10-K/A 1 l93146be10-ka.txt THE LAMSON AND SESSIONS COMPANY FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 F O R M 10-K/A (Amendment No. 1) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 29, 2001 Commission File Number 1-313 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] THE LAMSON & SESSIONS CO. (Exact name of Registrant as specified in its charter) Ohio 34-0349210 ---- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 25701 Science Park Drive Cleveland, Ohio 44122-7313 --------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 216/464-3400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Shares, without par value New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held as of February 8, 2002 by non-affiliates of the Registrant: $52,801,571. As of February 8, 2002 the Registrant had outstanding 13,777,608 common shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by reference into Part III. Operating expenses were $54.1 million in 2000 ($6.1 million higher than 1999), or 15.5%, of net sales compared with 16.5% of net sales in 1999. Continued productivity improvements in general administrative activities offset increases in sales commission and legal, professional and acquisition related expenses. The result was more than a two-and-a-half times increase in operating income to $34.5 million (9.9% of net sales) in 2000 versus $13.3 million (4.6% of net sales) in 1999. Interest expense increased by $7 million in 2001 due to the acquisition debt of approximately $113 million added late in 2000. The Company had an average borrowing rate during 2001 of 6.81% compared with 7.85% in 2000. The Company's earnings before interest, taxes, depreciation and amortization (EBITDA) was $24.2 million for 2001, compared with the $45.7 million EBITDA earned in 2000. FINANCIAL CONDITION Despite the lower operating income in 2001, the Company focused on generating cash flow from working capital reductions. Working capital was $31.2 million at the end of 2001 compared with $58.3 million at the end of 2000. The current ratio decreased to 1.50 in 2001 from 1.76 in 2000 as accounts receivable and inventory declined by a combined $34.9 million from lower economic activity and improved inventory control, while payables and accruals declined by $17.7 million. Cash flow generated from operating activities was a strong $30.1 million in 2001 versus $27.5 million in 2000. Accounts receivable were $39.2 million at the end of 2001, compared with $56.6 million at the end of 2000. Days sales outstanding in 2001 were about 49.5 and approximately the same as the 50.8 days for 2000. Inventory levels at the end of 2001 were $42.1 million compared with $59.6 million at the end of 2000. As a result, annual inventory turns increased from 3.9 times in 2000 to 4.9 times in 2001. All inventory categories have been reduced. However, the largest reduction came in PVC resin and related products for which pounds in inventory were lower and average unit cost at year-end was more than 30% below the 2000 year-end levels. Accounts payable decreased by $6.6 million in 2001 from the prior year-end, primarily from the purchasing of raw material inventory and lower unit costs for these items. The current balance in deferred tax assets decreased due to lower than expected 2002 operating results limiting the short term utilization of net operating losses. Accrued liabilities at 2001 year-end were approximately $11 million less than the prior year, as the final purchase price adjustment for Ameriduct was paid in 2001; incentive compensation is lower in the current year; and legal and environmental liabilities have been adjusted to reflect current evaluations of these items. The current portion of long-term debt has increased to reflect the amortization schedule of term debt provided in our credit agreement. The strong operating cash flow experienced in the fourth quarter of the year allowed the Company to pay down debt by over $22 million during 2001, a 15.9% reduction. Capital expenditures totaled approximately $8.0 million in 2001, compared with $11.1 million in 2000. The current year spending was primarily for distribution center productivity, new product tooling and quality enhancements. The Company has adequate credit capacity available to support its current operational expense and capital spending needs as well as those anticipated for the remainder of 2002. However, the Company has been experiencing lower earnings levels in its PVC Pipe business, reflecting an oversupply of raw material available to support existing market demand as well as extremely low demand levels in the telecommunications infrastructure market, which is expected to continue through 2002. Unless the EBITDA level improves sufficiently, the Company will seek a further amendment to its secured credit agreement in order to prevent a covenant violation and, concurrently, evaluate changes to its capital structure in order to ensure an appropriate degree of financial flexibility. The Company has commenced negotiations of such an amendment so that it can be entered into before a covenant violation occurs. 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. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED THE LAMSON & SESSIONS CO. AND SUBSIDIARIES NOTE C--LONG-TERM DEBT AND COMMITMENTS--CONTINUED In August 2000, the Company completed the refinancing of its previous secured credit agreement by entering into a new five-year, $125 million revolving credit agreement with a consortium of banks led by Harris Trust of Chicago. In December 2000, in conjunction with the acquisition of Ameriduct, the agreement was amended and increased to a $194 million facility, consisting of $48.5 million in term debt and $145.5 million in a revolver. As of September 30, 2001 the agreement was amended reducing the credit commitments of the lenders to an aggregate $170 million of which $38.5 million is available for the issuance of letters of credit. Beginning in the third quarter of 2001, the term portion of this agreement requires principal payments of $2 million on March 31 and June 30 and $3.5 million on September 30 and December 31 of each year with a balloon payment in August 2005. This agreement is secured by substantially all of the Company's assets. Interest on this credit facility is at LIBOR plus 1.5% to 3.5%. The specific rate is determined based on the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization and is adjusted quarterly. The rate at December 29, 2001 is 7.24%. In addition to amounts borrowed, letters of credit related to Industrial Revenue Bond financings and other contractual obligations total approximately $15.8 million under the agreement. The Company's credit agreement contains various restrictive covenants pertaining to maintenance of net worth, certain financial ratios and limits the amount of stock repurchases and dividend payments. The Company's Industrial Revenue Bond financings include several issues due in annual installments from 2000 through 2023 with interest at variable rates. The weighted average rate for these bonds at December 29, 2001 was 1.78%. The Company's headquarters is subject to a mortgage payable in equal monthly installments through 2003 with interest at 8.625%. The aggregate minimum combined maturities of long-term debt for the years 2003 through 2006 are approximately $12,070,811, $11,660,000, $72,760,000 and $665,000 respectively, with $7,110,000 due thereafter. Interest paid was $9,573,000, $4,026,000 and $3,679,000 in 2001, 2000 and 1999, respectively. Rental expense was $6,268,000, $5,861,000 and $4,908,000 in 2001, 2000 and 1999, respectively. Aggregate future minimum payments related to non-cancelable operating leases with initial or remaining terms of one year or more for the years 2002 through 2006 are approximately $3,637,000, $3,129,000, $2,699,000, $1,964,000 and $1,578,000, respectively, with $5,139,000 due thereafter. NOTE D--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. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED THE LAMSON & SESSIONS CO. AND SUBSIDIARIES NOTE I--STOCK COMPENSATION PLANS--CONTINUED The following table summarizes information about options outstanding at December 29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------- -------------------------------- WEIGHTED-AVERAGE RANGE OF SHARES REMAINING WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE EXERCISE PRICES AT 12/29/01 CONTRACTUAL LIFE (YRS) EXERCISE PRICE AT 12/29/01 EXERCISE PRICE --------------- ----------- ---------------------- -------------- ----------- -------------- $ 0-5 265,250 7.07 $ 4.97 197,250 $ 4.97 5-10 1,718,550 5.72 7.39 1,188,683 6.86 10-15 38,500 7.70 10.88 20,667 10.65 15-20 10,000 8.65 17.94 3,333 17.94
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based plans. Accordingly, compensation cost has not been recognized for the fixed stock-based compensation plans. Had compensation expense been recognized following SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net income and earnings per share would have been as follows:
FISCAL YEARS ------------------------------------------------------------ (Dollars in thousands, except per share data) 2001 2000 1999 ------------------------------------------------------------ Net income As reported $ (3,843) $ 21,448 $ 18,788 Pro forma (4,507) 20,941 18,322 Basic earnings per share As reported $ (0.28) $ 1.58 $ 1.40 Pro forma (0.33) 1.54 1.36 Diluted earnings per share As reported $ (0.28) $ 1.53 $ 1.39 Pro forma (0.33) 1.50 1.36
For pro forma calculations, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants:
2001 2000 1999 ------------------------------------------------------------ Expected volatility 57.2% 52.2% 29.8% Risk-free interest rates 4.87% 6.05% 5.74% Average expected life 5 years 5 years 5 years
The Company has deferred compensation plans that provide both certain executive officers and directors of the Company with the opportunity to defer receipt of executive bonus compensation and director fees, respectively. The Company funds these deferred compensation liabilities by making contributions to the Rabbi Trusts which invest exclusively in the Company's common shares. In accordance with Emerging Issues Task Force (EITF) 97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested," both the trust assets and the related obligation are recorded in equity at cost and offset each other. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED THE LAMSON & SESSIONS CO. AND SUBSIDIARIES NOTE L--BUSINESS SEGMENTS--CONTINUED
(Dollars in thousands) 2001 2000 1999 --------- --------- --------- NET SALES Carlon $ 188,161 $ 142,979 $ 120,975 Lamson Home Products 62,128 63,351 53,401 PVC Pipe 102,383 142,403 117,005 --------- --------- --------- $ 352,672 $ 348,733 $ 291,381 ========= ========= ========= OPERATING INCOME (LOSS) Carlon $ 14,585 $ 21,687 $ 15,065 Lamson Home Products 3,724 1,856 1,135 PVC Pipe (11,220) 20,224 5,814 Corporate Office (906) (9,280) (8,668) --------- --------- --------- $ 6,183 $ 34,487 $ 13,346 ========= ========= ========= DEPRECIATION AND AMORTIZATION Carlon $ 12,080 $ 5,187 $ 3,737 Lamson Home Products 2,508 2,520 2,792 PVC Pipe 3,431 3,522 3,607 --------- --------- --------- $ 18,019 $ 11,229 $ 10,136 ========= ========= ========= IDENTIFIABLE ASSETS Carlon $ 153,194 $ 184,527 $ 52,326 Lamson Home Products 28,157 31,720 30,658 PVC Pipe 45,684 61,449 51,393 Corporate Office (includes deferred tax and pension assets) 46,786 42,597 48,942 --------- --------- --------- $ 273,821 $ 320,293 $ 183,319 ========= ========= =========
Substantially all sales are made within North America. Net sales to a single customer within the Carlon and PVC Pipe segments totaled approximately 14% in 2001, and 17% in 2000 and 1999 of consolidated net sales.
2001 OPERATING 2001 NET INCOME (LOSS) OPERATING CHARGE EXCLUDING NET INCOME (LOSS) (GAIN) CHARGE (GAINS) ------------- ----------- ------------- Carlon $ 14,585 $ 3,762 $ 18,347 Lamson Home Products 3,724 1,149 4,873 PVC Pipe (11,220) 661 (10,559) Corporate Office (906) (2,400) (3,306) --------- --------- --------- $ 6,183 $ 3,172 $ 9,355 ========= ========= =========
The above schedule shows the operating results by segment excluding the restructuring and impairment charge of $7.7 million and net gains of $4.6 million recorded in 2001. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this March 5, 2002. THE LAMSON & SESSIONS CO. By /s/ James J. Abel ----------------------------------- James J. Abel Executive Vice President, Secretary, Treasurer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of February 20, 2002. Signature Title --------- ----- /s/ John B. Schulze Chairman of the Board, President ---------------------------- and Chief Executive Officer John B. Schulze (Principal Executive Officer) /s/ James J. Abel Executive Vice President, Secretary, ---------------------------- Treasurer and Chief Financial Officer James J. Abel (Principal Financial Officer) /s/ Lori L. Spencer Vice President and Controller ---------------------------- (Principal Accounting Officer) Lori L. Spencer /s/ James T. Bartlett* Director ---------------------------- James T. Bartlett /s/ Francis H. Beam, Jr.* Director ------------------------- Francis H. Beam, Jr. /s/ Martin J. Cleary* Director ------------------------- Martin J. Cleary 38 /s/ William H. Coquillette* Director --------------------------- William H. Coquillette /s/ John C. Dannemiller* Director ------------------------- John C. Dannemiller /s/ George R. Hill* Director ------------------------- George R. Hill /s/ A. Malachi Mixon, III* Director -------------------------- A. Malachi Mixon, III /s/ John C. Morley* Director ------------------------ John C. Morley /s/ D. Van Skilling* Director ------------------------- D. Van Skilling * The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to a Power of Attorney executed on behalf of the above-named directors of The Lamson & Sessions Co. and filed herewith as Exhibit 24 on behalf of The Lamson & Sessions Co. and each such person. March 5, 2002 By /s/ James J. Abel ---------------------------------------- James J. Abel, Attorney-in-fact 39