FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X Quarterly Report Pursuant to Section 13 or 15(d) of the
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Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1997
___ 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 1-5502
ZURN INDUSTRIES, INC.
IRS Employer
State of Address and Identification
Incorporation Telephone Number Number
- --------------- ------------------ --------------
Pennsylvania 14801 Quorum Drive 25-1040754
Addison, Texas 75240-7584
972-560-2000
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
February 11, 1998 -- Common Stock, $.50 Par Value -- 12,569,830
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PART I - FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL POSITION
(Thousands)
December 31, March 31,
1997 1997
-------- --------
Assets
Current assets
Cash and equivalents $ 10,895 $ 22,908
Marketable securities 5,895 8,489
Accounts receivable 109,272 110,194
Inventories
Finished products 72,917 80,473
Work in process 12,482 13,722
Raw materials and supplies 24,617 28,604
Contracts in process 10,758 11,467
-------- --------
120,774 134,266
Income taxes 62,471 59,551
Discontinued operations' net assets 13,529 4,313
Other current assets 8,276 8,323
-------- --------
Total current assets 331,112 348,044
Property, plant, and equipment 150,198 154,349
Less allowances for depreciation
and amortization 49,644 49,169
-------- --------
100,554 105,180
Goodwill 188,999 194,064
Investments 33,623 38,524
Other assets 48,816 40,545
-------- --------
$703,104 $726,357
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 29,383 $ 49,243
Other current liabilities 202,838 190,581
-------- --------
Total current liabilities 232,221 239,824
Debt obligations 129,648 160,957
Retirement obligations 68,761 68,346
Other liabilities 16,614 26,512
Shareholders' equity
Common stock 6,368 6,285
Other shareholders' equity 249,492 224,433
-------- --------
255,860 230,718
-------- --------
$703,104 $726,357
======== ========
See notes to consolidated financial statements.
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CONSOLIDATED OPERATIONS
(Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended
December 31 December 31
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1997 1996 1997 1996
---- ---- ---- ----
Net sales $152,529 $65,686 $475,126 $229,150
Cost of sales 105,014 45,891 332,590 164,378
Marketing and administration 27,769 13,523 88,164 41,873
Interest expense 4,512 441 13,886 1,092
Goodwill amortization 1,738 23 5,065 69
Interest income (570) (887) (2,030) (2,428)
Other expense (income) 973 (1,392) (504) (3,066)
-------- ------- -------- --------
Continuing operations income
before income taxes 13,093 8,087 37,955 27,232
Income taxes 5,650 3,210 16,340 10,300
-------- ------- -------- --------
Continuing operations income 7,443 4,877 21,615 16,932
Discontinued operations 2,164 (6,400)
-------- ------- -------- --------
Net income $ 7,443 $ 7,041 $ 21,615 $ 10,532
======== ======= ======== ========
Basic earnings per share
Continuing operations $ .60 $ .39 $ 1.74 $ 1.37
Net Income $ .60 $ .57 $ 1.74 $ .85
Diluted earnings per share
Continuing operations $ .59 $ .39 $ 1.72 $ 1.37
Net Income $ .59 $ .57 $ 1.72 $ .85
Average shares outstanding
Basic 12,496 12,346 12,413 12,343
Diluted 12,717 12,448 12,577 12,388
Cash dividends declared
per common share $ .10 $ .10 $ .30 $ .30
See notes to consolidated financial statements.
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CONSOLIDATED CASH FLOWS
(Thousands)
Nine Months Ended
December 31
-------------------
1997 1996
-------- --------
Operations
Net income $ 21,615 $ 10,532
Depreciation and amortization 13,868 4,383
Operating assets and liabilities 6,684 12,818
Discontinued operations (10,770) (25,374)
Miscellaneous (18) (2,284)
-------- --------
31,379 75
Investing
Capital expenditures (12,799) (4,389)
Long-term investments (5,706) (705)
Purchase of business (2,984)
Property, plant, and equipment disposals 10,025 1,327
Sales of operations 3,065 2,706
Marketable securities 2,594 (25,925)
Discontinued operations 1,634 66,706
-------- --------
(4,171) 39,720
Financing
Borrowings 30,000
Debt payments (58,471) (626)
Dividends paid (3,704) (3,703)
Stock options exercised 3,132 160
Discontinued operations (80) (2,185)
-------- --------
(29,123) (6,354)
Cash and equivalents
(Decrease) increase (1,915) 33,441
Foreign exchange rate effect 407
Beginning of year 12,403 16,195
-------- --------
End of period $ 10,895 $ 49,636
======== ========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the results for the interim periods
presented. The results of operations for the nine months ended December 31, 1997
are not necessarily indicative of the results to be expected for the full year.
During fiscal 1998's first quarter, the January 1997 credit agreement was
amended to increase the available line for revolving loans by $20 million. At
December 31, 1997, $11.7 million of letters of credit were outstanding.
On January 29, 1998, the United States Bankruptcy Court for the Eastern District
of Texas confirmed the Chapter 11 bankruptcy Plan of Reorganization filed by
United States Brass Corporation, an indirect wholly-owned subsidiary of the
Company. The Plan is expected to become effective prior to March 31, 1998 and
establishes the Brass Trust to pay claims resulting from US Brass polybutylene
plumbing systems and provides for the payment of all other unsecured claims.
The Trust will be funded by an amount equal to any amounts US Brass and its
affiliates eventually recover from their insurance carriers, $53.4 million in
cash, and a $20 million noninterest bearing note payable over ten years.
Consequently, US Brass will continue to be a subsidiary and future US Brass
polybutylene plumbing systems claims will be enjoined and channeled to the
Trust.
The Company operates plants that generate hazardous and nonhazardous wastes
which are subject to federal and state disposal laws and believes it is in
material compliance with such laws and related regulations. Several of the
Eljer Industries, Inc. facilities acquired in January 1997 have implemented
required remediation programs to remedy the effects of past waste disposal and
others have not undergone comprehensive environmental studies. Included in the
statement of financial position is a $7.7 million reserve for environmental,
health, and safety matters which management believes is adequate and expects
payments of substantial portions to be made over the next three years.
In the normal course of business, financial and performance guarantees are made
in connection with major engineering and construction contracts and a liability
is recognized when a probable loss occurs. Also, there are various other
claims, legal, and environmental proceedings which management believes will have
no material effect on the Company's financial position or results of operations
when they are resolved.
Earnings per share are based on income and the average shares of common stock
and dilutive securities outstanding during the period. Excluded out-of-the-
money stock options were: 1997 - 242,000 at $37.00 to $45.375; 1996 - 651,000 at
$28.75 to $45.375. Basic and diluted earnings (loss) per share from
discontinued operations in 1996 were: three months - $.18; nine months - $(.52).
The adoption in the current quarter of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," increased the 1997 quarter and nine
months diluted amounts $.01 per share and did not affect previously reported net
income earnings per share for the prior year.
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Three Months Ended December 31
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1997 1996
---------------- ----------------
Income Shares Income Shares
-------- ------ -------- ------
(Thousands)
Basic earnings per share
Average common shares outstanding 12,496 12,346
Continuing operations income $ 7,443 $ 4,877
Dilutive securities' effect
Convertible preferred stock 4 4
Restricted common stock 6 4
Stock options 211 94
------- ------ ------- ------
Diluted earnings per share $ 7,443 12,717 $ 4,877 12,448
Nine Months Ended December 31
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1997 1996
---------------- ----------------
Income Shares Income Shares
------- ------ ------- ------
(Thousands)
Basic earnings per share
Average common shares outstanding 12,413 12,343
Continuing operations income $21,615 $16,932
Preferred stock dividends (2) (2)
------- -------
21,613 16,930
Dilutive securities' effect
Convertible preferred stock 2 4 2 4
Restricted common stock 5 2
Stock options 155 39
------- ------ ------- ------
Diluted earnings per share $21,615 12,577 $16,930 12,388
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
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Liquid assets amounted to $16.8 million and $20.9 million at December 31 and
March 31, 1997, respectively. The $10.5 million of restricted cash at March 31,
1997 (classified with cash and equivalents in the accompanying statement of
consolidated financial position) was released during the first quarter on
payment of the debt obligations it secured. Inventories declined as a result of
greater net sales and actions taken to reduce inventory levels. Trade accounts
payable declined (primarily in the first quarter) in line with the more
efficient cash management practices instituted in fiscal 1996 and the payment of
costs accrued in connection with the acquisition of Eljer Industries, Inc. in
January 1997.
The increase in discontinued operations' net assets was primarily caused by
payment of the operations' liabilities. The remaining balance includes amounts
owed under construction contracts and asset sale agreements, as well as costs
related to two power plants that were under construction when the State of
Illinois Retail Rate Law of 1987 was repealed. If the repeal is not
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reversed and the projects' assets, including debt funding by the owner, are
insufficient, the Company could sustain up to a $14 million pretax loss for
which no provision has been made as management believes the Company's costs will
be recovered.
Sales of underutilized assets and the sale/leaseback of a manufacturing facility
reduced the carrying amount of property, plant, and equipment. The sale
proceeds were used to prepay long-term debt obligations which also were reduced
when a sales-type lease receivable was liquidated and the customer assumed the
related debt obligation. The decline in other long-term liabilities is
attributable to the transfer of Marysville, Ohio property to a party which has
assumed the Company's environmental remediation obligation.
Results of Operations
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The Company's sales were derived from:
Three Months Ended Nine Months Ended
December 31 December 31
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Thousands)
Building Products
Plumbing Products $ 90,797 $38,645 $292,444 $125,666
Heating, Ventilating,
and Air Conditioning 39,139 113,369
Fire Protection Systems 10,471 12,009 33,625 32,636
-------- ------- -------- --------
140,407 50,654 439,438 158,302
Water Resource Construction 12,122 15,032 35,688 70,848
-------- ------- -------- --------
$152,529 $65,686 $475,126 $229,150
======== ======= ======== ========
The Plumbing Products and HVAC sales increase and the increases in costs and
expenses primarily resulted from the acquisition of Eljer. In thousands of
dollars, the contribution of Eljer for the three- and nine-month periods of
1997, respectively, to sales, operating income, and earnings (net of acquisition
financing effects) was: sales - $87,352 and $269,818; operating income - $9,219
and $24,961; pretax income - $2,619 and $5,632; net income -$1,231 and $2,249,
or $.10 and $.18 per diluted share. Eljer's revenues were lower than last year
largely due to HVAC revenues suffering from unseasonably warm weather in the
North American market and, in Europe, from a soft German market and adverse
currency exchange rates. The lower Water Resource Construction revenues reflect
the timing of Advanco Constructors' project starts and the sale last year of
Gary Concrete which contributed $2.0 and $12.7 million to sales for the three-
and nine-month periods ended December 31, 1996.
The greater gross profit margin percentage in 1997 was attributable to Advanco
Constructors' larger profit on lower revenues which offset lower Fire Protection
Systems margins and those obtained by Eljer Plumbingware and Selkirk HVAC in the
remodeling, repair, and do-it-yourself markets. Included in other expense for
the current quarter is $1.4 million for the relocation of the Company's
headquarters to a leased facility in Dallas, Texas. Last year other income
included the gain from the sale of Gary Concrete and a full
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quarter's income from the sales-type lease which was liquidated in the current
quarter. Goodwill amortization, which is not deductible, increased the 1997
effective tax rate compared to the prior year.
The Company's backlog of unfilled orders was as follows:
December September December
1997 1997 1996
----- ----- -----
(Millions)
Building Products $ 53 $ 57 $ 32
Water Resource Construction 89 87 73
----- ----- -----
$ 142 $ 144 $ 105
===== ===== =====
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not required to present the disclosures before its fiscal year
ending March 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
United States Brass Corporation Bankruptcy
- ------------------------------------------
The second paragraph of "Notes To Consolidated Financial Statements" on page 5
is incorporated herein by reference.
Environmental Matters
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On September 30, 1997, US Brass received notice from the United States
Environmental Protection Agency of the approval of a Record of Decision calling
for implementation of the final gas migration and landfill cover at the
Operating Industries, Inc. Superfund site in Monterey Park, California which was
operated as a landfill from 1948 through 1984. The notice seeks a $684,712
payment from US Brass as its allocated share of the estimated $215 million of
costs to be incurred under the Seventh Partial Consent Decree entered by the
United States District Court for the Central District of California in the
action entitled U.S., et al vs Chevron Chemical Co., et al.
See Form 10-Q, Part II, Item 1 for the quarterly period ended September 30,
1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
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The exhibits listed in the Exhibit Index to this report on Form 10-Q are
incorporated herein by reference. Management contracts and compensatory plan
arrangements are preceded by an asterisk (*) in the Exhibit Index.
Reports on Form 8-K
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No reports were filed during the quarter for which this report is filed.
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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.
ZURN INDUSTRIES, INC.
(Registrant)
February 13, 1998 /s/ George W. Hanthorn
-----------------------------
George W. Hanthorn
Vice President-General Counsel
and Secretary
February 13, 1998 /s/ John E. Rutzler III
-----------------------------
John E. Rutzler III
Vice President-Controller
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EXHIBIT INDEX
3 Articles Of Incorporation And By-laws
-------------------------------------
Restated Articles of Incorporation with Amendments through Incorporated
April 22, 1996 filed as Exhibit 3.1 to Form 10-K for the by reference
year ended March 31, 1996
By-laws as of August 1995 filed as Exhibit 3.1 to Form Incorporated
10-Q for the quarter ended September 30, 1995 by reference
4 Instruments Defining The Rights Of Security Holders,
----------------------------------------------------
Including Indentures
--------------------
Description of Common Stock contained in the prospectus Incorporated
dated July 26, 1972 beginning on page 18 ("Description of by reference
Capital Stock") forming a part of Amendment No. 3 to the
Form S-1 Registration Statement No. 2-44631
Description of Common Stock as set forth in the Restated Included in
Articles of Incorporation with Amendments through Exhibit 3.1
April 22, 1996 filed as Exhibit 3.1 to Form 10-K for the
year ended March 31, 1996
Description of Preferred Share Purchase Rights contained Incorporated
in the Form 8-A Registration Statement dated May 17, 1996 by reference
10 Material Contracts
------------------
* 1986 Stock Option Plan filed as Exhibit 28A to Form S-8 Incorporated
Post-Effective Amendment No. 1 Registration Statement No. by reference
33-19103
* 1989 Directors Stock Option Plan filed as Exhibit 28 to Incorporated
Form S-8 Registration Statement No. 33-30383 by reference
* 1991 Stock Option Plan filed as Exhibit 28 to Form S-8 Incorporated
Registration Statement No. 33-49224 by reference
* 1995 Directors Stock Option Plan filed as Exhibit 99 to Incorporated
Form S-8 Registration Statement No. 33-65219 by reference
* 1996 Employee Stock Plan filed as Exhibit 10.17 to Form Incorporated
10-K for the year ended March 31, 1997 by reference
* Supplemental Executive Retirement Plan of Zurn Incorporated
Industries, Inc. filed as Exhibit 10.1 to Form 10-Q for by reference
the quarter ended December 31, 1994
* 1986 Retirement Plan for Outside Directors of Zurn Incorporated
Industries, Inc. filed as Exhibit 10.16 to Form 10-Q for by reference
the quarter ended December 31, 1996
* Zurn Long-Term Incentive Plan filed as Exhibit 10.22 to Incorporated
Form 10-Q for the quarter ended September 30, 1997 by reference
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* Agreements Relating to Employment dated June 5, 1989 Incorporated
with J.A. Zurn filed as Exhibit 10H to Form 10-Q for the by reference
the quarter ended June 30, 1989; dated October 17, 1994
with R.R. Womack filed as Exhibit 10.2 to Form 10-Q for
the quarter ended December 31, 1994; dated July 1, 1995
with J.R. Mellett filed as Exhibit 10.8 to Form 10-Q for
the quarter ended June 30, 1995; dated August 14, 1995
with F.E. Sheeder filed as Exhibit 10.11 to Form 10-Q for
the quarter ended September 30, 1995; dated April 21, 1997
with W.J. Durbin, D. Haines, J.A. Harris, and B.F. Sherman
filed as Exhibit 10.18 to Form 10-K for the year ended
March 31, 1997; dated July 9, 1997 with G.W. Hanthorn
filed as Exhibit 10.23 to Form 10-Q for the quarter ended
September 30, 1997
10.25* Agreement Relating to Employment dated January 19, 1998
with J.E. Rutzler III
* Employment Agreement dated January 22, 1996 with R.R. Incorporated
Womack filed as Exhibit 10.13 to Form 10-Q for the by reference
quarter ended December 31, 1995
* Zurn Industries, Inc. Deferred Compensation Plan for Non- Incorporated
Employee Directors filed as Exhibit 19E to Form 10-Q for by reference
the quarter ended June 30, 1989
* Zurn Industries, Inc. Deferred Compensation Plan for Incorporated
Salaried Employees filed as Exhibit 10.3 to Form 10-Q for by reference
the quarter ended December 31, 1994
* Zurn Industries, Inc. Optional Deferment Plan for Incorporated
Incentive Compensation Plan Participants filed as Exhibit by reference
10.4 to Form 10-Q for the quarter ended December 31, 1994
* Zurn Supplemental Pension Plan filed as Exhibit 10.5 to Incorporated
Form 10-Q for the quarter ended December 31, 1994 by reference
* Indemnity Agreements dated August 14, 1986 with E.J. Incorporated
Campbell, and J.A. Zurn filed as Exhibit 19J to Form 10-Q by reference
for the quarter ended September 30, 1986; dated October
20, 1986 with J.E. Rutzler III filed as Exhibit 10B to
Form 10-Q for the quarter ended December 31, 1988; dated
January 25, 1993 with W.E. Butler, April 1, 1993 with
D. Haines, and August 6, 1993 with Z. Baird filed as
Exhibit 10A to Form 10-Q for the quarter ended June 30,
1993; dated October 17, 1994 with R.R. Womack filed as
Exhibit 10.6 to Form 10-Q for the quarter ended December
31, 1994; dated June 8, 1995 with R.D. Neary, and July 1,
1995 with J.R. Mellett filed as Exhibit 10.9 to Form 10-Q
for the quarter ended June 30, 1995; dated August 14, 1995
with F.E. Sheeder filed as Exhibit 10.12 to Form 10-Q for
the quarter ended September 30, 1995; dated October 30,
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1995 with M.K. Brown filed as Exhibit 10.14 to Form 10-Q
for the quarter ended December 31, 1995; dated October 28,
1996 with W.J. Durbin, January 28, 1997 with S.G. Arbuckle,
and June 4, 1997 with J.M. Sergey filed as Exhibit 10.19 to
Form 10-K for the year ended March 31, 1997; dated July 8,
1997 with G.W. Hanthorn
* Irrevocable Trust Agreements for the Grantor's: 1986 Incorporated
Retirement Plan for Outside Directors of Zurn Industries, by reference
Inc.; Deferred Compensation Plan for Non-Employee
Directors; Supplemental Executive Retirement Plan for
Zurn Industries, Inc.; Zurn Industries, Inc. Supplemental
Pension Plan for Participants in the Deferred Compensation
Plan for Salaried Employees; Deferred Compensation Plan
for Salaried Employees; Optional Deferment Plan for
Incentive Compensation Plan Participants filed as Exhibit
19I to Form 10-Q for the quarter ended September 30, 1986
* Second Irrevocable Trust Agreement for the Grantor's Incorporated
Indemnity Agreements filed as Exhibit 10A to Form 10-Q by reference
for the quarter ended December 31, 1988
* Zurn Industries, Inc. Executive Incentive Plan filed as Incorporated
Exhibit 10.20 to Form 10-K for the year ended March 31, by reference
1997
Amended and Restated Credit Agreement dated June 6, 1997 Incorporated
among Zurn Industries, Inc., Eljer Manufacturing, Inc., by reference
Various Lending Institutions, NationsBank, N.A., as
Documentation Agent and Bankers Trust Company, as
Administrative Agent filed as Exhibit 10.21 to Form 10-Q
for the quarter ended June 30, 1997
27 Financial Data Schedule SEC Edgar
----------------------- Filing Only
* - Management contracts and compensatory plan arrangements.
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