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, 1999 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 7, 1999
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
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
----------------- -----------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash $ 1,686,919 $ 1,118,848
Receivables:
Trade accounts and notes 19,795,534 20,866,928
Other 609,216 565,254
----------------- -----------------
20,404,750 21,432,182
Less allowance for doubtful accounts (298,000) (326,000)
----------------- -----------------
Net receivables 20,106,750 21,106,182
----------------- -----------------
Inventories 47,733,926 46,128,697
Prepaid expenses 580,151 559,472
Income taxes receivable - 211,760
Deferred tax asset 121,339 117,241
----------------- -----------------
Total current assets 70,229,085 69,242,200
----------------- -----------------
Property, plant and equipment, at cost:
Land 1,259,938 1,259,938
Buildings 21,867,166 21,769,690
Machinery and equipment 19,363,914 19,699,040
Tools and dies 7,221,467 7,017,936
Leaseholds, office equipment and vehicles 8,187,760 8,148,299
Assets in progress 1,752,686 1,200,506
----------------- -----------------
59,652,931 59,095,409
Less accumulated depreciation and amortization (25,256,443) (24,596,773)
----------------- -----------------
Net property, plant and equipment 34,396,488 34,498,636
----------------- -----------------
Long-term receivables ($371,370 and $370,569 due
from affiliates, respectively) 628,480 619,800
Long-term investments 3,933,730 3,317,131
Intangibles and other assets, at cost, less
accumulated amortization 4,459,143 5,162,200
----------------- -----------------
$ 113,646,926 $ 112,839,967
================= =================
</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,
1999 1998
------------------- -------------------
(Unaudited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 13,368,606 $ 8,854,438
Current installments of long-term debt 3,997,200 4,794,400
Line of credit with bank 20,000,000 22,300,000
Deferred licensing and maintenance fees 608,601 466,327
Accrued expenses and other liabilities 4,836,177 5,528,425
Income taxes payable 577,301 -
------------------- -------------------
Total current liabilities 43,387,885 41,943,590
Deferred tax liability 3,101,121 2,938,628
Long-term debt, excluding current installments 16,768,150 17,568,150
Deferred licensing and maintenance fees 1,903,277 2,131,624
------------------- -------------------
Total liabilities 65,160,433 64,581,992
------------------- -------------------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, $.01 par value:
50,000,000 shares authorized; 9,121,482
issued and outstanding 91,215 91,215
Additional paid-in capital 11,912,993 11,912,993
Accumulated other comprehensive loss (3,805,191) (2,581,558)
Retained earnings 40,287,476 38,835,325
------------------- -------------------
Total shareholders' equity 48,486,493 48,257,975
------------------- -------------------
$ 113,646,926 $ 112,839,967
=================== ===================
</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,
1999 1998
-------------------- -------------------
<S> <C> <C>
Net sales $ 36,227,944 $ 36,192,255
Cost of sales 27,700,597 26,849,615
-------------------- -------------------
Gross profit 8,527,347 9,342,640
Selling, general and
administrative expenses 5,193,180 4,997,909
-------------------- -------------------
Operating income 3,334,167 4,344,731
-------------------- -------------------
Other (income) expense:
Interest expense 907,952 932,033
Other (income) expense, net (81,935) 67,341
-------------------- -------------------
826,017 999,374
-------------------- -------------------
Income before income taxes 2,508,150 3,345,357
-------------------- -------------------
Income tax expense:
Current 952,506 941,496
Deferred 103,493 278,233
-------------------- -------------------
1,055,999 1,219,729
-------------------- -------------------
Net earnings $ 1,452,151 $ 2,125,628
==================== ===================
Common Shares and Equivalents Outstanding:
Basic 9,121,482 8,910,029
Diluted 9,344,485 9,252,927
Earnings Per Share:
Basic $ 0.16 $ 0.24
Diluted $ 0.16 $ 0.23
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
---------------------- ----------------------
Cash flow from operating activities:
<S> <C> <C>
Net earnings $ 1,452,151 $ 2,125,628
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities :
Depreciation and amortization 939,956 791,135
Deferred licensing and maintenance fees (86,073) (273,690)
Deferred income taxes (20,827) (6,227)
Gain on sale and disposal of assets (8,904) 13,327
(Earnings) loss on investments in affiliates (459,825) (7,035)
Changes in assets and liabilities:
Receivables 755,541 (6,905,595)
Prepaid expenses (20,679) 133,826
Income taxes receivable 211,760 -
Inventories (1,986,132) (654,305)
Other assets (186,249) 32,485
Accounts payable 4,591,565 3,042,906
Accrued expenses (444,554) 37,141
Income taxes payable 694,658 1,033,339
Other long-term liabilities - 272,233
---------------------- ----------------------
Net cash provided (used) by operating activities 5,432,388 (364,832)
---------------------- ----------------------
Cash flow from investing activities:
Proceeds from sale of assets 11,610 -
Acquisition of property, plant and equipment (1,042,252) (1,729,727)
Proceeds from sale of long-term investments 16,226 34,571
---------------------- ----------------------
Net cash used in investing activities (1,014,416) (1,695,156)
---------------------- ----------------------
Cash flow from financing activities:
Net borrowings (retirement) under line of credit agreements (2,300,000) 2,500,000
Retirement of long-term debt (1,597,200) (1,347,200)
Proceeds from exercise of stock options - 91,731
---------------------- ----------------------
Net cash provided (used) by financing activities (3,897,200) 1,244,531
---------------------- ----------------------
Effect of exchange rate changes on cash 47,299 68,597
---------------------- ----------------------
Net increase (decrease) in cash 568,071 (746,860)
Cash at beginning of year 1,118,848 1,850,779
---------------------- ----------------------
Cash at end of period $ 1,686,919 $ 1,103,919
====================== ======================
</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, 1998 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 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Raw material and supplies $ 17,241 $ 13,107
Work in process 13,365 11,371
Finished Goods 17,128 21,651
--------------- ----------------
$ 47,734 $ 46,129
=============== ================
</TABLE>
3. Earnings Per Share
The Company calculates earnings per share in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 128. 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 223,003 and 342,898
shares for the three months ended March 31, 1999 and 1998, respectively.
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.
6
<PAGE>
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
------------------- --------------------
<S> <C> <C>
Net earnings $ 1,452,151 $ 2,125,628
Foreign currency translation loss (1,337,633) (470)
Unrealized gain on investment (net of tax) 114,000 -
------------------- --------------------
Comprehensive income $ 228,518 $ 2,125,158
=================== ====================
</TABLE>
Accumulated other comprehensive loss on the accompanying Consolidated Balance
Sheets includes foreign currency translation adjustments and unrealized gain on
investment.
5. Segment and Geographic Information
The Company and its subsidiaries are engaged in the manufacture and distribution
of beverage dispensing equipment and related parts and components. The Company's
reportable segments are based on the geographic area of the final customer as
indicated by the following (dollars in thousands):
<TABLE>
<CAPTION>
Latin All
Domestic America Pacific Brazil Other Corporate Total
------------------------------------------------------------------------
Quarter ended March 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $23,203 3,810 3,273 345 5,597 - $36,228
Operating income (loss) 4,844 417 303 (403) 1,038 (2,865) 3,334
Quarter ended March 31, 1998
Total revenues $17,772 6,442 3,639 2,189 6,150 - $36,192
Operating income (loss) 4,076 1,382 421 109 1,197 (2,840) 4,345
</TABLE>
All intercompany revenues are eliminated in computing revenues and operating
income. The corporate component of operating income represents corporate general
and administrative expenses.
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.
7
<PAGE>
Results of Operations
Comparison of the Three-Month Periods Ended March 31, 1999 and 1998
Net sales for the quarter ended March 31, 1999 were $36.2 million, up slightly
from net sales in the first quarter of 1998. Sales in the Company's North
America region rose 31%, led by strong sales of frozen beverage dispensers.
Latin America sales (excluding sales by the Company's Brazilian subsidiary)
declined 41% from sales in the first quarter last year. Sales in Brazil fell 84%
in the quarter. These sales declines reflect the poor economic conditions in
Brazil and several other key markets in South and Central America.
Gross margin in the first quarter of 1999 was 23.5%, compared to 25.8% in the
first quarter of 1998. Increased sales of frozen beverage dispensers contributed
to the decline in gross margin. The Company earns a lower gross margin on sales
of frozen beverage dispensers because the manufacturing profit on the equipment
is shared with a joint venture partner. The poor financial performance of the
Company's Brazilian subsidiary further reduced gross margin.
Selling, general and administrative expenses for the quarter ended March 31,
1999 were $5.2 million, up 4% from $5.0 million in the first quarter last year.
The Company is managing expenses carefully in response to weak conditions in
many of its markets.
Interest expense for the first quarter of 1999 was $0.9 million, down slightly
from the 1998 quarter because of lower debt levels. The Company's first quarter
effective tax rate increased to 42.1% in 1999 from 36.5% in 1998. The increased
rate was caused primarily by the nondeductibility of losses at the Company's
Brazilian subsidiary. Net earnings for the first three months of 1999 were $1.5
million, down from $2.1 million in the first quarter 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. The Company is in compliance with, or has obtained waivers
of, the financial covenants contained in the credit agreement that governs the
Company's primary credit facilities.
Cash provided from operating activities was $5.4 million in the first quarter of
1999, compared with $0.3 million of cash used by operating activities in the
1998 quarter. Capital spending was $1.0 million, primarily for production
tooling and equipment.
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 1998 Form 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.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. Adoption of this SOP during the
three months ended March 31, 1999 has not had a material effect on the
consolidated financial statements of the Company.
8
<PAGE>
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 has completed substantially all of the Assessment Phase.
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 June 30, 1999 and medium-priority non-compliant systems
by September 30, 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 1998, accounting for 23% 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 has replaced a non-compliant payroll system, and expects to have
upgraded or replaced its non-compliant timekeeping system by June 30, 1999. As
of March 31, 1999, the Company has committed more than half of the $200,000 it
expects to spend 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the Company's market risk factors
since December 31, 1998.
9
<PAGE>
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
None
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)
May 14, 1999 By: /s/ George F. Schroeder
--------------------------------------
George F. Schroeder
President and CEO
May 14, 1999 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
Consolidated Balance Sheet and Consolidated Statements of Income found on
pages 2 to 4 of the Company's 10Q, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,687
<SECURITIES> 0
<RECEIVABLES> 20,405
<ALLOWANCES> 298
<INVENTORY> 47,734
<CURRENT-ASSETS> 70,229
<PP&E> 59,653
<DEPRECIATION> 25,256
<TOTAL-ASSETS> 113,647
<CURRENT-LIABILITIES> 43,388
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 48,395
<TOTAL-LIABILITY-AND-EQUITY> 113,647
<SALES> 36,228
<TOTAL-REVENUES> 36,310
<CGS> 27,701
<TOTAL-COSTS> 32,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 907
<INCOME-PRETAX> 2,508
<INCOME-TAX> 1,056
<INCOME-CONTINUING> 1,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,452
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
