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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 September 30, 1999 Commission file number 0-784
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DETREX CORPORATION
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(Exact name of registrant as specified in its charter)
Michigan 38-0480840
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24901 Northwestern Hwy., Ste. 500, Southfield, MI 48075
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 358-5800
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Securities registered pursuant to section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section (g) of the Act:
Common Capital Stock, $2 Par Value
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(Title of Class)
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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As of October 27, 1999 1,583,414 shares of the registrant's stock were
outstanding.
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DETREX CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE
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Item 1 Condensed Consolidated Balance Sheets-
September 30, 1999 (Unaudited) and
December 31, 1998 3
Condensed Consolidated Unaudited Statements
of Operations For the Three and Nine Months
Ended September 30, 1999 and 1998 4
Consolidated Unaudited Statements of Cash
Flows- Nine Months Ended September 30, 1999
and 1998 5
Notes to Condensed Consolidated Unaudited
Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Interim Financial Information 8-10
PART II OTHER INFORMATION
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Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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DETREX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED AUDITED
September 30, December 31,
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1999 1998
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ASSETS
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Current Assets:
Cash and cash equivalents $ 148,129 $ 192,689
Accounts receivable (less allowance for uncollectible accounts
of $278,000 in 1999 and $249,000 in 1998) 13,921,374 12,222,210
Accounts receivable-other 530,000 --
Inventories:
Raw materials 5,681,330 3,435,271
Work in process 281,522 333,283
Finished goods 6,239,215 7,157,247
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Total Inventories 12,202,067 10,925,801
Prepaid expenses and other 1,073,275 966,651
Deferred income taxes 1,924,027 1,924,027
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Total Current Assets 29,798,872 26,231,378
Land, buildings, and equipment-net 26,329,575 25,263,345
Land, buildings, and equipment held for sale 180,000 21,232
Bond proceeds held for investment - restricted -- 1,247,902
Prepaid pensions 1,680,023 1,383,246
Deferred income taxes 1,023,626 689,504
Other assets 1,053,152 1,154,148
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$60,065,248 $55,990,755
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities:
Loans payable $ 7,941,653 $ 6,289,774
Current portion of long-term debt 818,000 500,000
Current maturities of capital leases 221,691 256,724
Accounts payable 10,759,901 9,682,835
Environmental reserve 1,235,000 1,235,000
Accrued compensation 443,663 263,872
Other accruals 2,473,239 2,078,391
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Total Current Liabilities 23,893,147 20,306,596
Long term portion of capital lease obligations 319,947 468,142
Long-term debt 4,705,500 3,500,000
Accrued postretirement benefits 4,832,375 4,671,375
Environmental reserve 6,382,339 6,803,817
Accrued pensions and other 148,079 148,079
Minority interest 2,150,659 2,067,500
Stockholders' Equity:
Common capital stock, $2 par value, authorized 4,000,000 shares,
outstanding 1,583,414 shares 3,166,828 3,166,828
Additional paid-in capital 22,020 22,020
Retained earnings 14,444,354 14,836,398
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Total Stockholders' Equity 17,633,202 18,025,246
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$60,065,248 $55,990,755
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SEE NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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DETREX CORPORATION
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF
OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
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Net sales $ 23,277,078 $ 22,112,737 $ 67,476,750 $ 64,840,860
Cost of sales 17,765,900 16,540,226 51,319,677 48,998,792
Selling, general and administrative expenses 4,741,393 4,769,307 13,612,018 13,311,982
Provision for depreciation and amortization 934,119 835,597 2,804,391 2,469,637
Net (gain) loss from property transaction 72,604 -- (307,602) --
Other (income) and deductions (76,065) (45,992) (170,148) (282,244)
Minority interest 34,326 81,617 143,158 222,549
Interest expense 298,350 228,315 697,629 587,522
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Loss before income taxes (493,549) (296,333) (622,373) (467,378)
Credit for income taxes (225,130) (30,033) (230,333) (98,974)
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Net loss $ (268,419) $ (266,300) $ (392,040) $ (368,404)
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Net loss per common share:
Basic $ (.17) $ (.17) $ (.25) $ (.23)
Diluted $ (.17) $ (.17) $ (.25) $ (.23)
Weighted average shares outstanding:
Basic 1,583,414 1,583,414 1,583,414 1,583,414
Effects of dilutive stock options -- -- -- --
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Diluted 1,583,414 1,583,414 1,583,414 1,583,414
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SEE NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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DETREX CORPORATION
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (392,040) $ (368,404)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,804,391 2,469,637
Gain on disposal of assets (307,602) (750)
Deferred income taxes (334,122) (334,864)
Minority interest 83,159 162,550
Changes to operating assets and liabilities that provided (used) cash:
Accounts receivable (1,699,164) 2,971,918
Accounts receivable- other (530,000) --
Inventories (1,276,266) (414,609)
Prepaid expenses and other (403,401) (369,179)
Other assets 90,502 (47,996)
Accounts payable 1,077,066 (1,338,214)
Environmental reserve (421,478) (746,057)
Accrued compensation 179,791 (844,642)
Other accruals 388,036 (484,439)
Postretirement benefits 161,000 175,000
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Total adjustments (188,088) 1,198,355
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Net cash (used in) provided by operating activities (580,129) 829,951
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,211,754) (4,492,286)
Sale of fixed assets 504,414 1,368,000
Unused proceeds from bond issue-restricted for capital expenditures 1,247,902 (2,010,227)
Proceeds from insurance settlement -- 1,250,000
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Net cash used in investing activities (2,459,438) (3,884,513)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under revolving credit facility-net 1,651,879 (809,609)
Borrowing under equipment loan facility-net 1,523,500 --
Principal payments under capital lease obligations (180,373) (208,925)
Proceeds from debt issued -- 4,000,000
Debt issuance costs -- (222,985)
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Net cash provided by financing activities 2,995,006 2,758,481
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Net decrease in cash and cash equivalents (44,560) (296,081)
Cash and cash equivalents at beginning of period 192,689 398,093
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Cash and cash equivalents at end of period $ 148,129 $ 102,012
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 657,104 $ 596,628
Income taxes $ 176,585 $ 282,413
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred with the acquisition of equipment $ 26,500 $ 119,373
Capital lease terminations $ 29,256 $ 73,530
SEE NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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DETREX CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying condensed consolidated
unaudited financial statements reflect all adjustments (consisting of normal
recurring accruals) necessary to present fairly the results of operations for
the periods presented. Certain amounts for 1998 have been reclassified to
conform with 1999 classifications. The information furnished for the nine months
may not be indicative of results to be expected for the full year.
2. The Company and at least seventeen other companies are potentially
responsible for sharing the costs in a proceeding to clean up contaminated
sediments in the Fields Brook watershed in Ashtabula, Ohio. The Environmental
Protection Agency (`EPA') issued a Record of Decision in 1986 concerning the
methods it recommends using to accomplish this task. The Company and the other
potentially responsible parties have negotiated with the EPA as to how best to
effect the clean up operation. After negotiation, an agreement was reached with
the EPA on clean-up methodology. This agreement has been incorporated into
Consent Decree with both the EPA and State of Ohio. The Consent Decrees were
lodged on May 14, 1999 and after a public comment period, were entered by the
court on July 7, 1999. These Consent Decrees resolve the claims of the EPA and
State of Ohio and provide for the clean up of the Fields Brook watershed. The
Company's share of clean-up costs is anticipated to be in the range of
approximately $3.0 million.
The Company maintains a reserve for anticipated expenditures over the
next several years in connection with remedial investigations, feasibility
studies, remedial design, and remediation relating to the clean up of
environmental contamination at several sites, including property owned by the
Company. The amount of the reserve at September 30, 1999 is $7.6 million. The
reserve includes a provision for the Company's anticipated share of remediation
in the Fields Brook watershed referred to above, as well as a provision for
costs that are expected to be incurred in connection with remediation of other
sites. Some of these studies have been completed; others are ongoing. In many
cases, the methods of remediation remain to be agreed upon.
The Company expects to continue to incur professional fees, expenses
and capital expenditures in connection with its environmental compliance
efforts. In addition to the above, there are several other claims and lawsuits
pending against the Company and its subsidiaries. One of those lawsuits involves
the division of costs between several potentially responsible companies for
reimbursement to the EPA for costs it incurred to conduct environmental
remediation at a drum and barrel recycler, which the Company had utilized
several years ago. The potentially responsible companies entered into an
Agreement to, among other things, jointly defend the cost claims of the EPA. A
dispute arose amongst the potentially responsible companies over the Agreement
which resulted in the filing of a lawsuit. The matter went to trial before a
jury in June of 1999 and a judgment was entered against the Company in the
amount of approximately $750,000, plus interest and attorney fees. The Company
is taking an appeal to the Michigan Court of Appeals and believes it has
reasonable grounds to seek reversal of the judgment.
The amount of liability to the Company with respect to costs of
remediation of contamination of the Fields Brook watershed and of other sites,
and the amount of liability with respect to several other claims and lawsuits
against the Company, was based on available data. The Company has established
its reserves in accordance with its interpretation of the principles outlined in
Statement of Financial Accounting Standards No. 5 and Securities and Exchange
Commission Staff Accounting Bulletin No. 92. In the event that any additional
accruals should be required in the future with respect to such matters, the
amounts of such additional accruals could have a material impact on the results
of operations to be reported for a specific accounting period but should not
have a material impact on the Company's consolidated financial position.
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DETREX CORPORATION
3. Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company has five operating segments that meet the
quantitative thresholds of Statement No. 131:
- - Harvel Plastics - manufactures PVC and CVPC pipe and custom extrusions
- - Elco Corporation - produces lubricant additives, hydrochloric acid and fine
chemicals
- - Seibert-Oxidermo - supplies paint, primers and specialty coatings for the
automotive industry
- - Equipment Division - designs, engineers and sells industrial cleaning
equipment
- - Solvents Division - distributes virgin or reclaimed solvents and aqueous or
semi-aqueous cleaning chemistries.
Information regarding the Company's Automation Division and RTI Laboratories
Division are combined with corporate data since they do not meet the
quantitative thresholds. In addition, Corporate data includes interest expense,
corporate administrative expense, and provisions for certain employee benefit
items. Data (in thousands) for the three months ended September 30, 1999 and
1998 and the nine months ended September 30, 1999 and 1998 is as follows:
Three Months Ended Sept 30 Nine Months Ended Sept 30
1999 1998 1999 1998
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Net sales:
Harvel Plastics $ 9,096,969 $ 7,789,605 $ 26,406,671 $ 22,577,512
Elco Corporation 5,291,885 4,975,414 15,165,978 14,884,251
Seibert-Oxidermo 3,294,703 2,594,950 10,173,798 8,973,137
Equipment Division 1,530,895 2,192,332 3,533,214 5,707,588
Solvents Division 3,639,293 3,741,590 10,887,764 10,866,650
Other 423,333 818,846 1,309,325 1,831,722
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Total $ 23,277,078 $ 22,112,737 $ 67,476,750 $ 64,840,860
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Earnings (loss) before income taxes:
Harvel Plastics 377,936 886,882 1,575,173 2,418,340
Elco Corporation 497,558 158,164 1,190,046 854,709
Seibert-Oxidermo (20,733) (204,067) 178,280 (358,791)
Equipment Division (125,788) (140,772) (564,281) (523,336)
Solvents Division (421) 38,755 781 126,461
Other 111,161 176,909 322,386 421,923
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Sub-total 839,713 915,871 2,702,385 2,939,306
Corporate administrative expense (937,737) (931,555) (2,809,291) (2,820,387)
Corporate interest expense (225,052) (163,895) (559,381) (491,166)
Other (170,473) (116,754) 43,914 (95,131)
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Total $ (493,549) $ (296,333) $ (622,373) $ (467,378)
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DETREX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF INTERIM FINANCIAL INFORMATION
Results of Operations
Summarized below is selected operating data for the current fiscal period and
the comparable data for the same period last year (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
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1999 1998 1999 1998
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$ % $ % $ % $ %
- - - - - - - -
Sales 23,277 100.0 22,113 100.0 67,477 100.00 64,841 100.0
Gross margin 5,511 23.7 5,573 25.2 16,157 23.9 15,842 24.4
Selling, general and administrative expenses 4,741 20.4 4,769 21.6 13,612 20.2 13,312 20.5
Depreciation and amortization 934 4.0 836 3.8 2,804 4.2 2,470 3.8
Net income (loss) (268) (1.2) (266) (1.2) (392) (0.6) (368) (.6)
Detrex Corporation and its consolidated subsidiaries (the Company) incurred a
net loss of $268,419 for the third quarter of 1999 compared with a net loss of
$266,300 for the third quarter of 1998. For the first nine months of 1999, the
Company incurred a net loss of $392,040 compared with a net loss of $368,404 for
the first nine months of 1998.
Sales for the nine month period were up $2.6 million largely due to increased
sales in the plastic pipe subsidiary, Harvel Plastics ("Harvel"), as demand was
strong in the building industry and the new West Coast location allowed Harvel
to service new markets. A smaller sales increase in the paint subsidiary,
Seibert-Oxidermo ("Seibert") from new business coming on stream also contributed
to increased sales for the Company. The increased sales were partially offset by
weaker sales in the Automation and Equipment Divisions of the Company.
The gross margins of the Company were lower for the nine-month period 23.9%
versus 24.4% for a year ago. Gross margins decreased in the third quarter 23.7%
in 1999 compared to 25.2% for the same period in 1998. Gross margin reduction
for the quarter was largely due to increases in raw material costs at Harvel,
partially offset by gross margin increases at The Elco Corporation ("Elco") and
Seibert due to favorable product mix and manufacturing efficiencies from plant
consolidation.
Selling, general and administrative expenses were level with the third quarter
of 1998.
The provision for depreciation and amortization is higher than 1998 as a result
of depreciation of new plants in Ashtabula, Ohio and Bakersfield, California as
well as the new information management system at the Corporate headquarters.
Interest expense is higher in 1999 due to an increase in borrowings and higher
interest rates from a year ago.
The income tax credit in 1999 reflects a credit for federal income tax,
partially offset by state and local income tax expense.
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DETREX CORPORATION
Results of Operations - Segment Disclosure
Harvel sales are up for the quarter and year-to-date over a year ago from a
combination of strong demand in the building industry and servicing new markets
from their West Coast facility. Earnings were down year-to-date due to a margin
decline caused by increased raw material costs.
Elco's sales performance was up slightly in the third quarter and on a
year-to-date basis. Favorable product mix and reduced manufacturing expense
resulted in an increase in operating income over the same period a year ago.
Seibert's sales improved in the quarter and year-to-date due to continued strong
automotive demand and volume increases from new accounts. In spite of larger
than normal lab and testing costs associated with product approvals, earnings
were up due to favorable product mix and manufacturing efficiencies.
The third quarter and year-to-date sales and earnings for the Equipment Division
were lower than year-ago levels due to continued weakness in the cleaning
equipment market; however, quote activity and order bookings increased in the
quarter.
Solvents Division sales for the third quarter and year-to-date were
approximately the same as 1998. Sales in low margin product lines reduced
earnings versus the third quarter and year-to-date periods last year.
Liquidity, Financial Condition, and Capital Resources
The Company utilized internally generated funds, the proceeds from the sale of a
closed plant and increased borrowing to finance operating activities and $4.2
million in capital expenditures during the first nine months of 1999. The
Company borrowed $1.5 million under its equipment facility and borrowings under
its revolving credit facility increased by an additional $1.7 million. In May
1999 the Company and Comerica Bank amended the Company's Credit Agreement to
provide more flexibility with respect to the equipment loan facility.
Working capital was $5.9 at both September 30,1999 and December 31, 1998.
Accounts receivable increased by $1.7 million, primarily due to the higher sales
volume at Harvel. Inventories also increased from the December 31, 1998 level,
partially due to Harvel's new production facility on the West Coast. The Company
is paying no dividends and cannot forecast when the dividend will be restored.
Year 2000 Compliance
The Company has substantially completed its work to resolve the potential impact
of the Year 2000 on the processing of information by its computerized
information systems. Year 2000 ("Y2K") issues may arise if computer programs
have been written using two digits, instead of four, to define the applicable
year. In such case, a program that utilizes time-sensitive logic may recognize a
date using "00" as the Year 1900 rather than the Year 2000, which could result
in miscalculations or system failures.
In 1997, the Company undertook a study to determine its future computer hardware
and software requirements for its management information systems, including Y2K
compliance considerations. Since then the Company has implemented a program,
consisting of two phases, for achieving upgraded systems and Y2K compliance. The
first phase of the program consisted of replacing the Company's computerized
information systems and programs with
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DETREX CORPORATION
new systems and programs that are Y2K compliant. As of November 1998, the
Company had completed the first phase. As a result, the Company's accounts
payable, accounts receivable and general ledger were upgraded to new, Y2K
compliant systems and programs. The Company converted its fixed asset records to
new Y2K compliant programs in the second quarter of 1999.
The second phase of becoming Y2K compliant in its management information systems
was the replacement of computerized information systems and programs that
perform job costing for the Company's Equipment Division and sales invoicing for
the Company's Solvents and Equipment Divisions with Y2K compliant systems and
programs. The Company completed this phase in the third quarter of 1999.
All of the parent Company's operations systems were reviewed and work plans were
established to develop Y2K compliance. This has now been accomplished. In
addition the Company's subsidiaries, Harvel, Elco and Seibert, are substantially
Y2K compliant.
Since the Company relies on electronic data from certain of its vendors,
financial institutions and customers, the Company has conducted surveys to
determine if these entities are Y2K compliant or are on schedule to become Y2K
compliant before the end of 1999. The Company has sent detailed questionnaires
to approximately 500 vendors, financial institutions and customers to determine
if they are on schedule to become Y2K compliant. Approximately 70% have
responded to the questionnaires in varying degrees of detail. All of these
entities have indicated that they are or will become Y2K compliant. However, the
Company has not yet conducted any testing with third parties and therefore has
no assurance that these entities, or others that have not responded, will become
Y2K compliant on a timely basis. If the Company's most significant vendors,
financial institutions and customers fail to become Y2K compliant on a timely
basis, such failure could have a material adverse effect on the Company's
business and operations.
To become Y2K compliant, the Company appointed an officer as project coordinator
for its Y2K program and engaged the services of information systems consultants.
As of September 30, 1999, the Company has spent approximately $1.0 million to
upgrade its information systems and programs, most of which were for capital
expenditures. The Company cannot accurately allocate the portion of such
expenditures for information systems and programs that relate solely to Y2K
compliance.
In the last two years, the Company has dedicated significant management
attention to the Y2K issue. Management updates the Board of Directors on a
regular basis concerning the Company's progress in achieving Y2K compliance.
Because its expects to become Y2K complaint, the Company has not developed a
contingency plan in the event that it should fail to become Y2K compliant. The
Company will continue to monitor its progress in becoming Y2K compliant and will
develop contingency plans as needed if it determines that there will be a
shortfall in its Y2K efforts or those of its vendors, financial institutions and
customers. The Company currently cannot determine the cost of contingency plans,
should they be necessary.
PART II - OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) No reports on Form 8-K have been filed for the
quarter ended September 30, 1999.
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DETREX CORPORATION
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.
DETREX CORPORATION
Date 11/12/99 S. J. Quinlan
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S. J. Quinlan
Controller and Chief Accounting Officer
Date 11/12/99 G. J. Israel
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G. J. Israel
Vice President - Finance and Chief Financial
Officer
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Exhibit Index
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Exhibit No. Description
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27 Financial Data Schedule