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Thomas & Betts 10-Q 2006 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Commission file number 1-4682
Thomas & Betts Corporation
(Exact name of registrant as specified in its charter)
(901) 252-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Report includes forward-looking statements regarding
Thomas & Betts Corporation that are subject to
uncertainties in our operations, business, economic and
political environment. Statements that contain words such as
“achieve,” “guidance,” “believes,”
“expects,” “anticipates,”
“intends,” “estimates,”
“continue,” “should,” “could,”
“may,” “plan,” “project,”
“predict,” “will” or similar expressions are
forward-looking statements. These statements are subject to
risks and uncertainties, and many factors could affect our
future financial condition or results of operations.
Accordingly, actual results, performance or achievements may
differ materially from those expressed or implied by the
forward-looking statements contained in this Report. We
undertake no obligation to revise any forward-looking statement
included in the Report to reflect any future events or
circumstances. For more information regarding our risks, please
see Item 1A. Risk Factors in our Form 10-K for the
year ended December 31, 2005. Reference in this Report to
“we,” “our,” “us,”
“Thomas & Betts” or “the
Corporation” refers to Thomas & Betts Corporation
and its consolidated subsidiaries.
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PART I. FINANCIAL INFORMATION
THOMAS & BETTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying consolidated
financial statements contain all adjustments necessary for the
fair presentation of the Corporation’s financial position
as of March 31, 2006 and December 31, 2005 and the
results of operations and cash flows for the periods ended
March 31, 2006 and 2005.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP) have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes included in the
Corporation’s Annual Report on
Form 10-K for the
fiscal year ended December 31, 2005. The results of
operations for the periods ended March 31, 2006 and 2005
are not necessarily indicative of the operating results for the
full year.
Certain reclassifications have been made to prior periods to
conform to the current year presentation.
The following is a reconciliation of the basic and diluted
earnings per share computations:
The Corporation had stock options that were
out-of-the-money which
were excluded because of their anti-dilutive effect. Such
out-of-the-money
options were 0.6 million shares of common stock in the
quarter ended March 31, 2006 and 1.1 million shares of
common stock in the quarter ended March 31, 2005.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
On January 1, 2006, the Corporation adopted Statement of
Financial Accounting Standard (SFAS) No. 123
(Revised), “Share-Based Payment”, which requires all
share-based payments to employees to be recognized as
compensation expense in financial statements based on their fair
values over the requisite service period. Under the provisions
of SFAS No. 123R, non-employee members of the board of
directors are deemed to be employees. SFAS No. 123R
applies to new awards and to unvested awards that are
outstanding as of the adoption date. Compensation expense for
options outstanding as of the adoption date will be recognized
over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes. As allowed by
SFAS No. 123R, the Corporation has elected modified
prospective application. Under the modified prospective
application, prior periods have not been revised for comparative
purposes.
As of March 31, 2006, the Corporation has equity
compensation plans for key employees and for non-employee
directors. Amounts recognized in the financial statements with
respect to these and prior plans are as follows:
Basic and diluted earnings per share were negatively impacted
from amounts recognized during the quarter ended March 31,
2006 by $0.01 for options and an additional $0.01 for restricted
stock. Compensation expense, net of tax, of $0.8 million
for stock options and $0.3 million for restricted stock was
charged against income during the quarter ended March 31,
2006. Prior to January 1, 2006, no compensation expense was
recognized for stock options.
May 2004 Equity Compensation Plans
In May 2004, the Corporation’s shareholders approved its
Equity Compensation Plan. Under the Equity Compensation Plan,
which expires in 2014, unless earlier terminated, the
Corporation may grant to key employees options for up to
3,000,000 shares of common stock and restricted stock
awards for up to 500,000 shares of common stock. Restricted
stock represents nonvested shares as defined by SFAS
No. 123R, since such shares cannot be sold prior to
completion of the requisite service period (vesting period).
Option grants to purchase common stock for cash have a term not
to exceed 10 years and are at a price not less than the
fair market value on the grant date. For awards under the plan,
restricted stock awards cliff-vest in three years after the
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
award date and options to purchase common stock have
graded-vesting of one-third increments beginning on the
anniversary of the date of grant.
In May 2004, the Corporation’s shareholders approved its
Non-Employee Directors Equity Plan. Under the Non-Employee
Directors Equity Plan, which expires in 2014, unless earlier
terminated, the Corporation may grant to non-employee directors
options for up to 750,000 shares of common stock,
restricted stock awards for up to 100,000 shares of common
stock, unrestricted stock awards for up to 100,000 shares
of common stock, and stock credits for up to 750,000 shares
of common stock. Restricted stock represents nonvested shares as
defined by SFAS No. 123R, since such shares cannot be sold
prior to completion of the requisite service period (vesting
period). Option grants to purchase common stock for cash have a
term not to exceed 10 years and are at a price not less
than the fair market value on the grant date. For awards under
the plan, restricted stock awards and options to purchase common
stock cliff-vest in one year after the grant date. Stock credits
are granted for elective or non-elective fee deferrals, as
defined, and do not constitute shares of common stock. Stock
credits may be distributed in cash or stock, as determined by
the Corporation after a director’s retirement date.
Prior Equity Compensation Plans
Under a previous stock incentive plan, the Corporation granted
options and awarded restricted stock to key employees.
Restricted stock awards cliff-vest in three years after the
grant date and options to purchase common stock have
graded-vesting of one-third increments beginning on the
anniversary of the date of grant. Option grants to purchase
common stock for cash have a term not to exceed 10 years
and are at a price not less than the fair market value on the
grant date.
Change of Control Provisions
Upon a change of control, as defined in the Corporation’s
plans, the restrictions applicable to restricted shares
immediately lapse and all outstanding stock options will become
fully vested and immediately exercisable.
Methods Used to Measure Compensation
Stock Options
The Corporation’s option grants qualify for classification
as equity and such grants contain no provisions to allow an
employee to force cash payment by the Corporation. The
Corporation’s options do not contain future market or
performance conditions. The fair value of grants has been
estimated on the grant date using a Black-Scholes option-pricing
model. The initial measurement date is the grant date. The
Corporation has elected a straight-line amortization method over
the requisite service period (vesting period). The
Corporation’s current estimate of forfeitures ranges from
0% to 5%. Compensation expense associated with option grants was
recorded to selling, general and administrative (SG&A)
expenses and cost of sales.
The Corporation has three homogenous groups which are expected
to have different option exercise behaviors: executive
management, non-executive management and the board of
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
directors. Expected lives of share options were derived from
historical data. The risk-free rate is based on the
U.S. Treasury yield curve for the expected terms. Expected
volatility is based on a combination of historical volatility of
the Corporation’s common stock and implied volatility from
traded options in the Corporation’s common stock.
The following are assumptions used in Black-Scholes valuations
during the quarter ended March 31, 2006.
Nonvested Shares
The Corporation’s restricted stock awards qualify for
classification as equity and such awards contain no provisions
to allow an employee to force cash payment by the Corporation.
The initial measurement date is the award date. The Corporation
has elected a straight-line amortization method over the
requisite service period (vesting period). The fair value of
awards has been determined as the stock price on the award date.
The Corporation’s current estimate of forfeitures is 0%.
Compensation expense associated with restricted stock awards was
recorded to SG&A.
Summary of Option Activity
The following is a summary of the option transactions during the
quarter ended March 31, 2006.
The weighted-average grant date fair value of options granted
during the quarter ended March 31, 2006 was $15.44. The
total intrinsic value of options exercised during the quarter
ended March 31, 2006 was $19.4 million.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
Summary of Nonvested Shares Activity
The following is a summary of restricted stock transactions
during the quarter ended March 31, 2006.
As of March 31, 2006, there was $5.4 million of total
unrecognized compensation cost related to nonvested restricted
stock. That cost is expected to be recognized over a
weighted-average period of 2.4 years. The total grant date
fair value of restricted stock vested during the quarter ended
March 31, 2006 was $1.4 million.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
Prior Year Pro Forma Disclosures
Prior to the adoption of SFAS No. 123R, the
Corporation applied the intrinsic-value-based method to account
for its fixed-plan stock options and provided pro forma
disclosures. Because the Corporation established the exercise
price based on the fair value as of the grant date, options
granted had no intrinsic value, and therefore no estimated
compensation expense was recorded in the Corporation’s
financial statements for periods prior to the adoption of
SFAS No. 123R. The following table illustrates the pro
forma effect on net earnings and earnings per share as if the
Corporation had applied the fair value recognition provisions of
SFAS No. 123, “Accounting for Stock-Based
Compensation,” to stock-based compensation. Fair value of
grants as of March 31, 2005 was estimated on the grant date
using a Black-Scholes option-pricing model.
The following are assumptions used in Black-Scholes valuations
during the quarter ended March 31, 2005.
The weighted-average grant date fair value of options granted
during the quarter ended March 31, 2005 was $8.70. The
total intrinsic value of options exercised during the quarter
ended March 31, 2005 was $6.7 million.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
The Corporation’s income tax provision for the quarter
ended March 31, 2006 was $15.8 million, or an
effective rate of 29% of pre-tax income, compared to a tax
provision in the quarter ended March 31, 2005 of
$10.0 million, or an effective rate of 29% of pre-tax
income. The effective rate for both years reflects benefits from
our Puerto Rican manufacturing operations.
The Corporation had net deferred tax assets totaling
$63.2 million as of March 31, 2006 and
$60.4 million as of December 31, 2005. Realization of
deferred tax assets is dependent upon the Corporation’s
ability to generate sufficient future taxable income and, if
necessary, execution of its tax planning strategies. Management
believes that it is more-likely-than-not that future taxable
income and tax planning strategies, based on tax laws in effect
as of March 31, 2006, will be sufficient to realize the
recorded deferred tax assets, net of the existing valuation
allowance at March 31, 2006. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this
assessment. Management has identified certain tax planning
strategies that it could utilize to avoid the loss carryforward
expiring prior to their realization. These tax planning
strategies include primarily sales of non-core assets. Projected
future taxable income is based on management’s forecast of
the operating results of the Corporation, and there can be no
assurance that such results will be achieved. Management
periodically reviews such forecasts in comparison with actual
results and expected trends. In the event management determines
that sufficient future taxable income, in light of tax planning
strategies, may not be generated to fully realize the net
deferred tax assets, the Corporation will increase the valuation
allowance by a charge to income tax expense in the period of
such determination. Additionally, if events change in subsequent
periods which indicate that a previously recorded valuation
allowance is no longer needed, the Corporation will decrease the
valuation allowance by providing an income tax benefit in the
period of such determination.
Total comprehensive income and its components are as follows:
The Corporation is exposed to market risk from changes in raw
material prices, foreign-exchange rates, and interest rates. At
times, the Corporation may enter into various derivative
instruments to manage certain of these risks. The Corporation
does not enter into derivative instruments for speculative or
trading purposes.
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
At times, the Corporation enters into interest rate swap
agreements. As of March 31, 2006, the Corporation had
outstanding interest rate swap agreements with a notional amount
of $81.3 million relating to debt securities maturing in
June 2013. The interest rate swap agreements effectively convert
fixed interest rates associated with its debt securities to
floating interest rates based on the London Interbank Offered
Rate (“LIBOR”) plus an applicable spread.
The interest rate swaps qualify for the short-cut method of
accounting for a fair value hedge under SFAS No. 133.
The amount to be paid or received under the interest rate swap
agreements is recorded as a component of net interest expense.
At March 31, 2006, the net
out-of-the-money fair
value of the interest rate swaps was $6.7 million, which is
comprised of $6.7 million classified in other long-term
liabilities with an off-setting $6.7 million net decrease
in the book value of the debt hedged. At December 31, 2005,
the net
out-of-the-money fair
value of the interest rate swaps was $5.0 million, which is
comprised of $5.0 million classified in other long-term
liabilities with an offsetting $5.0 million net decrease in
the book value of the debt hedged. Net interest expense includes
expense of $0.2 million associated with these interest rate
swap agreements for the quarter ended March 31, 2006 and a
benefit of $0.4 million for the quarter ended
March 31, 2005.
The Corporation is exposed to risk from fluctuating prices for
certain materials used to manufacture its products, such as:
steel, aluminum, copper, zinc, resins and rubber compounds. At
times, some of the risk associated with usage of aluminum,
copper and zinc is mitigated through the use of futures
contracts that fix the price the Corporation will pay for a
commodity. Commodities futures contracts utilized by the
Corporation have not previously been designated as hedging
instruments and do not qualify for hedge accounting treatment
under the provisions of SFAS No. 133 and
SFAS No. 138.
Mark-to-market gains
and losses for commodities futures, if any, are recorded in cost
of sales. As of March 31, 2006, the Corporation had
outstanding commodities futures contracts with a notional amount
of $1.3 million and a market value which is recorded in
prepaid expenses of $3.1 million. As of December 31,
2005, the Corporation had outstanding commodities futures
contracts with a notional amount of $4.6 million and a
market value which is recorded in prepaid expenses of
$4.0 million. Cost of sales reflects a loss of
$0.9 million for the quarter ended March 31, 2006 and
a gain of $0.9 million for the quarter ended March 31,
2005, related to
mark-to-market
adjustments for commodities futures contracts.
From time to time, the Corporation utilizes forward foreign
exchange contracts for the sale or purchase of foreign
currencies (principally European currencies). Forward foreign
exchange contracts utilized by the Corporation have not
previously been designated as hedging instruments and do not
qualify for hedge accounting treatment under the provisions of
SFAS No. 133 and SFAS No. 138.
Mark-to-market gains
and losses for forward foreign exchange contracts are recorded
in other (expense) income, net. The Corporation had no
outstanding forward sale or purchase contracts as of
March 31, 2006 and December 31, 2005. For the quarter
ended
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
March 31, 2006, the Corporation had no
mark-to-market
adjustments for forward foreign exchange contracts. For the
quarter ended March 31, 2005, the Corporation recorded a
mark-to-market loss of
$0.4 million for forward foreign exchange contracts in
other (expense) income.
The Corporation’s long-term debt at March 31, 2006 and
December 31, 2005 was:
The Corporation’s $200 million committed revolving
credit facility contains customary covenants which could
restrict the payment of dividends, investments, liens, certain
types of additional debt and dispositions of assets if the
Corporation fails to maintain its financial covenants and
certain minimum levels of total availability under the facility.
The Corporation pays an annual commitment fee of 20 basis
points to maintain this unsecured facility. No borrowings were
outstanding under this facility as of March 31, 2006. Any
borrowings outstanding as of June 2010 would mature on that date.
Outstanding letters of credit which reduced availability under
the $200 million credit facility, amounted to
$32.8 million at March 31, 2006. The letters of credit
relate primarily to third-party insurance claims processing,
existing debt obligations and certain tax incentive programs.
The Corporation has a EUR10 million (approximately
US $12 million) committed revolving credit facility
with a European bank. The Corporation pays an annual unused
commitment fee of 25 basis points on the undrawn balance to
maintain this facility. This facility has an indefinite maturity
and no borrowings were outstanding as of March 31, 2006.
As of March 31, 2006, the Corporation’s aggregate
availability of funds under its credit facilities is
approximately $179.3 million, after deducting outstanding
letters of credit. The Corporation has the option, at the time
of drawing funds under any of the credit facilities, of
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
selecting an interest rate based on a number of benchmarks
including LIBOR, the federal funds rate, or the prime rate of
the agent bank.
Interest expense-net in the accompanying statements of
operations includes interest income of $4.2 million for the
quarter ended March 31, 2006 and $2.0 million for the
quarter ended March 31, 2005.
Net periodic cost for the Corporation’s defined benefit
pension plans and for post-retirement health-care and life
insurance benefits included the following components:
Contributions to the Corporation’s qualified and
non-qualified pension plans during the quarters ended
March 31, 2006 and 2005 were not significant. The
Corporation expects required contributions during the remainder
of 2006 to its qualified and non-qualified pension plans to be
minimal.
The Corporation has three reportable segments: Electrical, Steel
Structures and HVAC. The Electrical segment designs,
manufactures and markets thousands of different electrical
connectors, components and other products for electrical,
utility and communications applications. The Steel Structures
segment designs, manufactures and markets tubular steel
transmission and distribution poles and lattice steel
transmission towers for North American power companies. The HVAC
segment designs, manufactures and markets heating and
ventilation products for commercial and industrial buildings.
The Corporation’s reportable segments are based primarily
on product lines and represent the primary mode used to assess
allocation of resources and performance. The Corporation
evaluates its business segments primarily on the basis of
segment earnings, with segment earnings
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
defined as earnings from continuing operations before interest,
taxes and certain other charges. The Corporation has no material
inter-segment sales.
By July 2000, Kaiser Aluminum, its property insurers, 28 Kaiser
injured workers, nearby businesses and a class of 18,000
residents near the Kaiser facility in Louisiana, filed product
liability and business interruption cases against the
Corporation and six other defendants in Louisiana state court
seeking damages in excess of $550 million. These cases
alleged that a Thomas & Betts cable tie mounting base
failed, thereby allowing bundled cables to come in contact with
a 13.8 kV energized bus bar. This alleged electrical fault
supposedly initiated a series of events culminating in an
explosion, which leveled 600 acres of the Kaiser facility.
A trial in the fall of 2001 resulted in a jury verdict in favor
of the Corporation. However, 13 months later, the trial
court overturned that verdict in granting plaintiffs’
motions for judgment notwithstanding the verdict. In December
2002, the trial court judge found the Thomas &
Betts’ product, an adhesive backed mounting base, to be
unreasonably dangerous and therefore assigned 25% fault to
Thomas & Betts. The judge set the damages for an injured
worker at $20 million and the damages for Kaiser at
$335 million. The judgment did not address damages for
nearby businesses or the class of 18,000 residents near the
Kaiser facility. The Corporation’s 25% allocation was
$88.8 million, plus legal interest. The Corporation
appealed to
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
the Louisiana Court of Appeals, an intermediate appellate court.
The appeal required a bond in the amount of $104 million
(the judgment plus legal interest). Plaintiffs successfully
moved the trial court to increase the bond to $156 million.
The Corporation’s liability insurers have secured the
$156 million bond. The case was briefed and in January 2006
was argued before the Louisiana Court of Appeals.
In March 2006, the Louisiana Court of Appeals unanimously
reversed the trial court’s decision and reinstated the jury
verdict of no liability in favor of the Corporation. In
April 2006, the plaintiffs filed with the Louisiana Supreme
Court an appeal of the Court of Appeals decision. Management
intends to vigorously contest the appeal by plaintiffs.
In 2004, the Corporation and the class of 18,000 residents
reached a court-approved settlement. The settlement extinguished
the claims of all class members and included indemnity of the
Corporation against future potential claims asserted by class
members or those class members who opted out of the settlement
process. The $3.75 million class settlement amount was paid
directly by an insurer of the Corporation. The claims of the
nearby businesses have been partially dismissed and to date
never pursued further.
The Corporation is also involved in legal proceedings and
litigation arising in the ordinary course of business. In those
cases where we are the defendant, plaintiffs may seek to recover
large and sometimes unspecified amounts or other types of relief
and some matters may remain unresolved for several years. Such
matters may be subject to many uncertainties and outcomes which
are not predictable with assurance. We consider the gross
probable liability when determining whether to accrue for a loss
contingency for a legal matter. We have provided for losses to
the extent probable and estimable. The legal matters that have
been recorded in our consolidated financial statements are based
on gross assessments of expected settlement or expected outcome.
Additional losses, even though not anticipated, could have a
material adverse effect on our financial position, results of
operations or liquidity in any given period.
The Corporation follows the provisions of FASB Interpretation
No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation requires the
Corporation to recognize the fair value of guarantee and
indemnification arrangements issued or modified by the
Corporation, if these arrangements are within the scope of that
Interpretation. In addition, under previously existing generally
accepted accounting principles, the Corporation continues to
monitor the conditions that are subject to the guarantees and
indemnifications to identify whether it is probable that a loss
has occurred, and would recognize any such losses under the
guarantees and indemnifications when those losses are estimable.
The Corporation generally warrants its products against certain
manufacturing and other defects. These product warranties are
provided for specific periods of time and usage of the product
depending on the nature of the product, the geographic location
of its sale and other
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THOMAS & BETTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
factors. The accrued product warranty costs are based primarily
on historical experience of actual warranty claims as well as
current information on repair costs.
The following table provides the changes in the
Corporation’s accruals for estimated product warranties:
In conjunction with the divestiture of the Corporation’s
Electronics OEM business to Tyco Group S.A.R.L. in July 2000,
the Corporation provided an indemnity to Tyco associated with
environmental liabilities that were not known as of the sale
date. Under this indemnity, the Corporation is liable for
subsequently identified environmental claims up to
$2 million. Additionally, the Corporation as of
March 31, 2006 is liable for 50% of subsequently identified
environmental claims that exceed $2 million and such
liability becomes zero in July 2007. To date, environmental
claims by Tyco have been negligible.
On May 3, 2006, the Corporation’s board of directors
approved a share repurchase plan that allows the Corporation to
buy up to three million of its common shares. The timing of
repurchases will depend upon a variety of factors including
market conditions and are expected to be completed over the next
two years. The Corporation will repurchase the shares from
available cash resources.
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Executive Overview
Thomas & Betts Corporation is a leading designer and
manufacturer of electrical connectors and components used in
industrial, commercial, communications, and utility markets. We
are also a leading producer of commercial heating units and
highly engineered steel structures used for, among other things,
utility transmission. We operate in approximately 20 countries.
Manufacturing, marketing and sales activities are concentrated
primarily in North America and Europe.
Critical Accounting Policies
The preparation of financial statements contained in this report
requires the use of estimates and assumptions to determine
certain amounts reported as net sales, costs, expenses, assets
or liabilities and certain amounts disclosed as contingent
assets or liabilities. We cannot assure that actual results will
not differ from those estimates or assumptions. Our significant
accounting policies are described in Note 2 of the Notes to
Consolidated Financial Statements in our Annual Report on
Form 10-K for the
fiscal year ended December 31, 2005. We believe that our
critical accounting policies include: Revenue Recognition;
Inventory Valuation; Goodwill and Other Intangible Assets;
Long-Lived Assets; Pension and Postretirement Benefit Plan
Actuarial Assumptions; Income Taxes; and Environmental Costs.
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2006 Outlook
We currently believe that we will continue to see solid
underlying demand in our key markets in 2006. Given our strong
first quarter 2006 performance, we expect high-single digit
sales growth, driven primarily by volume, and earnings per
diluted share in the range of $2.55 to $2.60 for the full year
2006. Our 2006 outlook assumes an effective tax rate of 29% and
includes a charge of approximately $0.06 per diluted share
from the adoption of Statement on Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based
Payment.” The key risks we may face in 2006 include
continued higher prices and volatility in commodity markets for
our materials, and the potential negative impact of rising
energy costs and higher interest rates on capital spending in
the markets we serve. Other risks and uncertainties which may
affect our sales performance and earnings per share in 2006 are
identified under the caption “Caution Regarding
Forward-Looking Statements” in this Form 10-Q.
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Summary of Consolidated Results
2006 Compared with 2005
First quarter 2006 net sales increased from the prior-year
period for the Corporation as a whole and for each of its
segments reflecting continued underlying strength in most of our
key markets. The net sales increase was driven primarily by
volume increases in the Electrical and Steel Structures segments
and price increases to offset higher material and energy costs.
The effect of foreign currency exchange on net sales growth was
not significant.
Earnings from operations for the first quarter of 2006 were up
significantly compared to the prior-year period reflecting
higher sales and improved fixed cost absorption (i.e., operating
efficiencies).
First quarter net sales in 2006 were $441.8 million, up
$49.6 million, or 12.7%, from the prior-year period. Higher
sales volumes and price increases to offset higher material and
energy costs contributed significantly to the sales improvement.
Sales also benefited from our ability to effectively respond to
higher order activity while maintaining high levels of service
to our customers.
The first quarter 2006 gross profit was $136.3 million, or
30.9% of net sales, compared to $111.0 million or 28.3% in
2005. This improvement reflects increased sales volumes with our
plants benefiting from improved absorption. During the first
quarter 2006, we experienced higher material
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and energy costs compared to the prior-year period, which were
largely offset through increased selling prices for our products.
Selling, general and administrative (“SG&A”)
expense in the first quarter of 2006 was $78.5 million, or
17.8% of net sales, essentially flat as a percentage of net
sales compared to the prior-year period. The year-over-year
dollar increase in SG&A of $9.2 million is the result
of higher sales, the timing of certain expenses and the
inclusion of stock option expense in 2006.
Interest expense, net for the first quarter of 2006 decreased
$3.7 million from the prior-year period due primarily to
higher interest income and lower interest expense. Interest
income included in interest expense, net was $4.2 million
for the first quarter of 2006 and $2.0 million for the
first quarter of 2005. Interest expense of $7.7 million in
the first quarter of 2006 and $9.2 million in the first
quarter of 2005 reflects lower average debt levels and the
impact of interest rate swap agreements. Interest rate swap
agreements resulted in an expense of $0.2 million in the
first quarter of 2006 and a benefit of $0.4 million in the
first quarter of 2005.
The income tax provision in the first quarter of 2006 reflected
an effective rate of 29% of pre-tax income compared to an
effective rate in the prior-year period of 29% of pre-tax
income. The effective rate for both years reflects benefits from
our Puerto Rican manufacturing operations.
Net Earnings were $38.8 million, or $0.63 per basic
and $0.62 per diluted share, in the first quarter of 2006
compared to net earnings of $24.4 million, or
$0.41 per basic and $0.40 per diluted share, in the
first quarter of 2005. Higher 2006 results reflect increased
operating earnings on higher current year sales volumes and the
benefit of lower interest expense.
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Summary of Segment Results
Net Sales
Segment Earnings
We evaluate our business segments primarily on the basis of
segment earnings. Segment earnings are defined as earnings from
continuing operations before interest, taxes and certain other
charges.
Our segment earnings are significantly influenced by the
operating performance of our Electrical segment that accounted
for more than 75% of our consolidated net sales and consolidated
segment earnings during each of the periods presented.
Electrical Segment
Electrical segment net sales of $357.8 million in the first
quarter of 2006 were up $41.0 million, or 12.9%, from the
prior-year period. Improved sales volume and higher selling
prices to offset higher material and energy costs contributed
significantly to the sales growth. Strong demand in industrial,
light commercial construction and utility distribution markets
drove the volume improvement.
Electrical segment earnings of $47.7 million in the first
quarter of 2006 were up $14.6 million, or 44.3%, from the
prior-year period. Higher sales volumes, improved operating
efficiencies and our continued ability to offset higher material
and energy costs through higher selling prices contributed to
the improvement in segment earnings.
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Other Segments
First quarter net sales of $52.7 million in 2006 in our
Steel Structures segment were up $8.1 million, or 18.1%,
from the prior-year period. The sales increase reflects higher
levels of capital investment by U.S. electrical utilities
to expand or upgrade regional transmission grids. Steel
Structures segment earnings in the first quarter of 2006 were
$7.0 million, up 30.9%, from the first quarter of 2005
primarily reflecting the higher sales volume.
First quarter net sales and earnings in 2006 in our HVAC segment
were $31.2 million and $3.3, respectively, essentially flat
with net sales of $30.7 million and segment earnings of
$3.7 in the first quarter of 2005. The 2006 results were
affected by mild winter weather.
Liquidity and Capital Resources
The Corporation had cash and cash equivalents of
$391.7 million and $216.7 million at March 31,
2006 and December 31, 2005, respectively. Additionally, the
Corporation had marketable securities of $0.5 million and
$292.2 million at March 31, 2006 and December 31,
2005, respectively.
The following table reflects the primary category totals in our
Consolidated Statements of Cash Flows.
Cash provided by operating activities during the quarters ended
March 31, 2006 and 2005 was primarily attributable to net
earnings and the impact of changes in working capital. Operating
activities in 2006 reflect the impact of $2.9 million
associated with incremental tax effects for share-based payment
arrangements. Due to the Corporation’s use of the modified
prospective application of accounting for share-based payments,
2005 operating activities have not been adjusted for comparative
purposes.
During the quarter ended March 31, 2006, we had capital
expenditures totaling $14.1 million, compared to
$8.3 million in the prior-year period. We expect capital
expenditures to be approximately $45 to $50 million in
2006. This spending is for projects that maintain our existing
production capabilities and support our ongoing business plans.
As of December 31, 2005, the Corporation’s marketable
securities include primarily auction-rate securities. The
interest rates on these securities reset typically monthly to
prevailing market rates, but may have longer stated maturities.
All such securities were liquidated during the quarter ended
March 31, 2006.
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During the quarter ended March 31, 2005, we purchased the
net operating assets of Southern Monopole and Utilities Company
for $16.5 million. Southern Monopole manufactures steel
poles used primarily for electrical transmission towers.
Cash used in financing activities during the quarter ended
March 31, 2006 reflected debt repayments of
$150.1 million. In January 2006, $150 million of
senior unsecured notes payable were paid upon maturity from
available cash resources. Financing activities included
$30.1 million of cash provided by stock options exercised
in 2006 and $11.0 million in 2005. Financing activities in
2006 reflect the impact of $2.9 million associated with
incremental tax effects for share-based payment arrangements.
Cash flows from operating activities in 2006 have been reduced
by a similar amount. Due to the Corporation’s use of the
modified prospective application of accounting for share-based
payments, 2005 financing activities have not been adjusted for
comparative purposes.
The Corporation’s $200 million committed revolving
credit facility contains customary covenants which could
restrict the payment of dividends, investments, liens, certain
types of additional debt and dispositions of assets if the
Corporation fails to maintain its financial covenants and
certain minimum levels of total availability under the facility.
The Corporation pays an annual commitment fee of 20 basis
points to maintain this unsecured facility. We have the option,
at the time of drawing funds under the facility, of selecting an
interest rate based on the London Interbank Offered Rate
(LIBOR), the federal funds rate, or the prime rate of the agent
bank. No borrowings were outstanding under this facility as of
March 31, 2006. Any borrowings outstanding as of June 2010
would mature on that date.
The Corporation is in compliance with the following significant
financial covenants contained in the $200 million credit
facility:
Fixed Charge Coverage Ratio. The Corporation must
maintain a ratio, as defined in the agreement, of no less than
2.50 to 1.00 as of the end of any fiscal quarter through
March 31, 2006; 2.75 to 1.00 as of the end of any fiscal
quarter ending June 30, 2006 through December 31,
2006; and 3.00 to 1.00 as of the end of any fiscal quarter
ending March 31, 2007 and thereafter.
Leverage Ratio. The Corporation must maintain a ratio, as
defined in the agreement, of no greater than 4.00 to 1.00 as of
the end of any fiscal quarter through December 31, 2006;
3.75 to 1.00 as of the end of any fiscal quarter ending
March 31, 2007 and thereafter.
At March 31, 2006, outstanding letters of credit, or
similar financial instruments that reduce the amount available
under the $200 million credit facility totaled
$32.8 million. Letters of credit relate primarily to
third-party insurance claims processing, existing debt
obligations and certain tax incentive programs.
We have a EUR10 million (approximately
US $12 million) committed revolving credit facility
with a European bank that has an indefinite maturity.
Availability under this facility is EUR10 million
(approximately US $12 million) as of March 31,
2006. This credit facility
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contains standard covenants similar to those contained in the
$200 million credit agreement and standard events of
default such as covenant default and cross-default.
We are in compliance with all covenants or other requirements
set forth in our credit facilities. However, if we fail to be in
compliance with the financial or other covenants of our credit
agreements, then the credit agreements could be terminated, any
outstanding borrowings under the agreements could be accelerated
and immediately due and we could have difficulty renewing or
obtaining credit facilities in the future.
As of March 31, 2006, the aggregate availability of funds
under our credit facilities was approximately
$179.3 million, after deducting outstanding letters of
credit. Availability is subject to the satisfaction of various
covenants and conditions to borrowing. These are back up
facilities that have not been utilized and we currently do not
expect to utilize these facilities in the foreseeable future.
As of March 31, 2006, we had investment grade credit
ratings from Standard & Poor’s, Moody’s
Investor Service and Fitch Ratings on our senior unsecured debt.
Should these credit ratings drop, repayment under our credit
facilities and securities will not be accelerated; however, our
credit costs may increase. Similarly, if our credit ratings
increase, we may have a decrease in our credit costs. The
maturity of the senior unsecured debt securities do not
accelerate in the event of a credit downgrade.
Thomas & Betts had the following senior unsecured debt
securities outstanding as of March 31, 2006:
The indentures underlying the debt securities contain standard
covenants such as restrictions on mergers, liens on certain
property, sale-leaseback of certain property and funded debt for
certain subsidiaries. The indentures also include standard
events of default such as covenant default and
cross-acceleration. We are in compliance with all covenants and
other requirements set forth in the indentures.
On May 3, 2006, the Corporation’s board of directors
approved a share repurchase plan that allows the Corporation to
buy up to three million of its common shares. The timing of
repurchases will depend upon a variety of factors including
market conditions and are expected to be completed over the next
two years. The Corporation will repurchase the shares from
available cash resources.
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The Corporation does not currently pay cash dividends. Future
decisions concerning the payment of cash dividends on the common
stock will depend upon our results of operations, financial
condition, capital expenditure plans and other factors that the
Board of Directors may consider relevant.
In the short-term we expect to fund expenditures for capital
requirements as well as other liquidity needs from a combination
of cash generated from operations and existing cash balances.
These sources should be sufficient to meet our operating needs
in the short-term.
Over the long-term, we expect to meet our liquidity needs with a
combination of cash generated from operations and existing cash
balances plus increased debt or equity issuances. From time to
time, we may access the public capital markets if terms, rates
and timing are acceptable. We have an effective shelf
registration statement that will permit us to issue an aggregate
of $325 million of senior unsecured debt securities, common
stock and preferred stock.
Off-Balance Sheet Arrangements
As of March 31, 2006, we did not have any off-balance sheet
arrangements.
Refer to Note 10 in the Notes to Consolidated Financial
Statements for information regarding our guarantee and
indemnification arrangements.
Market Risk and Financial Instruments
Thomas & Betts is exposed to market risk from changes
in interest rates, raw material prices and foreign exchange
rates. At times, we may enter into various derivative
instruments to manage certain of these risks. We do not enter
into derivative instruments for speculative or trading purposes.
For the period ended March 31, 2006, the Corporation has
not experienced any material changes since December 31,
2005 in market risk that affect the quantitative and qualitative
disclosures presented in our 2005 Annual Report on
Form 10-K.
We have established disclosure controls and procedures to ensure
that material information relating to the Company is made known
to the Chief Executive Officer and Chief Financial Officer who
certify the Company’s financial reports.
Our Chief Executive Officer and Chief Financial Officer have
evaluated the Company’s disclosure controls and procedures
as of the end of the period covered by this report and they have
concluded that, as of this date, these controls and procedures
are effective to ensure that the information required to be
disclosed under the Securities Exchange Act of 1934 is disclosed
within the time periods specified by SEC rules.
There have been no significant changes in internal control over
financial reporting that occurred during the first quarter of
2006 that have materially affected or are reasonably likely to
materially affect the Company’s internal control over
financial reporting.
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PART II. OTHER INFORMATION
See Note 10, “Contingencies,” in the Notes to
Consolidated Financial Statements, which is incorporated herein
by reference. See also Item 3. “Legal
Proceedings,” in the Corporation’s 2005 Annual Report
on Form 10-K, which is incorporated herein by reference.
There are many factors that could pose a material risk to the
Corporation’s business, its operating results and financial
condition and its ability to execute its business plan, some of
which are beyond our control. There have been no material
changes from the risk factors as previously set forth in our
2005 Annual Report on
Form 10-K under
Item 1A. “Risk Factors,” which is
incorporated herein by reference.
Shareholders who wish to present director nominations or other
business at the Annual Meeting of Shareholders to be held in
2007 must give notice to the Secretary at our principal
executive offices on or prior to January 2, 2007.
The Exhibit Index that follows the signature page of this
Report is incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Corporation has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: May 5, 2006
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EXHIBIT INDEX
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