<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 3, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number 0-10181
ELJER INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2270874
- - ------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
17120 Dallas Parkway, Dallas, Texas 75248
- - ------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 407-2600
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.
Yes X No
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At May 3, 1994 there were 7,122,326 shares of registrant's common stock
outstanding.
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ELJER INDUSTRIES, INC.
FORM 10-Q
APRIL 3, 1994
INDEX
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income for the three months
ended April 3, 1994 and April 4, 1993
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Unaudited Condensed Financial Statements
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
ITEM 2--CHANGES IN SECURITIES
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5--OTHER INFORMATION
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three Months Ended
April April
3, 1994 4, 1993
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<S> <C> <C>
NET SALES $90,875 $95,648
COST OF SALES 66,607 69,618
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GROSS PROFIT 24,268 26,030
SELLING & ADMINISTRATIVE EXPENSES 19,910 19,208
LITIGATION COSTS 1,360 1,945
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INCOME FROM OPERATIONS 2,998 4,877
OTHER EXPENSE, net 325 400
INTEREST INCOME 376 522
INTEREST EXPENSE 3,453 3,754
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INCOME (LOSS) BEFORE INCOME TAXES (404) 1,245
INCOME TAXES (764) 371
------- -------
NET INCOME $ 360 $ 874
======= =======
NET INCOME PER SHARE $ 0.05 $ 0.12
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,100 7,073
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
April January
A S S E T S 3, 1994 2, 1994
----------- ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash & temporary cash investments $ 15,748 $ 23,439
Restricted cash 15,765 15,966
Trade accounts receivable, net
of reserves of $8,747 and $8,890 49,615 49,995
Insurance receivable 6,909 6,621
Inventories 61,704 59,548
Other current assets 8,290 7,202
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Total current assets 158,031 162,771
PROPERTIES & EQUIPMENT, net of
accumulated depreciation of
$96,539 and $94,793 57,266 58,015
COST IN EXCESS OF NET TANGIBLE
ASSETS ACQUIRED, net 11,702 11,879
OTHER ASSETS 2,624 2,758
-------- --------
$229,623 $235,423
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
April January
LIABILITIES AND SHAREHOLDERS' EQUITY 3, 1994 2, 1994
------------------------------------ ----------- -------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt $ 20,885 $ 18,430
Trade accounts payable 13,971 18,933
Accrued contingencies covered by insurance 6,909 6,621
Accrued expenses 60,220 63,687
-------- --------
Total current liabilities 101,985 107,671
LONG-TERM DEBT 103,095 103,114
POSTRETIREMENT BENEFITS 40,972 40,743
OTHER LIABILITIES 13,185 13,144
DEFERRED INCOME TAXES 847 871
-------- --------
Total liabilities 260,084 265,543
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par value,
50,000,000 shares authorized;
7,107,326 and 7,092,326 shares
outstanding 7,186 7,186
Additional capital 78,801 78,700
Accumulated deficit (106,886) (107,246)
Foreign currency translation adjustments (9,483) (8,666)
Treasury stock (79) (94)
-------- --------
Total shareholders' equity (deficit) (30,461) (30,120)
-------- --------
$229,623 $235,423
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months Ended
April April
3, 1994 4, 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 360 $ 874
Adjustments to reconcile net
income to net cash used in
perating activities-
Depreciation and amortization 2,476 2,777
Stock issued as compensation 116 67
Change in assets and liabilities-
Trade accounts receivable (1,184) (1,846)
Inventories (2,190) (842)
Trade accounts payable and
accrued expenses (7,234) (6,278)
Accrued litigation - Kowin
Development (89) (12,871)
Postretirement benefits 229 841
Other assets (1,042) (354)
Other, net 525 357
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Net cash used in operating activities (8,033) (17,275)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment (1,714) (1,903)
Proceeds from disposition of properties
and equipment 16 79
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Net cash used in investing activities (1,698) (1,824)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 8,413 (1,116)
Decrease in long-term debt (6,012) (11)
Collateralization of letters of credit -- (1,450)
Taxes paid on dividends from foreign
subsidiaries -- (3,974)
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Net cash provided by (used in)
financing activities 2,401 (6,551)
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EFFECTS OF EXCHANGE RATES ON CASH (361) (100)
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NET DECREASE IN CASH & TEMPORARY
CASH INVESTMENTS (7,691) (25,750)
CASH & TEMPORARY CASH INVESTMENTS,
BEGINNING OF PERIOD 23,439 46,808
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CASH & TEMPORARY CASH INVESTMENTS,
END OF PERIOD $15,748 $21,058
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
Eljer Industries, Inc. and its wholly-owned subsidiaries (the "Company") of
after the elimination of intercompany transactions and balances.
Accounting policies used in the preparation of the quarterly condensed
consolidated financial statements, except as indicated below, are consistent in
all material respects with the accounting policies described in the notes to
financial statements appearing in the Company's Annual Report on Form 10-K for
the year ended January 2, 1994. In the opinion of management, the interim
financial statements reflect all adjustments which are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the interim periods presented. The results for such interim periods
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial statements
included in the aforementioned Form 10-K.
During the first quarter of 1994, the Company adopted the provisions of
Financial Accounting Standards Board Interpretation No. 39 ("FIN 39"). FIN 39
requires the Company to present separately in its balance sheet its contingent
liabilities which can be estimated and the related recoverable assets.
Accordingly, the accompanying condensed balance sheet as of January 2, 1994, and
condensed statement of cash flows for the year ended January 2, 1994, have been
reclassified to conform to the 1994 presentation.
Certain other reclassifications have also been made to the prior year
financial statements to conform to the 1994 presentation.
(2) INVENTORIES:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
April January
3, 1994 2, 1994
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<S> <C> <C>
Finished goods $36,529 $33,572
Work in process 8,121 8,529
Raw materials 17,054 17,447
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Total inventories $61,704 $59,548
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</TABLE>
<PAGE>
(3) CONTINGENCIES:
The Company and certain of its subsidiaries are involved in litigation
related to the Qest polybutylene plumbing systems (the "Qest system"),
environmental matters, Kowin Development Corporation ("Kowin Development"),
shareholder suits and other matters which, if determined adversely to the
Company, may have a material adverse effect on its financial condition or
results of operations. Reference is made to Note (13) "Contingencies" to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended January 2, 1994, which is incorporated herein.
(4) INCOME TAXES:
The Company's income tax benefit is a result of European and Canadian
pretax losses in 1994 and the Company's ability to utilize deferred tax benefits
in the United States. See Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
ELJER INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales decreased by approximately $4.8 million to $90.9 million for the
three-month period ended April 3, 1994, compared to the three-month period ended
April 4, 1993, a 5.0% decrease. The sales decrease resulted primarily from
declines in European sales of commercial, industrial and residential chimneys
and gas vents due to the deterioration in the European economy, particularly in
Germany. In addition, 1993 first quarter sales included approximately $1
million of sales generated at the Company's fiberglass plant, which was sold in
the third quarter of 1993.
Gross profit margin decreased to 26.7% for the three-month period ended
April 3, 1994, from 27.2% for the comparable 1993 period. The rise in margins
for the Company's plumbing products, due to increased volume, improved product
mix and production efficiencies, was more than offset by the reduced level of
sales of higher margin European products.
Total selling and administrative expenses through April 3, 1994, were
approximately $702,000 higher for the three-month period then ended, as compared
to the 1993 level. The increase resulted primarily from increased research,
development and other selling costs related to the implementation of new
plumbing products in North America. Litigation costs were approximately
$585,000 lower in the first quarter of 1994 compared to 1993.
Other expense, net was relatively stable, decreasing only $75,000 in the
first three months of 1994 as compared to 1993. Interest expense in the first
three months of 1994 declined approximately $301,000 over the same period in
1993. This decrease is primarily due to lower borrowing levels related to
financing agreements at two of the Company's indirect wholly-owned subsidiaries
during the first quarter of 1994 as compared to 1993.
Income tax expense was reduced from $371,000 for the first three months of
1993 to a benefit of $764,000 for the same period in 1994 due to European and
Canadian pretax losses in the 1994 quarter, and the Company's ability to utilize
deferred tax benefits in the United States.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The net cash used in operating activities of $8.0 million for the three
months ended April 3, 1994, was $9.2 million less than the net cash used in
operating activities for the comparable 1993 period. The cash usage in 1993
included a deposit of approximately $12.6 million in lieu of an appeal bond for
the previously disclosed Kowin Development litigation, in addition to other
costs and fees associated with this lawsuit. The cash usage in the first
quarters of 1994 and 1993 included payments previously accrued of approximately
$4.2 million and $4.0 million, respectively, to customers under purchase
incentive programs.
Capital expenditures for the first three months of 1994 were $1.7 million,
primarily for the replacement and improvement of capital equipment at various
locations.
The Company experienced an increase in short-term borrowings during the
first quarter of 1994 related mainly to revolving debt at the Company's
indirect, wholly-owned subsidiary, United States Brass Corporation
("U.S. Brass") and the Company's Selkirk subsidiaries in Europe. The Company
reduced its long-term borrowings by $6.0 million due to the principal repayment
required under the First Amendment to Amended and Restated Credit Agreement
(the "Amendment") as discussed in the Company's Annual Report on Form 10-K for
the year ended January 2, 1994. Under the terms of the Amendment, $2.0 million,
$4.0 million and $11.0 million principal payments are scheduled for October
5, 1994, December 30, 1994 and December 29, 1995, respectively, with the balance
becoming due at the April 30, 1996 maturity date. The Company will be working
toward some manner of debt restructuring prior to the maturity of the Amendment
in April 1996. Neither the Company nor any of it subsidiaries has any
commitment with respect to restructurings or other sources of financing and
there can be no assurance that any such commitments can be obtained prior to the
maturity of the Amendment.
In connection with the Amendment, the maturity date related to the
accounts receivable sale program was accelerated to September 30, 1994. The
Company is currently having discussions with other potential lenders to replace
this facility and, while there can be no assurance in this regard, anticipates
it will be successful. The structure of a new facility may be different than
the current program.
As previously disclosed in the Company's Form 10-K for the year ended
January 2, 1994, on February 4, 1994, Shell Chemical Company and Celanese
Specialty Resins, a unit of Hoechst Celanese Corporation ("Celanese") notified
U.S. Brass that they believe they have made expenditures on behalf of U.S. Brass
totaling approximately $35.3 million in claims settlements and related
administrative costs of the toll free telephone service operated by them to
handle calls from homeowners who have Qest systems which have experienced
failures. However, insufficient information supporting this amount has been
provided to U.S. Brass, and when and if sufficient information is ultimately
provided, U.S. Brass believes that it has grounds to seek substantial reductions
in any such amount or to avoid any liability for such demands. U.S. Brass is
unable to estimate the potential liability, if any, for which it may ultimately
be responsible. Any such liability should be covered by its general liability
insurance. See also "Legal Proceedings" in Part II -- Other Information, Item 1
in this Report and Note (13) to the Company's Consolidated Financial Statements
in the Company's Annual Report on Form 10-K for the year ended January 2, 1994.
The Company believes that if it continues to be exposed to protracted
litigation or suffers adverse court verdicts in Qest system lawsuits discussed
in "Legal Proceeings" below, including the possibility of punitive damage awards
for which insurance coverage may not be available, and if the Company does not
receive complete and timely reimbursement from its excess insurance carriers, or
obtain interim funding arrangements from its insurers, payments of such
litigation costs may materially and adversely affect its liquidity.
Although the Company continues to believe that the Qest system
liabilities are substantially covered by insurance, it is also exploring other
means of resolving the polybutylene-related liabilities. It is continuing to
press its suit against its former parent company, Household International, Inc.
("Household"), and is seeking to hold Household responsible for a portion of
these liabilities, in addition to other damages. Further, the Company is
exploring other options including the reorganization of U.S. Brass under federal
bankruptcy laws. Such a proceeding could provide a means of maximizing the
return to creditors of U.S. Brass and systematically resolving the issues raised
in the polybutylene-related litigation. Under the terms of the Amendment
(discussed above), the filing of such a proceeding no longer constitutes an
event of default under the Credit Agreement. See Notes (13) and (14) to the
Consolidated Financial Statements of the Company in the Company's Annual Report
on Form 10-K for the year ended January 2, 1994.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note (13) "Contingencies" and Note (14) "Relationship with Household"
to the Consolidated Financial Statements of the Company in the Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 1994, as filed with
the Securities and Exchange Commission, which are made a part hereof by this
reference.
U.S. Brass is a defendant together, in some cases with the Company,
Household, Eljer Manufacturing, Inc. ("Eljer Manufacturing") and Qest Products
Inc., in a number of lawsuits filed by homeowners, homeowner associations,
developers, builders and plumbing contractors which involve the Qest
polybutylene plumbing system manufactured and sold by U.S. Brass or a
predecessor company. As of March 31, 1994, 108 lawsuits involving approximately
30,000 residential claims remain pending, not including purported class members
in Arizona, California and Nevada.
On May 16, 1994, the Company announced that Shell Oil Company ("Shell")
had filed suit in New Jersey state court against Household, the Company, Eljer
Manufacturing and U.S. Brass alleging that U.S. Brass breached its obligations
under a sharing agreement with Shell for handling Qest system claims and
liabilities. This suit also alleges that Household intentionally stripped the
Company and U.S. Brass of assets in connection with the spin-off of the Company
by Household in 1989 and thereby rendered U.S. Brass incapable of meeting its
obligations under the sharing agreement. Shell asserts claims of breach of
contract, fraud, negligent misrepresentation, contribution and indemnity and
alter-ego claims. In addition, Shell seeks compensator and punitive damages
and a declaration that Household, the Company and Eljer Manufacturing are
liable for all obligations of U.S. Brass to Shell. As previously reported, a
similar action against Household, Eljer Manufacturing and U.S. Brass was filed
in December, 1993 by Celanese in the same court. Shell, Celanese, the Company
and its subsidiaries are defendants in a number of lawsuits filed by homeowners,
developers, builders and plumbing contractors which involve the Qest system
manufactured and sold by U.S. Brass. In defending these actions, the defendants
are also litigating their respective responsibility and liability for the
alleged defects in the plumbing system.
As previously reported, the Company is involved in a number of insurance
coverage lawsuits presently pending in federal and state courts with respect to
the polybutylene plumbing litigation. The Company filed suit in July 1993 in
federal court in Illinois against 18 insurance companies seeking declaratory
relief that each of the defendants is obligated to defend and indemnify the
Company and its subsidiaries, Eljer Manufacturing and U.S. Brass, for lawsuits
arising from the installation and use of polybutylene plumbing systems
manufactured and sold by U.S. Brass. The Company also seeks monetary damages
from the insurance companies for failing to defend and indemnify the Company and
its subsidiaries in the polybutylene plumbing system cases. A number of
insurers have moved to dismiss the Company's suit or to refer the matter to the
Illinois state court.
On May 16, 1994, the Company reported that the federal magistrate judge
has recommended to the federal district judge that the Company's suit be
dismissed on jurisdictional grounds. The magistrate judge, without considering
the merits, concluded that insurance carriers not named in the suit are
indispensable parties, and that if added to the suit, federal court jurisdiction
based on diversity would not exist. The Company disagrees with the magistrate
judge's recommendation and is considering the various responses which are
available to it.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 7, 1994, related to the
announcement that Celanese filed suit in the Superior Court of New
Jersey against Household, the former parent of the Company, Eljer
Manufacturing and U.S. Brass.
A report on Form 8-K was filed on February 11, 1994, related to the
announcement that the federal appeals court in Chicago had affirmed
substantially all of a previously-announced arbitration award in
favor of Kowin Development and against Eljer Manufacturing.
A report on Form 8-K was filed on March 25, 1994, related to the
March 14, 1994, announcement of an agreement in principle to settle
the class action securities litigation against the Company and
certain present and former members of the Board of Directors pending
in a federal court in Texas.
Subsequent Reports on Form 8-K
None
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SIGNATURES:
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELJER INDUSTRIES, INC.
Date May 17, 1994 By /s/ Henry W. Lehnerer
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Henry W. Lehnerer
Vice President -
Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
