<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 1998 Commission file number 333-49971
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EAGLE-PICHER HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3989553
------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 East Fifth Street, Suite 500, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code 513-721-7010
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(Not Applicable)
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Former name, former address and former fiscal year,
if changed since last report
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes____ No__X__
625,001 shares of Class A common capital stock, $.01 par value each, were
outstanding at September 26, 1998.
374,999 shares of Class B common capital stock, $.01 par value each, were
outstanding at September 26, 1998.
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TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.........................................3
Condensed Consolidated Statements of Income (Loss)(Unaudited)....3
Condensed Consolidated Balance Sheets (Unaudited)................4
Condensed Consolidated Statements of Cash Flows (Unaudited)......6
Notes to Condensed Consolidated Financial Statements (Unaudited).8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................17
Signature............................................................18
Exhibit Index........................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Three Months Nine
August 31 Ended Ended Months Ended
------------------ August 31 February 28 August 31
1998 1997 1998 1998 1997
---- ---- ---- ---- ----
Predecessor Predecessor Predecessor
<S> <C> <C> <C> <C> <C>
Net Sales $ 206,356 $ 216,756 $ 426,277 $ 205,842 $ 682,546
--------- --------- --------- --------- ---------
Operating Costs and Expenses:
Cost of products sold 163,518 174,103 333,093 162,796 549,082
Selling and administrative 18,042 17,503 38,329 17,141 56,846
Management compensation expense 4,395 - 21,716 2,056 -
Depreciation 9,644 9,688 19,417 8,983 30,697
Amortization of intangibles 4,244 4,084 8,741 3,839 12,239
Loss on division sales - 1,803 - - 1,803
--------- --------- --------- --------- ---------
199,843 207,181 421,296 194,815 650,667
--------- --------- --------- --------- ---------
Operating Income 6,513 9,575 4,981 11,027 31,879
Interest expense (12,132) (7,540) (24,686) (6,940) (24,391)
Other income (expense) 681 (817) 1,007 820 539
--------- --------- --------- --------- ---------
Income (Loss) Before Taxes (4,938) 1,218 (18,698) 4,907 8,027
Income Taxes (1,135) 2,337 (5,596) 4,100 9,821
--------- --------- --------- --------- ---------
Net Income (Loss) $ (3,803) $ (1,119) $ (13,102) $ 807 $ (1,794)
========= ========= ========= ========= =========
Income (Loss) Applicable
to Common Shareholders $ (6,338) $ (17,990)
========= =========
Income (Loss) per Common Share $ (6.34) $ (.11) $ (17.99) $ .08 $ (.18)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
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EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
August 31 November 30
ASSETS 1998 1997
---- ----
Predecessor
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 21,099 $ 53,739
Receivables, less allowances 120,444 130,927
Income tax refunds receivable 1,341 3,025
Inventories:
Raw materials and supplies 55,354 51,592
Work in process 17,547 25,801
Finished goods 17,712 14,803
-------- --------
90,613 92,196
Prepaid expenses 8,440 8,290
Deferred income taxes 18,935 13,793
-------- --------
Total current assets 260,872 301,970
-------- --------
PROPERTY, PLANT AND EQUIPMENT 255,653 279,847
Less accumulated depreciation 19,505 36,309
-------- --------
Net property, plant and equipment 236,148 243,538
DEFERRED INCOME TAXES 1,144 98,991
EXCESS OF ACQUIRED NET ASSETS OVER COST NET OF
ACCUMULATED AMORTIZATION OF $8,729 233,106 -
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS NET OF ACCUMULATED AMORTIZATION
OF $16,284 - 48,837
OTHER ASSETS 85,162 53,545
-------- --------
Total Assets $816,432 $746,881
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 44,062 $ 52,886
Long-term debt - current portion 14,072 3,403
Income taxes 3,246 2,294
Other current liabilities 75,136 55,419
-------- --------
Total current liabilities 136,516 114,002
-------- --------
LONG-TERM DEBT - less current portion 487,209 269,994
-------- --------
OTHER LONG TERM LIABILITIES 25,676 26,768
-------- --------
SERIES A 11-3/4% CUMULATIVE EXCHANGEABLE PREFERRED STOCK;
AUTHORIZED 50,000 SHARES; ISSUED AND OUTSTANDING 14,191
SHARES 84,893 -
-------- --------
</TABLE>
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EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
August 31 November 30
1998 1997
---- ----
Predecessor
<S> <C> <C>
SHAREHOLDERS' EQUITY
Class A Common stock, authorized 625,001 shares,
$.01 par value each; issued and outstanding
625,001 shares 6 -
Class B Common stock, authorized 374,999 shares,
$.01 par value each; issued and outstanding
374,999 shares 4 -
Common shares -- authorized 20,000,000 shares;
issued and outstanding 10,000,000 shares - 341,807
Additional paid-in capital 99,991 -
Foreign currency translation 127 (1,836)
Accumulated deficit (17,990) (3,854)
--------- ---------
Total Shareholders' Equity 82,138 336,117
--------- ---------
Total Liabilities and Shareholders' Equity $ 816,432 $ 746,881
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
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EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
August 31 February 28 August 31
1998 1998 1997
---- ---- ----
Predecessor Predecessor
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(13,102) $ 807 $ (1,794)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 29,522 12,822 42,936
Proceeds from insurance settlement 13,659 - -
Loss on division sales - - 1,803
Changes in assets and liabilities:
Receivables 15,188 (4,705) 4,072
Income tax refunds receivable 660 1,024 69,771
Inventories 4,435 (2,235) 985
Accounts payable (6,837) (2,787) 7,063
Accrued liabilities 25,205 (5,488) 8,334
Other (4,784) (8,521) 7,561
-------- -------- ---------
Net cash provided by (used in)
operating activities 63,946 (9,083) 140,731
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from division sales - - 38,417
Capital expenditures (16,053) (5,692) (41,476)
Other 94 (1,042) (2,407)
-------- -------- ---------
Net cash used in
investing activities (15,959) (6,734) (5,466)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 445,000 8,000
Reduction of long-term debt (2,580) (250,000) (127,411)
Borrowings under revolving credit agreement 47,825 79,100 -
Repayments under revolving credit agreement (91,925) - -
Redemption of common stock - (446,638) -
Issuance of common stock - 100,001 -
Issuance of preferred stock - 80,005 -
Debt issuance cost - (26,062) -
Other 824 (360) 4,876
-------- -------- ---------
Net cash used in
financing activities (45,856) (18,954) (114,535)
-------- -------- ---------
</TABLE>
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EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
August 31 February 28 August 31
1998 1998 1997
---- ---- ----
Predecessor Predecessor
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents 2,131 (34,771) 20,730
Cash and cash equivalents, beginning of period 18,968 53,739 32,725
------- -------- -------
Cash and cash equivalents, end of period $21,099 $ 18,968 $53,455
======= ======== =======
Supplemental cash flow information: 1998 1997
---- -----
Cash paid during the nine months ending August 31:
Interest paid $19,060 $ 18,052
Income taxes paid (refunded), net $ 4,446 $(66,016)
Cash paid during the three months ended August 31:
Interest paid $ 6,250 $ 1,551
Income taxes paid (refunded), net $ 4,141 $ 1,213
</TABLE>
See accompanying notes to the consolidated financial statements.
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EAGLE-PICHER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. BASIS OF REPORTING FOR INTERIM FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included for the
fiscal year ended November 30, 1997 and for the three months ended February 28,
1998, presented in the Company's Form S-4/A filed with the SEC on June 5, 1998.
The financial statements presented herein reflect all adjustments
(consisting of normal and recurring accruals) which, in the opinion of
management, are necessary to fairly state the results of operations for the
three and nine month periods ended August 31, 1998 and 1997. (See Note B.)
Results of operations for interim periods are not necessarily indicative of
results to be expected for an entire year.
The six and three month periods ended August 31, 1998 and February 28,
1998 (Predecessor), respectively, included in the Condensed Consolidated
Statements of Income (Loss) and of Cash Flows are presented for comparison to
the nine months ended August 31, 1997 of the Predecessor Company. (See Note B.)
B. ACQUISITION OF THE COMPANY
On February 24, 1998 ("Closing Date"), Eagle-Picher Industries, Inc.
("Company") was acquired by a subsidiary of Granaria Industries BV, Eagle-Picher
Holdings, Inc. ("Parent"), from the Eagle-Picher Industries, Inc. Personal
Injury Settlement Trust ("Trust") (the "Acquisition"). The Trust was established
pursuant to the Company's Plan of Reorganization upon its emergence from
bankruptcy.
The unaudited condensed consolidated financial statements as of and for
the three months ended February 28, 1998 include the effects of the Acquisition
as of February 24, 1998. Accordingly, the condensed consolidated statement of
income (loss) for the three months ended February 28, 1998 includes results of
operations from (1) December 1, 1997 through February 24, 1998 of the Company
prior to the consummation of the Acquisition (for clarity, sometimes referred to
herein as the "Predecessor Company") and (2) February 25 through February 28,
1998 of the Company.
The Acquisition was accounted for using the purchase method of accounting.
The preliminary allocation of the purchase price of the Company has been
determined based on estimates of fair value and are subject to change.
Appraisals are currently being completed to value property, plant, equipment and
identifiable intangible assets. The excess of purchase price over the assessed
values of those assets will be allocated to goodwill. The Company expects to
finalize the purchase price allocation by November 30, 1998. Adjustments are not
expected to be material.
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Upon closing of the acquisition, the Parent received $100 million
equity investment from Granaria Industries BV and an equity partner. The Parent
also received proceeds approximating $80 million from its offering of preferred
stock. These proceeds were invested in the Company, which issued approximately
$180 million of common stock to the Parent. The Company also borrowed $225
million in term loans and $79.1 million in revolving credit loans under a
syndicated senior secured loan facility, and issued $220 million in senior
subordinated notes ("Subordinated Notes"), the proceeds of which were used to
redeem the Company's 10% Senior Unsecured Sinking Fund Debentures ("Debentures")
and common stock, both held by the Trust. The Company, which is the operating
entity, is a wholly-owned subsidiary of the Parent. The Parent's results of
operations and cash flow approximate those of the Company.
The following pro forma information for the nine months ended August
31, 1998 and 1997 gives effect to the Acquisition as if it had been consummated
on December 1, 1997 and 1996, respectively. This information is not necessarily
indicative of either the future results of operations or the results of
operations that would have occurred if those events had been consummated on the
indicated dates.
<TABLE>
<CAPTION>
Nine Months Ended
August 31
-------------------------------
1998 1997
---- ----
(In thousands of
dollars, except
per share amounts)
<S> <C> <C>
Net Sales $ 632,119 $ 682,546
Net loss $ (16,500) $ (21,100)
Accumulated dividends on preferred stock 7,382 7,382
----------- ----------
Net loss applicable to common shareholders (23,882) (28,482)
Net loss per common share $ (23.88) $ (28.48)
Average number of common shares outstanding 1,000,000 1,000,000
</TABLE>
C. BASIC AND DILUTED EARNINGS PER SHARE
The calculation of net income (loss) per share is based upon the
average number of common shares outstanding, which was 9,600,071 in the three
months ended February 28, 1998, 10,000,000 in the three months and nine months
ended August 31, 1997, and 1,000,000 in the three months and six months ended
August 31, 1998. In 1998, 1,000,000 shares were outstanding after the
acquisition. Prior to the acquisition, 10,000,000 shares were outstanding. The
net loss applicable to common shareholders represents the net loss increased by
accumulated dividends on preferred stock of $2.5 million and $4.9 million for
the three and six months ended August 31, 1998, respectively. No potential
common stock was outstanding during the nine months ended August 31, 1998 or
1997.
D. INTANGIBLE ASSETS
Excess of acquired net assets over cost is being amortized on a
straight-line basis over fifteen years. The recoverability of these assets is
evaluated periodically based on current and estimated future cash flows of each
of the related business units over the remaining amortization period.
Reorganization value in excess of amounts allocable to identifiable assets was
being amortized on a straight-line basis over four years.
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E. LEGAL MATTERS
The Company is involved in routine litigation, environmental
proceedings and claims pending with respect to matters arising out of the normal
course of business. In management's opinion, the ultimate liability resulting
from all claims, individually or in the aggregate, will not materially affect
the Company's consolidated financial position, results of operations or cash
flows.
F. SUBSEQUENT EVENT
On September 28, 1998, the Committee of the Incentive Stock Plan of
Eagle-Picher Industries, Inc. ("Stock Plan") voted to amend the Stock Plan to
accelerate the vesting of all participants, which was to take place in various
increments through 2001, so that all participants will be fully vested as of
November 1, 1998. This action will result in additional management expense of
approximately $3.3 million in the fourth quarter over what would have been
recognized if the Stock Plan had not been amended.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
As a result of the Acquisition of the Company by Granaria Industries
B.V. from the Trust as of February 24, 1998, which was accounted for as a
purchase, the Company's results of operations and financial position for periods
after February 24, 1998 are not comparable to prior periods. The unaudited
condensed consolidated statement of income (loss) as of February 28, 1998
includes results of operations from (1) December 1, 1997 through February 24,
1998 of the Predecessor Company and (2) February 25 through February 28, 1998 of
the Company.
In addition to the effects of the Acquisition, another factor
affecting comparability of operations is the sale of the Plastics, Transicoil
and Fabricon Products divisions in 1997. The Company also contributed the assets
of its former Suspension Systems division to Eagle-Picher-Boge, L.L.C., a joint
venture formed in 1997 in which the Company has a 45% interest. These divisions
are collectively referred to as the "Divested Divisions."
The following table sets forth certain sales and operating data, net
of all inter-segment transactions, for the Company's businesses for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Three months ended ended ended ended
August 31 August 31 February 28 August 31
------------------
1998 1997 1998 1998 1997
---- ---- ---- ---- ----
(In millions of dollars)
Predecessor Predecessor Predecessor
<S> <C> <C> <C> <C> <C>
Net sales by segment:
Industrial $ 35.1 $ 52.4 $ 71.5 $ 37.6 $157.3
Machinery 68.0 65.8 136.8 64.4 199.4
Automotive 103.3 98.6 218.0 103.8 325.8
------ ------ ------ ------ ------
Total $206.4 $216.8 $426.3 $205.8 $682.5
====== ====== ====== ====== ======
EBITDA by segment:
Industrial $ 7.0 $ 8.1 $ 14.1 $ 6.6 $ 23.8
Machinery 9.6 6.6 20.5 7.8 22.9
Automotive 13.5 13.1 31.3 15.2 43.1
Corporate overhead (5.3) (2.7) (11.0) (3.7) (13.2)
------ ------ ------ ------ ------
$ 24.8 $ 25.1 $ 54.9 $ 25.9 $ 76.6
====== ====== ====== ====== ======
Total
</TABLE>
Net Sales. The Company's net sales were $206.4 million for the third
quarter ended August 31, 1998, a decrease of $10.4 million or 4.8% from the
comparable period of 1997. Included in the results of the third quarter of 1997
are $13.7 million of sales of the Divested Divisions, which, if excluded, would
result in an increase in the Company's quarterly net sales of approximately
1.6%.
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Net sales of Industrial products, excluding net sales of the Divested
Divisions, decreased 22.4% in the third quarter of 1998 from the comparable
period in 1997, due primarily to decreased prices of germanium products.
Germanium sales have been affected by lower market prices which have resulted
from increased supplies, the completion of a major satellite project and the
increased use of recycled germanium by the Company's customers in response to
sharp increases in germanium prices which took place in 1996. Since the
customers now supply a larger portion of the Company's raw materials, its sales
volume is less as a toll refiner than as a buyer and seller of germanium.
Operating margins, however, have been maintained.
Net sales for the Machinery Group in the third quarter of 1998,
excluding the Divested Divisions, increased 8.2% due in part to increases in
demand for heavy-duty fork lift trucks and wheel tractor scrapers. Sales of
special purpose batteries are comparable to those of the same period in 1997.
The Automotive Group's net sales, excluding the Divested Divisions,
increased 8.7% primarily due to increased market penetration of precision
machined components, many of which are used in light trucks, vans and sport
utility vehicles which have recently grown in popularity. Volumes of fuel
systems have also increased as new programs are implemented.
The Ford Motor Company ("Ford") has recently notified the Company that
it will no longer purchase certain products from the Automotive Group. Sales
contributed by those products in 1997 were $19.4 million. The Company
anticipates that these programs will be discontinued gradually through 1999 and
that this revenue will be replaced by new programs currently being implemented.
The Company expects strong price pressure to continue across all
product lines, particularly in the Automotive Group. The Company will continue
to pursue productivity improvements and material cost reductions to mitigate
such price pressure.
Historically, the third quarter results of the Automotive Group are
depressed as most of the automobile companies shut their plants for two weeks in
July to retool for new model years. In 1998, these results were further
depressed by the strike by the United Auto Workers at certain General Motors
Corporation ("GM") plants and the resulting closure of other GM plants. Some of
the Automotive Group operations experienced lay-offs as a result of the strike
at GM. It is estimated that the Company lost approximately $7.0 million in
revenue and $2.5 million in operating income during the strike.
Since the 1980's, original equipment manufacturers ("OEM's") such as
Ford, GM and the Chrysler Corporation have been outsourcing an increasing
percentage of their production requirements. OEM's benefit from outsourcing
because outside suppliers generally have significantly lower cost structures and
can assist in shortening development periods for new products. The Company
expects to continue to benefit from the trend toward outsourcing.
Historically, sales to certain Asian markets have been insignificant
to the Company's total net sales; therefore, the current economic conditions in
Asia have not had, nor are they expected to have, a material adverse effect on
the Company's operations. The Company believes that despite these conditions,
the Asian region has solid long-term growth opportunities and will continue to
explore these opportunities.
Cost of Products Sold. Cost of products sold, excluding depreciation
expense, decreased by $10.6 million or 6.1% from the third quarter of 1997
compared to the comparable period in 1998. Excluding the results of Divested
Divisions, as a percentage of sales, cost of products sold declined from 79.7%
in the third quarter of 1997 to 79.2% in the third quarter of 1998. Reasons for
this decline include improved performance at certain start-up operations,
increased operating efficiencies, and changes in product mix in certain
operations in the Machinery Group.
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Selling and Administrative. Selling and administrative expenses
increased by $.6 million or 3.1% in the quarter ended August 31, 1998 from the
quarter ended August 31, 1997. Excluding results of Divested Divisions, these
expenses increased $1.3 million or 7.9% over the same time frame. Besides a
general increase due to activity relating to increased sales volumes, items
contributing to this increase include management fees now payable to Granaria
Industries B.V. and a retention program for mid-level management.
Depreciation and Amortization. Depreciation and amortization are not
comparable for the three months ended August 31, 1998 and 1997 due to the
differences in asset bases as a result of the Acquisition on February 24, 1998.
EBITDA. The Company defines EBITDA as earnings before interest, taxes,
depreciation, amortization and management expenses. Due to the differences in
the asset bases, it is preferable to compare EBITDA rather than operating
income. EBITDA decreased from $25.1 million in the three months ended August 31,
1997 to $24.8 million for the same period in 1998 or 1.2%. After excluding the
results of Divested Divisions, EBITDA increased .8%.
In the third quarter of 1998, EBITDA for the Industrial Group declined
to $7.0 million from $8.1 million in the comparable period of 1997. Excluding
the results of Divested Divisions, this decline was $.5 million or 6.7% on a
22.4% decrease in sales. As previously mentioned, although lower germanium
prices have contributed to reduced sales, EBITDA has remained relatively
consistent for these operations as did results at other Industrial Group
operations.
In the Machinery Group, EBITDA increased from $6.6 million in the
third quarter of 1997 to $9.6 million in the same period of 1998. Excluding
results of the Divested Divisions, the increase was $3.2 million. Reasons for
this increase include improved efficiencies at operations manufacturing
special-purpose batteries and at the aluminum foundry, and a shift in product
mix at operations manufacturing construction and other industrial equipment.
EBITDA for the Automotive Group increased to $13.5 million in the
third quarter of 1998 from $13.1 million in the same period in the prior year.
Excluding the results of Divested Divisions, the increase was .7%. Any increases
in EBITDA resulting from the increased volumes previously discussed have been
offset by losses related to the GM strike situation.
Interest Expense. Interest expense for the three months ended August
31, 1998 and 1997 was $12.1 million and $7.5 million, respectively. In 1997,
interest expense included interest on the $250 million Subordinated Debentures
held by the Trust which were retired upon the Acquisition and the $50 million
Divestiture Notes retired in August 1997. In 1998, the increase in interest was
attributable to the borrowings against the new credit facility totaling $304.1
million, the issuance of $220 million in Subordinated Notes and the issuance of
an additional $8 million industrial revenue bond in June 1997.
FINANCIAL CONDITION
Since the Acquisition, the Company has generated cash from operations
of $63.9 million which has enabled it to repay a net amount of $46.7 million in
debt and expend $16.1 million for capital. Significant factors contributing to
cash provided by operations include:
1) the receipt of $13.7 million from an insurance company in
settlement of certain claims relating primary to environmental
remediation expenses;
2) a $15.2 million reduction of accounts receivable balances from what
were considered high levels at February 28, 1998 to more normal
levels at August 31, 1998;
3) the funding of approximately $8.0 million of employee health care
expenses from a trust that had been earmarked for this purpose
rather than from Company funds; and
4) the accrual of $10.3 million in interest (which was paid September
1, 1998) relating to the Senior Subordinated Notes.
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<PAGE> 14
The Company's liquidity needs are primarily for capital maintenance
and debt service. With the exception of an expansion at a plant manufacturing
industrial machinery, capital expenditures in the six months ended August 31,
1998 have been primarily for capital maintenance. The Company anticipates that
capital spending will be approximately $9.0 to $11.0 million in the fourth
quarter of 1998. The Company has scheduled debt payments of $2.7 million in the
fourth quarter of 1998 and $10.4 million in 1999.
The Company believes that its cash flows from operations and available
borrowings under its bank credit facilities will be sufficient to fund its
anticipated liquidity requirements for the next twelve months. In the event that
the foregoing sources are not sufficient to fund the Company's expenditures and
service its indebtedness, the Company would be required to raise additional
funds.
The Company has entered into a letter of intent for the sale of its
Trim Division for $14.5 million in cash. The transaction is conditioned on,
among other things, the buyer's due diligence investigation and the buyer
obtaining financing. There is no assurance that this transaction will be
completed on these terms. If consummated, the transaction is not expected to
result in a material gain or loss.
YEAR 2000
The Year 2000 problem arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20." If not
corrected, many computer programs could fail or cause erroneous results.
Failures of this nature could cause interruptions to manufacturing processes,
business and financial functions and communications with customers and
suppliers.
Due to the diverse nature of the Company's operations, each operating
division has its own discrete computer systems. The Company is performing a
comprehensive review to identify the systems affected by the Year 2000 issue.
The Company is assessing its information technology systems such as business
computing systems, end user computer systems and technical infrastructure, as
well as embedded systems commonly found in manufacturing and service equipment,
testing equipment and environmental operations. The assessments also include the
Company's products and evaluation of the readiness of its suppliers and service
providers.
The review of each of the systems involves a five step process. The
Company first inventories areas of potential risk based on comparison to
published industry guidelines. Each component identified in the inventory is
then evaluated for its risk of failure and the impact of potential failure to
the Company's operations and its customers. Once the risks are assessed,
remediation is commenced. Options for remediation may include replacement,
modification or continued use depending on information gathered during the
inventory and assessment stages. The remediated system is then tested and
reviewed before the determination is made as to the readiness of the system. A
project committee meets regularly to review the status of the investigation into
and resolution of Year 2000 issues. Most of the Company's divisions have
completed the inventory and assessment phases and are working on remediation and
testing. The remaining divisions have the inventory and assessment phases
underway. The Company expects that all divisions will have completed the
inventory and assessment phases by February 28, 1999 and will have implemented
initial remediation attempts and testing thereof by June 30, 1999.
The Company's remaining costs to remediate the Year 2000 problem are
not expected to exceed $4.0 million. Of this amount, approximately $1.5 million
will be spent in the form of capital for systems replacement and approximately
$1.0 million will be incremental costs. The remaining costs relate to the
redeployment of the Company's existing resources to assess and remediate the
Year 2000 problem. Projects being deferred by this issue include items such as
system enhancements that would improve performance or functionality. The impact
on net income (loss) to date has not been material.
14
<PAGE> 15
The Company suspects its greatest risk lies within its financial
computer systems and Electronic Data Interchange ("EDI") capabilities with its
customers and suppliers. The Company relies on customer requirements and outside
services for most of its EDI capabilities and therefore is dependent on such
parties addressing Year 2000 issues. If these systems were to fail, the Company
would encounter difficulty performing functions such as compiling financial
data, invoicing customers, accepting electronic customer orders or informing
customers of shipments electronically. While some of these functions could be
performed manually, the Company presently is not certain what the extent of the
impact on operations would be. There is also risk associated with certain
suppliers, including utility companies, over which the Company has limited
control. The Company is presently working on contingency plans to address issues
related to potential failures of critical systems due to Year 2000 problems, and
it expects to have those plans in place by May 31, 1999.
The Company presently believes that through the planned modification
to existing systems and conversion to new systems, as well as ongoing
correspondence with suppliers and customers, the Year 2000 issue will not
materially impair the Company's ability to conduct business.
EURO CONVERSION
The Company has both operating divisions and domestic export customers
located in Europe. In 1997, combined revenues from these sources was
approximately 13% of total revenues. Revenues involving countries participating
in the Euro conversion were somewhat lower. The Company is currently assessing
the impact of the Euro conversion on its operations.
The Company's European operations are taking steps to ensure their
capability of entering Euro transactions as of January 1, 1999. It is not
anticipated that changes to information technology and other systems which are
necessary to enter these transactions will be material. The affected operations
plan to make the Euro the functional currency sometime during the transition
period.
It is difficult to assess the competitive impact of the Euro
Conversion on the Company's operations. In some markets, where customers already
appear to be considering the exchange rates when considering prices, this
process may be accelerated. In other markets, where sales are made in U.S.
dollars, there may be pressures to denominate sales in the Euro, however,
exchange risks resulting from these transactions would be hedged.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are
not recitations of historical fact, constitute "forward looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934. The
words "estimate," "anticipate," "project," "intend," "believe," "expect," and
similar expressions are intended to identify forward looking statements. Such
forward-looking information involves important risks and uncertainties that
could materially alter results in the future from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, the ability of the Company to
maintain existing relationships with customers, the ability of the Company to
successfully implement productivity improvements, cost reduction initiatives,
facilities expansion and the ability of the Company to develop, market and sell
new products and to continue to comply with environmental laws, rules and
regulations. Other risks and uncertainties include uncertainties relating to
economic conditions, acquisitions and divestitures, government and regulatory
policies, technological developments and changes in the competitive environment
in which the Company operates. Persons reading this Form 10-Q are cautioned that
such forward-looking statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, readers should
specifically consider the various factors which could cause actual events or
results to differ materially from those indicated by such forward-looking
statements.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's $225 million term loan facility (the "Term Loan
Facility") bears interest at a variable rate equal to either (a) the average
daily rate on overnight U.S. federal funds transactions ("Federal Funds Rate"),
or (b) the London Interbank Offered Rate shown on Telerate Page 3750 for the
applicable interest period ("LIBOR"), plus, in either case, an applicable
spread.
On February 26, 1998, the Company entered into a three year interest
rate swap agreement with its lead bank to partially hedge its interest rate risk
on the Term Loan Facility. Under this agreement the Company pays a fixed rate of
5.805% on a notional amount of $150 million and receives LIBOR on that amount.
This swap transaction effectively fixes the interest rate on $150 million of the
Term Loan Facility at 5.805% plus the applicable spread for the duration of the
interest rate swap.
The remaining $75 million of the Term Loan Facility bears interest at
the variable rates described above. In addition, the Company has a revolving
loan facility that had a balance of $35 million at August 31, 1998, which also
bears interest at the variable rates described above. Accordingly, a 1% increase
in an application index rate would result in additional interest expense of
$1.1 million per year assuming no change in the level of borrowing under the
revolving loan facility.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K--None
17
<PAGE> 18
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.
EAGLE-PICHER HOLDINGS, INC.
/s/ CARROLL D. CURLESS
------------------------------
Carroll D. Curless
Vice President and Controller
DATE October 1, 1998
-----------------------
18
<PAGE> 19
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule (submitted
electronically to the Securities
and Exchange Commission for its
information)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) AND THE CONDENSED CONSOLIDATED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,099
<SECURITIES> 0
<RECEIVABLES> 122,167
<ALLOWANCES> 1,723
<INVENTORY> 90,613
<CURRENT-ASSETS> 260,872
<PP&E> 255,653
<DEPRECIATION> 19,505
<TOTAL-ASSETS> 816,432
<CURRENT-LIABILITIES> 136,516
<BONDS> 487,209
84,893
0
<COMMON> 10
<OTHER-SE> 82,128
<TOTAL-LIABILITY-AND-EQUITY> 816,432
<SALES> 206,356
<TOTAL-REVENUES> 206,356
<CGS> 163,518
<TOTAL-COSTS> 163,518
<OTHER-EXPENSES> 36,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,132
<INCOME-PRETAX> (4,938)
<INCOME-TAX> (1,135)
<INCOME-CONTINUING> (3,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,803)
<EPS-PRIMARY> (6.34)
<EPS-DILUTED> (6.34)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) AND THE CONDENSED CONSOLIDATED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 682,546
<TOTAL-REVENUES> 682,546
<CGS> 549,082
<TOTAL-COSTS> 549,082
<OTHER-EXPENSES> 101,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,391
<INCOME-PRETAX> 8,027
<INCOME-TAX> 9,821
<INCOME-CONTINUING> (1,794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,794)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
