MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER RESULTS
Overview
Consolidated net sales of $142.8 million for the third quarter
of 1994 increased 7% over the comparable 1993 period. Net
earnings of $10.2 million declined 11% from the third quarter of
1993. Net earnings per common share of $.20 decreased 9% from
the $.22 reported last year.
Gross margin as a percentage of net sales decreased to 30.8%
from 31.9% in last year's third quarter primarily as a result of
the specialty chemicals segment. Operating profit of $19.1
million declined by 12% as profits of the specialty process
equipment and controls segment increased 25% while those of the
specialty chemicals segment declined 25%.
Specialty Chemicals
The Company's specialty chemicals segment reported sales of
$92.6 million representing an 8% decrease from the comparable
period in 1993. Approximately 6% was attributable to lower unit
volume and 3% to lower selling prices, partially offset by 1%
favorable impact from foreign currency translation.
Domestic dyes sales of $48.7 million were 11% lower than the
third quarter of 1993 due to weak demand for apparel dyes (7%)
and lower selling prices (4%). International dyes sales of
$21.3 million declined by 10% versus the comparable 1993 period
primarily attributable to lower unit volume under a long-term
supply agreement. Specialty ingredients sales were essentially
unchanged from the comparable 1993 period. The percentage of
sales outside the United States decreased slightly to 24% from
25% in the third quarter of 1993.
Operating profit of $12.0 million for the third quarter of 1994
declined 25% from the comparable quarter in 1993 primarily
attributable to lower unit volume and lower selling prices,
offset in part by lower dye intermediate costs. The proportion
of operating profit outside the United States decreased to 21%
from 27% in the third quarter of 1993.
Specialty Process Equipment and Controls
The Company's specialty process equipment and controls segment
reported sales of $50.2 million representing a 51% increase over
the third quarter of 1993. Approximately 35% was attributable
to the acquisition of Egan Machinery, 11% to unit volume and 5%
to pricing. Export sales of $12.4 million were up 93% versus
1993 and accounted for 25% of total segment sales versus 19% for
the third quarter of 1993. Operating profit increased 25% to
$7.1 million in the third quarter of 1994. Approximately 11%
was attributable to the acquisition of Egan Machinery with the
balance attributable primarily to higher unit volume and
improved pricing. The order backlog for extruders and related
equipment at the end of the third quarter amounted to $68
million compared to $38 million at the end of 1993.
Other
Selling, general and administrative expenses of $24.2 million
increased 17% versus the third quarter of 1993 primarily due to
the acquisition of Egan Machinery and the impact of inflation.
Depreciation and amortization of $3.6 million increased 15%
versus the third quarter of 1993 primarily as a result of the
Egan Machinery acquisition and a higher fixed asset base.
Interest expense increased $323 thousand to $578 thousand in the
third quarter of 1994 primarily as a result of increased
borrowings. Other income of $424 thousand increased by $178
thousand versus 1993. The Company's effective tax rate of 36.3%
was lower than the 39% in the third quarter of 1993 primarily
because the latter rate reflected a retroactive charge for
increased federal income taxes.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales for the first nine months of 1994 of
$430.9 million increased 4% from the comparable period in 1993.
Net earnings of $39.1 million decreased slightly versus the
$39.5 million earned in the comparable period in 1993. Net
earnings per common share of $.76 were equal to last year.
Gross margin as a percentage of net sales decreased slightly to
31.9% from 32.3% reported in the comparable nine month period
last year. Operating profit of $70.1 million was 3% lower then
the comparable period in 1993 as profits of the specialty
process equipment and controls segment increased 27% while those
of the specialty chemicals segment decreased 13%.
Specialty Chemicals
The Company's specialty chemicals segment reported sales of
$293.6 million representing a decline of 5% versus the first
nine months of 1993. The decrease was attributable equally to
lower selling prices and unit volume.
Domestic dyes sales decreased 7% to $156.3 million for the first
nine months of 1994 due equally to lower selling prices and weak
demand for apparel dyes. International dyes sales of $67.7
million were lower by 7% versus 1993 primarily as a result of
lower unit volume under a long-term supply agreement. Specialty
ingredients sales rose 2% to $69.6 million reflecting increased
unit volume. The percentage of sales outside the United States
decreased slightly to 24% from 25% for the comparable period in
1993.
Operating profit of $47.6 million for the first nine months of
1994 decreased 13% from 1993 due primarily to lower unit volume
and lower pricing, offset in part by lower dye intermediate
costs. The percentage of operating profit outside the United
States decreased to 19% from 22% for the comparable period in
1993.
Specialty Process Equipment and Controls
The Company's specialty process equipment and controls segment
reported sales of $137.3 million representing a 29% increase
over the first nine months of 1993. Approximately 16% was
attributable to the acquisition of Egan Machinery, 9% to unit
volume and 4% to pricing. Export sales of $34 million increased
18% from 1993 and accounted for 25% of total segment sales
versus 27% in the first nine months of 1993. Operating profit
of $22.5 million increased 28% versus the comparable period in
1993. Approximately 5% was attributable to the acquisition of
Egan Machinery with the balance attributable primarily to unit
volume and improved pricing.
Other
Selling, general and administrative expenses of $66.4 million
increased 7% versus the first nine months of 1993 primarily due
to the acquisition of Egan Machinery and the impact of
inflation. Depreciation and amortization of $10.0 million
increased 6% primarily as a result of the Egan Machinery
acquisition and a higher fixed asset base. Interest expense and
other income were essentially the same versus 1993. The
Company's effective tax rate of 36.3% was lower than the 37.5%
in the comparable 1993 period.
LIQUIDITY AND CAPITAL RESOURCES
The September 24, 1994 working capital balance of $123.5 million
decreased $1.4 million from year-end 1993. The current ratio
declined to 1.9 from 2.3 at the end of 1993 primarily as a
result of increased short-term borrowings. Days sales in
receivables of 54 days increased slightly from 52 days at year-
end 1993. Inventory turnover of 2.8 for the first nine months
of 1994 declined slightly from 2.9 at year-end 1993.
Cash flows from operating activities of $14.1 million decreased
$17.2 million from the first nine months of 1993 primarily
attributable to increased working capital requirements. Cash
provided by operating activities, cash reserves and increased
borrowings were used to finance the acquisition of Egan
Machinery, fund capital expenditures, pay cash dividends and
repurchase 1.4 million shares of the Company's common stock.
The Company's debt to total capital ratio increased to 22% from
7% at year-end 1993. Capital expenditures are expected to
approximate $20 million in 1994 primarily for expansion and
improvement of operating facilities in the United States and
Europe. Long-term liquidity requirements including such items
as capital expenditures and dividends are expected to be
financed from operations.
INTERNATIONAL OPERATIONS
The lower U.S. dollar exchange rate at September 24, 1994 for
the Belgian Franc and French Franc accounted for the increase of
$4.3 million in the accumulated translation adjustment account
since year-end 1993. Changes in the balance of this account are
primarily a function of fluctuations in exchange rates and do
not necessarily reflect either enhancement or impairment of the
net asset values or the earnings potential of the Company's
foreign operations.
The Company operates manufacturing facilities in Europe which
serve primarily the European market. Exchange rate disruptions
between the United States and European currencies, and among
European currencies, are not expected to have a material effect
on year-to-year comparisons of the Company's earnings.
RESEARCH AND DEVELOPMENT
The Company employs about 240 engineers, draftsmen, chemists,
and technicians responsible for developing new and improved
chemical products, specialty food and pharmaceutical ingredients
and process equipment systems for the industries served by the
Company. Year-to-year variations in sales of such new products
generally are not expected to significantly affect the Company's
results versus the prior year. Research and development
expenditures totalled $8.6 million for the first nine months of
1994 compared to $8.3 million in the comparable 1993 period.
ENVIRONMENTAL MATTERS
The Company's manufacturing facilities are subject to various
federal, state and local requirements with respect to the
discharge of materials into the environment or otherwise
relating to the protection of the environment. The Company has
been designated, along with others, as a potentially responsible
party under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, or comparable state
statutes, at two waste disposal sites; and two inactive
subsidiaries have been designated, along with others, as
potentially responsible parties at a total of four other sites.
While the cost of compliance with existing environmental
requirements is expected to increase, based on the facts
currently known to the Company, management expects that those
costs, including the cost to the Company of remedial actions at
the waste disposal sites where it has been named a potentially
responsible party, will not have a material effect on the
Company's liquidity and financial condition and that the cost to
the Company of any remedial actions will not be material to the
results of the Company's operations in any given year.