SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
Commission file number 1-12854
McWhorter Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3919940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Cottage Place
Carpentersville, Illinois 60110
(Address of principal executive offices, including zip code)
847-428-2657
(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
Number of shares outstanding of each of the issuer's classes of common stock,
as of the latest practicable date: 10,361,013 shares as of May 31, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying interim financial statements of McWhorter
Technologies, Inc. (the "Company" or "McWhorter") do not include all
disclosures normally provided in annual financial statements. These financial
statements, which should be read in conjunction with the financial statements
contained in McWhorter's Annual Report on Form 10-K for the fiscal year
ended October 31, 1996, are unaudited but include all adjustments that
McWhorter's management considers necessary for a fair presentation. These
adjustments consist of normal recurring accruals. Interim results are not
necessarily indicative of the results for the year. All references to years
are to fiscal years ended October 31.
<TABLE>
STATEMENTS OF INCOME
Dollars in thousands, except per share amounts
<CAPTION>
Quarter Ended Six Months Ended
April 30, April 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Net sales $80,882 $76,917 $152,416 $142,157
Costs and expenses:
Cost of sales 68,145 65,285 128,831 120,770
Research 2,068 1,878 4,124 3,672
Selling, general and
administrative 3,922 3,954 7,957 7,922
Other expense, net (Note 1) 726 14 964 20
Income from operations 6,021 5,786 10,540 9,773
Interest expense, net 364 433 661 844
Income before income taxes 5,657 5,353 9,879 8,929
Income tax expense (Note 2) 1,781 2,166 3,489 3,614
Net income $ 3,876 $ 3,187 $ 6,390 $ 5,315
Net income per share (Note 3) $ .37 $ .31 $ .61 $ .51
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
BALANCE SHEETS
Dollars in thousands, except per share amounts
<CAPTION>
April 30, October 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash $ 1,461 $ 1,060
Accounts receivable 46,479 47,166
Inventories (Note 4) 23,242 18,151
Other current assets 5,907 5,019
77,089 71,396
Property, plant and equipment 111,495 107,119
Less accumulated depreciation 38,247 33,489
Net property, plant and equipment 73,248 73,630
Other assets 9,407 8,228
$159,744 $153,254
Liabilities & Shareholders' Equity
Current liabilities:
Short-term debt $ 7,697 $ 9,995
Trade accounts payable 25,580 26,363
Accrued liabilities 10,259 10,504
43,536 46,862
Long-term debt, less current portion 19,123 13,145
Deferred income taxes 11,299 10,486
Accrued environmental liabilities 2,456 3,037
Shareholders' equity:
Common stock (par value $.01 per share;
authorized 30,000,000 shares; issued
and outstanding 10,353,520 shares at
April 30, 1997 and 10,465,940 at
October 31, 1996) 110 110
Additional paid-in capital 10,805 10,803
Retained earnings 83,952 77,562
Currency translation adjustments (440) (74)
Restricted stock awards (1,463) (1,463)
Treasury stock, at cost (612,027 shares
at April 30, 1997 and 499,607 shares
at October 31, 1996) (9,634) (7,214)
83,330 79,724
$159,744 $153,254
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
Dollars in thousands
<CAPTION>
Six Months Ended
April 30,
1997 1996
<S> <C> <C>
Operating Activities
Net income $ 6,390 $ 5,315
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,790 4,388
Deferred income taxes 62 2,720
Other, net 211 (230)
Changes in working capital:
Accounts receivable 687 (674)
Inventories (5,091) (8,631)
Trade accounts payable &
accrued liabilities (1,028) 6,616
Other current assets (137) (823)
Net cash provided by operating activities 5,884 8,681
Investing Activities
Capital expenditures (4,372) (3,263)
Investment in joint venture (2,343)
Other, net 20
Net cash used by investing activities (6,715) (3,243)
Financing Activities
Increase in debt, net 3,680 662
Purchase of treasury stock (2,476) (5,447)
Proceeds from exercise of stock options 28 102
Net cash provided (used) by financing activities 1,232 (4,683)
Increase in cash 401 755
Cash at beginning of period 1,060 1,904
Cash at end of period $ 1,461 $ 2,659
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Dollars in thousands, except share amounts
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
<S> <C> <C> <C> <C>
Balance October 31, 1996 10,465,940 $110 $10,803 $77,562
Net income 6,390
Issuance of common stock
for restricted stock awards 1,500 8
Exercise of stock options 2,402 (6)
Purchase of treasury stock (116,322)
Currency translation
adjustments
Balance April 30, 1997 10,353,520 $110 $10,805 $83,952
</TABLE>
<TABLE>
Statement of Changes in Shareholders' Equity (continued)
<CAPTION>
Currency Restricted
Translation Stock Treasury
Adjustments Awards Stock
<S> <C> <C> <C>
Balance October 31, 1996 $(74) $(1,463) $(7,214)
Net income
Issuance of common stock for
restricted stock awards 22
Exercise of stock options 34
Purchase of treasury stock (2,476)
Currency translation adjustments (366)
Balance April 30, 1997 $(440) $(1,463) $(9,634)
</TABLE>
See Notes to Financial Statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Second quarter results for 1997 included a pretax charge of
$615,000 ($366,000 after taxes, or $.04 per share) for certain
costs, primarily severance, related to the Company's
upcoming relocation of the Minneapolis research facility to
Carpentersville in the first half of 1998. Additionally, the
results included a pretax charge of $196,000 ($117,000 after
taxes, or $.01 per share) for the write-off of a tax related
receivable.
2. Second quarter results for 1997 included a tax benefit of
$591,000 ($.06 per share) that resulted from the conclusion
of an income tax audit for the period prior to the Company s
spin-off in 1994.
3. Net income per share amounts were computed on the basis of
the weighted average number of common and common equivalent shares
outstanding. Such weighted average shares used in the computations were
10,445,117 and 10,411,226 for the quarters ended April 30, 1997 and 1996,
respectively, and 10,469,426 and 10,514,221 for the six months ended
April 30, 1997 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, Earnings Per Share , which is
required to be adopted for financial statements for periods ending after
December 15,1997. The Company will be required to change the method
currently used to compute earnings per share to restate all prior periods.
The Company s primary earnings per share as reflected in the accompanying
condensed consolidated statements of income are not materially different
from basic and diluted earnings per share calculated under the new
methodology.
4. The major classes of inventories consist of the following:
<TABLE>
Dollars in thousands
<CAPTION>
April 30, October 31,
1997 1996
<S> <C> <C>
Manufactured products $15,549 $11,916
Raw materials, supplies and work-in-process 7,693 6,235
$23,242 $18,151
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
General
The following discussion and analysis of results of operations and
financial condition of McWhorter should be read in conjunction
with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1996. Except for historical information contained
herein, certain matters set forth in this Form 10-Q are forward-
looking statements that involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements.
Results of Operations
Net sales increased 5.2 percent in the second quarter to
$80,882,000 compared to $76,917,000 in the same period of 1996.
For the six months, net sales were $152,416,000, a 7.2 percent
increase versus net sales of $142,157,000 in the comparable period
a year ago. The increase in net sales in the second quarter was
primarily due to a 9 percent volume increase, offset by 2 percent
price and 2 percent mix decreases. For the six months, the increase
in net sales was due to an 11 percent volume increase, offset by 2
percent price and 2 percent mix decreases. Volume improved in
large part due to strong activity with national accounts.
The Company's gross profit margin for the second quarter of 1997
was 15.7 percent compared to 15.1 percent in last year's second
quarter. For the six months, the gross profit margin was 15.5
percent versus 15.0 percent for the comparable period a year ago.
Current year margins were favorably impacted by the combination
of stability in raw material costs and cost reductions achieved
through a number of ongoing internal process improvements.
These favorable effects were partially offset by lower sales prices
and higher sales of resin for the decorative market which are
typically lower margin, compared to the prior year periods.
Operating expenses (research, selling, general and administrative)
for the second quarter were 7.4 percent of sales compared to 7.6 percent in
the prior year second quarter. For the six months, operating expenses were
7.9 percent of sales compared to 8.2 percent for the same period a year
ago. Higher actual expenses compared to the prior year were primarily the
result of additional research personnel.
In February of 1997, the Company announced plans to construct a 35,000 square
foot laboratory facility in Carpentersville, Illinois. The projected cost of
this new facility is $5,500,000, and is scheduled to open in the spring of
1998. As a result of this project, the Company will be closing the facility
that is currently leased in Minneapolis. Employees from product development
and technical support groups will be relocated to the new facility to serve
McWhorter s Liquid Coatings, Powder Coatings and Composite Polymer businesses.
Approximately 36 employees in Research and Development and Information
Technology Services will be impacted by the closing.
<PAGE>
In total, the Company expects to incur approximately $1,300,000
of pretax charges to operating earnings, $773,500 after taxes, or
$.08 per share related to this move. Due to the Company's
decision in February, an after tax charge of $.04 per share was
recorded in the second quarter of 1997 primarily for costs
associated with the estimated amount of termination benefits to be
paid to certain employees. The Company also expects to record an
after-tax charge, primarily in the second quarter of 1998, of $.03 to
$.05 per share for costs to be incurred in connection with the
relocation of existing employees, hiring of new employees, and
costs related to moving equipment from Minneapolis to
Carpentersville.
Other expense for the second quarter and first six months of 1997
included $615,000 of expenses for certain costs, primarily
severance, related to the Company s upcoming relocation of the
Minneapolis research facility to Carpentersville. Additionally, the
1997 results included an expense of $196,000 for the write-off of a
tax related receivable.
Net interest expense decreased $69,000, or 16 percent, and
$183,000, or 22 percent, for the second quarter and first six months
of 1997, respectively, compared to the same periods in 1996.
These comparisons reflect a reduction in total debt of
approximately $6 million from April 30, 1996.
The effective tax rate for the second quarter and first six months of
1997 was 31.5 percent and 35.3 percent, respectively, versus 40.5
percent in the comparable periods a year ago. Refer to Note 2 of
Notes to Financial Statements for discussion of the tax benefit
recorded in the second quarter of 1997.
Net income for the second quarter was $3,876,000, or $.37 per share, a
per-share increase of 19 percent over last year's second quarter net income
of $3,187,000, or $.31 per share. For the six months, net income was
$6,390,000, or $.61 per share, a per-share increase of 20 percent over last
year's six month net income of $5,315,000, or $.51 per share. The second
quarter and first six months of 1997 included a positive net effect of $.01
per share for certain nonrecurring items. Refer to Note 1 and Note 2 of Notes
to Financial Statements for discussion of these items.
Financial Condition
In the first six months of 1997 cash generated by operations was
$5,884,000 compared to $8,681,000 in the comparable period a
year ago. The difference was primarily from changes in working
capital, and a lower deferred tax provision recorded in the current
year compared to the prior year due to the recording of deferred tax
assets associated with the tax benefit taken in the second quarter of
1997. The Company's current ratio was 1.8 at April 30, 1997
compared to 1.5 at October 31, 1996.
Investing activities used cash of $6,715,000 in the first six months
of 1997 compared to $3,243,000 in the comparable period a year
ago. The increase was primarily because the Company made its
initial funding of its equity portion of the joint venture in
McWhorter Technologies Thailand Company, Ltd. (McWhorter
Thailand) in the amount of $2,343,000 in the first quarter of 1997.
This 40 percent equity investment is accounted for under the equity
method, and is carried as a long-term investment in other assets on
the balance sheet. Capital expenditures of $4,372,000 and
$3,263,000 in the first six months of 1997 and 1996,
<PAGE>
respectively, were primarily for productivity improvements. Capital spending
for fiscal year 1997 is currently anticipated to be approximately $9,000,000.
Financing activities provided cash of $1,232,000 in the first six
months of 1997 compared to using cash of $4,683,000 in the
comparable period a year ago. Debt as a percentage of invested
capital was 24.3 percent at April 30, 1997, up from 22.5 percent at
October 31, 1996. Total debt increased to $26,820,000 at April 30,
1997 from $23,140,000 at October 31, 1996. This increase was
primarily attributed to the Company s funding of its equity
investment in McWhorter Thailand in the amount of $2,343,000,
and the repurchase of common stock for treasury at a total cost of
$2,476,000. In the first half of 1996, the Company spent
$5,447,000 to purchase treasury stock.
The Board of Directors of the Company has adopted a resolution
authorizing the repurchase by the Company of up to an aggregate
of 500,000 shares of its common stock over a twelve-month period
ending in February 1998. As of May 31, 1997, the Company had
acquired 130,622 of these shares at a total cost of $2,712,000.
The Company has a $60,000,000 unsecured revolving credit
facility that terminates on February 10, 1999. At April 30, 1997,
$43,000,000 was available under this facility. The credit facility
and internally generated funds are expected to be adequate to
finance McWhorter's capital expenditures and other operating
requirements.
With respect to environmental liabilities, management reviews
each site, taking into consideration the numerous factors that
influence the costs that will likely be incurred. Reserves are
adjusted as additional information becomes available to better
estimate the total remediation costs at individual sites. While
uncertainties exist with respect to the amounts and timing of
McWhorter's ultimate environmental liabilities, management
believes that such liabilities, individually and in the aggregate, will
not have a material adverse effect on the Company's financial
condition or results of operations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On February 19, 1997, the annual meeting of stockholders of the
Company was held. The following individuals were elected
directors at the meeting and the voting results were as follows:
<TABLE>
<CAPTION>
Directors Votes For Votes Withheld
<S> <C> <C>
D. George Harris 7,021,770 21,345
Michelle L. Collins 7,024,148 18,967
Edward M. Giles 7,025,626 17,489
John G. Johnson, Jr. 7,021,838 21,277
Jeffrey M. Nodland 7,016,725 26,390
John R. Stevenson 7,019,039 24,076
Heinn F. Tomfohrde, III 7,020,087 23,028
</TABLE>
<PAGE>
In addition, the following proposal was submitted to stockholders
as described in the Company's Proxy Statement dated January 8,
1997 and was voted upon and approved by the stockholders at the
meeting, with the voting results as follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Against Abstentions
<S> <C> <C> <C>
Ratification of Ernst & Young
LLP as auditors 6,999,242 41,063 2,810
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement regarding computation of net income per share
27 Financial Data Schedules
(b) No reports on Form 8-K were filed during the second
quarter of 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
McWhorter Technologies, Inc.
/s/ Louise M. Tonozzi-Frederick
Louise M. Tonozzi-Frederick
Vice President and Chief Financial Officer
Date: June 11, 1997
<PAGE>
<TABLE>
EXHIBIT 11.1 - Statement regarding computation of net income per share
<CAPTION>
Quarter Ended Six Months Ended
April 30, April 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary
Average common shares outstanding 10,415,153 10,482,335 10,441,729 10,598,502
Less: Shares of restricted stock
awards issued, not yet vested (94,354) (94,354) (94,354) (94,354)
Net effect of dilutive stock
options--based on the treasury
stock method using average market
price 124,318 23,245 122,051 10,073
Total 10,445,117 10,411,226 10,469,426 10,514,221
Net income $3,876,000 $3,187,000 $6,390,000 $5,315,000
Net income per share $ .37 $ .31 $ .61 $ .51
Fully Diluted
Average common shares outstanding 10,415,153 10,482,335 10,441,729 10,598,502
Net effect of dilutive stock
options--based on the treasury
stock method using ending market
price, if higher than average
market price 134,434 48,590 134,039 49,965
Total 10,549,587 10,530,925 10,575,768 10,648,467
Net income $3,876,000 $3,187,000 $6,390,000 $5,315,000
Net income per share $ .37 $ .30 $ .60 $ .50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statements of Income, Balance Sheets, and Statements of Cash Flows and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 1,461
<SECURITIES> 0
<RECEIVABLES> 46,479
<ALLOWANCES> 0
<INVENTORY> 23,242
<CURRENT-ASSETS> 77,089
<PP&E> 111,495
<DEPRECIATION> 38,247
<TOTAL-ASSETS> 159,744
<CURRENT-LIABILITIES> 43,536
<BONDS> 4,320
0
0
<COMMON> 110
<OTHER-SE> 83,220
<TOTAL-LIABILITY-AND-EQUITY> 159,744
<SALES> 152,416
<TOTAL-REVENUES> 152,416
<CGS> 128,831
<TOTAL-COSTS> 128,831
<OTHER-EXPENSES> 13,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 661
<INCOME-PRETAX> 9,879
<INCOME-TAX> 3,489
<INCOME-CONTINUING> 6,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,390
<EPS-PRIMARY> .61
<EPS-DILUTED> 0
</TABLE>
