<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 1-13574
SCHULLER INTERNATIONAL GROUP, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1196355
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 17th Street
Denver, Colorado 80202
- - --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(303) 978-2000
---------------
(Registrant's telephone number, including area code)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
Schuller International Group, Inc. is a wholly owned subsidiary of
Schuller Corporation and there is no market for the registrant's common stock.
As of November 8, 1996, there were 100 shares of the registrant's sole class of
common stock outstanding.
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*PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
* "Company" when used in this report refers to Schuller International
Group, Inc., incorporated in the State of Delaware in 1992, and
includes, where applicable, its consolidated subsidiaries.
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SCHULLER INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and equivalents $ 85,697 $ 140,328
Marketable securities, at cost which
approximates market 2,689 21,043
Receivables, net 266,689 192,426
Inventories 111,787 77,121
Receivable from parent 3,899 10,920
Prepaid expenses 7,538 4,932
Deferred tax assets 26,044 31,957
----------------------------------------
Total Current Assets 504,343 478,727
Property, Plant and Equipment,
net of accumulated depreciation of
$616,860 and $578,120, respectively 787,749 715,903
Receivable from Parent 9,950 9,698
Other Assets 321,884 202,461
----------------------------------------
$1,623,926 $1,406,789
===================================================================================================================
LIABILITIES
- - -------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts and notes payable $ 141,132 $ 91,206
Compensation and benefits 102,783 98,081
Income taxes 17,585 11,564
Note payable to parent 25,000
Other accrued liabilities 59,870 64,600
----------------------------------------
Total Current Liabilities 321,370 290,451
Long-Term Debt, less current portion 418,147 408,807
Notes Payable to Parent 75,000
Postretirement Benefits Other Than
Pensions 205,334 203,107
Deferred Income Taxes and
Other Noncurrent Liabilities 304,185 287,990
----------------------------------------
1,324,036 1,190,355
----------------------------------------
Contingencies and Commitments (Note 3)
STOCKHOLDER'S EQUITY
- - -------------------------------------------------------------------------------------------------------------------
Common Stock, $1 par value; 100 shares
authorized, issued and outstanding
Capital in Excess of Par Value 57,082 57,082
Retained Earnings 215,492 126,668
Cumulative Currency Translation Adjustment 27,316 32,684
----------------------------------------
299,890 216,434
----------------------------------------
$1,623,926 $1,406,789
===================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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SCHULLER INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -------------------------------
1996 1995 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $422,978 $363,094 $1,130,490 $1,045,546
Cost of Sales 301,539 265,069 806,990 745,517
Selling, General and
Administrative 37,314 30,531 103,932 90,098
Research, Development
and Engineering 8,550 7,187 24,133 21,477
Services Provided by
Parent 3,465 2,954 10,251 9,137
Other Income (Expense),
net (1,797) 593 1,361 (7,013)
------------------------------------------------------------------------
Income from Operations 70,313 57,946 186,545 172,304
Interest Income 1,503 1,891 5,499 5,970
Interest Expense 11,749 10,266 34,008 32,980
Interest Expense - Parent 980 548 1,982 1,662
------------------------------------------------------------------------
Income before Income Taxes 59,087 49,023 156,054 143,632
Income Tax Expense 25,537 21,077 67,230 61,760
------------------------------------------------------------------------
Net Income $ 33,550 $ 27,946 $ 88,824 $ 81,872
===================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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SCHULLER INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 88,824 $ 81,872
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 51,542 46,413
Deferred taxes 11,814 4,195
Product guarantee income 6,019 6,518
Provision for furnace rebuilds 5,616 6,183
Postretirement and pension benefits 8,877 15,434
Other, net 19,129 7,878
(Increase) decrease in current assets:
Receivables (28,332) (23,706)
Inventories (17,047) (21,747)
Prepaid expenses (2,309) (1,653)
Receivable from parent 6,769 7,315
Increase (decrease) in current liabilities:
Accounts payable (9,721) 1,433
Compensation and benefits (10,512) (16,733)
Income taxes 6,232 7,652
Other accrued liabilities (9,903) (9,371)
Decrease in postretirement benefits other
than pensions (8,257) (11,702)
Decrease in other noncurrent liabilities (14,044) (1,211)
---------------------------------------
Net cash provided by operating activities 104,697 98,770
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- - -------------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (76,840) (80,105)
Acquisitions (151,555)
Proceeds from sales of assets 1,567 2,023
Purchases of held-to-maturity securities (8,580) (33,673)
Purchases of available-for-sale securities (4,982) (6,080)
Proceeds from maturities of
held-to-maturity securities 25,946 58,357
Proceeds from sales or maturities of
available-for-sale securities 6,082
(Increase) decrease in other assets 4,859 (14,044)
---------------------------------------
Net cash used in investing activities (203,503) (73,522)
---------------------------------------
</TABLE>
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SCHULLER INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, continued
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES: 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Issuance of debt - external $ 724 $ 5,339
Issuance of debt - parent 50,000
Payments on debt - external (5,213) (518)
---------------------------------------
Net cash provided by financing activities 45,511 4,821
---------------------------------------
Effect of Exchange Rate Changes on Cash (1,336) 167
---------------------------------------
Net Increase (Decrease) in Cash and Equivalents (54,631) 30,236
Cash and Equivalents at Beginning of Period 140,328 93,428
---------------------------------------
Cash and Equivalents at End of Period $ 85,697 $123,664
===================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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SCHULLER INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying condensed consolidated financial statements include the
accounts of Schuller International Group, Inc., and those of its majority owned
subsidiaries (collectively, "the Company"). The Company is a wholly owned
subsidiary of Schuller Corporation.
The condensed consolidated financial statements as of September 30, 1996 and
December 31, 1995 and for the three and nine month periods ended September 30,
1996 and 1995 reflect all normal, recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
condition and the results of operations for the periods presented. The
year-end condensed consolidated balance sheet was derived from audited
financial statements, and as presented does not include all disclosures
required by generally accepted accounting principles.
The Company has reclassified the presentation of certain prior period
information to conform with the current presentation format.
Additional information regarding the Company's accounting policies, operations
and financial position, is contained or incorporated in the Company's Form 10-K
for the year ended December 31, 1995 filed with the Securities and Exchange
Commission.
Note 1 - Inventories
The major classes of inventories were as follows:
<TABLE>
<CAPTION>
(Thousands of dollars)
September 30, December 31,
1996 1995
--------------------------------
<S> <C> <C>
Finished goods $ 64,976 $46,432
Raw materials and supplies 35,298 23,344
Work-in-process 11,513 7,345
--------------------------------
$111,787 $77,121
================================
</TABLE>
Note 2 - Notes Payable to Parent
During August 1996, the Company executed a $50 million note payable to Schuller
Corporation, due October 1, 1998. The proceeds were used to partially finance
the acquisition of NRG Barriers, Inc. ("NRG") - see Note 5. Also during the
third quarter of 1996, a $25 million note to Schuller Corporation has been
reclassified from current liabilities to long term debt.
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Note 3 - Contingencies and Commitments
Between 1988 and 1992, the Company manufactured phenolic roofing insulation
which may, under certain circumstances, contribute to the corrosion of metal
decks on which it is installed. Subsequently, the Company began a voluntary
program to inspect such metal decks and remediate where appropriate. The
Company has also accrued for costs relating to future inspections, remediation
and anticipated claims. These accruals are based on the Company's historical
experience regarding the incidence of corrosion and the cost of remediation and
include a number of assumptions related to the types of roofs on which phenolic
insulation has been installed as well as the assumption that the Company's past
remediation experience will continue over the remaining lives of roofs
insulated with the Company's phenolic roofing insulation.
During 1995, the Company and its liability insurance carriers reached a
settlement with respect to the extent of coverage to be provided by such
carriers. In addition, during 1995, the Company and the former owner of the
phenolic roofing insulation business reached an agreement with respect to the
costs to be reimbursed by the former owner. Pursuant to these agreements, the
Company has been reimbursed for a portion of historical costs incurred and is
entitled to receive reimbursement for a substantial portion of future costs to
be incurred by the Company for inspection and remediation.
In 1996, the Company, Schuller Corporation and a third party were named as
defendants in two class action cases filed in U.S. District Court in Boston,
Massachusetts. The plaintiffs purport to represent all building owners in the
United States with phenolic insulation installed on their roof decks and seek
damages and injunctive relief, including an order requiring the removal and
replacement of the phenolic insulation and remediation of any deck corrosion.
The Company intends to defend these allegations vigorously.
The Company has reviewed its historical inspection and remediation experience
and the terms and collectibility of amounts payable under the reimbursement
agreements in light of the commitments and contingencies described above.
Based on the information available to date and subject to the assumptions
described above, if additional costs are incurred in excess of the accrued
amounts, such costs are not expected to have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
Note 4 - Other Income (Expense), net
Other income, net, was $1.4 million for the first nine months of 1996 compared
with other expense, net, of $7 million for the same period of 1995. Other
income for 1996 included a $7.2 million gain relating to the receipt of surplus
pension assets in connection with the settlement of
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defined benefit pension plans in which the Company's Canadian employees
previously participated. Other expense for 1995 included a $2.9 million charge
for legal costs in connection with litigation brought by the Company against
the former owner of the phenolic roofing business.
Note 5 - Acquisitions
In August 1996, the Company acquired NRG Barriers, Inc., a U.S. manufacturer of
commercial roofing insulation, and the assets of Dibiten USA and Dibiten
Mexico, manufacturers of commercial roofing products, in separate transactions.
Nord Bitumi SpA, headquartered in Italy, and Nord Bitumi U.S., Inc.,
manufacturers of commercial roofing products, were acquired in the first
quarter of 1996. Also during the first quarter of 1996, the Company acquired
Web Dynamics, a U.S. manufacturer of polymer filtration products. The
acquisitions were accounted for under the purchase method, and accordingly, the
purchase prices were allocated on the basis of the estimated fair value of
assets acquired and liabilities assumed. In addition, a joint venture, in
which the Company has a 60 percent interest, to operate and expand an existing
fiber glass mat facility in China, became effective January 1, 1996, and is
accounted for under the equity method.
The combined cash purchase price for the acquisitions and the Company's
contribution to the joint venture totaled $151.6 million during the first nine
months of 1996. Total purchase prices in excess of net assets acquired of
approximately $125 million are being amortized on a straight-line basis over 20
years. In connection with these acquisitions, the Company assumed $43 million
of debt, $38 million of which was outstanding at September 30, 1996. The
operating results of the acquired businesses have been included in the
condensed consolidated statement of income from the dates of acquisition.
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Note 6 - Business Segment Information
The Company reports separately the results of the Building Products and
Engineered Products segments. The Building Products segment consists of the
Company's building insulation, commercial and industrial roofing systems and
mechanical insulations businesses. The Engineered Products segment consists of
the Company's specialty insulations, filtration and mats and fibers businesses.
<TABLE>
<CAPTION>
(Thousands of dollars)
Three Months
Ended September 30,
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Building Products 1996 1995
- - -----------------------------------------------------------------------------------------------------------
Net Sales $268,452 $219,328
Costs and Expenses 222,934 185,463
Other Income (Expense), net (846) 1,378
- - -----------------------------------------------------------------------------------------------------------
Income from Operations $ 44,672 $ 35,243
===========================================================================================================
Engineered Products
- - -----------------------------------------------------------------------------------------------------------
Net Sales $163,442 $149,736
Costs and Expenses 130,771 122,263
Other Income (Expense), net 606 1,222
- - -----------------------------------------------------------------------------------------------------------
Income from Operations $ 33,277 $ 28,695
===========================================================================================================
Corporate and Eliminations
- - -----------------------------------------------------------------------------------------------------------
Net Sales $ (8,916) $ (5,970)
Costs and Expenses (2,837) (1,985)
Other Income (Expense), net (1,557) (2,007)
- - -----------------------------------------------------------------------------------------------------------
Income (Loss) from Operations $ (7,636) $ (5,992)
===========================================================================================================
Consolidated Total Company
- - -----------------------------------------------------------------------------------------------------------
Net Sales $422,978 $363,094
Costs and Expenses 350,868 305,741
Other Income (Expense), net (1,797) 593
- - -----------------------------------------------------------------------------------------------------------
Income from Operations $ 70,313 $ 57,946
===========================================================================================================
</TABLE>
Net sales included in Corporate and Eliminations relate principally to the
elimination of intersegment sales from the Engineered Products segment to the
Building Products segment (at prices approximating market).
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<TABLE>
<CAPTION>
(Thousands of dollars)
Nine Months
Ended September 30,
- - -----------------------------------------------------------------------------------------------------------
Building Products 1996 1995
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 676,670 $ 596,795
Costs and Expenses 569,868 496,005
Other Income (Expense), net (1,336) (1,112)
- - -----------------------------------------------------------------------------------------------------------
Income from Operations $ 105,466 $ 99,678
===========================================================================================================
Engineered Products
- - -----------------------------------------------------------------------------------------------------------
Net Sales $ 478,755 $ 468,309
Costs and Expenses 383,979 377,551
Other Income (Expense), net 709 1,749
- - -----------------------------------------------------------------------------------------------------------
Income from Operations $ 95,485 $ 92,507
===========================================================================================================
Corporate and Eliminations
- - -----------------------------------------------------------------------------------------------------------
Net Sales $ (24,935) $ (19,558)
Costs and Expenses (8,541) (7,327)
Other Income (Expense), net 1,988 (7,650)
- - -----------------------------------------------------------------------------------------------------------
Income (Loss) from Operations $ (14,406) $ (19,881)
===========================================================================================================
Consolidated Total Company
- - -----------------------------------------------------------------------------------------------------------
Net Sales $1,130,490 $1,045,546
Costs and Expenses 945,306 866,229
Other Income (Expense), net 1,361 (7,013)
- - -----------------------------------------------------------------------------------------------------------
Income from Operations $ 186,545 $ 172,304
===========================================================================================================
</TABLE>
Net sales included in Corporate and Eliminations relate principally to the
elimination of intersegment sales from the Engineered Products segment to the
Building Products segment (at prices approximating market).
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<PAGE> 12
Report of Independent Accountants
To the Securityholders and Directors
of Schuller International Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Schuller International Group, Inc., as of September 30, 1996, and the related
condensed consolidated statement of income for the three and nine month periods
ended September 30, 1996 and 1995, and the condensed consolidated statement of
cash flows for the nine month periods ended September 30, 1996 and 1995. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995 and the
related consolidated statements of income, cash flows and stockholder's equity
for the year then ended (not presented herein); and in our report dated
February 2, 1996, except for Note 21, as to which the date is March 23, 1996,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ COOPERS & LYBRAND L.L.P.
- - -----------------------------
COOPERS & LYBRAND L.L.P.
Denver, Colorado
November 12, 1996
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ITEM 2.
SCHULLER INTERNATIONAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Schuller International Group, Inc. ("the Company"), a wholly owned subsidiary
of Schuller Corporation ("Schuller"), manufactures and markets insulation for
buildings and equipment, commercial roofing systems, high-efficiency air
filtration media and fibers and nonwoven mats used as reinforcements in
building and industrial applications. The Company operates 50 manufacturing
facilities in North America, Europe and China, and is comprised of two
principal business segments: Building Products and Engineered Products.
The Building Products segment consists of the Company's building insulation
business, which manufactures fiber glass wool insulation for walls and attics
in residential and commercial buildings; commercial and industrial roofing
systems business, which supplies roofing membranes, insulations, accessories
and related guarantees; and mechanical insulations business, which manufactures
pipe and duct insulation for use in commercial buildings, factories, refineries
and other industrial applications.
The Engineered Products segment consists of the Company's specialty insulations
and filtration business, which manufactures thermal and
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<PAGE> 14
acoustic insulation for aircraft, automobiles and heating, ventilating and air
conditioning ("HVAC") and other equipment; air filtration media for commercial
and industrial buildings; and ultra-fine fibers for clean room air filters and
battery separators. The Engineered Products segment also includes the
Company's mats and fibers business, which manufactures continuous filament
fiber glass-based products used for reinforcing roofing, flooring, wall
coverings and plastic products.
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine month periods ended
September 30, 1996 and 1995, certain income and expense items and the
percentage that such items increased:
<TABLE>
<CAPTION>
Three Months
Ended September 30, Percentage
1996 1995 Increase
---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
Net Sales:
Building Products $ 268,452 $ 219,328 22.4
Engineered Products 163,442 149,736 9.2
Corporate and Eliminations (8,916) (5,970)
---------- ----------
422,978 363,094 16.5
Cost of Sales 301,539 265,069 13.8
---------- ----------
Gross Profit 121,439 98,025 23.9
Other Operating Expenses 49,329 40,672 21.3
Other Income (Expense), net (1,797) 593
---------- ----------
Income from Operations:
Building Products 44,672 35,243 26.8
Engineered Products 33,277 28,695 16.0
Corporate and Eliminations (7,636) (5,992)
---------- ----------
$ 70,313 $ 57,946 21.3
========== ==========
</TABLE>
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<TABLE>
<CAPTION>
Nine Months
Ended September 30, Percentage
1996 1995 Increase
---------- ---------- ---------------
(Thousands of dollars)
<S> <C> <C> <C>
Net Sales:
Building Products $ 676,670 $ 596,795 13.4
Engineered Products 478,755 468,309 2.2
Corporate and Eliminations (24,935) (19,558)
---------- ----------
1,130,490 1,045,546 8.1
Cost of Sales 806,990 745,517 8.2
---------- ----------
Gross Profit 323,500 300,029 7.8
Other Operating Expenses 138,316 120,712 14.6
Other Income (Expense), net 1,361 (7,013)
---------- ----------
Income from Operations:
Building Products 105,466 99,678 5.8
Engineered Products 95,485 92,507 3.2
Corporate and Eliminations (14,406) (19,881)
---------- ----------
$ 186,545 $ 172,304 8.3
========== ==========
</TABLE>
Third Quarter 1996 Compared With Third Quarter 1995
- - ---------------------------------------------------
The Company's net sales for the third quarter of 1996 increased $59.9 million,
or 16.5 percent, to $423 million from $363.1 million for the same period of
1995. Gross profit increased $23.4 million, or 23.9 percent, compared with the
third quarter of 1995, with gross profit margins of 28.7 percent and 27 percent
for the quarters ended September 30, 1996 and 1995, respectively. Income from
operations for the third quarter of 1996 increased $12.4 million, or 21.3
percent, to $70.3 million from $57.9 million.
The Building Products segment's net sales increased $49.2 million, or 22.4
percent, to $268.5 million compared with $219.3 million for the third quarter
of 1995. Income from operations increased $9.5 million, or 26.8
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percent, to $44.7 million from $35.2 million. The increase in net sales is
due primarily to the inclusion of the commercial and industrial roofing
businesses acquired during 1996. In addition to the acquisitions, the
operating results of the roofing business increased due to higher selling
prices during the third quarter of 1996, while the third quarter of 1995
reflected higher raw materials costs and other nonrecurring expenses. The
building insulation business reported moderately improved net sales for the
third quarter of 1996 as higher volumes from increased housing starts in the
U.S. and Canada more than offset the effects of continuing pricing pressures.
Income from operations likewise improved as the Company realized production
efficiencies from operating at high capacity output levels to meet the current
strong demand. Mechanical insulations reported improved operating results on
higher sales volumes, reflecting market share gains and continued strengthening
of commercial and industrial construction markets.
The Engineered Products segment's net sales increased $13.7 million, or 9.2
percent, to $163.4 million compared with $149.7 million for the third quarter
of 1995. Income from operations increased $4.6 million, or 16 percent, to $33.3
million from $28.7 million. The U.S. mats and fibers business reported
significantly higher net sales and income from operations due to increased
sales volumes and enhanced productivity. These improvements are due primarily
to expanded production capacity resulting from the 1996 second quarter
completion of a furnace rebuild, and slightly higher selling prices due to
industry capacity constraints.
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<PAGE> 17
The U.S. operating results were partially offset by continuing weakness in
European construction markets and decreases in the U.S. dollar-reported results
of the Company's German operations due to strengthening of the U.S. dollar
against the German mark. The specialty insulations and filtration businesses
experienced slightly higher overall net sales and operating income due to
improvements in sales of HVAC equipment insulation and growing, yet highly
competitive, markets for ultra-fine fibers. These operating improvements were
partially offset by increased fixed costs related to recently completed
capacity expansions in filtration, along with weakness in sales of automotive
insulation products due to competition from alternate materials.
Other operating expenses include selling, general, administrative and research,
development and engineering expenses, and services provided by parent. These
expenses, while increasing $8.7 million, remained relatively constant at 11.7
percent and 11.2 percent of net sales for the third quarters of 1996 and 1995,
respectively. The increase is principally due to the additional expenses as a
result of recently acquired companies, the cost of acquisition activities, and
increased product and process improvement programs.
First Nine Months of 1996 Compared With First Nine Months of 1995
- - -----------------------------------------------------------------
The Company's net sales for the nine months ended September 30, 1996 increased
$84.9 million, or 8.1 percent, to $1.13 billion from $1.05 billion for 1995.
Gross profit increased $23.5 million, or 7.8 percent,
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compared with 1995, with gross profit margins of 28.6 percent and 28.7 percent
for 1996 and 1995, respectively. Income from operations for the nine months
ended September 30, 1996 increased $14.2 million, or 8.3 percent, to $186.5
million from $172.3 million.
The Building Products segment's net sales increased $79.9 million, or 13.4
percent, to $676.7 million compared with $596.8 million for the same period of
1995. Income from operations increased $5.8 million, or 5.8 percent, to
$105.5 million from $99.7 million. The net sales increase is principally due
to the inclusion of the operating results of the 1996 acquisitions by the
commercial and industrial roofing systems business. Also during the first nine
months of 1996, the roofing business experienced increased selling prices and
lower operating costs when compared with 1995. While net sales for the
building insulation business increased during the first nine months of 1996,
operating profits declined as lower selling prices more than offset the effects
of increased housing starts and recent productivity improvements. Net sales
and operating income for mechanical insulations increased slightly compared
with 1995 as nonresidential construction markets remained strong.
The Engineered Products segment's net sales increased $10.5 million, or 2.2
percent, to $478.8 million compared with $468.3 million for the same period of
1995. Income from operations increased $3 million, or 3.2 percent, to $95.5
million from $92.5 million. Net sales and income from operations for U.S. mats
and fibers increased moderately compared with
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<PAGE> 19
1995 on higher selling prices, as industry capacity remained constrained, and
higher sales volumes, as the Company's capacity was expanded mid year 1996.
These improvements were partially offset by decreases in the Company's German
operations due to the continuing weakness in European construction markets,
along with the strength of the U.S. dollar against the German mark. The
filtration and specialty insulations businesses reported moderately improved
operating income on slightly higher net sales as strong demand for ultra-fine
fibers used for filtration and increases in sales of HVAC equipment insulation
were partially offset by weakness in sales of automotive insulation products.
Other operating expenses increased $17.6 million, and were slightly higher as
a percentage of net sales for 1996 at 12.2 percent compared with 11.5 percent
for the first nine months of 1995. The increase is principally due to the
additional expenses of recently acquired companies, the cost of acquisition
activities, and increased product and process improvement programs.
Other income, net, was $1.4 million for the first nine months of 1996 compared
with other expense, net, of $7 million for the same period of 1995. Other
income for 1996 included a $7.2 million gain relating to the receipt of surplus
pension assets in connection with the settlement of defined benefit pension
plans in which the Company's Canadian employees previously participated. Other
expense for 1995 included a $2.9 million charge for legal costs in connection
with litigation brought by the
I-18
<PAGE> 20
Company against the former owner of the phenolic roofing business.
LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as the ability to generate sufficient
cash flow to satisfy operating requirements, fund capital expenditures and meet
existing obligations and commitments. In addition, liquidity also includes the
ability to obtain appropriate financing and to convert into cash those assets
that are no longer required to meet the Company's strategic objectives.
Therefore, liquidity should not be considered separately from capital
resources, which consist of currently or potentially available funds for use
in achieving long-range business objectives and meeting debt service
commitments. In addition, the Company's relationship with Schuller Corporation
should be considered in evaluating liquidity.
The Company's Senior Notes are governed by an indenture that contains a number
of financial and operating covenants including, among other things,
restrictions on borrowings, investments, stock issuances and repurchases,
dividends and other distributions by the Company and certain of its
subsidiaries, transactions with Schuller Corporation and other affiliates,
disposal of assets and prepayments on indebtedness subordinate to the Senior
Notes. As of September 30, 1996, the maximum amount available for dividends
under the terms of the indenture was approximately $214.5 million.
Noncompliance with the covenants in the indenture could result in the
termination of existing credit agreements and the acceleration of
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<PAGE> 21
debt owed by the Company and its subsidiaries. At September 30, 1996, the
Company was in compliance with these covenants.
At September 30, 1996, the Company had cash and marketable securities of $88.4
million, of which $53.2 million was available for domestic operating purposes.
In addition, at September 30, 1996, the Company had a $100 million receivables
sale facility (the "Receivables Facility") for its domestic short-term working
capital requirements. Amounts available for borrowing under the Receivables
Facility are based on the daily balance of certain outstanding trade accounts
receivable adjusted for various factors as defined under the terms of the
Receivables Facility. There have been no borrowings under the Receivables
Facility through September 30, 1996. The Company's international subsidiaries
also had borrowing and working capital facilities totaling $85 million at
September 30, 1996. These facilities, of which $80 million was available for
borrowing at September 30, 1996, are secured by the Company's shares and
interests in certain international subsidiaries and joint ventures.
The Company's net operating activities provided $104.7 million of cash during
the first nine months of 1996. The Company's cash flows from operating
activities are primarily influenced by sales volume and selling prices. Demand
for the Company's products has historically been cyclical due to macroeconomic
factors affecting residential and commercial construction markets. Selling
prices are subject to factors influenced by the competitive environment in
which the Company operates, including
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<PAGE> 22
fluctuations in overall capacity utilization.
During the first nine months of 1996, sales volumes increased due to continued
strength in U.S. construction markets, recently completed acquisitions and
increases in operating capacity, partially offset by softness in European
construction markets. The Company's building insulation business continued to
experience price declines which began in the second quarter of 1995 due to new
industry capacity. Building insulation should, however, benefit for the
remainder of 1996 from strong housing starts experienced through August 1996.
While pricing for the Company's mats and fibers has been strong in 1996 as
industry production was constrained, recently added capacity may adversely
impact future pricing.
The Company's investing activities included the combined cash purchase prices
for acquisitions and contributions to a joint venture totaling $151.6 million
during the first nine months of 1996. The Company's capital expenditures for
the nine months ended September 30, 1996 totaled $76.8 million, excluding
acquisitions, of which approximately $35 million were for capacity expansion
projects. The Company's capacity expansion programs are periodically revised
to reflect changes in demand, industry capacity and the results of productivity
and technology innovations. The Company currently estimates capital spending
in 1996 of approximately $100 million to $110 million, excluding acquisitions,
of which approximately $40 million to $50 million will be used in capacity
expansion programs.
I-21
<PAGE> 23
As of September 30, 1996, outstanding purchase commitments relating to these
and other projects totaled $24.1 million.
The Company's financing activities for the first nine months of 1996 included
the proceeds from a $50 million note payable to Schuller Corporation, due
October 1, 1998. The proceeds were used to partially finance the acquisition
of NRG Barriers, Inc. during the third quarter of 1996.
The Company believes that its current cash position, funds available from
borrowing facilities, and cash generated from operations will enable it to
satisfy its debt service requirements, its ongoing capital expansion program
and its other ongoing operating costs. However, the Company may need to access
capital markets to pay the principal of its $400 million Senior Notes due in
2004, or in connection with possible significant future acquisitions.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements of the Company
contained in this report concerning matters that are not historical facts,
including, without limitation, statements concerning (i) the expected effect of
strong housing starts experienced through August 1996 on results for the
building insulations business, (ii) possible price decreases due to increased
capacity in the mats and fibers industry, (iii)
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<PAGE> 24
the Company's planned expansion of production capacity of continuous filament
fiber glass, fiber glass mat and ultra-fine fiber and (iv) the Company's
expectations concerning levels of capital spending and funding of current
operations, debt service, dividends and future acquisitions, constitute such
forward-looking statements. See "Liquidity and Capital Resources."
Forward-looking statements of the Company are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in such statements. Important factors relating to such risks and
uncertainties are set forth below.
Factors that could affect the forward looking statements generally are related
to demand for the Company's products and to overall capacity levels in the
industry. Demand for such products is cyclical and is influenced by
macroeconomic factors affecting demand in residential and commercial
construction and replacement markets and demand from original equipment
manufacturers, including the general rate of inflation, interest rates,
employment rates and overall consumer confidence. Approximately half of the
Company's annual sales are made to customers in commercial and industrial
construction markets, while approximately one-third are made to customers in
residential construction markets. The remainder of the Company's annual sales
are made to original equipment manufacturers. Overall capacity levels in the
industry directly affect prices for the Company's products. Other factors that
may affect prices include the
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<PAGE> 25
overall competitive environment in which the Company operates, the availability
and pricing of raw materials, rates of technological development and changes in
productivity. In addition, overall demand for the Company's products could be
affected by the factors described in "BUSINESS - Occupational Health and Safety
Regulations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Other factors also could affect the Company's expected levels of capital
spending and funding of current operations, debt service and dividends,
including, without limitation, the contingencies and commitments discussed in
the Company's financial statements included in this report and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. In addition,
the Company's ability to make future acquisitions depends upon the ability of
the Company to identify and reach agreement with viable acquisition candidates
and the availability of sources of financing for such acquisitions on terms
which are acceptable to the Company.
Additional information regarding the Company's relationship with Schuller
Corporation, accounting policies, operations, financial position and factors
that may effect future operating results and operations is contained or
incorporated in the Company's Form 10-K for the year ended December 31, 1995
filed with the Securities and Exchange Commission.
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<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27.1, Financial Statement Schedules.
(b) Form 8-K.
None.
II-1
<PAGE> 27
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.
SCHULLER INTERNATIONAL GROUP, INC.
----------------------------------
(Registrant)
Date: November 14, 1996 By: /s/ R. B. Von Wald
---------------------------------------
R. B. Von Wald
Executive Vice President,
General Counsel and Secretary
Date: November 14, 1996 By: /s/ K. L. Jensen
---------------------------------------
K. L. Jensen
Senior Vice President and
Chief Financial Officer
II-2
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
27.1 - Financial Statement Schedules.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FORM 10Q OF SCHULLER INTERNATIONAL GROUP, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 85,697
<SECURITIES> 2,689
<RECEIVABLES> 286,062
<ALLOWANCES> 8,421
<INVENTORY> 111,787
<CURRENT-ASSETS> 504,343
<PP&E> 1,404,609
<DEPRECIATION> 616,860
<TOTAL-ASSETS> 1,623,926
<CURRENT-LIABILITIES> 321,370
<BONDS> 418,147
0
0
<COMMON> 0
<OTHER-SE> 299,890
<TOTAL-LIABILITY-AND-EQUITY> 1,623,926
<SALES> 1,130,490
<TOTAL-REVENUES> 1,130,490
<CGS> 806,990
<TOTAL-COSTS> 806,990
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,509
<INTEREST-EXPENSE> 34,008
<INCOME-PRETAX> 156,054
<INCOME-TAX> 67,230
<INCOME-CONTINUING> 88,824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,824
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
