Item 1. Business - -----------------
General
Ladish Co., Inc. ("Ladish" or the "Company") engineers, produces and markets high-strength, high-technology forged and cast metal components for a wide variety of load-bearing and fatigue-resisting applications in the jet engine, aerospace and industrial markets. Approximately 94% of the Company's 2002 billings were derived from the sale of jet engine parts, missile components, landing gear, helicopter rotors and other aerospace products. Approximately 19% of the Company's 2002 billings were derived from sales, directly or through prime contractors, under United States government contracts, primarily covering defense equipment. Although no comprehensive trade statistics are available, based on its experience and knowledge of the industry, management believes that the Company is the second largest supplier of forged and cast metal components to the domestic aerospace industry, with an estimated 20% market share in the jet engine component field.
Products and Markets
The Company markets its products primarily to manufacturers of jet engines, commercial business and defense aircraft, helicopters, satellites, heavy-duty off-road vehicles and industrial and marine turbines. The principal markets served by the Company are jet engine, commercial aerospace (defined by Ladish as satellite, rocket and aircraft components other than jet engines) and general industrial products. The amount of revenue and the revenue as a percentage of total revenue by market were as follows for the periods indicated:
Manufacturing
Ladish offers one of the most complete ranges of forging and investment casting services in the world. The Company employs all major forging processes, including open and closed-die hammer and press forgings, as well as ring-rolling, and also produces near-net shape aerospace components through isothermal forging and hot-die forging techniques. Closed-die forging involves hammering or pressing heated metal into the required shape and size by utilizing machined impressions in specially prepared dies which exert three-dimensional control on the heated metal. Open-die forging involves the hammering or pressing of metal into the required shape without such three-dimensional control, and ring-rolling involves rotating heated metal rings through presses to produce the desired shape. Investment casting involves the creation of precise wax molds which are dipped, autoclaved and cast to create near-net components for the aerospace industry.
Much of the Company's business is capital intensive, requiring large and sophisticated forging, casting and heating equipment and extensive facilities for inspection and testing of components after formation.
Ladish believes that it has the largest forging hammer and largest ring-roll in the world at its plant in Cudahy, Wisconsin. Its largest counterblow forging hammer has a capacity of 125,000 mkg (meter-kilograms), and its ring-rolling equipment can produce single-piece seamless products that weigh up to 350,000 pounds with outside diameters as large as 28 feet and face heights up to 10 feet. Ladish's 4,500-ton and 10,000-ton isothermal presses can produce forgings, in superalloys as well as titanium, that weigh up to 2,000 pounds. Much of the equipment has been designed and built by Ladish. The Company also maintains such auxiliary facilities as die-sinking, heat-treating and machining equipment and produces most of the precision dies necessary for its forging operations. The Company considers such equipment to be in good operating condition and adequate for the purposes for which it is being used.
Marketing and Sales
The product sales force, consisting primarily of sales engineers, is supported by the Company's metallurgical staff of approximately 100 engineers and technicians. These technically trained sales engineers, organized along product line and customer groupings, work with customers on an ongoing basis to monitor competitive trends and technological innovations. Additionally, sales engineers consult with customers regarding potential projects and product development opportunities. During the past few years, the Company has refocused its marketing efforts on the jet engine components market and the commercial aerospace industry.
The Company is actively involved with key customers in joint cooperative research and development, engineering, quality control, just-in-time inventory control and computerized process modeling programs. The Company has entered into strategic life-of-the-program contracts for a number of sole-sourced products with each of Rolls-Royce, Sikorsky and Snecma for major programs. The Company believes that these contracts are a reflection of the aerospace and industrial markets' recognition of the Company's manufacturing and technical expertise.
The research and development of jet engine components is actively supported by the Company's Advanced Materials and Process Technology Group. The Company's long-standing commitment to research and development is evidenced by its industry-recognized materials and process advancements such as processing aluminum-lithium, Udimet 720 and titanium aluminides. The experienced staff and fully equipped research facilities support Ladish sales through customer-funded projects. Management believes that these research efforts position the Company to participate in future growth in demand for critical advanced jet engine components.
Customers
The Company's top three customers, Rolls-Royce, United Technologies and General Electric, accounted for approximately 53%, 52% and 55% of the Company's revenues in 2000, 2001 and 2002, respectively. Net sales to Rolls-Royce were 28%, 28% and 28%, United Technologies 16%, 15% and 16% and General Electric 9%, 9% and 11% of total Company net sales for the respective years. No other customer accounted for ten percent or more of the Company's sales.
Caterpillar, Volvo, Techspace Aero and Snecma are also important customers of the Company. Because of the relatively small number of customers for some of the Company's principal products, the Company's largest customers exercise significant influence over the Company's prices and other terms of trade.
Exports accounted for approximately 50%, 49% and 50% of total Company net sales in 2000, 2001 and 2002, respectively. Exports to England constituted approximately 22%, 21% and 26%, respectively in the above years, of total Company net sales.
A substantial portion of the Company's revenues is derived from long-term, fixed price contracts with major engine and aircraft manufacturers. These contracts are typically "requirements" contracts under which the purchaser commits to purchase a given portion of its requirements of a particular component from the Company. Actual purchase quantities are typically not determined until shortly before the year in which products are to be delivered. The Company attempts to minimize its risk by entering into fixed-price contracts with its raw material suppliers. Additionally, a portion of the Company's revenue is directly or indirectly related to government spending, particularly military and space program spending.
Research and Development
The Company maintains a research and development department which is engaged in applied research and development work primarily relating to the Company's forging operations. The Company works closely with customers, universities and government technical agencies in developing advanced forgings, materials and processes. The Company spent approximately $2.9 million, $3.7 million and $3.5 million on applied research and development work during 2000, 2001 and 2002, respectively.
Patents and Trademarks
Although the Company owns patents covering certain of its processes, the Company does not consider these patents to be of material importance to the Company's business as a whole. The Company considers certain other information that it owns to be trade secrets and the Company takes measures to protect the confidentiality and control the disclosure and use of such information. The Company believes that these safeguards adequately protect its proprietary rights and the Company vigorously defends these rights.
The Company owns or has obtained licenses for various trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, copyright registrations, patent applications, inventions, know-how, trade secrets, confidential information and any other intellectual property that is necessary for the conduct of its business (collectively, "Intellectual Property"). The Company is not aware of any existing or threatened patent infringement claim (or of any facts that would reasonably be expected to result in any such claim) or any other existing or threatened challenge by any third party that would significantly limit the rights of the Company with respect to any such Intellectual Property or to the validity or scope of any such Intellectual Property. The Company has no pending claim against a third party with respect to the infringement by such third party or any such Intellectual Property that, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the Company's financial condition or results of operations. While the Company considers all of its proprietary rights as a whole to be important, the Company does not consider any single right to be essential to its operations as a whole.
Raw Materials
Raw materials used by the Company in its metal components include alloys of titanium, nickel, steel, aluminum, tungsten and other high temperature alloys. The major portion of metal requirements for forged products are purchased from major metal suppliers producing forging quality material as needed
to fill customer orders. The Company has two or more sources of supply for all significant raw materials.
The titanium and nickel-based superalloys used by the Company have a relatively high dollar value. Accordingly, the Company recovers and recycles scrap materials such as machine turnings, forging flash, solids and test pieces.
The Company's most significant raw materials consist of nickel and titanium alloys. Its principal suppliers of nickel alloys include Special Metals Corporation and Allegheny Technologies. Its principal suppliers of titanium alloys are Titanium Metals Corporation of America, Allegheny Technologies and RTI International. The Company typically has fixed-price contracts with its suppliers.
In addition, the Company, its customers and suppliers have undertaken active programs for supply chain management which are reducing overall lead times and the total cost of raw materials.
Energy
The Company uses a considerable amount of energy in the processing of its forged and cast metal components. The rapidly fluctuating prices for energy, both natural gas and electricity, had a significant impact on the Company's 2002 results and are likely to have a similar effect in 2003. Although the Company attempts to ameliorate the impact of these price swings by purchasing directly from producers and pre-ordering supplies for the future, the level of price fluctuation and lack of availability are not within the control of the Company.
Backlog
The average amount of time necessary to manufacture the Company's products is five to six weeks from the receipt of raw material. The timing of the placement and filling of specific orders may significantly affect the Company's backlog figures, which are subject to cancellation for a variety of reasons. In addition, the Company typically only includes those contracts which will result in shipments within the next 12 to 18 months when compiling backlog and does not include the out years of long-term agreements. As a result, the Company's backlog may not be indicative of actual results or provide meaningful data for period-to-period comparisons. The Company's backlog was approximately $271 million, $242 million and $195 million as of December 31, 2000, 2001 and 2002, respectively. The Company's backlog declined by approximately 20% following the terrorist attacks on September 11, 2001. Following these terrorist attacks, the commercial aerospace market experienced a significant downturn worldwide which reduced the backlog at December 31, 2001. The global commercial aerospace market continued to soften in 2002 and the Company's backlog experienced a further decline.
Competition
The sale of metal components is highly competitive. Certain of the Company's competitors are larger than the Company and have substantially greater capital resources. Although the Company is the sole supplier on several sophisticated components required by prime contractors under a number of governmental programs, many of the Company's products could be replaced with other similar products of its competitors. However, the significant investment in tooling, the time required and the cost of obtaining the status of a "certified supplier" are barriers to entry. Competition is based on quality (including advanced engineering and manufacturing capability), price and the ability to meet delivery requirements.
Environmental, Health and Safety Matters
The Company's operations are subject to many federal, state and local regulations relating to the protection of the environment and to workplace health and safety. In particular, the Company's operations are subject to extensive federal, state and local laws and regulations governing waste disposal, air and water emissions, the handling of hazardous substances, environmental protection, remediation, workplace exposure and other matters. Management believes that the Company is presently in substantial compliance with all such laws and does not currently anticipate that the Company will be required to expend any substantial amounts in the foreseeable future in order to meet current environmental, workplace health or safety requirements. However, additional costs and liabilities may be incurred to comply with current and future requirements which could have a material adverse effect on the Company's results of operations or financial condition.
There are no known pending remedial actions or claims relating to environmental matters that are expected to have a material effect on the Company's financial position or results of operations. All of the properties owned by the Company, however, are located in industrial areas and have a history of heavy industrial use. These properties may potentially incur environmental liabilities in the future that could have a material adverse effect on the Company's financial condition or results of operations. The Company was previously named a potentially responsible party at three "Superfund" sites. The Company's liability with respect to these sites has been resolved. Although the Company does not believe that the amount for which it may be held liable for any further administrative or wrap-up expense will exceed the amount it has reserved of approximately $0.24 million for such loss, no assurance can be given that the amount for which the Company will be held responsible will not be significantly greater than expected.
With respect to any past or future claim for any environmental, health or safety matter, the Company evaluates every such claim from both a technical and legal perspective, using outside consultants where necessary. The Company establishes a good faith estimate of its prospective risk associated with said claim and, where material, establishes a financial reserve for the estimated value of such claim.
Forward Looking Statements
Any statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995, and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performance, estimates, projections, goals and forecasts. Potential factors which could cause the Company's actual results of operations to differ materially from those in the forward-looking statements include:
Any forward-looking statement speaks only as of the date on which such statement is made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Employees
As of December 31, 2002, the Company had approximately 1,074 employees, of whom 790 were engaged in manufacturing functions, 75 in executive and administrative functions, 165 in technical functions, and 44 in sales and sales support. At such date, approximately 603 employees, principally those engaged in manufacturing, were represented by labor organizations under collective bargaining agreements.
The above facilities are owned by the Company.
The Company believes that its facilities are well maintained, are suitable to support the Company's business and are adequate for the Company's present and anticipated needs. While the rate of utilization of the Company's manufacturing equipment is not uniform, the Company estimates that its facilities overall are currently operating at approximately 60% of capacity.
The principal executive offices of the Company are located at 5481 South Packard Avenue, Cudahy, Wisconsin 53110. Its telephone number at such address is (414) 747-2611.
Item 3.
Item 3. Legal Proceedings - --------------------------
From time to time the Company is involved in legal proceedings relating to claims arising out of its operations in the normal course of business. Although the Company believes that there are no material legal proceedings pending or threatened against the Company or any of its properties, the Company has been named as a defendant in forty-one (41) asbestos cases in Mississippi and two (2) asbestos cases in Illinois. As of the date of this filing, the Company has been dismissed from three (3) of the cases in Mississippi and one (1) case in Illinois. The Company never manufactured or processed asbestos. The Company's only exposure to asbestos involves products the Company purchased from third parties. The Company has notified its insurance carriers of these claims and is vigorously defending these actions.
A purported stockholder of the Company filed a putative class action, Dean v. Ladish Co., Inc., et. al., Case No. 03-C-0165, in the United States District Court for the Eastern District of Wisconsin, on February 28, 2003, against the Company and two Company officers. The complaint includes claims under the federal securities laws and state common law, and seeks damages for stockholders who purchased the common stock of the Company between March 10, 1998 and September 27, 2002. The complaint's allegations, which the Company intends to dispute, are based primarily on accounting issues relating to the Company's restatement in 2002. The Company has notified its insurance carrier of the claim, retained legal counsel and is vigorously defending the claim. The Company has not made any provision for potential costs or losses, if any, which may arise from this claim.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth quarter of 2002.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters - -------
The common stock of the Company, par value $0.01 per share, trades on the Nasdaq National Market under the symbol "LDSH".
The following table sets forth, for the fiscal periods indicated, the high and low sales prices for each quarter of the years 2000, 2001 and 2002. At December 31, 2002 there were an estimated 1,200 beneficial holders of the Company's common stock.
The Company has not paid cash dividends and currently intends to retain all its earnings to finance its operations, its stock repurchase program and future growth. The Company does not expect to pay dividends for the foreseeable future.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The selected financial data of the Company for each of the last five fiscal years are set forth below.
The data below should be read in conjunction with the Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this filing.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - -------------
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
For the year ended December 31, 2002, the Company had net sales of $188.5 million which reflects a 25% decrease from the $252.4 million of sales in 2001. This downturn in sales resulted from the continued weakness in the global aerospace market. The downturn in the Company's principal markets began with the terrorist attacks on September 11, 2001, expanded during 2002 and continues to negatively impact sales in 2003. Gross profit in 2002 of $12.4 million, or 6.6% of sales, is a significant reduction from the $33.8 million of gross profit in 2001. The decline in gross profitability was largely due to the underabsorption of the Company's fixed costs as sales decreased. In addition, many of the Company's customers utilized the decline in demand as an opportunity to demand price concessions which further eroded the Company's profit margins.
Selling, general and administrative expenses in fiscal 2002 were $9.1 million in contrast to $11.1 million in 2001. The overall decrease in SG&A expenses in 2002 reflects in part the Company's cost reduction efforts in response to declining sales.
Interest expense in 2002 was relatively flat when compared to 2001, $1.9 million versus $2.0 million, respectively. The interest expense in both years is related to the Company's $30 million of long-term notes which bear interest at a fixed rate of 7.19% per annum. The Company did not have any indebtedness outstanding at the end of either year under the senior credit facility.
Pretax income for 2002 was $1.68 million, or approximately 1% of sales, in comparison to $20.52 million, 8% of sales, in 2001. The decline in pretax profitability on an overall basis and as a percentage of sales is due to the combination of reduced sales to the commercial aerospace industry, the resultant underabsorption of fixed costs and the pricing pressures exerted by the Company's customers. The Company was also negatively impacted in 2002 by an inventory charge at Stowe of approximately $0.9 million and approximately $0.3 million of accounting and legal fees associated with the restatement of the Company's financial statements for 1999, 2000 and 2001. Pretax income in 2002 did benefit from a $6.0 million pension credit compared to the $7.9 million pension credit in 2001, and from a $0.78 million refund of import duty on raw material.
The 2002 income tax provision of $0.049 million reflects an effective rate of 2.9% vs. the statutory rate of 35% due primarily to the benefit of the extra-territorial income exclusion. See note 7 to the financial statements.
The Company's contract backlog at December 31, 2002 was $195 million in contrast to backlog of $242 million at the end of 2001. The decline in backlog is a reflection of the overall state of the commercial aerospace industry and a focus within the supply chain to reduce inventory and working capital through shortened leadtimes for orders.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net sales for the year ended December 31, 2001 were $252.4 million, a 10% increase over fiscal 2000. The growth in sales is attributable to a strong global aerospace market along with capacity and capability expansion at both PCT and Stowe. Sales growth for the year was negatively impacted in the fourth quarter of 2001 due to the September 11, 2001 terrorist attack and the resulting downturn in the commercial aerospace market. Gross profit in 2001 of $33.8 million, or 13.4% of sales, reflected a decline from the 2000 levels of $34.5 million, or 14% of sales. This decrease in profitability in 2001 is a result of increased energy costs in the first half of the year, lower employment costs in 2000 due to a seven-week work stoppage and margin pressures from the Company's main customers.
In fiscal 2001, selling, general and administrative expenses of $11.1 million represented 4.4% of sales. This was in contrast with the $11.7 million, or 5.1% of sales, of selling, general and administrative expenses incurred in 2000. The decrease in SG&A expenses in 2001 is largely attributable to the stability of the Company's common stock price and the avoidance of imputed compensation expense associated with repriced stock options and FASB Interpretation No. 44.
The slight increase in interest expense in 2001 is due to the higher debt level associated with the $30 million private placement of notes in July 2001. The notes bear interest at a fixed rate of 7.19% per annum. The Company did not have any indebtedness outstanding at year end 2001 under the senior credit facility.
The Company's pretax income for the twelve months ending December 31, 2001 of $20.5 million, or 8.1% of sales, is a reduction from the $20.9 million, or 9.1% of sales, of pretax income in fiscal 2000. As discussed above with respect to gross income, 2001 earnings were down from 2000 due to energy costs, the 2000 strike and margin pressure from customers. Pretax income in 2001 did benefit from an addition of $7.9 million in pension credit in comparison to $7.0 million of like benefit in 2000.
The 2001 tax provision of $7.4 million, an effective rate of 36%, primarily reflects a non-cash accounting charge as substantially all of the reported tax provision is offset by the utilization of net operating loss carryforwards. The rate of 36% reflects a benefit of 4% due primarily to the extra-territorial income exclusion. See note 7 to the financial statements.
At December 31, 2001 contract backlog at the Company was $242 million. This represents an 11% decrease from the $271 million of contract backlog at the end of 2000. The decline in backlog is attributable to a downturn in the global aerospace market following the September 11, 2001 terrorist attack.
Liquidity and Capital Resources
On April 13, 2001, the Company and a group of lenders entered into an amended and restated credit facility (the "New Facility"). The New Facility was comprised of a $16 million term facility with a three-year maturity and a $39 million revolving loan facility. The term facility bore interest at a rate of LIBOR plus 1.25% and the revolving loan facility bore interest at a rate of LIBOR plus 0.80%.
On July 20, 2001, the Company sold $30 million of senior notes ("Senior Notes") in a private placement to certain institutional investors. The Senior Notes bear interest at a rate of 7.19% per annum with the interest being paid semiannually. The Senior Notes have a seven-year duration with the principal amortizing equally over the remaining duration after the third year. The Company used the proceeds from the Senior Notes to repay outstanding borrowings under the New Facility and for working capital purposes.
In conjunction with the private placement of the Senior Notes, the Company and the lenders in the New Facility amended the New Facility on July 17, 2001 (the "Amended Facility"). The Amended Facility consisted of a maximum of $50 million revolving line of credit which bore interest at a rate of LIBOR plus 0.80%. The Company and the lenders entered into an additional amendment to the Amended Facility on April 12, 2002 in order to allow one lender to withdraw and to reduce the maximum size of the revolving line of credit to $45 million. On December 31, 2002, the Company and the lenders further modified the Amended Facility by reducing the maximum line of revolving credit to $25 million with a variable interest rate based upon the Company's operating performance. As of December 31, 2002, the interest rate on the Amended Facility was LIBOR plus 1.25%. As of December 31, 2002, $25 million was available pursuant to the terms of the Amended Facility. There were no borrowings under the Amended Facility as of December 31, 2002.
Under the common stock repurchase program (the "Program") authorized by the Company's Board of Directors in 1998, the Company has repurchased a total of 2,822,235 shares, or share equivalents, of its common stock out of the 3,500,000 shares authorized by the Board of Directors under the Program. The Company has funded the Program with approximately $19.5 million of cash generated from operations.
Inflation has not had a material effect upon the Company during the period covered by this report. Given the products manufactured by the Company and the raw materials used therein, the Company does not anticipate any significant impact from inflation in the foreseeable future.
Critical Accounting Policy
The Company has net operating loss ("NOL") carryforwards that were generated prior to its reorganization ("Pre-Reorganization") completed on April 30, 1993 as well as NOL carryforwards that were generated subsequent to reorganization and prior to the 1998 ownership change ("Post-Reorganization"), and an NOL carryforward generated in 2002. These NOLs are available to the Company to reduce future taxable income. The net realizable value of the related tax benefit of the NOLs is approximately $10.9 million as of December 31, 2002.
The amount of the NOL carryforwards used through December 31, 2002 total $18.6 million of the Pre-Reorganization NOLs and $42.8 million of the Post-Reorganization NOLs. Federal NOL carryforwards remaining as of December 31, 2002 total $15 million of Pre-Reorganization NOLs and $6.2 million of Post-Reorganization NOLs. Wisconsin NOL carryforwards remaining as of December 31, 2002 total $8
million of Pre-Reorganization NOLs and $10.9 million of Post-Reorganization NOLs. The NOL carryforward generated in 2002 amounted to $6.1 million for federal and $0.7 million for Wisconsin.
The Company's IPO in March, 1998 created an ownership change as defined by the Internal Revenue Service ("IRS"). This ownership change generated an IRS imposed limitation on the utilization of NOL carryforwards, generated prior to the ownership change, to reduce future taxable income. The annual use of the NOL carryforwards is limited to the lesser of the Company's taxable income or the amount of the IRS imposed limitation. Since the ownership change, the total NOL available for use is $11.9 million annually. To the extent less than $11.9 million is used in any year, the unused amount is added to and increases the limitation in the succeeding year. Pre-Reorganization NOLs are further limited to an annual usage of $2.1 million. Any unused amount is added to and increases the limitation in the succeeding year. The Pre-Reorganization NOLs expire in 2008 and the Post-Reorganization NOLs expire in years 2008 through 2010. There is no limitation on the usage of the NOLs generated in 2002 and these NOLs expire in 2022.
Realization of the net deferred tax assets over time is dependent upon the Company generating sufficient taxable income in future periods. FAS 109 requires establishment of a valuation allowance reserve for all or a part of the NOLs unless it is more likely than not that sufficient taxable income will be generated in future periods to utilize the NOLs before they expire. In determining that realization of the net deferred tax assets was more likely than not, the Company gave consideration to a number of factors including its recent earnings history, expectations for earnings in the future, the timing of reversal of temporary differences, tax planning strategies available to the Company and the expiration dates associated with NOL carryforwards. If, in the future, the Company determines that it is no longer more likely than not that the net deferred tax assets will be realized, a valuation allowance will be established against all or part of the net deferred tax assets with an offsetting charge to the income tax provision.
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk - ---------------------------------------------------------------------
The Company believes that its exposure to market risk related to changes in foreign currency exchange rates and trade accounts receivable is immaterial.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
The response to Item 8. Financial Statements and Supplementary Data incorporates by reference the information listed in the consolidated financial statements and accompanying schedules beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - --------------------
By letter dated August 19, 2002, Deloitte & Touche LLP, who had been engaged to replace Arthur Andersen as the Company's independent accountants, resigned the engagement, claiming a disagreement with management regarding the Company's method of recognition of valuation allowances against deferred tax assets. This resignation was reported on a Form 8-K filed on August 26, 2002.
The Company subsequently engaged KPMG LLP to reaudit 1999, 2000 and 2001, and to audit 2002. There have been no disagreements on accounting and financial disclosure with the Company's public accounting firm, KPMG LLP.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
Certain information called for by this Item is incorporated herein by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of Stockholders filed herewith as an Exhibit.
The list of Executive Officers in Part I, Item 1. Business, paragraph captioned "Executive Officers of the Registrant" is incorporated by reference. The list of Directors of the Company is as follows:
Name Age ---- --- Lawrence W. Bianchi 62 Margaret Bertelsen Hampton 44 Leon A. Kranz 63 Wayne E. Larsen 48 Scott D. Roeper 43 Robert W. Sullivan 44 Kerry L. Woody 51
Other information required by Item 401 of Regulation S-K is as follows:
Lawrence W. Bianchi, 62. Director since 1998. Mr. Bianchi in 1993 retired as the Managing Partner of the Milwaukee, Wisconsin office of KPMG Peat Marwick. From 1994 to 1998 Mr. Bianchi served as CFO of the law firm of Foley & Lardner. Mr. Bianchi's principal occupation is investments.
Gene E. Bunge, 57. Mr. Bunge has served as Vice President, Engineering since November 1991. From 1985 until that time he was General Manager of Engineering. Mr. Bunge has been with the Company since 1968. He has a B.S.E.E. from the Milwaukee School of Engineering.
George Groppi, 54. Mr. Groppi has served as Vice President Quality and Metallurgy since September 1999. He was named Manager of Product Metallurgy in 1992. In 1994 he was appointed Manager of Production Control and recently assumed the position of Manager of Quality & Metallurgy. Mr. Groppi has been with the Company since 1969. He holds a B.S. in Mechanical Engineering from Marquette University.
Lawrence C. Hammond, 55. Mr. Hammond has served as Vice President, Human Resources since January 1994. Prior to that time he had served as Director of Industrial Relations at the Company and he had been Labor Counsel at the Company. Mr. Hammond has been with the Company since 1980. He has a B.A. and a Masters in Industrial Relations from Michigan State University and a J.D. from the Detroit College of Law.
Margaret Bertelsen Hampton, 44. Director since 2001. Ms. Hampton has been a Portfolio Manager at Grace Brothers Ltd., an Evanston, Illinois based investment management firm, since 1997. Previously, Ms. Hampton was a Managing Director for First Chicago Capital Corporation, a position she held for more than five years. Ms. Hampton is a Director of Furr's Restaurant Group in Dallas, Texas.
Leon A. Kranz, 63. Director since 2001. Mr. Kranz is President and Chief Executive Officer of Weber Metals, Inc., a Paramount, California based metals processor, a position he has held for ten years.
Wayne E. Larsen, 48. Director since 1997. Since 1995 Mr. Larsen has been Vice President Law/Finance and Secretary of the Company. He served as General Counsel and Secretary since 1989 after joining the Company as corporate counsel in 1981. Mr. Larsen is a Trustee of the Ladish Co. Foundation and a Director of the Wisconsin Foundation for Independent Colleges and the South Shore YMCA of Milwaukee. Mr. Larsen has a B.A. from Marquette University and a J.D. from Marquette Law School.
William J. Lazzari, 53. Mr. Lazzari has been President of Stowe Machine Co., Inc. ("Stowe") since 2000. He was General Manager at Stowe for over four years prior to becoming President. He holds a B.S. in Marketing from the University of Hartford.
David L. Provan, 53. Mr. Provan has served as Vice President, Materials Management since September 1999. Prior to that time he had been Purchasing Manager, Raw Materials, and Head Buyer. Mr. Provan has been with the Company since 1979. He has a Bachelor's Degree in Business Administration from the University of Wisconsin-Parkside.
Scott D. Roeper, 43. Director since 2001. Mr. Roeper is a Managing Director and Partner for Facilitator Capital Fund ("FCF"), a Wisconsin-based private equity fund. Prior to joining FCF in 1999, Mr. Roeper was a senior banker for Firstar Bank since 1990. Mr. Roeper is a Director of numerous FCF portfolio companies.
Robert W. Sullivan, 44. Director since 1993. Mr. Sullivan is President of The Plitt Company, a seafood distribution concern. Previously Mr. Sullivan had been President of The Martec Group, a sales and marketing consulting group for more than fifteen years. Mr. Sulllivan is a Director of Furr's Restaurant Group in Dallas, Texas.
Randy B. Turner, 53. Mr. Turner has served as President of Pacific Cast Technologies, Inc. ("PCT") since it was acquired by the Company in January 2000. Prior to joining the Company, Mr. Turner served as President of the corporate predecessor to PCT. He has a B.S. in Business Management from Lewis and Clark College.
Gary J. Vroman, 43. Mr. Vroman has served as Vice President, Sales and Marketing since December 1995. From January 1994 to December 1995 he was General Manager of Sales. Prior to that period he had been the Product Manager for jet engine components. Mr. Vroman has been with the Company since 1982. He has a B.S. in Engineering from the University of Illinois and a M.S. in Engineering Management from the Milwaukee School of Engineering.
Kerry L. Woody, 51. Director since 1997. Mr. Woody has been President since 1995 and was appointed Chief Executive Officer of the Company in 1998. Prior to that time he was Vice President-Operations, Vice President-Manufacturing Services and Production Manager. He joined the Company in 1975. In addition, Mr. Woody serves as a Director of Vilter Manufacturing Co. and Milwaukee Lutheran College. Mr. Woody has a B.S. in Engineering from Milliken University.
The Company's ethics code is reflected in its policies addressing i) conflict of interest, ii) compliance with antitrust laws, iii) improper payments, iv) falsification of records, and v) insider trading. These policies apply to all Company employees including the principal executive officer, the principal financial officer, controller and members of the Board of Directors. On an annual basis, the Company requires its key management personnel to certify their review and compliance with these policies. A copy of the policies is filed herewith as Exhibit 14.
Item 11.
Item 11. Executive Compensation - --------------------------------
The information called for by this Item is incorporated herein by reference to the sections entitled "Executive Compensation and Other Matters," "The Stock Option Plan," "Pension Benefits," "Compensation of Directors," "Employment Agreements," "Compensation Committee Interlocks and Insider Participation," "Compensation and Stock Option Committee Report," and "Total Shareholder Return" of the Proxy Statement for the 2003 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
The information called for by this Item is incorporated herein by reference to the sections entitled "Voting Securities and Stockholders" and "The Stock Option Plan" of the Proxy Statement for the 2003 Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information called for by this Item is incorporated herein by reference to the section entitled "Certain Relationships" of the Proxy Statement for the 2003 Annual Meeting of Stockholders.
Item 14.
Item 14. Controls and Procedures - ---------------------------------
The Company's management, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, has evaluated the Company's disclosure controls and procedures within 90 days prior to the filing date of this report. Based on that evaluation, management believes that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time period specified by the Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of management's evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------
Exhibits. See the accompanying index to exhibits on page X-1 which is part of this report.
Financial Statements. See the accompanying index to financial statements and schedules on page which is a part of this report.
Reports on Form 8-K. The Company has not filed any reports on Form 8-K during the fourth quarter of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LADISH CO., INC.
By: /s/ Wayne E. Larsen --------------------------------------------- Wayne E. Larsen March 18, 2003 Vice President Law/Finance & Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATION - -------------
I, Kerry L. Woody, President and CEO of Ladish Co., Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Ladish Co., Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Kerry L. Woody - ------------------------------------- Kerry L. Woody President and CEO
CERTIFICATION - -------------
I, Wayne E. Larsen, Vice President Law/Finance and Secretary of Ladish Co., Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Ladish Co., Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Wayne E. Larsen - -------------------------------------- Wayne E. Larsen Vice President Law/Finance & Secretary
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002..............................................F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002............................F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 2001 and 2002..................................F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002..................................F-7
Notes to Consolidated Financial Statements...................................F-8
Independent Auditors' Report
To the Stockholders of Ladish Co., Inc.:
We have audited the accompanying consolidated balance sheets of Ladish Co., Inc., a Wisconsin corporation, and subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ladish Co., Inc. and subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2(f) to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
Milwaukee, Wisconsin January 23, 2003 except as to note 11, which is as of March 19, 2003
Ladish Co., Inc.
Consolidated Balance Sheets December 31, 2001 and 2002 (Dollars in Thousands Except Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Balance Sheets December 31, 2001 and 2002 (Dollars in Thousands Except Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Statements of Operations (Dollars in Thousands Except Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Statements of Stockholders' Equity (Dollars in Thousands Except Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Statements of Cash Flows (Dollars in Thousands)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Notes to Consolidated Financial Statements (Dollars in Thousands Except Share and Per Share Data)
(1) Business Information --------------------
Ladish Co., Inc. (the "Company"), headquartered in Cudahy, Wisconsin, engineers, produces and markets high-strength, high-technology forged and cast metal components for a wide variety of load-bearing and fatigue-resisting applications in the jet engine, aerospace and industrial markets, for both domestic and international customers. The Company operates as a single segment. Net sales to the jet engine, aerospace and industrial customers were approximately 71%, 21% and 8% in 2000, 72%, 21% and 7% in 2001 and 74%, 20% and 6% in 2002, respectively, of total Company net sales.
In January 2000, the Company acquired Wyman-Gordon Titanium Castings, LLC, an investment casting operation. The acquired business was renamed Pacific Cast Technologies, Inc. ("PCT") and is located in Albany, Oregon.
In 2000, 2001 and 2002, respectively, the Company had three customers that collectively accounted for approximately 53%, 52% and 55%, respectively, of total Company net sales. Net sales to Rolls-Royce were 28%, 28% and 28%, United Technologies 16%, 15% and 16% and General Electric 9%, 9% and 11% of total Company net sales for the respective years.
Exports accounted for approximately 50%, 49% and 50% of total Company net sales in 2000, 2001 and 2002, respectively, with exports to England constituting approximately 22%, 21% and 26%, respectively, of total Company net sales.
As of December 31, 2002, approximately 56% of the Company's employees were represented by one of seven collective bargaining units. The collective bargaining agreements with most of these units will expire during the year 2003.
(2) Summary of Significant Accounting Policies ------------------------------------------
(a) Consolidation -------------
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents -------------------------
The Company considers marketable securities with maturities of less than three months to be cash equivalents and are shown as a component of cash and cash equivalents on the balance sheets.
(c) Outstanding Checks ------------------
Outstanding payroll and accounts payable checks related to certain bank accounts are recorded as accounts payable in the accompanying consolidated balance sheets. These checks amounted to $3,905 and $1,537 as of December 31, 2001 and 2002, respectively.
(d) Inventories -----------
Inventories are stated at the lower of cost, first-in, first-out (FIFO) basis, or market. Inventory values include material and conversion costs.
Inventories for the years ended December 31, 2001 and 2002 consist of the following:
December 31, ------------------------- 2001 2002 ------------ ------------ Raw Materials $16,996 $10,235 Work-in-Process and Finished 37,057 36,567 ------------ ------------ 54,053 46,802 Less Progress Payments (994) (953) ------------ ------------ Total Inventories $53,059 $45,849 ============ ============
(e) Property, Plant and Equipment -----------------------------
Additions to property, plant, and equipment are recorded at cost. Tooling costs, along with normal repairs and maintenance, are expensed as incurred. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as follows:
Land Improvements 30 or 39 years Buildings and Improvements 30 or 39 years Machinery and Equipment 5 to 12 years
(f) Goodwill --------
Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible net assets relating to business acquisitions. Goodwill is included in other assets. As of December 31, 2002, goodwill amounted to $8,180. In 2000 and 2001, goodwill was amortized on a straight-line basis over 20 years resulting in amortization expense of $484 and $490, respectively. SFAS No. 142 "Goodwill and Other Intangibles", which was adopted on January 1, 2002, requires that goodwill no longer be amortized but instead that it will be tested for impairment at least annually. No amortization expense was recorded in 2002. The goodwill assets were subjected to fair value impairment tests in 2002 and no impairments were recognized.
(g) Fair Values of Financial Instruments ------------------------------------
The fair value of financial instruments (principally the Senior Notes) does not materially differ from their carrying values.
(h) Revenue Recognition -------------------
Sales revenue is recognized when the title and risk of loss have passed to the customer, there is pervasive evidence of an arrangement, delivery has occurred or the services provided, the sales price is determinable and collectibility is reasonably assured. This generally occurs at the time of shipment. Net sales include freight out as well as reductions for returns and allowances, and sales
discounts. Progress payments on contracts are generally recognized as a reduction of the related inventory costs. Progress payments in excess of inventory costs are reflected as a liability.
(i) Income Taxes ------------
Deferred taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates. Deferred income tax provisions or benefits are based on the change in the deferred tax assets and liabilities from period to period.
(j) Use of Estimates ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results will likely differ from those estimates, but management believes such differences will not be material.
(3) Debt ----
Senior Debt -----------
On April 13, 2001, the Company and a group of lenders entered into an amended and restated credit facility (the "New Facility"). The New Facility was comprised of a $16,000 term facility with a three-year maturity and a $39,000 revolving loan facility. The term facility bore interest at a rate of LIBOR plus 1.25% and the revolving loan facility bore interest at a rate of LIBOR plus 0.80%.
On July 20, 2001, the Company sold $30,000 of senior notes ("Senior Notes") in a private placement to certain institutional investors. The Senior Notes bear interest at a rate of 7.19% per annum with the interest being paid semiannually. The Senior Notes have a seven-year duration with the principal amortizing equally over the remaining duration after the third year. The Company used the proceeds from the Senior Notes to repay outstanding borrowings under the New Facility and for working capital purposes.
In conjunction with the private placement of the Senior Notes, the Company and the lenders in the New Facility amended the New Facility on July 17, 2001 (the "Amended Facility"). The Amended Facility consisted of a maximum $50,000 revolving line of credit which bore interest at a rate of LIBOR plus 0.80%. The Company and the lenders entered into an additional amendment to the Amended Facility on April 12, 2002 in order to allow one lender to withdraw and to reduce the maximum size of the revolving line of credit to $45,000. On December 31, 2002, the Company and the lenders further modified the Amended Facility by reducing the maximum line of revolving credit to $25,000 with a variable interest rate based upon the Company's operating performance. As of December 31, 2002, the interest rate on the Amended Facility was LIBOR plus 1.25%. As of December 31, 2002, $25,000 was available pursuant to the terms of the Amended Facility. There were no borrowings under the Amended Facility as of December 31, 2002.
Warrants related to previously repaid senior subordinated notes were 354,767, 32,076 and 32,076 outstanding and exercisable as of December 31, 2000, 2001 and 2002, respectively. Each warrant entitles the holder to purchase one share of common stock for $1.20 per share. The exercise price may be paid in cash, or by the surrender of already outstanding Ladish common stock, or other warrants having a fair value equal to the exercise price. The warrants expire in 2005.
(4) Stockholders' Equity --------------------
Under the common stock repurchase program (the "Program") authorized by the Company's Board of Directors in 1998, the Company has repurchased a total of 2,822,235 shares, or share equivalents, of its common stock out of the 3,500,000 shares authorized by the Board of Directors under the Program. The Company has funded the Program with approximately $19,500 of cash generated from operations.
The Company has a Long-Term Incentive Plan (the "Plan") that covers certain employees. Under the Plan, incentive stock options for up to 983,333 shares may be granted to employees of the Company of which 977,833 options have been granted. These options expire ten years from the grant date. In 2000, 2001 and 2002, 6,500, 130,000 and 12,000 options, respectively, were granted under the Plan. These options vest over two years. As of December 31, 2002, 715,334 options granted under the Plan remain outstanding.
Additionally, the Company granted 496,188 stock options in 1993 to an individual who was then Chairman of the Board of Directors. The options were granted at fair value, vested on date of grant and expire if not exercised in ten years from date of grant. All of these options remain outstanding as of December 31, 2002.
The Company accounts for its option grants using the intrinsic value based method pursuant to APB Opinion No. 25 and Statement of Financial Accounting Standards No. 123 ("SFAS 123") under which no compensation expense was recognized in 2000, 2001 and 2002. Had compensation cost for these options been determined pursuant to the fair value method under SFAS 123, the Company's pro forma net income and diluted earnings per share would have been as follows:
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, and additional awards in future years are anticipated, the effect of applying SFAS 123 in the above pro forma disclosure is not necessarily indicative of future results.
The fair value of the option grants in 2000, 2001 and 2002 used to compute the pro forma amounts above was estimated based on vesting of the grants using the Black-Scholes option pricing model with the following assumptions:
A summary of options for 2000, 2001 and 2002 is as follows:
The options outstanding and exercisable as of December 31, 2002 consist of the following:
In June 1999, the Company reduced the exercise price of 320,000 options previously granted to certain employees from $13.50 and $15.50 to $8.25. As a result, the Company recorded additional compensation expense (credit) of $320, $75 and $(305) in 2000, 2001 and 2002, respectively, relating to the modified stock options.
(5) Research and Development ------------------------
Research and Development costs are expensed as incurred. These costs were $2,921, $3,709 and $3,467 in 2000, 2001 and 2002, respectively. Research and Development costs funded by customers, amounting to $728, $1,518 and $1,980 in 2000, 2001 and 2002, respectively, have been recorded as sales.
(6) Leases ------
Certain office and warehouse facilities and equipment are leased under noncancelable operating leases expiring on various dates through the year 2007. Rental expense was $154, $145 and $136 in 2000, 2001 and 2002, respectively.
Minimum lease obligations under noncancelable operating leases are as follows:
2003 $163 2004 154 2005 139 2006 104 2007 and Thereafter 104 -------- Total $664 ========
(7) Income Taxes ------------
The Company has net operating loss ("NOL") carryforwards that were generated prior to its reorganization ("Pre-Reorganization") completed on April 30, 1993 as well as NOL carryforwards that were generated subsequent to reorganization and prior to the 1998 ownership change ("Post-Reorganization"), and an NOL carryforward generated in 2002. These NOLs are available to the Company to reduce future taxable income and the related tax benefits are included in deferred income taxes on the accompanying balance sheets at their net realizable value of approximately $8,499 and $10,916 as of December 31, 2001 and 2002, respectively, reflecting a combined federal and state tax rate of 40%.
The amount of the NOL carryforwards used through December 31, 2002 total $18,578 of the Pre-Reorganization NOLs and $42,848 of the Post-Reorganization NOLs. Federal NOL carryforwards remaining as of December 31, 2002 total $14,997 of Pre-Reorganization NOLs and $6,239 of Post-Reorganization NOLs. Wisconsin NOL carryforwards remaining as of December 31, 2002 total $8,025 of Pre-Reorganization NOLs and $10,901 of Post-Reorganization NOLs. The NOL carryforward generated in 2002 amounted to $6,054 for federal and $710 for Wisconsin.
The Company's IPO in March, 1998 created an ownership change as defined by the Internal Revenue Service ("IRS"). This ownership change generated an IRS imposed limitation on the utilization of NOL carryforwards, generated prior to the ownership change, to reduce future taxable income. The annual use of the NOL carryforwards is limited to the lesser of the Company's taxable income or the amount of the IRS imposed limitation. Since the ownership change, the total NOL available for use is $11,865 annually. To the extent less than $11,865 is used in any year, the unused amount is added to and increases the limitation in the succeeding year. Pre-Reorganization NOLs are further limited to an annual usage of $2,142. Any unused amount is added to and increases the limitation in the succeeding year. The Pre-Reorganization NOLs expire in 2008 and the Post-Reorganization NOLs expire in years 2008 through 2010. There is no limitation on the usage of the NOLs generated in 2002 and these NOLs expire in 2022.
Realization of the net deferred tax assets over time is dependent upon the Company generating sufficient taxable income in future periods. In determining that realization of the net deferred tax assets was more likely than not, the Company gave consideration to a number of factors including its recent earnings history, expectations for earnings in the future, the timing of reversal of temporary differences, tax planning strategies available to the Company and the expiration dates associated with NOL carryforwards. If, in the future, the Company determines that it is no longer more likely than not that the net deferred tax assets will be realized, a valuation allowance will be established against all or part of the net deferred tax assets with an offsetting charge to the income tax provision.
The components of net deferred income tax assets for the years ended December 31, 2001 and 2002 are as follows:
A reconciliation of the Federal statutory tax rate to the Company's effective tax rate for the years ended December 31, 2000, 2001 and 2002 is as follows:
The components of income tax expense (benefits) for the years ended December 2000, 2001 and 2002 are as follows:
Alternative minimum tax payments totaling $652 have been made through 2002 and are recorded as a tax receivable as the carryback of the NOL generated in 2002 will result in a refund of these payments.
(8) Pensions and Postretirement Benefits ------------------------------------
The Company has noncontributory defined benefit pension plans ("Plans") covering a majority of its employees. Plans covering salaried and management employees provide pension benefits that are based on the highest five consecutive years of an employee's compensation during the last ten years prior to retirement. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company's funding policy is to contribute annually an amount equal to or greater than the minimum amount required under the Employee Retirement Income Security Act of 1974. The Plans' assets are primarily invested in U.S. Government securities, corporate bonds and common stocks.
In addition to pension benefits, a majority of the Company's employees are provided certain postretirement healthcare and life insurance benefits. The employees may become eligible for these benefits when they retire. The Company accrues, as current costs, the future lifetime retirement benefits for both active and retired employees and their dependents. Steps have been taken by the Company to reduce the amount of the future obligation for pensions and postretirement healthcare benefits of future retirees by capping the amount of funds payable on behalf of the retirees.
The following is a reconciliation of the change in benefit obligation and plan assets for the years ended December 31, 2001 and 2002:
For certain of the Plans and the officers' supplemental pension plan, the accumulated benefit obligation exceeds the fair value of the plan assets plus accrued pension expense. This results in an additional pension liability of $1,078 and $18,819 as of December 31, 2001 and 2002, respectively. The additional pension liability is allocated to intangible assets for prior service costs of $867 and $2,480 as of December 31, 2001 and 2002, respectively, and the balance is reported in stockholders' equity. The status of the Plans is presented in the consolidated balance sheets as follows:
The components of the net periodic benefit costs for the years ended December 31, 2000, 2001 and 2002 are:
Assumptions used in the determination of net periodic benefit costs for these years are:
2000 2001 2002 ---------- ---------- ----------
Discount Rate 8.25% 8.50% 7.50% Rate of Increase in Compensation Levels 3.00% 3.00% 3.00% Expected Long-Term Rate of Return on Assets 9.25% 9.25% 9.25%
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
As a result of union labor renegotiations finalized during 2000, the benefits in certain Company sponsored pension plans were frozen and replaced with comparable benefits in national multi-employer plans not administered by the Company. The Company contributed $1,413 and $1,245 to these plans during 2001 and 2002, respectively.
(9) Officers' Deferred Compensation Plan ------------------------------------
Certain officers have deferred compensation agreements (the "Plan") which, upon retirement, provide them with, among other things, supplemental pension and other postretirement benefits. An accumulated unfunded liability, net of the investments in a Rabbi Trust, of $2,599 and $3,035 as of December 31, 2001 and 2002, respectively, has been recorded under these agreements as actuarially determined. The expense was $252, $292 and $291 in 2000, 2001 and 2002, respectively.
The Company has established a Rabbi Trust for the beneficiaries of the Plan to fund a portion of the benefits earned under the Plan. The Rabbi Trust does not hold any Company stock and is considered in the calculations determined by the actuary.
(10) Profit Sharing --------------
The Cudahy site has a profit sharing program in which substantially all of the employees are eligible to participate. The profit sharing payout is derived from a formula based on net income and is payable no later than February 15th of the subsequent year. The expense was $1,366, $812 and $0 in 2000, 2001 and 2002, respectively. PCT has a profit sharing program called "Gainshare" in which all employees are
eligible to participate. The Gainshare pool is calculated based on various internal operating measurements. The expense was $469, $691 and $93 in 2000, 2001 and 2002, respectively.
(11) Commitments and Contingencies -----------------------------
The Company is involved in various stages of investigation relative to environmental protection matters relating to various waste disposal sites. The potential costs related to such matters and the possible impact thereof on future operations are uncertain due in part to uncertainty as to the extent of the pollution, the complexity of laws and regulations and their interpretations, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable level of the Company's involvement. The Company has made provisions in the financial statements for potential losses related to these matters. The Company does not anticipate such losses will have a material impact on the financial statements beyond the aforementioned provisions.
Various other lawsuits and claims arising in the normal course of business are pending against the Company and losses that might result from such actions are not expected to be material to the financial statements.
A purported stockholder of the Company filed a putative class action, Dean v. Ladish Co., Inc., et. al., Case No. 03-C-0165, in the United States District Court for the Eastern District of Wisconsin, on February 28, 2003, against the Company and two Company officers. The complaint includes claims under the federal securities laws and state common law, and seeks damages for stockholders who purchased the common stock of the Company between March 10, 1998 and September 27, 2002. The complaint's allegations, which the Company intends to dispute, are based primarily on accounting issues relating to the Company's restatement in 2002. The Company has notified its insurance carrier of the claim, retained legal counsel and is vigorously defending the claim. The Company has not made any provision for potential costs or losses, if any, which may arise from this claim.
Since 1995, the Company has participated in a joint venture with Weber Metals, Inc. ("Weber"). The joint venture is directed toward serving the jet engine market by combining the Company's technology and market presence with Weber's unique equipment. A director of the Company is the chief executive officer of Weber. The Company's payments to Weber under the joint venture were $1,236 and $1,073 in 2001 and 2002, respectively.
(12) Earnings Per Share ------------------
Basic earnings per share of common stock are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock are computed by dividing net income by the average number of common shares and common share equivalents related to the assumed exercise of stock options and warrants.
The following shares were used to calculate basic and diluted earnings per share for the years ended December 31, 2000, 2001 and 2002:
The shares outstanding used to compute diluted earnings per share for 2002 excluded outstanding options to purchase 635,688 shares of common stock at a weighted average exercise price of $14.79. These options were excluded because their exercise prices were greater than the average market price of the common shares during the year and their inclusion in the computation would have been antidilutive.
(13) Acquisitions ------------
On January 14, 2000, the Company completed the purchase of certain assets and assumption of certain liabilities of Wyman-Gordon Titanium Castings, LLC. The acquired business was renamed PCT.
The PCT acquisition was accounted for using the purchase method of accounting. The Company's consolidated statements of operations include the revenues and expenses of PCT from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $2,700.
The PCT purchase price allocation was as follows:
Current Assets $8,842 Property, Plant and Equipment 16,614 Assumed Liabilities (2,906) Goodwill 2,700 ------- Total Purchase Price $25,250 =======
(14) Quarterly Results of Operations (Unaudited) -------------------------------------------
The following table sets forth unaudited consolidated income statement data for each quarter of the Company's last two fiscal years. The unaudited quarterly financial information has been prepared on the same basis as the annual information presented in the financial statements and, in management's opinion, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information provided. The operating results for any quarter are not necessarily indicative of results for any future period.
An inventory adjustment was recorded in the quarter ended December 31, 2002 which reduced gross profit and operating income by $858, net income by $515 and decreased per share results by $0.04.
Per share amounts for the quarters and the full years have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average shares outstanding in each period.
(15) Valuation and Qualifying Accounts ---------------------------------
X-1