<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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission file number 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 August 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>
June 30, December 31,
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and equivalents $ 94,751 $ 140,328
Marketable securities, at cost which
approximates market 1,679 21,043
Receivables, net 241,052 192,426
Inventories 104,094 77,121
Receivable from parent 3,899 10,920
Prepaid expenses 6,426 4,932
Deferred tax assets 27,647 31,957
-----------------------------------
Total Current Assets 479,548 478,727
Property, Plant and Equipment,
net of accumulated depreciation of
$589,045 and $578,120, respectively 753,475 715,903
Receivable from Parent 9,806 9,698
Other Assets 245,842 202,461
-----------------------------------
$ 1,488,671 $ 1,406,789
=============================================================================================
LIABILITIES
- ---------------------------------------------------------------------------------------------
Current Liabilities
Accounts and notes payable $ 103,104 $ 91,206
Compensation and benefits 104,763 98,081
Income taxes 16,345 11,564
Demand note payable to parent 25,000 25,000
Other accrued liabilities 54,603 64,600
-----------------------------------
Total Current Liabilities 303,815 290,451
Long-Term Debt, less current portion 410,470 408,807
Postretirement Benefits Other Than
Pensions 207,071 203,107
Deferred Income Taxes and
Other Noncurrent Liabilities 300,623 287,990
-----------------------------------
1,221,979 1,190,355
-----------------------------------
Contingencies and Commitments (Note 2)
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 181,942 126,668
Cumulative Currency Translation Adjustment 27,668 32,684
-----------------------------------
266,692 216,434
-----------------------------------
$ 1,488,671 $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 Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 381,403 $ 354,051 $ 707,512 $ 682,452
Cost of Sales 272,901 251,782 505,451 480,448
Selling, General and
Administrative 35,191 30,111 66,618 59,567
Research, Development
and Engineering 8,531 7,820 15,583 14,290
Services Provided by
Parent 3,402 3,154 6,786 6,183
Other Income (Expense),
net (2,298) (2,546) 3,158 (7,606)
----------------------------------------------------------------------
Income from Operations 59,080 58,638 116,232 114,358
Interest Income 1,711 2,016 3,996 4,079
Interest Expense 10,915 11,565 22,259 22,714
Interest Expense - Parent 518 562 1,002 1,114
----------------------------------------------------------------------
Income before Income Taxes 49,358 48,527 96,967 94,609
Income Tax Expense 21,223 20,637 41,693 40,683
----------------------------------------------------------------------
Net Income $ 28,135 $ 27,890 $ 55,274 $ 53,926
===================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
SCHULLER INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 55,274 $ 53,926
Noncash items included in net income:
Depreciation and amortization 33,737 29,895
Postretirement and pension benefits 6,135 10,347
Provision for furnace rebuilds 3,690 4,196
Product guarantee income 3,459 3,855
Deferred income taxes 8,169 1,213
Other, net 17,681 5,065
(Increase) decrease in current assets:
Receivables (35,039) (16,688)
Inventories (22,596) (28,970)
Prepaid expenses (1,201) 438
Receivable from parent 6,913 7,358
Increase (decrease) in current liabilities:
Accounts payable (477) (2,236)
Compensation and benefits (2,311) (15,698)
Income taxes 4,978 7,080
Other accrued liabilities (12,044) (16,654)
Decrease in postretirement benefits other
than pensions (3,342) (4,684)
Decrease in other noncurrent liabilities (11,363) (4,230)
--------------------------------------
Net cash provided by operating activities 51,663 34,213
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (57,582) (46,533)
Acquisitions (57,007)
Proceeds from sales of assets 1,378 2,083
Purchases of held-to-maturity securities (7,574) (31,617)
Purchases of available-for-sale securities (4,982) (6,079)
Proceeds from maturities of
held-to-maturity securities 25,946 48,357
Proceeds from sales and maturities of
available-for-sale securities 6,082
Increase in other assets (3,222) (5,922)
---------------------------------------
Net cash used in investing activities (96,961) (39,711)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------------
Issuance of debt 679
Payments on debt (20) (456)
---------------------------------------
Net cash provided by (used in) financing
activities 659 (456)
---------------------------------------
Effect of Exchange Rate Changes on Cash (938) 526
---------------------------------------
Net Decrease in Cash and Equivalents (45,577) (5,428)
Cash and Equivalents at Beginning of Period 140,328 93,428
---------------------------------------
Cash and Equivalents at End of Period $ 94,751 $ 88,000
===================================================================================================================
</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 June 30, 1996 and
December 31, 1995 and for the three and six month periods ended June 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)
June 30, December 31,
1996 1995
----------------------------------
<S> <C> <C>
Finished goods $ 65,261 $ 46,432
Raw materials and supplies 26,854 23,344
Work-in-process 11,979 7,345
----------------------------------
$ 104,094 $ 77,121
==================================
</TABLE>
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Note 2 - 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 the first quarter of 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 the third quarter of 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 3 - Other Income (Expense), net
Other income, net, was $3.2 million for the first six months of 1996 compared
with other expense, net, of $7.6 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 Company against the former owner of the phenolic
roofing business.
Note 4 - Acquisitions
On January 31, 1996, the Company acquired the commercial and industrial roofing
businesses of Nord Bitumi SpA, headquartered in Italy, and Nord Bitumi U.S.,
Inc. On March 25, 1996, the Company
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acquired Web Dynamics, a U.S. manufacturer of polymer filtration products.
Also during the first quarter of 1996, 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, which is accounted for under the equity
method.
The combined purchase price for the acquisitions and the Company's contribution
to the joint venture totaled $60.1 million during the first six months of 1996.
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. Total purchase price in excess of net
assets acquired of $41 million is being amortized on a straight-line basis over
20 years. The pro forma effect of the acquisitions is not material to the
results of operations for the three or six months ended June 30, 1996 and 1995.
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<PAGE> 9
Note 5 - 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 June 30,
- -----------------------------------------------------------------------------------------------------------
Building Products 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 227,718 $ 198,335
Costs and Expenses 190,928 163,960
Other Income (Expense), net (329) 212
- -----------------------------------------------------------------------------------------------------------
Income from Operations $ 36,461 $ 34,587
===========================================================================================================
Engineered Products
- -----------------------------------------------------------------------------------------------------------
Net Sales $ 161,818 $ 162,374
Costs and Expenses 131,540 130,837
Other Income (Expense), net (167) 74
- -----------------------------------------------------------------------------------------------------------
Income from Operations $ 30,111 $ 31,611
===========================================================================================================
Corporate and Eliminations
- -----------------------------------------------------------------------------------------------------------
Net Sales $ (8,133) $ (6,658)
Costs and Expenses (2,443) (1,930)
Other Income (Expense), net (1,802) (2,832)
- -----------------------------------------------------------------------------------------------------------
Income (Loss) from Operations $ (7,492) $ (7,560)
===========================================================================================================
Consolidated Total Company
- -----------------------------------------------------------------------------------------------------------
Net Sales $ 381,403 $ 354,051
Costs and Expenses 320,025 292,867
Other Income (Expense), net (2,298) (2,546)
- -----------------------------------------------------------------------------------------------------------
Income from Operations $ 59,080 $ 58,638
===========================================================================================================
</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)
Six Months
Ended June 30,
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Building Products 1996 1995
- -----------------------------------------------------------------------------------------------------------
Net Sales $408,218 $377,467
Costs and Expenses 346,934 310,542
Other Income (Expense), net (490) (2,490)
- -----------------------------------------------------------------------------------------------------------
Income from Operations $ 60,794 $ 64,435
===========================================================================================================
Engineered Products
- -----------------------------------------------------------------------------------------------------------
Net Sales $315,313 $318,573
Costs and Expenses 253,208 255,288
Other Income (Expense), net 103 527
- -----------------------------------------------------------------------------------------------------------
Income from Operations $ 62,208 $ 63,812
===========================================================================================================
Corporate and Eliminations
- -----------------------------------------------------------------------------------------------------------
Net Sales $(16,019) $(13,588)
Costs and Expenses (5,704) (5,342)
Other Income (Expense), net 3,545 (5,643)
- -----------------------------------------------------------------------------------------------------------
Income (Loss) from Operations $ (6,770) $(13,889)
===========================================================================================================
Consolidated Total Company
- -----------------------------------------------------------------------------------------------------------
Net Sales $707,512 $682,452
Costs and Expenses 594,438 560,488
Other Income (Expense), net 3,158 (7,606)
- -----------------------------------------------------------------------------------------------------------
Income from Operations $116,232 $114,358
===========================================================================================================
</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> 11
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 June 30, 1996, and the related
condensed consolidated statement of income for the three and six month periods
ended June 30, 1996 and 1995, and the condensed consolidated statement of cash
flows for the six month periods ended June 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
August 8, 1996
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<PAGE> 12
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 45 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; the 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 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,
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<PAGE> 13
which manufactures continuous filament fiber glass-based products used for
reinforcing roofing, flooring, wall covering and plastic products.
RESULTS OF OPERATIONS
The following table sets forth, for the three and six month periods ended June
30, 1996 and 1995, certain income and expense items and the percentage that
such items increased (decreased):
<TABLE>
<CAPTION>
Three Months Percentage
Ended June 30, Increase
1996 1995 (Decrease)
-------- ------------- ----------
(Thousands of dollars)
<S> <C> <C>
Net Sales:
Building Products $227,718 $198,335 14.8
Engineered Products 161,818 162,374 (0.3)
Corporate and Eliminations (8,133) (6,658)
-------- --------
381,403 354,051 7.7
Cost of Sales 272,901 251,782 8.4
-------- --------
Gross Profit 108,502 102,269 6.1
Other Operating Expenses 47,124 41,085 14.7
Other Expense, net (2,298) (2,546) (9.7)
-------- --------
Income from Operations:
Building Products 36,461 34,587 5.4
Engineered Products 30,111 31,611 (4.7)
Corporate and Eliminations (7,492) (7,560)
-------- --------
$ 59,080 $ 58,638 0.8
======== ========
Six Months Percentage
Ended June 30, Increase
1996 1995 (Decrease)
-------- ------------- ----------
(Thousands of dollars)
Net Sales:
Building Products $408,218 $377,467 8.1
Engineered Products 315,313 318,573 (1.0)
Corporate and Eliminations (16,019) (13,588)
-------- --------
707,512 682,452 3.7
Cost of Sales 505,451 480,448 5.2
-------- --------
Gross Profit 202,061 202,004
Other Operating Expenses 88,987 80,040 11.2
Other Income (Expense), net 3,158 (7,606)
-------- --------
Income from Operations:
Building Products 60,794 64,435 (5.7)
Engineered Products 62,208 63,812 (2.5)
Corporate and Eliminations (6,770) (13,889)
-------- --------
$116,232 $114,358 1.6
======== ========
</TABLE>
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Second Quarter 1996 Compared With Second Quarter 1995
The Company's net sales for the second quarter of 1996 increased $27.3 million,
or 7.7 percent, to $381.4 million from $354.1 million for the same period of
1995. Gross profit increased $6.2 million, or 6.1 percent, compared with the
second quarter of 1995. Gross profit margins were 28.4 percent and 28.9
percent for the quarters ended June 30, 1996 and 1995, respectively. Income
from operations for the second quarter of 1996 was $59.1 million, up slightly
from $58.6 million for the second quarter of 1995.
The Building Products segment's net sales for the second quarter of 1996
increased $29.4 million, or 14.8 percent, compared with the same period of
1995. Income from operations increased $1.9 million, or 5.4 percent. These
increases are due primarily to the inclusion of the operating results of the
Nord Bitumi SpA and Nord Bitumi U.S., Inc. (collectively "Nord") businesses
acquired earlier in 1996 by the commercial and industrial roofing systems
business. The building insulation business benefited from stronger U.S.
housing starts which resulted in higher sales volume during the second quarter
of 1996. However, lower selling prices resulted in moderately lower operating
profits as the industry continued to experience excess capacity. Mechanical
insulations reported improved operating results, reflecting continued strength
in commercial and industrial construction markets coupled with enhanced
productivity.
The Engineered Products segment's income from operations decreased $1.5
million, or 4.7 percent, and net sales were flat compared with the second
quarter of 1995. Net sales were unchanged and income from operations for U.S.
mats and fibers declined slightly when compared
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<PAGE> 15
with 1995. The Company's U.S. production remained capacity constrained, along
with other market suppliers, which led to higher selling prices. Sales volumes
were negatively affected for a significant portion of the second quarter of
1996 by the shutdown and rebuilding of a furnace for regular maintenance and to
increase production capacity. The operating results of the worldwide mats and
fibers business declined as U.S. dollar-reported results of the Company's
German operations decreased due to the strengthening of the U.S. dollar against
the German mark, along with continuing weakness in European construction
markets. The filtration and specialty insulations businesses experienced
slightly higher net sales and operating income as the continued demand for
ultra-fine fibers used for filtration and improvements in sales of HVAC
equipment insulation were partially offset by weakness in sales of automotive
insulation products.
Other operating expenses include selling, general, administrative and research,
development and engineering expenses and services provided by parent. These
expenses increased $6 million, or 14.7 percent, principally due to additional
expenses as a result of recent acquisitions, acquisition activities and
increased product and process improvement programs.
First Six Months of 1996 Compared With First Six Months of 1995
The Company's net sales for the six months ended June 30, 1996 increased $25
million, or 3.7 percent, to $707.5 million from $682.5 million for the same
period of 1995. Gross profit was flat compared with 1995, with gross profit
margins of 28.6 percent and 29.6 percent for 1996 and 1995, respectively,
reflecting lower building insulation
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<PAGE> 16
prices realized during 1996. Income from operations increased $1.8 million, or
1.6 percent, to $116.2 million from $114.4 million.
The Building Products segment's net sales increased $30.7 million, or 8.1
percent, compared with the same period of 1995. The increase in net sales is
due mainly to the Nord acquisition. Increased building insulation sales volumes
due to stronger 1996 U.S. housing starts were offset by lower selling prices.
Income from operations decreased $3.6 million, or 5.7 percent, primarily as a
result of lower building insulation prices due to excess industry capacity. Net
sales and operating income for mechanical insulations were essentially flat
compared with 1995.
The Engineered Products segment's income from operations decreased $1.6
million, or 2.5 percent, on a one percent, or $3.3 million, decrease in net
sales compared with the first six months of 1995. While net sales and income
from operations for U.S. mats and fibers were essentially flat compared with
1995 as U.S. production remained capacity constrained, U.S. dollar-reported
results of the Company's German operations decreased due to the strengthening
of the U.S. dollar against the German mark, along with continuing weakness in
European construction markets. The filtration and specialty insulations
businesses experienced slightly higher net sales and operating income as the
continued demand for ultra-fine fibers used for filtration and improvements in
sales of HVAC equipment insulation were partially offset by weakness in sales
of automotive insulation products.
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<PAGE> 17
Other operating expenses increased $8.9 million, or 11.2 percent, for the first
half of 1996 compared with the same period of 1995. The increase is
principally due to additional expenses associated with acquisitions,
acquisition activities and increased product and process improvement programs.
Other income, net, was $3.2 million for the first six months of 1996 compared
with other expense, net, of $7.6 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 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.
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<PAGE> 18
At June 30, 1996, the Company had cash and marketable securities of $96.4
million, of which $72 million was available for domestic operating purposes.
In addition, at June 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 June 30, 1996. The Company's foreign subsidiaries also had
working capital facilities totaling $65.7 million available for borrowing at
June 30, 1996.
The Company's cash flows from operating activities are primarily influenced by
sales volume and selling prices. During the first six months of 1996, sales
volumes were positively influenced by strong U.S. construction markets,
partially offset by softness in European construction markets and capacity
constraints in U.S. markets served by the Company's mats and fibers and
ultra-fine fibers businesses. The Company's building insulation business
continued to experience price declines which began in the second half of 1995
due to new capacity. In addition, changes in the Company's accounts receivable
and inventory balances reflect changes in actual and anticipated sales levels.
Increases in sales volumes, primarily from the acquisitions completed during
1996, resulted in a larger increase in accounts receivable for the first six
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<PAGE> 19
months of 1996 when compared with the same period of 1995. Meanwhile,
production capacity constraints combined with strong demand, particularly in
mats and fibers, resulted in a smaller increase in inventory balances than was
reported for the first six months of 1995.
Demand for the Company's products has historically been cyclical due to
macroeconomic factors affecting residential and commercial construction
markets. The Company estimates that approximately half of its annual sales are
made to commercial and industrial construction markets, while approximately
one-third are made to residential construction markets and the remainder are
made to original equipment manufacturers.
I-18
<PAGE> 20
The Company's investing activities for the six months ended June 30, 1996
include the combined cash purchase prices for acquisitions and contributions to
its joint venture of $57 million. The Company's investing activities also
include capital expenditures for the six months ended June 30, 1996 totaling
$57.6 million, of which approximately $27.9 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. In order to meet worldwide demand for its mats
and fibers products, the Company announced plans during 1995 to increase its
U.S. production capacity of continuous filament fiber glass by mid 1997. The
increase will be accomplished primarily by reconstructing an existing furnace,
while also expanding existing capacity. In addition, the Company entered into
a joint venture in China and began expansion of an existing fiber glass mat
facility, with completion expected in 1997. The Company also plans to complete
the current expansion of its filtration business' ultra-fine fiber production
capacity during 1996 through capital spending programs. 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 the capacity expansion programs described above. As of
June 30, 1996, outstanding purchase commitments relating to these and other
projects totaled $16.7 million.
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
I-19
<PAGE> 21
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 June 30, 1996, the maximum amount available for dividends under
the terms of the indenture was approximately $192 million. Noncompliance with
the covenants in the indenture could result in the termination of existing
credit agreements and the acceleration of debt owed by the Company and its
subsidiaries. At June 30, 1996, the Company was in compliance with these
covenants.
The Company believes that its current cash position, funds available under the
Receivables Facility and foreign working capital 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
future acquisitions.
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> 22
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> 23
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: August 8, 1996 By: /s/ R. B. VON WALD
---------------------------------------
R. B. Von Wald
Executive Vice President,
General Counsel and Secretary
Date: August 8, 1996 By: /s/ K. L. JENSEN
---------------------------------------
K. L. Jensen
Senior Vice President and
Chief Financial Officer
II-2
<PAGE> 24
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------- ------------------- ----
27.1 Financial Statement Schedules.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 94,751
<SECURITIES> 1,679
<RECEIVABLES> 243,789
<ALLOWANCES> 7,037
<INVENTORY> 104,094
<CURRENT-ASSETS> 479,548
<PP&E> 1,342,520
<DEPRECIATION> 589,045
<TOTAL-ASSETS> 1,488,671
<CURRENT-LIABILITIES> 303,815
<BONDS> 410,470
<COMMON> 0
0
0
<OTHER-SE> 266,692
<TOTAL-LIABILITY-AND-EQUITY> 1,488,671
<SALES> 707,512
<TOTAL-REVENUES> 707,512
<CGS> 505,451
<TOTAL-COSTS> 505,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,052
<INTEREST-EXPENSE> 23,261
<INCOME-PRETAX> 96,967
<INCOME-TAX> 41,693
<INCOME-CONTINUING> 55,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,274
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
