FORM 10-Q
UNITED STATES
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 period ended September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___TO ___
Commission file number: 0-28096
-----------------------------
THE YORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0490631
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8554 KATY FREEWAY, SUITE 200 77024
(Address of principal executive offices) (Zip Code)
(713) 984-5500
(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 [ ]
The number of shares outstanding of the registrant's common stock as of October
11, 1998 was 8,930,950.
THE YORK GROUP, INC.
INDEX
PAGE
Part I. Financial Information
Item 1.Financial Statements
Consolidated Balance Sheets -
September 30, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) Three and nine
months ended September 30, 1998 and 1997 ........... 3
Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 1998 and 1997 ...... 4
Notes to Consolidated Financial Statements (Unaudited) ..... 5-6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ......... 7-9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .......................... 10
Signature .................................................. 11
1
THE YORK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents ..................... $ 3,246 $ 15,478
Trade accounts and notes receivable, net
of allowance for doubtful accounts and
returns and allowances of $4,016 in
1998 and $3,117 in 1997:
Stockholders and affiliates ................ 5,089 5,128
Other ...................................... 24,519 16,857
Inventories ................................... 39,453 36,325
Prepaid expenses .............................. 2,583 1,228
Deferred tax asset ............................ 4,910 4,506
--------- ---------
Total current assets ...................... 79,800 79,522
--------- ---------
Property, plant and equipment, net .............. 53,629 38,718
Goodwill and other intangibles, net ............. 61,680 10,867
Other noncurrent assets ......................... 5,577 1,438
--------- ---------
Total assets .................................. $ 200,686 $ 130,545
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............. $ 3,620 $ 3,608
Accounts payable .............................. 3,200 4,409
Income taxes payable .......................... 1,828 1,565
Accrued expenses .............................. 17,330 13,333
--------- ---------
Total current liabilities ................. 25,978 22,915
--------- ---------
Long-term debt .................................. 77,950 25,925
Other noncurrent liabilities .................... 5,378 870
Deferred tax liability .......................... 7,603 5,188
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized and unissued ............. -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 8,930,950 and 8,906,950
shares issued and outstanding .............. 89 89
Additional paid-in capital .................... 40,390 40,209
Foreign currency translation adjustment ....... (107) --
Retained earnings ............................. 43,405 35,349
--------- ---------
Total stockholders' equity ................. 83,777 75,647
--------- ---------
Total liabilities and stockholders' equity .... $ 200,686 $ 130,545
========= =========
The accompanying consolidated notes are an integral part
of these financial statements.
2
THE YORK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net Sales (including sales to
Stockholders and affiliates
of $10,276 and $9,277 for
the three months ended
September 30, 1998 and 1997,
respectively, and $35,374
and $41,995 for the nine months
ended September 30, 1998 and
1997, respectively) ........... $ 58,352 $ 40,413 $ 174,186 $ 131,575
Cost of goods sold ............... 43,113 29,221 124,555 96,050
--------- --------- --------- ---------
Gross Profit .................. 15,239 11,192 49,631 35,525
Other operating expenses ......... 10,739 8,203 31,289 20,810
--------- --------- --------- ---------
Operating income .............. 4,500 2,989 18,342 14,715
Interest expense, net ............ (1,484) (122) (3,312) (389)
--------- --------- --------- ---------
Income before income taxes ....... 3,016 2,867 15,030 14,326
Income tax provision ............. 1,206 1,075 5,903 5,372
--------- --------- --------- ---------
Net Income ....................... $ 1,810 $ 1,792 $ 9,127 $ 8,954
========= ========= ========= =========
Average shares outstanding:
Basic ......................... 8,931 8,894 8,919 8,647
========= ========= ========= =========
Diluted ....................... 9,079 9,169 9,307 8,913
========= ========= ========= =========
Earnings per share:
Basic ......................... $ 0.20 $ 0.20 $ 1.02 $ 1.04
========= ========= ========= =========
Diluted ....................... $ 0.20 $ 0.20 $ 0.99 $ 1.01
========= ========= ========= =========
The accompanying consolidated notes are an integral part of
these financial statements.
3
THE YORK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
---------- --------
Cash flows from operating activities:
Net income ...................................... $ 9,127 $ 8,954
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization ................. 6,772 3,663
Deferred income tax provision ................ 97 92
Loss on disposition of property, plant
and equipment ............................... 104 79
Provision for doubtful accounts ............... 123 43
Decrease/(increase) in:
Accounts receivable .......................... (4,817) 3,807
Inventories .................................. 1,352 (2,414)
Prepaid expenses ............................. 98 (1,879)
Other noncurrent assets ...................... (1,798) (142)
Increase/(decrease) in:
Accounts payable ............................. (3,128) (1,306)
Accrued expenses ............................. 1,194 201
Other liabilities ............................ (73) --
-------- --------
Net cash provided by operating activities .... 9,051 11,098
-------- --------
Cash flows from investing activities:
Capital expenditures ............................ (5,996) (5,888)
Collection of notes receivable .................. 227 475
Acquisitions, net of cash acquired of
$17,582 and $3,744 ............................ (66,035) (6,882)
-------- --------
Net cash used in investing activities ........ (71,804) (12,295)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .......... 181 112
Proceeds from issuance of long-term debt ........ 74,500 --
Repayment of long-term debt ..................... (23,089) (4,881)
Dividends paid .................................. (1,071) (1,016)
-------- --------
Net cash provided by (used in) financing
activities ................................. 50,521 (5,785)
-------- --------
Net (decrease) in cash and cash equivalents ............ (12,232) (6,982)
Cash and cash equivalents, beginning of period ......... 15,478 31,940
-------- --------
Cash and cash equivalents, end of period ............... $ 3,246 $ 24,958
======== ========
Supplemental schedule of noncash investing
and financing activities:
Details of 1998 acquisitions
(Note 2)
Fair value of assets acquired ..... $ 95,404
Liabilities assumed ............... 11,787
--------
Cash paid ......................... $ 83,617
========
The accompanying consolidated notes are an integral part of
these financial statements.
4
THE YORK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The York Group, Inc. and subsidiaries (the "Company") and have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the Company's December
31, 1997 audited consolidated financial statements and the notes thereto
included in the Company's 1997 Annual Report on Form 10-K. In the opinion of the
Company's management, all adjustments and eliminations, consisting only of
normal and recurring adjustments, necessary to present fairly the consolidated
financial statements have been included. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income and its
components. Comprehensive income is the total of net income and all other
non-owner changes in equity. For the three and nine months ended September 30,
1998, the Company had comprehensive income of $1.7 million and $9.0 million,
respectively, consisting of net income and foreign currency translation
adjustment. For the three and nine months ended September 30, 1997, the only
component of comprehensive income for the Company is net income. Adopting
Statement No. 130 did not have a material effect on the Company's financial
position or results of operations.
2. ACQUISITIONS
On March 16, 1998, the Company acquired all of the outstanding shares of
Colonial Guild, Ltd., a leading manufacturer of bronze memorialization and
commemorative products. The purchase price of $78.6 million was financed using
available cash and the Company's line of credit facility entered into on March
12, 1998. The acquisition has been accounted for using the purchase method of
accounting.
During the nine month period ended September 30, 1998, the Company also
consummated three small acquisitions. The acquisitions were financed using the
Company's line of credit, with an aggregate purchase price for the acquisitions
of $5.0 million. These acquisitions have been accounted for using the purchase
method of accounting.
Pro forma unaudited consolidated operating results of the Company and the
acquired companies for the nine months ended September 30, 1998 and 1997,
assuming the Colonial acquisition and other acquisitions made in 1998 and 1997
had been made as of January 1, 1997, are summarized and included in the table
below. Pro forma adjustments include only the effects of events directly
attributable to transactions that are factually supportable and expected to have
a continuing impact. Pro forma adjustments do not reflect anticipated
"efficiencies" in operations. The Company believes that this unaudited pro forma
information is not indicative of future results of operations, nor the results
of historical operations had the acquisitions been consummated as of the assumed
dates.
5
UNAUDITED PRO FORMA FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1998 1997
------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ........................ $ 185,133 $ 178,281
Net income ....................... $ 8,237 $ 9,511
Earnings per share:
Basic ......................... $ .92 $ 1.07
Diluted ....................... $ .89 $ 1.04
3. SUPPLEMENTAL INFORMATION
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(IN THOUSANDS)
Inventories:
Raw materials .................. $ 14,689 $ 10,123
Work in process ................ 5,156 4,039
Finished goods ................. 19,608 22,163
-------- --------
$ 39,453 $ 36,325
======== ========
Property, Plant and Equipment:
Land and improvements .......... $ 4,754 $ 3,825
Building and improvements ...... 19,060 12,721
Equipment ...................... 51,081 38,245
Construction-in-progress ....... 5,042 5,003
-------- --------
79,937 59,794
Less: accumulated depreciation . (26,308) (21,076)
-------- --------
$ 53,629 $ 38,718
======== ========
4. CONTINGENCIES
ENVIRONMENTAL MATTERS
In 1991, the Georgia Department of Natural Resources (the GDNR) issued a
Notice of Violation - Consent Order alleging that the Company's Lawrenceville,
Georgia facility was storing and treating hazardous wastes without a permit and
was otherwise in violation of certain hazardous waste regulations in the
operation of its electroplating line and associated waste water treatment
system. The GDNR approved a closure-plan and post-closure plan for the facility
in August 1994, and issued a Hazardous Waste Facility Permit effective September
27, 1995 to document the post-closure care requirements. The Company has
provided financial assurance in the form of a letter of credit in the amount of
approximately $1.1 million to secure its post-closure care obligations.
At September 30, 1998 and December 31, 1997, the Company had reserves of
approximately $1.3 million and $1.4 million, respectively, for estimated costs
to complete the implementation of the post-closure plan. Actual remediation
costs may differ from estimates due to unforeseen factors which may arise as the
closure occurs. Accordingly, these reserves may be adjusted as additional
information becomes available.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company is the second largest casket manufacturer in the United States
and produces a wide variety of caskets, as well as casket components and burial
vaults. The Company's finished caskets are marketed through a network of Company
and privately owned distributors, which serve domestic funeral homes, as well as
certain foreign markets. Casket components are sold to other casket
manufacturers and assemblers (including certain of the Company's distributors).
Burial vaults are sold directly to funeral home and cemetery operators as well
as to privately owned distributors.
On March 16, 1998 the Company acquired all of the outstanding stock of
Colonial Guild, Ltd., a leading manufacturer of bronze memorialization and
commemorative products. Colonial Guild's products are sold to monument dealers,
cemeteries and funeral homes (See Note 2 of Notes to Consolidated Financial
Statements).
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales increased $17.9 million, or 44.4%. This increase primarily
reflects additional net sales from Colonial Guild and other acquired operations.
Additionally, same store sales volume from distribution operations owned during
both quarters increased approximately 6% in 1998 from 1997 levels.
Gross profit increased $4.0 million, or 36.2% Gross margin decreased from
27.7% to 26.1%. Gross profit and margin were positively affected by the Colonial
Guild acquisition, offset partially by acquisitions of manufacturing operations.
Additionally, margins were negatively affected by lower casket manufacturing
throughput, the result of reduced purchases of finished caskets by Company owned
distribution operations. The lower purchase levels are a direct result of the
Company's inventory reduction plan instituted during the second quarter of 1998.
This plan was initiated in order to position the Company for the end of its
casket supply contract with Service Corporation International (SCI).
Other operating expenses increased $2.5 million, or 30.9% and as a
percentage of net sales decreased from 20.3% to 18.4%. The increase in other
operating expenses reflects the acquisition of Colonial Guild, partially offset
by generally lower expense levels throughout the remainder of the Company, most
significantly in distribution operations. The reduction reflects the effects of
the Company's expense management efforts.
Net interest expense increased $1.4 million to $1.5 million. The increase
reflects the use of cash and issuance of debt for acquisitions.
The Company's effective tax rate was 40.0% in the third quarter of 1998
compared to 37.5% in 1997. The increase reflects an increase in non-deductible
expenses, higher state income taxes and the Company's Federal statutory tax
rate.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Many of the factors that affected third quarter results also had an impact
on year to date results. Refer to the third quarter comparison for additional
discussion.
Net sales increased $42.6 million, or 32.4%. The increase primarily
reflects the effects of acquisitions and increased sales from Company owned
distribution operations, partially offset by lower sales to independent
distributor customers in 1998.
Gross profit increased $14.1 million, or 39.7%. Gross margin increased from
27.0% to 28.5%. The increases reflect primarily the acquisition of Colonial
Guild, offset partially by the effects of lower casket manufacturing throughput
resulting from inventory reduction initiatives.
7
Other operating expenses increased $10.5 million, or 50.4%, and as a
percentage of net sales, increased from 15.8% to 18.0%. The increase reflects
the effects of acquisitions, partially offset by expense reduction efforts.
Net interest expense increased $2.9 million to $3.3 million in 1998. Cash
paid for interest during the nine months ended September 30, 1998 and 1997 was
$3.5 million and $1.7 million, respectively.
The Company's effective tax rate increased from 37.5% in 1997 to 39.3% in
1998. Cash paid for income taxes during the nine months ended September 30, 1998
and 1997 was $6.9 million and $5.6 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on cash flows from operations as well
as borrowings from banks and other lenders to fund its operations.
Cash and cash equivalents were $3.2 million at September 30, 1998, a
decrease of $12.2 million from December 31, 1997. For the nine months ended
September 30, 1998, cash provided by operations totaled $9.1 million, cash used
in investing activities totaled $71.8 million and cash provided by financing
activities totaled $50.5 million.
The Company utilized approximately $66.0 million of cash for acquisitions
during the first nine months of 1998, net of cash acquired.
Long-term debt, including current maturities, at September 30, 1998 totaled
$81.6 million compared to $29.5 million at December 31, 1997, with the increase
attributable to the issuance of debt related to the Colonial Guild and other
acquisitions. Long-term debt at September 30, 1998 consisted primarily of $55.5
million borrowed under the Company's revolving line of credit, $21.4 million of
Senior Notes, $2.5 million in promissory notes and $2.0 million in convertible
notes.
The Company maintains a $60 million unsecured revolving credit facility
with a group of major banks. At September 30, 1998, $4.5 million was available
under the revolving credit facility.
The Company's capital resources consist of its cash balances at September
30, 1998, future cash flows from operations and the borrowing capacity under the
revolving credit facility. The Company believes that these resources will be
sufficient to fund capital expenditures and meet other operating requirements.
The Company believes that its inventory management efforts will continue to
generate positive cash flow through the end of 1998. In order to finance its
acquisition activities, the Company may require additional capital resources.
As disclosed in previous announcements and official filings, during the
first quarter of 1998, SCI, the Company's largest single customer informed the
Company that beginning in January 1999 it would buy substantially all of its
caskets from another supplier. Management estimates purchases under the SCI
contract represent approximately 20% of the Company's revenues and between 40%
and 45% of the Company's operating income before adjustment for actions taken
relative to the loss of such business.
The Company's management has taken several initiatives in order to prepare
for the loss of SCI business in 1999. With approximately 75% of funerals
performed in the United States taking place in independently owned and operated
funeral establishments, the Company is targeting its sales and marketing
programs towards the independent funeral operator. During the second quarter of
1998 the Company initiated an inventory reduction program in order to manage
inventory levels as the SCI supply agreement draws to a close. This inventory
reduction program has, and will, through at least the remainder of 1998, reduce
reported earnings due to lost production absorption at manufacturing facilities,
but will provide positive cash flow as finished goods inventories are sold and
not replenished. During the third quarter, margins were negatively affected, but
cash flow increased as company owned distribution center inventories were
reduced by approximately $3 million.
The Company has reviewed its facilities, both manufacturing and
distribution, to determine if any such facilities should be downsized as a
result of the expected level of business in 1999. During the third quarter of
1998, the Company announced that it will close its bronze manufacturing
operations in Portland, Oregon, consolidating the production from that plant
into the Company's other two bronze manufacturing facilities. The Company also
announced a shift reduction at one of its metal casket assembly operations,
effective November 2, 1998. Additional manpower and facility adjustments are
anticipated during the fourth quarter of 1998.
8
THE YEAR 2000 ISSUE
The Company has recognized the need to ensure that its computer operations
and operating systems will not be adversely affected by the upcoming calendar
year 2000 and is cognizant of the time sensitive nature of the issue. The
Company has assessed how it may be impacted by year 2000 and has formulated and
commenced implementation of a plan to address information systems issues. This
plan involves a combination of hardware and software modifications, upgrades and
replacement, including implementation of a new software package which will not
only address the year 2000 issue, but provide additional business process
functionality. The Company estimates that the cost of year 2000 compliance for
its information system, combined with capital expenditures for hardware and
software involving functionality improvements will be approximately $6.0
million. The Company does not believe that year 2000 compliance issues with
respect to customers and suppliers will have a material effect on the Company's
operations or financial results.
INFLATION
Historically, inflation has not had a material impact on the results of
operations of the Company nor is it anticipated to have a material impact for
the foreseeable future.
SELECTED QUARTERLY OPERATING RESULTS AND SEASONALITY
Historically, the Company's operations have experienced seasonal
variations. Generally, the Company's net sales are highest in the first quarter
and lowest in the third quarter of each year. These fluctuations are due in part
to the seasonal variance in the death rate, with a greater number of deaths
generally occurring in cold weather months, and the timing of the Company's
annual manufacturing facility vacation shutdowns, which occur primarily in the
third quarter. In addition, operating results can vary between quarters of the
same or different years due to, among other things, fluctuations in the number
of deaths, changes in product mix, and the timing of annual price increases
relative to changes in costs. As a result, the Company experiences variability
in its operating results on a quarterly basis, which may make quarterly
year-to-year comparisons less meaningful.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial data schedule
10
SIGNATURE
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.
October 12, 1998 THE YORK GROUP, INC.
By: /s/ DAVID F. BECK
David F. Beck
Vice President and Chief Financial
Officer (Principal Financial Officer
and Duly Authorized Officer)
11