FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
--- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-X- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
OR
--- 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.
(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 _____
At August 9, 1996 there were 7,153,407 shares of registrant's common stock
outstanding.
<PAGE>
ELJER INDUSTRIES, INC.
FORM 10-Q
June 30, 1996
INDEX
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income for the six months
ended June 30, 1996 and July 2, 1995
Condensed Consolidated Statements of Income for the three
months ended June 30, 1996 and July 2, 1995
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Unaudited Condensed Consolidated 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
1
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months Ended
June July
30, 1996 2, 1995
--------- ---------
<S> <C> <C>
NET SALES .......................................... $ 186,397 $ 191,471
COST OF SALES ...................................... 139,986 145,263
--------- ---------
GROSS PROFIT ....................................... 46,411 46,208
SELLING & ADMINISTRATIVE EXPENSES .................. 37,629 38,419
LITIGATION COSTS (SETTLEMENTS), net ................ (3,167) 4,493
UNUSUAL ITEM - U.S. BRASS BANKRUPTCY ADJUSTMENT .... 852 (2,242)
--------- ---------
INCOME FROM OPERATIONS ............................. 11,097 5,538
OTHER EXPENSE, net ................................. 232 931
INTEREST INCOME .................................... (706) (994)
INTEREST EXPENSE ................................... 6,669 7,659
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES .................. 4,902 (2,058)
INCOME TAX EXPENSE ................................. 1,964 30
--------- ---------
NET INCOME (LOSS) .................................. $ 2,938 $ (2,088)
========= =========
NET INCOME (LOSS) PER SHARE ........................ $ 0.41 $ (0.29)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES ........... 7,205 7,130
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended
June July
30, 1996 2, 1995
-------- --------
<S> <C> <C>
NET SALES .......................................... $ 92,983 $ 92,416
COST OF SALES ...................................... 68,216 69,606
-------- --------
GROSS PROFIT ....................................... 24,767 22,810
SELLING & ADMINISTRATIVE EXPENSES .................. 19,138 18,938
LITIGATION COSTS (SETTLEMENTS), net ................ (4,555) 1,834
UNUSUAL ITEM - U.S. BRASS BANKRUPTCY ADJUSTMENT .... 1,200 (1,076)
-------- --------
INCOME FROM OPERATIONS ............................. 8,984 3,114
OTHER EXPENSE, net ................................. 68 827
INTEREST INCOME .................................... (353) (417)
INTEREST EXPENSE ................................... 3,235 3,953
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES .................. 6,034 (1,249)
INCOME TAX EXPENSE (BENEFIT) ....................... 2,149 (43)
-------- --------
NET INCOME (LOSS) .................................. $ 3,885 $ (1,206)
======== ========
NET INCOME (LOSS) PER SHARE ........................ $ 0.54 $ (0.17)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES ........... 7,225 7,130
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June December
A S S E T S 30, 1996 31, 1995
----------- --------- --------
(Unaudited)
CURRENT ASSETS:
Cash & temporary cash investments ......... $ 9,627 $ 22,957
Restricted cash ........................... 14,050 13,777
Trade accounts receivable, net of
reserves of $7,773 and $6,908 .......... 63,858 69,038
Inventories ............................... 64,258 64,565
Other current assets ...................... 4,390 4,344
-------- --------
Total current assets ................... 156,183 174,681
PROPERTIES & EQUIPMENT, net of accumulated
depreciation of $112,430 and $108,777 .............. 61,711 64,283
COST IN EXCESS OF NET TANGIBLE ASSETS
ACQUIRED, net ...................................... 10,656 10,874
OTHER RESTRICTED CASH ................................ 5,582 --
OTHER ASSETS ......................................... 2,578 2,449
-------- --------
$236,710 $252,287
======== ========
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June December
LIABILITIES AND SHAREHOLDERS' EQUITY 30, 1996 31, 1995
- ------------------------------------ ------------- -----------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Short-term debt and current maturities
of long-term debt ....................................... $ 26,239 $ 35,907
Trade accounts payable .................................... 14,640 17,112
Prepetition liabilities subject to compromise ............. 31,997 31,209
Accrued expenses .......................................... 66,303 49,965
Long-term debt subject to restructure ..................... 53,344 --
--------- ---------
Total current liabilities ............................. 192,523 134,193
LONG-TERM DEBT ................................................. 12,218 85,024
POSTRETIREMENT BENEFITS ........................................ 37,921 39,409
OTHER LIABILITIES .............................................. 24,541 26,499
DEFERRED INCOME TAXES .......................................... 1,615 1,620
--------- ---------
Total liabilities ..................................... 268,818 286,745
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par value,
50,000,000 shares authorized;
7,153,407 and 7,136,652 shares outstanding ............ 7,186 7,186
Additional capital ........................................ 79,123 78,965
Accumulated deficit ....................................... (111,643) (114,581)
Foreign currency translation adjustments .................. (6,731) (5,978)
Treasury stock ............................................ (43) (50)
--------- ---------
Total shareholders' equity (deficit) .............. (32,108) (34,458)
--------- ---------
$ 236,710 $ 252,287
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June July
30, 1996 2, 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 2,938 $ (2,088)
Adjustments to reconcile net income (loss) to net
cash used in operating activities-
Depreciation and amortization 4,596 4,870
Loss on disposition of fixed ssets 205 74
Changes in assets and liabilities-
Trade accounts receivable 4,976 (2,516)
Inventories (68) (4,876)
Trade accounts payable and accrued
expenses 14,603 (8,200)
Other assets 639 (400)
Other, net (3,747) (1,863)
-------- --------
Net cash provided by (used in) operating activities 24,142 (14,999)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment (2,052) (7,899)
Proceeds from disposition of properties
and equipment 90 241
-------- --------
Net cash used in investing activities (1,962) (7,658)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt (2,610) 3,127
Repayment of long-term debt (26,280) (778)
(Increase) decrease in restricted cash (6,504) 200
-------- --------
Net cash provided by (used in) financing activities (35,394) 2,549
-------- --------
EFFECTS OF EXCHANGE RATES ON CASH (116) 545
-------- --------
NET DECREASE IN CASH & TEMPORARY
CASH INVESTMENTS (13,330) (19,563)
CASH & TEMPORARY CASH INVESTMENTS,
BEGINNING OF PERIOD 22,957 26,109
-------- --------
CASH & TEMPORARY CASH INVESTMENTS, $ 9,627 $ 6,546
END OF PERIOD ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<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. ("Eljer Industries") and its wholly-owned subsidiaries
(collectively, the "Company") after the elimination of intercompany transactions
and balances.
Accounting policies used in the preparation of the quarterly condensed
consolidated financial statements 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 December 31,
1995, as filed with the Securities and Exchange Commission (the "Company's 1995
Form 10-K"). 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 neces
sarily 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
Company's 1995 Form 10-K.
Certain reclassifications have been made to the prior year financial
statements to conform to the 1996 presentation.
(2) HOUSEHOLD SETTLEMENT:
On May 31, 1996, Eljer Industries and Eljer Manufacturing, Inc. ("Eljer
Manufacturing") settled the pending litigation with their former parent
Household International, Inc. ("Household"). Under the terms of the settlement,
Household paid approximately $27.2 million, which includes settlement of
counterclaims that Household had against the Company. From the settlement
proceeds, the Company paid legal fees of $2.7 million and received $24.5
million.
As part of the tentative settlement reached in connection with the
Cox-Spencer cases discussed in Note (3) below, the Company expects to pay $14.4
million, or 75% of the net Household settlement proceeds after all legal fees
and expenses, into a trust to be created as part of a U.S. Brass reorganization
plan. The net favorable impact of $10.1 million includes a $5.3 million
recoupment of past legal fees and expenses, and is reflected in litigation costs
(settlements), net on the condensed consolidated statements of income.
(3) BANKRUPTCY OF UNITED STATES BRASS CORPORATION:
On May 23, 1994, (the "Petition Date") Eljer Industries' indirect,
wholly-owned subsidiary, United States Brass Corporation ("U.S. Brass") filed a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
Eastern District of Texas (the "Bankruptcy Court"). The purpose of the filing is
to resolve systematically the issues resulting from the Qest polybutylene
plumbing systems (the "Qest polybutylene system") and related litigation and to
seek confirmation of a plan of reorganization ("Plan") which, among other
things, provides for the payment, satisfaction and discharge of all claims
against U.S. Brass involving the Qest polybutylene system. U.S. Brass is
conducting its business and managing its properties as a debtor-in-possession
under Section 1108 of the Bankruptcy Code subject to the supervision and orders
of the Bankruptcy Court. See the Company's 1995 Form 10-K for a discussion of
the U.S. Brass bankruptcy, including discussion of the Qest polybutylene system
litigation, related insurance coverage, claims filed in the U.S. Brass
bankruptcy proceeding and claims against the Company.
7
<PAGE>
As previously disclosed, on April 8, 1996, the Bankruptcy Court
approved the Second Amended Plan of Reorganization (the "Amended Brass Plan")
and the Second Amended Disclosure Statement (the "Amended Brass Disclosure
Statement") filed by Eljer Industries, Eljer Manufacturing and U.S. Brass. At
the same time, the Bankruptcy Court approved the proposed plan of reorganization
and proposed disclosure statement (the "PB Committee Disclosure Statement")
filed by the Official Polybutylene Claimants Committee (the "PB Committee"). On
May 14, 1996, Eljer Industries, Eljer Manufacturing, U.S. Brass and the PB
Committee filed a Joint Statement and Request for Entry of a Scheduling Order
with the Bankruptcy Court. The Bankruptcy Court has not ruled on the Request.
In November 1995, Eljer Industries, Eljer Manufacturing and U.S. Brass
entered into a tentative settlement in connection with two national class
actions dealing with polybutylene plumbing systems, Tina Cox et al. V. Shell Oil
Company et al., and Garria Spencer, et al. V. Shell Oil Company, et al. (The
"Cox-Spencer Cases"). The tentative settlement is contingent upon finalization
of an agreement with the parties to the Cox-Spencer Cases and confirming a plan
of reorganization in the U.S. Brass bankruptcy embodying the terms of the
tentative settlement. The tentative settlement provides that Eljer Manufacturing
and U.S. Brass will contribute an amount equal to any proceeds of their
insurance policies; the Company will contribute $14.4 million, which is 75
percent of the net proceeds of the Household litigation (see Note (2) "Household
Settlement" for further discussion); $3 million in cash; a non-interest bearing
note for $20 million payable over 10 years; and 17.5 percent of the equity of
Eljer Industries in exchange for which Eljer Industries, Eljer Manufacturing and
U.S. Brass will receive relief satisfactory to them from claims arising from
polybutylene sales to date and U.S. Brass will remain an indirect, wholly-owned
subsidiary of Eljer Industries. Since November 1995, the Company has negotiated
with the PB Committee, Shell Oil and Hoechst Celanese with the expectation that
successful negotiations would result in a consensual third amended Plan that
would include the tentative settlement terms. As part of those negotiations,
Eljer Industries, Eljer Manufacturing and U.S. Brass have tentatively agreed to
pay $6 million they had planned to pay for notice to creditors and
administrative costs in the bankruptcy into the trust expected to be created as
a result of confirmation of a Plan of Reorganization. The trust will then be
responsible for paying for notice and administrative fees and any excess
remaining will be used to pay claims of creditors not previously dealt with in
the November 1995, tentative settlement. Negotiations have not resulted in a
final agreement and the third amended Plan has not been filed. The timing or
likelihood of the filing of a third amended Plan cannot be predicted. The
Company believes it has previously made adequate accruals for the terms of this
settlement. Until a third amended Plan is filed, the Amended Brass Plan
discussed above remains pending with the Bankruptcy Court.
Under the Bankruptcy Code, claims against U.S. Brass that were or could
have been commenced prior to the Petition Date are stayed while U.S. Brass
continues business operations as a debtor-in-possession. Certain of these claims
are reflected as Prepetition liabilities subject to compromise on the Condensed
Consolidated Balance Sheets. Additional claims (liabilities subject to
compromise) may arise subsequent to the Petition Date resulting from rejection
of executory contracts or unexpired leases, and from the determination by the
Bankruptcy Court, or from the agreement of parties in interest, to allow claims
for contingencies and other disputed amounts. U.S. Brass will continue to
evaluate the claims filed in the bankruptcy proceeding and may make adjustments
in Prepetition liabilities subject to compromise. U.S. Brass received approval
from the Bankruptcy Court to pay or otherwise honor certain of its prepetition
obligations, including its secured working capital facility, employee wages,
commissions, sales incentive programs, existing product warranties and
outstanding checks. U.S. Brass participates in various intercompany transactions
with its parent, Eljer Manufacturing and an affiliated Canadian company and, at
June 30, 1996, U.S. Brass had a net affiliate receivable of approximately $1.7
million.
8
<PAGE>
As a result of the uncertainties related to the availability of
insurance coverage and the ultimate outcome of the bankruptcy proceeding, U.S.
Brass continues to adjust its litigation reserves to maintain an equity balance
of zero. Accordingly, for the six-month period ended June 30, 1996, U.S. Brass
increased its litigation reserves by approximately $852,000 and for the
comparable period of 1995, U.S. Brass reduced its litigation reserves by $2.2
million.
Selected financial data for U.S. Brass are as follows (in thousands):
<TABLE>
<CAPTION>
For the Six Months Ended
June July
30, 1996 2, 1995
-------- --------
<S> <C> <C>
Net Sales to Nonaffiliate Customers.................. $40,679 $39,644
Sales to Affiliates.................................. 9,140 9,200
Reorganization Expenses.............................. 400 1,700
Litigation Reserve Adjustment........................ 852 (2,242)
Income from Operations............................... 729 702
Income (Loss) Before Income Taxes.................... - -
Net Income........................................... - -
Cash Used in Operating Activities.................... (178) (5,004)
Cash Used in Investing Activities.................... (187) (803)
Cash Provided by Financing Activities................ 1,091 6,277
Total Cash Flow, net................................. 726 470
</TABLE>
<TABLE>
<CAPTION>
As of June As of December
30, 1996 31, 1995
-------- --------
<S> <C> <C>
Total Current Assets................................. $40,223 $36,826
Total Assets......................................... 55,878 53,210
Total Liabilities.................................... 55,878 53,210
Total Shareholders' Equity........................... - -
</TABLE>
Cash payments of reorganization items made during the six months ended June 30,
1996 and July 2, 1995, were not material.
(4) INVENTORIES:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June December
30, 1996 31, 1995
------- -------
<S> <C> <C>
Finished goods $32,290 $32,887
Work in process 8,566 9,201
Raw materials 23,402 22,477
------- -------
Total inventories $64,258 $64,565
======= =======
</TABLE>
(5) LIQUIDITY AND CAPITAL RESOURCES:
During the first half of 1996, Eljer Manufacturing paid its U.S. term
debt lenders a total of $29.5 million for principal reduction and the
collateralization of letters of credit held by certain of the lenders. Of the
total payment amount, $24.5 million was paid as a result of the Household
settlement. Another $3.0 million payment is scheduled for August 30, 1996. The
remaining principal balance ($50.8 million) is due on the January 31, 1997
maturity date.
9
<PAGE>
The Company is currently holding discussions with its lenders to extend
the maturity date of the term debt beyond January 31, 1997. The Company is also
exploring other alternatives of debt restructuring of the existing debt prior to
the January 1997 term debt maturity date. Neither the Company nor any of its
subsidiaries has any commitment with respect to an extension, a restructuring or
other sources of financing and there can be no assurance that any such
commitment can be obtained prior to the term debt maturity date. Failure to
obtain such a commitment or extension or failure to pay the term debt when due
would constitute an event of default thereunder, and would give the lenders the
right, if they elect to do so, to foreclose on the collateral which constitutes
essentially all the domestic assets of the Company (except those assets pledged
under a revolving credit agreement and the assets of U.S. Brass), including a
majority of the stock of its foreign subsidiaries. Failure to pay the term debt
when due, would also be an event of default under the revolving credit
agreement. Due to the current scheduled maturity date, the Company's U.S. term
debt has been classified as a current liability (long-term debt subject to
restructure) on the condensed consolidated balance sheet.
(6) CONTINGENCIES:
Eljer Industries and certain of its subsidiaries are involved in
litigation related to the Qest polybutylene system, environmental matters 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 (2) "Bankruptcy of United States Brass Corporation" and Note (13)
"Contingencies" to the Consolidated Financial Statements in the Company's 1995
Form 10-K, which is incorporated herein, for additional discussion of
contingencies and legal matters involving the Company.
During the second quarter of 1996, Eljer Industries and Eljer
Manufacturing reached a settlement in the previously disclosed litigation with
Household, their former parent. See Note (2) "Household Settlement" for a
detailed discussion of the settlement terms.
In response to the Company's previously submitted plan for closure of
the hazardous waste management unit at its Salem, Ohio facility, in the second
quarter, the Ohio EPA proposed new closure requirements which may increase the
estimated cost for implementing the closure plan from $2.0 million to $3.2
million. In addition, a previously submitted proposal from the Company to
establish the cost of post-closure care at $1.0 million was recently accepted by
the Ohio EPA, bringing the current total estimated cost to implement both
closure and post-closure to $4.2 million.
Eljer Manufacturing has tentatively agreed to settle Ybarra, et al. v.
Eljer Manufacturing, Inc. As previously disclosed, the litigation involved
claims of racial and sexual discrimination made by approximately 20 current or
former employees at Eljer Manufacturing's Nampa, Idaho, manufacturing facility.
Under the terms of the tentative settlement, Eljer Manufacturing has agreed to
pay the plaintiffs an average of less than $40,000 each. The settlement is
subject to final documentation and court approval.
As previously disclosed, Eljer Manufacturing's Selkirk Metalbestos
division ("Selkirk") has been engaged in negotiations with the Consumer Product
Safety Commission ("CPSC") over the recall and retrofit of Selkirk's high
temperature plastic vent pipe made from Ultem resin ("Sel-Vent I") with a new
product manufactured from Radel resin ("Sel-Vent II"). The CPSC has approved the
proposed recall and retrofit campaign and, pursuant to agreement reached with
the CPSC, the campaign to notify consumers who have Sel-Vent I systems has
begun. To date, Selkirk has not received any requests for replacement of a
Sel-Vent I system with a Sel-Vent II system, but the campaign is in its early
stages and Selkirk expects to replace between 1,000 and 1,700 installations at a
cost ranging from $200 to $250 per installation, depending on the size of the
installation. In Canada, Selkirk intends to offer a similar recall and retrofit
campaign when Sel-Vent II is approved for installation by Canadian authorities.
The timing of such approval cannot be predicted.
10
<PAGE>
During the second quarter, the Company accrued $4.0 million to cover
costs and expenses of litigation including the matters discussed above,
litigation associated with the U.S. Brass bankruptcy, environmental issues and
other matters.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales of $93.0 million for the three-month period ended June 30,
1996, were relatively flat compared to the same 1995 period. Net sales for the
three months ended June 30, 1996, were favorably impacted by strengthened U.S.
housing starts, offset by the eleven week strike at the Company's cast iron
plant (resolved on May 22, 1996) and a weak European economy. Net sales for the
first half of 1996 decreased $5.1 million to $186.4 million, compared to the
first half of 1995. The decrease was primarily attributable to the harsh weather
conditions experienced in early 1996.
Gross profit margin increased to 26.6% and 24.9%, respectively, for the
three and six months ended June 30, 1996, from 24.7% and 24.1%, respectively,
for the comparable 1995 periods. The increase resulted from a stable raw
material market and price increases fully instituted in the second half of 1995
in response to the significant raw material cost increases in early 1995. In
addition, reduced postretirement benefit expenses improved margins but were
offset by the effects of the eleven week strike at the Company's cast iron plant
as fixed costs could not be fully absorbed into inventory.
On May 31, 1996, Eljer Industries and Eljer Manufacturing settled the
pending litigation with their former parent, Household. Under the terms of the
settlement, Household paid approximately $27.2 million, which includes
settlement of counterclaims that Household had against the Company. From the
settlement proceeds, the Company paid legal fees of $2.7 million and received
$24.5 million, which was used to reduce U.S. term debt and provide collateral
for related letters of credit. As part of the tentative settlement reached in
connection with the Cox-Spencer cases discussed in Note (3) "Bankruptcy of
United States Brass Corporation" to the Condensed Financial Statements in Part
1, Item 1, the Company expects to ultimately pay $14.4 million of the Household
settlement proceeds into a trust to be created as part of a U.S. Brass
reorganization plan, which represents 75% of the net proceeds after recoupment
of $5.3 million in past legal fees and expenses. Including the $5.3 million
recoupment of past legal fees and expenses, the net impact of the Household
settlement was $10.1 million during the quarter.
Litigation costs (settlements), net also includes a $4.0 million
accrual for the costs and expenses of other litigation, including the litigation
associated with the U.S. Brass bankruptcy, environmental issues, employee claims
and other matters.
As a result of the uncertainties related to the availability of
insurance coverage and the ultimate outcome of the bankruptcy proceeding, U.S.
Brass continues to adjust its litigation reserves to maintain an equity balance
of zero. Accordingly, for the three-month period ended June 30, 1996, the U.S.
Brass adjustment was an unfavorable $1.2 million compared to the same period in
1995 in which the adjustment was a favorable $1.1 million. For the first six
months of 1996 the adjustment was an unfavorable $.9 million compared to a
favorable $2.2 million in the same period of 1995. In 1995 these adjustments
were favorable as a result of this subsidiary's net loss due to bankruptcy
related legal fees and lower gross profit margins resulting from the significant
increase in raw material prices. The 1996 adjustments were unfavorable as U.S.
Brass experienced improved gross profit margins due to stabilized raw material
prices, success of its new products and lower bankruptcy related legal costs.
See Note (3) "Bankruptcy of United States Brass Corporation" to the Condensed
Consolidated Financial Statements in Part I, Item 1 for additional discussion.
11
<PAGE>
Interest expense decreased $1.0 million and $.7 million, respectively,
in the six and three months ended June 30, 1996, over the same periods in 1995,
which is attributable to lower debt levels in the first half of 1996 compared to
the first half of 1995.
Income tax expense increased to $1.9 million for the first half of
1996. No tax benefit was recorded for the United States losses in the first half
of 1995.
Liquidity and Capital Resources
The net cash provided by operating activities for the six months ended
June 30, 1996, was $24.1 million compared to net cash used in operating
activities of $15.0 million for the comparable 1995 period. This favorable
operating cash flow was primarily due to the settlement of the Household
litigation, of which net proceeds were $24.5 million. In addition, during the
first half of 1995, inventories increased $5.5 million due to increased cost of
certain raw materials and increased ordering of these materials prior to
announced price increases. The Company utilized these increased orders later in
1995 and reduced inventories from the end of June 1995 level of $73.7 million
down to $64.5 million at the end of 1995.
In accordance with a settlement agreement with the Ohio Attorney
General, the Company is required to fund a trust account, which will be used to
pay for implementation of a closure plan for the Marysville, Ohio, site. A total
of $8.5 million is scheduled to be funded to this trust account in three
installments during 1996. In the first half of 1996, the Company has made two
payments totalling $5.5 million to the trust account.
As previously reported, U.S. Brass filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
The purpose of the filing is to resolve systematically the issues resulting from
the Qest polybutylene system and related litigation and to seek confirmation of
a Plan which, among other things, will provide for the payment, satisfaction and
discharge of all claims against U.S. Brass involving the Qest polybutylene
system. There have been two proposed Plans filed with the Bankruptcy Court,
which are discussed more fully in Note (3) "Bankruptcy of United States Brass
Corporation" to the Condensed Consolidated Financial Statements in Part I, Item
1. U.S. Brass, Eljer Industries and Eljer Manufacturing have tentatively agreed
to participate in a global polybutylene settlement related to the two certified
national class actions dealing with polybutylene claims. As part of the
settlement, Shell Oil and Hoechst Celanese, who were suppliers of the resins
used in the manufacture of the polybutylene plumbing systems, have agreed to
make up to $950 million available to repair such systems. The settlement was
approved on November 9, 1995, by the Chancery Court for Obion County at Union
City, Tennessee.
Eljer Industries' and U.S. Brass' participation in the settlement is
conditioned on the confirmation of a plan of reorganization in the U.S. Brass
bankruptcy proceeding and finalization of an agreement with the parties to the
global polybutylene settlement. Under the terms of its proposed agreement, the
Company will contribute an amount equal to the proceeds it receives from certain
insurance coverage; $14.4 million, which is 75% of the net proceeds from the
litigation with its former parent, Household; $3.0 million in cash; a
non-interest bearing note for $20.0 million payable over 10 years; and 17.5
percent of the equity of Eljer Industries. Since November 1995, the Company has
negotiated with the PB Committee, Shell Oil and Hoechst Celanese with the
expectation that successful negotiations would result in a consensual third
amended Plan that would include the terms of the tentative settlement. However,
negotiations have not resulted in a final agreement and the third amended Plan
has not been filed. The timing or likelihood of the filing of a third amended
Plan cannot be predicted. The Company believes it has previously made adequate
accruals for the terms of this agreement.
No assurances can be given that the proposed agreement will be
finalized and a related plan of reorganization be confirmed and agreed to by the
Bankruptcy Court and U.S. Brass creditors. As a result, no assurances can be
given that the reorganization of U.S. Brass will successfully be
12
<PAGE>
concluded or, if it is concluded, what the effects to U.S. Brass, Eljer
Industries and Eljer Manufacturing would be. If the proposed agreement is not
finalized, the ultimate resolution of the U.S. Brass bankruptcy could involve
the Company losing its control over U.S. Brass. As previously discussed, the
possibility also exists that settlement of claims against the Company could,
among other things, result in a change in the Company's equity structure. Until
these matters are further resolved, they continue to create a substantial doubt
about the Company ability to continue as a going concern in its present
consolidated form. Further, if the proposed agreement is ultimately finalized,
the Company will need to arrange financing for the portion of the pledged
Household proceeds as the net proceeds were used initially to repay U.S. term
debt pursuant to the term debt agreement.
During the first half of 1996, Eljer Manufacturing paid its U.S. term
debt lenders a total of $29.5 million for principal reduction and the
collateralization of letters of credit held by the lenders. Of the total payment
amount, $24.5 million was paid as a result of the Household settlement. Another
$3.0 million payment is scheduled for August 30, 1996. The remaining principal
balance ($50.8 million) is due on the January 31, 1997 maturity date.
The Company is currently holding discussions with its lenders to extend
the maturity date of the term debt beyond January 31, 1997. The Company is also
exploring other alternatives of debt restructuring of the existing debt prior to
the January 1997 term debt maturity date. Neither the Company nor any of its
subsidiaries has any commitment with respect to an extension, a restructuring or
other sources of financing and there can be no assurance that any such
commitment can be obtained prior to the term debt maturity date. Failure to
obtain such a commitment or extension or failure to pay the term debt when due
would constitute an event of default thereunder, and would give the lenders the
right, if they elect to do so, to foreclose on the collateral which constitutes
essentially all the domestic assets of the Company (except those assets pledged
under a revolving credit agreement and the assets of U.S. Brass), including a
majority of the stock of its foreign subsidiaries. Failure to pay the term debt
when due, would also be an event of default under the revolving credit
agreement. Management does believe it has adequate cash resources and debt
availability to meet its obligations until the January 1997 term debt maturity
date.
13
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
See Note (3) "Bankruptcy of United States Brass Corporation" and Note
(6) "Contingencies" to the Condensed Consolidated Financial Statements in Part
I, Item 1 of this report and Note (2) "Bankruptcy of United States Brass
Corporation", and Note (13) "Contingencies" to the Consolidated Financial
Statements in the Company's 1995 Form 10-K, which are made a part hereof by this
reference.
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) Exhibits:
Exhibit
Number Description
------- --------------------------------
11 Calculation of Primary and
Fully Diluted Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on June 13, 1996, related to
the settlement of litigation with Household International,
Inc., the former parent of Eljer Industries.
Subsequent Reports on Form 8-K
None
14
<PAGE>
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: August 14, 1996 By:/s/ Brooks F. Sherman
------------------------ ---------------------
Brooks F. Sherman
Vice President - Finance, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
15
EXHIBIT 11
Page 1 of 2
ELJER INDUSTRIES, INC.
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three Months Ended
June July
30, 1996 2, 1995
----------- -----------
<S> <C> <C>
Primary Earnings Per Share:
Net Income (loss) $ 3,885,000 $(1,206,000)
----------- -----------
Weighted average common shares outstanding 7,153,676 7,130,475
Dilutive effect of stock options considered
common stock equivalents 71,052 --
----------- -----------
Weighted average number of common and
common equivalent shares 7,224,728 7,130,475
----------- -----------
Primary earnings (loss) per share $ 0.54 $ (0.17)
=========== ===========
Fully Diluted Earnings Per Share:
Net income (loss) $ 3,885,000 $(1,206,000)
----------- -----------
Weighted average common shares outstanding 7,153,676 7,130,475
Dilutive effect of stock options considered
common stock equivalents 71,052 --
----------- -----------
Weighted average number of common and
common equivalent shares 7,224,728 7,130,475
----------- -----------
Fully diluted earnings (loss) per share $ 0.54 $ (0.17)
=========== ===========
</TABLE>
<PAGE>
EXHIBIT 11
Page 2 of 2
ELJER INDUSTRIES, INC.
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Six Months Ended
June July
30, 1996 2, 1995
----------- -----------
<S> <C> <C>
Primary Earnings Per Share:
Net Income (loss) $ 2,938,000 $(2,088,000)
----------- -----------
Weighted average common shares outstanding 7,148,593 7,130,051
Dilutive effect of stock options considered
common stock equivalents 56,800 --
----------- -----------
Weighted average number of common and
common equivalent shares 7,205,393 7,130,051
----------- -----------
Primary earnings (loss) per share $ 0.41 $ (0.29)
=========== ===========
Fully Diluted Earnings Per Share:
Net income (loss) $ 2,938,000 $(2,088,000)
----------- -----------
Weighted average common shares outstanding 7,148,593 7,130,051
Dilutive effect of stock options considered
common stock equivalents 56,800 --
----------- -----------
Weighted average number of common and
common equivalent shares 7,205,393 7,130,051
----------- -----------
Fully diluted earnings (loss) per share $ 0.41 $ (0.29)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,627
<SECURITIES> 0
<RECEIVABLES> 71,631
<ALLOWANCES> 7,773
<INVENTORY> 64,258
<CURRENT-ASSETS> 156,183
<PP&E> 174,141
<DEPRECIATION> 112,430
<TOTAL-ASSETS> 236,710
<CURRENT-LIABILITIES> 192,523
<BONDS> 12,218
0
0
<COMMON> 7,186
<OTHER-SE> (39,294)
<TOTAL-LIABILITY-AND-EQUITY> 236,710
<SALES> 186,397
<TOTAL-REVENUES> 186,397
<CGS> 139,986
<TOTAL-COSTS> 139,986
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,669
<INCOME-PRETAX> 4,902
<INCOME-TAX> 1,964
<INCOME-CONTINUING> 2,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,938
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
