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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File No. 1-10270
MORTON INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Indiana 36-3640053
- ---------------------------------------- ------------------------------------
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
100 North Riverside Plaza, Chicago, Illinois 60606-1596
- -------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (312) 807-2000
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at December 31, 1996
- ----------------------------- --------------------------------
Common Stock, $1.00 par value 142,289,411 shares
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MORTON INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
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PART I. FINANCIAL INFORMATION:
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income and Retained
Earnings - Three months and six months ended
December 31, 1996 and 1995 3
Consolidated Balance Sheets - December 31, 1996
and June 30, 1996 4
Consolidated Statements of Cash Flows -
Six months ended December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements -
December 31, 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 9
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submissions of Matters to a Vote of Security-Holders 9 - 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 10
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Item 1. Financial Statements (Unaudited)
_________________________________________
MORTON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
-------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ------------- -------------
<C> <C> <C> <C>
Net sales $ 943.3 $ 916.1 $ 1,819.2 $ 1,725.7
Interest, royalties, and sundry income 7.3 30.8 17.2 39.1
----------- ----------- ------------- -------------
950.6 946.9 1,836.4 1,764.8
Deductions from income:
Cost of products sold 674.4 645.2 1,296.0 1,225.6
Selling, administrative, and general expense 108.1 111.7 220.2 213.3
Research and development expense 19.6 21.9 38.3 41.5
Interest expense 6.0 6.3 12.0 12.4
Amortization of goodwill 2.6 2.6 5.1 5.1
----------- ----------- ------------- -------------
810.7 787.7 1,571.6 1,497.9
----------- ----------- ------------- -------------
Income before income taxes 139.9 159.2 264.8 266.9
Income taxes 51.8 59.7 98.0 100.1
----------- ----------- ------------- -------------
Net Income 88.1 99.5 166.8 166.8
Retained earnings at beginning of period 1,732.8 1,465.6 1,675.5 1,417.6
Cash dividends: $.15 and $.13 per share for the
three months ended December 31, 1996 and 1995,
respectively; $.30 and $.26 per share for the
six months ended December 31, 1996 and 1995,
respectively. (21.4) (19.3) (42.8) (38.6)
----------- ----------- ------------- -------------
Retained earnings at end of period $ 1,799.5 $ 1,545.8 $ 1,799.5 $ 1,545.8
=========== =========== ============= =============
Net income per share $ .61 $ .66 $ 1.15 $ 1.11
=========== =========== ============= =============
Shares used in computation (in thousands) 145,001 150,452
============= =============
</TABLE>
See notes to consolidated financial statements.
3
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MORTON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
December 31 June 30
1996 1996
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(Note)
<C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 71.3 $ 71.1
Receivables 660.1 624.6
Deferred income tax benefits 15.5 23.6
Inventories 392.0 364.5
Prepaid expenses 131.5 112.4
----------- ----------
Total current assets 1,270.4 1,196.2
Other assets
Cost in excess of net assets of businesses acquired,
less amortization 291.2 296.3
Investments in affiliates 137.3 70.7
Miscellaneous 60.0 62.5
----------- ----------
488.5 429.5
Property, plant and equipment, at cost 2,251.4 2,151.3
Less allowances for depreciation 1,072.9 1,005.5
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1,178.5 1,145.8
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$ 2,937.4 $ 2,771.5
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Notes payable and current portion of long-term debt $ 108.2 $ 37.2
Accounts payable 279.1 296.6
Accrued salaries, wages and other compensation 59.3 67.6
Other accrued expenses 125.1 122.3
Income taxes 31.9 33.6
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Total current liabilities 603.6 557.3
Long-term debt, less current portion 218.5 218.5
Deferred income taxes 54.4 53.4
Accrued postretirement benefits other than pensions 156.7 155.2
Other noncurrent liabilities 115.3 114.3
Shareholders' equity
Preferred stock (par value $1.00 per share)
Authorized - 25.0 shares, none issued
Common stock (par value $1.00 per share)
Authorized - 300.0 shares
Issued, including shares in treasury - 148.4 shares
and 148.4 shares at December 31 and June 30, 1996 148.4 148.4
Additional paid-in capital 50.8 55.9
Retained earnings 1,799.5 1,675.5
Foreign currency translation adjustment and other 15.8 11.0
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2,014.5 1,890.8
Less cost of common stock in treasury - 6.1 shares
at December 31, 1996 and 6.0 shares at June 30, 1996 225.6 218.0
----------- ----------
Total shareholders' equity 1,788.9 1,672.8
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$ 2,937.4 $ 2,771.5
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</TABLE>
Note: The balance sheet at June 30, 1996 has been derived from the
audited consolidated financial statements at that date.
See notes to consolidated financial statements.
4
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MORTON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Cash Provided (Used)
Six Months Ended
December 31
------------------------
1996 1995
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Operating Activities <C> <C>
- --------------------
Net income $ 166.8 $ 166.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 94.2 90.8
Deferred income taxes 0.2 0.2
Undistributed earnings of affiliates (1.5) (2.6)
Changes in operating assets and liabilities
net of effects of businesses acquired:
Receivables (34.6) (96.5)
Inventories and prepaid expense (46.0) (42.5)
Accounts payable and accrued expenses (24.1) (5.0)
Accrued income taxes 9.6 22.3
Other - net 3.2 3.7
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Net cash provided by operating activities 167.8 137.2
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Investing Activities
- --------------------
Purchase of property, plant and equipment (122.5) (100.0)
Proceeds from property and other asset disposals 5.3 1.5
Cash invested in businesses acquired (65.0) (0.6)
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Net cash used for investing activities (182.2) (99.1)
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Financing Activities
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Purchase of common stock for treasury (21.6) (52.8)
Increase in notes payable 71.6 21.7
Repayment of long-term debt (0.1) (0.1)
Stock option transactions 5.3 4.6
Dividends paid (42.8) (38.6)
----------- ----------
Net cash provided by (used for) financing activities 12.4 (65.2)
Effect of foreign exchange rate changes on cash
and cash equivalents 2.2 1.0
Increase/(decrease) in cash and cash equivalents 0.2 (26.1)
Cash and cash equivalents at beginning of year 71.1 88.3
----------- ----------
Cash and cash equivalents at end of period $ 71.3 $ 62.2
=========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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MORTON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
- ---------------------
The interim financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation SX and therefore, do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended December 31, 1996 are not necessarily indicative of the
results to be expected for the fiscal year ending June 30, 1997. It is
suggested that the financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report to Shareholders and Annual Report on Form 10-K for the fiscal
year ended June 30, 1996.
Inventories
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Inventories are stated at lower of cost (principally last-in, first-out
method) or market. Components of inventories are as follows:
Dec. 31 June 30
1996 1996
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Finished products and work-in-process $263.8 $261.3
Materials and supplies 128.2 103.2
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$392.0 $364.5
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Item 2. Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
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Results of Operations
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Sales increased 3 percent in the second quarter of fiscal 1997 compared with
the fiscal 1996 second quarter while earnings per share decreased 8 percent
for the same two periods. However, fiscal 1996 earnings included $24.1
million of unusual, non-operating, pretax income ($15.1 million or 10 cents
per share after tax) relating to environmental insurance settlements going
back more than a decade. Excluding the 10 cents per share impact in fiscal
1996, second quarter fiscal 1997 earnings per share increased 9 percent to 61
cents. Sales for the second quarter were $943.3 million versus $916.1 million
in the prior year. Net income for the quarter was $88.1 million compared with
$99.5 million in the second quarter of fiscal 1996.
For the six months ended December 31, 1996, sales were $1.8 billion, up 5
percent over the prior year. Net income for the first six months of fiscal
1997 was $166.8 million, the same as fiscal 1996. Excluding the impact of the
environmental insurance settlements from fiscal 1996, net income and earnings
per share grew 10 percent and 14 percent, respectively. A lower effective tax
rate and fewer common shares outstanding contributed 4 cents to per share
earnings in the first half of fiscal year 1997. The decrease in the common
shares outstanding is due to the share repurchase program begun in fiscal 1996.
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Specialty chemicals saw strong profit growth despite flat sales growth. Airbag
sales exceeded expectations in the second quarter as side-impact airbags and
additional business captured by Morton offset sizable price declines. Airbag
profits, however, were below the second quarter of fiscal 1996 as higher
freight and manufacturing costs to meet the additional demand reduced operating
margins. Salt results improved, despite tough comparisons with the prior year
for the ice control business, due to excellent results for non-ice control
products. Early season snowfall resulted in strong ice control sales in the
second quarter of fiscal 1996.
Sales for Morton's specialty chemicals business in the second quarter of
fiscal 1997 were $392.5 million, flat compared with fiscal 1996 second quarter
results. Operating earnings were $56.5 million, a 14 percent increase over
the second quarter of fiscal 1996. Operating margins improved to 14.4
percent, due in part to lower raw material prices for most product lines.
In the second quarter of fiscal 1997, thermoplastic polyurethanes, advanced
materials, plastics additives, automotive coatings (after adjusting for the
transfer of approximately $7 million of sales to a joint venture set up in
January 1996), industrial coatings and powder coatings showed healthy sales
gains. These product lines contributed approximately 38 percent of chemical
group sales in the current quarter. Partially offsetting these favorable
year-over-year performances were lower sales in the extrudable specialties
portion of packaging adhesives, dyes and electronic materials. Among the
contributors to the improved earnings were performance chemicals, plastics
additives, industrial coatings, automotive coatings and powder coatings.
Earnings from these product lines accounted for approximately 53 percent of
chemical group profits and 77 percent of the year-over-year increase. The
unfavorable impact of foreign exchange on sales and earnings for the current
quarter was $4.2 million and $.5 million, respectively.
Specialty chemical sales for the first six months of fiscal 1997 were $799.8
million, up 2 percent and operating profits of $123.0 million were up 16
percent over the same period in fiscal 1996. The growth in sales year over
year was largely attributable to plastics additives, industrial coatings,
automotive coatings (after adjusting for the transfer of sales to a joint
venture set up last year), powder coatings, thermoplastic polyurethanes, and
waterbased polymers. Performance chemicals, plastics additives, industrial
coatings, automotive coatings, and powder coatings accounted for 52 percent of
year-to-date earnings and approximately 74 percent of the increase from the
same period in fiscal 1996. Partially offsetting these sales and earnings
increases were unfavorable comparisons with the prior year in the extrudable
specialties portion of packaging adhesives and electronic materials. Sales and
earnings were down year over year in extrudable specialties due to the
discontinuance of a product line.
Earnings grew faster than sales for the six months ended December 31, 1996, as
earnings reflected the impact of higher volumes and lower raw material prices
on operating margins. Earnings for the first six months of fiscal 1997 also
included a $2.4 million gain on the sale of the Lytron product line.
Year-to-date chemical sales and earnings were negatively impacted by the
effects of foreign exchange translation of $7.8 million and $.9 million,
respectively.
Salt sales in the second quarter of fiscal 1997 were $171.7 million, a 2
percent increase versus the second quarter of fiscal 1996. Fiscal 1997 second
quarter operating earnings were $39.8 million, up 6 percent compared to prior
year earnings of $37.6 million. Operating margins improved to 23.2 percent
from 22.3 percent last year. Sales for the first six months of fiscal 1997
were $287.4 million, an increase of 3 percent, and operating earnings were
$63.1 million, a 10 percent increase over the six months ended December 31,
1995. Earnings increased faster than sales for both the second quarter and
year-to-date as a result of higher production levels to prepare for the fiscal
1997 ice control season and continued tight control of costs.
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While the salt business benefited from customers replenishing depleted ice
control salt inventories after last year's record-breaking winter, the mild
December weather this year meant ice control salt sales for the quarter were 7
percent below the prior year's strong second quarter ice control salt sales.
Excellent performances from all other salt product lines, including grocery
and water conditioning products, offset the lower ice control results.
Airbag sales for the second quarter of fiscal 1997 were $379.1 million, up 6
percent over the same period in the prior year. Operating earnings of $60.9
million were down 16 percent. Operating margins were 16.1 percent versus 20.1
percent in the prior year. For the six months ended December 31, 1996, sales
for the airbag business were $732.0 million, an 11 percent improvement over
the same period in the prior year, but operating earnings were $115.6 million,
down 6 percent over the comparable period.
Although sales to VW, BMW, Honda, Mitsubishi, Toyota, Chrysler, Nissan,
Subaru, and Mazda were up strongly in the quarter, operating earnings declined
overall as prices for inflators and modules continued to show a decline in the
quarter and manufacturing and freight cost were considerably higher than
expected. Volume continued to increase during the current quarter, up 29
percent, while average selling prices continued to decline, down 18 percent
compared with the second quarter of fiscal 1996. The volume increase was
primarily generated by Asian customers purchasing significantly greater
numbers of driver-side and passenger-side inflators. This unanticipated
volume increase is also responsible for the higher year-over-year operating
costs, particularly overtime, temporary direct labor and freight costs.
Morton's corporate administrative and other costs were below last year's
second quarter, however because of the income from the environmental
insurance settlements received in the second quarter of fiscal 1996, overall
corporate expense comparisons were negative. Excluding the impact of the
environmental insurance settlements from the prior year's results, corporate
expenses were 27 percent below the second quarter of the prior year and 14
percent below the first six months of fiscal 1996. Lower corporate
administrative costs, net interest expense and environmental expenses were the
main reasons for the lower corporate and other costs.
The Company repurchased 528,500 shares of its common stock during the current
quarter. The cumulative shares repurchased in fiscal 1996 and in the first
half of fiscal 1997 were 7.3 million (out of a 10 million share authorization)
at an average share price of $36.34.
Liquidity and Capital Resources
- -------------------------------
Operating activities were a source of cash in the six month period ended
December 31, 1996, providing $167.8 million, compared to the same period in
the prior year when operations provided $137.2 million.
This change is largely attributable to the changes in operating assets and
liabilities which resulted in a $91.9 million use of funds this year compared
to a $118.0 million use of funds during the first six months of last year.
This decrease in the use of funds is primarily attributable to improved
working capital management, principally related to accounts receivable and
inventory. Net income provided $166.8 million in the first six months of
fiscal year 1997, unchanged from the prior year. Depreciation and
amortization was $3.4 million higher in the current period. This increase is
primarily the result of the high level of capital spending at the airbag
facilities in Utah in recent years.
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Investing activities in the first six months of fiscal year 1997 were
primarily the result of capital spending, which used $122.5 million of cash
compared to $100.0 million in the same period in fiscal 1996. The major
increase in capital spending this period compared to the same period in fiscal
1996 is at the airbag facilities in Utah and Europe and reflects the overall
increase in capital spending levels compared with prior years as well as the
timing of expenditures. Expansion related to certain chemical products as
well as basic upkeep of the Salt and Chemical facilities continue to be areas
of capital spending. Cash invested in businesses acquired was $65.0 million
in the first six months of fiscal 1997 primarily related to the acquisition of
a controlling block of stock in an Italian powder coatings company. Cash
invested in businesses acquired was $.6 million in the six months ended
December 31, 1995.
Financing activities for the six month period ended December 31, 1996, were a
$12.4 million source of funds compared to a $65.2 million use of funds during
the same period in the prior year. Short-term notes payable increased $71.6
million in the current period compared with a $21.7 million increase during
the same period of last year. This change reflects the higher level of
incremental borrowing required in fiscal 1997 as cash generated from
operations increased but was not sufficient to offset the higher level of
capital spending and acquisitions. During the second quarter of fiscal 1996,
the board of directors authorized a 10 million share buy back of the Company's
common stock. Through December 31, 1996, the Company repurchased approximately
7.3 million shares of its common stock with .5 million shares purchased in the
first six months of fiscal 1997 for approximately $21.6 million. Dividend
payments for the first six months of fiscal year 1997 increased to $42.8
million from $38.6 million in the same period last year, due to the increase in
the dividend rate paid per share.
The Company's current ratio was 2.1 at both December 31 and June 30, 1996.
Total debt as a percentage of total capitalization at December 31, 1996, was
15.1 percent compared to 12.9 percent at June 30, 1996.
As of December 31, 1996, the Company had unexpended authorizations for fixed
asset spending of $209.1 million. These authorizations related primarily to
the restructuring and expansion of the chemical business, expansion of the
airbag business as well as general facility expansion, product improvement,
and maintenance Company-wide.
Estimated cash flow from operations and current financial resources, including
financing capacity, are expected to be adequate to fund the Company's
anticipated working capital requirements, fixed asset spending, dividend
payments and share repurchases in the foreseeable future.
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security-Holders
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The Company's annual shareholders' meeting was held on October 24, 1996. The
results of the matters voted upon at the meeting are as follows:
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1. The following individuals were elected directors of the Company for terms
specified in the proxy statement for the above meeting in accordance with
the following votes:
AUTHORITY
WITHHELD
SHARES FOR (Shares)
Dennis C. Fill 120,594,137 1,846,388
William E. Johnston 119,810,001 2,630,524
Edward J. Mooney 119,785,167 2,655,358
George A. Schaefer 120,581,622 1,858,903
2. The appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending June 30, 1997, was ratified in
accordance with the following votes:
FOR 121,336,083 shares
AGAINST 726,493 shares
ABSTAIN 377,949 shares
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
During the fiscal quarter ended December 31, 1996, two 8-K reports were filed
as follows:
1. Date of report: November 22, 1996; item reported: Item 5 - Other
Events; no financial statements and one exhibit were filed therewith.
2. Date of report: November 25, 1996; item reported: Item 5 - Other
Events; no financial statements or exhibits were filed therewith.
*************************************
SIGNATURE
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.
MORTON INTERNATIONAL, INC.
--------------------------
(Registrant)
Date: February 10, 1997 BY: /s/ L. F. Zumbach
---------------------------
L. F. Zumbach
Controller
(Principal Accounting Officer)
10
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 57700
<SECURITIES> 13600
<RECEIVABLES> 670900
<ALLOWANCES> (10800)
<INVENTORY> 392000
<CURRENT-ASSETS> 1270400
<PP&E> 2251400
<DEPRECIATION> (1072900)
<TOTAL-ASSETS> 2937400
<CURRENT-LIABILITIES> 603600
<BONDS> 218500
0
0
<COMMON> 148400
<OTHER-SE> 1640500
<TOTAL-LIABILITY-AND-EQUITY> 2973400
<SALES> 943300
<TOTAL-REVENUES> 950600
<CGS> 674400
<TOTAL-COSTS> 802100
<OTHER-EXPENSES> 2600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6000
<INCOME-PRETAX> 139900
<INCOME-TAX> 51800
<INCOME-CONTINUING> 88100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88100
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
