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 March 31, 2002 Commission File Number 1-5341
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ELCOR CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 75-1217920
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14643 DALLAS PARKWAY
SUITE 1000, WELLINGTON CENTRE, DALLAS, TEXAS 75254-8890
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 851-0500
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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 April 26, 2002, Registrant had outstanding
19,385,390 shares of Common Stock, Par Value $1 per Share.
ELCOR CORPORATION AND SUBSIDIARIES
FORM 10-Q INDEX
<Table>
<Caption>
Page
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Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 and June 30, 2001 1
Consolidated Statements of Operations for the Three Months and
Nine Months Ended March 31, 2002 and 2001 2
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</Table>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ELCOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited, $ in thousands)
<Table>
<Caption>
March 31, June 30,
ASSETS 2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 35 $ 128
Trade receivables, less allowance of $775 and $985 93,065 73,660
Inventories -
Finished goods 32,344 39,783
Work-in-process 595 411
Raw materials 9,162 10,822
------------ ------------
Total inventories 42,101 51,016
------------ ------------
Prepaid expenses and other 9,423 8,487
Deferred income taxes 4,283 3,977
------------ ------------
Total current assets 148,907 137,268
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 317,729 316,865
Less - accumulated depreciation (109,794) (96,829)
------------ ------------
Property, plant and equipment, net 207,935 220,036
------------ ------------
OTHER ASSETS 5,660 2,744
------------ ------------
$ 362,502 $ 360,048
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 36,504 $ 37,159
Accrued liabilities 14,296 10,875
------------ ------------
Total current liabilities 50,800 48,034
------------ ------------
LONG-TERM DEBT 106,000 123,300
DEFERRED INCOME TAXES 32,002 26,612
SHAREHOLDERS' EQUITY -
Common stock, $1 par 19,988 19,988
Paid-in-capital 58,128 58,368
Accumulated other comprehensive income 102 --
Retained earnings 105,304 95,552
------------ ------------
183,522 173,908
Less - Treasury stock (630,040 and 758,609 shares, at cost) (9,822) (11,806)
------------ ------------
Total shareholders' equity 173,700 162,102
------------ ------------
$ 362,502 $ 360,048
============ ============
</Table>
See accompanying notes to consolidated financial statements.
1
ELCOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, $ in thousands
except per share data)
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
SALES $ 119,175 $ 88,458 $ 375,522 $ 270,746
------------ ------------ ------------ ------------
COST AND EXPENSES
Cost of sales 99,845 74,388 306,456 222,099
Selling, general and administrative 14,537 11,665 44,998 35,652
Plant closure costs 4,851 -- 4,851 --
Vendor settlement (5,625) -- (5,625) --
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 5,567 2,405 24,842 12,995
------------ ------------ ------------ ------------
OTHER EXPENSE
Interest expense, net 856 903 4,473 2,031
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,711 1,502 20,369 10,964
Provision for income taxes 1,782 565 7,717 4,078
------------ ------------ ------------ ------------
NET INCOME $ 2,929 $ 937 $ 12,652 $ 6,886
============ ============ ============ ============
NET INCOME PER SHARE-BASIC $ .15 $ .05 $ .66 $ .36
============ ============ ============ ============
NET INCOME PER SHARE-DILUTED $ .15 $ .05 $ .65 $ .35
============ ============ ============ ============
DIVIDENDS PER COMMON SHARE $ .05 $ .05 $ .15 $ .15
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING (000'S)
BASIC 19,358 19,220 19,278 19,353
============ ============ ============ ============
DILUTED 19,705 19,389 19,606 19,527
============ ============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
2
ELCOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, $ in thousands)
<Table>
<Caption>
Nine Months Ended
March 31,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,652 $ 6,886
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization, including
$3,546 of impairment in 2002 17,007 10,283
Deferred income taxes 5,084 1,966
Changes in assets and liabilities:
Trade receivables (19,405) 8,379
Inventories 8,915 (19,789)
Prepaid expenses and other (936) (3,879)
Accounts payable and accrued liabilities 2,766 (6,276)
------------ ------------
Net cash provided by (used for) operating activities 26,083 (2,430)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (8,250) (32,555)
Other 530 97
------------ ------------
Net cash used for investing activities (7,720) (32,458)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings (repayments), net (17,300) 39,400
Dividends on common stock (2,900) (2,897)
Treasury stock transactions and other, net 1,744 (4,873)
------------ ------------
Net cash provided by (used for) financing activities (18,456) 31,630
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (93) (3,258)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 128 4,702
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35 $ 1,444
============ ============
</Table>
See accompanying notes to consolidated financial statements.
3
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 accounting principles generally accepted in the United
States 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 2001
Annual Report on Form 10-K. The unaudited financial information
contained herein has been prepared in conformity with accounting
principles generally accepted in the United States 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 nine-month periods ending March 31,
2002 and 2001, 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. The company is segregated into the following segments: Building
Products, Electronics Manufacturing Services and Industrial Products.
The Building Products segment consists of the various operating
subsidiaries of Elk Corporation of Dallas (collectively Elk). These
companies manufacture and sell premium laminated fiberglass asphalt
shingles and accessory roofing products, together with coated and
non-coated performance nonwoven fabrics used in manufacturing asphalt
roofing products and various industrial applications. This segment was
previously identified as Roofing Products. The name change to Building
Products reflects the anticipated increase in importance of performance
nonwoven fabrics to future operations as the company exploits market
opportunities for such products outside its traditional roofing market.
The Electronics Manufacturing Services segment consists of the various
operating subsidiaries of Cybershield, Inc. (collectively Cybershield).
These companies provide shielding solutions to the digital wireless
telecommunications industry, serving both the handset and
infrastructure segments of the industry. Cybershield is also an
important supplier of shielding solutions to the computer, bar coding
and medical electronics industries.
The Industrial Products segment is comprised of: (1) Chromium
Corporation (Chromium), which provides surface finishes and
remanufactured diesel engine cylinder liners and pistons for the
railroad and marine transportation industries; and (2) Ortloff
Engineers, LTD (OEL), which provides technology licensing and
consulting services for the natural gas processing industry.
4
Financial information by company segment is summarized as follows:
<Table>
<Caption>
(In thousands) (In thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
SALES
Building products $ 111,544 $ 78,088 $ 339,533 $ 237,396
Electronics manufacturing services 4,072 6,820 25,284 23,556
Industrial products 3,559 3,520 10,705 9,705
Corporate and eliminations -- 30 -- 89
------------ ------------ ------------ ------------
$ 119,175 $ 88,458 $ 375,522 $ 270,746
============ ============ ============ ============
OPERATING PROFIT (LOSS)
Building products $ 14,434 $ 3,908 $ 38,731 18,270
Electronics manufacturing services (6,198) 556 (6,143) 2,172
Industrial products 320 (171) 1,431 (1,119)
Corporate and other (2,989) (1,888) (9,177) (6,328)
------------ ------------ ------------ ------------
5,567 2,405 24,842 12,995
Interest expense, net (856) (903) (4,473) (2,031)
------------ ------------ ------------ ------------
Income before income taxes $ 4,711 $ 1,502 $ 20,369 $ 10,964
============ ============ ============ ============
IDENTIFIABLE ASSETS
Building products $ 309,015 $ 293,886 $ 309,015 $ 293,886
Electronics manufacturing services 23,369 32,270 23,369 32,270
Industrial products 11,472 10,421 11,472 10,421
Corporate 18,646 20,413 18,646 20,413
------------ ------------ ------------ ------------
$ 362,502 $ 356,990 $ 362,502 $ 356,990
============ ============ ============ ============
DEPRECIATION AND AMORTIZATION
Building products $ 3,307 $ 2,380 $ 9,880 $ 6,776
Electronics manufacturing services(1) 3,889 363 4,659 1,153
Industrial products 164 148 459 298
Corporate 670 693 2,009 2,056
------------ ------------ ------------ ------------
$ 8,030 $ 3,584 $ 17,007 $ 10,283
============ ============ ============ ============
CAPITAL EXPENDITURES
Building products $ 2,663 $ 5,904 $ 6,605 $ 28,136
Electronics manufacturing services 163 192 247 3,531
Industrial products 250 351 1,086 721
Corporate 185 60 312 167
------------ ------------ ------------ ------------
$ 3,261 $ 6,507 $ 8,250 $ 32,555
============ ============ ============ ============
</Table>
NOTE:
(1) Includes $3,546 of impairment in the third quarter of fiscal 2002.
5
3. Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share includes
outstanding stock options. The following table sets forth the
computation of basic and diluted earnings per share:
<Table>
<Caption>
(In thousands) (In thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 2,929 $ 937 $ 12,652 $ 6,886
============ ============ ============ ============
Denominator for basic earnings
per share - weighted average
shares outstanding 19,358 19,220 19,278 19,353
Effect of dilutive securities:
Stock options 347 169 328 174
------------ ------------ ------------ ------------
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 19,705 19,389 19,606 19,527
============ ============ ============ ============
Basic earnings per share $ .15 $ .05 $ .66 $ .36
============ ============ ============ ============
Diluted earnings per share $ .15 $ .05 $ .65 $ .35
============ ============ ============ ============
</Table>
4. According to the terms of the company's $175,000,000 revolving credit
facility, the company was required to pledge as collateral certain
trade receivables and inventories if the company's leverage ratio
exceeded a defined threshold at quarter end. At June 30, 2001, the
company's leverage ratio exceeded the threshold, effecting the lien. At
September 30, 2001 and December 31, 2001, the company's leverage ratio
was below the threshold, and the lien was released. The provisions of
the revolving credit facility relating to the pledge of collateral
expired upon the release of the lien and the company has no contingent
future obligations to pledge collateral.
5. In the fourth quarter of fiscal 2001, the company conformed its
shipping and handling costs to Emerging Issues Task Force Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." Accordingly,
freight costs for prior reporting periods have been reclassified to
cost of goods sold. Previously, freight costs were classified as a
reduction of sales.
6. In January 2002, the company reached a cash settlement relating to a
dispute with a vendor. The company recorded pretax income of $5,625,000
in the third quarter of fiscal 2002. The cash settlement primarily
represented a reimbursement of costs previously recorded to expense as
selling, general and administrative costs.
6
7. In January 2002, the company's Cybershield subsidiary announced the
consolidation of its operations. Accordingly, the Georgia facility was
closed, and certain employees and manufacturing equipment transferred
to Cybershield's Texas facility. In the third quarter of fiscal 2002,
the company recorded a nonrecurring charge of $4,851,000, including
noncash costs of $3,600,000 (primarily related to the impairment of
property, plant and equipment, goodwill and inventories) and other
costs of $1,251,000 (primarily related to severance, relocation costs
and the settlement of a dispute with a customer concerning certain
inventory produced at the Georgia facility for that customer).
Cybershield expects to incur approximately $200,000 of additional
nonrecurring employee severance, relocation, and equipment moving costs
during the quarter ending June 30, 2002.
8. The company's manufacturing operations can be affected by conditions in
the energy markets, which may be volatile and subject to adverse
change. In November 2001, the company adopted an Energy Risk Management
Policy and an Energy Committee was appointed to develop strategies to
manage the company's risks of adverse changes in the energy markets.
The company has entered into hedge transactions to set the price
relating to approximately 50% of its anticipated use of natural gas not
subject to fixed rate contracts through October 2002. This derivative
is accounted for as a cash flow hedge under the provisions of Financial
Accounting Standards (SFAS) No. 138, an amendment to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
beginning in the third quarter of fiscal 2002. As of March 31, 2002,
the fair value of these derivative items was $102,000, which is
included as an "Other Current Asset" on the consolidated balance sheet.
9. Total comprehensive income for the three months and nine months ended
March 31, 2002 was as follows:
<Table>
<Caption>
Three Months Nine Months
Ended March 31 Ended March 31
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 2,929 $ 937 $ 12,652 $ 6,886
Derivative transactions (note 8) 102 -- 102 --
------------ ------------ ------------ ------------
Total comprehensive income $ 3,031 $ 937 $ 12,754 $ 6,886
============ ============ ============ ============
</Table>
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
CHANGES IN THE THREE-MONTH PERIOD ENDED MARCH 31, 2002 COMPARED TO THE
THREE-MONTH PERIOD ENDED MARCH 31, 2001.
Overall Performance
During the three-month period ended March 31, 2002, sales increased 35% to
$119,175,000 compared to $88,458,000 in the same three-month period in the prior
fiscal year. Net income increased 213% to $2,929,000 in the current year quarter
compared to $937,000 in the third quarter of fiscal 2001. The increase in both
sales and income in the current year period is primarily attributable to the
Building Products segment.
Consolidated operating income of $5,567,000 in the three months ended March
31, 2002 was 131% higher than $2,405,000 in the same three-month period last
year. Operating income for the current year quarter included two nonrecurring
items: (1) a favorable settlement with a vendor resulting in the receipt of
$5,625,000, and (2) plant closure costs of $4,851,000. As a percentage of sales,
operating income, excluding the aforementioned nonrecurring items, was 4.0%
during the seasonally slower third quarter of fiscal 2002 compared to 2.7%
during the third quarter in the prior year. Selling, general and administrative
(SG&A) costs in the quarter ended March 31, 2002 were significantly higher than
in the same prior year quarter, due primarily to overall higher sales levels,
increased selling expenses related to new products, higher corporate level
expenses from increased incentive compensation directly related to higher
earnings, and approximately $500,000 of compensation and retirement expenses
related to management succession. As a percentage of sales, SG&A costs were
12.2% in the third quarter of fiscal 2002 compared to 13.2% in the same quarter
last year.
Interest expense was $856,000 in the third quarter of fiscal 2002 compared
to $903,000 in the same prior year period. However, in the third quarter of
fiscal 2001, the company capitalized $1,298,000 of interest related to the
construction of the Myerstown, Pennsylvania shingle plant and other major
projects. No interest costs were capitalized in the current year period. The
average interest rate paid on indebtedness for the three months ended March 31,
2002 was 3.2%, compared to 6.8% in the same three-month period in the prior
year.
Results of Business Segments
Sales in the Building Products segment increased 43% to $111,544,000 for
the three months ended March 31, 2002 compared to $78,088,000 in the same prior
year period. Sales growth in the third quarter of fiscal 2002 was driven by a
continuation of strong demand for Elk's premium laminated asphalt shingles and
significant growth in external shipments of performance nonwoven fabrics.
Roofing product prices during the current year quarter averaged about 3% higher
than the same quarter in the prior fiscal year.
Operating income for the Building Products segment more than tripled to
$14,434,000 in the three months ended March 31, 2002 from $3,908,000 for the
three months ended March 31, 2001. Operating income in the current year quarter
included a $5,625,000 favorable vendor settlement. The cash settlement primarily
represented a reimbursement of certain general and administrative costs
previously incurred by Elk. Excluding this nonrecurring item, operating income
increased to $8,809,000, a 125%
8
increase over the previous year quarter. The significant increase in recurring
current year operating income was primarily the result of increased product
shipments. Operating profit growth significantly exceeded sales growth in the
current year quarter as a result of lower unit raw material costs, primarily
asphalt, and lower per unit manufacturing costs. Asphalt costs during the
current year quarter averaged about $19 per ton less than in the same quarter
last year. Lower unit manufacturing costs resulted from the operation of Elk's
roofing plants at about 85% of design capacity during the quarter ended March
31, 2002, compared to an operating rate of about 69% during the year-ago
quarter. Elk's new Myerstown, Pennsylvania plant continues to make good progress
towards achieving design capacity and efficiency. This plant is expected to be
capable of manufacturing all products at 100% of design capacity by June 2002.
Management is optimistic regarding the calendar 2002 roofing season and
believes the company is well positioned to take full advantage of an expected
continuation of strong demand in its Building Products segment. As a result of
the Middle East conflict, oil prices have recently increased to approach the
levels that the company last experienced during the period from March 2001 to
September 2001. During that period, asphalt costs ranged from $10 to $20 per ton
higher than the company's average asphalt cost during the March 2002 quarter.
However, management is cautiously optimistic that the relatively tight supply
and demand conditions expected to affect the roofing industry during the
remainder of calendar 2002 should permit the recovery of higher asphalt costs
through higher product pricing. Elk has announced 5% to 7% price increases that
become effective during April and May of 2002 and believes that competitive
conditions are favorable for such an increase.
Sales for the Electronics Manufacturing Services segment decreased 40% to
$4,072,000 in the three-month period ended March 31, 2002 compared to $6,820,000
in the same prior year quarter. An operating loss of $6,198,000 in the quarter
ended March 31, 2002 compared to a $556,000 operating profit in the same quarter
last year. The recurring operating loss for the quarter ended March 31, 2002 was
$1,347,000, of which 84% of this amount occurred during the month of January
2002. Sales and operating results were adversely affected by sharply reduced
orders from Cybershield's cellular handset customers during the quarter ended
March 31, 2002. The fiscal 2002 operating loss includes $4,851,000 of
nonrecurring expenses related to the closure of Cybershield's Georgia
manufacturing plant. See footnote 7 on page 7 of this Form 10-Q for additional
information relating to Cybershield's consolidation of all activities of the
Georgia plant into its Texas manufacturing facility. The closure of the Georgia
facility is expected to reduce Cybershield's fixed costs by about $2,400,000 per
year. Management expects that the lower fixed costs from this plant closure
should enable Cybershield to return to profitability with modest increases in
volume. However, continued uncertainty in the cellular handset market limits
future sales visibility at Cybershield.
Although Cybershield does not expect to realize any material sales from its
exclusive EXACT(TM) precision 3D metallized plastic technology during the
remainder of fiscal 2002, management is very optimistic about the market
potential for its EXACT technology and its potential to diversify revenue
sources among a wider variety of electronics applications. Various applications
are currently being evaluated by many leading consumer electronics manufacturers
and management is encouraged by their initial responses.
Sales for the Industrial Products segment of $3,559,000 in the quarter
ended March 31, 2002 were slightly higher than $3,520,000 in the same prior year
quarter. Chromium continued to experience lower comparative unit volumes during
the current year quarter as railroads deferred maintenance expenditures.
Ortloff's sales in the current year quarter exceeded sales in the same prior
year quarter as
9
a result of a higher level of licensing and consulting fees generated from
international gas processing projects.
Operating income of $320,000 in the three-month period ended March 31, 2002
compared to $171,000 loss in the same three-month period last year. Despite
lower sales, cost reductions resulting from Chromium's consolidation last year
enabled it to remain profitable in the current year quarter. Sales levels at
Chromium are currently expected to remain under pressure until such time as the
railroads resume normal maintenance spending in response to an improving
economy. However, Chromium's lower expense structure and improved manufacturing
efficiency should permit it to remain profitable through this period of industry
slowness. Ortloff's improved profitability was primarily the result of the
aforementioned higher sales level. Ortloff is expected to continue to register a
relatively strong performance for the remainder of fiscal 2002.
CHANGES IN THE NINE-MONTH PERIOD ENDED MARCH 31, 2002 COMPARED TO THE NINE-MONTH
PERIOD ENDED MARCH 31, 2001.
Overall Performance
During the nine-month period ended March 31, 2002, sales increased 39% to
$375,522,000 compared to $270,746,000 for the same period in the prior fiscal
year. Net income increased 84% to $12,652,000 in the first nine months of fiscal
2002 compared to $6,886,000 in the same period last year. Each of the three
business segments achieved higher sales in the current year period compared to
the same period last year. The Building Products and Industrial segments each
reported increased operating income for the nine months ended March 31, 2002
compared to the same period last year. Despite higher sales, the Electronics
Manufacturing Services segment recorded an operating loss in the first nine
months of fiscal 2002 compared to profitable operations for the same prior year
period.
Consolidated operating income of $24,842,000 in the first nine months of
fiscal 2002 was 91% higher than $12,995,000 in the same period last year. As a
percentage of sales, operating income was 6.6% during the nine-month period
ended March 31, 2002 compared to 4.8% in the same nine-month period last year.
Selling, general and administrative costs in the first nine months of fiscal
2002 were significantly higher than in the first nine months of fiscal 2001. The
SG&A increase was primarily due to higher selling expenses related to new
product introductions and overall higher sales levels. However, as a percentage
of sales, SG&A costs were 12.0% in the first nine months of fiscal 2002 compared
to 13.2% in the same period last year.
Interest expense was $4,473,000 in the first nine months of fiscal 2002
compared to $2,031,000 in the same prior year period. In the first nine months
of the prior fiscal year, the company capitalized $3,965,000 of interest related
to the construction of the Myerstown, Pennsylvania shingle plant and other major
projects. No interest costs have been capitalized in the current fiscal year.
The average interest rate paid on indebtedness for the nine months ended March
31, 2002 was 4.6% compared to 7.1% in the same nine-month period in the prior
year.
Results of Business Segments
Sales in the Building Products segment increased 43% to $339,533,000 for
the nine months ended March 31, 2002 compared to $237,396,000 in the same prior
year period. The significant increase in sales reflected a sharp rebound in
shipments of premium laminated asphalt shingles that began in the fourth quarter
of the prior fiscal year and continued throughout the first nine months of
fiscal 2002.
10
Highly successful new products and warranty initiatives and a favorable
inventory position, combined with relatively mild weather and lower interest
rates this year contributed to sharply higher sales for this business segment.
Building Products sales further benefited from Elk's success in penetrating
markets served by its new Myerstown, Pennsylvania roofing plant, which met its
performance test level of operations in the fourth quarter of fiscal 2001. In
the first nine months of the prior year, shipments of laminated shingles were
adversely affected by weak economic conditions and harsh winter weather
conditions in the Northern United States and heavy winter and spring rains in
many other parts of the country.
Operating income for the Building Products segment increased 112% to
$38,731,000 in the nine months ended March 31, 2002 compared to $18,270,000 for
the nine months ended March 31, 2001. The increase in operating income is
primarily the result of a significant increase in shipments of premium laminated
fiberglass shingles and performance nonwoven fabrics. Increased product sales
more than offset higher marketing costs and depreciation relating to the new
Myerstown, Pennsylvania roofing plant. Average selling prices in the first nine
months of fiscal 2002 were slightly higher than in the same period last year.
Current year operating income also included a $5,625,000 favorable vendor
settlement.
Sales for the Electronics Manufacturing Services segment increased 7% to
$25,284,000 in the first nine months of fiscal 2002 compared to $23,556,000 in
the same period in the prior fiscal year. Cybershield's unit volumes declined,
but average unit selling prices were higher, primarily as a result of an
increased sales mix of units containing purchased plastic parts. Despite
increased sales, the Electronics Manufacturing Services segment reported a
$6,143,000 operating loss in the nine-month period ended March 31, 2002 compared
to $2,172,000 operating income in the same nine-month period last year. The
current year operating loss includes $4,851,000 of nonrecurring plant closure
costs (see footnote 7 on page 7 of this Form 10-Q). The deterioration in
operating results also reflects lower unit volumes and related margins, costs
associated with the ramp of several new handset components and production
start-up inefficiencies during the early part of fiscal 2002.
Sales for the Industrial Products segment increased 10% in the first nine
months of fiscal 2002 to $10,705,000 from $9,705,000 in the same period last
year. Operating income of $1,431,000 in the nine-month period ended March 31,
2002 compared to a $1,119,000 operating loss in the first nine months last year.
Most of the prior year operating loss was the result of consolidation of
manufacturing operations and initial production of products new to Chromium's
Ohio plant. Sales for Chromium were lower in the first nine months of fiscal
2002 compared to the prior year due to lower unit volumes as the railroads
deferred maintenance expenditures. Nevertheless, Chromium was able to maintain
profitability in the first nine months of fiscal 2002 due to cost reductions.
Ortloff sales and operating income were both higher in the first nine months of
fiscal 2002 compared to the prior year period due primarily to a higher level of
licensing and consulting fees from international gas processing projects.
FINANCIAL CONDITION
Cash flows from operating activities are generally the result of net
income, deferred taxes, depreciation and amortization, and changes in working
capital. During the first nine months of fiscal 2002, the company generated
operating cash flows of $26,083,000 compared to $2,430,000 used for operating
activities for the first nine months in the prior fiscal year. Cash flows from
higher net income, deferred income taxes, depreciation and amortization were
partially offset by a $8,966,000 seasonal increase in working capital (excluding
cash and cash equivalents) since June 30, 2001. The increase in depreciation and
amortization was primarily attributable to the Myerstown, Pennsylvania roofing
plant
11
being in service in the current fiscal year and impairment of assets at
Cybershield's Georgia facility, which was closed in the third quarter of fiscal
2002. The current ratio was 2.9 to 1 at both March 31, 2002 and at the end of
fiscal 2001.
The increase in working capital requirements primarily related to higher
trade receivables. Trade receivables increased $19,405,000 at March 31, 2002
compared to June 30, 2001, primarily due to much higher shipment levels in the
Building Products segment in the current year. Receivables at March 31, 2002
also include amounts with extended payment terms to certain customers for
products shipped during the late winter and early spring months, with most
payments generally due during the spring. Lower inventories of premium laminated
fiberglass shingles reflect continuing strong demand for such products during
the quarter ended March 31, 2002.
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.
Cash flows from investing activities primarily reflect the company's
capital expenditure strategy. Net cash used for investing activities was
$7,720,000 in the nine-month period ended March 31, 2002 compared to $32,458,000
in the same period in the prior fiscal year. After several years of aggressive
plant capacity expansion, including the Myerstown, Pennsylvania roofing plant,
capital expenditures in fiscal 2002 are currently planned to be in the range of
$10,000,000 to $13,000,000, most of which relates to improving productivity at
existing plants and extending production capacity for new products.
Cash flows from financing activities generally reflect changes in the
company's borrowings during the period, together with dividends paid on common
stock, treasury stock transactions and exercises of stock options. Net cash used
for financing activities was $18,456,000 the first nine months of fiscal 2002
compared to $31,630,000 provided by financing activities for the same period in
fiscal 2001. The fiscal 2002 amount includes a $17,300,000 reduction in
long-term debt compared to net long-term borrowings of $39,400,000 in the
comparable prior year period. Long-term debt represented 38% of the $279,700,000
of invested capital (long-term debt plus shareholders' equity) at March 31,
2002. The company has no off-balance sheet arrangements or transactions with
unconsolidated, limited purpose entities.
The company's Board of Directors has authorized the purchase of common
stock from time to time on the open market. As of March 31, 2002, the company
has repurchase authority of approximately $10,600,000 remaining.
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 manufacturing
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.
12
FORWARD-LOOKING STATEMENTS
In an effort to give investors a well-rounded view of the company's
current condition and future opportunities, management's discussion and analysis
of financial condition and results of operations contain "forward-looking
statements" that involve risks and uncertainties about its prospects for the
future. The statements that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements usually are accompanied by words such as "outlook,"
"believe," "estimate," "plan," "project," "expect," "anticipate," "predict,"
"could," "should," "may," "hope," or similar words that convey the uncertainty
of future events or outcomes. These statements are based on judgments the
company believes are reasonable; however, actual results could differ materially
from those discussed here. Such risks and uncertainties include, but are not
limited to, the following:
1. The company's building 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 and insurance 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 building 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 energy, trucking and rail costs. Historically, the
company has been able to pass some of the higher raw material, energy
and transportation costs through to the customer. Should the company be
unable to recover higher raw material, energy and/or transportation
costs from price increases of its products, operating results could be
adversely affected and/or lower than projected.
3. The company has been involved in a significant expansion plan over the
past several years, including the construction of new facilities and
the expansion of existing facilities. Progress in achieving anticipated
operating efficiencies and financial results is difficult to predict
for new and expanded plant facilities. If such progress is slower than
anticipated, or if demand for products produced at new or expanded
plants does not meet current expectations, operating results could be
adversely affected.
4. Certain facilities of the company's manufacturing 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 is subject to inherent and case-specific
uncertainty. The outcome of such litigation depends on numerous
interrelated factors, many of which cannot be predicted.
13
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 or borrowings under its available credit facilities, 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 Cybershield's shielding
business, is subject to the risks of technological changes that could
affect the demand for or the relative cost of the company's technology,
products and services, or the method and profitability of the method of
distribution or delivery of such technology, 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, market demand is
less than expected, 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.
14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The company is subject to market risk from changes in interest rates on
its outstanding debt, which has a variable interest rate. Based on the company's
outstanding debt at March 31, 2002, the company's interest costs would increase
or decrease $1,060,000 for each theoretical 1% increase or decrease in the
company's borrowing rates. The company's exposure to market risk from changes in
foreign currency risk is not material.
In November 2001, the company adopted an Energy Risk Management Policy
and an Energy Committee was appointed to develop strategies to manage the
company's risks of adverse changes in the energy markets. The company has
entered into hedge transactions to set the price relating to approximately 50%
of its anticipated use of natural gas not subject to fixed rate contracts
through October 2002. This hedge has been accounted for under the provisions of
Financial Accounting Standards (SFAS) No. 138, an amendment to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" beginning in the
third quarter of fiscal 2002.
15
PART II. OTHER INFORMATION
ITEM 5: Other Information
The Board of Directors elected Thomas D. Karol, formerly President and
Chief Executive Officer, to succeed Harold K. Work as Chairman of the Board
effective with Mr. Work's retirement on March 31, 2002. Mr. Karol will continue
to serve as Chief Executive Officer and Mr. Work will continue to serve as a
Director.
Concurrently with Mr. Karol's election, Richard A. Nowak was elected
President and Chief Operating Officer. Mr. Nowak was formerly Executive Vice
President of the company.
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) The registrant filed one report on Form 8-K during the quarter
ended March 31, 2002. The registrant filed a Form 8-K on
January 19, 2002 relating to a press release containing
"forward-looking statements" about its prospects for the
future and certain other information concerning the company's
disclosures under Regulation F-D.
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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: May 1, 2002 /s/ Harold R. Beattie, Jr.
------------- ----------------------------------------
Harold R. Beattie, Jr.
Vice President, Chief Financial Officer
and Treasurer
/s/ Leonard R. Harral
----------------------------------------
Leonard R. Harral
Vice President and Chief
Accounting Officer
17