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 September 30, 1996 Commission file number 0-14825
SEALRIGHT CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 16-0876812
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9201 Packaging Drive, DeSoto, Kansas 66018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 913-583-3025
7101 College Boulevard, Overland Park, Kansas 66210-1891
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.
(1) Yes X No (2) Yes X No
As of September 30, 1996, Sealright Co., Inc. had 11,071,991 shares of
Common Stock outstanding. The market value of stock held by non-
affiliates is approximately $71,943,000.
SEALRIGHT CO., INC. AND SUBSIDIARIES
FORM 10-Q
November 1, 1996
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Financial Statements included herein have been
prepared by Management, without 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 Management believes that the disclosures are
adequate to enable a reasonable understanding of the information presented.
It is suggested that these Consolidated Financial Statements be read
in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10K, for the year
ended December 31, 1995.
Except for historical information contained herein, the matters set
forth in this report or in oral statements made by officers of the
Company are forward looking statements that involve certain risks
and uncertainties that could cause actual results to differ materially
from those in the forward looking statements. The Company's expectations
respecting future revenues and profits assume, among other things,
reasonable continued growth in the general economy which affects demand
for the Company's products, reasonable stability in raw material pricing,
changes in which affect customer purchasing decisions as well as the
Company's revenues and margins, and successful execution of the Company's
previously announced restructuring plan.
The costs and benefits of the Company's restructuring and facility
consolidation plan may vary from the Company's original expectations due
to various factors such as: the extent of management's ability to control
costs, inefficiencies, overheads and operational issues during the
transition period; sales prices realized upon future disposal of redundant
assets, particularly real property which is subject to future supply and
demand conditions in various real estate markets; higher or lower than
anticipated rates of relocation or resignation of employees who otherwise
would receive termination payments and difficulties inherent in forecasting
results of an operating mode different from that which exists at the time
the forecast is made. Investors are also advised to consider other risks
and uncertainties that may be discussed in documents filed by the Company
with the Securities and Exchange Commission.
SEALRIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE PERIODS ENDED September 30, 1996 and 1995
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
1996 1995 1996 1995
Net Sales $68,419 $76,151 $209,214 $230,824
Cost of Sales 55,542 63,237 173,790 187,109
Gross Profit 12,877 12,914 35,424 43,715
Selling, Gen. & Admin. Exp. 7,775 9,561 25,085 27,043
Other Expense 270 365 753 1,148
Restructuring Expense 815 -- 3,264 --
Operating Income 4,017 2,988 6,322 15,524
Interest Expense 1,318 1,243 4,050 3,743
Income Before Income Taxes 2,699 1,745 2,272 11,781
Provision for Inc. Taxes 975 698 814 4,695
NET INCOME $ 1,724 $ 1,047 $ 1,458 $ 7,086
NET INCOME PER SHARE $ 0.15 $ 0.09 $ 0.13 $ 0.64
AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 11,072 11,072 11,072 11,095
SEALRIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(In Thousands)
(Unaudited)
September 30, 1996 December 31, 1995
ASSETS
Current Assets
Cash $ 8 $ 6,017
Accounts Receivable 28,596 22,591
Inventories (Note 3) 43,844 39,848
Other Current Assets 3,448 2,639
Total Current Assets 75,896 71,095
Property, Plant & Equipment 249,804 240,065
Less: Accumulated Depreciation 108,364 97,762
Property, Plant and Equipment, Net 141,440 142,303
Intangibles, Net 11,354 12,115
Other Assets 2,215 2,584
TOTAL ASSETS $230,905 $228,097
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt $ 6,200 $ 6,200
Accounts Payable 14,905 12,874
Accrued Vacation 3,103 3,253
Accrued Workers' Compensation Reserve 2,354 2,675
Restructuring Liability 1,192 3,259
Accrued Liabilities 6,578 1,989
Total Current Liabilities 34,332 30,250
Long-Term Debt 81,350 77,400
Deferred Income Taxes 12,061 14,168
Post-Retirement Benefits 2,381 2,241
Pension Liability 917 917
Restructuring Liability 375 1,105
TOTAL LIABILITIES 131,416 126,081
Stockholders' Equity
Common Stock, Par Value $.10
Authorized 20,000,000 shares;
issued and outstanding 11,071,991
as of September 30, 1996 and
December 31, 1995, respectively 1,107 1,107
Paid-In Capital 14,911 14,911
Retained Earnings 83,471 85,998
Total Stockholders' Equity 99,489 102,016
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $230,905 $228,097
SEALRIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1996 and September 30, 1995
(In Thousands)
(Unaudited)
1996 1995
Cash Flows from Operating Activities:
Net Income $ 1,458 $ 7,086
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation & Amortization 15,007 14,697
Deferred Tax Provision 1,530 3,127
Changes in Assets and Liabilities:
Accounts Receivable, Net (6,680) (4,288)
Inventories (3,996) (3,202)
Accounts Payable 2,623 2,276
Other (2,448) (1,420)
Total Adjustments $ 6,036 $ 11,190
Net Cash Provided By Operating Activities $ 7,494 $ 18,276
Cash Flows from Investing Activities:
Capital Expenditures $(13,603) $(16,814)
Proceeds from Disposal of Equipment 106 157
Net Cash Used in
Investing Activities $(13,497) $(16,657)
Cash Flows from Financing Activities:
Net Borrowings Under Revolving
Credit Agreement $ 8,000 $ 7,000
Proceeds from Common Stock Issued -- 165
Principal Payments of Long-Term Debt (4,017) (5,151)
Dividends Paid (3,989) (3,982)
Net Cash Used in Financing Activities $ (6) $ (1,968)
Net Decrease in Cash $ (6,009) $ (349)
Cash, Beginning of Year 6,017 1,057
Cash, End of Nine Months $ 8 $ 708
SEALRIGHT CO., INC. AND SUBSIDIARIES
10-Q
SEPTEMBER 30, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain normal interim adjustments necessary to
present fairly the financial position of Sealright Co., Inc. and
Subsidiaries as of September 30, 1996 and December 31, 1995, and
the results of their operations for the periods ended September 30,
1996 and 1995.
NOTE 2 - ACCOUNTING PRINCIPLES AND POLICIES
The accompanying financial statements have been prepared consistent
with the accounting principles and policies described more fully
in Note 1 of the Company's Annual Report for the year ended
December 31, 1995.
NOTE 3 - INVENTORIES
Inventories at September 30, 1996 and December 31, 1995, were:
1996 1995
(In Thousands)
Inventories Carried on LIFO Basis
Raw Materials $16,154 $13,395
Work-In-Process 5,175 9,163
Finished Goods 18,126 12,714
$39,455 $35,272
LIFO Reserve (1,470) (1,466)
Inventories Carried on LIFO Basis $37,985 $33,806
Inventories Carried on Average or FIFO Basis 5,859 6,042
$43,844 $39,848
Because the inventory determination under the LIFO method can
only be made at the end of each fiscal year based on the
inventory levels and costs at that time, interim LIFO
determinations, including those at September 30, 1996, must
necessarily be based on management's estimate of expected year-end
inventory levels and costs. Since estimates of future inventory
levels and prices are subject to many factors beyond the control
of management, interim financial results are subject to final
year-end LIFO inventory amounts. Accordingly, inventory components
reported for the period ending September 30, 1996, are estimates
based on management's knowledge of the Company's production cycle,
the costs associated with this cycle and the sales and purchasing
volume of the Company.
NOTE 4 - STATEMENTS OF CASH FLOWS
Supplemental cash flow information for the nine months ended
September 30, 1996 and 1995 is (in thousands):
1996 1995
Interest Paid (Net of Amount Capitalized) $ 4,081 $ 3,880
Income Taxes Paid 317 1,530
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Year-to-date net sales were $209.2 million, down $21.6 million or
9.4 percent, from 1995. Net sales for the third quarter of 1996
were $68.4 million, a decrease of 10.2 percent from the same quarter
of 1995. For the quarter, sales of rigid paperboard products were
down 10.8 percent while sales of flexible packaging products were
down 9.2 percent from the same quarter of 1995. Sales at the Company's
subsidiary in Australia were up more than 200 percent ($630) thousand from
last year reflecting the Company's expanding international presence. The
revenue decline for both the year and the quarter is attributed to
three factors. First, cool, wet weather coupled with rising raw material
costs for the dairy industry, primarily butterfat, reduced demand for the
Company's frozen dessert packaging by $3.4 million for the quarter and
9.5 million year-to-date from the same period last year. Secondly, the
Company had $8.0 million and $2.8 million of revenue year-to-date and
the quarter ended September 30, 1995, respectively, from customers
that were lost in late 1995 and early 1996. Finally, the Company lost
several accounts due to unanticipated factors.
Gross profit year-to-date was $35.4 million compared to $43.7 million
a year ago. Gross profit for the quarter was $12.9 million, or 18.8
percent of net sales. During the third quarter of 1995, the Company's
gross margin was 17.0 percent. The increase in gross margin, despite
the $7.7 million decline in revenue, reflects the Company realizing
the expected efficiency benefits from its restructuring plan. The
inefficiencies sustained during the first and second quarter as a
result of moving the Company's DeSoto, Kansas rigid paperboard
operations to Fulton, New York and Los Angeles, California have
diminished. Both facilities' performance has improved. The Company's
gross margin in the third quarter improved from the first and second
quarters of 1996 in both rigid and flexible packaging operations.
However, the Company continued to suffer from losses at its Los Angeles
rigid plastics operation due to significant inefficiencies encountered
during the conversion to new thermoforming equipment. The operating
loss for the third quarter was $800 thousand and the loss year-to-date
was $2.3 million.
Selling, General and Administrative expenses year-to-date are down
$2.0 million, or 7.2 percent, from 1995. SG&A expenses for the
quarter are down $1.7 million, or 18.7 percent, from the same period
last year. These reductions are primarily due to staffing reductions
as part of the Company's restructuring plan coupled with continued cost
cutting initiatives. The Company has eliminated approximately 70
salaried positions since last September.
The Company has been incurring restructuring expenses during the year
as a result of moving equipment and personnel involved with the plant
consolidation plan announced in late 1995. Additionally, other costs
associated with the restructuring such as employee recruiting and
management reorganization are classified in this category. Restructuring
expenses year-to-date have been $3.3 million, and $0.8 million for the
third quarter. Restructuring expense during the quarter reflects costs
associated with moving the Company's machine manufacturing operations,
research and development center and Corporate Office to the DeSoto
facility. Restructuring expense is expected to be approximately $2.3
million during the fourth quarter as the Company consolidates its
Charlotte and Raleigh, North Carolina facilities.
Interest expense year-to-date was $4.0 million, or 8 percent higher
than last year, reflecting a higher level of debt coupled with reduced
interest capitalization. Capital spending is 19 percent lower than
last year reducing the amount of associated interest expense
capitalization. Interest expense for the quarter is 6 percent higher
than last year as a result of the same factors.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine month
period ended September 30, 1996, was $7.5 million compared to
$18.3 million for the same period in 1995. The primary cause of the
reduction year over year has been the reduction in the Company's level
of net income. Earnings are down primarily due to reduced net sales,
losses at the Company's rigid plastics facility and additional expenses
associated with the ongoing restructuring. Accounts receivable and
inventories reflect higher dollar and percentage increases from the
beginning of 1996 versus 1995 due to aggressive management of these two
asset classes in the fourth quarter of last year, resulting in low
year-end levels of receivables and inventory. Capital expenditures
year-to-date were $13.6 million, which is 19 percent lower than the
same period last year. Capital spending has been directed at
modifications to facilities to accommodate equipment consolidation,
cost savings initiatives and the Company's new management information
system.
At September 30, 1996, the Company had borrowed $8.0 million against its
$30 million bank line of credit at an average interest rate of 5.95%.
The remaining $22 million of available credit is significantly more
than the Company's anticipated needs for working capital and investment
spending for the balance of the year.
The Company must comply with various financial covenants under its
debt agreements. The Company was granted a temporary modification to
the loan covenant agreements by its lenders in the fourth quarter of
1995 since the restructuring charge incurred in 1995 caused the fixed
charge coverage ratio to fall below 200%, the minimum level of
compliance under the agreements. The Company's financial performance
during the third quarter of 1996 was not sufficient to meet the
minimum level of compliance pursuant to the 1995 modification. The
Company's lenders waived compliance with the fixed charge coverage
ratio for the third quarter. The Company and its lenders have
held substantive discussions and have agreed in principle to
modifying the loan agreements to grant a modification to the fixed
charge coverage for the fourth quarter of 1996 and the first three
quarters of 1997. Under the proposed agreement, the Company will not
pay a fee or penalty for this modification. As of the date of submission
of this report, a final modification agreement has not been signed.
The Company paid a regular dividend of $0.12 per share per quarter
to its Common shareholders during the first three quarters of 1996,
resulting in dividends paid of $4.0 million for 1996. The Company's
Board of Directors announced the suspension of regular dividends on
October 24, 1996 due to the acceleration of restructuring expense
associated with the potential impact, if a decision is made to sell
or otherwise dispose of its rigid plastics operation. The Company
intends to resume paying dividends, possibly in 1997, once operating
performance warrants such resumption.
The Company also announced it is exploring the possible sale of the
Los Angeles rigid plastics operation. This facility manufactures
thermoformed and injection molded plastic containers primarily for
the cultured dairy industry on the West Coast. The Company may
take up to a $4.0 million charge to earnings in the fourth quarter
if this operation is sold. A final decision will be made by the
Board of Directors during the fourth quarter.
PART II - OTHER INFORMATION
Item 1. Legal Proceeding
None
Item 2.) Changes in Securities
None
Item 3.) Defaults Upon Senior Securities
The Company must comply with various financial covenants
under its debt agreements. The Company was granted a temporary
modification to these agreements by its lenders in the fourth
quarter of 1995 since the restructuring charge incurred in 1995
caused the fixed charge coverage ratio to fall below 200%, the
minimum level of compliance under the agreements. The Company's
financial performance during the third quarter of 1996 was not
sufficient to meet the minimum level of compliance pursuant to
the 1995 modification. The Company's lenders waived compliance
with the fixed charge coverage ratio for the third quarter.
The Company and its lenders have held substantive discussions
and have agreed in principle to modifying the loan agreements
to grant a modification to the fixed charge coverage for the
fourth quarter of 1996 and the first three quarters of 1997.
Under the proposed agreement, the Company will not pay a fee
or penalty for this modification. As of the date of submission
of this report, a final agreement has not been signed.
Item 4.) Submission of Matters to a Vote of Securities Holders
None
Item 5.) Other Materially Important Events
On October 24, 1996, the Company announced the closing of
its Charlotte and Raleigh, North Carolina production
facilities. Equipment and production from the Charlotte
flexible packaging facility will be moved to the Company's
Akron, Ohio and San Leandro, California flexible packaging
facilities. Equipment from the Company's Styrotech machine
manufacturing facility in Raleigh will be moved to DeSoto,
Kansas and will be combined with the existing machine
manufacturing operations currently located in DeSoto. These
moves are expected to increase restructuring expense in the
fourth quarter to $2.3 million and will complete the
restructuring plan announced in late 1995. Both moves,
which will be substantially complete in the fourth quarter,
will result in a net reduction of approximately 120 positions.
The Company also announced it is exploring the possible
sale of the Los Angeles rigid plastics operation. This
facility manufactures thermoformed and injection molded
plastic containers primarily for the cultured dairy industry
on the West Coast. The Company may take up to a $4.0 million
charge to earnings in the fourth quarter if this operation
is sold. A final decision will be made by the Board of
Directors during the fourth quarter.
Item 6.) Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
SALES OF UNREGISTERED SECURITIES
None
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.
Date: November 11, 1996 /s/ Charles F. Marcy
By: Charles F. Marcy
President & CEO
Date: November 11, 1996 /s/ John T. Carper
By: John T. Carper
Senior Vice President
Finance & CFO
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