FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-3947
Hach Company
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(Exact name of Registrant as specified in its charter)
Delaware 42-0704420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5600 Lindbergh Drive, Loveland, Colorado 80537
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(Address of principal executive offices) (Zip code)
(970) 669-3050
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(Registrant's telephone number including area code)
Not applicable
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(Former name, former address, and former fiscal year,
if changed since last report)
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 registrant's
classes of common stock, as of December 16, 1997.
Title Outstanding
Common Stock 8,240,193
Class A Common Stock 8,236,193
Part I. Financial Information
Item 1. Financial Statements
Summarized Financial Statements
The accompanying Consolidated Balance Sheet as of November 1, 1997 and the
Consolidated Statements of Income and Retained Earnings for the quarters and the
six months ended November 1, 1997 and October 26, 1996 and the Consolidated
Statements of Cash Flows for the six months ended November 1, 1997 and October
26, 1996 are unaudited; however, in the opinion of management all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the results of such periods have been made. The results of
operations for the quarters and six months ended November 1, 1997 and October
26, 1996 are not necessarily indicative of the results of operations to be
expected for the full year.
The financial data included herein pursuant to Rule 10-01 of Regulation S-X
has been subjected to a review by Coopers & Lybrand L.L.P., the Registrant's
independent accountants.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Thousands of Dollars Except Share Data)
(Unaudited)
QUARTER ENDED SIX MONTHS ENDED
11/1/97 10/26/96 11/1/97 10/26/96
--------- --------- -------- ---------
Net sales $ 31,542 $ 30,284 $ 63,956 $ 59,194
Cost of sales 16,010 15,324 32,561 30,071
--------- --------- --------- ---------
Gross profit 15,532 14,960 31,395 29,123
Selling, general and administrative expense 8,782 8,244 17,668 16,253
Research and development expense 2,070 2,290 4,237 4,244
--------- --------- --------- ---------
Income from operations 4,680 4,426 9,490 8,626
Interest income 119 451 599 801
Interest expense (516) - (656) -
--------- --------- --------- ---------
Income before income taxes 4,283 4,877 9,433 9,427
Income tax expense 1,528 1,662 3,358 3,252
--------- --------- --------- ---------
Net income 2,755 3,215 6,075 6,175
Retained earnings, beginning of period $ 68,648 $ 69,455 $ 65,823 $ 67,177
Cash dividends (493) (682) (988) (1,364)
--------- --------- --------- ---------
Retained earnings, end of period $ 70,910 $ 71,988 $ 70,910 $ 71,988
========= ========= ========= =========
Net income per common share $ 0.16 $ 0.14 $ 0.32 $ 0.27
========= ========= ========= =========
Dividends per common share $ 0.03 $ 0.03 $ 0.06 $ 0.06
========= ========= ========= =========
Weighted average shares outstanding 16,455,936 22,726,116 18,764,029 22,719,314
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
NOVEMBER 1, 1997 April 30, 1997
---------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,485 $ 14,575
Marketable securities, held to maturity 879 19,100
Accounts receivable, less reserves
of $265 and $249, respectively 17,401 17,829
Inventories 12,899 11,798
Deferred taxes and other current assets 4,437 4,416
--------- ---------
Total current assets 45,101 67,718
Property, plant and equipment at cost:
Buildings and improvements 24,215 23,404
Machinery and equipment 50,013 46,555
--------- ---------
74,228 69,959
Less allowance for depreciation
and amortization 45,064 42,141
--------- ---------
29,164 27,818
Land 983 986
--------- ---------
Net property, plant and equipment 30,147 28,804
Marketable securities, held to maturity 1,606 7,406
Other assets 1,932 1,652
--------- ---------
Total Assets $ 78,786 $ 105,580
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
NOVEMBER 1, 1997 April 30, 1997
---------------- --------------
(Unaudited)
LIABILITIES
Current liabilities:
Accounts payable $ 3,515 $ 4,044
Accrued liabilities:
Compensation 1,220 1,082
Compensated absences 3,910 3,655
Profit sharing 1,758 3,473
Income taxes payable 359 753
Other 1,903 1,379
--------- ---------
Total current liabilities 12,665 14,386
Long term debt 30,000 -
Other long term liabilities 2,163 1,726
Deferred income taxes 1,930 2,179
--------- ---------
Total liabilities 46,758 18,291
STOCKHOLDERS' EQUITY
Common stock, $1 par value; (authorized
25,000,000 shares; issued 11,622,953 shares 11,623 11,623
Class A Common stock, $1 par value; (authorized
20,000,000 shares; issued 11,622,953 shares 11,623
Capital contributed in excess of par value - 453
Retained earnings 70,910 76,944
Cumulative currency translation adjustment (123) 338
--------- ---------
94,033 89,358
Less: Shares held in treasury at cost:
(6,769,520 at November 1, 1997 and
254,356 at April 30, 1997) (62,005) (2,069)
--------- ---------
Total Stockholders Equity 32,028 87,289
--------- ---------
Total Liabilities and Stockholders' Equity $ 78,786 $ 105,580
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED
November 1, 1997 October 26, 1996
---------------- ----------------
Cash flows from operating activities:
Net income $ 6,075 $ 6,175
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 3,097 3,002
Provision for deferred income taxes (250) 195
Loss on disposal of property, plant & equipment 7 16
(Increase) decrease in accounts receivable 428 (2,408)
(Increase) in inventories (1,101) (186)
Decrease in prepaid expenses & other assets (21) (1,498)
Increase (decrease) in accounts payable (529) 1,840
Decrease in accrued liabilities (755) (234)
------- -------
Net cash provided by operating activities 6,951 6,902
Cash flows from investing activities:
Capital expenditures (4,511) (2,805)
Purchases of investments held-to-maturity (2,213) (8,903)
Proceeds from the maturity of short-term investments 26,234 6,037
(Increase) in long-term assets (280) (73)
------- -------
Net cash used by investing activities 19,230 (5,744)
Cash flows from financing activities:
Dividends paid (988) (1,364)
Proceeds from borrowings 30,000 -
Purchases of treasury stock (60,279) (206)
Exercise of stock options 391 156
------- -------
Net cash used by financing activities (30,876) (1,414)
Effects of exchange rate changes (395) (286)
------- -------
Net (decrease) in cash & cash equivalents (5,090) (542)
Cash & cash equivalents at the beginning of the period 14,575 8,487
------- -------
Cash & cash equivalents at the end of the period $ 9,485 $ 7,945
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The consolidated balance sheet at November 1, 1997 and the consolidated
statements of income and retained earnings and cash flows for the interim
periods ended November 1, 1997 and October 26, 1996, have been prepared by the
Company, without audit. The April 30, 1997 balance sheet was derived from
audited financial statements and as presented does not include all the
disclosures required by generally accepted accounting principles. In the opinion
of management, all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made. These financial statements include
forward looking information as defined by the Private Securities Litigation
Reform Act of 1995 and therefore results of operations for the interim periods
are not necessarily indicative of the operating results for a full year of
future operations.
Certain amounts in the financial statements for April 30, 1997 have been
reclassified to conform with the current periods presentation.
2. Inventories
The components of inventories are: (Thousands of Dollars)
November 1, 1997 April 30, 1997
---------------- --------------
Raw materials and purchased parts $ 3,609 $ 2,811
Work-in-progress 1,402 1,534
Finished goods 7,468 7,031
Resale 420 422
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$ 12,899 $ 11,798
========= =========
3. Income Taxes
For both periods presented, the provision for income taxes is based upon an
expected annual effective income tax rate. The rates utilized for the quarter
ended November 1, 1997 and October 26, 1996 were 35.6% and 34.5% respectively.
4. Net Income Per Common Share
Net income per common share is based on the weighted average number of
shares outstanding during the period. Common stock equivalents do not have a
material dilutive effect on the net income per common share.
5. Capital Stock
On July 8, 1997, the Company repurchased the entire block of Hach Company
common stock which was owned by Lawter International. This stock represented
approximately 28% ownership in Hach Company. The purchase of the 3,157,223
shares at $19.00 per share was financed with $30 million of cash on hand and $30
million in bank financing.
On May 19, 1997, the Board of Directors approved a proposal to amend the
Company's Certificate of Incorporation. At the Company's annual meeting on
September 9, 1997 the shareholders approved a new class of stock designated as
Class A Common Stock. The Class A stock is non-voting except under certain
limited circumstances. All common shares and per share amounts in this report
have been adjusted to give retroactive effect to a two for one stock split
effected in the form of a stock dividend distributed on October 2, 1997 to
holders of record on September22, 1997. The distribution on October 2, 1997,
increased the number of shares outstanding from 8,228,581 to 16,457,162.
6. Long-Term Debt
During the first quarter of 1998, the Company entered into a revolving
credit agreement with Colorado National Bank. Under the Revolving Credit
Agreement, the Company may borrow up to $40,000,000 under a five-year unsecured
revolving credit facility, which matures on July 1, 2002. The Agreement has
restrictions on amounts outstanding which consist of (i) $40,000,000 to June 30,
2000; (ii) $32,500,000 from July 1, 2000 to June 30, 2001; and (iii) $22,500,000
from July 1, 2001 to the Revolving Credit Maturity Date of July 1, 2002. At
November 1, 1997, the Company had $30 million outstanding. The Revolving Credit
Agreement allows the Company to borrow at interest rates that vary based on the
Banks Reference Rate or the London Interbank Offered Rate (LIBOR), at the option
of the Company. The interest rate as of November 1, 1997, on the $30 million was
6.73%. The interest period for the loan is 90 days, which began on October 6,
1997. The Company is also required to pay a commitment fee of 12.5 or 25.0 basis
points per annum, depending on certain financial ratios, on the average daily
amount of unused funds.
The Revolving Credit Agreement contains covenants and provisions that
restrict, among other things, the ability of the Company and its material
subsidiaries to: (i) create liens on any of its property or assets or assign any
rights to security interests in future revenues; (ii) engage in sale and
leaseback transactions; (iii) engage in mergers, consolidations and sales of all
or substantially all of their assets on a consolidated basis; (iv) enter into
agreements restricting dividends and advances by the subsidiaries; and, (v)
engage in transactions with affiliates other than those based on arm's-length
negotiations. The Revolving Credit Agreement also limits the ability of the
Company and or subsidiaries to purchase capital items, incur indebtedness or
issue preferred stock. The Revolving Credit Agreement also requires the Company
to satisfy certain financial performance criteria.
7. Recently Issued Financial Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," in February 1997.
This statement, which is required to be adopted in the third quarter of fiscal
year 1998, establishes standards for computing and presenting earnings per
share. The FASB issued Statement of Financial Accounting Standards No. 129,
"Information about Capital Structure," also in February 1997. This statement,
which is required to be adopted in the third quarter of fiscal year 1998,
establishes standards for disclosing information about an entity's capital
structure. The FASB also issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," in June 1997. This statement, which is
also required to be adopted in the third quarter of fiscal year 1998,
establishes standards for reporting of comprehensive income and its components
(such as revenues, expenses, gains and losses). The FASB also issued Statement
of Financial Accounting Standards No. 131, "Segments of an Enterprise and
Related Information," in June 1997. This statement, which is required to be
adopted in the third quarter of fiscal year 1998, establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The Company believes that these statements will have no
material effect on the Company's financial statements.
8. Subsequent Event
On December 2, 1997, Hach Company and Environmental Test Systems, Inc.
(ETS) jointly announced they have agreed, pursuant to a letter of intent, on the
principal terms of a merger by which ETS will become a wholly owned subsidiary
of Hach Company. Under terms of the transaction, at closing, Hach will
distribute to ETS shareholders an aggregate of $16,000,000 in cash, Hach Common
Stock and Hach Class A Common Stock in exchange for all outstanding common stock
of ETS. The transaction is expected to be completed during the first quarter of
1998 and is subject to regulatory approval, the negotiation of a definitive
merger agreement to be approved by both company's boards, approval by the
shareholders of ETS and other customary conditions.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Analysis of Financial Condition:
The Company experienced substantial change in the capital structure during
the six months ended November 1, 1997. On July 8, 1997, the Company purchased
3,157,223 shares of its common stock from Lawter International. The purchase
price was approximately $60 million. The Company used $30 million of existing
cash and $30 million of bank borrowings to finance the stock purchase. The bank
borrowings provide for a revolving line of credit of up to $40 million.
The Company monitors cash flow and capital expenditures in great detail as
part of its total budgeting process. During fiscal year 1998, the Company
expects to spend approximately $10,000,000 on capital items. These expenditures
include the construction of a 66,000 square foot building at the Loveland,
Colorado site, in addition to expenditures made for production equipment as well
as computer hardware and software to support distribution, research and
development and administration.
The Company intends to finance its capital projects and dividend payments
through existing cash and cash equivalents, short-term investments, projected
cash flow from operations and bank borrowings.
Results of Operations: Quarter ended November 1, 1997 compared to quarter ended
October 26, 1996.
Net sales increased 4.2% to $31,542,000 from $30,284,000. The Company's
domestic net sales increased 6.5% while its international net sales decreased
0.3%. The domestic net sales increase was due primarily to unit volume increases
in most of the Company's major product lines. Sales for the Company's European
subsidiary were adversely effected by a stronger U.S. dollar.
Cost of sales increased 4.5% to $16,010,000 from $15,324,000. This item,
composed of material, labor and product overhead, increased primarily because of
unit volume increases. The gross profit percent decreased to 49.2% from 49.4%
due to the mix of products sold.
Selling, general and administrative expense increased 6.5% to $8,782,000
from $8,244,000. The increase was due to higher payroll and related expenses and
costs related to implementation of a new company-wide integrated software
system.
Research and development expense decreased 9.6% to $2,070,000 from
$2,290,000. The decrease was due to lower payroll and related expenses and lower
outside development costs.
Interest income decreased to $119,000 from $451,000. The decrease was due
to lower average investment balances in the current period.
Interest expense increased to $516,000. The increase was due to interest on
a long-term loan used to repurchase Hach Company common stock owned by Lawter
International.
The effective income tax rate was 35.7% in the current period compared to
34.1% in the prior year's second quarter.
Results of Operations: Six months ended November 1, 1997 to six months ended
October 26, 1996
Net sales increased 8% to $63,956,000 from $59,194,000. The Company's
domestic net sales increased 9.5% while its international net sales increased
5.6%. Both the domestic and international net sales increases were due primarily
to unit volume increases in most of the Company's major product lines.
Cost of sales increased 8.3% to $32,561,000 from $30,071,000. This item,
composed of material, labor and product overhead, increased primarily because of
unit volume increases. The gross profit percent decreased to 49.1% from 49.2%
due to the mix of products sold.
Selling, general and administrative expense increased 8.7% to $17,668,000
from $16,253,000. The increase was due to higher payroll and related expenses
and costs related to implementation of a new company-wide integrated software
system.
Research and development expense decreased 0.2% to $4,237,000 from
$4,244,000. The decrease was due to lower payroll and related expenses and lower
outside development costs.
Interest income decreased to $599,000 from $801,000. The decrease was due
to lower average investment balances in the current period.
Interest expense increased to $656,000. The increase was due to interest on
a long-term loan used to repurchase Hach Company common stock owned by Lawter
International.
The effective income tax rate was 35.6% for the current six month period
compared to 34.5% in the prior year's period.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
At the company's annual stockholder's meeting held on September 9, 1997,
stockholders approved an amendment to the Company's Certificate of Incorporation
to create a new class of common stock, designated as Class A Common Stock, which
is nonvoting except in certain limited circumstances.
Item 4. Submission of Matters to a Vote of Security Holders
On September 9, 1997, Hach Company held its annual meeting of stockholders.
At this meeting, the stockholders were asked to consider and vote upon a
proposal to amend Article Fourth of the Company's Restated Certificate of
Incorporation to : (i) authorize a new class of common stock designated as Class
A Common Stock, $1.00 par value which would be non-voting (except in certain
limited circumstances); (ii) increase the number of authorized shares of capital
stock from 25,000,000 to 45,000,000 consisting of 25,000,000 Shares of Common
Stock and 20,000,000 of Class A Common Stock; and (iii) establish the rights,
powers and limitations of the Class A Common Stock. A total of 7,614,652 votes
were cast of which 7,351,060 were affirmative, 251,995 were negative and 11,597
abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) 1. Report of Independent Accountants.
2. Awareness Letter of Independent Accountants.
3. Financial Data Schedule
(b) During the quarter ended November 1, 1997, the Registrant filed no report
on From 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Hach Company
By: /s/ Bruce J. Hach
----------------------------------------------------
Bruce J. Hach, President and Chief Operating Officer
December 16, 1997
Date
By: /s/ Gary R. Dreher
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Gary R. Dreher, Vice President and Chief Financial Officer
December 16, 1997
Date