1 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 February 28, 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 0-17051 Tuscarora Incorporated (Exact name of registrant as specified in the charter.) Pennsylvania 25-1119372 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 800 Fifth Avenue New Brighton, Pennsylvania 15066 (Address of principal executive offices) (Zip Code) 412-843-8200 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) 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 at least the past 90 days. Yes [ X ] No [ ] As of April 1, 1997, 9,465,585 shares of Common Stock, without par value, of the registrant were outstanding. 2 Tuscarora Incorporated INDEX Page Part I. Financial Information: Item 1. Financial Statements Condensed Consolidated Balance Sheets at February 28, 1997 and August 31, 1996 3 Condensed Consolidated Statements of Income - Three and six month periods ended February 28, 1997 and February 29, 1996 4 Condensed Consolidated Statements of Cash Flows - Six months ended February 28, 1997 and February 29, 1996 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Part II. Other Information: Item 1. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 12 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Tuscarora Incorporated CONDENSED CONSOLIDATED BALANCE SHEETS February 28, August 31, 1997 1996 ---- ---- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 507,448 $ 3,379,776 Trade accounts receivable, net of provision for losses 29,329,414 26,094,406 Inventories 19,551,098 15,666,880 Prepaid expenses and other current assets 3,273,793 1,771,694 ------------ ------------ 52,661,753 46,912,756 Property, Plant and Equipment, net 83,874,250 78,709,646 Other Assets Goodwill 6,025,762 3,406,779 Other non-current assets 2,539,318 2,140,261 ------------ ------------ Total Assets $145,101,083 $131,169,442 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 5,315,974 $ 5,346,335 Accounts payable 14,577,459 16,416,387 Accrued income taxes 34,442 153,930 Accrued payroll and related taxes 724,731 595,282 Other current liabilities 2,537,667 1,176,918 ------------ ------------ 23,190,273 23,688,852 Long-Term Debt - less current maturities 47,237,409 39,249,136 Deferred Income Taxes 2,620,234 2,069,988 Other Long-Term Liabilities 2,067,303 1,334,577 ------------ ------------ Total Liabilities 75,115,219 66,342,553 Shareholders' Equity Preferred Stock - par value $.01 per share; authorized shares, 1,000,000; - - none issued Common Stock - without par value; authorized shares, 20,000,000; issued shares, 9,458,947 at February 28, 1997 and 9,426,923 at August 31, 1996 9,458,947 9,426,923 Capital surplus 846,757 740,818 Retained earnings 59,708,850 54,825,048 Foreign currency translation adjustment 47,020 (38,690) ------------ ------------ 70,061,574 64,954,099 Less cost of reacquired shares of Common Stock; 4,620 shares at February 28, 1997 and 12,351 at August 31, 1996 75,710 127,210 ------------ ------------ Total Shareholders' Equity 69,985,864 64,826,889 ------------ ------------ Total Liabilities and Shareholders' Equity $145,101,083 $131,169,442 ============ ============ Note: The consolidated balance sheet at August 31, 1996 has been taken from the audited financial statements and condensed. Share numbers and the Common Stock and Capital Surplus accounts as of August 31, 1996 have been adjusted to reflect the 50% share distribution declared on December 18, 1996 payable on January 13, 1997 to holders of record on December 27, 1996. See notes to condensed consolidated financial statements. 3 4 Tuscarora Incorporated CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended February 28, February 29, February 28, February 29, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Net Sales $ 48,976,541 $ 43,188,022 $102,417,245 $ 90,483,738 Cost of Sales 37,454,546 33,274,525 77,189,649 68,613,281 ------------ ------------ ------------ ------------ Gross profit 11,521,995 9,913,497 25,227,596 21,870,457 Selling and Administrative Expenses 7,061,198 5,985,773 13,923,466 12,100,041 Interest Expense 885,317 685,899 1,722,679 1,393,966 Other (Income) Expense 147,238 (23,294) 105,728 (32,115) ------------ ------------ ------------ ------------ 8,093,753 6,648,378 15,751,873 13,461,892 ------------ ------------ ------------ ------------ Income before income taxes 3,428,242 3,265,119 9,475,723 8,408,565 Provision for Income Taxes 1,354,556 1,278,424 3,710,363 3,267,425 ------------ ------------ ------------ ------------ Net income $ 2,073,686 $ 1,986,695 $ 5,765,360 $ 5,141,140 ============ ============ ============ ============ Net income per share $.22 $.21 $.61 $.55 ==== ==== ==== ==== Weighted average number of shares of Common Stock outstanding 9,449,003 9,362,306 9,436,502 9,317,366 ========= ========= ========= ========= The per share and share numbers for the three and six month periods ended February 29, 1996 have been adjusted to reflect the 50% share distribution declared on December 18, 1996 payable on January 13, 1997 to holders of record on December 27, 1996. See notes to condensed consolidated financial statements. 4 5 Tuscarora Incorporated CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended February 28, February 29, 1997 1996 ------------ ------------ Operating Activities Net Income $ 5,765,360 $ 5,141,140 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 7,445,766 5,817,025 Amortization 387,881 292,119 Provision for losses on receivables 322,352 238,132 Increase (decrease) in deferred income taxes 260,992 ( 178,202) (Gain) loss on sale of property, plant and equipment, net 177,303 ( 4,044) Stock compensation expense 6,602 5,855 Supplemental retirement plan 58,777 - Changes in operating assets and liabilities, net of effects of business acquisitions: Decrease (increase): Trade accounts receivable ( 484,041) ( 329,594) Inventories ( 2,943,308) 773,364 Prepaid expenses and other current assets ( 1,151,524) (1,389,016) Other non-current assets - ( 111,021) Increase (decrease): Accounts payable ( 2,875,334) (2,116,452) Accrued income taxes ( 259,538) 75,316 Accrued payroll and related taxes 62,324 4,115 Other current liabilities ( 1,616,916) ( 566,312) Other long-term liabilities - ( 49,139) ------------ ------------ Net cash provided by operating activities 5,156,696 7,603,286 ------------ ------------ Investing Activities Purchase of property, plant and equipment (10,519,944) (9,714,540) Business acquisitions, net of cash acquired ( 4,807,343) 129,066 Proceeds from sale of property, plant and equipment 793,666 12,080 ------------ ------------ Net cash (used for) investing activities (14,533,621) (9,573,394) ------------ ------------ Financing Activities Proceeds from long-term debt 10,700,000 3,500,000 Payments on long-term debt ( 3,412,928) (2,589,890) Dividends paid ( 881,558) ( 811,254) Proceeds from sale of Common Stock 182,861 215,560 ------------ ------------ Net cash provided by financing activities 6,588,375 314,416 ------------ ------------ Effects of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents ( 83,778) ( 2,126) ------------ ------------ Net decrease in cash and cash equivalents ( 2,872,328) (1,657,818) Cash and Cash Equivalents at Beginning of Period 3,379,776 2,659,767 ------------ ------------ Cash and Cash Equivalents at End of Period $ 507,448 $ 1,001,949 ============ ============ See notes to condensed consolidated financial statements. 5 6 Tuscarora Incorporated NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Condensed Consolidated Financial Statements The condensed consolidated balance sheet at February 28, 1997 and the consolidated statements of income and consolidated statements of cash flows for the periods ended February 28, 1997 and February 29, 1996 have been prepared by the Company, without audit. In the opinion of Management, all adjustments necessary to present fairly the financial position, results of operations and changes in cash flows at February 28, 1997 and for the periods presented have been made. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1996 Annual Report to Shareholders and incorporated by reference in the Company's annual report on Form 10-K for the fiscal year ended August 31, 1996. The results of operations for the period ended February 28, 1997 are not necessarily indicative of the operating results to be expected for the full year. 2. Inventories Inventories are summarized as follows: February 28, August 31, 1997 1996 ---- ---- Finished goods $ 11,311,117 $ 9,739,590 Work in process 352,483 215,475 Raw materials 6,028,880 4,233,990 Supplies 1,858,618 1,477,825 ------------ ------------ $ 19,551,098 $ 15,666,880 ============ ============ 6 7 3. Acquisitions In September 1996, the Company acquired the custom thermoforming business of FormPac Corporation in Sandusky, Ohio; and in October 1996, the Company acquired all the outstanding capital stock of EPS (Moulders) Ltd., a custom molding business in Livingston, Scotland. The aggregate purchase price for these acquisitions was approximately $6.7 million and includes cash consideration of $4.9 million, notes and other obligations payable valued at approximately $788,000, and an accrual for estimated payments based on the sales of EPS (Moulders) Ltd. during the twelve months following the acquisition and on the operating performance of FormPac during the three years following its acquisition. The excess of the purchase price of $6.7 million over the fair market value of the net assets acquired in these acquisitions resulted in approximately $2.5 million being recognized as goodwill and amortized over 15 years. The Company is continuing the businesses acquired at the same locations under leases assumed or entered into in connection with the acquisitions. The operating results of the acquisitions are included in the Company's consolidated results of operations from the date of acquisition. The combined operating results, including the results from the acquired businesses had they been included at the beginning of the fiscal year would not be materially different from the results of operations as reported. 4. 50% Share Distribution On December 18, 1996, the Company's Board of Directors declared a 50% share distribution on the Company's Common Stock payable on January 13, 1997 to shareholders of record on December 27, 1996. In connection with the distribution, $1.00 has been transferred from the Company's Capital Surplus account to the Company's Common Stock account for each share issued. All references in the accompanying financial statements to the number of shares and per share amounts for the three and six month periods ended February 29, 1996 have been restated to reflect the distribution. 5. Claims and Contingencies A lawsuit seeking compensatory and punitive damages as a result of the alleged wrongful death of an employee was filed against the Company in December 1996 (see Item 1 of Part II of this current report). Two lawsuits are pending against the Company involving claims of sexual discrimination and harassment in which compensatory and punitive damages are sought. The Company is vigorously contesting these lawsuits and believes that, consistent with a policy in place for many years, it promptly, reasonably and effectively responded to all alleged incidents. Other employment-related claims are pending before Federal and state agencies. The Company is involved in legal and administrative proceedings, including one with respect to a Superfund site, which may result in the Company becoming liable for a portion of certain environmental cleanup costs. With respect to these matters, the Company believes that its share of the costs should not be significant. In the opinion of management, the disposition of the legal and administrative proceedings should not have a material adverse effect on the Company's financial position or results of operations. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - SECOND QUARTER FISCAL 1997 COMPARED TO SECOND QUARTER FISCAL 1996 Net sales for the quarter ended February 28, 1997 were $49.0 million, an increase of $5.8 million, or 13.4%, over the same quarter of fiscal 1996. Approximately 61.1% of the increase in net sales was due to the acquisitions of FormPac Corporation in Sandusky, Ohio in September 1996 and EPS (Moulders) Ltd. in Livingston, Scotland in October 1996. The balance of the increase was due to the Company's core molding operations. The sales increase was achieved despite lower sales at the Company's integrated materials facilities and price reductions in January 1997 resulting from lower raw material costs. Gross profit for the quarter ended February 28, 1997 was $11.5 million, a 16.2% increase from $9.9 million in the second quarter of fiscal 1996. The gross profit margin increased to 23.5% from 23.0% due to lower raw material costs and to improvement in the profit margin at the integrated materials facilities. The gross margin increased despite below-average profit margins at the facilities acquired in September and October 1996. Selling and administrative expenses increased $1.1 million or 18.0% for the quarter ended February 28, 1997 and increased as a percentage of net sales to 14.4% from 13.9% in the same period of fiscal 1996. The dollar increase is due primarily to increased employee costs added as a result of the acquisitions in September and October 1996. Interest expense for the quarter ended February 28, 1997 was $885,000 compared to $686,000 in the same period of fiscal 1996. The increase of $199,000, or 29.1%, is due to the increase in long-term debt primarily as a result of the acquisitions in September and October 1996. Income before income taxes for the quarter ended February 28, 1997 increased to $3.4 million from $3.3 million in the same period of fiscal 1996, an increase of $100,000 or 5.0%. The provision for income taxes for the quarter ended February 28, 1997 increased primarily due to the increased income before income taxes. Net income for the quarter ended February 28, 1997 was $2.1 million, an increase of 4.4% from the $2.0 million earned in the same quarter of fiscal 1996. The increase was due primarily to the increases in net sales and gross profit. Net sales and net income were Company records for a second fiscal quarter. 8 9 RESULTS OF OPERATIONS - SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO SIX MONTHS ENDED FEBRUARY 29, 1996 Net sales for the six months ended February 28, 1997 were $102.4 million, an increase of $11.9 million, or 13.2%, over the same six-month period of fiscal 1996. Approximately 63.3% of the increase in net sales was due to the acquisitions of Alpine Packaging Corporation in Colorado Springs, Colorado in December 1995 and of FormPac Corporation and EPS (Moulders) Ltd. in September and October 1996, respectively. The balance of the increase was due to the Company's core molding operations. The overall sales increase was achieved despite lower sales at the Company's integrated materials facilities and reductions in some selling prices. Gross profit for the six months ended February 28, 1997 was $25.2 million, a 15.4% increase from $21.9 million in the first six months of fiscal 1996. The gross profit margin increased to 24.6% from 24.2% due to lower raw material costs throughout the period and higher profit margins at the integrated materials facilities. The gross profit margin increased despite below average gross margins at the facilities acquired in September and October 1996. Selling and administrative expenses for the current six-month period were $13.9 million, an 15.1% increase over $12.1 million in the previous period. Selling and administrative expenses increased as a percentage of net sales to 13.6% from 13.4% in the same period of fiscal 1996. The dollar increase is due primarily to increased employee costs added as a result of the acquisitions in December 1995 and September and October 1996. Interest expense for the six months ended February 28, 1997 increased to $1.7 million from $1.4 million in the same period of fiscal 1996. The increase of $329,000, or 23.6%, is due to the increase in long-term debt primarily as a result of the acquisitions in September and October 1996. Income before income taxes for the six months ended February 28, 1997 increased to $9.5 million from $8.4 million in the same period of fiscal 1996, an increase of $1.1 million or 12.7%. The provision for income taxes for the quarter ended February 28, 1997 increased primarily due to the increased income before income taxes. Net income for the six months ended February 28, 1997 was $5.8 million, an increase of 12.1% from the $5.1 million earned in the same period of fiscal 1996. The increase was due primarily to the increases in net sales and gross profit. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the six months ended February 28, 1997 amounted to $5.2 million compared to $7.6 million for the same period in fiscal 1996. Depreciation and amortization for the same six-month periods amounted to $7.8 million and $6.1 million, respectively. Because a substantial portion of the company's operating expenses are attributable to depreciation and amortization, the Company believes that its liquidity would not be adversely affected should a period of reduced earnings occur. 9 10 During the six months ended February 28, 1997, the Company's inventories and accounts receivable decreased as a result of the increased sales level and as a result of the acquisitions in September and October 1996. These increases and decreases in accounts payable reduced the net cash provided by operating activities. Capital expenditures for property, plant and equipment during the six months ended February 28, 1997 amounted to $10.5 million, including approximately $907,000 for environmental control equipment. The largest amount of the capital expenditures was for molding presses and related process equipment. In September 1996, the Company acquired the custom thermoforming business of FormPac Corporation in Sandusky, Ohio and in October 1996 the Company acquired the custom molding business of EPS (Moulders) Ltd. in Livingston Scotland (see Note 3 to the Condensed Consolidated Financial Statements). The amount paid at the closings of these transactions was borrowed from the Company's principal bank (see the following paragraph). The Company will continue to look for acquisitions which will mesh well with the Company's business. Total long-term debt of the Company amounted to $47.2 million at February 28, 1997, of which $44.0 million was borrowed under a credit agreement with the Company's principal bank, including $13.9 million out of an available $40.0 million under a revolving credit agreement. During the six months ended February 28, 1997, $10.7 million was borrowed under the revolving credit agreement primarily to fund the acquisitions referred to above. Total long-term debt amounted to $39.2 million at August 31, 1996. On December 18, 1996, the Company declared its regular semiannual cash dividend of $.14 per share payable on January 6, 1997 to shareholders of record on December 27, 1997. The Company also declared a 50% stock distribution payable to shareholders of record on December 27, 1996 payable on January 13, 1997. A cash dividend of $.13 per share was paid in January 1996. Cash provided by operating activities as supplemented by the amount available under the bank credit agreement should be sufficient to enable the Company to continue to fund its operating needs, capital expenditures and dividend payments. INFLATION The impact of inflation on the Company's financial position and results of operations has not been significant during the periods discussed. 10 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings. On December 23, 1996, a Complaint for Wrongful Death was filed by John C. Bartram, Administrator of the Estate of Dwayne Scott Mount, Deceased (the "Decedent"), against the Company and Toyo Machine and Metal Co., Ltd. ("Toyo") in the Court of Common Pleas of Marion County, Ohio. On May 7, 1996, the Decedent was killed while working on a molding machine manufactured by defendant Toyo, at the Company's custom molding plant in Marion, Ohio. Count I of the Complaint claims that the Decedent was wrongfully killed as a result of certain alleged intentional conduct of the Company and seeks both compensatory and punitive damages from the Company of not less than $5,000,000. Count II of the Complaint seeks damages from defendant Toyo for defective and/or negligent design of the machine. The Company has filed an Answer to the Complaint denying the allegations against the Company and asserting various defenses including that the plaintiff's claim is barred by recovery from the Ohio Bureau of Workers' Compensation. The Company will vigorously defend this litigation. Item 4. Submission of Matters to a Vote of Security Holders. The Company's Annual Meeting of Shareholders was held on December 18, 1996. The holders of 5,280,433 shares of the Company's Common Stock (approximately 84.0% of the shares entitled to be voted) were present at the meeting in person or by proxy. The matters voted upon at the meeting were (i) the election of three persons to serve as directors for a three-year term expiring at the annual meeting of shareholders in 1999, and (ii) the ratification of the appointment of Ernst & Young, LLP as the independent public accountants to audit the financial statements of the Company and its subsidiaries for the 1997 fiscal year. Thomas S. Blair, Jeffery L. Leininger and Thomas P. Woolaway, the nominees of the Company's Board of Directors, were elected to serve as directors until 1999. There were no other nominees. Shares were voted as follows: Withhold Name For Vote For ---- --- -------- Thomas S. Blair 5,248,738 31,695 Jeffery L. Leininger 5,243,163 37,270 Thomas P. Woolaway 5,249,738 30,695 The appointment of Ernst & Young, LLP as the independent public accountants for the 1997 fiscal year was ratified: affirmative votes, 5,257,688 shares; negative votes, 3,540 shares; and abstained, 19,225 shares. -11- 12 Item. 6. Exhibits and Reports on Form 8-K. (a) Exhibits The exhibits listed below are filed as a part of this quarterly report. Exhibit No. Document ----------- -------- 11 Computation of Net Income Per Share. 27 Financial Data Schedule. (b) Reports on Form 8-K No events which resulted in the filing of a current report on Form 8-K occurred during the fiscal quarter ended February 28, 1997. 12 13 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. Tuscarora Incorporated (Registrant) Date: April 14, 1997 By /s/ JOHN P. O'LEARY, JR. ------------------------- John P. O'Leary, Jr., President and Chief Executive Officer Date: April 14, 1997 By /s/ BRIAN C. MULLINS --------------------- Brian C. Mullins, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) 13 14 Tuscarora Incorporated FORM 10-Q FOR QUARTER ENDED FEBRUARY 28, 1997 EXHIBIT LIST The following exhibits are filed as a part of this quarterly report on Form 10-Q. Exhibit No. Document ------- -------- 11 Computation of Net Income Per Share. 27 Financial Data Schedule.