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 March 31, 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
May 12, 1998
Common stock, par value $.01 per share 9,143,578
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
-------------------- --------------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash $ 1,103,919 $ 1,850,779
-------------------- --------------------
Receivables:
Trade accounts and notes 29,681,606 22,674,269
Refundable income taxes 1,483 1,483
Other 219,436 298,274
-------------------- --------------------
29,902,525 22,974,026
Less allowance for doubtful accounts (335,000) (335,000)
-------------------- --------------------
Net receivables 29,567,525 22,639,026
-------------------- --------------------
Inventories 45,026,942 44,414,567
Prepaid expenses 45,043 178,869
Deferred tax asset 227,076 220,849
-------------------- --------------------
Total current assets 75,970,505 69,304,090
-------------------- --------------------
Property, plant and equipment, at cost:
Land 1,259,938 1,259,938
Buildings 18,326,647 18,152,535
Machinery and equipment 18,518,557 17,839,310
Tools and dies 8,454,117 8,454,022
Leaseholds, office equipment and vehicles 6,819,503 6,776,193
Construction in progress 2,421,504 1,600,204
-------------------- --------------------
55,800,266 54,082,202
Less accumulated depreciation and amortization (22,936,628) (22,186,770)
-------------------- --------------------
Net property, plant and equipment 32,863,638 31,895,432
-------------------- --------------------
Long-term receivables 701,943 724,959
Long-term investments 3,246,085 3,273,621
Intangibles and other assets,
at cost, less accumulated amortization 5,339,171 5,470,886
-------------------- --------------------
$ 118,121,342 $ 110,668,988
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1998 1997
------------------- --------------------
(Unaudited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 15,159,013 $ 12,133,894
Current installments of long-term debt 3,822,200 4,444,400
Line of credit with bank 21,500,000 19,000,000
Deferred licensing and maintenance fees 512,271 538,554
Accrued expenses and other liabilities 5,742,591 5,718,003
Income taxes payable 1,222,480 185,472
------------------- --------------------
Total current liabilities 47,958,555 42,020,323
Deferred tax liability 2,008,638 1,736,405
Other long-term liabilities 820,000 820,000
Long-term debt, excluding current installments 20,840,350 21,565,350
Long-term deferred licensing and maintenance fees 1,315,597 1,565,597
------------------- --------------------
Total liabilities 72,943,140 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; 8,926,311
and 8,902,236 issued and outstanding
in 1998 and 1997, respectively 89,263 89,022
Additional paid-in capital 11,698,994 11,607,504
Accumulated other comprehensive loss -
Cumulative translation adjustment (1,728,189) (1,727,719)
Retained earnings 35,118,134 32,992,506
------------------- --------------------
Total shareholders' equity 45,178,202 42,961,313
------------------- --------------------
$ 118,121,342 $ 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
March 31, March 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Net sales $36,319,755 $ 30,398,159
Cost of sales 26,870,975 22,733,537
----------------- -----------------
Gross profit 9,448,780 7,664,622
Selling, general and
administrative expenses 4,997,909 4,220,650
----------------- -----------------
Operating income 4,450,871 3,443,972
----------------- -----------------
Other income (expense):
Interest expense (932,033) (547,458)
Other income (expense), net (173,481) 16,369
----------------- -----------------
(1,105,514) (531,089)
----------------- -----------------
Income before income taxes 3,345,357 2,912,883
----------------- -----------------
Income tax expense:
Current 941,496 1,092,624
Deferred 278,233 30,127
----------------- -----------------
1,219,729 1,122,751
----------------- -----------------
Net earnings $ 2,125,628 $ 1,790,132
================= =================
Common Shares and Equivalents Outstanding:
Basic 8,910,029 8,755,346
Diluted 9,252,927 9,232,841
Earnings Per Share:
Basic $ 0.24 $ 0.20
Diluted $ 0.23 $ 0.19
</TABLE>
See accompanying notes to consolidated financial statements.
4
4<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
------------------------ -----------------------
<S> <C> <C>
Net earnings $ 2,125,628 $ 1,790,132
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities (net of effects from purchase of subsidiaries:)
Depreciation and amortization 791,135 595,040
Loss on sale and disposal of assets 13,327 -
Gain on investments in affiliates 27,536 213,868
Changes in assets and liabilities:
Receivables (6,905,595) (4,943,020)
Refundable income taxes - 399,417
Prepaid expenses 133,826 64,569
Deferred tax liability (6,227) (24,395)
Inventories (654,305) (1,041,343)
Other assets 32,485 110,365
Accounts payable 3,042,906 3,619,698
Accrued expenses and other liabilities 37,141 (58,042)
Income taxes payable 1,033,339 723,653
Deferred license fees and other revenue (273,690) (62,258)
Other long-term liabilities 272,233 -
------------------------ -----------------------
Net cash provided (used) by operating activities (330,261) 1,387,684
------------------------ -----------------------
Acquisition of property, plant and equipment (1,729,727) (2,707,393)
Acquisition of subsidiary companies - (5,986,000)
Additional investments in affiliates - (250,000)
------------------------ -----------------------
Net cash used in investing activities (1,729,727) (8,943,393)
------------------------ -----------------------
Net borrowings under line of credit agreements 2,500,000 1,300,000
Retirement of long-term debt (1,347,200) 6,300,875
Proceeds from exercise of stock options 91,731 104,771
------------------------ -----------------------
Net cash provided by financing activities 1,244,531 7,705,646
----------------------- -----------------------
Effect of exchange rate changes on cash 68,597 17,261
----------------------- -----------------------
Net increase (decrease) in cash (746,860) 167,198
Cash at beginning of year 1,850,779 1,016,426
----------------------- -----------------------
Cash at end of period $ 1,103,919 $ 1,183,624
======================= =======================
</TABLE>
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
various factors including historical percentages and price increases. Year end
inventory adjustments are based upon valuation of ending inventory. Inventory
components are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------------------- ----------------------
<S> <C> <C>
Finished Goods $ 12,191,970 $ 13,437,781
Work in process 28,469,094 28,980,250
Raw material and supplies 4,365,878 1,996,536
-------------------------- ----------------------
$ 45,026,942 $ 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 342,898 and 477,495
shares for the three months ended March 31, 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.
During 1997, the Company declared a three-for-two stock split effected in the
form of dividends. All references in the consolidated financial statements to
number of shares, per share amounts, stock option data and market prices of the
Company's common stock have been restated to give effect to the stock split.
6
<PAGE>
4. Comprehensive Income
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 the 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
March 31, 1998 March 31, 1997
--------------------- ------------------
<S> <C> <C>
Net Earnings $ 2,125,628 $ 1,790,132
Foreign currency translation loss (470) (41,298)
--------------------- ------------------
Comprehensive income $ 2,125,158 $ 1,748,834
===================== ==================
</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 March 31, 1998 and 1997
Net sales for the quarter ended March 31, 1998 were $36.3 million, a 19.5%
increase over net sales in the first quarter of 1997. The increase reflects
strong sales results in North America, Latin America and Europe, as well as the
inclusion of Lancer's subsidiary in New Zealand, which was acquired in the
second quarter of 1997. Sales to customers outside the United States were 51.0%
of net sales in the first quarter of 1998, compared to 45.1% of net sales in the
same period last year.
Gross margin in the first quarter of 1998 was 26.0%, up from 25.2% in the first
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 $5.0 million during the
quarter ended March 31, 1998, an increase of $0.8 million, or 18.4%, from the
same period of 1997. Expenses rose in support of the higher level of sales, and
because of the inclusion of Lancer's new operations in New Zealand and Belgium.
Interest expense was $0.9 million in the first quarter of 1998, up from $0.5
million in the same period last year. The increased interest expense was caused
by higher borrowings related to capital spending, acquisitions, and increases in
current assets during the past year. Lancer's first quarter effective tax rate
decreased to 36.5% in 1998 from 38.5% in 1997. The improvement in 1998 was due
to the absence of nondeductible losses from certain of the Company's foreign
subsidiaries. Net earnings for the 1998 quarter were $2.1 million, up from $1.8
million in the first quarter of 1997.
7
<PAGE>
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 in operating activities was $0.3 million in the three months ended
March 31, 1998, compared to $1.4 million of cash provided by operating
activities in the same period of 1997. Capital spending was $1.7 million in the
first quarter of 1998. During the quarter, Lancer completed construction of a
32,000 square foot office addition to its primary facility in San Antonio. The
Company funded the capital expenditures and the cash used in operations with
borrowings under its credit facilities.
Accounting Matters
The Company maintains a 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. 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. See 1997 10-K.
The Internal Revenue Service is examining the Company's U.S. income tax return
for 1995. Management does not believe that any significant adjustments will be
required.
Year 2000
In 1997, Lancer implemented a BaaN ERP manufacturing system which is year 2000
compliant. The Company is also working with its vendors and processing banks to
ensure that their systems are year 2000 compliant. The Company does not expect
to incur any additional material expenses relating to year 2000 compliance.
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 5 - Other Information
John P. Herbots resigned as the Company's Chief Financial Officer effective
April 17, 1998. The Company has not named a successor.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
8
<PAGE>
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)
May 13, 1998 By: /s/ George F. Schroeder
George F. Schroeder
President and CEO
May 13, 1998 By: /s/ Christi A. Rohmer
Christi A. Rohmer
Controller
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Balance Sheets and Consolidated Statements of Income found on
pages 2 to 4 of the Company's 10-Q, and qualified in its entirety by
reference to such fiancial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,104
<SECURITIES> 0
<RECEIVABLES> 29,903
<ALLOWANCES> 335
<INVENTORY> 45,027
<CURRENT-ASSETS> 75,971
<PP&E> 55,800
<DEPRECIATION> 22,937
<TOTAL-ASSETS> 118,121
<CURRENT-LIABILITIES> 47,959
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 118,032
<TOTAL-LIABILITY-AND-EQUITY> 118,121
<SALES> 36,320
<TOTAL-REVENUES> 36,147
<CGS> 28,871
<TOTAL-COSTS> 30,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 932
<INCOME-PRETAX> 3,345
<INCOME-TAX> 1,220
<INCOME-CONTINUING> 2,126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,126
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
