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 May 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 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 July 1, 1997, 9,468,117 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 May 31, 1997 and August 31, 1996 3 Condensed Consolidated Statements of Income - Three and nine month periods ended May 31, 1997 and May 31, 1996 4 Condensed Consolidated Statements of Cash Flows - Nine Months ended May 31, 1997 and May 31, 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 6. Exhibits and Reports on Form 8-K. 11 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Tuscarora Incorporated CONDENSED CONSOLIDATED BALANCE SHEETS May 31, August 31, 1997 1996 ----------- ---------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 1,411,395 $ 3,379,776 Trade accounts receivable, net of provision for losses 28,891,709 26,094,406 Inventories 19,352,632 15,666,880 Prepaid expenses and other current assets 2,840,109 1,771,694 ------------ ------------ 52,495,845 46,912,756 Property, Plant and Equipment, net 89,207,366 78,709,646 Other Assets Goodwill 6,056,930 3,406,779 Other non-current assets 3,675,054 2,140,261 ------------ ------------ Total Assets $151,435,195 $131,169,442 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 5,436,226 $ 5,346,335 Accounts payable 14,093,384 16,416,387 Accrued income taxes - 153,930 Accrued payroll and related taxes 526,201 595,282 Other current liabilities 2,764,709 1,176,918 ------------ ------------ 22,820,520 23,688,852 Long-Term Debt - less current maturities 52,150,579 39,249,136 Deferred Income Taxes 2,325,005 2,069,988 Other Long-Term Liabilities 2,106,039 1,334,577 ------------ ------------ Total Liabilities 79,402,143 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, 9,471,887 at May 31, 1997 and 9,426,923 at August 31, 1996 9,471,887 9,426,923 Capital surplus 982,307 740,818 Retained earnings 61,594,228 54,825,048 Foreign currency translation adjustment 60,340 (38,690) ------------ ------------ 72,108,762 64,954,099 Less cost of reacquired shares of Common Stock; 4,620 shares at May 31, 1997 and 12,351 at August 31, 1996 75,710 127,210 ------------ ------------ Total Shareholders' Equity 72,033,052 64,826,889 ------------ ------------ Total Liabilities and Shareholders' Equity $151,435,195 $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 May 31, Nine Months Ended May 31, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Net Sales $ 52,592,726 $ 45,113,282 $155,009,971 $135,597,020 Cost of Sales 41,194,724 34,563,391 118,384,373 103,176,672 ------------ ------------ ------------ ------------ Gross profit 11,398,002 10,549,891 36,625,598 32,420,348 Selling and Administrative Expenses 7,276,063 5,903,900 21,199,529 18,003,941 Interest Expense 943,397 693,752 2,666,076 2,087,718 Other Expense 57,592 78,323 163,320 46,208 ------------ ------------ ------------ ------------ 8,277,052 6,675,975 24,028,925 20,137,867 ------------ ------------ ------------ ------------ Income before income taxes 3,120,950 3,873,916 12,596,673 12,282,481 Provision for Income Taxes 1,235,572 1,502,649 4,945,935 4,770,074 ------------ ------------ ------------ ------------ Net income $ 1,885,378 $ 2,371,267 $ 7,650,738 $ 7,512,407 ============ ============ ============ ============ Net income per share $.20 $.25 $.81 $.80 ==== ==== ==== ==== Weighted average number of shares of Common Stock outstanding 9,464,026 9,399,204 9,445,777 9,344,844 ========= ========= ========= ========= The per share and share numbers for the three and nine month periods ended May 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. 4 5 Tuscarora Incorporated CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended May 31, 1997 1996 ------------ -------- Operating Activities Net Income $ 7,650,738 $ 7,512,407 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 11,214,791 9,062,681 Amortization 572,113 429,159 Provision for losses on receivables 477,302 360,000 Decrease in deferred income taxes (35,126) (145,402) Loss on sale of property, plant and equipment, net 63,448 96,387 Stock compensation expense 10,126 9,122 Supplemental retirement plan 99,699 - Changes in operating assets and liabilities, net of effects of business acquisitions: Decrease (increase): Trade accounts receivable 302,388 392,290 Inventories (1,993,181) 832,991 Prepaid expenses and other current assets (264,221) (1,463,571) Other non-current assets - (178,432) Increase (decrease): Accounts payable (3,564,557) (1,134,610) Accrued income taxes (742,686) (222,581) Accrued payroll and related taxes (136,469) (1,704) Other current liabilities (1,539,586) (1,509,428) Other long-term liabilities - (49,139) ------------ ------------ Net cash provided by operating activities 12,114,779 13,990,170 ------------ ------------ Investing Activities Purchase of property, plant and equipment (15,332,867) (17,135,608) Business acquisitions, net of cash acquired (10,121,789) 89,022 Proceeds from sale of property, plant and equipment 856,502 12,080 ------------ ------------ Net cash (used for) investing activities (24,598,154) (17,034,506) ------------ ------------ Financing Activities Proceeds from long-term debt 15,700,000 5,500,000 Payments on long-term debt (4,559,646) (3,758,638) Dividends paid (881,558) (811,254) Proceeds from sale of Common Stock 327,827 277,602 ------------ ------------ Net cash provided by financing activities 10,586,623 1,207,710 ------------ ------------ Effects of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents (71,629) (4,243) ------------ ------------ Net decrease in cash and cash equivalents (1,968,381) (1,840,869) Cash and Cash Equivalents at Beginning of Period 3,379,776 2,659,767 ------------ ------------ Cash and Cash Equivalents at End of Period $ 1,411,395 $ 818,898 ============ ============ 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 May 31, 1997 and the consolidated statements of income and consolidated statements of cash flows for the periods ended May 31, 1997 and May 31, 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 May 31, 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 May 31, 1997 are not necessarily indicative of the operating results to be expected for the full year. 2. Inventories Inventories are summarized as follows: May 31, August 31, 1997 1996 ------------ ------------ Finished goods $ 10,558,298 $ 9,739,590 Work in process 276,218 215,475 Raw materials 6,565,163 4,233,990 Supplies 1,952,953 1,477,825 ------------ ------------ $ 19,352,632 $ 15,666,880 ============ ============ 3. Acquisitions There have been four acquisitions during the 1997 fiscal year. On September 10, 1996, the Company acquired the custom thermoforming business of FormPac Corporation in Sandusky, Ohio; on October 4, 1996, the Company acquired all the outstanding capital stock of EPS (Moulders) Ltd., a custom molding business in Livingston, Scotland; on April 9, 1997, the Company acquired the custom thermoforming business of Thermoformers Plus in Chula Vista, California; and on May 30, 1997, the Company acquired the integrated materials business of Allgood Industries, Inc. in Hayward, California. 6 7 The aggregate purchase price for these acquisitions was $13.3 million, including $10,340,000 in cash, notes and other obligations valued at $2,105,000 and $875,000 of contingent consideration based on the sales or operating performance of the business acquired. The amount recorded as contingent consideration was based on reasonably attainable sales and a specified minimum payment amount. The purchase price exceeded the fair market value of the net assets acquired by $2.6 million which was recognized as goodwill and is being amortized over 15 years. All the acquisitions have been accounted for as purchases. 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 consolidated 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 was 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 nine month periods ended May 31, 1996 have been restated to reflect the distribution. 5. Claims and Contingencies A lawsuit seeking substantial compensatory and punitive damages as a result of the alleged wrongful death of an employee was filed against the Company in December 1996. In addition, several legal and administrative proceedings against the Company involving claims of employment discrimination are pending and 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. In the opinion of Management, the dispositon of the proceedings should not have a material adverse effect on the Company's financial position or results of operations. 6. Other Information In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 128, "Earnings Per Share" which requires adoption in the Company's fiscal quarter ended February 28, 1998. This Statement generally requires the presentation of basic and diluted earnings per share on the face of the Statements of Income. In the opinion of Management, the amount of basic earnings per share will not be materially different from the earnings per share currently reported on the Statements of Income nor will the amount of diluted earnings per share be materially different from the basic earnings per share. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THIRD QUARTER FISCAL 1997 COMPARED TO THIRD QUARTER FISCAL 1996 Net sales for the quarter ended May 31, 1997 were $52.6 million, an increase of $7.5 million, or 16.6%, over the same quarter of fiscal 1996. Approximately 52.3% of the increase in net sales was due to the acquisitions of FormPac Corporation in Sandusky, Ohio in September 1996, EPS (Moulders) Ltd. in Livingston, Scotland in October 1996 and Thermoformers Plus in Chula Vista, California in April 1997. The balance of the increase was due to higher sales at the Company's core molding operations. The sales increase was achieved despite slightly lower sales at the Company's integrated materials facilities than in the prior year, two large customers adjusting inventory levels and reducing their packaging requirements and price reductions in January 1997 resulting from lower raw material costs. Gross profit for the quarter ended May 31, 1997 was $11.4 million, an 8.0% increase from $10.5 million in the third quarter of fiscal 1996. The gross profit margin decreased to 21.7% from 23.4% due to well below objective gross profit margins at the facilities acquired in the first quarter of fiscal 1997 and at two of the Company's existing manufacturing facilities, the combined impact on sales of the two large customers adjusting inventory levels and reducing their packaging requirements and the price reductions. Selling and administrative expenses increased $1.4 million or 23.2% for the quarter ended May 31, 1997 and increased as a percentage of net sales to 13.8% from 13.1% in the same period of fiscal 1996. The dollar increase is due primarily to increased employee costs added as a result of the acquisitions during the fiscal year. Interest expense for the quarter ended May 31, 1997 was $943,000 compared to $694,000 in the same period of fiscal 1996. The increase of $250,000, or 36.0%, is due primarily to increases in long-term debt incurred in connection with the acquisitions in September and October 1996. Income before income taxes for the quarter ended May 31, 1997 decreased to $3.1 million from $3.9 million in the same period of fiscal 1996, a decrease of $753,000 or 19.4%. The effective tax rate increased to 39.6% compared to 38.8% in the same period of fiscal 1996 primarily as a result of the income tax effect of an operating loss of the UK operations during the 1997 fiscal year. Net income for the quarter ended May 31, 1997 was $1.9 million, a decrease of 20.5% from the $2.4 million earned in the same quarter of fiscal 1996. The decrease is due primarily to the decrease in gross profit margin. The Company expects that the net income for the fourth quarter of fiscal 1997 will be negatively impacted by continued low gross profit margins at certain manufacturing facilities, principally in the businesses acquired during the current fiscal year, and continued reduced sales to one large customer as well as by selling and administrative expenses and interest expenses resulting from the acquisition on May 30, 1997 of the integrated materials business of Allgood Industries, Inc. in Hayward, California. 8 9 RESULTS OF OPERATIONS - NINE MONTHS ENDED MAY 31, 1997 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1996 Net sales for the nine months ended May 31, 1997 were $155.0 million, an increase of $19.4 million, or 14.3%, over the same nine month period of fiscal 1996. Approximately 60.5% 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 higher sales at the Company's core molding operations. The sales increase was achieved despite lower sales at the Company's integrated materials facilities than in the prior year, two large customers adjusting inventory levels and reducing their packaging requirements and reductions in some selling prices. Gross profit for the nine months ended May 31, 1997 was $36.6 million, a 13.0% increase from $32.4 million in the first nine months of fiscal 1996. The gross profit margin was positively affected during the nine months ended May 31, 1997 by lower raw material costs throughout the period and would have been higher than in the prior fiscal year but for the factors discussed in the results of operations for the third fiscal quarter. After taking these into account, the gross profit margin for the nine months ended May 31, 1997, decreased to 23.6% from 23.9% in the prior fiscal year. Selling and administrative expenses for the current nine month period were $21.2 million, a 17.7% increase over $18.0 million in the previous period. Selling and administrative expenses increased as a percentage of net sales to 13.7% from 13.3% 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 nine months ended May 31, 1997 amounted to $2.7 million compared to $2.1 million in the same period of fiscal 1996. The increase of $578,000, or 27.7%, is due primarily to increases in long-term debt incurred in connection with the acquisitions in September and October 1996. Income before income taxes for the nine months ended May 31, 1997 increased to $12.6 million from $12.3 million in the same period of fiscal 1996, an increase of $314,000 or 2.6%. The effective tax rate increased to 39.3% compared to 38.8% in the same period of fiscal 1996 primarily as a result of the income tax effect of the 1997 fiscal year operating loss of the UK operations. Net income for the nine months ended May 31, 1997 was $7.7 million, an increase of 1.8% from the $7.5 million earned in the same period of fiscal 1996. The increase was due primarily to the increase in net sales. For information with respect to the fourth quarter of fiscal 1997, see the last paragraph under the discussion of the results of operations for the third fiscal quarter. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended May 31, 1997 amounted to $12.1 million compared to $14.0 million for the same period in fiscal 1996. Depreciation and amortization for the same nine month periods amounted to $11.8 million and $9.5 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 nine months ended May 31, 1997, the Company's inventories and accounts receivable increased as a result of the increased sales level and the acquisitions during the fiscal year. The net cash provided by operating activities was less than in the prior fiscal year as a result of increases in inventories and accounts receivable and decreases in accounts payable. Capital expenditures for property, plant and equipment during the nine months ended May 31, 1997 amounted to $15.3 million, including approximately $1.6 million for environmental control equipment. The largest amount of the capital expenditures was for molding presses and related processing equipment. As stated above, the Company acquired the custom thermoforming business of FormPac Corporation in Sandusky, Ohio in September 1996, the custom molding business of EPS (Moulders) Ltd. in Livingston, Scotland in October 1996 and the custom thermoforming business of Thermoformers Plus in Chula Vista, California in April 1997. The Company also acquired the integrated materials business of Allgood Industries, Inc. in Hayward, California on May 30, 1997. An aggregate of $10.3 million in cash was paid in connection with these acquisitions, substantially all of which 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 $52.1 million at May 31, 1997, of which $47.8 million was borrowed under a credit agreement with the Company's principal bank, including $18.9 million out of an available $40.0 million under a revolving credit agreement. During the nine months ended May 31, 1997, $15.7 million was borrowed under the revolving credit agreement primarily to fund the acquisitions during the period. Total long-term debt amounted to $39.2 million at August 31, 1996. On December 18, 1996, the Company declared a regular semiannual cash dividend of $.093 per share (after adjustment for the 50% share distribution mentioned below) payable on January 6, 1997 to shareholders of record on December 27, 1996. On December 18, 1996, the Company also declared a 50% share distribution payable on January 13, 1997 to shareholders of record on December 27, 1996. On June 13, 1997, the Company declared a regular semiannual cash dividend of $.10 per share payable on July 3, 1997 to shareholders of record on June 23, 1997. Cash dividends of $.086 per share were paid in January and July 1996, as adjusted for the 50% stock distribution. 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 requirements, capital expenditures and cash dividends. 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. ------------------ Reference is made to the Company's current report on Form 10-Q for the fiscal quarter ended February 28, 1997 for a description of a wrongful death action filed against the Company in December 1996 in which substantial compensatory and punitive damages are sought as a result of the alleged wrongful death of an employee. See Note 5 of the Notes to the Condensed Consolidated Financial Statements included in Part I of this current report. 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 May 31, 1997. 11 12 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: July 15 , 1997 By /s/ John P. O'Leary, Jr. -------------------------- John P. O'Leary, Jr., President and Chief Executive Officer Date: July 15 , 1997 By /s/ Brian C. Mullins -------------------------- Brian C. Mullins, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) 12 13 Tuscarora Incorporated FORM 10-Q FOR QUARTER ENDED MAY 31, 1997 EXHIBIT INDEX 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.