EX-13 3 t19339x13.txt THOMAS ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES Thomas' discussion and analysis of its financial condition and results of operations are based upon Thomas' consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When preparing these consolidated financial statements, the Company is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates its estimates, including, but not limited to, those related to product warranties, bad debts, inventories, equity investments, income taxes, pensions and other post-retirement benefits, contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In response to the Securities and Exchange Commission's (SEC) Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies", the Company identified the following critical accounting policies which affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Based on the SEC's suggestions, included with the accounting policies are potential adverse results which could occur if different assumptions or conditions were to prevail. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Thomas' customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Thomas provides for the estimated cost of product warranties. While the Company engages in extensive product quality programs and processes, should actual product failure rates differ from estimates, revisions to the estimated warranty liability would be required. Thomas writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Thomas holds a 32 percent minority interest in the Genlyte Thomas Group LLC (GTG) joint venture, which comprises Thomas' lighting segment and is accounted for using the equity method. If future adverse changes in market conditions or poor operating results of GTG occurred, it could result in losses or an inability to recover the carrying value of the Company's investment, thereby possibly requiring an impairment charge in the future. GTG's critical accounting policies are determined separately by The Genlyte Group Incorporated, which owns 68 percent of GTG and consolidates the GTG results. RESULTS OF OPERATIONS The Company's net income of $28.2 million in 2001, was the second highest level in the Company's history. The 2001 net income came in 6.4% below the 2000 record net income of $30.1 million, which included non-recurring, after-tax gains of $1.3 million related to the proceeds from a life insurance policy and sale of securities that were partially offset in 2000 by an after-tax charge of $.6 million related to environmental costs. The net impact of these items in 2000 was $.05 per share. Net income in 2000 was $3.9 million or 15.0% over the 1999 net income of $26.2 million. PUMP AND COMPRESSOR SEGMENT Net sales for the Pump and Compressor Segment in 2001 were $184.4 million, which represents a decrease of $4.4 million, or 2.4%, from the 2000 net sales of $188.8 million. The shortfall in sales came primarily from the North American operations, due to lower levels of demand and some cancellation of projects. The softness in North America came in the industrial, environmental and construction markets. Our medical market, which comprises approximately 35 percent of our revenues, showed modest growth. This was due to continued strength in our single largest application, the oxygen concentrator, which represents over 50 percent of the Company's sales in the medical equipment market. Sales for 2001 in our European operation were basically flat in U.S. dollars, but would have been $2.1 million higher, if measured in constant exchange rates. This increase in sales, at constant exchange rates, was due to strength in our medical and automotive markets in Europe. Sales in our Asia Pacific operations increased $1.1 million, or 11.7%, when measured in U.S. dollars. If measured at constant exchange rates, the Asia Pacific sales would have increased an additional $1.1 million in 2001. The increase in Asia Pacific was due primarily to strength in the medical, environmental, and industrial markets. The 2000 net sales for the Pump and Compressor Segment of $188.8 million were $11.0 million, or 6.2%, over 1999. The increase was due primarily to the growth in our Asia Pacific operation and to the October 1999 acquisition of Oberdorfer Pumps. Operating income in 2001 for the Pump and Compressor Segment decreased to $28.5 million, or 9.9% lower than the $31.6 million level in 2000. The 2001 decrease was due to several factors including pricing pressures, unfavorable manufacturing variances due to lower plant utilization, $1.0 million in unfavorable exchange rate effects when measured in constant exchange rates, and overall general softness in the economy. Additionally, SG&A expenses increased $.9 million in 2001 in the Pump and Compressor business primarily due to increasing our presence in Asia Pacific and by continuing to invest in engineering efforts, which management believes should benefit our company in the future. The 2000 operating income of $31.6 million increased 6.9% over the 1999 level of $29.6 million. The 2000 operating income was a record for the Pump and Compressor Segment, and the increase was primarily due to increased sales. LIGHTING SEGMENT As disclosed in the notes to the consolidated financial statements, the Lighting Segment's operating income includes our 32% interest in the GTG joint venture, our amortization of Thomas' excess investment in GTG, and expenses related to Thomas Industries stock options issued to GTG employees. The Lighting Segment's operating income was $24.8 million in 2001 compared to $24.6 million in 2000. This 0.8% increase was due in part to the full year favorable impact in 2001 of the acquisitions by GTG of Chloride Systems and Translite during the fourth quarter of 2000, which were partially offset by lower operating income due to lower sales levels in the stock and flow goods businesses, which experienced intense competitive pressures due to the softness in commercial construction. Operating income was $24.6 million in 2000 compared to $23.1 million in 1999. This increase was due in part to the acquisitions noted above, improved margins due to mix, cost reductions, and synergies realized due to the formation of the joint venture. At any time on or after January 31, 2002, Thomas has the right (a "put right"), but not the obligation, to require the Joint Venture (GTG) to purchase all, but not less than all, of Thomas' ownership interest in GTG at the applicable purchase price. The purchase price shall be equal to the "Fair Market Value" of GTG multiplied by Thomas' ownership percentage in GTG. The "Fair Market Value" means the value of the total interests in GTG computed as a going concern, including the control premium. Further explanation can be found in our Joint Proxy Statement dated July 23, 1998, which is on file with the SEC. The Company will continue to review alternatives with respect to the GTG put right. CORPORATE Interest expense for 2001 decreased $.4 million, or 9.1%, from 2000, due primarily to the lower levels of long-term debt, which were partially offset by higher levels of short-term borrowings during 2001. On January 31, 2001, the Company made a $7.7 million payment on our private placement long-term debt, which bears interest at 9.36%. Income tax provisions were $16.9 million, $18.2 million, and $16.1 million in 2001, 2000, and 1999, respectively. The effective income tax rate was 37.5% in 2001, compared to 37.7% in 2000 and 38.1% in 1999. The Company, like other 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 involved in remedial efforts at certain of its present and former locations, and when costs can be reasonably estimated, the Company records appropriate liabilities for such matters. The Company does not believe that the ultimate resolution of environmental matters will have a material adverse effect on its financial position, results of operations, or liquidity. At December 31, 2001, the Company employed approximately 1,075 people. LIQUIDITY AND SOURCES OF CAPITAL Cash and cash equivalents increased $15.6 million to $29.5 million at December 31, 2001, compared to $13.9 million and $16.5 million at December 31, 2000 and 1999, respectively. This increase was primarily due to the collection of a $22.3 million note from GTG in November 2001. Cash flows from operations were $21.9 million in 2001 compared to $28.0 million in 2000 and $26.7 million in 1999. The reduction in cash flows from operations in 2001 were primarily due to lower earnings, lower tax distributions from GTG, and to higher compensation incentive payments in 2001 for the 2000 results. Cash flows from operations have exceeded Thomas' capital requirements for net property additions and dividends for the last three years, providing additional funds for the 1999 acquisition of Oberdorfer Pumps, Inc., the net reductions of long-term and short-term debt during 2001, 2000, and 1999, totaling $23.5 million, and treasury stock purchases in 2001, 2000, and 1999, totaling $17.3 million. Dividends paid in 2001 were $5.0 million compared with $4.7 million, in both 2000 and 1999. In February 2001, the Company increased its quarterly dividend per share from $.075 to $.085, effective with the April 1, 2001 dividend. The following summarizes the Company's contractual obligations at December 31, 2001, and the effect such obligations are expected to have on its liquidity and cash flow in future periods. Less than 1-3 After December 31 (In Thousands) Total 1 year years 3 years ---------------------------------------------------------------------------------------------------------- Contractual Obligations: Long-term debt $ 32,726 $ 7,788 $ 15,586 $ 9,352 Non-cancelable operating lease obligations 7,656 2,017 2,089 3,550 Other long-term obligations 577 119 238 220 --------------------------------------------------- Total contractual obligations $ 40,959 $ 9,924 $ 17,913 $ 13,122 ===================================================
As of December 31, 2001, the Company had standby letters of credit totaling $4,518,000 with expiration dates during 2002. The Company anticipates that these letters of credit will be renewed at their expiration dates. The Company announced in December 1999 that it planned to repurchase, from time to time depending on market conditions and other factors, up to 15 percent, or 2,373,000 shares, of its outstanding Common Stock in the open market or through privately negotiated transactions at the prevailing market prices. During 2001, the Company purchased an additional 3,300 shares at a cost of $67,000. Through December 31, 2001, the Company has purchased, on a cumulative basis, 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 a combination of cash flows generated from operating activities and uncommitted borrowing arrangements. The Company's long-term debt bears interest at fixed rates, with the exception of the $1.25 million Industrial Revenue Bond that accrues interest at a variable rate. Short-term borrowings are priced at variable interest rates. The Company's results of operations and cash flows, therefore, would only be affected by interest rate changes to the extent of variable rate debt. At December 31, 2001, only the $1.25 million Industrial Revenue Bond was outstanding. A 100 basis point movement in the interest rate on the $1.25 million bond would result in an $12,500 annualized effect on interest expense and cash flows. The Company also has short-term investments of $28.8 million as of December 31, 2001 that bear interest at variable rates. Therefore, a 100 basis point movement in the interest rate would result in an approximate $288,000 annualized effect on interest income and cash flows. The fair value of the Company's long-term debt is estimated based on current interest rates offered to the Company for similar instruments. A 100 basis point movement in the interest rate would result in an approximate $490,000 annualized effect on the fair value of long-term debt. The Company has significant operations consisting of sales and manufacturing activities in foreign countries. As a result, the Company's financial results could be significantly affected by factors such as changes in 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 and Asia. Our Lighting Segment currency exposure is primarily in Canada. Working capital increased from $30.6 million at December 31, 2000, to $46.0 million at December 31, 2001, primarily due to proceeds received from GTG's note payment. This was partially offset by long-term debt payments. Working capital decreased from $32.2 million at December 31, 1999, to $30.6 million at December 31, 2000, primarily due to the stock repurchase program. December 31 ------------------------------------------------ (Dollars in Thousands) 2001 2000 1999 ------------------------------------------------------------------------------------------------- Working capital $ 45,978 $ 30,677 $ 32,244 Current ratio 2.52 1.94 2.06 Long-term debt, less current portion $ 24,938 $ 40,727 $ 40,513 Long-term debt to total capital 9.5% 15.8% 16.2%
Certain loan agreements of the Company include restrictions on working capital, operating leases, tangible net worth, and the payment of cash dividends and stock distributions. Under the most restrictive of these arrangements, retained earnings of $83.2 million are not restricted at December 31, 2001. Thomas is in compliance with all covenants or other requirements set forth in its borrowing agreements. In the event of non-compliance or if Thomas prepays the debt, then Thomas would incur a penalty. At December 31, 2001, the prepayment penalty would have been approximately $2.5 million on a pre-tax basis. As of December 31, 2001, the Company had no short-term borrowing arrangements. Thomas currently expects to fund expenditures for capital requirements as well as liquidity needs from a combination of available cash balances, internally generated funds, and, if necessary, short-term financing arrangements. The Company does not have any bank committed lines of credit and management believes, if short-term borrowings were needed to support the sales growth of the business, that competitive financing could be obtained given the current financial position of the Company. Cash in excess of operating requirements will continue to be invested in high grade, short-term securities. As disclosed in the footnotes to the consolidated financial statements, the Company does have a 32 percent interest in the GTG joint venture, which is accounted for using the equity method, and therefore, is an unconsolidated entity. At December 31, 2001 and 2000, except as described above, management was aware of no relationships with any other unconsolidated entities, financial partnerships, structured finance entities, or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. NEW EUROPEAN CURRENCY Twelve European countries (the European Monetary Union) have adopted a common currency. The new currency (Euro) replaced the existing currencies of the participating countries. The transition from the various currencies to the Euro occurred over a three-year period and became effective in 2002. While management currently believes the Company has accommodated any required changes in its operations, there can be no assurance that its customers, suppliers, service providers, or government agencies will all meet the Euro currency requirements in a timely manner. Such failure to complete the necessary work on a timely basis could result in material financial risk. At this time, we have had no significant problems related to the Euro conversion that has affected our Company. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These statements established new accounting and reporting standards for business combinations and associated goodwill and intangible assets. SFAS 141, effective July 1, 2001, eliminates the pooling of interest method of accounting and amortization of goodwill for business combinations initiated after June 30, 2001. SFAS 142, effective January 1, 2002, requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The estimated pre-tax benefit to the Company as a result of not recording goodwill amortization in 2002 is $4,265,000. This is a preliminary estimate and includes $483,000 of amortization related to the pump and compressor segment and $3,782,000 related to the lighting segment. On an after-tax basis this would be $3,339,000 or $.21 per share. The Company has not completed its assessment of the additional effects of adopting SFAS 142, but at this time the Company does not anticipate a significant effect on its results of operations or financial position. The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), dated August 2001. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. We will adopt the provisions of SFAS 144 as of January 1, 2002 and we are currently evaluating the impact SFAS 144 may have on our financial position and results of operations. 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 Annual 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 performances or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement. In addition to the risks and uncertainties of ordinary business operations, the forward-looking statements of the Company referred to above are also subject to the following risks and uncertainties: o The Company operates in a highly competitive business environment, and its sales could be negatively affected by its inability to maintain or increase prices, changes in geographic or product mix, or the decision of its customers to purchase competitive products instead of the Company's products. Sales could also be affected by pricing, purchasing, financing, operational, advertising, or promotional decisions made by purchasers of the Company's products. o The Pump and Compressor Segment operates in a market where technology improvements and the introduction of products for new applications are necessary for future growth. The Company could experience difficulties or delays in the development, production, testing, and marketing of new products. As an original equipment supplier, the Company's results of operations are directly affected by the success of its customers' products. o The Pump and Compressor Segment has several key customers, none of which are 10% or more of our consolidated sales. However, the loss of any of these key customers could have a negative affect on the Company's results. o On an annual basis, the Company negotiates renewals for property, casualty, workers compensation, general liability, product liability, and health insurance coverages. Due to conditions within these insurance markets and other factors beyond the Company's control, future coverages and the amount of the related premiums could have a negative affect on the Company's results. o The Pump and Compressor Segment has the leading market share in the oxygen concentrator OEM market worldwide. The Company's market share could be reduced significantly due to a competitor, the vertical integration by our customers, or new technology replacing compressed air in oxygen concentrators. The loss of market share in the oxygen concentrator OEM market could have a significant affect on the Company's results. o GTG, which comprises the Company's Lighting Segment, participates in a highly competitive market that is dependent on the level of residential, commercial, and industrial construction activity in North America. Changes in interest rates, consumer preferences, office and plant occupancy rates, and acceptance of new products affect the Lighting Segment. o As the Company's business continues to expand outside the United States, the Company could experience changes in its ability to obtain or hedge against currency exchange rates and fluctuations in those rates. The Company could also be affected by nationalizations; unstable governments, economies, or legal systems; terrorist attacks; or inter-governmental disputes. These currency, economic, and political uncertainties may affect the Company's results. The forward-looking statements made by the Company are based on estimates that the Company believes are reasonable. This means that the Company's actual results could differ materially from such estimates and expectations as a result of being positively or negatively affected by the factors as described above, as well as other unexpected, unanticipated, or unforeseen factors. COMMON STOCK MARKET PRICES AND DIVIDENDS The Company's common stock is traded on the New York Stock Exchange (ticker symbol TII). On January 25, 2002, there were 2,056 security holders of record. High and low stock prices and dividends for the last two years were: 2001 2000 ---------------------------------------------------------------------------------------------------- Market Price Cash Market Price Cash -------------------------- Dividends --------------------- Dividends Quarter Ended High Low Declared High Low Declared --------------------------------------------------------------------------------------------------- March 31 $ 27.30 $ 20.19 $ .085 $ 20.00 $ 17.50 $ .075 June 30 29.50 20.65 .085 20.63 17.69 .075 September 30 28.90 20.20 .085 20.88 17.88 .075 December 31 27.22 20.98 .085 23.25 18.56 .075
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 ------------------------------------------------ (In thousands, except share data) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Net sales $ 184,382 $ 188,824 $ 177,802 Cost of products sold 118,625 120,835 113,752 ------------------------------------------------ Gross profit 65,757 67,989 64,050 Selling, general and administrative expenses 43,411 44,070 41,914 Equity income from GTG 24,835 24,575 23,147 ------------------------------------------------ Operating income 47,181 48,494 45,283 Interest expense 3,630 3,995 4,601 Interest income and other 1,489 3,799 1,527 ------------------------------------------------ Income before income taxes 45,040 48,298 42,209 Income taxes 16,870 18,213 16,059 ------------------------------------------------ Net income $ 28,170 $ 30,085 $ 26,150 ================================================ Net income per share - Basic $ 1.86 $ 1.95 $ 1.66 Net income per share - Diluted $ 1.80 $ 1.91 $ 1.62 See accompanying notes.
CONSOLIDATED BALANCE SHEETS
December 31 ------------------------------- (In thousands) 2001 2000 ---------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 29,500 $ 13,941 Accounts receivable, net 21,026 22,255 Inventories 20,696 22,288 Deferred income taxes 2,497 2,713 Other current assets 2,442 2,251 ------------------------------- Total current assets 76,161 63,448 Property, plant and equipment, net 39,770 39,521 Investment in GTG 179,219 168,954 Note receivable from GTG - 22,287 Intangible assets, net 9,244 10,111 Other assets 2,320 1,791 ------------------------------- Total assets $ 306,714 $ 306,112 =============================== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 6,861 $ 7,340 Accrued expenses and other current liabilities 11,738 13,530 Dividends payable 1,295 1,129 Income taxes payable 2,501 2,986 Current portion of long-term debt 7,788 7,786 ------------------------------- Total current liabilities 30,183 32,771 Deferred income taxes 5,349 7,776 Long-term debt, less current portion 24,938 40,727 Other long-term liabilities 8,531 7,436 ------------------------------- Total liabilities 69,001 88,710 Shareholders' equity: Preferred stock, $1 par value, 3,000,000 shares authorized - none issued - - Common stock, $1 par value, shares authorized: 60,000,000; shares issued: 2001 - 17,855,511; 2000 - 17,670,342 17,856 17,670 Capital surplus 114,342 112,027 Deferred compensation 739 401 Treasury stock held for deferred compensation (739) (401) Retained earnings 158,161 135,153 Accumulated other comprehensive income (loss) (14,189) (9,058) Less cost of treasury shares: 2,622,339 shares in 2001; 2,619,039 shares in 2000 (38,457) (38,390) ------------------------------- Total shareholders' equity 237,713 217,402 ------------------------------- Total liabilities and shareholders' equity $ 306,714 $ 306,112 =============================== See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31 ------------------------------------------------ (In thousands) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Common stock Beginning of year $ 17,670 $ 17,567 $ 17,486 Stock options exercised and other 171 76 81 Shares issued to deferred share trust 14 20 - Other 1 7 - ------------------------------------------------ End of year 17,856 17,670 17,567 Capital surplus: Beginning of year 112,027 110,988 110,412 Stock options exercised 1,278 480 569 Tax benefit from options exercised and other 691 183 7 Shares issued to deferred share trust 346 376 - ------------------------------------------------ End of year 114,342 112,027 110,988 Deferred compensation: Beginning of year 401 - - Deferred compensation 338 401 - ------------------------------------------------ End of year 739 401 - Treasury stock held for deferred compensation: Beginning of year (401) - - Increase in treasury stock held for deferred compensation (338) (401) - ------------------------------------------------ End of year (739) (401) - Retained earnings: Beginning of year 135,153 109,689 88,277 Net income 28,170 30,085 26,150 Cash dividends declared (5,162) (4,621) (4,738) ------------------------------------------------ End of year 158,161 135,153 109,689 Accumulated other comprehensive income (loss): Beginning of year (9,058) (6,385) (4,351) Other comprehensive (loss)(1) (5,131) (2,673) (2,034) ------------------------------------------------ End of year (14,189) (9,058) (6,385) Treasury stock: Beginning of year (38,390) (22,377) (21,137) Treasury stock purchased (67) (16,013) (1,255) Treasury stock retired and other - - 15 ------------------------------------------------ End of year (38,457) (38,390) (22,377) ------------------------------------------------ Total shareholders' equity $ 237,713 $ 217,402 $ 209,482 ================================================
(1) A reconciliation of net income to total comprehensive income follows. Years ended December 31 ------------------------------------------------ (In thousands) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Net income $ 28,170 $ 30,085 $ 26,150 Other comprehensive income (loss): Minimum pension liability (3,032) (89) 706 Related tax benefit (expense) 1,137 34 (268) Foreign currency translation (3,236) (2,618) (2,472) ------------------------------------------------ Total comprehensive income $ 23,039 $ 27,412 $ 24,116 ================================================ At December 31, 2001, accumulated other comprehensive income was a loss of $14,189,000 comprised of foreign currency translation losses of $12,239,000 and a minimum pension liability of $1,950,000. See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 ------------------------------------------------ (In thousands) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Operating activities Net income $ 28,170 $ 30,085 $ 26,150 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,364 7,907 7,671 Deferred income taxes (1,045) 1,010 503 Equity income from GTG (24,835) (24,575) (23,147) Distributions from GTG 11,592 13,797 12,013 Other items 495 216 801 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 255 (2,076) (1,849) Inventories 761 (3,467) 671 Accounts payable (383) (325) 1,917 Income taxes payable 136 1,546 (1,417) Accrued expenses and other liabilities (2,028) 1,890 510 Other 417 1,985 2,861 ------------------------------------------------ Net cash provided by operating activities 21,899 27,993 26,684 Investing activities Purchases of property, plant and equipment (8,548) (10,888) (7,953) Sales of property, plant and equipment 42 131 46 Proceeds from GTG note receivable 22,287 - - Purchase of company (net of cash acquired) - - (6,466) ------------------------------------------------ Net cash provided by (used in) investing activities 13,781 (10,757) (14,373) Financing activities Payments on notes payable to banks, net - - (138) Payments on long-term debt (17,787) (7,784) (7,782) Proceeds from long-term debt 2,000 8,000 - Treasury stock purchased (67) (16,013) (1,255) Dividends paid (4,997) (4,679) (4,747) Other 1,449 1,097 327 ------------------------------------------------ Net cash used in financing activities (19,402) (19,379) (13,595) Effect of exchange rate changes (719) (403) (434) ------------------------------------------------ Net increase (decrease) in cash and cash equivalents 15,559 (2,546) (1,718) Cash and cash equivalents at beginning of year 13,941 16,487 18,205 ------------------------------------------------ Cash and cash equivalents at end of year $ 29,500 $ 13,941 $ 16,487 ================================================ See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Thomas Industries Inc. and subsidiaries (The Company or Thomas) and affiliates operate in two business segments: the pump and compressor segment and the lighting segment. The Company designs, manufactures and sells pumps and compressors for use in global original equipment manufacturing applications as well as construction equipment, leakage detection systems and laboratory equipment. Manufacturing facilities and sales and distribution operations are located in North America and Europe, with additional sales and distribution operations located in Asia and Australia. The Company operates in the lighting segment through its 32% interest in the Genlyte Thomas Group LLC (GTG). GTG, which was formed August 30, 1998 as discussed below, designs, manufactures, markets and sells lighting products principally in North America for consumer, commercial and industrial applications. 2. ACCOUNTING POLICIES Basis of Presentation Effective August 30, 1998, the Company and The Genlyte Group (Genlyte) formed GTG, combining Thomas' and Genlyte's lighting businesses. Genlyte has a 68% interest in GTG, and Thomas holds a 32% interest, which is accounted for using the equity method of accounting. At December 31, 2001, Thomas' investment in GTG exceeded its underlying equity in net assets by $55,699,000. For each of the years ended December 31, 2001, 2000 and 1999, equity income was reduced by $2,116,000 for straight-line amortization of the excess investment (see Note 2, New Accounting Pronouncements). Principles of Consolidation The consolidated financial statements include the accounts of the Company. Affiliates not required to be consolidated are accounted for using the equity method, under which the Company's share of earnings of these affiliates is included in income as earned. Intercompany accounts and transactions are eliminated. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents consist of liquid investments with initial maturities of three months or less. Inventories Inventories are valued at the lower of cost or market. Inventories valued using the last-in, first-out (LIFO) method represented approximately 37% and 40% of consolidated inventories at December 31, 2001 and 2000, respectively. Inventories not on LIFO are valued using the first-in, first-out (FIFO) method. Inventories at December 31 consist of the following: (In thousands) 2001 2000 ------------------------------------------------------------------------------ Finished goods $ 6,311 $ 7,046 Raw materials 10,882 11,032 Work in process 3,503 4,210 ------------------------------- Total inventories $ 20,696 $ 22,288 =============================== On a current cost basis, inventories would have been $4,472,000 and $4,466,000 higher than reported at December 31, 2001 and 2000, respectively. Property, Plant and Equipment The cost of property, plant and equipment is depreciated principally by the straight-line method over their estimated useful lives ranging from 4 to 31.5 years. Property, plant and equipment consisted of the following: (In thousands) 2001 2000 ------------------------------------------------------------------------------ Land $ 771 $ 792 Buildings 16,283 15,605 Leasehold improvements 3,245 3,220 Machinery and equipment 72,079 67,939 ------------------------------- 92,378 87,556 Accumulated depreciation and amortization (52,608) (48,035) ------------------------------- Total property, plant and equipment, net $ 39,770 $ 39,521 =============================== Depreciation expense relating to property, plant and equipment was approximately $7,881,000, $7,447,000 and $7,256,000 during 2001, 2000 and 1999, respectively. Long-lived and Intangible Assets Intangible assets represent the excess of cost over the fair value of net assets of companies acquired and are stated net of accumulated amortization of $4,715,000 and $4,419,000 at December 31, 2001 and 2000, respectively. Excess of cost over the fair value of net assets acquired (or goodwill) generally is amortized on a straight-line basis over 30 to 40 years (see Note 2, New Accounting Pronouncements). Long-lived and intangible assets are periodically reviewed for recoverability when impairment indicators are present. If this review indicates that long-lived assets would not be recoverable, as determined based on the estimated undiscounted cash flows of the asset over the remaining amortization period, the carrying amount of long-lived assets would be written down to current fair value, which is generally determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale). In the opinion of management, no significant impairment indicators were present during the periods presented in these consolidated financial statements (see Note 2, New Accounting Pronouncements). Research and Development Costs Research and development costs, which include costs of product improvements and design, are expensed as incurred ($10,369,000 in 2001, $9,721,000 in 2000 and $9,370,000 in 1999). Financial Instruments Various methods and assumptions are used by the Company in estimating its fair value disclosures for significant financial instruments. Fair values of cash equivalents approximate their carrying amount because they are highly liquid investments with a maturity of less than three months when purchased. The fair value of long-term debt is based on the present value of the underlying cash flows discounted at the current estimated borrowing rates available to the Company. Foreign Currency Translation The local currency is the functional currency for the Company's foreign subsidiaries. Results are translated into U.S. dollars using monthly average exchange rates, while balance sheet accounts are translated using year-end exchange rates. The resulting translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders' equity. Shipping and Handling Costs In September 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The EITF requires that all shipping and handling amounts billed to a customer in a sale transaction be classified as revenue. The EITF also states that a company cannot net the shipping and handling costs against the shipping and handling revenues in the financial statements. In addition to shipping and handling costs included in cost of products sold, the Company also has shipping and handling costs included in selling, general and administrative expenses totaling $1,303,000, $1,309,000 and $1,535,000 for 2001, 2000 and 1999, respectively. Revenue Recognition Revenue from product sales is recognized upon title transfer, which generally occurs upon shipment. Credit is extended based on local business customs and practices, and collateral is generally not required. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These statements establish new accounting and reporting standards for business combinations and associated goodwill and intangible assets. SFAS 141, effective July 1, 2001, eliminates the pooling of interest method of accounting and amortization of goodwill for business combinations initiated after June 30, 2001. SFAS 142, effective January 1, 2002, requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The estimated pre-tax benefit to the Company as a result of not recording goodwill amortization in 2002 is $4,265,000. This is a preliminary estimate and includes $483,000 of amortization related to the pump and compressor segment and $3,782,000 related to the lighting segment. On an after-tax basis the impact is $3,339,000 or $0.21 per share. The Company has not completed its assessment of the additional effects of adopting SFAS 142, but at this time the Company does not anticipate a significant effect on its results of operations or financial position. The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), dated August 2001. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the accounting and reporting provisions for Accounting Principles Board (APB) Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. We will adopt the provisions of SFAS 144 as of January 1, 2002, and we are currently evaluating the impact SFAS 144 may have on our financial position and results of operations. Other Accounts receivable at December 31, 2001 and 2000 was net of an allowance for doubtful accounts of $1,103,000 and $752,000, respectively. Certain prior year amounts have been reclassified to conform to the current year presentation. 3. NET INCOME PER SHARE The computation of the numerator and denominator in computing basic and diluted net income per share follows: (In thousands) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Numerator: Net income $ 28,170 $ 30,085 $ 26,150 ================================================ Denominator: Weighted average shares outstanding 15,168 15,405 15,796 Effect of dilutive securities: Director and employee stock options 441 331 344 Employee performance shares 12 41 42 ------------------------------------------------ Dilutive potential common shares 453 372 386 ------------------------------------------------ Denominator for diluted earnings per share-- adjusted weighted average shares and assumed conversions 15,621 15,777 16,182 ================================================
The deferred compensation obligation discussed in Note 7 is funded with shares of the Company's common stock, which are included in the calculation of basic and diluted earnings per share. 4. EQUITY INVESTMENT Genlyte Thomas Group LLC (GTG) is an affiliated company accounted for on the equity method. See Notes 1 and 2 for a description of GTG. At any time on or after January 31, 2002, Thomas has the right (a "put right"), but not the obligation, to require the Joint Venture (GTG) to purchase all, but not less than all, of Thomas' ownership interest in GTG at the applicable purchase price. The purchase price shall be equal to the "Fair Market Value" of GTG multiplied by Thomas' ownership percentage in GTG. The "Fair Market Value" means the value of the total interests in GTG computed as a going concern, including the control premium. Summarized financial information reported by the affiliate and a summary of the amounts recorded in Thomas' consolidated financial statements follow. GTG is organized as a limited liability corporation (LLC) that has elected to be taxed as a partnership for U.S. income tax purposes. Therefore, Thomas and Genlyte are responsible for income taxes applicable to their share of GTG's taxable income. The net income reflected below for GTG does not include any provision for U.S. income taxes which will be incurred by Thomas and Genlyte; however, amounts have been provided for foreign income taxes and certain U.S. franchise taxes. At December 31, 2001, Thomas' retained earnings include $30,122,000 of after-tax undistributed earnings from GTG accounted for on the equity method. December 31 ------------------------------ GTG Balance Sheets 2001 2000 ----------------------------------------------------------------------------- (In thousands) Cash and cash equivalents $ 59,691 $ 23,817 Accounts receivable, net 141,703 143,988 Inventories 132,932 151,257 Other current assets 8,718 7,564 ------------------------------ Total current assets 343,044 326,626 Property, plant and equipment, net 110,447 113,001 Intangible assets, net 135,417 140,312 Other assets 30,213 34,453 ------------------------------ Total assets $ 619,121 $ 614,392 ============================== Total current liabilities $ 170,545 $ 177,454 Other liabilities 25,584 22,980 Note payable to Thomas(3) - 22,287 Long-term debt, less current portion 36,989 44,365 Shareholders' equity 386,003 347,306 ------------------------------ Total liabilities and shareholders' equity $ 619,121 $ 614,392 ============================== Years Ended December 31 ------------------------------ GTG Income Statements 2001 2000 ----------------------------------------------------------------------------- (In thousands) Net sales $ 985,176 $ 1,007,706 Cost of products sold 636,582 651,304 ------------------------------ Gross profit 348,594 356,402 SG&A expense 248,005 257,583 Amortization 6,007 4,616 ------------------------------ Operating profit 94,582 94,203 Interest expense, net 3,699 4,184 Minority interest (54) (140) ------------------------------ Income before taxes 90,937 90,159 Income taxes(1) 6,064 6,622 ------------------------------ Net income $ 84,873 $ 83,537 ============================== Amounts recorded by Thomas: Investment(2) $ 179,219 $ 168,954 Note receivable(3) - 22,287 Equity income 24,835(4) 24,575(5) Distributions received 11,592 13,797 (1) GTG is organized as a limited liability corporation (LLC) that has elected to be taxed as a partnership for U.S. income tax purposes. GTG is subject to foreign income taxes and certain U.S. franchise taxes. (2) Thomas' investment in GTG exceeded its underlying equity in net assets by $55,699,000 at December 31, 2001 and $57,815,000 at December 31, 2000. For each of the years ended December 31, 2001 and December 31, 2000, equity income was reduced by $2,116,000 representing straight-line amortization of the excess investment. (3) The note receivable from GTG represents a debt equalization note issued to Thomas at the formation of GTG. Interest on the principal amount outstanding under the note accrued at a variable rate and was payable on a quarterly basis. The note was paid off on November 21, 2001. (4) Consists of $27,159,000 of equity income from GTG less $2,116,000 of amortization of Thomas' excess investment and $208,000 of expense for Thomas Industries stock options issued to GTG employees. (5) Consists of $26,732,000 of equity income from GTG less $2,116,000 of amortization of Thomas' excess investment and $41,000 of expense for Thomas Industries' stock options issued to GTG employees. The Company in the normal course of business has transactions with GTG. These transactions consist primarily of interest received from GTG under the note receivable discussed above and reimbursement for other shared corporate expenses. Receivables due from GTG as of December 31, 2001 and 2000 were $37,000 and $199,000, respectively. For the years ended December 31, 2001, 2000 and 1999, the Company recorded interest on the note receivable of $1,012,000, $1,543,000 and $1,281,000, respectively, and recorded $387,000, $515,000 and $496,000, respectively, related to the reimbursement of shared corporate expenses. 5. INCOME TAXES A summary of the provision for income taxes follows: (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Current: Federal $ 13,287 $ 12,638 $ 10,746 State 1,647 1,952 1,961 Foreign 2,981 2,613 2,849 ---------------------------------------- 17,915 17,203 15,556 Deferred: Federal and state (1,158) 659 663 Foreign 113 351 (160) ---------------------------------------- (1,045) 1,010 503 ---------------------------------------- Total provision for income taxes $ 16,870 $ 18,213 $ 16,059 ======================================== The U.S. and foreign components of income before income taxes follow: (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- United States $ 38,090 $ 41,175 $ 35,392 Foreign 6,950 7,123 6,817 ---------------------------------------- Income before income taxes $ 45,040 $ 48,298 $ 42,209 ======================================== A reconciliation of the normal statutory federal income tax rate to the Company's effective income tax rate follows: 2001 2000 1999 -------------------------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 2.4 2.7 3.0 Nondeductible amortization of intangible assets 1.2 1.2 1.3 Effect of foreign tax rates .5 1.2 1.2 GTG foreign equity earnings recorded net of tax (2.4) (2.0) (2.0) Other .8 (.4) (.4) ------------------------------ Effective income tax rate 37.5% 37.7% 38.1% ============================== Deferred income taxes are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. Temporary differences which gave rise to significant deferred tax assets and liabilities follow: (In thousands) 2001 2000 -------------------------------------------------------------------------------- Deferred tax assets: Employee benefit obligations $ 2,640 $ 1,496 Net operating loss carryforwards 354 601 Allowance for doubtful accounts receivable 270 231 Inventory reserves 772 753 Compensation accruals 626 830 Accrued liabilities and other 1,246 1,411 ------------------------- 5,908 5,322 Less valuation allowance (354) (601) ------------------------- Net deferred tax asset 5,554 4,721 Deferred tax liabilities: Accelerated depreciation 4,494 4,217 Undistributed foreign earnings 2,064 1,953 Investment in GTG 971 2,809 Other 877 805 ------------------------- 8,406 9,784 ------------------------- Net deferred tax liability $ 2,852 $ 5,063 ========================= Classification: Net current assets $ 2,496 $ 2,713 Net long-term liabilities 5,348 7,776 ------------------------- Net deferred tax liabilities $ 2,852 $ 5,063 ========================= Deferred tax assets and liabilities are classified according to the related asset and liability classification on the consolidated balance sheet. Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of the valuation allowance of $354,000. The valuation allowance is provided for income tax loss carryforward benefits for state income tax purposes (NOLs) which expire over a two-year period beginning in 2009. Management believes that based on a number of factors the available evidence creates sufficient uncertainty regarding the realizability of these NOLs. The Company's foreign subsidiaries have accumulated undistributed earnings ($20,649,000 at December 31, 2001). Under current tax regulations and with the availability of certain tax credits, it is management's belief, based on current estimates which could change, that the likelihood of the Company incurring significant taxes on any distribution of such accumulated earnings in excess of amounts provided for is remote. The Company made federal, state and foreign income tax payments of $18,828,000 in 2001, $12,496,000 in 2000 and $15,964,000 in 1999. 6. LONG-TERM DEBT INCLUDING THE CURRENT PORTION Long-term debt, including the current portion, consists principally of 9.36% senior notes ($30,890,000 and $38,620,000 at December 31, 2001 and 2000, respectively) with annual maturities through 2005. The remainder ($1,836,000 and $9,893,000 at December 31, 2001 and 2000, respectively) consists of other debt instruments at various interest rates and maturities. The fair value of the Company's long-term debt, including the current portion, at December 31, 2001 and 2000 was $35,969,000 and $50,815,000, respectively. Maturities of long-term debt for the next five years are as follows: 2002-$7,788,000; 2003-$7,792,000; 2004-$7,794,000, 2005-$7,766,000 and 2006-$69,000. Certain loan agreements of the Company include restrictions on working capital, operating leases, tangible net worth and the payment of cash dividends and stock distributions. Under the most restrictive of these arrangements, retained earnings of $83,228,000 were not restricted at December 31, 2001. Cash paid for interest was $3,916,000 in 2001, $4,316,000 in 2000 and $4,867,000 in 1999. 7. SHAREHOLDERS' EQUITY Stock Repurchase Program Thomas' Board of Directors in 1999 authorized the purchase of up to 2,373,000 shares of Thomas common stock in the open market. Through December 31, 2001, Thomas had repurchased 879,189 shares at a cost of approximately $17,334,000. Stock Incentive Plans At the April 20, 1995 Annual Meeting, the Company's shareholders approved the Company's 1995 Incentive Stock Plan. An aggregate of 900,000 shares of common stock, plus all shares remaining under the Company's 1987 Incentive Stock Plan, were reserved for issuance under this Plan. At the April 15, 1999 Annual Meeting, the Company's shareholders approved a 750,000 share increase in the number of shares reserved for issuance under the 1995 Incentive Stock Plan. Under this Plan, options may be granted to employees at not less than market value at date of grant. All options granted have 10-year terms, and vest and become fully exercisable at the end of five years of continued employment. The Company's 1987 Incentive Stock Plan has been terminated, except with respect to outstanding options which may be exercised through 2005. At the April 21, 1994 Annual Meeting, the Company's shareholders approved the Non-Employee Director Stock Option Plan. Under this Plan, each continuing non-employee director in office on the date of each annual meeting is awarded options to purchase 3,000 shares of common stock at not less than market value at date of grant. All options granted have 10-year terms, and vest and become fully exercisable as of the date granted. This Plan provides for options to be awarded at each annual meeting through 2004 or until 375,000 options have been granted. At December 31, 2001, there were seven non-employee directors in office, and 189,000 options had been awarded under this Plan. The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with SFAS 123, the Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations, in accounting for its stock-based compensation because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized for options granted to employees and non-employee directors. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its stock options granted subsequent to December 31, 1994 under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 2001 2000 1999 ------------------------------------------------------------------------------ Risk-free interest rate 4.7% 5.1% 6.6% Expected life, in years 6.5 6.5 6.5 Expected volatility 0.313 0.283 0.284 Expected dividend yield 1.5% 1.5% 1.6% The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restriction and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: (In thousands, except share data) 2001 2000 1999 -------------------------------------------------------------------------------- Net income As reported $ 28,170 $ 30,085 $ 26,150 Pro forma 27,373 29,143 25,269 Net income per share-- As reported 1.86 1.95 1.66 Basic Pro forma 1.80 1.89 1.60 Net income per share-- As reported 1.80 1.91 1.62 Diluted Pro forma 1.75 1.84 1.56 A summary of stock option activity for all plans follows: 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Options Price Options Price Options Price ------------------------------------------------------------------------------- Beginning of year 1,580,670 $ 16.07 1,498,696 $ 15.12 1,497,583 $ 14.49 Granted 225,350 25.40 185,700 20.68 207,450 18.30 Exercised (212,246) 12.03 (85,295) 8.74 (106,442) 10.88 Forfeited or expired (66,360) 19.53 (18,431) 19.16 (99,895) 16.85 ------------------------------------------------------------------------------- End of year 1,527,414 $ 17.86 1,580,670 $ 16.07 1,498,696 $ 15.12 =============================================================================== Exercisable at end of year 903,663 $ 15.34 921,575 $ 13.87 778,439 $ 12.26
The weighted average fair value of options granted was $6.42 in 2001, $6.02 in 2000 and $5.90 in 1999 using a Black-Scholes option pricing model. Options outstanding at December 31, 2001 had option prices ranging from $6.67 to $25.87 and expire at various dates between December 10, 2002 and December 10, 2011 (with a weighted-average remaining contractual life of 6.4 years). There are 638,010 shares reserved for future grant, of which 172,881 shares are reserved for the Non-Employee Director Stock Option Plan. Included in the summary of stock option activity above, are options granted to GTG employees, which in accordance with SFAS 123, the Company has recorded compensation expense based on using a Black-Scholes option pricing model. This expense was $208,000 and $41,000 for 2001 and 2000, respectively, and is netted with the Company's equity income from GTG (see Note 4, Equity Investments). Since an expense is recorded related to these GTG options, there is no pro forma adjustment necessary. In addition to the options listed above, 11,000 performance share awards were granted in December 2001,10,600 performance share awards were granted in December 2000, and 11,800 performance share awards were granted in December 1999. Awards may be earned based on the total shareholder return of the Company during the three-year periods commencing January 1 following the grant date. A total of 1,000 shares were issued for 2001 from awards granted in December 1998,11,827 shares were earned in 2000 from awards granted in December 1997, and 13,841 shares were earned in 1999 from awards granted in 1996. Deferred Share Trust Employees who earn performance share awards as discussed above may elect to defer receipt of such shares until termination of employment. Nonemployee Directors are permitted to receive part or all of their director fees in the form of common stock of the Company and to defer receipt of such shares until retirement or other termination of service. In April 2000, the Company established a deferred share trust (the "Trust") to maintain the shares deferred for these obligations. The Trust qualifies as a rabbi trust for income tax purposes as the assets of the Trust are subject to the claims of general creditors of the Company. Dividends payable on the shares held by the Trust are reinvested in additional shares of common stock of the Company on behalf of the participants. Since there is no provision for diversification of the Trust's assets and settlement can only be made with a fixed number of shares of the Company's common stock, the deferred compensation obligation is classified as a component of shareholders' equity and the common stock held by the Trust is classified as treasury stock. Subsequent changes in the fair value of the common stock are not reflected in earnings or shareholders' equity of the Company. Shareholder Rights Plan On December 10, 1997, the Board of Directors of the Company adopted a shareholder rights plan (the Rights Plan) pursuant to which preferred stock purchase rights (the Rights) were declared and distributed to the holders of the Company's common stock. The Rights Plan generally provides that the Rights separate from the common stock and become exercisable if a person or group of persons working together acquires at least 20% of the common stock (a 20% Acquisition) or announces a tender offer which would result in ownership by that person or group of at least 20% of the common stock (a 20% Tender Offer). Upon a 20% Acquisition, the holders of Rights may purchase the common stock at half-price. If, following the separation of the Rights from the common stock, the Company is acquired in a merger or sale of assets, holders of Rights may purchase the acquiring company's stock at half-price. Notwithstanding the foregoing discussion, under the Rights Plan, the Board of Directors has flexibility in certain events. In order to provide maximum flexibility, the Board of Directors may delay the date upon which the Rights become exercisable in the event of a 20% Tender Offer. In addition, the Board of Directors has the option to exchange one share of common stock for each outstanding Right at any time after a 20% Acquisition, but before the acquirer has purchased 50% of the outstanding common stock. The Rights may also be redeemed at two cents per Right at any time prior to a 20% Acquisition or a 20% Tender Offer. 8. EMPLOYEE BENEFIT PLANS The Company has noncontributory defined benefit pension plans and contributory defined contribution plans covering its hourly union employees. The defined benefit plans primarily provide flat benefits of stated amounts for each year of service. The Company's policy is to fund pension costs deductible for income tax purposes. The Company also sponsors defined contribution pension plans covering substantially all U.S. employees whose compensation is not determined by collective bargaining. Annual contributions are determined by the Board of Directors. Other Postretirement Pension Benefits Benefits --------------------------------------------------- (In thousands) 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at beginning of year $ 6,710 $ 5,982 $ 692 $ 677 Service cost 273 166 46 24 Interest cost 486 467 71 48 Plan amendments - 65 - - Benefits paid (642) (529) (42) (15) Actuarial (gain) loss 134 559 294 (42) --------------------------------------------------- Benefit obligations at end of year $ 6,961 $ 6,710 $ 1,061 $ 692 =================================================== CHANGE IN PLAN ASSETS Value of plan assets at beginning of year $ 7,079 $ 7,339 $ - $ - Actual return on plan assets (353) 322 - - Employer contributions 250 150 42 15 Benefits paid (642) (529) (42) (15) Reversion of plan assets - (203) - - ---------------------------------------------------- Value of plan assets at end of year $ 6,334 $ 7,079 $ - $ - ====================================================
The defined benefit plans' assets at December 31, 2001 consisted primarily of listed stocks and bonds, including 14,430 shares of Company common stock having a market value of $360,000 at that date. The reversion of plan assets of $203,000 in 2000 relates to the termination in 1999 of Thomas' Pension Floor Plan. Other Postretirement Pension Benefits Benefits --------------------------------------------------- (In thousands) 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------- Funded status of the plans Assets less accumulated obligations $ (627) $ 369 $ (1,061) $ (692) Unrecognized actuarial loss (gain) 1,002 (39) 161 (131) Unrecognized transition gain 9 11 - - Unrecognized prior service cost 523 530 205 224 --------------------------------------------------- Net asset (liability) recognized at end of year $ 907 $ 871 $ (695) $ (599) ===================================================
The accumulated benefit obligation and plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $6,598,000 and $5,961,000 as of December 31, 2001. Plan assets exceeded accumulated benefit obligations for all plans as of December 31, 2000. Other Postretirement Pension Benefits Benefits (In thousands) 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------- Balance sheet assets (liabilities) Prepaid benefit costs $ 38 $ 871 $ - $ - Accrued benefit liabilities (636) - (695) (599) Intangible assets 531 - - - Accumulated other comprehensive income 974 55 - - --------------------------------------------------- Net asset (liability) recognized at end of year $ 907 $ 926 $ (695) $ (599) =================================================== Assumptions as of December 31 Discount rate 7.25% 7.50% 7.25% 7.50% Expected return on plan assets 9.00% 9.00% - - Initial health care cost trend rate - - 10.00% 8.00% Ultimate health care cost trend rate - - 5.50% 4.50% Year ultimate rate is achieved - - 2008 2006
A one-percentage-point change in the assumed health care cost trend rate would not have a significant effect on the other postretirement benefits amounts reported above. The following table details the components of pension and other postretirement benefit costs. Pension Benefits Other Postretirement Benefits (In thousands) 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Service cost $ 273 $ 166 $ 208 $ 46 $ 24 $ 22 Interest cost 486 467 685 71 48 47 Expected return on plan assets (611) (618) (981) - - - Curtailment loss recognized - - 462 - - - Other amortization and deferral 66 50 44 19 19 19 ---------------------------------------------------------------------------- $ 214 $ 65 $ 418 $ 136 $ 91 $ 88 ============================================================================
The curtailment loss of $462,000 relates to the termination in 1999 of Thomas' Pension Floor Plan. Thomas sponsors various defined contribution plans to assist eligible employees in providing for retirement or other future needs. Company contributions to these plans amounted to $1,106,000 in 2001, $1,183,000 in 2000 and $1,143,000 in 1999. 9. LEASES, COMMITMENTS AND CONTINGENCIES Rental expense for building, machinery and equipment was $2,702,000 in 2001, $2,562,000 in 2000 and $2,514,000 in 1999. Future minimum rentals under non-cancelable operating leases are as follows: 2002-$2,017,000; 2003-$1,270,000; 2004-$819,000; 2005-$712,000; 2006-$638,000 and thereafter-$2,200,000. The Company had letters of credit outstanding in the amount of $4,518,000 at December 31, 2001. 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 involved in remedial efforts at certain of its present and former locations; and when costs can be reasonably estimated, the Company records appropriate liabilities for such matters. The Management does not believe that the ultimate resolution of environmental matters will have a material adverse effect on its financial position, results of operations or liquidity. In the normal course of business, the Company is a party to legal proceedings and claims. When costs can be reasonably estimated, appropriate liabilities for such matters are recorded. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations, or liquidity of the Company, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could be material to the Company. 10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES A summary of accrued expenses and other current liabilities follows: (In thousands) 2001 2000 -------------------------------------------------------------------------------- Accrued wages, taxes and withholdings $ 3,701 $ 5,138 Accrued insurance 1,543 1,223 Accrued interest 1,347 1,633 Accrued warranty expense 1,018 1,080 Other current liabilities 4,129 4,456 ----------------------- Total accrued expenses and other current liabilities $ 11,738 $ 13,530 ======================= 11. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Unaudited quarterly results of operations follow: Net Sales Gross Profit Net Income ------------------------------------------------------------------------------- (In thousands, except share data) 2001 2000 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------- 1st Quarter $ 49,696 $ 50,811 $ 18,301 $ 17,799 $ 7,280 $ 7,158 2nd Quarter 46,915 48,436 16,753 17,829 7,328 8,412(1) 3rd Quarter 44,008 45,048 15,395 16,545 6,605 7,571 4th Quarter 43,763 44,529 15,308 15,816 6,957 6,944(2) ------------------------------------------------------------------------------- $ 184,382 $ 188,824 $ 65,757 $ 67,989 $ 28,170 $ 30,085 ===============================================================================
Basic Net Income Diluted Net Income Per Share Per Share ----------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------------------------- 1st Quarter $ 0.48 $ 0.46 $ 0.47 $ 0.45 2nd Quarter 0.48 0.54(1) 0.47 0.53(1) 3rd Quarter 0.43 0.49 0.42 0.48 4th Quarter 0.46 0.46(2) 0.45 0.45(2) ----------------------------------------------------- $ 1.86 $ 1.95 $ 1.80 $ 1.91 ===================================================== (1) The second quarter of 2000 included a non-taxable gain of $793,000 or $.05 per share from the proceeds of a life insurance policy. (2) The fourth quarter of 2000 included pre-tax gains of $839,000 from the sale of securities. On an after-tax basis, the gain totaled $522,000, or $.04 per share. The fourth quarter of 2000 also included a pre-tax charge of $1,000,000 related to environmental costs. On an after-tax basis, this charge was $623,000, or $.04 per share. 12. ACQUISITION During October 1999, the Company acquired Oberdorfer Pumps, Inc., a manufacturer of centrifugal, rotary gear and rubber impeller liquid pumps located in Syracuse, New York at a cost of approximately $6,400,000. The Company recorded approximately $3,200,000 of goodwill related to this acquisition which is being amortized over 30 years (see Note 2, New Accounting Pronouncements). 13. INDUSTRY SEGMENT INFORMATION Industry segment information follows: (In thousands) 2001 2000 1999 Revenues Sales and operating revenues- Pump and Compressor $ 184,382 $ 188,824 $ 177,802 ================================================ Operating income (loss) Pump and Compressor $ 28,488 $ 31,607 $ 29,556 Lighting (GTG) 24,835 24,575 23,147 Corporate (6,142) (7,688) (7,420) ------------------------------------------------ $ 47,181 $ 48,494 $ 45,283 ================================================ Assets Pump and Compressor $ 107,386 $ 107,577 $ 95,416 Lighting (GTG) 179,219 168,954 158,865 Corporate 20,109 29,581 38,117 ------------------------------------------------ $ 306,714 $ 306,112 $ 292,398 ================================================ Investment in equity affiliates Lighting (GTG) $ 179,219 $ 168,954 $ 158,865 ================================================ Depreciation and amortization Pump and Compressor $ 8,156 $ 7,682 $ 7,452 Corporate 208 225 219 ------------------------------------------------ $ 8,364 $ 7,907 $ 7,671 ================================================ Additions to property, plant and equipment Pump and Compressor $ 8,514 $ 10,849 $ 7,555 Corporate 34 39 398 ------------------------------------------------ $ 8,548 $ 10,888 $ 7,953 ================================================
Intersegment and interlocation sales are not significant and have been eliminated from the above tabulation. Operating income by segment is gross profit less operating expenses, excluding interest, general corporate expenses, other income and income taxes. Information by geographic area follows: (In thousands) 2001 2000 1999 Revenues(1) Total net sales including intercompany sales North America $ 133,997 $ 139,775 $ 128,806 Europe 55,715 55,263 55,920 Asia Pacific 10,385 9,300 3,810 ------------------------------------------------ $ 200,097 $ 204,338 $ 188,536 ================================================ Intercompany sales North America $ (8,748) $ (9,115) $ (4,981) Europe (6,967) (6,399) (5,753) ------------------------------------------------ $ (15,715) $ (15,514) $ (10,734) ================================================ Net sales to unaffiliated customers North America $ 125,249 $ 130,660 $ 123,825 Europe 48,748 48,864 50,167 Asia Pacific 10,385 9,300 3,810 ------------------------------------------------ $ 184,382 $ 188,824 $ 177,802 ================================================ Property, plant and equipment North America $ 32,914 $ 32,189 $ 29,328 Europe 6,601 6,951 6,746 Asia Pacific 255 381 78 ------------------------------------------------ $ 39,770 $ 39,521 $ 36,152 ================================================ (1) Revenues are attributed to geographic areas based on the location of the selling entity.
Report of Independent Auditors Board of Directors and Shareholders of Thomas Industries Inc.: We have audited the accompanying consolidated balance sheet of Thomas Industries Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Thomas Industries Inc. as of December 31, 2000 and for the years ended December 31, 2000 and 1999, were audited by other auditors whose report dated February 7, 2001, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thomas Industries Inc. and subsidiaries as of December 31, 2001, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Louisville, Kentucky January 25, 2002 FIVE YEAR SUMMARY OF OPERATIONS AND STATISTICS
Years ended December 31 ------------------------------------------------------------------- (Dollars in thousands, except per share) 2001(A) 2000(A) 1999(A) 1998(A) 1997 ----------------------------------------------------------------------------------------------------------------------- Earnings Statistics Net sales(B) $ 184,382 $ 188,824 $ 177,802 $ 178,836 $ 547,702 Cost of products sold(B) 118,625 120,835 113,752 113,934 378,746 Selling, general, and administrative expenses 43,411 44,070 41,914 40,805 127,969 Equity income from lighting 24,835 24,575 23,147 20,323 - Interest expense 3,630 3,995 4,601 6,199 6,480 Income before income taxes 45,040 48,298(D) 42,209 39,406 35,644 As a percentage of net sales 24.4% 25.6% 23.7% 22.0% 6.5% Income taxes 16,870 18,213 16,059 14,896 13,174 Effective tax rate 37.5% 37.7% 38.1% 37.8% 37.0% Net income 28,170 30,085(E) 26,150 24,510 22,470 ------------------------------------------------------------------- Financial Position Working capital $ 45,978 $ 30,677 $ 32,244 $ 31,564 $ 92,258 Current ratio 2.5 to 1 1.9 to 1 2.1 to 1 2.0 to 1 2.1 to 1 Property, plant and equipment - net 39,770 39,521 36,151 35,215 80,197 Total assets 306,714 306,112 292,398 281,179 324,098 Return on ending assets 9.2% 9.8% 8.9% 8.7% 6.9% Long-term debt, less current portion 24,938 40,727 40,513 48,298 55,006 Long-term debt to capital 9.5% 15.8% 16.2% 20.2% 24.1% Shareholders' equity 237,713 217,402 209,482 190,687 173,405 Return on beginning shareholders' equity 13.0% 14.4% 13.7% 14.1% 14.2% ------------------------------------------------------------------- Data Per Common Share(C) Net income $ 1.80 $ 1.91(E) $ 1.62 $ 1.50 $ 1.38 Cash dividends declared 0.34 0.30 0.30 0.30 0.28 Shareholders' equity 15.16 14.10 12.97 11.73 10.59 Price range 29.50 23.25 22.31 26.63 22.33 to to to to to 20.19 17.50 16.13 17.06 13.67 Closing price 25.00 23.25 20.44 19.625 19.75 Price / earnings ratio 13.9 12.2 12.6 13.1 14.3 ------------------------------------------------------------------- Other Data Cash dividends declared $ 5,162 $ 4,621 $ 4,738 $ 4,766 $ 4,357 Expenditures for property, plant and equipment 8,548 10,888 7,953 7,687 17,696 Depreciation and amortization 8,364 7,907 7,671 7,619 16,049 Average number of employees 1,110 1,085 1,030 1,050 3,300 Average sales per employee 166.1 174.0 172.6 170.3 166.0 Number of shareholders of record 2,064 2,193 2,248 1,950 2,057 Average number common shares outstanding(C) 15,621,000 15,777,492 16,181,507 16,382,928 16,271,678 ------------------------------------------------------------------- Segment Information Net Sales(B) Pumps and Compressors $ 188,824 $ 188,824 $ 177,802 $ 178,836 $ 173,637 Lighting - - - - 374,065 ------------------------------------------------------------------- Total Net Sales $ 188,824 $ 188,824 $ 177,802 $ 178,836 $ 547,702 =================================================================== Operating Income Pumps and Compressors $ 28,488 $ 31,607 $ 29,556 $ 30,743 $ 30,879 Lighting 24,835 24,575 23,147 20,323 22,423 Corporate expenses (6,142) (7,688) (7,420) (6,646) (12,315) ------------------------------------------------------------------- Total Operating Income $ 47,181 $ 48,494 $ 45,283 $ 44,420 $ 40,987 =================================================================== Note: See accompanying Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (A) Thomas Industries changed its method of accounting for its lighting business (contributed to GTG) to the equity method, effective January 1,1998, the beginning of Thomas' fiscal year. This change had no effect on Thomas' net income or common shareholders' equity but did reduce its revenues, costs, assets, liabilities, and number of employees. Financial statements for years prior to 1998 were not restated; therefore, some information in Thomas' financial statements and highlights for 1998 through 2001 is not comparable to 1997. (B) Freight expense related to shipments to customers, which previously has been netted in net sales, has been reclassed from net sales to cost of products sold for 1998, 1999, 2000, and 2001. (C) Adjusted for 1997 stock splits. (D) Includes $1,632,000 of pre-tax gains related to insurance proceeds and sale of securities; also includes a $1,000,000 pre-tax charge related to environmental costs. (E) Includes $1,315,000, or $.09 per share, of after-tax gains related to insurance proceeds and sale of securities; also includes a $623,000, or $.04 per share, after-tax charge related to environmental costs.