UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1997 Commission file number 0-13875
LANCER CORPORATION
(Exact name of registrant as specified in its charter)
Texas 74-1591073
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
235 West Turbo, San Antonio, Texas 78216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 344-3071
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 14(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 issuers of classes of
common stock, as of the latest practicable date.
Title Shares outstanding as of
November 10, 1997
Common stock, par value $.01 per share 8,900,384
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
-------------------- --------------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash $ 1,095,366 $ 1,016,425
-------------------- --------------------
Receivables:
Trade accounts and notes 26,773,405 19,686,318
Refundable income taxes 1,572 396,495
Other 1,504,005 690,034
-------------------- --------------------
28,278,982 20,772,847
Less allowance for doubtful accounts (185,000) (185,000)
-------------------- --------------------
Net receivables 28,093,982 20,587,847
-------------------- --------------------
Inventories 43,120,699 28,238,923
Prepaid expenses 184,456 243,937
Deferred tax asset 102,346 64,513
-------------------- --------------------
Total current assets 72,596,849 50,151,645
-------------------- --------------------
Property, plant and equipment, at cost:
Land 1,307,663 1,307,663
Buildings 9,986,421 9,681,466
Machinery and equipment 17,245,116 14,925,713
Tools and dies 8,635,096 8,448,506
Leaseholds, office equipment and vehicles 6,834,951 5,945,069
Construction in progress 9,359,293 5,162,508
-------------------- --------------------
53,368,540 45,470,925
Less accumulated depreciation and amortization (21,488,976) (19,676,377)
-------------------- --------------------
Net property, plant and equipment 31,879,564 25,794,548
-------------------- --------------------
Long-term receivables 447,795 404,007
Investment in affiliates 5,867,304 2,975,000
Intangibles and other assets,
at cost, less accumulated amortization 3,373,551 2,684,073
-------------------- --------------------
$ 114,165,063 $ 82,009,273
==================== ====================
<CAPTION>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1997 1996
------------------- --------------------
(Unaudited)
Current liabilities:
<S> <C> <C>
Accounts Payable $ 16,176,313 $ 6,302,345
Current installments of long-term debt 3,472,200 1,852,500
Line of credit with bank 19,000,000 11,700,000
Deferred licensing and maintenance fees 962,844 1,339,868
Accrued expenses and other liabilities 5,753,900 4,288,130
Income taxes payable (22,387) -
------------------- --------------------
Total current liabilities 45,342,870 25,482,843
Deferred tax liability 1,179,036 1,038,655
Other long-term liabilities 820,000 820,000
Long-term debt, excluding current installments 21,958,550 15,459,375
Long-term deferred licensing and maintenance fees 2,173,149 2,172,137
------------------- --------------------
Total liabilities 71,473,605 44,973,010
------------------- --------------------
Shareholders' equity:
Common stock, $.01 par value:
50,000,000 shares authorized; 8,900,436 and 5,820,976
issued and outstanding in 1997 and 1996, respectively 89,004 58,209
Additional paid-in capital 11,594,526 9,888,244
Cumulative translation adjustment (514,040) 183,803
Retained earnings 31,521,968 26,906,007
------------------- --------------------
Total shareholders' equity 42,691,458 37,036,263
------------------- --------------------
$ 114,165,063 $ 82,009,273
=================== ====================
<CAPTION>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 29,844,076 $ 27,895,453 $ 92,536,791 $ 77,133,939
Cost of sales 22,214,108 21,409,375 69,300,881 58,866,795
---------------- ---------------- ----------------- -----------------
Gross profit 7,629,968 6,486,078 23,235,910 18,267,144
Selling, general and
administrative expenses 5,377,909 4,085,332 14,435,253 10,670,224
---------------- ---------------- ----------------- -----------------
Operating income 2,252,059 2,400,746 8,800,657 7,596,920
---------------- ---------------- ----------------- -----------------
Other income (expense):
Interest expense (638,029) (306,971) (2,012,136) (1,114,336)
Other income, net 122,660 230,973 586,845 452,250
---------------- ---------------- ----------------- -----------------
(515,369) (75,998) (1,425,291) (662,086)
---------------- ---------------- ----------------- -----------------
Income before income taxes 1,736,690 2,324,748 7,375,366 6,934,834
---------------- ---------------- ----------------- -----------------
Income tax expense (benefit):
Current 642,587 708,353 2,619,024 2,522,704
Deferred 69,468 107,643 140,381 37,131
---------------- ---------------- ----------------- -----------------
712,055 815,996 2,759,405 2,559,835
---------------- ---------------- ----------------- -----------------
Net earnings $ 1,024,635 $ 1,508,752 $ 4,615,961 $ 4,374,999
================ ================ ================= =================
Weighted average shares 9,402,980 9,120,756 9,384,624 9,091,337
================ ================ ================= =================
Net earnings per share $ 0.11 $ 0.17 $ 0.49 $ 0.48
================ ================ ================= =================
<CAPTION>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 30,
1997 1996
----------------------- -----------------------
Cash flow from operating activities:
<S> <C> <C>
Net earnings $ 4,615,961 $ 4,374,999
Adjustments to reconcile net earnings to net cash used by
operating activities (net of effects from purchase of subsidiaries:)
Depreciation and amortization 2,011,512 1,844,980
Loss on sale and disposal of assets - (15,485)
Cumulative effect of the translation adjustment (697,843) 218,896
Gain on investments in affiliates (87,826) -
Changes in assets and liabilities:
Receivables (6,654,003) (5,183,764)
Refundable income taxes 394,923 -
Prepaid expenses 76,903 (183,771)
Deferred tax liability (37,833) -
Inventories (10,698,760) (7,023,797)
Other assets 152,769 (71,524)
Accounts payable 9,291,848 1,982,935
Accrued expenses and other liabilities 1,303,441 1,279,103
Income taxes payable (22,387) (330,577)
Deferred license fees and other revenue (376,012) 659,693
Other long-term liabilities 140,381 90,000
----------------------- -----------------------
Net cash used by operating activities (586,926) (2,358,312)
----------------------- -----------------------
Cash flow from investing activities:
Proceeds from sale of assets - 43,625
Acquisition of property, plant and equipment (6,929,838) (5,838,456)
Acquisition of subsidiary companies (3,768,375) -
Additional investments in affiliates (250,000) -
----------------------- -----------------------
Net cash used in investing activities (10,948,213) (5,794,831)
----------------------- -----------------------
Cash flow from financing activities:
Net borrowings under line of credit agreements 7,300,000 7,900,000
Proceeds from long-term debt 5,850,000 8,301,883
Retirement of long-term debt (1,717,125) (6,447,550)
Proceeds from exercise of stock options 181,205 23,204
----------------------- -----------------------
Net cash provided by financing activities 11,614,080 9,777,537
----------------------- -----------------------
Net increase in cash 78,941 1,624,394
Cash at beginning of year 1,016,425 754,352
----------------------- -----------------------
Cash at end of period $ 1,095,366 $ 2,378,746
======================= =======================
<CAPTION>
Lancer issued debt of $3,986,000 and stock of $1,555,872 to the sellers of the subsidiaries acquired in 1997.
The non-cash portion of these transactions is excluded from the above statement.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
All adjustments (consisting of normal recurring adjustments) have been made
which are necessary for a fair presentation of financial position and results of
operations. All intercompany balances and transactions have been eliminated in
consolidation. It is suggested that the consolidated financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the December 31, 1996 Annual Report on Form 10-K.
Net earnings per share are based on the weighted average number of common and
common equivalent (dilutive stock options) shares outstanding each period. Fully
diluted net earnings per share would not be different than net earnings per
share. On July 8, 1997, the Company effected a three-for-two stock split
accounted for as a dividend. Prior year weighted average shares outstanding and
prior year per share amounts have been restated accordingly.
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the current year's presentation.
2. Inventory Components
The Company uses the gross profit method to determine cost of sales and
inventory for interim periods. Inventory components are estimated based on
historical relationships as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------------- --------------------
<S> <C> <C>
Finished Goods $ 11,845,866 $ 8,543,784
Work in process 25,290,777 18,425,735
Raw material and supplies 5,984,056 1,269,404
==================== ====================
$ 43,120,699 $ 28,238,923
==================== ====================
</TABLE>
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(Statement 128). Statement 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. Statement 128 was issued to
simplify the computation of EPS and to make the U.S. standard more compatible
with the EPS standards of other countries and that of the International
Accounting Standards Committee (IASC). It replaces the presentation of primary
EPS with a presentation of basic EPS and fully diluted EPS with diluted EPS.
<PAGE>
If the Company had adopted the Statement as of September 30, 1997, EPS would
have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Basic EPS $ 0.12 $ 0.17 $ 0.52 $ 0.48
Diluted EPS 0.11 0.17 0.49 0.48
</TABLE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "forecast," "plan," and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions which exist
or must be made as a result of certain factors including, without limitation,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, one-time events and other factors described herein
and in other filings made by the Company with the Securities and Exchange
Commission. Based upon changing conditions, should any one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, forecast, planned or intended. The
Company does not intend to update these forward-looking statements.
Results of Operations
Comparison of the Three-Month Periods Ended September 30, 1997 and 1996
Net sales for the quarter ended September 30, 1997 were $29.8 million, a 7.1%
increase over sales in the third quarter of 1996. The increase primarily
reflects the inclusion of sales from the Company's newly-acquired operations in
Brazil and New Zealand. Sales in parts of Asia and Europe were below
expectations. Overall, sales to customers outside the United States were 43.3%
of sales in the third quarter of 1997, compared to 37.0% of sales in the third
quarter of 1996.
Gross margin in the third quarter of 1997 was 25.6%, up from 23.3% in the same
period last year. The improvement was the result of continued cost savings in
the manufacturing process and changes in product mix.
Selling, general and administrative expenses were $5.4 million in the third
quarter of 1996, an increase of $1.3 million, or 33.0% from the third quarter
last year. Expenses from Lancer's new operations in Brazil and New Zealand, plus
costs associated with the Company's new marketing initiative in Europe caused
most of the increase.
Interest expense for the three months ended September 30, 1997 was $0.6 million,
up $0.3 million, or 107.8% from the same period last year. The higher interest
expense is the result of larger borrowings that financed capital spending,
acquisitions, and increases in current assets. Lancer's effective tax rate
increased in the third quarter of 1997 because of the nondeductibility of
foreign losses against income earned in the United States. Net earnings for the
1997 quarter were $1.0 million, down 32.1% from the $1.5 million earned in the
third quarter of 1996.
There were several factors that negatively impacted Lancer's financial
performance in the third quarter of 1997. First, the Company's subsidiaries in
Brazil and New Zealand were unprofitable. Sales in those markets suffered from
overall weakness in demand for dispensing equipment. Results from both
subsidiaries may remain pressured in the near term, but are expected to
strengthen in 1998. Second, Lancer recently formed a new subsidiary in Brussels,
Belgium. Operations consist of a warehouse and sales office. The new European
operation will improve service to customers. The short term impact has been to
increase costs in a weak European market. Third, sales to Asian customers were
below expectations, as falling currency values in Southeast Asia negatively
impacted shipments to the region. Currently, demand for the Company's products
varies greatly by individual market within Asia. The uncertainty about currency
values could continue to impact the Company's sales in Asia.
Comparison of the Nine-Month Periods ended September 30, 1997 and 1996
Net sales for the nine months ended September 30, 1997 were $92.5 million, a 20%
increase from sales in the same period of 1996. The increase reflects the
results of the Company's recently acquired subsidiaries in Brazil and New
Zealand, higher export sales from the United States, and higher sales in the
domestic market. Sales to customers outside the United States were 48.0% of net
sales in the first three quarters of 1997, compared to 39.7% in the same period
of 1996.
Gross margin in the first nine months of 1997 was 25.1%, up from 23.7%
in the 1996 period. Improved manufacturing efficiencies caused most of the
increase.
Selling, general and administrative expenses were $14.4 million in the first
three quarters of 1997, up 35.3% from the same period of 1996. Operating costs
from the new subsidiaries in Brazil and New Zealand, increased spending in
Europe, and a general increase in spending to support growth caused the
increase.
Interest expense rose to $2.0 million in 1997 from $1.1 million in 1996 because
of higher average borrowings. Net earnings were $4.6 million in the first three
quarters of 1997, up 5.5% from the $4.4 million earned in the 1996 period.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flows from operations and
amounts available under the Company's existing lines of credit. The Company has
met, and currently expects that it will continue to meet, substantially all of
its working capital and capital expenditure requirements as well as its debt
service requirements with funds provided by operations and borrowings under its
credit facilities.
Net cash used by operating activities improved to $0.6 million in the first nine
months of 1997, compared to $2.4 million in the same period last year. Lancer
invested $6.9 million in property, plant and equipment in the first three
quarters of 1997. Additionally, the Company paid approximately $6.0 million for
its Brazilian operations, and $3.3 million for the assets of the New Zealand
company acquired in the second quarter. The Company financed the Brazilian
transaction with a $4.0 million note issued to the seller and $2.0 million in
cash. Consideration for the New Zealand acquisition consisted of 122,832 shares
of Lancer Corporation common stock valued at approximately $1.6 million,
adjusted for the three-for-two stock split effected July 8, 1997, and $1.7
million in cash. Lancer financed the cash portion of its acquisitions and its
capital spending with bank debt.
Effective May 12, 1997, the Company increased its revolving facility from
$17.5 million to $25.0 million. All other material terms of the revolving
facility are unchanged.
Part II - Other Information
Item 1 - Legal Proceedings
The Company is a party to various lawsuits and claims generally incidental to
its business. In the opinion of management and independent legal counsel, the
ultimate disposition of these matters is not expected to have a significant
adverse effect on the Company's financial position or results of operations.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
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.
LANCER CORPORATION
(Registrant)
November 12, 1997 By: /s/ George F. Schroeder
George F. Schroeder
President and CEO
November 12, 1997 By: /s/ John P. Herbots
John P. Herbots
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The
Consolidated Balance Sheets And Consolidated Statements Of Income Found
On Pages 2, 3, And 4 Of The Company's 10-Q For The Year-To-Date.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,095
<SECURITIES> 0
<RECEIVABLES> 28,279
<ALLOWANCES> (185)
<INVENTORY> 43,121
<CURRENT-ASSETS> 72,597
<PP&E> 53,369
<DEPRECIATION> (21,489)
<TOTAL-ASSETS> 114,165
<CURRENT-LIABILITIES> 45,343
<BONDS> 0
89
0
<COMMON> 0
<OTHER-SE> 42,602
<TOTAL-LIABILITY-AND-EQUITY> 114,165
<SALES> 92,537
<TOTAL-REVENUES> 93,124
<CGS> 69,301
<TOTAL-COSTS> 83,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,012)
<INCOME-PRETAX> 7,375
<INCOME-TAX> 2,759
<INCOME-CONTINUING> 4,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,616
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
