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 APRIL 30, 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 847-428-2657
(Address of principal executive (Registrant's telephone number
offices,including zip code) 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 May 31, 1998, 10,346,505 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 Six Months
Ended Ended
April 30, April 30,
1998 1997 1998 1997
(Note 1) (Note 1)
Net sales $ 115,614 $ 80,882 $213,734 $152,416
Costs and expenses:
Cost of sales (Note 2) 96,763 68,145 181,894 128,831
Research 2,741 2,068 5,395 4,124
Selling, general and
administrative 7,462 3,922 14,501 7,957
Other (income) expenses,
net (Note 3) (208) 726 (476) 964
Income from operations 8,856 6,021 12,420 10,540
Interest expense, net 1,821 364 3,421 661
Income before income taxes 7,035 5,657 8,999 9,879
Income tax expense (Note 4) 675 1,781 1,430 3,489
Net income $6,360 $3,876 $7,569 $6,390
Net income per share -
basic (Note 6) $ .62 $ .38 $ .74 $ .62
Net income per share -
diluted (Note 6) $ .61 $ .37 $ .73 $ .61
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
(April 30, 1998 Unaudited)
April 30, October 31,
1998 (Note 1) 1997
Assets
Current assets:
Cash $ 1,563 $ 3,929
Accounts receivable 81,957 67,762
Inventories (Note 5) 37,573 26,487
Other current assets 8,075 8,743
129,168 106,921
Property, plant and equipment 186,073 148,609
Accumulated depreciation (51,660) (43,315)
Net property, plant and equipment 134,413 105,294
Intangibles, net 72,719 36,153
Other assets 7,297 10,814
$343,597 $259,182
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 21,846 $ 23,706
Trade accounts payable 49,956 43,265
Accrued liabilities 16,541 15,276
88,343 82,247
Long-term debt 130,676 57,152
Deferred income taxes 20,990 22,446
Accrued environmental liabilities 1,646 2,201
Other liabilities 5,248 3,468
Shareholders' equity:
Common stock (par value $.01 per
share; authorized 30,000,000 shares;
issued 10,965,547 shares at April 30,
1998 and October 31, 1997) 110 110
Additional paid-in capital 10,913 10,867
Retained earnings 100,549 92,980
Currency translation adjustments (3,220) (940)
Restricted stock awards (1,727) (1,633)
Treasury stock, at cost (619,231
shares at April 30, 1998 and
612,460 shares at October 31, 1997) (9,931) (9,716)
96,694 91,668
$343,597 $259,182
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended April 30,
1998 1997
(Note 1)
Operating Activities
Net income $ 7,569 $ 6,390
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,738 4,790
Deferred income taxes (840) 62
Other, net (37) 211
Changes in working capital:
Accounts receivable (4,281) 687
Inventories (1,449) (5,091)
Trade accounts payable and
accrued liabilities (1,360) (1,028)
Other current assets 977 (137)
Net cash provided by operating activities 8,317 5,884
Investing Activities
Acquisition spending, net of cash acquired (55,231)
Capital expenditures (10,992) (4,372)
Investment in and advances to joint ventures (1,607) (2,343)
Other, net (420)
Net cash used by investing activities (68,250) (6,715)
Financing Activities
Increase in debt, net 57,509 3,680
Purchase of treasury stock (2,476)
Proceeds from exercise of stock options 58 28
Net cash provided by financing activities 57,567 1,232
(Decrease) increase in cash (2,366) 401
Cash at beginning of period 3,929 1,060
Cash at end of period $1,563 $1,461
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.The consolidated results for the quarter and
six months ended April 30, 1998 included the
full consolidation of Accurate Dispersions
(Accurate), the European joint-venture, and
Syntech S.p.A. subsequent to their being
purchased by the Company. On April 1, 1998
substantially all of the assets of Accurate
Coatings and Dispersions, Inc. together with
$6.5 million of debt was acquired for
approximately $39.4 million in cash. The
excess of purchase price over the net book
value of assets was approximately $35 million,
the largest component of which was allocated to
goodwill. 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. Syntech S.p.A. and its
affiliated entities and subsidiaries was
acquired on August 1, 1997.
2.Second quarter 1998 results included a pretax
charge of approximately $500,000 ($300,000 after
taxes, or 3 cents per share) related to the one-
time amortization of the excess of fair value over
net book value associated with inventories
acquired as part of the purchase of Accurate.
3.Second quarter 1997 results included a pretax
charge of $811,000 ($483,000 after taxes, or 5
cents per share) for costs, primarily severance,
related to the relocation of the Minneapolis
research facility to Carpentersville and the write-
off of a tax related receivable.
4.Second quarter 1998 results included a
favorable adjustment of $2,311,000 (22 cents per
share) relating to the impact on deferred income
taxes of changes in the Italian income tax
regulations. Second quarter 1997 results included
a favorable adjustment of $591,000 (6 cents per
share) that resulted from the conclusion of an
income tax audit for the period prior to the
Company's spin-off in 1994.
5.The major classes of inventories consist of the following:
April 30, October 31
Dollars in thousands 1998 1997
Manufactured products $23,386 $16,407
Raw materials, supplies and work-in-process 14,187 10,080
$37,573 $26,487
6.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. The difference between the previously
reported amounts and the restated amounts was not
material.
Quarter Ended Six Months Ended
April 30, April 30,
1998 1997 1998 1997
Net income for calculation
of net income per share-
basic and diluted $6,360,000 $3,876,000 $7,569,000 $6,390,000
Weighted average common
shares outstanding 10,346,502 10,421,131 10,345,094 10,444,719
Less: Shares contingently
returnable 104,836 100,332 103,317 97,335
Weighted average shares for
calculation of net income
per share - basic 10,241,666 10,320,799 10,241,777 10,347,384
Effect of dilutive securities:
Dilutive effect of stock
options 100,852 66,708 100,935 65,361
Other 68,701 12,201 59,818 12,201
Dilutive potential common
shares 169,553 78,909 160,753 77,562
Weighted average shares for
calculation of net income
per share - diluted 10,411,219 10,399,708 10,402,530 10,424,946
Net income per share -
basic $ .62 $ .38 $ .74 $ .62
Net income per share -
diluted $ .61 $ .37 $ .73 $ .61
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.
Overview
On April 1, 1998, the Company completed the
acquisition of substantially all of the assets of
Accurate Coatings and Dispersions, Inc. together
with $6.5 million of debt for approximately $39.4
million in cash. Accurate Dispersions (Accurate)
located in South Holland, Illinois manufactures
and distributes dispersed pigments for the
coatings industry. The purchase price was funded
from the Company's $150 million revolving credit
facility. The acquisition was accounted for under
the purchase method and the results of Accurate
since the date of acquisition have been included
in the consolidated results of the Company. The
excess of purchase price over the net book value
of assets was approximately $35 million, the
largest component of which was allocated to
goodwill.
Results of Operations
Net sales increased 43 percent in the second
quarter of 1998 to $115,614,000 compared to
$80,882,000 in the same period of 1997. For the
six months, net sales were $213,734,000, a 40
percent increase versus net sales of $152,416,000
in the comparable period a year ago. The increase
in net sales was primarily from acquired
businesses (see Note 1 of Notes to Consolidated
Financial Statements). Excluding acquired
businesses, second quarter sales were flat and six
month sales decreased 1 percent. Volume
comparisons with 1997 continue to be impacted by
the loss of low margin industrial toll business.
The Company's gross profit margin for the second
quarter of 1998 was 16.3 percent compared to 15.7
percent in last year's second quarter. For the
six months, the gross profit margin was 14.9
percent versus 15.5 percent for the comparable
period a year ago. Current quarter margins were
favorably impacted by lower raw material costs,
improved product mix, and internal process
improvements in the U.S.
Operating expenses (research, selling, general and
administrative) for the second quarter of 1998
were 8.8 percent of net sales compared to 7.4
percent in the prior year second quarter. For the
six months, operating expenses were 9.3 percent of
sales compared to 7.9 percent for the same period
a year ago. Higher expenses compared to prior
year resulted primarily from the acquired
businesses.
Net interest expense increased $1,457,000 in the
second quarter and $2,760,000 year-to-date
compared to 1997. The increase is from debt
borrowed to fund acquisitions (see Note 1 of Notes
to Consolidated Financial Statements).
The effective tax rate for the second quarter of
1998 was 42 percent versus 40.5 percent in the
comparable period a year ago excluding the
favorable adjustments to 1998 and 1997 income tax
expense discussed in Note 4 of Notes to
Consolidated Financial Statements. The increase
is from the non-deductibility of goodwill
amortization for the Syntech S.p.A. acquisition.
Net income for the second quarter of 1998 was
$6,360,000, or 61 cents per share on a diluted
basis compared to last year's second quarter net
income of $3,876,000, or 37 cents per share on a
diluted basis. For the six months, net income was
$7,569,000, or 73 cents per share on a diluted
basis, compared to last year's six month net
income of $6,390,000, or 61 cents per share on a
diluted basis. Refer to Notes 2, 3, and 4 of
Notes to Consolidated Financial Statements for a
discussion on the impact of certain nonrecurring
items on 1998 and 1997 net income. The net impact
of the nonrecurring items was a favorable 19 cents
per share in the second quarter and year-to-date
1998 and a favorable 1 cent per share in the
comparable periods of 1997.
Financial Condition
In the first six months of 1998, cash generated by
operations was $8,317,000 compared to cash
generated by operations of $5,884,000 in the
comparable period a year ago. The Company's
current ratio was 1.5 at April 30, 1998 compared
to 1.3 at October 31, 1997. Excluding the
working capital of the entities acquired in 1998,
working capital increased approximately $4.5
million primarily from the seasonality of the
business.
Investing activities used cash of $68,250,000 in
the first six months of 1998 compared to cash used
of $6,715,000 in the comparable period a year ago.
The increase was primarily because of the
acquisitions in 1998 (see Note 1 of Notes to
Consolidated Financial Statements). Capital
expenditures of approximately $11,000,000 in the
first six months of 1998 were primarily for the
construction of the new research and development
facility, powder capacity expansion, and
productivity improvements. Capital expenditures
of $4,400,000 in the first six months of 1997 was
primarily for productivity improvements. Capital
spending for fiscal year 1998 is currently
anticipated to be approximately $25,000,000.
Financing activities provided cash of $57,567,000
in the first six months of 1998 compared to cash
provided of $1,232,000 in the comparable period a
year ago. Debt as a percentage of invested
capital was 61.2 percent at April 30, 1998, up
from 46.9 percent at October 31, 1997, and 24.3
percent a year ago. Total debt increased to
$152,522,000 at April 30, 1998 from $80,858,000 at
October 31, 1997. This increase was primarily
attributed to the borrowings to fund acquisitions
(see Note 1 of Notes to Consolidated Financial
Statements) and the assumed debt of the acquired
entities.
The Company has a $150 million unsecured revolving
credit facility that terminates on July 30, 2002.
At April 30, 1998, $25.9 million was available
under this facility. The Company's European
subsidiaries, primarily the Italian subsidiary,
have short-term lines of credit that are
cancelable at any time of $25 million of which $10
million is available for future use at April 30,
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 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On February 18, 1998, the annual meeting of
stockholders of the Company was held. The
following individuals were elected directors at
the meeting and the voting results were as
follows:
Directors Votes For Votes Withheld
Michelle L. Collins 6,855,196 104,277
Edward M. Giles 6,926,194 33,279
D. George Harris 6,720,434 239,039
John G. Johnson, Jr. 6,927,597 31,876
Jeffrey M. Nodland 6,926,455 33,018
John R. Stevenson 6,924,287 35,186
Heinn F. Tomfohrde III 6,927,497 31,976
In addition, the following proposal was submitted
to stockholders as described in the Company's
Proxy Statement dated January 5, 1998 and was
voted upon and approved by the stockholders at the
meeting, with the voting results as follows:
Proposal Votes For Votes Against Abstentions
Ratification of
Ernst & Young
LLP as auditors 6,895,202 46,698 17,573
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.32 Asset Purchase Agreement by and among
Accurate Coatings & Dispersions, Inc.,
the Principal Stockholders Thereof and McWhorter
Technologies, Inc. dated as of March 23, 1998
27.1 Financial Data Schedule for the
second quarter of 1998
27.2 Financial Data Schedule for the second quarter of 1997.
The Financial Data Schedule for the
second quarter of 1997 is being
included to reflect restatement of
information pursuant to the
adoption of statement of Financial
Accounting Standard No. 128,
"Earnings Per Share."
(b) No reports on Form 8-K were filed during the second 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: June 10, 1998