1
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For Quarter Ended December 31, 1999 Commission File number 1-5341
ELCOR CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 75-1217920
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14643 DALLAS PARKWAY
SUITE 1000, WELLINGTON CENTRE, DALLAS, TEXAS 75240-8871
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 851-0500
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 close of business on February 1, 2000, Registrant had outstanding
19,601,671 shares of Common Stock, Par Value $1 per Share.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ELCOR CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited, $ in thousands)
December 31, June 30,
ASSETS 1999 1999
- ------ ------------ ----------
CURRENT ASSETS
Cash and cash equivalents $ 3,270 $ 4,186
Trade receivables, less allowance of $1,023 and $967 51,259 72,866
Inventories -
Finished goods 20,809 15,377
Work-in-process 565 180
Raw materials 13,653 10,213
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Total inventories 35,027 25,770
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Prepaid expenses, insurance receivable and other 4,918 8,352
Deferred income taxes 2,413 2,111
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Total current assets 96,887 113,285
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PROPERTY, PLANT AND EQUIPMENT, AT COST 244,034 212,704
Less - accumulated depreciation (82,223) (76,984)
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Property, plant and equipment, net 161,811 135,720
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OTHER ASSETS 3,234 3,177
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$ 261,932 $ 252,182
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 24,961 $ 18,067
Accrued liabilities 15,910 15,817
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Total current liabilities 40,871 33,884
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LONG-TERM DEBT 49,300 63,000
DEFERRED INCOME TAXES 18,749 18,047
SHAREHOLDERS' EQUITY -
Common stock, $1 par 19,988 19,988
Paid-in-capital 59,035 59,586
Retained earnings 80,156 64,632
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159,179 144,206
Less - Treasury stock (416,118 and 465,149 shares, at cost) (6,167) (6,955)
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Total shareholders' equity 153,012 137,251
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$ 261,932 $ 252,182
============ ==========
See accompanying notes to consolidated financial statements.
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ELCOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, $ in thousands
except per share data)
Three Months Ended Six Months Ended
---------------------- ----------------------
12-31-99 12-31-98 12-31-99 12-31-98
--------- --------- --------- ---------
SALES $ 81,736 $ 71,199 $ 177,525 $ 157,067
--------- --------- --------- ---------
COST AND EXPENSES
Cost of sales 60,674 53,311 130,416 116,374
Selling, general and administrative 9,838 9,812 19,350 20,084
--------- --------- --------- ---------
INCOME FROM OPERATIONS 11,224 8,076 27,759 20,609
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Gain from involuntary conversion 889 -- 889 --
Interest expense, net (104) (445) (521) (1,004)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 12,009 7,631 28,127 19,605
Provision for income taxes 4,538 2,953 10,647 7,401
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 7,471 4,678 17,480 12,204
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- -- (4,340)
--------- --------- --------- ---------
NET INCOME $ 7,471 $ 4,678 $ 17,480 $ 7,864
========= ========= ========= =========
INCOME PER COMMON SHARE-BASIC:
Before cumulative effect of
change in accounting principle $ .38 $ .24 $ .89 $ .62
Cumulative effect of change
in accounting principle -- -- -- (.22)
--------- --------- --------- ---------
NET INCOME PER SHARE-BASIC $ .38 $ .24 $ .89 $ .40
========= ========= ========= =========
INCOME PER COMMON SHARE-DILUTED:
Before cumulative effect of change
in accounting principle $ .37 $ .24 $ .87 $ .61
Cumulative effect of change in
accounting principle -- -- -- (.22)
--------- --------- --------- ---------
NET INCOME PER SHARE-DILUTED $ .37 $ .24 $ .87 $ .39
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE $ .05 $ .0467 $ .10 $ .0933
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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ELCOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in thousands)
Six Months Ended
December 31,
--------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,480 $ 7,864
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,254 4,532
Deferred income taxes 401 804
Gain from involuntary conversion (889) --
Cumulative effect of change in accounting principle -- 4,340
Changes in assets and liabilities:
Trade receivables 21,607 8,366
Inventories (9,257) 2,302
Prepaid expenses, insurance receivable and other 2,672 331
Accounts payable and accrued liabilities 6,987 (16)
-------- --------
Net cash provided by operating activities 44,255 28,523
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (31,330) (12,062)
Insurance proceeds from involuntary conversion 1,651 2,000
Other (72) 999
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Net cash used for investing activities (29,751) (9,063)
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CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings, net (13,700) (14,500)
Dividends on common stock (1,956) (1,818)
Treasury stock transactions and other, net 236 (6,026)
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Net cash used for financing activities (15,420) (22,344)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (916) (2,884)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,186 5,240
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,270 $ 2,356
======== ========
See accompanying notes to consolidated financial statements.
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ELCOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The attached condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. As a result, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The company believes that the disclosures
included herein are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
related notes included in the company's 1999 Annual Report on Form
10-K. The unaudited financial information contained herein has been
prepared in conformity with generally accepted accounting principles on
a consistent basis and does reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
of operations for the three-month and six-month periods ending December
31, 1999 and 1998, but are, however, subject to year-end audit by the
company's independent auditors. Because of seasonal, weather-related
conditions in some of the Company's market areas, sales can vary at
times, and results of any one quarter or other interim reporting period
should not necessarily be considered as indicative of results for a
full fiscal year.
2. In the first quarter of fiscal 1999, the company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," issued
by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants. This Statement of Position
requires, among other things, companies to expense on a current basis
previously capitalized start-up costs. Adoption of this Statement of
Position resulted in a $4,340,000 charge, net of tax, and is reported
as a cumulative effect of change in accounting principle on the
Consolidated Statement of Operations for fiscal 1999.
3. On September 15, 1998, the company experienced an explosion at its
nonwoven fiberglass roofing mat plant in Ennis, Texas. The explosion
significantly damaged a drying oven and caused less extensive damage to
the remainder of the mat manufacturing line. There was no damage to a
separate mat line that runs in parallel to the damaged line, nor was
there any damage to the company's Ennis, Texas shingle manufacturing
plant. There were no injuries from the explosion. The damaged line was
restored to partial operation in December 1998. By March 1999, the
damaged section had been replaced. In June 1999, the line was operating
at line speeds equivalent to line speeds at the time of the explosion.
The company has submitted claims totaling $17,492,000 for property
damage and business interruption. As of December 31, 1999, the company
had received insurance advances of $12,862,000. Operating income from
some of the lost shingle sales portion of the business interruption
claim had not been recorded to income at December 31, 1999. Assets with
net book value of $3,990,000 were destroyed in the explosion and were
insured for replacement value. As of December 31, 1999, the company had
received replacement value payments on the property claim in excess of
the net book value of destroyed assets in the amount of $889,000. This
amount was recorded as a gain from involuntary conversion in December
1999.
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In February 2000, the company reached a settlement with its insurance
company, which resulted in the receipt of an additional $4,155,000 in
claimed losses. Recognition into income of about $650,000 of gain from
involuntary conversion and about $1,700,000 of income from the business
interruption claim will be recorded in the March 2000 quarter.
4. In the fourth quarter of fiscal 1999, management approved a
consolidation plan for Chromium Corporation's reciprocating engine
components business. All operations for this business activity at the
Lufkin, Texas facility are being transferred to the Cleveland, Ohio
plant. Costs to relocate equipment and other consolidation items with
an estimated cost of $1,145,000 are expected to be incurred and
recorded to expense in fiscal 2000. The majority of the consolidation
costs were incurred in the December 1999 quarter. Subsequent to the
completion of this business consolidation, the entire Lufkin, Texas
facility will be used for Cybershield's products for digital wireless
cellular phones and other electronic equipment.
5. In June 1999, the Board of Directors declared a three-for-two stock
split payable in the form of a stock dividend, which was distributed on
August 11, 1999 to shareholders of record on July 15, 1999. Appropriate
references to number of shares and to per share information in the
consolidated financial statements as of December 31, 1998 have been
adjusted to reflect the stock split on a retroactive basis.
6. Effective January 5, 2000, the company increased its unsecured
revolving credit facility from $100,000,000 to $125,000,000 and
extended its term to December 15, 2004. There were no significant
changes to the financial covenants or to the interest rate the company
pays for either LIBOR based borrowings or prime rate based borrowings
or to the commitment fee paid for the unused portion of the line.
7. In accordance with the requirements of FASB SFAS No. 131, the company
is segregated into two segments: Roofing Products and Industrial
Products. The Roofing Products Group consists of the various operating
subsidiaries of Elk Corporation of Dallas (collectively Elk). These
companies manufacture and sell premium laminated fiberglass asphalt
residential and accessory roofing products, together with nonwoven mats
used in manufacturing asphalt roofing products and various industrial
applications.
The Industrial Products Group is comprised of three businesses: (1)
products used in digital wireless cellular phones and other electronic
equipment; (2) remanufactured large diesel reciprocating engine
components used in the railroad and marine transportation industries;
and (3) technology licensing and consulting services for the natural
gas processing and sulfer recovery industries.
Historically, the first two businesses in the Industrial Products Group
were operated as separate divisions of Chromium Corporation. Effective
July 1, 1999, Chromium's operations were segregated into separate
companies. The reciprocating engine components business will continue
to do business as Chromium Corporation (Chromium) and the conductive
coatings and related products business will be operated as subsidiaries
of Cybershield, Inc. (Cybershield). The technology licensing and
consulting services business will continue to be conducted as Ortloff
Engineers, LTD (OEL).
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Financial information by company segment is summarized as follows (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
SALES
Roofing products $ 68,830 $ 62,366 $ 151,769 $ 139,280
Industrial products 12,861 8,798 25,667 17,737
Corporate and eliminations 45 35 89 50
--------- --------- --------- ---------
$ 81,736 $ 71,199 $ 177,525 $ 157,067
========= ========= ========= =========
OPERATING PROFIT
Roofing products $ 11,318 $ 9,445 $ 27,595 $ 22,145
Industrial products 1,407 1,089 2,936 2,631
Corporate and other (1,501) (2,458) (2,772) (4,167)
--------- --------- --------- ---------
11,224 8,076 27,759 20,609
Gain from involuntary conversion 889 -- 889 --
Interest expense, net (104) (445) (521) (1,004)
--------- --------- --------- ---------
Income before income taxes $ 12,009 $ 7,631 $ 28,127 $ 19,605
========= ========= ========= =========
IDENTIFIABLE ASSETS
Roofing products $ 212,863 $ 169,820 $ 212,863 $ 169,820
Industrial products 31,620 18,054 31,620 18,054
Corporate 17,449 13,030 17,449 13,030
--------- --------- --------- ---------
$ 261,932 $ 200,904 $ 261,932 $ 200,904
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Roofing products $ 2,110 $ 2,016 $ 4,211 $ 3,955
Industrial products 499 242 967 488
Corporate 38 44 76 89
--------- --------- --------- ---------
$ 2,647 $ 2,302 $ 5,254 $ 4,532
========= ========= ========= =========
CAPITAL EXPENDITURES
Roofing products $ 16,130 $ 4,521 $ 25,372 $ 6,724
Industrial products 1,456 1,212 3,379 2,648
Corporate 1,134 1,292 2,579 2,690
--------- --------- --------- ---------
$ 18,720 $ 7,025 $ 31,330 $ 12,062
========= ========= ========= =========
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8. Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share includes
adjustments for the number of shares subject to outstanding stock
options. The following table sets forth the computation of basic and
diluted earnings per share (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 7,471 $ 4,678 $ 17,480 $ 7,864
======== ======== ======== ========
Denominator for basic earnings
per share - weighted average
shares outstanding 19,564 19,485 19,546 19,589
Effect of dilutive securities:
Employee stock options 507 383 481 345
-------- -------- -------- --------
Denominator for dilutive earnings
per share - adjusted weighted
average shares and assumed
issuance of shares purchased
under incentive stock option plan
using the treasury stock method 20,071 19,868 20,027 19,934
======== ======== ======== ========
Basic earnings per share $ .38 $ .24 $ .89 $ .40
======== ======== ======== ========
Diluted earnings per share $ .37 $ .24 $ .87 $ .39
======== ======== ======== ========
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ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
CHANGES IN THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999 COMPARED TO THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 1998.
During the three-month period ended December 31, 1999, net income increased
60% to $7,471,000 from $4,678,000 in the three-month period ended December 31,
1998. Sales increased 15% to $81,736,000 in the current year quarter compared to
$71,199,000 in the prior year period. The increases in sales and operating
income reflected rapidly accelerating demand for Cybershield's products used in
digital wireless cellular phones, together with a strong level of shipments for
Elk's Prestique(R) premium laminated fiberglass asphalt shingles and roofing mat
products. During the three-month period ended December 31, 1999, the company
recorded $889,000 from involuntary conversion as a result of replacement value
payments on a property claim in excess of the net book value of destroyed
assets. See Note 3 on page 4 of this Form 10-Q for further information on this
claim.
Sales for the Roofing Products Group increased 10% to $68,830,000 for the
three months ended December 31, 1999 compared to $62,366,000 in the same prior
year quarter. Elk continued to achieve strong sales levels for its nonwoven mats
used in manufacturing asphalt roofing products and various industrial
applications. Demand remained strong for Elk's premium laminated fiberglass
asphalt shingles. However, shipments in the current year quarter were held down
by lower laminated shingle inventories as a result of a 22% increase in demand
during the twelve months ended September 30, 1999 coupled with manufacturing
inefficiencies related to Elk's use of alternative sources of nonwoven
fiberglass mat in its manufacturing process as a result of the nonwoven mat
plant accident referred to above. Lost sales and operating profit related to the
inventory shortage were partially offset by $1,130,000 of business interruption
insurance recoveries recognized during the quarter ended December 31, 1999.
Average selling prices were also slightly higher in the second quarter of fiscal
2000 compared to the same prior year quarter. Operating income for the Roofing
Products Group increased 20% to $11,318,000 in the three months ended December
31, 1999 compared to $9,445,000 in the prior year quarter, primarily as a result
of higher sales.
Sales for the Industrial Products Group increased 46% in the three-month
period ended December 31, 1999 to $12,861,000 from $8,798,000 in the same prior
year quarter. Operating income for the Industrial Products Group increased 29%
to $1,407,000 in the current year quarter compared to $1,089,000 in the prior
year quarter. Cybershield's sales more than doubled for the three-month period
ended December 31, 1999 and operating profit rose substantially compared to the
same prior year quarter. This continuing growth is primarily the result of
rapidly accelerating demand for digital wireless handsets, combined with a
significant increase in the number of value added products and services provided
to the digital wireless cellular phone industry by Cybershield.
Significantly higher sales and operating results for Cybershield were
offset by a 30% decrease in sales and an $866,000 operating loss at Chromium,
which experienced lower demand for remanufactured diesel engine components used
in the railroad and marine transportation industries. The operating loss
included over $800,000 of nonrecurring costs to relocate equipment and other
consolidation related items incurred in transferring its manufacturing
operations in Lufkin, Texas to Cleveland, Ohio. When the relocation is completed
in the March 2000 quarter, Chromium's operating expenses will have been reduced
by about $1,000,000 per year as a result of this consolidation. OEL, the
company's patent licensing and engineering consulting services business,
reported lower revenues
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and operating income for the three months ended December 31, 1999 compared to
the same quarter in the prior fiscal year.
Overall selling, general and administrative costs (SG&A) in the three-month
period ending December 31, 1999 were only slightly higher than in the same
period in the prior fiscal year despite the 15% increase in revenues. As a
percentage of sales, SG&A costs were 12.0% of sales in the current year quarter
compared to 13.8% in the prior year quarter.
Interest expense for the three months ended December 31, 1999 was lower
than in the same quarter last year. The company capitalized $509,000 of interest
in the current year quarter in connection with the construction of its new
Myerstown, Pennsylvania shingle plant and other major projects.
CHANGES IN THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1999 COMPARED TO THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 1998.
During the six-month period ended December 31, 1999, net income before last
year's cumulative effect of a change in accounting principle increased 43% to
$17,480,000 from $12,204,000 in last year's first half. Sales increased 13%
compared to the prior year period. The increases in sales and net income before
the accounting change were primarily the result of rapidly increasing demand for
Cybershield's products used in digital wireless cellular phones, combined with
strong shipments of roofing mat products and premium laminated fiberglass
asphalt shingles. In the first quarter of fiscal 1999, the company adopted
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
issued by the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants, which resulted in a $4,340,000 charge, net of
tax, for the cumulative effect of this accounting change. This one-time
cumulative charge reduced last year's first half net income to $7,864,000
compared to $17,480,000 in the first half of the current fiscal year.
Sales for the Roofing Products Group increased 9% to $151,769,000 for the
six months ended December 31, 1999 compared to $139,280,000 in the same period
last year. Despite strong demand for Elk's premium laminated asphalt shingles,
shipments were held down by lower laminated shingle inventories at the beginning
of the current fiscal year as a result of a 24% increase in demand during the
last nine months of fiscal 1999. Strong sales increases were achieved for
nonwoven mats used in manufacturing asphalt roofing products and various
industrial applications. Operating income for the Roofing Products Group
increased 25% in the first half of fiscal 2000 to $27,595,000 from $22,145,000
in the prior year period, primarily as a result of strong sales of premium
laminated fiberglass asphalt shingles and nonwoven fiberglass mats, together
with improved margins from increased manufacturing output. During the first half
of fiscal 2000, Elk was able to largely offset increasing asphalt and glass
fiber raw material costs by increasing laminated shingle prices. As a result of
rapidly escalating crude oil prices, asphalt costs for the month of January
2000 were about 30% higher than in the same month last year. Further asphalt
price increases are expected in February 2000. In addition, prices for glass
fiber are expected to be about 10% higher in the March 2000 quarter compared to
the same quarter last year. About one-half of the higher raw material costs
expected in the March 2000 quarter should be offset by higher selling prices
for Elk Prestique laminated shingles.
Raw material cost increases not offset by higher selling prices are
presently expected to reduce net income by about $1,000,000 in the March 2000
quarter. If asphalt prices increase beyond their price level in early February
2000, the reduction in net income may be higher. If Elk Prestique laminated
shingle price increases announced for late March 2000 are successfully
implemented, the higher raw material cost increases currently being experienced
should be fully offset in the June 2000 quarter, provided that raw material
costs stabilize at current levels.
Sales for the Industrial Products Group increased 45% in the first half of
fiscal 2000 to $25,667,000 from $17,737,000 in the same period in the prior
fiscal year. Operating income for the Industrial Products Group increased 12% in
the six months ended December 31, 1999 to $2,936,000 compared to $2,631,000 in
the same period last year. Sales of Cybershield's advanced shielding products
and related services for the digital wireless cellular phone industry more than
doubled in the first six months of fiscal 2000 and Cybershields' operating
profit nearly doubled compared to the first six months in the prior fiscal year.
The current year results include Cybershield's Canton, Georgia
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operation, which was acquired in January 1999 as YDK America, Inc. This new
company generated positive operating income during the first half of fiscal 2000
after incurring initial operating losses in the latter half of fiscal 1999. In
addition to the strong growth in demand for digital wireless handsets, recent
significant orders for new business in other areas include shielding of a new
laptop computer for one of the largest computer manufacturers, shielding of
components for telecommunications switching equipment for a leading
manufacturer, high performance coatings for magnesium components of lightweight
digital video projectors used for computerized business presentations, and
shielding of bar code readers for a leading manufacturer.
Cybershield plans to expand its digital wireless cellular phone business to
serve the European, Asian and Latin American markets over the next few years
through acquisition or other business arrangements to better serve its
customers' growing markets for digital wireless cellular phones and other
digital wireless electronic products. Cybershield is planning to establish
operations in Europe by the summer of calendar year 2000 before pursuing other
global growth opportunities.
For the first six months of fiscal 2000, Chromium Corporation's sales
decreased 31% compared to the same prior year period as a result of lower demand
for remanufactured diesel engine components used in the railroad and marine
transportation industries. Excluding nonrecurring items relating to the
consolidation of its manufacturing operations, Chromium's operating results were
near break-even in the first six months of fiscal 2000 compared to a small
operating profit achieved in the first half last year. Revenues for OEL's patent
licensing and engineering consulting services were lower in the first half of
fiscal 2000 compared to the same six month period last year, but operating
profit was slightly higher. Management expects some improvement at OEL in the
second half of fiscal 2000 because of higher demand for its services resulting
from higher oil prices.
Overall SG&A costs in the six-month period ending December 31, 1999 were
lower than in the same period in the prior fiscal year. In the prior year, the
company adjusted its medical and casualty self-insurance reserves to reflect
escalating cost trends and recorded a write-off of certain computer related
items. As a percentage of sales, SG&A costs were 10.9% of sales in the first
half of fiscal 2000 compared to 12.8% in the prior year period.
Interest expense in the first half of fiscal 2000 was lower than in the
same period last year, as the company capitalized $784,000 of interest in the
current year period in connection with the construction of its new Myerstown,
Pennsylvania shingle plant and other major projects.
FINANCIAL CONDITION
During the first six months of fiscal 2000, the company generated cash
flows of $44,255,000 from operating activities. Of this total, $22,469,000 was
the result of the significantly reduced level of working capital. The decrease
in working capital was primarily due to a significant seasonal decrease in trade
receivables, and increased current liabilities, partially offset by higher
inventories. The higher level of current liabilities was primarily attributable
to the normal timing of vendor payments and payables associated to the
construction of a new roofing plant. Trade receivables were lower primarily due
to seasonality in the roofing products business. The trade receivable balance at
the end of fiscal 1999 was unusually high as a result of a 28% year-to-year
increase in sales during the last two months of fiscal 1999 (the period to which
most outstanding receivables at June 30, 1999 apply). Higher inventories were
primarily attributable to seasonality and to increased raw materials, which
reflected the purchase of certain raw materials in anticipation of price
increases. The current ratio at December 31, 1999 was 2.4:1 compared to 3.3:1 at
June 30, 1999. Historically, working capital requirements fluctuate during the
year because of seasonality in some market areas. Generally, working capital
requirements and related borrowings are higher in the spring and summer months,
and lower in the fall and winter months.
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The company used $29,751,000 for investing activities in the first six
months of fiscal 2000. Most expenditures were for additions to property, plant
and equipment. About $22,000,000 of capital expenditures in the first six months
of fiscal 2000 were for the purchase of land and construction costs relating to
the new $70,000,000 Myerstown, Pennsylvania premium laminated fiberglass asphalt
shingle plant. This new facility is expected to be completed next fall with
manufacturing operations scheduled to begin in the December quarter of calendar
year 2000. The Myerstown plant is expected to increase the company's overall
laminated shingle capacity by about 38%. The company plans to invest about
$137,000,000 over a three-year period beginning in fiscal 2000, including the
costs to build the new roofing plant, together with expenditures to expand
capacity and improve productivity at existing plants, to install production
lines for new products and to increase capacity for Cybershield's digital
wireless cellular phone business. The company expects to incur about $75,000,000
of these capital expenditures in fiscal 2000.
Cash flows used for financing activities were $15,420,000 during the first
six months of fiscal 2000, primarily resulting from dividend payments and a
$13,700,000 decrease in long-term debt. Long-term debt represented 24% of the
$202,312,000 of invested capital (long-term debt plus shareholders' equity) at
December 31, 1999.
In September 1998, the company's Board of Directors authorized the purchase
of up to $10,000,000 of common stock from time to time on the open market to be
used for general corporate purposes. As of December 31, 1999, 129,992 shares
with a cumulative cost of $1,771,000 had been repurchased under this
authorization.
Effective January 5, 2000, the company increased its revolving credit
facility from $100,000,000 to $125,000,000 and extended the facility to December
15, 2004 to support its capital expansion program. Management believes that
current cash and cash equivalents, cash flows from operations and its unsecured
revolving credit facility should be sufficient during fiscal 2000 and beyond to
fund its currently planned capital expenditures, working capital needs,
dividends, stock repurchases and other cash requirements.
The company's operations are subject to extensive federal, state and local
laws and regulations relating to environmental matters. Although the company
does not believe it will be required to expend amounts which will have a
material adverse effect on the company's consolidated financial position or
results of operations by reason of environmental laws and regulations, such laws
and regulations are frequently changed and could result in significantly
increased cost of compliance. Further, certain of the company's industrial
products operations utilize hazardous materials in their production processes.
As a result, the company incurs costs for remediation activities off-site and at
its facilities from time to time. The company establishes and maintains reserves
for such remediation activities, when appropriate. Current reserves established
for known or probable remediation activities are not material to the company's
financial position or results of operations.
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YEAR 2000 ISSUE
The company is currently developing a new information system for most of
its critical financial, distribution and manufacturing applications. While the
primary purpose of the new information system is to modernize and improve the
company's operations, it is also expected to resolve the Year 2000 issues in
these critical computer systems. The system was completed and implemented at all
but one location as of December 31, 1999 at an estimated total cost of about
$12,000,000. Implementation at one operating location has been deferred until
the first quarter of calendar year 2000. This location will continue to utilize
the company's existing information system until the new system is implemented.
The company has completed all testing and remedial programming for the existing
computer system and believes this existing system to be Year 2000 compliant.
Costs to develop the new information system are being capitalized. Other costs
relating to Year 2000 readiness projects have been about $425,000.
As of February 14, 2000, the company has experienced no significant
problems relating to its Year 2000 readiness. Activities within the company and
with its suppliers and other third parties are continuing to be monitored.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" about the company's
prospects for the future. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, the
following:
1. The company's roofing products business is substantially
non-cyclical, but can be affected by weather, the availability
of financing and general economic conditions. In addition, the
asphalt roofing products manufacturing business is highly
competitive. Actions of competitors, including changes in
pricing, or slowing demand for asphalt roofing products due to
general or industry economic conditions or the amount of
inclement weather could result in decreased demand for the
company's products, lower prices received or reduced
utilization of plant facilities. Further, changes in building
codes and other standards from time to time can cause changes
in demand, or increases in costs that may not be passed
through to customers.
2. In the asphalt roofing products business, the significant raw
materials are ceramic coated granules, asphalt, glass fibers,
resins and mineral filler. Increased costs of raw materials
can result in reduced margins, as can higher trucking and rail
costs. Historically, the company has been able to pass some of
the higher raw material and transportation costs through to
the customer. Should the company be unable to recover higher
raw material and/or transportation costs from price increases
of its products, operating results could be adversely affected
and/or lower than projected.
3. The company expects to make up to $137 million in new
investments to expand capacity and improve productivity at
existing plants and to build new plants over a three-year
period beginning in fiscal 2000. Progress in achieving
anticipated operating efficiencies and financial results is
difficult to predict for new plant facilities. If such
progress is slower than anticipated, if substantial cost
overruns occur in building new plants, or if demand for
products produced at new plants does not meet current
expectations, operating results could be adversely affected.
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4. Certain facilities of the company's industrial products
subsidiaries must utilize hazardous materials in their
production process. As a result, the company could incur costs
for remediation activities at its facilities or off-site, and
other related exposures from time to time in excess of
established reserves for such activities.
5. The company's litigation, including its patent infringement
suits against GAF Building Materials Corporation and certain
affiliates, is subject to inherent and case-specific
uncertainty. The outcome of such litigation depends on
numerous interrelated factors, many of which cannot be
predicted.
6. Although the company currently anticipates that most of its
needs for new capital in the near future will be met with
internally generated funds and borrowings under its existing
loan facility, significant increases in interest rates could
substantially affect its borrowing costs under its existing
loan facility, or its cost of alternative sources of capital.
7. Each of the company's businesses, especially its Cybershield's
digital wireless cellular phone business, is subject to the
risks of technological changes that could affect the demand
for or the relative cost of the company's products and
services, or the method and profitability of the method of
distribution or delivery of such products and services. In
addition, the company's businesses each could suffer
significant setbacks in revenues and operating income if it
lost one or more of its largest customers, or if its
customers' plans and/or markets should change significantly.
8. Although the company insures itself against physical loss to
its manufacturing facilities, including business interruption
losses, natural or other disasters and accidents, including
but not limited to fire, earthquake, damaging winds and
explosions, operating results could be adversely affected if
any of its manufacturing facilities became inoperable for an
extended period of time due to such events.
9. Each of the company's businesses is actively involved in the
development of new products, processes and services which are
expected to contribute to the company's ongoing long-term
growth and earnings. If such development activities are not
successful, or the company cannot provide the requisite
financial and other resources to successfully commercialize
such developments, the growth of future sales and earnings may
be adversely affected.
Parties are cautioned not to rely on any such forward-looking beliefs or
judgments in making investment decisions.
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PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
GAF Patent Litigation
On February 9, 2000, Elk and GAF stipulated to a dismissal of all
claims and counterclaims in the utility patent case. Trial on Elk's trade dress
claim in the design case, including GAF's counterclaims, is unscheduled but
pending. GAF's motion for attorneys fees also is pending.
While management can give no assurances regarding the ultimate outcome
of the remaining litigation, even if the outcome were to be adverse to Elk, it
is not expected to have a material adverse effect on the Registrant's financial
position or liquidity.
Gibraltar Tort Litigation
On February 7, 2000, the settlement with the plaintiffs in the
remaining Gibraltar tort litigation was consummated. The settlement, which was
accrued in the fourth quarter of fiscal 1999, did not have a material adverse
effect on the Registrant's results of operations, financial position or
liquidity.
On November 22, 1999, Cybershield of Texas, Inc. (f/k/a Chromium
Corporation) filed suit in County Court in Dallas County, Texas, against its
primary and umbrella/excess insurance carriers seeking recovery of its defense
costs, and certain other damages, in connection with the Gibraltar tort
litigation. The coverage litigation is not expected to have a material effect on
the Registrant's results of operations, financial position or liquidity.
ITEM 4: Submission of Matters to a Vote of Security Holders
(a) The company's Annual Meeting of Shareholders was held on October 26,
1999 for the purpose of electing two directors ratifying the
appointment of the company's independent auditors.
(b) Directors Elected: NUMBER OF VOTES
---------------
AUTHORITY
FOR WITHHELD
--- ---------
David W. Quinn 16,681,341 87,612
Richard J. Rosebery 16,676,092 92,861
Other Directors Whose Term Continued After the Meeting:
James E. Hall
Thomas D. Karol
Dale V. Kesler
William F. Ortloff*
Harold K. Work
*Mr. Ortloff passed away October 27, 1999
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(c) Other matters voted upon at the meeting and the number of
affirmative votes, negative votes and abstentions.
NUMBER OF VOTES
----------------------------------------
AFFIRMATIVE AGAINST ABSTENTIONS
----------- ------- -----------
Ratification of Arthur
Andersen LLP as
independent auditors of
the company for the fiscal
year ending June 30, 2000 16,689,740 36,463 42,750
ITEM 6: Exhibits and Reports of Form 8-K
(a) Exhibit:
Exhibit (4.11): Fifth Amendment dated January 5, 2000 to Loan Agreement
dated September 29, 1993 among Elcor Corporation, Bank of America,
N.A., as Issuer, Administrative Lender, and Lender; and Comerica
Bank-Texas, Bank of Tokyo-Mitsubishi, Ltd., The Frost National Bank,
and Bank One, Texas, N.A., as Lenders.
Exhibit (27): Financial Data Schedule (EDGAR submission only).
(b) The registrant filed one report on Form 8-K during the quarter ended
December 31, 1999. The registrant filed a Form 8-K on October 19, 1999
relating to a press release containing "forward-looking statements"
about its prospects for the future.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELCOR CORPORATION
DATE: February 14, 2000 /s/ Richard J. Rosebery
-------------------------- -------------------------------------
Richard J. Rosebery
Vice Chairman, Chief Financial &
Administrative Officer and Treasurer
/s/ Leonard R. Harral
-------------------------------------
Leonard R. Harral
Vice President and Chief
Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
Exhibit (4.11): Fifth Amendment dated January 5, 2000 to Loan Agreement dated
September 29, 1993 among Elcor Corporation, Bank of America,
N.A., as Issuer, Administrative Lender, and Lender; and
Comerica Bank-Texas, Bank of Tokyo-Mitsubishi, Ltd., The
Frost National Bank and Bank One, Texas, N.A., as Lenders.
Exhibit (27): Financial Data Schedule (EDGAR submission only).
The registrant filed one report on Form 8-K during the
quarter ended December 31, 1999. The registrant filed a Form
8-K on October 19, 1999 relating to a press release
containing "forward-looking statements" about its prospects
for the future.