SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission file number:
March 31, 2002 1-5761
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LaBARGE, INC.
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(Exact Name of Registrant as specified in its charter)
DELAWARE 73-0574586
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(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
9900A Clayton Road, St. Louis, 63124
Missouri
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(Address) (Zip Code)
(314) 997-0800
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(Registrant's telephone number, including Area Code)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No.
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of March 31, 2002. 15,773,253 shares of common stock.
LaBARGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands except per share data)
Three Months Ended Nine Months Ended
----------- -----------
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
-------- -------- -------- -------
Net sales $30,159 $32,428 $93,761 $83,636
-------- -------- -------- -------
Costs and expenses:
Cost of sales 24,036 25,153 74,749 65,273
Selling and administrative 4,118 5,010 12,949 13,250
expense
Interest expense 269 433 920 1,528
Other income, net (239) (221) (436) (826)
-------- -------- -------- -------
Income before income taxes 1,975 2,053 5,579 4,411
Income tax expense 730 838 2,099 1,835
Net earnings $1,245 $1,215 $3,480 $2,576
====== ====== ====== =====
Basic net earnings per $.08 $.08 $.23 $.17
share
Average common shares 14,964 14,928 14,969 14,899
outstanding
====== ====== ====== ======
Diluted net earnings per $.08 $.08 $.23 $.17
share
Average diluted common
shares outstanding 15,499 14,928 15,344 14,899
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
LaBARGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
March 31, July 1,
2002 2001
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ASSETS
Current assets:
Cash and cash equivalents $850 $666
Accounts and notes receivable, net 14,777 16,946
Inventories 22,135 23,212
Prepaid expenses 811 727
Deferred tax assets, net 830 1,087
------ ------
Total current assets $39,403 $42,638
------ ------
Property, plant and equipment, net 13,479 13,113
Deferred tax assets, net 1,058 1,908
Intangible assets, net 5,024 4,693
Other assets, net 4,997 5,186
------ ------
$63,961 $67,538
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $1,325 $2,500
Current maturities of long-term debt 195 1,779
Trade accounts payable 7,556 9,605
Accrued employee compensation 5,531 5,965
Other accrued liabilities 839 3,899
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Total current liabilities $15,446 $23,748
------ ------
Other long-term liabilities 2,582 953
Long-term debt 7,161 7,500
Subordinated debt 5,621 5,621
------ ------
Stockholders' equity:
Common stock, $.01 par value. Authorized
40,000,000 shares; issued 15,773,253
shares at March 31, 2002 and 15,773,253 158 158
at July 1, 2001, including shares in
treasury
Additional paid-in capital 13,513 13,569
Retained earnings 22,286 18,806
Accumulated other comprehensive loss (120) (97)
Less cost of common stock in treasury, shares
at 806,956 at March 31, 2002 and 812,176 (2,686) (2,720)
shares at July 1, 2001
------ ------
Total stockholders' equity 33,151 29,716
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$63,961 $67,538
====== ======
See accompanying notes to consolidated financial statements.
LaBARGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Nine Months Ended
March 31, April 1,
2002 2001
------ ------
Cash flows from operating activities:
Net earnings $3,480 $2,576
Adjustments to reconcile net cash provided by
operating activities:
Depreciation and amortization 1,646 2,160
Deferred taxes 1,107 378
Other 23 2
Changes in assets and liabilities, net of
acquisitions:
Accounts and notes receivable, net 2,169 2,617
Inventories 1,077 (2,891)
Prepaid expenses (83) (29)
Trade accounts payable (2,049) 1,612
Accrued liabilities and other (1,888) 3,149
------ ------
Net cash provided by operating activities 5,482 9,574
Cash flows from investing activities:
Additions to property, plant and equipment (1,878) (1,446)
Additions to other assets (299) 283
------ ------
Net cash used by investing activities (2,177) (1,163)
------ ------
Cash flows from financing activities:
Borrowings of long-term debt 517 -
Repayments of long-term debt (2,439) (1,367)
(Purchase) sale of common stock (24) 153
Net change in short-term borrowings (1,175) (6,230)
------ ------
Net cash used by financing activities (3,121) (7,444)
------ ------
Net increase in cash and cash equivalents 184 967
Cash and cash equivalents at beginning of year 666 734
------ ------
Cash and cash equivalents at end of period $850 $1,701
====== ======
See accompanying notes to consolidated financial statements.
LaBARGE, INC.
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The consolidated balance sheets at March 31, 2002 and July 1, 2001, the
related consolidated statements of operations for the three and nine months
ended March 31, 2002 and April 1, 2001 and the consolidated statements of
cash flows for the nine months ended March 31, 2002 and April 1, 2001, have
been prepared by LaBarge, Inc. (the "Company") without audit. In the
opinion of management, adjustments, all of a normal and recurring nature,
necessary to present fairly the financial position and the results of
operations and cash flows for the aforementioned periods, have been made.
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 1, 2001.
2. GROSS AND NET SALES
Gross and net sales consist of the following:
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Gross sales $30,885 $33,011 $95,925 $84,883
Less sales discounts 726 583 2,164 1,247
Net sales $30,159 $32,428 $93,761 $83,636
====== ====== ====== ======
The Company accepts sales discounts from a few customers in the normal
course of business.
3. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
(dollars in thousands)
March 31, July 1,
2002 2001
--------- ---------
Billed shipments, net of progress $14,858 $16,703
payments
Less allowance for doubtful 289 289
accounts
Trade receivables, net 14,569 16,414
Other current receivables 208 532
$14,777 $16,946
======= =======
Progress payments are payments from customers in accordance with contractual
terms for contract costs incurred to date. Such payments are credited to
the customer at the time of shipment.
At March 31, 2002 and July 1, 2001, other current receivables include $0 and
$346,000 of customer payments to be received as a settlement under a prior
claim for material.
For the nine months ended March 31, 2002 and twelve months ended July 1,
2001, expense for doubtful accounts charged to income before income taxes
was $9,000 and $324,000.
4. INVENTORIES
Inventories consist of the following:
(dollars in thousands)
March 31, July 1,
2002 2001
-------- --------
Raw materials $13,486 $11,554
Work in progress 10,264 13,028
Less reserve for obsolescence 520 755
23,230 23,827
Less progress payments 1,095 615
$22,135 $23,212
====== ======
In accordance with contractual agreements, the U.S. Government has a
security interest in inventories identified with related contracts for which
progress payments have been received.
For the nine months ended March 31, 2002 and the twelve months ended July 1,
2001, expense for inventory reserves charged to income before income taxes
was $83,000 and $1.1 million, respectively.
5. INTANGIBLE ASSETS, NET
Intangible assets, net, is summarized as follows:
(dollars in thousands)
March 31, July 1,
2002 2001
------ ---------
Software $ 2,048 $ 1,598
Patents 122 91
Goodwill 6,694 6,694
$ 8,864 $ 8,383
Less amortization 3,840 3,690
$ 5,024 $ 4,693
====== ========
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually
in accordance with the provisions of Statement 142. Statement 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
The Company adopted the provisions of Statement 142 in the first quarter,
ended September 30, 2001.
Goodwill amortization expense was $0 for the three and nine months ended
March 31, 2002. Goodwill amortization expense was approximately $226,000
and $678,000 for the three and nine months ended April 1, 2001,
respectively.
6. OTHER ASSETS
Other assets is summarized as follows:
(dollars in thousands)
March 31, July 1,
2002 2001
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Cash value of life insurance $ 3,941 $ 4,220
Deposits, licenses, and other 968 871
Investments in businesses 136 136
$ 5,045 $ 5,227
Less amortization 48 41
$ 4,997 $ 5,186
======= ========
Investments in businesses primarily refers to securities of Norwood Abbey,
Ltd., held by the Company.
7. SHORT- AND LONG-TERM OBLIGATIONS
Short-term borrowings, long-term debt and the current maturities of
long-term debt consist of the following:
(dollars in thousands)
March 31, July 1,
2002 2001
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Short-term borrowings:
Revolving credit agreement:
Balance at period-end $1,325 $2,500
Interest rate at period-end 2.88% 4.78%
Average amount of short-term
borrowings $2,949 $7,275
outstanding during period
Average interest rate for period 4.07% 8.30%
Maximum short-term borrowings at any $6,320 $13,302
month-end
Senior long-term debt:
Senior lender:
Term loan $6,400 $2,336
Mortgage loan - 5,895
Other 956 1,048
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Total senior long-term debt 7,356 9,279
Less current maturities 195 1,779
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Long-term debt, less current $7,161 $7,500
maturities
======= =======
Subordinated debt $5,621 $5,621
======= =======
The average interest rate was computed by dividing the sum of daily
interest costs by the sum of the daily borrowings for the respective
periods.
Senior Lender:
On February 1, 2002, the Company renewed its revolving credit agreement
through May 2003. The credit agreement was reduced to $15.0 million from
$18.0 million with substantially the same terms and conditions. Also on
this date, the balance of the senior secured term loan, $1.6 million, was
repaid in full.
On March 12, 2002, the Company entered into a new credit facility with
another bank, replacing the credit facility renewed on February 1, 2002,
and refinancing the mortgage loan of $6.2 million used to finance the 1998
purchase of the Company's headquarters building in St. Louis, Missouri.
The following is a summary of the new credit facility:
A revolving credit facility up to $15.0 million, secured by substantially
all the assets of the Company other than real estate, based on a borrowing
base formula equal to the sum of 80% of eligible receivables, and 40% of
eligible inventories, less outstanding letters of credit. As of March 31,
2002, the maximum allowable was $12.1 million. The revolver borrowing at
quarter end was $1.3 million, and letters of credit outstanding totaled
$2.9 million. Unused revolving credit available at March 31, 2002 was $10.8
million. This credit facility matures on September 30, 2004.
A $6.4 million term loan secured by the Company's headquarters building in
St. Louis, Missouri. The loan payment schedule is based on a 25-year
amortization and begins in December 2002 with a balloon final payment due
in October 2009.
Interest on the loans is at prime or a stated rate over LIBOR based on
certain ratios. For the period, the average rate was approximately 4.07%.
Covenants and performance criteria consist of Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") in relation to debt, EBITDA
in relation to interest, minimum levels of EBITDA and tangible net worth.
The Company is in compliance with its borrowing agreement covenants for the
quarter ended March 31, 2002.
Other long-term debt:
Industrial Revenue Bonds:
In July 1998, the Company acquired tax-exempt Industrial Revenue Bond
financing in the amount of $1.3 million. The debt is payable over 10 years
with an interest rate of 5.28%. This funding was used to expand the
Berryville, Arkansas, facility. The outstanding balance at March 31, 2002
was $956,000.
Subordinated Convertible Notes:
In March 1999, the Company, through its subsidiary LaBarge-OCS, Inc.,
issued its Subordinated Convertible Notes ("Notes") due June 2003 in the
aggregate principal amount of $5.6 million for the acquisition of OCS. The
Notes bear interest at 7.5% per annum payable quarterly, and noteholders
are entitled to participation payments if LaBarge-OCS, Inc., operating as
The Network Technologies Group, achieves certain levels of net earnings.
The Notes are convertible by the holders into LaBarge, Inc. Common Stock at
$8.00 per share at any time up to their maturity date.
Other Long-Term Liabilities:
Other long-term liabilities include deferred revenues associated with the
proprietary ScadaNET Network(TM) (representing prepaid communication
services) in the amount of $1.4 million and customer advances in the amount
of $1.1 million.
To mitigate the exposure to changes in interest rates, the Company entered
into an interest rate swap agreement. This agreement, designated as a cash
flow hedge, swaps a portion of the Company's exposure to three-month LIBOR
rates with a fixed rate of 5.95%. The notional amount of the agreement is
$3.5 million and it expires in June 2003. In accordance with SFAS 133, as
amended by SFAS 138, the change in fair value of the swap during the third
quarter of fiscal 2002, amounting to approximately $44,000, was recorded to
other comprehensive loss.
The aggregate maturities of long-term obligations are as follows:
(dollars in thousands)
Fiscal Year
2003 $6,245
2004 682
2005 803
2006 366
2007 344
8. CASH FLOWS
Total cash payments for interest for the three and nine months ended March
31, 2002 were $407,000 and $976,000, respectively, compared with $475,000
and $488,000, respectively, for the three and nine months ended April 1,
2001. Cash payments for federal and state income taxes were $139,000 and
$1.4 million, respectively, for the three and nine months ended March 31,
2002, compared with $231,000 and $1.9 million, respectively, for the three
and nine months ended April 1, 2001.
9. EARNINGS PER COMMON SHARE
Basic and diluted earnings per share are computed as follows and include
adjustments to prior periods required by the adoption of FAS 142:
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ----- ----
Numerator:
Reported net earnings $1,245 $1,215 $3,480 $2,576
Add back: Goodwill - 226 - 678
amortization expense
------ ------ ------ -----
Adjusted net earnings $1,245 $1,441 $3,480 $3,254
====== ====== ====== ======
Denominator:
Denominator for basic net 14,964 14,928 14,969 14,899
earnings per share
------ ------ ------ ------
Potential common shares:
Denominator for diluted net
earnings per share-adjusted
weighted-average shares and 15,499 14,928 15,344 14,899
assumed conversions
------ ------ ------ ------
Basic net earnings per share:
Reported net earnings $.08 $.08 $.23 $.17
Goodwill amortization expense - .02 - .05
------ ------ ------ ------
Adjusted net earnings per $.08 $.10 $.23 $.22
share
====== ====== ====== ======
Diluted net earnings per share
Reported net earnings $.08 $.08 $.23 $.17
Goodwill amortization expense - .02 - .05
------ ------ ------ ------
Adjusted net earnings per $.08 $.10 $.23 $.22
share
====== ====== ====== ======
The effect of conversion of the Subordinated Convertible Notes into common
stock is not considered in the calculations of diluted net earnings per
common share because it would have an anti-dilutive effect on earnings per
share.
10. BUSINESS SEGMENT INFORMATION
Business segments:
(dollars in thousands)
Net Sales to Customers:
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Manufacturing $29,552 $31,530 $91,235 $82,091
Services Group
Network 607 898 2,526 1,545
Technologies Group
----- ------ ----- -----
$30,159 $32,428 $93,761 $83,636
===== ===== ===== =====
Pretax earnings:
Manufacturing Services $2,326 $2,790 $6,671 $7,447
Group
Network Technologies
Group (385) (365) (673) (1,522)
Corporate and other 303 61 501 14
items
Interest expense (269) (433) (920) (1,528)
Net earnings before $1,975 $2,053 $5,579 $4,411
income taxes
Income tax expense 730 838 2,099 1,835
------ ------ ------ ------
Net earnings 1,245 $1,215 $3,480 $2,576
====== ====== ====== ======
Depreciation & Amortization
Expense:
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Manufacturing
Services $386 $345 $1,211 $1,128
Group
Network Technologies
Group 29 226 73 689
Corporate and other
items 124 66 362 343
------ ------ ------ ------
$539 $637 $1,646 $2,160
====== ====== ====== ======
Investments in Other Assets & Capital Expenditures:
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Manufacturing
Services $774 $(9) $1,982 $1,015
Group
Network Technologies
Group 56 (163) 216 85
Corporate and other
items (288) 20 (21) 63
------ ------ ------ ------
$542 $(152) $2,177 $1,163
====== ====== ====== ======
Total Assets:
March 31, July 1,
2002 2001
------ ------
Manufacturing Services Group $43,927 $46,150
Network Technologies Group 5,323 5,459
Corporate and other items 14,711 15,929
$63,961 $67,538
======== ========
Geographic Information:
The Company has no sales offices or facilities outside of the United States.
Sales for export did not exceed 10% of total sales for the three months and
nine months ended March 31, 2002.
LaBARGE, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Statements contained in this Report which are not historical facts are
forward-looking statements within the meaning of the federal securities
laws. Forward-looking statements involve risks and uncertainties. Future
events and the Company's actual results could differ materially from those
contemplated by those forward-looking statements. Important factors which
could cause the Company's actual results to differ materially from those
projected in, or inferred by, forward-looking statements are (but are not
necessarily limited to) the following: the impact of increasing competition
or deterioration of economic conditions in the Company's markets; cutbacks
in defense spending by the U.S. Government; unexpected increases in the cost
of raw materials, labor and other resources necessary to operate the
Company's business; the availability, amount, type and cost of financing for
the Company and any changes to that financing.
LaBarge, Inc. ("LaBarge" or the "Company") is a Delaware Corporation. The
Company is engaged in the following primary business activities:
*The Manufacturing Services Group is the Company's core electronics
manufacturing services business, which has been its principal business
since 1985. This group designs, engineers and produces sophisticated
electronic systems and devices and complex interconnect systems on a
contract basis for its customers. In the fiscal 2002 third quarter, the
Company derived approximately 98% of its total revenues from this group.
The group markets its services to companies in technology-driven
industries desiring an engineering and manufacturing partner capable of
developing and providing high-reliability electronic equipment, including
products capable of performing in harsh environmental conditions, such as
high and low temperature, severe shock and vibration. The group serves
customers in a variety of markets with significant revenues from customers
in the government systems, defense, aerospace, oil and gas, and other
commercial markets. The group's engineering and manufacturing facilities
are located in Arkansas, Missouri, Oklahoma and Texas.
The backlog of unshipped orders in the Manufacturing Services Group
increased to $99.5 million at
March 31, 2002, compared with $93.2 million at April 1, 2001. The growth
in backlog is the result of an improved and reorganized sales and
marketing effort that concentrates on the Company's core competencies and
the application of those competencies to targeted large customers in a
variety of industries.
* The Network Technologies Group was started in fiscal 1999 through the
acquisition of privately held Open Cellular Systems, Inc. ("OCS"). The
group designs and markets proprietary cellular and network communication
system products and Internet services that provide monitoring and control
of remote industrial equipment. Results of the group are included in the
consolidated results of the Company since the date of the OCS acquisition,
March 2, 1999. This group is initially focusing its marketing efforts on
the railroad industry to monitor railroad crossing equipment, and on the
oil and gas pipeline industry to monitor cathodic protection devices. The
Company derived 2% and 3%, respectively, of its total revenues from this
group for the three months and nine months ended March 31, 2002.
The backlog of unshipped orders in the Network Technologies Group is
$220,000 at March 31, 2002, compared with $1.4 million at April 1, 2001.
Subsequent to quarter end, this group added $1.3 million to backlog with
the finalization of an agreement with Union Pacific Railroad.
SIGNIFICANT EVENTS
Recent significant events include:
* In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement
142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of."
The Company has adopted the provisions of Statement 142 with the first
fiscal quarter ended September 30, 2001.
Goodwill amortization expense was $0 for the three and nine months ended
March 31, 2002 and $226,000 and $678,000, respectively, for the three and
nine months ended April 1, 2001.
RESULTS OF OPERATIONS - Three And Nine Months Ended March 31, 2002
Net Sales
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Net Sales $30,159 $32,428 $93,761 $83,636
====== ====== ====== ======
For the fiscal 2002 third quarter ended March 31, 2002, net sales were $30.2
million compared with $32.4 million for the same period of fiscal 2001.
Sales to top 10 customers represented 77% of total revenue in the third
quarter of fiscal 2002 versus 81% for the same period of fiscal 2001. The
Company's top three customers and the portion of total third-quarter sales
they represented were as follows: Schlumberger, 18%; Lockheed Martin, 15%;
and Northrop Grumman, 14%.
The Manufacturing Services Group. Sales in the manufacturing services
segment of the business were
$29.6 million, accounting for 98% of total sales for the quarter ended March
31, 2002, down 6% or $2.0 million over the same period of fiscal 2001.
Sales of electro-mechanical assemblies for mail sorting equipment used by
the U.S. Postal Service declined 50% in the quarter ended March 31, 2002,
compared with the previous year, as the Company delivered its final units
under the $39.0 million contract with Northrop Grumman. Offsetting this,
the Manufacturing Services Group experienced significant sales growth from
the defense market, growing 52%, primarily consisting of land-based and ship
borne radar systems. Additionally, sales of electronic assemblies for
airport inspections systems contributed to revenues in the March 2002
quarter.
Network Technologies Group. Sales of the Network Technologies Group were 2%
of total sales for the quarter ended March 31, 2002.
The Group generated third-quarter sales of $607,000 million versus $898,000
for the third quarter of fiscal 2001. Sales were primarily to the railroad
industry where the Company's ScadaNET Network(TM) product is used primarily
to monitor railroad crossing equipment. The decline in third-quarter sales
is attributable to delays by the State of Illinois in funding the next phase
of a major crossing retofit program. It is expected that the Illinois
retofit program will fully resume beginning in the fourth fiscal quarter.
The Company also began shipping small numbers of units to targeted customers
in the pipeline market where the ScadaNET Network(TM) is used to monitor the
performance of cathodic protection devices on petroleum and natural gas
pipelines.
Gross Profit
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Gross profit $ 6,123 $ 7,275 $19,012 $18,363
Gross margin
20.3% 22.4% 20.3% 22.0%
====== ====== ====== ======
A breakdown of margins by group shows the following:
Manufacturing Services Group. This group's gross profit margin was 19.8%
for the quarter ended March 31, 2002, compared with 21.5% for the quarter
ended April 1, 2001, as a result of costs incurred on start-up programs and
higher medical insurance expenses.
Network Technologies Group. This group's gross profit margin was 46.2% for
the quarter ended March 31, 2002, compared with 54.4% for the quarter ended
April 1, 2001. Evaluation units sold into the oil and gas pipeline market
are at a lower gross profit, currently impacting margins. It is the
Company's expectation that production run quantities sold into this market
will have similar gross profit margins as other markets currently served.
Selling and Administrative Expenses
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Selling and $ 4,118 $ 5,010 $ 12,949 $13,250
administrative
expenses 13.7% 15.5% 13.8% 15.8%
Percent of sales
====== ====== ====== ======
Selling and administrative expenses decreased in both actual dollars spent
and percent of sales for the three and nine months ended March 31, 2002,
compared with the prior year's periods.
Manufacturing Services Group. Selling and administrative expenses for this
group were $3.5 million (11.9% of sales) for the quarter ended March 31,
2002 and $4.1 million (13.0% of sales) for the same period of fiscal 2001.
This group initiated cost containment initiatives targeted at reducing
selling and administrative expenses in the third quarter.
Network Technologies Group. Selling and administrative expenses for the
quarter ended March 31, 2002 for this group were $665,000 and included no
goodwill amortization. For the same period of fiscal 2001, these expenses
totaled $854,000, including $215,000 in amortization of goodwill. Selling
and administrative expenses increased in the fiscal 2002 period due to
additional selling and development activity.
Interest Expense
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Interest expense $ 269 $ 433 $920 $1,52
8
====== ====== ====== ======
Interest expense decreased for the quarter ended March 31, 2002, primarily
due to lower debt levels and lower interest rates on short-term borrowings.
Average short-term borrowings for the three- and nine-month period ended
March 31, 2002 were $5.6 million lower than the same periods of fiscal 2001.
Average interest rates declined 390 basis points for the nine months ended
March 31, 2002.
Pretax Earnings
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Pretax earnings $1,975 $2,053 $5,579 $4,41
1
====== ====== ====== ======
The decrease in pretax earnings for the quarter ended March 31, 2002,
compared with the same period of fiscal 2001, is primarily attributable to
lower gross profit ($1.1 million) on a sales decrease of ($2.3 million),
offset by a reduction in goodwill amortization expense of $226,000 and a
$164,000 reduction in interest expense.
Tax Expense
(dollars in thousands)
Three Months Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2002 2001 2002 2001
------ ------ ------ ------
Tax Expense $ 730 $ 838 $2,099 $1,83
5
====== ====== ====== ======
The tax rate for the quarter ended March 31, 2002, of 37% was lower than the
prior year's fiscal third quarter rate
of 41%, due to the elimination of the non-deductible goodwill amortization
expense of $226,000.
FINANCIAL CONDITION AND LIQUIDITY
The following table shows LaBarge's equity and total debt positions:
Stockholders' Equity and Debt
(dollars in thousands)
March 31, July 1,
2002 2001
------ ------
Stockholders' $33,151 $29,716
equity
Debt $14,302 $17,400
====== ======
The Company's operations provided $363,000 and $5.5 million, respectively,
of net cash for the three and nine months ended March 31, 2002.
Currently, total debt-to-equity ratio for the Company is .43 to 1 versus .59
to 1 at the end of fiscal 2001.
RISK FACTORS
The Company operates in a competitive marketplace and is exposed to risks
associated with economic conditions.
The Network Technologies Group, as a relatively new operation, has used cash
during its first three years of operation. It is too early to predict the
timing and the extent of the potential widespread acceptance of this
segment's products and its contribution to future earnings and cash flow.
Overall, management believes our availability of funds going forward from
cash generated from operations and available bank credit should be
sufficient to support the planned operations and capital expenditures of the
Company's business for the next two years.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements. In
preparing these financial statements, management has made their best
estimates and judgment of certain amounts included in the financial
statements. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described
below. However, application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and,
as a result, actual results could differ from these estimates. The
Company's senior management discusses the accounting policies described
below with the audit committee of the Company board of director on an annual
basis.
The following discussion of critical accounting policies is intended to
bring to the attention of readers those accounting policies that we believe
are critical to our consolidated financial statements and other financial
disclosure. It is not intended to be a comprehensive list of all of our
significant accounting policies that are more fully described in Note 1 of
the Notes to the Consolidated Financial Statements included in our 2001
Annual Report on Form 10-K.
Revenue Recognition and Cost of Sales
Revenue on production contracts is recorded when specific contract terms are
fulfilled, usually by delivery or acceptance (the units of production or
delivery methods). Revenues under long-term contracts for which units of
production or delivery are inappropriate measures of performance is
recognized on the percentage-of-completion method based upon incurred costs
compared to total estimated costs under the contract. The percentage-of-
completion method gives effect to the most recent contract value and
estimates of cost at completion. When appropriate, contract prices are
adjusted for increased scope and other changes ordered or caused by the
customer.
Since some contracts extend over a long period of time, revisions in cost
and contract price during the progress of work have the effect of adjusting
current period earnings applicable to performance in prior periods. When
the current contract cost estimate indicates a loss, provision is made for
the total anticipated loss.
The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition"
provides guidance on the application of generally accepted accounting
principles to selected revenue recognition issues. The Company's revenue
recognition policy is in accordance with generally accepted accounting
principles and SAB No. 101.
Accounts Receivable
Accounts receivables have been reduced by an allowance for amounts that may
become uncollectable in the future. This estimated allowance is based
primarily on management's evaluation of the financial condition of the
customer.
Inventory
Inventories are valued at the lower of cost or market and have been reduced
by an allowance for excess and obsolete inventories. The Company adjusts
the value of its allowance based upon assumptions for future usage and
market conditions. If actual demand or market conditions are less favorable
than those projected by management, additional inventory write-down may be
required.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. The Company has considered future taxable income analyses and
feasible tax planning strategies in assessing the need for the valuation
allowance. Should the Company determine that it would not be able to
recognize all or part of its net deferred tax assets in the future, and
adjustment to the carrying value of the deferred tax assets would be charged
to income in the period which such determination was made.
Goodwill and Other Long-Lived Assets
The Company has adopted the provisions of SFAS No. 142 and has reassessed
the useful lives and residual values of all recorded intangible assets.
Goodwill and other long-lived assets with indefinite useful lives are
reviewed by management for impairment annually or whenever events or changes
in circumstance indicate the carrying amount may not be recoverable. If
indicators of impairment are present, the determination of the amount of
impairment is based on the Company's judgment as to the future operating
cash flows to be generated from these assets throughout their estimated
useful lives
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill
and Other Intangible Assets." Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated or
completed after June 30, 2001. Statement 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. Statement 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
The Company has adopted the provisions of Statement 142 with the first
fiscal quarter ended September 30, 2001; and has reassessed the useful lives
and residual values of all recorded intangible assets. No change in
amortization periods was made. The Company has received third party expert
advice as to the evaluation of goodwill and intangible assets value. No
impairment was required to be recorded.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This standard applies to
legal obligations associated with the retirement of tangible long-lived
assets. Management does not believe adoption of these standards will have a
material adverse effect on the Company's financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," whish
addresses the impairment or disposal of long-lived assets and the reporting
of discontinued operations. Management does not believe adoption of this
standard will have a material adverse effect on the Company's financial
statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to the Company's operations result primarily
from changes in interest rates. The Company has interest rate
exposure relating to floating rate debt and, accordingly, to
mitigate the exposure to changes in interest rates, the Company
entered into an interest rate swap agreement. This agreement,
designated as a cash flow hedge, swaps a portion of the Company's
exposure to three-month LIBOR rates with a fixed rate of 5.95%.
The notional amount of the agreement is $3.5 million and it
expires in June 2003. In accordance with SFAS 133, as amended by
SFAS 138, the change in fair value of the swap during the third
quarter of fiscal 2002, amounting to approximately $44,000, was
recorded to other comprehensive loss. At current debt levels, a
one-percent increase in short-term interest rates would result in
a $45,000 charge to pretax earnings.
PART II
ITEM 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibit 10.18: Amended and Restated Loan Agreement by among LaBarge,
Inc. and Bank of America, N.A.;
EXHIBIT 10.19: LOAN AGREEMENT BY AND AMONG U.S. BANK, N.A., LABARGE, INC
AND LABARGE PROPERTIES, INC.
(b) Reports on Form 8-K: Current reports on From 8-K were filed on
January 4, 2002 and February 4, 2002, in accordance with Regulation FD
to report certain information the Registrant intended to present to
certain institutional investors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LaBARGE, INC.
Date: May 10, 2002
s/Donald H. Nonnenkamp
Donald H. Nonnenkamp
Vice President
and Chief Financial Officer