1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 ----------- For Quarter Ended December 31, 1997 Commission File number 1-5341 ----------------- ------ ELCOR CORPORATION ------------------------------------------------------ (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 75240-8871 - -------------------------------------------- ---------- (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 2, 1998, Registrant had outstanding 13,232,590 shares of Common Stock, Par Value $1 per Share. 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements ELCOR CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited, $ in thousands) ASSETS 12-31-97 6-30-97 --------- --------- CURRENT ASSETS Cash and cash equivalents $ 4,450 $ 3,601 Trade receivables, less allowance of $730 and $545 34,757 43,178 Inventories - Finished goods 21,338 26,400 Work-in-process 416 441 Raw materials 7,665 6,586 --------- --------- Total inventories 29,419 33,427 --------- --------- Prepaid expenses and other 3,173 3,572 Deferred income taxes 2,342 2,508 --------- --------- Total current assets 74,141 86,286 --------- --------- PROPERTY, PLANT AND EQUIPMENT, AT COST 185,841 180,115 Less - accumulated depreciation (67,981) (62,648) --------- --------- Property, plant and equipment, net 117,860 117,467 --------- --------- OTHER ASSETS 3,221 3,490 --------- --------- $ 195,222 $ 207,243 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 10,469 $ 15,899 Accrued liabilities 12,992 12,386 --------- --------- Total current liabilities 23,461 28,285 --------- --------- LONG-TERM DEBT 37,700 52,600 DEFERRED INCOME TAXES 14,508 13,578 SHAREHOLDERS' EQUITY - Common stock 13,238 8,814 Paid-in-capital 66,644 71,350 Retained earnings 39,794 33,039 --------- --------- 119,676 113,203 Less - Treasury stock, at cost, 5,000 and 17,500 shares at December 31, 1997 and June 30, 1997, respectively (123) (423) --------- --------- Total shareholders' equity 119,553 112,780 --------- --------- $ 195,222 $ 207,243 ========= ========= See accompanying notes to consolidated financial statements. 2 3 ELCOR CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited, $ in thousands except per share data) Three Months Ended Six Months Ended --------------------- --------------------- 12-31-97 12-31-96 12-31-97 12-31-96 -------- -------- -------- -------- SALES $ 60,965 $ 50,636 $134,481 $115,172 -------- -------- -------- -------- COST AND EXPENSES Cost of sales 47,301 39,242 102,702 89,766 Selling, general and administrative 8,384 7,680 17,189 15,577 -------- -------- -------- -------- INCOME FROM OPERATIONS 5,280 3,714 14,590 9,829 -------- -------- -------- -------- OTHER EXPENSE Interest expense, net 614 52 1,373 213 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 4,666 3,662 13,217 9,616 Provision for income taxes 1,718 1,353 4,875 3,539 -------- -------- -------- -------- NET INCOME $ 2,948 $ 2,309 $ 8,342 $ 6,077 ======== ======== ======== ======== INCOME PER COMMON SHARE - BASIC $ .22 $ .18 $ .63 $ .46 ======== ======== ======== ======== - DILUTED $ .22 $ .17 $ .62 $ .46 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ .06 $ .05 $ .12 $ .09 ======== ======== ======== ======== AVERAGE COMMON SHARES OUTSTANDING - BASIC 13,231 13,170 13,217 13,154 ======== ======== ======== ======== - DILUTED 13,523 13,265 13,484 13,227 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 3 4 ELCOR CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, $ in thousands) Six Months Ended ---------------- 12-31-97 12-31-96 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,342 $ 6,077 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 5,370 3,872 Deferred income taxes 1,096 1,760 Changes in assets and liabilities: Trade receivables 8,421 13,275 Inventories 4,008 5,303 Prepaid expenses and other 399 (527) Accounts payable and accrued liabilities (4,825) (3,913) -------- -------- Net cash provided by operating activities 22,811 25,847 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (5,748) (11,794) Other 254 ( 57) -------- -------- Net cash used for investing activities (5,494) (11,851) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term borrowings, net (14,900) (14,000) Dividends on common stock (1,587) (1,230) Treasury stock transactions and other, net 19 407 -------- -------- Net cash used for financing activities (16,468) (14,823) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 849 ( 827) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,601 3,744 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,450 $ 2,917 ======== ======== See accompanying notes to consolidated financial statements. 4 5 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 1997 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 ended December 31, 1997 and 1996, 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. Effective December 15, 1997, the company increased its unsecured revolving credit facility from $80 million to $100 million and the term was extended to December 15, 2002. There were no changes to the financial covenants or to the interest rate the company currently pays for either LIBOR based borrowings or prime rate based borrowings. However, the commitment fee for the average unused portion of the line was reduced from .25% to .175%. 3. In September 1997, the Board of Directors declared a three-for-two stock split payable in the form of a stock dividend which was distributed on November 12, 1997. An amount equal to the par value of the common shares issued in connection with the split was transferred from paid-in capital to the common stock account. Appropriate references to number of shares and to per share information in the Consolidated Financial Statements have been adjusted to reflect the stock split on a retroactive basis. 5 6 4. 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: (In thousands) Three Months Ended Six Months Ended 12-31-97 12-31-96 12-31-97 12-31-96 ------- ------- ------- ------- Net Income $ 2,948 $ 2,309 $ 8,342 $ 6,077 ======= ======= ======= ======= Denominator for basic earnings per share - weighted average 13,231 13,170 13,217 13,154 shares outstanding Effect of dilutive securities: Employee stock options 292 95 267 73 ------- ------- ------- ------- 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 13,523 13,265 13,484 13,227 ======= ======= ======= ======= Basic earnings per share $ .22 $ .18 $ .63 $ .46 ======= ======= ======= ======= Diluted earnings per share $ .22 $ .17 $ .62 $ .46 ======= ======= ======= ======= 6 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 DECEMBER 31, 1997 COMPARED TO THE THREE MONTH PERIOD ENDED DECEMBER 31, 1996. During the three month period ended December 31, 1997, net income increased 28% to $2,948,000 from $2,309,000 in the same quarter last year. Sales increased 20% compared to the prior year quarter. The increase in sales was primarily the result of increased shipments of the company's patented Enhanced High Definition(R) and Raised Profile(TM) Prestique(R) premium laminated fiberglass asphalt shingles, increased shipments of nonwoven fiberglass roofing mats, and much higher sales by the Industrial Products Group. The increase in net income is primarily the result of significantly higher income contribution by the Industrial Products Group. The Roofing Products Group achieved higher sales but slightly lower operating profit for the three months ended December 31, 1997 compared to the same prior year period. Elk Corporation's shipments were aided by El Nino's effect on increased demand in the western United States, which is supplied by Elk's Shafter, California plant. However, contributions from higher shipments of premium laminated shingles were offset by slightly lower average selling prices and higher depreciation and amortization costs during the quarter. Elk's Ennis, Texas nonwoven fiberglass roofing mat operations also achieved higher sales and improved operating profit during the quarter ended December 31, 1997 and are positioned to supply high quality roofing mats to satisfy the growing demand for its products. The Industrial Products Group achieved significantly higher sales and operating profit during the three months ended December 31, 1997 as compared to the same period in the prior year. Chromium Corporation continued to benefit from strong demand for its Compushield(R) conductive coatings used in the telecommunications and electronic equipment industries. Chromium also experienced higher demand for remanufactured large diesel engine components used in the transportation industry. In addition, increased use of Ortloff's technology licensing and consulting services for the natural gas processing industry also contributed to improved results in the current year period. On an overall basis, gross margin on sales was 22.4% for the quarter ended December 31, 1997 compared to 22.5% in the prior year quarter. Lower margins received by the Roofing Products Group for its products as a result of slightly lower average selling prices and higher depreciation and amortization costs were offset by higher margins in the Industrial Products Group. Selling, general and administrative costs were 13.8% of sales in the current year quarter, down from 15.2% of sales in the prior year quarter. Interest expense was significantly higher in the second quarter of fiscal 1998 compared to the same quarter in the prior fiscal year. During the previous year, most interest cost was capitalized in connection with the company's major facilities expansion program, which was completed in March 1997. 7 8 CHANGES IN THE SIX MONTH PERIOD ENDED DECEMBER 31, 1997, AS COMPARED TO THE SIX MONTH PERIOD ENDED DECEMBER 31, 1996. During the six month period ended December 31, 1997, net income increased 37% to $8,342,000 from $6,077,000 in the same period last year. Sales increased 17% compared to the comparable prior year period. The increases in sales and net income were primarily attributable to increased shipments of premium laminated fiberglass shingles, together with much higher sales and income contribution by the Industrial Products Group during the six month period ended December 31, 1997. In the Roofing Products Group, both sales and operating income were higher for the six months ended December 31, 1997 as compared to the same period in the prior fiscal year. The western United States, which is served by the Shafter, California roofing plant, produced very strong demand for Elk Prestique premium laminated shingles. This increased demand was aided by concerns that severe El Nino conditions could cause rain damage from leaking roofs. Although Elk's other roofing plants were also very profitable, sales and operating income were lower at these plants in the first six months of fiscal 1998, as compared to the same period in the prior fiscal year, due primarily to lower shipments from these plants resulting from a realignment of markets served following performance improvements at the Shafter, California plant. Sales and operating income from Elk's mat operations were also higher in the first six months of fiscal 1998 compared to the same period in fiscal 1997. The Industrial Products Group achieved sharply higher sales and operating income in the six month period ending December 31, 1997 compared to the same prior year period. Increased demand and improved results were achieved in each of the Group's principal operations of (1) conductive coatings used in the telecommunications and electronic equipment industries; (2) remanufactured diesel engine components used in the transportation industry; and (3) technology licensing and consulting services for the natural gas processing industry. On an overall basis, for the first six months of fiscal 1998, gross margin on sales was 23.6%, compared to 22.1% for the same period in the prior fiscal year. This increase is primarily attributable to higher sales with better margins in the Industrial Products Group. Higher selling, general and administrative costs are primarily the result of increased business activity in the current year. As a percentage of sales, such expenses were 12.8% of sales for the first six months of fiscal 1998, down from 13.5% of sales for the same period in the prior fiscal year. Higher interest expense in the current year is attributable to the capitalization of most interest cost in the prior year in connection with the company's major facilities expansion program. FINANCIAL CONDITION Total invested capital at December 31, 1997 was $157,253,000. Long-term debt of $37,700,000 represented 24% of total capitalization. At December 31, 1997, $60,710,000 was available under the company's unsecured revolving line of credit, which was increased to $100 million on December 15, 1997 so as to provide additional financial resources to support the company's growth strategies. Cash provided by operations for the six months ended December 31, 1997 was $22,811,000. The current ratio was 3.2 to 1 at December 31, 1997. Working capital decreased $7,321,000 from June 30, 1997, primarily related to a seasonal reduction in trade receivables and inventories, partially offset by lower accounts payable. Historically, working capital requirements fluctuate during the year 8 9 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. In addition, receivables may increase during the late winter and early spring months due to extended payment terms to certain customers during these months with payment generally due during the summer months. The company utilized $16,468,000 of cash for financing activities in the first six months of fiscal 1998, primarily for repayment of long-term debt and payment of dividends on common stock. The company used $5,494,000 for investing activities in the first six months of fiscal 1998. Capital expenditures for fiscal 1998 are expected to be in the range of $12,000,000 to $15,000,000. The majority of planned capital expenditures are for productivity, capacity, and cost improvement projects at the current roofing plants and for the development of new computer systems. In addition, the company is expanding its capacity in the Chromium Corporation Conductive Coatings Division to meet rapidly growing demand for its Compushield process for conductive coatings applied to plastic enclosures for telecommunications and electronic equipment. In September 1997, the Board of Directors increased the regular quarterly cash dividend to six cents per common share (after giving effect to a stock split) and declared a three-for-two stock split payable in the form of a stock dividend which was distributed on November 12, 1997 to shareholders of record at the close of business on October 16, 1997. In September 1994, the company's Board of Directors authorized the purchase of up to $10 million of the company's common shares from time to time on the open market to be used for general corporate purposes. As of December 31, 1997, 225,750 shares (after giving effect to the stock split) with a cumulative cost of $2,804,000 had been repurchased under this program. 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 process. 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, in accordance with Statement of Financial Accounting Standard No. 5, "Accounting for Contingencies." Current reserves established for known or probable remediation activities are not material to the company's financial position or results of operations. Management believes that cash and cash equivalents, cash flows from operations and its revolving credit facility should be sufficient during fiscal 1998 and beyond to fund its currently projected capital expenditure requirements, working capital needs, dividends, stock repurchases and other cash requirements. 9 10 PENDING ACCOUNTING PRONOUNCEMENT The Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants has issued an exposure draft on "Reporting on the Costs of Start-Up Activities." If the exposure draft were to be finalized in its proposed form, it would require companies to expense on a current basis previously capitalized start-up costs. At December 31, 1997, the company had $7,827,000,000 of unamortized capitalized start-up costs. While the company does not agree with the accounting treatment proposed in the AcSEC exposure draft and believes that capitalizing costs incurred in constructing major new facilities provides a better matching of revenues and expenses, the company will adopt this statement of position if and when it is finalized. YEAR 2000 ISSUE The company is currently developing a new information system for its critical financial, distribution and manufacturing applications. This system is scheduled for completion and full implementation in the summer of 1999 at an estimated total cost of $6 - $8 million. While the primary purpose of this new information system is to modernize and improve the Company's operations, it is also expected to resolve Year 2000 issues in these critical computer systems. The company also has teams of employees and consultants who are reviewing other computer applications and systems not included in the scope of the new information system, and its electronic interaction with its suppliers, customers and other business partners for Year 2000 readiness. The company is in process of taking relevant inventory, assessing risk, assigning priorities to various tasks and performing limited internal tests. It expects to have fully developed action and contingency plans by the end of calender 1998 and for integrated testing and any remediation to be complete before January 1, 2000. At this time, other than the cost of developing and implementing its new information system, the company does not believe that the costs of addressing the Year 2000 issue will be material, nor will this issue result in uncertainty that is reasonably likely to affect future financial results or operating performance. Furthermore, the company believes its Year 2000 readiness project is on schedule for timely completion. 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 somewhat cyclical and is affected by weather and some of the same economic factors that affect the housing and home improvement industries generally, including interest rates, the availability of financing and general economic conditions. In addition, the asphalt roofing products manufacturing business is highly competitive. 10 11 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. 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 transportation costs from price increases of its products, operating results could be lower than projected. 3. During fiscal 1997, the company completed construction of a new plant at the company's Ennis, Texas facility to manufacture nonwoven fiberglass roofing mats and other mats for a variety of industrial uses. As a new facility, its progress in achieving anticipated operating efficiencies and financial results is difficult to predict. If such progress is slower than anticipated, or if demand for products produced at this new plant does not meet expectations, operating results could be adversely affected. 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. Parties are cautioned not to rely on any such forward-looking beliefs or judgments in making investment decisions. 11 12 PART II. OTHER INFORMATION ITEM 4: Submission of Matters to a Vote of Security Holders (a) The company's Annual Meeting of Shareholders was held on October 28, 1997 for the purpose of electing three directors and ratifying the appointment of the company's independent auditors. (b) Directors Elected: NUMBER OF VOTES --------------- AUTHORITY FOR WITHHELD --- --------- Robert M. Leibrock 7,699,179 91,958 W.F. Ortloff 7,695,110 96,027 Harold K. Work 7,709,634 81,503 Other Directors Whose Term Continued After the Meeting: F.H. Callaway James E. Hall David W. Quinn Richard J. Rosebery (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 7,756,492 14,801 19,844 Andersen LLP as independent auditors of the company for the fiscal year ending June 30, 1998 12 13 ITEM 6: Exhibits and Reports of Form 8-K (a) Exhibits: Exhibit (4.10): Fourth Amendment dated December 15, 1997 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A., Comerica Bank - Texas, and The Bank of Tokyo - Mitsubishi, Ltd. As Lenders. Exhibit (27): Financial Data Schedule (EDGAR submission only) (b) The Registrant filed two reports on Form 8-K during the quarter ended December 31, 1997. The Registrant filed a Form 8-K on October 15, 1997 relating to a press release containing "forward-looking statements" about its prospects for the future. The Registrant also filed a Form 8-K on October 28, 1997 regarding two significant rulings by the district court relating to the company's ongoing patent litigation with GAF. 13 14 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 13, 1998 /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 14 15 INDEX TO EXHIBIT Exhibit Number Description - -------------- ----------- Exhibit (4.10): Fourth Amendment dated December 15, 1997 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A., Comerica Bank - Texas, and The Bank of Tokyo - Mitsubishi, Ltd. As Lenders. Exhibit (27): Financial Data Schedule (EDGAR submission only)