UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
/ / 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 1-12854
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 847-482-2657
(Address of principal executive (Registrant's telephone
offices,including zip code) number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
Common Stock, $0.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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
As of January 31, 1998, 10,343,589 shares of common
stock were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED 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, 1997, 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 expected
for the year. All references to years are to fiscal
years ended October 31.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended January 31,
1998 (Note 1) 1997
Net sales $ 98,120 $71,534
Costs and expenses:
Cost of sales 85,131 60,686
Research 2,654 2,056
Selling, general and administrative 7,039 4,035
Other (income) expense, net (268) 238
Income from operations 3,564 4,519
Interest expense, net 1,600 297
Income before income taxes 1,964 4,222
Income tax expense 755 1,708
Net income $ 1,209 $ 2,514
Net income per share-
basic and diluted (Note 2) $ 0.12 $ 0.24
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
(January 31, 1998 Unaudited)
January 31, October 31,
1998 (Note 1) 1997
Assets
Current assets:
Cash $ 2,388 $ 3,929
Accounts receivable 69,150 67,762
Inventories (Note 3) 34,899 26,487
Other current assets 9,634 8,743
116,071 106,921
Property, plant and equipment 171,068 148,609
Accumulated depreciation (48,305) (43,315)
Net property, plant and equipment 122,763 105,294
Intangibles, net 40,120 36,153
Other assets 6,744 10,814
$285,698 $259,182
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 19,758 $ 23,706
Trade accounts payable 41,385 43,265
Accrued liabilities 14,375 15,276
75,518 82,247
Long-term debt, less current portion 89,178 57,152
Deferred income taxes 22,929 22,446
Accrued environmental liabilities 2,013 2,201
Other liabilities 4,970 3,468
Shareholders' equity:
Common stock (par value $.01 per
share; authorized 30,000,000 shares;
issued 10,965,547 shares at January 31,
1998 and October 31, 1997) 110 110
Additional paid-in capital 10,867 10,867
Retained earnings 94,189 92,980
Currency translation adjustments (2,497) (940)
Restricted stock awards (1,633) (1,633)
Treasury stock, at cost (621,958
shares at January 31, 1998 and
612,460 shares at October 31, 1997) (9,946) (9,716)
91,090 91,668
$285,698 $259,182
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended January 31,
1998 (Note 1) 1997
Operating Activities
Net income $1,209 $2,514
Adjustments to reconcile net income to
net cash (used) provided by operating
activities:
Depreciation and amortization 3,630 2,375
Deferred income taxes 539 398
Other, net 359 334
Changes in working capital:
Accounts receivable 4,599 8,553
Inventories (3,214) (5,153)
Trade accounts payable and
accrued liabilities (9,058) (6,428)
Other current assets (408) (917)
Net cash (used) provided by operating
activities (2,344) 1,676
Investing Activities
Acquisition spending, net of cash acquired (8,190)
Capital expenditures (2,928) (1,697)
Investment in and advances to joint ventures (1,130) (2,343)
Other, net 110
Net cash used by investing activities (12,138) (4,040)
Financing Activities
Increase in debt, net 12,928 2,328
Proceeds from exercise of stock options 13 25
Net cash provided by financing activities 12,941 2,353
Decrease in cash (1,541) (11)
Cash at beginning of period 3,929 1,060
Cash at end of period $ 2,388 $ 1,049
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated results for the quarter ended
January 31, 1998 include the full consolidation of
Syntech S.p.A. and the European joint-venture pursuant to the
Company's buyout of its joint-venture partners. Syntech S.p.A.
was acquired on August 1, 1997. The buyout of the European
joint-venture partners occurred in separate transactions during
November 1997 and January 1998 for a total of approximately
$8.2 million, net of cash acquired.
2. The Company adopted Financial Accounting
Standards Board Statement of Financial Accounting
Standard No. 128, "Earnings Per Share". Statement 128
replaced the previously reported primary and fully
diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very
similar to fully diluted earnings per share. As
required by the statement, prior period amounts have
been restated.
Quarter Ended January 31,
1998 1997
Net income for calculation of net income per
share - basic and diluted $ 1,209,000 $ 2,514,000
Weighted average common shares outstanding 10,342,853 10,467,439
Less: Shares contingent by returnable 101,847 94,354
Weighted average shares for calculation of
net income per share - basic 10,241,006 10,373,085
Effect of dilutive securities:
Dilutive effect of stock options 100,988 64,107
Other 51,224 12,201
Dilutive potential common shares 152,212 76,308
Weighted average shares for calculation of
net income per share - diluted 10,393,218 10,449,393
Net income per share - basic $ 0.12 $ 0.24
Net income per share - diluted $ 0.12 $ 0.24
3. The major classes of inventories consist of the following:
January 31, October 31,
Dollars in thousands 1998 1997
Manufactured products $21,921 $16,407
Raw materials, supplies and work-in-process 12,978 10,080
$34,899 $26,487
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, 1997. 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 increased 37 percent in the first quarter of
1998 to $98,120,000 compared to $71,534,000 in the same
period of 1997. The increase in net sales was due
primarily from acquired businesses (see Note 1 of Notes
to Consolidated Financial Statements). Excluding
acquired businesses, sales decreased 3% due to lower
selling prices 2% and product mix impact 1% with volume
being flat. Higher architectural volumes were offset
by loss of low margin industrial toll business.
The Company's gross profit margin for the first quarter
of 1998 was 13.2 percent compared to 15.2 percent in
last year's first quarter. Current year margins were
impacted by absorption issues in our manufacturing
facilities resulting from lower than anticipated
volumes and lower overall margins in the northern
European operations, and changes in the product mix,
partially offset by cost reductions achieved through a
number of ongoing internal process improvements.
Operating expenses (research, selling, general and
administrative) for the first quarter of 1998 were 9.9
percent of net sales compared to 8.5 percent in the
prior year first quarter. Higher actual expenses
compared to the prior year resulted primarily from the
acquired businesses.
Net interest expense increased $1,303,000 in the first
quarter of 1998 compared to the same period in 1997.
The increase is due to debt borrowed to fund the August
1997 acquisition of Syntech S.p.A. and assumed debt of
the acquired businesses.
The effective tax rate for the first quarter of 1998
was 42.0 percent versus 40.5 percent in the comparable
period a year ago. The increase is due to higher tax
rate in Italy and the non-deductibility of goodwill
amortization.
Net income for the first quarter of 1998 was
$1,209,000, or $.12 per share compared to last year's
first quarter net income of $2,514,000, or $.24 per
share.
Financial Condition
In the first quarter of 1998 cash used by operations
was $2,344,000 compared to cash generated by operations
of $1,676,000 in the comparable period a year ago.
The difference resulted
primarily from changes in working capital, and the
effect of interest expense on debt used to finance the
acquisition of Syntech S.p.A. The Company's current
ratio was 1.5 at January 31, 1998 compared to 1.3 at
October 31, 1997. The increase in the current ratio
was due to higher working capital of $6.3 million
resulting from the consolidation of the European joint-
venture in the Company's results (see Note 1 of Notes
to Consolidated Financial Statements), $3.2 million of
higher inventories due to lower than expected sales,
and lower payables of $5.4 million due to timing of
payments and lower raw material prices.
Investing activities used cash of $12,138,000 in the
first quarter of 1998 compared to $4,040,000 in the
comparable period a year ago. The increase was
primarily because of the purchase of remaining equity
interests in the European joint-venture for
approximately $8.2 million, net of cash acquired.
Capital expenditures of $2,928,000 and $1,697,000 in
the first quarter of 1998 and 1997, respectively, were
primarily for productivity improvements. Capital
spending for fiscal year 1998 is currently anticipated
to be approximately $25,000,000.
Financing activities provided cash of $12,941,000 in
the first three months of 1998 compared to $2,353,000
in the comparable period a year ago. Debt as a
percentage of invested capital was 54.4 percent at
January 31, 1998, up from 46.9 percent at October 31,
1997. Total debt increased to $108,936,000 at January
31, 1998 from $80,858,000 at October 31, 1997. This
increase was primarily attributed to the borrowing to
fund the purchase of the remaining equity interests in
the European joint-venture and the assumed debt of the
joint-venture.
The Company has a $150 million unsecured revolving
credit facility that terminates on July 30, 2002. At
January 31, 1998, $74.8 million was available under
this facility. The Company's European subsidiaries,
primarily Italy, have short-term lines of credit that
are cancellable at any time of $27 million of which
$10.8 million is available for future use at January
31, 1998. The credit facilities 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.
Impact of Year 2000
The Company has completed an assessment of the impact
of Year 2000 and determined that the majority of the
computer programs were developed using a four-digit
year rather than a two-digit year. However, it will be
required to modify portions of its software so that all
computer systems will function properly with respect to
dates in the year 2000 and thereafter. The estimated
effort for the Year 2000 project is not material and is
expected to be completed by June 1999. To date, the
Company has not incurred any material expense in the
assessment of the Year 2000 issue and the development
of modification plans.
The Company is initiating formal communications with
significant suppliers and customers to determine the
extent of which the Company's interface systems are
vulnerable to those third parties' failure to remediate
their own Year 2000 issues. There is no guarantee that
the systems of other companies on which the Company's
systems rely will be timely converted and would not
have an adverse effect on the Company's operations.
The costs of the project and the date on which the
Company believes it will complete the Year 2000
modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of
future events, including the continued availability of
certain resources and other factors. However, there
can be no guarantee that these estimates will be
achieved and actual results could differ materially
from those anticipated. Specific factors that might
cause such material differences include, but are not
limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedules
(b) No reports on Form 8-K were filed during
the first quarter of 1998.
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: March 10, 1998