MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER RESULTS
Overview
Consolidated net sales of $164.8 million for the first quarter
of 1996 declined 2% from the comparable 1995 period. Net
earnings of $9.5 million declined 28% versus the first quarter
of 1995. Net earnings per common share of $.20 were 26% lower
than the $.27 reported last year.
Gross margin as a percentage of net sales decreased to 29.1%
from 30.7% in the first quarter of 1995 as a result of lower
margins in both of the Company's segments. Consolidated
operating profit of $16.8 million declined 25% from the first
quarter of 1995 as the specialty chemicals segment decreased 18%
and the specialty process equipment and controls segment
decreased 29%.
Specialty Chemicals
The Company's specialty chemicals segment reported sales of
$96.1 million which represents a decline of 6% from the first
quarter of 1995. The decrease was attributable to the impact of
lower unit volume (4%) and lower selling prices (2%).
Domestic dyes sales of $46.5 million declined 11% from the
comparable 1995 quarter primarily due to lower unit volume (8%)
and lower selling prices (3%). International dyes sales of
$23.5 million declined 4% versus the first quarter of 1995
primarily as a result of lower selling prices. Specialty
ingredients sales of $26.1 million rose 1% primarily as a result
of increased unit volume. The percentage of sales outside the
United States was 26%, versus 25% in the comparable 1995 period.
Operating profit of $12.8 million for the first quarter of 1996
decreased 18% from 1995. The decrease was attributable
primarily to the impact of lower unit volume and pricing. The
percentage of operating profit outside the United States
declined to 11% from 17% in 1995.
Specialty Process Equipment and Controls
The Company's specialty process equipment and controls segment
reported sales of $68.7 million, which represents an increase of
5% from the first quarter of 1995. Approximately 21% was
attributable to the incremental impact of acquisitions offset
partially by lower unit volume in the domestic business. Export
sales shipped from the U.S. accounted for 28% of total segment
sales versus 18% in the comparable period in 1995 as shipments
to the Far East increased significantly. International sales
increased substantially as a result of acquisitions and
accounted for 16% of total segment sales versus 1% in the first
quarter 1995.
Operating profit for the first quarter of 1996 declined 29% to
$7.1 million primarily attributable to lower unit volume in the
domestic business. International operating profit was not
significant in either the first quarter of 1996 or the first
quarter of 1995. The order backlog for extruders and related
equipment at the end of the first quarter of 1996 amounted to
$92 million (including ER-WE-PA backlog of $24 million) compared
to $72 million at December 30, 1995.
Other
Selling, general and administrative expenses of $27.1 million
increased 7% versus the comparable period in 1995 primarily due
to the impact of acquisitions. Depreciation and amortization of
$4.0 million increased 8% versus 1995 primarily as a result of a
higher fixed asset base including acquisitions. Interest
expense increased $469 thousand primarily as a result of
increased borrowings. Other income of $252 thousand
approximated the level for the first quarter of 1995. The
effective tax rate of 36.9% decreased slightly versus the
comparable 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
The March 30, 1996 working capital balance of $124.4 million
decreased $1.8 million from $126.2 million at year-end 1995.
The current ratio declined slightly to 1.7 from 1.8 at the end
of 1995. Days sales in receivables averaged 62 days in the first
quarter of 1996, an increase from 55 days for all of 1995.
Inventory turnover averaged 2.9 for the first quarter of 1996
compared with 2.8 for all of 1995.
Cash flows from operating activities of $14.3 million increased
$9.9 million from the first quarter of 1995 primarily
attributable to decreases in working capital requirements
partially offset by lower earnings. Cash provided by operating
activities and increased borrowings were used to finance the
acquisition of ER-WE-PA, fund capital expenditures and pay cash
dividends. The Company's debt to total capital ratio increased
to 35% from 34% at year-end 1995. Capital expenditures are
expected to approximate $16 million in 1996 primarily for
expansion and improvement of operating facilities in the United
States and Europe. The Company's long-term liquidity needs
including such items as capital expenditures and dividends are
expected to be financed from operations.
INTERNATIONAL OPERATIONS
The stronger U.S. dollar exchange rate versus the Belgian Franc
and French Franc accounted primarily for the reduction of $1.5
million in the accumulated translation adjustment account since
year-end 1995. 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 285 engineers, draftsmen, chemists,
and technicians responsible for developing new and improved
chemical products and process equipment systems for the
industries served by the Company. Often, new products are
developed in response to specific customer needs. The Company's
process of developing and commercializing new products and
product improvements is ongoing and involves many products, no
one of which is large enough to significantly impact the
Company's results of operations from year-to-year. Research and
development expenditures totaled $3.5 million for the first
quarter of 1996 compared to $3.4 million in the comparable 1995
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 an inactive
subsidiary has been designated, along with others, as a
potentially responsible party at two 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 be material to the results of the Company's operations in
any given year.