SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1995 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 Number 1-4704
GUARDSMAN PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-0593900
(State of incorporation) (I.R.S. Employer Identification No.)
3033 Orchard Vista Drive, S.E., Suite 200
P.O. Box 1521, Grand Rapids, Michigan 49501
(Address of principal executive offices) (Zip Code)
(616) 957-2600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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.
Common Stock, $1 Par Value, 9,522,491 shares at July 31, 1995.
1
GUARDSMAN PRODUCTS, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Management Representation 3
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 4
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended June 30, 1995 and 1994 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 7
Notes to Condensed Consolidated Financial
Statements - June 30, 1995 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
GUARDSMAN PRODUCTS, INC.
PART I - FINANCIAL INFORMATION
Management Representation
The condensed consolidated financial statements included herein have been
prepared by Guardsman Products, Inc. (the "Company") without an audit
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, which are of a
normal recurring nature, necessary to present fairly the financial position
of the registrant as of June 30, 1995 and December 31, 1994, the results of
operations for the three months and six months ended June 30, 1995 and
1994, and cash flows for the six months ended June 30, 1995 and 1994. The
results of operations for such interim periods are not necessarily
indicative of the results to be expected for the full fiscal year.
3
<TABLE>
GUARDSMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,693 $ 5,630
Accounts receivable, less allowances
of $679 and $808, respectively 36,019 29,517
Inventories 32,408 31,324
Deferred income taxes 2,092 1,866
Other current assets 5,662 5,224
Total current assets 83,874 73,561
Property and equipment 49,289 46,666
Less accumulated depreciation 19,775 18,689
29,514 27,977
Goodwill, less accumulated amortization
of $3,735 and $3,251, respectively 20,265 20,336
Other intangibles, less accumulated
amortization of $5,198 and $5,374,
respectively 13,144 12,587
Other assets 3,112 2,591
$ 149,909 $ 137,052
</TABLE>
The accompanying notes are an integral
part of these financial statements
4
<TABLE>
GUARDSMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share data)
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 20,415 $ 19,286
Income taxes 132 510
Current maturities of long-term debt 78 93
Other current liabilities 10,620 11,299
Total current liabilities 31,245 31,188
Long-term debt 35,584 27,805
Other liabilities 15,526 13,633
Stockholders' equity
Common stock, $1 par value
Authorized - 30,000,000 shares
Issued and outstanding - 9,502,781
shares in 1995, 9,482,199 shares
in 1994 9,503 9,482
Additional paid-in capital 46,770 46,560
Retained earnings 12,480 9,949
Cumulative translation adjustments (1,199) (1,565)
67,554 64,426
$ 149,909 $ 137,052
</TABLE>
The accompanying notes are an integral
part of these financial statements
5
<TABLE>
GUARDSMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except share and per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $ 63,317 $ 48,946 $ 127,657 $ 93,896
Cost of sales 41,724 31,726 84,784 60,957
21,593 17,220 42,873 32,939
Selling, general and
administrative
expenses 7,069 13,857 35,149 27,441
Interest expense 563 297 1,047 508
Investment income (136) (91) (254) (176)
Income before income
taxes 4,097 3,157 6,931 5,166
Income taxes 1,720 1,326 2,882 2,170
Net income $ 2,377 $ 1,831 $ 4,049 $ 2,996
Net income per share $ 0.25 $ 0.23 $ 0.43 $ 0.38
Weighted average
shares outstanding 9,495,754 7,956,326 9,489,986 7,948,644
</TABLE>
The accompanying notes are an integral
part of these financial statements
6
<TABLE>
GUARDSMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands except per share data)
<CAPTION>
Six Months Ended
June 30,
1995 1994
<S> <C> <C>
Operations
Net income $ 4,049 $ 2,996
Adjustments to reconcile net income
to cash provided by operations
Depreciation and amortization 3,496 2,422
Deferred income taxes (732) 2
Deferred compensation and pension costs 307 246
Other - net 335 36
Changes in certain working capital items
Accounts receivable (5,521) (3,697)
Inventories (634) 562
Other current assets (109) 523
Accounts payable 38 19
Accrued expenses (851) 868
Cash provided by operations 378 3,977
Investing Activities
Purchase of businesses (1,344)
Fixed asset additions (3,204) (850)
Other - net (118) 643
Cash used in investing activities (4,666) (207)
Financing Activities
Cash dividends - $.16 per share in
1995 and 1994 (1,519) (1,272)
Increase (decrease) in debt 7,413 (2,539)
Stock issued under employee and
stockholder plans 232 485
Cash provided by (used in) financing
activities 6,126 (3,326)
Effect of foreign currency rate changes 225 (85)
Increase in cash and cash equivalents 2,063 359
Cash and cash equivalents at beginning
of period 5,630 4,472
Cash and cash equivalents at end of period $ 7,693 $ 4,831
</TABLE>
The accompanying notes are an integral
part of these financial statements
7
GUARDSMAN PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1995
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
NOTE B - ACQUISITION OF BUSINESS
As previously disclosed, on August 31, 1994, the Company purchased 100% of
the stock of Moline Paint Manufacturing Co. ("Moline"). The accompanying
condensed consolidated statements of income reflect the operating results
of Moline since the effective date of the acquisition. Pro forma unaudited
consolidated operating results of the Company and Moline for the six months
ended June 30, 1994 are summarized below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1994
<S> <C>
Net sales $113,761
Net income 2,164
Earnings per share .23
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation expense as
a result of a step-up in the basis of fixed assets, additional amortization
expense as a result of goodwill and other intangible assets, increased
interest expense on acquisition debt and a one-time charge for the cost of
certain environmental matters. They do not purport to be indicative of the
results of operations which actually would have resulted had the
combination been in effect on January 1, 1994 or of future results of
operations of the consolidated entities.
Effective January 30, 1995, the Company purchased the business and certain
assets (primarily accounts receivable, inventory and intangible assets) of
Soil Shield International, Inc. ("Soil Shield"), a producer and distributor
8
GUARDSMAN PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1995
CONTINUED
of retail-applied fabric protection products. The Company is servicing the
former Soil Shield customers from its existing facilities. The acquisition
of Soil Shield did not have a material effect on the Company's financial
statements.
NOTE C - INVENTORIES
Inventories are summarized below (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
Finished products $ 17,122 $ 16,680
Raw materials and work in process 15,286 14,644
$ 32,408 $ 31,324
</TABLE>
NOTE D - INCOME TAXES
The Company's effective income tax rate for the six months ended June 30,
1995 was 41.6% compared to 42.0% during the same period in 1994. The
effective tax rates for both periods were influenced by the relationship of
permanent differences to estimated taxable income. The Company's effective
income tax rate for the remainder of the year may either increase or
decrease depending upon the components and level of consolidated pretax
income. Income taxes paid totaled $3,990,000 and $2,066,000 for the six
months ended June 30, 1995 and 1994, respectively.
NOTE E - CONTINGENCIES
Like other companies in its industry, Guardsman is subject to existing and
evolving standards related to the protection of the environment. As a
result, it is the Company's policy to establish reserves for site
restoration costs and related claims where it is probable a liability
exists and the amount can be reasonably estimated. These reserves are
adjusted as information becomes available upon which a more accurate
estimate of eventual costs can be made. Such estimates are subject to
numerous variables, the effects of which are difficult to measure,
including the stage of the investigations, the nature of potential
remedies, the joint and several liability with other potentially
9
GUARDSMAN PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1995
CONTINUED
responsible parties, availability of insurance and government funds and
other issues. Accordingly, the ultimate cost of these matters cannot be
determined at this time and may not be resolved for a number of years. The
net reserves of $4,309,000 at June 30, 1995 represent the Company's best
estimate of probable exposures at this time. Based upon information
currently available, it is not anticipated that the outcome of these
environmental matters will materially affect the Company's consolidated
financial position. The ultimate effect of these matters on the Company's
results of operations cannot be predicted because any such effect depends
on the amount and timing of charges to operations resulting from new
information as it becomes available.
Approximately $115,000 is included as an offset to these net reserves at
June 30, 1995. This amount represents estimated reimbursements from a
state government agency for costs expended for site restoration of an area
formerly containing underground storage tanks.
The Company is also involved in legal proceedings and litigation arising in
the ordinary course of business. In the opinion of management, the outcome
of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements.
NOTE F - INTEREST PAYMENTS
Payment of interest due under the Company's borrowings amounted to $889,000
and $497,000 during the six month periods ended June 30, 1995 and 1994,
respectively.
10
GUARDSMAN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Results of Operations - Second quarter 1995 Compared to Second quarter
1994
Net sales for the second quarter of 1995 increased 29.4% to
$63,317,000 compared to $48,946,000 for the quarter ended June 30,
1994. Coatings Group sales increased $11,718,000 (31.4%) due
primarily to increases in unit volume. The Group's liquid and powder
coatings product lines realized an increase in net sales of
$9,779,000, which included $11,478,000 of sales for Moline Paint
Manufacturing Co., which was acquired on August 31, 1994. Excluding
Moline, unit volume was down 6.6%, due mainly to the Group's metal
coatings product lines, which was partially offset by an increase in
the average selling price. The Group's resin product lines
experienced an increase in net sales of $1,939,000 representing a
29.3% volume increase, due primarily to increased customer demand, and
an increase in the average selling price. Compared to the 1994 period,
the Consumer Products Group's net sales increased $2,653,000 (22.8%).
Approximately 73% of the increase is due to sales for Soil Shield
International, Inc., which was acquired on January 30, 1995. The
Group's Specialty Products, Atlanta Sundries and Interior Care
divisions continue to report strong sales growth, which was partially
offset by a decrease in sales of the Group's Household lines.
Consolidated gross margin as a percentage of sales was 34.2% in the
second quarter of 1995 compared to 35.2% in 1994. This decrease
reflects repetitive increases in raw material costs over the last nine
months as well as a shift in product mix with resin, automotive
maintenance and private label products, which generate lower margins
as a percentage of sales, representing a larger proportion of sales in
the 1995 period.
Operating expenses for the second quarter of 1995 totaled $17,069,000
compared to $13,857,000 for the 1994 period. The increase in
operating expenses reflects the addition of Moline's administrative
expenses and increased selling expenses due to additional sales. As a
percentage of sales, operating expenses decreased to 27.0% in 1995
from 28.3% in 1994.
Interest expense for the 1995 period totaled $563,000 compared to
$297,000 for the 1994 period. This increase is due to an increase in
long-term borrowings and variable interest rates. The increase in
long-term borrowings resulted from the purchase of Moline and Soil
Shield as well as from working capital requirements.
11
The Company's effective tax rate was 42.0% for the quarters ended June
30, 1995 and 1994. The effective tax rates are influenced by the
relationship of permanent differences to estimated taxable income.
Net income amounted to $2,377,000 for 1995, up 29.8% from the
$1,831,000 earned during the second quarter of 1994. Earnings per
share increased 8.7% to $.25 per share in the second quarter of 1995
compared to $.23 per share in 1994, based on an average of 19% more
shares outstanding than in the same quarter of 1994.
2. Results of Operations - Six Months 1995 Compared to Six Months 1994
Net sales for the six months ended June 30, 1995 totaled a record
$127,657,000, an increase of $33,761,000 (36.0%) compared to the first
six months of 1994. Coatings Group sales increased $27,035,000
(37.1%) due primarily to increases in unit volume. The Group's liquid
and powder coatings product lines realized an increase in net sales of
$23,231,000 which included $23,658,000 of sales for Moline. Excluding
Moline, unit volume was down 3.3%, as discussed in the second quarter
results, which was partially offset by average selling price
increases. The Group's resin product lines experienced an increase in
net sales of $3,804,000 representing a 33.2% volume increase and an
increase in the average selling prices. The Consumer Products Group's
net sales increased $6,726,000 (32.0%) compared to the 1994 period.
Approximately 48% of the sales increase represents sales for Soil Shield
while the additional increase is consistent with the second quarter
discussed previously.
Consolidated gross margins as a percentage of sales were 33.6% and
35.1% in the first six months of 1995 and 1994, respectively. This
decline is consistent with the reasons for the decrease reported in
the second quarter.
Operating expenses for the six-month period in 1995 totaled
$35,149,000 compared to $27,441,000 for the 1994 period. Increases
for the six months were consistent with those reported for the second
quarter. As a percentage of sales, operating expenses decreased to
27.5% in 1995 from 29.2% in 1994.
Interest expense for the 1995 period totaled $1,047,000 compared to
$508,000 for the 1994 period. This increase is due to an increase in
long-term borrowings and variable interest rates. The increase in
long-term borrowings resulted from the purchase of Moline and Soil
Shield as well as from working capital requirements.
The Company's effective tax rate for the six months ended June 30,
1995 was 41.6% compared to 42.0% during the same 1994 period. The
effective tax rates are influenced by the relationship of permanent
differences to estimated taxable income.
12
Net income amounted to $4,049,000 for 1995, up 35.1% from the
$2,996,000 earned during the first six months of 1994. Earnings per
share increased 13.2% to $.43 per share in the first six months of
1995 compared to $.38 per share in 1994, based on an average of 19%
more shares outstanding than in the same period of 1994.
3. Liquidity, Capital Resources and Financial Condition
During the six months ended June 30, 1995, the Company's operations
generated net cash flows of $378,000. During this period, the Company
invested $3,204,000 in fixed assets, paid dividends of $1,519,000 and
made cash payments of $1,344,000 associated with the acquisitions of
Soil Shield and Moline. Cash balances increased $2,063,000 during the
first half of 1995 due mainly to a seasonal cash buildup in the
Canadian operations and in the United Kingdom. These funds are not
currently available to pay down the Company's borrowings under the
domestic revolving credit agreements. As a result of the foregoing,
outstanding debt increased $7,413,000 during the first six months of
1995.
During the six-month period ended June 30, 1995, accounts receivable
increased $6,502,000, inventories increased $1,084,000 and accounts
payable increased $1,129,000 primarily as a result of the Company's
increased sales levels. In addition, included in these amounts is the
consolidation of Soil Shield effective January 30, 1995.
Working capital was $52,629,000 at June 30, 1995 compared to
$42,373,000 at December 31, 1994. The current ratio was 2.7 to 1 at
June 30, 1995 and 2.4 to 1 at December 31, 1994.
Management believes that internally generated funds will be adequate
to finance future property and equipment additions and meet existing
obligations under its long-term borrowing agreements. The Company
anticipates that any business acquisitions in the future will be
financed with cash flows from operations and by the issuance of long-
term debt or common stock. At June 30, 1995, the Company had
$5,593,000 of unused credit available under its unsecured long-term
revolving credit agreements and $6,093,000 available under its
unsecured short-term revolving credit agreements.
Like other companies in its industry, Guardsman is subject to existing
and evolving standards related to the protection of the environment.
For information regarding environmental obligations, see Note E to the
Condensed Consolidated Financial Statements.
13
GUARDSMAN PRODUCTS, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Stockholders held on May 11, 1995,
pursuant to the Notice of Annual Meeting of Stockholders and
Proxy Statement dated April 3, 1995:
(a) The four nominees were elected as directors. Of the
9,485,699 shares eligible to vote, the following votes were
cast:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C> <C>
K. Kevin Hepp 5,875,876 3,205,998
George R. Kempton 5,639,820 3,678,109
James L. Sadler 5,639,621 3,678,507
Robert W. Schult 5,627,145 3,703,459
</TABLE>
(b) The amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock
from 15,000,000 shares to 30,000,000 shares was approved
(5,604,494 votes for, 3,390,294 votes against and 51,333
votes abstained).
(c) The 1995 Long-Term Incentive Plan was approved (5,425,685
votes for, 3,491,591 votes against and 146,300 votes
abstained).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(11) Statement re: Computation of Per Share Income.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file a Form 8-K Current Report
during the second quarter of 1995.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUARDSMAN PRODUCTS, INC.
Date: August 2, 1995 By \s\ Henry H. Graham, Jr.
Henry H. Graham, Jr.
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Signatory for Registrant
and Principal Financial Officer)
15
EXHIBIT 11
<TABLE>
GUARDSMAN PRODUCTS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE INCOME
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Weighted average shares outstanding 9,496 7,956 9,490 7,949
Increase in dilutive incremental
shares issuable upon exercise
of common stock as computed
by maximum dilutive methods 113 24 93 53
Common shares assuming full dilution 9,609 7,980 9,583 8,002
Net income $2,377 $1,831 $4,049 $2,996
Fully diluted net income per share $ 0.25 $ 0.23 $ 0.42 $ 0.38
</TABLE>
NOTE: The income per share calculations noted above differ from the
calculations used in determining income per share reported in the condensed
consolidated financial statements, which were based on weighted average
shares outstanding. These differences result from the inclusion of
outstanding stock options and other shares using maximum dilutive methods
in the above calculations, which were excluded from the calculation of
income per share reported in the condensed consolidated financial
statements because they were not materially dilutive (i.e., less than 3%).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SECOND QUARTER 1995 FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 7,693
<SECURITIES> 0
<RECEIVABLES> 36,698
<ALLOWANCES> 679
<INVENTORY> 32,408
<CURRENT-ASSETS> 83,874
<PP&E> 49,289
<DEPRECIATION> 19,775
<TOTAL-ASSETS> 149,909
<CURRENT-LIABILITIES> 31,245
<BONDS> 35,584
<COMMON> 9,503
0
0
<OTHER-SE> 58,051
<TOTAL-LIABILITY-AND-EQUITY> 149,909
<SALES> 127,657
<TOTAL-REVENUES> 127,657
<CGS> 84,784
<TOTAL-COSTS> 84,784
<OTHER-EXPENSES> 34,970
<LOSS-PROVISION> 179
<INTEREST-EXPENSE> 1,047
<INCOME-PRETAX> 6,931
<INCOME-TAX> 2,882
<INCOME-CONTINUING> 4,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,049
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.00
</TABLE>
