<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
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For Quarter Ended December 31, 1998 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 February 1, 1999, Registrant had outstanding
12,995,493 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 12-31-98 6-30-98
- ------ ---------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,356 $ 5,240
Trade receivables, less allowance of $993 and $580 48,084 56,450
Inventories -
Finished goods 17,826 20,549
Work-in-process 254 446
Raw materials 8,440 7,827
--------- ---------
Total inventories 26,520 28,822
--------- ---------
Prepaid expenses and other 1,458 1,789
Deferred income taxes 2,122 2,228
--------- ---------
Total current assets 80,540 94,529
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PROPERTY, PLANT AND EQUIPMENT, AT COST 190,628 194,133
Less - accumulated depreciation (72,232) (73,401)
--------- ---------
Property, plant and equipment, net 118,396 120,732
--------- ---------
OTHER ASSETS 1,968 1,783
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$ 200,904 $ 217,044
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,566 $ 14,579
Accrued liabilities 14,625 12,628
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Total current liabilities 27,191 27,207
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LONG-TERM DEBT 33,500 48,000
DEFERRED INCOME TAXES 14,237 15,881
SHAREHOLDERS? EQUITY -
Common stock, $1 par 13,326 13,326
Paid-in-capital 66,753 67,862
Retained earnings 53,440 47,394
--------- ---------
133,519 128,582
Less - Treasury stock (334,450 and 100,423 shares, at cost) (7,543) (2,626)
--------- ---------
Total shareholders' equity 125,976 125,956
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$ 200,904 $ 217,044
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
1
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ELCOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, $ in thousands
except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
12-31-98 12-31-97 12-31-98 12-31-97
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES $ 71,199 $ 60,965 $ 157,067 $ 134,481
------------- ------------- ------------- -------------
COST AND EXPENSES
Cost of sales 53,311 47,301 116,374 102,702
Selling, general and administrative 9,812 8,384 20,084 17,189
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 8,076 5,280 20,609 14,590
------------- ------------- ------------- -------------
OTHER EXPENSE
Interest expense, net 445 614 1,004 1,373
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 7,631 4,666 19,605 13,217
Provision for income taxes 2,953 1,718 7,401 4,875
------------- ------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 4,678 2,948 12,204 8,342
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- (4,340) --
-------------- ------------- -------------- -------------
NET INCOME $ 4,678 $ 2,948 $ 7,864 $ 8,342
============= ============= ============= =============
INCOME PER COMMON SHARE-BASIC:
Before cumulative effect of
change in accounting principle $ .36 $ .22 $ .93 $ .63
Cumulative effect of change
in accounting principle -- -- (.33) --
------------- ------------- -------------- -------------
NET INCOME PER SHARE-BASIC $ .36 $ .22 $ .60 $ .63
============= ============= ============= =============
INCOME PER COMMON SHARE-DILUTED:
Before cumulative effect of change
in accounting principle $ .35 $ .22 $ .92 $ .62
Cumulative effect of change in
accounting principle -- -- (.33) --
------------- ------------- -------------- -------------
NET INCOME PER SHARE-DILUTED $ .35 $ .22 $ .59 $ .62
============= ============= ============= =============
DIVIDENDS PER COMMON SHARE $ .07 $ .06 $ .14 $ .12
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
ELCOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
12-31-98 12-31-97
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,864 $ 8,342
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 4,532 5,370
Deferred income taxes 804 1,096
Cumulative effect of change in accounting principle 4,340 --
Changes in assets and liabilities:
Trade receivables 8,366 8,421
Inventories 2,302 4,008
Prepaid expenses and other 331 399
Accounts payable and accrued liabilities (16) (4,825)
-------- --------
Net cash provided by operating activities 28,523 22,811
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (12,062) (5,748)
Insurance proceeds and other, net 2,999 254
-------- --------
Net cash used for investing activities (9,063) (5,494)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings, net (14,500) (14,900)
Dividends on common stock (1,818) (1,587)
Treasury stock transactions and other, net (6,026) 19
-------- --------
Net cash used for financing activities (22,344) (16,468)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,884) 849
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,240 3,601
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,356 $ 4,450
======== ========
</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 six-month periods ending December
31, 1998 and 1997, 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 December 31, 1997 have been
restated to reflect this accounting change. There was no significant
impact on net income for the three-month or six-month periods ended
December 31,1997 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 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.
Subsequent to the explosion, the company increased roofing mat
production from its nondamaged mat line and began purchasing additional
roofing mats from third party suppliers. The company believes there are
adequate supplies of roofing mats from internal and/or external sources
available to operate its three roofing shingle manufacturing facilities
until the damaged line is repaired and fully operational. The damaged
line was restored to partial operation in December 1998 and management
anticipates that the damaged line should be restored to full operation
by the spring of 1999.
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. In December 1998, the company received its
first insurance advances of $3,287,000 for property damage and
$2,000,000 for business interruption. 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, "Disclosure 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 $6,000,000, which
was financed through borrowings under Elcor's revolving credit
agreement. The acquisition was accounted for using the purchase method
of accounting. The company is currently evaluating the allocation of
the purchase price. 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 includes
outstanding stock options.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended Six Months Ended
12-31-98 12-31-97 12-31-98 12-31-97
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $ 4,678 $ 2,948 $ 7,864 $ 8,342
============== =========== =========== ===========
Denominator for basic earnings
per share - weighted average
shares outstanding 12,990 13,231 13,059 13,217
Effect of dilutive securities:
Employee stock options 255 292 230 267
-------------- ----------- ----------- -----------
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 13,245 13,523 13,289 13,484
============== =========== =========== ===========
Basic earnings per share $ .36 $ .22 $ .60 $ .63
============== =========== =========== ===========
Diluted earnings per share $ .35 $ .22 $ .59 $ .62
============== =========== =========== ===========
</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 DECEMBER 31, 1998 COMPARED TO THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 1997.
During the three-month period ended December 31, 1998, net income increased 59%
to $4,678,000 from $2,948,000 in the same three-month period last year. Sales
increased 17% compared to the prior year quarter. The increase in sales was
primarily the result of record December quarter shipments of Elk Prestique(R)
Enhanced High Definition(R) and Raised Profile(TM) premium laminated fiberglass
asphalt shingles. 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 nearly doubled its
operating profit for the three months ended December 31, 1998 compared to the
same prior year period. Elk Corporation's shipments were aided by relatively
mild weather during much of the December quarter, together with sharply
increasing 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. 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 lower sales and reduced operating profit
during the three months ended December 31, 1998 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 slightly 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 was significantly lower as a result of sharply depressed oil and gas
prices, causing some of its customers to reduce capital spending plans.
On an overall basis, gross margin on sales was 25.1% for the quarter ended
December 31, 1998 compared to 22.4% 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) and slightly higher
average selling prices. Selling, general and administrative costs were 13.8% of
sales in both the current year quarter and in the prior year quarter.
CHANGES IN THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 1997.
During the six-month period ended December 31, 1998, net income before the
cumulative effect of a change in accounting principle increased 46% to
$12,204,000 from $8,342,000 in last year's first half. Sales increased 17%
compared to the prior year period. The increases in sales and net income before
the accounting change were primarily the result of increased production and 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
7
<PAGE> 9
cumulative charge reduced net income for the first half of fiscal 1999 to
$7,864,000 from $8,342,000 in the same period last year.
The Roofing Products Group achieved significantly higher sales with sharply
increased operating profit for the six months ended December 31, 1998 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 half of fiscal
1999 compared to the same prior year period. The company's nonwoven fiberglass
roofing mat plant also contributed to improved first half results. However, as
described in note 4 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 both lower sales and lower operating
profit for the first six months of fiscal 1999 compared to the same prior year
period due primarily to lower revenues and income from Ortloff Engineers'
technology licensing and consulting services for the natural gas processing
industry. Lower oil prices have reduced capital spending plans for some of its
customers. Chromium Corporation's Conductive Coatings Division reported higher
sales and slightly higher operating income. Strong demand for its Compushield
conductive coatings and conductive gaskets used in wireless digital
telecommunications and other electronic equipment industries accounted for the
increase in revenues. Chromium's sales of remanufactured large diesel engine
components decreased slightly in the first half of fiscal 1999 compared to the
prior year period.
On an overall basis, gross margin on sales was 25.9% for the six month period
ended December 31, 1998 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 12.8% of sales the first half of fiscal
1999 and also in the first six months of fiscal 1998.
At the present time, the company anticipates continued growing demand for its
premium laminated fiberglass asphalt shingles for the remainder of fiscal 1999,
although the market is usually seasonally slower in the March quarter. All three
roofing plants plan to continue production at high levels throughout the winter.
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.
FINANCIAL CONDITION
During the first six months of fiscal 1999, the company generated cash flows of
$28,523,000 from operating activities. Of this total, $10,668,000 was the result
of lower inventories and trade receivables. These changes were primarily the
result of a normal seasonal reduction in business activities. Historically,
working capital requirements fluctuate during the year because of seasonality in
some market areas. Generally, 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 December 31, 1998 was 3.0:1 compared to
3.5:1 at June 30, 1998.
8
<PAGE> 10
The company used $9,063,000 for investing activities in the first half of fiscal
1999. The majority of investing expenditures were for additions to property,
plant and equipment. Capital expenditures are expected to be about $24,000,000
in fiscal 1999, excluding replacement of equipment at the Ennis, Texas mat plant
damaged by an explosion (as described in note 4 to the consolidated financial
statements). 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, the acquisition of expanded capacity for the Conductive Coatings
operation (see note 7 to the consolidated financial statements), capital costs
associated with developing new computer systems and preparation for construction
of a fourth major laminated shingle plant. The company expects to invest about
$100-$120 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.
Cash flows used for financing activities were $22,344,000 during the first six
months of fiscal 1999, primarily resulting from dividend payments, a $14,500,000
seasonal reduction in long-term debt, and purchases of treasury shares.
Long-term debt represented 21% of the $159,476,000 of invested capital
(long-term debt plus shareholders' equity) at December 31, 1998. At December 31,
1998, $60,860,000 was available under the company's $100,000,000 unsecured
revolving line of credit.
During the first six 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.
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 Standard 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 believes it could secure additional capital at favorable
rates to support its capital expansion program.
9
<PAGE> 11
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 December 31, 1998, the company's expenditures for its new information system
have been $6,329,000, 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, and its interaction with its
suppliers, customers and other business partners 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. Contingency plans for other aspects of Year 2000 readiness are
currently being developed. The company expects to have completed any required
remediation before January 1, 2000.
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.
10
<PAGE> 12
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 up to
$100-$120 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.
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
11
<PAGE> 13
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.
Parties are cautioned not to rely on any such forward-looking beliefs or
judgments in making investment decisions.
12
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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 judgment against Elk in its design patent case. The decision
held that the district court committed no reversible error in finding against
Elk based on inequitable conduct.
Elk will evaluate its future course of action, including its trial strategy
for its trade dress claim, certain other matters in the design patent case, and
trial in the utility patent case.
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.
For further information and background on the GAF Patent Litigation, see
Part I, Item 3 of the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1998.
ITEM 4: Submission of Matters to a Vote of Security Holders
(a) The company's Annual Meeting of Shareholders was held on
October 27, 1998 for the purpose of electing two directors,
considering and voting upon a proposal to increase authorized
common stock, considering and voting upon a proposal to approve
the 1998 Amended and Restated Elcor Corporation Incentive Stock
Option Plan, and ratifying the appointment of the company's
independent auditors.
<TABLE>
<CAPTION>
(b) Directors Elected: NUMBER OF VOTES
---------------
AUTHORITY
FOR WITHHELD
--- ---------
<S> <C> <C>
James E. Hall 10,393,644 761,046
Harold K. Work 10,396,402 758,288
</TABLE>
Other Directors Whose Term Continued After the Meeting:
W.F. Ortloff
F.H. Callaway
David W. Quinn
Richard J. Rosebery
Dale V. Kesler
On October 27, 1998, Mr. Robert M. Leibrock retired from the
Board of Directors. On November 5, 1998, Thomas D. Karol,
President and Chief Executive Officer of Pro Group Holdings,
Inc. was appointed to fill the vacancy left upon Mr.
Leibrock's retirement. On January 3, 1999, Mr. Callaway passed
away. On January 27, 1999, the number of active directors was
reduced by the Board of Directors from eight to seven, and Mr.
Kesler was appointed to replace Mr. Callaway as Chairman of
the Compensation Committee.
13
<PAGE> 15
(c) Other matters voted upon at the meeting and the number of
affirmative votes, negative votes and abstentions.
<TABLE>
<CAPTION>
NUMBER OF VOTES
-------------------------------------------
AFFIRMATIVE AGAINST ABSTENTIONS
----------- --------- -----------
<S> <C> <C> <C>
Approval of an increase 8,068,325 3,057,321 29,045
in authorized common stock
from 50,00,000 shares to
100,000,000 shares
Approval of the 1998 7,919,331 2,487,321 25,283
Amended and Restated
Incentive Stock Option Plan
Ratification of Arthur 11,126,659 17,217 10,814
Andersen LLP as
independent auditors of
the company for the fiscal
year ending June 30, 1999
</TABLE>
ITEM 5: Other Information
Item 5. Other Information
On December 14, 1998, Mr. Richard A. Nowak was elected by the
Elcor Board of Directors as President, Chief Executive Officer
and a Director of Elk Corporation of Dallas (Elk), succeeding
Harold K. Work, who remains as Chairman of the Board of that
wholly owned subsidiary and as Chairman, President and Chief
Executive Officer of Elcor Corporation. Mr. Nowak was most
recently Vice President of Sales and Marketing of Elk and its
subsidiaries and has been an employee of Elk for twenty years.
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 December 31, 1998. The registrant filed a Form 8-K on
October 20, 1998 relating to a press release containing
"forward-looking statements" about its prospects for the
future.
14
<PAGE> 16
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: February 12, 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
15
<PAGE> 17
EXIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,356
<SECURITIES> 0
<RECEIVABLES> 49,077
<ALLOWANCES> 993
<INVENTORY> 26,520
<CURRENT-ASSETS> 80,540
<PP&E> 190,628
<DEPRECIATION> 72,232
<TOTAL-ASSETS> 200,904
<CURRENT-LIABILITIES> 27,191
<BONDS> 33,500
0
0
<COMMON> 13,326
<OTHER-SE> 112,650
<TOTAL-LIABILITY-AND-EQUITY> 200,904
<SALES> 157,067
<TOTAL-REVENUES> 157,067
<CGS> 116,374
<TOTAL-COSTS> 136,458
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,004
<INCOME-PRETAX> 19,605
<INCOME-TAX> 7,401
<INCOME-CONTINUING> 12,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,340)
<NET-INCOME> 7,864
<EPS-PRIMARY> .60
<EPS-DILUTED> .59
</TABLE>
