SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
Commission file number 1-12854
McWhorter Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3919940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Cottage Place
Carpentersville, Illinois 60110
(Address of principal executive offices, including zip
code)
847-428-2657
(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 outstanding of each of the issuer's
classes of common stock, as of the latest practicable
date: 10,352,826 shares as of August 31, 1997.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying interim financial statements of
McWhorter Technologies, Inc. (the "Company" or
"McWhorter") do not include all disclosures normally
provided in annual financial statements. These
financial statements, which should be read in
conjunction with the financial statements contained in
McWhorter's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996, are unaudited but include
all adjustments that McWhorter's management considers
necessary for a fair presentation. These adjustments
consist of normal recurring accruals. Interim results
are not necessarily indicative of the results for the
year. All references to years are to fiscal years
ended October 31.
STATEMENTS OF INCOME
Quarter Ended Nine Months Ended
July 31, July 31,
Dollars in thousands, except
per share amounts 1997 1996 1997 1996
Net sales $85,581 $87,144 $237,997 $229,301
Costs and expenses:
Cost of sales 71,018 73,148 199,849 193,918
Research 2,131 2,078 6,255 5,750
Selling, general and
administrative 4,139 4,150 12,096 12,072
Other (income) expense,
net (Note 1) (94) 19 870 39
Income from operations 8,387 7,749 18,927 17,522
Interest expense, net 366 418 1,027 1,262
Income before income taxes 8,021 7,331 17,900 16,260
Income tax expense (Note 2) 3,189 2,971 6,678 6,585
Net income $ 4,832 $ 4,360 $11,222 $ 9,675
Net income per share (Note 4) $ .46 $ .42 $ 1.07 $ .92
See Notes to Financial Statements
BALANCE SHEETS
(Dollars in thousands, except per share amounts)
July 31, October 31,
1997 1996
Assets
Current assets:
Cash (Note 3) $ 48,561 $ 1,060
Accounts receivable 45,491 47,166
Inventories (Note 5) 21,469 18,151
Other current assets 7,265 5,019
122,786 71,396
Property, plant and equipment 113,630 107,119
Accumulated depreciation (40,624) (33,489)
Net property, plant and equipment 73,006 73,630
Other assets 8,618 8,228
$204,410 $153,254
Liabilities & Shareholders' Equity
Current liabilities:
Short-term debt $ 9,748 $ 9,995
Trade accounts payable 22,845 26,363
Accrued liabilities 12,269 10,504
44,862 46,862
Long-term debt, less current portion
(Note 3) 58,123 13,145
Deferred income taxes 11,846 10,486
Accrued environmental liabilities 2,201 3,037
Shareholders' equity:
Common stock (par value $.01 per share;
authorized 30,000,000 shares; issued
and outstanding 10,352,333 shares at
July 31, 1997 and 10,465,940 at
October 31, 1996) 110 110
Additional paid-in capital 10,866 10,803
Retained earnings 88,784 77,562
Currency translation adjustments (1,020) (74)
Restricted stock awards (1,633) (1,463)
Treasury stock, at cost (613,214
shares at July 31, 1997 and 499,607
shares at October 31, 1996) (9,729) (7,214)
87,378 79,724
$204,410 $153,254
See Notes to Financial Statements
STATEMENTS OF CASH FLOWS
Nine Months Ended
July 31,
Dollars in thousands
1997 1996
Operating Activities
Net income $11,222 $ 9,675
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,236 6,692
Deferred income taxes 609 4,080
Other, net 203 (277)
Changes in working capital:
Accounts receivable 1,675 (5,661)
Inventories (3,318) (10,000)
Trade accounts payable & accrued
liabilities (1,753) 11,661
Other current assets (1,495) 977
Net cash provided by operating activities 14,379 17,147
Investing Activities
Capital expenditures (6,614) (4,779)
Investment in joint venture (2,343)
Other, net 24
Net cash used by investing activities (8,957) (4,755)
Financing Activities
Increase (decrease) in debt, net 44,731 (8,258)
Purchase of treasury stock (2,683) (5,667)
Proceeds from exercise of stock options 31 102
Net cash provided (used) by financing activities 42,079 (13,823)
Increase (decrease) in cash 47,501 (1,431)
Cash at beginning of period 1,060 1,904
Cash at end of period $48,561 $ 473
See Notes to Financial Statements
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Dollars in thousands, except share amounts
Common Stock
Additional
Paid-in
Shares Amount Capital
Balance October 31, 1996 10,465,940 $110 $10,803
Net income
Issuance of common stock
for restricted stock awards 8,993 69
Exercise of stock options 2,622 (6)
Purchase of treasury stock (125,222)
Currency translation adjustments
Balance July 31, 1997 10,352,333 $110 $10,866
Currency Restricted
Retained Translation Stock Treasury
Earnings Adjustments Awards Stock
Balance October 31, 1996 $77,562 $ ( 74) $(1,463) $(7,214)
Net income 11,222
Issuance of stock for
restricted stock awards (170) 131
Exercise of stock options 37
Purchase of treasury stock (2,683)
Currency translation adjustments (946)
Balance July 31, 1997 $88,784 $(1,020) $(1,633) $(9,729)
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
1. Nine month results for 1997 included a
pretax charge of $615,000 ($366,000 after
taxes, or $.04 per share) for certain
costs, primarily severance, related to
the Company's upcoming relocation of the
Minneapolis research facility to
Carpentersville in the first half of
1998. Additionally, the results included
a pretax charge of $196,000 ($117,000
after taxes, or $.01 per share) for the
write-off of a tax related receivable.
2. Nine month results for 1997 included a
tax benefit recorded in the second
quarter of $591,000 ($.06 per share) that
resulted from the conclusion of an income
tax audit for the period prior to the
Company s spin-off in 1994.
3. July 31, 1997 debt and cash levels
reflect borrowing to fund the August 1,
1997 acquisition of Syntech S.p.A., a
privately-owned Italian-based liquid and
powder resins company.
4. Net income per share amounts were
computed on the basis of the weighted
average number of common and common
equivalent shares outstanding. Such
weighted average shares used in the
computations were 10,397,611 and
10,430,434 for the quarters ended July
31, 1997 and 1996, respectively, and
10,474,193 and 10,486,971 for the nine
months ended July 31, 1997 and 1996,
respectively.
5. The major classes of inventories consist
of the following:
Dollars in thousands
July 31, October 31,
1997 1996
Manufactured products $14,293 $11,916
Raw materials, supplies and work-in-process 7,176 6,235
$21,469 $18,151
6. In February 1997, the Financial
Accounting Standards Board issued
Statement of Financial Accounting
Standard No. 128, Earnings Per Share ,
which is required to be adopted for
financial statements for periods ending
after December 15, 1997. The Company
will be required to change the method
currently used to compute earnings per
share to restate all prior periods. The
Company s primary earnings per share as
reflected in the accompanying statements
of income are not materially different
from basic and diluted earnings per share
calculated under the new methodology.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
General
The following discussion and analysis of
results of operations and financial condition
of McWhorter should be read in conjunction
with the financial statements and notes
thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended
October 31, 1996. Except for historical
information contained herein, certain matters
set forth in this Form 10-Q are forward-
looking statements that involve certain risks
and uncertainties that could cause actual
results to differ materially from those in
the forward-looking statements.
Results of Operations
Net sales decreased 2 percent in the third
quarter to $85,581,000 compared to
$87,144,000 in the same period of 1996. For
the nine months, net sales were $237,997,000,
a 4 percent increase versus net sales of
$229,301,000 in the comparable period a year
ago. The decrease in net sales in the third
quarter was due primarily to a decrease in
volume, while price and mix remained flat.
Volume was off in the quarter due primarily
to the loss of low margin industrial toll
business. For the nine months, the increase
in net sales was due to 6 percent volume and
1 percent mix increases, offset by a 3
percent price decrease. Volume improvement
for the nine month period was due in large
part to growth with national accounts.
The Company's gross profit margin for the
third quarter of 1997 was 17.0 percent
compared to 16.1 percent in last year's third
quarter. For the nine months, the gross
profit margin was 16.0 percent versus
15.4 percent for the comparable period a year ago.
Current year margins were favorably impacted
by the combination of stability in raw
material costs and cost reductions achieved
through a number of ongoing internal process
improvements. These favorable effects were
partially offset by lower sales prices and
higher sales of resin for the architectural
market which are typically lower margin,
compared to the prior year periods.
Operating expenses (research, selling,
general and administrative) for the third
quarter were 7.3 percent of sales compared to
7.1 percent in the prior year third quarter.
For the nine months, operating expenses were
7.7 percent of sales compared to 7.8 percent for
the same period a year ago. Higher actual
expenses compared to the prior year were
primarily the result of additional research
personnel.
In February of 1997, the Company announced
plans to construct a 41,900 square foot
laboratory facility in Carpentersville,
Illinois. The projected cost of this new
facility is $6,800,000, and is scheduled to
open in the spring of 1998. As a result of
this project, the Company will be closing the
facility that is currently leased in
Minneapolis. Employees from product
development and technical support groups will
be relocated to the new facility to serve
McWhorter s Liquid Coatings, Powder Coatings
and Composite Polymer businesses.
Approximately 36 employees in Research and
Development and Information Technology
Services will be impacted by the closing.
In total, the Company expects to incur
approximately $1,300,000 of pretax charges to
operating earnings, $773,500 after taxes, or
$.08 per share related to this move. Due to
the Company s decision in February, an after
tax charge of $.04 per share was recorded in
the second quarter of 1997 primarily for
costs associated with the estimated amount of
termination benefits to be paid to certain
employees. The Company also expects to
record an after-tax charge, primarily in the
second quarter of 1998, of $.03 to $.05 per
share for costs to be incurred in connection
with the relocation of existing employees,
hiring of new employees, and costs related to
moving equipment from Minneapolis to Carpentersville.
Other expense in the nine month period of
1997 included $615,000 of expenses for
certain costs, primarily severance, related
to the Company s upcoming relocation of the
Minneapolis research facility to
Carpentersville. Additionally, the 1997 nine
month results included an expense of $196,000
for the write-off of a tax related receivable.
On August 1, 1997 the Company completed its
acquisition of Syntech S.p.A., a privately-
owned Italian-based liquid and powder resins
company with 1996 sales of approximately $85
million.
Higher debt and cash levels at July 31, 1997
reflect borrowing to fund the August 1, 1997
acquisition of Syntech S.p.A.
Net interest expense decreased $52,000, or 12
percent, and $235,000, or 19 percent, for the
third quarter and first nine months of 1997,
respectively, compared to the same periods in
1996. These comparisons reflect a reduction
in total debt, excluding the acquisition
borrowing of $48 million, of approximately $4
million from July 31, 1996.
The effective tax rate for the third quarter
and first nine months of 1997 was 39.8 percent
and 37.3 percent, respectively, versus 40.5 percent
in the comparable periods a year ago. Refer to
Note 2 of Notes to Financial Statements for
discussion of the tax benefit recorded in the
second quarter of 1997.
Net income for the third quarter was
$4,832,000, or $.46 per share, a per-share
increase of 10 percent over last year's third quarter net
income of $4,360,000, or $.42 per share. For
the nine months, net income was $11,222,000,
or $1.07 per share, a per-share increase of
16 percent over last year's nine month net
income of $9,675,000, or $.92 per share. The
first nine months of 1997 included a positive
net effect of $.01 per share for certain
nonrecurring items. Refer to Note 1 and Note 2
of Notes to Financial Statements for
discussion of these items.
Financial Condition
In the first nine months of 1997 cash
generated by operations was $14,379,000
compared to $17,147,000 in the comparable
period a year ago. The difference was
primarily from changes in working capital,
and a lower deferred tax provision recorded
in the current year compared to the prior
year due to the recording of deferred tax
assets associated with the tax benefit taken
in the second quarter of 1997. The Company's
current ratio was 2.7 at July 31, 1997
compared to 1.5 at October 31, 1996. The
increase in the current ratio was due to the
$48 million borrowed on July 31, 1997 to fund
the August 1, 1997 acquisition of Syntech S.p.A.
Investing activities used cash of $8,957,000
in the first nine months of 1997 compared to
$4,755,000 in the comparable period a year
ago. The increase was primarily because the
Company made its initial funding of its
equity portion of the joint venture in
McWhorter Technologies Thailand Company, Ltd.
(McWhorter Thailand) in the amount of
$2,343,000 in the first quarter of 1997.
This 40 percent equity investment is
accounted for under the equity method, and is
carried as a long-term investment in other
assets on the balance sheet. Capital
expenditures of $6,614,000 and $4,779,000 in
the first nine months of 1997 and 1996,
respectively, were primarily for productivity
improvements. Capital spending for fiscal
year 1997 is currently anticipated to be
between $9,000,000 and $10,000,000.
Financing activities provided cash of
$42,079,000 in the first nine months of 1997
compared to using cash of $13,823,000 in the
comparable period a year ago. Debt as a
percentage of invested capital was 43.7
percent at July 31, 1997, up from 22.5
percent at October 31, 1996. Total debt
increased to $67,871,000 at July 31, 1997
from $23,140,000 at October 31, 1996. This
increase was primarily attributed to the
borrowing of $48 million to fund the August
1, 1997 acquisition of Syntech S.p.A., the
Company s funding of its equity investment in
McWhorter Thailand in the amount of
$2,343,000, and the repurchase of common
stock for treasury at a total cost of
$2,683,000. In the first nine months of
1996, the Company spent $5,667,000 to
purchase treasury stock.
The Board of Directors of the Company has
adopted a resolution authorizing the
repurchase by the Company of up to an
aggregate of 500,000 shares of its common
stock over a twelve-month period ending in
February 1998. As of August 31, 1997, the
Company had acquired 139,522 of these shares
at a total cost of $2,920,000.
The Company has a $150,000,000 unsecured
revolving credit facility that terminates on
July 30, 2002. At July 31, 1997, $94,000,000
was available under this facility. The
credit facility and internally generated
funds are expected to be adequate to finance
McWhorter's capital expenditures and other
operating requirements.
With respect to environmental liabilities,
management reviews each site, taking into
consideration the numerous factors that
influence the costs that will likely be
incurred. Reserves are adjusted as
additional information becomes available to
better estimate the total remediation costs
at individual sites. While uncertainties
exist with respect to the amounts and timing
of McWhorter's ultimate environmental
liabilities, management believes that such
liabilities, individually and in the
aggregate, will not have a material adverse
effect on the Company's financial condition
or results of operations.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.28 $150,000,000 Credit Agreement
dated July 30, 1997 among McWhorter
Technologies, Inc., the Banks
listed therein and Wachovia Bank of
Georgia, N.A., as agent
11.1 Statement regarding
computation of net income per
share
27 Financial Data Schedules
(b) Form 8-K dated August 11, 1997
regarding acquisition of
Syntech S.p.A.
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.
McWhorter Technologies, Inc.
/s/ Louise M. Tonozzi-Frederick
Louise M. Tonozzi-Frederick
Vice President and Chief Financial Officer
Date: September 11,1997
EXHIBIT 11.1 - Statement regarding computation of net income per share
Quarter Ended Nine Months Ended
July 31, July 31,
1997 1996 1997 1996
Primary
Average common shares
outstanding 10,357,030 10,480,240 10,445,329 10,558,794
Less: Shares of restricted
stock awards issued,
not yet vested (101,847) (94,354) (98,828) (94,354)
Net effect of dilutive
stock options--
based on the treasury
stock method using average
market price 142,428 44,548 127,692 22,531
Total 10,397,611 10,430,434 10,474,193 10,486,971
Net income $4,832,000 $4,360,000 $11,222,000 $9,675,000
Net income per share $ .46 $ .42 $ 1.07 $ .92
Fully Diluted
Average common shares
outstanding 10,357,030 10,480,240 10,445,329 10,558,794
Net effect of dilutive
stock options--based on
the treasury stock
method using ending market
price, if higher than
average market price 166,770 44,548 165,535 22,159
Total 10,523,800 10,524,788 10,610,864 10,580,953
Net income $4,832,000 $4,360,000 $11,222,000 $9,675,000
Net income per share $ .46 $ .41 $ 1.06 $ .91