SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 1998
Commission File Number: 333-10611
UNIFRAX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 34-1535916
(State or other jurisdiction of (Employer Identification No.)
jurisdiction)
2351 Whirlpool Street, Niagara Falls, NY 14305-2413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 278-3800
-------------------------------------------
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 _____
<PAGE>
Unifrax Corporation
Form 10-Q
Index
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997.................1
Condensed Consolidated Statements of Income for the
Three-month periods ended March 31, 1998 and 1997....2
Condensed Consolidated Statements of Cash Flow for the
Three-months periods ended March 31, 1998 and 1997...3
Notes to Condensed Consolidated Financial Statements......4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................9
Item 2. Changes in Securities.....................................9
Item 3. Defaults on Senior Securities.............................9
Item 4. Submission of Matters to a Vote of Security Holders ......9
Item 5. Other Information.........................................9
Item 6. Exhibits and Report on Form 8-K...........................9
Signatures............................................................10
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unifrax Corporation
Condensed Consolidated Balance Sheets
(Unaudited - In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31 March 31
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 359 $ 425
Accounts receivable, less allowances of $1,254
and $992, respectively 12,720 13,693
Inventories 7,885 9,075
Deferred income taxes 2,320 2,320
Prepaid expenses and other current assets 411 475
--------- --------
Total current assets 23,695 25,988
Property, plant and equipment, at cost 70,907 71,251
Less accumulated depreciation and amortization (33,391) (34,528)
-------- --------
37,516 36,723
Deferred income taxes 24,849 24,338
Organization costs, net of accumulated amortization
of $891 and $1,062, respectively 4,030 3,842
Other assets 372 328
--------- --------
$ 90,462 $ 91,219
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,206 $ 2,411
Accrued expenses 7,568 10,592
---------- --------
Total current liabilities 10,774 13,003
Long term debt 115,500 112,500
Note payable--affiliate 7,000 7,000
Accrued postretirement benefit cost 3,209 3,278
Other long-term obligations 158 159
-------- --------
Total liabilities 136,641 135,940
STOCKHOLDERS' DEFICIT
Common stock--$.01 par value;
shares authorized--40,000;
shares issued and outstanding--20,000 -- --
Redeemable convertible cumulative preferred
stock--voting $.01 par value;
shares authorized--10,000, shares issued and
outstanding--1,666.67
(aggregate liquidation preference of $2,536
and $2,574, respectively,
including dividends in arrears) -- --
Additional paid-in capital 42,520 42,520
Accumulated deficit (88,406) (86,913)
Cumulative translation adjustment (293) (328)
----------- -----------
Total stockholders' deficit (46,179) (44,721)
---------- --------
$ 90,462 $ 91,219
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Unifrax Corporation
Condensed Consolidated Statements of Income
(Unaudited - In Thousands)
Three Months Ended March 31
1997 1998
---- ----
Net Sales $22,028 $21,734
Cost of goods sold 11,906 10,912
------ ------
Gross profit 10,122 10,822
Selling and distribution expenses 3,220 3,134
Administration expenses 1,974 2,066
Research and development expenses 642 666
--------- --------
Operating income 4,286 4,956
Interest expense (3,157) (3,031)
Other income (expense), net 33 79
----------- ----------
Income before income taxes 1,162 2,004
Provision for income taxes 510 511
--------- --------
Net Income $ 652 $ 1,493
======== =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Unifrax Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31
1997 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 652 $ 1,493
Depreciation and amortization 1,186 1,426
Other adjustments and changes in operating assets and liabilities 1,064 544
-------- --------
Cash provided by operating activities 2,902 3,463
INVESTING ACTIVITIES
Capital expenditures (2,992) (416)
Deferred software and other costs -- --
Proceeds from sales of property, plant and equipment 9 19
-------- ---------
Cash used in investing activities (2,983) (397)
FINANCING ACTIVITIES
Borrowings under revolving loan 800 4,900
Repayments of revolving loan 0 (6,900)
Repayment of term loan (1,250) (1,000)
-------- --------
Cash used in financing activities (450) (3,000)
Net (decrease) increase in cash (531) 66
Cash--beginning of period 898 359
------------- ---------
Cash--end of period $ 367 $ 425
============= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Unifrax Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Unifrax Corporation ("The Company" or "Unifrax") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Results for the period ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and the notes thereto for the year ended December 31, 1997, included in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. All capitalized terms used in these notes to condensed consolidated
financial statements that are not defined herein have the meanings given to them
in such consolidated financial statements and notes to consolidated financial
statements.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
December 31 March 31
1997 1998
----------- --------
Raw materials and supplies $1,598 $1,475
Work in process 1,551 1,726
Finished products 4,410 5,379
------ ------
7,559 8,580
Adjustment to LIFO Cost 326 495
-------- --------
$ 7,885 $9,075
======= ======
<PAGE>
NOTE C - CONTINGENCIES
Ceramic Fibers
Regulatory agencies and others, including the Company, are currently conducting
scientific research to determine the potential health impact resulting from the
inhalation of airborne ceramic fibers. To date, the results of this research
have been inconclusive as to whether or not ceramic fiber exposure presents an
unreasonable risk to humans.
Various legal proceedings and claims have been made against manufacturers of
ceramic fibers, including the Company, alleging death or personal injury as a
result of exposure in the manufacture and handling of ceramic fiber and other
products. The amount of any liability that might ultimately exist with respect
to these claims is presently not determinable.
Consistent with customary practice among manufacturers of ceramic fiber
products, the Company has entered into agreements with distributors of its
product whereby the Company has agreed to indemnify the distributors against
losses resulting from ceramic fiber claims and the costs to defend against such
claims. The amount of any liability that might ultimately exist with respect to
these indemnities is presently not determinable.
Pursuant to the Unifrax Corporation Recapitalization Agreement
("Recapitalization Agreement"), BP America Inc. and certain of its affiliates
(collectively "BPA"), has agreed to indemnify the Company against liabilities
for personal injury and wrongful death attributable to exposure prior to the
Closing to refractory ceramic fibers manufactured by the Company. BPA has agreed
to indemnify the Company against all liabilities arising from exposure claims
pending at the time of the Closing. For all other claims arising from alleged
exposure occurring solely prior to Closing, BPA has agreed to indemnify the
Company against 80% of all losses, until the total loss which the Company incurs
reaches $3.0 million, after which time BPA has agreed to indemnify the Company
against 100% of such losses. BPA has agreed to indemnify the Company against all
punitive damages attributable to the conduct of the Company prior to Closing.
Where losses arise from alleged exposure both before and after Closing, the
losses will be allocated between BPA and the Company, pro rata, based on the
length of exposure or pursuant to arbitration if initiated by the Company.
The Company cannot avail itself of this indemnity for losses attributable to the
Company's failure to maintain a Product Stewardship Program consistent with the
program maintained by the Company prior to Closing, as modified in a
commercially reasonable manner in accordance with changing regulatory,
scientific and technical factors. BP shall not indemnify the Company with
respect to any liabilities for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product Stewardship Program
consistent with that maintained by the Company prior to the Closing. Unifrax
intends to defend ceramic fiber claims vigorously.
Environmental Matters
The Company is subject to loss contingencies pursuant to various federal, state
and local environmental laws and regulations. These include possible obligations
to remove or mitigate the effects on the environment of the placement, storage,
disposal or release of certain chemical or petroleum substances by the Company
or by other parties.
Under the terms of the Recapitalization Agreement, BPA assumed liability, and
the rights to recovery from third parties, for environmental remediation and
other similar required actions with respect to certain environmental obligations
of Unifrax existing as of the Closing Date.
The Company may, in the future, be involved in further environmental assessments
or clean-ups. While the ultimate requirement for any such remediation, and its
cost, is presently not known, and while the amount of any future costs could be
material to the results of operations in the period in which they are
recognized, the Company does not expect these costs, based upon currently known
information and existing requirements, to have a material adverse effect on its
financial position.
Prior to divestment, the Company owned a site in Sanborn, NY, at which extensive
remediation activity is currently being undertaken. The site was used by a
number of former Carborundum operations other than the Company. Testing has
indicated that certain contamination is present in the soil. Neither past nor
current operations of the Company are believed to have contributed to, or to be
contributing to, the existence of the contamination. BPA has assumed
responsibility for implementing remedial activities specified by the State of
New York which required removal of the contamination, chiefly by means of soil
vapor extraction. Under the terms of an agreement, BPA has taken title to and
assumed liability for the remediation of this property as of October 30, 1996.
Unifrax leases a portion of the present manufacturing facilities on this site.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, including product liability claims.
From time to time the Company has been named as a defendant in lawsuits
involving alleged injury suffered from exposure to ceramic fiber. The Company
believes that it is not presently a party to any litigation the outcome of which
would have a material adverse effect on its financial condition or results of
operations. Pursuant to the Recapitalization Agreement, BPA agreed to indemnify
the Company, subject to certain limitations, against all currently known
lawsuits and certain future lawsuits alleging exposure to ceramic fiber.
Various other legal proceedings and claims have been made against the Company in
the ordinary course of business. While the amounts could be material to the
results of operations in the period recognized, in the opinion of management of
the Company, the ultimate liability, if any, resulting from such matters will
not have a material adverse effect on the Company's financial position.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in this Management Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this document that do not
relate to present or historical conditions are "forward looking statements"
within the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and of Section 21F of the Securities Exchange Act of 1934, as amended.
Additional oral or written statements may be made by the Company from time to
time, and such statements may be included in documents filed with the Securities
and Exchange Commission. Such forward looking statements involve risks and
uncertainties which could cause results or outcomes to differ materially from
those expressed in such forward looking statements. Among the important factors
on which such statements are based are assumptions concerning the continuing
strength of the ceramic fiber market on which the Company is substantially
dependent, changing prices for ceramic fiber products, acceptance of new
products, the status of health and safety issues affecting the ceramic fiber
industry in general and the Company in particular, the Company's continuing
ability to operate under the restrictions imposed by the substantial
indebtedness which it is subject to, the risks associated with international
operations, the impact of environmental regulations on the Company's operations
and property and related governmental regulations, and the continuing
availability of certain raw materials, including vermiculite which is purchased
from a source in China.
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
Net sales for the first quarter of 1998 decreased by $0.3 million or 1.3% from
$22.0 million in 1997 to $21.7 million in 1998, due to lower sales in some
traditional blanket applications and in porosity-controlled products.
Gross profit increased by $0.7 million, or 6.9%, from $10.1 million in 1997 to
$10.8 million in 1998. Gross profit as a percentage of net sales increased from
46.0% in 1997 to 49.8% in 1998. The gross profit increase was primarily due to
fewer outside purchases and resales of ceramic fiber.
Selling and distribution expenses decreased by $0.1 million, or 2.7%, from $3.2
million in 1997 to $3.1 million in 1998 as a result of the lower sales volume.
Selling and distribution expense as a percentage of net sales decreased slightly
from 14.6% in 1997 to 14.4% in 1998.
Administration expenses increased by $0.1 million, or 4.7%, from $2.0 million in
1997 to $2.1 million in 1998 due to higher property taxes. Administrative
expenses as a percentage of net sales were 9.0 % in 1997 and 9.5% in 1998.
Research and development expenses remained relatively constant in 1997 and 1998,
increasing as a percentage of net sales from 2.9% in 1997 to 3.1% in 1998, due
to the lower sales in 1998.
Operating income increased by $0.7 million, or 15.6%, from $4.3 million in 1997
to $5.0 million in 1998. Operating income as a percentage of net sales increased
from 19.5% in 1997 to 22.8% in 1998, as a result of the factors previously
indicated.
Interest expense decreased by $0.2 million, or 4.0% from $3.2 million in 1997 to
$3.0 million in 1998 due to the lower level of long term debt. Interest expense
decreased as a percentage of net sales from 14.3% in 1997 to 13.9% in 1998.
Provision for income taxes remained at $0.5 million in 1997 and 1998. The
effective income tax rate decreased from 43.9% in 1997 to 25.5% in 1998,
primarily as a result of recognizing deferred tax benefits resulting from the
Recapitalization which were previously unrecognized.
Net income increased by $0.8 million or 129.0% from $0.7 million in 1997 to $1.5
million in 1998, as a result of the factors previously indicated. Net income as
a percentage of net sales increased from 3.0% in 1997 to 6.9% in 1998.
Liquidity and Capital Resources
During the three-month period ended March 31, 1998, the Company's cash flows
from operating activities increased by $0.6 million or 19.3%, from $2.9 million
in 1997 to $3.5 million in 1998. This increase was primarily the result of
increased net income offset somewhat by increased working capital requirements.
Cash outflows from investing activities decreased by $2.6 million, or 86.7%,
from $3.0 million in 1997 to $0.4 million in 1998. This decrease was primarily
due to lower capital spending.
Cash outflows from financing activities increased by $2.5 million from $0.5
million in 1997 to $3.0 million in 1998. During the first quarter of 1998 the
Company made a voluntary prepayment of principal of $1.0 million on its Term
Loan and repaid $2.0 million against its revolving credit facility. The $0.5
million remaining borrowing against the revolving credit facility at March 31,
1998, was repaid in full on April 1, 1998.
Management believes that cash flows from operations and the available credit
facility will be sufficient to fund operating and capital expenditure needs for
1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults on Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the period covered by
this report.
<PAGE>
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.
UNIFRAX CORPORATION
Date: May 11, 1998 By: /s/ William P. Kelly
------------ --------------------
William P. Kelly, President and
Chief Executive Officer
Date: May 11, 1998 By: /s/ Mark D. Roos
------------ --------------------
Mark D. Roos, Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNIFRAX
CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH
31, 1998, AND THEIR CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD
ENDED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 425
<SECURITIES> 0
<RECEIVABLES> 14,060
<ALLOWANCES> 992
<INVENTORY> 9,075
<CURRENT-ASSETS> 25,988
<PP&E> 71,251
<DEPRECIATION> 34,528
<TOTAL-ASSETS> 91,219
<CURRENT-LIABILITIES> 13,003
<BONDS> 119,500
<COMMON> 0
0
0
<OTHER-SE> (44,721)
<TOTAL-LIABILITY-AND-EQUITY> 91,219
<SALES> 21,734
<TOTAL-REVENUES> 21,734
<CGS> 10,912
<TOTAL-COSTS> 10,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 268
<INTEREST-EXPENSE> 3,031
<INCOME-PRETAX> 2,004
<INCOME-TAX> 511
<INCOME-CONTINUING> 1,493
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 1,493
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
