
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
22
ITEM 4. Controls and Procedures - Continued
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial reporting
that occurred during the quarter ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
------- -----------------
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 302 of the Sarbanes-Oxley Act of 2002,
filed herewith
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 302 of the Sarbanes-Oxley Act of 2002,
filed herewith
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
23
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 & Chief Financial Officer
Date: May 9, 2005
24