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, 1998 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.)
6655 Lancer Blvd., San Antonio, Texas 78219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 310-7000
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 11, 1998
Common stock, par value $.01 per share 9,121,482
1
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- --------------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash $ 817,216 $ 1,850,779
-------------------- --------------------
Receivables:
Trade accounts and notes 25,966,089 22,674,269
Other 872,511 299,757
-------------------- --------------------
26,838,600 22,974,026
Less allowance for doubtful accounts (385,000) (335,000)
-------------------- --------------------
Net receivables 26,453,600 22,639,026
-------------------- --------------------
Inventories 49,309,546 44,414,567
Prepaid expenses 459,905 178,869
Deferred tax asset 227,768 220,849
-------------------- --------------------
Total current assets 77,268,035 69,304,090
-------------------- --------------------
Property, plant and equipment, at cost:
Land 1,259,938 1,259,938
Buildings 21,634,373 18,152,535
Machinery and equipment 18,871,226 17,732,999
Tools and dies 6,607,430 5,520,759
Leaseholds, office equipment and vehicles 7,236,605 6,714,519
Assets in progress 2,361,533 4,701,452
-------------------- --------------------
57,971,105 54,082,202
Less accumulated depreciation and amortization (24,068,304) (22,186,770)
-------------------- --------------------
Net property, plant and equipment 33,902,801 31,895,432
-------------------- --------------------
Long-term receivables 628,359 724,959
Long-term investments 3,179,746 3,274,388
Intangibles and other assets,
at cost, less accumulated amortization 5,120,309 5,470,119
-------------------- --------------------
$ 120,099,250 $ 110,668,988
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- -------------------
(Unaudited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 13,226,911 $ 12,133,894
Current installments of long-term debt 3,997,200 4,444,400
Line of credit with bank 23,300,000 19,000,000
Deferred licensing and maintenance fees 568,269 538,554
Accrued expenses and other liabilities 6,676,424 5,718,003
Income taxes payable 543,817 185,472
-------------------- -------------------
Total current liabilities 48,312,621 42,020,323
Deferred tax liability 2,109,823 1,736,405
Other long-term liabilities 820,000 820,000
Long-term debt, excluding current installments 19,165,350 21,565,350
Deferred licensing and maintenance fees 1,315,597 1,565,597
-------------------- -------------------
Total liabilities 71,723,391 67,707,675
-------------------- -------------------
Shareholders' equity:
Preferred stock, without par value
5,000,000 shares authorized; none issued - -
Common stock, $.01 par value:
50,000,000 shares authorized; 9,121,534 and 8,902,236
issued and outstanding in 1998 and 1997, respectively 91,215 89,022
Additional paid-in capital 11,912,991 11,607,504
Accumulated other comprehensive loss -
Cumulative translation adjustment (2,735,668) (1,727,719)
Retained earnings 39,107,321 32,992,506
-------------------- -------------------
Total shareholders' equity 48,375,859 42,961,313
-------------------- -------------------
$ 120,099,250 $ 110,668,988
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 36,600,490 $ 29,844,076 $ 110,205,192 $ 92,536,791
Cost of sales 27,169,417 22,214,108 81,627,526 69,300,881
----------------- ----------------- ----------------- -----------------
Gross profit 9,431,073 7,629,968 28,577,666 23,235,910
Selling, general and
administrative expenses 5,175,032 5,377,909 15,393,926 14,435,253
----------------- ----------------- ----------------- -----------------
Operating income 4,256,041 2,252,059 13,183,740 8,800,657
----------------- ----------------- ----------------- -----------------
Other income (expense):
Interest expense (1,140,073) (638,029) (3,042,420) (2,012,136)
Other income, net (139,081) 122,660 (435,268) 586,845
----------------- ----------------- ----------------- -----------------
(1,279,154) (515,369) (3,477,688) (1,425,291)
----------------- ----------------- ----------------- -----------------
Income before income taxes 2,976,887 1,736,690 9,706,052 7,375,366
----------------- ----------------- ----------------- -----------------
Income tax expense:
Current 1,276,550 642,587 3,224,738 2,619,024
Deferred (139,347) 69,468 366,499 140,381
----------------- ----------------- ----------------- -----------------
1,137,203 712,055 3,591,237 2,759,405
----------------- ----------------- ----------------- -----------------
Net earnings $ 1,839,684 $ 1,024,635 $ 6,114,815 $ 4,615,961
================= ================= ================= =================
Common Shares and Equivalents Outstanding:
Basic 9,112,304 8,900,436 9,063,394 8,900,436
Diluted 9,368,008 9,402,980 9,318,998 9,384,624
Earnings Per Share:
Basic $ 0.20 $ 0.12 $ 0.67 $ 0.52
Diluted $ 0.20 $ 0.11 $ 0.66 $ 0.49
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
---------------------- ----------------------
Cash flow from operating activities:
<S> <C> <C>
Net earnings $ 6,114,815 $ 4,615,961
Adjustments to reconcile net income to net cash provided by (used in)
operating activities (net of effects from purchase of subsidiaries:)
Depreciation and amortization 2,283,546 2,048,003
Loss on sale and disposal of assets 16,351 -
Loss (gain) on long-term investments (16,125) (87,826)
Changes in assets and liabilities:
Receivables (4,099,916) (6,469,604)
Prepaid expenses (281,036) 76,903
Deferred taxes 348,477 (44,095)
Inventories (5,362,118) (10,985,604)
Other assets (326,493) (105,597)
Accounts payable 1,327,299 9,453,198
Accrued expenses and other liabilities 1,041,982 1,351,950
Income taxes payable 388,119 (11,190)
Deferred license fees and maintenance fees (220,285) (376,012)
Other long-term liabilities - 140,381
---------------------- ----------------------
Net cash provided by (used in) operating activities 1,214,616 (393,532)
---------------------- ----------------------
Cash flow from investing activities:
Proceeds from sale of assets 7,500 -
Acquisition of property, plant and equipment (4,105,161) (7,022,232)
Acquisition of subsidiary companies - (3,768,375)
Net investments in affiliates 110,767 (250,000)
---------------------- ----------------------
Net cash used in investing activities (3,986,894) (11,040,607)
---------------------- ----------------------
Cash flow from financing activities:
Net borrowings under line of credit agreements 4,300,000 7,300,000
Proceeds from long-term debt - 5,850,000
Retirement of long-term debt (2,847,200) (1,717,125)
Proceeds from exercise of stock options 307,680 181,205
---------------------- ----------------------
Net cash provided by financing activities 1,760,480 11,614,080
---------------------- ----------------------
Effect of exchange rate changes on cash (21,765) (101,000)
---------------------- ----------------------
Net increase (decrease) in cash (1,033,563) 78,941
Cash at beginning of period 1,850,779 1,016,425
---------------------- ----------------------
Cash at end of period $ 817,216 $ 1,095,366
====================== ======================
</TABLE>
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.
5
<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, 1997 Annual Report on Form 10-K.
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 relationship as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Finished Goods $ 18,168,079 $ 13,437,781
Work in process 25,374,394 28,980,250
Raw material and supplies 5,767,073 1,996,536
==================== ====================
$ 49,309,546 $ 44,414,567
==================== ====================
</TABLE>
3. Earnings Per Share
The Company adopted the Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share", in 1997, and accordingly, basic earnings per share is
calculated using the weighted average number of common shares outstanding and
diluted earnings per share is calculated assuming the issuance of common shares
for all potential dilutive common shares outstanding during the reporting
period. The dilutive effect of stock options approximated 255,704 and 502,544
shares for the three, and 255,604 and 484,188 shares for the nine, months ended
September 30, 1998 and 1997 respectively. All prior-period earnings per share
data presented in the consolidated financial statements have been restated to
conform to the requirements of SFAS No. 128.
6
<PAGE>
4. Comprehensive Loss
As of January 1, 1998, the Company has adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS 130 established new rules for the reporting and
display of comprehensive income and its components. The adoption of this
statement, however, has no impact on the Company's net income or stockholders'
equity. SFAS 130 requires that Company's foreign currency translation
adjustments, which prior to the adoption were reported separately in
stockholders' equity, be included in other comprehensive income.
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net earnings as reported $ 1,839,684 $ 1,024,635 $ 6,114,815 $ 4,615,961
Foreign currency translation (loss) (363,235) (531,663) (1,007,949) (697,843)
================= ================= ================= =================
Comprehensive income $ 1,476,449 $ 492,972 $ 5,106,866 $ 3,918,118
================= ================= ================= =================
</TABLE>
Accumulated foreign currency translation adjustments on the accompanying
Consolidated Balance Sheets account for all of the Company's other comprehensive
income.
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, 1998 and 1997
Net sales for the quarter ended September 30, 1998 were $36.6 million, a 22.6%
increase from sales in the third quarter of 1997. Higher sales throughout the
Americas were partially offset by a decline in sales to customers in Asia. Sales
to customers outside the United States were 46.9% of total sales in the third
quarter of 1998, compared to 43.3% of net sales in the same period last year.
Gross margin in the third quarter of 1998 was 25.8%, up slightly from 25.6% in
the third quarter of 1997. The Company's emphasis on controlling overhead costs
and improving manufacturing efficiencies contributed to the improvement in gross
margin.
Selling, general and administrative expenses were $5.2 million in the three
months ended September 30, 1998, down $0.2 million, or 3.7%, from the third
quarter of 1997. Expenses last year were high because of several unusual
factors, the most significant being start-up expenses for the Company's
subsidiary in Belgium.
7
<PAGE>
Interest expense was $1.1 million in the third quarter of 1998, compared to $0.6
million in the third quarter last year. The increased interest expense in 1998
was caused by higher borrowings related to capital spending and growth in
current assets during the past year. Lancer's third quarter effective tax rate
declined to 38.2% in 1998 from 41.0% in 1997. The Company's tax rate in the
third quarter of 1997 was unusually high due to foreign losses that were not
deductible against income earned in the United States. Net earnings for the 1998
quarter were $1.8 million, up from $1.0 million in the third quarter of 1997.
Comparison of the Nine-Month Periods ended September 30, 1998 and 1997
Net sales for the nine months ended September 30, 1998 were $110.2 million, a
19.1% increase from sales in the same period of 1997. Sales growth in the
Americas more than offset a sales decline in Asia. Sales in 1998 also reflect
the inclusion of the Company's New Zealand operation, which was acquired in the
second quarter of 1997. Sales to customers outside the United States were 47.7%
of total sales in the first nine months of 1998, compared to 48.0% in the same
period last year.
Gross margin in the nine months ended September 30, 1998 was 25.9%, compared to
25.1% in the first three quarters of 1997. The Company's emphasis on controlling
overhead costs and improving manufacturing efficiencies contributed to the
improvement in gross margin.
Selling, general and administrative expenses were $15.4 million in the first
nine months of 1998, an increase of $1.0 million, or 6.6%, from the same period
of 1997. As a percent of sales, expenses fell in the 1998 period because of the
existence of certain non-recurring expenses in 1997, and because of the
Company's efforts to manage its costs.
Higher borrowings that funded capital spending and growth in current assets
caused interest expense to rise to $3.0 million in 1998, compared to $2.0
million in 1997. The Company's effective tax rate was 37.0% in the first three
quarters of 1998, compared to 37.4% in the same period of 1997. The higher
effective tax rate was caused by a slight increase in the proportion of the
Company's income that was earned in high tax rate jurisdictions. Net earnings in
the first nine months of 1998 were $6.1 million, up from $4.6 million in the
same period last year.
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 provided by operating activities was $1.2 million in the first nine
months of 1998, compared to cash used in operating activities of $0.4 million in
the same period of 1997. The Company made capital expenditures of $4.1 million
in the first nine months of 1998. The Company completed construction of a 32,000
square foot office addition to its primary facility in San Antonio during the
first quarter of 1998. The Company funded the capital expenditures with cash
provided by operations and with borrowings under its credit facilities.
Effective July 15, 1998, the company increased its revolving facility from $25
million to $35 million, and amended certain financial covenants. The Company is
in compliance with the financial covenants contained in its credit agreement.
Accounting Matters
The Company maintains a Domestic International Sales Corporation (DISC) in order
to defer income taxes on its foreign sales. The Company continues to evaluate
the benefit of converting the DISC to a Foreign Sales Corporation (FSC). At the
time of such conversion, the Company will be required to provide for federal
income taxes on $2.4 million of undistributed earnings of the DISC. For further
explanation see the 1997 Form 10-K.
8
<PAGE>
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
established standards of accounting and reporting for derivative instruments and
for hedging activities. It requires that all derivatives be recognized as either
assets or liabilities in the statement of financial position and measures these
instruments at fair value. This statement is effective for financial statements
for periods beginning June 15, 1999. The Company believes that SFAS No. 133 will
not have a material impact on its financial statements and disclosures.
Year 2000
The Year 2000 ("Y2K") issue arose because some computer programs use two-digit
date fields to designate a year. Some of these programs with two-digit date
fields will not recognize the year 2000, or may confuse it with the year 1900.
This date recognition problem could cause erroneous calculations, or could cause
entire systems to malfunction.
The Company has adopted a two-phase approach to the Year 2000 threat. In the
Assessment Phase, the Company generates a comprehensive inventory of the
Company's date-oriented systems, and determines which are not Y2K compliant. The
Renovation/Replacement Phase involves correcting or replacing non-compliant
systems. The Company believes that it has completed approximately 80% of the
Assessment Phase, and plans to finish the Assessment Phase by the end of 1998.
The Renovation/Replacement Phase is being executed as non-compliant systems are
identified. The Company expects that it will have corrected high-priority
non-compliant systems by March 31, 1999, and medium-priority non-compliant
systems by June, 1999.
In the second quarter of 1998, the Company initiated correspondence with its
suppliers to determine their Y2K readiness. The Company plans to monitor the
readiness of its key suppliers throughout 1999. The Company intends to determine
the Y2K readiness of its key customers during 1999. The Coca-Cola Company was
the Company's largest customer in 1997, accounting for 24% of sales.
The Company's primary information technology ("IT") system is a BaaN ERP system
that was installed in 1996, and upgraded in 1998. The Company believes the BaaN
system, and other major IT systems, are Y2K compliant. Among non-IT systems, the
Company's timekeeping/payroll system in San Antonio is non-compliant. A new
system has been selected, and is expected to be in operation by the first
quarter of 1999. The Company has committed approximately $100,000 to the
Renovation/Replacement process through September 30, 1998, and expects to spend
no more than $200,000 on all of the Company's Y2K issues.
The Company believes there is low risk of any internal critical system not being
Y2K-compliant by the end of 1999. The Company continues to assess its risk
exposure attributable to external factors and suppliers. Although the Company
has no reason to conclude that any specific supplier represents a risk, the most
likely worst-case Y2K scenario would entail production disruption due to
inability of suppliers to deliver critical parts. The Company is unable to
quantify such a scenario, but it could potentially result in a material adverse
impact on the results of operations, liquidity or financial position of the
Company. The Company does not now have a formal contingency plan to deal with
non-performance by suppliers. The Company intends, however, to monitor the Y2K
readiness of key suppliers throughout 1999, and to develop a contingency plan
for any supplier whose lack of preparedness may jeopardize the Company's
operations.
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.
9
<PAGE>
Item 5 - Other Events
David E. Green was appointed Chief Financial Officer of the Company effective
November 9, 1998. Prior to joining Lancer, Mr. Green held senior positions
including Vice President Operations and Chief Financial Officer during 16 years
with Coca-Cola Bottling Company of the Southwest, a wholly-owned subsidiary of
Texas Bottling Group.
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 13, 1998 By: /s/ George F. Schroeder
George F. Schroeder
President and CEO
November 13, 1998 By: /s/ David E. Green
David E. Green
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolided
Balance Sheet and Consolidated Statements of Income found on pages 2 to 4 of
the Company's 10Q, and is qualified in its entirely by reference to such
financial statements.
</LEGEND>
<CIK> 0000768162
<NAME> LANCER
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 817
<SECURITIES> 0
<RECEIVABLES> 26,839
<ALLOWANCES> 385
<INVENTORY> 49,310
<CURRENT-ASSETS> 77,268
<PP&E> 57,971
<DEPRECIATION> 24,068
<TOTAL-ASSETS> 120,099
<CURRENT-LIABILITIES> 71,723
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 48,285
<TOTAL-LIABILITY-AND-EQUITY> 48,376
<SALES> 110,205
<TOTAL-REVENUES> 110,205
<CGS> 81,628
<TOTAL-COSTS> 97,022
<OTHER-EXPENSES> 435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,042
<INCOME-PRETAX> 9,706
<INCOME-TAX> 3,591
<INCOME-CONTINUING> 6,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,115
<EPS-PRIMARY> .67
<EPS-DILUTED> .66
</TABLE>
