1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-22098
INSILCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0635844
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Metro Place North
Fifth Floor
Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)
614-792-0468
(Registrant's telephone number, including area code)
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. (X) Yes ( ) No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 10, 1997,
4,080,693 shares of common stock, $.001 par value, were outstanding.
2
INSILCO CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
- September 30, 1997 (unaudited)
- December 31, 1996
Condensed Consolidated Income Statements 4
- Nine months ended September 30, 1997 (unaudited)
- Nine months ended September 30, 1996 (unaudited)
- Three months ended September 30, 1997 (unaudited)
- Three months ended September 30, 1996 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity (Deficit) 5
- For the nine months ended September 30, 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
- Nine months ended September 30, 1997 (unaudited)
- Nine months ended September 30, 1996 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 7
Independent Auditors' Review Report 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II. OTHER INFORMATION - Not Applicable
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
Assets
------
Current assets:
Cash and cash equivalents $ 4,629 3,481
Trade receivables, net 85,381 73,874
Other receivables 4,962 8,499
Inventories, net 54,474 66,385
Deferred tax asset 1,621 29,859
Prepaid expenses and other current assets 7,043 7,010
--------- -------
Total current assets 158,110 189,108
Property, plant and equipment, net 110,330 114,379
Deferred tax asset 3,752 7,542
Investment in unconsolidated companies 9,288 8,550
Goodwill, net 13,633 13,659
Other assets and deferred charges 18,936 18,762
--------- -------
Total assets $ 314,049 352,000
========= =======
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Current portion of long-term debt $ 626 24,272
Current portion of other long-term obligations 5,603 6,661
Accounts payable 33,956 37,984
Income taxes payable 10,994 3,596
Accrued expenses and other 51,350 68,639
--------- -------
Total current liabilities 102,529 141,152
Long-term debt, excluding current portion 279,737 136,770
Other long-term obligations, excluding current portion 37,448 40,676
Stockholders' equity (deficit) (105,665) 33,402
--------- -------
Commitments and contingencies (See Note 8)
Total liabilities and stockholders' equity (deficit) $ 314,049 352,000
========= =======
Note: The condensed consolidated balance sheet at December 31, 1996 has been
derived from the audited balance sheet as of that date.
See accompanying notes to unaudited condensed consolidated financial statements.
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4
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
(Unaudited)
(In thousands, except share and per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Sales $ 418,406 443,390 131,394 142,893
Cost of products sold 288,686 300,535 93,250 97,783
Depreciation and amortization 14,547 12,797 4,749 4,710
Selling, general and administrative expenses 73,243 82,970 22,432 26,197
---------- --------- --------- ---------
Operating income 41,930 47,088 10,963 14,203
---------- --------- --------- ---------
Other income (expense):
Interest expense (13,460) (14,044) (5,698) (4,644)
Interest income 2,848 673 770 213
Gain on sale of Rolodex 95,001 -- -- --
Equity in net income of Thermalex 2,154 2,273 607 910
Other income, net 189 3,569 120 1,828
---------- --------- --------- ---------
Total other income (expense) 86,732 (7,529) (4,201) (1,693)
---------- --------- --------- ---------
Income before income taxes and
extraordinary item 128,662 39,559 6,762 12,510
Income tax expense (49,821) (13,126) (2,447) (4,028)
---------- --------- --------- ---------
Income before extraordinary item 78,841 26,433 4,315 8,482
Extraordinary item, net of tax (728) -- (728) --
---------- --------- --------- ---------
Net income $ 78,113 26,433 3,587 8,482
========== ========= ========= =========
Earnings per share and common
share equivalent:
Income before extraordinary item $ 9.27 2.67 0.74 0.86
Extraordinary item (0.08) -- (0.12) --
---------- --------- --------- ---------
Net income per share and common
share equivalent $ 9.19 2.67 0.62 0.86
========== ========= ========= =========
Weighted average number of common shares
and common share equivalents 8,502,521 9,882,651 5,799,472 9,830,403
========== ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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5
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Nine Months Ended September 30, 1997
(unaudited)
(In thousands)
Common Stock Additional Accumulated Cumulative Total
Par Value Treasury Paid-in Equity Translation Stockholders'
$0.001 Stock Capital (Deficit) Adjustment Equity (Deficit)
------------ -------- ----------- ----------- ----------- ----------------
Balance at December 31, 1996 $10 (10,745) 81,496 (37,115) (244) 33,402
Net income -- -- -- 78,113 -- 78,113
Repurchase of shares (see Note 4) (5) -- (92,673) (127,322) -- (220,000)
Costs of tender -- -- (926) -- -- (926)
Purchase of treasury stock -- (5,523) -- -- -- (5,523)
Restricted Stock -- -- 570 -- -- 570
Shares issued upon exercise of stock options -- -- 8,255 -- -- 8,255
Tax benefit from exercise of stock options -- -- 3,278 -- -- 3,278
Foreign currency translation -- -- -- -- (2,834) (2,834)
--- ------- ------- -------- ------ --------
Balance at September 30, 1997 $ 5 (16,268) -- (86,324) (3,078) (105,665)
=== ======= ======= ======== ====== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 78,113 26,433
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,547 12,797
Deferred tax expense 33,359 10,370
Gain on sale of Rolodex (95,001) --
Other noncash charges and credits (42) (739)
Change in operating assets and liabilities:
Receivables (19,314) 4,492
Inventories 3,703 (1,191)
Payables and other (1,942) (26,036)
Other long-term liabilities (1,802) (1,786)
--------- -------
Net cash provided by operating activities 11,621 24,340
--------- -------
Cash flows from investing activities:
Proceeds from divestiture, net 112,610 6,392
Other investing activities 3,437 2,074
Capital expenditures (15,022) (14,662)
Acquisitions of businesses, net of cash acquired -- (39,123)
--------- -------
Net cash provided by (used in) investing activities 101,025 (45,319)
--------- -------
Cash flows from financing activities:
Repurchase of shares (see Note 4) (220,000) --
Retirement of long-term debt (117,071) (11,224)
Debt issuance and tender costs (11,126) --
Payment of prepetition liabilities (2,811) (2,839)
Purchase of treasury stock (1,887) (3,932)
Proceeds from sale of notes 150,000 --
Proceeds from debt borrowing 87,038 29,653
Proceeds from sale of stock 4,618 811
--------- -------
Net cash provided by (used in) financing activities (111,239) 12,469
--------- -------
Effect of exchange rate changes on cash (259) --
--------- -------
Net increase (decrease) in cash and cash equivalents 1,148 (8,510)
Cash and cash equivalents at beginning of period 3,481 9,894
--------- -------
Cash and cash equivalents at end of period $ 4,629 1,384
========= =======
Interest paid $ 10,635 12,946
========= =======
Income taxes paid $ 6,683 1,865
========= =======
See accompanying notes to unaudited condensed consolidated financial statements.
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INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1997
(1) Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all determinable adjustments
have been made which are considered necessary to present fairly the
financial position and the results of operations and cash flows at the
dates and for the periods presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results are likely to differ from
those estimates and assumptions, but management does not believe such
differences will materially affect the Company's financial position,
results of operations or cash flows.
(2) Divestiture
-----------
On March 5, 1997, the Company completed the sale of its Office Products
business within the Office Products/Specialty Publishing Group with the
divestiture of its traditional office products business (the "Rolodex
Business") for $112.6 million, net of transaction costs including
investment banking fees and expenses of $2.0 million paid to Goldman
Sachs & Co., ("Goldman Sachs") an affiliate of the Company's principal
stockholder.
The divestiture of the Rolodex Business was preceded in 1996 by the
divestiture of the Rolodex electronics product line ("Rolodex
Electronics") and the Company's computer accessories business
("Curtis"). (See Note 9 for unaudited pro forma financial information
with respect to these divestitures).
(3) Refinancing of Existing Debt
----------------------------
On July 3, 1997, the Company refinanced its existing debt under a new
six year $200 million amended and restated credit agreement with a bank
group consisting of Citicorp USA, Inc., Goldman Sachs Credit Partners,
L.P., (an affiliate of the Company's principal stockholder) and First
National Bank of Chicago (the "Bank Credit Agreement"). The Bank Credit
Agreement provides for a $200 million revolving credit facility with a
$50 million sublimit for issuance of letters of credit and a $50 million
sublimit for multi-currency borrowing. The bank loans bear interest at
various floating rates, at the Company's option, which approximate the
one to six month LIBOR rates plus 1.25% (such LIBOR rates approximated
5.66% to 5.84% at September 30, 1997). The revolving credit facility
will terminate and all amounts outstanding, if any, will be due on July
8, 2003.
Annual commitment fees consist of 0.3% of the average daily unused
commitment and 1.25% of
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8
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1997
the average outstanding letters of credit. An underwriting fee of
$1,750,000 was paid to the co-agents in July 1997.
The Bank Credit Agreement is guaranteed on a joint and several basis by
the Company's material directly and indirectly wholly owned subsidiaries
(the Guarantors) and has been secured by substantially all assets of the
Guarantors. The Bank Credit Agreement contains certain financial and
other covenants usual and customary for a secured credit agreement.
(4) Repurchase of Shares of Common Stock
------------------------------------
On July 10, 1997, the Company, using the proceeds from the sale of the
Rolodex Business purchased (i) 2,805,194 shares from Water Street
Corporate Recovery Fund I, L.P. ("Water Street") (the Company's largest
stockholder which is an investment partnership of which Goldman Sachs &
Co. is the general partner) at $38.50 per share in cash for an aggregate
purchase price of $107,999,969 and (ii) 51,948 shares from Robert L.
Smialek, the President and Chairman of the Board of the Company, at
$38.50 per share in cash, for an aggregate purchase price of $1,999,998.
On July 11, 1997, the Company commenced a tender offer (the "Tender
Offer"), pursuant to which it offered to purchase up to 2,857,142 shares
at a price of $38.50 per share in cash. Upon the expiration of the
Tender Offer, on August 12, 1997, 2,857,142 shares had been tendered and
the Company purchased all of the shares tendered. At the completion of
the Tender Offer, the number of outstanding shares were reduced to
approximately 4.1 million. The Company incurred transaction fees of
$204,000 payable to Goldman Sachs related to the Tender Offer.
(5) Issuance of Subordinated Notes
------------------------------
On August 12, 1997, the Company completed the issuance of $150 million
of 10.25% senior subordinated notes (the "Notes") due August 15, 2007
which was managed by an underwriting group of Goldman Sachs, McDonald &
Company Securities, Inc. and Citicorp Securities, Inc. The purchase of
shares tendered in the Tender Offer was paid for from the proceeds of
the issuance and sale of the Notes.
The net proceeds from the offer and sale of the Notes (the "Offering")
were approximately $145.9 million after payment of $4.1 million in
underwriting fees to the underwriting group. The Company used the net
proceeds from the Offering to fund the purchase of shares tendered in
the Tender Offer, repay loans under the pay fees and expenses of the
aforementioned transactions and for general corporate purposes. In
addition to the underwriting fees discussed above and in Note 3, the
Company incurred additional fees payable to Goldman Sachs of
approximately $2.0 million in connection with the refinancing (see Note
3) and issuance of the Notes.
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9
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1997
(6) Inventories
-----------
Inventories consisted of the following at September 30, 1997 (in
thousands):
Raw materials and supplies $25,643
Work-in-process 18,177
Finished goods 10,654
-------
Total inventories $54,474
=======
(7) Earnings Per Share
------------------
When dilutive, stock options are included as share equivalents using the
treasury stock method.
In March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("FASB") No. 128, Earnings
Per Share, which simplifies the method for calculating earnings per
share. As defined in FASB No. 128, "basic earnings per share" is
determined using only the weighted average of the shares issued and
reserved for issuance, while "diluted earnings per share" includes stock
options (when dilutive) as share equivalents using the treasury stock
method. If FASB No. 128 had been adopted as of January 1, 1997, basic
earnings per share for the third quarter of 1997 would have been $0.64
per share and diluted earnings per share would have been $0.62 per
share; for the nine months ended September 30, 1997, basic earnings per
share would have been $9.47 per share and diluted earnings per share
would have been $9.19 per share.
(8) Contingencies
-------------
The Company is implicated in various claims and legal actions arising in
the ordinary course of business. These claims and any resulting
liabilities will be addressed in the ordinary course of business and be
paid in cash as expenses are incurred.
The United States Federal Trade Commission ("FTC") is investigating the
Company's acquisition of the automotive tubing business assets of
Helima-Helvetion International, Inc. ("HHI") (a subsidiary of Helmut
Lingemann GmbH & Co., see Note 9) to determine if the acquisition
violated U.S. antitrust laws. The Company has responded to various FTC
requests for information concerning the relevant market and competitive
conditions in that market. The Company is currently in discussion with
the FTC for a potential resolution of this issue. Revenues for the three
and nine months ended September 30, 1997 associated with the automotive
tubing business acquired from HHI were $1,139,000 and $4,025,000,
respectively, and the tangible net assets at September 30, 1997 were
$7,352,000.
In the opinion of management, the ultimate disposition of the matters
discussed above will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
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10
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1997
(9) Pro Forma Result of Operations
------------------------------
Set forth below is certain unaudited pro forma consolidated financial
information of the Company based on historical information that has been
adjusted to reflect the divestiture of the Office Products business and
all transactions directly or indirectly related to the transactions
discussed in Notes 3, 4 and 5. In addition, the historical financial
information for the nine and three months ended September 30, 1996 has
been adjusted to reflect the acquisition of the automotive aluminum
tubing business of Helmut Lingemann GmbH & Co (the "Lingemann Business")
which was acquired in July 1996.
The income statement data give effect to the following transactions as
if all had occurred at the beginning of each period presented; (i) the
Company's purchase of 2,805,194 shares of common stock from Water Street
and 51,948 shares from Mr. Smialek at a price of $38.50 per share; (ii)
the Company's purchase of 2,857,142 shares at a price of $38.50 per
share pursuant to the Tender Offer; (iii) the Closing of the Bank Credit
Agreement (including advances to refinance in full outstanding
indebtedness under the prior credit agreement); and (iv) the issuance of
$150 million of the Notes. The income statement for the nine months
ended September 30, 1997 and the 1996 periods give effect to the sale of
the Rolodex Business (which occurred on March 5, 1997) as if it occurred
at the beginning of each period. In addition, the income statement data
for the 1996 periods have been adjusted to reflect (i) the divestiture
of Rolodex Electronics, (ii) the divestiture of Curtis, and (iii) the
acquisition of the Lingemann Business as if all had occurred at the
beginning of the periods presented. The Rolodex Electronics and Curtis
divestitures and the Lingemann acquisition actually occurred in the
third and fourth quarters of 1996. The nonrecurring transactions
directly related to the aforementioned transaction are excluded from the
pro forma income statement data. The unaudited summary pro forma
consolidated financial data is based on certain assumptions and
estimates, and therefore does not purport to be indicative of the
results that would actually have been obtained had the transactions been
completed as of such dates or indicative of future results of operations
and financial position.
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INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1997
Unaudited Pro Forma Condensed Consolidated Income Statements
(In thousands, except share and per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
----- ---- ---- ----
Sales $ 407,609 391,618 131,394 122,164
Cost of products sold 283,203 274,725 93,250 87,344
Depreciation and amortization 14,353 13,074 4,749 4,275
Selling, general and administrative
expenses 70,289 66,592 22,432 20,099
---------- --------- --------- ---------
Operating income 39,764 37,227 10,963 10,446
---------- --------- --------- ---------
Other income (expense):
Interest expense (22,339) (24,521) (7,459) (7,799)
Interest income 717 536 489 164
Equity in net income of Thermalex 2,154 2,273 607 910
Other income, net 188 4,220 120 2,463
---------- --------- --------- ---------
Total other income (expense) (19,280) (17,492) (6,243) (4,262)
---------- --------- --------- ---------
Income before income taxes 20,484 19,735 4,720 6,184
Income tax expense (7,535) (6,853) (1,661) (2,246)
---------- --------- --------- ---------
Net income $ 12,949 12,882 3,059 3,938
========== ========= ========= =========
Net income per share and common
share equivalent $ 3.10 3.09 0.73 0.96
========== ========= ========= =========
Weighted average number of common
shares and common share equivalents 4,180,176 4,168,365 4,215,619 4,116,116
========== ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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INDEPENDENT AUDITORS' REVIEW REPORT
THE BOARD OF DIRECTORS
INSILCO CORPORATION
We have reviewed the condensed consolidated balance sheet of Insilco Corporation
and subsidiaries as of September 30, 1997, the related condensed consolidated
income statements for the three-month periods and nine-month periods ended
September 30, 1997 and 1996, the related condensed consolidated statement of
stockholders' equity (deficit) for the nine-month period ended September 30,
1997, and the related condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 1997 and 1996. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Insilco Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated January 31, 1997, except as to the
second paragraph in note 3, which is as of March 5, 1997, we expressed an
unqualified opinion on those consolidated financial statements. We did not audit
the 1996 financial statements of Thermalex, Inc., a 50 percent owned investee
company which is accounted for under the equity method. The 1996 financial
statements of Thermalex, Inc. were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Thermalex, Inc., was based solely on the report of the other
auditors. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1996, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Columbus, Ohio
October 17, 1997 KPMG Peat Marwick LLP
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a diversified manufacturer of automotive component products,
telecommunications and electronics components and is a publisher of specialty
publishing products. The Company's Automotive Components Group serves primarily
the automotive markets through Thermal Components and Steel Parts operating
units and manufactures stainless steel tubing used in non-automotive
applications through its Romac Metals operating unit. The Technologies Group
serves primarily the electrical, electronic and telecommunications components
markets through its Stewart Connector Systems, Stewart Stamping, Signal
Transformer and Escod Industries operating units. The Specialty Publishing Group
consists of Taylor Publishing (a publisher of yearbooks and other specialty
publications).
During 1996 and 1997, the Company completed several material transactions
affecting its ongoing operations and debt and capital structure. A summary of
these transactions follows:
o ACQUISITIONS: In 1996, the Company acquired the automotive aluminum tube
business of Helmut Lingemann GmbH & Co. (the "Lingemann Business"). This
acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets and liabilities acquired
based on their fair values at the acquisition date. The operating results
of the business acquired have been included for the periods subsequent to
the acquisition date.
o DIVESTITURES: The Office Products business of the Company's Office
Products/Specialty Publishing Group was divested in three separate
transactions during 1996 and the first quarter of 1997. The 1996
transactions included the divestitures of the Company's computer
accessories business (Curtis) and electronic organizer business (Rolodex
Electronics) for $21 million in the aggregate which was used to reduce the
outstanding amounts on the Company's bank loans. On March 5, 1997, the
remainder of the Office Products business, which consisted of the Rolodex
business, was sold for net cash proceeds of approximately $112 million (the
"Rolodex Proceeds").
o REFINANCING: The Company entered into an Amended and Restated Credit
Agreement as of July 3, 1997 (the "Bank Credit Agreement") that among other
things, provides for (i) a $200 million revolving credit facility, (ii) a
$50 million sublimit for commercial and standby letters of credit and (iii)
a $50 million sublimit for advances in selected foreign currencies.
o ISSUANCE OF SUBORDINATED DEBT: On August 12, 1997, the Company issued $150
million aggregate principal amount of 10.25% Senior Subordinated Notes due
2007 (the "Notes"), realizing therefrom net proceeds of $145.9 million.
o SELF TENDER: On July 10, 1997, the Company, using the Rolodex Proceeds
purchased an aggregate of 2,857,142 shares of its common stock for
$109,999,967. On August 12, 1997, the Company completed a tender offer (the
"Tender Offer"), pursuant to which it purchased an additional 2,857,142
shares for $109,999,967. The purchase of shares tendered in the Tender
Offer was paid for from the proceeds received on the issuance of the Notes.
The discussion that follows of the financial condition and results of operations
includes the effect of the transactions discussed above in the respective
periods in which they were recorded. As a result, the comparability of the
results is significantly impacted. Pro forma results of operations, assuming all
these transactions occurred at the beginning of the respective periods, are
presented in Note 9 to the Unaudited Condensed Consolidated Financial
Statements.
13
14
Summarized sales and operating income (loss) by business segment for the three
months and nine months ended September 30, 1997 compared to the corresponding
periods in 1996 are set forth in the following table (in thousands) and
discussed below:
Nine Months Three Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
SALES
Automotive Components Group $171,912 154,057 55,646 52,577
Technologies Group 148,063 137,647 50,102 45,466
Office Products/Specialty Publishing Group:
Specialty Publishing 87,634 85,179 25,646 24,121
Office Products 10,797 66,507 -- 20,729
-------- ------- ------- -------
98,431 151,686 25,646 44,850
-------- ------- ------- -------
$418,406 443,390 131,394 142,893
======== ======= ======= =======
OPERATING INCOME (LOSS)
Automotive Components Group $ 17,211 17,758 4,611 5,480
Technologies Group 17,326 19,056 5,955 5,653
Office Products/Specialty Publishing Group
Specialty Publishing 5,535 3,371 421 (286)
Office Products 1,926 6,966 -- 3,377
-------- ------- ------- -------
7,461 10,337 421 3,091
-------- ------- ------- -------
Unallocated Corporate (68) (63) (24) (21)
-------- ------- ------- -------
$ 41,930 47,088 10,963 14,203
======== ======= ======= =======
14
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SALES. Consolidated sales decreased by approximately 8% ($11,499,000) in the
third quarter of 1997 compared to the corresponding period in 1996 due to the
divestiture of the Office Products business in three separate transactions
completed in late 1996 and the first quarter of 1997. Sales of the Office
Products business were $20,729,000 in the third quarter of 1996. Excluding the
Office Products business, the Company's consolidated sales increased 8%
($9,230,000) in the third quarter of 1997 compared to 1996. In the first nine
months of 1997, consolidated sales decreased 6% ($24,984,000) compared to 1996
due to the divestiture of the Office Products business. Sales of office products
totaled $10,797,000 in the first nine months of 1997 compared to $66,507,000 in
the corresponding period in 1996. Excluding the Office Products business,
consolidated sales increased 8% ($30,726,000) in the first nine months of 1997
compared to 1996.
The Automotive Components Group's sales increased 6% in the third quarter and
12% in the first nine months of 1997 ($3,069,000 and $17,855,000, respectively)
compared to the corresponding periods in 1996. The third quarter 1997 increase
was due to increased sales of automotive heat exchangers and related components
from the July 1996 acquisition of the Lingemann Business which contributed
$7,322,000 in the third quarter of 1997 compared to $4,433,000 in 1996. The
increased sales from the acquisition were partially offset by the continued
weakness in the automotive heat exchanger aftermarket. The 12% sales increase
for the first nine months of 1997 compared to 1996 was due to: (i) increased
sales from the Lingemann Business which contributed $22,597,000 in 1997 compared
to $4,433,000 in 1996, and (ii) sales of transmission and other stamped
automotive parts at Steel Parts, which increased 6% in the first nine months of
1997 compared to 1996. These gains were partially offset by weakness in the
automotive heat exchanger aftermarket.
The Technologies Group's sales increased 10% in the third quarter and 8% in the
first nine months of 1997 ($4,636,000 and $10,416,000, respectively) compared to
the corresponding periods in 1996 primarily due to growth in sales of wire and
cable assembly products at Escod Industries. Escod's sales increased 21% and 15%
in the respective 1997 periods compared to 1996 due to strong demand from one of
its major customers, as well as continued expansion of its customer base. Sales
at Signal Transformer increased 23% and 10% in the respective 1997 periods
compared to 1996 primarily because of higher demand from electronics original
equipment manufacturers compared to the prior year. Partially offsetting these
gains was a 1% decline in sales at Stewart Connector for the third quarter of
1997 compared to 1996. Stewart Connector's performance was due to a slowdown in
connector assembly orders from a large telecommunications customer, as well as
lower sales to the networking industry.
Taylor Publishing's sales for the third quarter and first nine months of 1997
increased 6% and 3%, respectively, compared to the corresponding periods in 1996
largely due to the timing of deliveries of the fall season yearbooks.
OPERATING INCOME. Consolidated operating income for the third quarter decreased
from $14,203,000 in 1996 to $10,963,000 in 1997 primarily due to the divested
Office Products business. Excluding the Office Products business, third quarter
1997 operating income increased 1% ($137,000), mainly due to increases at Taylor
Publishing and, to a lesser degree, at the Technologies Group. In the first nine
months of 1997, operating income decreased 11% ($5,158,000) compared to the
corresponding period in 1996 primarily due to the divested Office Products
business. Excluding the divested Office Products business, operating income
decreased by less than 1% ($118,000).
The Automotive Components Group's operating income in the third quarter of 1997
compared to 1996 decreased from $5,480,000 to $4,611,000. The operating income
of the Automotive Components Group was impacted by: (i) soft aftermarket demand
for automotive heat exchangers, (ii) additional expenses related to the
integration of the Lingemann Business into the Company's operations, and (iii)
increased research and development costs associated with the Group's new
technical center. In addition, the
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Company's heat exchanger equipment manufacturer had a substantial decline in
order backlog as of the end of the quarter. The Automotive Components Group's
operating income in the first nine months of 1997 compared to the corresponding
period in 1996 decreased from $17,758,000 to $17,211,000. Lower operating income
from the automotive heat exchanger aftermarket business was partially offset by
increased operating income at the Company's stamped steel parts business and
stainless steel tubing business.
The Technologies Group's operating income in the third quarter of 1997 compared
to 1996 increased from $5,653,000 to $5,955,000. Operating income at Escod and
Signal improved during the quarter. However, these improvements were partially
offset by a less favorable sales mix of products at Stewart Connector and price
degradation on certain mature connector products, as well as decreased operating
income at Stewart Stamping related to one-time credits in 1996 and start-up
expenses at the El Paso stamping facility. The Technologies Group's operating
income in the first nine months of 1997 compared to 1996 decreased from
$19,056,000 to $17,326,000. Operating income was impacted by competitive pricing
pressures in the connector market and start-up expenses at the El Paso facility.
Partially offsetting these declines, Escod's operating income in the nine-month
period increased sharply over the prior year due to higher margins and increased
volume.
Taylor Publishing's operating income increased from a loss of $286,000 to income
of $421,000 in the third quarter of 1997 compared to 1996 primarily due to the
timing of fall season yearbook deliveries. In the first nine months of 1997,
Taylor Publishing's operating income compared to the corresponding 1996 period
increased from $3,371,000 to $5,535,000 due to improved operating margins from
increased productivity.
OTHER INCOME (EXPENSE). Other income for the first nine months of 1997 included
a pretax gain on the sale of the Rolodex Business totaling $95,001,000. Interest
expense increased 23% ($1,054,000) in the third quarter of 1997 compared to the
third quarter of 1996 due to the refinancing completed during the third quarter
of 1997. For the first nine months of 1997, interest expense decreased 4%
($584,000) from the corresponding period in 1996 due to lower debt prior to the
refinancing (see Note 3 to the condensed consolidated financial statements).
Interest income increased $557,000 and $2,175,000 in the third quarter and first
nine months of 1997, respectively, from the corresponding 1996 periods as a
result of interest income earned on the proceeds from the sale of the Rolodex
Business. (See Note 2 to the condensed consolidated financial statements).
Equity income from the Company's unconsolidated joint venture, Thermalex, was
$607,000 and $2,154,000 in the third quarter and first nine months of 1997
respectively, compared to $910,000 and $2,273,000 in the corresponding periods
of 1996. Thermalex incurred additional expenses in the third quarter of 1997
related to the start-up of a new extrusion press.
"Other income, net", included in Other income (expense), for the third quarter
and first nine months of 1997 decreased $1,708,000 and $3,380,000 from the
corresponding periods of 1996, respectively. For the quarter the decline was due
to a $2,200,000 favorable adjustment to the Company's environmental liabilities
in the third quarter of 1996. For the year over year comparison of the
nine-month period, other income for 1996 also included the favorable resolution
of several legal disputes dating to prior years.
INCOME TAX EXPENSE. The Company's effective income tax rate of 38.7% for the
first nine months of 1997 increased from 33.2% in the corresponding period of
1996 primarily because of the greater proportion of domestic source income
resulting from the sale of the Rolodex Business.
CASH FLOWS FROM OPERATING ACTIVITIES. Operations provided $11,621,000 of cash in
the first nine months of 1997 compared to $24,340,000 in 1996. Cash flows from
operations decreased due to the divestiture of businesses whose cash flows were
included in the 1996 results, the timing of cash receipts
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and higher tax payments. Prior to the sale of the Rolodex Business, the Company
had substantial tax loss carryforwards, which reduced cash tax payments from the
income tax expense recorded in the Company's financial statements. These tax
loss carryforwards were substantially reduced in 1997 due to the gain on the
sale of the Rolodex Business.
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES. On March 5, 1997, the Company
sold its Rolodex Business for a net sales price of $112,610,000. In the first
nine months of 1996, the Company had acquisitions totaling $39,123,000 including
its Lingemann automotive aluminum tube business acquired in July 1996 and
businesses serving the automotive, heavy truck and industrial manufacturing
radiator replacement market acquired in early 1996. In addition, in the third
quarter of 1996, the Company sold its computer accessories business for proceeds
of $6,392,000. In the first nine months of 1997, the Company received a
$1,460,000 dividend distribution from Thermalex, compared to a $400,000 dividend
and a $1,000,000 loan repayment in the corresponding 1996 period. The Company's
other current investments consist principally of capital expenditures which
totaled $15,022,000 and $14,662,000 for the first nine months of 1997 and 1996,
respectively.
CASH FLOWS FROM FINANCING ACTIVITIES. Financing activities used $111,239,000 in
the first nine months of 1997 as compared to providing $12,469,000 in 1996. On
July 3, 1997, the Company refinanced its existing bank debt (See Note 3 to the
condensed consolidated financial statements) and using the Rolodex Proceeds
purchased 2,857,142 shares of its common stock, at $38.50 per share in cash, for
an aggregate purchase price of $109,999,967. On August 12, 1997, the Company
completed the Tender Offer, in which it purchased an additional 2,857,142 shares
at a price of $38.50 per share in cash for an aggregate purchase price of
$109,999,967. On August 12, 1997, the Company issued $150 million of the Notes,
for net proceeds of approximately $145.9 million (the "Offering"). The Company
used the net proceeds from the Offering to fund the purchase of shares tendered
in the Tender Offer, repay loans under the Bank Credit Agreement, pay fees and
expenses of the aforementioned transactions and for general corporate purposes.
The Company incurred $11,126,000 in costs for the refinancing, Tender Offer and
issuance of the Notes.
In addition, the Company paid $2,811,000 and $2,839,000 of prepetition
liabilities in the first nine months of 1997 and 1996, respectively. In the
first nine months of 1997, the Company also repurchased $1,887,000 of its common
stock to fund income tax withholding on the exercise of stock options as
permitted by the Company's 1993 Long-Term Incentive Plan. In the first nine
months of 1996, the Company repurchased its common stock under a then existing
stock buyback program for aggregate proceeds of $3,932,000.
SEASONALITY. The Company's yearbook publishing business, Taylor Publishing, is
highly seasonal, with a majority of sales occurring in the second and third
quarters of the year. Taylor receives significant customer advance deposits
commencing each November and continuing through March. The Company's other
businesses are not highly seasonal.
IMPACT OF INFLATION AND CHANGING PRICES. Inflation and changing prices have not
significantly affected the Company's operating results or markets.
LIQUIDITY. At September 30, 1997, the Company's cash and cash equivalents and
net working capital amounted to $4,629,000 and $55,581,000, respectively,
representing increases in cash and cash equivalents of $1,148,000 and in net
working capital of $7,625,000. The borrowing ability under the Company's
revolving credit facility at the end of the third quarter of 1997 was
$62,010,000, including $40,242,000 available for letters of credit.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Except for the historical information contained herein, the matters
discussed in this Form 10-Q included in "Management's
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Discussion and Analysis of Financial Condition and Results of Operations"
include "Forward Looking Statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that the expectations
reflected in Forward Looking Statements are reasonable, they can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies or
projections involving anticipated revenues, expenses, earnings, levels of
capital expenditures, liquidity or indebtedness or other aspects of operating
results or financial position. The Company operations are subject to a number of
uncertainties, risks and other influences, many of which are outside the control
of the Company and any one of which, or a combination of which, could materially
affect the results of the Company's operations and whether the Forward Looking
Statements made by the Company ultimately prove to be accurate. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed from time to time in the Company's filings with the
Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSILCO CORPORATION
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Registrant
Date: November 13, 1997 By: /s/ Philip K. Woodlief
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Philip K. Woodlief
* Vice President and Corporate Controller;
Principal Accounting Officer
* In his capacity as Corporate Controller, Mr. Woodlief is duly authorized
to sign this report on behalf of the registrant.
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