FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-20704
ACX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1208699
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16000 Table Mountain Parkway, Golden, Colorado 80403
(Address of principal executive offices) (Zip Code)
(303) 271-7000
(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 [ ]
There were 28,523,011 shares of common stock outstanding as of
October 29, 1999.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACX TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENT
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $338,564 $248,019 $840,125 $742,078
Cost of goods sold 282,355 205,266 680,319 597,665
-------- -------- -------- --------
Gross profit 56,209 42,753 159,806 144,413
Selling, general and
administrative 30,094 22,326 83,876 72,364
Goodwill amortization 4,827 2,645 9,581 7,563
Asset impairment and
restructuring charges
(Note 5) --- 25,482 --- 32,720
-------- -------- -------- --------
Operating income (loss) 21,288 (7,700) 66,349 31,766
Gain from sale of businesses
(Note 4) 30,236 --- 30,236 ---
Other income - net 303 508 319 568
Interest expense - net (15,239) (5,314) (25,836) (14,946)
-------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes and
extraordinary loss 36,588 (12,506) 71,068 17,388
Income tax expense (benefit) 15,000 (5,000) 28,500 6,900
-------- -------- -------- --------
Income (loss) from
continuing operations
before extraordinary loss 21,588 (7,506) 42,568 10,488
Loss from discontinued
operations, net of tax
(Note 1) (6,107) --- (6,107) ---
-------- -------- -------- --------
Income (loss) before
extraordinary loss 15,481 (7,506) 36,461 10,488
Extraordinary loss, net of
tax (Note 2) (2,332) --- (2,332) ---
-------- -------- -------- --------
Net income (loss) $13,149 ($7,506) $34,129 $10,488
======== ======== ======== ========
Net income (loss) per basic
share $0.46 ($0.26) $1.20 $0.37
======== ======== ======== ========
Net income (loss) per
diluted share $0.46 ($0.26) $1.19 $0.36
======== ======== ======== ========
Weighted average shares
outstanding - basic 28,459 28,581 28,443 28,520
======== ======== ======== ========
Weighted average shares
outstanding - diluted 28,760 29,019 28,741 29,126
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
ACX TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $42,316 $26,196
Accounts receivable 133,065 92,763
Inventories
Finished 86,931 62,484
In process 48,157 37,458
Raw materials 58,228 48,610
------------- ------------
Total inventories 193,316 148,552
Notes receivable -- 60,568
Other assets 43,297 30,076
Current assets of discontinued
operations 2,593 ---
------------- ------------
Total current assets 414,587 358,155
------------- ------------
Properties at cost less accumulated
depreciation of $327,265 in 1999
and $286,204 in 1998 674,354 373,691
Goodwill, net 630,869 206,583
Other assets 84,619 22,776
Noncurrent assets of discontinued
operations 41,000 ---
------------- ------------
Total assets $1,845,429 $961,205
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $416,000 $86,300
Other current liabilities 190,504 119,311
------------- ------------
Total current liabilities 606,504 205,611
Long-term debt 665,000 233,000
Other long-term liabilities 79,500 61,260
------------- ------------
Total liabilities 1,351,004 499,871
Minority interest 6,279 13,379
Shareholders' Equity
Preferred stock, non-voting, $0.01
par value, 20,000,000 shares
authorized and no shares issued
or outstanding --- ---
Common stock, $0.01 par value
100,000,000 shares authorized
and 28,482,000 and 28,373,000
issued and outstanding at
September 30, 1999, and
December 31, 1998, respectively 285 284
Paid-in capital 452,287 451,401
Retained earnings 35,838 1,710
Accumulated other comprehensive loss (264) (5,440)
------------- ------------
Total shareholders' equity 488,146 447,955
------------- ------------
Total liabilities and shareholders'
equity $1,845,429 $961,205
============= ============
See Notes to Consolidated Financial Statements.
ACX TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Nine months ended
September 30,
--------------------
1999 1998
-------- --------
Cash flows from operating
activities:
Net income $34,129 $10,488
Adjustments to reconcile net
income to net cash provided
by operating activities:
Noncash loss from
discontinued operations 10,000 ---
Restructuring and asset
impairment --- 32,720
Depreciation and
amortization 52,492 40,631
Gain on sales of businesses (30,236) ---
Change in deferred income
taxes 2,604 (9,151)
Change in current assets and
liabilities 49,227 (1,585)
Change in deferred items and
other (7,415) (6,614)
Change in current assets of
discontinued operations (2,593) ---
-------- --------
Net cash provided by operating
activities 108,208 66,489
-------- --------
Cash flows used in investing
activities:
Acquisitions, net of cash
acquired (899,841) (293,564)
Proceeds from sales of
assets 129,526 129,952
Capital expenditures (56,981) (61,939)
Other 3,776 (2,098)
-------- --------
Net cash used in investing
activities (823,520) (227,649)
-------- --------
Net cash provided by financing
activities 731,432 148,819
-------- --------
Cash and cash equivalents:
Net increase (decrease) in cash
and cash equivalents 16,120 (12,341)
Balance at beginning of period 26,196 49,355
-------- --------
Balance at end of period $42,316 $37,014
======== ========
See Notes to Consolidated Financial Statements.
ACX TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Discontinued Operations
Under the terms of a March 1997 agreement between ACX
Technologies, Inc. (ACX or the Company) and Crown Cork & Seal
Company, Inc. (Crown), as amended, Crown paid a nonrefundable $10
million payment and issued a $60 million note to the Company in
exchange for Golden Aluminum Company (Golden Aluminum). Crown had
the option of returning Golden Aluminum to the Company in
satisfaction of the $60 million note. On May 26, 1999, ACX
announced that it had been notified by Crown of its intention to
return Golden Aluminum effective August 23, 1999.
On August 17, 1999 the Company entered into a letter of
intent with Alcoa Inc. to sell Golden Aluminum for $41 million
and the Company is in the process of completing the sale. The
disposition is expected to be completed by the end of 1999 and is
expected to result in an estimated after-tax loss of
approximately $6.1 million, including approximately $0.1 million
of after-tax losses associated with operating activities of
Golden Aluminum from August 23, 1999 through the expected sale
date. Accordingly, the results for Golden Aluminum since August
23, 1999 and the estimated loss through the disposition date have
been classified as discontinued operations in the consolidated
statement of income.
Summarized results of discontinued operations are as follows
(in thousands):
Nine Months and
Three Months
Ended
September 30,
1999
---------------
Net sales $2,325
========
Loss on disposal before
income taxes ($10,000)
Loss on operations during
disposition period before
income taxes (178)
Income tax benefit 4,071
-------
Net loss on disposal of
discontinued operations ($6,107)
=======
The basic and diluted per share loss on the disposal of the
discontinued operations for the three months and nine months
ended September 30, 1999 is $0.21. The assets and liabilities of
Golden Aluminum which are held for sale have been separately
identified on the September 30, 1999 consolidated balance sheet
as net current or noncurrent assets of discontinued operations.
These assets are comprised of accounts receivable and payable and
property, plant and equipment. The note receivable from Crown
was classified in current assets in the December 31, 1998,
consolidated balance sheet. There were no other assets or
liabilities associated with Golden Aluminum at December 31, 1998.
Significant estimates have been made by management with
respect to the loss on disposal of Golden Aluminum. Actual
results could differ from these estimates making it reasonably
possible that a change in these estimates could occur in the near
term.
Note 2. Extraordinary Item
During third quarter 1999, the Company retired $358 million of
debt with the proceeds from a new $1.3 billion credit facility
led by Bank of America (the Credit Facilities). The Credit
Facilities were executed on August 2, 1999 and the proceeds were
used to refinance all prior debt and the acquisition of the
folding carton business of Fort James Corporation (Fort James).
Amounts borrowed under the new facilities bear interest at LIBOR
plus a spread that varies depending on the Company's financial
performance. In addition, the Company pays a commitment fee on
the unused portion of the Credit Facilities. Borrowings are
secured with a pledge of 100% of the common and preferred shares
of the Company's domestic subsidiaries and 65% of the common and
preferred shares of material foreign subsidiaries. If the
Company fails to meet certain financial measures and repay at
least $525 million within 180 days of closing the Credit
Facilities, then borrowings will become secured by all assets of
the Company and its subsidiaries. Through September 30, 1999 the
Company had repaid $109 million of the $525 million.
In connection with the $358 debt repayment, the Company
recorded an extraordinary loss of $2.3 million, net of taxes of
$1.3 million, in the third quarter of 1999. The extraordinary
loss represents prepayment penalties and the write off of
unamortized loan origination costs, net of the related tax
benefits. The after-tax loss was calculated using the estimated
effective tax rate for the Company. The loss per basic and
diluted share on the extraordinary loss is $0.08.
Note 3. 1999 Acquisitions
On August 2, 1999, the Company acquired the assets and
liabilities of the folding carton manufacturing business of Fort
James for cash consideration of approximately $839 million, plus
transaction and financing costs. The transaction has been
accounted for under the purchase method. Accordingly, the excess
of the purchase price over the fair value of the assets and
liabilities acquired of approximately $443 million is being
amortized using the straight-line method over 30 years. The
folding carton business of Fort James is a major supplier of
folding cartons to leading consumer product companies for
packaging food and health care products.
The following pro forma information for ACX has been
prepared assuming that this acquisition had occurred on January
1, 1998. The pro forma information includes adjustments for (1)
amortization of goodwill (2) increased interest expense related
to new borrowings at applicable rates for the purchase, (3)
decrease in interest income related to the assumed use of cash
for the purchase of Fort James, and (4) the net tax effect of pro
forma adjustments at the statutory rate. The pro forma financial
information is presented for informational purposes only and may
not be indicative of the results of operations as they would have
been had the transaction been effected on the assumed date nor is
it necessarily indicative of the results of operations which may
occur in the future.
Pro forma Pro forma
Nine Months Nine Months
Ended Ended
September 30, September 30,
(In thousands, except per share data) 1999 1998
------------- -------------
Net sales $1,177,751 $1,194,389
============= =============
Income (loss) from continuing
operations, before
extraordinary loss $21,307 ($13,412)
============= =============
Net income (loss) $12,868 ($13,412)
============= =============
Income (loss) from continuing
operations, before
extraordinary loss per basic
share of common stock $0.75 ($0.47)
============= =============
Income (loss) from continuing
operations, before
extraordinary loss per diluted
share of common stock $0.74 ($0.47)
============= =============
Net income (loss) per basic share
of common stock $0.45 ($0.47)
============= =============
Net income (loss) per diluted
share of common stock $0.45 ($0.47)
============= =============
On March 12, 1999, the Company acquired the net assets of
Precision Technologies (Precision) for approximately $22 million
in cash and 300,000 warrants to receive shares of the Company's
common stock at an exercise price equal to the fair market value
at the date of closing. These warrants vest only upon the
achievement of certain revenue goals within three years. The
Precision acquisition has been accounted for under the purchase
method. Accordingly, the excess of the purchase price over the
fair value of net assets acquired of approximately $19 million is
being amortized using the straight-line method over 20 years.
Precision, located in Livermore, California, manufactures
precision-machined parts for the semiconductor, medical, and
aircraft industries.
On March 1, 1999, the Company acquired all of the
outstanding shares of Edwards Enterprises (Edwards) for
approximately $18 million in cash. The Edwards acquisition has
been accounted for under the purchase method. Accordingly, the
excess of the purchase price over the fair value of net assets
acquired of approximately $4 million is being amortized using the
straight-line method over 20 years. Edwards, located in Newark,
California, manufactures precision-machined parts for the
semiconductor industry.
Note 4. 1999 Dispositions
On September 2, 1999, the Company sold the assets and
business of its flexible packaging division to Sonoco Products
Company for approximately $105 million in cash. The Company used
the proceeds from the sale, less transaction costs, to reduce
debt associated with its recent acquisition of the folding carton
business of Fort James (see Note 3). The Company recorded a pre-
tax gain of $22.7 million and after-tax gain of $13.6 million or
$0.48 per share on a basic basis and $0.47 per share on a diluted
basis. The after-tax gain was calculated using the estimated
effective tax rate for the Company.
On August 3, 1999, the Company sold its majority interest in
a group of solar electric distribution companies to Kyocera
International, Inc., a wholly owned subsidiary of Kyocera
Corporation. The Company realized $30.8 million in cash of which
$20.8 million was consideration for the Company's equity position
and of which $10 million was for the repayment of certain debt
owed to the Company. The Company used the proceeds from the
sale, less transaction costs, to reduce debt associated with its
recent acquisition of the folding carton business of Fort James
(see Note 3). The pre-tax gain recorded in conjunction with this
transaction totaled $7.5 million while the post-tax gain was $4.5
million. The after-tax gain was calculated using the estimated
effective tax rate for the Company. Resultant earnings per share
on a basic and diluted basis for this sale are $0.16.
Note 5. Asset Impairment and Restructuring Charges
During the third quarter of 1998, the Company recorded $19.5
million in asset impairment and restructuring charges associated
with Graphic Packaging's flexible division. Deterioration of
the performance of this division led to an overall restructuring
plan which was completed in September 1999 with the sale of these
operations. (See Note 4). In addition, the Company recorded a
$5.6 million asset impairment charge at the Chattanooga,
Tennessee operation within Coors Ceramics, as well as a $0.4
million asset impairment charge at its Solar Electric business.
During first quarter of 1998, Coors Ceramics recorded a $6.2
million asset impairment charge related to the cancellation of
its C-4 technology agreement with IBM and the Solar Electric
business recorded a $1.0 million asset impairment charge to write
down its investment in a solar electric systems distributor
located in Argentina to its estimated fair market value.
Note 6. Segment Information
The Company's reportable segments (Packaging and Ceramics)
are based on its method of internal reporting, which is based on
product category. In addition, prior to August 3, 1999, the
Company owned a majority interest in a group of solar electric
distribution companies and a real estate developmental
partnership, which are included in the Other segment. On August
3, 1999, the Company sold its majority interest in the solar
electric distribution companies; thus the information reported
below does not include activity subsequent to that date. Prior
to January 31, 1999, the Other segment also included a corn-wet
milling facility, and prior to March 1998, a biodegradable
polymer developmental business.
The Company evaluates the performance of its segments and
allocates resources to them based primarily on operating income.
The table below summarizes information about reported segments as
of and for the three months ended September 30:
Operating
Net Income Total
(In thousands) Sales (Loss) Assets
-------- -------- ----------
1999
Packaging $238,439 $12,548 $1,387,330
Ceramics 94,947 11,970 317,806
Other 5,178 (535) 23,318
-------- -------- ----------
Segment total 338,564 23,983 1,728,454
Corporate --- (2,695) 116,975
-------- -------- ----------
Consolidated total $338,564 $21,288 $1,845,429
======== ======== ==========
1998
Packaging $159,740 ($7,618) $557,612
Ceramics 70,023 3,146 264,534
Other 18,256 (1,254) 71,162
-------- -------- ----------
Segment total 248,019 (5,726) 893,308
Corporate --- (1,974) 116,116
-------- -------- ----------
Consolidated total $248,019 ($7,700) $1,009,424
======== ======== ==========
The table below summarizes information about reported
segments for the nine months ended September 30:
Operating
Net Income
(In thousands) Sales (Loss)
-------- ---------
1999
Packaging $537,700 $40,171
Ceramics 266,936 34,321
Other 35,489 (108)
-------- -------
Segment total 840,125 74,384
Corporate --- (8,035)
-------- -------
Consolidated total $840,125 $66,349
======== =======
1998
Packaging $461,773 $23,213
Ceramics 230,390 20,319
Other 49,915 (5,030)
-------- -------
Segment total 742,078 38,502
Corporate --- (6,736)
-------- -------
Consolidated total $742,078 $31,766
======== =======
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General Business Overview
ACX Technologies, Inc. (ACX or the Company), together with
its subsidiaries, is a diversified, value added manufacturing
organization focused on pioneering differentiated customer
solutions. Two business segments comprise the majority of the
Company's results from operations: the packaging business,
operated through Graphic Packaging Corporation (Graphic
Packaging), and the ceramics business, operated through Coors
Ceramics Company (Coors Ceramics). On June 15, 1999, the Company
announced a plan to spin-off Coors Ceramics. Under the proposed
spin-off plan, the Company would distribute 100% of the shares of
Coors Ceramics to shareholders of ACX in a tax-free transaction.
The transaction, which is subject to regulatory approvals, a
favorable IRS ruling and final approval of the Company's Board of
Directors, is planned for completion on or about January 1, 2000.
Graphic Packaging is a manufacturer of folding cartons and
participates in the beverage, frozen food, dried food, soap and
detergent, tobacco, pet food, quick service restaurant,
photographic, and personal care markets. Graphic Packaging's
strategy is to focus on folding cartons.
To further its folding carton strategy, on August 2, 1999,
the Company acquired the assets and liabilities of the folding
carton manufacturing business of Fort James Corporation (Fort
James) for cash consideration of approximately $839 million, plus
transaction and financing costs. The transaction has been
accounted for under the purchase method. Fort James' folding
carton operation is a major supplier of folding cartons to
leading consumer product companies for packaging food and health
care products. With the assets acquired from Fort James, the
Company believes that Graphic Packaging is the country's largest
folding carton company, with expanded technical capabilities.
On September 2, 1999, the Company sold the assets and
business of its flexible packaging division to Sonoco Products
Company for approximately $105 million in cash. The Company will
use the proceeds from the sale, less transaction costs, to reduce
debt associated with its recent acquisition of the folding carton
business of Fort James.
Coors Ceramics develops, manufactures, and sells advanced
technical products and other engineered materials across a wide
range of product lines for a variety of custom applications.
Coors Ceramics, which has been in business for more than 78
years, is the largest U.S.-owned, independent manufacturer of
advanced technical ceramics. The majority of Coors Ceramics'
sales are to the semiconductor equipment, petrochemical, power
generation and mining, automotive, telecommunications, and pulp
and paper industries. In March 1999, the Company acquired
Precision Technologies (Precision) and Edwards Enterprises
(Edwards), both manufacturers of precision-machined parts
primarily for the semiconductor equipment industry.
The Company sold a portion of its other businesses (Other),
primarily operating through its majority owned subsidiary, Golden
Genesis Company (Golden Genesis) on August 3, 1999. Kyocera
International, Inc., a wholly owned subsidiary of Kyocera
Corporation, purchased 100% of the common shares of Golden
Genesis, including the Company's majority ownership, for $2.33
per share. The Company received proceeds of $30.7 million for
its majority interest in Golden Genesis, including the repayment
of certain debt. The Other businesses
also includes a real estate development partnership and the
operations of a biodegradable polymer project and a corn-wet
milling facility. During 1998, the Company exited the
biodegradable polymer project and on January 31, 1999, the
Company sold the corn-wet mill operation.
Results from Continuing Operations
Consolidated net sales for the three months ended September
30, 1999 increased 36.5% to $338.6 million as compared to
consolidated net sales of $248.0 million for the same period in
1998. For the nine months ended September 30, 1999 consolidated
net sales grew 13.2% to $840.1 million compared to the 1998
period. These increases are primarily attributable to the August
1999 acquisition by Graphic Packaging of the Fort James folding
carton business. In addition, the March 1999 acquisitions of
Edwards and Precision by Coors Ceramics contributed to the
increase in net sales. The increase in net sales generated by
these acquisitions was partially offset by the sale of the
flexible packaging division of Graphic Packaging and the sale of
Golden Genesis. The base business sales of Graphic Packaging
decreased from 1998 levels primarily due to price competition.
In addition, Coors Ceramics' base business decreased from 1998
levels due to softness in the pulp and paper and fluid handling
markets.
Consolidated gross margin for the three months and nine
months ended September 30, 1999 was 16.6% and 19.0%,
respectively, down slightly from the gross margins for the same
1998 periods of 17.2% and 19.5%, respectively. The slight
decline is the result of a third quarter 1999 inventory writedown
at Graphic Packaging's Lawrenceburg plant and the lower margins
experienced in the newly acquired Fort James' packaging
facilities.
Consolidated operating income for the third quarter of 1999
totaled $21.3 million, a significant increase over the operating
loss reported in the third quarter of 1998 of $7.7 million. The
increase in operating income of $29 million is primarily related
to the fact that in third quarter 1998, a $25.5 million asset
impairment and restructuring charge was recorded while the 1999
period had no such charge. For the nine months ended September
30, 1999, consolidated operating income grew 108.9% to $66.3
million over consolidated operating income for the same nine
month period in 1998, which was due primarily to the $32.7
million in asset impairment and restructuring charges recorded
during 1998 with no such charges in 1999. Excluding these
charges, consolidated operating income for the first three
quarters of 1999 was $1.8 million higher than in the comparable
period in 1998.
Net interest expense for the third quarter of 1999 totaled
$15.2 million, a significant increase from the $5.3 million in
net interest expense recorded in the 1998 third quarter. For the
first nine months of 1999, net interest expenses totaled $25.8
million, compared with $14.9 million in the year to date period
ended September 30, 1998. These increases reflect the interest
related to the $1.3 billion credit facility led by Bank of
America (Credit Facilities) that was entered into in August 1999
to finance the acquisition of the folding carton operations of
Fort James, as well as amortization of the related debt issuance
costs.
The consolidated effective tax rate for the first nine
months of 1999 and 1998 was approximately 40%.
Liquidity and Capital Resources
The Company's liquidity is generated from both internal and
external sources and is used to fund short-term working capital
needs, capital expenditures, and acquisitions. At September 30,
1999, the Company's working capital was negative $191.9 million
with a current ratio of 0.68 to 1. The negative working capital
position is primarily due to the addition of short term debt
related to the Credit Facilities in third quarter 1999. The
Company expects to raise funds to reduce outstanding debt under
the Credit Facilities through operating cash flow, the sale of
Golden Aluminum and the receipt of approximately $200 million in
cash upon the spin-off of Coors Ceramics in conjunction with the
new credit facility into which Coors Ceramics will enter. These
events are expected to address the working capital short fall.
At September 30, 1999, the Company has $110 million available to
borrow under the Credit Facilities.
On August 2, 1999, the Company entered into the Credit
Facilities and refinanced all of its prior debt and acquired
the folding carton business of Fort James. Amounts borrowed
under the Credit Facilities bear interest at LIBOR plus a spread
that varies depending on the Company's financial performance. In
addition, the Company pays a commitment fee on the unused portion
of the Credit Facilities. Borrowings are secured with a pledge
of 100% of the common and preferred shares of the Company's
domestic subsidiaries and 65% of the common and preferred shares
of material foreign subsidiaries. If the Company fails to meet
certain financial measures and repay at least $525 million within
180 days of closing the Credit Facilities, then borrowings will
become secured by all assets of the Company and its subsidiaries.
Through September 30, 1999 the Company had repaid $109 million of
the $525 million.
The Company has entered into contracts to hedge the
underlying interest rate on $175 million of anticipated long-term
borrowings. These contracts lock in an average risk-free rate of
approximately 5.9% and expire on May 1, 2000. The anticipated
borrowings will be used to refinance a portion of the Credit
Facilities. As of September 30, 1999 the unrecognized gain
associated with these hedge contracts was approximately $1.5
million. In addition, the Company has entered into two year
interest rate swap agreements for $100 million of borrowings
currently outstanding under the Credit Facilities. Under these
swap agreements, the Company has locked in an average fixed rate
of 5.94%.
During 1998, the Company's Board of Directors approved the
repurchase of up to 5% of the outstanding common shares of the
Company. As of September 30, 1999, the Company had repurchased
181,200 shares at an aggregate cost of $2.4 million. Under the
terms of the Credit Facilities, the Company is currently
prohibited from repurchasing any additional outstanding common
shares or paying dividends.
The Company believes that cash flows from operations and the
sale of certain assets will be adequate to meet the required debt
repayments and the Company's needs for working capital and
capital expenditures. In addition, the Company can borrow
additional amounts under the Credit Facilities to meet capital
expenditure requirements. Capital expenditures for the Company
have slightly exceeded depreciation for the nine months ended
September 30, 1999 primarily at Graphic Packaging due to the
construction of a new packaging facility located in Golden,
Colorado. It is anticipated that this facility will be
operational in early 2000. Capital expenditures for the year
2000 are also expected to slightly exceed depreciation for
Graphic Packaging due to the purchase of an Enterprise Resource
Planning system. The system, which is estimated to cost
approximately $30 million over the next two years, is expected to
significantly enhance the manufacturing, scheduling, purchasing,
and financial operations of Graphic Packaging.
Year 2000 Readiness Disclosure
The Year 2000 issue arose because many existing computer
programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize a
year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create
erroneous results disrupting normal business operations.
Management has implemented an enterprise-wide program to
prepare the Company's financial, manufacturing, and other
critical systems and applications for the year 2000. The program
includes a task force established in March 1998 that has the
support and participation of upper management and includes
individuals with expertise in risk management, legal, and
information technologies. The Board of Directors monitors the
progress of the program on a quarterly basis. The task force's
objective is to ensure an uninterrupted transition to the year
2000 by assessing, testing, and modifying all information
technology (IT) and non-IT systems, interdependent systems, and
third parties such as suppliers and customers.
The Year 2000 task force has taken an inventory of all IT
and non-IT systems. This inventory categorizes potential systems
date failures into three categories: "major" (critical to
production and could be business threatening with no short-term
alternatives available); "limited" (disrupting to the business
operations with short-term solutions available); and "minor"
(inconsequential to the business operations). The task force has
prioritized the program to focus first on "major" systems. All
critical systems are Year 2000 compliant as of September 30,
1999.
IT Systems - The Company is primarily using internal
resources to remediate IT systems. External resources are used
to assist in testing compliance of IT systems. The Company does
not rely on any one IT system. The majority of the IT systems
have been recently purchased from third party vendors. These
systems were already Year 2000 compliant or had Year 2000
compliance upgrades. As of September 30, 1999, all of the
Company's IT systems were Year 2000 compliant.
Non-IT Systems - The Company has approximately 40
manufacturing facilities with varying degrees of non-IT systems
(such as printing presses, automated kiln systems, statistical
process control systems, ink mixing systems, quality control
systems, and machining equipment). The vast majority of these
facilities are located in North America. To ensure Year 2000
compliance for non-IT systems, the Year 2000 task force has
contacted the suppliers of these non-IT systems and obtained
statements that the systems are Year 2000 compliant and is in the
process of testing Year 2000 compliance. The majority of these
non-IT systems use time intervals instead of dates and are Year
2000 compliant. Thus, the Company believes that potential
disruptions of such systems due to the Year 2000 issue should be
minimal. As of September 30, 1999, virtually all of the
Company's "major" and "limited" non-IT systems are Year 2000
compliant. The "minor" non-IT systems are in various stages of
compliance.
Third Parties - The Year 2000 task force has been in contact
with key suppliers and customers to minimize potential business
disruptions related to the Year 2000 issue between the Company
and these third parties. The task force has focused on suppliers
and customers that are classified as "major" and "limited."
While the Company cannot guarantee compliance by third party
suppliers, the Company has developed contingency plans to ensure
the availability of inventory supplies in the event a supplier is
not Year 2000 compliant.
Contingency Plans - The Company is in the process of
finalizing contingency plans in the event there are Year 2000
failures related to the Company's IT and non-IT systems and/or
key third parties. The Company's manufacturing facilities are
not interdependent in terms of non-IT systems, and its facilities
utilize a diverse range of non-IT systems (i.e., printing
presses, kilns, and other manufacturing equipment). In addition,
no one facility accounts for a significant amount of revenue.
Thus, the contingency plan for non-IT systems includes the
transfer of production between facilities and manufacturing
equipment. Currently, the Company believes that there is enough
manufacturing capacity to accommodate the contingency plan.
The Company's IT systems are also not heavily interdependent
between facilities and key third parties and the Company utilizes
a diverse range of IT systems. The contingency plan for IT
systems includes the ability to transfer transaction processing,
record keeping, and compliance work between facilities and
maintaining "hard" copies of critical information.
The Company is not dependent on any one supplier. The
Company has established back-up suppliers and will maintain
adequate inventory levels at December 31, 1999 to minimize the
potential business disruption in the event of a Year 2000 failure
by a supplier.
Costs - Through September 30, 1999, the Company has spent
approximately $1 million and believes that the Year 2000
expenditures are substantially complete. These costs include the
costs incurred for external consultants and professional advisors
and the costs for software and hardware. The Company has not
separately tracked internal costs such as payroll related costs
for its information technologies group and other employees
working on the Year 2000 project. The Company expenses all costs
related to the Year 2000 issue as incurred. These costs are
being funded through operating cash flows.
The Company's current estimate of the time and costs related
to the remediation of the Year 2000 issue are based on the facts
and circumstances existing at this time. New developments could
affect the Company's estimates to remediate the Year 2000 issue.
These developments include, but are not limited to: (i) the
availability and cost of personnel trained in this area; (ii) the
ability to identify and remediate all IT and non-IT systems;
(iii) unanticipated failures in IT and non-IT systems; and (iv)
the planning and Year 2000 compliance success that key customers
and suppliers attain.
Segment Information
Third Quarter Only
(In thousands)
Operating
Net Sales Income (Loss)
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
Graphic Packaging $238,439 $159,740 $12,548 ($7,618)
Coors Ceramics 94,947 70,023 11,970 3,146
Other 5,178 18,256 (535) (1,254)
Corporate --- --- (2,695) (1,974)
-------- -------- ------- -------
$338,564 $248,019 $21,288 ($7,700)
======== ======== ======= =======
Third Quarter - Year to Date
(In thousands)
Operating
Net Sales Income (Loss)
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
Graphic Packaging $537,700 $461,773 $40,171 $23,213
Coors Ceramics 266,936 230,390 34,321 20,319
Other 35,489 49,915 (108) (5,030)
Corporate --- --- (8,035) (6,736)
-------- -------- ------- -------
$840,125 $742,078 $66,349 $31,766
======== ======== ======= =======
GRAPHIC PACKAGING
Graphic Packaging's third quarter 1999 net sales were $238.4
compared to the $159.7 million recorded in the 1998 period; a
resultant increase of $78.7 million or 49.3%. Year to date net
sales for the nine months ended September 30, 1999 were $537.7
million an increase of $75.9 million over the 1998 period. The
increases in the year to date and quarter periods over 1998 are
primarily attributable to the acquisition of the Fort James
folding carton business on August 2, 1999, offset in part by the
loss of sales related to the sale of the flexible packaging
division on September 2, 1999. Pro forma sales for Graphic
Packaging's ongoing operations are expected to be approximately
$260 million per quarter.
For the third quarter of 1999, Graphic Packaging had
operating income of $12.5 million compared to an operating loss
of $7.6 million in the 1998 similar period. For the nine month
period ended September 30, 1999 operating income of $40.2 million
was recorded while the 1998 period reported operating income of
$23.2 million. The increases experienced in both periods over
1998 amounts are primarily the result of the asset impairment and
restructuring charge booked in the 1998 third quarter of $19.5
million. The acquisition of Fort James added $7.4 million of
operating income to both the 1999 third quarter as well as the
nine months ended September 30, 1999. This addition was offset
in part by additional goodwill amortization related to the
acquisition of $2.5 million and transition service costs of $1.3
million.
The Company expects that fourth quarter 1999 will improve
over the third quarter due to the additional month of activity
from the Fort James operations, and as the Company furthers its
integration of the Fort James plants.
COORS CERAMICS
Coors Ceramics' third quarter 1999 net sales were $94.9
million compared to $70.0 million for the similar 1998 period.
For the year to date period ended September 30, 1999, net sales
totaled $266.9, an increase of $36.5 million or 15.8% over the
same period in 1998. The increase in sales for both the quarter
and year to date periods is due to the strategic decision to
focus on the high-growth semiconductor market. This strategy was
pursued through the March 1999 acquisitions of Edwards and
Precision, which primarily contributed to the increase in sales
for both periods. In addition, base business sales at Coors
Ceramics for the third quarter 1999 are up over the 1998 quarter
due to the additional sales of ceramic products to the
semiconductor industry. Sales to the semiconductor industry were
approximately 33% and 28% of total sales for Coors Ceramics for
the third quarter of 1999 and the nine month period ended
September 30, 1999, respectively. For the similar 1998 periods,
sales to the semiconductor industry were approximately 6% and 9%,
respectively.
Third quarter 1999 operating income was $12.0 million
compared to $3.1 million for the third quarter of 1998, an
increase of $8.9 million. This increase is partially
attributable to the strong performance within the semiconductor
industry from the Edwards and Precision acquisitions and
additional ceramic product sales. In addition, this increase in
operating income is partially attributable to the fact that a
$5.6 million asset impairment charge at the Chattanooga,
Tennessee operation was recorded in the 1998 quarter, while the
1999 quarter reflected no such charge. These increases were
offset slightly by additional general and administrative costs
related to certain organizational changes in conjunction with the
spin-off. Year to date operating income through September 30,
1999 was $34.3 million. The comparable period in 1998 resulted
in $20.3 million of operating income. The increase from 1998 to
1999 of $14 million was attributable to the absence in the 1999
period of an $11.8 million asset impairment charge booked in
1998. The remaining increase reflects the contribution to
operating income from the Edwards and Precision acquisitions.
At the same time, operating income generated from ceramic product
sales is down over the 1998 period. This decrease illustrates
the softness in the pulp and paper and fluid handling markets
experienced in 1999.
Excluding any costs associated with the spin-off of Coors
Ceramics, the Company expects that fourth quarter ongoing results
will be in line with those reported in third quarter. Coors
Ceramics is in the process of reviewing its facilities for
potential consolidation opportunities. On November 1, 1999,
Coors Ceramics made the decision to relocate its Pittsburgh,
Pennsylvania operations to Oklahoma City, Oklahoma. It is
expected that the facility will be moved at the end of 1999.
Associated costs are not expected to be material.
OTHER
Since the August 3, 1999 sale of Golden Genesis, the Other
business is comprised of a real estate development partnership
and a nutritional supplement business. The Company is in the
process of disposing of these assets in order to focus solely on
its core businesses.
Operating loss for the third quarter of 1999 and 1998 was
$0.5 million and $1.3 million respectively. Operating loss for
the nine months ended September 30, 1999 was $0.1 million
compared to $5.0 million for the similar 1998 period. Included
in the year to date 1998 amount was a $1.4 million asset
impairment charge. The sale of Golden Genesis and the resulting
elimination of ongoing losses associated with this activity
account for the remaining reduction in operating losses in the
Other businesses.
Corporate
Corporate costs totaled $2.7 million and $8.0 million for
the third quarter and nine months ended September 30, 1999,
respectively. This compares to corporate costs of $2.0 million
and $6.7 million for the same periods in 1998, respectively. The
increase in corporate costs reflects higher professional fees and
other costs associated with the Company's plan to spin off Coors
Ceramics on or about December 31, 1999.
Forward-Looking Statements
Some of the statements in this Form 10-Q Quarterly Report,
as well as statements by the Company in periodic press releases,
oral statements made by the Company's officials to analysts and
shareholders in the course of presentations about the Company and
conference calls following quarterly earnings releases,
constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Words or
phrases denoting the anticipated results of future events such as
"anticipate," "believe," "estimate," "will likely," "are expected
to," "will continue," "project," "trends" and similar expressions
that denote uncertainty are intended to identify such forward-
looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the
Company to be materially different from any future results,
performance or achievements expressed or implied by the forward-
looking statements. Such factors include, among other things,
(i) general economic and business conditions; (ii) changes in
industries in which the Company does business, such as beverage,
food, telecommunications, automotive, semiconductor, pulp and
paper, petrochemical, and tobacco; (iii) the loss of major
customers; (iv) the loss of market share and increased
competition in certain markets; (v) industry shifts to
alternative materials, such as replacement of ceramics by
plastics or metals and competitors offering products with
characteristics similar to the Company's products; (vi) changes
in consumer buying habits; (vii) governmental regulation
including environmental laws; (viii) the ability of the Company
to successfully identify and maximize efficiencies between
Graphic Packaging and the companies it acquires and successfully
merge the corporate cultures; and (ix) other factors over which
the Company has little or no control.
These statements should be read in conjunction with the
financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1998. The accompanying
financial statements have not been examined by independent
accountants in accordance with generally accepted auditing
standards, but in the opinion of management of ACX Technologies,
such financial statements include all adjustments necessary to
summarize fairly the Company's financial position and results of
operations. Except for certain reclassifications made to
consistently report the information contained in the financial
statements, all adjustments made to the interim financial
statements presented are of a normal recurring nature. The
results of operations for the three and nine month periods ended
September 30, 1999, may not be indicative of results that may be
expected for the year ending December 31, 1999. Certain 1998
information has been reclassified to conform to the 1999
presentation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Document Description
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 4, 1999,
regarding the agreement the Company entered into to
sell the assets and business of its flexible
packaging division to Sonoco Products Company.
A report on Form 8-K was filed on August 17, 1999,
indicating that the Company had acquired the assets
and liabilities of the folding carton manufacturing
business of Fort James Corporation.
A report on Form 8-K was filed on September 7, 1999,
regarding the letter of intent the Company signed
with Alcoa Inc. to sell its Golden Aluminum Company.
A report on Form 8-K was filed on September 17, 1999,
indicating that the Company had sold the assets and
business of its flexible packaging division to Sonoco
Products Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 5, 1999 By/s/Jed J. Burnham
----------------------------
Jed J. Burnham
(Chief Financial Officer and
Treasurer)
Date: November 5, 1999 By/s/Beth A. Parish
----------------------------
Beth A. Parish
(Controller and Principal
Accounting Officer)