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 September 30, 1997
Commission File Number: 0-23238
DEFLECTA-SHIELD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 42-1411117
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 North 9th Street, Indianola, Iowa 50125
(Address of principal executive offices) (Zip Code)
(515) 961-6100
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of November 14, 1997, 4,800,000 shares of the registrant's Common Stock
were outstanding. <PAGE>
<PAGE>
DEFLECTA-SHIELD CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page
PART I. Financial Information . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996 . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three
Months ended September 30, 1997 and 1996 . . . . . . . . 4
Consolidated Statements of Income for the Nine
Months ended September 30, 1997 and 1996 . . . . . . . . 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1997 and 1996 . . . . .. . . . 6
Notes to Consolidated Financial Statements . . . .. . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . .. . . . . . . . . 9
PART II. Other Information
Item 1. Legal Proceedings . .. . . . . . . . . . . . . . . . . 14
Item 5. Other Information . .. . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 14
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
DEFLECTA-SHIELD CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands)
September 30 December 31
1997 1996
____________ ___________
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 951 $ 459
Accounts receivable, less allowance
for doubtful accounts of $972
and $703, respectively 10,819 10,326
Inventories 10,660 10,123
Deferred income taxes 1,762 1,328
Prepaid expenses 351 304
_________ ________
Total current assets 24,543 22,540
Property and equipment, net 12,165 9,383
Goodwill and intangibles, net 11,786 12,117
Other assets 368 107
_________ ________
$48,862 $44,147
========= ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current maturities of long-term debt $ 8 $ 9
Accounts payable 5,361 4,830
Accrued expenses 3,464 2,461
_________ ________
Total current liabilities 8,833 7,300
Deferred income taxes 301 280
Other liabilities 89 -
Long-term debt, less current maturities 8,434 8,024
_________ ________
Total liabilities 17,657 15,604
_________ ________
Stockholders equity:
Common stock 48 48
Additional paid-in capital 18,556 18,556
Retained earnings 12,601 9,939
_________ ________
31,205 28,543
Commitments and contingencies - -
_________ ________
$48,862 $44,147
========= ========
The accompanying notes are an integral part of these statements.
3
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DEFLECTA-SHIELD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30
________________________________
1997 1996
_______ ________
Net sales $18,414 $18,465
Cost of sales 11,813 12,035
________ ________
Gross Profit 6,601 6,430
Operating expenses:
Selling 2,578 2,386
General and administrative 1,845 1,672
Restructuring charge 1,099 -
Amortization 111 113
________ ________
Income from operations 968 2,259
Interest expense 135 250
________ ________
Income before income taxes 833 2,009
Income tax expense 333 764
________ ________
Net income $500 $1,245
======== ========
Net income per share $.10 $.26
======== ========
Weighted average common shares outstanding 4,800 4,800
======== ========
The accompanying notes are an integral part of these statements.
4
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DEFLECTA-SHIELD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share amounts)
(Unaudited)
Nine Months Ended September 30,
__________________________________
1997 1996
_________ _________
Net sales $53,732 $54,743
Cost of sales 34,399 36,185
_________ _________
Gross Profit 19,333 18,558
Operating expenses:
Selling 7,369 7,681
General and administrative 5,581 4,957
Restructuring charge 1,099 -
Amortization 332 372
_________ _________
Income from operations 4,952 5,548
Interest expense 454 799
_________ _________
Income before income taxes 4,498 4,749
Income tax expense 1,836 1,825
_________ _________
Net income $2,662 $2,924
========= =========
Net income per share $.55 $.61
========= =========
Weighted average common shares
outstanding 4,800 4,800
========= =========
The accompanying notes are an integral part of these statements.
5
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DEFLECTA-SHIELD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
Nine Months Ended September 30
________________________________
1997 1996
_______ _______
Cash flow from operating activities:
Net income $2,662 $2,924
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 1,666 1,471
Amortization 332 372
Gain on sale of assets (15) (5)
Restructuring charge 1,099 -
Deferred income taxes (678) -
Add (deduct) changes in assets and
liabilities:
Accounts receivable (493) (606)
Inventories (537) 396
Prepaid expenses (47) 748
Other assets 3 4
Accounts payable 531 650
Accrued expenses 671 299
_________ ________
Net cash provided by operating activities 5,194 6,253
_________ ________
Cash flow from investing activities:
Purchases of property and equipment (5,183) (1,412)
Proceeds from sale of property and equipment 72 22
________ ________
Cash used by investing activities (5,111) (1,390)
________ ________
Cash flow from financing activities:
Net proceeds (repayment) of revolving line
of credit 415 (3,461)
Repayment of other debt (6) (1,449)
_________ ________
Net cash used (provided) by financing
activities 409 (4,910)
_________ ________
Net increase (decrease) in cash 492 (47)
Cash at beginning of period 459 533
_________ ________
Cash at end of period $ 951 $ 486
========= ========
Supplemental disclosures of cash
flow information:
Cash paid during the period for interest $ 490 $ 815
Cash paid during the period for income
taxes $1,749 $1,263
The accompanying notes are an integral part of these statements.
6
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DEFLECTA-SHIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 1 - BASIS OF PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of
Deflecta-Shield Corporation and its subsidiaries (collectively, the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the
opinion of management, all adjustments (which were of a normal
recurring nature) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
NOTE 2 - INVENTORIES
Inventories at September 30, 1997 and December 31, 1996 consisted of
the following:
September 30, December 31,
1997 1996
_____________ ____________
(Unaudited)
Raw materials $ 5,150 $ 4,606
Finished goods and
work-in-process 5,510 5,517
_________ _________
$10,660 $10,123
========= =========
NOTE 3 - NEW ACCOUNTING PROUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, which must be adopted by the Company for all financial statements
issued after December 15, 1997. The Company has reviewed the effects of the
provisions of the standard and determined that the net income per share for
the three and nine months ended September 30, 1996 would not be affected. If
the Company would have adopted the provisions of the standard during the
third quarter and nine months of 1997, basic earnings per share would have
been equal to the earnings per share of $.10 and $.55 presented on the face
of the Consolidated Statements of Income.
The FASB issued SFAS No. 130, Reporting Comprehensive Income, which will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Adoption of this standard is not expected to have
a material impact on disclosures in the Company's financial statements.
7
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The FASB has issued SFAS No. 131, Disclosures About Segments Of An
Enterprise And Related Information, which established a new accounting
principle for reporting information about operating segments in annual
financial statements and interim financial reports. It also established
standards for related disclosures about products and services, geographic
areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating
the applicability of this standard. However, the Company does not expect a
material impact on disclosures in the Company's financial statements.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
($ in thousands except per share amounts)
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the consolidated
financial statements included elsewhere herein and in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1996.
Results of Operations
The following tables set forth, for the periods indicated, certain
operating data as a percentage of net sales.
Percentage of Net Sales
_______________________________________________________
Three Months Ended Nine Months Ended
September 30, September 30,
________________________ _______________________
1997 1996 1997 1996
____ ____ ____ ____
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.2 65.2 64.0 66.1
_______ _______ _______ _______
Gross profit 35.8 34.8 36.0 33.9
Selling expenses 14.0 12.9 13.7 14.0
General and
administrative
expenses 10.0 9.1 10.4 9.1
Restructuring
Charge 6.0 0.0 2.1 0.0
Amortization .6 .6 .6 .7
_______ _______ _______ _______
Income from
operations 5.2 12.2 9.2 10.1
Interest expense .7 1.3 .8 1.4
_______ _______ _______ _______
Income before
income taxes 4.5 10.9 8.4 8.7
Income tax expense 1.8 4.2 3.4 3.3
_______ _______ _______ _______
Net income 2.7% 6.7% 5.0% 5.4%
======= ======= ======= =======
Three Months Ended September 30, 1997 Compared to
Three Months ended September 30, 1996
Net Sales. Net sales were $18,414 for the three months ended
September 30, 1997, compared to $18,465 for the three months ended
September 30, 1996, a decrease of $51, or .3%. While net sales of air
deflectors and fiberglass products were down for the quarter, net sales
increased in heavy truck products, shock absorbers and suspension systems,
and aluminum products. A portion of the drop in net sales was due to the
effect of the UPS strike which limited the Company's ability to fill special
order business. Also, because the Company moved away from low margin
customers which accounted for a fair amount of sales in the comparable
quarter of 1996, an increase in net sales in air deflectors was not
anticipated.
9
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Gross Profit. Gross profit was $6,601 for the three months ended
September 30, 1997, compared to $6,430 for the comparable period of 1996,
an increase of $171. This gross profit increase on lower sales volume was due
to improvements in manufacturing efficiencies, decreased costs of some raw
material components, and favorable shifts in product mix. As a percentage of
net sales, gross margins increased to 35.8% from 34.8% for the same quarter
of 1996.
Selling Expenses. Selling expenses were $2,578 for the three months ended
September 30, 1997, compared to $2,386 for the comparable period of 1996, an
increase of $192, or 8.0%. As a percentage of net sales for the same
periods, selling expenses increased to 14.0% from 12.9%. The increased
selling expenses were due to planned spending for catalogs and other
advertising and promotional materials to support new product introductions
in heavy truck products, shock absorbers and suspension systems, and
aluminum products.
General and Administrative Expenses. General and administrative expenses
were $1,845 for the three months ended September 30, 1997, compared to $1,672
for the three months ended September 30, 1996, an increase of $173, or 10.3%.
As a percentage of net sales, general and administrative expenses increased
to 10.0% compared to 9.1% for the comparable period in 1996. The majority of
the increase is due to (i) increased headcount in senior management, (ii)
training, manpower, and development costs for a new information system, and
(iii) investment in design costs for new product research and development.
Restructuring Charge. The third quarter of 1997 included a previously
announced pretax charge of $1,099 for employee severance and asset write-down
and disposition costs. Because of a softening in demand for fiberglass
products, the Company will close its Corydon, Iowa plant and transfer
production to other existing facilities in California and Iowa in a
consolidation effort designed to increase efficiencies and reduce costs.
The restructuring charge also includes the write-down in asset value and
disposition costs of facilities that will close by year end in Chicago,
Illinois and Sturgis, Michigan.
Interest Expense. Interest expense was $135 for the three months ended
September 30, 1997, compared to $250 for the three months ended September 30,
1996, a decrease of $115, or 46.0%. Interest rates were more favorable in
1997 and interest-bearing debt averaged approximately $7,191 for the three
months ended September 30, 1997, compared to approximately $9,268 for the
three months ended September 30, 1996.
Income Tax Expense. The effective income tax rate was 40.0% for the three
months ended September 30, 1997, compared to 38.0% for the comparable period
of 1996.
Net Income Per Share. Net income for the three months ended September 30,
1997 was $500, or $10 per share, compared to $1,245, or $.26 per share for the
comparable three months of 1996. Excluding the pretax restructuring charge,
described above, of $1,099 ($660 after tax), net income was $1,160, or $.24
per share, for the three months ended September 30, 1997 compared to net
income of $1,245, or $.26 per share, for the comparable period of 1996. The
restructuring charge decreased earnings per share by $.14 in the third quarter
of 1997 to $.10 per share.
10
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Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
Net Sales. Net sales were $53,732 for the nine months ended
September 30, 1997, compared to $54,743 for the nine months ended
September 30, 1996, a decrease of $1,011, or 1.8%. The majority of the
nine months net sales decline occurred in the first quarter of 1997 which was
below the comparable period of 1996 by $1,130, or 6.3%. In general, the light
truck accessory market was soft in the first nine months of 1997. In addition,
the Company's promotions in late 1996 resulted in reduced ordering in early
1997, and, by repositioning some product lines, the Company moved away from
some low margin customers to whom sales were made in the comparable nine month
period of 1996.
Gross Profit. Offsetting the shortfall in net sales, gross profit was
$19,333 for the nine months ended September 30, 1997, compared to $18,558 for
the comparable period of 1996, an increase of $775, or 4.2%. As a percentage of
net sales, gross margins increased to 36.0% from 33.9% for the same period of
1996. The increased gross profit percentage is due to improvements in
manufacturing processes and efficiencies, decreased costs of some raw material
components, and favorable shifts in product mix.
Selling Expenses. Selling expenses were $7,369 for the nine months ended
September 30, 1997, compared to $7,681 for the comparable period of 1996, a
decrease of $312, or 4.1%. As a percentage of net sales for the same periods,
selling expenses decreased to 13.7% from 14.0%. The reduction in selling
expenses is a function of: (i) the timing of spending for product advertising
that was greater in the first nine months of 1996, and (ii) a reduction in
outbound freight resulting from a combination of decreased sales volume and
better utilization of less-than-truckload shipments to customers.
General and Administrative Expenses. General and administrative expenses
were $5,581 for the nine months ended September 30 1997, compared to $4,957 for
the nine months ended September 30, 1996, an increase of $624, or 12.6%. As a
percentage of net sales, general and administrative expenses increased to
10.4% compared to 9.1% for the comparable period in 1996. The increase is
principally the result of (i) increased headcount in senior management,
(ii) increased product design and development costs, (iii) training,
manpower, and development costs for a new information system, and
(iv) costs related to consolidation of facilities.
Restructuring Charge. The portion of the pretax restructuring charge of
$1,099 for consolidating the Corydon, Iowa operations with other existing
facilities is in furtherance of the Company's ongoing commitment and goal
to consolidate and streamline its operations. The restructuring charge is
principally the write-down in asset value of properties that will be closed
by year end and employee severance.
11
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Interest Expense. Interest expense was $454 for the nine months ended
September 30, 1997, compared to $799 for the nine months ended
September 30, 1996, a decrease of $345, or 43.2%. Interest rates were more
favorable in 1997 and interest-bearing debt averaged approximately $7,644
for the nine months ended September 30, 1997, compared to approximately
$10,898 for the nine months ended September 30, 1996.
Income Tax Expense. The effective income tax rate was 40.8% for the
nine months ended September 30, 1997, compared to 38.4% for the comparable
period of 1996.
Net Income Per Share. Net income for the nine months ended September
30, 1997 was $2,662, or $.55 per share, compared to $2,924, or $.61 per
share, for the comparable nine month period of 1996. Excluding the pretax
restructuring charge, described above, of $1,099 ($660 after tax), net
income was $3,322, or $.69 per share, for the nine months ended September
30, 1997 compared to net income of $2,924, or $.61 per share, for the
comparable period of 1996. The restructuring charge decreased earnings
per share by $.14 for the nine months of 1997 to $.55 per share.
Seasonality and Quarterly Data
Although the Company deviated from the pattern at one time, it has
historically generated the majority of its net sales and income from
operations in the second and third quarters of each year. The Company
expects the historical pattern to continue in 1997 and future years. This
seasonal pattern combined with effects of new product introductions and the
timing of customer orders can cause the Company's results of operations to
vary from quarter to quarter.
Liquidity and Capital Resources
The Company's liquidity requirements arise primarily from working capital
and capital expenditure requirements. The Company maintains a $21 million
revolving credit facility which expires on July 21, 1999. The Company
believes that funds generated from operations and funds available under the
revolving credit facility will be adequate to meet its working capital, debt
service and capital expenditure requirements through the next twelve months.
As of September 30, 1997, the Company had cash balances of $951 and
working capital of $15,710. The current ratio at September 30, 1997 was 2.8:1,
compared to 3.1:1 at December 31, 1996. Cash flows provided by operating
activities were $5,194 for the nine months ended September 30, 1997 compared
to cash flows provided by operating activities of $6,253 for the nine
months ended September 30, 1996.
Accounts receivable of $10,819 increased by 4.8% at September 30, 1997
while days sales outstanding increased to 54.1 from 52.8 at December 31,
1996. Inventories of $10,660 at September 30, 1997 increased by $537 or
5.3%, from $10,123 at December 31, 1996. This represents an increase in
days sales in inventory to 84.8 days from 77.5 days. From year end, the
finished goods inventory was increased in order to balance the inventory mix
and to allow the Company to respond to customer's orders without significant
delays in the nine months of 1997. Inventory levels were $10,876 at quarter
end June 30, 1997.
12
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Capital expenditures of $5,183 for the nine months ended September 30,
1997 were for the purchase of a 96,800 square feet Chicago facility for
heavy truck production, product molds and tooling, and manufacturing and
data processing equipment. The Company anticipates that capital expenditures
in the remainder of 1997 will be approximately $3,000.
As of September 30, 1997, the outstanding principal balance of the
Company's debt was $8,442, an increase of $409 from the outstanding balance
at December 31, 1996.
While the Company announced a reorganization and restructuring change
in the third quarter of 1997, the Company is still evaluating further
reorganization of several of its facilities and processes. The Company is
developing a strategic plan designed to minimize short-term disruptions,
inefficiencies and costs resulting from the contemplated reorganization,
which is expected to include consolidation of other portions of the Company's
manufacturing and distribution facilities. There has not been a final
determination of which locations into which various activities would be
consolidated, but it is currently anticipated that there will be consolidation
into a new facility located in the same metropolitan area as one of the
Company's existing facilities. The Company anticipates that costs and
expenses associated with any relocation and consolidation would ultimately
be substantially offset by cost savings generated thereby. However, it is
currently anticipated that the reorganization will negatively impact earnings
in the short term. Furthermore, the timing relationship between the incurrence
of charges with respect to the reorganization and the generation of
anticipated savings may cause the Company's results of operations to vary
from quarter to quarter.
Forward Looking Information
Information included in this Report on Form 10-Q relating to expectations as
to sale, earnings and capital expenditures constitutes forward-looking
statements that involve a number of risks and uncertainties. From time to
time, information provided by the Company or statements made by its employees
may contain other forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include but
are not limited to: general economic conditions, including their impact on
the sale of new light trucks; sales of new heavy trucks, which are cyclical;
competitive factors, including pricing pressures; changes in product and
sales mix; the timely development and introduction of competitive new
products by the Company and market acceptance of those products; inventory
risks due to changes in market demand or the Company's business strategies;
difficulties which may be encountered in the consolidation of the Company's
manufacturing and distribution facilities; changes in effective tax rates;
and the fact that a substantial portion of the Company's sales are generated
from orders received during the quarter, making prediction of quarterly
revenues and earnings difficult. The words believe, expect, anticipate,
project, and similar expressions identify forward looking statements.
Readers are cautioned not to place undue reliance on these forward looking
statements, which speak only as of the date made. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
13
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended
September 30, 1997
14
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<PAGE>
SIGNATURE
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.
Date: November 14, 1997
DEFLECTA-SHIELD CORPORATION
By: /s/Ronald C. Fox
Ronald C. Fox,
Chief Financial Officer
(Duly authorized officer and
Principal Financial and
Accounting Officer)
15
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914605
<NAME> DEFLECTA-SHIELD CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 951
<SECURITIES> 0
<RECEIVABLES> 11,791
<ALLOWANCES> 972
<INVENTORY> 10,660
<CURRENT-ASSETS> 24,543
<PP&E> 23,417
<DEPRECIATION> 11,252
<TOTAL-ASSETS> 48,862
<CURRENT-LIABILITIES> 8,833
<BONDS> 8,434
0
0
<COMMON> 48
<OTHER-SE> 31,157
<TOTAL-LIABILITY-AND-EQUITY> 48,862
<SALES> 53,732
<TOTAL-REVENUES> 53,732
<CGS> 34,399
<TOTAL-COSTS> 34,399
<OTHER-EXPENSES> 14,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454
<INCOME-PRETAX> 4,498
<INCOME-TAX> 1,836
<INCOME-CONTINUING> 2,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,662
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
