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 August 1, 1998
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 80538
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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 September 10, 1998.
Title Outstanding
Common Stock 8,972,610
Class A Common Stock 8,552,132
Part I. Financial Information
Item 1. Financial Statements
Summarized Financial Statements
The accompanying Consolidated Balance Sheet as of August 1, 1998 and the
Consolidated Statements of Income and Retained Earnings for the quarters ended
August 1, 1998 and August 2, 1997 and the Consolidated Statements of Cash Flows
for the quarters ended August 1, 1998 and August 2, 1997 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 ended August 1, 1998 and August 2, 1997 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 PricewaterhouseCoopers LLP, 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 QUARTER ENDED
AUGUST 1, 1998 AUGUST 2, 1997
-------------- --------------
Net sales $ 36,776 $ 32,414
Cost of sales 18,080 16,551
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Gross profit 18,696 15,863
Selling, general and administrative expense 10,406 8,886
Research and development expense 2,502 2,167
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Income from operations 5,788 4,810
Interest income 164 480
Interest expense (506) (140)
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Income before income taxes 5,446 5,150
Income tax expense 1,996 1,830
--------- ---------
Net income 3,450 3,320
Retained earnings, beginning of period $ 72,628 $ 76,944
Cash dividends (600) (493)
--------- ---------
Retained earnings, end of period $ 75,478 $ 79,771
========= =========
Net income per share:
Basic $ 0.20 $ 0.16
Diluted $ 0.20 $ 0.16
========= =========
Dividends per share:
Common stock $ 0.03 $ 0.03
Class A common stock $ 0.04 $ 0.03
========= =========
Weighted average shares outstanding
Basic 17,064,432 20,998,460
Diluted 17,172,263 21,031,728
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
AUGUST 1, 1998 April 30, 1998
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,684 $ 4,358
Marketable securities, available for sale 324 680
Accounts receivable, less reserves
of $341 and $305, respectively 18,225 20,937
Inventories 14,870 15,360
Deferred taxes and other current assets 4,834 5,282
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Total current assets 45,937 46,617
Property, plant and equipment at cost:
Buildings and improvements 32,208 30,615
Machinery and equipment 54,407 52,412
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86,615 83,027
Less allowance for depreciation
and amortization 48,915 47,211
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37,700 35,816
Land 1,084 1,083
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Net property, plant and equipment 38,784 36,899
Marketable securities, available for sale 606 1,018
Acquired product technology 12,047 12,199
Goodwill 3,191 3,204
Other assets 2,381 2,413
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Total Assets $ 102,946 $ 102,350
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
AUGUST 1, 1998 April 30, 1998
-------------- --------------
(Unaudited)
LIABILITIES
Current liabilities:
Current portion of long term debt $ 315 $ 1,069
Accounts payable 3,874 4,591
Accrued liabilities:
Compensation 1,010 1,407
Compensated absences 4,028 3,933
Profit sharing 3,839 3,483
Income taxes payable 2,179 720
Other 1,938 1,974
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Total current liabilities 17,183 17,177
Long term debt 33,300 35,994
Other long term liabilities 2,874 2,771
Deferred income taxes 6,371 6,589
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Total liabilities 59,728 62,531
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 11,623
Capital contributed in excess of par value - -
Retained earnings 75,478 72,714
Unearned ESOP shares (2,550) (2,629)
Accumulated other comprehensive (loss) (379) (437)
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95,795 92,894
Less: Shares held in treasury at cost:
(2,651,843 Common, 3,072,321 Class A at
August 1, 1998 and 2,667,001 Common,
3,123,074 Class A at April 30, 1998) (52,577) (53,075)
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Total Stockholders' Equity 43,218 39,819
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Total Liabilities and Stockholders' Equity $ 102,946 $ 102,350
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
QUARTER ENDED QUARTER ENDED
August 1, 1998 August 2, 1997
---------------- --------------
Cash flows from operating activities:
Net income $ 3,450 $ 3,320
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 1,852 1,573
Provision for deferred income taxes (287) (142)
Decrease in accounts receivable 2,712 324
(Increase) decrease in inventories 490 (208)
Decrease in other current assets 517 596
(Decrease) in accounts payable (640) (664)
Increase in accrued liabilities 848 698
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Net cash provided by operating activities 8,942 5,497
Cash flows from investing activities:
Capital expenditures (3,564) (2,746)
Purchases of investments - (2,079)
Proceeds from the sale of investments 768 25,459
(Increase) decrease in long-term assets 32 (258)
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Net cash (used) provided by investing activities (2,764) 20,376
Cash flows from financing activities:
Dividends paid (600) (493)
Proceeds from borrowings - 30,000
Payments on long-term borrowings (2,714) -
Purchases of treasury stock - (60,257)
Exercise of stock options 412 168
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Net cash used by financing activities (2,902) (30,582)
Effects of exchange rate changes 50 (240)
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Net increase (decrease) in cash & cash equivalents 3,326 (4,949)
Cash & cash equivalents at the beginning of the period 4,358 14,575
------- -------
Cash & cash equivalents at the end of the period $ 7,684 $ 9,626
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
HACH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The consolidated balance sheet at August 1, 1998 and the consolidated
statements of income and retained earnings and cash flows for the interim
periods ended August 1, 1998 and August 2, 1997, have been prepared by the
Company, without audit. The April 30, 1998 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, 1998 have been
reclassified to conform with the current periods presentation.
2. Inventories
The components of inventories are: (Thousands of Dollars)
August 1, 1998 April 30, 1998
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Raw materials and purchased parts $ 4,345 $ 4,545
Work-in-progress 1,604 1,555
Finished goods 8,584 8,882
Resale 337 378
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$ 14,870 $ 15,360
========= =========
3. Investments
The Company accounts for investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". During the
first quarter of fiscal year 1999 the Company sold approximately $770,000 of
investments previously classified as held-to-maturity. Proceeds from the sale of
these investments were used for the acquisition of Environmental Test Systems,
Inc. (ETS). Upon the sale of the investments the Company realized a gain of
$1,000. In addition, all remaining investments previously classified as
held-to-maturity have been reclassified as available-for-sale. At the time of
the transfer these investments had a carrying value of $930,000, which
approximated the fair value. These investments have been reclassified because of
the liquidity needs brought about by the acquisition of ETS on April 30, 1998.
4. Property, Plant and Equipment
The Company capitalizes interest costs on certain assets that require a
period of time to prepare them for their intended use. Total interest costs
incurred during the quarter ended August 1, 1998 and August 2, 1997 were
$574,000 and $140,000 respectively, of which $109,000 and $13,000 were
capitalized to fixed assets, respectively.
5. 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 quarters
ended August 1, 1998 and August 2, 1997 were 36.7% and 35.5% respectively.
6. Earnings Per Share
The Company adopted the Statement of Financial Accounting Standards No.
128, "Earnings Per Share" in the quarter ended January 31, 1998 and all
historical net income per share data presented has been restated to conform to
the provisions of this statement. The standard established a different method of
computing net income per share than was required under the provisions of
Accounting Principles Board Opinion No. 15. The following table reconciles the
basic and diluted earnings per share (EPS) computations as shown on the
Consolidated Statements of Income and Retained Earnings included in this report
on Form 10-Q.
EARNINGS PER SHARE
(Thousands of Dollars Except Share Data)
(Unaudited)
Quarter Ended
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August 1, 1998 August 2, 1997
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Per Per
Share Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to common stockholders $3,450 17,064 $ 0.20 $3,320 20,998 $ 0.16
Effect of dilutive securities
Stock options - 108 - - 34 -
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Diluted earnings per share
Income available to common stockholders $3,450 17,172 $ 0.20 $3,320 21,032 $ 0.16
====== ====== ====== ====== ====== ======
Options to purchase shares of the Company's common stock of 20,356 for the
quarter ended August 2, 1997 were outstanding but were not included in the
computation of diluted EPS because the price of the options, which range from
$8.0625 to $10.375 per share for the quarter ended August 2, 1997, was greater
than the average market price of the common stock for the period reported. The
outstanding options not included in the calculation for the quarter ended August
1, 1998 will expire in between February 1998 and February 2006.
7. Recently Issued Financial Accounting Standards
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," which requires that all components of
comprehensive income and total comprehensive income be reported and that changes
be shown in a financial statement displayed with the same prominence as other
financial statements. The Company has decided it will present this information
in its statement of stockholders' equity in its annual financial statements. The
total comprehensive income for the quarters ended August 1, 1998 and August 2,
1997, was comprised of the following:
August 1, 1998 August 2, 1997
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Net income $ 3,450 $ 3,320
Foreign currency translation adjustment 50 (240)
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Comprehensive income $ 3,500 $ 3,080
============== ==============
In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. The
interim reporting disclosures are not required in the first year of adoption.
SFAS No. 131 specifies revised guidelines for determining an entity's operating
segments and the type and level of financial information to be disclosed. SFAS
No. 131 changes current practice under SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," by establishing a new framework on which to
base segment reporting. The "management" approach expands the required
disclosures for each segment. The Company will adopt SFAS No. 131 in its annual
financial statements for the year ended April 30, 1999 and has not yet
determined the impact of such adoption.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Analysis of Financial Condition:
Cash and short-term investments increased $2,970,000 during the quarter to
$8,008,000. Prior to the purchase of Environmental Test Systems (ETS),
approximately $770,000 of investments used in the transaction had been
classified as held-to-maturity. Upon the sale of these investments, the Company
realized a gain of $1,000. All remaining securities previously classified as
held-to-maturity have been reclassified as available-for-sale. Additionally,
long-term debt decreased by $2,694,000 to $33,300,000.
The Company monitors cash flow and capital expenditures in great detail as
part of its total budgeting process. During the first quarter of fiscal year
1999, the Company completed the construction of a 66,000 square foot building at
the Loveland, Colorado site. Capital needs in the near future will be 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.
Year 2000 Computer Systems Compliance
The Company is in the process of the modification or conversion of Company
computer systems to provide for proper functioning beyond calendar year 1999. It
is anticipated that substantially all of these Year 2000 costs will be incurred
during fiscal 1998 and 1999. Maintenance or modification costs will be expensed
as incurred, while the costs of new software will be capitalized and amortized
over the software's useful life. Management believes that resources are
available to complete the modification and conversion and that its costs will
not materially affect the Company's operating results or financial condition.
Management believes that the Year 2000 compliance will be completed well before
the end of fiscal year 1999. The Company cannot predict the nature or
materiality of the impact on its operations or operating results of
noncompliance by parties outside of its control.
Recently Issued Financial Accounting Standards
In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. The
interim reporting disclosures are not required in the first year of adoption.
SFAS No. 131 specifies revised guidelines for determining an entity's operating
segments and the type and level of financial information to be disclosed. SFAS
No. 131 changes current practice under SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," by establishing a new framework on which to
base segment reporting. The "management" approach expands the required
disclosures for each segment. The Company will adopt SFAS No. 131 in its annual
financial statements for the year ended April 30, 1999 and has not yet
determined the impact of such adoption.
Results of Operations: Quarter ended August 1, 1998 compared to quarter ended
August 2, 1997.
Net sales increased 13.5% to $36,776,000 from $32,414,000. The increase was
primarily due to the acquisition of Environmental Test Systems, Inc. (ETS) which
was completed on April 30, 1998. For the quarter ended August 1, 1998, ETS' net
sales were $4,211,000. Exclusive of ETS, domestic sales increased 0.2% while
international net sales increased 1.0%. Sales throughout Asia, which represent
approximately 8.0% of consolidated sales decreased 21.0% from the prior year's
first quarter. Asian sales were down due to weaker economic conditions and a
stronger dollar versuses local currencies. Sales for the Company's European
subsidiary increased approximately 12.0%. Approximately 60.0% of ETS' yearly
sales are pool and spa testing products which are seasonal in nature.
Historically, about 80.0% of pool and spa testing products sales occurred
between January and July.
Cost of sales increased 9.2% to $18,080,000 from $16,551,000. This item,
composed of material, labor and product overhead, increased primarily because of
unit volume increases. The gross profit percent increased to 50.8% from 48.9%
due to the mix of products sold and higher margins on products sold by
ETS.
Selling, general and administrative expense increased 17.1% to $10,406,000
from $8,886,000. The increase was due to additional personnel from the ETS
acquisition, higher payroll and related expenses and costs related to
implementation of a new company-wide integrated software system.
Research and development expense increased 15.5% to $2,502,000 from
$2,167,000. The increase was due to additional personnel from the ETS
acquisition higher payroll and related expenses and planned expansion of the
Company's research and development efforts.
Interest income decreased to $164,000 from $480,000. The decrease was due
to lower average investment balances in the current period.
Interest expense increased to $506,000 from $140,000. The increase was due
to interest on a long-term loan used to repurchase Hach Company common stock
owned by Lawter International, which was entered into in July, 1997.
The effective income tax rate was 36.7% in the current period compared to
35.5% in the prior year's second quarter. The increase is primarily due to the
amortization of non-deductible goodwill which was recorded in connection with
the ETS acquisition and the expiration of a tax credits for research activities.
Part II. Other Information
Item 1. Legal Proceedings
None
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 August 1, 1998, the Registrant filed a report on
From 8-K announcing the completion of the acquisition of Environmental Test
Systems, Inc.(ETS), and that the Company would take a one time charge of
$3,000,000 for in-process research and development associated with the
acquisition. The Company also stated that Mark J. Stephenson would remain
President of ETS and would become Vice President of Marketing and Services
for Hach Company.
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
September 11, 1998
Date
By: /s/ Gary R. Dreher
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Gary R. Dreher, Vice President and Chief Financial Officer
September 11, 1998
Date