Item 1. - BUSINESS
The Lamson & Sessions Co. ("Company"), founded in 1866, is a diversified manufacturer and supplier of a broad line of thermoplastic electrical, telecommunications and fluid drainage products for major domestic markets. The markets for thermoplastic conduit, related fittings and accessories, wiring devices and sewer pipe include: the construction, utility and telecommunications industries; municipalities, other government agencies, and contractors; and do-it-yourself home remodelers.
In November 1995, the Company completed the sale of its Valley-Todeco division which was engaged in the manufacture and sale of fasteners serving the aerospace industry. (Refer to Note J to the Consolidated Financial Statements.) Proceeds from the sale were utilized to reduce debt.
PRINCIPAL PRODUCTS AND MARKETS
The Company is engaged in the manufacture and distribution of a broad line of thermoplastic electrical, telecommunication and engineered sewer products. In addition, the Company distributes a wide variety of consumer electrical wiring devices.
All of the Company's thermoplastic products compete with and serve as substitutes for similar metallic products, and its engineered sewer pipe products compete with and serve as substitutes for clay, concrete, ductile iron, asbestos cement and polyethylene products. The Company's thermoplastic products offer several advantages over these other products. Specifically, nonmetallic electrical conduit and related fittings and accessories are generally less expensive, lighter and easier to install than metallic products. Furthermore, thermoplastic conduit does not rust, corrode or conduct electricity. Thermoplastic sewer pipe weighs less than substitute products, is easier and more economical to install, does not degenerate due to sewer gases as do some competing products, and eliminates avoidable problems which can be caused by infiltration and exfiltration.
Four markets are served, each of which has unique product and marketing requirements. These markets are: (i) Industrial, Residential, Commercial and Utility Construction (served by Carlon Electrical Products, "Electrical") -- contractors engaged in the installation of electrical systems in industrial, residential and commercial construction, and electric power utility projects; original equipment manufacturers who use components as subassemblies for their own products; and industrial companies who maintain or repair their own facilities; (ii) Consumer (served by Lamson Home Products, "Home") -- retail consumers of electrical products who perform "do-it-yourself" home repairs; and small electrical contractors; (iii) Telecommunications (served by Carlon Telecom Systems, "Telecom") -- cable TV, telephone and telecommunications companies; and (iv) Engineered Sewer Products (served by Lamson Vylon Pipe, "Vylon") -- various government and private builders of sewer and drainage systems.
A breakdown of revenues as a percent of net sales related to significant classes of product by major market segment for 1995, 1994 and 1993, respectively is as follows:
The following summarizes the principal products used in each of the four markets:
INDUSTRIAL, RESIDENTIAL, COMMERCIAL AND UTILITY CONSTRUCTION. The principal products sold to this market include rigid conduit, flexible electrical nonmetallic tubing, fittings and accessories, outlet boxes, and other products. Other products in this market also include thermoplastic spirally extruded liquidtight conduit, which is used by industrial companies and original equipment manufacturers requiring a watertight housing for electrical cable, and a broad line of industrial nonmetallic enclosures comprised of molded, non-corrosive boxes designed to enclose and protect devices such as electrical controls, switches and industrial control panels.
TELECOMMUNICATIONS. The products included in this market are traditional smooth wall communication duct and spacers used by telecommunication and CATV industries to house telecommunications cable, multi-cell duct systems designed to protect underground fiber optic cables and allow future cabling expansion, and flexible conduit used inside buildings to protect communications cable.
CONSUMER. The products included in this market are products such as light dimmers, fan speed controls, touch controls, door chimes, motion sensors and home security systems. In addition, the Company supplies this market with products such as outlet boxes, electrical conduit, liquidtight conduit and electrical fittings.
ENGINEERED SEWER PRODUCTS. Principal products utilized by this market include closed profile engineered sewer pipe used for direct burial and sliplining as well as traditional solid wall sewer and drain pipe used in residential construction of sanitary drainage systems, sewer main and highway underdrain available in diameters ranging from 4 to 48 inches.
COMPETITION
Each of the four markets in which the Company is presently operating is highly competitive based on service, price and quality. Most of the competitors are either national or smaller regional manufacturers who compete with limited product offerings. Unlike a majority of the Company's competitors, the Company manufactures a broad line of thermoplastic products, complementary fittings and accessories, thus enabling it to offer its customers complete and integrated systems. The company believes that its products will continue to compete favorably. However, certain of the Company's competitors have greater financial resources than the Company, which could adversely affect the Company through price competition strategies.
DISTRIBUTION
The Company distributes its products through a nationwide network of more than 175 manufacturers' representatives. Currently, 10 of these manufacturers' representatives inventory the Company's products. The Company has reduced the number of these inventory locations and has developed its own strategically located distribution centers.
RAW MATERIALS
The Company is a large purchaser of pipe grade polyvinyl chloride resin and has historically been able to obtain adequate quantities.
PATENTS AND TRADEMARKS
The Company owns various patents, patent applications, licenses, trademarks and trademark applications relating to its products and processes. While the Company considers that, in the aggregate, its patents, licenses and trademarks are of importance in the operation of its business, it does not consider that any individual patent, license or trademark, or any technically related group, is of such importance that termination would materially affect its business.
SEASONAL FACTORS
The Company's four business units experience seasonality caused principally by a decrease in construction activity during the winter months. They are subject also to the economic cycles affecting the construction industry.
MAJOR CUSTOMERS
Sales to Affiliated Distributors, a buying group not otherwise affiliated with the Company, totalled approximately 12% of net sales in 1995 and 1994. No customer exceeded 10% of net sales in 1993.
BACKLOG
Due to the nature of the Company's business, orders are generally filled within several weeks of order date. Therefore, statistics relative to order backlog are not indicative of the status of the Company's business at any point in time.
RESEARCH AND DEVELOPMENT
The Company is engaged in an aggressive new product development program in an effort to introduce innovative applications for thermoplastic and consumer electrical products. The Company maintains a separate research and development center in Cleveland, Ohio to facilitate the introduction of value-added products and improved manufacturing processes. The Company sponsored research and development activity totalled $3.7 million, $3.4 million and $3.2 million in 1995, 1994 and 1993, respectively.
ENVIRONMENTAL REGULATIONS
The Company believes that its current operations and its use of property, plant and equipment conform in all material respects to applicable environmental laws and regulations presently in effect (Refer to Note C to the Consolidated Financial Statements). The Company has facilities at numerous geographic locations, which are subject to a range of federal, state and local environmental laws and regulations. Compliance with these laws has, and will, require expenditures on a continuing basis.
EMPLOYEES
At fiscal years ended, the Company had the following employees:
1995 1994 1993 ---- ---- ---- 1,048 1,325 1,425
FOREIGN OPERATIONS
The net sales, operating earnings and assets employed outside the United States are not significant. Export sales were approximately 2% of consolidated net sales in 1995 and 1% in each of the two prior fiscal years and were made principally to countries in North America.
Item 2.
Item 2. - PROPERTIES
The Company owns or leases manufacturing and distribution facilities which are suitable and adequate for the production and marketing of its products. The Company owns executive and administrative offices which are located in Cleveland, Ohio and occupy 68,000 square feet in a suburban office complex. In addition, the Company leases 7,000 square feet of administrative offices in an office building near the Corporate headquarters. The Company also has research and development offices, located in Cleveland, Ohio, which occupy leased space of 27,000 square feet. The following is a list of the Company's manufacturing and distribution center locations:
Approximate Square Feet ----------- Manufacturing Facilities (Owned): - ----------------------------------------
Woodland, California 73,000
High Springs, Florida 113,000
Clinton, Iowa 156,000
Bowling Green and Aurora, Ohio 205,000 (2 facilities)
Oklahoma City, Oklahoma 166,000
Nazareth, Pennsylvania 53,000
Pasadena, Texas 46,000
Distribution Centers (Leased): - ----------------------------------------
Woodland, California 41,000
Montreal, Canada 20,000
Clinton, Iowa 56,000
Oklahoma City, Oklahoma 90,000
Allentown, Pennsylvania 65,000
The Company presently utilizes substantially all of its facilities and operated in 1995 at approximately 77% of productive capacity.
Item 3.
Item 3. - LEGAL PROCEEDINGS
The Company is a party to various claims and matters of litigation incidental to the normal course of its business. Management believes that the final resolution of these matters will not have a material adverse effect on the Company's financial position.
Item 4.
Item 4. - SUBMISSION OF MATTERS TO SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
JOHN B. SCHULZE
Chairman, President and Chief Executive Officer
Chairman, President and Chief Executive Officer since January 1990. Age 58.
JAMES J. ABEL
Executive Vice President, Secretary, Treasurer and Chief Financial Officer
Executive Vice President, Secretary, Treasurer and Chief Financial Officer since September 1994. Previously was Executive Vice President, Treasurer and Chief Financial Officer February 1993 - September 1994. Previously was Senior Vice President, Treasurer and Chief Finan- cial Officer December 1990 - February 1993. Age 50.
CHARLES E. ALLEN
Senior Vice President
Senior Vice President since September 1989. Age 55.
MELVIN W. JOHNSON
Vice President
Vice President since February 1991. Pre- viously was Vice President -- Engineering January 1985 - January 1991. Age 59.
MARK R. BUCK
Vice President - Carlon Electrical Products Vice President - Carlon Electrical Products since October 1983. Age 42.
A. CORYDON MEYER
Vice President - Lamson Home Products Vice President - Lamson Home Products since March 1990. Age 41.
NORMAN P. SUTTERER
Vice President - Carlon Telecom Systems Vice-President - Carlon Telecom Systems since February 1989. Age 46.
PART II
Item 5.
Item 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange and Pacific Stock Exchange. High and low sales prices for the common stock are included in Note K to the Consolidated Financial Statements. No dividends were paid in 1995, 1994 or 1993. The approximate number of shareholders of record of the Company's Common Stock at February 1, 1996 was 2,128.
Item 6.
Item 6. - SELECTED FINANCIAL DATA FIVE-YEAR FINANCIAL SUMMARY
Item 7.
Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Management's Discussion and Analysis - ------------------------------------
DISCUSSION OF THE CONSOLIDATED STATEMENT OF OPERATIONS THE CONSOLIDATED STATEMENT OF OPERATIONS summarizes Lamson & Sessions' operating performance over the last three years. In 1995, the Company reported the highest net sales, excluding discontinued operations, since 1989. Carlon Telecom Systems experienced strong demand for products in 1995 leading the areas of growth experienced by the Company. In late 1995, the Company sold Valley Todeco, its aerospace fastener business (see Note J - to the Consolidated Financial Statements). This divestiture allowed the Company to retire subordinated debt and will enable the Company to focus on growth through acquisitions and new product development in the electrical products markets which it serves.
NET SALES of $299 million for 1995 were 4% higher than net sales of $288 million in 1994. 1995 sales, excluding the aerospace fastener business sold during 1995, were $280 million compared to $269 million in adjusted 1994 sales. The 1995 adjusted sales increase consisted of a 24% increase for Carlon Telecom Systems, a 4% increase for Lamson Home Products, a 1% increase for Carlon Electrical Products, and a 12% decrease for Lamson Vylon Pipe. The sales increase consisted of overall price increases of nearly 10%, a 15% new product volume increase for Carlon Telecom Systems, offset by sales volume decreases in engineered sewer products and electrical fittings. Increased marketing efforts in engineered sewer products and electrical products are expected to reverse this negative trend. Net sales for 1994 were 11% higher than net sales of $260 million in 1993. Product mix improvements, resulting in higher average selling prices, were coupled with strong demand to generate the sales gains. Carlon Electrical Products and Carlon Telecom Systems emphasis on new products improved their product mix and achieved higher sales on lower volume in 1994 compared to 1993.
GROSS MARGIN percentage increased 5% to nearly 19% of net sales in 1995, compared to 18% of net sales in 1994. This improvement reflects the Company's continuing progress in implementing operating efficiencies and improved product mix as evidenced by new product introductions in Carlon Telecom Systems and reduced rigid pipe sales. The Company experienced continued improvement in the aerospace fastener business prior to its sale in the fourth quarter. Also in the fourth quarter, gross margin was adversely affected by declining polyvinylchloride (PVC) resin costs. However, the Company's continued emphasis on non-commodity products is working to minimize the effect of highly variable PVC pricing. Gross margin percentage improved by 20% from 15% of net sales comparing 1994 and 1993. Increased manufacturing efficiencies in the aerospace fastener business (which was sold during 1995) and reduced rigid pipe sales improved 1994 margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES held constant at 14% of sales in 1995 and 1994. However, excluding the aerospace fastener business, the Company experienced an increase in these expenses of nearly 6%, reflecting marketing efforts and higher sales commissions, as well as staffing costs associated with new product programs and related support functions. Selling, general and administrative expenses increased nominally from 1993 to 1994. The 1994 increase related to increased commission rates on higher margin products, promotional expenses, salary expenses and employee health care.
INTEREST EXPENSE decreased 12% from 1994 to 1995. The decrease resulted from a rate reduction due to the restructuring of the Company's secured credit agreement, refinancing of Industrial Revenue Bonds and debt reduction using cash generated from operating cash flow and the sale of assets. Interest expenses increased 15% from 1993 to 1994. During that period, rising interest rates on the secured credit facility were partially offset by average lower borrowings resulting from the proceeds from the sale of the Company's truck frame unit.
INCOME TAX BENEFIT of nearly $4 million was generated from a reduction in the valuation allowance placed on the Company's deferred tax assets due to continuing improvement in operating results and the outlook for sustained profitability. The company has no current income tax provision as it continues to be in a net operating loss carryforward position. No income tax provision was recorded in 1994.
Discussion of the Consolidated Statement of Financial Position THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION shows Lamson & Sessions' financial position at year end, compared to the previous year end. The statement provides information to assist in assessing such factors as the Company's liquidity and financial resources. The 1995 current ratio decreased 4%, mainly due to the sale of the Company's aerospace business. The 1995 debt to equity ratio decreased significantly, to less than 1 down from 4 in 1994. Total debt decreased 44%, from $51 million to below $29 million, while equity increased 140% to nearly $31 million.
ACCOUNTS RECEIVABLE are primarily due from trade customers. Accounts Receivable declined nominally overall in 1995 from 1994. Excluding the sold aerospace fastener unit business from 1994, Accounts Receivable increased nearly $2 million due to higher fourth quarter sales, with corresponding 1995 days sales outstanding dropping nearly 1 day to 45 days compared to December 31, 1994.
INVENTORIES decreased $11 million in 1995 from 1994. These results reflect the sale of the aerospace fastener business and reduced pricing in the fourth quarter as raw material costs fell.
PREPAID EXPENSES AND OTHER increased nearly $6 million in 1995 from 1994. Nearly $4 million of the increase relates to the reduction of the valuation allowance on the Company's deferred tax asset. The remaining increase in other current assets relates to the amount receivable on the sale of the aerospace fastener business, pending resolution of certain contractual conditions, and increases in other non-trade receivables.
LONG-TERM DEBT decreased $22 million during 1995. The outstanding revolving line of credit was significantly reduced and the final $11 million in 14% subordinated debt was retired two years prior to its maturity. Stronger cash flow from operations, augmented by the sale of the aerospace business and certain assets remaining from the 1994 sale of the truck frame business, facilitated the debt reduction.
POST-RETIREMENT BENEFITS AND OTHER LONG-TERM LIABILITIES decreased 19% from $36 million in 1994 to $29 million in 1995. The Company took several steps during the year to eliminate underfunding relating to several defined benefit pension plans. As a result, nearly $6 million of additional minimum liability was eliminated, with a corresponding increase in equity. The Company retained the pension plan liability, health care benefits for existing retirees and approximately $1.2 million of other liabilities of its aerospace fastener business which will be paid out over an extended period of time.
DISCUSSION OF THE CONSOLIDATED STATEMENT OF CASH FLOWS THE CONSOLIDATED STATEMENT OF CASH FLOWS shows cash inflows and outflows from the Company's operating, investing and financing activities. Cash and cash equivalents remained comparable at year end 1995 compared to 1994. Significantly improved operating cash flow was generated in 1995 compared to 1994.
CASH FLOWS FROM OPERATING ACTIVITIES - The Company generated over $19 million in cash from operations in 1995, an increase of 405% over the prior year. The primary sources of the operating cash increase were the 92% improvement, before tax benefit, in earnings from continuing operations and nearly $5 million in cash flow from inventory reductions. The Company generated nearly $4 million in cash from operations in 1994. 1994 cash flow from operations was approximately equal to 1993 cash flow from operations as improved continuing operations cash flow was offset by the loss in the discontinued truck frame business.
CASH FLOWS FROM INVESTING ACTIVITIES - The Company generated $3 million in cash flow from 1995 investing activities. Cash receipts from the sale of a business unit exceeded the $11 million capital expenditures made by the Company. 1995 purchases of plant, property and equipment increased over the prior year as the Company continues to invest in projects which will reduce costs, provide efficiency in product development and more effectively utilize support functions. The Company generated over $10 million in cash flow from 1994 investing activities.
CASH FLOWS FROM FINANCING ACTIVITIES - The Company used over $22 million of cash flow for 1995 financing activities. The Company retired $11 million in 14% subordinated debt in 1995. In addition, borrowings under the secured credit agreement were reduced nearly $11 million in 1995. The Company used $13 million of cash flow for 1994 financing activities. The company reduced borrowings on the secured credit agreement by $12 million in 1994.
Based upon the Company's past performance and current expectations, management believes that internally generated cash flows and existing capacity under the secured credit agreement are adequate to fund the Company's 1996 cash needs for capital expenditures and general operating requirements.
Outlook - -------
The Company's strong improvement in 1995 reflects efforts to pursue market and product opportunities that are expected to provide sustainable revenue and profit growth. Management believes that this positive trend will continue in 1996 based on current estimates for the year in construction spending, housing starts, interest rates and general economic improvement. The emphasis on growth is reflected in the continued investment in product development, improved business systems to facilitate cost reduction, organizational efficiency, and strong cash management.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENT OF OPERATIONS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES (in thousands, except per share data)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
December 30, 1995 and December 31, 1994 (Dollars in thousands)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
December 30, 1995 and December 31, 1994 (Dollars in thousands)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE LAMSON & SESSIONS CO. AND SUBSIDIARIES Three fiscal years ended December 30, 1995
NOTE A--ACCOUNTING POLICIES
ORGANIZATION: The Company primarily is in one business segment and is engaged in the manufacture and distribution of a broad line of thermoplastic electrical, telecommunication and engineered sewer products. In addition, the Company distributes a wide variety of consumer electrical wiring devices. Products are sold primarily to national and regional electrical distributors, power utilities, regional Bell operating companies and other telecommunications providers, national and regional retailers, and government and private builders of sewer and drainage systems. Substantially all sales are made within North America. In 1995 and 1994, sales to a single customer totalled approximately 12% in each year. No customer exceeded 10% of net sales in 1993.
FISCAL YEAR: The Company's fiscal year end is the Saturday closest to December 31.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The consolidated financial statements include the accounts of the Company and all domestic and foreign subsidiaries after elimination of significant intercompany items and transactions. Certain 1994 and 1993 items have been reclassified to conform with 1995 reporting classifications.
INVENTORIES: Inventories are valued at the lower of first-in, first-out (FIFO) cost or market.
PROPERTY AND DEPRECIATION: Property, plant and equipment are recorded at cost. For financial reporting purposes, depreciation and amortization are computed principally by the straight-line method over the estimated useful lives of the assets. Accelerated methods of depreciation are used for federal income tax purposes.
INCOME TAXES: The Company accounts for income taxes using the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Investment tax credits are recorded using the flow-through method.
EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per common share are based on the weighted average number of common shares and dilutive common share equivalents outstanding during the year.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs consist of company sponsored activities to develop new value-added products. Costs are expensed as incurred. R&D expenditures were $3,700,000, $3,400,000, and $3,200,000 in 1995, 1994 and 1993, respectively.
ADVERTISING EXPENDITURES: Advertising costs are expensed as incurred. Advertising expenditures were $3,200,000, $2,100,000, and $1,900,000 for 1995, 1994 and 1993, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued THE LAMSON & SESSIONS CO. AND SUBSIDIARIES NOTE B--LONG-TERM DEBT Long-term debt consists of the following: (In thousands)
The Company's long-term $65,000,000 secured credit agreement was refinanced effective July 14, 1995. The agreement is secured by the Company's accounts receivable, inventory, and property, plant and equipment. The agreement consists of both term and revolving credit facilities with interest variable on both portions. The rate paid varies based on the Company's financial performance and the pricing option chosen. Borrowings under this agreement carry interest based on any of three pricing options (prime rate, LIBOR or commercial paper) plus the applicable spread. Interest is paid in accordance with the maturity of the pricing option selected. The term portion of this facility carried interest at 3.0% over the commercial paper rate (8.8%) at December 30, 1995 and requires quarterly principal payments of $750,000. The remaining revolving credit portion permits borrowings up to $50,000,000 at any time through December 31, 1999. The agreement provides for the payment of a commitment fee on the revolving line of credit of .375% per annum on the average daily unused commitment. In addition to amounts borrowed, letters of credit related to Industrial Revenue Bond financings and other contractual obligations total approximately $14,000,000 under the agreement.
The Company's 14% Senior Subordinated Notes were redeemed in full on December 1, 1995.
The Company's Industrial Revenue Bond financings include several issues due in annual installments from 1996 through 2023 with interest at variable rates ranging from 4% to 7.5%. The weighted average rate for these bonds in December 1995 was 5.4%. The Company maintains a letter of credit related to one of the Industrial Revenue Bonds for approximately $1,900,000 with a local bank. The Company's headquarter facility is subject to a mortgage payable in equal monthly installments through 2003 with interest at 8.625%.
The Company's credit agreements contain various restrictive covenants pertaining to maintenance of debt service, tangible net worth and certain other financial ratios.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE B--LONG-TERM DEBT--Continued
The aggregate minimum combined maturities of long-term debt for the years 1997 through 2000 are approximately $4,797,000, $4,041,000, $8,368,000 and $1,148,000, respectively, with $6,488,000 due thereafter.
Interest expense includes $803,000, $850,000 and $767,000 for amortization of deferred financing cost in 1995, 1994 and 1993, respectively. Interest paid was $6,069,000, $6,847,000 and $8,229,000 in 1995, 1994 and 1993, respectively.
Rental expense related to operating leases was $3,470,000, $3,015,000 and $2,647,000 in 1995, 1994 and 1993, respectively. Aggregate future minimum payments related to operating leases with initial or remaining terms of one year or more for the years 1996 through 2000 and thereafter are $2,671,000, $1,790,000, $1,228,000, $686,000 and $622,000, respectively.
NOTE C--DISCONTINUED OPERATIONS
The results of discontinued operations are reflected on a restated comparative basis as follows:
During the first quarter of 1994, the Company entered into a definitive agreement to sell substantially all of the assets and certain liabilities (including prospective pension and benefit post-retirement obligations) of its Midland Steel Products Division for $16,430,000 resulting in a loss of $8,900,000 ($.67 per share) after related costs and expenses. Included in the loss on disposal is a curtailment loss of $1,140,000 related to net pension costs and a settlement gain of $650,000 related to post-retirement benefits other than pensions. The Company believes adequate provision has been made for all contractual obligations, environmental costs, and other obligations retained in the sale of the division. Included in 1994 and 1993 losses from operations is interest of $1,836,000 allocated on the basis of the Company's incremental borrowing rate applied on the net proceeds from the sale. The assets held for sale at the end of 1994 are comprised of land and building pending final resolution of certain contractual conditions. The sale of these assets was completed in the second quarter of 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D--PENSION PLANS
The Company sponsors defined benefit pension and defined contribution savings plans covering substantially all employees. Plans covering salaried employees provide benefits that are based on an employee's years of service and compensation during the five-year period prior to retirement. Plans covering hourly employees provide benefits of stated amounts for each year of service. The Company annually contributes amounts to the plans which are actuarially determined to provide sufficient assets to meet future benefit payment requirements.
Pension expense from continuing operations is comprised of the following:
The following table summarizes the funded status of the Company's defined benefit pension plans and the related amounts recognized in the Company's consolidated statement of financial position:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D--PENSION PLANS--Continued
Accrued expenses and other liabilities include the current portion of pension liabilities of $2,100,000 and $4,487,000 in 1995 and 1994, respectively. The discount rates used in determining pension expense were 8.0%, 7.25% and 8.5% in 1995, 1994 and 1993, respectively. The discount rates used for funded status information were 7.4% in 1995 and 8.0% in 1994. The change in the discount rate had the effect of increasing the accumulated benefit obligation by approximately $4,400,000. The long-term rates of return on assets used in determining the funded status information were 9.5% in 1995 and 1994. Plan assets consist primarily of fixed income and equity marketable securities, including Company securities with a fair market value at December 30, 1995 of $913,000. The salary progression assumption used in determining the funded status information was 5% in each year.
NOTE E--POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to providing pension benefits, the Company provides health care and life insurance benefits for certain of its retired employees. The Company accrues the estimated cost of retiree benefit payments, other than pensions, during the employees' active service period. The Company funds these benefit costs on a pay-as-you-go basis, with the retiree, in most instances, paying a portion of the costs.
Summary information for the Company's plans is as follows:
The decrease in APBO is principally due to the reduction in the assumed health care cost trend rate. In addition, the Company remains contingently liable for post-retirement benefits of certain businesses previously sold.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E--POST-RETIREMENT BENEFITS OTHER THAN PENSIONS--Continued
The components of periodic post-retirement benefit cost reflected in continuing operations are as follows:
The discount rate used in determining the APBO was 7.0% in 1995 and 7.5% in 1994. The assumed health care cost trend rate used in measuring the APBO was an average of 11% in 1995 and 14% in 1994, declining to an ultimate rate of 5.5% in 2007 and thereafter.
If the health care cost trend rate assumptions were increased by 1%, the APBO as of December 30, 1995 would increase by 7.5%. The effect of this change on periodic post-retirement benefit cost for 1995 would be an increase of 10.7%, or approximately $200,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F--LITIGATION
The Company is a party to various claims and matters of litigation incidental to the normal course of its business. Management believes that the final resolution of these matters will not have a material adverse effect on the Company's financial position.
NOTE G--PREFERRED AND PREFERENCE STOCK
The Company has authorized 1,200,000 and 3,000,000 shares of Serial Preferred and Preference Stock, respectively, none of which is issued or outstanding at December 30, 1995.
The Company has reserved for issuance 200,000 shares of Cumulative Redeemable Serial Preference Stock, Series II, without par value, which is part of purchase rights related to each outstanding common share. None of these shares were issued in 1995 or 1994. The right associated with each common share entitles its holder to purchase from the Company or acquiring company, one one-hundredth of a share of preference stock at a price of $47 which is subject to adjustment. The rights become exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common shares or takes certain other actions. In any such event, a 15% or more owner is prohibited from exercising the rights. When exercisable, the rights entitle each holder to purchase, according to the agreement, either the Company's common shares or stock in the acquiring entity worth twice the value of the then applicable purchase price. Under certain circumstances, the Company has the authority to exchange each right for one common share without payment required. Unless otherwise extended, the Company may redeem the rights in their entirety, at a price of one cent per right, at any time until the tenth calendar day following any public announcement that beneficial ownership of 15% or more has occurred in the Company's common shares, or upon certain other events, including Board of Directors approval of a merger. The rights expire on September 7, 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE H--STOCK OPTIONS
Under the 1994 Nonemployee Directors Stock Option Plan, the Company is authorized to issue 60,000 non-qualified stock options. The options become exercisable one year after date of grant and expire at the end of ten years. Under the 1988 Incentive Equity Performance Plan, the Company is authorized to issue 1,150,000 incentive stock options (ISO's), non-qualified stock options, stock appreciation rights (SAR's), and restricted or deferred stock. Options generally become exercisable in part one year after date of grant and expire at the end of ten years. Options outstanding under the 1978 Non-Qualified Incentive Stock Option Plan have been granted for the purchase of common shares at prices ranging from $4.75 to $5.75 per share. No options are available for future grant under the 1978 Plan.
A summary of the option transactions follows:
At December 30, 1995, there were 210,233 options available for future grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE I--INCOME TAXES
A deferred federal tax benefit of $3,900,000 was recorded in the fourth quarter of 1995. There was no income tax expense or benefit recorded in 1994 or 1993. The Company has available net operating loss carryforwards totalling approximately $36,100,000 which expire in the years 2000 to 2008. The Company also has available general business tax credit carryforwards of $1,800,000 which expire through 2010, and alternative minimum tax credit carryforwards of approximately $900,000 which may be carried forward indefinitely.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
The valuation allowance for net deferred tax assets decreased by $6,500,000. The reduction was the result of net changes in temporary differences and the reversal of $3,900,000 of valuation allowance based on improved operating results for 1995 and projected operating results for 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE I -- INCOME TAXES -- Continued
The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the differences summarized below:
Income taxes paid in 1995 were $26,000. In 1994 and 1993, the Company received income tax refunds of $201,000 and $1,626,000, respectively.
NOTE J--DISPOSITION OF BUSINESS
During the fourth quarter, the Company sold its aerospace fastener business for approximately $11,700,000. Net sales for 1995 through the sale date and 1994 were $18,951,000 and $18,838,000, respectively. Operating results, corporate costs to prepare the business for sale, and anticipated future costs related to the business resulted in losses of approximately $3,000,000 in 1995 and $4,000,000 in 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
NOTE K--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--(UNAUDITED)
PART IV
The Lamson & Sessions Co. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands)
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders The Lamson & Sessions Co.
We have audited the accompanying consolidated statement of financial position of The Lamson & Sessions Co. and Subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 30, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Lamson & Sessions Co. and Subsidiaries at December 30, 1995 and December 31, 1994, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP Cleveland, Ohio January 18, 1996
STATEMENT OF MANAGEMENT'S RESPONSIBILITY ----------------------------------------
We have prepared the financial statements and other financial information contained in this Annual Report.
The management of Lamson & Sessions is primarily responsible for the integrity of this financial information. The financial statements were prepared in accordance with generally accepted accounting principles and necessarily include certain amounts based on management's reasonable best estimates and judgments, giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that contained in the financial statements.
Management is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom.
To meet management's responsibility for financial reporting, we have established internal control systems which we believe are adequate to provide reasonable assurance that our assets are protected from loss. These systems produce data used for the preparation of published financial information and provide for appropriate reporting relationships and division of responsibility. All significant systems and controls are reviewed periodically by our internal auditors in order to ensure compliance, and by our independent auditors to support their audit work. It is management's policy to implement a high proportion of recommendations resulting from these reviews.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets regularly with management, internal auditors, and our independent auditors to review accounting, auditing and financial matters. Both the independent auditors and the internal auditors have free access to the Audit Committee, with or without management, to discuss the scope and results of their audits and the adequacy of the system of internal controls.
/s/ John B. Schulze - ------------------------------------- John B. Schulze Chairman of the Board, President and Chief Executive Officer
/s/ James J. Abel - ------------------------------------- James J. Abel Executive Vice President, Secretary, Treasurer and Chief Financial Officer
PART II
Item 9.
Item 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10.
Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
The information set forth under the caption "Election of Directors" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 26, 1996 is hereby incorporated by reference.
(b) Executive Officers - See Part I
(c) Compliance with Section 16 (a) of the Exchange Act.
The information set forth in the last paragraph under caption "Election of Directors" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 26, 1996 is hereby incorporated by reference.
Item 11.
Item 11. - EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 26, 1996 is hereby incorporated by reference.
Item 12.
Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Ownership of the Company's Common Shares," "Election of Directors" and "Security Ownership of Management" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 26, 1996 is hereby incorporated by reference.
Item 13.
Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
None.
PART IV
Item 14.
Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Consolidated financial statements of The Lamson & Sessions Co. and Subsidiaries are included in Item 8 of this report:
1. Financial Statements
Consolidated Statement of Operations for Fiscal Years Ended 1995, 1994 and 1993.
Consolidated Statement of Cash Flows for Fiscal Years Ended 1995, 1994 and 1993.
Consolidated Statement of Financial Position at December 30, 1995 and December 31, 1994.
Consolidated Statement of Shareholders' Equity for Fiscal Years Ended 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Exhibits - Management Contracts and Compensatory Plans are identified with an asterisk (*).
3(a) Amended Articles of Incorporation of the Company (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on June 1, 1989).
3(b) Amended Code of Regulations of the Company (incorporated by reference to Exhibit 3 (b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
4(a) Specimen Certificate of Common Shares, without par value with Rights legend (incorporated by reference to Exhibit 3 to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on June 1, 1989).
4(e) Form of Rights Certificate (incorporated by reference to Exhibit 4(oo) to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 25, 1988).
4(g) Rights Agreement, amended and restated as of February 14, 1990, by and between the Company and National City Bank filed herewith.
10(a) 1988 Incentive Equity Performance Plan (as amended on September 22, 1988, February 23, 1989, December 20, 1990 and April 24, 1992) (incorporated by reference to Exhibit 28 of the Company's Registration Statement, on Form S-8 and Form S-3 (Registration No. 33-54732) filed with the Securities and Exchange Commission on November 20, 1992).
* 10(b) Form of Three-Year Employment Agreement between the Company and certain executive officers filed herewith.
* 10(c) Form of Two-Year Employment Agreement between the Company and certain executive officers (incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
* 10(d) Corporate Officers Incentive Compensation Plan (incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
* 10(e) Form of Amended and Restated Supplemental Executive Retirement Agreement dated as of March 20, 1990 between the Company and certain of its executive officers filed herewith.
* 10(f) The Company's Deferred Compensation Plan for Nonemployee Directors filed herewith.
* 10(g) Form of Indemnification Agreement between the Company and the Directors and certain officers (incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
* 10(h) The Company's Long Term Incentive Plan (incorporated by reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1991).
* 10(j) Mortgage and Security Agreement, dated October 29, 1993, between The Lamson & Sessions Co. and PFL Life Insurance Company (incorporated herein by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended January 1, 1994).
10(k) Asset Purchase Agreement between Iochpe-Maxion Ohio, Inc. and The Lamson & Sessions Co. dated as of May 4, 1994 (incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K dated as of May 27, 1994).
10(s) Amended and Restated Loan Agreement dated as of July 14, 1995 by and between the Company and General Electric Capital Corporation (incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the period ended July 1, 1995, the "GECC Loan Agreement").
10(t) Amendment No. 1 dated as of October 30, 1995, to the GECC Loan Agreement, filed herewith.
10(u) Amendment No. 2 and Consent dated as of November 8, 1995, to the GECC Loan Agreement, filed herewith.
11 Computation of Earnings Per Common Share filed herewith.
21 Subsidiaries of the Registrant filed herewith.
23 Consent of Independent Accountants filed herewith.
24 Powers of Attorney filed herewith.
27 Financial Data Schedule (Submitted for the SEC's Information) filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended December 30, 1995.
(c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is included in Item 8.
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 of the undersigned, thereunto duly authorized, on this 11th day of March 1996.
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 March 11, 1996.
Signature Title --------- -----
/s/ John B. Schulze Chairman of the Board, President - ----------------------------- and Chief Executive Officer (Principal John B. Schulze Executive Officer)
/s/ James J. Abel Executive Vice President, Secretary, James - ----------------------------- Treasurer and Chief Financial Officer J. Abel (Principal Financial Officer and Principal Accounting Officer)
/s/ Francis H. Beam, Jr.* Director - ----------------------------- Francis H. Beam, Jr.
/s/ Leigh Carter* Director - ----------------------------- Leigh Carter
/s/ Martin J. Cleary* Director - ----------------------------- Martin J. Cleary
/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/ Kevin O'Donnell* Director - ----------------------------- Kevin O'Donnell
/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 11, 1996
By /s/ James J. Abel ------------------------------------- James J. Abel, Attorney-in-fact
EXHIBIT INDEX
EXHIBIT INDEX