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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarter ended September 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from __________ to __________
Commission file number 1-8485
MILACRON INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1062125
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2090 Florence Avenue
P.O. Box 63716
Cincinnati, Ohio 45206
(Address of principal executive offices)
(513) 487-5000
(Registrant's telephone number, including area code)
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 [ ]
Number of shares of Common Stock, $1.00 par value,
outstanding as of November 9, 1999: 37,012,968
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MILACRON INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed
Statement of Earnings 3
Consolidated Condensed
Balance Sheet 4
Consolidated Condensed
Statement of Cash Flows 5
Notes to Consolidated
Condensed Financial
Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 23
PART II. Other Information
Item 1. Legal Proceedings 24
Item 6. (a) Exhibits 24
(b) Reports on Form 8-K 24
Signatures 25
Index to Exhibits 26
PART I. FINANCIAL INFORMATION
MILACRON INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
(In millions, except share
and per-share amounts)
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------- -------- -------- --------
Sales $ 393.0 $ 352.1 $1,186.0 $1,079.1
Cost of products sold 290.5 252.2 877.6 778.9
-------- -------- -------- --------
Manufacturing margins 102.5 99.9 308.4 300.2
Other costs and expenses
Selling and administrative 64.3 64.5 203.1 194.4
Other - net 3.7 1.6 8.2 9.8
-------- -------- -------- --------
Total other costs and
expenses 68.0 66.1 211.3 204.2
Operating earnings 34.5 33.8 97.1 96.0
Interest
Income .5 .6 1.2 1.5
Expense (10.0) (8.2) (29.3) (24.0)
-------- -------- -------- --------
Interest - net (9.5) (7.6) (28.1) (22.5)
-------- -------- -------- --------
Earnings from continuing
operations before income taxes
and minority shareholders'
interests 25.0 26.2 69.0 73.5
Provision for income taxes 6.8 6.6 19.8 19.5
-------- -------- -------- --------
Earnings from continuing
operations before minority
shareholders' interests 18.2 19.6 49.2 54.0
Minority shareholders' interests
in earnings of subsidiaries .8 1.1 1.4 2.2
-------- -------- -------- --------
Earnings from continuing
operations 17.4 18.5 47.8 51.8
Discontinued operations net
of income taxes Earnings (loss)
from operations - (3.9) - 1.3
Loss on sale - (35.2) - (35.2)
-------- -------- -------- --------
Total discontinued operations - (39.1) - (3.9)
-------- -------- -------- --------
Net earnings (loss) $ 17.4 $ (20.6) $ 47.8 $ 17.9
======== ======== ======== ========
Earnings (loss) per common share
Basic
Continuing operations $ .47 $ .47 $ 1.29 $ 1.32
Discontinued operations - (1.00) - (.87)
-------- -------- -------- --------
Net earnings (loss) $ .47 $ (.53) $ 1.29 $ .45
======== ======== ======== ========
Diluted
Continuing operations $ .47 $ .47 $ 1.28 $ 1.29
Discontinued operations - (1.00) - (.84)
-------- -------- -------- --------
Net earnings (loss) $ .47 $ (.53) $ 1.28 $ .45
======== ======== ======== ========
Dividends per common share $ .12 $ .12 $ .36 $ .36
======== ======== ======== ========
Weighted average common shares
outstanding assuming dilution
(in thousands) 36,994 39,149 37,157 39,532
See notes to consolidated condensed financial statements.
Milacron Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
(Unaudited)
(In millions)
Sept. 30, Dec. 31,
1999 1998
-------- --------
Assets
Current assets
Cash and cash equivalents $ 41.2 $ 48.9
Notes and accounts receivable,
less allowances
of $12.0 in 1999 and $12.1 in 1998 218.3 226.1
Receivable from sale of
Discontinued machine tools segment - 10.8
Inventories
Raw materials 50.5 45.6
Work-in-process and finished parts 188.8 204.6
Finished products 161.8 150.8
-------- --------
Total inventories 401.1 401.0
Other current assets 48.0 43.7
-------- --------
Total current assets 708.6 730.5
Property, plant and equipment 606.8 605.2
Less accumulated depreciation (263.9) (254.3)
-------- --------
Property, plant and equipment - net 342.9 350.9
Goodwill 422.6 397.6
Other noncurrent assets 68.7 78.1
-------- --------
Total assets $1,542.8 $1,557.1
======== ========
Liabilities and shareholders' equity
Current liabilities
Amounts payable to banks and current
portion of long-term debt $ 228.9 $ 185.2
Trade accounts payable 126.8 155.2
Advance billings and deposits 30.5 31.7
Accrued and other current liabilities 168.4 178.8
-------- --------
Total current liabilities 554.6 550.9
Long-term accrued liabilities 185.3 193.9
Long-term debt 320.1 335.7
-------- --------
Total liabilities 1,060.0 1,080.5
-------- --------
Commitments and contingencies - -
Shareholders' equity
Preferred shares 6.0 6.0
Common shares (outstanding: 37.0 in 1999
and 37.8 in 1998) 365.4 379.0
Reinvested earnings 140.2 106.0
Accumulated other comprehensive
income (loss) (28.8) (14.4)
-------- --------
Total shareholders' equity 482.8 476.6
-------- --------
Total liabilities and shareholders' equity $1,542.8 $1,557.1
======== ========
See notes to consolidated condensed financial statements.
Milacron Inc. and Subsidiaries
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents
Operating activities cash flows
Net earnings (loss) $ 17.4 $ (20.6) $ 47.8 $ 17.9
Operating activities providing
(using) cash:
Loss on sale of discontinued
machine tools segment - 35.2 - 35.2
Depreciation and amortization 14.9 14.6 43.7 43.8
Deferred income taxes (.1) .7 9.3 (2.9)
Working capital changes
Notes and accounts
receivable 6.3 (14.4) (3.5) (5.8)
Inventories (2.7) (10.1) (19.4) (50.9)
Other current assets (1.2) 3.2 (4.9) 1.0
Trade accounts payable (3.5) (18.2) (23.7) (24.2)
Accrued and other current
liabilities 5.6 (3.0) 4.7 18.1
Decrease (increase) in
Other noncurrent assets 2.0 1.5 3.2 (7.1)
Decrease in long-term
accrued liabilities (1.2) (2.2) (3.2) (.9)
Other - net .7 (.2) (1.9) (1.5)
-------- -------- -------- -------
Net cash provided (used)
by operating activities 38.2 (13.5) 52.1 22.7
-------- -------- -------- -------
Investing activities cash flows
Capital expenditures (7.3) (22.9) (36.1) (52.3)
Net disposals of property,
plant and equipment 2.6 .6 3.1 2.1
Acquisitions (35.8) (192.7) (46.8) (213.2)
Divestitures - - 9.6 -
-------- -------- -------- --------
Net cash used by
investing activities (40.5) (215.0) (70.2) (263.4)
-------- -------- -------- --------
Financing activities cash flows
Dividends paid (4.5) (4.8) (13.6) (14.4)
Issuance of long-term debt - 18.5 - 23.0
Repayments of long-term debt (3.4) (.1) (5.1) (.6)
Increase in amounts
payable to banks 15.5 234.1 47.8 264.0
Issuance of common shares .1 - .2 5.6
Purchase of treasury and other
common shares - (7.7) (18.9) (20.8)
-------- -------- -------- --------
Net cash provided by
financing activities 7.7 240.0 10.4 256.8
-------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents 5.4 11.5 (7.7) 16.1
Cash and cash equivalents at
beginning of period 35.8 30.3 48.9 25.7
-------- -------- -------- --------
Cash and cash equivalents at
end of period $ 41.2 $ 41.8 $ 41.2 $ 41.8
======== ======== ======== ========
See notes to consolidated condensed financial statements.
MILACRON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
- ---------------------
In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments, all of which are normal and recurring,
necessary to present fairly the company's financial
position, results of operations and cash flows.
The Consolidated Condensed Balance Sheet at December 31,
1998, has been derived from the audited consolidated
financial statements at that date, but does not include all
of the information and footnotes required by generally
accepted accounting principles for complete financial
statements.
The accounting policies followed by the company are set
forth in the "Summary of Significant Accounting Policies"
note to the consolidated financial statements included in
the company's Annual Report on Form 10-K for the year ended
December 31, 1998.
DISCONTINUED OPERATIONS
- -----------------------
On October 2, 1998, the company completed the sale of its
machine tools group (MTG). The proceeds from the sale,
including post-closing adjustments, were approximately $187
million, of which $180 million was received on the closing
date and used to repay bank borrowings incurred for the
acquisition of Uniloy (see Acquisitions). MTG was largely
involved in the manufacture and sale of aerospace systems
and stand-alone machinery for general metalworking. The
Consolidated Condensed Statement of Earnings for 1998
presents the operating results of MTG as a discontinued
operation. MTG's sales were $105.4 million in the third
quarter of 1998 and $346.4 million for the nine months ended
September 30, 1998.
ACQUISITIONS
- ------------
In February, 1998, the company acquired Wear Technology,
which had annual sales of approximately $10 million as of
the acquisition date and serves the aftermarket for new and
rebuilt twin screws for extrusion systems, and Northern
Supply, a regional catalog distribution company offering
supplies to plastics processors for injection molding, blow
molding and extrusion with annual sales of approximately $5
million.
In May, 1998, the company acquired Autojectors, Inc., a
leading U.S. producer of vertical insert injection molding
machinery widely used to make medical, electrical and
automotive components. Autojectors had annual sales of
approximately $20 million as of the acquisition date.
In September, 1998, the company acquired Master Unit Die
Products, Inc., a leading North American manufacturer of
quick-change mold bases for the plastics industry. Master
Unit Die Products has annual sales in excess of $10 million.
Also, in September, 1998, the company acquired the assets of
the plastics machinery division of Johnson Controls, Inc.
(Uniloy) for approximately $204 million. Uniloy, which is
known for its Uniloy brand of equipment, as well as various
other brands, had annual sales of more than $190 million for
its fiscal year ended September 30, 1998, and is one of the
world's leading providers of blow molding machines, as well
as structural foam systems, aftermarket parts, services and
molds for blow molding.
On December 30, 1998, the company acquired Werkzeugfabrik
GmbH Konigsee (Werko), a manufacturer of high-speed steel
drills. Located in eastern Germany, Werko had annual sales
of approximately $25 million as of the acquisition date.
With the exception of Werko, all of the businesses acquired
in 1998 are included in the plastics technologies segment
from the respective dates of acquisition. Werko is included
in the metalworking technologies segment beginning in 1999.
In July, 1999, the company acquired Nickerson Machinery
Inc., Pliers International Inc., and Plastic Moulding Supply
LTD (collectively, Nickerson). With annual sales of $7
million, Nickerson sells supplies and equipment for plastic
processing through two catalog distribution centers in the
U.S. and one in the U.K. The operation in the U.K. also
manufactures and refurbishes screws and barrels for small
injection molding machines. Nickerson is included in the
plastics technologies segment beginning in the third quarter
of 1999.
In the third quarter of 1999, the company made two
acquisitions in the metalworking technologies segment. In
August, the company acquired Producto Chemical, Inc.
(Producto), a U.S. manufacturer of process cleaners,
washers, corrosion inhibitors and specialty products for
metalworking with annual sales approaching $5 million.
Producto's products will be marketed worldwide through the
company's sales and distribution channels. In September,
the company acquired Oak International, Inc. (Oak), a global
supplier of metalforming lubricants and process cleaners and
a leading supplier of lubricants used in the manufacture of
industrial heat exchangers and air conditioners.
Headquartered in Michigan, Oak has two manufacturing plants
in the U.S. and one in the U.K. and has annual sales
approaching $12 million.
All of the acquisitions are being accounted for under the
purchase method and were financed through the use of
available cash and bank borrowings. The aggregate cost of
the acquisitions, including professional fees and other
related costs, is expected to total approximately $30.1
million for 1999 and $242.3 million for 1998. The
allocation of the aggregate cost of the acquisitions to the
assets acquired and liabilities assumed is presented in the
table that follows.
(In millions)
1999 1998
------ ------
Cash and cash equivalents $ .7 $ 2.1
Accounts receivable 4.0 33.4
Inventories 4.1 65.6
Other current assets .3 3.5
Property, plant and equipment 3.5 30.4
Goodwill 21.0 192.8
Other noncurrent assets .2 9.6
------ ------
Total assets 33.8 337.4
Current portion of
long-term debt .8 7.0
Other current liabilities 1.7 75.8
Long-term accrued liabilities .4 1.4
Long-term debt .8 10.9
------ ------
Total liabilities 3.7 95.1
------ ------
Total acquisition cost $ 30.1 $242.3
====== ======
In the 1998 allocation of acquisition cost, other current
liabilities includes a reserve of $5.7 million for the
consolidation of Uniloy's European blow molding operations
in a new headquarters located near Milan, Italy. At the
time Uniloy was acquired on September 30, 1998, the company
had recognized the need for improved efficiency within its
European operations and immediately thereafter began to
evaluate various options for the purpose of identifying the
optimal long-term solution. Through that process, it was
determined that three existing manufacturing plants located
in Florence and Milan, Italy and Berlin, Germany would be
permanently closed and that the manufacturing operations at
those plants would be consolidated into a more modern plant
in Italy or be transferred to another existing plant located
in the Czech Republic. In the second quarter of 1999, the
company began to develop a detailed plan for the plant
closures and consolidation, which was formally approved by
the company's management in August, 1999, and publicly
announced in September, 1999.
As approved, the total cost of the plan is expected to be
$6.7 million, including $4.6 million for employee
termination and relocation costs, $1.1 million for exit
costs related to the three manufacturing facilities that
will be closed and $1.0 million for other costs related to
the consolidation, including the relocation of inventory and
manufacturing equipment, consulting fees and training for
new employees. Of the total $6.7 million cost, a total of
$1.0 million will be charged to earnings in the fourth
quarter of 1999 and the first three quarters of 2000.
The total cash cost of the consolidation is expected to be
approximately $4.0 million, which includes capital
expenditures for the new facility and is net of expected
proceeds from the sales of the existing Milan and Florence
plants at their approximate book values. The consolidation
is expected to be completed by September, 2000.
SEVERANCE EXPENSE
- -----------------
In the first half of 1998, the company recorded severance
expense of $5.3 million before tax ($3.7 million after tax)
related to a workforce reduction plan involving
approximately 125 employees at Widia, the company's European
cutting tool company. As a result of the workforce
reduction and other actions at Widia, the company is
achieving annual pretax cost savings of approximately $5.0
million, which began to phase in during the fourth quarter
of 1998.
INCOME TAXES
- ------------
In both 1999 and 1998, the provision for income taxes
consists of U.S. federal and state and local income taxes as
well as non-U.S. income taxes. The provision also includes
the effects of adjustments of deferred tax assets and
related valuation allowances in certain non-U.S.
jurisdictions, as described below.
At December 31, 1998, certain of the company's non-U.S.
subsidiaries reported net operating loss carryforwards
aggregating approximately $120 million, substantially all of
which have no expiration dates. This amount included $39
million related to Werko (see Acquisitions), which was
acquired on December 30, 1998. The deferred tax assets
related to certain of these loss carryforwards were
partially reserved through valuation allowances which
totaled approximately $28 million. During the first half of
1999, the company reevaluated Werko's preacquisition profits
and losses. As a result of the reevaluation, the company's
calculation of Werko's net operating loss carryforwards has
been increased to approximately $74 million and the related
valuation allowance has been increased by $10 million. The
additional deferred tax assets and valuation allowances have
been recorded in 1999 in connection with the allocation of
the Werko acquisition cost.
Effective January 1, 1999, the German federal income tax
rate on undistributed earnings was reduced from 45% to 40%.
As a result, the net carrying value of the company's net
deferred tax assets in Germany, including valuation
allowances, was reduced by approximately $1.8 million. This
increase in the first quarter tax provision was
substantially offset by adjustments of certain other non-
U.S. accrued and deferred income tax balances.
The company reviews the valuation of all deferred tax assets
on an ongoing basis and concluded in 1998 that it was more
likely than not that a portion of these assets would be
realized in the future. Accordingly, certain non-U.S.
valuation allowances were reversed which caused the
effective tax rate for 1998 to be less than the U.S.
statutory rate. Similarly, the 1999 effective tax rate also
provides for the reversal of non-U.S. valuation allowances
due to the expectation of additional net operating loss
carryforward utilization. The 1999 rate also includes the
effect of tax reserve adjustments to more accurately reflect
actual expected liabilities. These benefits are offset to
some degree by a provision for the write down of the
company's net deferred tax assets in Germany from the
"without distribution" rate to the lower "with distribution"
rate of 30%.
RECEIVABLES
- -----------
In accordance with the company's receivables purchase
agreement with an independent party, the company sells on an
ongoing basis undivided percentage ownership interests of up
to $75 million in designated pools of accounts receivable.
At September 30, 1999, June 30, 1999, December 31, 1998,
September 30, 1998, June 30, 1998, and December 31, 1997,
the undivided interests in the company's gross accounts
receivable that had been sold to the purchaser aggregated
$74.5 million, $72.9 million, $63.1 million, $61.3 million,
$75.0 million and $75.0 million, respectively. Increases
and decreases in the amount sold are reported as operating
cash flows in the Consolidated Condensed Statement of Cash
Flows. Costs related to the sales are included in other
costs and expenses-net in the Consolidated Condensed
Statement of Earnings.
LIABILITIES
- -----------
The components of accrued and other current liabilities and
long-term accrued liabilities are shown in the following
tables.
(In millions)
Sept. 30, Dec. 31,
1999 1998
-------- --------
Accrued and other current liabilities
Accrued salaries, wages
and other compensation $ 57.0 $ 49.1
Accrued and deferred income taxes 13.5 (.5)
Other accrued expenses 97.9 130.2
-------- --------
$ 168.4 $ 178.8
======== ========
Long-term accrued liabilities
Accrued pension and other
compensation $ 61.8 $ 74.9
Accrued postretirement health
care benefits 39.3 40.6
Accrued and deferred income taxes 28.4 26.6
Minority shareholders' interests 20.8 19.9
Other 35.0 31.9
-------- --------
$ 185.3 $ 193.9
======== ========
Long-term Debt
The components of long-term debt are shown in the following table.
(In millions)
Sept. 30, Dec. 31,
1999 1998
-------- --------
Long-term debt
7-7/8% Notes due 2000 $ 100.0 $ 100.0
8-3/8% Notes due 2004 115.0 115.0
Revolving credit facility 179.5 84.8
Other 33.0 43.7
-------- --------
Total long-term debt 427.5 343.5
Less current maturities (107.4) (7.8)
-------- --------
$ 320.1 $ 335.7
======== ========
Outstanding borrowings under the company's revolving credit
facility of $100.0 million and DM 149 million ($79.5
million) at September 30, 1999, and $10.0 million and DM
125 million ($74.8 million) at December 31, 1998 are
included in long-term debt based on the expectation that
these borrowings will remain outstanding for more than one
year. These borrowings are at variable interest rates,
which had a weighted average of 5.4% per year at September
30, 1999 and 4.8% per year at December 31, 1998. The
September 30, 1999 amount includes $100.0 million that was
reclassified to long-term debt during the second quarter
due to a change in the company's expectations as to
repayment.
As presented above, current maturities of long-term debt at
September 30, 1999 includes the 7-7/8% Notes due 2000 which
are payable on May 15, 2000.
LINES OF CREDIT
- ---------------
At September 30, 1999, the company had lines of credit with
various U.S. and non-U.S. banks of approximately $612
million, including a $375 million committed revolving
credit facility. These credit facilities support letters of
credit and leases in addition to providing borrowings under
varying terms. Under the provisions of the revolving
credit facility, the company's additional borrowing
capacity totaled approximately $207 million at September
30, 1999.
SHAREHOLDERS' EQUITY
- --------------------
On October 2, 1998, the company announced its intention to
repurchase up to two million of its outstanding common
shares on the open market, of which 1,239,700 were
repurchased during the fourth quarter of 1998 at a cost of
$23.5 million. The remaining 760,300 shares were
repurchased in the first quarter of 1999 at a cost of $13.1
million. In the first three quarters of 1998, the company
repurchased a total of 839,900 treasury shares on the open
market at a cost of $19.7 million to partially meet current
and future needs of management incentive, employee benefit
and dividend reinvestment programs. Additional shares
totaling 103,168 and 38,303 were purchased in the first
three quarters of 1999 and 1998, respectively, in
connection with current exercises of stock options and
restricted share grants in lieu of the use of authorized
but unissued shares or treasury shares.
COMPREHENSIVE INCOME
- --------------------
Total comprehensive income represents the net change in
shareholders' equity during a period from sources other
than transactions with shareholders and, as such, includes
net earnings. For the company, the only other component of
total comprehensive income is the change in the cumulative
foreign currency translation adjustments recorded in
shareholders' equity. Total comprehensive income and
changes in total shareholders' equity are as follows:
(In millions)
Three Months Ended
-----------------------------------
Sept. 30, 1999 Sept. 30, 1998
---------------- ----------------
Total Total Total Total
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
------- ------- ------- -------
Balance at beginning of period $ 464.7 $ 487.2
Net common share transactions - (7.7)
Net earnings (loss) $ 17.4 17.4 $ (20.6) (20.6)
Foreign currency translation
adjustments (a) 5.2 5.2 25.6 25.6
------- -------
Total comprehensive income $ 22.6 $ 5.0
======= =======
Cash dividends (4.5) (4.8)
------- -------
Balance at end of period $ 482.8 $ 479.7
======= =======
(In millions)
Nine Months Ended
------------------------------------
Sept. 30, 1999 Sept. 30, 1998
---------------- ----------------
Total Total Total Total
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
------- ------- ------- -------
Balance at beginning of period $ 476.6 $ 471.9
Net common share transactions (13.6) (15.2)
Net earnings $ 47.8 47.8 $ 17.9 17.9
Foreign currency translation
adjustments (a) (14.4) (14.4) 19.5 19.5
------- -------
Total comprehensive income $ 33.4 $ 37.4
======= =======
Cash dividends (13.6) (14.4)
------- -------
Balance at end of period $ 482.8 $ 479.7
======= =======
(a) For the three and nine month periods ended September
30, 1998, includes $17.1 million related to the
recognition of unfavorable foreign currency translation
adjustments in connection with the sale of the company's
machine tools group (see Discontinued Operations). This
amount is included in the loss in the sale of the
business.
CONTINGENCIES
- -------------
The company is involved in remedial investigations and
actions at various locations, including former plant
facilities, and EPA Superfund sites where the company and
other companies have been designated as potentially
responsible parties. The company accrues remediation costs
in accordance with American Institute of Certified Public
Accountants Statement of Position No. 96-1 when it is
probable that a liability has been incurred and the amount
of the liability can be reasonably estimated.
Environmental costs have not been material in the past.
Various lawsuits arising during the normal course of
business are pending against the company and its
consolidated subsidiaries.
In the opinion of management, the ultimate liability, if
any, resulting from these matters will have no significant
effect on the company's consolidated financial position or
results of operations.
ORGANIZATION
- ------------
The company operates in two business segments: plastics
technologies and metalworking technologies (formerly
cutting process technologies). Descriptions of the
products and services of these business segments are
included in the "Organization" note to the consolidated
financial statements included in the company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Operating results for the third quarters of 1999 and 1998
and for the nine month periods ended September 30, 1999 and
1998 are presented in the following table.
(In millions, except share
and per-share amounts)
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 30, Sept. 30, Sept. 30,Sept. 30,
1999 1998 1999 1998
-------- -------- -------- --------
Sales
Plastics technologies $ 215.6 $ 178.6 $ 654.2 $ 548.1
Metalworking technologies 177.4 173.5 531.8 531.0
-------- -------- -------- --------
$ 393.0 $ 352.1 $1,186.0 $1,079.1
======== ======== ======== ========
Operating earnings
Plastics technologies $ 21.0 $ 21.2 $ 61.6 $ 57.1
Metalworking technologies 18.2 19.1 50.6 57.3
Corporate expenses (3.4) (5.2) (11.2) (14.3)
Other unallocated expenses (a) (1.3) (1.3) (3.9) (4.1)
-------- -------- -------- --------
Operating earnings 34.5 33.8 97.1 96.0
Interest expense-net (9.5) (7.6) (28.1) (22.5)
-------- -------- -------- --------
Earnings from continuing
operations before income taxes
and minority shareholders'
interests $ 25.0 $ 26.2 $ 69.0 $ 73.5
======== ======== ======== ========
New orders
Plastics technologies $ 236.2 $ 188.6 $ 665.5 $ 555.1
Metalworking technologies 169.9 169.7 525.2 536.3
-------- -------- -------- --------
$ 406.1 $ 358.3 $1,190.7 $1,091.4
======== ======== ======== ========
(a) Includes financing costs related to the sale of accounts receivable.
EARNINGS PER COMMON SHARE
- -------------------------
Basic earnings per common share data are based on the
weighted-average number of common shares outstanding during
the respective periods. Diluted earnings per common share
data are based on the weighted-average number of common
shares outstanding adjusted to include the effects of
potentially dilutive stock options and certain restricted
shares.
RECENTLY ISSUED PRONOUNCEMENTS
- ------------------------------
During the second quarter of 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities"(SFAS No. 133). This
standard was originally to have been effective for the
company beginning in 2000. However, in July, 1999, the
FASB issued Statement of Financial Accounting Standards No.
137 which postpones the mandatory adoption of SFAS No. 133
by the company until 2001. SFAS No. 133 establishes
comprehensive accounting and reporting requirements for the
recognition and measurement of derivative financial
instruments and hedging activities including a requirement
that derivatives be measured at fair value and recognized
in the statement of financial position. The company enters
into forward contracts, which are a form of derivative
instrument, to minimize the effect of foreign currency
exchange rate fluctuations. The company is evaluating the
effect of SFAS No. 133 on its financial position and
results of operations. However, management currently
believes that the effect will not be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
RESULTS OF OPERATIONS
- ---------------------
Milacron operates in two business segments: plastics
technologies and metalworking technologies (formerly cutting
process technologies).
DISCONTINUED OPERATIONS
On October 2, 1998, we completed the sale of our machine
tools group (MTG) for proceeds of $187 million, including
post-closing adjustments. All comparisons of "results of
operations" in this Management's Discussion and Analysis
exclude the historical operations of MTG.
RECLASSIFICATION OF FINANCIAL STATEMENT
Beginning in the fourth quarter of 1998, expense for
minority shareholders' interests in the earnings of
subsidiaries, which was previously included as a component
of operating earnings in the Consolidated Condensed
Statement of Earnings, is presented as a separate component
of earnings from continuing operations after income taxes.
Also beginning in the fourth quarter of 1998, amortization
expense related to deferred debt issuance costs has been
reclassified from other costs and expenses-net to interest
expense. Amounts for 1998 have been reclassified to conform
to these presentations.
ACQUISITIONS
In February, 1998, Milacron acquired Wear Technology and
Northern Supply. Wear Technology is a McPherson, Kansas
company with annual sales of approximately $10 million as of
the acquisition date which primarily serves the aftermarket
for new and rebuilt twin screws for extrusion systems.
Northern Supply, with annual sales of approximately $5
million, offers supplies to plastics processors for
injection molding, blow molding and extrusion through
distribution centers in Minneapolis, Minnesota and
Charlotte, North Carolina.
In May, 1998, we acquired Autojectors, Inc., a leading U.S.
producer of vertical insert injection molding machinery
widely used to make medical, electrical and automotive
components. With annual sales of approximately $20 million
as of the acquisition date, Autojectors operates through two
manufacturing facilities near Fort Wayne, Indiana.
Effective September 30, 1998, we acquired Master Unit Die
Products, Inc., a leading North American manufacturer of
quick-change mold bases for the plastics industry. Master
Unit Die Products has annual sales in excess of $10 million.
Also on September 30, 1998, we acquired the assets of
Uniloy, the plastics machinery division of Johnson Controls,
Inc., for approximately $204 million. Uniloy, which is known
for its Uniloy brand of equipment, as well as various other
brands, had sales of more than $190 million for its fiscal
year ending on September 30, 1998, and is one of the world's
leading providers of blow molding machines, as well as
structural foam systems, aftermarket parts, services and
molds for blow molding.
On December 30, 1998, we acquired Werkzeugfabrik GmbH
Konigsee (Werko), a manufacturer of high-speed steel drills.
Located in eastern Germany, Werko had annual sales of
approximately $25 million as of the acquisition date.
In July, 1999, we acquired Nickerson Machinery Inc., Pliers
International Inc., and Plastic Moulding Supply LTD
(collectively, Nickerson). With annual sales of $7 million,
Nickerson sells supplies and equipment for plastic
processing through two catalog distribution centers in the
U.S. and one in the U.K. The operation in the U.K. also
manufactures and refurbishes screws and barrels for small
injection molding machines.
In August, 1999, we acquired Producto Chemical, Inc.
(Producto), which manufactures process cleaners, washers,
corrosion inhibitors and specialty products for
metalworking. Producto has annual sales approaching $5
million.
In September, 1999, we acquired Oak International, Inc.
(Oak), a global supplier of lubricants and process cleaners
used in metalforming and metalworking. Oak has three
manufacturing plants, including two in the U.S. and one in
the U.K., and has annual sales approaching $12 million.
With the exception of Werko, Oak and Producto, all of the
businesses purchased in 1998 and 1999 are included in the
plastics technologies segment from the respective dates of
acquisition. Werko, Oak and Producto are included in the
metalworking technologies segment. In the aggregate, these
acquisitions had the effect of increasing third quarter
1999 new orders and sales by $47 million and $50 million,
respectively, in relation to 1998. For the first three
quarters of 1999, the acquisitions resulted in increases in
new orders and sales of $152 million and $154 million,
respectively, in relation to the comparable period of 1998.
All of the acquisitions were financed through available cash
and bank borrowings and have been accounted for under the
purchase method of accounting.
PRESENCE OUTSIDE THE U.S.
In recent years, Milacron's growth outside the U.S. has
allowed it to become more globally balanced. In the first
nine months of 1999, markets outside the U.S. represented
the following percentages of our consolidated sales: Europe
27%; Asia 7%; Canada and Mexico 7%; and the rest of the
world 2%. As a result of this geographic mix, foreign
currency exchange rate fluctuations affect the translation
of our sales and earnings, as well as consolidated
shareholders' equity. During the first quarter of 1999, the
weighted-average exchange rates of most European currencies
in relation to the U.S. dollar were slightly stronger than
in the comparable period of 1998. As a result, Milacron
experienced favorable translation effects on new orders and
sales. However, the dollar strengthened against these
currencies during the second and third quarters such that
the weighted-average rates for those quarters and for the
first nine months of 1999 were unfavorable to the comparable
period of 1998. The net effect during the third quarter of
1999 was to reduce new orders by $6 million and sales by $7
million in relation to 1998. For the first three quarters
of 1999, exchange rate differences had the net effect of
reducing consolidated new orders and sales by $9 million and
$11 million, respectively. The effect on earnings was not
significant for either the third quarter or the year-to-date
period.
Between December 31, 1998 and September 30, 1999, the new
European currency, the euro, and the sovereign currencies of
the eleven participating countries weakened against the
dollar by approximately 11%. This resulted in a $14 million
reduction in consolidated shareholders' equity due to
unfavorable foreign currency translation adjustments.
If the euro and the related currencies should weaken further
against the dollar in future periods, we will once again
experience a negative effect in translating our non-U.S. new
orders, sales and, possibly, net earnings when compared to
historical results.
NEW ORDERS AND BACKLOG
Consolidated new orders in the third quarter of 1999 were
$406 million, which represents a $48 million, or 13%,
increase from $358 million in the comparable period of 1998.
Excluding the effects of the 1998 and 1999 acquisitions, new
orders for our base businesses were virtually unchanged in
relation to 1998. However, third quarter orders for our
base businesses increased by 4% in relation to the second
quarter of 1999.
In the plastics technologies segment, new orders increased
by $48 million, or 25%. Acquisitions accounted for $39
million, or about three quarters, of the increase. Orders
for extrusion systems increased in both the U.S. and Europe.
Orders for injection molding machines increased in the U.S.
due to a single large order from a U.S. manufacturer, but
decreased in Europe due to softness in many capital goods
markets. Currency exchange rate fluctuations had the effect
of reducing orders by $3 million.
Orders for metalworking technologies products were $170
million, which equaled the results achieved in the third
quarter of 1998. However, currency translation effects
decreased orders by $3 million in 1999 in relation to 1998.
Excluding the effects of acquisitions, new orders decreased
by $8 million, or 5%. The decrease was due principally to
lower orders for metalworking inserts and tool holders in
Europe and for grinding wheels and certain lines of round
metalcutting tools in North America. Orders for high-speed
steel drills increased due in part to the Werko acquisition
as did worldwide orders for metalworking fluids.
Consolidated new orders were $1,191 million in the first
three quarters of 1999, which represents an increase of $99
million, or 9%, in relation to 1998. Excluding the effects
of acquisitions, new orders decreased by $53 million, or 5%.
New orders increased by $110 million, or 20%, in the
plastics technologies segment due entirely to the 1998 and
1999 acquisitions. Without the acquisitions, the segment's
new orders decreased by $22 million, or 4%, due primarily to
lower orders for injection molding machines, especially in
Europe. Worldwide orders for extrusion systems increased by
20%, including a 27% increase in the U.S. Orders for D-M-E
mold bases and components increased in North America but
decreased in Europe. Currency exchange rate fluctuations
had the effect of reducing the segment's 1999 new orders by
almost $5 million.
Orders for metalworking technologies products were $525
million in the first three quarters of 1999, a decrease of
$11 million, or 2%, in relation to the comparable period of
1998. More than $4 million of the total decrease resulted
from currency exchange rate fluctuations. Excluding the
effect of acquisitions, new orders decreased by $30 million.
The decrease resulted from lower orders for Widia
metalcutting products in Europe and grinding wheels in North
America. Orders for round tools increased due to the Werko
acquisition and strong demand for high-speed steel drills in
the U.S. However, these effects were partially offset by
reduced demand for other round tool lines in the U.S.
U.S. export orders were $36 million in the third quarter of
1999, of which Uniloy accounted for approximately $10
million. In the third quarter of 1998, export orders
totaled $31 million. For the first three quarters of 1999,
export orders totaled $102 million compared to $90 million
in the same period of 1998. Uniloy accounted for $24
million of export orders in the 1999 period.
Milacron's backlog of unfilled orders totaled $260 million
at September 30, 1999, compared to $247 million at December
31, 1998, and $261 million at September 30, 1998.
SALES
Sales in the third quarter of 1999 were $393 million, which
represents a $41 million, or 12%, increase from $352 million
in 1998. Excluding the effects of acquisitions and currency
exchange rate fluctuations, third quarter sales were
essentially flat in relation to 1998 reflecting ongoing
weakness in many industrial sectors worldwide.
Sales of plastics technologies products increased by $37
million, or 21%. The segment's sales include an incremental
$42 million related to acquisitions. Shipments of injection
molding machines decreased in both the U.S. and Europe but
sales of extrusion systems increased worldwide. Shipments
of D-M-E products increased in North America but decreased
in Europe.
Sales of metalworking technologies products increased from
$174 million in the third quarter of 1998 to $177 million in
1999 due to the Werko acquisition. Without Werko and the
smaller 1999 acquisitions, sales would have decreased by 2%.
Currency effects reduced the segment's sales by
approximately $4 million in relation to 1998. Sales of
carbide inserts and insert holders increased in North
America but decreased by 8% in local currencies in Europe.
Except for high-speed steel drills, demand for most lines of
round metalcutting tools remained soft in North America, as
did demand for grinding wheels. Worldwide sales of
metalworking fluids increased slightly in relation to 1998.
In the first nine months of 1999, consolidated sales were
$1,186 million, an increase of $107 million, or 10%, in
relation to 1998. Recent acquisitions contributed $154
million of incremental sales.
Sales of the plastics technologies segment were $654 million
in the first nine months of 1999 compared to $548 million in
1998. The $106 million, or 19%, increase resulted from
recent acquisitions. Currency exchange rate differences had
the effect of reducing the 1999 amount by almost $6 million.
Sales of injection molding machines decreased worldwide but
sales of U.S.-built extrusion systems increased
significantly in relation to 1998. Sales of D-M-E products
also increased.
Sales of metalworking technologies products were $532
million in the first three quarters of 1999, which
approximated the $531 million of sales recorded in 1998.
Acquisitions contributed an incremental $18 million in 1999,
but currency exchange rate differences had the effect of
reducing 1999 sales by $5 million. The segment's 1999
results reflect weakness in most industrial markets except
automotive. Sales of Valenite metalcutting products
increased modestly in North America but shipments of Widia
products decreased, particularly in Europe. Round tool
sales increased due to the Werko acquisition but remained
soft for many lines in North America.
Export sales were $33 million in the third quarter of 1999
compared to $34 million in 1998. The 1999 amount includes
$10 million for Uniloy. For the first three quarters of
1999, export sales totaled $103 million compared to $88
million in 1998. Uniloy contributed $30 million to the 1999
amount.
Sales of both segments to non-U.S. markets, including
exports, totaled $170 million in the third quarter of 1999,
compared to $166 million in 1998. Sales to non-U.S. markets
totaled $513 million during the first three quarters of 1999
compared to $485 million in 1998. For the first nine months
of 1999 and 1998, products manufactured outside the U.S.
approximated 40% and 42% of sales, respectively, while
products sold outside the U.S. approximated 43% and 45% of
sales, respectively.
MARGINS, COSTS AND EXPENSES AND OPERATING EARNINGS
Our consolidated manufacturing margin in the third quarter
of 1999 was 26.1% compared to 25.5% in the second quarter of
1999 and 28.4% in the third quarter of 1998. The decrease
in relation to 1998 resulted principally from efficiency and
capacity problems in Uniloy's European operations and lower
sales volume for injection molding machines in the U.S. and
Widia metalcutting products in Europe.
The decrease in the plastics technologies segment resulted
principally from lower volume in the U.S. injection molding
business and the aforementioned problems in Uniloy's
European operations. As discussed more fully in the notes
to the consolidated condensed financial statements, in
September, 1999, we announced a plan to consolidate Uniloy
manufacturing in Europe to address these problems.
In the metalworking technologies segment, the margin
decrease occurred principally at Widia due to lower sales
volume in Europe and in round tools due to a shift in demand
to lower-margin products. Margins for metalworking fluids
also decreased in relation to 1998.
For the first nine months of 1999, the consolidated
manufacturing margin decreased from 27.8% to 26.0%. The
year-to-date decrease resulted primarily from higher sales
of lower-margin products and the effects of unabsorbed
capacity at certain locations.
In the third quarter of 1999, the plastics technologies
segment had operating earnings of $21.0 million, or 9.7% of
sales, compared to $21.2 million, or 11.9% of sales, in
1998. Earnings for injection molding machines decreased due
to lower sales volume in the U.S. In addition, the
segment's results were held back by the aforementioned
difficulties in Uniloy's European operations. Earnings in
the extrusion systems business improved worldwide due
principally to higher sales volume and the effects of recent
cost reduction measures in Europe.
The metalworking technologies segment had operating earnings
of $18.2 million, or 10.3% of sales, in the third quarter of
1999, which represents a 5% decrease from $19.1 million, or
11% of sales, in 1998. The decrease resulted from lower
sales volume for Widia products in Europe and for industrial
round tools in North America. These factors offset a
significant improvement at Valenite and more modest
increases for grinding wheels and metalworking fluids. In
general, the segment's profitability was penalized by the
effect of a shift in sales mix to lower-margin products in
certain businesses. Widia also had unabsorbed capacity costs
as production levels were adjusted to control inventory.
For the first nine months of 1999, the plastics technologies
segment had operating earnings of $61.6 million, or 9.4% of
sales, compared to $57.1 million, or 10.4% of sales, in
1998. The increase related almost entirely to the addition
of Uniloy despite its reduced third quarter profitability.
Earnings increased for U.S.-built extrusion systems but
decreased for U.S.-built injection molding machines. The
segment expects a stronger fourth quarter of 1999 with
increased earnings in relation to the third quarter of 1999
and the fourth quarter of 1998. Additional improvement is
expected in 2000 as a result of accelerated introductions of
higher-margin products and cost-cutting measures initiated
in several operations, including the consolidation of blow
molding operations in Europe.
The metalworking technologies segment had operating earnings
of $50.6 million, or 9.5% of sales, in the first three
quarters of 1999, a decrease of $6.7 million from $57.3
million, or 10.8% of sales, in the comparable period of
1998. The decrease resulted principally from the
aforementioned softness in worldwide industrial markets and
lower manufacturing margins related to a shift in sales mix,
particularly for round tools in North America. Given
softness in many key markets, the segment expects that the
fourth quarter of 1999 will be stronger than the third but
below the levels achieved in the fourth quarter of 1998.
The benefits of recent acquisitions, new product
introductions and continued cost cutting are expected to
result in gradual sales and earnings improvement in 2000.
For both the third quarter of 1999 and for the year to date,
total selling and administrative expense decreased
significantly as a percentage of sales due to our aggressive
cost-cutting measures. For the third quarter,
administrative expense increased in dollar amount in
relation to 1998 due primarily to the inclusion of Uniloy's
costs. Selling expense decreased by $2 million in relation
to 1998 despite higher sales volume and decreased by almost
$5 million in relation to the second quarter of 1999 due to
significant cost reduction efforts in several businesses.
Other expense-net increased to $3.7 million in the third
quarter of 1999 from $1.6 million in 1998. The 1999 amount
includes higher expense for goodwill amortization due
principally to the Uniloy acquisition, which occurred at the
end of the third quarter of 1998. For the first three
quarters of 1999, other expense-net was $8.2 million
compared to $9.8 million in the same period of 1998. The
decrease resulted in part from the absence of $5.3 million
of Widia severance cost, the effect of which was partially
offset by higher goodwill amortization expense in 1999. As
a result of the 1998 severance cost and other actions at
Widia, we are achieving annualized pretax savings of
approximately $5.0 million, which began to phase in during
the fourth quarter of 1998.
Interest expense-net, including amortization of debt
issuance costs, increased in the third quarter of 1999 due
to higher short-term borrowing rates and higher average debt
levels to finance working capital requirements, acquisitions
and the repurchase of common shares in early 1999 and late
1998. Net interest expense also increased for the first
nine months of 1999 for similar reasons.
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY SHAREHOLDERS' INTERESTS
Earnings from continuing operations before income taxes and
minority shareholders' interests were $25.0 million in the
third quarter of 1999 compared to $26.2 million in 1998.
Despite higher earnings for extrusion systems and Valenite
products, our earnings were depressed by the problems in
Uniloy's European operations and by the effects of lower
sales volume for injection molding machines and for certain
Widia products and round metalcutting tools. As a
percentage of sales, pretax earnings decreased from 7.4% to
6.4%.
For the first nine months of 1999, earnings from continuing
operations before income taxes and minority shareholders'
interests were $69.0 million, or 5.8% of sales, compared to
$73.5 million, or 6.8% of sales, in 1998. The decrease
results principally from lower sales volume for certain
businesses due to soft market conditions, the effects of
which offset lower severance costs and the incremental
earnings from recent acquisitions.
INCOME TAXES
The 1999 and 1998 provisions for income taxes include U.S.
federal and state and local income taxes as well as non-U.S.
income taxes in jurisdictions outside the U.S.
As discussed more fully in the notes to the consolidated
condensed financial statements, Milacron entered both 1999
and 1998 with sizable net operating loss (NOL) carryforwards
in certain jurisdictions, along with valuation allowances
against the NOL carryforwards and other deferred tax assets.
Valuation allowances are evaluated periodically and adjusted
based on a "more likely than not" assessment of whether the
related deferred tax assets will be realized. Decreases or
increases in these valuation allowances serve to favorably
or unfavorably affect our effective tax rate. As a result
of planned reductions in valuation allowances and certain
other factors described below, our expected effective tax
rate for 1999 is less than the U.S. statutory rate, as was
also the case in 1998. In addition to the effects of
reductions in valuation allowances, the 1999 effective tax
rate includes adjustments of income tax reserves to more
accurately reflect actual expected liabilities. These
benefits are partially offset by the downward adjustment of
the carrying value of net deferred tax assets in Germany to
the lower "with distribution" rate. This change is being
made as a result of recent changes in Milacron's capital
structure in Europe.
The effective tax rates for 1999 and 2000 are expected to be
approximately 28-31%. However, the actual rates for both
years will ultimately be contingent on the mix of earnings
among tax jurisdictions and other factors that cannot be
predicted with certainty at this time.
EARNINGS FROM CONTINUING OPERATIONS
Earnings from continuing operations, net of minority
shareholders' interests, were $17.4 million, or $.47 per
share (diluted), in the third quarter of 1999 compared to
$18.5 million, or $.47 per share (diluted), in 1998. The
earnings decrease resulted from the problems in Uniloy's
European operations, lower sales volume for injection
molding machines and certain metalworking products and a
higher effective tax rate. The per-share amount was
unchanged due to fewer shares outstanding as a result of the
share repurchase program (see Liquidity and Sources of
Capital). For the first three quarters of 1999, earnings
from continuing operations were $47.8 million, or $1.28 per
share (diluted), compared to $51.8 million, or $1.29 per
share (diluted), in 1998. The year-to-date decrease in 1999
resulted principally from soft market conditions for certain
businesses and a higher effective tax rate which offset the
beneficial effects of the recent acquisitions.
DISCONTINUED OPERATIONS
In 1998, discontinued operations reflects the loss on the
sale of the machine tools segment, which was sold on October
2, 1998, and its operating results through the date of sale.
NET EARNINGS
For the third quarter of 1999, net earnings were $17.4
million, or $.47 per share (diluted), compared to a loss of
$20.6 million, or $.53 per share (diluted), in 1998. The
1998 amount includes an operating loss of $3.9 from the
discontinued machine tools segment and the loss on the sale
of the segment of $35.2 million. Net earnings for the first
three quarters of 1999 were $47.8 million, or $1.28 per
share (diluted), compared to $17.9 million, or $.45 per
share (diluted), in 1998. The most significant factor
effecting the net earnings comparison was the 1998 loss on
the sale of the machine tools segment.
YEAR 2000
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The term "Year 2000 problem" (Y2K) refers to processing
difficulties that may occur in information technology (I.T.)
systems and other equipment with embedded microprocessors
that were designed without considering the distinction
between dates in the 1900s and the 2000s. If not corrected,
these systems could fail or miscalculate data when
processing information that includes a date on or after
January 1, 2000.
Each of Milacron's business units, as well as our corporate
headquarters, is responsible for developing and executing
comprehensive plans to minimize and, to the extent possible,
eliminate any major business interruptions that could be
caused by the Y2K issue. We have established an executive
level Y2K Compliance Committee, which is monitoring our
progress toward Y2K preparedness. This monitoring process
includes receiving quarterly updates from our business
units, testing by our internal auditors, and reporting from
limited reviews conducted by outside consultants to identify
issues requiring attention by the Compliance Committee.
Milacron's Y2K effort focuses primarily on three important
elements: 1) I.T. systems; 2) non-I.T. equipment that
includes embedded microprocessors; and 3) supplier and
infrastructure preparedness.
Most of our efforts have focused on our most critical I.T.
business systems (e.g., financial; enterprise resource
planning, or "ERP"). Each of our ten major manufacturing
locations operates a unique information technology system
which has been selected to best serve that business's needs.
Four of these businesses operate systems that are licensed
from independent third-party software providers and require
third party updates to be Y2K compliant. Milacron relied on
these third parties to replace or upgrade its software with
Y2K compliant software. We have installed and continue to
test the new software to provide assurance that the updated
systems will properly process date-sensitive information.
Five other businesses used the Y2K compliance process as an
opportunity to modernize their systems by installing new ERP
systems licensed from independent software providers. All
of the ERP system installations have been completed.
Another business unit operates its own proprietary business
systems, which have been reprogrammed to be Y2K compliant.
These major business units will continue testing as needed
during Quarter 4, 1999.
In addition, Milacron is in the process of completing
inventories, assessments and testing of non-I.T. systems
(e.g., production equipment) which may contain embedded
chips that could malfunction with the approach of the year
2000. Wherever critical systems are identified as not being
compliant, Milacron is remediating or replacing these non-
compliant systems. The remediation phase of this effort is
substantially completed.
All business units have substantially completed the process
of contacting key vendors and service providers to obtain
information about their plans and progress on Y2K issues and
to obtain their assurances that they expect to be able to
provide an uninterrupted flow of product or service
approaching and into the year 2000. We are following up on
significant concerns that are identified as a result of
these communications and, in some cases, may be arranging
alternative sources of that product or service.
We have also focused on preparing written contingency plans.
Each of our major business units is identifying potential
risks outside their control that could cause a significant
risk to the business. If we can't eliminate the risk, we're
planning ways to mitigate the risk before January 1, 2000 or
compensate for the disruption after January 1, 2000, if it
does occur.
Many of the machinery products we sell rely on computer
controls and embedded microprocessors to achieve optimum
performance. We are making information available publicly
to our customers on the Y2K status of these products.
Substantially all of them are Y2K compliant.
Milacron has estimated the cost of major system
implementation and remediation efforts. However, other
costs are being absorbed in departmental operating budgets.
Based on currently available information, we estimate that
the incremental cost of these major implementation and
remediation projects will be approximately $14 million over
1997, 1998 and 1999, of which over 92% has been expended
through September 30, 1999. These costs are not expected to
have a material effect on Milacron's financial position,
results of operations, or cash flows.
Milacron recognizes that the Y2K issue could result in the
interruption or failure of certain normal business
operations which could materially and adversely affect our
results of operations, liquidity and financial condition.
We believe that the reasonable worst-case scenario is that
Milacron could encounter production and shipment delays
caused in large part by vendors, service providers and other
third parties. Due to the general uncertainty inherent in
the Y2K problem, resulting in part from the uncertainty of
the Y2K preparedness of third parties, we are unable to
determine at this time whether the consequences of the Y2K
issue will have a material impact on Milacron's results of
operations, liquidity or financial condition. However, as a
result of our past and future Y2K activities, we believe
that the risk of significant interruption of normal
operations should be reduced.
MARKET RISK
- -----------
FOREIGN CURRENCY EXCHANGE RATE RISK
Milacron uses foreign currency forward exchange contracts to
hedge its exposure to adverse changes in foreign currency
exchange rates related to firm commitments arising from
international transactions. The company does not hold or
issue derivative instruments for trading purposes. At
September 30, 1999, Milacron had outstanding forward
contracts totaling $18.6 million compared to $19.1 million
at December 31, 1998, and $25.8 million at September 30,
1998. The potential loss from a hypothetical 10% adverse
change in foreign currency rates on Milacron's foreign
exchange contracts at September 30, 1999, December 31, 1998
or September 30, 1998, would not materially affect
Milacron's consolidated financial position, results of
operations, or cash flows.
INTEREST RATE RISK
At September 30, 1999, Milacron had fixed interest rate debt
of $221 million, including $100 million of 7-7/8% Notes due
May 15, 2000, and $115 million of 8-3/8% Notes due March 15,
2004. We also had floating rate debt totaling $328 million,
with interest fluctuating based primarily on changes in
LIBOR. At December 31, 1998 and September 30, 1998, fixed
rate debt totaled $228 million and $222 million,
respectively, and floating rate debt totaled $293 million
and $443 million, respectively. The September 30, 1998,
amount includes $180 million of borrowings that were repaid
in October, 1998, using the initial proceeds from the sale
of the machine tools segment. We also sell up to $75
million of accounts receivable under our receivables
purchase agreement, which results in financing fees that
fluctuate based on changes in commercial paper rates. As a
result, annual interest expense and financing fees fluctuate
based on fluctuations in short-term borrowing rates. The
effect of these fluctuations was not significant in the
first three quarters of 1999 or 1998.
LIQUIDITY AND SOURCES OF CAPITAL
- --------------------------------
At September 30, 1999, Milacron had cash and cash
equivalents of $41 million, representing an increase of $5
million during the third quarter of 1999 and a decrease of
$8 million during the first three quarters of the year.
Operating activities provided $38 million of cash in the
third quarter of 1999, compared to a $14 million use of cash
in 1998. For the first nine months of 1999, operating
activities provided $52 million of cash compared to the $23
million provided in the comparable period of 1998. Both
increases in cash provided resulted primarily from steps
taken to better align production with demand and to improve
working capital management.
In the third quarter of 1999, investing activities resulted
in a $41 million use of cash due to capital expenditures of
$7 million and acquisitions of $36 million. In the third
quarter of 1998, investing activities used $215 million of
cash, including capital expenditures of $23 million and
acquisitions of $193 million. In the first three quarters
of 1999, investing activities resulted in a $70 million net
use of cash due to capital expenditures of $36 million and
acquisitions of $47 million. The latter amount includes $15
million of payments of post-closing adjustments related to
the 1998 acquisitions which more than offset $10 million of
additional cash proceeds from the machine tools sale that
were received in the first two quarters of 1999. In the
first three quarters of 1998, capital expenditures of $52
million and acquisitions of $213 million contributed to a
$263 million use of cash.
Financing activities provided $8 million of cash in the
third quarter of 1999, compared to $240 million of cash
provided in 1998. The 1999 amount resulted from $12 million
of net additional borrowings offset by dividend payments.
In the third quarter of 1998, additional borrowings,
principally to finance acquisitions, provided $253 million
of cash. In October, 1998, we used the $180 million of
initial proceeds from the sale of the machine tools segment
to repay a substantial portion of these new borrowings. The
repurchase of common shares and dividends payments used $13
million of cash in the third quarter of 1998. During the
first three quarters of 1999, financing activities provided
$10 million of cash. Additional borrowings, net of
repayments, provided $43 million of cash while dividends and
common share repurchases used $33 million of cash.
Financing activities provided $257 million of cash in the
first three quarters of 1998 due principally to incremental
borrowings of $286 million, the effects of which were
partially offset by dividend requirements and the purchase
of treasury shares.
In the fourth quarter of 1998, we announced a two million
common share repurchase program, of which 1.2 million shares
were repurchased through December 31, 1998. The remainder of
shares were repurchased in the first half of 1999. Including
shares repurchased to meet the current needs of management
incentive plans, Milacron used $19 million of cash for share
repurchases in 1999, all of which occurred in the first half
of the year.
As of September 30, 1999, December 31, 1998, and September
30, 1998 Milacron's current ratio was 1.3. The decrease in
the current ratio from historical levels was principally the
result of higher bank borrowings to finance the 1998
acquisitions and the share repurchase program.
As of September 30, 1999, Milacron had lines of credit with
various U.S. and non-U.S. banks of approximately $612
million, including a $375 million committed revolving credit
facility. Under the provisions of the facility, our
additional borrowing capacity totaled approximately $207
million at September 30, 1999.
Total debt was $549 million at September 30, 1999,
representing an increase of $28 million from December 31,
1998. Total shareholders' equity was $483 million at
September 30, 1999, an increase of $6 million from December
31, 1998. The increase resulted from net earnings of $48
million which more than offset $14 million of unfavorable
foreign currency translation adjustments, dividend payments
and the effects of the share repurchase program. The ratio
of total debt to total capital (debt plus equity) was 53% at
September 30, 1999, compared to 52% at December 31, 1998.
We reduced the 1999 capital expenditures budget from an
original amount of $80 million to a revised budget of $60
million, a portion of which may be financed by leasing
programs. We made this reduction primarily as a result of
reduced production levels and capacity expansion needs in
some businesses.
Our $100 million of 7-7/8% Notes are due on May 15, 2000.
We are considering various alternatives available to us to
fund the repayment, including cash flow from operations, the
issuance of long-term debt in the public market or drawing
upon short-term lines of credit. We believe that Milacron's
cash flow from operations and currently available credit
lines are sufficient to meet our operating and capital
requirements in 1999.
OUTLOOK
- -------
We will continue to focus on improving operational
efficiency and closely monitor our capital investment and
inventory management to maximize cash flows. However, given
persistent softness in many of our markets, we anticipate
that fourth quarter earnings will approximate those of the
prior year but we do not expect our earnings for the year to
exceed 1998. Assuming that current economic conditions
persist, we believe that our goals of a 7% to 8% sales
increase and a 10% to 12% earnings improvement are
achievable in 2000. Longer term, our opportunity to achieve
even better results will depend on the integration of our
recent acquisitions for maximum synergies,an accelerated
schedule of new product introductions and recovery in
certain industrial sectors in both North America and Europe.
CAUTIONARY STATEMENT
Milacron wishes to caution readers about all of the
forward-looking statements in the "Outlook" section above
and elsewhere. These include all statements that speak
about the future or are based on our interpretation of
factors that might affect our businesses. Milacron
believes the following important factors, among others,
could affect its actual results in 1999 and beyond and
cause them to differ materially from those expressed in
any of our forward-looking statements:
* global and regional economic
conditions, consumer spending and
industrial production, particularly in
segments related to the level of
automotive production and spending in
the construction industry;
* fluctuations in currency exchange
rates of U.S. and non-U.S. countries,
including countries in Europe and Asia
where Milacron has several principal
manufacturing facilities and where many
of our competitors and suppliers are
based;
* fluctuations in domestic and non-
U.S. interest rates which affect the
cost of borrowing under Milacron's lines
of credit and financing fees related to
the sale of domestic accounts
receivable;
* production and pricing levels of
important raw materials, including
plastic resins, which are a key material
used by purchasers of Milacron's
plastics technologies products, and
steel, cobalt, tungsten and industrial
grains used in the production of
metalworking products;
* lower than anticipated levels of
plant utilization resulting in
production inefficiencies and higher
costs, whether related to the delay of
new product introductions, improved
production processes or equipment, or
labor relation issues
* any major disruption in production
at key customer or supplier facilities;
* alterations in trade conditions in
and between the U.S. and non-U.S.
countries where Milacron does business,
including export duties, import
controls, quotas and other trade
barriers;
* changes in tax, environmental and
other laws and regulations in the U.S.
and non-U.S. countries where Milacron
does business;
* unanticipated litigation, claims or
assessments, including but not limited
to claims or problems related to product
liability, warranty, or environmental
issues;
* the failure of key vendors,
software providers, public utilities,
financial institutions or other critical
suppliers to provide products or
services that are Y2K compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The information required by Item 3 is included in Item 2 on
page 21 of this Form 10-Q.
PART II. OTHER INFORMATION
MILACRON INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
In the opinion of management and counsel, there are no
material pending legal proceedings to which the company or
any of its subsidiaries is a party or of which any of its
property is the subject.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit (3) - Certificate of Incorporation and
Bylaws
Exhibit (4) - Instruments Defining the Rights
of Security Holders, Including
Indentures
Exhibit (10) - Material Contracts
Exhibit (11) - Statement Regarding Computation
of Per Share Earnings - filed as
a part of Part I
Exhibit (27) - Financial Data Schedule - filed
as part of Part I
(b) Reports on Form 8-K
- There were no reports on Form 8-K filed during the
quarter ended September 30,1999.
MILACRON INC. AND SUBSIDIARIES
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.
Milacron Inc.
Date: November 12, 1999 By:/s/Jerome L. Fedders
Jerome L. Fedders
Controller
Date: November 12, 1999 By:/s/Robert P. Lienesch
Robert P. Lienesch
Vice President - Finance
and Treasurer and
Chief Financial Officer
MILACRON INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NO. PAGE NO.
2 Plan of Acquisition, Reorganization,
Arrangement, Liquidation, or
Succession - not applicable
3 Certificate of Incorporation and By-Laws
3.1 Restated Certificate of
Incorporation filed with the
Secretary of State of the State of
Delaware on November 17, 1998
-Incorporated herein by reference to
the company's Registration Statement
on Form S-8 (Registration No. 333-70733)
3.4 By-laws, as amended
-Incorporated herein by reference to
the company's Registration Statement
on Form S-8 (Registration No. 333-7733)
4 Instruments Defining the Rights of Security Holders,
Including Indentures:
4.1 8-3/8% Notes due 2004
-Incorporated herein by reference to the
company's Amendment No. 3 to Form S-4
Registration Statement dated July 7, 1994
(File No. 33-53009)
4.2 7-7/8% Notes due 200
-Incorporated herein by reference to the
company's Registration Statement Form S-4
dated July 21, 1995 (File No. 33-630081)
4.3 Milacron Inc. hereby agrees to furnish to
the Securities and Exchange Commission, upon its
request, the instruments with respect to long-
term debt for securities authorized
thereunderwhich do not exceed 10% of the
registrant's total consolidated assets
10 Material Contracts:
10.1 Milacron 1987 Long-Term Incentive Plan
-Incorporated herein by reference to the
company's Proxy Statement dated
March 27,1987.
10.2 Milacron 1991 Long-Term Incentive Plan
-Incorporated herein by reference to the
company's Proxy Statement dated
March 22,1991.
10.3 Milacron 1994 Long-Term Incentive Plan
-Incorporated herein by reference to the
company's Proxy
Statement dated March 24,1994.
10.4 Milacron 1997 Long-Term Incentive Plan,
as amended - Incorporated herein by reference
to the company's Form 10-K for the year ended
December 31, 1998.
10.5 Milacron 1996 Short-Term Management
Incentive Plan-Incorporated herein by
reference to the company's Form 10-K for the
year ended December 28, 1996.
10.6 Milacron Inc. Supplemental Pension Plan,
as amended - Incorporated herein by reference
to the company's Form 10-K for the year ended
December 31, 1998.
10.7 Milacron Inc. Supplemental Retirement
Plan, as amended - Incorporated herein by
reference to the company's Form 10-K for the
year ended December 31, 1998.
10.8 Milacron Inc. Plan for the Deferral of
Directors' Compensation, as amended
-Incorporated herein by reference to the
company's Form 10-K for the year ended
December 31, 1998.
10.9 Milacron Inc. Retirement Plan for Non-
Employee Directors, as amended
-Incorporated herein by reference to the
company's Form 10-K for the year ended
December 31, 1998.
10.10 Milacron Inc. Retirement Plan for
Non-Employee Directors,as amended
-Incorporated herein by reference to the
company's Form 10-K for the year ended
December 31, 1998.
10.11 Amended and Restated Revolving
Credit Agreement dated as of
November 30, 1998 among Milacron Inc.,
Cincinnati Milacron Kunststoffmaschinen
Europe GmbH, the lenders listed therein
And Bankers Trust Company, as agent.
-Incorporated herein by reference to the
company's Form 10-K for the year ended
December 31, 1998.
10.12 Milacron Compensation Deferral
Plan, as amended -Incorporated herein by
reference to the company's Form 10-K for the
year ended December 31, 1998.
10.13 Rights Agreement dated as of
February 5, 1999, between Milacron, Inc. and
Chase Mellon Shareholder Services,L.L.C., as
Rights Agent.
-Incorporated herein by reference to the
company's Registration Statement on Form 8-A
(File No. 001-08485).
10.14 Purchase and Sale Agreement between
UNOVA, Inc., UNOVA Industrial Automation
Systems, Inc., UNOVA U.K. Limited and
Cincinnati Milacron, Inc. dated August 20,
1998.
-Incorporated herein by reference to the
company's Form 8-K dated December 30, 1995.
10.15 Purchase and Sale Agreement between
Johnson Controls, Inc., Hoover Universal,
Inc. and Cincinnati Milacron Inc., dated
August 3, 1998. -Incorporated herein by
reference to the company's Form 8-K dated
September 30, 1998.
11 Statement Regarding Computation of Per-
Share Earnings 29
15 Letter Regarding Unaudited Interim
Financial Information Not Applicable
18 Letter Regarding Change in Accounting
Principles - Not Applicable
19 Report Furnished to Security Holders
- Not Applicable
22 Published Report Regarding Matters
Submitted to Vote of Security Holders
- Not Applicable
23 Consent of Experts and Counsel
- Not Applicable
24 Power Attorney - Not Applicable
27 Financial Data Schedule - Filed as part
of EDGAR document 30
99 Additional Exhibits - Not Applicable