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, 1998
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 No. 1-12825
MORTON INTERNATIONAL, INC.
--------------------------
(Exact Name of Registrant as Specified in its Charter)
Indiana 36-4140798
- ---------------------------------------- ------------------------------------
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
100 North Riverside Plaza, Chicago, Illinois 60606-1596
- -------------------------------------------- ----------
Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (312) 807-2000
- ----------------------------- --------------
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at September 30, 1998
- ---------------------------- ---------------------------------
Common Stock, $1.00 par value 121,342,273 shares
<PAGE>
MORTON INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION:
- -------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income and Retained
Earnings - Three months ended
September 30, 1998 and 1997 3
Consolidated Balance Sheets - September 30, 1998
and June 30, 1998 4
Consolidated Statements of Cash Flows -
Three months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements -
September 30, 1998 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 10
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
- -----------------------------------------
MORTON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Net sales $ 593.8 $ 601.3
Interest, royalties and sundry income 6.2 10.1
------------------ -------------------
600.0 611.4
Deductions from income:
Cost of products sold 403.6 408.8
Selling, administrative and general expense 100.8 94.9
Research and development expense 14.9 14.4
Interest expense 6.4 5.6
Amortization of goodwill 3.3 3.0
------------------ -------------------
529.0 526.7
------------------ -------------------
Income before income taxes 71.0 84.7
Income taxes 25.6 30.5
------------------ -------------------
Net income 45.4 54.2
Retained earnings at beginning of period 1,840.3 1,706.0
Cash dividends: $.13 per share for the
three months ended September 30, 1998 and
$.12 per share for the three months ended
September 30, 1997 (16.3) (16.3)
Exercise of stock options ( .1) (4.6)
------------------ -------------------
Retained earnings at end of period $ 1,869.3 $ 1,739.3
================== ===================
Basic earnings per share $ .36 $ .40
================== ===================
Diluted earnings per share $ .36 $ .39
================== ===================
Shares used in computation (in thousands)
Basic earnings per share 124,787 135,796
================== ===================
Diluted earnings per share 125,760 137,888
================== ===================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
MORTON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 154.2 $ 138.0
Receivables 478.3 468.6
Inventories 419.5 381.0
Prepaid expenses and other 125.6 125.4
--------------- ---------------
Total current assets 1,177.6 1,113.0
--------------- ---------------
Other assets
Cost in excess of net assets of businesses
acquired, less amortization 366.4 357.4
Investments in affiliates 92.6 73.9
Miscellaneous 128.0 121.9
--------------- ---------------
587.0 553.2
--------------- ---------------
Property, plant and equipment, at cost 1,849.0 1,773.1
Less allowances for depreciation 950.6 891.4
--------------- ---------------
898.4 881.7
--------------- ---------------
$ 2,663.0 $ 2,547.9
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Notes payable and current portion of long-term debt $ 186.5 $ 22.6
Accounts payable 229.2 215.6
Accrued salaries, wages and other compensation 53.9 52.1
Other accrued expenses 154.8 159.3
Income taxes 39.6 22.1
--------------- ---------------
Total current liabilities 664.0 471.7
--------------- ---------------
Long-term debt, less current portion 222.3 222.5
Deferred income taxes 68.3 60.9
Accrued postretirement benefits other than pensions 158.1 157.9
Other noncurrent liabilities 107.0 103.8
--------------- ---------------
Total noncurrent liabilities 555.7 545.1
--------------- ---------------
Shareholders' equity
Preferred Stock (par value $1.00 per share) Authorized - 25.0 shares, none
issued
Common Stock (par value $1.00 per share)
Authorized - 500.0 shares
Issued-140.1 shares at September 30 and June 30, 1998 140.1 140.1
Retained earnings 1,869.3 1,840.3
Accumulated other comprehensive income (5.7) (19.2)
Unamortized restricted stock award ( .7) ( .7)
--------------- ---------------
2,003.0 1,960.5
Less cost of common stock in treasury-18.8 shares
at September 30, 1998 and 13.3 shares at June 30, 1998 559.7 429.4
--------------- ---------------
Total shareholders' equity 1,443.3 1,531.1
--------------- ---------------
$ 2,663.0 $ 2,547.9
=============== ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<PAGE>
MORTON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Cash Provided (Used)
Three Months Ended
September 30
-------------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Operating Activities
- --------------------
Net Income $ 45.4 $ 54.2
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 34.7 33.8
Deferred income taxes 1.8 .1
Undistributed earnings of affiliates (1.4) (2.0)
Changes in operating assets and liabilities net
of effects of businesses acquired
Receivables 12.6 (4.2)
Inventories and prepaid expenses (27.4) (40.6)
Accounts payable and accrued expenses (6.4) (13.3)
Accrued income taxes 16.0 6.6
Other - net (4.8) 1.3
------------- --------------
Net cash provided by operating activities 70.5 35.9
------------- --------------
Investing Activities
- --------------------
Purchase of property, plant and equipment (25.6) (35.1)
Proceeds from property and other asset disposals .3 4.5
Net cash invested in businesses acquired (30.7) -
Investment in affiliates - (2.9)
------------- --------------
Net cash used for investing activities (56.0) (33.5)
------------- --------------
Financing Activities
- --------------------
Purchase of common stock for treasury (130.8) (141.4)
Net increase of short-term notes payable 159.3 7.3
Repayment of long-term debt ( .1) ( .1)
Stock option transactions .2 4.4
Dividends paid (16.3) (16.3)
------------- --------------
Net cash provided (used) for financing activities 12.3 (146.1)
------------- --------------
Effect of foreign exchange rate changes on cash
and cash equivalents (10.6) 2.5
------------- --------------
Increase (decrease) in cash and cash equivalents 16.2 (141.2)
Cash and cash equivalents at beginning of year 138.0 430.3
------------- --------------
Cash and cash equivalents at end of period $ 154.2 $ 289.1
============= ==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
MORTON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
- ---------------------
The interim financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation SX and therefore, do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the fiscal year ending June 30, 1999. It is suggested that the
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report to
Shareholders and Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
Earnings Per Share
- ------------------
The numerators for the earnings per share disclosures on the accompanying
unaudited Consolidated Statements of Income and Retained Earnings are the same
as the income numbers shown on that Statement. Following is the computation of
the denominator for the basic and diluted earnings per share calculations:
Three months ended
September 30
-----------------------
(in thousands)
1998 1997
---- ----
Denominator for basic earnings per share 124,787 135,796
-weighted average shares outstanding
Dilutive effect of employee stock options 973 2,092
-------- --------
Denominator for diluted earnings per share 125,760 137,888
======== ========
Comprehensive Income
- --------------------
As of July 1, 1998, the Company adopted the Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income. Statement 130 requires unrealized gains or losses on the
Company's foreign currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. The June 30, 1998 Consolidated Balance Sheet has been
reclassified to conform to the requirements of Statement 130.
The components of comprehensive income, net of tax, for the three month periods
ended September 31, 1998 and 1997 are as follows:
1998 1997
---- ----
(in millions)
Net income $45.4 $54.2
Foreign currency translation adjustments 13.5 (1.8)
----- -----
Comprehensive income $58.9 $52.4
===== =====
6
<PAGE>
Accumulated other comprehensive income on the accompanying Consolidated Balance
Sheets is net of deferred income tax benefits of $5.5 million and $16.7 million
at September 30 and June 30, 1998, respectively.
Acquisitions
- ------------
In the first quarter of fiscal 1999, the Company acquired seventy-five percent
of Poliolchimica S.p.A. ("Poliolchimica"), a producer of polyester resins. The
Company also acquired the Comiel division, a producer of polyesters and wax
lubricants for polyvinyl chloride and other plastics, from Reagens Comiel S.p.A.
The purchase price for these Italian businesses was $30.7 million. Assuming the
acquisitions had been effective as of July 1, 1997, unaudited pro forma data for
the three months ended September 30, 1998 and 1997 would not be materially
different in relation to consolidated results presented herein.
Inventories
- -----------
Inventories are stated at the lower of cost (principally last-in, first-out
method) or market. Components of inventories are as follows:
Sept. 30 June 30
1998 1998
-------- --------
(in millions)
Finished products and work-in-process $326.9 $294.6
Materials and supplies 92.6 86.4
------ ------
$419.5 $381.0
====== ======
New Accounting Pronouncement
- ----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." It requires an
entity to recognize derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair market value. The statement is
effective for fiscal years beginning after June 15, 1999. The Company is
currently assessing the effect the statement will have on its financial position
and results of operations in the period of adoption.
Item 2. Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
Results of Operations
- ---------------------
Net income for the first quarter of fiscal 1999 was $45.4 million, down 16
percent from $54.2 million for the first quarter of fiscal 1998. The comparisons
in this quarter versus last year's strong first quarter were difficult
considering the impact of the Asian problems, pricing declines in selected
chemical product lines as well as ice control salt. First quarter sales of
$593.8 million declined 1 percent compared to $601.3 million in the first
quarter of fiscal 1998. Diluted earnings per share for the quarter of 36 cents
compares to 39 cents for the same period in fiscal 1998.
In the first quarter of fiscal 1999, specialty chemicals sales were down 2
percent to $426.3 million versus $433.7 million in the same period of fiscal
1998. For the total chemical business, volume slipped by approximately 1 percent
while price/mix declined 2 and a half percent. Offsetting those were a 2 percent
increase in sales due to acquisitions. The impact of foreign exchange was
neutral in the quarter versus last year's first quarter. First quarter operating
earnings for specialty chemicals were $64.4 million, a 12 percent decrease from
the first quarter of fiscal 1998.
7
<PAGE>
Among those chemical product lines which showed sales growth in the first
quarter of fiscal 1999 were packaging adhesives due to the Poliolchimica
acquisition, industrial adhesives, waterbased polymers, performance chemicals,
dyes, powder coatings and industrial coatings. The combined sales of these
product lines contributed 65 percent of the group's total sales and grew 5
percent over the first quarter of fiscal 1998. Product lines contributing to the
improvement in chemical group earnings included waterbased polymers, performance
chemicals, dyes and North American powder coatings. Earnings for these product
lines constituted 40 percent of the group's total earnings and collectively
showed a 21 percent improvement over the first quarter of fiscal year 1998.
Salt sales for the first quarter of fiscal 1999 were $167.5 million, flat with
last year's first quarter sales. North American salt sales were modestly ahead
of last year for the same period. North American ice control salt sales were 5
percent below last year for the quarter; however, non-ice control salt sales,
particularly water conditioning salt products, contributed to Salt's overall
performance. European salt sales were 4 percent below prior year for the first
quarter. Salt operating earnings were $22.8 million in the first quarter of
fiscal 1999, down 16 percent from $27.0 million in the first quarter of fiscal
1998. Operating earnings declined in the first quarter due in large part to
lower current year production levels of ice control salt. Also, the impact of
two strikes in the quarter, one in Rittman, Ohio, and the other at Salins du
Girard in the south of France, contributed to the reduced earnings. Both strikes
were settled after approximately two weeks. Operating margins for salt were 14
percent in the first quarter of fiscal 1999 versus 16 percent for the same
period in fiscal 1998, reflecting the lower operating margins of both European
and North American Salt operations.
Company total corporate costs were 7 percent higher in the first quarter of
fiscal 1999 versus the same period of last fiscal year. Although the company
maintained tight control over corporate administrative costs in the quarter, net
interest costs increased by $2.7 million, mostly due to a decline in interest
income as the company purchased its shares.
Liquidity and Capital Resources
- -------------------------------
Operating activities were a source of cash in the three month period ended
September 30, 1998 and 1997, providing $70.5 million and $35.9 million,
respectively.
Income from operations was $45.4 million during the first quarter of fiscal 1999
versus $54.2 million for the same period of fiscal 1998. In the first three
months of the current fiscal year, depreciation and amortization was $34.7
million, up $.9 million from the same period of the prior year. Changes in
operating assets and liabilities resulted in a use of $10.0 million in the first
quarter of fiscal 1999 compared to a $50.2 million use of cash last year.
Receivables were a source of cash in fiscal 1999 of $12.6 million versus a use
in 1998 of $4.2 million. Inventories and prepaid expenses used $13.2 million
less cash this year.
Investing activities in the first quarter of fiscal 1999 generated a $56.0
million use of funds compared to $33.5 million use of funds for the same period
last year. Capital spending accounted for a use of funds of $25.6 million for
the first quarter of fiscal year 1999 versus $35.1 for the first quarter of last
year. Expansion related to certain chemical products as well as basic upkeep of
the salt and chemical manufacturing facilities continue to be the major areas of
capital spending.
8
<PAGE>
The acquisition of two Italian chemical companies, Poliolchimica and Comiel,
required a use of $30.7 million in the first quarter of the current fiscal year.
There were no business acquisitions in the first three months of fiscal 1998.
Financing activities for the three month period ending September 30, 1998 were a
$12.3 million source of funds compared to a $146.1 million use of funds during
the same period in the prior year. Accounting for most of the change was
short-term notes payable, which resulted in a source of funds of $159.3 million
for the first quarter of fiscal 1999 versus a source of funds of $7.3 million
for the same period of fiscal 1998. This increase was primarily related to the
short-term financing of the stock repurchases for the quarter. The common stock
repurchase program resulted in a use of funds of $130.8 million in the first
quarter of fiscal 1999 and $141.4 million during the same period of last year.
At the end of the September 30, 1998 quarter, the Company had repurchased 9.8
million shares under the current 10 million share authorization. The balance was
acquired in early October. Since the spinoff in May 1997, Morton has repurchased
19.8 million shares as of September 30, 1998 bringing the shares outstanding to
121.3 million at that date. On October 22, 1998, the Company's Board of
Directors approved the repurchase of an additional 8.0 million shares. Dividends
paid were $16.3 million at the end of the first quarter of fiscal 1999 and 1998.
The Company's current ratio was 1.8 at September 30, 1998, versus a 2.4 ratio at
June 30, 1998. Total debt as a percentage of total capitalization at September
30, 1998 was 21.3 percent compared to 13.3 percent at June 30, 1998.
As of September 30, 1998, the Company has unexpended authorizations for fixed
asset acquisitions of $86.8 million. These authorizations relate primarily to
chemical facility expansion, product improvements and facility upgrades on a
company-wide basis.
Estimated cash flow from operations and current financial resources, including
financing capacity, are expected to be adequate to fund the Company's
anticipated working capital requirements, fixed asset spending, dividend
payments, business acquisitions and share repurchases in the foreseeable future.
Euro Conversion
- ---------------
The euro is scheduled to be introduced on January 1, 1999, at which time the
conversion rates between existing sovereign currencies ("legacy currencies") and
the euro will be set for the participating European Monetary Union states.
However, the legacy currencies in those states will continue to be used as legal
tender through January 1, 2002. Thereafter, the legacy currencies will be
canceled and euro bills and coins will be used in the participating states.
Transition to the euro creates a number of issues for the Company. Business
issues that must be addressed include product pricing policies and ensuring the
continuity of business and financial contracts. Finance and accounting issues
include the conversion of accounting systems, statutory records, tax books and
payroll systems to the euro, as well as conversion of bank accounts and other
treasury and cash management activities.
The Company is addressing these transition issues and currently does not expect
the transition to the euro and the costs to be incurred to have a material
effect on its liquidity, financial condition or results of operations.
9
<PAGE>
Forward Looking-Cautionary Statement
- ------------------------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements reflect management's current expectations and involve
a number of risks and uncertainties. Actual results could differ materially
depending on a variety of factors, including the risks and uncertainties
discussed in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on September 21, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(1) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
(27) (a) Financial Data Schedules for the first quarter of fiscal 1999. (27)
(b) Financial Data Schedules restated for fiscal 1998.
(2) Reports on Form 8-K.
The Company did not file any 8-K Reports during the fiscal quarter ended
September 30, 1998.
*************************************
SIGNATURE
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.
MORTON INTERNATIONAL, INC.
------------------------------------
(Registrant)
Date: November 9, 1998 BY: /s/ L. N. Liszt
-------------------- ------------------------------------
L. N. Liszt
Controller
(Principal Accounting Officer)
10
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 54300
<SECURITIES> 99900
<RECEIVABLES> 491800
<ALLOWANCES> (13500)
<INVENTORY> 419500
<CURRENT-ASSETS> 1177600
<PP&E> 1849000
<DEPRECIATION> (950600)
<TOTAL-ASSETS> 2663000
<CURRENT-LIABILITIES> 664000
<BONDS> 222300
0
0
<COMMON> 140100
<OTHER-SE> 1303200
<TOTAL-LIABILITY-AND-EQUITY> 2663000
<SALES> 593800
<TOTAL-REVENUES> 600000
<CGS> 403600
<TOTAL-COSTS> 519300
<OTHER-EXPENSES> 3300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6400
<INCOME-PRETAX> 71000
<INCOME-TAX> 25600
<INCOME-CONTINUING> 45400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45400
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 50800
<SECURITIES> 87200
<RECEIVABLES> 482100
<ALLOWANCES> (13500)
<INVENTORY> 381000
<CURRENT-ASSETS> 1113000
<PP&E> 1773100
<DEPRECIATION> (891400)
<TOTAL-ASSETS> 2547900
<CURRENT-LIABILITIES> 471700
<BONDS> 222500
0
0
<COMMON> 140100
<OTHER-SE> 1391000
<TOTAL-LIABILITY-AND-EQUITY> 2547900
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<TOTAL-REVENUES> 2574400
<CGS> 1726100
<TOTAL-COSTS> 2192700
<OTHER-EXPENSES> 27100
<LOSS-PROVISION> 5500
<INTEREST-EXPENSE> 23300
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<INCOME-TAX> 117300
<INCOME-CONTINUING> 208500
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