SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 1-313
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T H E L A M S O N & S E S S I O N S C O.
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(Exact name of Registrant as specified in its charter)
Ohio 34-0349210
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25701 Science Park Drive
Cleveland, Ohio 44122-7313
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(Address of principal executive offices) (Zip Code)
216/464-3400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
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
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APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 29, 2001 the Registrant had outstanding 13,777,608 common
shares.
PART I
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ITEM 1 - FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Third Quarter Ended Nine Months Ended
------------------------------------------ ------------------------------------------
2001 2000 2001 2000
-------------------- -------------------- -------------------- --------------------
NET SALES $ 90,554 100.0% $ 88,291 100.0% $275,946 100.0% $259,930 100.0%
Cost of products sold 76,952 85.0% 65,424 74.1% 228,329 82.7% 188,835 72.6%
----------- ----------- ----------- -----------
GROSS PROFIT 13,602 15.0% 22,867 25.9% 47,617 17.3% 71,095 27.4%
Operating expenses 13,010 14.3% 12,462 14.1% 39,238 14.3% 41,161 15.9%
----------- ----------- ----------- -----------
OPERATING INCOME 592 0.7% 10,405 11.8% 8,379 3.0% 29,934 11.5%
Interest expense, net 2,763 3.1% 995 1.1% 7,995 2.9% 2,541 1.0%
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (2,171) -2.4% 9,410 10.7% 384 0.1% 27,393 10.5%
Income tax (benefit) provision (250) -0.3% 2,434 2.8% 908 0.3% 8,588 3.3%
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (1,921) -2.1% $ 6,976 7.9% $ (524) -0.2% $ 18,805 7.2%
=========== =========== =========== ===========
BASIC (LOSS) EARNINGS PER
COMMON SHARE $ (0.14) $ 0.51 $ (0.04) $ 1.39
=========== =========== =========== ===========
AVERAGE COMMON SHARES
OUTSTANDING 13,776 13,638 13,751 13,529
=========== =========== =========== ===========
DILUTED (LOSS) EARNINGS PER
COMMON SHARE $ (0.14) $ 0.48 $ (0.04) $ 1.35
=========== =========== =========== ===========
DILUTED AVERAGE COMMON SHARES
OUTSTANDING 13,776 14,426 13,751 13,944
=========== =========== =========== ===========
See notes to Consolidated Financial Statements (Unaudited).
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands) Third Quarter Third Quarter
Ended Year Ended Ended
-----------------------------------------------------
2001 2000 2000
-----------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,458 $ 1,452 $ 6,754
Accounts receivable, net 51,692 56,659 53,958
Inventories, net
Finished goods and work-in-process 39,816 53,283 54,338
Raw materials 5,104 6,290 6,628
------------- ------------- -------------
44,920 59,573 60,966
Deferred tax assets 10,710 13,211 10,501
Prepaid expenses and other 5,439 4,011 3,385
------------- ------------- -------------
TOTAL CURRENT ASSETS 120,219 134,906 135,564
PROPERTY, PLANT AND EQUIPMENT
Land 3,998 3,998 3,588
Buildings 25,706 24,702 22,349
Machinery and equipment 121,364 116,154 105,077
------------- ------------- -------------
151,068 144,854 131,014
Less allowances for depreciation and amortization 86,029 79,557 75,125
------------- ------------- -------------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 65,039 65,297 55,889
GOODWILL 82,854 88,868 35,277
PENSION ASSETS 23,408 21,555 20,928
DEFERRED TAX ASSETS 2,853 -- 4,500
OTHER ASSETS 9,418 9,667 9,221
------------- ------------- -------------
TOTAL ASSETS $ 303,791 $ 320,293 $ 261,379
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 27,995 $ 28,572 $ 34,875
Accrued compensation and benefits 6,655 10,034 10,252
Other accrued expenses 20,204 25,499 21,451
Taxes 3,299 4,383 5,850
Current maturities of long-term debt 12,060 8,168 938
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 70,213 76,656 73,366
LONG-TERM DEBT 122,903 130,276 77,722
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 26,031 27,332 26,905
SHAREHOLDERS' EQUITY
Common shares 1,378 1,369 1,369
Other capital 75,494 74,997 74,964
Retained earnings 9,712 10,236 7,593
Accumulated other comprehensive (loss) income (1,940) (573) (540)
------------- ------------- -------------
Total Shareholders' Equity 84,644 86,029 83,386
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 303,791 $ 320,293 $ 261,379
============= ============= =============
See notes to Consolidated Financial Statements (Unaudited).
3
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
NINE MONTHS ENDED
------------------------------------
2001 2000
--------------- ---------------
OPERATING ACTIVITIES
Net (loss) income $ (524) $ 18,805
Adjustments to reconcile net (loss) income to cash provided
by operating activities:
Depreciation 8,879 6,917
Amortization 4,619 412
Deferred income taxes (352) 5,955
Net change in working capital accounts:
Accounts receivable 2,871 (4,914)
Inventories 14,653 (15,572)
Prepaid expenses and other (1,428) 1,811
Accounts payable, accrued expenses and other current liabilities (5,847) 11,190
Other long-term items (4,833) (5,305)
------------ ------------
CASH PROVIDED BY OPERATING ACTIVITIES 18,038 19,299
INVESTING ACTIVITIES
Acquisitions (2,737) (47,313)
Net additions to property, plant and equipment (6,092) (7,141)
------------ ------------
CASH USED IN INVESTING ACTIVITIES (8,829) (54,454)
FINANCING ACTIVITIES
Net (payments) borrowings under secured credit agreement (2,400) 38,656
Net changes in long-term borrowings and capital lease obligations (1,081) (803)
Exercise of stock options 278 1,332
------------ ------------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES (3,203) 39,185
INCREASE IN CASH AND CASH EQUIVALENTS 6,006 4,030
Cash and cash equivalents at beginning of year 1,452 2,724
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,458 $ 6,754
============ ============
See notes to Consolidated Financial Statements (Unaudited).
4
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and changes in accounting
estimates) considered necessary for a fair presentation have been included.
NOTE B - INCOME TAXES
The third quarter 2001 income tax provision was calculated based on management's
estimate of the effective tax rate for the year. The difference between this
rate and the applicable statutory tax rate is due to the tax treatment of
goodwill amortization generated with the 2000 acquisition of Pyramid Industries,
Inc. ("Pyramid"). The provision for 2000 is primarily a non-cash charge.
NOTE C - BUSINESS SEGMENTS
The Company's reportable segments are as follows:
CARLON - INDUSTRIAL, RESIDENTIAL, COMMERCIAL, TELECOMMUNICATIONS AND UTILITY
CONSTRUCTION: The major customers served are electrical contractors and
distributors, original equipment manufacturers, electric power utilities, cable
television (CATV), telephone and telecommunications companies. The principal
products sold by this segment include electrical, telecommunications and wire
raceway systems and a broad line of nonmetallic enclosures, outlet boxes and
electrical fittings. Examples of the applications for the products included in
this segment are multi-cell duct systems or High Density Polyethylene (HDPE)
conduit designed to protect underground fiber optic cables, allowing future
cabling expansion and flexible conduit used inside buildings to protect
communications cable. The two 2000 acquisitions of Pyramid and Ameriduct
Worldwide, Inc. ("Ameriduct") are included as part of the Carlon segment.
LAMSON HOME PRODUCTS - CONSUMER: The major customers served are home centers and
mass merchandisers for the "do-it-yourself" home repair market. The products
included in this segment are outlet boxes, liquidtight conduit, electrical
fittings, chimes and lighting controls.
PVC PIPE: This business segment supplies electrical, power and communications
conduit to the electrical distribution, telecommunications, consumer and power
utility markets. The 1/2-inch to 6-inch electrical and telecommunications
conduit is made from polyvinylchloride (PVC) and is used to protect wire or
fiber optic cables supporting the infrastructure of our power or
telecommunications systems. In addition, this segment provides closed-profile,
engineered sewer pipe ranging in diameter from 21 inches to 54 inches to various
municipalities and private contractors for drainage systems in new construction
and rehabilitation markets.
5
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE C - BUSINESS SEGMENTS - CONTINUED
(Dollars in thousands)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES
Carlon $ 49,052 $ 35,185 $ 147,421 $ 100,019
Lamson Home Products 15,835 16,939 45,419 47,834
PVC Pipe 25,667 36,167 83,106 112,077
--------- --------- --------- ---------
$ 90,554 $ 88,291 $ 275,946 $ 259,930
========= ========= ========= =========
OPERATING INCOME (LOSS)
Carlon $ 4,618 $ 5,504 $ 14,811 $ 15,667
Lamson Home Products 1,162 995 3,301 1,914
PVC Pipe (4,094) 5,178 (7,150) 20,118
Corporate Office (1,094) (1,272) (2,583) (7,765)
--------- --------- --------- ---------
$ 592 $ 10,405 $ 8,379 $ 29,934
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Carlon $ 3,017 $ 1,142 $ 9,081 $ 2,797
Lamson Home Products 635 568 1,862 1,885
PVC Pipe 920 760 2,555 2,647
--------- --------- --------- ---------
$ 4,572 $ 2,470 $ 13,498 $ 7,329
========= ========= ========= =========
Total assets by business segment at September 29, 2001, December 30, 2000 and
September 30, 2000.
SEPTEMBER 29, DECEMBER 30, SEPTEMBER 30,
2001 2000 2000
---------------- --------------- ----------------
IDENTIFIABLE ASSETS
Carlon $168,792 $184,527 $114,688
Lamson Home Products 30,294 31,720 32,552
PVC Pipe 52,030 61,449 66,826
Corporate Office (includes cash, deferred tax
and pension assets) 52,675 42,597 47,313
---------------- --------------- ----------------
$303,791 $320,293 $261,379
================ =============== ================
6
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D - COMPREHENSIVE INCOME
The components of comprehensive (loss) income for the third quarter and the
first nine months of 2001 and 2000 are as follows:
(Dollars in thousands)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------------- -----------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- --------------- -------------
Net (loss) income $ (1,921) $ 6,976 $ (524) $ 18,805
Foreign currency translation
adjustments 6 12 (10) (160)
Loss on derivative
instruments, net of tax (1,093) -- (1,357) --
--------- --------- --------- ---------
Comprehensive (loss) income $ (3,008) $ 6,988 $ (1,891) $ 18,645
========= ========= ========= =========
The components of accumulated other comprehensive loss, at September 29, 2001,
December 30, 2000 and September 30, 2000 are as follows:
(Dollars in thousands)
SEPTEMBER 29, DECEMBER 30, SEPTEMBER 30,
2001 2000 2000
------------- ------------- -------------
Foreign currency translation
adjustments $ (540) $ (530) $ (483)
Minimum pension liability adjustment (43) (43) (57)
Accumulated derivative losses (1,357) -- --
------------- ------------- -------------
Accumulated other comprehensive
loss $ (1,940) $ (573) $ (540)
============= ============= =============
7
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E - EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share amounts)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------ ----------------------------
2001 2000 2001 2000
------------- ------------- ------------ -----------
BASIC (LOSS) EARNINGS-PER-SHARE COMPUTATION
Net (Loss) Income $ (1,921) $ 6,976 $ (524) $ 18,805
========= ========= ========= =========
Average Common Shares Outstanding 13,776 13,638 13,751 13,529
========= ========= ========= =========
Basic (Loss) Earnings Per Share $ (0.14) $ 0.51 $ (0.04) $ 1.39
========= ========= ========= =========
DILUTED (LOSS) EARNINGS-PER-SHARE COMPUTATION
Net Income $ (1,921) $ 6,976 $ (524) $ 18,805
========= ========= ========= =========
Basic Shares Outstanding 13,776 13,638 13,751 13,529
Stock Options Calculated Under
the Treasury Stock Method -- 788 -- 415
--------- --------- --------- ---------
Total Shares 13,776 14,426 13,751 13,944
========= ========= ========= =========
Diluted (Loss) Earnings Per Share $ (0.14) $ 0.48 $ (0.04) $ 1.35
========= ========= ========= =========
8
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F - DERIVATIVES AND HEDGING
Effective as of December 31, 2000, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities" which was issued in June, 1998 by the Financial Accounting
Standards Board (FASB), as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of SFAS 133" and
SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities."
As a result of the adoption of SFAS 133, the Company is required to recognize
all derivative financial instruments as either assets or liabilities at fair
value. Derivative instruments that are not hedges must be adjusted to fair value
through net income. Under the provisions of SFAS 133, changes in the fair value
of derivative instruments that are classified as fair value hedges are offset
against changes in the fair value of the hedged assets, liabilities, or firm
commitments, through net income. Changes in the fair value of derivative
instruments that are classified as cash flow hedges are recognized in other
comprehensive income until such time as the hedged items are recognized in net
income.
The adoption of SFAS 133 did not result in any transition adjustment as the
Company had no derivative instruments outstanding at December 31, 2000. During
the first quarter of 2001, the Company entered into two interest rate swap
agreements for a total notional amount of $58.5 million which effectively fixes
interest rates on its variable rate debt at 5.41% and 5.48% plus the Company's
risk premium of 1.5% to 3.5%, respectively. These transactions are considered
cash flow hedges and, thus, the fair market value at the end of the third
quarter of $1,357,000 (net of tax) loss, has been recognized in other
comprehensive income (loss). There is no ineffectiveness on the cash flow
hedges, therefore, all changes in the fair value of these derivatives are
recorded in equity and not included in the current period's income statement.
Approximately $911,000 (net of tax) loss of the fair value of the hedges is
classified as current, with the remaining $446,000 (net of tax) loss
classification as long-term.
The Company has no derivative instruments that are classified as fair value
hedges.
NOTE G - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill in the first
quarter of 2002. During 2002, the Company will perform the first of the required
impairment tests of goodwill as of December 30, 2001 and has not yet determined
what the effect of these tests will be on the earnings and financial position of
the Company.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
Net sales were $90.6 million in the third quarter of 2001, a 2.6% increase over
the third quarter of 2000. The Carlon segment increased net sales by 39.4% in
the current quarter compared to the prior year period. The majority of this net
sales increase is due to acquisitions which contributed $17.1 million in net
sales in the third quarter 2001 compared to $1.3 million in the same period of
2000. Lamson Home Products experienced a sales decline during the third quarter
of 2001 of 6.5% off a strong third quarter in 2000. Retailers in the home
improvement sector resumed their reduction in inventory levels and experienced
softness in sales as the economy slowed and consumer confidence fell. The PVC
Pipe Business experienced a 29% decline in net sales this quarter compared to
the third quarter of 2000. As in the second quarter of 2001, the volume of
electrical and telecommunications conduit shipped continues to be strong, up
8.3% over the third quarter of 2000. However, pricing remains depressed as
average selling prices dropped 7.2% from the second quarter of 2001 and is 35%
lower than the third quarter of 2000.
For the first three quarters of 2001, net sales increased by 6.2% from the first
three quarters of 2000. The Carlon business segment net sales increased $47.4
million while both the Lamson Home Products and PVC Pipe segments net sales
declined 5.0% and 25.8%, respectively, during the first three quarters of 2001
compared to the same period of 2000. Acquisitions from fiscal 2000 contributed
approximately $56.0 million in net sales for the first three quarters of 2001 in
the Carlon segment. Net sales are off for the remainder of the business segment
by almost 8.6% during the first three quarters of 2001 due to the general
slowdown in the economy and decline in telecom infrastructure project activity.
Lamson Home Products has experienced very inconsistent demand patterns from its
largest customer so far in 2001 as it deals with internal restructuring and
policy changes. PVC Pipe volume is up 13.8% from the first three quarters of
2000 while pricing is down by approximately 33.0%, which illustrates a continued
oversupply of PVC resin availability compared to current market demand.
Gross margin was 15.0% in the third quarter 2001 representing a 42.0% decline
from the 25.9% gross margin achieved in the third quarter of 2000. This
quarter's results lowered the gross margin year-to-date in 2001 to 17.3%
compared to 27.4% for the first three quarters of 2000. The majority of this
decline in the third quarter and year-to-date has occurred in the PVC Pipe
Business as selling prices have declined significantly as described above while
average PVC resin cost was lower by 17.7% in the third quarter of 2001 and 13.5%
for the first nine months of 2001, compared to the respective periods in 2000.
In addition, there has been a shift in product mix away from the more profitable
telecommunication duct to electrical conduit as the large Regional Bell
Operating Companies (RBOC's) curtailed capital spending during the third quarter
2001. As the prime construction season ends and resin prices continue to go
lower, the Company aggressively curtailed production in order to reduce pipe
inventory. However, plant operating rates resulted in $1 million less absorption
of fixed costs during the third quarter of 2001 when compared to the third
quarter of 2000. The Carlon business segment also had modestly lower gross
margins in both the current third quarter and year-to-date as the high density
polyethylene (HDPE) pipe products had lower selling prices than the prior year
as telecom market demand has dropped dramatically. Finally, Lamson Home Products
continues to earn better gross margins in 2001 compared to 2000 due to continued
progress on lowering product costs and the introduction of new products.
10
Operating income for the third quarter of 2001 totaled $.6 million or .7% of net
sales. This compares to the prior year's third quarter operating income of $10.4
million or 11.8% of net sales. The reduced operating income is primarily a
result of the lower gross profit in the current quarter as operating expenses
were approximately the same in total dollars and as a percentage of net sales as
the third quarter of 2000.
Year-to-date operating income is $8.4 million in 2001 compared to $29.9 million
for the same period in 2000. Despite an increased sales level in the first three
quarters of 2001 and higher amortization charges, operating expenses were
reduced to 14.3% of net sales in the first three quarters of 2001 versus 15.9%
of net sales in the prior year period primarily to reductions in legal costs,
compensation expense, discretionary selling and marketing expenses and
settlement of litigation in the first quarter of 2001.
Net interest expense increased significantly compared with the prior year due to
an approximate $100 million increase in debt to fund the acquisitions completed
in 2000. Average borrowing rates were 6.77% in the third quarter of 2001 (6.84%
in the first three quarters of 2001) compared to 7.82% in the third quarter of
2000.
The income tax provision in the third quarter of 2001 reflects the impact of the
pretax loss on full year income estimates. The high income tax provision despite
nominal pretax income in the first nine months of 2001 is caused by the effect
of permanent unfavorable tax treatment of goodwill from the Pyramid acquisition.
The income tax provision for the first nine months of 2000 was 31.4%.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) was $5.1 million for the third quarter of 2001, and $21.8 million for
the first three quarters of 2001 compared with $12.9 million and $37.3 million
for the respective periods in 2000.
FINANCIAL CONDITION
Working capital was reduced to $50.0 million at the end of the current quarter,
which is $12.2 million lower than last year's third quarter and $8.3 million
lower than year-end 2000. During the first three quarters of 2001, the Company
generated $18.0 million of cash flows from operating activities compared to
$19.3 million for the first three quarters of 2000. The Company was able to
produce these positive cash flows despite the decline in net income, by
maintaining strong oversight of accounts receivable despite deteriorating
economic conditions and aggressively reducing the level of inventory.
Accounts receivable were $51.7 million at the end of the third quarter of 2001
compared to $56.7 million at year-end 2000 and $54.0 million outstanding at the
end of third quarter 2000. Days sales outstanding were about 54 days this
quarter which is comparable to both year-end 2000 and the prior year's third
quarter performance levels. The Company is experiencing slower payment from some
smaller telecom market customers due to the dramatic decrease in their wireless
activity this year.
At the end of the third quarter 2001 the Company had $44.9 million in inventory.
The inventory level is down $14.7 million or 25% from year-end 2000 and there is
similar reduction from third quarter of 2000. This decrease was the result of an
across-the-board inventory reduction effort in the second and third quarters of
2001 reacting to the softening demand. The Company was also able to achieve
higher inventory turn targets due to supply chain process improvements and
recent capital expenditures. The cost per pound of the primary raw material,
polyvinylchloride (PVC) resin in inventory is approximately 19% lower at the
end of the third quarter 2001 as compared with the same quarter of 2000 and 15%
lower than year-end 2000. Pounds of PVC resin inventory at the end of the third
quarter of 2001 have also declined by 30% and 23% compared to the end of the
third quarter of 2000 and year-end 2000, respectively. On an overall basis,
inventory turns improved to 5.5 times
11
at this quarter ending versus 3.8 times in the prior year quarter. The Company's
exposure to resin price volatility is reduced with the improved inventory turns.
Accounts payable have remained about the same as year-end 2000, despite the
usual seasonal growth expected in the third quarter, but are lower than the
prior year third quarter by $7 million due to the inventory reduction program
that significantly lowered the purchases of PVC and HDPE resins in the second
and third quarters of 2001.
The reduction in accrued expenses during the first three quarters of 2001
reflects revised expectations for compensation costs and annual customer sales
and marketing programs. In addition, the Company paid the remaining purchase
price and continued non-compete payments related to prior year acquisitions.
Capital expenditures totaled $6.1 million during the first three quarters of
2001. The expenditures were primarily for PVC, HDPE and flexible conduit
extrusion line capacity and productivity improvements that occurred in the first
few months of the year, the installation of radio-frequency (RF) technology at
the distribution centers and tooling for new product line development. The
Company anticipates spending a total of $9 million to $10 million for the full
year of 2001.
Based on current projected operating results for the year, the Company believes
cash flow from operations and its secured credit facility provide adequate
financing for general corporate purposes and the planned capital expenditures.
The Company has negotiated a second amendment to its credit facility which
resets various covenant levels through 2003 to reflect the lower earnings and
growth expectations in the current economic environment and lowers the secured
credit facility to $170 million of which $125 million represents a revolving
credit facility with the remainder in term debt. This amendment may increase the
Company's cost of borrowings under this agreement by an additional 50-100 basis
points through the term of the agreement.
OUTLOOK
The following paragraphs contain forward-looking comments. The comments are
subject to, and the actual future results may be impacted by, the cautionary
limitations and factors outlined in the following narrative comments.
The Company's sales have been supported by a very steady residential
construction base through the first three quarters of 2001. Housing starts are
expected to decline modestly the fourth quarter of 2001 through the first half
of 2002 from the 1.5 million unit level to closer to a 1.4 million unit level
before trending back up in the second half of 2002. These levels are still
fairly strong compared to previous economic downturns. Further interest rate
cuts should help maintain the level of existing home sales, which contributes to
home improvement product sales of Lamson Home Products.
The telecom infrastructure market spending remains weak as telephone and cable
TV companies capital spending plans continue to be deferred. This situation is
not expected to improve appreciably until no earlier than the second half of
2002 or the first half of 2003. Spending in this market is required long-term,
we believe, to build out the metropolitan rings, expand corporate and
institutional high-speed data and communications networks and to provide
broadband services to the home. The Company is exploring other areas, such as
gas collection, water drainage and sewer markets to better utilize its
manufacturing capacity while the telecom market remains soft.
We are advised that the cost of PVC resin may have hit a floor as PVC resin
manufacturing companies are expressing that they are selling resin for almost
their cash cost. This, along with reduced inventories channel-wide, should cause
a stabilization of pricing in the market. Additional PVC resin manufacturing
capacity
12
scheduled to be brought up the first part of 2002 along with the lower projected
U.S. construction activity the first half of next year, however, will keep the
pricing environment competitive. Improvement in the PVC Pipe segment may require
further substantial improvement in the export market, particularly in the
Pacific rim to absorb the current supply imbalance in the domestic market and
stabilize these costs.
The Company is reviewing several scenarios including the rationalization of
facilities, personnel and product lines in order to reduce fixed cost levels to
meet the challenges facing the Company heading into 2002.
The above statements contain expectations that are forward-looking statements
that involve risks and uncertainties within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expected as a result of a variety of factors, such as: (i) the
volatility of resin pricing, (ii) the ability of the Company to pass through raw
material cost increases to its customers, (iii) maintaining a stable level of
housing starts, telecom infrastructure spending, consumer confidence and general
construction trends, and (iv) further deterioration in the country's general
economic condition affecting the markets for the Company's products.
PART II
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ITEM 1 - LEGAL PROCEEDINGS
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On September 23, 1999, the Company announced that a United States District Court
jury in the Northern District of Illinois found that the Company willfully
infringed on a patent held by Intermatic Incorporated of Spring Grove, Illinois,
relating to the design of an in-use weatherproof electrical outlet cover, and
awarded Intermatic $12.5 million in damages plus pre-judgment interest of
approximately $1.5 million. The court declined to increase the damages with
respect to the willfulness finding. The Company is pursuing a vigorous appeal
and believes it has meritorious positions that will substantially reduce or
eliminate the jury award. If, however, the appeal process is not successful, the
final resolution of the matter could have a material adverse affect on the
Company's financial position, cash flows and results of operations. This appeal
was heard on September 4, 2001 and it is expected that there will be a
resolution to this matter by the end of the first quarter of 2002.
During the first quarter of 2001, the Company settled its litigation against PW
Eagle and received a payment of $2.05 million, representing a partial recovery
of costs incurred in current and previous quarters, arising out of the failed
sale of the PVC Pipe segment in 1999.
The Company is also a party to various other claims and matters of litigation
incidental to the normal course of its business. Management believes that the
final resolution of these matters will not have a material adverse affect on the
Company's financial position, cash flows or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits.
10(a) Amended and Restated Credit Agreement, dated as of December
15, 2000, among the Company, the Guarantors party thereto, the
Lenders party thereto, National City Bank, as Syndication
Agent, Bank of America, N.A., as Documentation Agent and
Harris Trust and Savings Bank, as Administrative Agent.
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10(b) Second Amendment to the Amended and Restated Credit Agreement,
entered into as of October 31, 2001, among The Lamson &
Sessions Co., the Guarantors party thereto, the Lenders party
thereto and Harris Trust and Savings Bank, as Administrative
Agent for Lenders.
10(c) Form of two-year non-qualified stock option agreement under
the Company's 1998 Incentive Equity Plan.
10(d) Form of three-year non-qualified stock option agreement under
the Company's 1998 Incentive Equity Plan.
10(e) Form of two-year non-qualified stock option agreement under
the Company's 1988 Incentive Equity Performance Plan.
10(f) Form of three-year non-qualified stock option agreement under
the Company's 1988 Incentive Equity Performance Plan.
10(g) The Lamson & Sessions Co. Nonemployee Directors Stock Option
Plan, As Amended and Restated as of July 19, 2001.
10(h) Form of non-qualified stock option agreement under the
Company's Nonemployee Directors Stock Option Plan.
10(i) The Lamson & Sessions Co. Deferred Compensation Plan for
Nonemployee Directors As Amended and Restated as of October
18, 2001.
10(j) The Lamson & Sessions Co. Deferred Compensation Plan for
Executive Officers As Amended and Restated as of October 18,
2001.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed for the
three months ended September 29, 2001.
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SIGNATURES
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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.
THE LAMSON & SESSIONS CO.
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(Registrant)
DATE: November 12, 2001 By /s/ James J. Abel
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Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
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