UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 1-12854
MCWHORTER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3919940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 EAST COTTAGE PLACE
CARPENTERSVILLE, ILLINOIS 60110 847-428-2657
(Address of principal executive offices, (Registrant's telephone number
including zip code) including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
------------------- -----------------
Common Stock, $0.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
As of July 31, 1998, 10,352,810 shares of common stock were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim financial statements of McWhorter Technologies,
Inc. (the "Company" or "McWhorter") do not include all disclosures normally
provided in annual financial statements. These financial statements, which
should be read in conjunction with the financial statements contained in
McWhorter's Annual Report on Form 10-K for the fiscal year ended October 31,
1997, are unaudited but include all adjustments that McWhorter's management
considers necessary for a fair presentation. These adjustments consist of normal
recurring accruals. Interim results are not necessarily indicative of the
results expected for the year. All references to years are to fiscal years ended
October 31.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended Nine Months Ended
July 31, July 31,
-------------------------------- ------------------------------
1998 1997 1998 1997
(Note 1) (Note 1)
----------------- ----------- --------------- -------------
Net sales $125,770 $85,581 $339,504 $237,997
Costs and expenses:
Cost of sales (Note 2) 103,901 71,018 285,795 199,849
Research 2,777 2,131 8,172 6,255
Selling, general and administrative 7,523 4,139 22,024 12,096
Other (income) expenses, net (Note 3) 744 (94) 268 870
-------- ------- -------- --------
Income from operations 10,825 8,387 23,245 18,927
Interest expense, net 2,330 366 5,751 1,027
-------- ------- -------- --------
Income before income taxes 8,495 8,021 17,494 17,900
Income tax expense (Note 4) 3,643 3,189 5,073 6,678
-------- ------- -------- --------
Net income $ 4,852 $ 4,832 $ 12,421 $ 11,222
======== ======= ======== ========
Net income per share - basic (Note 6) $ .47 $ .47 $ 1.21 $ 1.09
======== ======= ======== ========
Net income per share - diluted (Note 6) $ .47 $ .47 $ 1.19 $ 1.08
======== ======= ======== ========
See Notes to Consolidated Financial Statements
2
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
(July 31, 1998 Unaudited)
July 31, October 31,
1998 1997
(Note 1)
---------------- ---------------
ASSETS
Current assets:
Cash $ 3,558 $ 3,929
Accounts receivable 86,155 67,762
Inventories (Note 5) 40,670 26,487
Other current assets 9,974 8,743
---------------- ---------------
140,357 106,921
Property, plant and equipment 193,947 148,609
Accumulated depreciation (55,250) (43,315)
---------------- ---------------
Net property, plant and equipment 138,697 105,294
Intangibles, net 72,474 36,153
Other assets 7,415 10,814
---------------- ---------------
$358,943 $259,182
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 25,501 $ 23,706
Trade accounts payable 53,196 43,265
Accrued liabilities 20,075 15,276
---------------- ---------------
98,772 82,247
Long-term debt, less current portion 128,724 57,152
Deferred income taxes 21,824 22,446
Accrued environmental liabilities 1,459 2,201
Other liabilities 5,482 3,468
Shareholders' equity:
Common stock (par value $.01 per share; authorized
30,000,000 shares; issued 10,965,547 shares at July
31, 1998 and October 31, 1997) 110 110
Additional paid-in capital 10,919 10,867
Retained earnings 105,401 92,980
Currency translation adjustments (2,193) (940)
Restricted stock awards (1,727) (1,633)
Treasury stock, at cost (612,737 shares at July 31,
1998 and 612,460 shares at October 31, 1997) (9,828) (9,716)
---------------- ---------------
102,682 91,668
---------------- ---------------
$358,943 $259,182
================ ===============
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended July 31,
-----------------------------------------
1998 1997
(Note 1)
----------------- ----------------
OPERATING ACTIVITIES
Net income $ 12,421 $11,222
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,079 7,236
Deferred income taxes (334) 609
Other, net (303) 203
Changes in working capital:
Accounts receivable (8,103) 1,675
Inventories (4,586) (3,318)
Trade accounts payable and accrued liabilities 4,905 (1,753)
Other current assets 255 (1,495)
----------------- ----------------
Net cash provided by operating activities 16,334 14,379
INVESTING ACTIVITIES
Acquisition spending, net of cash acquired (55,231)
Capital expenditures (17,680) (6,614)
Investment in and advances to joint ventures (2,449) (2,343)
Other, net (285)
----------------- ----------------
Net cash used by investing activities (75,645) (8,957)
FINANCING ACTIVITIES
Increase in debt, net 58,739 44,731
Purchase of treasury stock (2,683)
Proceeds from exercise of stock options 201 31
----------------- ----------------
Net cash provided by financing activities 58,940 42,079
(Decrease) increase in cash (371) 47,501
Cash at beginning of period 3,929 1,060
----------------- ----------------
Cash at end of period $ 3,558 $48,561
================= ================
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated results for the quarter and nine months ended July 31, 1998
included the full consolidation of Accurate Coatings and Dispersions, Inc.
(Accurate), the European joint-venture, and Syntech S.p.A. subsequent to
their being purchased by the Company. On April 1, 1998 substantially all of
the assets of Accurate were acquired for approximately $39.4 million in cash
and the assumption of $6.5 million of debt. The excess of purchase price over
the net book value of assets was approximately $35 million, the largest
component of which was allocated to goodwill. The buyout of the European
joint-venture partners occurred in separate transactions during November 1997
and January 1998 for a total of approximately $8.2 million, net of cash
acquired. Syntech S.p.A. and its affiliated entities and subsidiaries were
acquired on August 1, 1997.
2. Nine month 1998 results included a pretax charge of approximately $500,000
($300,000 after taxes, or 3 cents per share) related to the one-time write-
off of the excess of fair value over net book value associated with
inventories acquired as part of the purchase of Accurate.
3. Third quarter 1998 results included a pretax charge of $931,000 ($540,000
after taxes, or 5 cents per share) for costs related to the relocation of the
Minneapolis research facility to Carpentersville. Nine month 1997 results
included a pretax charge of $811,000 ($483,000 after taxes, or 5 cents per
share) for costs, primarily severance, related to the relocation of the
Minneapolis research facility to Carpentersville and the write-off of a tax
related receivable.
4. Nine month 1998 results included a favorable adjustment of $2,311,000 (22
cents per share) relating to the impact on deferred income taxes of changes
in the Italian income tax regulations. Nine month 1997 results included a
favorable adjustment of $591,000 (6 cents per share) that resulted from the
conclusion of an income tax audit for the period prior to the Company's spin-
off in 1994.
5. The major classes of inventories consist of the following:
July 31, October 31,
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
Manufactured products $26,671 $16,407
Raw materials, supplies and work-in-process 13,999 10,080
- --------------------------------------------------------------------------------
$40,670 $26,487
================================================================================
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6. The Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 128, "Earnings Per Share". Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is very similar to fully diluted earnings per share. As
required by the Statement, prior period amounts have been restated. The
difference between the previously reported amounts and the restated amounts
was not material.
Quarter Ended July 31, Nine Months Ended July 31,
------------------------------ -------------------------------
1998 1997 1998 1997
---------------------------------------------------------------
Net income for calculation of net income
per share - basic and diluted $4,852,000 $4,832,000 $12,421,000 $11,222,000
===============================================================
Weighted average common shares
outstanding 10,350,386 10,357,030 10,346,878 10,415,114
Less: Shares contingently returnable 105,647 101,847 104,102 98,855
---------------------------------------------------------------
Weighted average shares for calculation
of net income per share - basic 10,244,739 10,255,183 10,242,776 10,316,259
Effect of dilutive securities:
Dilutive effect of stock options 110,627 77,485 104,058 68,716
Other 70,782 12,201 63,512 12,201
---------------------------------------------------------------
Dilutive potential common shares 181,409 89,686 167,570 80,917
Weighted average shares for calculation
of net income per share - diluted 10,426,148 10,344,869 10,410,346 10,397,176
===============================================================
Net income per share - basic $.47 $.47 $1.21 $1.09
===============================================================
Net income per share - diluted $.47 $.47 $1.19 $1.08
===============================================================
7. Subsequent Events
On August 13, 1998, the Company announced plans to close its manufacturing
facility in Chicago Heights, Illinois and to write down its investment in the
McWhorter Thailand joint venture. Pretax charges related to these plans of
approximately $4,800,000 and approximately $2,500,000, respectively, will be
recorded in the fourth quarter of 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
- -------
The following discussion and analysis of results of operations and financial
condition of McWhorter should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K for the fiscal year ended October 31, 1997. Except for historical information
contained herein, certain matters set forth in this Form 10-Q are forward-
looking statements that involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements.
Results of Operations
- ---------------------
Net sales increased 47 percent in the third quarter of 1998 to $125,770,000
compared to $85,581,000 in the same period of 1997. For the nine months, net
sales were $339,504,000, a 43 percent increase versus net sales of $237,997,000
in the comparable period a year ago. The increase in net sales was entirely
from acquired businesses (see Note 1 of Notes to Consolidated Financial
Statements). Softness in the North American liquid coatings business, primarily
in July, was offset by the strong performance of the composite polymer, powder
resin, and colorant businesses.
The Company's gross profit margin for the third quarter of 1998 was 17.4 percent
compared to 17.0 percent in last year's third quarter. For the nine months, the
gross profit margin was 15.8 percent versus 16.0 percent for the comparable
period a year ago. Current quarter margins were favorably impacted by lower raw
material costs, improved product mix, and internal process improvements in the
U.S.
Operating expenses (research, selling, general and administrative) for the third
quarter of 1998 were 8.2 percent of net sales compared to 7.3 percent in the
prior year third quarter. For the nine months, operating expenses were 8.9
percent of sales compared to 7.7 percent for the same period a year ago. Higher
expenses compared to the prior year resulted primarily from the acquired
businesses.
Net interest expense increased $1,964,000 in the third quarter and $4,724,000
year-to-date compared to 1997. The increase is from debt borrowed to fund
acquisitions (see Note 1 of Notes to Consolidated Financial Statements).
The effective tax rate for the third quarter of 1998 was 42.0 percent versus
40.5 percent in the comparable period a year ago excluding the favorable
adjustments to 1998 and 1997 income tax expense discussed in Note 4 of Notes to
Consolidated Financial Statements. The increase is from the non-deductibility
of goodwill amortization for the Syntech S.p.A. acquisition.
Net income for the third quarter of 1998 was $5,392,000, or 52 cents per share
on a diluted basis, excluding an after-tax charge of $540,000 or 5 cents per
share, for costs related to the relocation of the Minneapolis research facility.
Third quarter 1997 net income was $4,832,000, or 47 cents
7
per share on a diluted basis. Excluding the nonrecurring items discussed below,
net income for the nine months was $10,950,000, or $1.05 per share on a diluted
basis, compared to net income of $11,114,000, or $1.07 per share on a diluted
basis, for the comparable period in 1997. The 1998 results included a net
benefit of 14 cents per share due to the favorable tax impact of a change in
Italian tax law, offset by charges for the Minneapolis research facility
relocation costs discussed above and for the one-time write-off of the excess of
fair value over net book value of inventory acquired as part of the acquisition
of Accurate. The 1997 results included a net benefit of 1 cent per share due to
the conclusion of an income tax audit offset by charges primarily related to the
relocation of the Company's Minneapolis research facility to Carpentersville.
Including these nonrecurring items, net income for 1998 was $12,421,000, or
$1.19 per share on a diluted basis, compared to net income for 1997 of
$11,222,000, or $1.08 per share on a diluted basis. Refer to Notes 2, 3, and 4
of Notes to Consolidated Financial Statements for a discussion on the impact of
certain nonrecurring items on 1998 and 1997 net income.
Financial Condition
- -------------------
In the first nine months of 1998 and 1997, cash generated by operations was
$16,334,000 and $14,379,000, respectively. The Company's current ratio was 1.4
at July 31, 1998 compared to 1.3 at October 31, 1997. Excluding the working
capital of the entities acquired in 1998, working capital increased
approximately $5.6 million primarily from the seasonality of the business.
Investing activities used cash in 1998 and 1997 of $75,645,000 and $8,957,000,
respectively. The increase was primarily because of the acquisitions in 1998
(see Note 1 of Notes to Consolidated Financial Statements). Capital expenditures
of approximately $17,680,000 in the first nine months of 1998 were primarily for
the construction of the new research and development facility, powder capacity
expansion, the implementation of a Enterprise Resource Planning package, and
productivity improvements. Capital expenditures of $6,6140,000 in the first nine
months of 1997 were primarily for productivity improvements. Capital spending
for the fiscal year 1998 is currently anticipated to be approximately
$25,000,000.
Financing activities provided cash of $58,940,000 in the first nine months of
1998 compared to cash provided of $42,079,000 in the comparable period a year
ago. Debt as a percentage of invested capital was 60.0 percent at July 31,
1998, up from 46.9 percent at October 31, 1997, and 43.7 percent a year ago.
Total debt increased to $154,225,000 at July 31, 1998 from $80,858,000 at
October 31, 1997. This increase was primarily attributed to the borrowings to
fund acquisitions (see Note 1 of Notes to Consolidated Financial Statements) and
the assumed debt of the acquired entities.
The Company has a $150 million unsecured revolving credit facility that
terminates on July 30, 2002. At July 31, 1998, $27.9 million was available
under this facility. The Company's European subsidiaries, primarily the Italian
subsidiary, have short-term lines of credit that are cancelable at any time of
$24 million of which $9.6 million is available for future use at July 31, 1998.
The credit facilities and internally generated funds are expected to be adequate
to finance McWhorter's capital expenditures and other operating requirements.
The Board of Directors of the Company has adopted a resolution authorizing the
repurchase by the Company of up to an aggregate of 500,000 shares of its common
stock. The resolution
8
expires May 1999.
With respect to environmental liabilities, management reviews each site, taking
into consideration the numerous factors that influence the costs that will
likely be incurred. Reserves are adjusted as additional information becomes
available to better estimate the total remediation costs at individual sites.
While uncertainties exist with respect to the amounts and timing of McWhorter's
ultimate environmental liabilities, management believes that such liabilities,
individually and in the aggregate, will not have a material adverse effect on
the Company's financial condition or results of operations.
Subsequent Events
- -----------------
On August 13, 1998, the Company announced plans to close its manufacturing
facility in Chicago Heights, Illinois and to write down its investment in the
McWhorter Thailand joint venture. Pretax charges related to these plans of
approximately $4,800,000 and approximately $2,500,000, respectively, will be
recorded in the fourth quarter of 1998. The closure of the Chicago Heights
facility is a result of an in-depth review of the Company's North American
production capabilities as a part of a continuing effort to improve efficiency.
Production from the Chicago Heights facility will be transferred to the
Company's facilities in Carpentersville, Illinois and Columbus, Georgia. This
transition is expected to be completed no later than June 30, 2000. When
completed, savings are projected at approximately $2,800,000 per year. The
Company's decision not to proceed further with the construction of the
manufacturing facility in Thailand was influenced by the poor economic prospects
for this joint venture and the level of additional investment that would have
been required to complete the facility.
Impact of Year 2000
- -------------------
The Company uses a combination of purchased and internally developed information
technology (IT) systems. The Company has completed an assessment of the impact
of the Year 2000 on these systems. The current purchased software is Year 2000
compliant and the majority of internally developed systems were developed using
a four digit year. The Company expects to complete its assessment of non-IT
systems compliance by October 1998. The Company is currently in the process of
testing and modifying software and hardware to ensure that all systems will
function properly with respect to dates in the Year 2000 and thereafter. In
addition, the Company is finalizing its contingency plans for software,
hardware, and non-IT systems in the event the modifications discussed above fail
to correct the Year 2000 issues. The contingency plans will be completed by the
first quarter of 1999.
The estimated costs related to testing, modifying, and replacing existing IT
systems for Year 2000 compliance are approximately $300,000 of which $50,000 has
been spent or committed to date. Approximately $75,000 of the projected costs
will be capital expenditures. Year 2000 compliance is expected to be achieved no
later than June 1, 1999, which is prior to any anticipated impact on the
Company's operations. The Company believes that, with modifications to existing
software and hardware, the Year 2000 issue will not have a material impact on
the operations of the Company. However, if such modifications are not made, or
are not completed on timely basis, the Year 2000 Issue could result in the
temporary inability to process orders, send invoices, or engage in similar
business activities, which would have a material impact on
9
the Company's operations.
The Company has begun formal communications with significant suppliers and
customers to determine the extent to which the Company's activities would be
impacted by those third parties' failure to remediate their own Year 2000
issues. There is no guarantee that the systems of other companies on which the
Company's operations rely will be corrected on a timely basis and therefore have
no adverse impact on the Company's operations.
This Year 2000 disclosure contains forward-looking statements under The Private
Securities Litigation Reform Act of 1995 and is subject to various risks and
uncertainties. The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1998, the Company settled a previously disclosed Corrective Action Order
issued by the California Department of Toxic Substances Control for $68,000.
(See Item 3 of the Company's Summary Annual Report on Form 10-K for the fiscal
year 1997). The Company is not party to any legal or administrative proceedings,
other than routine litigation incidental to the business or involving claims for
immaterial amounts.
ITEM 5. OTHER INFORMATION
Pursuant to recent amendments to the rules relating to proxy statements under
the Securities Exchange Act of 1934, as amended (the Exchange Act), shareholders
of the Company are hereby notified that any shareholder proposal not included in
the Company's proxy materials for its 1999 Annual Meeting of Shareholders in
accordance with Rule 14a-8 under the Exchange Act will be considered untimely
for the purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice
thereof is received by the Company after November 21, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the third quarter of 1998
27.2 Financial Data Schedule for the third quarter of 1997.
The Financial Data Schedule for the third quarter of 1997
is being included to reflect restatement of information
pursuant to the adoption of statement of Financial
Accounting Standard No. 128, "Earnings Per Share."
(b) No reports on Form 8-K were filed during the third quarter of
1998.
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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.
McWhorter Technologies, Inc.
/s/ Louise M. Tonozzi-Frederick
------------------------------------------
Louise M. Tonozzi-Frederick
Vice President and Chief Financial Officer
Date: August 31, 1998
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