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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
[ ] 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 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 847-428-2657
(Address of principal executive offices, (Registrant's telephone number
including zip code) including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
-------------------- --------------------
Common Stock, $0.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 [ ]
As of March 8, 1999, 10,233,029 shares of common stock were outstanding.
1
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED 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 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 expected for the
year. The financial statements and the accompanying discussion and analysis of
results of operations and financial condition should be read in conjunction with
the financial statements and notes contained in McWhorter's Annual Report on
Form 10-K for the fiscal year ended October 31, 1998. All references to years
are to fiscal years ended October 31. Unless otherwise stated, per share
information is on a diluted basis.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
January 31,
--------------------
1999 1998
(Note 1)
-------- --------
<S> <C> <C>
Net sales $ 96,235 $ 98,120
Costs and expenses:
Cost of sales 81,566 85,131
Research 2,865 2,654
Selling, general and administrative 7,843 7,039
Other (income) expenses, net (67) (268)
-------- --------
Income from operations 4,028 3,564
Interest expense, net 1,981 1,600
-------- --------
Income before income taxes 2,047 1,964
Income tax expense 839 755
-------- --------
Net income $ 1,208 $ 1,209
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-------- --------
Earnings per share - basic (Note 4) $ .12 $ .12
-------- --------
-------- --------
Earnings per share - diluted (Note 4) $ .12 $ .12
-------- --------
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
(Note 1)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,736 $ 4,099
Accounts receivable 72,047 82,765
Inventories (Note 3) 42,670 40,207
Other current assets 12,865 12,193
--------- ---------
133,318 139,264
Property, plant and equipment 201,644 198,900
Accumulated depreciation (61,951) (58,384)
--------- ---------
Net property, plant and equipment 139,693 140,516
Intangibles, net 75,336 76,117
Other assets 7,905 6,568
--------- ---------
$ 356,252 $ 362,465
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 22,233 $ 26,474
Trade accounts payable 47,565 49,808
Accrued liabilities 15,004 17,812
--------- ---------
84,802 94,094
Long-term debt, less current portion 130,760 130,128
Deferred income taxes 24,890 23,695
Accrued environmental liabilities 1,445 1,566
Other liabilities 5,687 5,538
Shareholders' equity:
Common stock (par value $.01 per share; authorized 30,000,000 shares;
issued 10,965,547 shares at January 31, 1999 and October 31, 1998) 110 110
Additional paid-in capital 11,111 10,931
Retained earnings 107,032 105,824
Currency translation adjustments 1,762 2,381
Treasury stock, at cost (618,218 shares at January 31,
1999 and 644,451 shares at October 31, 1998) (10,082) (10,471)
Other (1,265) (1,331)
--------- ---------
108,668 107,444
--------- ---------
$ 356,252 $ 362,465
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements
</TABLE>
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Additional Currency Total
Common Paid-in Retained Translation Treasury Shareholders'
Stock Capital Earnings Adjustments Stock Other Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October 31, 1997 $ 110 $10,867 $ 92,980 $ (940) $ (9,716) $(1,633) $ 91,668
Comprehensive income:
Net income 12,844 12,844
Foreign currency
translation adjustments 3,321 3,321
---------
Total comprehensive income 16,165
---------
Issuance of common stock for
restricted stock awards 55 100 (94) 61
Deferred compensation stock plan (322) 396 74
Exercise of stock options 9 139 148
Purchase of treasury shares (672) (672)
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Balance October 31, 1998 $ 110 $10,931 $105,824 $2,381 $(10,471) $(1,331) $107,444
Comprehensive income:
Net income 1,208 1,208
Foreign currency
translation adjustments (619) (619)
---------
Total comprehensive income 589
---------
Issuance of common stock for
restricted stock awards 179 505 684
Deferred compensation stock plan (37) 66 29
Exercise of stock options 1 1
Purchase of treasury shares (79) (79)
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Balance January 31, 1999 $ 110 $11,111 $107,032 $1,762 $(10,082) $(1,265) $108,668
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</TABLE>
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended January 31,
------------------------------------
1999 (Note 1) 1998
------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,208 $ 1,209
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 4,505 3,630
Deferred income taxes (232) 539
Other, net (101) 359
Changes in working capital:
Accounts and notes receivable 10,332 4,599
Inventories (2,669) (3,214)
Trade accounts payable and
accrued liabilities (3,287) (9,058)
Other current assets (1,035) (408)
---------- ---------
Net cash provided (used) by operating activities 8,721 (2,344)
INVESTING ACTIVITIES
Acquisition spending, net of cash acquired (8,190)
Capital expenditures (3,370) (2,928)
Investment in and advances to joint ventures (1,130)
Other, net (49) 110
---------- ---------
Net cash used by investing activities (3,419) (12,138)
FINANCING ACTIVITIES
Increase (decrease) in debt, net (3,587) 12,928
Other (78) 13
---------- ---------
Net cash provided (used) by financing activities (3,665) 12,941
Increase (decrease) in cash 1,637 (1,541)
Cash at beginning of period 4,099 3,929
---------- ---------
Cash at end of period $ 5,736 $ 2,388
---------- ---------
---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In April 1998, the Company completed the acquisition of substantially all
of the assets of Accurate Coatings and Dispersions, Inc. (Accurate) for
approximately $39,400,000 and the assumption of $6,500,000 in debt. The
acquisition was accounted for using the purchase method. The excess of the
purchase price over the net book value of the assets acquired was
approximately $35,000,000, the largest component of which was allocated to
goodwill. The results of Accurate have been included in the consolidated
results of the Company since the date of acquisition. The pro forma
operating results, including Accurate for the quarter ended January 31,
1998, would not have been materially different from the consolidated
results of the Company.
2. During the first quarter of 1999, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive
Income". In accordance with SFAS No. 130, the Company has reported
comprehensive income and its components in the Company's Consolidated
Statement of Shareholders' Equity. Adoption of this statement had no effect
on the Company's financial position, results of operations, or cash flows.
3. The major classes of inventories consist of the following:
<TABLE>
<CAPTION>
January 31, October 31,
DOLLARS IN THOUSANDS 1999 1998
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<S> <C> <C>
Manufactured products $ 28,793 $ 26,339
Raw materials, supplies and work-in-process 13,877 13,868
---------------------------------------------------------------------------------
$ 42,670 $ 40,207
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---------------------------------------------------------------------------------
</TABLE>
4. Earnings per share (EPS) is computed by dividing net income by the weighted
average number of shares of stock (basic) plus stock equivalents (diluted)
outstanding during the year. Stock equivalents consist primarily of stock
options and are included in the calculation of weighted average shares
outstanding using the treasury stock method. Basic weighted average shares
reconciles to diluted weighted average shares as follows:
<TABLE>
<CAPTION>
Quarter ended January 31,
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Basic weighted average shares outstanding 10,290,375 10,241,006
Dilutive effect of common stock equivalents 94,936 152,212
--------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 10,385,311 10,393,218
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
McWhorter is a leading manufacturer of surface coating resins and colorants
and is a manufacturer of resins used in the reinforced fiberglass plastics
industry. Surface coating resins are a primary component of paint and
coatings which are used for a variety of protective and decorative purposes.
Colorants are used to disperse pigments in paints and coatings. Resins used
for reinforced fiberglass plastics are a primary component for various
fiberglass products. In April 1998, the Company completed the acquisition of
Accurate Coatings and Dispersions, Inc. (Accurate). Accurate, located in
South Holland, Illinois, manufactures and distributes colorants for the
coatings industry. The acquisition of Accurate expands McWhorter's presence
in the colorant market and better enables the Company to serve its customers.
McWhorter purchased Arizona Chemical's customer list and technology related
to its European alkyd resin business in April 1998. The Company strengthened
its global presence with the purchase of the equity interests of its joint
venture partners in McWhorter Technologies Europe (McWhorter Europe) in the
first quarter of 1998. As a result, the Company increased its equity interest
in McWhorter Europe from 33% to 100%.
RESULTS OF OPERATIONS
Net sales decreased 2 percent in the first quarter of 1999 to $96,235,000
compared to $98,120,000 in the same period of 1998. The decrease in net sales
resulted from lower volumes in the Company's liquid coating resins business
and was offset by the inclusion of Accurate sales in the first quarter of
1999 and improved volumes in the Company's composite polymers and powder
coating resins businesses.
The Company's gross profit margin for the first quarter of 1999 was 15.2
percent compared to 13.2 percent in last year's first quarter. Margins were
favorably impacted by lower raw material costs, product mix, and internal
process improvements in the U.S.
Operating expenses (research, and selling, general and administrative) for
the first quarter of 1999 were 11.1 percent of net sales compared to 9.9
percent in the prior year's first quarter. The inclusion of Accurate and
higher professional services expense in the U.S. base businesses accounted
for the increase versus the prior year.
Net interest expense was $1,981,000 in the first quarter of 1999 compared to
$1,600,000 in the prior year's first quarter. The increase is due to debt
borrowed to fund the Accurate acquisition.
The effective tax rate for the first quarter of 1999 was 41.0 percent versus
42.0 percent in the comparable period a year ago. Favorable changes in
Italian income tax regulations and rates during 1998 resulted in the lower
rate in the first quarter of 1999.
Net income for the first quarter of 1999 was $1,208,000, or 12 cents per
share compared to last year's first quarter net income of $1,209,000, or 12
cents per share.
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FINANCIAL CONDITION
At January 31, 1999 the Company's working capital was $48,516,000 and the
current ratio was 1.6. At January 31, 1998 the Company's working capital was
$45,170,000 and the current ratio was 1.5. In the first quarter of 1999, cash
provided by operations was $8,721,000 compared to cash used by operations of
$2,344,000 in the comparable period a year ago. Working capital changes
accounted for the improvement.
Investing activities used cash of $3,419,000 in the first quarter of 1999 and
$12,138,000 in the same period a year ago. The decrease resulted primarily
from the purchase of the equity interests of the Company's joint venture
partners in McWhorter Europe in the first quarter of 1998. Capital
expenditures of $3,370,000 in the first quarter of 1999 were primarily for
implementation of an Enterprise Resource Planning package and productivity
improvements. Capital expenditures of $2,928,000 in the first quarter of 1998
were primarily for productivity improvements. Capital spending for the fiscal
year 1999 is currently anticipated to be approximately $25,000,000.
Financing activities used cash of $3,665,000 in the first quarter of 1999
compared to cash provided of $12,941,000 in the comparable period a year ago.
The decrease was primarily attributed to borrowings in the first quarter of
1998 to fund the purchase of the equity interests of the Company's joint
venture partners in McWhorter Europe and repayments of debt in the first
quarter of 1999. Debt as a percentage of invested capital was 58.5 percent at
January 31, 1999 down from 59.3 percent at October 31, 1998. Total debt
decreased to $152,993,000 at January 31, 1999 from $156,602,000 at October
31, 1998.
The Company has a $150,000,000 unsecured revolving credit facility that
terminates on July 30, 2002. At January 31, 1999, approximately $26,700,000
was available under this facility. The Company's European subsidiaries,
primarily the Italian subsidiary, have short-term lines of credit that are
cancelable at any time of approximately $28,500,000 of which approximately
$13,900,000 is available for future use at January 31, 1999. The credit
facilities and internally generated funds are expected to be adequate to
finance McWhorter's capital expenditures and other operating requirements.
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. The resolution expires in May 1999. The Company has purchased
37,600 shares at a cost of approximately $751,000 under this plan as of
January 31, 1999.
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.
8
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IMPACT OF YEAR 2000
During 1999, the Company has continued its program to prepare its information
technology (IT) and non-information technology (non-IT) systems for year 2000
compliance. The year 2000 issue relates to computer systems that use two
digits rather than four to define the applicable year and whether such
systems will properly process information when the year changes to 2000.
The Company has completed an assessment of the impact of the year 2000 on its
purchased and internally developed IT systems. The current purchased software
and a majority of the internally developed software are year 2000 compliant.
Non-compliant internally developed software is expected to be replaced by
June 1999. The Company is currently in the process of modifying and testing
its non-IT systems to ensure that these systems will function properly with
respect to dates in the year 2000. Non-IT systems are expected to be
compliant by October 1999. The Company has begun formal communications with
significant suppliers and customers to determine the extent to which the
Company's activities would be impacted by those third parties' failure to
remediate their own year 2000 issues.
The estimated costs related to testing and modifying existing systems for
year 2000 compliance are approximately $575,000, of which $200,000 has been
spent or committed to date. Approximately $525,000 of the total compliance
costs are expected to be capital expenditures. No significant information
systems projects have been deferred to accommodate the year 2000 issues.
Year 2000 compliance is expected to be achieved no later than October 1999.
The Company believes that with the planned modifications, year 2000 issues
will not have a material impact on operations. However, if these
modifications are not made, or are not completed on a timely basis, year 2000
issues could result in the temporary inability to process orders, send
invoices, or engage in similar business activities, which would have a
material impact on the Company's operations. Failure by significant suppliers
and customers to be year 2000 compliant could also have a material impact on
the Company. The amounts of potential liability and lost revenue resulting
from the failure to be year 2000 compliant cannot be reasonably estimated at
this time.
The Company's contingency plans will be finalized as the testing of systems
is completed. Contingency plans are expected to be completed by June 1999.
These plans include the manual processes required to perform critical
business functions that could be affected by year 2000 issues.
This is a year 2000 readiness disclosure statement within the meaning of the
Year 2000 Information and Readiness Disclosure Act. (P.L. 105-271)
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Management's discussion and analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act. Such statements relate to, among other things,
expenditures, cost reductions, cash flow, operating
9
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improvements, and year 2000 compliance, and are indicated by words such as
"estimates", "expects", and similar words and phrases. Such statements are
subject to inherent uncertainties and risks which could cause actual results
to vary materially from expected results, including but not limited to the
following: levels of industrial activity and economic conditions in the U.S.
and other countries around the world, pricing pressures and other competitive
factors, and levels of capital spending in certain industries, all of which
could have a material impact on the Company's order rates and product sale
prices; McWhorter's ability to integrate and operate acquired businesses on a
profitable basis; the relationship of the U.S. dollar to other currencies and
its impact on pricing and cost competitiveness; interest rates; utilization
of McWhorter's capacity and the effect of capacity utilization on McWhorter's
costs; labor market conditions and raw material costs; developments with
respect to contingencies, such as environmental matters and litigation; year
2000 compliance; and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in information relating to market risk
since the Company's disclosure included in Item 7A of Form 10-K as filed with
the Securities and Exchange Commission on January 26, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the first quarter of 1999
(b) No reports on Form 8-K were filed during the first quarter of
1999.
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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: March 9, 1999
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 5,736
<SECURITIES> 0
<RECEIVABLES> 72,047
<ALLOWANCES> 0
<INVENTORY> 42,670
<CURRENT-ASSETS> 133,318
<PP&E> 201,644
<DEPRECIATION> 61,951
<TOTAL-ASSETS> 356,252
<CURRENT-LIABILITIES> 84,802
<BONDS> 130,760
0
0
<COMMON> 110
<OTHER-SE> 108,558
<TOTAL-LIABILITY-AND-EQUITY> 356,252
<SALES> 96,235
<TOTAL-REVENUES> 96,235
<CGS> 81,566
<TOTAL-COSTS> 81,566
<OTHER-EXPENSES> 10,641
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<INTEREST-EXPENSE> 1,981
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