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 26, 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. 1-4663
Crompton & Knowles Corporation
(exact name of registrant as specified in its charter)
Massachusetts 04-1218720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Station Place, Metro Center
Stamford, Connecticut 06902
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)353-5400
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 practicable
date.
Class Outstanding at October 14, 1998
Common Stock, $.10 par value 72,062,595 shares
CROMPTON & KNOWLES CORPORATION
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 26, 1998
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements and
Accompanying Notes
. Consolidated Statements of Earnings
(unaudited) - Quarters and nine months ended
September 26, 1998 and September 27, 1997
. Consolidated Balance Sheets - September 26, 1998
(unaudited) and December 27, 1997
. Consolidated Statements of Cash Flows
(unaudited) - Nine months ended
September 26, 1998 and September 27, 1997
. Notes to Consolidated Financial
Statements - Quarter ended September 26, 1998
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 Statement Re Computation of Per Share Earnings
*Exhibit 27 Financial Data Schedules
* A copy of this Exhibit is annexed to this report on Form 10-Q
provided to the Securities and Exchange Commission and the New
York Stock Exchange.
UNAUDITED
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Quarters and nine months ended September 26, 1998 and September 27, 1997
(In thousands, except per share data)
Quarters ended Nine months ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
Net sales $ 442,768 $ 455,076 $ 1,394,324 $ 1,423,091
Cost of products sold 279,600 287,626 874,156 904,636
Selling, general
and administrative 64,219 67,713 197,566 204,152
Depreciation and amortization 20,164 20,092 60,651 60,245
Research and development 13,080 13,543 39,443 39,481
Severance and other costs - 13,000 - 13,000
Special environmental charge - 15,000 - 15,000
Operating profit 65,705 38,102 222,508 186,577
Interest expense 17,916 25,641 62,034 79,175
Other income (1,055) (27,910) (2,602) (27,129)
Earnings before income
taxes and extraordinary loss 48,844 40,371 163,076 134,531
Provision for income taxes 18,252 15,549 60,746 51,330
Earnings before
extraordinary loss 30,592 24,822 102,330 83,201
Extraordinary loss on early
extinguishment of debt (5,674) (1,882) (21,468) (3,109)
Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092
Basic earnings per common share
Earnings before
extraordinary loss $ .41 $ .33 $ 1.37 $ 1.13
Extraordinary loss (.07) (.02) (.28) (.04)
Net earnings $ .34 $ .31 $ 1.09 $ 1.09
Diluted earnings per common share
Earnings before
extraordinary loss $ .40 $ .32 $ 1.34 $ 1.10
Extraordinary loss (.07) (.02) (.28) (.04)
Net earnings $ .33 $ .30 $ 1.06 $ 1.06
Dividends per common share $ - $ - $ .05 $ .05
See accompanying notes to consolidated financial statements.
- 2 -
September 26, 1998 UNAUDITED
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 26, 1998 and December 27, 1997
(In thousands of dollars)
September 26, December 27,
1998 1997
ASSETS
CURRENT ASSETS
Cash $ 8,803 $ 10,607
Accounts receivable 288,311 262,412
Inventories 357,921 356,716
Other current assets 71,843 85,314
Total current assets 726,878 715,049
NON-CURRENT ASSETS
Property, plant and equipment 476,292 474,892
Cost in excess of acquired net assets 180,023 181,025
Other assets 161,690 177,854
$ 1,544,883 $ 1,548,820
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 11,595 $ 1,770
Accounts payable 147,435 145,405
Accrued expenses 149,331 149,910
Income taxes payable 48,022 38,909
Other current liabilities 26,420 27,094
Total current liabilities 382,803 363,088
NON-CURRENT LIABILITIES
Long-term debt 811,769 896,291
Postretirement health care liability 148,392 149,344
Other liabilities 144,148 160,187
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 7,733 7,733
Additional paid-in capital 236,761 232,213
Accumulated deficit (96,878) (174,019)
Accumulated translation adjustment (34,894) (42,045)
Treasury stock at cost (51,357) (40,228)
Deferred compensation (834) (984)
Pension liability adjustment (2,760) (2,760)
Total stockholders' equity (deficit) 57,771 (20,090)
$ 1,544,883 $ 1,548,820
See accompanying notes to consolidated financial statements.
- 3 -
UNAUDITED
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 26, 1998 and September 27, 1997
(In thousands of dollars)
Sept. 26, Sept. 27,
Increase (decrease) to cash 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 80,862 $ 80,092
Adjustments to reconcile net earnings
to net cash provided by operations:
Extraordinary loss on early debt extinguishment 21,468 3,109
Depreciation and amortization 60,651 60,245
Noncash interest 4,977 10,541
Deferred taxes 6,442 21,689
Changes in assets and liabilities, net (8,916) (9,292)
Net cash provided by operations 165,484 166,384
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (5,927) -
Capital expenditures (42,084) (27,900)
Other investing activities 380 3,008
Net cash used by investing activities (47,631) (24,892)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of 11% and 12% notes (352,802) -
Proceeds (payments) on long-term borrowings 259,438 (136,975)
Proceeds (payments) on short-term borrowings 9,825 (5,901)
Premium paid on early extinguishment of debt (22,984) (4,123)
Treasury stock acquired (20,922) -
Dividends paid (3,721) (3,671)
Other financing activities 10,669 3,612
Net cash used by financing activities (120,497) (147,058)
CASH
Effect of exchange rates on cash 840 (400)
Change in cash (1,804) (5,966)
Cash at beginning of period 10,607 21,120
Cash at end of period $ 8,803 $ 15,154
See accompanying notes to consolidated financial statements.
-4-
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Quarter ended September 26, 1998
PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The information included in the foregoing consolidated financial
statements is unaudited but reflects all adjustments which are,
in the opinion of management, necessary for a fair statement of
the results for the interim periods presented.
Included in accounts receivable are allowances for doubtful
accounts of $12.8 million in 1998 and $8.7 million at December
27, 1997.
Accumulated depreciation amounted to $456.9 million in 1998 and
$416.6 million at December 27, 1997.
Accumulated amortization of cost in excess of acquired net assets
amounted to $46.7 million in 1998 and $42.2 million at December
27, 1997.
Accumulated amortization of patents, unpatented technology,
trademarks and other intangibles included in other assets
amounted to $134.4 million in 1998 and $123.3 million at December
27, 1997.
Cash payments during the nine months ended September 26, 1998 and
September 27, 1997 included interest of $57.3 million and $62.7
million, respectively, and income taxes of $24.2 million and
$25.1 million, respectively.
It is suggested that the interim consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes included in the Company's 1997 Annual Report
on Form 10-K.
CAPITAL STOCK
As of September 26, 1998, there were 77,332,751 common shares
issued at $.10 par value, of which 3,891,856 shares were held in
the treasury.
INVENTORIES
Components of inventories are as follows:
Sept.26, Dec. 27,
(In thousands) 1998 1997
Finished goods $243,666 $226,730
Work in process 42,500 47,029
Raw materials and supplies 71,755 82,957
$357,921 $356,716
EARNINGS(LOSS)PER COMMON SHARE
The computation of basic earnings per common share is based on
the weighted average number of common shares outstanding. The
computation of diluted earnings per common share is based on the
weighted average number of common and common equivalent shares
outstanding. The following is a reconciliation of the shares used
in both computations:
(In thousands) Third Quarter Nine Months
1998 1997 1998 1997
Weighted average common
shares outstanding 74,460 73,508 74,331 73,309
Stock options, warrants
and other equivalents 1,823 2,117 2,189 1,902
Weighted average common
and common equivalent
shares outstanding 76,283 75,625 76,520 75,211
BUSINESS SEGMENT DATA
Third Quarter Ended
Sept. 26, Sept. 27,
(In thousands) 1998 1997
SALES
Specialty Chemicals $ 352,322 $ 375,328
Specialty Equipment and Controls 90,446 79,748
Total net sales $ 442,768 $ 455,076
OPERATING PROFIT
Specialty Chemicals $ 56,902 $ 61,407
Specialty Equipment and Controls 11,814 10,165
Severance and other costs - ( 13,000)
Special environmental provision - ( 15,000)
General corporate expense ( 3,011) ( 5,470)
Total operating profit $ 65,705 $ 38,102
Nine Months Ended
Sept. 26, Sept. 27,
(In thousands) 1998 1997
SALES
Specialty Chemicals $ 1,139,117 $ 1,192,337
Specialty Equipment and Controls 255,207 230,754
Total net sales $ 1,394,324 $ 1,423,091
OPERATING PROFIT
Specialty Chemicals $ 205,019 $ 206,039
Specialty Equipment and Controls 32,012 25,913
Severance and other costs - ( 13,000)
Special environmental provision - ( 15,000)
General corporate expense ( 14,523) ( 17,375)
Total operating profit $ 222,508 $ 186,577
COMPREHENSIVE INCOME
Effective in the first quarter of 1998, the Company adopted
Financial Accounting Standards Board Statement No. 130 "Reporting
Comprehensive Income". The statement establishes standards for
reporting "comprehensive income" and its components in financial
statements and notes thereto. An analysis of the Company's
comprehensive income follows:
Third Quarter Nine Months
Ended Ended
Sept.26, Sept.27, Sept.26, Sept.27,
(In thousands) 1998 1997 1998 1997
Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092
Other comprehensive
(income)expense:
Foreign currency
translation adjustments (11,690) 1,871 ( 7,151) 13,110
Minimum pension liability
adjustments, net - - - ( 953)
(11,690) 1,871 ( 7,151) 12,157
Comprehensive income $ 36,608 $ 21,069 $ 88,013 $ 67,935
LONG-TERM DEBT
On March 31, 1998, the Company amended its $600 million revolving
credit agreement with a syndicate of banks. The termination date
was extended to September 2003 from August 2001. Borrowings
under the credit agreement were amended as follows: Tranche I
provides a maximum of $375 million (up from $300 million)
available to the Company for working capital and general
corporate purposes. Tranche II provides a maximum of $75 million
(down from $150 million) available to Uniroyal Chemical Company,
Inc. for working capital and general corporate purposes. Tranche
III continues to provide up to $150 million available to the
European and Canadian subsidiaries of the Company.
On May 8, 1998 the Company redeemed the outstanding 11% Senior
Subordinated Notes at a price of 105.5% of the principal amount
thereof plus accrued and unpaid interest and the 12% Subordinated
Discount Notes at a price of 100% of the principal amount thereof
plus accrued and unpaid interest. The payment for the redemption
including premium and accrued interest amounted to $366.2 million
and was funded by drawing on the Company's $600 million revolving
credit agreement. In addition, $107.2 million of the Company's
9% and 10.5% debt was refinanced in the nine months of 1998.
Borrowings under the revolving credit agreement totaled $453.4
million at September 26, 1998.
RECENT EVENT
On September 17, 1998, the Company and Bayer AG, Germany
announced an agreement in principle to form a joint venture to
serve the agricultural seed treatment market in North America.
The basis of the joint venture will be the Company's Gustafson
seed treatment business. The transaction is anticipated to close
in November 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER RESULTS
Overview
Consolidated net sales of $442.8 million for the third quarter
of 1998 decreased 3% from the comparable period in 1997. The
decrease was primarily attributable to lower unit volume.
International sales, including US exports, were 41% of total
sales, unchanged from the third quarter of 1997.
Net earnings before extraordinary losses on early extinguishment
of debt increased 23% to $30.6 million, or $.41 per share basic
and $.40 per share diluted, compared to $24.8 million, or $.33
per share basic and $.32 per share diluted, in last year's third
quarter. The extraordinary losses on early extinguishment of
debt were $5.7 million, or $.07 per share in the third quarter
of 1998 and $1.9 million, or $.02 per share in the comparable
1997 quarter. Net earnings were $24.9 million, or $.34 per
share basic and $.33 per share diluted, compared with $22.9
million, or $.31 per share basic and $.30 per share diluted, in
the prior year's third quarter.
Gross margin as a percentage of net sales increased slightly to
36.9% from 36.8% in the third quarter of 1997. Consolidated
operating profit of $65.7 million was essentially unchanged from
the $66.1 million (before special charges of $28 million) in the
third quarter of 1997. The specialty chemicals segment
decreased 7% while the specialty process equipment and controls
segment increased 16%.
Specialty Chemicals
The Company's specialty chemicals segment sales of $352.3
million decreased 6% from the comparable 1997 period. The
decrease was primarily due to lower unit volume. An analysis of
sales by major product class within the specialty chemicals
segment follows.
Chemicals and polymers sales of $115.9 million decreased 4% from
the third quarter of 1997 primarily due to lower unit volume
offset, in part, by improved pricing. Sales of rubber chemicals
were 9% lower than 1997 primarily due to an unfavorable sales
mix and lower unit volume. EPDM sales increased 8% primarily
due to improved pricing. Nitrile rubber sales decreased 12%
primarily as a result of lower unit volume.
Crop protection sales of $86.9 million decreased 5% from the
comparable 1997 quarter primarily as a result of lower unit
volume. The U.S. farm economy worsened during the third quarter
of 1998 as drought, low commodity prices and lack of grower
financing impacted demand for the Company's insecticide, harvest
aid and seed treatment products. In addition, international
sales were negatively impacted by economic conditions in Russia,
Asia and Central Europe.
Specialty sales of $74.7 million decreased 4% versus the third
quarter of 1997 primarily attributable to lower unit volume as
weak demand for urethanes more than offset increased sales from
the introduction of a new polymerization inhibitor and the
recent plant expansion for synthetic lubricants.
Colors sales of $53.2 million decreased 15% from the third
quarter of 1997 primarily due to lower unit volume of 13% and
lower pricing of 2%. Increased imports of finished apparel from
Asia adversely affected the business.
Specialty ingredients sales of $21.6 million were 8% lower than
the third quarter of 1997 primarily attributable to lower unit
volume as a result of product rationalization in the second half
of 1997.
Operating profit of $56.9 million decreased 7% versus the third
quarter of 1997 primarily as a result of lower unit volume and
unfavorable product mix within certain businesses.
Specialty Process Equipment and Controls
The Company's specialty process equipment and controls segment
sales of $90.5 million increased 13% from the third quarter of
1997 primarily as a result of increased unit volume.
Operating profit of $11.8 million increased 16% from the third
quarter of 1997 primarily attributable to higher unit volume.
The order backlog of extruders and related equipment at the end
of the third quarter of 1998 amounted to $117 million compared
to $115 million at the end of the second quarter.
Other
Selling, general and administrative expenses of $64.2 million
decreased 5% versus the third quarter of 1997 primarily due to
an adjustment of long-term incentive expense caused by the
Company's recent share price decline. Depreciation and
amortization of $20.2 million increased slightly from the
comparable 1997 period. Research and development costs of $13.1
million decreased 3% from the third quarter of 1997, but as a
percentage of sales remained constant at 3%. Interest expense
of $17.9 million decreased 30% from the comparable period of
1997 primarily due to lower levels of indebtedness and lower
interest cost on borrowings used to redeem the 11% and 12% Notes
in May, 1998. Other income of $1.1 million decreased
significantly from $27.9 million in the third quarter of 1997,
primarily as a result of the settlement of post retirement
medical and life insurance benefits with the U.S. Department of
the Army which resulted in a gain to the company of $28.0
million in 1997. The effective tax rate of 37.4% decreased
versus the 38.5% in the comparable 1997 quarter.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales of $1.39 billion for the first nine
months of 1998 decreased 2% from the comparable period in 1997.
The decrease resulted primarily from lower unit volume (1%) and
the impact of lower foreign currency translation (1%).
International sales, including U.S. exports, increased as a
percentage of total sales to 40% from 39% for the first nine
months of 1997.
Net earnings before extraordinary losses on early extinguishment
of debt increased 23% to $102.3 million, or $1.37 per share
basic and $1.34 per share diluted, compared to $83.2 million, or
$1.13 per share basic and $1.10 per share diluted, for the prior
year. The extraordinary losses on early extinguishment of debt
were $21.5 million, or $.28 per share in 1998, and $3.1 million,
or $.04 per share, in the first nine months of 1997. Net
earnings were $80.9 million, or $1.09 per share basic and $1.06
per share diluted, compared with $80.1 million, or $1.09 per
share basic and $1.06 per share diluted, for the comparable
period in 1997.
Gross margin as a percentage of net sales increased to 37.3%
from 36.4% for the first nine months of 1997. The increase was
attributable primarily to lower raw material costs and improved
pricing. Consolidated operating profit increased 4% to $222.5
million from $214.6 million (before special charges of $28
million) in the prior year. The specialty chemicals segment was
slightly lower than 1997 while the specialty process equipment
and controls segment increased 24%.
Specialty Chemicals
The Company's specialty chemicals segment sales of $1.14 billion
decreased 4% from the comparable 1997 period. The decrease was
primarily due to lower unit volume of 3% and lower foreign
currency translation of 1%. An analysis of sales by major
product class within the specialty chemicals segment follows.
Chemicals and polymers sales of $360.2 million decreased 4% from
the first nine months of 1997. The decrease was primarily
attributable to lower unit volume of 3% and lower foreign
currency translation of 1%. Sales of rubber chemicals were 9%
lower than 1997 primarily due to lower pricing, unfavorable
sales mix and unit volume. EPDM sales increased 8% primarily due
to improved pricing. Nitrile rubber sales decreased 8%
primarily as a result of lower unit volume.
Crop protection sales of $295.3 million decreased 5% from the
comparable 1997 period primarily as a result of lower unit
volume. Unfavorable weather, low commodity prices and lack of
grower financing impacted demand for insecticide and other
products in the United States, and international sales were
negatively impacted by economic conditions in Russia, Asia and
Central Europe.
Specialty sales of $234.9 million were comparable to the prior
year. Improved pricing of 1% was offset by the impact of lower
foreign currency translation.
Colors sales of $178.9 million decreased 9% from the first nine
months of 1997 primarily due to lower unit volume of 6%, foreign
currency translation of 2% and lower pricing of 1%.
Specialty ingredients sales of $69.8 million were 7% lower than
the comparable period in 1997 primarily attributable to lower
unit volume as a result of product rationalization in the second
half of 1997.
Operating profit of $205.0 million decreased $1.0 million from
$206.0 million for the nine month period in 1997 primarily from
a decrease in unit volume offset by lower operating costs and
improved pricing.
Specialty Process Equipment and Controls
The Company's specialty process equipment and controls segment
reported sales of $255.2 million representing an 11% increase
from the 1997 nine month period primarily due to higher unit
volume.
Operating profit of $32.0 million increased 24% versus the
comparable 1997 period primarily due to increased unit volume
and improved pricing and product mix.
Other
Selling, general and administrative expenses of $197.6 million
decreased 3% versus the comparable period in 1997, primarily
from the lower unit volume of sales and an adjustment of long-
term incentive expense caused by the Company's share price
decline. Depreciation and amortization of $60.7 million
increased 1% versus the 1997 period primarily as a result of a
higher fixed asset base. Research and development cost of $39.4
million approximated the comparable period in 1997 and as a
percentage of net sales remained constant at 3%. Interest
expense of $62.0 million decreased 22% from the nine months of
1997 due to lower levels of indebtedness and lower interest cost
on borrowings used to redeem the 11% and 12% Notes in May.
Other income of $2.6 million in 1998 decreased significantly
from $27.1 million in 1997 which included a settlement gain of
$28.0 million with the U.S. Department of the Army. The
effective tax rate of 37.3% decreased versus the 38.2% rate in
the comparable 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The September 26, 1998 working capital balance of $344.1 million
decreased $7.9 million from year-end 1997. The current ratio of
1.9 decreased slightly from 2.0 at the end of 1997. Days sales
in receivables averaged 55 days versus 54 days for the nine
months of 1997. Inventory turnover averaged 3.2 compared to 3.3
for the nine months of 1997.
Net cash flow provided by operations of $165.5 million decreased
$900 thousand compared to the first nine months of 1997
primarily due to increased operating earnings more than offset
by lower noncash interest and deferred taxes. The cash flow was
primarily used, together with additional credit agreement
borrowings, to fund capital expenditures, reduce debt including
the 11% and 12% Notes, repurchase 1.3 million shares of the
Company's common stock and pay the annual cash dividend. The
Company's debt to total capital percentage decreased to 93% from
102% at year-end 1997. The Company's liquidity needs, including
debt servicing, are expected to be financed from operations.
On May 8, 1998 the Company redeemed the outstanding 11% Senior
Subordinated Notes and the 12% Subordinated Discount Notes. The
payment for the redemption including premium and accrued
interest amounted to $366.2 million and was funded by drawing on
the Company's $600 million revolving credit agreement.
Borrowings under the revolving credit agreement totaled $453.4
million at September 26, 1998.
On September 17, 1998, the Company and Bayer AG, Germany
announced an agreement in principle to form a joint venture to
serve the agricultural seed treatment market in North America.
The basis of the joint venture will be the Company's Gustafson
seed treatment business. The transaction is anticipated to
close in November 1998.
Capital expenditures are expected to approximate $60 million in
1998 primarily for replacement needs and improvement of domestic
and foreign facilities.
YEAR 2000 ISSUES
The Company has assessed and continues to assess its Information
Technology (IT) infrastructures including those systems that are
typically viewed as non-IT systems to determine and address any
potential problems that may result from Year 2000 compliance
issues. As generally known, Year 2000 compliance issues pertain
to the ability of computerized systems to recognize and process
date sensitive information beginning January 1, 2000. The
Company has performed this assessment over the last two years
and has been implementing appropriate steps to be Year 2000
compliant in both its IT and non-IT systems.
Under the Company's current environment, IT systems include
mission critical applications that directly support the
Company's operations. These IT systems also include networked
personal computers running desktop applications. Typical non-IT
system within the Company's environment include process controls
and other microcontrollers containing imbedded computer chips.
Assessment of non-IT systems is an ongoing activity and, to the
extent that any existing non-IT system has Year 2000 compliance
issues, the Company is aggressively undertaking measures to
remedy such systems. The Company believes that existing non-IT
systems will continue to function without significant problems
beyond January 1, 2000.
The Company employs a number of major mission critical IT
systems in its Specialty Chemicals business. These systems are
currently being upgraded to address Year 2000 compliance issues
and the Company expects this to be completed by mid-1999.
The Company's Specialty Machinery and Controls business is
supported by a legacy system that runs on a mid-range computer
system. This system has been reworked, tested and the Company
believes that it is now Year 2000 compliant. The Company has
assessed all other IT systems including non-IT systems in this
business segment and has undertaken necessary steps to address
any Year 2000 compliance issues. This business currently sells
equipment controls containing programs and microchips. The
Company believes that these products which are used in the
operation of extrusion machinery are Year 2000 compliant.
The Company has operations in Europe, Asia Pacific, and Latin
America supported by IT systems operating on mid-range
computers. The Company is presently upgrading these IT systems
to address Year 2000 compliance. The Company expects to
complete this upgrade by mid-1999.
The Company is actively looking into the overall Year 2000
readiness of its major business partners including vendors,
suppliers, and service providers in order to determine that the
Company's operations will not be disrupted in the event that any
such third party failed to have Year 2000 compliant systems.
The Company has received assurances from nearly all of the major
business entities that it conducts business with that these
entities will be able to conduct business beyond January 1, 2000
without any disruption. The Company continues to provide status
information of its Year 2000 compliance effort to its customers
and assures its customers that the Company's IT infrastructure
will continue to function properly beyond January 1, 2000.
The Company has spent approximately $4.6 million to assess
and correct Year 2000 compliance issues in its IT infrastructure
through September 26, 1998. The Company estimates that it will
spend an additional $1.9 million to complete the
remediation of Year 2000 compliance issues in its IT
infrastructure. The Company is committed to allocate funds to
remediate any other Year 2000 compliance issues in the course of
its ongoing assessment of its IT infrastructure. Year 2000
compliance costs are not expected to have a material effect on
the Company's results of operations.
The Company does not expect to have any material risk exposure
emanating from its internal IT infrastructure. While it is not
expected to occur, failures of the Company's supplier's vendors,
and key customers to address the Year 2000 compliance could have
material adverse impact on the Company's operations. In
particular, failures of the Company's energy and
telecommunication suppliers to address Year 2000 compliance
could have an immediate impact on the Company's operations. The
Company is continuing to assess and focus its efforts to
mitigate any potential risk associated with the Year 2000
compliance.
The Company does not have any formal contingency plan at this
time. The Company continually monitors the need to develop a
formal contingency plan.
ACCOUNTING STANDARD CHANGE
In June 1997 the Financial Accounting Standards Board issued
Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which is effective for years beginning
after 1997. In June 1998, the Financial Accounting Standards
Board issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which is effective for
years beginning after 1999. The Company is currently evaluating
the statements and plans to adopt Statement No. 131 in the
fourth quarter of 1998 and Statement No. 133 in the first
quarter of 2000.
ENVIRONMENTAL MATTERS
The Company is involved in claims, litigation, administrative
proceedings and investigations of various types in a number of
jurisdictions. A number of such matters involve claims for a
material amount of damages and relate to or allege environmental
liabilities, including clean-up costs associated with hazardous
waste disposal sites, natural resource damages, property damage
and personal injury. The Company and some of its subsidiaries
have been identified by federal, state or local governmental
agencies, and by other potentially responsible parties (each a
"PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or
comparable state statutes, as a PRP with respect to costs
associated with waste disposal sites at various locations in the
United States. In addition, the Company is involved with
environmental remediation and compliance activities at some of
its current and former sites in the United States and abroad.
Each quarter, the Company evaluates and reviews estimates for
future remediation and other costs to determine appropriate
environmental reserve amounts. For each site a determination is
made of the specific measures that are believed to be required
to remediate the site, the estimated total cost to carry out the
remediation plan, the portion of the total remediation costs to
be borne by the Company and the anticipated time frame over
which payments toward the remediation plan will occur. As of
September 26, 1998, the Company's reserves for environmental
remediation activities totaled $96.7 million. These estimates
may change in the future should additional sites be identified,
further remediation measures be required or undertaken, the
interpretation of current laws and regulations be modified or
additional environmental laws and regulations be enacted.
The Company intends to assert all meritorious legal defenses and
other equitable factors which are available to it with respect
to the above matters. The Company believes that the resolution
of these environmental matters will not have a material adverse
effect on the consolidated financial position of the Company.
While the Company believes it is unlikely, the resolution of
these environmental matters could have a material adverse effect
on the Company's consolidated results of operation in any given
year if a significant number of these matters are resolved
unfavorably.
FORWARD-LOOKING STATEMENTS
The information in this Form 10-Q contains forward-looking
statements and estimates which are based on currently available
information. The Company's actual results may differ
significantly from the results discussed. Investors are
cautioned that there can be no assurance that the actual results
will not differ materially from those suggested in such forward-
looking statements and estimates.
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings.
(a) Reference is made to Item 1(i) of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
28, 1997, and to page 16 (Other Environmental Matters) of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997 for information relating to Uniroyal's
Painesville, Lake County, Ohio facility and to the facility's
litigation with the Lake County Board of Commissioners. In
September 1998, the parties entered into a settlement agreement
pursuant to which Uniroyal agreed to comply with certain interim
and final limits pertaining to the discharge of certain
substances from its wastewater to the Lake County sanitary sewer
system and paid an administrative fine of $176,000, and Lake
County dismissed all of its present and past claims against
Uniroyal with prejudice.
(b) Reference is made to Item 3 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 27, 1997,
for information pertaining to the Vertac Chemical Corporation
site in Jacksonville, Arkansas ("Vertac Site") allegedly
contaminated by dioxins. On October 23, 1998, the United States
District Court for the Eastern District of Arkansas, Western
Division, entered an order granting the United States of
America's motion for summary judgement against the Registrant's
Canadian subsidiary, Uniroyal Chemical Co./Cie. ("Uniroyal") and
Hercules Incorporated ("Hercules") as to the amount of $102.9
million of removal and remediation costs that the United States
claims it incurred at the Vertac Site. Trial on the allocation
of these costs as between Uniroyal and Hercules was concluded on
November 6, 1998, and how much, if any, of the costs will
ultimately be imposed on Uniroyal cannot be determined at this
time, although Uniroyal continues to believe that its share of
liability will be small in comparison to that of Hercules.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
11 Statement Re Computation of
Per Share Earnings
27* Financial Data Schedules
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
* A copy of this Exhibit is annexed to this report on
Form 10-Q provided to the Securities and Exchange
Commission and the New York Stock Exchange.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
CROMPTON & KNOWLES CORPORATION
(Registrant)
November 10, 1998 By:/s/ Charles J. Marsden
Charles J. Marsden
Senior Vice President &
Chief Financial Officer
November 10, 1998 By:/s/ John T. Ferguson II
John T. Ferguson II
Vice President, General
Counsel and Secretary
CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
Quarters Ended Nine Months Ended
Sept.26, Sept.27, Sept.26, Sept.27,
1998 1997 1998 1997
BASIC
Earnings
Earnings before extraordinary
loss $ 30,592 $ 24,822 $ 102,330 $ 83,201
Extraordinary loss on early extinguishment
of debt (5,674) (1,882) (21,468) (3,109)
Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092
Shares
Weighted average shares
outstanding 74,460 73,508 74,331 73,309
Per share
Earnings before extraordinary
loss $ .41 $ .33 $ 1.37 $ 1.13
Extraordinary loss on early extinguishment
of debt (.07) (.02) (.28) (.04)
Net earnings $ .34 $ .31 $ 1.09 $ 1.09
DILUTED
Earnings
Earnings before extraordinary
loss $ 30,592 $ 24,822 $ 102,330 $ 83,201
Extraordinary loss on early extinguishment
of debt (5,674) (1,882) (21,468) (3,109)
Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092
Shares
Weighted average shares
outstanding 74,460 73,508 74,331 73,309
Common stock
equivalents 1,823 2,117 2,189 1,902
Average shares
outstanding 76,283 75,625 76,520 75,211
Per share
Earnings before extraordinary
loss $ .40 $ .32 $ 1.34 $ 1.10
Extraordinary loss on early extinguishment
of debt (.07) (.02) (.28) (.04)
Net earnings $ .33 $ .30 $ 1.06 $ 1.06
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<NAME> CROMPTON & KNOWLES CORPORATION
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<INCOME-CONTINUING> 102,330
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<F1>Reflects Basic earnings per share.
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<TABLE> <S> <C>
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<NAME> CROMPTON & KNOWLES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 15,154
<SECURITIES> 0
<RECEIVABLES> 281,595
<ALLOWANCES> 8,787
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<CURRENT-LIABILITIES> 359,866
<BONDS> 924,549
0
0
<COMMON> 7,733
<OTHER-SE> (35,621)
<TOTAL-LIABILITY-AND-EQUITY> 1,572,781
<SALES> 1,423,091
<TOTAL-REVENUES> 1,423,091
<CGS> 904,636
<TOTAL-COSTS> 1,236,514
<OTHER-EXPENSES> (27,129)
<LOSS-PROVISION> 1,400
<INTEREST-EXPENSE> 79,175
<INCOME-PRETAX> 134,531
<INCOME-TAX> 51,330
<INCOME-CONTINUING> 83,201
<DISCONTINUED> 0
<EXTRAORDINARY> (3,109)
<CHANGES> 0
<NET-INCOME> 80,092
<EPS-PRIMARY> 1.09<F1>
<EPS-DILUTED> 1.06<F2>
<FN>
<F1>Reflects Basic earnings per share. Restated for FAS 128.
<F2>Restated for FAS 128.
</FN>
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