SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the quarterly period
ended June 26, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period
from to
Commission File No. 1-4663
Crompton & Knowles Corporation
(exact name of registrant as specified in its charter)
Massachusetts 04-1218720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Station Place, Metro Center
Stamford, Connecticut 06902
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)353-5400
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at July 14, 1999
Common Stock, $.10 par value 65,465,975 shares
CROMPTON & KNOWLES CORPORATION
FORM 10-Q
FOR QUARTER ENDED JUNE 26, 1999
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements and
Accompanying Notes
. Consolidated Statements of Earnings
(unaudited) - Second quarter and six
months ended 1999 and 1998
. Consolidated Balance Sheets - June 26, 1999
(unaudited) and December 26, 1998
. Consolidated Statements of Cash Flows
(unaudited) - Six Months ended 1999 and 1998
. Notes to Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
*Exhibit 10.1 Amended and Restated Employment Agreement
*Exhibit 10.2 Amended Crompton & Knowles Corporation 1998
Long Term Incentive Plan
*Exhibit 27 Financial Data Schedules
* A copy of this Exhibit is annexed to this report on Form 10-Q
provided to the Securities and Exchange Commission.
UNAUDITED
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Second quarter and six months ended 1999 and 1998
(In thousands, except per share data)
Second quarter ended Six months ended
1999 1998 1999 1998
Net sales $ 409,174 $ 474,337 $ 805,466 $ 951,556
Cost of products sold 248,582 292,091 495,877 594,556
Selling, general
and administrative 60,066 66,074 120,656 133,347
Depreciation and amortization 18,666 20,394 37,503 40,487
Research and development 11,278 13,200 22,586 26,363
Equity income (2,379) - (9,434) -
Operating profit 72,961 82,578 138,278 156,803
Interest expense 12,953 20,505 26,107 44,118
Other (income) expense 451 (1,258) (40,255) (1,547)
Earnings before income
taxes and extraordinary loss 59,557 63,331 152,426 114,232
Provision for income taxes 21,588 23,536 55,254 42,494
Earnings before
extraordinary loss 37,969 39,795 97,172 71,738
Extraordinary loss on early
extinguishment of debt (1,085) (13,843) (1,085) (15,794)
Net earnings $ 36,884 $ 25,952 $ 96,087 $ 55,944
Basic Earnings per common share:
Earnings before
extraordinary loss $ .58 $ .53 $ 1.46 $ .96
Extraordinary loss (.02) (.18) (.02) (.21)
Net earnings $ .56 $ .35 $ 1.44 $ .75
Diluted Earnings per common share:
Earnings before
extraordinary loss $ .57 $ .52 $ 1.43 $ .94
Extraordinary loss (.02) (.18) (.02) (.21)
Net earnings $ .55 $ .34 $ 1.41 $ .73
Dividends per common share $ .05 $ .05 $ .05 $ .05
See accompanying notes to consolidated financial statements.
- 2 -
June 26, 1999 UNAUDITED
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 26, 1999 and December 26, 1998
(In thousands of dollars)
June 26, December 26,
1999 1998
ASSETS
CURRENT ASSETS
Cash $ 14,243 $ 12,104
Accounts receivable 199,368 173,668
Inventories 318,711 334,562
Other current assets 82,788 77,422
Total current assets 615,110 597,756
NON-CURRENT ASSETS
Property, plant and equipment 449,804 473,403
Cost in excess of acquired net assets 145,563 166,184
Other assets 170,715 171,550
$ 1,381,192 $ 1,408,893
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 15,327 $ 17,305
Accounts payable 106,396 117,338
Accrued expenses 133,451 139,401
Income taxes payable 79,657 103,179
Other current liabilities 14,711 17,149
Total current liabilities 349,542 394,372
NON-CURRENT LIABILITIES
Long-term debt 668,975 646,857
Postretirement health care liability 142,995 142,727
Other liabilities 142,686 158,234
STOCKHOLDERS' EQUITY
Common stock 7,733 7,733
Additional paid-in capital 240,884 238,615
Retained earnings (deficit) 76,830 (15,985)
Accumulated other comprehensive income (49,737) (37,571)
Treasury stock at cost (197,944) (125,246)
Deferred compensation (772) (843)
Total stockholders' equity 76,994 66,703
$ 1,381,192 $ 1,408,893
See accompanying notes to consolidated financial statements.
- 3 -
UNAUDITED
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended 1999 and 1998
(In thousands of dollars)
Increase (decrease) to cash 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 96,087 $ 55,944
Adjustments to reconcile net earnings
to net cash provided by operations:
Gain on sale of specialty ingredients (42,060) -
Extraordinary loss on early debt extinguishment 1,085 15,794
Depreciation and amortization 37,503 40,487
Equity income (9,434) -
Changes in assets and liabilities, net (a) (85,078) 2,177
Net cash provided (used) by operations (a) (1,897) 114,402
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of specialty ingredients 103,000 -
Capital expenditures (34,078) (21,341)
Acquisitions - (5,927)
Other investing activities (3,100) 235
Net cash provided (used) by investing activities 65,822 (27,033)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of 11% and 12% notes - (352,802)
Proceeds on long-term borrowings 22,118 279,313
Proceeds (payments) on short-term borrowings (1,978) 1,174
Premium paid on early extinguishment of debt (1,437) (15,289)
Treasury stock acquired (74,596) -
Dividends paid (3,272) (3,721)
Other financing activities (3,121) 9,343
Net cash used by financing activities (62,286) (81,982)
CASH
Effect of exchange rates on cash 500 (1,163)
Change in cash 2,139 4,224
Cash at beginning of period 12,104 10,607
Cash at end of period $ 14,243 $ 14,831
(a) 1999 includes tax payment of $48 million relating to fourth quarter
1998 Gustafson gain and 1998 includes Gustafson cash flow of
$14 million and accounts receivable discounting of $20 million.
See accompanying notes to consolidated financial statements.
-4-
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The information included in the foregoing consolidated financial
statements is unaudited but reflects all adjustments which, in the
opinion of management, are necessary for a fair statement of the
results for the interim periods presented.
Included in accounts receivable are allowances for doubtful
accounts of $10.8 million in 1999 and $9.8 million at December 26,
1998.
Accumulated depreciation amounted to $433.3 million in 1999 and
$434.7 million at December 26, 1998.
Accumulated amortization of cost in excess of acquired net assets
amounted to $41.1 million in 1999 and $44.6 million at December 26,
1998.
Accumulated amortization of patents, unpatented technology,
trademarks and other intangibles included in other assets amounted
to $126.9 million in 1999 and $120.9 million at December 26, 1998.
Cash payments during the quarters ended June 26, 1999 and June 27,
1998 included interest of $26.5 million and $40.7 million,
respectively, and income taxes of $76.8 million and $9.6 million,
respectively.
It is suggested that the interim consolidated financial statements
be read in conjunction with the consolidated financial statements
and notes included in the Company's 1998 Annual Report on Form 10-
K.
CAPITAL STOCK
As of June 26, 1999, there were 77,332,751 common shares issued at
$.10 par value, of which 11,876,760 shares were held in the
treasury.
INVENTORIES
Components of inventories are as follows:
June 26, Dec. 26,
(In thousands) 1999 1998
Finished goods $226,735 $226,663
Work in process 40,501 45,237
Raw materials and supplies 51,475 62,662
$318,711 $334,562
EARNINGS PER COMMON SHARE
The computation of basic earnings per common share is based on the
weighted average number of common shares outstanding. The
computation of diluted earnings per common share is based on the
weighted average number of common and common equivalent shares
outstanding. The following is a reconciliation of the shares used
in the computations:
(In thousands) Second Quarter Six Months
1999 1998 1999 1998
Weighted average common
shares outstanding 65,488 74,430 66,603 74,267
Stock options and
other equivalents 1,147 2,383 1,322 2,346
Weighted average common
and common equivalent
shares outstanding 66,635 76,813 67,925 76,613
BUSINESS SEGMENT DATA
The Company evaluates a segment's performance based on several
factors, of which a primary financial measure is operating profit.
In computing operating profit, the following items have not been
deducted: interest expense, other (income) expense and income
taxes. Intersegment sales are not significant.
Second Quarter Ended
June 26, June 27,
(In thousands) 1999 1998
SALES
Specialty Chemicals
Performance Chemicals $ 112,567 $ 116,228
Crop Protection 81,340 100,545
Colors 53,765 64,610
Other - 23,346
247,672 304,729
Polymers & Polymer Processing
Equipment
Polymers 79,410 88,456
Polymer Processing Equipment 82,092 81,152
161,502 169,608
Total net sales $ 409,174 $ 474,337
OPERATING PROFIT
Specialty Chemicals
Performance Chemicals $ 13,847 $ 16,121
Crop Protection 30,131 30,079
Colors 5,860 8,063
Other - 2,510
49,838 56,773
Polymers & Polymer Processing
Equipment
Polymers 22,686 21,126
Polymer Processing Equipment 5,511 9,832
28,197 30,958
General corporate expense ( 5,074) ( 5,153)
Total operating profit $ 72,961 $ 82,578
Six Months Ended
June 26, June 27,
(In thousands) 1999 1998
SALES
Specialty Chemicals
Performance Chemicals $ 226,081 $ 229,500
Crop Protection 147,058 208,388
Colors 103,943 125,710
Other - 48,151
477,082 611,749
Polymers & Polymer Processing
Equipment
Polymers 158,145 175,046
Polymer Processing Equipment 170,239 164,761
328,384 339,807
Total net sales $ 805,466 $ 951,556
OPERATING PROFIT
Specialty Chemicals
Performance Chemicals $ 26,849 $ 30,348
Crop Protection 52,245 58,358
Colors 10,562 14,937
Other - 4,998
89,656 108,641
Polymers & Polymer Processing
Equipment
Polymers 44,093 39,476
Polymer Processing Equipment 16,323 20,198
60,416 59,674
General corporate expense ( 11,794) ( 11,512)
Total operating profit $ 138,278 $ 156,803
Segment assets in the Other category of Specialty Chemicals
declined $65.0 million due to the disposition of the specialty
ingredients business. There are no other material changes in total
assets for any other segments from the amounts disclosed as of
year-end 1998.
COMPREHENSIVE INCOME
An analysis of the Company's comprehensive income follows:
Second Quarter Ended
June 26, June 27,
(In thousands) 1999 1998
Net earnings $ 36,884 $ 25,952
Other comprehensive expense:
Foreign currency translation
adjustments ( 262) ( 1,343)
Comprehensive income $ 36,622 $ 24,609
Six Months Ended
June 26, June 27,
(In thousands) 1999 1998
Net earnings $ 96,087 $ 55,944
Other comprehensive expense:
Foreign currency translation
adjustments ( 12,166) ( 4,539)
Comprehensive income $ 83,921 $ 51,405
The balance of accumulated other comprehensive income includes
accumulated translation adjustments and minimum pension liability
in the amounts of $48.7 million and $1.0 million at June 26, 1999,
and $36.6 million and $1.0 million at December 26, 1998.
MERGER AGREEMENT
On May 31, 1999, the Company's board of directors approved a
definitive agreement (the "Merger Agreement") for a tax-free,
stock-for-stock merger of equals with Witco Corporation ("Witco").
The Merger Agreement provides, among other things, subject to the
terms and conditions set forth therein, that (a) the Company will
merge with and into CK Witco Corporation ("CK Witco"), a wholly-
owned subsidiary of the Company (the "First Step Merger") and (b)
immediately thereafter, Witco will merge with and into CK Witco
Corporation (the "Second Step Merger"). The First Step Merger,
together with the Second Step Merger, will be known as the
"Merger", so that CK Witco is the surviving corporation. Under the
terms of the Merger, each share of the Company's common stock will
be automatically converted into one share of CK Witco common stock,
and each share of Witco common stock will be exchanged for .9242
shares of CK Witco common stock.
The Merger, which will be accounted for as a purchase, is subject
to approval by the shareholders of both companies at special
meetings of stockholders to be held on September 1, 1999. Common
stockholders of record on July 23, 1999 will be eligible to vote at
the special meeting.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER RESULTS
Overview
Consolidated net sales of $409.2 million for the second quarter
of 1999 decreased 14% from the comparable period in 1998. After
adjusting to exclude $57 million from deconsolidated joint
ventures and the sale of the specialty ingredients business, net
sales decreased 2%, primarily as a result of lower Colors sales.
International sales, including U.S. exports, were 42% of total
sales, up from 40% in the second quarter of 1998.
Net earnings before extraordinary losses decreased 5% to $38.0
million, or $.58 per share basic and $.57 per share diluted,
compared to $39.8 million, or $.53 per share basic and $.52 per
share diluted, in the second quarter of 1998. Net earnings
increased 42% to $36.9 million, or $.56 per share basic and $.55
per share diluted, compared to $26.0 million, or $.35 per share
basic and $.34 per share diluted, in the second quarter of 1998.
Gross margin as a percentage of sales increased to 39.2% from
38.4% in the second quarter of 1998. The increase was
attributable primarily to improved product mix and lower raw
material and manufacturing costs partially offset by lower
pricing. Consolidated operating profit of $73.0 million declined
12%; however, excluding the impact of deconsolidated joint
ventures and the sale of the specialty ingredients business,
operating profit was down 4% versus the second quarter of 1998.
Specialty Chemicals
Performance chemicals sales of $112.6 million decreased 3% from
the second quarter of 1998. Rubber chemical sales were lower by
5% primarily due to lower pricing, while specialty additive sales
were about equal to the prior year. Operating profit of $13.8
million was 14% below the $16.1 million in the prior year
primarily as a result of lower pricing in rubber chemicals.
Crop protection sales of $81.3 million decreased 19% from the
prior year primarily as a result of the deconsolidation of the
seed treatment joint venture. Excluding the $22.2 million impact
of the joint venture deconsolidation, crop protection sales
increased 4% from the second quarter of 1998. The increase in
sales was achieved despite the poor condition of the U.S. farm
economy and poor April and May weather conditions in California.
Benefitting the quarter were increased exports to China and the
Middle East, new product registrations in Eastern Europe and
improved California weather in June. Operating profit of $30.1
million was essentially unchanged from the prior year. However,
excluding the $3.4 million impact of the seed treatment joint
venture deconsolidation, operating profit increased 13% from
1998, primarily as a result of increased sales volume, lower
manufacturing costs and improved product mix.
Colors sales of $53.8 million decreased 17% from $64.6 million in
the second quarter of 1998 primarily as a result of continuing
weakness in the U.S. and European textile dye markets. Lower
selling prices in the quarter accounted for 6% of the sales
decline. Operating profit of $5.9 million decreased 27% from
$8.1 million in 1998 primarily as a result of lower sales volume
and pricing.
Other sales and operating profit decreased $23.3 million and $2.5
million, respectively, as a result of the sale of the specialty
ingredients business effective the first day of fiscal 1999.
Polymers & Polymer Processing Equipment
Polymers sales of $79.4 million decreased 10% from 1998 primarily
as a result of the deconsolidation of the nitrile rubber joint
venture. Excluding the $11.2 million impact from the joint
venture deconsolidation, polymer sales were 3% higher than the
second quarter of 1998. EPDM sales were up 4% primarily as a
result of higher pricing, while urethane sales increased 1% over
the prior year. Operating profit of $22.7 million increased 7%
over the prior year. Excluding the joint venture
deconsolidation, operating profit increased 9% from the second
quarter of 1998 primarily as a result of improved pricing and
lower raw material costs offset in part by lower equity income
from the nitrile rubber joint venture.
Polymer processing equipment sales of $82.1 million increased 1%
from $81.2 million in the prior year despite lower selling prices
of approximately 5%. New orders during the quarter were
significantly below shipments and the equipment order backlog
declined to $103 million from $118 million at the end of the
first quarter. Operating profit of $5.5 million was down 44%
from $9.8 million in 1998 primarily as a result of lower pricing
and a shift in sales to lower margin systems.
Other
Selling, general and administrative expenses of $60.1 million
decreased 9% versus the second quarter of 1998 primarily due to
the impact of the deconsolidation of the joint ventures and the
sale of the specialty ingredients business. Depreciation and
amortization (down 8%) and research and development costs (down
15%) also declined as a result of the deconsolidation of the
joint ventures and the sale of the specialty ingredients
business. Equity income of $2.4 million in the second quarter of
1999 was primarily attributable to the seed treatment joint
venture. Interest expense of $13.0 million decreased 37%
primarily due to lower levels of indebtedness and lower interest
cost on borrowings used to redeem high cost debt in 1998. Other
expense of $.5 million compares to other income of $1.3 million
in 1998. The effective tax rate of 36.2% compares favorably with
37.2% in the comparable 1998 quarter.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales of $805.5 million for the first six months
of 1999 decreased 15% from the comparable period in 1998. After
adjusting to exclude $131.7 million from deconsolidated joint
ventures and the sale of the specialty ingredients business, net
sales decreased 2%, primarily as a result of lower Colors sales.
International sales, including U.S. exports, were 43% of total
sales, up from 40% in the six months of 1998.
Net earnings increased 72% to $96.1 million, or $1.44 per share
basic and $1.41 per share diluted, compared to $55.9 million, or
$.75 per share basic and $.73 per share diluted, in the first six
months of 1998. Before after-tax special items (a $26.8 million
gain from the sale of the specialty ingredients business in 1999
and extraordinary losses on early extinguishment of debt of $1.1
million in 1999 and $15.8 million in 1998), net earnings were
$70.4 million, or $1.07 per share basic and $1.04 per share
diluted, compared with $71.7 million, or $.96 per share basic and
$.94 per share diluted, in the prior year.
Gross margin as a percentage of sales increased to 38.4% from
37.5% in the first six months of 1998. The increase was
attributable primarily to improved product mix and lower raw
material and manufacturing costs partially offset by lower
pricing. Consolidated operating profit of $138.3 million
declined 12%; however, excluding the impact of deconsolidated
joint ventures and the sale of the specialty ingredients
business, operating profit was down 2% from last year.
Specialty Chemicals
Performance chemicals sales of $226.1 million decreased 1% from
the first six months of 1998. Rubber chemical sales were lower
by 3% primarily due to lower pricing, while specialty additive
sales were higher by 1 percent. Performance chemicals operating
profit of $26.8 million decreased 12% versus the second quarter
of 1998 primarily as a result of lower pricing in rubber
chemicals.
Crop protection sales of $147.1 million decreased 29% from the
prior year primarily as a result of the deconsolidation of the
seed treatment joint venture. Excluding the $61.9 million impact
of the joint venture deconsolidation, crop protection sales were
essentially unchanged from the prior year. Operating profit of
$52.2 million decreased 10% from the prior year primarily due to
the seed treatment joint venture. Excluding the $10.0 million
impact of the joint venture deconsolidation, operating profit was
8% higher than 1998 primarily as a result of improved product mix
and lower manufacturing costs.
Colors sales of $103.9 million decreased 17% from the first six
months of 1998 primarily as a result of weakness in the U.S. and
European textile dye markets. Lower selling prices for the year
account for 5 percent of the sales decline. Operating profit of
$10.6 million was 29% lower than the first six months of 1998
primarily as a result of lower sales volume and pricing.
Other sales and operating profit decreased $48.2 million and $5.0
million, respectively, as a result of the sale of the specialty
ingredients business effective the first day of fiscal 1999.
Polymers & Polymer Processing Equipment
Polymers sales of $158.1 million decreased 10% from 1998
primarily as a result of the deconsolidation of the nitrile
rubber joint venture. Excluding the $21.7 million impact from
the joint venture deconsolidation, polymer sales were 3% higher
than the first six months of 1998. EPDM sales increased 5%
resulting primarily from higher selling prices. Urethane sales
were essentially unchanged from the prior year. Operating profit
of $44.1 million increased 12% over the prior year primarily as a
result of improved pricing and lower raw material costs.
Polymer processing equipment sales of $170.2 million were 3%
higher than the first six months of 1998 despite lower pricing of
3%. Operating profit of $16.3 million was 19% lower than 1998
primarily as a result of lower pricing and a shift in sales to
lower margin systems.
Other
Selling, general and administrative expenses of $120.7 million
decreased 10% versus the six months of 1998 primarily due to the
impact of the deconsolidation of the joint ventures and the sale
of the specialty ingredients business. Depreciation and
amortization (down 7%) and research and development costs (down
14%) also declined as a result of the deconsolidation of the
joint ventures and the sale of the specialty ingredients
business. Equity income of $9.4 million in the first six months
of 1999 was primarily attributable to the seed treatment joint
venture. Interest expense of $26.1 million decreased 41%
primarily due to lower levels of indebtedness and lower interest
cost on borrowings used to redeem high cost debt in 1998. Other
income of $40.3 million includes a gain in the amount of $42.1
million from the sale of the specialty ingredients business
offset partially by $2.2 million in fees related to the accounts
receivable securitization program. The effective tax rate of
36.2% compares favorably with 37.2% in the comparable 1998
period.
LIQUIDITY AND CAPITAL RESOURCES
The June 26, 1999 working capital balance of $265.6 million
increased $62.2 million from the year-end 1998 balance of $203.4
million, while the current ratio increased to 1.8 from 1.5. The
increase was primarily due to a seasonal increase in accounts
receivable of the crop protection business and to a $48.2 million
income tax payment related to the 1998 Gustafson gain. Days
sales in receivables averaged 43 days in the six month period in
1999, versus 54 days in the same period in 1998, principally due
to the impact of the accounts receivable securitization program.
Inventory turnover averaged 3.0, compared to 3.2 in 1998,
primarily as a result of the joint venture deconsolidations.
Net cash used by operations of $1.9 million changed $116.3 million from
the net cash provided by operations of $114.4 million in the first
half of 1998, primarily due to the 1999 tax payment on the 1998
Gustafson gain, 1998 cash flow provided by Gustafson of $14
million and accounts receivable discounting of $20 million in the
first half of the prior year. Cash provided from the sale of the
specialty ingredients business and additional borrowings under
the Company's revolving credit agreement were used primarily to
fund the net cash used by operations, repurchase common shares,
finance capital expenditures and pay the dividend. The Company's
debt to total capital decreased to 90% from 91% at year-end 1998.
The Company's liquidity needs, including debt servicing, are
expected to be financed from operations. The Company has
available a revolving credit agreement providing for borrowings
of $545 million through September 2003. Borrowings under the
agreement amounted to $327.1 million at June 26, 1999 and carried
a weighted average interest rate of 5.7%. In addition, the
Company has available an accounts receivable securitization
program to sell up to $82 million of domestic accounts receivable
to an agent bank. As of June 26, 1999, $80 million of domestic
accounts receivable had been sold under this agreement.
In September 1998, the Company announced a share repurchase
program to buy back 7.5 million shares or approximately 10% of
the common shares then outstanding. In January 1999, the Company
announced another share repurchase program for 6.8 million
shares, or approximately 10% of the common shares then
outstanding. During the first half of 1999, the Company
repurchased 4.1 million common shares and from September 1998 to
date, has repurchased 9.5 million shares at an average price of
$17.85 per share.
Capital expenditures are expected to approximate $70 million in
1999, primarily for replacement needs and improvement of domestic
and foreign facilities.
MARKET RISK
During the second quarter of 1999, the Company settled an
outstanding $230 million interest rate lock contract ("Interest
Hedge") with a major financial institution. The Interest Hedge
would have expired on September 1, 2000.
The fair market value of long-term debt is subject to interest
rate risk. The Company's long-term debt amounted to $669.0
million at June 26, 1999. The fair market value of such debt was
$685.9 million, and with respect to notes, has been determined
based on quoted market prices.
YEAR 2000 ISSUES
The Company has assessed and continues to assess its Information
Technology ("IT") infrastructures including those systems that
are typically viewed as non-IT systems to determine and address
any potential problems that may result from Year 2000 compliance
issues. As generally known, Year 2000 compliance issues pertain
to the ability of computerized systems to recognize and process
date sensitive information beginning January 1, 2000. The Company
has performed this assessment over the last three years and has
been implementing appropriate steps to be Year 2000 compliant in
both its IT and non-IT systems.
Under the Company's current environment, IT systems include
mission critical applications that directly support the Company's
operations. These IT systems also include networked personal
computers running desktop applications. Typical non-IT systems
within the Company's environment include process controls and
other microcontrollers containing imbedded computer chips. The
Company has completed its assessment of its non-IT systems and is
aggressively undertaking measures to remedy such systems. The
Company expects to complete this remediation by October 1999.
The Company employs a number of major mission critical IT systems
in its Specialty Chemicals and Polymers businesses. These systems
have been fully upgraded and tested to address Year 2000
compliance issues.
The Company's Polymer Processing Equipment business is supported
by a legacy system that runs on a mid-range computer system.
This system has been reworked and tested, and the Company
believes that it is now Year 2000 compliant. The Company has
assessed all other IT systems including non-IT systems in this
business segment and has undertaken necessary steps to address
any Year 2000 compliance issues. This business currently sells
equipment controls containing programs and microchips. The
Company believes that these products which are used in the
operation of extrusion machinery are Year 2000 compliant.
The Company has operations in Europe, Asia Pacific, and Latin
America supported by IT systems operating on mid-range computers.
The Company has completed upgrading these IT systems to address
Year 2000 compliance.
The Company is actively looking into the overall Year 2000
readiness of its major business partners including vendors,
suppliers, and service providers in order to determine that the
Company's operations will not be disrupted in the event that any
such third party failed to have Year 2000 compliant systems. The
Company has received assurances from nearly all of the major
business entities that it conducts business with that these
entities will be able to conduct business beyond January 1, 2000,
without any disruption. The Company continues to provide status
information of its Year 2000 compliance effort to its customers
and assures its customers that the Company's IT infrastructure
will continue to function properly beyond January 1, 2000.
The Company has spent approximately $5.6 million to assess and
correct Year 2000 compliance issues in its IT infrastructure
through June 26, 1999. The Company estimates that it will spend
an additional $.7 million to complete the remediation of Year
2000 compliance issues in its IT infrastructure. The Company is
committed to allocate funds to remediate any other Year 2000
compliance issues in the course of its ongoing assessment of its
IT infrastructure. Year 2000 compliance costs are not expected to
have a material effect on the Company's results of operations.
The Company does not expect to have any material risk exposure
emanating from its internal IT infrastructure. While it is not
expected to occur, failure of the Company's suppliers and key
customers to address Year 2000 compliance could have a material
adverse impact on the Company's operations. In particular,
failure of the Company's energy and telecommunication suppliers
to address Year 2000 compliance could have a material adverse
impact on the Company's operations. The Company is continuing to
assess its efforts to mitigate any potential risk associated with
Year 2000 compliance and is actively pursuing the development of
appropriate contingency plans when needed.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities." In June 1999, the Financial Accounting
Standards Board issued Statement No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" which delays the
effective date of Statement No. 133 to fiscal years beginning
after June 15, 2000. The Company plans to adopt this statement
in the first quarter of 2001.
ENVIRONMENTAL MATTERS
The Company is involved in claims, litigation, administrative
proceedings and investigations of various types in a number of
jurisdictions. A number of such matters involve claims for a
material amount of damages and relate to or allege environmental
liabilities, including clean-up costs associated with hazardous
waste disposal sites, natural resource damages, property damage
and personal injury. The Company and some of its subsidiaries
have been identified by federal, state or local governmental
agencies, and by other potentially responsible parties (each a
"PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or comparable
state statues, as a PRP with respect to costs associated with
waste disposal sites at various locations in the United States.
In addition, the Company is involved with environmental
remediation and compliance activities at some of its current and
former sites in the United States and abroad.
Each quarter, the Company evaluates and reviews estimates for
future remediation and other costs to determine appropriate
environmental reserve amounts. For each site, a determination is
made of the specific measures that are believed to be required to
remediate the site, the estimated total cost to carry out the
remediation plan, the portion of the total remediation costs to
be borne by the Company and the anticipated time frame over which
payments toward the remediation plan will occur. As of June 26,
1999, the Company's reserves for environmental remediation
activities totaled $92 million. It is reasonably possible that
the Company's estimates for environmental remediation liabilities
may change in the future should additional sites be identified,
further remediation measures be required or undertaken, the
interpretation of current laws and regulations be modified or
additional environmental laws and regulations be enacted.
The Company intends to assert all meritorious legal defenses and
all other equitable factors which are available to it with
respect to the above matters. The Company believes that the
resolution of these environmental matters will not have a
material adverse effect on the consolidated financial position of
the Company. While the Company believes it is unlikely, the
resolution of these environmental matters could have a material
adverse effect on the Company's consolidated results of
operations in any given year if a significant number of these
matters are resolved unfavorably.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-Q are forward looking
statements that involve risks and uncertainties. These
statements are based on currently available information and the
Company's actual results may differ significantly from the
results discussed. Investors are cautioned that there can be no
assurances that the actual results will not differ materially
from those suggested in such forward-looking statements.
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to page 16 of the Registrant's 1998 Annual
Report on Form 10-K for information pertaining to an action
instituted by the Connecticut Department of Environmental
Protection against Uniroyal involving wastewater discharges at
Uniroyal's Naugatuck, Connecticut plant. On July 30, 1999, the
parties entered into a Consent Judgment whereby Uniroyal agreed
to pay the sum of $1,200,000 and to comply with certain
injunctive provisions relating mainly to its discharges to the
publicly owned treatment works.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
10.1* Amended and Restated Employment Agreement
10.2* Amended Crompton & Knowles Corporation
1998 Long Term Incentive Plan
27* Financial Data Schedules
(b) A report on Form 8-K was filed by Crompton & Knowles
Corporation on June 2, 1999.
A report on Form 8-K/A was filed by Crompton & Knowles
Corporation on June 8, 1999.
* Copies of these Exhibits are annexed to this report on
Form 10-Q provided to the Securities and Exchange
Commission and the New York Stock Exchange.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
CROMPTON & KNOWLES CORPORATION
(Registrant)
August 10, 1999 By:/s/ Peter Barna
Peter Barna
Vice President, Finance &
Chief Financial Officer
August 10, 1999 By:/s/ John T. Ferguson II
John T. Ferguson II
Vice President, General
Counsel and Secretary