<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 Quarter Ended March 31, 1999 Commission File number 1-5341
-------------- ------
ELCOR CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-1217920
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14643 DALLAS PARKWAY
SUITE 1000, WELLINGTON CENTRE, DALLAS, TEXAS 75240-8871
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 851-0500
--------------
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 .
----- -----
As of close of business on May 3, 1999, Registrant had outstanding
13,007,347 shares of Common Stock, Par Value $1 per Share.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ELCOR CORPORATION
CONSOLIDATED BALANCE SHEET
---------------------------
(Unaudited, $ in thousands)
<TABLE>
<CAPTION>
ASSETS 3-31-99 6-30-98
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,444 $ 5,240
Trade receivables, less allowance of $1,012 and $580 60,547 56,450
Inventories -
Finished goods 22,371 20,549
Work-in-process 327 446
Raw materials 7,802 7,827
--------- ---------
Total inventories 30,500 28,822
--------- ---------
Other current assets 8,931 1,789
Deferred income taxes 847 2,228
--------- ---------
Total current assets 102,269 94,529
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST 206,304 194,133
Less - accumulated depreciation (74,523) (73,401)
--------- ---------
Property, plant and equipment, net 131,781 120,732
--------- ---------
OTHER ASSETS 2,082 1,783
--------- ---------
$ 236,132 $ 217,044
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,597 $ 14,579
Accrued liabilities 16,302 12,628
--------- ---------
Total current liabilities 31,899 27,207
--------- ---------
LONG-TERM DEBT 57,500 48,000
DEFERRED INCOME TAXES 16,498 15,881
SHAREHOLDERS' EQUITY -
Common stock, $1 par 13,326 13,326
Paid-in-capital 66,396 67,862
Retained earnings 57,644 47,394
--------- ---------
137,366 128,582
Less -- Treasury stock (318,576 and 100,423
shares, at cost) (7,131) (2,626)
--------- ---------
Total shareholders' equity 130,235 125,956
--------- ---------
$ 236,132 $ 217,044
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
ELCOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(Unaudited, $ in thousands
except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- ------------------------
3-31-99 3-31-98 3-31-99 3-31-98
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 70,735 $ 59,225 $ 227,802 $ 193,706
---------- ---------- ---------- ----------
COST AND EXPENSES
Cost of sales 53,132 45,225 169,506 147,927
Selling, general and administrative 8,898 8,257 28,982 25,446
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 8,705 5,743 29,314 20,333
---------- ---------- ---------- ----------
OTHER EXPENSE
Interest expense, net 464 514 1,468 1,887
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 8,241 5,229 27,846 18,446
Provision for income taxes 3,126 1,860 10,527 6,735
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 5,115 3,369 17,319 11,711
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- (4,340) --
---------- ---------- ---------- ----------
NET INCOME $ 5,115 $ 3,369 $ 12,979 $ 11,711
========== ========== ========== ==========
INCOME PER COMMON SHARE-BASIC:
Before cumulative effect of
change in accounting principle $ .39 $ .25 $ 1.33 $ .88
Cumulative effect of change
in accounting principle -- -- (.33) --
---------- ---------- ---------- ----------
NET INCOME PER SHARE-BASIC $ .39 $ .25 $ 1.00 $ .88
========== ========== ========== ==========
INCOME PER COMMON SHARE-DILUTED:
Before cumulative effect of
change in accounting principle $ .38 $ .25 $ 1.30 $ .87
Cumulative effect of change
in accounting principle -- -- (.32) --
---------- ---------- ---------- ----------
NET INCOME PER SHARE-DILUTED $ .38 $ .25 $ .98 $ .87
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ .07 $ .06 $ .21 $ .18
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
ELCOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Unaudited, $ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
3-31-99 3-31-98
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,979 $ 11,711
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization 6,825 8,116
Deferred income taxes 4,340 1,554
Cumulative effect of change in accounting principle 4,340 --
Changes in assets and liabilities:
Trade receivables (3,101) (4,595)
Inventories (1,355) (1,579)
Other current assets (7,131) 756
Accounts payable and accrued liabilities 3,157 (3,616)
---------- ----------
Net cash provided by operating activities 20,054 12,347
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (22,236) (9,079)
Business acquisition, net of cash acquired (5,298) --
Insurance proceeds and other, net 2,883 1,718
---------- ----------
Net cash used for investing activities (24,651) (7,361)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings (repayments) 9,500 (3,900)
Dividends on common stock (2,729) (2,385)
Treasury stock transactions and other, net (5,970) 521
---------- ----------
Net cash provided by (used for) financing activities 801 (5,764)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,796) (778)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,240 3,601
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,444 $ 2,823
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
ELCOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. The attached condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. As a result, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The company believes that the disclosures
included herein are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
related notes included in the company's 1998 Annual Report on Form
10-K. The unaudited financial information contained herein has been
prepared in conformity with generally accepted accounting principles on
a consistent basis and does reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
of operations for the three-month and nine-month periods ending March
31, 1999 and 1998, but are, however, subject to year-end audit by the
company's independent auditors. Because of seasonal, weather-related
conditions in some of the company's market areas, sales can vary at
times, and results of any one quarter or other interim reporting period
should not necessarily be considered as indicative of results for a
full fiscal year.
2. In fiscal 1998, the company changed its method of accounting for
inventories from the LIFO method to the FIFO method. In accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes," the
consolidated financial statements as of March 31, 1998 have been
restated to reflect this accounting change. There was no significant
impact on net income for the three-month or nine-month periods ended
March 31, 1998 as a result of this change in accounting principle.
3. On September 15, 1998, the company experienced an explosion at its
fiberglass roofing mat plant in Ennis, Texas. The explosion
significantly damaged a drying oven and caused less extensive damage to
the remainder of the mat manufacturing line. At the time of the
explosion, the damaged mat line supplied all of the company's internal
fiberglass roofing mat needs. In addition, roofing mats from the
damaged line were being sold to other asphalt roofing products
manufacturers. There was no damage to a separate mat line that runs in
parallel to the damaged line, nor was there any damage to the company's
Ennis, Texas shingle manufacturing plant. There were no injuries from
the explosion.
The damaged line was restored to partial operation in December 1998. At
March 31, 1999, the damaged section had been replaced and had achieved
production line speeds nearly equal to the line speeds prior to the
explosion. The plant is currently producing quantities of roofing mats
sufficient to meet the company's internal fiberglass roofing mat
requirements.
4
<PAGE> 6
The company carries both property damage and business interruption
insurance. Accordingly, management does not expect the explosion to
have a material adverse impact on the company's financial results. The
$100,000 deductible portion of the loss was recorded during the quarter
ended September 30, 1998. As of March 31, 1999 the company had received
insurance advances of $3,287,000 for property damage and $2,000,000 for
business interruption. In April 1999, additional advances of $2,500,000
for property damage and $2,000,000 for business interruption were
received. Additional advance requests have been submitted and are
pending insurance company review. Estimated lost operating income is
included in net sales. Reimbursable costs incurred to mitigate the loss
have been recorded as a reduction of the related expense.
4. In the first quarter of fiscal 1999, the company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," issued
by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants. This Statement of Position
requires, among other things, companies to expense on a current basis
previously capitalized start-up costs. Adoption of this Statement of
Position resulted in a $4,340,000 charge, net of tax, and is reported
as a cumulative effect of change in accounting principle on the
Consolidated Statement of Operations.
5. During the first quarter of fiscal 1999, the company adopted Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." The adoption of SFAS 130 had no effect on the
consolidated financial statements, as there are no items that the
company is required to recognize as components of comprehensive income.
6. In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly held companies to
disclose, among other things, certain interim and annual financial
information about the enterprise using a new management approach. This
approach requires segment information to be reported based on how
management evaluates the operating performance of its business units or
segments. The company will adopt SFAS No. 131 in fiscal 1999, but is
still assessing the disclosure requirements of this standard.
7. On January 11, 1999, a newly formed wholly owned subsidiary of the
company purchased all of the outstanding shares of YDK America, Inc.
(YDKA), a leading supplier to the computer industry of electronic
plastic enclosures and components having electroless conductive
coatings. The total purchase price was approximately $5,300,000, net of
cash acquired, which was financed through borrowings under Elcor's
revolving credit agreement. The company is currently evaluating the
allocation of the purchase price. The acquisition was accounted for
using the purchase method of accounting, and the operating results have
been included in the company's consolidated financial statements since
the date of acquisition. The acquisition did not have a material impact
on operating results. YDKA's sales were $11.2 million for its fiscal
year ending June 30, 1998.
5
<PAGE> 7
8. Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share include
outstanding stock options.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended Nine Months Ended
3-31-99 3-31-98 3-31-99 3-31-98
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 5,115 $ 3,369 $ 12,979 $ 11,711
========== ========== ========== ==========
Denominator for basic earnings
per share - weighted average
shares outstanding 12,996 13,269 13,038 13,234
Effect of dilutive securities:
Employee stock options 306 275 256 270
---------- ---------- ---------- ----------
Denominator for dilutive earnings
per share - adjusted weighted
average shares and assumed issuance
of shares purchased under incentive
stock option plan using the treasury
stock method 13,302 13,544 13,294 13,504
========== ========== ========== ==========
Basic earnings per share $ .39 $ .25 $ 1.00 $ .88
========== ========== ========== ==========
Diluted earnings per share $ .38 $ .25 $ .98 $ .87
========== ========== ========== ==========
</TABLE>
6
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
CHANGES IN THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE
THREE-MONTH PERIOD ENDED MARCH 31, 1998.
During the three-month period ended March 31, 1999, net income increased 52% to
$5,115,000 from $3,369,000 in the same three-month period last year. Sales
increased 19% compared to the prior year quarter. The increase in sales was
primarily the result of record shipments of Elk Prestique(R) Enhanced High
Definition(R) and Raised Profile(TM) premium laminated fiberglass asphalt
shingles and continuing high demand for Chromium's Compushield(R) products used
in digital wireless phones. The increase in net income is primarily the result
of significantly higher income contribution by the Roofing Products Group.
The Roofing Products Group achieved higher sales and substantially higher
operating profit for the three months ended March 31, 1999 compared to the same
prior year period. Elk Corporation's shipments were aided by relatively mild
weather, which permitted increased roofing activity in the normally slower
winter months, together with sharply increased demand in the residential roofing
replacement market. Furthermore, new construction also continued at a strong
level. Contributions from higher shipments of premium laminated shingles were
further improved by slightly higher average selling prices and lower customer
discounts. Demand was strong in most regions of the United States. As a result,
each of the company's roofing plants achieved higher production levels, sales
and operating profit in the fiscal 1999 quarter as compared to the prior year
quarter.
The Industrial Products Group reported higher sales but lower operating profit
during the three months ended March 31, 1999 as compared to the same period in
the prior year. Chromium Corporation continued to benefit from strong demand for
its Compushield(R) conductive coatings and formed-in-place dispense conductive
gaskets used in digital wireless cellular phones and other electronic products.
However, Chromium experienced lower demand for remanufactured large diesel
engine components used in the transportation industry. Also, Ortloff's patent
licensing and engineering consulting services to the petroleum industry were
significantly lower as a result of depressed oil and gas prices, causing some of
its customers to temporarily reduce capital spending plans. Results for the
three-month period ended March 31,1999 include operations of YDK America, Inc.
subsequent to its acquisition on January 11, 1999 (as described in note 7 to the
consolidated financial statements).
On an overall basis, gross margin on sales was 24.9% for the quarter ended March
31, 1999 compared to 23.6% in the prior year quarter. Higher margins were
achieved by the Roofing Products Group for its products as a result of increased
production (which decreases per unit costs), slightly higher average selling
prices and lower customer discounts. Selling, general and administrative costs
were 12.6% of sales in the current year quarter compared to 13.9% in the prior
year quarter, as the company's sales organization was able to service increased
sales orders without a proportionate increase in overall selling costs.
CHANGES IN THE NINE-MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE NINE-MONTH
PERIOD ENDED MARCH 31, 1998.
During the nine-month period ended March 31, 1999, net income before the
cumulative effect of a change in accounting principle increased 48% to
$17,319,000 from $11,711,000 in last year's period. Sales increased 18% compared
to the prior year period. The increases in sales and net income before
7
<PAGE> 9
the accounting change were primarily the result of increased production, a
record level of shipments of premium laminated fiberglass asphalt shingles, and
accelerating demand for Chromium's Compushield(R) products used in digital
wireless cellular phones. In the first quarter of fiscal 1999, the company
adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," issued by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants, which resulted in a
$4,340,000 charge, net of tax, for the cumulative effect of this accounting
change. This one-time cumulative charge reduced net income for the first nine
months of fiscal 1999 to $12,979,000 compared to $11,711,000 in the same period
last year.
The Roofing Products Group achieved significantly higher sales with sharply
increased operating profit for the nine months ended March 31, 1999 compared to
the same prior year period. These increases were primarily the result of
increased manufacturing output and a record level of shipments of premium
laminated fiberglass asphalt shingles. Each of the company's three roofing
plants recorded increased sales and operating profit in the first nine months of
fiscal 1999 compared to the same prior year period. The company's nonwoven
fiberglass roofing mat plant also contributed to improved results. However, as
described in note 3 of this Form 10-Q, this plant was damaged by an explosion on
September 15, 1998. Due to the company's property damage and business
interruption insurance policies, management does not expect the explosion to
have a material adverse impact on the company's results of operations, financial
position or liquidity.
The Industrial Products Group recorded higher sales and lower operating profit
for the first nine months of fiscal 1999 compared to the same prior year period.
Chromium Corporation's Conductive Coatings Division reported sharply higher
sales and operating income. Strong demand for its Compushield conductive
coatings and conductive gaskets used in wireless digital telecommunications and
other electronic equipment industries primarily accounted for the significant
increase in sales and operating profit. Chromium's sales and operating income
relating to remanufactured large diesel engine components were lower in the
first nine months of fiscal 1999 compared to the prior year period. Ortloff
Engineers' technology licensing and consulting services for the natural gas
processing industry accounted for a significant portion of the Group's lower
operating income. Lower oil prices have temporarily reduced capital spending
plans for many of its customers.
On an overall basis, gross margin on sales was 25.6% for the nine month period
ended March 31, 1999 compared to 23.6% in the prior year period. The improvement
in margin was primarily attributable to increased production, which lowered per
unit costs, at the company's roofing shingle plants. Selling, general and
administrative costs were 12.7% of sales the first nine months of fiscal 1999
compared to 13.1% in the first nine months of fiscal 1998.
At the present time, the company anticipates continuing strong demand for its
premium laminated fiberglass asphalt shingles for the remainder of fiscal 1999.
The strong demand may permit the company to increase prices in the months ahead.
Further, the completion of the third expansion of its Conductive Coatings
facility in Lufkin, Texas and the acquisition of YDK America in Canton, Georgia
(see note 7 to the consolidated financial statements) has added capacity that
will be used for increased production of wireless digital cellular phone
components to meet rapidly growing demand for these and other electronic
products.
Effective with the close of trading on May 5, 1999, Standard & Poor's Financial
Information Services included Elcor Corporation in it S&P Small Cap 600 Index.
8
<PAGE> 10
FINANCIAL CONDITION
During the first nine months of fiscal 1999, the company generated cash flows of
$20,054,000 from operating activities despite a $6,844,000 increase in working
capital (excluding cash). The increase in working capital is primarily due to a
receivable from an insurance company included in other current assets relating
to an explosion at the company's nonwoven fiberglass roofing mat plant (as
described in note 3 to the consolidated financial statement). Trade receivables
and inventories, which were primarily offset by higher accounts payable and
accrued liabilities, reflect seasonal increases in business activity. In
addition, trade receivables generally increase during the late winter and early
spring months due to extended payment terms to certain customers during these
months with payment generally due during the summer months. Historically,
working capital requirements and related borrowings are higher in the spring and
summer months, and lower in the fall and winter months. The current ratio at
March 31, 1999 was 3.2:1 compared to 3.5:1 at June 30, 1998.
The company used $24,651,000 for net investing activities in the first nine
months of fiscal 1999. The majority of investing expenditures were for additions
to property, plant and equipment. Capital expenditures are expected to be about
$30,000,000 in fiscal 1999, excluding replacement of equipment at the Ennis,
Texas mat plant damaged by an explosion (as described in note 3 to the
consolidated financial statements). Most of the expenditures incurred to replace
damaged equipment are expected to be covered by the company's property damage
insurance policy. The majority of other planned fiscal 1999 capital expenditures
are a continuation of productivity, capacity and cost improvement projects at
its existing roofing plants, capital costs associated with developing new
computer systems and beginning construction of a fourth major laminated shingle
plant. The company expects to invest about $125 million over a three year period
beginning in fiscal 1999 to expand capacity and improve productivity at existing
plants, to install production facilities for new products, to build a new
roofing plant, and to increase capacity for its conductive coatings business. As
more fully described in note 7 to the consolidated financial statements, in
January 1999 the company acquired YDK America, Inc. for approximately
$5,300,000, net of cash acquired, to expand capacity for its conductive coatings
business.
Cash flows provided by financing activities were $801,000 during the first nine
months of fiscal 1999, primarily resulting from a $9,500,000 increase in
long-term debt, offset by dividend payments and purchases of treasury shares.
Long-term debt represented 31% of the $187,735,000 of invested capital
(long-term debt plus shareholders' equity) at March 31, 1999. At March 31, 1999,
$40,560,000 was available under the company's $100,000,000 unsecured revolving
line of credit. During the first nine months of fiscal 1999, the company
purchased 286,600 shares of its common shares on the open market under SEC Rule
10b-18 at a total cost of $6,305,000 to complete the $10 million stock buy back
program authorized by the Board of Directors in September 1994. On September 28,
1998, the Board of Directors authorized an additional $10 million stock
repurchase program. The Board of Directors also increased the regular quarterly
cash dividend rate by 17% to $.07 per share.
The company's operations are subject to extensive federal, state and local laws
and regulations relating to environmental matters. Although the company does not
believe it will be required to expend amounts which will have a material adverse
effect on the company's consolidated financial position or results of operations
by reason of environmental laws and regulations, such laws and regulations are
frequently changed and could result in significantly increased cost of
compliance.
9
<PAGE> 11
Further, certain of the company's industrial products operations utilize
hazardous materials in their production process. As a result, the company incurs
costs for remediation activities off-site and at its facilities from time to
time. The company establishes and maintains reserves for such remediation
activities, when appropriate, in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies." Current reserves
established for known or probable remediation activities are not material to the
company's financial position or results of operations.
Management believes that current cash and cash equivalents, cash flows from
operations and its unsecured revolving credit facility should be sufficient
during fiscal 1999 and beyond to fund its planned capital expenditures, working
capital needs, dividends, stock repurchases and other cash requirements.
However, management is planning to secure additional capital at favorable rates
to support its capital expansion program.
YEAR 2000 ISSUE
The company is currently developing a new information system for most of its
critical financial, distribution and manufacturing applications. The system is
scheduled for completion and implementation before December 31, 1999 at an
estimated total cost of about $11 million. While the primary purpose of this new
information system is to modernize and improve the company's operations, it is
also expected to resolve the Year 2000 issues in these critical computer
systems. Costs to develop this new information system are being capitalized.
Other costs relating to Year 2000 readiness are being expensed as incurred. As
of March 31, 1999, the company's expenditures for its new information system
have been $7,893,000, and its expenditures for its Year 2000 readiness projects
have been less than $250,000. At this time, other than the cost of developing
and implementing its new information system, the company does not believe that
the costs of addressing the Year 2000 issue will be material. The company does
not believe that other critical information systems work has been deferred due
to its Year 2000 efforts.
The company also has teams of employees and consultants who are reviewing other
computer applications and systems not included in the scope of the new
information system, including embedded technology, for Year 2000 readiness. The
company has completed the process of taking relevant inventory, assessing risk,
and assigning priorities to various tasks. Internal testing will be completed by
June 30, 1999. The company has developed contingency plans for its critical
information system which primarily consist of making its existing information
system Year 2000 compliant in the event the new system is not completed by its
scheduled date. The company has completed and tested its remedial programming
for its mainframe computer system and believes this existing system to be Year
2000 compliant. The company expects to have completed any required remediation
before January 1, 2000.
The company has initiated inquiries of key suppliers and other third parties
with whom it has significant business relationships to assess their state of
readiness in addressing Year 2000 issues that could adversely impact the
company. The company has requested a written response from those third parties
that they will be Year 2000 compliant by the end of calendar 1999. The company
has no means of ensuring that its business partners will be fully Year 2000
compliant. Contingency plans for what the company and its consultants determine
to be the most reasonably and likely worst case scenario, and other aspects of
Year 2000 readiness, are being developed in connection with the company's annual
strategic plan, which is scheduled for completion in the summer of 1999.
Disruptions of financial markets or computer system failure at government
agencies, financial institutions, utilities and others on which the company is
dependent could adversely affect the company. The effects of a potential
disruption at these entities cannot be determined at this time.
10
<PAGE> 12
The company believes the Year 2000 readiness project is on schedule for timely
completion. Based on a current assessment of risks relating to its Year 2000
readiness, the company does not believe that this issue will result in
uncertainty that is reasonably likely to materially affect future financial
results or operating performance.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" about the company's
prospects for the future. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, the
following:
1. The company's roofing products business is cyclical and is
affected by weather and some of the same economic factors that
affect the housing and home improvement industries generally,
including interest rates, the availability of financing and
general economic conditions. In addition, the asphalt roofing
products manufacturing business is highly competitive. Actions
of competitors, including changes in pricing, or slowing
demand for asphalt roofing products due to general or industry
economic conditions or the amount of inclement weather could
result in decreased demand for the company's products, lower
prices received or reduced utilization of plant facilities.
Further, changes in building codes and other standards from
time to time can cause changes in demand, or increases in
costs that may not be passed through to customers.
2. In the asphalt roofing products business, the significant raw
materials are ceramic coated granules, asphalt, glass fibers,
resins and mineral filler. Increased costs of raw materials
can result in reduced margins, as can higher trucking and rail
costs. Historically, the company has been able to pass some of
the higher raw material and transportation costs through to
the customer. Should the company be unable to recover higher
raw material and/or transportation costs from price increases
of its products, operating results could be lower than
projected.
3. During fiscal 1997, the company completed the construction of
a plant at the company's Ennis, Texas facility to manufacture
nonwoven fiberglass roofing mats and other mats for a variety
of industrial uses. The company also expects to make about
$125 million in new investments to expand capacity and improve
productivity at existing plants and to build new plants over a
three year period beginning in fiscal 1999. Progress in
achieving anticipated operating efficiencies and financial
results is difficult to predict for new plant facilities. If
such progress is slower than anticipated, if substantial cost
overruns occur in building new plants, or if demand for
products produced at new plants does not meet current
expectations, operating results could be adversely affected.
4. Certain facilities of the company's industrial products
subsidiaries must utilize hazardous materials in their
production process. As a result, the company could incur costs
for remediation activities at its facilities or off-site, and
other related exposures from time to time in excess of
established reserves for such activities.
11
<PAGE> 13
5. The company's litigation, including its patent infringement
suits against GAF Building Materials Corporation and certain
affiliates, is subject to inherent and case-specific
uncertainty. The outcome of such litigation depends on
numerous interrelated factors, many of which cannot be
predicted.
6. Even with fully developed action and contingency plans for
Year 2000 readiness, it is possible that the company will not
achieve full internal readiness. Further, the company's
business may be adversely affected by external Year 2000
disruption that the company is not in position to control,
including but not limited to potential disruptions in power
and other energy supplies, telecommunications or other
infrastructure, potential disruptions in transportation and
the supply of raw materials, and potential disruptions in
financial and banking systems. Year 2000 problems therefore
could result in unanticipated expenses or liabilities,
production or disruption delays or other adverse effects on
the company.
7. Although the company currently anticipates that most of its
needs for new capital in the near future will be met with
internally generated funds, significant increases in interest
rates could substantially affect its borrowing costs under its
existing loan facility, or its cost of alternative sources of
capital.
8. Each of the company's businesses, especially its Conductive
Coatings Division's business, is subject to the risks of
technological changes that could affect the demand for or the
relative cost of the company's products and services, or the
method and profitability of the method of distribution or
delivery of such products and services. In addition, the
company's businesses each could suffer significant setbacks in
revenues and operating income if it lost one or more of its
largest customers.
9. Although the company insures itself against physical loss to
its manufacturing facilities, including business interruption
losses, natural or other disasters and accidents, including
but not limited to fire, earthquake, damaging winds and
explosions, operating results could be adversely affected if
any of its manufacturing facilities became inoperable for an
extended period of time due to such events.
10. Each of the company's businesses is actively involved in the
development of new products, processes and services which are
expected to contribute to the company's long-term growth and
earnings. If such development activities are not successful,
or the company cannot provide the requisite financial and
other resources to successfully commercialize such
developments, the growth of future sales and earnings may be
adversely affected.
Parties are cautioned not to rely on any such forward-looking beliefs or
judgments in making investment decisions.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
GAF Patent Litigation
On February 11, 1999, the United States Court of Appeals for the
Federal Circuit (Court of Appeals) issued a decision upholding the district
court's partial final judgement against Elk in its design patent case. The
decision held that the district court committed no reversible error in finding
Elk's design patent unenforceable. On April 16, 1999, the Court of Appeals
denied Elk's petition for a rehearing of the case.
Elk is preparing its appeal of the Court of Appeals' decision to the United
States Supreme Court. While management can give no assurances regarding the
ultimate outcome of the litigation, even if the outcome were to be adverse to
Elk, it is not expected to have a material effect on the Registrant's financial
position or liquidity.
Gibraltar Tort Litigation
On March 23, 1999, the Court in the Adams case issued a scheduling
order setting a discovery timeline and an initial trial date of November 1,
1999. The plaintiffs were ordered to designate five (5) groups of twelve (12)
trial plaintiffs. All Adams plaintiffs are represented by new counsel.
Management continues to believe that the claims brought against Chromium in the
Adams case are without merit. While management can give no assurances regarding
the ultimate outcome of this litigation, it believes that it will not have a
material adverse effect on the consolidated results of operation, financial
position or liquidity of the Registrant.
For further information and background on the GAF Patent Litigation and the
Gibraltar Tort Litigation, see Part I, Item 3 of the Registrant's Annual Report
on Form 10-K for the year ended June 30, 1998, and its Part II, Item I of the
Quarterly Reports on Form 10-Q for the quarters ended September 30, 1998 and
December 31, 1998.
ITEM 6: Exhibits and Reports of Form 8-K
(a) Exhibit:
Exhibit (27): Financial Data Schedule (EDGAR submission only)
(b) The registrant filed one report on Form 8-K during the quarter
ended March 31, 1999. The registrant filed a Form 8-K on
January 21, 1999 relating to a press release containing
"forward-looking statements" about its prospects for the
future.
13
<PAGE> 15
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.
ELCOR CORPORATION
DATE: May 13, 1999 /s/ Richard J. Rosebery
------------------ ----------------------------------------
Richard J. Rosebery
Vice Chairman, Chief Financial &
Administrative Officer and Treasurer
/s/ Leonard R. Harral
----------------------------------------
Leonard R. Harral
Vice President and Chief
Accounting Officer
14
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,444
<SECURITIES> 0
<RECEIVABLES> 61,559
<ALLOWANCES> 1,012
<INVENTORY> 30,500
<CURRENT-ASSETS> 9,778
<PP&E> 206,304
<DEPRECIATION> 74,523
<TOTAL-ASSETS> 236,132
<CURRENT-LIABILITIES> 31,899
<BONDS> 57,500
0
0
<COMMON> 13,326
<OTHER-SE> 116,909
<TOTAL-LIABILITY-AND-EQUITY> 236,132
<SALES> 227,802
<TOTAL-REVENUES> 227,802
<CGS> 169,506
<TOTAL-COSTS> 198,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,468
<INCOME-PRETAX> 27,846
<INCOME-TAX> 10,527
<INCOME-CONTINUING> 17,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,340)
<NET-INCOME> 12,979
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .98
</TABLE>
