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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/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
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Commission file number 333-14913-01
ASTOR HOLDINGS II, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 25-1766332
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
8521 SIX FORKS ROAD, RALEIGH, NORTH CAROLINA 27615
(Address of principal executive offices) (Zip code)
(919) 846-8011
(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.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of November 14, 1997: 1,000.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASTOR HOLDINGS II, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
September 30, September 30,
------------------------ ------------------
1997 1996 1997 (1) 1996
----------- ---------- --------- --------
<S> <C> <C> <C> <C>
Sales $73,974 $42,339 $140,731 $84,499
Cost of goods sold 54,014 32,153 103,193 64,408
-------- ------- -------- -------
Gross profit before depreciation
and amortization 19,960 10,186 37,538 20,091
Selling, general and administrative
expenses 7,851 4,577 14,939 9,010
Depreciation and amortization 2,424 1,792 4,751 3,345
-------- ------- -------- -------
Operating income 9,685 3,817 17,848 7,736
Income from Rheochem Technologies, Inc. 0 225 83 441
Interest expense, net (3,785) (1,607) (7,470) (3,276)
-------- ------- -------- -------
Income before taxes 5,900 2,435 10,461 4,901
Provision for income taxes 2,689 (1,242) 4,518 (190)
-------- ------- -------- -------
Net income $3,211 $3,677 $5,943 $5,091
-------- ------- -------- -------
-------- ------- -------- -------
Operating income $9,685 $3,817 $17,848 $7,736
Add: Depreciation and amortization 2,424 1,792 4,751 3,345
Add: Income from Rheochem Technologies, Inc. 0 225 83 441
-------- ------- ------- -------
EBITDA $12,109 $5,834 $22,682 $11,522
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
(1) Astor Holdings II, Inc.'s consolidated income for the six months
ended September 30, 1997 includes the results of operations of
Adco Technologies Inc. ("ADCO"), acquired on October 8, 1996, the
results of operations of Rheochem Technologies, Inc. ("Rheochem") for the
five months following its acquisition on April 30, 1997, and the results
of operations of the automobile replacement glass business of Tremco
Incorporated for the three months following its acquisition on July 1,
1997.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE>
ASTOR HOLDINGS II, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, March 31,
1997 1997
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $11,955 $12,972
Accounts receivable (net of allowance for doubtful
accounts of $1,123 and $1,058, respectively) 39,382 29,979
Receivable from affiliates 783 1,043
Inventory 31,840 28,974
Prepaid expenses and other current assets 3,380 3,853
--------- --------
Total current assets 87,340 76,821
Property, plant and equipment:
Land and improvements 8,781 8,400
Buildings and improvements 14,408 12,990
Machinery and equipment 65,376 60,838
--------- --------
Total cost 88,565 82,228
Less accumulated depreciation (11,782) (8,998)
--------- --------
Property, plant and equipment, net 76,783 73,230
Investment in affiliate 0 4,196
Goodwill 76,502 59,222
Other intangible assets 9,224 9,226
--------- --------
Total assets $249,849 $222,695
--------- --------
--------- --------
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $26,143 $21,195
Accrued interest payable 5,940 5,976
Accrued expenses 11,299 10,016
Current portion of long-term debt 2,218 1,492
--------- --------
Total current liabilities 45,600 38,679
Long-term debt 143,349 131,418
Subordinated note due to affiliate 6,047 6,125
Deferred income taxes 7,409 4,176
Other long-term liabilities 2,732 3,398
Shareholder's equity:
Common stock:
Par value $.01 per share, authorized 10,000 shares,
issued and outstanding 1,000 shares 0 0
Additional paid-in capital 36,671 36,671
Retained earnings - net of transfer of $23,864
accumulated deficit as a result of the March 31,
1996 quasi-reorganization 8,654 2,711
Foreign currency translation adjustment (613) (483)
--------- --------
Total shareholder's equity 44,712 38,899
--------- --------
Total liabilities and shareholder's equity $249,849 $222,695
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
ASTOR HOLDINGS II, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended September 30,
1997 1996
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $5,943 $5,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,751 3,345
Amortization of discount on bonds 27 0
Equity in income of affiliate (83) (441)
Changes in operating assets and liabilities
(net of businesses acquired)
Accounts receivable (4,653) 243
Receivable from affiliates (316) (69)
Inventory (1,383) (3,177)
Prepaid and other current assets 552 (866)
Accounts payable 2,092 49
Deferred taxes - net 3,171 (698)
Accrued interest payable (36) (294)
Accrued expenses (223) 2,317
Other long-term liabilities (655) (185)
--------- ---------
Subtotal (1,451) (2,680)
--------- ---------
Net cash provided by operating activities 9,187 5,315
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,927) (2,094)
Acquisition of business, net of cash acquired (18,058) 0
--------- ---------
Net cash used in investing activities (21,985) (2,094)
FINANCING ACTIVITIES:
Capital lease payments (31) 0
Payment of debt issuance costs (71) 0
Proceeds from long-term debt 13,059 0
Payment of long-term debt (1,151) (2,610)
Decrease in due to affiliated company 0 (172)
--------- ---------
Net cash provided by (used in) financing activities 11,806 (2,782)
Effect of exchange rate changes on cash and cash equivalents (25) 169
Net (decrease) increase in cash and cash equivalents (1,017) 608
Cash and cash equivalents at beginning of period 12,972 1,157
--------- ---------
Cash and cash equivalents at end of period $11,955 $1,765
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
ASTOR HOLDINGS II, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of Astor Holdings II, Inc.
(together with its subsidiaries, "Astor Holdings II" or the "Company") are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
audited financial statements. The unaudited financial statements should be
read in conjunction with the audited financial statements and footnotes for
the year ended March 31, 1997. In the opinion of management, all adjustments
and normal recurring accruals considered necessary for a fair presentation of
the results for the interim period have been included. The interim results
reflected in the accompanying unaudited financial statements are not
necessarily indicative of expected results for the full year.
EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization expense and extraordinary items. Information
concerning EBITDA is included as it is used by certain investors as a measure
of a company's ability to service its debt. EBITDA should not be used as an
alternative to, or be construed as more meaningful than, operating income or
cash flows or as an indicator of the operating performance or liquidity of
Astor Holdings II.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Environmental Remediation Costs
The Company accrues losses associated with environmental remediation
obligations when they are probable and reasonably estimable. These accruals
are adjusted as additional information is available or if circumstances
change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value.
Crude Oil Swap Contracts
The Company has entered into price swap contracts to fix the purchase price
of crude oil through March 1999. The contracts are intended to mitigate the
impact of market fluctuations related to the cost of crude oil on feedstock
costs. These contracts cover a notional amount of crude oil equivalent to
729,000 barrels as of September 30, 1997. Gains and losses on the contracts
are deferred and are recognized in income during the period affected. Gains
during the six-month periods ended September 30, 1997 and 1996 on crude oil
swaps aggregating $223,000 and $1,397,760, respectively, are included in cost
of goods sold in the statements of operations.
NOTE 3 - INVENTORY
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
<S> <C> <C>
Inventory consists of the following:
(In thousands)
Raw materials 13,180 12,568
Work-in-progress 5,872 4,844
Finished goods 13,791 12,586
Allowance for inventory obsolescence (1,003) (1,024)
------ ------
31,840 28,974
------ ------
</TABLE>
5
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NOTE 4 - INCOME TAXES
Income tax expense recorded for the six months ended September 30, 1997
is greater than that computed by applying the U.S. federal income tax rate to
income before taxes primarily due to the non-deductibility of the goodwill
amortization. Income tax expense recorded for the six month period ended
September 30, 1996 is less than that computed by applying the U.S. federal
income tax rate to income before taxes primarily due to the elimination of a
valuation allowance related to the Company's deferred tax assets.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
As is prevalent in the specialty chemical industry, Astor Holdings II
has environmental issues that it is addressing. There are issues related to
the remediation of contaminated soils and ground water at the Company's wax
manufacturing plants. Quaker State Corporation ("QSC") is responsible for
the vast majority of the costs associated with such issues. Astor Holdings
II's potential liability is limited to sharing fifty percent of the first
$5,500,000 of non-ground water remediation with QSC. Astor Holdings II will
pay for its share of the above costs by issuing subordinated 9% notes payable
to QSC which will be due in equal quarterly installments commencing on July
1, 1999 through December 31, 2008. As of September 30, 1997, Astor Holdings
II has incurred $251,477 of shared costs and has issued notes in such
principal amount to QSC. The future cost to Astor Holdings II for non-ground
water remediation, if any, is not known at this time.
The Company has environmental issues related to contamination at its
Titusville, Pennsylvania facility. Environmental conditions also exist at a
third party waste disposal area (the "Cyclops Site") located near the
Titusville facility. The owner of the Cyclops Site has requested the Company
to share the cost of voluntary cleanup. The Company has not acceded to this
request since it believes that it has no responsibility for the Cyclops Site.
Under the terms of the L1,450,988 of 8% subordinated debt due 2003 issued to
the former shareholders of Associated British Industries Limited ("ABI") by
Astor Holdings II's parent corporation, Astor Holdings, Inc. (the "Parent"), in
connection with the acquisition of ABI in 1995, the Parent is entitled to
set-off costs in excess of $350,000 relating to the Titusville facility and
any costs relating to the Cyclops Site against the principal and interest
otherwise payable, so long as the Parent notifies the shareholders by June
28, 1999 of the existence of any environmental condition that could give rise
to a set-off claim. The Company recently notified the shareholders
that environmental conditions exist at the Titusville facility and the
Cyclops Site and that the Company estimates that the aggregate amount of
environmental costs that may be set-off against principal and interest
otherwise payable to them is approximately $3,000,000. (At November 13, 1997
such principal and interest was the equivalent of approximately $2,900,000.)
Any setoff by the Parent will result in a corresponding reduction in a mirror
intercompany note from the Astor Holdngs II to the Parent. Astor Holdings II
believes it has provided for probable losses with respect to these issues and
does not anticipate a material impact on future operating results.
The Michigan Department of Natural Resources has identified the property on
which ADCO's plant is located as a site of environmental contamination.
Management has recorded a reserve of approximately $148,000 at September 30,
1997 included in other accrued liabilities, as an estimate of the amount of
loss that is reasonably possible to be incurred for this site. Management
does not believe it is reasonably possible that an adverse outcome on the
issue, greater than the amount recorded, would have a material effect on
Astor Holdings II's financial condition, operations or liquidity. ADCO has
notified Nalco Chemical Company ("Nalco"), the previous owner of ADCO, that
Nalco may be responsible for indemnifying ADCO for expenditures made for the
above matter. Pursuant to the terms of an agreement entered into in
connection with ADCO's acquisition of Adco Products, Inc., ADCO is
indemnified to a limited extent against certain environmental liabilities by
Nalco. In certain instances, the indemnification is limited by a $100,000
deductible and a limitation on the amount of indemnification ranging from
$341,600 to $3.5 million depending upon the type of claim made, with an
aggregate limitation of $3.5 million for all such claims made.
6
<PAGE>
NOTE 6 - BUSINESS SEGMENT INFORMATION
Astor Holdings II operates in two industries: Specialty Waxes, and Adhesives
and Sealants. Prior to the acquisition of ADCO in the year ended March 31,
1997, Astor Holdings II operated primarily in one industry, Specialty Waxes.
A summary of segment information for the six months ended September 30, 1997
is shown below (in thousands):
<TABLE>
<CAPTION>
Corporate
(includes
Specialty Adhesives goodwill
Waxes and Sealants amortization) Consolidated
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 99,403 $ 41,328 $ 0 $140,731
Intersegment sales 0 0 0 0
-------- --------- -------- --------
Total revenue $ 99,403 41,328 0 140,731
-------- --------- -------- --------
Operating income $ 15,163 $ 6,325 $ (3,640) $ 17,848
-------- --------- -------- --------
Income from Rheochem
Technologies, Inc. $ 83
Interest expense (7,470)
--------
Income before taxes $ 10,461
--------
</TABLE>
NOTE 7 - SUMMARY FINANCIAL INFORMATION
The following represents summarized financial information of Astor
Holdings II and its wholly-owned subsidiary Astor Corporation for the six
months ended September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Astor
Holdings II, Astor
Inc. Corporation Eliminations Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current assets $10,579 $ 87,340 $(10,579) $ 87,340
Non current assets 41,084 162,494 (41,069) 162,509
-------- -------- -------- --------
Total assets $51,663 $249,834 $(51,648) $249,849
-------- -------- -------- --------
-------- -------- -------- --------
Current liabilities $ 904 $ 55,277 $(10,581) $ 45,600
Non current liabilities 6,047 153,490 0 159,537
Preferred stock of
subsidiary 0 1,745 (1,745) 0
Stockholder's equity 44,712 39,322 (39,322) 44,712
-------- -------- -------- --------
Total liabilities and
stockholder's equity $51,663 $249,834 $(51,648) $249,849
-------- -------- -------- --------
-------- -------- -------- --------
Sales $ 0 $140,731 $ 0 $140,731
Operating income (2) 17,850 0 17,848
Net income $ (2) $ 5,945 $ 0 $ 5,943
</TABLE>
7
<PAGE>
NOTE 8 - ACQUISITIONS
On April 30, 1997, Astor Corporation acquired for $14.1 million the 50% joint
venture interest in Rheochem that was previously held by Rheochem, Inc. To
finance this acquisition, Astor Corporation borrowed $12.5 million under the
Senior Bank Facility and paid $1.6 million from available cash. Rheochem
operates as a division of Astor Corporation.
On July 1, 1997, Astor Corporation purchased from Tremco Incorporated the
assets of its automobile replacement glass business for $4 million.
Additional consideration of $1 million will be paid on June 30, 1999
contingent on certain future events.
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at
the dates of acquisition. The operating results of the acquired businesses
have been included in the consolidated statement of operations from the dates
of acquisition. If the Rheochem acquisition had taken place at the beginning
of fiscal 1998 rather than April 30, 1997, pro forma consolidated net sales
would have been $143.9 million and pro forma consolidated net income would
have been $5.9 million for the six month period ended September 30, 1997. If
the ADCO and Rheochem acquisitions had taken place at the beginning of fiscal
1997, pro forma consolidated net sales would have been $129.3 million and pro
forma consolidated net income would have been $5.6 million for the six month
period ended September 30, 1996.
NOTE 9 - SUBSEQUENT EVENT
On October 15, 1997 a change of control of Astor Holdings II occurred upon
the merger (the "Merger") of a wholly owned subsidiary of AlliedSignal Inc.
("AlliedSignal") with and into the sole stockholder of Astor Holdings II. By
virtue of the Merger Astor Holdings II has become an indirect wholly owned
subsidiary of AlliedSignal.
On October 23, 1997 the Company prepaid in full all its obligations
outstanding under the Credit Agreement dated as of October 8, 1996, as
amended, among the Company, certain lenders and The Chase Manhattan Bank, as
agent, and terminated the available revolving credit commitments thereunder.
The Company made such prepayment with the proceeds of loans made by
AlliedSignal for such purpose. These loans made by AlliedSignal are
evidenced by a dollar promissory note in the amount of $13,235,295.13 and a
pounds sterling promissory note in the amount of L 12,191,253.21. The
promissory notes require no annual amortization payments and are payable on
demand on or after November 1, 2002. The dollar based note bears interest at
the average 30-day commercial paper rate and the Sterling based note bears
interest at the 90 day LIBOR rate. In addition, an affiliated company has
repurchased in open market transactions approximately $85,000,000 of the
10.5% Senior Subordinated Notes Due 2006.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1996.
SALES. Sales of Astor Holdings II, Inc. (together with its subsidiaries,
"Astor Holdings II" or the "Company") increased by $31.7 million, or 75%,
from $42.3 million for the three months ended September 30, 1996 to $74.0
million for the three months ended September 30, 1997. Of this sales
increase, $18.6 million is related to the acquisition of Adco Technologies,
Inc. ("Adco"), on October 8, 1996 and $7.9 million is attributable to the
acquisition of the remaining 50% equity interest in the Rheochem
Technologies, Inc. joint venture ("Rheochem") on April 30, 1997. Excluding
the impact of Adco and Rheochem, sales increased $5.1 million or 12% as a
result of strong specialty wax demand in the United States.
GROSS PROFIT BEFORE DEPRECIATION AND AMORTIZATION. Gross profit
increased by $9.8 million from $10.2 million for the three months ended
September 30, 1996 to $20.0 million for the three months ended September 30,
1997. Approximately $5.9 million of the increase is attributable to the
acquisition of Adco and $2.3 million is attributable to the acquisition of
Rheochem. Gross profit as a percentage of sales increased from 24.1% to
27.0% as a result of the Adco acquisition and improved margins in the
Company's specialty wax business. Excluding the effect of the acquisitions of
Adco and Rheochem, gross profit increased 16% and gross profit as a
percentage of sales improved from 24.1% for the three months ended September
30, 1996 to 24.9% for the three months ended September 30, 1997 owing to
higher specialty wax volumes and prices realized in the U.S. and lower unit
costs achieved through the capital spending program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3.3 million, or 72%, from $4.6 million
for the three months ended September 30, 1996 to $7.9 million for the three
months ended September 30, 1997. The acquisitions of Adco and Rheochem
accounted for $2.1 million of the increase. The remaining $1.2 million
increase was primarily attributable to an increase in the employee bonus
accrual to reflect the Company's strong financial performance. Selling,
general and administrative expenses as a percentage of sales decreased from
10.8% for the three months ended September 30, 1996 to 10.6% for the three
months ended September 30, 1997. The decrease is primarily associated with
the higher sales volume.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $0.6 million, or 35%, from $1.8 million for the three months
ended September 30, 1996 to $2.4 million for the three months ended September
30, 1997, primarily due to the acquisitions of Adco and Rheochem.
INCOME FROM RHEOCHEM. For the three months ended September 30, 1997, the
Company recorded no equity earnings from Rheochem as a result of the purchase
of the remaining 50% interest in Rheochem. Rheochem's earnings are now
consolidated with the Company's. The Company's share of equity earnings from
Rheochem for the three months ended September 30, 1996 was $0.2 million.
INTEREST EXPENSE, NET. Interest expense, net, increased by $2.2 million
from $1.6 million for the three months ended September 30, 1996 to $3.8
million for the three months ended September 30, 1997. This increase was due
to the increased debt level of the Company related to the acquisitions of
Adco, Rheochem and the autoglass business of Tremco Incorporated ("Tremco
Autoglass") as well as the higher interest rate on subordinated debt as
compared to bank debt. During the three months ended September 30, 1997, the
Company had an average amount of debt outstanding of $151.7 million, with
the average interest rate during this period equal to 10.0%. During the
three months ended September 30, 1996, the Company had an average amount of
debt outstanding of $75.0 million, with the average interest rate during
this period equal to 8.6%.
INCOME BEFORE TAXES. As a result of factors discussed above, income
before taxes increased by $3.5 million from $2.4 million for the three months
ended September 30, 1996 to $5.9 million for the three months ended September
30, 1997.
NET INCOME. Net income decreased by $0.5 million from $3.7 million for the
three months ended September 30, 1996 to $3.2 million for the three months ended
September 30, 1997. Net income for the three months ended September 30, 1996
included tax benefits of $2.0 million relating to the release of valuation
allowances.
COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 1997 WITH THE SIX MONTHS ENDED
SEPTEMBER 30, 1996.
SALES. Sales increased by $56.2 million, or 67%, from $84.5 million to
$140.7 million. Of this sales increase, $33.6 million was attributable to
the acquisition of Adco and $13.6 million was attributable to the acquisition
of Rheochem. Excluding the impact of Adco and Rheochem, sales increased $9.0
million or 11% as a result of strong specialty wax demand in the United
States.
GROSS PROFIT BEFORE DEPRECIATION AND AMORTIZATION. Gross profit
increased by $17.4 million, or 87%, from $20.1 million for the six months
ended September 30, 1996 to $37.5 million for the six months ended September
30, 1997. Approximately $10.4 million of the increase is attributable to the
acquisition of Adco and $3.7 million is attributable to the acquisition of
Rheochem. Gross profit as a percentage of sales increased from 23.8% for the
six months ended September 30, 1996 to 26.7% for the six months ended
September 30, 1997. Excluding the effect of the acquisitions, gross profit
increased 17% and gross profit as a percentage of sales
9
<PAGE>
improved from 23.8% to 25.1%, owing to higher specialty wax volumes and
prices realized in the U.S. and lower unit costs achieved through the capital
spending program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses increased by $5.9 million, or 66%, from $9.0 million
to $14.9 million. Approximately $3.8 million of the increase is related to
the acquisitions. The remaining $2.1 million increase is primarily
attributable to an increase in the employee bonus accrual to reflect the
Company's strong financial performance. Selling, general and administrative
expenses as a percentage of sales decreased from 10.7% to 10.6% primarily as
a result of higher sales volume.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1.5 million, or 42%, from $3.3 million to $4.8 million,
primarily owing to the acquisitions of Adco and Rheochem.
INCOME FROM RHEOCHEM. The Company's share of equity earnings from
Rheochem decreased $358,000, or 81%, from $441,000 to $83,000. The decrease
was attributable to the Company's purchase of the remaining 50% interest in
Rheochem. Rheochem's earnings are now consolidated with the Company's.
INTEREST EXPENSE, NET. Interest expense, net, increased by $4.2 million
from $3.3 million to $7.5 million. This increase was due to the increased
debt level of the company related to the acquisitions of Adco, Rheochem and
Tremco Autoglass as well as the higher interest rate on subordinated debt as
compared to bank debt. During the six months ended September 30, 1997, the
Company had an average amount of debt outstanding of $148.1 million, with
the average interest rate during this period equal to 10.1%. During the six
months ended September 30, 1996 the Company had an average amount of debt
outstanding of $74.6 million, with the average interest rate during this
period equal to 8.8%.
INCOME BEFORE TAXES. As a result of the factors discussed above, income
before taxes increased $5.6 million from $4.9 million for the six months
ended September 30, 1996 to $10.5 million for the six months ended September
30, 1997.
NET INCOME. Net income increased by $0.8 million from $5.1 million for
the six months ended September 30, 1996 to $5.9 million for the six months
ended September 30, 1997. Net income for the six months ended September 30,
1996 included tax benefits relating to the release of valuation allowances of
$2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended
September 30, 1997 was $9.2 million compared to $5.3 million of net cash
provided by operating activities for the six months ended September 30, 1996.
The $9.2 million of net cash provided by operating activities for the six
months ended September 30, 1997 was primarily due to $13.8 million of cash
flow from operating profits offset by a $4.6 million use of cash from working
capital attributable to higher accounts receivable and inventory due to
sales increases. The $5.3 million of net cash provided in the six months
ended September 30, 1996 was primarily due to cash flow from operating
profits of $7.3 million and a $2.0 million use of cash from working capital.
Cash used in investing activities for the six months ended September 30,
1997 and 1996 was $22.0 million and $2.1 million, respectively. Cash used in
investing activities for the six months ended September 30, 1997 comprised
the Rheochem acquisition cost of $14.1 million (net of cash acquired), the
Tremco Autoglass acquisition cost of $4.0 million and capital expenditures of
$3.9 million. The Company expects capital expenditures to be approximately
$7.0 million for fiscal 1998. The Company expects to fund such capital
expenditures primarily from cash generated from operating activities.
Cash provided by financing activities for the six months ended September
30, 1997 was $11.8 million due to increased borrowings under the revolving
credit facility for the Rheochem and Tremco Autoglass acquisitions. Cash
used in financing activities for the six months ended September 30, 1996 was
$2.8 million due to debt repayments.
On October 23, 1997, the Company prepaid in full all its obligations
outstanding under the Credit Agreement dated as of October 8, 1996, as
amended, among the Company, certain lenders and The Chase Manhattan Bank, as
Agent (the "Senior Bank Facility") and terminated the available revolving
credit commitments thereunder. The Company made such prepayments with the
proceeds of loans made by AlliedSignal for such purpose. These new loans
require no annual amortization payments and are payable on demand on or after
November 1, 2002. Dollar based loans bear interest at the average 30-day
commercial paper rate and the Sterling based loan bears interest at the 90
day LIBOR rate. As a result of the refinancing of indebtedness under the
Senior Bank Facility, the Company has significantly reduced its interest
expense. In addition, since the acquisition of the Company by AlliedSignal,
an affiliated company has repurchased approximately $85,000,000 of its 10.5%
Senior Subordinated Notes due 2006.
SEASONALITY. Revenues and earnings of the Company's two business
segments, specialty waxes and adhesives and sealants, tend to be seasonal
due to the decline in candle wax sales in December resulting from customer
purchase patterns and the decline of roofing and building construction
projects in winter months. Both segments are also impacted by fewer work and
shipping days because of scheduled plant shutdowns during the winter
holidays. These factors have historically resulted in seasonal fluctuations
in the performance of the Company, with the summer quarters being the
stronger.
10
<PAGE>
FOREIGN EXCHANGE EXPOSURE.
The functional currency for the majority of the Company's foreign
operations is the applicable local currency. The bulk of the Company's
foreign sales, raw materials, expenses, assets, and liabilities (including
bank debt) are denominated in the local currency, providing for a natural
hedge for currency exposure. For a small portion of foreign sales
transactions, the Company uses forward foreign exchange contracts to mitigate
exposure. There were no significant contracts outstanding at September 30,
1997. The translation from the applicable foreign currency to U.S. dollars
is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. Translation adjustments
resulting from such translation were $0.6 million at September 30, 1997 and
$0.5 million at September 30, 1996.
HEDGING ACTIVITIES.
The Company is currently not a party to any interest rate swap contracts
relating to any of its outstanding debt. As of September 30, 1997, $115.9
million of the Company's outstanding debt of $151.6 million was subject to a
fixed rate. In order to mitigate the impact of fluctuations in the market
price of crude oil, which determines certain feedstock costs, the Company has
entered into a series of price swap contracts that fix the cost of a portion
of the Company's raw material purchases through March 31, 1999. In addition,
the prices of certain byproducts from the Company's production processes also
track crude oil prices, acting to hedge volatility in the Company's raw
material costs.
FORWARD LOOKING STATEMENTS
The foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains "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, which
represent the Company's expectations or beliefs concerning future events,
including, but not limited to, the following: statements regarding future
capital expenditures and the source of funding for future capital
expenditures; statements regarding the Company's primary capital
requirements; and statements regarding seasonal fluctuations in the Company's
future performance. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including without
limitation, the following: growth in the business, as a result of
acquisitions or internal growth, affecting future capital expenditures;
technological change in equipment used in developing and manufacturing the
Company's products; damage, destruction or other casualty loss with respect
to the Company's fixed plant or equipment; insufficient cash flow from
operations to fund anticipated capital expenditures and scheduled debt
payments; changes in the Company's debt and capital structure; and shifts in
product mix changing the effect of seasonality on the Company's future
performance. Results actually achieved thus may differ materially from
expected results included in these and other forward looking statements.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON 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. Financial Data Schedule.
(b) Reports on Form 8-K
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: November 14, 1997
ASTOR HOLDINGS II, INC.
By: /s/ Boyd D. Wainscott
---------------------------------
Boyd D. Wainscott
Chief Executive Officer
Dated: November 14, 1997
By: /s/ John F. Gottshall
---------------------------------
John F. Gottshall
Chief Financial Officer
13
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<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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0
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