Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2007 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 1-4682
Thomas & Betts Corporation
(Exact name of registrant as specified in its charter)
Tennessee | 22-1326940 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
8155 T&B Boulevard | ||
Memphis, Tennessee | 38125 | |
(Address of principal executive offices) | (Zip Code) |
(901) 252-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding Shares | ||
Title of Each Class | at May 1, 2007 | |
Common Stock, $.10 par value | 58,174,447 |
Thomas & Betts Corporation and Subsidiaries
TABLE OF CONTENTS
1
Table of Contents
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Report includes forward-looking comments and statements regarding Thomas & Betts Corporation that are subject to uncertainties in our operations, business, economic and political environment. Forward-looking statements contain words such as:
• “achieve” | • “anticipates” | • “intends” | ||
• “should” | • “expects” | • “predict” | ||
• “could” | • “might” | • “will” | ||
• “may” | • “believes” | • other similar expressions |
Forward-looking statements are subject to risks and uncertainties.(a) Many factors could affect our future financial condition or results of operations. Accordingly, actual results, performance or achievements may differ materially from those expressed or implied by the forward-looking statements contained in this Report. We undertake no obligation to revise any forward-looking statement included in the Report to reflect any future events or circumstances.
(a) | These risks and uncertainties, which are further explained in Item 1A. Risk Factors in our Form 10-K for the year ended December 31, 2006, include: |
• | negative economic conditions could have a material adverse effect on our operating results and financial condition; | |
• | a significant reduction in the supply of commodity raw materials could materially disrupt our business and rising and volatile costs for commodity raw materials and energy could have a material adverse effect on our profitability; | |
• | significant changes in customer demand due to increased competition could have a material adverse effect on our operating results and financial condition. |
A reference in this Report to “we”, “our”, “us”, “Thomas & Betts” or the “Corporation” refers to Thomas & Betts Corporation and its consolidated subsidiaries.
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Thomas & Betts Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Net sales | $ | 474,552 | $ | 441,802 | ||||
Cost of sales | 329,717 | 305,519 | ||||||
Gross profit | 144,835 | 136,283 | ||||||
Selling, general and administrative | 87,329 | 78,528 | ||||||
Earnings from operations | 57,506 | 57,755 | ||||||
Income from unconsolidated companies | 30 | 174 | ||||||
Interest expense, net | (3,551 | ) | (3,467 | ) | ||||
Other (expense) income, net | (160 | ) | 186 | |||||
Earnings before income taxes | 53,825 | 54,648 | ||||||
Income tax provision | 16,685 | 15,848 | ||||||
Net earnings | $ | 37,140 | $ | 38,800 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.63 | $ | 0.63 | ||||
Diluted | $ | 0.63 | $ | 0.62 | ||||
Average shares outstanding: | ||||||||
Basic | 58,593 | 61,432 | ||||||
Diluted | 59,393 | 62,540 |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
Table of Contents
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 309,866 | $ | 370,968 | ||||
Marketable securities | 314 | 371 | ||||||
Receivables, net | 236,627 | 204,270 | ||||||
Inventories: | ||||||||
Finished goods | 102,956 | 107,786 | ||||||
Work-in-process | 30,591 | 27,408 | ||||||
Raw materials | 87,336 | 83,342 | ||||||
Total inventories | 220,883 | 218,536 | ||||||
Deferred income taxes | 52,165 | 60,611 | ||||||
Prepaid expenses | 12,986 | 13,614 | ||||||
Total Current Assets | 832,841 | 868,370 | ||||||
Property, plant and equipment: | ||||||||
Land | 17,341 | 17,042 | ||||||
Buildings | 183,919 | 183,323 | ||||||
Machinery and equipment | 621,752 | 621,272 | ||||||
Construction-in-progress | 12,064 | 14,409 | ||||||
Gross property, plant and equipment | 835,076 | 836,046 | ||||||
Less accumulated depreciation | (573,574 | ) | (568,846 | ) | ||||
Net property, plant and equipment | 261,502 | 267,200 | ||||||
Goodwill | 490,769 | 490,210 | ||||||
Investments in unconsolidated companies | 115,708 | 115,726 | ||||||
Deferred income taxes | 46,148 | 42,811 | ||||||
Prepaid pension plan costs | 6,681 | 6,590 | ||||||
Other assets | 40,032 | 39,316 | ||||||
Total Assets | $ | 1,793,681 | $ | 1,830,223 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt | $ | 644 | $ | 719 | ||||
Accounts payable | 152,000 | 144,844 | ||||||
Accrued liabilities | 92,466 | 96,611 | ||||||
Income taxes payable | 6,079 | 6,355 | ||||||
Total Current Liabilities | 251,189 | 248,529 | ||||||
Long-Term Liabilities: | ||||||||
Long-term debt | 387,081 | 386,912 | ||||||
Accrued pension plan liability | 46,676 | 46,028 | ||||||
Deferred income taxes | 10,310 | 10,376 | ||||||
Other long-term liabilities | 71,501 | 70,019 | ||||||
Contingencies (Note 10) | ||||||||
Shareholders’ Equity: | ||||||||
Common stock | 5,763 | 5,924 | ||||||
Additional paid-in capital | 212,442 | 294,502 | ||||||
Retained earnings | 855,921 | 818,781 | ||||||
Accumulated other comprehensive income | (47,202 | ) | (50,848 | ) | ||||
Total Shareholders’ Equity | 1,026,924 | 1,068,359 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 1,793,681 | $ | 1,830,223 | ||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
Table of Contents
(In thousands)
(Unaudited)
(Unaudited)
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net earnings | $ | 37,140 | $ | 38,800 | ||||
Adjustments: | ||||||||
Depreciation and amortization | 12,344 | 11,785 | ||||||
Deferred income taxes | 6,232 | 4,528 | ||||||
Share-based compensation expense | 5,201 | 1,792 | ||||||
Incremental tax benefits from share-based payment arrangements | (1,003 | ) | (2,902 | ) | ||||
Changes in operating assets and liabilities, net: | ||||||||
Receivables | (32,100 | ) | (23,915 | ) | ||||
Inventories | (1,895 | ) | (19,978 | ) | ||||
Accounts payable | 7,100 | 19,661 | ||||||
Accrued liabilities | (4,172 | ) | (13,885 | ) | ||||
Income taxes payable | (263 | ) | (6,171 | ) | ||||
Other | 4,589 | 4,435 | ||||||
Net cash provided by (used in) operating activities | 33,173 | 14,150 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property, plant and equipment | (6,392 | ) | (14,086 | ) | ||||
Proceeds from sale of property, plant and equipment | 91 | 118 | ||||||
Marketable securities acquired | (2 | ) | (121,625 | ) | ||||
Proceeds from marketable securities | 60 | 413,253 | ||||||
Net cash provided by (used in) investing activities | (6,243 | ) | 277,660 | |||||
Cash Flows from Financing Activities: | ||||||||
Repurchase of common shares | (93,541 | ) | — | |||||
Stock options exercised | 4,604 | 30,083 | ||||||
Incremental tax benefits from share-based payment arrangements | 1,003 | 2,902 | ||||||
Repayment of long-term debt and other borrowings | (137 | ) | (150,112 | ) | ||||
Net cash provided by (used in) financing activities | (88,071 | ) | (117,127 | ) | ||||
Effect of exchange-rate changes on cash | 39 | 299 | ||||||
Net increase (decrease) in cash and cash equivalents | (61,102 | ) | 174,982 | |||||
Cash and cash equivalents, beginning of period | 370,968 | 216,742 | ||||||
Cash and cash equivalents, end of period | $ | 309,866 | $ | 391,724 | ||||
Cash payments for interest | $ | 4,994 | $ | 10,003 | ||||
Cash payments for income taxes | $ | 10,739 | $ | 16,371 |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Unaudited)
1. | Basis of Presentation |
In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for the fair presentation of the Corporation’s financial position as of March 31, 2007 and December 31, 2006 and the results of operations and cash flows for the periods ended March 31, 2007 and 2006.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006. The results of operations for the periods ended March 31, 2007 and 2006 are not necessarily indicative of the operating results for the full year.
2. | Basic and Diluted Earnings Per Share |
The following is a reconciliation of the basic and diluted earnings per share computations:
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(In thousands, except per share data) | ||||||||
Net earnings | $ | 37,140 | $ | 38,800 | ||||
Basic shares: | ||||||||
Average shares outstanding | 58,593 | 61,432 | ||||||
Basic earnings per share | $ | 0.63 | $ | 0.63 | ||||
Diluted shares: | ||||||||
Average shares outstanding | 58,593 | 61,432 | ||||||
Additional shares on the potential dilution from stock options and nonvested restricted stock | 800 | 1,108 | ||||||
59,393 | 62,540 | |||||||
Diluted earnings per share | $ | 0.63 | $ | 0.62 | ||||
The Corporation had stock options that wereout-of-the-money which were excluded because of their anti-dilutive effect. Suchout-of-the-money options were 0.7 million shares of common stock for the first quarter of 2007 and 0.6 million shares of common stock for the first quarter of 2006.
3. | Share-Based Payment Arrangements |
In January 2006, the Corporation adopted Statement of Financial Accounting Standard (SFAS) No. 123 (Revised), “Share-Based Payment”, which requires all share-based payments to employees to be recognized as compensation expense in financial statements based on their fair values over the requisite service period. Under the provisions of SFAS No. 123R, non-employee members of the Board of Directors are deemed to be employees. SFAS No. 123R applies to new awards and to unvested awards that are outstanding as of the adoption date. Compensation expense for options outstanding as of the adoption date will be recognized over the remaining service period using the
6
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
compensation cost calculated for pro forma disclosure purposes under previous accounting standards. The Corporation’s share-based payment arrangements are described in Note 9 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K.
Compensation expense, net of tax, of $2.6 million ($0.04 per basic and diluted share) for stock options and $0.6 million ($0.01 per basic and diluted share) for nonvested restricted stock was charged against income during the first quarter of 2007. Compensation expense, net of tax, of $0.8 million ($0.01 per basic and diluted share) for stock options and $0.3 million ($0.01 per basic and diluted share) for nonvested restricted stock was charged against income during the first quarter of 2006. Compensation expense, net of tax, for the full year 2006 was $7.4 million ($0.12 per basic and diluted share) for stock options and nonvested restricted stock. The Corporation does not anticipate a significant change in compensation expense, net of tax, for the full year 2007.
Summary of Option Activity
The following is a summary of the option transactions during the quarter ended March 31, 2007:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Number | Exercise | Contractual | Aggregate | |||||||||||||
of Shares | Price | Term | Intrinsic Value | |||||||||||||
(Years) | (In thousands) | |||||||||||||||
Outstanding at December 31, 2006 | 2,560,687 | $ | 30.98 | |||||||||||||
Granted | 404,282 | 47.91 | ||||||||||||||
Exercised | (153,876 | ) | 29.95 | |||||||||||||
Forfeited or expired | (85,488 | ) | 43.87 | |||||||||||||
Outstanding at March 31, 2007 | 2,725,605 | $ | 33.14 | 6.67 | $ | 43,933 | ||||||||||
Exercisable at March 31, 2007 | 1,761,292 | $ | 27.40 | 5.34 | $ | 38,592 | ||||||||||
The weighted-average grant date fair value of options granted during the quarter ended March 31, 2007 was $16.93. The total intrinsic value of options exercised during the first quarter of 2007 was $3.2 million.
Summary of Nonvested Shares Activity
The following is a summary of nonvested restricted stock transactions during the quarter ended March 31, 2007:
Weighted-Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at December 31, 2006 | 237,974 | $ | 32.51 | |||||
Granted | 127,617 | 47.95 | ||||||
Vested | (72,312 | ) | 20.69 | |||||
Forfeited | — | — | ||||||
Nonvested at March 31, 2007 | 293,279 | $ | 42.14 | |||||
7
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The total grant date fair value of nonvested restricted stock that vested during the quarter ended March 31, 2007 was $1.5 million.
4. | Income Taxes |
The Corporation’s income tax provision for the quarter ended March 31, 2007 was $16.7 million, or an effective rate of 31% of pre-tax income, compared to a tax provision in the quarter ended March 31, 2006 of $15.8 million, or an effective rate of 29% of pre-tax income. The increase in the effective rate over the prior-year period reflects the effect of a net increase in U.S. income taxes on the Corporation’s overall blended tax rate. The effective rate for both years reflects benefits from our Puerto Rican manufacturing operations which has a lower effective tax rate.
The Corporation had net deferred tax assets totaling $88.0 million as of March 31, 2007 and $93.0 million as of December 31, 2006. Realization of the deferred tax assets is dependent upon the Corporation’s ability to generate sufficient future taxable income and, if necessary, execution of tax planning strategies. Management believes that it is more-likely-than-not that future taxable income, based on tax laws in effect as of March 31, 2007, will be sufficient to realize the recorded deferred tax assets, net of the existing valuation allowance at March 31, 2007. Projected future taxable income is based on management’s forecast of the operating results of the Corporation, and there can be no assurance that such results will be achieved. Management periodically reviews such forecasts in comparison with actual results and expected trends. In the event management determines that sufficient future taxable income, in light of tax planning strategies, may not be generated to fully realize the net deferred tax assets, the Corporation will increase the valuation allowance by a charge to income tax expense in the period of such determination. Additionally, if events change in subsequent periods which indicate that a previously recorded valuation allowance is no longer needed, the Corporation will decrease the valuation allowance by providing an income tax benefit in the period of such determination.
On January 1, 2007, the Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income tax positions recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 requires that an enterprise must determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit to recognize in the financial statements. The adoption of FIN 48 had no impact on the Corporation. The Corporation examined its tax positions for all open tax years through December 31, 2006 and the full benefit of each tax position taken has been recognized in the financial statements in accordance with FIN 48. On any future tax positions, the Corporation intends to record interest and penalties, if any, as a component of income tax expense.
The Corporation’s tax years are open for all U.S. jurisdictions from 2003 through 2006. Certain state tax years remain open for 2001 and 2002 filings. International statutes vary widely and the open years range from 2001 through 2006. Taxing authorities have the ability to review prior tax years to the extent of net operating loss and tax credit carryforwards to open tax years.
8
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
5. | Comprehensive Income |
Total comprehensive income and its components are as follows:
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Net income | $ | 37,140 | $ | 38,800 | ||||
Cumulative translation adjustment | 2,647 | 1,454 | ||||||
Unrealized gains (losses) on marketable securities | (1 | ) | (4 | ) | ||||
Amortization of unrecognized pension and postretirement costs | 1,000 | — | ||||||
Comprehensive income | $ | 40,786 | $ | 40,250 | ||||
6. | Derivative Instruments |
The Corporation is exposed to market risk from changes in raw material prices, interest rates and foreign-exchange rates. At times, the Corporation may enter into various derivative instruments to manage certain of those risks. The Corporation does not enter into derivative instruments for speculative or trading purposes.
Commodities Futures Contracts
As of March 31, 2007 and December 31, 2006, the Corporation had no outstanding commodities futures contracts. The Corporation is exposed to risk from fluctuating prices for certain materials used to manufacture its products, such as: steel, aluminum, copper, zinc, resins and rubber compounds. At times, some of the risk associated with usage of aluminum, copper and zinc has been mitigated through the use of futures contracts that fix the price the Corporation paid for a commodity.Mark-to-market gains and losses for commodities futures, if any, were recorded in cost of sales. Cost of sales reflects a loss of $0.9 million for the quarter ended March 31, 2006, related to mark-to-market adjustments for commodities futures contracts.
Interest Rate Swap Agreements
As of March 31, 2007 and December 31, 2006, the Corporation had no outstanding interest rate swap agreements, which results in all of its outstanding unsecured notes having fixed interest rates. In the past, the Corporation entered into interest rate swap agreements that effectively converted fixed interest rates associated with certain of its debt securities to floating interest rates. The interest rate swaps qualified for the short-cut method of accounting for a fair valued hedge under SFAS No. 133. The amount to be paid or received under the interest rate swap agreements was recorded as a component of net interest expense. Net interest expense includes expense of $0.2 million associated with interest rate swap agreements for the quarter ended March 31, 2006.
Forward Foreign Exchange Contracts
The Corporation had no outstanding forward sale or purchase contracts as of March 31, 2007 and December 31, 2006. From time to time, the Corporation utilizes forward foreign exchange contracts for the sale or purchase of foreign currencies.
9
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
7. | Debt |
The Corporation’s long-term debt at March 31, 2007 and December 31, 2006 was:
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Unsecured notes | ||||||||
6.63% Notes due 2008 | $ | 114,854 | $ | 114,821 | ||||
6.39% Notes due 2009 | 149,900 | 149,887 | ||||||
7.25% Notes due 2013 | 120,377 | 120,192 | ||||||
Other, including capital leases | 2,594 | 2,731 | ||||||
Long-term debt (including current maturities) | 387,725 | 387,631 | ||||||
Less current portion | 644 | 719 | ||||||
Long-term debt | $ | 387,081 | $ | 386,912 | ||||
The indentures underlying the unsecured notes above contain standard covenants such as restrictions on mergers, liens on certain property, sale-leaseback of certain property and funded debt for certain subsidiaries. The indentures also include standard events of default such as covenant default and cross-acceleration.
The Corporation has a $300 million committed revolving credit facility that contains customary covenants which could potentially restrict the payment of dividends, investments, liens, issuing certain types of additional debt and the disposition of assets if the Corporation fails to maintain its financial covenants and certain minimum levels of total availability under the facility. The Corporation pays an annual commitment fee of 10 basis points to maintain this facility. Any borrowings outstanding as of December 2011 would mature on that date. No borrowings were outstanding under this facility as of March 31, 2007 and December 31, 2006.
Outstanding letters of credit which reduced availability under the credit facility amounted to $22.4 million at March 31, 2007. The letters of credit relate primarily to third-party insurance claims processing.
The Corporation has a EUR10 million (approximately US $13 million) committed revolving credit facility with a European bank. The Corporation pays an annual unused commitment fee of 25 basis points on the undrawn balance to maintain this facility. This credit facility contains standard covenants similar to those contained in the $300 million credit agreement and standard events of default such as covenant default and cross-default. This facility has an indefinite maturity and no borrowings were outstanding as of March 31, 2007 and December 31, 2006.
As of March 31, 2007, the Corporation’s aggregate availability of funds under its credit facilities is approximately $291.0 million, after deducting outstanding letters of credit. The Corporation has the option, at the time of drawing funds under any of the credit facilities, of selecting an interest rate based on a number of benchmarks including LIBOR, the federal funds rate, or the prime rate of the agent bank.
Interest expense, net in the accompanying statements of operations includes interest income of $3.6 million for the quarter ended March 31, 2007 and $4.2 million for the quarter ended March 31, 2006.
10
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
8. | Pension and Postretirement Benefits |
Net periodic cost for the Corporation’s pension and postretirement benefits included the following components:
Quarter Ended | ||||||||||||||||
Pension Benefits | Postretirement Benefits | |||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(In thousands) | ||||||||||||||||
Service cost | $ | 2,970 | $ | 2,593 | $ | 61 | $ | 44 | ||||||||
Interest cost | 5,316 | 5,232 | 244 | 250 | ||||||||||||
Expected return on plan assets | (7,074 | ) | (6,931 | ) | — | — | ||||||||||
Plan net loss (gain) | 1,117 | 1,494 | 100 | 150 | ||||||||||||
Prior service cost (gain) | 259 | 238 | (56 | ) | (50 | ) | ||||||||||
Transition obligation (asset) | (4 | ) | (8 | ) | 194 | 194 | ||||||||||
Net periodic pension cost | $ | 2,584 | $ | 2,618 | $ | 543 | $ | 588 | ||||||||
Contributions to our qualified pension plans during the quarters ended March 31, 2007 and 2006 were not significant. We expect required contributions during the remainder of 2007 to our qualified pension plans to be minimal.
9. | Segment Disclosures |
The Corporation has three reportable segments: Electrical, Steel Structures and HVAC. During the first quarter of 2007, the Corporation began to report corporate expense related to legal, finance and administrative costs separately from business segment results. Management believes this change provides improved transparency into the underlying operating trends in the business segments. Segment information for the prior period has been revised to conform to the current presentation.
The Electrical segment designs, manufactures and markets thousands of different electrical connectors, components and other products for electrical, utility and communications applications. The Steel Structures segment designs, manufactures and markets highly engineered tubular steel transmission and distribution poles. We also market lattice steel transmission towers for North American power and telecommunications companies which we currently source from third parties. The HVAC segment designs, manufactures and markets heating and ventilation products for commercial and industrial buildings.
11
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The Corporation’s reportable segments are based primarily on product lines and represent the primary mode used to assess allocation of resources and performance. The Corporation evaluates its business segments primarily on the basis of segment earnings, with segment earnings defined as earnings before interest, income taxes, corporate expense and certain other charges. Corporate expense includes legal, finance and administrative costs. The Corporation has no material inter-segment sales.
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Net Sales | ||||||||
Electrical | $ | 389,166 | $ | 357,849 | ||||
Steel Structures | 53,030 | 52,728 | ||||||
HVAC | 32,356 | 31,225 | ||||||
Total | $ | 474,552 | $ | 441,802 | ||||
Segment Earnings | ||||||||
Electrical | $ | 64,901 | $ | 58,239 | ||||
Steel Structures | 8,902 | 8,332 | ||||||
HVAC | 4,709 | 4,151 | ||||||
Segment earnings | 78,512 | 70,722 | ||||||
Corporate expense | (20,976 | ) | (12,793 | ) | ||||
Interest expense, net | (3,551 | ) | (3,467 | ) | ||||
Other (expense) income, net | (160 | ) | 186 | |||||
Earnings before income taxes | $ | 53,825 | $ | 54,648 | ||||
10. | Contingencies |
Legal Proceedings
Kaiser Litigation
By July 2000, Kaiser Aluminum, its property insurers, 28 Kaiser injured workers, nearby businesses and a class of 18,000 residents near the Kaiser facility in Louisiana, filed product liability and business interruption cases against the Corporation and nine other defendants in Louisiana state court seeking damages in excess of $550 million. These cases alleged that a Thomas & Betts cable tie mounting base failed, thereby allowing bundled cables to come in contact with a 13.8 kV energized bus bar. This alleged electrical fault supposedly initiated a series of events culminating in an explosion, which leveled 600 acres of the Kaiser facility.
A trial in the fall 2001 resulted in a jury verdict in favor of the Corporation. However, 13 months later, the trial court overturned that verdict in granting plaintiffs’ motions for judgment notwithstanding the verdict. In December 2002, the trial court judge found the Thomas & Betts product, an adhesive backed mounting base, to be unreasonably dangerous and therefore assigned 25% fault to Thomas & Betts. The judge set the damages for an injured worker at $20 million and the damages for Kaiser at $335 million. The judgment did not address damages for nearby
12
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
businesses or the class of 18,000 residents near the Kaiser facility. The Corporation’s 25% allocation was $88.8 million, plus legal interest. The Corporation appealed to the Louisiana Court of Appeals, an intermediate appellate court. The appeal required a bond in the amount of $104 million (the judgment plus legal interest). Plaintiffs successfully moved the trial court to increase the bond to $156 million. The Corporation’s liability insurers secured the $156 million bond. As a result of court decisions, such bonds have subsequently been released.
In 2004, the Corporation and the class of 18,000 residents reached a court-approved settlement. The settlement extinguished the claims of all class members and included indemnity of the Corporation against future potential claims asserted by class members or those class members who opted out of the settlement process. The $3.75 million class settlement amount was paid directly by an insurer of the Corporation.
In March 2006, the Louisiana Court of Appeals unanimously reversed the trial court’s decision and reinstated the jury verdict of no liability in favor of the Corporation. In April 2006, the Kaiser plaintiffs filed with the Louisiana Supreme Court an appeal of the Court of Appeals decision. In May 2006, the Louisiana Supreme Court refused to accept the plaintiffs appeal. The Louisiana Supreme Court let stand the appellate court decision to reinstate the jury verdict of no liability in favor of the Corporation. In August 2006, the plaintiffs initiated a new appeal of the original jury verdict. The Court of Appeals dismissed that appeal. In 2007, the Kaiser plaintiffs filed an additional motion for a new trial at the trial court level. The Corporation contests this attempt to relitigate resolved issues.
The injured worker who was a separate plaintiff and whose earlier judgment against the Corporation was reversed sought relief from the trial court arguing that Thomas & Betts never appealed the $20 million award the injured worker received. The trial court agreed, but the Louisiana Court of Appeals immediately reversed that decision. The injured worker then appealed this ruling to the Louisiana Supreme Court, which refused to hear the appeal. In January 2007, the injured worker petitioned the United States Supreme Court for a hearing on his claim. The United States Supreme Court refused to accept this petition. This injured worker joined the Kaiser plaintiffs’ motion for a new trial. The Corporation continues to contest these further legal actions.
Other Legal Matters
The Corporation is also involved in legal proceedings and litigation arising in the ordinary course of business. In those cases where we are the defendant, plaintiffs may seek to recover large and sometimes unspecified amounts or other types of relief and some matters may remain unresolved for several years. Such matters may be subject to many uncertainties and outcomes which are not predictable with assurance. We consider the gross probable liability when determining whether to accrue for a loss contingency for a legal matter. We have provided for losses to the extent probable and estimable. The legal matters that have been recorded in our consolidated financial statements are based on gross assessments of expected settlement or expected outcome. Additional losses, even though not anticipated, could have a material adverse effect on our financial position, results of operations or liquidity in any given period.
Guarantee and Indemnification Arrangements
The Corporation follows the provisions of FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation requires the Corporation to recognize the fair value of guarantee and
13
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
indemnification arrangements issued or modified by the Corporation, if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, the Corporation continues to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.
The Corporation generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time and usage of the product depending on the nature of the product, the geographic location of its sale and other factors. The accrued product warranty costs are based primarily on historical experience of actual warranty claims as well as current information on repair costs.
The following table provides the changes in the Corporation’s accruals for estimated product warranties:
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Balance at beginning of period | $ | 1,737 | $ | 1,478 | ||||
Liabilities accrued for warranties issued during the period | 283 | 262 | ||||||
Deductions for warranty claims paid during the period | (845 | ) | (304 | ) | ||||
Changes in liability for pre-existing warranties during the period, including expirations | 166 | 142 | ||||||
Balance at end of period | $ | 1,341 | $ | 1,578 | ||||
In conjunction with the divestiture of the Corporation’s Electronics OEM business to Tyco Group S.A.R.L. in July 2000, the Corporation provided an indemnity to Tyco associated with environmental liabilities that were not known as of the sale date. Under this indemnity, the Corporation is liable for subsequently identified environmental claims up to $2 million. Additionally, the Corporation as of March 31, 2007, is liable for 50% of subsequently identified environmental claims that exceed $2 million and such liability becomes zero in July 2007. To date environmental claims by Tyco have been negligible.
11. | Share Repurchase Plans |
In July 2006, the Corporation’s Board of Directors approved a share repurchase plan that authorizes the Corporation to buy up to 3,000,000 of its common shares. Through March 2007, the Corporation repurchased, through open-market transactions, 2,500,000 common shares with available cash resources. The timing of future repurchases, if any, will depend upon a variety of factors including market conditions. The Corporation expects to repurchase additional shares under this repurchase plan with available cash resources. This authorization expires in July 2008.
In March 2007, the Corporation’s Board of Directors approved a share repurchase plan that authorizes the Corporation to buy an additional 3,000,000 of its common shares. As of March 31, 2007, no common shares had been repurchased under this authorization. The timing of future repurchases, if any, will depend upon a variety of factors including market conditions. The Corporation expects to repurchase additional shares under this repurchase plan with available cash resources. This authorization expires in March 2009.
14
Table of Contents
Thomas & Betts Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
12. | Recently Issued Accounting Standards |
Effective December 31, 2006, the Corporation adopted the recognition and disclosure provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” requiring recognition of the overfunded or underfunded status of benefit plans on its balance sheet. SFAS No. 158 also eliminates the use of “early measurement dates” to account for certain of the Corporation’s pension and other postretirement plans effective December 31, 2008. The Corporation has not yet evaluated the impact of eliminating the use of early measurement dates.
15
Table of Contents
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview
Introduction
Thomas & Betts Corporation is a leading designer and manufacturer of electrical components used in industrial, commercial, communications, and utility markets. We are also a leading producer of highly engineered steel structures, used primarily for utility transmission, and commercial heating units. We have operations in approximately 20 countries. Manufacturing, marketing and sales activities are concentrated primarily in North America and Europe.
Critical Accounting Policies
The preparation of financial statements contained in this report requires the use of estimates and assumptions to determine certain amounts reported as net sales, costs, expenses, assets or liabilities and certain amounts disclosed as contingent assets or liabilities. Actual results may differ from those estimates or assumptions. Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006. We believe our critical accounting policies include the following:
• | Revenue Recognition: The Corporation recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales discounts, quantity and price rebates, and allowances are estimated based on contractual commitments and experience and recorded in the period as a reduction of revenue in which the sale is recognized. Quantity rebates are in the form of volume incentive discount plans, which include specific sales volume targets oryear-over-year sales volume growth targets for specific customers. Certain distributors can take advantage of price rebates by subsequently reselling the Corporation’s products into targeted construction projects or markets. Following a distributor’s sale of an eligible product, the distributor submits a claim for a price rebate. The Corporation provides additional allowances for bad debts when circumstances dictate. A number of distributors, primarily in the Electrical segment, have the right to return goods under certain circumstances and those returns, which are reasonably estimable, are accrued as a reduction of revenue at the time of shipment. Management analyzes historical returns and allowances, current economic trends and specific customer circumstances when evaluating the adequacy of accounts receivable related reserves and accruals. | |
• | Inventory Valuation: Inventories are stated at the lower of cost or market. Cost is determined using thefirst-in, first-out (FIFO) method. To ensure inventories are carried at the lower of cost or market, the Corporation periodically evaluates the carrying value of its inventories. The Corporation also periodically performs an evaluation of inventory for excess and obsolete items. Such evaluations are based on management’s judgment and use of estimates. Such estimates incorporate inventory quantities on-hand, aging of the inventory, sales forecasts for particular product groupings, planned dispositions of product lines and overall industry trends. | |
• | Goodwill and Other Intangible Assets: We follow the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires a transitional and annual test of goodwill and indefinite lived assets associated with reporting units for indications of impairment. With the assistance of a third party appraisal firm, the Corporation performs its annual impairment assessment in the fourth quarter of each year, unless circumstances dictate more |
16
Table of Contents
frequent assessments. Indications of impairment require significant judgment by management. Under the provisions of SFAS No. 142, each test of goodwill requires that we determine the fair value of each reporting unit, and compare the fair value to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Corporation must perform a second more detailed impairment assessment. The second impairment assessment involves allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill as of the assessment date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date. |
• | Long-Lived Assets: We follow the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 establishes accounting standards for the impairment of long-lived assets such as property, plant and equipment and intangible assets subject to amortization. For purposes of recognizing and measuring impairment of long-lived assets, the Corporation evaluates assets at the lowest level of identifiable cash flows for associated product groups. The Corporation reviews long-lived assets to beheld-and-used for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Indications of impairment require significant judgment by management. If the sum of the undiscounted expected future cash flows over the remaining useful life of the primary asset in the associated product groups is less than the carrying amount of the assets, the assets are considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. When fair values are not available, we estimate fair values using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. | |
• | Pension and Postretirement Benefit Plan Actuarial Assumptions: We follow the provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” SFAS No. 132 (Revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” For purposes of calculating pension and postretirement medical benefit obligations and related costs, the Corporation uses certain actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expenseand/or liability measurement. We evaluate these assumptions annually. Other assumptions include employee demographic factors (retirement patterns, mortality and turnover), rate of compensation increase and the healthcare cost trend rate. See additional information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Qualified Pension Plans in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006. | |
• | Income Taxes: We use the asset and liability method of accounting for income taxes. This method recognizes the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities and provides a valuation allowance based on a more-likely-than-not criteria. The Corporation has valuation allowances for deferred tax assets primarily associated with foreign net operating loss carryforwards and foreign income tax credit carryforwards. Realization of the deferred tax assets is dependent upon the Corporation’s ability to generate sufficient future taxable income and, if necessary, execution of tax |
17
Table of Contents
planning strategies. Management believes that it is more-likely-than-not that future taxable income, based on enacted tax law in effect as of March 31, 2007, will be sufficient to realize the recorded deferred tax assets net of existing valuation allowances. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, which involve estimates and uncertainties, in making this assessment. Projected future taxable income is based on management’s forecast of the operating results of the Corporation. Management periodically reviews such forecasts in comparison with actual results and expected trends. In the event management determines that sufficient future taxable income, in light of tax planning strategies, may not be generated to fully realize net deferred tax assets, we will increase valuation allowances by a charge to income tax expense in the period of such determination. Likewise, if management determines that future taxable income will be sufficient to utilize net operating loss carryforwards and other deferred tax assets, the Corporation will decrease the existing valuation allowance by recording a reduction to income tax expense in the period of such determination. |
• | Environmental Costs: Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that those costs will be incurred and can be reasonably estimated based on evaluations of current available facts related to each site. The operation of manufacturing plants involves a high level of susceptibility in these areas, and there is no assurance that we will not incur material environmental or occupational health and safety liabilities in the future. Moreover, expectations of remediation expenses could be affected by, and potentially significant expenditures could be required to comply with, environmental regulations and health and safety laws that may be adopted or imposed in the future. Future remediation technology advances could adversely impact expectations of remediation expenses. |
2007 Outlook
We continue to expect mid-single digit sales growth for the full year 2007 compared to 2006, driven primarily by volume gains and price increases to offset higher material and energy costs. We are also reaffirming our prior earnings guidance, despite an eight cent per share legal settlement charge taken in the first quarter, of between $3.05 to $3.15 per diluted share for the full year 2007.
Our 2007 guidance assumes:
• | continued solid demand in most of our key markets; | |
• | Steel Structures segment sales of approximately $55 million per quarter; | |
• | corporate expense of approximately $14 million per quarter for the balance of the year; | |
• | net interest expense of $14 million for the full year; | |
• | a 31% effective income tax rate; and, | |
• | approximately 58.5 million fully diluted average shares outstanding for each of the remaining quarters this year. |
The key risks we may face for the remainder of 2007 include the potential negative impact of rising and volatile commodity and energy costs and higher interest rates on capital spending in the markets we serve.
18
Table of Contents
Summary of Consolidated Results
Quarter Ended March 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
% of Net | % of Net | |||||||||||||||
In Thousands | Sales | In Thousands | Sales | |||||||||||||
Net sales | $ | 474,552 | 100.0 | $ | 441,802 | 100.0 | ||||||||||
Cost of sales | 329,717 | 69.5 | 305,519 | 69.1 | ||||||||||||
Gross profit | 144,835 | 30.5 | 136,283 | 30.9 | ||||||||||||
Selling, general and administrative | 87,329 | 18.4 | 78,528 | 17.8 | ||||||||||||
Earnings from operations | 57,506 | 12.1 | 57,755 | 13.1 | ||||||||||||
Income from unconsolidated companies | 30 | — | 174 | — | ||||||||||||
Interest expense, net | (3,551 | ) | (0.8 | ) | (3,467 | ) | (0.8 | ) | ||||||||
Other (expense) income, net | (160 | ) | — | 186 | 0.1 | |||||||||||
Earnings before income taxes | 53,825 | 11.3 | 54,648 | 12.4 | ||||||||||||
Income tax provision | 16,685 | 3.5 | 15,848 | 3.6 | ||||||||||||
Net earnings | $ | 37,140 | 7.8 | $ | 38,800 | 8.8 | ||||||||||
Per share earnings: | ||||||||||||||||
Basic | $ | 0.63 | $ | 0.63 | ||||||||||||
Diluted | $ | 0.63 | $ | 0.62 | ||||||||||||
2007 Compared with 2006
Overview
First quarter 2007 net sales for the Corporation and for each of its segments increased from the prior-year period, reflecting solid demand in our key markets. The net sales increase was driven primarily by price increases to offset higher material and energy costs, with net volume increases and the effect of foreign currency exchange having less of an impact.
Earnings from operations, which included a $7 million charge related to a legal settlement involving a commercial dispute on a product line we no longer market, was essentially flat with the prior year period and reflects the Corporation’s continuing ability to recover rising material and energy costs through price increases.
First quarter 2007 earnings were $0.63 per diluted share compared to $0.62 per diluted share in the first quarter of the prior year. 2007 includes a charge of $0.08 per share related to a legal settlement.
Net Sales and Gross Profit
Net sales in the first quarter of 2007 were $474.6 million, up $32.8 million, or 7.4%, from the prior-year period. The net sales increase was driven primarily by price increases to offset higher material and energy costs, with volume increases and the effect of foreign currency exchange having less of an impact. Foreign currency exchange accounted for $5 million of the sales increase.
Gross profit in the first quarter of 2007 was $144.8 million, or 30.5% of net sales, which is relatively flat on a percentage basis compared to the prior-year period. The Corporation continues to offset higher material and energy costs with increased selling prices.
19
Table of Contents
Expenses
Selling, general and administrative (SG&A) expense in the first quarter of 2007 was $87.3 million, or 18.4% of net sales, compared to $78.5 million, or 17.8% of net sales, in the prior-year period. First quarter 2007 SG&A included a $7 million pre-tax charge related to a legal settlement. As a percent of net sales, SG&A was negatively impacted by 1.5 percentage points as a result of the legal settlement.
Interest Expense, Net
Interest expense, net for the first quarter of 2007 was $3.6 million compared to $3.5 million in the prior-year period. Interest income included in interest expense, net was $3.6 million for the first quarter of 2007 and $4.2 million for the first quarter of 2006, and primarily reflects lower average invested cash balances. Interest expense was $7.2 million in the first quarter of 2007 and $7.7 million in the first quarter of 2006, and primarily reflects lower average debt levels.
Income Taxes
The income tax provision in the first quarter of 2007 reflected an effective rate of 31% of pre-tax income compared to an effective rate in the prior-year period of 29%. The increase in the effective rate over the prior-year period reflects the effect of a net increase in U.S. income taxes on the Corporation’s overall blended tax rate. The effective rate for both years reflects benefits from our Puerto Rican manufacturing operations which has a lower effective tax rate.
Net Earnings
Net earnings were $37.1 million, or $0.63 per basic and diluted share, in the first quarter of 2007 compared to net earnings of $38.8 million, or $0.63 per basic and $0.62 per diluted share, in the first quarter of 2006. Net earnings in the first quarter of 2007 include the negative impact of the $7 million pre-tax charge related to a legal settlement ($0.08 per share). Net earnings per share in the first quarter of 2007 also reflects the impact of the Corporation’s 2006 share repurchase activity.
20
Table of Contents
Summary of Segment Results
Net Sales
Quarter Ended March 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
In | % of Net | In | % of Net | |||||||||||||
Thousands | Sales | Thousands | Sales | |||||||||||||
Electrical | $ | 389,166 | 82.0 | $ | 357,849 | 81.0 | ||||||||||
Steel Structures | 53,030 | 11.2 | 52,728 | 11.9 | ||||||||||||
HVAC | 32,356 | 6.8 | 31,225 | 7.1 | ||||||||||||
$ | 474,552 | 100.0 | $ | 441,802 | 100.0 | |||||||||||
Segment Earnings
Quarter Ended March 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
In | % of Net | In | % of Net | |||||||||||||
Thousands | Sales | Thousands | Sales | |||||||||||||
Electrical | $ | 64,901 | 16.7 | $ | 58,239 | 16.3 | ||||||||||
Steel Structures | 8,902 | 16.8 | 8,332 | 15.8 | ||||||||||||
HVAC | 4,709 | 14.6 | 4,151 | 13.3 | ||||||||||||
Segment earnings | 78,512 | 16.5 | 70,722 | 16.0 | ||||||||||||
Corporate expense | (20,976 | ) | (12,793 | ) | ||||||||||||
Interest expense, net | (3,551 | ) | (3,467 | ) | ||||||||||||
Other (expense) income, net | (160 | ) | 186 | |||||||||||||
Earnings before income taxes | $ | 53,825 | $ | 54,648 | ||||||||||||
The Corporation has three reportable segments: Electrical, Steel Structures and HVAC. We evaluate our business segments primarily on the basis of segment earnings, with segment earnings defined as earnings before interest, income taxes, corporate expense and certain other charges.
During the first quarter of 2007, we began to report corporate expense related to legal, finance and administrative costs separately from business segment results. Management believes this change provides improved transparency into the underlying operating trends in the business segments. Segment information for the prior period has been revised to conform to the current presentation.
Our segment earnings are significantly influenced by the operating performance of our Electrical segment that accounted for more than 80% of our consolidated net sales and consolidated segment earnings during each of the periods presented.
Electrical Segment
Electrical segment net sales in the first quarter of 2007 increased $31.3 million, or 8.8%, from the prior-year period reflecting price increases to offset higher material and energy costs and net volume improvements. The Electrical segment experienced solid demand in its key end markets of industrial maintenance and repair, utility distribution and positive trends in non-residential commercial construction. Favorable foreign currency exchange accounted for approximately $4 million of the increase.
Electrical segment earnings in the first quarter of 2007 were up $6.7 million, or 11.4%, from the prior-year period. The earnings improvement reflects the favorable impact of higher net sales
21
Table of Contents
volumes, operating efficiencies and our continued ability to offset higher material and energy costs through higher selling prices.
Other Segments
Net sales in the first quarter of 2007 were $53.0 million in our Steel Structures segment which was essentially flat compared with the prior-year period. Steel Structures segment earnings in the first quarter of 2007 were up 6.8% to $8.9 million, or 16.8% of net sales, reflecting improved project mix in 2007 compared to 2006.
Net sales in the first quarter of 2007 in our HVAC segment were up $1.1 million, or 3.6%, from the prior-year period. HVAC segment earnings in the first quarter of 2007 were up $0.6 million, or 13.4%, from the prior-year period. The earnings improvement reflects continued cost control and higher sales.
Liquidity and Capital Resources
We had cash and cash equivalents of $309.9 million and $371.0 million at March 31, 2007 and December 31, 2006, respectively.
The following table reflects the primary category totals in our Consolidated Statements of Cash Flows:
Quarter Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in) operating activities | $ | 33,173 | $ | 14,150 | ||||
Net cash provided by (used in) investing activities | (6,243 | ) | 277,660 | |||||
Net cash provided by (used in) financing activities | (88,071 | ) | (117,127 | ) | ||||
Effect of exchange-rate changes on cash | 39 | 299 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | (61,102 | ) | $ | 174,982 | |||
Operating Activities
The first quarter is typically the least favorable in terms of cash generation because of the timing of certain payments. Even so, we had strong cash generation in the quarter with cash flow from operations more than doubling compared to the first quarter of 2006 to approximately $33 million. Cash provided by operating activities during the first quarter of 2007 and first quarter of 2006 was primarily attributable to net earnings of $37.1 million and $38.8 million, respectively, and the impact of changes in working capital. Cash used for inventory in the first quarter of 2007 was $1.9 million, down from cash used for inventory in the prior year period of $20.0 million. Depreciation and amortization was approximately $12 million in both the first quarter of 2007 and the first quarter of 2006.
Investing Activities
During the first quarter of 2007, we had capital expenditures totaling $6.4 million, compared to $14.1 million in the prior-year period. We expect the rate of capital expenditures to increase and to approximate $50 million for the full year 2007. Capital expenditures in 2007 include investment to expand tubular steel structures sales capacity by$15-$20 million annually beginning in 2008. Additionally, during the first quarter of 2006, we converted a substantial portion of our marketable securities into cash equivalents.
22
Table of Contents
Financing Activities
Cash used in the first quarter of 2007 financing activities included the repurchase of approximately 1.8 million common shares for approximately $94 million. Financing activities also reflect $4.6 million of cash provided by stock options exercised in the first quarter of 2007. Financing activities in the first quarter of 2006 reflected cash used for debt repayments of $150.1 million which was partially offset by $30.1 million of cash provided by stock options exercised.
$300 million Credit Facility
We have a $300 million credit agreement that contains customary covenants which could potentially restrict the payment of dividends, investments, liens, issuing certain types of additional debt and the disposition of assets if the Corporation fails to maintain its financial covenants and certain minimum levels of total availability under the facility. We have the option, at the time of drawing funds under the facility, of selecting an interest rate based on the London Interbank Offered Rate (LIBOR), the federal funds rate, or the prime rate of the agent bank. The credit facility contains the following significant financial covenants:
Consolidated Interest Coverage Ratio. The Corporation must maintain a ratio, as defined in the agreement, of no less than 3.00 to 1.00 as of the end of any fiscal quarter.
Leverage Ratio. The Corporation must maintain a ratio, as defined in the agreement, of no greater than 4.00 to 1.00 as of the end of any fiscal quarter through March 31, 2008; 3.75 to 1.00 as of the end of any fiscal quarter ending June 30, 2008 and thereafter.
At March 31, 2007, outstanding letters of credit, or similar financial instruments that reduce the amount available under the $300 million credit facility totaled $22.4 million. Letters of credit relate primarily to third-party insurance claims processing.
Other Credit Facilities
We have a EUR10 million (approximately US$13 million) committed revolving credit facility with a European bank that has an indefinite maturity. Availability under this facility is EUR10 million (approximately US$13 million) as of March 31, 2007. This credit facility contains standard covenants similar to those contained in the $300 million credit facility and standard events of default such as covenant default and cross-default.
Compliance and Availability
We are in compliance with all covenants or other requirements set forth in our credit facilities. However, if we fail to be in compliance with the financial or other covenants of our credit agreements, then the credit agreements could be terminated, any outstanding borrowings under the agreements could be accelerated and immediately due and we could have difficulty renewing or obtaining credit facilities in the future.
As of March 31, 2007, the aggregate availability of funds under our credit facilities was approximately $291.0 million, after deducting outstanding letters of credit. Availability is subject to the satisfaction of various covenants and conditions to borrowing. We currently do not have any borrowings under these facilities.
Credit Ratings
As of March 31, 2007, we had investment grade credit ratings from Standard & Poor’s, Moody’s Investor Service and Fitch Ratings on our senior unsecured debt. Should these credit ratings drop, repayment under our credit facilities and securities will not be accelerated; however, our credit costs may increase. Similarly, if our credit ratings improve, we could potentially have a
23
Table of Contents
decrease in our credit costs. The maturity of any of our debt securities does not accelerate in the event of a credit downgrade.
Debt Securities
Thomas & Betts had the following senior unsecured debt securities outstanding as of March 31, 2007:
Issue Date | Amount | Interest Rate | Interest Payable | Maturity Date | ||||||
May 1998 | $115 million | 6.63 | % | May 1 and November 1 | May 2008 | |||||
February 1999 | $150 million | 6.39 | % | March 1 and September 1 | February 2009 | |||||
May 2003 | $125 million | 7.25 | % | June 1 and December 1 | June 2013 |
The indentures underlying the unsecured debt securities contain standard covenants such as restrictions on mergers, liens on certain property, sale-leaseback of certain property and funded debt for certain subsidiaries. The indentures also include standard events of default such as covenant default and cross-acceleration. We are in compliance with all covenants and other requirements set forth in the indentures.
Other
In July 2006, the Corporation’s Board of Directors approved a share repurchase plan that authorizes the Corporation to buy up to 3,000,000 of its common shares. Through March 2007, the Corporation repurchased, through open-market transactions, 2,500,000 common shares with available cash resources. The timing of future repurchases, if any, will depend upon a variety of factors including market conditions. The Corporation expects to repurchase additional shares under this repurchase plan with available cash resources. This authorization expires in July 2008.
In March 2007, the Corporation’s Board of Directors approved a share repurchase plan that authorizes the Corporation to buy an additional 3,000,000 of its common shares. As of March 31, 2007, no common shares had been repurchased under this authorization. The timing of future repurchases, if any, will depend upon a variety of factors including market conditions. The Corporation expects to repurchase additional shares under this repurchase plan with available cash resources. This authorization expires in March 2009.
The Corporation does not currently pay cash dividends. Future decisions concerning the payment of cash dividends on the common stock will depend upon our results of operations, financial condition, capital expenditure plans and other factors that the Board of Directors may consider relevant.
In the short-term we expect to fund expenditures for capital requirements as well as other liquidity needs from a combination of cash generated from operations and existing cash balances. These sources should be sufficient to meet our operating needs in the short-term.
Over the longer-term, we expect to meet our liquidity needs with a combination of cash generated from operations and existing cash balances, the use of our credit facilities, plus issuances of debt or equity securities. From time to time, we may access the public capital markets if terms, rates and timing are acceptable. We have an effective shelf registration statement that will permit us to issue an aggregate of $325 million of senior unsecured debt securities, common stock and preferred stock.
Off-Balance Sheet Arrangements
As of March 31, 2007, we did not have any off-balance sheet arrangements.
24
Table of Contents
Refer to Note 10 in the Notes to Consolidated Financial Statements for information regarding our guarantee and indemnification arrangements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market Risk and Financial Instruments
Thomas & Betts is exposed to market risk from changes in interest rates, raw material prices and foreign exchange rates. At times, we may enter into various derivative instruments to manage certain of these risks. We do not enter into derivative instruments for speculative or trading purposes.
For the period ended March 31, 2007, the Corporation has not experienced any material changes since December 31, 2006 in market risk that affect the quantitative and qualitative disclosures presented in our 2006 Annual Report onForm 10-K.
Item 4. | Controls and Procedures |
(a) | Evaluation of Disclosure Controls and Procedures |
We have established disclosure controls and procedures to ensure that material information relating to the Company is made known to the Chief Executive Officer and Chief Financial Officer who certify the Company’s financial reports.
Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report and they have concluded that, as of this date, these controls and procedures are effective to ensure that the information required to be disclosed under the Securities Exchange Act of 1934 is disclosed within the time periods specified by SEC rules.
(b) | Changes in Internal Control over Financial Reporting |
There have been no significant changes in internal control over financial reporting that occurred during the first quarter of 2007 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
See Note 10, “Contingencies,” in the Notes to Consolidated Financial Statements, which is incorporated herein by reference. See also Item 3. “Legal Proceedings,” in the Corporation’s 2006 Annual Report onForm 10-K, which is incorporated herein by reference.
Item 1A. Risk Factors
There are many factors that could pose a material risk to the Corporation’s business, its operating results and financial condition and its ability to execute its business plan, some of which are beyond our control. There have been no material changes from the risk factors as previously set forth in our 2006 Annual Report onForm 10-K under Item 1A. “Risk Factors,” which is incorporated herein by reference.
Item 2. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
In July 2006, the Corporation’s Board of Directors approved a share repurchase plan that authorizes the Corporation to buy up to 3,000,000 of its common shares. Through March 2007, the
25
Table of Contents
Corporation repurchased, through open-market transactions, 2,500,000 common shares with available cash resources. The timing of future repurchases, if any, will depend upon a variety of factors including market conditions. The Corporation expects to repurchase additional shares under this repurchase plan with available cash resources. This authorization expires in July 2008.
In March 2007, the Corporation’s Board of Directors approved a share repurchase plan that authorizes the Corporation to buy an additional 3,000,000 of its common shares. As of March 31, 2007, no common shares had been repurchased under this authorization. The timing of future repurchases, if any, will depend upon a variety of factors including market conditions. The Corporation expects to repurchase additional shares under this repurchase plan with available cash resources. This authorization expires in March 2009.
Issuer Purchases of Equity Securities
Maximum | ||||||||||||||||
Total Number | Number | |||||||||||||||
of Common | of Common | |||||||||||||||
Shares | Shares | |||||||||||||||
Total | Average | Purchased | that May | |||||||||||||
Number of | Price Paid | as Part of | Yet Be | |||||||||||||
Common | per | Publicly | Purchased | |||||||||||||
Shares | Common | Announced | Under | |||||||||||||
Period | Purchased | Share | Plans | the Plans | ||||||||||||
July 2006 Plan | ||||||||||||||||
February 8, 2007 to February 28, 2007 | 1,230,900 | $ | 51.50 | 1,230,900 | 1,101,480 | |||||||||||
March 1, 2007 to March 8, 2007 | 601,480 | $ | 50.03 | 601,480 | 500,000 | |||||||||||
Total for the quarter ended March 31, 2007 | 1,832,380 | $ | 51.02 | 1,832,380 | 500,000 | |||||||||||
March 2007 Plan | ||||||||||||||||
Total for the quarter ended March 31, 2007 | — | $ | — | — | 3,000,000 | |||||||||||
Item 5. | Other Information |
Shareholders who wish to present director nominations or other business at the Annual Meeting of Shareholders to be held in 2008 must give notice to the Secretary at our principal executive offices on or prior to January 3, 2008.
Item 6. | Exhibits |
The Exhibit Index that follows the signature page of this Report is incorporated herein by reference.
26
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Thomas & Betts Corporation
(Registrant)
(Registrant)
By: | /s/ Kenneth W. Fluke |
Kenneth W. Fluke
Senior Vice President and
Chief Financial Officer
(principal financial officer)
Date: May 4, 2007
27
Table of Contents
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |||
10 | .1† | Approval of Incentive Payments (Incorporated by reference to Item 1.01 of the Current Report onForm 8-K dated February 6, 2007). | ||
12 | Statement re Computation of Ratio of Earnings to Fixed Charges | |||
31 | .1 | Certification of Principal Executive Officer Under Securities Exchange ActRules 13a-14(a) or 15d-14(a) | ||
31 | .2 | Certification of Principal Financial Officer Under Securities Exchange ActRules 13a-14(a) or 15d-14(a) | ||
32 | .1 | Certification of Principal Executive Officer Pursuant toRule 13a-14(b) orRule 15d-14(b) of the Securities Exchange Act of 1934 and furnished solely pursuant to 18 U.S.C. § 1350 and not filed as part of the Report or as a separate disclosure document. | ||
32 | .2 | Certification of Principal Financial Officer Pursuant toRule 13a-14(b) orRule 15d-14(b) of the Securities Exchange Act of 1934 and furnished solely pursuant to 18 U.S.C. § 1350 and not filed as part of the Report or as a separate disclosure document. |
† | Management contract or compensatory plan or arrangement. |
28